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: December 17, 1997
Date of earliest event
reported: December 4, 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. Acquisition or Disposition of Assets
On December 4, 1997, the Registrant (the "Company" or "Magellan")
acquired the outstanding common stock of Human Affairs International,
Incorporated ("HAI"), a wholly-owned subsidiary of Aetna Insurance Company of
Connecticut and a unit of Aetna U.S. Healthcare, Inc. ("AUSHC"), for
approximately $122.1 million in cash. HAI manages the care of over 15 million
covered lives through employee assistance programs and managed behavioral health
plans. The Company funded the acquisition of HAI with cash on hand and will
account for the acquisition of HAI using the purchase method of accounting.
Subsequent to the consummation of the HAI acquisition, the Company may
be required to make additional annual contingent payments over a five-year
period of up to $60 million per year for an aggregate of $300 million, to AUSHC
(the "Contingent Payments"). The amount and timing of the contingent payments
will depend upon HAI's receipt of additional covered lives under two separate
calculations. Under the first calculation, the Company may be required to pay up
to $25 million per year for each of five years following the acquisition based
on the net increase in "incremental lives" in specified products. Under the
second calculation, the Company may be required to pay up to $35 million per
year for each of five years based on the net cumulative increase in "HMO
incremental lives" in certain products. The Company expects to fund the
Contingent Payments, if any, with a combination of cash on hand, future cash
flows from operations and amounts borrowed pursuant to its Revolving Credit
Agreement.
The total consideration in the HAI acquisition, including the potential
Contingent Payments, was determined through arm's length negotiations between
representatives of Magellan and AUSHC . No directors or officers of Magellan and
its affiliates or AUSHC and its affiliates had any material relationship prior
to the HAI acquisition.
Magellan and its provider business affiliates and AUSHC and its health
insurance and behavioral managed care affiliates transacted business in the
ordinary course prior to the HAI acquisition.
The Company and HAI entered into a Master Service Agreement with AUSHC
whereby AUSHC and HAI will provide access to and coordinate the provision of
behavioral health care services to AUSHC members. The Master Service Agreement
covers approximately 58% of HAI's initial annual revenues.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
Financial Statements
The following HAI Financial Statements, together with the independent
auditors' reports thereon, are included herein:
1) Audited Consolidated Balance Sheets as of December 31, 1996 and 1995;
2) Audited Consolidated Statements of Income for the years ended
December 31, 1996 and 1995;
3) Audited Consolidated Statements of Stockholder's Equity for the years
ended December 31, 1996 and 1995;
4) Audited Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995;
5) Unaudited Consolidated Balance Sheet as of September 30, 1997;
6) Unaudited Consolidated Statements of Income for the nine months ended
September 30, 1997 and 1996;
7) Unaudited Consolidated Statement of Stockholder's Equity for the nine
months ended September 30, 1997 and
8) Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996.
2
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
3
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholder of
Human Affairs International, Incorporated:
We have audited the accompanying consolidated balance sheets of Human Affairs
International, Incorporated and subsidiaries, (a wholly owned subsidiary of
Aetna Inc.), as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholder's equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Human Affairs
International, Incorporated and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------
February 7, 1997, except as to
note 10 which is as of
February 27, 1997
4
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
--------------------------
1997 1996 1995
------------ ----------- -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $36,255,658 $33,446,435 $22,294,437
Receivables:
Contract service fees, less allowance for doubtful accounts of
$68,422 at September 30, 1997 and December 31, 1996 and
$375,748 at December 31, 1995 6,771,313 6,364,124 6,206,738
Related party (note 6) 5,547,515 2,957,865 2,250,953
Income taxes (note 3) 130,188 99,584 --
Other current assets 29,162 423,471 269,180
Deferred income taxes (note 3) 364,629 364,629 419,309
----------- ----------- -----------
Total current assets 49,098,465 43,656,108 31,440,617
----------- ----------- -----------
Property, equipment, and leasehold improvements, less accumulated
depreciation and amortization (note 2) 241,923 406,044 846,285
Cost in excess of net assets acquired of purchased subsidiaries, less
accumulated amortization of $205,006 at September 30, 1997 and $143,504
at December 31, 1996 and $61,502 at December 31, 1995 (note 8) 615,016 676,518 758,520
Noncurrent deferred income taxes (note 3) 56,751 364,498 808,821
Other assets 21,033 63,006 62,995
----------- ----------- -----------
$50,033,188 $45,166,174 $33,917,238
=========== =========== ===========
Liabilities and Stockholder's Equity
Current liabilities:
Unearned contract service fees $ 4,260,590 $ 4,591,431 $ 4,832,356
Accounts payable and accrued liabilities 11,776,208 8,231,292 6,948,838
Related party (note 6) 9,441,603 2,454,957 6,793,418
Current installments of note payable (note 8) -- 333,333 333,333
Current installments of noncompete and salary continuation
agreements (note 7) -- -- 500,932
Current installments of obligations under capital leases (note 5) 7,098 7,058 9,453
Income taxes payable (note 3) 1,328,814 -- 823,439
----------- ----------- -----------
Total current liabilities 26,814,313 15,618,071 20,241,769
Note payable, less current installments (note 8) -- -- 333,333
Obligations under capital leases, less current installments (note 5) 2,635 10,112 18,093
Other long-term liabilities 2,737 2,404 92,519
Stockholder's equity (notes 6 and 10):
Common stock, no par value. Authorized 50,000 shares;
issued and outstanding 10,000 shares 1,000 1,000 1,000
Additional paid-in capital -- 11,092,000 11,092,000
Retained earnings 23,212,503 18,442,587 2,138,524
----------- ----------- -----------
Total stockholder's equity 23,213,503 29,535,587 13,231,524
Commitments and contingencies (notes 5, 9 and 10)
----------- ----------- -----------
$50,033,188 $45,166,174 $33,917,238
=========== =========== ===========
See accompanying notes to consolidated financial statements.
5
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Consolidated Statements of Income
Nine Months ended
September 30, Year ended December 31,
------------------------------- -------------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenues:
Contract service fees (note 6) $ 88,845,581 $ 78,033,338 $105,923,687 $ 94,148,402
Interest 1,166,952 1,100,649 1,538,769 2,240,216
------------ ------------ ------------ ------------
Total revenues 90,012,533 79,133,987 107,462,456 96,388,618
------------ ------------ ------------ ------------
Expenses (note 6):
Operating costs 67,128,675 59,828,799 80,696,520 70,209,268
Interest 900 673 1,033 1,701
Depreciation and amortization 219,458 404,455 517,404 822,273
Noncompete employment agreement (note 7) -- 105,708 105,708 262,824
Minority interest -- -- -- 71,524
------------ ------------ ------------ ------------
Total expenses 67,349,033 60,339,635 81,320,665 71,367,590
------------ ------------ ------------ ------------
Income before income taxes 22,663,500 18,794,352 26,141,791 25,021,028
Income tax expense (note 3) 8,985,584 7,343,152 9,837,728 9,775,720
------------ ------------ ------------ ------------
Net income $ 13,677,916 $ 11,451,200 $ 16,304,063 $ 15,245,308
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
6
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Nine months ended September 30, 1997
(unaudited) and years ended
December 31, 1996 and 1995
Retained
Additional earnings Total
Common paid-in (accumulated stockholder's
stock capital deficit) equity
------------ ------------ ------------- -------------
Balances at December 31, 1994 $ 1,000 $ 18,692,000 $ (706,784) $ 17,986,216
Dividend to parent -- -- (12,400,000) (12,400,000)
Return of capital to parent -- (7,600,000) -- (7,600,000)
Net income -- -- 15,245,308 15,245,308
------------ ------------ ------------ ------------
Balances at December 31, 1995 1,000 11,092,000 2,138,524 13,231,524
Net income -- -- 16,304,063 16,304,063
------------ ------------ ------------ ------------
Balances at December 31, 1996 1,000 11,092,000 18,442,587 29,535,587
Dividend to parent (unaudited) -- -- (8,908,000) (8,908,000)
Return of capital to parent (unaudited) -- (11,092,000) -- (11,092,000)
Net income (unaudited) -- -- 13,677,916 13,677,916
------------ ------------ ------------ ------------
Balances at September 30, 1997 (unaudited) $ 1,000 $ -- $ 23,212,503 $ 23,213,503
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
7
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Consolidated Statements of Cash Flows
Nine Months ended
September 30, Years ended December 31,
---------------------------- -----------------------------
1997 1996 1996 1995
------------ ------------ ------------ -------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 13,677,916 $ 11,451,200 $ 16,304,063 $ 15,245,308
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 219,458 404,455 517,404 822,273
Loss on disposal of assets 41,776 10,378 32,066 77,260
Increase (decrease) in allowance for doubtful accounts 7,407 150,000 (314,733) 314,733
(Increase) decrease in contract service fees receivable (414,595) (2,127,925) 157,347 539,966
Decrease (increase) in related party receivable (2,589,650) (152,662) (706,912) (196,706)
Decrease (increase) in income tax receivable (30,604) 1,069,259 (99,584) --
Decrease (increase) in other current assets 394,308 175,582 (154,291) 13,674
Decrease in deferred tax assets 307,747 470,598 499,003 167,190
Decrease (increase) in other assets 41,971 (9) (11) 3,027
Decrease in unearned contract service fees (330,840) (557,382) (240,925) (234,116)
Increase (decrease) in accounts payable and accrued
liabilities 3,544,916 820,325 1,282,454 (1,497,670)
Increase (decrease) in payable to related party 6,986,646 (3,931,504) (4,338,461) (1,396,534)
Increase (decrease) in noncompete and salary
continuation agreements payable -- (500,932) (500,932) 34,180
Increase (decrease) in income taxes payable 1,328,814 1,050,060 (823,439) (3,133,475)
Increase (decrease) in other long-term liabilities 333 (72,764) (90,115) (331,729)
Increase in minority interest -- -- -- 71,524
------------ ------------ ------------ ------------
Net cash provided by operating activities 23,185,603 8,258,679 11,522,934 10,498,905
------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (39,696) (44,698) (35,895) (209,328)
Proceeds from disposal of fixed assets 4,087 4,949 8,668 34,818
Distribution to minority interest -- -- -- (309,610)
Payment for purchase of minority interest (Note 8) (333,333) (333,333) (333,333) (333,334)
------------ ------------ ------------ ------------
Net cash used in investing activities (368,942) (373,082) (360,560) (817,454)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (7,438) -- (10,376) (16,839)
Return of capital to parent (11,092,000) -- -- (7,600,000)
Dividends paid to parent (8,908,000) -- -- (12,400,000)
------------ ------------ ------------ ------------
Net cash used in financing activities (20,007,438) -- (10,376) (20,016,839)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,809,223 7,885,597 11,151,998 (10,335,388)
Cash and cash equivalents, beginning of period 33,446,435 22,294,437 22,294,437 32,629,825
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 36,255,658 $ 30,180,034 $ 33,446,435 $ 22,294,437
============ ============ ============ ============
Supplemental Disclosures of Cash Flow Information
Interest paid $ 900 $ 673 $ 1,033 $ 1,701
Income taxes paid 7,138,190 5,559,681 11,647,990 12,742,005
Supplemental Disclosures of Noncash Investing and Financing Activities
Capital lease obligations incurred for office equipment $ -- $ -- $ -- $ 25,248
Note payable to a related party for acquisition of minority interest -- -- -- 666,666
See accompanying notes to consolidated financial statements.
8
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
Human Affairs International, Incorporated is a provider of
employee behavioral health assistance programs and a managed
behavioral health care company. The employee assistance
programs are provided for clients' employees and their
families and include the management of the delivery of
behavioral health services that deal with personal problems
that can interfere with an employee's well-being and job
performance. These problems may include, among other things,
psychological disorders, family or marital issues, alcohol
and/or other drug abuse, stress, depression, and anxiety. The
managed behavioral health care program manages the clinical
services delivered for the treatment of psychiatric and/or
substance abuse conditions through the process of negotiating
clinical quality at a reasonable price in order to achieve
optimal care. The Company provides services primarily
throughout the Continental United States, Alaska, and Hawaii.
(b) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Human Affairs International, Incorporated and its
wholly owned subsidiaries, Human Affairs International of
California, Incorporated and Human Affairs of Alaska which was
an unincorporated joint venture in 1994 (collectively referred
to as the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation. The
Company is a wholly owned subsidiary of Aetna Life Insurance
Company (ALIC). The Company's ultimate parent is Aetna Inc.
(the Parent). During 1996, Aetna Life and Casualty Company,
the Company's former parent, merged with U.S. Healthcare, Inc.
and each became a wholly owned subsidiary of a new holding
company, Aetna Inc.
The unaudited consolidated condensed financial statements of
the Company as of September 30, 1997, and for the nine-month
periods ended September 30, 1997 and 1996, were prepared by
the Company without audit. Certain information and
9
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of
management, all necessary adjustments (consisting only of
normal recurring adjustments) have been made to present fairly
the consolidated financial position and results of operations
and cash flows for these periods. The results of operations
for the period ended September 30, 1997, are not necessarily
indicative of the expected results for the year ending
December 31, 1997.
(c) Cash Equivalents
The Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash
equivalents. Cash equivalents consisted of money market funds
of $31,693,520 and $21,901,800 at December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, the book value of
cash equivalents approximates fair value.
(d) Cost in Excess of Net Assets Acquired of Purchased
Subsidiaries
These costs represent the excess purchase price over the fair
value of the net assets of acquired companies and are
amortized on a straight-line basis over a period of ten years.
During 1995, additional costs were incurred when the Company
acquired the remaining interest of the Alaska Joint Venture.
Amortization expense was $82,002 and $61,502 in 1996 and 1995,
respectively.
(e) Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements are recorded
at cost. Depreciation is calculated on a straight-line basis
over the estimated useful lives of the assets which range from
three to ten years.
(f) Revenue Recognition
Contract services fees are primarily determined on a monthly
per capita amount and
10
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
are recognized over the life of the contract. Unearned
contract service fees are billed or collected revenues that
have not been recognized as income pending the performance of
contract service obligations. These fees primarily represent 1
to 12 months of advance billings as specified in the
contracts.
(g) Contract Service Costs
The direct operating costs associated with servicing the
contracts are expensed as incurred and included in operating
costs. These costs are directly related to the level and
timing of the services provided. These direct operating costs
are accrued as services are rendered and include estimates of
the costs of services rendered but not yet reported. The
Company accrues for losses on contracts when it is probable
that the expected future service costs of a contract will
exceed the service fees expected on the contract.
(h) Income Taxes
The Company is included in the consolidated federal income tax
return of the Parent and the Parent's other subsidiaries. In
accordance with a tax sharing arrangement, the Company's
current federal income tax provisions are generally computed
as if the Company were filing a separate federal income tax
return; current income tax benefits, including those resulting
from carrybacks, are recognized to the extent realized in the
consolidated return.
Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences
between the income tax and financial statement reporting
amounts of assets and liabilities.
(i) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
11
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
accompanying notes. Actual results could differ from those
estimates.
(j) Reclassifications
Certain amounts in 1995 have been reclassified to conform to
the 1996 presentation.
(2) Property, Equipment, and Leasehold Improvements
The components of property, equipment, and leasehold improvements
follow:
1996 1995
---------------- ----------------
Property and equipment $ 3,785,868 $ 4,252,318
Leasehold improvements 180,693 186,111
---------------- ----------------
3,966,561 4,438,429
Less accumulated depreciation
and amortizaiton 3,560,517 3,592,144
---------------- ----------------
$ 406,044 $ 846,285
================ ================
(3) Income Taxes
Income tax expense consists of the following:
Current Deferred Total
---------- ---------- ----------
Year ended December 31, 1996:
U.S. federal $8,017,571 $ 192,764 $8,210,335
State and local 1,598,406 28,987 1,627,393
---------- ---------- ----------
$9,615,977 $ 221,751 $9,837,728
========== ========== ==========
Year ended December 31, 1995:
U.S. federal $8,109,809 $ 145,335 $8,255,144
State and local 1,498,721 21,855 1,520,576
---------- ---------- ----------
$9,608,530 $ 167,190 $9,775,720
========== ========== ==========
12
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The following schedule reconciles the computed "expected" tax
expense based on a U.S. federal corporate tax rate of 35 percent in
effect for the year, to the tax expense reflected in the accompanying
consolidated financial statements:
1996 1995
----------- ------------
Computed "expected" tax expense $ 9,149,627 $ 8,757,360
State tax (net of federal income tax benefit) 1,057,805 988,374
Change in beginning-of-year valuation allowance
allocated to income tax expense (389,395) (18,984)
Other 19,691 48,970
---------- -----------
Total tax expense $ 9,837,728 $ 9,775,720
========== =============
The significant components of deferred income tax expense for the years
ended December 31, 1996 and 1995, are as follows:
1996 1995
---------- ----------
Deferred tax expense (exclusive of the effects of
other components listed below) $ 611,146 $ 186,174
Decrease in beginning-of-year balance of the
valuation allowance for deferred tax assets (389,395) (18,984)
--------- ----------
$ 221,751 $ 167,190
========= ==========
13
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1996 and 1995, are presented
below:
1996 1995
----------- -------------
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 23,338 $ 143,724
Deferred compensation, due to accrual for
financial reporting purposes -- 209,217
Accrued liabilities not deductible until paid
for tax reporting purposes 253,664 357,701
HMO claims accrued not yet reported 255,795 122,219
Rent payable on long-term lease forfeiture, due
to accrual for financial reporting purposes 32,558 93,407
Software expense 253,654 465,290
Amortization due to goodwill 18,278 7,842
Tax credit carryforwards 38,652 37,398
Net operating loss carryforward -- 368,337
------------ ------------
Total gross deferred tax assets 875,939 1,805,135
Less valuation allowance 136,957 526,352
------------ ------------
Total deferred tax assets 738,982 1,278,783
------------ ------------
Deferred tax liabilities-fixed assets, due to
differences in depreciation methods (9,855) (50,653)
------------ ------------
Net deferred tax assets $ 729,127 $ 1,228,130
============ ============
Net current deferred tax assets $ 364,629 $ 419,309
Net noncurrent deferred tax assets 364,498 808,821
------------ ------------
$ 729,127 $ 1,228,130
============ ============
The valuation allowance for deferred tax assets as of January 1, 1996 and 1995,
was $526,352 and $545,336, respectively. The change in the total valuation
allowance for the years ended December 31, 1996 and 1995, was a decrease of
$389,395 and $18,984, respectively. Subsequently recognized tax benefits
relating to the valuation allowance for deferred tax assets will be recognized
as an income tax benefit in the consolidated statements of operations.
Management believes that it is more
14
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
likely than not that the Company will realize the benefit of the net deferred
tax asset in the future. During 1996, the Company utilized net operating loss
carryforwards for tax return purposes of approximately $1,052,000.
(4) Employee Retirement Plans
The Company's employees are covered under the Parent's Employee Benefit
Plans and are entitled to benefits earned under the plan through
December 31, 1996. Eligible employees receive pension incentive
savings, post retirement health care, and life insurance benefits. The
aggregate charges to operations for all benefit plans are allocated by
the Parent based upon measures appropriate for the nature of the
service provided and are included in the overall benefits allocation
from the Parent which approximates 23 percent of the Company's salaries
and wages. The related liabilities are recorded on the Parent's
financial statements.
(5) Leases
The Company is obligated under capital leases for equipment that expire
at various dates during the next five years. At December 31, 1996 and
1995, equipment of $52,141 and $48,215 and related accumulated
amortization of $34,971 and $33,258, respectively, were recorded under
these capital leases. Amortization of assets held under capital leases
is included in depreciation expense.
The Company leases office space and equipment under operating lease
agreements. Rent expense under these leases was $4,092,214 and
$3,685,159 in 1996 and 1995, respectively.
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) and
future minimum capital lease payments as of December 31, 1996 are as
follows:
15
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Operating
Operating Leases, net
Capital Operating sublease of sublease
leases leases rentals rentals
---------- ----------- ------------- ------------
Year ending December 31:
1997 $ 8,261 $ 2,909,298 $ (83,444) $ 2,825,854
1998 5,669 2,653,337 -- 2,653,337
1999 5,361 2,164,973 -- 2,164,973
2000 -- 1,698,488 -- 1,698,488
2001 -- 1,689,914 -- 1,689,914
Thereafter -- 5,913,232 -- 5,913,232
---------- ----------- ------------- ------------
Total minimum lease payments 19,291 $17,029,242 $ (83,444) $ 16,945,798
=========== ============= ============
Less amount representing interest at 9% 2,121
----------
Present value of net minimum
capital lease payments 17,170
Less current installments of obligations
under capital leases 7,058
----------
Obligations under capital leases,
excluding current installments $ 10,112
==========
(6) Related Party Transactions
The Company utilizes its network of providers to service existing
contracts of the Parent in the area of focused psychiatric review
(FPR), health maintenance organizations (HMO), managed choice (MC), and
network services (NS). The Company provides behavioral health care and
utilization management services to the Parent's members at a capitated
rate per member per month. The Company recorded FPR revenue of
approximately $14.1 million and $14.5 million, HMO revenue of
approximately $16.8 million and $9.5 million, MC revenue of
approximately $27.8 million and $19.4 million, and NS revenue of
approximately $4.5 million and $4.3 million in 1996 and 1995,
respectively, from Parent company agreements. Related party receivables
of $2,957,865 and $2,250,953 at December 31, 1996 and 1995,
respectively, are due from the Parent for balances paid to the Parent
from customers of the Company.
16
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Certain administrative and support functions of the Company are
provided by the Parent and its affiliates. The consolidated financial
statements reflect allocated charges for these services based upon
measures appropriate for the type and nature of the services provided.
The year ended December 31, 1996, was the first full year following the
Parent company sale of its property/casualty division. As a result of
this sale, the methodology of allocating the administrative and support
functions performed by the Parent changed significantly. Accordingly,
the amount allocated to the Company for the year ending December 31,
1996 increased significantly over what it had been in prior years. The
Company was charged $15,159,017 and $8,399,540 during 1996 and 1995,
respectively, for these allocated charges.
The Company also rents furniture, fixtures, and equipment from the
Parent. The rental expense for these items totaled $1,062,068 and
$782,691 for December 31, 1996 and 1995, respectively. Additionally,
the Parent pays certain direct costs on behalf of the Company such as
payroll and office supplies which the Company then reimburses the
Parent. Balances of $2,454,957 and $6,793,418 were payable to the
Parent at December 31, 1996 and 1995, respectively, for these allocated
charges and direct costs.
(7) Non-Compete Employment Agreement
During 1990, the Company terminated the employment of the officer and
former sole stockholder of the Company. Pursuant to the terms of
employment and noncompete agreements, the officer received annual
compensation and benefits through June 9, 1996, paid ratably over the
period. During the year ended December 31, 1996, the Company paid all
remaining amounts due to this officer which amounted to $500,932.
(8) Acquisition of Joint Venture
On April 1, 1995, the Company purchased the remaining minority interest
of Human Affairs of Alaska Joint Venture for $1,000,000. Of the total
purchase price $333,334 was paid at closing, $333,333 was paid during
1996, and the remainder was paid in April 1997. The acquisition has
been accounted for using the purchase method of accounting and,
accordingly, the acquired interest in assets and liabilities is stated
at estimated fair values. This transaction resulted in costs in excess
of net assets acquired of approximately $820,000.
17
HUMAN AFFAIRS INTERNATIONAL, INCORPORATED AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Aetna Inc.)
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The Former Joint Venture Partner entered into Personal Services and
Bonus Agreements with the Company wherein the Former Joint Venture
Partner has agreed to serve as an employee of the Company through March
2000.
(9) Commitments and Contingencies
The Company is involved in certain legal actions arising in the normal
course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that their
outcome will not have a significant effect on the Company's
consolidated financial statements.
(10) Subsequent Event
On February 27, 1997, $20,000,000 was paid to the Parent. This payment
represented a return of capital of $11,092,000 and a dividend of
$8,908,000.
18
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 HAI. The
Unaudited Pro Forma Consolidated Statements of Operations for the year ended
September 30, 1997 give effect to the HAI acquisition as if it had been
completed on October 1, 1996. The Unaudited Pro Forma Consolidated Statement of
Operations for the year ended September 30, 1997 also gives effect to the
Crescent Transactions (as hereinafter described), which were consummated on June
17, 1997. The Unaudited Pro Forma Consolidated Balance Sheet as of September 30,
1997 gives effect to the HAI acquisition as if it had occurred on September 30,
1997. The pro forma consolidated statements of operations and balance sheets do
not give effect to hospital acquisitions and closures (prior to the Crescent
Transactions) during fiscal 1997 as such transactions and events are not
considered material to the pro forma presentation.
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") to Crescent Real Estate Equities Limited Partnership
("Crescent") for $417.2 million (before costs estimated at $16.0 million) and
the Crescent Operating, Inc. ("COI") warrants ("COI Warrants") to acquire 2.5%
of the outstanding common stock of COI, (ii) the creation of Charter Behavioral
Health System, LLC ("CBHS"), which is 50% owned by both the Company and COI and
engages in the behavioral healthcare provider business, (iii) the Company's
entry into the healthcare franchising business and (iv) the issuance by Magellan
of 2,566,622 warrants to Crescent and COI (1,283,311 Warrants each) with an
exercise price of $30 per share. CBHS leases the Purchased Facilities from
Crescent under a twelve-year operating lease ("Facilities Lease) (subject to
renewal) for $41.7 million annually, subject to adjustment, with a 5% escalator,
compounded annually. The Warrants issued to Crescent and COI have been valued at
$25 million in the Company's Balance Sheet. The exercise price of the COI
Warrants is $18.32. The COI Warrants have been ascribed no value in the
Company's Balance Sheet as the COI Warrants have nominal fair value. The Company
accounts for its 50% investment in CBHS under the equity method of accounting,
which significantly reduces 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 are being
operated by CBHS after the closing of the Crescent Transactions. CBHS includes 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, 1997 is as follows
(in thousands):
Earnings
Before Interest,
Income Taxes
and Depreciation
Net Revenue Minority Interest and Amortization
--------------------- --------------------- ---------------------
CBHS $ 555,324 $ 63,169 $ 20,073
Hospital-based joint ventures 99,962 13,081 3,205
European hospitals 29,236 6,975 1,221
Other 45,130 31,249 29
--------------------- --------------------- ---------------------
$ 729,652 $ 114,474 $ 24,528
===================== ===================== =====================
The Company incurred a loss before income taxes, minority interest and
extraordinary items of approximately $59.9 million as a result of the Crescent
Transactions, which was recorded during the year ended September 30, 1997.
19
The Unaudited Pro Forma Statements of Operations presentation assumes
that 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. The remaining net proceeds from the Crescent Transactions
are assumed to be partially utilized to fund the HAI acquisition. If the
remaining net proceeds from the Crescent Transactions (after funding the HAI
acquisition) were assumed to be invested at Magellan's historic temporary cash
investment rate of 5.5% for the year ended September 30, 1997 pro forma
consolidated net income and net income per common share would be $47.4 million
and $1.61 (primary) and $1.57 (fully diluted), respectively, for the year ended
September 30, 1997.
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 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 and HAI, which
appear elsewhere herein.
20
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For The Year Ended September 30, 1997
(in thousands, except per share amounts)
Divested
Operations -
Magellan Crescent Pro Forma Pro Forma
As Reported Transactions Adjustments Combined HAI
-------------- -------------- -------------- -------------- --------------
Net Revenue $ 1,210,696 $ (555,324) $ 55,463 (1) $ 710,835 $ 116,736
-------------- -------------- -------------- -------------- --------------
Salaries, cost of care and other
operating expenses 978,513 (426,862) 4,719 (2) 556,370 88,002
Bad debt expense 46,211 (42,720) 0 3,491 0
Depreciation and amortization 44,861 (20,073) (177)(3) 24,611 312
Interest, net 45,377 (3,233) (6,833)(4) 35,311 (1,604)
Stock option expense 4,292 0 0 4,292 0
Equity in loss of CBHS 8,122 0 12,028 (5) 20,150 0
Loss on Crescent Transactions 59,868 0 (59,868)(6) 0 0
Unusual items 357 (2,500) 0 (2,143) 0
-------------- -------------- -------------- -------------- --------------
1,187,601 (495,388) (50,131) 642,082 86,710
-------------- -------------- -------------- -------------- --------------
Income before income taxes
and minority interest 23,095 (59,936) 105,594 68,753 30,026
Provision for income taxes 9,238 (23,974) 42,238 (7) 27,502 11,480
-------------- -------------- -------------- -------------- --------------
Income before minority interest 13,857 (35,962) 63,356 41,251 18,546
Minority interest 9,102 0 0 9,102 0
-------------- -------------- -------------- -------------- --------------
Net income $ 4,755 $ (35,962) $ 63,356 $ 32,149 (4)$ 18,546
============== ============== ============== ============== ==============
Average number of common
shares outstanding - primary 29,474 29,474
============== ==============
Average number of common
shares outstanding-fully diluted 30,167 30,167
============== ==============
Net income per common
share - primary $ 0.16 $ 1.09 (4)
============== ==============
Net income per common
share - fully diluted $ 0.16 $ 1.07 (4)
============== ==============
Pro Forma Pro Forma
Adjustments Consolidated
-------------- ---------------
Net Revenue $ (13,885)(8)$ 813,686
-------------- ---------------
Salaries, cost of care and other
operating expenses (10,914)(9) 633,458
Bad debt expense 0 3,491
Depreciation and amortization 3,948 (10) 28,871
Interest, net 0 33,707
Stock option expense 0 4,292
Equity in loss of CBHS 0 20,150
Loss on Crescent Transactions 0 0
Unusual items 0 (2,143)
-------------- ---------------
(6,966) 721,826
-------------- ---------------
Income before income taxes
and minority interest (6,919) 91,860
Provision for income taxes (2,768)(11) 36,214
-------------- ---------------
Income before minority interest (4,151) 55,646
Minority interest 0 9,102
-------------- ---------------
Net income $ (4,151) $ 46,544 (12)
============== ===============
Average number of common
shares outstanding - primary 29,474
===============
Average number of common
shares outstanding-fully diluted 30,167
===============
Net income per common
share - primary $ 1.58 (12)
===============
Net income per common $ 1.54 (12)
share - fully diluted ===============
See Notes to the Pro forma Consolidated Financial Statements(Unaudited)
21
PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1997
(In thousands)
ASSETS
Magellan Pro Forma Pro Forma
as Reported HAI Adjustments Consolidated
----------- --------- ----------- ------------
Current Assets:
Cash and cash equivalents .......................... $ 372,878 $ 36,256 $ (122,100)(13) $ 275,830
(4,500)(13)
(6,704)(13)
Accounts receivable, net ........................... 107,998 6,771 -- 114,769
Other .............................................. 26,162 524 (495)(15) 26,191
--------- --------- ---------- -----------
Total Current Assets .......................... 507,038 43,551 (133,799) 416,790
Assets Restricted for Settlement of Unpaid
Claims and Other Long-Term Liabilities ............. 87,532 -- -- 87,532
Property and Equipment:
Land ............................................... 11,667 -- -- 11,667
Buildings and improvements ......................... 70,174 179 -- 70,353
Equipment .......................................... 63,719 2,286 1,535 (14) 67,540
--------- --------- ---------- -----------
145,560 2,465 1,535 149,560
Accumulated depreciation ........................... (37,038) (2,224) 2,224 (14) (37,038)
--------- --------- ---------- -----------
108,522 241 3,759 112,522
Construction in progress ........................... 692 -- -- 692
--------- --------- ---------- -----------
109,214 241 3,759 113,214
Other long-term assets .................................... 20,893 21 -- 20,914
Deferred income tax assets ................................ 1,158 57 (57)(15) 1,158
Investment in CBHS ........................................ 16,878 -- -- 16,878
Goodwill, net ............................................. 114,234 615 82,673 (16) 197,522
Other intangible assets, net .............................. 38,673 -- 20,668 (16) 59,341
--------- --------- ---------- -----------
$ 895,620 $ 44,485 $ (26,756) $ 913,349
========= ========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................... $ 45,346 4,530 $ (3,894)(17) $ 45,982
Accrued liabilities ................................ 170,429 16,729 352 (18) 187,510
Current maturities of long-term debt and
capital lease obligations ...................... 3,601 7 -- 3,608
--------- --------- ---------- -----------
Total Current Liabilities ..................... 219,376 21,266 (3,542) 237,100
Long-term debt and capital lease obligations .............. 391,693 3 -- 391,696
Reserve for unpaid claims ................................. 49,113 -- -- 49,113
Deferred credits and other long-term liabilities .......... 16,110 2 -- 16,112
Minority interest ......................................... 61,078 -- -- 61,078
Commitments and contingencies
Stockholders' equity:
Common stock ....................................... 8,361 1 (1)(19) 8,361
Additional paid-in capital ......................... 340,645 -- -- 340,645
Accumulated deficit ................................ (129,955) 23,213 (23,213)(19) (129,955)
Warrants outstanding ............................... 25,050 -- -- 25,050
Common stock in treasury ........................... (82,731) -- -- (82,731)
Cumulative foreign currency adjustments ............ (3,120) -- -- (3,120)
--------- --------- ---------- -----------
Total stockholders' equity .................... 158,250 23,214 (23,214) 158,250
--------- --------- ---------- -----------
$ 895,620 $ 44,485 $ (26,756) $ 913,349
========= ========= ========== ===========
See Notes to the Pro Forma Consolidated Financial Statements(Unaudited)
22
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The pro forma adjustment to net revenue represents Franchise Fees paid to
Magellan by CBHS pursuant to the Master Franchise Agreement for the 259
days ended June 16, 1997. As part of the Crescent Transactions, CBHS leases
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 between the Company and Crescent 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. The
Company receives from CBHS initial Franchise Fees of $78.3 million, subject
to increase. The Company provides 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.
(2) The pro forma adjustments to salaries, supplies and other operating
expenses represent fees payable to CBHS of $7.6 million for the 259 day
period ended June 16, 1997 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 $2.9 million for the 259 day period
ended June 16, 1997, related to the transfer of existing personnel and
functions between Magellan and CBHS. Magellan personnel transferred to CBHS
and incremental corporate overhead occurred primarily in the human
resources, legal and finance and accounting functions.
(3) The pro forma adjustment to depreciation and amortization represents the
amortization expense related to intangible assets that became impaired as a
result of the Crescent Transactions.
(4) The pro forma adjustment to interest expense, net, represents reductions in
interest expense as a result of paying off the outstanding borrowings under
the Revolving Credit Agreement 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 5.5% for the year ended September 30,
1997, pro forma combined net income and net income per common share would
be $36.8 million and $1.25 (primary) and $1.22 (fully diluted)
respectively, for the year ended September 30, 1997.
(5) The pro forma adjustments to equity in loss of CBHS represent Magellan's
percentage interest (50%) in CBHS' pro forma loss for the 259 day period
ended June 16, 1997. Magellan's investment in CBHS is 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 are as follows (in thousands):
23
For the Year Ended
September 30, 1997
------------------------------------------------------------------------
CBHS
Operations -
106 Days Ended
Divested September 30, Pro Forma Pro Forma
STATEMENTS OF OPERATIONS: Operations 1997 Adjustments Consolidated
---------- -------------- ----------- ------------
Net revenue $ 555,324 $ 213,730 $ 2,565 (i) $ 771,619
----------- ------------ ------------ ------------
Salaries, supplies and other
operating expenses 426,862 210,277 103,723 (ii) 740,862
Bad debt expense 42,720 17,437 -- 60,157
Depreciation and amortization 20,073 668 (17,333)(iii) 3,408
Interest, net 3,233 1,592 167 (iv) 4,992
Unusual items 2,500 -- -- 2,500
----------- ------------ ------------ ------------
495,388 229,974 86,557 811,919
----------- ------------ ------------ ------------
Income (loss) before income taxes 59,936 (16,244) (83,992) (40,300)
Provision for income taxes 23,974 -- (23,974)(v) --
----------- ------------ ------------ ------------
Net income (loss) $ 35,962 $ (16,244) $ (60,018) $ (40,300)
=========== ============ ============ ============
(i) Fees from Magellan for the management of hospital-based businesses
controlled by Magellan that are less than wholly-owned by Magellan (See
Note 2) less non-recurring collection fees receivable from Magellan of
approximately $5.0 million during the 106 days ended September 30, 1997.
(ii) The pro forma adjustments to salaries, supplies and other operating
expenses are as follows (000's):
Franchise Fees (See Note 1) $ 55,463
Rent Expense under the Facilities Lease 44,665
Additional Corporate Overhead (See Note 2) 3,595
-----------------------
$ 103,723
=======================
(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.
(iv) The pro forma adjustment to interest, net, is computed as follows (000's):
Interest expense on serviced IRBs $ (3,233)
Interest expense for new borrowings 3,400
-----------------------
$ 167
=======================
Average borrowings 60,000
Borrowing rate 8.%
-----------------------
Annual Interest $ 4,800
=======================
259 Days Interest $ 3,400
=======================
(v) CBHS is a limited liability company. Accordingly, no tax benefit is
presented as the tax consequences of CBHS ownership will pass through to
Magellan and COI.
24
(6) The pro forma adjustment to Loss on Crescent Transactions represents the
elimination of the non-recurring losses incurred by Magellan as a result of
consummating the Crescent Transactions on June 17, 1997.
(7) 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%.
(8) The pro forma adjustments to net revenue represents the effect of
renegotiated contractual rates between HAI and AUSHC as a direct result of
the acquisition of HAI by Magellan.
(9) The pro forma adjustments to salaries, cost of care and other operating
expenses represents the elimination of AUSHC's overhead allocation to HAI
of $17.2 million for the year ended September 30, 1997, less bonus expense
of $1.1 million for the year ended September 30, 1997, that was reflected
in AUSHC's financial statements for HAI's benefit and expenses of $5.1
million that HAI will incur to absorb corporate functions previously
performed by AUSHC. The AUSHC corporate functions absorbed by HAI include,
but are not limited to, information technology, human resources and legal.
Magellan does not anticipate incurring any additional corporate overhead as
a result of the HAI acquisition.
(10) The pro forma adjustments to depreciation and amortization represents (i)
the change in the depreciation of HAI equipment relating to the adjustment
of HAI equipment to fair value and (ii) the change in amortization expense
which resulted from the adjustments to intangible assets recorded as part
of the HAI purchase price allocation. The calculation of the adjustments
are summarized below (in thousands):
Estimated Fair Value of Property and Equipment $ 4,000
Estimated Useful Life (Years) / 5
---------
Estimated Annual Depreciation $ 800
=========
Estimated Goodwill $ 83,288
Estimated Useful Life / 40
---------
Estimated Annual Amortization 2,082
=========
Estimated Other Intangible Assets (primarily client lists) $ 20,668
Estimated Useful Life / 15
---------
Estimated Annual Amortization $ 1,378
=========
Total Estimated Depreciation and Amortization $ 4,260
HAI Historical Depreciation and Amortization $ (312)
---------
Pro Forma Adjustment $ 3,948
=========
The allocation of the HAI purchase price to equipment, goodwill and
identifiable intangible assets above and estimated useful lives are
based on the Company's preliminary valuations, which are subject to
change upon receiving independent appraisals for such assets.
Subsequent to the consummation of the HAI acquisition, the Company may
be required to make Contingent Payments during the first five Contract
Years to AUSHC of up to an aggregate of $300 million. The Contingent
Payments, if any, would be recorded as goodwill and client lists,
which would result in estimated additional annual amortization expense
of $11 million to $13 million in future periods. The maximum
Contingent Payment attributable to each Contract Year is $60 million.
(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%.
25
(12) If the remaining excess proceeds from the Crescent Transactions (after
the HAI acquisition) were assumed to be invested at Magellan's historic
temporary cash investment rate, pro forma consolidated net income and
net income per common share would be $48.0 million and $1.63 (primary)
and $1.59 (fully diluted), respectively, for the year ended September
30, 1997.
(13) The pro forma adjustments to cash and cash equivalents represent (i)
the use of cash on hand to fund the HAI purchase price of $122.1
million and related transaction costs of $4.5 million and (ii)
estimated working capital settlement payment to AUSHC as agreed to by
the parties in the Stock Purchase Agreement, as amended.
(14) The pro forma adjustments to equipment and accumulated depreciation
represents the changes necessary to value HAI equipment at fair value.
(15) The pro forma adjustment to other current assets and deferred income
tax assets represents the elimination of HAI tax obligations that will
remain with AUSHC after the closing.
(16) The pro forma adjustments to goodwill and other intangible assets
represents additions to effect for the HAI purchase price allocation.
See Note 10 for further information regarding the nature of HAI
intangible assets.
(17) The pro forma adjustments to accounts payable represents the
elimination of related party balances between HAI and AUSHC.
(18) The pro forma adjustment to accrued liabilities represents certain
liabilities assumed by Magellan from AUSHC that were reflected in
AUSHC's financial statements, including accrued vacation and accrued
incentive, offset by the elimination of current income taxes payable
that will remain with AUSHC after the closing.
(19) The pro forma adjustments to common stock and accumulated deficit
represent the elimination of the net balance of HAI's stockholder's
equity.
26
Exhibits
2(a) Stock Purchase Agreement, dated August 5, 1997, between the Company and
Aetna Insurance Company of Connecticut.
2(b) Master Service Agreement, dated August 5, 1997, between the Company, Aetna
U.S. Healthcare, Inc. and Human Affairs International, Incorporated.
2(c) Amendment to Stock Purchase Agreement, dated December 4, 1997, between the
Company and Aetna Insurance Company of Connecticut.
2(d) First Amendment to Master Services Agreement, dated December 4, 1997,
between the Company, Aetna U.S. Healthcare, Inc. and Human Affairs
International, Incorporated.
23(a) Consent of KPMG Peat Marwick LLP.
99(a) Press release, dated August 5, 1997.
99(b) Press release, dated December 5, 1997
27
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: December 17, 1997 Magellan Health Services, Inc.
By: /s/ Craig L. McKnight
------------------------------
Executive Vice President and
Chief Financial Officer
28