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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: APRIL 14, 1999
DATE OF EARLIEST EVENT REPORTED: APRIL 9, 1999
MAGELLAN HEALTH SERVICES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 1-6639 58-1076937
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of Identification No.)
Incorporation or
organization)
3414 PEACHTREE ROAD, N.E., SUITE 1400
ATLANTA, GEORGIA 30326
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(Address of principal executive offices) (Zip Code)
(404) 841-9200
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(Registrant's telephone number, including area code)
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NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
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FORWARD-LOOKING STATEMENTS
This current report of the Registrant ("Magellan" or the "Company") on Form
8-K includes "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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,
1998. 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, 1998.
ITEM 2. DISPOSITION OF ASSETS
On April 6, 1999, the Company announced that it had signed definitive
agreements for the sale of its European operations to Investment AB Bure
("Bure"), a Swedish company (the "Europe Sale"). The Company had no material
relationships with Bure prior to the Europe Sale.
The operations being sold are (i) Charter Medical of England Limited, which
is the operator of Charter Nightingale Hospital and Charter Clinic Chelsea in
London, England, and (ii) Societe Anonyme de la Metairie in Nyon, Switzerland
(collectively, the "European Hospitals"). The European Hospitals are engaged in
the business of providing psychiatric health care services to patients in both
inpatient and outpatient settings and constitute substantially all of the
Company's business conducted outside of the United States (including
possessions) and Canada. The Europe Sale was consummated on April 9, 1999 (the
"Closing Date").
The Company will receive approximately $57.0 million of total consideration
(before payment of transaction costs estimated to total approximately $2.5
million) for the Europe Sale, an amount determined through arms-length
negotiations between the Company and Bure, as follows:
- On the Closing Date, Bure paid the Company approximately $49.6 million as
consideration for (i) all of the outstanding shares of stock of the
European Hospitals; (ii) the right to continue using the "CHARTER" name, a
registered trademark of the Company, and certain other marks owned by the
Company for up to ten (10) years and (iii) continued access to certain
outcomes-monitoring systems owned and operated by the Company.
- Additionally, Bure deposited approximately $7.4 million into an
interest-bearing escrow account (the "Property Deposit") on the Closing
Date. The Property Deposit will be used to purchase certain real property
belonging to a wholly owned domestic subsidiary of the Company and used in
the European Hospitals' business. The Property Deposit will be disbursed,
together with all interest accrued thereon, to the Company no later than
May 31, 1999.
The Company will utilize approximately $38.2 million of the net proceeds
from the Europe Sale to make a mandatory unscheduled principal payment on
indebtedness outstanding under the Term Loan Facility (as defined) by April 14,
1999. The remainder of the proceeds will be used to reduce indebtedness
outstanding under the Revolving Facility (as defined) or for general corporate
purposes.
On a pro forma basis at December 31, 1998, the Company would have recorded a
non-recurring gain on the Europe Sale of approximately $28.0 million, before
provision for income taxes.
2
ITEM 7. PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information for the
Company is included herein:
1) Unaudited Pro Forma Consolidated Balance Sheet at December 31, 1998;
2) Unaudited Pro Forma Consolidated Statement of Operations for the fiscal year
ended September 30, 1998; and
3) Unaudited Pro Forma Consolidated Statement of Operations for the three
months ended December 31, 1998.
3
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Unaudited Pro Forma Consolidated Financial Information set forth below
is based on the historical presentation of the consolidated financial statements
of Magellan, and the historical operating results of Human Affairs
International, Incorporated ("HAI"), Allied Health Services, Inc. and certain of
its affiliates ("Allied"), and Merit Behavioral Care Corporation ("Merit").
Certain reclassifications have been made to fiscal 1998 amounts to conform to
fiscal 1999 presentation.
The Unaudited Pro Forma Consolidated Balance Sheet at December 31, 1998,
gives effect to the Europe Sale as if it had occurred on December 31, 1998.
The Unaudited Pro Forma Consolidated Statements of Operations for the fiscal
year ended September 30, 1998, and for the three months ended December 31, 1998,
give effect to the following events as if they had occurred on October 1, 1997:
- the HAI acquisition (as described below);
- the Allied acquisition (as described below);
- the Green Spring minority stockholder conversion (as described below);
- the Merit acquisition (as described below); and
- The Europe Sale
The Unaudited Pro Forma Consolidated Financial Information does not purport
to be indicative of the results that actually would have been obtained if the
operations had been conducted as presented and they are not necessarily
indicative of operating results to be expected in future periods. Additionally,
due to the ongoing integration of the Company's managed healthcare businesses
and other factors, the Unaudited Pro Forma Consolidated Statement of Operations
for the three months ended December 31, 1998, is not necessarily proportional to
nor indicative of the pro forma results expected for a full year.
The Unaudited Pro Forma Consolidated Statement of Operations for the fiscal
year ended September 30, 1998, excludes approximately $35.0 million to $40.0
million of annual cost savings that the Company expects to achieve by September
30, 1999, as a result of the Integration Plan (as defined). The Unaudited Pro
Forma Consolidated Statements of Operations for the fiscal year ended September
30, 1998, and for the three months ended December 31, 1998, also exclude managed
care integration costs of $17.0 million and $1.8 million, respectively, that
were directly attributable to the HAI, Allied and Merit acquisitions.
Additionally, the Unaudited Pro Forma Consolidated Statement of Operations for
the fiscal year ended September 30, 1998, excludes both the extraordinary loss
on early extinguishment of debt that was a direct result of the Merit
acquisition and the non-recurring gain attributable to the Europe Sale.
The Unaudited Pro Forma Consolidated Financial Information and notes thereto
should be read in conjunction with the historical consolidated financial
statements and notes thereto of Magellan, and Management's Discussion and
Analysis of Financial Condition and Results of Operations that appear in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998, filed on December 29, 1998, and in the Company's quarterly report on Form
10-Q for the quarterly period ended December 31, 1998, filed on February 16,
1999, which are incorporated herein by reference, the historical consolidated
financial statements and notes thereto of Merit, which appear in the Company's
current report on Form 8-K/A, filed on October 28, 1998, which are incorporated
herein by reference and the historical consolidated financial statements and
notes thereto of HAI, which appear in the Company's current report on Form 8-K,
filed on December 17, 1997, which are incorporated herein by reference.
4
The following is a description of each of the transactions (other than the
Europe Sale which is described elsewhere herein) that are reflected in the pro
forma presentation:
HAI ACQUISITION. On December 4, 1997, the Company consummated the purchase
of HAI, formerly a unit of Aetna US Healthcare, Inc. ("Aetna"), for
approximately $122.1 million. At the time of the HAI acquisition, HAI managed
the care of approximately 16.3 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 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 $60.0 million annually
to Aetna over the five-year period subsequent to closing. The maximum aggregate
amount of contingent payments is $300.0 million. The amount and timing of the
payments will be contingent upon net increases in the number of HAI's covered
lives in specified products. 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 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 would record additional consideration paid or payable to
Aetna under the above calculations as goodwill and identifiable intangible
assets.
On March 26, 1999, the Company paid Aetna $60.0 million of additional
consideration for the purchase of HAI under the above calculations. The amount
was funded through a combination of cash on hand ($10.0 million) and borrowings
under the Revolving Facility (as defined) ($50.0 million) and was accounted for
as a purchase of goodwill and identifiable intangible assets.
ALLIED ACQUISITION. On December 5, 1997, the Company purchased Allied for
approximately $70.0 million, excluding transaction costs, and accounted for the
Allied acquisition using the purchase method of accounting. The purchase price
the Company originally paid for Allied was funded from cash on hand and
consisted of a $50.0 million payment to the former owners of Allied and a $20.0
million deposit into an interest-bearing escrow account (the "Allied Escrow
Deposit"). The Company was required to pay up to $60.0 million, including the
Allied Escrow Deposit, during the three years following the closing of the
Allied acquisition if Allied's performance exceeded certain earnings targets.
During the quarter ended December 31, 1998, the Company and the former
owners of Allied amended the Allied purchase agreement (the "Allied
Amendments"). The Allied Amendments resulted in the following changes to the
original terms of the Allied purchase agreement:
- The Allied Escrow Deposit and all interest accrued thereon was returned
to the Company;
- The Company paid the former owners of Allied $4.5 million of additional
consideration for the purchase of Allied. This additional consideration
was accounted for as a purchase of goodwill; and
- The Company capped future obligations with respect to additional
contingent payments for the purchase of Allied at $3.0 million. The
earnings targets which must be met by Allied for this amount to be paid
were revised upwards as well.
5
Allied provides specialty risk-based products and administrative services to
a variety of insurance companies and other customers. At the time of the Allied
acquisition, Allied's services covered approximately 3.8 million aggregate lives
through more than 80 physician networks across the eastern United States.
Allied's networks include physicians specializing in cardiology, oncology and
diabetes.
GREEN SPRING MINORITY STOCKHOLDER CONVERSION. The minority stockholders of
Green Spring Health Services, Inc. ("Green Spring") converted their interests in
Green Spring into an aggregate of 2,831,516 shares of the Company's common stock
during January 1998. As a result of the Green Spring minority stockholder
conversion, the Company owns 100% of Green Spring. The Company accounted for the
Green Spring minority stockholder conversion as a purchase of minority interest
at the fair value of the consideration paid.
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 Merit's debt. The Company accounted for the Merit acquisition using
the purchase method of accounting. At the time of the Merit acquisition, Merit
managed behavioral healthcare programs for approximately 21.6 million covered
lives across all segments of the healthcare industry, including HMO's, Blue
Cross/Blue Shield organizations and other insurance companies, employers 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 as follows: (i) the Company
terminated its existing credit agreement (the "Magellan Existing 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 Oustanding Notes"); (v) the Company entered into a new senior
secured bank credit agreement (the "Credit Agreement") with The Chase Manhattan
Bank and a syndicate of financial institutions, providing for credit facilities
of $700.0 million; and (vi) the Company issued its 9% Series A Senior
Subordinated Notes due 2008 (the "Notes") pursuant to an indenture, dated
February 12, 1998, between the Company and Marine Midland Bank, as Trustee (the
"Indenture"). The Credit Agreement provides for (a) a term loan facility in an
aggregate principal amount of $550.0 million (the "Term Loan Facility"),
consisting of three separately maturing $183.3 million tranches with different
interest rates (London inter-bank offered rate ("LIBOR") plus 2.25%, 2.50% or
2.75%) and (b) a revolving credit 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 $150.0 million (the "Revolving Facility").
6
The following table sets forth the sources and uses of funds for the Merit
acquisition (in thousands):
Sources:
Cash and cash equivalents........................................................................... $ 59,290
Credit Agreement:
Revolving Facility (1)............................................................................ 20,000
Term Loan Facility................................................................................ 550,000
The Notes........................................................................................... 625,000
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Total sources..................................................................................... $ 1,254,290
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Uses:
Cash paid to Merit Shareholders..................................................................... $ 448,867
Repayment of Merit Existing Credit Agreement (2).................................................... 196,357
Purchase of the Magellan Outstanding Notes (3)...................................................... 432,102
Purchase of Merit Outstanding Notes (4)............................................................. 121,651
Transaction costs (5)............................................................................... 55,313
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Total uses........................................................................................ $ 1,254,290
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(1) The Revolving Facility provides for borrowings of up to $150.0 million. At
February 12, 1998, the Company had approximately $112.5 million available
for borrowing pursuant to the Revolving Facility, 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 principal amount of $375.0 million, tender premium of $43.4 million
and accrued interest of $13.7 million.
(4) Includes principal 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 associated with the
tender offers for the Magellan Outstanding Notes and the Merit Outstanding
Notes, the Notes offering, the Merit acquisition and the Credit Agreement
By virtue of acquiring Merit, the Company may be required to make certain
contingent payments in fiscal 1999 to the former shareholders of CMG Health,
Inc. ("CMG"), based on the performance of three CMG customer contracts. CMG was
acquired by Merit in September, 1997. Such contingent payments are subject to an
aggregate maximum of $23.5 million.
The historical financial information for the European Hospitals is presented
under the caption entitled "Divested Operations" in the Unaudited Pro Forma
Consolidated Financial Statements.
7
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
MAGELLAN DIVESTED PRO FORMA
AS REPORTED OPERATIONS ADJUSTMENTS
----------- ---------- -----------
ASSETS
Cash and cash equivalents................................ $ 49,358 $ (3,590) $ 57,000(1)
(2,500)(3)
(38,213)(4)
Accounts receivable, net................................. 172,990 (5,006) --
Restricted cash and investments.......................... 132,099 -- --
Other current assets..................................... 33,916 (661) --
----------- ---------- -----------
Total current assets................................. 388,363 (9,257) 16,287
Assets restricted for settlement of unpaid claims and
other liabilities...................................... 33,978 -- --
Property and equipment, net.............................. 156,436 (20,940) --
Deferred income taxes.................................... 94,069 106 (11,213)(5)
Investments in unconsolidated subsidiaries............... 31,814 -- --
Other long-term assets................................... 18,751 -- --
Goodwill, net............................................ 1,067,085 -- --
Other intangible assets, net............................. 160,447 -- --
----------- ---------- -----------
Total assets......................................... $ 1,950,943 $ (30,091) $ 5,074
----------- ---------- -----------
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................................... $ 33,593 $ (1,253) $ --
Accrued liabilities...................................... 242,199 (1,126) --
Medical claims payable................................... 191,384 -- --
Income taxes payable..................................... 681 (258) --
Current maturities of long-term debt and capital lease
obligations............................................ 29,428 (1) (1,834)(4)
----------- ---------- -----------
Total current liabilities............................ 497,285 (2,638) (1,834)
Long-term debt and capital lease obligations............. 1,156,020 (985) (36,379)(4)
Reserve for unpaid claims................................ 27,149 -- --
Deferred credits and other long-term liabilities......... 74,633 -- --
Minority interest........................................ 4,683 -- --
Commitments and contingencies
Stockholders' equity:
Common stock........................................... 8,476 -- --
Additional paid-in capital............................. 349,663 (28,639) 28,639(2)
Accumulated deficit.................................... (145,057) -- (28,639)(2)
57,000(1)
(2,500)(3)
(11,213)(5)
Warrants outstanding..................................... 25,050 -- --
Common stock in treasury................................. (44,309) -- --
Cumulative foreign currency adjustments.................. (2,650) 2,171 --
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191,173 (26,468) 43,287
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Total liabilities and stockholders' equity........... $ 1,950,943 $ (30,091) $ 5,074
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PRO FORMA
CONSOLIDATED
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ASSETS
Cash and cash equivalents................................
$ 62,055
Accounts receivable, net................................. 167,984
Restricted cash and investments.......................... 132,099
Other current assets..................................... 33,255
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Total current assets................................. 395,393
Assets restricted for settlement of unpaid claims and
other liabilities...................................... 33,978
Property and equipment, net.............................. 135,496
Deferred income taxes.................................... 82,962
Investments in unconsolidated subsidiaries............... 31,814
Other long-term assets................................... 18,751
Goodwill, net............................................ 1,067,085
Other intangible assets, net............................. 160,447
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Total assets......................................... $1,925,926
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................................... $ 32,340
Accrued liabilities...................................... 241,073
Medical claims payable................................... 191,384
Income taxes payable..................................... 423
Current maturities of long-term debt and capital lease
obligations............................................ 27,593
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Total current liabilities............................ 492,813
Long-term debt and capital lease obligations............. 1,118,656
Reserve for unpaid claims................................ 27,149
Deferred credits and other long-term liabilities......... 74,633
Minority interest........................................ 4,683
Commitments and contingencies
Stockholders' equity:
Common stock........................................... 8,476
Additional paid-in capital............................. 349,663
Accumulated deficit....................................
(130,409)
Warrants outstanding..................................... 25,050
Common stock in treasury................................. (44,309)
Cumulative foreign currency adjustments.................. (479)
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207,992
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Total liabilities and stockholders' equity........... $1,925,926
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See Notes to Unaudited Pro Forma Consolidated Financial Statements
8
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MAGELLAN PRO FORMA PRO FORMA
AS REPORTED HAI ALLIED MERIT ADJUSTMENTS COMBINED
------------ --------- --------- ---------- ----------- ------------
Net revenue......................... $ 1,499,659 $ 19,528 $ 21,299 $ 262,630 $ (2,143) (6) $ 1,800,973
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Salaries, cost of care and other
operating expenses................ 1,299,458 15,031 21,422 241,084 (3,285) (7) 1,573,710
Equity in loss of unconsolidated
subsidiaries...................... 19,083 -- -- -- -- 19,083
Depreciation and amortization....... 54,885 34 100 16,159 (2,347) (8) 68,831
Interest, net....................... 75,375 (256) (92) 8,870 16,128 100,025
Stock option expense................ (5,623) -- -- -- -- (5,623)
Managed care integration costs...... 16,962 -- -- -- (16,962) (10) --
Unusual items....................... 458 -- -- 1,318 1,682 (11) 3,458
------------ --------- --------- ---------- ----------- ------------
1,460,598 14,809 21,430 267,431 (4,784) 1,759,484
------------ --------- --------- ---------- ----------- ------------
Income (loss) before income taxes
and minority interest............. 39,061 4,719 (131) (4,801) 2,641 41,489
Provision for (benefit from) income
taxes............................. 20,033 1,879 -- (786) 2,732 (12) 23,858
------------ --------- --------- ---------- ----------- ------------
Income (loss) before minority
interest.......................... 19,028 2,840 (131) (4,015) (91) 17,631
Minority interest................... 5,296 -- -- -- (2,606) (13) 2,690
------------ --------- --------- ---------- ----------- ------------
Net income.......................... $ 13,732 $ 2,840 $ (131) $ (4,015) $ 2,515 $ 14,941
------------ --------- --------- ---------- ----------- ------------
------------ --------- --------- ---------- ----------- ------------
Average number of common shares
outstanding--basic................ 30,784 815 (13) 31,599
------------ ----------- ------------
------------ ----------- ------------
Average number of common shares
outstanding--diluted.............. 31,198 815 (13) 32,013
------------ ----------- ------------
------------ ----------- ------------
Net income per share--basic......... $ 0.45 $ 0.47
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------------ ------------
Net income per share--diluted....... $ 0.44 $ 0.47
------------ ------------
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DIVESTED PRO FORMA PRO FORMA
OPERATIONS ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------
Net revenue......................... $ (29,922) $ -- $1,771,051
----------- ----------- ------------
Salaries, cost of care and other
operating expenses................ (21,577) -- 1,552,133
Equity in loss of unconsolidated
subsidiaries...................... -- -- 19,083
Depreciation and amortization....... (1,332) -- 67,499
Interest, net....................... -- (4,396) (14) 95,629
Stock option expense................ -- -- (5,623)
Managed care integration costs...... -- -- --
Unusual items....................... -- -- 3,458
----------- ----------- ------------
(22,909) (4,396) 1,732,179
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Income (loss) before income taxes
and minority interest............. (7,013) 4,396 38,872
Provision for (benefit from) income
taxes............................. (2,805) 1,758 (15) 22,811
----------- ----------- ------------
Income (loss) before minority
interest.......................... (4,208) 2,638 16,061
Minority interest................... -- -- 2,690
----------- ----------- ------------
Net income.......................... $ (4,208) $ 2,638 $ 13,371
----------- ----------- ------------
----------- ----------- ------------
Average number of common shares
outstanding--basic................ 31,599
------------
------------
Average number of common shares
outstanding--diluted.............. 32,013
------------
------------
Net income per share--basic......... $ 0.42
------------
------------
Net income per share--diluted....... $ 0.42
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See Notes to Unaudited Pro Forma Consolidated Financial Statements
9
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MAGELLAN PRO FORMA PRO FORMA DIVESTED
AS REPORTED ADJUSTMENTS COMBINED OPERATIONS
----------- ------------- ----------- -----------
Net revenue................................................ $ 463,143 $ -- $ 463,143 $ (7,918)
----------- ------------- ----------- -----------
Salaries, cost of care and other operating expenses........ 413,216 -- 413,216 (5,842)
Equity in earnings of unconsolidated subsidiaries.......... (4,982) -- (4,982) --
Depreciation and amortization.............................. 18,391 -- 18,391 (366)
Interest, net.............................................. 24,109 -- 24,109 --
Stock option expense....................................... 12 -- 12 --
Managed care integration costs............................. 1,750 (1,750) (10) -- --
Unusual items.............................................. 22 (22) (11) -- --
----------- ------------- ----------- -----------
452,518 (1,772) 450,746 (6,208)
----------- ------------- ----------- -----------
Income (loss) before income taxes
and minority interest.................................... 10,625 1,772 12,397 (1,710)
Provision for (benefit from) income taxes.................. 6,037 709 (12) 6,746 (684)
----------- ------------- ----------- -----------
Income (loss) before minority interest..................... 4,588 1,063 5,651 (1,026)
Minority interest.......................................... 407 -- 407 --
----------- ------------- ----------- -----------
Net income................................................. $ 4,181 $ 1,063 $ 5,244 $ (1,026)
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Average number of common shares outstanding--basic......... 31,613 31,613
----------- -----------
----------- -----------
Average number of common shares outstanding--diluted....... 31,660 31,660
----------- -----------
----------- -----------
Net income per share--basic................................ $ 0.13 $ 0.17
----------- -----------
----------- -----------
Net income per share--diluted.............................. $ 0.13 $ 0.17
----------- -----------
----------- -----------
PRO FORMA PRO FORMA
ADJUSTMENTS CONSOLIDATED
------------- ------------
Net revenue................................................ $ -- $ 455,225
------------- ------------
Salaries, cost of care and other operating expenses........ -- 407,374
Equity in earnings of unconsolidated subsidiaries.......... -- (4,982)
Depreciation and amortization.............................. -- 18,025
Interest, net.............................................. (1,060) (14) 23,049
Stock option expense....................................... -- 12
Managed care integration costs............................. -- --
Unusual items.............................................. -- --
------------- ------------
(1,060) 443,478
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Income (loss) before income taxes
and minority interest.................................... 1,060 11,747
Provision for (benefit from) income taxes.................. 424 (15) 6,486
------------- ------------
Income (loss) before minority interest..................... 636 5,261
Minority interest.......................................... -- 407
------------- ------------
Net income................................................. $ 636 $ 4,854
------------- ------------
------------- ------------
Average number of common shares outstanding--basic......... 31,613
------------
------------
Average number of common shares outstanding--diluted....... 31,660
------------
------------
Net income per share--basic................................ $ 0.15
------------
------------
Net income per share--diluted.............................. $ 0.15
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SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
10
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Adjustments to cash and cash equivalents and accumulated deficit represent
the receipt of consideration for the Europe Sale. The pro forma presentation
presumes that all consideration, including the Property Deposit, was
received at closing.
(2) Adjustments to additional paid-in capital and accumulated deficit represent
elimination of the division equity of the European Hospitals.
(3) Adjustments to cash and cash equivalents and accumulated deficit represent
estimated transaction costs (primarily commissions, legal fees and
accounting fees) directly related to the Europe Sale.
(4) Adjustments to cash and cash equivalents, current maturities of long-term
debt and capital lease obligations and long-term debt and capital lease
obligations represent the use of proceeds from the Europe Sale (net of
estimated transaction costs and income taxes related to the gain on the
Europe Sale of approximately $16.3 million which will be payable in future
periods) to reduce the Company's indebtedness under the Term Loan Facility
as required by the Credit Agreement.
(5) Adjustments to deferred income taxes and accumulated deficit represent
income taxes on the gain on the Europe Sale provided for at the Company's
historical average statutory income tax rate of 40%.
(6) Adjustment to net revenue for the fiscal year ended September 30, 1998,
represents a decrease in HAI revenue resulting from renegotiated contractual
rates with Aetna as a direct result of the acquisition of HAI by the
Company.
(7) Adjustments to salaries, cost of care and other operating expenses for the
fiscal year ended September 30, 1998, represent the following (in
thousands):
TRANSACTION DESCRIPTION AMOUNT
- ----------- ------------------------------------------------------------------------------------ ---------
HAI Elimination of Aetna overhead allocations........................................... $ (2,044)
HAI Bonus expense previously reflected in Aetna's financial statements.................. 200
HAI Costs absorbed by HAI previously incurred by Aetna including information technology,
human resources and legal........................................................... 852
Allied Reduction of shareholders'/executives' compensation to revised contractual level
pursuant to the Allied purchase agreement........................................... (197)
Allied Reduction of certain consulting agreement costs to revised contractual level
pursuant to the Allied purchase agreement........................................... (203)
Merit Presentation of Merit's capitalized start-up costs as other operating expenses to
conform to the Company's accounting policies........................................ 514
Merit Salaries, benefits and other costs for duplicative CMG personnel and facilities that
were eliminated as a direct result of Merit's acquisition of CMG.................... (2,224)
Merit Elimination of fees paid by Merit to its former owner............................... (183)
---------
$ (3,285)
---------
---------
11
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) Adjustments to depreciation and amortization for the fiscal year ended
September 30, 1998, represent the following (in thousands):
TRANSACTION DESCRIPTION AMOUNT
- ----------- ------------------------------------------------------------------------------------ ---------
HAI Purchase price allocation (i)....................................................... $ 633
Allied Purchase price allocation (ii)...................................................... 291
Merit Purchase price allocation (iii)..................................................... (3,519)
GS Additional amortization expense as a result of the Green Spring Minority Stockholder
Conversion (iv)..................................................................... 248
---------
$ (2,347)
---------
---------
- ------------------------
(i) Represents $4.0 million fair value of property and equipment depreciated
over an estimated useful life of 5 years, $80.6 million of goodwill
amortized over an estimated useful life of 40 years and $24.2 million
estimated fair value of other intangible assets (primarily client lists)
amortized over a weighted average estimated useful life of 21 years less
historical depreciation and amortization.
(ii) Represents $43.9 million of goodwill amortized over an estimated useful
life of 40 years and $9.8 million estimated fair value of other
intangible assets (primarily client lists and treatment protocols)
amortized over an estimated useful life of 15 years.
(iii) Represents $36.7 million fair value of property and equipment
depreciated over an estimated useful life of 4 years, $696.5 million of
goodwill amortized over an estimated useful life of 40 years and $65.8
million estimated fair value of other intangible assets (primarily
client lists) amortized over a weighted average estimated useful life
of 10 years less historical depreciation and amortization.
(iv) Represents $6.9 million of goodwill amortized over an estimated
remaining useful life of 39 years and $13.6 million estimated fair
value of client lists amortized over an estimated remaining useful life
of 24 years.
The Company may be required to make additional contingent payments to Aetna
of up to $60.0 million annually during the five years following the
consummation of the HAI acquisition for aggregate potential contingent
payments of $300.0 million. These contingent payments would be recorded as
goodwill and identifiable intangible assets, which would result in estimated
additional annual amortization of $11.0 million to $13.0 million in future
periods if all the contingent payments are made. The Company made the first
such payment of $60.0 million to Aetna on March 26, 1999.
The Company paid $4.5 million of additional consideration to the former
owners of Allied during the three months ended December 31, 1998, and may
also be required to make additional contingent payments to the former owners
of Allied of up to $3.0 million under certain circumstances. The $4.5
million payment was recorded as goodwill, and the $3.0 million, if paid,
would be recorded as goodwill as well. If both payments were made, estimated
annual amortization would increase by approximately $0.2 million.
12
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) Adjustments to interest, net, represent the following (in thousands):
Elimination of Merit historical interest expense.................. $ (10,536)
Elimination of historical interest expense for the Magellan
Outstanding Notes............................................... (15,820)
Elimination of the Company's historical deferred financing cost
amortization.................................................... (914)
Term Loan Facility interest expense (i)........................... 17,016
Revolving Facility interest expense (i)........................... 600
Foregone interest income--cash utilized to fund the HAI, Allied
and Merit acquisitions at 5.5% per annum........................ 3,039
The Notes at 9.0% per annum....................................... 21,094
Amortization of deferred financing costs of $35.6 million over a
weighted average life of 8.1 years.............................. 1,649
---------
$ 16,128
---------
---------
- ------------------------
(i) Assumes borrowings are one-month LIBOR-based, which is consistent with
the Company's past borrowing practices. Average one-month LIBOR was
approximately 5.64%, resulting in pro forma rates of 8.14% (average for
tranche A (LIBOR plus 2.25%), tranche B (LIBOR plus 2.50%), and tranche C
(LIBOR plus 2.75%)) for the Term Loan Facility and 7.89% (LIBOR plus
2.25%) for the Revolving Facility.
(10) Adjustments to managed care integration costs represent the elimination of
the expenses incurred by the Company as a direct result of the Merit
acquisition and the Allied acquisition. The Company's management has
committed to a plan (the "Integration Plan") to combine and integrate the
operations of its behavioral managed healthcare ("Behavioral") business
segment, which was formed through acquisitions consummated in fiscal 1996
(Green Spring) and fiscal 1998 (HAI and Merit), and its specialty managed
healthcare ("Specialty") business segment, which was formed through
acquisitions consummated in fiscal 1997 (Care Management Resources, Inc.)
and fiscal 1998 (Allied). The Integration Plan was implemented to
eliminate duplicative functions and to standardize business practices and
information technology platforms. The Company expects to achieve
approximately $60.0 million of cost savings on an annual basis by
September 30, 1999, in its Behavioral segment and approximately $3.0
million of cost savings on an annual basis in its Specialty segment as a
result of the Integration Plan.
The Integration Plan will result in the elimination of approximately 1,000
positions during fiscal 1998 and fiscal 1999. Approximately 425 employees
had been involuntarily terminated pursuant to the Integration Plan as of
December 31, 1998. The Company estimates that approximately 100 additional
employees will be involuntarily terminated as part of the Integration Plan.
The remaining positions have been or will be eliminated through normal
attrition.
The employee groups of the Behavioral segment that are primarily affected
include executive management, finance, human resources, information systems
and legal personnel at the various corporate headquarters and regional
offices and credentialing, claims processing, contracting and marketing
personnel at various operating locations. The Company expects to complete
its involuntary terminations by the end of fiscal 1999.
13
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Integration Plan has resulted in the closure and identified closure of
approximately 20 leased facilities during fiscal 1998 and fiscal 1999. The
Company expects the remaining office closures, if any, to be insignificant.
The Company recorded approximately $21.3 million of liabilities related to
the Integration Plan, of which $12.4 million was recorded as part of the
Merit purchase price allocation and $8.9 million was recorded in the
statement of operations under "Managed care integration costs" in fiscal
1998. The Company may record adjustments to such liabilities in fiscal 1999
depending upon the Company's ability to sublease closed offices and upon
determination of the final amount of the Company's severance obligations.
The Integration Plan will result in additional incremental costs that must
be expensed as incurred in accordance with Emerging Issues Task Force
Consensus 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)" that are not described above and certain
other charges. Other integration costs include, but are not limited to,
outside consultants, costs to relocate closed office contents and
long-lived asset impairments. Other integration costs are reflected in the
statement of operations under "Managed care integration costs."
During the fiscal year ended September 30, 1998, and the quarter ended
December 31, 1998, the Company incurred approximately $8.1 million and $1.8
million of other integration costs, respectively. These costs included
long-lived asset impairments of approximately $2.4 million in fiscal 1998
and outside consulting costs of approximately $4.1 million and $0.8 million
in fiscal 1998 and the quarter ended December 31, 1998, respectively. The
asset impairments relate primarily to identifiable intangible assets that
no longer have value and have been written off as a result of the
Integration Plan.
(11) Adjustment to unusual items for the fiscal year ended September 30, 1998,
represents the elimination of non-recurring gains of $3.0 million on the
sale of assets formerly used in the Company's psychiatric hospital
provider business, offset primarily by the elimination of Merit's
transaction costs related to the Merit acquisition of $1.3 million.
Adjustment to unusual items for the three months ended December 31, 1998,
represents the elimination of non-recurring losses on the sale of assets
formerly used in the Company's psychiatric hospital provider business.
(12) Adjustments to provision for income taxes represent the tax expense
related to the pro forma adjustments at the Company's historical average
statutory income tax rate of 40% and the imputed income tax expense on the
operating results of Allied, which was an S-corporation for income tax
purposes and historically did not provide for income taxes prior to its
acquisition by the Company.
(13) Adjustments to minority interest and average number of common shares
outstanding (basic and diluted) represent the effect of the Green Spring
minority stockholder conversion.
14
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) Adjustments to interest, net, represent reductions of interest expense
related to the use of proceeds from the Europe Sale to reduce average pro
forma long-term debt outstanding as follows (in thousands):
FISCAL YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1998
------------------------ ------------------------
PRO FORMA PRO FORMA
AVERAGE INTEREST AVERAGE INTEREST
AMOUNT RATE REDUCTION RATE REDUCTION
--------- ----------- ----------- ----------- -----------
Term Loan Facility (i)............................ $ 38,213 8.14% $ 3,111 7.85% $ 750
Revolving Facility (ii)........................... 16,287 7.89% 1,285 7.62% 310
--------- ----------- -----------
$ 54,500 $ 4,396 $ 1,060
--------- ----------- -----------
--------- ----------- -----------
- ------------------------
(i) Amount represents the net amount of proceeds from the Europe Sale used
to reduce the Company's indebtedness under the Term Loan Facility as
required by the Credit Agreement. The pro forma presentation presumes
that the payment is applied ratably across each tranche; however, the
holders of tranches B and C have the option of refusing prepayment. If
the tranche B and C lenders exercise this right, the entire payment
would be applied to tranche A. There would be no material impact to the
pro forma presentation.
(ii) Amount represents the net amount of proceeds from the Europe Sale
remaining after the reduction of the Company's indebtedness under the
Term Loan Facility. The pro forma presentation presumes this amount
would have been used to reduce average amounts outstanding under the
Revolving Facility.
(15) Adjustments to provision for income taxes represent the tax expense
related to the pro forma adjustment at the Company's historical average
statutory income tax rate of 40%
15
EXHIBITS
2(a) Share Purchase Agreement, dated April 2, 1999, by and among the Company, Charter
Medical International, S.A., Inc. (a wholly owned subsidiary of the Company),
Investment AB Bure, and CMEL Holding Limited (a wholly owned subsidiary of
Investment AB Bure).
2(b) Stock Purchase Agreement, dated April 2, 1999, among the Company, Charter Medical
International, S.A., Inc. (a wholly owned subsidiary of the Company), Investment AB
Bure, and Grogrunden 515 AB (a wholly owned subsidiary of Investment AB Bure).
2(c) First Amendment to Share Purchase Agreement, dated April 8, 1999, by and among the
Company, Charter Medical International, S.A., Inc. (a wholly owned subsidiary of
the Company), Investment AB Bure, and CMEL Holding Limited (a wholly owned
subsidiary of Investment AB Bure).
2(d) First Amendment to Stock Purchase Agreement, dated April 8, 1999, among the
Company, Charter Medical International, S.A., Inc. (a wholly owned subsidiary of
the Company), Investment AB Bure, and CMEL Holding AB (a wholly owned subsidiary of
Investment AB Bure).
99 Press release dated April 6, 1999.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 12, 1999 MAGELLAN HEALTH SERVICES, INC.
By: /s/ JEFFREY T. HUDKINS
-----------------------------------------
Jeffrey T. Hudkins
Vice President and Controller
(Principal Accounting Officer)