UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE :
: CHAPTER 11 CASE NO.
:
MAGELLAN HEALTH SERVICES, INC., ET AL., : 03-40515 (PCB)
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:
:
:
DEBTORS. : (JOINTLY ADMINISTERED)
:
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DISCLOSURE STATEMENT FOR
DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION
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WEIL, GOTSHAL & MANGES LLP
Attorneys for Debtors
and Debtors in Possession
767 Fifth Avenue
New York, New York 10153
(212) 310-8000
Dated: August 18, 2003
TABLE OF CONTENTS
PAGE
I. Introduction..................................................................................................11
II. Treatment of Creditors and Shareholders Under the Plan........................................................15
A. New Capital Structure...............................................................................15
B. Summary of Classification and Treatment.............................................................16
C. Description of the Treatment of Classes of Claims and Equity Interests..............................19
1. Senior Secured Lender Claims (Class 1)....................................................19
2. Other Secured Claims (Class 2)............................................................24
3. Priority Non-Tax Claims (Class 3).........................................................24
4. Aetna Claim (Class 4).....................................................................25
5. Provider Claims (Class 5).................................................................25
6. Customer Claims (Class 6).................................................................25
7. Senior Note Claims (Class 7)..............................................................26
8. Senior Subordinated Note Claims (Class 8).................................................26
9. Other General Unsecured Claims (Class 9)..................................................27
10. Convenience Claims (Class 10).............................................................29
11. Intercompany Claims of the Debtors (Class 11).............................................29
12. Subsidiary Equity Interests (Class 12)....................................................29
13. Magellan Preferred Stock Interests (Class 13).............................................29
14. Magellan Common Stock Interests (Class 14)................................................30
D. Enforcement of Subordination Provisions.............................................................30
E. Non-Cash Property to Be Distributed Under the Plan..................................................30
1. New Senior Secured Credit Agreement.......................................................30
2. New Notes.................................................................................31
3. New Warrants..............................................................................31
4. New Aetna Warrant.........................................................................31
5. New Common Stock and MVS Securities.......................................................32
F. Investment..........................................................................................35
G. Exit L/C Facility...................................................................................35
H. Exit Financing......................................................................................35
I. Administrative Expenses and Priority Tax Claims.....................................................36
1. Fees and Expenses of Professionals........................................................36
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2. Payments to Healthcare Partners, Inc......................................................36
3. Payments to Gleacher......................................................................37
4. Payments to Houlihan Lokey................................................................38
5. Payments to Amalgamated Gadget and Pequot Capital.........................................38
6. Payments to Equity Investor...............................................................39
7. Exit Financing Fees.......................................................................39
8. Statutory Fees to United States Trustee...................................................40
J. Payments of Provider and Physician Advisor Claims and Customer Claims...............................40
1. Provider Claims and Claims by Physician Advisors..........................................40
2. Customer Claims...........................................................................41
K. Deemed Consolidation for Voting and Distribution Purposes...........................................41
L. Securities Law Matters..............................................................................43
1. Issuance and Resale of New Securities Under the Plan......................................43
M. Registration Rights Agreement.......................................................................44
N. Aetna Amended MSA and the Aetna Purchase Option.....................................................44
O. NASDAQ Listing......................................................................................45
P. Reservation of "Cram Down" Rights...................................................................45
III. Voting Procedures and Requirements............................................................................46
A. Vote Required for Acceptance by a Class.............................................................46
B. Classes Not Entitled to Vote........................................................................46
C. Voting..............................................................................................47
IV. Financial Information, Projections, and Valuation Analysis....................................................47
A. Selected Historical Financial Information...........................................................47
B. Projections.........................................................................................47
1. Pro Forma Projected Consolidated Balance Sheet as of September 30, 2003 (Unaudited) (a)...50
2. Projected Condensed Consolidated Balance Sheets (Unaudited)...............................52
3. Projected Statements of Operations (Unaudited)............................................53
4. Projected Statement of Sources and Uses of Cash (Unaudited)...............................54
5. General Assumptions.......................................................................55
6. Going Concern Valuation...................................................................56
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7. Value of New Warrants.....................................................................58
V. Business Description and Reasons for Chapter 11...............................................................59
A. The Debtors' Businesses ............................................................................59
1. Description of Business...................................................................60
B. Events Leading to the Commencement of the Chapter 11 Cases..........................................60
C. Exit Financing......................................................................................64
D. Business With Aetna.................................................................................65
E. Pending Litigation and Other Proceedings............................................................66
1. In General................................................................................66
2. OIG Claims................................................................................66
3. Wachovia..................................................................................67
4. RICO and ERISA Class Actions..............................................................67
5. Tennessee Actions.........................................................................68
6. MTS Health Partners, L.P..................................................................68
7. EPA Claims................................................................................68
8. Normal Course Litigation..................................................................69
VI. Significant Events During the Chapter 11 Cases ...............................................................69
A. Filing and First Day Orders.........................................................................69
1. Payment of Providers and Customers........................................................69
2. Payment of Employee Wages and Benefits....................................................70
3. Cash Management and Bank Accounts ........................................................70
B. Appointment of the Official Committee...............................................................71
E. Claims Process and Bar Date.........................................................................73
F. Asset Sales.........................................................................................73
G. Motion to Terminate Exclusivity.....................................................................74
H. Other Significant Motions...........................................................................74
VII. Governance of Reorganized Magellan............................................................................75
A. Board of Directors .................................................................................75
B. Senior Management ..................................................................................76
VIII. Other Aspects of the Plan.....................................................................................76
A. Distributions.......................................................................................76
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B. Distributions Through Agents........................................................................76
1. Timing and Conditions of Distributions....................................................76
2. Procedures for Treating Disputed Claims Under the Plan....................................78
C. Conditions to the Confirmation .....................................................................80
D. Conditions to the Effective Date ...................................................................80
E. Treatment of Executory Contracts, Unexpired Leases, and Cost of Access Agreements and Claims........81
1. Contracts and Leases Not Expressly Rejected are Assumed...................................81
2. Cure of Defaults..........................................................................81
3. Rejection Claims..........................................................................82
4. Survival of the Debtors' Corporate Indemnities............................................82
5. Compensation and Benefit Programs.........................................................82
F. Effect of Plan......................................................................................82
1. Discharge of Claims and Termination of Equity Interests...................................82
2. Exculpation...............................................................................83
G. Releases ...........................................................................................83
H. Injunction..........................................................................................83
I. Management Incentive Plan...........................................................................83
J. Miscellaneous Provisions............................................................................84
K. Certain Indenture Trustee Fees and Expenses.........................................................84
IX. The Equity Offering...........................................................................................84
A. Ability to Participate in Equity Offering...........................................................84
B. Issuance of Equity Subscription Rights..............................................................85
C. Subscription Period.................................................................................86
D. Subscription Price..................................................................................86
E. Exercise of Equity Subscription Rights..............................................................86
F. Transfer Restriction; Revocation....................................................................87
G. Equity Investor.....................................................................................87
H. Distribution of New Common Stock and MVS Securities ................................................87
I. Disputed Claims ....................................................................................88
J. Subsequent Adjustments to the Rights Participation Claim Amount; Cut Back in Equity Offering for
Oversubscription ...................................................................................88
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K. No Interest.........................................................................................88
L. Validity of Exercise of Equity Subscription Rights..................................................88
M. Use of Proceeds.....................................................................................88
X. Certain Factors to Be Considered..............................................................................89
A. Certain Bankruptcy Considerations...................................................................89
B. Risks Relating to the Plan Securities...............................................................89
1. Variances from Projections ...............................................................89
2. Lack of Trading Market....................................................................89
3. Dividend Policies.........................................................................89
4. Restrictions on Transfer..................................................................89
5. Issue Price of Series B Notes.............................................................90
6. Control by Equity Investor................................................................90
C. Risks Associated with the Business..................................................................90
XI. Confirmation of the Plan......................................................................................91
A. Confirmation Hearing................................................................................91
B. General Requirements of Section 1129................................................................91
C. Best Interests Tests................................................................................93
D. Liquidation Analysis...............................................................................94
E. Feasibility.........................................................................................98
F. Section 1129(b).....................................................................................98
1. No Unfair Discrimination..................................................................98
2. Fair and Equitable Test...................................................................98
XII. Alternatives to Confirmation and Consummation of the Plan.....................................................99
A. Liquidation Under Chapter 7.........................................................................99
B. Alternative Plan....................................................................................99
XIII. Certain Federal Income Tax Consequences of the Plan of Reorganization........................................100
A. Consequences to Debtor.............................................................................100
1. Cancellation of Debt.....................................................................101
2. Limitations on Loss Carryforwards and Other Tax Benefits.................................101
3. Alternative Minimum Tax..................................................................103
B. Consequences to Holders of Certain Claims..........................................................103
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4. Distributions in Discharge of Accrued But Unpaid Interest................................106
5. Interest and Original Issue Discount on Series B New Notes...............................107
7. Ownership and Disposition of New Common Stock ...........................................108
2. Ownership and Disposition of New Warrants; Constructive Distributions to Holders of New
Common Stock.............................................................................109
D. Information Reporting and Withholding..............................................................109
XIV. Conclusion...................................................................................................110
GLOSSARY OF TERMS
Set forth below is a glossary of certain terms used in the description of the
Plan. To the extent that terms are defined in the Glossary of Terms and also
defined elsewhere in this Disclosure Statement, the definitions in this Glossary
of Terms shall be the controlling definitions. To the extent not defined in this
Glossary of Terms or otherwise defined in this Disclosure Statement, capitalized
terms used in this Disclosure Statement have the meanings ascribed to such terms
in Article I of the Plan attached hereto as Exhibit A.
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Administrative Expense Claim Any Claim constituting a cost or expense
of administration of any of the
Reorganization Cases allowed under
sections 503(b), 507(a)(1), and 1114(e)
of the Bankruptcy Code, including,
without limitation, any actual and
necessary costs and expenses of
preserving the Debtors' estates, any
actual and necessary costs and expenses
of operating the Debtors' businesses,
any indebtedness or obligations incurred
or assumed by the Debtors, as debtors in
possession, during the Reorganization
Cases, including, without limitation,
for the acquisition or lease of property
or an interest in property or the
rendition of services, any allowances of
compensation and reimbursement of
expenses to the extent allowed by Final
Order under sections 330 or 503 of the
Bankruptcy Code, and any fees or charges
assessed against the estates of the
Debtors under section 1930 of chapter
123 of title 28 of the United States
Code.
Aetna Aetna Inc. f/k/a Aetna U.S. Healthcare,
Inc.
Aetna Amended MSA The Aetna Master Service Agreement as
amended by the Second Amendment dated as
of March 11, 2003, which provides, among
other things, (a) for the Aetna Purchase
Option; (b) for a two-year extension of
the Aetna Master Service Agreement
(until December 31, 2005), which (I) may
be extended by Aetna in its sole
discretion for an additional one year
(until December 31, 2006) and (II) shall
be extended for an additional one year
(until December 31, 2006) if Aetna fails
to exercise the Aetna Purchase Option
prior to December 31, 2005; (c) for the
delivery by Reorganized Magellan to
Aetna of a letter of credit in the
amount of $5 million to cover IBNR
payments; (d) that Magellan and
Reorganized Magellan shall be subject to
enhanced performance standards and shall
take certain other actions to establish
a stand alone business dedicated to
serving Aetna, (e) that, in settlement
of the Aetna Claim, Reorganized
Magellan, on the Effective Date, shall
pay Aetna $15 million in cash and shall
issue to Aetna the New Aetna Note; (f)
for Aetna granting Magellan certain
rights of exclusivity on terms and a
timetable as mutually agreed between the
parties; and (g) that, as part of the
consideration for Aetna entering into
the Aetna Amended MSA, Reorganized
Magellan shall, on the Effective Date,
issue and deliver to Aetna the New Aetna
Warrant and enter into the Aetna
Registration Rights Agreement. The Aetna
Amended MSA will be set forth in the
Plan Supplement and the related
registration rights agreement and
security agreements and guarantees
related to the New Aetna Note and the
Aetna Purchase Option will be
substantially in the form set forth in
the Plan Supplement.
Aetna Asset Purchase Agreement The form of asset purchase agreement
attached as Exhibit D to the Aetna
Amended MSA.
Aetna Claim Those Claims under Section 7 of the
Aetna Master Service Agreement (before
giving effect to the Aetna Amended MSA)
which Claims are deemed Allowed under
the Plan in the amount of $60 million,
as of the Commencement Date.
Aetna Master Service Agreement The Master Service Agreement, dated as
of August 5, 1997, by and among Aetna
(on behalf of itself and all of its
applicable affiliates (other than Human
Affairs International, Incorporated
("HAI")), Magellan and HAI, as amended,
supplemented or otherwise modified from
time to time.
Aetna Purchase Option An option giving Aetna the right to
purchase the Aetna-dedicated business
1
unit as of December 31, 2005 (the assets
and business subject to such option are
set forth in the Aetna Asset Purchase
Agreement), subject to the limitations
set forth in the New Senior Secured
Credit Agreement, for a purchase price
of $30,000,000 plus $500 per outpatient
provider, $2,500 per facility that
provides partial hospitalization or
intermediate care and $5,000 per
facility providing inpatient care, in
each case, that becomes part of the
Aetna network as provided for in the
Aetna Amended MSA and the Aetna Asset
Purchase Agreement. In addition (i)
Aetna may exercise the Aetna Purchase
Option and purchase the Aetna-dedicated
business unit prior to December 31, 2005
if specified events occur and (ii) in
the event Aetna elects to extend the
Aetna Amended MSA through December 31,
2006, Aetna shall be entitled to
exercise the Aetna Purchase Option at
specified times during the extension
period. The obligations of Reorganized
Magellan under the Aetna Purchase Option
and the New Aetna Note will be
guaranteed by those subsidiaries of
Reorganized Magellan as are guaranteeing
the New Facilities or the Exit
Financing, as the case may be (which
guaranty will be subordinated to the New
Facilities or the Exit Financing, as the
case may be (and any guarantees
thereof), on terms that are satisfactory
to the Administrative Agent (or the
administrative agent under the Exit
Financing) and Aetna) and secured by a
"silent" second priority lien (i.e., a
junior lien with only limited rights and
remedies as to the collateral, on terms
that are satisfactory to the
Administrative Agent (or the
administrative agent under the Exit
Financing) and Aetna) on the assets of
Reorganized Magellan and its
subsidiaries which will secure the New
Senior Secured Obligations or the Exit
Financing. The terms and provisions of
the Aetna Purchase Option are set forth
in the Aetna Amended MSA and the Aetna
Purchase Agreement. The guarantees and
security agreement related to the Aetna
Purchase Option and the New Aetna Note
shall be substantially in the form set
forth in the Plan Supplement. See II.N
for information on restrictions on the
ability to exercise the Aetna Purchase
Option.
Aetna Registration Rights Agreement The registration rights agreement
related to the New Common Stock issued
upon exercise of the New Aetna Warrant.
The Aetna Registration Rights Agreement
shall be substantially in the form set
forth in the Plan Supplement.
Alternate Treatment A The treatment afforded the holders of
Class 1 Claims (Senior Secured Claims)
pursuant to Section 4.1(a)(i) of the
Plan.
Alternate Treatment B The treatment afforded the holders of
Class 1 Claims (Senior Secured Claims)
pursuant to Section 4.1(a)(ii) of the
Plan.
Bankruptcy Code Title 11 of the United States Code.
Bankruptcy Court The United States Bankruptcy Court for
the Southern District of New York having
jurisdiction over the Reorganization
Cases and, to the extent of any
reference made under section 157 of
title 28 of the United States Code, the
unit of such District Court having
jurisdiction over the Reorganization
Cases under section 151 of title 28 of
the United States Code.
Business Day Any day other than a Saturday, a Sunday,
or any other day on which banking
institutions in New York, New York are
required or authorized to close by law
or executive order.
Cash Distribution Amount As of the Effective Date, an amount of
Cash to be paid to holders of Allowed
Senior Note Claims and Allowed Other
General Unsecured Claims as determined
by Magellan prior to the Effective Date
which shall be an amount not less than
(a) an amount equal to (i) the accrued
and unpaid interest in respect of the
Senior Notes through the Effective Date
(which includes any penalties for
failure to register the Senior Notes at
a rate of 10 3/8% per annum since the
last payment of interest on account of
the Senior Notes) divided by (ii) the
Note Claim Percentage and not more than
(b) $50 million; provided, however, that
if the Class 1 Claims (Senior Secured
Claims) receive Alternate Treatment A
under the Plan, the Cash Distribution
Amount shall be the amount set forth in
clause (a) above but in no case more
than $50 million.
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Class 8/Class 9 Distributable
Share Amount 9,927,406 shares of New Common Stock;
provided, however, that if the Plan is
accepted by Class 8 Amount and Class 9,
the Class 8/Class 9 Distributable Share
Amount shall be 9,679,221.
Class 13
Distributable Share Amount The number of shares of New Common Stock
distributable to Class 13 such that the
Allowed Claims in such Class receive 2%
of the total shares of New Common Stock
distributable to Classes 8, 9, 13 and 14
(but not any shares distributable to
such Classes in respect of their
participation in the Equity Offering);
provided that if the Plan is not
accepted by Class 8 and Class 9, the
Class 13 Distributable Share Amount will
be zero.
Class 14
Distributable Share Amount The number of shares of New Common Stock
distributable to Class 14 such that the
Allowed Claims in such Class receive
0.5% of the total shares of New Common
Stock distributable to Classes 8, 9, 13
and 14 (but not any shares distributable
to such Classes in respect of their
participation in the Equity Offering);
provided that if the Plan is not
accepted by Class 8 and Class 9, the
Class 14 Distributable Share Amount will
be zero.
Commencement Date The date the Debtors' chapter 11 cases
were commenced (March 11, 2003).
Convenience Claim Any prepetition unsecured Claim against
any Debtor that, but for being defined
as a Convenience Claim, would be an
Other General Unsecured Claim, and that
is Allowed in an amount of $500 or less,
or is reduced to $500 by the election of
the holder thereof on such holder's
Ballot.
Customer Claim Claims against the Debtor (including
Aetna), for amounts due pursuant to
service contracts (or any guaranties
related to such service contracts)
between the Debtors (and/or their
subsidiaries) and those insurance
companies, corporate clients and other
customers who pay the Debtors and/or
their subsidiaries for services, which
Claims include, among other charges,
profit sharing, reimbursement,
performance penalties, retroactive
membership adjustments, indemnification
and/or other claims for damages and
other payments that would be required to
be made if such contracts were assumed
under section 365 of the Bankruptcy
Code. Customer Claims do not include any
Aetna Claim or any Claims related to
service contracts that have terminated
or for which a notice of termination had
been received by Magellan or any of its
subsidiaries on or prior to the
Effective Date.
Debtors Magellan and the entities listed on
Schedule A to the Plan, as amended from
time to time.
Disclosure Statement This document, together with the annexed
exhibits and schedules.
Distribution Record Date With respect to all Classes (other than
Class 8, 9 and 14) the date of the
Confirmation Order and, with respect to
Classes 8, 9 and 14 (the Debtors' public
debt and equity securities), the
Distribution Record Date shall be the
date of mailing documentation relating
to distributions under the Plan.
Effective Date A Business Day on or after the
Confirmation Date specified by Magellan
on which (i) no stay of the Confirmation
Order is in effect, and (ii) the
conditions to the effectiveness of the
Plan specified in Section 10.2 of the
Plan have been satisfied or waived.
Equity Interest The interest of any holder of an equity
security of any of the Debtors
represented by any issued and
outstanding shares of common or
preferred stock or other instrument
evidencing a present ownership interest
in any of the Debtors, whether or not
transferable, or any option, warrant, or
right, contractual or otherwise, to
acquire any such interest.
Equity Commitment Letter The letter, dated July 14, 2003, by and
between Magellan and the Equity Investor
and any subsequent definitive
subscription agreement by and between
Magellan and the Equity Investor, to the
extent such subscription agreement
supersedes the July 14, 2003 letter, in
each case that sets forth the terms and
conditions upon which the Equity
Investor has agreed to purchase MVS
Securities.
3
Equity Investor Onex. For purposes hereof, the entity
actually making the purchase of the MVS
Securities will be Onex American
Holdings II LLC, a Delaware limited
liability company, and a subsidiary of
Onex. All references to Equity Investor
in that context will refer to Onex
American Holdings II LLC.
Equity Offering The offering of 2,631,579 (1) shares of
New Common Stock pursuant to the Equity
Subscription Rights as described in
Section 9 of the Plan.
Exercising Claimant The holder of a Senior Subordinated Note
Claim within Class 8 under the Plan or
an Other General Unsecured Claim within
or potentially within Class 9 under the
Plan or Houlihan Lokey, that has
exercised the Equity Subscription
Rights, if any, that such holder was
entitled to exercise on account of such
Claim to the extent of its Rights
Participation Claim Amount.
Exit Financing Has the meaning specified in Section
5.18 of the Plan.
General Unsecured Claims Any Claim against any of the Debtors
(including any Senior Subordinated Note
Claim or Senior Note Claim) that (a) is
not an Other Secured Claim, Senior
Secured Lender Claim, Administrative
Expense Claim, Priority Tax Claim,
Priority Non-Tax Claim, the Aetna Claim,
Convenience Claim, Intercompany Claim,
Provider Claim, or a Customer Claim, or
(b) is otherwise determined by the
Bankruptcy Court to be a General
Unsecured Claim.
Houlihan Lokey Houlihan Lokey Howard & Zukin Capital.
Informal Committee The Informal Committee of certain
holders of Senior Notes and Senior
Subordinated Notes.
Interim Distribution Date In the event there exist on the
Effective Date any Disputed Claims
classified in Class 9 (Other General
Unsecured Claims), each successive three
month anniversary of the Effective Date
until the Final Distribution Date.
Investment The purchase of the MVS Securities by
the Equity Investor pursuant to the
terms of the Equity Commitment Letter.
Magellan Magellan Health Services, Inc., a
Delaware corporation, the parent debtor
or debtor in possession, as the context
requires.
Magellan Common Stock
Interests Existing Equity Interests of Magellan
represented by the authorized common
stock issued by Magellan, or any option,
warrant, or right, contractual or
otherwise, to acquire any such Equity
Interest (other than any Magellan
Preferred Stock Interests).
Magellan Preferred Stock
Interests Existing Equity Interests of Magellan
represented by the shares of Series A
Redeemable Preferred Stock issued by
Magellan.
Members Those individuals whose behavioral
healthcare is covered by Magellan or its
subsidiaries.
Minimum Hold Condition At any time, (i) the number of
outstanding MVS Securities at such time
is at least 15.33% of the total number
of MVS Securities and shares of New
Common Stock issued on the Effective
Date and (ii) the number of outstanding
MVS Securities at such time is at least
10% of the aggregate number of MVS
Securities and shares of New Common
Stock then outstanding. The Minimum Hold
Condition is not met if, at any time,
clause (i) or clause (ii) of this
definition is not satisfied.
MVS Securities The shares of multiple voting common
stock of Reorganized Magellan, par value
of $0.01 per share, authorized and to be
issued under the Plan on the Effective
Date in connection herewith. The MVS
Securities will be of a different class
of common stock of Reorganized Magellan
than the New Common Stock. The MVS
Securities will be issued to the Equity
Investor pursuant to the terms of the
Equity Commitment Letter. Each share of
MVS Securities and each share of New
Common Stock will be identical in all
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(1) Assumes total shares of New Common Stock of 10,000,000.
4
respects, except with respect to voting
and except that (a) the MVS Securities
will be convertible into New Common
Stock, as provided in the Amended
Certificate of Incorporation and (b) the
Equity Investor and its affiliates
(including any entity to which MVS
Securities could be transferred without
conversion pursuant to the penultimate
sentence of this section) may convert
shares of New Common Stock that they may
acquire into the same number of shares
of MVS Securities unless no MVS
Securities are then outstanding.
Pursuant to the terms of the Equity
Commitment Letter, the Equity Investor
shall receive shares of MVS Securities
on the Effective Date, which MVS
Securities shall be entitled to exercise
50% of the voting rights pertaining to
all of Reorganized Magellan's
outstanding common stock (including the
New Common Stock and the MVS
Securities). The MVS Securities shall be
convertible into the same number of
shares of New Common Stock upon the
transfer of the MVS Securities to any
person other than the Equity Investor,
Onex, Onex Partners LP, a Delaware
limited partnership ("Onex Partners"),
or an entity controlled by Onex or Onex
Partners (including a change of control
of any entity other than Onex or Onex
Partners owning the MVS Securities so
that it is no longer controlled by Onex
or Onex Partners). Onex shall be deemed
to control any entity controlled by Mr.
Gerald W. Schwartz so long as Mr.
Schwartz controls Onex. All MVS
Securities shall cease to have any
special voting rights (ie., each share
of MVS Securities and New Common Stock
shall have one vote per share and shall
vote together on all matters submitted
to stockholders, including the election
of all members of the Board of Directors
of Reorganized Magellan, as a single
class) if the Minimum Hold Condition is,
at any time, not met.
New Aetna Note A note to be issued by Reorganized
Magellan to Aetna on the Effective Date
in the aggregate principal amount of $45
million plus an amount equal to the
aggregate amount of accrued and unpaid
interest on the $60 million Aetna Claim
from February 15, 2003 through the
Effective Date with an interest rate of
the Alternate Base Rate (as defined in
the New Senior Secured Credit Agreement)
plus 3.25% per annum payable quarterly
with a final maturity on December 31,
2005 (or earlier upon a closing under
the Aetna Asset Purchase Agreement);
provided that (i) obligations of Aetna
under the Aetna Purchase Option shall be
payable through an offset of payment
obligations under the New Aetna Note by
way of a dollar for dollar reduction in
the amount of principal and accrued and
unpaid interest due on the New Aetna
Note (with Reorganized Magellan paying
any remaining amounts of principal and
accrued and unpaid interest due on the
New Aetna Note in Cash) as set forth in
more detail in the Aetna Amended MSA,
the Aetna Asset Purchase Agreement and
the New Aetna Note, subject to the
limitations set forth in the New Senior
Secured Credit Agreement, (ii) if, prior
to December 31, 2005, the Aetna Master
Service Agreement is extended to
December 31, 2006, then (A) Reorganized
Magellan shall pay to Aetna on December
31, 2005, 50% of the outstanding
principal amount on account of the New
Aetna Note plus accrued and unpaid
interest and (B) the final maturity on
the remaining principal (and accrued and
unpaid interest) will be December 31,
2006. The obligations of Reorganized
Magellan under the Aetna Purchase Option
and the New Aetna Note will be
guaranteed by those subsidiaries of
Reorganized Magellan as are guaranteeing
the New Facilities or the Exit
Financing, as the case may be (which
guaranty will be subordinated to the New
Facilities or the Exit Financing, as the
case may be (and any guarantees
thereof), on terms that are satisfactory
to the Administrative Agent (or the
administrative agent under the Exit
Financing) and Aetna) and secured by a
"silent" second priority lien (i.e., a
junior lien with only limited rights and
remedies as to the collateral, on terms
that are satisfactory to the
Administrative Agent (or the
administrative agent under the Exit
Financing) and Aetna) on the assets of
Reorganized Magellan and its
subsidiaries which will secure the New
Senior Secured Obligations or the Exit
Financing. The New Aetna Note, as well
as the guarantees and security
agreements related thereto, shall be
substantially in the form as set forth
in the Plan Supplement.
5
New Aetna Warrant A warrant to purchase a number of shares
of New Common Stock equal to 1.0% of the
New Common Stock to be issued on the
Effective Date (without regard to the
New Common Stock issued upon exercise of
the New Warrants, and the New Aetna
Warrants or in connection with the
Equity Offering, the Investment or the
New Management Incentive Plan). The New
Aetna Warrant shall be exercisable on or
after January 1, 2006 and expire on the
fifth anniversary of the Effective Date
and shall have an exercise price equal
to the per share value of the New Common
Stock set forth in the Disclosure
Statement (or approximately $24.10 per
share). The form of the warrant
agreement governing the New Aetna
Warrant shall be substantially in the
form set forth in the Plan Supplement.
New Common Stock The shares of common stock of
Reorganized Magellan, par value of
$0.01, authorized and to be issued under
the Plan on the Effective Date in
connection herewith (but shall not
include the MVS Securities). See section
II.E.5 herein.
New Facilities Has the meaning set forth in Section 4.1
of the Plan. See section II.C.1 herein.
New Management Incentive Plan A management incentive plan for certain
employees of the Reorganized Debtors,
which plan will provide for options to
purchase up to a number of shares of New
Common Stock equal to 10% of the shares
of New Common Stock outstanding as of
the Effective Date (including New Common
Stock issued upon exercise of the Equity
Subscription Rights and New Common Stock
issued upon conversion of the MVS
Securities issued in connection with the
Investment).
New Notes Notes in the aggregate principal amount
not to exceed $300 million less the Cash
Distribution Amount, the terms of which
shall be governed by the New Note
Indenture. The New Notes shall be
unsecured obligations of Reorganized
Magellan. The New Notes shall bear
interest at the rate of 9-?% per annum
and will have a final maturity of
November 15, 2008. The New Notes shall
be contractually subordinated solely to
the New Senior Secured Obligations, if
the Class 1 Claims receive Alternate
Treatment A, and the obligations under
the Exit Financing if the Class 1 Claims
receive Alternate Treatment B; provided
further that Reorganized Magellan agrees
to use its reasonable best efforts to
cause the Exit Financing to have terms
that do not require that the New Notes
be contractually subordinated to any
debts or claims. The interest payment
dates shall be the same dates as
interest is paid on the existing Senior
Notes. The New Notes shall have
substantially the same terms as the
existing Senior Notes. The New Notes
issued to holders of Allowed Claims in
Class 7 (Senior Note Claims) will be a
different series than those issued to
the holders of Allowed Claims in Class 9
(Other General Unsecured Claims) and to
Houlihan Lokey pursuant to Section 5.17
of the Plan. The New Notes issued to
Class 7 (Senior Note Claims) will be the
Series A Notes and the New Notes issued
to Class 9 (Other General Unsecured
Claims) and to Houlihan Lokey will be
the Series B Notes. See section II.E.2
hereof.
New Senior Secured Credit
Agreement The Credit Agreement, dated as of the
Effective Date, between Reorganized
Magellan and JPMorgan Chase Bank, as
Administrative Agent, which shall be
substantially in the form set forth in
the Plan Supplement, which sets forth
the terms of the New Facilities and all
related security agreements, guarantees
and other loan documents to be executed
in connection therewith.
New Senior Secured Obligations The obligations of Reorganized Magellan
under the New Facilities.
New Warrants Warrants to purchase a number of shares
of the New Common Stock equal to the sum
of the Class 13 Distributable Share
Amount and the Class 14 Distributable
Share Amount. The New Warrants shall
expire on the seventh anniversary of the
Effective Date and shall have an
exercise price equal to $625 million
divided by the number of shares of New
Common Stock issued to holders of Senior
Subordinated Note Claims hereunder
(without regard to the New Common Stock
issued upon consummation of the Equity
Offering and the Investment) (or
approximately $69.46 per share). The
form of the warrant agreement governing
the New Warrants shall be substantially
in the form set forth in the Plan
Supplement. See section II.E.3 hereof.
6
Note Claim Percentage A percentage equal to (a) the Allowed
Senior Note Claims and the Allowed
Senior Subordinated Note Claims divided
by (b) the aggregate of the Allowed
Senior Note Claims, the Allowed Senior
Subordinated Note Claims and the Allowed
Other General Unsecured Claims
Note Distribution Amount With respect to each $1,000 of Allowed
Other General Unsecured Claim, an amount
equal to (a) the product of (i) $1,000
and (ii) a fraction equal to (A) the
aggregate amount of the Senior Note
Claims (including any interest that
would have accrued on the Senior Notes
through the Effective Date but for the
occurrence of the Commencement Date at a
rate of 10 3/8% per annum) divided by
(B) the sum of (1) the Allowed Senior
Note Claims and (2) Allowed Senior
Subordinated Note Claims LESS (b) the
Ratable Proportion of the Cash
Distribution Amount allocable to a
holder of a $1,000 Allowed Other General
Unsecured Claim.
Official Committee The statutory committee of unsecured
creditors appointed, pursuant to section
1102 of the Bankruptcy Code, in the
Reorganization Cases.
Onex Onex Corporation, a corporation
organized and existing under the laws of
the Province of Ontario, Canada.
Other General Unsecured Claim Any General Unsecured Claim against any
of the Debtors not constituting a Senior
Subordinated Note Claim or a Senior Note
Claim.
Other General Unsecured Claim A percentage equal to 100% less the Note
Percentage Claim Percentage.
Other Secured Claims Any Secured Claim against any of the
Debtors not constituting a Senior
Secured Lender Claim.
Partial Cash-Out Election The election by a holder of an Allowed
Senior Subordinated Note Claim or an
Allowed Other General Unsecured Claim to
receive $22.50 per share in Cash in lieu
of the shares of New Common Stock such
holder would be entitled to receive,
subject to the limitation set forth in
Sections 4.8 and 4.9 of the Plan.
Plan The Debtors' Third Amended Joint Plan of
Reorganization Under Chapter 11 of the
Bankruptcy Code annexed as Exhibit A to
this Disclosure Statement, as the same
may be amended from time to time, the
exhibits and schedules thereto and any
supplements to the Plan.
Plan Documents The documents to be executed, delivered,
assumed, and/or performed in conjunction
with the consummation of the Plan on the
Effective Date, including but not
limited to (i) the Amended Bylaws, (ii)
the Amended Certificate of
Incorporation, (iii) the New Senior
Secured Credit Agreement, (iv) the New
Note Indenture, (v) the New Warrants,
(vi) the New Management Incentive Plan,
(vii) the New Aetna Note, (viii) the
guarantees and security agreements
related to the New Aetna Note and the
Aetna Purchase Option (and any related
intercreditor agreement(s)), (ix) the
New Aetna Warrant, (xi) the Aetna
Amended MSA, (xii) the Registration
Rights Agreement, (xiii) the Aetna
Registration Rights Agreement and (xiv)
the Equity Commitment Letter. Each of
the Plan Documents to be entered into as
of the Effective Date will be filed in
draft form in the Plan Supplement (other
than the Aetna Amended MSA and the
Equity Commitment Letter, which are
final, executed agreements).
Plan Securities Collectively, the New Notes, the New
Aetna Note, the New Common Stock, the
Equity Subscription Rights, the MVS
Securities and the New Warrants.
Plan Supplement A supplemental appendix to the Plan that
will contain the draft form of the Plan
Documents to be entered into as of the
Effective Date, to be filed no later
than ten (10) days before the date of
the Confirmation Hearing, and in any
event no later than 5 days prior to the
Voting Deadline. Documents to be
included in the Plan Supplement will be
posted at www.magellanhealth.com as they
become available, but no later than 5
days prior to the Voting Deadline.
7
Priority Non-Tax Claim Any Claim against any of
the Debtors other than an Administrative
Expense Claim or a Priority Tax Claim,
entitled to priority in payment as
specified in sections 507(a)(3), (4),
(5), (6), (7), or (9) of the Bankruptcy
Code.
Priority Tax Claim Any Claim of a governmental
unit of the kind entitled to priority in
payment as specified in sections 502(i)
and 507(a)(8) of the Bankruptcy Code.
Providers Psychiatrists, psychologists, licensed
clinical social workers, marriage and
family therapists, licensed clinical
professional counselors and others
(including facilities such as
psychiatric hospitals and outpatient
facilities) who provide behavioral
health services to the Debtors' Members
and who are, or have been, part of the
Debtors' provider network or who are
otherwise entitled to reimbursement from
the Debtors. The term "Providers" shall
also include individual mental health
physicians whose primary purpose is to
evaluate treatment provided or proposed
for the Debtors' Members and make
recommendations to the Debtors regarding
the medical necessity and
appropriateness of that treatment.
Provider Claim Claims made by Providers against any of
the Debtors for payment for behavioral
health services rendered by such
Providers which are required to be paid
by the Debtors.
Registration Rights Agreement That certain registration rights
agreement to be entered into by
Reorganized Magellan for the benefit of
the holders of Registrable Securities
with substantially the terms and
conditions set forth in Section 5.14 of
the Plan. The Registration Rights
Agreement shall be substantially in the
form as set forth in the Plan
Supplement.
Reorganized Debtors Reorganized Magellan and each of the
Debtors listed on Exhibit A to the Plan,
as reorganized as of the Effective Date
in accordance with the Plan.
Reorganized Magellan Magellan, as reorganized as of the
Effective Date in accordance with the
Plan.
Rights Participation Claim Amount See Section IX.A herein.
Rights Participation Disputed Claims
List The Other General Unsecured Claims
identified by the Debtors on Schedule B
to the Plan with List respect to their
Rights Participation Claim Amount for
purposes of Section 9 of the Plan.
Secured Claim A Claim to the extent (i) secured by
Collateral, the amount of which Claim is
equal to or less than the value of such
Collateral (A) as set forth in the Plan,
(B) as agreed to by the holder of such
Claim and the Debtors, or (C) as
determined by a Final Order in
accordance with section 506(a) of the
Bankruptcy Code, or (ii) secured by the
amount of any rights of setoff of the
holder thereof under section 553 of the
Bankruptcy Code.
Senior Lender Agent The Administrative Agent, the
Syndication Agent, the Documentation
Agent and the Collateral Agent under the
Senior Secured Credit Agreement.
Senior Lenders The Lenders, the Issuing Banks and the
Senior Lender Agent under the Senior
Secured Credit Agreement.
Senior Note Claim Any Claim against Magellan arising under
or in connection with the Senior Note
Indenture and the notes issued
thereunder (which shall include all
penalties under the Senior Note
Indenture for non-registration of the
Senior Notes which, with interest due on
such Senior Notes, shall be at a
combined rate of interest of 10 3/8%
from the interest payment immediately
preceding the Commencement Date through
the Effective Date).
Senior Note Indenture The Indenture, dated as of May 31, 2001,
between Magellan and HSBC Bank, Inc., as
trustee, and all documents and
instruments related thereto, as amended
or modified from time to time pursuant
to which the Senior Notes were issued.
Senior Notes The $250,000,000 of 9 3/8% Senior Notes
due 2007 issued under the Senior Note
Indenture.
8
Senior Secured Credit Agreement That certain Credit Agreement dated as
of February 12, 1998, as amended or
modified, among Magellan; Charter
Behavioral Health System of New Mexico,
Inc., a New Mexico corporation; Merit
Behavioral Care Corporation, a Delaware
corporation; each other wholly owned
domestic subsidiary of Magellan that is
a "Subsidiary Borrower" pursuant to
Section 2.23 of the Senior Secured
Credit Agreement; the Lenders (as
defined in Article I of the Senior
Secured Credit Agreement); JPMorgan
Chase Bank, formerly The Chase Manhattan
Bank, a New York banking corporation, as
administrative agent for the Lenders, as
collateral agent (in such capacity, the
"Collateral Agent") for the Lenders and
as an issuing bank (in such capacity, an
"Issuing Bank"); Wachovia Bank, National
Association, formerly First Union
National Bank, a national banking
association, as syndication agent (in
such capacity, the "Syndication Agent")
for the Lenders and as an issuing bank
(in such capacity, an "Issuing Bank");
and Credit Lyonnais New York Branch, a
licensed branch of a bank organized and
existing under the laws of the Republic
of France, as documentation agent (in
such capacity, the "Documentation
Agent") for the Lenders and as an
issuing bank (in such capacity, an
"Issuing Bank" and, together with
JPMorgan Chase Bank and Wachovia Bank,
National Association, each in its
capacity as an issuing bank, the
"Issuing Banks") and all documents and
instruments related thereto.
Senior Secured Lender Claim Any Claim against any of the Debtors
based on the Senior Secured Credit
Agreement (inclusive of postpetition
interest) net of all Cash payments made
by the Debtors to the holders of such
Claims on account of interest and letter
of credit fees on or after the
Commencement Date.
Senior Subordinated Note Claim Any Claim against Magellan arising under
or in connection with the Senior
Subordinated Note Indenture and the
notes issued thereunder.
Senior Subordinated Note Indenture The Indenture, dated as of February 12,
1998, between Magellan and Bank One
Trust Company, N.A, as trustee, and all
documents and instruments related
thereto, as amended or modified from
time to time pursuant to which the
Senior Subordinated Notes were issued.
Senior Subordinated Notes The $625,000,000 of 9% Senior
Subordinated Notes due 2008 issued under
the Senior Subordinated Note Indenture.
Series A New Notes The New Notes issued to Class 7 (Senior
Note Claims).
Series B New Notes The New Notes issued to Class 9 (Other
General Unsecured Claims) and to
Houlihan Lokey.
Subject Lenders The Senior Lenders holding a majority of
the Senior Secured Lender Claims of
those Senior Lenders who executed a
lock-up agreement with the Debtors
agreeing to vote for the first amended
plan of reorganization of the Debtors
dated March 26, 2003; provided that if
the Exit Financing is consummated,
Subject Lenders shall mean the
administrative agent under the Exit
Financing.
Subscription Agent The entity(ies) engaged by the Debtors
to administer the Equity Offering.
Innisfree M&A Inc. will act as
Subscription Agent for Class 8 Claims
and Bankruptcy Services, LLC will act as
Subscription Agent for Class 9 Claims.
Subscription Commencement Date The date ballots and Subscription Forms
are mailed to holders of Claims (August
29, 2003).
Subscription Expiration Date The Voting Deadline (September 30, 2003)
, unless extended by Magellan in its
sole discretion.
Subscription Form The form to be used by a holder of
Equity Subscription Rights to exercise
such Equity Subscription Rights.
Subscription Purchase Price The purchase price that an Exercising
Claimant must pay in order to exercise
its Equity Subscription Rights in
accordance with Section 9 of the Plan,
which price shall be equal to the Equity
Subscription Price set forth in Section
9.3 of the Plan.
9
Subscription Record Date The record date for voting on the Plan
(August [20], 2003).
Subsidiary Equity Interests Any Equity Interests in the Debtors
(other than Magellan) owned by Magellan
or any of its subsidiaries.
Voting Agent See section I of this Disclosure
Statement for contact information.
Voting Deadline 4:00 p.m., prevailing Easter Time, on
September 30, 2003, the last date for
the actual receipt by the Voting Agent
of ballots to accept or reject the Plan.
- -------------------------------------- -----------------------------------------
10
I.
INTRODUCTION
a. Note: Please refer to the Glossary of Terms for definitions
of most of the terms used in this Disclosure Statement. Some
terms that are used only in a specific section may be
defined in that section. Any terms used in this Disclosure
Statement which are not otherwise defined herein shall have
the meanings set forth in the Plan.
Magellan and 88 of its subsidiaries have commenced chapter 11 cases
under the Bankruptcy Code. The purpose of this Disclosure Statement is to
provide information of a kind and in sufficient detail to enable the creditors
who are entitled to vote to make an informed decision on whether to accept or
reject the Plan. In summary, this Disclosure Statement includes or describes:
-------------------- ---------------------------------------------------------------------------------------------------
SECTION SUMMARY OF CONTENTS
-------------------- ---------------------------------------------------------------------------------------------------
II the capital structure of Reorganized Magellan
the treatment of creditors and shareholders of the Debtors under the Plan
-------------------- ---------------------------------------------------------------------------------------------------
III which parties in interest are entitled to vote
how to vote to accept or reject the Plan
-------------------- ---------------------------------------------------------------------------------------------------
IV selected historical financial information
projections
valuation information
-------------------- ---------------------------------------------------------------------------------------------------
V the businesses of the Debtors
why the Debtors commenced their chapter 11 cases
-------------------- ---------------------------------------------------------------------------------------------------
VI significant events that have occurred in the chapter 11 cases
-------------------- ---------------------------------------------------------------------------------------------------
VII directors and officers of Reorganized Magellan
-------------------- ---------------------------------------------------------------------------------------------------
VIII how distributions under the Plan will be made
how disputed claims will be resolved
-------------------- ---------------------------------------------------------------------------------------------------
IX the Equity Offering
-------------------- ---------------------------------------------------------------------------------------------------
X certain factors creditors should consider before voting
-------------------- ---------------------------------------------------------------------------------------------------
XI the procedure for confirming the Plan
a liquidation analysis
-------------------- ---------------------------------------------------------------------------------------------------
XII alternatives to the Plan
-------------------- ---------------------------------------------------------------------------------------------------
XIII certain tax consequences
-------------------- ---------------------------------------------------------------------------------------------------
Please note that if there is any inconsistency between (i) the Plan (including
the exhibits and schedules attached thereto and any supplements to the Plan) or
(ii) the Plan Documents and the descriptions in the Disclosure Statement, the
terms of the Plan (and the exhibits and schedules attached thereto and any
supplements to the Plan) or the Plan Documents will govern.
Attached to this Disclosure Statement are the following Exhibits:
11
-------------------- ---------------------------------------------------------
EXHIBIT DOCUMENT
-------------------- ---------------------------------------------------------
A The Debtors' Third Amended Joint Plan of
Reorganization Under Chapter 11 of the Bankruptcy
Code
-------------------- ---------------------------------------------------------
B Order of the Bankruptcy Court, dated August 18,
2003, approving the Disclosure Statement (without
exhibits)
-------------------- ---------------------------------------------------------
C Magellan's Annual Report on Form 10-KA for the
year ended September 30, 2002
-------------------- ---------------------------------------------------------
D Magellan's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003
-------------------- ---------------------------------------------------------
Additional financial information about the Debtors can be found in
the annual report on Form 10-KA for the year ended September 30, 2002, which was
filed by Magellan with the Securities and Exchange Commission on January 23,
2003, the quarterly report on Form 10-Q for the quarter ended March 31, 2003,
which was filed by Magellan on May 15, 2003 and the monthly operating reports
filed by the Debtors in their chapter 11 cases. Copies of these SEC filings are
attached hereto as Exhibits and available on the Internet at www.sec.gov. The
Debtors' monthly operating reports are available on the Bankruptcy Court's
Electronic Case Filing System which can be found at www.nysb.uscourts.gov, the
official website for the Bankruptcy Court. See section IV.B herein for important
information that should be considered when reviewing the Debtors' financial
information.
This Disclosure Statement, the Plan, and any documents referred to in
the Disclosure Statement and the Plan are the only materials that creditors
should use to determine whether to vote to accept or reject the Plan.
-----------------------------------------------------------
THE LAST DAY TO VOTE TO ACCEPT OR REJECT THE PLAN IS
SEPTEMBER 30, 2003. TO BE COUNTED, YOUR BALLOT (OR THE
MASTER BALLOT CAST ON BEHALF OF HOLDERS OF THE SENIOR NOTES
OR THE SENIOR SUBORDINATED NOTES) MUST BE ACTUALLY RECEIVED
BY THE VOTING AGENT BY THIS DATE.
THE RECORD DATE FOR DETERMINING WHICH CREDITORS MAY VOTE ON
THE PLAN AND PARTICIPATE IN THE EQUITY OFFERING IS AUGUST
[20], 2003 (THE "VOTING RECORD DATE").
SUBSCRIPTION FORMS FOR THE EQUITY OFFERING ARE INCLUDED
HEREIN FOR THOSE HOLDERS OF SENIOR SUBORDINATED NOTE CLAIMS
AND OTHER GENERAL UNSECURED CLAIMS WHO ARE ENTITLED TO
PARTICIPATE IN THE EQUITY OFFERING. THE SUBSCRIPTION
COMMENCEMENT DATE AND SUBSCRIPTION EXPIRATION DATE SHALL BE
SET FORTH IN THE NOTICE ACCOMPANYING THE SUBSCRIPTION
FORMS.
IF YOU HAVE A DISPUTED CLAIM OR ARE LISTED ON THE RIGHTS
PARTICIPATION DISPUTED CLAIMS LIST, YOU MAY NOT BE ENTITLED
TO PARTICIPATE IN THE EQUITY OFFERING ABSENT AN ORDER FROM
THE BANKRUPTCY COURT ESTIMATING YOUR CLAIM FOR SUCH
PURPOSES.
-----------------------------------------------------------
The Debtors believe that approval of the Plan maximizes the recovery
to creditors and Equity Interest holders.
12
-----------------------------------------------------------
RECOMMENDATION:
-----------------------------------------------------------
THE DEBTORS URGE CREDITORS TO VOTE TO ACCEPT THE PLAN.
-----------------------------------------------------------
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS IN THESE
CASES ALSO STRONGLY ENCOURAGES ALL CREDITORS TO VOTE IN
FAVOR OF THE PLAN. THE OFFICIAL COMMITTEE IS COMPRISED OF
TWO INDENTURE TRUSTEES AND THREE HOLDERS OF THE SENIOR
NOTES AND/OR THE SENIOR SUBORDINATED NOTES. THE OFFICIAL
COMMITTEE WAS ACTIVELY INVOLVED IN THE FORMULATION OF THE
PLAN, AND BELIEVES THAT THE PLAN PROVIDES THE HIGHEST AND
BEST RECOVERIES TO THE DEBTORS' UNSECURED CREDITORS.
-----------------------------------------------------------
-----------------------------------------------------------
FOR EXISTING HOLDERS OF COMMON STOCK AND
PREFERRED STOCK OF MAGELLAN HEALTH
SERVICES, INC.
IF CLASS 8 OR 9 REJECTS THE PLAN, THERE WILL BE NO
DISTRIBUTION TO CLASS 13 OR CLASS 14 AND, AS A RESULT, THE
NEW COMMON STOCK OTHERWISE DISTRIBUTABLE TO CLASS 13 AND
CLASS 14 WILL BE DISTRIBUTED TO CLASS 8 AND CLASS 9, AND
NO NEW WARRANTS WILL BE ISSUED.
-----------------------------------------------------------
Additional copies of this Disclosure Statement are available upon request
made to the Voting Agent, at the following address:
- ---------------------------------------- ---------------------------------------
FOR VOTING CLASSES 1, 4, AND 9: FOR VOTING CLASSES 7, 8, 13 AND 14:
Bankruptcy Services, LLC Innisfree M&A Inc.
70 E. 55th Street 501 Madison Avenue, 20th Floor
New York, NY 10022 New York, NY 10022
(Attn: Magellan Health Services, Inc.) (Attn: Magellan Health Services, Inc.)
Phone: (212) 376-8494 Phone: (877) 750-2689
- ---------------------------------------- ---------------------------------------
The summaries contained herein of the Plan and other documents related
thereto are qualified in their entirety by the Plan and its exhibits and
schedules, and the documents and exhibits contained in the Plan Supplement. The
Debtors will file the Plan Supplement with the Bankruptcy Court at least five
days before the Voting Deadline. The Debtors will also post the documents set
forth in the Plan Supplement at www.magellanhealth.com as such documents become
available, but in any event, at least five days before the Voting Deadline. The
financial and other information included in this Disclosure Statement are for
purposes of soliciting acceptances of the Plan and are being communicated for
settlement purposes only.
The Bankruptcy Code provides that only the ballots of creditors who timely
vote on the Plan will be counted for purposes of determining whether the
13
requisite acceptances have been attained. Failure to deliver a properly
completed ballot by the Voting Deadline will not be counted as either an
acceptance or a rejection. Any improperly completed or late ballot will not be
counted.
14
II.
TREATMENT OF CREDITORS AND SHAREHOLDERS
UNDER THE PLAN
The Plan governs the treatment of claims against and
interests in each of the Debtors in the chapter 11 cases. The table in section
II.B below summarizes the treatment for each class. The table is followed by a
description of the types of claims or interests in each class and a description
of the property to be distributed under the Plan. FOR PURPOSES OF THIS
DISCLOSURE STATEMENT, THE DEBTORS HAVE ASSUMED AN EFFECTIVE DATE OF SEPTEMBER
30, 2003.
A. NEW CAPITAL STRUCTURE
The following table summarizes the proposed capital
structure for Reorganized Magellan. The New Senior Secured Obligations, the New
Notes, the New Aetna Note, the New Common Stock and the New Warrants are
described in section II.E below.
INSTRUMENT DESCRIPTION COMMENTS
- ----------------------------------------------------------------------------------------------------
New Senior Secured Approximately $115.8 million in term At the option of the Debtors,
Credit Agreement loans, $45 million in loans under a holders of Allowed Senior Secured
rollover facility and $75.3 million Lender Claims (Class 1) will (i)
in reimbursement obligations for receive Cash in the amount of $50
outstanding letters of credit, which million and the New Senior Secured
shall be obligations of Reorganized Obligations or (ii) be paid in full.
Magellan, guaranteed by the See II.C.1.
wholly-owned subsidiaries of
Reorganized Magellan (other than
foreign subsidiaries and
subsidiaries for which the giving of
a guarantee would violate law) and
secured by substantially all of the
assets of Reorganized Magellan and
its subsidiaries that guarantee the
New Facilities.
New Notes Up to approximately $275,000,000 in Issued to:
unsecured notes of Reorganized o Holders of Allowed Senior
Magellan. Note Claims (Class 7) who
will receive Series A New
Notes;
o Holders of Allowed Other
General Unsecured Claims
(Class 9) who will
receive Series B New
Notes; and
o Houlihan Lokey on account
of its success fee as set
forth in its engagement
letter who will receive
Series B New Notes.
New Aetna Note Approximately $47.7 million note of Issued to the holder of the Aetna
Reorganized Magellan (which includes Claim (Class 4).
accrued interest of approximately
$2.7 million through the Effective
Date, which is assumed to be
September 30, 2003).
15
INSTRUMENT DESCRIPTION COMMENTS
- ----------------------------------------------------------------------------------------------------
New Common Stock Up to 12,631,579 million shares of Issued to:
common stock of Reorganized
Magellan, par value $0.01 per share o Holders of Allowed Senior
allocated as follows: Subordinated Note Claims
(Class 8)
o 10,000,000 shares of New
Common Stock issued to o Holders of Allowed Other
holders of Claims and General Unsecured Claims
Interests in the Debtors; (Class 9),
provided that such
holders in Class 8 and o Holders of Magellan
Class 9 have the right to Preferred Stock Interests
elect to be distributed (Class 13) and Magellan
Cash in lieu of such Common Stock Interests
shares under the Partial (Class 14);
Cash-Out Election at a
price of $22.50 per share o Exercising Claimants who
for up to 2,222,222 exercise their Equity
shares ($50 million in Subscription Rights; and
the aggregate); and
o Houlihan Lokey on account
o up to 2,631,579 shares of of its success fee as set
New Common Stock issued forth in its engagement
upon exercise of the letter.
Equity Subscription
Rights and to the Equity
Investor to the extent
such Equity Subscription
Rights are not
exercised).
MVS Securities Up to 7,485,380 shares of MVS The Equity Investor.
Securities allocated as follows:
o 2,631,579 shares directly
to Equity Investor at a
price of $28.50 per
share.
o up to 2,631,579 shares to
Equity Investor to the
extent shares of New
Common Stock not
purchased in Equity
Offering at a price of
$28.50 per share.
o up to 2,222,222 shares to
Equity Investor to the
extent the Partial
Cash-Out Election is
exercised at a price of
$22.50 per share.
New Warrants Warrants to purchase 248,185 shares Issued to holders of Magellan
of New Common Stock. Preferred Stock Interests (Class 13)
and Magellan Common Stock Interests
(Class 14).
New Aetna Warrant Warrant to purchase 100,000 shares Issued to Aetna in connection with
of New Common Stock. Aetna Amended MSA.
Option or other Ten percent of the New Common Stock Available for issuance under New
stock-based awards after giving effect to the Equity Management Incentive Plan.
Offering and conversion of the MVS
Securities issued in connection with
the Investment (approximately
1,695,906 shares of New Common
Stock) reserved for issuance.
B. SUMMARY OF CLASSIFICATION AND TREATMENT
The following table divides the Claims against, and Equity Interests
in, the Debtors into separate classes and summarizes the treatment for each
class under the Plan. The table also identifies which classes are entitled to
vote on the Plan based on provisions of the Bankruptcy Code. Finally, the table
indicates an estimated recovery for each class. IMPORTANT NOTE: The recoveries
described in the following table represent the Debtors' best estimates of those
values given the information available at this time and are not a guaranty of
value. These estimates do not predict the potential trading prices for any
securities issued under the Plan. Unless otherwise specified, the information in
16
the following table and in the sections below is based on calculations as of
July 31, 2003. The estimation of recoveries makes the following assumptions:
o The new debt instruments to be issued (i.e., the New Senior
Secured Obligations, the New Notes and the New Aetna Note)
under the Plan are worth their face value.
o The New Warrants to be issued under the Plan are worth
$7.96 per New Warrant, based on the Black-Scholes valuation
methodology using the following criteria: an exercise price
of $69.46 per share, a seven year term, an implied
volatility of 50% and a risk free interest rate of 5.83%.
o The estimated total equity value for Reorganized Magellan
on the Effective Date is $242,100,000. See the valuation
discussion in section IV herein.
o No value has been attributed to the Equity Subscription
Rights.
17
ENTITLED ESTIMATED
CLASS DESIGNATION TREATMENT IMPAIRMENT TO VOTE RECOVERY
----- ----------- --------- ---------- ------- --------
Administrative Payment in full (or as otherwise agreed). Unimpaired No 100%
Expense Claims
Priority Tax Claims Payment in full on Effective Date or over six
years from the date of assessment of the tax, Unimpaired No 100%
with interest or payment as otherwise agreed.
Class 1 Senior Secured At the option of the Debtors, holders of Senior Impaired Yes 100%
Lender Claims Secured Lender Claims will receive either (i)
$50 million in Cash and the New Senior Secured
Obligations or (ii) payment in full. See
Section II.C.1 herein.
Class 2 Other Secured Claims Reinstated or such other treatment determined Unimpaired No 100%
by the Debtors and described in Section 4.2 of
the Plan.
Class 3 Priority Non-Tax Paid in full in Cash on the later of the Unimpaired No 100%
Claims Effective Date and the date on which such Claim
is Allowed.
Class 4 Aetna Claims $15 million in Cash and the New Aetna Note. Impaired Yes 100%
See Section II.C.4 herein.
Class 5 Provider Claims Reinstated. Unimpaired No 100%
Class 6 Customer Claims Reinstated. Unimpaired No 100%
Class 7 Senior Note Claims (i) Cash equal to the Note Claim Percentage of Impaired Yes 100%
the Cash Distribution Amount and (ii) New Notes
with a principal amount equal to (A) the Senior
Note Claims (inclusive of interest at 10 3/8%
per annum through the Effective Date) less (B)
such Cash payment.
Class 8 Senior Subordinated (i) A number of shares of New Common Stock Impaired Yes 31.9% -
Note Claims equal to the product of the Class 8/Class 9 35.4% (*)
Distributable Share Amount and the Note Claim
Percentage, subject to the Partial Cash-Out
Election as described in Section 4.8(b) of
the Plan, and (ii) the Equity Subscription
Rights on the terms set forth in Section 9
of the Plan.
Class 9 Other General For each $1,000 of Allowed Other General Impaired Yes 52.7% -
Unsecured Claims Unsecured Claims, (i) a principal amount of 55.2% (*)
New Notes equal to the Note Distribution
Amount, (ii) Cash equal to such holder's
Ratable Proportion of the Other General
Unsecured Claim Percentage of the Cash
Distribution Amount (iii) such holder's Ratable
Proportion of shares of New Common Stock
equal to the product of the Other General
Unsecured Claim Percentage and Class
8/Class 9 Distributable Share Amount,
subject to the Partial Cash-Out Election as
described in Section 4.9(b) of the Plan,
and (iv) the Equity Subscription Rights on
the terms set forth in Section 9 of the
Plan.
Class 10 Convenience Claims Paid in full in Cash. Unimpaired No 100%
Class 11 Intercompany Claims Reinstated. Unimpaired No 100%
Class 12 Subsidiary Equity Reinstated. Unimpaired No 100%
Interests
Class 13 Magellan Preferred Class 13 Distributable Share Amount of shares Impaired Yes (deemed to N/A
Stock Interests of New Common Stock and New Warrants to reject if Class 8
purchase shares of New Common Stock. or 9 does not
accept Plan)
Class 14 Magellan Common Class 14 Distributable Share Amount of shares Impaired Yes (deemed to N/A
Stock Interests of New Common Stock and New Warrants to reject if Class 8
purchase shares of New Common Stock. or 9 does not
accept Plan)
(*) Estimated recoveries to Class 8 and Class 9 are based on valuations before
giving effect to the Equity Offering and the Investment which are at $28.50 per
share, higher than the $24.10 per share valuation set forth in this Disclosure
Statement. Also, such recoveries do not assume the exercise, by the holder of an
Allowed Claim in such Classes, of the Partial Cash-Out Election.
18
C. DESCRIPTION OF THE TREATMENT OF CLASSES OF CLAIMS AND EQUITY
INTERESTS
Unless otherwise indicated, the characteristics and amount of the
claims or interests in the following classes are based on the books and records
of the Debtors. For purposes of estimating the amount of Claims, the Debtors
have assumed an Effective Date of September 30, 2003.
--------------------------------------------------------------
HOLDERS OF CLASS 13 AND CLASS 14 INTERESTS
--------------------------------------------------------------
THE DISTRIBUTIONS YOU ARE ENTITLED TO UNDER THE PLAN ARE
CONTINGENT UPON ACCEPTANCE OF THE PLAN BY CLASS 8 AND CLASS
9. IF EITHER CLASS 8 OR CLASS 9 DOES NOT ACCEPT THE PLAN,
AS A RESULT OF THE OPERATION OF SECTION 1129 OF THE
BANKRUPTCY CODE, NO DISTRIBUTIONS WILL BE MADE TO EITHER
CLASS 13 OR CLASS 14.
--------------------------------------------------------------
The Debtors have reviewed the proofs of claim filed on or before June
27, 2003, the date fixed by the Bankruptcy Court for filing proofs of claim in
these Cases. Based upon a review of the proofs of claim, the Debtors determined
that no Claims were filed arising under the securities laws, including Claims
arising from rescission of a purchase or sale of a security of any of the
Debtors or for damages arising from the purchase or sale of such a security or
any Claims for reimbursement or contribution in connection with such Claims for
rescission or damages. Section 510(b) of the Bankruptcy Code subordinates all
such Claims to the Claims represented by the underlying securities.
1. Senior Secured Lender Claims (Class 1)
The Claims in this Class (Senior Secured Lender Claims) total $ 236.1
million (which amount includes $75.3 million of letters of credit outstanding
under the Senior Secured Credit Agreement as of the Commencement Date and all
accrued and unpaid interest and fees thereunder). The Claims are based on
amounts owed by the Debtors under the Senior Secured Credit Agreement and
amounts owed by certain other Debtors that have guaranteed those obligations.
Holders of the Senior Secured Lender Claims assert that such Claims are secured
by pledges of the stock of certain of the other Debtors and certain non-Debtors
by certain Debtors and non-Debtors and by liens on the other assets of certain
of the Debtors and non-Debtors.
The following table shows the calculation of the Claims in this
Class:
INSTRUMENT AMOUNT
- -------------------------------------------------------- ----------------------
Revolver (loans) $45.0 million
Term B Loan $57.9 million
Term C Loan $57.9 million
------------
TOTAL (NON-CONTINGENT) $160.8 MILLION
Undrawn letters of credit $75.3 million
------------
TOTAL (NON-CONTINGENT) $75.3 MILLION
============
TOTAL $236.1 MILLION
19
Pursuant to the Plan, at the option of the Debtors, the holders of
the Senior Secured Lender Claims shall receive either (i) Cash in the amount of
$50 million and the New Senior Secured Obligations or (ii) Cash in the amount of
their Allowed Claims to the extent such Allowed Claims are for amounts other
than amounts which represent undrawn letters of credit under the Senior Secured
Credit Agreement and Cash and/or a standby letter of credit from a financial
institution reasonably satisfactory to the Administrative Agent (which letter of
credit shall be in form and substance satisfactory to the Administrative Agent)
in an amount equal to 105% of such Allowed Claim representing undrawn letters of
credit under the Senior Secured Credit Agreement. The New Senior Secured
Obligations shall be governed by the New Senior Secured Credit Agreement, which
shall be substantially in the form as set forth in the Plan Supplement. The
Senior Secured Lender Claims shall be Allowed in the following amounts:
$120,324,657.07 on account of Revolving Loans and unreimbursed letter of credit
disbursements and issued but undrawn letters of credit under the Senior Secured
Credit Agreement as of the Commencement Date (including unreimbursed drawings
made under letters of credit under the Senior Secured Credit Agreement to the
extent drawn after the Commencement Date and prior to the Effective Date),
$57,881,095.64 on account of Tranche B Term Loans under the Senior Secured
Credit Agreement and $57,881,095.97 on account of Tranche C Term Loans under the
Senior Secured Credit Agreement provided that such Allowed Claims shall be
reduced to the extent (i) such Allowed Claims have been paid in Cash or (ii)
such Allowed Claims relate to letters of credit that have expired since the
Commencement Date and no related draw has been made thereunder. The New Senior
Secured Credit Agreement shall be substantially in the form as set forth in the
Plan Supplement. The following is a summary of the terms of the New Senior
Secured Credit Agreement and the New Facilities:
a. New Facilities.
(1) A Rollover Facility in an aggregate principal amount of
$94,841,522.84, which amount includes unreimbursed letter of credit
disbursements and issued but undrawn letters of credit (the "Rollover
Facility"). Letters of Credit outstanding under the Rollover Facility
will remain outstanding and will be subject to renewal as described
below under "Letters of Credit."
(2) A Tranche B Term Loan Facility in an aggregate principal
amount of $45,622,662.79 (the "New Tranche B Facility").
(3) A Tranche C Term Loan Facility in an aggregate principal
amount of $45,622,663.05 (the "New Tranche C Facility" and, together
with the New Tranche B Facility, the "New Term Loan Facilities" and,
together with the Rollover Facility, are referred to herein as the
"New Facilities");
provided that such amounts shall be reduced, as appropriate, to take
into account the extent to which (i) such related Allowed Senior
Secured Claims have been paid in Cash or (ii) such related Allowed
Senior Secured Claims relate to letters of credit which have expired
since the Commencement Date and no related draw has been made
thereunder.
b. Purpose and Availability.
` (1) On the Effective Date, Tranche B Loans under the Senior
Secured Credit Agreement will become loans under the New Tranche B
Facility (without any additional loans being made by the Lenders under
the New Tranche B Facility). Amounts repaid or prepaid under the New
Tranche B Facility may not be reborrowed.
(2) On the Effective Date, Tranche C Loans under the Senior
Secured Credit Agreement will become loans under the New Tranche C
20
Facility (without any additional loans being made by the Lenders under
the New Tranche C Facility). Amounts repaid or prepaid under the New
Tranche C Facility may not be reborrowed.
(3) On the Effective Date, Revolving Loans under the Senior
Secured Credit Agreement will become loans under the Rollover Facility
pursuant to the Plan. Amounts repaid or prepaid under the Rollover
Facility may not be reborrowed.
(4) On the Effective Date, letters of credit outstanding under
the Senior Secured Credit Agreement will become letters of credit
under the Rollover Facility. No additional letters of credit will be
issued under the Rollover Facility. Any letter of credit rolled over
from the Senior Secured Credit Agreement may be renewed or extended if
(a) such letter of credit provides for automatic renewal by its terms
or (b) no increase is made in the aggregate face amount of such letter
of credit, in each case subject to the terms of such letter of credit
and the terms of the Rollover Facility. Such letters of credit will be
used by Reorganized Magellan solely for general corporate purposes and
may be renewed or extended up to the fifth business day prior to the
Maturity Date or the Extended Maturity Date, as applicable (each as
defined below).
c. Guarantees. All obligations of Reorganized Magellan under the New
Facilities and under interest rate protection agreements entered into with any
lender under the Tranche B Facility, Tranche C Facility or the Rollover Facility
(the "New SSA Lenders") (or any affiliate of any New SSA Lender) will be
unconditionally guaranteed (the "Guarantees") by each wholly owned subsidiary of
Reorganized Magellan other than any foreign subsidiary (to the extent and for as
long as the guarantee by such foreign subsidiary would cause adverse tax
consequences to Reorganized Magellan) and any subsidiary for which the giving of
a Guarantee would violate applicable law, or any regulation, rule, order,
approval, license or other restriction issued or imposed by any governmental
authority or for which such guaranty would cause any net worth or net equity
requirement or similar calculation or requirement imposed by any law or any
regulation, rule, order, approval, license or other restriction issued or
imposed by any governmental authority not to be satisfied (collectively, the
"Guarantors").
d. Security. The New Facilities, the Guarantees and any interest rate
protection agreements entered into with any New SSA Lender (or any affiliate of
any New SSA Lender) will be secured by substantially all the assets of
Reorganized Magellan and each Guarantor (collectively, the "Collateral").
All pledges, security interests and mortgages related to the
Collateral shall be created on terms, and pursuant to documentation, reasonably
satisfactory to the Administrative Agent, and, subject to customary limited
exceptions to be agreed upon, none of the Collateral shall be subject to any
other pledges, security interests or mortgages, except in respect of certain
obligations owing to Aetna as described below.
e. Letters of Credit. On the Effective Date, letters of credit
outstanding under the Senior Secured Credit Agreement will be automatically
deemed to be letters of credit issued under the Rollover Facility. No additional
letters of credit shall be issued under the Rollover Facility. Any letter of
credit rolled over from the Senior Secured Credit Agreement may be renewed or
extended if (a) such letter of credit provides for the automatic renewal by its
terms or (b) no increase is made in the aggregate face amount of such letter of
credit, in each case subject to the terms of such letter of credit and the terms
of the Rollover Facility.
21
Each letter of credit renewed or extended under the Rollover Facility
will be issued by the Issuing Bank under the New Senior Secured Credit Agreement
that issued such letter of credit under the Senior Secured Credit Agreement.
Each letter of credit shall expire no later than the earlier of (a) 12 months
after its date of issuance and (b) the fifth business day prior to the Maturity
Date or the Extended Maturity Date (as defined below), as applicable.
To the extent that there are drawings under any letter of credit
under the Rollover Facility, each New SSA Lender under the Rollover Facility
shall be irrevocably obligated to pay to the Administrative Agent, for the
account of such Issuing Bank, its pro rata percentage of such letter of credit
drawing (based upon their respective Rollover Facility loans) and the amount
paid to such Issuing Bank shall be added to the principal amount of the Rollover
Facility.
The issuance of a letter of credit by an Issuing Bank shall be
subject to the customary procedures, and reimbursement of the customary costs,
of such Issuing Bank.
f. Maturity and Amortization. Except as provided below, each of the
New Facilities will mature on November 30, 2005 (the "Maturity Date"). In the
event that either (1) Aetna waives its rights under Sections 7.E and 8.C.ii of
the Aetna Amended MSA (which prohibits Magellan from extending the maturity of
the New Facilities beyond November 30, 2005 under certain circumstances) or (2)
the Required Lenders have agreed in writing to the release of their liens on the
Purchased Assets (as defined in the Aetna Amended MSA), to the crediting or
offsetting of any obligations of Aetna under the Aetna Purchase Option against
any obligations of Reorganized Magellan under the New Aetna Note and to such
other covenant waivers as may be necessary in order to permit the consummation
of the Aetna Purchase Option, then Reorganized Magellan shall be permitted to
extend the Maturity Date to a date not later than November 30, 2006 (as so
extended, the "Extended Maturity Date") if Reorganized Magellan shall have
satisfied the conditions set forth in the New Senior Secured Credit Agreement.
Reorganized Magellan shall be required to make the following
amortization payments, payable in quarterly installments:
DATE TOTAL PRINCIPAL PAYMENT
- ------------------------------ --------------------------------
March 31, 2004 $7,000,000
June 30, 2004 $7,000,000
September 30, 2004 $7,000,000
December 31, 2004 $7,000,000
March 31, 2005 $12,000,000
June 30, 2005 $12,000,000
September 30, 2005 $12,000,000
November 30, 2005 Balance
- ------------------------------ --------------------------------
; provided, however, that in the event the maturity of the New Facilities is
extended to the Extended Maturity Date, (a) no amortization payment shall be due
and payable on November 30, 2005, (b) on the last day of each fiscal quarter
ending after the Maturity Date but prior to the Extended Maturity Date an
amortization payment of $15,000,000 shall be due and payable and (c) the entire
remaining principal amount outstanding under the New Facilities shall be due and
payable on the Extended Maturity Date.
22
The aggregate amount of amortization for each period set forth above
shall be allocated among the New Facilities on a pro rata basis (determined
using (x) the aggregate principal amount of loans outstanding under each of the
New Term Loan Facilities and the Rollover Facility on the Effective Date and (y)
the aggregate amount of unreimbursed letter of credit disbursements and the
aggregate face amount of undrawn letters of credit, in each case, on the
Effective Date) and shall be applied to repay loans outstanding under the New
Facilities. In the event the amount allocated to the Rollover Facility exceeds
the aggregate amount of loans thereunder outstanding on the date of such
payment, such excess (i) shall be deposited in an account with the
Administrative Agent and held as cash collateral in respect of reimbursement
obligations under letters of credit at 105% of the face amount thereof, and (ii)
after the application described in clause (i), any excess shall be allocated
among outstanding loans under the New Term Loan Facilities on a pro rata basis
(determined using the aggregate principal amount of loans outstanding under each
of the New Term Loan Facilities on the Effective Date).
To the extent any letter of credit issued under the New Senior
Secured Credit Agreement terminates, is terminated, is reduced or expires prior
to the final maturity of the Rollover Facility, and the beneficiary thereof does
not make a draw thereunder, the amount of such letter of credit shall be
credited to Reorganized Magellan's obligations to pay any amounts on account of
the Rollover Facility pursuant to the amortization schedule set forth above or
otherwise in the order in which such obligations arise.
g. Mandatory Prepayments. Loans under the New Facilities shall be
prepaid from asset sale proceeds and debt issuances as more fully described in
the New Senior Secured Credit Agreement. The aggregate amount of any mandatory
prepayment shall be allocated among the New Facilities on a pro rata basis
(determined using (x) the aggregate principal amount of loans outstanding under
each of the New Term Loan Facilities and the Rollover Facility on the Effective
Date and (y) the aggregate amount of unreimbursed letter of credit disbursements
and the aggregate face amount of undrawn letters of credit, in each case, on the
Effective Date) and shall be applied to reduce the remaining amortization
amounts described above under "Maturity and Amortization" in the inverse order
of maturity against the remaining payments. In the event the amount allocated to
the Rollover Facility exceeds the aggregate amount of loans thereunder
outstanding on the date of such prepayment, such excess (i) shall be deposited
in an account with the Administrative Agent and held as cash collateral in
respect of reimbursement obligations under letters of credit at 105% of the face
amount thereof and (ii) after the application described in clause (i), any
excess shall be allocated among outstanding loans under the New Term Loan
Facilities on a pro rata basis (determined using the aggregate principal amount
of loans outstanding under each of the New Facilities on the Effective Date).
h. Cash Interest Rates. The cash interest rate under the New
Facilities will be ABR plus 3.25% per annum, payable quarterly. ABR is the
Alternate Base Rate, which is the higher of the Prime Rate and the Federal Funds
Effective Rate plus 1/2 of 1%.
i. Pay-in-Kind Interest. In the event that the Maturity Date is
extended to the Extended Maturity Date, interest will accrue on the New
Facilities, in addition to the cash interest described above, from and including
the Maturity Date to the Extended Maturity Date at a rate equal to 3.00% per
annum, which additional interest shall be payable in the form of additional
principal obligations under each of the respective New Facilities.
j. Fees. 1.00% of the aggregate amount of the New Facilities payable
to the Administrative Agent, for the account of the New SSA Lenders, on the
Effective Date, which shall be payable to the New SSA Lenders on a pro rata
basis based upon their respective (x) loans outstanding under each of the New
23
Term Loan Facilities and the Rollover Facility on the Effective Date and (y)
amount of unreimbursed letter of credit disbursements and amount of undrawn
letters of credit, in each case on the Effective Date.
k. Letter of Credit Fee. A per annum fee equal to 4.25% will accrue
on the aggregate face amount of outstanding letters of credit under the Rollover
Facility, payable in arrears at the end of each quarter and upon the termination
of the Rollover Facility. In addition, Reorganized Magellan shall pay to the
Issuing Bank, for its own account, (a) a fronting fee equal to 0.125% per annum
on the aggregate face amount of outstanding letters of credit, payable in
arrears at the end of each quarter and upon the termination of the Rollover
Facility, in each case for the actual number of days elapsed over a 360-day
year, and (b) customary issuance and administration fees.
l. Covenants. The New Senior Secured Credit Agreement shall contain
affirmative and negative covenants usual for facilities and transactions of this
type and others to be reasonably specified by the Administrative Agent (to be
applicable to Reorganized Magellan and its subsidiaries) all as more fully set
forth in the New Senior Secured Credit Agreement.
Class 1 is impaired and entitled to vote to accept or reject the
Plan.
2. Other Secured Claims (Class 2)
The Claims in this Class (Other Secured Claims) consist of the Claims
of miscellaneous creditors secured under equipment leases, mechanics and tax
liens, liens of landlords on accounts, or similar Claims. For purposes of the
Plan, each holder of a Claim secured by distinct property will be treated as
being in a separate subclass of Class 2. Proofs of claim evidencing
approximately $55.8 million of Claims have alleged that they were part of this
Class. Most of the filed claims were incorrectly classified, were duplicate
filings or relate to equipment leases the Debtors will assume. The Debtors
estimate that the Claims in this Class are approximately $1.0 million.
At the sole option of the Reorganized Debtors, the Reorganized
Debtors will pay these Secured Claims in full, reinstate the debt, return the
collateral (or proceeds of the sale thereof), or provide periodic cash payments
having a present value equal to the value of the secured creditor's interest in
the Debtors' property. Any Claims in this Class that the Debtors choose to pay
in full shall be paid on the Effective Date by the Debtors. To the extent the
Claim of a creditor exceeds the value of the collateral in which it has an
interest, such excess will become part of Class 9 (Other General Unsecured
Claims). To the extent a Secured Claim accrues interest under applicable local
law and the holder of such Claim is entitled to interest based on the value of
the collateral, such Secured Claim will include interest.
The holders of Claims in Class 2 are not impaired and are not
entitled to vote to accept or reject the Plan.
3. Priority Non-Tax Claims (Class 3)
The Claims in this Class (Priority Non-Tax Claims) are the types
identified in section 507(a) of the Bankruptcy Code that are entitled to
priority in payment (other than Administrative Expense Claims and Priority Tax
Claims). For the Debtors, these Claims relate primarily to prepetition wages and
employee benefit plan contributions that had not yet been paid as of the
Commencement Date. Most of these Claims have already been paid by the Debtors
pursuant to an order entered by the Bankruptcy Court on the Commencement Date.
Approximately $178 million of Claims were either scheduled on the Debtors'
24
Schedules or asserted in filed proofs of claim. Most of the filed claims were
incorrectly classified, or were duplicate filings. The Debtors estimate that the
aggregate allowed amount of the Claims in this Class remaining unpaid as of the
Effective Date will be less than approximately $2.7 million. Except to the
extent that a holder of an Allowed Priority Non-Tax Claim has agreed to a
different treatment of such Claim, each such holder shall receive, in full
satisfaction of such Claim, Cash in an amount equal to such Claim, on, or as
soon as reasonably practicable after, the later of (i) the Effective Date, (ii)
the date such Claim becomes Allowed, and (iii) the date for payment provided by
any agreement or understanding between the applicable Debtors and the holder of
such Claim.
The holders of Claims in Class 3 are not impaired and are not
entitled to vote to accept or reject the Plan.
4. Aetna Claim (Class 4)
The Claim in this Class (the Aetna Claim) will, as of the Effective
Date, total approximately $62,700,000 (which includes accrued and unpaid
interest of approximately $2,700,000). The Claim is based on amounts owed by
Magellan under Section 7 of the Aetna Master Service Agreement. On the Effective
Date, Aetna, as the holder of the Aetna Claim, which Claim is irrevocably deemed
Allowed under the Plan, shall receive, on account of such Claim and on account
of Aetna's rights under the Aetna Amended MSA: (a) $15 million in Cash, (b) the
New Aetna Note, in the principal amount of $45 million plus an amount equal to
interest on $60 million from February 15, 2003 through and including the
Effective Date at the interest rate set forth in the New Aetna Note, (c) the New
Aetna Warrant and (d) the rights provided for under the Aetna Registration
Rights Agreement. Moreover, the Confirmation Order shall confirm that the Aetna
Amended MSA and all documents and instruments related thereto (which documents
were previously assumed by the Debtors pursuant to an Order of the Bankruptcy
Court) shall be binding on the Reorganized Debtors.
Class 4 is impaired and entitled to vote to accept or reject the
Plan.
5. Provider Claims (Class 5)
The Claims in this Class (Provider Claims) are Claims against
Magellan and/or the other Debtors for Claims of Providers. Most of these
Provider Claims have already been paid by the Debtors pursuant to an order
entered by the Bankruptcy Court on the Commencement Date. Each holder of an
Allowed Provider Claim shall be paid in the ordinary course of the business of
the Reorganized Debtors.
The holders of Claims in Class 5 are not impaired and are not
entitled to vote to accept or reject the Plan.
6. Customer Claims (Class 6)
The Claims in this Class (Customer Claims) are Claims against
Magellan and/or its debtor-subsidiaries for amounts due under service contracts
(or any guarantees relating to such service contracts) between Magellan and/or
its subsidiaries and their customers (i.e., insurance companies, corporate
clients and others who pay Magellan and/or its subsidiaries for services) for,
among other charges, profit sharing, reimbursement, performance penalties,
retroactive membership adjustments, indemnification, claims for damages and
other payments. Customer Claims do not include the Aetna Claim or any Claims
related to service contracts for which a notice of termination had been received
by Magellan or any of its subsidiaries (which Claims (other than the Aetna
Claim) will be treated under Class 9) on or before the Commencement Date. Most
of these Customer Claims have already been paid by the Debtors pursuant to an
25
order entered by the Bankruptcy Court on the Commencement Date. Each holder of
an Allowed Customer Claim shall be paid in the ordinary course of the business
of the Reorganized Debtors. To the extent any Debtor has guaranteed the payment
of any Customer Claims, such guarantee shall remain in full force and effect.
The holders of Claims in Class 6 are not impaired and are not
entitled to vote to accept or reject the Plan.
7. Senior Note Claims (Class 7)
The total amount of Claims in this Class (Senior Notes Claims) is
$258.4 million which includes approximately $8.4 million of interest accrued
through the Commencement Date. Each holder of an Allowed Senior Note Claim will
receive its Ratable Proportion of (a) the Note Claim Percentage of the Cash
Distribution Amount and (b) New Notes equal to (x) the amount of the Senior Note
Claims (including any interest that would have accrued on the Senior Notes
through the Effective Date but for the Commencement Date at a rate of 10 3/8%
per annum) less (y) the Cash payment described in (a) above. Based on the
assumptions set forth herein and the estimates of the Claims contained herein,
the holders of the Senior Note Claims are estimated to receive New Notes in the
aggregate principal amount of $250 million and Cash of $22.7 million. In
addition, the Reorganized Debtors may distribute up to $23.4 million in
additional Cash to holders of Allowed Senior Note Claims which will reduce the
principal amount of the New Notes distributable to such holders on a dollar for
dollar basis. The distribution made to the holders of the Senior Subordinated
Note Claims gives full effect to the enforcement of the subordination provisions
of the Senior Subordinated Note Indenture. The New Notes issued to Class 7
(Senior Note Claims) will be the "Series A New Notes" which is of a different
series than those issued to the holders of Class 9 Claims (Other General
Unsecured Claims) and to Houlihan Lokey pursuant to Section 5.17 of the Plan.
The Senior Note Claims are Allowed in full under the Plan.
Class 7 is impaired and entitled to vote to accept or reject the
Plan.
8. Senior Subordinated Note Claims (Class 8)
The total amount of Claims in this Class (Senior Subordinated Note
Claims) is $657.2 million which includes approximately $32.2 million of interest
accrued through the Commencement Date. Each holder of an Allowed Senior
Subordinated Note Claim shall receive (i) its Ratable Proportion of a number of
shares of New Common Stock equal to the product of the Class 8/Class 9
Distributable Share Amount and the Note Claim Percentage, subject to the Partial
Cash-Out Election as described in Section 4.8(b) of the Plan, and (ii) the right
to participate in the Equity Subscription Rights on the terms set forth in
Section 9 of the Plan. Based on the assumptions set forth herein and the
estimates of the Claims contained herein, the holders of Allowed Senior
Subordinated Note Claims are estimated to receive approximately 8,997,664 shares
of New Common Stock, and the right to purchase 2,428,067 shares of New Common
Stock in the Equity Offering at a price of $28.50 per share. The distribution
made to the holders of the Senior Subordinated Note Claims gives full effect to
the enforcement of the subordination provisions of the Senior Subordinated Note
Indenture. The Senior Subordinated Note Claims are Allowed in full under the
Plan.
Subject to the limitations set forth herein, each holder of an
Allowed Senior Subordinated Note Claim in Class 8 or an Allowed Other General
Unsecured Claim in Class 9 shall have the right to elect to receive Cash in lieu
of New Common Stock to be distributed to such holder pursuant to Section
4.8(a)(i) or 4.9(a)(i)(C) of the Plan in Cash at a price of $22.50 per share.
Subject to the next two succeeding sentences, such holder electing to receive a
26
Cash payment in lieu of shares of New Common Stock that such holders are
otherwise entitled to receive may only make such an election in respect of all
(but not less than all) of such shares. Such election shall be made on the
Ballot in accordance with the instructions set forth thereon. To the extent that
holders of Allowed Senior Subordinated Note Claims and Allowed Other General
Unsecured Claims (and Disputed Other General Unsecured Claims, assuming that
such Disputed Other General Unsecured Claims are Allowed as of the Effective
Date) have made Partial Cash-Out Elections such that more than $50 million would
be required to be paid out in lieu of shares of New Common Stock, each holder of
an Allowed Senior Subordinated Note Claim and an Allowed Other General Unsecured
Claim making the Partial Cash-Out Election will receive its pro rata portion
(based on the aggregate amount of Claims making such election) of $50 million
and will be issued a number of shares of New Common Stock equal to (1) the
number of shares such holder would have otherwise been entitled to receive less
(2) a number of shares equal to (A) such holder's Cash payment received divided
by (B) $22.50.
9. Other General Unsecured Claims (Class 9)
The total amount of Claims in this Class (Other General Unsecured
Claims) that were timely filed against the Debtors (including those claims
improperly classified in other Classes) are approximately $444.5 million of
which approximately $98 million were duplicate claims and approximately $ 39
million were improperly classified. The Debtors also have various objections to
other Claims in this Class. The Debtors estimate the ultimate Allowed amount of
Claims in this Class will be approximately $69.4 million based on the following:
INSTRUMENT ESTIMATED ALLOWED AMOUNT
- ------------------------------------------------------- ------------------------
Ordinary course Claims from vendors and suppliers $ 9.9 million
Claims from rejection Claims from executory contracts $4.0 million
and unexpired leases
Unclaimed Property Claims $ 10.0 to 29.1 million
Litigation and other unliquidated Claims $ 0 to 46.6 million
Other Claims $1.7 million
TOTAL $ 25.6 TO 91.3 MILLION (2)
Except to the extent that an Allowed Other General Unsecured Claim is
an Insured Claim, for each $1,000 of Allowed Other General Unsecured Claims, the
holder thereof will receive: (i) (A) a principal amount of New Notes equal to
the Note Distribution Amount, (B) such holder's Ratable Proportion of the Other
General Unsecured Claim Percentage of the Cash Distribution Amount and (C) such
holder's Ratable Proportion of shares of New Common Stock equal to the product
of the Other General Unsecured Claim Percentage and Class 8/Class 9
Distributable Share Amount, subject to the Partial Cash-Out Election as
described in Section 4.9(b) of the Plan, and (ii) the right to participate in
the Equity Subscription Rights on the terms set forth in Section 9 of the Plan.
Based on the assumptions set forth herein and the estimates of the
Claims contained herein, each holder of $1,000 of Allowed Other General
Unsecured Claims will receive:
- --------------------
(2) This number represents a range up to a number of total Other General
Unsecured Claims that would result in no more than $300 million of New Notes
being issued pursuant to the Plan (before giving effect to the payment of Cash,
which results in a reduction in the principal amount of New Notes).
27
(1) New Notes in the aggregate amount of approximately $273.06;
(2) Cash in a minimum amount of $24.78 (any additional Cash
distributed in excess of $24.78 will reduce the principal amount of the New
Notes distributed to such holder);
(3) approximately 9.8276 shares of New Common Stock (which has an
implied value of $236.84 using a per share valuation of $24.10), subject to the
Partial Cash-Out Election. and
(4) the right to participate in the Equity Subscription Rights on the
terms set forth in Section 9 of the Plan.
In addition, based on the assumptions set forth herein and the
estimates of the Claims contained herein, the holders of Allowed Other General
Unsecured Claims are estimated to receive, in the aggregate, New Notes in an
aggregate principal amount of $18.9 million, Cash in the aggregate amount of
$1.7 million, an aggregate of approximately 681,557 shares of New Common Stock,
and the right to purchase an aggregate of 183,992 shares of New Common Stock in
the Equity Offering at a price of $28.50 per share. In addition, the Reorganized
Debtors may distribute up to $1.8 million in additional Cash to holders of
Allowed Other General Unsecured Claims, which will reduce the principal amount
of the New Notes distributable to such holders on a dollar for dollar basis. The
New Notes issued to Class 9 (Other General Unsecured Claims) will be the "Series
B New Notes" which is of a different series than those issued to the holders of
Class 7 Claims (Senior Note Claims).
Subject to the limitations set forth herein, each holder of an
Allowed Senior Subordinated Note Claim in Class 8 or an Allowed Other General
Unsecured Claim in Class 9 shall have the right to elect to receive Cash in lieu
of New Common Stock to be distributed to such holder pursuant to Sections
4.8(a)(i) or 4.9(a)(i)(C) of the Plan in Cash at a price of $22.50 per share.
Subject to the next two succeeding sentences, such holder electing to receive a
Cash payment in lieu of shares of New Common Stock that such holders are
otherwise entitled to receive may only make such an election in respect of all
(but not less than all) of such shares. Such election shall be made on the
Ballot in accordance with the instructions set forth thereon. To the extent that
holders of Allowed Senior Subordinated Note Claims and Allowed Other General
Unsecured Claims (and Disputed Other General Unsecured Claims, assuming that
such Disputed Other General Unsecured Claims are Allowed as of the Effective
Date) have made Partial Cash-Out Elections such that more than $50 million would
be required to be paid out in lieu of shares of New Common Stock, each holder of
an Allowed Senior Subordinated Note Claim and an Allowed Other General Unsecured
Claim making the Partial Cash-Out Election will receive its pro rata portion
(based on the aggregate amount of Claims making such election) of $50 million
and will be issued a number of shares of New Common Stock equal to (1) the
number of shares such holder would have otherwise been entitled to receive less
(2) a number of shares equal to (A) such holder's Cash payment received divided
by (B) $22.50.
Magellan believes, based on Other General Unsecured Claims filed as
of June 27, 2003 that, if all Disputed Other General Unsecured Claims were
Allowed, the New Notes required to be issued pursuant to the Plan will not
exceed $300 million less the Cash Distribution Amount. Based on an assumed
Effective Date of September 30, 2003, the Allowed Other General Unsecured Claims
must be no more than $91.3 million in order for the amount of the New Notes not
to exceed $300 million less the Cash Distribution Amount. To the extent that the
Debtors would be required to issue more than such amount of New Notes, assuming
all Disputed Other General Unsecured Claims were Allowed, the Debtors reserve
the right to bring proceedings against the holders of some Disputed Other
General Unsecured Claims to determine the extent to which they will be Allowed
or estimated for purposes of capping the distributions available.
28
A holder of an Allowed Other General Unsecured Claim that is an
Insured Claim shall be paid in the ordinary course of the business of the
Reorganized Debtors to the extent that such Claim is insured and shall have an
Allowed Other General Unsecured Claim to the extent the applicable insurance
policy does not provide coverage with respect to any portion of such Insured
Claim.
The holders of Claims in Class 9 are impaired and entitled to vote to
accept or reject the Plan.
10. Convenience Claims (Class 10)
The Debtors estimate that over 4,300 prepetition unsecured creditors
have Claims of $500 or less. For purposes of administrative convenience, and in
accordance with section 1122(b) of the Bankruptcy Code, the Plan provides that
each holder of an Other General Unsecured Claim whose Claim is allowed in the
amount of $500 or less (or reduces its Claim, when voting on the Plan, to $500),
will receive a Cash distribution in the amount of its Allowed Claim rather than
participating in the distributions for Class 9. The Debtors estimate that there
are Allowed Claims aggregating approximately $0.8 million that are $500 or below
and that up to an additional 600 holders of Allowed Claims between $500 and
$1,000 may reduce their Claims to $500 (representing additional payments of $0.3
million on account of Allowed Claims of approximately $0.4 million), in each
case which will fall within this Class. As a result of the fact that a
substantial portion of the Convenience Claims relate to unclaimed property, the
Debtors believe that a large portion of the Cash payments to be made to this
Class will revest in the Debtors pursuant to Section 6.6 of the Plan.
Class 10 is not impaired and not entitled to vote to accept or reject
the Plan.
11. Intercompany Claims of the Debtors (Class 11)
The Claims in this Class (Intercompany Claims) consist of the Claims
held by Magellan or a wholly-owned subsidiary of Magellan against Magellan or
another wholly-owned Debtor. Unless the Debtors agree otherwise, Intercompany
Claims will be reinstated. These Intercompany Claims will not receive any of the
property distributed to other claimholders under the Plan.
Class 11 is not impaired and not entitled to vote to accept or reject
the Plan.
12. Subsidiary Equity Interests (Class 12)
Class 12 consists of all Equity Interests of the Debtors that are
subsidiaries of Magellan. All of the Subsidiary Equity Interests will be
reinstated under the Plan.
Class 12 is not impaired and not entitled to vote to accept or reject
the Plan.
13. Magellan Preferred Stock Interests (Class 13)
Class 13 consists of the Series A Redeemable Preferred Stock of
Magellan with an aggregate preference amount of $72.9 million (which includes
$13.8 million of accrued and unpaid dividends). The holders of the Magellan
Preferred Stock outstanding as of the Distribution Record Date shall receive
their Ratable Proportion of (a) the Class 13 Distributable Share Amount of
shares of New Common Stock (or 198,548 shares) and (b) New Warrants to purchase
a number of shares of New Common Stock equal to the Class 13 Distributable Share
Amount (or 198,548 shares). If Class 8 or Class 9 votes to reject the Plan,
pursuant to the Bankruptcy Code, Class 13 will not be entitled to any
distribution.
29
Class 13 is impaired and entitled to vote on the Plan. If Class 8 or
Class 9 votes to reject the Plan, Class 13 will be deemed to reject the Plan.
14. Magellan Common Stock Interests (Class 14)
Class 14 consists of all Equity Interests in Magellan represented by
its common stock, $0.01 par value. As of the Commencement Date, there were
35,318,926 shares of Magellan Common Stock outstanding. The holders of the
Magellan Common Stock outstanding as of the Distribution Record Date shall
receive their Ratable Proportion of (a) the Class 14 Distributable Share Amount
of shares of New Common Stock equal to 0.5% of the New Common Stock to be issued
on the Effective Date (or 49,637 shares) and (b) New Warrants to purchase a
number of shares of New Common Stock equal to the Class 14 Distributable Share
Amount (or 49,637 shares). If Class 8 or Class 9 votes to reject the Plan,
pursuant to the Bankruptcy Code, Class 14 will not be entitled to any
distribution.
Class 14 is impaired and entitled to vote on the Plan. If Class 8 or
Class 9 votes to reject the Plan, Class 14 will be deemed to reject the Plan.
D. ENFORCEMENT OF SUBORDINATION PROVISIONS
The distributions under the Plan of Reorganization to holders of
Allowed Senior Note Claims and Allowed Senior Subordinated Note Claims take into
account the contractual subordination provisions relating to such. Therefore,
the distributions to holders of Allowed Senior Note Claims in Class 7 are
adjusted to reflect the turnover by the holders of the Allowed Senior
Subordinated Note Claims of all of the New Notes to which they otherwise would
be entitled under the Plan of Reorganization to the holders of the Allowed
Senior Note Claims; and the distributions to the holders of the Allowed Senior
Subordinated Note Claims are adjusted to reflect the turnover to them of all the
shares of New Common Stock to which the holders of the Allowed Senior Note
Claims would otherwise be entitled under the Plan of Reorganization.
Accordingly, after the recognition and implementation of the
contractual subordination as provided above, the distributions to the holders of
Claims in Class 8 shall not be subject to levy, garnishment, attachment or other
legal process by any holder of indebtedness senior to the indebtedness of the
holders of the Claims by reason of claimed contractual subordination rights. On
the Effective Date, all creditors shall be deemed to have waived any and all
contractual subordination rights that they may have with respect to such
distribution, and the Confirmation Order shall permanently enjoin, effective as
of the Effective Date, all holders of senior indebtedness from enforcing or
attempting to enforce any such rights with respect to the distributions under
the Plan of Reorganization to the holders of Claims in Class 8.
E. NON-CASH PROPERTY TO BE DISTRIBUTED UNDER THE PLAN
1. New Senior Secured Credit Agreement
If Reorganized Magellan does not elect to pay the Class 1 Claims in
full, Reorganized Magellan will become obligated under the New Senior Secured
Credit Agreement. See section II.C.1 herein for a description of the New Senior
Secured Credit Agreement and the New Facilities. A form of the agreement will be
included in the Plan Supplement.
30
2. New Notes
Reorganized Magellan will issue up to approximately $275,000,000 of
New Notes on the Effective Date. New Notes will be issued to Houlihan Lokey on
account of their success fee as set forth in its engagement letter with
Magellan. See section II.I.4 herein.
The New Notes will be unsecured obligations solely of Reorganized
Magellan and shall not be guaranteed by any of Reorganized Magellan's
subsidiaries. The New Notes shall bear interest at the rate of 9-?% per annum
and will have a final maturity of November 15, 2008. The New Notes shall be
subordinated solely to the New Senior Secured Obligations, if issued under
Section 4.1(a)(i) of the Plan, and the obligations under the Exit Financing;
provided that Reorganized Magellan agrees to use its reasonable best efforts to
cause the Exit Financing to have terms that do not require that the New Senior
Notes be contractually subordinated to any debts or claims. Otherwise, the New
Notes will not be contractually subordinated to any debts or claims. The
interest payment dates shall be the same dates as interest is paid on the
existing Senior Notes. The New Notes shall have substantially the same terms as
the existing Senior Notes. The New Notes issued to Class 7 (Senior Note Claims)
will be of a different series than those issued to the holders of Class 9 (Other
General Unsecured Claims) and to Houlihan Lokey pursuant to the Plan. The New
Notes issued to Class 7 (Senior Note Claims) will be the Series A Notes, and the
New Notes issued to Class 9 (Other General Unsecured Claims) and to Houlihan
Lokey will be the Series B Notes. The New Notes will be issued under an
indenture qualified under the Trust Indenture Act of 1939. A form of the
indenture will be included in the Plan Supplement.
3. New Warrants
Reorganized Magellan will be authorized to issue warrants
representing 2.5% of the New Common Stock issued on the Effective Date (without
regard to the New Common Stock issued upon exercise of the Equity Subscription
Rights, the Investment, the New Warrants, the New Management Incentive Plan, and
the New Aetna Warrants) or approximately 248,185 shares. The New Warrants shall
expire on the seventh anniversary of the Effective Date and shall have an
exercise price equal to $625 million divided by the number of shares of New
Common Stock issued to holders of Senior Subordinated Note Claims under the Plan
(without regard to the New Common Stock issued upon exercise of the Equity
Subscription Rights or the Investment) (or approximately $69.46 per share). The
New Warrants will be subject to customary anti-dilution adjustments, such as for
stock splits, combinations, stock dividends, and similar transactions. A form of
the warrant agreement will be included in the Plan Supplement.
4. New Aetna Warrant
Reorganized Magellan will be authorized to issue a warrant to
purchase a number of shares of New Common Stock equal to 1.0% of the New Common
Stock to be issued on the Effective Date (without regard to the New Common Stock
issued upon exercise of the Equity Subscription Rights, the Investment, the New
Warrants, the New Management Incentive Plan and the New Aetna Warrant) or
approximately 100,000 shares (assuming 10,000,000 shares of New Common Stock
outstanding as of the Effective Date). The New Aetna Warrant shall be
exercisable on or after January 1, 2006 and expire on the fifth anniversary of
the Effective Date and shall have an exercise price equal to the per share value
of the New Common Stock set forth in the Disclosure Statement (or approximately
$24.10 per share). A form of the New Aetna Warrant will be included in the Plan
Supplement.
31
5. New Common Stock and MVS Securities
Reorganized Magellan will be authorized to issue 30,000,000 shares of
common stock: both New Common Stock and MVS Securities in amounts to be
determined by Magellan and the Equity Investor. The MVS Securities and the New
Common Stock will be identical in all respects, except with respect to voting
and except that the MVS Securities will be convertible into New Common Stock, as
provided herein. In exchange for such investment, the Equity Investor shall
receive shares of MVS Securities on the Effective Date, which MVS Securities
shall be entitled to exercise 50% of the voting rights pertaining to all of
Reorganized Magellan's outstanding common stock (including the New Common Stock
and the MVS Securities). As a result of the Investment by the Equity Investor,
the MVS Securities will represent no less than 17.24% of the economic equity
interests in Reorganized Magellan. If no one participates in the Equity Offering
and the Partial Cash-Out Election is fully subscribed, the Equity Investor will
own apprximately 49% of the economic equity interests in Reorganized Magellan.
The MVS Securities shall be convertible into the same number of shares of New
Common Stock upon the transfer of the MVS Securities to any person other than
the Equity Investor, Onex, Onex Partners LP, a Delaware limited partnership
("Onex Partners"), or an entity controlled by Onex or Onex Partners (including a
change of control of any entity other than Onex or Onex Partners owning the MVS
Securities so that it is no longer controlled by Onex or Onex Partners). Onex
shall be deemed to control any entity controlled by Mr. Gerald W. Schwartz so
long as Mr. Schwartz controls Onex. All MVS Securities shall cease to have any
special voting rights (i.e., each share of MVS Securities and New Common Stock
shall have one vote per share and shall vote together on all matters submitted
to stockholders, including the election of all members of the Board of Directors
of Reorganized Magellan, as a single class) if the Minimum Hold Condition is, at
any time, not met. The MVS Securities and the New Common Stock will be separate
classes of common stock of Reorganized Magellan and will have separate
certificates and CUSIP numbers.
Approximately ten million shares of New Common Stock will be issued
as of the Effective Date to holders of Claims in Class 8 and Class 9 and Equity
Interests in Classes 13 and 14 (which amount includes shares of New Common Stock
that will be issued to Houlihan Lokey on account of its success fee as set forth
in its engagement letter). Approximately 248,185 shares will be reserved for the
exercise of the New Warrants and approximately 100,000 shares will be reserved
for the exercise of the New Aetna Warrant. An amount equal to 10% of the New
Common Stock issued pursuant to the Plan (inclusive of New Common Stock issued
pursuant to the Equity Offering and the Investment) (or 1,695,906 shares) will
be reserved for issuance upon the exercise of options or other stock-based
awards granted under the New Management Incentive Plan. Up to 2,631,579 shares
of New Common Stock will be issued in connection with the exercise of the Equity
Subscription Rights. In addition, in connection with the issuance of the MVS
Securities, up to 7,485,380 shares of New Common Stock will be issued in
conversion of the MVS Securities.
Pursuant to the terms of the Equity Commitment Letter and provided
that all conditions precedent set forth therein have been satisfied, the Equity
Investor shall purchase on the Effective Date: (i) 2,631,579 shares of MVS
Securities for a purchase price of $28.50 per share or $75,000,000 in the
aggregate, (ii) up to 2,631,579 shares of MVS Securities at a purchase price of
$28.50 per share to the extent the Equity Offering is not fully subscribed
pursuant to Section 9.7 and (iii) up to 2,222,222 shares of MVS Securities at a
price of $22.50 per share to the extent necessary to fully fund the Partial
Cash-Out Election (which is a maximum of $50 million). The Equity Investor shall
pay to Magellan, by wire transfer in immediately available funds on the
Effective Date and on one Business Day prior to the making of any payments
pursuant to the Partial Cash-Out Election, Cash in an amount equal to the
purchase price of MVS Securities to be purchased, all subject to the terms and
conditions set forth in the Equity Commitment Letter. See section II.I.4 herein.
32
The following chart lists the equity capitalization for Reorganized
Magellan as of the Effective Date before giving effect to the exercise of any
New Warrants and any options granted pursuant to the New Management Incentive
Plan if Classes 8 and 9 accept the Plan: IF CLASS 8 OR 9 REJECTS THE PLAN, THERE
WILL BE NO DISTRIBUTION TO CLASS 13 OR CLASS 14 AND, AS A RESULT, THE NEW COMMON
STOCK OTHERWISE DISTRIBUTABLE TO CLASS 13 AND CLASS 14 WILL BE DISTRIBUTED TO
CLASS 8 AND CLASS 9 AND NO NEW WARRANTS WILL BE ISSUED.
33
----------------------------------------------------------------------------------------------------------
SHARES DISTRIBUTED ON ACCOUNT OF CLAIMS
---------------------------------------
----------------------------------------------------------------------------------------------------------
------------------------------------------------------ ----------------------------- ---------------------
HOLDER NUMBER OF SHARES OF NEW %
COMMON STOCK
------------------------------------------------------ ----------------------------- ---------------------
Senior Subordinated Note Claim 8,997,664 90.6%
Other General Unsecured Claims 681,557 6.9%
Magellan Preferred Stock Interests 198,548 2.0%
Magellan Common Stock Interests 49,637 0.5%
TOTAL (BEFORE EQUITY OFFERING, INVESTMENT AND 9,927,406 100.00%
HOULIHAN LOKEY FEE)
------------------------------------------------------ ----------------------------- ---------------------
- ----------------------------------------------------------------------------------------------------------------------------------
POST EFFECTIVE DATE OWNERSHIP
-----------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- --------------------------- ------------------------------------ ------------- ------------------------------------ --------------
HOLDER NUMBER OF SHARES OF NEW COMMON % NUMBER OF SHARES OF NEW COMMON %
STOCK (AFTER CONVERSION OF MVS STOCK (AFTER CONVERSION OF MVS
SECURITIES) SECURITIES)
ASSUMING NO EXERCISE OF THE ASSUMING FULL EXERCISE OF THE
PARTIAL CASH-OUT ELECTION PARTIAL CASH-OUT ELECTION
- --------------------------- ------------------------------------ ------------- ------------------------------------ --------------
- ------------------------------------------------------------------------------------------------------------------------------------
PRIMARY SHARE OWNERSHIP
-----------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------- -------------------------- ----------- ------------------------------------- ---------
Senior Subordinated Note Claims 8,997,664 59.0% 6,931,918 45.4%
Other General Unsecured Claims 681,557 4.5% 525,080 3.4%
Magellan Preferred Stock Interests 198,548 1.3% 198,548 1.3%
Magellan Common Stock Interests 49,637 0.3% 49,637 0.3%
Equity Offering. To the extent these 2,631,579 17.2% 2,631,579 17.2%
shares are not purchased in the Equity
Offering, the Equity Investor will purchase
an equivalent number of MVS Securities
Equity Investor (but not on account of 2,631,579 17.2% 4,853,801 31.8%
backstop of the Equity Offering) in the
form of MVS Securities
Houlihan Lokey 72,594 0.5% 72,594 0.5%
TOTAL 15,263,158 (ALL SHARES) 100.00% 15,263,158 (ALL SHARES) 100.00%
- --------------------------------------------- -------------------------- ----------- ------------------------------------- ---------
- ------------------------------------------------------------------------------------------------------------------------------------
OPTIONS AND WARRANTS ISSUED IN CONNECTION WITH PLAN
---------------------------------------------------
Magellan Preferred Stock Interests 198,548 (upon exercise of the New 198,548 (upon exercise of the New
Warrants) Warrants)
Magellan Common Stock Interests 49,637 (upon exercise of the New 49,637 (upon exercise of the New
Warrants) Warrants)
Aetna (New Aetna Warrant) 100,000 (upon exercise of the New 100,000 (upon exercise of the New
Aetna Warrant) Aetna Warrant)
Management (New Management Incentive Plan) 1,695,906 (upon exercise of such 1,695,906 (upon exercise of such
options) options)
- --------------------------------------------- ------------------------------------ ------------- -----------------------------------
34
INVESTMENT
Pursuant to the terms of the Equity Commitment Letter and provided
that all conditions precedent set forth therein have been satisfied, the Equity
Investor shall purchase on the Effective Date: (i) 2,631,579 shares of MVS
Securities for a purchase price of $28.50 per share or $75,000,000 in the
aggregate, (ii) up to 2,631,579 shares of MVS Securities at a purchase price of
$28.50 per share to the extent the Equity Offering is not fully subscribed
pursuant to Section 9.7 and (iii) up to 2,222,222 shares of MVS Securities at a
price of $22.50 per share to the extent necessary to fully fund the Partial
Cash-Out Election (which is a maximum of $50 million). The Equity Investor shall
pay to Magellan, by wire transfer in immediately available funds on the
Effective Date and on one Business Day prior to the making of any payments
pursuant to the Partial Cash-Out Election, Cash in an amount equal to the
purchase price of MVS Securities to be purchased, all subject to the terms and
conditions set forth in the Equity Commitment Letter. Reorganized Magellan and
the other Reorganized Debtors are authorized to execute and deliver all
documents, agreements and other instruments necessary or desirable to effectuate
the same.
G. EXIT L/C FACILITY
In connection with the consummation of the Plan, the Debtors are
authorized to enter into financing arrangements with JPMorgan Chase Bank (and
other members of the bank group acceptable to Magellan) and one or more
financial institutions or other parties (the "Exit Issuers") to make available
to Reorganized Magellan letters of credit in an amount to be determined by
Reorganized Magellan and JP Morgan Chase Bank (the "Exit L/C Facility") which
shall be secured only by cash collateral in the amount equal to 105% of the
letters of credit issued under the Exit L/C Facility. Reorganized Magellan and
the other Reorganized Debtors are authorized to execute and deliver all
documents, agreements and other instruments necessary or desirable to effectuate
the same.
H. EXIT FINANCING
In connection with the consummation of the Plan and in lieu of the
New Senior Secured Obligations, the Debtors are authorized to enter into
financing arrangements with one or more financial institutions or other third
parties to make available to Reorganized Magellan and its subsidiaries term
loans, revolving credit loans and/or letters of credit (the "Exit Financing")
which may be guarantied by substantially all of the subsidiaries of Reorganized
Magellan and secured by substantially all of the assets of Reorganized Magellan
and its subsidiaries. The proceeds of the Exit Financing will be used to repay,
in full, the Senior Secured Lender Claims as specified in Section 4.1 of the
Plan, to provide working capital to Reorganized Magellan and its subsidiaries
and for general corporate purposes and letters of credit to be issued under the
Exit Financing as specified in Section 4.1 of the Plan; provided, however, that
as required by the terms of the Aetna Amended MSA, the Reorganized Debtors shall
not, and shall cause each of their affiliates not to, enter into or to agree or
commit to enter into any financing arrangement, or other agreement, contract,
arrangement or other transaction that would (A) result in the imposition or
continuance of any lien on any of the Purchased Assets (as defined in the Aetna
Asset Purchase Agreement) which would not be released upon the sale of the
Purchased Assets to Aetna or (B) prevent, alter or delay or conflict with any of
the transactions contemplated by the Aetna Amended MSA or the Aetna Asset
Purchase Agreement. Reorganized Magellan and the other Reorganized Debtors are
authorized to execute and deliver all documents, agreements and other
instruments necessary or desirable to effectuate the Exit Financing.
35
I. ADMINISTRATIVE EXPENSES AND PRIORITY TAX CLAIMS
To confirm the Plan, Administrative Expense Claims and allowed
Priority Tax Claims must be paid in full or in a manner otherwise agreeable to
the holders of those Claims. Administrative expenses are the actual and
necessary costs and expenses of the Debtors' chapter 11 cases. Those expenses
include, but are not limited to, postpetition salaries and other benefits for
employees, postpetition rent for facilities and offices, amounts owed to vendors
providing goods and services during the chapter 11 cases, postpetition
obligations to Providers and customers, tax obligations incurred after the
commencement of the chapter 11 cases, including interest, if applicable, under
relevant state law, and certain statutory fees and expenses. Other
administrative expenses include the actual, reasonable, and necessary
professional fees and expenses of the professionals retained by the Debtors and
the Official Committee, certain fees and expenses incurred in connection with
the Equity Commitment Letter, and litigation Claims arising after the
Commencement Date, once liquidated, to the extent not covered by insurance.
Postpetition litigation Claims covered by insurance, once liquidated, will be
paid in the ordinary course of the Debtors' business.
Consistent with the requirements of the Bankruptcy Code, the Plan
generally provides for allowed Administrative Expense Claims to be paid in full
on the later of the Effective Date and the first business day after the date
that is thirty (30) calendar days after the date such Administrative Expense
Claim becomes allowed, except for Administrative Expense Claims relating to
ordinary course of business transactions, which will be paid by the Debtors in
accordance with the past practice of the Debtors and in accordance with the
terms of the agreements governing or relating to such obligations. Allowed
Administrative Expense Claims relating to compensation of the professionals
retained by the Debtors or the Official Committee, or for the reimbursement of
expenses for certain members of the Official Committee will, unless otherwise
agreed by the claimant, be paid on the date on which an order allowing such
Administrative Expense Claim is entered.
Allowed Priority Tax Claims will be paid, at the option of the
Debtors, either (a) in full on the later of the Effective Date and the first
business day after the date that is thirty (30) days after the date such Claim
becomes allowed or (b) with interest at a fixed annual rate equal to 6% per
annum over a period not exceeding six (6) years from the date of assessment of
the tax. All Allowed Priority Tax Claims that are not due and payable on or
before the Effective Date will be paid in the ordinary course of business by the
Debtors as they come due. Valid liens of the holders of Allowed Priority Tax
Claims are not affected by the Plan.
1. Fees and Expenses of Professionals
The Debtors estimate that, subsequent to Commencement Date, various
professionals will file fee applications, for approximately $7 million,
excluding success fees, assuming the Effective Date is September 30, 2003.
Professional fees are subject to review and approval by the Bankruptcy Court.
2. Payments to Healthcare Partners, Inc
Magellan engaged Healthcare Partners Inc. ("HPI") as their management
consultants. HPI is a newly formed entity that specializes in providing
management and other business consulting services to healthcare and managed care
companies. Mr. Shulman and Dr. Lerer are principals and Mr. Kudla and Ms. Mezin
are consultants (each an "Officer" and, collectively referred to herein as, the
"Officers"). Magellan entered into (i) that certain letter agreement, dated
December 3, 2002, among Magellan, HPI, Steven J. Shulman, and Dr. Rene Lerer and
(ii) Schedule B to the letter agreement executed by Magellan, Keith Kudla and
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Danna Mezin (collectively, the "HPI Engagement Letter"). Pursuant to the HPI
Engagement Letter, HPI made available to the Debtors the services of the
Officers, with Mr. Shulman serving as Chief Executive Officer of the Debtors. On
January 8, 2003, Mr. Shulman appointed Dr. Lerer as Chief Operating Officer of
Magellan.
Prior to the date of the HPI Engagement Letter, Daniel S. Messina
resigned as Chief Executive Officer of Magellan. Due to the size of the Debtors'
operations and the complexity of their attendant financial difficulties, at that
time, the Debtors determined that they needed to augment their existing
management and, most importantly, hire a new Chief Executive Officer. The
Debtors also determined that extensive management experience in the healthcare
field was a prerequisite to the hiring of any new management. After an extensive
interview process, during which other candidates were interviewed and
considered, the Debtors, together with their financial and legal consultants,
selected HPI and the Officers to augment their management team and entered into
the HPI Engagement Letter.
During the term of the HPI Engagement Letter, the Chief Executive
Officer and the other Officers have devoted, and will devote, substantially all
of their business time and efforts to the services and duties set forth in the
engagement letter, except that the Officers may serve on boards of directors and
advisory boards of other companies provided that such services do not interfere
with their obligations to the Debtors.
The HPI Engagement Letter provides that HPI will charge the Debtors a
monthly fee of $250,000, as well as reimbursement for reasonable out-of-pocket
expenses incurred in connection with the engagement. In addition, as is more
particularly set forth in the HPI Engagement Letter, HPI will be entitled to
receive a performance-based success bonus which could be as much as $2,000,000
based on the consummation of a successful restructuring and the achievement of
various financial and operational targets (the "HPI Reorganization Fee").
Pursuant to an Order of the Bankruptcy Court entered on June 23,
2003, the retention of HPI pursuant to the HPI Engagement Letter was approved in
all respects including payment of the HPI Reorganization Fee.
Magellan has paid HPI monthly payments aggregating approximately $1
million through March 31, 2003, plus reimbursement of expenses, and anticipates
that an additional $750,000 in monthly payments (exclusive of reimbursement of
expenses) will be made through and including the Effective Date (assuming an
Effective Date of September 30, 2003) pursuant to the terms of the HPI
Engagement Letter. In addition, Reorganized Magellan will pay to HPI, after the
Effective Date, the HPI Reorganization Fee in an amount of between $300,000 to
$2 million.
3. Payments to Gleacher
On September 19, 2002, the Debtors retained Gleacher Partners LLC
("Gleacher") as their financial advisor in connection with their restructuring
efforts, including in connection with these Reorganization Cases. The terms and
conditions of Gleacher's retention by the Debtors are set forth in that certain
letter agreement by and between the Debtors and Gleacher (the "Gleacher
Engagement Letter"), dated September 19, 2002. Among other things, the Gleacher
Engagement Letter provides for a monthly cash retainer fee in the amount of
$175,000. The monthly fees are to be credited against the Gleacher Restructuring
Fee (as defined below) payable to Gleacher by the Debtors; provided, however,
that any such credit shall not exceed $1,050,000. Upon the completion of a
restructuring (as described in the Gleacher Engagement Letter), the Debtors
shall pay to Gleacher the amount of $6,000,000 (the "Gleacher Restructuring
Fee").
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Pursuant to an Order of the Bankruptcy Court entered on March 11,
2003, the retention of Gleacher pursuant to the Gleacher Engagement Letter was
approved in all respects including the payment of the Gleacher Restructuring
Fee.
Magellan has paid Gleacher monthly payments aggregating approximately
$1.4 million through March 31, 2003, plus reimbursement of expenses and
anticipates that an additional $350,000 in monthly payments (exclusive of
reimbursement of expenses) will be made through and including the Effective Date
pursuant to the terms of the Gleacher Engagement Letter. In addition,
Reorganized Magellan will pay to Gleacher the Gleacher Restructuring Fee on or
about the Effective Date.
4. Payments to Houlihan Lokey
On October 8, 2002, the Informal Committee retained Houlihan Lokey as
its financial advisors in connection with its negotiations with the Debtors
regarding the terms of a restructuring. Thereafter, on March 17, 2003, following
the appointment by the United States Trustee for the Southern District of New
York (the "United States Trustee") of the members of the Official Committee for
these chapter 11 cases, the Official Committee chose to retain Houlihan Lokey as
its financial advisors. The terms and conditions of Houlihan Lokey's retention
by the Official Committee are set forth in that certain Engagement Letter, dated
March 17, 2003 (the "Houlihan Lokey Engagement Letter"). The Houlihan Lokey
Engagement Letter provides for, among other things, a monthly fee in the amount
of $150,000 plus reimbursement for all of Houlihan Lokey's reasonable
out-of-pocket expenses. In addition, upon the completion of a Transaction (as
defined in the Houlihan Lokey Engagement Letter), the Debtors will pay to
Houlihan Lokey an additional fee equal to 0.75% of the aggregate recoveries to
the holders of the General Unsecured Claims in the same consideration that is
given to such holders of General Unsecured Claims pursuant to the Plan or, at
the option of the Official Committee, and with the consent of the Debtors, in
Cash (the "Houlihan Lokey Transaction Fee"). Magellan has paid Houlihan Lokey
monthly payments aggregating $900,000 through March 31, 2003, plus reimbursement
of expenses and anticipates that an additional $600,000 in monthly payments
(exclusive of reimbursement of expenses) will be made pursuant to the terms of
the Engagement Letter through and including the Effective Date.
Pursuant to an Order of the Bankruptcy Court entered on June 23,
2003, the retention of Houlihan Lokey by the Official Committee pursuant to the
Houlihan Lokey Engagement Letter was approved in all respects including the
payment of the Houlihan Lokey Transaction Fee.
In addition, pursuant to Section 5.17 of the Plan, based on the
assumption of Allowed Other General Unsecured Claims of approximately $69.4
million, the Debtors anticipate that approximately $2.0 million in New Notes,
$0.2 million in Cash, 72,594 shares of New Common Stock and Equity Subscription
Rights to purchase 19,590 shares of New Common Stock in the Equity Offering will
be delivered to Houlihan Lokey in full satisfaction of the Houlihan Lokey
Transaction Fee.
5. Payments to Amalgamated Gadget and Pequot Capital
On March 10, 2003, the Debtors entered into a Commitment Letter with
Amalgamated Gadget, L.P. and Pequot Capital, which, inter alia, provides for the
payment of certain fees to and expenses of Amalgamated Gadget, L.P. and Pequot
Capital. On April 4, 2003, the Bankruptcy Court approved the Commitment Letter
(including payment of the expenses, the commitment fee provided for therein, and
the break-up fee provided for therein) as administrative expenses and
obligations of the Debtors' estates. Prior to the Commencement Date, the Debtors
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paid Amalgamated and Pequot $750,000 or 50% of the commitment fee. As a result
of the filing of this Disclosure Statement and the Plan, a termination event
occurred under the March 10, 2003 commitment letter, and the Debtors paid to
Amalgamated and Pequot the other half of their commitment fee or $750,000 as
well as the break up fee of $1,000,000.
6. Payments to Equity Investor
On July 14, 2003, the Debtors entered into the Equity Commitment
Letter with the Equity Investor, which, inter alia, provides for the payment of
certain fees to and expenses of the Equity Investor. The Equity Commitment
Letter provides for the payment to the Equity Investor of a commitment fee (the
"Commitment Fee") in an amount equal to 1.75% of the aggregate maximum purchase
price of the investment to be made pursuant to the Equity Commitment Letter.
$1.75 million of the Commitment Fee shall be paid within three business days of
approval of the Equity Commitment Letter which amount, except as expressly
provided below, shall be non refundable whether or not the closing of the
Investment occurs (the "Initial Installment"). The remainder of the Commitment
Fee shall be payable solely upon the closing of the Investment. If the closing
of the Investment occurs and the Commitment Fee calculated based upon the actual
amount of the Investment is less than $1.75 million, then the Equity Investor
will refund the difference between the Initial Payment and the actual Commitment
Fee to Magellan.
Finally, the Equity Commitment Letter provides for the Debtors to
reimburse the Equity Investor for all reasonable actual fees and expenses (the
"Expenses") incurred by or on behalf of the Equity Investor in connection with
the negotiation, preparation, execution and delivery of the Equity Commitment
Letter and any and all definitive documentation or other acts relating thereto,
including, but not limited to, the actual reasonable fees and expenses of
counsel, accountants and/or consultants to the Equity Investor and the fees and
expenses incurred by the Equity Investor in connection with any due diligence
(including fees and expenses payable to consultants), all in an amount not to
exceed $1,000,000, provided, however, that, should the Equity Commitment Letter
or the Equity Offering require the Equity Investor and their counsel to
participate in litigation, contested matters, adversary proceedings, or
negotiations necessitated by such litigation, contested matter or adversary
proceedings, related to the Chapter 11 Cases subsequent to the Commencement
Date, the Debtors will be obligated to reimburse the Equity Investor for all
Expenses incurred as a consequence.
7. Exit Financing Fees
In furtherance of obtaining Exit Financing, the Debtors engaged in
negotiations with Deutsche Bank Securities Inc. ("DBSI") with respect to
proposed exit financing that would provide them with the financing necessary to
refinance their obligations under the Senior Secured Credit Facility on terms
more favorable than the New Senior Secured Credit Agreement. In that regard, and
in order to move toward obtaining a firm financing commitment, the Debtors and
DBSI entered into a letter agreement providing for the payment of certain fees,
including a work fee (the "Work Fee"), and the indemnification of DBSI, as well
as outlining indicative terms of a proposed financing, subject to further due
diligence on the part of DBSI and other conditions (the "DBSI Letter
Agreement"). The DBSI Letter Agreement was approved by the Court on May 23,
2003.
Following the Court's approval of the DBSI Letter Agreement, Deutsche
Bank Trust Company Americas ("DBTCA") and DBSI (together with DBTCA, "DB")
conducted and completed their due diligence of the Debtors and, on July 31,
2003, presented the Debtors with an Exit Financing Commitment Letter (the "Exit
Financing Commitment Letter"), dated July 31, 2003, and an Exit Financing Fee
Letter (the "Fee Letter") dated July 31, 2003. Pursuant to the terms of the Exit
Financing Commitment Letter, DB has committed to provide the Debtors with the
Exit Financing in an aggregate amount of up to $230 million in connection with
the Debtors' emergence from chapter 11 and to act as administrative agent for
the facility. In addition, DBSI has agreed to act as the sole lead arranger and
sole book running manager with respect to such Exit Financing.
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Pursuant to the Fee Letter, the following fees are to be paid in
connection with the Exit Financing: (i) a commitment fee equal to 1/2 of 1% per
annum of the total commitments for the time period commencing on the date of
execution of the Exit Financing Commitment Letter and terminating on the earlier
of (x) the Closing Date and (y) such earlier date as DBTCA's commitments
pursuant to the Exit Financing Commitment Letter are terminated, which
commitment fee shall be due and payable to DBTCA upon such earlier date; and
(ii) a customary break-up fee to be approved by the Bankruptcy Court if
Magellan, or any other person or entity controlled by or affiliated with
Magellan, consummates at any time within one year after the date of the Exit
Financing Commitment Letter, a transaction substantially similar to the Exit
Financing, or a merger or consolidation or acquisition of all or a substantial
part of the assets of Magellan (or any subsidiary or holding company thereof),
but does not borrow under the Exit Financing at the time of the consummation
thereof; it being understood that such fee shall be in addition to any cash
reimbursement required to be paid to DB pursuant to the Exit Financing
Commitment Letter for its out-of-pocket fees and expenses incurred in respect of
the Exit Financing; provided, however, that such non-refundable fee will not be
payable if either (x) DBTCA declines to provide the Exit Financing on
substantially the terms outlined in the Exit Financing Commitment Letter (as the
same may be modified as provided in the Fee Letter) or (y) DB exercises certain
adjustment rights pursuant to the Fee Letter.
In addition to the foregoing, the Exit Financing Commitment Letter
provides for Magellan to (i) reimburse DB for all reasonable out-of-pocket fees
and expenses (including legal fees and expenses) incurred in connection with the
Exit Financing Commitment Letter and the transactions contemplated thereby
(whether or not the transactions contemplated thereby are consummated) and (ii)
indemnify DB against all actions, suits, proceedings, claims, damages, losses,
liabilities and expenses arising out of or in connection with the transactions
contemplated by the Exit Financing Commitment Letter except to the extent that
any such loss, claim, damage, liability or expense is a result of such
indemnified person's gross negligence or willful misconduct.
The Debtors intend to seek approval from the Bankruptcy Court of the
Exit Financing Commitment Letter and the Fee Letter prior to the Confirmation
Date.
8. Statutory Fees to United States Trustee
The Debtors are required to pay statutory fees pursuant to Chapter
123 of title 28, United States Code. Any quarterly statutory fees that are
outstanding on the Effective Date, as determined by the Bankruptcy Court, will
be paid on the Effective Date.
J. PAYMENTS OF PROVIDER AND PHYSICIAN ADVISOR CLAIMS AND CUSTOMER CLAIMS
1. Provider Claims and Claims by Physician Advisors
The fundamental nature of the Debtors' business is to provide, or
assist in the coordination of, care for their Members through a process of
referring their Members to appropriate behavioral health care providers. The
Debtors utilize a number of different types of providers, including, individual
practitioners or group practices, such as psychiatrists, psychologists, licensed
clinical social workers, marriage and family therapists, licensed clinical
professional counselors, employee assistance program counselors and other
behavioral healthcare professionals, and facilities such as inpatient
psychiatric and substance abuse hospitals, intensive outpatient facilities,
partial hospitalization facilities, and other intermediate care and alternative
care facilities. Of the Providers used by the Debtors, approximately 40% are
under contract with the Debtors (the "Contract Providers") and the remainder,
approximately 60%, are non-contract providers (the "Non-Contract Providers"). In
all cases, the Debtors are responsible for payment to Providers for services
rendered.
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As an integral part of assisting their Members in receiving
appropriate mental health care and managing that care, the Debtors have
contracts with a network of individual mental health physicians whose primary
purpose is to evaluate treatment provided or proposed for Members and make
recommendations to the Debtors regarding the medical necessity and
appropriateness of that treatment (the "Physician Advisors"). In total, the
Debtors have contracts with approximately 150 active Physician Advisors. Without
qualified evaluators, the Debtors would not be able to adequately determine the
level or type of medical care necessary and appropriate for their Members, nor
would the Debtors be able to maintain and control the cost of care. Moreover,
many state utilization review statutes and regulation and accreditation bodies
require that only trained and experienced physicians make adverse medical
necessity determinations. Additionally, those same state agencies require that
appeals of adverse medical necessity decisions be conducted by independent third
party Physician Advisors.
Pursuant to an Order of the Bankruptcy Court entered on the
Commencement Date, the payments due to Providers and Physician Advisors (whether
relating to the period prior or subsequent to Commencement Date) have been
authorized to be paid in full in the ordinary course of business.
2. Customer Claims
The Debtors' source of revenue is their contracts with their
customers in the following four segments: (i) Workplace Group, (ii) Health Plan
Solutions Group, (iii) Public Solutions Group and (iv) Corporate and Other. The
Debtors' contracts with customers typically have terms of one to three years,
and in certain cases contain renewal provisions (at the customer's option) for
successive terms of between one and two years (unless terminated earlier).
Pursuant to an Order of the Bankruptcy Court entered on the
Commencement Date, the Debtors have been authorized to make payments due to the
customers in respect of their contracts.
K. DEEMED CONSOLIDATION FOR VOTING AND DISTRIBUTION PURPOSES
For purposes of voting and for distributions to holders of Allowed
Claims in Classes 7, 8 and 9 under the Plan, the Debtors will be deemed
consolidated and treated as equivalent to a single legal entity. This "deemed"
consolidation has two major effects. First, it eliminates guarantees of the
obligations of one Debtor by another Debtor. Second, each Claim filed in Classes
7, 8 or 9 against any of the Debtors will be considered to be a single claim
against the consolidated Debtors. For purposes of clarification, each of the
holders of Allowed Claims in Classes 7, 8 and 9 will vote as separate classes.
Except as specified in the Plan, the deemed consolidation will not
affect (other than for purposes related to funding distributions under the Plan)
the legal and organizational structure of the Debtors or pre and
post-Commencement Date guarantees, liens and security interests, any financing
entered into on the Effective Date or pursuant to any contract or lease that is
assumed under the Plan, or distributions out of any insurance policies or
proceeds of policies.
The Debtors believe that the foregoing deemed consolidation of their
respective estates is warranted in light of the criteria established by the
courts in ruling on the propriety of substantive consolidation in other cases.
The two critical factors considered in assessing the entitlement to substantive
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consolidation are (i) whether creditors dealt with the Debtors as a single
economic unit and did not rely on their separate identity in extending credit or
(ii) whether the affairs of the Debtors are so entangled that consolidation will
benefit all creditors. With respect to the first factor, creditors who make
loans on the basis of the financial status of a separate entity expect to be
able to look to the assets of their particular borrower for satisfaction of that
loan. The second factor involves whether there has been a commingling of the
assets and business functions and considers whether all creditors will benefit
because untangling is either impossible or so costly as to consume the assets.
The following is a discussion of these factors as they relate to the Debtors.
There is a factual basis for the deemed consolidation of the Debtors.
First, the Debtors believe that many of the Debtors' vendors, suppliers, and
customers likely have dealt with Magellan and its subsidiaries as a single,
undifferentiated entity. It is the Debtors' view that this course of dealing and
the expectations of certain holders of General Unsecured Claims justify
consolidation for distribution purposes.
Second, the affairs of the Debtors are entangled. The Debtors consist
of Magellan and 88 of its direct and indirect subsidiaries. Through the
subsidiary Debtors, Magellan provides services to its customers and payments to
its Providers. There is in many cases little correlation between the names under
which many of the Debtors conduct business and the names of the legal entities
that technically own the Debtors' assets. This fact alone could make it very
difficult for creditors to ascertain which Debtor they have a Claim against.
Third, the books and records of the Debtors reflect a large amount of
intercompany Claims reflecting, among other things, advances from Magellan to
fund its subsidiaries' operations, upstreamed funds from certain Debtors to
enable Magellan to make payments to creditors, the allocation of corporate
overhead, and the transfer of other property from one Debtor to another. These
intercompany Claims are assets of certain of the Debtors and Claims against
other Debtors. In order to accurately calculate the distributions to creditors
of a particular Debtor, all relevant intercompany Claims would have to be
valued. In view of the complexity of such transactions and the adjustments that
have been made over time, it would be difficult to reconcile intercompany Claims
without embarking on an enormous effort that would diminish the return for all
creditors.
Fourth, the obligations under the Senior Secured Credit Agreement
have been guarantied by substantially all of the subsidiaries of Magellan
including the Debtors. These subsidiaries of Magellan have also granted security
interests in their assets to secure the obligations under the Senior Secured
Credit Agreement including the stock of the subsidiaries. In order to determine
the value of the assets relating to the security interests and the stock of the
individual subsidiaries, the Debtors would need to value the assets of each
guarantor separately, which would be virtually impossible without embarking on a
prolonged effort that would diminish the return for all creditors and prolong
these cases.
Finally, the Debtors participate in a unified cash management system
(which includes non-Debtor subsidiaries) which could make it extremely difficult
and costly to confirm a Plan for individual Debtors.
In view of the foregoing, the Debtors believe that creditors would
not be prejudiced to any significant degree by the deemed consolidation proposed
in the Plan. The Debtors believe that a deemed consolidation is consistent with
many of their creditors' having dealt with the Debtors as a single economic
entity. Further, the Debtors believe that such deemed consolidation would best
use the Debtors' assets and maximize the potential of all of the Debtors to pay
the creditors of each entity the distributions proposed in the Plan.
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L. SECURITIES LAW MATTERS
Holders of Senior Note Claims, Senior Subordinated Note Claims and
Other General Unsecured Claims, Magellan Preferred Stock Interests and Magellan
Common Stock Interests will receive Plan Securities pursuant to the Plan.
Section 1145 of the Bankruptcy Code provides certain exemptions from the
securities registration requirements of federal and state securities laws with
respect to the distribution of securities under a Plan.
1. Issuance and Resale of New Securities Under the Plan.
Section 1145(a) of the Bankruptcy Code generally exempts from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), the offer or sale of a debtor's securities under a chapter 11 plan if
such securities are offered or sold in exchange for a Claim against, or an
Equity Interest in, such debtor. In reliance upon this exemption, the Plan
Securities issued to creditors under the Plan generally will be exempt from the
registration requirements of the Securities Act. Accordingly, such securities
may be resold without registration under the Securities Act or other federal
securities laws pursuant to an exemption provided by section 4(1) of the
Securities Act, unless the holder is an "underwriter" with respect to such
securities, as that term is defined in the Bankruptcy Code. In addition, such
securities generally may be resold without registration under state securities
laws pursuant to various exemptions provided by the respective laws of the
several states. However, recipients of securities issued under the Plan are
advised to consult with their own legal advisors as to the availability of any
such exemption from registration under state law in any given instance and as to
any applicable requirements or conditions to such availability.
Section 1145(b) of the Bankruptcy Code defines "underwriter" for
purposes of the Securities Act as one who (i) purchases a Claim with a view to
distribution of any security to be received in exchange for the Claim other than
in ordinary trading transactions, (ii) offers to sell securities issued under a
plan for the holders of such securities, (iii) offers to buy securities issued
under a plan from persons receiving such securities, if the offer to buy is made
with a view to distribution of such securities, or (iv) is a control person of
the issuer of the securities or other issuer of the securities within the
meaning of Section 2(11) of the Securities Act. The legislative history of
section 1145 of the Bankruptcy Code suggests that a creditor who owns at least
ten percent (10%) of the securities of a reorganized debtor may be presumed to
be a "control person."
Notwithstanding the foregoing, statutory underwriters may be able to
sell their securities pursuant to the resale limitations of Rule 144 promulgated
under the Securities Act. Rule 144 would, in effect, permit the resale of
securities received by statutory underwriters pursuant to a chapter 11 plan,
subject to applicable volume limitations, notice and manner of sale
requirements, and certain other conditions. Parties who believe they may be
statutory underwriters as defined in section 1145 of the Bankruptcy Code are
advised to consult with their own legal advisors as to the availability of the
exemption provided by Rule 144.
Whether any particular person would be deemed to be an "underwriter"
with respect to any security issued under the Plan would depend upon the facts
and circumstances applicable to that person. Accordingly, the Debtors express no
view as to whether any particular person receiving distributions under the Plan
would be an "underwriter" with respect to any security issued under the Plan.
In view of the complex, subjective nature of the question of whether
a particular person may be an underwriter or an affiliate of the reorganizing
Debtors, the Debtors make no representations concerning the right of any person
to trade in the Plan Securities to be distributed pursuant to the Plan.
Accordingly, the Debtors recommend that potential recipients of Plan Securities
consult their own counsel concerning whether they may freely trade such
securities.
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M. REGISTRATION RIGHTS AGREEMENT
Effective as of the Effective Date, Reorganized Magellan, the Equity
Investor (to the extent required), Houlihan Lokey and certain holders of shares
of New Common Stock and New Notes who may be deemed to be "underwriters" or
"affiliates" of Reorganized Magellan for purposes of the Securities Act, shall
enter into the Registration Rights Agreement. Pursuant to the Registration
Rights Agreement, among other things, Reorganized Magellan shall: (i) within
sixty days after the Effective Date, prepare and file, and shall use its
reasonable best efforts to have declared effective within sixty days thereafter,
a registration statement under the Securities Act for the offering on a
continuous basis pursuant to Rule 415 of the Securities Act, of the shares of
New Common Stock (including New Common Stock issuable upon conversion of the MVS
Securities) and New Notes (the "Registrable Securities") held by the Equity
Investor, Houlihan Lokey and certain "underwriters" or "affiliates" of
Reorganized Magellan (the "Shelf Registration"); and (ii) keep the Shelf
Registration effective for a period ending on the earlier of (a) the date that
is the two-year anniversary of the date upon which such registration statement
is declared effective by the Securities and Exchange Commission (the "SEC"), (b)
the date such Registrable Securities have been disposed of pursuant to an
effective registration statement, (c) the date such Registrable Securities have
been disposed of (1) pursuant to and in accordance with SEC Rule 144 (or any
similar provision then in force) under the Securities Act or (2) pursuant to
another exemption from the registration requirements of the Securities Act
pursuant to which the Registrable Securities are thereafter freely tradable
without restriction under the Securities Act, (d) the date such Registrable
Securities may be disposed of pursuant to SEC Rule 144 (or any similar provision
then in force) within the volume limitations thereunder within a 90 day period
or pursuant to SEC Rule 144(k) (or any similar provision then in force) under
the Securities Act or (e) such Registrable Securities cease to be outstanding.
The Registration Rights Agreement shall also provide the Equity Investor and any
other holder of the MVS Securities with demand and piggy-back registration
rights with respect to the shares of New Common Stock issued or issuable upon
conversion of MVS Securities for so long as the Minimum Hold Condition is met.
The Registration Rights Agreement shall contain black-out periods and liquidated
damage provisions, of the type customarily included in registration rights
agreements used in connection with the offering and sale of debt securities
under SEC Rule 144A, that will require Reorganized Magellan to pay liquidated
damages to the holders of the Registrable Securities in the event that
Reorganized Magellan shall fail to satisfy certain deadlines. The Registration
Rights Agreement shall be reasonably satisfactory to the Official Committee.
N. AETNA AMENDED MSA AND THE AETNA PURCHASE OPTION
The Aetna Amended MSA was entered into prior to the Commencement
Date. Magellan (and the other Debtors, to the extent they are a party) has
obtained the Bankruptcy Court's authorization and approval to assume the Aetna
Amended MSA pursuant to an order of the Bankruptcy Court dated as of April 23,
2003 to the extent set forth therein. Reorganized Magellan (and the other
Reorganized Debtors, to the extent they are a party) are authorized to execute
and deliver all documents, agreements and other instruments necessary or
desirable to effectuate the same, including the New Aetna Note, the New Aetna
Warrant, the Aetna Registration Rights Agreement, all guarantees and security
agreements related to the New Aetna Note and the Aetna Purchase Option and all
such documents shall be binding upon the Reorganized Debtors party thereto.
In addition (i) Aetna may exercise the Aetna Purchase Option and
purchase the Aetna-dedicated business unit prior to December 31, 2005 if
specified events occur and (ii) in the event Aetna elects to extend the Aetna
Master Services Agreement through December 31, 2006, Aetna shall be entitled to
44
exercise the Aetna Purchase Option at specified times during the extension
period. Notwithstanding anything to the contrary set forth in the Aetna Amended
MSA, Reorganized Magellan shall not be entitled to consummate the sale
contemplated by the Aetna Purchase Option, or permit the obligations of Aetna
under the Aetna Purchase Option to be credited or offset against any obligations
of Reorganized Magellan under the New Aetna Note, without the prior written
consent of the Required Lenders (as defined in the New Senior Secured Credit
Agreement) to the extent that all obligations under the New Senior Secured
Credit Agreement have not been indefeasibly paid in full. Aetna and Reorganized
Magellan executed the Aetna Amended MSA prior to the Commencement Date. The
Aetna Amended MSA specifies a number of circumstances in which the amendment
will terminate (subject to waiver by Aetna in its sole discretion), including,
among others, the documentation relating to the reorganization not being
satisfactory to Aetna.
Pursuant to the terms of the Aetna Amended MSA, notwithstanding
anything to the contrary set forth in the Plan Documents, Reorganized Magellan
shall not, and shall cause each of its affiliates not to, enter into, renew,
amend, modify, supplement or extend (or to agree or commit to do any of the
foregoing) any agreement, contract, arrangement or other transaction (including,
without limitation, any bank facility or refinancing thereof (including the Exit
Financing)) that would result in the imposition or continuance of any lien on
any of the Purchased Assets) which would not be automatically released upon the
sale of the Purchased Assets to Aetna pursuant to the Aetna Purchase Option, or
that would prevent, alter or delay any of the transactions contemplated by the
Aetna Amended MSA or the Aetna Asset Purchase Agreement (including without
limitation the repayment of the New Aetna Note, the exercise of the Aetna
Purchase Option, the execution of the Aetna Asset Purchase Agreement or the
consummation of the purchase contemplated thereunder); provided that the New
Senior Secured Credit Agreement, together with any amendments thereto as may be
entered into from time to time after the date thereof, shall be excluded from
the foregoing covenant but only to the extent that the stated maturity of the
loans under such agreement (as it may be so amended) is not extended beyond
November 30, 2005.
O. NASDAQ LISTING
Reorganized Magellan shall use its reasonable best efforts to cause
the New Common Stock to be listed on the national market system of Nasdaq or
such other national securities exchange for which it may qualify.
P. RESERVATION OF "CRAM DOWN" RIGHTS
The Bankruptcy Code permits the Bankruptcy Court to confirm a chapter
11 plan over the dissent of any class of Claims or Equity Interests as long as
the standards in section 1129(b) are met. This power to confirm a plan over
dissenting classes - often referred to as "cram down" - is an important part of
the reorganization process. It assures that no single group (or multiple groups)
of Claims or interests can block a restructuring that otherwise meets the
requirements of the Bankruptcy Code.
The Debtors reserve the right to seek confirmation of the Plan,
notwithstanding the rejection of the Plan by any class entitled to vote. In the
event a class votes to reject the Plan, the Debtors will request the Bankruptcy
Court to rule that the Plan meets the requirements specified in section 1129(b)
of the Bankruptcy Code with respect to such class. The Debtors will also seek
such a ruling with respect to each class that is deemed to reject the Plan.
In connection with and following the Bankruptcy Court's denial of a
motion filed by R2 Investments, LDC ("R2") seeking to terminate the Debtors'
exclusive right to file a plan of reorganization and solicit acceptances thereof
so that R2 could file a competing plan of reorganization, R2 , the owner of
45
approximately $212,500,000 of Senior Subordinated Notes and $29,750,000 of
Senior Notes. stated it intends to vote against the Plan. If R2 votes to reject
the Plan and, as a result, Class 8 does not accept the Plan, the Debtors intend
to, and believe they will be able to, confirm the Plan over the rejection of the
Plan by such Class in accordance with Section 1129(b) of the Bankruptcy Code.
III.
VOTING PROCEDURES AND REQUIREMENTS
Detailed voting instructions are provided with the ballot
accompanying this Disclosure Statement. For purposes of the Plan, Classes 1, 4,
7, 8, 9, 13 and 14 are the only classes entitled to vote.
If your Claim is not in one of these Classes, you are not entitled to
vote and you will not receive a ballot with this Disclosure Statement. If your
Claim is in one of these Classes, you should read your ballot and follow the
listed instructions carefully. If your Claim is in one of these Classes and your
did not receive a ballot, it is because, pursuant to the Order of the Bankruptcy
Court, dated August 18, 2003, approving the Disclosure Statement, you are not
entitled to vote on the Plan. Please use only the ballot that accompanies this
Disclosure Statement.
-----------------------------------------------------------
Ballot information number:
For Voting Classes 1, 4, and 9 (212) 376-8494
For Voting Classes 7, 8, 13 and 14: (877) 750-2689
-----------------------------------------------------------
A. VOTE REQUIRED FOR ACCEPTANCE BY A CLASS
Under the Bankruptcy Code, acceptance of a plan of reorganization by
a class of Claims is determined by calculating the number and the amount of
Claims voting to accept, based on the Allowed Claims actually voting. Acceptance
by a Class requires an affirmative vote of more than one-half of the total
number of Allowed Claims voting in such Class and two-thirds in amount of the
total Allowed Claims voting in such Class.
Under the Bankruptcy Code, acceptance of a plan of reorganization by
a Class of Equity Interests (i.e., Classes 13 and 14) is determined by
calculating the amount of Equity Interests voting to accept, based on the
Allowed Equity Interests actually voting. Acceptance by a Class of Equity
Interests requires an affirmative vote of more than two-thirds in amount of the
total Allowed Equity Interests voting in such Class.
B. CLASSES NOT ENTITLED TO VOTE
Under the Bankruptcy Code, creditors are not entitled to vote if
their contractual rights are unimpaired by the Plan. Based on this standard, for
example, the holders of Priority Non-Tax Claims and miscellaneous Secured Claims
are not being affected by the Plan and, therefore, are deemed to have accepted
the Plan.
In addition, classes of Claims or interests that are not entitled to
receive property under the Plan are deemed to have rejected the Plan. This is
applicable to Class 13 (Magellan Preferred Stock Interests and Class 14
(Magellan Common Stock Interests), if Class 8 or Class 9 rejects the Plan. For a
summary of the classes entitled to vote, see the charts in section II.B.
46
C. VOTING
In order for your vote to be counted, your vote must be actually
RECEIVED by the Voting Agent at the following address before the Voting Deadline
of 4:00 p.m., prevailing Eastern Time, on September 30 , 2003:
VOTING AGENT:
---------------------------------------------------------
FOR VOTING CLASSES 1, 4, AND 9
Bankruptcy Services, LLC
70 E. 55th Street
New York, NY 10022
(Attn: Magellan Health Services, Inc.)
(212) 376-8494
FOR VOTING CLASSES 7, 8 ,13 AND 14:
Innisfree M&A Inc.
501 Madison Avenue, 20th Floor New York, NY 10022
(Attn: Magellan Health Services, Inc.)
(877) 750-2689
---------------------------------------------------------
If the instructions on your ballot require you to return the ballot
to your bank, broker, or other nominee, or to their agent, you must deliver your
ballot to them in sufficient time for them to process it and return it to the
Voting Agent before the Voting Deadline. If a ballot is damaged or lost, you may
contact the Debtors' Voting Agent at the number set forth above. Any ballot that
is executed and returned but which does not indicate an acceptance or rejection
of the Plan will not be counted. THE VOTING AGENT WILL NOT ACCEPT BALLOTS
TRANSMITTED BY FACSIMILE OR OTHER ELECTRONIC MEANS.
IV.
FINANCIAL INFORMATION, PROJECTIONS, AND VALUATION ANALYSIS
A. SELECTED HISTORICAL FINANCIAL INFORMATION
Historical financial information can be found in Magellan's Form
10-KA for the year 2002, filed on January 23, 2003, and its quarterly report on
Form 10-Q for the quarter ended March 31, 2003, filed on May 15, 2003. Copies of
Magellan's Form 10-KA for the year 2002 and the Form 10-Q for the quarter ended
March 31, 2003 is attached hereto as Exhibits.
B. PROJECTIONS
The following projected pro forma balance sheets and projected
financial performance (the "Projections") reflect the operations of Magellan and
its subsidiaries (including the Debtors and non-Debtor subsidiaries).
It is important to note that the Projections and estimates of value
described below may differ from actual performance and are highly dependent on
significant assumptions concerning the future operations of these businesses.
These assumptions include the growth of certain lines of business, labor and
47
other operating costs, inflation, and the level of investment required for
capital expenditures and working capital (see assumptions below). Please refer
to section X below for a discussion of many of the factors that could have a
material effect on the information provided in this section.
The Projections assume that the Plan will be confirmed and
consummated in accordance with its terms and that there will be no material
changes in the current regulatory environment that will have an unexpected
impact on the Debtors' operations. The Projections assume an Effective Date of
September 30, 2003, with Allowed Claims treated in accordance with the Plan.
Expenses incurred as a result of the Reorganization Cases are assumed to be paid
upon the Effective Date. If the Debtors do not emerge from chapter 11 by
September 30, 2003, as assumed for purposes of this analysis, additional
bankruptcy expenses will be incurred until such time as a plan of reorganization
is confirmed. These expenses could significantly impact the Debtors' results of
operations and cash flows.
The Projections should be read in conjunction with the assumptions,
qualifications and footnotes to the Projections set forth herein, the historical
consolidated financial information (including the notes and schedules thereto),
and the unaudited actual results reported in the monthly operating reports of
the Debtors. The Projections were prepared by management in good faith based
upon assumptions believed to be reasonable and applied in a manner consistent
with past practice.
Magellan does not, as a matter of course, publicly disclose
projections as to its future revenues, earnings, or cash flow. Accordingly, none
of Magellan, the Debtors, Reorganized Magellan or the Reorganized Debtors
intends to update or otherwise revise the Projections to reflect circumstances
existing since their preparation, the occurrence of unanticipated events, or
changes in general economic or industry conditions, even in the event that any
or all of the underlying assumptions are shown to be in error.
The Projections were not prepared with a view towards complying with
the guidelines for prospective financial statements published by the American
Institute of Certified Public Accountants. The Projections have not been
compiled, or prepared for examination or review, by the Debtors' independent
auditors (who accordingly assume no responsibility for them). Furthermore, the
Projections have been prepared to reflect projected estimates of cash balances
on hand (in bank balances) and not cash balances according to generally accepted
accounting principles.
WHILE PRESENTED WITH NUMERICAL SPECIFICITY, THE PROJECTIONS ARE BASED
UPON A VARIETY OF ASSUMPTIONS AND ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC,
AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE
CONTROL OF THE DEBTORS. CONSEQUENTLY, THE INCLUSION OF THE PROJECTIONS HEREIN
SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE DEBTORS (OR ANY OTHER PERSON)
THAT THE PROJECTIONS WILL BE REALIZED, AND ACTUAL RESULTS MAY VARY MATERIALLY
FROM THOSE PRESENTED BELOW. THE INDUSTRY IN WHICH THE DEBTORS COMPETE IS HIGHLY
COMPETITIVE AND THE DEBTORS' EARNINGS MAY BE SIGNIFICANTLY ADVERSELY AFFECTED BY
CHANGES IN THE COMPETITIVE ENVIRONMENT, CHANGES IN SUPPLY AND DEMAND DYNAMICS,
THE PRICE EROSION OF SERVICES PROVIDED, REGULATORY CHANGES AND FUTURE
IMPROVEMENTS IN TECHNOLOGY. DUE TO THE FACT THAT THE PROJECTIONS ARE SUBJECT TO
SIGNIFICANT UNCERTAINTY AND ARE BASED UPON ASSUMPTIONS WHICH MAY NOT PROVE TO BE
CORRECT, NEITHER THE DEBTORS NOR ANY OTHER PERSON ASSUMES ANY RESPONSIBILITY FOR
THEIR ACCURACY OR COMPLETENESS.
48
The following Projections include assumptions as to the reorganized
equity value of Reorganized Magellan (see section IV.B.6 below), certain
write-downs of its assets to fair market value and estimates of its liabilities
as of the Effective Date. Reorganized Magellan will be required to reflect such
estimates or actual balances as of the Effective Date. Such determination will
be based upon the fair value of its assets as of that date, which could be
materially greater or lower than the values assumed in the foregoing estimates.
49
1. Pro Forma Projected Consolidated Balance Sheet as of September 30, 2003
(Unaudited) (a)
($ in thousands)
FRESH START/ PRO FORMA
SEPTEMBER 30, REORGANIZATION SEPTEMBER 30,
2003 ADJUSTMENTS 2003
-------------- -------------- ------------
ASSETS
- ------
Cash and Cash Equivalents(1) $139,168 $36,103 $175,271
Accounts Receivable, Net 61,034 0 61,034
Restricted Cash and Investments (2) 130,941 15,750 146,691
Refundable Income Taxes 1,133 0 1,133
Other Current Assets 26,073 0 26,073
---------- --------- ----------
Total Current Assets $358,349 $51,853 $410,202
Property and Equipment, Net $75,986 $0 $75,986
Deferred Income Taxes 0 0 0
Investments in Unconsolidated Subs. 13,651 0 13,651
Other Long-Term Assets (3) 30,422 (2,865) 27,557
Goodwill(4) 501,580 (501,580) 0
Other Intangible Assets(5) 56,540 30,540 87,080
Reorg. Value in Excess of Identifiable Assets(6) 0 564,860 564,860
---------- --------- ----------
TOTAL ASSETS $1,036,528 $142,808 $1,179,336
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable $15,753 $0 $15,753
Accrued Liabilities(7, 8) 221,956 (100,546) 121,410
Medical Claims Payable 213,558 0 213,558
---------- --------- ----------
Total Current Liabilities $451,2673 ($100,546) $350,721
Liabilities Subject to Compromise
Accounts Payable and Other Accrued Liabilities $29,651 $(29,651) $0
Debt
Total Debt(9-12) $1,045,280 $606,144 $439,136
Deferred Credits and Long-Term Liabs. $592 $0 $592
Minority Interest 799 0 799
Preferred Stock(13) 72,766 72,766 0
Stockholders' Equity(14) (563,828) 952,915 388,087
---------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,036,528 $142,808 $1,179,336
50
NOTES TO PRO FORMA PROJECTED CONSOLIDATED BALANCE SHEET AS OF
September 30, 2003
1. $15 million adjustment for cash payment to Aetna, $2 million
adjustment for cash payment of Convenience Claims, $15.8 million adjustment for
cash collateralization of additional letters of credit, $4 million adjustment
for cash payment for unclaimed property due to Providers, $1.1 million payment
to settle certain claims, $50 million payment to Senior Lenders, $24.6 million
for Cash Distribution Amount and $150 million of additional cash from Equity
Offering (and from the Investment made by the Equity Investor).
2. $15.8 million adjustment for cash collateralization of $15 million
in additional letters of credit at 105% of face value. Subsequent cash
collateralization relates to rollover from the New Senior Secured Credit
Agreement.
3. Adjusted to reflect deferred financing costs associated with the
New Senior Secured Credit Agreement and write-off of commitment fees and
expenses related to the Investment.
4 Adjusted to zero in connection with fresh start accounting rules
concerning the extinguishment of goodwill upon Debtors' emergence from chapter
11.
5. Adjustment to restate other intangible assets at fair value upon
Debtors' emergence from chapter 11 in accordance with fresh start accounting
rules.
6. Adjustment to reconcile assets with reorganized stockholders'
equity upon Debtors' emergence from Chapter 11 in accordance with fresh start
accounting rules.
7. $60 million in accrued payments to Aetna adjusted to zero in
connection with the distributions to Aetna on account of the Aetna Claim.
8. $40.6 million adjustment to accrued interest ($8.4 million of
accrued interest on account of the Senior Notes and $32.2 million of accrued
interest on the Senior Subordinated Notes)
9. Adjustment of $50 million of cash payment in respect of Senior
Secured Credit Agreement.
10 Adjustment to reflect issuance of $2.0 million in Senior Notes to
Houlihan Lokey as payment of a portion of their transaction fee and $18.2
million in Senior Notes issued to Other General Unsecured Creditors on account
of their Claims.
11 Issuance of $47.7 of New Aetna Note in satisfaction of their
Claims and payment to Aetna of Cash of $15 million. See footnote 1 above.
12. $625 million Senior Subordinated Notes adjusted to zero in
connection with tax rules concerning the extinguishment of debt in the context
of a chapter 11 filing and at 11:59 pm, September 30, 2003.
13. Adjusted to zero in connection with tax rules concerning the
extinguishment of preferred stock in the context of a chapter 11 filing.
14 Fresh Start accounting adjustments to stockholders' equity to
reflect reorganization equity and $150 million of new equity, net of $4.5
million in fees and expenses to be paid in connection with the issuance of the
new equity.
51
2. Projected Condensed Consolidated Balance Sheets (Unaudited)
($ in Thousands)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------ ------------ ------------ ------------
2003 2004 2005 2006 2007 2008
---- ---- ---- ---- ---- ----
Current Assets:
Cash and Cash Equivalents $168,347 $147,439 $143,312 $172,812 $230,987 $257,642
Accounts Receivable, Net 57,598 56,499 58,819 48,046 50,546 53,210
Restricted Cash and Investments 156,299 165,319 162,043 174,818 187,529 200,326
Refundable Income Taxes 1,133 1,133 1,133 1,133 1,133 1,133
Other Current Assets 25,773 25,773 25,773 24,935 22,423 22,423
--------- --------- --------- --------- --------- ---------
Total Current Assets $409,150 $396,163 $391,080 $421,745 $492,617 $534,733
Property and Equipment, Net $88,816 $102,435 $93,324 $81,002 $73,746 $67,886
Investments in Unconsolidated Subs. 13,491 13,491 13,491 13,491 13,491 13,491
Other Long-Term Assets 29,059 25,907 26,928 26,253 25,578 30,903
Other Intangible Assets 84,176 72,564 61,012 54,478 49,610 45,983
Reorg. Value in Excess of Identifiable
Assets 564,860 564,860 564,860 564,860 564,860 564,860
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS $1,189,551 $1,175,419 $1,150,694 $1,161,827 $1,219,901 $1,257,855
Current Liabilities:
Accounts Payable $15,086 $13,583 $13,541 $11,781 $12,079 $12,276
Accrued Liabilities 131,821 139,797 167,641 176,876 190,056 199,859
Medical Claims Payable 206,479 194,110 206,627 183,520 195,151 207,667
--------- --------- --------- --------- --------- ---------
Total Current Liabilities $353,386 $347,491 $387,809 $372,177 $397,286 $419,802
Total Debt $435,835 $407,835 $277,354 $277,354 $277,354 $256,400
Capital Lease Obligations 2,796 775 0 0 0 0
Deferred Credits and Long-Term Liabs. 342 0 0 0 0 0
Minority Interest 802 806 806 806 806 806
Preferred Stock $0 $0 $0 $0 $0 $0
Stockholders' Equity 396,391 418,513 484,725 511,490 544,455 580,847
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,189,551 $1,175,419 $1,150,694 $1,161,827 $1,219,901 $1,257,855
52
3. Projected Statements of Operations (Unaudited)
($ in Thousands)
FOR THE 12 MONTHS ENDING
CONSOLIDATED INCOME STATEMENT ---------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------ ------------ ------------ ------------
2003 2004 2005 2006 2007 2008
---- ---- ---- ---- ---- ----
NET REVENUE $1,554,840 $1,385,671 $1,441,185 $1,264,556 $1,326,670 $1,392,682
Costs and Expenses:
Salaries, Cost of Care and Other ($1,412,592) ($1,261,007) ($1,285,328) ($1,142,977) ($1,202,541) ($1,263,057)
Equity in Earnings of Unconsolidated
Subsidiaries 4,706 3,324 2,800 2,800 2,800 2,800
Depreciation and Amortization (47,382) (48,806) (53,638) (50,106) (42,973) (39,637)
Interest, Net (38,674) (38,381) (36,027) (26,027) (25,377) (24,497)
Special Charges (7,693) (2,300) (2,000) (2,000) (2,000) (2,000)
Aetna Adjustment $0 $0 $45,000 $0 $0 $0
Total Transaction Fees and Expenses (44,607) 0 0 0 0 0
Net Gain on Extinguishment of Senior
Subordinated Notes 440,355 0 0 0 0 0
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST $452,953 $38,501 $111,992 $46,246 $56,579 $62,290
Income Taxes (12,361) (16,183) (45,579) (19,281) (23,414) (25,699)
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST $440,593 $22,318 $66,413 $26,965 $33,165 $36,592
Minority Interest (40) 4 0 0 0 0
INCOME (LOSS) FROM CONTINUING OPERATIONS $440,553 $22,322 $66,413 $26,965 $33,165 $36,592
Income (Loss) from Discontinued Operations,
Net 4,343 (200) (200) (200) (200) (200)
NET INCOME (LOSS) $444,896 $22,122 $66,213 $26,765 $32,965 $36,392
Preferred Dividends (903) 0 0 0 0 0
INCOME (LOSS) TO COMMON STOCKHOLDERS $443,993 $22,122 $66,213 $26,765 $32,965 $36,392
53
4. Projected Statement of Sources and Uses of Cash (Unaudited)
($ in Thousands)
FOR THE 12 MONTHS ENDING
CONSOLIDATED STATEMENT OF CASH FLOWS --------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------ ------------ ------------ ------------
2003 2004 2005 2006 2007 2008
---- ---- ---- ---- ---- ----
CASH FLOW FROM OPERATIONS:
Net Income (Loss) $444,896 $22,122 $66,213 $26,765 $32,965 $36,392
Adjustments:
Depreciation and Amortization $47,382 $48,806 $53,638 $50,106 $42,973 $39,637
Less Net Gain on Extinguishment of Senior
Subordinated Notes (440,355) 0 0 0 0 0
Plus Loss on Write-off of Deferred
Financing Fees (650) 0 0 0 0 0
Equity in Unconsolidated Subsidiaries (4,706) (3,324) (2,800) (2,800) (2,800) (2,800)
Cash Flows from Changes in Assets and
Liabilities:
Accounts Receivable, Net $23,577 $1,098 ($2,320) $10,773 ($2,500) ($2,664)
Restricted Cash and Investments (13,231) (9,019) 3,275 (12,775) (12,710) (12,797)
Other Assets (20,322) 3,152 (1,020) 1,513 3,188 (5,325)
Accounts Payable and Other Accrued
Liabilities 54,317 (7,188) 324 (5,015) 599 120
Medical Claims Payable 1,147 (12,369) 12,516 (23,107) 11,631 12,516
Income Taxes Payable 13,927 13,661 27,478 12,490 12,879 9,880
Distributions from Unconsolidated
Subsidiaries 3,398 3,324 2,800 2,800 2,800 2,800
Other Liabilities (500) (342) 0 0 0 0
Minority Interest 119 4 0 0 0 0
Other 2,017 0 0 0 0 0
--------- ---------- ---------- ---------- ---------- ----------
NET CASH PROVIDED BY OPERATIONS $111,016 $59,925 $160,104 $60,750 $89,024 $77,759
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures ($37,671) ($50,813) ($32,975) ($31,250) ($30,850) ($30,150)
Acquisition Capital Expenditures (3,731) 0 0 0 0 0
--------- ---------- ---------- ---------- ---------- ----------
NET CASH USED IN INVESTING
ACTIVITIES ($39,837) ($50,813) ($32,975) ($31,250) ($30,850) ($30,150)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from (Payments on) Debt and
Capital Lease Obligations ($1,420) ($30,021) ($131,256) $0 0 ($20,954)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $69,759 ($20,908) ($4,127) $29,500 $58,174 $26,655
Cash and Cash Equivalents at Beginning
of Period 98,588 168,347 147,439 143,312 172,812 230,987
--------- ---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $168,347 $147,439 $143,312 $172,812 $230,987 $257,642
54
5. General Assumptions
The Debtors' Projections are largely based on the Debtors' current
customer base with estimates of how the underlying capitation rates, care cost
trends and administrative expenses change over the forecast period. Known
contract losses and certain other known contract changes have been reflected in
the Projections, and no other contract losses have been projected. Additionally,
new business for the Health Plan and Public Solutions segments has not been
included in the Projections.
General contract assumptions, subject to contract specific
conditions, include annual trends throughout the forecast period as follows: (i)
nominal `same-store' membership increases of 2%; (ii) CPI of 3%; (iii) medical
care cost trends of 6% in the Health Plan and Public Solutions segments; and
(iv) administrative cost trends of 3%.
With respect to working capital the following assumptions have been
incorporated in the Projections: accounts receivable are projected to remain
constant at 20 days for the Health Plan segment, 44 days for the Workplace
segment and 5 days for the Public Solutions segment. Accounts payable is
projected at 13 days. Medical Claims payable are projected at historic levels
and adjusted for seasonality.
With respect to capital expenditures the following assumptions have
been incorporated in the Projections: recurring capital expenditures are
projected at approximately 2.0% of net revenues. Incremental capital
expenditures associated with the Debtor's Performance Improvement Plan ("PIP")
are projected at 0.8% of calendar year 2003 net revenues, 1.4% of calendar year
2004 net revenues, 0.3% of calendar year 2005 net revenues, 0.2% of calendar
year 2006 and 2007 and 0.1% of calendar year 2008 net revenues.
With respect to net operating losses ("NOLs") the following
assumption has been incorporated into the Projections: Magellan, as well as the
other Debtors, are assumed to have NOL carryovers remaining after the Effective
Date and that such NOL carryovers will be utilized under the general limitation
applicable to entities that undergo a change of ownership pursuant to a
confirmed Plan. See section XIII.A.2 herein (Limitations on Loss Carryforwards
and other Tax Benefits).
With respect to the New Facilities maturing November 30, 2005, the
following assumptions have been incorporated into the Projections: the New
Facilities are assumed to be refinanced with a new credit facility with a term
of five years (the "Refinancing") at November 30, 2005. The Refinancing will be
issued in the amount of $150 million, of which $50 million will constitute
availability under a revolver (the "New Revolver") and $100 million will
constitute availability under letters of credit (the "New LCs"). The loans under
the Refinancing will bear interest at 7.25% per annum paid quarterly and the New
LCs will have fees payable at a rate of 4.25% per annum paid quarterly plus an
additional annual fronting fee of .125% paid quarterly. The lenders financing
the Refinancing will be paid an upfront refinancing fee of $3.4 million, which
will be amortized over the life of the Refinancing until maturity at November
30, 2010.
With respect to the New Notes maturing November 15, 2008, the
following assumptions have been incorporated into the Projections: the New Notes
will be in the aggregate principal amount of $271.0 million as of the Effective
Date, the New Notes are assumed to be refinanced with $250 million of new senior
notes with a term of 7 years (the "Refinancing Senior Notes") at November 14,
2008. The Refinancing Senior Notes will bear interest at 9.375% per annum paid
semi-annually. The lenders financing the Refinancing Senior Notes will be
entitled to an upfront refinancing fee of $10 million, which will be amortized
over the life of the Refinancing Senior Notes until maturity thereof at November
15, 2014.
55
The Projections assume that the Aetna Master Services Agreement is
terminated and Aetna exercises the Aetna Purchase Option as of December 31,
2005, that Aetna pays the Debtor $45 million in respect of the Aetna Purchase
Option and that the New Aetna Note is repaid at its maturity on December 31,
2005.
The Projections are based on management's estimates of future
performance and reflect numerous assumptions, including assumptions with respect
to the future performance of the Reorganized Debtors, the performance of the
industry, general business and economic conditions and other matters, most of
which are beyond the Debtors' control. Numerous factors may affect the future
financial performance of the Reorganized Debtors and the accuracy of the
Projections. Therefore, the actual results achieved during the projection period
will vary from the projected results, and may vary substantially. No
representations can be or are being made with respect to the accuracy of the
Projections, or the ability of the Reorganized Debtors to achieve the projected
results.
The Projections assume that the Plan will be confirmed and
consummated in accordance with its terms and that there will be no material
changes in the current regulatory environment that will have an unexpected
impact on the Debtors' operations. The Projections assume an Effective Date of
September 30, 2003, with Allowed Claims treated in accordance with the Plan.
The Projections should be read in conjunction with the assumptions,
qualifications and footnotes to the Projections set forth herein and the
Debtors' historical consolidated financial information (including the notes and
schedules thereto). The Projections were not prepared with a view towards
complying with the guidelines for financial statements published by the American
Institute of Certified Public Accountants. The Projections have not been
compiled, or prepared for examination or review, by the Debtors' independent
auditors (who accordingly assume no responsibility for them). Furthermore, the
Projections have been prepared to reflect projected estimates of cash balances
on hand (in bank balances) and not cash balances according to generally accepted
accounting principles.
6. Going Concern Valuation
Gleacher Partners LLC ("Gleacher") has advised the Debtors with
respect to the value of the Reorganized Debtors.
For purposes of the Plan, the reorganization value (the
"Reorganization Value") of the Reorganized Debtors is estimated to range from
approximately $650 million to $700 million with a midpoint Reorganization Value
of $675 million. The Reorganization Value assumes an effective date (the
"Effective Date") of September 30, 2003, and reflects the going concern value of
the Debtors after giving effect to the implementation of the Plan, but prior to
the issuance of additional New Common Stock pursuant to the Equity Offering.
The equity value (the "Equity Value") of the Reorganized Debtors is
estimated to range from approximately $216.0 million to $266.0 million with a
midpoint Equity Value of $241.0 million or from approximately $21.60 per share
to $26.60 per share of New Common Stock with a midpoint of $24.10 per share
assuming that a total of 10,000,000 shares of New Common Stock are issued and
outstanding on the Effective Date (without regard to the Equity Offering). The
Equity Value reflects the difference between the Reorganization Value and the
total amount of net debt that is estimated to be outstanding after giving effect
to the Plan, including the New Notes to be issued to holders of Allowed Senior
Note Claims and Other General Unsecured Claims, but prior to issuance of
additional New Common Stock in connection with the Equity Offering and the
purchases by the Equity Investor thereof.
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Gleacher has assisted the Debtors in arriving at the Reorganization
Value. In doing so, Gleacher has assumed and relied on the accuracy and
completeness of certain of the Projections The Projections reflect numerous
assumptions, including assumptions with respect to the future performance of the
Reorganized Debtors, the performance of the industry, general business and
economic conditions and other matters, most of which are beyond the Debtors'
control. Numerous factors may affect the future financial performance of the
Reorganized Debtors and the accuracy of the Projections. Therefore, the actual
results achieved during the projection period will vary from the projected
results, and may vary substantially. No representations can be or are being made
with respect to the accuracy of the Projections, or the ability of the
Reorganized Debtors to achieve the projected results.
In arriving at the Reorganization Value, Gleacher performed certain
quantitative analyses and made determinations as to the most appropriate and
relevant methods of financial and comparative analysis and the application of
those methods to the particular circumstances of the Reorganized Debtors.
Gleacher did not assign any specific relative weight to any analysis or factor
considered but rather made qualitative judgments as to the significance and
relevance of each analysis and factor based on the Debtors' circumstances,
including their operating performance.
Gleacher used the comparable-company trading multiple and discounted
cash-flow methodologies to arrive at the going-concern value of the Reorganized
Debtors. These valuation techniques reflect both the market's current view of
the Reorganized Debtors' value as well as a longer-term focus on the intrinsic
value of the cash flow projections in the Reorganized Debtors' business plan.
The valuation multiples and discount rates used by Gleacher to arrive at the
going-concern value of the Reorganized Debtors' business were based on the
public market valuation of selected public companies deemed generally comparable
to the operating businesses of the Reorganized Debtors. In selecting such
companies, Gleacher considered factors such as the focus of the comparable
companies' businesses as well as such companies' current and projected operating
performance relative to the Reorganized Debtors and other industry participants.
The foregoing valuations also are based on a number of additional assumptions,
including a successful reorganization of the Reorganized Debtors' business and
finances in a timely manner, the achievement of the forecasts reflected in the
Projections, the amount of available Cash and/or borrowing capacity available at
the Effective Date, the continuation of current market conditions through the
Effective Date, and the Plan becoming effective in accordance with its terms.
In connection with the analysis of the value of the Reorganized
Debtors, Gleacher (i) reviewed certain historical financial information of the
Debtors for recent years, (ii) reviewed the Projections and the assumptions
underlying them, (iii) reviewed certain internal financial and operating data of
the Debtors, (iv) met with certain members of management to discuss the Debtors'
operations and future prospects (including the operational changes contemplated
by the Projections), (v) reviewed publicly available financial data and (vi)
considered certain economic conditions and industry information relevant to the
Debtors' operating business and conducted such other analyses as Gleacher deemed
appropriate.
As noted above, Gleacher assumed and relied on the accuracy and
completeness of all financial and other information that was provided to or
discussed with it by the Debtors as well as publicly available information, and
did not assume any responsibility for independently verifying this information.
Gleacher also assumed that all financial information and analysis (including the
Projections) provided by the Debtors were prepared in good faith and on bases
reflecting the best currently available judgments and estimates of management of
the Debtors.
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Gleacher has not expressed and is not expressing any opinion with
respect to the financial information, analyses and forecasts provided by the
Debtors or the assumptions on which they are based.
In addition, Gleacher has not made or obtained an independent
valuation or appraisal of the assets or liabilities of the Reorganized Debtors,
and no such independent valuation or appraisal was provided to Gleacher in
connection with the valuation analysis.
The valuation analysis prepared by Gleacher is based on economic and
market conditions as they existed and could be evaluated as of August 18, 2003.
The Reorganization Value represents a hypothetical going-concern value for the
Reorganized Debtors. It was calculated solely for the purpose of determining
value available for distribution to creditors under the Plan and evaluating
whether the plan satisfied the "best interests test" under section 1129(a)(7) of
the Bankruptcy Code as well as establishing a reasonable estimate of the initial
stockholders' equity for fresh-start accounting. The Reorganization Value does
not purport to reflect or constitute an appraisal, a liquidation value or an
estimate of the actual market value that may be realized through the sale of any
securities to be issued pursuant to the Plan. The value of the Debtors' business
is subject to uncertainties and contingencies that are difficult to predict.
Consequently, the Reorganization Value is not necessarily indicative of any
actual value, which may be significantly more or less favorable than the value
set forth herein.
Additionally, the valuation of newly-issued securities is subject to
additional uncertainties and contingencies, all of which are difficult to
predict. Actual market prices of such securities at issuance will depend upon,
among other things, conditions in the financial markets, the anticipated initial
securities holdings of pre-petition creditors, some of which may prefer to
liquidate their investment rather than hold it on a long-term basis, and other
factors that generally influence the prices of securities. Actual market prices
of such securities also may be affected by the Debtors' history in chapter 11,
conditions affecting the Debtors' competitors or the industry generally in which
the Debtors participate or by other factors not possible to predict.
Accordingly, the Reorganization Value does not necessarily reflect, and should
not be construed as reflecting, any value that will be attained in the public or
private markets. Finally, the Equity Value shown herein is based on the
Reorganized Debtors' assumption regarding their capitalization on the Effective
Date.
The valuation set forth herein reflects the assumption that the
operating results anticipated by management and reflected in the Projections can
be achieved in all material respects, including contract retentions and
renewals. To the extent that the valuation is dependent on the Debtors'
achievement of the Projections contained in the Disclosure Statement, the
valuation should be considered speculative. The valuation also assumes (i) a
successful and timely reorganization of the Debtors' capital structure, (ii) the
Plan becoming effective in accordance with its proposed terms and (iii) the
continuity of the present operating management of the Debtors following
consummation of the Plan.
Because of the uncertainties discussed herein, neither Gleacher nor
the Debtors assumes any responsibility for the accuracy of the valuation
estimate.
7. Value of New Warrants
The Plan contemplates the distribution of New Warrants to holders of
Magellan Preferred Stock Interests and Magellan Common Stock Interests. The
exercise price of the New Warrants is $69.46, an amount greater than the
estimated equity value per share of New Common Stock. The exercise of the New
Warrants requires the payment to the Reorganized Debtor of Cash in the amount of
the exercise price. While New Warrants may be valued using complex mathematical
computations, those computations are based upon highly subjective assumptions,
58
including; among, others, the estimated trading prices of the equity securities
into which the New Warrants may be converted and the projected volatility of
price movements of those shares. Based on (i) an assumed trading price equal to
the assumed midpoint Equity Value of $241.0 million, (ii) a distribution of
approximately 10,000,000 shares of New Common Stock and (iii) an estimated
trading volatility of between 40% and 60% (based on observed historical trading
volatilities of publicly traded companies that are comparable to the Debtors),
Gleacher computed the theoretical value of a New Warrant using a variant of a
standard computation methodology for the valuation of warrants of $7.96. The
value of a New Warrant is estimated to be in a range from, $5.46 to $10.46 per
New Warrant. The aggregate value of the New Warrants is estimated to be in a
range from $1.4 million to $2.6 million, with a midpoint of $2.0 million.
THERE CAN BE NO ASSURANCE THAT THE NEW COMMON STOCK WILL TRADE AT THE
ESTIMATED EQUITY VALUE PER SHARE, THAT THE TRADING VOLATILITY OF THE NEW COMMON
STOCK WILL BE PERCEIVED TO BE IN A RANGE OF 40% TO 60%, OR THAT THE MARKET VALUE
OF THE NEW WARRANTS WILL BE IN THE RANGE DESCRIBED ABOVE. IN ADDITION, THE
MATHEMATICAL COMPUTATION METHODOLOGY USED DOES NOT ACCOUNT FOR THE POTENTIAL
DILUTIVE IMPACT OF THE NEW WARRANTS AND THE OTHER OPTIONS AND WARRANTS
CONTEMPLATED BY THE PLAN. ACTUAL TRADING VALUES FOR NEW WARRANTS FREQUENTLY
DIFFER MATERIALLY FROM THOSE VALUES DERIVED FROM MATHEMATICAL COMPUTATIONS.
ACCORDINGLY, THE FOREGOING COMPUTATION OF VALUE CANNOT BE RELIED UPON AS A
MEASURE OF REALIZABLE VALUE OF THE NEW WARRANTS.
THE VALUATIONS HEREIN REPRESENT ESTIMATED GOING-CONCERN VALUES AND
NEW WARRANT VALUES AND DO NOT NECESSARILY REFLECT VALUES THAT COULD BE
ATTAINABLE IN PUBLIC OR PRIVATE MARKETS. THE EQUITY VALUES AND NEW WARRANT
VALUES ASCRIBED IN THE ANALYSIS DO NOT PURPORT TO BE ESTIMATES OF THE
POST-REORGANIZATION MARKET TRADING VALUES. SUCH TRADING VALUE, IF ANY, MAY BE
MATERIALLY DIFFERENT FROM THE EQUITY VALUE AND NEW WARRANT VALUE RANGES
ASSOCIATED WITH THE VALUATION ANALYSIS.
V.
BUSINESS DESCRIPTION AND REASONS FOR CHAPTER 11
A. THE DEBTORS' BUSINESSES
The Debtors are currently engaged in the behavioral managed
healthcare business. Magellan is the country's leading behavioral managed care
organization, with approximately 68 million covered lives. Magellan's customers
include health plans, government agencies, unions, and corporations. Additional
detail on the Debtors' operations and business segments can be found in its Form
10-KA for the year 2002, filed on January 23, 2003, and its quarterly report on
Form 10-Q for the quarter ended March 31, 2003, filed on May 15, 2003,
respectively, with the Securities and Exchange Commission. These documents are
attached hereto as exhibits and may be obtained from the Securities and Exchange
Commission, including at their EDGAR website www.sec.gov or commercially at such
websites as www.freeedgar.com. The Debtors' monthly operating reports are
available on the Bankruptcy Court's Electronic Case Filing System which can be
found at www.nysb.uscourts.gov, the official website for the Bankruptcy Court,
and at www.magellanhealth.com.
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1. Description of Business
Magellan and its subsidiaries (collectively, for this subparagraph 2,
"Magellan") are currently engaged in the behavioral managed healthcare business.
Magellan, a public company organized under the laws of Delaware, is the ultimate
parent of the Magellan family of companies. Within the behavioral managed
healthcare business, Magellan operates in the following four segments, based on
the services it provides and the customers that it serves: (i) Workplace Group
("Workplace"); (ii) Health Plan Solutions Group ("Health Plans"); (iii) Public
Solutions Group ("Public"); and (iv) Corporate and Other. Workplace provides,
primarily to employers, EAP assessment and referral services and integrated
products that combine EAP with risk-based or ASO managed behavioral healthcare
services. Health Plans provides risk-based and ASO products to health plan
beneficiaries through contracts with managed care companies, health insurance
companies and other health plans. Public provides risk-based and ASO products to
Medicaid beneficiaries through contracts with State or local government
agencies. Corporate and Other mainly provides administrative support to the
other segments.
According to enrollment data reported in Open Minds, Magellan is the
nation's largest provider of behavioral managed healthcare services. As of
December 31, 2002, Magellan had approximately 67.4 million covered lives under
behavioral managed healthcare contracts and managed behavioral healthcare
programs for approximately 2,300 customers. Through their current network of
approximately 48,000 providers (including treatment facilities), Magellan
manages behavioral healthcare programs for HMOs, Blue Cross/Blue Shield
organizations and other insurance companies, corporations, federal, state and
local governmental agencies, labor unions and various state Medicaid programs.
Magellan believes it has the largest and most comprehensive behavioral
healthcare provider network in the United States.
The Debtors' professional care managers coordinate and manage the
delivery of behavioral healthcare treatment services through the Debtors'
network of providers, which includes psychiatrists, psychologists, licensed
clinical social workers, marriage and family therapists and licensed clinical
professional counselors. The treatment services provided by the Debtors'
behavioral provider network include outpatient programs (such as counseling and
therapy), intermediate care programs (such as sub-acute emergency care,
intensive outpatient programs and partial hospitalization services), inpatient
treatment services and alternative care services (such as residential treatment,
home and community-based programs and rehabilitative and support services).
Magellan provides these services through: (i) risk-based products; (ii) EAPs;
(iii) ASO products and (iv) products that combine features of some or all of
these products. Under risk-based products, Magellan and its subsidiaries arrange
for the provision of a full range of behavioral healthcare services for
beneficiaries of their customers' healthcare benefit plans through fee
arrangements under which Magellan assumes all or a portion of the responsibility
for the cost of providing such services in exchange for a fixed per member per
month fee. Under EAPs, Magellan and its subsidiaries provide assessment services
to employees and dependents of their customers, and if required, referral
services to the appropriate behavioral healthcare service provider. Magellan and
its subsidiaries are responsible for the cost of referred services. Under ASO
products, Magellan provides services such as utilization review, claims
administration and provider network management. Magellan does not assume the
responsibility for the cost of providing behavioral healthcare services pursuant
to their ASO products.
B. EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11 CASES
During 2002, the Debtors' operating performance deteriorated
primarily due to a loss of revenue from their service contract with Aetna.
Pursuant to the Aetna Master Service Agreement, the Debtors manage the
behavioral health care for substantially all of Aetna's members in exchange for
a per member per month fee from Aetna. Aetna's membership declined in 2002 due
60
to certain initiatives by Aetna to withdraw from certain businesses (which was
permitted under, and did not constitute a breach of, the terms of the Aetna
Master Services Agreement). Accordingly, the Debtors' revenues decreased.
Another key factor was the increase in the cost of care, which
affects the Debtors' profitability in their risk-based business. Risk-based
business represented approximately 51% of the covered lives of Magellan and its
subsidiaries (including its Debtor and non-Debtor subsidiaries) as of September
30, 2002 and 87.7% of their revenue for the fiscal year ended September 30,
2002. Under the Debtors' risk-based business, the Debtors are responsible for
the cost of the behavioral health care incurred by their customers' members in
exchange for a fixed per member per month fee from the customers. In late 2001
and early 2002, the Debtors began to experience increases in the cost of such
care due to several factors, including increased usage of behavioral health
benefits by the members. The rising costs of care per member and the relatively
fixed revenue per member resulted in a decrease in profitability for the
Debtors. The Debtors attempted and continue to attempt to seek rate increases
from their customers; however, many of the Debtors' contracts are multi-year
contracts and, therefore, the opportunities to re-price the contracts are
limited. In addition, competition and other factors have limited the Debtors'
ability to obtain rate increases that match the cost of care increases.
As a result of these and other factors, the Debtors' profitability,
and cash flow from operations, decreased significantly. The Debtors determined
in the Spring of 2002 that the lower level of cash flow from operations would
not be sufficient to satisfy their non-operating obligations, including
principal payments on the debt, contingent purchase price and earn-out
obligations with respect to certain acquisitions and capital expenditures
necessary to maintain their intellectual property and other operating
infrastructure. Consequently, at that time, the Debtors attempted to refinance
their secured obligations under the Senior Secured Credit Agreement with debt
that provided more flexibility in financial covenants to account for the lower
level of earnings and more liquidity in terms of principal amortization. The
Debtors, however, were not able to obtain refinancing in amounts and with
appropriate terms that would provide the necessary relief.
Recognizing the constraints their debt structure placed upon the
Debtors' ability to effectively operate their businesses and maximize value,
beginning in late 2002, the Debtors began discussions with an ad hoc committee
of the holders of the Senior Notes and the Senior Subordinated Notes, as well as
their professionals, regarding the terms of a capital restructuring. Houlihan
Lokey acted as the financial advisor to the Informal Committee and Akin Gump
Strauss Hauer & Feld LLP acted as the legal advisor to the Informal Committee.
Shortly thereafter, the Debtors also began to engage in discussions with the
Senior Lenders and Aetna, and their respective professionals, with respect to
the same matter. Alvarez & Marsal acts as financial advisors to the
Administrative Agent under the Senior Secured Credit Agreement, Wachtell,
Lipton, Rosen & Katz and Cravath, Swaine & Moore LLP act as legal advisors to
the Administrative Agent under the Senior Secured Credit Agreement, and Davis
Polk & Wardwell acts as legal advisor to Aetna.
In the fourth quarter of fiscal 2002, the Debtors announced that they
most likely would not meet, as of September 30, 2002, one or more of their
financial covenants under the Senior Secured Credit Agreement. As a result and
in furtherance of the restructuring effort, the Debtors approached the Lenders
under the Senior Secured Credit Agreement for a waiver. On October 25, 2002,
Magellan entered into an agreement with its Lenders that provided for, among
other things, waivers of financial covenants under the Senior Secured Credit
Agreement (collectively, the "October Waiver"). The October Waiver provided
Magellan with a waiver through December 31, 2002 of any event of default that
may exist as a result of the failure of Magellan to comply with any of the
financial covenant requirements for the fiscal quarter ended September 30, 2002.
61
On January 1, 2003, Magellan entered into an amendment and waiver
(the "January Waiver") which continued the agreements contained in the October
Waiver, as well as waiving any events of default triggered by Magellan's failure
to satisfy financial covenants for the quarter ended December 31, 2002, through
and including January 15, 2003. In addition, the January Waiver amended the
Senior Secured Credit Agreement by eliminating the LIBOR interest rate option
for any loans which are incurred or rolled over after January 1, 2003. As a
result of the loss of the LIBOR interest rate option, Magellan's interest
expense under the Senior Secured Credit Agreement increased.
On January 10, 2003, the State of Tennessee obtained an order to
seize possession and control of the assets of one of the Debtors' non-Debtor
subsidiaries, causing Magellan to default under another provision of the Senior
Secured Credit Agreement. This additional default resulted in an automatic
acceleration of Magellan's obligations under the Senior Secured Credit
Agreement. The automatic acceleration of the obligations under the Senior
Secured Credit Agreement also constituted a default under the Senior Notes and
the Senior Subordinated Notes.
As a result of the default and automatic acceleration of Magellan's
obligations under the Senior Secured Credit Agreement, Magellan had no ability
to access any credit thereunder absent a further waiver by 100% of the Lenders.
Regrettably, the Debtors were unable to obtain such a waiver as a result of
their unwillingness to succumb to the demands of two Lenders who insisted upon
not only a permanent 2.00% increase in the interest rate under the Senior
Secured Credit Agreement, but also that the Lenders receive a waiver fee equal
to $2.7 million as a condition to agreeing to merely a two week waiver. Notably,
when the Debtors advised the Administrative Agent under the Senior Secured
Credit Agreement of, among other things, the total unreasonableness of the $2.7
million fee request, the response by the two Lenders was to increase the demand
for a waiver fee from $2.7 million to $13.5 million. The order to seize
possession and control of the assets of one of the Debtors' non-Debtor
subsidiaries obtained by the State of Tennessee was withdrawn in February, 2003.
Although the Debtors were hopeful that they could achieve, and indeed
made substantial progress toward, a consensus with all of their Lenders with
respect to a comprehensive restructuring to be implemented pursuant to a plan of
reorganization, it became apparent that, because of continuing unconscionable
demands by the same two Lenders, such a result would not be achievable.
Nevertheless, the Administrative Agent under the Senior Secured Credit
Agreement, as well as the Senior Lenders holding approximately 47.5% of the
obligations under Senior Secured Credit Agreement (including the administrative
agent), executed agreements, pursuant to which they have agreed to vote for a
plan of reorganization which is similar to the Plan. In addition, 52% of the
holders of the Subordinated Notes and 35% of the holders of the Senior Notes
have also executed agreements, pursuant to which they have agreed to vote for a
plan of reorganization which is similar the Plan. These agreements were executed
prior to the Commencement Date. The lock-up and voting agreements executed by
certain Senior Lenders are not binding on the parties thereto because the Plan
is not materially consistent with the term sheet attached thereto. In addition,
all of the lock-up and voting agreements referred to above are terminable by the
Senior Lenders or the holders of Senior Notes or Subordinated Notes party
thereto because the Bankruptcy Court did not approve this Disclosure Statement
on or before June 30, 2003. In formulating the Plan, Reorganized Magellan had
significant discussions with the Administrative Agent and the Creditors
Committee and the Plan is product of those discussions.
In addition, as a result of substantial negotiations with Aetna, in
connection with the Plan, the Debtors and Aetna have entered into the Aetna
Amended MSA, which would have expired pursuant to its terms on December 31,
2003, and a settlement of the Debtors' obligation to pay Aetna the approximately
$60 million owed. As provided in the Plan, the Aetna Amended MSA, which was
executed prior to the Commencement Date by all of the relevant Debtors, provides
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for, among other things, (i) a two year extension of the Master Services
Agreement (to and including December 31, 2005), (ii) an option for Aetna to
purchase certain Aetna-dedicated business units on December 31, 2005 (the assets
and business subject to such option shall be agreed to by the parties) for a
purchase price of $30 million plus $500 per outpatient provider, $2,500 per
facility that provides partial hospitalization or intermediate care and $5,000
per facility providing inpatient care, in each case, that becomes part of the
Aetna network, and (iii) in connection with the settlement of the $60 million
owed to Aetna, a cash payment by the Debtors to Aetna in the amount of $15
million plus a note for the balance owed and certain accrued interest. The
exercise of such purchase option is subject to the limitations set forth in the
New Senior Secured Credit Agreement. The extension of the existing services
agreement and the settlement of the $60 million obligation are integral
components of the Plan.
In order to fulfill the condition to confirmation and consummation as
specified in the original plan of reorganization filed with the Bankruptcy Court
on March 11, 2003 that the Debtors realize not less than $50 million in proceeds
(and $47.5 million in net proceeds) from an equity or debt investment, prior to
the Commencement Date, the Debtors sought a commitment from their primary
creditor constituencies, as well as a third party investor, the Equity Investor,
for an equity and/or debt infusion to be made in conjunction with the
effectiveness of the Plan. Because the Equity Investor required more time to
complete its due diligence, it was unable to provide the Debtors with a
commitment letter at that time. The Debtors did, however, receive two definitive
proposals to provide financing in connection with the consummation of the
restructuring, the most favorable of which was made by Amalgamated Gadget, L.P.
("AG") and Pequot Capital Management, Inc. ("PCM" and, together with AG, the
"Initial Investors"), both on behalf of certain managed funds and accounts.
After extensive negotiation with the Initial Investors, the Debtors
and the Initial Investors reached an agreement on the terms and provisions of an
investment that was set forth in a commitment letter dated March 10, 2003 (the
"PCM/AG Equity Commitment Letter"). See section II.I.5 herein. The PCM/AG Equity
Commitment Letter also provides for indemnification obligations, expense
reimbursement and the payment of various fees, including a break-up fee of $1
million and a commitment fee of $1.5 million, of which $750,000 was previously
paid on March 11, 2003. On April 4, 2003, the Court granted approval of the
PCM/AG Equity Commitment Letter and, specifically, the break-up fee,
indemnification, expense reimbursement obligation and commitment fee contained
therein.
The Debtors nevertheless continued to have discussions with the
Equity Investor and other potential third-party investors regarding a proposal
that would be even more favorable to the Debtors and their creditors. After
completing its due diligence and engaging in extensive negotiations with the
Debtors, on May 21, 2003, the Equity Investor presented the Debtors with a
funding commitment, pursuant to which the Equity Investor agreed to provide the
Debtors with, among other things, a commitment to purchase up to $200 million of
common stock of Reorganized Magellan in conjunction with the consummation of a
plan of reorganization.
In June and July of 2003, the Debtors conducted an informal auction
process, pursuant to which Amalgamated and the Equity Investor bid. At the
conclusion of such process, the final bid by the Equity Investor was supported
by the board of directors of Magellan and the Official Committee. In selecting
the bid of the Equity Investor, the Board of Directors considered, among other
factors, the Equity Investor's strength as a strategic investor. As a result,
the Debtors and the Equity Investor entered into the Equity Commitment Letter.
Such letter was approved on July 14, 2003. The terms of that letter are embodied
in the Plan. In addition, the Equity Commitment Letter provides for the payment
of various fees, indemnification and expense reimbursement. See II.I.6.
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C. EXIT FINANCING
Although the Debtors consider the terms of the New Secured Credit
Agreement fair and reasonable and believe that they can successfully reorganize
by entering into the New Senior Secured Credit Agreement, they, nevertheless,
continued to explore the possibility of obtaining exit financing that would
effectively replace the New Senior Secured Credit Agreement under terms that are
more favorable. In connection therewith, the Debtors engaged in various
discussions and negotiations with certain financial institutions regarding their
expected financing needs upon the Effective Date. The Debtors determined that
they would require financing in the form of a secured credit facility in the
amount of approximately $230 million that could be utilized to refinance the
outstanding balance under the Senior Secured Credit Agreement, fund certain
costs and expenses directly associated with emerging from chapter 11, support
letters of credit and provide for general working capital requirements and
general corporate purposes.
In furtherance of the foregoing, the Debtors engaged in negotiations
with DBSI with respect to proposed exit financing that would provide them with
the financing necessary to refinance their obligations under the Senior Secured
Credit Facility on terms more favorable than the New Senior Secured Credit
Agreement proposed in the Plan.
On July 31, 2003, DB and Magellan entered into the Exit Financing
Commitment Letter, dated July 31, 2003, and an Exit Financing Fee Letter, dated
July 31, 2003. Pursuant to the terms of the Exit Financing Commitment Letter, DB
has committed to provide the Debtors with the Exit Financing in an aggregate
amount of up to $230 million in connection with the Debtors' emergence from
chapter 11 and to act as administrative agent for the facility. In addition,
DBSI has agreed to act as the sole lead arranger and sole book running manager
with respect to such Exit Financing.
The Exit Financing is subject to the terms of the Aetna Amended MSA,
which provides that the Reorganized Debtors shall not, and shall cause each of
their affiliates not to, enter into or to agree or commit to enter into any
financing arrangement, or other agreement, contract, arrangement or other
transaction that would (A) result in the imposition or continuance of any lien
on any of the Purchased Assets (as defined in the Aetna Asset Purchase
Agreement) which would not be released upon the sale of the Purchased Assets to
Aetna or (B) prevent, alter or delay or conflict with any of the transactions
contemplated by the Aetna Amended MSA or the Aetna Asset Purchase Agreement. The
obligations of Reorganized Magellan under the Aetna Purchase Option and the New
Aetna Note will be guaranteed by those subsidiaries of Reorganized Magellan as
are guaranteeing the New Facilities or the Exit Financing, as the case may be
(which guaranty will be subordinated to the New Facilities or the Exit
Financing, as the case may be (and any guarantees thereof), on terms that are
satisfactory to the Administrative Agent (or the administrative agent under the
Exit Financing) and Aetna) and secured by a "silent" second priority lien (i.e.,
a junior lien with only limited rights and remedies as to the collateral, on
terms that are satisfactory to the Administrative Agent (or the administrative
agent under the Exit Financing) and Aetna) on the assets of Reorganized Magellan
and its subsidiaries which will secure the New Senior Secured Obligations or the
Exit Financing.
The commitments of DB under the Exit Financing Commitment Letter
terminate on the earliest of (i) September 15, 2003, unless on or prior to such
date the Bankruptcy Court has entered an order approving the Commitment Letter,
(ii) November 15, 2003, unless on or prior to such date the Bankruptcy Court has
entered an order confirming the Plan, and (iii) December 15, 2003, unless the
Transaction has been consummated and initial borrowings under the Exit Financing
have occurred. The commitments of DB under the Exit Financing Commitment Letter
are also subject to a number of conditions precedent that are usual and
customary for these types of facilities plus, among others, the following
conditions: (a) All obligations in respect of the Exit Financing shall be
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"senior debt" for the purposes of the New Aetna Note (as defined in the Plan);
(b) Magellan shall have received at least $100 million of gross cash proceeds
from the Equity Offering and Investment. In addition to the proceeds from the
Term Loan and the Equity Offering, Magellan shall have sufficient cash to make
all cash payments required to be made under the Plan and shall have at least $65
million of cash after making all cash payments required to be made pursuant to
the Plan; (c) After consummation, the Debtors shall have no outstanding
preferred equity, indebtedness or contingent liabilities, except for (i)
indebtedness incurred pursuant to the Exit Financing, (ii) up to $300 million in
New Notes (as such amount may be reduced as provided in the Exit Financing
Commitment Letter), (iii) the New Aetna Note in the amount of approximately
$47.8 million and (iv) certain other debt and other liabilities that will be
assumed pursuant to the Plan; (d) the Plan shall have been approved by the
Bankruptcy Court, the order confirming the Plan shall not be subject to any
stay, and all conditions precedent to the effectiveness of the Plan shall have
occurred; and (e) there shall have been no material adverse change to Magellan
and its subsidiaries since March 31, 2003. As a result of these conditions,
there can be no assurance that the Debtors will consummated the Exit Financing.
D. BUSINESS WITH AETNA
On December 4, 1997, Magellan consummated the purchase of Human
Affairs International, Incorporated ("HAI"), formerly a unit of Aetna, for
approximately $122.1 million, which Magellan funded from cash on hand. HAI
managed behavioral healthcare programs primarily through employee assistance
programs ("EAPs") and other behavioral managed healthcare plans. At such time,
Aetna entered the Aetna Service Agreement as of August 5, 1997, which was later
amended by the First Amendment to Master Services Agreement, dated December 4,
1997, between Magellan, Aetna and HAI. For the past three years, the revenues
derived from the Aetna Service Agreement have been $283.7 million, $315.6
million and $250.3 million in fiscal years 2001, 2002 and 2003, respectively.
Pursuant to Section 7 of the Aetna Master Service Agreement, Magellan
was required to make additional contingent payments of up to $60.0 million
annually to Aetna through 2003 which amount constitutes the Aetna Claim. The
last payment was due February 15, 2003. The Debtors did not make such payment.
Prior to the execution of the Aetna Amended MSA, the Aetna Master Service
Agreement would have expired on December 31, 2003. Prior to the Commencement
Date, Magellan sought an extension of the Aetna Master Service Agreement.
Magellan and Aetna had extensive prepetition discussions relating to
the extension of the Aetna Master Service Agreement and the settlement of the
Aetna Claim. On March 11, 2003, prior to the filing of the petitions in these
Reorganization Cases, Aetna and the Debtors entered into the Aetna Amended MSA.
The Aetna Amended MSA required Magellan (and the other Debtors to the extent a
party thereto) to obtain the Bankruptcy Court's authorization and approval to
assume the Aetna Amended MSA within 60 days of the Commencement Date. The Aetna
Amended MSA was approved and assumed pursuant to an Order of the Bankruptcy
Court dated April 23, 2003. Pursuant to the terms of the Aetna Amended MSA and
the Plan, on the Effective Date, Aetna, as the holder of the Aetna Claim, which
Claim is irrevocably deemed Allowed under the Plan, shall receive, on account of
such Claim and on account of Aetna's rights under the Aetna Amended MSA: (a) $15
million in Cash, (b) the New Aetna Note, in the principal amount of $45 million
plus an amount equal to interest on $60 million from February 15, 2003 through
and including the Effective Date at the interest rate set forth in the New Aetna
Note, (c) the New Aetna Warrant and (d) the rights provided for under the Aetna
Registration Rights Agreement. Moreover, the Confirmation Order shall confirm
that the Aetna Amended MSA and all documents and instruments related thereto
(which documents were previously assumed by the Debtors pursuant to an Order of
the Bankruptcy Court) shall be binding on the Reorganized Debtors.
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The Debtors believe that the settlement of the Aetna Claim is, and
execution of the Aetna Amended MSA was, fair and reasonable.
E. PENDING LITIGATION AND OTHER PROCEEDINGS
1. In General
The management and administration of the delivery of behavioral
managed healthcare services, and the direct provision of behavioral healthcare
treatment services, entail significant risks of liability. From time to time,
the Debtors are subject to various actions and claims arising from the acts or
omissions of their employees, network providers or other parties. In the normal
course of business, the Debtors receive reports relating to suicides and other
serious incidents involving patients enrolled in their programs. Such incidents
occasionally give rise to malpractice, professional negligence and other related
actions and claims against the Debtors or their network providers. As the number
of lives covered by the Debtors grows and the number of providers under contract
increases, actions and claims against the Debtors (and, in turn, possible legal
liability) predicated on malpractice, professional negligence or other related
legal theories can be expected to increase. Many of these actions and claims
received by the Debtors seek substantial damages and therefore require the
defendant to incur significant fees and costs related to their defense. To date,
claims and actions against the Debtors alleging professional negligence have not
resulted in material liabilities and the Debtors do not believe that any such
pending action against it will have a material adverse effect on the Debtors.
However, there can be no assurance that pending or future actions or claims for
professional liability (including any judgments, settlements or costs associated
therewith) will not have a material adverse effect on the Debtors.
To the extent the Debtors' customers are entitled to indemnification
under their contracts with the Debtors relating to liabilities they incur
arising from the operation of the Debtors' programs, such indemnification may
not be covered under the Debtors' insurance policies. In addition, to the extent
that certain actions and claims seek punitive and compensatory damages arising
from alleged intentional misconduct by the Debtors, such damages, if awarded,
may not be covered, in whole or in part, by the Debtors' insurance policies.
From time to time, the Debtors receive notifications from and engage
in discussions with various governmental agencies concerning their respective
managed care businesses and operations. As a result of these contacts with
regulators, the Debtors in many instances implement changes to their operations,
revise their filings with such agencies and/or seek additional licenses to
conduct their business. In recent years, in response to governmental agency
inquiries or discussions with regulators, the Debtors have determined to seek
licensure as a single service HMO, TPA or utilization review agent in one or
more jurisdictions.
2. OIG Claims
The healthcare industry is subject to numerous laws and regulations.
The subjects of such laws and regulations include, but are not limited to,
matters such as licensure, accreditation, government healthcare program
participation requirements, reimbursement for patient services, and Medicare and
Medicaid fraud and abuse. Over the past several years, government activity has
increased with respect to investigations and/or allegations concerning possible
violations of fraud and abuse and false claims statutes and/or regulations by
healthcare providers. Entities that are found to have violated these laws and
regulations may be excluded from participating in government healthcare
programs, subjected to fines or penalties or required to repay amounts received
from the government for previously billed patient services. The Office of the
Inspector General of the Department of Health and Human Services ("OIG") and the
United States Department of Justice ("Department of Justice") and certain other
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governmental agencies are currently conducting inquiries and/or investigations
regarding the compliance by the Debtors and certain of their affiliates with
such laws and regulations. Certain of the inquiries relate to the operations and
business practices of the Psychiatric Hospital Facilities prior to the
consummation of the Crescent transactions in June 1997. The Department of
Justice has indicated that its inquiries are based on its belief that the
federal government has certain civil and administrative causes of action under
the Civil False Claims Act, the Civil Monetary Penalties Law, other federal
statutes and the common law arising from the participation in federal health
benefit programs of the Psychiatric Hospital Facilities nationwide. The
Department of Justice inquiries relate to the following matters: (i) Medicare
cost reports; (ii) Medicaid cost statements; (iii) supplemental applications to
CHAMPUS/TRICARE based on Medicare cost reports; (iv) medical necessity of
services to patients and admissions; (v) failure to provide medically necessary
treatment or admissions; and (vi) submission of claims to government payors for
inpatient and outpatient psychiatric services. No amounts related to such
proposed causes of action have yet been specified.
The Debtors have been in extensive negotiations with the Department
of Justice concerning this Claim. Magellan believes that it will settle this
Claim prior to Confirmation.
3. Wachovia
On or about August 4, 2000, Magellan was served with a lawsuit filed
by Wachovia Bank, N.A. ("Wachovia") in the Court of Common Pleas of Richland
County, South Carolina, seeking recovery under the indemnification provisions of
an Engagement Letter between South Carolina National Bank (now Wachovia) and
Magellan and the Employee Stock Ownership Plan ("ESOP") Trust Agreement between
South Carolina National Bank (now Wachovia) and Magellan for losses sustained in
a settlement entered into by Wachovia with the United States Department of Labor
("DOL") in connection with the ESOP's purchase of stock of Magellan in 1990
while Wachovia served as ESOP Trustee. The participants of the ESOP were
primarily employees who worked in the Debtors' healthcare provider and
franchising segments. Magellan subsequently removed the case to the United
States District Court for the District of South Carolina (Case No.
3:00-CV-02664). Wachovia also alleges fraud, negligent misrepresentation and
other claims, and asserts losses of $30 million from the settlement with the DOL
(plus costs and interest which amount to approximately $10 million). During the
second quarter of fiscal 2001, the court entered an order dismissing all of the
claims asserted by Wachovia, with the exception of the contractual
indemnification portion of the claim. Magellan disputes Wachovia's claims and
has been vigorously contesting such claims. During November 2002, Magellan's
Board of Directors rejected a proposed settlement of this claim that had been
reached as a result of a court-ordered mediation. This litigation has been
partially stayed as a consequence of the commencement of the Reorganization
Cases. The Debtors believe, however, that such claims constitute prepetition
Other General Unsecured Claims and, to the extent Allowed, will be in Class 9
under the Plan.
4. RICO and ERISA Class Actions
On October 26, 2000, two class action complaints (the "Class
Actions") were filed against Magellan Health Services, Inc. and Magellan
Behavioral Health, Inc. (the "Defendants") in the United States District Court
for the Eastern District of Missouri under the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and ERISA. The class representatives purport to bring
the actions on behalf of a nationwide class of individuals whose behavioral
health benefits have been provided, underwritten and/or arranged by the
Defendants since 1996 (RICO class) and 1994 (ERISA class). The complaints allege
violations of RICO and ERISA arising out of the Defendants' alleged
misrepresentations with respect to and failure to disclose its claims practices,
the extent of the benefits coverage and other matters that cause the value of
benefits to be less than the value represented to Magellan's members. The
complaints seek unspecified compensatory damages, treble damages under RICO, and
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an injunction barring the alleged improper practices, plus interest, costs and
attorneys' fees. During the third quarter of fiscal 2001, the court transferred
the Class Actions to the United States District Court for the District of
Maryland (Case No. L-01-01786). These actions are similar to suits filed against
a number of other health care organizations, elements of which have already been
dismissed by various courts around the country, including the Maryland court
where the Class Actions are now pending. The Debtors believe that the claims
asserted in these actions are without merit. This litigation has been stayed as
a consequence of the commencement of the Reorganization Cases. The Debtors
believe, however, that such claims constitute prepetition Other General
Unsecured Claims and, to the extent Allowed, will be in Class 9 under the Plan.
No Claim has been filed with respect to the Class Action and therefore Magellan
believes that there will be no Allowed Claim with respect thereto.
5. Tennessee Actions
On January 10, 2003, the Tennessee Department of Commerce and
Insurance (the "Department") sought and received on an ex parte basis an order
of seizure (the "Seizure Order") of Tennessee Behavioral Health, Inc. ("TBH"), a
Tennessee corporation and wholly-owned non-Debtor subsidiary of Magellan, from
the Chancery Court of State of Tennessee (20th Judicial District, Davidson
County). TBH continued to operate in the ordinary course of business, subject to
approvals of payments and disbursements by the agent appointed by the
Commissioner of Commerce and Insurance for the State of Tennessee (the
"Commissioner"). On February 12, 2003, TBH reached an agreement with the
Tennessee Department of Commerce and Insurance under which the Seizure Order has
been lifted. Under the agreement, TBH will operate under an agreed notice of
supervision. Both the State of Tennessee and Magellan acknowledge that TBH is
now and has been continuously compliant with the State of Tennessee's net worth
requirements.
6. MTS Health Partners, L.P.
On or about October 30, 2002, MTS Health Partners, L.P. ("MTS") filed
an action against Magellan in the United States District Court for the Southern
District of New York. In this action, MTS asserts that Magellan breached a
contract executed by the parties in June, 2002 pursuant to which MTS was
retained to render certain advisory services for Magellan. The complaint in this
action seeks damages for breach of contract for monies which Magellan was
allegedly required to pay to MTS under the contract. The complaint in this
action also seeks damages based upon the theory of quantum meruit. On December
27, 2002, Magellan filed an answer to the complaint in which it denied all
material and substantive allegations made against it in the complaint. The
answer also asserted counterclaims against MTS for breach of contract and
professional negligence, in which Magellan claimed that MTS failed to perform
many of its obligations under the contract and act in the best interests of
Magellan. Discovery has yet to commence in this action. The Debtors believe that
the claims asserted in these actions are without merit. This litigation has been
stayed as a consequence of the commencement of the Reorganization Cases. MTS has
filed claims against the Debtors in the amount of $12 million plus damages
resulting from legal fees in an unliquidated amount. The Debtors believe,
however, that such claims constitute prepetition Other General Unsecured Claims
and, to the extent Allowed, will be in Class 9 under the Plan.
7. EPA Claims
The United States Environmental Protection Agency (the "EPA") has
identified Charter Baywood Hospital ("Baywood Hospital") and related entities in
Long Beach, California as potentially responsible parties in connection with the
Casmalia Disposal Site, a Superfund site located in Santa Barbara County,
California. The EPA has asserted that in 1986 and 1987, Baywood Hospital sent in
excess of 500,000 pounds of hazardous waste to the Casmalia Disposal Site. The
EPA has asserted liability under the Resource Conservation and Recovery Act (42
U.S.C. Sect. 6901 et. seq.) and/or the Comprehensive Environmental Response,
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Compensation, and Liability Act (42 U.S.C. Sect. 6901 et. seq.) The Debtors
believe that all of the waste disposed of by the Baywood Hospital was not
hazardous waste, and therefore there is no liability under environmental law.
The Debtors have been in extensive discussions with the EPA and the
Debtors believe that a settlement will be reached with the EPA prior to the
Confirmation Date.
8. Normal Course Litigation
The Debtors also are subject to or party to other litigation, claims,
and civil suits relating to their operations and business practices. All of such
litigation has been stayed as a consequence of the commencement of the
Reorganization Cases. The Debtors believe, however, that such claims constitute
prepetition Other General Unsecured Claims and, to the extent Allowed, will be
in Class 9 under the Plan.
VI.
SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASES
A. FILING AND FIRST DAY ORDERS
On the Commencement Date, the Bankruptcy Court entered certain orders
designed to minimize any disruption of the Debtors' business operations and to
facilitate their reorganization. Certain of these Orders are described below.
1. Payment of Providers and Customers
Because the fundamental nature of the Debtors' business is to
provide, or assist in the coordination of, care for their Members through a
process of referring their Members to appropriate behavioral health care
providers, it is essential to the value of the Debtors' business enterprise that
certain critical relationships with the Debtors' mental health Providers and
certain physician advisors who evaluate Members' medical necessities (the
"Physician Advisors") not be disrupted or impaired. In order to ensure that
Providers and Physician Advisors continue to conduct business with the Debtors
and continue to provide services to the Debtors' customers, on the Commencement
Date, the Debtors requested that the Court grant them authority to satisfy
Provider and Physician Advisor Claims (whether pre- or post- Commencement Date)
in the ordinary course of business. This request was granted on the Commencement
Date.
Furthermore, because the Debtors' main source of revenue is payment
from their customers, it is critical to the Debtors' relationships with their
customers that the Debtors continue certain customer practices that were in
place prior to the commencement of their chapter 11 cases and make payments of
Customer Claims in connection therewith. Such customer practices include
providing customers with certain refunds, refundable deposits, profit sharing
and reimbursements and paying performance penalties, prepaid contract discounts
and claims processing fees (collectively, the "Customer Practices"). In order to
maintain customer loyalty, retain exiting customers and continue to attract new
customers, the Debtors requested that the Court grant them authority to continue
Customer Practices and to pay Customer Claims arising in connection therewith.
This request was granted on the Commencement Date.
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2. Payment of Employee Wages and Benefits
The Debtors' employees are essential to the continued operation of
their businesses and their successful reorganization. Thus, in order to ensure
that their relationship with their employees remains intact, the Debtors believe
that it is critical that they satisfy all obligations to employees and continue,
in the ordinary course, those personnel policies, programs and procedures that
were in effect prior to the Commencement Date. Accordingly, on the Commencement
Date, the Debtors sought and obtained court approval to, at their discretion,
satisfy all obligations to their employees in the ordinary course, including the
payment of salaries, wages, benefits and other amounts owed to or with respect
to employees, and to continue all employee policies, procedures, and programs.
3. Cash Management and Bank Accounts
The Debtors sought approval to continue their centralized cash
management system, including funding their non-debtor subsidiaries and
affiliates and maintaining their existing bank accounts and business forms. In
order to minimize costs and disruption to their businesses, the Debtors sought
court approval to continue collecting and disbursing funds in accordance with
their prepetition cash management system and to continue to fund certain of the
day to day obligations of their subsidiaries and affiliates and to allocate such
costs among the various subsidiaries. In addition, the Debtors sought authority
to continue to fund non-Debtor affiliates to enable them to continue in
existence while the Debtors reorganized. Finally, the Debtors sought authority
to maintain their existing bank accounts and business forms in order to avoid
the disruption and delay in the Debtors' payroll activities and businesses that
would necessarily result from closing the prepetition bank accounts and opening
new accounts. All of the foregoing relief was granted by the Bankruptcy Court on
the Commencement Date.
4. Cash Collateral and Adequate Protection
Because the Debtors did not have available sources of working capital
and financing to carry on the operation of their businesses without the use of
their cash and other amounts on deposit in the Debtors' bank accounts, on the
Commencement Date, the Debtors sought approval to use such cash and such other
amounts on deposit in their bank accounts that constituted cash collateral of
the Senior Lenders under the Senior Secured Credit Agreement (the "Cash
Collateral"). As a result, by Orders dated March 11, 2003 and April 23, 2003,
the Bankruptcy Court authorized (i) the Debtors' use of the Cash Collateral and
(ii) the Debtors to provide the Senior Lenders with adequate protection for
their use of Cash Collateral in the form of (a) replacement liens, (b) current
interest payments on the obligations under the Senior Secured Credit Agreement
and (c) the payment of all letter of credit and agent's fees and all reasonable
professional fees and expenses of the Senior Lenders' Agent in accordance with
the terms of the Senior Secured Credit Agreement. Additionally, the Court
ordered that the Senior Lenders are obligated to renew or extend letters of
credit outstanding as of the Commencement Date.
5. Injunction of Transfers of Interests and Procedures For Certain
Transfers of Interests
In order to preserve the Debtors' use of net operating loss
carryforwards, on the Commencement Date, the Debtors requested that the Court
(i) issue an injunction, imposed, pursuant to sections 362 and 105(a) of the
Bankruptcy Code, prohibiting the ownership of such Stock above a certain
threshold and (ii) establish procedures to notify holders of existing common
stock and preferred stock of Magellan (collectively, the "Stock") of (A) the
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injunction referred to above and (B) the notification procedures that must be
satisfied at least 20 days before the transfer of Stock by shareholders who
already own stock above a certain threshold. On that date, the Bankruptcy Court
entered an order approving of the proposed notice procedures and the injunction.
B. APPOINTMENT OF THE OFFICIAL COMMITTEE
On March 17, 2003, the United States Trustee, pursuant to its
authority under section 1102 of the Bankruptcy Code, appointed the members of
the Official Committee for these chapter 11 cases.
Since that appointment, the Debtors have consulted with the Official
Committee on all matters material to the administration of the chapter 11 cases.
The Debtors have also discussed their business operations with the Official
Committee and its financial advisors and have sought concurrence of the Official
Committee for actions and transactions outside of the ordinary course of
business. The Official Committee has participated actively in reviewing the
Debtors' business operations, operating performance, and business plan.
The Official Committee consists of five members. The current members
of the Official Committee, and the attorneys, financial advisors, and other
professionals retained by the Official Committee, are set forth below:
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OFFICIAL COMMITTEE MEMBERS
Bank One Trust Company, N.A., as Pequot Capital Management, Inc.
Successor Indenture Trustee
for the Senior Subordinated Notes.
HSBC Bank USA as Indenture Trustee Franklin Advisers, Inc.
for the Senior Notes.
Corporate Trust Services
Oaktree Capital Management, LLC
The Official Committee has retained the following advisors:
Counsel Financial Advisors
Akin Gump Strauss Hauer & Feld LLP Houlihan Lokey Howard & Zukin
590 Madison Avenue, 22nd Floor 686 Third Avenue, 15th Floor
New York, New York 10022 New York, New York 10017
Notably, all of the member of the Official Committee were members of
the pre-Commencement Date Informal Committee (other than Bank One Trust Company,
N.A.).
C. MOTION TO APPOINT EQUITY COMMITTEE
On or about April 14, 2003, Bill Fusco, Greg Bunting, Prescott Group
Capital Management LLC, Michael Rodeno, and Clayton Henry, each of whom holder
Magellan Common Stock, filed a motion requesting that the Bankruptcy Court
direct the US Trustee to appoint an official committee of holders of Magellan
Common Stock pursuant to section 1102(a)(2) of the Bankruptcy Code (the "Equity
Committee Motion"). The Equity Committee Motion was later joined by another
holder of Magellan Common Stock, Roger Smith. The Equity Committee Motion was
opposed by the U.S. Trustee, the Official Committee and the Debtors and was
denied by the Bankruptcy Court on May 9, 2003.
D. REAL ESTATE ISSUES
1. Extension of Time to Assume or Reject Unexpired Leases
Pursuant to section 365(d)(4) of the Bankruptcy Code, the Debtors
were required to assume or reject their unexpired leases of nonresidential real
property on or before the date that is 60 days following the Commencement Date.
Pursuant to an Order dated April 30, 2003, the Bankruptcy Court extended the
assumption/rejection deadline to and including the Confirmation Date.
2. Rejection of Unexpired Leases
Prior to the Commencement Date, the Debtors initiated an internal
operational restructuring program with the goal of decreasing operating costs
without reducing the quality of services rendered to their customers. In
connection with this program, the Debtors determined to (i) combine several of
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their smaller operations into larger, more efficient, consolidated businesses,
(ii) discontinue certain underperforming lines of business and (iii) close
offices in areas where they no longer had a significant customer demand for
services. As a result, the Debtors determined to close several of their office
locations and reject and/or terminate several unexpired leases and subleases of
nonresidential real property related to such locations. Accordingly, pursuant to
Orders of the Bankruptcy Court dated April 3, 2003, May 21, 2003, July 24, 2003,
and August 1, 2003, the Debtors rejected and/or terminated 34 unexpired real
property leases and all related subleases.
3. Assumption of Five Unexpired Leases
As a condition to amending five of their unexpired leases of
nonresidential real property for properties that are essential to the Debtors'
operations, including the lease related to their corporate headquarters, the
Debtors were required by the respective landlords to assume such leases.
Pursuant to Orders dated May 21, 2003, July 14, 2003, and August 1, 2003, the
Bankruptcy Court approved of the Debtors' assumption of the five leases.
E. CLAIMS PROCESS AND BAR DATE
1. Schedules and Statements
On April 23, 2003, the Debtors filed with the Bankruptcy Court
statements of financial affairs, schedules of assets and liabilities and
schedules of executory contracts and unexpired leases (collectively, the
"Schedules and Statements"). On May 1, 2003 and May 8, 2003, certain of the
Schedules and Statements were amended to correct an inadvertent error in listing
certain of the Debtors' chapter 11 case numbers.
2. Bar Date
On May 9, 2003, the Debtors filed a motion requesting that, pursuant
to Bankruptcy Rule 3003(c)(3), the Bankruptcy Court fix June 20, 2003 as the
date by which proofs of claim are required to be filed in the Reorganization
Cases (the "Bar Date Motion"). By order dated May 19, 2003 (the "Bar Date
Order"), June 27, 2003 (the "Bar Date") was fixed as the last date by which
proofs of claim must be filed in order to share in the distributions in
connection with the Plan. Notice of the Bar Date and the obligation to file
proofs of claim was given as provided in the Bar Date Order including
publication thereof.
F. ASSET SALES
1. Sale of Property in New Mexico
Charter Hospital of Santa Teresa, Inc., one of the Debtors in these
chapter 11 cases, was the owner of certain nonresidential real property and
personal property located in the County of Dona Ana, New Mexico. The property
had previously been used as a psychiatric hospital, but was closed five years
ago when the Debtors determined to cease operations at all of their psychiatric
hospitals. The Debtors have been marketing the property since that time.
Pursuant to an Order dated April 30, 2003, the Debtors obtained Bankruptcy Court
approval to sell the property in New Mexico for an aggregate of $1.8 million.
2. Sale of Nurse Access Business
Care Management Resources, Inc. (doing business as Magellan Nurse
Access, "MNA"), one of the Debtors in these chapter 11 cases, was a nurse
advisory business with call centers located in Columbia, Maryland and St. Louis,
Missouri that provided 24 hour telephonic nursing advisory services to its
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clients. Because MNA was not a profitable operation, as part of the Debtors'
strategy to dispose of unprofitable non-core businesses, the Debtors determined
to cease operation of the MNA business. Pursuant to an Order of the Court dated
April 30, 2003, the Debtors obtained Court approval to sell substantially all of
the assets of MNA for, among other things, $221,604.09 in cash, subject to
certain price reductions.
3. Sale of Unused Parcel of Land
Charter Medical-Clayton County ("Charter"), a subsidiary of Magellan
and a Debtor in these cases, acquired an unused parcel of land (approximately
3.3 acres) located in Clayton, Georgia in 1994. Since that time, Charter has
been marketing the property in an effort to sell it. Pursuant to an Order of the
Court, dated July 31, 2003, the Debtors obtained Court approval to sell the
property for $297,000 in cash, subject to certain adjustments and the payment of
a broker's fee.
G. MOTION TO TERMINATE EXCLUSIVITY
On July 18, 2003, R2 Investments, LDC ("R2") filed a motion seeking
to terminate the Debtors' exclusive right to file a plan of reorganization and
solicit acceptances thereof so that R2 could file a competing plan of
reorganization. R2 proposed a competing plan to be premised on its proposal to
backstop a $100 million equity rights offering using an equity value of
Reorganized Magellan of $300 million. On August 5, 2003, after a hearing, the
Bankruptcy Court denied R2's motion. R2 has stated that it owns approximately
$212,500,000 of Senior Subordinated Notes and $29,750,000 of Senior Notes. R2
has also stated it intends to vote against the Plan. If R2 votes to rejct the
Plan and, as a result, Class 8 does not accept the Plan, the Debtors intend to,
and believe they will be able to, confirm the Plan over the rejection of the
Plan by such Class in accordance with Section 1129(b) of the Bankruptcy Code.
H. OTHER SIGNIFICANT MOTIONS
1. Motion to Pay Work Fee
As described above, Deutsche Bank Securities Inc. ("DBSI") is
currently in the process of conducting due diligence with respect to providing
the Debtors with Exit Financing. In connection therewith, on May 1, 2003, the
Debtors filed a Motion requesting authorization from the Bankruptcy Court to (i)
pay DBSI a work fee in the amount of $125,000, (ii) under certain circumstances,
reimburse DBSI's reasonable out-of-pocket expenses, and (iii) indemnify DBSI
with respect to DBSI's due diligence effort with respect to such financing. The
Motion was approved by Order of the Bankruptcy Court dated May 23, 2003.
2. Motion to Make Capital Contribution
On May 9, 2003, the Debtors filed a Motion requesting Bankruptcy
Court authorization to make a capital contribution to Premier Behavioral Systems
of Tennessee, LLC, a joint venture affiliate, in the amount of approximately
$900,000 in connection with such affiliate's entering into an extension of its
operating contract with the State of Tennessee. The Motion was approved by Order
of the Bankruptcy Court dated May 29, 2003.
3. Motion to Enter Into Equity Commitment Letter
See II.I.6. On July 14, 2003, the Bankruptcy Court approved the
Equity Commitment Letter.
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VII.
GOVERNANCE OF REORGANIZED MAGELLAN
A. BOARD OF DIRECTORS
The number of directors on Reorganized Magellan's Board of Directors
shall be fixed at seven (7) whose names shall be disclosed at or prior to the
Confirmation Hearing. For purposes of the composition of Reorganized Magellan's
initial Board of Directors: (1) one of the board members shall be the chief
executive officer of Reorganized Magellan and shall have an initial three year
term, (2) one of the board members shall qualify as an independent director and
shall be selected by the Equity Investor and shall have a term of two years, (3)
one of the board members shall be selected by the Equity Investor and shall have
a term of one year (such directors specified in clause (1), (2) and (3), the
"Class 1 Directors"); (4) one of the board members shall be the chief operating
officer of Reorganized Magellan and shall have an initial term of two years, (5)
one of the board members shall be selected by the Equity Investor and shall have
a term of one year (such directors specified in clause (4) and (5), the "Class 2
Directors"); and (6) two (2) additional board members having three (3) year
terms (each, a "Committee Director") initially shall be selected by the Official
Committee of which one shall qualify as an independent director (such directors
specified in clause (6), the "Class 3 Directors"). During the three-year period
following the Effective Date, the Reorganized Debtors shall not modify the
initial terms attributable to the seats on the Board of Directors.
On and after the Effective Date, Reorganized Magellan's Amended
Certificate of Incorporation and Amended Bylaws, shall provide that until the
Minimum Hold Condition is not met (i) the holders of the MVS Securities shall
(x) vote as a separate class to elect the three (3) Class 1 Directors and (y)
vote together with the holders of the New Common Stock to elect the two (2)
Class 2 Directors and (ii) the two (2) Class 3 Directors shall be elected by the
holders of New Common Stock voting as a separate class Until the Minimum Hold
Condition is no longer met, the holders of the MVS Securities shall be entitled
to cast a number of votes equal to the aggregate number of shares of New Common
Stock outstanding at the time of any vote. After the Minimum Hold Condition is
not met, the MVS Securities shall cease to have any special voting rights (i.e.,
each share of MVS Securities and New Common Stock shall have one vote per share
and shall vote together on all matters submitted to stockholders, including the
election of all members of the Board of Directors, as a single class in
accordance with applicable law).
Until the Minimum Hold Condition is not met, all affiliated party
transactions between Reorganized Magellan and the Equity Investor or any of its
affiliates must be approved by either (i) a majority of the members of
Reorganized Magellan's Board of Directors elected by the holders of New Common
Stock, voting as a separate class, or (ii) holders of a majority of the New
Common Stock, voting as a separate class.
Reorganized Magellan may not consummate any acquisition of any other
business prior to the 210th day following the Effective Date unless a majority
of the members of Reorganized Magellan's Board of Directors (not including the
two directors appointed by the Equity Investor (a) who are not members of
management and (b) who are not independent) approve such acquisition.
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B. SENIOR MANAGEMENT
Steven Shulman will be Chief Executive Officer of Reorganized
Magellan. The names of other senior members of management will be disclosed on
or before confirmation of the Plan.
VIII.
OTHER ASPECTS OF THE PLAN
A. DISTRIBUTIONS
One of the key concepts under the Bankruptcy Code is that only Claims
and Equity Interests that are "allowed" may receive distributions under a
chapter 11 plan. This term is used throughout the Plan and the descriptions
below. In general, an "allowed" Claim or "allowed" Equity Interest simply means
that the debtor agrees, or in the event of a dispute, that the Bankruptcy Court
determines, that the Claim or interest, and the amount thereof, is in fact a
valid obligation of the debtor.
Any Claim that is not a Disputed Claim and for which a proof of claim
has been filed is an Allowed Claim. Any Claim that has been listed by any Debtor
in such Debtor's schedules of assets and liabilities, as may be amended from
time to time, as liquidated in amount and not disputed or contingent is an
Allowed Claim in the amount listed in the schedules unless an objection to such
Claim has been filed. If the holder of such Claim files a proof of claim in an
amount different than the amount set forth on the Debtor's schedules of assets
and liabilities, the Claim is an Allowed Claim for the lower of the amount set
forth on the Debtor's schedules of assets and liabilities and on the proof of
claim and a Disputed Claim for the difference. Any Claim that has been listed in
the Debtor's schedules of assets and liabilities as disputed, contingent or not
liquidated and for which a proof of claim has been filed is a Disputed Claim.
Any Claim for which an objection has been timely interposed is a Disputed Claim.
For an explanation of how Disputed Claims will be determined, see section
VIII.B.2.
An objection to any Claim may be interposed by the Debtors within 120
days after the Effective Date or such later date as may be fixed by the
Bankruptcy Court. Any Claim for which an objection has been interposed will be
an Allowed Claim to the extent the objection is determined in favor of the
holder of the Claim.
B. DISTRIBUTIONS THROUGH AGENTS
Distributions to the holders of the Senior Secured Lender Claims
(Class 1) will be made through the Administrative Agent under the Senior Secured
Credit Agreement. Distributions to the holders of the Senior Note Claims (Class
7) and the Senior Subordinated Note Claims (Class 8) will be made through the
respective indenture trustees. Distributions to holders of Allowed Other General
Unsecured Claims (Class 9) and Allowed Convenience Claims (Class 10) will be
made through the Disbursing Agent.
1. Timing and Conditions of Distributions
(a) Date of Distribution
Except as otherwise provided for in the Plan, distributions on
account of Allowed Claims will be made on the Effective Date or as soon
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thereafter as practicable or, with respect to a Disputed Claim, only after and
to the extent such Claim becomes allowed. Disputed Claims will be treated as set
forth below.
(b) Distributions to Classes 7, 8 and 9.
(i) On, or as soon as practicable after, the Effective Date, the
Disbursing Agent shall distribute the New Notes, New Common Stock, the
Cash Distribution Amount, and the Cash payment in respect of the
Partial Cash-Out Election to holders of Allowed Claims in Classes 7, 8
and 9, as specified in Section 4 of the Plan in accordance with
Section 6.3 of the Plan. For the purpose of calculating the Note Claim
Percentage, the Other General Unsecured Claim Percentage, the Ratable
Proportion of New Common Stock, the Cash Distribution Amount and the
Cash payment in respect of the Partial Cash-Out Election to be
distributed to the holder of an Allowed Senior Subordinated Note Claim
or an Allowed Other General Unsecured Claim, the Reorganized Debtors
shall include all Disputed Claims in the aggregate amount of all
Allowed Claims either in the amounts asserted by the holders of such
Claims or as estimated by the Bankruptcy Court. Notwithstanding the
foregoing, the Reorganized Debtors may exclude any or all Insured
Claims from such calculation to the extent they determine, in the
exercise of their discretion, that sufficient insurance is available
to cover such Insured Claims.
(ii) The Cash Distribution Amount and each holder's entitlement
to the Cash payment in respect of the Partial Cash-Out Election shall
be calculated as of the Effective Date and shall not be recalculated
after the Effective Date.
(iii) On, or as soon as practicable after, each of the Interim
Distribution Dates and the Final Distribution Date (other than in
respect of Insured Claims for which insurance coverage is available),
Reorganized Magellan shall (i) recalculate the Note Claim Percentage,
the Other General Unsecured Claim Percentage, and the Ratable
Proportion for each holder of an Allowed Claim in each applicable
Class, based on the aggregate amount of Allowed Claims in such Class
on such date, (ii) make a distribution of the New Notes, New Common
Stock, the Cash Distribution Amount, and the Cash payment in respect
of the Partial Cash-Out Election to holders of Disputed Claims that
have become Allowed since the Effective Date or the last Interim
Distribution Date, as the case may be, and (iii) make a distribution
of New Common Stock, to the holders of previously Allowed Senior
Subordinated Note Claims in Class 8 and Allowed Other General
Unsecured Claims in Class 9, based on the recalculations set forth
hereunder, such that after such distributions such holders will have
received the shares of New Common Stock they are entitled to under the
Plan. Such distributions after the Effective Date of (x) New Notes
shall include any cash payments in the form of interest, or otherwise,
that were made in respect of such New Notes after the Effective Date
through the date of issuance, and (y) New Common Stock shall include
any cash payments in the form of dividends or otherwise that were made
in respect of such New Common Stock through the date of issuance to
the extent such holders have not theretofore received such
distribution. The Debtors will not pay interest in respect of the Cash
Distribution Amount or the Cash payment in respect of the Partial
Cash-Out Election. After the Final Distribution Date, any unpaid
amount of the Cash Distribution Amount shall revest with the
Reorganized Debtors.
(iv) After the Effective Date but prior to an Interim
Distribution Date or the Final Distribution Date, as the case may be,
the Reorganized Debtors, in their sole discretion, may direct the
Disbursing Agent to distribute New Notes, New Common Stock and the
Cash, plus any cash payments in the form of interest, dividends or
otherwise to a holder of Allowed Senior Subordinated Note Claims in
Class 8 and Allowed Other General Unsecured Claims in Class 9 after
77
the Effective Date if it determines that the cost and administrative
burden of such interim distribution would be worthwhile. For purposes
of these distributions, the Debtors at their option may estimate the
amount to include for unliquidated Claims or seek an order from the
Bankruptcy Court determining such estimates. Notwithstanding the
foregoing, no distribution shall be made on an Interim Distribution
Date (and no Interim Distribution Date shall be deemed to occur) if
the value of the distributions required to be made as a result is less
than $100,000.
(c) Surrender of Certain Securities Necessary for Distribution
Plans of reorganization generally require a holder of an instrument
or security of a debtor to surrender such instrument or security prior to
receiving a new instrument or security in exchange therefore under the plan of
reorganization. This rule avoids disputes regarding who is the proper recipient
of instruments or securities under a plan of reorganization.
At the option of the Debtors, as a condition to participating in the
distributions under the Plan, a holder of an instrument must, prior to the first
anniversary of the Effective Date, (a) surrender such instrument to Reorganized
Magellan or its designee or (b) provide the Disbursing Agent with an affidavit
of loss and/or indemnity and bond, reasonably satisfactory to the Disbursing
Agent. Failure to do so within such time will result in the forfeiture of such
holder's right to receive any distribution relating to such Claim under the
Plan.
(d) Fractional Shares, Fractional Warrants and Minimum Face Amount of
New Notes; Fractional Equity Subscription Rights
No fractional shares of New Common Stock, fractional New Warrants or
Cash in lieu thereof shall be distributed. In addition, the New Notes will be
distributed in a minimum face amount of $1,000. For purposes of distribution,
fractional shares of New Common Stock and fractional New Warrants shall be
rounded down to the next whole number or zero, as applicable and no Cash will be
distributed in lieu thereof. Similarly, if a distribution on account of a Claim
would result in the issuance of a New Note in an amount less than a multiple of
$1,000 (or zero), such distribution shall be rounded down to the nearest
multiple of $1,000 (or zero) and no Cash will be distributed in lieu thereof;
provided, however that for Allowed Claims which would result in the distribution
of New Notes, in the aggregate, of an amount of less than $10,000 to a holder,
Reorganized Magellan shall distribute Cash in lieu of New Notes to the extent
that a New Note in an increment of less than $1,000 would otherwise be issued.
Reorganized Magellan may, at its option, select such other rounding method as
reasonably deemed equitable by Reorganized Magellan. As a result of this
rounding, less than all shares of New Common Stock, New Warrants and New Notes
specified in the Plan of Reorganization may actually be issued under the Plan.
No fractional Equity Subscription Rights or Cash in lieu thereof,
shall be distributed. For purposes of distribution, fractional Equity
Subscription Rights shall be rounded down to the next whole number or zero, as
applicable, pursuant to the terms set forth in Section 9.1 of the Plan.
2. Procedures for Treating Disputed Claims Under the Plan
(a) Disputed Claims
A Disputed Claim is a Claim that has not been allowed or disallowed
pursuant to an agreement by the parties or an order of the Bankruptcy Court. A
Claim for which a proof of claim has been filed but that is listed on the
Debtors' schedules of assets and liabilities as unliquidated, disputed or
contingent, and which has not yet been resolved by the parties or by the
Bankruptcy Court, is a Disputed Claim. If a holder of a Claim has filed a proof
78
of claim that is inconsistent with the Claim as listed on the Debtors' schedules
of assets and liabilities, such Claim is a Disputed Claim to the extent of the
difference between the amount set forth in the proof of Claim and the amount
scheduled by the Debtors. Any Claim for which the Debtors or any party in
interest have interposed a timely objection is a Disputed Claim.
(b) Objections to Claims
The Debtors shall be entitled to object to all Disputed Claims or
Claims not already allowed. Any objections to Claims shall be served and filed
on or before one hundred and twenty (120) days after the Effective Date or such
later date as may be fixed by the Bankruptcy Court. All objections shall be
litigated to Final Order; provided, however, that Reorganized Magellan shall
have the authority to file, settle, compromise or withdraw any objections to
Claims or Equity Interests without the approval of the Bankruptcy Court.
(c) No Distributions Pending Allowance
If any significant portion of a Claim is a Disputed Claim, no payment
or distribution shall be made on account of such Claim until such Disputed Claim
becomes an Allowed Claim provided, however, that, (a) as set forth in Section 9
of the Plan, holders of Other General Unsecured Claims in Class 9 that are
Disputed Claims are entitled to participate in the Equity Offering to the extent
of their Rights Participation Claim Amount and (b) to the extent the Reorganized
Debtors appeal a Bankruptcy Court order Allowing any Disputed Claim, the
Reorganized Debtors shall, pending an appeal, implement appropriate assurance
that the distributions will be made to the holders of such Disputed Claims
pending such appeal if such Disputed Claims are ultimately Allowed.
(d) Distributions After Allowance
Except with respect to distributions to holders of Allowed Claims in
Class 8 (Senior Subordinated Note Claims) and Class 9 (Other General Unsecured
Claims), after such time as a Disputed Claim becomes, in whole or in part, an
Allowed Claim, the Reorganized Debtors shall distribute to the holder thereof
the distributions, if any, to which such holder is then entitled under the Plan
of Reorganization. Such distributions shall be made as soon as practicable after
the date that the order or judgment of the Bankruptcy Court allowing such
Disputed Claim (or portion thereof) becomes a Final Order, but in no event more
than thirty (30) days thereafter. Distributions of shares of New Common Stock
and New Notes distributable to a holder of a Disputed Claim that becomes an
Allowed Claim (in whole or in part) as a result of the entry of an order or
judgment of the Bankruptcy Court allowing such Disputed Claim (or portion
thereof) shall be made in accordance with Section 6.3 of the Plan.
(e) Interest and Dividends
To the extent that a Disputed Claim becomes an Allowed Claim after
the Effective Date and is entitled to a Cash distribution under the Plan, the
holder of such Claim shall not be entitled to any interest thereon. To the
extent that a Disputed Claim becomes an Allowed Claim after the Effective Date
and is entitled to shares of New Common Stock as a distribution under the Plan,
the holder of such Claim shall be entitled to such shares of New Common Stock
together with any Cash dividends paid with respect thereto after the Effective
Date and prior to the date of distribution. To the extent that a Disputed Claim
becomes an Allowed Claim after the Effective Date and is entitled to New Notes
as a distribution under the Plan, the holder of such Claim shall be entitled to
such New Notes together with any Cash interest paid, or New Notes representing
"payment-in-kind" interest issued, in either case with respect thereto after the
Effective Date and prior to the date of distribution.
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C. CONDITIONS TO THE CONFIRMATION
The confirmation of the Plan is subject to satisfaction of
the following conditions precedent:
a. Magellan shall have received executed copies of the Equity
Commitment Letter and such letter shall be in full force and effect.
b. The aggregate principal amount of New Notes to be issued under the
Plan shall not exceed $300 million less the Cash Distribution Amount.
c. The amount of Convenience Claims shall not exceed $4,000,000.
d. The Confirmation Order shall be reasonably satisfactory to the
Official Committee, Aetna, the Subject Lenders and the Equity Investor.
e. The Plan Documents shall be reasonably satisfactory to the
Official Committee, the Subject Lenders and the Equity Investor.
f. The New Senior Secured Credit Agreement (or the Exit Financing, as
applicable) and the guarantees and security agreements related to the New Aetna
Note and the Aetna Purchase Option shall be satisfactory to the Subject Lenders
and the other Plan Documents shall be reasonably satisfactory to the Subject
Lenders.
g. If the Class 1 Claims are receiving Alternate Treatment A, the net
proceeds from the Equity Offering and the Investment less the payments of Cash
used to satisfy General Unsecured Claims and the Convenience Claims, either
during the Reorganization Cases or upon the Effective Date, shall be at least
$25 million.
h. The Aetna Amended MSA shall have been assumed by an order of the
Bankruptcy Court that shall be a Final Order which order shall be acceptable to
Aetna in its sole discretion and such Final Order shall be in full force and
effect. The Aetna Registration Rights Agreement, the New Aetna Note, the New
Aetna Warrant and the guarantees and security agreements related to the New
Aetna Note and the Aetna Purchase Option shall be acceptable to Aetna in its
sole discretion.
The conditions specified herein may be waived in whole or in part by Magellan in
its sole discretion, with the consent of the Official Committee, the Subject
Lenders, Aetna, and the Equity Investor, which consents shall not be
unreasonably withheld. Any such waiver may be effected at any time, without
notice or leave or order of the Bankruptcy Court, and without any formal action.
D. CONDITIONS TO THE EFFECTIVE DATE
The occurrence of the Effective Date of the Plan is subject to the
satisfaction of the following conditions precedent:
a. The Confirmation Order, in form and substance reasonably
satisfactory to Reorganized Magellan, the Official Committee, Aetna, the Equity
Investor and the Subject Lenders, shall have been entered and shall be in full
force and effect and there shall not be a stay or injunction in effect with
respect thereto.
80
b. All transactions contemplated by the Equity Commitment Letter to
have occurred on the Effective Date shall have been consummated.
c. The documents relating to the Aetna Amended MSA with Aetna
described in Section 5.13 of the Plan shall have been executed and delivered by
the parties thereto and such agreements related thereto shall be effective.
d. (i) The Plan of Reorganization, shall have not been amended,
altered, or modified, unless such amendment, alteration, or modification has
been consented to by the Official Committee, Aetna and the Subject Lenders,
which consents shall not be unreasonably withheld; as well as consented to by
the Equity Investor to the extent such amendment, alteration or modification
would cause the Plan of Reorganization not to be substantially in the form of
the plan and/or term sheet attached to the Equity Commitment Letter; and (ii)
(A) if the Class 1 Claims are to receive Alternate Treatment A, the New Senior
Secured Credit Agreement and the guarantees and security agreements related to
the New Aetna Note and the Aetna Purchase Option (in form satisfactory to the
Subject Lenders) and the other Plan Documents shall be reasonably satisfactory
to the Subject Lenders, (B) the Aetna Registration Rights Agreement, the New
Aetna Note, the New Aetna Warrant and the guarantees and security agreements
related to the New Aetna Note and the Aetna Purchase Option (in form
satisfactory to Aetna) and the other Plan Documents shall be reasonably
satisfactory to Aetna, and (C) all Plan Documents (in form reasonably
satisfactory to the Official Committee), each shall be in full force and effect.
The conditions specified herein may be waived in whole or in part by Reorganized
Magellan in its sole discretion, with the consent of the Official Committee, the
Subject Lenders and the Equity Investor, which consents shall not be
unreasonably withheld. Any such waiver may be effected at any time, without
notice or leave or order of the Bankruptcy Court, and without any formal action.
E. TREATMENT OF EXECUTORY CONTRACTS, UNEXPIRED LEASES, AND COST OF
ACCESS AGREEMENTS AND CLAIMS
1. Contracts and Leases Not Expressly Rejected are Assumed
All executory contracts and unexpired leases to which any of the
Debtors are parties are hereby assumed, except for an executory contract or
unexpired lease that (i) has been previously assumed or rejected pursuant to a
Final Order of the Bankruptcy Court, (ii) is specifically designated as a
contract or lease to be rejected on the Schedule of Rejected Contracts and
Leases, (Schedule 8.1), or (iii) is the subject of a separate motion to assume
or reject filed under section 365 of the Bankruptcy Code by the Debtors at least
20 days prior to the Confirmation Hearing. The Debtors will provide notice to
the parties affected by any amendment to Schedule 8.1.
2. Cure of Defaults
Generally, if there has been a default (other than a default
specified in section 365(b)(2) of the Bankruptcy Code) under an executory
contract or unexpired lease, the debtor can assume the contract or lease only if
the debtor cures the default. Accordingly, a condition to the assumption of an
executory contract or unexpired lease is that any default under an executory
contract or unexpired lease that is to be assumed pursuant to the Plan will be
cured in a manner consistent with the Bankruptcy Code and as set forth in the
Plan.
81
3. Rejection Claims
If an entity with a Claim for damages arising from the rejection of
an executory contract or unexpired lease under the Plan has not already filed a
proof of claim for such damages, that Claim shall be barred and shall not be
enforceable against the Debtors unless a proof of claim is filed with the
Bankruptcy Court and served upon counsel for the Debtors within thirty (30) days
after the Confirmation Date.
4. Survival of the Debtors' Corporate Indemnities.
For purposes of the Plan, the obligations of the Debtors to indemnify
and reimburse persons who are or were directors, officers or employees of any
Debtor on the Commencement Date or any time thereafter against and for any
obligations (including, without limitation, fees and expenses incurred by the
board of directors of any Debtor or the members thereof in connection with the
Reorganization Cases) pursuant to articles of incorporation, codes of
regulations, bylaws, applicable state law or specific agreement, or any
combination of the foregoing, shall survive the confirmation of the Plan, remain
unaffected thereby, and not be discharged in accordance with section 1141 of the
Bankruptcy Code, irrespective of whether indemnification or reimbursement is
owed in connection with an event occurring before, on, or after the Commencement
Date. In furtherance of the foregoing, Reorganized Magellan shall maintain
insurance for the benefit of such directors, officers, or employees at levels no
less favorable than those existing as of the date of entry of the Confirmation
Order for a period of no less than three years following the Effective Date.
5. Compensation and Benefit Programs.
All employment and severance policies, workers' compensation
programs, and all compensation and benefit plans, policies and programs of the
Debtors applicable to its present and former employees, officers, and directors,
including, without express or implied limitation, all savings plans, retirement
plans, health care plans, disability plans, severance benefit plans, incentive
plans, and life, accidental death, and dismemberment insurance plans, shall be
deemed to be, and shall be treated as though they are, executory contracts that
are deemed assumed under the Plan, and the Debtors' obligations under such
plans, policies, and programs shall be deemed assumed pursuant to section 365(a)
of the Bankruptcy Code, survive confirmation of the Plan, remain unaffected
thereby, and not be discharged in accordance with section 1141 of the Bankruptcy
Code. Any defaults existing under any of such plans, policies, and programs
shall be cured promptly after they become known by the Debtors.
F. EFFECT OF PLAN
1. Discharge of Claims and Termination of Equity Interests
The Plan will discharge all Claims against the Debtors, and terminate
all Equity Interests in Magellan, of any nature whatsoever, known or unknown,
including, without limitation, any interest accrued or expenses incurred thereon
from and after the Commencement Date, or against their estates or properties or
interests in property. All holders of existing Claims against and Equity
Interests in the Debtors will be enjoined from asserting against the Debtors, or
any of their assets or properties, any other or further Claim or Equity Interest
based upon any discharged Claim, terminated Equity Interest, or act or omission,
transaction, or other activity that occurred prior to the Effective Date,
whether or not such holder has filed a proof of Claim or proof of Equity
Interest.
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2. Exculpation
None of the Debtors, Aetna, the Administrative Agent under the Senior
Secured Credit Agreement, the Official Committee, the Informal Committee, the
Equity Investor nor any of their respective members, officers, directors,
employees, agents, counsel or other professionals shall have or incur any
liability to any Debtor, any Reorganized Debtor, any holder of any Claim or
Equity Interest or any other entity for any act or omission in connection with,
or arising out of, the Reorganization Cases, the formulation, dissemination,
implementation or confirmation of the Plan of Reorganization, the consummation
of the Plan of Reorganization, or the administration of the Plan of
Reorganization or property to be distributed under the Plan of Reorganization or
any other act or omission in connection with the Plan of Reorganization, the
Disclosure Statement or any contract, instrument, release, document or other
agreement related thereto; provided, however, that the foregoing shall not
affect the liability of any person that otherwise would result from any such act
or omission to the extent such act or omission is determined by a Final Order to
have constituted willful misconduct or gross negligence or the liability of the
Equity Investor with respect to the Equity Commitment Letter and provided
further that nothing in the Plan shall discharge Aetna of its obligations under
the Aetna Amended MSA (and the other agreements and documents entered into with
respect thereto). Any of the foregoing parties in all respects shall be entitled
to rely on the advice of counsel with respect to any of the foregoing.
G. RELEASES
As of the Effective Date, the respective officers, directors,
employees, financial advisors, professionals, accountants, and attorneys of the
Debtors who have served, or been employed or retained by, the Debtors on or
after the Commencement Date shall be released by the Debtors from any and all
Claims arising on or after the Commencement Date against them in their capacity
as representatives of the Debtors, except for willful misconduct or gross
negligence.
H. INJUNCTION
Except as otherwise expressly provided in the Plan, all persons or
entities who have held, hold or may hold Claims or Equity Interests are
permanently enjoined, from and after the Effective Date, from (a) commencing or
continuing in any manner any action or other proceeding of any kind on any such
Claim or Equity Interest against any of the Debtors, (b) the enforcement,
attachment, collection or recovery by any manner or means of any judgment,
award, decree or order against any Debtor, (c) creating, perfecting, or
enforcing any encumbrance of any kind against any Debtor or against the property
or interests in property of any Debtor, and (d) asserting any right of setoff,
subrogation or recoupment of any kind against any obligation due from any Debtor
or against the property or interests in property of any Debtor, with respect to
any such Claim or Equity Interest.
I. MANAGEMENT INCENTIVE PLAN
As of the Effective Date, Reorganized Magellan shall adopt the New
Management Incentive Plan, and it shall automatically become effective on the
Effective Date. The terms and conditions of the Management Incentive Plan will
be determined by the Board of Directors of Reorganized Magellan.
J. MISCELLANEOUS PROVISIONS
The Plan contains provisions relating to the cancellation of existing
securities, corporate actions, delivery of distributions, manner of payment,
vesting of assets, binding effect, payment of statutory fees, retiree benefits,
dissolution of the Official Committee (at an appropriate time on or after the
83
Effective Date), recognition of guaranty rights, substantial consummation,
compliance with tax requirements, severability, revocation and amendment of the
Plan, governing law, and timing. For more information regarding these items, see
the Plan attached hereto as Exhibit A.
K. CERTAIN INDENTURE TRUSTEE FEES AND EXPENSES
The Debtors will pay the reasonable fees and expenses of each of the
indenture trustees for the publicly issued debt securities of Magellan, as
mutually agreed or determined by the Bankruptcy Court, including the reasonable
fees and expenses of its professionals.
IX.
THE EQUITY OFFERING
A. ABILITY TO PARTICIPATE IN EQUITY OFFERING
Holders of Senior Subordinated Note Claims and Other General
Unsecured Claims, whether or not Allowed, are entitled to participate in the
Equity Offering solely to the extent of their Rights Participation Claim Amount.
If an Other General Unsecured Claim is not Disputed, the holder of such Claim
shall be entitled to participate to the extent of the amount of such Other
General Unsecured Claim as set forth on the proof of claim or as set forth on
the Schedules. If an Other General Unsecured Claim is Disputed or listed on the
Rights Participation Disputed Claims List attached as Schedule B to the Plan,
the holder of such Claim shall not be entitled to participate in the Equity
Offering, unless and until the holder of such Other General Unsecured Claim has
obtained an order from the Bankruptcy Court estimating such Claim for the
purposes of participating in the Equity Offering prior to the Subscription
Expiration Date.
The Subscription Agent is as follows:
- ---------------------------------------- ---------------------------------------
FOR CLASS 9 FOR CLASS 8:
Bankruptcy Services, LLC Innisfree M&A Inc.
70 E. 55th Street 501 Madison Avenue, 20th Floor
New York, NY 10022 New York, NY 10022
(Attn: Magellan Health Services, Inc.) (Attn: Magellan Health Services, Inc.)
Phone: (212) 376-8494 Phone: (877) 750-2689
- ---------------------------------------- ---------------------------------------
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The chart below summarizes the right of each holder of a
Senior Subordinated Note Claim (Class 8) or an Other General Unsecured Claim
(Class 9) to participate in the Equity Offering. Please see the Plan for the
definition of "Rights Participation Claim Amount".
- ----------------------------------------------------------------------- ----------------------------------------------------------
TYPE OF CLAIM / CHARACTERISTICS OF CLAIM RIGHTS PARTICIPATION AMOUNT
- ----------------------------------------------------------------------- ----------------------------------------------------------
SENIOR SUBORDINATED CLAIM Amount of Senior Subordinated Claim
- ----------------------------------------------------------------------- ----------------------------------------------------------
OTHER GENERAL UNSECURED CLAIM
- ----------------------------------------------------------------------- ----------------------------------------------------------
Listed on Debtors' Schedules as Disputed, Contingent or Zero, unless otherwise allowed for purposes of
Unliquidated participating in the Equity Offering.
- ----------------------------------------------------------------------- ----------------------------------------------------------
Objection to Claim has been filed Zero, unless otherwise allowed for purposes of
participating in the Equity Offering.
- ----------------------------------------------------------------------- ----------------------------------------------------------
Claim is listed on Rights Participation Disputed Claims Zero, unless otherwise allowed for purposes of
List participating in the Equity Offering.
- ----------------------------------------------------------------------- ----------------------------------------------------------
If Other General Unsecured Claim does not meet any of three criteria
above (i.e., not Disputed and not listed on Rights Participation
Disputed Claims List),
- ----------------------------------------------------------------------- ----------------------------------------------------------
Holder has filed Claim, but no corresponding Claim listed Amount of filed Claim.
on Debtors' Schedules
- ----------------------------------------------------------------------- ----------------------------------------------------------
Holder has filed Claim, but corresponding Scheduled amount Amount on Schedules.
is different
- ----------------------------------------------------------------------- ----------------------------------------------------------
Holder has not filed Claim or holder has filed Claim and Amount on Schedules.
Claim is same as Scheduled amount
- ----------------------------------------------------------------------- ----------------------------------------------------------
If the Debtors or Reorganized Debtors or any other party in interest
has interposed an objection or request for estimation with respect to an Other
General Unsecured Claim, which has not been withdrawn or determined by a Final
Order on or before the Subscription Record Date, the Rights Participation Claim
Amount with respect to such Other General Unsecured Claim shall be the portion,
if any, of such Other General Unsecured Claim to which no objection has been
interposed. If, after the Subscription Record Date, a holder of a Claim is
permitted to participate in the Equity Offering as a result of a Bankruptcy
Court order estimating such Claim for the purpose of determining such holder's
Rights Participation Claim Amount, such holder shall be permitted to participate
in the Equity Offering to the same extent as a holder of a Rights Participation
Claim Amount as of the Subscription Record Date (i.e., Ratable Proportions will
not be recalculated).
B. ISSUANCE OF EQUITY SUBSCRIPTION RIGHTS
The Equity Subscription Rights shall entitle the holders of Senior
Subordinated Note Claims and Other General Unsecured Claims the right to
purchase an aggregate of 2,631,579 shares of New Common Stock at a price of
$28.50 per share pursuant to the terms and conditions set forth in this Section
9. Such Equity Subscription Rights shall be allocated as follows:
85
BENEFICIARY OF EQUITY AMOUNT
- --------------------- ------
SUBSCRIPTION RIGHTS
- -------------------
Senior Subordinated Note Claims Product of Note Claim Percentage and 2,611,989 shares of New
(Class 8) Common Stock
Other General Unsecured Claims Product of Other General Unsecured Claim Percentage and
(Class 9) 2,611,989 shares of New Common Stock
Houlihan Lokey 19,590 shares of New Common Stock
TOTAL 2,631,579 SHARES OF NEW COMMON STOCK
Each holder of a Senior Subordinated Note Claim within Class 8 as of
the Subscription Record Date shall receive its Ratable Proportion of the Note
Claim Percentage of 2,611,989 Equity Subscription Rights and each holder of an
Other General Unsecured Claim within or potentially within Class 9 as of the
Subscription Record Date shall receive its Ratable Proportion of the Other
General Unsecured Claim Percentage of 2,611,989 Equity Subscription Rights (such
Ratable Proportion, Note Claim Percentage and Other General Unsecured Claim
Percentage to be calculated as if such holder's Allowed Claim was its Rights
Participation Claim Amount) as set forth in this Section. A Subscription Form
will be distributed to each holder of a claim in Class 8 and Class 9 together
with the Ballot.
C. SUBSCRIPTION PERIOD
The Equity Offering shall commence on the Subscription Commencement
Date (August [20], 2003) and shall expire on the Subscription Expiration Date
(September 30, 2003). After the Subscription Expiration Date, unexercised Equity
Subscription Rights shall be treated as acquired by the Equity Investor and
Magellan shall only be obligated to honor the exercise of such Equity
Subscription Rights by the Equity Investor and any exercise of any such
unexercised Equity Subscription Rights by any Person other than the Equity
Investor shall be null and void and Magellan shall not be obligated to honor any
such purported exercise received by the Subscription Agent after the
Subscription Expiration Date, regardless of when the documents relating to such
exercise were sent.
D. SUBSCRIPTION PRICE
The Subscription Price for Equity Subscription Rights will be $28.50
per share of New Common Stock, payable in Cash.
E. EXERCISE OF EQUITY SUBSCRIPTION RIGHTS
1. For Persons Other than Holders of Senior Subordinated Note Claims.
In order to exercise the Equity Subscription Rights, each holder
thereof must: (i) return a duly completed Subscription Form to the Subscription
Agent so that such form is received by the Subscription Agent on or before the
Subscription Expiration Date; and (ii) pay to the Subscription Agent (on behalf
of the Debtors) on or before the Subscription Expiration Date immediately
available funds in an amount equal to such holder's Subscription Purchase Price,
such payment to be made either by wire transfer to the Subscription Agent in
86
accordance with the wire instructions set forth on the Subscription Form or by
bank or cashier's check delivered to the Subscription Agent along with the
Subscription Form. If, on or prior to the Subscription Expiration Date, the
Subscription Agent for any reason has not received from a given holder of Equity
Subscription Rights both a duly completed Subscription Form and immediately
available funds in an amount equal to such holder's Subscription Purchase Price,
such holder shall be deemed to have not exercised its Equity Subscription Rights
and to have relinquished and waived its right to participate in the Equity
Offering. A Subscription Form must also be accompanied by sufficient indication
of ownership of the Claim giving rise to the Equity Subscription Rights, as well
as appropriate executed representations as to ownership. The payments made in
accordance with the Equity Offering shall be deposited and held by the
Subscription Agent in a trust account, escrow account, or similar segregated
account or accounts which shall be separate and apart from Magellan's general
operating funds and any other funds subject to any cash collateral arrangements
and which segregated account or accounts will be maintained for the purpose of
holding the money for administration of the Equity Offering until the Effective
Date, or such other later date, at the option of the Reorganized Debtors, but
not later than 20 days after the Effective Date.
2. For Holders of Senior Subordinated Note Claims.
In order to exercise the Equity Subscription Rights, each holder
entitled to Equity Subscription Rights must provide its instruction to its bank,
broker, or other nominee, or to its agent. The bank or broker, in turn, must
then convey the instruction on a Master Subscription Form, and arrange for the
proper payment either through the Depository Trust Company ("DTC"), or, if DTC
is unable to act as intermediary for subscription instructions and payments, by
following the payment instructions outlined above.
F. TRANSFER RESTRICTION; REVOCATION
The Equity Subscription Rights are not transferable, except for the
right of the Equity Investor to exercise any unexercised Equity Subscription
Rights. Additionally, once a holder of Equity Subscription Rights has properly
exercised its Equity Subscription Rights such exercise shall not be permitted to
be revoked.
G. EQUITY INVESTOR
Pursuant to the terms of the Equity Commitment Letter and provided
that all conditions precedent set forth therein have been satisfied, the Equity
Investor shall be entitled to, and shall, exercise all unexercised Equity
Subscription Rights at $28.50 per share of New Common Stock (except that such
rights shall be rights to acquire MVS Securities). The Equity Investor shall pay
to Magellan, by wire transfer in immediately available funds on or prior to the
Effective Date, Cash in an amount equal to the Subscription Purchase Price
attributable to the unexercised Equity Subscription Rights pursuant to the terms
of the Equity Commitment Letter. For purposes of Section 9.6 of the Plan and the
Equity Commitment Letter, the Equity Investor shall be deemed to have acquired
all unsubscribed and unexercised Equity Subscription Rights and exercised them
in connection with its commitment under the Equity Commitment Letter (except
that such rights shall be rights to acquire MVS Securities).
H. DISTRIBUTION OF NEW COMMON STOCK AND MVS SECURITIES
On, or as soon as practicable after, the Effective Date, the
Disbursing Agent shall distribute the New Common Stock purchased by each
Exercising Claimant to such Exercising Claimant and the MVS Securities to the
Equity Investor.
87
I. DISPUTED CLAIMS
For all purposes of Section 9 of the Plan, each holder of an Other
General Unsecured Claims in Class 9 is entitled to participate in the Equity
Offering to the extent of its Rights Participation Claim Amount. The entitlement
of a holder of an Other General Unsecured Claim to participate in the Equity
Offering on the terms set forth in the Plan shall not be affected by whether or
not such Other General Unsecured Claim is Allowed.
J. SUBSEQUENT ADJUSTMENTS TO THE RIGHTS PARTICIPATION CLAIM AMOUNT; CUT
BACK IN EQUITY OFFERING FOR OVERSUBSCRIPTION
Holders of Disputed Claims and holders of Other General Unsecured
Claims listed on the Rights Participation Disputed Claims List attached to the
Plan as Exhibit B shall be entitled to participate in the Equity Offering solely
to the extent of their Rights Participation Claim Amounts. If any holder of such
Claim has obtained an order of the Bankruptcy Court estimating its General
Unsecured Claim for the purpose of participating in the Equity Offering prior to
the Subscription Expiration Date, such holder shall be entitled to participate
in the Equity Offering. If, as a result of such subsequent allowances of Other
General Unsecured Claims for purposes of participation in the Equity Offering,
more than all of the shares of New Common Stock subject to the Equity Offering
have been subscribed for as a result of the exercise of the Equity Subscription
Rights, each Exercising Claimant shall be cut back pro rata based on the number
of shares purchased by such Exercising Claimant in the Equity Offering, and the
difference between the price paid by such Exercising Claimant and the adjusted
Subscription Purchase Price shall be refunded to such Exercising Claimant,
without interest, as soon as practicable after the Effective Date.
K. NO INTEREST
In the event the Subscription Purchase Price is repaid to the entity
making such payment, no interest shall be paid thereon.
L. VALIDITY OF EXERCISE OF EQUITY SUBSCRIPTION RIGHTS
All questions concerning the timeliness, viability, form and
eligibility of any exercise of Equity Subscription Rights shall be determined by
Magellan in consultation with the Official Committee, whose determinations shall
be final and binding. Magellan, in its sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
times as it may determine, or reject the purported exercise of any Equity
Subscription Rights. Subscription Forms shall be deemed not to have been
received or accepted until all irregularities have been waived or cured within
such time as Magellan determines, in its sole discretion. Neither Magellan nor
the Subscription Agent shall be under any duty to give notification of any
defect or irregularity in connection with the submission of Subscription Forms
or incur any liability for failure to give such notification.
M. USE OF PROCEEDS
On the Effective Date, the proceeds received by Reorganized Magellan
from the Equity Offering shall be used to fund the Cash payments required under
the Plan and for general corporate purposes.
88
X.
CERTAIN FACTORS TO BE CONSIDERED
A. CERTAIN BANKRUPTCY CONSIDERATIONS
Although the Debtors believe that the Plan will satisfy all
requirements necessary for confirmation by the Bankruptcy Court, there can be no
assurance that the Bankruptcy Court will reach the same conclusion. Moreover,
there can be no assurance that modifications of the Plan will not be required
for confirmation or that such modifications would not necessitate the
resolicitation of votes. In addition, although the Debtors believe that the
Effective Date will be during the third quarter of 2003, there can be no
assurance as to such timing.
B. RISKS RELATING TO THE PLAN SECURITIES
1. Variances from Projections
The Projections included herein are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ materially include, but are
not limited to, Reorganized Magellan's ability to operate its business
consistent with the Projections, comply with the covenants of its financing
agreements, attract and retain key executives, attract and retain customers,
maintain its existing provider network, comply with the terms of its customer
contracts, and respond to adverse regulatory actions taken by the federal and
state governments.
2. Lack of Trading Market
Initially, the securities (the New Notes, the New Common Stock and
the New Warrants) issued under the Plan will not be listed on any exchange.
There can be no assurance that an active trading market for the New Notes, the
New Common Stock or the New Warrants will develop. Accordingly, no assurance can
be given that a holder of the New Notes, New Common Stock or New Warrants will
be able to sell such securities in the future or as to the price at which any
such sale may occur. If such markets were to exist, such securities could trade
at prices higher or lower than the value ascribed to such securities in this
Disclosure Statement, depending upon many factors, including the prevailing
interest rates, markets for similar securities, the general economic and
industry conditions, and the performance of, and investor expectations for,
Reorganized Magellan.
Pursuant to the terms of the Plan, Reorganized Magellan shall use its
reasonable best efforts to cause the New Common Stock to be listed on the
national market system of Nasdaq or such other national securities exchange for
which it may qualify.
3. Dividend Policies
The Debtors do not anticipate that Reorganized Magellan will pay
dividends on the New Common Stock in the near future.
4. Restrictions on Transfer
Holders of Plan Securities who are deemed to be "underwriters" as
defined in section 1145(b) of the Bankruptcy Code, including holders who are
deemed to be "affiliates" or "control persons" within the meaning of the
Securities Act, will be unable freely to transfer or to sell their securities
except pursuant to (i) "ordinary trading transactions" by a holder that is not
89
an "issuer" within the meaning of section 1145(b), (ii) an effective
registration of such securities under the Securities Act and under equivalent
state securities or "blue sky" laws, or (iii) pursuant to the provisions of Rule
144 under the Securities Act or another available exemption from registration
requirements. For a more detailed description of these matters, see section
II.L.
5. Issue Price of Series B Notes
The Series B New Notes will have a different CUSIP number than the
Series A New Notes and, despite having identical economic terms, may not be
fungible with the Series A New Notes as a result of the potential that such
notes will have different "issue prices" for federal income tax purposes. This
is due to the fact that the Series A New Notes will likely be treated as simply
a continuation of the existing Senior Notes for federal income tax purposes,
whereas the issue price of the Series B New Notes will be established in
connection with the implementation of the Plan.
In addition, Series B New Notes issued after the Effective Date to
holders of Disputed Claims which are subsequently Allowed may have an "issue
price" and a CUSIP number different from the Series B New Notes issued on the
Effective Date and may not be fungible with respect to the Series B New Notes
issued on the Effective Date. As a result, these subsequently issued Series B
New Notes may not be as readily tradable as the New Notes issued on the
Effective Date.
6. Control by Equity Investor
As a result of the confirmation and consummation of the Plan,
Reorganized Magellan will issue MVS Securities to the Equity Investor, which
will entitle the Equity Investor to special voting rights. Initially, the Equity
Investor will own between 17.2% and 49% of the economic equity interests in
Reorganized Magellan, but shall be entitled to exercise 50% of the voting rights
pertaining to all of Reorganized Magellan's outstanding common stock (including
the New Common Stock and the MVS Securities). In addition, the Equity Investor
will have the right to appoint certain members of the Board of Directors. See
II.A and VII.A.
Accordingly, the Equity Investor will exercise a controlling
influence over the business and affairs of Reorganized Magellan and, although it
does not have a majority of the voting rights, will effectively have the power
to determine all matters submitted to a vote of Reorganized Magellan's
shareholders where shares vote together as a single class. The Equity Investor
effectively has the power to approve significant corporate transactions such as
certain amendments to the articles of incorporation, mergers, amalgamations, and
the sale of all or substantially all of the assets of Reorganized Magellan. The
Equity Investor's voting power could have the effect of deterring or preventing
a change in control of Reorganized Magellan.
C. RISKS ASSOCIATED WITH THE BUSINESS
Additional discussion of risks related to the Debtors' business are
set forth in greater detail in Magellan's most recent Form 10-KA, filed with the
Securities and Exchange Commission on January 23, 2003. See the sections
entitled: "Cautionary Statements".
90
XI.
CONFIRMATION OF THE PLAN
A. CONFIRMATION HEARING
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court,
after appropriate notice, to hold a hearing on confirmation of a plan of
reorganization. The confirmation hearing is scheduled for 11:00 a.m., prevailing
Eastern Time on October 8, 2003, before the Honorable Prudence Carter Beatty,
Room 701, United States Bankruptcy Court for the Southern District of New York,
1 Bowling Green, New York, New York 10004. The confirmation hearing may be
adjourned from time to time by the Bankruptcy Court without further notice
except for an announcement of the adjourned date made at the confirmation
hearing or any subsequent adjourned confirmation hearing.
Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of a plan of reorganization. Any objection
to confirmation of the Plan must be in writing, must conform to the Federal
Rules of Bankruptcy Procedure, must set forth the name of the objector, the
nature and amount of Claims or interests held or asserted by the objector
against the particular Debtor or Debtors, the basis for the objection and the
specific grounds therefor, and must be filed with the Bankruptcy Court, with a
copy to Chambers, together with proof of service thereof, and served so as to be
received no later than 4:00 p.m., prevailing Eastern Time, on September 25, 2003
on (i) Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153,
Attention: Stephen Karotkin, Esq., Attorneys for the Debtors, (ii) Wachtell,
Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019, Attention:
Richard Feintuch, Esq., Attorneys for the Lenders' Agent; (iii) Akin, Gump,
Strauss, Hauer & Feld, LLP, 590 Madison Avenue, 22nd Floor, New York, New York
10022, Attention: Michael Stamer, Esq., Attorneys for the Official Committee,
(iv) Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017,
Attention: Marshall S. Huebner , Esq., Attorneys for Aetna; (v) Hennigan,
Bennett & Dorman LLP, 601 South Figueroa Street, Suite 3300, Los Angeles,
California 90017 Attention: Bruce Bennett, Esq., Attorneys for the Equity
Investor and (vi) the Office of the United States Trustee, 33 Whitehall Street,
21st floor, New York, New York 10004 (Attention: Pamela Lustrin, Esq.).
Objections to confirmation of the Plan are governed by Rule 9014 of the Federal
Rules of Bankruptcy Procedure.
UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED, IT MAY NOT BE
CONSIDERED BY THE BANKRUPTCY COURT.
B. GENERAL REQUIREMENTS OF SECTION 1129
At the confirmation hearing, the Bankruptcy Court will determine
whether the following confirmation requirements specified in section 1129 of the
Bankruptcy Code have been satisfied.
1. The Plan complies with the applicable provisions of the
Bankruptcy Code.
2. The Debtors have complied with the applicable provisions of
the Bankruptcy Code.
3. The Plan has been proposed in good faith and not by any
means proscribed by law.
91
4. Any payment made or promised by the Debtors or by a person
issuing securities or acquiring property under the Plan for
services or for costs and expenses in, or in connection
with, the chapter 11 cases, or in connection with the Plan
and incident to the chapter 11 cases, has been disclosed to
the Bankruptcy Court, and any such payment made before the
confirmation of the Plan is reasonable or if such payment is
to be fixed after confirmation of the Plan, such payment is
subject to the approval of the Bankruptcy Court as
reasonable.
5. The Debtors have disclosed the identity and affiliations of
any individual proposed to serve, after confirmation of the
Plan, as a director, officer or voting trustee of the
Debtors, affiliates of the Debtors participating in the Plan
with the Debtors, or a successor to the Debtors under the
Plan, and the appointment to, or continuance in, such office
of such individual is consistent with the interests of
creditors and equity holders and with public policy, and the
Debtors have disclosed the identity of any insider that will
be employed or retained by the Debtors, and the nature of
any compensation for such insider.
6. With respect to each class of Claims or Equity Interests,
each holder of an impaired Claim or impaired Equity Interest
either has accepted the Plan or will receive or retain under
the Plan on account of such holder's Claim or Equity
Interest, property of a value, as of the Effective Date,
that is not less than the amount such holder would receive
or retain if the Debtors were liquidated on the Effective
Date under chapter 7 of the Bankruptcy Code. See discussion
of "Best Interests Test" below.
7. Except to the extent the Plan meets the requirements of
section 1129(b) of the Bankruptcy Code (discussed below),
each class of Claims or Equity Interests has either accepted
the Plan or is not impaired under the Plan. Class 13
(Magellan Preferred Stock Interests) and Class 14 (Magellan
Common Stock Interests) are deemed to have rejected the Plan
if the Plan is not accepted by both Classes 8 and 9. Thus
the Plan can be confirmed only if the requirements of
section 1129(b) of the Bankruptcy Code are met.
8. With respect to Class 1 (Senior Secured Lender Claims) if
such Class rejects the Plan, the Plan satisfies the
requirements of section 1129(b)(2)(A).
9. Except to the extent that the holder of a particular Claim
has agreed to a different treatment of such Claim, the Plan
provides that allowed Administrative Expense Claims and
Allowed Priority Non-Tax Claims will be paid in full on the
Effective Date and that Allowed Priority Tax Claims will
receive on account of such Claims deferred cash payments,
over a period not exceeding six (6) years after the date of
assessment of such Claims, of a value, as of the Effective
Date, equal to the allowed amount of such Claims.
10. At least one class of impaired Claims has accepted the Plan,
determined without including any acceptance of the Plan by
any insider holding a Claim in such class.
11. Confirmation of the Plan is not likely to be followed by the
liquidation or the need for further financial reorganization
of the Debtors or any successor to the Debtors under the
Plan, unless such liquidation or reorganization is proposed
in the Plan. See discussion of "Feasibility" below.
92
12. The Plan provides for the continuation after the Effective
Date of payment of all retiree benefits (as defined in
section 1114 of the Bankruptcy Code), at the level
established pursuant to subsection 1114(e)(1)(B) or 1114(g)
of the Bankruptcy Code at any time prior to confirmation of
the Plan, for the duration of the period the Debtors have
obligated themselves to provide such benefits.
C. BEST INTERESTS TESTS
As described above, the Bankruptcy Code requires that each holder of
an impaired Claim or Equity Interest either (i) accept the Plan or (ii) receive
or retain under the Plan property of a value, as of the Effective Date, that is
not less than the value such holder would receive if the Debtors were liquidated
under chapter 7 of the Bankruptcy Code.
The first step in determining whether this test has been satisfied is
to determine the dollar amount that would be generated from the liquidation of
the Debtors' assets and properties in the context of chapter 7 liquidation
cases. The gross amount of cash that would be available for satisfaction of
Claims and Equity Interests would be the sum consisting of the proceeds
resulting from the disposition of the unencumbered assets and properties of the
Debtors, augmented by the unencumbered cash held by the Debtors at the time of
the commencement of the liquidation case.
The next step is to reduce that gross amount by the costs and
expenses of liquidation and by such additional administrative and priority
Claims that might result from the termination of the Debtors' businesses and the
use of chapter 7 for the purposes of liquidation. Any remaining net cash would
be allocated to secured creditors, as appropriate, and to creditors and
shareholders in strict priority in accordance with section 726 of the Bankruptcy
Code.
The Debtors' costs of liquidation under chapter 7 would include the
costs of winding down the Debtors' businesses, as well as the costs of operation
during the wind-down period. Other expenses would include (i) the fees payable
to a trustee in bankruptcy, (ii) the fees that might be payable to attorneys and
other professionals that such a trustee might engage, and (iii) the expenses
incurred during the chapter 11 cases allowed in the chapter 7 cases, such as
compensation for attorneys, financial advisors, appraisers, accountants, and
other professionals for the Debtors and statutory committee of unsecured
creditors appointed in the chapter 11 cases, and costs and expenses of members
of the statutory committee of unsecured creditors, as well as other compensation
Claims. In addition, Claims would arise by reason of the breach or rejection of
obligations incurred and leases and executory contracts assumed or entered into
by the Debtors during the pendency of the chapter 11 cases.
The foregoing types of Claims, costs, expenses, fees, and such other
Claims that may arise in a liquidation case would be paid in full from the
liquidation proceeds before the balance of those proceeds would be made
available to pay prepetition priority and unsecured Claims. The Debtors believe
that in a chapter 7 case, Classes 8, 9, 13, and 14 would receive no distribution
of property.
After consideration of the effects that a chapter 7 liquidation would
have on the ultimate proceeds available for distribution to creditors in the
chapter 11 cases, including (i) the increased costs and expenses of a
liquidation under chapter 7 arising from fees payable to a trustee in bankruptcy
and professional advisors to such trustee, (ii) additional costs associated with
the rapid transfer or cessation of operations and the erosion in value of assets
in a chapter 7 case in the context of the expeditious liquidation required under
chapter 7 and the "forced sale" atmosphere that would prevail, (iii) the
substantial increases in Claims that would be satisfied on a priority basis, and
(iv) the additional prepetition Claims that would arise due to the cessation of
the Debtors' businesses, the Debtors have determined that confirmation of the
Plan will provide each holder of an Allowed Claim with a recovery that is not
less than such holder would receive pursuant to liquidation of the Debtors under
chapter 7.
9
=================================================================== ======================== ===============================
LIQUIDATION PLAN
BEST INTEREST COMPARISON RECOVERY RECOVERY
------------------------ -------- --------
CLASS
Senior Secured Lender Claims (Class 1) 100% 100%
Aetna Claim (Class 4) 0% 100%
Senior Note Claims (Class 7) 0% 100%
Senior Subordinated Note Claims (Class 8) 0% 31.9% TO 35.4%
Other General Unsecured Claims (Class 9) 0% 52.7% TO 55.2%
Convenience Claims (Class 10) 0% 100%
Magellan Preferred Stock Interests (Class 13) 0% N/A
Magellan Common Stock Interests (Class 14) 0% N/A
=================================================================== ======================== ===============================
The Debtors also believe that the value of any distributions to each
class of Allowed Claims in a chapter 7 case, including all Secured Claims, would
be less than the value of distributions under the Plan because such
distributions in a chapter 7 case would not occur for a substantial period of
time. In this regard, there is a risk that distribution of the proceeds of the
liquidation could be delayed for one or more years after the completion of such
liquidation in order to resolve Claims and prepare for distributions. In
addition, recovery to creditors may be decreased by any litigation engendered by
the Claims allowance process. Given that the Plan represents a settlement of
many complex inter-creditor issues, the Debtors would expect significant
litigation of such issues in the event of a liquidation, leading to potentially
lengthy delays in distributions. Incorporating the time value of distributions
to the liquidation analysis contained herein would further lower the estimated
recoveries as presented.
THE DEBTORS' LIQUIDATION ANALYSIS IS AN ESTIMATE OF THE PROCEEDS THAT
MAY BE GENERATED AS A RESULT OF A HYPOTHETICAL CHAPTER 7 LIQUIDATION OF THE
DEBTORS AND DOES NOT EXPLICITLY FACTOR IN THE LOSS OF VALUE DUE TO DELAYS IN
DISTRIBUTION IN THE CHAPTER 7 PROCESS. THE ANALYSIS IS BASED ON A NUMBER OF
SIGNIFICANT ASSUMPTIONS WHICH ARE DESCRIBED BELOW. THE LIQUIDATION ANALYSIS DOES
NOT PURPORT TO BE A VALUATION OF THE DEBTORS' ASSETS AND IS NOT NECESSARILY
INDICATIVE OF THE VALUES THAT MAY BE REALIZED IN AN ACTUAL LIQUIDATION.
D. LIQUIDATION ANALYSIS
The following liquidation analysis (the "Liquidation Analysis") has
been prepared by the Debtors as an estimate of the values which might be
realized by all classes of creditors in the event the assets of the Debtors were
to be liquidated in chapter 7 cases under the Bankruptcy Code. A chapter 7
liquidation consists generally of the cessation of business, the identification
and assembly of assets, and the initiation of distressed or "forced" sales of
the Debtors' assets by a court-appointed chapter 7 trustee, with subsequent
distribution of the net proceeds of such asset dispositions to creditors in
accordance with statutory priorities. The following Liquidation Analyses should
be read in conjunction with the accompanying notes.
94
If no Chapter 11 plan can be confirmed, the chapter 11 cases may be
converted to cases under chapter 7 of the Bankruptcy Code, in which a trustee
(or trustees) would be elected or appointed to liquidate the assets of the
Debtors. A discussion of the effect that a chapter 7 liquidation would have to
the recovery of holders of Claims and Interests is set forth in Section XI.C,
"Best Interests of Creditors and Stockholders" and in the liquidation analysis
set forth in section XII.A to this Disclosure Statement. The Debtors believe
that liquidation under chapter 7 would result in (i) smaller distributions being
made to creditors than those provided for in the Plan because of the additional
administrative expenses involved in the appointment of a trustee (or trustees)
and attorneys and other professionals during the liquidation and, from the
rejection of leases and other executory contracts in connection with a cessation
of the Debtors' operations and (ii) the failure to realize the greater total
Reorganization Value of the Debtors' assets.
The Debtors believe that the Plan enables the Debtors to successfully
and expeditiously emerge from chapter 11, preserves their business and allows
creditors and Equity Interest holders to realize the highest recoveries under
the circumstances. Creditors will receive greater recoveries than in a chapter 7
liquidation. Although a chapter 11 liquidation is preferable to a chapter 7
liquidation, the Debtors believe that a liquidation under chapter 11 is a much
less attractive alternative to creditors and Equity Interest holders because a
greater return to creditors and Equity Interest holders is provided for in the
Plan.
95
($ in millions)
ESTIMATED
ESTIMATED LIQUIDATION
STATEMENT OF ASSETS 06/30/03 RECOVERY PROCEEDS
------------------- -------- -------- --------
Cash and Cash Equivalents $139.2 100% $139.2
Accounts Receivable, net 61.0 80% 48.8
Restricted Cash and Investments 130.9 100% 130.9
Refundable Income Taxes 1.1 0% 0.0
Other Current Assets 26.1 15% 3.9
Property and Equipment, net $76.0 20% $15.2
Deferred Income Taxes 0.0 0% 0.0
Investments in Unconsolidated Subsidiaries 13.7 70% 9.6
Other Long-term Assets(1) 30.4 30% 9.1
Goodwill, net 501.6 0% 0.0
Other Intangible Assets 56.5 0% 0.0
---
TOTAL GROSS PROCEEDS FROM LIQUIDATION $356.7
CHAPTER 7 ADMINISTRATIVE CLAIMS
-------------------------------
Trustee and Receiver Fees $10.7
Other Professional Fees 5.0
Wind-down Costs 40.0
-----
TOTAL CHAPTER 7 ADMINISTRATIVE CLAIMS $55.7
--------------------------------------------------- ------------------ --- ------------------- --- ---------
NET PROCEEDS AVAILABLE FOR DISTRIBUTION $301.0
--------------------------------------------------- ------------------ --- ------------------- --- ---------
96
DISTRIBUTION OF NET PROCEEDS
- ---------------------------------------------------------- ------------------ --- -------------------- -- -----------------------
NET PROCEEDS AVAILABLE FOR DISTRIBUTION $301.0
- ---------------------------------------------------------- ------------------ --- -------------------- -- -----------------------
($ in millions) ESTIMATED
ESTIMATED ESTIMATED LIQUIDATION
SENIOR LENDER CLAIMS BALANCE RECOVERY PROCEEDS
- -------------------- ------- -------- --------
Senior Lender Claims $160.8 100% $160.8
NET EST. PROCEEDS AVAILABLE FOR DISTRIBUTION AFTER SENIOR LENDER CLAIMS $140.3
ADMINISTRATIVE CLAIMS
- ---------------------
Post-petition Trade Creditor Claims(2) $200.0 66% $131.2
Accrued Salaries, Wages and other Compensation(3) 12.0 66% 7.9
Taxes(4) 1.8 66% 1.2
----- ---- ------
TOTAL ADMINISTRATIVE CLAIMS $213.8 $140.3
BALANCE AVAILABLE FOR DISTRIBUTION TO PRIORITY CREDITORS $0.0
PRIORITY CLAIMS
- ---------------
Other Claims(5) $72.3 0% $0.0
BALANCE AVAILABLE FOR DISTRIBUTION TO UNSECURED CREDITORS $0.0
GENERAL UNSECURED CLAIMS
- ------------------------
Senior Notes $258.4 0% $0.0
Aetna 60.0 0% 0.0
Senior Subordinated Notes 657.2 0% 0.0
Other General Unsecured Claims 76.5 0% 0.0
----- ---
TOTAL GENERAL UNSECURED CLAIMS $1,052.0 $0.0
BALANCE AVAILABLE FOR DISTRIBUTION TO PREFERRED
STOCKHOLDERS $0.0
PREFERRED STOCK
- ---------------
Preferred Stock $72.8 0% $0.0
- ----------------------------------------------
For estimated recoverable value of Charter Note.
Represents 100% of Accounts Payable, 75% of Medical Claims Payable
and 50% of Other Accrued Liabilities at 09/30/03.
$4 million for Payroll and 401K as well as $4 million for bonus plan
and $4 million for severance. Represents Federal and State cash taxes
for second quarter of 2003, as well as Property taxes. Payroll taxes
will have already been paid.
Represents 25% of Medical Claims Payable and 50% of Other Accrued
Liabilities at February 28, 2003.
97
E. FEASIBILITY
The Bankruptcy Code requires that a debtor demonstrate that
confirmation of a plan is not likely to be followed by liquidation or the need
for further financial reorganization. For purposes of determining whether the
Plan meets this requirement, the Debtors have analyzed their ability to meet
their obligations under the Plan. As part of this analysis, the Debtors have
made the Projections described in section IV above. Based upon the Projections,
the Debtors believe that they will be able to make all payments required
pursuant to the Plan and, therefore, that confirmation of the Plan is not likely
to be followed by liquidation or the need for further reorganization.
F. SECTION 1129(B)
The Bankruptcy Court may confirm a Plan over the rejection or deemed
rejection of the Plan by a class of Claims or Equity Interests if the Plan "does
not discriminate unfairly" and is "fair and equitable" with respect to such
class.
1. No Unfair Discrimination.
This test applies to classes of Claims or Equity Interests that are
of equal priority and are receiving different treatment under the Plan. The test
does not require that the treatment be the same or equivalent, but that such
treatment be "fair."
2. Fair and Equitable Test.
This test applies to classes of different priority and status (e.g.,
secured versus unsecured) and includes the general requirement that no class of
Claims receive more than 100% of the allowed amount of the Claims in such class.
As to the dissenting class, the test sets different standards, depending on the
type of Claims or interests in such class:
o Secured Creditors. Each holder of an impaired Secured Claim
either (i) retains its liens on the property, to the extent
of the allowed amount of its Secured Claim and receives
deferred cash payments having a value, as of the Effective
Date, of at least the allowed amount of such Claim, or (ii)
has the right to credit bid the amount of its Claim if its
property is sold and retains its liens on the proceeds of
the sale or (iii) receives the "indubitable equivalent" of
its allowed Secured Claim.
o Unsecured Creditors. Either (i) each holder of an impaired
unsecured Claim receives or retains under the plan property
of a value equal to the amount of its Allowed Claim or (ii)
the holders of Claims and interests that are junior to the
Claims of the dissenting class do not receive any property
under the plan.
o Equity Interests. Either (i) each Equity Interest holder
will receive or retain under the plan property of a value
equal to the greater of (a) the fixed liquidation preference
or redemption price, if any, of such stock and (b) the value
of the stock, or (ii) the holders of interests that are
junior to the Equity Interests of the dissenting class do
not receive or retain any property under the plan of
reorganization.
The Debtors believe the Plan will satisfy the "fair and equitable"
requirement even if Class 1 (Senior Secured Lender Claims) rejects the Plan
because the Bankruptcy Court will determine in the context of Class 1 receiving
Alternate Treatment A either (i) that the holders of the Senior Secured Lender
Claims (who will receive the New Senior Secured Obligations) will retain their
liens on the property and will receive the New Senior Secured Obligations which
represent deferred cash payments having a value, as of the Effective Date, of at
least the allowed amount of the Senior Secured Lender Claims or (ii) that the
New Senior Secured Obligations represent the "indubitable equivalent" of the
Allowed Senior Secured Lender Claims.
98
The Debtors believe the Plan will satisfy the "fair and equitable"
requirement notwithstanding that Class 8 (Senior Subordinated Note Claims) may
reject the Plan. As a result of either Class 8 or Class 9 rejecting the Plan, no
distributions will be made to Class 13 (Magellan Preferred Stock Interests), and
Class 14 (Magellan Common Stock Interests). Therefore, the Plan will satisfy the
"fair and equitable" requirement because no class that is junior to such classes
will receive or retain any property under the Plan.
The Debtors believe the Plan will satisfy the "fair and equitable"
requirement notwithstanding that Class 13 (Magellan Preferred Stock Interests),
and Class 14 (Magellan Common Stock Interests) are, or may be, deemed to reject
the Plan because no class that is junior to such classes will receive or retain
any property on account of the Claims or Equity Interests in such class.
XII.
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
A. LIQUIDATION UNDER CHAPTER 7
If no chapter 11 plan can be confirmed, the chapter 11 cases may be
converted to cases under chapter 7 of the Bankruptcy Code in which a trustee
would be elected or appointed to liquidate the assets of the Debtors for
distribution in accordance with the priorities established by the Bankruptcy
Code. A discussion of the effect that a chapter 7 liquidation would have on the
recoveries of holders of Claims is set forth in section XI.D of this Disclosure
Statement. The Debtors believe that liquidation under chapter 7 would result in
smaller distributions being made to creditors than those provided for in the
Plan because (i) the assets of the Debtors would have to be sold or otherwise
disposed of in an expedited fashion, (ii) additional administrative expenses
attendant to the appointment of a trustee and the trustee's employment of
attorneys and other professionals, and (iii) additional expenses and Claims,
some of which would be entitled to priority, which would be generated during the
liquidation and from the rejection of leases and other executory contracts in
connection with a cessation of the Debtors' operations.
B. ALTERNATIVE PLAN
If the Plan is not confirmed, the Debtors or any other party in
interest (if the Debtors' exclusive period in which to file a plan of
reorganization has expired) could attempt to formulate a different plan of
reorganization. Such a plan might involve either a reorganization and
continuation of the Debtors' business or an orderly liquidation of the Debtors'
assets under chapter 11. The Debtors have concluded that the Plan enables
creditors and equity holders to realize the most value under the circumstances.
In a liquidation under chapter 11, the Debtors would still incur the expenses
associated with closing or transferring to new operators numerous facilities.
The process would be carried out in a more orderly fashion over a greater period
of time than in a chapter 7 liquidation. Further, if a trustee were not
appointed, because such appointment is not required in a chapter 11 case, the
expenses for professional fees would most likely be lower than those incurred in
a chapter 7 case. Although preferable to a chapter 7 liquidation, the Debtors
believe that liquidation under chapter 11 is a much less attractive alternative
to creditors and equity holders than the Plan because of the greater return
provided by the Plan and because such return would be distributed much more
quickly than in a chapter 7 liquidation scenario.
99
XIII.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN OF REORGANIZATION
The following discussion summarizes certain federal income tax
consequences of the implementation of the Plan to the Debtors, certain holders
of Claims and holders of Equity Interests. The following summary does not
address the federal income tax consequences to holders whose Claims are entitled
to reinstatement or payment in full in cash or are otherwise unimpaired under
the Plan (e.g., holders of Provider Claims, Customer Claims or Convenience
Claims). Additionally, this summary does not address the federal income tax
consequences to holders of Senior Secured Lender Claims or Aetna Claims as it is
the Debtors' understanding that such holders have retained separate counsel to
advise them with respect to such Claims.
The following summary is based on the Internal Revenue Code of 1986,
as amended (the "Tax Code"), Treasury Regulations promulgated thereunder,
judicial decisions, and published administrative rules and pronouncements of the
Internal Revenue Service ("IRS"), all as in effect on the date hereof. Changes
in such rules or new interpretations thereof may have retroactive effect and
could significantly affect the federal income tax consequences described below.
The federal income tax consequences of the Plan are complex and are
subject to significant uncertainties. The Debtors have not requested a ruling
from the IRS or an opinion of counsel with respect to any of the tax aspects of
the Plan. Thus, no assurance can be given as to the interpretation that the IRS
will adopt. In addition, this summary addresses neither foreign, state, or local
tax or other tax consequences of the Plan, nor the federal income tax
consequences of the Plan to special classes of taxpayers (such as foreign
taxpayers, broker-dealers, banks, mutual funds, insurance companies, financial
institutions, small business investment companies, regulated investment
companies, tax-exempt organizations, persons holding a claim as part of a
hedging, integrated constructive sale or straddle, and investors in pass-through
entities).
ACCORDINGLY, THE FOLLOWING SUMMARY OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES
PERTAINING TO A HOLDER OF A CLAIM OR EQUITY INTEREST. ALL HOLDERS OF CLAIMS AND
EQUITY INTERESTS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR THE FEDERAL,
STATE, LOCAL AND OTHER TAX CONSEQUENCES APPLICABLE TO THEM UNDER THE PLAN.
A. CONSEQUENCES TO DEBTOR
Magellan and its domestic corporate subsidiaries (the "Magellan
Group") file a U.S. consolidated federal income tax return. The Magellan Group
reported consolidated net operating loss ("NOL") carryforwards for federal
income tax purposes of approximately $720 million as of September 30, 2002, a
portion of which is subject to certain existing limitations. See Exhibit B,
Magellan Health Services, Inc., et al. 2002 Form 10KA, at Note 9 (Income Taxes).
A substantial portion of these NOL carryforwards are attributable to Magellan's
subsidiaries. In addition, the Debtors expect to incur additional losses during
the taxable year ending September 30, 2003. The amount of the Debtors' losses
and NOL carryforwards, and the potential application of any limitations (whether
new or existing) with respect to such losses and NOL carryforwards, remain
subject to examination by the IRS.
As discussed below, in connection with the implementation of the
Plan, the amount of the Debtors' NOL carryforwards may be significantly reduced,
and the tax basis of the Debtors' assets may be reduced. In addition, the
Reorganized Debtors' subsequent utilization of any losses and NOL carryforwards
remaining, and possibly certain other tax attributes, may be restricted
following the Effective Date.
100
1. Cancellation of Debt
The Tax Code provides that a debtor in a bankruptcy case must reduce
certain of its tax attributes - such as NOL carryforwards, current year NOLs,
tax credits and tax basis in assets - by the amount of any cancellation of debt
("COD"). COD is the amount by which the indebtedness discharged (reduced by any
unamortized discount) exceeds any consideration given in exchange therefor,
subject to certain statutory or judicial exceptions that can apply to limit the
amount of COD (such as where the payment of the cancelled debt would have given
rise to a tax deduction). To the extent the amount of COD exceeds the tax
attributes available for reduction, the remaining COD is without further tax
cost to the debtor. However, to the extent that nonrecourse debt is satisfied
with the underlying collateral, generally the debtor recognizes a gain from the
disposition of property based on an amount realized equal to the nonrecourse
debt satisfied, as opposed to COD.
It is unclear whether the reduction in tax attributes occurs on a
separate company basis where the Debtors file a consolidated federal income tax
return. The Debtors are aware that the IRS has, in certain cases, asserted that
such reduction in respect of consolidated tax attributes (such as consolidated
NOLs) generally should occur on a consolidated basis. In addition, legislation
has recently been proposed that would require the reduction of a group's NOLs
and other tax attributes (such as tax credits and tax basis) on a consolidated
basis. It is uncertain whether the proposed legislation will be passed in its
current form or at all and, if passed, what its effective date will be. The
Debtors do not believe that reducing tax attributes on a separate company versus
a consolidated basis would have a material effect on the Projections.
Any reduction in tax attributes does not occur until the end of the
taxable year or, in the case of asset basis reduction, the first day of the
taxable year following the taxable year in which the COD is incurred. If
advantageous, a debtor may elect to reduce the basis of depreciable property
prior to any reduction in its NOLs or other tax attributes.
As a result of the discharge of Claims pursuant to the Plan, the
Debtors will realize substantial COD. The extent of such COD and resulting tax
attribute reduction will depend, in part, on the value of the New Common Stock
distributed. Based on the estimated reorganization value of the Reorganized
Debtors (see section IV.B.6), it is anticipated that the Reorganized Debtors
will incur approximately $440 million of COD. Although a substantial amount of
the Claims are against Magellan, rather than against direct or indirect
subsidiaries, the Magellan Group's NOLs are disbursed throughout the Magellan
Group. Therefore, the extent to which NOLs (and certain tax credits) survive tax
attribute reduction (and the extent of any basis reduction and potentially the
identity of the assets whose basis is reduced) will depend upon the manner of
applying the attribute reduction rules in the context of a consolidated group.
2. Limitations on Loss Carryforwards and Other Tax Benefits
Following the implementation of the Plan, any remaining NOL and tax
credit carryforwards and, possibly, certain other tax attributes of the
Reorganized Debtors allocable to periods prior to the Effective Date
(collectively, "pre-change losses") may be subject to limitation under section
382 of the Tax Code as a result of the change in ownership of the Reorganized
Debtors.
Under section 382, if a corporation undergoes an "ownership change"
and the corporation does not qualify for (or elects out of) the special
bankruptcy exception discussed below, the amount of its pre-change losses that
may be utilized to offset future taxable income is subject to an annual
101
limitation. Such limitation also may apply to certain losses or deductions that
are "built-in" (i.e., attributable to periods prior to the Effective Date but
not yet taken into account for tax purposes) as of the date of the ownership
change and that are subsequently recognized.
The issuance of the New Common Stock of Reorganized Magellan to
holders of General Unsecured Claims and the MVS Securities to the Equity
Investor pursuant to the Plan will constitute an ownership change of the
Reorganized Debtors.
a. General Section 382 Limitation
In general, the amount of the annual limitation to which a
corporation (or consolidated group) would be subject is equal to the product of
(i) the fair market value of the stock of the corporation (or, in the case of a
consolidated group, the common parent) immediately before the ownership change
(with certain adjustments) multiplied by (ii) the "long-term tax-exempt rate" in
effect for the month in which the ownership change occurs (4.45% for ownership
changes occurring in July 2003). For a corporation (or consolidated group) in
bankruptcy that undergoes the change of ownership pursuant to a confirmed plan,
the stock value generally is determined immediately after (rather than before)
the ownership change, after giving effect to the surrender of creditors' claims,
and certain adjustments that ordinarily would apply do not apply.
Any unused limitation may be carried forward, thereby increasing the
annual limitation in the subsequent taxable year. However, if the corporation
(or the consolidated group) does not continue its historic business or use a
significant portion of its assets in a new business for two years after the
ownership change, the annual limitation resulting from the ownership change is
zero.
b. Built-In Gains and Losses
If a loss corporation (or consolidated group) has a net unrealized
built-in loss at the time of an ownership change (taking into account most
assets and items of "built-in" income and deduction), then any built-in losses
recognized during the following five years (up to the amount of the original net
built-in loss) generally will be treated as pre-change losses and similarly will
be subject to the annual limitation. Conversely, if the loss corporation (or
consolidated group) has a net unrealized built-in gain at the time of an
ownership change, any built-in gains recognized during the following five years
(up to the amount of the original net built-in gain) generally will increase the
annual limitation in the year recognized, such that the loss corporation (or
consolidated group) would be permitted to use its pre-change losses against such
built-in gain income in addition to its regular annual allowance. Although the
rule applicable to net unrealized built-in losses generally applies to
consolidated groups on a consolidated basis, certain corporations that join the
consolidated group within the preceding five years may not be able to be taken
into account in the group computation of net unrealized built-in loss. Such
corporations would nevertheless still be taken into account in determining
whether the consolidated group has a net unrealized built-in gain. In general, a
loss corporation's (or consolidated group's) net unrealized built-in gain or
loss will be deemed to be zero unless it is greater than the lesser of (i) $10
million or (ii) 15% of the fair market value of its assets (with certain
adjustments) before the ownership change. The Debtors anticipate that the
Magellan Group will be in a net unrealized built-in gain position as of the
Effective Date.
c. Special Bankruptcy Exception
An exception to the foregoing annual limitation rules generally
applies where qualified (so-called "old and cold") creditors of a debtor
receive, in respect of their Claims, at least 50% of the vote and value of the
stock of the reorganized debtor (or a controlling corporation if also in
bankruptcy) pursuant to a confirmed chapter 11 plan. Due to fixed voting rights
to which the Equity Investor will be entitled as a result of its ownership of
the MVS Securities, the Debtors do not believe that they will qualify for this
exception.
102
3. Alternative Minimum Tax
In general, a federal alternative minimum tax ("AMT") is imposed on a
corporation's alternative minimum taxable income at a 20% rate to the extent
that such tax exceeds the corporation's regular federal income tax. For purposes
of computing taxable income for AMT purposes, certain tax deductions and other
beneficial allowances are modified or eliminated. In particular, even though a
corporation otherwise might be able to offset all of its taxable income for
regular tax purposes by available NOL carryforwards, only 90% of a corporation's
taxable income for AMT purposes may be offset by available NOL carryforwards (as
computed for AMT purposes).
In addition, if a corporation (or consolidated group) undergoes an
"ownership change" within the meaning of section 382 of the Tax Code and is in a
net unrealized built-in loss position on the date of the ownership change, the
corporation's (or group's) aggregate tax basis in its assets would be reduced
for certain AMT purposes to reflect the fair market value of such assets as of
the change date. Although not entirely clear, it appears that the application of
this provision would be unaffected by whether the Debtors otherwise qualify for
the special bankruptcy exception to the annual limitation rules of section 382
of the Tax Code discussed in the preceding section.
Any AMT that a corporation pays generally will be allowed as a
nonrefundable credit against its regular federal income tax liability in future
taxable years when the corporation is no longer subject to the AMT.
B. CONSEQUENCES TO HOLDERS OF CERTAIN CLAIMS
Pursuant to and in accordance with the Plan, holders of Allowed
Senior Note Claims will receive Series A New Notes and Cash in satisfaction of
their Claims, holders of Allowed Senior Subordinated Note Claims will receive
New Common Stock (subject to a possible Partial Cash-Out Election) and Equity
Subscription Rights in satisfaction of their Claims, and holders of Other
General Unsecured Claims (other than holders of Insured Claims who will receive
Cash) will receive Cash, Series B New Notes, New Common Stock (subject to a
possible Partial Cash-Out Election), and Equity Subscription Rights in
satisfaction of their Claims.
The federal income tax consequences of the Plan to holders of Allowed
Claims against the Debtors depend, in part, on whether such Claims, and, in the
case of the Allowed Other General Unsecured Claims, the Series B New Notes and,
possibly, the Equity Subscription Rights constitute "securities" of Magellan for
federal income tax purposes. The term "security" is not defined in the Tax Code
or in the regulations issued thereunder and has not been clearly defined by
judicial decisions. The determination of whether a particular debt constitutes a
"security" depends on an overall evaluation of the nature of the debt. One of
the most significant factors considered in determining whether a particular debt
is a security is its original term. In general, debt obligations issued with a
weighted average maturity at issuance of five years or less (e.g., trade debt
and revolving credit obligations) do not constitute securities, whereas debt
obligations with a weighted average maturity of ten years or more constitute
securities. For purposes of the following discussion, it has been assumed that
the Other General Unsecured Claims and the Series B New Notes do not constitute
"securities" and that the Senior Subordinated Note Claims and the Equity
Subscription Rights do constitute "securities" of Magellan. Each holder is urged
to consult its tax advisor regarding the status of its Claim.
The following discussion does not necessarily apply to holders who
have Claims in more than one class relating to the same underlying obligation
103
(such as where the underlying obligation is classified as partially secured and
partially unsecured). Such holders should consult their tax advisor regarding
the effect of such dual status obligations on the federal income tax
consequences of the Plan to them.
1. Consequences to Holders of Other General Unsecured Claims
The receipt of Cash, Series B New Notes, Equity Subscription Rights
and New Common Stock (subject to a possible Partial Cash-Out Election) in
satisfaction of an Other General Unsecured Claim will be a fully taxable
transaction. In general, a holder of such an Allowed Claim will recognize gain
or loss in an amount equal to the difference between (i) the "amount realized"
by the holder in satisfaction of its Claim (other than any Claim for accrued but
unpaid interest, and less any portion of such distribution required to be
treated as imputed interest as a result of any such distribution being made
after the Effective Date) and (ii) the holder's adjusted tax basis in its Claim
(other than any Claim for accrued but unpaid interest).
For these purposes, the "amount realized" by a holder will equal the
sum of the "issue price" of any Series B New Notes (see section XIII.B.5,
below), the fair market value of any New Common Stock, the amount of any Cash,
and possibly the fair market value of any Equity Subscription Rights, received
in satisfaction of such holder's Claim. Holders of Disputed Claims allowed after
the Effective Date may have an "issue price" in the Series B New Notes received
subsequent to the Effective Date (see section XIII.B.5, below) different from
the issue price of the notes issued on the Effective Date. In addition, it is
unclear whether a holder of an Allowed Claim who receives a distribution
post-Effective Date on account of the resolution of Disputed Claims (including
holders of previously Allowed Claims) that included a cash distribution
attributable to previously paid dividends and/or interest should treat such cash
distribution as additional amount realized on such holder's Claim or in fact as
dividends and/or interest. All holders of Allowed Claims should consult their
tax advisors as to the tax consequences of the receipt of the New Common Stock,
Series B New Notes or Cash subsequent to the Effective Date.
For a discussion of the tax consequences of any Claims for accrued
but unpaid interest, see section XIII.B.4 below. Due to the possibility that a
holder of an Allowed Claim may receive additional distributions subsequent to
the Effective Date in respect of any subsequently disallowed Disputed Claims,
the imputed interest provisions of the Tax Code also may apply to treat a
portion of the distribution to such holders as imputed interest.
In addition, because a holder may receive additional distributions
after the Effective Date, any loss, and a portion of any gain, realized by a
holder in satisfaction of its claim may be deferred until all such subsequent
distributions are made. Such holders are urged to consult their tax advisors
regarding the possible application of (or ability to elect out of) the
"installment method" of reporting any gain that may be recognized by such holder
in respect of its Claim.
Where gain or loss is recognized by a holder, the character of such
gain or loss as long-term or short-term capital gain or loss or as ordinary
income or loss will be determined by a number of factors, including the tax
status of the holder, whether the Claim constitutes a capital asset in the hands
of the holder and how long it has been held, whether the Claim was acquired at a
market discount, and whether and to what extent the holder had previously
claimed a bad debt deduction. A holder of an Allowed Claim who purchased its
Claim from a prior holder at a market discount may be subject to the market
discount rules of the Tax Code. Under those rules, assuming that the holder has
made no election to amortize the market discount into income on a current basis
with respect to any market discount instrument, any gain recognized on the
exchange of its Claim (subject to a de minimis rule) generally would be
characterized as ordinary income to the extent of the accrued market discount on
such Claim as of the date of the exchange.
104
A holder's tax basis in any New Common Stock and, if
applicable, Equity Subscription Rights received will equal
the fair market value of the stock and the Equity Subscription Rights. A
holder's tax basis in any Series A New Notes received will equal the "issue
price" of such notes (see section XIII.B.5, below). The holding period for any
New Common Stock, Series B New Notes and, if applicable, Equity Subscription
Rights generally will begin the day following the issuance of such stock, notes
and rights.
Notwithstanding the foregoing, it is possible the IRS may attempt to
treat the receipt of Cash, New Common Stock, Series B New Notes and Equity
Subscription Rights in satisfaction of Claims against any subsidiary of Magellan
as part of a non-recognition transaction. So treated, such a holder would not be
permitted to recognize any loss, but to the extent that the holder receives
Cash, Series B New Notes and Equity Subscription Rights, such holder would still
be required to recognize a portion of its gain. In the case of a holder that
does not recognize loss, the holder's tax basis in its New Common Stock would
reflect the unrecognized loss. In addition, the holder's holding period in the
New Common Stock would, in whole or in part, include its holding period in its
Claim. However, Magellan believes, and the discussion herein assumes, that the
satisfaction of Claims described in this paragraph should be treated as a fully
taxable transaction, in which both gain and loss may be recognized.
2. Consequences to Holders of Senior Subordinated Note Claims
A holder of an Allowed Senior Subordinated Note Claim will receive
New Common Stock and Equity Subscription Rights in satisfaction of its Claim.
Pursuant to a Partial Cash-Out Election, a holder may receive Cash in lieu of
all or part of the New Common Stock.
The receipt of New Common Stock, and Equity Subscription Rights
together with some Cash if a Partial Cash-Out Election is made, will be a
"recapitalization" for federal income tax purposes. Accordingly, in general, the
holder of such a Claim will not recognize loss upon such exchange, but will
recognize any gain realized with respect to its Claim (computed as described in
the preceding section) in an amount not in excess of any Cash received with
respect to such Claim (subject to the treatment of any Claim for accrued but
unpaid interest, as discussed at XIII.B.4, below, and except to the extent a
portion of any amounts received after the Effective Date are required to be
treated as imputed interest due to the distribution of such consideration after
the Effective Date). The character and timing of any gain would be determined in
accordance with the principles described in the preceding section.
A holder's aggregate tax basis in any New Common Stock and, possibly,
Equity Subscription Rights received in satisfaction of its Claim will equal the
holder's aggregate adjusted tax basis in its Claim (including any Claim for
accrued but unpaid interest) increased by any gain or interest income recognized
in respect of its Claim and decreased by the amount of any Cash received and any
deductions claimed in respect of any previously accrued interest. In general,
the holder's holding period for the New Common Stock and, if applicable, Equity
Subscription Rights received will include the holder's holding period for the
Claim except to the extent issued in respect of a Claim for accrued but unpaid
interest or imputed interest (which will begin the day following the receipt of
such stock and rights). Such tax basis will be allocated, if necessary, between
the New Common Stock and the Equity Subscription Rights based on relative fair
market value.
In the event that no New Common Stock is received in satisfaction of
an Allowed Senior Subordinated Note Claim due to a Partial Cash-Out Election, it
is possible that recapitalization treatment would nevertheless obtain from the
receipt of Equity Subscription Rights (with the consequences described above).
Alternatively, it is possible that the Equity Subscription Rights would be
disregarded and a holder would be treated as receiving only Cash, with
consequences similar to those described in the preceding section. Each holder is
urged to consult its tax advisor regarding the federal income tax consequences
to it of making a Partial Cash-Out Election.
105
3. Consequences to Holders of Senior Note Claims
The holders of Allowed Senior Note Claims will receive (i) Series A
New Notes and (ii) Cash in an amount at least equal to the accrued but unpaid
interest on such Claims (and possibly additionally Cash in respect of the
principal amount of such Claims). The Series A New Notes will have substantially
the same terms as the existing Senior Notes, except that they will mature one
year later in November 2008 and they may be subordinated to the New Senior
Secured Obligation or the obligations under the Exit Financing.
Whether the receipt of the New Notes by holder of Senior Note Claims
is respected as an "exchange" and satisfaction of their existing notes for
federal income tax purposes, or is instead regarded merely as an amendment,
depends on whether the changed terms constitute a "significant modification" of
the notes for U.S. federal income tax purposes, as determined under applicable
Treasury Regulations. The Debtors believe, and this discussion assumes, that any
change in the terms of the New Notes will not constitute a significant
modification and, accordingly, that the New Notes will be treated for federal
income tax purposes simply as a continuation of the existing Senior Notes, with
amended terms. Thus, a holder's receipt of the New Notes generally should be
treated as a nonevent for federal income tax consequences. There is no
assurance, however, that the IRS would not take a contrary position.
In contrast, the receipt of Cash by a holder will be a taxable event.
Such Cash will be treated as a payment of the accrued but unpaid interest (to
the extent thereof), with any remainder treated as a redemption of a portion of
the holder's Senior Notes. Accordingly, the holder generally will have interest
income (to the extent not previously included in its gross income). In addition,
to the extent a portion of the holder's notes is treated as redeemed, the holder
will recognize gain or loss in an amount equal to the difference between (i) the
dollar amount of notes redeemed and (ii) the holder's adjusted tax basis in such
notes.
Where gain or loss is recognized by a holder, the character of such
gain or loss as long-term or short-term capital gain or loss or as ordinary
income or loss will be determined by a number of factors, including the tax
status of the holder, whether the Claim constitutes a capital asset in the hands
of the holder and how long it has been held, whether the Claim was acquired at a
market discount, and whether and to what extent the holder had previously
claimed a bad debt deduction. A holder of an Allowed Claim who purchased its
Claim from a prior holder at a market discount may be subject to the market
discount rules of the Tax Code. Under those rules, assuming that the holder has
made no election to amortize the market discount into income on a current basis
with respect to any market discount instrument, any gain recognized on the
exchange of its Claim (subject to a de minimis rule) generally would be
characterized as ordinary income to the extent of the accrued market discount on
such Claim as of the date of the exchange.
4. Distributions in Discharge of Accrued But Unpaid Interest
In general, to the extent that any amount received by a holder of an
Allowed Claim (whether cash, stock or other consideration) is received in
satisfaction of accrued interest during its holding period, such amount will be
taxable to the holder as interest income (if not previously included in the
holder's gross income). Conversely, a holder generally recognizes a deductible
loss to the extent any accrued interest claimed was previously included in its
gross income and is not paid in full.
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The extent to which any amounts received by holders of Allowed
General Unsecured Claims and Senior Subordinated Note Claims will be allocated
to any accrued but unpaid interest for federal income tax purposes is unclear.
Each holder is urged to consult its tax advisor with respect to the allocation
of amounts received between the principal and interest portions of its Claim.
5. Interest and Original Issue Discount on Series B New Notes
Each holder of a Series B New Note generally will be required to
include in its gross income any interest payable with respect to Series B New
Notes in accordance with its regular method of accounting.
In addition, it is possible that the Series B New Notes may be
treated as issued with original issue discount ("OID"). In general, a debt
instrument is treated as having OID to the extent its "stated redemption price
at maturity" (in this case, the face amount of the Series B New Notes) exceeds
its "issue price," subject to a de minimis exception.
The "issue price" of the Series B New Notes will depend upon whether
they are traded on an "established securities market" during the sixty (60) day
period ending thirty (30) days after the Effective Date, or alternatively
whether a significant portion of the Claims exchanged for such notes is so
traded. Pursuant to Treasury Regulations, an "established securities market"
need not be a formal market. It is sufficient that the notes appear on a system
of general circulation (including a computer listing disseminated to subscribing
brokers, dealers or traders) that provides a reasonable basis to determine fair
market value by disseminating either recent price quotations or actual prices of
recent sales transactions, or that price quotations for such notes are readily
available from brokers, dealers or traders. If, as the Debtors anticipate,
neither the Series B New Notes nor a significant portion of the Claims exchanged
for such notes are traded on an established securities market (and the stated
interest rate of 9-3/8% is greater than the applicable federal rate for
obligations of similar maturity in effect on the Confirmation Date), the issue
price of the Series B New Notes generally will be their face amount, in which
event no OID would result. In contrast, if there is the requisite market in the
Series B New Notes or in the claims, the issue price of the notes would be based
on the fair market value of such notes or claims, as the case may be.
If the Series B New Notes are issued with OID, each holder generally
will be required to accrue the OID in respect of the Series B New Notes received
and include such amount in gross income as interest over the term of such notes
based on the constant yield method. Accordingly, each holder generally would be
required to include amounts in gross income in advance of the payment of cash in
respect of such income. A holder's tax basis in a Series B New Note will be
increased by the amount of any OID included in income and reduced by any cash
received (other than payments of stated interest) made with respect to such
note.
Any Series B New Notes issued after the Effective Date in
satisfaction of Disputed Claims subsequently allowed may have a different issue
price and yield to maturity for federal income tax purposes than any Series B
New Notes issued prior thereto and thus may not be fungible with the Series B
New Notes issued on the Effective Date or to holders of earlier resolved
Disputed Claims. Holders of Disputed Claims should consider their federal income
tax consequences accordingly.
6. Exercise or Lapse of the Equity Subscription Rights
A holder of an Equity Subscription Right generally will not recognize
gain or loss upon the exercise of such right. A holder's tax basis in the New
Common Stock received upon exercise of an Equity Subscription Right will be
equal to the sum of the holder's tax basis in the Equity Subscription Right and
the amount paid for the New Common Stock. The holder will commence a new holding
period with respect to the New Common Stock acquired.
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Upon the lapse of an Equity Subscription Right, the holder generally
would recognize gain or loss equal to the difference between the amount received
(zero in the case of a lapse) and its tax basis in the Equity Subscription Right
(if any). In general, such gain or loss would be a capital gain or loss,
long-term or short-term, depending on whether the requisite holding period was
satisfied.
7. Ownership and Disposition of New Common Stock
Any gain recognized by a holder upon a subsequent taxable disposition
of New Common Stock received in satisfaction of a Claim directly against
Magellan or a first-tier subsidiary of Magellan pursuant to the Plan (or any
stock or property received for it in a later tax-free exchange) will be treated
as ordinary income to the extent of (i) any bad debt deductions (or additions to
a bad debt reserve) claimed with respect to its Claim and any ordinary loss
deductions incurred upon satisfaction of its Claim, less any income (other than
interest income) recognized by the holder upon satisfaction of its Claim, and
(ii) with respect to a cash-basis holder, any amount that would have been
included in its gross income if the holder's Claim had been satisfied in full
but that was not included by reason of the cash method of accounting.
In addition, the Treasury Department is expected to promulgate
regulations that will provide that any accrued "market discount" not treated as
ordinary income upon a tax-free exchange (including a "recapitalization"
exchange) of market discount bonds would carry over to the nonrecognition
property received in the exchange. If such regulations are promulgated and
applicable to the Plan (and likely even without issuance of regulations), any
holder of an Allowed Senior Subordinated Note Claim which has accrued market
discount would carry over such accrued market discount to any New Common Stock
received in satisfaction of such Claim pursuant to the Plan (possibly including
any New Common Stock acquired in the Equity Offering upon the exercise of an
Equity Subscription Right), such that any gain recognized by the holder upon a
subsequent disposition of such New Common Stock would be treated as ordinary
income to the extent of any accrued market discount not previously included in
income.
If no appropriate adjustment is made to the number of shares of New
Common Stock for which a New Warrant may be exercised or to the exercise price
of the New Warrants, a constructive distribution may result that could be
taxable to the holders of the New Common Stock.
C. CONSEQUENCES TO HOLDERS OF MAGELLAN PREFERRED STOCK INTERESTS AND MAGELLAN
COMMON STOCK INTERESTS
If Class 8 (Senior Subordinated Note Claims) and Class 9 (Other
General Unsecured Claims) accept the Plan, holders of Magellan Preferred Stock
Interests and Magellan Common Stock Interests will be entitled to receive New
Common Stock and New Warrants.
1. Recapitalization Exchange
The receipt of New Common Stock and New Warrants in respect of either
a Magellan Preferred Stock Interest or a Magellan Common Stock Interest will be
a "recapitalization" for federal income tax purposes. Accordingly, in general,
the holder of a Magellan Preferred Stock Interest or Magellan Common Stock
Interest will not recognize gain or loss upon such exchange.
To the extent that there are accrued but undeclared dividends in
respect of the underlying preferred stock, the consideration that a holder
receives in exchange for its Magellan Preferred Stock Interests would be
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potentially taxable as a dividend for federal income tax purposes if, and to the
extent that, the aggregate value received therefor exceeded the original issue
price of the underlying preferred stock (determined on a share by share basis).
However, the Debtors do not anticipate that the fair market value of the New
Common Stock to be issued in exchange for the Magellan Preferred Stock Interests
will exceed the original issue price of the Magellan Preferred Stock Interests.
In general, a holder's aggregate tax basis in any New Common Stock
and New Warrants received will equal the holder's aggregate adjusted tax basis
in the underlying preferred stock or common stock. Such tax basis will be
allocated between the New Common Stock and the New Warrants based on relative
fair market value. In general, the holder's holding period for the New Common
Stock and the New Warrants received will include the holder's holding period for
the underlying preferred stock or common stock.
2. Ownership and Disposition of New Warrants; Constructive Distributions
to Holders of New Common Stock
A holder of a New Warrant generally will not recognize gain or loss
upon the exercise of such warrant. A holder's tax basis in the New Common Stock
received upon exercise of a New Warrant will be equal to the sum of the holder's
tax basis in the New Warrant and the exercise price. The holder will commence a
new holding period with respect to the New Common Stock received.
If the terms of the New Warrant provide for any adjustment to the
number of shares of New Common Stock for which the New Warrant may be exercised
or to the exercise price of the New Warrants, such adjustment may, under certain
circumstances, result in constructive distributions that could be taxable to the
holder of the New Warrants. Conversely, the absence of an appropriate adjustment
may result in a constructive distribution that could be taxable to the holders
of the New Common Stock.
Upon the lapse or disposition of a New Warrant, the holder generally
would recognize gain or loss equal to the difference between the amount received
(zero in the case of a lapse) and its tax basis in the warrant. In general, such
gain or loss would be a capital gain or loss, long-term or short-term, depending
on whether the requisite holding period was satisfied.
D. INFORMATION REPORTING AND WITHHOLDING
All distributions to holders of Allowed Claims under the Plan are
subject to any applicable withholding (including employment tax withholding).
Under federal income tax law, interest, dividends, and other reportable payments
may, under certain circumstances, be subject to "backup withholding" at the then
applicable rate (currently 28%). Backup withholding generally applies if the
holder (a) fails to furnish its social security number or other taxpayer
identification number ("TIN"), (b) furnishes an incorrect TIN, (c) fails
properly to report interest or dividends, or (d) under certain circumstances,
fails to provide a certified statement, signed under penalty of perjury, that
the TIN provided is its correct number and that it is a United States person
that is not subject to backup withholding. Certain persons are exempt from
backup withholding, including, in certain circumstances, corporations and
financial institutions. Backup withholding is not an additional tax but merely
an advance payment, which may be refunded to the extent it results in an
overpayment of tax and the appropriate information is supplied to the IRS.
Recently effective Treasury Regulations generally require disclosure
by a taxpayer on its federal income tax return of certain types of transactions
in which the taxpayer participated after January 1, 2003, including, among other
types of transactions, the following (i) certain transactions that result in the
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taxpayer claiming a loss in excess of specified thresholds; and (ii) certain
transactions in which the taxpayer's federal income tax treatment differs by
more than a specified threshold in any tax year from its treatment for financial
reporting purposes. These categories are very broad; however, there are numerous
exceptions. Holders are urged to consult their tax advisors regarding these
regulations and whether the transactions contemplated by the Plan would be
subject to these regulations and require disclosure on the holders' tax returns.
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XIV.
CONCLUSION
The Debtors believe the Plan is in the best interests of all
creditors and equity holders and urges the holders of impaired claims in Class 1
(Senior Secured Lender Claims), Class 4 (Aetna Claims), Class 7 (Senior Note
Claims), Class 8 (Senior Subordinated Note Claims), Class 9 (Other General
Unsecured Claims), Class 13 (Magellan Preferred Stock Interests) and Class 14
(Magellan Common Stock Interests) to vote to accept the Plan and to evidence
such acceptance by returning their Ballots.
Dated: August 18, 2003
Respectfully submitted,
By: /s/ Mark S. Demilio
-----------------------------------------------
Name: Mark S. Demilio
Title: Executive Vice President and Chief
Financial Officer
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