-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ESpBRqQDmhJDTfoZ7BlTRfxkzTLVo+1Pe9aI+Cr5kMgy4tqXbus536Xx77sS8ip3 p9FHeJH0cyTH/CQLURVIbA== 0000019411-97-000008.txt : 19970222 0000019411-97-000008.hdr.sgml : 19970222 ACCESSION NUMBER: 0000019411-97-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAGELLAN HEALTH SERVICES INC CENTRAL INDEX KEY: 0000019411 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 581076937 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06639 FILM NUMBER: 97529022 BUSINESS ADDRESS: STREET 1: 3414 PEACHTREE RD N E STREET 2: STE 1400 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 9127421161 FORMER COMPANY: FORMER CONFORMED NAME: CHARTER MEDICAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 QUARTERLY REPORT - -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________________ to ____________________ Commission File No. 1-6639 MAGELLAN HEALTH SERVICES, INC. (Exact name of Registrant as specified in its charter) Delaware 58-1076937 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3414 Peachtree Road, NE, Suite 1400 Atlanta, Georgia 30326 (Address of principal executive offices) (Zip Code) (404) 841-9200 (Registrant's telephone number, including area code) See Table of Additional Registrants below. ------------------------------------ Not Applicable (Former name, former address and former fiscal year, if changed since last report) ------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No The number of shares of the Registrant's Common Stock outstanding as of January 31, 1997, was 28,686,091. - --------------------------------------------------------------------------------
ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Behavioral Heath Systems Indiana 35-1990127 3414 Peachtree Rd., N.E. of Indiana, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Beltway Community Hospital, Texas 58-1324281 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Blue Grass Physician Kentucky 66-1294402 3050 Rio Dosa Drive Management Group, Inc. Lexington, KY 40509 (606) 269-2325 C.A.C.O. Services, Inc. Ohio 58-1751511 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 CCM, Inc. Nevada 58-1662418 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 CMCI, Inc. Nevada 88-0224620 1061 East Flamingo Road Suite One Las Vegas, NV 89119 (702) 737-0282 CMFC, Inc. Nevada 88-0215629 1061 East Flamingo Road Suite One Las Vegas, NV 89119 (702) 737-0282 CMSF, Inc. Florida 58-1324269 3550 Colonial Boulevard Fort Myers, FL 33912 (813) 939-0403 CPS Associates, Inc. Virginia 58-1761039 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Alvarado Behavioral California 58-1394959 7050 Parkway Drive Health System, Inc. La Mesa, CA 91942-2352 (619) 465-4411 Charter Asheville North Carolina 58-2097827 60 Caledonia Road Behavioral Health System, Inc. Asheville, NC 28803 (704) 253-3681 i ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ The Charter Arbor Indy Delaware 58-2265776 3414 Peachtree Rd., N.E. Behavioral Health System, LLC Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Augusta Behavioral Georgia 58-1615676 3100 Perimeter Parkway Health System, Inc. P.O. Box 14939 Augusta, GA 30909 (404) 868-6625 Charter Bay Harbor Behavioral Florida 58-1640244 3414 Peachtree Rd., N.E. Health System, Inc. Suite 1400 Atlanta, Georgia 30326 (404) 841-9200 The Charter Beacon Behavioral Delaware 35-1994155 1720 Beacon Street Health System, LLC Fort Wayne, IN 46805 (219) 423-3651 Charter Behavioral Health System New Jersey 58-2097832 19 Prospect Street at Fair Oaks, Inc. Summit, NJ 07901 (908) 277-9102 Charter Behavioral Health System Maryland 52-1866212 522 Thomas Run Road at Hidden Brook, Inc. Bel Air, MD 21014 (410) 879-1919 Charter Behavioral Health System California 33-0606642 3414 Peachtree Rd., N.E. at Los Altos, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System Florida 65-0519663 1324 37th Avenue, East at Manatee Adolescent Treatment Bradenton, FL 34208 Services, Inc. (813) 746-1388 Charter Behavioral Health System Maryland 52-1866221 14901 Broschart Road at Potomac Ridge, Inc. Rockville, MD 20850 (301) 251-4500 Charter Behavioral Health Delaware 58-2213642 3414 Peachtree Rd., N.E. Systems, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System Georgia 58-1513304 240 Mitchell Bridge Road of Athens, Inc. Athens, GA 30606 (404) 546-7277 Charter Behavioral Health System Texas 58-1440665 8402 Cross Park Drive of Austin, Inc. Austin, TX 78754 (512) 837-1800 ii ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Behavioral Health System Texas 76-0430571 3414 Peachtree Rd., N.E. of Baywood, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System Florida 58-1527678 4480 51st Street, West of Bradenton, Inc. Bradenton, FL 34210 (813) 746-1388 Charter Behavioral Health System Georgia 58-1408670 3500 Riverside Drive of Central Georgia, Inc. Macon, GA 31210 (912) 474-6200 Charter Behavorial Health System Virginia 54-1765921 1500 Westbrook Avenue of Central Virginia, Inc. Richmond, VA 23227 (804) 266-9671 Charter Behavioral Health System South Carolina 58-1761157 2777 Speissegger Drive of Charleston, Inc. Charleston, SC 29405-8299 (803) 747-5830 Charter Behavioral Health System Virginia 58-1616917 2101 Arlington Boulevard of Charlottesville, Inc. Charlottesville, VA 22903-1593 (804) 977-1120 Charter Behavioral Health System Illinois 58-1315760 3414 Peachtree Rd., N.E. of Chicago, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System California 58-1473063 3414 Peachtree Rd., N.E. of Chula Vista, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System Missouri 61-1009977 200 Portland Street of Columbia, Inc. Columbia, MO 65201 (314) 876-8000 Charter Behavioral Health System Texas 58-1513305 3126 Rodd Field Road of Corpus Christi, Inc. Corpus Christi, TX 78414 (512) 993-8893 Charter Behavioral Health System Texas 58-1513306 6800 Preston Road of Dallas, Inc. Plano, TX 75024 (214) 964-3939 Charter Behavioral Health System Maryland 52-1866214 3680 Warwick Road, Route 1 of Delmarva, Inc. East New Market, MD 21631 (410) 943-8108 The Charter Behavioral Health SystemDelaware 35-1994080 7200 East Indiana of Evansville, LLC Evansville, IN 47715 (812) 475-7200 iii ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Behavioral Health System Texas 58-1643151 3414 Peachtree Rd., N.E. of Fort Worth, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System Mississippi 58-1616919 3531 Lakeland Drive of Jackson, Inc. Jackson, MS 39208 (601) 939-9030 Charter Behavioral Health System Florida 58-1483015 3414 Peachtree Rd., N.E. of Jacksonville, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 The Charter Behavioral Health SystemDelaware 35-1994087 2700 River City Park Drive of Jefferson, LLC Jeffersonville, IN 47130 (812) 284-3400 Charter Behavioral Health System Kansas 58-1603154 8000 West 127th Street of Kansas City, Inc. Overland Park, KS 66213 (913) 897-4999 Charter Behavioral Health System Louisiana 72-0686492 302 Dulles Drive of Lafayette, Inc. Lafayette, LA 70506 (318) 233-9024 Charter Behavioral Health System Louisiana 62-1152811 4250 Fifth Avenue, South of Lake Charles, Inc. Lake Charles, LA 70605 (318) 474-6133 The Charter Behavioral Health SystemDelaware 35-1994736 3414 Peachtree Rd., N.E. of Michigan City, LLC Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System Mississippi 58-2138622 3414 Peachtree Rd., N.E. of Mississippi, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System Alabama 58-1569921 3414 Peachtree Rd., N.E. of Mobile, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System New Hampshire 02-0470752 29 Northwest Boulevard of Nashua, Inc. Nashua, NH 03063 (603) 886-5000 Charter Behavioral Health System Nevada 58-1321317 7000 West Spring Mountain Rd. of Nevada, Inc. Las Vegas, NV 89117 (702) 876-4357 iv ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Behavioral Health System New Mexico 58-1479480 5901 Zuni Road, SE of New Mexico, Inc. Albuquerque, NM 87108 (505) 265-8800 Charter Behavioral Health System North Carolina 56-1908581 3414 Peachtree Rd., N.E. of North Carolina, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System California 58-1857277 101 Cirby Hills Drive of Northern California, Inc. Roseville, CA 95678 (916) 969-4666 Charter Behavioral Health System Arkansas 58-1449455 4253 Crossover Road of Northwest Arkansas, Inc. Fayetteville, AR 72703 (501) 521-5731 The Charter Behavioral Health SystemDelaware 35-1994154 101 West 61st Avenue of Northwest Indiana, LLC State Road 51 Hobart, IN 46342 (219) 947-4464 Charter Behavioral Health System Kentucky 61-1006115 435 Berger Road of Paducah, Inc. Paducah, KY 42002-7609 (502) 444-0444 Charter Behavioral Health Georgia 66-0523678 Caso Bldg., Suite 1504 of Puerto Rico, Inc. 1225 Ponce de Leon Avenue Santurce, PR 00907 Charter Behavioral Health System California 58-1747020 455 Silicon Valley Boulevard of San Jose, Inc. San Jose, CA 95138 (408) 224-2020 Charter Behavioral Health System Georgia 58-1750583 1150 Cornell Avenue of Savannah, Inc. Savannah, GA 31406 (912) 354-3911 Charter Behavioral Health System Arkansas 71-0752815 3414 Peachtree Rd., N.E. of Texarkana, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System California 95-2685883 2055 Kellogg Drive of the Inland Empire, Inc. Corona, CA 91719 (714) 735-2910 Charter Behavioral Health System Ohio 58-1731068 1725 Timberline Road of Toledo, Inc. Maumee, Ohio 43537 (419) 891-9333 Charter Behavioral Health System Arizona 86-0757462 3414 Peachtree Rd., N.E. of Tucson, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 v ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Behavioral Health System California 33-0606644 3414 Peachtree Rd., N.E. of Visalia, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System Minnesota 41-1775626 109 North Shore Drive of Waverly, Inc. Waverly, MN 55390 (612) 658-4811 Charter Behavioral Health System North Carolina 56-1050502 3637 Old Vineyard Road of Winston-Salem, Inc. Winston-Salem, NC 27104 (919) 768-7710 Charter Behavioral Health System California 33-0606646 3414 Peachtree Rd., N.E. of Yorba Linda, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health Georgia 58-1900736 811 Juniper St., N.E. Systems of Atlanta, Inc. Atlanta, GA 30308 (404) 881-5800 Charter Brawner Behavioral Georgia 58-0979827 3414 Peachtree Rd., N.E. Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter By-The-Sea Georgia 58-1351301 2927 Demere Road Behavioral Health System, Inc. St. Simons Island, GA 31522 (912) 638-1999 Charter Canyon Behavioral Health Utah 58-1557925 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Canyon Springs California 33-0606640 69696 Ramon Road Behavioral Health System, Inc. Cathedral City, CA 92234 (619) 321-2000 Charter Centennial Peaks Colorado 58-1761037 2255 South 88th Street Behavioral Health System, Inc. Louisville, CO 80027 (303) 673-9990 Charter Community Hospital, California 58-1398708 21530 South Pioneer Boulevard Inc. Hawaiian Gardens, CA 90716 (310) 860-0401 Charter Contract Services, Inc. Georgia 58-2100699 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 vi ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Cove Forge Behavioral Pennsylvania 25-1730464 New Beginnings Road Health System, Inc. Williamsburg, PA 16693 (814) 832-2121 Charter Fairmount Behavioral Pennsylvania 58-1616921 561 Fairthorne Avenue Health System, Inc. Philadelphia, PA 19128 (215) 487-4000 Charter Fenwick Hall South Carolina 57-0995766 3414 Peachtree Rd., N.E. Behavioral Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Financial Offices, Inc. Georgia 58-1527680 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Forest Behavioral Louisiana 58-1508454 9320 Linwood Avenue Health System, Inc. Shreveport, LA 71106 (318) 688-3930 Charter Grapevine Behavioral Texas 58-1818492 2300 William D. Tate Ave. Health System, Inc. Grapevine, TX 76051 (817) 481-1900 Charter Greensboro Behavioral North Carolina 58-1335184 700 Walter Reed Drive Health System, Inc. Greensboro, NC 27403 (919) 852-4821 Charter Health Management Texas 58-2025056 6800 Park Ten Blvd. of Texas, Inc. Suite 275-W San Antonio, TX 78213 (210) 699-8585 Charter Hospital of Ohio 58-1598899 3414 Peachtree Rd., N.E. Columbus, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Denver, Colorado 58-1662413 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Ft. Collins, Colorado 58-1768534 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Laredo, Inc. Texas 58-1491620 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 vii ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Hospital of Miami, Inc. Florida 61-1061599 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Mobile, Inc. Alabama 58-1318870 5800 Southland Drive Mobile, AL 36693 (334) 661-3001 Charter Hospital of Santa New Mexico 58-1584861 3414 Peachtree Rd., N.E. Teresa, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of St. Louis, Inc. Missouri 58-1583760 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Torrance, Inc. California 58-1402481 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Indiana BHS Indiana 58-2247985 3414 Peachtree Rd., N.E. Holding, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 The Charter Indianapolis Behavioral Delaware 35-1994923 5602 Caito Drive Health System, LLC Indianapolis, IN 46226 (317) 545-2111 The Charter Lafayette Behavioral Delaware 35-1994151 3700 Rome Drive Health System, LLC Lafayette, IN 47905 (317) 448-6999 Charter Lakehurst New Jersey 22-3286879 3414 Peachtree Rd., N.E. Behavioral Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Lakeside Behavioral Tennessee 62-0892645 2911 Brunswick Road Health System, Inc. Memphis, TN 38134 (901) 377-4700 Charter Laurel Heights Georgia 58-1558212 3414 Peachtree Rd., N.E. Behavioral Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Linden Oaks Illinois 36-3943776 852 West Street Behavioral Health System, Inc. Naperville, IL 60540 (708) 305-5500 viii ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Little Rock Behavioral Arkansas 58-1747019 1601 Murphy Drive Health System, Inc. Maumelle, AR 72113 (501) 851-8700 Charter Louisiana Behavioral Louisiana 72-1319231 1514 Doctor's Drive Health System, Inc. Suite 102 Bossier City, LA 71111 (318) 747-4362 Charter Louisville Behavioral Kentucky 58-1517503 1405 Browns Lane Health System, Inc. Louisville, KY 40207 (502) 896-0495 Charter Meadows Behavioral Maryland 52-1866216 3414 Peachtree Rd., N.E. Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical - California, Inc. Georgia 58-1357345 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical - Clayton Georgia 58-1579404 3414 Peachtree Rd., N.E. County, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical - Cleveland, Inc. Texas 58-1448733 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical - Long California 58-1366604 3414 Peachtree Rd., N.E. Beach, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical - New York, Inc. New York 58-1761153 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical (Cayman Cayman Islands, BWI 58-1841857 Caledonian Bank & Trust Islands) Ltd. Swiss Bank Building Caledonian House Georgetown-Grand Cayman Cayman Islands (809) 949-0050 Charter Medical Executive Georgia 58-1538092 3414 Peachtree Rd., N.E. Corporation Suite 1400 Atlanta, GA 30326 (404) 841-9200 ix ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Medical Information Georgia 58-1530236 3414 Peachtree Rd., N.E. Services, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical International, Cayman Islands, BWI N/A Caledonian Bank & Trust Inc. Swiss Bank Building Caledonian House Georgetown-Grand Cayman Cayman Islands (809) 949-0050 Charter Medical International, Nevada 58-1605110 3414 Peachtree Rd., N.E. S.A., Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Managed Care Sales and Georgia 58-1195352 3414 Peachtree Rd., N.E. Services, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical of East Arizona 58-1643158 2190 N. Grace Boulevard Valley, Inc. Chandler, AZ 85224 (602) 899-8989 Charter Medical of England United Kingdom N/A 111 Kings Road Limited Box 323 London SW3 4PB London, England 44-71-351-1272 Charter Medical of Florida, Inc. Florida 58-2100703 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical of North Arizona 58-1643154 6015 W. Peoria Avenue Phoenix, Inc. Glendale, AZ 85302 (602) 878-7878 Charter Medical of Puerto Commonwealth of 58-1208667 Caso Building, Suite 1504 Rico, Inc. Puerto Rico 1225 Ponce De Leon Avenue Santurce, P.R. 00907 (809) 723-8666 Charter Milwaukee Behavioral Wisconsin 58-1790135 11101 West Lincoln Avenue Health System, Inc. West Allis, WI 53227 (414) 327-3000 Charter Mission Viejo Behavioral California 58-1761156 23228 Madero Health System, Inc. Mission Viejo, CA 92691 (714) 830-4800 x ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter MOB of Virginia 58-1761158 1023 Millmont Avenue Charlottesville, Inc. Charlottesville, VA 22901 (804) 977-1120 Charter North Behavioral Alaska 58-1474550 2530 DeBarr Road Health System, Inc. Anchorage, AK 99508-2996 (907) 258-7575 Charter Northbrooke Wisconsin 39-1784461 46000 W. Schroeder Drive Behavioral Health System, Inc. Brown Deer, WI 53223 (414) 355-2273 Charter North Counseling Alaska 58-2067832 2530 DeBarr Road Center, Inc. Anchorage, AK 99508-2996 (907) 258-7575 Charter Northridge Behavioral North Carolina 58-1463919 400 Newton Road Health System, Inc. Raleigh, NC 27615 (919) 847-0008 Charter Oak Behavioral California 58-1334120 1161 East Covina Boulevard Health System, Inc. Covina, CA 91724 (818) 966-1632 Charter of Alabama, Inc. Alabama 63-0649546 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, Georgia 30326 (404) 841-9200 Charter Palms Behavioral Texas 58-1416537 1421 E. Jackson Avenue Health System, Inc. McAllen, TX 78502 (512) 631-5421 Charter Peachford Behavioral Georgia 58-1086165 2151 Peachford Road Health System, Inc. Atlanta, GA 30338 (404) 455-3200 Charter Pines Behavioral North Carolina 58-1462214 3621 Randolph Road Health System, Inc. Charlotte, NC 28211 (704) 365-5368 Charter Plains Behavioral Texas 58-1462211 801 N. Quaker Avenue Health System, Inc. Lubbock, TX 79408 (806) 744-5505 Charter-Provo School, Inc. Utah 58-1647690 4501 North University Ave. Provo, UT 84604 (801) 227-2000 Charter Real Behavioral Texas 58-1485897 8550 Huebner Road Health System, Inc. San Antonio, TX 78240 (512) 699-8585 xi ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Ridge Behavioral Kentucky 58-1393063 3050 Rio Dosa Drive Health System, Inc. Lexington, KY 40509 (606) 269-2325 Charter Rivers Behavioral South Carolina 58-1408623 2900 Sunset Boulevard Health System, Inc. West Columbia, SC 29169 (803) 796-9911 Charter Rockford Behavioral Delaware 51-0374617 100 Rockford Drive Health System, Inc. Newark, DE 19713 (302) 996-5480 Charter San Diego Behavioral California 58-1669160 11878 Avenue of Industry Health System, Inc. San Diego, CA 92128 (619) 487-3200 Charter Sioux Falls Behavioral South Dakota 58-1674278 2812 South Louise Avenue Health System, Inc. Sioux Falls, SD 57106 (605) 361-8111 The Charter South Bend Behavioral Delaware 35-1994307 6704 N. Gumwood Drive Health System, LLC Granger, IN 46530 (219) 272-9799 Charter Springs Behavioral Florida 58-1517461 3130 S.W. 27th Avenue Health System, Inc. Ocala, FL 32674 (904) 237-7293 Charter Springwood Virginia 58-2097829 Route 4, Box 50 Behavioral Health System, Inc. Leesburg, VA 22075 (703) 777-0800 Charter Suburban Hospital Texas 75-1161721 3414 Peachtree Rd., N.E. of Mesquite, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 The Charter Terre Haute Behavioral Delaware 35-1994308 1400 Crossing Boulevard Health System, LLC Terre Haute, IN 47802 (812) 299-4196 Charter Thousand Oaks Behavioral California 58-1731069 3414 Peachtree Rd., N.E. Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Westbrook Behavioral Virginia 54-0858777 1500 Westbrook Avenue Health System, Inc. Richmond, VA 23227 (804) 266-9671 Charter White Oak Behavioral Maryland 52-1866223 3414 Peachtree Rd., N.E. Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 xii ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Charter Wichita Behavioral Kansas 58-1634296 8901 East Orme Health System, Inc. Wichita, KS 67207 (316) 686-5000 Charter Woods Behavioral Alabama 58-1330526 700 Cottonwood Road Health System, Inc. Dothan, AL 36301 (205) 794-4357 Correctional Behavioral Delaware 58-2180940 3414 Peachtree Rd., N.E. Solutions, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Correctional Behavioral Indiana 35-1978792 3414 Peachtree Rd., N.E. Solutions of Indiana, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Correctional Behavioral New Jersey 22-3436964 3000 Atrium Way Solutions of New Jersey, Inc. Suite 410 Mount Laurel, NJ (609) 235-2339 Correctional Behavioral Ohio 34-1826431 Allen Correctional Institute Solutions of Ohio, Inc. 2338 North West Street Lima, OH 45801 (419) 224-8000 Desert Springs Hospital, Inc. Nevada 88-0117696 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, Georgia 30326 (404) 841-9200 Employee Assistance Services, Inc. Georgia 58-1501282 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Florida Health Facilities, Inc. Florida 58-1860493 21808 State Road 54 Lutz, FL 33549 (813) 948-2441 Gulf Coast EAP Services, Inc. Alabama 58-2101394 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Hospital Investors, Inc. Georgia 58-1182191 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Illinois Mentor, Inc. Illinois 36-3643670 313 Congress St. Boston, MA 02210 (617) 790-4800 xiii ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ Magellan Public Solutions, Inc. Delaware 58-2227841 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Mandarin Meadows, Inc. Florida 58-1761155 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Magellan Public Network, Inc. Delaware 51-0374654 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Massachusetts Mentor, Inc. Massachusetts 04-2799071 313 Congress St. Boston, MA 02210 (617) 790-4800 Metroplex Behavioral Healthcare Texas 58-2138596 1000 South Main Street Services, Inc. Suite 100 Grapevine, TX 76051 (817) 540-6948 National Mentor, Inc. Delaware 04-3250732 313 Congress St. Boston, MA 02210 (617) 790-4800 National Mentor Healthcare, Inc. Massachusetts 04-2893910 313 Congress St. Boston, MA 02210 (617) 790-4800 NEPA - Massachusetts, Inc. Massachusetts 58-2116751 #6 Courthouse Lane Chelmsford, MA 01863 (508) 441-2332 NEPA - New Hampshire, Inc. New Hampshire 58-2116398 29 Northwest Boulevard Nashua, NH 03063 (603) 886-5000 Nevada Behavioral Services, Inc. Nevada Applied for 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Ohio Mentor, Inc. Ohio 31-1098345 313 Congress St. Boston, MA 02210 (617) 790-4800 Pacific-Charter Medical, Inc. California 58-1336537 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 xiv ADDITIONAL REGISTRANTS(1) Address including zip code, State or other and telephone number Exact name of jurisdiction of I.R.S. Employer including area code, registrant as specified incorporation Identification of registrant's principal in its charter or organization Number executive offices - -------------------- -------------- -------------- ------------------------ South Carolina Mentor, Inc. South Carolina 57-0782160 313 Congress St. Boston, MA 02210 (617) 790-4800 Southeast Behavioral Systems, Georgia 58-2100700 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Schizophrenia Treatment and Georgia 58-1672912 209 Church Street Rehabilitation, Inc. Decatur, GA 30030 (404) 377-1986 Sistemas De Terapia Georgia 58-1181077 3414 Peachtree Rd., N.E. Respiratoria, S.A., Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Western Behavioral California 58-1662416 3414 Peachtree Rd., N.E. Systems, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Wisconsin Mentor, Inc. Wisconsin 39-1840054 313 Congress St. Boston, MA 00210 (617) 790-4800
(1) The Additional Registrants listed are wholly-owned subsidiaries of the Registrant and are guarantors of the Registrant's 11 1/4% Series A Senior Subordinated Notes due 2004. The Additional Registrants have been conditionally exempted, pursuant to Section 12(h) of the Securities Exchange Act of 1934, from filing reports under Section 13 of the Securities Exchange Act of 1934. xv FORM 10-Q MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES INDEX Page No. -------- PART I - Financial Information: Condensed Consolidated Balance Sheets - September 30, 1996 and December 31, 1996.............................1 Condensed Consolidated Statements of Operations - For the Three Months ended December 31, 1995 and 1996................3 Condensed Consolidated Statements of Cash Flows - For the Three Months ended December 31, 1995 and 1996................4 Notes to Condensed Consolidated Financial Statements..................5 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................13 PART II - Other Information: Item 1. - Legal Preceedings..........................................19 Item 5. - Other Information..........................................19 Item 6. - Exhibits and Reports on Form 8-K...........................20 Signatures...........................................................21 MAGELLAN HEALTH SERVICES, INC. QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I - FINANCIAL INFORMATION
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) September 30, December 31, 1996 1996 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents ................. $ 120,945 $ 114,452 Accounts receivable, net .................. 189,878 191,862 Supplies .................................. 4,753 4,913 Refundable income taxes ................... 1,323 -- Other current assets ...................... 21,251 27,122 ----------- ----------- Total Current Assets ................. 338,150 338,349 Property and Equipment: Land ...................................... 83,431 82,751 Buildings and improvements ................ 388,821 388,832 Equipment ................................. 146,915 150,217 ----------- ----------- 619,167 621,800 Accumulated depreciation .................. (126,053) (135,083) ----------- ----------- 493,114 486,717 Construction in progress .................. 2,276 3,624 ----------- ----------- 495,390 490,341 Assets Restricted for Settlement of Unpaid Claims and Other Long-Term Liabilities ........... 105,303 94,786 Other Long-Term Assets ........................... 30,755 28,033 Goodwill, net .................................... 128,012 126,991 Other Intangible Assets, net ..................... 42,527 40,457 ----------- ----------- $ 1,140,137 $ 1,118,957 =========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets.
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except per share data) September 30, December 31, 1996 1996 ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ..................................... $ 78,966 $ 72,797 Accrued liabilities .................................. 189,599 163,555 Current maturities of long-term debt and capital lease obligations ......................... 5,751 5,785 ----------- ----------- Total Current Liabilities ................... 274,316 242,137 Long-Term Debt and Capital Lease Obligations ................ 566,307 581,202 Deferred Income Taxes ....................................... 12,368 12,250 Reserve for Unpaid Claims ................................... 73,040 70,449 Deferred Credits and Other Long-Term Liabilities ............ 39,769 30,039 Minority Interest ........................................... 52,520 54,816 Commitments and Contingencies Stockholders' Equity: Preferred Stock, without par value Authorized - 10,000 shares Issued and outstanding - none Common Stock, par value $0.25 per share Authorized - 80,000 shares Issued and outstanding - 33,007 shares at September 30, 1996 and 33,030 shares at December 31, 1996 ........................ 8,252 8,259 Other Stockholders' Equity Additional paid-in capital ........................ 327,681 328,390 Accumulated deficit ............................... (129,457) (125,266) Warrants outstanding .............................. 54 54 Common Stock in Treasury, 4,424 shares at September 30, 1996 and December 31, 1996 .............. (82,731) (82,731) Cumulative foreign currency adjustments ........... (1,982) (642) ----------- ----------- Stockholders' Equity ........................ 121,817 128,064 ----------- ----------- $ 1,140,137 $ 1,118,957 =========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. 2
MAGELLAN HEALTH SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) For the Three Months ended December 31, --------------------- 1995 1996 --------- --------- Net revenue ............................................. $ 295,665 $ 346,819 --------- --------- Costs and expenses: Salaries, supplies and other operating expenses . 231,326 284,123 Bad debt expense ................................. 19,788 20,235 Depreciation and amortization .................... 10,180 13,099 Interest, net .................................... 13,822 13,569 Stock option expense ............................. 1,823 604 --------- --------- 276,939 331,630 --------- --------- Income before provision for income taxes, minority interest and extraordinary item ......... 18,726 15,189 Provision for income taxes .............................. 7,959 6,075 --------- --------- Income before minority interest and extraordinary item .. 10,767 9,114 Minority interest ....................................... 1,019 1,973 --------- --------- Income before extraordinary item ........................ 9,748 7,141 Extraordinary item - loss on early extinquishment of debt (net of income tax benefit of $1,967) ............ -- (2,950) --------- --------- Net income .............................................. $ 9,748 $ 4,191 ========= ========= Average number of common shares outstanding ............. 27,994 28,589 ========= ========= Income per common share: Income before extraordinary item ................. $ 0.35 $ 0.25 Extraordinary loss on early extinguishment of debt -- (0.10) --------- --------- Net income .............................................. $ 0.35 $ 0.15 ========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 3
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) For the Three Months ended December 31 ---------------------- 1995 1996 ---------- --------- Cash Flows from Operating Activities Net income ...................................................... $ 9,748 $ 4,191 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................ 10,180 13,099 Stock option expense ..................................... 1,823 604 Non-cash interest expense ................................ 600 483 Gain on sale of assets ................................... (139) (493) Extraordinary loss on early extinguishment of debt ....... -- 4,917 Cash flows from changes in assets and liabilities, net of effects from sales and acquisitions of businesses: Accounts receivable, net .......................... (5,595) (1,984) Other assets ...................................... (2,443) (4,109) Accounts payable and other accrued liabilities .... (33,602) (32,046) Reserve for unpaid claims ......................... (1,690) (2,351) Income taxes payable .............................. 6,196 1,517 Other liabilities ................................. (1,311) (9,729) Minority interest, net of dividends paid .......... 1,163 2,296 Other ............................................. 168 216 --------- --------- Total adjustments ............................ (24,650) (27,580) --------- --------- Net cash used in operating activities ... (14,902) (23,389) --------- --------- Cash Flows From Investing Activities Capital expenditures ............................................ (4,368) (7,012) Acquisitions of businesses, net of cash acquired ................ (47,327) (1,612) Decrease (increase) in assets restricted for settlement of unpaid claims ................................................. (3,614) 10,381 Proceeds from sale of assets .................................... 503 4,822 --------- --------- Net cash provided by (used in) investing activities .................. (54,806) 6,579 --------- --------- Cash Flows From Financing Activities Proceeds from issuance of debt, net of issuance costs ........... 68,125 126,825 Payments on debt and capital lease obligations .................. (448) (116,620) Proceeds from exercise of stock options and warrants ............ -- 112 --------- --------- Net cash provided by financing activities 67,677 10,317 --------- --------- Net decrease in cash and cash equivalents .............................. (2,031) (6,493) Cash and cash equivalents at beginning of period ....................... 105,514 120,945 --------- --------- Cash and cash equivalents at end of period ............................. $ 103,483 $ 114,452 ========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 4 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 (Unaudited) NOTE A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended September 30, 1996, included in the Company's Annual Report on Form 10-K, as amended. NOTE B - Nature of Business The Company's hospital business is seasonal in nature, with a reduced demand for certain services generally occurring in the first fiscal quarter around major holidays, such as Thanksgiving and Christmas, and during the summer months comprising the fourth fiscal quarter. The Company's business is also subject to general economic conditions and other factors. Accordingly, the results of operations for the interim periods are not necessarily indicative of the actual results expected for the year. NOTE C - Supplemental Cash Flow Information Below is supplemental cash flow information related to the three months ended December 31, 1995 and 1996:
For the Three Months ended December 31 1995 1996 --------- -------- (In thousands) Income taxes paid, net of refunds received........................................$ 700 $ 2,540 Interest paid, net of amounts capitalized......................................... 23,498 24,939 Notes payable assumed in connection with acquisitions of businesses............... 12,000 --
5 NOTE D - Long-Term Debt and Leases Information with regard to the Company's long-term debt and capital lease obligations at September 30, 1996 and December 31, 1996 is as follows:
September 30, December 31, 1996 1996 ------------- ------------ (In thousands) Revolving Credit Agreement due through 2001 (6.9375% at December 31, 1996) ................... $105,593 $121,000 11.25% Senior Subordinated Notes due 2004 ............... 375,000 375,000 6.66% to 10.75% Mortgage and other notes payable through 1999 ............................. 12,163 11,957 Variable rate secured notes due through 2013 (3.15% to 4.35% at December 31, 1996............ 60,875 60,825 7.5% Swiss Bonds ........................................ 6,443 6,443 3.2% to 11.50% capital lease obligations due through 2014 12,333 12,089 -------- -------- 572,407 587,314 Less amounts due within one year ................. 5,751 5,785 Less debt service funds .......................... 349 327 -------- -------- $566,307 $581,202 ======== ========
On October 28, 1996, the Company entered into a new Credit Agreement with certain financial institutions for a five-year senior secured reducing revolving credit facility in an aggregate committed amount of $400 million (the "New Revolving Credit Agreement"). The Company borrowed approximately $121.0 million under the New Revolving Credit Agreement in October 1996 to (i) pay-off the existing borrowings outstanding under the previous Revolving Credit Agreement that was terminated and (ii) pay for fees and expenses related to the New Revolving Credit Agreement. The loans outstanding under the New Revolving Credit Agreement bear interest (subject to certain potential adjustments) at a rate per annum equal to one, two, three or six-month LIBOR plus 1.25% or the Prime Lending Rate. Interest on Prime Lending Rate Loans is payable at the end of each fiscal quarter and upon conversion to a LIBOR based loan. Interest on LIBOR based loans is payable at the end of their respective one, two, three or six-month terms. The Company recorded an extraordinary loss from the early extinguishment of debt of approximately $3.0 million, net of tax, in the quarter ended December 31, 1996 to write off unamortized deferred financing costs related to its previous Revolving Credit Agreement. NOTE E - Accrued Liabilities Accrued liabilities consist of the following (in thousands):
September 30, December 31, 1996 1996 ------------- ------------ Salaries and wages .................. $ 39,841 $ 36,433 Amounts due health insurance programs 27,223 15,345 Medical claims payable .............. 26,552 25,781 Interest ............................ 20,348 9,958 Other ............................... 75,635 76,038 -------- -------- $189,599 $163,555 ======== ========
6 NOTE F - Facility Closures During fiscal 1996, the Company consolidated, closed or sold nine psychiatric facilities (the "Closed Facilities"). The Closed Facilities that are still owned by the Company will be sold, leased or used for alternative purposes depending on the market conditions in each geographic area. The Company recorded charges of approximately $4.1 million related to facility closures in fiscal 1996. Severance and related benefits related to the closed facilities have been fully paid as of December 31, 1996. Other exit costs paid and applied against the resulting liabilities recorded during fiscal 1996 were approximately $250,000 during the quarter ended December 31, 1996. - The following table presents net revenue, salaries, supplies and other operating expenses and bad debt expenses and depreciation and amortization of the Closed Facilities (in thousands):
Quarter ended December 31, -------------------------- 1995 1996 ---- ---- Net Revenue ................................... $12,740 $ 81 Salaries, supplies and other operating expenses and bad dept expenses .................. 13,237 785 Depreciation and Amortization ................. 327 --
The Company also recorded a charge of approximately $2.0 million in the fourth quarter of fiscal 1996 related to severance and related benefits for employees who were terminated pursuant to planned overhead reductions. Substantially all of such severance and benefits have been paid through December 31, 1996. NOTE G - Contingencies The Company is self-insured for a substantial portion of its general and professional liability risks. The reserves for self-insured general and professional liability losses, including loss adjustment expenses, are based on actuarial estimates that are discounted at an average rate of 6% to their present value based on the Company's historical claims experience adjusted for current industry trends. The reserve for unpaid claims is adjusted periodically as such claims mature, to reflect changes in actuarial estimates based on actual experience. While management and its actuaries believe that the present reserve is reasonable, ultimate settlement of losses may vary from the amount provided. Certain of the Company's subsidiaries are subject to claims, civil suits, and governmental investigations and inquiries relating to their operations and certain alleged business practices. In the opinion of management, based on consultation with counsel, resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. On August 1, 1996, the United States Department of Justice, Civil Division, filed its First Amended Complaint in a civil qui tam action initiated in November of 1994 against the Company and its Orlando South hospital subsidiary ("Charter Orlando") by two former employees. The First Amended Complaint alleges that Charter Orlando violated the civil False Claims Act (the "Act") in billing for inpatient treatment provided to elderly patients. The Court granted the Company's motion to dismiss the government's First Amended Complaint yet granted the government leave to its First Amended Complaint. The government filed a Second Amended Complaint on December 12, 1996 which, similar to the First Amended Complaint alleges that the Company and its subsidiary violated the Act in billing for the treatment of geriatric patients. Like the First Amended Complaint, the Second Amended Complaint is based on disputed clinical and factual issues which the Company believes do not constitute a violation of the Act. The Company and its subsidiary,therefore, have filed a motion to dismiss the Second Amended Complaint. The Company 7 and its subsidiary deny the allegations made in the Second Amended Complaint and will vigorously defend against its claims. The Company does not believe this matter will have a material adverse effect on its financial position or results of operations. 8
NOTE H - Guarantor Condensed Consolidating Financial Statements MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS (In thousands, except share and per share amounts) September 30, 1996 -------------------------------------------- Magellan Health Services, Inc. Guarantor Nonguarantor (Parent ASSETS Subsidiaries Subsidiaries Corporation) ------------ ------------ -------------- Current Assets Cash and cash equivalents .......................................... $ 29,751 $ 79,552 $ 11,642 Accounts receivable, net ........................................... 139,523 44,904 5,451 Supplies ........................................................... 4,091 394 268 Other current assets ............................................... 8,379 121 14,074 ----------- ----------- ----------- Total Current Assets ............................... 181,744 124,971 31,435 Assets restricted for settlement of unpaid claims and other long-term liabilities ........................................ -- 78,542 26,761 Property and Equipment Land ............................................................... 74,790 6,657 1,984 Buildings and improvements ......................................... 350,187 33,493 5,141 Equipment .......................................................... 112,748 25,206 8,961 ----------- ----------- ----------- 537,725 65,356 16,086 Accumulated depreciation ........................................... (111,556) (10,313) (4,184) Construction in progress ........................................... 1,586 621 69 ----------- ----------- ----------- 427,755 55,664 11,971 Other Long-Term Assets (1) ................................................ 98,191 (56,176) 1,187,042 Goodwill, net ............................................................. 20,645 94,682 12,685 ----------- ----------- ----------- $ 728,335 $ 297,683 $ 1,269,894 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable ................................................... $ 32,644 $ 34,057 $ 12,265 Accrued liabilities and income tax payable ......................... 57,948 55,208 76,443 Current maturities of long-term debt and capital lease obligations . 2,620 3,131 -- ----------- ----------- ----------- Total Current Liabilities .......................... 93,212 92,396 88,708 Long-Term Debt and Capital Lease Obligations .............................. (455,333) 8,815 1,012,825 Deferred Income Tax Liabilities .......................................... -- (4,252) 16,620 Reserve for Unpaid Claims ................................................. -- 72,494 546 Deferred Credits and Other Long-Term Liabilities(1) ....................... 352,044 43,565 29,378 Minority interest ......................................................... -- -- -- Stockholders' Equity Common Stock, par value $0.25 per share; Authorized - 80,000 shares Issued and outstanding - 33,007 shares ............................ 2,764 (483) 8,252 Committments and contingencies Other Stockholders' Equity Additional paid-in capital ......................................... 609,627 30,237 327,681 Retained earnings (Accumulated deficit) ............................ 126,826 58,932 (129,457) Warrants outstanding ............................................... -- -- 54 Common Stock in treasury, 4,424 shares ............................. -- (4,736) (82,731) Cumulative foreign currency adjustments ............................ (805) 715 (1,982) ----------- ----------- ----------- 738,412 84,665 121,817 ----------- ----------- ----------- $ 728,335 $ 297,683 $ 1,269,894 =========== =========== =========== September 30, 1996 --------------------------- Consolidated Elimination Consolidated Entries Total ------------ ------------ Current Assets Cash and cash equivalents .......................................... $ -- $ 120,945 Accounts receivable, net ........................................... -- 189,878 Supplies ........................................................... -- 4,753 Other current assets ............................................... -- 22,574 ----------- ----------- Total Current Assets ............................... -- 338,150 Assets restricted for settlement of unpaid claims and other long-term liabilities ........................................ -- 105,303 Property and Equipment Land ............................................................... -- 83,431 Buildings and improvements ......................................... -- 388,821 Equipment .......................................................... -- 146,915 ----------- ----------- -- 619,167 Accumulated depreciation ........................................... -- (126,053) Construction in progress ........................................... -- 2,276 ----------- ----------- -- 495,390 Other Long-Term Assets (1) ................................................ (1,155,775) 73,282 Goodwill, net ............................................................. -- 128,012 ----------- ----------- $(1,155,775) $ 1,140,137 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable ................................................... $ -- $ 78,966 Accrued liabilities and income tax payable ......................... -- 189,599 Current maturities of long-term debt and capital lease obligations . -- 5,751 ----------- ----------- Total Current Liabilities .......................... -- 274,316 Long-Term Debt and Capital Lease Obligations .............................. -- 566,307 Deferred Income Tax Liabilities .......................................... -- 12,368 Reserve for Unpaid Claims ................................................. -- 73,040 Deferred Credits and Other Long-Term Liabilities(1) ....................... (385,218) 39,769 Minority interest ......................................................... 52,520 52,520 Stockholders' Equity Common Stock, par value $0.25 per share; Authorized - 80,000 shares Issued and outstanding - 33,007 shares ............................ (2,281) 8,252 Committments and contingencies Other Stockholders' Equity Additional paid-in capital ......................................... (639,864) 327,681 Retained earnings (Accumulated deficit) ............................ (185,758) (129,457) Warrants outstanding ............................................... -- 54 Common Stock in treasury, 4,424 shares ............................. 4,736 (82,731) Cumulative foreign currency adjustments ............................ 90 (1,982) ----------- ----------- (823,077) 121,817 ----------- ----------- $(1,155,775) $ 1,140,137 =========== ===========
(1) Elimination entry related to intercompany receivables and payables and investment in consolidated subsidiaries. The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these balance sheets. 9
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS (In thousands, except per share amounts) December 31, 1996 -------------------------------------------- Magellan Health Services, Inc. Guarantor Nonguarantor (Parent ASSETS Subsidiaries Subsidiaries Corporation) ------------ ------------ -------------- Current Assets Cash and cash equivalents .......................................... $ 49,927 $ 58,757 $ 5,768 Accounts receivable, net ........................................... 129,712 55,503 6,647 Supplies ........................................................... 4,220 390 303 Other current assets ............................................... 1,761 4,424 20,937 ----------- ----------- ----------- Total Current Assets ............................... 185,620 119,074 33,655 Assets restricted for settlement of unpaid claims and other long-term liabilities .................................... -- 71,872 22,914 Property and Equipment Land ............................................................... 75,959 5,778 1,014 Buildings and improvements ......................................... 353,039 30,652 5,141 Equipment .......................................................... 113,971 27,106 9,140 ----------- ----------- ----------- 542,969 63,536 15,295 Accumulated depreciation ........................................... (118,994) (11,479) (4,610) Construction in progress ........................................... 2,068 1,450 106 ----------- ----------- ----------- 426,043 53,507 10,791 Other Long-Term Assets (1) ................................................ 96,592 (55,377) 1,176,805 Goodwill, net ............................................................. 20,171 94,219 12,601 ----------- ----------- ----------- $ 728,426 $ 283,295 $ 1,256,766 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable ................................................... $ 44,716 $ 23,106 $ 4,975 Accrued liabilities and income tax payable ......................... 55,839 56,699 51,017 Current maturities of long-term debt and capital lease obligations . 2,654 3,131 -- ----------- ----------- ----------- Total Current Liabilities .......................... 103,209 82,936 55,992 Long-Term Debt and Capital Lease Obligations .............................. (473,615) 7,935 1,046,882 Deferred Income Tax Liabilities ........................................... -- (4,283) 16,533 Reserve for Unpaid Claims ................................................. -- 77,480 (7,031) Deferred Credits and Other Long-Term Liabilities (1) ...................... 402,482 35,955 16,326 Minority interest ......................................................... -- -- -- Stockholders' Equity Common Stock, par value $0.25 per share; Authorized - 80,000 shares Issued and outstanding - 33,030 shares ............................. 2,766 (483) 8,259 Commitments and contingencies ............................................. -- -- -- Other Stockholders' Equity Additional paid-in capital ......................................... 735,915 35,947 328,390 Retained earnings (Accumulated deficit) ............................ (42,687) 52,683 (125,266) Warrants outstanding ............................................... -- -- 54 Common stock in Treasury, 4,424 shares ............................. -- (4,736) (82,731) Cumulative foreign currency adjustments ............................ 356 (139) (642) ----------- ----------- ----------- 696,350 83,272 128,064 ----------- ----------- ----------- $ 728,426 $ 283,295 $ 1,256,766 =========== =========== =========== December 31, 1996 --------------------------- Consolidated Elimination Consolidated Entries Total ASSETS ------------ ------------ Current Assets Cash and cash equivalents .......................................... $ -- $ 114,452 Accounts receivable, net ........................................... -- 191,862 Supplies ........................................................... -- 4,913 Other current assets ............................................... -- 27,122 ----------- ----------- Total Current Assets ............................... -- 338,349 Assets restricted for settlement of unpaid claims and other long-term liabilities .................................... -- 94,786 Property and Equipment Land ............................................................... -- 82,751 Buildings and improvements ......................................... -- 388,832 Equipment .......................................................... -- 150,217 ----------- ----------- -- 621,800 Accumulated depreciation ........................................... -- (135,083) Construction in progress ........................................... -- 3,624 ----------- ----------- -- 490,341 Other Long-Term Assets (1) ................................................ (1,149,530) 68,490 Goodwill, net ............................................................. -- 126,991 ----------- ----------- $(1,149,530) $ 1,118,957 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable ................................................... $ -- $ 72,797 Accrued liabilities and income tax payable ......................... -- 163,555 Current maturities of long-term debt and capital lease obligations . -- 5,785 ----------- ----------- Total Current Liabilities .......................... -- 242,137 Long-Term Debt and Capital Lease Obligations .............................. -- 581,202 Deferred Income Tax Liabilities ........................................... -- 12,250 Reserve for Unpaid Claims ................................................. -- 70,449 Deferred Credits and Other Long-Term Liabilities (1) ...................... (424,724) 30,039 Minority interest ......................................................... 54,816 54,816 Stockholders' Equity Common Stock, par value $0.25 per share; Authorized - 80,000 shares Issued and outstanding - 33,030 shares ............................. (2,283) 8,259 Commitments and contingencies ............................................. -- -- Other Stockholders' Equity Additional paid-in capital ......................................... (771,862) 328,390 Retained earnings (Accumulated deficit) ............................ (9,996) (125,266) Warrants outstanding ............................................... -- 54 Common stock in Treasury, 4,424 shares ............................. 4,736 (82,731) Cumulative foreign currency adjustments ............................ (217) (642) ----------- ----------- (779,622) 128,064 ----------- ----------- $(1,149,530) $ 1,118,957 =========== ===========
(1) Elimination entry related to intercompany receivables and payables and investment in consolidated subsidiaries. The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these balance sheets. 10
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (In thousands) For the Three Months ended December 31, 1995 -------------------------------------------- Magellan Health Services, Inc. Guarantor Nonguarantor (Parent Subsidiaries Subsidiaries Corporation) ------------ ------------ ---------------- Net revenue ............................................................ $ 247,754 $ 44,528 $ 7,847 Costs and expenses Salaries, supplies and other operating expenses ................ 193,846 37,360 4,584 Bad debt expense ................................................ 19,964 669 (845) Depreciation and amortization ................................... 8,745 1,256 179 Interest, net ................................................... (10,100) 80 23,842 Stock option expense (credit) ................................... -- -- 1,823 --------- --------- --------- 212,455 39,365 29,583 --------- --------- --------- Income (loss) before income taxes and equity in earnings (loss) of subsidiaries ............................ 35,299 5,163 (21,736) Provision for income taxes ............................................ 653 632 269 --------- --------- --------- Income (loss) before equity in earnings (loss) of subsidiaries ......... 34,646 4,531 (22,005) Equity in earnings (loss) of subsidiaries .............................. 289 (301) 18,075 --------- --------- --------- Net income (loss) ...................................................... $ 34,935 $ 4,230 $ (3,930) ========= ========= ========= CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Cash provided by (used in) operating activities ........................ $ (15,884) $ 8,975 $ (7,993) --------- --------- --------- Cash Flows from Investing Activities: Capital expenditures ............................................ (3,919) (256) (193) Acquisitions of businesses, net of cash acquired ................ -- 38,226 (85,553) Proceeds from sale of assets .................................... 503 -- -- Increase in assets restricted for the settlement of unpaid claims -- (4,265) 651 --------- --------- --------- Cash provided by (used in) investing activities ........................ (3,416) 33,705 (85,095) --------- --------- --------- Cash Flows from Financing Activities: Proceeds from the issuance of debt .............................. -- 125 68,000 Payments on debt and capital obligations ........................ (430) (18) -- --------- --------- --------- Cash provided by (used in) financing activities ........................ (430) 107 68,000 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ................... (19,730) 42,787 (25,088) Cash and cash equivalents at beginning of period ....................... 60,719 10,279 34,516 --------- --------- --------- Cash and cash equivalents at end of period ............................. $ 40,989 $ 53,066 $ 9,428 ========= ========= ========= Consolidated Elimination Consolidated Entries Total ------------ ------------ Net revenue ............................................................ $ (4,464) $ 295,665 Costs and expenses Salaries, supplies and other operating expenses ................ (4,464) 231,326 Bad debt expense ................................................ -- 19,788 Depreciation and amortization ................................... -- 10,180 Interest, net ................................................... -- 13,822 Stock option expense (credit) ................................... -- 1,823 --------- --------- (4,464) 276,939 --------- --------- Income (loss) before income taxes and equity in earnings (loss) of subsidiaries ............................ -- 18,726 Provision for income taxes ............................................ 6,405 7,959 --------- --------- Income (loss) before equity in earnings (loss) of subsidiaries ......... (6,405) 10,767 Equity in earnings (loss) of subsidiaries .............................. (19,082) (1,019) --------- --------- Net income (loss) ...................................................... $ (25,487) $ 9,748 ========= ========= CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Cash provided by (used in) operating activities ........................ $ -- $ (14,902) --------- --------- Cash Flows from Investing Activities: Capital expenditures ............................................ -- (4,368) Acquisitions of businesses, net of cash acquired ................ -- (47,327) Proceeds from sale of assets .................................... -- 503 Increase in assets restricted for the settlement of unpaid claims -- (3,614) --------- --------- Cash provided by (used in) investing activities ........................ -- (54,806) --------- --------- Cash Flows from Financing Activities: Proceeds from the issuance of debt .............................. -- 68,125 Payments on debt and capital obligations ........................ -- (448) --------- --------- Cash provided by (used in) financing activities ........................ -- 67,677 --------- --------- Net increase (decrease) in cash and cash equivalents ................... -- (2,031) Cash and cash equivalents at beginning of period ....................... -- 105,514 --------- --------- Cash and cash equivalents at end of period ............................. $ -- $ 103,483 ========= =========
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements. 11
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (In thousands, except shares and per share amounts) For the Three Months ended December 31, 1996 --------------------------------------------- Magellan Health Services, Inc. Guarantor Nonguarantor (Parent Subsidiaries Subsidiaries Corporation) ------------ ------------- ------------- Net revenue ...................................................................... $ 223,877 $ 112,591 $ 10,706 Costs and expenses Salaries, supplies and other operating expenses ........................... 177,681 100,260 6,537 Bad debt expense .......................................................... 19,024 1,211 0 Depreciation and amortization ............................................. 8,617 3,750 732 Interest, net ............................................................. (12,106) (443) 26,118 Stock option expense ...................................................... 0 0 604 --------- --------- --------- 193,216 104,778 33,991 --------- --------- --------- Income (loss) from continuing operations before income taxes and equity in earnings (loss) of subsidiaries ...................................... 30,661 7,813 (23,285) Provision for (benefit from) income taxes ........................................ 831 2,855 2,389 --------- --------- --------- Income (loss) from continuing operations before equity in earnings (loss) of subsidiaries ...................................... 29,830 4,958 (25,674) Equity in earnings (loss) of continuing subsidiaries ............................. (53) (1,842) 32,815 --------- --------- --------- Income (loss) before extraordinary item .......................................... 29,777 3,116 7,141 Extraordinary item - loss on early extinguishment of debt (net of income tax benefit of $1,967) .................................................. (1,193) 0 (2,950) --------- --------- --------- Net income (loss) ................................................................ $ 28,584 $ 3,116 $ 4,191 ========= ========= ========= CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Cash provided by (used in) operating activities .................................. $ 18,476 $ (22,153) $ (19,712) --------- --------- --------- Cash Flows from Investing Activities: Capital expenditures ...................................................... (3,133) (3,663) (216) Acquisition of businessess ................................................ (170) (1,442) 0 Decrease(increase) in assets restricted for the settlement of unpaid claims 0 6,670 3,711 Proceeds from the sale of assets .......................................... 4,822 0 0 --------- --------- --------- Cash provided by (used in) investing activities .................................. 1,519 1,565 3,495 --------- --------- --------- Cash Flows from Financing Activities: Payments on debt and capital lease obligations ........................... (71,435) (207) (44,978) Proceeds from the issuance of debt ........................................ 71,616 0 55,209 Proceeds from exercixe of stock options & warrants ........................ 0 0 112 --------- --------- --------- Cash provided by (used in) financing activities .................................. 181 (207) 10,343 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ............................. (20,176) (20,795) (5,874) Cash and cash equivalents at beginning of period ................................. 29,751 79,552 11,642 --------- --------- --------- Cash and cash equivalents at end of period ....................................... $ 49,927 $ 58,757 $ 5,768 ========= ========= ========= Consolidated Elimination Consolidated Entries Total --------------------------- Net revenue ...................................................................... $ (355) $ 346,819 Costs and expenses Salaries, supplies and other operating expenses ........................... (355) 284,123 Bad debt expense .......................................................... 0 20,235 Depreciation and amortization ............................................. 0 13,099 Interest, net ............................................................. 0 13,569 Stock option expense ...................................................... 0 604 --------- --------- (355) 331,630 --------- --------- Income (loss) from continuing operations before income taxes and equity in earnings (loss) of subsidiaries ...................................... 0 15,189 Provision for (benefit from) income taxes ........................................ 0 6,075 --------- --------- Income (loss) from continuing operations before equity in earnings (loss) of subsidiaries ...................................... 0 9,114 Equity in earnings (loss) of continuing subsidiaries ............................. (32,893) (1,973) --------- --------- Income (loss) before extraordinary item .......................................... (32,893) 7,141 Extraordinary item - loss on early extinguishment of debt (net of income tax benefit of $1,967) .................................................. 1,193 (2,950) --------- --------- Net income (loss) ................................................................ $ (31,700) $ 4,191 ========= ========= CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Cash provided by (used in) operating activities .................................. $ 0 $ (23,389) --------- --------- Cash Flows from Investing Activities: Capital expenditures ...................................................... 0 (7,012) Acquisition of businessess ................................................ 0 (1,612) Decrease(increase) in assets restricted for the settlement of unpaid claims 0 10,381 Proceeds from the sale of assets .......................................... 0 4,822 --------- --------- Cash provided by (used in) investing activities .................................. 0 6,579 --------- --------- Cash Flows from Financing Activities: Payments on debt and capital lease obligations ........................... 0 (116,620) Proceeds from the issuance of debt ........................................ 0 126,825 Proceeds from exercixe of stock options & warrants ........................ 0 112 --------- --------- Cash provided by (used in) financing activities .................................. 0 10,317 --------- --------- Net increase (decrease) in cash and cash equivalents ............................. 0 (6,493) Cash and cash equivalents at beginning of period ................................. 0 120,945 --------- --------- Cash and cash equivalents at end of period ....................................... $ 0 $ 114,452 ========= =========
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements. 12 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES December 31, 1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the sufficiency of the Company's liquidity and sources of capital and the statements under the heading "Outlook". Actual results may differ materially from those projected in such forward looking statements. These forward-looking statements are subject to certain risks, uncertainties and other factors which could cause actual results to differ materially from those anticipated, including, without limitation, potential reductions in reimbursement by third-party payers and changes in hospital payer mix, governmental budgetary constraints and healthcare reform, the impact of potential hospital closures, competition in the provider business and the managed care business, and the regulatory environment for the Company's businesses, as well as the other factors discussed in Exhibit 99 hereto, which is hereby incorporated by reference. Green Spring Acquisition On December 13, 1995, the Company acquired a 51% ownership interest in Green Spring for approximately $68.9 million in cash, the issuance of 215,458 shares of Magellan Common Stock valued at approximately $4.3 million and the contribution of GPA, a wholly-owned subsidiary of the Company, which became a wholly-owned subsidiary of Green Spring. On December 20, 1995, the Company acquired an additional 10% ownership interest in Green Spring for approximately $16.7 million in cash as a result of an exercise by a minority stockholder of its Exchange Option ("Exchange Option") for a portion of the stockholder's interest in Green Spring. Green Spring provides managed behavioral healthcare services, which includes utilization management, care management and employee assistance programs through a 50-state provider network covering approximately 13.7 million people nationwide. The Company has accounted for the acquisition of Green Spring using the purchase method of accounting, which resulted in additional intangible assets of approximately $113 million. The minority stockholders of Green Spring consist of four Blue Cross/Blue Shield organizations (the "Blues") that are key customers of Green Spring. In addition, two other Blues organizations that formerly owned a portion of Green Spring have continued as customers of Green Spring. As of December 31, 1996, the minority stockholders of Green Spring have the Exchange Option, under certain circumstances, to exchange their ownership interest in Green Spring for 2,831,739 shares of the Company's Common Stock or $65.1 million in subordinated notes. The Company may elect to pay cash in lieu of issuing the subordinated notes. The Exchange Option expires December 13, 1998. Psychiatric Hospital Results Selected statistics (from the date of acquisition for acquired facilities) for the psychiatric hospitals in operation by quarter for fiscal 1996 and fiscal 1997 are as follows: 13
Fiscal Fiscal % 1996 1997 Change ---------- ----------- -------- Hospitals in operation: December 31 .................... 102 95 (7)% March 31 ....................... 99 June 30 ........................ 96 September 30 .................. 95 Average licensed beds at: Quarter: First ..................... 9,110 8,463 (7)% Second .................... 9,040 Third ..................... 8,677 Fourth .................... 8,469 Year ........................... 8,805 Net revenue (in thousands): Quarter: First ..................... $ 253,565 $ 229,064 (9)% Second .................... 257,690 Third ..................... 249,145 Fourth .................... 228,597 ---------- Year ........................... $ 988,997 ========== Patient days: Quarter: First ..................... 432,474 392,352 (9)% Second .................... 463,327 Third ..................... 452,864 Fourth .................... 404,346 ---------- Year ........................... 1,753,011 ========== Equivalent patient days: Quarter: First ..................... 478,693 437,960 (9)% Second .................... 513,502 Third ..................... 503,622 Fourth .................... 450,708 ---------- Year ........................... 1,946,525 ========== Net revenue per equivalent patient day: Quarter: First ..................... $ 530 $ 523 (1)% Second .................... 502 Third ..................... 495 Fourth .................... 507 Year ........................... 508 Admissions: Quarter: First ..................... 32,865 32,326 (2)% Second .................... 37,966 Third ..................... 35,854 Fourth .................... 33,861 ---------- Year ........................... 140,546 ========== Average length of stay (days): Quarter: First ..................... 12.4 11.5 (7)% Second .................... 12.2 Third ..................... 12.5 Fourth .................... 12.5 Year ........................... 12.4
Note: Includes Northstar Hospital in Anchorage, Alaska that is managed pursuant to a joint venture arrangement. 14 Results of Operations The following table summarizes, for the periods indicated, changes in selected operating indicators.
Percentage of Net Revenue -------------------------------------- For the Three Months Ended December 31 -------------------------------------- 1995 1996 ---------- --------- Net revenue ................................... 100.% 100.% Salaries, supplies and other operating expenses 78.2 82.0 Bad debt expense .............................. 6.7 5.8 --------- -------- Total expenses ................................ 84.9 87.8 Operating margin .............................. 15.1 12.2 ========= ========
Patient days at the Company's hospitals decreased 9% for the quarter ended December 31, 1996, as compared to the same period of fiscal 1996. The decrease resulted primarily from patient days attributable to the hospitals closed during fiscal 1996 and a decline in average length of stay. Total admissions decreased 2% for the quarter ended December 31, 1996, as compared to the prior year period. The decrease resulted primarily from the hospitals closed in fiscal 1996 offset by admissions growth of 4% at the Company's continuing hospitals. The Company's net revenue for the quarter ended December 31, 1996 increased 17.3% compared to the same period in fiscal 1996. The increase resulted primarily from the Green Spring acquisition reduced by the closure of hospitals during fiscal 1996. Green Spring (excluding GPA), which was acquired on December 13, 1995, had revenues of approximately $10.7 million and $79.1 million for the quarters ended December 31, 1995 and 1996, respectively. Net revenue for the quarters ended December 31, 1995 and 1996 included $7.8 million and $11.0 million, respectively, for the normal settlement and adjustments related to reimbursement issues related to earlier fiscal periods ("reimbursement issues"). Net revenue per equivalent patient day at the Company's psychiatric hospitals decreased in the quarter ending December 31, 1996 by 1.3% compared to the same period in the prior year. The decrease was primarily due to (i) continued shift in payer mix from private payer sources to managed care payers, (ii) reduction in payments from certain payers, including Medicare, and (iii) shifts in program mix to residential treatment settings from acute care settings, offset by higher revenues related to reimbursement issues. The Company's salaries, supplies and other operating expenses increased 22.8% in the quarter ended December 31, 1996 compared to the same period in fiscal 1996. The increase resulted primarily from the Green Spring acquisition less the effect of hospitals closed during fiscal 1996. Expenses incurred by Green Spring (excluding GPA) were approximately $9.1 million and $70.4 million for the quarter ended December 31, 1995 and 1996, respectively. The Company's bad debt expense increased 2.3% or approximately $447,000, in the quarter ended December 31, 1996 compared to the same period in fiscal 1996. Bad debt expense decreased to 5.8% of net revenue in the quarter ended December 31, 1996 compared to 6.7% for the prior year period. This decrease was primarily the result of bad debt expense for Green Spring representing less than 1% of its revenue in each period. Depreciation and amortization increased 28.7% in the first quarter of fiscal 1997 compared to the same period in fiscal 1996. The increase resulted primarily from depreciation and amortization related to the Green Spring Acquisition . Stock option expense for the first quarter of fiscal 1997 decreased $1.2 million from the previous year primarily due to fluctuations in the market price of the Company's common stock. Minority interest increased $1.0 million in the first quarter of fiscal 1997 as compared to the prior year period. 15 The increase is primarily due to the Company acquiring a controlling interest in Green Spring in December 1995. Recent Accounting Pronouncements In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which became effective for fiscal years beginning after December 15, 1995. FAS 123 established new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation expense for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 will be required to make pro forma disclosures of net income and earnings per share as if the provisions of FAS 123 had been applied. The Company is adopting FAS 123 in fiscal 1997 on a proforma disclosure basis. Liquidity and Sources of Capital Operating Activities. The Company's net cash used in operating activities was approximately $14.9 million and $23.4 million for the quarters ended December 31, 1995 and 1996, respectively. The Company had negative cash flows from operations during the first quarter of fiscal 1996 and fiscal 1997 primarily as a result of insurance settlement payments ($14.0 million and $11.4 million for the quarters ended December 31, 1995 and December 31, 1996, respectively) and the $21.1 million semi-annual interest payment paid in October each year for the 11.25% Senior Subordinated Notes. Management believes that the Company will have positive cash flows from operations in fiscal 1997, which will be adequate to fund operations, capital expenditures and debt service obligations. Investing Activities. The Company acquired a 61% ownership interest in Green Spring during the first quarter of fiscal 1996. The consideration paid for Green Spring and related acquisition costs resulted in the use of cash of approximately $87.2 million. Management believes that its cash on hand, future cash flows from operations, borrowing capacity under the New Revolving Credit Agreement and its ability to issue debt and equity securities under current market conditions will provide adequate capital resources to support the Company's anticipated investing strategies. Financing Activities. The Company borrowed approximately $68.1 million and $15.4 million (excluding borrowings of approximately $115.6 million to pay off the previous Revolving Credit Agreement), respectively, during the quarters ended December 31, 1995 and 1996, primarily to fund the acquisition of Green Spring in fiscal 1996 and to fund working capital needs and fees and expenses related to the New Revolving Credit Agreement in fiscal 1997. The Company believes that its businesses will generate sufficient cash flows from operations to meet its future debt service requirements. On September 27, 1996, the Company repurchased approximately 4.0 million shares of its Common Stock for approximately $73.5 million, including transaction costs, pursuant to a "Dutch Auction" self-tender offer to its stockholders. On November 1, 1996, the Company announced that its board of directors approved the repurchase of an additional 3.0 million shares of its Common Stock from time to time subject to the terms of the New Revolving Credit Agreement. The Company expects to use cash on hand, future cash flows from operations and borrowings under its New Revolving Credit Facility to fund any future treasury stock purchases. As of December 31, 1996, the Company had approximately $209 million of availability under the New Revolving Credit Agreement. The Company was in compliance with all debt covenants at December 31, 1996. Outlook On January 30, 1997, the Company announced that it had signed definitive agreements for a series of transactions (the "Crescent Transactions") with Crescent Real Estate Equities, limited partnership. ("Crescent"), 16 which are described in "Item 5 - Other Information" and incorporated herein by reference. The Company expects to close the Crescent Transactions in the third quarter of fiscal 1997. The Crescent Transactions, if consummated, would result in the Company relinquishing control of substantially all of its domestic provider business. The Company expects to record a loss before income taxes of approximately $45 million to $55 million as a result of the Crescent Transactions. In addition, the Company believes that the Crescent Transactions would allow the holders of the Company's 11.25% Senior Subordinated Notes (the "Notes") to put their notes to the Company at 101% of face value. If the Company is required to repurchase all of the Notes, it would record an extraordinary loss for the early extinguishment of debt of approximately $7.5 million to $8.0 million, net of tax. The Company expects to have approximately $200 million of net proceeds remaining from the Crescent Transactions ("Remaining Proceeds") after paying off long-term debt, excluding any Notes repurchased. The Company also expects to enter into a new credit agreement with a group of commercial banks prior to the closing of the Crescent Transactions. Under the terms of the new credit agreement, the Company may borrow up to $200 million plus additional unspecified amounts sufficient to repurchase all of the Notes, if necessary. The Company anticipates that the Crescent Transactions could result in reduced net income until the Remaining Proceeds are used to repurchase Notes or are reinvested at an acceptable rate of return to the Company. If the Company is required to repurchase all the Notes as a result of the Crescent Transactions, it would result in increased net income. However, the Company's liquidity and capital resources would be significantly reduced, which would limit the level of investing activities (e.q. acquisitions) the Company may choose or be able to pursue. The remaining portion of "Outlook" is prepared with a view toward the existing operating structure of the Company as of December 31, 1996 before the effects of the Crescent Transactions: Management continually assesses events and changes in circumstances that could affect its business strategy and the viability of its provider facilities. During fiscal 1995, the Company consolidated, closed or sold 15 psychiatric hospitals. During fiscal 1996, the Company consolidated, closed or sold nine psychiatric hospitals. See Note F for further information regarding facility closures in fiscal 1996. The Company plans to pursue acquisitions in its provider segment during fiscal 1997 in markets where it does not currently have a presence and in markets where it has existing hospital operations. Management expects to consolidate services in selected markets as a result of acquisitions or overcapacity and to close or sell additional facilities in future periods depending on market conditions and evolving business strategies. If the Company closes additional psychiatric hospitals in future periods, it could result in additional charges to income for the costs necessary to exit the hospital operations. During fiscal 1995 and fiscal 1996, the Company recorded impairment losses on property and equipment and intangible assets of approximately $27.0 million and $1.2 million, respectively. Such impairment losses resulted from changes in the manner that certain of the Company's assets will be used in future periods and from historical operating losses at certain of the Company's operating facilities combined with projected future operating losses. The affected businesses that were operating as of December 31, 1996 had operating income of approximately $100,000 (net revenue less salaries, supplies and other operating expenses and bad debt expense) in aggregate during fiscal 1996, and operating income of approximately $200,000 in aggregate during the quarter ended December 31, 1996, excluding the normal settlement of reimbursement issues. When events or changes in circumstances are present that indicate the carrying amount of long-lived assets may not be recoverable, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through future cash flows expected from the use of the asset and its eventual disposition. The Company may record additional impairment losses in future periods as circumstances warrant. The Company's hospitals continue to experience a shift in payer mix to managed care payers from other payers, which contributed to a reduction in revenue per equivalent patient day in fiscal 1996 and the first quarter of fiscal 1997 compared to prior periods. Management anticipates continued shifting in its hospitals' payer mix towards 17 managed care payers as a result of changes in the healthcare marketplace and the synergies created by the Green Spring acquisition. Future shifts in the Company's hospital payer mix to managed care payers could result in lower revenue per equivalent patient day in future periods for the Company's hospital operations. In addition, the Company's hospitals have experienced pricing pressure, which contributed to a reduction in revenue per equivalent day compared to prior periods. Management expects the pricing pressure to continue into fiscal 1997, which could result in lower revenue per equivalent patient day in future periods. During fiscal 1994, 1995 and 1996, the Company recorded revenue of $32.1 million, $35.6 million and $28.3 million, respectively, for settlements and adjustments related to reimbursement issues. The settlements in fiscal 1994, 1995 and 1996 related primarily to certain reimbursable costs associated with the Company's financial reorganization in fiscal 1992 and costs related to the early extinguishment of long-term debt in fiscal 1994. Management anticipates that revenue related to such settlements will decline in fiscal 1997, and that the decline will be comparable to the reduction experienced in fiscal 1996. During fiscal 1996, the Company recorded reductions of expenses of approximately $15.3 million as a result of updated actuarial estimates related to malpractice claim reserves. No such reductions of expenses were recorded during the first quarter of fiscal 1996 or fiscal 1997. While management and its actuaries believe that the present reserve is reasonable, ultimate settlement of losses may vary from the amount recorded and result in additional fluctuations in income in future periods. 18 PART II - OTHER INFORMATION Item 1. - Legal Proceedings Certain of the Company's subsidiaries are subject to or parties to claims, civil suits and governmental investigations and inquiries relating to their operations and certain alleged business practices. In the opinion of management, based on consultation with counsel, resolution of these matters will not have a material adverse effect on the Company's financial position or results or operations. Item 5. - Other Information On January 30, 1997, the Company announced that it had entered into a definitive agreement to sell substantially all of its domestic hospital real estate and related personal property (the "Assets") to Crescent. In addition, the Company's domestic portion of its provider business segment will be operated as a joint venture ("CBHS") that is equally owned by Magellan and an affiliate of Crescent (the "Affiliate"). The Company will receive $400 million in cash, subject to adjustment, and warrants in the Affiliate for the purchase of 2.5% of the Affiliate's common stock, exercisable over 12 years, as consideration for the assets. In addition to the assets, Crescent and the Affiliate will each receive 1,283,500 warrants to purchase Magellan Common Stock at $30 per share, exercisable over 12 years. In related agreements, (i) Crescent will lease the real estate and related assets to CBHS for annual rent beginning at $40 million, subject to adjustment, with a 5% annual escalation clause compounded annually and (ii) CBHS will pay Magellan approximately $81 million in annual franchise fees, subject to increase, for the use of assets retained by Magellan and for support in certain areas. The franchise fees paid by CBHS will be subordinated to the lease obligation with Crescent. The assets retained by Magellan include, but are not limited to, the "CHARTER" name, intellectual property, treatment protocols and procedures, clinical quality management, operating processes and the "1-800-CHARTER" telephone call center. Magellan will provide CBHS ongoing support in areas including managed care contracting services, advertising and marketing assistance, risk management services, outcomes monitoring, and consultation on matters relating to reimbursement, government relations, clinical strategies, regulatory matters, strategic planning and business development. The Company intends to initially use the proceeds from the sale of the Assets to reduce its long-term debt, including borrowings under the New Revolving Credit Agreement. The Company believes that under the terms of the Notes indenture, these proposed transactions would allow the Noteholders to put their Notes to the Company at 101% of face value. The Company intends to maintain adequate cash reserves and borrowing capacity to extinguish all the Notes, if necessary. The Noteholders right to put the Notes will expire up to 70 days subsequent to the consummation of the Crescent Transactions. The Company intends to use the remaining proceeds from the sale of the Assets, if any after debt reductions, to pursue acquisitions in its managed care and public sector business segments, develop new products and increase managed care and public sector marketing efforts. The Company will account for its 50% investment in CBHS under the equity method of accounting. The Company expects to record a loss before income taxes of approximately $45 million to $55 million as a result of these proposed transactions, including, but not limited to, the write off of certain hospital-based intangible assets, collection fees associated with accounts receivable and certain restructuring and exit costs offset by the expected gain on the sale of the Assets. These transactions are subject to approval by Magellan stockholders, federal antitrust authorities and other customary closing conditions, including the negotiation of certain financing matters. 19 Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits 4(a) Credit Agreement, dated as of October 16, 1996, among the Company, the lenders named therein, The Chase Manhattan Bank as Administrative Agent and Collateral Agent and First Union National Bank of North Carolina as Syndication Agent, which was filed as Exhibit 4(ai) to the Company's Annual Report on Form 10-K for the year ended September 30, 1996, and is incorporated herein by reference. 27 Financial Data Schedule 99 Safe Harbor for Forward-Looking Statements under the Private Litigation Reform Act of 1995: Certain Cautionary Statements. (b) Report on Form 8-K There were no current reports on Form 8-K filed by the Registrant with the Securities and Exchange Commission during the quarter ended December 31, 1996. 20 FORM 10-Q MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES 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 thereunto duly authorized. MAGELLAN HEALTH SERVICES, INC. (Registrant) Date: February 11, 1997 /s/ Craig L. McKnight ------------------------ --------------------- Craig L. McKnight Executive Vice President and Chief Financial Officer Date: February 11, 1997 /s/ Howard A. McLure ------------------------ -------------------- Howard A. McLure Vice President and Controller (Principal Accounting Officer) 21 EX-99 2 EXHIBIT 99 EXHIBIT 99 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS Magellan Health Services, Inc. (the "Company") and its representatives may make forward looking statements (as such term is defined in the Private Securities Litigation Reform Act) from time-to-time. The Company wants to invoke to the fullest extent possible the protection of the Private Securities Litigating Reform Act and the judicially created "bespeaks caution" doctrine with respect to such statements. Accordingly, the Company is filing this Exhibit 99, which lists certain factors that may cause actual results to differ materially from those in such forward looking statements. This list is not necessarily exhaustive. The Company operates in a rapidly changing business, and new risk factors emerge periodically. There can be no assurance that this Exhibit lists all material risks to the Company at any specific point in time. Readers are also referred to the risk factor disclosure contained in the Company's Registration Statement on Form S-3 (Registration No. 333-20371). On January 30, 1997, the Company announced that it had signed definitive agreements for a series of transactions (the "Crescent Transactions") with Crescent Real Estate Equities, limited partnership ("Crescent"), which are described in "Item 5 - Other Information". The Company expects to close the Crescent Transactions in the third quarter of fiscal 1997. The following risk factors are prepared with a view toward the existing operating structure of the Company as of December 31, 1996 before the effects of the Crescent Transaction: Limitations Imposed by the New Revolving Credit Agreement and Senior Note Indenture In May 1994, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement") with certain financial institutions and issued $375 million of Senior Subordinated Notes (the "Senior Notes") to institutional investors. The Credit Agreement was terminated in October 1996 and the Company entered into a new Credit Agreement (the "New Revolving Credit Agreement"). The New Revolving Credit Agreement and the indenture for the Senior Notes contain a number of restrictive covenants which, among other things, limit the ability of the Company and certain of its subsidiaries to incur other indebtedness, enter into certain joint venture transactions, incur liens, make certain restricted payments and investments, enter into certain business combination and asset sale transactions and make capital expenditures. These restrictions could adversely affect the Company's ability to conduct its operations, finance its capital needs or to pursue attractive business combinations and joint ventures if such opportunities arise. Under the New Revolving Credit Agreement, the Company also is required to maintain certain specified financial ratios. Failure by the Company to maintain such financial ratios or to comply with the restrictions contained in the New Revolving Credit Agreement and the indenture for the Senior Notes could cause such indebtedness (and by reason of cross-acceleration provisions, other indebtedness) to become immediately due and payable and/or could cause the cessation of funding under the New Revolving Credit Agreement. Acquisition Growth Strategy The Company has historically grown through acquisitions. There can be no assurance that the Company will be able to make successful acquisitions in the future or that any such acquisitions will be successfully integrated into its operations. In addition, future acquisitions could have an adverse effect upon the Company's operating results, particularly in the fiscal quarters immediately following the consummation of such transactions while the acquired operations are being integrated into its operations. Green Spring Health Services, Inc. Acquisition and Potential Adverse Reaction On December 13, 1995, the Company acquired a controlling interest in Green Spring Health Services, Inc. ("Green Spring"), a leading provider of managed behavioral healthcare services. The Company's hospitals have contracts with behavioral managed care companies other than Green Spring. Such other companies could decide to terminate their contracts with the Company's hospitals in reaction to the Company's acquisition of a majority interest in one of their major competitors. Historical Operating Losses The Company experienced losses from continuing operations before reorganization items, extraordinary items and the cumulative effect of a change in accounting principle during each fiscal year since the completion of a management buyout in 1988 through fiscal 1995. Such losses amounted to $81.7 million for the ten-month period ended July 31, 1992, $8.1 million for the two-month period ended September 30, 1992 and $39.6 million, $47.0 million and $43.0 million for the fiscal years ended September 30, 1993, 1994 and 1995, respectively. The Company reported net revenue and income from continuing operations of approximately $1.35 billion and $32.4 million, respectively, for the year ended September 30, 1996. The Company also reported net revenue and net income from continuing operations before extraordinary items of approximately $295.7 million and $9.7 million, respectively, compared to net revenue and income from continuing operations before extraordinary items of $346.8 million and $7.1 million, respectively, for the three months ended December 31, 1996. There can be no assurance that the Company's profitability for the year ended September 30, 1996 and the three months ended December 31, 1996 will continue in future periods. The Company's history of losses could have an adverse effect on its operations. Potential Hospital Closures The Company continually assesses events and changes in circumstances that could effect its business strategy and the viability of its provider facilities. During fiscal 1995, the Company consolidated, closed or sold 15 psychiatric hospitals. During fiscal 1996, the Company consolidated, closed or sold nine psychiatric hospitals. The Company recorded charges of approximately $4.1 million for the year ended September 30, 1996, as a result of these consolidations, closures and sales. The Company may elect to consolidate services in selected markets and to close or sell additional facilities in future periods depending on market conditions and evolving business strategies. If the Company closes additional psychiatric hospitals in future periods, it could result in charges to income for the cost necessary to exit the hospital operations. Potential Reductions in Reimbursement by Third-Party Payers and Changes in Hospital Payer Mix The Company's hospitals have been adversely affected by factors influencing the entire psychiatric hospital industry. Factors which affect the Company include (i) the imposition of more stringent length of stay and admission criteria and other cost containment measures by payers; (ii) the failure of reimbursement rate increases from certain payers that reimburse on a per diem or other discounted basis to offset increases in the cost of providing services; (iii) an increase in the percentage of its business that the Company derives from payers that reimburse on a per diem or other discounted basis; (iv) a trend toward higher deductibles and co-insurance for individual patients; (v) pricing pressure related to increasing rate of claims denials by third party payers; and (vi) a trend toward limiting employee health benefits, such as reductions in annual and lifetime limits on mental health coverage. Any of these factors could result in reductions in the amounts that the Company's hospitals can expect to collect per patient day for services provided. For the fiscal year ended September 30, 1996, the Company derived approximately 21% of its gross psychiatric patient service revenue from managed care organizations (primarily HMOs and PPOs, as hereinafter defined), 25% from other private payers (primarily commercial insurance and Blue Cross), 28% from Medicare, 17% from Medicaid, 3% from the Civilian Health and Medical Program for the Uniformed Services ("CHAMPUS") and 6% from other government programs. Changes in the mix of the Company's patients among the managed care organizations, Medicare and Medicaid categories, and among different types of private-pay sources, can significantly affect the profitability of the Company's hospital operations. Therefore, there can be no assurance that payments under governmental and private third-party payer programs will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs of providing care to patients covered by such programs. Previous Bankruptcy Reorganization The Company was reorganized pursuant to Chapter 11 of the United States Bankruptcy Code, effective on July 21, 1992 (the "Reorganization"). Prior to the Reorganization, the Company's total indebtedness was approximately $1.8 billion. From February 1991 until July 1992, the Company was in default in the payment of interest and principal, or both, on substantially all such indebtedness. The indebtedness was incurred by the Company in connection with a management buy-out of the Company in 1988 and a hospital-construction program. As a result of the Reorganization, the Company's long-term debt was reduced by approximately $700 million and its redeemable preferred stock of $233 million was eliminated. The holders of such debt and preferred stock received approximately 97% of Magellan's Common Stock outstanding on July 21, 1992. Dependence on Healthcare Professionals Physicians traditionally have been the source of a significant portion of the patients treated at the Company's hospitals. Therefore, the success of the Company's hospitals is dependent in part on the number and quality of the physicians on the medical staffs of its hospitals and their admission practices. A small number of physicians account for a significant portion of patient admissions at some of the Company's hospitals. There can be no assurance that the Company can retain its current physicians on staff or that additional physician relationships will be developed in the future. Furthermore, hospital physicians generally are not employees of the Company and in general Magellan does not have contractual arrangements with hospital physicians restricting the ability of such physicians to practice elsewhere. Potential General and Professional Liability Effective June 1, 1995, Plymouth Insurance Company, Ltd. ("Plymouth"), a wholly-owned Bermuda subsidiary of the Company, provides general and hospital professional liability insurance up to $25 million per occurrence for the Company's hospitals. All of the risk of losses from $1.5 million to $25 million per occurrence has been reinsured with unaffiliated insurers. The Company also insures with an unaffiliated insurer 100% of the risk of losses between $25 million and $100 million per occurrence, subject to an annual aggregate limit of $75 million. The Company's general and professional liability coverage is written on a "claims made or circumstances reported" basis. For reinsured claims between $10 and $25 million per occurrence, the Company has an annual aggregate limit of coverage of $30 million. For reinsured claims between $1.5 million and $10 million per occurrence, the Company has no significant limitations on the aggregate dollar amounts of coverage. For the six years from June 1, 1989 through May 31, 1995, the Company had a similar general and hospital professional liability insurance program. For those years, the per occurrence deductible (with respect to which the Company was self-insured) was $2.5 million for the years ended May 31, 1990 and 1991, $2 million for the years ended May 31, 1992 and 1993 and $1.5 million (relating to the Company's general hospitals sold on September 30, 1993) for the year ended May 31, 1994. For psychiatric hospitals, Plymouth's coverage did not contain a per occurrence deductible for the years ended May 31, 1994 and 1995. In December 1994, the per occurrence deductible for the years ended May 31, 1989 and 1990 was eliminated. Plymouth provides coverage with no per occurrence deductible for hospital system claims which had not been paid prior to December 31, 1994. Plymouth does not underwrite any insurance policies with any parties other than the Company or its affiliates and subsidiaries. The amount of expense relating to Magellan's malpractice insurance may materially increase or decrease from year to year depending, among other things, on the nature and number of new reported claims against Magellan and amounts of settlements of previously reported claims. To date, Magellan has not experienced a loss in excess of policy limits. Management believes that its coverage limits are adequate. However, losses in excess of the limits described above or for which insurance is otherwise unavailable could have a material adverse effect upon the Company. Potential Expiration and Realization Uncertainties Related to Estimated Tax Net Operating Loss Carryforwards As of September 30, 1996, the Company had estimated tax net operating loss ("NOL") carryforwards of approximately $250 million available to reduce future federal taxable income. These NOL carryforwards expire in 2006 through 2010 and are subject to adjustment upon examination by the Internal Revenue Service. Due to the ownership change which occurred as a result of the Reorganization, the Company's utilization of NOLs generated prior to the effective date of the Reorganization is limited. Based on this limitation and certain other factors, the Company has recorded a valuation allowance of approximately $102.2 million against the amount of the NOL deferred tax asset that in Management's opinion, is not likely to be recovered. There can be no assurance that these NOL carryforwards will not expire, be reduced or be made subject to further limitations prior to their potential utilization in future periods. Governmental Budgetary Constraints and Healthcare Reform In the 1995 and 1996 sessions of the United States Congress, the focus of healthcare legislation has been on budgetary and related funding mechanism issues. Both the Congress and the Clinton Administration have made proposals to reduce the rate of increase in projected Medicare and Medicaid expenditures and to change funding mechanisms and other aspects of both programs. If enacted, these proposals would generally reduce Medicare and Medicaid expenditures. The Company cannot predict the effect of any such legislation, if adopted, on its operations; but the Company anticipates that, although overall Medicare and Medicaid funding may be reduced from projected levels, the changes in such programs may provide opportunities to the Company to obtain increased Medicare and Medicaid business through risk-sharing or partial risk-sharing contracts with managed care plans and state Medicaid programs. A number of states in which the Company has operations have either adopted or are considering the adoption of healthcare reform proposals of general applicability or Medicaid reform proposals, partly in response to possible changes in Medicaid law. Where adopted, these state reform laws have often not yet been fully implemented. The Company cannot predict the effect of these state healthcare reform and Medicaid reform laws on its operations. Provider Business-Competition Each of the Company's hospitals competes with other hospitals, some of which are larger and have greater financial resources. Some competing hospitals are owned and operated by governmental agencies, others by nonprofit organizations supported by endowments and charitable contributions and others by proprietary hospital corporations. The hospitals frequently draw patients from areas outside their immediate locale and, therefore, the Company's hospitals may, in certain markets, compete with both local and distant hospitals. In addition, the Company's hospitals compete not only with other psychiatric hospitals, but also with psychiatric units in general hospitals, and outpatient services provided by the Company may compete with private practicing mental health professionals and publicly funded mental health centers. The competitive position of a hospital is, to a significant degree, dependent upon the number and quality of physicians who practice at the hospital and who are members of its medical staff. The Company has entered into joint venture arrangements with other healthcare providers in certain markets to promote more efficiency in the local delivery system. The Company believes that its provider business competes effectively with respect to the aforementioned factors. However, there can be no assurance that Magellan will be able to compete successfully in the provider business in the future. Competition among hospitals and other healthcare providers for patients has intensified in recent years. During this period, hospital occupancy rates for inpatient behavioral care patients in the United States have declined as a result of cost containment pressures, changing technology, changes in reimbursement, changes in practice patterns from inpatient to outpatient treatment and other factors. In recent years, the competitive position of hospitals has been affected by the ability of such hospitals to obtain contracts with Preferred Provider Organizations ("PPO's"), Health Maintenance Organizations ("HMO's") and other managed care programs to provide inpatient and other services. Such contracts normally involve a discount from the hospital's established charges, but provide a base of patient referrals. These contracts also frequently provide for pre-admission certification and for concurrent length of stay reviews. The importance of obtaining contracts with HMO's, PPO's and other managed care companies varies from market to market, depending on the individual market strength of the managed care companies. State certificate of need laws regulate the Company and its competitors' ability to build new hospitals and to expand existing hospital facilities and services. These laws do provide some protection from competition, as their interest is to prevent duplication of services. In most cases, these laws do not restrict the ability of the Company or its competitors to offer new outpatient services. As of December 31, 1996, the Company operated 39 hospitals in 12 states (Arizona, Arkansas, California, Colorado, Indiana, Kansas, Louisiana, Nevada, New Mexico, South Dakota, Texas and Utah) which do not have certificate of need laws applicable to hospitals. Managed Care Business - Competition The managed healthcare industry is being affected by various external factors including rising healthcare costs, intense price competition, and market consolidation by major managed care companies. Magellan faces competition from a number of sources including other behavioral health managed care companies and traditional full service managed care companies that contract to provide behavioral healthcare benefits. Also, to a lesser extent, competition exists from fully capitated multi-specialty medical groups and individual practice associations that directly contract with managed care companies and other customers to provide and manage all components of healthcare for the members including the behavioral healthcare component. The Company believes that the most significant factors in a customer's selection of a managed behavioral healthcare company include price, the extent and depth of provider networks and quality of services. The Company also believes that the acquisition of Green Spring creates opportunities to enhance its revenues through managed care contracts utilizing the continuum of care and through information systems that support care management and at-risk pricing mechanisms, although no such assurance can be given. Management believes that its managed care business competes effectively with respect to these factors. However, there can be no assurance that Magellan will be able to compete successfully in the managed care business in the future. Regulatory Environment The federal government and all states in which the Company operates regulate various aspects of the Company's businesses. Such regulations provide for periodic inspections or other reviews of the Company's provider operations by, among others, state agencies, the United States Department of Health and Human Services (the "Department") and CHAMPUS to determine compliance with their respective standards of care and other applicable conditions of participation which is necessary for continued licensure or participation in identified healthcare programs, including, but not limited to, Medicare, Medicaid and CHAMPUS. The Company is also subject to state regulation regarding the admission and treatment of patients and federal regulations regarding confidentiality of medical records of substance abuse patients. Although the Company endeavors to comply with such regulatory requirements, there can be no assurance that the Company will always be in full compliance. The failure to obtain or renew any required regulatory approvals or licenses or to qualify for continued participation in identified healthcare programs could adversely affect the Company's operations. The Company is also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments between healthcare providers that are designed to induce overutilization of services paid for by Medicare or Medicaid. Such laws include the anti- kickback provisions of the federal Medicare and Medicaid Patients and Program Protection Act of 1987. These provisions prohibit, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. GPA, the Company's subsidiary that owns or manages professional group practices, is subject to the federal and the state illegal remuneration, practice of medicine and certain other laws which prohibit the subsidiary from owning, but not managing, professional practices. In addition, some states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. The Company endeavors to comply with all federal and state laws applicable to its business. However, a violation of these federal and state laws may result in civil or criminal penalties for individuals or entities or exclusion from participation in identified healthcare programs. Magellan's managed care business operations, in some states, are subject to utilization review, licensure and related state regulation procedures. Green Spring provides managed behavioral healthcare services to various Blue Cross/Blue Shield plans that operate Medicare and Medicaid health maintenance organizations or other at-risk managed care programs and that participate in the Blue Cross Federal Employees health program. As a contractor to these Blue Cross/Blue Shield plans, Green Spring is indirectly subject to federal and, with respect to the Medicaid program, state monitoring and regulation of performance and financial reporting requirements. Although Magellan believes that it is in compliance with all current state and federal regulatory requirements applicable to the managed care business it conducts, failure to do so could adversely affect its operations. Physician ownership of or investment in healthcare entities to which they refer patients has come under increasing scrutiny at both state and federal levels. Congress passed legislation (commonly referred to as "Stark I") which prohibits physicians from referring Medicare patients for clinical laboratory services to an entity with which the physician has a financial relationship. The Department recently published final Stark I regulations on August 14, 1995. Such regulations will govern how the Department views and reviews these financial relationships. Additionally, Congress passed legislation (commonly referred to as "Stark II") which prohibits physicians from referring Medicare or Medicaid patients for certain designated health services, including inpatient and outpatient hospital services, to entities in which they have an ownership or investment interest or with which they have a compensation arrangement. The entity is also prohibited from billing the Medicare or Medicaid programs for such services rendered pursuant to a prohibited referral. To the extent designated services are provided by the Company's provider and managed care operations, physicians who have a financial relationship with the Company and the Company will be subject to the provisions of Stark II. Some states have passed similar legislation which prohibits the referral of private pay patients. To date, the Department has not published Stark II regulations. However, the Department indicated that it will review referrals involving any of the designated services under the language and interpretations set forth in the Stark I rule. The Company's acquisitions and joint venture activities are also subject to federal antitrust laws. The healthcare industry has recently been an active area of antitrust enforcement action by the United States Federal Trade Commission (the "FTC") and the Department of Justice ("DOJ"). The Company's acquisitions and joint venture arrangements could be the subject of a DOJ or an FTC enforcement action which, if determined adversely to the Company, could have a material adverse effect upon the Company's operations. Changes in laws or regulations or new interpretations of existing laws or regulations can have an adverse effect on the Company's operating methods, costs, reimbursement amounts and acquisition and joint venture activities. In addition, the healthcare industry is subject to increasing governmental scrutiny, and additional laws and regulations may be enacted which could require changes in the Company's operations. A federal or state agency charged with enforcement of such laws and regulations might assert an interpretation of such laws and resolutions or may increase scrutiny of a previously ignored area, which may require changes in the Company's operations. Capitation Arrangements The Company's managed care business contracts with companies holding state HMO or insurance company licenses on a capitated or "at-risk" basis where the risk of patient care is assumed by the Company in exchange for a monthly fee per member regardless of utilization level. As of December 31, 1996, approximately 35% of Green Spring's managed care members were under capitated arrangements. During fiscal 1996, approximately 70% of Green Spring's revenues were from at-risk contracts. Increases in utilization levels under capitated contractual arrangements could adversely effect the operations of the managed care business. Some jurisdictions are taking the position that capitated agreements in which the provider bears the risk should be regulated by insurance laws. In this regard, Green Spring's primary customers are comprised of Blue Cross/Blue Shield Plans and other insurance entities which are licensed insurance organizations in their respective states. Green Spring offers "carved out" managed mental health benefits, on a wholesale basis, as a vendor to the regulated insurance organizations. Most current employer group relationships are also contracted through the respective regulated insurance organizations. However, as Magellan and Green Spring develop more direct risk arrangements on a retail basis directly with employer groups or other non-insurance entity customers, the Company may be required to obtain insurance licenses in the respective states where the direct risk arrangements are to be pursued. There can be no assurance that the Company can obtain the insurance licenses required by the respective states in a timely or cost effective manner to respond to market demand. Mental Health Parity Legislation In October 1996, President Clinton signed a bill submitted by the U.S. Congress that prohibits health plans from setting annual or lifetime caps on mental health coverage ("parity") at levels below those set for general medical/surgical healthcare services. The bill does not require a health plan to offer or provide mental health services and does not affect other terms and conditions of health plans, such as inpatient day or outpatient visit limits or scope of benefits, nor does this bill prohibit health plans from utilizing other forms of cost containment. The definition of mental health services in the bill excludes substance abuse and chemical dependency. The effective date for the parity legislation is January 1, 1998. Other key components of the parity legislation are as follows: 1) Employers with 50 or fewer employees are exempt from the parity legislation. 2) Health plans that incur increased costs of 1% or more as a result of the parity legislation will be exempt. 3) The parity legislation expires on September 30, 2001 unless extended by Congress. The Company views the parity legislation as an acknowledgment by the Federal government of the importance of effective treatment of mental health disorders for society in general. The parity legislation could result in cost containment mechanisms by third party payers such as the elimination of mental health benefit plans or encouraging the utilization of managed care organizations to administer mental health benefit plans, which could both result in lower demand and lower revenue per equivalent patient day in the Company's provider business. However, this bill is subject to administrative and judicial interpretation, neither of which the Company is able to predict. There can be no assurance that such interpretations will not adversely effect the Company's businesses. Possible Volatility of Stock Price The Company believes factors such as announcements with respect to healthcare reform measures, reductions in government healthcare program projected expenditures, acquisitions and quarter-to-quarter and year-to-year variations in financial results could cause the market price of Magellan Common Stock to fluctuate substantially. Any such adverse announcement with respect to healthcare reform measures or program expenditures, acquisitions or any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of Magellan Common Stock in any given period. As a result, the market for Magellan Common Stock may experience price and volume fluctuations unrelated to the operating performance of Magellan. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 1, 2, AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-mos SEP-30-1997 DEC-31-1996 114,452,000 0 191,862,000 0 4,913,000 338,349,000 625,424,000 135,083,000 1,118,957,000 242,137,000 581,202,000 8,259,000 0 0 119,805,000 1,118,957,000 346,819,000 346,819,000 0 284,123,000 13,703,000 20,235,000 13,569,000 15,189,000 6,075,000 7,141,000 0 2,950,000 0 4,191,000 0.15 0
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