- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: APRIL 8, 1998
DATE OF EARLIEST EVENT MARCH 3, 1998
REPORTED:
MAGELLAN HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter).
DELAWARE 1-6639 58-1076737
(State of incorporation) (Commission File Number) (IRS Employer
Identification
No.)
3414 PEACHTREE ROAD, N.E., SUITE 1400,
ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)
(404) 841-9200
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 5. OTHER EVENTS
OVERVIEW
On March 3, 1998, Magellan Health Services, Inc. (together with its
consolidated subsidiaries hereinafter referred to collectively as the "Company")
entered into an Equity Purchase Agreement, pursuant to which it agreed to sell
to Crescent Operating, Inc. ("COI") the Company's common and preferred equity
interest in Charter Behavioral Health System, LLC ("CBHS"). In addition, the
Company and certain of its wholly-owned subsidiaries entered into a Purchase
Agreement, pursuant to which the Company and such subsidiaries agreed to sell to
CBHS: (i) Charter Advantage LLC, ("Charter Advantage"), the entity that conducts
the Company's franchising operations; (ii) Charter System, LLC, which owns the
intellectual property comprising the "CHARTER" system of behavioral healthcare;
(iii) Group Practice Affiliates, Inc. ("GPA"), the Company's physician practice
management business; (iv) certain behavioral staff model operations; (v) the
Company's Puerto Rican provider management business; (vi) Golden Isle Assurance
Company, Ltd. ("Golden Isle"), one of the Company's captive insurance companies;
and (vii) Strategic Advantage, Inc. ("Strategic Advantage"), which owns certain
intellectual property used by the Company to monitor clinical results. The
Company and COI also entered into a Support Agreement which, among other things,
obligates COI to provide CBHS assistance to obtain financing for its payment
obligation under the Purchase Agreement. The following summary of certain
provisions of the Equity Purchase Agreement, the Purchase Agreement and the
Support Agreement does not purport to be complete and is qualified in its
entirety by reference to the copies of such documents filed as exhibits to this
Form 8-K.
Upon consummation of the CBHS Transactions, the Company will receive $280.0
million in cash, pursuant to the Purchase Agreement and, pursuant to the Equity
Purchase Agreement, the number of shares of COI Common Stock obtained by
dividing $30.0 million by the average closing price of a share of COI Common
Stock for the ten trading days preceding consummation of the CBHS Transactions.
The Company expects to use the cash proceeds, after transaction costs of
approximately $8.0 million, to repay indebtedness outstanding under the term
loan facility of the Company's Credit Agreement. The CBHS Transactions are
expected to close in the third quarter of fiscal 1998. There can be no assurance
that the Company will consummate the CBHS Transactions.
The obligations of the Company and CBHS to consummate the transactions
contemplated by the Equity Purchase Agreement and the Support Agreement are
conditioned upon the execution and delivery of a Services Purchase Agreement. It
is expected that the Services Purchase Agreement would obligate the Company to
purchase from CBHS a designated minimum amount of behavioral healthcare services
for gate-kept risk-based covered lives if it meets certain standards required of
it pursuant to the Provider Services Agreement. If the CBHS Transactions are
consummated, the Company also expects to enter into a Provider Services
Agreement with CBHS, pursuant to which the Company would grant CBHS status as a
national preferred provider of behavioral healthcare services to the Company for
ten years provided that CBHS complies during the term of the Provider Services
Agreement with enhanced clinical, quality assurance, reporting and customer
service standards in addition to the standards currently required of other
providers of such services to the Company. See "--Description of the Definitive
Agreements."
DESCRIPTION OF THE DEFINITIVE AGREEMENTS
THE EQUITY PURCHASE AGREEMENT. The Company has agreed, pursuant to the
Equity Purchase Agreement, to sell to COI the Company's common and preferred
equity interest in CBHS for the number of shares of COI common stock obtained by
dividing $30.0 million by the average closing price of a share of COI common
stock for the ten trading days preceding consummation of the CBHS Transactions.
The obligation of COI to consummate the transactions contemplated by the Equity
Purchase Agreement is conditioned, among other things, upon the consummation of
the transactions contemplated by the Purchase Agreement. The obligations of COI
and the Company to consummate the transactions contemplated by the Equity
Purchase Agreement are also subject to, among other things, the effectiveness of
the interim final rule (the "Final Rule") relating to the existing statutory
shared risk
safe harbor of [the Anti-Kickback Statute]. If the Final Rule becomes effective
in the form proposed on the date of execution of the Equity Purchase Agreement,
the obligations of COI and the Company to consummate the transactions
contemplated by the Equity Purchase Agreement are also subject to execution and
delivery of the Services Purchase Agreement substantially in the form agreed to
by the parties. If the Final Rule does not become effective in the form proposed
on the date of execution of the Equity Purchase Agreement, it is a condition of
the obligation of COI and the Company to consummate the transactions
contemplated by the Equity Purchase Agreement that the Company and CBHS shall
have executed the Services Purchase Agreement in a form that complies with the
Final Rule without any material loss of the proposed benefits to be provided to
the parties under the Services Purchase Agreement.
THE PURCHASE AGREEMENT. The Company and certain of its wholly-owned
subsidiaries have agreed, pursuant to a Purchase Agreement, to sell to CBHS: (i)
Charter Advantage; (ii) Charter System, LLC; (iii) GPA; (iv) certain behavioral
staff model operations; (v) the Company's Puerto Rican provider management
business; (vi) Golden Isle and (vii) Strategic Advantage. The Purchase Agreement
also grants CBHS the right to purchase any or all of certain staff model
operations of Merit Behavioral Care Corporation ("Merit"), which was acquired by
the Company on February 12, 1998, for no additional consideration. The
obligation of CBHS to consummate the transactions contemplated by the Purchase
Agreement is conditioned, among other things, upon the occurrence of the
following: (i) consummation of the transactions contemplated by the Equity
Purchase Agreement and (ii) consummation by CBHS of financing arrangements
sufficient to permit it to consummate the transactions contemplated by the
Purchase Agreement. The obligations of CBHS and the Company to consummate the
transactions contemplated by the Purchase Agreement are also subject to, among
other things, the execution of either (i) a Joint Venture Purchase Agreement
pursuant to which the Company will sell to CBHS, for no additional
consideration, its interest in its six hospital-based joint ventures (the "Joint
Ventures") or (ii) amendments to the services agreement between the Company and
certain subsidiaries of CBHS relating to the Joint Ventures pursuant to which
CBHS the Company will transfer to CBHS all rights to receive certain
distributions with respect to the Joint Ventures and pursuant to which CBHS
would assume all obligations of the Company with respect to the Joint Ventures
arising after consummation of the CBHS Transactions.
Pursuant to the Purchase Agreement, CBHS will be obligated to repay to the
Company, within 180 days after the consummation of the CBHS Transactions, all
amounts owed under any working capital loan and other loans, advances and
prepaid items from the Company existing on the date of the execution of the
Purchase Agreement and thereafter made by the Company. The Purchase Agreement
also provides that the Company and CBHS will execute an amendment to the master
franchise agreement entered into by them in connection with the use of the
"CHARTER" system of behavioral healthcare by CBHS upon the closing of the
Purchase Agreement which will reduce the franchise fees ("Franchise Fees") due
from CBHS from the current amount of approximately $6.5 million per month to
$5.0 million per month from February 1, 1998 until the closing of the Purchase
Agreement. If, however, the transactions contemplated by the Purchase Agreement
are not consummated, CBHS will be obligated to pay the full amount of the
Franchise Fees during the period between February 1, 1998 and the termination of
the Purchase Agreement. Any amount of accrued and unpaid Franchise Fees on the
date of the execution of the Purchase Agreement and the amount of the Franchise
Fees accrued but not paid following the execution of the Purchase Agreement must
be paid by CBHS no later than 180 days following the consummation of the CBHS
Transactions.
THE SUPPORT AGREEMENT. The Company and COI also entered into the Support
Agreement. Pursuant to the Support Agreement, COI agreed to cooperate with and
provide assistance to CBHS in the preparation of any offering documents or other
material required in connection with CBHS's efforts to obtain financing for its
payment obligation under the Purchase Agreement. COI further agreed to reimburse
CBHS for all expenses incurred in connection with obtaining such financing,
whether or not
2
the CBHS Transactions are consummated. In addition, COI agreed to purchase up to
$25.0 million of CBHS securities if necessary to permit CBHS to obtain the
required financing. Pursuant to the Support Agreement, the Company agreed to
cooperate with CBHS in obtaining the financing by providing any information
required in connection with the financing.
The Support Agreement also provides that if, as a result of the failure of
CBHS to obtain sufficient financing for its payment obligations under the
Purchase Agreement, the transactions contemplated by the Purchase Agreement are
not consummated or the Purchase Agreement is terminated, then COI will pay the
Company a termination fee ("Termination Fee") which is comprised of $2.5 million
in cash and the number of shares of COI Common Stock obtained by dividing $2.5
million by the average closing price of a share of COI Common Stock for the five
trading days prior to the date of termination of the Purchase Agreement and for
the five trading days after the termination of the Purchase Agreement. COI shall
not be obligated to pay the Termination Fee until the later to occur of (i) 30
days after the date of the execution of the Support Agreement or (ii) the date
on which the Company and CBHS agree on a schedule defining CBHS's obligation to
open additional psychiatric facilities and implement services at such
facilities. Furthermore, COI may terminate either the Equity Purchase Agreement
or the Support Agreement for any reason within 30 days of the signing of the
agreements without incurring the Termination Fee.
All of COI's obligations under the Support Agreement described above are
also subject to the Final Rule becoming effective. If the Final Rule becomes
effective in the form proposed on the date of execution of the Support
Agreement, COI's obligations under the Support Agreement are also subject to
execution and delivery of the Services Purchase Agreement substantially in the
form agreed to by the parties. If the Final Rule does not become effective in
the form proposed on the date of the Support Agreement, it is a condition of
COI's obligations under the Support Agreement that the Company and CBHS shall
have executed the Services Purchase Agreement in a form that complies with the
Final Rule without any material loss of the proposed benefits to be provided
under the Services Purchase Agreement.
SERVICES PURCHASE AGREEMENT. The obligations of the Company and CBHS to
consumate the transactions contemplated by the Equity Purchase Agreement and the
Support Agreement are conditioned upon the execution and delivery of the
Services Purchase Agreement upon consummation of the CBHS Transactions. The
Company now contemplates that, pursuant to the Services Purchase Agreement, CBHS
would agree to comply with certain standards required of it pursuant to the
Provider Services Agreement to maintain existing inpatient facilities and
service capabilities and to develop and implement (i) a buildout of outpatient
facilities within a 20-mile radius of certain existing CBHS facilities providing
inpatient services and (ii) a comprehensive, nationwide buildout of additional
services and facilities to service the Company's gate-kept risk-based covered
lives. In exchange, the Company would agree to purchase a designated amount of
behavioral healthcare services for the Company's gate-kept risk-based covered
lives from CBHS and the entities managed by CBHS (collectively, the "CBHS
Entities") for the five year term of the Services Purchase Agreement.
The Services Purchase Agreement would obligate the Company to purchase
during each year of the term of the agreement not less than $18 million of
inpatient services (the "Designated Inpatient Amount") and not less than $20
million of outpatient services (the "Designated Outpatient Amount," and together
with the Designated Inpatient Amount, the "Designated Amounts"), each subject to
certain reductions under certain circumstances. A liason committee made up of
representatives of the Company and CBHS (the "Committee") would adjust the
Designated Amounts, either up or down, subject to certain minimum Designated
Amounts to be mutually agreed on by the parties.The Committee would make the
following adjustments to the Designated Amounts, as applicable: (i) an upward
adjustment due to the CBHS Entities' build out of additional services and
facilities, (ii) a downward adjustment due to CBHS Facilities (as defined) being
closed or (iii) a downward adjustment due to reductions in the number of the
Company's risk based lives due to expired or terminated customer contracts.
3
To the extent that the Company purchases less than the Designated Amounts
during any of the years of the term of the Services Purchase Agreement, (each
year a "Contract Year") the Company is required to pay service fees to CBHS as
calculated by the Committee pursuant to a formula to be set forth in the
Services Purchase Agreement ("Service Fees"). The maximum potential Service Fees
payable to CBHS by the Company for the five-year term of the Service Purchase
Agreement is expected to be approximately $59.4 million, assuming no changes to
the Designated Accounts. To determine the amount of the Service Fees, the
Committee will first determine the Purchased Inpatient and Purchased Outpatient
Amounts (collectively, the "Purchased Amounts") by adding (i) the amount of
certain defined inpatient and outpatient services, respectively, which the
Company refers to CBHS Entities but which the CBHS Entities do not actually
provide to (ii) the amounts of inpatient and outpatient services actually
purchased by the Company.
Next, the Committee will determine the amounts of shortfalls and/or excess
purchases made by the Company based on the Purchased Amounts as compared to the
Designated Amounts. If the Purchased Inpatient Amount is less than the
Designated Inpatient Amount, then there is deemed to be an Inpatient Shortfall
which is equal to 33% of the difference between the Purchased Inpatient Amount
and the Designated Inpatient Amount. Likewise, if the Purchased Outpatient
Amount is less than the Designated Outpatient Amount, then there is deemed to be
an Outpatient Shortfall which is equal to 17% of the difference in the Purchased
Outpatient Amount and the Designated Outpatient Amount. On the other hand, if
either of the Purchased Amounts exceeds its respective Designated Amount, then
there is an Excess Purchase. If the Purchased Inpatient Amount exceeds the
Designated Inpatient Amount, then the Inpatient Excess Purchase is equal to 33%
of the difference in the Purchased Inpatient Amount and the Designated Inpatient
Amount. Similarly, if the Purchased Outpatient Amount exceeds the Designated
Outpatient Amount, then the Outpatient Excess Purchase is equal to 17% of the
difference in the Purchased Outpatient Amount and the Designated Outpatient
Amount. The resulting Inpatient Shortfall or Inpatient Excess Purchase and
Outpatient Shortfall or Outpatient Excess Purchase will then be netted against
one another to determine the Net Shortfall or Net Excess Purchase.
In the event of a Net Excess Purchase, no Services Fees are due and 50% of
the Net Excess Purchase (the "Carryforward Amount") will be carried forward to
reduce any Net Shortfall in future years. In the event of a Net Shortfall, the
Committee will determine the Final Shortfall by subtracting the Carryforward
Amount from previous years, if any, from the Net Shortfall. The Final Shortfall,
if any, will then be divided into a Final Inpatient Shortfall and Final
Outpatient Shortfall by reducing the Inpatient and/or Outpatient Shortfalls by
the Carryforward Amount allocated on a pro rata basis in percentages equal to
the proportions in which the Inpatient and Outpatient Shortfalls comprise the
Net Shortfall. The Service Fee is then calculated by multiplying the Final
Inpatient and Outpatient Shortfalls by the appropriate factors for each Contract
Year, as set forth below:
CONTRACT YEAR OUTPATIENT SHORTFALL FACTORS INPATIENT SHORTFALL FACTORS
- --------------------------------------------------------- ----------------------------- ---------------------------
First.................................................... 1 50/33
Second................................................... 50/17 50/33
Third.................................................... 1 1
Fourth................................................... 1 1
Fifth.................................................... 1 1
THE PROVIDER SERVICES AGREEMENT. The Company and CBHS expect to enter into
a Provider Services Agreement upon the consummation of the CBHS Transactions.
The Company will grant "national preferred provider" status to CBHS and CBHS
Entities for a period of ten years, pursuant to the Provider Services Agreement.
The Provider Services Agreement would replace, amend or supercede all existing
provider agreements between the Company and the CBHS Entities. If one of the
CBHS Entities' facilities ("CBHS Facilities") is qualified to provide behavioral
health services required by an individual patient and if permitted by the
patient's benefit agreement, the Company's customer and applicable law, a CBHS
Facility meeting the patient's needs will be the first provider recommended by
the Company to a
4
patient at the time the patient is provided with a list of potential providers.
Pursuant to the Provider Services Agreement, in order to retain their national
preferred provider status, the CBHS Entities are required to: (i) provide
services to the Company and its customers at market rates comparable to those
charged by comparable facilities in the geographic area of a particular
facility; (ii) comply with terms and conditions for participation in the
provider networks of the Company and its customers; (iii) have available certain
required behavioral health services at each of the CBHS Facilities, (iv) have
facilities geographically located such that they are accessable to patients
within the Company's provider networks; (v) comply with certain service
standards and requirements of the Company and its customers; and (vi) comply
with enhanced clinical, quality assurance, reporting and customer service
standards in addition to the standards currently required of other providers of
such services to the Company which will be mutually agreed on by the Company and
CBHS. The Provider Services Agreement would also standardize the provider
arrangements between the Company and CBHS to include additional representations,
covenants and agreements customarily present in contracts with similar providers
of behavioral healthcare.
IMPACT ON THE COMPANY
REDUCTION IN NUMBER OF COVERED LIVES. Consummation of the CBHS Transactions
will result in a reduction in the number of covered lives in the Company's
behavioral managed care products by the approximately 1.1 million lives enrolled
in behavioral managed care products offered by GPA. The following table sets
forth, on a pro forma basis after giving effect to the CBHS Transactions, the
approximate number of covered lives as of December 31, 1997 and revenue for
fiscal 1997 for each type of managed behavioral healthcare program offered by
the Company:
PROGRAMS COVERED LIVES PERCENT REVENUE PERCENT
- ----------------------------------------------------------- ----------------- ----------- ---------- -----------
(IN MILLIONS, EXCEPT PERCENTAGES)
Risk-Based Products........................................ 17.2 30.1% $ 795.1 72.7%
Employee Assistance Plans.................................. 10.5 18.4 99.7 9.1
Integrated Products........................................ 3.1 5.4 54.2 5.0
Administrative-Services-Only Products...................... 23.0 40.2 131.1 11.9
Other...................................................... 3.4 5.9 14.2 1.3
----- ----------- ---------- -----------
Total.................................................. 57.2 100.0% $ 1,094.3 100.0%
----- ----------- ---------- -----------
----- ----------- ---------- -----------
The following table sets forth, on a pro forma basis after giving effect to
the CBHS Transactions, the approximate number of covered lives as of December
31, 1997, and revenue for fiscal 1997 in each of the Company's market segments
described below:
MARKET COVERED LIVES PERCENT REVENUE PERCENT
- ------------------------------------------------------------ ----------------- ----------- --------- -----------
(IN MILLIONS, EXCEPT PERCENTAGES)
Corporations and Labor Unions............................... 20.6 36.1% $ 193.2 17.7%
Health Maintenance Organizations............................ 7.6 13.3 226.4 20.7
Blue Cross/Blue Shield and Insurance Companies.............. 18.4 32.1 311.0 28.4
Medicaid Programs........................................... 2.5 4.4 265.4 24.3
Governmental Agencies (including CHAMPUS)................... 4.7 8.2 84.7 7.7
Other....................................................... 3.4 5.9 13.6 1.2
--- ----- --------- -----
Total................................................... 57.2 100.0% $ 1,094.3 100.0%
--- ----- --------- -----
--- ----- --------- -----
REDUCTION IN INDEBTEDNESS. If the CBHS Transactions are consummated, the
Company will use the estimated net proceeds of $272.0 million received from the
CBHS Transactions to reduce indebtedness outstanding under the Term Loan
Facility. The following table sets forth the capitalization of the Company on a
pro forma basis, before and after giving effect to the consummation of the CBHS
5
Transactions, at December 31, 1997. The information in this table should be read
in conjunction with "-- Unaudited Pro Forma Consolidated Financial
Information--CBHS Transactions."
DECEMBER 31, 1997
----------------------------------
BEFORE THE CBHS AFTER THE CBHS
TRANSACTIONS TRANSACTIONS
----------------- ---------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents(1)............................... $ 160,609 $ 128,393
----------------- ---------------
----------------- ---------------
Total debt (including current maturities):
New Credit Agreement:
Revolving Facility(2).................................. $ 20,000 $ 20,000
Term Loan Facility(3).................................. 550,000 278,000
Senior Subordinated Notes................................ 625,000 625,000
Other(4)................................................. 20,154 19,494
----------------- ---------------
Total debt............................................. 1,215,154 942,494
Stockholders' equity(5).................................. 179,033 278,619
----------------- ---------------
Total capitalization................................... $ 1,394,187 $ 1,221,113
----------------- ---------------
----------------- ---------------
-------------------------------
(1) Includes restricted cash of $52.1 million.
(2) The Revolving Facility provides for borrowings of up to $150.0
million.
(3) The Term Loan Facility consists of: (i) a 6 year Tranche A Term Loan;
(ii) a 7 year Tranche B Term Loan; and (iii) an 8 year Tranche C Term
Loan each in an aggregate principal amount of $183.3 million. If the
CBHS Transactions are consummated, the net proceeds of an estimated
$272.0 million will be used to repay approximately $90.7 million of
each tranche of the Term Loan Facility.
(4) Other debt consists primarily of: (i) $7.6 million of mortgages and
other notes payable through 1999, bearing interest at 6.8% to 8.0%;
(ii) $6.1 million of 7.5% Swiss Bonds due 2001, which were redeemed in
March, 1998; and (iii) $6.4 million in 3.95% capital lease obligations
due in 2014.
(5) Represents the pro forma book value of the Company's stockholders'
equity. The Company's Common Stock is publicly traded on The New York
Stock Exchange. As of March 31, 1998 the market value of the Company's
Common Stock was approximately $818.7 million.
6
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--CBHS TRANSACTIONS
The Unaudited Pro Forma Consolidated Financial Information--CBHS
Transactions is based on the pro forma presentation included in Unaudited Pro
Forma Consolidated Financial Information included in the Company's Current
Report on Form 8-K, as amended, filed on April 3, 1998, which is incorporated
herein by reference (the "Merit 8-K"). The Unaudited Pro Forma Consolidated
Statements of Operations--CBHS Transactions for the year ended September 30,
1997 and the three months ended December 31, 1997 give effect to the CBHS
Transactions as if they had been consummated on October 1, 1996. The Unaudited
Pro Forma Consolidated Balance Sheet--CBHS Transactions as of December 31, 1997
gives effect to the CBHS Transactions as if they had been consummated on
December 31, 1997. "Pro Forma Combined" in the Unaudited Pro Forma Consolidated
Statements of Operations--CBHS Transactions and Unaudited Pro Forma Consolidated
Balance Sheet--CBHS Transactions gives effect to all the transactions described
in the Merit 8-K.
The Unaudited Pro Forma Consolidated Financial Information--CBHS
Transactions does not purport to be indicative of the results that actually
would have been obtained if the operations had been conducted as presented and
they are not necessarily indicative of operating results to be expected in
future periods. The Unaudited Pro Forma Consolidated Financial Information--CBHS
Transactions and notes thereto should be read in conjunction with the historical
consolidated financial statements and notes thereto of the Company which are set
forth in the Company's Annual Report on Form 10-K for its fiscal year ended
September 30, 1997, the Unaudited Pro Forma Consolidated Financial Information
included in the Merit 8-K, and the historical consolidated financial statements
of Merit, which are included in the Merit 8-K.
7
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--CBHS TRANSACTIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DIVESTED
PRO FORMA OPERATIONS--CBHS PRO FORMA PRO FORMA
COMBINED TRANSACTIONS(1) ADJUSTMENTS CONSOLIDATED
------------ ---------------- ----------- ------------
Net revenue................... $1,601,606 $(138,684) $(55,463)(2) $1,407,459
------------ ---------------- ----------- ------------
Salaries, cost of care and
other operating expenses.... 1,355,098 (101,096) (16,064)(3) 1,237,938
Bad debt expense.............. 3,491 (4,115) 0 (624)
Depreciation and
amortization................ 68,962 (4,131) 0 64,831
Interest, net................. 96,389 1,042 (22,032)(4) 75,399
Stock option expense.......... 4,292 0 0 4,292
Equity in loss of CBHS........ 20,150 0 (20,150)(5) 0
Unusual items................. (943) 0 0 (943)
------------ ---------------- ----------- ------------
1,547,439 (108,300) (58,246) 1,380,893
------------ ---------------- ----------- ------------
Income (loss) before income
taxes and minority
interest.................... 54,167 (30,384) 2,783 26,566
Provision for (benefit from)
income taxes................ 30,033 (12,154) 1,113(6) 18,992
------------ ---------------- ----------- ------------
Income (loss) before minority
interest.................... 24,134 (18,230) 1,670 7,574
Minority interest............. 2,267 (2,400) 0 (133)
------------ ---------------- ----------- ------------
Net income (loss)............. $ 21,867 $ (15,830) $ 1,670 $ 7,707
------------ ---------------- ----------- ------------
------------ ---------------- ----------- ------------
Average number of common
shares outstanding--basic... 31,613 31,613
------------ ------------
------------ ------------
Average number of common
shares
outstanding--diluted........ 32,306 32,306
------------ ------------
------------ ------------
Net income per common
share--basic................ $ 0.69 $ 0.24
------------ ------------
------------ ------------
Net income per common share--
diluted..................... $ 0.68 $ 0.24
------------ ------------
------------ ------------
See Notes to Unaudited Pro Forma Consolidated Statements of Operations--CBHS
Transactions
8
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DIVESTED
PRO FORMA OPERATIONS--CBHS PRO FORMA PRO FORMA
COMBINED TRANSACTIONS(1) ADJUSTMENTS CONSOLIDATED
--------- ---------------- ----------- -------------
Net revenue................... $ 443,293 $ (49,150) $ 0 $ 394,143
--------- ---------------- ----------- -------------
Salaries, cost of care and
other operating expenses.... 382,704 (29,361) 0 353,343
Bad debt expense.............. 1,070 (1,020) 0 50
Depreciation and
amortization................ 17,470 (1,076) 0 16,394
Interest, net................. 24,685 299 (5,610)(4) 19,374
Stock option expense
(credit).................... (3,959) 0 0 (3,959)
Equity in loss of CBHS........ 11,488 0 (11,488)(5) 0
--------- ---------------- ----------- -------------
433,458 (31,158) (17,098) 385,202
--------- ---------------- ----------- -------------
Income (loss) before income
taxes and minority
interest.................... 9,835 (17,992) 17,098 8,941
Provision for (benefit from)
income taxes................ 6,202 (7,197) 6,839(6) 5,844
--------- ---------------- ----------- -------------
Income (loss) before minority
interest.................... 3,633 (10,795) 10,259 3,097
Minority interest............. 518 (517) 0 1
--------- ---------------- ----------- -------------
Net income (loss)............. $ 3,115 $ (10,278) $ 10,259 $ 3,096
--------- ---------------- ----------- -------------
--------- ---------------- ----------- -------------
Average number of common
shares outstanding--basic... 31,801 31,801
--------- -------------
--------- -------------
Average number of common
shares
outstanding--diluted........ 32,616 32,616
--------- -------------
--------- -------------
Net income per common
share--basic................ $ 0.10 $ 0.10
--------- -------------
--------- -------------
Net income per common
share--diluted.............. $ 0.10 $ 0.09
--------- -------------
--------- -------------
See Notes to Unaudited Pro Forma Consolidated Statements of Operations--CBHS
Transactions
9
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--CBHS
TRANSACTIONS
(1) Represents the elimination of historical operations as a result of the CBHS
Transactions, including franchise operations from June 17, 1997 through
December 31, 1997, and the operations of GPA, the Puerto Rican provider
business, the Joint Ventures and other operations.
(2) Adjustment to net revenue represents the elimination of pro forma franchise
fees for the 259 days ended June 16, 1997.
(3) Adjustments to salaries, cost of care and other operating expenses represent
the elimination of fees payable to CBHS by Magellan for the management of
less than wholly-owned hospital based joint ventures controlled by Magellan
for the 259 days ended June 16, 1997 and the elimination of estimated
franchise overhead and personnel.
(4) Adjustment to interest, net, represents the reductions in interest expense
as a result of the repayment of pro forma outstanding borrowings under the
New Credit Agreement with the net proceeds from the CBHS Transactions. The
net proceeds would be applied ratably to repay each tranche of the Term Loan
Facility upon consummation of the CBHS Transactions.
(5) Adjustment to equity in loss of CBHS represents the elimination of
Magellan's pro forma equity in loss of CBHS.
(6) Adjustment to provision for income taxes represents the tax expense related
to the pro forma adjustments at the Company's historic effective tax rate of
40%.
10
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--CBHS TRANSACTIONS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
PRO FORMA DIVESTED OPERATIONS-- PRO FORMA PRO FORMA
ASSETS COMBINED CBHS TRANSACTIONS ADJUSTMENTS CONSOLIDATED
-------- ------------ --------------------- ------------ ------------
Current assets:
Cash and cash equivalents... $ 160,609 $ (32,216) $ 0 $ 128,393
Accounts receivable, net.... 190,136 (14,468) 0 175,668
Deferred income taxes....... 6,616 0 0 6,616
Other current assets........ 45,847 (3,206) 0 42,641
------------ ---------- ------------ ------------
Total current assets...... 403,208 (49,890) 0 353,318
Assets restricted for
settlement of unpaid claims
and other long-term
liabilities................. 73,020 0 0 73,020
Property and equipment:
Land........................ 11,687 (2,018) 0 9,669
Buildings and
improvements................ 75,698 (47,196) 0 28,502
Equipment................... 123,150 (14,317) 0 108,833
------------ ---------- ------------ ------------
210,535 (63,531) 0 147,004
Accumulated depreciation.... (41,169) 12,806 0 (28,363)
------------ ---------- ------------ ------------
169,366 (50,725) 0 118,641
Construction in progress.... 995 (83) 0 912
------------ ---------- ------------ ------------
Total property and
equipment................. 170,361 (50,808) 0 119,553
Other long-term assets........ 61,740 (687) 0 61,053
Deferred income taxes......... 71,529 0 (66,390)(1) 5,139
Investment in CBHS............ 5,390 0 (5,390)(2) 0
Investment in COI............. 0 0 30,000(3) 30,000
Goodwill, net................. 846,982 (10,272) 0 836,710
Other intangible assets,
net......................... 224,820 (2,259) 0 222,561
------------ ---------- ------------ ------------
$1,857,050 $(113,916) $ (41,780) $1,701,354
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............ $ 44,880 $ (6,661) $ 0 $ 38,219
Accrued liabilities......... 335,714 (10,438) 12,400(4) 337,676
Current maturities of
long-term debt and capital
lease obligations........... 3,604 (577) 0 3,027
------------ ---------- ------------ ------------
Total current
liabilities............. 384,198 (17,676) 12,400 378,922
Long-term debt and capital
lease obligations........... 1,211,550 (83) (272,000)(5) 939,467
Reserve for unpaid claims..... 40,201 0 0 40,201
Deferred tax liabilities...... 0 0 0 0
Deferred credits and other
long-term liabilities....... 16,795 0 47,020(4) 63,815
Minority interest............. 25,273 (24,943) 0 330
Commitments and contingencies
Stockholders' equity:
Common stock................ 9,095 0 0 9,095
Additional paid-in
capital..................... 399,141 0 0 399,141
Retained earnings
(accumulated deficit)....... (156,044) 0 99,586(6) (56,458)
Warrants outstanding........ 25,050 0 0 25,050
Common stock in treasury.... (95,187) 0 0 (95,187)
Cumulative foreign currency
adjustments................. (3,022) 0 0 (3,022)
------------ ---------- ------------ ------------
Total stockholders'
equity.................... 179,033 0 99,586 278,619
------------ ---------- ------------ ------------
$1,857,050 $ (42,702) $(112,994) $1,701,354
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
See Notes to Unaudited Pro Forma Consolidated Balance Sheet--CBHS Transactions
11
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--CBHS TRANSACTIONS
(1) Adjustment to deferred income tax assets represents the tax consequences of
the gains related to the CBHS Transactions, which relate primarily to the
utilization of historical and pro forma net operating loss carryforwards.
(2) Adjustment to Investment in CBHS represents the elimination of the Company's
investment.
(3) Adjustment to Investment in COI represents the Company's basis in COI common
stock received as consideration in the CBHS Transactions. The Company's
investment in COI would have represented approximately 11.7% of COI's
outstanding common stock based on the closing price of COI's common stock on
April 7, 1998. The Company expects to account for its investment in COI as
an available-for-sale security.
(4) Adjustment to accrued liabilities and deferred credits and other long-term
liabilities represents the current and long-term portion of the net deferred
gain recorded on the CBHS Transaction equal to the maximum potential
obligation payable under the Services Purchase Agreement. Such amounts, or
portions thereof, would be payable to CBHS to the extent that shortfalls
exist under the Services Purchase Agreement. The Company will recognize a
gain from the CBHS Transactions in future periods for that portion of
services purchased from CBHS.
(5) Adjustment to long-term debt and capital lease obligations represents the
repayment of long-term debt under the New Credit Agreement with the
estimated proceeds of approximately $280.0 million less approximately $8.0
million of transaction costs from the CBHS Transactions.
(6) Adjustment to accumulated deficit represents the net gain on the CBHS
Transactions, computed as follows (in thousands):
Net consideration--CBHS Transactions............................. $ 302,000
Net assets sold to COI and CBHS.................................. (71,214)
Basis of CBHS Investment Sold.................................... (5,390)
Obligations under the Services Purchase Agreement................ (59,420)
---------
Gain on sale before income taxes............................. 165,976
Provision for income taxes................................... 66,390
---------
$ 99,586
---------
---------
12
EXHIBITS
2(a) Purchase Agreement, dated March 3, 1998, between the Company, Charter
Behavioral Corporation, Charter Behavioral Health Systems, Inc., Green
Spring Health Services, Inc., Advantage Behavioral Systems, Inc. and
Charter Behavioral Health Systems, LLC, which was filed as Exhibit 2(f)
to the Company's Registration Statement on Form S-4 filed April 3, 1998,
and is incorporated herein by reference.
2(b) Equity Purchase Agreement, dated March 3, 1998, between the Company,
Charter Behavioral Health Systems, Inc. and Crescent Operating, Inc.
which was filed as Exhibit 2(g) to the Company's Registration Statement
on Form S-4 filed April 3, 1998, and is incorporated herein by reference.
2(c) Support Agreement, dated March 3, 1998, between the Company and Crescent
Operating, Inc. which was filed as Exhibit 2(h) to the Company's
Registration Statement on Form S-4 filed April 3, 1998, and is
incorporated herein by reference.
99(a) Press release, dated March 4, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 8, 1998 Magellan Health Services, Inc.
By: /S/ HOWARD A. MCLURE
-----------------------------------------
Senior Vice President and
Controller