<PAGE>
[LOGO]
January 8, 1999
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of Magellan Health Services, Inc. ("Magellan") on February 11,
1999, at 10:00 A.M. The Annual Meeting will be held at the Harbor Court Hotel,
550 Light Street, Baltimore, Maryland. A Notice of Annual Meeting, Proxy
Statement and Proxy containing information about matters to be acted on at the
Annual Meeting are enclosed.
I encourage you to attend the Annual Meeting.
I look forward to seeing you at the Annual Meeting. REGARDLESS OF WHETHER OR
NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE. This will ensure
that sufficient shares are represented and voted at the Annual Meeting.
Returning your completed proxy card will not limit your right to vote in person
if you attend the Annual Meeting.
Very truly yours,
/s/ Henry T. Harbin, M.D.
Henry T. Harbin, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 11, 1999
------------------------
The Annual Meeting of Stockholders of Magellan Health Services, Inc., a
Delaware corporation (the "Company" or "Magellan"), will be held at the Harbor
Court Hotel, 550 Light Street, Baltimore, Maryland, on February 11, 1999, at
10:00 A.M., local time, to consider and act upon the following:
1. A proposal to elect four directors to three-year terms expiring at
the 2002 annual meeting of stockholders or until their successors are duly
elected and qualified;
2. A proposal to approve the Magellan Health Services, Inc. 2000
Employee Stock Purchase Plan (the "2000 Plan"); and
3. Such other matters as may properly come before the Annual Meeting.
Stockholders of record at the close of business on December 14, 1998 are
entitled to notice of, and to vote at, the Annual Meeting. A complete list of
stockholders entitled to vote at the Annual Meeting will be available for
inspection at the offices of the Company at 6950 Columbia Gateway Drive, 4th
floor, Columbia, Maryland, during normal business hours from January 20, 1999
through February 10, 1999.
Your attention is directed to the accompanying Proxy Statement.
/s/ Linton C. Newlin
Linton C. Newlin
SECRETARY
Atlanta, Georgia
January 8, 1999.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN, DATE AND
RETURN PROMPTLY THE ENCLOSED PROXY. THE PROXY IS REVOCABLE AND YOU MAY VOTE YOUR
SHARES IN PERSON IF YOU ATTEND THE ANNUAL MEETING.
<PAGE>
MAGELLAN HEALTH SERVICES, INC.
3414 PEACHTREE ROAD, N.E.
SUITE 1400
ATLANTA, GEORGIA 30326
------------------------
PROXY STATEMENT FOR THE
1999 ANNUAL MEETING OF STOCKHOLDERS
---------------------
THE ANNUAL MEETING
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Directors (the "Board") from the holders of the
Company's Common Stock, $.25 par value per share (the "Common Stock"), for use
at the Annual Meeting to be held at 10:00 A.M., local time, on February 11,
1999, and any adjournment or postponement thereof. The Annual Meeting will be
held at the Harbor Court Hotel, 550 Light Street, Baltimore, Maryland. This
Proxy Statement and the accompanying form of proxy are first being sent or given
to stockholders on or about January 11, 1999. At the Annual Meeting,
stockholders will be asked to consider and vote upon:
1. A proposal to elect four (4) directors for three-year terms expiring
at the 2002 annual meeting of stockholders or until their successors
are duly elected and qualified;
2. A proposal to approve the 2000 Plan; and
3. Such other matters as may properly come before the Annual Meeting.
The Board is not aware of any other matters that may properly come before
the Annual Meeting. If any such other matters properly come before the Annual
Meeting, it is the intention of the persons named as proxies on the form of
proxy card sent with this Proxy Statement (the "Proxies") to vote in accordance
with their best judgment on such matters.
THE BOARD HAS UNANIMOUSLY APPROVED THE NOMINEES FOR ELECTION AS DIRECTORS
AND THE 2000 PLAN, AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO
ELECT SUCH NOMINEES AND FOR THE 2000 PLAN.
VOTING
The Board has fixed the close of business on December 14, 1998, as the
record date for determining the stockholders entitled to notice of, and to vote
at, the Annual Meeting. On the record date, 31,597,157 shares of Common Stock
were outstanding. Each share is entitled to one vote on each matter presented
for a vote at the Annual Meeting. The presence in person or by proxy of the
holders of a majority of the shares of Common Stock outstanding on the record
date constitutes a quorum for the transaction of business at the Annual Meeting.
A stockholder who has returned a proxy may revoke it at any time before the
Annual Meeting by executing a later-dated proxy, by voting by ballot at the
Annual Meeting or by filing with the inspector of election an instrument of
revocation.
Stockholders should specify their choices on the enclosed proxy card. If no
specific instructions are given with respect to the matters to be acted upon,
the shares represented by a properly signed proxy card will be voted FOR the
proposal to elect the nominees as directors, and FOR the 2000 Plan. If any other
matters properly come before the Annual Meeting, the Proxies will vote on such
matters in their discretion.
Shares held by stockholders present at the Annual Meeting in person who do
not vote and ballots marked "abstain" or "withheld" will be counted as present
at the Annual Meeting for quorum purposes. With respect to the election of
directors, abstentions and broker non-votes will have no effect on the outcome
of the vote. With respect to the 2000 Plan, abstentions will have the effect of
a vote against the
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2000 Plan and broker non-votes will have no effect on the outcome of the vote.
There are no rights of appraisal or similar dissenters' rights with respect to
any matter to be acted upon pursuant to this Proxy Statement.
VOTING BY ESOP PARTICIPANTS
Each participant in the Company's Employee Stock Ownership Plan (the "ESOP")
is being sent a Proxy Statement and an ESOP proxy card to vote the Common Stock
allocated to such participant's ESOP Account (the "Allocated Shares"). The ESOP
proxy card may be used by a participant to give directions to the ESOP Trustee
as to how such participant's Allocated Shares should be voted. In order to give
directions to the ESOP Trustee, a participant must complete, sign and date the
ESOP proxy card and return it to the ESOP Trustee in a timely manner. To be
considered timely, the ESOP Trustee must receive the ESOP proxy card prior to
the Annual Meeting. As of the record date, 18,125 shares of Common Stock were
held by the ESOP Trustee and eligible to be voted at the Annual Meeting.
Under the terms of the ESOP, the ESOP Trustee is required to keep
participant voting instructions confidential and may not divulge such
instructions to any person, including officers and employees of the Company.
Neither the ESOP Trustee nor the Administrative Committee of the ESOP
(consisting of three officers of the Company) will make recommendations to
participants about whether or how to vote.
SOLICITATION OF PROXIES
The cost of soliciting proxies will be paid by the Company. Banks, brokers
and other custodians, nominees and fiduciaries are requested to forward proxy
materials to the beneficial owners of Common Stock and to secure their voting
instructions, if necessary. The Company will reimburse such persons for their
reasonable out-of-pocket expenses in forwarding proxy materials to the
beneficial owners of Common Stock. Certain officers and other employees of the
Company, who will receive no compensation for their services other than their
regular compensation, may solicit proxies by mail, telephone or personal
contact. In addition, the firm of MacKenzie Partners, Inc. has been retained by
the Company to assist in the solicitation of proxies for a fee of approximately
$5,000 plus expenses.
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PRINCIPAL HOLDERS OF COMMON STOCK
The following table sets forth certain information as of September 30, 1998
(except as otherwise noted) with respect to any person known by the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP CLASS
- ----------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
Richard E. Rainwater(1).................................... 4,412,774 13.1%
777 Main Street
Suite 2700
Ft. Worth, TX 76102
Rainwater-Magellan Holdings, L.P.(1)....................... 1,982,720 5.9
777 Main Street
Suite 2700
Ft. Worth, TX 76102
Brahman Capital Corporation(2)............................. 2,457,150 7.8
277 Park Avenue
26th Floor
New York, NY 10172
Wellington Management Company, LLP(3)...................... 2,446,100 7.7
75 State Street
Boston, MA 02109
Lazard Freres & Co., LLC(4)................................ 2,438,135 7.7
30 Rockefeller Plaza
New York, NY 10020
Wanger Asset Management, L.P.(5)........................... 2,391,000 7.3
227 West Monroe Street
Suite 3000
Chicago, IL 60606
Legg Mason Fund Advisor, Inc.(6)........................... 2,000,000 6.3
100 Light Street
Baltimore, MD 21202
</TABLE>
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(1) Includes 1,942,996 shares of Common Stock that Rainwater-Magellan Holdings,
L.P. ("Rainwater-Magellan") has the right to acquire pursuant to a Warrant,
dated as of January 25, 1996 (the "Rainwater-Magellan Warrant"). Richard E.
Rainwater's amount includes 12,500 shares that Darla D. Moore, a director of
the Company and spouse of Richard E. Rainwater, has the right to acquire
upon the exercise of options. Under the rules of the United States
Securities and Exchange Commission (the "SEC"), Rainwater, Inc., the general
partner of Rainwater-Magellan, is also deemed to be beneficial owner of the
shares owned by Rainwater-Magellan.
(2) Information concerning beneficial ownership of securities by Brahman Capital
Corporation is based on its Form 13F dated November 12, 1998.
(3) Information concerning beneficial ownership of securities by Wellington
Management Company, LLP is based on its Form 13F dated November 12, 1998.
(4) Information concerning beneficial ownership of securities by Lazard Freres &
Co., LLC is based on its Form 13F, dated October 10, 1998.
3
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(5) Information concerning beneficial ownership of securities by Wanger Asset
Management, L.P. is based on its Form 13F dated November 10, 1998.
(6) Information concerning beneficial ownership of securities by Legg Mason Fund
Advisor, Inc. is based on its Form 13F dated November 10, 1998.
Brahman Capital Corporation is an institutional investment manager and
possesses sole dispositive power over 2,457,150 shares of Common Stock and sole
voting authority over 2,457,150 shares of Common Stock.
Wellington Management Company, LLP is an institutional investment manager
and possesses sole dispositive power over 2,429,000 shares of Common Stock and
shares dispositive power over 17,100 shares of Common Stock owned by it.
Wellington Management Company, LLP possesses sole voting authority over
1,576,600 shares of Common Stock, shared voting power over 17,100 shares of
Common Stock and no voting power over 852,400 shares of Common Stock.
Lazard Freres & Co., LLC is an institutional money manager and possesses
sole dispositive power over 2,438,135 shares of Common Stock owned by it and
possesses sole voting authority over 2,037,885 of the shares of Common Stock and
no voting authority over 400,250 shares of Common Stock.
Wanger Asset Management, L.P. is an investment advisor to mutual funds and
private accounts and has sole dispositive power over 2,390,600 shares of Common
Stock owned by it and shared voting authority over 2,390,600 shares of Common
Stock.
Legg Mason Fund Advisor, Inc. is an institutional investment manager and
possesses shared dispositive power over 2,000,000 shares of Common Stock and
sole voting authority over 2,000,000 shares of Common Stock.
ELECTION OF DIRECTORS
Under the Company's Restated Certificate of Incorporation, the number of
directors is currently fixed at twelve. At present, the Company has only eleven
directors. There is now one vacancy on the Board because the Company has not
identified a candidate for the vacancy. The directors are divided into three
classes, with the nominees in a single class being elected each year to serve
three-year terms. At the Annual Meeting, the Board will nominate four
individuals to serve as directors for three-year terms expiring at the 2002
annual meeting of stockholders or until their successors are duly elected and
qualified. The Proxies may not vote proxies for more than four nominees. Of the
current eleven directors, three will continue to serve for terms expiring in
2000 and four will continue to serve for terms expiring in 2001 (the "Continuing
Directors").
G. Fred DiBona, Jr. was elected to the Board on January 22, 1996, pursuant
to the Stockholders Agreement, as amended, among the Company, Independence Blue
Cross ("IBC") and certain other minority stockholders of Green Spring Health
Services, Inc., the Company's then majority-owned managed behavioral healthcare
company ("Green Spring"). During the second quarter of fiscal 1998, the minority
stockholders of Green Spring, including IBC, converted their interests in Green
Spring into an aggregate of 2,831,516 shares of the Company's common stock. As a
result of the Green Spring minority stockholder conversion, the Company owns
100% of Green Spring. See "Certain Relationships and Related Transactions."
Daniel S. Messina was elected to the Board on December 11, 1997, pursuant to
the Master Service Agreement, as amended, among the Company, Aetna U.S.
Healthcare, Inc. ("Aetna") and Human Affairs International, Incorporated
("HAI"). On December 4, 1997, the Company acquired the outstanding common stock
of HAI from Aetna for approximately $122.1 million. Aetna has the right to
designate a nominee(s) acceptable to the Company for election as a director(s)
of the Company equal to the number of director(s) that are appointed by or
represent any Blue Cross or Blue Shield plan or its affiliates (the
4
<PAGE>
"Blues") on the Magellan Board for as long as the Master Service Agreement, or
similar agreement, remains in effect. Aetna currently has the right to appoint
one (1) director, as Mr. DiBona is the sole director representing the Blues. See
"Certain Relationships and Related Transactions."
The terms of the Stock and Warrant Purchase Agreement entered into by the
Company and Rainwater-Magellan in connection with Rainwater-Magellan's purchase
of shares of the Company's Common Stock and the Rainwater-Magellan Warrant in a
private placement (the "Private Placement") provide that Rainwater-Magellan has
the right to designate a nominee acceptable to the Company for election as a
director of the Company for so long as Rainwater-Magellan, Rainwater, Inc.,
Richard E. Rainwater, Darla D. Moore and their affiliates continue to own
beneficially a specified minimum number of shares of Common Stock. Darla D.
Moore was designated by Rainwater-Magellan for election as director and was
elected a director by the Board on February 22, 1996. See "Certain Relationships
and Related Transactions."
If the nominees listed below are unable to serve (which is not anticipated),
the Board will designate substitute nominees, in which case the Proxies will
vote all valid proxies for the election of such substitute nominees.
The table below sets forth the name and certain other information about the
persons nominated for election as directors and the Continuing Directors.
<TABLE>
<CAPTION>
NAME, AGE, AND DATE POSITION WITH THE COMPANY, PRINCIPAL OCCUPATIONS DURING PAST FIVE
FIRST BECAME A DIRECTOR TERM EXPIRING YEARS AND OTHER DIRECTORSHIPS
- ----------------------------- --------------- -------------------------------------------------------------------
<S> <C> <C>
NOMINEES TO THE BOARD FOR TERMS EXPIRING IN 2002
Edwin M. Banks 2002 Portfolio Manager, W.R. Huff Asset Management Co., LLC (a
36 registered investment advisor) (since 1988). Director of e.spire
July 1992 Communications, Inc..
Daniel S. Messina 2002 Chief Financial Officer of Aetna U.S. Healthcare (since January
43 1998); Vice President--Business Strategy--Aetna U.S. Healthcare
December 1997 (1997); Deputy Chief Financial Officer, Aetna U.S. Healthcare
(1996-1997); Vice President-- Financial Relations and Chief of
Staff to the Vice Chairman for Strategy, Finance and
Administration, Aetna, Inc. (1995-1996) and Vice President and
Controller, Aetna Health Plans (1991-1995).
Darla D. Moore 2002 Private Investor, Rainwater, Inc. (investments) (since 1994);
44 Managing Director, The Chase Manhattan Bank, N.A. (commercial
February 1996 banking) (1982-1994).
Jeffrey A. Sonnenfeld 2002 Chairman and President, The Chief Executive Leadership Institute
44 (education) (since December 1997); Professor of organization and
September 1997 management and director of the Center for Leadership & Career
Studies of the Goizueta Business School at Emory University
(1989-1997). Director of U.S. Franchise Systems.
CONTINUING DIRECTORS
Henry T. Harbin, M.D. 2000 President and Chief Executive Officer (since March 1998); Executive
51 Vice President of the Company (1995-1998); President and Chief
March 1998 Executive Officer of Green Spring (1994-1998); Executive Vice
President and Chief Clinical Officer of Green Spring (1993-1994).
</TABLE>
5
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<TABLE>
<CAPTION>
NAME, AGE, AND DATE POSITION WITH THE COMPANY, PRINCIPAL OCCUPATIONS DURING PAST FIVE
FIRST BECAME A DIRECTOR TERM EXPIRING YEARS AND OTHER DIRECTORSHIPS
- ----------------------------- --------------- -------------------------------------------------------------------
<S> <C> <C>
Raymond H. Kiefer 2000 Retired insurance executive (since 1992); President, Allstate
71 Insurance Company (1989-1992).
July 1992
Gerald L. McManis 2000 President of McManis Associates, Inc. ("MAI") and MMI Companies,
62 Inc. (strategy development and management consulting firm for
February 1994 healthcare and healthcare-related companies) (since 1965). Director
of MMI Companies, Inc.
Andre C. Dimitriadis 2001 Chairman and Chief Executive Officer of LTC Properties (a
58 healthcare real estate investment trust) (since 1992).
July 1992
A.D. Frazier, Jr. 2001 President and Chief Executive Officer, Invesco Inc. (a registered
54 investment advisor) (since 1996); Senior Executive Vice President
May 1995 and Chief Operating Officer for the Atlanta Committee for the
Olympic Games (1991-1996). Director of Amvescap PLC, Apache
Corporation and RockTenn Corporation.
G. Fred DiBona, Jr. 2001 Director, President and Chief Executive Officer of Independence
47 Blue Cross (a health insurance company) (since 1990). Director of
January 1996 Philadelphia Suburban Corporation, Tasty Baking Company, Peco
Energy Company and Eclipsys Corporation.
Robert W. Miller 2001 Chairman of the Board (since March 1998); Partner, King & Spalding
57 (law firm) (1985-1997)
February 1998
</TABLE>
VOTE REQUIRED
Directors will be elected by a plurality of the votes cast at the Annual
Meeting, assuming a quorum is present. Any shares not voted at the Annual
Meeting, whether due to abstention, broker non-votes or otherwise, will have no
impact on the election of directors. Votes will be tabulated by inspectors of
election appointed by the Board.
THE BOARD RECOMMENDS THE NOMINEES FOR ELECTION AS DIRECTORS AND URGES
STOCKHOLDERS TO VOTE "FOR" MESSRS. BANKS, MESSINA AND SONNENFELD AND MS. MOORE.
SHARES REPRESENTED AT THE ANNUAL MEETING BY PROPERLY SIGNED BUT UNMARKED PROXIES
WILL BE VOTED "FOR" EACH OF THE NOMINEES.
BOARD INFORMATION
During the fiscal year ended September 30, 1998, the Board held 11 meetings.
Each director attended more than 75% of the meetings of the Board and committees
of the Board on which he or she was a member except Mr. Frazier, Mr. McManis,
Mr. Messina and Ms. Moore, who attended 64%, 73%, 60% and 73% of such meetings,
respectively. During fiscal 1998, Mr. Frazier and Mr. McManis attended 60% of
the Board's regular meetings and 100% of the meetings of the committees of the
Board on which they were a member. Mr. Messina attended 60% of the Board's
meetings. Ms. Moore attended 80% of the Board's regular meetings and 100% of the
meetings of the committees of the board on which she was a member. Ms. Moore did
not attend two meetings due to a concern over a conflict of interest on matters
being considered. Ms. Moore attended 89% of the Board's Meetings, excluding
those she did not attend because of such concern.
6
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The Board has standing Audit, Compensation and Finance Committees. There is
no nominating committee of the Board.
AUDIT COMMITTEE. The Audit Committee consists of Messrs. DiBona (Chairman),
Frazier, Kiefer and Sonnenfeld. The Audit Committee held one meeting during
fiscal 1998. The Audit Committee makes recommendations to the Board regarding
(i) engaging independent auditors for the Company, (ii) approving the terms of
the engagement of the Company's independent auditors, (iii) reviewing the scope
and results of audits of the Company's financial statements, (iv) reviewing the
Company's internal accounting controls, (v) receiving reports of audits and
other activities of the Company's internal audits, (vi) reviewing related-party
transactions pursuant to the related-party transactions policy adopted by the
Audit Committee and the Board of Directors, and (vii) receiving reports of
actions and proposed actions relating to the Company's compliance program and
taking any actions with respect to such reports as the Audit Committee deems
appropriate.
COMPENSATION COMMITTEE. The Compensation Committee consists of Messrs.
Frazier (Chairman), Banks, Dimitriadis and McManis. The Compensation Committee
held two meetings during fiscal 1998. The Compensation Committee's duties are
described under the caption "Compensation Committee Report on Executive
Compensation."
FINANCE COMMITTEE. The Finance Committee consists of Ms. Moore
(Chairperson) and Messrs. Banks, Dimitriadis and Messina. The Finance Committee
held one meeting during fiscal 1998. The Finance Committee reviews the Company's
existing equity and debt capital structure and the terms, interest rates,
amortization and maturity schedules, restrictive covenants and other provisions
of agreements and indentures relating to the Company's debt structure; reviews
any significant proposed changes in the equity or debt capital structure of the
Company; reviews the Company's actual and budgeted cash flows and capital
expenditures, the Company's cash management system and any proposed changes in
the cash management system, investment policies relating to cash and cash
equivalents and any proposed material changes in the terms of any retirement or
pension plan of the Company or any subsidiary; and reports and makes
recommendations to the Board concerning the matters described above.
The operations liaison committee was formed in April 1998 to monitor the
integration of the HAI and Merit Behavioral Care Corporation ("Merit")
businesses, which were both acquired in fiscal 1998, with Green Spring, the
Company's existing managed behavioral healthcare business, and to monitor the
operating performance of the Company. The operations liaison committee consists
of Messrs. Frazier and Banks and Ms. Moore. This committee is not vested with
authority to approve any corporate actions, but was established to report to the
full Board as necessary.
During fiscal 1998, each non-employee director received a monthly retainer
of $2,000, a fee of $1,000 for each Board meeting and $1,000 for each Board
committee meeting attended. Members of the operations liaison committee also
received a monthly retainer of $1,000, in lieu of an attendance fee. Mr. Miller
received an additional monthly retainer of $5,000 for serving as Chairman of the
Board. In addition, during fiscal 1998, Mr. Miller was granted an option under
the 1996 Director's Stock Option Plan to purchase 25,000 shares of Common Stock,
at an exercise price of $20.25 upon his appointment to the Board. Mr. Miller was
granted an option under the 1996 Director's Stock Option Plan to purchase 25,000
shares of Common Stock, at an exercise price of $22.4375 upon his appointment to
Chairman of the Board. Mr. Harbin received no additional compensation for
serving as a director. In accordance with Aetna's policy, Mr. Messina will not
accept any compensation nor any option grants for serving as a director.
7
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to the
Company's Chief Executive Officers and the Company's four next most highly
compensated executive officers (the "Named Executive Officers"), for the three
fiscal years ended September 30, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------------------
---------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS(#)(2) COMPENSATION(3)
- ------------------------------ ----------- --------- ----------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Harbin M.D.(5)....... 1998 $ 596,455 $ 463,184 $ -- 275,000 $ 125,726
President and Chief Executive 1997 338,069 161,707 -- 125,000 10,750
Officer (since March 18, 1996 236,705 167,195 -- 100,000 10,750
1998)
E. Mac Crawford(4)............ 1998 414,151 3,684,816 135,834 -- 168,348
Chairman of the Board, 1997 806,250 2,475,000 -- 933,666 166,575
President and Chief 1996 712,500 153,500 -- 300,000 181,936
Executive Officer (through
March 18, 1998)
Craig L. McKnight............. 1998 383,250 185,000 -- -- 49,506
Executive Vice President and 1997 378,688 150,000 59,743 65,000 45,158
Chief Financial Officer 1996 361,250 50,000 -- 25,000 73,891
John J. Wider, Jr.(6)......... 1998 300,456 31,744 -- 85,000 5,000
President and Chief Operating 1997 55,385 30,000 -- 25,000 --
Officer of Magellan
Behavioral Health, Inc.
Clarissa C. Marques, Ph.D..... 1998 237,770 103,601 -- 70,000 8,200
Executive Vice President and 1997 179,577 65,918 -- -- 10,750
Chief Clinical and Quality 1996 141,268 34,330 -- 20,000 10,750
Management Officer
Gregory T. Torres............. 1998 236,665 100,500 -- 35,000 28,976
President and Chief Executive 1997 197,231 80,000 -- 25,000 27,058
Officer of National Mentor, 1996 165,250 65,000 -- 25,000 16,335
Inc.
</TABLE>
- --------------------------
(1) Other Annual Compensation for fiscal 1998 includes payment of accrued
vacation of $109,467 for Mr. Crawford upon his resignation. Other Annual
Compensation for fiscal 1997 includes country club initiation fees and dues
of $42,004 for Mr. McKnight.
(2) Represents the number of stock options granted under the Company's 1994,
1996, 1997 and 1998 Stock Option Plans.
(3) All other compensation for fiscal 1998 includes: (a) contributions to the
Company's 401(k) Plan of $5,250 for Mr. Crawford and Mr. McKnight,
contributions to the Green Spring 401(k) Plan of $8,200, $5,000 and $8,200
for Dr. Harbin, Mr. Wider and Dr. Marques, respectively, and contributions
to the National Mentor, Inc. 401(k) Plan of $3,750 for Mr. Torres, (b)
amounts deposited in trust pursuant to the Company's Executive Benefit Plan
("EBP") of $116,129, $152,428, $42,158 and $21,100 for Dr. Harbin, Mr.
Crawford, Mr. McKnight and Mr. Torres, respectively, (c) premiums paid for
life and disability insurance of $1,397, $10,670, $2,098 and $4,126 for Dr.
Harbin, Mr. Crawford, Mr. McKnight and Mr. Torres, respectively. All Other
Compensation for fiscal 1997 includes: (a) contributions to the Company's
401(k) Plan of $5,250 for Mr. Crawford, $3,000 for Mr. McKnight,
contributions to the Green Spring 401(k) plan of $10,750 for Dr. Harbin and
Dr. Marques, respectively, and
8
<PAGE>
contributions to the National Mentor, Inc. 401(k) Plan of $2,375 for Mr.
Torres, (b) amounts deposited in trust pursuant to the Company's EBP of
$151,816, $42,158 and $23,100 for Messrs. Crawford, McKnight, and Torres,
respectively, and (c) premiums paid for life and disability insurance of
$9,509 and $1,583 for Mr. Crawford and Mr. Torres, respectively. All Other
Compensation for fiscal 1996 includes: (a) contributions to the ESOP of
$18,050 and $22,795 for Messrs. Crawford and McKnight, respectively, which
represents the Company's expense (the fair value of the ESOP shares on the
date earned was $699 and $883 for Messrs. Crawford and McKnight,
respectively); (b) contributions to the Company's 401(k) Plan of $5,250 for
Mr. Crawford, contributions to the Green Spring 401(k) Plan of $10,750 for
Dr. Harbin and Dr. Marques, respectively; and contributions to the National
Mentor, Inc. 401(k) Plan of $2,310 for Mr. Torres, (c) amounts deposited in
trust pursuant to the EBP of $137,191, $40,150 and $14,025 for Messrs.
Crawford, McKnight, and Torres, respectively; (d) premiums paid for life and
disability insurance of $19,840 and $10,260 for Messrs. Crawford, and
McKnight, respectively; and (e) term life insurance premiums of $1,605 and
$686 for Messrs. Crawford and McKnight, respectively.
(4) Mr. Crawford resigned as Chairman of the Board, President and Chief
Executive Officer, effective March 18, 1998.
(5) Dr. Harbin became President and Chief Executive Officer of the Company
effective March 18, 1998. Dr. Harbin's annual salary was increased to
$700,000 at such time. Dr. Harbin became an executive officer of the Company
on December 13, 1995.
(6) Mr. Wider became an employee of the Company effective June 23, 1997.
OPTION GRANTS IN FISCAL 1998
The following table sets forth certain information with respect to grants of
options to the Named Executive Officers who were granted options during fiscal
1998 and the potential realizable value of such options on September 30, 1998:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF PERCENTAGE VALUE AT ASSUMED
SECURITIES OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME (#) FISCAL 1998 PER SHARE DATE 5% 10%
- ----------------------------------- ----------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Harbin, M.D............... 200,000(1) 14.3% $ 22.438 12/31/08 $ 3,111,547 $ 8,073,506
75,000(2) 5.3 22.688 02/28/07 966,686 2,397,472
John J. Wider, Jr.................. 40,000(2) 2.9 22.438 12/31/08 621,909 1,613,426
40,000(2) 2.9 26.719 12/31/08 724,118 1,868,873
5,000(2) 0.4 30.125 02/28/07 87,173 217,093
Clarissa C. Marques, Ph.D.......... 30,000(2) 2.1 22.438 12/31/08 466,432 1,210,069
30,000(2) 2.1 26.719 12/31/08 543,267 1,402,224
10,000(2) 0.7 30.125 02/28/07 174,346 434,187
Gregory T. Torres.................. 35,000(2) 2.5 22.688 02/28/07 459,557 1,144,469
</TABLE>
- --------------------------
(1) Options granted under the 1998 Stock Option Plan. One-third of the options
became exercisable upon grant, with the remaining options becoming
exercisable over two years at the rate of 33 1/3% of the total number of
options per year.
(2) Options granted under the 1997 and 1998 Stock Option Plans which become
exercisable over three years at the rate of 33 1/3% of the total number of
options per year.
9
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND OPTION VALUES AT SEPTEMBER 30, 1998
The following table sets forth certain information with respect to options
exercised by the Named Executive Officers during fiscal 1998, and the number and
value of options held on September 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES VALUE AT SEPTEMBER 30, 1998 SEPTEMBER 30, 1998($)(2)
ACQUIRED ON REALIZED ---------------------------- --------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- ----------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Harbin M.D.......... -- $ -- 208,335 291,665 $ -- $ --
E. Mac Crawford.............. 362,990 4,315,951 701,222 -- -- --
Craig L. McKnight............ -- -- 180,000 10,000 -- --
John J. Wider, Jr............ -- -- 8,334 101,666 -- --
Clarissa C. Marques, Ph.D.... -- -- 20,000 70,000 -- --
Gregory T. Torres............ -- -- 40,000 45,000 -- --
</TABLE>
- --------------------------
(1) Value realized is the difference between the option exercise price and the
closing market price of the common stock on the date of exercise, multiplied
by the number of shares to which the option relates.
(2) The closing price for the Common Stock as reported on September 30, 1998 was
$10.8125. None of the unexercised options were in-the-money at September 30,
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 (the "Stock Option Repricing"). Each holder of 10,000 or more stock
options who was eligible to participate in the Stock Option Repricing was
required to forfeit a percentage of outstanding stock options as follows:
<TABLE>
<S> <C>
- - 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 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.
COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for establishing policies with
respect to compensation paid by the Company to its executive officers. The
Compensation Committee approves the design of all compensation plans applicable
to executive officers including: (i) reviewing and recommending the terms of
employment and similar agreements between the Company and any executive officer;
(ii) reviewing and approving the terms of annual incentive or bonus plans in
which any executive officer of the Company participates, including, but not
limited to, performance goals, thresholds for bonuses, maximum bonuses and
operating and other income targets under such incentive or bonus plans; (iii)
approving base salaries of executive officers; (iv) approving incentive award
payouts to executive officers; (v) reviewing and making recommendations
concerning approval and adoption of and amendments to stock-based compensation
plans, including stock option, restricted stock, phantom stock, stock
appreciation right and stock purchase plans; (vi) approving the terms of all
other compensation plans applicable to any executive; (vii) granting options and
make awards under stock-based compensation plans, except to the extent the
10
<PAGE>
authority to make such awards has been delegated by the Compensation Committee
to the Chief Executive Officer of the Company or Stock Option Subcommittee of
the Board or such awards are required by law to be made by the Board of
Directors; and (viii) monitoring the ongoing operations of all compensation
plans in which an executive officer participates. The Compensation Committee
consists of directors who are not employees of the Company and who are not
eligible to participate in any of the plans that the Compensation Committee
administers. A subcommittee of the Compensation Committee, which is comprised
solely of "outside directors" as such term is defined by Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), administers the
Company's stock option plans and other compensation arrangements that constitute
"qualified performance-based compensation," as defined by Section 162(m) of the
Code.
POLICIES. In 1996, the Compensation Committee retained an independent
compensation consultant to advise it with respect to executive officer
compensation, including base salaries, annual incentive plans, benefits and
stock-based and long-term incentive compensation. The compensation consultant
reviewed and researched executive pay practices in a peer group of specific
for-profit healthcare companies, which the Compensation Committee believes
reflects the talent pool from which the Company might draw and provides a useful
benchmark of the Company's present executive officers. With regard to base
salary, the consultant reported that the base salary of the Company's chief
executive officer was between the 50th and 75th percentile of the peer group
chief executive officers and that other executive officer salaries were
generally near or slightly above the 75th percentiles of comparable peer group
positions. With regard to annual incentive compensation, the consultant reported
that the percentage of base salary paid by the Company as a bonus if the annual
incentive target were met, when combined with salaries, would place total annual
compensation between the 50th and 75th percentile. However, if annual incentive
targets were not met and no bonus was paid, total annual compensation would be
well below the 50th percentile of the peer group as previously described.
Based in substantial part on the findings and recommendations of the
independent compensation consultant, the Compensation Committee adopted the
following policies with respect to executive officer compensation for fiscal
1998.
1. BASE SALARY--Executive officer base salaries should be at
approximately the 75th percentile of the peer group developed by the
compensation consultant, subject to increase to a higher percentile for
individual executive officers based on performance.
2. PERFORMANCE-BASED COMPENSATION--A significant portion of executive
officer compensation should be performance-based.
In implementing these policies, the Compensation Committee has, from time to
time received additional advice from outside consultants with respect to stock
option plans and other incentive compensation and recommended that the Company
adopt certain performance-based compensation plans. These plans were adopted by
the Company after receiving necessary approvals from the Board and stockholders.
The plans that are currently in force are described below:
1997 STOCK OPTION PLAN. Under the 1997 Stock Option Plan, key employees of
the Company (including executive officers) may be granted options to purchase up
to 1,500,000 shares of Common Stock.
1998 STOCK OPTION PLAN. Under the 1998 Stock Option Plan, key employees of
the Company (including executive officers) may be granted options to purchase up
to 1,000,000 shares of Common Stock.
EXECUTIVE BENEFITS PLAN. The Company adopted the EBP in 1993 on the
recommendation of the compensation consultant. The EBP is funded through a
performance-based component and a fixed
11
<PAGE>
component and has been structured to provide an incentive for executive officers
to remain with the Company.
Under the performance-based component, an amount equal to one-third of an
executive officer's annual bonus, if any, is paid by the Company to a trust and
invested in one or more mutual funds. The amount contributed to the trust and
any appreciation or contributions is paid to the executive officer on a date
selected by the executive officer prior to funding (but not earlier than two
years after funding or later than normal retirement date). Payments from the
trust to the executive officer are forfeited if, at the time payment would
otherwise be made, the executive officer is no longer employed by the Company
and is in violation of a non-competition agreement signed prior to funding.
The fixed component of the EBP is an annual amount equal to 19.5% of the
base salary of the chief executive officer and 11% of the base salary of other
executive officers. At the election of each executive officer, the fixed
component may be used to make additional payments to the trust described above
or to purchase life or disability insurance. Amounts deposited in the trust are
subject to forfeiture, as described above.
CHIEF EXECUTIVE OFFICER COMPENSATION. In fiscal 1998, the compensation of
E. Mac Crawford, the Company's Chief Executive Officer through March 18, 1998,
included base compensation of $414,151, a bonus of $3,684,816 in connection with
Mr. Crawford's employment contract and benefits under the EBP of $163,098. Mr.
Crawford's base salary was increased to $825,000 effective March 1, 1997 at the
time his employment agreement was amended. Mr. Crawford's employment agreement,
as amended, also provided for the bonus described above.
In fiscal 1998, the compensation of Dr. Harbin, the Company's Chief
Executive Officer since March 18, 1998, included base compensation of $596,455,
a signing and retention bonus of $350,000 related to the execution of his
employment agreement, a regular bonus of $113,184 related to Green Spring's
fiscal 1997 performance and benefits under the EBP of $117,526. Dr Harbin's base
salary was increased to $700,000, effective March 18, 1998 at the effective date
of his employment agreement. In negotiating Dr. Harbin's employment agreement,
the Compensation Committee considered Dr. Harbin's experience as President and
Chief Executive Officer of Green Spring since the Company acquired Green Spring
on December 13, 1995, Green Spring's financial performance since the acquisition
by the Company and Dr. Harbin's efforts in integrating the HAI, Merit and Green
Spring businesses after the Company's acquisition of HAI and Merit during fiscal
1998. Accordingly, the Compensation Committee believed that it was in the best
interests of the Company's stockholders to promote Dr. Harbin to President and
Chief Executive Officer of the Company and award Dr. Harbin a signing and
retention bonus of up to $700,000 in recognition of his importance to the future
prospects of the Company. In addition, the Compensation Committee desired to
have a long-term contract that will allow Dr. Harbin adequate time to oversee
the implementation of the Company's long-term strategies.
NON-DEDUCTIBILITY OF CERTAIN COMPENSATION. The Company is party to an
employment agreement with Dr. Harbin. Under the terms of the agreement, the
compensation paid to Dr. Harbin may exceed $1 million in fiscal 1999, 2000 or
2001. Section 162(m) of the Code generally provides that, subject to certain
exceptions, a publicly-held corporation such as the Company, may not deduct for
federal income tax purposes compensation paid to any of its Named Executive
Officers in excess of $1 million annually. The Compensation Committee determined
that the benefit to the Company of entering into an extended employment contract
with Dr. Harbin offset the potential loss of a tax deduction.
A.D. Frazier, Jr. (Chairman)
Andre C. Dimitriadis
Edwin M. Banks
Gerald L. McManis
12
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. McManis, a member of the Compensation Committee, is the President of
MAI, a healthcare development and management consulting firm. During fiscal
1998, MAI provided consulting services to the Company related to the development
of strategic plans and a review of the Company's business processes. Management
believes that the services received from MAI were negotiated on terms as
favorable as could be obtained from an unaffiliated third party. The Company
incurred approximately $84,200 in fees for such services and related expenses
during fiscal 1998. Mr. McManis is not a member of the subcommittee that
administers the Company's stock option plans and other "qualified performance-
based compensation."
EMPLOYMENT AGREEMENTS
HENRY T. HARBIN, M.D. The Company has an Employment Agreement with Dr.
Harbin for a three-year term beginning March 18, 1998. The agreement provides
for a base salary of $700,000 and a signing bonus of $700,000, of which $350,000
was payable at signing with the remaining $350,000 payable on March 18, 1999.
Dr. Harbin will not be entitled to receive the second $350,000 payment unless he
is employed at such date. Dr. Harbin will also be entitled to receive annual
bonuses between 50% and 100% of his base salary conditioned upon his and/or the
Company's meeting certain goals or objectives to be established by the Board or
the Compensation Committee. The agreement also provides for severance payments
to Dr. Harbin upon termination by the Company (including certain constructive
termination events, such as a substantial change in Dr. Harbin's duties, but not
including termination for cause), upon Dr. Harbin's resignation under certain
circumstances, or after a change in control (as defined in the agreement). Such
severance payments would consist of an amount equal to three times Dr. Harbin's
base salary and the portion(s) of any bonus or incentive compensation accrued
through the date of termination. In addition, if Dr. Harbin resigns or is
terminated following a change of control, Dr. Harbin will receive a "gross-up"
payment intended to compensate Dr. Harbin if certain excise taxes would be
imposed in such case. Subject to certain exceptions, the Company will be unable
to deduct for federal income tax purposes the compensation or severance payments
to Dr. Harbin to the extent that such payments exceed an aggregate annual amount
of $1 million.
CRAIG L. MCKNIGHT. The Company has an Employment Agreement with Mr.
McKnight for a five-year term beginning March 1, 1995. The agreement provides
for a base salary of $350,000 and for bonuses and life and disability insurance
benefits that are competitive with similar benefits for comparable positions
within the investor-owned hospital industry. The agreement also provides for
severance payments upon termination without cause, termination due to death or
disability, or resignation after a change of control (as defined in the
agreement). Upon any such termination, Mr. McKnight would receive the greater of
(i) all salary payments that would come due during the term of the agreement
subsequent to termination and (ii) two years' salary at the then current salary
level and a portion of any bonus or other cash incentive compensation accrued
through the date of termination.
JOHN J. WIDER, JR. The Company has an Employment Agreement with Mr. Wider
for a three-year term beginning November 17, 1998. The Agreement provides for a
base salary of $380,000 and for bonuses and benefits commensurate with his
position. The Agreement also provides for severance payments upon termination
without cause or resignation after a change of control (as defined in the
Agreement). Under any such termination, Mr. Wider would receive the greater of
(i) salary payments that would come due during the term of the Agreement
subsequent to termination plus a portion of any bonus accrued through the date
of termination and (ii) two years of annual salary plus a portion of any bonus
accrued through the date of termination. In the event the Agreement is not
renewed by the Company at expiration, Mr. Wider would receive severance payments
for two years from the date of expiration of the Agreement.
CLARISSA C. MARQUES, PH.D. The Company has an Employment Agreement with Dr.
Marques for a three-year term (the "Initial Term") beginning March 12, 1997. The
agreement provides for a base salary
13
<PAGE>
determined by the President and CEO of Green Spring, provided that the base
salary shall not be less than the annual salary in effect at execution of the
Agreement. Dr. Marques' current salary is $275,000. The Agreement also provides
for participation in benefit programs and incentive compensation programs
similar to those provided other similarly situated employees. In addition, the
agreement provides for severance payments upon termination without cause equal
to salary, fringe benefits and incentive compensation for the remainder of the
Initial Term, or, if after the Initial Term, for the renewal periods (as defined
in the Agreement). Dr. Marques also has a Letter Agreement with the Company,
dated May 2, 1995, that provides for a payment of $750,000 at retirement or
termination if the average earnings before interest and taxes ("EBIT") of Green
Spring exceeds 10% of Shareowners' Investment (as defined in the agreement) over
Dr. Marques' employment period or $500,000 if the average EBIT of Green Spring
is less than 10% of Shareowners' Investment over Dr. Marques' employment period.
The Letter Agreement defines retirement as termination of employment on or after
age 60 years (Dr. Marques is currently 46 years of age) and defines termination
as termination without cause, death or disability. The amounts payable to Dr.
Marques under the Letter Agreement will be reduced by amounts earned under other
long-term incentive payments subsequent to the date of the agreement. Dr.
Marques may elect payments, if any, under the Letter Agreement, in the form of a
lump sum or annual annuity.
EXECUTIVE BENEFITS PLAN. The terms of the EBP provide that the amounts
deposited in the trust on behalf of executive officers are to be paid to
executive officers, together with any appreciation in such amounts, upon a
change of control of the Company if the change of control occurs prior to the
scheduled date for distribution of amounts held in the trust. The trust
agreement defines a "change of control" as the replacement of 50% or more of the
members of the Board within a 12-month period that is followed by the
termination of employment within a 12-month period of one-third or more of the
employees who participate in the EBP.
14
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total return of the Common
Stock, the Standard & Poors ("S&P") 500 Stock Index and the Standard & Poors
Hospital Management Index ("HMI") since September 30, 1992. The graph assumes
$100 was invested in each of the Common Stock, the S&P 500 Stock Index and the
S&P HMI and that dividends received were reinvested on the date paid. The graph
does not take into account trading commissions or taxes.
[GRAPH]
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURNS
<S> <C> <C> <C>
ON $100 INVESTED ON SEPTEMBER 30, 1992
Company S&P 500 S&P HMI
9/30/92 $100 $100 $100
9/30/93 $386 $113 $128
9/30/94 $451 $117 $196
9/30/95 $335 $152 $215
9/30/96 $339 $183 $254
9/30/97 $518 $257 $221
9/30/98 $177 $280 $175
</TABLE>
15
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of Common Stock by (i) directors, (ii) the Named Executive Officers
and (iii) directors and executive officers as a group, as of September 30, 1998.
Information with respect to certain significant stockholders of the Company is
set forth in "Principal Holders of Common Stock."
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF TOTAL
NAME OWNERSHIP(1)(2) OUTSTANDING
- ---------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
Henry T. Harbin M.D................................................... 212,335 *
E. Mac Crawford....................................................... 712,248 2.2%
Craig L. McKnight..................................................... 182,437 *
John J. Wider, Jr..................................................... 12,400 *
Clarissa C. Marques, Ph.D............................................. 25,501 *
Gregory T. Torres..................................................... 58,915 *
Edwin M. Banks(3)..................................................... 40,000 *
G. Fred DiBona, Jr.(4)................................................ 961,956 3.0%
Andre C. Dimitriadis.................................................. 39,000 *
A.D. Frazier, Jr...................................................... 39,000 *
Raymond H. Kiefer..................................................... 40,000 *
Gerald L. McManis..................................................... 38,500 *
Daniel S. Messina(6).................................................. 0 *
Robert W. Miller...................................................... 1,000 *
Darla D. Moore(5)..................................................... 4,412,774 13.1%
Jeffrey A. Sonnenfeld Ph.D............................................ 6,250 *
All directors and executive officers as a group (16 persons)(7)....... 6,782,316 19.4%
</TABLE>
- ------------------------
* Less than 1% of total outstanding.
(1) Includes 208,335; 701,222; 180,000; 10,000; 23,333 and 40,000 shares that
Dr. Harbin, Mr. Crawford, Mr. McKnight, Mr. Wider, Dr. Marques and Mr.
Torres, respectively, have the right to acquire upon the exercise of options
and warrants within 60 days of September 30, 1998.
(2) Includes 37,500 shares that each of Messrs. Banks, Dimitriadis, Frazier,
Kiefer and McManis have the right to acquire, 12,500 shares that Mr. DiBona
and Ms. Moore have the right to acquire and 6,250 shares that Dr. Sonnenfeld
has the right to acquire within 60 days of September 30, 1998.
(3) Does not include shares owned by W.R. Huff Asset Management Co. LLC, a
registered investment advisor ("Huff"), of which Mr. Banks disclaims
beneficial ownership. Mr. Banks is a Portfolio Manager with Huff.
(4) Includes 949,456 shares that IBC and its affiliates own. See "Certain
Relationships and Related Transactions." Mr. DiBona is a director and the
President and Chief Executive Officer of IBC and disclaims beneficial
ownership or all securities attributed to him because of his positions with
IBC.
(5) Includes 2,417,554 shares owned by Richard E. Rainwater, 39,724 shares owned
by Rainwater, Inc. and 1,942,996 shares that Rainwater-Magellan, has the
right to acquire pursuant to the Rainwater-Magellan Warrant. Ms. Moore is
the spouse of Richard E. Rainwater, the sole stockholder and sole director
of Rainwater, Inc., which is the sole general partner of Rainwater-Magellan.
(6) In accordance with Aetna's policy, Mr. Messina will not accept any option
grants for serving as a director.
(7) Includes 1,381,640 shares that the directors and executive officers have the
right to acquire upon the exercise of options and units, 949,456 shares that
IBC and its affiliates own and 1,942,996 shares that
16
<PAGE>
Rainwater-Magellan has the right to acquire upon the exercise of the
Rainwater-Magellan Warrant, all of which are exercisable within 60 days of
September 30, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gerald L. McManis, a director of the Company, is the President of MAI, a
healthcare development and management consulting firm. During fiscal 1998, MAI
provided consulting services to the Company with respect to the development of
strategic plans and a review of the Company's business processes. The Company
paid approximately $84,200 in fees for such services and related expenses during
fiscal 1998.
G. Fred DiBona, Jr., a director of the Company, is a director and the
President and Chief Executive Officer of IBC.
The Company acquired a 51%-equity interest in Green Spring on December 13,
1995 for approximately $68.9 million in cash, the issuance of Common Stock
valued at approximately $4.3 million and the contribution of Group Practice
Affiliates, Inc., a wholly-owned subsidiary of the Company ("GPA"), to Green
Spring. The Exchange Agreement provided that the minority stockholders of Green
Spring, including IBC, had the option (the "Exchange Option"), under certain
circumstances, to exchange their equity interests in Green Spring for 2,831,516
shares of Common Stock or $65.1 million in subordinated notes. In the event of
an exchange, the Company could have elected to pay cash in lieu of issuing
subordinated notes. The Exchange Option would have expired on December 13, 1998.
The consideration paid and terms of the Exchange Option were determined through
arm's length negotiations that considered, among other factors, the historical
and projected income of Green Spring and the value of GPA. The consideration
paid by the Company was determined by the Board with the advice of management
and the Company's investment bankers. On December 20, 1995, the Company acquired
an additional 10% equity interest in Green Spring for $16.7 million in cash as a
result of the exercise of the Exchange Option by a minority stockholder of Green
Spring.
On December 13, 1995, as part of the Company's initial investment in Green
Spring, IBC sold a 4.42% equity interest in Green Spring, in which it had a cost
basis of approximately $3.3 million, to the Company for approximately $5.4
million in cash. The Exchange Option gave IBC the right, until December 13,
1998, to exchange its remaining equity interest in Green Spring for a maximum of
889,456 shares of Common Stock or approximately $20.5 million in subordinated
notes.
IBC converted its equity interest in Green Spring into 889,456 shares of
Common Stock valued at approximately $17.9 million on January 29, 1998 in
connection with the Company's acquisition of Merit and related transactions
(collectively the "Transactions"). The Transactions are more fully described in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998. See "Incorporation of Certain Documents by Reference."
IBC and its affiliated entities contract with Green Spring for provider
network, care management and medical review services pursuant to contractual
relationships entered into on July 7, 1994, with terms of up to five years.
During fiscal 1998, IBC and its affiliated entities paid Green Spring
approximately $54.7 million for such services. As of September 30, 1998, IBC and
its affiliated entities owed Green Spring approximately $13.5 million. Green
Spring recorded revenue of approximately $54.6 million from IBC during fiscal
1998.
On July 7, 1994, IBC sold a subsidiary to Green Spring in exchange for a
$15.0 million promissory note. As of November 30, 1998, $3.0 million remained
outstanding under such promissory note and is due and payable on July 7, 1999.
Daniel S. Messina, a director of the Company, is the Chief Financial Officer
of Aetna. On December 4, 1997, the Company consummated the purchase of HAI,
formerly a unit of Aetna, for approximately $122.1 million, which the Company
funded from cash on hand. HAI manages behavioral healthcare, primarily through
employee assistance programs ("EAPs") and other non-risk-based managed
17
<PAGE>
behavioral healthcare plans. The Company may be required to make additional
contingent payments of up to $60.0 million annually to Aetna over the five-year
period subsequent to closing. The amount and timing of the payments will be
contingent upon net increases in the HAI's covered lives in specified products.
The consideration paid for HAI was determined through arm's length negotiations
that considered, among other factors, the historical and projected income of
HAI. The consideration paid by the Company was determined by the Board with the
advice of management and the Company's investment bankers. The HAI acquisition
is more fully described in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998. See "Incorporation of Certain Documents by
Reference."
Aetna and its affiliated entities contract with the Company for various
behavioral managed care services pursuant to contractual relationships entered
into on December 4, 1997. During fiscal 1998, Aetna and its affiliated entities
paid the Company approximately $72.3 million for such services. As of September
30, 1998, Aetna and its affiliated entities owed the Company approximately
$788,000. The Company recorded revenue of approximately $69.2 million from Aetna
during fiscal 1998. Aetna also provides the Company services related to its
employee medical and dental plans. During fiscal 1998, the Company paid Aetna
approximately $515,000 for such services.
Richard E. Rainwater and certain of his affiliates have a significant
interest in Crescent Real Estate Equities Limited Partnership ("Crescent") and
the Company. Set forth below is a summary of the interests of such persons.
On June 17, 1997, the Company sold substantially all of its domestic
acute-care psychiatric hospitals and residential treatment facilities (the
"Psychiatric Hospital Facilities") to Crescent for $417.2 million in cash
(before costs of approximately $16 million) and warrants for the purchase of
2.5% of the common stock of Crescent Operating, Inc., an affiliate of Crescent
("COI"). Simultaneously with the sale of the Psychiatric Hospital Facilities to
Crescent, the Company and COI formed Charter Behavioral Health Systems, LLC
("CBHS") to conduct the operations of the Psychiatric Hospital Facilities and
certain other facilities transferred to CBHS by the Company. The Company owns a
50% interest in CBHS, which it obtained by contributing approximately $5 million
of certain net assets to CBHS. The Company franchises the "CHARTER" System of
behavioral healthcare to each of the Psychiatric Hospital Facilities and other
facilities operated by CBHS. In exchange, CBHS pays certain franchise fees to
the Company.
Crescent is the operating partnership of Crescent Real Estate Equities
("CEI"). Mr. Rainwater is the Chairman of the Board of Directors of CEI. The
sole general partner of Crescent is Crescent Real Estate Equities ("Crescent
GP"), which is a wholly-owned subsidiary of CEI. As of April 9, 1998, Mr.
Rainwater owned beneficially 11.0% of Crescent, which interests consist of
common stock in CEI (including common stock of CEI that may be acquired pursuant
to the exercise of options) and units of ownership in Crescent. Mr. Rainwater is
an affiliate of Crescent, Crescent GP and CEI.
A total of 4,000,000 shares of Common Stock and warrants for an additional
2,000,000 shares of Common Stock were acquired by Rainwater-Magellan from the
Company in the Private Placement pursuant to a Stock and Warrant Purchase
Agreement and certain related agreements (the "Private Placement Agreements").
Rainwater-Magellan beneficially owns 1,982,720 shares of Common Stock,
including a portion of the Rainwater-Magellan Warrant, which gives
Rainwater-Magellan the right to purchase an additional 1,942,996 shares of
Common Stock. Rainwater, Inc. is the sole general partner of Rainwater-Magellan.
Richard E. Rainwater is the sole stockholder and the sole director of Rainwater,
Inc. Mr. Rainwater has sole voting and dispositive power over the shares of
Common Stock owned by Rainwater-Magellan and the shares of Common Stock
underlying the Rainwater-Magellan Warrant. As a result of such relationships,
Mr. Rainwater is deemed to be the beneficial owner of the shares of Common Stock
held by Rainwater-Magellan, including the shares of Common Stock which can be
purchased under the Rainwater-Magellan Warrant.
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Mr. Rainwater owns beneficially approximately 62.8% of Rainwater-Magellan.
Mr. Rainwater's three children own beneficially an additional 4.8% of
Rainwater-Magellan through a limited partnership of which Mr. Rainwater is
general partner and an additional 1.2% each through trusts which are managed by
an unaffiliated trustee.
The Rainwater-Magellan Warrant entitles the holders to purchase in the
aggregate, at any time prior to its January 25, 2000 expiration date, up to
2,000,000 shares of Common Stock at a purchase price of $26.15 per share. The
Private Placement Agreements provide, among other things, for the adjustment of
the number of shares of Common Stock that can be purchased under the
Rainwater-Magellan Warrant and the purchase price, respectively, for certain
dilutive events, for registration rights for the shares of Common Stock owned by
Rainwater-Magellan, including those underlying the Rainwater-Magellan Warrant
(which registration rights, as mentioned below, have been exercised), and for a
variety of other customary provisions, including, without limitation, certain
restrictions on Rainwater-Magellan's private sale of such shares, certain
preemptive rights of Rainwater-Magellan to acquire additional securities issued
by the Company for cash in a private placement transaction, and standstill
covenants restricting the purchase of additional shares of Common Stock by
Rainwater-Magellan and its affiliates in certain circumstances.
Darla D. Moore, a director of the Company, is the spouse of Richard E.
Rainwater. Under the terms of the Private Placement Agreements,
Rainwater-Magellan has the right to designate a nominee acceptable to the
Company for election as a director of the Company for so long as the Rainwater
Group continues to own beneficially a specified minimum number of shares of
Common Stock. Rainwater-Magellan proposed Ms. Moore as its nominee for director,
and Ms. Moore was elected a director by the board in February 1996.
Under the terms of the Private Placement Agreements, the Company agreed (i)
to pay a transaction fee of $150,000; (ii) to reimburse certain expenses of
Rainwater, Inc. in connection with the Private Placement; (iii) to pay the
Rainwater Group an annual monitoring fee of $75,000 commencing on March 31,
1996; and (iv) to reimburse the Rainwater Group for reasonable fees and expenses
(up to a maximum of $25,000 annually) incurred in connection with its ownership
of the Common Stock and the Rainwater-Magellan Warrant. The Company also agreed
under the Private Placement Agreements to reimburse the Rainwater Group in the
future for one additional filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, if a filing under such act is required in
connection with an exercise of the Rainwater-Magellan Warrant.
Rainwater-Magellan purchased the Common Stock and the Rainwater-Magellan
Warrant on January 25, 1996. During fiscal 1998, the Company paid an aggregate
of $75,000 for the annual monitoring fee and fees and expenses incurred in
connection with its ownership of the Common Stock and Rainwater-Magellan
Warrant. Excluded from these amounts are directors' fees and expense
reimbursement paid to Ms. Moore in her capacity as a director of the Company.
The Company has incurred costs to date of approximately $55,000 in connection
with its registration of the shares and approximately $40,000 in costs to
register the shares of Common Stock underlying the Rainwater-Magellan Warrant.
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PROPOSED 2000 EMPLOYEE STOCK PURCHASE PLAN
The following summary description of the Magellan Health Services, Inc. 2000
Employee Stock Purchase Plan ("2000 Plan") is qualified in its entirety by
reference to the full text of the 2000 Plan, which is attached hereto as
Appendix I.
The Board of Directors has adopted, subject to stockholder approval, the
2000 Plan, covering 1,000,000 shares of Common Stock. The purpose of the 2000
Plan is to provide eligible employees of the Company and its subsidiaries with
an opportunity to be compensated through benefits of stock ownership and to
acquire an interest in the Company through the purchase of Common Stock. It is
the intention of the Company that the 2000 Plan qualify as an "employee stock
purchase plan" under Section 423 of the Code.
The 2000 Plan will be administered by a committee (the "Employee Stock Plan
Committee") consisting of not fewer than three members appointed by the Chief
Executive Officer of the Company. Each member of the Employee Stock Plan
Committee will be either a Director, an officer, an employee of the Company or
of a subsidiary thereof. The Employee Stock Plan Committee will be vested with
authority to make, administer and interpret such rules and regulations as it
deems necessary to administer the 2000 Plan, and any determination, decision or
action of the Employee Stock Plan Committee in connection with the construction,
interpretation, administration or application of the 2000 Plan will be final and
binding on all participants and all persons claiming under or through any
participant.
For each offering period, any person who is employed by the Company or any
of the Company's subsidiaries designated by the Employee Stock Plan Committee,
and who was employed on the 60th day preceding the first day of an offering
period, will be eligible to participate in the 2000 Plan for such offering
period.
The Employee Stock Plan Committee has the authority to establish the
offering periods under the 2000 Plan; provided that each offering period will
have a term of not less than three months and not more than 12 months and that
the first offering period will not begin before January 1, 2000, and the last
offering period will end on or before December 31, 2002. On the first date of
each offering period, a participant is granted an option to purchase a number of
whole shares determined by dividing the amount to be withheld and applied for
the offering period by the "option price" per share of Common Stock, provided
that the maximum number of shares for which an option is granted to a
participant with respect to any single offering period shall not exceed 200
shares for each full or partial month in the offering period. The "option price"
is the lesser of (i) 85% of the closing price of the Common Stock on the New
York Stock Exchange as of the first day of the offering period or (ii) 85% of
the closing price of the Common Stock on the New York Stock Exchange as of the
last day of the offering period. The closing price of the Common Stock on
January 7, 1999 was $9.375 per share. Payment for shares to be purchased under
the Employee Stock Plan will be made by payroll deductions, but cannot exceed
10% of participants' annualized base pay.
No participant will be granted an option (i) if, immediately after the
grant, the participant would own stock and options possessing 5% or more of the
total combined voting power or value of all classes of stock of the Company or
any subsidiary of the Company, or (ii) which permits his or her rights to
purchase stock under all employee stock purchase plans to accrue at a rate which
exceeds $25,000 of the fair market value of the stock for each calendar year in
which such option is outstanding at any time.
A participant may withdraw from the 2000 Plan except that no withdrawal may
be made during the calendar month in which the last day of the offering period
occurs, or such later date as may be established by the Employee Stock Plan
Committee. All of the participant's payroll deductions credited to his or her
account will be paid to him or her promptly after receipt of the notice of
withdrawal, and no further payroll deductions will be made during that offering
period. A participant's withdrawal will not have any effect upon his or her
eligibility to participate in any similar plan which may be thereafter adopted
by the
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Company or in any subsequent offering period. Upon termination of the
participant's employment for any reason, the payroll deductions credited to the
participant's 2000 Plan account will be returned to the participant unless the
participant's termination occurs during the calendar month in which the last day
of the offering period occurs. In that event, the participant's account will be
used to purchase shares of Common Stock on the last day of the offering period.
Unless a participant gives written notice of withdrawal from the 2000 Plan
to the Company, the option to purchase shares during an offering period will be
exercised automatically for the participant on the day on which the offering
period terminates. If the total number of shares for which options are to be
exercised exceeds the number of shares then available under the 2000 Plan for
such offering period (as determined by the Employee Stock Plan Committee in its
sole discretion), the Company shall make a pro rata allocation of the shares
available.
Neither payroll deductions credited to a participant's account nor any
rights with regard to the exercise of an option or to receive shares under the
2000 Plan may be assigned, transferred, pledged or otherwise disposed of by a
participant. The Company may treat any such act as an election to withdraw
funds.
The Board of Directors of the Company may at any time terminate or amend the
2000 Plan. No such termination can affect options previously granted, and no
amendment can make any change in options theretofore granted which would
adversely affect the rights of any participant. No amendment can be made prior
to approval of the stockholders of the Company if such amendment would: (i)
require the sale of more shares than are authorized under the 2000 Plan or (ii)
permit payroll deductions at a rate in excess of 10% of a participant's base
pay.
If the Company cannot ascertain the whereabouts of a participant three years
after the participant's last purchase, under specified circumstances the Company
may mail a notice of pending action to the last known address of the
participant. The Committee may then cancel the account balance (including both
shares and withholdings) if it is not claimed within three months after such
notice. If the participant notifies the Company within one year of the date of
the notice, the Company will deliver the account balance to the participant.
The amounts withheld from a participant's pay under the 2000 Plan will be
taxable income to the participant and must be included in the participant's
gross income for federal income tax purposes in the year which such amounts
otherwise would have been received.
A participant will not be required to recognize any income for federal
income tax purposes either at the time the participant is granted an option
(which will be on the first day of the offering period) or by virtue of the
exercise of the option (which will take place on the last day of such offering
period). The federal income tax consequences of a sale or disposition of shares
acquired under the 2000 Plan depend in part on the length of time the shares are
held by a participant before such sale or disposition. If a participant sells or
otherwise disposes of shares acquired under the 2000 Plan (other than any
transfer resulting from death) within two years after the date on which the
option to purchase such shares is granted to him ("Two-Year Period"), the
participant must recognize ordinary income in the year of such disposition in an
amount equal to the excess of (i) the fair market value of the shares on the
date such shares are exercised over (ii) the option price. The amount of
"ordinary" income recognized by the participant will be added to the
participant's basis in such shares. Any gain realized on a sale in excess of the
participant's basis (after increasing such basis in such shares by the amount of
the ordinary income recognized) will be taxed as capital gain, and any loss
realized (after increasing such basis in such shares by the ordinary income
recognized) will be a capital loss.
If a participant sells shares acquired under the 2000 Plan after holding
such shares for the Two-Year Period or the participant dies, the participant or
the participant's estate must include in ordinary income in the year of sale (or
the taxable year ending upon death) an amount equal to the lesser of (i) the
excess of
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the fair market value of the shares on the date the option was granted over the
option price, or (ii) the excess of the fair market value of the shares at the
time of sale of the shares or on the date of death over the option price. Except
in the case of a transfer as a result of death, the amount of ordinary income
recognized by the participant will be added to the participant's basis in such
shares. Any gain realized upon the sale in excess of such basis will be taxed as
a long-term capital gain. Any loss realized will be treated as long-term capital
loss.
The Company will not receive any income tax deduction as result of issuing
shares pursuant to the 2000 Plan, except upon sale or disposition of shares by a
participant within the Two-Year Period. In such an event, the Company will be
entitled to a deduction equal to the amount included as ordinary income to the
participant with respect to the sale or disposition of such shares.
VOTE REQUIRED
Approval and adoption of the 2000 Plan by stockholders requires the
affirmative vote of a majority of the shares of Common Stock represented and
entitled to vote at the Annual Meeting. Assuming the existence of a quorum,
abstentions will be treated as a vote against the 2000 Plan and broker non-votes
will be disregarded and will have no effect on the outcome of the vote.
THE BOARD HAS UNANIMOUSLY APPROVED THE 2000 PLAN AND RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE 2000 PLAN. SHARES OF COMMON STOCK REPRESENTED AT THE
ANNUAL MEETING BY SIGNED BUT UNMARKED PROXIES WILL BE VOTED "FOR" THE 2000 PLAN.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, certain officers and persons who own more than 10%
percent of the Common Stock to file reports of ownership and changes in
ownership with the SEC and furnish copies of such reports to the Company. Based
solely on a review of the copies of such forms furnished to the Company, or
written representations that no other reports were required, the Company
believes that all persons who are required to comply with the Section 16(a)
filing requirements with respect to the Common Stock have complied with such
filing requirements on a timely basis, except for Gregory T. Torres, who filed
one late Form 4 for the sale of 7,000 shares of Magellan Common Stock in June
1998.
ADDITIONAL INFORMATION
ATTENDANCE
Attendance at the Annual Meeting is limited to stockholders of record or
their proxies, beneficial owners of Common Stock having evidence of such
ownership and guests of the Company.
STOCKHOLDERS PROPOSALS
In order to be included in the proxy statement and form of proxy for the
2000 Annual Meeting, a stockholder proposal must be in writing and received by
the Company by the close of business on September 2, 1999. All stockholder
proposals should be submitted by certified mail, return receipt requested, to
the Secretary of the Company, 3414 Peachtree Road, N.E., Suite 1400, Atlanta,
Georgia, 30326.
OTHER BUSINESS
Management does not know of any other matters that may properly come before
the Annual Meeting other than those described above. If any other matter
properly comes before the meeting, all properly
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executed proxies delivered pursuant to this solicitation will be voted on any
such matters in the discretion of the Proxies.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company expects to retain Arthur Andersen LLP as its independent public
accountants for the fiscal year ended September 30, 1999 upon written acceptance
of an engagement letter, which is expected to occur no later than June 30, 1999.
Arthur Andersen LLP served as the Company's independent public accountants for
the fiscal year ended September 30, 1998. Representatives of such firm will be
present at the Annual Meeting, will have an opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company with
the SEC are incorporated herein by reference:
(i) The Company's Annual Report on Form 10-K for fiscal year ended
September 30, 1998; and
(ii) All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since January 8, 1999.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the date on which the Annual
Meeting is held shall be deemed to be incorporated by reference in this Proxy
Statement and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement.
Copies of all documents that are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in this Proxy Statement) will be provided without
charge to each person to whom this Proxy Statement is delivered, upon written or
oral request. Copies of this Proxy Statement as amended or supplemented from
time to time, or any other documents (or parts of documents) that constitute
part of this Proxy Statement will be provided without charge to each such
person, upon written or oral request. Requests should be directed to Magellan
Health Services, Inc., Attn: Kevin Helmintoller, Vice President--Investor
Relations, 6950 Columbia Gateway Drive, Columbia, Maryland, 21046 (410)
953-1218. These documents may also be accessed from the SEC Internet site, which
is located at www.sec.gov.
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APPENDIX I
PROPOSED 2000 EMPLOYEE STOCK PURCHASE PLAN
MAGELLAN HEALTH SERVICES, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE. The purpose of the Magellan Health Services, Inc. 2000
Employee Stock Purchase Plan (the "Plan"), is to provide employees of Magellan
Health Services, Inc. (the "Company") and its subsidiary companies with an
opportunity to be compensated through the benefits of stock ownership and to
acquire an interest in the Company through the purchase of Common Stock of the
Company. It is the intention of the Company to have the Plan qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986 (the "Code"). The provisions of the Plan shall, accordingly, be construed
so as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.
2. DEFINITIONS. (a) "Base Pay" means the compensation payable to an
employee by the Company or a designated subsidiary (as defined in Code
Section 424(f)) (a "subsidiary") calculated at that employee's base salary
or standard hourly rate of compensation, but excluding overtime,
commissions, shift differential, incentive bonus compensation and
compensation payable under any deferred compensation or other fringe benefit
plan.
(b) "Employee" means for each Offering Period (as defined in Section 4)
any person who is employed by the Company or by any subsidiary of the
Company designated from time to time by the Committee (as defined in Section
13) to participate in such Offering Period.
3. ELIGIBILITY. (a) Any Employee who shall be employed on the 60th day
preceding the Offering Date of an Offering Period shall be eligible to
participate in the Plan for such Offering Period. Notwithstanding the
foregoing, the Committee, in its sole discretion, may credit the employment
service of persons employed by a business acquired by the Company or by any
subsidiary thereof for the purpose of satisfying the 60-day rule herein.
(b) Any provision of the Plan to the contrary notwithstanding, no
Employee shall be granted an option:
(i) If, immediately after the grant such Employee would own shares,
and/or hold outstanding options to purchase stock, possessing 5% or more
of the total combined voting power or value of all classes of shares of
the Company or of any subsidiary of the Company; or
(ii) Which permits his rights to purchase shares under all employee
stock purchase plans of the Company and its subsidiaries to accrue at a
rate which exceeds $25,000 of the fair market value of the shares
(determined at the time such option is granted) for each calendar year in
which such stock option is outstanding at any time.
4. OFFERING PERIODS. The Committee shall establish the Offering Periods
under the Plan which shall be of not less than three months nor more than twelve
months duration each, the first of which shall not begin before January 1, 2000,
and the last of which shall end not later than December 31, 2002. The beginning
date (the "Offering Date") and the ending date (the "Termination Date") of each
Offering Period shall be set in advance of each Offering Period by the
Committee.
5. PARTICIPATION. An eligible Employee may become a participant only by
completing an election notice provided by the Company and filing it with the
designated representative of the Company no later than the date specified by the
Company in the election notice form.
Unless otherwise adjusted in accordance with rules established by the
Committee in its sole discretion, payroll deductions for a participant with
respect to an Offering Period shall commence with the first pay date beginning
on or after the Offering Date, and shall end with the last pay date ending on or
before the
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Termination Date, unless sooner terminated by the participant as provided in
Section 10. All Employees granted options under the Plan shall have the same
rights and privileges, except that the amount of stock which may be purchased
under such option may vary in a uniform manner as described in Section 7.
6. METHOD OF PAYMENT. Payments for shares under the Plan may be made only
by payroll deductions, as follows:
(a) If a participant wishes to participate in the Plan, then at the time
he files his election notice, he shall elect to have deductions made from
his Base Pay at a rate, expressed as a percentage, not to exceed 10% of his
annualized Base Pay as of the Offering Date. Any or all amounts withheld
during the one-month period immediately preceding the Termination Date in
any Offering Period may be applied to the purchase of shares on the
Termination Date or to the purchase of shares offered for the next
subsequent Offering Period in a manner as may be determined by the
Committee, in its sole discretion, but only if such application is
administered consistently among all participants during such Offering
Period.
(b) All payroll deductions made for a participant shall be credited to
his account under the Plan. A participant may not make any separate cash
payment into such account. A participant's account shall be no more than a
bookkeeping account maintained by the Company, and neither the Company nor
any subsidiary shall be obligated to segregate or hold in trust or escrow
any funds in a participant's account.
(c) A participant's election to have deductions made from his Base Pay
shall be effective for all pay dates occurring during the Offering Period
which commences immediately following the filing, in accordance with Section
5, of the participant's election notice and for each subsequent Offering
Period until such election is modified or revoked by the participant or
until such participant no longer meets the eligibility requirements of
Section 3(a). A participant may discontinue his participation in the Plan as
provided in Section 10.
A participant may elect to change the rate of payroll deductions at such
times and in accordance with such rules as may be prescribed by the Committee;
any such change in the rate of payroll deductions shall be applicable only with
respect to Offering Periods commencing after a participant files with the
Committee an election notice requesting such change.
7. GRANTING OF OPTION. (a) Subject to any adjustment under Sections 12 or
17, on the Offering Date for each Offering Period, a participant shall be
granted an option to purchase a number of whole shares determined by
dividing the amount to be withheld for participation in the Plan and applied
to such Offering Period by the option price per share of Common Stock
determined in accordance with Section 7(b) but, in no event shall the
maximum number of shares for which an option is granted to a participant
with respect to any single Offering Period exceed 200 shares per month for
each full or partial month during the Offering Period.
(b) The option price per share of shares purchased with payroll
deductions for a participant will be equal to the lesser of: (i) 85% of the
closing price of the Common Stock on the New York Stock Exchange on the
Offering Date; or (ii) 85% of the closing price of the Common Stock on the
New York Stock Exchange on the Termination Date. If no shares are traded on
such exchange on either such date, such price shall be determined on the
last trading date for such shares immediately preceding the Offering Date or
the Termination Date, as applicable.
8. EXERCISE OF OPTION. Unless a participant gives written notice of
withdrawal pursuant to Section 10(a) or such participant's payroll deductions
are returned in accordance with Section 10(c), his option for the purchase of
shares during an Offering Period with payroll deductions will be exercised
automatically for him on the Termination Date of that Offering Period. The
automatic exercise shall, subject to Sections 12 and 17, be for the purchase of
the maximum number of full shares subject to his
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option which the sum of payroll deductions credited to the participant's account
on the Termination Date can purchase at the option price.
9. DELIVERY. As promptly as practicable after the end of an Offering
Period, the Company will deliver the shares purchased upon the exercise of the
option to a designated broker selected by the Company to administer and hold
shares in individual accounts established for the benefit of each participant.
The Committee, in its sole discretion, may establish procedures to permit a
participant to receive such shares directly. Amounts credited to the
participant's account in excess of the amount necessary to pay the option price
for the maximum number of full shares subject to his option shall either be
refunded to the participant or credited to the participant's account for the
next subsequent Offering Period as may be determined by the Committee, in its
sole discretion.
10. WITHDRAWAL. (a) A participant may withdraw payroll deductions credited
to his account under the Plan by giving written notice to the representative
of the Company designated on the election notice form. A participant may
withdraw amounts credited to his account at any time prior to the first day
of the calendar month ending on the Termination Date or such later date as
may be established by the Committee in its sole discretion. All of the
participant's payroll deductions credited to his account will be paid to him
promptly after receipt of his notice of withdrawal, and no further
deductions will be made from his pay during that Offering Period.
(b) A participant's withdrawal will not limit his eligibility to
participate in any similar plan which may hereafter be adopted by the
Company or in any subsequent Offering Period.
(c) Upon termination of the participant's employment during an Offering
Period for any reason, including death or retirement, the payroll deductions
credited to his account for such period will be returned to him or, in the
case of his death, to the person or persons entitled thereto under Section
14. Notwithstanding the foregoing, the payroll deductions credited to the
account of any participant whose employment is terminated during the
calendar month ending on the Termination Date shall not be returned but
shall instead be used to purchase shares in accordance with Section 8.
11. NO INTEREST. No interest shall be accrued or payable with respect to
amounts in a participant's account.
12. STOCK. (a) The shares of Common Stock to be sold to participants under
the Plan may, at the election of the Company, be either treasury shares or
shares originally issued for such purpose. The maximum number of shares
which shall be made available for sale under the Plan shall be 1,000,000
shares and the maximum number of shares available for sale in each Offering
Period shall be determined by the Committee in its sole discretion, subject
in each case to adjustment upon changes in capitalization of the Company as
provided in Section 17. If the total number of shares for which options are
to be exercised for an Offering Period in accordance with Section 8 exceeds
the number of shares then available under the Plan for such Offering Period,
the Company shall make a pro rata allocation of the shares available based
on a fraction, the numerator of which shall be the number of shares with
respect to which a participant has an option to purchase for an Offering
Period and the denominator of which shall be the number of shares available
for purchase, with rounding down for each participant to the nearest whole
number.
(b) A participant will have no interest in shares covered by an option
until such option has been exercised.
13. ADMINISTRATION. The Plan shall be administered by a Committee (the
"Committee") consisting of not less than three members who shall be appointed by
the Chief Executive Officer of the Company. Each member of the Committee shall
be either a director, an officer, or an employee of the Company or of a
subsidiary thereof. The Committee shall be vested with full authority to make,
administer, and interpret such rules and regulations as it deems necessary to
administer the Plan, and any determination, decision, or action of the Committee
in connection with the construction, interpretation, administration, or
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application of the Plan shall be final, conclusive, and binding upon all
participants and all persons claiming under or through any participant.
14. DESIGNATION OF BENEFICIARY. A participant may file a written
designation of a beneficiary who is to receive any shares or cash to the
participant's credit under the Plan in the event of such participant's death
before, on, or after the Termination Date but prior to the delivery of shares
and, if applicable, cash. Such designation of beneficiary may be changed by the
participant at any time by written notice. Upon the death of a participant and
upon receipt by the Company of proof of the identity and existence at the
participant's death of a beneficiary validly designated by him under the Plan,
the Company shall deliver such shares or cash to the account of such
beneficiary. In the event of the death of a participant and in the absence of a
beneficiary validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such shares or cash to the
account of the executor or administrator of the estate of the participant, or if
no such executor or administrator has been appointed (to the knowledge of the
Company) the Company, in its discretion, may deliver such shares or cash to the
account of the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent, or relative is known to the Company,
then to the account of such other person as the Company may designate. No
designated beneficiary shall, prior to the death of the participant by whom he
has been designated, acquire any interest in the shares or cash credited to the
participant under the Plan.
15. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way by the participant. Any such attempted
assignment, transfer, pledge, or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 10.
16. USE OF FUNDS. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose.
17. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event that the
outstanding shares of Common Stock of the Company are hereafter increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of a recapitalization,
reclassification, stock split, combination of shares, or dividend payable in
shares of Common Stock, an appropriate adjustment shall be made by the Committee
to the number and kind of shares as to which outstanding options shall be
exercisable and to the option price. No fractional shares shall be issued or
optioned in making the foregoing adjustments. All adjustments made by the
Committee under this paragraph shall be conclusive and binding on all
participants and all persons claiming under or through any participant.
Subject to any required action by the stockholders, if the Company shall be
a party to any reorganization involving merger, consolidation, acquisition of
the stock or acquisition of the assets of the Company, the Committee in its
discretion may declare (a) that all options granted hereunder are to be
terminated after giving at least ten days' notice to holders of outstanding
options, or (b) that any option granted hereunder shall pertain to and apply
with appropriate adjustment as determined by the Committee to the securities of
the resulting corporation to which a holder of the number of shares of Common
Stock subject to the option would have been entitled. The adoption of a plan of
dissolution or liquidation by the Board of Directors and stockholders of the
Company shall cause every option outstanding hereunder to terminate on the
fifteenth day thereafter, except that, in the event of the adoption of a plan of
dissolution or liquidation in connection with a reorganization as provided in
the preceding sentence, options outstanding hereunder shall be governed by and
shall be subject to the provisions of the preceding sentence.
Any issue by the Company of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to any option, except as specifically provided otherwise in this
I-4
<PAGE>
Section 17. The grant of an option pursuant to the Plan shall not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
18. AMENDMENT OR TERMINATION. The Board of Directors of the Company may at
any time terminate or amend the Plan. No such termination can affect options
previously granted and no amendment can make any change in any option
theretofore granted which would adversely affect the rights of any participant.
No amendment can be made without prior approval of the stockholders of the
Company if such amendment would:
(a) Require the sale of more shares than are authorized under Section
12; or
(b) Permit payroll deductions or cash payments at a rate in excess of
10% of a participant's Base Pay.
19. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall not be deemed to have been
duly given until actually received by the representative of the Company
designated on the election notice form provided by Section 5.
20. MISSING PAYEE. If (i) the Company utilizes a designated broker to
administer and hold in individual accounts the shares purchased by the
participants, (ii) the Company subsequently cannot ascertain the whereabouts of
a participant whose account is held with the designated broker, (iii) after
three years from the date of the last purchase by such participant, a notice of
such account balance and pending action under this section is mailed to the last
known address of such person, as shown on the records of the designated broker
or the Company, and (iv) within three months after such mailing, such person has
not made written claim therefor, then the Committee may direct that such account
balance (including both shares and withholdings) otherwise due to such person be
canceled and returned to the Company. Upon such cancellation, the Company or the
designated broker shall have no further liability therefor, except that, in the
event such person, within one year of the date of the notice referred to in
(iii) above, notifies the Company or the broker of his whereabouts and requests
the amounts due to him under the Plan, the number of shares (as may be adjusted
to reflect any extraordinary corporate event or recapitalization) together with
any dividends or other accretions thereon and the amount of withholdings
contained in such account so canceled shall be delivered to him as provided
herein by the Plan.
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<PAGE>
MAGELLAN HEALTH SERVICES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS
FEBRUARY 11, 1999
The undersigned appoints HENRY T. HARBIN and CRAIG L. McKNIGHT, or either of
them, as proxies, each with full power of substitution, to represent and to vote
all shares of Common Stock of Magellan Health Services, Inc. held by the
undersigned at the annual meeting of stockholders to be held on February 11,
1999, at 10:00 A.M., local time, at the Harbor Court Hotel, 550 Light Street,
Baltimore, Maryland, and at any adjournment or postponement (the "Annual
Meeting") upon the matters described in the accompanying Notice of Annual
Meeting of Stockholders and Proxy Statement, receipt of which is acknowledged,
and upon any other business that may properly come before the Annual Meeting.
The proxies are directed to vote on the matters described in the Notice of
Annual Meeting of Stockholders and Proxy Statement as designated below, and in
their discretion on such other business as may properly come before the meeting
<TABLE>
<CAPTION>
or any adjournment thereof.
<S> <C>
1. ELECTION OF DIRECTORS / / FOR All Nominees Listed
Below
/ / WITHHOLD AUTHORITY to
Vote For All Nominees
Listed Below:
</TABLE>
EDWIN M. BANKS, DANIEL S. MESSINA, DARLA D. MOORE, JEFFREY A. SONNENFELD
TO WITHHOLD AUTHORITY TO VOTE FOR LESS THAN ALL NOMINEES WRITE THE NAME OF SUCH
NOMINEE(S) ON THE LINE BELOW:
<TABLE>
<CAPTION>
________________________________________________________________________________
<S> <C>
2. PROPOSAL TO APPROVE THE COMPANY'S / / FOR
PROPOSED 2000 EMPLOYEE STOCK PURCHASE / / AGAINST
PLAN: / / ABSTAIN
</TABLE>
(CONTINUED ON REVERSE SIDE)
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED, BUT
IF NO DIRECTION IS INDICATED, THE PROXY
WILL BE VOTED "FOR" PROPOSALS 1 AND 2.
DATED _____________________, 1999
_________________________________
_________________________________
Signature of Stockholder
Please sign exactly as your name or names appear hereon. Where more than one
owner is shown, each should sign. Persons signing in a fiduciary or
representative capacity should give full title. If this proxy is submitted by a
corporation, please sign in full corporate name by an authorized officer. If a
partnership, please sign in partnership name by authorized person.
Please mark, sign, date and return this proxy card promptly, using the enclosed
envelope.
