-----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, N1aAEgKU6PwxsOGL8WPfdKWftmSA/dc7uXT/+4gvDGTXF7RkeN6V7/g232/A8J+U xY48R/Md+sGH42mZBc/rFg== 0000909518-03-000749.txt : 20031009 0000909518-03-000749.hdr.sgml : 20031009 20031009162522 ACCESSION NUMBER: 0000909518-03-000749 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031008 ITEM INFORMATION: Bankruptcy or receivership ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20031009 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: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06639 FILM NUMBER: 03935220 BUSINESS ADDRESS: STREET 1: 6950 COLUMBIA GATEWAY STREET 2: STE 400 CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 4109531000 FORMER COMPANY: FORMER CONFORMED NAME: CHARTER MEDICAL CORP DATE OF NAME CHANGE: 19920703 8-K 1 jd10-8_8k.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT - October 8, 2003 (Date of Earliest Event Reported) MAGELLAN HEALTH SERVICES, INC. ------------------------------ (Exact name of registrant as specified in its charter) Commission File No. 1-6639 Delaware 58-1076937 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 6950 Columbia Gateway Drive Suite 400 Columbia, Maryland 21046 -------------------------------------- ----- (Address of principal Zip Code executive offices) Registrant's telephone number, including area code: (410) 953-1000 Not Applicable (Former Name or Former Address, if Changed Since Last Report) ================================================================================ ITEM 3. BANKRUPTCY OR RECEIVERSHIP. On October 8, 2003, the Third Joint Amended Plan of Reorganization, as modified (the "Plan"), of Magellan Health Services, Inc. ("Magellan" or the "Company") and certain of its subsidiaries was confirmed by order of the United States Bankruptcy Court for the Southern District of New York (the "Court"). At a hearing by the Court on confirmation of the Plan held on October 8, 2003, the vote of the Company's creditors on acceptance of the Plan was reported. The plan was accepted by the favorable vote of all classes of the Company's creditors entitled to vote on the plan, as determined in accordance with the plan, other than the Company's senior secured creditors whose approval was not required for confirmation of the Plan. Magellan currently anticipates that the conditions to effectiveness of the plan will be satisfied and the plan will be substantially consummated in the current quarter. Magellan today issued the attached press release regarding the Court's confirmation of the Plan (attached hereto as Exhibit 2.1 hereto). Certain of the statements made in the press release, including those concerning the success of the company's reorganization plan, constitute forward looking statements as contemplated under the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those contemplated or implied by such forward looking statements including: service issues arising with certain customers, terminations by customers, operating results or cash flows differing from those contemplated or implied by such forward looking statements, the impact of new or amended laws or regulations, governmental inquiries, outcome of ongoing litigation, interest rate increases, unanticipated increases in the costs of care and other factors. Any forward looking statements made in this release are also qualified in their entirety by these risks and the complete discussion of risks set forth under the caption "Cautionary Statements" in Magellan's Annual Report on Form 10-K/A for the year ended September 30, 2002 filed with the Securities and Exchange Commission on January 23, 2003. As previously disclosed, on March 11, 2003, Magellan and 88 of its subsidiaries (collectively, the "Debtors") filed voluntary petitions under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the Court. The chapter 11 cases were consolidated for procedural purposes only and have been jointly administered under case no. 03-40515 (PCB) pursuant to an order of the Court. The Debtors have remained in possession of their assets and properties, and have continued to operate their businesses and manage their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. Also as previously reported, on August 18, 2003, the Debtors received approval from the Court of the distribution to their creditors of a Disclosure Statement (the "Disclosure Statement") with respect to the Debtors' Third Joint Amended Plan of Reorganization, which the Debtors had previously filed with the Court with the approval of its Official Committee of Unsecured Creditors. A copy of the Third Joint Amended Plan of Reorganization is hereby incorporated by reference into this report from Exhibit 2(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 filed with the SEC on August 19, 2003. On September 25, 2003 and October 8, 2003, the Debtors filed with the Court certain Modifications to the Debtors' Third Amended Joint Plan of Reorganization (the "Plan Modifications"). A copy of the Plan Modifications filed with the Court on September 25 and October 8, 2003 are attached hereto as Exhibits 2.2 and 2.3, respectively. The order of the Court confirming the Plan (the "Confirmation Order") contains certain provisions which affect or otherwise relate to the implementation of the Plan and a copy of the Confirmation Order is attached hereto as Exhibit 2.4. The following is a summary of the transactions, including modifications of the rights of the Company's existing securityholders, which are contemplated to occur either pursuant to or in connection with the implementation and consummation of the Plan. This summary only highlights certain of the substantive provisions of the Plan and is not intended to be a complete description of, and is not a substitute for a full and complete reading of, the Plan. This summary is qualified in its entirety by reference to the full text of the Plan, as it will be implemented pursuant to the Confirmation Order. Capitalized terms used but not defined in this report have the meanings set forth in the Plan. 2 Under the Plan, the Company and its subsidiaries will continue to conduct their current business in their current organizational form and with their current assets in all material respects (except for cash to be distributed under the Plan to creditors of the Company), but the Company will be recapitalized (as so recapitalized, "reorganized Magellan") as of the effective date of the Plan (the "Effective Date"). Both the existing indebtedness of the Company (i.e., secured bank loans, two classes of notes and general unsecured creditor claims) and the existing equity interests in the Company (approximately 35.3 million shares of a single class of Common Stock, $0.25 par value per share, and approximately 59,063 shares of Series A Redeemable Senior Preferred Stock, without par value) will be restructured pursuant to the Plan, as described below. Under the Plan, the Company's senior secured bank indebtedness, extended under a credit agreement dated February 12, 1998, as amended (the "Existing Credit Agreement"), and consisting of currently outstanding term loans of approximately $115.8 million and a revolving loan under which there are outstanding borrowings of $45.0 million and outstanding letters of credit of approximately $73.5 million, will be either repaid in full or repaid in part and restructured. If not repaid in full, this indebtedness will be repaid to the extent of $50.0 million and the remaining balance will be converted to secured term loans (and reimbursement obligations with respect to outstanding letters of credit and renewals thereof) having maturities through November 30, 2005 (the "New Facilities"). The New Facilities will bear interest at a rate equal to the prime rate plus 3.25 percent and the Company will pay letter of credit fees equal to 4.25 percent per annum plus a fronting fee of 0.125 percent per annum of the face amount of letters of credit. The Company will also pay the lenders a fee of one percent of the New Facilities on the Effective Date. The New Facilities will be guaranteed by substantially all of the subsidiaries of reorganized Magellan and will be secured by substantially all of the assets of reorganized Magellan and the subsidiary guarantors. However, the Company anticipates that the New Facilities will not be used and, instead, the indebtedness under its Existing Credit Agreement will be refinanced as described below. On August 1, 2003, the Company entered into a commitment letter with Deutsche Bank (the "DB Commitment Letter") to provide a credit facility (the "Exit Facility") that would provide $100.0 million in term loans, an $80.0 million letter of credit facility and a $50.0 million revolving credit facility. The interest rate on the Exit Facility would be lower than the rates of interest on the New Facilities. Borrowings under the Exit Facility would have a term of five years. The Exit Facility would be guaranteed by substantially all of the subsidiaries of reorganized Magellan and would be secured by substantially all of the assets of reorganized Magellan and the subsidiary guarantors. The proceeds of the Exit Facility, together with cash on hand, would be used to repay the obligations under the existing Credit Agreement, to pay fees and expenses related to the Debtors' chapter 11 cases, to make other cash payments contemplated by the Plan, and for general working capital purposes. The DB Commitment Letter is subject to a number of conditions, the satisfaction or waiver of which is necessary before Deutsche Bank is obligated to extend funds thereunder. There is no assurance that the Company will satisfy such conditions or have such conditions waived by the Effective Date and therefore no assurance that the Company will be able to borrow under the Exit Facility on the Effective Date, instead of making payment in respect of the Existing Credit Facility and entering into the New Facility as described above . 3 Under the Plan, holders of the Company's currently outstanding 9-3/8% Senior Notes due 2007 in the approximate principal amount of $250.0 million (the "Senior Notes") will exchange their Senior Notes and all accrued and unpaid interest thereon for new unsecured notes (the "New Notes") of the Company and cash in an aggregate amount equal to the face amount of the Senior Notes plus the accrued and unpaid interest thereon. A copy of the form of Indenture with respect to which the New Notes may be issued under the Plan, between Magellan Health Services, Inc. and HSBC Bank or another indenture trustee, is hereby incorporated by reference into this report from Exhibit 99.3 to the Company's Current Report on Form 8-K dated September 29, 2003. The New Notes will contain terms substantially similar to the existing Senior Notes, will have a maturity of November 15, 2008 and an interest rate of 9-3/8% per annum. Holders of the Company's currently outstanding 9% Senior Subordinated Notes due 2008 in the approximate principal amount of $625.0 million (the "Senior Subordinated Notes") will be entitled to receive, in satisfaction of their claims, which include all accrued and unpaid interest, approximately 88% of the equity of the reorganized company (before giving effect to the Equity Offering and the Onex Investment, and the reservation of shares for issuance pursuant to the warrants and for management compensation purposes described below). Holders of general unsecured creditor claims (other than Senior Notes claims and Senior Subordinated Notes claims), which the Company estimates at approximately $75 million, subject to resolution of certain pending disputes) will receive, in satisfaction of their claims (including any unpaid interest accrued thereon) cash, shares of Ordinary Common Stock representing approximately 9% of reorganized Magellan's equity (before giving effect to the Equity Offering and the Onex Investment, and the reservation of shares for issuance pursuant to the warrants and for management compensation purposes described below), and New Notes, the portion of each to be determined in accordance with certain criteria set forth in the Plan. The Company expects that on the Effective Date it will issue New Notes in the aggregate principal amount of approximately $250 million. No interest payments have been, or (prior to the Effective Date) will be, made regarding the Senior Subordinated Notes, the Senior Notes or other general unsecured claims against the Company during the course of the Debtors' chapter 11 proceedings. Under the Plan, in summary, the currently outstanding shares of Common Stock of the Company will be cancelled and two classes of newly authorized shares of common stock will be issued, shares of Ordinary Common Stock, $0.01 par value per share ("Ordinary Common Stock"), and shares of Multiple and Variable Vote Restricted Convertible Common Stock, $0.01 par value per share ("Multi-Vote Common Stock"), including shares of Ordinary Common Stock to be issued to holders of the Senior Subordinated Notes and to holders of general unsecured creditor claims, as discussed above. In addition, certain shares of Ordinary Common Stock and warrants to purchase shares of Ordinary Common Stock will be issued under the Plan to holders of the Company's currently outstanding Common Stock and Series A Redeemable Preferred Stock. The Multi-Vote Common Stock and Ordinary Common Stock will have the same powers, privileges and rights, and each share will represent an equivalent interest in reorganized Magellan's equity, except that the shares of Multi-Vote Common Stock will have the number of votes from time to time sufficient so that all the outstanding shares of Multi-Vote Common Stock will have an equal number of votes as all the shares of Ordinary Common Stock, i.e., the Multi-Vote Common Stock will be entitled to exercise 50% of the voting power of all the common stock of reorganized Magellan, except as described below. The Multi-Vote Common Stock will be issued only to Onex and is transferable by Onex only to its affiliates; upon transfer to any other party it will automatically convert on a share-for-share basis into the Ordinary Common Stock. The Multi-Vote Securities will cease to have any special voting rights in the event the outstanding shares of Multi-Vote Common Stock ceases to represent a specified minimum percentage of the common equity of reorganized Magellan, as described below. The Multi-Vote 4 Common Stock and Ordinary Common Stock also differ in that each class has certain other voting rights and other special rights and privileges, including as described below. As part of the Plan, the Company has also offered to holders of its Senior Subordinated Notes and its general unsecured creditors and one holder of an administrative claim (the "Equity Offering") the opportunity to purchase on the Effective Date 2,631,579 shares of Ordinary Common Stock representing approximately 17.2 % of the equity of reorganized Magellan (taking into account the issuance of equity of reorganized Magellan to its creditors pursuant to the Plan as described above and giving effect to the Equity Offering and the Onex Investment but before giving affect to the reservation of shares for issuance pursuant to the warrants and for management compensation purposes as described below), at a price per share of $28.50, or a total price of $75 million. The Company has received a commitment from Onex Corporation, a Canadian corporation, to purchase on the same terms any shares in the Equity Offering not purchased by the creditors to whom it was offered. The Company has also received a commitment from Onex Corporation, for it or investment funds or other entities affiliated with it (collectively, "Onex"), to purchase on the Effective Date 2,631,579 shares of common stock, which will represent approximately 17.2% of the equity of reorganized Magellan on the Effective Date (taking in to account the issuance of equity of reorganized Magellan to its creditors pursuant to the Plan as described above and giving effect to the Equity Offering and such investment by Onex but before giving affect to the reservation of shares for issuance pursuant to the warrants and for management compensation purposes as described below), at a purchase price per share of $28.50 or at a total price of $75 million (the "Onex Investment"). In addition, Onex had committed to purchase additional shares of common stock at a purchase price of $22.50 per share to fund an offer made by the Company pursuant to the Plan to holders of its Subordinated Notes and other general unsecured creditors permitting them to elect to receive $22.50 in cash per share in lieu of all the shares of Ordinary Common Stock they would otherwise receive under the Plan (the "Cash-Out Election"), up to a total of $50 million and subject to pro ration if such election is oversubscribed. Any shares purchased by Onex, whether in the Equity Offering, pursuant to the Onex Investment or to fund the Cash-Out election, will be Multi-Vote Common Stock. The time period for creditors of the Company to elect to purchase shares of Ordinary Common Stock pursuant to the Equity Offering has expired and creditors have elected to purchase 2,222,182 shares out of the 2,631,579 shares offered. The time period for creditors to elect to participate in the Cash-Out Election has expired and the Company estimates that creditors have elected to receive cash payments for a total of 681,801 shares that would otherwise be issued to them under the Plan (requiring cash payments in an amount totaling $15,340,525 and thereby without a requirement for pro ration among electing holders). Based on these elections, the Company estimates Onex pursuant to its commitment will be obligated to purchase on the Effective Date approximately 409,397 shares of Multi-Vote Common Stock with respect to the unsubscribed portion o the Equity Offering, 2,631,579 shares of Multi-Vote Common Stock pursuant to the Onex Investment, and approximately 681,801 shares pursuant to 5 funding the Cash-Out Election, for a total purchase of approximately 3,722,777 shares of Multi-Vote Common Stock by Onex, which on the Effective Date will represent approximately 24.7% of Reorganized Magellan's equity (without giving affect to the reservation of shares for issuance pursuant to the warrants and for management compensation purposes referred to below). Holders of Senior Subordinated Notes are expected to receive approximately 11,426,000 shares of Ordinary Common Stock in respect of their claims and subscriptions pursuant to the Equity Offering. Under the Plan, the existing Series A Redeemable Preferred Stock of the Company will be cancelled and the holders thereof will receive 198,548 shares of Ordinary Common Stock, representing approximately 1.3% of the equity of reorganized Magellan on the Effective Date (after giving effect to the issuance of such shares, the Equity Offering and the Onex Investment but without giving affect to the reservation of shares for issuance pursuant to the warrants and for management compensation purposes as referred to below), as well as warrants to purchase until the seventh anniversary of the Effective Date for $69.46 per share a like number of shares of Ordinary Common Stock. The existing common stock of the Company will also be cancelled and the holders thereof will receive 49,637 shares of Ordinary Common Stock, representing approximately 0.3% of the equity of reorganized Magellan on the Effective Date (after giving effect to the issuance of such shares, the Equity Offering and the Onex Investment but without giving affect to the reservation of shares for issuance pursuant to the warrants and for management compensation purposes referred to herein), which equals approximately 1 share of Ordinary Common Stock for every 712 shares of existing common stock, as well as warrants to purchase until the seventh anniversary of the Effective Date for $69.46 per share a like number of shares of Ordinary Common Stock. The form of warrant to be received by existing holders of the Company's Common Stock and Series A Redeemable Preferred Stock, and the related form of warrant agreement, was previously filed with the Court as an exhibit to the Plan and was filed as Exhibit 99.4 to the Company's Current Report on Form 8-K dated September 25, 2003. Pursuant to the Plan, all outstanding options and warrants to purchase existing common stock will be cancelled, and will not be replaced with options or warrants to purchase Ordinary Common Stock. No fractional shares or cash in lieu thereof will be issued or paid. As part of, and subject to, consummation of the Plan, Aetna Inc. ("Aetna") and Magellan have agreed to renew their behavioral health services contract. Under this agreement, the Company will continue to manage the behavioral health care of individuals covered by Aetna's healthcare programs through December 31, 2005, with an option for Aetna to either purchase the business or to extend the agreement at that time. Pursuant to the Plan, on the Effective Date, the Company will pay $15.0 million of its obligation to Aetna of $60.0 million plus accrued interest, and provide Aetna with an interest-bearing note (the "Aetna Note") for the balance, which would mature on December 31, 2005. The Aetna Note will be guaranteed by substantially all of the subsidiaries of reorganized Magellan and would be secured by a second lien on substantially all of the assets of reorganized Magellan and the subsidiary guarantors. Additionally, if this contract is extended by Aetna at its option through at least December 31, 2006, one-half of the Aetna Note would be payable on December 31, 2005, and the remainder would be payable on December 31, 2006. If Aetna opts to purchase the business, the purchase price could be offset against any amounts owing under the Aetna Note. The Court approved the renewal of the Aetna agreement on April 23, 2003. This agreement, the Second Amendment, dated as of 6 March 11, 2003 to the Master Service Agreement, dated as of August 5, 1997, by and among Aetna, Magellan Health Services, Inc. and Magellan's subsidiary Human Affairs International, as amended, is hereby incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 12, 2003. In addition, Aetna will receive under the Plan an option to purchase, commencing on January 1, 2006 and not later than the fifth anniversary of the Effective Date 100,000 shares of Ordinary Common Stock at a purchase price of $24.10 per share. The form of the warrant to be received by Aetna, and the related form of warrant agreement, was previously filed with the Court as an exhibit to the Plan and was filed as Exhibit 99.7 to the Company's Current Report on Form 8-K dated September 25, 2003. Upon implementation of the Plan, the Company's certificate of incorporation and bylaws will be amended and restated. The total number of shares of capital stock which reorganized Magellan will have the authority to issue will be 70,000,000 shares, consisting of: (i) 40,000,000 shares of Ordinary Common Stock, (ii) 20,000,000 shares of Multi-Vote Common Stock and (iii) 10,000,000 shares of preferred stock, issuable in the discretion of the Board of Directors in the manner provided by law in one or more series with such powers, privileges and rights as may be determined by the Board (except that no non-voting shares shall be issued). As of the Effective Time, the Board of Directors of reorganized Magellan will consist of nine members, including the Company's chief executive officer (Steven J. Shulman) and chief operating officer (Dr. Rene Lerer) and seven members selected by Onex and the Official Committee of Unsecured Creditors (Mark L. Hilson, Robert Haft, Christopher A. Govan, Robert M. LeBlanc, Michael P. Ressner, Michael Diament and Saul Burian). The terms of office of three of the members (Messrs. Haft, Govan and LeBlanc) will extend to the 2005 annual meeting of reorganized Magellan, the terms of office of two members (Messrs. Hilson and Lerer) will extend until the 2006 annual meeting and the terms of office of four members (Messrs. Shulman, Ressner, Diament and Burian) will extend until the 2007 annual meeting and in each case the term of their successors will extend for three years and until the election and qualification of their respective successors, or in any case their earlier death, incapacity, resignation or removal. Upon the expiration of their initial terms, the seats held by four of the initial directors (Messrs. Shulman, Hilson, Haft and Govan and their successors) will be filled by election by vote of the Multi-Vote Common Stock, voting as a separate class, three (Messrs. Ressner, Diament and Burian and their successors) will be filled by election by vote of the Ordinary Common Stock, voting as a separate class and two (Messrs. LeBlanc and Lerer and their successors) will be filled by election by vote of the Multi-Vote Common Stock and Ordinary Common Stock, voting together as though one class, in which vote the Multi-Vote Common Stock will be entitled to cast 50% of the entire vote. However, the special voting powers of the Multi-Vote Common Stock and Ordinary Common Stock will terminate at such time as there are no shares of Multi-Vote Common Stock and all the directors will be elected by vote of the common stockholders. Copies of the forms of Amended and Restated Certificate of Incorporation and Restated By-Laws of the Company are hereby incorporated by reference into this report from Exhibits 99.1 and 99.2, respectively, to the Company's Current Report on Form 8-K dated September 29, 2003. The Company's current senior executive officers (Steven J. Shulman, Dr. Rene Lerer and Mark S. Demilio) are expected to enter into employment agreements with reorganized Magellan on or about the Effective Date and to continue in their current positions upon consummation of the Plan. On October 8, 2003, the material terms of such agreements were filed with the Court as 7 exhibits to the Plan and such filings are attached as Exhibits 2.5, 2.6 and 2.7 to this report. In general, the Company's other senior officers are expected to continue in the reorganized Magellan's employ in substantially the same positions. The form of employment agreement with reorganized Magellan to be entered into by the Company's other senior officers was previously filed with the Court as an exhibit to the Plan and was filed as Exhibit 99.10 to the Company's Current Report on Form 8-K dated September 25, 2003. The Plan also provides for the establishment of a Management Incentive Plan under which restricted stock awards, stock options and other equity incentives may be issued to members of the Company's management and other employees. A total of 2,693,499 shares of Ordinary Common Stock have been reserved for issuance pursuant to such plan over a period not to exceed ten years after the Effective Date. Pursuant to the Plan, restricted stock awards and other equity incentives covering a total of approximately 73,000 shares of Ordinary Common Stock are to be issued to executive officers of the Company on or about the Effective Date. The form of the Management Incentive Plan was previously filed with the Court as an exhibit to the Plan and was filed as Exhibit 99.5 to the Company's Current Report on Form 8-K dated September 25, 2003. The existing common stock of the Company was previously registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), until its listing on the New York Stock Exchange was terminated on October 8, 2002. Pursuant to Rule 12g-2 promulgated under the Exchange Act, the existing common stock of the Company was deemed to be registered under Section 12(g) of the Exchange Act without the filing of an additional registration statement upon the termination of the listing of the existing common stock of the Company on the New York Stock Exchange and has remained so registered. On or as soon as practicable after the Effective Date, the Ordinary Common Stock of reorganized Magellan will be registered under Section 12(g) of the Exchange Act. As the existing common stock of the Company will be cancelled, it will cease to be registered. Information regarding the assets and liabilities of the Debtors as of August 31, 2003 is hereby incorporated by reference into this report from the Company's monthly operating report to the Court attached as Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on October 3, 2003. The Company's assets and liabilities as of the date the confirmation order was issued were not materially different. The Company's cash assets upon consummation of the Plan will differ materially by reason of the cash payments to be made under the Plan, the issuance of equity pursuant to the Equity Offering and the Onex Investment and the borrowings the Company expects to make under the Exit Facility, as described above, and the Company's liabilities will differ materially by reason of the discharge of liabilities provided by the Plan and the new obligations undertaken by the Company in implementation of the Plan as described above. On or near the Effective Date, the Company will adopt "fresh start accounting" with respect to its financial reports, which requires the Company to restate all assets and liabilities to their fair values based upon the provisions of the Plan and certain valuations which the Company will make in connection with the implementation of the Plan. The Company has not yet determined the impact of fresh start accounting on the historical consolidated financial statements. 8 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements Not applicable. (b) Pro Forma Financial Information Not applicable (c) Exhibits. Exhibit No. Description ----------- ----------- 2.1 Press Release issued October 8, 2003 by Magellan Health Services, Inc. 2.2 Modifications to Debtors' Third Joint Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code, as filed with the U.S. Bankruptcy Court for the Southern District of New York on September 25, 2003 (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated September 29, 2003). 2.3 Modifications to Debtors' Third Joint Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code, as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 2.4 Order Confirming Debtors' Third Joint Amended Plan of Reorganization, as Modified, Pursuant to Chapter 11 of the Bankruptcy Code, , as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 2.5 Term sheet related to the Employment Agreement for Steven J. Shulman, as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 2.6 Term sheet related to the Employment Agreement for Dr. Rene Lerer, as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 2.7 Term sheet related to the Employment Agreement for Mark S. Demilio, as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 9 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MAGELLAN HEALTH SERVICES, INC. By: /s/ Mark S. Demilio -------------------------------------- Name: Mark S. Demilio Title: Executive Vice President and Chief Financial Officer Dated: October 9, 2003 10 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 2.1 Press Release issued October 8, 2003 by Magellan Health Services, Inc. 2.2 Modifications to Debtors' Third Joint Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code, as filed with the U.S. Bankruptcy Court for the Southern District of New York on September 25, 2003 (incorporated by reference to Exhibit 99.2 to the Company's current report on Form 8-K dated September 29, 2003). 2.3 Modifications to Debtors' Third Joint Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code, as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 2.4 Order Confirming Debtors' Third Joint Amended Plan of Reorganization, as Modified, Pursuant to Chapter 11 of the Bankruptcy Code, , as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 2.5 Term sheet related to the Employment Agreement for Steven J. Shulman, as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 2.6 Term sheet related to the Employment Agreement for Dr. Rene Lerer, as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 2.7 Term sheet related to the Employment Agreement for Mark S. Demilio, as filed with the U.S. Bankruptcy Court for the Southern District of New York on October 8, 2003. 11 EX-2 3 jd10-9ex2_1.txt 2.1 Exhibit 2.1 MAGELLAN HEALTH SERVICES RECEIVES FINAL COURT APPROVAL IN CHAPTER 11 PROCESS -- Bankruptcy Court Confirms Plan of Reorganization -- COLUMBIA, Md. - October 8, 2003 - Magellan Health Services, Inc. (OCBB: MGLH) today announced that the U.S. Bankruptcy Court for the Southern District of New York entered an order confirming the Company's Third Amended Plan of Reorganization, as modified. The Company's Plan of Reorganization received overwhelming support from the Company's unsecured creditors and, at its confirmation hearing today, the Court ruled that Magellan had met all of the statutory requirements necessary for confirmation of its Plan of Reorganization. The Company expects to consummate the reorganization during the fourth quarter. Steven J. Shulman, chief executive officer of Magellan, said, "This is a great day for Magellan. We appreciate the strong support our creditors, lenders and new investors have demonstrated for Magellan and our Plan of Reorganization. We also are grateful for the loyalty of our customers, members, providers and other vendors, and for the outstanding efforts of our employees in ensuring that our business continued to operate smoothly throughout our bankruptcy process. As a result of this enormous and extremely successful effort, we are supremely confident of our ability to achieve new goals. We are excited to focus our full energies on our future as the `new Magellan,' delivering unparalleled service, strength and solutions to all of our stakeholders." Mark S. Demilio, chief financial officer, said, "Having reduced Magellan's debt by approximately $600 million and attracted $150 million in new equity, Magellan will exit Chapter 11 with a significantly strengthened capital structure that will enable the Company to continue to enhance its market leadership position. Further, we have the support of highly respected and sophisticated investors and financial partners, such as Onex, who have demonstrated their confidence in the Company and its prospects for the future." "In just seven months, the nation's largest behavioral managed healthcare company has successfully addressed its financial challenges and positioned itself strongly for the future," said Robert Le Blanc, managing director of Onex. "Magellan has a strong and profitable business model and an accomplished management team and we are very pleased to be partnering with the Company to realize its full potential in the future." As disclosed previously, Onex Corporation will be making an equity investment in reorganized Magellan as part of the Company's Plan of Reorganization. Consummation of the Company's reorganization is subject to certain regulatory approvals, including those required under the Hart-Scott-Rodino Act, and other customary conditions. About Magellan: Headquartered in Columbia, Md., Magellan Health Services (OCBB: MGLH), is the country's leading behavioral managed care organization. Its customers include health plans, corporations and government agencies. Safe Harbor Statement: Certain of the statements made in this document including the consummation of the Plan of Reorganization and success of any restructuring constitute forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those contemplated or implied by such forward-looking statements including: ability to obtain all required regulatory approvals and to satisfy all other conditions to consummation of the Plan of Reorganization, service issues arising with certain customers, terminations by customers, operating results or cash flows differing from those contemplated or implied by such forward-looking statements, the impact of new or amended laws or regulations, governmental inquiries, outcome of ongoing litigation, interest rate increases, unanticipated increases in the costs of care and other factors. Any forward-looking statements made in this document are also qualified in their entirety by these risks and the complete discussion of risks set forth under the caption "Cautionary Statements" in Magellan's Transition Report on Form 10-K for the transition period from October 1, 2002 to December 31, 2002 filed with the Securities and Exchange Commission on August 12, 2003. # # # BONDHOLDER CONTACT: Bill Forrest Gleacher Partners, LLC 212-418-4200 SHAREHOLDER CONTACT: Melissa Rose 410-953-1218 MEDIA CONTACT: Erin Somers 410-953-2405 EX-2 4 mv10-8ex2_3.txt 2.3 Exhibit 2.3 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - -----------------------------------------X IN RE : CHAPTER 11 CASE NO. : MAGELLAN HEALTH SERVICES, INC., ET AL., : 03-40515 (PCB) : DEBTORS. : (JOINTLY ADMINISTERED) - -----------------------------------------X MODIFICATIONS TO DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE --------------------------------------- WEIL, GOTSHAL & MANGES LLP Attorneys for Debtors and Debtors in Possession 767 Fifth Avenue New York, New York 10153 (212) 310-8000 Dated: New York, New York October 8, 2003 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - -----------------------------------------X IN RE : CHAPTER 11 CASE NO. : MAGELLAN HEALTH SERVICES, INC., ET AL., : 03-40515 (PCB) : DEBTORS. : (JOINTLY ADMINISTERED) - -----------------------------------------X MODIFICATIONS TO DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE --------------------------------------- The Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated August 18, 2003, of Magellan Health Services, Inc. and certain of its direct and indirect subsidiaries, as debtors and debtors in possession, as modified by the Modifications to Debtors' Third Amended Joint Plan Of Reorganization Under Chapter 11 Of The Bankruptcy Code, Dated September 25, 2003, is further amended as follows: 1. Section 2.3 of the Plan is amended to read as follows in its entirety: Except to the extent that a holder of an Allowed Priority Tax Claim agrees to a different treatment, each holder of an Allowed Priority Tax Claim shall receive, at the sole option of the Debtors, Cash in an amount equal to such Allowed Priority Tax Claim on, or as soon thereafter as is reasonably practicable, the later of the Effective Date and the first Business Day after the date that is thirty (30) calendar days after the date such Priority Tax Claim becomes an Allowed Priority Tax Claim. All Allowed Priority Tax Claims that are not due and payable on or before the Effective Date shall be paid in the ordinary course of business as such obligations become due. Upon the Debtors' default in making a payment under the terms of the Plan, and upon providing the Debtors with written notice and a reasonable opportunity, but not less than 30 days, to cure such default, the Internal Revenue Service may institute collection action or pursue any and all available remedies without further leave of the Court. 2. Section 5.7 of the Plan is amended to read in its entirety as follows: Section 5.7 Release of Representatives As of the Effective Date, the respective officers, directors, employees, financial advisors, professionals, accountants, and attorneys of the Debtors who have served, or been employed or retained by, the Debtors on or after the Commencement Date (the "Releasees) shall be released by the Debtors from any and all Claims 2 arising on or after the Commencement Date against them in their capacity as representatives of the Debtors, except for willful misconduct or gross negligence, intentional fraud, breach of fiduciary duty that results in a personal profit at the expense of the Estate, and/or the knowing misuse of confidential information. Nothing in Section 5.7 of the Plan shall effect a release of any claim of the United States Government or any of its agencies or any state and local authority whatever, including without limitation any claim arising under the Internal Revenue Code, the environmental laws or any criminal laws of the United States or any state and local authority against the Releasees, nor shall anything in the Confirmation Order or the Plan enjoin the United States or any state or local authority from bringing any claim, suit, action or other proceedings against the Releasees for any liability whatever, including without limitation any claim arising under the Internal Revenue Code, the environmental laws or any criminal laws of the United States or any state and local authority. 3. Section 5.9 of the Plan is amended to add at the end thereof: Reorganized Magellan may not consummate any acquisition of any other business prior to the 210th day following the Effective Date unless a majority of the members of Reorganized Magellan's Board of Directors (not including the two directors appointed by the Equity Investor (a) who are not members of management and (b) who are not independent) approve such acquisition. 4. Section 11.7 of the Plan is amended to read in its entirety as follows: Section 11.7 Exculpation None of the Debtors, Aetna, the Administrative Agent, the Official Committee, the Informal Committee, the Equity Investor nor any of their respective members, officers, directors, employees, agents, counsel or other professionals shall have or incur any liability to any Debtor, any Reorganized Debtor, any holder of any Claim or Equity Interest or any other entity for any act or omission in connection with, or arising out of, the Reorganization Cases, the formulation, dissemination, implementation or confirmation of the Plan of Reorganization, the consummation of the Plan of Reorganization, or the administration of the Plan of Reorganization or property to be distributed under the Plan of Reorganization or any other act or omission in connection with the Plan of Reorganization, the Disclosure Statement or any contract, instrument, release, document or other agreement related thereto; provided, however that the foregoing shall not affect the liability of any person that otherwise would result from any such act or omission to the extent such act or omission is determined by a Final Order to have constituted willful misconduct or gross negligence intentional fraud, and/or breach of fiduciary duty that results in a personal profit at the expense of the Estate or the liability of the Equity Investor with respect to the Equity Commitment Letter and provided further that nothing in the Plan of Reorganization shall discharge Aetna of its obligations under the Aetna Amended MSA (and the other agreements 3 and documents entered into with respect thereto). Any of the foregoing parties in all respects shall be entitled to rely on the advice of counsel with respect to any of the foregoing. Nothing in Section 11.7 of the Plan shall limit the liability of the members of the Official Committee for the knowing misuse of confidential information or ultra vires acts. 5. Section 10.1 and 10.2 of the Plan is amended as follows: a. Section 10.1(b) shall be deleted and replaced with "(b) [Intentionally Omitted].." b. Section 10.2 shall be amended to: (i) add a paragraph (e) immediately following (d) which will read "(e) The aggregate principal amount of New Notes to be issued under the Plan or Reorganization shall not exceed $300 million less the Cash Distribution Amount, assuming for purposes of satisfying this condition, that the Effective Date is October 31, 2003."; and (ii) to amend the last full paragraph of 10.2 to read as follows: "The conditions specified herein may be waived in whole or in part by Reorganized Magellan in its sole discretion, with the consent of the Official Committee, the Subject Lenders, Aetna and the Equity Investor, which consents shall not be unreasonably withheld. Any such waiver may be effected at any time, without notice or leave or order of the Bankruptcy Court, and without any formal action." 4 Dated: New York, New York October 8, 2003 Respectfully submitted, MAGELLAN HEALTH SERVICES INC. By: /s/ Mark S. Demilio ----------------------------------------------- Name: Mark S. Demilio Title: Executive President, Chief Financial Officer ADVANTAGE BEHAVIORAL SYSTEMS, INC. ADVOCARE OF TENNESSEE, INC. AGCA NEW YORK, INC. AGCA, INC. ALLIANCE HEALTH SYSTEMS, INC. ALLIED SPECIALTY CARE SERVICES, LLC CARE MANAGEMENT RESOURCES, INC. CHARTER ALVARADO BEHAVIORAL HEALTH SYSTEM, INC. CHARTER BAY HARBOR BEHAVIORAL HEALTH SYSTEM, INC. CHARTER BEHAVIORAL HEALTH SYSTEM AT FAIR OAKS, INC. CHARTER BEHAVIORAL HEALTH SYSTEM AT HIDDEN BROOK, INC. CHARTER BEHAVIORAL HEALTH SYSTEM AT POTOMAC RIDGE, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF COLUMBIA, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF DALLAS, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF DELMARVA, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF LAKE CHARLES, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF MASSACHUSETTS, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF NASHUA, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO, INC. THE CHARTER BEHAVIORAL HEALTH SYSTEM OF NORTHWEST INDIANA, LLC CHARTER BEHAVIORAL HEALTH SYSTEM OF PADUCAH, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF TOLEDO, INC. CHARTER BEHAVIORAL OF LAYAFETTE, INC. CHARTER CENTENNIAL PEAKS BEHAVIORAL HEALTH SYSTEM, INC. 5 CHARTER FAIRMOUNT BEHAVIORAL HEALTH SYSTEM, INC. CHARTER FENWICK HALL BEHAVIORAL HEALTH SYSTEM, INC. CHARTER FOREST BEHAVIORAL HEALTH SYSTEM, INC. CHARTER GRAPEVINE BEHAVIORAL HEALTH SYSTEM, INC. CHARTER HOSPITAL OF MOBILE, INC. CHARTER HOSPITAL OF SANTA TERESA, INC. CHARTER HOSPITAL OF ST. LOUIS, INC. CHARTER LAKESIDE BEHAVIORAL HEALTH SYSTEMS, INC. CHARTER LINDEN OAKS BEHAVIORAL HEALTH SYSTEM, INC. CHARTER MEDICAL - CLAYTON COUNTY, INC. CHARTER MEDICAL - LONG BEACH, INC. CHARTER MEDICAL OF EAST VALLEY, INC. CHARTER MEDICAL OF PUERTO RICO, INC. CHARTER MILWAUKEE BEHAVIORAL HEALTH SYSTEM, INC. CHARTER MOB OF CHARLOTTESVILLE, INC. CHARTER NORTHRIDGE BEHAVIORAL HEALTH SYSTEM, LLC CMCI, INC. CMFC, INC. CMG HEALTH OF NEW YORK, INC. CMG HEALTH, INC. CONTINUUM BEHAVIORAL HEALTHCARE CORPORATION CORRECTIONAL BEHAVIORAL SOLUTIONS OF INDIANA, INC. CORRECTIONAL BEHAVIORAL SOLUTIONS OF NEW JERSEY, INC. FLORIDA HEALTH FACILITIES, INC. GPA OF PENNSYLVANIA, INC. GREEN SPRING HEALTH SERVICES, INC. GREEN SPRING OF PENNSYLVANIA, INC. GROUP PLAN CLINIC, INC. HAWAII BIODYNE, INC. HUMAN AFFAIRS INTERNATIONAL OF PENNSYLVANIA, INC. IHEALTH TECHNOLOGIES, LLC INROADS BEHAVIORAL HEALTH SERVICES OF TEXAS, LP LOUISIANA BIODYNE, INC. MAGELLAN BEHAVIORAL HEALTH OF WASHINGTON, INC. MAGELLAN BEHAVIORAL HEALTH SYSTEMS, LLC MAGELLAN BEHAVIORAL HEALTH, INC. MAGELLAN BEHAVIORAL OF MICHIGAN, INC. MAGELLAN CAPITAL, INC. MAGELLAN CBHS HOLDINGS, INC. MAGELLAN HRSC, INC. MAGELLAN PUBLIC SOLUTIONS, INC. MAGELLAN SPECIALTY HEALTH, INC. 6 MANAGED CARE SERVICES MAINSTAY OF CENTRAL PA, INC. MBC FEDERAL PROGRAMS, INC. MBC NATIONAL SERVICE CORPORATION MBC OF AMERICA, INC. MBC OF NEW MEXICO, INC. MBC OF TENNESSEE, INC. MBC OF NEW YORK, INC., A NEW YORK INDEPENDENT PRACTICE ASSOCIATION MBC OF TENNESSEE, LLC MBH CAPITAL, INC. MBH OF PUERTO RICO, INC. MERIT BEHAVIORAL CARE CORPORATION MERIT BEHAVIORAL CARE OF FLORIDA, INC. MERIT BEHAVIORAL CARE OF MASSACHUSETTS, INC. MERIT INROADS BEHAVIORAL HEALTH SERVICES OF ILLINOIS, LLC MERIT INROADS BEHAVIORAL HEALTH SERVICES, LLC NEW GPA, INC. P.P.C GROUP, INC. P.P.C., INC. PERSONAL PERFORMANCE CONSULTANTS OF NEW YORK, INC. PREMIER HOLDINGS, INC. VIVRA, INC. WESTWOOD/PEMBROKE HEALTH SYSTEM LIMITED PARTNERSHIP. 7 BY: MAGELLAN HEALTH SERVICE, INC., as agent and attorney-in-fact for each of the foregoing entities By: /s/ Mark S. Demilio --------------------------------------------- Name: Mark S. Demilio Title: Executive Vice President, Chief Financial Officer Counsel: Stephen Karotkin, Esq. (SK 7357) WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, NY 10153 Telephone: (212) 310-8000 Facsimile: (212) 310-8007 Attorneys for Debtors and Debtors in Possession 8 EX-2 5 jd10-8ex2_4.txt 2.4 Exhibit 2.4 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - ----------------------------------------------------x : In re : Chapter 11 Case No. : Magellan Health Services, Inc., et al., : 03-40515 (PCB) : Debtors. : : (Jointly : Administered) : - ----------------------------------------------------x ORDER CONFIRMING DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION, AS MODIFIED, PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE ------------------------------------------------------- Magellan Health Services, Inc. ("Magellan") and its affiliated debtors, as debtors and debtors in possession (collectively, with Magellan, the "Debtors"), having proposed and filed their Third Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code, dated August 18, 2003 (as modified by the Modifications to Debtors' Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated September 25, 2003, and the Modifications to Debtors' Third Amended Joint Plan of Reorganization under chapter 11 of the Bankruptcy Code, dated October 8, 2003 (collectively, the "Modifications"), the "Plan"), (1) and the Disclosure Statement in respect of the Plan, dated August 18, 2003 (the "Disclosure Statement"); and the Disclosure Statement having been approved by the Court pursuant to an order, dated August 19, 2003, as containing "adequate information" pursuant to section 1125 of the Bankruptcy Code (the "Disclosure Statement Order"); and the Affidavits of Mailing by Bankruptcy Services, LLC ("BSI") of Solicitation Packages (the "BSI Affidavit"), dated September 8, 2003, having been filed with the Court on September 12, 2003, and the Affidavit of - --------------------- (1) Capitalized terms used but not defined herein have the meanings ascribed to them in the Plan. 1 Service of Solicitation Packages by Innisfree M&A, Inc. ("Innisfree" and, together with BSI, the "Voting Agents"), dated October 6, 2003 having been filed with the Court on October 7, 2003 (collectively, the "Affidavits of Mailing"); and the Affidavit of Miriam Bloom of BSI regarding the methodology for the tabulation of and results of voting with respect to the Plan (the "BSI Certification"), the Certification of Jane Sullivan of Innisfree with respect to the tabulation of votes on the Plan (the "Innisfree Certification") and the Supplement to the Innisfree Certifications (collectively, the "Certifications") having been filed with the Court on October 6, 2003; and the Debtors having filed with this Court the Plan Supplement and the affidavits in support of confirmation of the Plan of (i) Mark S. Demilio, Executive Vice President and Chief Financial Officer of the Debtors (the "Demilio Affidavit"), and (ii) William D. Forrest, CTP, Managing Director of Gleacher Partners, LLC ("Gleacher"), financial advisors to the Debtors (the "Forrest Affidavit" and, together with the Demilio Affidavit, collectively, the "Affidavits in Support of Plan Confirmation") (collectively, with the Affidavits of Mailing and the Certifications, the "Debtors' Confirmation Documents"); and each of the Objections (as hereinafter defined) having been resolved, withdrawn or overruled; and the Court having conducted a hearing to consider confirmation of the Plan on October 8, 2003 (the "Confirmation Hearing"); and the Court having reviewed and considered the Plan, the Plan Supplement, the Debtors' Confirmation Documents, the Disclosure Statement, the Disclosure Statement Order, and the entire record of the Confirmation Hearing, and the Court being familiar with the Plan and other relevant factors affecting the Debtors' chapter 11 cases (the "Chapter 11 Cases"); and the Court having taken judicial notice of the entire record of the Chapter 11 Cases since the Commencement Date; and the appearance 2 of all interested parties having been duly noted in the record of the Confirmation Hearing; and after due deliberation and sufficient cause appearing therefor; IT IS HEREBY FOUND, CONCLUDED, ORDERED, ADJUDGED, AND DECREED, AS FOLLOWS: FINDINGS OF FACT (2) ----------------- BACKGROUND - ---------- 1. The Debtors each filed with this Court a voluntary petition for relief under chapter 11 of the Bankruptcy Code on March 11, 2003 (the "Commencement Date"). (Debtors' Chapter 11 Petitions, Docket No. 1). 2. Each of the Debtors continues to operate its business and manage its properties as a debtor in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 3. By order of the Court, dated March 11, 2003, these chapter 11 cases were consolidated for procedural purposes only pursuant to Bankruptcy Rule 1015(b). (Docket No. 28). 4. On March 18, 2003, the United States Trustee for the Southern District of New York (the "United States Trustee") appointed the Official Committee. (Notice of Appointment of Official Committee, Docket No. 65). 3 - --------------------------- (2) The Findings of Fact and Conclusions of Law contained herein constitute the findings of fact and conclusions of law required to be entered by this Court pursuant to Rule 52 of the Federal Rules of Civil Procedure, as made applicable herein by Rules 7052 and 9014 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). FORMULATION OF THE PLAN AND DEVELOPMENT OF THE DEBTORS' BUSINESS PLAN - --------------------------------------------- 5. Prior to the commencement of these chapter 11 cases, the Debtors engaged in discussions with the Senior Secured Lenders, Aetna, their largest customer, and an ad hoc committee of holders of the Magellan's Senior Notes and Senior Subordinated Notes toward the formulation of a plan of reorganization. As a result of such discussions, on the Commencement Date, the Debtors filed a plan of reorganization. One of the conditions of confirmation and consummation of such plan of reorganization was that the Debtors realize not less than $50 million in proceeds (and $47.5 million in net proceeds) from an equity or debt investment. (Debtors' Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code, dated March 11, 2003) 6. Prior to the Commencement Date, the Debtors sought a commitment from, among other parties, their primary creditor constituencies, as well as a third party investor, Onex Corporation ("Onex"), for an equity and/or debt infusion to be made in conjunction with the effectiveness of the Plan. Because Onex required more time to complete its due diligence, it was unable to provide the Debtors with a commitment letter at that time. The Debtors did, however, receive two definitive proposals to provide financing in connection with the consummation of the restructuring, the most favorable of which was made by Amalgamated Gadget, L.P. ("AG") and Pequot Capital Management, Inc. ("PCM" and, together with AG, the "Initial Investors"), both on behalf of certain managed funds and accounts. (Demilio Affidavit, at P. 4). 7. After extensive negotiation with the Initial Investors, the Debtors and the Initial Investors reached an agreement on the terms and provisions of an investment that was set forth in a commitment letter dated March 10, 2003 (the "PCM/AG Equity Commitment Letter"). (Demilio Affidavit at P. 5). The PCM/AG Equity Commitment Letter provides, among other things, for indemnification obligations, expense reimbursement and the payment of various fees, including a break-up fee of $1 million and a commitment fee of $1.5 million, of which $750,000 was paid on March 11, 2003 and the remainder was paid in September 2003. PCM/AG Equity Commitment Letter. (Demilio Affidavit at P. 5). 4 8. On March 11, 2003, the Debtors filed their Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code. On March 26, 2003, the Debtors filed their First Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Court and the proposed disclosure statement in connection therewith. 9. On April 4, 2003, the Court approved the PCM/AG Equity Commitment Letter and, specifically, the break-up fee, indemnification, expense reimbursement obligation and commitment fee contained therein. (Docket No. 147). 10. On April 23, 2003, the Court approved the Debtors' assumption of the Aetna Amended MSA, including all documents and instruments related thereto, finding that such assumption was in the best interests of the Debtors, their creditors, and all parties in interest. (Docket No. 397). 11. Although the Debtors had negotiated an equity commitment from AG, the Debtors nevertheless continued to solicit proposals from other potential investors, including Onex, for an equity commitment that would be even more favorable to the Debtors and their creditors. After completing its due diligence and engaging in extensive negotiations with the Debtors, on May 21, 2003, Onex presented the Debtors with a funding commitment, pursuant to which Onex agreed to provide the Debtors with, among other things, a commitment to purchase up to $200 million of common stock of Reorganized Magellan in conjunction with the consummation of a plan of reorganization. (Demilio Affidavit at P. 6). 5 12. In June and July of 2003, the Debtors conducted an informal auction process, pursuant to which AG and Onex submitted competing bids. At the conclusion of such process, the final bid by Onex was supported by the board of directors of Magellan and the Official Committee. In selecting Onex bid, the Board of Directors considered, among other factors, Onex's strength as a strategic investor. (Demilio Affidavit at P. 7). As a result, the Debtors and Onex entered into the Equity Commitment Letter, which, subject to modifications requested by the Court, was approved by this Court on July 14, 2003. (Docket No. 814). The terms of the Equity Commitment Letter are embodied in the Plan. 13. On July 25, 2003, the Debtors filed their Second Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the "Second Amended Plan") and the proposed disclosure statement in connection therewith (the "July 25 Disclosure Statement"). On August 11, 2003, the Court held a hearing on approval of the July 25 Disclosure Statement (the "Disclosure Statement Hearing"). 14. On August 18, 2003, the Debtors filed the Plan and Disclosure Statement to, inter alia, address the comments made by the Court at the Disclosure Statement Hearing and to make other agreed changes. THE DISCLOSURE STATEMENT ORDER AND SOLICITATION OF VOTES ON THE PLAN - ------------------------------------- 15. On August 19, 2003, by the Disclosure Statement Order, this Court approved the Disclosure Statement as containing "adequate information" within the meaning of section 1125 of the Bankruptcy Code. (Disclosure Statement Order, Docket No.763). 6 16. The Disclosure Statement Order authorized and directed the Voting Agents, on behalf of the Debtors, to solicit acceptances and rejections of the Plan in a manner consistent with the Bankruptcy Code, the Bankruptcy Rules and in accordance with the procedures set forth in the Disclosure Statement Order. (Disclosure Statement Order, Docket No.763). 17. The Disclosure Statement Order authorized and directed the Debtors to provide or cause to be provided notice by publication (the "Publication Notice") of the approval of the Disclosure Statement, the Voting Deadline, the time and place of the Confirmation Hearing, the time and date by which objections to confirmation of the Plan were required to be filed, and other pertinent information. (Disclosure Statement Order, Docket No.763). 18. The Disclosure Statement Order (i) established September 30, 2003 at 4:00 p.m. (Eastern Time) (the "Voting Deadline") as the date and time by which all Ballots were required to be completed, executed, marked and received by the BSI for Classes 1, 4 and 9, and by Innisfree for Classes 7, 8, 13 and 14, in order to be counted as timely acceptances or rejections of the Plan; (ii) established September 25, 2003, at 4:00 p.m. (Eastern Time) as the date and time for filing objections to the Plan (the "Objection Deadline"); (iii) established certain procedures for the solicitation and tabulation of votes to accept or reject the Plan; (iv) approved the form of Ballots to be used for Classes 1, 4, 7, 8, 9, 13 and 14 of the Plan; (v) scheduled the Confirmation Hearing for October 8, 2003 at 11:00 a.m. (Eastern Time), and (vi) established certain procedures for the Equity Offering. 19. Pursuant to the Disclosure Statement Order, the record date for determining creditors entitled to vote on the Plan was August 21, 2003 (the "Record Date"). 7 20. In compliance with the Disclosure Statement Order, the Debtors caused to be transmitted by first class mail, postage prepaid, on or before August 29, 2003 to each holder of a Claim or Equity Interest in Classes 1, 4, 7, 8, 9, 13 and 14 of the Plan (a) a copy of the Disclosure Statement and all exhibits thereto, including, without limitation, the Plan annexed thereto as Exhibit "A" and the Disclosure Statement Order annexed thereto as Exhibit "B;" (b) the Notice of (i) Approval of Proposed Disclosure Statement, (ii) Establishment of Record Date, (iii) Establishment of a Date for a Hearing on Confirmation of the Plan of Reorganization and Notice and Objection Procedures in Respect Thereof, (iv) Approval of Solicitation Packages and Procedures for Distribution Thereof, (v) Approval of Forms of Ballot and Establishment of Procedures for Voting on the Plan of Reorganization, and (vi) Approval of Forms and Procedures for Equity Offering (the "Confirmation Hearing Notice"); (c) if such holder was entitled, pursuant to the Disclosure Statement Order, to vote, an appropriate Ballot for each class in which such holder was entitled to vote and a pre-addressed return envelope for each such Ballot, and (d) for holders of Claims in Classes 8 and 9 entitled to participate in the Equity Offering, a subscription form for participation in the Equity Offering (collectively, a "Solicitation Package"). Pursuant to the Disclosure Statement Order, the Debtors were required to complete such transmittal on or before August 29, 2003 and, as except as described below, such transmittal was timely completed in accordance with the requirements of the Disclosure Statement Order. 21. At the time of the solicitation, the Debtors mistakenly classified certain holders of Claims in Class 9 as holders of claims in an Unimpaired Class. (Demilio Affidavit at P. 11). As a result, the Debtors did not cause to be transmitted Disclosure Statements, Class 9 Ballots and Subscription Forms to such holders on or before August 29, 2003. On September 4, 2003, the 8 Debtors caused Class 9 Ballots and Disclosure Statements to be sent to such entities via overnight courier and extended the Voting Deadline and Objection Deadline for such creditors to October 6, 2003. (Demilio Affidavit at P. 11). Considering the extensions of the Voting Deadline and the Objection Deadline afforded to these creditors, these creditors had sufficient notice of the Confirmation Hearing, the Voting Deadline, and the Objection Deadline. On September 9, 2003, the Debtor caused Subscription Forms to be sent to such entities. 22. On August 29, 2003, the Debtors caused Solicitation Packages to be sent to parties to unexpired leases and executory contracts whose leases and contracts are listed on Schedule 8.1 of the Plan as executory contracts and unexpired leases to be rejected pursuant to the Plan. (BSI Affidavit P. 2). 23. In compliance with the Disclosure Statement Order, the Debtors caused the Confirmation Hearing Notice and a notice of non-voting status (the "Notice of Non-Voting Status") to be transmitted by first class mail, postage prepaid, on or before August 29, 2003 to all entities required to receive notice of the Confirmation Hearing and Plan but not entitled to vote on the Plan, including holders of Claims in Classes 2, 3, 5, 6, 10, 11 and 12 of the Plan (collectively, the "Unimpaired Classes"), as well as counterparties to executory contracts and unexpired leases not being rejected pursuant to the Plan. 24. Accordingly, the Debtors' distribution of the Solicitation Packages was substantially in accordance with the Disclosure Statement Order. 25. In addition, the Disclosure Statement Order required that the Debtors publish the Confirmation Hearing Notice in the national editions of the Wall Street Journal and The New York Times no less than twenty-five (25) days before the Objection Deadline. On September 11, 2003, fourteen (14) days before the Objection Deadline, the Confirmation Hearing Notice was published in the national editions of the Wall Street Journal and The New York Times. 9 (Certificates of Publication, Docket Nos. 991, 992). Given the widespread actual notice provided by the Debtors of the Confirmation Hearing, the Voting Deadline and the Objection Deadline, the delay in publication of the Confirmation Hearing Notice did not adversely affect the rights of any parties in interest, and all parties in interest had sufficient notice of the Confirmation Hearing, the Voting Deadline and the Objection Deadline. FILING OF THE PLAN SUPPLEMENT - ----------------------------- 26. In accordance with sections 1.88 and 1.91 of the Plan, on September 25, 2003 the Debtors filed with this Court the Plan Supplement, which includes draft forms of (i) the Amended Bylaws, (ii) the Amended Certificate of Incorporation, (iii) the New Note Indenture, (iv) the New Warrants, (v) the New Management Incentive Plan, (vi) the New Aetna Note, (vii) the guarantees and security agreements related to the New Aetna Note and the Aetna Purchase Option (and any related intercreditor agreement(s)), (viii) the New Aetna Warrant, (ix) the Aetna Amended MSA, (x) the Registration Rights Agreement (which includes provisions related to Aetna's registration rights), (xi) the employment agreements to be entered into between the Debtors and certain employees and (xii) the Equity Commitment Letter. (Plan Supplement, Docket No.935). CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS UNDER THE PLAN - ------------------------------------------------------------ 27. The Plan designates the following classes of Claims and Equity Interests: Class 1 - Senior Secured Lender Claims Class 2 - Other Secured Claims Class 3 - Priority Non-Tax Claims Class 4 - Aetna Claim 10 Class 5 - Provider Claims Class 6 - Customer Claims Class 7 - Senior Note Claims Class 8 - Senior Subordinated Note Claims Class 9 - Other General Unsecured Claims Class 10 -Convenience Claims Class 11 - Intercompany Claims Class 12 - Subsidiary Equity Interests Class 13 - Magellan Preferred Stock Interests Class 14 - Magellan Common Stock Interests (Plan, Sections 3 and 4). OVERVIEW OF TREATMENT OF CLAIMS UNDER THE PLAN - ---------------------------------------------- 28. As described above, the Plan provides for an equity investment by Onex. Additionally, the Plan provides for Classes 8 and 9 to participate in an Equity Offering. Holders of eligible Claims in Classes 8 and 9 had the right to purchase an aggregate of 2,631,579 shares of New Common Stock at a price of $28.50 per share. 29. Holders of Claims in Class 1 shall receive either (i) Cash in the amount of $50 million and the New Senior Secured Obligations or (ii) (a) Cash in the amount of their Allowed Claims to the extent such Allowed Claims are for amounts other than amounts that represent undrawn letters of credit under the Senior Secured Credit Agreement and (b) Cash and/or a standby letter of credit from a financial institution reasonably satisfactory to the Administrative Agent (which letter of credit shall be in form and substance satisfactory to the Administrative Agent) in an amount equal to 105% of such Allowed Claim representing undrawn letters of credit under the Senior Secured Credit Agreement. The Senior Secured Lender Claims shall be Allowed in the following amounts: $120,324,657.07 on account of Revolving Loans and unreimbursed letter of credit disbursements and issued but undrawn letters of credit under the Senior Secured Credit Agreement as of the Commencement Date (including 11 unreimbursed drawings made under letters of credit under the Senior Secured Credit Agreement to the extent drawn after the Commencement Date and prior to the Effective Date), $57,881,095.64 on account of Tranche B Term Loans under the Senior Secured Credit Agreement and $57,881,095.97 on account of Tranche C Term Loans under the Senior Secured Credit Agreement provided that such Allowed Claims shall be reduced to the extent (i) such Allowed Claims have been paid in Cash or (ii) such Allowed Claims relate to letters of credit that have expired since the Commencement Date and no related draw has been made thereunder. Plan, Section 4.1. 30. Aetna, as holder of the Claim in Class 4, will receive, on account of such Claim, and on account of Aetna's rights under the Aetna Amended MSA: (a) $15 million in Cash, (b) the New Aetna Note, in the principal amount of $45 million plus an amount equal to interest on $60 million from February 15, 2003 through and including the Effective Date at the interest rate set forth in the New Aetna Note, (c) the New Aetna Warrant, (d) the rights provided for under the Aetna Registration Rights Agreement and (e) the rights provided for under the Aetna Amended MSA including all documents and instruments related thereto (including, but not limited to, the Aetna Asset Purchase Agreement, the Aetna Note, the Aetna Warrant and the Vendor Contracts (as such term is defined in the Aetna Amended MSA)). Plan, Section 4.4. 31. Each holder of an Allowed Claim in Class 7 shall receive its Ratable Proportion of (a) the Note Claim Percentage of the Cash Distribution Amount and (b) New Notes equal to (x) the amount of the Senior Note Claims (including any interest that would have accrued on the Senior Notes through the Effective Date but for the Commencement Date at a rate of 10 3/8% per annum) less (y) the Cash payment described in (a) above. Plan, Section 4.7. 12 32. Each holder of an Allowed Claim in Class 8 will receive (i) its Ratable Proportion of a number of shares of New Common Stock equal to the product of the Class 8/Class 9 Distributable Share Amount and the Note Claim Percentage, subject to the Partial Cash-Out Election as described in Section 4.8(b) of the Plan, and (ii) the right to participate in the Equity Offering on the terms set forth in Section 9 of the Plan. Based on the assumptions set forth in the Disclosure Statement and the estimates of the Claims contained therein, the holders of Allowed Senior Subordinated Note Claims are estimated to receive approximately 8,997,664 shares of New Common Stock and the right to purchase 2,428,067 shares of New Common Stock in the Equity Offering at a price of $28.50 per share. Plan, Section 4.8. 33. Each holder of an Allowed Claim in Class 9 will receive for each $1,000 of Allowed Other General Unsecured Claims: (i) (A) a principal amount of New Notes equal to the Note Distribution Amount, (B) such holder's Ratable Proportion of the Other General Unsecured Claim Percentage of the Cash Distribution Amount and (C) such holder's Ratable Proportion of shares of New Common Stock equal to the product of the Other General Unsecured Claim Percentage and Class 8/Class 9 Distributable Share Amount, subject to the Partial Cash-Out Election as described in Section 4.9(b) of the Plan, and (ii) the right to participate in the Equity Subscription Rights on the terms set forth in Section 9 of the Plan. Based on the assumptions set forth in the Disclosure Statement and the estimates of the Claims contained therein, the holders of Allowed Other General Unsecured Claims are estimated to receive, in the aggregate, New Notes, in an aggregate principal amount of $18.9 million, Cash in the aggregate amount of $1.7 million, an aggregate of approximately 681,557 shares of New Common Stock, and the right to purchase an aggregate of 183,992 shares of New Common Stock in the Equity Offering at a price of $28.50 per share. Plan, Section 4.9. 13 34. Holders of Magellan Preferred Stock Interests (Class 13) will receive their Ratable Proportion of (a) the Class 13 Distributable Share Amount of shares of New Common Stock (or 198,548 shares) and (b) New Warrants to purchase a number of shares of New Common Stock equal to the Class 13 Distributable Share Amount (or 198,548 shares). Plan, Section 4.13. 35. Holders of Magellan Common Stock Interests (Class 14) will receive their Ratable Proportion of (a) the Class 14 Distributable Share Amount of shares of New Common Stock equal to 0.5% of the New Common Stock to be issued on the Effective Date (or 49,637 shares) and (b) New Warrants to purchase a number of shares of New Common Stock equal to the Class 14 Distributable Share Amount (or 49,637 shares). Plan, Section 4.14. 36. Claims in Classes 5, 6, 11, and 12 are or will be reinstated and are therefore unimpaired. In the event that the Debtors elect Alternate Treatment B with respect to the Claims in Class 1, Class 1 will be paid in cash, in full, and provided cash or a backstop letter of credit to repay Letter of Credit Obligations outstanding under the Senior Secured Credit Agreement and are, therefore, unimpaired or, alternatively, will be impaired but will be receiving the indubitable equivalent of their Allowed Claims under section 1129(b)(2)(A)(iii) of the Bankruptcy Code. Claims in Classes 2, 3 and 10 will be paid in full and are also unimpaired. In the event that the Debtors elect Alternate Treatment A with respect to the Claims in Class 1, the Debtors will distribute $50,000,000 in cash and the New Senior Secured Obligations and Class 1 will be impaired. 14 37. With respect to any Missouri Department of Revenue tax returns not due as of the Confirmation Hearing, the Debtors have agreed to file any such returns and pay any deficiencies reflected in such returns on the later of (a) the Effective Date and (b) the date such deficiencies would be paid in the ordinary course of business. 38. Pursuant to the Plan, each holder of an Allowed Senior Subordinated Note Claim in Class 8 or an Allowed Other General Unsecured Claim in Class 9 had the right to elect to receive a portion of a certain amount of Cash in lieu of New Common Stock to be distributed to such holder pursuant to Section 4 of the Plan at a price of $22.50 per share. Such holders electing to receive a Cash payment in lieu of shares of New Common Stock that such holders are otherwise entitled to receive may only make such an election in respect of all (but not less than all) of such shares. 39. Pursuant to Section 9 of the Plan, the holders of Senior Subordinated Note Claims and Other General Unsecured Claims had the right to subscribe to purchase an aggregate of 2,631,579 shares of New Common Stock at a price of $28.50 per share. Pursuant to Section 9 of the Plan, holders of Senior Subordinated Note Claims subscribed for 2,202,592 shares of New Common Stock and Houlihan Lokey subscribed for 19,590 shares of New Common Stock, for an aggregate of 2,222,182 shares. (BSI Certification, P. 3, Innisfree Certification, P. 9) 40. The foregoing proposed treatment of Claims is appropriate because each of the Debtors is a co-obligor on the Senior Secured Credit Agreement, pursuant to which substantially all of the Debtors' assets have been pledged to the Senior Secured Lenders. 15 41. Neither the Plan nor this Order eliminates, reduces or otherwise impairs any and all rights of setoff and recoupment under the Bankruptcy Code and applicable non-bankruptcy law of National Mentor, Inc. and National Mentor Holdings, Inc. against the Debtors. 42. As required by section 1122 of the Bankruptcy Code, all Claims within each class are substantially similar to the other Claims in that class, and all Equity Interests within each class are substantially similar to the other Equity Interests in that class. (Plan, Section 4; Demilio Affidavit, at P. 10). 43. The classification scheme was not proposed to create a consenting impaired class or to manipulate class voting. (Plan, Section 4; Demilio Affidavit, at P. 10). OFFICERS AND DIRECTORS OF REORGANIZED DEBTORS - --------------------------------------------- 44. On the Effective Date, the board of directors of Reorganized Magellan will consist of the following individuals: CLASS I CLASS II CLASS III ---------------------------------------------------------------------------------------- Steven L. Shulman Robert M. LeBlanc Michael P. Ressner (3 year term) (1 year term) (3 year term) Mark L. Hilson Rene Lerer Michael Diament (2 year term) (2 year term) (3 year term) Robert Haft Saul Burian (1 year term) (3 year term) Christopher A. Govan (1 year term) -----------------------------------------------------------------------------------------
(Demilio Affidavit at P. 15) 45. The officers of Reorganized Magellan will be as follows: Steven J. Shulman Chief Executive Officer Rene Lerer President & Chief Operating Officer Mark S. Demilio Chief Financial Officer 16 Megan M. Arthur General Counsel Jeff D. Emerson Chief Information Officer Gregory A. Bayer Chief Restructuring Officer Caskie Lewis-Clapper Chief Human Resources Officer Dennis P. Moody Senior Vice President, Aetna Operations Jonathan Book Senior Vice President, Chief Medical Officer Deb Heggie Acting Chief Clinical Officer Linton C. Newlin Senior Vice President, Tax Jeffrey N. West Senior Vice President & Controller Keith Kudla Senior Vice President of Business Initiatives Melissa Rose Vice President, Investor Relations Gary Ross Vice President, Facilities Suzanne Kunis Senior Vice President Wayne Feest Senior Vice President Danna Mezin Senior Vice President (Demilio AffidavitP. 8) 46. The boards of directors of the other Debtors will be selected by Reorganized Magellan on or before the Effective Date. Following the Effective Date, Reorganized Magellan shall enter into employment agreements with each of Steven J. Shulman, Dr. Rene Lerer and Mark S. Demilio (collectively, the "Senior Executives"). The material terms of the employment agreements of each of the Senior Executives were disclosed at the Confirmation Hearing. Definitive employment agreements substantially consistent with such terms will be negotiated among Magellan, each of the Senior Executives and the Equity Investor. Such employment agreements shall be in form and substance satisfactory to Magellan, the Senior Executives and the Equity Investor and the Official Committee. RELEASE, EXCULPATION AND INDEMNIFICATION PROVISIONS - --------------------------------------------------- 47. The Plan provides for the release by the Debtors of the Debtors' claims and causes of action, if any, against the Debtors' officers, directors, employees, financial advisors, professionals, accountants and attorneys who have 17 served with, or been employed or retained by, the Debtors, on or after the Commencement Date, other than claims and causes of action for willful misconduct or gross negligence, intentional fraud, breach of fiduciary duty that results in a personal profit at the expense of the Debtors' estates, and/or the knowing misuse of confidential information. Nothing in Section 5.7 of the Plan shall effect a release of any claim of the United States Government or any of its agencies or any state and local authority whatever, including without limitation any claim arising under the Internal Revenue Code, the environmental laws or any criminal laws of the United States or any state and local authority against the Releasees, nor shall anything in the Confirmation Order or the Plan enjoin the United States or any state or local authority from bringing any claim, suit, action or other proceedings against the Releasees for any liability whatever, including, without limitation, any claim arising under the Internal Revenue Code, the environmental laws or any criminal laws of the United States or any state and local authority. (Plan, Section 5.7). 48. The Plan provides that none of the Debtors, Aetna, the Administrative Agent, the Official Committee, the Informal Committee, the Equity Investor nor any of their respective members, officers, directors, employees, agents, counsel or other professionals shall have or incur any liability to any Debtor, any Reorganized Debtor, any holder of any Claim or Equity Interest or any other entity for any act or omission in connection with, or arising out of, the Chapter 11 Cases, the formulation, dissemination, implementation or confirmation of the Plan, the consummation of, or the administration of, the Plan or property to be distributed under the Plan or any other act or omission in connection with the Plan, the Disclosure Statement or any contract, 18 instrument, release, document or other agreement related thereto; provided, however that the foregoing shall not affect the liability of any person that otherwise would result from any such act or omission to the extent such act or omission is determined by a Final Order to have constituted willful misconduct or gross negligence, intentional fraud, and/or breach of fiduciary duty that results in a personal profit at the expense of the Estate, or the liability of the Equity Investor with respect to the Equity Commitment Letter and provided further that nothing in the Plan discharges Aetna of its obligations under the Aetna Amended MSA (and the other agreements and documents entered into with respect thereto). Any of the foregoing parties in all respects shall be entitled to rely on the advice of counsel with respect to any of the foregoing. Nothing in Section 11.7 of the Plan shall limit the liability of the members of the Official Committee for the knowing misuse of confidential information or ultra vires acts. (Plan, Section 11.7). 49. Any and all obligations of the Debtors to indemnify and reimburse persons who are or were directors, officers or employees of any Debtor on the Commencement Date or any time thereafter against and for any obligations (including, without limitation, fees and expenses incurred by the Board of Directors of any Debtor or the members thereof in connection with the Chapter 11 Cases) pursuant to articles of incorporation, codes of regulations, bylaws, applicable state law or specific agreement, or any combination of the foregoing, shall survive the confirmation of the Plan, remain unaffected thereby, and not be discharged in accordance with section 1141 of the Bankruptcy Code, irrespective of whether indemnification or reimbursement is owed in connection with an event occurring before, on, or after the Commencement Date. In furtherance of the foregoing, Reorganized Magellan shall maintain insurance for the benefit of such directors, officers, or employees at levels no less favorable than those existing as of the date of entry of the Confirmation Order for a period of no less than three years following the Effective Date. Plan, Section 8.5 19 50. The limited release, exculpation and indemnification provisions of the Plan were negotiated at arm's-length and are integral to the Plan. (Demilio Affidavit, at P. 13). INJUNCTION REGARDING WORTHLESS STOCK DEDUCTION - ---------------------------------------------- 51. The Reorganized Debtors will have available certain net operating tax loss carryforwards and will use a portion thereof to offset taxable income following the Effective Date. The Debtors have reported, as of September 30, 2002, net operating loss carryforwards for federal income tax purposes in excess of $700 million. (Disclosure Statement, Section XIII.A). The ability of the Reorganized Debtors to utilize such carryforwards could be adversely affected by the actions of equity security holders of Magellan in taking worthless stock deductions with respect to the Equity Interests in Magellan during certain tax years. "BEST INTERESTS" TEST - --------------------- 52. Under the Plan, Claims or Equity Interests in Classes 1, 4, 7, 8, 9, 13, and 14 are impaired. (Plan, Section 4). Consequently, each holder of a Claim or Equity Interest in such classes must either accept the Plan or receive or retain under the Plan property of a value, as of the Effective Date, that is not less than the value such holder would receive or retain if the Debtors were liquidated under chapter 7 of the Bankruptcy Code. 11 U.S.C. ss. 1129(a)(7). 53. The Claims in Classes 2, 3, 5, 6, 10, 11, and 12 are unimpaired under the Plan. (Plan, Section 2). Consequently, each holder of a Claim or Equity Interest in each of such classes is conclusively deemed to have accepted the Plan under section 1126(f) of the Bankruptcy Code. 11 U.S.C. ss. 1126(f). The "best interests" test of section 1129(a)(7) of the Bankruptcy Code, is, accordingly, not applicable to the recoveries of such Classes. 20 54. The holder of Claims in Classes 4 and the holder of Equity Interests in Class 13 of the Plan unanimously voted to accept the Plan. Accordingly, the "best interests" test is not applicable to the holders of Claims and Equity Interest in Classes 4 and 13 of the Plan. 55. The liquidation analysis set forth in the Disclosure Statement accompanying the Plan (the "Liquidation Analysis") was prepared by the Debtors with the assistance of Gleacher, the Debtors' financial advisors. (Forrest Affidavit, at P. 19; Disclosure Statement, XI.D, 94-96). The Liquidation Analysis provides a summary of the liquidation values of the Debtors' assets, on a consolidated basis, assuming a chapter 7 liquidation in which a bankruptcy trustee appointed by the Court would liquidate the assets of the Debtors' estates. The information and conclusions in the Liquidation Analysis are reasonable. (Forrest Affidavit, at P. 20) (Liquidation Analysis) 56. In the Liquidation Analysis, the Debtors estimate that a chapter 7 liquidation would generate total proceeds from the liquidation of all of the Debtors' assets and cash on hand of approximately $356.7 million. The Debtors estimate that the costs of such liquidation would be approximately $55.7 million. The net liquidation proceeds, therefore, would be approximately $301 million, and such proceeds would be applied first to satisfy the Senior Lender Claims, which aggregate approximately $160.8 million. The remainder of such proceeds would be used to satisfy Administrative Expense Claims. Little or no liquidation proceeds would be available to creditors holding priority claims or general unsecured claims. (Forrest Affidavit, at P. 22) (Liquidation Analysis). 21 57. Because holders of Senior Lender Claims in Class 1 and Administrative Expense Claims would receive all of the proceeds from a liquidation, holders of Claims and Equity Interests in Classes 2 through 14, inclusive, would not receive any distributions in a chapter 7 liquidation. (Forrest Affidavit, P. 20, 21) (Liquidation Analysis). Accordingly, the Plan satisfies the "best interests" test of section 1129(a)(7) of the Bankruptcy Code as to Classes 2 through 14. 58. Based upon the Liquidation Analysis and the discussion of the "best interests" test described in Section XI.C. of the Disclosure Statement and the Forrest Affidavit, each entity in a class entitled to vote that did not accept the Plan will receive at least as much under the Plan as it would receive in a chapter 7 liquidation. FEASIBILITY OF THE PLAN - ----------------------- 59. Based on the cash flow projections incorporated in the Disclosure Statement (Disclosure Statement, IV. B.), and the cash required to satisfy projected Administrative Expense Claims, Priority Tax Claims and Priority Non-Tax Claims, the Debtors have, or will have available, sufficient cash resources to fund all such payments on the Effective Date. (Forrest Affidavit, at P. 7). 60. On the Effective Date, the Reorganized Debtors will consummate the Investment, as described in Section 5.19 of the Plan, and the Equity Offering, as described in Section 9 of the Plan. As a result of the equity investments, the Debtors will have an additional $150 million of cash. (Forrest Affidavit at P. 8). 22 61. Also, on or prior to the Effective Date, the Reorganized Debtors shall either elect Alternate Treatment A (under which the holders of Class 1 Claims will receive $50 million in Cash and the New Senior Secured Obligations) or Alternate Treatment B (under which the holders of Class 1 Claims will receive Cash and letters of credit in an amount not less than the amount of their Allowed Claims). 62. Under Alternate Treatment A for the Class 1 Claims, the Reorganized Debtors will enter into the New Facilities consisting of (i) a Rollover Facility in an aggregate principal amount of $94,841,522.84, (ii) a New Tranche B Facility in an aggregate principal amount of $45,622,662,79, and (iii) a New Tranche C Facility in an aggregate amount of $45,622,663.05. (Forrest Affidavit at P. 10). 63. Under Alternate Treatment B for the Class 1 Claims, the Reorganized Debtors will obtain Exit Financing arranged by Deutsche Bank Securities Inc. ("DBSI"), pursuant to which Deutsche Bank Trust Company Americas, Inc. ("DBTCA" and together with DBSI, "DB") and a syndicate of lenders (collectively, the "Exit Financing Senior Lenders") will provide financing in the amount of $230 million to Magellan on terms and conditions substantially the same as those that are set forth in the commitment letter executed by DB and Magellan and approved by Court order dated September 15, 2003 (the "DB Commitment Letter"). (Forrest Affidavit, at P. 11). (DB Commitment Letter Docket No. 850). 64. The Plan provides that on the Effective Date, the Reorganized Debtors are authorized to execute such agreements and documents as may be necessary to effect the transactions contemplated by the Exit Financing (if the Debtors elect Alternate Treatment B), and that the Exit Financing will be available to be drawn by Magellan; provided, that Magellan is able to meet the 23 conditions precedent set forth in the definitive credit agreement to be executed in connection therewith (the "DB Credit Agreement") and the other loan documents related thereto. The proceeds from the Exit Financing can be used for, among other things, satisfying the existing secured financing under the Senior Secured Credit Agreement, funding cash distributions under the Plan and the working capital needs of the Reorganized Debtors. The Plan will enable the Debtors to emerge from chapter 11 on a sound financial footing, thereby enabling the Reorganized Debtors to have a sound capital structure going forward. Moreover, the cash flow projections for the future operations of the Reorganized Debtors from the Effective Date through year 2007, as such information is set forth in Section IV. B. of the Disclosure Statement, are fair and reasonable. 65. In addition, the Exit Financing permits consummation of the transactions required or contemplated by the Aetna Amended MSA, including but not limited to the Aetna Purchase Option (provided that, consummation of the transactions required or contemplated by the Aetna Amended MSA will not affect the rights of the Exit Financing Senior Lenders under the Exit Financing), and is thus consistent with and does not violate this Court's Order of April 23, 2003, approving the Debtors' assumption of the Aetna Amended MSA and related documents and instruments. 66. Therefore, under Alternate Treatment B, in addition to the $150 million of equity issued pursuant to the Investment and the Equity Offering, under the Exit Financing, Magellan will have $230 million of credit available on and after the Effective Date, of which the Debtors estimate that $50 million will be undrawn. 67. Moreover, under either Alternate Treatment A or Alternate Treatment B, because all Unsecured Claims other than Convenience Claims will be settled and paid in accordance with the treatment provided in Classes 7, 8 and 9 24 of the Plan, the Reorganized Debtors' capital structure will be significantly improved. The Projections (as defined in the Forrest Affidavit) are a reasonable estimate of the Reorganized Debtors' future performance. Based on the cash projected to be generated through the Reorganized Debtors' operations, the cash investment pursuant to the Investment and the Equity Offering, and, the cash expected to be available under either Alternate Treatment A or Alternate Treatment B, the Reorganized Debtors will have the liquidity necessary to (i) continue their operations for at least the next five years, (ii) meet their ongoing obligations under the Plan and (iii) meet their obligations during that time under the Exit Financing or the New Senior Secured Credit Agreement, as applicable, and thereafter have the ability to pay off or refinance their obligations on a long-term basis. (Forrest Affidavit, P. 15). Accordingly, the Plan meets the feasibility test of section 1129(a)(11) of the Bankruptcy Code. THE VOTING - ---------- 68. Section 3.1 of the Plan identifies each of the following Classes as unimpaired under the Plan: Class 2 (Other Secured Claims), Class 3 (Priority Non-Tax Claim), Class 5 (Provider Claims), Class 6 (Customer Claims), Class 10 (Convenience Claims), Class 11 (Intercompany Claims), and Class 12 (Subsidiary Equity Interests). Pursuant to section 1126(f) of the Bankruptcy Code, the holders of Claims and Equity Interests in these Classes, and, therefore, these Classes, are conclusively presumed to have accepted the Plan. 69. The Plan was voted on by all Classes of impaired Claims and Equity Interests that were entitled to vote pursuant to the Bankruptcy Code, the Bankruptcy Rules and the Disclosure Statement Order. 25 70. The Voting Agents have made a final determination of the validity of, and tabulation respecting, all acceptances and rejections of the Plan by the impaired Classes of Claims and Equity Interests entitled to vote on the Plan, and the Certifications set forth such results, including the amount and number of Claims and Equity Interests of each Class voting to accept or reject the Plan. As set forth in the Certifications, (i) each of Classes 4, 7, 8, and 9 has accepted the Plan by at least two-thirds in amount and a majority in number of the Claims in each such Class actually voting, and (ii) each of Classes 13 and 14 has accepted the Plan by holders of two-thirds in amount of the Equity Interests in such Class actually voting. 71. The holders of Claims in Class 1 have voted to reject the Plan. However, in the event that the Debtors elect Alternative Treatment B, the Debtors will pay the holders of Allowed Claims in Class 1 in full, in Cash and provide Cash and/or a backstop letter of credit sufficient to repay the letter of credit obligations owing to the Senior Secured Lenders, on the Effective Date in accordance with Alternate Treatment B. Accordingly, under Alternate Treatment B, the Claims in Class 1 are unimpaired. Alternatively, the Court can confirm the Plan over the dissenting votes of Class 1 if the Plan provides the holders of Claims in Class 1 with the "indubitable equivalent" of their Claims in accordance with section 1129(b)(2)(A)(iii) of the Bankruptcy Code. 72. In the event that the Debtors elect Alternate Treatment A, the holders of Claims in Class 1 will retain the liens securing their Claims and will receive current and deferred Cash payments totaling at least the allowed amount of their Claims and having a value, as of the Effective Date, of at least the Allowed amount of the Senior Secured Lender Claims, in accordance with section 1129(b)(2)(A)(i) of the Bankruptcy Code. (Forrest Affidavit at P. 18). Accordingly, under Alternate Treatment A, the Plan satisfies section 1129(b)(2)(A)(i) of the Bankruptcy Code as to Class 1. 26 73. The determination of the Voting Agents with respect to the voting on the Plan validly and correctly sets forth the tabulation of votes, as required by the Bankruptcy Code, Bankruptcy Rules, and the Disclosure Statement Order. 74. Pursuant to section 9 of the Plan, certain holders of Claims in Classes 8 and 9 of the Plan who were eligible to participate in the Equity Offering and Houlihan Lokey have subscribed for an aggregate of 2,222,182 shares of New Common Stock. (BSI Certification at P. 3 and Innisfree Certification at Exhibit A). MODIFICATIONS TO THE PLAN 75. On September 25, 2003, the Debtors filed the Modifications dated September 25, 2003. Among other things, the Modifications provide for (i) a change in the composition of the board of directors of Reorganized Magellan from seven directors to nine directors, (ii) certain tag-along rights, (iii) co-investment rights for R2 and (iv) a change in the Management Incentive Plan. 76. On October 8, 2003, the Debtors filed the Modifications dated October 8, 2003. Among other things, these modifications (i) modify the terms of payment of Allowed Priority Tax Claims, (ii) modify the releases and exculpations as requested by the United States Trustee, and (iii) make one of the conditions to confirmation of the Plan a condition to consummation, not confirmation, of the Plan. 77. In addition, the Debtors are hereby authorized, if so elected by the Debtors, to adjust, prior to the Effective Date, the authorized and issued number of shares of New Common Stock (and MVS Securities). All such actions to 27 effectuate any such adjustment shall be authorized and approved in all respects in each case without further action under applicable law, regulation, order or rule, including, without limitation, any action by the stockholders of Magellan or Reorganized Magellan. The number of shares of New Common Stock and related exercise price in respect of New Warrants and the Aetna Warrant, the shares of New Common Stock and MVS Securities to be authorized and issued under the Plan, as well as all subscription prices shall be adjusted accordingly. To the extent such election to effectuate such an adjustment is made by the Debtors, the Plan shall be deemed modified to reflect such adjustment. 78. Notice of the proposed Modifications was provided to the United States Trustee, the attorneys for the Official Committee, the attorneys for the agent for the Debtors' Senior Secured Lenders, the attorneys for R2, the attorneys for Onex, the attorneys for DB, and the attorneys for Aetna. The Modifications do not adversely affect the treatment of the Claim of any creditor or the Equity Interests of any equity security holder who has not accepted in writing the Modifications. OBJECTIONS TO CONFIRMATION OF THE PLAN - -------------------------------------- 79. By the Objection Deadline, objections to confirmation of the Plan (collectively, the "Objections") were filed by the following parties: o The Office of the United States Trustee for the Southern District of New York o Commonwealth of Pennsylvania o Missouri Department of Revenue o Epotec, Inc. o Pennsylvania Psychiatric Society o Black Diamond Capital Management, LLC, Highland Capital Management, L.P., and Van Kampen Investment Advisory Corp. (collectively, "Black Diamond") o National Mentor, Inc. and National Mentor Holdings, Inc., o Continental Insurance Company and Columbia Casualty Company o St. Paul Fire and Marine Insurance Company ("PPS") and o Horizon Health Care Services, d/b/a Horizon Blue Cross Blue Shield of New Jersey 28 80. All of the Objections, other than the Objection of Black Diamond, have been either withdrawn or resolved. The Objection of Black Diamond is hereby overruled. MISCELLANEOUS - ------------- 81. To the extent that any of the foregoing findings of fact constitute conclusions of law, they are adopted as such. To the extent any of the conclusions of law delineated below constitute findings of fact, they are adopted as such. CONCLUSIONS OF LAW ------------------ JURISDICTION AND VENUE - ---------------------- 1. This Court has jurisdiction over the Chapter 11 Cases and to confirm the Plan pursuant to 28 U.S.C.ss. 1334. 2. Confirmation of the Plan is a core proceeding pursuant to 28 U.S.C. ss. 157(b), and this Court has jurisdiction to enter a final order with respect thereto. 3. Venue of the Chapter 11 Cases in this district was proper as of the Commencement Date and continues to be proper pursuant to 28 U.S.C. ss.ss. 1408 and 1409. 4. The Debtors are entities qualified to be debtors under section 109 of the Bankruptcy Code, and the Debtors are proper proponents of the Plan under section 1121(a) of the Bankruptcy Code. SOLICITATION - ------------ 5. All persons required to receive notice of the Confirmation Hearing have received proper, timely and adequate notice substantially in accordance with the Disclosure Statement Order and have had an opportunity to appear and be heard with respect thereto. 29 6. The Debtors have solicited and tabulated votes with respect to the Plan in good faith and in a manner consistent with the Bankruptcy Code, the Bankruptcy Rules and the Disclosure Statement Order. THE PLAN SATISFIES SECTION 1129(A)(1) OF THE BANKRUPTCY CODE - ------------------------------------------------------------ 7. Section 1129(a)(1) of the Bankruptcy Code requires that a plan comply with the applicable provisions of the Bankruptcy Code. This Court finds and concludes that the Plan satisfies all of the applicable provisions of the Bankruptcy Code, and, as required by Bankruptcy Rule 3016(a), the Plan is dated and identifies the Debtors as the proponents of the Plan. A. DUE AND PROPER NOTICE OF THE CONFIRMATION HEARING WAS GIVEN TO ALL PARTIES IN INTEREST -------------------------------------------- 8. This Court has taken judicial notice of the Affidavits of Mailing, Certifications, and Affidavits of Publication filed by the Debtors and the Voting Agents, and finds and concludes that (a) the Debtors complied in all material respects with Bankruptcy Rules 2002 and 3017(a) in providing notice of the Confirmation Hearing, (b) the errors in not timely sending out Ballots to those entities that were entitled to vote, as described in paragraph 20 of the Findings of Fact, are harmless in light of the corrective actions taken, and (c) the Debtors complied in all material respects with the Disclosure Statement Order in providing notice of the Confirmation Hearing in the method and manner as prescribed in the Disclosure Statement Order. All Entities entitled to and required to receive notice of the Confirmation Hearing pursuant to the Bankruptcy Code, applicable non-bankruptcy law, and the orders of this Court have received due, proper, timely and adequate notice of such hearings and have had an opportunity to appear at and be heard at such hearings. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1957). 30 B. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1123(A)(1) OF THE BANKRUPTCY CODE 9. Section 1123(a)(1) of the Bankruptcy Code provides that a plan must designate classes of claims and interests. The Plan adequately and properly classifies all Claims and Equity Interests required to be so classified, and, accordingly, satisfies section 1123(a)(1) of the Bankruptcy Code. Classes of Administrative Expense Claims and Priority Tax Claims are not required to be designated pursuant to section 1123(a)(1) of the Bankruptcy Code. C. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1122 OF THE BANKRUPTCY CODE -------------------------------------- 10. Section 1122(a) of the Bankruptcy Code provides that a plan may place a claim or interest in a particular class if such claim or interest is substantially similar to the other claims or interests of such class. A classification structure satisfies section 1122 of the Bankruptcy Code when a reasonable basis exists for the structure, and the claims or interests within each particular class are substantially similar. See In re Jersey City Medical Center, 817 F.2d 1055, 1060-61 (3d Cir. 1987); In re U.S. Truck Co., 800 F.2d 581, 586 (6th Cir. 1986); In re LeBlanc, 622 F.2d 872, 879 (5th Cir. 1986). 11. In accordance with section 1122(a) of the Bankruptcy Code, Section 4 the Plan separately classifies Claims against and Equity Interests in the Debtors together with Claims against or Equity Interests that are substantially similar to the other Claims or Equity Interests of such class. The Plan, therefore, satisfies section 1122(a) of the Bankruptcy Code. 12. Section 4.10 of the Plan provides treatment for holders of Convenience Claims. The convenience class established in Section 4.10 of the Plan is reasonable and necessary for administrative convenience and, therefore, the classification of Convenience Claims in the Plan satisfies section 1122(b) of the Bankruptcy Code. 31 D. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1123(A)(2) OF THE BANKRUPTCY CODE -------------------------------------------- 13. Section 1123(a)(2) of the Bankruptcy Code provides that a plan must specify any class of claims or interests that is not impaired under the Plan. Pursuant to Section 4 of the Plan, each of Classes 1, 4, 7, 8, 9, 13 and 14 is identified as impaired, and each of Classes 2, 3, 5, 6, 10, 11 and 12, is identified as unimpaired. Accordingly, the Plan satisfies section 1123(a)(2) of the Bankruptcy Code. In the event that the Debtors elect Alternate Treatment B, Class 1 will be paid in full, in Cash, on the Effective Date and will be deemed to be unimpaired. E. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1123(A)(3) OF THE BANKRUPTCY CODE -------------------------------------------- 14. Section 1123(a)(3) of the Bankruptcy Code provides that a plan must specify the treatment of each impaired class of claims and equity interests. Section 4 of the Plan specifies the treatment of each impaired class of Claims and Equity Interests. Accordingly, the Plan satisfies section 1123(a)(3) of the Bankruptcy Code. F. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1123(A)(4) OF THE BANKRUPTCY CODE -------------------------------------------- 15. Section 1123(a)(4) of the Bankruptcy Code requires a plan to provide the same treatment for each claim or interest of a particular class, unless the holder of the claim or interest agrees to less favorable treatment of such particular claim or interest. The Plan provides the same treatment for each Claim or Equity Interest in each class. Accordingly, the Plan satisfies section 1123(a)(4) of the Bankruptcy Code. 32 G. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1123(A)(5) OF THE BANKRUPTCY CODE 16. Section 1123(a)(5) of the Bankruptcy Code provides that a plan must provide adequate means of implementation of the plan. Section 5 and other provisions of the Plan provide adequate means for implementation of the Plan. In particular, Section 5 and other provisions of the Plan provide for, among other things, (i) revesting of the assets of the Debtors' estates in the Reorganized Debtors, (ii) adoption of a proposed charter and by-laws by Reorganized Magellan, (iii) either (a) effectuation of the transactions contemplated by the Exit Financing including, without limitation, by authorizing the execution and delivery by the Debtors and/or the Reorganized Debtors of and any documents, instruments and agreements related thereto and the granting of the security interests and liens described in the DB Commitment Letter in connection therewith or (b) implementation of Alternate Treatment A, (iv) issuance of the New Common Stock and (v) the consummation of the other transactions contemplated by the Plan. Accordingly, the Plan satisfies section 1123(a)(5) of the Bankruptcy Code. H. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1123(A)(6) OF THE BANKRUPTCY CODE ----------------------------------------- 17. Section 1123(a)(6) of the Bankruptcy Code requires a plan to provide for the inclusion in the charter of the debtor, if the debtor is a corporation, or of any corporation to which the debtor transfers all or any part of the debtor's estate or with which the debtor has merged or consolidated, of a provision prohibiting the issuance of non-voting equity securities. In furtherance of Section 5 of the Plan, the certificate of incorporation of Reorganized Magellan will contain provisions prohibiting the issuance of non-voting equity securities. (Plan Supplement, Docket No. 935). In addition, each of the other Reorganized Debtors will amend its charter or certificate of incorporation to prohibit the issuance of such non-voting equity securities. (Demilio Affidavit at P. 21). Accordingly, the Plan satisfies section 1123(a)(6) of the Bankruptcy Code. 33 I. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1123(A)(7) OF THE BANKRUPTCY CODE ----------------------------------------- 18. Section 1123(a)(7) of the Bankruptcy Code requires that the manner of selection of any director, officer or trustee of the reorganized debtor, or any successor to such officer, director or trustee, be consistent with the interests of creditors and equity security holders and with public policy. In furtherance of the Plan, the identities of those persons who will serve, on the Effective Date as officers of the Reorganized Debtors have been disclosed by the Debtors and are set forth above in the Findings of Fact. 19. The appointment, or continuation in office, of the boards of directors of the Reorganized Debtors, as described in paragraphs 44 and 45 of the Findings of Fact, is consistent with the interests of creditors and with public policy. (Demilio Affidavit, at P. P. 18-20). Accordingly, the Plan satisfies section 1123(a)(7) of the Bankruptcy Code. J. SECTION 1123(B)(2) OF THE BANKRUPTCY CODE: THE REJECTION AND ASSUMPTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES ARE IN THE BEST INTERESTS OF THE DEBTORS' ESTATES ------------------------------------------------- 20. Pursuant to section 1123(b)(2) of the Bankruptcy Code, a plan may provide for the rejection or assumption of any executory contract or unexpired lease of the debtor not previously rejected under section 365. 21. Under section 365 of the Bankruptcy Code, a debtor may assume an executory contract or unexpired lease if (i) outstanding defaults under the contract or lease have been cured under section 365(b)(1) of the Bankruptcy 34 Code, and (ii) the debtor's decision to assume such executory contract or unexpired lease is supported by valid business justifications. See In re Klein Sleep Prods., Inc., 78 F.3d 18, 25 (2d Cir. 1996); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1098-99 (2d Cir. 1993), cert. dismissed, 511 U.S. 1026, 114 S. Ct. 1418 (1994); Control Data Corp. v. Zelman (In re Minges), 602 F.2d 38, 42 (2d Cir. 1979); In re Kopel, 232 B.R. 57, 63 (Bankr. E.D.N.Y. 1999); Westbury Real Estate Ventures, Inc. v. Bradlees, Inc. (In re Bradlees Stores, Inc.), 194 B.R. 555, n.1 (Bankr. S.D.N.Y. 1996); In re Child World, Inc., 142 B.R. 87, 89 (Bankr. S.D.N.Y. 1992). 22. The assumption of executory contracts and unexpired leases pursuant to Section 8.1 and 8.2 of the Plan, subject to the occurrence of the Effective Date, (i) is in the best interests of the Debtors, their estates, and their creditors, (ii) is based upon and within the Debtors' sound business judgment, (iii) is necessary to the implementation of the Plan, and (iv) satisfies the requirements of section 365(a) of the Bankruptcy Code. 23. Schedule 8.1 to the Plan sets forth contracts and leases that, to the extent they constitute executory contracts and unexpired leases, the Debtors wish to reject, subject to the occurrence of and effective as of the Effective Date. Section 8.1 of the Plan provides that the executory contracts and unexpired leases set forth on Schedule 8.1 of the Plan are to be rejected, as of the Confirmation Date, subject to the occurrence of, and effective as of, the Effective Date. 24. Courts have uniformly deferred to the business judgment of the debtor to determine whether the rejection of an executory contract or unexpired lease by the debtor is appropriate under section 365(a) of the Bankruptcy Code. See NLRB v. Bildisco & Bildisco, 465 U.S. 513, 525 (1984); Lubrizol Enterp., 35 Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1046-47 (4th Cir. 1985); Minges, 602 F.2d at 42; In re Lawson, 146 B.R. 663, 664-65 (Bankr. E.D. Va. 1992), aff'd in part, rev'd in part, 14 F.3d 595 (4th Cir. 1993); In re Chipwich, Inc., 54 B.R. 427 (Bankr. S.D.N.Y. 1985). To the extent that sound business reasons justify the debtor's rejection of a particular lease or contract, rejection should be approved. 25. The rejection of the executory contracts and unexpired leases set forth in Schedule 8.1 of the Plan, subject to the occurrence of and effective as of the Effective Date, (i) is in the best interests of the Debtors, their estates, and their creditors, (ii) is based upon and within the Debtors' sound business judgment, (iii) is necessary to the implementation of the Plan, and (iv) satisfies the requirements of section 365(a) of the Bankruptcy Code. Accordingly, the Plan satisfies the requirements of section 1123(b)(2) of the Bankruptcy Code. K. SECTION 1123(B)(3) OF THE BANKRUPTCY CODE IS SATISFIED ------------------------------------------------------ 26. Section 1123(b)(3) of the Bankruptcy Code requires that settlements accomplished under a plan of reorganization be fair and reasonable. The Plan does not incorporate any settlements requiring approval and, accordingly, section 1123(b) of the Bankruptcy Code is not applicable. L. THE TRANSFERS OF PROPERTIES UNDER THE PLAN ARE GOVERNED BY THE EXEMPTIONS PROVIDED IN SECTION 1146(C) OF THE BANKRUPTCY CODE ----------------------------------------- 27. Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer or exchange or a security, or the making or delivery of an instrument of transfer under a confirmed plan may not be taxed under any law imposing a stamp tax or similar tax. The Plan contemplates issuance of the New Common Stock, MVS Securities and New Notes and entry into the DB Credit Agreement; the DB Credit Agreement requires a pledge of certain of the Reorganized Debtors' assets to secure the obligations thereunder. 36 28. On May 1, 2003, the Bankruptcy Court entered an Order authorizing the sale of the Debtors' NurseAccess business (Docket No. 434) and an Order authorizing the sale of certain real property and personal property located in Dona Ana, New Mexico (Docket No. 433). These asset sales made by the Debtors during the pendency of the Chapter 11 Cases were an integral part of the Debtors' efforts to restructure and streamline their business and, therefore, were a necessary predicate to the Debtors' successful emergence from chapter 11. Pursuant to section 1146(c) of the Bankruptcy Code, issuance of the New Common Stock, MVS Securities and New Notes ,recordation of the security interests granted in connection with the Exit Financing or other instruments delivered in connection therewith, and the transfers made in connection with the Debtors' asset sales during the pendency of the Chapter 11 Cases are not and will not be subject to taxation under any law imposing a stamp, transfer or similar tax. In re 995 Fifth Ave. Assocs., 963 F.2d 503 (2d Cir. 1992). THE DEBTORS HAVE SATISFIED SECTION - ---------------------------------- 1129(A)(2) OF THE BANKRUPTCY CODE 29. Section 1129(a)(2) of the Bankruptcy Code requires the proponent of a plan to comply with all of the applicable provisions of the Bankruptcy Code. The Debtors, as proponents of the Plan, have complied with all of the provisions of the Bankruptcy Code and the Bankruptcy Rules governing notice, disclosure and solicitation in connection with the Plan, the Disclosure Statement and all other matters considered by this Court in connection with these Chapter 11 Cases. In re Johns-Manville Corp., 68 B.R. 618, 630 (Bankr. S.D.N.Y. 1986), aff'd, 78 B.R. 407 (S.D.N.Y. 1987); In re Toy & Sports Warehouse, Inc., 37 B.R. 141, 149 (Bankr. S.D.N.Y. 1984). 37 30. The Debtors have complied with the operating guidelines and financial reporting requirements enacted by the United States Trustee by (i) timely filing all operating reports and financial statements and (ii) maintaining and providing proof of insurance. 31. The Debtors have paid all statutory fees required to be paid during the Chapter 11 Cases and filed all fee statements required to be filed. 32. The Debtors have timely filed with the Court all schedules, lists of executory contracts, and statements of financial affairs. 33. Sufficient and timely notice of the Confirmation Hearing and all other hearings in these Chapter 11 Cases has been given to holders of Claims and Equity Interests and all other parties in interest to whom notice was required to have been given. 34. The solicitation of votes was made following approval and dissemination of the Disclosure Statement to holders of Claims and Equity Interests in Classes that are impaired and entitled to vote, and was made in good faith and in compliance with the provisions of the Bankruptcy Code and the Bankruptcy Rules. The Ballots of holders of Claims and Equity Interests were properly solicited and tabulated. 35. The Debtors have complied with all applicable provisions of the Bankruptcy Code, the Bankruptcy Rules and all orders of this Court and have fulfilled all of the obligations and duties owed to their estates and creditors as required by and set forth in sections 1107 and 1108 of the Bankruptcy Code. Accordingly, the Debtors have satisfied section 1129(a)(2) of the Bankruptcy Code. 38 THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(3) OF THE BANKRUPTCY CODE - ----------------------------------------- 36. Section 1129(a)(3) of the Bankruptcy Code states that a plan must be proposed in good faith and not by any means forbidden by law. See Kane v. Johns-Manville Corp., 843 F.2d 636, 649 (2d Cir. 1988), citing Koelbl v. Glessing (In re Koelbl), 751 F.2d 137, 139 (2d Cir. 1984) (quoting Manati Sugar Co. v. Mock, 75 F.2d 284 (2d Cir. 1935)); In re Texaco Inc., 84 B.R. 893, 899 (Bankr. S.D.N.Y.), appeal dismissed, 92 B.R. 38 (S.D.N.Y. 1988). 37. This Court has examined the totality of the circumstances surrounding the formulation of the Plan. The Plan is based on extensive arm's length negotiations between and among the Debtors, the Senior Secured Lenders, Aetna, certain holders of the Senior Secured Notes and the Senior Subordinated Notes, Onex, R2 and the Official Committee. The Plan and the Disclosure Statement reflect the culmination of such efforts and the substantial input of each representative group. Additionally, as evidenced by the overwhelming acceptance of the Plan by creditors, the Plan achieves the goal of consensual reorganization embodied in the Bankruptcy Code. Further, the limited release and exculpation provided in Sections 5.7 and 11.7 of the Plan have been agreed to in good faith and are consistent with sections 105 and 1129 of the Bankruptcy Code. The terms of the Exit Financing, including, without limitation, the DB Commitment Letter and the DB Credit Agreement have been negotiated in good faith and at arm's length and are fair, just and reasonable under the circumstances. Thus, the Debtors have complied with the "good faith and not by any means forbidden by law" requirement of section 1129(a)(3) of the Bankruptcy Code. (Demilio Affidavit, at P. 13). 39 THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(4) OF THE BANKRUPTCY CODE - ----------------------------------------- 38. Section 1129(a)(4) of the Bankruptcy Code requires that all payments made or to be made by the plan proponent, by the debtor or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, have been approved by, or are subject to the approval of, the Court as reasonable. 39. All payments made by the Debtors on account of "out of the ordinary course of business" transactions have been approved by the Court as reasonable, and all payments made or to be made to professionals retained by Order of the Court will be, as set forth in Section 2.1 of the Plan, subject to review and approval by this Court upon final application under section 330, 331 or 503(b) of the Bankruptcy Code. Accordingly, the Plan satisfies section 1129(a)(4) of the Bankruptcy Code. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(5) OF THE BANKRUPTCY CODE - ----------------------------------------- 40. Section 1129(a)(5) of the Bankruptcy Code requires the proponent of a plan of reorganization to disclose the identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer, or voting trustee of the debtor, an affiliate of the debtor participating in a joint plan with the debtor or a successor to the debtor under the plan, and to show that the appointment to, or continuance in, such office of such individual is consistent with the interests of creditors and equity security holders and with public policy. Section 1129(a)(5) of the Bankruptcy Code also requires the proponent of a plan of reorganization to disclose the identity of any insider that will be employed or retained by the reorganized debtor, and the nature of any compensation for such insider. 40 41. The Debtors have disclosed the identities of those persons who will serve, on the Effective Date of the Plan, as officers of the Reorganized Debtors. Following the Effective Date, the boards of directors of the Reorganized Debtors will determine what changes, if any, will be made to the composition of the Reorganized Debtors' officers and their compensation. The Debtors also have disclosed the name and affiliation of the individuals proposed to serve as directors of the Reorganized Magellan. The appointment, or continuation in office, of such individuals is consistent with the interests of creditors and with public policy. Accordingly, the Plan satisfies section 1129(a)(5) of the Bankruptcy Code. SECTION 1129(A)(6) OF THE BANKRUPTCY CODE IS NOT APPLICABLE TO THE PLAN - ---------------------------------- 42. Section 1129(a)(6) of the Bankruptcy Code requires a debtor to obtain the approval of any governmental regulatory commission, with jurisdiction over the debtor, with respect to any rate changes provided for in the debtor's plan of reorganization. The Plan does not provide for any changes in rates that require regulatory approval of any governmental agency. Section 1129(a)(6) of the Bankruptcy Code is, accordingly, not applicable. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(7) OF THE BANKRUPTCY CODE - ----------------------------------------- 43. Section 1129(a)(7) of the Bankruptcy Code requires each creditor or equity interest holder in an impaired class to accept the plan of reorganization or receive or retain under such plan on account of such claim or interest property of a value, as of the effective date of such plan, that is not less than the amount that such holder would receive or retain if the debtor were liquidated under chapter 7 of the Bankruptcy Code. In re Crowthers McCall Pattern, Inc., 120 B.R. 279, 297 (Bankr. S.D.N.Y. 1990). 41 44. Based upon the Findings of Fact (paragraphs 1 to 66 hereinabove) contained in this Confirmation Order, the Liquidation Analysis set forth in Section XI.D of the Disclosure Statement, and the sworn statements made in the Forrest Affidavit, this Court concludes that the Plan satisfies the "best interest" test under section 1129(a)(7) of the Bankruptcy Code. THE PLAN SATISFIES EITHER THE REQUIREMENTS OF SECTION 1129(A)(8) OR SATISFIES THE REQUIREMENTS OF SECTION 1129(B) OF THE BANKRUPTCY CODE - ------------------------------------------------------ 45. Section 1129(a)(8) of the Bankruptcy Code requires that, with respect to each class of claims or interests under a plan, such class has either accepted the plan or is not impaired under the plan. According to the BSI Certification and the Innisfree Certification, Classes 4, 7, 8, 9,13 and 14 have voted to accept the Plan. Class 1 has voted to reject the Plan. The Claims in each of Classes 2, 3, 5, 6, 10, 11 and 12 are unimpaired under the Plan and, pursuant to section 1126(f) of the Bankruptcy Code, holders of unimpaired Claims in such classes are deemed to have accepted the Plan. As to Class 1, if the Debtors elect Alternate Treatment B, the Debtors have agreed to pay the Allowed Claims in Class 1 in full, in Cash and to cause the issuance of a letter of credit to backstop any letters of credit obligations owing to the Senior Secured Lenders, on the Effective Date. Accordingly, the Claims in Class 1 would be unimpaired in such extent and the Plan satisfies the requirements of Section 1129(a)(8) of the Bankruptcy Code. Alternatively, the Debtors' treatment of the Allowed Claims in Class 1 under Alternate Treatment B provides the holders of the Allowed Claims in Class 1 with the "indubitable equivalent" of their Allowed Claims in accordance with section 1129(b)(2)(A)(iii) of the Bankruptcy Code and, therefore, the Plan satisfies section 1129(b)(2)(A)(iii) of the Bankruptcy Code 42 as to such Class. Additionally, if the Debtors elect Alternate Treatment A, the holders of Allowed Claims in Class 1 will retain the liens securing their Allowed Claims and will receive current Cash payments and deferred Cash payments totaling at least the allowed amount of their Claims, as of the Effective Date, in accordance with section 1129(b)(2)(A)(i) of the Bankruptcy Code, and therefore, satisfies section 1129(b)(2)(A)(i) of the Bankruptcy Code as to such Class. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(9) OF THE BANKRUPTCY CODE - ----------------------------------------- 46. Section 1129(a)(9) of the Bankruptcy Code provides for certain mandatory treatment of claims entitled to priority under the Bankruptcy Code. 47. As required by section 1129(a)(9)(A) of the Bankruptcy Code, Section 2.1 of the Plan provides that, except as otherwise agreed to by a holder of an Allowed Administrative Expense Claim, the Debtors shall pay to each holder of an Allowed Administrative Expense Claim Cash in an amount equal to such Allowed Claim on, or as soon thereafter as is reasonably practicable after, the later of the Effective Date and the first Business Day after the date that is thirty (30) calendar days after the date such Administrative Expense Claim becomes an Allowed Administrative Expense Claim; provided, however, that Allowed Administrative Expense Claims representing liabilities incurred in the ordinary course of business by the Debtors, as debtors in possession, or liabilities arising under loans or advances to or other obligations incurred by the Debtors, as debtors in possession, whether or not incurred in the ordinary course of business, shall be paid by the Debtors in the ordinary course of business, consistent with past practice and in accordance with the terms and subject to the conditions of any agreements governing, instruments evidencing, or other documents relating to such transactions. In addition, pursuant to Section 2.2 of the Plan, all payments made or to be made (as Administrative Expense Claims) to professionals retained by orders of the Court will be subject to review and approval by this Court upon final application under section 328, 330, 331 or 503(b) of the Bankruptcy Code. 43 48. Consistent with section 1129(a)(9)(B) of the Bankruptcy Code, Section 4.3 of the Plan provides that, except as otherwise agreed to by a holder of an Allowed Priority Non-Tax Claim, such holder shall receive, in full satisfaction of such Allowed Priority Non-Tax Claim, Cash in an amount equal to such Claim, on or as soon as reasonably practicable after the latest of (i) the Effective Date, (ii) the date such Claim becomes Allowed, and (iii) the date for payment provided by any agreement or understanding between the applicable Debtors and the holder of such Claim. 49. Consistent with section 1129(a)(9)(C) of the Bankruptcy Code, Section 2.3 of the Plan provides that a holder of an Allowed Priority Tax Claim shall, on account of such Allowed Priority Tax Claim be paid in full, in cash, on the Effective Date or as soon thereafter as is reasonably practicable, or on the Business Day after the date that is thirty (30) calendar days after the date such Priority Tax Claim becomes an Allowed Priority Tax Claim. 50. Accordingly, the Plan satisfies section 1129(a)(9) of the Bankruptcy Code. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(10) OF THE BANKRUPTCY CODE - ------------------------------------------ 51. Section 1129(a)(10) of the Bankruptcy Code provides that at least one impaired class of claims must accept a plan of reorganization, determined without including any acceptance of such plan by any insider. 44 52. The Plan satisfies section 1129(a)(10) of the Bankruptcy Code because Classes 4, 7, 8, and 9, which are impaired classes, have voted to accept the Plan by the requisite majorities, determined without including any acceptance of the Plan by insiders. (Demilio Affidavit at P. 23). THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(11) OF THE BANKRUPTCY CODE - ------------------------------------------ 53. Section 1129(a)(11) of the Bankruptcy Code requires that a plan be feasible and that the debtor or its successor under such plan would not likely require liquidation or further financial reorganization, except as provided under such plan. In re Clarkson, 767 F.2d 417, 420 (8th Cir. 1985) (citing Chase Manhattan Mortgage & Realty Trust v. Bergman (In re Bergman), 585 F.2d 1171, 1179 (2d Cir. 1978)); In re Texaco, Inc., 84 B.R. 893, 907 (Bankr. S.D.N.Y. 1988) (citing In re Johns-Manville Corp., 68 B.R. 618, 635 (Bankr. S.D.N.Y. 1986), aff'd, 78 B.R. 407 (S.D.N.Y. 1987)). 54. Based upon the Findings of Fact and the Conclusions of Law contained in this Confirmation Order, this Court concludes that the Plan satisfies section 1129(a)(11) of the Bankruptcy Code, and the Debtors will not likely require liquidation or further financial reorganization after confirmation. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(12) OF THE BANKRUPTCY CODE - ------------------------------------------ 55. Section 1129(a)(12) of the Bankruptcy Code requires that all fees payable under section 1930 of title 28 of the United States Code, as determined by the court at the hearing on confirmation of the plan, either have been paid or the plan provides for the payment of all such fees on the effective date of the plan. 45 56. Section 13.1 of the Plan provides for the payment on the Effective Date (or as soon as practicable thereafter) of all fees payable under section 1930 of title 28 of the United States Code. All post-consummation fees that are due and payable will be payable by the Reorganized Debtors until the Chapter 11 Cases are closed pursuant to section 350(a) of the Bankruptcy Code. Accordingly, the Plan satisfies section 1129(a)(12) of the Bankruptcy Code. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(A)(13) OF THE BANKRUPTCY CODE - ------------------------------------------ 57. Section 1129(a)(13) of the Bankruptcy Code requires the continuation of payment of all retiree benefits, at the level established pursuant to section 1114 of the Bankruptcy Code at any time prior to confirmation of the plan, for the duration of the period the debtor has obligated itself to provide such benefits. 58. Section 13.2 of the Plan provides that, on and after the Effective Date, the Reorganized Debtors shall continue to pay all retiree benefits (within the meaning of section 1114 of the Bankruptcy Code) for the duration of the period the Debtors have obligated themselves to provide such benefits. Accordingly, the Plan satisfies section 1129(a)(13) of the Bankruptcy Code. THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(D) OF THE BANKRUPTCY CODE - ----------------------------------------- 59. Section 1129(d) of the Bankruptcy Code provides that, on request of a governmental unit, the court may not confirm a plan if its principal purpose is the avoidance of taxes or the avoidance of the application of section 5 of the Securities Act of 1933, as amended. The principal purpose of the Plan is not avoidance of taxes or avoidance of the requirements of section 5 of the Securities Act of 1933, as amended, and there has been no objection to the Plan by any governmental unit alleging any such avoidance. (Demilio Affidavit, at P. 28). Accordingly, the Plan satisfies section 1129(d) of the Bankruptcy Code. 46 THE RELEASES, EXCULPATION AND INDEMNITY PROVISIONS ARE CONSISTENT WITH SECTIONS 105 AND OTHER PROVISIONS OF THE BANKRUPTCY CODE - ------------------------------------------- 60. This Court has jurisdiction to approve the provisions in Section 11.7 of the Plan (Exculpation) and Section 5.7 of the Plan (Release of Representatives) pursuant to sections 1334(a), (b) and (d) of title 28 of the United States Code. 61. Section 105(a) of the Bankruptcy Code empowers the Court and permits Court approval of the limited release, exculpation and indemnification provisions where, as here, such provisions are essential to the formulation and implementation of the Plan and confer material benefits on the Debtors, their estates and creditors. On the basis of the Affidavits in Support of Confirmation and the record presented at the Confirmation Hearing, this Court finds and concludes that it has jurisdiction to approve of the limited release, exculpation and indemnification provisions set forth in the Plan and that such provisions of the Plan are consistent with sections 105 and 1129 of the Bankruptcy Code and other applicable provisions of the Bankruptcy Code and are in the best interests of the Debtors' estates and creditors. See A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 1002-03 (4th Cir.), cert. denied, 479 U.S. 876 (1986); In re Johns-Manville Corp., 801 F.2d 60, 63-64 (2d Cir. 1986); In re The Leslie Fay Companies, Inc., 207 B.R. 764 (Bankr. S.D.N.Y. 1997); see also In re Drexel Burnham Lambert Group, Inc., 138 B.R. 717 (Bankr. S.D.N.Y.), aff'd, 140 B.R. 347 (S.D.N.Y. 1992). THE INJUNCTION AGAINST WORTHLESS STOCK DEDUCTION IS CONSISTENT WITH THE BANKRUPTCY CODE AND CASELAW - ------------------------------------ 62. Section 13.14 of the Plan states that any "fifty percent shareholder" of Magellan shall be enjoined from claiming a worthless stock deduction with respect to any Equity Interests held by such entity for any 47 taxable year of such shareholder ending prior to the Effective Date. This Court finds and concludes that an injunction against claiming a worthless stock deduction is proper because, if a fifty percent shareholder were allowed to claim such deduction, there would be an immediate "ownership change" for Magellan, which would effectively eliminate or reduce substantially the use by the Reorganized Debtors of certain net operating tax loss carryforwards (which are property of the Debtors' estates) to offset taxable income following the Effective Date. See Official Comm. of Unsecured Creditors v. PSS Steamship Co. (In re Prudential Lines, Inc.), 928 F.2d 565 (2d Cir.), cert. denied, 502 U.S. 821 (1991) (upholding bankruptcy court's order enjoining worthless stock deduction); In re Phar-Mor, Inc., 152 B.R. 924 (Bankr. N.D. Ohio 1993) (enjoining transfer of stock by minority shareholder that might result in an ownership change of the debtor). THE NEW COMMON STOCK AND NEW NOTES ARE EXEMPT FROM REGISTRATION PURSUANT TO SECTION 1145 OF THE BANKRUPTCY CODE - ----------------------------------------------- 63. Under section 1145 of the Bankruptcy Code, the New Common Stock, including, without limitation, the shares of New Common Stock issued pursuant to the Equity Offering, and New Notes (including, without limitation, the 92,184 shares of New Common Stock and New Notes distributed to Houlihan Lokey under its engagement letter, the Rights Registration Agreement and the Plan) will be freely tradeable by the recipients thereof, subject to (i) the provisions of section 1145(b)(1) of the Bankruptcy Code relating to the definition of an underwriter in Section 2(a)(11) of the Securities Act and compliance with any rules and regulations of the Securities Exchange Commission, if any, applicable at the time of any future transfer of such securities or instruments; (ii) the restrictions, if any, on the transferability of such securities and instruments; and (iii) applicable regulatory approval. The issuance of New Common Stock, the 48 New Notes and the ability to participate in the Equity Offering (including, without limitation, amounts payable to Houlihan Lokey in accordance with section 5.17 of the Plan) are or were in exchange for Claims against, or Equity Interests in, the Debtors, or principally in such exchange and partly for cash or property, within the meaning of section 1145(a)(1) of the Bankruptcy Code. 64. The exemption from the requirements of Section 5 of the Securities Act of 1933, as amended, and any state or local law requiring registration of the offer, issuance, exchange or transfer of a security provided for in the Plan or registration or licensing of an issuer of, underwriter of, or broker dealer in, such security is authorized by section 1145 of the Bankruptcy Code and is applicable to the extent set forth in the Plan. The New Common Stock and New Notes are exempt from registration pursuant to section 1145 of the Bankruptcy Code and are freely tradeable by the holders thereof except to the extent a holder is an "underwriter" as defined in section 1145(b) of the Bankruptcy Code. 65. To the extent that any of the foregoing conclusions of law constitute findings of fact, they are adopted as such. DECRETAL PROVISIONS ------------------- NOW, THEREFORE, IT IS HEREBY ORDERED AND ADJUDGED AS FOLLOWS: 1. The Plan is hereby confirmed. 2. The record of the Confirmation Hearing is hereby closed. 3. The Effective Date of the Plan shall occur on the date when the conditions set forth in Section 10.2 of the Plan shall have been satisfied or, if applicable, shall have been waived by Reorganized Magellan, in its sole 49 discretion, with the consent of the Official Committee, the Subject Lenders and the Equity Investor, which consents shall not be unreasonably withheld. Any such waiver may be effected at any time, without notice or leave or order of the Bankruptcy Court, and without any formal action. 4. With respect to all Classes (other than Classes 7, 8, and 14) the record date for purposes of determining the holders of Allowed Claims and Equity Interests that are entitled to distributions that are required to be made under the Plan on the Effective Date, shall be the date of the Confirmation Order, and distributions with respect to Classes 7, 8, and 14 (the Debtors' public debt and equity securities) shall be made to holders of the public debt and equity securities surrendering such securities. 5. Any Objections that have not been withdrawn prior to the entry of this Confirmation Order or that are not cured by the relief granted herein are hereby overruled in their entirety, and all withdrawn Objections are hereby deemed withdrawn with prejudice. 6. In accordance with section 1141(a) of the Bankruptcy Code and Section 11 of the Plan (and as limited thereby), upon entry of this Confirmation Order, the Plan shall be binding upon and inure to the benefit of the Debtors and their respective successors and assigns, the holders of Claims and Equity Interests and their respective successors and assigns (whether or not they voted to accept the Plan, whether or not they are impaired under the Plan, and whether or not any such holder has filed, or is deemed to have filed, a proof of Claim or proof of Equity Interest), any other Entity giving, acquiring, or receiving property under the Plan, and any lessor or lessee of property to or from any of the Debtors. Except as qualified by Section 11.9 of the Plan, the rights 50 afforded in the Plan and the treatment of all Claims and Equity Interests therein shall be in exchange for the discharge of all existing debts and Claims, and termination of all Equity Interests, of any kind, nature, or description whatsoever against or in the Debtors or any of their assets or properties to the fullest extent permitted by section 1141 of the Bankruptcy Code. Except as provided in the Plan, upon the Effective Date, all existing Claims against the Debtors and Equity Interests in the Debtors shall be, and shall be deemed to be, discharged and terminated, and all holders of Claims and Equity Interests shall be precluded and enjoined from asserting against the Reorganized Debtors, their successors or assignees, or any of their assets or properties, any other or further Claim or Equity Interest based upon any act or omission, transaction, or other activity of any kind or nature that occurred prior to the Effective Date, whether or not such holder has filed a proof of claim or proof of equity interest, and whether or not the facts of or legal bases therefor were known or existed prior to the Effective Date. In addition, each holder (as well as any trustees and agents on behalf of each holder) of a Claim or Equity Interest and any affiliate of such holder shall be deemed to have forever waived, released, and discharged the Debtors, to the fullest extent permitted by section 1141 of the Bankruptcy Code, of and from any and all Claims, Equity Interests, rights, and liabilities that arose prior to the Effective Date. Upon the Effective Date, all such persons shall be forever precluded and enjoined, pursuant to section 524 of the Bankruptcy Code, from prosecuting or asserting any such discharged Claim against or terminated Equity Interest in the Debtors. 7. Pursuant to the Order of this Court dated April 23, 2003, approving the Debtors' assumption of the Amended MSA pursuant to section 365 of the Bankruptcy Code, the Aetna Amended MSA, including all documents and instruments related thereto (including but not limited to the Aetna Asset Purchase Agreement, the Aetna Note, the Aetna Warrant and the Vendor Contracts), and the Aetna Registration Rights Agreement are and shall remain binding on the Debtors, the Reorganized Debtors, their Affiliates and their successors. 51 8. In accordance with sections 524 and 1141(d) of the Bankruptcy Code and Section 11 of the Plan (and as limited thereby), except as otherwise set forth in the Plan and in this Confirmation Order, on and after the Effective Date, all persons or entities who have held, hold or may hold Claims or Equity Interests are permanently enjoined, from and after the Effective Date, from (a) commencing or continuing in any manner any action or other proceeding of any kind on any such Claim or Equity Interest against any of the Debtors, (b) the enforcement, attachment, collection or recovery by any manner or means of any judgment, award, decree or order against any Debtor, (c) creating, perfecting, or enforcing any encumbrance of any kind against any Debtor or against the property or interests in property of any Debtor, and (d) asserting any right of setoff, subrogation or recoupment of any kind against any obligation due from any Debtor or against the property or interests in property of any Debtor, with respect to any such Claim or Equity Interest. 9. Notwithstanding Section 11.4 of the Plan or anything in this Confirmation Order to the contrary, the Plan shall not modify or impair any rights of setoff, recoupment or other defenses which St. Paul Fire and Marine Insurance Company, the successor by merger to American Continental Insurance Company ("St. Paul"), may assert under applicable law. Furthermore, notwithstanding Section 11.4 of the Plan or anything in this Conformation Order to the contrary, the Plan shall not modify or impair St. Paul's right to seek relief from the automatic stay to pursue the declaratory judgment pending against the Debtors in the United States District Court for the District of Maryland, Case Number S 02 C. 52 10. The injunction contained in Section 11.4 of the Plan shall not affect the rights of PPS to continue to pursue its pending injunction action against the Debtors in the matter styled as Pennsylvania Psychiatric Society v. Magellan Health Services, Inc., et. al ., currently pending in the United States District Court for the Western District of Pennsylvania, as Civil Action No. 99-0937, solely to the extent that PPS is seeking to enjoin any ongoing alleged wrongful conduct by the Debtors occurring on or after the Commencement Date and for no other monetary or non-monetary relief against the Debtors. 11. In accordance with section 1141(b) of the Bankruptcy Code and Section 11.1 of the Plan, all property of the Debtors' bankruptcy estates shall vest in the Reorganized Debtors free and clear of all Claims, liens, encumbrances, charges, and other interests, except as provided herein. The Reorganized Debtors may operate their businesses and may use, acquire, and dispose of property free of any restrictions of the Bankruptcy Code or the Bankruptcy Rules and in all respects as if there were no pending cases under any chapter or provision of the Bankruptcy Code, except as provided herein and in the Plan. In addition, pursuant to Section 5.4 of the Plan, the distributions to the holders of Claims in Class 8 shall not be subject to levy, garnishment, attachment or other legal process by any holder of indebtedness senior to the indebtedness of the holders of such Claims by reason of claimed contractual subordination rights. On the Effective Date, all creditors shall be deemed to have waived any and all contractual subordination rights that they may have with respect to such distribution, and the Confirmation Order hereby enjoins, effective as of the Effective Date, all holders of senior indebtedness from enforcing or attempting to enforce any such rights with respect to the distributions under the Plan to the holders of Claims in Class 8. 12. Pursuant to Section 11.6 of the Plan, all holders of Claims and Equity Interests and other parties in interest, along with their respective present or former employees, agents, officers, directors, or principals, shall be enjoined from taking any actions to interfere with the implementation or consummation of the Plan. 13. In accordance with section 1142 of the Bankruptcy Code, upon entry of this Confirmation Order, the Debtors are authorized to enter into the transactions described in the Plan and the Plan Supplement and are authorized and empowered to take all actions to issue, execute, deliver, file, and record all documents appropriate or necessary to consummate, implement, or otherwise effectuate the transactions contemplated hereunder and thereunder. 14. In accordance with section 1142 of the Bankruptcy Code, upon entry of this Confirmation Order (and subject to the occurrence of the Effective Date) without limiting the immediately preceding paragraph, the following shall be deemed authorized and approved in all respects: (i) the adoption and filing by Reorganized Magellan of the Amended Certificate of Incorporation, (ii) the adoption of the Amended Magellan By-Laws, (iii) the issuance of the New Common Stock and MVS Securities, (iv) the issuance of the New Notes, (v) the issuance of the New Warrants, (vi) the issuance of the New Aetna Note, (vii) the issuance of the New Aetna Warrant (viii) the entering into of the DB Credit Agreement or the New Senior Secured Credit Agreement, as the case may be, and the transactions contemplated thereby (including, without limitation, the payment of any fees in connection therewith), (ix) the entering into of employment agreements with the Senior Executives, (x) the entering into of employment agreements between the Debtors and their employees and (xi) the entering into of 53 any other agreement, instrument or document necessary or desirable to effectuate the foregoing and the Plan. On the Effective Date, the matters provided under the Plan involving the capital and corporate structures and governance of the Reorganized Debtors shall be deemed to have occurred and shall be in effect from and after the Effective Date pursuant to applicable state laws without any requirement of further action by the stockholders or directors of the Debtors or the Reorganized Debtors. 15. The board of directors of Reorganized Magellan shall be deemed to have approved the acquisition of the MVS Securities by the Equity Investor and its affiliates and associates prior to the time any of such entities became the owner of MVS Securities within the meaning of Section 203 of the Delaware General Corporation Law. The Amended Certificate of Incorporation shall provide that Reorganized Magellan elects not to be governed by Section 203 of the Delaware General Corporation Law. 16. Except as otherwise set forth in the Plan, prior to, or as of, the Effective Date, and only with the Official Committee's and the Equity Investor's prior written consent, Reorganized Magellan may cause any or all of the Debtors to engage in any intercompany transactions deemed necessary or appropriate (including, without limitation, merging, dissolving, or transferring assets, between or among the Debtors). 17. Pursuant to sections 365(a) and 1123(b)(2) of the Bankruptcy Code and Section 8.1 of the Plan, all executory contracts and unexpired leases of the Debtors not previously assumed or rejected are hereby assumed, effective as of and subject to the occurrence of the Effective Date, except for (i) the executory contracts and unexpired leases listed on Schedule 8.1 to the Plan, which are to be rejected pursuant to the Plan, and (ii) any executory contracts 54 and unexpired leases that are the subject of a motion to reject, assume or assign pending before the Court at least twenty (20) days prior to the Confirmation Hearing. Pursuant to sections 365(a) and 1123(b)(2) of the Bankruptcy Code, all executory contracts and unexpired leases set forth on Schedule 8.1 to the Plan are hereby rejected, effective as of the Confirmation Date and subject to the occurrence of the Effective Date. Entry of this Confirmation Order shall constitute approval of the assumption of all executory contracts and unexpired leases described in Section 8 effective as of, and subject to, the occurrence of the Effective Date and the rejection of the contracts and leases listed on Schedule 8.1 to the Plan effective as of the Confirmation Date. 18. To the extent any Debtor and any Customer (as of the Confirmation Date) and/or party to a managed care service agreement with any Debtor in effect on the Confirmation Date have entered into amendments or agreements or have revised their course of dealing by consent of the Debtors in any fashion, including through the payment, advancement, credit or setoff of funds, both prior to and after the Commencement Date, such amendments, agreements, and/or revised consensual course of dealings are an ordinary course of business transaction under the Plan or have otherwise been approved by the Bankruptcy Court. Said amendments, agreements and/or revised consensual course of dealings are assumed concomitant with the assumption of the underlying executory contracts, and any right to any payment, credit, setoff or recoupment arising thereunder shall remain in full force and effect and is not subject to discharge under the Plan and this Order. 19. Effective upon entry of this Confirmation Order, all unexpired contracts between any of the Debtors and Continental Insurance Company and/or Columbia Casualty Company (collectively, together with their insurance affiliates, the "CNA Companies" or "CNA") shall be assumed pursuant to section 365 of the Bankruptcy Code, including but not limited to that certain Indemnity 55 Agreement, effective as of June 25, 1999, among and between Magellan Health Services, Inc., East River Insurance Company (Bermuda) Ltd. and Continental Insurance Company. Notwithstanding anything to the contrary contained in the Plan or this Order, except as otherwise previously agreed to, CNA shall not be required to surrender or release any collateral to the Debtors absent agreement of the parties, or further order of the Court. Nothing contained in this Order shall constitute an adjudication or finding as to the existence or enforceability of a prior agreement by CNA to return collateral. 20. Pursuant to Section 5.1 of the Plan, subject to the occurrence of the Effective Date, the Debtors shall be deemed consolidated for the following purposes under the Plan: (i) all guarantees by any of the Debtors of the obligations of any other Debtor arising prior to the Effective Date shall be deemed eliminated so that any Claim against any Debtor and any guaranty thereof executed by any other Debtor and any joint and several liability of any of the Debtors shall be deemed to be one obligation of the deemed consolidated Debtors, and (ii) each and every Claim arising prior to the Effective Date and filed against any of the Debtors shall be deemed filed against the deemed consolidated Debtors and shall be deemed one Claim against and obligation of the deemed consolidated Debtors. Without limitation of the foregoing, any holder of duplicate Claims shall receive a distribution for only one such Claim. 21. Such deemed consolidation, however, shall not (other than for purposes related to funding distributions under the Plan affect: (i) the legal and organizational structure of the Reorganized Debtors; (ii) intercompany Claims by and among the Debtors or Reorganized Debtors; (iii) pre- and post-Commencement Date guarantees, liens, and security interests that are 56 required to be maintained (A) in connection with executory contracts or unexpired leases that were entered into during the Chapter 11 Cases or that have been or will be assumed pursuant to section 365 of the Bankruptcy Code, (B) pursuant to the Plan, (C) in connection with any financing entered into by the Reorganized Debtors on the Effective Date; or (D) in connection with any Customer Claims and (iv) distributions out of any insurance policies or proceeds of such policies. 22. In accordance with section 105 of the Bankruptcy Code, the provisions of the Plan governing release and exculpation that are set forth in Sections 5 and 11 of the Plan, are hereby approved in all respects. 23. In accordance with sections 105 and 1123(b)(6) of the Bankruptcy Code and Section 13.14 of the Plan, and in furtherance of section 362 of the Bankruptcy Code, any "fifty percent shareholder" within the meaning of section 382(g)(4)(D) of the Internal Revenue Code of 1986, as amended, is hereby enjoined from claiming a worthless stock deduction with respect to any Equity Interests for any taxable year of such shareholder ending prior to the Effective Date. 24. In accordance with section 1145 of the Bankruptcy Code, the offer or issuance, sale, exchange or other transfer of any security in accordance with the Plan or this Confirmation Order, including the New Common Stock, the MVS Securities and the New Notes, is hereby declared exempt from (a) the provisions of section 5 of the Securities Act of 1933, as amended (15 U.S.C. ss. 77(e), as amended), and (b) any state or local law requiring registration for the offer or sale of a security or registration or licensing of the issuer or an affiliate thereof as an underwriter, broker or dealer in securities. 57 25. Under section 1145 of the Bankruptcy Code, the New Common Stock, including, without limitation, the shares of New Common Stock issued pursuant to the Equity Offering, and New Notes (including, without limitation, the 92,184 shares of New Common Stock and New Notes distributed to Houlihan Lokey under its engagement letter, the Registration Rights Agreement and the Plan) will be freely tradeable by the recipients thereof, subject to (i) the provisions of section 1145(b)(1) of the Bankruptcy Code relating to the definition of an underwriter in Section 2(a)(11) of the Securities Act of 1933 and compliance with any rules and regulations of the Securities Exchange Commission, if any, applicable at the time of any future transfer of such securities or instruments; (ii) the restrictions, if any, on the transferability of such securities and instruments; and (iii) applicable regulatory approval. The issuance of New Common Stock, New Notes and the ability to participate in the Equity Offering (including, without limitation, amounts payable to Houlihan Lokey in accordance with section 5.17 of the Plan) are or were in exchange for claims against, or Equity Interests in, the Debtors, or principally in such exchange and partly for cash or property, within the meaning of section 1145(a)(1) of the Bankruptcy Code. 26. Pursuant to section 1146(c) of the Bankruptcy Code and Section 13.12 of the Plan, the issuance, transfer or exchange of notes or equity securities under the Plan, the creation of any mortgage, deed of trust, or other security interest, the making or assignment of any lease or sublease, or the making or delivery of any deed or other instrument of transfer under, in furtherance of, or in connection with the Plan of Reorganization, shall not be subject to any stamp, real estate transfer, mortgage recording or other similar tax. 58 27. All entities holding Claims against or Equity Interests in the Debtors that are treated under the Plan are hereby directed to execute, deliver, file or record any document, and to take any action necessary to implement, consummate and otherwise effect the Plan in accordance with its terms, and all such entities shall be bound by the terms and provisions of all documents executed and delivered by them in connection with the Plan. 28. In accordance with section 1142 of the Bankruptcy Code, the Debtors, the Reorganized Debtors, the Disbursing Agent, and any other entity designated pursuant to the Plan are hereby authorized, empowered and directed to issue, execute, deliver, file and record any document, and to take any action necessary or appropriate to implement, consummate and otherwise effectuate the Plan in accordance with its terms, and all such entities shall be bound by the terms and provisions of all documents issued, executed and delivered by them as necessary or appropriate to implement or effectuate the transactions contemplated by the Plan. Without limiting the generality of the foregoing, the Debtors and/or the Reorganized Debtors are hereby authorized and empowered to execute the DB Credit Agreement and any other agreements instruments and documents necessary or required to consummate, implement or otherwise effectuate the Exit Financing, to grant the liens and security interests described in the DB Commitment Letter in connection therewith and to pay any fees required to be paid in connection with the Exit Financing. 29. The Debtors, are authorized to amend or modify the Plan at any time prior to the Effective Date, in accordance with Section 13.5 of the Plan; provided, however that any amendment or modification of paragraph 4 of the Modifications dated September 25, 2003 shall be subject to the approval of the Equity Investor and R2. 30. The Modifications are hereby approved. 59 31. The Debtors are authorized to take any and all actions in connection with the Equity Offering and the issuance of New Common Stock in consummation of the Equity Offering as described in Section 9 of the Plan 32. Until the Effective Date, and except as otherwise ordered by this Court, this Court shall retain exclusive jurisdiction over the Debtors, their properties and operations. On and after the Effective Date, in accordance with sections 105(a) and 1142 of the Bankruptcy Code, the Debtors, their properties and their operations shall be released from the custody and jurisdiction of the Bankruptcy Court, except that this Court retains jurisdiction over, and if this Court exercises its retained jurisdiction, shall have exclusive jurisdiction over, all matters arising out of or related to these cases and the Plan or which otherwise are enumerated in Section 12 of the Plan, including the following: (a) To hear and determine applications for the assumption or rejection of executory contracts or unexpired leases and the allowance of Claims resulting therefrom. (b) To determine any motion, adversary proceeding, application, contested matter, and other litigated matter pending on or commenced after the Confirmation Date. (c) To ensure that distributions to holders of Allowed Claims are accomplished as provided in the Plan. (d) To consider Claims or the allowance, classification, priority, compromise, estimation, or payment of any Claim, Administrative Expense Claim, or Equity Interest. (e) To enter, implement, or enforce such orders as may be appropriate in the event the Confirmation Order is for any reason stayed, reversed, revoked, modified, or vacated. (f) To issue injunctions, enter and implement other orders, and take such other actions as may be necessary or appropriate to restrain interference by any person with the consummation, implementation, or enforcement of the Plan, the Confirmation Order, or any other order of the Bankruptcy Court. 60 (g) To hear and determine any application to modify the Plan in accordance with section 1127 of the Bankruptcy Code, to remedy any defect or omission or reconcile any inconsistency in the Plan, the Disclosure Statement, or any order of the Bankruptcy Court, including the Confirmation Order, in such a manner as may be necessary to carry out the purposes and effects thereof. (h) To hear and determine all applications under sections 330, 331, and 503(b) of the Bankruptcy Code for awards of compensation for services rendered and reimbursement of expenses incurred prior to the Confirmation Date. (i) To hear and determine disputes arising in connection with the interpretation, implementation, or enforcement of the Plan, the Confirmation Order, any transactions or payments contemplated by the Plan, or any agreement, instrument, or other document governing or relating to any of the foregoing. (j) To take any action and issue such orders as may be necessary to construe, enforce, implement, execute, and consummate the Plan or to maintain the integrity of the Plan following consummation. (k) To determine such other matters and for such other purposes as may be provided in the Confirmation Order. (l) To hear and determine matters concerning state, local, and federal taxes in accordance with sections 346, 505, and 1146 of the Bankruptcy Code. (m) To hear and determine any other matters related to the Plan and not inconsistent with the Bankruptcy Code and title 28 of the United States Code. (n) To determine any other matters that may arise in connection with or are related to the Plan, the Disclosure Statement, the Confirmation Order any of the Plan Documents, or any other contract, instrument, release or other agreement or document related to the Plan, the Disclosure Statement or the Plan Supplement. (o) To enter a final decree closing these Chapter 11 Cases. (p) To recover all assets of the Debtors and property of the Debtors' estates, wherever located. (q) To hear and determine any rights, claims or causes of action held by, or accruing to, any of the Debtors pursuant to the Bankruptcy Code or pursuant to any federal or state statute or legal theory; 61 provided, however, that the Bankruptcy Court shall not maintain jurisdiction to interpret, construe, enforce or determine disputes under the Registration Rights Agreement and, from and after the Effective Date, the Equity Commitment Letter, as set forth in such documents. 33. Any person or entity seeking an allowance of final compensation or reimbursement of expenses for professional services rendered to the Debtors or in relation to these cases pursuant to sections 327, 328, 330, 331, 503(b) and 1103 of the Bankruptcy Code shall file and serve an application for allowance of final compensation for services rendered and reimbursement of related expenses incurred on or before the Effective Date (each, an "Application"), on each of the following entities not later than forty-five (45) days after the Effective Date (or such later date as may be established by further order of the Court): Weil, Gotshal & Manges LLP Attorneys for the Debtors 767 Fifth Avenue New York, New York 10153 Attn: Stephen Karotkin, Esq. Akin Gump Straus Hauer & Feld LLP Attorneys for the Official Committee 590 Madison Avenue New York, NY 10022 Attn: Michael S. Stamer, Esq. Office of the United States Trustee 33 Whitehall Street, 21st Floor New York, New York 10004 Attn: Pamela J. Lustrin, Esq. Wachtell, Lipton, Rosen & Katz Attorneys for the Agent for the Senior Secured Lenders 51 W. 52nd Street New York, New York 10019 Attn: Richard D. Feintuch, Esq. Davis Polk & Wardwell Attorneys for Aetna, Inc. 450 Lexington Avenue New York, New York 10017 Attn: Marshall S. Huebner, Esq. 62 34. A hearing to consider the Applications so served and filed shall be held before the Court on __________________m., or as soon thereafter as counsel may be heard, in Courtroom 701, United States Bankruptcy Court for the Southern District of New York, Alexander Hamilton Custom House, One Bowling Green, New York, New York (the "Final Fee Hearing"), or on such adjourned date and time as may be announced at the Final Fee Hearing. 35. Each Application shall comply with the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, the Local Bankruptcy Rules and the Guidelines for Fees and Disbursements for Professionals in the Southern District of New York, and shall set forth, among other things, in reasonable detail, (i) the name and address of the applicant; (ii) the nature of the professional or other services rendered and expenses for which reimbursement is requested for all periods from the date the particular applicant was retained through the Effective Date; (iii) the amount of compensation and reimbursement of expenses requested, (iv) whether any payments have been received on account and, if so, the amount or amounts thereof; (v) the amount of any success fee or premium requested and the basis therefor; and (vi) the amounts of compensation and reimbursement of expenses previously allowed by the Court, if any. 36. Notwithstanding any contrary provisions in this Order, the New Common Stock and New Notes authorized to be issued to Houlihan Lokey pursuant to section 5.17 of the Plan will be issued on the Effective Date even if a Final Fee Hearing has not been held. Such distributions shall, however, be subject to disgorgement, if so ordered by this Court, in connection with a Final Fee Application. 63 37. On or before twenty days prior to the Final Fee Hearing, counsel for the Debtors be, and they hereby are, directed to serve upon all persons who have filed requests for notices under Bankruptcy Rule 2002, a notice setting forth the amount of fees and disbursements requested by each applicant who filed an Application. Upon written request made to the Debtors or their counsel, any party in interest may obtain a copy of any Application. Objections, if any, to any Application shall be in writing, shall set forth with specificity the basis of the objection, shall state whether the objector is a Creditor of or the holder of Equity Interests in the Debtors, the amount or extent of the objector's Claim or Equity Interests, and shall be served on the applicant whose Application is the subject of the objection and on each of the entities listed in paragraph 33 above, by personal service or express overnight delivery and filed with the Court, with a copy delivered to Chambers, so as to be received on or before three (3) days prior to the Final Fee Hearing. 38. As of the Effective Date, the Official Committee shall dissolve and its members shall be released and discharged from all further authority, duties, responsibilities and obligations relating to the Chapter 11 Cases and the retention and employment of the legal and financial professionals retained by the Official Committee shall also terminate as of the Effective Date; provided, however, that the Official Committee and its attorneys shall be retained with respect to (a) applications filed pursuant to sections 330 and 331 of the Bankruptcy Code, (b) motions seeking the enforcement of the provisions of the Plan and the transactions contemplated thereunder or under the Confirmation Order and (c) any matter pending as of the Effective Date until such matter is resolved by a Final Order. Any fees incurred by the Official Committee's attorneys after the Effective Date shall be paid by Reorganized Magellan without the need to file any fee application or obtain the Bankruptcy Court's approval. 64 39. All fees payable pursuant to section 1930 of title 28, United States Code, as determined by the Court, shall be paid on the Effective Date or as soon as practicable thereafter. All post-confirmation and post-consummation fees that are due and payable shall be paid by the Reorganized Debtors until these Chapter 11 Cases are closed pursuant to section 350(a) of the Bankruptcy Code. 40. Within fifteen (15) days after the entry date of this Confirmation Order, or within such further time as this Court may allow, the Debtors are hereby directed to mail to all known creditors, Equity Interest holders and other parties in interest (including all professionals) a copy of this Confirmation Order. 41. In the event of any inconsistency between the Plan, or any agreement, instrument or document intended to implement the Plan, and this Confirmation Order, the provisions of this Confirmation Order shall govern and shall supersede any such document or order of this Court issued prior to the Effective Date. 42. The provisions of this Confirmation Order are integrated with each other and are non-severable and mutually dependent. 43. The failure specifically to include any particular provision of the Plan in this Confirmation Order shall not diminish or impair the efficacy of such provision, it being understood that it is the intent of this Court that the Plan be confirmed and approved in its entirety. 65 44. Nothing in this Confirmation Order, the Plan or any Plan Document shall impair, amend or otherwise modify the rights of DBSI or DBTCA set forth in the DB Commitment Letter or in this Court's September 15, 2003 Order approving the DB Commitment Letter. 45. This Confirmation Order is a final order and the period in which an appeal must be filed shall commence upon the entry hereof. Dated: New York, New York October __, 2003 ------------------------------------ UNITED STATES BANKRUPTCY JUDGE 66 EX-2 6 jd10-8_shulman.txt 2.5 Exhibit 2.5 SUMMARY OF KEY TERMS FOR PROPOSED EMPLOYMENT AGREEMENT BETWEEN STEVEN J. SHULMAN (THE "EXECUTIVE") AND MAGELLAN HEALTH SERVICES, INC. (THE "COMPANY") 1. Term: Three years from the date of the Company's ---- emergence from bankruptcy (the "Operative Date"), with automatic renewals for successive one year terms subject to 6 month written notice of non-renewal by either party to the other. 2. Position; Duties: Chairman and Chief Executive Officer and member of ---------------- the board of directors of the Company (as constituted following the Operative Date) (the "Board").(1) Executive shall (i) report, as Chief Executive Officer, directly to the Board and (ii) have such duties and responsibilities typical of, and consistent with, the positions of Chairman and Chief Executive Officer in a public company the size and nature of the Company. The non-employee members of the Board will appoint a Lead Director who will meet regularly with the Chairman/Chief Executive Officer regarding major corporate strategies and policies, chair Board meetings in the absence of the Chairman, arrange for and chair meetings of non-management directors and perform such other functions as may from time to time be performed generally by Lead Directors of public companies the size and nature of the Company. 3. Other Activities: Entitled to serve as a member of the board of ---------------- directors of a reasonable number companies in which Internet Healthcare Group has invested. Entitled to (i) serve on the boards of directors of companies on which Executive serves as of the Operative Date, (ii) with the prior approval of the Board, serve on the boards of directors of a reasonable number of other companies, (iii) serve on civic or charitable boards and (iv) manage his personal and family investments, to the extent such activities do not materially interfere with the performance of his duties for the Company. - ---------------------------- (1) Note, by-laws must be conformed to permit Executive to serve as Chief Executive Officer and not as President. 1 4. Place of Performance Avon, Connecticut shall be location of the -------------------- principal executive offices of the Company, at which shall be based the Executive, each of the executives reporting directly to Executive and certain other employees of the Company (the "Offices"). 5. Base Salary: $1,000,000 per year, with annual review for ----------- increase by the Board or a duly authorized committee thereof, it being understood that any such increase shall be at the discretion of the Board or a duly authorized committee thereof. 6. Annual Bonus: Entitled to an annual target bonus opportunity of ------------ 100% of Base Salary ("Target Bonus"). Commencing with the calendar year 2004, the applicable performance targets shall be fixed by the Board or a duly authorized committee thereof during the first quarter of the year after consultation with the Executive (the "Performance Targets"); provided that (i) the Performance Targets established with respect to the Target Bonus shall not be less favorable than the corporate performance targets applicable to other bonus eligible executives of the Company and (ii) the other terms and conditions applicable to the Target Bonus shall not be less favorable than those established for other bonus eligible executives of the Company. The Executive shall earn the applicable portion of the Target Bonus based on the achievement of the Performance Targets, as follows: % Achievement of % of Performance Targets Target Bonus Earned ------------------- ------------------- 80% 0% 100% 100% 120% 200% 2 The portion of Target Bonus earned by the Executive shall be determined on a straight line interpolated basis for Performance Target achievement between the percentages set forth above. Payments of any annual bonus shall be made no later than the March 31 of the year following the year in which such bonus is earned (e.g., by March 31, 2005 for the bonus earned for 2004). Notwithstanding the foregoing, the bonus, if any, earned for 2004 shall be increased by the percentage equal to the number of days from the Operative Date to December 31, 2003 divided by 365. 7. Sign-on Arrangements: -------------------- a. Stock The Company shall grant to the Executive on the Operative Date the number of shares of common stock (the "Signing Bonus Shares") that have an aggregate value of $1,000,000 based upon the weighted average per share cost of the shares purchased by Onex and its Affiliates on the Operative Date (the "Average Price Per Share").(2) The Signing Bonus Shares shall be fully vested on the Operative Date, but may not be transferred until the earlier of (i) the first anniversary of the Operative Date and (ii) the Executive's termination of employment. The Company shall make a cash payment to the Executive on the Operative Date in an amount such that after payment of all federal, state or local taxes on such amount (based upon reasonable and appropriate assumptions to be set forth in the definitive agreement), the Executive is left with an amount equal to the aggregate federal, state and local taxes on the Signing Bonus Shares. b. Stock Purchase The Executive shall purchase on the Operative Date the number of shares of common stock (the "Purchased Shares") that have an aggregate value of $1,000,000 based on the Average Price Per Share. The Purchased Shares shall be fully vested on the Operative Date, but may not be transferred until the earlier of (i) the first anniversary of the Operative Date and (ii) the Executive's termination of employment. - ----------------------- (2) The Average Price Per Share will include all shares that are to be purchased by Onex or its Affiliates under the Plan of Reorganization determined as of the Operative Date, regardless of whether the purchase of such shares has closed. 3 c. Stock Options Options covering 628,483 shares (3) with a ten-year term will be granted to the Executive on the Operative Date as follows: A tranche of options for 179,566 shares (4) with an exercise price equal to the Average Price Per Share shall become vested as to one third of the shares on each of the first three anniversaries of the Operative Date (each, a "Vesting Date"). Options that have become vested on a Vesting Date shall become exercisable only if the market price of the Company's Common Stock has increased from the Operative Date through the determination date at a cumulative rate of 16% per annum, with daily compounding, over the Average Price Per Share. The determination of whether these options have become exercisable shall be determined on each trading day occurring on or after a Vesting Date and shall be based on the average closing prices of the Company's Common Stock for each of the 20 consecutive trading days ending on each such determination date. In all events, subject to the provisions of this term sheet regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (6) Another tranche of options for 269,350 shares (7) with an exercise price of $24 (8) shall become vested as to one third of the shares on each Vesting Date. Options that have become vested on a Vesting Date shall become exercisable only if the market price of the Company's Common Stock has increased from the Operative Date through the determination date at a cumulative rate of 10% per annum, with daily compounding, over the Average Price Per Share. The determination of whether these options have become exercisable shall be determined on each trading day occurring on or after a Vesting Date and shall be based on the average closing prices of the Company's Common Stock for each of the 20 consecutive trading days ending on each such determination date. In all events, subject to the provisions of this term sheet regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date.9 Shares acquired upon exercise of the options described in this paragraph shall not be transferable until the earlier of (i) the third anniversary of the Operative Date or (ii) Executive's termination of employment. - --------------------------- (3) Amount to equal 3.50% of common equity on a diluted basis (i.e., outstanding plus assumed issuance of 15% of common equity to management). Current assumption is 15,263,158 shares outstanding and 2,693,499 shares to management. 4 Another tranche of options for 179,567 shares (10) with an exercise price equal to the Average Price Per Share shall become vested and exercisable as to one third of the shares on each Vesting Date. d. Miscellaneous The Company shall register the shares acquired by the Executive for resale no later than the date such shares are not subject to any restriction on transfer imposed under this Agreement. 8. Other Long-Term --------------- Incentives: Entitled to participate in the long-term incentive ---------- programs of the Company including those contained in the Management Incentive Plan, on a basis that are at least as favorable as awards to other similarly-situated, senior-level executives of the Company, it being understood that the Board may modify or terminate any long-term incentive plan established by the Company; provided that no such amendment or termination may adversely affect any outstanding long-term incentive awards of Executive. 9. Employee Benefits: Entitled to participate in the employee welfare ----------------- benefit programs of the Company on a basis at least as favorable as other similarly-situated, senior-level executives of the Company; provided that (i) subject to the obligations set forth in clause (ii) below, the Board may modify or terminate any employee welfare benefit program established by the Company; provided that no such amendment or termination may adversely affect any benefits accrued by Executive prior to the date of such amendment or termination and (ii) in any event, the Company shall provide at its cost life insurance benefits to the Executive of no less than three times the Executive's Base Salary, the Executive shall be permitted to purchase at his own expense additional life insurance coverage in an amount no less than three times his Base Salary, and the Company shall provide long-term disability coverage equal to no less than 60% of the Executive's Base Salary; provided, in all cases Executive is insurable by an insurance company with respect to such coverage. - ------------------------------------------- (4) Amount to equal 1.00% of common equity on a diluted basis (See footnote 3, above). (6) Confirm with Company accountants whether this provision may be eliminated in the event of a required change in the manner of accounting for "fixed" options. (7) Amount to equal 1.50% of common equity on a diluted basis (See footnote 3, above). (8) Based on $240,000,000 pre-money equity valuation. Current assumption is 10,000,000 shares pre-money. (9) Confirm with Company accountants whether this provision may be eliminated in the event of a required change in the manner of accounting for "fixed" options. (10) Amount to equal 1.00% of common equity on a diluted basis (See footnote 3, above). 5 10. Deferred Compensation Plan: Executive shall be entitled to participate in any qualified or non-qualified deferred compensation plan of the Company on no less favorable a basis (including, without limitation, the right to receive Company contributions) than is made available to other senior executives of the Company (excluding the Chief Executive Officer), it being understood that the Board may modify or terminate any deferred compensation plan established by the Company; provided that no such amendment or termination may adversely affect any benefits accrued by Executive prior to the date of such amendment or termination. 11. Perquisites: Entitled to perquisites at least as ----------- favorable as those provided other similarly-situated, senior-level executives of the Company, it being understood that this provision of Executive's Agreement shall not require the Company to offer any perquisites to other such executives. Notwithstanding the foregoing, Executive shall be provided tax and financial allowance of no less than $15,000 per annum, a personal membership in a country club and health club in the vicinity of the Offices, a car allowance of no less than $1,000 per month, first- or business class air travel (including for Executive's spouse when appropriate for business purposes) and an annual physical. The Company agrees to take reasonable actions to minimize any tax liability of Executive related to the perquisites made available hereunder. 12. Business Expense ---------------- Reimbursement: Entitled to reimbursement for all ------------- appropriate business expenses; also entitled to reimbursement of the reasonable costs associated with the negotiation and preparation of his employment and other arrangements with the Company to the extent not exceeding $50,000. 13. Termination of Employment: In the event the Executive's employment ------------------------- terminates, the Executive (or in the event of his death, his estate or other legal representative) shall be entitled to the following: a. Without Cause or for Good Reason: (i) Base Salary through the date of termination; (ii) pro-rata Target Bonus for the year in which termination occurs, payable in a single installment immediately after termination; (iii) 2 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; 6 (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for three years after termination (but not beyond the original term of such options); options that are not exercisable as of the date of termination because the applicable performance hurdle has not been satisfied as of such date shall become exercisable if the applicable conditions for exercisability are satisfied during this three-year post-termination exercise period; (v) continued participation for the Executive and his eligible dependents at the Company's expense in all medical, dental and hospitalization coverages for two years, with any period of continuation coverage provided by COBRA commencing thereafter; provided that if the applicable plan in effect on the Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of the Executive's date of termination; (vi) at his election, continuation of his life insurance and/or long-term disability coverage by the Company for up to two years following termination (provided the Executive reimburses the Company for such premiums); (vii) any amounts earned, accrued or owing to the Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate; and (ix) non-renewal of employment term at the election of the Company shall be treated as a termination without Cause occurring immediately prior to the expiration of the contract term. b. Death or Disability: (i) Base Salary through the end of the month in which termination occurs; (ii) pro-rata Target Bonus for the year in which termination occurs, payable in a single installment immediately after termination; 7 (iii) in the case of a termination due to Executive's Disability, a lump-sum cash payment equal to two times the sum of (a) Base Salary plus (b) Target Bonus; provided that this payment shall not be made if Executive is eligible at the time of the termination of his employment for long-term disability benefits under the Company's long-term disability program; (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for two years following termination (but not beyond the original term of such options); options that are not exercisable as of the date of termination because the applicable performance hurdle has not been satisfied as of such date shall become exercisable if the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) any amounts earned, accrued or owing to the Executive but not yet paid; and (vi) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. c. For Cause or Voluntary: (i) Base Salary through the date of termination; (ii) upon a termination of employment for Cause, all stock options shall terminate immediately upon the date of termination and, upon a voluntarily termination of employment by the Executive (other than for Good Reason or Disability), all vested stock options shall remain exercisable until the later of (A) 90 days following the date of termination or (B) the 45th day following the first day on or after the date of termination on which the Executive is not subject to a trading "blackout" imposed by the Company and may sell the shares acquired upon option exercise without violation of Rule 10b-5 under the Securities Exchange Act of 1934; (iii) any amounts earned, accrued or owing to the Executive but not yet paid; and 8 (iv) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. d. Termination Without Cause or for Reason in Connection With or Within Three Years After, a Change in Control: Unless such termination is for Good Reason pursuant to clause (viii) of the definition thereof, all the payments and benefits provided , in the case of a Termination without Cause or for Good Reason in Section 13.a above, with the following exceptions: (i) clause (iii) of Section 13.a shall be 3 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; (ii) clause (iv) of Section 13.a shall apply to stock options that vested upon the Change in Control as provided in Section 14 below only if such options will receive more favorable treatment under clause (iv) of Section 13.a; (iii) clause (v) and (vi) of Section 13.a shall be modified to replace "two years" with "three years" in each place it appears; and (iv) clause (ix) of Section 13.a shall be replaced with the following: "non-renewal of employment term at the election of the Company during the Change in Control protection period shall be treated as a termination without Cause pursuant to this Section 13.d immediately prior to the expiration of the employment term." e. No Mitigation; No Offset: In the event of any termination of employment (including non-renewal of the term by the Company), the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due him under the agreement on account of any remuneration attributable to any subsequent employer or claims asserted by the Company or any affiliate, but the Company shall not be obligated to provide medical, dental or hospitalization insurance following the Executive's commencement of other employment if such employment provides comparable coverage determined on a benefit-by-benefit basis. 9 f. Non-Competition; Non-Solicitation: For any period during which Base Salary is continued (or in respect of which it is paid in a lump sum), or for one year after the Executive's voluntary termination of employment without Good Reason or his termination for Cause.(12) 14. Change in Control Protections: ----------------------------- a. Treatment of Equity: Full vesting immediately prior to a Change in Control of all outstanding equity (including, but not limited to, stock options), with all vested stock options to remain exercisable for the remainder of their terms; provided that options held by Executive shall be cashed out in connection with a Change in Control if (i) required by the terms of the Management Incentive Plan and (ii) all other options issued by the Company are cashed out in connection with such Change in Control. Options that are not exercisable because the applicable performance hurdle has not been satisfied shall become exercisable immediately prior to the Change in Control. b. 280G Gross-Up: Full excise tax gross-up. 15. Dispute Settlements: Arbitration in accordance with the ------------------- Commercial Arbitration Rules of the American Arbitration Association. The venue for any such proceedings shall be in Hartford, Connecticut. 16. Applicable Law: Connecticut. -------------- 17. Indemnification: --------------- Appropriate indemnification provisions, including, but not limited to, indemnification pursuant to the Company's corporate governance documents or, if greater, applicable law. Insurance pursuant to a Company-purchased directors' and officers' liability insurance and umbrella insurance in an amount no less than $50 million. 18. Definitions: See Attachment A. ----------- - ------------------------ (12) Definition of competitive activity to be narrowly defined and shall not prohibit association with a company if an immaterial portion of its revenues is attributable to operations directly competitive with the Company (provided the Executive is not employed within those directly competitive operations). 10 ATTACHMENT A DEFINITIONS ----------- "CAUSE" shall mean: (i) the Executive is convicted of (or pleads guilty or nolo contendere to) a felony; (ii) intentional fraud by the Executive in the performance of his duties for the Company or intentional misappropriation of Company funds by the Executive; (iii) (A) material breach of the non-competition/non-solicitation covenants set forth in the employment agreement or (B) a willful and material breach of the confidentiality provisions set forth in the employment agreement; (iv) a willful and material violation by the Executive of the Company's written policies and procedures that are legal and ethical, have been made available to the Executive and relate to the performance of his duties for the Company (provided that the Company has not failed to terminate other employees for comparable violations), or willful gross misconduct by the Executive relating to the performance of his duties for the Company; or (v) willful failure to comply with direction of the Board or any duly authorized committee thereof (including any written policies or procedures promulgated by those bodies), provided that (A) such directions (or policies or procedures) are action of the Board or a duly authorized committee thereof within the meaning of Section 141 of the General Corporation Law of the State of Delaware (or any comparable provision of applicable law), (B) the existence of such directions (or policies or procedures) is known by Executive or such directions (or policies or procedures) have been communicated to Executive, (C) such directions (or policies or procedures) are consistent with the duties and role of a Chairman or Chief Executive Officer of a company the nature and size of the Company and (D) such directions (or policies or procedures) do not require actions that are illegal or unethical. For purposes of clauses (iii) and (iv), no act or failure to act shall be deemed to be "willful" if Executive reasonably believed in good faith that such act or failure to act was in, or not opposed to, the best interests of the Company. Anything notwithstanding to the contrary, the Executive's employment shall not be terminated for 11 "Cause," within the meaning of clauses (ii) through (v) above, unless the Executive has been given written notice by the Board stating the basis for such termination and, in the case of clauses (iii) through (v) above, he is also given fifteen (15) days to cure the neglect or conduct that is the basis of any such claim and, if he fails to cure such conduct, or such conduct cannot be cured (and also for any purported termination for Cause under clause (ii) above), the Executive has an opportunity to be heard before the Board and after such hearing, the Board gives the Executive written notice confirming that in the judgment of a majority of the members of the Board that includes at least two directors who are independent for purposes of the listing requirements of the securities exchange on which the Company's securities are listed "Cause" for terminating the Executive's employment on the basis set forth in the original notice exists. The Executive's communication to the Board of his disagreement with decisions made by the Board and the reasons for that disagreement shall not constitute "Cause" provided that he does not engage in conduct constituting Cause as set forth in clause (v) above. Any termination for Cause shall be subject to de novo review in accordance with the arbitration provisions of the employment agreement. If an arbitrator or arbitrators determine that the basis for Cause did not exist, then the Executive's termination of employment shall be treated as a termination without Cause. "CHANGE IN CONTROL" shall mean the occurrence of any one of the following events: (i) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, becomes after the Operative Date a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of 30% or more of the Voting Stock of the Company; provided that this clause (i) shall not be operative during the period the Minimum Hold Condition is satisfied (it being understood that a Change in Control will occur at the time the Minimum Hold Condition is not satisfied (the "Requisite Time") if (A) a person becomes the beneficial owner of 30% or more of the Voting Stock during the period in which the Minimum Hold Condition is satisfied and (B) that person is the beneficial owner of 30% or more of the Voting Stock at the Requisite Time); (ii) the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the Operative Date and the Minimum Hold Condition is not satisfied at the time; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors, or who became a director at a time the Minimum Hold Condition was satisfied, shall be considered to be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of the Company's assets; 12 (iv) all or substantially all of the assets of the Company are disposed of pursuant to a merger, consolidation, share exchange, reorganization or other transaction unless the shareholders of the Company immediately prior to such merger, consolidation, share exchange, reorganization or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock or other ownership interests of the Company, a majority of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company; or (v) the Company combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock of the combined company (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by Affiliates of such other company who were not Affiliates of the Company prior to the relevant transaction in exchange for stock of such other company). For purposes of the Change in Control definition, "the Company" shall include any entity that succeeds to all or substantially all of the business of the Company, "Affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified and "Voting Stock" shall mean any capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation and reference to a percentage of Voting Stock shall refer to such percentage of the votes of such Voting Stock. "DISABILITY" shall mean the Executive's inability, due to physical or mental incapacity, to substantially perform his duties and responsibilities for a period of 180 consecutive days as determined by a medical doctor selected by the Company and the Executive. If the parties cannot agree on a medical doctor, each party shall select a medical doctor and the two doctors shall select a third who shall be the approved medical doctor for this purpose. "GOOD REASON" shall mean termination by the Executive of his employment after written notice to the Company following the occurrence of any of the following events without his consent: (i) a reduction in the Executive's then current Base Salary or the Target Bonus opportunity (i.e., 100% of Base Salary); 13 (ii) a material diminution in the Executive's positions, duties or authorities (including any removal of the Executive from any position set forth in Section 2 above, or any failure to elect or re-elect the Executive as Chairman of the Board) or interference with the Executive's carrying out his duties or exercising his authority so that he is unable to carry out his duties or exercise his authority as Chairman of the Board or as Chief Executive Officer (including any action by the Board or one or more members thereof to give direction to other employees of the Company with the intent of undermining, or in a manner that, by itself or in combination with other actions described in this parenthetical in clause (ii), could reasonably be expected to materially undermine, the Executive's authority, provided that no action taken by (A) the Board or one or more members thereof in accordance with any requirement of law or regulation or the listing standards of NASDAQ or other securities exchange on which the Company's securities are listed or (B) the Board as a whole or a duly authorized committee of the Board as a whole, in accordance with generally accepted principles of sound corporate governance for public companies of the size and nature, shall constitute "Good Reason"); (iii) the assignment to the Executive of duties which are materially inconsistent with his duties or which materially impair the Executive's ability to function as Chairman or as Chief Executive Officer of the Company; (iv) a change in the reporting structure so that the Executive reports to someone other than the Board; (v) requiring the Executive to relocate, or the relocation of the Offices, to a location that is more than 50 miles from Avon, Connecticut; (vi) a breach by the Company of any material provision of the Executive's employment agreement; (vii) the failure of the Company to obtain the assumption in writing of its obligation to perform this agreement by any successor to all or substantially all of the assets of the Company within 15 days after a merger, consolidation, sale or similar transaction; or (viii) for any reason by the Executive during the 30-day period following the six-month anniversary of a Change in Control (whether or not the Executive consented to such Change in Control), provided that the Executive's termination of employment pursuant to this clause (viii) shall be treated as termination for Good Reason pursuant to Section 13.a above; provided that in the case of clauses (i) through (vii) (but not clause (viii)) such event continues uncured for fifteen (15) days after the Executive gives the Company notice thereof. 14 EX-2 7 jd10-8_lerer.txt 2.6 Exhibit 2.6 SUMMARY OF KEY TERMS FOR PROPOSED EMPLOYMENT AGREEMENT BETWEEN RENE LERER (THE "EXECUTIVE") AND MAGELLAN HEALTH SERVICES, INC. (THE "COMPANY") 1. Term: Three years from the date of the Company's emergence from bankruptcy (the "Operative Date"), with automatic renewals for successive one year terms subject to 6 month written notice of non-renewal by either party to the other. 2. Position; Duties: President and Chief Operating Officer and member ---------------- of the board of directors of the Company (as constituted following the Operative Date) (the "Board"). (1) Executive shall (i) report, as President and Chief Operating Officer, directly to the Chief Executive Officer and (ii) have such duties and responsibilities typical of, and consistent with, the positions of President and Chief Operating Officer in a public company the size and nature of the Company. 3. Other Activities: Entitled to serve as a member of the board of ---------------- directors of a reasonable number companies in which Internet Healthcare Group has invested. Entitled to (i) serve on the boards of directors of companies on which Executive serves as of the Operative Date, (ii) with the prior approval of the Board, serve on the boards of directors of a reasonable number of other companies, (iii) serve on civic or charitable boards and (iv) manage his personal and family investments, to the extent such activities do not materially interfere with the performance of his duties for the Company. 4. Place of Performance Avon, Connecticut shall be location of the -------------------- principal executive offices of the Company, at which shall be based the Executive, each of the executives reporting directly to the Chief Executive Officer and certain other employees of the Company (the "Offices"). - --------------------------- (1) Note, by-laws must be conformed to permit Executive to serve as President and not as Chief Executive Officer. 1 5. Base Salary: $600,000 per year, with annual review for ----------- increase. 6. Annual Bonus: Entitled to an annual target bonus opportunity of ------------ 75% of Base Salary ("Target Bonus"). Commencing with the calendar year 2004, the applicable performance targets shall be fixed by the Board or a duly authorized committee thereof during the first quarter of the year after consultation with the Executive (the "Performance Targets"); provided that (i) the Performance Targets established with respect to the Target Bonus shall not be less favorable than the corporate performance targets applicable to other bonus eligible executives of the Company and (ii) the other terms and conditions applicable to the Target Bonus shall not be less favorable than those established for other bonus eligible executives of the Company. The Executive shall earn the applicable portion of the Target Bonus based on the achievement of the Performance Targets, as follows: % Achievement of % of Performance Targets Target Bonus Earned ------------------- ------------------- 80% 0% 100% 100% 2 The portion of Target Bonus earned by the Executive shall be determined on a straight line interpolated basis for Performance Target achievement between the percentages set forth above. Payments of any annual bonus shall be made no later than the March 31 of the year following the year in which such bonus is earned (e.g., by March 31, 2005 for the bonus earned for 2004). Notwithstanding the foregoing, the bonus, if any, earned for 2004 shall be increased by the percentage equal to the number of days from the Operative Date to December 31, 2003 divided by 365. 7. Sign-on Arrangements: -------------------- a. Stock The Company shall grant to the Executive on the Operative Date the number of shares of common stock (the "Signing Bonus Shares") that have an aggregate value of $600,000 based upon the weighted average per share cost of the shares purchased by Onex and its Affiliates on the Operative Date (the "Average Price Per Share").(2) The Signing Bonus Shares shall be fully vested on the Operative Date, but may not be transferred until the earlier of (i) the first anniversary of the Operative Date and (ii) the Executive's termination of employment. The Company shall make a cash payment to the Executive on the Operative Date in an amount such that after payment of all federal, state or local taxes on such amount (based upon reasonable and appropriate assumptions to be set forth in the definitive agreement), the Executive is left with an amount equal to the aggregate federal, state and local taxes on the Signing Bonus Shares. b. INTENTIONALLY LEFT BLANK c. Stock Options Options covering 377,090 shares (3) with a ten-year term will be granted to the Executive on the Operative Date as follows: A tranche of options for 107,740 shares (4) with an exercise price equal to the Average Price Per - ---------------------------- (2) The Average Price Per Share will include all shares that are to be purchased by Onex or its Affiliates under the Plan of Reorganization determined as of the Operative Date, regardless of whether the purchase of such shares has closed. (3) Amount to equal 2.10% of common equity on a diluted basis (i.e., outstanding plus assumed issuance of 15% of common equity to management). Current assumption is 15,263,158 shares outstanding and 2,693,499 shares to management. (4) Amount to equal 0.60% of common equity on a diluted basis (See footnote 3, above). 3 Share shall become vested as to one third of the shares on each of the first three anniversaries of the Operative Date (each, a "Vesting Date"). Options that have become vested on a Vesting Date shall become exercisable only if the market price of the Company's Common Stock has increased from the Operative Date through the determination date at a cumulative rate of 16% per annum, with daily compounding, over the Average Price Per Share. The determination of whether these options have become exercisable shall be determined on each trading day occurring on or after a Vesting Date and shall be based on the average closing prices of the Company's Common Stock for each of the 20 consecutive trading days ending on each such determination date. In all events, subject to the provisions of this term sheet regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (6) Another tranche of options for 161,610 shares (7) with an exercise price of $24 (8) shall become vested as to one third of the shares on each Vesting Date. Options that have become vested on a Vesting Date shall become exercisable only if the market price of the Company's Common Stock has increased from the Operative Date through the determination date at a cumulative rate of 10% per annum, with daily compounding, over the Average Price Per Share. The determination of whether these options have become exercisable shall be determined on each trading day occurring on or after a Vesting Date and shall be based on the average closing prices of the Company's Common Stock for each of the 20 consecutive trading days ending on each such determination date. In all events, subject to the provisions of this term sheet regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (9) Shares acquired upon exercise of the options described in this paragraph shall not be transferable until the earlier of (i) the third anniversary of the Operative Date or (ii) Executive's termination of employment. Another tranche of options for 107,740 shares (10) with an exercise price equal to the Average Price Per Share shall become vested and exercisable as to one third of the shares on each Vesting Date. - --------------------------------- (6) Confirm with Company accountants whether this provision may be eliminated in the event of a required change in the manner of accounting for "fixed" options. (7) Amount to equal 0.90% of common equity on a diluted basis (See footnote 3, above). (8) Based on $240,000,000 pre-money equity valuation. Current assumption is 10,000,000 shares pre-money. (9) Confirm with Company accountants whether this provision may be eliminated in the event of a required change in the manner of accounting for "fixed" options.. (10) Amount to equal 0.60% of common equity on a diluted basis (See footnote 3, above). 4 d. Miscellaneous The Company shall register the shares acquired by the Executive for resale no later than the date such shares are not subject to any restriction on transfer imposed under this Agreement. 8. Other Long-Term --------------- Incentives: Entitled to participate in the long-term incentive ---------- programs of the Company including those contained in the Management Incentive Plan, on a basis that are at least as favorable as awards to other similarly-situated, senior-level executives of the Company, it being understood that the Board may modify or terminate any long-term incentive plan established by the Company; provided that no such amendment or termination may adversely affect any outstanding long-term incentive awards of Executive. 9. Employee Benefits: Entitled to participate in the employee welfare ----------------- benefit programs of the Company on a basis at least as favorable as other similarly-situated, senior-level executives of the Company; provided that (i) subject to the obligations set forth in clause (ii) below, the Board may modify or terminate any employee welfare benefit program established by the Company; provided that no such amendment or termination may adversely affect any benefits accrued by Executive prior to the date of such amendment or termination and (ii) in any event, the Company shall provide at its cost life insurance benefits to the Executive of no less than three times the Executive's Base Salary, the Executive shall be permitted to purchase at his own expense additional life insurance coverage in an amount no less than three times his Base Salary, and the Company shall provide long-term disability coverage equal to no less than 60% of the Executive's Base Salary; provided, in all cases Executive is insurable by an insurance company with respect to such coverage. 5 10. Deferred Compensation Plan: Executive shall be entitled to -------------------------- participate in any qualified or non-qualified deferred compensation plan of the Company on no less favorable a basis (including, without limitation, the right to receive Company contributions) than is made available to other senior executives of the Company (excluding the Chief Executive Officer), it being understood that the Board may modify or terminate any deferred compensation plan established by the Company; provided that no such amendment or termination may adversely affect any benefits accrued by Executive prior to the date of such amendment or termination. 11. Perquisites: Entitled to perquisites at least as ----------- favorable as those provided other similarly-situated, senior-level executives of the Company, it being understood that this provision of Executive's Agreement shall not require the Company to offer any perquisites to other such executives. Notwithstanding the foregoing, Executive shall be provided tax and financial allowance of no less than $15,000 per annum, a personal membership in a country club and health club in the vicinity of the Offices, a car allowance of no less than $1,000 per month, first- or business class air travel (including for Executive's spouse when appropriate for business purposes) and an annual physical. The Company agrees to take reasonable actions to minimize any tax liability of Executive related to the perquisites made available hereunder. 12. Business Expense ---------------- Reimbursement: Entitled to reimbursement for all ------------- appropriate business expenses; also entitled to reimbursement of the reasonable costs associated with the negotiation and preparation of his employment and other arrangements with the Company to the extent not exceeding $50,000. 13. Termination of Employment: In the event the Executive's employment ------------------------- terminates, the Executive (or in the event of his death, his estate or other legal representative) shall be entitled to the following: a. Without Cause or for Good Reason: (i) Base Salary through the date of termination; (ii) pro-rata Target Bonus for the year in which termination occurs, payable in a single installment immediately after termination; (iii) 2 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; 6 (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for two years after termination (but not beyond the original term of such options); options that are not exercisable as of the date of termination because the applicable performance hurdle has not been satisfied as of such date shall become exercisable if the applicable conditions for exercisability are satisfied during this three-year post-termination exercise period; (v) continued participation for the Executive and his eligible dependents at the Company's expense in all medical, dental and hospitalization coverages for two years, with any period of continuation coverage provided by COBRA commencing thereafter; provided that if the applicable plan in effect on the Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of the Executive's date of termination; (vi) at his election, continuation of his life insurance and/or long-term disability coverage by the Company for up to two years following termination (provided the Executive reimburses the Company for such premiums); (vii) any amounts earned, accrued or owing to the Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate; and (ix) non-renewal of employment term at the election of the Company shall be treated as a termination without Cause occurring immediately prior to the expiration of the contract term. b. Death or Disability: (i) Base Salary through the end of the month in which termination occurs; (ii) pro-rata Target Bonus for the year in which termination occurs, payable in a single installment immediately after termination; 7 (iii) in the case of a termination due to Executive's Disability, a lump-sum cash payment equal to two times the sum of (a) Base Salary plus (b) Target Bonus; provided that this payment shall not be made if Executive is eligible at the time of the termination of his employment for long-term disability benefits under the Company's long-term disability program; (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for two years following termination (but not beyond the original term of such options); options that are not exercisable as of the date of termination because the applicable performance hurdle has not been satisfied as of such date shall become exercisable if the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) any amounts earned, accrued or owing to the Executive but not yet paid; and (vi) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. c. For Cause or Voluntary: (i) Base Salary through the date of termination; (ii) upon a termination of employment for Cause, all stock options shall terminate immediately upon the date of termination and, upon a voluntarily termination of employment by the Executive (other than for Good Reason or Disability), all vested stock options shall remain exercisable until the later of (A) 90 days following the date of termination or (B) the 45th day following the first day on or after the date of termination on which the Executive is not subject to a trading "blackout" imposed by the Company and may sell the shares acquired upon option exercise without violation of Rule 10b-5 under the Securities Exchange Act of 1934; (iii) any amounts earned, accrued or owing to the Executive but not yet paid; and 8 (iv) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. d. Termination Without Cause or for Good Reason in Connection With or Within Three Years After, a Change in Control: Unless such termination is for Good Reason pursuant to clause (viii) of the definition thereof, all the payments and benefits provided , in the case of a Termination without Cause or for Good Reason in Section 13.a above, with the following exceptions: (i) clause (iii) of Section 13.a shall be 3 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; (ii) clause (iv) of Section 13.a shall apply to stock options that vested upon the Change in Control as provided in Section 14 below only if such options will receive more favorable treatment under clause (iv) of Section 13.a; (iii) clause (v) and (vi) of Section 13.a shall be modified to replace "two years" with "three years" in each place it appears; and (iv) clause (ix) of Section 13.a shall be replaced with the following: "non-renewal of employment term at the election of the Company during the Change in Control protection period shall be treated as a termination without Cause pursuant to this Section 13.d immediately prior to the expiration of the employment term." e. No Mitigation; No Offset: In the event of any termination of employment (including non-renewal of the term by the Company), the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due him under the agreement on account of any remuneration attributable to any subsequent employer or claims asserted by the Company or any affiliate, but the Company shall not be obligated to provide medical, dental or hospitalization insurance following the Executive's commencement of other employment if such employment provides comparable coverage determined on a benefit-by-benefit basis. 9 f. Non-Competition; Non-Solicitation: For any period during which Base Salary is continued (or in respect of which it is paid in a lump sum), or for one year after the Executive's voluntary termination of employment without Good Reason or his termination for Cause. (12) 14. Change in Control Protections: a. Treatment of Equity: Full vesting immediately prior to a Change in Control of all outstanding equity (including, but not limited to, stock options), with all vested stock options to remain exercisable for the remainder of their terms; provided that options held by Executive shall be cashed out in connection with a Change in Control if (i) required by the terms of the Management Incentive Plan and (ii) all other options issued by the Company are cashed out in connection with such Change in Control. Options that are not exercisable because the applicable performance hurdle has not been satisfied shall become exercisable immediately prior to the Change in Control. b. 280G Gross-Up: Full excise tax gross-up. 15. Dispute Settlements: Arbitration in accordance with the ------------------- Commercial Arbitration Rules of the American Arbitration Association. The venue for any such proceedings shall be in Hartford, Connecticut. 16. Applicable Law: Connecticut. -------------- 17. Indemnification: Appropriate indemnification provisions, --------------- including, but not limited to, indemnification pursuant to the Company's corporate governance documents or, if greater, applicable law. Insurance pursuant to a Company-purchased directors' and officers' liability insurance and umbrella insurance in an amount no less than $50 million. 18. Definitions: See Attachment A. ----------- - ---------------------------- (12) Definition of competitive activity to be narrowly defined and shall not prohibit association with a company if an immaterial portion of its revenues is attributable to operations directly competitive with the Company (provided the Executive is not employed within those directly competitive operations). 10 ATTACHMENT A DEFINITIONS ----------- "CAUSE" shall mean: (i) the Executive is convicted of (or pleads guilty or nolo contendere to) a felony; (ii) intentional fraud by the Executive in the performance of his duties for the Company or intentional misappropriation of Company funds by the Executive; (iii) (A) material breach of the non-competition/non-solicitation covenants set forth in the employment agreement or (B) a willful and material breach of the confidentiality provisions set forth in the employment agreement; (iv) a willful and material violation by the Executive of the Company's written policies and procedures that are legal and ethical, have been made available to the Executive and relate to the performance of his duties for the Company (provided that the Company has not failed to terminate other employees for comparable violations), or willful gross misconduct by the Executive relating to the performance of his duties for the Company; or (v) willful failure to comply with direction of the Chief Executive Officer or the Board or any duly authorized committee thereof (including any written policies or procedures promulgated by those bodies), provided that (A) such directions (or policies or procedures) of the Board or such committee are actions of the Board or a duly authorized committee thereof within the meaning of Section 141 of the General Corporation Law of the State of Delaware (or any comparable provision of applicable law), (B) the existence of such directions (or policies or procedures) is known by Executive or such directions (or policies or procedures) have been communicated to Executive, (C) such directions (or policies or procedures) are consistent with the duties and role of a President, Chief Operating Officer or a director of a company the nature and size of the Company and (D) such directions (or policies or procedures) do not require actions that are illegal or unethical. For purposes of clauses (iii) and (iv), no act or failure to act shall be deemed to be "willful" if Executive reasonably believed in good faith that such act or failure to act was in, or not opposed to, the best interests of the Company. Anything notwithstanding to the 11 contrary, the Executive's employment shall not be terminated for "Cause," within the meaning of clauses (ii) through (v) above, unless the Executive has been given written notice by the Board stating the basis for such termination and, in the case of clauses (iii) through (v) above, he is also given fifteen (15) days to cure the neglect or conduct that is the basis of any such claim and, if he fails to cure such conduct, or such conduct cannot be cured (and also for any purported termination for Cause under clause (ii) above), the Executive has an opportunity to be heard before the Board and after such hearing, the Board gives the Executive written notice confirming that in the judgment of a majority of the members of the Board that includes at least two directors who are independent for purposes of the listing requirements of the securities exchange on which the Company's securities are listed "Cause" for terminating the Executive's employment on the basis set forth in the original notice exists. The Executive's communication to the Board of his disagreement with decisions made by the Board and the reasons for that disagreement shall not constitute "Cause" provided that he does not engage in conduct constituting Cause as set forth in clause (v) above. Any termination for Cause shall be subject to de novo review in accordance with the arbitration provisions of the employment agreement. If an arbitrator or arbitrators determine that the basis for Cause did not exist, then the Executive's termination of employment shall be treated as a termination without Cause. "CHANGE IN CONTROL" shall mean the occurrence of any one of the following events: (i) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, becomes after the Operative Date a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of 30% or more of the Voting Stock of the Company; provided that this clause (i) shall not be operative during the period the Minimum Hold Condition is satisfied (it being understood that a Change in Control will occur at the time the Minimum Hold Condition is not satisfied (the "Requisite Time") if (A) a person becomes the beneficial owner of 30% or more of the Voting Stock during the period in which the Minimum Hold Condition is satisfied and (B) that person is the beneficial owner of 30% or more of the Voting Stock at the Requisite Time); (ii) the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the Operative Date and the Minimum Hold Condition is not satisfied at the time; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors, or who became a director at a time the Minimum Hold Condition was satisfied, shall be considered to be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of the Company's assets; 12 (iv) all or substantially all of the assets of the Company are disposed of pursuant to a merger, consolidation, share exchange, reorganization or other transaction unless the shareholders of the Company immediately prior to such merger, consolidation, share exchange, reorganization or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock or other ownership interests of the Company, a majority of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company; or (v) the Company combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock of the combined company (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by Affiliates of such other company who were not Affiliates of the Company prior to the relevant transaction in exchange for stock of such other company). For purposes of the Change in Control definition, "the Company" shall include any entity that succeeds to all or substantially all of the business of the Company, "Affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified and "Voting Stock" shall mean any capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation and reference to a percentage of Voting Stock shall refer to such percentage of the votes of such Voting Stock. "DISABILITY" shall mean the Executive's inability, due to physical or mental incapacity, to substantially perform his duties and responsibilities for a period of 180 consecutive days as determined by a medical doctor selected by the Company and the Executive. If the parties cannot agree on a medical doctor, each party shall select a medical doctor and the two doctors shall select a third who shall be the approved medical doctor for this purpose. "GOOD REASON" shall mean termination by the Executive of his employment after written notice to the Company following the occurrence of any of the following events without his consent: (i) a reduction in the Executive's then current Base Salary or the Target Bonus opportunity (i.e., 100% of Base Salary); 13 (ii) a material diminution in the Executive's positions, duties or authorities (including any removal of the Executive from any position set forth in Section 2 above, or any failure to elect or re-elect the Executive as a member of the Board) or interference with the Executive's carrying out his duties or exercising his authority so that he is unable to carry out his duties or exercise his authority as President, Chief Operating Officer or director; (iii) the assignment to the Executive of duties which are materially inconsistent with his duties or which materially impair the Executive's ability to function as President or as Chief Operating Officer of the Company or as a director; (iv) a change in the reporting structure so that the Executive reports to someone other than the Chief Executive Officer; (v) requiring the Executive to relocate, or the relocation of the Offices, to a location that is more than 50 miles from Avon, Connecticut; (vi) a breach by the Company of any material provision of the Executive's employment agreement; (vii) the failure of the Company to obtain the assumption in writing of its obligation to perform this agreement by any successor to all or substantially all of the assets of the Company within 15 days after a merger, consolidation, sale or similar transaction; or (viii) for any reason by the Executive during the 30-day period following the six-month anniversary of a Change in Control (whether or not the Executive consented to such Change in Control), provided that the Executive's termination of employment pursuant to this clause (viii) shall be treated as termination for Good Reason pursuant to Section 13.a above; provided that in the case of clauses (i) through (vii) (but not clause (viii)) such event continues uncured for fifteen (15) days after the Executive gives the Company notice thereof. 14 EX-2 8 jd10-8_demilio.txt 2.7 Exhibit 2.7 SUMMARY OF KEY TERMS FOR PROPOSED EMPLOYMENT AGREEMENT BETWEEN MARK S. DEMILIO (THE "EXECUTIVE") AND MAGELLAN HEALTH SERVICES, INC. (THE "COMPANY") 1. Term: Three years from the date of the ---- Company's emergence from bankruptcy (the "Operative Date"), with automatic renewals for successive one year terms subject to 6 month written notice of non-renewal by either party to the other. 2. Position; Duties: Executive Vice President, Chief ---------------- Financial Officer. Executive shall (i) report directly to the Chief Executive Officer and (ii) have such duties and responsibilities typical of, and consistent with, the position of Executive Vice President, Chief Financial Officer in a public company the size and nature of the Company. 3. Other Activities: Entitled to (i) with the prior approval ---------------- of the Board, serve on the boards of directors of a reasonable number of other companies, (iii) serve on civic or charitable boards and (iv) manage his personal and family investments, to the extent such activities do not materially interfere with the performance of his duties for the Company. 4. Place of Performance Avon, Connecticut shall be location of -------------------- the principal executive offices of the Company, at which shall be based the Executive, each of the executives reporting directly to the Chief Executive Officer and certain other employees of the Company (the "Offices"). 5. Base Salary: $500,000 per year, with annual review ----------- for increase. 6. Annual Bonus: Entitled to an annual target bonus ------------ opportunity of 60% of Base Salary ("Target Bonus"). Commencing with the calendar year 2004, the applicable performance targets shall be fixed by the Board or a duly authorized committee thereof during the first quarter of the year after consultation with the 1 Executive (the "Performance Targets"); provided that (i) the Performance Targets established with respect to the Target Bonus shall not be less favorable than the corporate performance targets applicable to other bonus eligible executives of the Company and (ii) the other terms and conditions applicable to the Target Bonus shall not be less favorable than those established for other bonus eligible executives of the Company. The Executive shall earn the applicable portion of the Target Bonus based on the achievement of the Performance Targets, as follows: % Achievement of % of Performance Targets Target Bonus Earned ------------------- ------------------- 80% 0% 100% 100% 2 The portion of Target Bonus earned by the Executive shall be determined on a straight line interpolated basis for Performance Target achievement between the percentages set forth above. Payments of any annual bonus shall be made no later than the March 31 of the year following the year in which such bonus is earned (e.g., by March 31, 2005 for the bonus earned for 2004). 7. Sign-on Arrangements: --------------------- a. Stock The Company shall grant to the Executive on the Operative Date the number of shares of common stock (the "Signing Bonus Shares") that have an aggregate value of $400,000 based upon the weighted average per share cost of the shares purchased by Onex and its Affiliates on the Operative Date (the "Average Price Per Share"). (2) The Signing Bonus Shares shall be fully vested on the Operative Date, but may not be transferred until the earlier of (i) the first anniversary of the Operative Date and (ii) the Executive's termination of employment. The Company shall make a cash payment to the Executive on the Operative Date in an amount such that after payment of all federal, state or local taxes on such amount (based upon reasonable and appropriate assumptions to be set forth in the definitive agreement), the Executive is left with an amount equal to the aggregate federal, state and local taxes on the Signing Bonus Shares. b. INTENTIONALLY LEFT BLANK c. Stock Options Options covering 251,393 shares (3) with a ten-year term will be granted to the Executive on the Operative Date as follows: A tranche of options for 71,827 shares (4) with an exercise price equal to the Average Price Per Share shall become vested as to one third of the shares on each of the first three anniversaries of the Operative Date (each, a "Vesting Date"). Options that have become vested on a Vesting Date shall become exercisable only if the market price of - ---------------------------------- (2) The Average Price Per Share will include all shares that are to be purchased by Onex or its Affiliates under the Plan of Reorganization determined as of the Operative Date, regardless of whether the purchase of such shares has closed. (3) Amount to equal 1.40% of common equity on a diluted basis (i.e., outstanding plus assumed issuance of 15% of common equity to management). Current assumption is 15,263,158 shares outstanding and 2,693,499 shares to management. (4) Amount to equal 0.40% of common equity on a diluted basis (See footnote 3, above). the Company's Common Stock has increased from the Operative Date through the determination date at a cumulative rate of 16% per annum, with daily compounding, over the Average Price Per Share. The determination of whether these options have become exercisable shall be determined on each trading day occurring on or after a Vesting Date and shall be based on the average closing prices of the Company's Common Stock for each of the 20 consecutive trading days ending on each such determination date. In all events, subject to the provisions of this term sheet regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (6) Another tranche of options for 107,740 shares (7) with an exercise price of $24 (8) shall become vested as to one third of the shares on each Vesting Date. Options that have become vested on a Vesting Date shall become exercisable only if the market price of the Company's Common Stock has increased from the Operative Date through the determination date at a cumulative rate of 10% per annum, with daily compounding, over the Average Price Per Share. The determination of whether these options have become exercisable shall be determined on each trading day occurring on or after a Vesting Date and shall be based on the average closing prices of the Company's Common Stock for each of the 20 consecutive trading days ending on each such determination date. In all events, subject to the provisions of this term sheet regarding termination of employment such options shall become fully vested and exercisable on the seventh anniversary of the Operative Date. (9) Shares acquired upon exercise of the options described in this paragraph shall not be transferable until the earlier of (i) the third anniversary of the Operative Date or (ii) Executive's termination of employment. Another tranche of options for 71,826 shares (10) with an exercise price equal to the Average Price Per Share shall become vested and exercisable as to one third of the shares on each Vesting Date. - ------------------------------------- (6) Confirm with Company accountants whether this provision may be eliminated in the event of a required change in the manner of accounting for "fixed" options. (7) Amount to equal 0.60% of common equity on a diluted basis (See footnote 3, above). (8) Based on $240,000,000 pre-money equity valuation. Current estimate is 10,000,000 shares. (9) Confirm with Company accountants whether this provision may be eliminated in the event of a required change in the manner of accounting for "fixed" options. (10) Amount to equal 0.40% of common equity on a diluted basis (See footnote 3, above). 4 d. Miscellaneous The Company shall register the shares acquired by the Executive for resale no later than the date such shares are not subject to any restriction on transfer imposed under this Agreement. 8. Other Long-Term Incentives: Entitled to participate in the long-term incentive programs of the Company including those contained in the Management Incentive Plan, on a basis that are at least as favorable as awards to other similarly-situated, senior-level executives of the Company, it being understood that the Board may modify or terminate any long-term incentive plan established by the Company; provided that no such amendment or termination may adversely affect any outstanding long-term incentive awards of Executive. 9. Employee Benefits: Entitled to participate in the employee welfare benefit programs of the Company on a basis at least as favorable as other similarly-situated, senior-level executives of the Company; provided that (i) subject to the obligations set forth in clause (ii) below, the Board may modify or terminate any employee welfare benefit program established by the Company; provided that no such amendment or termination may adversely affect any benefits accrued by Executive prior to the date of such amendment or termination and (ii) in any event, the Company shall provide at its cost life insurance benefits to the Executive of no less than three times the Executive's Base Salary, the Executive shall be permitted to purchase at his own expense additional life insurance coverage in an amount no less than three times his Base Salary, and the Company shall provide long-term disability coverage equal to no less than 60% of the Executive's Base Salary; provided, in all cases Executive is insurable by an insurance company with respect to such coverage. 5 10. Deferred Compensation Plan: Executive shall be entitled to participate in any qualified or non-qualified deferred compensation plan of the Company on no less favorable a basis (including, without limitation, the right to receive Company contributions) than is made available to other senior executives of the Company (excluding the Chief Executive Officer), it being understood that the Board may modify or terminate any deferred compensation plan established by the Company; provided that no such amendment or termination may adversely affect any benefits accrued by Executive prior to the date of such amendment or termination. 11. Perquisites: Entitled to perquisites at least as ----------- favorable as those provided other similarly-situated, senior-level executives of the Company, it being understood that this provision of Executive's Agreement shall not require the Company to offer any perquisites to other such executives. Notwithstanding the foregoing, Executive shall be provided tax and financial allowance of no less than $15,000 per annum, a personal membership in a country club and health club in the vicinity of the Offices, a car allowance of no less than $1,000 per month, first- or business class air travel (including for Executive's spouse when appropriate for business purposes) and an annual physical. The Company agrees to take reasonable actions to minimize any tax liability of Executive related to the perquisites made available hereunder. 12. Business Expense ---------------- Reimbursement: Entitled to reimbursement for all ------------- appropriate business expenses; also entitled to reimbursement of the reasonable costs associated with the negotiation and preparation of his employment and other arrangements with the Company to the extent not exceeding $50,000. 13. Termination of Employment: In the event the Executive's employment ------------------------- terminates, the Executive (or in the event of his death, his estate or other legal representative) shall be entitled to the following: a. Without Cause or for Good Reason: (i) Base Salary through the date of termination; (ii) pro-rata Target Bonus for the year in which termination occurs, payable in a single installment immediately after termination; (iii) 2 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; 6 (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for two years after termination (but not beyond the original term of such options); options that are not exercisable as of the date of termination because the applicable performance hurdle has not been satisfied as of such date shall become exercisable if the applicable conditions for exercisability are satisfied during this three-year post-termination exercise period; (v) continued participation for the Executive and his eligible dependents at the Company's expense in all medical, dental and hospitalization coverages for two years, with any period of continuation coverage provided by COBRA commencing thereafter; provided that if the applicable plan in effect on the Executive's date of termination does not permit post-termination continuation of coverage, the Company may commence the COBRA continuation coverage period as of the Executive's date of termination; (vi) at his election, continuation of his life insurance and/or long-term disability coverage by the Company for up to two years following termination (provided the Executive reimburses the Company for such premiums); (vii) any amounts earned, accrued or owing to the Executive but not yet paid; (viii) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate; and (ix) non-renewal of employment term at the election of the Company shall be treated as a termination without Cause occurring immediately prior to the expiration of the contract term. b. Death or Disability: (i) Base Salary through the end of the month in which termination occurs; (ii) pro-rata Target Bonus for the year in which termination occurs, payable in a single installment immediately after termination; 7 (iii) in the case of a termination due to Executive's Disability, a lump-sum cash payment equal to two times the sum of (a) Base Salary plus (b) Target Bonus; provided that this payment shall not be made if Executive is eligible at the time of the termination of his employment for long-term disability benefits under the Company's long-term disability program; (iv) accelerated vesting of all outstanding equity awards not yet vested, with all vested options remaining exercisable for two years following termination (but not beyond the original term of such options); options that are not exercisable as of the date of termination because the applicable performance hurdle has not been satisfied as of such date shall become exercisable if the applicable conditions for exercisability are satisfied during this two-year post-termination exercise period; (v) any amounts earned, accrued or owing to the Executive but not yet paid; and (vi) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. c. For Cause or Voluntary: (i) Base Salary through the date of termination; (ii) upon a termination of employment for Cause, all stock options shall terminate immediately upon the date of termination and, upon a voluntarily termination of employment by the Executive (other than for Good Reason or Disability), all vested stock options shall remain exercisable until the later of (A) 90 days following the date of termination or (B) the 45th day following the first day on or after the date of termination on which the Executive is not subject to a trading "blackout" imposed by the Company and may sell the shares acquired upon option exercise without violation of Rule 10b-5 under the Securities Exchange Act of 1934; (iii) any amounts earned, accrued or owing to the Executive but not yet paid; and 8 (iv) other payments, entitlements or benefits, if any, that in accordance with applicable plans, programs, arrangements or other agreements of the Company or any affiliate. d. Termination Without Cause or for Good Reason in Connection With, or Within Three Years After, a Change in Control: Unless such termination is for Good Reason pursuant to clause (viii) of the definition thereof, all the payments and benefits provided , in the case of a Termination without Cause or for Good Reason in Section 13.a above, with the following exceptions: (i) clause (iii) of Section 13.a shall be 3 times the sum of (a) Base Salary plus (b) Target Bonus, payable in a single cash installment immediately after termination; (ii) clause (iv) of Section 13.a shall apply to stock options that vested upon the Change in Control as provided in Section 14 below only if such options will receive more favorable treatment under clause (iv) of Section 13.a; (iii) clause (v) and (vi) of Section 13.a shall be modified to replace "two years" with "three years" in each place it appears; and (iv) clause (ix) of Section 13.a shall be replaced with the following: "non-renewal of employment term at the election of the Company during the Change in Control protection period shall be treated as a termination without Cause pursuant to this Section 13.d immediately prior to the expiration of the employment term." e. No Mitigation; No Offset: In the event of any termination of employment (including non-renewal of the term by the Company), the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due him under the agreement on account of any remuneration attributable to any subsequent employer or claims asserted by the Company or any affiliate, but the Company shall not be obligated to provide medical, dental or hospitalization insurance following the Executive's commencement of other employment if such employment provides comparable coverage determined on a benefit-by-benefit basis. 9 f. Non-Competition; Non-Solicitation: For any period during which Base Salary is continued (or in respect of which it is paid in a lump sum), or for one year after the Executive's voluntary termination of employment without Good Reason or his termination for Cause. (12) 14. Change in Control Protections: ------------------------------ a. Treatment of Equity: Full vesting immediately prior to a Change in Control of all outstanding equity (including, but not limited to, stock options), with all vested stock options to remain exercisable for the remainder of their terms; provided that options held by Executive shall be cashed out in connection with a Change in Control if (i) required by the terms of the Management Incentive Plan and (ii) all other options issued by the Company are cashed out in connection with such Change in Control. Options that are not exercisable because the applicable performance hurdle has not been satisfied shall become exercisable immediately prior to the Change in Control. b. 280G Gross-Up: Full excise tax gross-up. 15. Dispute Settlements: Arbitration in accordance with the ------------------- Commercial Arbitration Rules of the American Arbitration Association. The venue for any such proceedings shall be in Hartford, Connecticut. 16. Applicable Law: Connecticut. -------------- 17. Indemnification: Appropriate indemnification provisions, --------------- including, but not limited to, indemnification pursuant to the Company's corporate governance documents or, if greater, applicable law. Insurance pursuant to a Company-purchased directors' and officers' liability insurance and umbrella insurance in an amount no less than $50 million. 18. Definitions: See Attachment A. ----------- - --------------------------- (12) Definition of competitive activity to be narrowly defined and shall not prohibit association with a company if an immaterial portion of its revenues is attributable to operations directly competitive with the Company (provided the Executive is not employed within those directly competitive operations). 10 ATTACHMENT A DEFINITIONS ----------- "CAUSE" shall mean: (i) the Executive is convicted of (or pleads guilty or nolo contendere to) a felony; (ii) intentional fraud by the Executive in the performance of his duties for the Company or intentional misappropriation of Company funds by the Executive; (iii) (A) material breach of the non-competition/non-solicitation covenants set forth in the employment agreement or (B) a willful and material breach of the confidentiality provisions set forth in the employment agreement; (iv) a willful and material violation by the Executive of the Company's written policies and procedures that are legal and ethical, have been made available to the Executive and relate to the performance of his duties for the Company (provided that the Company has not failed to terminate other employees for comparable violations), or willful gross misconduct by the Executive relating to the performance of his duties for the Company; or (v) willful failure to comply with direction of the Chief Executive Officer or the Board or any duly authorized committee thereof (including any written policies or procedures promulgated by those bodies), provided that (A) such directions (or policies or procedures) of the Board or such committee are actions of the Board or a duly authorized committee thereof within the meaning of Section 141 of the General Corporation Law of the State of Delaware (or any comparable provision of applicable law), (B) the existence of such directions (or policies or procedures) is known by Executive or such directions (or policies or procedures) have been communicated to Executive, (C) such directions (or policies or procedures) are consistent with the duties and role of an Executive Vice President, Chief Financial Officer of a company the nature and size of the Company and (D) such directions (or policies or procedures) do not require actions that are illegal or unethical. For purposes of clauses (iii) and (iv), no act or failure to act shall be deemed to be "willful" if Executive reasonably believed in good faith that such act or failure to act was in, or not opposed to, the best interests of the Company. Anything notwithstanding to the 11 contrary, the Executive's employment shall not be terminated for "Cause," within the meaning of clauses (ii) through (v) above, unless the Executive has been given written notice by the Board stating the basis for such termination and, in the case of clauses (iii) through (v) above, he is also given fifteen (15) days to cure the neglect or conduct that is the basis of any such claim and, if he fails to cure such conduct, or such conduct cannot be cured (and also for any purported termination for Cause under clause (ii) above), the Executive has an opportunity to be heard before the Board and after such hearing, the Board gives the Executive written notice confirming that in the judgment of a majority of the members of the Board that includes at least two directors who are independent for purposes of the listing requirements of the securities exchange on which the Company's securities are listed "Cause" for terminating the Executive's employment on the basis set forth in the original notice exists. The Executive's communication to the Board of his disagreement with decisions made by the Board and the reasons for that disagreement shall not constitute "Cause" provided that he does not engage in conduct constituting Cause as set forth in clause (v) above. Any termination for Cause shall be subject to de novo review in accordance with the arbitration provisions of the employment agreement. If an arbitrator or arbitrators determine that the basis for Cause did not exist, then the Executive's termination of employment shall be treated as a termination without Cause. "CHANGE IN CONTROL" shall mean the occurrence of any one of the following events: (i) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, becomes after the Operative Date a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of 30% or more of the Voting Stock of the Company; provided that this clause (i) shall not be operative during the period the Minimum Hold Condition is satisfied (it being understood that a Change in Control will occur at the time the Minimum Hold Condition is not satisfied (the "Requisite Time") if (A) a person becomes the beneficial owner of 30% or more of the Voting Stock during the period in which the Minimum Hold Condition is satisfied and (B) that person is the beneficial owner of 30% or more of the Voting Stock at the Requisite Time); (ii) the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the Operative Date and the Minimum Hold Condition is not satisfied at the time; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors, or who became a director at a time the Minimum Hold Condition was satisfied, shall be considered to be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of the Company's assets; 12 (iv) all or substantially all of the assets of the Company are disposed of pursuant to a merger, consolidation, share exchange, reorganization or other transaction unless the shareholders of the Company immediately prior to such merger, consolidation, share exchange, reorganization or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock or other ownership interests of the Company, a majority of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company; or (v) the Company combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock of the combined company (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by Affiliates of such other company who were not Affiliates of the Company prior to the relevant transaction in exchange for stock of such other company). For purposes of the Change in Control definition, "the Company" shall include any entity that succeeds to all or substantially all of the business of the Company, "Affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified and "Voting Stock" shall mean any capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation and reference to a percentage of Voting Stock shall refer to such percentage of the votes of such Voting Stock. "DISABILITY" shall mean the Executive's inability, due to physical or mental incapacity, to substantially perform his duties and responsibilities for a period of 180 consecutive days as determined by a medical doctor selected by the Company and the Executive. If the parties cannot agree on a medical doctor, each party shall select a medical doctor and the two doctors shall select a third who shall be the approved medical doctor for this purpose. "GOOD REASON" shall mean termination by the Executive of his employment after written notice to the Company following the occurrence of any of the following events without his consent: (i) a reduction in the Executive's then current Base Salary or the Target Bonus opportunity (i.e., 100% of Base Salary); 13 (ii) a material diminution in the Executive's positions, duties or authorities (including any removal of the Executive from any position set forth in Section 2 above) or interference with the Executive's carrying out his duties or exercising his authority so that he is unable to carry out his duties or exercise his authority as Executive Vice President, Chief Financial Officer; (iii) the assignment to the Executive of duties which are materially inconsistent with his duties or which materially impair the Executive's ability to function as Executive Vice President, Chief Financial Officer of the Company; (iv) a change in the reporting structure so that the Executive reports to someone other than the Chief Executive Officer; (v) requiring the Executive to relocate, or the relocation of the Offices to a location that is more than 50 miles from Avon, Connecticut; (vi) a breach by the Company of any material provision of the Executive's employment agreement; (vii) the failure of the Company to obtain the assumption in writing of its obligation to perform this agreement by any successor to all or substantially all of the assets of the Company within 15 days after a merger, consolidation, sale or similar transaction; or (viii) for any reason by the Executive during the 30-day period following the six-month anniversary of a Change in Control (whether or not the Executive consented to such Change in Control), provided that the Executive's termination of employment pursuant to this clause (viii) shall be treated as termination for Good Reason pursuant to Section 13.a above; provided that in the case of clauses (i) through (vii) (but not clause (viii)) such event continues uncured for fifteen (15) days after the Executive gives the Company notice thereof. 14 -----END PRIVACY-ENHANCED MESSAGE-----