<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-12
</TABLE>
<TABLE>
<S> <C> <C>
----------------------------------------------------------------------------
MAGELLAN HEALTH SERVICES, INC.
----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction
applies:
------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by
/ / Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------
</TABLE>
<PAGE>
[LOGO]
January 19, 2001
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of Magellan Health Services, Inc. on February 21, 2001, at
10:00 a.m., local time. The Annual Meeting will be held at The Harbor Court
Hotel, 550 Light Street, Baltimore, Maryland 21203. A Notice of Annual Meeting
of Stockholders, a Proxy Statement containing information about matters to be
acted on at the Annual Meeting, and a proxy card are enclosed.
I encourage you to attend 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.
I look forward to seeing you at the Annual Meeting.
Very truly yours,
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 21, 2001
---------------------
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 21, 2001, at
10:00 a.m., local time, to consider and act upon the following:
1. A proposal to elect four directors to serve for a three-year term
expiring at the 2004 Annual Meeting of Stockholders or until their
respective successors are duly elected and qualified;
2. A proposal to amend the Magellan Health Services, Inc. 2000 Long-Term
Incentive Compensation Plan;
3. A proposal to amend the Magellan Health Services, Inc. 2000 Employee
Stock Purchase Plan; and
4. Such other matters as may properly come before the Annual Meeting.
Stockholders of record at the close of business on January 12, 2001 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,
Columbia, Maryland 21046, during normal business hours for the ten-day period
prior to the Annual Meeting and at the place of the Annual Meeting on the day of
the meeting.
Your attention is directed to the accompanying Proxy Statement.
By Order of the Board of Directors,
Mark S. Demilio
SECRETARY
Columbia, Maryland
January 19, 2001
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.
6950 COLUMBIA GATEWAY DRIVE
COLUMBIA, MARYLAND 21046
---------------------
PROXY STATEMENT FOR THE
2001 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"), and the
holders of the Company's Series A Preferred Stock, $1,000 par value per share
(the "Series A Preferred Stock"), for use at the Annual Meeting to be held at
10:00 a.m., local time, on February 21, 2001, 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
proxy card are first being sent or given to stockholders on or about
January 19, 2001. At the Annual Meeting, stockholders will be asked to consider
and vote upon:
1. A proposal to elect four directors to serve for a three-year term
expiring at the 2004 Annual Meeting of Stockholders or until their
respective successors are duly elected and qualified;
2. A proposal to amend the Magellan Health Services, Inc. 2000 Long-Term
Incentive Compensation Plan (the "2000 LTIC Plan");
3. A proposal to amend the Magellan Health Services, Inc. 2000 Employee
Stock Purchase Plan (the "2000 ESP Plan"); and
4. 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 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 EACH OF THE PROPOSALS DESCRIBED ABOVE AND
RECOMMENDS THAT STOCKHOLDERS VOTE FOR ALL OF THE PROPOSALS.
VOTING
RECORD DATE AND QUORUM
The Board has fixed the close of business on January 12, 2001 as the record
date for determining the stockholders entitled to notice of, and to vote at, the
Annual Meeting. On the record date, 32,652,406 shares of Common Stock were
outstanding, with each share of Common Stock entitled to one vote on each matter
presented for a vote at the Annual Meeting. On the record date, 59,063 shares of
Series A Preferred Stock were outstanding, which are entitled to an aggregate of
6,300,053 votes 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 and Series A Preferred 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.
1
<PAGE>
VOTING PROCEDURES
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 each of
the proposals set forth above.
VOTE REQUIRED
A plurality of the votes of the holders of all shares of Common Stock and
Series A Preferred Stock that are present at the Annual Meeting and entitled to
vote will be necessary to elect the director-nominees listed herein. A majority
of the votes entitled to be cast by the holders of all shares of Common Stock
and Series A Preferred Stock that are present at the Annual Meeting and entitled
to vote will be necessary to approve the amendment to the 2000 LTIC Plan and the
amendment to the 2000 ESP Plan. Abstentions and proxies relating to "street
name" shares for which brokers have not received voting instructions from the
beneficial owner ("Broker Non-Votes") are counted in determining whether a
quorum is present.
With respect to the election of directors, the four nominees receiving the
highest number of votes will be elected. Therefore, withholding authority to
vote for a director nominee will have no effect. With respect to all other
matters submitted to the stockholders for their consideration, abstentions will
be counted as part of the total number of votes cast on such proposals in
determining whether the proposals have received the requisite number of
favorable votes, whereas Broker Non-Votes will not be counted as part of the
total number of votes cast on such proposals. Thus, abstentions will have the
same effect as votes against any given proposal, whereas Broker Non-Votes will
have no effect in determining whether the stockholders have approved any given
proposal.
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, 10,735 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,
2
<PAGE>
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.
ELECTION OF DIRECTORS
(ITEM 1 OF NOTICE)
Under the Company's certificate of incorporation, the number of directors is
currently fixed at twelve. The directors are divided into three classes of four
directors each, with the nominees in a single class being elected each year to
serve for a three-year term. At the Annual Meeting, the Board will nominate four
individuals to serve as directors for a three-year term expiring at the 2004
Annual Meeting of Stockholders or until their respective successors are duly
elected and qualified. The Proxies may not vote for more than four nominees. 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
for the election of such substitute nominees.
Of the current twelve directors, four will continue to serve for terms
expiring in 2002 and four will continue to serve for terms expiring in 2003 (the
"Continuing Directors"). The tables below set forth the name and certain other
information about the nominees for election as directors and the Continuing
Directors.
NOMINEES FOR ELECTION AS DIRECTORS
<TABLE>
<CAPTION>
NAME, AGE, AND DATE CURRENT POSITION WITH THE COMPANY, PRINCIPAL OCCUPATIONS
FIRST BECAME A DIRECTOR TERM EXPIRING DURING PAST FIVE YEARS, AND OTHER DIRECTORSHIPS
----------------------- ------------- ------------------------------------------------
<S> <C> <C>
G. Fred DiBona, Jr........ 2001 Director, President and Chief Executive Officer of
50 Independence Blue Cross (a health insurance
January 1996 company) (since 1990). Also a director of
Philadelphia Suburban Corporation, Tasty Baking
Company, PECO Energy Company and Eclipsys
Corporation.
Andre C. Dimitriadis...... 2001 Chairman and Chief Executive Officer of LTC
59 Properties (a healthcare real estate investment
July 1992 trust) (since 1992). Also a director of LTC
Properties, Inc. and LTC Healthcare, Inc.
A.D. Frazier, Jr.......... 2001 Global Partner of Amvescap PLC (global investment
56 services) (since January 2001) President and Chief
May 1995 Executive Officer of Invesco Inc. (an institutional
asset management company) (1996-2000); Senior
Executive Vice President and Chief Operating
Officer for the Atlanta Committee for the Olympic
Games (1991-1996). Also a director of Amvescap PLC,
Apache Corporation, R. J. Reynolds Tobacco
Holdings, Inc. and RockTenn Corporation.
Robert W. Miller.......... 2001 Chairman of the Board (since March 1998); Partner,
59 King & Spalding (law firm) (1985-1997). Also a
February 1998 director of Paracelsus Healthcare Corporation.
</TABLE>
THE BOARD RECOMMENDS THE NOMINEES FOR ELECTION AS DIRECTORS AND URGES
STOCKHOLDERS TO VOTE FOR MESSRS. DIBONA, DIMITRIADIS, FRAZIER AND MILLER. SHARES
REPRESENTED AT THE ANNUAL MEETING BY PROPERLY SIGNED BUT UNMARKED PROXIES WILL
BE VOTED FOR EACH OF THE NOMINEES.
3
<PAGE>
CONTINUING DIRECTORS
<TABLE>
<CAPTION>
NAME, AGE, AND DATE CURRENT POSITION WITH THE COMPANY, PRINCIPAL OCCUPATIONS
FIRST BECAME A DIRECTOR TERM EXPIRING DURING PAST FIVE YEARS AND OTHER DIRECTORSHIPS
----------------------- ------------- ------------------------------------------------
<S> <C> <C>
David Bonderman........... 2002 Managing Director/Founding Partner of Texas Pacific
58 Group (since 1992). Also a director of Bell &
December 1999 Howell, Inc., Beringer Wine Estates, Continental
Airlines, Inc., CoStar Group, Inc., Denbury
Resources, Inc., Ducati Motor Holding S.p.A.,
Oxford Health Plans, Inc., Paradyne Networks, Inc.,
Ryanair Ltd., and Washington Mutual, Inc.
Daniel S. Messina......... 2002 Chief Operating Officer of the Company (since
45 August 2000); Chief Financial Officer of Aetna U.S.
December 1997 Healthcare (1998-2000); Vice President, Business
Strategy of Aetna U.S. Healthcare (1997); Deputy
Chief Financial Officer, Aetna U.S. Healthcare
(1996-1997); and Vice President, Financial
Relations and Chief of Staff to the Vice Chairman
for Strategy, Finance and Administration, Aetna,
Inc. (1995-1996).
Darla D. Moore............ 2002 Private Investor, Rainwater, Inc. (investments)
46 (since 1994).
February 1996
Jeffrey A. Sonnenfeld..... 2002 Chairman and President, The Chief Executive
46 Leadership Institute (education) (since January
September 1997 1998); Professor of Organization and Management and
Director of the Center for Leadership and Career
Studies of the Goizueta Business School at Emory
University (1989-1997). Also a director of U.S.
Franchise Systems, Inc.
Jonathan J. Coslet........ 2003 Investment Professional and Senior Partner of Texas
36 Pacific Group (since 1993). Also a director of
December 1999 Oxford Health Plans, Inc.
Henry T. Harbin, M.D...... 2003 President and Chief Executive Officer (since March
53 1998); Executive Vice President of the Company
March 1998 (1995-1998); President and Chief Executive Officer
of Green Spring (1994-1998).
Gerald L. McManis......... 2003 Retired; President of McManis Associates, Inc. and
64 MMI Companies, Inc. (strategy development and
February 1994 management consulting firm for healthcare and
healthcare-related companies) (1965-2000).
James B. Williams......... 2003 Partner in CAF, Inc., the management affiliate of
44 Texas Pacific Group (since 1998). President --
December 1999 Kaiser/Group Health; President, Kaiser Permanente
International; and Senior Vice President --
Operations and Strategic Development of Kaiser
Permanente (health maintenance organization)
(1994-1998).
</TABLE>
4
<PAGE>
AGREEMENTS TO NOMINATE OR APPOINT DIRECTORS
Pursuant to certain agreements, the Company is obligated to nominate or
appoint to the Board certain individuals designated by others as set forth
below.
Darla D. Moore was elected to the Board on February 22, 1996 pursuant to the
Stock and Warrant Purchase Agreement entered into by the Company and
Rainwater-Magellan Holdings, L.P. ("Rainwater-Magellan"), an affiliate of
Rainwater, Inc. and Richard E. Rainwater. In connection with the Stock and
Warrant Purchase Agreement, Rainwater-Magellan purchased 4,000,000 shares of
Common Stock and a Warrant to acquire up to 2,000,000 additional shares of
Common Stock. The Stock and Warrant Purchase Agreement provides that
Rainwater-Magellan has the right to designate a nominee acceptable to the
Company for election as 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 at least 600,000 shares of Common Stock.
David Bonderman, Jonathan J. Coslet and James B. Williams were elected to
the Board effective December 15, 1999 pursuant to an Amended and Restated
Investment Agreement dated December 15, 1999 (the "Investment Agreement")
entered into by the Company and TPG Magellan LLC, an affiliate of the investment
firm Texas Pacific Group ("TPG"), in connection with TPG's acquisition of 59,063
shares, and an option to acquire 21,000 additional shares, of Series A Preferred
Stock of the Company. The Investment Agreement provides that, as long as TPG and
its affiliates beneficially own at least 50% of the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock issued or issuable
under the Investment Agreement, the Board shall cause three individuals
designated by TPG (the "TPG Nominees") to be nominated as directors of the
Company and the Company shall use its best efforts to cause the election of the
TPG Nominees up for election at any annual meeting of stockholders. In addition,
each committee of the Board is required generally to include among its members
at least one TPG Nominee.
MEETINGS OF THE BOARD OF DIRECTORS
The Board held six meetings during fiscal 2000. Each director attended more
than 75% of the meetings of the Board and committees of the Board of which he or
she was a member, except Mr. Bonderman, Mr. Frazier and Ms. Moore.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has standing Audit and Compensation Committees. There is no
nominating committee of the Board.
AUDIT COMMITTEE. The Audit Committee currently consists of Messrs. Frazier
(Chairman), Coslet, Dimitriadis, and Miller. The Audit Committee held seven
meetings during fiscal 2000. The Audit Committee's duties are described under
the caption "Report of the Audit Committee."
COMPENSATION COMMITTEE. The Compensation Committee currently consists of
Messrs. McManis (Chairman), DiBona, Sonnenfeld and Williams. Mr. Messina served
on the Compensation Committee until August 24, 2000, when he was named the Chief
Operating Officer of the Company. At such time, he resigned from the
Compensation Committee. The Compensation Committee held four meetings during
fiscal 2000. The Compensation Committee's duties are described under the caption
"Compensation Committee Report on Executive Compensation."
COMPENSATION OF DIRECTORS
During fiscal 2000, each non-employee director received a monthly retainer
of $2,000 and a fee of $1,000 for each Board meeting and each Board committee
meeting attended. Mr. Miller received an additional monthly retainer of $5,000
for serving as Chairman of the Board. Dr. Harbin, an employee
5
<PAGE>
of the Company, received no additional compensation for serving as a director.
In accordance with Aetna's policy, Mr. Messina did not accept any compensation
or any option grants for serving as a director. Since becoming an employee,
Mr. Messina received no additional compensation for serving as a director.
The Company granted 25,000 options each to Messrs. Bonderman, Coslet and
Williams upon their joining the Board on December 15, 1999 pursuant to the 1996
Directors' Stock Option Plan. The Company did not make any other stock option
grants to directors during fiscal 2000.
REPORT OF THE AUDIT COMMITTEE
The Company's Audit Committee is responsible for, among other things,
reviewing with the Company's independent auditors the scope and results of their
audit engagement. In connection with the fiscal 2000 audit, the Audit Committee
has:
- reviewed and discussed with management the Company's audited financial
statements to be included in the Company's Annual Report on Form 10-K for
the year ended September 30, 2000,
- discussed with Arthur Andersen LLP, the Company's independent auditors,
the matters required by Statement of Accounting Standards No. 61, and
- received from Arthur Andersen LLP the written disclosures and letter from
Arthur Andersen LLP required by Independence Standards Board Standard
No. 1 regarding their independence.
Based on the review and the discussions described in the preceding bullet
points, the Audit Committee has recommended to the Board of Directors that the
audited financial statements be included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2000 for filing with the Securities
and Exchange Commission.
The Audit Committee has adopted a charter, a copy of which is attached to
the proxy statement as Appendix A. The members of the Audit Committee have been
determined to be independent in accordance with the requirements of
Section 303.01(B)(2)(a) and (3) of the New York Stock Exchange listing
standards.
A. D. Frazier, Jr. (Chairman)
Jonathan J. Coslet
Andre C. Dimitriadis
Robert W. Miller
THE FOREGOING REPORT SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY
GENERAL STATEMENT OR REFERENCE TO THIS PROXY STATEMENT INTO ANY FILING UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY
INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED
FILED UNDER SUCH ACTS.
6
<PAGE>
PRINCIPAL HOLDERS OF COMMON STOCK
The following table sets forth certain information as of December 15, 2000
(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
NAME AND ADDRESS BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
---------------- -------------------- --------------------
<S> <C> <C>
TPG Advisors II (2)...................................... 8,540,053 20.7%
201 Main Street
Suite 2420
Fort Worth, TX 76102
BLUM Capital Partners, L.P. (3).......................... 4,806,800 12.3%
909 Montgomery Street
San Francisco, CA 94133
Richard E. Rainwater (4)................................. 2,484,935 6.4%
777 Main Street
Suite 2700
Ft. Worth, TX 76102
Dimensional Fund Advisors, Inc. (5)...................... 2,197,300 5.6%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
</TABLE>
------------------------
(1) The information regarding the beneficial ownership of Common Stock by such
individual or entity is included herein in reliance on its report filed with
the United States Securities and Exchange Commission (the "SEC"), except
that the percentage of Common Stock beneficially owned is based upon the
Company's calculations made in reliance upon the number of shares of Common
Stock reported to be beneficially owned by such person or entity in such
report and, with respect to entities and persons other than TPG Advisors II,
32,647,625 shares of Common Stock issued and outstanding as of December 15,
2000, plus 6,300,053 shares of Common Stock that TPG has a right to vote, on
a converted basis from its shares of Series A Preferred Stock, as a single
class with holders of Common Stock. With respect to TPG Advisors II, the
percentage of Common Stock beneficially owned also is based upon 2,240,000
shares of Common Stock that TPG Magellan LLC has the right to acquire upon
exercise of an option within 60 days after December 15, 2000.
(2) Includes 6,300,053 shares that TPG Magellan LLC has the right to acquire
upon conversion of 59,063 shares of Series A Preferred Stock and 2,240,000
shares that TPG Magellan LLC has the right to acquire upon conversion of
21,000 shares of Series A Preferred Stock that TPG Magellan LLC has the
right to acquire upon exercise of an option within 60 days after
December 15, 2000. Information concerning beneficial ownership of securities
is based upon an Amendment No. 3 to Schedule 13D filed by TPG Advisors II on
February 22, 2000.
(3) Includes (i) 1,031,700 shares owed directly by limited partnerships for
which BLUM Capital Partners, L.P. ("BLUM LP") serves as the general partner
and BLUM LP's investment advisory client accounts; (ii) 3,616,800 shares
owned directly by RCBA Strategic Partners, L.P. ("Strategic"), of which RCBA
GP, L.L.C. ("RCBA GP") is general partner; and (iii) 158,300 shares owned by
The Common Fund, an investment manager for educational institutions. As of
September 30, 2000, BLUM LP and RCBA GP, had sole investment power and sole
voting power as to 4,806,800 shares. Under the rules of the SEC, Richard C.
Blum & Associates, Inc. ("RCBA, Inc."), the sole general partner of BLUM LP,
and RCBA GP, the sole general partner of Strategic, are also
7
<PAGE>
deemed to be beneficial owners of the shares beneficially owned by BLUM LP
and Strategic respectively. Richard C. Blum, chairman, director and a
substantial shareholder of RCBA, Inc. also might be deemed a beneficial
owner of shares owed by RCBA, Inc. Information concerning beneficial
ownership of securities is based upon an Amendment No. 1 to Schedule 13D
filed by BLUM LP on May 25, 2000.
(4) Includes (i) 2,417,554 shares owned directly by Richard E. Rainwater;
(ii) 27,657 shares owned directly by Rainwater-Magellan Holdings, L.P.
("Rainwater-Magellan"); and (iii) 39,724 shares owned by Rainwater, Inc., of
which Mr. Rainwater is the sole shareholder. Does not include 11,250 shares
that Darla D. Moore, a director of the Company, and the spouse of Richard E.
Rainwater and President of Rainwater, Inc., has the right to acquire upon
the exercise of options. Under the rules of the SEC, Rainwater, Inc., the
sole general partner of Rainwater-Magellan, is also deemed to be beneficial
owner of the shares beneficially owned by Rainwater-Magellan. Information
concerning beneficial ownership of securities by Mr. Rainwater,
Rainwater-Magellan and Rainwater, Inc. is based upon an Amendment No. 2 to
Schedule 13D filed by Rainwater-Magellan and dated April 17, 1998.
(5) Dimensional Fund Advisors, Inc. ("DFA") is an institutional investment
manager. As of September 30, 2000, DFA had sole investment power and sole
voting power as to 2,197,300 shares owned by its advisory clients. DFA
asserts that none of its clients own more than 5% of Magellan's Common
Stock. Information concerning beneficial ownership of securities is based
upon a Schedule 13G filed by DFA on February 3, 2000 and a Schedule 13F
filed by DFA on November 2, 2000.
EXECUTIVE COMPENSATION
The following table sets forth, for the three fiscal years ended
September 30, 2000, the compensation paid by the Company to the Company's Chief
Executive Officer, the Company's four next most highly compensated executive
officers serving at the end of fiscal 2000, and one additional executive officer
who was not serving as such at the end of fiscal 2000 (collectively, the "Named
Executive Officers").
8
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------------- ------------------------------
SECURITIES
UNDERLYING
FISCAL OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS(#)(1) COMPENSATION(2)
--------------------------- -------- -------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Harbin M.D. (3)........ 2000 $783,654 -- -- 90,000 $150,403
President and Chief Executive 1999 725,000 $470,813 -- 150,000 162,039
Officer 1998 600,000 350,000 -- 275,000 122,922
John J. Wider, Jr. (4).......... 2000 413,342 -- -- 113,400 51,768
President and Chief Operating 1999 380,000 204,795 -- 50,000 52,601
Officer of Magellan Behavioral 1998 306,077 93,767 -- 85,000 40,077
Health, Inc.
Daniel S. Messina (5)........... 2000 20,833 -- -- 300,000 18,334
Executive Vice President and 1999 -- -- -- -- --
Chief Operating Officer 1998 -- -- -- -- --
Clarissa C. Marques, Ph.D....... 2000 320,000 -- -- 96,800 40,462
Executive Vice President and 1999 287,500 155,664 -- 85,000 42,598
Chief Clinical and Quality 1998 247,500 103,601 -- 70,000 40,004
Management Officer
Clifford W. Donnelly (6)........ 2000 350,000 -- -- 62,200 50,317
Executive Vice President and 1999 175,000 74,400 -- 125,000 31,945
Chief Financial Officer 1998 -- -- -- -- --
Mark S. Demilio (7)............. 2000 245,000 -- -- 75,000 30,220
Executive Vice President, 1999 76,667 30,000 -- 40,000 13,310
Finance and Legal 1998 -- -- -- -- --
</TABLE>
------------------------
(1) Represents the number of stock options granted under the Company's stock
option plans.
(2) For fiscal 2000, includes (i) contributions to the Company's 401(k) plans of
$4,153, $8,296, $7,462, $10,717 and $2,720 for Dr. Harbin, Mr. Wider,
Dr. Marques, Mr. Donnelly and Mr. Demilio, respectively, and
(ii) contributions by the Company deposited in trust pursuant to the
Company's Supplemental Accumulation Plan ("SAP") of $146,250, $43,472,
$18,334, $33,000, $39,600 and $27,500 for Dr. Harbin, Mr. Wider,
Mr. Messina, Dr. Marques, Mr. Donnelly and Mr. Demilio, respectively, for
the calendar year 2000. For fiscal 1999, includes (i) contributions to the
Company's 401(k) plans of $12,554, $11,400, $11,400 and $2,245 for
Dr. Harbin, Mr. Wider, Dr. Marques and Mr. Donnelly, respectively,
(ii) contributions by the Company deposited in trust pursuant to the
Company's Executive Benefit Plan ("EBP") of $149,485, $41,201, $31,198 and
$13,310 for Dr. Harbin, Mr. Wider, Dr. Marques and Mr. Demilio,
respectively, for calendar year 1999, and (iii) a contribution by the
Company deposited in trust as a beginning balance in the Company's SAP of
$29,700 for Mr. Donnelly for calendar year 1999. For fiscal 1998, includes
(i) contributions to the Green Spring Health Services, Inc. 401(k) Plan of
$396, $3,255 and $3,604 for Dr. Harbin, Mr. Wider and Dr. Marques,
respectively, (ii) contributions by the Company deposited in trust pursuant
to the Company's EBP of $121,129, $36,822 and $36,400 for Dr. Harbin,
Mr. Wider and Dr. Marques, respectively, for calendar year 1998, and
(iii) premiums of $1,397 paid on behalf of Dr. Harbin for life and
disability insurance for calendar year 1998.
(3) Dr. Harbin became President and Chief Executive Officer of the Company
effective March 18, 1998.
(4) Mr. Wider resigned from the Company effective October 16, 2000.
(5) Mr. Messina was named Executive Vice President and Chief Operating Officer
of the Company on August 24, 2000, with an effective date of September 18,
2000.
9
<PAGE>
(6) Mr. Donnelly became an employee of the Company on March 31, 1999 and
resigned from the Company effective September 30, 2000. Mr. Donnelly,
pursuant to his severance agreement with the Company, forfeited all benefits
under the SAP.
(7) Mr. Demilio became an employee of the Company on July 1, 1999 and became
Executive Vice President, Finance and Legal, on December 1, 2000.
OPTION GRANTS IN FISCAL 2000
The following table sets forth certain information with respect to grants of
options to the Named Executive Officers during fiscal 2000 and the potential
realizable value of such options on September 30, 2000.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM ($) (1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED (#) FISCAL 2000 (%) SHARE ($) DATE 5% 10%
---- ----------- --------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Harbin, M.D............. 30,800(2) 1.2 4.8400 3/31/10 93,751 237,582
19,200(3) 0.8 4.8400 3/31/10 58,442 148,103
20,000(4) 0.8 2.3750 5/16/10 29,872 75,703
20,000(4) 0.8 2.1250 5/31/10 26,728 67,734
Daniel S. Messina................ 200,000(2) 7.9 2.6250 8/24/10 330,170 836,715
100,000(4) 3.9 2.6250 8/24/10 165,085 418,357
John J. Wider, Jr................ 35,000(2)(5) 1.4 4.8400 3/31/10(6) 106,535 269,980
8,400(3) 0.3 4.8400 3/31/10(6) 25,568 64,795
20,000(4) 0.8 2.2500 5/16/10(6) 28,300 71,718
30,000(4) 1.2 2.2200 5/18/10(6) 41,884 106,143
20,000(4) 0.8 2.2500 6/08/10(6) 28,300 71,718
Clarissa C. Marques, Ph.D........ 40,000(2) 1.6 4.8400 3/31/10 121,754 308,549
6,800(3) 0.3 4.8400 3/31/10 20,698 52,453
30,000(4) 1.2 2.2200 5/18/10 41,884 106,143
20,000(4) 0.8 2.1875 6/08/10 27,514 69,726
Clifford W. Donnelly............. 7,200(3) 0.3 4.8400 3/31/10(6) 21,916 55,539
15,000(4) 0.6 2.2200 5/18/10(6) 20,942 53,072
40,000(4) 1.6 2.3750 6/09/10(6) 59,745 151,406
Mark S. Demilio.................. 20,000(2) 0.8 4.8400 3/31/10 60,877 154,274
5,000(3) 0.2 4.8400 3/31/10 15,219 38,569
30,000(4) 1.2 2.2200 5/18/10 41,884 106,143
10,000(4) 0.4 2.0000 6/05/10 12,578 31,875
10,000(4) 0.4 2.3750 6/09/10 14,936 37,851
</TABLE>
--------------------------
(1) The Company is required by the Securities and Exchange Commission to use a
5% and 10% assumed rate of appreciation over the ten-year option term. This
does not represent the Company's estimate or projection of the future Common
Stock price. If the Common Stock does not appreciate, the Named Executive
Officers will receive no benefit from the options.
(2) Options become exercisable over three years at the rate of 33 1/3% of the
total number of options per year.
(3) Fifty percent of such options became exercisable on September 30, 2000, and
the remaining 50% become exercisable on September 30, 2001.
(4) Options become 100% exercisable one year from the date of grant.
(5) Under the severance agreement approved by the Board on October 9, 2000
between the Company and Mr. Wider, 23,333 of these options were cancelled.
The remaining 11,667 options will vest on March 31, 2001.
(6) These are the original expiration dates under the terms of the grants.
However, under the terms of the severance agreements with Messrs. Wider and
Donnelly, these options will expire if not exercised by March 31, 2002.
10
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 2000
AND OPTION VALUES AT SEPTEMBER 30, 2000
None of the Named Executive Officers exercised options during fiscal 2000.
The following table sets forth certain information with respect to the number
and value of options held by the Named Executive Officers on September 30, 2000:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SEPTEMBER 30, 2000(#) SEPTEMBER 30, 2000($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry T. Harbin M.D............................ 312,934 227,066 0 62,500
Daniel S. Messina.............................. -- 300,000 -- 356,250
John J. Wider, Jr. (2)......................... 105,369 170,031 0 110,275
Clarissa C. Marques, Ph.D...................... 79,234 165,566 0 80,275
Clifford W. Donnelly (2)....................... 45,267 141,933 0 81,388
Mark S. Demilio................................ 15,834 99,166 0 80,275
</TABLE>
------------------------
(1) The closing price for the Common Stock as reported on September 29, 2000
(the last trading day of the fiscal year) was $3.8125.
(2) A portion of these options were canceled under the severance agreements with
Messrs. Wider and Donnelly. In total, 150,000 of Mr. Wider's and 75,000 of
Mr. Donnelly's options were canceled.
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
making awards under stock-based compensation plans, except to the extent the
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 as 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. 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. Historically, the Compensation Committee adopted the following
policies with respect to executive officer compensation.
1. BASE SALARY. Executive officer base salaries should be at
approximately the 75th percentile of the peer group as periodically
surveyed, subject to increase to a higher percentile for individual
executive officers based on performance.
11
<PAGE>
2. PERFORMANCE-BASED COMPENSATION. A significant portion of executive
officer compensation should be performance-based.
ANNUAL INCENTIVE PLAN. In fiscal year 2000, executive officers were
eligible for participation in the Short-Term Incentive Plan ("STIP") which was
designed to award officers (and other employees) for meeting or exceeding
specific financial targets approved by the Compensation Committee for fiscal
year 2000. The Target Bonus Award levels range from 50% to 60% of base salary
with a maximum bonus of 75% to 100% of base salary. Incentive Awards are funded
based on meeting or exceeding threshold goals and are awarded based on corporate
and individual performance. Based on the financial results attained for fiscal
year 2000, the STIP was not funded and therefore no bonuses were paid under this
plan.
LONG-TERM INCENTIVE COMPENSATION PLAN. During 1999, the Compensation
Committee received advice from an outside compensation consultant with respect
to the need for additional long-term incentive compensation for the Company's
executive officers. In order to ensure that the Company's total compensation is
competitive with industry practice, the consultant recommended that the
Compensation Committee approve a proposal for an "omnibus type" long-term
incentive compensation plan. The Compensation Committee, the Board of Directors
and the Company's stockholders approved the Magellan Health Services, Inc. 2000
Long-Term Incentive Compensation Plan (the "2000 LTIC Plan"). The long-term
incentive plans that are currently in force include the Company's 1994, 1996,
1997 and 1998 Stock Option Plans and the 2000 LTIC Plan. The 2000 LTIC Plan
allows approval of several types of long-term incentives including stock
options, stock appreciation rights, restricted stock, performance shares,
performance units and other incentive awards. This type of plan allows the
Compensation Committee flexibility in developing appropriate long-term incentive
strategies to retain the Company's key executive officers. The Compensation
Committee continues to have full control over the design and amount of grants
awarded to executive officers under the 2000 LTIC Plan.
EXECUTIVE BENEFITS PLAN. The Company adopted an Executive Benefits Plan
(the "EBP") in 1993 that was in place until the plan was terminated on
December 31, 1999. The EBP was funded through a performance-based component and
a fixed component and was structured to provide an incentive for executive
officers to remain with the Company.
With the assistance of a compensation consultant, a new executive benefits
plan was developed for executive officers. The new program, called the Magellan
Health Services, Inc. Supplemental Accumulation Plan (the "SAP"), was approved
by the Compensation Committee for plan year 2000. The SAP, a calendar year based
plan, is funded through a fixed component that has been structured to provide an
incentive for executive officers to remain with the Company. It may also be
funded by the executive officers through voluntary deferrals of base and/or
incentive compensation. Annually, the Compensation Committee approves the fixed
percentage contribution for the Executive Officers. For 2000, the Chief
Executive Officer was eligible for a Company contribution of 19.5% of base
salary and the other executive officers were eligible for a Company contribution
of 11% of base salary. Both Company and voluntary contributions are paid to a
trust and invested in one or more mutual funds selected by the respective
executive officer.
The fixed percentage amount contributed to the trust and any appreciation
thereon is paid to the executive officer on a date at least two years from the
date of funding, if such officer is still employed at that time (or at the date
of involuntary termination by the Company for plan balances that were
transferred from the previous EBP only), or two years following the date of
termination from the Company, provided that the executive officer has complied
with covenants not to compete with the Company during that time period and the
termination was not "for cause".
CHIEF EXECUTIVE OFFICER COMPENSATION. In fiscal 2000, the compensation of
Dr. Harbin, the Company's Chief Executive Officer, included base compensation of
$775,000. No bonus was earned by Dr. Harbin with respect to fiscal year 2000. A
contribution under the SAP of $146,250 was made for
12
<PAGE>
calendar year 2000. Dr. Harbin's base salary was increased from $750,000 to
$800,000 effective April 1, 2000. This base salary increase of 6.7% was based on
Dr. Harbin's overall leadership of the Company with the continued integration of
behavioral health and progress in consolidation and divestiture of certain
non-core interests. At the time of the salary increase, Dr. Harbin was also
granted 50,000 stock options (30,800 vesting ratably over three years and 19,200
vesting over eighteen months). In addition, 40,000 stock options (purchase match
options) were granted based upon the purchase of 20,000 shares by Dr. Harbin of
the Company's stock in the open market during the May/June 2000 window period.
NON-DEDUCTIBILITY OF CERTAIN COMPENSATION. The compensation paid to
Dr. Harbin exceeded $1 million in fiscal 2000, and may exceed $1 million in
fiscal 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
has determined that the benefit to the Company of retaining Dr. Harbin's
employment offsets the potential loss of a tax deduction.
Gerald L. McManis (Chairman)
G. Fred DiBona
Jeffrey A. Sonnenfeld
James B. Williams
Members of the Compensation Committee
THE FOREGOING REPORT SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY
GENERAL STATEMENT OR REFERENCE TO THIS PROXY STATEMENT INTO ANY FILING UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY
INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED
FILED UNDER SUCH ACTS.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, at the end of fiscal 2000 and as of the date
hereof, consists of Messrs. McManis, DiBona, Sonnenfeld and Williams, each a
non-employee director. Mr. DiBona is a director and the President and Chief
Executive Officer of Independence Blue Cross, with which the Company has entered
into certain contracts. See "Certain Relationships and Related Transactions."
Mr. Williams is affiliated with Texas Pacific Group, which has engaged in
certain transactions with the Company. See "Certain Relationships and Related
Transactions." Neither Mr. McManis nor Mr. Sonnenfeld has engaged in related
party transactions with the Company.
Prior to becoming the Chief Operating Officer of the Company, effective
September 18, 2000, Mr. Messina was the Chief Financial Officer of U.S. Aetna
Healthcare, Inc. ("Aetna") and was also a member of the Compensation Committee.
During fiscal 2000, Aetna engaged in certain transactions with the Company. See
"Certain Relationships and Related Transactions."
None of the Company's executive officers serves as a member of a board of
directors or compensation committee of any entity that has one or more executive
officers who serves on the Company's Board or on the Compensation Committee.
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 paid on March 18,
1999. Dr Harbin's base salary was increased from $700,000 to $750,000, effective
April 1, 1999, and to $800,000, effective April 1, 2000. Dr. Harbin is also
entitled to receive annual bonuses between 50% and 100% of his base salary
conditioned upon his and/or the Company's meeting certain
13
<PAGE>
goals or objectives to be established by the Board or the Compensation
Committee. For fiscal year 2000, the annual bonus target was increased from 50%
to 60% of base salary. 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.
DANIEL S. MESSINA. The Company has an Employment Agreement with
Mr. Messina documented in a letter dated September 6, 2000. The Agreement
provides for a base salary of $500,000, a signing bonus of $200,000, of which
$70,000 was payable after 30 days of employment, with the remaining $130,000 to
be paid after six months of employment. The Agreement also provides for
severance payments upon termination by the Company without cause. Under any such
termination, Mr. Messina would receive two years of annual salary.
JOHN J. WIDER, JR. The Company has a Severance Agreement with Mr. Wider
that provides for continuation of his base salary of $400,000 through
October 15, 2002. The Agreement also provides for forfeiture of 150,000 options
as of October 31, 2000, and the continued right to vest in 125,400 options
through October 31, 2001.
CLARISSA C. MARQUES, PH.D. The Company has an Employment Agreement with
Dr. Marques for an initial three-year term beginning January 1, 1999, with
automatic renewals for additional one-year terms, unless either party gives
notice of its intent not to renew the agreement. The Agreement provides for a
base salary of $270,000 and for bonuses and benefits commensurate with
Dr. Marques's position. Dr. Marques's current salary is $340,000. The Agreement
also provides for severance payments upon termination by the Company without
cause, termination by Dr. Marques for "good reason" (as defined in the
agreement), or resignation by Dr. Marques after a change of control (as defined
in the Agreement). Upon any such termination, Dr. Marques would receive base
salary for the remaining term of the agreement or two years, whichever is
greater, plus a portion of any bonus accrued through the date of termination. In
the event the Company elects not to renew the agreement, Dr. Marques would
receive severance payments for two years from the date of expiration of the
agreement. The agreement supersedes all prior agreements between the company and
Dr. Marques related to her employment.
CLIFFORD W. DONNELLY. The Company has a Severance Agreement dated
September 20, 2000 with Mr. Donnelly. The Agreement provides for a lump sum
severance payment of $500,000. The Agreement also provides for the forfeiture of
75,000 options effective at termination, the continued right to vest in 112,200
options through September 30, 2001, and the forfeiture of all benefits under the
SAP.
MARK S. DEMILIO. The Company has an oral Employment Agreement with
Mr. Demilio for a two-year term effective March 1, 2000, with automatic renewals
for additional one-year terms, unless either party gives notice of its intent
not to renew the Agreement. The Agreement provides for a base salary of $250,000
and for bonuses and benefits commensurate with Mr. Demilio's position. Effective
December 1, 2000, the Agreement was amended to reflect the assumption of new
responsibilities and his salary was increased to $320,000. The Agreement also
provides for severance payments upon termination by the Company without cause,
termination by Mr. Demilio for "good reason", or resignation by Mr. Demilio
after a change of control. Upon any such termination, Mr. Demilio would
14
<PAGE>
receive base salary for two years. In the event the Company elects not to renew
the agreement, Mr. Demilio would receive severance payments for two years from
the date of expiration of the Agreement. The Agreement supersedes all prior
agreements between the Company and Mr. Demilio related to his employment.
EXECUTIVE BENEFITS PLAN. The terms of the Magellan Health Services, Inc.
Supplemental Accumulation Plan ("SAP") provide that the amounts deposited in the
trust on behalf of executive officers are to be immediately and fully vested
upon a change of control of the Company (as defined in the SAP document).
PERFORMANCE GRAPH
The following graph compares the cumulative total return of the Common
Stock, the Standard & Poor's 500 Stock Index ("S&P 500") and the Standard &
Poor's Healthcare Index ("S&P HI") since September 30, 1995. The graph assumes
$100 was invested in each of the Common Stock, the S&P 500 and the S&P HI and
that dividends received were reinvested on the date paid. The graph does not
take into account trading commissions or taxes.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SEP-95 MAR-96 SEP-96 MAR-97 SEP-97 MAR-98 SEP-98 MAR-99 SEP-99 MAR-00 SEP-00
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Magellan 100 109.76 101.22 120.12 154.88 May-04 52.74 20.43 35.67 23.48 18.6
S&P 500 100 110.45 117.61 129.55 162.09 188.52 174.02 220.11 219.49 256.43 245.81
S&P HI 100 124.92 116.07 130.79 138.51 169.09 96.43 130.37 92.41 109.26 151.53
</TABLE>
<TABLE>
<CAPTION>
SEPT. MARCH SEPT. MARCH SEPT. MARCH SEPT. MARCH SEPT.
1995 1996 1996 1997 1997 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Magellan.................. $100.00 $109.76 $101.22 $120.12 $154.88 $126.83 $ 52.74 $ 20.43 $ 35.67
S&P 500................... 100.00 $110.45 $117.61 $129.55 $162.09 $188.52 $174.02 $220.11 $219.49
S&P HI.................... 100.00 $124.92 $116.07 $130.79 $138.51 $169.09 $ 96.43 $130.37 $ 92.41
<CAPTION>
MARCH SEPT.
2000 2000
-------- --------
<S> <C> <C>
Magellan.................. $ 23.48 $ 18.60
S&P 500................... $256.43 $245.81
S&P HI.................... $109.26 $151.53
</TABLE>
THE FOREGOING GRAPH SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY
GENERAL STATEMENT OR REFERENCE TO THIS PROXY STATEMENT INTO ANY FILING UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY
INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED
FILED UNDER SUCH ACTS.
15
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of Common Stock by (i) directors, (ii) Named Executive Officers and
(iii) directors and executive officers as a group, as of December 15, 2000.
Information with respect to certain significant stockholders of the Company is
set forth in "Principal Holders of Common Stock."
<TABLE>
<CAPTION>
NUMBER OPTIONS
OF SHARES EXERCISABLE PERCENT OF
BENEFICIALLY WITHIN OUTSTANDING
NAME OWNED (1) 60 DAYS (2) SHARES (3)
---- ------------ ----------- -----------
<S> <C> <C> <C>
Henry T. Harbin M.D........................................ 32,000 352,934 *
Daniel S. Messina.......................................... -- --
John J. Wider, Jr.......................................... 33,400 24,867 *
Clarissa C. Marques, Ph.D.................................. 12,168 95,734 *
Clifford W. Donnelly (4)................................... 30,000 28,600 *
Mark S. Demilio............................................ 10,000 15,834 *
David Bonderman (5)........................................ 6,300,053 2,246,250 20.7%
Jonathan J. Coslet (5)..................................... -- 6,250 *
G. Fred DiBona, Jr. (6).................................... 949,456 15,000 2.5%
Andre C. Dimitriadis....................................... 2,500 30,000 *
A.D. Frazier, Jr........................................... 2,500 30,000 *
Gerald L. McManis.......................................... 42,000 30,000 *
Robert W. Miller........................................... 2,000 18,750 *
Darla D. Moore (7)......................................... 2,484,935 15,000 6.4%
Jeffrey A. Sonnenfeld Ph.D................................. -- 11,250 *
James B. Williams (5)...................................... -- 6,250 *
All directors and executive officers as a group (17
persons) (8)............................................. 9,917,012 2,973,722 30.7%
</TABLE>
------------------------
* Less than 1% of total outstanding.
(1) Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, the Company believes that each of
the stockholders named in this table has sole voting and investment power
with respect to the shares indicated as beneficially owned. This table is
based upon information supplied by directors and executive officers.
(2) Represents shares that can be acquired through stock option exercises on or
prior to February 14, 2001.
(3) Based on an aggregate of 32,647,625 shares of Common Stock issued and
outstanding as of December 15, 2000 plus 6,300,053 shares of Common Stock
which TPG Magellan LLC has the right to vote, on an "as converted" basis, as
a single class with the holders of the Common Stock. Assumes that all
options exercisable within 60 days after December 15, 2000 owned by the
person are exercised. The total number of shares outstanding used in
calculating this percentage also assumes that none of the options owned by
other persons are exercised.
(4) Includes 30,000 shares held by CNC Partners, a partnership of which
Mr. Donnelly is the general partner.
(5) Includes for Mr. Bonderman and excludes for Messrs. Coslet and Williams as
"shares beneficially owned" the 6,300,053 shares of Common Stock that TPG
Magellan LLC has the right to acquire upon conversion of 59,063 shares of
Series A Preferred Stock; and as "options exercisable within 60 days" the
2,240,000 shares of Common Stock that TPG Magellan LLC has the right to
acquire upon conversion of 21,000 shares of Series A Preferred Stock that
TPG Magellan LLC has the right to acquire within 60 days after December 15,
2000 upon exercise of an option.
16
<PAGE>
Messrs. Bonderman, Coslet and Williams are affiliates of TPG Magellan LLC
and disclaim beneficial ownership of all such shares.
(6) Includes 949,456 shares that Independence Blue Cross ("IBC") and its
affiliates own. Mr. DiBona is a director and the President and Chief
Executive Officer of IBC and disclaims beneficial ownership of all
securities attributed to him because of his positions with IBC.
(7) Includes 2,417,554 shares owned by Richard E. Rainwater, 27,657 shares owned
by Rainwater-Magellan and 39,724 shares owned by Rainwater, Inc. Ms. Moore
is the spouse of Richard E. Rainwater and the sole stockholder and sole
director of Rainwater, Inc., which is the sole general partner of
Rainwater-Magellan.
(8) Includes as "shares beneficially owned" 6,300,053 shares of Common Stock
that TPG Magellan LLC has the right to acquire upon conversion of 59,063
shares of Series A Preferred Stock; 2,484,935 shares owned in the aggregate
by Richard E. Rainwater, Rainwater-Magellan and Rainwater, Inc.; and 949,456
shares owned by IBC and its affiliates. Includes as "options exercisable
within 60 days" 2,240,000 shares that TPG Magellan LLC has the right to
acquire upon conversion of 21,000 shares of Series A Preferred Stock that
TPG Magellan LLC has the right to acquire within 60 days after December 15,
2000 upon exercise of an option.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
G. Fred DiBona, Jr., who became a director of the Company on January 22,
1996, is a director and the President and Chief Executive Officer of IBC. IBC
and its affiliated entities have entered into contracts with the Company for
provider network, care management and medical review services. The Company
recorded revenue of approximately $58.8 million from IBC during fiscal 2000.
Darla D. Moore, who became a director on February 22, 1996, is the spouse of
Richard E. Rainwater. Mr. Rainwater is the beneficial owner of 2,484,935 shares
of Common Stock. Mr. Rainwater and certain of his affiliates have a significant
interest in the Company. On January 25, 1996, Rainwater-Magellan acquired a
total of 4,000,000 shares of Common Stock and warrants for an additional
2,000,000 shares of Common Stock from the Company pursuant to a Stock and
Warrant Purchase Agreement and certain related agreements (the
"Rainwater-Magellan Private Placement Agreements"). The warrants expired on
January 25, 2000. The Rainwater-Magellan Private Placement Agreements provide
for 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. During
fiscal 2000, the Company paid an aggregate of $75,000 for the annual monitoring
fee and fees and expenses incurred in connection with Rainwater-Magellan's
ownership of the Common Stock and the 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.
David Bonderman, Jonathan J. Coslet and James B. Williams, who became
directors on December 15, 1999, are affiliated with Texas Pacific Group ("TPG").
On December 15, 1999, TPG purchased from the Company 59,063 shares of Series A
Preferred Stock for $59,063,000 in cash. The Company paid TPG a placement fee of
$1,625,000 in connection with such issuance of Series A Preferred Stock. On
February 29, 2000, Magellan Specialty Health, Inc., a subsidiary of the Company,
purchased the outstanding stock of Vivra Inc. ("Vivra"). The initial purchase
price of Vivra was $10.25 million, and additional consideration of
$10.0 million may be payable based upon future results. Approximately 30% of the
voting interest in Vivra was owned by TPG at the time of the Company's
acquisition. Messrs. Bonderman, Coslet and Williams did not participate in the
Board's approval of the Vivra acquisition.
Daniel S. Messina, who became the Chief Operating Officer of the Company
effective September 18, 2000 and has been a director of the Company since
December 11, 1997, was the Chief
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Financial Officer of Aetna prior to joining the Company. On December 4, 1997,
the Company consummated the purchase of Human Affairs International,
Incorporated ("HAI"), formerly a unit of Aetna, for approximately
$122.1 million, plus additional contingent payments to Aetna of up to
$60 million annually over the five-year period subsequent to closing. The
Company has made additional purchase price payments totaling $120 million
through September 30, 2000, $60 million of which was paid in fiscal 2000. 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. Aetna and its affiliated
entities contract with the Company for various behavioral and specialty managed
care services. The Company recorded revenue of approximately $284.1 million from
Aetna and its affiliated entities during fiscal 2000. As of September 30, 2000,
Aetna and its affiliated entities owed the Company approximately $5.6 million.
PROPOSED AMENDMENT TO THE 2000 LTIC PLAN
(ITEM 2 OF NOTICE)
A proposal will be presented at the Annual Meeting to approve an amendment
to the Magellan Heath Services, Inc. 2000 Long-Term Incentive Compensation Plan
to (i) expand eligibility under the 2000 LTIC Plan to include non-employee
directors and consultants of the Company as participants, and (ii) to limit the
total number of shares issuable on the exercise of awards that may be granted to
the non-employee directors to 120,000. The amendment was adopted by the Board of
Directors on December 7, 2000, subject to approval by the Company's
stockholders.
SUMMARY OF THE 2000 LTIC PLAN
The following is a summary description of the 2000 LTIC Plan.
The 2000 LTIC Plan covers 1,000,000 shares of Common Stock (no more than
50,000 of which may be granted in the form of Restricted Stock). The purpose of
the 2000 LTIC Plan is to promote the long-term viability and financial success
of the Company and its subsidiaries by assisting in the recruiting and retention
of key employees. The 2000 LTIC Plan is designed to enable key employees to
acquire or increase a proprietary interest in the Company.
ADMINISTRATION. The 2000 LTIC Plan is administered by the Compensation
Committee of the Board or any other Committee of the Board appointed to
administer the 2000 LTIC Plan (the "Committee"), provided that the composition
of such Committee shall at all times meet the requirements of Rule 16b-3 under
the Securities Exchange Act of 1934 and Internal Revenue Code Section 162(m),
each as amended. The Committee has authority to grant awards upon such terms
(consistent with the provisions of the 2000 LTIC Plan) as the Committee may
consider appropriate. In addition, the Committee has complete authority (i) to
interpret all provisions of the 2000 LTIC Plan; (ii) to prescribe the form of
Agreements; (iii) to adopt, amend, and rescind rules and regulations pertaining
to the administration of the 2000 LTIC Plan; and (iv) to make all other
determinations necessary or advisable for the administration of the 2000 LTIC
Plan. Any decision made, or action taken, by the Committee in connection with
the administration of the 2000 LTIC Plan shall be final, conclusive, and binding
on all participants and all persons claiming under or through any participant.
ELIGIBILITY. In addition to the non-employee directors and consultants that
will be added pursuant to the amendment described above, key employees of the
Company or of any affiliate are eligible to receive awards under the 2000 LTIC
Plan. An individual may receive more than one award. The Committee will, in its
discretion, select the eligible key employees and will base its selection on the
employees' job responsibilities and present and potential contributions to the
success of the Company and its affiliates.
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AWARDS. Awards granted under the 2000 LTIC Plan may be in the form of
incentive stock options, non-qualified stock options, stock appreciation rights
("SARs"), shares of restricted stock, performance shares, performance units,
dividend units, and incentive awards.
STOCK OPTIONS. One or more option grants may be made to any eligible
employee. Options will be embodied in an option agreement in a form approved by
the Committee. The option agreement may provide for "incentive stock options"
that are intended to satisfy the requirements of Section 422A of the Internal
Revenue Code ("Code"), or such other options ("nonqualified stock options") that
entitle the holder to purchase from the Company a stated number of shares of
common stock at the price set forth in the option agreement. The exercise price
per share of an option will be an amount equal to the closing price of a share
of Common Stock on the date of grant, provided, however, that the Committee is
authorized to grant options having an exercise price below the closing price of
a share of Common Stock on the date of grant.
Except as otherwise provided in a participant's option agreement, no stock
option granted under the 2000 LTIC Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. All options shall be exercisable during a
participant's lifetime only by such participant except, in the case of
non-qualified stock options only, as otherwise provided in a participant's
option agreement.
An option may be exercised in whole at any time or in part, from time to
time, at such times and in compliance with such requirements as set forth in the
option agreement. No option is exercisable more than ten years from the date the
option was granted.
Each option agreement will set forth the extent to which the participant
will have the right to exercise the options following termination of the
participant's employment with the Company or its affiliates.
Payment of the exercise price shall be made in cash or cash equivalent
acceptable to the Committee. If the participant's option agreement so provides,
payment of the exercise price may be made in shares of Common Stock or through
other arrangements specified in the option agreement.
SUMMARY OF FEDERAL TAX CONSEQUENCES OF THE ISSUANCE AND EXERCISE OF
OPTIONS. The following discussion of the federal tax consequences of the
issuance and exercise of options under the 2000 LTIC Plan is based on the Code
provisions in effect on the date of this Proxy Statement, current regulations
thereunder, and existing administrative rulings of the Internal Revenue Service.
The discussion is limited to the tax consequences on United States citizens and
the tax consequences may vary depending upon the personal circumstances of
individual holders of options.
An option holder will not recognize income upon the grant of a non-qualified
option under the 2000 LTIC Plan, or at any other time prior to the exercise of
the option. Upon exercise of a nonqualified option, the option holder will
recognize compensation taxable as ordinary income in an amount equal to the
excess of the fair market value of the Common Stock on the date the option is
exercised over the option price of the Common Stock. This income is subject to
withholding and other employment taxes, if applicable. The Company then will be
entitled to a deduction in a like amount for compensation taxable to the option
holder. The ordinary income recognized upon exercise of the option will
constitute personal service income for purposes of Federal income taxes.
A subsequent taxable disposition of shares of Common Stock acquired upon
exercise of a non-qualified option and held as a capital asset will result in a
capital gain or loss measured by the difference between the fair market value of
the Common Stock on the date the option was exercised and the amount realized on
later disposition. The gain or loss will be long-term if the shares of Common
Stock are held for more than one year.
An option holder will not recognize income upon the grant or exercise of an
incentive stock option under the 2000 LTIC Plan if at all times during the
period beginning on the date the option was
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granted and ending on the day three months before the date of such exercise, the
option holder was an employee of the Company. The difference between the fair
market value of the Common Stock on the date of exercise and the option price,
however, is an item of tax preference for purposes of the alternative minimum
tax.
If an option holder who has acquired shares of Common Stock by the exercise
of an incentive stock option makes a taxable disposition of such Common Stock
more than two years after the grant of the option and one year after the
transfer of such Common Stock to the option holder, the option holder generally
will recognize long-term capital gain or loss measured by the difference between
the option price and the selling price.
If an option holder who has acquired shares of Common Stock by the exercise
of an incentive stock option makes a taxable disposition of such Common Stock
within two years from the date of the granting of the option or within one year
after the transfer of such Common Stock to the option holder, a disqualifying
disposition occurs. In that event the option holder recognizes ordinary income
equal to the lesser of (i) the actual gain or (ii) the difference between the
exercise price and the fair market value of the Common Stock on the date of
exercise. If a loss is sustained on such a disposition, the loss will generally
be treated as a capital loss. If the amount received on the disqualifying
disposition exceeds the fair market value of the Common Stock on the date of
exercise, the excess will generally be either long- or short-term capital gain.
RESTRICTED STOCK. An award of restricted stock may be granted for no
consideration other than services. The Committee may, in its discretion,
designate individuals to whom any awards of restricted stock are to be made.
Each grant of restricted stock will be evidenced by an agreement that will
specify the period(s) of restriction, the number of shares of restricted stock
granted, and such other provisions as the Committee may determine.
While the shares are restricted stock, a participant will have all rights of
a shareholder with respect to such shares, including the right to receive
dividends and to vote the shares; provided, however, that (i) a participant may
not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of
shares of restricted stock and (ii) the Company will retain custody of the
certificates evidencing shares of restricted stock.
In the event of a participant's death or disability, restrictions on
restricted stock will lapse on a pro-rata basis as designated by the Committee.
In the event of a participant's retirement, the Committee may terminate any
remaining restrictions on restricted stock. Unless otherwise provided by the
Committee in a participant's restricted stock agreement, in the event that a
participant granted an award of restricted stock ceases to be an employee of the
Company or its affiliates for any reason, other than death, disability, or
retirement prior to the lapse of all restrictions applicable to such restricted
stock, the shares of restricted stock awarded to the participant shall be
forfeited to the Company.
STOCK APPRECIATION RIGHTS ("SARS"). SARs may be granted under the 2000 LTIC
Plan in connection with an option, or may be separately awarded. Each grant of
SARs will be evidenced by an SAR Agreement that will specify the terms and
conditions applicable to such award.
SARs granted in connection with an option will be exercisable to the extent
the option is exercisable. SARs not granted in connection with an option will be
exercisable pursuant to such terms and conditions established by the Committee
and designated in the SAR Agreement.
Upon the exercise of SARs, the participant is generally entitled to payment
(in cash or shares of Common Stock or a combination thereof as set forth in the
SAR Agreement at the time of grant) for each SAR equal to the product of the
excess of the closing price of a share of Common Stock on the New York Stock
Exchange on the date of exercise over the closing price of a share of Common
Stock
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on the New York Stock Exchange on the date of grant of the SARs, multiplied by
the number of shares called for by the SAR (or portion thereof) which are so
exercised.
SARs granted under the 2000 LTIC Plan are not transferable by the
participant except by will or the laws of descent and distribution and are
exercisable during the participant's lifetime only by the participant or, in the
event of the participant's mental or physical incapacity, by his or her legal
representative.
SARs granted in connection with an option shall lapse in accordance with the
same terms and conditions as specified in the underlying option. SARs not
granted in connection with an option shall lapse in accordance with the terms
and conditions specified by the Committee in the SAR.
Each SAR Agreement will set forth the extent to which the participant will
have the right to exercise the Stock Appreciation Right following termination of
the participant's employment with the Company and/or its affiliates. No
participant will, solely as a result of having been granted SARs, have any
rights as a shareholder of the Company.
PERFORMANCE SHARES/PERFORMANCE UNITS. Awards may be granted under the 2000
LTIC Plan in the form of bookkeeping entries called performance shares or
performance units, subject to such terms and conditions not inconsistent with
the 2000 LTIC Plan as the Committee will impose. Each Performance Unit will have
an initial value that is established by the Committee at the time of grant. Each
Performance Share will have an initial value equal to the closing price of a
share of Common Stock on the New York Stock Exchange on the date of grant. The
Performance Share or Performance Unit Agreement will specify the terms and
conditions of the award, including the performance-related objectives applicable
to the award and the extent to which satisfaction of such specified objectives
will determine the number and/or value of performance units or performance
shares that will be paid out to the participant.
The measuring period to establish the performance objectives set forth in a
Performance Share or Performance Unit Agreement will be at least three years.
Upon the completion of the applicable performance period, the Committee will
determine the number of shares of Common Stock or cash equal to the value of the
award, which will be paid to the participant in connection with the award for no
consideration other than for services.
Each Performance Share or Performance Unit Agreement will set forth the
extent to which the participant will have the right to receive a payout with
respect to any outstanding performance shares or performance units following
termination of the participant's employment with the Company and/or its
affiliates. No participant will, solely as a result of having been awarded
performance shares or performance units, have any rights as a shareholder of the
Company.
DIVIDEND UNITS. The Committee may grant dividend units equal to a specified
number of shares of Common Stock on which participants will receive cash
payments equal to the dividends paid on the underlying number of shares when,
as, and if paid. Each grant of dividend units will be evidenced by an Agreement
that will specify the terms and conditions applicable to such award, including
the treatment of such award upon the participant's termination of employment. An
award of dividend units will entitle the participant to payment of an amount of
cash equal to such cash dividends only and not to any right to the actual
dividends on the underlying shares or to the underlying shares themselves. The
award of dividend units may be combined with other awards. The Company does not
currently pay any cash dividends nor does it expect to do so in the near future.
INCENTIVE AWARDS. The Committee may designate participants to receive
incentive awards, which would be made from an incentive pool established for
each plan year by the Committee. The Committee will allocate an incentive pool
percentage to each applicable participant for each Plan Year within 90 days of
the commencement of the plan year. In no event may the incentive pool percentage
for any one participant exceed 50% of the total incentive pool and in no event
may the sum of all
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participants' applicable incentive pool percentages equal more than 100% of the
incentive pool. Each incentive award will be evidenced by an agreement that will
specify the terms and conditions applicable to such award.
The incentive pool will be a cash amount designated by the Committee each
plan year as practicable following the close of such plan year. A participant's
incentive award will be determined based on the participant's allocated portion
of the incentive pool, as reduced in the sole discretion of the Committee using
any factors it determines applicable.
Unless a participant makes a deferral election under the 2000 LTIC Plan,
each participant's final awards will be paid in a lump sum cash payment as soon
as possible following the release of Company's audited financial statements for
the plan year.
Unless determined otherwise by the Committee, in the event the employment of
a participant is terminated by reason of death, disability, or retirement during
a plan year, the participant's payout of the incentive award will be prorated,
as specified by the Committee in its discretion. In the event that a
participant's employment terminates for any other reason, all incentive awards
will be forfeited to the Company unless determined otherwise by the Committee.
Except as otherwise provided by the Committee, incentive awards may not be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the participant only by the participant's
legal representative.
SUMMARY OF FEDERAL TAX CONSEQUENCES OF THE AWARDS OTHER THAN OPTIONS. A
recipient of restricted stock generally will be subject to tax at ordinary
income rates on the fair market value of the restricted stock at such time as
the restricted stock is no longer subject to a substantial risk of forfeiture or
restrictions on transfer for purposes of Section 83 of the Code. However, a
recipient who so elects under Section 83(b) of the Code within 30 days of the
date of transfer of the restricted stock will recognize ordinary income on the
date of transfer of the shares equal to the excess of the fair market value of
the restricted stock on such date (determined without regard to the risk of
forfeiture or restrictions on transfer) over any purchase price paid for the
stock. If a Section 83(b) election has not been made, any dividends received
with respect to restricted stock that is subject at that time to a risk of
forfeiture or restrictions on transfer generally will be treated as compensation
that is taxable as ordinary income to the recipient.
A participant generally will not recognize income upon the grant of
performance shares or performance units. Upon payment in respect of performance
shares or performance units, the participant generally will recognize as
ordinary income an amount equal to the amount of cash received and the fair
market value of any stock received.
The grant of SARs ordinarily will not result in taxable income to the
participant or a federal income tax deduction to the Company. Upon exercise of a
SAR, the SAR holder will recognize ordinary income and the Company normally will
have a corresponding deduction in an amount equal to the cash or fair market
value of the stock received by the SAR holder. If a SAR holder allows a SAR to
expire, other than as a result of exercise of a related option, the Internal
Revenue Service may contend that the SAR holder has ordinary income in the year
of expiration equal to the amount of cash or the fair market value of the stock
that the SAR holder would have received if he or she had exercised the SAR
immediately before it expired.
A participant generally will not recognize income upon the grant of dividend
units. Upon payment of cash with respect to such dividend units, the participant
generally will recognize as ordinary income an amount equal to the amount of
cash received. Upon receipt of any cash incentive award payments, a participant
will recognize as ordinary income an amount equal to the cash incentive award
payment the participant receives.
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In limited circumstances where the sale of stock received under the 2000
LTIC Plan could subject an officer or director to suit under Section 16(b) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
federal income tax consequences to the officer or director may differ from the
federal income tax consequences described above. In these circumstances, absent
a Section 83(b) election (as described above), the principal difference usually
will be to postpone valuation and taxation of the stock received so long as the
sale of the stock received could subject the officer or director to suit under
Section 16(b) of the Exchange Act, but not longer than six months.
To the extent that a participant recognizes ordinary income on the payment
of an award, the Company should be entitled to a corresponding deduction,
PROVIDED that, among other things, the income meets the test of reasonableness,
is an ordinary and necessary business expense, is not an "excess parachute
payment" within the meaning of Section 280G of the Code and is not disallowed by
the $1 million limitation on certain executive compensation under
Section 162(m). An employee who recognizes ordinary income ordinarily will be
subject to both wage withholding and other employment taxes.
OTHER TERMS. Unless and until the Committee proposes for shareholder vote
and the shareholders approve a change in the general performance measures
described below, the attainment of which may determine the degree of payout
and/or vesting with respect to awards to a participant who, as of the date of
vesting and/or payout of an award, is one of the group of "covered employees" as
defined in the regulations under Section 162(m) of the Code ("Covered
Employees") which are designed to qualify for the performance based exception
from the tax deductibility limits of Section 162(m) of the Code ("Performance
Based Exception"), the Committee will establish performance measures from time
to time in connection with performance based awards. The performance measure(s)
to be used for purposes of such awards will be chosen from among (a) earnings
per share; (b) net income (before or after taxes); (c) return measures
(including, but not limited to, return on assets, equity, or sales); (d) cash
flow return on investments which equals net cash flows divided by owners equity;
(e) earnings before interest, taxes, depreciation, amortization (EBITDA);
(f) gross revenues; and (g) share price (including but not limited to growth
measures and shareholder return).
Company performance will be based at the Committee's discretion on overall
company performance or performance of a specified segment of the Company's
operations. This measure may be expressed as a concrete goal, in terms of an
increase or decrease, or in comparison to the Company's competitors, the
industry or some other comparator group. The Committee will have the discretion
to adjust its determination of the degree of attainment of the pre-established
performance goals, provided however that awards which are designed to qualify
for the Performance Based Exception and which are held by a Covered Employee may
not be adjusted upward. In the event that the applicable tax and/or securities
laws change to permit Committee or Board discretion to alter the governing
performance measures without obtaining shareholder approval of such changes, the
Committee in its sole discretion may make those changes without obtaining
shareholder approval. In addition, if the Committee determines that it is
advisable to grant awards which do not qualify for the Performance Based
Exception, the Committee may make such grants without satisfying the
requirements of such exception.
DEFERRALS. The Committee may permit or require a participant to defer
receipt of the cash payment or shares that would otherwise be due to such
participant by virtue of the exercise of an option or SAR, the lapse or waiver
of restrictions with respect to restricted stock, the satisfaction of any
requirements or goals with respect to performance shares or incentive awards or
the receipt of dividend payments on dividend units. If such deferral is required
or permitted, the Committee will establish the rules and procedures for such
deferral.
DEDUCTIBILITY. At all times when Section 162(m) of the Code is applicable,
all awards granted under the 2000 LTIC Plan shall comply with the requirements
of Section 162(m) of the Code, unless
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the Committee determines that such compliance is not desirable with respect to
any such award, in which case compliance with Section 162(m) of the Code is not
required.
ACCELERATION OF AWARDS. An award may initially provide or the Committee may
at any time amend it to provide, for accelerated exercisability, termination of
restrictions, or waiver or modification of performance objectives, subject to
such terms and conditions and upon the occurrence if such events as the
Committee in its sole discretion determines.
ACCELERATION AND VESTING UPON CHANGE OF CONTROL. Subject to the certain
limitations, all stock options and SARs will automatically become fully
exercisable, all restrictions applicable to restricted stock will automatically
terminate, and all performance objectives in performance share awards and
incentive awards will be waived upon certain extraordinary events described in
the 2000 LTIC Plan, including, briefly, certain acquisitions by specified
persons of beneficial ownership of 20% or more of either the then outstanding
shares of Common Stock or the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors, certain changes in the composition of the Board, consummation of
certain reorganizations, mergers, consolidations or sales or other dispositions
of all or substantially all of the assets of the Company, and approval by the
shareholders of the Company of a complete liquidation or dissolution of the
Company. Upon the occurrence of one of these triggering events, all outstanding
awards shall automatically vest and be surrendered and the participants shall
receive in full satisfaction for such award, a distribution in the form of
shares of Common Stock. However, if the Committee determines that any payment to
a participant would be nondeductible by the Company under Section 280G of the
Code, any amount payable to a participant pursuant to the 2000 LTIC Plan shall
be reduced automatically to an amount that maximizes the payments under the 2000
LTIC Plan without causing any payments to be nondeductible by the Company
because of Section 280G of the Code.
TERMINATION DATE. Unless sooner terminated by the Board, the 2000 LTIC Plan
will terminate on September 30, 2009; provided, that any award outstanding at
the time of such termination will continue in full force and effect and will
continue to be governed by the 2000 LTIC Plan and its applicable agreement until
the award expires or is discharged by its terms.
AMENDMENT. The Board may amend the Plan from time to time and no amendment
may become effective until shareholder approval has been obtained if such
approval is required by any federal or state law or the rules of the stock
exchange on which the Common Stock is listed or the Board determines that
obtaining shareholder approval is advisable. No amendment shall, without a
participant's consent, adversely affect the rights of such participant under any
award outstanding at the time the amendment is made.
VOTE REQUIRED
Approval of the amendment to the 2000 LTIC Plan by stockholders requires the
affirmative vote of a majority of the shares of Common Stock and Series A
Preferred 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
amendment to the 2000 LTIC Plan, while Broker Non-Votes will be disregarded and
will have no effect on the outcome of the vote.
THE BOARD HAS UNANIMOUSLY APPROVED THE AMENDMENT TO THE 2000 LTIC PLAN AND
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE 2000 LTIC PLAN.
SHARES OF STOCK REPRESENTED AT THE ANNUAL MEETING BY SIGNED BUT UNMARKED PROXIES
WILL BE VOTED FOR THE AMENDMENT TO THE 2000 LTIC PLAN.
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PROPOSED AMENDMENT TO THE 2000 ESP PLAN
(ITEM 3 OF NOTICE)
A proposal will be presented at the Annual Meeting to approve an amendment
to the Magellan Health Services, Inc. 2000 Employee Stock Purchase Plan to
increase the number of shares of Common Stock authorized for issuance under the
2000 ESP Plan from 1,000,000 to 1,500,000. The amendment was adopted by the
Board of Directors on January 10, 2001, subject to approval by the Company's
stockholders.
SUMMARY OF THE 2000 ESP PLAN
The following is a summary description of the 2000 ESP Plan.
The purpose of the 2000 ESP 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
ESP Plan qualify as an "employee stock purchase plan" under Section 423 of the
Code.
The 2000 ESP Plan is 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 is vested with
authority to make, administer and interpret such rules and regulations as it
deems necessary to administer the 2000 ESP 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 ESP Plan
is 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 ESP Plan for such offering
period. An eligible employee may become a participant only by timely completing
an election notice provided by the Company.
The Employee Stock Plan Committee has the authority to establish the
offering periods under the 2000 ESP 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. 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 of the Company and its
subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value
of the stock (determined at the time the option is granted) for each calendar
year in which such option is outstanding at any time.
A participant may withdraw from the 2000 ESP 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
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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 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 ESP 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 ESP
Plan to the Company or the participant's payroll deductions are returned to the
participant upon his or her termination of employment, 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. Including the
shares to be added by the amendment described above, the maximum number of
shares available for sale under the 2000 ESP Plan is 1,500,000 and the maximum
number of shares available for sale in each offering period shall be determined
by the Employee Stock Plan Committee in its discretion. If the total number of
shares for which options are to be exercised exceeds the number of shares then
available under the 2000 ESP 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. The shares to be sold to
participants may, at the election of the Company, be either Treasury shares or
shares originally issued for this purpose.
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 ESP 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 participant shall have no interest in shares covered by an option
until the option has been exercised.
In the event that the outstanding shares of Common Stock of the Company are
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, the Employee Stock Plan Committee
will make an appropriate adjustment to the number and kind of shares as to which
outstanding options will be exercisable and to the option price. Further,
subject to any required action by the stockholders, if the Company is a party to
any reorganization involving merger, consolidation, acquisition of the stock or
acquisition of the assets of the Company, the Employee Stock Plan Committee in
its discretion may declare (a) that all options granted under the 2000 ESP Plan
are to be terminated after giving at least ten (10) days notice to holders of
outstanding options, or (b) that any option granted under the 2000 ESP Plan
shall pertain to and apply with appropriate adjustment to the securities of the
resulting corporation to which a holder of Common Stock subject to the option
would have been entitled. The adoption of a plan of dissolution and liquidation
by the Board and stockholders of the Company shall cause every outstanding
option to terminate on the fifteenth (15) day thereafter, except that, in the
event of the adoption of a plan of dissolution or liquidation in connection with
a reorganization described in the previous sentence, the outstanding options
shall be governed by and subject to the provisions of the preceding sentence.
The Board of Directors of the Company may at any time terminate or amend the
2000 ESP 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 ESP Plan
or (ii) permit payroll deductions at a rate in excess of 10% of a participant's
base pay.
If the Company uses a designated broker to administer and hold in individual
accounts the shares purchased by the participant and the Company cannot
ascertain the whereabouts of a participant three
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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 Employee Stock Plan Committee may then cancel such 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 number of
shares (as adjusted to reflect any extraordinary corporate event or
recapitalization) and together with any dividends or other accretions thereon
and the amount of withholdings contained in such account so canceled to the
participant.
The amounts withheld from a participant's pay under the 2000 ESP 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 ESP 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 ESP 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. Whether the capital gain or loss will be
long-term or short-term will depend on how long the shares were held.
If a participant sells or otherwise disposes shares acquired under the 2000
ESP 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 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 or
disposition 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 ESP 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 of the amendment to the 2000 ESP Plan by stockholders requires the
affirmative vote of a majority of the shares of Common Stock and Series A
Preferred 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
amendment to the 2000 ESP Plan, while Broker Non-Votes will be disregarded and
will have no effect on the outcome of the vote.
THE BOARD HAS UNANIMOUSLY APPROVED THE AMENDMENT TO THE 2000 ESP PLAN AND
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE 2000 ESP PLAN. SHARES
OF STOCK REPRESENTED AT THE ANNUAL MEETING BY SIGNED BUT UNMARKED PROXIES WILL
BE VOTED FOR THE AMENDMENT TO THE 2000 ESP PLAN.
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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 Messrs. Bonderman, Coslet and
Williams who filed their Form 3s approximately six months late, and Mr. McManis
who filed a Form 4 for May 2000 approximately six days late.
ADDITIONAL INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS
The Company expects to retain Arthur Andersen LLP as its independent public
accountants for the fiscal year ended September 30, 2001 upon written acceptance
of an engagement letter, which is expected to occur no later than June 30, 2001.
Arthur Andersen LLP served as the Company's independent public accountants for
the fiscal year ended September 30, 2000. 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.
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.
STOCKHOLDER PROPOSALS
In order to be included in the proxy statement and proxy card for the 2002
Annual Meeting, a stockholder proposal must be made in writing and received by
the Company by the close of business on September 21, 2001. All stockholder
proposals should be submitted by certified mail, return receipt requested, to
the Secretary of the Company, 6950 Columbia Gateway Drive, Columbia, Maryland
21046.
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 executed proxies delivered
pursuant to this solicitation will be voted on any such matters in the
discretion of the Proxies.
By Order of the Board of Directors,
Mark S. Demilio
SECRETARY
January 19, 2001
Columbia, Maryland
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APPENDIX A
AUDIT COMMITTEE CHARTER
ARTICLE I--PURPOSE
The Audit Committee of Magellan Health Services, Inc. (the "Company") is a
committee of the Company's Board of Directors. The primary function of the Audit
Committee is to assist the Board of Directors in fulfilling its financial
oversight responsibilities by reviewing the Company's financial statements, the
other financial information that is proposed to be provided to the shareholders,
the periodic financial reports filed with the Securities and Exchange
Commission, the systems of internal controls which management and the Board of
Directors have established, and the audit process. In doing so, it is the
responsibility and duty of the Audit Committee to provide an open avenue of
communication between the Board of Directors on the one hand, and management,
the internal auditors, and the independent accountants on the other.
ARTICLE II--ORGANIZATION
SECTION 2.01 COMPOSITION. The Board of Directors shall appoint annually the
Audit Committee members. The Audit Committee shall be composed at least three,
but not more than five, directors. The Board of Directors shall appoint one of
the members of the Audit Committee as Chairperson. It is the responsibility of
the Chairperson to schedule all meetings of the Audit Committee and provide the
Audit Committee with a written agenda for all meetings.
SECTION 2.02 QUALIFICATIONS. Only independent directors may be members of
the Audit Committee. At least one member of the Audit Committee shall have a
background in financial reporting, accounting or auditing. An independent
director is a director who:
- is not and has not been employed in an executive capacity of the Company
for at least five years prior to election to the Audit Committee;
- is not, and is not affiliated with any firm that is, a significant advisor
or consultant to the Company;
- is not affiliated with a significant customer or supplier of the Company;
- does not have a personal services contract with the Company;
- is not affiliated with a tax-exempt entity that receives significant
contributions from the Company; and
- is not a spouse, parent, sibling, child or in-law of any person described
in (1) through (5) or of any member of management.
ARTICLE III--GENERAL RESPONSIBILITIES
SECTION 3.01 AUTHORITY AND POWERS. The Audit Committee shall have the power
to conduct or authorize investigations into any matters within the Audit
Committee's scope of responsibilities. The Audit Committee shall have
unrestricted access to members of management and all information relevant to its
responsibilities. The Audit Committee is empowered and authorized to retain
independent counsel, accountants, or others to assist it in the conduct of any
investigation. The Audit Committee shall perform such other functions assigned
by law, the Company's charter or bylaws, or the Board of Directors.
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SECTION 3.02 MEETINGS. The Audit Committee shall meet at least 4 times per
year or more frequently as circumstances require. The Audit Committee may ask
members of management or others to attend the meetings and provide pertinent
information as necessary.
SECTION 3.03 REPORTS. The actions of the Audit Committee shall be reported
to the Board of Directors with such recommendations as the Audit Committee may
deem appropriate.
SECTION 3.04 CHARTER. The Audit Committee shall review and update the Audit
Committee's charter and recommend to the Board of Directors any amendment to the
Charter.
SECTION 3.05 EXECUTIVE SESSIONS. The Audit Committee shall meet with the
director of internal audit, the independent accountants, and management in
separate executive sessions to discuss any matters that the Audit Committee or
any member of any of these groups believe should be discussed privately with the
Audit Committee.
ARTICLE IV--INTERNAL CONTROLS AND RISK ASSESSMENT
SECTION 4.01 PROCESSES. The Audit Committee shall review and evaluate the
effectiveness of the Company's process for assessing significant risks or
exposures and the steps management has taken to minimize such risks to the
Company. The Audit Committee shall discuss with management, the Company's
independent public accountants, and the director of internal audit, the status
and adequacy of management information systems and other information technology,
including the significant risks related thereto and major controls over such
activities.
SECTION 4.02 INTERNAL CONTROLS. The Audit Committee shall consider and
review with management, the independent accountants and the director of internal
auditing:
- The effectiveness of or weaknesses in the Company's internal controls
including computerized information system controls and security, the
overall control environment and accounting and financial controls.
- Any related significant findings and recommendations of the independent
accountants and/or the internal auditors together with management's
responses thereto, including the timetable for implementation of
recommendations to correct weaknesses in internal controls.
SECTION 4.03 REVIEW OF CONTROLS IN AUDITS. The Audit Committee shall review
with the director of internal audit and the independent accountants the
coordination of audit effort to assure completeness of coverage of key business
controls and risk areas, reduction of redundant efforts, and the effective use
of audit resources.
ARTICLE V--FINANCIAL REPORTING
SECTION 5.01 FILINGS AND REPORTS. The Audit Committee shall review filings
with the SEC and other agencies and other published documents containing the
Company's financial statements, including annual and interim reports, press
releases and statutory filings, and consider whether the information contained
in these documents is consistent with the information contained in the financial
statements.
SECTION 5.02 ANNUAL REVIEW. The Audit Committee shall review with
management and, separately, with the independent accountants at the completion
of the annual audit:
- The Company's annual financial statements and related footnotes.
- The independent accountants' audit of the financial statements and related
report thereon.
- Any significant changes required in the independent accountants' audit
plan.
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- Any significant difficulties or disputes with management encountered
during the course of the audit.
- The existence of significant estimates and judgments underlying the
financial statements, including the rationale behind those estimates as
well as the details on material accruals and reserves, and the Company's
accounting principles.
- The overall quality of the Company's financial reporting.
- Other matters related to the conduct of the audit which are to be
communicated to the Audit Committee under generally accepted auditing
standards.
SECTION 5.03 RISK ASSESSMENT. The Audit Committee shall assess the
Company's internal processes for determining and managing key financial
statement risk areas.
SECTION 5.04 QUARTERLY REVIEW. The Audit Committee shall review with
management, the internal auditors and the independent accountants the interim
financial statements of the Company. The Audit Committee shall review the
significant estimates and judgments underlying the financial statements,
including the rationale behind those estimates and the details on material
accruals and reserves, and determine the appropriateness and consistency of the
methodology used to make such estimates and judgments.
ARTICLE VI--EXTERNAL AUDITOR
SECTION 6.01 ENGAGEMENT. The Audit Committee shall determine and recommend
to the board of directors the independent accountants to be nominated and the
compensation of the independent accountants. The Audit Committee shall review
and recommend to the board of directors the discharge of the independent
accountants. As part of the selection and review process the Audit Committee
shall confirm and assure the independence of the independent accountants,
including a review of the nature of all services and related fees provided by
the independent accountants.
SECTION 6.02 SCOPE OF AUDIT. The Audit Committee shall review the scope and
approach of the annual audit with the independent accountants.
SECTION 6.03 COMMUNICATIONS. The independent accountants shall be
instructed by the Audit Committee to communicate and report directly to the
Audit Committee any serious difficulties or disputes with management. The Audit
Committee shall review the external auditors' identification of issues and
business and financial risks and exposures.
ARTICLE VII--INTERNAL AUDITOR
SECTION 7.01 SELECTION. The Audit Committee shall review and concur in the
appointment, replacement, reassignment, or dismissal of the director of internal
audit or the engagement, replacement or dismissal of an accounting firm in the
event the function is outsourced. In the event the function is outsourced, the
Audit Committee shall meet with the engagement partner (who shall be deemed the
"director of internal audit" for purposes of this Charter). As part of the
hiring or engagement process and from time to time thereafter, the Audit
Committee shall confirm and ensure the independence of the internal auditors and
the open avenue of communication between the internal auditors and the Audit
Committee.
SECTION 7.02 SCOPE. Consider, in consultation with the director of internal
audit, the audit scope and role of the internal auditors, including a review and
evaluation of the scope, risk assessment and nature of the internal auditors'
plan and any subsequent changes. The Audit Committee shall determine whether or
not the internal auditors' plan is sufficiently linked to the Company's overall
business objectives and management's success and risk factors.
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SECTION 7.03 REVIEWS. Consider and review with management and, separately,
with the director of internal audit:
- Significant findings during the year and management's responses thereto,
including the timetable for implementation of the recommendations to
correct weaknesses in internal control.
- Any difficulties encountered in the course of their audits, including any
restrictions on the scope of their work or access to required information.
- Any changes required in the planned scope of their audit plan.
- The internal auditing department budget and staffing.
- The internal auditing department charter.
ARTICLE VIII--COMPLIANCE
SECTION 8.01 COMPLIANCE PROGRAMS. The Audit Committee shall ascertain
whether the Company has an effective process for ensuring compliance with and
determining risks and exposures from applicable laws and regulations and
contracts, monitoring contracts to identify risks and exposures and a process
for detecting and responding to any noncompliance.
SECTION 8.02 LEGAL REVIEW. The Audit Committee shall review with the
Company's general counsel and others any legal, tax or regulatory matters that
may have a material impact on Company operations and the financial statements,
related Company compliance policies, and programs and reports received from
regulators.
SECTION 8.02 CODES OF ETHICAL CONDUCT. The Audit Committee shall review and
assess the Company's processes for administering a code of ethical conduct;
review with the director of internal audit and the independent accountants the
results of their review of the Company's monitoring of compliance with the
Company's code of conduct, including compliance with the Foreign Corrupt
Practices Act; and review policies and procedures with respect to officers'
expense accounts and perquisites, including their use of corporate assets, and
consider the results of any review of these areas by the internal auditor or the
independent accountants.
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APPENDIX B
AMENDMENT NUMBER ONE
TO THE
MAGELLAN HEALTH SERVICES, INC.
2000 LONG-TERM INCENTIVE COMPENSATION PLAN
Pursuant to the powers of amendment reserved in Article XVIII of the
Magellan Health Services, Inc. 2000 Long-Term Incentive Compensation Plan (the
"Plan"), Magellan Health Services, Inc. hereby amends the Plan as follows:
1.
Article I of the Plan hereby is amended by deleting the same in its entirety
and by substituting the following therefor:
"ARTICLE I
PURPOSE
The purpose of the 2000 Long-Term Incentive Compensation Plan is to
promote the long-term viability and financial success of Magellan Health
Services, Inc. (the "Company") and its Affiliates. The Plan is designed to
enable key employees, non-employee members of the Board and consultants to
acquire or increase a proprietary interest in the Company."
2.
Section 2.18 of the Plan hereby is amended by deleting the same in its
entirety and by substituting the following therefor:
"'Participant' means any key employee, non-employee member of the Board
or consultant of the Company or of an Affiliate, including any key
employee who is a member of the Board, who satisfies the requirements of
Article V of the Plan."
3.
Section 4.01 of the Plan hereby is amended to add the following sentence
at the end thereof:
"Notwithstanding any provisions of this Section 4.01 to the contrary, and
subject to limits on individual Awards set forth herein, the maximum
number of shares of Common Stock available for Awards under the Plan to
non-employee members of the Board shall be one hundred twenty thousand
(120,000)."
4.
Article V of the Plan hereby is amended by deleting the same in its
entirety and by substituting the following therefor:
"ARTICLE V
ELIGIBILITY
Key employees, non-employee members of the Board and consultants of the
Company or of any Affiliate are eligible to receive Awards under the Plan.
An individual may receive more than one Award. The selection of Participants
under the Plan shall be made by the Committee in the exercise of its sole
discretion. With respect to the selection of eligible key employees, the
Committee shall base such selection on the employees' job responsibilities
and present and potential contributions to the success of the Company and
its Affiliates."
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5.
Article VI of the Plan hereby is amended by deleting the same in its
entirety and by substituting the following therefor:
"ARTICLE VI
GRANT OF AWARDS
The Committee may, from time to time, grant Awards to one or more
persons eligible for Awards under the provisions of Article V. In
determining the size of Awards, the Committee shall take into account a
Participant's areas of responsibilities, his or her performance, potential
and level and form of compensation, the Fair Market Value at the time of the
Award and such other considerations as the Committee deems appropriate."
6.
The first sentence of Section 7.01 of the Plan hereby is amended by deleting
the same in its entirety and by substituting the following therefor:
"One or more options may be granted to any persons eligible for Awards
under the provisions of Article V."
7.
Section 7.02 of the Plan hereby is amended by adding the following new
sentence at the end thereof:
"Notwithstanding any provisions of this Section 7.02 to the contrary,
"incentive stock options" may be granted only to employees of the Company
or of any Affiliate."
8.
Section 7.08(ii) of the Plan hereby is amended by deleting the same in its
entirety and by substituting the following therefor:
"(ii) TERMINATION OF EMPLOYMENT OR CESSATION OF RELATIONSHIP.
"(a) DEATH, DISABILITY, OR RETIREMENT. Except as otherwise provided in a
Participant's Agreement, in the event of a Participant's death or
Disability, Options shall become exercisable according to the terms of
the Agreement. In the event of the Retirement of a Participant who is an
employee of the Company or of an Affiliate, the Committee may accelerate
the exercisability of Options.
"(b) OTHER THAN DEATH, DISABILITY, OR RETIREMENT. Each Agreement shall set
forth the extent to which the Participant shall have the right to
exercise the Option following either the termination of the Participant's
employment with the Company or any Affiliate or, if the Participant is
not an employee, the cessation of the Participant's relationship with the
Company and its Affiliates, for reason other than death, Disability or
Retirement. Such provisions shall be determined in the sole discretion of
the Board, shall be included in the Agreement entered into with each
Participant, need not be uniform among all Options issued pursuant to
this Article VII and may reflect distinctions based on the reasons for
such termination or cessation."
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9.
The title of Section 8.04 and Section 8.04 (ii) and (iii) of the Plan hereby
are amended by deleting the same in their entirety and by substituting the
following therefor:
"TERMINATION OF EMPLOYMENT OR CESSATION OF RELATIONSHIP.
"(ii) RETIREMENT. In the event of the Retirement of a Participant who is an
employee, the Committee may terminate any remaining restrictions on
Restricted Stock.
"(iii) OTHER THAN DEATH, DISABILITY OR RETIREMENT. Unless otherwise provided
by the Committee in a Participant's Agreement, in the event of the
termination of the Participant's employment with the Company or any
Affiliate or, if the Participant is not an employee, the cessation of
the Participant's relationship with the Company and its Affiliates,
for reason other than death, Disability or Retirement, prior to the
lapse of all restrictions applicable to Restricted Stock awarded to
such Participant, the shares of Restricted Stock awarded to the
Participant shall be forfeited to the Company, as of the effective
date of such termination or cessation. With respect to Participants
who are employees, the Committee may decide in each case to what
extent leaves of absence for governmental or military service,
illness, temporary disability or other reasons shall not be deemed a
termination of employment."
10.
Section 9.07 of the Plan hereby is amended by deleting the same in its
entirety and by substituting the following therefor:
"TERMINATION OF EMPLOYMENT OR CESSATION OF RELATIONSHIP. Each Agreement
shall set forth the extent to which the Participant shall have the right
to exercise the Stock Appreciation Right following either the termination
of the Participant's employment with the Company or any Affiliate or, if
the Participant is not an employee, the cessation of the Participant's
relationship with the Company and its Affiliates. Such provisions shall
be determined in the sole discretion of the Committee, shall be included
in the Agreement entered into with Participants, need not be uniform
among all Stock Appreciation Rights issued pursuant to the Plan and may
reflect distinctions based on the reasons for such termination or
cessation."
11.
Section 10.04 of the Plan hereby is amended by deleting the same in its
entirety and by substituting the following therefor:
"TERMINATION OF EMPLOYMENT OR CESSATION OF RELATIONSHIP. Each Agreement
shall set forth the extent to which the Participant shall have the right
to receive a payout with respect to any outstanding Performance Shares or
Performance Units following either the termination of the Participant's
employment with the Company or any Affiliate or, if the Participant is
not an employee, the cessation of the Participant's relationship with the
Company and its Affiliates. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Agreement
entered into with Participants, need not be uniform among all Performance
Shares and Performance Units issued pursuant to the Plan and may reflect
distinctions based on the reasons for such termination or cessation."
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12.
The second sentence of Article XI of the Plan hereby is amended by deleting
the same in its entirety and by substituting the following therefor:
"Each grant of Dividend Units shall be evidenced by an Agreement that
shall specify the terms and conditions applicable to such Award,
including the treatment of such Award upon either the termination of the
Participant's employment with the Company or any Affiliate or, if the
Participant is not an employee, the cessation of the Participant's
relationship with the Company and its Affiliates."
13.
The title of Section 12.05 and the first paragraph of Section 12.05(i) of
the Plan hereby are amended by deleting the same in their entirety and by
substituting the following therefor:
"TERMINATION OF EMPLOYMENT OR CESSATION OF RELATIONSHIP.
"(i) TERMINATION OF EMPLOYMENT OR CESSATION OF RELATIONSHIP DUE TO
DEATH, DISABILITY OR RETIREMENT. Unless determined otherwise by the
Committee, in the event of the termination of the Participant's
employment with the Company or any Affiliate or, if the Participant is
not an employee, the cessation of the Participant's relationship with the
Company and its Affiliates, for reason of death, Disability or Retirement
during a Plan Year, the Participant shall receive a payout of the
Incentive Awards which is prorated, as specified by the Committee in its
discretion."
14.
Section 12.05(ii) of the Plan hereby is amended by deleting the same in its
entirety and by substituting the following therefor:
"(ii) TERMINATION OF EMPLOYMENT OR CESSATION OF RELATIONSHIP FOR OTHER
REASONS. In the event of the termination of the Participant's employment
with the Company or any Affiliate or, if the Participant is not an
employee, the cessation of the Participant's relationship with the
Company and its Affiliates, for any reason other than those reasons set
forth in Section 12.05(i) herein, all Incentive Awards shall be forfeited
by the participant to the Company unless determined otherwise by the
Committee."
15.
Subject to the approval of the Company's stockholders, the effective date of
this Amendment Number One to the Plan shall be December 7, 2000.
B-4
<PAGE>
APPENDIX C
AMENDMENT NUMBER ONE
TO THE
MAGELLAN HEALTH SERVICES, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
Pursuant to the powers of amendment reserved in Section 18 of the Magellan
Health Services, Inc. 2000 Employee Stock Purchase Plan (the "Plan"), Magellan
Health Services, Inc. hereby amends the Plan as follows:
1.
Section 12 of the Plan hereby is amended by deleting the second sentence
thereof in its entirety and by substituting the following therefor:
"The maximum number of shares that shall be made available for sale
under the Plan shall be 1,500,000 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."
2.
This Amendment Number One shall be effective as of April 1, 2001.
C-1
<PAGE>
[LOGO]
ANNUAL MEETING OF STOCKHOLDERS
THE HARBOR COURT HOTEL
550 LIGHT STREET
BALTIMORE, MARYLAND
FEBRUARY 21, 2001
10:00 A.M.
MAGELLAN HEALTH SERVICES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS
FEBRUARY 21, 2001
The undersigned appoints HENRY T. HARBIN and MARK S. DEMILIO, and each 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 21,
2001, at 10:00 a.m., local time, at The Harbor Court Hotel, 550 Light Street,
Baltimore, Maryland 21203, and at any adjournment or postponement thereof, 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 or any adjournment
thereof.
<TABLE>
<CAPTION>
<S> <C>
1. ELECTION OF DIRECTORS / / FOR All Nominees Listed
Below
/ / WITHHOLD AUTHORITY to Vote
For All Nominees Listed
Below:
G. FRED DIBONA, JR., ANDRE C. DIMITRIADIS, A. D. FRAZIER, JR., ROBERT W. MILLER
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S) WRITE THE NAME OF SUCH NOMINEE(S) ON THE LINE
BELOW:
</TABLE>
(CONTINUED ON REVERSE SIDE)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
2. PROPOSAL TO AMEND THE MAGELLAN HEALTH SER- / / FOR
VICES, INC. 2000 LONG-TERM INCENTIVE COMPENSATION PLAN / / AGAINST
/ / ABSTAIN
3. PROPOSAL TO AMEND THE MAGELLAN HEALTH SER- / / FOR
VICES, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN / / AGAINST
/ / ABSTAIN
</TABLE>
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2 AND 3.
DATED ___________________, 2001
_______________________________
_______________________________
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.
