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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: SEPTEMBER 24, 1999
DATE OF EARLIEST EVENT REPORTED: SEPTEMBER 10, 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 incorporation) Identification No.)
6950 COLUMBIA GATEWAY DRIVE, SUITE 400
COLUMBIA, MARYLAND 21046
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(Address of principal executive offices) (Zip Code)
(410) 953-1000
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(Registrant's telephone number, including area code)
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NOT APPLICABLE
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(Former name or former address, 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, as amended, for the fiscal year ended
September 30, 1998 and the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999. 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 and the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
ITEM 2. DISPOSITION OF ASSETS
On September 10, 1999, the Company consummated the transfer of assets and
other interests pursuant to a Letter Agreement dated August 10, 1999 with
Crescent Real Estate Equities ("Crescent"), Crescent Operating, Inc. ("COI") and
Charter Behavioral Health Systems, LLC ("CBHS") that effects the Company's exit
from its healthcare provider and healthcare franchising businesses (the "CBHS
Transactions". The terms of the CBHS Transactions are summarized as follows:
HEALTHCARE PROVIDER INTERESTS
- The Company redeemed 80% of its CBHS common interest and all of its CBHS
preferred interest, leaving the Company with a 10% non-voting common
interest in CBHS.
- The Company has agreed to transfer to CBHS its interests in five of its
six hospital-based joint ventures ("Provider JVs") and related real estate
as soon as practicable, including net proceeds of approximately $9 million
from the sale of Magellan's 75% ownership interest in Naperville
Psychiatric Ventures on September 1, 1999.
- The Company transferred to CBHS the right to receive approximately $7.1
million from Crescent for the sale of two psychiatric hospitals that were
acquired by the Company (and leased to CBHS) in connection with CBHS'
acquisition of certain businesses from Ramsey Healthcare, Inc. in fiscal
1998.
- The Company forgave receivables due from CBHS of approximately $3.3
million for payments received by CBHS for patient services prior to the
formation of CBHS on June 17, 1997. The receivables related primarily to
patient stays that "straddled" the formation date of CBHS.
- The Company will pay $2.0 million to CBHS in 12 equal monthly installments
beginning on the first anniversary of the closing date.
- CBHS will indemnify the Company for 20% of up to the first $50 million
(i.e., $10 million) for expenses, liabilities and settlements related to
government investigations for events that occurred prior to June 17, 1997
(the "CBHS Indemnification"). CBHS will be required to pay the Company a
maximum of $500,000 per year under the CBHS Indemnification.
- Crescent, COI, CBHS and Magellan have provided each other with mutual
releases of claims among all of the parties with respect to the original
transactions that effected the formation of CBHS and the operation of CBHS
since June 17, 1997 with certain specified exceptions.
1
- CBHS will have the right to require the Company to transfer certain other
real estate and interests related to the healthcare provider business to
CBHS within 30 days of closing.
HEALTHCARE FRANCHISING INTERESTS
- The Company transferred its healthcare franchising interests to CBHS,
which includes Charter Advantage, LLC, the Charter call center operation,
the Charter name and related intellectual property. The Company has been
released from performing any franchise services or incurring future
franchising expenses.
- The Company forgave prepaid Charter call center management fees of
approximately $2.7 million.
- The Company forgave unpaid franchise fees of approximately $115 million.
The CBHS Transactions, together with the formal plan of disposal authorized
by the Company's Board of Directors on September 2, 1999, represents the
disposal of the Company's healthcare provider and healthcare franchising
business segments under Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"). APB 30 requires that the results of continuing
operations be reported separately from those of discontinued operations for all
periods presented and that any gain or loss from disposal of a segment of a
business be reported in conjunction with the related results of discontinued
operations. Accordingly, the Company will be required to restate its results of
operations for all prior periods. The Company expects to record an after-tax
loss on disposal (primarily non-cash) of its healthcare provider and healthcare
franchising business segments of approximately $42.0 to $48.0 million, in the
fourth quarter of fiscal 1999.
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 June 30, 1999;
2) Unaudited Pro Forma Consolidated Statements of Operations for the fiscal
years ended September 30, 1996, 1997 and 1998; and
3) Unaudited Pro Forma Consolidated Statements of Operations for the nine
months ended June 30, 1998 and 1999.
2
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 1996, 1997 and 1998 amounts
to conform to fiscal 1999 presentation.
The Unaudited Pro Forma Consolidated Balance Sheet at June 30, 1999, gives
effect to the CBHS Transactions as if they occurred on June 30, 1999.
The Unaudited Pro Forma Consolidated Statements of Operations for the fiscal
year ended September 30, 1998, and for the nine months ended June 30, 1998 and
1999, 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);
- The Europe sale (as described below); and
- the CBHS Transactions
The Unaudited Pro Forma Consolidated Statements of Operations for the fiscal
years ended September 30, 1996 and 1997 presents the impact of separately
reporting continuing operations and discontinued operations as a result of the
CBHS Transactions.
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 nine months ended June 30, 1998 and 1999, are 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 has achieved 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 nine
months ended June 30, 1998 and 1999, also exclude managed care integration costs
of $17.0 million, $12.3 million and $4.4 million, respectively, that were
directly attributable to the HAI, Allied and Merit acquisitions. The Unaudited
Pro Forma Consolidated Statement of Operations for the fiscal year ended
September 30, 1997 excludes the non-recurring loss on Crescent Transactions. The
Unaudited Pro Forma Consolidated Statement of Operations for the fiscal year
ended September 30, 1998, and for the nine months ended June 30, 1998 excludes
the extraordinary loss on early extinguishments of debt that was a direct result
of the Merit acquisition. The Unaudited Pro Forma Consolidated Statement of
Operations for the nine months ended June 30, 1999 excludes 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, as amended, for the fiscal year ended
September 30, 1998, filed on March 30, 1999, and in the Company's quarterly
report on Form 10-Q for the quarterly period ended June 30, 1999, filed on
August 16, 1999, which are incorporated herein by reference; the historical
3
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; 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.
The following is a description of each of the transactions (other than the
CBHS Transactions which are 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 with respect
to the first contract year after closing. The amount was accounted for as
additional 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 additional 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 increased.
4
Allied provides specialty risk-based products and administrative services to
a variety of insurance companies and other customers. Allied's services cover
approximately three million aggregate lives through 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
with an aggregate value of $63.5 million 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 Outstanding Notes"); (v) the Company entered into a new senior
secured bank credit agreement (the "Credit Agreement") 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").
5
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 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 Company has initiated legal proceedings against
certain former owners of CMG with respect to representations made by such former
owners in conjunction with Merit's acquisition of CMG. Whether any contingent
payments will be made to the former shareholders of CMG and the amount and
timing of contingent payments, if any, are subject to the outcome of these
proceedings.
EUROPE SALE. On April 9, 1999, the Company sold its European psychiatric
provider operations to Investment AB Bure of Sweden for approximately $57.0
million (before transaction costs of approximately $2.5 million). The sale
resulted in a non-recurring gain of approximately $23.9 million before provision
for income taxes.
The Company used approximately $38.2 million of the net sale proceeds to
make mandatory unscheduled principal payments on indebtedness outstanding under
the Term Loan Facility. The remaining proceeds were used to reduce borrowings
outstanding under the Revolving Facility.
DISCONTINUED OPERATIONS. The historical financial information for the
impact of the CBHS Transactions is presented under the column entitled
"Discontinued Operations" in the Unaudited Pro Forma Consolidated Financial
Statements. The Unaudited Pro Forma Statements of Operations for the fiscal year
ended September 30, 1996, 1997 and 1998 and the nine months ended June 30, 1998
and 1999 effects for the restatement necessary to separately report discontinued
operations as required by APB 30. The Unaudited Pro Forma Balance Sheet at June
30, 1999 assigns no value to the Company's remaining 10% common ownership
interest in CBHS and assumes that the Provider JVs and certain other real estate
and interests were transferred to CBHS, effective June 30, 1999.
6
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
MAGELLAN DISCONTINUED PRO FORMA
AS REPORTED OPERATIONS ADJUSTMENTS
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ASSETS
Cash and cash equivalents................................ $ 40,307 $ (2,917) $ (3,000)(1)
(6,778)(2)
(3,344)(3)
Accounts receivable, net................................. 156,349 (6,188) --
Restricted cash and investments.......................... 111,882 -- --
Other current assets..................................... 24,634 (3,555) --
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Total current assets................................. 333,172 (12,660) (13,122)
Assets restricted for settlement of unpaid claims and
other liabilities...................................... 28,751 -- --
Property and equipment, net.............................. 137,314 (21,223) (2,150)(3)
Deferred income taxes.................................... 85,767 -- 29,536(6)
Investments in unconsolidated subsidiaries............... 38,174 (17,644) (1,016)(3)
Other long-term assets................................... 21,172 (9,336) --
Goodwill, net............................................ 1,066,787 (4,246) --
Other intangible assets, net............................. 152,336 -- --
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Total assets......................................... $1,863,473 $(65,109) $ 13,248
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................................... $ 22,182 $ (1,892) $ --
Accrued liabilities...................................... 213,591 (2,065) (6,778)(2)
(110)(3)
8,000(4)
Medical claims payable................................... 218,915 -- --
Income taxes payable..................................... 200 -- --
Current maturities of long-term debt and capital lease
obligations............................................ 31,260 -- --
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Total current liabilities............................ 486,148 (3,957) 1,112
Long-term debt and capital lease obligations............. 1,102,184 -- (6,400)(3)
Reserve for unpaid claims................................ 21,366 -- --
Deferred credits and other long-term liabilities......... 31,435 -- 2,000(5)
Minority interest........................................ 1,955 (312) --
Commitments and contingencies
Stockholders' equity:
Common stock........................................... 8,516 -- --
Additional paid-in capital............................. 350,774 (60,840) 60,840(6)
Accumulated deficit.................................... (119,601) -- (3,000)(1)
(2,000)(5)
(8,000)(4)
(31,304)(6)
Warrants outstanding................................... 25,050 -- --
Common stock in treasury............................... (44,309) -- --
Cumulative foreign currency adjustments................ (45) -- --
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220,385 (60,840) 16,536
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Total liabilities and stockholders' equity........... $1,863,473 $(65,109) $ 13,248
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PRO FORMA
CONSOLIDATED
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ASSETS
Cash and cash equivalents................................ $ 24,268
Accounts receivable, net................................. 150,161
Restricted cash and investments.......................... 111,882
Other current assets..................................... 21,079
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Total current assets................................. 307,390
Assets restricted for settlement of unpaid claims and
other liabilities...................................... 28,751
Property and equipment, net.............................. 113,941
Deferred income taxes.................................... 115,303
Investments in unconsolidated subsidiaries............... 19,514
Other long-term assets................................... 11,836
Goodwill, net............................................ 1,062,541
Other intangible assets, net............................. 152,336
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Total assets......................................... $1,811,612
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................................... $ 20,290
Accrued liabilities...................................... 212,638
Medical claims payable................................... 218,915
Income taxes payable..................................... 200
Current maturities of long-term debt and capital lease
obligations............................................ 31,260
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Total current liabilities............................ 483,303
Long-term debt and capital lease obligations............. 1,095,784
Reserve for unpaid claims................................ 21,366
Deferred credits and other long-term liabilities......... 33,435
Minority interest........................................ 1,643
Commitments and contingencies
Stockholders' equity:
Common stock........................................... 8,516
Additional paid-in capital............................. 350,774
Accumulated deficit.................................... (163,905)
Warrants outstanding................................... 25,050
Common stock in treasury............................... (44,309)
Cumulative foreign currency adjustments................ (45)
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176,081
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Total liabilities and stockholders' equity........... $1,811,612
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See Notes to Unaudited Pro Forma Consolidated Financial Statements
7
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
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MAGELLAN DISCONTINUED PRO FORMA
AS REPORTED OPERATIONS CONSOLIDATED
----------- ------------ ------------
Net revenue........................................................... $1,347,284 $(1,044,711) $ 302,573
----------- ------------ ------------
Salaries, cost of care and other operating expenses................... 1,145,915 (846,060) 299,855
Equity in loss of unconsolidated subsidiaries......................... 2,005 -- 2,005
Depreciation and amortization......................................... 48,924 (34,634) 14,290
Interest, net......................................................... 48,017 567 48,584
Stock option expense.................................................. 914 -- 914
Special charges....................................................... 37,271 (36,050) 1,221
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1,283,046 (916,177) 366,869
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Income (loss) before income taxes
and minority interest............................................... 64,238 (128,534) (64,296)
Provision for (benefit from) income taxes............................. 25,695 (51,414) (25,719)
----------- ------------ ------------
Income (loss) before minority interest................................ 38,543 (77,120) (38,577)
Minority interest..................................................... 6,160 (1,629) 4,531
----------- ------------ ------------
Net income (loss)..................................................... $ 32,383 $ (75,491) $ (43,108)
----------- ------------ ------------
----------- ------------ ------------
Average number of common shares outstanding--basic.................... 31,014 31,014
----------- ------------
----------- ------------
Average number of common shares outstanding--diluted.................. 31,596 (582) 15) 31,014
----------- ------------ ------------
----------- ------------ ------------
Net income (loss) per share--basic.................................... $ 1.04 $ (1.39)
----------- ------------
----------- ------------
Net income (loss) per share--diluted.................................. $ 1.02 $ (1.39)
----------- ------------
----------- ------------
1997
---------------------------------------
MAGELLAN DISCONTINUED PRO FORMA
AS REPORTED OPERATIONS CONSOLIDATED
----------- ------------ ------------
Net revenue........................................................... $1,216,263 $ (752,391) $ 463,872
----------- ------------ ------------
Salaries, cost of care and other operating expenses................... 1,024,724 (586,252) 438,472
Equity in loss of unconsolidated subsidiaries......................... 13,689 (8,122) 5,567
Depreciation and amortization......................................... 44,861 (25,178) 19,683
Interest, net......................................................... 45,377 1,061 46,438
Stock option expense.................................................. 4,292 -- 4,292
Loss on Crescent Transactions......................................... 59,868 (59,868) --
Special charges....................................................... 357 (357) --
----------- ------------ ------------
1,193,168 (678,716) 514,452
----------- ------------ ------------
Income (loss) before income taxes
and minority interest............................................... 23,095 (73,675) (50,580)
Provision for (benefit from) income taxes............................. 9,238 (29,471) (20,233)
----------- ------------ ------------
Income (loss) before minority interest................................ 13,857 (44,204) (30,347)
Minority interest..................................................... 9,102 (2,246) 6,856
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Net income (loss)..................................................... $ 4,755 $ (41,958) $ (37,203)
----------- ------------ ------------
----------- ------------ ------------
Average number of common shares outstanding--basic.................... 28,781 28,781
----------- ------------
----------- ------------
Average number of common shares outstanding--diluted.................. 29,474 (693) 15) 28,781
----------- ------------ ------------
----------- ------------ ------------
Net income (loss) per share--basic.................................... $ 0.17 $ (1.29)
----------- ------------
----------- ------------
Net income (loss) per share--diluted.................................. $ 0.16 $ (1.29)
----------- ------------
----------- ------------
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 EUROPE PRO FORMA
AS REPORTED HAI ALLIED MERIT SALE ADJUSTMENTS
----------- --------- --------- --------- --------- -----------
Net revenue........................................... $1,499,659 $ 19,528 $ 21,299 $ 260,308 $ (29,922) $ (2,143)(7)
----------- --------- --------- --------- --------- -----------
Salaries, cost of care and other operating expenses... 1,299,458 15,031 21,422 241,084 (21,577) (3,285)(8)
Equity in (earnings) loss of unconsolidated
subsidiaries........................................ 19,083 -- -- (2,322) -- --
Depreciation and amortization......................... 54,885 34 100 16,159 (1,332) (2,347)(9)
Interest, net......................................... 75,375 (256) (92) 8,870 -- 11,732(10)
Stock option expense.................................. (5,623) -- -- -- -- --
Managed care integration costs........................ 16,962 -- -- -- -- (16,962)(11)
Special charges....................................... 458 -- -- 1,318 -- 1,682(12)
----------- --------- --------- --------- --------- -----------
1,460,598 14,809 21,430 265,109 (22,909) (9,180)
----------- --------- --------- --------- --------- -----------
Income (loss) before income taxes and minority
interest............................................ 39,061 4,719 (131) (4,801) (7,013) 7,037
Provision for (benefit from) income taxes............. 20,033 1,879 -- (786) (2,805) 4,490(13)
----------- --------- --------- --------- --------- -----------
Income (loss) before minority interest................ 19,028 2,840 (131) (4,015) (4,208) 2,547
Minority interest..................................... 5,296 -- -- -- -- (2,606)(14)
----------- --------- --------- --------- --------- -----------
Net income (loss)..................................... $ 13,732 $ 2,840 $ (131) $ (4,015) $ (4,208) $ 5,153
----------- --------- --------- --------- --------- -----------
----------- --------- --------- --------- --------- -----------
Average number of common shares outstanding--basic.... 30,784 815(14)
----------- -----------
----------- -----------
Average number of common shares
outstanding--diluted................................ 31,198 815(14)
----------- -----------
----------- -----------
Net income (loss) per share--basic.................... $ 0.45
-----------
-----------
Net income (loss) per share--diluted.................. $ 0.44
-----------
-----------
PRO FORMA DISCONTINUED PRO FORMA
COMBINED OPERATIONS CONSOLIDATED
----------- ------------ ------------
Net revenue........................................... $1,768,729 $ (158,959) $1,609,770
----------- ------------ ------------
Salaries, cost of care and other operating expenses... 1,552,133 (94,255) 1,457,878
Equity in (earnings) loss of unconsolidated
subsidiaries........................................ 16,761 (31,878) (15,117)
Depreciation and amortization......................... 67,499 (4,289) 63,210
Interest, net......................................... 95,629 1,130 96,759
Stock option expense.................................. (5,623) -- (5,623)
Managed care integration costs........................ -- -- --
Special charges....................................... 3,458 (3,458) --
----------- ------------ ------------
1,729,857 (132,750) 1,597,107
----------- ------------ ------------
Income (loss) before income taxes and minority
interest............................................ 38,872 (26,209) 12,663
Provision for (benefit from) income taxes............. 22,811 (10,484) 12,327
----------- ------------ ------------
Income (loss) before minority interest................ 16,061 (15,725) 336
Minority interest..................................... 2,690 (1,202) 1,488
----------- ------------ ------------
Net income (loss)..................................... $ 13,371 $ (14,523) $ (1,152)
----------- ------------ ------------
----------- ------------ ------------
Average number of common shares outstanding--basic.... 31,599 31,599
----------- ------------
----------- ------------
Average number of common shares
outstanding--diluted................................ 32,013 (414) 15) 31,599
----------- ------------ ------------
----------- ------------ ------------
Net income (loss) per share--basic.................... $ 0.42 $ (0.04)
----------- ------------
----------- ------------
Net income (loss) per share--diluted.................. $ 0.42 $ (0.04)
----------- ------------
----------- ------------
See Notes to Unaudited Pro Forma Consolidated Financial Statements
9
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MAGELLAN EUROPE PRO FORMA
AS REPORTED HAI ALLIED MERIT SALE ADJUSTMENTS
----------- --------- --------- --------- --------- -----------
Net revenue........................................... $1,047,253 $ 19,528 $ 21,299 $ 260,308 $ (22,329) $ (2,143)(7)
----------- --------- --------- --------- --------- -----------
Salaries, cost of care and other operating expenses... 903,795 15,031 21,422 241,084 (16,126) (3,285)(8)
Equity in (earnings) loss of unconsolidated
subsidiaries........................................ 16,905 -- -- (2,322) -- --
Depreciation and amortization......................... 37,649 34 100 16,159 (982) (2,347)(9)
Interest, net......................................... 49,336 (256) (92) 8,870 -- 12,831(10)
Stock option expense.................................. (3,527) -- -- -- -- --
Managed care integration costs........................ 12,314 -- -- -- -- (12,314)(11)
Special charges....................................... (3,000) -- -- 1,318 -- 1,682(12)
----------- --------- --------- --------- --------- -----------
1,013,472 14,809 21,430 265,109 (17,108) (3,433)
----------- --------- --------- --------- --------- -----------
-----------
Income (loss) before income taxes and minority
interest............................................ 33,781 4,719 (131) (4,801) (5,221) 1,290
Provision for (benefit from) income taxes............. 15,972 1,879 -- (786) (2,088) 2,192(13)
----------- --------- --------- --------- --------- -----------
Income (loss) before minority interest................ 17,809 2,840 (131) (4,015) (3,133) (902)
Minority interest..................................... 5,063 -- -- -- -- (2,606)(14)
----------- --------- --------- --------- --------- -----------
Net income (loss)..................................... $ 12,746 $ 2,840 $ (131) $ (4,015) $ (3,133) $ 1,704
----------- --------- --------- --------- --------- -----------
----------- --------- --------- --------- --------- -----------
Average number of common shares outstanding--basic.... 30,505 1,090(14)
----------- -----------
----------- -----------
Average number of common shares
outstanding--diluted................................ 31,099 1,090(14)
----------- -----------
----------- -----------
Net income (loss) per share--basic.................... $ 0.42
-----------
-----------
Net income (loss) per share--diluted.................. $ 0.41
-----------
-----------
PRO FORMA DISCONTINUED PRO FORMA
COMBINED OPERATIONS CONSOLIDATED
----------- ------------ ------------
Net revenue........................................... $1,323,916 $ (128,173) $1,195,743
----------- ------------ ------------
Salaries, cost of care and other operating expenses... 1,161,921 (71,135) 1,090,786
Equity in (earnings) loss of unconsolidated
subsidiaries........................................ 14,583 (24,221) (9,638)
Depreciation and amortization......................... 50,613 (3,284) 47,329
Interest, net......................................... 70,689 841 71,530
Stock option expense.................................. (3,527) -- (3,527)
Managed care integration costs........................ -- -- --
Special charges....................................... -- -- --
----------- ------------ ------------
1,294,279 (97,799) 1,196,480
----------- ------------ ------------
Income (loss) before income taxes and minority
interest............................................ 29,637 (30,374) (737)
Provision for (benefit from) income taxes............. 17,169 (12,150) 5,019
----------- ------------ ------------
Income (loss) before minority interest................ 12,468 (18,224) (5,756)
Minority interest..................................... 2,457 (976) 1,481
----------- ------------ ------------
Net income (loss)..................................... $ 10,011 $ (17,248) $ (7,237)
----------- ------------ ------------
----------- ------------ ------------
Average number of common shares outstanding--basic.... 31,595 31,595
----------- ------------
----------- ------------
Average number of common shares
outstanding--diluted................................ 32,189 (594) 15) 31,595
----------- ------------ ------------
----------- ------------ ------------
Net income (loss) per share--basic.................... $ 0.32 $ (0.23)
----------- ------------
----------- ------------
Net income (loss) per share--diluted.................. $ 0.31 $ (0.23)
----------- ------------
----------- ------------
See Notes to Unaudited Pro Forma Consolidated Financial Statements
10
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MAGELLAN EUROPE PRO FORMA PRO FORMA
AS REPORTED SALE ADJUSTMENTS COMBINED
----------- --------- ----------- -----------
Net revenue......................................................... $1,447,169 $ (16,043) $ -- $1,431,126
----------- --------- ----------- -----------
Salaries, cost of care and other operating expenses................. 1,298,056 (11,887) -- 1,286,169
Equity in earnings of unconsolidated subsidiaries................... (21,525) -- -- (21,525)
Depreciation and amortization....................................... 57,603 (730) -- 56,873
Interest, net....................................................... 70,958 -- (2,092) 10) 68,866
Stock option expense................................................ 18 -- -- 18
Managed care integration costs...................................... 4,391 -- (4,391) 11) --
Gain on Europe Sale................................................. (23,912) -- 23,912 (12 --
Special charges..................................................... 2,274 -- (1,374) 12) 900
----------- --------- ----------- -----------
1,387,863 (12,617) 16,055 1,391,301
----------- --------- ----------- -----------
Income (loss) before income taxes
and minority interest............................................. 59,306 (3,426) (16,055) 39,825
Provision for (benefit from) income taxes........................... 29,113 (1,370) (6,422) 13) 21,321
----------- --------- ----------- -----------
Income (loss) before minority interest.............................. 30,193 (2,056) (9,633) 18,504
Minority interest................................................... 556 -- -- 556
----------- --------- ----------- -----------
Net income (loss)................................................... $ 29,637 $ (2,056) $ (9,633) $ 17,948
----------- --------- ----------- -----------
----------- --------- ----------- -----------
Average number of common shares outstanding--basic.................. 31,710 31,710
----------- -----------
----------- -----------
Average number of common shares outstanding--diluted................ 31,822 31,822
----------- -----------
----------- -----------
Net income per share--basic......................................... $ 0.93 $ 0.57
----------- -----------
----------- -----------
Net income per share--diluted....................................... $ 0.93 $ 0.56
----------- -----------
----------- -----------
DISCONTINUED PRO FORMA
OPERATIONS CONSOLIDATED
------------- ------------
Net revenue......................................................... $ (30,801) $1,400,325
------------- ------------
Salaries, cost of care and other operating expenses................. (38,069) 1,248,100
Equity in earnings of unconsolidated subsidiaries................... 3,284 (18,241)
Depreciation and amortization....................................... (1,430) 55,443
Interest, net....................................................... 55 68,921
Stock option expense................................................ -- 18
Managed care integration costs...................................... -- --
Gain on Europe Sale................................................. -- --
Special charges..................................................... -- 900
------------- ------------
(36,160) 1,355,141
------------- ------------
Income (loss) before income taxes
and minority interest............................................. 5,359 45,184
Provision for (benefit from) income taxes........................... 2,144 23,465
------------- ------------
Income (loss) before minority interest.............................. 3,215 21,719
Minority interest................................................... 9 565
------------- ------------
Net income (loss)................................................... $ 3,206 $ 21,154
------------- ------------
------------- ------------
Average number of common shares outstanding--basic.................. 31,710
------------
------------
Average number of common shares outstanding--diluted................ 31,822
------------
------------
Net income per share--basic......................................... $ 0.67
------------
------------
Net income per share--diluted....................................... $ 0.66
------------
------------
See Notes to Unaudited Pro Forma Consolidated Financial Statements
11
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) Adjustments to cash and cash equivalents and accumulated deficit represent
estimated transaction costs (primarily investment banking fees, legal fees
and accounting fees) directly related to the CBHS Transactions.
(2) Adjustments to cash and cash equivalents and accrued liabilities represents
the settlement of amounts due to CBHS pursuant to the Provider JV services
agreements and other working capital matters.
(3) Adjustments to cash and cash equivalents, property and equipment, investment
in unconsolidated subsidiaries, accrued liabilities and long-term debt
represent the impact of the probable disposal of the Heights joint venture
and related real estate, which was excluded from the CBHS Transactions.
(4) Adjustment to accrued liabilities and accumulated deficit represents the
estimated losses that will be incurred subsequent to the APB 30 measurement
date. The estimated losses relate primarily to (i) legal costs that will be
incurred through the disposal date of the Provider JVs and (ii) incremental
legal costs that will be incurred as a direct result of the CBHS
Transactions.
(5) Adjustments to deferred credits and other long-term liabilities and
accumulated deficit represents the amount payable to CBHS pursuant to the
terms of the CBHS Transactions.
(6) Adjustments to additional paid-in capital, deferred income taxes and
accumulated deficit represent elimination of the additional paid-in capital
of the discontinued operations and the impact of the net loss from the CBHS
Transactions.
The pro forma loss from the CBHS Transactions is computed as follows:
Net assets transferred to CBHS................................................. $ 60,840
Payment to CBHS................................................................ 2,000
Transaction costs.............................................................. 3,000
Discontinued operations reserve................................................ 8,000
---------
Loss before income taxes....................................................... 73,840
Income tax benefit at 40%...................................................... 29,536
---------
Net loss....................................................................... $ 44,304
---------
---------
(7) Adjustment to net revenue for the fiscal year ended September 30, 1998, and
the nine months June 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.
12
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) Adjustment to salaries, cost of care and other operating expenses for the
fiscal year ended September 30, 1998, and for the nine months ended June 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)
---------
---------
(9) Adjustments to depreciation and amortization for the fiscal year ended
September 30, 1998, and for the nine months ended June 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 less historical
depreciation and amortization.
(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.
13
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(10) Adjustments to interest, net, represent the following (in thousands):
NINE MONTHS NINE MONTHS
FISCAL ENDED ENDED
1998 JUNE 30, 1998 JUNE 30, 1999
---------- ------------- -------------
Elimination of Merit historical interest expense.... $ (10,536) $ (10,536) $ --
Elimination of historical interest expense for the
Magellan Outstanding Notes........................ (15,820) (15,820) --
Elimination of the Company's historical deferred
financing cost amortization....................... (914) (914) --
Term Loan Facility interest expense (i)............. 17,016 17,016 --
Revolving Facility interest expense (i)............. 600 600 --
Foregone interest income--cash utilized to fund the
HAI, Allied and Merit acquisitions at 5.5% per
annum............................................. 3,039 3,039 --
The Notes at 9.0% per annum......................... 21,094 21,094 --
Amortization of deferred financing costs of $35.6
million over a weighted average life of 8.1
years............................................. 1,649 1,649 --
Reduction of interest expense as a result of the
Europe Sale (ii).................................. (4,396) (3,297) (2,092)
---------- ------------- -------------
$ 11,732 $ 12,831 $ (2,092)
---------- ------------- -------------
---------- ------------- -------------
- ------------------------
(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.
14
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ii) Calculated as follows (in thousands):
NINE MONTHS
ENDED
FISCAL YEAR ENDED NINE MONTHS ENDED JUNE 30,
SEPTEMBER 30, 1998 JUNE 30, 1998 1999
------------------------ ------------------------ -----------
PRO FORMA PRO FORMA
AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AMOUNT RATE REDUCTION RATE REDUCTION RATE
--------- ----------- ----------- ----------- ----------- -----------
Term Loan Facility (a).......................... $ 38,213 8.14% $ 3,111 8.14% $ 2,333 7.75%
Revolving Facility (b).......................... 16,287 7.89% 1,285 7.89% 964 7.50%
--------- ----------- -----------
$ 54,500 $ 4,396 $ 3,297
--------- ----------- -----------
--------- ----------- -----------
PRO FORMA
INTEREST
REDUCTION
-----------
Term Loan Facility (a).......................... $ 1,481
Revolving Facility (b).......................... 611
-----------
$ 2,092
-----------
-----------
- ------------------------
(a) 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.
(b) 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.
(11) 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 Integration Plan will result in the elimination of approximately 1,000
positions during fiscal 1998 and fiscal 1999. Approximately 510 employees
had been involuntarily terminated pursuant to the Integration Plan as of
June 30, 1999. The remaining positions have been or will be eliminated
through normal attrition.
The employee groups of the Behavioral Managed Healthcare 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 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
15
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 nine months ended
June 30, 1999, the Company incurred approximately $8.1 million and $3.3
million of other integration costs, respectively.
(12) Adjustments to gain on Europe Sale and to special charges represent the
elimination of non-recurring gains on the Europe Sale and 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.
(13) 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
pre-acquisition 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.
(14) Adjustments to minority interest and average number of common shares
outstanding (basic and diluted) represent the effect of the Green Spring
minority stockholder conversion.
(15) Adjustment to average number of common shares outstanding-diluted
represents the elimination of common stock equivalents which become
anti-dilutive as a result of the pro forma net loss for fiscal 1996, 1997
and 1998 and for the nine months ended June 30, 1998.
16
EXHIBITS
2(a) Letter Agreement dated August 10, 1999 by and among the Company, Charter
Behavioral Health Systems, LLC, Crescent Real Estate Equities Limited Partnership
and Crescent Operating, Inc.
99(a) Press release dated August 16, 1999.
99(b) Press release dated September 14, 1999.
17
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: September 24, 1999 MAGELLAN HEALTH SERVICES, INC.
By: /s/ JEFFREY T. HUDKINS
-----------------------------------------
Jeffrey T. Hudkins
Vice President and Controller
(Principal Accounting Officer)