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FORM 10-Q
AMENDMENT NO. 2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________________ TO
________________________
COMMISSION FILE NO. 1-6639
MAGELLAN HEALTH SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1076937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3414 PEACHTREE ROAD, NE, SUITE 1400
ATLANTA, GEORGIA 30326
(Address of principal executive offices)
(Zip Code)
(404) 841-9200
(Registrant's telephone number, including area code)
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW.
------------------------
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___No ___
The number of shares of the Registrant's Common Stock outstanding as of
January 31, 1998, was 30,543,065.
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ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Allied Specialty Care Services, Inc. Florida 58-1761155 3106 Commerce Pkwy.
Miramar, FL 33025
(800) 789-4618
Behavioral Health Systems of Indiana, Inc. Indiana 35-1990127 3414 Peachtree
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Behavioral Healthcare Solutions, Inc. Delaware 87-0552566 10150 S. Centennial Pkwy.
Sandy. UT 84070
(801) 256-7300
Beltway Community Hospital, Inc. Texas 58-1324281 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Blue Grass Physician Kentucky 66-1294402 3414 Peachtree Rd. N.E.
Management Group, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
C.A.C.O. Services, Inc. Ohio 58-1751511 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CCM, Inc. Nevada 58-1662418 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
CMCI, Inc. Nevada 88-0224620 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CMFC, Inc. Nevada 88-0215629 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282
CPS Associates, Inc. Virginia 58-1761039 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Advantage, LLC Delaware 58-2292977 3414 Peachtree Rd. N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Alvarado Behavioral Health System, California 58-1394959 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Asheville Behavioral North Carolina 58-2097827 3414 Peachtree Rd. N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Arbor Indy Behavioral Delaware 58-2265776 3414 Peachtree Rd. N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
i
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter Augusta Behavioral Georgia 58-1615676 3414 Peachtree Rd. N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Bay Harbor Behavioral Florida 58-1640244 3414 Peachtree Rd. N.E.
Health System, Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
The Charter Beacon Behavioral Delaware 35-1994155 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Behavioral Corporation Delaware 91-1819015 1061 E. Flamingo Rd.
Suite One
Las Vegas, NV 89119
(702) 737-0282
Charter Behavioral Health System at Fair Oaks, New Jersey 58-2097832 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Behavioral Health System Maryland 52-1866212 3414 Peachtree Rd., N.E.
at Hidden Brook, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System at Los Altos, California 33-0606642 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System at Manatee Florida 65-0519663 3414 Peachtree Rd., N.E.
Adolescent Treatment Services, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Maryland 52-1866221 3414 Peachtree Rd., N.E.
at Potomac Ridge, Inc. Suite 1400
Atlanta, GA 33026
(404) 841-9200
Charter Behavioral Health Systems, Inc. Delaware 58-2213642 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Athens, Georgia 58-1513304 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Austin, Texas 58-1440665 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Baywood, Texas 76-0430571 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Bradenton, Florida 58-1527678 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
ii
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter Behavioral Health System of Central Georgia 58-1408670 3414 Peachtree Rd., N.E.
Georgia, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavorial Health System of Central Virginia 54-1765921 3414 Peachtree Rd., N.E.
Virginia, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of South Carolina 58-1761157 3414 Peachtree Rd., N.E.
Charleston, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Virginia 58-1616917 3414 Peachtree N.E.
of Charlottesville, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Chicago, Illinois 58-1315760 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 58-1473063 3414 Peachtree Rd., N.E.
of Chula Vista, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Columbia, Missouri 61-1009977 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Corpus Texas 58-1513305 3414 Peachtree Rd., N.E.
Christi, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Dallas, Texas 58-1513306 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Delmarva, Maryland 52-1866214 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health System Delaware 35-1994080 3414 Peachtree Rd., N.E.
of Evansville, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Fort Texas 58-1643151 3414 Peachtree Rd., N.E.
Worth, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Jackson, Mississippi 58-1616919 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Florida 58-1483015 3414 Peachtree Rd., N.E.
of Jacksonville, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
iii
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
The Charter Behavioral Health System Delaware 35-1994087 3414 Peachtree Rd., N.E.
of Jefferson, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System Kansas 58-1603154 3414 Peachtree Rd., N.E.
of Kansas City, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Lafayette, Louisiana 72-0686492 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Lake Louisiana 62-1152811 3414 Peachtree Rd., N.E.
Charles, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Maryland, Maryland 52-2026699 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health System Delaware 35-1994736 3414 Peachtree Rd., N.E.
of Michigan City, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Mississippi 58-2138622 3414 Peachtree Rd., N.E.
Mississippi, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Mobile, Alabama 58-1569921 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Nashua, New Hampshire 02-0470752 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Nevada, Nevada 58-1321317 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System New Mexico 58-1479480 5901 Zuni Road, SE
of New Mexico, Inc. Albuquerque, NM 87108
(505) 265-8800
Charter Behavioral Health System of Northern California 58-1857277 3414 Peachtree Rd., N.E.
California, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Northwest Arkansas 58-1449455 3414 Peachtree Rd., N.E.
Arkansas, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Behavioral Health System of Delaware 35-1994154 3414 Peachtree Rd., N.E.
Northwest Indiana, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
iv
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter Behavioral Health System of Paducah, Kentucky 61-1006115 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health of Puerto Rico, Inc. Georgia 66-0523678 Caso Bldg., Suite 1504
1225 Ponce de Leon Avenue
Santurce, PR 00907
Charter Behavioral Health System of San Jose, California 58-1747020 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Savannah, Georgia 58-1750583 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Texarkana, Arkansas 71-0752815 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 95-2685883 3414 Peachtree Rd., N.E.
of the Inland Empire, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Toledo, Ohio 58-1731068 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Tucson, Arizona 86-0757462 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Visalia, California 33-0606644 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System of Waverly, Minnesota 41-1775626 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System North Carolina 56-1050502 3414 Peachtree Rd., N.E.
of Winston-Salem, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health System California 33-0606646 3414 Peachtree Rd., N.E.
of Yorba Linda, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Behavioral Health Systems of Atlanta, Georgia 58-1900736 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Talbott Behavioral Health System, Inc. Georgia 58-0979827 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
v
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter By-The-Sea Behavioral Health System, Georgia 58-1351301 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Call Center, Inc. Georgia 58-2318455 2151 Peachford Rd.
Atlanta, GA 30338
(888) 222-4302
Charter Call Center of Texas, Inc. Texas 75-2709908 920 South Main St.
Suite 250
Grapevine, TX 76051
(817) 481-9998
Charter Canyon Behavioral Health System, Inc. Utah 58-1557925 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Canyon Springs Behavioral California 33-0606640 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Centennial Peaks Behavioral Colorado 58-1761037 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Community Hospital, Inc. California 58-1398708 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Contract Services, Inc. Georgia 58-2100699 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Cove Forge Behavioral Health System, Pennsylvania 25-1730464 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Fairmount Behavioral Health System, Pennsylvania 58-1616921 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Fenwick Hall Behavioral Health System, South Carolina 57-0995766 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Financial Offices, Inc. Georgia 58-1527680 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Forest Behavioral Health System, Inc. Louisiana 58-1508454 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Grapevine Behavioral Health System, Texas 58-1818492 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
vi
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter Greensboro Behavioral Health System, North Carolina 58-1335184 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Health Management of Texas, Inc. Texas 58-2025056 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Columbus, Inc. Ohio 58-1598899 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Denver, Inc. Colorado 58-1662413 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Ft. Collins, Inc. Colorado 58-1768534 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Laredo, Inc. Texas 58-1491620 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Miami, Inc. Florida 61-1061599 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Mobile, Inc. Alabama 58-1318870 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Santa Teresa, Inc. New Mexico 58-1584861 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of St. Louis, Inc. Missouri 58-1583760 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Hospital of Torrance, Inc. California 58-1402481 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Indiana BHS Holding, Inc. Indiana 58-2247985 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Indianapolis Behavioral Delaware 35-1994923 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
The Charter Lafayette Behavioral Delaware 35-1994151 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
vii
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter Lakehurst Behavioral Health System, New Jersey 22-3286879 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Lakeside Behavioral Health Network, Tennessee [Applied for] 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Lakeside Behavioral Health System, Tennessee 62-0892645 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Laurel Heights Behavioral Georgia 58-1558212 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Linden Oaks Behavioral Health System, Illinois 36-3943776 852 West Street
Inc. Naperville, IL 60540
(708) 305-5500
Charter Little Rock Behavioral Health System, Arkansas 58-1747019 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Louisiana Behavioral Health System, Louisiana 72-1319231 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Louisville Behavioral Health System, Kentucky 58-1517503 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Managed Care Services, LLC Georgia 58-2324879 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Meadows Behavioral Health System, Inc. Maryland 52-1866216 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--California, Inc. Georgia 58-1357345 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Clayton County, Inc. Georgia 58-1579404 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Cleveland, Inc. Texas 58-1448733 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical--Long Beach, Inc. California 58-1366604 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
viii
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter Medical--New York, Inc. New York 58-1761153 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical (Cayman Islands) Ltd. Cayman Islands, 58-1841857 Caledonian Bank & Trust
BWI Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical Information Services, Inc. Georgia 58-1530236 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical International, & Trust Inc. Cayman Islands, N/A Caledonian Bank
BWI Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050
Charter Medical International, S.A., Inc. Nevada 58-1605110 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Managed Care Sales and Services, Inc. Georgia 58-1195352 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of East Valley, Inc. Arizona 58-1643158 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of England Limited United Kingdom N/A 111 Kings Road
Box 323
London SW3 4PB
London, England
44-71-351-1272
Charter Medical of North Phoenix, Inc. Arizona 58-1643154 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Medical of Puerto Rico, Inc. Commonwealth of 58-1208667 Caso Building, Suite 1504
Puerto Rico 1225 Ponce De Leon Avenue
Santurce, P.R. 00907
(809) 723-8666
Charter Milwaukee Behavioral Health System, Wisconsin 58-1790135 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Mission Viejo Behavioral Health California 58-1761156 3414 Peachtree Rd., N.E.
System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter MOB of Charlottesville, Inc. Virginia 58-1761158 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
ix
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter North Behavioral Health System, Inc. Alaska 58-1474550 2530 DeBarr Road
Anchorage, AK 99508-2996
(907) 258-7575
Charter Northbrooke Behavioral Health System, Wisconsin 39-1784461 46000 W. Schroeder Drive
Inc. Brown Deer, WI 53223
(414) 355-2273
Charter North Counseling Center, Inc. Alaska 58-2067832 2530 DeBarr Road
Anchorage, AK 99508-2996
(907) 258-7575
Charter Northridge Behavioral Health System, North Carolina 58-1463919 400 Newton Road
Inc. Raleigh, NC 27615
(919) 847-0008
Charter Oak Behavioral Health System, Inc. California 58-1334120 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter of Alabama, Inc. Alabama 63-0649546 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Palms Behavioral Health System, Inc. Texas 58-1416537 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Peachford Behavioral Health System, Georgia 58-1086165 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Pines Behavioral Health System, Inc. North Carolina 58-1462214 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Plains Behavioral Health System, Inc. Texas 58-1462211 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter-Provo School, Inc. Utah 58-1647690 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Real Behavioral Health System, Inc. Texas 58-1485897 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Ridge Behavioral Health System, Inc. Kentucky 58-1393063 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Rivers Behavioral Health System, Inc. South Carolina 58-1408623 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Rockford Behavioral Health System, Delaware 1-0374617 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
x
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Charter San Diego Behavioral Health System, California 58-1669160 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Charter Sioux Falls Behavioral Health System, South Dakota 58-1674278 2812 South Louise Avenue
Inc. Sioux Falls, SD 57106
(605) 361-8111
The Charter South Bend Behavioral Delaware 35-1994307 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Springs Behavioral Health System, Inc. Florida 58-1517461 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Springwood Behavioral Health System, Virginia 58-2097829 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Suburban Hospital of Mesquite, Inc. Texas 75-1161721 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter System, LLC Nevada 91-1819015 1061 E. Flamingo Rd.
Suite One
Las Vegas, NV 89119
(702) 737-0282
The Charter Terre Haute Behavioral Delaware 35-1994308 3414 Peachtree Rd., N.E.
Health System, LLC Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Thousand Oaks Behavioral California 58-1731069 3414 Peachtree Rd., N.E.
Health System, Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Westbrook Behavioral Health System, Virginia 54-0858777 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter White Oak Behavioral Health System, Maryland 52-1866223 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Wichita Behavioral Health System, Inc. Kansas 58-1634296 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Charter Woods Behavioral Health System, Inc. Alabama 58-1330526 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral Solutions, Inc. Delaware 58-2180940 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
xi
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Correctional Behavioral Solutions of Indiana, Indiana 35-1978792 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Correctional Behavioral Solutions of New New Jersey 22-3436964 3000 Atrium Way
Jersey, Inc. Suite 410
Mount Laurel, NJ
(609) 235-2339
Correctional Behavioral Solutions of Ohio, Ohio 34-1826431 Allen Correctional Institute
Inc. 2338 North West Street
Lima, OH 45801
(419) 224-8000
Desert Springs Hospital, Inc. Nevada 88-0117696 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200
Employee Assistance Services, Inc. Georgia 58-1501282 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
First Step Independent Living Program, Inc. California 95-3574845 1174 Nevada St.
Redlands, CA 92374
(909) 307-6584
Florida Health Facilities, Inc. Florida 58-1860493 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Gulf Coast EAP Services, Inc. Alabama 58-2101394 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Horrigan Cole Enterprises, Inc. California 33-0152162 1174 Nevada St.
Redlands, CA 92374
(909) 307-6584
Hospital Investors, Inc. Georgia 58-1182191 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Human Affairs of Alaska, Inc. Alaska 92-0155098 4300 "B' St.
Anchorage, AK 99503
(907) 562-0794
Human Affairs International, Incorporated Utah 87-0300539 10150 S. Centennial Pkwy.
Sandy, UT 84070
(801) 256-7300
Illinois Mentor, Inc. Illinois 36-3643670 313 Congress St.
Boston, MA 02210
(617) 790-4800
Magellan Executive Corporation Georgia 58-2310891 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Magellan Public Solutions, Inc. Delaware 58-2227841 222 Berkeley St.
Boston, MA 02117
(617) 437-6400
xii
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Magellan Public Network, Inc. Delaware 51-0374654 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Magellan Public Solutions of Ohio, Inc. Ohio [Applied for] 222 Berkeley St.
Boston, MA 02117
(617) 437-6400
Massachusetts Mentor, Inc. Massachusetts 04-2799071 313 Congress St.
Boston, MA 02210
(617) 790-4800
Metroplex Behavioral Healthcare Services, Inc. Texas 58-2138596 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
National Mentor, Inc. Delaware 04-3250732 313 Congress St.
Boston, MA 02210
(617) 790-4800
National Mentor Healthcare, Inc. Massachusetts 04-2893910 313 Congress St.
Boston, MA 02210
(617) 790-4800
NEPA--Massachusetts, Inc. Massachusetts 58-2116751 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
NEPA--New Hampshire, Inc. New Hampshire 58-2116398 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
New Allied, Inc. Florida 58-1324269 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Ohio Mentor, Inc. Ohio 31-1098345 313 Congress St.
Boston, MA 02210
(617) 790-4800
Pacific-Charter Medical, Inc. California 58-1336537 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
South Carolina Mentor, Inc. South Carolina 57-0782160 313 Congress St.
Boston, MA 02210
(617) 790-4800
Southeast Behavioral Systems, Inc. Georgia 58-2100700 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Schizophrenia Treatment and Rehabilitation, Georgia 58-1672912 3414 Peachtree Rd., N.E.
Inc. Suite 1400
Atlanta, GA 30326
(404) 841-9200
Sistemas De Terapia Respiratoria, S.A., Inc. Georgia 58-1181077 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
xiii
ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE,
JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ---------------------------------------------- ----------------- -------------- ------------------------------
Western Behavioral Systems, Inc. California 58-1662416 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200
Wisconsin Mentor, Inc. Wisconsin 39-1840054 313 Congress St.
Boston, MA 00210
(617) 790-4800
- ------------------------
(1) The Additional Registrants listed are wholly-owned subsidiaries of the
Registrant and are guarantors of the Registrant's 11 1/4% Series A Senior
Subordinated Notes due 2004. The Additional Registrants have been
conditionally exempted, pursuant to Section 12(h) of the Securities Exchange
Act of 1934, from filing reports under Section 13 of the Securities Exchange
Act of 1934.
xiv
FORM 10-Q
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
-------------
PART I--FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets--
September 30, 1997 and December 31, 1997........................................................ 1
Condensed Consolidated Statements of Operations--
For the Three Months ended December 31, 1996 and 1997........................................... 3
Condensed Consolidated Statements of Cash Flows--
For the Three Months ended December 31, 1996 and 1997........................................... 4
Notes to Condensed Consolidated Financial Statements.............................................. 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................. 17
PART II--OTHER INFORMATION:
Item 1.--Legal Proceedings........................................................................ 25
Item 6.--Exhibits and Reports on Form 8-K......................................................... 25
Signatures........................................................................................ 27
The undersigned Registrant hereby amends Note F--Income per Common Share of
the Notes to Condensed Consolidated Financial Statements of its Report on Form
10-Q for the quarterly period ended December 31, 1997.
MAGELLAN HEALTH SERVICES, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I--FINANCIAL INFORMATION
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 372,878 $ 170,459
Accounts receivable, net.......................................................... 107,998 140,219
Refundable income taxes........................................................... 2,466 --
Other current assets.............................................................. 23,696 34,438
------------- ------------
Total Current Assets............................................................ 507,038 345,116
Assets restricted for settlement of unpaid claims
and other long-term liabilities................................................... 87,532 73,020
Property and equipment:
Land.............................................................................. 11,667 11,687
Buildings and improvements........................................................ 70,174 72,102
Equipment......................................................................... 63,719 74,319
------------- ------------
145,560 158,108
Accumulated depreciation.......................................................... (37,038) (41,169)
------------- ------------
108,522 116,939
Construction in progress.......................................................... 692 995
------------- ------------
Total property and equipment.................................................... 109,214 117,934
------------- ------------
Deferred income taxes............................................................... 1,158 2,178
Investment in CBHS.................................................................. 16,878 5,390
Other long-term assets.............................................................. 20,893 42,932
Goodwill, net....................................................................... 114,234 242,968
Other intangible assets, net........................................................ 38,673 67,576
------------- ------------
$ 895,620 $ 897,114
------------- ------------
------------- ------------
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
1
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 45,346 $ 37,663
Accrued liabilities............................................................... 170,429 191,645
Income taxes payable.............................................................. -- 781
Current maturities of long-term debt and capital lease obligations................ 3,601 3,604
------------- ------------
Total Current Liabilities....................................................... 219,376 233,693
Long-term debt and capital lease obligations........................................ 391,693 391,550
Reserve for unpaid claims........................................................... 49,113 40,201
Deferred credits and other long-term liabilities.................................... 16,110 15,023
Minority interest................................................................... 61,078 64,785
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, without par value
Authorized--10,000 shares
Issued and outstanding--none.................................................... -- --
Common Stock, par value $0.25 per share
Authorized--80,000 shares
Issued and outstanding--33,439 shares at September 30, 1997 and 33,543 shares at
December 31, 1997............................................................. 8,361 8,387
Other Stockholders' Equity
Additional paid-in capital...................................................... 340,645 338,961
Accumulated deficit............................................................. (129,955) (122,327)
Warrants outstanding............................................................ 25,050 25,050
Common Stock in Treasury, 4,424 shares at September 30, 1997 and 4,969 shares at
December 31, 1997............................................................. (82,731) (95,187)
Cumulative foreign currency adjustments......................................... (3,120) (3,022)
------------- ------------
Total stockholders' equity.................................................... 158,250 151,862
------------- ------------
$ 895,620 $ 897,114
------------- ------------
------------- ------------
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
2
MAGELLAN HEALTH SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ----------
Net revenue............................................................................ $ 346,819 $ 216,097
---------- ----------
Costs and expenses:
Salaries, cost of care and other operating expenses.................................. 284,123 175,621
Bad debt expense..................................................................... 20,235 1,070
Depreciation and amortization........................................................ 13,099 6,969
Interest, net........................................................................ 13,569 7,401
Stock option expense (credit)........................................................ 604 (3,959)
Equity in loss of CBHS............................................................... -- 11,488
---------- ----------
331,630 198,590
---------- ----------
Income before provision for income taxes,
minority interest and extraordinary item............................................. 15,189 17,507
Provision for income taxes............................................................. 6,075 7,003
---------- ----------
Income before minority interest and extraordinary item................................. 9,114 10,504
Minority interest...................................................................... 1,973 2,876
---------- ----------
Income before extraordinary item....................................................... 7,141 7,628
Extraordinary item--loss on early extinquishment
of debt (net of income tax benefit of $1,967)........................................ (2,950) --
---------- ----------
Net income............................................................................. $ 4,191 $ 7,628
---------- ----------
---------- ----------
Average number of common shares outstanding--basic..................................... 28,589 28,969
---------- ----------
---------- ----------
Average number of common shares outstanding--diluted................................... 28,983 29,784
---------- ----------
---------- ----------
Income per common share--basic:
Income before extraordinary item..................................................... $ 0.25 $ 0.26
---------- ----------
---------- ----------
Net income........................................................................... $ 0.15 $ 0.26
---------- ----------
---------- ----------
Income per common share--diluted:
Income before extraordinary item..................................................... $ 0.25 $ 0.26
---------- ----------
---------- ----------
Net income........................................................................... $ 0.14 $ 0.26
---------- ----------
---------- ----------
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................................. $ 4,191 $ 7,628
---------- ----------
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization......................................................... 13,099 6,969
Equity in loss of CBHS................................................................ -- 11,488
Stock option expense (credit)......................................................... 604 (3,959)
Non-cash interest expense............................................................. 483 422
Gain on sale of assets................................................................ (493) --
Extraordinary loss on early extinguishment of debt.................................... 4,917 --
Cash flows from changes in assets and liabilities, net of effects from sales and
acquisitions of businesses:
Accounts receivable, net............................................................ (1,984) (16,304)
Other assets........................................................................ (4,109) (9,999)
Accounts payable and other accrued liabilities...................................... (32,046) (21,184)
Reserve for unpaid claims........................................................... (2,351) (9,256)
Income taxes payable and deferred income taxes...................................... 1,517 2,056
Other liabilities................................................................... (9,729) (1,623)
Minority interest, net of dividends paid............................................ 2,296 3,199
Other............................................................................... 216 (1,162)
---------- ----------
Total adjustments................................................................. (27,580) (39,353)
---------- ----------
Net cash used in operating activities........................................... (23,389) (31,725)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................................... (7,012) (4,578)
Acquisitions and investments in businesses, net of cash acquired........................ (1,612) (165,548)
Decrease in assets restricted for settlement of unpaid claims........................... 10,381 14,364
Proceeds from sale of assets............................................................ 4,822 --
Crescent Transaction costs.............................................................. -- (4,253)
---------- ----------
Net cash provided by (used in) investing activities............................. 6,579 (160,015)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net of issuance costs................................... 126,825 --
Payments on debt and capital lease obligations.......................................... (116,620) (140)
Proceeds from exercise of stock options and warrants.................................... 112 1,917
Purchases of treasury stock............................................................. -- (12,456)
---------- ----------
Net cash provided by (used in) financing activities............................. 10,317 (10,679)
---------- ----------
Net decrease in cash and cash equivalents................................................. (6,493) (202,419)
Cash and cash equivalents at beginning of period.......................................... 120,945 372,878
---------- ----------
Cash and cash equivalents at end of period................................................ $ 114,452 $ 170,459
---------- ----------
---------- ----------
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation, have been included.
These financial statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended September
30, 1997, included in the Company's Annual Report on Form 10-K.
NOTE B--NATURE OF BUSINESS
The Company's 50% owned hospital business, Charter Behavioral Health
Systems, LLC ("CBHS"), is seasonal in nature, with a reduced demand for certain
services generally occurring in the first fiscal quarter around major holidays,
such as Thanksgiving and Christmas, and during the summer months comprising the
fourth fiscal quarter. The Company's business is also subject to general
economic conditions and other factors. Accordingly, the results of operations
for the interim periods are not necessarily indicative of the actual results
expected for the year.
NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION
Below is supplemental cash flow information related to the three months
ended December 31, 1996 and 1997:
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Income taxes paid, net of refunds received............................... $ 2,540 $ 4,752
Interest paid, net of amounts capitalized................................ 24,939 21,550
5
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE D--LONG-TERM DEBT AND LEASES
Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1997 and December 31, 1997 is as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(IN THOUSANDS)
Magellan Existing Credit Agreement due through 2002............. $ -- $ --
11.25% Senior Subordinated Notes due 2004....................... 375,000 375,000
6.78125% to 8.00% Mortgage and other notes payable through
1999.......................................................... 7,721 7,577
7.5% Swiss Bonds................................................ 6,443 6,443
3.95% Capital lease obligations due through 2014................ 6,438 6,438
------------- ------------
395,602 395,458
Less amounts due within one year.............................. 3,601 3,604
Less debt service funds....................................... 308 304
------------- ------------
$ 391,693 $ 391,550
------------- ------------
------------- ------------
On February 12, 1998, the Company terminated the Magellan Existing Credit
Agreement and extinguished the $375 million 11.25% Senior Subordinated Notes in
connection with the acquisition of Merit Behavioral Care Corporation ("Merit").
See Note J--"Subsequent Events--Merit Acquisition".
NOTE E--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
Salaries, wages and other benefits.............................. $ 21,647 $ 21,596
Amounts due health insurance programs........................... 14,126 8,159
Medical claims payable.......................................... 36,508 63,877
Interest........................................................ 19,739 9,322
Crescent Transactions........................................... 14,648 9,805
Other........................................................... 63,761 78,886
------------- ------------
$ 170,429 $ 191,645
------------- ------------
------------- ------------
NOTE F--INCOME PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"), effective October 1, 1997. Income per common
share for the quarter ended December 31, 1996 has been restated to conform to
FAS 128 as required. The effect of adopting FAS 128 was not material.
6
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE F--INCOME PER COMMON SHARE (CONTINUED)
The following table presents the components of weighted average common
shares outstanding-- diluted:
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Weighted average common shares outstanding--basic.......................... 28,589 28,969
Common stock equivalents--stock options.................................... 377 762
Common stock equivalents--warrants......................................... 17 53
--------- ---------
Weighted average common shares outstanding--diluted........................ 28,983 29,784
--------- ---------
--------- ---------
Options to purchase approximately 363,000 shares of common stock at $26.65
to $31.41 per share were outstanding during the quarter ended December 31, 1997
but were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
The options, which expire between fiscal 2006 and 2007, were still outstanding
at December 31, 1997.
Warrants to purchase approximately 2,713,000 shares of common stock at
$30.00 to $38.70 per share were outstanding during the quarter ended December
31, 1997 but were not included in the computation of diluted EPS because the
warrants' exercise price was greater than the average market price of the common
shares. The warrants, which expire between fiscal 2001 and 2009, were still
outstanding at December 31, 1997.
The Company owned a 61% equity interest in Green Spring Health Services,
Inc. ("Green Spring") at December 31, 1997. The four minority stockholders of
Green Spring have the option to exchange their ownership interests in Green
Spring for 2,831,516 shares of the Company's common stock or $65.1 million of
subordinated notes (the "Exchange Option"). The Exchange Option was considered a
potentially dilutive security for the quarters ended December 31, 1996 and 1997
for the purpose of computing diluted income per common share. The Exchange
Option was anti-dilutive for the quarters ended December 31, 1996 and 1997 and,
therefore, was excluded from the respective diluted income per common share
calculations.
Each of the minority stockholders of Green Spring exercised the Exchange
Option in January 1998, which resulted in the issuance of 2,831,516 shares of
the Company's common stock. See Note J-- "Subsequent Events--Green Spring
Minority Shareholder Conversion".
NOTE G--INVESTMENT IN CBHS
The Company became a 50% owner of CBHS upon consummation of the Crescent
Transactions (as defined) on June 17, 1997, which are further described in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997. The
Company accounts for its investment in CBHS using the equity method.
7
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE G--INVESTMENT IN CBHS (CONTINUED)
A summary of financial information for CBHS is as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
Current assets.................................................. $ 148,537 $ 149,724
Property and equipment, net..................................... 18,424 18,217
Other noncurrent assets......................................... 8,633 8,081
------------- ------------
Total Assets.................................................. $ 175,594 $ 176,022
------------- ------------
------------- ------------
Current liabilities............................................. $ 68,497 $ 83,478
Long-term debt.................................................. 65,860 65,846
Other noncurrent liabilities.................................... 7,481 16,820
Members' capital................................................ 33,756 9,878
------------- ------------
Total liabilities and members' capital........................ $ 175,594 $ 176,022
------------- ------------
------------- ------------
THREE MONTHS
ENDED
DECEMBER 31,
1997
-----------------
Net revenue................................................................ $ 178,058
--------
Operating expenses......................................................... 199,664
Interest, net.............................................................. 1,370
--------
Net loss before preferred member distribution............................ $ (22,976)
--------
Cash used in operating activities.......................................... $ (2,176)
--------
Magellan equity loss....................................................... $ (11,488)
--------
The Company's transactions with CBHS and related balances are as follows (in
thousands):
THREE MONTHS
ENDED
DECEMBER 31, 1997
-----------------
Franchise Fee revenue...................................................... $ 19,575
-------
Costs:
Accounts receivable collection fees...................................... 1,054
Hospital-based joint venture management fees............................. 1,630
SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------ -----------------
Due (to) from CBHS, net (1).......................... $ (5,090) $ 6,188
------- -------
------- -------
Prepaid CHARTER call center management fees.......... $ -- $ 5,905
8
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE G--INVESTMENT IN CBHS (CONTINUED)
SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------ -----------------
------- -------
------- -------
- ------------------------
(1) The nature of hospital accounts receivable billing and collection processess
have resulted in the Company and CBHS receiving remittances from payors
which belong to the other party. Additionally, the Company and CBHS have
established a settlement and allocation process for the accounts receivable
related to those patients who were not yet discharged from their treatment
on June 16, 1997. In an effort to settle these amounts on a timely basis,
and in light of CBHS start up operations and cash flow requirements, the
Company made advances to CBHS periodically during the quarter ending
December 31, 1997. Such advances, net of all settlement activity and certain
other amounts due to CBHS for certain shared services and related matters,
resulted in the amount shown above as due from CBHS.
9
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE G--INVESTMENT IN CBHS (CONTINUED)
The Company is in continuing discussions with Crescent Operating, Inc.
("COI"), the other 50% owner of CBHS, and its affiliates concerning the possible
sale of the Company's franchise operations, together with related intellectual
property, the Company's interest in CBHS and six hospital-based joint ventures
("JV Hospitals") and certain other assets. In connection with the proposed sale,
it is anticipated that CBHS and its affiliates will be an important part of the
Company's managed behavioral care preferred provider network under the terms of
a long-term arrangement. The parties have not yet reached agreement on all the
terms of the transaction. Significant issues regarding the terms of the proposed
sale remain under discussion. In addition to resolution of such issues,
completion of the proposed sale would be subject to a number of conditions,
including regulatory approvals and the obtaining by COI and its affiliates of
all necessary debt and equity financing. If the sale is completed, the Company
intends to use the cash proceeds remaining after payment of fees and expenses to
repay indebtedness. There can be no assurance that any such transaction will
occur.
NOTE H--ACQUISITIONS
ALLIED HEALTH GROUP, INC. ACQUISITION.
On December 5, 1997, the Company purchased the assets of Allied Health
Group, Inc. and certain affiliates ("Allied"). Allied provides specialty
risk-based products and administrative services to a variety of insurance
companies and other customers for its 3.4 million members. Allied manages over
80 physician networks across the eastern United States. Allied's networks
include physicians specializing in cardiology, oncology and diabetes. The
Company paid $70 million for Allied, of which $50 million was paid to the
sellers at closing with the remaining $20 million placed in escrow.
The Company funded the acquisition of Allied with cash on hand and has
accounted for the acquisition of Allied using the purchase method of accounting.
The escrowed amount is payable if Allied achieves specified earnings targets
during the three years following the closing. Additionally, the purchase price
may be increased during the three year period by $40 million if Allied's
performance exceeds specified earnings targets. The maximum purchase price
payable is $110 million.
The preliminary allocation of the Allied purchase price to goodwill and
identifiable intangible assets was based on the Company's preliminary
valuations, which are subject to change upon receiving independent appraisals of
identifiable intangible assets.
HAI ACQUISITION. On December 4, 1997, the Company acquired the outstanding
common stock of Human Affairs International, Incorporated ("HAI"), a
wholly-owned subsidiary of Aetna Insurance Company of Connecticut and a unit of
Aetna U.S. Healthcare ("Aetna"), for approximately $122.1 million. HAI manages
the care of over 16 million covered lives, primarily through employee assistance
programs and other managed behavioral healthcare plans. The Company funded the
acquisition of HAI with cash on hand and has accounted for the acquisition of
HAI using the purchase method of accounting.
The Company may be required to make additional contingent payments of up to
$300 million to Aetna (the "Contingent Payments") over the five-year period
(each year a "Contract Year") subsequent to closing. The amount and timing of
the Contingent Payments will depend upon HAI's receipt of additional covered
lives, under two separate calculations. Under the first calculation, the Company
may be required
10
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE H--ACQUISITIONS (CONTINUED)
to pay up to $25 million per year for each of five years following the
acquisition based on the net annual growth in the number of lives covered in
specified HAI products. Under the second calculation, the Company may be
required to pay up to $35 million per Contract Year, based on the net cumulative
increase in lives covered by certain other HAI products. The Company expects to
fund the Contingent Payments, if any, with a combination of cash on hand, future
cash flows from operations and borrowing capacity under the New Credit Agreement
(as defined).
The preliminary allocation of the HAI purchase price to goodwill and
identifiable intangible assets was based on the Company's preliminary
valuations, which are subject to change upon receiving independent appraisals of
identifiable intangible assets.
The unaudited pro forma information for the quarters ended December 31, 1996
and 1997 have been prepared assuming the Crescent Transactions (as defined),
Allied acquisition and HAI acquisition were consummated on October 1, 1996. The
unaudited pro forma information does not purport to be indicative of the results
that would have actually been obtained had such transactions been consummated,
or which may be attained in future periods (in thousands, except per share
data):
PRO FORMA
FOR THE THREE MONTHS ENDED
--------------------------
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Net revenue...................................................... $ 235,506 $ 264,427
Income before extraordinary item................................. 10,317 10,384
Net income....................................................... 7,367 10,384
Income per common share--basic:
Income before extraordinary item............................... 0.36 0.36
Net income..................................................... 0.26 0.36
Income per common share--diluted:
Income before extraordinary item............................... 0.36 0.35
Net income..................................................... 0.25 0.35
NOTE I--CONTINGENCIES
The Company is self-insured for a substantial portion of its general and
professional liability risks. The reserves for self-insured general and
professional liability losses, including loss adjustment expenses, are based on
actuarial estimates that are discounted at an average rate of 6% to their
present value based on the Company's historical claims experience adjusted for
current industry trends. The reserve for unpaid claims is adjusted periodically
as such claims mature, to reflect changes in actuarial estimates based on actual
experience. During the quarter ended December 31, 1997, the Company recorded
reductions in malpractice claim reserves of approximately $4.1 million as a
result of updated actuarial estimates. This reduction resulted primarily from
updates to actuarial assumptions regarding the Company's expected losses for
more recent policy years. These revisions are based on changes in expected
values of ultimate losses resulting from the Company's claim experience, and
increased reliance on such claim experience. While management and its actuaries
believe that the present reserve is reasonable, ultimate settlement of losses
may vary from the amount provided.
11
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE I--CONTINGENCIES (CONTINUED)
Certain of the Company's subsidiaries are subject to claims, civil suits,
and governmental investigations and inquiries relating to their operations and
certain alleged business practices. In the opinion of management, based on
consultation with counsel, resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
On August 1, 1996, the United States Department of Justice, Civil Division,
filed an Amended Complaint in a civil QUI TAM action initiated in November 1994
against the Company and its Orlando South hospital subsidiary ("Charter
Orlando") by two former employees. The First Amended Complaint alleges that
Charter Orlando violated the federal False Claims Act (the "Act") in billing for
impatient treatment provided to elderly patients. The Court granted the
Company's motion to dismiss the government's First Amended Complaint yet granted
the government leave to amend its First Amended Complaint. The government filed
a Second Amended Complaint on December 12, 1996 which, similar to the First
Amended Complaint, alleges that the Company and its subsidiary violated the Act
in billing for the treatment of geriatric patients. Like the First Amended
Complaints, the Second Amended Complaint is based on disputed clinical and
factual issues which the Company believes do not constitute a violation of the
Act. On the Company's motion, the Court has ordered the ordered the parties to
participate in mediation of the matter. As a result of the mediation, the
parties are engaged in settlement discussions which may lead to a resolution of
the matter. The parties have reached a tentative financial settlement of this
matter for approximately $4.8 million, which has been accrued, however,
negotiations concerning substantive non-monetary issues continue, and resolution
of such non-monetary issues will be material in connection with the Company's
decision to finalize a settlement. There can be no assurance at this time that
the non-monetary terms will be resolved to the Company's satisfaction. In any
event, the Company and its subsidiary deny the allegations made in the Second
Amended Complaint and will vigorously defend against its claims. The Company
does not believe this matter will have a material adverse effect on its
financial position or results of operations.
In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists, psychologists and clinical social workers
brought an action under the federal antitrust laws in the United States District
Court for the Southern District of New York against nine behavioral health
managed care organizations, including Merit, CMG, Green Spring and HAI
(collectively, the "Defendants"). The complaint alleges that the Defendants
violated Section 1 of the Sherman Act by engaging in a conspiracy to fix the
prices at which the Defendants purchase services from mental healthcare
providers such as the plaintiffs. The complaint further alleges that the
Defendants engaged in a group boycott to exclude mental healthcare providers
from the Defendants' networks in order to further the goals of the alleged
conspiracy. The complaint also challenges the propriety of the Defendants'
capitation arrangements with their respective customers, although it is unclear
from the complaint whether the plaintiffs allege that the Defendants unlawfully
conspired to enter into capitation arrangements with their respective customers.
The complaint seeks treble damages against the Defendants in an unspecified
amount and a permanent injunction prohibiting the Defendants from engaging in
the alleged conduct which forms the basis of the complaint, plus costs and
attorney's fees. Subsequent to the quarterly period ended December 31, 1997 for
which this Report on Form 10-Q was filed, on May 12, 1998, the District Court
granted the Defendants' motion to dismiss the complaint with prejudice. On May
27, 1998, the plaintiffs filed a notice of appeal of the District Court's
dismissal of their complaint with the United States Second Circuit Court of
Appeals. The Defendants intend to vigorously contest this appeal and to further
defend themselves in
12
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE I--CONTINGENCIES (CONTINUED)
this matter. The Company does not believe this matter will have a material
adverse effect on its financial position or results of operations.
NOTE J--SUBSEQUENT EVENTS
MERIT ACQUISITION. On February 12, 1998, the Company acquired all of the
outstanding stock of Merit for approximately $448.9 million in cash plus the
repayment of long-term debt. The Company refinanced its $375 million 11.25%
Senior Subordinated Notes as part of the Merit acquisition. The Company will
account for the Merit acquisition using the purchase method of accounting. Merit
manages healthcare programs for over 21 million covered lives across all
segments of the healthcare industry, including HMOs, Blue Cross/Blue Shield
organizations and other insurance companies, corporations and labor unions,
federal, state and local government agencies, and various state Medicaid
programs.
In connection with the consummation of the Merit acquisition, the Company
consummated certain related transactions (together with the Merit acquisition,
collectively, the "Transactions"), as follows: (i) the Company terminated its
Credit Agreement; (ii) the Company repaid all loans outstanding pursuant to and
terminated Merit's existing credit agreement (the "Merit Existing Credit
Agreement"); (iii) the Company completed a tender offer for its 11 1/4% Series A
Senior Subordinated Notes due 2004 (the "Magellan Outstanding Notes"); (iv)
Merit completed a tender offer for its 11 1/2% Senior Subordinated Notes due
2005 (the "Merit Outstanding Notes"); (v) the Company entered into a new senior
secured bank credit agreement (the "New Credit Agreement") with The Chase
Manhattan Bank and a syndicate of financial institutions, providing for credit
facilities of up to $700 million; and (vi) the Company issued $625 million in 9%
Senior Subordinated Notes due 2008 (the "Notes").
13
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE J--SUBSEQUENT EVENTS (CONTINUED)
The following table sets forth the sources and uses of funds for the
Transactions at closing (in thousands):
SOURCES:
Cash and cash equivalents....................................... $ 59,290
New Credit Agreement:
Revolving Facility (1)........................................ 20,000
Term Loan Facility............................................ 550,000
The Notes....................................................... 625,000
---------
Total sources................................................. $1,254,290
---------
---------
USES:
Cash paid to Merit shareholders................................. $ 448,867
Repayment of Merit Existing Credit Agreement (2)................ 196,357
Purchase of Magellan Outstanding Notes (3)...................... 432,102
Purchase of Merit Outstanding Notes (4)......................... 121,651
Transaction costs (5)........................................... 55,314
---------
Total uses...................................................... $1,254,290
---------
---------
- ------------------------
(1) The Revolving Facility provides for borrowings of up to $150.0 million. The
Company had $112.5 million available for borrowing pursuant to the Revolving
Facility after consummating the Transactions, excluding approximately $17.5
million of availability reserved for certain letters of credit.
(2) Includes principal amount of $193.6 million and accrued interest of $2.7
million.
(3) Includes face amount of $375.0 million, tender premium of $43.4 million and
accrued interest of $13.7 million.
(4) Includes face amount of $100.0 million, tender premium of $18.9 million and
accrued interest of $2.8 million.
(5) Transaction costs include, among other things, expenses payable at closing
associated with the Debt Tender Offers, the Offering, the Merit acquisition
and the New Credit Agreement.
GREEN SPRING MINORITY SHAREHOLDER CONVERSION. The four minority
shareholders of Green Spring converted their ownership interests into 2,831,516
shares of Magellan common stock in accordance with the terms in the Green Spring
Exchange Agreement at various dates during January 1998. The Company will
account for the Green Spring Minority Shareholder Conversion as a purchase of
the minority interests in Green Spring at the fair value of the consideration
paid.
14
NOTE K--GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, 1997
--------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
ASSETS SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------ ------------ ------------
Current Assets
Cash and cash equivalents....................... $ 102,419 $ 62,326 $ 208,133 $ -- $ 372,878
Accounts receivable, net........................ 46,652 60,185 1,161 -- 107,998
Other current assets............................ 2,346 10,215 13,601 -- 26,162
----------- ------------- ------------ ------------ ------------
Total Current Assets........................ 151,417 132,726 222,895 -- 507,038
Assets restricted for settlement of unpaid claims
and other long-term liabilities................. -- 71,501 16,031 -- 87,532
Property and equipment
Land............................................ 5,406 5,389 872 -- 11,667
Buildings and improvements...................... 35,789 31,517 2,868 -- 70,174
Equipment....................................... 19,704 35,023 8,992 -- 63,719
----------- ------------- ------------ ------------ ------------
60,899 71,929 12,732 -- 145,560
Accumulated depreciation........................ (15,168) (17,288) (4,582) -- (37,038)
Construction in progress........................ 4 611 77 -- 692
----------- ------------- ------------ ------------ ------------
Total property and equipment................ 45,735 55,252 8,227 -- 109,214
----------- ------------- ------------ ------------ ------------
Investment in CBHS................................ 16,878 -- -- -- 16,878
Deferred income taxes............................. -- 4,428 (3,270) -- 1,158
Other long-term assets (1)........................ 114,642 (5,757) 978,588 (1,027,907) 59,566
Goodwill, net..................................... 17,966 96,268 -- -- 114,234
----------- ------------- ------------ ------------ ------------
$ 346,638 $ 354,418 $1,222,471 $(1,027,907) $ 895,620
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................ $ 23,057 $ 17,097 $ 5,192 $ -- $ 45,346
Accrued liabilities and income tax payable...... 27,800 73,586 69,043 -- 170,429
Current maturities of long-term debt and capital
lease obligations............................. 466 3,135 -- -- 3,601
----------- ------------- ------------ ------------ ------------
Total Current Liabilities................... 51,323 93,818 74,235 -- 219,376
Long-term debt and capital lease obligations...... (793,325) 3,913 1,181,105 -- 391,693
Reserve for unpaid claims......................... -- 56,339 (7,226) -- 49,113
Deferred credits and other long-term
liabilities(1).................................. 8,393 6,290 (183,893) 185,320 16,110
Minority interest................................. -- -- -- 61,078 61,078
Stockholders' Equity
Common Stock, par value $0.25 per share;
Authorized--80,000 shares Issued and
outstanding--33,439 shares.................... 2,752 (483) 8,361 (2,269) 8,361
Committments and contingencies
Other Stockholders' Equity
Additional paid-in capital...................... 1,000,935 125,624 340,645 (1,126,559) 340,645
Retained earnings (Accumulated deficit)......... 76,035 71,317 (129,955) (147,352) (129,955)
Warrants outstanding............................ -- -- 25,050 -- 25,050
Common Stock in treasury, 4,424 shares.......... -- -- (82,731) -- (82,731)
Cumulative foreign currency adjustments......... 525 (2,400) (3,120) 1,875 (3,120)
----------- ------------- ------------ ------------ ------------
Total stockholders equity................... 1,080,247 194,058 158,250 (1,274,305) 158,250
----------- ------------- ------------ ------------ ------------
$ 346,638 $ 354,418 $1,222,471 $(1,027,907) $ 895,620
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
- ------------------------
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
15
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1997
--------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
ASSETS SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------ ------------ ------------
Current Assets
Cash and cash equivalents....................... $ 79,896 $ 61,733 $ 28,830 $ -- $ 170,459
Accounts receivable, net........................ 41,406 76,057 22,756 -- 140,219
Other current assets............................ 6,135 12,011 16,292 -- 34,438
----------- ------------- ------------ ------------ ------------
Total Current Assets........................ 127,437 149,801 67,878 -- 345,116
Assets restricted for settlement of unpaid claims
and other long-term liabilities................. -- 66,028 6,992 -- 73,020
Property and equipment
Land............................................ 5,450 5,365 872 -- 11,687
Buildings and improvements...................... 36,261 31,647 4,194 -- 72,102
Equipment....................................... 27,253 38,031 9,035 -- 74,319
----------- ------------- ------------ ------------ ------------
68,964 75,043 14,101 -- 158,108
Accumulated depreciation........................ (16,483) (19,713) (4,973) -- (41,169)
Construction in progress........................ 22 896 77 -- 995
----------- ------------- ------------ ------------ ------------
52,503 56,226 9,205 -- 117,934
Investment in CBHS................................ 5,390 -- -- -- 5,390
Deferred income taxes............................. (9) 4,425 (2,238) -- 2,178
Other long-term assets (1)........................ 145,692 (5,743) 1,293,918 (1,323,359) 110,508
Goodwill, net..................................... 145,163 97,805 -- -- 242,968
----------- ------------- ------------ ------------ ------------
$ 476,176 $ 368,542 $1,375,755 $(1,323,359) $ 897,114
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................ $ 20,758 $ 14,236 $ 2,669 $ -- $ 37,663
Accrued liabilities............................. 48,491 81,664 61,490 -- 191,645
Income taxes payable............................ (309) 1,227 (137) -- 781
Current maturities of long-term debt and capital
lease obligations............................. 477 3,127 -- -- 3,604
----------- ------------- ------------ ------------ ------------
Total Current Liabilities................... 69,417 100,254 64,022 -- 233,693
Long-term debt and capital lease obligations...... (818,540) 13,890 1,196,200 -- 391,550
Reserve for unpaid claims......................... 1,006 46,530 (7,335) -- 40,201
Deferred credits and other long-term liabilities
(1)............................................. 133,831 15,377 (28,994) (105,191) 15,023
Minority interest................................. -- -- -- 64,785 64,785
Commitments and contingencies
Stockholders' Equity
Common Stock, par value $0.25 per share;
Authorized--80,000 shares Issued and
outstanding--33,543 shares.................... 2,752 (483) 8,387 (2,269) 8,387
Other Stockholders' Equity
Additional paid-in capital...................... 1,120,638 122,262 338,961 (1,242,900) 338,961
Retained earnings (Accumulated deficit)......... (33,402) 73,107 (122,327) (39,705) (122,327)
Warrants outstanding............................ -- -- 25,050 -- 25,050
Common stock in Treasury, 4,969 shares.......... -- -- (95,187) -- (95,187)
Cumulative foreign currency adjustments......... 474 (2,395) (3,022) 1,921 (3,022)
----------- ------------- ------------ ------------ ------------
Total stockholders' equity.................. 1,090,462 192,491 151,862 (1,282,953) 151,862
----------- ------------- ------------ ------------ ------------
$ 476,176 $ 368,542 $1,375,755 $(1,323,359) $ 897,114
----------- ------------- ------------ ------------ ------------
----------- ------------- ------------ ------------ ------------
- ------------------------
(1) Elimination entry related to intercompany receivables and payables and
investment in consolidated subsidiaries.
16
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------- ------------- ------------
Net revenue............................... $ 223,877 $ 112,591 $ 10,706 $ (355) $ 346,819
Costs and expenses
Salaries, cost of care and other
operating expenses.................... 177,681 100,260 6,537 (355) 284,123
Bad debt expense........................ 19,024 1,211 -- -- 20,235
Depreciation and amortization........... 8,617 3,750 732 -- 13,099
Interest, net........................... (12,106) (443) 26,118 -- 13,569
Stock option expense.................... -- -- 604 -- 604
----------- ------------- ------------- ------------- ------------
193,216 104,778 33,991 (355) 331,630
----------- ------------- ------------- ------------- ------------
Income (loss) before income taxes and
equity in earnings (loss) of
subsidiaries............................ 30,661 7,813 (23,285) -- 15,189
Provision for (benefit from) income
taxes................................... 831 2,855 2,389 -- 6,075
----------- ------------- ------------- ------------- ------------
Income (loss) before equity in earnings
(loss) of subsidiaries.................. 29,830 4,958 (25,674) -- 9,114
Equity in earnings (loss) of
subsidiaries............................ (53) (1,842) 32,815 (32,893) (1,973)
----------- ------------- ------------- ------------- ------------
Income (loss) before extraordinary item... 29,777 3,116 7,141 (32,893) 7,141
Extraordinary item--loss on early
extinguishment of debt (net of income
tax benefit of $1,967).................. (1,193) -- (2,950) 1,193 (2,950)
----------- ------------- ------------- ------------- ------------
Net income (loss)......................... $ 28,584 $ 3,116 $ 4,191 $ (31,700) $ 4,191
----------- ------------- ------------- ------------- ------------
----------- ------------- ------------- ------------- ------------
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating
activities.............................. $ 18,476 $ (22,153) $ (19,712) $ -- $ (23,389)
----------- ------------- ------------- ------------- ------------
Cash Flows from Investing Activities:
Capital expenditures.................... (3,133) (3,663) (216) -- (7,012)
Acquisitions of businesses.............. (170) (1,442) -- -- (1,612)
Decrease in assets restricted for the
settlement of unpaid claims........... -- 6,670 3,711 -- 10,381
Proceeds from the sale of assets........ 4,822 -- -- -- 4,822
----------- ------------- ------------- ------------- ------------
Cash provided by investing activities..... 1,519 1,565 3,495 -- 6,579
----------- ------------- ------------- ------------- ------------
Cash Flows from Financing Activities:
Payments on debt and capital lease
obligations........................... (71,435) (207) (44,978) -- (116,620)
Proceeds from the issuance of debt...... 71,616 -- 55,209 -- 126,825
Proceeds from exercise of stock options
and warrants.......................... -- -- 112 -- 112
----------- ------------- ------------- ------------- ------------
Cash provided by (used in) financing
activities.............................. 181 (207) 10,343 -- 10,317
----------- ------------- ------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents............................. 20,176 (20,795) (5,874) -- (6,493)
Cash and cash equivalents at beginning of
period.................................. 29,751 79,552 11,642 -- 120,945
----------- ------------- ------------- ------------- ------------
Cash and cash equivalents at end of
period.................................. $ 49,927 $ 58,757 $ 5,768 $ -- $ 114,452
----------- ------------- ------------- ------------- ------------
----------- ------------- ------------- ------------- ------------
17
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
---------------------------------------------------------------------
MAGELLAN
HEALTH
SERVICES,
INC. CONSOLIDATED
GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL
----------- ------------- ------------ ------------- ------------
Net revenue............................... $ 85,862 $ 130,191 $ 44 $ -- $ 216,097
Costs and expenses
Salaries, cost of care and other
operating expenses.................... 61,343 110,841 3,437 -- 175,621
Bad debt expense........................ 179 891 -- -- 1,070
Depreciation and amortization........... 2,260 4,067 642 -- 6,969
Interest, net........................... (21,031) (682) 29,114 -- 7,401
Stock option expense (credit)........... -- -- (3,959) -- (3,959)
Equity in loss of CBHS.................. 11,488 -- -- -- 11,488
----------- ------------- ------------ ------------- ------------
54,239 115,117 29,234 -- 198,590
----------- ------------- ------------ ------------- ------------
Income (loss) before income taxes and
equity in earnings (loss) of
subsidiaries............................ 31,623 15,074 (29,190) -- 17,507
Provision for (benefit from) income
taxes................................... 138 4,284 2,581 -- 7,003
------------- ------------ ------------- ------------
Income (loss) before equity in earnings
(loss) of subsidiaries.................. 31,485 10,790 (31,771) -- 10,504
Equity in earnings (loss) of
subsidiaries............................ (206) (2,633) 39,399 (39,436) (2,876)
----------- ------------- ------------ ------------- ------------
Net income (loss)......................... $ 31,279 $ 8,157 $ 7,628 $ (39,436) $ 7,628
----------- ------------- ------------ ------------- ------------
----------- ------------- ------------ ------------- ------------
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash provided by (used in) operating
activities.............................. $ (36,449) $ (238) $ 4,962 $ -- $ (31,725)
----------- ------------- ------------ ------------- ------------
Cash Flows from Investing Activities:
Capital expenditures.................... (1,825) (2,710) (43) -- (4,578)
Acquisition and investments in
businessess, net of cash acquired..... 15,751 (2,979) (178,320) -- (165,548)
Decrease in assets restricted for the
settlement of unpaid claims........... -- 5,474 8,890 -- 14,364
Crescent Transaction costs.............. -- -- (4,253) -- (4,253)
----------- ------------- ------------ ------------- ------------
Cash provided by (used in) investing
activities.............................. 13,926 (215) (173,726) -- (160,015)
----------- ------------- ------------ ------------- ------------
Cash Flows from Financing Activities:
Payments on debt and capital lease
obligations........................... -- (140) -- -- (140)
Proceeds from exercise of stock options
& warrants............................ -- -- 1,917 -- 1,917
Purchases of treasury stock............. -- -- (12,456) -- (12,456)
----------- ------------- ------------ ------------- ------------
Cash used in financing activities......... -- (140) (10,539) -- (10,679)
----------- ------------- ------------ ------------- ------------
Net decrease in cash and cash
equivalents............................. (22,523) (593) (179,303) -- (202,419)
Cash and cash equivalents at beginning of
period.................................. 102,419 62,326 208,133 -- 372,878
----------- ------------- ------------ ------------- ------------
Cash and cash equivalents at end of
period.................................. $ 79,896 $ 61,733 $ 28,830 $ -- $ 170,459
----------- ------------- ------------ ------------- ------------
----------- ------------- ------------ ------------- ------------
18
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
DECEMBER 31, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Although
the Company believes that its plans, intentions and expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such plans, intentions or expectations will be achieved. Important factors that
could cause actual results to differ materially from the Company's
forward-looking statements are set forth in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997. All forward-looking
statements attributable to the Company or persons acting on behalf of the
Company are expressly qualified in their entirety by the cautionary statements
set forth in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997.
OVERVIEW
The Company has historically derived the majority of its revenue from
providing healthcare services in an inpatient setting. Payments from third-party
payors are the principal source of revenue for most healthcare providers. In the
early 1990's, many third-party payors sought to control the cost of providing
care to their patients by instituting managed care programs or seeking the
assistance of managed care companies. Providers participating in managed care
programs agree to provide services to patients for a discount from established
rates, which generally results in pricing concessions by the providers and lower
margins. Additionally, managed care programs generally encourage alternatives to
inpatient treatment settings and reduce utilization of inpatient services. As a
result, third-party payors established managed care programs or engaged managed
care companies in many areas of healthcare, including behavioral healthcare. The
Company, which until June 1997 was the largest operator of psychiatric hospitals
in the United States, was adversely affected by the adoption of managed care
programs by third-party payors.
Prior to the first quarter of fiscal 1996, the Company was not a provider of
behavioral managed care services. During the first quarter of fiscal 1996, the
Company acquired a 61% ownership interest in Green Spring. At that time, the
Company intended to become a fully integrated behavioral healthcare provider by
combining the managed behavioral healthcare products offered by Green Spring
with the direct treatment services offered by the Company's psychiatric
hospitals. The Company believed that an entity that participated in both the
managed care and provider segments of the behavioral healthcare industry could
more efficiently provide and manage behavioral healthcare for insured
populations than an entity that was solely a managed care company. The Company
also believed that earnings from its managed care business would offset, in
part, the negative impact on the financial performance of its psychiatric
hospitals caused by managed care. Green Spring was the Company's first
significant involvement in managed behavioral healthcare.
Subsequent to the Company's acquisition of Green Spring, the growth of the
managed behavioral healthcare industry accelerated. Under the Company's majority
ownership, Green Spring increased its base of covered lives from 12.0 million as
of the end of calendar year 1995 to 21.1 million as of the end of calendar year
1997, a compound annual growth rate of over 32%. While growth in the industry
was accelerating, the managed behavioral healthcare industry also began to
consolidate. The Company concluded that consolidation presented an opportunity
for the Company to enhance its stockholder value by increasing its participation
in the managed behavioral healthcare industry, which the Company believed
offered growth and earnings prospects superior to those of the psychiatric
hospital industry. Therefore, the Company decided to sell its domestic
psychiatric facilities to obtain capital for expansion in the managed behavioral
healthcare business.
19
During the third quarter of fiscal 1997, the Company sold substantially all
of its domestic acute-care psychiatric hospitals and residential treatment
facilities (the "Psychiatric Hospital Facilities") to Crescent Real Estate
Equities Limited Partnership ("Crescent") for $417.2 million in cash (before
costs of approximately $16.0 million) and certain other consideration (the
"Crescent Transactions"). The sale of the Psychiatric Hospital Facilities
provided the Company with approximately $200 million of net cash proceeds, after
debt repayment, for use in implementing its business strategy. The Company used
the net cash proceeds to finance the acquisitions of HAI and Allied in December
1997. The Company has further implemented its business strategy through the
Merit acquisition. See Note J--"Subsequent Events--Merit Acquisition".
The Company now generates a significant portion of its revenue and earnings
from its managed care business. A significant portion of the Company's managed
care revenue and earnings are generated from risk-based products, and such
portion will increase following the Merit acquisition. The Company believes
enrollment in risk-based products will continue to grow through new covered
lives and the transition of covered lives in administrative services-only
products and employee assistance programs to higher revenue risk-based products.
Risk-based products typically generate significantly higher amounts of revenue
than other managed behavioral healthcare products. Because the Company is
responsible for the cost of care, risk-based products typically have lower
margins than non-risk-based products.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1996 COMPARED TO THE QUARTER ENDED DECEMBER 31,
1997.
REVENUE. Managed care revenue increased 61.8% to $134.1 million for the
quarter ended December 31, 1997 from $82.9 million in the same period in fiscal
1997. The increase resulted primarily from the acquisition of HAI and Allied in
December 1997 and continued revenue growth at Green Spring. HAI and Allied
revenues were approximately $9.2 million and $18.5 million, respectively, for
the quarter ended December 31, 1997. Green Spring revenues were positively
impacted by the award of several new contracts and acquisitions since December
31, 1996, resulting in a 54% increase in covered lives to 21.1 million as of
December 31, 1997 as compared to December 31, 1996.
Public sector revenue increased 36.1% to $29.3 million for the quarter ended
December 31, 1997 from $21.5 million in the same period in fiscal 1997. The
increase was primarily attributable to a 26% increase in placements in Mentor
homes and $1.7 million in additional revenues from correctional contracts.
Healthcare franchising revenue was $19.6 million for the quarter ended
December 31, 1997. The healthcare franchising revenue consisted of franchise
fees payable by CBHS pursuant to the master franchising agreement entered into
as part of the Crescent Transactions (the "Franchise Fees").
Provider business revenue decreased 86.3% to $33.1 million for the quarter
ended December 31, 1997 from $242.4 million in the same period in fiscal 1997.
The decrease resulted primarily from the effect of the consummation of the
Crescent Transactions on June 17, 1997, following which revenue from the
Psychiatric Hospital Facilities and other facilities transferred to CBHS was no
longer recorded as part of the Company's revenue. During the quarters ended
December 31, 1996 and 1997, the Company recorded revenue of $11.0 million and
$0.7 million, respectively, for settlements and adjustments related to
reimbursement issues with respect to psychiatric hospitals owned or formerly
owned by the Company. During fiscal 1997, the Company recorded $27.4 million for
such settlements. Management anticipates that revenue related to such
settlements will decline significantly for fiscal 1998.
SALARIES, COST OF CARE AND OTHER OPERATING EXPENSES. Salaries, cost of care
and other operating expenses attributable to the managed care business increased
61.7% to $119.6 million for the quarter ended December 31, 1997 from $73.9
million in the same period in fiscal 1997. The increase resulted primarily from
the acquisition of HAI and Allied, which had expenses of $6.8 million and $17.6
million, respectively, for the quarter ended December 31, 1997, and from
continued growth at Green Spring.
20
Public sector salaries, cost of care and other operating expenses increased
39.0% to $27.4 million for the quarter ended December 31, 1997 from $19.7
million in the same period in fiscal 1997. The increase was due primarily to
internal growth and increases in costs related to expansion and new product
development.
Healthcare franchising operating expenses were $2.2 million for the quarter
ended December 31, 1997. The Company recorded no expenses with respect to the
healthcare franchising business during the quarter ended December 31, 1996
because the Crescent Transactions were not consummated until the third quarter
of fiscal 1997.
Salaries, cost of care and other operating expenses attributable to the
provider business decreased 88.0% to $22.1 million for the quarter ended
December 31, 1997 from $184.7 million in the same period in fiscal 1997. The
decrease resulted primarily from the effect of the consummation of the Crescent
Transactions, following which operating expenses of the Psychiatric Hospital
Facilities and other facilities transferred to CBHS were no longer accounted for
as part of the Company's operating expenses. During the quarter ended December
31, 1997, the Company recorded reductions of expenses of approximately $4.1
million as a result of updated actuarial estimates related to malpractice claim
reserves. These reductions resulted primarily from updates to actuarial
assumptions regarding the Company's expected losses for more recent policy
years. These revisions are based on changes in expected values of ultimate
losses resulting from the Company's claim experience, and increased reliance on
such claim experience. While management and its actuaries believe that the
present reserve is reasonable, ultimate settlement of losses may vary from the
amount recorded and result in additional fluctuations in income in future
periods.
BAD DEBT EXPENSE. Bad debt expense, which is primarily attributable to the
provider business, decreased 94.7%, or $19.2 million, for the quarter ended
December 31, 1997 compared to the same period in fiscal 1997. The decrease was
primarily attributable to the effect of the consummation of the Crescent
Transactions, following which the bad debt expense incurred by the Psychiatric
Hospital Facilities and other facilities transferred to CBHS was no longer
accounted for as part of the Company's bad debt expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
46.8%, or $6.1 million, for the quarter ended December 31, 1997 compared to the
same period in fiscal 1997. The decrease was primarily attributable to the
effect of the consummation of the Crescent Transactions, whereby the Psychiatric
Hospital Facilities were sold to Crescent, offset by increases in depreciation
and amortization resulting from the HAI and Allied acquisitions.
INTEREST, NET. Interest expense, net, decreased 45.5%, or $6.2 million, for
the quarter ended December 31, 1997 compared to the same period in fiscal 1997.
The decrease was primarily the result of lower interest expense due to lower
average borrowings and higher interest income due to temporary investments of
the cash received in the Crescent Transactions.
OTHER ITEMS. Stock option expense (credit) for the quarter ended December
31, 1997 decreased $4.6 million from the quarter ended December 31, 1996
primarily due to fluctuations in the market price of the Company's common stock.
The Company recorded equity in the loss of CBHS of $11.5 million for the
quarter ended December 31, 1997, representing the Company's proportionate (50%)
loss in CBHS for the quarter ended December 31, 1997. See Note G--"Investment in
CBHS".
Minority interest increased $0.9 million during the quarter ended December
31, 1997 compared to the same period in fiscal 1997. The increase was primarily
due to Green Spring's net income growth in fiscal 1998.
21
The Company recorded an extraordinary loss on early extinguishment of debt,
net of tax, of $3.0 million during the quarter ended December 31, 1996 related
to the termination of its then existing credit agreement.
IMPACT OF CRESCENT TRANSACTIONS
The Company owns a 50% equity interest in CBHS, from which it receives the
Franchise Fees. The Franchise Fees represent a significant portion of the
Company's earnings and cash flows. The following is a discussion of certain
matters related to the Company's ownership of CBHS that may have a bearing on
the Company's future results of operations.
CBHS may consolidate services in selected markets by closing facilities
depending on market conditions and evolving business strategies. For example,
during fiscal 1995 and 1996, the Company consolidated, closed or sold 15 and 9
psychiatric hospitals, respectively. During fiscal 1997, the Company
consolidated or closed three psychiatric hospitals prior to the Crescent
Transactions. If CBHS closes additional psychiatric hospitals, it could result
in charges to income for the costs attributable to the closures, which would
result in lower equity in earnings of CBHS for the Company.
The Company's JV Hospitals and CBHS' hospitals continue to experience a
shift in payor mix to managed care payors from other payors, which contributed
to a reduction in revenue per equivalent patient day in fiscal 1996 and a
decline in average length of stay in fiscal 1995, 1996 and 1997. Management
anticipates a continued shift in hospital payor mix towards managed care payors
as a result of changes in the healthcare marketplace. Future shifts in hospital
payor mix to managed care payors could result in lower revenue per equivalent
patient day and lower average length of stay in future periods for the Company's
JV Hospitals and CBHS' hospitals, which could result in lower equity in earnings
from CBHS for the Company and cash flows to pay the Franchise Fees. The
hospitals currently managed or operated by CBHS, including hospitals closed or
sold in 1997, reported a 10% reduction in equivalent patient days, a 7%
reduction in average length of stay and a 4% decrease in admissions in fiscal
1997 compared to fiscal 1996.
The Balanced Budget Act of 1997 (the "Budget Act"), which was enacted by
Congress in August 1997, includes provisions that eliminated the TEFRA bonus
payment and reduced reimbursement of certain costs previously paid by Medicare
and eliminated the Medicaid "disproportionate share" program. These provisions,
along with other provisions in the Budget Act, will reduce the amount of revenue
and earnings that CBHS hospitals will receive for the treatment of Medicare
patients. CBHS management estimates that such reductions will approximate $10
million in fiscal 1998, and due to the phase-in effects of the Budget Act,
approximately $15 million annually in subsequent fiscal years.
Based on projections of fiscal 1998 operations prepared by management of
CBHS and results of operations through December 31, 1997, the Company believes
that CBHS will be unable to pay the full amount of the Franchise Fees it is
contractually obligated to pay the Company during fiscal 1998. The Company
currently estimates that CBHS will be able to pay approximately $58 to $68
million of the Franchise Fees in fiscal 1998, a $10 to $20 million shortfall
relative to amounts payable under the master franchise agreement. The Company
may be required to record bad debt expense related to Franchise Fees receivable
from CBHS, if any, in fiscal 1998 or future periods if CBHS's operating
performance does not improve to levels achieved prior to the consummation of the
Crescent Transactions. If CBHS defaults in payment of the Franchise Fees, the
Company will pursue all remedies available to it under the master franchise
agreement.
IMPACT OF THE MERIT ACQUISITION
Following the Merit acquisition, the Company provides managed behavioral
healthcare services in the United States to over 58 million covered lives. The
Company believes it has the number one market position in each of the major
product markets in which it competes. The Company believes its industry
22
leading position will enhance its ability to (1) provide a consistent level of
high quality service on a nationwide basis; (ii) enter into favorable agreements
with behavioral healthcare providers that allow it to effectively control
healthcare costs for its customers; and (iii) effectively market its managed
care products to large corporate, HMO and insurance customers, which, the
Company believes, increasingly prefer to be serviced by a single-source provider
on a national basis.
The Company believes that the Merit acquisition creates opportunities for
the Company to achieve significant cost savings in its managed behavioral
healthcare business. Management believes that cost saving opportunities will
result from leveraging fixed overhead over a larger revenue base and an
increased number of covered lives and from reducing duplicative corporate and
regional selling, general and administrative expenses. As a result, the Company
expects to achieve approximately $60.0 million of cost savings in its managed
behavioral healthcare business on an annual basis within eighteen months
following the consummation of the Merit acquisition. The Company expects to
spend approximately $26.0 million during the eighteen months following the
consummation of the Merit acquisition in connection with achieving such costs.
The Company expects to finalize its plans for the integration of the
businesses of Green Spring, HAI and Merit by March 31, 1998. The Company expects
to record charges to operations during the quarter ended March 31, 1998 to the
extent the integration plan results in the elimination of personnel and facility
closures at HAI and Green Spring and for integration plan costs incurred that
benefit future periods.
The full implementation of the integration plan is expected to take eighteen
months. The Merit acquisition and related transactions are expected to be
dilutive to future earnings until the integration plan is substantially
complete. Accordingly, such earnings dilution will be most significant during
the remaining quarters of fiscal 1998.
The Company expects to record an extraordinary loss of approximately $30.0
million to $35.0 million, net of tax benefits, in connection with the
termination of its Credit Agreement and extinguishing the $375 million in 11.25
% Senior Subordinated Notes as part of the Transactions.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company's net cash used in operating activities
was approximately $23.4 million and $31.7 million for the quarters ended
December 31, 1996 and 1997, respectively. The Company typically has negative
operating cash flows in the December quarter each year due to the interest
payment previously due in October each year for the $375 million 11.25% Senior
Subordinated Notes and annual employee incentive payments. Operating cash flows
for the quarter ended December 31, 1997 were also adversely affected by the
change in due to/from CBHS, primarily due to working capital advances, of $11.3
million, the prepayment of CHARTER call center management fees to CBHS of $5.9
million and insurance settlement payments of $6.8 million.
INVESTING ACTIVITIES. The Company utilized $165.5 million in funds, net of
cash acquired, for acquisitions and investments in businesses, including Allied
and HAI, during the quarter ended December 31, 1997. In addition, the Company
paid approximately $4.3 million for Crescent Transaction costs during the
quarter ended December 31, 1997. The Company expects to fund an additional $6.6
million in transaction costs and construction costs in fiscal 1998 related to
the Crescent Transactions.
FINANCING ACTIVITIES. The Company borrowed approximately $126.8 million,
net of issuance costs, in the first quarter of fiscal 1997, primarily to
refinance its then existing credit agreement. The Company repurchased
approximately 545,000 shares of its common stock for approximately $12.5 million
during the quarter ended December 31, 1997.
As of February 12, 1998, the Company had approximately $112.5 million of
availability under the Revolving Facility of the New Credit Agreement.
23
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
Following the consummation of the Merit acquisition, interest payments on
the Notes and interest and principal payments on indebtedness outstanding
pursuant to the New Credit Agreement will represent significant liquidity
requirements for the Company. Borrowings under the New Credit Agreement will
bear interest at floating rates and will require interest payments on varying
dates depending on the interest rate option selected by the Company. Borrowings
pursuant to the New Credit Agreement will include $550 million in Term Loans and
up to $150 million under the Revolving Facility. Commencing in the second
quarter of fiscal 1999, the Company will be required to make principal payments
with respect to the Term Loans.
The Company is in the process of finalizing its plans for the integration of
the businesses of Green Spring, HAI and Merit. The Company expects to achieve
approximately $60.0 million of cost savings on an annual basis within eighteen
months following the consummation of the Merit acquisition. Such cost savings
are measured relative to the combined budgeted amounts of the Company, Merit and
HAI for the current fiscal year prior to the cost savings initiatives. The
Company expects to spend approximately $26.0 million during the eighteen months
following the consummation of the Merit acquisition in connection with achieving
such cost savings, including expenses related to reducing duplicative personnel
in its managed care organizations, contractual terminations for eliminating
excess real estate (primarily locations under operating leases) and other
related costs in connection with the integration plan. Certain of such costs
will be capital expenditures.
During December 1997, the Company purchased HAI and Allied for approximately
$122.1 million and $70.0 million, respectively, excluding transaction costs. In
addition, the Company incurred the obligation to make contingent payments to the
former owners of HAI and Allied. With respect to HAI, the Company may be
required to make additional contingent payments of up to $60.0 million annually
to Aetna over the five-year period subsequent to closing. The Company is
obligated to make contingent payments under two separate calculations. Under the
first calculation, the amount and timing of the contingent payments will be
based on growth in the number of lives covered by certain HAI products during
the next five years. The Company may be required to make contingent payments of
up to $25.0 million per year for each of the five years following the HAI
acquisition depending on the net annual growth in the number of lives covered by
such HAI products. The amount to be paid per incremental covered life decreases
during the five-year term of the Company's contingent payment obligation. Under
the second calculation, the Company may be required to make contingent payments
of up to $35.0 million per year for each of five years based on the net
cumulative growth in the number of lives covered by certain other HAI products.
Aetna will receive a specified amount per net incremental life covered by such
products. The amount to be paid per incremental covered life increases with the
number of incremental covered lives.
The Company may be required to pay up to $40.0 million during the three
years following the closing of the Allied acquisition based on Allied's
performance relative to certain earnings targets. In connection with Merit's
acquisition of CMG Health, Inc. ("CMG"), the Company, by acquiring Merit, may be
required to make certain future contingent cash payments over the next two years
to the former shareholders of CMG based upon the performance of certain CMG
customer contracts. Such contingent payments are subject to an aggregate maximum
of $23.5 million.
The Company believes that the cash flow generated from its operations
together with amounts available for borrowing under the New Credit Agreement,
should be sufficient to fund its debt service requirements, anticipated capital
expenditures, contingent payments, if any, with respect to HAI, Allied and CMG
and other investing and financing activities. The Company currently estimates
that it will spend approximately $50.0 million to $60.0 million for capital
expenditures in fiscal 1998. On a combined basis, the Company (excluding its
provider business), Merit and HAI spent approximately $40 million for capital
expenditures during fiscal 1997. The majority of the Company's budgeted capital
expenditures relate to
24
management information systems and related equipment. The Revolving Facility
will provide the Company with revolving loans and letters of credit in an
aggregate principal amount at any time not to exceed $150.0 million. Immediately
after the consummation of the Transactions, $112.5 million, including $17.5
million for letters of credit, was available to the Company for borrowing
pursuant to the Revolving Facility. The Company's future operating performance
and ability to service or refinance the Notes or to extend or refinance the
indebtedness outstanding pursuant to the New Credit Agreement will be subject to
future economic conditions and to financial, business and other factors, many of
which are beyond the Company's control.
The New Credit Agreement provides for the Term Loan Facility in an aggregate
principal amount of $550 million, consisting of an approximately $183.3 million
Tranche A Term Loan (the "Tranche A Term Loan"), an approximately $183.3 million
Tranche B Term Loan (the "Tranche B Term Loan") and an approximately $183.3
million Tranche C Term Loan (the "Tranche C Term Loan") and the Revolving
Facility providing for revolving loans to the Company and the "Subsidiary
Borrowers" (as defined therein) and the issuance of letters of credit for the
account of the Company and the Subsidiary Borrowers in an aggregate principal
amount (including the aggregate stated amount of letters of credit) of $150
million.
The Tranche A Term Loan and the Revolving Facility will mature on the date
that is six years after the closing of the Transactions. The Tranche B Term Loan
will mature on the date that is seven years after the closing of the
Transactions and the Tranche C Term Loan will mature on the date that is eight
years after the closing of the Transactions. The Tranche A Term Loan will be
amortized in installments in amounts equal to $22.0 million in the second year
following the closing date, $30.0 million in the third year following the
closing date, $36.0 million in the fourth year following the closing date, $48.0
million in the fifth year following the closing date, and $47.3 million in the
sixth year following the closing date. The Tranche B Term Loan will be amortized
in installments in amounts equal to $2.2 million in each of the second through
fifth years following the closing date, $55.0 million in the sixth year
following the closing date, and $119.5 million in the seventh year following the
closing date. The Tranche C Term Loan will be amortized in installments in
amounts equal to $2.2 million in each of the second through sixth years
following the closing date, $55.0 million in the seventh year following the
closing date and $117.3 million in the eighth year following the closing date.
In addition, the credit facilities are subject to mandatory prepayment and
reductions (to be applied first to the Term Loan Facility) in an amount equal to
(a) 100% of the net proceeds of certain offerings of equity securities by the
Company or any of its subsidiaries, (b) 100% of the net proceeds of certain debt
issuances of the Company or any of its subsidiaries, (c) 75% of the Company's
excess cash flow, as defined, and (d) 100% of the net proceeds of certain asset
sales or other dispositions of property of the Company and its subsidiaries, in
each case subject to certain limited exceptions.
The New Credit Agreement will impose restrictions on the Company's ability
to make capital expenditures and both the New Credit Agreement and the Indenture
governing the Notes limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged financial
condition of the Company subsequent to the Merit acquisition, could limit the
Company's ability to respond to market opportunities. The covenants contained in
the New Credit Agreement will also, among other things, restrict the ability of
the Company to dispose of assets, repay other indebtedness, amend other debt
instruments (including the Indenture), pay dividends, create liens on assets,
enter into sale and leaseback transactions, make investments, loans or advances,
redeem or repurchase common stock and make acquisitions.
25
MODIFICATION OF COMPUTER SOFTWARE FOR THE YEAR 2000
The Company and its subsidiaries have internally developed computer software
systems that process transactions based on storing two digits for the year of a
transaction (i.e., "97" for 1997) rather than four digits, which will be
required for year 2000 transaction processing. CBHS expects to spend $1.0
million in the aggregate during fiscal 1998 and fiscal 1999 to modify internal
use software. The Company expects to spend approximately $1.6 million in the
aggregate during fiscal 1998 and fiscal 1999 to modify internal use software.
The Company does not anticipate incurring any other significant costs for year
2000 software modification. The cost of modifying internal use software for the
year 2000 is charged to expense as incurred.
26
PART II--OTHER INFORMATION
ITEM 1.--LEGAL PROCEEDINGS
Certain of the Company's subsidiaries are subject to or parties to claims,
civil suits and governmental investigations and inquiries relating to their
operations and certain alleged business practices. In the opinion of management,
based on consultation with counsel, resolution of these matters will not have a
material adverse effect on the Company's financial position or results or
operations.
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2(a) Stock Purchase Agreement, dated August 5, 1997, between the Company and
Aetna Insurance Company of Connecticut, which was filed as Exhibit 2(a)
to the Company's current report on Form 8-K, which was filed on December
17, 1997, and is incorporated herein by reference.
2(b) Master Service Agreement, dated August 5, 1997, between the Company,
Aetna U.S. Healthcare, Inc. and Human Affairs International,
Incorporated, which was filed as Exhibit 2(b) to the Company's current
report on Form 8-K, which was filed on December 17, 1997, and is
incorporated herein by reference.
2(c) Amendment to Stock Purchase Agreement, dated December 4, 1997, between
the Company and Aetna Insurance Company of Connecticut, which was filed
as Exhibit 2(c) to the Company's current report on Form 8-K, which was
filed on December 17, 1997, and is incorporated herein by reference.
2(d) First Amendment to Master Services Agreement, dated December 4, 1997,
between the Company, Aetna U.S. Healthcare, Inc. and Human Affairs
International, Incorporated, which was filed as Exhibit 2(d) to the
Company's current report on Form 8-K, which was filed on December 17,
1997, and in incorporated herein by reference.
2(e) Asset Purchase Agreement, dated October 16, 1997, among the Company;
Allied Health Group, Inc.; Gut Management, Inc.; Sky Management Co.;
Florida Specialty Network, LTD; Surgical Associates of South Florida,
Inc.; Surginet, Inc.; Jacob Nudel, M.D.; David Russin, M.D. and Lawrence
Schimmel, M.D.
2(f) First Amendment to Asset Purchase Agreement, dated December 5, 1997,
among the Company; Allied Health Group, Inc.; Gut Management, Inc.; Sky
Management Co.; Florida Specialty Network, LTD; Surgical Associates of
South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.; David Russing
M.D. and Lawrence Schimmel, M.D.
2(g) Agreement and Plan of Merger, dated October 24, 1997, among the
Company, Merit Behavioral Care Corporation and MBC Merger Corporation.
27 Financial Data Schedule
27
(b) Report on Form 8-K
The following current reports on Form 8-K were filed by the
Registrant with the Securities and Exchange Commission during the quarter
ended December 31, 1997.
FINANCIAL
STATEMENTS
DATE OF REPORT ITEM REPORTED AND DESCRIPTION FILED
- ---------------------- --------------------------------- ---------------
December 17, 1997 Acquisition--HAI Acquisition Yes (1)
- ------------------------
(1) Audited financial statements for the two years in the period ended
December 31, 1996, unaudited financial statements for the nine months
ended September 30, 1997 and 1996 and as of September 30, 1997, unaudited
pro forma statement of operations for the year ended September 30, 1997
and unaudited pro forma balance sheet as of September 30, 1997.
28