SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: June 30, 1997
Date of earliest event
reported: June 17, 1997
MAGELLAN HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter).
Delaware 1-6639 58-1076737
- ----------------------- ---------------------- -------------------------------
(State of incorporation)(Commission File Number)(IRS Employer Identification No)
3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326
- --------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 841-9200
- ----------------------------------------------------
(Registrant's telephone number, including area code)
Item 2. Disposition of Assets
On January 30, 1997, the Registrant ("Company" or "Magellan") announced
that it had entered into a series of transactions (the "Crescent Transactions")
including an agreement to sell substantially all of its domestic hospital real
estate and related personal property (the "Assets") to Crescent Real Estate
Equities Limited Partnership ("Crescent") and CBHS (as hereinafter defined). The
Crescent Transactions were approved by Magellan stockholders on May 30, 1997 and
were consummated on June 17, 1997. The Crescent Transactions are more fully
described in the Company's Proxy Statement filed on Schedule 14A on April 24,
1997, which is incorporated herein by reference. In addition, the Company's
domestic portion of its provider business segment will be operated as a joint
venture ("CBHS") that is initially owned equally by Magellan and Crescent
Operating, Inc., an affiliate of Crescent ("COI"). The Company received $417.2
million in cash (before costs estimated to be $12.5 million), which includes
$17.2 million for hospitals acquired after January 30, 1997, and warrants in COI
for the purchase of 2.5% of COI's common stock, exercisable over 12 years, as
consideration for the Assets. In addition to the Assets, Crescent and COI each
received 1,283,311 warrants (2,566,622 warrants in aggregate) to purchase
Magellan Common Stock at $30 per share, exercisable over 12 years.
In related agreements, (i) Crescent leased the real estate and related
assets to CBHS for annual rent beginning at $41.7 million, which includes $1.7
million for hospitals acquired after January 30, 1997 that were sold to
Crescent, with a 5% annual escalation clause, compounded annually, (the
"Facilities Lease") and (ii) CBHS will pay Magellan approximately $78 million in
annual franchise fees, subject to increase, for the use of assets retained by
Magellan and for support in certain areas. The franchise fees to be paid by CBHS
to the Company are subordinated to the lease obligations in favor of Crescent.
The assets retained by Magellan include, but are not limited to, the "CHARTER"
name, intellectual property, protocols and procedures, clinical quality
management, operating processes and the "1-800- CHARTER" telephone call center.
Magellan will provide CBHS ongoing support in areas including advertising and
marketing assistance, risk management services, outcomes monitoring, and
consultation on matters relating to reimbursement, government relations,
clinical strategies, regulatory matters, strategic planning and business
development.
The Company intends to initially use the proceeds from the sale of the
Assets to reduce its long-term debt, including borrowings under its Revolving
Credit Agreement. Under the terms of its Senior Subordinated Notes (the "Notes")
indentures, the Noteholders will have the right to put their Notes to the
Company at 101% of face value. The Company intends to maintain adequate cash
reserves and borrowing capacity to extinguish all the Notes, if necessary. The
Noteholder's right to put the Notes will expire on July 21, 1997. The Company
intends to use the remaining proceeds from the sale of the Assets, if any, after
debt reductions, to pursue acquisitions in its managed care and public sector
business segments, develop new products and increase managed care and public
sector marketing efforts.
The Company will account for its 50% investment in CBHS under the
equity method of accounting. The Company expects to record a loss before income
taxes of approximately $55 million to $60 million as a result of these
transactions, including, but not limited to, the write-off of certain
hospital-based intangible assets, collection fees associated with accounts
receivable, certain construction commitments and exit costs and the loss on the
sale of the Assets.
Item 7. Financial Statements and Exhibits
Unaudited Pro Forma Consolidated Financial Information
The Unaudited Pro Forma Consolidated Financial Statements are based on
the historical presentation of the consolidated financial statements of Magellan
and the historical operating results and financial position of the divested
operations and assets of CBHS. The Unaudited Pro Forma Consolidated Statements
of Operations for the year ended September 30, 1996 and the six months ended
March 31, 1997 give effect to the Crescent Transactions as if they had occurred
on October 1, 1995. The Unaudited Pro Forma Consolidated Statement of Operations
for the year ended September 30, 1996 also gives effect to the following
transactions completed during fiscal 1996 as if such transactions had been
completed on October 1, 1995: (i) the Green Spring Health Services, Inc. ("Green
Spring") acquisition, (ii)
2
the issuance of the Shares (as hereinafter defined), (iii) the Share Repurchase
(as hereinafter defined) and (iv) the pre- closure operating results for the
nine acute care psychiatric hospitals that were closed or sold during fiscal
1996. The Company acquired a 61% ownership interest in Green Spring in December
1995. The "Shares" represent the 4,000,000 shares issued to Rainwater-Magellan
Holdings, L.P. on January 25, 1996. The "Share Repurchase" represents the
Company's repurchase of approximately 3,962,000 shares of Common Stock on
September 27, 1996. The Unaudited Pro Forma Consolidated Balance Sheet as of
March 31, 1997 gives effect to the Crescent Transactions as if they had occurred
on March 31, 1997. The pro forma consolidated statements of operations and
balance sheets do not effect for hospital acquisitions and closures during
fiscal 1997 as such transactions and events are not considered material to the
pro forma presentation.
On March 19, 1997, the Company announced that it had signed definitive
agreements to sell its three European Hospitals to Priory Hospitals Limited
("Priory") and enter into a franchise agreement with Priory for approximately
$76 million in aggregate consideration. On June 17, 1997, the Company announced
that the sale of its two United Kingdom hospitals had been referred to the
Monopolies and Mergers Commission ("MMC") by the Office of Fair Trade under the
provisions of the Fair Trading Act. The MMC is required to make their report by
September 15, 1997. The time period for receiving regulatory approval under the
definitive agreements has expired and the Company has begun exploring other
strategic alternatives related to its European hospitals. Accordingly, the sale
of the European Hospitals has been excluded from the pro forma presentations.
The Crescent Transactions resulted in (i) the sale of substantially all
of the Company's domestic provider real estate and related equipment (the
"Purchased Facilities") for $417.2 million (before costs estimated at $12.5
million) and the COI warrants to acquire 2.5% of the outstanding common stock of
COI, (ii) the creation of CBHS, which is 50% owned by the Company and engage in
the behavioral healthcare provider business and (iii) the Company's entry into
the healthcare franchising business. CBHS leased the Purchased Facilities from
Crescent under a twelve-year operating lease (subject to renewal) for $41.7
million annually, subject to adjustment, with a 5% escalator, compounded
annually. Magellan issued 2,566,622 warrants to Crescent and COI (1,283,311
Warrants each) with an exercise price of $30 per share. The Warrants issued to
Crescent and COI have been valued at $25 million in the Pro Forma Balance Sheet.
The exercise price of the COI Warrants will be determined after 30 days of
initial trading of COI common stock. The COI Warrants have been ascribed no
value in the Pro Forma Balance Sheet as the COI Warrants have nominal fair
value. The Company will account for its 50% investment in CBHS under the equity
method of accounting, which will significantly reduce the revenues and related
operating expenses presented in the Company's Statement of Operations. Divested
Operations in the Pro Forma Statements of Operations represent the businesses
that will be operated by CBHS after the closing. CBHS will include a significant
portion of the business included in Magellan's provider business segment and a
portion of Magellan's corporate overhead. A summary of Magellan's provider
business operations for the year ended September 30, 1996 is as follows (000's):
Earnings
Before Interest,
Income Taxes
and Minority Depreciation
Net Revenue Interest and Amortization
----------- -------------- ----------------
CBHS ............................... $ 808,744 $ 103,536 $ 28,863
Hospital-based joint ventures ...... 107,253 14,683 4,129
European hospitals ................. 32,230 8,853 1,078
General hospitals .................. 32,796 (89) 290
Other .............................. 56,916 1,289 (580)
---------- ---------- ----------
$1,037,939 $ 128,272 $ 33,780
========== ========== ==========
The Company would have incurred a loss before income taxes, minority
interest and extraordinary items of approximately $59 million if the Crescent
Transactions were consummated on March 31, 1997. The components of
3
the loss from the Crescent Transactions are more fully described in Note 21 to
the Pro Forma Consolidated Financial Statements.
The Unaudited Pro Forma Consolidated Financial Statements are presented
using two different assumptions. Under the terms of the Indenture, Noteholders
may elect to have the Company repurchase their Notes at 101% of the face value
of the Notes after the Closing. The Company mailed a notice to the Noteholders
on June 19, 1997 which, among other things, stated the latest date which the
holders of the Notes will have to tender their Notes to the Company (the "Notes
Payment Date"). The Notes Payment Date is July 21, 1997. On the Notes Payment
Date, the Company will be required to provide sufficient funds to the Trustee to
redeem all tendered Notes plus accrued interest to the Notes Payment Date. The
Company will not hire any outside agents to assist in this process. Noteholder
consent or approval of the Crescent Transactions was not required. Noteholders
may elect to have the Company repurchase their Notes for various reasons
including, but not limited to, concerns about the Company's prospects after the
Crescent Transactions, liquidity of the Notes in the open market and prevailing
bond and equity market conditions at the Notes Payment Date.
The first presentation assumes that no Noteholders elect to have their
Notes repurchased and the net proceeds from the Crescent Transactions are
deposited with no investment return after payment of indebtedness outstanding
under the Company's Revolving Credit Agreement and industrial revenue bonds for
certain of the Purchased Facilities. If the excess proceeds from the Crescent
Transactions were assumed to be invested at Magellan's historic temporary cash
investment rate of 5.4% for the year ended September 30, 1996 and 5.25% for the
six months ended March 31, 1997, pro forma consolidated net income and net
income per common share would be $27.4 million and $0.96, respectively, for the
year ended September 30, 1996 and $20.1 million and $0.70, respectively, for the
six months ended March 31, 1997.
The second presentation assumes that no Noteholders elect to have their
Notes repurchased by the Company and no net proceeds from the Crescent
Transactions are available for deposit. On January 29, 1997, the date preceding
public announcement of the Crescent Transactions, the bid and asked prices of
the Notes on the New York Stock Exchange were 110.75% and 111.25% of the face
value of the Notes, respectively. On June 16, 1997, the bid and asked prices of
the Notes on the New York Stock Exchange were 111.0% and 112.25% of the face
value of the Notes, respectively.
The Unaudited Pro Forma Consolidated Financial Statements do not
purport to be indicative of the results that actually would have been obtained
if the operations had been conducted as presented and they are not necessarily
indicative of operating results to be expected in future periods. The Company's
hospital business is seasonal in nature with a reduced demand for certain
services generally occurring in the first fiscal quarter around major holidays,
such as Thanksgiving and Christmas, and during the summer months comprising the
fourth fiscal quarter. The Franchise Fees are recognized ratably throughout the
year for purposes of the Unaudited Pro Forma Consolidated Financial Statements.
Accordingly, the Unaudited Pro Forma Statement of Operations for the six months
ended March 31, 1997 are not necessarily indicative of the pro forma results
expected for a full year. The Unaudited Pro Forma Consolidated Financial
Statements and notes thereto should be read in conjunction with the historical
consolidated financial statements and notes thereto of Magellan, which are
incorporated herein by reference.
4
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Assumes No Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
For The Year Ended September 30, 1996
(in thousands, except per share amounts)
Operations Pro Pro
Magellan Green Closed or Sold Forma Forma Divested
As Reported Spring In Fiscal 1996 Adjustments Combined Operations
----------- ----------- -------------- ----------- ----------- -----------
Net Revenue ................... $ 1,345,279 $ 46,232 $ (32,718) $ 0 $ 1,358,793 $ (808,744)
----------- ----------- ----------- ----------- ----------- -----------
Salaries, supplies and other
operating expenses ........ 1,064,445 40,120 (29,320) 0 1,075,245 (608,127)
Bad debt expense .............. 81,470 0 (2,306) 0 79,164 (70,021)
Depreciation and amortization . 48,924 1,693 (1,193) 381(1) 49,805 (28,863)
Interest, net ................. 48,017 (215) 0 4,246(2) 52,048 (4,852)
Stock option expense .......... 914 0 0 0 914 0
Equity in loss of CBHS ........ 0 0 0 0 0 0
Unusual items ................. 37,271 0 0 0 37,271 (997)
----------- ----------- ----------- ----------- ----------- -----------
1,281,041 41,598 (32,819) 4,627 1,294,447 (712,860)
---------- ----------- ----------- ----------- -----------
Income before income taxes
and minority interest .... 64,238 4,634 101 (4,627) 64,346 (95,884)
Provision for income taxes .... 25,695 1,900 40 (1,698)(3) 25,937 (38,354)
----------- ----------- ----------- ----------- ----------- -----------
Income before minority interest 38,543 2,734 61 (2,929) 38,409 (57,530)
Minority interest ............. 6,160 0 0 1,016 7,176 0
----------- ----------- ----------- ----------- ----------- -----------
Net income .................... $ 32,383 $ 2,734 $ 61 $ (3,945) $ 31,233 $ (57,530)
=========== =========== =========== =========== =========== ===========
Average number of common
shares outstanding ........ 31,014 (2,597)(5) 28,417
=========== =========== ===========
Net income per common share ... $ 1.04 $ 1.10
=========== ===========
Pro Pro
Forma Forma
Adjustments Consolidated
----------- ------------
Net Revenue ................... $ 78,200(6)$ 628,249
----------- ------------
Salaries, supplies and other
operating expenses ........ 3,360 470,478
Bad debt expense .............. 0 9,143
Depreciation and amortization . (308)(8) 20,634
Interest, net ................. (10,474)(9) 36,722
Stock option expense .......... 0 914
Equity in loss of CBHS ........ 7,659 (10) 7,659
Unusual items ................. 0 36,274
---------- -----------
237 581,824
---------- -----------
Income before income taxes
and minority interest .... 77,963 46,425
Provision for income taxes .... 31,185 (11) 18,768
---------- -----------
Income before minority interest 46,778 27,657
Minority interest ............. 0 7,176
---------- -----------
Net income .................... $ 46,778 $ 20,481 (9)
========== ===========
Average number of common
shares outstanding ........ 28,417
===========
Net income per common share ... $ 0.72(9)
===========
See Notes to the Pro forma Consolidated Financial Statements(Unaudited)
5
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Assumes No Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
For The Six Months Ended March 31, 1997
(in thousands, except per share amounts)
Magellan Divested Pro Forma Pro Forma
As Reported Operations Adjustments Consolidated
-------------- -------------- -------------- --------------
Net Revenue $ 696,741 $ (382,606) $ 39,100 (6) $ 353,235
-------------- -------------- -------------- --------------
Salaries, supplies and other
operating expenses.............. 566,333 (298,111) 3,222 (7) 271,444
Bad debt expense................... 35,375 (32,599) 0 2,776
Depreciation and amortization...... 26,187 (14,406) (131)(8) 11,650
Interest, net...................... 26,722 (2,096) (5,011)(9) 19,615
Stock option expense............... 1,433 0 0 1,433
Equity in loss of CBHS............. 0 0 11,475 (10) 11,475
Unusual items...................... 1,395 (2,500) 0 (1,105)
-------------- -------------- -------------- --------------
657,445 (349,712) 9,555 317,288
-------------- -------------- -------------- --------------
Income before income taxes
and minority interest......... 39,296 (32,894) 29,545 35,947
Provision for income taxes......... 15,718 (13,158) 11,818 (11) 14,378
-------------- -------------- -------------- --------------
Income before minority interest.... 23,578 (19,736) 17,727 21,569
Minority interest.................. 4,545 0 0 4,545
-------------- -------------- -------------- --------------
Net income......................... $ 19,033 $ (19,736) $ 17,727 $ 17,024 (9)
============== ============== ============== ==============
Average number of common
shares outstanding............. 28,657 28,657
============== ==============
Net income per common share........ $ 0.66 $ 0.59 (9)
============== ==============
See Notes to the Pro forma Consolidated Financial Statements(Unaudited)
6
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Assumes All Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
For The Year Ended September 30, 1996
(in thousands, except per share amounts)
Operations Pro
Magellan Green Closed or Sold Pro Forma Forma
As Reported Spring In Fiscal 1996 Adjustments Combined
-------------- -------------- -------------- -------------- --------------
Net revenue...................... $ 1,345,279 $ 46,232 $ (32,718) $ 0 $ 1,358,793
-------------- -------------- -------------- -------------- --------------
Salaries, supplies and other
operating expenses............. 1,064,445 40,120 (29,320) 0 1,075,245
Bad debt expense................. 81,470 0 (2,306) 0 79,164
Depreciation and amortization.... 48,924 1,693 (1,193) 381 (1) 49,805
Interest, net.................... 48,017 (215) 0 4,246 (2) 52,048
Stock option expense............. 914 0 0 0 914
Equity in loss of CBHS........... 0 0 0 0 0
Unusual items.................... 37,271 0 0 0 37,271
-------------- -------------- -------------- -------------- --------------
1,281,041 41,598 (32,819) 4,627 1,294,447
-------------- -------------- -------------- -------------- --------------
Income before income taxes
and minority interest....... 64,238 4,634 101 (4,627) 64,346
Provision for income taxes....... 25,695 1,900 40 (1,698)(3) 25,937
-------------- -------------- -------------- -------------- --------------
Income before minority interest.. 38,543 2,734 61 (2,929) 38,409
Minority interest................ 6,160 0 0 1,016 (4) 7,176
-------------- -------------- -------------- -------------- --------------
Net income....................... $ 32,383 $ 2,734 $ 61 $ (3,945) $ 31,233
============== ============== ============== ============== ==============
Average number of common
shares outstanding........... 31,014 (2,597)(5) 28,417
============== ============== ==============
Net income per common share...... $ 1.04 $ 1.10
============== ==============
Divested Pro Forma Pro Forma
Operations Adjustments Consolidated
-------------- ------------ ------------
Net revenue...................... $ (808,744) $ 78,200 (6) $ 628,249
-------------- ----------- ------------
Salaries, supplies and other
operating expenses............. (608,127) 3,360 (7) 470,478
Bad debt expense................. (70,021) 0 9,143
Depreciation and amortization.... (28,863) (308)(8) 20,634
Interest, net.................... (4,852) (37,010)(9) 10,186
Stock option expense............. 0 0 914
Equity in loss of CBHS........... 0 7,659 (10) 7,659
Unusual items.................... (997) 0 36,274
-------------- ---------- ------------
(712,860) (26,299) 555,288
-------------- ---------- ------------
Income before income taxes
and minority interest....... (95,884) 104,499 72,961
Provision for income taxes....... (38,354) 41,800 (11) 29,383
-------------- ---------- ------------
Income before minority interest.. (57,530) 62,699 43,578
Minority interest................ 0 0 7,176
-------------- ---------- ------------
Net income....................... $ (57,530) $ 62,699 $ 36,402
============== ========== ============
Average number of common
shares outstanding........... 28,417
============
Net income per common share...... $ 1.28
============
See Notes to the Pro Forma Consolidated Financial Statements(Unaudited)
7
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Assumes All Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
For The Six Months Ended March 31, 1997
(in thousands, except per share amounts)
Magellan Divested Pro Forma Pro Forma
As Reported Operations Adjustments Consolidated
-------------- -------------- -------------- --------------
Net revenue..................... $ 696,741 $ (382,606) $ 39,100 (6) $ 353,235
-------------- -------------- -------------- --------------
Salaries, supplies and other
operating expenses.......... 566,333 (298,111) 3,222 (7) 271,444
Bad debt expense................ 35,375 (32,599) 0 2,776
Depreciation and amortization... 26,187 (14,406) (131)(8) 11,650
Interest, net................... 26,722 (2,096) (18,677)(9) 5,949
Stock option expense............ 1,433 0 0 1,433
Equity in loss of CBHS.......... 0 0 11,475 (10) 11,475
Unusual items................... 1,395 (2,500) 0 (1,105)
-------------- -------------- -------------- --------------
657,445 (349,712) (4,111) 303,622
-------------- -------------- -------------- --------------
Income before income taxes
and minority interest...... 39,296 (32,894) 43,211 49,613
Provision for income taxes...... 15,718 (13,158) 17,285 (11) 19,845
-------------- -------------- -------------- --------------
Income before minority interest. 23,578 (19,736) 25,926 29,768
Minority interest............... 4,545 0 0 4,545
-------------- -------------- -------------- --------------
Net income...................... $ 19,033 $ (19,736) $ 25,926 $ 25,223
============== ============== ============== ==============
Average number of common
shares outstanding.......... 28,657 28,657
============== ==============
Net income per common share..... $ 0.66 $ 0.88
============== ==============
See Notes to the Pro forma Consolidated Financial Statements(Unaudited)
8
PRO FORMA CONSOLIDATED BALANCE SHEET
(Assumes All Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
March 31, 1997
(In thousands)
ASSETS
Magellan Pro Forma Pro Forma
as Reported Adjustments Consolidated
-------------- -------------- --------------
Current Assets:
Cash and cash equivalents............... $ 114,245 $ 375,000 (18) $ 113,937
12,500 (18)
12,500 (18)
7,683 (18)
(12,475)(18)
(10,000)(18)
(381,766)(18)
(3,750)(18)
Accounts receivable, net................ 192,394 (19,660)(12) 172,734
Supplies................................ 4,465 (2,944)(13) 1,521
Other................................... 25,299 (4,396)(13) 20,903
-------------- ------------- --------------
Total Current Assets............... 336,403 (27,308) 309,095
Assets Restricted for Settlement of Unpaid
Claims and Other Long-Term Liabilities.. 96,402 0 96,402
Property and Equipment:
Land.................................... 82,705 (70,091)(14) 12,614
Buildings and improvements.............. 393,814 (325,229)(14) 68,585
Equipment............................... 154,831 (100,099)(14) 54,732
-------------- ------------- --------------
631,350 (495,419) 135,931
Accumulated depreciation................ (143,724) 111,894 (14) (31,830)
-------------- ------------- --------------
487,626 (383,525) 104,101
Construction in progress................ 3,735 (2,049)(14) 1,686
-------------- ------------- --------------
491,361 (385,574) 105,787
Other long-term assets......................... 32,126 (343)(13) 31,783
Deferred income tax assets..................... 0 13,265 (19) 13,265
Investment in/Advances to CBHS................. 0 15,493 (15) 15,493
Goodwill, net.................................. 125,329 (13,768)(16) 111,561
Other intangible assets, net................... 40,766 (9,943)(16) 30,823
-------------- -------------- --------------
$ 1,122,387 $ (408,178) $ 714,209
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................ $ 69,920 $ 0 $ 69,920
Accrued liabilities..................... 165,358 (12,333)(17) 153,025
Current maturities of long-term debtand
capital lease obligations........... 5,845 (2,003)(18) 3,842
-------------- ------------- --------------
Total Current Liabilities.......... 241,123 (14,336) 226,787
Long-term debt and capital lease obligations... 580,536 (360,708)(18) 219,828
Deferred income tax liabilities................ 15,295 (15,295)(19) 0
Reserve for unpaid claims...................... 62,316 0 62,316
Deferred credits and other long-term liabilities 24,211 0 24,211
Minority interest.............................. 56,698 0 56,698
Commitments and contingencies
Stockholders' equity:
Common stock............................ 8,307 0 8,307
Additional paid-in capital.............. 332,905 0 332,905
Accumulated deficit..................... (113,374) (42,839)(21) (156,213)
Warrants outstanding.................... 50 25,000 (20) 25,050
Common stock in treasury................ (82,731) 0 (82,731)
Cumulative foreign currency adjustments. (2,949) 0 (2,949)
-------------- -------------- --------------
Total stockholders' equity......... 142,208 (17,839) 124,369
-------------- -------------- --------------
$ 1,122,387 $ (408,178) $ 714,209
============== ============== ==============
See Notes to the Pro Forma Consolidated Financial Statements(Unaudited)
9
PRO FORMA CONSOLIDATED BALANCE SHEET
(Assumes No Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
March 31, 1997
(In thousands)
ASSETS
Magellan Pro Forma Pro Forma
as Reported Adjustments Consolidated
-------------- -------------- --------------
Current Assets:
Cash and cash equivalents............... $ 114,245 $ 375,000 (18) $ 312,140
12,500 (18)
12,500 (18)
7,683 (18)
(12,475)(18)
(10,000)(18)
(187,313)(18)
Accounts receivable, net................ 192,394 (19,660)(12) 172,734
Supplies................................ 4,465 (2,944)(13) 1,521
Other................................... 25,299 (4,396)(13) 20,903
-------------- -------------- --------------
Total Current Assets............... 336,403 170,895 507,298
Assets Restricted for Settlement of Unpaid
Claims and Other Long-Term Liabilities.. 96,402 0 96,402
Property and Equipment:
Land.................................... 82,705 (70,091)(14) 12,614
Buildings and improvements.............. 393,814 (325,229)(14) 68,585
Equipment............................... 154,831 (100,099)(14) 54,732
-------------- -------------- --------------
631,350 (495,419) 135,931
Accumulated depreciation................ (143,724) 111,894 (14) (31,830)
-------------- -------------- --------------
487,626 (383,525) 104,101
Construction in progress................ 3,735 (2,049)(14) 1,686
-------------- -------------- --------------
491,361 (385,574) 105,787
Other long-term assets......................... 32,126 (343)(13) 31,783
Deferred income tax assets..................... 0 8,210 (19) 8,210
Investment in/Advances to CBHS................. 0 15,493 (15) 15,493
Goodwill, net.................................. 125,329 (13,768)(16) 111,561
Other intangible assets, net................... 40,766 (1,056)(16) 39,710
-------------- -------------- --------------
$ 1,122,387 $ (206,143) $ 916,244
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................ $ 69,920 $ 0 $ 69,920
Accrued liabilities..................... 165,358 7,120 (17) 172,478
Current maturities of long-term debt and
capital lease obligations........... 5,845 (2,003)(18) 3,842
-------------- -------------- --------------
Total Current Liabilities.......... 241,123 5,117 246,240
Long-term debt and capital lease obligations... 580,536 (185,708)(18) 394,828
Deferred income tax liabilities................ 15,295 (15,295)(19) 0
Reserve for unpaid claims...................... 62,316 0 62,316
Deferred credits and other long-term liabilities 24,211 0 24,211
Minority interest.............................. 56,698 0 56,698
Commitments and contingencies
Stockholders' equity:
Common stock............................ 8,307 0 8,307
Additional paid-in capital.............. 332,905 0 332,905
Accumulated deficit..................... (113,374) (35,257)(21) (148,631)
Warrants outstanding.................... 50 25,000 (20) 25,050
Common stock in treasury................ (82,731) 0 (82,731)
Cumulative foreign currency adjustments. (2,949) 0 (2,949)
-------------- -------------- --------------
Total stockholders' equity......... 142,208 (10,257) 131,951
-------------- -------------- --------------
$ 1,122,387 $ (206,143) $ 916,244
============== ============== ==============
See Notes to the Pro Forma Consolidated Financial Statements(Unaudited)
10
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Notes (1) through (5) relate to the effect of the Green Spring
Acquisition, the issuance of the Shares and the Share Repurchase as if such
transactions occurred on October 1, 1995.
(1) The pro forma adjustments to amortization expense represent an increase
to amortization expense in conjunction with the 61% acquisition of
Green Spring.
(2) The pro forma adjustments to interest expense, net, represent the
interest expense incurred and the interest income forgone by Magellan
as a result of the Green Spring Acquisition and the Share Repurchase,
net of reductions in interest expense as a result of the issuance of
the Shares. Historic interest rates used for borrowings and temporary
cash investments were approximately 7.6% and 5.4%, respectively.
(3) The pro forma adjustments to income taxes represent the tax effect of
the pro forma adjustment to interest expense at Magellan's historic
effective tax rate of 40%.
(4) The pro forma adjustments to minority interest represent the 39%
minority interest in Green Spring and GPA as a result of the Green
Spring Acquisition.
(5) The pro forma adjustments to average number of common shares
outstanding give effect to the issuance of shares in the Green Spring
Acquisition and the issuance of the Shares, offset by the Share
Repurchase.
(6) The pro forma adjustments to net revenue represent Franchise Fees paid
to Magellan by CBHS pursuant to the Master Franchise Agreement. As
part of the Crescent Transactions, CBHS will lease the Purchased
Facilities from Crescent under the Facilities Lease. The annual base
rent under the Facilities Lease begins at $40 million for pro forma
purposes and escalates 5% per year, compounded annually. The
Subordination Agreement provides that the Franchise Fees are
subordinated in payment to the $40 million annual base rent, 5%
escalator rent and the additional rent under the Facilities Lease due
Crescent, in certain circumstances. The Company will be entitled to
pursue all available remedies for breach of the Master Franchise
Agreement, except that the Company does not have the right to take any
action that could reasonably be expected to force CBHS into bankruptcy
or receivership. If CBHS encounters a decline in earnings or financial
difficulties, such amounts due Crescent will be paid before any
Franchise Fees are paid. After the Crescent Transactions, the Company
will receive from CBHS initial Franchise Fees of approximately $78
million, subject to increase. The Company will provide CBHS with an
array of services, including advertising and marketing assistance,
risk management services, outcomes monitoring, consultation with
respect to matters relating to CBHS' business in which the Company has
expertise and the Company's operation of a telephone call center
utilizing the "1- 800-CHARTER" telephone number.
(7) The pro forma adjustments to salaries, supplies and other operating
expenses represent fees payable to CBHS of $10.6 million and $5.2
million for the year ended September 30, 1996 and the six months ended
March 31, 1997, respectively, for the management of hospital-based
businesses controlled by Magellan that are less than wholly-owned by
Magellan, net of reductions in corporate overhead of $7.2 million and
$2.0 million for the year ended September 30, 1996 and the six months
ended March 31, 1997, respectively, related to the transfer of
existing personnel and functions between Magellan and CBHS. The
Company and CBHS expect to incur incremental corporate overhead of
approximately $1 million annually as a result of the Crescent
Transactions. Magellan personnel transferred to CBHS and incremental
corporate overhead will occur primarily in the human resource, legal
and finance and accounting functions.
(8) The pro forma adjustments to depreciation and amortization represent
the amortization expense related to other intangible assets that would
become impaired as a result of the Crescent Transactions. The impaired
other intangible assets have a remaining net book value of
approximately $105,000 at March 31, 1997, which are included in the
impairment losses referred to in Note (16).
11
(9) The pro forma adjustments to interest expense, net, assuming all of
the Notes are repurchased, represent the reduction in interest expense
for the assumed repurchase of the Notes at 101% of the aggregate
principal amount pursuant to the provisions of the Indenture, offset
by additional borrowings under the new credit agreement required to
fund the assumed repurchase of the Notes. The pro forma adjustment to
interest expense, net, assuming the Notes are not repurchased,
represents reductions in interest expense as a result of paying off
the outstanding borrowings under the Revolving Credit Agreement
(historic and pro forma) with no assumed investment of the excess
proceeds from the Crescent Transactions. If the excess proceeds from
the Crescent Transactions were assumed to be invested at Magellan's
historic temporary cash investment rate of 5.4% for the year ended
September 30, 1996 and 5.25% for the six months ended March 31, 1997,
pro forma consolidated net income and net income per common share
would be $27.4 million and $0.96 million, respectively, for the year
ended September 30, 1996 and $20.1 million and $0.70, respectively,
for the six months ended March 31, 1997.
(10) The pro forma adjustments to equity in loss of CBHS represent
Magellan's percentage interest (50%) in CBHS' pro forma loss for the
year ended September 30, 1996 and the six months ended March 31, 1997.
Magellan's investment in CBHS will be accounted for under the equity
method of accounting. The timing and terms of a 10% equity interest
grant to CBHS management will be addressed by the governing board of
CBHS at a later date. The Company anticipates that the granting of a
10% equity interest to CBHS management will result in equally shared
dilution of ownership interest between Magellan and COI and that the
grant will be at an exercise price at least equal to the fair value of
the underlying equity at the date of grant, which will not result in
compensation expense under the provisions of APB Opinion 25.
Magellan's ownership interest in CBHS is reflected at its initial
ownership percentage of 50% for the purposes of computing pro forma
equity in loss of CBHS. The Condensed Pro Forma Statements of
Operations and Balance Sheet of CBHS are as follows (000's).
For the Year Ended September 30, 1996
---------------------------------------------------
Divested Pro Forma Pro Forma
STATEMENTS OF OPERATIONS: Operations Adjustments Consolidated
-------------- -------------- ---------------
Net revenue.............................. $ 808,744 $ 10,615 (i) $ 819,359
-------------- -------------- ---------------
Salaries, supplies and other
operating expenses..................... 608,127 149,512 (ii) 757,639
Bad debt expense......................... 70,021 -- 70,021
Depreciation and amortization............ 28,863 (26,444)(iii) 2,419
Interest, net............................ 4,852 (1,252)(iv) 3,600
Unusual items............................ 997 -- 997
-------------- -------------- ---------------
712,860 121,816 834,676
-------------- -------------- ---------------
Income (loss) before income taxes........ 95,884 (111,201) (15,317)
Provision for income taxes............... 38,354 (38,354)(v) --
-------------- -------------- ---------------
Net income (loss)................... $ 57,530 $ (72,847) $ (15,317)
============== ============== ===============
For the Six Months Ended
March 31, 1997
---------------------------------------------------
Divested Pro Forma Pro Forma
STATEMENTS OF OPERATIONS: Operations Adjustments Consolidated
-------------- -------------- ---------------
Net revenue.............................. $ 382,606 $ 5,186 (i) $ 387,792
-------------- -------------- ---------------
Salaries, supplies and other
operating expenses..................... 298,111 73,093 (ii) 371,204
Bad debt expense......................... 32,599 -- 32,599
Depreciation and amortization............ 14,406 (12,367)(iii) 2,039
Interest, net............................ 2,096 304 (iv) 2,400
Unusual items............................ 2,500 -- 2,500
-------------- -------------- ---------------
349,712 61,030 410,742
-------------- -------------- ---------------
Income (loss) before income taxes........ 32,894 (55,844) (22,950)
Provision for income taxes............... 13,158 (13,158)(v) --
-------------- -------------- ---------------
Net income (loss)................... $ 19,736 $ (42,686) $ (22,950)
============== ============== ===============
(i) Fees from Magellan for the management of hospital-based businesses
controlled by Magellan that are less than wholly-owned by
(ii) The pro forma adjustments to salaries, supplies and other operating expenses are as follows (000's):
Six Months
Year Ended Ended
September 30, 1996 March 31, 1997
------------------ --------------
Franchise Fees (See Note 6).................. $ 78,200 $ 39,100
Rent Expense under the Facilities Lease...... 63,057 31,529
Additional Corporate Overhead (See Note 7)... 8,255 2,464
------------------ --------------
$ 149,512 $ 73,093
================== ==============
12
(iii) The pro forma adjustment to depreciation and amortization represents
the decrease in depreciation expense as a result of the sale of
property and equipment to Crescent by Magellan and the elimination of
amortization expense related to impaired intangible assets (See Note
16).
(iv) The pro forma adjustment to interest, net, is computed as follows
(000's):
Six Months
Year Ended Ended
September 30, 1996 March 31, 1997
------------------ ---------------
Interest expense on serviced IRBs $ (4,852) $ (2,096)
Interest expense for new borrowings 3,600 2,400
------------------ ---------------
$ (1,252) $ 304
================== ===============
Average borrowings $ 45,000 60,000
Borrowing rate 8.0% 8.0%
------------------ ---------------
Annual Interest $ 3,600 $ 4,800
================== ===============
Semi-Annual Interest $ 2,400
===============
(v) CBHS will be formed as a limited liability company. Accordingly, no
tax benefit is presented as the tax consequences will pass through to
Magellan and COI.
BALANCE SHEET March 31, 1997
- ---------------------------------------------------- -----------------
Current assets...................................... $ 9,657
Property and equipment, net......................... 18,418
Other long-term assets.............................. 343
-----------------
Total assets................................. $ 28,418
=================
Accrued liabilities................................. $ 6,984
Capital lease obligation............................ 53
Note payable - Magellan............................. 10,000
-----------------
Total current liabilities.................... 17,037
Capital lease obligation............................ 888
Member capital...................................... 10,493
-----------------
Total liabilities and member capital......... $ 28,418
=================
(11) The pro forma adjustments to provision for income taxes represent the
tax expense related to the pro forma adjustments at the Company's
historic effective tax rate of 40%.
(12) The pro forma adjustments to accounts receivable, net, represent the
reduction in the net realizable value of accounts receivable for
estimated collection fees on hospital-based receivables of $125.2
million for the divested operations pursuant to a contractual
obligation with CBHS, whereby CBHS will receive a fee equal to 5% of
collections for the first 120 days after the Closing ($4.4 million) and
estimated bad debt agency fees of 40% for receivables collected
subsequent to 120 days after the Closing ($15.3 million).
(13) The pro forma adjustments to supplies, other current assets and other
long-term assets represent the sale of such assets to CBHS at their
recorded amounts.
(14) The pro forma adjustments to land, buildings and improvements,
equipment, accumulated depreciation and construction in progress
represent the basis of real and personal property sold to Crescent and
contributed and sold by Magellan to CBHS. A summary of these
transactions is as follows (000's):
13
Sales price......................................................... $ 400,000
Less: transaction costs............................................ (12,475)
Warrant valuation................................................... (25,000)
----------
Transaction consideration, net...................................... 362,525
Net book value of Property and Equipment sold to Crescent and CBHS.. 372,156
----------
Loss on sale of Property and Equipment to Crescent.................. $ (9,631)
==========
Net book value of Property and Equipment contributed to CBHS........ $ 13,418
==========
Total net book value of Property and Equipment sold and contributed. $ 385,574
==========
(15) The pro forma adjustments to Investment in/Advances to CBHS represent
Magellan's capital contribution for its 50% ownership and voting
interest in CBHS in the form of contributed net assets and advances to
CBHS for working capital purposes. Magellan will provide a guarantee
under certain circumstances, not to exceed $65 million, for a CBHS
bank line of credit secured by CBHS' receivables. CBHS consummated a
senior secured credit facility at closing with a group of commercial
banks of up to $100 million pursuant to a 5-year revolving credit
facility. Each of the Company and COI will make a commitment to loan
CBHS up to $17.5 million each, for a period of five years. The Company
will have the right to require CBHS to draw down a portion of its loan
commitment, which will be funded equally by the Company and COI, and
will be used in the manner directed by the Company. The fair value of
the net assets contributed to CBHS by Magellan is approximately $5.5
million and the pro forma advance to CBHS by Magellan is approximately
$10.0 million.
(16) The pro forma adjustments to goodwill and other intangible assets
represent impairment losses related primarily to hospital-based
goodwill and other intangible assets as a result of the Crescent
Transactions, including the write-off of approximately $8.9 million in
unamortized deferred financing costs if the Notes are repurchased. The
Company is disposing of a significant portion of its provider business
segment. The impairment loss results from reducing the book value of
the Company's investment in CBHS to its approximate fair value. The
impairment losses represent the carrying amount of goodwill and other
intangible assets related to the divested or contributed operations.
(17) The pro forma adjustments to accrued liabilities represent the accrual
of $5.0 million of exit costs and the remaining obligation to construct
the Philadelphia Purchased Facility of $9.6 million, less the payment
of accrued interest for debt serviced as a result of the Crescent
Transactions of $20.0 million if the Notes are repurchased and $0.5
million if the Notes are not repurchased, and $7.0 million of accrued
vacation liabilities assumed by CBHS. The Company is exiting the
domestic provider business as a result of the Crescent Transactions.
The type and amount of exit costs accrued are as follows (000's):
Incremental staffing, consulting and related costs to prepare and coordinate
audits of terminating Medicare cost reports for divested businesses............ $ 2,000
Incremental staffing and related costs to perform accounting functions
related to retained hospital-based assets and liabilities...................... 2,000
Incremental staffing and related costs to prepare and file final income tax,
property tax, sales and use tax and other tax returns for divested businesses.. 1,000
---------
$ 5,000
=========
The Company is constructing a hospital in Philadelphia to replace its
existing Philadelphia hospital. The Company has incurred $1.4 million
in construction costs through March 31, 1997 and is committed to incur
up to $11.0 million in total construction costs as part of the Crescent
Purchase Agreement.
(18) The pro forma adjustments to cash and cash equivalents, current
maturities of long-term debt and capital lease obligations ("CLOs") and
long-term debt and CLOs represent inflows and outflows of cash and the
changes in the Company's debt structure as a result of the Crescent
Transactions. A summary of the pro forma adjustments to cash and cash
equivalents is as follows (000's):
14
No Notes All Notes
Repurchased Repurchased
--------- -----------
Sale of Property and Equipment ............... $ 375,000 $ 375,000
Issuance of warrants to Crescent ............. 12,500 12,500
Issuance of warrants to COI .................. 12,500 12,500
Sale of supplies and other assets ............ 7,683 7,683
Transaction costs ............................ (12,475) (12,475)
Advance to CBHS .............................. (10,000) (10,000)
Debt and accrued interest payments ........... (187,313) (381,766)
Premium on Notes ............................. -- (3,750)
--------- ---------
$ 197,895 $ (308)
========= =========
A summary of the Company's pro forma combined debt structure before the Crescent
Transactions and after the Crescent Transactions is as follows (000's):
Pro Forma
Combined Pro Forma Pro Forma
Before the After the After the
Crescent Crescent Crescent
Transactions Transactions(1) Transactions(2)
------------ --------------- ---------------
Revolving credit agreement.............. $ 121,000 $ 200,000 $ --
11.25% Senior Subordinated Notes........ 375,000 -- 375,000
Other long-term debt and CLOs........... 84,536 19,828 19,828
------------ -------------- --------------
Subtotal $ 580,536 $ 219,828 $ 394,828
------------ -------------- --------------
Current maturities of long-term debt
and CLOs............................. $ 5,845 $ 3,842 $ 3,842
============ ============== ==============
(1) Assumes all Noteholders elect to have their Notes repurchased.
(2) Assumes no Noteholders elect to have their Notes repurchased.
(19) The pro forma adjustments to deferred income tax assets and liabilities
represent the tax consequences related to (i) accounts receivable
collection fees, (ii) loss on the sale of real and personal property to
Crescent, (iii) impairment losses related to intangible assets, (iv)
exit costs and related commitments and (v) the premium required to
service the Notes if the Notes are repurchased at the Company's
historic effective tax rate of 40%.
(20) The pro forma adjustments to warrants outstanding represent the fair
value of the 2,566,622 Warrants issued to Crescent and COI having an
exercise price of $30 per share. The Company will receive $12.5 million
each from Crescent and COI as consideration for the Warrants. The fair
value of the warrants was determined using the Black-Scholes method of
valuation. The Warrants will be exercisable by Crescent and COI at the
following times and in the following amounts:
15
Number of Shares
of Common Stock End of
Date First Issuable Upon Exercise
Exercisable Exercise Period
June 17 of Warrants June 17
- ----------------- ------------------- ----------------
1998 30,000 2001
1999 62,325 2002
2000 97,114 2003
2001 134,513 2004
2002 174,678 2005
2003 217,770 2006
2004 263,961 2007
2005 313,433 2008
2006 366,376 2009
2007 422,961 2009
2008 483,491 2009
(21) The pro forma adjustments to accumulated deficit represent the net loss
related to (i) estimated accounts receivable collection fees, (ii) loss
on the sale of real and personal property to Crescent, (iii) impairment
losses related to intangible assets, (iv) exit costs and related
commitments and (v) the premium required to service the Notes, if the
Notes are repurchased. The pre-tax loss and after-tax loss are
summarized as follows (000's):
Pre-tax After-tax Note
Loss Loss Reference
-------------- --------------- --------------
Accounts receivable collection fees $ 19,660 $ 11,796 (12)
Impairment losses on intangible assets 14,824 8,894 (16)
Exit costs and construction obligation 14,647 8,788 (17)
Loss on the sale of property and equipment 9,631 5,779 (14)
-------------- ---------------
$ 58,762 $ 35,257
============== ===============
The extraordinary loss on the early extinguishment of debt would be
approximately $7.6 million, net of tax, if all the Notes are repurchased.
The Closing of the Crescent Transactions will result in accelerated vesting
for options to purchase 1,210,375 shares of Common Stock under the 1996
Stock Option Plan. The accelerated vesting of options under the 1996 Stock
Option Plan is triggered by the Closing of the Crescent Transactions. The
Company believes the Crescent Transactions meet the definition of a
"sale...of all or substantially all" of the Company's assets included in
the 1996 Stock Option Plan, which is supported by relevant Delaware case
law.
Exhibits
2(a) Real Estate Purchase and Sale Agreement, dated January 29, 1997,
between the Company and Crescent Real Estate Equities Limited
Partnership, which was filed as Exhibit 2(a) to the Company's current
report on Form 8-K filed on April 23, 1997, and is incorporated herein
by reference.
2(b) Amendment No. 1, dated February 28, 1997, to the Real Estate Purchase
and Sale Agreement, dated January 29, 1997, between the Company and
Crescent Real Estate Equities Limited Partnership, which was filed as
Exhibit 2(b) to the Company's current report on Form 8-K filed on April
23, 1997, and is incorporated herein by reference.
2(c) Amendment No. 2, dated May 29, 1997, to the Real Estate Purchase and
Sale Agreement, dated January 29, 1997, between the Company and
Crescent Real Estate Equities Limited Partnership.
2(d) Contribution Agreement, dated June 16, 1997 between the Company and
Crescent Operating, Inc.
16
4(a) Warrant Purchase Agreement, dated January 29, 1997, between the Company
and Crescent Real Estate Equities Limited Partnership which was filed
as Exhibit 4(a) to the Company's current report on Form 8-K, which was
filed on April 23, 1997, and is incorporated herein by reference.
4(b) Amendment No. 1,dated June 17, 1997, to the Warrant Purchase Agreement,
dated January 29, 1997, between the Company and Crescent Real Estate
Equities Limited Partnership.
99(a) Press release, dated June 17, 1997.
99(b) Master Lease Agreement, dated June 16, 1997, between Crescent Real
Estate Funding VII, L.P., as Landlord, and Charter Behavioral Health
Systems, LLC, as Tenant.
99(c) Master Franchise Agreement, dated June 17, 1997, between the Company
and Charter Behavioral Health Systems, LLC.
99(d) Form of Franchise Agreement, dated June 17, 1997, between the Company,
as Franchisor, and Franchise Owners.
99(e) Subordination Agreement, dated June 16, 1997, between the Company,
Charter Behavioral Health Systems, LLC and Crescent Real Estate
Equities Limited Partnership.
99(f) Operating Agreement of Charter Behavioral Health Systems, LLC, dated
June 16, 1997, between the Company and Crescent Operating, Inc.
99(g) Warrant Purchase Agreement, dated June 16, 1997, between the Company
and Crescent Operating, Inc.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: June 30, 1997 Magellan Health Services, Inc.
By: /s/ Craig L. McKnight
------------------------------
Executive Vice President and
Chief Financial Officer
18