-----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, BiFYHkrpbLBKOoRH73kdeOOrbCUwOrf0G6OprGHsm/rnz/WDw6JDHlQZ4O9NnAP+ DzmJoAETgqyQSKB4W4Ho6A== 0000912057-97-001940.txt : 19970129 0000912057-97-001940.hdr.sgml : 19970129 ACCESSION NUMBER: 0000912057-97-001940 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970128 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAGELLAN HEALTH SERVICES INC CENTRAL INDEX KEY: 0000019411 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 581076937 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-06639 FILM NUMBER: 97511880 BUSINESS ADDRESS: STREET 1: 3414 PEACHTREE RD N E STREET 2: STE 1400 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 9127421161 FORMER COMPANY: FORMER CONFORMED NAME: CHARTER MEDICAL CORP DATE OF NAME CHANGE: 19920703 10-K405/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A AMENDMENT NO. 1 TO /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NO. 1-6639 MAGELLAN HEALTH SERVICES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 58-1076937 - -------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 3414 PEACHTREE ROAD, N.E. SUITE 1400 ATLANTA, GEORGIA 30326 - -------------------------------- ----------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 841-9200 See Table of Additional Registrants below. -------------------------- Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - --------------------------------------------------------------- ----------------------------- Common Stock ($0.25 par value) New York Stock Exchange 11 1/4% Series A Senior Subordinated Notes due 2004 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the Registrant at November 25, 1996 was approximately $504 million. Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes /X/ No / / The number of shares of the Registrant's Common Stock outstanding as of November 25, 1996 was 28,583,406. DOCUMENTS INCORPORATED BY REFERENCE: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Behavioral Heath Systems of Indiana, Indiana 35-1990127 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Beltway Community Hospital, Inc. Texas 58-1324281 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Blue Grass Physician Management Kentucky 66-1294402 3050 Rio Dosa Drive Group, Inc. Lexington, KY 40509 (606) 269-2325 C.A.C.O. Services, Inc. Ohio 58-1751511 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 CCM, Inc. Nevada 58-1662418 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 CMCI, Inc. Nevada 88-0224620 1061 East Flamingo Road Suite One Las Vegas, NV 89119 (702) 737-0282 CMFC, Inc. Nevada 88-0215629 1061 East Flamingo Road Suite One Las Vegas, NV 89119 (702) 737-0282 CMSF, Inc. Florida 58-1324269 3550 Colonial Boulevard Fort Myers, FL 33912 (813) 939-0403 CPS Associates, Inc. Virginia 58-1761039 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Alvarado Behavioral Health California 58-1394959 7050 Parkway Drive System, Inc. La Mesa, CA 91942-2352 (619) 465-4411 Charter Appalachian Hall Behavioral North Carolina 58-2097827 60 Caledonia Road Health System, Inc. Asheville, NC 28803 (704) 253-3681
i ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Arbor Indy Behavioral Health Indiana 35-1916340 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Arbor Indy Behavioral Health Delaware 58-2265776 3414 Peachtree Rd., N.E. System, LLC Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Augusta Behavioral Health Georgia 58-1615676 3100 Perimeter Parkway System, Inc. P.O. Box 14939 Augusta, GA 30909 (404) 868-6625 Charter Bay Harbor Behavioral Health Florida 58-1640244 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, Georgia 30326 (404) 841-9200 Charter Beacon Behavioral Health Indiana 58-1524996 1720 Beacon Street System, Inc. Fort Wayne, IN 46805 (219) 423-3651 Charter Beacon Behavioral Health Delaware 35-1994155 1720 Beacon Street System, LLC Fort Wayne, IN 46805 (219) 423-3651 Charter Behavioral Health System at New Jersey 58-2097832 19 Prospect Street Fair Oaks, Inc. Summit, NJ 07901 (908) 277-9102 Charter Behavioral Health System at Maryland 52-1866212 522 Thomas Run Road Hidden Brook, Inc. Bel Air, MD 21014 (410) 879-1919 Charter Behavioral Health System at California 33-0606642 3414 Peachtree Rd., N.E. Los Altos, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System at Florida 65-0519663 1324 37th Avenue, East Manatee Adolescent Treatment Bradenton, FL 34208 Services, Inc. (813) 746-1388 Charter Behavioral Health System at Maryland 52-1866221 14901 Broschart Road Potomac Ridge, Inc. Rockville, MD 20850 (301) 251-4500
ii ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Behavioral Health Systems, Delaware 58-2213642 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of Georgia 58-1513304 240 Mitchell Bridge Road Athens, Inc. Athens, GA 30606 (404) 546-7277 Charter Behavioral Health System of Texas 58-1440665 8402 Cross Park Drive Austin, Inc. Austin, TX 78754 (512) 837-1800 Charter Behavioral Health System of Texas 76-0430571 3414 Peachtree Rd., N.E. Baywood, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of Florida 58-1527678 4480 51st Street, West Bradenton, Inc. Bradenton, FL 34210 (813) 746-1388 Charter Behavioral Health System of Georgia 58-1408670 3500 Riverside Drive Central Georgia, Inc. Macon, GA 31210 (912) 474-6200 Charter Behavorial Health System of Virginia 54-1765921 1500 Westbrook Avenue Central Virginia, Inc. Richmond, VA 23227 (804) 266-9671 Charter Behavioral Health System of South Carolina 58-1761157 2777 Speissegger Drive Charleston, Inc. Charleston, SC 29405-8299 (803) 747-5830 Charter Behavioral Health System of Virginia 58-1616917 2101 Arlington Boulevard Charlottesville, Inc. Charlottesville, VA 22903-1593 (804) 977-1120 Charter Behavioral Health System of Illinois 58-1315760 3414 Peachtree Rd., N.E. Chicago, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of California 58-1473063 3414 Peachtree Rd., N.E. Chula Vista, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of Missouri 61-1009977 200 Portland Street Columbia, Inc. Columbia, MO 65201 (314) 876-8000
iii ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Behavioral Health System of Texas 58-1513305 3126 Rodd Field Road Corpus Christi, Inc. Corpus Christi, TX 78414 (512) 993-8893 Charter Behavioral Health System of Texas 58-1513306 6800 Preston Road Dallas, Inc. Plano, TX 75024 (214) 964-3939 Charter Behavioral Health System of Maryland 52-1866214 3680 Warwick Road, Route 1 Delmarva, Inc. East New Market, MD 21631 (410) 943-8108 Charter Behavioral Health System of Indiana 35-1916338 7200 East Indiana Evansville, Inc. Evansville, IN 47715 (812) 475-7200 Charter Behavioral Health System of Delaware 35-1994080 7200 East Indiana Evansville, LLC Evansville, IN 47715 (812) 475-7200 Charter Behavioral Health System of Texas 58-1643151 3414 Peachtree Rd., N.E. Fort Worth, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of Mississippi 58-1616919 3531 Lakeland Drive Jackson, Inc. Jackson, MS 39208 (601) 939-9030 Charter Behavioral Health System of Florida 58-1483015 3947 Salisbury Road Jacksonville, Inc. Jacksonville, FL 32216 (904) 296-2447 Charter Behavioral Health System of Indiana 35-1916342 2700 River City Park Drive Jefferson, Inc. Jeffersonville, IN 47130 (812) 284-3400 Charter Behavioral Health System of Delaware 35-1994087 2700 River City Park Drive Jefferson, LLC Jeffersonville, IN 47130 (812) 284-3400 Charter Behavioral Health System of Kansas 58-1603154 8000 West 127th Street Kansas City, Inc. Overland Park, KS 66213 (913) 897-4999 Charter Behavioral Health System of Louisiana 72-0686492 302 Dulles Drive Lafayette, Inc. Lafayette, LA 70506 (318) 233-9024
iv ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Behavioral Health System of Louisiana 62-1152811 4250 Fifth Avenue, South Lake Charles, Inc. Lake Charles, LA 70605 (318) 474-6133 Charter Behavioral Health System of Indiana 35-1916343 3414 Peachtree Rd., N.E. Michigan City, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of Delaware 35-1994736 3414 Peachtree Rd., N.E. Michigan City, LLC Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of Alabama 58-1569921 3414 Peachtree Rd., N.E. Mobile, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of New Hampshire 02-0470752 29 Northwest Boulevard Nashua, Inc. Nashua, NH 03063 (603) 886-5000 Charter Behavioral Health System of Nevada 58-1321317 7000 West Spring Mountain Rd. Nevada, Inc. Las Vegas, NV 89117 (702) 876-4357 Charter Behavioral Health System of New Mexico 58-1479480 5901 Zuni Road, SE New Mexico, Inc. Albuquerque, NM 87108 (505) 265-8800 Charter Behavioral Health System of California 58-1857277 101 Cirby Hills Drive Northern California, Inc. Roseville, CA 95678 (916) 969-4666 Charter Behavioral Health System of Arkansas 58-1449455 4253 Crossover Road Northwest Arkansas, Inc. Fayetteville, AR 72703 (501) 521-5731 Charter Behavioral Health System of Indiana 58-1603160 101 West 61st Avenue Northwest Indiana, Inc. State Road 51 Hobart, IN 46342 (219) 947-4464 Charter Behavioral Health System of Delaware 35-1994154 101 West 61st Avenue Northwest Indiana, LLC State Road 51 Hobart, IN 46342 (219) 947-4464
v ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Behavioral Health System of Kentucky 61-1006115 435 Berger Road Paducah, Inc. Paducah, KY 42002-7609 (502) 444-0444 Charter Behavioral Health of Puerto Georgia 66-0523678 Caso Bldg., Suite 1504 Rico, Inc. 1225 Ponce de Leon Avenue Santurce, PR 00907 Charter Behavioral Health System of California 58-1747020 455 Silicon Valley Boulevard San Jose, Inc. San Jose, CA 95138 (408) 224-2020 Charter Behavioral Health System of Georgia 58-1750583 1150 Cornell Avenue Savannah, Inc. Savannah, GA 31406 (912) 354-3911 Charter Behavioral Health System of Arkansas 71-0752815 3414 Peachtree Rd., N.E. Texarkana, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of California 95-2685883 2055 Kellogg Drive the Inland Empire, Inc. Corona, CA 91719 (714) 735-2910 Charter Behavioral Health System of Ohio 58-1731068 1725 Timberline Road Toledo, Inc. Maumee, Ohio 43537 (419) 891-9333 Charter Behavioral Health System of Arizona 86-0757462 3414 Peachtree Rd., N.E. Tucson, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of California 33-0606644 3414 Peachtree Rd., N.E. Visalia, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Behavioral Health System of Minnesota 41-1775626 109 North Shore Drive Waverly, Inc. Waverly, MN 55390 (612) 658-4811 Charter Behavioral Health System of North Carolina 56-1050502 3637 Old Vineyard Road Winston-Salem, Inc. Winston-Salem, NC 27104 (919) 768-7710 Charter Behavioral Health System of California 33-0606646 3414 Peachtree Rd., N.E. Yorba Linda, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200
vi ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Behavioral Health Systems of Georgia 58-1900736 811 Juniper St., N.E. Atlanta, Inc. Atlanta, GA 30308 (404) 881-5800 Charter Brawner Behavioral Health Georgia 58-0979827 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter By-The-Sea Behavioral Health Georgia 58-1351301 2927 Demere Road System, Inc. St. Simons Island, GA 31522 (912) 638-1999 Charter Canyon Behavioral Health Utah 58-1557925 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Canyon Springs Behavioral California 33-0606640 69696 Ramon Road Health System, Inc. Cathedral City, CA 92234 (619) 321-2000 Charter Centennial Peaks Behavioral Colorado 58-1761037 2255 South 88th Street Health System, Inc. Louisville, CO 80027 (303) 673-9990 Charter Community Hospital, Inc. California 58-1398708 21530 South Pioneer Boulevard Hawaiian Gardens, CA 90716 (310) 860-0401 Charter Contract Services, Inc. Georgia 58-2100699 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Cove Forge Behavioral Health Pennsylvania 25-1730464 New Beginnings Road System, Inc. Williamsburg, PA 16693 (814) 832-2121 Charter Fairmount Behavioral Health Pennsylvania 58-1616921 561 Fairthorne Avenue System, Inc. Philadelphia, PA 19128 (215) 487-4000 Charter Fenwick Hall Behavioral South Carolina 57-0995766 3414 Peachtree Rd., N.E. Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200
vii ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Financial Offices, Inc. Georgia 58-1527680 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Forest Behavioral Health Louisiana 58-1508454 9320 Linwood Avenue System, Inc. Shreveport, LA 71106 (318) 688-3930 Charter Grapevine Behavioral Health Texas 58-1818492 2300 William D. Tate Ave. System, Inc. Grapevine, TX 76051 (817) 481-1900 Charter Greensboro Behavioral Health North Carolina 58-1335184 700 Walter Reed Drive System, Inc. Greensboro, NC 27403 (919) 852-4821 Charter Health Management of Texas, Texas 58-2025056 6800 Park Ten Blvd. Inc. Suite 275-W San Antonio, TX 78213 (210) 699-8585 Charter Hospital of Columbus, Inc. Ohio 58-1598899 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Denver, Inc. Colorado 58-1662413 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Ft. Collins, Colorado 58-1768534 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Laredo, Inc. Texas 58-1491620 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Miami, Inc. Florida 61-1061599 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Mobile, Inc. Alabama 58-1318870 5800 Southland Drive Mobile, AL 36693 (334) 661-3001
viii ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Hospital of Santa Teresa, New Mexico 58-1584861 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of St. Louis, Inc. Missouri 58-1583760 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Hospital of Torrance, Inc. California 58-1402481 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Indiana BHS Holding, Inc. Indiana 58-2247985 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Indianapolis Behavioral Indiana 58-1674291 5602 Caito Drive Health System, Inc. Indianapolis, IN 46226 (317) 545-2111 Charter Indianapolis Behavioral Delaware 35-1994923 5602 Caito Drive Health System, LLC Indianapolis, IN 46226 (317) 545-2111 Charter Lafayette Behavioral Health Indiana 58-1603158 3700 Rome Drive System, Inc. Lafayette, IN 47905 (317) 448-6999 Charter Lafayette Behavioral Health Delaware 35-1994151 3700 Rome Drive System, LLC Lafayette, IN 47905 (317) 448-6999 Charter Lakehurst Behavioral Health New Jersey 22-3286879 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Lakeside Behavioral Health Tennessee 62-0892645 2911 Brunswick Road System, Inc. Memphis, TN 38134 (901) 377-4700 Charter Laurel Heights Behavioral Georgia 58-1558212 3414 Peachtree Rd., N.E. Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200
ix ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Linden Oaks Behavioral Illinois 36-3943776 852 West Street Health System, Inc. Naperville, IL 60540 (708) 305-5500 Charter Little Rock Behavioral Arkansas 58-1747019 1601 Murphy Drive Health System, Inc. Maumelle, AR 72113 (501) 851-8700 Charter Louisiana Behavioral Health Louisiana 72-1319231 1514 Doctor's Drive System, Inc. Suite 102 Bossier City, LA 71111 (318) 747-4362 Charter Louisville Behavioral Health Kentucky 58-1517503 1405 Browns Lane System, Inc. Louisville, KY 40207 (502) 896-0495 Charter Meadows Behavioral Health Maryland 52-1866216 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical-- California, Inc. Georgia 58-1357345 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical--Clayton County, Georgia 58-1579404 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical-- Cleveland, Inc. Texas 58-1448733 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical--Dallas, Inc. Texas 58-1379846 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical--Long Beach, Inc. California 58-1366604 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200
x ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Medical--New York, Inc. New York 58-1761153 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical (Cayman Islands) Cayman Islands, BWI 58-1841857 Caledonian Bank & Trust Ltd. Swiss Bank Building Caledonian House Georgetown-Grand Cayman Cayman Islands (809) 949-0050 Charter Medical Executive Georgia 58-1538092 3414 Peachtree Rd., N.E. Corporation Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical Information Georgia 58-1530236 3414 Peachtree Rd., N.E. Services, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical International, Inc. Cayman Islands, BWI N/A Caledonian Bank & Trust Swiss Bank Building Caledonian House Georgetown-Grand Cayman Cayman Islands (809) 949-0050 Charter Medical International, S.A., Nevada 58-1605110 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical Management Company Georgia 58-1195352 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical of East Valley, Inc. Arizona 58-1643158 2190 N. Grace Boulevard Chandler, AZ 85224 (602) 899-8989 Charter Medical of England Limited United Kingdom N/A 111 Kings Road Box 323 London SW3 4PB London, England 44-71-351-1272
xi ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Medical of Florida, Inc. Florida 58-2100703 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Medical of North Phoenix, Arizona 58-1643154 6015 W. Peoria Avenue Inc. Glendale, AZ 85302 (602) 878-7878 Charter Medical of Puerto Rico, Inc. Commonwealth of Puerto 58-1208667 Caso Building, Suite 1504 Rico 1225 Ponce De Leon Avenue Santurce, P.R. 00907 (809) 723-8666 Charter Milwaukee Behavioral Health Wisconsin 58-1790135 11101 West incoln Avenue System, Inc. West Allis, WI 53227 (414) 327-3000 Charter Mission Viejo Behavioral California 58-1761156 23228 Madero Health System, Inc. Mission Viejo, CA 92691 (714) 830-4800 Charter MOB of Charlottesville, Inc. Virginia 58-1761158 1023 Millmont Avenue Charlottesville, VA 22901 (804) 977-1120 Charter North Behavioral Health Alaska 58-1474550 2530 DeBarr Road System, Inc. Anchorage, AK 99508-2996 (907) 258-7575 Charter Northbrooke Behavioral Wisconsin 39-1784461 46000 W. Schroeder Drive Health System, Inc. Brown Deer, WI 53223 (414) 355-2273 Charter North Counseling Center, Alaska 58-2067832 2530 DeBarr Road Inc. Anchorage, AK 99508-2996 (907) 258-7575 Charter Northridge Behavioral Health North Carolina 58-1463919 400 Newton Road System, Inc. Raleigh, NC 27615 (919) 847-0008 Charter Oak Behavioral Health California 58-1334120 1161 East Covina Boulevard System, Inc. Covina, CA 91724 (818) 966-1632 Charter of Alabama, Inc. Alabama 63-0649546 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, Georgia 30326 (404) 841-9200
xii ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Palms Behavioral Health Texas 58-1416537 1421 E. Jackson Avenue System, Inc. McAllen, TX 78502 (512) 631-5421 Charter Peachford Behavioral Health Georgia 58-1086165 2151 Peachford Road System, Inc. Atlanta, GA 30338 (404) 455-3200 Charter Petersburg Behavioral Health Virginia 58-1761160 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Pines Behavioral Health North Carolina 58-1462214 3621 Randolph Road System, Inc. Charlotte, NC 28211 (704) 365-5368 Charter Plains Behavioral Health Texas 58-1462211 801 N. Quaker Avenue System, Inc. Lubbock, TX 79408 (806) 744-5505 Charter-Provo School, Inc. Utah 58-1647690 4501 North University Ave. Provo, UT 84604 (801) 227-2000 Charter Real Behavioral Health Texas 58-1485897 8550 Huebner Road System, Inc. San Antonio, TX 78240 (512) 699-8585 Charter Regional Medical Center, Texas 74-1299623 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, Georgia 30326 (404) 841-9200 Charter Ridge Behavioral Health Kentucky 58-1393063 3050 Rio Dosa Drive System, Inc. Lexington, KY 40509 (606) 269-2325 Charter Rivers Behavioral Health South Carolina 58-1408623 2900 Sunset Boulevard System, Inc. West Columbia, SC 29169 (803) 796-9911 Charter Rockford Behavioral Health Delaware 51-0374617 100 Rockford Drive System, Inc. Newark, DE 19713 (302) 996-5480 Charter San Diego Behavioral Health California 58-1669160 11878 Avenue of Industry System, Inc. San Diego, CA 92128 (619) 487-3200
xiii ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Sioux Falls Behavioral South Dakota 58-1674278 2812 South Louise Avenue Health System, Inc. Sioux Falls, SD 57106 (605) 361-8111 Charter South Bend Behavioral Health Indiana 58-1674287 6704 N. Gumwood Drive System, Inc. Granger, IN 46530 (219) 272-9799 Charter South Bend Behavioral Health Delaware 35-1994307 6704 N. Gumwood Drive System, LLC Granger, IN 46530 (219) 272-9799 Charter Springs Behavioral Health Florida 58-1517461 3130 S.W. 27th Avenue System, Inc. Ocala, FL 32674 (904) 237-7293 Charter Springwood Behavioral Health Virginia 58-2097829 Route 4, Box 50 System, Inc. Leesburg, VA 22075 (703) 777-0800 Charter Suburban Hospital of Texas 75-1161721 3414 Peachtree Rd., N.E. Mesquite, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Terre Haute Behavioral Indiana 58-1674293 1400 Crossing Boulevard Health System, Inc. Terre Haute, IN 47802 (812) 299-4196 Charter Terre Haute Behavioral Delaware 35-1994308 1400 Crossing Boulevard Health System, LLC Terre Haute, IN 47802 (812) 299-4196 Charter Thousand Oaks Behavioral California 58-1731069 3414 Peachtree Rd., N.E. Health System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Treatment Center of Michigan 58-2025057 3414 Peachtree Rd., N.E. Michigan, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Charter Westbrook Behavioral Health Virginia 54-0858777 1500 Westbrook Avenue System, Inc. Richmond, VA 23227 (804) 266-9671 Charter White Oak Behavioral Health Maryland 52-1866223 3414 Peachtree Rd., N.E. System, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200
xiv ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Charter Wichita Behavioral Health Kansas 58-1634296 8901 East Orme System, Inc. Wichita, KS 67207 (316) 686-5000 Charter Woods Behavioral Health Alabama 58-1330526 700 Cottonwood Road System, Inc. Dothan, AL 36301 (205) 794-4357 Correctional Behavioral Solutions, Delaware 58-2180940 3414 Peachtree Rd., N.E. Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Correctional Behavioral Solutions of Indiana 35-1978792 3414 Peachtree Rd., N.E. Indiana, Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Correctional Behavioral Solutions of New Jersey 22-3436964 3000 Atrium Way New Jersey, Inc. Suite 410 Mount Laurel, NJ (609) 235-2339 Correctional Behavioral Solutions of Ohio 34-1826431 Allen Correctional Institute Ohio, Inc. 2338 North West Street Lima, OH 45801 (419) 224-8000 Desert Springs Hospital, Inc. Nevada 88-0117696 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, Georgia 30326 (404) 841-9200 Employee Assistance Services, Inc. Georgia 58-1501282 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Florida Health Facilities, Inc. Florida 58-1860493 21808 State Road 54 Lutz, FL 33549 (813) 948-2441 Gulf Coast EAP Services, Inc. Alabama 58-2101394 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200
xv ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Hospital Investors, Inc. Georgia 58-1182191 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Illinois Mentor, Inc. Illinois 36-3643670 313 Congress St. Boston, MA 02210 (617) 790-4800 Magellan Public Solutions, Inc. Delaware 58-2227841 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Mandarin Meadows, Inc. Florida 58-1761155 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Magellan Public Network, Inc. Delaware 51-0374654 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Massachusetts Mentor, Inc. Massachusetts 04-2799071 313 Congress St. Boston, MA 02210 (617) 790-4800 Metroplex Behavioral Healthcare Texas 58-2138596 1000 South Main Street Services, Inc. Suite 100 Grapevine, TX 76051 (817) 540-6948 National Mentor, Inc. Delaware 04-3250732 313 Congress St. Boston, MA 02210 (617) 790-4800 National Mentor Healthcare, Inc. Massachusetts 04-2893910 313 Congress St. Boston, MA 02210 (617) 790-4800 NEPA--Massachusetts, Inc. Massachusetts 58-2116751 #6 Courthouse Lane Chelmsford, MA 01863 (508) 441-2332 NEPA--New Hampshire, Inc. New Hampshire 58-2116398 29 Northwest Boulevard Nashua, NH 03063 (603) 886-5000
xvi ADDITIONAL REGISTRANTS(1)
STATE OR OTHER I.R.S. ADDRESS INCLUDING ZIP CODE, JURISDICTION OF EMPLOYER AND TELEPHONE NUMBER INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION AREA CODE, OF REGISTRANT'S PRINCIPAL AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------------------ -------------- ------------------------------------ Ohio Mentor, Inc. Ohio 31-1098345 313 Congress St. Boston, MA 02210 (617) 790-4800 Pacific-Charter Medical, Inc. California 58-1336537 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 South Carolina Mentor, Inc. South Carolina 57-0782160 313 Congress St. Boston, MA 02210 (617) 790-4800 Southeast Behavioral Systems, Inc. Georgia 58-2100700 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Schizophrenia Treatment and Georgia 58-1672912 209 Church Street Rehabilitation, Inc. Decatur, GA 30030 (404) 377-1986 Sistemas De Terapia Respiratoria, Georgia 58-1181077 3414 Peachtree Rd., N.E. S.A., Inc. Suite 1400 Atlanta, GA 30326 (404) 841-9200 Western Behavioral Systems, Inc. California 58-1662416 3414 Peachtree Rd., N.E. Suite 1400 Atlanta, GA 30326 (404) 841-9200
- ------------------------ (1) The Additional Registrants listed are wholly-owned subsidiaries of the Registrant and are guarantors of the Registrant's 11 1/4% Series A Senior Subordinated Notes due 2004. The Additional Registrants have been conditionally exempted, pursuant to Section 12(h) of the Securities Exchange Act of 1934, from filing reports under Section 13 of the Securities Exchange Act of 1934. xvii MAGELLAN HEALTH SERVICES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 TABLE OF CONTENTS
PART I PAGE ----- ITEM 1. Business.................................................................... 2 ITEM 2. Properties.................................................................. 17 ITEM 3. Legal Proceedings........................................................... 18 ITEM 4. Submission of Matters to a Vote of Security Holders......................... 18 PART II ITEM 5. Market Price for Registrant's Common Equity and Related Stockholder Matters..................................................................... 19 ITEM 6. Selected Financial Data..................................................... 19 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 21 ITEM 8. Financial Statements and Supplementary Data................................. 30 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 30 PART III ITEM 10. Directors and Executive Officers of the Registrant.......................... 31 ITEM 11. Executive Compensation...................................................... 32 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............. 35 ITEM 13. Certain Relationships and Related Transactions.............................. 37 PART IV ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.............. 39
The undersigned Registrant hereby amends Items 10 through 13 of its Annual Report on Form 10-K for the fiscal year ended September 30, 1996. PART I ITEM 1. BUSINESS GENERAL Magellan Health Services, Inc. ("Magellan" or the "Company"), which was incorporated in 1969, is an integrated, national behavioral healthcare company. The Company operates through three principal subsidiaries engaging in (i) the provider business, (ii) the managed care business and (iii) the public sector business. Charter Behavioral Health Systems, Inc. ("Charter" or the "provider business"), the Company's wholly-owned subsidiary that engages in the provider business, operated 90 acute care psychiatric hospitals and 4 residential psychiatric treatment centers with an aggregate capacity of 8,429 licensed beds as of September 30, 1996. Charter also manages one acute care psychiatric hospital with 34 licensed beds. Eighty-eight of Charter's hospitals operate partial hospitalization programs and the Company operates approximately 150 outpatient centers, staffed by mental health professionals. Green Spring Health Services, Inc. ("Green Spring" or the "managed care business"), the Company's 61% owned subsidiary that engages in the managed care business, provides managed behavioral healthcare services, which include (i) Enhanced Utilization Management, a utilization review process that employs clinical criteria designed to provide each patient with accessible, appropriate and affordable treatment across the entire continuum of care and services; (ii) Care Management, a fully integrated healthcare model that offers utilization review services and provides care to patients through the management of a national network of contract providers and Green Spring-owned staff model clinics; and (iii) Comprehensive Administrative Services, including member assistance, management reporting, claims processing, clinical management information and provider referral systems that are adaptable to customer circumstances and requirements through a network of more than 30,000 providers nationwide covering approximately 13.6 million people as of September 30, 1996. Magellan Public Solutions, Inc. ("Public Solutions" or the "public sector business"), the Company's wholly-owned subsidiary that engages in the public sector business, provides specialty home-based behavioral healthcare services, behavioral services in correctional facilities and troubled and delinquent adolescent facilities services pursuant to contractual arrangements with governmental agencies. The Company's business strategy is to provide access to a full continuum of behavioral healthcare and managed care services and to perform such services in a cost effective manner with monitored results. The Company's integrated national behavioral healthcare company has the capability to deliver and to manage the delivery of behavioral healthcare services for large public and private payers who need assistance in managing the risk of behavioral healthcare costs. RECENT DEVELOPMENTS GREEN SPRING ACQUISITION On December 13, 1995, the Company acquired a 51% ownership interest in Green Spring for approximately $68.9 million in cash, the issuance of 215,438 shares of Magellan Common Stock valued at approximately $4.3 million and the contribution of Group Practice Affiliates, Inc. ("GPA"), a wholly-owned subsidiary of the Company, which became a wholly-owned subsidiary of Green Spring. GPA was organized by the Company for the purpose of acquiring and managing professional group practices and has acquired seven group practices through September 30, 1996. On December 20, 1995, the Company acquired an 2 additional 10% ownership interest in Green Spring for approximately $16.7 million in cash as a result of an exercise by a minority stockholder of its Exchange Option (as hereinafter defined) for a portion of the stockholder's interest in Green Spring. The Company has a 61% ownership interest in Green Spring. Green Spring is a leading provider of managed behavioral healthcare services, which includes utilization management, care management and employee assistance programs through a 50-state provider network covering approximately 13.6 million people nationwide. The Green Spring acquisition and the creation of Public Solutions combined with the existing provider business created the first integrated national behavioral healthcare system and gives the Company the capability to provide case management and delivery services to large private organizations and a public sector marketplace seeking increased privatization of services. The Company changed its name to Magellan Health Services, Inc. on December 21, 1995 to reflect the broader range of services it provides as a result of the Green Spring acquisition. The minority shareholders of Green Spring consist of four Blue Cross/Blue Shield organizations (the "Blues") that are key customers of Green Spring. In addition, two other Blues organizations that formerly owned a portion of Green Spring continue to be customers of Green Spring. The minority stockholders of Green Spring have the option, under certain circumstances, to exchange their ownership interests ("Exchange Option") in Green Spring for 2,831,739 shares of Magellan Common Stock or $65.1 million in subordinated notes. The Company may elect to pay cash in lieu of issuing the subordinated notes. The Exchange Option expires December 13, 1998. NEW REVOLVING CREDIT AGREEMENT On October 28, 1996, the Company entered into a new Credit Agreement with certain financial institutions for a five-year Senior Secured reducing revolving credit facility in an aggregate committed amount of $400 million (the "New Revolving Credit Agreement"). The Company borrowed approximately $121.0 million under the New Revolving Credit Agreement in October 1996 to (i) pay-off the existing borrowings under the Revolving Credit Agreement (as hereinafter defined) and (ii) pay for fees and expenses related to the New Revolving Credit Agreement. The loans outstanding under the New Revolving Credit Agreement bear interest (subject to certain potential adjustments) at a rate per annum equal to one, two, three or six-month LIBOR plus 1.25% or the Prime Lending Rate. Interest on Prime Lending Rate loans is payable at the end of each fiscal quarter and upon conversion to a LIBOR-based loan. Interest on LIBOR-based loans is payable at the end of their respective one, two, three or six-month terms. PRIOR DEVELOPMENTS NME ACQUISITION During fiscal 1994, the Company agreed to acquire 40 psychiatric hospitals (the "Acquired Hospitals") from Tenet Healthcare Corporation (formerly known as National Medical Enterprises, Inc. ("NME")). The purchase price for the Acquired Hospitals was approximately $120.4 million in cash plus an additional cash amount of approximately $51 million, subject to adjustment, for the net working capital of the Acquired Hospitals (the "Hospital Acquisition"). The Acquired Hospitals had an aggregate capacity of 2,873 licensed beds when acquired and were located in 19 states. On June 30, 1994, the Company completed the purchase of 27 of the Acquired Hospitals for a cash purchase price of approximately $129.6 million, which included approximately $39.3 million, subject to adjustment, for the net working capital of the facilities. On October 31, 1994, the Company completed the purchase of three additional Acquired Hospitals for a cash purchase price of approximately $5 million, which included approximately $2.2 million related to the net working capital of the facilities. On November 30, 1994, the Company completed the purchase of the remaining ten Acquired Hospitals for a 3 cash purchase price of approximately $36.8 million, including approximately $9.5 million related to the net working capital of the ten Acquired Hospitals. During the year ended September 30, 1995, the Company received approximately $3.5 million from NME as a partial payment related to the settlement of the working capital portion of the purchase price. The Company accounted for the Hospital Acquisition using the purchase method of accounting. DEBT REFINANCING In order to finance the Hospital Acquisition and to refinance substantially all of the Company's outstanding long-term debt, on May 2, 1994, the Company entered into a Second Amended and Restated Credit Agreement with certain financial institutions for a five-year reducing, revolving credit facility in an aggregate committed amount of $300 million (the "Revolving Credit Agreement") and issued $375 million of 11 1/4% Series A Senior Subordinated Notes which mature on April 15, 2004 (the "Notes") and are general unsecured obligations of the Company. (See Note 6 of the Company's Consolidated Financial Statements.) SALE OF GENERAL HOSPITALS On September 30, 1993, the Company sold its general hospitals and related assets to Quorum, Inc. for approximately $338 million. The Company retained the assets and liabilities relating to these hospitals for professional liability claims incurred and cost report settlements for periods prior to September 30, 1993. For fiscal 1993, the general hospitals had net revenue of approximately $347 million, a net loss of approximately $15 million, and admissions and patient days of 39,669 and 205,843, respectively. In 1993, the Company restated its consolidated financial statements to reflect the sales of the general hospitals and its interest in a non-hospital subsidiary as discontinued operations. FINANCIAL RESTRUCTURING In its 1992 fiscal year, the Company completed a restructuring of its debt and equity capitalization (the "Restructuring") pursuant to a prepackaged plan of reorganization filed under Chapter 11 of the United States Bankruptcy Code (the "Plan"), which became effective on July 21, 1992. As a result of the Restructuring, the Company's long-term debt was reduced by approximately $700 million and its redeemable preferred stock of $233 million was eliminated. The holders of the debt and preferred stock that were reduced or eliminated received approximately 97% of the Company's Common Stock outstanding on July 21, 1992. PROVIDER BUSINESS OVERVIEW The Company's psychiatric hospitals in operation on September 30, 1996 are located in well-populated urban and suburban locations in 33 states and two foreign countries. Seven of the Company's hospitals are affiliated with medical schools for residency and other post-graduate teaching programs. Most of the Company's hospitals offer a full continuum of behavioral care in their service area. The continuum includes inpatient hospitalization, partial hospitalization, intensive outpatient services and, in some markets, residential treatment services. The Company's hospitals provide structured and intensive treatment programs for mental health and alcohol and drug dependency disorders in children, adolescents and adults. The specialization of programs enables the clinical staff to provide care that is specific to the patient's needs and facilitates monitoring of the patient's progress. A typical treatment program of the Company integrates physicians and other patient-care professionals with structured activities, providing patients with testing, adjunctive therapies (occupational, recreational and other), group therapy, individual therapy and educational programs. A 4 treatment program includes one or more of the types of treatment settings provided by the Company's continuum of care. For those patients who do not have a personal psychiatrist or other specialist, the hospital refers the patient to a member of its medical staff. A significant portion of hospital admissions are provided by referrals from former patients, local marketplace advertising, managed care organizations and physicians. Professional relationships are an important aspect of the Company's ongoing business. Management believes the quality of the Company's treatment programs, staff employees and physical facilities are important factors in maintaining good professional relationships. The Company's hospitals work closely with mental health professionals, non-psychiatric physicians, emergency rooms and community agencies that come in contact with individuals who may need treatment for mental illness or substance abuse. A portion of the Company's marketing efforts is directed at increasing general awareness of mental health and addictive disease and the services offered by the Company's hospitals. SEASONALITY The Company's provider business is seasonal in nature, with a reduced demand for certain services generally occurring in the first fiscal quarter around major holidays, such as Thanksgiving and Christmas, and during the summer months comprising the fourth fiscal quarter. COMPETITION Each of the Company's hospitals competes with other hospitals, some of which are larger and have greater financial resources. Some competing hospitals are owned and operated by governmental agencies, others by nonprofit organizations supported by endowments and charitable contributions and others by proprietary hospital corporations. The hospitals frequently draw patients from areas outside their immediate locale and, therefore, the Company's hospitals may, in certain markets, compete with both local and distant hospitals. In addition, the Company's hospitals compete not only with other psychiatric hospitals, but also with psychiatric units in general hospitals, and outpatient services provided by the Company may compete with private practicing mental health professionals. The competitive position of a hospital is, to a significant degree, dependent upon the number and quality of physicians who practice at the hospital and who are members of its medical staff. The Company has entered into joint venture arrangements with other healthcare providers in certain markets to achieve more efficiency in the local delivery system. In recent years, the competitive position of hospitals has been affected by the ability of such hospitals to obtain contracts with Preferred Provider Organizations ("PPO's"), Health Maintenance Organizations ("HMO's") and other managed care programs to provide inpatient and other services. Such contracts normally involve a discount from the hospital's established charges, but provide a base of patient referrals. These contracts also frequently provide for pre-admission certification and for concurrent length of stay reviews. The importance of obtaining contracts with HMO's, PPO's and other managed care companies varies from market to market, depending on the individual market strength of the managed care companies. The Company's acquisition of Green Spring creates opportunities to increase its revenues through managed care contracts utilizing the continuum of care described above and through information systems that support care management and at-risk pricing mechanisms. State certificate of need laws regulate the Company and its competitors' ability to build new hospitals and to expand existing hospital facilities and services. These laws do provide some protection from competition, as their intent is to prevent duplication of services. In most cases, these state laws do not restrict the ability of the Company or its competitors to offer new outpatient services. The Company operates 39 hospitals in 12 states (Arizona, Arkansas, California, Colorado, Indiana, Kansas, Louisiana, Nevada, New Mexico, South Dakota, Texas and Utah) which do not have certificate of need laws applicable to hospitals. 5 INDUSTRY TRENDS The Company's hospitals have been adversely affected by factors influencing the entire psychiatric hospital industry. Factors which affect the Company include (i) the imposition of more stringent length of stay and admission criteria by payors; (ii) the failure of reimbursement rates received from certain payers that reimburse on a per diem or other discounted basis to offset increases in the cost of providing services; (iii) an increase in the percentage of its business that the Company derives from payers that reimburse on a per diem or other discounted basis; (iv) a trend toward higher deductibles and co-insurance for individual patients; (v) a trend toward limiting employee mental health benefits, such as reductions in annual and lifetime limits on mental health coverage and (vi) pricing pressure related to an increasing rate of claims denials by third party payers. In response to these conditions, the Company has (i) strengthened controls to minimize costs and capital expenditures; (ii) reviewed its portfolio of hospitals and sold, closed or leased hospitals or consolidated operations in certain locations; (iii) developed strategies to increase outpatient services and partial hospitalization programs to meet the demands of the marketplace; (iv) implemented programs to contest third party denials relating to valid pre-certified medical procedures; (v) renegotiated contracts with managed care organizations at increased rates; and (vi) created an integrated national behavioral healthcare system thereby improving Charter's ability to obtain contracts with large private and public payers. GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM In the 1995 and 1996 sessions of the United States Congress, the focus of healthcare legislation has been on budgetary and related funding mechanism issues. Both the Congress and the Clinton Administration have made proposals to reduce the rate of increase in projected Medicare and Medicaid expenditures and to change funding mechanisms and other aspects of both programs. If enacted, these proposals would generally reduce Medicare and Medicaid expenditures. The Company cannot predict the effect of any such legislation, if adopted, on its operations; but the Company anticipates that, although overall Medicare and Medicaid funding may be reduced from projected levels, the changes in such programs may provide opportunities to the Company to obtain increased Medicare and Medicaid business through risk-sharing or partial risk-sharing contracts with managed care plans and state Medicaid programs. A number of states in which the Company has operations have either adopted or are considering the adoption of healthcare reform proposals of general applicability or Medicaid reform proposals, partly in response to possible changes in Medicaid law. Where adopted, these state reform laws have often not yet been fully implemented. The Company cannot predict the effect of these state healthcare reform and Medicaid reform laws on its operations. The Health Insurance Portability Act (H.R. 3103, also known as the Kassebaum-Kennedy Bill) was signed into law by President Clinton in August, 1996. Under this law, nongovernment health plans covering two or more employees are subject to new rules intended to make health insurance more accessible and avoid individual losses of coverage. Among other things, the law requires insurers to offer individual coverage to persons who lose their employer-sponsored insurance, and limits the ability of insurers to deny coverage because of pre-existing medical conditions, mental or physical. The law also prohibits group health plans (and insurers that offer them) from discriminating in enrollment or premiums based upon medical conditions, including both physical and mental illnesses, but does not require plans to offer particular benefits or restrictions. The law also establishes a four-year trial program to encourage the use of medical savings accounts by giving tax incentives to individuals and employers who contribute to such accounts. Anyone participating in a medical savings account must also maintain a high-deductible catastrophic health insurance policy, and the program is generally limited to 750,000 catastrophic policies. The law may have a minimal, though positive, impact on the Company's operations. The law effectively allows people with insurance coverage to retain that coverage, and while it does not mandate coverage for the uninsured, the law creates tax incentives for purchasing catastrophic health insurance coverage in 6 connection with a medical spending account. Accordingly, enactment of the law may result in an increase in the insurance coverage available for the types of services offered by the Company. SOURCES OF REVENUE Payments are made to the Company's hospitals by patients, by insurance companies and self-insured employers, by the federal and state governments under Medicare, Medicaid, CHAMPUS (as hereinafter defined) and other programs and by HMO's, PPO's and other managed care programs. Amounts received under government programs, HMO, PPO and other managed health care arrangements, certain self- insured employers and certain Blue Cross plans are generally less than the hospital's established charges. The approximate percentages of gross patient revenue (which is revenue before deducting contractual allowances and discounts from established billing rates) derived by the Company's hospitals from various payment sources for the last three fiscal years were as follows:
PERCENTAGE OF HOSPITAL GROSS PATIENT REVENUE FOR THE YEAR ENDED SEPTEMBER 30, ------------------------------------- 1994 1995 1996 ----- ----- ----- Medicare............................................... 27% 26% 28% Medicaid............................................... 16 17 17 --- --- --- 45 43 45 HMO's and PPO's........................................ 14 17 21 CHAMPUS................................................ 5 4 3 Other Government Programs.............................. 3 6 6 Other (primarily Blue Cross and other commercial insurance)........................................... 35 30 25 --- --- --- Total.................................................. 100% 100% 100% --- --- --- --- --- ---
Most private insurance carriers reimburse their policyholders or make direct payments to the hospitals for charges at rates specified in their policies. The patient remains responsible to the hospital for any difference between the insurance proceeds and the total charges. Certain Blue Cross programs have negotiated reimbursement rates with certain of the Company's hospitals which are less than the hospital's established charges. Most of the Company's hospitals have entered into contracts with HMO's, PPO's, certain self-insured employers and other managed care plans which provide for reimbursement at rates less than the hospital's normal charges. In addition to contracts entered into by individual hospitals with such managed care plans, the Company has entered into regional and national contracts with HMO's, PPO's, self-insured employers and other managed care plans that apply to all of the Company's hospitals in the geographic areas covered by a contract. The Company is seeking to obtain additional regional and national contracts. The Company expects its percentage of revenue from these payor sources to increase in the future. Under the Medicare provisions of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), costs per Medicare case are determined for each of the Company's hospitals. A target cost per case is established for each year (the "Target Rate"). If a hospital's costs per case are less than the Target Rate, the hospital receives a bonus of 50% of the difference between its actual costs per case and the Target Rate (limited to 5% of the Target Rate). Hospitals with costs which exceed the Target Rate are paid an additional amount equal to 50% of the excess, up to 10% of the Target Rate. These limits apply only to operating costs and do not apply to capital costs, including lease expense, depreciation and interest associated with capital expenditures. The Target Rate for each hospital is increased annually by the application of an "update factor." 7 Most of the Company's hospitals participate in state-operated Medicaid programs. Current federal law prohibits Medicaid funding for inpatient services in freestanding psychiatric hospitals for patients between the ages of 21 and 64. Each state is responsible for establishing the Medicaid eligibility and coverage criteria, payment methodology and funding mechanisms which apply in that state, subject to federal guidelines. Accordingly, the level of Medicaid payments received by the Company's hospitals varies from state to state. In addition to the basic payment level for patient care, several state programs include a financial benefit for hospitals which treat a disproportionately large volume of Medicaid patients as a percentage of the total patient population. These "disproportionate share" benefits are subject to annual review and revision by the related state governments and could be substantially reduced or eliminated at any point in the future. The Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") prohibits disproportionate share payments to hospitals which have a Medicaid utilization rate of less than 1%. The amount of disproportionate share payments each hospital can receive is limited through the use of formulas based generally on the cost of providing services to Medicaid and uninsured patients. The Company received approximately $11 million, $9 million and $5 million in Medicaid disproportionate share payments in fiscal 1994, 1995 and 1996, respectively. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may affect payments made under either or both of such programs. In addition, federal or state governments could reduce the future funds available under such programs or adopt additional restrictions on admissions and more stringent requirements for utilization of services. These types of measures could adversely affect the Company's operations. Final determination of amounts payable under Medicare and certain Medicaid programs are subject to review and audit. The Company's management believes that adequate provisions have been made for any adjustments that might result from such reviews or audits. Most of the Company's hospitals receive revenues from the CHAMPUS program. Under various CHAMPUS programs, payments can either be based on contractually agreed upon rates or rates determined by regulatory formulas. CHAMPUS patients are subject to annual limits on the number of psychiatric days covered by CHAMPUS. Covered inpatient services are generally limited to 30 days for adult acute patients, 45 days for child and adolescent acute patients, and 150 days for residential treatment center patients. REGULATION AND OTHER FACTORS Operations of psychiatric hospitals are subject to substantial federal, state and local government regulation. Such regulations provide for periodic inspections or other reviews by state agencies, the United States Department of Health and Human Services (the "Department") and CHAMPUS to determine compliance with their respective standards of medical care, staffing, equipment and cleanliness necessary for continued licensing or participation in the Medicare, Medicaid or CHAMPUS programs. The admission and treatment of patients at the Company's hospitals are also subject to substantial state regulation relating to involuntary admissions, confidentiality and patients' rights and to federal regulation relating to confidentiality of medical records of substance abuse patients. Obtaining approvals for construction of new hospitals and for renovation of and additions to existing hospitals is subject to various governmental requirements, such as approval of sites and findings of community need for additional hospital facilities and services. In addition, in certain states, as a practical matter, it is necessary to pledge to provide various amounts of uncompensated care to indigent persons in order to obtain a certificate of need. Federal law contains numerous provisions designed to insure that services rendered by hospitals to Medicare and Medicaid patients are medically necessary and are of a quality which meets professionally recognized standards and to insure that claims for reimbursement under the Medicare and Medicaid programs are properly filed. Among other things, services provided at the Company's hospitals are subject 8 to periodic review by Peer Review Organizations ("PRO's"). All hospitals which participate in the Medicare program are subject to review by PRO's. PRO activities include reviews of certain admissions and services to determine medical necessity and to determine whether quality of care meets professionally recognized standards. PRO's have the authority to recommend to the Department that a provider who is in substantial noncompliance with the medical necessity and quality of care standards of a PRO or who has grossly and flagrantly violated an obligation to render quality care be excluded from participation in the Medicare program or be required to reimburse the federal government for certain payments previously made to the provider under the Medicare program. The Company's hospitals have been subject to and have complied with various forms of utilization review since 1970. The Company has implemented a quality assurance program in each of its hospitals, which includes procedures for utilization review and retrospective patient care evaluation. Approximately 20% of the Company's hospitals have received accreditation with commendation from the Joint Commission on Accreditation of Healthcare Organizations (the "Joint Commission"). The Medicare and Medicaid Patient and Program Protection Act of 1987 expanded the authority of the Department to exclude from participation in the Medicare and Medicaid programs those hospitals which engage in defined prohibited activities. The Department is required under this Act to exclude from participation in the Medicare and Medicaid programs any individual or entity that has been convicted of a criminal offense relating to the delivery of services under Medicare and Medicaid or to the neglect or abuse of patients. In addition, the Department has authority to exclude from participation in the Medicare program individuals or hospitals under certain other circumstances. These include engaging in illegal remuneration arrangements with physicians and other healthcare providers, license revocation, exclusion from some other government programs (such as CHAMPUS), filing claims for excess charges or for unnecessary services, failure to comply with conditions of participation and failure to disclose certain required information or to grant proper access to hospital books and records. The Department has authority to impose civil monetary penalties against any participant in the Medicare program which makes claims for payment for services which were not rendered or were rendered by a person or entity not properly licensed under state law. The Department also has authority to impose a penalty of not more than $2,000 for each improperly claimed service and an assessment equal to not more than twice the amount claimed for each service not rendered. In 1989, Congress passed the so-called Stark I legislation ("Stark I") which prohibits physicians who have a financial relationship with entities that furnish clinical laboratory services from referring to such entities for Medicare-reimbursed clinical laboratory services and prohibits the entities for billing for services provided pursuant to such prohibited referrals. Stark I, which contains a number of exceptions from its general referral prohibition, became effective January 1, 1992. Proposed regulations implementing Stark I were first issued in March 1992, however, the final Stark I regulations were issued on August 14, 1995. In 1993, Congress passed Stark II legislation ("Stark II") which expanded the prohibitions of Stark I to include referrals from physicians for a wide variety of medical services, including inpatient/outpatient hospital services, and extended the referral prohibition to include services reimbursed under Medicaid in addition to Medicare. The limitations on referrals outlined in Stark II became effective January 1, 1995. Although the regulations implementing Stark II have not been issued it is anticipated that they will be similar to the Stark I regulations. A number of states in which the Company has operations have adopted legislation similar to the Stark legislation. The Company believes that its financial relationships with physicians do not violate the applicable statutes and regulations. There can be no assurance however that (i) government enforcement agencies will not contend that certain of these financial relationships are in violation of the Stark legislation, (ii) that the Stark legislation will not ultimately be interpreted by the courts in a manner inconsistent with the Company's practices or (iii) regulations will be issued in the future that will result in an interpretation by the courts in the manner inconsistent with the Company's practices. 9 Federal law makes it a felony, subject to certain exceptions, for a hospital to make false statements relating to claims for payments under the Medicare program, to engage in illegal remuneration arrangements with physicians and other healthcare providers, to make false statements relating to compliance with the Medicare conditions of participation, or to make false claims for Medicare or Medicaid payments. A number of states have adopted laws that also make illegal under state law certain remuneration and referral arrangements with physicians and other healthcare providers. In order to provide guidance to healthcare providers with respect to the statute that makes certain remuneration arrangements between hospitals and physicians and other healthcare providers illegal, the Department has issued regulations outlining certain "safe harbor" practices, which, although potentially capable of inducing prohibited referrals of business, would not be subject to enforcement action under the illegal remuneration statute. The practices covered by the regulations include, among others, certain investment transactions, leases of space and equipment, personal services and management contracts, sales of physician practices, payments to employees and waivers of beneficiary deductibles and co-payments. Additional proposed safe harbors were published in 1993 by the Department. Certain transactions and agreements of the Company do not satisfy all the applicable criteria contained in the final and proposed safe harbor regulations that relate to such transactions and agreements. However, the Company believes that such leases and contracts do not violate the statute that makes certain remuneration arrangements illegal. There can be no assurance that (i) government enforcement agencies will not assert that certain of these arrangements are in violation of the illegal remuneration statute or (ii) the statute and the regulations will ultimately be interpreted by the courts in a manner consistent with the Company's practices. Recent legislation, which becomes effective January 1, 1997, strengthens federal health care fraud and abuse law enforcement efforts. Among other things, the new legislation (i) adds several new offenses, (ii) expands the scope of certain existing laws by including private health insurance plans as well as the Medicare and Medicaid programs, (iii) increases penalties for certain existing offenses and (iv) significantly increases funding for health care fraud and abuse detection and prosecution efforts, including authorizing informants to share in recoveries and establishing a national health care fraud and abuse data bank. Among other things, the new legislation prohibits submitting a claim for reimbursement based on a code that the person knows or "should know" will result in a greater payment than the code "the person knows or should know" is applicable to the item or service actually provided, and prohibits submitting claims to Medicare or Medicaid for a pattern of medical or other items or services that a person knows or should know are not medically necessary. The legislation also prohibits offering any inducements to beneficiaries in order to influence them to order or receive Medicare or Medicaid covered items or services from a particular provider or practitioner. The new offenses created by this legislation, as well as the greater spending on health care fraud and abuse enforcement which will result from this legislation, may significantly increase the likelihood that any particular health care company will be scrutinized by federal, state and/or local law envorcement officials. In addition, the increased penalties will strengthen the ability of enforcement agencies to effect more numerous and larger monetary settlements with health care providers and businesses than was previously the case. CHAMPUS regulations authorize CHAMPUS to exclude from the CHAMPUS program any provider who has committed fraud or engaged in abusive practices. The regulations permit CHAMPUS to make its own determination of abusive practices without reliance on any actions of the Department. The term "abusive practices" is defined broadly to include, among other things, the provision of medically unnecessary services, the provision of care of inferior quality and the failure to maintain adequate medical or financial records. 10 A number of states have adopted hospital rate review legislation, which generally provides for state regulation of rates charged for various hospital services. Such laws are in effect in the state of Florida in which the Company operates seven hospitals. In Florida, the Health Care Board approves a budget for each hospital, which establishes a permitted level of revenues per discharge. If this level of permitted revenues per discharge is exceeded by a hospital in a particular year by more than a specified amount, certain penalties, including cash penalties, can be imposed. GPA, a subsidiary of Green Spring that owns or manages professional group practices, is subject to the federal and state illegal remuneration statutes described above. In addition, in some states, practice of medicine and certain other health professions' laws prohibit the subsidiary from owning, but not from managing, professional practices. MEDICAL STAFFS At September 30, 1996, approximately 1,400 licensed physicians were active members of the medical staffs of the Company's hospitals. Many of these physicians also serve on the medical staffs of other hospitals. A number of these physicians serve in administrative capacities in the Company's hospitals. Most of these physicians are independent contractors who have private practices in addition to their duties for the Company, while certain of these physicians are employees of the Company. The medical and professional affairs of each hospital are supervised by the medical staff of the hospital, under the control of its board of trustees. The Company recruits physicians to serve in administrative capacities at its hospitals and to engage in private practice in communities where the Company's hospitals are located. Registered nurses and certain other hospital employees are required to be licensed under the professional licensing laws of most states. The Company's hospital subsidiaries require such employees to maintain such professional licenses as a condition of employment. GENERAL AND PROFESSIONAL LIABILITY Effective June 1, 1995, Plymouth Insurance Company, Ltd. ("Plymouth"), a wholly-owned Bermuda subsidiary of the Company, provides general and hospital professional liability insurance up to $25 million per occurrence for the Company's hospitals. All of the risk of losses from $1.5 million to $25 million per occurrence has been reinsured with unaffiliated insurers. The Company also insures with an unaffiliated insurer 100% of the risk of losses between $25 million and $100 million per occurrence, subject to an annual aggregate limit of $75 million. The Company's general and professional liability coverage is written on a "claims made or circumstances reported" basis. For reinsured claims between $10 and $25 million per occurrence, the Company has an annual aggregate limit of coverage of $30 million. For reinsured claims between $1.5 million and $10 million per occurrence, the Company has no limits on the aggregate dollar amounts of coverage. For the six years from June 1, 1989 through May 31, 1995, the Company had a similar general and hospital professional liability insurance program. For those years, the per occurrence deductible (with respect to which the Company was self-insured) was $2.5 million for the years ended May 31, 1990 and 1991, $2 million for the years ended May 31, 1992 and 1993 and $1.5 million (relating to the Company's general hospitals sold on September 30, 1993) for the year ended May 31, 1994. For psychiatric hospitals, Plymouth's coverage did not contain a per occurrence deductible for the years ended May 31, 1994 and 1995. In December 1994, the per occurrence deductible for the years ended May 31, 1989 and 1990 was eliminated. Plymouth provides coverage with no per occurrence deductible for hospital system claims which had not been paid prior to December 31, 1994. Plymouth does not underwrite any insurance policies with any parties other than the Company or its affiliates and subsidiaries. The amount of expense relating to Magellan's malpractice insurance based on estimated ultimate losses incurred during the year may materially increase or decrease from year to year depending, among other things, on the nature and number of new reported claims against Magellan and amounts of 11 settlements of previously reported claims. To date, Magellan has not experienced a loss in excess of policy limits. Management believes that its coverage limits are adequate. However, losses in excess of the limits described above or for which insurance is otherwise unavailable could have a material adverse effect upon the Company. MANAGED CARE BUSINESS OVERVIEW Green Spring is the nation's third largest managed behavioral healthcare organization specializing in mental health and substance abuse/dependency services through a network of more than 30,000 providers nationwide, serving approximately 13.6 million people at September 30, 1996. Green Spring was founded in 1989 by a group of clinicians who utilized a clinical model that emphasizes the treatment needs of individuals. Green Spring attempts to match each patient with an appropriate provider, focusing on the quality of care and cost effectiveness from both the clinical and service aspects. Green Spring's services include: ENHANCED UTILIZATION MANAGEMENT, a utilization review process that employs clinical criteria designed to provide each patient with accessible, appropriate and affordable treatment across the entire continuum of care and services; CARE MANAGEMENT, a fully integrated healthcare model that offers utilization review services and provides care to patients through the management of a national network of providers and Green Spring-owned staff model clinics; COMPREHENSIVE ADMINISTRATIVE SERVICES, including member assistance, management reporting, claims processing, clinical management information and provider referral systems that are adaptable to customer circumstances and requirements. Green Spring has several contractual funding arrangements with its customers ranging from full risk capitated contracts to non-risk administrative services only (ASO) arrangements. The primary funding arrangements for risk business include full capitation and partial capitation. Under full capitation arrangements, Green Spring assumes full risk for care under the contract and is paid a monthly fee for each at-risk member regardless of the actual utilization of services by the member. Partial capitation arrangements are similar to full capitation arrangements except that the underwriting gain or loss is split between the customer and Green Spring based on a pre-determined formula. Non-risk funding arrangement include administrative service fees, and incentive-based administrative service fees. ASO funding arrangements call for the payment of a fee to Green Spring for providing varying levels of administrative support and management. Incentive-based administrative service fees are similar to incentive-based ASO arrangements except the ASO fee is subject to adjustment based on the level of performance achieved by Green Spring compared to a mutually agreed target level of performance. At September 30, 1996, Green Spring's risk and non-risk membership was approximately 4.4 million and 9.2 million, respectively. During fiscal 1996, risk and non-risk business comprised approximately 70% and 30%, respectively, of Green Spring revenues. Green Spring's customers include Fortune 1000 companies, Blue Cross/Blue Shield organizations, major HMO's/PPOs, several state employee programs, labor unions and several state Medicaid programs. During fiscal 1996, approximately 70% of Green Spring's revenues were generated from Blue Cross/Blue Shield organizations. 12 GOVERNMENT REGULATION Green Spring operations, in some states, are subject to utilization review, licensure and related state regulatory procedures. Green Spring provides managed behavioral healthcare services to various Blue Cross/Blue Shield plans that operate Medicare and Medicaid health maintenance organizations or other at-risk managed care programs and that participate in the Blue Cross Federal Employees health program. As a contractor to these Blue Cross/Blue Shield plans, Green Spring is indirectly subject to federal and, with respect to the Medicaid program, state monitoring and regulation of performance and financial reporting requirements. However, Green Spring must comply with all reporting and monitoring requirements of the Health Care Financial Administration ("HCFA") communicated to it from the prime contractor, Blue Cross/Blue Shield plans, for the behavioral healthcare portion for the Medicare risk business. The Office of Inspector General of the United States monitors and reviews financial healthcare benefits through several Blue Cross plans. Medicaid business is also subject to the financial reporting and performance monitoring requirements of the applicable state governments as well as HCFA as noted above. The management of Green Spring believes that it is in compliance, in all material respects, with all current state and federal regulatory requirements applicable to the business it conducts. COMPETITION The managed healthcare industry is being affected by various external factors including rising healthcare costs, intense price competition, market consolidation by major managed care companies and proposed healthcare reform legislation. Green Spring faces competition from a number of sources, including other behavioral health managed care companies and traditional full service managed care companies that contract to provide behavioral healthcare benefits. Also, to a lesser extent, competition exists from fully capitated multi-specialty medical groups and individual practice associations that directly contract with managed care companies and other customers to provide and manage all components of healthcare for the members including the behavioral healthcare component. Green Spring believes that the most significant factors in a customer's selection of a managed behavioral healthcare company include price, the extent and depth of provider networks and flexibility and quality of services. The management of Green Spring believes that Green Spring competes effectively with respect to these factors. PUBLIC SECTOR BUSINESS OVERVIEW The Company's public sector business provides specialty home-based behavioral healthcare services ("mentor homes") through its National Mentor, Inc. subsidiary ("Mentor") to over 2,200 clients in 16 states as of September 30, 1996. The public sector business also includes three facilities in Florida for troubled and delinquent adolescents and two contracts for behavioral services in correctional facilities in Ohio and New Jersey. Mentor was founded in 1983 and was acquired by the Company in January 1995. Public Solutions was established as a separate business unit of the Company during fiscal 1996 to meet the growing demand among public sector agencies for privatized behavioral healthcare services. Public Solutions' services include: SPECIALTY HOME-BASED BEHAVIORAL HEALTHCARE SERVICES, which features individualized home and community-based health and human services delivered in highly structured and professionally monitored family environments or "mentor" homes. The mentor homes serve clients with chronic behavioral disorders and 13 disabilities requiring long-term care, including children and adolescents with behavioral problems, individuals with mental retardation or developmental disabilities, and individuals with neurological impairment or other medical and behavioral frailties; TROUBLED AND DELINQUENT ADOLESCENT FACILITY SERVICES, which features contracts with governmental entities for correctional facilities for youth with emotional and substance abuse problems that have led to convictions; CORRECTIONAL FACILITY BEHAVIORAL HEALTHCARE SERVICES, which features the management and provision of behavioral healthcare to the prison population of government-run correctional facilities. COMPETITION AND GOVERNMENT REGULATION Public Solutions competes with various for profit and not-for-profit entities, including, but not limited to, (i) managed behavioral healthcare companies that have started managing human services for governmental agencies, (ii) home health care organizations, (iii) proprietary nursing home companies and (iv) proprietary corrections companies. Public Solutions believes that the most significant factors in a customer's selection of services include price and quality of services and outcomes. The pricing aspect of such services is especially important to attract public sector agencies looking to outsource public services to the private sector as demand for quality services escalates while budgeted dollars for healthcare services are reduced. The management of Public Solutions believes it competes effectively with respect to these factors. The public sector market place is extremely complex and therefore includes some unique issues regarding competition and government regulation. States normally purchase human services through various agencies utilizing a procurement process whereby one to seven program solicitations may be going on at the same time with little procurement coordination between agencies. County or municipal solicitations may also occur simultaneously. This situation may be changing as some states now have central procurement or purchasing divisions with standard proposal kits, and others are developing coordinated purchasing of blended services/funding. Public sector purchasing methods have evolved to include a number of controls designed to maintain an open and competitive bidding process. Bids are typically solicitated through a variety of Request-for-Proposal formats ranging from vague to exhaustive in detail. Bids are generally sought on a price-basis only, although "two-envelope" price quality competitors are becoming more commonplace. Several legal and regulatory barriers are found, depending on the state or governmental entity. For example, some entities have statutes which prevent contracts with for-profit or out-of-state organizations for delivery of services. Others require contractors to meet specific residency or business performance requirements. Many governmental entities have specific statutes affecting the ability of public officials to privatize services. These include requirements to meet prior cost-effectiveness tests, requirements to give first priority to competitive bids submitted by public sector employee unions, or outright bars on privatization of specific services. MENTAL HEALTH PARITY LEGISLATION In October 1996, President Clinton signed a bill submitted by the U.S. Congress that prohibits health plans from setting annual or lifetime caps on mental health coverage ("parity") at levels below those set for general medical/surgical healthcare services. The bill does not require a health plan to offer or provide mental health services and does not affect other terms and conditions of health plans, such as inpatient day or outpatient visit limits or scope of benefits, nor does this bill prohibit health plans from utilizing other forms of cost containment. The definition of mental health services in the bill excludes substance abuse 14 and chemical dependency. The effective date for the parity legislation is January 1, 1998. Other key components of the parity legislation are as follows: 1) Employers with 50 or fewer employees are exempt from the parity legislation. 2) Health plans that incur increased costs of 1% or more as a result of the parity legislation will be exempt. 3) The parity legislation expires on September 30, 2001 unless extended by Congress. The Company views the parity legislation as an acknowledgement by the Federal government of the importance of effective treatment of mental health disorders for society in general. However, at this time, the Company cannot predict or measure the effect the parity legislation will have on each of its businesses. INTELLECTUAL PROPERTY The Company owns certain intellectual property which is important to its provider business. The Company has registered as trademarks both the "CHARTER" name and "800-CHARTER". The Company also owns the "Charter System", which is a system for the operation of businesses specializing in the delivery of behavioral healthcare under the "CHARTER" names and marks. The Charter System includes treatment programs and procedures, quality standards, quality assessment methods, performance improvement and monitoring programs, advertising and marketing assistance, promotional materials, consultation and other matters related to the operation of businesses specializing in the delivery of behavioral healthcare. EMPLOYEES OF THE REGISTRANT At September 30, 1996, the Company had approximately 19,000 full-time and part-time employees. The Company believes it has satisfactory relations with its employees. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AND AGE POSITION WITH THE COMPANY AND PRINCIPAL OF EXECUTIVE OFFICER OCCUPATIONS DURING THE PAST FIVE YEARS --------------------- -------------------------------------------------------------------------- E. Mac Crawford Chairman of the Board of Directors, President and Chief Executive Officer 47 (since 1993); President and Chief Operating Officer (1992-1993) and Director (since 1990); Executive Vice President--Hospital Operations (1990-1992) Craig L. McKnight Executive Vice President and Chief Financial Officer (since October 1995); 45 Executive Vice President--Office of the President and Chairman (March 1995-September 1995); Partner, Coopers & Lybrand L.L.P. (1985-1995) John C. Bartlett, M.D. Executive President--Clinical Strategies (since January 1996); Senior Vice 49 President--Clinical Strategies (April 1995-January 1996); Vice President--Corporate Medical Director, MCC Behavioral Care Inc. (1988--1995) Steve J. Davis Executive Vice President, Administrative Services (Chief Administrative 48 Officer) and General Counsel (since January 1996); Senior Vice President--General Counsel (April 1995-December 1995); Vice President--General Counsel (September 1994-March 1995); Partner, Dow, Lohnes & Albertson (1992-1994); Of Counsel (since September 1994); Partner, Phears & Davis (1990-1992)
15
NAME AND AGE POSITION WITH THE COMPANY AND PRINCIPAL OF EXECUTIVE OFFICER OCCUPATIONS DURING THE PAST FIVE YEARS --------------------- -------------------------------------------------------------------------- John M. DeStefanis Executive Vice President of the Company and President and Chief Operating 46 Officer of Charter Behavioral Health Systems, Inc. (since January 1996); President and Chief Operating Officer, Quantum Health Resources, Inc. (1994-1996); President and Chief Operating Officer, Norrell Healthcare Corporation (1992-1994); Senior Vice President, Caremark International, Inc. (1991-1992) Henry T. Harbin M.D. Executive Vice President of the Company (since December 1995); President 50 and Chief Executive Officer of Green Spring Health Services, Inc. (since 1994); Executive Vice President and Chief Clinical Officer of Green Spring (1993-1994); Consultant to Green Spring (1989-1992) Danna Mauch, Ph.D. Executive Vice President of the Company and President and Chief Operating 46 Officer of Magellan Public Solutions, Inc. (since May 1996); President, Integrated Health Strategies, Inc. (1990-April 1996) Richard M. Mastaler Executive Vice President--Business Development (since September 1996); 50 President, Unilab Southern California Clinical Laboratory (1994-1996); President and Chief Executive Officer, Qualmed Health and Life Insurance Company (1992-1994); President and Chief Executive Officer, Preferred Health Network (1987-1994)
Coopers & Lybrand L.L.P is an international accounting firm that provides accounting and auditing services, tax services and consulting services. As an audit partner at Coopers & Lybrand L.L.P., Mr. McKnight had responsibility for a wide range of hospital and managed care engagements, as well as assisting clients with formulating financing options, financial restructuring and the purchase/sale of health plans and facilities. MCC Behavioral Care, Inc. is a managed mental health and substance abuse provider. As Corporate Medical Director, Dr. Bartlett coordinated and managed the professional and clinical activities of the organization, including quality management, risk management and outcomes evaluation. Dow, Lohnes & Albertson is a law firm with offices in Washington, D.C. and Atlanta, Georgia. As a partner, Mr. Davis performed legal services for clients relating to commercial litigation, health care and general corporate matters, including representation of the Company. Following his employment by the Company, Mr. Davis has continued to provide consulting services to the firm on non-Company matters pursuant to an "Of Counsel" arrangement. Phears & Davis was a law firm in Norcross, Georgia, in which Mr. Davis was a Senior Partner. Quantum Health Resources, Inc. is a provider of therapy and support services to individuals with chronic health disorders. Norrell Healthcare Corporation is a provider of healthcare and supplemental staffing services. Caremark International, Inc. is a provider of various healthcare-related services including home healthcare and intervenous therapy. As a consultant to Green Spring, Dr. Harbin provided management services related to precertification and concurrent/retrospective review for Green Spring enrollees considered for or admitted for psychiatric or substance abuse treatment. Integrated Health Strategies, Inc. ("IHS") was a consulting firm for health and human services organizations. As president of IHS, Dr. Mauch assisted health and human services executives, boards of directors and clinical leaders with strategic planning, policy analysis and program development. Unilab Southern California Clinical Laboratory is California's largest clinical laboratory. Qualmed and Preferred Health Network are both managed healthcare companies. 16 INTERNATIONAL OPERATIONS The Company owns and operates two psychiatric hospitals in London, England (a 45-bed hospital and a 78-bed hospital) and a 69-bed psychiatric hospital in Nyon, Switzerland. The Company's international hospital operations are not material to the Company's overall operations. The Company's international operations also include the Bermuda insurance company that provides the coverages described under "Liability Insurance." ITEM 2. PROPERTIES PROVIDER BUSINESS The following table provides information relating to the 91 psychiatric hospitals and 4 residential psychiatric treatment centers operated or managed by the Company as of September 30, 1996.
STATE/COUNTRY NUMBER OF HOSPITALS NUMBER OF LICENSED BEDS - ------------------------------------------------ ----------------------- ------------------------- Alabama......................................... 2 169 Alaska.......................................... 2 108 Arizona......................................... 2 170 Arkansas........................................ 2 125 California...................................... 8 649 Colorado........................................ 1 72 Delaware........................................ 1 72 England......................................... 2 123 Florida......................................... 7 638 Georgia......................................... 9 902 Illinois........................................ 1 100 Indiana......................................... 8 577 Kansas.......................................... 2 160 Kentucky........................................ 3 256 Louisiana....................................... 3 259 Maryland........................................ 3 250 Massachusetts................................... 2 215 Minnesota....................................... 1 40 Mississippi..................................... 1 111 Missouri........................................ 1 96 Nevada.......................................... 1 84 New Hampshire................................... 1 100 New Jersey...................................... 1 150 New Mexico...................................... 2 170 North Carolina.................................. 6 603 Ohio............................................ 1 38 Pennsylvania.................................... 2 265 South Carolina.................................. 3 248 South Dakota.................................... 1 60 Switzerland..................................... 1 69 Tennessee....................................... 1 204 Texas........................................... 8 662 Utah............................................ 1 196 Virginia........................................ 3 362 Wisconsin....................................... 2 160 -- ----- Total......................................... 95 8,463 -- -- ----- -----
17 All of the Company's hospitals located in the United States have been accredited by the Joint Commission. The Joint Commission is a national commission which establishes standards relating to the physical plant, administration, quality of patient care, governing body and medical staffs of hospitals. The Company operates 10 leased hospitals, including one 150-bed general hospital not listed above, which is managed by an unaffiliated third party. The leases for such hospitals have terms expiring between 1997 and 2069. The leases for two hospitals contain options to purchase these hospitals for nominal consideration at the end of their respective lease terms. Fifty-nine of the Company's hospitals previously listed are subject to mortgages at September 30, 1996, which were subsequently released in October 1996 pursuant to the terms of the New Revolving Credit Agreement. The Company owns 15 medical office buildings and leases an additional 9 such buildings. Five of the Company's medical office buildings are subject to mortgages. The Company leases office space for its outpatient centers. The leases generally have terms of less than five years. In addition, the Company leases to third parties, with options to purchase by the lessees, three facilities which it previously operated prior to fiscal 1991. The Company is also attempting to sell or lease 16 other previously operated hospitals and related medical office buildings and certain unimproved real estate. The Company's corporate headquarters in Atlanta, Georgia also serves as headquarters for the provider business with a lease term expiring in 1999. MANAGED CARE BUSINESS Green Spring leases all of its 50 operating facilities with terms expiring between 1996 and 2009. Green Spring's headquarters facilities are leased and are located in Columbia, Maryland with lease terms expiring between 1998 and 2001. PUBLIC SECTOR BUSINESS Public Solutions owns three juvenile facilities in Florida. The remaining 58 operating facilities are leased with terms expiring between 1997 and 2001. Public Solutions' headquarters is leased and is located in Boston, Massachusetts with a lease term expiring in 2002. ITEM 3. LEGAL PROCEEDINGS Certain of the company's subsidiaries are subject to or parties to claims, civil suits and governmental investigations and inquiries relating to their operations and certain alleged business practices. In the opinion of management, based on consultation with counsel, resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 18 PART II ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company has one class of Common Stock, which was listed for trading on the American Stock Exchange through December 30, 1996 (ticker symbol "MGL"), and on the New York Stock Exchange, effective December 31, 1996. As of November 25, 1996, there were 11,186 holders of record of the Company's $0.25 par value Common Stock. The following table sets forth the high and low sales prices of the Company's Common Stock from October 1, 1994 through the fiscal year ended September 30, 1996 as reported by the American Stock Exchange:
COMMON STOCK SALES PRICES -------------------- CALENDAR YEAR HIGH LOW --------------------------- --------- --------- 1994 Fourth Quarter........................................................... $ 28 1/2 19 1995 First Quarter............................................................ $ 21 1/4 $ 13 7/8 Second Quarter........................................................... 19 5/8 15 5/8 Third Quarter............................................................ 23 1/4 16 1/4 Fourth Quarter........................................................... 24 1/4 17 3/8 1996 First Quarter............................................................ $ 25 $ 21 3/8 Second Quarter........................................................... 24 7/8 21 Third Quarter............................................................ 21 5/8 14 3/4
The Company has not declared any cash dividends during fiscal 1995 or 1996. As of November 30, 1996, the Company was prohibited from paying dividends on its Common Stock under the terms of its New Revolving Credit Agreement. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial information of the Company for each of the five years in the period ended September 30, 1996. The information prior to August 1992 is not comparable because of the consummation of the Company's Restructuring and the implementation of fresh start accounting in fiscal 1992, which included the revaluation of the Company's assets and liabilities and resulted in, among other things, significant reductions in long-term debt and interest expense and elimination of preferred stock and preferred stock dividend requirements. In 1993, the Company restated its consolidated financial statements to reflect the sale of certain subsidiaries as discontinued operations. The Summary of Operations and Balance Sheet Data for the five years ended September 30, 1996, presented below, have been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements and the related notes thereto. The following financial information should be read in conjunction with "Item 1.--Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company indicated in the Index on page F-1 of this Annual Report on Form 10-K. 19 SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TEN MONTHS TWO MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, JULY 31, SEPTEMBER 30, ------------------------------------------ 1992 1992 1993 1994 1995 1996 ---------- ------------- -------- -------- ---------- ---------- Net revenue................................................. $ 777,855 $142,850 $897,907 $904,646 $1,151,736 $1,345,279 Salaries, supplies and other operating expenses............. 563,600 107,608 640,847 661,436 863,598 1,064,445 Bad debt expense............................................ 50,403 14,804 67,300 70,623 92,022 81,470 Depreciation and amortization............................... 35,126 3,631 26,382 28,354 38,087 48,924 Amortization of reorganization value in excess of amounts allocable to identifiable asset........................... -- 7,167 42,678 31,200 26,000 -- Interest, net............................................... 169,244 12,690 74,156 39,394 55,237 48,017 ESOP expense (credit)....................................... 33,714 4,811 45,874 49,197 73,257 -- Stock option expense (credit)............................... -- (789) 38,416 10,614 (467) 914 Unusual items............................................... -- -- -- 71,287 57,437 37,271 Deferred compensation expense............................... 3,190 -- -- -- -- -- Income (loss) from continuing operations before income taxes, reorganization items and extraordinary item........ (77,422 ) (7,072) (37,746) (57,459) (53,705) 64,238 Provision for (benefit from) income taxes................... 4,259 1,054 1,874 (10,504) 11,082 25,695 Income (loss) from continuing operations before minority interest, reorganization items and extraordinary item..... (81,681 ) (8,126) (39,620) (46,955) (42,963) 38,543 Minority interest........................................... -- -- -- 48 340 6,160 Income (loss) before reorganization items and extraordinary items..................................................... (81,681 ) (8,126) (39,620) (47,003) (42,963) 32,383 Discontinued operations: Income (loss) from discontinued operations.................. 24,211 930 (14,703) -- -- -- Gain on disposal of discontinued operations................. -- -- 10,657 -- -- -- Income (loss) before reorganization items and extraordinary items..................................................... (57,470 ) (7,196) (43,666) (47,003) (42,963) 32,383 Reorganization Items: Professional fees and other expenses........................ (8,156 ) -- -- -- -- -- Adjust accounts to fair value............................... 83,004 -- -- -- -- -- Extraordinary item--gain (loss) on early extinguishment or discharge of debt......................................... 730,589 -- (8,561) (12,616) -- -- Net income (loss)........................................... $ 747,967 $ (7,196) $(52,227) $(59,619) $ (42,963) $ 32,383 Earnings (loss) per common share: Loss from continuing operations before extraordinary item... $ (0.33) $ (1.59) $ (1.78) $ (1.54) $ 1.04 Income (loss) from discontinued operations and disposal of discontinued operations................................... 0.04 (0.16) -- -- -- Income (loss) before extraordinary item..................... (0.29) (1.75) (1.78) (1.54) 1.04 Extraordinary loss on early extinguishment of debt.......... -- (0.35) (0.48) -- -- Net income (loss)........................................... --(A ) $ (0.29) $ (2.10) $ (2.26) $ (1.54) $ 1.04
- ------------------------ (A) Earnings per share for ten months ended July 31, 1992 is not presented because it is not meaningful due to the implementation of fresh start accounting and the increase in the number of shares outstanding as a result of the Plan. 20 BALANCE SHEET DATA (IN THOUSANDS)
SEPTEMBER 30, -------------------------------------------------- 1992 1993 1994 1995 1996 --------- -------- -------- -------- --------- Current assets.................................................................. $ 290,742 $231,915 $324,627 $305,575 $ 338,150 Current liabilities............................................................. 296,144 272,598 215,048 214,162 274,316 Working capital................................................................. (5,402) (40,683) 109,579 91,413 63,834 Working capital ratio........................................................... -- -- 1.51:1 1.43:1 1.23:1 Property and equipment, net..................................................... 486,762 444,786 494,345 488,767 495,390 Total assets.................................................................... 1,299,198 838,186 961,480 983,558 1,140,137 Long-term debt and capital lease obligations.................................... 844,839 350,205 533,476 538,770 566,307 Stockholders' equity............................................................ 10,424 57,298 56,221 88,560 121,817
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the sufficiency of the Company's liquidity and sources of capital and the statements under the heading "Outlook". These forward-looking statements are subject to certain risks, uncertainties and other factors which could cause actual results to differ materially from those anticipated, including, without limitation, potential reductions in reimbursement by third-party payers and changes in hospital payer mix, governmental budgetary constraints and healthcare reform, the impact of potential hospital closures, competition in the provider business and the managed care business, and the regulatory environment for the Company's businesses, as well as the other factors discussed in Exhibit 99 hereto, which is hereby incorporated by reference. GREEN SPRING ACQUISITION On December 13, 1995, the Company acquired a 51% ownership interest in Green Spring for approximately $68.9 million in cash, the issuance of 215,458 shares of Magellan Common Stock valued at approximately $4.3 million and the contribution of GPA, a wholly-owned subsidiary of the Company, which became a wholly-owned subsidiary of Green Spring. On December 20, 1995, the Company acquired an additional 10% ownership interest in Green Spring for approximately $16.7 million in cash as a result of an exercise by a minority stockholder of its Exchange Option for a portion of the stockholder's interest in Green Spring. The Company has a 61% ownership interest in Green Spring. Green Spring provides managed behavioral healthcare services, which includes utilization management, care management and employee assistance programs through a 50-state provider network covering approximately 13.6 million people nationwide. The Company has accounted for the acquisition of Green Spring using the purchase method of accounting, which resulted in additional intangible assets of approximately $113 million. The minority stockholders of Green Spring consist of four Blues organizations that are key customers of Green Spring. In addition, two other Blues organizations that formerly owned a portion of Green Spring have continued as customers of Green Spring. As of September 30, 1996, the minority stockholders of Green Spring have the Exchange Option, under certain circumstances, to exchange their ownership interest in Green Spring for 2,831,739 shares of the Company's Common Stock or $65.1 million in subordinated notes. The Company may elect to pay cash in lieu of issuing the subordinated notes. The Exchange Option expires December 13, 1998. OVERVIEW For the fiscal years ended September 30, 1994, 1995 and 1996, the Company's provider business derived approximately 14%, 17% and 21%, respectively, of its gross patient revenue from managed care 21 payors (primarily HMO's and PPO's); 35%, 30% and 25%, respectively, from other private payor sources (primarily Blue Cross and commercial insurance); and 51%, 53% and 54%, respectively, from governmental payers (primarily Medicare, Medicaid and CHAMPUS). The Company believes that its provider revenue from private payers, as a percentage of total gross patient revenue, has declined because of a shift by purchasers of health care coverage to managed care plans that generally authorize shorter lengths of stay than traditional insurance plans and authorize more outpatient treatment plans. Services to Medicare and Medicaid patients have increased due to increased recognition and treatment of behavioral illnesses of the elderly and disabled and, in some states, improved coverage of behavioral services in psychiatric hospitals for Medicaid beneficiaries. These shifts in the Company's payer mix and a shift in program mix to residential treatment settings have resulted in lower net revenue per equivalent patient day. The psychiatric hospital industry has been adversely affected by the trends described under "Item 1. Provider Business--Industry Trends." The Company's operating margins have declined to 14.8% in fiscal 1996 from 17.0% and 19.1% in fiscal 1995 and 1994, respectively. These declines are primarily attributable to the adverse business trends described above and the increasing significance of the Company's managed care business and public sector business in fiscal 1995 and 1996, which have historically had lower operating margins than the provider business. See Note 13 to the Consolidated Financial Statements. Operating income (net revenue less salaries, supplies and other operating expenses and bad debt expenses) was $199.4 million for fiscal 1996, compared with $196.1 million and $172.6 million in fiscal 1995 and 1994, respectively. The Company expects a reduction in operating margins as a percentage of net revenue in future periods due to continued pricing pressure in the provider business and the anticipated growth of its managed care and public sector businesses. The Company has broadened the scope of services it provides by offering alternatives to traditional inpatient treatment settings, such as partial hospitalization, intensive outpatient and residential treatment programs, the utilization of mentor homes and by entering the behavioral managed care business through the acquisition of Green Spring in December 1995. The Company's ability to increase the rates it charges in its provider business to offset cost increases is limited because the Company derives a significant portion of its revenues from patients covered by governmental and managed care programs. With respect to governmental programs, the amount the Company is paid for its provider business services is established by law and regulation. With respect to managed care programs, the amount is established by the managed care contracts. Although inflation has not been a significant factor in the Company's results of operations in recent years, a resurgence of inflation could adversely affect the Company's results of operations because of such limitations on the Company's ability to increase its rates. It is unlikely that federal and state governments will increase reimbursement rates under their programs in amounts sufficient to offset future price increases that result from general inflationary pressures. The Company's provider business is seasonal in nature, with a reduced demand for certain services generally occurring during the first fiscal quarter around major holidays such as Thanksgiving and Christmas and during the summer months comprising the fourth fiscal quarter. 22 A summary of the Company's psychiatric hospitals operated or managed during each fiscal year is as follows:
1994 1995 1996 ---- ---- ---- Beginning of the year........................................................... 74 101 102 Consolidated/closed/sold........................................................ -- (15) (9) Acquisitions and joint ventures (1)............................................. 27 16 2 ---- ---- ---- End of the year................................................................. 101 102 95 ---- ---- ---- ---- ---- ----
- ------------------------ (1) Includes Northstar Hospital in Anchorage, Alaska that is managed pursuant to an August 1996 joint venture agreement. The Company leases one general hospital, which is managed by an unrelated third party. The lease and management agreement expire in January 1997. During fiscal 1992, the Company filed a voluntary petition for relief pursuant to Chapter 11 of the U.S. Bankruptcy Code. The prepackaged plan of reorganization effected a restructuring of the Company's debt and equity capitalization. The Restructuring, which became effective on July 21, 1992, resulted in a reduction of approximately $700 million principal amount of long-term debt and the elimination of redeemable preferred stock having an aggregate liquidation preference of $233 million. The Company accounted for the Restructuring by using the principles of fresh start accounting. Accordingly, the Company's total assets were recorded at their assumed reorganization value, with the reorganization value allocated to identified tangible assets on the basis of their estimated fair value at July 31, 1992. The excess of the reorganization value over the value of identifiable assets is reported as "reorganization value in excess of amounts allocable to identifiable assets." The following table summarizes, for the periods indicated, changes in selected operating indicators.
PERCENTAGE OF NET REVENUE ---------------------- 1994 1995 1996 ------ ------ ------ Net revenue..................................................................... 100.0% 100.0% 100.0% ------ ------ ------ Salaries, supplies and other operating expenses................................. 73.1 75.0 79.1 Bad debt expenses............................................................... 7.8 8.0 6.1 ------ ------ ------ Total expenses.................................................................. 80.9 83.0 85.2 ------ ------ ------ Operating margin................................................................ 19.1 17.0 14.8 ------ ------ ------ ------ ------ ------
- ------------------------ (1) Hospitals operated or managed on September 30th. 23 PSYCHIATRIC HOSPITAL RESULTS Following are financial and statistical results from operations of hospitals which are included in the Company's consolidated financial statements:
SELECTED PSYCHIATRIC HOSPITAL OPERATING DATA FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------------------------ 1992 1993 1994 1995 1996 --------- --------- --------- ---------- --------- Number of Psychiatric Hospitals (1)............................... 79 74 101 102 95 Bed Capacity: Licensed Beds................................................. 7,228 6,902 8,908 8,939 8,463 Average Licensed Beds......................................... 7,288 7,145 7,468 9,368 8,805 Net Revenue (in thousands) (2).................................... $ 875,776 $ 853,792 $ 850,575 $1,042,360 $ 988,997 Total Patient Days (3)............................................ 1,430,815 1,373,835 1,383,388 1,758,079 1,753,011 Total Equivalent Patient Days (4)................................. 1,508,716 1,481,221 1,527,855 1,957,509 1,946,525 Net Revenue/Equivalent Patient Day (2)(4)......................... $ 580 $ 576 $ 557 $ 532 $ 508 Admissions........................................................ 81,311 86,794 102,802 132,165 140,546 Average Length of Stay (Days)..................................... 17.8 15.8 13.6 12.9 12.4 Private Pay and Other Sources/ Gross Revenue (5).................. 65% 56% 49% 47% 46% Government Programs/Gross Revenue (5)(6).......................... 35% 44% 51% 53% 54%
- ------------------------ (1) Hospitals operated or managed on September 30th. (2) Includes inpatient and outpatient revenue. (3) Provision of care to one patient for one day. (4) Represents inpatient days adjusted to reflect outpatient utilization, computed by dividing patient charges by inpatient charges per day. (5) Gross revenue is revenue before deducting contractual allowances and discounts from established billing rates. Gross Revenue is not separately identified in the Company's Consolidated Statements of Operations; instead, Net Revenue in the Consolidated Statements of Operations reflects gross revenue after deductions for contractual allowances and discounts from established billing rates. (6) Government programs include Medicare, Medicaid and the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS"), which provides payment for medical services to military dependents and retired military personnel. Note: Includes Northstar Hospital in Anchorage, Alaska that is managed pursuant to a joint venture agreement. FISCAL 1995 COMPARED TO FISCAL 1996. Patient days at the Company's hospitals decreased 0.3% in fiscal 1996 compared to fiscal 1995. The decrease resulted primarily from the closure of hospitals during fiscal 1995 and 1996 offset by increases in patient days resulting from (i) admission growth at same store hospitals and (ii) hospital acquisitions and joint ventures during fiscal 1995 and 1996. Admissions at the Company's hospitals increased 6.3% in fiscal 1996 compared to fiscal 1995. The increase resulted from continued admissions growth at the Company's same store hospitals and admissions attributable to hospital acquisitions and joint ventures in fiscal 1995 and 1996 offset by reductions resulting from hospitals closed in fiscal 1995 and 1996. 24 The Company's net revenue for fiscal 1996 increased 16.8% compared to fiscal 1995. The increase resulted primarily from acquisitions less (i) the effect of hospitals closed during fiscal 1995 and 1996 and (ii) the decrease in revenue per equivalent patient day in fiscal 1996. Mentor, which was acquired in January 1995, had revenue of $69.8 million during fiscal 1996 compared to $44.8 million for fiscal 1995. Green Spring (excluding GPA), which was acquired on December 13, 1995, had revenues of approximately $215.0 million . Net revenue for fiscal 1995 and 1996 included $35.6 million and $28.3 million , respectively, for the normal settlement and adjustments of reimbursement issues related to earlier fiscal periods ("reimbursement issues"). Net revenue per equivalent patient day at the Company's psychiatric hospitals decreased in 1996 by 4.5% compared to fiscal 1995. The decreases were primarily due to (i) continued shift in payer mix from private payer sources to managed care payers and governmental payers, (ii) pricing pressure from certain payers, primarily related to the denial of claims payable to the hospitals, (iii) lower settlements of reimbursement issues, (iv) shifts in program mix to residential treatment settings from acute care settings and (v) the elimination of ESOP expense in fiscal 1996, which resulted in lower Medicare reimbursement levels. The Company's salaries, supplies and other operating expenses increased 23.3% in fiscal 1996 compared to fiscal 1995. The increase resulted primarily from acquisitions less (i) the effect of hospitals closed in fiscal 1995 and 1996 and (ii) adjustments, as a result of updated actuarial estimates to malpractice claim reserves, which resulted in a reduction of expenses of approximately $15.3 million during 1996. Expenses incurred by Mentor increased to $59.7 million during fiscal 1996 compared to $38.1 million for fiscal 1995. Green Spring expenses (excluding GPA) were approximately $188.2 million during fiscal 1996. The Company's bad debt expense decreased 11.5% during fiscal 1996 compared to fiscal 1995. The decrease was primarily due to (i) the shift in the provider business to managed care payers, which reduces the Company's credit risk associated with individual patients and (ii) the number of reduced days of net revenue in its hospital receivables at September 30, 1996. Bad debt expense for Mentor and Green Spring was less than 1% of net revenue for their respective businesses in fiscal 1996. Depreciation and amortization increased 28.5% during fiscal 1996 compared to fiscal 1995. The increase resulted primarily from depreciation and amortization related to the Green Spring Acquisition. Reorganization value in excess of amounts allocable to identifiable assets ("Reorganization Value") and ESOP expense were not recorded in fiscal 1996 as a result of the completion of the amortization of Reorganization Value in fiscal 1995 and the Company's commitment to allocate all existing shares held by the ESOP to the participants as of September 30, 1995. Interest expense, net, decreased 13.1% during fiscal 1996 compared to fiscal 1995. The decrease resulted primarily from approximately $5.0 million of interest income recorded during fiscal 1996 related to income tax refunds due from the State of California for the Company's income tax returns for fiscal 1982 through 1989. Stock option expense for fiscal 1996 increased $1.4 million from the previous year due to fluctuations in the market price of the Company's Common Stock. During fiscal 1996, the Company recorded unusual items of $37.3 million. Included in the unusual charges was the resolution of a billing dispute in August 1996 between the Company and a group of insurance carriers that arose in fiscal 1996 related to matters originating in the 1980's. As part of the settlement of these claims, certain related payer matters and associated legal fees, the Company recorded a charge of approximately $30.0 million. The Company will pay the insurance settlement in twelve installments over a three-year period. The Company and the insurance carriers have agreed that the dispute and settlement will not negatively impact any present or pending business relationships nor will it prevent the parties from negotiating in good faith concerning additional business opportunities available to, and future relationships between, the parties. 25 During fiscal 1996, the Company consolidated, closed or sold nine psychiatric facilities. The Company recorded charges of approximately $4.1 million during fiscal 1996 related to the closure of psychiatric hospitals. The Company also recorded a charge of approximately $1.2 million related to impairment losses and $2.0 million related to severance costs for personnel reductions. See Note 4 to the Company's Consolidated Financial Statements for further information regarding unusual items. The Company's effective tax rate was 40.0% during fiscal 1996. The change in the effective tax rate from the prior year periods is primarily attributable to (i) the elimination of non-deductible amortization of reorganization value in excess of amounts allocable to identifiable assets in fiscal 1996 and (ii) the reduction in the Company's effective tax rate as a result of the favorable resolution of the Company's California income tax returns for fiscal 1982 through 1989 offset by the increase in non-deductible intangible amortization in the fiscal 1996 periods as a result of the Mentor and Green Spring acquisitions. As of September 30, 1996, the Company had estimated tax net operating loss (NOL) carryforwards of approximately $250 million available to reduce future federal taxable income. These NOL carryforwards expire in 2006 through 2010 and are subject to examination by the Internal Revenue Service. The Internal Revenue Service is currently examining the Company's income tax returns for fiscal 1989 through 1992. Adjustments arising from such examination could reduce or eliminate the NOL carryforwards. In management's opinion, adequate provisions have been made for any adjustments which may result from such examinations. Minority interest increased $5.8 million during fiscal 1996 compared to fiscal 1995. The increase is primarily due to the Company acquiring a controlling interest in Green Spring in December 1995 and obtaining a controlling interest in other businesses during fiscal 1995 and 1996. OUTLOOK Management continually assesses events and changes in circumstances that could effect its business strategy and the viability of its provider facilities. During fiscal 1995, the Company consolidated, closed or sold 15 psychiatric hospitals. During fiscal 1996, the Company consolidated, closed or sold nine psychiatric hospitals. See Note 4 of the Company's Consolidated Financial Statements for further information regarding facility closures. The Company plans to pursue acquisitions in its provider segment during fiscal 1997 in markets where it does not currently have a presence and in markets where it has existing hospital operations. Management expects to consolidate services in selected markets as a result of acquisitions or overcapacity and to close or sell additional facilities in future periods depending on market conditions and evolving business strategies. If the Company closes additional psychiatric hospitals in future periods, it could result in additional charges to income for the costs necessary to exit the hospital operations. During fiscal 1995 and fiscal 1996, the Company recorded impairment losses on property and equipment and intangible assets of approximately $27.0 million and $1.2 million, respectively. Such impairment losses resulted from changes in the manner that certain of the Company's assets will be used in future periods and from historical operating losses at certain of the Company's operating facilities combined with projected future operating losses. The affected businesses that were operating as of September 30, 1996 had operating income of less than $100,000 (net revenue less salaries, supplies and other operating expenses and bad debt expense) in aggregate during fiscal 1996, excluding the normal settlement of reimbursement issues. When events or changes in circumstances are present that indicate the carrying amount of long-lived assets may not be recoverable, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through future cash flows expected from the use of the asset and its eventual disposition. The Company may record additional impairment losses in future periods as circumstances warrant. 26 The Company's hospitals continue to experience a shift in payer mix to managed care payers from other payers, which contributed to a reduction in revenue per equivalent patient day in fiscal 1996 compared to prior periods. Management anticipates continued shifting in its hospitals' payer mix towards managed care payers as a result of changes in the healthcare marketplace and the synergies created by the Green Spring acquisition. Future shifts in the Company's hospital payer mix to managed care payers could result in lower revenue per equivalent patient day in future periods for the Company's hospital operations. In addition, the Company's hospitals have experienced pricing pressure related to an increasing rate of claim denials by third party payers, which contributed to a reduction in revenue per equivalent day compared to prior periods. Management expects the pricing pressure to continue into fiscal 1997, which could result in lower revenue per equivalent patient day in future periods. Management intends to vigorously contest third party denials that relate to valid pre-certified medical procedures and review or renegotiate contractual relationships with certain third party payers. During fiscal 1994, 1995 and 1996, the Company recorded revenue of $32.1 million, $35.6 million and $28.3 million, respectively, for settlements and adjustments related to reimbursement issues. The settlements in fiscal 1994, 1995 and 1996 related primarily to certain reimbursable costs associated with the Company's financial reorganization in fiscal 1992 and costs related to the early extinguishment of long-term debt in fiscal 1994. Management anticipates that revenue related to such settlements will decline in fiscal 1997, and that the decline will be comparable to the reduction experienced in fiscal 1996. During fiscal 1996, the Company recorded reductions of expenses of approximately $15.3 million as a result of updated actuarial estimates related to malpractice claim reserves. While management and its actuaries believe that the present reserve is reasonable, ultimate settlement of losses may vary from the amount recorded and result in additional fluctuations in income. On October 28, 1996, the Company terminated its Revolving Credit Agreement. The Company will record an extraordinary loss from the early extinguishment of debt of approximately $3.0 million, net of tax, in the first quarter of fiscal 1997 to write off deferred financing costs related to the Revolving Credit Agreement. FISCAL 1994 COMPARED TO FISCAL 1995. Patient days at the Company's hospitals increased 27.1% in fiscal 1995. The increase resulted primarily from the Acquired Hospitals. Total admissions increased 28.6% in fiscal 1995 as compared to fiscal 1994. The increase resulted primarily from the Acquired Hospitals. The Company's net revenue increased 27.3% from $904.6 million in fiscal 1994 to $1.15 billion in fiscal 1995. The increase resulted primarily from acquisitions. Net revenue for fiscal 1995 included $35.6 million related to reimbursement issues, compared to $32.1 million in fiscal 1994. Net revenue at the Company's non-psychiatric hospital operations increased $59.1 million, including $56.5 million provided by companies acquired or developed in the Company's expansion of services pursuant to its business strategy. The Company derived net revenue in fiscal 1995 of $249.2 million from the Acquired Hospitals compared to $52.1 million in fiscal 1994. Net revenue per equivalent patient day decreased 4.5% to $532 in fiscal 1995 from $557 in fiscal 1994. This decrease resulted primarily from lower net revenue per equivalent patient day for the Acquired Hospitals compared to the Company's other hospitals and a continued shift in payor mix from private payer sources to managed care payors and governmental payors. The Company's salaries, supplies and other operating expenses increased 30.6% in fiscal 1995 compared to fiscal 1994, due primarily to expenses incurred by the Acquired Hospitals of $194.1 million in fiscal 1995 compared to $40.2 million in fiscal 1994. The same store psychiatric hospitals of the Company decreased their salaries, supplies and other expenses primarily by reducing advertising expenses, purchased services, salaries and benefits and medical professional fees. The Company's bad debt expense increased 30.3% in fiscal 1995 compared to fiscal 1994. The increase resulted primarily from additional bad debt expense of $12.9 million during fiscal 1995 at the Acquired Hospitals and increased bad debt expense at the Company's other hospitals. 27 Depreciation and amortization increased 34.3% in fiscal 1995 compared to fiscal 1994. The increase resulted primarily from the depreciation related to the Acquired Hospitals and other acquisitions and the amortization of the related covenant not to compete and goodwill. Reorganization value in excess of amounts allocable to identifiable assets (the "Excess Reorganization Value") was amortized over the three-year period ended July 31, 1995. The related amortization expense decreased $5.2 million in fiscal 1995 as compared to fiscal 1994 due to the completion of the amortization period in fiscal 1995. Net interest expense for fiscal 1995 increased 40.2% from the previous fiscal year due to the issuance of the Notes and to borrowings under the Revolving Credit Agreement for acquisitions. ESOP expense for fiscal 1995 increased 49.5% to $73.5 million from $49.2 million for fiscal 1994. The increase resulted primarily from an increase in shares allocated to the ESOP participants. Stock option expense for fiscal 1995 decreased $11.1 million from the previous year due to a charge during the first quarter of fiscal 1994 of $3.9 million related to the manner of exercise of certain options held by a former employee and director (see Note 7 of the Company's Consolidated Financial Statements) and changes in the market price of the Company's Common Stock. During fiscal 1995, the Company recorded unusual items of $57.4 million. Included in the unusual charges was the resolution in March 1995 of disputes between the Company and a group of insurance carriers that arose in fiscal 1995 related to claims paid predominantly in the 1980's. As part of the resolution, the Company agreed to pay the insurance carriers approximately $29.8 million in five installments over a three-year period. The Company and the insurance carriers will continue to do business at the same or similar general levels. Furthermore, the parties will seek additional business opportunities that will serve to enhance their present relationships. During fiscal 1995, the Company consolidated, closed or sold 15 psychiatric facilities. The Company recorded a charge of approximately $3.6 million in the fourth quarter of fiscal 1995 related to the five psychiatric hospitals closed in the fourth quarter. The Company also recorded a charge of approximately $27.0 million in fiscal 1995 related to the adoption and implementation of Statement of Financial Accounting Standards No. 121. See "Recent Accounting Pronouncements" on page 30 for further detail. The Company also recorded an unusual item of approximately $3.0 million in fiscal 1995 for the gain on the sale of three psychiatric hospitals. During fiscal 1994, the Company recorded unusual items of approximately $71.3 million. Included in the unusual charges was the resolution in November 1994 between the Company and a group of insurance carriers of disputes that arose in the fourth quarter related to claims paid predominantly in the 1980's. As part of the resolution, the Company agreed to pay the insurance carriers approximately $31 million plus interest, for a total of $37.5 million in four installments over a three-year period. The Company and the insurance carriers will continue to do business at the same or similar general levels. Furthermore, the parties will seek additional business opportunities that will serve to enhance their present relationships. As a result of the Hospital Acquisition, the Company reassessed its business strategy in certain markets. The Company established a plan to consolidate services in selected markets and close or sell certain facilities owned prior to the Hospital Acquisition. Accordingly, the Company recorded a charge of $23.0 million in fiscal 1994 primarily to write down the assets of those facilities to their net realizable value. The Company also recorded as an unusual charge during fiscal 1994 of approximately $4.5 million of expenses related to the relocation of the Company's executive offices. See Note 4 to the Company's Consolidated Financial Statements for further information regarding unusual items. 28 During fiscal 1994, the Company recorded an extraordinary loss of approximately $12.6 million (net of income tax benefit of approximately $8.4 million) related to the defeasance of the Company's 7 1/2% Senior Subordinated Debentures due 2003 and the pay-off of certain subsidiary mortgages. The extraordinary loss includes the difference between the redemption price and the carrying value of the debentures and prepayment penalties related to such subsidiary mortgages. See "Item 1--Business" for additional information on trends that may affect operations. LIQUIDITY AND CAPITAL RESOURCES OPERATIONAL ACTIVITIES. The Company's net cash provided by operating activities was $95.6 million and $101.9 million for fiscal 1995 and fiscal 1996, respectively. The increase in net cash provided by operating activities is primarily attributable to (i) Green Spring operating cash flows since acquisition and (ii) state income tax refunds of $8.6 million from the State of California offset by (a) the increased payments related to the insurance settlements ($22.3 million in fiscal 1995 and $24.6 million in fiscal 1996), and (b) reduced operating cash flows from the provider business. As of September 30, 1995 and 1996, the Company had working capital of $91.4 million and $63.8 million, respectively, including cash and cash equivalents of $105.5 million and $120.9 million, respectively. The decrease in working capital is due primarily to the partial funding ($38.5 million) of treasury stock purchases described below with cash on hand during September 1996. Management believes that the Company will have adequate cash flow from operations in fiscal 1997 to fund its operations, capital expenditures and debt service obligations. INVESTING ACTIVITIES. The Company acquired a 61% ownership interest in Green Spring during fiscal 1996. The consideration paid for Green Spring and related acquisition costs resulted in the use of cash of approximately $87.2 million compared to approximately $62.0 million in acquisition expenditures during fiscal 1995. The Company plans to pursue acquisitions in each of its business segments during fiscal 1997. Management believes that its cash on hand, future cash flows from operations, borrowing capacity under the New Revolving Credit Agreement and its ability to issue debt and equity securities from time to time will provide adequate capital resources to support the Company's anticipated investing strategies. FINANCING ACTIVITIES. The Company borrowed approximately $28.9 million and $104.8 million, respectively, during fiscal 1995 and 1996, primarily to fund the acquisition of 13 hospitals in fiscal 1995 and to (i) fund the Green Spring acquisition and to (ii) partially fund ($35.0 million) treasury stock purchases during September 1996. The Company believes that its businesses will generate sufficient cash flows from operations to meet its future debt service requirements. On January 25, 1996, the Company issued 4,000,000 shares of Common Stock (the "Shares") along with a warrant to purchase an additional 2,000,000 shares of Common Stock (the "Warrant") pursuant to a Stock and Warrant Purchase Agreement. The Warrant, which expires in January, 2000 entitles the holder to purchase such additional shares of Common Stock at a per share price of $26.15, subject to adjustment for certain dilutive events, and provides registration rights for the shares of Common Stock underlying the Warrant. The aggregate purchase price for the Shares and the Warrant was $69,732,000. The Warrant becomes exercisable on January 25, 1997 and expires on January 25, 2000. The Company received proceeds of approximately $68.6 million, net of issuance costs, from the issuance of the Shares and the Warrant. Approximately $68.0 million of the proceeds were used to repay outstanding borrowings under the Revolving Credit Agreement. On September 27, 1996, the Company repurchased approximately 4.0 million shares for approximately $73.5 million, including transaction costs, pursuant to a "Dutch Auction" self-tender offer to its stockholders. On November 1, 1996, the Company announced that its board of directors approved the repurchase of an additional 3.0 million shares of its common stock from time to time subject to the terms of the New Revolving Credit Agreement. The Company expects to use cash on hand, future cash flows from 29 operations and borrowings under its New Revolving Credit Facility to fund any future treasury stock purchases. As of November 30, 1996, the Company had approximately $209 million of availability under the New Revolving Credit Agreement. The Company was in compliance with all debt covenants at September 30, 1996. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121 ("FAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ", which becomes effective for fiscal years beginning after December 15, 1995. FAS 121 establishes standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The Company adopted FAS 121 effective October 1, 1994. The financial statement impact of adopting FAS 121 was not material. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which becomes effective for fiscal years beginning after December 15, 1995. FAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation expense for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 will be required to make pro forma disclosures of net income and earnings per share as if the provisions of FAS 123 had been applied. The Company plans to adopt FAS 123 in fiscal 1997 on a proforma disclosure basis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this item is contained in the Company's Consolidated Financial Statements and financial statement schedule indicated in the Index on Page F-1 of this Annual Report on Form 10-K and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name and certain other information about each director of the Registrant:
NAME, AGE, AND DATE POSITION WITH THE REGISTRANT, FIRST BECAME A PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS DIRECTOR TERM EXPIRING AND OTHER DIRECTORSHIPS - ------------------------ --------------- ------------------------------------------------------------------------- E. Mac Crawford 1997 Chairman of the Board, President and Chief Executive Officer (since 47 1993); President and Chief Operating Officer (1992-1993); Executive Vice April 1990 President--Hospital Operations (1990-1992). Director of First Union National Bank of Georgia and Integrated Health Services, Inc. Raymond H. Kiefer 1997 Retired insurance executive (since 1992); President, Allstate Insurance 69 Company (1989-1992). July 1992 Gerald L. McManis 1997 President of McManis Associates, Inc. (strategy development and 60 management consulting firm for healthcare and healthcare- related February 1994 companies) (since 1965). Director of MMI Companies, Inc. Andre C. Dimitriadis 1998 Chairman and Chief Executive Officer of LTC Properties (a healthcare real 56 estate investment trust) (since 1992); Executive Vice President and Chief July 1992 Financial Officer, Beverly Enterprises, Inc. (nursing homes) (1989-1992). Director of Health Management, Inc. and Assisted Living Concepts, Inc. A.D. Frazier, Jr. 1998 Executive Vice President, Invesco PLC (a registered investment advisor) 52 (since 1996); Senior Executive Vice President and Chief Operating Officer May 1995 for the Atlanta Committee for the Olympic Games (1991-1996). Director of the INVESCO Funds/The EBI Funds/INVESCO Treasurer's Series Trust/The Global Health Sciences Fund. G. Fred DiBona, Jr. 1998 Director, President and Chief Executive Officer of Independence Blue 45 Cross (a health insurance company) (since 1990). Director of Pennsylvania January 1996 Savings Bank and Philadelphia Suburban Water Company. Edwin M. Banks 1999 Securities Analyst, W.R. Huff Asset Management Co., LLC (a registered 34 investment advisor) (1988 - present). Director of American Communications July 1992 Services, Inc. and Del Monte Corporation. Darla D. Moore 1999 Private Investor, Rainwater, Inc. (investments) (since 1994); Managing 42 Director, The Chase Manhattan Bank, N.A. (commercial banking) February 1996 (1982-1994).
The name and certain other information about each executive officer of the Registrant is set forth in Item 1, "Executive Officers of the Registrant." SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of the Exchange Act requires the Registrant's directors, certain officers and persons who own more than 10% percent of the Common 31 Stock to file reports of ownership and changes in ownership with the SEC and furnish copies of such reports to the Registrant. Based solely on a review of the copies of such forms furnished to the Registrant, or written representations that no other reports were required, the Registrant believes that all persons who are required to comply with the Section 16(a) filing requirements with respect to the Common Stock have complied with such filing requirements on a timely basis. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid by the Registrant to its Chief Executive Officer and the four most highly compensated executive officers other than the chief executive officer (the "Named Executive Officers") for the three fiscal years ended September 30, 1996: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM ------------------------------------------------ ---------------------------- NAME AND PRINCIPAL FISCAL OTHER ANNUAL COMPENSATION ALL OTHER POSITIONS YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)(2) COMPENSATION(3) - ------------------------------- ----------- --------- --------- ------------- ------------- ------------- E. Mac Crawford 1996 $ 712,500 $ 153,500 $ -- 300,000 $ 181,936 Chairman of the Board, 1995 600,000 -- 177,236 -- 204,095 President and Chief Executive 1994 600,000 369,000 1,009 90,000 332,135 Officer Craig L. McKnight (4) 1996 361,250 50,000 -- 25,000 73,891 Executive Vice President and 1995 204,167 -- 45,668 100,000 11,218 Chief Financial Officer Steve J. Davis (5) 1996 256,667 50,000 -- 40,000 50,449 Executive Vice President-- 1995 182,083 -- 21,121 -- 91,972 Administrative Services and 1994 15,000 8,484 1,270 17,500 2,828 General Counsel Henry T. Harbin (6) 1996 236,705 167,195 -- 100,000 10,750 Executive Vice President and President and Chief Executive Officer of Green Spring Health Services, Inc. John M. DeStefanis (7) 1996 255,993 50,000 125,399 100,000 45,702 Executive Vice President and President and Chief Operating Officer of Charter Behavioral Health Systems, Inc.
- ------------------------ (1) Other Annual Compensation for fiscal 1996 includes the reimbursement of relocation expenses of $111,219 for Mr. DeStefanis. Other Annual Compensation for fiscal 1995 includes: (a) reimbursement of relocation expenses of $157,558 and $38,289 for Messrs. Crawford and McKnight, respectively and (b) a car allowance of $12,000 for Mr. Davis. (2) Represents the number of stock options granted under the Registrant's 1994 Stock Option Plan and 1996 Stock Option Plan. (3) All Other Compensation for fiscal 1996 includes: (a) contributions to the ESOP of $18,050, $22,795 and $22,795 for Messrs. Crawford, McKnight and Davis, respectively, which represents the Registrant's expense (the fair value of the ESOP shares on the date earned were $699, $883 and $883 for Messrs. Crawford, McKnight and Davis, respectively); (b) contributions to the Registrant's 401(k) 32 Plan of $5,250 for Mr. Crawford and contributions to the Green Spring 401(k) Plan of $10,750 for Mr. Harbin, (c) amounts deposited in trust pursuant to the Executive Benefits Plan of $137,191, $40,150, $23,375 and $38,500 for Messrs. Crawford, McKnight, Davis and DeStefanis, respectively, (d) premiums paid for life and disability insurance of $19,840, $10,260, $3,595 and $6,672 for Messrs. Crawford, McKnight, Davis and DeStefanis, respectively, and (e) term life insurance premiums of $1,605, $686, $684 and $530 for Messrs. Crawford, McKnight, Davis and DeStefanis, respectively. All Other Compensation for fiscal 1995 includes: (a) contributions to the ESOP of $20,408 and $18,560 for Messrs. Crawford and Davis, respectively, which represents the Registrant's expense (the fair value of the ESOP shares on the date earned were $465 and $424 for Messrs. Crawford, and Davis, respectively); (b) contributions to the Registrant's 401(k) Plan of $5,250 for Mr. Crawford, (c) amounts deposited in trust pursuant to the Executive Benefits Plan of $104,877 and $25,897 for Messrs. Crawford and Davis, respectively, (d) premiums paid for life and disability insurance of $72,954 and $4,410 for Messrs. Crawford and Davis, respectively, (e) term life insurance premiums of $606, $208 and $685 for Messrs. Crawford, McKnight and Davis, respectively and (f) amount payable to Mr. Davis of $42,420 pursuant to Mr. Davis achieving performance goals set relating to his employment with the Registrant. (4) Mr. McKnight became an employee of the Registrant effective March 1, 1995. (5) Mr. Davis became an employee of the Registrant effective September 1, 1994. (6) Dr. Harbin became an executive officer of the Registrant effective December 13, 1995. (7) Mr. DeStefanis became an employee of the Registrant effective January 8, 1996. OPTION GRANTS IN FISCAL 1996 The following table sets forth certain information with respect to grants of options to the Named Executive Officers during fiscal 1996, and the potential realizable value of such options on September 30, 1996:
INDIVIDUAL GRANTS ------------------------------------------------------ POTENTIAL REALIZABLE NUMBER OF PERCENTAGE OF VALUE AT ASSUMED SECURITIES TOTAL ANNUAL RATES OF STOCK UNDERLYING OPTIONS PRICE APPRECIATION OPTIONS GRANTED TO EXERCISE FOR OPTION TERM GRANTED EMPLOYEES IN PRICE EXPIRATION -------------------------- NAME (#)(1) FISCAL 1996 PER SHARE DATE 5% 10% - -------------------------------------------- ----------- --------------- ----------- ----------- ------------ ------------ E. Mac Crawford............................. 300,000 19.1% $ 18.25 11/30/05 $ 3,443,198 $ 8,725,740 Craig L. McKnight........................... 25,000 1.6% 18.25 11/30/05 286,933 727,145 Steve J. Davis.............................. 40,000 2.5% 18.25 11/30/05 459,093 1,163,432 Henry T. Harbin............................. 100,000 6.4% 18.875 11/30/05 1,187,039 3,008,189 John M. DeStefanis.......................... 100,000 6.4% 22.50 01/08/06 1,415,013 3,585,91
- ------------------------ (1) Options were granted to Mr. DeStefanis under the 1994 Stock Option Plan which become exercisable over three years at the rate of 33 1/3% of the total number of options per year. Options were granted to Messrs. Crawford, McKnight, Davis and Harbin under the 1996 Stock Option Plan which become exercisable over four years at the rate of 25% of the total number of options per year. 33 AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND OPTION VALUES AT SEPTEMBER 30, 1996 The following table sets forth certain information with respect to options exercised by the Named Executive Officers during fiscal 1996, and the number and value of options held on September 30, 1996:
VALUE OF UNEXERCISED NUMBER OF IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT SHARES VALUE AT SEPTEMBER 30, 1996 SEPTEMBER 30, 1996($)(2) ACQUIRED ON REALIZED -------------------------- --------------------------- NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------------- ------------ ------------ ----------- ------------- ------------ ------------- E. Mac Crawford....................... 100,000 $ 1,926,500 425,440 330,000 $ 5,949,406 $ 750,000 Craig L. McKnight..................... -- -- 33,333 91,667 81,266 225,034 Steve J. Davis........................ -- -- 11,667 45,833 -- 100,000 Henry T. Harbin....................... -- -- -- 100,000 -- 187,500 John M. DeStefanis.................... -- -- -- 100,000 -- --
- ------------------------ (1) Value realized is the difference between the option exercise price and the closing market price of the Common Stock on the date of exercise, multiplied by the number of shares to which the option relates. (2) The closing price for the Common Stock as reported on September 30, 1996 was $20.75. The value of unexercised in-the-money options is the difference of the per share option exercise price and $20.75, multiplied by the number of shares of Common Stock underlying in-the-money options. 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table sets forth certain information as of December 31, 1996 (except as otherwise noted) with respect to any person known by the Registrant to be the beneficial owner of more than 5% of the outstanding Common Stock:
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME AND ADDRESS OWNERSHIP CLASS - ------------------------------------------------------------------------------- ---------------------- ------------- Rainwater-Magellan Holdings, L.P. 6,000,000(1) 19.6% 777 Main Street Suite 2700 Ft. Worth, TX 76102 Nicholas Company, Inc.(2) 2,804,000 9.8% 700 North Water Street Suite 1010 Milwaukee, WI 53202 Wellington Management Company, LLP(3) 2,426,400 8.5% 75 State Street Boston, MA 02109 Lazard Freres & Co., LLC(4) 1,761,000 6.2% 30 Rockefeller Plaza New York, NY 10020 First Pacific Advisors, Inc.(5) 1,592,500 5.6% 11400 West Olympic Blvd. Suite 1200 Los Angeles, CA 90064
- ------------------------ (1) Includes 2,000,000 shares of Common Stock that Rainwater-Magellan Holdings, L.P. ("Rainwater-Magellan") has the right to acquire pursuant to the Rainwater-Magellan Warrant. Under the rules of the SEC, Rainwater, Inc., the general partner of Rainwater-Magellan, and Richard E. Rainwater, the sole owner and sole director of Rainwater, Inc., are also deemed to be beneficial owners of the shares owned by Rainwater-Magellan. Information concerning beneficial ownership of securities by Rainwater-Magellan is based on its Schedule 13D, dated November 26, 1996. Darla D. Moore, a director of the Registrant, is the spouse of Richard E. Rainwater. (2) Information concerning beneficial ownership of securities by Nicholas Company, Inc. is based on its Form 13F, dated September 18, 1996. (3) Information concerning beneficial ownership of securities by Wellington Management Company, LLP is based on its Form 13F, dated November 4, 1996. (4) Information concerning beneficial ownership of securities by Lazard Freres & Co., LLC is based on its Form 13F, dated November 15, 1996. (5) Information concerning beneficial ownership of securities by First Pacific Advisors, Inc. is based on information provided to the Registrant on January 3, 1997. Nicholas Company, Inc. is a registered investment advisor and possesses sole dispositive power over the 2,804,000 shares of Common Stock owned by it. Nicholas Fund, Inc. is a registered investment company managed by Nicholas Company, Inc. and possesses sole voting power over 2,600,000 shares of the 2,804,000 shares owned by Nicholas Company, Inc. Albert O. Nicholas may be deemed to be a beneficial 35 owner of the shares held by Nicholas Company, Inc. under SEC rules because of his control of Nicholas Company, Inc. Mr. Nicholas is the President, a director and majority stockholder of Nicholas Company, Inc. and disclaims beneficial ownership of all securities reported as beneficially owned by Nicholas Company, Inc. Wellington Management Company, LLP is an institutional investment manager and possesses sole dispositive power over 2,393,300 shares of Common Stock and shares dispositive power over 33,100 shares of Common Stock owned by it. Wellington Management Company, LLP possesses sole voting authority over 1,199,000 shares of Common Stock, shared voting power over 33,100 shares of Common Stock and no voting power over 1,194,300 shares of Common Stock. Lazard Freres & Co., LLC is an institutional money manager and possesses sole dispositive power over 1,635,000 shares of the 1,761,000 shares of Common Stock owned by it and possesses sole voting authority over all of the Common Stock owned by it. First Pacific Advisors, Inc. is an institutional money manager and possesses sole dispositive power over all of the shares of Common Stock owned by it and possesses no voting power over such shares. SECURITY OWNERSHIP OF MANAGEMENT. The following table sets forth certain information concerning the beneficial ownership of Common Stock by (i) directors, (ii) the Named Executive Officers and (iii) directors and executive officers as a group, as of December 31, 1996:
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME OWNERSHIP(1)(2) TOTAL OUTSTANDING - ----------------------------------------------------- -------------------- ------------------- E. Mac Crawford...................................... 530,794 1.8% Craig L. McKnight.................................... 72,954 * Steve J. Davis....................................... 21,724 * Henry T. Harbin...................................... 25,000 * John M. DeStefanis................................... 33,333 * Edwin M. Banks(3).................................... 33,250 * G. Fred DiBona, Jr.(4)............................... 895,815 3.0% Andre C. Dimitriadis................................. 32,750 * A.D. Frazier, Jr..................................... 22,250 * Raymond H. Kiefer.................................... 33,750 * Gerald L. McManis.................................... 27,750 * Darla D. Moore(5).................................... 6,006,250 19.6% All directors and executive officers as a group (12 persons)................... 7,735,620(4)(5)(6) 23.9%
- ------------------------ * Less than 1% of total outstanding. (1) Includes 530,440, 72,917, 21,667, 25,000 and 33,333 shares that Messrs. Crawford, McKnight, Davis, Harbin and DeStefanis, respectively, have the right to acquire upon the exercise of options and warrants within 60 days of December 31, 1996. (2) Includes 32,750 shares that each of Messrs. Dimitriadis, Kiefer and Banks have the right to acquire, 27,750 shares that Mr. McManis has the right to acquire, 22,250 shares that Mr. Frazier has the right to acquire and 6,250 shares that Mr. DiBona and Ms. Moore each have the right to acquire within 60 days of December 31, 1996. (3) Does not include shares owned by W.R. Huff Asset Management Co., LLC ("Huff"), of which Mr. Banks disclaims beneficial ownership. Mr. Banks is a Securities Analyst with Huff. 36 (4) Includes 889,565 shares that Independence Blue Cross has the right to acquire pursuant to the Exchange Option. Mr. DiBona is a director and the President and Chief Executive Officer of Independence Blue Cross and disclaims beneficial ownership of all securities attributed to him because of his official positions with Independence Blue Cross. (5) Includes 4,000,000 shares owned by Rainwater-Magellan and 2,000,000 shares that Rainwater-Magellan has the right to acquire pursuant to the Rainwater-Magellan Warrant. Ms. Moore is the spouse of Richard E. Rainwater, the sole stockholder and sole director of Rainwater, Inc., which is the sole general partner of Rainwater-Magellan. (6) Includes 844,107 shares that the directors and executive officers have the right to acquire upon the exercise of options and units, 889,565 shares that Independence Blue Cross has the right to acquire upon exercise of the Exchange Option and 2,000,000 shares that Rainwater-Magellan has the right to acquire upon the exercise of the Rainwater-Magellan Warrant, all of which are exercisable within 60 days of December 31, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Gerald L. McManis, a director of the Registrant, is the President of McManis Associates, Inc. ("MAI"), a healthcare development and management consulting firm. During fiscal 1996, MAI provided consulting services to the Registrant with respect to the development of strategic plans and a review of the Registrant's business processes. The Registrant paid approximately $274,000 in fees for such services during fiscal 1996 and reimbursed MAI approximately $13,000 for expenses. G. Fred DiBona, Jr., a director of the Registrant, is a director and the President and Chief Executive Officer of Independence Blue Cross. As of December 31, 1996, Independence Blue Cross had a 12.25% equity interest in Green Spring. The Registrant acquired a 51%-equity interest in Green Spring on December 13, 1995 for approximately $68.9 million in cash, the issuance of Common Stock valued at approximately $4.3 million and the contribution of GPA, a wholly-owned subsidiary of the Registrant, to Green Spring. The minority stockholders of Green Spring, including Independence Blue Cross, have the option under certain circumstances, to exchange their equity interests in Green Spring for 2,831,739 shares of Common Stock or $65.1 million in subordinated notes. In the event of an exchange, the Registrant may elect to pay cash in lieu of issuing subordinated notes. The Exchange Option expires on December 13, 1998. The consideration paid and terms of the Exchange Option were determined through arm's length negotiations that considered, among other factors, the historical and projected income of Green Spring and the value of GPA. The consideration paid by the Registrant was determined by the Board with the advice of management and the Registrant's investment bankers. On December 20, 1995, the Registrant acquired an additional 10% equity interest in Green Spring for $16.7 million in cash as a result of the exercise of the Exchange Option by a minority stockholder of Green Spring. The Registrant had a 61%-equity interest in Green Spring as of December 31, 1996. On December 13, 1995, as part of the Registrant's initial investment in Green Spring, Independence Blue Cross sold a 4.42% equity interest in Green Spring, in which it had a cost basis of $3.2 million, to the Registrant for $5.4 million in cash. The Exchange Option gives Independence Blue Cross the right, until December 13, 1998, to exchange its remaining equity interest in Green Spring for a maximum of 889,565 shares of Common Stock or $20.5 million in subordinated notes. Independence Blue Cross and its affiliated entities contract with Green Spring for provider network, case management and medical review services pursuant to contractual relationships entered into on July 7, 1994, with terms of up to five years. During fiscal 1996 (since December 13, 1995, the date the Registrant acquired its initial equity interest in Green Spring), Independence Blue Cross and its affiliated entities paid Green Spring approximately $29.2 million. As of September 30, 1996, Independence Blue Cross and its 37 affiliated entities owed Green Spring approximately $9.6 million. Green Spring recorded revenue of approximately $32.8 million from Independence Blue Cross during fiscal 1996. On July 7, 1994, Independence Blue Cross sold a subsidiary to Green Spring in exchange for a $15.0 million promissory note. As of December 31, 1996, $9.0 million remained outstanding under such promissory note and is due and payable in equal installments on July 7, 1997, 1998 and 1999. Darla D. Moore, a director of the Registrant, is the spouse of Richard E. Rainwater. Mr. Rainwater is the sole stockholder and the sole director of Rainwater, Inc., the general partner of Rainwater-Magellan. As of December 31, 1996, Rainwater-Magellan beneficially owned 6,000,000 shares of Common Stock (including the 2,000,000 shares which can be purchased under the Rainwater-Magellan Warrant), which represented in the aggregate 19.6% of the Common Stock. Rainwater-Magellan purchased the Common Stock and the Rainwater-Magellan Warrant on January 25, 1996 in a private transaction (the "Private Placement"). As part of the Private Placement agreements, Rainwater-Magellan has the right to designate a nominee acceptable to the Registrant for election as a director of the Registrant for so long as the Rainwater Group continues to own beneficially a specified minimum number of shares of Common Stock. Rainwater-Magellan proposed Ms. Moore as its nominee for director, and Ms. Moore was elected a director by the Board in February 1996. As part of the Private Placement agreements, the Registrant agreed (i) to pay a transaction fee of $150,000; (ii) to reimburse certain expenses of Rainwater, Inc. in connection with the Private Placement; (iii) to pay Richard E. Rainwater and his affiliates (the "Rainwater Group") an annual monitoring fee of $75,000 commencing on March 31, 1996; and (iv) to reimburse the Rainwater Group for reasonable fees and expenses (up to a maximum of $25,000 annually) incurred in connection with its ownership of the Common Stock and the Rainwater-Magellan Warrant. The Registrant also agreed under the Private Placement agreements to reimburse the Rainwater Group in the future for one additional filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") if an HSR Act filing is required in connection with an exercise of the Rainwater-Magellan Warrant. From the date of the Private Placement through November 30, 1996, the Registrant paid to the Rainwater Group under the Private Placement agreements an aggregate of $306,344, consisting of a transaction fee of $150,000, expense reimbursement in connection with the Private Placement of $86,156, and monitoring fees and expenses of $70,188. Excluded from these amounts are directors' fees and expense reimbursement paid to Ms. Moore in her capacity as a director of the Registrant. 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THE REPORT: 1. FINANCIAL STATEMENTS Information with respect to this item is contained on Pages F-2 to F-36 of this Annual Report on Form 10-K. 2. FINANCIAL STATEMENT SCHEDULE Information with respect to this item is contained on page S-1 of this Annual Report on Form 10-K. 3. EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------------ -------------------------------------------------------------------------------------------------------- 2(a) Asset Sale Agreement (First Facilities), dated March 29, 1994, between National Medical Enterprises, Inc., as Seller, and the Company, as Buyer, which was filed as Exhibit 2(d) to the Company's Amendment No. 1 to Registration Statement on Form S-4 (No. 33-53701) filed July 1, 1994, and is incorporated herein by reference. 2(b) Asset Sale Agreement (Subsequent Facilities), dated March 29, 1994, between National Medical Enterprises, Inc., as Seller, and the Company, as Buyer, which was filed as Exhibit 2(e) to the Company's Amendment No. 1 to Registration Statement on Form S-4 (No. 33-53701) filed July 1, 1994, and is incorporated herein by reference. Exhibit 2(a) and 2(b) do not contain copies of the exhibits and schedules to such agreements. Such agreements describe such exhibits and schedules. The Company agrees to furnish supplementally to the Commission, upon request, a copy of any omitted exhibit or schedule to such agreements. 2(c) Amendment No. 1, dated September 12, 1994, to Asset Sale Agreement (First Facilities), dated March 29, 1994, between National Medical Enterprises, Inc., as Seller and the Company, as Buyer, which was filed as Exhibit 2(c) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. 2(d) Amendment No. 1, dated September 12, 1994, to Asset Sale Agreement (Subsequent Facilities), dated March 29, 1994, between National Medical Enterprises, Inc., as Seller and the Company, as Buyer, which was filed as Exhibit 2(d) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. 2(e) Amendment No. 2, dated September 29, 1994, to Asset Sale Agreement (Subsequent Facilities), dated March 29, 1994, between National Medical Enterprises, Inc., as Seller and the Company, as Buyer, which was filed as Exhibit 2(e) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. 2(f) Amendment No. 3, dated November 15, 1994, to Asset Sale Agreement (Subsequent Facilities), dated March 29, 1994, between National Medical Enterprises, Inc., as Seller and the Company, as Buyer, which was filed as Exhibit 2(f) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference.
39
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------------ -------------------------------------------------------------------------------------------------------- 3(a) Restated Certificate of Incorporation of the Company, as filed in Delaware on October 16, 1992, which was filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended September 30, 1992, and is incorporated herein by reference. 3(b) Bylaws of the Company, as amended, effective May 19, 1995, which was filed as Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended June 30, 1995, and is incorporated herein by reference. 3(c) Certificate of Ownership and Merger merging Magellan Health Services, Inc. (a Delaware corporation) into Charter Medical Corporation (a Delaware corporation), as filed in Delaware on December 21, 1995, which was filed as Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended September 30, 1995, and is incorporated herein by reference. 4(a) Indenture, dated as of May 2, 1994, among the Company, the Guarantors listed therein and Marine Midland Bank, as Trustee, relating to the 11 1/4% Senior Subordinated Notes due April 15, 2004 of the Company, which was filed as Exhibit 4(a) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(b) Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, the financial institutions listed therein, Bankers Trust Company, as Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(e) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(c) Second Amended and Restated Subsidiary Credit Agreement, dated as of May 2, 1994, among certain subsidiaries of the Company, the financial institutions listed therein, Bankers Trust Company, as Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(f) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(d) Second Amended and Restated Company Stock and Notes Pledge Agreement, dated as of May 2, 1994, between the Company and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(g) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(e) Second Amended and Restated Subsidiary Stock and Notes Pledge Agreement, dated as of May 2, 1994, among various subsidiaries of the Company and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(h) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(f) Second Amended and Restated Subsidiary Pledge and Security Agreement, dated as of May 2, 1994, among various subsidiaries of the Company and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(i) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(g) Second Amended and Restated Subsidiary Pledge and Security Agreement (ESOP collateral), dated as of May 2, 1994, between the Company and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(j) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(h) Second Amended and Restated FINCO Pledge and Security Agreement I, dated as of May 2, 1994, between CMFC, Inc. and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(k) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference.
40
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------------ -------------------------------------------------------------------------------------------------------- 4(i) Second Amended and Restated Subsidiary Guaranty, dated as of May 2, 1994, executed by various subsidiaries of the Company, which was filed as Exhibit 4(l) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(j) Second Amended and Restated Company Collateral Accounts Assignment Agreement, dated as of May 2, 1994, between the Company and Bankers Trust Company, as agent, which was filed as Exhibit 4(m) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(k) Company Pledge and Security Agreement, dated as of May 2, 1994, between the Company and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(n) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(l) Second Amended and Restated FINCO Pledge and Security Agreement II, dated as of May 2, 1994, between CMCI, Inc. and Bankers Trust Company, as Collateral Agent, which was filed as Exhibit 4(o) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(m) Second Amended and Restated Company Guaranty, dated as of May 2, 1994, executed by the Company, which was filed as Exhibit 4(p) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(n) Second Amended and Restated Subsidiary Collateral Accounts Assignment Agreement, dated as of May 2, 1994, among various subsidiaries of the Company and Bankers Trust Company, as Agent, which was filed as Exhibit 4(q) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(o) Form of Indenture of Mortgage, Deed to Secure Debt, Deed of Trust, Security Agreement and Assignment of Leases and Rents; Amended Indenture of Mortgage, Deed to Secure Debt, Deed of Trust, Security Agreement and Assignment of Leases and Rents; and Consolidated Agreement, executed as of May 2, 1994, by 71 subsidiaries of the Company and Bankers Trust Company, as Agent, and various trustees as shown on individual subsidiary cover pages attached, which was filed as Exhibit 4(t) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(p) Purchase Agreement, dated April 22, 1994, between the Company and Bear, Stearns & Co. Inc. and BT Securities Corporation, which was filed as Exhibit 4(u) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(q) Exchange and Registration Rights Agreement, dated April 22, 1994 between the Company and Bear, Stearns & Co. Inc. and BT Securities Corporation, which was filed as Exhibit 4(v) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. 4(r) Amendment No. 1, dated as of June 9, 1994, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, the financial institutions listed therein, Bankers Trust Company, as Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(w) to the Company's Amendment No. 1 to Registration Statement on Form S-4 (No. 33-53701) filed July 1, 1994, and is incorporated herein by reference.
41
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------------ -------------------------------------------------------------------------------------------------------- 4(s) Amendment No. 2, dated September 30, 1994, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, the financial institutions listed therein, Bankers Trust Company, as Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(s) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference 4(t) Amendment No. 3, dated as of December 12, 1994, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, the financial institutions listed herein, Bankers Trust Company, as Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended December 31, 1994, and is incorporated herein by reference. 4(u) Amendment No. 4, dated as of January 11, 1995, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, the financial institutions listed therein, Bankers Trust Company, as Agent, and First Union National Bank of North Carolina, as Co-Agent, which was filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended December 31, 1994, and is incorporated herein by reference. 4(v) Amendment No. 5, dated as of March 17, 1995, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank of North Carolina, as Co-Agent, and the lenders listed on Annex I, which was filed as Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 1995, and is incorporated herein by reference. 4(w) Amendment No. 6, dated as of October 17, 1995, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank of North Carolina, as Co-Agent, which was filed as exhibit 4 (a) to the Company's quarterly report on Form 10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference. 4(x) Amendment No. 7, dated as of November 30, 1995, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank of North Carolina, as Co-Agent, which was filed as exhibit 4 (b) to the Company's quarterly report on Form 10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference. 4(y) Amendment No. 8, dated as of January 24, 1996, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank, as Co-Agent, which was filed as exhibit 4 (c) to the Company's quarterly report on Form 10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference. 4(z) Amendment No. 9, dated as of June 30, 1996, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust Company, as agent, First Union National Bank, as Co-Agent, which was filed as exhibit 4 (a) to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1996 and is incorporated herein by reference.
42
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------------ -------------------------------------------------------------------------------------------------------- 4(aa) Amendment No. 10, dated as of July 31, 1996, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union Naitonal Bank as Co-Agent, which was filed as exhibit 4 (b) to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1996 and is incorporated herein by reference. 4(ab) Amendment No. 11, dated as of September 3, 1996, to Second Amended and Restated Credit Agreement, dated as of May 2, 1994, among the Company, Bankers Trust Company, as Agent, First Union National Bank as Co-Agent, which was filed as Exhibit (b) 12 to the Company's Amendment No. 2 to Schedule 13 E-4 dated September 5, 1996 and is incorporated herein by reference. 4(ac) Indenture Supplement No. 1, dated June 3, 1994, among the Company, the Guarantors listed therein and Marine Midland Bank, as Trustee, relating to the 11 1/4% Senior Subordinated Notes due April 15, 2004, together with a schedule identifying substantially similar documents, pursuant to Instruction 2 to Item 601 of Regulation S-K, which was filed as Exhibit 4(t) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. 4(ad) Indenture Supplement No. 3, dated August 30, 1994, among the Company, the Guarantors listed therein and Marine Midland Bank, as Trustee, relating to the 11 1/4% Senior Subordinated Notes due April 15, 2004, which was filed as Exhibit 4(v) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. The Company and the Additional Registrants agree, pursuant to (b)(4)(iii) of Item 601 of Regulation S-K, to furnish to the Commission, upon request, a copy of each agreement relating to long-term debt where the total amount of debt under each such agreement does not exceed 10% of the Registrants' respective total assets on a consolidated basis. 4(ae) Stockholders' Agreement, dated December 13, 1995, among Green Spring Health Services, Inc., Blue Cross and Blue Shield of New Jersey, Inc., Health Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc. and the Company, which was filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995, and is incorporated herein by reference. 4(af) Exchange Agreement, dated December 13, 1995, among Blue Cross and Blue Shield of New Jersey, Inc., Health Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc. and the Company, which was filed as Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995, and is incorporated herein by reference. 4(ag) Stock and Warrant Purchase Agreement, dated December 22, 1995, between the Company and Richard E. Rainwater, which was filed as Exhibit 4(f) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995, and is incorporated herein by reference. 4(ah) Amendment No. 1 to Stock and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Rainwater-Magellan Holdings, L.P., which was filed as Exhibit 4.7 to the Company's Registration Statement on Form S-3 dated February 26, 1996, and is incorporated herein by reference. 4(ai) Credit Agreement, dated as of October 16, 1996, among the Company, the lenders named therein, The Chase Manhattan Bank as Administrative Agent and Collateral Agent and First Union National Bank of North Carolina as Syndication Agent.
43
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------------ -------------------------------------------------------------------------------------------------------- *10(a) Written description of Corporate Annual Incentive Plan for the year ended September 30, 1995, which was filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended September 30, 1995, and is incorporated herein by reference. *10(b) Written description of Corporate Annual Incentive Plan for the year ended September 30, 1996, which was filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995, and is incorporated herein by reference. *10(c) 1989 Non-Qualified Deferred Compensation Plan of the Company, adopted January 1, 1989, as amended, which was filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K dated as of September 30, 1989 and is incorporated herein by reference. *10(d) 1992 Stock Option Plan of the Company, as amended, which was filed as Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. *10(e) Directors' Stock Option Plan of the Company, as amended, which was filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. *10(f) 1994 Stock Option Plan of the Company, as amended, which was filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. *10(g) Directors' Unit Award Plan of the Company, which was filed as Exhibit 10(i) to the Company's Registration Statement on Form S-4 (No. 33-53701) filed May 18, 1994, and is incorporated herein by reference. *10(h) Description of Flexible Benefits Plan, which was filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended September 30, 1994, and is incorporated herein by reference. *10(i) 1996 Stock Option Plan of the Company, which was filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 and is incorporated herein by reference. *10(j) 1996 Directors' Stock Option Plan of the Company, which was filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 and is incorporated herein by reference. *10(k) Employment Agreement, dated February 28, 1995, between the Company and John Cook Barlett, Executive Vice President--Quality Improvement, which was filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended September 30, 1995, an is incorporated herein by reference. *10(l) Employment Agreement, dated March 31, 1995, between the Company and Craig L. McKnight, Executive Vice President and Chief Financial Officer, which was filed as Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended September 30, 1995, an is incorporated herein by reference. *10(m) Employment Agreement, dated October 1, 1995, between the Company and E. Mac Crawford, Chairman of the Board of Directors, President and Chief Executive Officer, which was filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended September 30, 1995, an is incorporated herein by reference.
44
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------------ -------------------------------------------------------------------------------------------------------- *10(n) Employment Agreement, dated March 18, 1993, between Green Spring Health Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green Spring Health Services, Inc., which was filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference. *10(o) Letter Agreement, dated November 9, 1993, between Green Spring Health Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green Spring Health Services, Inc., which was filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference. *10(p) Letter Agreement, dated September 19, 1994 between Green Spring Health Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green Spring Health Services, Inc., which was filed as Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995 and is incorporated herein by reference. *10(q) Employment Agreement dated May 1, 1996, between the Company and Dr. Danna Mauch, President and Chief Operating Officer of Magellan Public Solutions, Inc. and Executive Vice President of the Company, which was filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 and is incorporated herein by reference. *10(r) Employment Agreement dated April 15, 1996, between the Company and John M. DeStefanis, President and Chief Operating Officer of Charter Behavioral Health Systems, Inc. and Executive Vice President of the Company, which was filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 and is incorporated herein by reference. *10(s) Employment Agreement dated May 7, 1996, between the Company and Steve J. Davis, Executive Vice President, Administrative Services and General Counsel, which was filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 and is incorporated herein by reference. *10(t) Employment Agreement dated February 28, 1996, between Green Spring Health Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green Spring Health Services, Inc. *10(u) Compensation Agreement dated September 30, 1996, between Magellan Health Services, Inc. and Henry T. Harbin, M.D., Executive Vice President of the Company and President and Chief Executive Officer of Green Spring Health Services, Inc. *10(v) Written description of the Green Spring Health Services, Inc. Annual Incentive Plan for the period ended September 30, 1996. 10(w) Stock Purchase Agreement, dated November 14, 1995, among Blue Cross and Blue Shield of New Jersey, Inc. Health Care Service Corporation, Independence Blue Cross, Medical Service Association of Pennsylvania, Pierce County Medical Bureau, Inc., Veritus, Inc., Green Spring Health Services, Inc. And the Company, which was filed as Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the Quarterly period ended December 31, 1995, and is incorporated herein by reference.
45
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------------ -------------------------------------------------------------------------------------------------------- 10(x) GPA Stock Exchange Agreement, dated November 14, 1995, between Green Spring Health Services, Inc. and the Company, which was filed as Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the Quarterly period ended December 31, 1995, and is incorporated herein by reference. 21 List of subsidiaries of the Company. 23 Consent of independent public accountants. 27 Financial Data Schedule 99 Safe Harbor for Forward-Looking Statements under Private Securities Litigation Reform Act of 1995: Certain Cautionary Statements.
- ------------------------ * Constitutes a management contract or compensatory plan arrangement. (B) REPORTS ON FORM 8-K: There were no current reports on Form 8-K filed by the Registrant with the Securities and Exchange Commission during the quarter ended September 30, 1996. (C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K: Exhibits required to be filed by the Company pursuant to Item 601 of Regulation S-K are contained in a separate volume. (D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X: Separate financial statements and schedules of Magellan Health Services, Inc. ("Parent Company") have been omitted since the restricted net assets as defined by Rule 4-08(e)(3) of Regulation S-X of the Parent Company's consolidated subsidiaries do not exceed 25% of the consolidated net assets of the Company as of September 30, 1996. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. MAGELLAN HEALTH SERVICES, INC. (Registrant) Date: January 24, 1997 /S/ CRAIG L. MCKNIGHT ------------------------------------------ Craig L. McKnight Executive Vice President and Chief Financial Officer Date: January 24, 1997 /S/ HOWARD A. MCLURE ------------------------------------------ Howard A. McLure Vice President and Controller (Chief Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ E. MAC CRAWFORD Chairman of the Board of - ------------------------------ Directors, President and January 24, 1997 E. Mac Crawford Chief Executive Officer /s/ EDWIN M. BANKS Director - ------------------------------ January 24, 1997 Edwin M. Banks /s/ G. FRED DIBONA, JR. Director - ------------------------------ January 24, 1997 G. Fred DiBona, Jr. /s/ ANDRE C. DIMITRIADIS Director - ------------------------------ January 24, 1997 Andre C. Dimitriadis /s/ A.D. FRAZIER, JR. Director - ------------------------------ January 24, 1997 A.d. Frazier, Jr. /s/ RAYMOND H. KIEFER Director - ------------------------------ January 24, 1997 Raymond H. Kiefer /s/ GERALD L. MCMANIS Director - ------------------------------ January 24, 1997 Gerald L. McManis /s/ DARLA D. MOORE Director - ------------------------------ January 24, 1997 Darla D. Moore 47 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS The following Consolidated Financial Statements of the Registrant and its subsidiaries are submitted herewith in response to Item 8 and Item 14(a)1:
PAGE ----- MAGELLAN HEALTH SERVICES, INC.: Report of independent public accountants............................................. F-2 Consolidated balance sheets as of September 30, 1995 and 1996........................ F-3 Consolidated statements of operations for the years ended September 30, 1994, 1995 and 1996........................................................................... F-5 Consolidated statements of changes in stockholders' equity for the years ended September 30, 1994, 1995, and 1996................................................. F-6 Consolidated statements of cash flows for the years ended September 30, 1994, 1995 and 1996........................................................................... F-7 Notes to Consolidated Financial Statements........................................... F-8
The following financial statement schedule of the Registrant and its subsidiaries is submitted herewith in response to Item 14(a)2:
PAGE ----- Schedule II--Valuation and qualifying accounts....................................... S-1
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Magellan Health Services, Inc: We have audited the accompanying consolidated balance sheets of Magellan Health Services, Inc. (a Delaware corporation) and subsidiaries as of September 30, 1995 and 1996, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Magellan Health Services, Inc. and subsidiaries as of September 30, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia November 7, 1996 F-2 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
SEPTEMBER 30, -------------------- 1995 1996 -------- ---------- Current Assets: Cash, including cash equivalents of $60,234 in 1995 and $54,631 in 1996 at cost which approximates market value........................................ $105,514 $ 120,945 Accounts receivable, less allowance for doubtful accounts of $48,741 in 1995 and $50,548 in 1996......................................................... 181,163 189,878 Supplies...................................................................... 5,768 4,753 Refundable income taxes....................................................... -- 1,323 Other current assets.......................................................... 13,130 21,251 -------- ---------- Total Current Assets........................................................ 305,575 338,150 Assets restricted for settlement of unpaid claims and other long-term liabilities................................................................... 94,138 105,303 Property and Equipment: Land.......................................................................... 88,019 83,431 Buildings and improvements.................................................... 377,169 388,821 Equipment..................................................................... 111,554 146,915 -------- ---------- 576,742 619,167 Accumulated depreciation...................................................... (90,877) (126,053) -------- ---------- 485,865 493,114 Construction in progress...................................................... 2,902 2,276 -------- ---------- Total Property and Equipment................................................ 488,767 495,390 -------- ---------- Other Long-Term Assets.......................................................... 33,249 30,755 Goodwill, net of accumulated amortization of $4,663 in 1995 and $9,151 in 1996.......................................................................... 39,994 128,012 Other Intangible Assets, net of accumulated amortization of $4,743 in 1995 and $10,393 in 1996............................................................... 21,835 42,527 -------- ---------- $983,558 $1,140,137 -------- ---------- -------- ----------
F-3 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, -------------------- 1995 1996 -------- ---------- Current Liabilities: Accounts payable.............................................................. $ 71,020 $ 78,966 Accrued liabilities........................................................... 139,908 189,599 Current income taxes payable.................................................. 435 -- Current maturities of long-term debt and capital lease obligations.............. 2,799 5,751 -------- ---------- Total Current Liabilities................................................... 214,162 274,316 Long-Term Debt and Capital Lease Obligations.................................... 538,770 566,307 Deferred Income Tax Liabilities................................................. -- 12,368 Reserve for Unpaid Claims....................................................... 100,125 73,040 Deferred Credits and Other Long-Term Liabilities................................ 34,455 39,769 Minority Interest............................................................... 7,486 52,520 Commitments and Contingencies Stockholders' Equity: Preferred stock, without par value Authorized--10,000 shares Issued and outstanding--none................................................ -- -- Common Stock, par value $.25 per share Authorized--80,000 shares Issued and outstanding--28,405 shares in 1995 and 33,007 shares in 1996..... 7,101 8,252 Other Stockholders' Equity Additional paid-in capital.................................................. 253,295 327,681 Accumulated deficit......................................................... (161,840) (129,457) Warrants outstanding........................................................ 64 54 Common Stock in treasury, 462 shares in 1995 and 4,424 shares in 1996....... (9,238) (82,731) Cumulative foreign currency adjustments..................................... (822) (1,982) -------- ---------- 88,560 121,817 -------- ---------- $983,558 $1,140,137 -------- ---------- -------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets. F-4 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, -------------------------------- 1994 1995 1996 -------- ---------- ---------- Net revenue..................................................................... $904,646 $1,151,736 $1,345,279 -------- ---------- ---------- Costs and expenses Salaries, supplies and other operating expenses............................... 661,436 863,598 1,064,445 Bad debt expense.............................................................. 70,623 92,022 81,470 Depreciation and amortization................................................. 28,354 38,087 48,924 Amortization of reorganization value in excess amounts allocable to identifiable assets......................................................... 31,200 26,000 -- Interest, net................................................................. 39,394 55,237 48,017 ESOP expense.................................................................. 49,197 73,527 -- Stock option expense (credit)................................................. 10,614 (467) 914 Unusual items................................................................. 71,287 57,437 37,271 -------- ---------- ---------- 962,105 1,205,441 1,281,041 -------- ---------- ---------- Income (loss) before income taxes, minority interest and extraordinary item..... (57,459) (53,705) 64,238 Provision for (benefit from) income taxes....................................... (10,504) (11,082) 25,695 -------- ---------- ---------- Income (loss) before minority interest and extraordinary item................... (46,955) (42,623) 38,543 Minority interest............................................................... 48 340 6,160 -------- ---------- ---------- Income (loss) before extraordinary item......................................... (47,003) (42,963) 32,383 Extraordinary item--loss on early extinguishment of debt (net of income tax benefit of $8,410)............................................................ (12,616) -- -- -------- ---------- ---------- Net income (loss)............................................................... $(59,619) $ (42,963) $ 32,383 -------- ---------- ---------- -------- ---------- ---------- Average number of common shares outstanding..................................... 26,394 27,870 31,014 -------- ---------- ---------- -------- ---------- ---------- Income (loss) per common share: Income (loss) before extraordinary item....................................... $ (1.78) $ (1.54) $ 1.04 Extraordinary loss on early extinguishment of debt............................ (0.48) -- -- -------- ---------- ---------- Net income (loss)............................................................... $ (2.26) $ (1.54) $ 1.04 -------- ---------- ---------- -------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-5 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ---------------------------- 1994 1995 1996 -------- -------- -------- Common Stock: Balance, beginning of period.................................................. $ 6,250 $ 6,725 $ 7,101 Exercise of options and warrants.............................................. 475 24 97 Green Spring Health Services, Inc. acquisition................................ -- -- 54 Pooling of Mentor............................................................. -- 352 -- Issuance of Common Stock, net of issuance costs............................... -- -- 1,000 -------- -------- -------- Balance, end of period........................................................ 6,725 7,101 8,252 -------- -------- -------- -------- -------- -------- Additional Paid-in Capital: Balance, beginning of period.................................................. 237,581 244,339 253,295 Stock option expense (credit)................................................. 10,614 (467) 914 Green Spring Health Services, Inc. acquisition................................ -- -- 4,263 Exercise of options and warrants.............................................. (3,856) 624 1,636 Issuance of Common Stock , net of issuance costs.............................. -- -- 67,573 Pooling of Mentor............................................................. -- 8,799 -- -------- -------- -------- Balance, end of period........................................................ 244,339 253,295 327,681 -------- -------- -------- -------- -------- -------- Accumulated Deficit: Balance, beginning of period.................................................. (59,423) (119,042) (161,840) Net income (loss)............................................................. (59,619) (42,963) 32,383 Pooling of Mentor............................................................. -- 165 -- -------- -------- -------- Balance, end of period........................................................ (119,042) (161,840) (129,457) -------- -------- -------- -------- -------- -------- Unearned Compensation under ESOP: Balance, beginning of period.................................................. (122,724) (73,527) -- ESOP expense.................................................................. 49,197 73,527 -- -------- -------- -------- Balance, end of period........................................................ (73,527) -- -- -------- -------- -------- -------- -------- -------- Warrants Outstanding: Balance, beginning of period.................................................. 274 180 64 Exercise of warrants.......................................................... (94) (116) (10) -------- -------- -------- Balance, end of period........................................................ 180 64 54 -------- -------- -------- -------- -------- -------- Common Stock in treasury: Balance, beginning of period.................................................. -- -- (9,238) Purchases of treasury stock................................................... -- (5,349) (73,493) Reacquisition of shares under shareholder note................................ -- (3,889) -- -------- -------- -------- Balance, end of period........................................................ -- (9,238) (82,731) -------- -------- -------- -------- -------- -------- Cumulative Foreign Currency Adjustments: Balance, beginning of period.................................................. (4,660) (2,454) (822) Foreign currency translation gain (loss)...................................... 2,206 1,632 (1,160) -------- -------- -------- Balance, end of period........................................................ (2,454) (822) (1,982) -------- -------- -------- -------- -------- -------- Total Stockholders' Equity...................................................... $ 56,221 $ 88,560 $121,817 -------- -------- -------- -------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-6 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ---------------------------- 1994 1995 1996 -------- -------- -------- Cash Flows From Operating Activities Net income (loss)............................................................. $(59,619) $(42,963) $ 32,383 -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of assets...................................................... -- (2,961) (2,062) Depreciation and amortization............................................... 59,554 64,087 48,924 Non-cash portion of unusual items........................................... 70,207 45,773 31,206 ESOP expense................................................................ 49,197 73,527 -- Stock option expense (credit)............................................... 10,614 (467) 914 Non-cash interest expense................................................... 2,005 2,735 2,424 Extraordinary loss on early extinguishment of debt.......................... 12,616 -- -- Cash flows from changes in assets and liabilities net of effects from sales and acquisitions of businesses: Accounts receivable, net.................................................. (7,533) 7,280 15,495 Other current assets...................................................... 4,563 9,533 129 Other long-term assets.................................................... 2,860 (5,813) 6,569 Accounts payable and accrued liabilities.................................. (13,017) (11,645) (7,516) Income taxes payable and deferred income taxes............................ (26,759) (16,761) 14,925 Reserve for unpaid claims................................................. 1,215 (5,885) (29,985) Other liabilities......................................................... (8,249) (21,127) (18,968) Minority interest, net of dividends paid.................................. 80 22 6,406 Other..................................................................... 613 285 1,022 -------- -------- -------- Total adjustments......................................................... 157,966 138,583 69,483 -------- -------- -------- Net cash provided by operating activities............................... 98,347 95,620 101,866 -------- -------- -------- -------- -------- -------- Cash Flows From Investing Activities Capital expenditures.......................................................... (14,626) (20,224) (38,801) Acquisitions of businesses, net of cash acquired.............................. (130,550) (61,980) (50,918) Decrease (increase) in assets restricted for settlement of unpaid claims and other long-term liabilities................................................. 7,076 (19,606) (17,732) Proceeds from sale of assets.................................................. 16,584 5,879 5,248 Other......................................................................... -- (1,050) -- -------- -------- -------- Net cash used in investing activities....................................... (121,516) (96,981) (102,203) -------- -------- -------- -------- -------- -------- Cash Flows From Financing Activities Payments on debt and capital lease obligations................................ (311,553) (46,779) (85,835) Proceeds from issuance of debt................................................ 381,798 28,869 104,800 Proceeds from issuance of common stock........................................ -- -- 68,573 Proceeds from exercise of stock options and warrants.......................... 1,315 531 3,401 Purchases of treasury stock................................................... -- (5,349) (73,493) Tax benefit related to the exercise of stock options.......................... 9,424 -- -- Income tax payments made on behalf of stock optionee.......................... (14,214) -- (1,678) -------- -------- -------- Net cash provided by (used in) financing activities..................... 66,770 (22,728) 15,768 -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................ 43,601 (24,089) 15,431 Cash and cash equivalents at beginning of period................................ 86,002 129,603 105,514 -------- -------- -------- Cash and cash equivalents at end of period...................................... $129,603 $105,514 $120,945 -------- -------- -------- -------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-7 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements of Magellan Health Services, Inc. ("Magellan" or the "Company") include the accounts of the Company and its subsidiaries except where control is temporary or does not rest with the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. On June 2, 1992, the Company filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. The prepackaged plan of reorganization (the "Plan") effected a restructuring of the Company's debt and equity capitalization. The Company's Plan was confirmed on July 8, 1992, and became effective on July 21, 1992 (effective on July 31, 1992 for financial reporting purposes). The consolidated financial statements for the three years in the period ended September 30, 1996 are presented for the Company after the consummation of the Plan. These financial statements were prepared under the principles of fresh start accounting. (See Note 3.) The Company is an integrated behavioral healthcare company providing behavioral healthcare services in the United States, the United Kingdom and Switzerland. The Company operates through three principal subsidiaries engaging in (i) the provider business, (ii) the managed care business and (iii) the public sector business. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. PROVIDER NET REVENUE Provider net revenue is based on established billing rates, less estimated allowances for patients covered by Medicare and other contractual reimbursement programs and discounts from established billing rates. Amounts received by the Company for treatment of patients covered by Medicare and other contractual reimbursement programs, which may be based on cost of services provided or predetermined rates, are generally less than the established billing rates of the Company's hospitals. Final determination of amounts earned under contractual reimbursement programs is subject to review and audit by the applicable agencies. Net revenue for fiscal 1994, 1995 and 1996 included $32.1 million, $35.6 million and $28.3 million, respectively, for the settlement and adjustment of reimbursement issues related to earlier fiscal periods. Management believes that adequate provision has been made for any adjustments that may result from such reviews. MANAGED CARE REVENUE Managed care revenue is recognized over the applicable coverage period on a per member basis for covered members and as earned and estimable for performance based revenues. Deferred revenue is recorded when premium payments are received in advance of the applicable coverage period. F-8 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING COSTS The production costs of advertising are expensed as incurred. The Company does not consider any of its advertising costs to be direct-response and, accordingly, does not capitalize such costs. Advertising costs consist primarily of radio and television air time, which is amortized as utilized, and printed media services. Advertising expense was approximately $35.6 million, $33.5 million and $30.5 million for the years ended September 30, 1994, 1995 and 1996, respectively. CHARITY CARE The Company provides healthcare services without charge or at amounts less than its established rates to patients who meet certain criteria under its charity care policies. Because the Company does not pursue collection of amounts determined to be charity care, they are not reported as revenue. For the years ended September 30, 1994, 1995 and 1996, the Company provided, at its established billing rates, approximately $29.3 million, $41.2 million and $37.9 million, respectively, of such care. INTEREST, NET The Company records interest expense net of capitalized interest and interest income. Interest income for the years ended September 30, 1994, 1995, and 1996 was approximately $4.4 million, $3.7 million and $10.5 million, respectively. CASH AND CASH EQUIVALENTS Cash equivalents are short-term, highly liquid interest-bearing investments with a maturity of three months or less when purchased, consisting primarily of money market instruments. CONCENTRATION OF CREDIT RISK Accounts receivable from patient revenue subject the Company to a concentration of credit risk with third party payors that include insurance companies, managed healthcare organizations and governmental entities. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific payors, historical trends and other information. Management believes the allowance for doubtful accounts is adequate to provide for normal credit losses. ASSETS RESTRICTED FOR THE SETTLEMENT OF UNPAID CLAIMS AND OTHER LONG-TERM LIABILITIES Assets restricted for the settlement of unpaid claims and other long-term liabilities include marketable securities which are carried at fair market value. Transfer of such investments from the insurance subsidiaries to the Company or any of its other subsidiaries is subject to approval by certain regulatory authorities. During fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities ("FAS 115"). Under FAS 115, investments are classified into three categories: (i) held to maturity; (ii) available for sale; and (iii) trading. Unrealized holding gains or losses are recorded for trading and available for sale securities. The Company's investments are classified as available for sale and the adoption of FAS 115 did not have a F-9 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) material effect on the Company's financial statements, financial condition and liquidity or results of operations. The unrealized gain or loss on investments available for sale was not material at September 30, 1995 and 1996. PROPERTY AND EQUIPMENT As a result of the adoption of fresh start accounting, property and equipment were adjusted to their estimated fair value as of July 31, 1992 and historical accumulated depreciation was eliminated. Expenditures for renewals and improvements are charged to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. The Company removes the cost and related accumulated depreciation from the accounts for property sold or retired, and any resulting gain or loss is included in operations. Amortization of capital lease assets is included in depreciation expense. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which is generally 10 to 40 years for buildings and improvements and three to ten years for equipment. Depreciation expense was $27.4 million, $35.1 million and $40.0 million for the years ended September 30, 1994, 1995 and 1996, respectively. INTANGIBLE ASSETS Intangible assets are composed principally of (i) goodwill, (ii) customer lists, (iii) non-compete agreements and (iv) deferred financing costs. Goodwill represents the excess of the cost of businesses acquired over the fair value of the net identifiable assets at the date of acquisition and is amortized using the straight-line method over 25 to 40 years. Customer lists are amortized using the straight line method over their estimated useful lives of 5 to 25 years. Non-compete agreements and deferred financing costs are amortized over the term of the related agreements. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of intangible assets may not be recoverable. When events or changes in circumstances are present that indicate the carrying amount of intangible assets may not be recoverable, the Company assesses the recoverability of intangible assets by determining whether the carrying value of such intangible assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition. No impairment losses on intangible assets were recorded by the Company in fiscal 1994 and 1996. Impairment losses of approximately $4.0 million were recorded in fiscal 1995. (See Note 4) MEDICAL CLAIMS PAYABLE Medical claims payable represents the liability for healthcare services authorized, incurred and not yet reported to the Company's managed care business. Medical claims payable are estimated based upon authorized healthcare services, past claim payment experience for member groups and other factors. While Management believes the liability for medical claims payable is adequate, actual results could differ from such estimates. F-10 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY Changes in the cumulative translation of foreign currency assets and liabilities are presented as a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions, which were not material, are included in operations as incurred. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed based on the weighted average number of shares of common stock outstanding during the period. Common stock equivalents were anti-dilutive or not material for the periods presented and therefore were excluded from the calculations. The Exchange Option, as hereinafter defined (see Note 2), is classified as a potentially dilutive security for fiscal 1996 for the purpose of computing fully diluted earnings per common share. The Exchange Option was anti-dilutive for fiscal 1996 and therefore was excluded from the 1996 calculation. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121 ("FAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which became effective for fiscal years beginning after December 15, 1995. FAS 121 established standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The Company adopted FAS 121 effective October 1, 1994. The initial financial statement impact of adopting FAS 121 was not material. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which becomes effective for fiscal years beginning after December 15, 1995. FAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation cost for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 will be required to make pro forma disclosures of net income and earnings per share as if the provisions of FAS 123 had been applied. The Company plans to adopt FAS 123 in the fiscal year ended September 30, 1997 on a pro forma disclosure basis. RECLASSIFICATIONS Certain reclassifications have been made to fiscal 1994 and fiscal 1995 amounts to conform to fiscal 1996 presentation. 2. ACQUISITIONS AND JOINT VENTURES ACQUISITIONS On December 13, 1995, the Company acquired a 51% ownership interest in Green Spring Health Services, Inc. ("Green Spring") for approximately $68.9 million in cash, the issuance of 215,458 shares of Magellan Common Stock valued at approximately $4.3 million and the contribution of Group Practice Affiliates, Inc. ("GPA"), a wholly-owned subsidiary of the Company, which became a wholly-owned F-11 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 2. ACQUISITIONS AND JOINT VENTURES (CONTINUED) subsidiary of Green Spring. On December 20, 1995, the Company acquired an additional 10% ownership interest in Green Spring for approximately $16.7 million in cash as a result of an exercise by a minority stockholder of its Exchange Option (as hereinafter defined) for a portion of the stockholder's interest in Green Spring. The Company has a 61% ownership interest in Green Spring. As of September 30, 1996, Green Spring provided managed behavioral healthcare services, which includes utilization management, care management and employee assistance programs through a 50-state provider network for approximately 13.6 million people nationwide. The minority stockholders of Green Spring consist of four Blue Cross/Blue Shield organizations (the "Blues") that are key customers of Green Spring. In addition, two other Blues organizations that formerly owned a portion of Green Spring have continued as customers of Green Spring. As of September 30, 1996, the minority stockholders of Green Spring have the option, under certain circumstances, to exchange their ownership interests ("Exchange Option") in Green Spring for 2,831,739 shares of the Company's Common Stock or $65.1 million in subordinated notes. The Company may elect to pay cash in lieu of issuing the subordinated notes. The Exchange Option expires December 13, 1998. The Exchange Option, if exercised by the minority stockholders of Green Spring, would be recorded at the fair value of the consideration paid. The Company recorded the investments in Green Spring using the purchase method of accounting. Green Spring's results of operations have been included in the consolidated financial statements since the acquisition date, less minority interest. The cost of the investments in Green Spring have been allocated to the estimated fair value of assets acquired and liabilities assumed to the extent acquired by the Company. The remaining portion of Green Spring's assets and liabilities has been recorded at the historical cost basis of the minority stockholders. The purchase price allocation for the investments in Green Spring and the historical cost basis of the minority stockholders of Green Spring, in aggregate, resulted in goodwill of approximately $89 million and identifiable intangible assets of approximately $24 million. At each reporting date, the Company must assess the fair value of the Exchange Option in relation to the redemption price available to the minority stockholders. In any period that the fair value of the Exchange Option is determined to be less than the redemption price, the difference must be recognized as an adjustment to minority interest. Subsequent increases in the fair value of the Exchange Option can be recognized only to the extent of previously recognized losses. No losses were recorded in fiscal 1996 as a result of changes in the fair value of the Exchange Option. In February 1995, the Company acquired Westwood Pembroke Health System, which includes two psychiatric hospitals and a professional group practice. The Company accounted for the acquisition using the purchase method of accounting. In January 1995, the Company acquired National Mentor, Inc. ("Mentor") by issuing 1,409,978 shares of Common Stock. Mentor provides specialized health services in mentor homes. The acquisition was accounted for as a pooling of interests, effective January 1, 1995. The consolidated financial statements of the Company were not restated for periods prior to January 1, 1995, as the effect of restatement would not have been material to such periods. F-12 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 2. ACQUISITIONS AND JOINT VENTURES (CONTINUED) During fiscal 1994, the Company agreed to acquire 40 psychiatric hospitals (the "Acquired Hospitals") from National Medical Enterprises. The purchase price for the Acquired Hospitals was approximately $120.4 million in cash plus an additional cash amount of approximately $51 million, subject to adjustment, for the net working capital of the Acquired Hospitals (the "Hospital Acquisition"). On June 30, 1994, the Company completed the purchase of 27 of the Acquired Hospitals for a cash purchase price of approximately $129.6 million, which included approximately $39.3 million, subject to adjustment, for the net working capital of the facilities. On October 31, 1994, the Company completed the purchase of three additional Acquired Hospitals for a cash purchase price of approximately $5 million, which included approximately $2.2 million related to the net working capital of the facilities. On November 30, 1994, the Company completed the purchase of the remaining ten Acquired Hospitals for a cash purchase price of approximately $36.8 million, including approximately $9.5 million related to the net working capital of ten Acquired Hospitals. The Company accounted for the Hospital Acquisition using the purchase method of accounting. The operating results of the Acquired Hospitals are included in the Company's Consolidated Statements of Operations from the respective dates of acquisition. JOINT VENTURES The Company has entered into four hospital-based joint ventures with Columbia/HCA Healthcare Corporation through September 30, 1996. Generally, each member of the joint venture leases and/or contributes certain assets in each respective market to the joint venture with the Company becoming the managing member. The joint ventures' results of operations have been included in the consolidated financial statements since inception, less minority interest. A summary of the joint ventures is as follows:
MARKET DATE - ----------------------------------------------------------------------------- --------------- Albuquerque, NM.............................................................. May 1995 Raleigh, NC.................................................................. June 1995 Lafayette, LA................................................................ October 1995 Anchorage, AK................................................................ August 1996
3. THE RESTRUCTURING AND FRESH START REPORTING The consummation of the Plan discussed in Note 1 resulted in, among other things, (i) a reduction of approximately $700 million in long-term debt, (ii) elimination of $233 million of preferred stock and (iii) the issuance of approximately 24.8 million shares of Common Stock to certain holders of debt securities, the preferred stockholders and common stockholders. As a result of the consummation of the Plan, the financing under the $880 Million Credit Agreement between the Company and certain banks dated September 1, 1988 was replaced by new facilities under the Amended and Restated Credit Agreement, dated July 21, 1992, among the Company and certain banks (the "Credit Agreement"). Upon consummation of the Plan, the Company recognized an extraordinary gain on debt discharge of approximately $731 million which represented forgiveness of debt, principal and interest, reduced by the estimated fair value of Common Stock issued to certain debtholders of the Company. The Company's F-13 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 3. THE RESTRUCTURING AND FRESH START REPORTING (CONTINUED) long-term debt was stated at the present value of amounts to be paid, based on market interest rates on July 31, 1992. This adjustment to present value resulted in an aggregate carrying amount for the Company's long-term debt which was less than the aggregate principal amount thereof, and resulted in the amortization of the difference into interest expense over the terms of the debt instruments and, upon extinguishment of the debt prior to scheduled maturity, resulted in a loss on debt extinguishment. Under the principles of fresh start accounting, the Company's total assets were recorded at their assumed reorganization value, with the reorganization value allocated to identifiable tangible assets on the basis of their estimated fair value. Accordingly, the Company's property and equipment were reduced and its intangible assets were written off. In addition, the Company's accumulated deficit, common stock in treasury and cumulative foreign currency adjustments were eliminated. The excess of the reorganization value over the value of identifiable assets was reported as "reorganization value in excess of amounts allocable to identifiable assets" (the "Excess Reorganization Value"). The total reorganization value assigned to the Company's assets was estimated by calculating projected cash flows before debt service requirements, for a five-year period, plus an estimated terminal value of the Company (calculated using a multiple of approximately six (6) on projected EBDIT (which is net revenue less operating and bad debt expenses)), each discounted back to its present value using a discount rate of 12% (representing the estimated after-tax weighted cost of capital). This amount was approximately $1.2 billion and was increased by (i) the estimated net realizable value of assets to be sold and (ii) estimated cash in excess of normal operating requirements. The above calculations resulted in an estimated reorganization value of approximately $1.3 billion, of which the Excess Reorganization Value was $225 million, of which $129 million related to continuing operations. The Excess Reorganization Value was amortized over the three-year period ended July 31, 1995. 4. UNUSUAL ITEMS INSURANCE SETTLEMENTS Unusual items included the resolutions of disputes between the Company and insurance carriers concerning certain billings for services. In November 1994, the Company and a group of insurance carriers resolved a billing dispute that arose in the fourth quarter of fiscal 1994 related to claims paid predominantly in the 1980's. As part of the resolution, the Company agreed to pay the insurance carriers approximately $31 million plus interest, for a total of $37.5 million in four installments over a three year period. The Company and the insurance carriers will continue to do business at the same or similar general levels. Furthermore, the parties will seek additional business opportunities that will serve to enhance their present relationships. In March 1995, the Company and a group of insurance carriers resolved a billing dispute which arose in fiscal 1995 related to matters arising predominately in the 1980's. As part of the settlement, the Company agreed to pay the insurance carriers $29.8 million payable in five installments over a three year period. The Company and the insurance carriers have agreed to continue to do business at the same or similar general levels and to seek additional business opportunities that will serve to enhance their present relationships. F-14 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 4. UNUSUAL ITEMS (CONTINUED) In August 1996, the Company and a group of insurance carriers resolved a billing dispute which arose in fiscal 1996 related to matters originating in the 1980's. As part of the settlement of these claims, certain related payer matters and associated legal fees, the Company recorded a charge of approximately $30.0 million during the quarter ended June 30, 1996. The Company will pay the insurance settlement amount in twelve installments over a three year period, beginning August 1996. The Company and the insurance carriers have agreed that the dispute and settlement will not negatively impact any present or pending business relationships nor will it prevent the parties from negotiating in good faith concerning additional business opportunities available to, and future relationships between, the parties. Amounts payable in future periods under the insurance settlements are as follows (in thousands): 1997............................................... $ 21,510 1998............................................... 14,180 1999............................................... 5,745
FACILITY CLOSURES During fiscal 1995 and fiscal 1996, the Company consolidated, closed or sold fifteen and nine psychiatric facilities (the "Closed Facilities"), respectively. The Closed Facilities that are still owned by the Company will be sold, leased or used for alternative purposes depending on the market conditions in each geographic area. The Company recorded charges of approximately $3.6 million and $4.1 million related to facility closures in fiscal 1995 and fiscal 1996, respectively, as follows (in thousands):
1995 1996 --------- --------- Severance and related benefits............................................. $ 2,132 $ 2,334 Contract terminations and other............................................ 1,492 1,782 --------- --------- $ 3,624 $ 4,116 --------- --------- --------- ---------
Approximately 500 and 620 employees were terminated at the facilities closed in the fourth quarter of fiscal 1995 and during fiscal 1996, respectively. Severance and related benefits paid and charged against the resulting liability were approximately $1.3 million and $2.9 million in fiscal 1995 and fiscal 1996, respectively. Other exit costs paid and applied against the resulting liabilities were approximately $212,000 and $1.4 million in fiscal 1995 and fiscal 1996, respectively. The following table presents net revenue, salaries, supplies and other operating expenses and bad debt expenses and loss before income taxes, excluding unusual items, of the Closed Facilities (in thousands):
YEAR ENDED SEPTEMBER 30, -------------------------------- 1994 1995 1996 --------- ---------- --------- Net revenue................................................. $ 74,574 $ 104,239 $ 34,984 Salaries, supplies and other operating expen and bad debt expenses.................................................. 71,900 102,744 39,295 Loss before income taxes.................................... (6,403) (8,638) (9,337)
F-15 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 The Company also recorded a charge of approximately $2.0 million in fiscal 1996 related to severance and related benefits for approximately 275 employees who were terminated pursuant to planned overhead reductions. ASSET IMPAIRMENTS As a result of the Hospital Acquisition, the Company reassessed its business strategy in certain markets at the end of fiscal 1994. The Company established a plan to consolidate services in selected markets and to close or sell certain facilities owned prior to the Hospital Acquisition. The Company recorded a charge of $23 million in fiscal 1994 primarily to write down the property and equipment at these facilities to their net realizable value. As discussed in Note 1, the Company adopted FAS 121 effective October 1, 1994. During fiscal 1995, the Company recorded impairment losses on property and equipment and intangible assets of approximately $23.0 million and $4.0 million, respectively. During fiscal 1996, the Company recorded impairment losses on property and equipment of approximately $1.2 million. Such losses resulted from changes in the manner that certain of the Company's assets will be used in future periods and current period operating losses at certain of the Company's operating facilities combined with projected future operating losses. Fair values of the long-lived assets that have been written down were determined using the best available information in each individual circumstance, which included quoted market price, comparable sales prices for similar assets or valuation techniques utilizing present value of estimated expected cash flows. OTHER During fiscal 1994, the Company recorded a charge of approximately $4.5 million related to the relocation of the Company's executive offices. During fiscal 1995, the Company recorded a gain of approximately $3.0 million related to the sale of three psychiatric hospitals. 5. BENEFIT PLANS The Company maintains an Employee Stock Ownership Plan (the "ESOP"), a noncontributory retirement plan that enables eligible employees to participate in the ownership of the Company. The Company had recorded unearned compensation to reflect the cost of Common Stock purchased by the ESOP but not yet allocated to participants' accounts. In the period that shares are allocated or projected to be allocated to participants, ESOP expense is recorded and unearned compensation is reduced. All shares had been allocated to the participants as of September 30, 1995. Interest expense on the remaining portion of the debt incurred to finance the ESOP transaction amounted to approximately $6.2 million for fiscal 1994 and is included in interest expense in the statements of operations. The Internal Revenue Service has ruled that the ESOP qualifies under Section 401 of the Internal Revenue Code of 1986, as amended. Such determination allows the Company to deduct its contributions to the ESOP for federal income tax purposes. During fiscal 1992, the Company reinstated a defined contribution plan (the "Magellan 401-K Plan"). Employee participants can elect to voluntarily contribute up to 6% of their compensation to the Magellan 401-K Plan. Effective October 1, 1992, the Company began making contributions to the Magellan 401-K Plan based on employee compensation and contributions. The Company makes a discretionary contribution of 2% of each employee's compensation and matches 50% of each employee's contribution up to 3% of their compensation. During the years ended September 30, 1994, 1995 and 1996, the Company made F-16 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 5. BENEFIT PLANS (CONTINUED) contributions of approximately $4.9 million, $5.8 million and $5.3 million, respectively, to the Magellan 401-K Plan. Green Spring also maintains a defined contribution plan (the "Green Spring 401-K Plan"). Employee participants can elect to voluntarily contribute up to 6% or 12% of their compensation, depending upon each employee's compensation level, to the Green Spring 401-K Plan. Green Spring matches up to 3% of each employee's compensation. Employees vest in employer contributions over five years. During the year ended September 30, 1996, Green Spring contributed approximately $760,000 to the Green Spring 401-K Plan. 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Information with regard to the Company's long-term debt and capital lease obligations at September 30, 1995 and 1996 is as follows (in thousands):
SEPTEMBER SEPTEMBER 30, 30, 1995 1996 ---------- ---------- Revolving Credit Agreement due through 1999 (9.0% at September 30, 1996)........ $ 80,593 $ 105,593 11.25% Senior Subordinated Notes due 2004....................................... 375,000 375,000 6.59 % to 10.75% Mortgage and other notes payable through 1999.................. 5,268 12,163 Variable rate secured notes due through 2013 (3.65 % to 3.85% at September 30, 1996.......................................................................... 62,025 60,875 7.5% Swiss Bonds................................................................ 6,443 6,443 3.85% to 11.50% Capital lease obligations due through 2014...................... 12,617 12,333 ---------- ---------- 541,946 572,407 Less amounts due within one year.............................................. 2,799 5,751 Less debt service funds....................................................... 377 349 ---------- ---------- $ 538,770 $ 566,307 ---------- ---------- ---------- ----------
The aggregate scheduled maturities of long-term debt and capital lease obligations during the five years subsequent to September 30, 1996 are as follows (in thousands): 1997--$5,751; 1998--$5,273; 1999-- $5,103; 2000--$1,991 and 2001--$16,802. The Senior Subordinated Notes, which are carried at cost, had a fair value of approximately $402 million and $405 million at September 30, 1995 and 1996, respectively, based on market quotes. The Company's remaining debt is also carried at cost, which approximates fair market value. REVOLVING CREDIT AGREEMENT On May 2, 1994, the Company entered into a Second Amended and Restated Credit Agreement with certain financial institutions for a five-year reducing, revolving credit facility in an aggregate committed amount of $300 million (the "Revolving Credit Agreement"). Proceeds from the Revolving Credit Agreement were used (i) to refinance certain mortgage indebtedness of certain subsidiaries of the Company in the principal amount of approximately $14.7 million and the loans to certain subsidiaries of F-17 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED) the Company outstanding under the Credit Agreement in the principal amount of approximately $46.8 million, (ii) for continued credit enhancement of certain currently outstanding variable rate demand notes issued by or for the benefit of certain subsidiaries of the Company and (iii) for working capital and other general corporate purposes, including to finance, in part, the Hospital Acquisition and to finance other permitted acquisitions and investments. The loans outstanding under the Revolving Credit Agreement bore interest (subject to certain potential adjustments) at a rate per annum equal to (a) the sum of the Base Lending Rate plus 3/4 of 1%, or (b) at the option of the Company, the sum of the maximum reserve-adjusted one, two, three or six-month LIBOR plus 1 3/4%. The Base Lending Rate was the higher of (x) the rate announced from time to time as Bankers Trust Company's prime lending rate, (y) the Federal Reserve's reported weekly average dealer offering rate for three-month certificates of deposit, adjusted for maximum reserves, plus 1/2 of 1%, and (z) the Federal Funds Rate plus 1/2 of 1%. NEW REVOLVING CREDIT AGREEMENT On October 28, 1996, the Company entered into a new Credit Agreement with certain financial institutions for a five-year Senior Secured reducing revolving credit facility in an aggregate committed amount of $400 million (the "New Revolving Credit Agreement"). The Company borrowed approximately $121.0 million under the New Revolving Credit Agreement in October 1996 to (i) pay-off the existing borrowings outstanding under the Revolving Credit Agreement and (ii) pay for fees and expenses related to the New Revolving Credit Agreement. The loans outstanding under the New Revolving Credit Agreement bear interest (subject to certain potential adjustments) at a rate per annum equal to one, two, three or six-month LIBOR plus 1.25% or the Prime Lending Rate. Interest on Prime Lending Rate Loans is payable at the end of each fiscal quarter and upon conversion to a LIBOR based loan. Interest on LIBOR based loans is payable at the end of their respective one, two, three or six-month terms. SENIOR SUBORDINATED NOTES Also on May 2, 1994, the Company issued $375 million of 11.25% Senior Subordinated Notes which mature on April 15, 2004 (the "Notes") and are general unsecured obligations of the Company. Interest on the Notes is payable semi-annually on each April 15 and October 15. Proceeds of $181.8 million from the sale of the Notes were used to defease, and, subsequently on June 9, 1994, to redeem the Company's outstanding 7.5% Senior Subordinated Debentures due 2003 (the "Debentures"). Certain remaining proceeds were used, along with proceeds from the Revolving Credit Agreement, to finance the Hospital Acquisition. The Notes are guaranteed on an unsecured senior subordinated basis by substantially all of the Company's existing subsidiaries and certain subsidiaries created after the issuance of the Notes. The Notes are not redeemable at the option of the Company prior to April 15, 1999. Thereafter, the Notes will be subject to redemption at the option of the Company, in whole or in part, at the redemption prices (expressed as a percentage of the principal amount) set forth below, plus accrued and unpaid F-18 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED) interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning April 15 of the years indicated below:
REDEMPTION YEAR PRICE - --------------------------------------------------------------------------------- ----------- 1999............................................................................. 105.625% 2000............................................................................. 103.750% 2001............................................................................. 101.875% 2002 and thereafter.............................................................. 100.000%
COVENANTS The New Revolving Credit Agreement and the indenture for the Notes contain a number of restrictive covenants, which, among other things, limit the ability of the Company and certain of its subsidiaries to incur other indebtedness, engage in transactions with affiliates, repurchase shares of the Company's common stock above specified levels, incur liens, make certain restricted payments, and enter into certain business combination and asset sale transactions. The New Revolving Credit Agreement also requires the Company to maintain certain specified financial ratios. The Company was in compliance with all debt covenants under the Revolving Credit Agreement and the Notes at September 30, 1996. EXTRAORDINARY LOSSES The consolidated statements of operations for the year ended September 30, 1994 includes an extraordinary after-tax loss of approximately $12.6 million, resulting from the early extinguishment of debt. The extraordinary loss in fiscal 1994 was related to the defeasance of the Debentures and the pay-off of certain subsidiary mortgages and includes the difference between the redemption price and the carrying value of the Debentures and prepayment penalties related to the subsidiary mortgages. On October 28, 1996, the Company paid off all obligations under its Revolving Credit Agreement. The Company will record an extraordinary loss from the early extinguishment of debt of approximately $3.0 million, net of tax, in fiscal 1997 to write off deferred financing costs related to the Revolving Credit Agreement. LEASES The Company leases certain of its operating facilities, some of which may be purchased during the term or at expiration of the leases. The book value of capital leased assets was approximately $8.4 million at September 30, 1996. The leases, which expire at various dates through 2069, generally require the Company to pay all maintenance, property tax and insurance costs. At September 30, 1996, aggregate amounts of future minimum payments under operating leases were as follows: 1997--$9.5 million; 1998--$7.0 million; 1999--$5.1 million; 2000--$3.3 million; 2001--$2.4 million; subsequent to 2001--$48.6 million. Rent expense for the years ended September 1994, 1995 and 1996 was $11.4 million, $15.4 million and $18.7 million, respectively. F-19 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 7. STOCKHOLDERS' EQUITY Pursuant to the Company's Restated Certificate of Incorporation, the Company is authorized to issue 80 million shares of common stock, $.25 par value per share, and 10 million shares of preferred stock, without par value. Under the terms of the Plan, approximately 24.8 million shares of Common Stock were issued to certain holders of debt securities, the preferred stockholders, and common stockholders. No shares of preferred stock have been issued as of September 30, 1996. COMMON STOCK The Company is prohibited from paying dividends on its Common Stock under the terms of the New Revolving Credit Agreement except under certain limited circumstances. 1992 STOCK OPTION PLAN The 1992 Stock Option Plan provides for the issuance of approximately 3.4 million options to purchase shares of Common Stock. A summary of changes in options outstanding and other related information is as follows:
YEAR ENDED SEPTEMBER 30, -------------------------------------------- 1994 1995 1996 ------------- ------------- -------------- Balance, beginning of period... 3,228,076 772,516 715,516 Granted........................ 6,000 0 0 Canceled....................... (24,000) (10,500) 0 Exercised...................... (2,437,560) (46,500) (346,526) ------------- ------------- -------------- Balance, end of period......... 772,516 715,516 368,990 ------------- ------------- -------------- ------------- ------------- -------------- $4.36 - $4.36 - Option prices, end of period... $22.75 $22.75 $4.36 - $22.75 Price range of exercised $4.36 - $4.36 - options...................... $.25 - $4.36 $14.19 $16.875 Average exercise price......... $.62 $6.26 $4.59
The exercise price of certain options will be reduced upon termination of employment of a certain optionee without cause. Options issued pursuant to the 1992 Stock Option Plan are exercisable upon vesting and expire through October 2000. As of September 30, 1996, 100% of the options outstanding were vested. Upon the termination of the employment of the Company's former Chairman of the Board on March 4, 1993, and under the provisions of the 1992 Stock Option Plan, all of the former employee's options vested and the option prices were reduced to $.25 per share. Such options totaled 2,220,336 at September 30, 1993. As a result, the Company recognized approximately $21.3 million in additional stock option expense during fiscal 1993. On December 3 and December 29, 1993, all of the options under the 1992 Stock Option Plan held by the former employee were exercised. On December 3, 1993, 326,000 options were exercised and the option exercise price was paid by reducing the number of shares issuable by the number of shares having a fair market value equal to the option exercise price (3,326 shares). This exercise triggered a new measurement date for the options exercised and, since the stock price had increased since March 4, 1993, additional stock option expense of $3.9 million was recognized in fiscal 1994. The option exercise price for the 1,894,336 options exercised on December 29, 1993, was paid in F-20 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 7. STOCKHOLDERS' EQUITY (CONTINUED) cash; accordingly, no additional stock option expense was triggered. For both of the exercises, the former employee elected to surrender optioned shares (approximately 570,000 shares) as consideration for the payment of required withholding taxes of approximately $14.2 million. These withholdings represent the minimum required tax withholding amounts required in order to avoid triggering a new measurement date and additional compensation expense. The Company was required to make withholding tax payments on behalf of the former employee of approximately $14.2 million which was charged against additional paid-in capital. This charge was offset by a tax benefit recorded of approximately $9.4 million related to additional stock option expense allowable for income tax purposes. 1994 STOCK OPTION PLAN The 1994 Stock Option Plan provides for the issuance of approximately 1.3 million options to purchase shares of Common Stock. Options must be granted on or before December 31, 1996. Officers and key employees of the Company are eligible to participate. The options have an exercise price which approximates fair market value of the Common Stock at the date of grant. A summary of changes in options outstanding and other related information is as follows:
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------- 1994 1995 1996 ------------------- ------------------- ------------------- Balance, beginning of period...................... -- 876,500 1,162,331 Granted.................... 921,000 495,000 161,000 Canceled................... (44,500) (209,169) (330,162) Exercised.................. -- -- (44,500) ------------------- ------------------- ------------------- Balance, end of period....... 876,500 1,162,331 948,669 ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- Option prices, end of period...................... $22.687 - $28.312 $15.625 - $27.875 $15.687 - $27.875 Price range of exercised options..................... -- -- $15.625 - $22.875 Average exercise price....... -- -- $20.70
Options granted under the 1994 Stock Option Plan are exercisable to the extent vested. An option vests at the rate of 33 1/3% of the shares covered by the option on each of the first three anniversary dates of the grant of the option if the optionee is an employee of the Company on such dates. Options must be exercised no later than ten years after the date of grant. As of September 30, 1996, 48.4% of the options outstanding were vested. 1996 STOCK OPTION PLAN The 1996 Stock Option Plan provides for the issuance of 1.75 million options to purchase shares of Company Common Stock. Options must be granted on or before December 31, 1999. Officers and key F-21 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 7. STOCKHOLDERS' EQUITY (CONTINUED) employees of the Company are eligible to participate. The options have an exercise price which approximates fair market value of the Common Stock at the date of grant. A summary of changes in options outstanding and other related information is as follows:
YEAR ENDED SEPTEMBER 30, 1996 ------------------ Balance, beginning of period.............................................. 0 Granted................................................................... 1,413,000 Cancelled................................................................. (114,500) Exercised................................................................. 0 ------------------ Balance, end of period.................................................... 1,298,500 ------------------ Options prices, end of period............................................. $ 15.75-$24.00 ------------------
Options granted under the 1996 Stock Option Plan are exercisable to the extent vested. An option vests at the rate of 25% of the shares covered by the option on each of the four anniversary dates of the grant of the option if the optionee is an employee of the Company on such dates. Options must be exercised no later than November 30, 2005. As of September 30, 1996, none of the options outstanding were vested. 1994 EMPLOYEE STOCK PURCHASE PLAN The 1994 Employee Stock Purchase Plan (the "1994 ESPP") covers 600,000 shares of Common Stock that can be purchased by eligible employees of the Company. The initial offering period began on April 1, 1994 and expired on March 31, 1995. The second offering period began on April 1, 1995 and ended March 31, 1996. On the first date of these offering periods, each participant was granted an option to purchase shares of Common Stock at a purchase price equal to 85% of the fair value of the Company's Common Stock on such date. Total options granted on April 1, 1994 and April 1, 1995 were 85,115 and 41,565, respectively, with option prices of $21.144 and $15.831, respectively. A total of 4,872 and 22,065 options were exercised at the end of the first and second offering periods, respectively. Effective August 1, 1995, the Company amended the 1994 ESPP to change the option price in subsequent offering periods to the lesser of (i) 85% of the fair value of Company Common Stock on the first day of the offering period or (ii) 85% of the fair value of the Company's Common Stock on the last day of the offering period. Holders of the options from the second offering period as of July 31, 1995 were given the choice of (i) canceling their options to purchase shares of Common Stock, (ii) exercising the option to purchase shares of Common Stock at a purchase price of $15.831 or (iii) keeping their options. A total of 11,870 options were exercised on July 31, 1995. The third offering period began August 1, 1995 and ended December 31, 1995. A total of 29,217 options were exercised at a purchase price of $16.681 at the end of the third offering period. The fourth offering period began January 1, 1996 and ended on June 30, 1996. A total of 68,146 options were exercised at a purchase price of $18.275 at the end of the fourth offering period. The fifth offering period began July 1, 1996 and will end on December 31, 1996. The number of options granted and F-22 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 7. STOCKHOLDERS' EQUITY (CONTINUED) the option price for the fifth offering period will be determined on December 31, 1996 when the option price is known. 1997 EMPLOYEE STOCK PURCHASE PLAN The 1997 Employee Stock Purchase Plan (the "1997 ESPP") covers 600,000 shares of Common Stock that can be purchased by eligible employees of the Company. The 1997 ESPP offering periods will have a term not less than three months and not more than 12 months. The first offering period under the 1997 ESPP will not begin prior to January 1, 1997 and the last offering period will end on or before December 31, 1999. The option price of each offering period will be the lesser of (i) 85% of the fair value of the Company's Common Stock on the first day of the offering period or (ii) 85% of the fair value of the Company's Common Stock on the last day of the offering period. 1992 DIRECTORS' STOCK OPTION PLAN AND DIRECTORS' UNIT AWARD PLAN The 1992 Directors' Stock Option Plan provides for the grant of options to non-employee members of the Company's Board of Directors to purchase up to 175,000 shares of the Company's Common Stock, subject to adjustments to reflect certain changes in capitalization. The options have an exercise price which approximates the fair market value of the Common Stock on the date of grant. During fiscal 1994, 25,000 of these options were exercised and an additional 25,000 options were granted at an exercise price of $23.163 per share. During fiscal 1995, 25,000 options were granted at an exercise price of $18.875 per share. During fiscal 1996, no options were granted. Options granted can be exercised from the date of vesting until February 1, 2003. No options can be granted after December 31, 1995. Options vest 20% when granted and an additional 20% on each successive February 1 for a period of four years, if the optionee continues to serve as a non-employee director on the applicable February 1. Unvested options vest in full in certain instances of termination. As of September 30, 1996, 68.0% of the options outstanding were vested. In addition, during 1994, the Company approved the Directors' Unit Award Plan (the "Unit Plan") which provides for the award of a maximum of 15,000 units (the "Units") that, upon vesting under the terms of the Unit Plan, would result in the issuance of an aggregate of 15,000 shares of Common Stock in settlement of Units. The Unit Plan provides for the award to each director who is not an employee of the Company of 2,500 Units. Upon vesting of the Units awarded to a director, the Company will settle the Units by issuing to the director, with no exercise price, a number of shares of the Company's Common Stock equal to the number of vested Units. 1996 DIRECTORS' STOCK OPTION PLAN The 1996 Directors' Stock Option Plan provides for the grant of options to non-employee members of the Company's Board of Directors to purchase up to 250,000 shares of the Company's Common Stock, subject to adjustments to reflect certain changes in capitalization. The options have an exercise price which approximates the fair market value of the Common Stock on the date of grant. During fiscal 1996, 175,000 options were granted at exercise prices ranging from $18.25 to $23.375. F-23 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 7. STOCKHOLDERS' EQUITY (CONTINUED) Options granted can be exercised from the date of vesting until November 30, 2005. No options can be granted after December 31, 1999. Options vest at the rate of 25% of the shares covered on each of the four anniversary dates of the grant of the option if the optionee continues to serve as a non-employee director on such dates. Options vest in full in certain instances of termination. As of September 30, 1996, none of the options outstanding were vested. RIGHTS PLAN Also upon consummation of the Plan, the Company adopted a Share Purchase Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan, each share of Common Stock also represents one Share Purchase Right (collectively, the "Rights"). The Rights trade automatically with the underlying shares of Common Stock. Upon becoming exercisable, but prior to the occurrence of certain events, each Right initially entitles its holder to buy one share of Common Stock from the Company at an exercise price of $60.00. The Rights will be distributed and become exercisable only if a person or group acquires, or announces its intention to acquire, Common Stock exceeding certain levels, as specified in the Rights Plan. Upon the occurrence of such events, the exercise price of each Right reduces to one-half of the then current market price. The Rights also give the holder certain rights in an acquiring company's Common Stock. The Company is entitled to redeem the Rights at a price of $.01 per Right at any time prior to the distribution of the Rights. The Rights have no voting power until exercised. COMMON STOCK WARRANTS The Company has two series of warrants outstanding, the 2002 Warrants and the 2006 Warrants. In connection with the Plan, the Company issued 114,690 of the 2002 Warrants to purchase one share each of the Company's Common Stock. These warrants, which expire on June 30, 2002, have an exercise price of $5.24 per share. During fiscal 1994, 1995 and 1996, 37,395, 47,392, and 4,320 shares were issued, respectively, upon the exercise of these warrants. The 2006 Warrants, which expire on September 1, 2006, were subject to certain adjustments as a result of the Plan, and accordingly, 146,791 of such warrants are currently outstanding with an exercise price of $38.70 per share. PRIVATE PLACEMENT TRANSACTION On January 25, 1996, the Company issued 4,000,000 shares of Common Stock (the "Shares") along with a warrant to purchase an additional 2,000,000 shares of Common Stock (the "Warrant") pursuant to a Stock and Warrant Purchase Agreement. The Warrant, which expires in January 2000 entitles the holder to purchase such additional shares of Common Stock at per share price of $26.15 subject to adjustment for certain dilutive events, and provides registration rights for the shares of Common Stock underlying the Warrant. The aggregate purchase price for the Shares and the Warrant was $69,732,000. The Warrant becomes exercisable on January 25, 1997 and expires on January 25, 2000. Approximately $68.0 million of the proceeds were used to repay outstanding borrowings under the Revolving Credit Agreement. F-24 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 7. STOCKHOLDERS' EQUITY (CONTINUED) TREASURY STOCK TRANSACTIONS During fiscal 1995, the Company purchased approximately 327,000 shares of its Common Stock in the open market for approximately $5.6 million. Approximately 17,000 of such shares were reissued related to 1994 ESPP exercises for approximately $291,000. On August 15, 1996, the Company commenced a "Dutch Auction" self-tender offer to stockholders for the repurchase of 1,891,891 shares of its own Common Stock. On September 5, 1996, the Company increased the self-tender offer to 3,300,000 shares. Under the terms of the offer, stockholders were invited to tender their shares by September 18, 1996 at prices ranging from $16.50 to $18.50 per share as specified by each stockholder. At the conclusion of the offer, the Company repurchased 3,961,505 shares on September 27, 1996 at $18.375 per share for a total cost of approximately $73.5 million, including transaction costs. The total shares repurchased represent approximately 12.0% of the outstanding Common Stock at such date. The transaction was financed through cash on hand and borrowings under the Revolving Credit Agreement. 8. INCOME TAXES The provision (benefit) for income taxes consisted of the following (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------- 1994 1995 1996 --------- --------- --------- Income taxes currently payable: Federal...................................... $ 0 $ 658 $ 6,900 State........................................ 639 1,851 (1,139) Foreign...................................... 1,466 1,188 3,779 Deferred income taxes: Federal...................................... (11,078) (12,931) 15,313 State........................................ (1,583) (1,848) 807 Foreign...................................... 52 0 35 --------- --------- --------- $ (10,504) $ (11,082) $ 25,695 --------- --------- --------- --------- --------- ---------
F-25 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 8. INCOME TAXES (CONTINUED) A reconciliation of the Company's income tax provision (benefit) to that computed by applying the statutory federal income tax rate is as follows (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------- 1994 1995 1996 --------- --------- --------- Income tax provision (benefit) at federal statutory income tax rate.................... $ (20,111) $ (18,798) $ 22,483 State income taxes, net of federal income tax benefit...................................... (616) (16) (216) Foreign income taxes, net of federal income tax benefit...................................... 987 772 2,479 Amortization of excess reorganization value.... 10,920 9,100 0 Other--net..................................... (1,684) (2,140) 949 --------- --------- --------- Income tax provision (benefit)................. $ (10,504) $ (11,082) $ 25,695 --------- --------- --------- --------- --------- ---------
As of September 30, 1996, the Company has estimated tax net operating loss ("NOL") carryforwards of approximately $250 million available to reduce future federal taxable income. These NOL carryforwards expire in 2006 through 2010 and are subject to examination by the Internal Revenue Service. The Company has recorded a valuation allowance against the entire amount of the NOL deferred tax asset and certain other deferred tax assets, that in management's opinion, are not likely to be recovered. Components of the net deferred income tax (assets) liabilities at September 30, 1995 and 1996 are as follows (in thousands):
YEAR ENDED SEPTEMBER 30, -------------------- 1995 1996 --------- --------- Deferred tax liabilities: Property and depreciation............................. $ 12,472 $ 23,970 Long-term debt and interest........................... 57,863 63,516 ESOP.................................................. 10,883 11,616 Other................................................. 7,214 14,133 --------- --------- Total deferred tax liabilities...................... 88,432 113,235 --------- --------- --------- --------- Deferred tax assets: Operating loss carry forwards......................... (93,171) (102,229) Insurance settlements................................. (18,752) (3,649) Self-insurance reserves............................... (46,319) (44,234) Restructuring costs................................... (21,042) (26,695) Other................................................. (38,707) (48,033) --------- --------- Total deferred tax assets........................... (217,991) (224,840) --------- --------- Valuation allowance..................................... 128,676 123,973 --------- --------- Deferred tax assets after valuation allowance........... (89,315) (100,867) --------- --------- Net deferred tax (assets) liabilities................... $ (883) $ 12,368 --------- --------- --------- ---------
F-26 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 8. INCOME TAXES (CONTINUED) The Internal Revenue Service is currently examining the Company's income tax returns for fiscal 1989 through 1992. In management's opinion, adequate provisions have been made for any adjustments which may result from these examinations. 9. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
SEPTEMBER 30, -------------------- 1995 1996 --------- --------- Salaries, wages and other benefits...................... $ 28,597 $ 39,841 Amounts due health insurance programs................... 10,252 27,223 Medical claims payable.................................. -- 26,552 Interest................................................ 20,561 20,348 Other................................................... 80,498 75,635 --------- --------- $ 139,908 $ 189,599 --------- --------- --------- ---------
10. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended September 30, 1994, 1995 and 1996 is as follows (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------- 1994 1995 1996 --------- --------- --------- Income taxes paid, net of refunds received.......... $ 7,097 $ 4,682 $ 9,299 Interest paid, net of amounts capitalized........... 25,554 54,302 56,248 Long-term debt assumed in connection with acquisitions...................................... 4,573 -- 12,100
The non-cash portion of unusual items for fiscal 1995 and 1996 includes the unpaid portion of the $29.8 million and $30.0 million insurance settlements that were recorded during the quarters ended March 31, 1995 and June 30, 1996, respectively. The payments of the insurance settlements are included in accounts payable and other accrued liabilities in the statement of cash flows for the years ended September 30, 1995 and 1996. 11. COMMITMENTS AND CONTINGENCIES The Company is self-insured for a substantial portion of its general and professional liability risks. The reserves for self-insured general and professional liability losses, including loss adjustment expenses, are based on actuarial estimates that are discounted at an average rate of 6% to their present value based on the Company's historical claims experience adjusted for current industry trends. The undiscounted amount of the reserve for unpaid claims at September 30, 1995 and 1996 was approximately $113.1 million and $84.3 million, respectively. The reserve for unpaid claims is adjusted periodically as such claims mature, to reflect changes in actuarial estimates based on actual experience. During fiscal 1996, the Company recorded a reduction in malpractice claim reserves of approximately $15.3 million as a result of updated F-27 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) actuarial estimates. While management and its actuaries believe that the present reserve is reasonable, ultimate settlement of losses may vary from the amount recorded. Certain of the Company's subsidiaries are subject to or parties to claims, civil suits and governmental investigations and inquiries relating to their operations and certain alleged business practices. In the opinion of management, based on consultation with counsel, resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. In January 1996, the Company settled an ongoing dispute with the Resolution Trust Corporation ("RTC"), for itself or in its capacity as conservator or receiver for 12 financial institutions, which formerly held certain debt securities that were issued by the Company in 1988. In connection with the settlement, the Company, denying any liability or fault, paid $2.7 million to the RTC in exchange for a release of all claims. On August 1, 1996, the United States Department of Justice, Civil Division, filed an Amended Complaint in a civil QUI TAM action initiated in November of 1994 against the Company and its Orlando South hospital subsidiary by two former employees. The Amended Complaint alleges that the hospital violated the federal False Claims Act ("the Act") in billing for inpatient treatment provided to elderly patients. The Amended Complaint is based on disputed clinical and factual issues which the Company believes do not constitute a violation of the Act. The Company and its subsidiary deny any liability in this matter and will continue to vigorously defend themselves against the suit. As is its policy, the Company will continue to cooperate with the government in this matter. The Company does not believe this matter will have a material adverse effect on its financial position or results of operations. 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company owns 50% of the Charter Medical Building in Macon, Georgia, and leases space in such building for certain corporate offices. Through September 30, 1994, the Company's corporate headquarters were located in the building and the lease, which expired September 30, 1994, provided for an average annual rent of approximately $1.2 million. Currently the Company is paying approximately $45,000 per month in rent on the building. Mr. William A. Fickling, Jr., a former Director and former Chairman of the Board of Directors of the Company, and his father's estate own 25% of the building. In the opinion of management, such office space was leased on terms as favorable as could be obtained from an unaffiliated party. The Company received distributions of approximately $280,000 in 1994. On September 15, 1993, the Company sold its ownership interest in Beech Street to the children of Mr. Fickling for approximately $5.5 million, plus the right to receive additional consideration if certain events (e.g. a public offering of Beech Street stock or if Beech Street sells 50% or more of its assets) occur within two years. The Company obtained a fairness opinion by an independent appraisal firm stating that the financial consideration was fair. The Company acquired its ownership interest in a series of related transactions beginning in May 1989, for a total purchase price of $2,956,000. During the period of its ownership, the Company received $1,242,000 in dividend distributions from Beech Street. Beech Street was, prior to May 1989, a wholly owned subsidiary of Beech Street, Inc., in which Mr. Fickling beneficially owns a majority of the outstanding stock. F-28 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED) The Company also has agreements with Beech Street where certain of the Company's hospitals provide services to employers (and their related employee and covered dependent groups) who have entered into agreements with Beech Street to utilize a Beech Street Preferred Provider Organization ("PPO") for hospital and other healthcare services. Such agreements provide for covered services to be rendered under terms (including discounts from the hospital's normal charges) which management of the Company believes are customary for hospital PPO agreements. The Beech Street PPO reviews claims and serves as an intermediary between the Company's hospitals and the contracting employers. The Company derived approximately $5.2 million in revenue from these agreements during fiscal 1994. The aggregate discount from customary charges was 19% in 1994. Gerald L. McManis, who was elected director in February 1994, is the President of McManis Associates, Inc. ("MAI"), a healthcare development and management consulting firm and a subsidiary of MMI Companies, Inc. ("MMI"). Mr. McManis also serves on the Board of Directors of MMI. During fiscal 1994, 1995 and 1996, MAI provided consulting services for the Company related to the development of strategic plans and a review of the Company's business processes. The Company incurred approximately $1.3 million, $158,000 and $274,000 in fees for such services during fiscal 1994, 1995 and 1996, respectively, and reimbursed MAI for approximately $244,000, $21,000 and $13,000, respectively, for expenses. G. Fred DiBona, Jr., who was appointed as a director of the Company in January 1996, is a Director and the President and Chief Executive Officer of Independence Blue Cross ("IBC"), a health insurance company. As of September 30, 1996, IBC owned 12.25% of Green Spring, a majority-owned subsidiary of the Company. IBC owned 16.67% of Green Spring prior to December 13, 1995. On December 13, 1995, IBC sold 4.42% of its ownership interest in Green Spring to the Company for $5,376,000 in cash. IBC had a cost basis of $3,288,000 in the 4.42% ownership interest sold to the Company. The Exchange Option described previously gives IBC the right to exchange its ownership interest in Green Spring for a maximum of 889,565 shares of Common Stock or $20,460,000 in subordinated notes through December 13, 1998. IBC and its affiliated entities contract with Green Spring for provider network, case management and medical review services pursuant to contractual relationships entered into on July 7, 1994 with terms of up to five years. During the period beginning December 14, 1995 through September 30, 1996, IBC and its affiliated entities made payments to Green Spring of approximately $29.2 million and owed Green Spring approximately $9.6 million at September 30, 1996. Green Spring recorded revenue of approximately $32.8 million from IBC during fiscal 1996. On July 7, 1994, IBC sold a subsidiary to Green Spring in exchange for a $15 million promissory note. As of September 30, 1996, $9 million remains outstanding under such promissory note and is due and payable in equal installments on July 7, 1997, 1998 and 1999. 13. BUSINESS SEGMENT INFORMATION The Company operates through three principal subsidiaries engaging in (i) the provider business, (ii) the managed care business and (iii) the public sector business. Intersegment sales are not material. Operating income represents net revenue less salaries, supplies and other operating expenses and bad debt expense, and excludes depreciation, amortization, interest (net), unusual items, income taxes and minority interest. Identifiable assets are those used in the Company's operations in each segment. Depreciation and F-29 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 13. BUSINESS SEGMENT INFORMATION (CONTINUED) amortization for the managed care business includes the amortization expense related to the step-up in asset basis for the acquisition of Green Spring in December 1995. Corporate assets consist primarily of cash and cash equivalents, investments and assets not employed in operations. Prior to fiscal 1996, the Company's managed care and public sector businesses were not material. Accordingly, no comparable segment information is presented for fiscal 1994 and 1995.
MANAGED PUBLIC PROVIDER CARE SECTOR CORPORATE 1996 BUSINESS BUSINESS BUSINESS OVERHEAD CONSOLIDATED - ------------------- --------- ----------- ----------- --------- ----------- Net revenue........ $1,037,939 $ 229,859 $ 77,481 $ -- $1,345,279 Operating income... 198,102 25,977 10,071 (34,786) 199,364 Depreciation and amortization..... 33,780 9,111 3,001 3,032 48,924 Identifiable assets........... 783,142 116,501 23,881 88,601 1,012,125 Capital expenditures..... 21,550 6,018 2,151 9,082 38,801
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended September 30, 1995 and 1996. The first quarter, second quarter and fourth quarter of fiscal 1995 contained unusual charges (income) of approximately ($3.0) million, $29.8 million and $30.6 million, respectively. The third and fourth quarter of fiscal 1996 include unusual charges of approximately $34.0 million and $3.3 million, respectively. See Note 4 for an explanation of these charges.
FISCAL QUARTERS ------------------------------------------ 1995 FIRST SECOND THIRD FOURTH - ------------------------------------ --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenue......................... $ 263,841 $ 299,817 $ 304,745 $ 283,333 Net income (loss)................... 349 (15,100) 1,682 (29,894) Net income (loss) per common share............................. 0.01 (0.53) 0.06 (1.07) 1996 - ------------------------------------ Net revenue......................... $ 295,665 $ 354,953 $ 346,379 $ 348,282 Net income (loss)................... 9,748 20,069 (5,722) 8,288 Net income (loss) per common share: Primary......................... 0.35 0.63 (0.18) 0.26 Fully diluted................... 0.35 0.59 (0.18) 0.26
F-30 15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS MAGELLAN HEALTH SERVICES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, 1995 -------------------------------------------------------------------- MAGELLAN HEALTH SERVICES, INC. CONSOLIDATED GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ----------- ------------- ------------ ------------ ------------ ASSETS Current Assets Cash and cash equivalents....................... $ 60,719 $ 10,279 $ 34,516 $ -- $ 105,514 Accounts receivable, net........................ 170,855 10,251 57 -- 181,163 Supplies........................................ 5,081 224 463 -- 5,768 Other current assets............................ 10,004 (1,241) 19,151 (14,784) 13,130 ----------- ------------- ------------ ------------ ------------ Total Current Assets.......................... 246,659 19,513 54,187 (14,784) 305,575 Assets restricted for settlement of unpaid claims and other long-term liabilites.................. -- 78,188 15,950 -- 94,138 Property and Equipment Land............................................ 79,807 7,199 1,013 -- 88,019 Buildings and improvements...................... 351,081 21,017 5,071 -- 377,169 Equipment....................................... 103,125 4,900 3,529 -- 111,554 ----------- ------------- ------------ ------------ ------------ 534,013 33,116 9,613 -- 576,742 Accumulated depreciation........................ (87,503) (2,716) (658) -- (90,877) Construction in progress........................ 2,650 251 1 -- 2,902 ----------- ------------- ------------ ------------ ------------ 449,160 30,651 8,956 -- 488,767 Other Long-Term Assets(1)......................... 129,898 18,398 1,010,425 (1,125,472) 33,249 Intangible assets, net............................ 29,498 11,811 20,520 -- 61,829 ----------- ------------- ------------ ------------ ------------ $ 855,215 $ 158,561 $1,110,038 $(1,140,256) $ 983,558 ----------- ------------- ------------ ------------ ------------ ----------- ------------- ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable................................ $ 50,510 $ 8,424 $ 12,086 $ -- $ 71,020 Accrued liabilities and income tax payable...... 67,646 4,156 68,541 -- 140,343 Current maturities of long-term debt and capital lease obligations............................. 2,673 126 -- -- 2,799 ----------- ------------- ------------ ------------ ------------ Total Current Liabilities..................... 120,829 12,706 80,627 -- 214,162 Long-Term Debt and Capital Lease Obligations...... (344,312) 5,271 877,811 -- 538,770 Reserve for Unpaid Claims......................... -- 89,207 25,702 (14,784) 100,125 Deferred Credits and Other Long-Term Liabilities (1)............................................. 512,425 476 37,338 (515,785) 34,455 Minority interest................................. -- -- -- 7,486 7,486 Stockholders' Equity Common Stock, par value $0.25 per share; Authorized 80,000 shares Issued and outstanding - 28,405 shares........ 2,765 837 7,101 (3,602) 7,101 Commitments and contingencies Other Stockholders' Equity Additional paid-in capital...................... 612,131 30,455 253,295 (642,586) 253,295 Retained earnings (Accumulated deficit)......... (47,789) 22,601 (161,840) 25,188 (161,840) Warrants outstanding............................ -- -- 64 -- 64 Common Stock in treasury 462 shares............. -- (4,736) (9,238) 4,736 (9,238) Cumulative foreign currency adjustments......... (835) 1,744 (822) (909) (822) ----------- ------------- ------------ ------------ ------------ 566,272 50,901 88,560 (617,173) 88,560 ----------- ------------- ------------ ------------ ------------ 855,215 158,561 1,110,038 (1,140,256) 983,558 ----------- ------------- ------------ ------------ ------------ ----------- ------------- ------------ ------------ ------------
- ------------------------ (1) Elimination entry related to intercompany receivables and payables and investment in consolidated subsidiaries. The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these balance sheets. F-31 15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, 1996 -------------------------------------------------------------------- MAGELLAN HEALTH SERVICES, INC. CONSOLIDATED GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED ASSETS SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ----------- ------------- ------------ ------------ ------------ Current Assets Cash and cash equivalents....................... $ 29,751 $ 79,552 $ 11,642 $ -- $ 120,945 Accounts receivable, net........................ 139,523 44,904 5,451 -- 189,878 Supplies........................................ 4,091 394 268 -- 4,753 Other current assets............................ 8,379 121 14,074 -- 22,574 ----------- ------------- ------------ ------------ ------------ Total Current Assets.......................... 181,744 124,971 31,435 -- 338,150 Assets restricted for settlement of unpaid claims a other long-term liabilities................... -- 78,542 26,761 -- 105,303 Property and Equipment Land............................................ 74,790 6,657 1,984 -- 83,431 Buildings and improvements...................... 350,187 33,493 5,141 -- 388,821 Equipment....................................... 112,748 25,206 8,961 -- 146,915 ----------- ------------- ------------ ------------ ------------ 537,725 65,356 16,086 -- 619,167 Accumulated depreciation........................ (111,556) (10,313) (4,184) -- (126,053) Construction in progress........................ 1,586 621 69 -- 2,276 ----------- ------------- ------------ ------------ ------------ 427,755 55,664 11,971 -- 495,390 Other Long-Term Assets (1)........................ 98,191 (56,176) 1,187,042 (1,155,775) 73,282 Goodwill, net..................................... 20,645 94,682 12,685 -- 128,012 ----------- ------------- ------------ ------------ ------------ $ 728,335 $ 297,683 $1,269,894 $(1,155,775) $1,140,137 ----------- ------------- ------------ ------------ ------------ ----------- ------------- ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable................................ $ 32,644 $ 34,057 $ 12,265 $ -- $ 78,966 Accrued liabilities and income tax payable...... 57,948 55,208 76,443 -- 189,599 Current maturities of long-term debt and capital lease obligations............................. 2,620 3,131 -- -- 5,751 ----------- ------------- ------------ ------------ ------------ Total Current Liabilities..................... 93,212 92,396 88,708 -- 274,316 Long-Term Debt and Capital Lease Obligations...... (455,333) 8,815 1,012,825 -- 566,307 Deferred Income Tax Liabilities................... -- (4,252) 16,620 -- 12,368 Reserve for Unpaid Claims......................... -- 72,494 546 -- 73,040 Deferred Credits and Other Long-Term Liabilities(1).................................. 352,044 43,565 29,378 (385,218) 39,769 Minority interest................................. -- -- -- 52,520 52,520 Stockholders' Equity Common Stock, par value $0.25 per share; Authorized - 80,000 shares Issued and outstanding - 33,007 shares........ 2,764 (483) 8,252 (2,281) 8,252 Committments and contingencies Other Stockholders' Equity Additional paid-in capital...................... 609,627 30,237 327,681 (639,864) 327,681 Retained earnings (Accumulated deficit)......... 126,826 58,932 (129,457) (185,758) (129,457) Warrants outstanding............................ -- -- 54 -- 54 Common Stock in treasury, 4,424 shares.......... -- (4,736) (82,731) 4,736 (82,731) Cumulative foreign currency adjustments......... (805) 715 (1,982) 90 (1,982) ----------- ------------- ------------ ------------ ------------ 738,412 84,665 121,817 (823,077) 121,817 ----------- ------------- ------------ ------------ ------------ $ 728,335 $ 297,683 $1,269,894 $(1,155,775) $1,140,137 ----------- ------------- ------------ ------------ ------------ ----------- ------------- ------------ ------------ ------------
- ------------------------ (1) Elimination entry related to intercompany receivables and payables and investment in consolidated subsidiaries. The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these balance sheets. F-32 15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (IN THOUSANDS)
SEPTEMBER 30, 1994 ---------------------------------------------------------------------- MAGELLAN HEALTH SERVICES, INC. CONSOLIDATED GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ----------- --------------- ------------ ------------ ------------ Net revenue............................... $ 890,737 $ 24,390 $ 6,931 $ (17,412) $ 904,646 Costs and expenses Salaries, supplies and other operating expenses.............................. 622,815 21,148 34,885 (17,412) 661,436 Bad debt expense........................ 70,856 (2) (231) -- 70,623 Depreciation and amortization........... 26,602 1,027 725 -- 28,354 Amortization of reorganization value in excess of amoounts allocable to identifiable assets................... -- -- 31,200 -- 31,200 Interest, net........................... (20,830) 21 60,203 -- 39,394 ESOP expense............................ 46,316 -- 2,881 -- 49,197 Stock option expense.................... -- -- 10,614 -- 10,614 Unusual items........................... 787 196 70,304 71,287 ----------- ------- ------------ ------------ ------------ 746,546 22,390 210,581 (17,412) 962,105 ----------- ------- ------------ ------------ ------------ Income (loss) before income taxes, equity in earnings (loss) of subsidiaries and extraordinary item........................ 144,191 2,000 (203,650) -- (57,459) Income tax benefit........................ (8,753) (195) 1,556 -- (10,504) ----------- ------- ------------ ------------ ------------ Income (loss) before equity in earnings (loss) of subsidiaries and extraordinary item...................................... 152,944 2,195 (202,094) -- (46,955) Equity in earnings (loss) of subsidiaries.............................. 1,889 -- 155,091 (157,028) (48) ----------- ------- ------------ ------------ ------------ Income (loss) before extraordinary item... 154,833 2,195 (47,003) (157,028) (47,003) Extraordinary item -- loss on early extinguishment or discharge of debt (net of income tax benefit of $8,410).......... -- -- (12,616) -- (12,616) ----------- ------- ------------ ------------ ------------ Net income (loss)......................... $ 154,833 $ 2,195 $ (59,619) $ (157,028) $ (59,619) ----------- ------- ------------ ------------ ------------ ----------- ------- ------------ ------------ ------------ CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Cash provided by (used in) operating activities................................ $ 153,152 $ 7,097 $ (61,902) $ -- $ 98,347 Cash Flows from Investing Activities: Capital expenditures.................... (14,282) (344) -- -- (14,626) Proceeds from the sale of assets........ 11,584 -- 5,000 -- 16,584 Acquisitions of businesses.............. (129,816) (734) -- -- (130,550) (Increase) decrease in assets restricted for the settlement of unpaid claims... -- (124) 7,200 -- 7,076 ----------- ------- ------------ ------------ ------------ Cash provided by (used in) investing activities................................ (132,514) (1,202) 12,200 -- (121,516) ----------- ------- ------------ ------------ ------------ Cash Flows from Financing Activities: Proceeds from the issuance of debt...... 25,862 -- 355,936 -- 381,798 Payments on debt and capital lease obligations........................... (19,797) (45) (291,711) -- (311,553) Cash flows from other financing activities............................ -- -- (3,475) -- (3,475) ----------- ------- ------------ ------------ ------------ Cash provided by (used in) financing activities................................ 6,065 (45) 60,750 -- 66,770 ----------- ------- ------------ ------------ ------------ Net increase in cash and cash equivalents............................... 26,703 5,850 11,048 -- 43,601 Cash and cash equivalents at beginning of period.................................... 45,147 2,756 38,099 -- 86,002 ----------- ------- ------------ ------------ ------------ Cash and cash equivalents at end of period.................................... $ 71,850 $ 8,606 $ 49,147 $ -- $ 129,603 ----------- ------- ------------ ------------ ------------ ----------- ------- ------------ ------------ ------------
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements. F-33 15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (IN THOUSANDS)
SEPTEMBER 30, 1995 --------------------------------------------------------------------- MAGELLAN HEALTH SERVICES, INC. CONSOLIDATED GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ----------- ------------- ------------- ------------ ------------ Net revenue....................................... $1,099,039 $ 79,702 $ (2,792) $ (24,213) $1,151,736 Costs and expenses Salaries, supplies and other operating expenses...................................... 789,850 74,449 22,934 (23,635) 863,598 Bad debt expense................................ 91,945 2,088 (2,011) -- 92,022 Depreciation and amortization................... 35,769 2,073 823 (578) 38,087 Amortization of reorganization value in excess of amounts allocable to identifiable assets... -- -- 26,000 -- 26,000 Interest, net................................... (32,975) 32 88,180 -- 55,237 ESOP expense.................................... 55,497 70 17,960 -- 73,527 Stock option expense............................ -- -- (467) -- (467) Unusual items................................... 26,640 3,957 26,840 -- 57,437 ----------- ------------- ------------- ------------ ------------ 966,726 82,669 180,259 (24,213) 1,205,441 ----------- ------------- ------------- ------------ ------------ Income (loss) before income taxes and equity in earnings of subsidiaries.......................... 132,313 (2,967) (183,051) -- (53,705) Provision for (benefit from) income taxes......... 6,139 (2,418) (14,803) -- (11,082) ----------- ------------- ------------- ------------ ------------ Income (loss) before equity in earnings (loss) of subsidiaries.................................... 126,174 (549) (168,248) -- (42,623) Equity in earnings (loss) of continuing subsidiaries...................................... 3,680 -- 125,285 (129,305) (340) ----------- ------------- ------------- ------------ ------------ Net income (loss)................................. $ 129,854 $ (549) $ (42,963) $ (129,305) $ (42,963) ----------- ------------- ------------- ------------ ------------ ----------- ------------- ------------- ------------ ------------ CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Cash provided by (used in) operating activities... $ 82,863 $ 28,223 $ (15,466) $ -- $ 95,620 ----------- ------------- ------------- ------------ ------------ Cash Flows from Investing Activities: Capital expenditures............................ (17,729) (1,177) (1,318) -- (20,224) Acquisition of businesses....................... (57,882) (4,098) -- -- (61,980) Increase in assets restricted for the settlement of un......................................... -- (16,713) (2,893) -- (19,606) Proceeds from the sale of assets................ -- -- 5,879 -- 5,879 Other........................................... (1,050) -- -- -- (1,050) ----------- ------------- ------------- ------------ ------------ Cash provided by (used in) investing activities... (76,661) (21,988) 1,668 -- (96,981) ----------- ------------- ------------- ------------ ------------ Cash Flows from Financing Activities: Proceeds from the issuance of debt.............. 28,869 -- -- -- 28,869 Payments on debt and capital lease obligations................................... (46,202) (31) (546) -- (46,779) Purchases of treasury stock..................... -- (4,531) (818) -- (5,349) Cash flows from other financing activities...... -- -- 531 -- 531 ----------- ------------- ------------- ------------ ------------ Cash provided by (used in) financing activities... (17,333) (4,562) (833) -- (22,728) ----------- ------------- ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents....................................... (11,131) 1,673 (14,631) -- (24,089) Cash and cash equivalents at beginning of period............................................ 71,850 8,606 49,147 -- 129,603 ----------- ------------- ------------- ------------ ------------ Cash and cash equivalents at end of period........ $ 60,719 $ 10,279 $ 34,516 $ -- $ 105,514 ----------- ------------- ------------- ------------ ------------ ----------- ------------- ------------- ------------ ------------
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements. F-34 15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (IN THOUSANDS)
SEPTEMBER 30, 1996 --------------------------------------------------------------------- MAGELLAN HEALTH SERVICES, INC. CONSOLIDATED GUARANTOR NONGUARANTOR (PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION) ENTRIES TOTAL ----------- ------------- ------------- ------------ ------------ Net revenue....................................... $1,012,448 $ 349,910 $ 975 $ (18,054) $1,345,279 Costs and expenses Salaries, supplies and other operating expenses...................................... 767,317 300,919 14,263 (18,054) 1,064,445 Bad debt expense................................ 76,784 5,379 (693) -- 81,470 Depreciation and amortization................... 35,801 11,969 1,154 -- 48,924 Interest, net................................... (42,935) (1,038) 91,990 -- 48,017 Stock option expense............................ -- -- 914 -- 914 Unusual items................................... 4,897 1,265 31,109 -- 37,271 ----------- ------------- ------------- ------------ ------------ 841,864 318,494 138,737 (18,054) 1,281,041 ----------- ------------- ------------- ------------ ------------ Income (loss) before income taxes and equity in earnings (loss) of subsidiaries................. 170,584 31,416 (137,762) -- 64,238 Provision for (benefit from) income taxes......... (14,543) 9,317 30,921 -- 25,695 ----------- ------------- ------------- ------------ ------------ Income (loss) before equity in earnings (loss) of subsidiaries.................................... 185,127 22,099 (168,683) -- 38,543 Equity in earnings (loss) of continuing subsidiaries...................................... (997) (4,772) 201,066 201,457 (6,160) ----------- ------------- ------------- ------------ ------------ Net income (loss)................................. $ 184,130 $ 17,327 $ 32,383 $ (201,457) $ 32,383 ----------- ------------- ------------- ------------ ------------ ----------- ------------- ------------- ------------ ------------ CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Cash provided by operating activities............. $ 8,028 $ 67,865 $ 25,973 $ -- $ 101,866 ----------- ------------- ------------- ------------ ------------ Cash Flows from Investing Activities: Capital expenditures............................ (27,543) (5,687) (5,571) -- (38,801) Acquisition of businessess...................... (820) 35,792 (85,890) -- (50,918) Increase in assets restricted for the settlement of unpaid claims.............................. -- (28,543) 10,811 -- (17,732) Proceeds from the sale of assets................ 2,663 2,585 -- -- 5,248 ----------- ------------- ------------- ------------ ------------ Cash provided by (used in) investing activities... (25,700) 4,147 (80,650) -- (102,203) ----------- ------------- ------------- ------------ ------------ Cash Flows from Financing Activities: Payments on debt and capital lease obligations (13,296) (4,539) (68,000) -- (85,835) Proceeds from the issuance of debt.............. -- 1,800 103,000 -- 104,800 Proceeds from the issuance of common stock, net of issuance costs............................. -- -- 68,573 -- 68,573 Purchase of treasury stock...................... -- -- (73,493) -- (73,493) Income tax payments made on behalf of stock optionee...................................... -- -- (1,678) -- (1,678) Proceeds from exercise of stock options & warrants...................................... -- -- 3,401 -- 3,401 ----------- ------------- ------------- ------------ ------------ Cash provided by (used in) financing activities... (13,296) (2,739) 31,803 -- 15,768 ----------- ------------- ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents....................................... (30,968) 69,273 (22,874) -- 15,431 Cash and cash equivalents at beginning of period............................................ 60,719 10,279 34,516 -- 105,514 ----------- ------------- ------------- ------------ ------------ Cash and cash equivalents at end of period........ $ 29,751 $ 79,552 $ 11,642 $ -- $ 120,945 ----------- ------------- ------------- ------------ ------------ ----------- ------------- ------------- ------------ ------------
The accompanying Notes to Condensed Consolidating Financial Statements are an integral part of these statements. F-35 15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) NOTES TO THE CONDENSED CONSOLIDATING FINANCIAL STATEMENTS General--These condensed consolidating financial statements reflect the Guarantors under the Notes and the Revolving Credit Agreement consummated in May 1994. The direct and indirect Guarantors are wholly owned by the Company or a Guarantor Subsidiary of the Company. Separate financial statements of the Guarantors are not presented because the Guarantors are jointly, severally and unconditionally liable under the guarantee, and the Company believes the condensed consolidating financial statements presented are more meaningful in understanding the financial position of the Guarantor Subsidiaries, and the separate financial statements are deemed not material to investors. Distributions--There are no restrictions on the ability of the Guarantor Subsidiaries to make distributions to the Company. Transfers from Guarantors to Nonguarantors--The New Revolving Credit Agreement permits the Company to contribute the assets of hospitals and related medical facilities to joint ventures that conduct a healthcare business, provided that certain conditions are satisfied and that the aggregate fair market value of all such facilities contributed to joint ventures with respect to which the Company and its wholly-owned subsidiaries have less than 50% of the equity interests or do not control such joint ventures does not exceed $100 million. Furthermore, the New Revolving Credit Agreement permits the Company and its Subsidiaries to make investments in controlled joint ventures up to $100 million plus the amount permitted but not used for uncontrolled joint ventures. The indenture related to the Notes also contains provisions that permit the Company and its Restricted Subsidiaries (as defined in the indenture for the Notes) to make investments in non-guarantors. The Company intends to make investments in Permitted Non-Control Investments (as defined in the New Revolving Credit Agreement) and Permitted Non Guarantor Transactions (as defined in the New Revolving Credit Agreement) to the extent it believes doing so will be consistent with its business strategy. To the extent the Company or its Restricted Subsidiaries make investments of the type described above, the assets available for debt payments and guarantee obligations could be diminished. F-36 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS ------------------------------------------------------------------ CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF CLASSIFICATION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - ------------------------------------------------------- ----------- ----------- ------------ ------------- ----------- Year ended September 30, 1994: Allowance for doubtful accounts...................... $ 28,843 $ 70,623 $ 19,877(A) $ 109(B) $ 43,555 8,560(D) 84,239(C) ----------- ----------- ------------ ------------- ----------- $ 28,843 $ 70,623 28,437 $ 84,348 $ 43,555 ----------- ----------- ------------ ------------- ----------- ----------- ----------- ------------ ------------- ----------- Year ended September 30, 1995: Allowance for doubtful accounts...................... $ 43,555 $ 92,022 $ 21,393(A) $ 111,021(C) $ 48,741 2,792(D) ----------- ----------- ------------ ------------- ----------- 43,555 $ 92,022 $ 24,185 $ 111,021 $ 48,741 ----------- ----------- ------------ ------------- ----------- ----------- ----------- ------------ ------------- ----------- Year ended September 30, 1996: Allowance for doubtful accounts...................... $ 48,741 $ 81,470 $ 22,761(A) $ 103,236(C) $ 50,548 812(D) ----------- ----------- ------------ ------------- ----------- $ 48,741 $ 81,470 $ 23,573 $ 103,236 $ 50,548 ----------- ----------- ------------ ------------- ----------- ----------- ----------- ------------ ------------- -----------
- ------------------------ (A) Recoveries of amounts previously charged to income. (B) Included in provision for restructuring for operations. (C) Accounts written off. (D) Allowance for doubtful accounts assumed in acquisitions. S-1 EX-4.(AI) 2 EX 4(AI) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CREDIT AGREEMENT dated as of October 16, 1996 among MAGELLAN HEALTH SERVICES, INC., THE SUBSIDIARY BORROWERS NAMED HEREIN, THE LENDERS NAMED HEREIN, and THE CHASE MANHATTAN BANK, as Administrative Agent, Collateral Agent and an Issuing Bank, and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Syndication Agent and an Issuing Bank - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [CS&M Reference No. 6700-439] TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINITIONS SECTION 1.01. DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 1.02. TERMS GENERALLY . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE II THE CREDITS SECTION 2.01. COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.02. LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 2.03. BORROWING PROCEDURE . . . . . . . . . . . . . . . . . . . . . 25 SECTION 2.04. EVIDENCE OF DEBT; REPAYMENT OF LOANS. . . . . . . . . . . . . 26 SECTION 2.05. FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 2.06. INTEREST ON LOANS . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.07. DEFAULT INTEREST. . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.08. ALTERNATE RATE OF INTEREST. . . . . . . . . . . . . . . . . . 28 SECTION 2.09. TERMINATION AND REDUCTION OF COMMITMENTS. . . . . . . . . . . 29 SECTION 2.10. CONVERSION AND CONTINUATION OF BORROWINGS. . . . . . . . . . 29 SECTION 2.11. PREPAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 2.12. MANDATORY COMMITMENT REDUCTIONS . . . . . . . . . . . . . . . 31 SECTION 2.13. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES . . . . . . . . 32 SECTION 2.14. CHANGE IN LEGALITY. . . . . . . . . . . . . . . . . . . . . . 33 SECTION 2.15. INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 2.16. PRO RATA TREATMENT. . . . . . . . . . . . . . . . . . . . . . 34 SECTION 2.17. SHARING OF SETOFFS. . . . . . . . . . . . . . . . . . . . . . 35 SECTION 2.18. PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 2.19. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 2.20. ASSIGNMENT OF COMMITMENTS UNDER CERTAIN CIRCUMSTANCES; DUTY TO MITIGATE . . . . . . . . . . . . . . . . . . . . 37 SECTION 2.21. LETTERS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 2.22. ADDITIONAL BORROWERS. . . . . . . . . . . . . . . . . . . . . 42 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. ORGANIZATION; POWERS. . . . . . . . . . . . . . . . . . . . . 43 SECTION 3.02. AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 3.03. ENFORCEABILITY. . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 3.04. GOVERNMENTAL APPROVALS. . . . . . . . . . . . . . . . . . . . 43 Contents, p. 2 PAGE ---- SECTION 3.05. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 44 SECTION 3.06. NO MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . 44 SECTION 3.07. TITLE TO PROPERTIES; POSSESSION UNDER LEASES. . . . . . . . . 44 SECTION 3.08. SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 3.09. LITIGATION; COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . 44 SECTION 3.10. AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 3.11. FEDERAL RESERVE REGULATIONS . . . . . . . . . . . . . . . . . 45 SECTION 3.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. . 45 SECTION 3.13. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 3.14. TAX RETURNS . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 3.15. NO MATERIAL MISSTATEMENTS . . . . . . . . . . . . . . . . . . 45 SECTION 3.16. EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . 46 SECTION 3.17. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . 46 SECTION 3.18. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 3.19. SECURITY DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 47 SECTION 3.20. LABOR MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 3.21. SOLVENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. ALL CREDIT EVENTS . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 4.02. FIRST CREDIT EVENT. . . . . . . . . . . . . . . . . . . . . . 49 SECTION 4.03. CREDIT EVENTS IN RESPECT OF ADDITIONAL REVOLVING FACILITY BORROWINGS. . . . . . . . . . . . . . . . . . . 52 SECTION 4.04. NEW SUBSIDIARY BORROWER CREDIT EVENT. . . . . . . . . . . . . 53 ARTICLE V AFFIRMATIVE COVENANTS SECTION 5.01. EXISTENCE; BUSINESSES AND PROPERTIES. . . . . . . . . . . . . 53 SECTION 5.02. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 5.03. OBLIGATIONS AND TAXES . . . . . . . . . . . . . . . . . . . . 54 SECTION 5.04. FINANCIAL STATEMENTS, REPORTS, ETC. . . . . . . . . . . . . . 55 SECTION 5.05. LITIGATION AND OTHER NOTICES. . . . . . . . . . . . . . . . . 57 SECTION 5.06. EMPLOYEE BENEFITS . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 5.07. MAINTAINING RECORDS; ACCESS TO PROPERTIES AND INSPECTIONS . . 57 SECTION 5.08. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 5.09. COMPLIANCE WITH ENVIRONMENTAL LAWS. . . . . . . . . . . . . . 58 SECTION 5.10. PREPARATION OF ENVIRONMENTAL REPORTS. . . . . . . . . . . . . 58 SECTION 5.11. FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . 58 Contents, p. 3 PAGE ---- ARTICLE VI NEGATIVE COVENANTS SECTION 6.01. INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 6.02. LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 6.03. SALE AND LEASEBACK TRANSACTIONS . . . . . . . . . . . . . . . 63 SECTION 6.04. INVESTMENTS, LOANS, ADVANCES AND CERTAIN OTHER TRANSACTIONS . . . . . . . . . . . . . . . . . . . 63 SECTION 6.05. MERGERS, CONSOLIDATIONS, SALES OF ASSETS AND ACQUISITIONS . . 65 SECTION 6.06. DIVIDENDS AND DISTRIBUTIONS; RESTRICTIONS ON ABILITY OF SUBSIDIARIES TO PAY DIVIDENDS . . . . . . . . . . . . 66 SECTION 6.07. TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . . . . 67 SECTION 6.08. OTHER INDEBTEDNESS AND AGREEMENTS . . . . . . . . . . . . . . 67 SECTION 6.09. BUSINESS OF THE BORROWERS AND SUBSIDIARIES. . . . . . . . . . 68 SECTION 6.10. INTEREST EXPENSE COVERAGE RATIO . . . . . . . . . . . . . . . 68 SECTION 6.11. LEVERAGE RATIO. . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 6.12. SENIOR DEBT RATIO . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 6.13. FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . 68 ARTICLE VII EVENTS OF DEFAULT ARTICLE VIII THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT AND THE COLLATERAL AGENT ARTICLE IX MISCELLANEOUS SECTION 9.01. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 9.02. SURVIVAL OF AGREEMENT . . . . . . . . . . . . . . . . . . . . 74 SECTION 9.03. BINDING EFFECT. . . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 9.04. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . 75 SECTION 9.05. EXPENSES; INDEMNITY . . . . . . . . . . . . . . . . . . . . . 78 SECTION 9.06. RIGHT OF SETOFF . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 9.07. APPLICABLE LAW. . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 9.08. WAIVERS; AMENDMENT. . . . . . . . . . . . . . . . . . . . . . 79 SECTION 9.09. INTEREST RATE LIMITATION. . . . . . . . . . . . . . . . . . . 80 SECTION 9.10. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 9.11. WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . 81 SECTION 9.12. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 9.13. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 9.14. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 9.15. JURISDICTION; CONSENT TO SERVICE OF PROCESS . . . . . . . . . 81 Contents, p. 4 PAGE ---- SECTION 9.16. CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . 82 SECTION 9.17. OBLIGATIONS JOINT AND SEVERAL . . . . . . . . . . . . . . . . 83 EXHIBITS, ANNEX AND SCHEDULES Exhibit A Form of Administrative Questionnaire Exhibit B Form of Assignment and Acceptance Exhibit C-1 Form of Borrowing Request Exhibit C-2 Form of New Borrower Agreement Exhibit C-3 Form of Subsidiary Borrower Termination Exhibit D Form of Guarantee Agreement Exhibit E Form of Indemnity, Subrogation and Contribution Agreement Exhibit F Form of Pledge Agreement Exhibit G Form of Security Agreement Exhibit H-1 Opinion of King & Spalding Exhibit H-2 Opinion of Foreign Counsel Schedule 1 Subsidiary Borrowers Schedule 1.01(a) Existing Letters of Credit Schedule 1.01(b) Guarantors Schedule 1.01(c) Real Estate for Sale Schedule 2.01 Commitments Schedule 3.08 Subsidiaries Schedule 3.09 Litigation Schedule 3.17 Environmental Matters Schedule 3.18 Insurance Schedule 4.02(a) Foreign Counsel Schedule 6.01(a) Indebtedness Schedule 6.02(a) Liens Schedule 6.04(m) Investments, Loans and Advances Schedule 6.06(b) Intercompany Dividend Restrictions and Encumbrances CREDIT AGREEMENT dated as of October 16, 1996, among MAGELLAN HEALTH SERVICES, INC., a Delaware corporation (the "PARENT BORROWER"), each subsidiary of the Parent Borrower listed on Schedule 1 hereto or as otherwise defined herein (each, a "SUBSIDIARY BORROWER" and collectively, the "SUBSIDIARY BORROWERS" (such term is used herein as modified in Article I); the Parent Borrower and the Subsidiary Borrowers are collectively referred to herein as the "BORROWERS"); the Lenders (as defined in Article I), THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT") for the Lenders, as collateral agent (in such capacity, the "COLLATERAL AGENT") for the Lenders and as an issuing bank (in such capacity, an "ISSUING BANK") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a North Carolina banking corporation, as syndication agent (in such capacity, the "SYNDICATION AGENT") for the Lenders and as an issuing bank (in such capacity, an "ISSUING BANK", and together with The Chase Manhattan Bank in its capacity as an Issuing Bank, the "ISSUING BANKS"). The Borrowers have requested the Lenders to extend credit to the Borrowers (a) pursuant to the Refinancing Revolving Credit Facility (such term and each other capitalized term used but not defined herein having the meaning given it in Article I), in the form of Refinancing Revolving Loans at any time and from time to time prior to the Refinancing Revolving Facility Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $300,000,000 and (b) pursuant to the Additional Revolving Credit Facility, in the form of Additional Revolving Loans at any time and from time to time prior to the Additional Revolving Facility Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $100,000,000. The Borrowers have requested the Issuing Banks to issue letters of credit under the Refinancing Revolving Credit Facility, in an aggregate face amount at any time outstanding not in excess of $100,000,000, to support payment obligations incurred in the Borrowers' and the Subsidiaries' business. The proceeds of the Refinancing Revolving Loans are to be used solely (a) on the Closing Date, (i) to refinance the principal of, and to pay all interest, fees and other amounts payable in respect of, the outstanding loans under the Existing Credit Agreement and (ii) to pay fees and expenses incurred in connection with the execution of this Agreement and the other Loan Documents (clauses (i) and (ii) are collectively referred to herein as the "TRANSACTIONS"), and (b) on or after the Closing Date, (i) for general corporate purposes and (ii) to finance acquisitions, investments, stock repurchases and debt repurchases, in each case as permitted hereunder. The proceeds of the Additional Revolving Loans are to be used solely on or after the date specified herein for (i) general corporate purposes and (ii) to finance acquisitions, investments, stock repurchases and debt repurchases, in each case as permitted hereunder. The Lenders are willing to extend such credit to the Borrowers and each Issuing Bank is willing to issue letters of credit for the account of the Borrowers on the terms and subject to the conditions set forth herein. Accordingly, the parties hereto agree as follows: 2 ARTICLE I DEFINITIONS SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings specified below: "ABR BORROWING" shall mean a Borrowing comprised of ABR Loans. "ABR LOAN" shall mean any Loan bearing interest at the Alternate Base Rate in accordance with the provisions of Article II. "ACQUIRED ENTITY" shall mean the assets, in the case of an acquisition of assets, or the capital stock or other equity interests (or, if the context requires, the person that is the issuer of such capital stock or other equity interests), in the case of an acquisition of capital stock or other equity interests, acquired by any Borrower or any Guarantor pursuant to a Permitted Acquisition. "ACQUIRED ENTITY EBITDA" shall mean, for purposes of clause (c) of the definition of Consolidated EBITDA, the net income of any Acquired Entity PLUS (ii) to the extent deducted in the determination of such Acquired Entity's net income, the sum of such Acquired Entity's: (A) aggregate amount of income tax expense for such period, (B) aggregate amount of interest expense for such period and (C) aggregate amount of amortization, depreciation and other non-cash charges (including amortization of goodwill, transaction expenses, employee stock ownership plan expense, excess reorganization expense, stock option expense, covenants not to compete and other intangible assets) for such period, all as determined in accordance with GAAP, PROVIDED that for purposes of determining Acquired Entity EBITDA, (i) all extraordinary gains or losses of such Acquired Entity and (ii) the gain (or loss) attributable to the sale of any assets of such Acquired Entity outside the ordinary course of business shall not be included in such Acquired Entity's net income. "ADDITIONAL FACILITY LENDER" shall mean a Lender that has an Additional Loan Commitment or, if such Commitment has expired or terminated, that has made Additional Revolving Loans that have not been repaid. "ADDITIONAL LOAN COMMITMENT" shall mean, with respect to each Additional Facility Lender, the commitment of such Lender to make Additional Revolving Loans hereunder as set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender assumed its Additional Loan Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Sections 2.09, 2.11, 2.12 or 2.20 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. "ADDITIONAL REVOLVING CREDIT FACILITY" shall mean the revolving credit facility pursuant to which Additional Revolving Loans shall be made. "ADDITIONAL REVOLVING FACILITY BORROWING" shall mean a Borrowing comprised of Additional Revolving Loans. 3 "ADDITIONAL REVOLVING FACILITY MATURITY DATE" shall mean the fourth anniversary of the Credit Agreement. "ADDITIONAL REVOLVING LOANS" shall mean the loans made by the Additional Facility Lenders to the Borrowers pursuant to Section 2.01(b) under the Additional Revolving Credit Facility. Each Additional Revolving Loan shall be a Eurodollar Loan or an ABR Loan. "ADJUSTED LIBO RATE" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the product of (a) the LIBO Rate in effect for such Interest Period and (b) Statutory Reserves. "ADMINISTRATIVE AGENT" shall have the meaning assigned to such term in the preamble to this Agreement or any successor appointed pursuant to Article VIII. "ADMINISTRATIVE AGENT FEES" shall have the meaning assigned to such term in Section 2.05(b). "ADMINISTRATIVE QUESTIONNAIRE" shall mean an Administrative Questionnaire in the form of Exhibit A. "AFFILIATE" shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified. "AGGREGATE CREDIT EXPOSURE" shall mean the aggregate amount of the Refinancing Facility Lenders' Credit Exposures. "ALTERNATE BASE RATE" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability of the Administrative Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the preceding sentence until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. The term "PRIME RATE" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. The term "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of 4 the quotations for the day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "APPLICABLE PERCENTAGE" shall mean, for any day, with respect to any Eurodollar Loan, or with respect to the Commitment Fees, as the case may be, the applicable percentage set forth below under the caption "Eurodollar Spread" or "Fee Percentage", as the case may be, based upon the Leverage Ratio as of the relevant determination date: Leverage Ratio Eurodollar Fee -------------- Spread Percentage ------ ---------- CATEGORY 1 1.50% .375% Greater than 3.50 to 1.00 CATEGORY 2 1.25% 0.25% Less than or equal to 3.50 to 1.00 but greater than 2.00 to 1.00 CATEGORY 3 1.00% 0.25% Less than or equal to 2.00 to 1.00 but greater than 1.00 to 1.00 CATEGORY 4 0.75% 0.25% Less than or equal to 1.00 to 1.00 Notwithstanding the foregoing, until the Parent Borrower has delivered the financial statements for the fiscal quarter ending immediately following the Closing Date, in accordance with Section 5.04(a) or (b), the Leverage Ratio shall be deemed to be in Category 2 for purposes of determining the Applicable Percentage. Each change in the Applicable Percentage resulting from a change in the Leverage Ratio shall be effective with respect to all Loans, Commitments and Letters of Credit outstanding on and after the date of delivery to the Administrative Agent of the financial statements and certificates required by Section 5.04(a) or (b) indicating such change until the date immediately preceding the next date of delivery of such financial statements and certificates indicating another such change. Notwithstanding the foregoing, (i) at any time during which the Parent Borrower has failed to deliver the financial statements and certificates required by Section 5.04(a) or (b), or (ii) at any time after the occurrence and during the continuance of an Event of Default, the Leverage Ratio shall be deemed to be in Category 1 for purposes of determining the Applicable Percentage. "ASSET SALE" shall mean the sale (including any transaction that has the economic effect of a sale), transfer or other disposition (by way of merger or otherwise, including sales in connection with a sale and leaseback transaction permitted pursuant to Section 6.03, or as a result of a Condemnation Event or a Casualty Event) by the Borrowers or any of the Guarantors to any person, other than the Borrowers or any Guarantor, of (a) any capital stock of the Subsidiary Borrowers or any of the Guarantors or (b) any other assets of the Borrowers or any of the 5 Guarantors (other than inventory, obsolete or worn out assets, scrap and Permitted Investments, in each case disposed of in the ordinary course of business) of the Borrowers or any of the Guarantors, except, (i) sales, transfers or other dispositions of accounts receivables and related assets of the Borrowers or any Guarantor in connection with a Permitted Receivables Financing, (ii) sales, transfers or other dispositions of the Real Estate for Sale; (iii) sales, transfers or other dispositions that are Permitted Non- Control Investments or Permitted Non-Guarantor Transactions, (iv) sales, transfers or other dispositions of Green Spring capital stock pursuant to the Green Spring Stockholders' Agreement, and (v) sales, transfers or other dispositions of any assets in one transaction or a series of related transactions having a value not in excess of $200,000. "ASSIGNMENT AND ACCEPTANCE" shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit B or such other form as shall be approved by the Administrative Agent. "BACK-UP LETTER OF CREDIT" shall mean any Letter of Credit issued in order to support any letter of credit that (a) exists on the Closing Date and (b) is set forth on Schedule 1.01(a). "BOARD" shall mean the Board of Governors of the Federal Reserve System of the United States of America. "BORROWERS" shall mean the Parent Borrower and the Subsidiary Borrowers. "BORROWING" shall mean a group of Loans of a single Type made by the Lenders on a single date and as to which a single Interest Period is in effect. "BORROWING REQUEST" shall mean a request by the Borrowers in accordance with the terms of Section 2.03 and substantially in the form of Exhibit C-1. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or day on which banks in New York City are authorized or required by law to close; PROVIDED, HOWEVER, that when used in connection with a Eurodollar Loan, the term "BUSINESS DAY" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "CAPITAL LEASE OBLIGATIONS" of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person in accordance with GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "CASUALTY EVENT" shall mean an event pursuant to which the Borrowers or any of the Guarantors has the right to collect and receive insurance proceeds (other than business interruption proceeds) under any insurance policies with respect to any insured casualty to any property of the Borrowers or any of the Guarantors. 6 A "CHANGE IN CONTROL" shall be deemed to have occurred if (a) any person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934 as in effect on the date hereof), other than any person or group that owns at least 5% of the capital stock of the Parent Borrower on the Closing Date, shall own directly or indirectly, beneficially or of record, shares representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Parent Borrower; (b) a majority of the seats (other than vacant seats) on the board of directors of the Parent Borrower shall at any time be occupied by persons who were neither (i) nominated by the board of directors of the Parent Borrower, nor (ii) appointed by directors so nominated; or (c) any change in control (or similar event, however denominated) with respect to the Parent Borrower shall occur under and as defined in any indenture or agreement in respect of Indebtedness for borrowed money in excess of the aggregate principal amount of $12,500,000 to which the Parent Borrower or any Guarantor is a party. "CHARTER BEHAVIORAL" shall mean Charter Behavioral Health Systems, Inc., a Delaware corporation. "CLOSING DATE" shall mean the date of the first Credit Event. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL" shall mean all the "Collateral" as defined in any Security Document. "COLLATERAL AGENT" shall have the meaning assigned to such term in the preamble to this Agreement or any successor appointed pursuant to Article VIII. "COMMITMENT" shall mean, with respect to any Lender, such Lender's Refinancing Loan Commitment and Additional Loan Commitment. "COMMITMENT FEE" shall have the meaning assigned to such term in Section 2.05(a). "CONDEMNATION EVENT" shall mean an event pursuant to which the Borrowers or any of the Guarantors has the right to collect and receive proceeds as a result of any action or proceeding for the taking of any property of the Borrowers or any Guarantor, or any part thereof or interest therein, for public or quasi-public use under the power of eminent domain, by reason of any public improvement or condemnation proceeding, or in any other manner. "CONFIDENTIAL INFORMATION MEMORANDUM" shall mean the Confidential Information Memorandum of the Parent Borrower dated September, 1996. "CONSOLIDATED EBITDA" shall mean, for any period, (a) Consolidated Net Income for such period PLUS (b) to the extent deducted in the determination of Consolidated Net Income, the sum of: (i) the aggregate amount of income tax expense for such period, (ii) the aggregate amount of Consolidated Interest Expense for such period and (iii) the aggregate amount of amortization, depreciation and other non-cash charges (including amortization of goodwill, transaction expenses, 7 employee stock ownership plan expense, excess reorganization expense, stock option expense, covenants not to compete and other intangible assets) for such period and PLUS, without duplication, (c) any Acquired Entity EBITDA during such period, calculated on a PRO FORMA basis as of the first day of such period. "CONSOLIDATED INTEREST EXPENSE" shall mean, with respect to the Parent Borrower and the Subsidiaries for any period, the gross interest expense (including interest expense attributable to Capital Lease Obligations and Interest Rate Protection Agreements but excluding any non-cash interest expense, including amortization of deferred loan costs) accrued or paid by the Parent Borrower and the Subsidiaries for such period, as determined on a consolidated basis in accordance with GAAP, PLUS (without duplication) (a) interest- equivalent costs associated with any Permitted Receivables Financing, whether accounted for as interest expense or loss on the sale of receivables and (b) interest expense of any Acquired Entity during such period, calculated on a PRO FORMA basis as of the first day of such period. "CONSOLIDATED NET INCOME" shall mean, for any period, the net income (or loss) of the Parent Borrower and the Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, PROVIDED that (a) there shall be included in the determination of Consolidated Net Income the net income (or loss) attributable to all Controlled Ventures (it being understood that such net income (or loss) will be proportionate to the Parent Borrower's equity interest, direct or indirect, in such Controlled Venture) and (b) there shall be excluded from the determination of Consolidated Net Income (i) the net income (or loss) attributable to all Non-Controlled Ventures to the extent that cash has not been distributed to the Parent Borrower or any of the Subsidiaries, (ii) all extraordinary gains or losses and (iii) the gain (or loss) attributable to the sale of any assets of the Parent Borrower or the Subsidiaries permitted under Section 6.05. "CONTROL" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "CONTROLLING" and "CONTROLLED" shall have meanings correlative thereto. For purposes of this Agreement, "CONTROL" shall be deemed to exist if, for financial reporting purposes, the Controlled person's financial statements are consolidated with the financial statement of the Controlling person. "CONTROLLED NON-GUARANTOR ENTITIES" shall mean partnerships, joint ventures or Subsidiary Non-Guarantors in which the Parent Borrower or any of the Subsidiaries have an ownership interest of 50% or greater of the equity interests therein and that are Controlled by the Parent Borrower. "CONTROLLED VENTURES" shall mean the healthcare partnerships and joint ventures (i) that are Controlled by the Parent Borrower or any of the Subsidiaries, (ii) of which the Parent Borrower or any of the Subsidiaries has an ownership interest of 50% or greater of the equity interests therein and (iii) of which the partnership documents and any other applicable governing documents contain no restriction or prohibition of any kind on cash distributions, other than Permitted Restrictions. "CREDIT EVENT" shall have the meaning assigned to such term in Section 4.01. 8 "CREDIT EXPOSURE" shall mean, with respect to any Refinancing Facility Lender at any time, the aggregate principal amount at such time of all outstanding Refinancing Revolving Loans of such Lender, PLUS the aggregate amount at such time of such Lender's L/C Exposure. "DEFAULT" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "DOLLARS" or "$" shall mean lawful money of the United States of America. "DOMESTIC SUBSIDIARIES" shall mean all Subsidiaries incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia. "ENVIRONMENT" shall mean ambient air, surface water and groundwater (including potable water, navigable water and wetlands), the land surface or subsurface strata, the workplace or as otherwise defined in any Environmental Law. "ENVIRONMENTAL CLAIM" shall mean any written accusation, allegation, notice of violation, claim, demand, order, directive, cost recovery action or other cause of action by, or on behalf of, any Governmental Authority or any person for damages, injunctive or equitable relief, personal injury (including sickness, disease or death), Remedial Action costs, tangible or intangible property damage, natural resource damages, nuisance, pollution, any adverse effect on the environment caused by any Hazardous Material, or for fines, penalties or restrictions, resulting from or based upon (a) the existence, or the continuation of the existence, of a Release (including sudden or non-sudden, accidental or non-accidental Releases), (b) exposure to any Hazardous Material, (c) the presence, use, handling, transportation, storage, treatment or disposal of any Hazardous Material or (d) the violation or alleged violation of any Environmental Law or Environmental Permit. "ENVIRONMENTAL LAW" shall mean any and all applicable present and future treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, Release or threatened Release of any Hazardous Material or to health and safety matters, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. Sections 9601 ET SEQ. (collectively "CERCLA"), the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. Sections 6901 ET SEQ., the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. Sections 1251 ET SEQ., the Clean Air Act of 1970, as amended 42 U.S.C. Sections 7401 ET SEQ., the Toxic Substances Control Act of 1976, 15 U.S.C. Sections 2601 ET SEQ., the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. Sections 651 ET SEQ., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Sections 11001 ET SEQ., the Safe Drinking Water Act of 1974, as amended, 42 U.S.C. Sections 300(f) ET SEQ., the Hazardous Materials Transportation Act, 49 U.S.C. Sections 5101 ET SEQ., and any similar or implementing state or local law, and all amendments or regulations promulgated under any of the foregoing. 9 "ENVIRONMENTAL PERMIT" shall mean any permit, approval, authorization, certificate, license, variance, filing or permission required by or from any Governmental Authority pursuant to any Environmental Law. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA AFFILIATE" shall mean any trade or business (whether or not incorporated) that, together with any Loan Party, is treated as a single employer under Section 414(b) or (c) of the Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA EVENT" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of any Loan Party or any of its ERISA Affiliates from any Plan or Multiemployer Plan; (f) the receipt by any Loan Party or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g) the receipt by any Loan Party or any ERISA Affiliate of any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a "prohibited transaction" with respect to which any Loan Party or any of its Subsidiaries is a "disqualified person" (within the meaning of Section 4975 of the Code) or with respect to which any Loan Party or any such Subsidiary could otherwise be liable; and (i) any other event or condition with respect to a Plan or Multiemployer Plan that could reasonably be expected to result in liability of any Loan Party. "EURODOLLAR BORROWING" shall mean a Borrowing comprised of Eurodollar Loans. "EURODOLLAR LOAN" shall mean any Loan bearing interest at a rate determined by reference to the Adjusted LIBO Rate in accordance with the provisions of Article II. "EVENT OF DEFAULT" shall have the meaning assigned to such term in Article VII. "EXISTING CREDIT AGREEMENT" shall mean the Second Amended and Restated Credit Agreement, dated as of May 2, 1994, and as amended by Amendments 1 through 11 thereto, among the Parent Borrower, Bankers Trust Company, as Agent, the Syndication Agent, as Co-Agent, and the financial institutions listed on Annex I thereto. "FEE LETTER" shall mean the Fee Letter dated August 21, 1996, between the Parent Borrower, the Administrative Agent and the Syndication Agent. 10 "FEES" shall mean the Commitment Fees, the Administrative Agent's Fees, the L/C Participation Fees and the Issuing Bank Fees. "FINANCIAL OFFICER" of any corporation shall mean any of the chief financial officer, principal accounting officer, Treasurer and Controller of such corporation. "FOREIGN SUBSIDIARY" shall mean any Subsidiary that is not a Domestic Subsidiary. "GAAP" shall mean generally accepted accounting principles applied on a consistent basis. "GOVERNMENTAL AUTHORITY" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "GREEN SPRING" shall mean Green Spring Health Services, Inc., a Delaware corporation. "GREEN SPRING EXCHANGE AGREEMENT" shall mean the agreement dated as of December 13, 1995 among Blue Cross and Blue Shield of New Jersey, Inc., Health Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc. and the Parent Borrower. "GREEN SPRING STOCKHOLDERS' AGREEMENT" shall mean the stockholders' agreement dated as of December 13, 1995 among Green Spring, Blue Cross and Blue Shield of New Jersey, Inc., Health Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc. and the Parent Borrower. "GUARANTEE" of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "GUARANTEE AGREEMENT" shall mean the Guarantee Agreement, substantially in the form of Exhibit D, made by the Guarantors in favor of the Collateral Agent for the benefit of the Secured Parties. "GUARANTORS" shall mean each person listed on Schedule 1.01(b) and each other person that becomes party to a Guarantee Agreement as a Guarantor, and the permitted successors and assigns of each such person. 11 "HAZARDOUS MATERIALS" shall mean all explosive or radioactive substances or wastes, hazardous or toxic substances or wastes, pollutants, solid, liquid or gaseous wastes, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls ("PCBS") or PCB-containing materials or equipment, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "INDEBTEDNESS" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations (determined on the basis of actual, not notional, obligations) of such person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances issued in support of obligations that constitute Indebtedness under any other clause of this definition (unless such obligations are fully cash collateralized), PROVIDED that all obligations in respect of letters of credit shall be deemed Indebtedness to the extent drawings thereunder are unreimbursed (after any applicable grace period) regardless of the purpose for which such letter of credit was issued. The Indebtedness of any person shall include the recourse Indebtedness of any partnership in which such person is a general partner. "INDEMNITY, SUBROGATION AND CONTRIBUTION AGREEMENT" shall mean the Indemnity, Subrogation and Contribution Agreement, substantially in the form of Exhibit E, among the Borrowers, the Guarantors and the Collateral Agent. "INSURANCE SUBSIDIARIES" shall mean (a) Golden Isle Assurance Company and (b) Plymouth Insurance Company, Ltd., each a corporation organized under the laws of Bermuda, and their respective successors and assigns. "INTEREST EXPENSE COVERAGE RATIO" shall mean, as of the last day of any fiscal quarter, the ratio of (a) Consolidated EBITDA for the period of four consecutive fiscal quarters ended on such day to (b) Consolidated Interest Expense for such period. "INTEREST PAYMENT DATE" shall mean, with respect to any Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part (and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration 12 been applicable to such Borrowing), and the date of any prepayment of such Borrowing or conversion of such Borrowing to a Borrowing of a different Type. "INTEREST PERIOD" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the applicable Borrower may elect and (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing and ending on the earliest of (i) the last Business Day of March, June, September or December, (ii) the Refinancing Revolving Facility Maturity Date or the Additional Revolving Facility Maturity Date, as applicable, and (iii) the date such Borrowing is converted to a Borrowing of a different Type in accordance with Section 2.10 or repaid or prepaid in accordance with Section 2.11; PROVIDED, HOWEVER, that, in the case of a Eurodollar Borrowing, if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "INTEREST RATE PROTECTION AGREEMENT" shall mean any interest rate swap, cap or other agreement or arrangement entered into by the Parent Borrower designed to protect the Parent Borrower against fluctuations in interest rates and not for speculation, PROVIDED that any such agreement or arrangement designed to protect against fluctuations in interest rates for borrowed money entered into after the Closing Date shall be satisfactory to the Administrative Agent. "ISSUING BANKS" shall have the meaning assigned to such term in the preamble to this Agreement, except as amended in Section 2.21(i). "ISSUING BANK FEES" shall have the meaning assigned to such term in Section 2.05(c). "L/C COMMITMENT" shall mean, with respect to each Issuing Bank, the commitment of such Issuing Bank to issue Letters of Credit pursuant to Section 2.21. "L/C DISBURSEMENT" shall mean a payment or disbursement made by an Issuing Bank pursuant to a Letter of Credit. "L/C EXPOSURE" shall mean at any time the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time PLUS (b) the aggregate principal amount of all L/C Disbursements that have not yet been reimbursed at such time. The L/C Exposure of any Refinancing Facility Lender at any time shall mean its Pro Rata Percentage of the aggregate L/C Exposure at such time. "L/C PARTICIPATION FEE" shall have the meaning assigned to such term in Section 2.05(c). 13 "LENDERS" shall mean (a) the financial institutions listed on Schedule 2.01 (other than any such financial institution that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b) any financial institution that has become a party hereto pursuant to an Assignment and Acceptance. "LETTER OF CREDIT" shall mean any letter of credit issued pursuant to Section 2.21. "LEVERAGE RATIO" shall mean, as of the last day of any fiscal quarter, the ratio of (a) Total Debt as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters ended on such date, all determined on a consolidated basis in accordance with GAAP. "LIBO RATE" shall mean, with respect to any Eurodollar Borrowing, the rate (rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar deposits approximately equal in principal amount of such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered to the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as determined by the Administrative Agent. "LIEN" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "LOAN DOCUMENTS" shall mean this Agreement, the Letters of Credit, the Guarantee Agreement, the Security Documents and the Indemnity, Subrogation and Contribution Agreement. "LOAN PARTIES" shall mean the Borrowers and the Guarantors. "LOANS" shall mean the Refinancing Revolving Loans and the Additional Revolving Loans. "MARGIN STOCK" shall have the meaning assigned to such term in Regulation U. "MATERIAL ADVERSE EFFECT" shall mean (a) a materially adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, of the Parent Borrower and the Subsidiaries taken as a whole, (b) material impairment of the ability of the Parent Borrower and the other Loan Parties taken as a whole to perform any of their respective obligations under any Loan Document to which it is or will be a party or (c) material impairment of the rights of or benefits available to the Lenders under any Loan Document. "MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA. 14 "NET CASH PROCEEDS" shall mean the cash proceeds of any Asset Sale or any transaction described in Section 6.05(e) (including cash and cash equivalents and cash payments received by way of deferred payment or principal pursuant to a note or installment receivable or otherwise, but only as and when received), net of (i) costs of sale (including fees, expenses and payment of the outstanding principal amount of, premium or penalty, if any, interest and other amounts on any Indebtedness (other than Loans) repaid under the terms thereof as a result of such Asset Sale), (ii) taxes paid or payable as a result thereof and (iii) amounts provided as a reserve, in accordance with GAAP, against any liabilities under any indemnification obligations associated with such Asset Sale (except that, to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds); PROVIDED, HOWEVER, that if the Asset Sale is a result of a Casualty Event or Condemnation Event, the cash proceeds thereof for purposes of this definition shall not include proceeds used to replace or repair the damaged or condemned property, as applicable, within 180 days of receipt of such proceeds or, if replacement or repair cannot reasonably be completed within such period, within 360 days of receipt of such proceeds. "NEW BORROWER AGREEMENT" shall mean any agreement entered into by a new Subsidiary Borrower, the Administrative Agent and the Collateral Agent in accordance with Section 2.22 and substantially in the form of Exhibit C-2. "NON-CONTROLLED VENTURES" shall mean all partnerships and joint ventures in which the Parent Borrower or any of the Subsidiaries have an ownership interest but are not a Controlled Venture. "OBLIGATIONS" shall mean all obligations defined as "Obligations" in the Guarantee Agreement and the Security Documents. "PARENT BORROWER" shall mean Magellan Health Services, Inc., a Delaware corporation. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "PERFECTION CERTIFICATE" shall mean the Perfection Certificate substantially in the form of Annex 1 to the Security Agreement. "PERMITTED ACQUISITION" shall mean any non-hostile acquisition of an Acquired Entity by the Parent Borrower or any Guarantor in which the Parent Borrower, any wholly owned Subsidiary or any Guarantor is (x) in the case of an asset or stock purchase, the purchaser of assets or stock, or (y) in the case of a merger or consolidation, the surviving entity or the owner of all the capital stock of the surviving or resulting entity, so long as (a) after giving effect to such acquisition, (i) the Parent Borrower shall be in compliance, on a PRO FORMA basis, with all covenants set forth in this Agreement, including the covenants contained in Section 6.10, 6.11 and 6.12, which shall be recomputed as at the last day of the most recently ended fiscal quarter (for which financial information has been delivered pursuant to Section 5.04) of the Parent Borrower as if such acquisition had occurred on the first day of each relevant period for testing such compliance, and the Parent Borrower shall have delivered to the Administrative Agent an officers' certificate to such effect for any acquisition in excess of $10,000,000, (ii) any Indebtedness of the Acquired 15 Entity that is acquired or assumed in connection with such acquisition shall be in compliance with Section 6.01 and (iii) on the date of such acquisition and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, (b) in the case of an asset acquisition, such assets are to be used, and in the case of an acquisition of capital stock or other equity interests, the person so acquired is engaged in, a healthcare business or businesses or reasonably related (ancillary or complementary) line of business or lines of business and (c) in the case of an acquisition of capital stock or other equity interests, (i) the Parent Borrower or the acquiring Guarantor shall acquire at least 50% of the outstanding equity securities of the Acquired Entity and otherwise Control such Acquired Entity, (ii) in the case of an Acquired Entity in which no person other than the Parent Borrower, any Affiliate of the Parent Borrower or any member of management of the Parent Borrower owns any equity interest, such Acquired Entity shall become a Guarantor in accordance with Section 5.11 and (iii) all the capital stock of or other equity interests in such Acquired Entity and any of the subsidiaries of the Acquired Entity owned by Parent Borrower or any Guarantor shall be pledged to the Collateral Agent in accordance with Section 5.11. "PERMITTED DEBT REPURCHASE" shall mean any repurchase of Permitted Subordinated Indebtedness by the Parent Borrower so long as (a) after giving effect to such repurchase, (i) the Parent Borrower shall be in compliance, on a PRO FORMA basis, with all covenants set forth in this Agreement, including the covenants contained in Section 6.10, 6.11 and 6.12, which shall be recomputed as at the last day of the most recently ended fiscal quarter (for which financial information has been delivered pursuant to Section 5.04) of the Parent Borrower as if such repurchase had occurred on the first day of each relevant period for testing such compliance, and the Parent Borrower shall have delivered to the Administrative Agent an officers' certificate to such effect for any repurchase in excess of $10,000,000 and (ii) on the date of such repurchase and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing and (b) after giving effect to such repurchase, the aggregate amount of cash on the Parent Borrower's consolidated balance sheet PLUS the remaining available balance of the Total Commitment shall be at least equal to $50,000,000. "PERMITTED INVESTMENTS" shall mean: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America or by any agency, instrumentality or sponsored corporation thereof to the extent such obligations are rated at least A or the equivalent thereof by Standard & Poor's Ratings Group or at least A-2 or the equivalent thereof by Moody's Investors Service, Inc., in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 360 days from the date of acquisition thereof and having, at such date of acquisition, a rating from Standard & Poor's Ratings Group of A-1 or from Moody's Investors Service, Inc. of P-1; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000; 16 (d) repurchase obligations with a term of not more than 90 days for, and secured by, underlying securities of the types described in clauses (a) through (c) above entered into with a bank meeting the qualifications described in clause (c) above; (e) other investment instruments offered by financial institutions which have a combined capital and surplus and undivided profits of not less than $250,000,000; and (f) deposits made prior to 1992 and interest and income earned thereon with respect to Parent Borrower's obligations under its Public Issue of 7.5% Dual Currency Swiss Franc Bonds dated 1986 and due 1998/2001. "PERMITTED NON-CONTROL INVESTMENT" shall mean any investment by the Parent Borrower or any Guarantor in another corporation or other business entity so long as (a) after giving effect to such Permitted Non-Control Investment, (i) the Parent Borrower shall be in compliance, on a PRO FORMA basis, with all covenants set forth in this Agreement, including the covenants contained in Sections 6.10, 6.11 and 6.12, which shall be recomputed as at the last day of the most recently ended fiscal quarter (for which financial information has been delivered pursuant to Section 5.04) of the Parent Borrower as if such investment had occurred on the first day of each relevant period for testing such compliance, and the Parent Borrower shall have delivered to the Administrative Agent an officers' certificate to such effect for any investment in excess of $10,000,000 and (ii) on the date of such investment and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, (b) such investment shall constitute either (i) an investment in less than 50% of the equity interests of such corporation or other business entity or (ii) an investment in which, notwithstanding the ownership by the Parent Borrower or any wholly owned Subsidiary of 50% or more of the equity interests of such corporation or business entity, neither the Parent Borrower nor any wholly owned Subsidiary Controls such corporation or other business entity, (c) all the capital stock of such corporation or other business entity owned by the Parent Borrower or any Guarantor shall be pledged to the Collateral Agent in accordance with Section 5.11 and (d) the aggregate amount of Permitted Non-Control Investments made after the Closing Date and outstanding at any time thereafter shall not exceed $100,000,000 LESS the amount, if any, by which the outstanding amount of Permitted Non-Guarantor Transactions at such time exceeds $100,000,000. Subject to satisfaction of the foregoing criteria, the term "Permitted Non-Control Investment" shall include (a) any investment arising as a result of sales or other dispositions of common stock of a Guarantor permitted pursuant to this Agreement, (b) transfers of assets to or other investments in entities that are neither Controlled Non-Guarantor Entities nor Guarantors and (c) the granting of any Guarantee of any Indebtedness of any such entity. "PERMITTED NON-GUARANTOR TRANSACTIONS" shall mean any (a) transfer of assets by the Parent Borrower or any Guarantor to a Controlled Non-Guarantor Entity, (b) investments by the Parent Borrower or any Guarantor in Controlled Non-Guarantor Entities (other than exchanges under the Green Spring Exchange Agreement and purchases pursuant to the Green Spring Stockholders' Agreement), (c) Guarantees by the Parent Borrower or any Guarantor of any Indebtedness of Controlled Non-Guarantor Entities or (d) any transaction that causes any Guarantor to become a Controlled Non-Guarantor Entity, in each case so long as, after giving effect to any such transaction, (i) the fair market value of all assets transferred to Controlled Non-Guarantor Entities (such value to be determined with respect to each asset as of the time such asset was transferred), (ii) the amount of then-outstanding investments in Controlled Non- Guarantor Entities, (iii) the then-outstanding principal amount of Indebtedness of the Controlled Non-Guarantor Entities 17 Guaranteed by the Parent Borrower or any Guarantor and (iv) the value of the equity interests retained by the Parent Borrower or any Guarantor in all Controlled Non-Guarantor Entities that became Controlled Non-Guarantor Entities as the result of a Permitted Non-Guarantor Transaction made after the Closing Date (such value to be determined with respect to each Controlled Non-Guarantor Entity as of the time the relevant Permitted Non-Guarantor Transaction occurred) and outstanding at any time thereafter, shall not exceed $100,000,000 in the aggregate PLUS the amount, if any, by which $100,000,000 exceeds the outstanding amount of Permitted Non-Control Investments at the time of such transaction. "PERMITTED RECEIVABLES FINANCING" shall mean any financing secured substantially by receivables (and related assets) originated by the Parent Borrower or any Subsidiary, PROVIDED that (i) any such receivables financing involves the sales of receivables to secure not more than $75,000,000 of Indebtedness outstanding at any time, (ii) sales of receivables are made at fair market value for sales of receivables in comparable receivables financings, (iii) the interest rate applicable to such receivables financing shall be a market interest rate (as determined in good faith by a Financial Officer of the Parent Borrower) as of the time such financing is entered into, (iv) such financing is non-recourse to the Parent Borrower and the Subsidiaries except to a limited extent customary for such financings and (v) the covenants, events of default and other provisions thereof, collectively, shall be market terms (as determined in good faith by a Financial Officer of the Parent Borrower). "PERMITTED RESTRICTIONS" shall mean, with respect to any Controlled Venture, provisions contained in the governing documents of such Controlled Venture that prohibit or otherwise restrict the making of distributions by such Controlled Venture (a) at any time such Controlled Venture has outstanding Indebtedness to any owner of equity interests thereof, (b) in the case of Controlled Ventures that are subject to taxation as a partnership under the Code to the extent that such distribution would cause any owner of equity interests thereof to have a negative balance in its capital account, (c) without the approval of at least a majority of the (i) directors, (ii) managers, managing members or members, (iii) general partners or (iv) the persons or governing body performing a similar function as any of the foregoing, (d) to the extent such distribution would be prohibited by any applicable law, rule or regulation, (e) out of or through the use of funds of such Controlled Venture that the directors, managers, managing members, members, general partners (or persons or governing body performing similar functions) have reasonably determined are necessary to pay such Controlled Venture's current and anticipated cash obligations, including operating expenses, debt service, acquisitions, capital expenditures and reasonable reserves or (f) under other circumstances that are consented to in writing by the Administrative Agent with respect to such Controlled Venture. "PERMITTED STOCK REPURCHASE" shall mean any repurchase by the Parent Borrower of shares of its common stock so long as (a) after giving effect to such repurchase, (i) the Parent Borrower shall be in compliance, on a PRO FORMA basis, with all covenants set forth in this Agreement, including the covenants contained in Section 6.10, 6.11 and 6.12, which shall be recomputed as at the last day of the most recently ended fiscal quarter (for which financial information has been delivered pursuant to Section 5.04) of the Parent Borrower as if such repurchase had occurred on the first day of each relevant period for testing such compliance, and the Parent Borrower shall have delivered to the Administrative Agent an officers' certificate to such effect for any repurchase that exceeds $10,000,000 and (ii) on the date of such repurchase and immediately after giving effect thereto, no Default or Event of Default shall exist, (b) the aggregate amount expended by the Parent Borrower in connection with all Permitted Stock Repurchases shall 18 not exceed during the term of this Agreement $27,207,346 and (c) after giving effect to any such repurchase, the aggregate amount of cash on the Parent Borrower's consolidated balance sheet PLUS the remaining available balance of the Total Commitment shall be at least equal to $50,000,000. "PERMITTED SUBORDINATED INDEBTEDNESS" shall mean (a) the Series A Notes (including the Guarantees thereof), (b) any Indebtedness of the Parent Borrower (including any Guarantees thereof) that refinances the Series A Notes, PROVIDED that (i) such refinancing Indebtedness is in an aggregate principal amount not greater than the aggregate principal amount of the Series A Notes plus the amount of any premiums required to be paid thereon and fees and expenses associated with such refinancing; (ii) such refinancing Indebtedness has a final maturity later than or equal to and a weighted average life longer than or equal to the remaining life of the Series A Notes determined as of the date of the refinancing; (iii) such refinancing Indebtedness bears interest at a fixed rate, which rate shall be, in the good faith judgment of the Parent Borrower's board of directors, consistent with the market at the time of issuance for similar Indebtedness; (iv) such refinancing Indebtedness shall contain subordination and intercreditor provisions that are no more favorable in any material respect to the holders thereof than the subordination and intercreditor provisions contained in the indenture governing the Series A Notes; (v) the negative and financial covenants (if any) of such refinancing Indebtedness shall not require the Parent Borrower to maintain any specified financial condition except as a condition to the taking of certain actions; (vi) each of the covenants, events of default and other provisions thereof (including any Guarantees thereof) shall be no less favorable to the Lenders in any material respect than those contained in the indenture governing the Series A Notes and (vii) on the date that such refinancing Indebtedness is incurred and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing; (c) Indebtedness issued pursuant to the Green Spring Exchange Agreement; and (d) any other Indebtedness of the Parent Borrower that is subordinated to all Senior Indebtedness, PROVIDED that (i) such Indebtedness has a maturity that is after the Refinancing Revolving Facility Maturity Date, (ii) such Indebtedness bears interest at a rate consistent with the market at the time of issuance for similar Indebtedness; (iii) such Indebtedness shall contain subordination and intercreditor provisions that are no more favorable in any material respect to the holders thereof than the subordination and intercreditor provisions contained in the indenture governing the Series A Notes; (iv) the negative financial covenants (if any) of such Indebtedness shall not require the Parent Borrower to maintain any specified financial condition except as a condition to the taking of certain actions; and (v) each of the covenants, events of default and other provisions thereof (including any Guarantees thereof) shall be no less favorable to the Lenders in any material respect than those contained in the indenture governing the Series A Notes. "PERSON" shall mean any natural person, corporation, limited liability company, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "PLAN" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which any Loan Party or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. 19 "PLEDGE AGREEMENT" shall mean the Pledge Agreement, substantially in the form of Exhibit F, between the Parent Borrower, the Subsidiaries party thereto and the Collateral Agent for the benefit of the Secured Parties. "PRO RATA PERCENTAGE" of any Refinancing Facility Lender at any time shall mean the percentage of the Total Refinancing Loan Commitment represented by such Lender's Refinancing Loan Commitment. "PUBLIC SOLUTIONS" shall mean Magellan Public Solutions, Inc., a Delaware corporation. "REAL ESTATE FOR SALE" shall mean the real property and improvements having a book value of $26,195,547 set aside by the Parent Borrower for sale as set forth in the Parent Borrower's consolidated balance sheet as of June 30, 1996 and described on Schedule 1.01(c). "REFINANCING INDEBTEDNESS" shall have the meaning assigned to such term in Section 6.01(o). "REFINANCING FACILITY LENDER" shall mean a Lender that has a Refinancing Loan Commitment or, if such Commitment has expired or been terminated, that has made Refinancing Revolving Loans that have not been repaid. "REFINANCING LOAN COMMITMENT" shall mean, with respect to each Refinancing Facility Lender, the commitment of such Lender to make Refinancing Revolving Loans hereunder as set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender assumed its Refinancing Loan Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Sections 2.09, 2.11, 2.12 or 2.20 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. "REFINANCING REVOLVING CREDIT FACILITY" shall mean the revolving credit facility pursuant to which Refinancing Revolving Loans shall be made and Letters of Credit shall be issued. "REFINANCING REVOLVING FACILITY BORROWING" shall mean a Borrowing comprised of Refinancing Revolving Loans. "REFINANCING REVOLVING FACILITY MATURITY DATE" shall mean the fifth anniversary of the Credit Agreement. "REFINANCING REVOLVING LOANS" shall mean the loans made by the Refinancing Facility Lenders to the Borrowers pursuant to Section 2.01(a) under the Refinancing Revolving Credit Facility. Each Refinancing Revolving Loan shall be a Eurodollar Loan or an ABR Loan. "REGISTER" shall have the meaning given such term in Section 9.04(d). "REGULATION G" shall mean Regulation G of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "REGULATION U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. 20 "REGULATION T" shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "REGULATION X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "RELEASE" shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, emanating or migrating of any Hazardous Material in, into, onto or through the environment. "REMEDIAL ACTION" shall mean (a) "remedial action" as such term is defined in CERCLA, 42 U.S.C. Section 9601(24), and (b) all other actions required by any Governmental Authority or voluntarily undertaken to: (i) cleanup, remove, treat, abate or in any other way address any Hazardous Material in the environment; (ii) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Material so it does not migrate or endanger or threaten to endanger public health, welfare or the environment; or (iii) perform studies and investigations in connection with, or as a precondition to, (i) or (ii) above. "REQUIRED LENDERS" shall mean, at any time, Lenders having Loans, L/C Exposure and unused Commitments representing at least a majority of the sum of all Loans outstanding, L/C Exposure and unused Commitments at such time. "RESPONSIBLE OFFICER" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "RIGHTS PLAN" shall mean the Rights Agreement dated as of July 21, 1992 between the Parent Borrower and First Union Bank of North Carolina, as Rights Agent (as defined therein). "SECURED PARTIES" shall have the meaning assigned to such term in the Security Agreement. "SECURITY AGREEMENT" shall mean the Security Agreement, substantially in the form of Exhibit G, between the Parent Borrower, the Subsidiaries party thereto and the Collateral Agent for the benefit of the Secured Parties. "SECURITY DOCUMENTS" shall mean the Security Agreement, the Pledge Agreement and each of the security agreements and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.11. "SENIOR DEBT" shall mean Total Debt but excluding all Permitted Subordinated Indebtedness. "SENIOR DEBT RATIO" shall mean, as of the last day of any fiscal quarter, the ratio of (a) Senior Debt as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters ended on such date, all determined on a consolidated basis in accordance with GAAP. 21 "SENIOR INDEBTEDNESS" shall mean all Indebtedness of the Parent Borrower and the Subsidiaries, including any Indebtedness incurred pursuant to this Agreement, unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is provided that such obligations are not superior in right of payment to any subordinated indebtedness; PROVIDED, HOWEVER, that Senior Indebtedness shall not include (i) any obligation of the Parent Borrower to any Subsidiary that is not a Borrower, (ii) any Indebtedness or obligation of the Parent Borrower and the Subsidiaries which is subordinate or junior in any respect (other than as a result of such Indebtedness being unsecured) to any other Indebtedness or obligation of the Parent Borrower and the Subsidiaries or (iii) any Indebtedness incurred in violation of this Agreement. "SERIES A NOTES" shall mean the 11 1/4% Series A Senior Subordinated Notes due 2004 of the Parent Borrower. "SERIES A NOTES INDENTURE" shall mean the Indenture governing the Series A Notes. "STATUTORY RESERVES" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Administrative Agent or any Lender (including any branch, Affiliate, or other fronting office making or holding a Loan) is subject with respect to the Adjusted LIBO Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "SUBSIDIARY" shall mean, with respect to any person (herein referred to as the "PARENT"), any corporation, partnership, association or other business entity of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held. "SUBSIDIARY" shall mean any subsidiary of the Parent Borrower. "SUBSIDIARY BORROWER" shall mean each wholly owned Subsidiary listed on Schedule 1 hereto and each wholly owned Subsidiary that executes a New Borrower Agreement in accordance with Section 2.22 and that has not ceased to be a Subsidiary Borrower in accordance with such Section. "SUBSIDIARY BORROWER TERMINATION" shall mean any termination executed by the Parent Borrower in accordance with Section 2.22 and substantially in the form of Exhibit C-3. "SUBSIDIARY NON-GUARANTORS" shall mean any Subsidiary that is not a Guarantor. "SYNDICATION AGENT" shall have the meaning assigned to such term in the preamble to this Agreement. 22 "TOTAL ADDITIONAL LOAN COMMITMENT" shall mean, at any time, the aggregate amount of Additional Loan Commitments as in effect at such time. "TOTAL COMMITMENT" shall mean, at any time, the aggregate amount of the Refinancing Loan Commitments and the Additional Loan Commitments, as in effect at such time. "TOTAL DEBT" shall mean, with respect to the Parent Borrower and the Subsidiaries on a consolidated basis at any time, all Indebtedness of the Parent Borrower and the Subsidiaries which at such time would be required to be reflected as a liability for borrowed money on a consolidated balance sheet of the Parent Borrower and its consolidated Subsidiaries prepared in accordance with GAAP, PLUS (without duplication) (a) any liabilities or obligations (including any portion of any purchase price received for receivables which receivables have not been collected) associated with or in respect of any Permitted Receivables Financing and (b) the amount of any outstanding letters of credit issued pursuant to this Agreement (it being understood that such letters of credit shall not be included in "Total Debt" to the extent such letters of credit are issued to support Indebtedness and the amount of such Indebtedness has been included in "Total Debt"). "TOTAL REFINANCING LOAN COMMITMENT" shall mean, at any time, the aggregate amount of Refinancing Loan Commitments, as in effect at such time. "TRANSACTIONS" shall have the meaning assigned to such term in the preamble to this Agreement. "TYPE", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term "RATE" shall include the Adjusted LIBO Rate and the Alternate Base Rate. "WHOLLY OWNED SUBSIDIARY" of any person shall mean a subsidiary of such person of which securities (except for directors' qualifying shares) or other ownership interests representing 100% of the equity or 100% of the ordinary voting power or 100% of the general partnership interests are, at the time any determination is being made, owned, controlled or held by such person or one or more wholly owned subsidiaries of such person or by such person and one or more wholly owned subsidiaries of such person. "WITHDRAWAL LIABILITY" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. TERMS GENERALLY. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context shall require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented or otherwise modified from time to time and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; PROVIDED, HOWEVER, that for purposes of determining compliance with the covenants contained in 23 Article VI, all accounting terms herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP as in effect on the date of this Agreement and applied on a basis consistent with the application used in the financial statements referred to in Section 3.05(a). ARTICLE II THE CREDITS SECTION 2.01. COMMITMENTS. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, (a) each Refinancing Facility Lender agrees, severally and not jointly, to make Refinancing Revolving Loans to the Borrowers, at any time and from time to time on or after the date hereof, and until the earlier of the Refinancing Revolving Facility Maturity Date and the termination of the Refinancing Loan Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in (i) such Lender's Credit Exposure exceeding (ii) such Lender's Refinancing Loan Commitment and (b) each Additional Facility Lender agrees, severally and not jointly, to make Additional Revolving Loans to the Borrowers, at any time and from time to time on or after the date specified in Section 4.03(a), and until the earlier of the Additional Revolving Facility Maturity Date and the termination of the Additional Loan Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding not to exceed such Lender's Additional Loan Commitment. Within the limits set forth in the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrowers may borrow, pay or prepay and reborrow Refinancing Revolving Loans and Additional Revolving Loans. SECTION 2.02. LOANS. (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Refinancing Loan Commitments or Additional Loan Commitments, as applicable; PROVIDED, HOWEVER, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Except for Loans deemed made pursuant to Section 2.02(f), the Loans comprising any Borrowing shall be in an aggregate principal amount that is (i) an integral multiple of $1,000,000 and not less than $5,000,000 or (ii) equal to the remaining available balance of the Commitments. (b) Subject to Sections 2.08 and 2.14, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the applicable Borrower may request pursuant to Section 2.03. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; PROVIDED that any exercise of such option shall not affect the obligation of the applicable Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; PROVIDED, HOWEVER, that the Borrowers shall not be entitled to request any Borrowing that, if made, would result in more than five Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, only Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings. 24 (c) Except with respect to Loans made pursuant to Section 2.02(f) and subject to Section 4.03(d) in the case of certain Additional Revolving Facility Borrowings, each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to such account in New York City as the Administrative Agent may designate not later than 11:00 a.m., New York City time, and the Administrative Agent shall by 12:00 (noon), New York City time, credit the amounts so received to a domestic account designated in the applicable Borrowing Request (PROVIDED that such designated account shall be an account of a Borrower or a Guarantor) or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. (d) Subject to Section 4.03(d) in the case of certain Additional Revolving Facility Borrowings, unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with paragraph (c) above, and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. If the Administrative Agent shall have so made funds available then, to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the applicable Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to such Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of any Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, a rate determined by the Administrative Agent to represent its cost of overnight or short-term funds (which determination shall be conclusive absent manifest error). If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (e) Notwithstanding any other provision of this Agreement, the Borrowers shall not be entitled to request any Borrowing if the Interest Period requested with respect thereto would end after the Refinancing Revolving Facility Maturity Date or the Additional Revolving Facility Maturity Date, as applicable. (f) If an Issuing Bank shall not have received from the applicable Borrower any payment required to be made to such Issuing Bank by Section 2.21(e) within the time specified in such Section, such Issuing Bank will promptly notify the Administrative Agent of the L/C Disbursement and the Administrative Agent will promptly notify each Refinancing Facility Lender of such L/C Disbursement and its Pro Rata Percentage thereof. Each Refinancing Facility Lender shall pay by wire transfer of immediately available funds to the Administrative Agent not later than 2:00 p.m., New York City time, on such date (or, if such Refinancing Facility Lender shall have received such notice later than 12:00 (noon), New York City time, on any day, not later than 10:00 a.m., New York City time, on the immediately following Business Day), an amount equal to such Lender's Pro Rata Percentage of such L/C Disbursement (it being understood that such amount shall be deemed to constitute an ABR Loan that is a Refinancing Revolving Loan of such Lender and such payment shall be deemed to have reduced the L/C Exposure), and the Administrative Agent will promptly pay to such Issuing Bank amounts so received by it from the Refinancing Facility Lenders. The Administrative Agent will promptly pay to such Issuing Bank 25 any amounts received by it from the applicable Borrower pursuant to Section 2.21(e) prior to the time that any Refinancing Facility Lender makes any payment pursuant to this paragraph (f); any such amounts received by the Administrative Agent thereafter will be promptly remitted by the Administrative Agent to the Refinancing Facility Lenders that shall have made such payments and to such Issuing Bank, as their interests may appear. If any Refinancing Facility Lender shall not have made its Pro Rata Percentage of such L/C Disbursement available to the Administrative Agent as provided above, such Lender and the applicable Borrower severally agree to pay interest on such amount, for each day from and including the date such amount is required to be paid in accordance with this paragraph to but excluding the date such amount is paid, to the Administrative Agent for the account of such Issuing Bank at (i) in the case of such Borrower, a rate per annum equal to the interest rate applicable to Loans pursuant to Section 2.06(a), and (ii) in the case of such Lender, for the first such day, the Federal Funds Effective Rate, and for each day thereafter, the Alternate Base Rate. SECTION 2.03. BORROWING PROCEDURE. In order to request a Borrowing (other than a deemed Borrowing pursuant to Section 2.02(f), as to which this Section 2.03 shall not apply), a Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Borrowing Request (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 12:00 noon, New York City time, one Business Day before a proposed Borrowing. Each Borrowing Request shall be irrevocable, shall be signed by or on behalf of the applicable Borrower and shall specify the following information: (i) whether the Borrowing then being requested is to be a Refinancing Revolving Facility Borrowing or an Additional Revolving Facility Borrowing and whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing, PROVIDED that any Borrowing on the Closing Date shall be an ABR Borrowing comprised solely of Refinancing Revolving Loans; (ii) the date of such Borrowing (which shall be a Business Day), (iii) the number and location of the account to which funds are to be disbursed (which shall be an account that complies with the requirements of Section 2.02(c)); (iv) the amount of such Borrowing; and (v) if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with respect thereto; PROVIDED, HOWEVER, that, notwithstanding any contrary specification in any Borrowing Request, each requested Borrowing shall comply with the requirements set forth in Section 2.02. In the case of an Additional Revolving Facility Borrowing, the Parent Borrower shall also deliver each applicable document specified in Section 4.03. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the applicable Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.03 (and the contents thereof), and of each Lender's portion of the requested Borrowing. SECTION 2.04. EVIDENCE OF DEBT; REPAYMENT OF LOANS. (a) The Borrowers, jointly and severally, unconditionally promise to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of (i) each Refinancing Revolving Loan on the Refinancing Revolving Facility Maturity Date and (ii) each Additional Revolving Loan on the Additional Revolving Facility Maturity Date. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrowers to such Lender resulting from each Loan 26 made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrowers to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from any Borrower or any Guarantor and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) above shall be prima facie evidence of the existence and amounts of the obligations therein recorded; PROVIDED, HOWEVER, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrowers to repay the Loans in accordance with their terms. (e) Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive a promissory note payable to such Lender and its registered assigns, the interests represented by such note shall at all times (including after any assignment of all or part of such interests pursuant to Section 9.04) be represented by one or more promissory notes payable to the payee named therein or its registered assigns. SECTION 2.05. FEES. (a) The Borrowers agree to pay to each Lender, through the Administrative Agent, on the Closing Date and on the last day Business Day of March, June, September and December in each year (calculated to such last Business Day, as applicable, of March, June, September and December) and on the date on which the Refinancing Loan Commitment or the Additional Loan Commitment, as applicable, of such Lender shall expire or be terminated as provided herein, a commitment fee (a "COMMITMENT FEE") equal to the Applicable Percentage per annum in effect from time to time on the average daily unused amount of the Refinancing Loan Commitment or the Additional Loan Commitment, as applicable, of such Lender during the preceding quarter (or other period commencing with the date of acceptance by the Borrowers of the Refinancing Loan Commitment or Additional Loan Commitment, as applicable, of such Lender or ending with the Refinancing Revolving Facility Maturity Date or the Additional Revolving Facility Maturity Date, as applicable, or the date on which the Refinancing Loan Commitment or Additional Loan Commitment, as applicable, of such Lender shall expire or be terminated) (it being understood that for purposes of this paragraph (a), an assignment of interest shall not be considered a termination of the Refinancing Loan Commitment or the Additional Loan Commitment, as applicable, of such Lender), PROVIDED that the aggregate fees payable on any such day shall not exceed the amount that would have been payable if no assignment of any Lender's interest had occurred during the applicable three month period. All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. The Commitment Fee due to each Lender shall commence to accrue on the date of acceptance by the Borrowers of the Refinancing Loan Commitment or the Additional Loan Commitment, as applicable, of such Lender and shall cease to accrue on the date on which the Refinancing Loan Commitment or the Additional Loan Commitment, as applicable, of such Lender shall expire or be terminated as provided herein. 27 (b) The Borrowers agree to pay to the Administrative Agent, for its own account, the administrative fees set forth in the Fee Letter at the times and in the amounts specified therein (the "ADMINISTRATIVE AGENT FEES"). (c) The Borrowers agree to pay (i) to each Refinancing Facility Lender, through the Administrative Agent, on the last Business Day of March, June, September and December of each year (calculated to such last Business Day, as applicable, of March, June, September and December) and on the date on which the Refinancing Loan Commitment of such Lender shall be terminated as provided herein, a fee (an "L/C PARTICIPATION FEE") calculated on such Lender's Pro Rata Percentage of the average daily aggregate L/C Exposure (excluding the portion thereof attributable to unreimbursed L/C Disbursements) during the preceding quarter (or shorter period commencing with the date hereof or ending with the Refinancing Revolving Facility Maturity Date or the date on which all Letters of Credit have been canceled or have expired and the Refinancing Loan Commitments of all Lenders shall have been terminated) at a rate equal to the Applicable Percentage from time to time used to determine the interest rate on Borrowings comprised of Eurodollar Loans pursuant to Section 2.06, PROVIDED that the aggregate fees payable on any such day shall not exceed the amount that would have been payable if no assignment of any Lender's interest had occurred during the applicable three month period, and (ii) to each Issuing Bank with respect to each Letter of Credit (x) a fee equal to 0.125% per annum of the face amount of such Letter of Credit issued by it, payable quarterly in arrears on the last Business Day of each quarter (calculated to such last Business Day, as applicable, of March, June, September and December) and (y) the standard issuance and administration fees specified from time to time by each Issuing Bank (the "ISSUING BANK FEES"). All L/C Participation Fees and Issuing Bank Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. (d) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the Issuing Bank Fees shall be paid directly to the respective Issuing Banks. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.06. INTEREST ON LOANS. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate; PROVIDED that in the event that the Leverage Ratio is greater than 3.50 to 1.00, each ABR Borrowing shall bear interest (computed on the basis described above) at a rate per annum equal to the Alternate Base Rate plus 0.25%. (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Percentage in effect from time to time. Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or Adjusted LIBO Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. 28 SECTION 2.07. DEFAULT INTEREST. If the Borrowers shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, by acceleration or otherwise, or under any other Loan Document, the Borrowers shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount to, but excluding, the date of actual payment (after as well as before judgment) (a) in the case of overdue principal, at the rate otherwise applicable to such Loan pursuant to Section 2.06 plus 2.00% per annum and (b) in all other cases, at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined by reference to the Prime Rate and over a year of 360 days at all other times) equal to the sum of the Alternate Base Rate plus 2.00%. SECTION 2.08. ALTERNATE RATE OF INTEREST. If, and on each occasion that, on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurodollar Loan during such Interest Period, or that reasonable means do not exist for ascertaining the Adjusted LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the Borrowers and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, any request by the Borrowers for a Eurodollar Borrowing pursuant to Section 2.03 shall be deemed to be a request for an ABR Borrowing. Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.09. TERMINATION AND REDUCTION OF COMMITMENTS. (a) The Refinancing Loan Commitments and the L/C Commitments shall automatically terminate on the Refinancing Revolving Facility Maturity Date. The Additional Loan Commitments shall automatically terminate on the Additional Revolving Facility Maturity Date. Notwithstanding the foregoing, all the Commitments and L/C Commitments shall automatically terminate at 5:00 p.m., New York City time, on October 31, 1996, if the initial Credit Event shall not have occurred by such time. (b) Upon at least two Business Days' prior irrevocable written or telecopy notice to the Administrative Agent, the Borrowers may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Refinancing Loan Commitment and/or the Total Additional Loan Commitment; PROVIDED, HOWEVER, that (i) each partial reduction of the Total Refinancing Loan Commitment and the Total Additional Loan Commitment shall be in an integral multiple of $1,000,000 and in a minimum amount of $5,000,000, (ii) the Total Refinancing Loan Commitment shall not be reduced to an amount that is less than the Aggregate Credit Exposure at the time and (iii) the Total Additional Loan Commitment shall not be reduced to an amount that is less than the aggregate principal amount of Additional Revolving Loans outstanding at the time. (c) Each reduction in the Total Refinancing Loan Commitment or the Total Additional Loan Commitment, as applicable, hereunder shall be made ratably among the Lenders in accordance with their respective Refinancing Loan Commitments or Additional Loan Commitments, as applicable. The Borrowers shall pay to the Administrative Agent for the account of the Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Total 29 Refinancing Loan Commitment or the Total Additional Loan Commitment, as applicable, so terminated or reduced accrued to (but excluding the date of) such termination or reduction. SECTION 2.10. CONVERSION AND CONTINUATION OF BORROWINGS. The applicable Borrower shall have the right at any time upon prior irrevocable notice to the Administrative Agent (a) not later than 12:00 (noon), New York City time, one Business Day prior to conversion, to convert any Eurodollar Borrowing into an ABR Borrowing, (b) not later than 10:00 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing into a Eurodollar Borrowing or to continue any Eurodollar Borrowing as a Eurodollar Borrowing for an additional Interest Period, and (c) not later than 10:00 a.m., New York City time, three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Borrowing to another permissible Interest Period, subject in each case to the following: (i) each conversion or continuation shall be made PRO RATA among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Borrowing; (ii) if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b) regarding the principal amount and maximum number of Borrowings of the relevant Type; (iii) each conversion shall be effected by each Lender and the Administrative Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by the Borrowers at the time of conversion; (iv) if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrowers shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.15; (v) any portion of a Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Borrowing; (vi) any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing; and (vii) upon notice to the Borrowers from the Administrative Agent given at the request of the Required Lenders, after the occurrence and during the continuance of a Default or Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan. Each notice pursuant to this Section 2.10 shall refer to this Agreement and specify (i) the identity and amount of the Borrowing that the applicable Borrower requests be converted or continued, (ii) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iv) if such Borrowing is to be converted to or 30 continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the applicable Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall advise the Lenders of any notice given pursuant to this Section 2.10 and of each Lender's portion of any converted or continued Borrowing. If the applicable Borrower shall not have given notice in accordance with this Section 2.10 to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section 2.10 to convert such Borrowing), such Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into a new Interest Period as an ABR Borrowing. SECTION 2.11. PREPAYMENT. (a) The Borrowers shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon at least two Business Days' prior written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent before 11:00 a.m., New York City time; PROVIDED, HOWEVER, that each partial prepayment shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000. (b) In the event of any termination of all the Refinancing Loan or Additional Loan Commitments, the Borrowers shall repay or prepay all applicable outstanding Borrowings on the date of such termination. In the event of any partial reduction of the Total Refinancing Loan Commitment, then (i) at or prior to the effective date of such reduction, the Administrative Agent shall notify the Borrowers and the Refinancing Facility Lenders of the Aggregate Credit Exposure after giving effect thereto and (ii) if the Aggregate Credit Exposure would exceed the Total Refinancing Loan Commitment after giving effect to such reduction, then the Borrowers shall, on the date of such reduction, repay or prepay Refinancing Revolving Facility Borrowings in an amount sufficient to eliminate such excess. In the event of any partial reduction of the Total Additional Loan Commitment, then (x) at or prior to the effective date of such reduction, the Administrative Agent shall notify the Borrowers and the Additional Facility Lenders of the outstanding principal amount of Additional Revolving Loans after giving effect thereto and (y) if the outstanding principal amount of Additional Revolving Loans after giving effect to such reduction would exceed the Total Additional Loan Commitment, then the Borrowers shall, on the date of such reduction, repay or prepay Additional Revolving Facility Borrowings in an amount sufficient to eliminate such excess. (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrowers to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section 2.11 shall be subject to Section 2.15 but otherwise without premium or penalty. All prepayments under this Section 2.11 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.12. MANDATORY COMMITMENT REDUCTIONS. (a) The Total Refinancing Loan Commitment and the Total Additional Loan Commitment shall be subject to reduction (i) on September 30 of each year and (ii) on the second Business Day following each date on which 50% of the aggregate Net Cash Proceeds received in respect of Asset Sales and in respect of transactions described in Section 6.05(e), and not previously taken into account in a prior reduction of the Total Refinancing Loan Commitment or the Total Additional Loan Commitment pursuant to this Section 2.12(a), equals or exceeds $5,000,000. The amount of the reduction on each such 31 applicable date shall equal 50% of the Net Cash Proceeds received on or prior to such date (or, in the case of clause (ii) in the preceding sentence on or prior to the second Business Day immediately preceding such date) and not previously taken into account in a prior reduction of the Total Refinancing Loan Commitment or the Total Additional Loan Commitment pursuant to this Section 2.12(a). If during the one-year period following any Asset Sale or transaction described in Section 6.05(e), the Borrowers and the Guarantors have not reinvested in their businesses an amount equal to 50% of the Net Cash Proceeds from such Asset Sale or transaction, the Total Refinancing Loan Commitment and the Total Additional Loan Commitment shall be further reduced on the first anniversary of such Asset Sale or transaction by the portion of such amount not so reinvested. Notwithstanding anything to the contrary in this Section 2.12(a), the Borrowers may elect, with respect to the initial $50,000,000 of reductions in Commitments required by this Section 2.12(a), by giving notice by telephone (promptly confirmed by writing or telecopy notice) prior to any reduction pursuant to this Section 2.12(a), to cause all or any portion of the applicable Net Cash Proceeds to reduce the Total Additional Loan Commitment or the Total Refinancing Loan Commitment or both. All other reductions in Commitments under this Section 2.12(a) shall be applied pro rata between the Total Refinancing Loan Commitment and the Total Additional Loan Commitment. Each reduction under this Section 2.12(a) shall be effected in accordance with Section 2.11(b). (b) Each reduction in the Total Refinancing Loan Commitment or the Total Additional Loan Commitment, as applicable, hereunder shall be made ratably among the Lenders in accordance with their respective Refinancing Loan Commitments or Additional Loan Commitments, as applicable. The Borrowers shall pay to the Administrative Agent for the account of the Lenders, on the date of each reduction, the Commitment Fee on the amount of the Total Refinancing Loan Commitment or the Total Additional Loan Commitment, as applicable, so reduced accrued to (but excluding) the date of such reduction. (c) If following any reduction of the Total Refinancing Loan Commitment pursuant to Section 2.12 and any payments required pursuant to Section 2.11(b)(ii), the Total Refinancing Loan Commitment is less than the aggregate L/C Exposure, the Borrowers shall, on the date of such reduction, provide cash collateral, in accordance with Section 2.21(j), in an amount equal to the amount that the aggregate L/C Exposure exceeds the Total Refinancing Loan Commitment upon such date of reduction. (d) The Borrowers shall deliver to the Administrative Agent, at the time of each reduction required under Section 2.12(a), a certificate signed by a Financial Officer of the Parent Borrower setting forth in reasonable detail the calculation of the amount of such reduction. SECTION 2.13. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES. (a) Notwithstanding any other provision of this Agreement, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender or an Issuing Bank of the principal of or interest on any Eurodollar Loan made by such Lender or any Fees or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income of such Lender or Issuing Bank by the jurisdiction in which such Lender or Issuing Bank has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender or an Issuing Bank (except any 32 such reserve requirement which is reflected in the Adjusted LIBO Rate) or shall impose on such Lender or Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or increase the cost to any Lender of issuing or maintaining any Letter of Credit or purchasing or maintaining a participation therein or to reduce the amount of any sum received or receivable by such Lender or Issuing Bank hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender or Issuing Bank to be material, then the Borrowers will pay to such Lender or Issuing Bank, as the case may be, upon demand such additional amount or amounts as will compensate such Lender or Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or an Issuing Bank shall have determined that the adoption after the date hereof of any law, rule, regulation, agreement or guideline regarding capital adequacy, or any change after the date hereof in any such law, rule, regulation, agreement or guideline (whether such law, rule, regulation, agreement or guideline has been adopted) or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or an Issuing Bank or any Lender's or Issuing Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any Governmental Authority has or would have the effect of reducing the rate of return on such Lender's or Issuing Bank's capital or on the capital of such Lender's or Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made or participations in Letters of Credit purchased by such Lender pursuant hereto or the Letters of Credit issued by such Issuing Bank pursuant hereto to a level below that which such Lender or Issuing Bank or such Lender's or Issuing Bank's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's or Issuing Bank's policies and the policies of such Lender's or Issuing Bank's holding company with respect to capital adequacy) by an amount deemed by such Lender or Issuing Bank to be material, then from time to time the Borrowers shall pay to such Lender or Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or Issuing Bank or such Lender's or Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or an Issuing Bank or its holding company, as applicable, as specified in paragraph (a) or (b) above shall be delivered to the Borrowers and shall be conclusive absent manifest error. Such certificate (i) shall set forth in reasonable detail the conditions giving rise to a circumstance or situation under Section 2.13(a) or (b), and (ii) shall set forth the calculations of the amounts to be paid by the applicable Borrower (which calculations shall be made in the same manner as for similar outstanding loans made by such Lender of a similar type and amount as Loans by such Lender under this Agreement to Persons of creditworthiness similar to that of the Parent Borrower), and, if made in accordance with this sentence, shall be conclusive absent manifest error. The Borrowers shall pay such Lender or Issuing Bank the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure or delay on the part of any Lender or any Issuing Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender's or Issuing Bank's right to demand such compensation. The protection of this Section shall be available to each Lender and Issuing 33 Bank regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, agreement, guideline or other change or condition that shall have occurred or been imposed. SECTION 2.14. CHANGE IN LEGALITY. (a) Notwithstanding any other provision of this Agreement, if, after the date hereof, any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrowers and to the Administrative Agent: (i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans), whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such for an additional Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and (ii) such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. If any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.14, a notice to the Borrowers by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrowers. SECTION 2.15. INDEMNITY. The Borrowers, jointly and severally, shall indemnify each Lender against any loss (but excluding lost profits) or expense that such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan prior to the end of the Interest Period in effect therefor, (ii) the conversion of any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan, in each case other than on the last day of the Interest Period in effect therefor, or (iii) any Eurodollar Loan to be made by such Lender (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.10) not being made after notice of such Loan shall have been given by the Borrowers hereunder (any of the events referred to in this clause (a) being called a "BREAKAGE EVENT") or (b) any default in the making of any payment or prepayment required to be made hereunder. In the case of any 34 Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section 2.15 shall be delivered to the Borrowers and shall be conclusive absent manifest error. SECTION 2.16. PRO RATA TREATMENT. Except as required under Section 2.14, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the Commitment Fees, each reduction of the Commitments and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Revolving Facility Lenders or the Additional Facility Lenders, as the case may be, in accordance with their respective applicable Commitments (or, if such applicable Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans). Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole dollar amount. SECTION 2.17. SHARING OF SETOFFS. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrowers or any other Loan Party, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans or L/C Disbursement as a result of which the unpaid principal portion of its Loans and participations in L/C Disbursements shall be proportionately less than the unpaid principal portion of the Loans and participations in L/C Disbursements of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans and L/C Exposure of such other Lender, so that the aggregate unpaid principal amount of the Loans and L/C Exposure and participations in Loans and L/C Exposure held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans and L/C Exposure then outstanding as the principal amount of its Loans and L/C Exposure prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Loans and L/C Exposure outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; PROVIDED, HOWEVER, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.17 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrowers expressly consent to the foregoing arrangements and agree that any Lender holding a participation in a Loan or L/C Disbursement deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrowers to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrowers in the amount of such participation. SECTION 2.18. PAYMENTS. (a) The Borrowers shall make each payment (including principal of or interest on any Borrowing or any L/C Disbursement or any Fees or other 35 amounts) hereunder and under any other Loan Document not later than 12:00 (noon), New York City time, on the date when due in immediately available dollars, without setoff, defense or counterclaim. Each such payment (other than Issuing Bank Fees, which shall be paid directly to the respective Issuing Banks,) shall be made to the Administrative Agent at its offices at Grand Central Tower, 140 East 45th Street, 29th Floor, New York, New York 10017. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.19. TAXES. (a) Any and all payments by or on behalf of the Borrowers or any Loan Party hereunder and under any other Loan Document shall be made, in accordance with Section 2.18, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, EXCLUDING (i) income taxes imposed on the net income of the Administrative Agent, any Lender or either Issuing Bank (or any permitted assignee thereof, (any such entity a "TRANSFEREE")) and (ii) franchise taxes imposed on the net income of the Administrative Agent, any Lender or an Issuing Bank (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent, such Lender or an Issuing Bank (or Transferee) is organized or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, being called "TAXES"). If the Borrowers or any Loan Party shall be required to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document to the Administrative Agent, any Lender or an Issuing Bank (or any Transferee), (i) the sum payable shall be increased by the amount (an "ADDITIONAL AMOUNT") necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.19) the Administrative Agent, such Lender or an Issuing Bank (or Transferee), as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrowers or such Loan Party shall make such deductions and (iii) the Borrowers or such Loan Party shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrowers agree to pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under any other Loan Document or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document ("OTHER TAXES"). (c) The Borrowers shall indemnify the Administrative Agent, each Lender and each Issuing Bank (or Transferee) for the full amount of Taxes and Other Taxes paid by the Administrative Agent, such Lender or such Issuing Bank (or Transferee), as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorney's fees and expenses)) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability prepared by the Administrative Agent, a Lender or an Issuing Bank (or Transferee), or the Administrative Agent on its behalf and accompanied by a copy of any relevant notices received from a Governmental Authority and any return or form prepared or filed by the Administrative Agent, a Lender or an Issuing Bank (or Transferee) in connection with such 36 payment or liability, absent manifest error, shall be conclusive for all purposes. Such indemnification shall be made within 30 days after the date the Administrative Agent, any Lender or any Issuing Bank (or Transferee), as the case may be, makes written demand therefor. (d) As soon as practicable after the date of any payment of Taxes or Other Taxes by the Borrowers or any other Loan Party to the relevant Governmental Authority, the Borrowers or such other Loan Party will deliver to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof. (e) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a "NON-U.S. LENDER") shall deliver to the Parent Borrower and the Administrative Agent two copies of either United States Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrowers and is not a controlled foreign corporation related to the Borrowers (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Borrowers under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office (a "NEW LENDING OFFICE"). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.19(e), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.19(e) that such Non-U.S. Lender is not legally able to deliver. (f) The Borrowers shall not be required to indemnify any Non-U.S. Lender or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to paragraph (a) or (c) above to the extent that (i) the obligation to withhold amounts with respect to United States Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan or a Letter of Credit; PROVIDED, HOWEVER, that this paragraph (f) shall not apply (x) to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, transfer or designation made at the request of the Borrowers and (y) to the extent the indemnity payment or additional amounts any Transferee, or any Lender (or Transferee), acting through a New Lending Office, would be entitled to receive (without regard to this paragraph (f)) do not exceed the indemnity payment or additional amounts that the person making the assignment, or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such assignment, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of paragraph (e) above. 37 (g) Nothing contained in this Section 2.19 shall require any Lender or Issuing Bank (or any Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary). SECTION 2.20. ASSIGNMENT OF COMMITMENTS UNDER CERTAIN CIRCUMSTANCES; DUTY TO MITIGATE. (a) If (i) any Lender delivers a certificate requesting compensation pursuant to Section 2.13, (ii) any Lender delivers a notice described in Section 2.14 or (iii) the Borrowers are required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender pursuant to Section 2.19, the Borrowers may, at their sole expense and effort (including with respect to the processing and recordation fee referred to in Section 9.04(b)), upon notice to such Lender and the Administrative Agent, require such Lender or Issuing Bank to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all of its interests, rights and obligations under this Agreement to an assignee that shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); PROVIDED that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) the Borrowers shall have received the prior written consent of the Administrative Agent (and, if a Refinancing Loan Commitment is being assigned, of each Issuing Bank), which consent shall not unreasonably be withheld, and (z) the Borrowers or such assignee shall have paid to the affected Lender in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans or L/C Disbursements of such Lender, respectively, plus all Fees and other amounts accrued for the account of such Lender hereunder (including any amounts under Section 2.13 and Section 2.15); PROVIDED FURTHER that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender's claim for compensation under Section 2.13 or notice under Section 2.14 or the amounts paid pursuant to Section 2.19, as the case may be, cease to cause such Lender to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.14, or cease to result in amounts being payable under Section 2.19, as the case may be (including as a result of any action taken by such Lender pursuant to paragraph (b) below), or if such Lender shall waive its right to claim further compensation under Section 2.13 in respect of such circumstances or event or shall withdraw its notice under Section 2.14 or shall waive its right to further payments under Section 2.19 in respect of such circumstances or event, as the case may be, then such Lender shall not thereafter be required to make any such transfer and assignment hereunder. (b) If (i) any Lender shall request compensation under Section 2.13, (ii) any Lender delivers a notice described in Section 2.14 or (iii) the Borrowers are required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender, pursuant to Section 2.19, then such Lender shall use reasonable efforts (which shall not require such Lender to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any certificate or document (including any document contesting the imposition of any such amount or requesting a refund of such amount by any relevant Governmental Authority) reasonably requested in writing by the Borrowers or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would reduce its claims for compensation under Section 2.13 or enable it to withdraw its notice pursuant to Section 2.14 or would reduce amounts payable pursuant to Section 2.19, as the case may be, in the future. The Borrowers hereby agree to pay all reasonable costs and expenses incurred by any Lender in 38 connection with any such filing or assignment, delegation and transfer. Any Lender receiving any refund or rebate of any amounts paid by a Borrower pursuant to Section 2.19 shall promptly pay the same to the applicable Borrower. SECTION 2.21. LETTERS OF CREDIT. (a) GENERAL. Any Borrower may request the issuance by an Issuing Bank of a Letter of Credit for such Borrower's own account, in a form reasonably acceptable to the Administrative Agent and such Issuing Bank, at any time and from time to time while the Refinancing Loan Commitments remain in effect. This Section shall not be construed to impose an obligation upon an Issuing Bank to issue any Letter of Credit that is inconsistent with the terms and conditions of this Agreement. (b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL, EXTENSION; CERTAIN CONDITIONS. In order to request the issuance of a Letter of Credit (or to amend, renew or extend an existing Letter of Credit), the Parent Borrower or a Guarantor shall hand deliver or telecopy to an Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) below), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare such Letter of Credit. Following receipt of such notice and prior to the issuance of the requested Letter of Credit or the applicable amendment, renewal or extension, the Administrative Agent shall notify the Borrowers and the applicable Issuing Bank of the amount of the Aggregate Credit Exposure after giving effect to (i) the issuance, amendment, renewal or extension of such Letter of Credit, (ii) the issuance or expiration of any other Letter of Credit that is to be issued or will expire on or prior to the requested date of issuance of such Letter of Credit and (iii) the borrowing or repayment of any Refinancing Revolving Loans that (based upon notices delivered to the Administrative Agent by the Borrowers) are to be borrowed or repaid on or prior to the requested date of issuance of such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if, and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrowers shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or extension (A) the L/C Exposure shall not exceed $100,000,000 and (B) the Aggregate Credit Exposure shall not exceed the Total Refinancing Loan Commitment. (c) EXPIRATION DATE. Each Letter of Credit (other than any Back-up Letter of Credit, which shall expire not less than 30 days after the expiry date set forth on Schedule 1.01(a) of the letter of credit that such Back-up Letter of Credit supports) shall expire at the close of business on the earlier of the date one year after the date of the issuance of such Letter of Credit and the date that is five Business Days prior to the Refinancing Revolving Facility Maturity Date, unless such Letter of Credit expires by its terms on an earlier date. (d) PARTICIPATIONS. By the issuance of a Letter of Credit and without any further action on the part of the applicable Issuing Bank or the Lenders, the Issuing Bank in respect of such Letter of Credit hereby grants to each Refinancing Facility Lender, and each such Lender hereby acquires from such Issuing Bank, a participation in such Letter of Credit equal to such Lender's Pro Rata Percentage of the aggregate amount available to be drawn under such Letter of Credit, effective upon the issuance of such Letter of Credit. In consideration and in furtherance of the foregoing, each Refinancing Facility Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of such Issuing Bank, such Lender's Pro Rata Percentage 39 of each L/C Disbursement made by such Issuing Bank and not reimbursed by the Borrowers (or, if applicable, another party pursuant to its obligations under any other Loan Document) forthwith on the date due as provided in Section 2.02(f). Each Refinancing Facility Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) REIMBURSEMENT. If an Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, the Borrowers shall pay to the Administrative Agent an amount equal to such L/C Disbursement not later than 2:00 p.m. on the day the Borrowers shall have received notice from such Issuing Bank that payment of such draft will be made, or, if the Borrowers shall have received such notice later than 10:00 a.m., New York City time, on any Business Day, not later than 10:00 a.m., New York City time, on the immediately following Business Day. (f) OBLIGATIONS ABSOLUTE. The Borrowers' obligations to reimburse L/C Disbursements as provided in paragraph (e) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under any and all circumstances whatsoever, and irrespective of: (i) any lack of validity or enforceability of any Letter of Credit or any Loan Document, or any term or provision therein; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of any Letter of Credit or any Loan Document; (iii) the existence of any claim, setoff, defense or other right that the Borrowers, any other party guaranteeing, or otherwise obligated with, the Borrowers, any Subsidiary or other Affiliate thereof or any other person may at any time have against the beneficiary under any Letter of Credit, either Issuing Bank, the Administrative Agent or any Lender or any other person, whether in connection with this Agreement, any other Loan Document or any other related or unrelated agreement or transaction; (iv) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment by an Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; and (vi) any other act or omission to act or delay of any kind of either Issuing Bank, the Lenders, the Administrative Agent or any other person or any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of the Borrowers' obligations hereunder. Without limiting the generality of the foregoing, it is expressly understood and agreed that the absolute and unconditional obligation of the Borrowers hereunder to reimburse L/C Disbursements will not be excused by the gross negligence or willful misconduct of either Issuing 40 Bank. However, the foregoing shall not be construed to excuse an Issuing Bank from liability to the Borrowers to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrowers to the extent permitted by applicable law) suffered by the Borrowers that are caused by such Issuing Bank's gross negligence or willful misconduct in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof; it is understood that an Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary and, in making any payment under any Letter of Credit (i) an Issuing Bank's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, be deemed not to constitute willful misconduct or gross negligence of such Issuing Bank. (g) DISBURSEMENT PROCEDURES. An Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. Such Issuing Bank shall as promptly as possible give telephonic notification, confirmed by telecopy, to the Administrative Agent and the Borrowers of such demand for payment and whether such Issuing Bank has made or will make an L/C Disbursement thereunder (it being understood that such notice shall not be required if prior to any L/C Disbursement the Borrowers have made available to the applicable Issuing Bank funds sufficient to reimburse such Issuing Bank for such L/C Disbursement), PROVIDED that any failure to give or delay in giving such notice shall not relieve the Borrowers of their obligation to reimburse such Issuing Bank and the Refinancing Facility Lenders with respect to any such L/C Disbursement. The Administrative Agent shall promptly give each Refinancing Facility Lender notice thereof. (h) INTERIM INTEREST. If an Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, then, unless the Borrowers shall reimburse such L/C Disbursement in full on such date, the unpaid amount thereof shall bear interest for the account of such Issuing Bank, for each day from and including the date of such L/C Disbursement, to but excluding the earlier of the date of payment by the Borrowers or the date on which interest shall commence to accrue thereon as provided in Section 2.02(f), at the rate per annum that would apply to such amount if such amount were an ABR Loan. (i) RESIGNATION OR REMOVAL OF AN ISSUING BANK. An Issuing Bank may resign at any time by giving 180 days' prior written notice to the Administrative Agent, the Lenders and the Borrowers, and may be removed at any time by the Borrowers by notice to such Issuing Bank, the Administrative Agent and the Lenders. Subject to the last sentence of this paragraph (i), upon the acceptance of any appointment as an Issuing Bank hereunder by a Lender that shall agree to serve as successor Issuing Bank, such successor shall succeed to and become vested with all the interests, rights and obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be discharged from its obligations to issue additional Letters of Credit hereunder. At the time such removal or resignation shall become effective, the Borrowers shall pay all accrued and unpaid fees due to the retiring Issuing Bank pursuant to Section 2.05(c)(ii). The acceptance of any appointment as an 41 Issuing Bank hereunder by a successor Lender shall be subject to approval, unless an Event of Default has occurred and is continuing, by the Parent Borrower (which approval shall not be unreasonably withheld) and shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrowers and the Administrative Agent, and, from and after the effective date of such agreement, (i) such successor Lender shall have all the rights and obligations of the previous Issuing Bank under this Agreement and the other Loan Documents and (ii) references herein and in the other Loan Documents to the term "Issuing Bank" shall be deemed to include such successor or any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the resignation or removal of an Issuing Bank hereunder, the retiring Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement and the other Loan Documents with respect to Letters of Credit issued by it prior to such resignation or removal, but shall not be required to issue additional Letters of Credit. (j) CASH COLLATERALIZATION. If any Event of Default shall occur and be continuing or if the Total Refinancing Loan Commitment is less than the aggregate L/C Exposure, the Borrowers shall, on the Business Day they receive notice from the Administrative Agent or the Required Lenders thereof and of the amount to be deposited, deposit in an account with the Collateral Agent, for the benefit of the Refinancing Facility Lenders, an amount in cash equal to the L/C Exposure as of such date. Such deposit shall be held by the Collateral Agent as collateral for the payment and performance of the Obligations. The Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits in Permitted Investments, which investments shall be made by the Collateral Agent and selected in its sole discretion, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall (i) automatically be applied by the Administrative Agent to reimburse the Issuing Banks for L/C Disbursements for which they have not been reimbursed, (ii) be held for the satisfaction of the reimbursement obligations of the Borrowers for the L/C Exposure at such time and (iii) if the maturity of the Loans has been accelerated, be applied to satisfy the Obligations. If the Borrowers are required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrowers within three Business Days after all Events of Default have been cured or waived. If the Borrowers are required to provide an amount of cash collateral hereunder pursuant to Section 2.12(d), such amount shall be returned to the Borrowers from time to time to the extent that the amount of such cash collateral held by the Collateral Agent exceeds the excess, if any, of the aggregate L/C Exposure over the Total Refinancing Loan Commitment; PROVIDED, that such return shall not be required at any time that an Event of Default has occurred and is continuing. SECTION 2.22. ADDITIONAL BORROWERS. The parties hereto agree that wholly owned Domestic Subsidiaries that are not Borrowers as of the Closing Date may enter into and become a party to this Agreement by executing a New Borrower Agreement. Upon execution and delivery after the date hereof by the Administrative Agent, the Collateral Agent and such a wholly owned Subsidiary of a New Borrower Agreement, such Subsidiary shall become a Borrower hereunder with the same force and effect as if originally named as a Borrower herein. The Parent Borrower may terminate any Subsidiary Borrower's interests, rights and obligations under this Agreement by executing and delivering to the Administrative Agent a Subsidiary Borrower Termination with respect to such Subsidiary, whereupon such Subsidiary shall cease to be a Subsidiary Borrower and a party to this Agreement. Notwithstanding the preceding sentence, no Subsidiary Borrower Termination will become effective as to any Subsidiary Borrower at a time 42 when any principal of or interest on any Loan to such Subsidiary Borrower shall be outstanding hereunder, PROVIDED that such Subsidiary Borrower Termination shall be effective to terminate such Subsidiary Borrower's right to make further Borrowings under this Agreement unless and until such Subsidiary executes subsequent to such termination a New Borrower Agreement. The execution and delivery of a New Borrower Agreement or a Subsidiary Borrower Termination shall not require the consent of any other Borrower hereunder. The rights and obligations of each Borrower hereunder shall remain in full force and effect notwithstanding the addition of any new Borrower or termination of any Borrower as a party to this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES Each of the Borrowers represents and warrants to the Administrative Agent, the Syndication Agent, the Collateral Agent, the Issuing Banks and each of the Lenders that: SECTION 3.01. ORGANIZATION; POWERS. Each of the Borrowers and the Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required, except where the failure so to qualify could not reasonably be expected to result in a Material Adverse Effect, and (d) has the corporate power and authority to execute, deliver and perform its obligations under each of the Loan Documents and each other agreement or instrument contemplated hereby to which it is or will be a party and, in the case of the Borrowers, to borrow hereunder. SECTION 3.02. AUTHORIZATION. The execution, delivery and performance by each Loan Party of each of the Loan Documents to which it is a party and the borrowings hereunder (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of the Borrowers or any Subsidiary, (B) any order of any Governmental Authority or (C) any provision of any indenture, agreement or other instrument to which the Borrowers or any Subsidiary is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by the Borrowers or any Subsidiary (other than any Lien created hereunder or under the Security Documents). SECTION 3.03. ENFORCEABILITY. This Agreement has been duly executed and delivered by the Borrowers and constitutes, and each other Loan Document when executed and delivered by each Loan Party thereto will constitute, a legal, valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms (subject, as to enforceability, to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent 43 transfer and other similar laws affecting creditors' rights generally from time to time in effect and to general principles of equity, regardless of whether in a proceeding in equity or at law). SECTION 3.04. GOVERNMENTAL APPROVALS. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions, except for (a) the filing of Uniform Commercial Code financing statements and filings with the United States Patent and Trademark Office and the United States Copyright Office, (b) filings and recordings necessary to release security interests and mortgages under the Existing Credit Agreement and (c) such as have been made or obtained and are in full force and effect. SECTION 3.05. FINANCIAL STATEMENTS. The Parent Borrower has heretofore furnished to the Lenders its consolidated balance sheets and statements of operations and cash flows and changes in stockholders' equity (a) as of and for the fiscal year ended September 30, 1995, audited by and accompanied by the opinion of Arthur Anderson LLP, independent public accountants, and (b) except for a statement of changes in stockholders' equity, as of and for the fiscal quarter and the portion of the fiscal year ended June 30, 1996, certified by its chief financial officer. Such financial statements present fairly in all material respects the financial condition and results of operations and cash flows of the Parent Borrower and its consolidated Subsidiaries as of such dates and for such periods. Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of the Parent Borrower and its consolidated Subsidiaries as of the dates thereof. Such financial statements were prepared in accordance with GAAP applied on a consistent basis, except that the financial statements described in clause (b) are condensed and comply as to form and presentation with the requirements of Form 10-Q of the forms promulgated under the Securities Exchange Act of 1934. SECTION 3.06. NO MATERIAL ADVERSE CHANGE. There has been no material adverse change in the business, assets, operations, prospects, condition, financial or otherwise, or material agreements of the Parent Borrower and the Subsidiaries, taken as a whole, since June 30, 1996. SECTION 3.07. TITLE TO PROPERTIES; POSSESSION UNDER LEASES. (a) Each of the Borrowers and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 6.02. (b) Each of the Borrowers and the Subsidiaries has complied with all obligations under all leases to which it is a party and that are material to the Borrowers and the Subsidiaries taken as a whole and all such leases are in full force and effect. Each of the Borrowers and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases in which a Borrower or a Subsidiary is a lessee. SECTION 3.08. SUBSIDIARIES. Schedule 3.08 sets forth as of the Closing Date a list of all Subsidiaries and the percentage ownership interest, direct or indirect, of the Parent Borrower therein. The shares of capital stock or other ownership interests so indicated on Schedule 3.08 are fully paid and non-assessable and are owned by the Parent Borrower, directly or indirectly, free and clear of all Liens, except Liens under the Loan Documents. 44 SECTION 3.09. LITIGATION; COMPLIANCE WITH LAWS. (a) Except as set forth on Schedule 3.09, there are not any actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of Parent Borrower, threatened against or affecting any Borrower or any Subsidiary or any business, property or rights of any such person (i) that involve any Loan Document or the Transactions or (ii) as to which there is a reasonable probability of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. (b) None of the Borrowers or any of the Subsidiaries or any of their respective material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation, or is in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. AGREEMENTS. (a) None of the Borrowers or any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted or could reasonably be expected to result in a Material Adverse Effect. (b) None of the Borrowers or any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.11. FEDERAL RESERVE REGULATIONS. (a) None of the Borrowers or any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. (b) No part of the proceeds of any Loan or any Letter of Credit will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation G, T, U or X. SECTION 3.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrowers nor any Subsidiary is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.13. USE OF PROCEEDS. The Borrowers will use the proceeds of the Loans and will request the issuance of Letters of Credit only for the purposes specified in the preamble to this Agreement. SECTION 3.14. TAX RETURNS. Each of the Borrowers and the Subsidiaries has filed or caused to be filed all Federal and state income tax returns and all other material tax returns or materials required to have been filed by it and has paid or caused to be paid all material taxes due and payable by it and all assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which such Borrower or such Subsidiary, as applicable, shall have set aside on its books adequate reserves. 45 SECTION 3.15. NO MATERIAL MISSTATEMENTS. None of (a) the Confidential Information Memorandum or (b) any other information, report, financial statement, exhibit or schedule furnished by or on behalf of the Parent Borrower to the Administrative Agent or any Lender in connection with the negotiation of any Loan Document or included therein or delivered pursuant thereto contained, contains or will contain any material misstatement of fact or omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading; PROVIDED that to the extent any such information, report, financial statement, exhibit or schedule was based upon or constitutes a forecast or projection, the Parent Borrower represents only that it acted in good faith and utilized reasonable assumptions and due care in the preparation of such information, report, financial statement, exhibit or schedule. SECTION 3.16. EMPLOYEE BENEFIT PLANS. Each of the Borrowers and its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in material liability of the Borrowers or any of its ERISA Affiliates. The present value of all benefit liabilities under each Plan (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed by more than $2,000,000 the fair market value of the assets of such Plan, and the present value of all benefit liabilities of all underfunded Plans (based on those assumptions used to fund each such Plan) did not, as of the last annual valuation dates applicable thereto, exceed by more than $7,500,000 the fair market value of the assets of all such underfunded Plans. SECTION 3.17. ENVIRONMENTAL MATTERS. Except as set forth in Schedule 3.17: (a) The properties owned or operated by the Borrowers and the Subsidiaries (the "PROPERTIES") do not contain any Hazardous Materials in amounts or concentrations which (i) constitute, or constituted a violation of, (ii) require Remedial Action under, or (iii) could give rise to liability under, Environmental Laws, which violations, Remedial Actions and liabilities, in the aggregate, could result in a Material Adverse Effect; (b) The Properties and all operations of the Borrowers and the Subsidiaries are in compliance, and in the last three years have been in compliance, with all Environmental Laws and all necessary Environmental Permits have been obtained and are in effect, except to the extent that such non- compliance or failure to obtain any necessary permits, in the aggregate, could not result in a Material Adverse Effect; (c) There have been no Releases or threatened Releases at, from, under or proximate to the Properties or otherwise in connection with the operations of the Borrowers or the Subsidiaries, which Releases or threatened Releases, in the aggregate, could result in a Material Adverse Effect; (d) Neither the Borrowers nor any of the Subsidiaries has received any notice of an Environmental Claim in connection with the Properties or the operations of the Borrowers or the Subsidiaries or with regard to any person whose liabilities for environmental matters any of the Borrowers or the Subsidiaries has retained or assumed, in whole or in part, contractually, by operation of law or otherwise, which, in the aggregate, could result in a Material Adverse Effect, 46 nor do the Borrowers or the Subsidiaries have reason to believe that any such notice will be received or is being threatened; and (e) Hazardous Materials have not been transported from the Properties, nor have Hazardous Materials been generated, treated, stored or disposed of at, on or under any of the Properties in a manner that could give rise to liability under any Environmental Law, nor have the Borrowers or the Subsidiaries retained or assumed any liability, contractually, by operation of law or otherwise, with respect to the generation, treatment, storage or disposal of Hazardous Materials, which transportation, generation, treatment, storage or disposal, or retained or assumed liabilities, in the aggregate, could result in a Material Adverse Effect. SECTION 3.18. INSURANCE. Schedule 3.18 sets forth a true, complete and correct description of all insurance maintained by the Borrowers or by the Borrowers for their Subsidiaries as of the date hereof and the Closing Date. As of each such date, such insurance is in full force and effect and all premiums have been duly paid. The Parent Borrower and its Subsidiaries have insurance in such amounts and covering such risks and liabilities as are in accordance with normal industry practice. SECTION 3.19. SECURITY DOCUMENTS. (a) The Pledge Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Pledge Agreement) and, when the Collateral is delivered to the Collateral Agent, the Pledge Agreement shall constitute a fully perfected first priority Lien on, and security interest in, all right, title and interest of the pledgors thereunder in such Collateral, in each case prior and superior in right to any other person. (b) The Security Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement) and, when financing statements in appropriate form are filed in the offices specified on Schedule 6 to the Perfection Certificate, the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in such Collateral (other than the Intellectual Property, as defined in the Security Agreement), in each case (assuming release of security interests under the Existing Credit Agreement) prior and superior in right to any other person, other than with respect to Liens expressly permitted by Section 6.02. (c) When the Security Agreement is filed in the United States Patent and Trademark Office and the United States Copyright Office, the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in the Intellectual Property (as defined in the Security Agreement), in each case prior and superior in right to any other person (it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a lien on registered trademarks, trademark applications and copyrights acquired by the grantors after the date hereof). SECTION 3.20. LABOR MATTERS. As of the date hereof and the Closing Date, there are no strikes, lockouts or slowdowns against any Borrower or any Subsidiary pending or, to the knowledge of any Borrower, threatened. The hours worked by and payments made to employees of the Borrowers and the Subsidiaries have not been in violation in any material respect 47 of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All payments due from any Borrower or any Subsidiary, or for which any claim may be made against any Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have in all material respects been paid or accrued as a liability on the books of such Borrower or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which any Borrower or any Subsidiary is bound. SECTION 3.21. SOLVENCY. Immediately after the consummation of the Transactions to occur on the Closing Date and immediately following the making of each Loan made on the Closing Date and after giving effect to the application of the proceeds of such Loans, (i) the fair value of the assets of each Loan Party will exceed its debts and liabilities, subordinated, contingent or otherwise; (ii) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (iii) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (iv) each Loan Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Closing Date. ARTICLE IV CONDITIONS OF LENDING The obligations of the Lenders to make Loans and of the Issuing Banks to issue Letters of Credit hereunder are subject to the satisfaction of the following conditions: SECTION 4.01. ALL CREDIT EVENTS. On the date of each Borrowing, including on the date of each issuance of a Letter of Credit (each such event being called a "CREDIT EVENT"): (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 (or such notice shall have been deemed given in accordance with Section 2.03) or, in the case of the issuance of a Letter of Credit, the applicable Issuing Bank and the Administrative Agent shall have received a notice requesting the issuance of such Letter of Credit as required by Section 2.21(b). (b) Except in the case of a Borrowing that does not increase the aggregate principal amount of Loans outstanding of any Lender, the representations and warranties set forth in Article III hereof shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) Each Borrower and each other Loan Party shall be in compliance with all the terms and provisions set forth herein and in each other Loan Document on its part to be 48 observed or performed, and at the time of and immediately after such Credit Event, no Event of Default or Default shall have occurred and be continuing. Each Credit Event shall be deemed to constitute a representation and warranty by each Borrower on the date of such Credit Event as to the matters specified in paragraphs (b) (except as aforesaid) and (c) of this Section 4.01. SECTION 4.02. FIRST CREDIT EVENT. On the Closing Date: (a) The Administrative Agent and the Syndication Agent shall have received, on behalf of itself, the Lenders and the Issuing Banks, a favorable written opinion of (i) King & Spalding, counsel for the Borrowers, substantially to the effect set forth in Exhibit H-1 and (ii) each foreign counsel listed on Schedule 4.02(a), substantially to the effect set forth in Exhibit H-2, in each case (A) dated the Closing Date, (B) addressed to the Issuing Banks, the Administrative Agent, the Syndication Agent and the Lenders, and (C) covering such other matters relating to the Loan Documents and the Transactions as the Administrative Agent or the Syndication Agent shall reasonably request, and the Borrowers hereby request such counsel to deliver such opinions. (b) All legal matters incident to this Agreement, the Borrowings and extensions of credit hereunder and the other Loan Documents shall be satisfactory to the Lenders, to the Issuing Banks and to Cravath, Swaine & Moore, counsel for the Administrative Agent and the Syndication Agent. (c) The Administrative Agent and the Syndication Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of each Loan Party, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of each Loan Party as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of each Loan Party dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the by- laws of such Loan Party as in effect on the Closing Date and at all times sincea date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Loan Party authorizing the execution, delivery and performance of the Loan Documents to which such person is a party and, in the case of the Borrowers, the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate or articles of incorporation of such Loan Party have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of such Loan Party; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above; and (iv) such other documents as the Lenders, the Issuing Banks or Cravath, Swaine & Moore, counsel for the Administrative Agent and the Syndication Agent, may reasonably request. 49 (d) The Administrative Agent and the Syndication Agent shall have received a certificate, dated the Closing Date and signed by a Financial Officer of the Parent Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01. (e) The Administrative Agent and the Syndication Agent shall have received all Fees and other amounts due and payable on or prior to the Closing Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrowers hereunder or under any other Loan Document. (f) The Pledge Agreement shall have been duly executed by the parties thereto and delivered to the Collateral Agent and shall be in full force and effect, and each of the Borrowers and the Guarantors shall have duly and validly pledged thereunder all the shares of capital stock or other equity interests held by them in their direct Subsidiaries to the Collateral Agent for the ratable benefit of the Secured Parties and certificates representing such shares, accompanied by instruments of transfer and stock powers endorsed in blank, shall be in the actual possession of the Collateral Agent; PROVIDED that (i) neither the Parent Borrower nor any Guarantor that is a Domestic Subsidiary shall be required to pledge the capital stock of Societe Anonyme De La Metairie or more than 65% of the capital stock of any other Foreign Subsidiary and (ii) no Foreign Subsidiary shall be required to pledge the capital stock of any of its Foreign Subsidiaries. (g) The Security Agreement shall have been duly executed by the Loan Parties thereto and shall have been delivered to the Collateral Agent and shall be in full force and effect on such date and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Administrative Agent or the Syndication Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid, legal and perfected first-priority security interest in and lien on the Collateral (subject to any Lien expressly permitted by Section 6.02) described in such agreement shall have been delivered to the Collateral Agent. (h) The Collateral Agent shall have received the results of a search of the Uniform Commercial Code filings (or equivalent filings) made with respect to the Loan Parties in the states (or other jurisdictions) in which the chief executive office of each such person is located and the other jurisdictions in which Uniform Commercial Code filings (or equivalent filings) are to be made pursuant to the preceding paragraph, together with copies of the financing statements (or similar documents) disclosed by such search, and accompanied by evidence satisfactory to the Collateral Agent that the Liens indicated in any such financing statement (or similar document) would be permitted under Section 6.02 or have been released or documents providing for the release of such financing statements (or similar documents) have been delivered to the Collateral Agent. (i) The Guarantee Agreement shall have been duly executed by each Guarantor, shall have been delivered to the Collateral Agent and shall be in full force and effect. 50 (j) The Indemnity, Subrogation and Contribution Agreement shall have been duly executed by each Loan Party, shall have been delivered to the Collateral Agent and shall be in full force and effect. (k) The Collateral Agent shall have received a Perfection Certificate with respect to the Loan Parties dated the Closing Date and duly executed by a Responsible Officer of the Parent Borrower. (l) Substantially contemporaneously with the first Credit Event, the Borrowers shall have repaid in full the principal of all loans outstanding, interest thereon and other amounts due and payable under the Existing Credit Agreement and under each other agreement related thereto, and the Administrative Agent and Syndication Agent shall have received duly executed documentation either evidencing or necessary for (i) the termination of the Existing Credit Agreement and each other agreement related thereto, (ii) the cancellation of all commitments thereunder (other than the existing letters of credit that the Back-up Letters of Credit support) and (iii) the termination of all related agreements and guarantees and security interests granted by any Loan Party or any Subsidiary or any other person in connection therewith and the discharge of all obligations or interests thereunder. (m) After giving effect to the Transactions, the Borrowers and the Subsidiaries shall have outstanding no Indebtedness or preferred stock other than (a) the Loans hereunder and (b) the Indebtedness set forth on Schedule 6.01(a) or otherwise permitted pursuant to Section 6.01. (n) The Lenders shall be satisfied that the consummation of the Transactions will not (i) violate any applicable law, statute, rule or regulation or (ii) conflict with, or result in a default or event of default under, (A) any indenture relating to any existing Indebtedness of any Loan Party or any subsidiary of any Loan Party that is not being repaid, repurchased or redeemed in full on or prior to the Closing Date in connection with the Transactions or any other indenture of any Loan Party or any subsidiary of any Loan Party to be in effect after the Closing Date or (B) any other material agreement of any Loan Party or any subsidiary of any Loan Party. (o) The Administrative Agent and the Syndication Agent shall have had the opportunity to review existing environmental reports in form, scope and substance reasonably satisfactory to them, as to any environmental hazards, liabilities or Remedial Action to which any Borrower or any of the Subsidiaries may be subject and shall be reasonably satisfied with the nature and cost of any such hazards, liabilities or Remedial Action and with the applicable Borrower's or applicable Subsidiary's plans with respect thereto. (p) The Administrative Agent and the Syndication Agent shall be reasonably satisfied with the corporate structure of the Parent Borrower and the Subsidiaries. (q) There shall not have occurred any event, or none of the Administrative Agent, the Syndication Agent or the Lenders shall have discovered or otherwise become aware of 51 information not previously known by the Administrative Agent, the Syndication Agent or any such Lender that, in each case, in the reasonable judgment of the Administrative Agent, the Syndication Agent or the Required Lenders, could reasonably be expected to have a Material Adverse Effect. SECTION 4.03. CREDIT EVENTS IN RESPECT OF ADDITIONAL REVOLVING FACILITY BORROWINGS. (a) Prior to the first Additional Revolving Facility Borrowing, the Administrative Agent shall have received the financial statements and certificates required to be delivered pursuant to Section 5.04(a) with respect to the fiscal year ending September 30, 1996. (b) Simultaneously with the delivery of a Borrowing Request (but not in connection with the delivery of any notice of conversion or continuation of outstanding Borrowings pursuant to Section 2.10) that requests the Additional Facility Lenders to make Additional Revolving Loans, the Parent Borrower shall deliver to the Administrative Agent a certificate of a Financial Officer certifying that such Borrowing will be permitted by, and will constitute "Senior Indebtedness" (as defined in the Series A Notes Indenture) under, the Series A Notes Indenture, and such certificate shall also set forth the specific provision of the Series A Notes Indenture upon which such Financial Officer is relying in making such certification (it being understood that such provision shall not be Section 5.08(i) of the Series A Notes Indenture). (c) If the provision upon which such Financial Officer is relying in making the certification described in clause (b) above is Section 5.08(xiii) of the Series A Notes Indenture, (i) such certification shall also set forth a list specifying all other outstanding "Indebtedness" (as defined in the Series A Notes Indenture), if any, that has been incurred by the Parent Borrower and the "Restricted Subsidiaries" (as defined in the Series A Notes Indenture) in reliance upon Section 5.08(xiii) of the Series A Notes Indenture and (ii) the Parent Borrower shall also cause to be delivered to the Administrative Agent any documents that the Administrative Agent may reasonably request with respect to the compliance of the applicable Additional Revolving Facility Borrowing with Section 5.08(xiii) of the Series A Notes Indenture, including a written statement of the type described in clause (d) below from Arthur Andersen LLP or other independent public accountants of recognized national standing or the opinion of King & Spalding or other counsel to the Parent Borrower reasonably satisfactory to the Administrative Agent as to the legal requirement applicable to such "Indebtedness" under the Series A Notes Indenture, in either case as so requested. (d) If the provision upon which such Financial Officer is relying in making the certification described above in clause (b) is the first paragraph of Section 5.08 of the Series A Notes Indenture, the applicable certificate described above in clause (b) shall also set forth the Consolidated Interest Coverage Ratio (as defined in the Series A Indenture), which shall be computed in accordance with, and as of the date specified in, the Series A Notes Indenture. Such certification shall be accompanied by the written statement of Arthur Andersen LLP or other independent public accountants of recognized national standing confirming that such accountants have read such certification, including the computation of the Consolidated Interest Coverage Ratio, and have analyzed the supporting documents relied upon by the Parent Borrower in making such certification and computation, and indicating that such accountants are not aware of any information that would cause such certification or computation to be inaccurate. If the applicable Additional Revolving Facility Borrowing will occur prior to the date that the financial statements for the fiscal quarter 52 ending immediately prior to such Borrowing have been delivered pursuant to Section 5.04(a) or (b) hereof, the Parent Borrower shall deliver to the Administrative Agent, simultaneously with such certificate, financial statements and information, as are available, for the twelve-month period ending on the last day of such fiscal quarter. Notwithstanding anything to the contrary in this Section 4.03(d), if the Consolidated Interest Coverage Ratio specified in such certificate is less than 2.25 to 1.00, the Lenders shall not be obligated to make any Additional Revolving Loans requested in such Borrowing Request. SECTION 4.04. NEW SUBSIDIARY BORROWER CREDIT EVENT. On or prior to the date of the first Borrowing by any Subsidiary Borrower that was not a Subsidiary Borrower on the Closing Date: (a) The Administrative Agent (or its counsel) shall have received from each party thereto either (i) a counterpart of the applicable New Borrower Agreement or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page thereof) that such party has signed a counterpart of such New Borrower Agreement. (b) The Administrative Agent shall have received (either at such time or in connection with the initial borrowing hereunder) such documents (including legal opinions) and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of such Subsidiary Borrower and the authorization of the transactions relating to such Subsidiary Borrower and any other legal matters relating to such Subsidiary Borrower and the applicable New Borrower Agreement, all in form and substance satisfactory to the Administrative Agent and its counsel. ARTICLE V AFFIRMATIVE COVENANTS Each Borrower covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document shall have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been reimbursed in full, unless the Required Lenders shall otherwise consent in writing, the Borrowers will, and will cause each of the Subsidiaries (unless otherwise set forth below) to: SECTION 5.01. EXISTENCE; BUSINESSES AND PROPERTIES. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.05. (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; comply in all 53 material respects with all applicable laws, rules, regulations and decrees and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 5.02. INSURANCE. (a) Keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law. (b) Cause all policies of casualty insurance to be endorsed or otherwise amended to include a "standard" or "New York" lender's loss payable endorsement, in form and substance satisfactory to the Administrative Agent and the Collateral Agent, which endorsement shall provide that, from and after the Closing Date, if the insurance carrier shall have received written notice from the Administrative Agent or the Collateral Agent of the occurrence of an Event of Default, the insurance carrier shall pay all proceeds otherwise payable to the Borrowers or the Loan Parties under such policies directly to the Collateral Agent; cause all such policies to provide that none of the Borrowers, the Administrative Agent, the Syndication Agent, the Collateral Agent or any other party shall be a coinsurer thereunder and to contain a "Replacement Cost Endorsement" (for at least 85% of replacement cost), without any deduction for depreciation, and such other provisions as the Administrative Agent or the Collateral Agent may reasonably require from time to time to protect their interests; deliver original or certified copies of all such policies to the Collateral Agent; cause each such policy to provide that it shall not be canceled, modified or not renewed (i) by reason of nonpayment of premium upon not less than 10 days' prior written notice thereof by the insurer to the Administrative Agent and the Collateral Agent (giving the Administrative Agent and the Collateral Agent the right to cure defaults in the payment of premiums) or (ii) for any other reason upon not less than 30 days' prior written notice thereof by the insurer to the Administrative Agent and the Collateral Agent; deliver to the Administrative Agent and the Collateral Agent, prior to the cancellation, modification or nonrenewal of any such policy of insurance, a copy of a renewal or replacement policy (or other evidence of renewal of a policy previously delivered to the Administrative Agent, and the Collateral Agent) together with evidence satisfactory to the Administrative Agent and the Collateral Agent of payment of the premium therefor. SECTION 5.03. OBLIGATIONS AND TAXES. Pay its Indebtedness and other obligations promptly and in accordance with their terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof (other than where failure to so do could not be reasonably expected to have a Material Adverse Effect); PROVIDED, HOWEVER, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so 54 long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and such Borrower or such Subsidiary shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien. SECTION 5.04. FINANCIAL STATEMENTS, REPORTS, ETC. In the case of the Parent Borrower, furnish to the Administrative Agent, the Syndication Agent and each Lender: (a) within 5 Business Days after any filing of its annual report on Form 10-K with the Securities and Exchange Commission (but in no event later than 120 days after the end of each fiscal year), (i) its consolidated balance sheet and related statements of operations, changes in stockholders' equity and cash flows, all audited by Arthur Andersen LLP or other independent public accountants of recognized national standing reasonably acceptable to the Required Lenders and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present in all material respects the financial condition, results of operations, changes in stockholders' equity and cash flows of the Parent Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; and (ii) an unaudited consolidated balance sheet and statement of operations for each of Charter Behavioral, Green Spring and Public Solutions. (b) within 5 Business Days after any filing of its quarterly report on Form 10-Q with the Securities and Exchange Commission (but in no event later than 60 days after the end of each of the first three fiscal quarters of each fiscal year), (i) its consolidated balance sheet and related statements of operations and cash flows showing the financial condition of the Parent Borrower and its consolidated Subsidiaries, all certified by one of its Financial Officers as fairly presenting in all material respects the financial condition and results of operations of the Parent Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP, applied on a basis consistent with the application of GAAP to the Parent Borrower's most recent financial statements delivered pursuant to Section 5.04(a), subject to normal year-end audit adjustments, the absence of notes that are not required by GAAP and the condensed presentation permitted by Form 10-Q of the forms promulgated under the Securities Exchange Act of 1934 and (ii) consolidated balance sheets and statements of operations of each of Charter Behavioral, Green Spring and Public Solutions, showing the financial condition of Charter Behavioral, Green Spring and Public Solutions, in the cases of (i) and (ii) of this paragraph as of the close of such fiscal quarter and the results of its operations and the operations of such Subsidiaries during such fiscal quarter and the then elapsed portion of the fiscal year. (c) within 30 days after the end of each month (other than the last month of any fiscal quarter), its unaudited consolidated balance sheet and related statements of income and cash flows, showing the consolidated financial condition of the Parent Borrower and its consolidated subsidiaries, in all cases as of the close of such month and the consolidated results of its operations and cash flows during such month and the then-elapsed portion of the fiscal year; 55 (d) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of the accounting firm or Financial Officer opining on or certifying such statements (which certificate, when furnished by an accounting firm, may be limited to accounting matters and disclaim responsibility for legal interpretations) (i) certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (ii) setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating compliance with the covenants contained in Sections 6.10, 6.11 and 6.12 (it being understood that nothing herein requires such computation to be prepared by an accounting firm), PROVIDED that if the accounting firm and other independent certified public accountants of recognized national standing are prohibited by applicable industry guidelines from delivering such certificates, the Parent Borrower shall no longer be required to cause the delivery of such certificate; (e) as soon as available but in any event not later than 45 days after the end of each of the first three fiscal quarters, and, in the case of the fourth fiscal quarter, not later than the date financial statements for such fiscal year are delivered pursuant to Section 5.04(a), a report in form and substance satisfactory to the Administrative Agent, of (i) (A) all Permitted Acquisitions consummated during such quarter of $1,000,000 or more, which shall include the total consideration for each such Permitted Acquisition (including a breakdown of any Indebtedness permitted under Section 6.01(d)); and (B) the amount expended for Permitted Acquisitions from the Closing Date through the end of such quarter; (ii) the aggregate sales price of assets sold or disposed of pursuant to each transaction that constitutes an Asset Sale permitted hereunder from the Closing Date through the end of such fiscal quarter and a schedule that identifies each such sale or disposition; (iii) all Permitted Debt Repurchases and all Permitted Stock Repurchases, which shall include amount of securities purchased thereto, from the Closing Date through the end of such quarter, segregated by type of security; and (iv) all Permitted Non-Guarantor Transactions and all Permitted Non-Control Investments, which shall (A) include the value of such Transactions and Investments completed during the period from the Closing Date through the end of such quarter and (B) in the case of Permitted Non-Control Investments, describe the management structure of the entity into which such Investment is made; (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials (except for registration statements on Form S-8) filed by any Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed to its stockholders, as the case may be; (g) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of any Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request; and 56 (h) within 5 Business Days after their availability (but in no event later than the beginning of the third month of each fiscal year), a copy of the budget for its consolidated statements of income and cash flows for each fiscal year, with a certificate signed by a Financial Officer certifying that such budget has been prepared in good faith. SECTION 5.05. LITIGATION AND OTHER NOTICES. Furnish to the Administrative Agent prompt written notice of the following: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) taken or proposed to be taken with respect thereto; (b) the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against any Borrower or any Affiliate thereof that could reasonably be expected to result in a Material Adverse Effect; and (c) any development (including any development relating to Medicare or Medicaid) that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect. SECTION 5.06. EMPLOYEE BENEFITS. (a) Comply in all material respects with the applicable provisions of ERISA and the Code relating to employee benefits and (b) furnish to the Administrative Agent (i) as soon as possible after, and in any event within 10 days after any Responsible Officer of any Borrower or any ERISA Affiliate knows or has reason to know that, any ERISA Event has occurred that, alone or together with any other ERISA Event could reasonably be expected to have a Material Adverse Effect. SECTION 5.07. MAINTAINING RECORDS; ACCESS TO PROPERTIES AND INSPECTIONS. Keep proper books of record and account in which in all material respects full, true and correct entries in conformity with GAAP and all requirements of law are made of all dealings and transactions in relation to its business and activities. Each Loan Party will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent, the Syndication Agent or any Lender to visit and inspect the financial records and the properties of any Borrower or any Subsidiary at reasonable times and as often as reasonably requested of the Parent Borrower and to make extracts from and copies of such financial records, and permit any representatives designated by the Administrative Agent or any Lender to discuss after reasonable notice to the Parent Borrower the affairs, finances and condition of any Borrower or any Subsidiary with the officers thereof and independent accountants therefor; PROVIDED, that all such visits and inspections shall be subject to health, safety and patient confidentiality procedures regularly enforced by the Subsidiaries that provide patient care. SECTION 5.08. USE OF PROCEEDS. Use the proceeds of the Loans and request the issuance of Letters of Credit only for the purposes set forth in the preamble to this Agreement. SECTION 5.09. COMPLIANCE WITH ENVIRONMENTAL LAWS. Comply, and cause all lessees and other persons occupying its Properties to comply, in all material respects with all 57 Environmental Laws and Environmental Permits applicable to its operations and Properties; obtain and renew all material Environmental Permits necessary for its operations and Properties; and conduct any Remedial Action in accordance with Environmental Laws. SECTION 5.10. PREPARATION OF ENVIRONMENTAL REPORTS. If a Default caused by reason of a breach of Section 3.17 or 5.09 shall have occurred and be continuing, at the request of the Required Lenders through the Administrative Agent, provide to the Lenders within 45 days after such request, at the expense of the Borrowers, an environmental site assessment report for the Properties which are the subject of such default prepared by an environmental consulting firm acceptable to the Administrative Agent and indicating the presence or absence of Hazardous Materials and the estimated cost of any compliance or Remedial Action in connection with such Properties. SECTION 5.11. FURTHER ASSURANCES. Execute any and all further documents, financing statements, agreements and instruments, and take all further action (including filing Uniform Commercial Code and other financing statements) that may be required under applicable law, or that the Required Lenders, the Administrative Agent or the Collateral Agent may reasonably request, in order to effectuate the transactions contemplated by the Loan Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests created or intended to be created by the Security Documents. The Borrowers will cause any subsequently acquired or organized wholly owned Domestic Subsidiary (other than any wholly owned Subsidiary that has total assets not in excess of $500,000 and has no Indebtedness other than to the Parent Borrower or any Guarantor (an "INACTIVE SUBSIDIARY")) or any wholly owned Domestic Subsidiary upon ceasing to be an Inactive Subsidiary to become a party to the Guarantee Agreement, Indemnity Subrogation and Contribution Agreement and each applicable Security Document in the manner provided therein. In addition, from time to time, the Borrowers and the Guarantors will, at their cost and expense, promptly secure the Obligations by pledging or creating, or causing to be pledged or created, perfected security interests with respect to assets acquired subsequent to the Closing Date as required by any Security Document. Such security interests and Liens will be created under the Security Documents and other security agreements and other instruments and documents in form and substance satisfactory to the Collateral Agent, and the Borrowers shall deliver or cause to be delivered to the Lenders all such instruments and documents (including legal opinions and lien searches) as the Collateral Agent shall reasonably request to evidence compliance with this Section. Each Borrower agrees to provide such evidence as the Collateral Agent shall reasonably request as to the perfection and priority status of each such security interest and Lien. ARTICLE VI NEGATIVE COVENANTS Each Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document have been paid in full and all Letters of Credit have been cancelled or have expired and 58 all amounts drawn thereunder have been reimbursed in full, unless the Required Lenders shall otherwise consent in writing, the Borrowers will not, and will not cause or permit any of the Subsidiaries (other than the Subsidiary Non- Guarantors, except with respect to Section 6.01 and Section 6.09) to: SECTION 6.01. INDEBTEDNESS. Incur, create, assume or permit to exist any Indebtedness, except for Indebtedness satisfying one of the following paragraphs: (a) Indebtedness existing on the date hereof and set forth in Schedule 6.01(a); (b) Indebtedness created hereunder and the other Loan Documents; (c) unsecured Indebtedness of the Parent Borrower, PROVIDED that (i) such Indebtedness shall not have any principal payments due on a date that is on or prior to the Refinancing Revolving Facility Maturity Date; (ii) such Indebtedness contains covenants (including financial and negative covenants) and events of default that are no more restrictive in any material respect than the analogous covenants and events of default contained in this Agreement and (iii) on the date that any such Indebtedness is incurred and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing; (d) unsecured Indebtedness assumed by the Parent Borrower in connection with a Permitted Acquisition made after the date hereof or of any Subsidiary acquired after the date hereof pursuant to a Permitted Acquisition, which Indebtedness exists at the time of such Permitted Acquisition and is not created in contemplation of such Permitted Acquisition, PROVIDED that on the date any such Indebtedness is incurred and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing; (e) unsecured Indebtedness of the Parent Borrower in an aggregate principal amount not to exceed $25,000,000 at any time outstanding, PROVIDED that on the date any such Indebtedness is incurred and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing; (f) unsecured Indebtedness of any Subsidiary in an aggregate principal amount (for all the Subsidiaries) not to exceed $50,000,000 at any time outstanding, PROVIDED that (i) no more than an aggregate principal amount of $25,000,000 of such Indebtedness may have any principal payments due on a date that is on or prior to the Refinancing Revolving Facility Maturity Date, (ii) such Indebtedness contains covenants (including financial and negative covenants) and events of default that are no more restrictive in any material respect than the analogous covenants and events of default contained in this Agreement and (iii) on the date that any such Indebtedness is incurred and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing; (g) secured Indebtedness of the Parent Borrower or any Subsidiary (including purchase money Indebtedness) in an aggregate principal amount (for the Parent Borrower 59 and all the Subsidiaries) not to exceed $50,000,000 at any time outstanding, PROVIDED that (i) no more than an aggregate principal amount of $25,000,000 of such Indebtedness may have any principal payments due on a date that is on or prior to the Refinancing Revolving Facility Maturity Date; (ii) such Indebtedness contains covenants (including financial and negative covenants) and events of default that are no more restrictive in any material respect than the analogous covenants and events of default contained in this Agreement; (iii) on the date that any such Indebtedness is incurred and immediately after giving effect thereto, no Default or Event of Default shall exist and be continuing; and (iv) the aggregate principal amount of such Indebtedness shall not exceed 80% of the fair market value of the assets and property securing such Indebtedness (as determined in good faith by a Financial Officer of the Parent Borrower); (h) Guarantees in respect of Indebtedness permitted pursuant to this Section 6.01 (except that Guarantees by the Parent Borrower and the Guarantors of Indebtedness of Controlled Non-Guarantor Entities shall be limited to Permitted Non-Guarantor Transactions); (i) Indebtedness of the Parent Borrower, any wholly owned Subsidiary or any Guarantor to any other wholly owned Subsidiary, any other Guarantor or the Parent Borrower, so long as such Indebtedness is subordinated to all Indebtedness incurred pursuant hereto and pursuant to the Guarantee Agreement and evidenced by a note pledged to the Collateral Agent for the benefit of the Lenders to the extent required by the Pledge Agreement; (j) Indebtedness incurred pursuant to any sale and leaseback transaction permitted by Section 6.03; (k) Indebtedness incurred under any Interest Rate Protection Agreement; (l) Indebtedness incurred in connection with any Permitted Receivables Financing; (m) Permitted Subordinated Indebtedness; (n) Indebtedness incurred in connection with any Permitted Non- Guarantor Transaction; and (o) extensions, renewals or refinancings of Indebtedness under paragraphs (a), (c) (d) and (g) so long as (i) such Indebtedness ("REFINANCING INDEBTEDNESS") is in an aggregate principal amount not greater than the aggregate principal amount of the Indebtedness being extended, renewed or refinanced plus the amount of any premiums required to be paid thereon and fees and expenses associated therewith, (ii) such Refinancing Indebtedness has a later or equal final maturity and a longer or equal weighted average life than the Indebtedness being extended, renewed or refinanced, (iii) the interest rate applicable to such Refinancing Indebtedness shall be a market interest rate (as determined in good faith by a Financial Officer of the Parent Borrower) as of the time of such extension, renewal or refinancing, (iv) if the Indebtedness being extended, renewed or refinanced is subordinated 60 to the Obligations, such Refinancing Indebtedness is subordinated to the Obligations to the extent of the Indebtedness being extended, renewed or refinanced, (v) each of the covenants, events of default or other provisions thereof (including any Guarantees thereof) shall be substantially no less favorable to the Lenders than those contained in the Indebtedness being refinanced and (vi) at the time and after giving effect to such extension, renewal or refinancing, no Default or Event of Default shall have occurred and be continuing. SECTION 6.02. LIENS. Create, incur, assume or permit to exist any Lien on any property or assets (including stock or other securities of any person, including any Subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except: (a) Liens on property or assets of the Parent Borrower and the Subsidiaries existing on the date hereof and set forth in Schedule 6.02(a); PROVIDED that such Liens shall secure only those obligations which they secure on the date hereof; (b) any Lien created under the Loan Documents; (c) any Lien existing on any property or asset prior to the acquisition thereof by any Borrower or any Subsidiary pursuant to a Permitted Acquisition, PROVIDED that (i) such Lien is not created in contemplation of or in connection with such acquisition and (ii) such Lien does not apply or extend to any other property or assets of any Borrower or any Subsidiary; (d) Liens for taxes not yet due or which are being contested in compliance with Section 5.03 or Liens for unpaid local or state taxes that are not in the aggregate material. (e) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and securing obligations that are not in the aggregate material; (f) pledges and deposits made in the ordinary course of business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations; (g) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (h) zoning restrictions, easements, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrowers and the Subsidiaries taken as a whole; 61 (i) purchase money security interests in real property, improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by any Borrower or any Subsidiary; PROVIDED that (i) such security interests secure Indebtedness permitted by Section 6.01, (ii) such security interests are incurred, and the Indebtedness secured thereby is created, within 180 days after such acquisition (or construction), (iii) the Indebtedness secured thereby does not exceed the lesser of the cost and the fair market value of such real property, improvements or equipment at the time of such acquisition (or construction) and (iv) such security interests do not apply to any other property or assets of any Borrower or any Subsidiary; (j) any Lien securing Indebtedness permitted by Section 6.01(g), PROVIDED that such Lien does not apply or extend to any other assets or property of any Borrower or any Subsidiary; (k) any Lien on an asset sold pursuant to a sale and leaseback transaction permitted by Section 6.03, PROVIDED that such Lien does not apply or extend to any other assets or property of any Borrower or any Subsidiary; (l) any Lien securing Indebtedness permitted by 6.01(i), PROVIDED that such Indebtedness is subordinated and evidenced by a note pledged in accordance with Section 6.01(i); (m) Liens on accounts receivables and related assets financed in connection with any Permitted Receivables Financing; (n) Liens securing Refinancing Indebtedness, to the extent that the Indebtedness being refinanced was originally permitted to be secured pursuant to this Section 6.02, PROVIDED that any such Lien does not apply or extend to any property or assets of any Borrower or any Subsidiary other than property or assets subject to the Liens securing the Indebtedness being refinanced; (o) bankers' liens and Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business consistent with past practices in connection with title insurance, purchase agreements, judgment liens (if released, bonded or stayed within 60 days) and leases and subleases; (p) prejudgment liens in respect of property of a Foreign Subsidiary that is incurred in connection with a claim or action against such Foreign Subsidiary before a court or tribunal outside of the United States, PROVIDED that such liens do not, individually or in the aggregate, have a Material Adverse Effect; (q) Liens on the assets of the Insurance Subsidiaries securing self insurance and reinsurance obligations and letters of credit or bonds issued in support of such self insurance and reinsurance obligations, PROVIDED that the assets subject to such Liens shall only be assets of the Insurance Subsidiaries; and 62 (r) deposits made prior to 1992 plus interest and income earned thereon to secure the Parent Borrower's obligations in respect of its Public Issue of 7.5% Dual Currency Swiss Franc Bonds dated 1986 and due 1998/2001. SECTION 6.03. SALE AND LEASEBACK TRANSACTIONS. Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred, PROVIDED that the Parent Borrower and the Subsidiaries may enter into any such transaction so long as (i) the aggregate fair market value of assets subject to all such transactions (as determined in good faith by the board of directors of the Parent Borrower) shall not exceed on a cumulative basis during the term of this Agreement $50,000,000, (ii) all the proceeds of any such transaction shall be in cash (except for obligations assumed by the buyer thereof) and the Net Cash Proceeds related to such transaction shall be applied to reduce the Commitments to the extent required by Section 2.12(a) and (iii) on the date that any such transaction is consummated and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. SECTION 6.04. INVESTMENTS, LOANS, ADVANCES AND CERTAIN OTHER TRANSACTIONS. Purchase, hold or acquire any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other person, or transfer any assets to any Controlled Non-Guarantor Entity, or engage in any transaction that causes any Guarantor to become a Controlled Non-Guarantor Entity, except: (a) investments made by the Parent Borrower or any Subsidiary (i) prior to the date hereof in the capital stock of the Subsidiaries that are existing on the date hereof and (ii) after the date hereof in the capital stock of the Borrowers, the Guarantors and wholly owned Domestic Subsidiaries not required to be Guarantors or Borrowers because of the second sentence of Section 5.11; (b) Permitted Investments; (c) Permitted Acquisitions; (d) Permitted Debt Repurchases; (e) Permitted Non-Guarantor Transactions; (f) Permitted Non-Control Investments; (g) Permitted Stock Repurchases; (h) loans and advances to (i) directors, officers and employees not in excess of $5,000,000 at any time outstanding and (ii) physicians and other health care professionals 63 not in excess of $10,000,000, in each case in the ordinary course of business and consistent with past practices; (i) investments in real property in the ordinary course of business and consistent with past practices not in excess of $10,000,000 at any time outstanding so long as such property is being used or will be used by an officer or employee of any Borrower or Guarantor primarily as a residence; (j) investments consisting of non-cash consideration from a sale of assets that is permitted pursuant to Section 6.05; (k) investments by any Borrower to the extent necessary in connection with a Permitted Receivables Financing; (l) loans or advances by the Parent Borrower, any wholly owned Subsidiary or any Guarantor to the Parent Borrower, any wholly owned Subsidiary or any Guarantor that are permitted under Section 6.01(i), PROVIDED that such loans or advances are subordinated and evidenced by a note pledged in accordance with Section 6.01(i); (m) investments, loans or advances existing on the date hereof and set forth on Schedule 6.04(m); (n) investments in the ordinary course of business and consistent with past practices in property (including debt and equity securities) issued by debtors as part of the reorganization of such debtors, PROVIDED that such property is issued in exchange for property originally issued when such debtors were solvent and were obtained in the ordinary course of business; (o) investments by Foreign Subsidiaries in instruments or securities of the highest grade investment available in local currencies or in certificates of deposit (or comparable instruments) of any bank with which such Subsidiary regularly transacts business; (p) any Interest Rate Protection Agreement permitted under Section 6.01(k); and (q) acquisition by Parent Borrower of shares of the capital stock of Green Spring pursuant to the Green Spring Exchange Agreement or the Green Spring Stockholders' Agreement. SECTION 6.05. MERGERS, CONSOLIDATIONS, SALES OF ASSETS AND ACQUISITIONS. Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or conduct any Asset Sale of (in one transaction or in a series of transactions) 63 all or any substantial part of its assets (whether now owned or hereafter acquired) or any capital stock of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the assets of any other person, except: (a) if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing (i) any wholly owned Subsidiary or any Guarantor may merge or consolidate into any Borrower or Guarantor in a transaction in which such Borrower or Guarantor is the surviving corporation and no person other than the Borrower, the Parent Borrower, a Guarantor or any wholly owned Subsidiary receives any consideration, (ii) any Borrower (other than the Parent Borrower) may merge into or consolidate with any wholly-owned Subsidiary or Guarantor in a transaction in which no person other than a Borrower, Guarantor or wholly-owned Subsidiary receives any consideration and the surviving or resulting corporation upon the consummation of such merger or consolidation is or becomes a Borrower, and (iii) any wholly owned Subsidiary or any Guarantor may merge into or consolidate with any other wholly owned Subsidiary in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than any Borrower or a wholly owned Subsidiary receives any consideration and so long as the surviving entity is a Guarantor or becomes a Guarantor to the extent required by Section 5.11; (b) the Parent Borrower and the Subsidiaries may conduct any Asset Sale so long as the fair market value of all the assets sold, transferred or otherwise disposed of pursuant to this Section 6.05(b) (excluding any Casualty Event or Condemnation Event) shall not exceed $50,000,000 on a cumulative basis during the term of this Agreement (as determined in good faith by a Financial Officer of the Parent Borrower) and so long as the Net Cash Proceeds from any such sale shall be applied to reduce the Commitments to the extent required by Section 2.12(a); PROVIDED, HOWEVER, that any Asset Sale otherwise permitted by Section 6.05(b) shall not be permitted unless (A) such sale, transfer or other disposition is for consideration at least 70% of which is cash, and (B) such consideration is at least equal to the fair market value of the assets sold, transferred or disposed of (as determined in good faith by a Financial Officer of the Parent Borrower) (c) the Parent Borrower or any Subsidiary may make Permitted Acquisitions; (d) any sale and leaseback transaction permitted by Section 6.03 may be effected, PROVIDED that the Net Cash Proceeds from such sale shall be applied to reduce the Commitments to the extent required by Section 2.12(a); (e) any transfer of assets made in connection with any Permitted Non- Control Investment or any Permitted Non-Guarantor Transaction may be effected, PROVIDED that any Net Cash Proceeds from such transfer shall be applied to reduce the Commitments to the extent required by Section 2.12(a); (f) any Subsidiary may liquidate and distribute assets to any other Subsidiary, a Guarantor or the Parent Borrower, PROVIDED that if the Subsidiary that is being liquidated is 65 a Guarantor or a Borrower, the Subsidiary that receives the assets pursuant to following such liquidation shall be a Guarantor or a Borrower; (g) the Parent Borrower or any Subsidiary may sell accounts receivable pursuant to any Permitted Receivables Financing; and (h) any Loan Party or any Subsidiary may lease or sublease properties in the ordinary course of business and consistent with past practice. SECTION 6.06. DIVIDENDS AND DISTRIBUTIONS; RESTRICTIONS ON ABILITY OF SUBSIDIARIES TO PAY DIVIDENDS. (a) Declare or pay, directly or indirectly, any dividend or make any other distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, with respect to any shares of its capital stock or directly or indirectly redeem, purchase, retire or otherwise acquire for value (or permit any Subsidiary to purchase or acquire) any shares of any class of its capital stock or set aside any amount for any such purpose; PROVIDED, HOWEVER, that: (i) any Subsidiary may declare and pay dividends or make other distributions to any Borrower or any wholly owned Subsidiary; (ii) Permitted Stock Repurchases may be effected; (iii) the Parent Borrower may repurchase common stock distributed in the ordinary course of business consistent with past practices to trusts pursuant to any employee-related benefit plan (including any employee stock ownership plan); (iv) the Parent Borrower may acquire warrants and options for the purchase of capital stock acquired upon the exercise of such warrants or options, PROVIDED that the sole consideration for any such warrants or options shall be the Parent Borrower's common stock; (v) the Parent Borrower may purchase, redeem or otherwise acquire for nominal consideration rights in connection with the Rights Plan; (vi) any Guarantor may declare and pay dividends PRO RATA to its shareholders, partners or other equity holders, as the case may be; and (vii) so long as no Default or Event of Default shall have occurred and be continuing, the Parent Borrower may declare and pay in each fiscal year PRO RATA cash dividends on its capital stock in a cumulative amount for such fiscal year not to exceed 6% of (x) the cash proceeds received by the Parent Borrower, net of underwriter's and broker's fees and commissions and costs and expenses incurred in connection therewith, from issuances of its common stock after the Closing Date pursuant to public or private offerings LESS (y) all amounts spent by the Parent Borrower to repurchase any shares of its common stock pursuant to a Permitted Stock Repurchase. 66 (b) Permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Subsidiary to (i) pay any dividends or make any other distributions on its capital stock or any other interest or (ii) make or repay any loans or advances to the Parent Borrower or the parent of such Subsidiary (dividends, distributions and other payments described in subclauses (i) and (ii) are collectively referred to herein as "UPSTREAM PAYMENTS"), other than encumbrances and restrictions: (A) pursuant to the Loan Documents; (B) existing under, or by reason of, applicable law; (C) contained in any debt instrument governing Indebtedness of a Subsidiary that becomes a Borrower or a Guarantor acquired or assumed pursuant to a Permitted Acquisition and permitted by Section 6.01(d) or (g) or refinancings thereof permitted by Section 6.01(o), PROVIDED that (x) such instrument was in existence at the time of such acquisition and was not created in contemplation of or in connection with the applicable Permitted Acquisition, (y) a Financial Officer of the Parent Borrower reasonably believes at the time such Indebtedness is acquired that the terms of such instrument will not encumber or restrict the ability of such acquired Subsidiary to make an Upstream Payment, except upon a default or an event of default under such Indebtedness and (z) such instrument contains no express encumbrances, or restrictions on the ability of such acquired Subsidiary to make an Upstream Payment, except upon a default or an event of default under such Indebtedness; (D) existing on the date hereof and set forth on Schedule 6.06(b); (E) contained in sale and leaseback agreements permitted by Section 6.03 and any debt instrument governing any Indebtedness permitted by Section 6.01(g); and (F) that are Permitted Restrictions in the case of a Controlled Venture. SECTION 6.07. TRANSACTIONS WITH AFFILIATES. Sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that any Borrower or any Subsidiary may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions substantially not less favorable to such Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, PROVIDED that the foregoing restriction shall not apply to any Permitted Receivables Financing or any Permitted Non-Guarantor Transaction. SECTION 6.08. OTHER INDEBTEDNESS AND AGREEMENTS. (a) Permit any waiver, supplement, modification, amendment, termination or release of any indenture, instrument or agreement governing any Indebtedness or preferred stock of any Borrower or any Subsidiary, or modify its charter or by-laws, in each case to the extent that any such waiver, supplement, modification, amendment, termination or release would be adverse to the Lenders in any material respect. 67 (b) Make any distribution, whether in cash, property, securities or a combination thereof, other than scheduled payments of principal and interest as and when due (to the extent not prohibited by applicable subordination provisions), in respect of, or pay, or offer or commit to pay, or directly or indirectly redeem, repurchase, retire or otherwise acquire for consideration, or set apart any sum for the aforesaid purposes, any subordinated Indebtedness for borrowed money of any Loan Party or any Subsidiary except for Permitted Debt Repurchases and Indebtedness permitted by Section 6.01(i). SECTION 6.09. BUSINESS OF THE BORROWERS AND SUBSIDIARIES. Engage at any time in any business or business activity that is not a health care business or activity and business activities reasonably related (ancillary or complementary) to such business or business activity. SECTION 6.10. INTEREST EXPENSE COVERAGE RATIO. Permit the Interest Expense Coverage Ratio as of the end of any fiscal quarter, beginning with the fiscal quarter ending on December 31, 1996, to be less than 2.50 to 1.00. SECTION 6.11. LEVERAGE RATIO. Permit the Leverage Ratio as of the end of any fiscal quarter, beginning with the fiscal quarter ending on December 31, 1996, to be in excess of 4.00 to 1.00. SECTION 6.12. SENIOR DEBT RATIO. Permit the Senior Debt Ratio as of the end of any fiscal quarter, beginning with the fiscal quarter ending on December 31, 1996, to be in excess of 2.00 to 1.00. SECTION 6.13. FISCAL YEAR. Change the end of its fiscal year from September 30 to any other date. ARTICLE VII EVENTS OF DEFAULT In case of the happening of any of the following events ("EVENTS OF DEFAULT"): (a) any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings or issuances of Letters of Credit hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; 68 (c) default shall be made in the payment of any Fee, any L/C Disbursement that is not satisfied by a deemed Loan pursuant to the second sentence of Section 2.02(f) or interest on any Loan or L/C Disbursement or any other amount (other than an amount referred to in (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of three Business Days; (d) default shall be made in the due observance or performance by any Borrower or any Subsidiary of any covenant, condition or agreement contained in Section 5.01(a), 5.05 or 5.08 or in Article VI; (e) default shall be made in the due observance or performance by any Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those specified in (b), (c) or (d) above) and such default shall continue unremedied for a period of 15 days after notice thereof from the Administrative Agent or any Lender to the Borrowers; (f) any Borrower or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness (other than the Indebtedness evidenced by any Loan Document) in a principal amount in excess of $12,500,000, when and as the same shall become due and payable (subject to any grace period), or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf to cause, such Indebtedness to become due prior to its stated maturity; (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of any Borrower or any Subsidiary, or of a substantial part of the property or assets of any Borrower or a Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Borrower or any Subsidiary or for a substantial part of the property or assets of any Borrower or a Subsidiary or (iii) the winding-up or liquidation of any Borrower or any Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (h) any Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Borrower or any Subsidiary or for a 69 substantial part of the property or assets of any Borrower or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any proceeding relating to the above, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (i) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against any Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 60 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of any Borrower or any Subsidiary to enforce any such judgment; (j) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to have a Material Adverse Effect; (k) any security interest purported to be created by any Security Document shall cease to be, or shall be asserted by any Borrower or any other Loan Party not to be, a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or such Security Document) security interest in the securities, assets or properties covered thereby, except to the extent that any such loss of perfection or priority results from the failure of the Collateral Agent to maintain possession of certificates representing securities pledged under the Pledge Agreement; (l) any Loan Document shall not be for any reason, or shall be asserted by any Loan Party not to be, in full force and effect and enforceable in accordance with its terms; or (m) there shall have occurred a Change in Control; then, and in every such event (other than an event with respect to any Borrower or any Subsidiary described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrowers, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein or in any other Loan Document to the contrary notwithstanding; and in any event with respect to any Borrower or any Subsidiary described in paragraph (g) or (h) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder and under any other Loan Document, shall automatically become due and payable, 70 without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein or in any other Loan Document to the contrary notwithstanding. ARTICLE VIII THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT AND THE COLLATERAL AGENT In order to expedite the transactions contemplated by this Agreement, The Chase Manhattan Bank is hereby appointed to act as Administrative Agent and Collateral Agent and First Union National Bank of North Carolina is hereby appointed to act as Syndication Agent, in each case on behalf of the Lenders and the Issuing Banks (for purposes of this Article VIII, the Administrative Agent, the Syndication Agent and the Collateral Agent are referred to collectively as the "AGENTS"). Each of the Lenders and each assignee of any such Lender and each Issuing Bank, hereby irrevocably authorizes the Agents to take such actions on behalf of such Lender or assignee or Issuing Bank and to exercise such powers as are specifically delegated to the Agents by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders and the Issuing Banks, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders and the Issuing Banks all payments of principal of and interest on the Loans, all payments in respect of L/C Disbursements and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender or the applicable Issuing Bank its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrowers of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrowers or any other Loan Party pursuant to this Agreement or the other Loan Documents as received by the Administrative Agent. Without limiting the generality of the foregoing, the Administrative Agent and the Collateral Agent are hereby expressly authorized to execute any and all documents (including releases) with respect to the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Documents. The Borrowers agree that the Administrative Agent may designate prior to the Closing Date any other Lender with the title co-agent and that any such co-agent shall not be obligated to perform any duties in such capacity as a co-agent. Neither the Agents nor any of their respective directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his own gross negligence or willful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrowers or any other Loan Party of any of the terms, conditions, covenants or agreements contained in any Loan Document. The Agents shall not be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement or any other Loan Documents, instruments or agreements. The Agents shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required 71 Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. Each Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Agents nor any of their respective directors, officers, employees or agents shall have any responsibility to the Borrowers or any other Loan Party on account of the failure of or delay in performance or breach by any Lender or any Issuing Bank of any of its obligations hereunder or to any Lender or any Issuing Bank on account of the failure of or delay in performance or breach by any other Lender or Issuing Bank or the Borrowers or any other Loan Party of any of their respective obligations hereunder or under any other Loan Document or in connection herewith or therewith. Each of the Agents may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that none of the Agents shall be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Agent as provided below, any of the Agents may resign at any time by notifying the Lenders and the Borrowers. Upon any such resignation, the Required Lenders, with the consent of the Parent Borrower (which consent shall not be unreasonably withheld), shall have the right to appoint a successor, PROVIDED the consent of the Parent Borrower shall not be required if an Event of Default has occurred and is continuing. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, with the consent of the Parent Borrower (which consent shall not be unreasonably withheld), which shall be a bank that is a Lender and has a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank, PROVIDED the consent of the Parent Borrower shall not be required if an Event of Default has occurred and is continuing. Upon the acceptance of any appointment as Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. After the Agent's resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. With respect to the Loans made by it hereunder, each Agent in its individual capacity and not as Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not an Agent, and the Agents and their Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrowers or any Subsidiary or other Affiliate thereof as if it were not an Agent. Each Lender agrees (a) to reimburse the Agents, on demand, in the amount of its PRO RATA share (based on its Commitment hereunder) of any expenses incurred for the benefit of the Lenders by the Agents, including counsel fees and compensation of agents and employees paid for 72 services rendered on behalf of the Lenders, that shall not have been reimbursed by the Borrowers and (b) to indemnify and hold harmless each Agent and any of its directors, officers, employees or agents, on demand, in the amount of such PRO RATA share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against it in its capacity as Agent or any of them in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by it or any of them under this Agreement or any other Loan Document, to the extent the same shall not have been reimbursed by the Borrowers or any other Loan Party, PROVIDED that no Lender shall be liable to an Agent or any such other indemnified person for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent or any of its directors, officers, employees or agents. Each Lender agrees that such Lender will not challenge the seniority, with respect to the Series A Notes or other subordinated Indebtedness of the Parent Borrower or the Subsidiaries permitted to be incurred by Section 6.01, of the Loans made by other Lenders. Each Lender acknowledges that it has, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX MISCELLANEOUS SECTION 9.01. NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to any Borrower, to it in care of the Parent Borrower at 3414 Peachtree Road, NE, Suite 1400, Atlanta, GA 30326, Attention of Treasurer (Telecopy No. (404) 814-5823); (b) if to the Administrative Agent, to Chase Manhattan Bank Agency Services Corporation, Grand Central Tower, 29th Floor, 140 East 45th Street, New York, New York 10017, Attention of Sandra Miklave (Telecopy No. (212) 622-0002), with a copy to The Chase Manhattan Bank, at 270 Park Avenue, New York, New York 10017, Attention of Dawn Lee Lum (Telecopy No. (212) 270-3279); 73 (c) if to the Syndication Agent, to First Union National Bank of North Carolina, 301 South College Street, Charlotte, North Carolina 28288, Attention of Sue Patterson (Telecopy No. 704-383-9144); and (d) if to a Lender, to it at its address (or telecopy number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 9.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 9.01. SECTION 9.02. SURVIVAL OF AGREEMENT. All covenants, agreements, representations and warranties made by the Loan Parties herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and the Issuing Banks and shall survive the making by the Lenders of the Loans and the issuance of Letters of Credit by the Issuing Banks, regardless of any investigation made by the Lenders or the Issuing Banks or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not been terminated. The provisions of Sections 2.13, 2.15, 2.19 and 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Syndication Agent, the Collateral Agent, any Lender or any Issuing Bank. SECTION 9.03. BINDING EFFECT. This Agreement shall become effective when it shall have been executed by the Borrowers, the Administrative Agent and the Syndication Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. SECTION 9.04. SUCCESSORS AND ASSIGNS. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrowers, the Administrative Agent and the Syndication Agent, the Issuing Banks or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective permitted successors and assigns. 74 (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); PROVIDED, HOWEVER, that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender, (x) the Parent Borrower, the Administrative Agent and the Syndication Agent (and, in the case of any assignment of a Commitment, the Issuing Banks) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld) and (y) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or, if less, the entire remaining amount of such Lender's Commitment), (ii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, (iii) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire and (iv) the assignment by any Lender of any portion of its Commitment or any portion of the Loans owing to such Lender must include, to the extent applicable, a ratable portion of both its Refinancing Loan Commitment and its Additional Loan Commitment and, to the extent applicable, a ratable portion of Refinancing Revolving Loans and Additional Revolving Loans owing to such Lender. Upon acceptance and recording pursuant to paragraph (e) of this Section 9.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 9.05, as well as to any Fees accrued for its account and not yet paid). (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment, and the outstanding balance of its Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of any Borrower or any Subsidiary or the performance or observance by any Borrower or any Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04 and such other documents and information as 75 it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, the Syndication Agent, the Collateral Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent and the Collateral Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent and the Collateral Agent, respectively, by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at one of its offices a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "REGISTER"). The entries in the Register shall be conclusive and the Borrowers, the Administrative Agent, the Issuing Banks, the Collateral Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrowers, the Issuing Banks, the Collateral Agent and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and, if required, the written consent of the Parent Borrower, the Issuing Banks, the Administrative Agent and the Syndication Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders and the Issuing Banks. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e). (f) Each Lender may without the consent of the Borrowers, the Issuing Banks or the Administrative Agent sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); PROVIDED, HOWEVER, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if they were Lenders and (iv) the Borrowers, the Administrative Agent, the Syndication Agent, the Issuing Banks and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrowers relating to the Loans or L/C Disbursements and to approve any amendment, modification or waiver of any provision of this Agreement and the other Loan Documents (other than amendments, modifications 76 or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans, increasing or extending the Commitments or releasing from any Lien granted under any Security Document all or any substantial part of the Collateral (except with respect to sales of, and other transactions relating to, Collateral permitted pursuant to any Loan Document)). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers; PROVIDED that, prior to any such disclosure of information designated by the Borrowers as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 9.16. (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to a Federal Reserve Bank to secure extensions of credit by such Federal Reserve Bank to such Lender; PROVIDED that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such Bank for such Lender as a party hereto. In order to facilitate such an assignment to a Federal Reserve Bank, the Borrowers shall, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes evidencing the Loans made to the Borrowers by the assigning Lender hereunder. (i) The Borrowers shall not assign or delegate any of their respective rights or duties hereunder without the prior written consent of the Administrative Agent, the Syndication Agent, the Issuing Banks and each Lender, and any attempted assignment without such consent shall be null and void. SECTION 9.05. EXPENSES; INDEMNITY. (a) The Borrowers agree to pay all reasonable out-of-pocket expenses incurred by the Administrative Agent, the Syndication Agent, the Collateral Agent and the Issuing Banks in connection with the syndication of the credit facilities provided for herein and the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Administrative Agent, the Syndication Agent, the Collateral Agent, an Issuing Bank or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or Letters of Credit issued hereunder, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent, the Syndication Agent and the Collateral Agent, and, in connection with any such enforcement or protection, the reasonable fees, charges and disbursements of any other counsel for the Administrative Agent, the Syndication Agent, the Collateral Agent, an Issuing Bank or any Lender. 77 (b) The Borrowers agree, jointly and severally, to indemnify the Administrative Agent, the Syndication Agent, the Collateral Agent, each co- agent, each Lender and each Issuing Bank, each Affiliate of any of the foregoing persons and each of their respective directors, officers, employees and agents (each such person being called an "INDEMNITEE") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans or issuance of Letters of Credit, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) any actual or alleged presence or Release of Hazardous Materials on any property owned or operated by the Borrowers or any of the Subsidiaries, or any Environmental Claim related in any way to the Borrowers or the Subsidiaries; PROVIDED that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) The provisions of this Section 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Syndication Agent, the Collateral Agent, any Lender or either Issuing Bank. All amounts due under this Section 9.05 shall be payable on written demand therefor. SECTION 9.06. RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, each Lender and Issuing Bank is hereby authorized at any time and from time to time, except to the extent prohibited by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or Issuing Bank to or for the credit or the account of any Borrower against any of and all the obligations of any Borrower now or hereafter existing under this Agreement and other Loan Documents held by such Lender or Issuing Bank, irrespective of whether or not such Lender or Issuing Bank shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender and Issuing Bank under this Section 9.06 are in addition to other rights and remedies (including other rights of setoff) which such Lender or Issuing Bank may have. SECTION 9.07. APPLICABLE LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN LETTERS OF CREDIT AND AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO 78 SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK. SECTION 9.08. WAIVERS; AMENDMENT. (a) No failure or delay of the Administrative Agent, the Syndication Agent, the Collateral Agent, any Lender or either Issuing Bank in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Syndication Agent, the Collateral Agent, the Issuing Banks and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrowers or any other Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrowers in any case shall entitle the Borrowers to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any other Loan Document (excluding Letters of Credit) nor any provision hereof or thereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders (or, in the case of any other such Loan Document, the parties thereto with the prior written consent of the Required Lenders); PROVIDED, HOWEVER, that no such agreement (i) shall (A) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan or any date for reimbursement of an L/C Disbursement, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan or L/C Disbursement, without the prior written consent of each Lender affected thereby, (B) change or extend the Commitment or decrease or extend the date for payment of the Commitment Fees of any Lender without the prior written consent of such Lender or (C) amend or modify the provisions of Section 2.12(a), 2.16, 4.03(b) or 9.04(i), the provisions of this Section, the definition of the term "Required Lenders" or release any Guarantor from its obligations under the Guarantee Agreement (other than in accordance with the Guarantee Agreement) or release from any Lien granted under any Security Document all or any substantial part of the Collateral (except with respect to sales of, and other transactions relating to, Collateral permitted pursuant to the Security Documents), without the prior written consent of each Lender, (ii) shall change the allocation between the Total Refinancing Loan Commitment and the Total Additional Loan Commitment of any prepayment or reduction pursuant to Section 2.09, 2.11 or 2.12 without the prior written consent of (A) Refinancing Facility Lenders representing more than 50% of the sum of the Aggregate Credit Exposure and unused Refinancing Loan Commitments and (B) Additional Facility Lenders representing more than 50% of the sum of the aggregate outstanding principal amount of the Additional Revolving Loans and unused Additional Loan Commitments or (iii) shall amend or modify Section 4.03(a), (c) or (d) without the prior written consent of Additional Facility Lenders representing more than 50% of the sum of the aggregate outstanding principal amount of Additional 79 Revolving Loans and unused Additional Loan Commitments; PROVIDED, FURTHER that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Syndication Agent, the Collateral Agent or either Issuing Bank hereunder or under any other Loan Document without the prior written consent of the Administrative Agent, the Syndication Agent, the Collateral Agent or such Issuing Bank. SECTION 9.09. INTEREST RATE LIMITATION. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan or participation in any L/C Disbursement, together with all fees, charges and other amounts which are treated as interest on such Loan or participation in such L/C Disbursement under applicable law (collectively the "CHARGES"), shall exceed the maximum lawful rate (the "MAXIMUM RATE") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan or participation in accordance with applicable law, the rate of interest payable in respect of such Loan or participation hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan or participation but were not payable as a result of the operation of this Section 9.09 shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or participations or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 9.10. ENTIRE AGREEMENT. This Agreement, the Fee Letter and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof. Any other previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED TO SUCH PARTY, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11. SECTION 9.12. SEVERABILITY. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being 80 understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 9.13. COUNTERPARTS. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 9.03. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement. SECTION 9.14. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 9.15. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, the Syndication Agent, the Collateral Agent, either Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Borrowers or its properties in the courts of any jurisdiction. (b) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.16. CONFIDENTIALITY. The Administrative Agent, the Syndication Agent, the Collateral Agent, each Issuing Bank and each of the Lenders agrees to keep confidential (and to use its best efforts to cause its respective agents and representatives to keep confidential) the Information (as defined below) and all copies thereof, extracts therefrom and analyses or other 81 materials based thereon, except that the Administrative Agent, the Syndication Agent, the Collateral Agent, either Issuing Bank or any Lender shall be permitted to disclose Information (a) to such of its respective officers, directors, employees, agents, auditors, affiliates and representatives as need to know such Information, (b) to the extent requested by any regulatory authority, (c) to the extent otherwise required by applicable laws and regulations or by any subpoena or similar legal process, (d) in connection with any suit, action or proceeding relating to the enforcement of its rights hereunder or under the other Loan Documents or (e) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section 9.16 or (ii) becomes available to the Administrative Agent, the Syndication Agent, either Issuing Bank, any Lender or the Collateral Agent on a nonconfidential basis from a source other than the Borrowers. For the purposes of this Section, "INFORMATION" shall mean all financial statements, certificates, reports, agreements and information (including all analyses, compilations and studies prepared by the Administrative Agent, the Syndication Agent, the Collateral Agent, either Issuing Bank or any Lender based on any of the foregoing) that (i) are received from the Borrowers and related to the Borrowers, any shareholder of any of the Borrowers or any employee, customer or supplier of the Borrowers, other than any of the foregoing that were available to the Administrative Agent, the Syndication Agent, the Collateral Agent, either Issuing Bank or any Lender on a nonconfidential basis prior to its disclosure thereto by the Borrowers, and (ii) are in the case of Information provided after the date hereof, clearly identified at the time of delivery as confidential. The provisions of this Section 9.16 shall remain operative and in full force and effect regardless of the expiration and term of this Agreement. SECTION 9.17. OBLIGATIONS JOINT AND SEVERAL. (a) Each Borrower agrees that it shall, jointly with the other Borrowers and severally, be liable for all the Obligations. Each Borrower further agrees that the Obligations of the other Borrowers may be extended and renewed, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its agreement hereunder notwithstanding any extension or renewal of any Obligation of the other Borrowers. (b) Each Borrower waives presentment to, demand of payment from and protest to the other Borrowers of any of the Obligations, and also waives notice of acceptance of its obligations and notice of protest for nonpayment. The Obligations of a Borrower hereunder shall not be affected by (i) the failure of any Lender or Issuing Bank or the Administrative Agent or Collateral Agent to assert any claim or demand or to enforce any right or remedy against the other Borrowers under the provisions of this Agreement or any of the other Loan Documents or otherwise; (ii) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement, any of the other Loan Documents or any other agreement; or (iii) the failure of any Lender or Issuing Bank to exercise any right or remedy against any other Borrower. (c) Each Borrower further agrees that its agreement hereunder constitutes a promise of payment when due and not of collection, and waives any right to require that any resort be had by any Lender or Issuing Bank to any balance of any deposit account or credit on the books of any Lender or Issuing Bank in favor of any other Borrower or any other person. (d) The Obligations of each Borrower hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including compromise, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by 82 reason of the invalidity, illegality or unenforceability of the Obligations of the other Borrowers or otherwise. Without limiting the generality of the foregoing, the Obligations of each Borrower hereunder shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agent, the Collateral Agent or any Lender or Issuing Bank to assert any claim or demand or to enforce any remedy under this Agreement or under any other Loan Document or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations of the other Borrowers, or by any other act or omission which may or might in any manner or to any extent vary the risk of such Borrower or otherwise operate as a discharge of such Borrower as a matter of law or equity. (e) Each Borrower further agrees that its obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation of the other Borrowers is rescinded or must otherwise be restored by the Administrative Agent, the Collateral Agent or any Lender or Issuing Bank upon the bankruptcy or reorganization of any of the other Borrowers or otherwise. (f) In furtherance of the foregoing and not in limitation of any other right which the Administrative Agent, the Collateral Agent or any Lender or Issuing Bank may have at law or in equity against any Borrower by virtue hereof, upon the failure of a Borrower to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, each other Borrower hereby promises to and will, upon receipt of written demand by the Administrative Agent, forthwith pay, or cause to be paid, in cash the amount of such unpaid Obligations, and thereupon each Lender shall, in a reasonable manner, assign the amount of the Obligations of the other Borrowers owed to it and paid by such Borrower pursuant to this guarantee to such Borrower, such assignment to be PRO TANTO to the extent to which the Obligations in question were discharged by such Borrower, or make such disposition thereof as such Borrower shall direct (all without recourse to any Lender and without any representation or warranty by any Lender). 83 (g) Upon payment by a Borrower of any sums as provided above, all rights of such Borrower against another Borrower, as the case may be, arising as a result thereof by way of right of subrogation or otherwise shall in all respects be subordinated and junior in right of payment to the prior indefeasible payment in full of all the Obligations to the Lenders and Issuing Banks. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. MAGELLAN HEALTH SERVICES, INC., by /s/ James R. Bedenbaugh ----------------------------------- Name: James R. Bedenbaugh Title: Vice President and Treasurer CHARTER BEHAVIORAL HEALTH SYSTEM OF CENTRAL GEORGIA, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF CHARLESTON, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF NEW MEXICO, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF NORTHERN CALIFORNIA, INC. CHARTER BEHAVIORAL HEALTH SYSTEM OF NORTHWEST ARKANSAS, INC. CHARTER BEHAVIORAL HEALTH SYSTEMS OF ATLANTA, INC. CHARTER FAIRMONT BEHAVIORAL HEALTH SYSTEM, INC. CHARTER FOREST BEHAVIORAL HEALTH SYSTEM, INC. CHARTER HOSPITAL OF ST. LOUIS, INC. CHARTER LAKESIDE BEHAVIORAL HEALTH SYSTEM, INC. CHARTER MISSION VIEJO BEHAVIORAL HEALTH SYSTEM, INC. CHARTER PALMS BEHAVIORAL HEALTH SYSTEM, INC. CHARTER PLAINS BEHAVIORAL HEALTH SYSTEM, INC. 84 CHARTER RIDGE BEHAVIORAL HEALTH SYSTEM, INC. CHARTER RIVERS BEHAVIORAL HEALTH SYSTEM, INC. CHARTER SAN DIEGO BEHAVIORAL HEALTH SYSTEM, INC. CHARTER SPRINGS BEHAVIORAL HEALTH SYSTEM, INC. CHARTER SPRINGWOOD BEHAVIORAL HEALTH SYSTEM, INC. CHARTER WOODS BEHAVIORAL HEALTH SYSTEM, INC. CMSF, INC. FLORIDA HEALTH FACILITIES, INC. THE CHARTER BEHAVIORAL HEALTH SYSTEM OF NORTHWEST INDIANA, LLC THE CHARTER INDIANAPOLIS BEHAVIORAL HEALTH SYSTEM, LLC THE CHARTER SOUTH BEND BEHAVIORAL HEALTH SYSTEM, LLC THE CHARTER TERRE HAUTE BEHAVIORAL HEALTH SYSTEM, LLC, each as a Subsidiary Borrower, by /s/ Charlote A. Sanford ------------------------ Name: Charlote A. Sanford Title: Treasurer THE CHASE MANHATTAN BANK, individually and as Administrative Agent, Collateral Agent and an Issuing Bank, by /s/ Dawn Lee Lum ---------------- Name: Dawn Lee Lum Title: Vice President 85 FIRST UNION NATIONAL BANK OF NORTH CAROLINA, individually and as Syndication Agent and an Issuing Bank, by /s/ Ann M. Dodd ------------------------- Name: Ann M. Dodd Title: Senior Vice President BANK OF IRELAND GRAND CAYMAN BRANCH, by /s/ John G. Cusack ------------------------------ Name: John G. Cusack Title: Assistant Vice President by /s/ Randolph H. Ross ------------------------------ Name: Randolph H. Ross Title: Vice President BANK OF TOKYO-MITSUBISHI TRUST COMPANY, by /s/ Margaret Sheridan Sunier ------------------------------ Name: Margaret Sheridan Sunier Title: Vice President and Manager BANQUE FRANCAISE DU COMMERCE EXTERIEUR, by /s/ Mark A. Harrington ------------------------------ Name: Mark A. Harrington Title: Vice President and Regional Manager by /s/ Timothy L. Polvado ------------------------------ Name: Timothy L. Polvado Title Assistant Vice President 86 CREDIT LYONNAIS NEW YORK BRANCH, individually and as Co-Agent, by /s/ Farboud Tavangar ------------------------------ Name: Farboud Tavangar Title: Vice President DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, by /s/ Andrew P. Nesi ------------------------------ Name: Andrew P. Nesi Title: Vice President by /s/ Richard W. Conroy ------------------------------ Name: Richard W. Conroy Title: Vice President FIRST AMERICAN NATIONAL BANK, by /s/ Sandra G. Hamrick ------------------------------ Name: Sandra G. Hamrick Title: Vice President GENERAL ELECTRIC CAPITAL CORPORATION, as Co-Agent and as Lender, by /s/ Cheryl P. Boyd ------------------------------ Name: Cheryl P. Boyd Title: Duly Authorized Signatory 87 GIROCREDIT BANK AKTIENGESELLSCHAFT DER SPARKASSEN, GRAND CAYMAN BRANCH, by /s/ Richard Stone ------------------------------ Name: Richard Stone Title: First Vice President by /s/ Sharad Gupta ------------------------------ Name: Sharad Gupta Title: Senior Vice President MITSUBISHI TRUST AND BANKING CORPORATION, by /s/ Patricia Loret de Mola ------------------------------ Name: Patricia Loret de Mola Title: Senior Vice President THE BANK OF NEW YORK, by /s/ Gregory L. Batson ------------------------------ Name: Gregory L. Batson Title: Vice President THE BANK OF NOVA SCOTIA, by /s/ Dana Maloney ------------------------------ Name: Dana Maloney Title: Relationship Manager THE NIPPON CREDIT BANK, LTD., by /s/ Clifford Abramsky ------------------------------ Name: Clifford Abramsky Title: Senior Manager EX-10.(T) 3 EX 10(T) EMPLOYMENT AGREEMENT THIS AGREEMENT is made and effective this 28th day of February, 1996, by and between GREEN SPRING HEALTH SERVICES, INC., a Delaware corporation (hereinafter "Employer") and Henry T. Harbin, M.D. (hereinafter "Employee"). WITNESSETH: WHEREAS, Employee currently serves in the capacity of President and Chief Executive Officer. WHEREAS, Employee and Employer are parties to an Employment Agreement dated March 18, 1993 (the "Previous Agreement"); WHEREAS, it is the intention of the parties hereto to terminate the Previous Agreement effective with the date of this Agreement and to set out the terms and conditions of the employment and the rights and duties of Employee in fulfilling the capacity of President and Chief Executive Officer for Employer. NOW, THEREFORE, in consideration of the mutual promises of the parties and the mutual benefits they will gain by the performance thereof, all in accordance with the provisions hereinafter set forth, it is agreed by and between the parties hereto as follows: 1. (a) Effective as of the date hereof Employer confirms the employment of Employee and Employee agrees to continue to be employed by Employer and to continue to serve as the President and Chief Executive Officer of Employer, pursuant to the terms of this Agreement. (b) This Agreement shall not be construed as a break in service for purposes of those benefit plans contemplated in paragraph 2(c) below and any time of service accrued by Employee as of the date of this Agreement for purposes of determining the level or extent of such benefits in accordance with the terms of any such benefit plan shall be credited to Employee. (c) The term of this employment shall commence on the date hereof and shall terminate on the last day of the calendar month in which occurs the third (3rd) anniversary of the date hereof ("Initial Term"). After the Initial Term, this Agreement shall automatically renew for one year period and for subsequent one year periods thereafter unless one party presents to the other party written notice of intent to terminate the Agreement at lease ninety (90) calendar days prior to the applicable expiration date of this Agreement. 2. (a) Subject to Paragraph 3(b) below, during the term of this Agreement Employer shall pay Employee a base salary, the amount of which shall be fixed from time to time by the Board of Directors of Green Spring Health Services, provided in no event shall the base salary be less than the annual base salary Employee was receiving on the effective date of this Agreement, unless all Green Spring Health Services officers are required to accept similar reductions. (b) All payments of compensation shall be subject to all lawful deductions such as Federal Withholding Taxes and FICA; and (c) In addition to the compensation payable to Employee as provided by subparagraph 2(a) above, Employee shall be entitled to fringe benefits similar to those provided to all employees. 3. (a) During the term of this employment Employee shall: (i) hold the title of President and Chief Executive Officer; and (ii) generally perform the duties on behalf of Employer that he performs as of the date hereof and such other duties which may be required commensurate with Employee's professional ability and qualifications. (b) During the term of this employment, if Employer and Employee mutually agree to a change in the duties and/or title of Employee, then and in that event the parties shall to the extent necessary and appropriate modify the terms of this Agreement, including, if such modification requires, an adjustment to the salary and/or fringe benefits. 4. (a) Employee agrees: (i) not to disclose any trade or secret data or any other proprietary or confidential information acquired during employment by Employer or its subsidiary, successor or affiliated companies, during employment or after the termination of employment or retirement, except with the prior permission of Employer, unless said information becomes generally available to the public or becomes available to Employee on a non-confidential basis from a source other than Employer; (ii) not to interfere with the employment of any other employee of Employer or its subsidiary, successor or affiliated companies, or urge, induce or solicit other employees to leave Employer or its subsidiary, successor or affiliated companies; (iii) during the term of employment with Employer and for a period of two (2) years following employment termination, not to solicit the business of, contract with, or become employed by any entity (including any subsidiary, successor or affiliated company of such entity) with which Employer or its subsidiary, successor or affiliated companies has contracts or had contracts with in the two (2) years period prior to termination, unless agreed to in advance in writing by Employer; and (iv) during the term of employment and for one (1) year after the termination of employment, engage, directly or indirectly, or through any corporations or associations in any business enterprise or employment which is directly competitive (including but not limited to the following activities: utilization management, network management or mental health and/or substance abuse managed care) with Employer or its subsidiary, successor or affiliated companies in any state or territory, including the District of Columbia, where Employer or its subsidiary, successor or affiliated companies do business at the time of Employee's termination of employment. (b) Paragraph 4(a)(iii) and 4(a)(iv) shall not be binding on Employee if Employee has completed the Initial Term or any renewal periods set forth in Paragraph 1 and Employee is not offered continued employment with Employer, or if Employee is offered continued employment upon renewal but with a substantial reduction in Employee's duties or responsibilities, or if Employee's employment is terminated pursuant to paragraph 8 earlier than the expiration of the Initial Term or, if this Agreement is renewed, earlier than the expiration of the renewal period. 5. In the event of the occurrence of any of the following, Employee's employment shall terminate immediately and Employer's sole obligation to Employee shall be the payment of any salary, bonus, and benefits accrued through the date of such termination: (a) the death of Employee; or (b) the disability of Employee as defined by Paragraph 6 hereinbelow; or (c) the default by Employee as defined by Paragraph 7 hereinbelow. Notwithstanding the foregoing, any other written contractual agreement duly signed by Employer and Employee which may be in effect at the time of a termination pursuant to this paragraph 5 shall not be affected by such termination unless and only to the extent the terms of such other agreement expressly so state. 6. For purposes of this Agreement, the term disability means that Employee is substantially unable to discharge his responsibilities to Employer and its affiliates by reason of physical or mental illness or incapacity, whether arising out of sickness, accident or otherwise, and shall be evidenced by the written determination of a qualified medical doctor acceptable to Employer, which determination shall specify the date and time when such disability commenced and that it has continued uninterrupted for a period of at least one hundred eighty (180) days. 7. For purposes of this Agreement, the term default means that Employee has: (a) by deliberate and intentional actions refused to perform his duties for Employer as provided by paragraph 3 above. In the event that Employer determines that Employee has deliberately or intentionally failed to perform his duties for Employer as provided in paragraph 3, Employer shall notify Employee in writing of the reasons for its determination and shall provide Employee a reasonable period in which to either contest the determination or to correct the defects in performance; or (b) breached or otherwise failed to comply with the provisions of paragraph 4 above; or (c) committed an act of dishonesty, fraud, misrepresentation or other acts of moral turpitude which in the reasonable opinion of the Board of Directors of Employer causes it to conclude that the continuation of employment is not in the best interests of Employer; 8. In the event Employer shall terminate for any reason other than as set forth in paragraph 5 above the Employment of Employee earlier than the expiration of the Initial Term or, in the event the parties agree to renew the Agreement, earlier than the expiration of any renewal period, or Employer shall change the location of Employee's primary base or employment from Columbia, Maryland vicinity, such termination shall be deemed to be "without cause" and Employee shall be entitled to all compensation set forth in paragraph 2(a), and benefits under paragraph 2(c) to the extent allowable under the terms of such benefit plans, for the remaining balance of the Initial Term or renewal period, as the case may be, without any condition or restriction other than as expressly set forth in this Agreement. This shall constitute Employer's sole obligation to Employee in the event of a termination pursuant to this paragraph 8. This provision shall not apply if the Employee's termination occurs as a result of the expiration of the Initial Term or any renewal period without renewal by the parties. Notwithstanding the foregoing, any other written contractual agreement duly signed by Employer and Employee which may be in effect at the time of a termination pursuant to this paragraph 8 shall not be affected by such termination unless and only to the extent the terms of such other agreement expressly so state. 9. All notices required hereunder shall be in writing and either delivered by hand delivery or by certified mail, postage prepaid, return receipt requested. Notices to Employer shall be addressed as follows: Green Spring Health Services, Inc., Suite 500, 5565 Sterrett Place, Columbia, Maryland 21044, Attn: Chairman, with a copy to : General Counsel c/o Green Spring Health Services, Inc., Suite 500, 5565 Sterrett Place, Columbia, Maryland 21044; and notices to Employee shall be addressed to the then last known address of Employee as reflected on the records of Employer. 10. This Agreement shall be binding upon Employee, and Employer and its successors and assigns. Employee shall not assign any part of his rights and/or duties under this Agreement, unless Employer agrees thereto in writing. 11. This instrument contains the entire Agreement of the parties. It may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 12. This Agreement has been executed in and shall be governed by the laws of the State of Maryland. IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first above written. EMPLOYEE: GREEN SPRING HEALTH SERVICES, INC.: /s/ Henry T. Harbin By: /s/ Donald P. Sacco - ------------------------------ -------------------------------- Henry T. Harbin, M.D. Donald P. Sacco Chair of the Board of Directors EX-10.(U) 4 EX 10(U) COMPENSATION AGREEMENT THIS COMPENSATION AGREEMENT (this "Agreement") is made and entered into as of the 30th day of September, 1996, by and between Magellan Health Services, Inc., a Delaware corporation ("Magellan"), and Henry T. Harbin, M.D., a resident of the State of Maryland ("Executive"). WITNESSETH: WHEREAS, Green Spring Health Services, Inc. ("Green Spring"), a Delaware corporation and majority-owned subsidiary of Magellan, is engaged in the business of providing managed behavioral health care services, including managed alcohol and other substance abuse services and employee assistance plan services, including case or care management, administrative services, utilization review, certification or pre-admission or pre-treatment certification, assessment and referral, triage, staff clinical services, provider network services and preferred provider organization services; WHEREAS, Executive is currently serving as the President and Chief Executive Officer of Green Spring; WHEREAS, Green Spring and Executive are parties to that certain Employment Agreement, effective February 28, 1996 (the "Employment Agreement"), and that certain letter agreement, dated November 9, 1993, as amended by letter agreement dated September 19, 1994 (as amended, the "Letter Agreement"), providing Executive with certain termination and retirement benefits in addition to those set forth in the Employment Agreement; and WHEREAS, Magellan desires to provide Executive with certain compensation and termination benefits in addition to those set forth in the Employment Agreement and the Letter Agreement, on the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the receipt and sufficiency of which hereby are acknowledged, Magellan and Executive agree as follows: ARTICLE I CONTRACT BONUS SECTION 1.1 CONTRACT BONUS. In consideration of Executive's service as the President and Chief Executive Officer of Green Spring throughout the period commencing on December 13, 1995 and ending on December 13, 1999 (the "Contract Bonus Period"), Magellan shall pay to Executive a bonus in the amount determined in accordance with Section 1.2 hereof (the "Contract Bonus"). Unless Executive's right to receive the Contract Bonus is terminated in accordance with Section 1.4 hereof, Executive's right to receive one-half of the Contract Bonus shall accrue on December 13, 1998 (the "First Accrual Date") and Executive's right to receive the remaining one-half of the Contract Bonus shall accrue upon expiration of the Contract Bonus Period (the "Second Accrual Date"). SECTION 1.2 BONUS AMOUNT. The aggregate Contract Bonus payable hereunder shall be in an amount equal to (a) Two Million Two Hundred Fifty Thousand Dollars ($2,250,000) MINUS (b) the "Excluded Amount" determined in accordance with Section 1.3 hereof. The Contract Bonus shall be paid in immediately available funds in two installments payable on or prior to the fifth business day following the First Accrual Date and the Second Accrual Date (each, an "Accrual Date"), as follows: (i) the amount of the Contract Bonus payable following the First Accrual Date shall be equal to One Million One Hundred Twenty-Five Thousand Dollars ($1,125,000) less the Excluded Amount calculated as of the First Accrual Date; and (ii) the amount of the Contract Bonus payable following the Second Accrual Date shall be equal to Two Million Two Hundred Fifty Thousand Dollars ($2,250,000) less the greater of (A) One Million One Hundred Twenty- Five Thousand Dollars ($1,125,000) and (B) the Excluded Amount calculated as of the Second Accrual Date. SECTION 1.3 EXCLUDED AMOUNT. For purposes of this Agreement, the Excluded Amount shall mean the aggregate value (without duplication) of all cash and non-cash compensation paid or payable to or on behalf of Executive by Magellan, Green Spring or any of their respective affiliates during or in respect of Executive's services as an employee of Magellan or any subsidiary thereof, including Green Spring, during the Contract Bonus Period, whether payable pursuant to the Employment Agreement, the Letter Agreement or otherwise (the "Excluded Amount"), except that the Excluded Amount shall not include (a) Executive's current base salary of Two Hundred Eighty-Five Thousand Dollars ($285,000) per annum to the extent paid or payable in respect of Executive's services as an employee of Magellan or any subsidiary thereof, including Green Spring, during the Contract Bonus Period and (b) amounts payable to Executive for service prior to the Contract Bonus Period, including amounts payable pursuant to the Green Spring Long Term Compensation Plan relating to the termination of such plan in connection with the equity investment by Magellan in Green Spring in December 1995. Without limiting the generality of the foregoing, the Excluded Amount shall include (i) all cash compensation such as increases in current base salary, cash bonus, car allowance and reimbursement, deferred cash compensation, 401k match, incentive bonus match, cash accumulation account contribution and other cash incentive compensation and (ii) the value of all non-cash compensation such as incentive stock options, restricted stock, stock appreciation rights, cash value buildup of insurance policies and other non-cash compensation. For purposes of calculating the Excluded Amount as of the Second Accrual Date, the Excluded Amount shall also include any portion of the Contract Bonus payable following the First Accrual Date. With respect to the options to purchase One Hundred Thousand (100,000) shares of Magellan common stock 2 currently held by Executive and any future stock options granted to Executive during the Contract Bonus Period, the value of such options for purposes of the Excluded Amount shall be calculated as follows: (A) the value of options that have not been exercised as of such Accrual Date ("Unexercised Options") shall be equal to the aggregate number of Unexercised Options multiplied by the arithmetic average of the closing prices of the common stock for which such options are exercisable (on the American Stock Exchange or other stock exchange or market on which such common stock is then traded) for the ten trading days preceding such Accrual Date MINUS the aggregate exercise price payable in connection with the exercise of such options; and (B) the value of options that have been exercised as of such Accrual Date ("Exercised Options") shall be equal to the greater of (1) the sum of (a) the closing prices of the common stock for which such options were exercisable on the date of each such exercise multiplied by (b) the number of options exercised in connection with such exercise MINUS the aggregate exercise price payable in connection with such exercises or (2) the value that would have been ascribed to such Exercised Options if no exercise of such options had occurred as of such Accrual Date and such options had been valued as Unexercised Options in accordance with clause (A) of this Section 1.3. The Excluded Amount shall not include any value relating to unvested stock options to the extent that such options will not vest in the ordinary course on or prior to the end of the Contract Bonus Period. In the event, on the Second Accrual Date, that compensation (or an estimate thereof) is included in the Excluded Amount on the basis that such compensation is in respect of Executive's services during the Contract Bonus Period but is payable thereafter and Executive does not receive such compensation or receives compensation in an amount different than the estimated amount used to calculate the Excluded Amount, Magellan shall promptly reimburse Executive, or Executive shall promptly reimburse Magellan, as appropriate, in an amount equal to the difference between the amount of compensation included in the Excluded Amount and the amount actually paid to Executive. The adjustment set forth in the preceding sentence shall not apply with respect to the value of any Exercised Options or Unexercised Options included within the Excluded Amount. SECTION 1.4 TERMINATION OR RESIGNATION. (a) In the event that (i) Executive resigns from his position as President and Chief Executive Officer of Green Spring other than following a Change of Control (as hereinafter defined) or (ii) is terminated from such position for any of the reasons set forth in Subsection (b) of this Section 1.4 at any time prior to the Second Accrual Date, this Agreement, including Executive's right to receive any unpaid 3 installments of the Contract Bonus, shall terminate effective upon such resignation or termination. (b) This Agreement, including Executive's right to receive any unpaid installments of the Contract Bonus, shall terminate pursuant to Subsection (a) of this Section 1.4 if at any time prior to the Second Accrual Date, Executive is terminated by Green Spring for any of the following reasons: (i) pursuant to paragraph 5 of the Employment Agreement (or if the Employment Agreement has expired or been terminated or superseded, upon a termination for any of the reasons set forth in paragraph 5 of the Employment Agreement); (ii) for breaching any material term of this Agreement or the Employment Agreement; (iii) for committing any material act or acts of dishonesty relating to Executive's employment that result, or are intended to result, in material direct or indirect personal gain or enrichment at the expense of Magellan or its affiliates; (iv) for engaging in any illegal or other wrongful conduct that is substantially detrimental or substantially damaging to the reputation, business, or operations of Magellan, Green Spring or their respective subsidiaries; or (v) for refusing, failing or neglecting to perform his duties under the Employment Agreement in a manner that is substantially detrimental or substantially damaging to the reputation, business or operations of Magellan, Green Spring or their respective subsidiaries; provided, however, that in the case of clauses (ii), (iii) and (v), no such termination shall be effective unless (A) Green Spring or Magellan shall have given Executive 30 days' prior written notice of any noncomplying conduct or deficiency in performance by Executive that, if not discontinued or corrected, could lead to Executive's termination under this Section 1.4(b) in order that Executive shall have had an opportunity to cure such noncomplying conduct or deficiency in performance and (B) Executive shall not have cured such noncomplying conduct or deficiency in performance during such 30 day period. (c) In the event that (i) Executive is terminated by Green Spring for any reason other than as set forth in Subsection(b) of this Section 1.4 at any time prior to the expiration of the Contract Bonus Period, or (ii) Executive resigns following a Change of Control, Executive shall be entitled to receive each installment of the Contract Bonus at the same time and in the same manner as if Executive's employment had continued through the expiration of the Contract Bonus Period; provided, however, that all termination or severance payments payable to Executive in connection with such termination or resignation shall be included in the calculation of the Excluded Amount pursuant to Section 1.3 hereof. 4 (d) As used in this Agreement, a "Change of Control" shall be deemed to have occurred upon any of the following events: (i) the acquisition after the date hereof in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3(a)(1) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by any person or entity (other than Executive or Edwin M. Crawford) or any group of persons or entities (other than Executive or Edwin M. Crawford) who constitute a group (within the meaning of Section 13(d)(3) of the Exchange Act) of any securities of Magellan such that as a result of such acquisition such person or entity or group beneficially owns (within the meaning of Rule 13d-3(a)(1) under the Exchange Act) more than 50% of Magellan's then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of Magellan; or (ii) the sale of all or substantially all of the assets of Magellan (including, without limitation, by way of merger, consolidation, or transfer) in a transaction (except for a sale-leaseback or similar transaction) where Magellan or the holders of common stock of Magellan do not receive (A) voting securities representing a majority of the voting power entitled to vote on a regular basis for the Board of Directors of the acquiring entity or of an affiliate which controls the acquiring entity, or (B) securities representing a majority of the equity interests in the acquiring entity or of an affiliate that controls the acquiring entity, if other than a corporation; provided, that if Executive becomes entitled to any payments (whether hereunder or otherwise) by reason of an event described in Internal Revenue Code Section 280G(b)(2)(A)(i) (a "Parachute Event") that would constitute "parachute payments" (as defined in Internal Revenue Code Section 280G(b)(G)(2)(A)) if paid, then Executive's entitlement to such payments shall be reduced by such amount as will cause none of such payments to constitute parachute payments if, and only if, the net amount received by Executive by reason of the Parachute Event, after imposition of all applicable taxes (including taxes under Internal Revenue Code Section 4099), would be greater after such reduction than if such reduction were not made. For purposes of this Agreement, a Change Of Control shall not be deemed to have occurred upon a sale or transfer of all or substantially all of the business of Charter Behavioral Health Systems, Inc. ARTICLE II MISCELLANEOUS SECTION 2.1 COUNTERPARTS. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. SECTION 2.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to a contract executed and performed in such state without reference to the choice of law principles of such state. SECTION 2.3 ENTIRE AGREEMENT. This Agreement, the Employment Agreement and the Letter Agreement contain the entire agreement between the parties with respect to the 5 subject matter of this Agreement and such agreements supersede all prior drafts of such agreements, all prior and contemporaneous agreements, representations, negotiations, discussions, correspondence and communications between Magellan, Green Spring and Executive. SECTION 2.4 NOTICES. All notices under this Agreement shall be sufficiently given for all purposes under this Agreement if in writing (a) when delivered personally; (b) five days after mailing in the United States Postal Service; (c) one day after sending by documented overnight delivery service; or (d) when receipt is confirmed, by telecopy, telefax or other electronic transmission service to the appropriate address or number as set forth below. IF TO MAGELLAN: Magellan Health Services, Inc. Suite 1400 3414 Peachtree Road, N.E. Atlanta, Georgia 30326 Attention: Cherie M. Fuzzell, Esq. Telecopier: (404) 814-5795 IF TO EXECUTIVE: Henry T. Harbin, M.D. 2002 Sulgrave Avenue Baltimore, Maryland 21209 Telecopier: (410) 740-2686 or to such other address and to the attention of such other person as Magellan or Executive may designate by written notice in accordance with this Section 2.4. SECTION 2.5 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of Magellan and its successors and assigns. Magellan shall be entitled to assign its rights and obligations under this Agreement to Green Spring or to any purchaser of Magellan's entire equity interest in Green Spring. The rights and obligations of Executive under this Agreement are personal to Executive and shall not be assignable or transferrable in any manner or subject to alienation, sale, pledge, encumbrance or other legal process or in any manner subject to the debts or liabilities of Executive, whether by operation of law or otherwise, except by operation of the laws of descent and distribution upon Executive's death after an Accrual Date but prior to payment of the Contract Bonus payable to Executive, if any, relating to such Accrual Date. If Executive shall, or shall attempt to, transfer, assign, alienate, sell, pledge or otherwise encumber any of his benefits hereunder or if by reason of bankruptcy or any other event, the benefits of Executive hereunder would devolve upon any other person or entity, Magellan, in its discretion, may terminate Executive's right to receive 6 the Contract Bonus to the extent necessary or advisable to prevent or limit the effects of such occurrence. SECTION 2.6 HEADINGS; DEFINITIONS. The section and article headings contained in this Agreement are inserted for convenience and reference only and will not affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained in this Agreement mean Sections or Articles of this Agreement unless otherwise stated. All capitalized terms defined in this Agreement are equally applicable to both the singular and plural forms of such terms. SECTION 2.7 AMENDMENTS AND WAIVERS. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. Any party to this Agreement may, only by an instrument in writing, waive compliance by the other party to this Agreement with any term or provision of this Agreement. The waiver by any parties to this Agreement of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. SECTION 2.8 SEVERABILITY OF PROVISIONS. If any provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner adverse to any party. IN WITNESS WHEREOF, Executive and Magellan, by a duly authorized officer, have executed this Compensation Agreement as of this 30th day of September, 1996. MAGELLAN HEALTH SERVICES, INC. By: /s/ E. Mac Crawford ----------------------------------- E. MAC CRAWFORD Chairman, President and Chief Executive Officer /s/ Henry T. Harbin, M.D. ----------------------------------- HENRY T. HARBIN, M.D. 7 EX-10.(V) 5 EX 10(V) GREEN SPRING HEALTH SERVICES Summary Provisions for the Annual Short Term Incentive I. PLAN OBJECTIVES The primary objective of the Green Spring annual incentive program is to foster our overall compensation philosophy of paying for performance. The Plan helps prioritize and focus employees' efforts on the accomplishment of various goals established through the annual planning and budget process. This is achieved by linking a significant element of variable cash compensation to the accomplishment of these specified goals. While base salaries are targeted to be merely at 50% of market, at targeted performance levels, the Plan provides incentive compensative opportunities which, in combination with base salary, will yield total annual compensation that is very competitive. II. ELIGIBILITY CRITERIA All regular non-clinical employees, except commissioned sales, Maryland clinical and temporary employees. While employees will be immediately eligible upon employment, it will be up to management to determine whether employees hired after October 1 have contributed enough to merit an annual incentive. In order to receive an incentive award, an employee must be employed by the company at the time of pay out. The one exception to this is an employee who is separated from employment due to the elimination of his/her position and had worked at least nine months during the calendar year for which incentives are being paid. III. PERFORMANCE GOALS Incentive award payouts will be tied to the accomplishment of goals and objectives. These goals will be established and communicated to employees at the beginning of each year. Each goal should be weighted according to its relative importance and priority, and the degree to which the employee can influence its accomplishment. Each goal will have performance standards tied to target (100%) and maximum (150%) award levels. IV. FUNDING Funds for the pay-out of incentives shall be accrued for each unit based upon financial performance. The national pool shall be established based upon National's financial results [Earnings Before Taxes - EBT] versus target. Individual state pools shall be established based 50% upon their financial performance versus targeted contribution margin and 50% based upon National's financial results [Earnings Before Taxes - EBT] versus target. The rate the pools shall increase will be 2% for every 1% above target. The funding pools may grow up to 150% of target. No funding will be established unless at least 80% of the goal is met (threshold funding). V. TARGET INCENTIVE LEVELS The following are the target incentive levels assuming target performance and target funding: GRADE PERCENTAGE ----- ---------- 1-9 2% 11-16 3% 17-19 7% 20-23 15% The amounts are established as a percentage of mid-point for the grade and not the employee's actual salary. Individual payout may increase by 50% based upon performance versus established goals (see paragraph III) and increase by 50% again based upon financial results (see paragraph IV). VI. PLAN ADMINISTRATION, MODIFICATION AND ADJUSTMENT The Plan will be administered by Green Spring's CEO and Board of Directors. The CEO and Board will approve award levels for Plan participants, as recommended by managers, and be responsible for changes in plan design, participation, and other aspects of Plan administration. VII. OTHER CONDITIONS This Plan and the applicable Incentive Schedules do not constitute either an express or implied contract of employment. At their discretion, the CEO and Board reserves the right to amend, change, interpret, replace and/or terminate this Plan and the individual incentive opportunities at any time. EX-21 6 EX 21 EXHIBIT 21 MAGELLAN HEALTH SERVICES, INC. SUBSIDIARY CORPORATIONS SEPTEMBER 30, 1996 The following corporations are all of the direct or indirect subsidiary corporations of Magellan Health Services, Inc., a Delaware corporation. Magellan Health Services, Inc. directly or indirectly owns all of the outstanding voting securities of such subsidiaries except where noted. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Behavioral Health Systems, Inc. Delaware Subsidiaries: Behavioral Health Systems of Indiana, Inc. Indiana Beltway Community Hospital, Inc. Texas Blue Grass Physician Management Services, Inc. Kentucky C.A.C.O. Services, Inc. Ohio CCM, Inc.(1) Nevada Charter of Alabama, Inc. Alabama Charter Alvarado Behavioral Health System, Inc. California Charter Appalachian Hall Behavioral Health System, North Carolina Inc. Charter Augusta Behavioral Health System, Inc. Georgia Charter Bay Harbor Behavioral Health System, Inc. Florida Charter Behavioral Health System of Athens, Inc. Georgia Charter Behavioral Health Systems of Atlanta, Inc. Georgia Charter Behavioral Health System of Austin, Inc. Texas Charter Behavioral Health System of Baywood, Inc. Texas - -------------------- 1 50% owned by Charter Behavioral Health Systems, Inc.; 50% owned by CMCI, Inc. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Behavioral Health System of Bradenton, Inc. Florida Subsidiary: Charter Behavioral Health System at Manatee Florida Adolescent Treatment Services, Inc. Charter Behavioral Health System of Central Georgia, Georgia Inc. Charter Behavioral Health System of Central Virginia, Virginia Inc. Subsidiary: Mental Healthsource, L.L.C.(2) Virginia Charter Behavioral Health System of Charleston, Inc. South Carolina Charter Behavioral Health System of Charlottesville, Virginia Inc. Charter Behavioral Health System of Chicago, Inc. Illinois Charter Behavioral Health System of Chula Vista, Inc. California Charter Behavioral Health System of Columbia, Inc. Missouri Charter Behavioral Health System of Corpus Christi, Texas Inc. Charter Behavioral Health System of Dallas, Inc. Texas Charter Behavioral Health System of Delmarva, Inc. Maryland Charter Behavioral Health System at Fair Oaks, Inc. New Jersey Charter Behavioral Health System of Fort Worth, Inc. Texas Charter Behavioral Health System at Hidden Brook, Maryland Inc. Charter Behavioral Health System of Jackson, Inc. Mississippi Subsidiary: Charter Behavioral Health System of Mississippi, Inc. Mississippi - ----------------------- 2 50% owned by Charter Behavioral Health System of Central Virginia, Inc. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Behavioral Health System of Jacksonville, Florida Inc. Charter Behavioral Health System of Kansas City, Inc. Kansas Charter Behavioral Health System of Lafayette, Inc. Louisiana Subsidiary: The Charter Cypress Behavioral Health System, Tennessee L.L.C.(3) Charter Behavioral Health System of Lake Charles, Louisiana Inc. Charter Behavioral Health System at Los Altos, Inc. California Charter Behavioral Health System of Massachusetts, Massachusetts Inc. Subsidiary: Westwood/Pembroke Health System Limited Partnership(4) Massachusetts Charter Behavioral Health System of Mobile, Inc. Alabama Charter Behavioral Health System of Nashua, Inc. New Hampshire Charter Behavioral Health System of Nevada, Inc. Nevada Charter Behavioral Health System of New Mexico, Inc. New Mexico Subsidiary: The Charter Heights Behavioral Health System Delaware Limited Partnership(5) Charter Behavioral Health System of North Carolina, North Carolina Inc. - ----------------------- 3 50% owned by Charter Behavioral Health System of Lafayette, Inc. 4 90% owned by Charter Behavioral Health System of Massachusetts, Inc. 5 67% owned by Charter Behavioral Health System of New Mexico, Inc. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Behavioral Health System of Northwest Arkansas Arkansas, Inc. Charter Behavioral Health System of Paducah, Inc. Kentucky Charter Behavioral Health System at Potomac Ridge, Maryland Inc. Charter Behavioral Health of Puerto Rico, Inc. Georgia Charter Behavioral Health System of San Jose, Inc. California Charter Behavioral Health System of Texarkana, Inc. Arkansas Charter Behavioral Health System of Toledo, Inc. Ohio Charter Behavioral Health System of Tucson, Inc. Arizona Charter Behavioral Health System of Visalia, Inc. California Charter Behavioral Health System of Waverly, Inc. Minnesota Charter Behavioral Health System of Winston-Salem, North Carolina Inc. Charter Behavioral Health System of Yorba Linda, Inc. California Charter Brawner Behavioral Health System, Inc. Georgia Subsidiary: Charter Behavioral Health System of Savannah, Georgia Inc. Charter-By-The-Sea Behavioral Health System, Inc. Georgia Charter Canyon Behavioral Health System, Inc. Utah Charter Canyon Springs Behavioral Health System, Inc. California Charter Centennial Peaks Behavioral Health System, Colorado Inc. Charter Community Hospital, Inc. California NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Contract Services, Inc. Georgia Charter Cove Forge Behavioral Health System, Inc. Pennsylvania Charter Fairmount Behavioral Health System, Inc. Pennsylvania Charter Fenwick Hall Behavioral Health System, Inc. South Carolina Charter Financial Offices, Inc. Georgia Charter Forest Behavioral Health System, Inc. Louisiana Charter Grapevine Behavioral Health System, Inc. Texas Subsidiary: Metroplex Behavioral Healthcare Services, Inc. Texas Charter Greensboro Behavioral Health System, Inc. North Carolina Charter Health Management of Texas, Inc. Texas Charter Hospital of Columbus, Inc. Ohio Charter Hospital of Denver, Inc. Colorado Charter Hospital of Ft. Collins, Inc. Colorado Charter Hospital of Laredo, Inc. Texas Charter Hospital of Mobile, Inc. Alabama Charter Hospital of Santa Teresa, Inc. New Mexico Charter Hospital of St. Louis, Inc. Missouri Subsidiary: Charter Hospital of Miami, Inc. Florida Charter Hospital of Torrance, Inc. California Charter Indiana BHS Holding, Inc. Indiana Subsidiaries(6) Charter Arbor Indy Behavioral Health System, Indiana Inc. - ----------------------- 6 Each Delaware limited liability company listed below is 95% owned by Charter Indiana BHS Holding, Inc. and 5% owned by Behavioral Health Systems of Indiana, Inc. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: The Charter Arbor Indy Behavioral Health System, Delaware LLC Charter Beacon Behavioral Health System, Inc. Indiana Subsidiary: Indiana Behavioral Health Systems, Indiana L.L.C.(7) The Charter Beacon Behavioral Health System, LLC Delaware Charter Behavioral Health System of Evansville, Indiana Inc. The Charter Behavioral Health System of Delaware Evansville, LLC Charter Behavioral Health System of Jefferson, Indiana Inc. The Charter Behavioral Health System of Delaware Jefferson, LLC Charter Behavioral Health System of Michigan Indiana City, Inc. The Charter Behavioral Health System of Michigan Delaware City, LLC Charter Behavioral Health System of Northwest Indiana Indiana, Inc. The Charter Behavioral Health System of Delaware Northwest Indiana, LLC Charter Indianapolis Behavioral Health System, Indiana Inc. The Charter Indianapolis Behavioral Health Delaware System, LLC - ----------------------- 7 51% collectively owned by Charter Beacon Behavioral Health System, Inc. and various other Indiana subsidiaries. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Lafayette Behavioral Health System, Inc. Indiana The Charter Lafayette Behavioral Health System, Delaware LLC Charter South Bend Behavioral Health System, Indiana Inc. The Charter South Bend Behavioral Health System, Delaware LLC Charter Terre Haute Behavioral Health System, Indiana Inc. The Charter Terre Haute Behavioral Health Delaware System, LLC Charter Lakehurst Behavioral Health System, Inc. New Jersey Charter Lakeside Behavioral Health System, Inc. Tennessee Subsidiary: Alliance For Behavioral Health(8) Tennessee Charter Laurel Heights Behavioral Health System, Inc. Georgia Charter Linden Oaks Behavioral Health System, Inc. Illinois Subsidiary: Naperville Psychiatric Ventures(9) Illinois Charter Little Rock Behavioral Health System, Inc. Arkansas Charter Louisiana Behavioral Health System, Inc. Louisiana Charter Louisville Behavioral Health System, Inc. Kentucky Charter Meadows Behavioral Health System, Inc. Maryland - -------------------------- 8 50% owned by Charter Lakeside Behavioral Health System, Inc. 9 75% owned by Charter Linden Oaks Behavioral Health System, Inc. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Medical - California, Inc. Georgia Subsidiary: Charter Behavioral Health System of Northern California California, Inc. Charter Medical (Cayman Islands) Ltd Cayman Islands Charter Medical - Clayton County, Inc. Georgia Charter Medical - Cleveland, Inc. Texas Subsidiary: Charter Regional Medical Center, Inc. Texas Charter Medical - Dallas, Inc. Texas Charter Medical of East Valley, Inc. Arizona Charter Medical of England Limited United Kingdom Charter Medical Executive Corporation Georgia Charter Medical of Florida, Inc. Florida Charter Medical Information Services, Inc. Georgia Charter Medical International, Inc. Cayman Islands Charter Medical International, S.A., Inc. Nevada Subsidiary: Societe Anonyme De La Metairie Switzerland Charter Medical International Services, Inc. Cayman Islands Charter Medical Leasing Limited United Kingdom Charter Medical - Long Beach, Inc. California Charter Medical Management Company Georgia Charter Medical - New York, Inc. New York NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Medical of North Phoenix, Inc. Arizona Subsidiary: Arizona Behavioral Systems, L.L.C.(10) Arizona Charter Medical of Puerto Rico, Inc. Commonwealth of Puerto Rico Charter Milwaukee Behavioral Health System, Inc. Wisconsin Charter Mission Viejo Behavioral Health System, Inc. California Charter MOB of Charlottesville, Inc. Virginia Charter North Behavioral Health System, Inc. Alaska Charter North Counseling Center, Inc. Alaska Charter North Star Behavioral Health System, Tennessee L.L.C.(11) Charter Northbrooke Behavioral Health System, Inc. Wisconsin Charter Northridge Behavioral Health System, Inc. North Carolina Subsidiary: Holly Hill/Charter Behavioral Health System, Tennessee L.L.C.(12) Charter Oak Behavioral Health System, Inc. California Charter Palms Behavioral Health System, Inc. Texas Charter Park Hospital Limited United Kingdom Charter Peachford Behavioral Health System, Inc. Georgia Charter Petersburg Behavioral Health System, Inc. Virginia Charter Pines Behavioral Health System, Inc. North Carolina - -------------------------- 10 Approximately 67% owned by Charter Medical of North Phoenix, Inc. 11 57% owned by Charter Behavioral Health Systems, Inc. 12 50% owned by Charter Northridge Behavioral Health System, Inc. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Charter Plains Behavioral Health System, Inc. Texas Charter - Provo School, Inc. Utah Charter Real Behavioral Health System, Inc. Texas Charter Ridge Behavioral Health System, Inc. Kentucky Charter Rivers Behavioral Health System, Inc. South Carolina Charter Rockford Behavioral Health System, Inc. Delaware Charter San Diego Behavioral Health System, Inc. California Charter Sioux Falls Behavioral Health System, Inc. South Dakota Charter Springs Behavioral Health System, Inc. Florida Charter Springwood Behavioral Health System, Inc. Virginia Charter Suburban Hospital of Mesquite, Inc. Texas Charter Thousand Oaks Behavioral Health System, Inc. California Charter Treatment Center Of Michigan, Inc. Michigan Charter Westbrook Behavioral Health System, Inc. Virginia Subsidiary: CPS Associates, Inc. Virginia Charter White Oak Behavioral Health System, Inc. Maryland Charter Wichita Behavioral Health System, Inc. Kansas Charter Woods Behavioral Health System, Inc. Alabama CMSF, Inc. Florida Desert Springs Hospital, Inc. Nevada Subsidiaries: CMCI, Inc. Nevada CMFC, Inc. Nevada NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Employee Assistance Services, Inc. Georgia Florida Health Facilities, Inc. Florida Subsidiary: Tampa Bay Behavioral Health Alliance, Inc. Florida Golden Isle Assurance Company Ltd. Bermuda Gulf Coast EAP Services, Inc. Alabama Hospital Investors, Inc. Georgia Mandarin Meadows, Inc. Florida NEPA - Massachusetts, Inc. Massachusetts NEPA - New Hampshire, Inc. New Hampshire Nevada Behavioral Services, Inc. Nevada Pacific - Charter Medical, Inc. California Subsidiary: Charter Behavioral Health System of the Inland California Empire, Inc. Plymouth Insurance Company, Ltd. Bermuda Schizophrenia Treatment and Rehabilitation, Inc. Georgia Sistemas De Terapia Respiratoria S.A., Inc. Georgia Southeast Behavioral Systems, Inc. Georgia Strategic Advantage, Inc. Minnesota Western Behavioral Systems, Inc. California Green Spring Health Services, Inc.(13) Delaware Subsidiaries: Advantage Behavioral Systems, Inc. Pennsylvania - --------------------------- 13 61% owned by Magell an Health Services, Inc. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: AdvoCare of Tennessee, Inc. Tennessee Subsidiary: Premier Holdings, Inc. Tennessee Subsidiary: Premier Behavioral Systems of Tennessee, Tennessee LLC(14) Green Spring Health Services of Michigan, Inc. Michigan Group Practice Affiliates, Inc. Delaware Subsidiaries: GMV, LLC(15) Virginia Capital Area PsySystems, Inc.(16) Texas GPA Arizona, Inc. Arizona GPA Pennsylvania, Inc. Pennsylvania Integrated Behavioral Care, Inc.(17) Virginia Novapsy Clinic, LLC(18) Virginia Pacific Behavioral Management, LLC(19) California Maschhoff, Barr & Associates, Inc. Washington Magellan Public Solutions, Inc. Delaware Subsidiary: Magellan Public Network, Inc. Delaware - ------------------------ 14 Approximately 33% owned by Premier Holdings, Inc. 15 50% owned by Group Practice Affiliates, Inc. 16 50% owned by Group Practice Affiliates, Inc. 17 50% owned by Group Practice Affiliates, Inc. 18 50% owned by Group Practice Affiliates, Inc. 19 70% owned by Group Practice Affiliates, Inc. NAME OF CORPORATION: STATE/JURISDICTION OF INCORPORATION: Subsidiaries: Correctional Behavioral Solutions, Inc. Delaware Subsidiaries: Correctional Behavioral Solutions of Indiana Indiana, Inc. Correctional Behavioral Solutions of New New Jersey Jersey, Inc. Correctional Behavioral Solutions of Ohio, Ohio Inc. National Mentor, Inc. Delaware Subsidiaries: Illinois Mentor, Inc. Illinois Massachusetts Mentor, Inc. Massachusetts National Mentor Healthcare, Inc. Massachusetts Ohio Mentor, Inc. Ohio South Carolina Mentor, Inc. South Carolina Wisconsin Mentor, Inc. Wisconsin EX-23 7 EX 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated November 7, 1996 and to all references to our firm, included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-57210, 33-62542 and 333-12877) and Form S-3 (File Nos. 33-57817 and 333-01217). /s/ Arthur Andersen LLP -------------------------------------- Atlanta, Georgia December 20, 1996 EX-27 8 EX 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES F-3, F-4, AND F-5 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY RERERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS SEP-30-1996 SEP-30-1996 120,945,000 0 189,878,000 0 4,753,000 338,150,000 621,443,000 126,053,000 1,140,137,000 274,316,000 566,307,000 0 0 8,252,000 113,565,000 1,140,137,000 1,345,279,000 1,345,279,000 0 1,064,445,000 87,109,000 81,470,000 48,017,000 64,238,000 25,695,000 32,383,000 0 0 0 32,383,000 1.04 0
EX-99 9 EX 99 EXHIBIT 99 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS Magellan Health Services, Inc. (the "Company") and its representatives may make forward looking statements (as such term is defined in the Private Securities Litigation Reform Act) from time-to-time. The Company wants to invoke to the fullest extent possible the protection of the Private Securities Litigating Reform Act and the judicially created "bespeaks caution" doctrine with respect to such statements. Accordingly, the Company is filing this Exhibit 99, which lists certain factors that may cause actual results to differ materially from those in such forward looking statements. This list is not necessarily exhaustive. The Company operates in a rapidly changing business, and new risk factors emerge periodically. There can be no assurance that this Exhibit lists all material risks to the Company at any specific point in time. Readers are also referred to the risk factor disclosure contained in the Company's Registration Statement on Form S-3 (Registration No. 333-01217). LIMITATIONS IMPOSED BY THE NEW REVOLVING CREDIT AGREEMENT AND SENIOR NOTE INDENTURE In May 1994, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement") with certain financial institutions and issued $375 million of Senior Subordinated Notes (the "Senior Notes") to institutional investors. The Credit Agreement was terminated in October 1996 and the Company entered into a new Credit Agreement (the "New Revolving Credit Agreement"). The New Revolving Credit Agreement and the indenture for the Senior Notes contain a number of restrictive covenants which, among other things, limit the ability of the Company and certain of its subsidiaries to incur other indebtedness, enter into certain joint venture transactions, incur liens, make certain restricted payments and investments, enter into certain business combination and asset sale transactions and make capital expenditures. These restrictions could adversely affect the Company's ability to conduct its operations, finance its capital needs or to pursue attractive business combinations and joint ventures if such opportunities arise. Under the New Revolving Credit Agreement, the Company also is required to maintain certain specified financial ratios. Failure by the Company to maintain such financial ratios or to comply with the restrictions contained in the New Revolving Credit Agreement and the indenture for the Senior Notes could cause such indebtedness (and by reason of cross-acceleration provisions, other indebtedness) to become immediately due and payable and/or could cause the cessation of funding under the New Revolving Credit Agreement. ACQUISITION GROWTH STRATEGY The Company has historically grown through acquisitions. There can be no assurance that the Company will be able to make successful acquisitions in the future or that any such acquisitions will be successfully integrated into its operations. In addition, future acquisitions could have an adverse effect upon the Company's operating results, particularly in the fiscal quarters immediately following the consummation of such transactions while the acquired operations are being integrated into its operations. GREEN SPRING HEALTH SERVICES, INC. ACQUISITION AND POTENTIAL ADVERSE REACTION On December 13, 1995, the Company acquired a controlling interest in Green Spring Health Services, Inc. ("Green Spring"), a leading provider of managed behavioral healthcare services. The Company's hospitals have contracts with behavioral managed care companies other than Green Spring. Such other companies could decide to terminate their contracts with the Company's hospitals in reaction to the Company's acquisition of a majority interest in one of their major competitors. In addition, there can be no assurance that Green Spring will be successfully integrated into the Company's operations. HISTORICAL OPERATING LOSSES The Company experienced losses from continuing operations before reorganization items, extraordinary items and the cumulative effect of a change in accounting principle during each fiscal year since the completion of a management buyout in 1988 through fiscal 1995. Such losses amounted to $81.7 million for the ten-month period ended July 31, 1992, $8.1 million for the two-month period ended September 30, 1992 and $39.6 million, $47.0 million and $43.0 million for the fiscal years ended September 30, 1993, 1994 and 1995, respectively. The Company reported net revenue and income from continuing operations of approximately $1.35 billion and $32.4 million, respectively, for the year ended September 30, 1996. There can be no assurance that the Company's profitability for the year ended September 30, 1996 will continue in future periods. The Company's history of losses could have an adverse effect on its operations. POTENTIAL HOSPITAL CLOSURES The Company continually assesses events and changes in circumstances that could effect its business strategy and the viability of its provider facilities. During fiscal 1995, the Company consolidated, closed or sold 15 psychiatric hospitals. During fiscal 1996, the Company consolidated, closed or sold nine psychiatric hospitals. The Company recorded charges of approximately $4.1 million for the year ended September 30, 1996, as a result of these consolidations, closures and sales. The Company may elect to consolidate services in selected markets and to close or sell additional facilities in future periods depending on market conditions and evolving business strategies. If the Company closes additional psychiatric hospitals in future periods, it could result in charges to income for the cost necessary to exit the hospital operations. POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYERS AND CHANGES IN HOSPITAL PAYER MIX The Company's hospitals have been adversely affected by factors influencing the entire psychiatric hospital industry. Factors which affect the Company include (i) the imposition of more stringent length of stay and admission criteria and other cost containment measures by payers; (ii) the failure of reimbursement rate increases from certain payers that reimburse on a per diem or other discounted basis to offset increases in the cost of providing services; (iii) an increase in the percentage of its business that the Company derives from payers that reimburse on a per diem or other discounted basis; (iv) a trend toward higher deductibles and co-insurance for individual patients; (v) pricing pressure related to increasing rate of claims denials by third party payers; and (vi) a trend toward limiting employee health benefits, such as reductions in annual and lifetime limits on mental health coverage. Any of these factors could result in reductions in the amounts that the Company's hospitals can expect to collect per patient day for services provided. For the fiscal year ended September 30, 1996, the Company derived approximately 21% of its gross psychiatric patient service revenue from managed care organizations (primarily HMOs and PPOs, as hereinafter defined), 25% from other private payers (primarily commercial insurance and Blue Cross), 28% from Medicare, 17% from Medicaid, 3% from the Civilian Health and Medical Program for the Uniformed Services ("CHAMPUS") and 6% from other government programs. Changes in the mix of the Company's patients among the managed care organizations, Medicare and Medicaid categories, and among different types of private-pay sources, can significantly affect the profitability of the Company's hospital operations. Therefore, there can be no assurance that payments under governmental and private third-party payer programs will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs of providing care to patients covered by such programs. PREVIOUS BANKRUPTCY REORGANIZATION The Company was reorganized pursuant to Chapter 11 of the United States Bankruptcy Code, effective on July 21, 1992 (the "Reorganization"). Prior to the Reorganization, the Company's total indebtedness was approximately $1.8 billion. From February 1991 until July 1992, the Company was in default in the payment of interest and principal, or both, on substantially all such indebtedness. The indebtedness was incurred by the Company in connection with a management buy-out of the Company in 1988 and a hospital-construction program. As a result of the Reorganization, the Company's long-term debt was reduced by approximately $700 million and its redeemable preferred stock of $233 million was eliminated. The holders of such debt and preferred stock received approximately 97% of Magellan's Common Stock outstanding on July 21, 1992. DEPENDENCE ON HEALTHCARE PROFESSIONALS Physicians traditionally have been the source of a significant portion of the patients treated at the Company's hospitals. Therefore, the success of the Company's hospitals is dependent in part on the number and quality of the physicians on the medical staffs of its hospitals and their admission practices. A small number of physicians account for a significant portion of patient admissions at some of the Company's hospitals. There can be no assurance that the Company can retain its current physicians on staff or that additional physician relationships will be developed in the future. Furthermore, hospital physicians generally are not employees of the Company and in general Magellan does not have contractual arrangements with hospital physicians restricting the ability of such physicians to practice elsewhere. POTENTIAL GENERAL AND PROFESSIONAL LIABILITY Effective June 1, 1995, Plymouth Insurance Company, Ltd. ("Plymouth"), a wholly-owned Bermuda subsidiary of the Company, provides general and hospital professional liability insurance up to $25 million per occurrence for the Company's hospitals. All of the risk of losses from $1.5 million to $25 million per occurrence has been reinsured with unaffiliated insurers. The Company also insures with an unaffiliated insurer 100% of the risk of losses between $25 million and $100 million per occurrence, subject to an annual aggregate limit of $75 million. The Company's general and professional liability coverage is written on a "claims made or circumstances reported" basis. For reinsured claims between $10 and $25 million per occurrence, the Company has an annual aggregate limit of coverage of $30 million. For reinsured claims between $1.5 million and $10 million per occurrence, the Company has no significant limitations on the aggregate dollar amounts of coverage. For the six years from June 1, 1989 through May 31, 1995, the Company had a similar general and hospital professional liability insurance program. For those years, the per occurrence deductible (with respect to which the Company was self-insured) was $2.5 million for the years ended May 31, 1990 and 1991, $2 million for the years ended May 31, 1992 and 1993 and $1.5 million (relating to the Company's general hospitals sold on September 30, 1993) for the year ended May 31, 1994. For psychiatric hospitals, Plymouth's coverage did not contain a per occurrence deductible for the years ended May 31, 1994 and 1995. In December 1994, the per occurrence deductible for the years ended May 31, 1989 and 1990 was eliminated. Plymouth provides coverage with no per occurrence deductible for hospital system claims which had not been paid prior to December 31, 1994. Plymouth does not underwrite any insurance policies with any parties other than the Company or its affiliates and subsidiaries. The amount of expense relating to Magellan's malpractice insurance may materially increase or decrease from year to year depending, among other things, on the nature and number of new reported claims against Magellan and amounts of settlements of previously reported claims. To date, Magellan has not experienced a loss in excess of policy limits. Management believes that its coverage limits are adequate. However, losses in excess of the limits described above or for which insurance is otherwise unavailable could have a material adverse effect upon the Company. POTENTIAL EXPIRATION AND REALIZATION UNCERTAINTIES RELATED TO ESTIMATED TAX NET OPERATING LOSS CARRYFORWARDS As of September 30, 1996, the Company had estimated tax net operating loss ( NOL") carryforwards of approximately $250 million available to reduce future federal taxable income. These NOL carryforwards expire in 2006 through 2010 and are subject to adjustment upon examination by the Internal Revenue Service. Due to the ownership change which occurred as a result of the Reorganization, the Company's utilization of NOLs generated prior to the effective date of the Reorganization is limited. Based on this limitation and certain other factors, the Company has recorded a valuation allowance of approximately $102.2 million against the amount of the NOL deferred tax asset that in Management's opinion, is not likely to be recovered. There can be no assurance that these NOL carryforwards will not expire, be reduced or be made subject to further limitations prior to their potential utilization in future periods. GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM In the 1995 and 1996 sessions of the United States Congress, the focus of healthcare legislation has been on budgetary and related funding mechanism issues. Both the Congress and the Clinton Administration have made proposals to reduce the rate of increase in projected Medicare and Medicaid expenditures and to change funding mechanisms and other aspects of both programs. If enacted, these proposals would generally reduce Medicare and Medicaid expenditures. The Company cannot predict the effect of any such legislation, if adopted, on its operations; but the Company anticipates that, although overall Medicare and Medicaid funding may be reduced from projected levels, the changes in such programs may provide opportunities to the Company to obtain increased Medicare and Medicaid business through risk-sharing or partial risk-sharing contracts with managed care plans and state Medicaid programs. A number of states in which the Company has operations have either adopted or are considering the adoption of healthcare reform proposals of general applicability or Medicaid reform proposals, partly in response to possible changes in Medicaid law. Where adopted, these state reform laws have often not yet been fully implemented. The Company cannot predict the effect of these state healthcare reform and Medicaid reform laws on its operations. PROVIDER BUSINESS-COMPETITION Each of the Company's hospitals competes with other hospitals, some of which are larger and have greater financial resources. Some competing hospitals are owned and operated by governmental agencies, others by nonprofit organizations supported by endowments and charitable contributions and others by proprietary hospital corporations. The hospitals frequently draw patients from areas outside their immediate locale and, therefore, the Company's hospitals may, in certain markets, compete with both local and distant hospitals. In addition, the Company's hospitals compete not only with other psychiatric hospitals, but also with psychiatric units in general hospitals, and outpatient services provided by the Company may compete with private practicing mental health professionals and publicly funded mental health centers. The competitive position of a hospital is, to a significant degree, dependent upon the number and quality of physicians who practice at the hospital and who are members of its medical staff. The Company has entered into joint venture arrangements with other healthcare providers in certain markets to promote more efficiency in the local delivery system. The Company believes that its provider business competes effectively with respect to the aforementioned factors. However, there can be no assurance that Magellan will be able to compete successfully in the provider business in the future. Competition among hospitals and other healthcare providers for patients has intensified in recent years. During this period, hospital occupancy rates for inpatient behavioral care patients in the United States have declined as a result of cost containment pressures, changing technology, changes in reimbursement, changes in practice patterns from inpatient to outpatient treatment and other factors. In recent years, the competitive position of hospitals has been affected by the ability of such hospitals to obtain contracts with Preferred Provider Organizations ("PPO's"), Health Maintenance Organizations ("HMO's") and other managed care programs to provide inpatient and other services. Such contracts normally involve a discount from the hospital's established charges, but provide a base of patient referrals. These contracts also frequently provide for pre-admission certification and for concurrent length of stay reviews. The importance of obtaining contracts with HMO's, PPO's and other managed care companies varies from market to market, depending on the individual market strength of the managed care companies. State certificate of need laws regulate the Company and its competitors' ability to build new hospitals and to expand existing hospital facilities and services. These laws do provide some protection from competition, as their interest is to prevent duplication of services. In most cases, these laws do not restrict the ability of the Company or its competitors to offer new outpatient services. As of September 30, 1996, the Company operated 39 hospitals in 12 states (Arizona, Arkansas, California, Colorado, Indiana, Kansas, Louisiana, Nevada, New Mexico, South Dakota, Texas and Utah) which do not have certificate of need laws applicable to hospitals. MANAGED CARE BUSINESS - COMPETITION The managed healthcare industry is being affected by various external factors including rising healthcare costs, intense price competition, and market consolidation by major managed care companies. Magellan faces competition from a number of sources including other behavioral health managed care companies and traditional full service managed care companies that contract to provide behavioral healthcare benefits. Also, to a lesser extent, competition exists from fully capitated multi-specialty medical groups and individual practice associations that directly contract with managed care companies and other customers to provide and manage all components of healthcare for the members including the behavioral healthcare component. The Company believes that the most significant factors in a customer's selection of a managed behavioral healthcare company include price, the extent and depth of provider networks and quality of services. The Company also believes that the acquisition of Green Spring creates opportunities to enhance its revenues through managed care contracts utilizing the continuum of care and through information systems that support care management and at-risk pricing mechanisms, although no such assurance can be given. Management believes that its managed care business competes effectively with respect to these factors. However, there can be no assurance that Magellan will be able to compete successfully in the managed care business in the future. REGULATORY ENVIRONMENT The federal government and all states in which the Company operates regulate various aspects of the Company's businesses. Such regulations provide for periodic inspections or other reviews of the Company's provider operations by, among others, state agencies, the United States Department of Health and Human Services (the "Department") and CHAMPUS to determine compliance with their respective standards of care and other applicable conditions of participation which is necessary for continued licensure or participation in identified healthcare programs, including, but not limited to, Medicare, Medicaid and CHAMPUS. The Company is also subject to state regulation regarding the admission and treatment of patients and federal regulations regarding confidentiality of medical records of substance abuse patients. Although the Company endeavors to comply with such regulatory requirements, there can be no assurance that the Company will always be in full compliance. The failure to obtain or renew any required regulatory approvals or licenses or to qualify for continued participation in identified healthcare programs could adversely affect the Company's operations. The Company is also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments between healthcare providers that are designed to induce overutilization of services paid for by Medicare or Medicaid. Such laws include the anti-kickback provisions of the federal Medicare and Medicaid Patients and Program Protection Act of 1987. These provisions prohibit, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. GPA, the Company's subsidiary that owns or manages professional group practices, is subject to the federal and the state illegal remuneration, practice of medicine and certain other laws which prohibit the subsidiary from owning, but not managing, professional practices. In addition, some states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. The Company endeavors to comply with all federal and state laws applicable to its business. However, a violation of these federal and state laws may result in civil or criminal penalties for individuals or entities or exclusion from participation in identified healthcare programs. Magellan's managed care business operations, in some states, are subject to utilization review, licensure and related state regulation procedures. Green Spring provides managed behavioral healthcare services to various Blue Cross/Blue Shield plans that operate Medicare and Medicaid health maintenance organizations or other at-risk managed care programs and that participate in the Blue Cross Federal Employees health program. As a contractor to these Blue Cross/Blue Shield plans, Green Spring is indirectly subject to federal and, with respect to the Medicaid program, state monitoring and regulation of performance and financial reporting requirements. Although Magellan believes that it is in compliance with all current state and federal regulatory requirements applicable to the managed care business it conducts, failure to do so could adversely affect its operations. Physician ownership of or investment in healthcare entities to which they refer patients has come under increasing scrutiny at both state and federal levels. Congress passed legislation (commonly referred to as "Stark I") which prohibits physicians from referring Medicare patients for clinical laboratory services to an entity with which the physician has a financial relationship. The Department recently published final Stark I regulations on August 14, 1995. Such regulations will govern how the Department views and reviews these financial relationships. Additionally, Congress passed legislation (commonly referred to as "Stark II") which prohibits physicians from referring Medicare or Medicaid patients for certain designated health services, including inpatient and outpatient hospital services, to entities in which they have an ownership or investment interest or with which they have a compensation arrangement. The entity is also prohibited from billing the Medicare or Medicaid programs for such services rendered pursuant to a prohibited referral. To the extent designated services are provided by the Company's provider and managed care operations, physicians who have a financial relationship with the Company and the Company will be subject to the provisions of Stark II. Some states have passed similar legislation which prohibits the referral of private pay patients. To date, the Department has not published Stark II regulations. However, the Department indicated that it will review referrals involving any of the designated services under the language and interpretations set forth in the Stark I rule. The Company's acquisitions and joint venture activities are also subject to federal antitrust laws. The healthcare industry has recently been an active area of antitrust enforcement action by the United States Federal Trade Commission (the "FTC") and the Department of Justice ("DOJ"). The Company's acquisitions and joint venture arrangements could be the subject of a DOJ or an FTC enforcement action which, if determined adversely to the Company, could have a material adverse effect upon the Company's operations. Changes in laws or regulations or new interpretations of existing laws or regulations can have an adverse effect on the Company's operating methods, costs, reimbursement amounts and acquisition and joint venture activities. In addition, the healthcare industry is subject to increasing governmental scrutiny, and additional laws and regulations may be enacted which could require changes in the Company's operations. A federal or state agency charged with enforcement of such laws and regulations might assert an interpretation of such laws and resolutions or may increase scrutiny of a previously ignored area, which may require changes in the Company's operations. CAPITATION ARRANGEMENTS The Company's managed care business contracts with companies holding state HMO or insurance company licenses on a capitated or "at-risk" basis where the risk of patient care is assumed by the Company in exchange for a monthly fee per member regardless of utilization level. As of September 30, 1996, approximately 30% of Green Spring's managed care members were under capitated arrangements. During fiscal 1996, approximately 70% of Green Spring's revenues were from at-risk contracts. Increases in utilization levels under capitated contractual arrangements could adversely effect the operations of the managed care business. Some jurisdictions are taking the position that capitated agreements in which the provider bears the risk should be regulated by insurance laws. In this regard, Green Spring's primary customers are comprised of Blue Cross/Blue Shield Plans and other insurance entities which are licensed insurance organizations in their respective states. Green Spring offers "carved out" managed mental health benefits, on a wholesale basis, as a vendor to the regulated insurance organizations. Most current employer group relationships are also contracted through the respective regulated insurance organizations. However, as Magellan and Green Spring develop more direct risk arrangements on a retail basis directly with employer groups or other non-insurance entity customers, the Company may be required to obtain insurance licenses in the respective states where the direct risk arrangements are to be pursued. There can be no assurance that the Company can obtain the insurance licenses required by the respective states in a timely or cost effective manner to respond to market demand. MENTAL HEALTH PARITY LEGISLATION In October 1996, President Clinton signed a bill submitted by the U.S. Congress that prohibits health plans from setting annual or lifetime caps on mental health coverage ("parity") at levels below those set for general medical/surgical healthcare services. The bill does not require a health plan to offer or provide mental health services and does not affect other terms and conditions of health plans, such as inpatient day or outpatient visit limits or scope of benefits, nor does this bill prohibit health plans from utilizing other forms of cost containment. The definition of mental health services in the bill excludes substance abuse and chemical dependency. The effective date for the parity legislation is January 1, 1998. Other key components of the parity legislation are as follows: 1) Employers with 50 or fewer employees are exempt from the parity legislation. 2) Health plans that incur increased costs of 1% or more as a result of the parity legislation will be exempt. 3) The parity legislation expires on September 30, 2001 unless extended by Congress. The Company views the parity legislation as an acknowledgment by the Federal government of the importance of effective treatment of mental health disorders for society in general. The parity legislation could result in cost containment mechanisms by third party payers such as the elimination of mental health benefit plans or encouraging the utilization of managed care organizations to administer mental health benefit plans, which could both result in lower demand and lower revenue per equivalent patient day in the Company's provider business. However, this bill is subject to administrative and judicial interpretation, neither of which the Company is able to predict. There can be no assurance that such interpretations will not adversely effect the Company's businesses. POSSIBLE VOLATILITY OF STOCK PRICE The Company believes factors such as announcements with respect to healthcare reform measures, reductions in government healthcare program projected expenditures, acquisitions and quarter-to-quarter and year-to-year variations in financial results could cause the market price of Magellan Common Stock to fluctuate substantially. Any such adverse announcement with respect to healthcare reform measures or program expenditures, acquisitions or any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of Magellan Common Stock in any given period. As a result, the market for Magellan Common Stock may experience price and volume fluctuations unrelated to the operating performance of Magellan. -----END PRIVACY-ENHANCED MESSAGE-----