-----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, MeCgX4ot0xt/ejmX7tbe9MDRj5AuQz94nJXnmoqrpxs2v3DZhGTBo7heC4A3ljHA Omr6bSxNiyuXV5HA28nODA== 0001047469-98-021530.txt : 19980525 0001047469-98-021530.hdr.sgml : 19980525 ACCESSION NUMBER: 0001047469-98-021530 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980522 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: S-3 SEC ACT: SEC FILE NUMBER: 333-53353 FILM NUMBER: 98630031 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 S-3 1 S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- MAGELLAN HEALTH SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 58-1076937 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
3414 PEACHTREE ROAD, N.E., SUITE 1400 ATLANTA, GEORGIA 30326 (404) 841-9200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ DAVID J. HANSEN, ESQ., GENERAL COUNSEL MAGELLAN HEALTH SERVICES, INC. 3414 PEACHTREE ROAD, N.E., SUITE 1400 ATLANTA, GEORGIA 30326 (404) 841-9200 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPY TO: PHILIP A. THEODORE, ESQ. KING & SPALDING 191 PEACHTREE ROAD ATLANTA, GEORGIA 30303-1763 (404) 572-4600 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time after the effective date of the Registration Statement. -------------------------- If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _____________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SHARES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED BE REGISTERED (1) PER UNIT (2) OFFERING PRICE (3) REGISTRATION FEE Common Stock, $.25 par value per share........... 37,825 $.01 $300.00 $.09
(1) The maximum number of shares that may be issued by the Registrant under its agreements in connection with the acquisition of shares of the Common Stock, no par value, of Care Management Resources, Inc. ("CMR Common Stock") assuming that the market price of a share of the Registrant's Common Stock is $26.438, which was the closing price on May 19, 1998, as reported on the New York Stock Exchange. (2) Estimated solely for the purpose of calculating the registration fee. Pursuant to Rule 457(f)(2), under the Securities Act of 1933, as amended, the offering price is based on the stated value of the CMR Common Stock as of March 31, 1998. There were 400,000 shares of issued and outstanding CMR Common Stock on such date, having an aggregate stated value of $12,000. (3) The Registrant may obtain a maximum of 30,000 shares of CMR Common Stock. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS 37,825 SHARES MAGELLAN HEALTH SERVICES, INC. COMMON STOCK ($.25 PAR VALUE) ------------------ The 37,825 shares (the "Shares") of common stock, $.25 par value per share ("Common Stock"), of Magellan Health Services, Inc. ("Magellan" or the "Company") that are being hereby registered may be offered for sale from time to time by and for the account of Paul G. Shoffeitt (the "Selling Stockholder"). See "Selling Stockholder." Magellan will not receive any of the proceeds from the sale of the Shares by the Selling Stockholder. The Selling Stockholder may acquire the Shares, or a portion thereof, by exercising certain options granted to him pursuant to an Option Agreement, dated as of December 4, 1997, between the Company and the Selling Stockholder (the "Option Agreement"). Magellan is registering the Shares as required by the Option Agreement, to provide the Selling Stockholder with freely tradeable securities. Magellan has also agreed to pay all fees and expenses incident to such registration, other than any underwriting discounts or any selling commissions payable in respect of sales of the Shares, which will be paid by the Selling Stockholder. Magellan expects to pay fees and expenses of approximately $25,000 in connection with the preparation and filing of the registration statement of which this Prospectus is a part (the "Registration Statement"). Magellan has agreed to keep the Registration Statement effective on a continual basis until December 31, 2001, subject to certain extensions. The Common Stock is listed on the New York Stock Exchange under the symbol "MGL." On May 19, 1998, the last reported sale price of the Common Stock on the New York Stock Exchange was $26.438 per share. The sale or distribution of all or any portion of the Shares offered hereby may be effected from time to time by the Selling Stockholder directly, indirectly through brokers or dealers or in a distribution by one or more underwriters on a firm commitment or best efforts basis, on the New York Stock Exchange, in the over-the-counter market, on any national securities exchange on which shares of the Common Stock are listed or traded, in privately negotiated transactions or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. See "Plan of Distribution." To the extent required, the names of any agent or broker-dealer and applicable commissions or discounts and any other required information with respect to any particular offer will be set forth in an accompanying Prospectus Supplement. See "Plan of Distribution." The Selling Stockholder reserves the sole right to accept or reject, in whole or in part, any proposed purchase of the Shares to be made directly or through agents. The Selling Stockholder and any agents or broker-dealers that participate with the Selling Stockholder in the distribution of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "1933 Act"), and any commissions received by them and any profit on the resale of the Shares may be deemed to be underwriting commissions or discounts under the 1933 Act. THERE ARE CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE SHARES. FOR A DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS" BEGINNING ON PAGE 9. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY , 1998. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 under the 1933 Act covering the Shares being offered by this Prospectus. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in exhibits and schedules to the Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Shares offered hereby, reference is made to the Registration Statement, including the exhibits thereto, and financial statements and notes filed as a part thereof. Statements made in this Prospectus concerning the contents of any document referred to herein are not necessarily complete. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the information requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. Copies of such material can be obtained from the Public Reference Section of the Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549 at prescribed rates. In addition, such reports, proxy statements and other information can be inspected and copied at the public reference facility referred to above and at Regional Offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also maintains a Web site that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. The address of such site is http:// www.sec.gov. The Common Stock is listed for trading on the New York Stock Exchange and reports, proxy statements and other information concerning the Company may be inspected at the office of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. 2 ' INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed with the Commission by the Company (Commission File No. 1-6639) are incorporated by reference into this Prospectus: (i) The Company's Current Report on Form 8-K, filed on June 30, 1997, which includes pro forma financial information for the Crescent Transactions (as defined); (ii) The Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 23, 1997; (iii) The Company's Proxy Statement on Schedule 14A, filed on January 9, 1998; (iv) The Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997, filed on February 17, 1998; (v) The Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998, filed on May 15, 1998; (vi) The Company's Current Report on Form 8-K, filed on December 17, 1997, which includes the audited financial statements of HAI (as defined) and pro forma information for the Company's acquisition of HAI; (vii) The Company's Current Report on Form 8-K/A, filed on April 3, 1998, which includes the audited financial statements of Merit (as defined) and pro forma financial information for the Acquisition (as defined); (viii) The Company's Current Report on Form 8-K, filed on April 8, 1998, which includes pro forma financial information for the CBHS Transactions (as defined); (ix) The description of the Common Stock in the Company's registration statement on Form 8-A filed on December 27, 1996. In addition, all documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering made pursuant to the Registration Statement shall be deemed to be incorporated by reference into and to be a part of this Prospectus from the date of filing of such documents. Any statement contained in a document so incorporated by reference shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus, or in any other subsequently filed document which is also incorporated by reference or deemed to be incorporated by reference, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed to constitute a part of this Prospectus except as so modified or superseded. The Company will provide, without charge, to each person to whom this Prospectus is delivered, upon the written or oral request of any such person, a copy of any or all of the documents incorporated by reference (not including exhibits to such documents unless such exhibits are specifically incorporated by reference in such documents). Requests for copies of such documents should be directed to Mr. Kevin Helmintoller, Vice President--Investor Relations, Magellan Health Services, Inc., 3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326, telephone (404) 841-9200. These documents may also be accessed from the Commission's Web site which is located at http://www.sec.gov. 3 SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS SET FORTH BELOW OR INCORPORATED HEREIN BY REFERENCE. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES HEREIN TO THE "COMPANY" REFER TO MAGELLAN HEALTH SERVICES, INC. AND ITS CONSOLIDATED SUBSIDIARIES. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS REFER TO YEARS ENDED SEPTEMBER 30. DATA PRESENTED IN THIS PROSPECTUS ON A PRO FORMA BASIS FOR THE YEAR ENDED SEPTEMBER 30, 1997 GIVE EFFECT TO: (I) THE CRESCENT TRANSACTIONS (AS DEFINED); (II) THE COMPANY'S ACQUISITION (THE "ACQUISITION") OF MERIT BEHAVIORAL CARE CORPORATION ("MERIT"), WHICH WAS CONSUMMATED ON FEBRUARY 12, 1998; (III) THE COMPANY'S ACQUISITION OF HUMAN AFFAIRS INTERNATIONAL, INCORPORATED ("HAI"), WHICH WAS CONSUMMATED ON DECEMBER 4, 1997; (IV) THE COMPANY'S ACQUISITION OF ALLIED HEALTH GROUP, INC. AND CERTAIN OF ITS AFFILIATES ("ALLIED"), WHICH WAS CONSUMMATED ON DECEMBER 5, 1997; (V) MERIT'S ACQUISITION OF CMG HEALTH, INC. ("CMG"), WHICH WAS CONSUMMATED ON SEPTEMBER 12, 1997; (VI) EACH OF THE OTHER TRANSACTIONS (AS DEFINED) AND (VII) THE CBHS TRANSACTIONS (AS DEFINED). ON MARCH 3, 1998, THE COMPANY ENTERED INTO DEFINITIVE AGREEMENTS WITH CRESCENT OPERATING, INC. ("COI") AND CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC ("CBHS") TO, AMONG OTHER THINGS, SELL THE COMPANY'S FRANCHISE OPERATIONS, CERTAIN DOMESTIC PROVIDER OPERATIONS AND CERTAIN OTHER ASSETS AND OPERATIONS (THE "CBHS TRANSACTIONS"). SEE "--CBHS TRANSACTIONS." UNLESS OTHERWISE INDICATED, ALL INDUSTRY DATA SET FORTH IN THIS PROSPECTUS HAVE BEEN DERIVED FROM "MANAGED BEHAVIORAL HEALTH MARKET SHARE IN THE UNITED STATES 1997-1998" PUBLISHED BY OPEN MINDS, GETTYSBURG, PENNSYLVANIA (HEREINAFTER REFERRED TO AS "OPEN MINDS "). THE INFORMATION PROVIDED IN THIS PROSPECTUS WITHOUT REFERENCE TO A SPECIFIC DATE IS CURRENT AS OF THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS CONTAINS AND INCORPORATES BY REFERENCE CERTAIN "FORWARD-LOOKING STATEMENTS." THOSE STATEMENTS INCLUDE, AMONG OTHER THINGS, THE DISCUSSIONS OF THE COMPANY'S BUSINESS STRATEGY AND EXPECTATIONS CONCERNING THE COMPANY'S POSITION IN THE INDUSTRY, FUTURE OPERATIONS, MARGINS, PROFITABILITY, LIQUIDITY AND CAPITAL RESOURCES. ALL THESE FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY THAT, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH STATEMENTS AND ESTIMATES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED, AND IT IS LIKELY THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED IN THE RISK FACTORS DISCUSSED BELOW. IN LIGHT OF THESE AND OTHER UNCERTAINTIES, THE INCLUSION OF A FORWARD-LOOKING STATEMENT HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY THAT THE COMPANY'S PLANS AND OBJECTIVES WILL BE ACHIEVED. THE COMPANY OVERVIEW According to enrollment data reported in OPEN MINDS, the Company is the nation's largest provider of managed behavioral healthcare services, offering a broad array of cost-effective managed behavioral healthcare products. As a result of the Acquisition, the Company has over 60.5 million covered lives under managed behavioral healthcare contracts and manages behavioral healthcare programs for over 4,000 customers. Through its current network of over 34,000 providers and 2,000 treatment facilities, the Company manages behavioral healthcare programs for Blue Cross/Blue Shield organizations, health maintenance organizations ("HMOs") and other insurance companies, corporations, federal, state and local governmental agencies, labor unions and various state Medicaid programs. The Company believes it has the largest and most comprehensive behavioral healthcare provider network in the United States as a result of the Acquisition. In addition to the Company's managed behavioral healthcare products, the Company offers specialty managed care products related to the management of certain chronic conditions. The Company also offers a broad continuum of behavioral healthcare services to approximately 3,100 individuals who receive healthcare benefits funded by state and local governmental agencies through National Mentor, Inc., its wholly-owned public-sector provider ("Mentor"). Furthermore, the Company franchises the "CHARTER" System of behavioral healthcare to the acute-care psychiatric hospitals and other behavioral care facilities operated by CBHS, an entity in which the Company owns a 50% equity 4 interest. If the CBHS Transactions are consummated, the Company will no longer have franchise operations or an ownership interest in CBHS. The Company's professional care managers coordinate and manage the delivery of behavioral healthcare treatment services through the Company's network of providers, which includes psychiatrists, psychologists, licensed clinical social workers, marriage and family therapists and licensed clinical professional counselors. The treatment services provided by the Company's extensive behavioral provider network include outpatient programs (such as counseling and therapy), intermediate care programs (such as sub-acute emergency care, intensive outpatient programs and partial hospitalization services), inpatient treatment services and alternative care services (such as residential treatment, home and community-based programs and rehabilitative and support services). The Company provides these services through: (i) risk-based products, (ii) employee assistance programs ("EAPs"), (iii) administrative services-only products ("ASO products") and (iv) products that combine features of some or all of these products. Under risk-based products, the Company arranges for the provision of a full range of behavioral healthcare services for beneficiaries of its customers' healthcare benefit plans through fee arrangements under which the Company assumes all or a portion of the responsibility for the cost of providing such services in exchange for a fixed per member per month fee. Under EAPs, the Company provides assessment services to employees and dependents of its customers, and if required, referral services to the appropriate behavioral healthcare service provider. Under ASO products, the Company provides services such as utilization review, claims administration and provider network management. The Company does not assume the responsibility for the cost of providing healthcare services pursuant to its ASO products. As a result of the Acquisition, based on total covered lives, the Company is the industry leader with respect to risk-based, ASO, EAP and integrated products, according to enrollment data reported in OPEN MINDS. For its fiscal year ended September 30, 1997, on a pro forma basis, risk-based, ASO, EAP and integrated products would have accounted for 73%, 12%, 9% and 5%, respectively, of the Company's managed behavioral healthcare net revenues. The Company was incorporated in 1969 under the laws of the State of Delaware. The Company's principal executive offices are located at 3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326, and its telephone number is (404) 841-9200. HISTORY The Company has historically derived the majority of its revenue as a provider of healthcare services in an inpatient setting. Payments from third party payors are the principal source of revenue for most healthcare providers. In the early 1990's, many third party payors sought to control the cost of providing care to their patients by instituting managed care programs or seeking the assistance of managed care companies. Providers participating in managed care programs agree to provide services to patients for a discount from established rates, which generally results in pricing concessions by the providers and lower margins. Additionally, managed care programs generally encourage alternatives to inpatient treatment settings and the reduced utilization of inpatient services. As a result, third party payors established managed care programs or engaged managed care companies in many areas of healthcare, including behavioral healthcare. The Company, which until June 1997 was the largest operator of psychiatric hospitals in the United States, was adversely affected by the adoption of managed care programs by third party payors. Prior to the first quarter of fiscal 1996, the Company was not a provider of behavioral managed care services. During the first quarter of fiscal 1996, the Company acquired a 61% ownership interest in Green Spring. At that time, the Company intended to become a fully integrated behavioral healthcare provider by combining the managed behavioral healthcare products offered by Green Spring with the direct treatment services offered by the Company's psychiatric hospitals. The Company believed that an entity that participated in both the managed care and provider segments of the behavioral healthcare industry could more efficiently provide and manage behavioral healthcare for insured populations than an entity that was 5 solely a managed care company. The Company also believed that earnings from its managed care business would offset, in part, the negative impact on the financial performance of its psychiatric hospitals caused by managed care. Green Spring was the Company's first significant involvement in managed behavioral healthcare. During the first quarter of fiscal 1998, the minority shareholders of Green Spring converted their interests in Green Spring into an aggregate of 2,831,516 shares of Company Common Stock (the "Green Spring Minority Shareholder Conversion"). Subsequent to the Company's acquisition of Green Spring, the growth of the managed behavioral healthcare industry accelerated. Under the Company's majority ownership, Green Spring increased its base of covered lives from 12.0 million as of the end of calendar year 1995 to 21.1 million as of the end of calendar year 1997, a compound annual growth rate of over 32%. While growth in the industry was accelerating, the managed behavioral healthcare industry also began to consolidate. The Company concluded that consolidation presented an opportunity for the Company to enhance its stockholder value by increasing its participation in the managed behavioral healthcare industry, which the Company believed offered growth and earnings prospects superior to those of the psychiatric hospital industry. Therefore, the Company decided to sell its domestic psychiatric facilities to obtain capital for expansion in the managed behavioral healthcare business. The Company took a significant step toward implementing this strategy during the third quarter of fiscal 1997, when it sold substantially all of its domestic acute care psychiatric hospitals and residential treatment facilities (collectively, the "Psychiatric Hospital Facilities") to Crescent Real Estate Equities Limited Partnership ("Crescent") for $417.2 million in cash (before costs of approximately $16.0 million) and certain other consideration. Simultaneously with the sale of the Psychiatric Hospital Facilities, the Company and COI, an affiliate of Crescent, formed CBHS, a joint venture, to operate the Psychiatric Hospital Facilities and certain other facilities transferred to CBHS by the Company. The Company retained a 50% ownership of CBHS; the other 50% of the equity of CBHS is owned by COI. In related transactions, (i) Crescent leased the Psychiatric Hospital Facilities to CBHS and (ii) the Company entered into a master franchise agreement (the "Master Franchise Agreement") with CBHS and a franchise agreement with each of the Psychiatric Hospital Facilities and the other facilities operated by CBHS (collectively, the "Franchise Agreements"). The Company's sale of the Psychiatric Hospital Facilities and the related transactions described above are referred to as the "Crescent Transactions." Pursuant to the Franchise Agreements, the Company franchises the "CHARTER" System of behavioral healthcare to each of the Psychiatric Hospital Facilities and other facilities operated by CBHS. In exchange, CBHS agreed to pay the Company, pursuant to the Master Franchise Agreement, annual franchise fees (the "Franchise Fees") of approximately $78.3 million. However, CBHS's obligation to pay the Franchise Fees is subordinate to its obligation to pay rent for the Psychiatric Hospital Facilities to Crescent. The sale of the Psychiatric Hospital Facilities provided the Company with approximately $200 million of net cash proceeds after debt repayment for use in implementing its business strategy. The Company used the net cash proceeds to finance the acquisition of additional managed care companies. Specifically, on December 4, 1997, the Company consummated the purchase of HAI, formerly a unit of Aetna/U.S. Healthcare ("Aetna"). HAI provides managed care services to approximately 16.3 million covered lives, primarily through EAPs and other managed behavioral healthcare plans. In addition, on December 5, 1997, the Company purchased the assets of Allied. Allied provides specialty risk-based products and administrative services to a variety of insurance companies and other customers, including Blue Cross of New Jersey, CIGNA and NYLCare, for its 3.7 million members. Allied has over 80 physician networks across the eastern United States. Allied's networks include physicians specializing in cardiology, oncology and diabetes. The Company continues to pursue a strategy of expanding its managed care operations and of reducing the extent to which its earnings are derived from the psychiatric hospital business. In this regard, the Company has further implemented its business strategy through the Acquisition. 6 On March 3, 1998, the Company entered into definitive agreements with COI and CBHS to, among other things, sell the Company's franchise operations, certain domestic provider operations and certain other assets and operations. If the CBHS Transactions are consummated, the Company will have completed the divestiture of substantially all of its domestic provider operations. See "CBHS Transactions." RECENT DEVELOPMENTS THE ACQUISITION. On February 12, 1998, the Company consummated its acquisition of Merit for cash consideration of approximately $448.9 million plus the repayment of Merit's debt. Merit manages behavioral healthcare programs for approximately 800 customers across all segments of the healthcare industry, including HMOs, Blue Cross/Blue Shield organizations and other insurance companies, corporations and labor unions, federal, state and local governmental agencies and various state Medicaid programs, and provides managed care services to approximately 21.6 million covered lives at the time of the Acquisition, including approximately 10.6 million risk-based lives. On September 12, 1997, Merit completed the acquisition of CMG. CMG is a national managed behavioral healthcare company with over two million covered lives, including over 1.9 million risk-based lives. Merit paid approximately $48.7 million in cash and issued approximately 739,000 shares of Merit common stock as consideration for CMG. THE TRANSACTIONS. On February 12, 1998, in connection with the consummation of the Acquisition, the Company consummated certain related transactions (together with the Acquisition, collectively, the "Transactions"), as follows: (i) the Company terminated its existing credit agreement (the "Magellan Existing Credit Agreement"); (ii) the Company repaid all loans outstanding pursuant to and terminated Merit's existing credit agreement (the "Merit Existing Credit Agreement") (the Magellan Existing Credit Agreement and the Merit Existing Credit Agreement are hereinafter referred to as the "Existing Credit Agreements"); (iii) the Company consummated a tender offer for its 11 1/4% Series A Senior Subordinated Notes due 2004 (the "Magellan Outstanding Notes"); (iv) Merit consummated a tender offer for its 11 1/2% Senior Subordinated Notes due 2005 (the "Merit Outstanding Notes") (the Magellan Outstanding Notes and the Merit Outstanding Notes are hereinafter referred to collectively as the "Outstanding Notes" and such tender offers are hereinafter referred to collectively as the "Debt Tender Offers"); (v) the Company entered into a new senior secured bank credit agreement (the "New Credit Agreement") with The Chase Manhattan Bank ("Chase") and a syndicate of financial institutions, providing for credit facilities of $700 million; and (vi) the Company issued its 9% Senior Subordinated Notes due 2008 (the "Old Notes") pursuant to an indenture, dated February 12, 1998, between the Company and Marine Midland Bank, as Trustee (the "Indenture"). The Company intends to effect an exchange offer in which it will exchange its 9% Series A Senior Subordinated Notes (the "New Notes") for the Old Notes. The Old Notes and the New Notes are collectively referred to hereinafter as the "Notes." GREEN SPRING MINORITY SHAREHOLDER CONVERSION. The minority shareholders of Green Spring have converted their interests in Green Spring into an aggregate of 2,831,516 shares of Company Common Stock. Such conversion is referred to as the "Green Spring Minority Shareholder Conversion." As a result of the Green Spring Minority Shareholder Conversion, the Company owns 100% of Green Spring. CBHS TRANSACTIONS. On March 3, 1998, the Company and certain of its wholly owned subsidiaries entered into definitive agreements with COI and CBHS pursuant to which the Company will, among other things, sell the Company's franchise operations, certain domestic provider operations and certain other assets and operations. The definitive agreements include: (i) an equity purchase agreement between the Company and COI (the "Equity Purchase Agreement"); (ii) a purchase agreement between the Company, certain of its wholly owned subsidiaries and CBHS (the "Purchase Agreement"); and (iii) a support agreement between the Company and COI (the "Support Agreement"). Pursuant to the Equity Purchase Agreement, the Company agreed to sell to COI the Company's common and preferred equity interest in CBHS. Pursuant to the Purchase Agreement, the Company and certain of its wholly owned subsidiaries 7 agreed to sell to CBHS: (i) Charter Advantage, LLC, the entity that conducts the Company's franchise operations; (ii) Charter System, LLC, which owns the intellectual property comprising the "CHARTER" system of behavioral healthcare; (iii) Group Practice Affiliates, Inc., the Company's physician practice management business ("GPA"); (iv) certain behavioral staff model operations; (v) the Company's Puerto Rican provider management business; (vi) Golden Isle Assurance Company, Ltd., one of the Company's captive insurance companies ("Golden Isle"); and (vii) Strategic Advantage, Inc., which owns certain intellectual property used by the Company to monitor clinical results ("Strategic Advantage"). The obligations of CBHS and the Company to consummate the transactions contemplated by the Purchase Agreement are also subject to, among other things, the execution of either (i) a Joint Venture Purchase Agreement pursuant to which the Company will sell to CBHS, for no additional consideration, its interest in six hospital-based joint ventures that are managed by CBHS on behalf of the Company (the "Joint Ventures") or (ii) amendments to the services agreements between the Company and certain subsidiaries of CBHS relating to the Joint Ventures pursuant to which the Company will transfer to CBHS all rights to receive certain distributions with respect to the Joint Ventures and pursuant to which CBHS would assume all obligations of the Company with respect to the Joint Ventures, in each case arising after consummation of the CBHS Transactions. The Purchase Agreement further provides that at the time of the closing of the CBHS Transactions, the Company and CBHS will execute an amendment to the Master Franchise Agreement stating that: (i) during the period from February 1, 1998 until the closing of the CBHS Transactions, the Franchise Fees will be reduced from $6.5 million per month to $5.0 million per month and (ii) all such Franchise Fees and all accrued and unpaid Franchise Fees as of March 3, 1998 shall be due and payable 180 days after the closing of the CBHS Transactions. Among other things, the Support Agreement obligates COI to provide CBHS assistance in obtaining financing for its payment obligation under the Purchase Agreement, including its agreement to: (i) provide assistance in the preparation of any offering documents required in connection with CBHS's efforts to obtain financing, (ii) reimburse CBHS for all expenses incurred in connection with obtaining financing, and (iii) purchase up to $25.0 million of CBHS securities if necessary to permit CBHS to obtain the required financing. The Support Agreement also obligates COI, under certain circumstances, to pay the Company a termination fee equal to $2.5 million in cash and the number of shares of COI common stock obtained by dividing $2.5 million by the average closing price of a share of COI common stock for the five trading days prior to the termination of the Purchase Agreement and for the five trading days after the termination of the Purchase Agreement, if the CBHS Transactions are not consummated as a result of the failure of CBHS to obtain sufficient financing for its payment obligations under the Purchase Agreement. Upon consummation of the CBHS Transactions, the Company will receive $280.0 million in cash, pursuant to the Purchase Agreement and, pursuant to the Equity Purchase Agreement, the number of shares of COI common stock obtained by dividing $30.0 million by the average closing price of a share of COI common stock for the ten trading days preceding consummation of the CBHS Transactions. The Company expects to use the cash proceeds, after transaction costs of approximately $8.0 million, to repay indebtedness outstanding under the term loan facility of the New Credit Agreement (the "Term Loan Facility"). The CBHS Transactions are expected to close in the third quarter of fiscal 1998. There can be no assurance that the Company will consummate the CBHS Transactions. The obligations of the Company and CBHS to consummate the transactions contemplated by the Equity Purchase Agreement and the Support Agreement are conditioned upon the execution and delivery of a services purchase agreement (the "Services Purchase Agreement"). It is expected that the Services Purchase Agreement would obligate the Company to purchase from CBHS a designated minimum amount of behavioral healthcare services for gate-kept risk-based covered lives if CBHS meets certain standards required of it pursuant to the Provider Services Agreement (as defined). If the CBHS Transactions are consummated, the Company also expects to enter into a provider services agreement (the "Provider Services Agreement") with CBHS pursuant to which the Company would grant CBHS status as a national preferred provider of behavioral healthcare services to the Company for ten years provided that CBHS complies during the term of the Provider Services Agreement with enhanced clinical, quality assurance, reporting and customer service standards in addition to the standards currently required of other providers of such services to the Company. 8 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES. SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS As a result of the Transactions, the Company is currently highly leveraged, with indebtedness that is substantial in relation to its stockholders' equity. As of March 31, 1998, the Company's aggregate outstanding indebtedness was approximately $1.2 billion and the Company's stockholders' equity was approximately $182.0 million as of the same date. The New Credit Agreement and the Indenture permit the Company to incur or guarantee certain additional indebtedness, subject to certain limitations. The Company's high degree of leverage could have important consequences to owners of Common Stock, including, but not limited to, the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired in the future; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness; (iii) the Company is substantially more leveraged than certain of its competitors, which might place the Company at a competitive disadvantage; (iv) the Company may be hindered in its ability to adjust rapidly to changing market conditions; and (v) the Company's high degree of leverage could make it more vulnerable in the event of a downturn in general economic conditions or its business or in the event of adverse changes in the regulatory environment applicable to the Company. The Company's ability to repay or to refinance its indebtedness and to pay interest on its indebtedness will depend on its financial and operating performance, which, in turn, is subject to prevailing economic and competitive conditions and to certain financial, business and other factors, many of which are beyond the Company's control. These factors could include operating difficulties, increased operating costs, the actions of competitors, regulatory developments and delays in implementing strategic projects. The Company's ability to meet its debt service and other obligations may depend in significant part on the extent to which the Company can successfully implement its business strategy. There can be no assurance that the Company will be able to implement its strategy fully or that the anticipated results of its strategy will be realized. If the Company's cash flow and capital resources are insufficient to fund its debt service obligations, the Company may be forced to reduce or delay capital expenditures, sell assets or seek to obtain additional equity capital or to restructure its debt. There can be no assurance that the Company's cash flow and capital resources will be sufficient for payment of principal of and interest on its indebtedness in the future, or that any such alternative measures would be successful or would permit the Company to meet its scheduled debt service obligations. The value of the Common Stock would be adversely affected if the Company were unable to fund its debt service obligations. In addition, because the Company's obligations under the New Credit Agreement bear interest at floating rates, an increase in interest rates could adversely affect, among other things, the Company's ability to meet its debt service obligations. HISTORY OF UNPROFITABLE OPERATIONS The Company experienced losses from continuing operations before extraordinary items in each fiscal year from 1993 through 1995. Such losses amounted to $39.6 million, $47.0 million and $43.0 million for the fiscal years ended September 30, 1993, 1994 and 1995, respectively. Merit experienced losses before cumulative effects of accounting changes in fiscal 1996 and 1997 of $16.9 million and $13.9 million, respectively. The Company reported net revenue and net income of approximately $1.35 billion and $32.4 9 million, respectively, for fiscal 1996 and net revenue and income before extraordinary items of approximately $1.2 billion and $4.8 million, respectively, for fiscal 1997. The Company's fiscal 1997 net income included a loss on the Crescent Transactions of $35.9 million, net of taxes. There can be no assurance that the Company's profitability will continue in future periods. RESTRICTIVE FINANCING COVENANTS The New Credit Agreement and the Indenture contain a number of covenants that restrict the operations of the Company and its subsidiaries. In addition, the New Credit Agreement requires the Company to comply with specified financial ratios and tests, including a minimum interest coverage ratio, a maximum leverage ratio, a minimum net worth test, a maximum senior debt ratio and a minimum "EBITDA" (as defined in the New Credit Agreement). There can be no assurance that the Company will be able to comply with such covenants, ratios and tests in the future. The Company's ability to comply with such covenants, ratios and tests may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any such covenants, ratios or tests could result in a default under the New Credit Agreement that would permit the lenders thereunder to declare all amounts outstanding thereunder to be immediately due and payable, together with accrued and unpaid interest. The breach of any such covenants, ratios or tests could result in a default under the Notes that would permit the trustee pursuant to the Indenture to declare the principal amount of the Notes to be immediately due and payable, together with accrued and unpaid interest. If the indebtedness outstanding pursuant to the New Credit Agreement or the Notes were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay such indebtedness and the other indebtedness of the Company. The value of the Common Stock would be adversely affected if the Company were unable to repay such indebtedness. CHANGE OF CONTROL The occurrence of a change of control with respect to the Company may result in a default, or otherwise require repayment of indebtedness, under both the Indenture and the New Credit Agreement. In addition, the New Credit Agreement prohibits the repayment of the Notes by the Company upon the occurrence of a change of control, unless and until such time as the indebtedness under the New Credit Agreement is repaid in full. The Company's failure to make such repayments in such instances would result in a default under both the Indenture and the New Credit Agreement. Future indebtedness of the Company may also contain restrictions or repayment requirements with respect to certain events or transactions that could constitute a change of control. In the event of a change of control, there can be no assurance that the Company would have sufficient assets to satisfy all of its obligations under the Notes or the New Credit Agreement. The provisions of the Indenture and the New Credit Agreement imposing restrictions or repayment requirements with respect to a change of control, as well as certain provisions of the Delaware General Corporation Law and the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that investors might be willing to pay in the future for Common Stock which could in turn adversely affect the ability of the Company to sell additional Common Stock. RISK-BASED PRODUCTS As a result of the Acquisition, revenues under risk-based contracts are the primary source of the Company's revenue from its managed behavioral care business. On a pro forma basis, such revenues would have accounted for approximately 56% of the Company's total revenue and 73% of its managed behavioral healthcare revenue in fiscal 1997. Under a risk-based contract, the Company assumes all or a portion of the responsibility for the cost of providing a full or specified range of behavioral healthcare treatment 10 services to a specified beneficiary population in exchange, generally, for a fixed fee per member per month. In order for such contracts to be profitable, the Company must accurately estimate the rate of service utilization by beneficiaries enrolled in programs managed by the Company and control the unit cost of such services. If the aggregate cost of behavioral healthcare treatment services provided to a given beneficiary population in a given period exceeds the aggregate of the per member per month fees received by the Company with respect to the beneficiary population in such period, the Company will incur a loss with respect to such beneficiary population during such period. Furthermore, the Company may be required to pay during any period amounts with respect to behavioral healthcare treatment services provided to a given beneficiary population that exceed per member per month fees received with respect to such beneficiary population during the same period. There can be no assurance that the Company's assumptions as to service utilization rates and costs will accurately and adequately reflect actual utilization rates and costs, nor can there be any assurance that increases in behavioral healthcare costs or higher-than-anticipated utilization rates, significant aspects of which are outside the Company's control, will not cause expenses associated with such contracts to exceed the Company's revenue for such contracts. In addition, there can be no assurance that adjustments will not be required to the estimates, particularly those regarding cost of care, made in reporting historical financial results. The Company will attempt to increase membership in its risk-based products following the Acquisition. If the Company is successful in this regard, the Company's exposure to potential losses from its risk-based products will also be increased. Furthermore, certain of such contracts and certain state regulations limit the profits that may be earned by the Company on risk-based business and may require refunds if the loss experience is more favorable than that originally anticipated. Such contracts and regulations may also require the Company or certain of its subsidiaries to reserve a specified amount of cash as financial assurance that it can meet its obligations under such contracts. As of March 31, 1998, the Company had cash reserves of $57.6 million pursuant to such contracts and regulations. Such amounts will not be available to the Company for general corporate purposes. Furthermore, certain state regulations restrict the ability of subsidiaries that offer risk-based products to pay dividends to the Company. Certain state regulations relating to the licensing of insurance companies may also adversely affect the Company's risk-based business. See "--Regulation." RELIANCE ON CUSTOMER CONTRACTS On a pro forma basis, approximately 78% of the Company's revenue in fiscal 1997 would have been derived from contracts with payors of behavioral healthcare benefits. The Company's managed care contracts typically have terms of one to three years, and in certain cases contain renewal provisions providing for successive terms of between one and two years (unless terminated earlier). Substantially all of these contracts are immediately terminable with cause and many, including some of the Company's most significant contracts, are terminable without cause by the customer upon the provision of requisite notice and the passage of a specified period of time (typically between 60 and 180 days), or upon the occurrence of certain other specified events. On a pro forma basis, the Company's ten largest managed behavioral healthcare customers would have accounted for approximately 47% of the Company's managed behavioral healthcare revenue for fiscal 1997. One of such contracts, an agreement between HAI and Aetna, represents 21% of the Company's pro forma covered lives and would have represented 5% of its pro forma managed behavioral healthcare revenues for fiscal 1997. The contract expires on December 3, 2003. There can be no assurance that such contracts will be extended or successfully renegotiated or that the terms of any new contracts will be comparable to those of existing contracts. Loss of all of these contracts or customers would, and loss of any one of these customers could, have a material adverse effect on the Company. In addition, price competition in bidding for contracts can significantly affect the financial terms of any new or renegotiated contract. The Company's customers may reevaluate their contractual arrangements with the Company as a result of the consummation of the Transactions. 11 SERVICES PURCHASE AGREEMENT The obligations of the Company and CBHS to consummate the transactions contemplated by the Equity Purchase Agreement and the Support Agreement are conditioned upon the execution and delivery of the Services Purchase Agreement. It is expected that the Services Purchase Agreement would obligate the Company to purchase from CBHS a designated minimum amount of behavioral healthcare services for gate-kept risk-based covered lives, subject to certain conditions, and to make certain payments to CBHS if it fails to do so. It is expected that such payments could equal up to $59.4 million, subject to increases pursuant to the terms of the Services Purchase Agreement. There can be no assurance that the Company will not be required to make such payments. DEPENDENCE ON GOVERNMENT SPENDING FOR MANAGED HEALTHCARE; POSSIBLE IMPACT OF HEALTHCARE REFORM A significant portion of the Company's managed care revenue is derived, directly or indirectly, from federal, state and local governmental agencies, including state Medicaid programs. Reimbursement rates vary from state to state, are subject to periodic negotiation and may limit the Company's ability to maintain or increase rates. The Company is unable to predict the impact on the Company's operations of future regulations or legislation affecting Medicaid or Medicare programs, or the healthcare industry in general, and there can be no assurance that future regulations or legislation will not have a material adverse effect on the Company. Moreover, any reduction in government spending for such programs could also have a material adverse effect on the Company. In addition, the Company's contracts with federal, state and local governmental agencies, under both direct contract and subcontract arrangements, generally are conditioned upon financial appropriations by one or more governmental agencies, especially with respect to state Medicaid programs. These contracts generally can be terminated or modified by the customer if such appropriations are not made. Finally, some of the Company's contracts with federal, state and local governmental agencies, under both direct contract and subcontract arrangements, require the Company to perform additional services if federal, state or local laws or regulations imposed after the contract is signed so require, in exchange for additional compensation to be negotiated by the parties in good faith. Government and other third-party payors are generally seeking to impose lower reimbursement rates and to renegotiate reduced contract rates with service providers in a trend toward cost control. In August 1997, Congress enacted the Balanced Budget Act of 1997 (the "Budget Act"). The Medicare-related provisions of the Budget Act are designed to reduce Medicare expenditures over the next five years by $115 billion, compared to projected Medicare expenditures before adoption of the Budget Act. The Congressional Budget Office projected in July 1997 that $43.8 billion of the reductions would come from reduced payments to hospitals, $21.8 billion from increased enrollment in managed care plans and $11.7 billion from reduced payments to physicians and ambulatory care providers. The five-year savings in projected Medicare payments to physicians and hospitals would be achieved under the Budget Act by reduced fee-for-service reimbursement and by changes in managed care programs designed to increase enrollment of Medicare beneficiaries in managed care plans. The increase in Medicare enrollment in managed care plans would be achieved in part by allowing provider-sponsored organizations and preferred provider organizations to compete with Medicare HMOs for Medicare enrollees. The Medicaid-related provisions of the Budget Act are designed to achieve net federal Medicaid savings of $14.6 billion over the next five years and $56.4 billion over the next ten years. The Budget Act achieves federal Medicaid savings in three areas. First, two-thirds of the savings over the next ten years are attributable to limitations on federal matching payments to states for reimbursements to "disproportionate share" hospitals. The next largest source of federal savings is a provision allowing states to shift the cost of Medicaid deductibles and coinsurance requirements for low-income Medicaid beneficiaries from their Medicaid programs to physicians and other providers. Most of the remaining savings derive from the repeal of the "Boren Amendment" and other minimum payment guarantees for hospitals, nursing homes and community health centers that serve Medicaid patients. These changes may have an adverse effect on 12 the Company if they result in reduced payment levels for providers of managed behavioral healthcare services. Prior to adoption of the Budget Act, the states were prohibited from requiring Medicaid recipients to enroll in managed care products that covered only Medicaid recipients. The Medicaid laws required that the states enroll Medicaid recipients in products that also covered a specific number of commercial enrollees. This requirement of the Medicaid laws was intended to limit the ability of the states to reduce coverage levels for Medicaid recipients below those offered to commercial enrollees. Under prior law, the Secretary of the United States Department of Health and Human Services (the "Department") could waive the prohibition. The Medicaid-related provisions of the Budget Act give states broad flexibility to require most Medicaid recipients to enroll in managed care products that only cover Medicaid recipients, without obtaining a waiver from the Secretary of the Department that was required under prior law. The Budget Act also allows states to limit the number of managed care organizations with which the state will contract to deliver care to Medicaid beneficiaries. These changes could have a positive impact on the Company's business, if they result in increased enrollment of Medicaid beneficiaries in managed care organizations and increased Medicaid spending on managed care. However, these changes also may have an adverse effect on the Company if a number of states decide to limit the number of managed care organizations with which they will contract and to select the organization solely on the basis of the cost of care, which could result in increased cost competition for state contracts. The Company cannot predict the effect of the Budget Act, or other healthcare reform measures that may be adopted by Congress or state legislatures, on its managed care operations and no assurance can be given that either the Budget Act or other healthcare reform measures will not have an adverse effect on the Company. REGULATION The managed healthcare industry and the provision of behavioral healthcare services are subject to extensive and evolving state and federal regulation. The Company is subject to certain state laws and regulations, including those governing: (i) the licensing of insurance companies, HMOs, preferred provider organizations ("PPOs"), third-party administrators ("TPAs") and companies engaged in utilization review and (ii) the licensing of healthcare professionals, including restrictions on business corporations from practicing, controlling or exercising excessive influence over behavioral healthcare services through the direct employment of psychiatrists or, in a few states, psychologists and other behavioral healthcare professionals. In addition, the Company is subject to certain federal laws as a result of the role the Company assumes in connection with managing its customers' employee benefit plans. The Company's managed care operations are also indirectly affected by regulations applicable to the establishment and operation of behavioral healthcare clinics and facilities. The Company believes its operations are structured to comply with applicable laws and regulations in all material respects and that it has received, or is in the process of applying for, all licenses and approvals material to the operation of its business. In many states, entities that assume risk under contracts with licensed insurance companies or HMOs have not been considered by state regulators to be conducting an insurance or HMO business. As a result, the Company has not sought licensure as either an insurer or HMO in certain states. Regulators in some states, however, have determined that risk assuming activity by entities that are not themselves providers of care is an activity that requires some form of licensure. There can be no assurance that other states in which the Company operates will not adopt a similar view, thus requiring the Company to obtain additional licenses. Such additional licensure might require the Company to maintain minimum levels of deposits, net worth, capital, surplus or reserves, or limit the Company's ability to pay dividends, make investments or repay indebtedness. The imposition of these additional licensure requirements could increase the Company's cost of doing business or delay the Company's conduct or expansion of its business. 13 Regulators may impose operational restrictions on entities granted licenses to operate as insurance companies or HMOs. For example, the California Department of Corporations (the "DOC") imposed certain restrictions on the Company in connection with its issuance of an approval of the Company's acquisition of HAI, including restrictions on the ability of the California subsidiary of HAI to fund the Company's operations in other states and on the ability of the Company to make certain operational changes with respect to HAI's California subsidiary. The DOC imposed substantially identical restrictions on the Company in connection with the Company's acquisition of Merit. The Company does not believe such restrictions will materially impact its integration plan. See "--Integration of Operations." In addition, utilization review and TPA activities conducted by the Company are regulated by many states, which states impose requirements upon the Company that increase its business costs. The Company believes that its TPA activities performed for its self-insured employee benefit plan customers are exempt from otherwise applicable state licensing or registration requirements based upon federal preemption under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and has relied on this general principle in determining not to seek licensure for certain of its activities in many states. Existing case law is not uniform on the applicability of ERISA preemption with respect to state regulation of utilization review or TPA activities. There can be no assurance that additional licensure will not be required with respect to utilization review or TPA activities in certain states. State regulatory agencies responsible for the administration and enforcement of the laws and regulations to which the Company's operations are subject have broad discretionary powers. A regulatory agency or a court in a state in which the Company operates could take a position under existing or future laws or regulations, or change its interpretation or enforcement practices with respect thereto, that such laws or regulations apply to the Company differently than the Company believes such laws and regulations apply or should be enforced. The resultant compliance with, or revocation of, or failure to obtain, required licenses and governmental approvals could result in significant alteration to the Company's business operations, delays in the expansion of the Company's business and lost business opportunities, any of which, under certain circumstances, could have a material adverse effect on the Company. The laws of some states limit the ability of a business corporation to directly provide, control or exercise excessive influence over behavioral healthcare services through the direct employment of psychiatrists, psychologists, or other behavioral healthcare professionals. In addition, the laws of some states prohibit psychiatrists, psychologists, or other healthcare professionals from splitting fees with other persons or entities. These laws and their interpretations vary from state to state and enforcement by the courts and regulatory authorities may vary from state to state and may change over time. The Company believes that its operations as currently conducted are in material compliance with the applicable laws, however there can be no assurance that the Company's existing operations and its contractual arrangements with psychiatrists, psychologists and other healthcare professionals will not be successfully challenged under state laws prohibiting fee splitting or the practice of a profession by an unlicensed entity, or that the enforceability of such contractual arrangements will not be limited. The Company believes that it could, if necessary, restructure its operations to comply with changes in the interpretation or enforcement of such laws and regulations, and that such restructuring would not have a material adverse effect on its operations. Several states in which the Company does business have adopted, or are expected to adopt, "any willing provider" laws. Such laws typically impose upon insurance companies, PPOs, HMOs or other types of third-party payors an obligation to contract with, or pay for the services of, any healthcare provider willing to meet the terms of the payor's contracts with similar providers. Compliance with any willing provider laws could increase the Company's costs of assembling and administering provider networks and could, therefore, have a material adverse effect on its operations. The Company's managed care operations are also generally affected by regulations applicable to the operations of healthcare clinics and facilities. 14 INTEGRATION OF OPERATIONS As a result of the Company's acquisition of Merit and HAI, the Company is the largest provider of managed behavioral healthcare services in the United States, according to the enrollment data reported in OPEN MINDS. The Company's ability to operate its acquired managed care businesses successfully depends on how well and how quickly it integrates the acquired businesses with its existing operations. The Company expects to achieve approximately $60.0 million of cost savings on an annual basis within eighteen months following the consummation of the Acquisition. However, as the Company implements the integration process, it may need to implement enhanced operational, financial and information systems and may require additional employees and management, operational and financial resources. There can be no assurance that the Company will be able to implement and maintain such operational, financial and information systems successfully or successfully obtain, integrate and utilize the required employees and management, operational and financial resources to achieve the successful integration of the acquired businesses with its existing operations. Failure to implement such systems successfully and to use such resources effectively could have a material adverse effect on the Company. Furthermore, implementing such operational, financial and information systems or obtaining such employees and management could reduce the cost savings the Company expects to achieve. HIGHLY COMPETITIVE INDUSTRY The industry in which the Company conducts its managed care business is highly competitive. The Company competes with large insurance companies, HMOs, PPOs, TPAs, provider groups and other managed care companies. Many of the Company's competitors are significantly larger and have greater financial, marketing and other resources than the Company, and some of the Company's competitors provide a broader range of services. The Company may also encounter substantial competition in the future from new market entrants. Many of the Company's customers that are managed care companies may, in the future, seek to provide managed behavioral healthcare services to their employees or subscribers directly, rather than contracting with the Company for such services. SUBORDINATION OF FRANCHISE FEES The Company owns a 50% equity interest in CBHS, from which it receives the Franchise Fees. The Franchise Fees represent a significant portion of the Company's earnings and cash flows. The Franchise Fees payable to the Company by CBHS are subordinated in right of payment to the $41.7 million annual base rent, 5% minimum escalator rent and, in certain circumstances, certain additional rent due to Crescent. If CBHS encounters a decline in earnings or financial difficulties, such amounts due to Crescent will be paid before any Franchise Fees are paid. The remainder of CBHS's available cash will then be applied in such order of priority as CBHS may determine, in the reasonable discretion of the CBHS governing board, to all other operating expenses of CBHS, including the current and accumulated Franchise Fees. The Company will be entitled to pursue all available remedies for breach of the Master Franchise Agreement, except that the Company does not have the right to take any action that could reasonably be expected to force CBHS into bankruptcy or receivership. As a result of the Crescent Transactions, the Company no longer controls the operations of the Psychiatric Hospital Facilities and other facilities operated by CBHS. Accordingly, factors that the Company does not control will likely influence the amount of the equity in the earnings of CBHS and the amount of Franchise Fees that the Company will realize in the future. For example, CBHS may pursue acquisitions in markets where it does not currently have a presence and in markets where it has existing hospital operations. Furthermore, CBHS may consolidate services in selected markets by closing additional facilities depending on market conditions and evolving business strategies. If CBHS closes additional psychiatric hospitals, it could result in charges to income for the costs attributable to the closure, which would result in lower equity in earnings of CBHS for the Company and receipt by the Company of less than the agreed to amount of Franchise Fees. 15 Based on projections of fiscal 1998 operations prepared by management of CBHS, the Company believes that CBHS will be unable to pay the full amount of the Franchise Fees it is contractually obligated to pay the Company during fiscal 1998. The Company currently estimates that CBHS will be able to pay approximately $58.0 million to $68.0 million of the Franchise Fees in fiscal 1998, a $10.0 million to $20.0 million shortfall relative to amounts payable under the Master Franchise Agreement. PROFESSIONAL LIABILITY; INSURANCE The management and administration of the delivery of managed behavioral healthcare services, like other healthcare services, entail significant risks of liability. The Company is regularly subject to lawsuits alleging malpractice and related legal theories, some of which involve situations in which participants in the Company's programs have committed suicide. The Company is also subject to claims of professional liability for alleged negligence in performing utilization review activities, as well as for acts and omissions of independent contractors participating in the Company's third-party provider networks. The Company is subject to claims for the costs of services denied. There can be no assurance that the Company's procedures for limiting liability have been or will be effective, or that one or more lawsuits will not have a material adverse effect on the Company in the future. The Company carries professional liability insurance, subject to certain deductibles. There can be no assurance that such insurance will be sufficient to cover any judgments, settlements or costs relating to present or future claims, suits or complaints or that, upon expiration thereof, sufficient insurance will be available on favorable terms, if at all. If the Company is unable to secure adequate insurance in the future, or if the insurance carried by the Company is not sufficient to cover any judgments, settlements or costs relating to any present or future actions or claims, there can be no assurance that the Company will not be subject to a liability that could have a material adverse effect on the Company. The Company has certain liabilities relating to the self-insurance program it maintained with respect to its provider business prior to the Crescent Transactions. 16 SHARES ELIGIBLE FOR FUTURE SALE The Shares are eligible for sale in the open market without restriction. In January 1996, the Company issued, in a private placement transaction, 4,000,000 shares of Common Stock (the "Rainwater Shares") to Rainwater-Magellan Holdings, L.P. ("Rainwater-Magellan"), along with warrants ("Warrants") to purchase an additional 2,000,000 shares of Common Stock (i.e., the Underlying Warrant Shares) for $26.15 per share. The Warrants expire on January 25, 2000. The Rainwater Shares are eligible for sale in the open market without restriction. Any Underlying Warrant Shares issued upon exercise of the Warrants will be eligible for sale in the open market without restriction. Warrants to purchase 57,004 shares of Common Stock were distributed by Rainwater-Magellan to three of its limited partners in redemption of their partnership interests. Pursuant to a pro-rata distribution, Rainwater, Inc. and Richard E. Rainwater received 39,724 and 2,417,554 shares of Common Stock, respectively, from Rainwater-Magellan. In connection with the Crescent Transactions in June 1997, the Company issued to Crescent and COI separate warrants to acquire a total of 2,566,622 shares of Common Stock for $30.00 per share that expire in installments during the years 2001 through 2009. The shares of Common Stock issued upon the exercise of such Warrants will be eligible for sale in the open market without restriction. In connection with the Green Spring Minority Shareholder Conversion, 2,831,516 shares of Common Stock are eligible for sale in the open market without restriction. As of March 31, 1998, the Company's officers, directors and employees held options for the purchase of 3,906,499 shares of Common Stock (2,698,507 of which are vested and 1,207,992 of which are subject to vesting periods of up to four years in duration). Upon exercise, the shares of Common Stock underlying such options will be eligible for sale on the open market without restriction, except that directors and certain officers of the Company must effect such sales pursuant to Rule 144 under the 1933 Act. Following this offering, sales and potential sales of shares of Common Stock in the public market pursuant to Rule 144 or otherwise could adversely affect the prevailing market prices for the Common Stock and impair the Company's ability to raise additional equity capital. 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 the Company's 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 the Company's Common Stock in any given period. As a result, the market for the Company's Common Stock may experience price and volume fluctuations unrelated to the operating performance of the Company. CBHS RISK FACTORS The following factors are relevant to an understanding of the risks associated with CBHS's business and the ability of CBHS to pay Franchise Fees to the Company. POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS AND CHANGES IN HOSPITAL PAYOR MIX. CBHS's hospitals have been adversely affected by factors influencing the entire psychiatric hospital industry. Such factors include: (i) the imposition of more stringent length of stay and admission criteria and other cost containment measures by payors; (ii) the failure of reimbursement rate increases from certain payors 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 business that CBHS derives from payors 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 behavorial health benefits, such as reductions in annual and lifetime limits on behavioral health coverage; and (vi) pricing pressure related to an increasing rate of claims denials by third party payors. Any of these factors may result in reductions in the amounts that CBHS's hospitals can expect to collect per patient day for services provided or the number of equivalent patient days. 17 For the fiscal year ended September 30, 1997, CBHS derived approximately 24% of its gross psychiatric patient service revenue from managed care organizations (primarily HMOs and PPOs), 22% from other private payors (primarily commercial insurance and Blue Cross), 27% from Medicare, 18% from Medicaid, 2% from the Civilian Health and Medical Program for the Uniformed Services ("CHAMPUS") and 7% from other government programs. Changes in the mix of CBHS's patients among the private-pay, Medicare and Medicaid categories, and among different types of private-pay sources, could significantly affect the profitability of CBHS's hospital operations. Moreover, there can be no assurance that payments under governmental and private third-party payor 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. GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM. In the 1995 and 1996 sessions of the United States Congress, the focus of healthcare legislation was 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. The Budget Act, which was signed into law by President Clinton in August 1997, reduces federal spending by an estimated $140 billion. The majority of the spending reduction will come from Medicare cuts of $115.0 billion. The Congressional Budget Office projected in July 1997 that $43.8 billion of the reductions would come from reduced payments to hospitals, $21.8 billion from increased enrollment in managed care plans and $11.7 billion from reduced payments to physicians and ambulatory care providers. The five-year savings in projected Medicare payments to physicians and hospitals would be achieved under the Budget Act by reduced fee-for-service reimbursement and by changes in managed care programs designed to increase enrollment of Medicare beneficiaries in managed care plans. The increase in Medicare enrollment in managed care plans would be achieved in part by allowing provider-sponsored organizations and preferred provider organizations to compete with Medicare HMOs for Medicare enrollees. The Medicaid-related provisions of the Budget Act are designed to achieve net federal Medicaid savings of $14.6 billion over the next five years and $56.4 billion over the next ten years. The Budget Act achieves federal Medicaid savings in three areas. First, two-thirds of the savings over the next ten years are attributable to limitations on federal matching payments to states for reimbursements to "disproportionate share" hospitals. The next largest source of federal savings is a provision allowing states to shift the cost of Medicaid deductibles and coinsurance requirements for low-income Medicaid beneficiaries from their Medicaid programs to physicians and other providers. Most of the remaining savings derive from the repeal of the "Boren Amendment" and other minimum payment guarantees for hospitals, nursing homes and community health centers that service Medicaid patients. CBHS management estimates that the Budget Act will reduce the amount of revenue and earnings that CBHS will receive for the treatment of Medicare and Medicaid patients. CBHS management estimates that such reductions will approximate $10.0 million in fiscal 1998, and due to the phase in effects of the bill, approximately $15.0 million in subsequent fiscal years. A number of states in which CBHS has operations have either adopted or are considering the adoption of healthcare reform proposals of general applicability or Medicaid reform proposals. Where adopted, these state reform laws have often not yet been fully implemented. The Company cannot predict the effect of these state healthcare reform proposals on CBHS's operations. The Company cannot predict the effect of other healthcare reform measures that may be adopted by Congress on the operations of CBHS and no assurance can be given that other federal healthcare reform measures will not have an adverse effect on CBHS. DEPENDENCE ON HEALTHCARE PROFESSIONALS. Physicians traditionally have been the source of a significant portion of the patients treated at CBHS's hospitals. Therefore, the success of CBHS's hospitals is dependent in part on the number and quality of the physicians on the medical staffs of the hospitals and their admission practices. A small number of physicians account for a significant portion of patient admissions at some of CBHS's hospitals. There can be no assurance that CBHS can retain its current 18 physicians on staff or that additional physician relationships will be developed in the future. Furthermore, hospital physicians generally are not employees of CBHS and, in general, CBHS does not have contractual arrangements with hospital physicians restricting the ability of such physicians to practice elsewhere. POTENTIAL GENERAL AND PROFESSIONAL LIABILITY. In recent years, physicians, hospitals, and other healthcare professionals and providers have become subject to an increasing number of lawsuits alleging medical malpractice and related legal theories. Many of these lawsuits involve large claims and substantial defense costs. CBHS maintains a general and hospital professional liability insurance policy with an unaffiliated insurer. In addition, CBHS' hospitals require all physicians on each hospital's medical staff to maintain professional liability coverage. Management believes that its coverage limits are adequate, however, there can be no assurance that a future claim or claims will not exceed the limits of these existing insurance policies or that a loss or losses for which insurance is unavailable will not have a material adverse effect on CBHS. GOVERNMENT REGULATION. The operation of psychiatric hospitals and other behavioral healthcare facilities and the provision of behavioral healthcare services are subject to extensive federal, state and local laws and regulations. These laws and regulations provide for periodic inspections or other reviews by state agencies, 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 psychiatric hospitals is also subject to substantial state regulation relating to involuntary admissions, confidentiality of patient medical information, patients' rights and federal regulation relating to confidentiality of medical records of substance abuse patients. CBHS is also subject to state certificate of need laws that regulate the construction of new hospitals and the expansion of existing hospital facilities and services. CBHS also is subject to federal and state laws that govern financial and other arrangements between healthcare providers. Such laws include the illegal remuneration provisions of the Social Security Act, the physician self-referral provisions of the Omnibus Budget Reconciliation Act of 1993 and state illegal remuneration and self-referral statutes and regulations that prohibit payments in exchange for referrals and referrals by physicians or other healthcare providers to persons or entities with which the physician or other healthcare provider has a financial relationship. 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 individuals and entities that engage in defined prohibited activities. The Department's exclusion authority was recently expanded under the Health Insurance Portability and Accounting Act of 1996 ("HIPAA") and the Budget Act, which added additional grounds for exclusion, established minimum exclusion periods for certain offenses and expanded the scope of the exclusion to include all federal healthcare programs. The Department also has the authority to impose civil monetary penalties for certain prohibited activities. HIPAA increased the amount of authorized penalties from $2,000 per item or service claimed to $10,000 per item or service claimed, and increased the assessment to which a person may be subject in lieu of damages from two times the amount claimed for each item or service to three times the amount claimed. Both HIPAA and the Budget Act expanded the Department's authority to impose civil monetary penalties by adding additional activities for which civil monetary penalties may be imposed. Provisions contained in HIPAA and the Budget Act also created new criminal healthcare fraud offenses that are applicable to both government programs and private health insurance plans and added new programs and increased funding for fraud and abuse detection and prevention. CHAMPUS regulations also authorize the exclusion of providers from the CHAMPUS program, if the provider has committed fraud or engaged in certain "abusive practices," which are 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. State regulatory agencies responsible for the administration and enforcement of the laws and regulations to which CBHS' operations are subject have broad discretionary powers. A regulatory agency or a court in a state in which CBHS operates could take a position under existing or future laws or regulations, or change its interpretation or enforcement practices with respect thereto, that such laws or regulations apply to CBHS differently than CBHS believes such laws and regulations apply or should be enforced. The resultant compliance with, or revocation of, or failure to obtain, required licences and governmental approvals could result in significant alteration to CBHS' business operations, delays in the expansion of CBHS' business and lost business opportunities, any of which, under certain circumstances, could have a material adverse effect on CBHS. 19 USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of the Shares. All of the proceeds from the sale of the Shares will be received by the Selling Stockholder. 20 SELLING STOCKHOLDER The following table sets forth certain information with respect to the ownership of the Shares as of March 31, 1998, and as adjusted to reflect the sale of the Shares offered hereby, by the Selling Stockholder. The Selling Stockholder has sole voting and investment power with respect to the Shares owned by him.
OWNERSHIP OF COMMON OWNERSHIP OF STOCK BEFORE THE COMMON STOCK AFTER OFFERING THE OFFERING (1) ----------------------- NUMBER OF ----------------------- NUMBER OF SHARES BEING NUMBER OF NAME SHARES PERCENT OFFERED SHARES PERCENT - ------------------------------------------------------- ---------- ----------- ------------ ---------- ----------- Paul G. Shoffeitt...................................... 37,825 .11 37,825 0 --
- ------------------------ (1) Assumes that all Shares being registered are sold. The Option Agreement provides that during November 1998 the Selling Stockholder has the right to cause the Company to purchase 15,000 shares of the common stock of Care Management Resources, Inc. ("CMR Shares") owned by him in exchange for the number of shares of Common Stock obtained by dividing $500,000 by the average closing price of a share of Common Stock on the ten trading days immediately prior to the second trading day preceding the date on which the Company will issue such stock to the Selling Stockholder (the "1998 Option"). During each of November 1999 and November 2000, the Selling Stockholder has the right to cause the Company to purchase 7,500 CMR Shares owned by him in exchange for the number of shares of Common Stock obtained by dividing $250,000 by the average closing price of a share of Common Stock on the ten trading days immediately prior to the second trading day preceding the date on which the Company will issue such stock to the Selling Stockholder (the "1999 Option" and "2000 Option," respectively, and together with the 1998 Option, the "Put Options"). Pursuant to the Option Agreement, the Company may elect to pay the Selling Stockholder cash consideration of $500,000 for the 1998 Option and $250,000 for each of the 1999 and 2000 Options in lieu of issuing shares of Common Stock to the Selling Stockholder upon the exercise of such options. Pursuant to the Option Agreement, the time period during which the Selling Stockholder may exercise each of the Put Options may be extended under certain circumstances. Pursuant to the Option Agreement, for a one year period following the expiration of each of the Put Options, the Company has the right to purchase from the Selling Stockholder the CMR Shares subject to the corresponding Put Options (the "1998 Call Option," "1999 Call Option" and "2000 Call Option," respectively, and collectively, the "Call Options"). The consideration to be paid by the Company upon exercise of the 1998 Call Option is the number of shares of Common Stock obtained by dividing $500,000 by the average closing price of a share of Common Stock on the ten trading days immediately prior to the second trading day preceding the date on which the Company will issue such shares to the Selling Stockholder. The consideration to be paid to the Selling Stockholder by the Company upon exercise of each of the 1999 and 2000 Call Options is the number of shares of Common Stock obtained by dividing $250,000 by the average closing price of a share of Common Stock on the ten trading days immediately prior to the second trading day preceding the date on which the Company will issue such stock to the Selling Stockholder. Pursuant to the Option Agreement, the time period during which the Company may exercise each of the Call Options may be extended under certain circumstances. The Company may elect to pay the Selling Stockholder cash consideration of $500,000 for the 1998 Call Option or $250,000 for each of the 1999 and 2000 Call Options in lieu of issuing shares of Common Stock to the Selling Stockholder upon its exercise of such options. At any time after January 1, 1998, the Company also may elect to purchase all of the CMR Shares held by the Selling Stockholder for a total cash purchase price of $1.0 million, plus any additional amount necessary to offset any adverse tax consequences to the Selling Stockholder as a result of the Company's election to purchase all of the CMR Shares in a single transaction prior to the time when the Selling Stockholder would have been entitled to exercise the Put Options (the "Cash Option"). 21 The Option Agreement obligates the Company to file the Registration Statement and to keep the Registration Statement effective until December 31, 2001, subject to certain extensions. The Option Agreement includes certain other customary provisions, including without limitation, certain restrictions on the Selling Stockholder's private sale of shares of Common Stock acquired pursuant to the terms of the Option Agreement and anti-dilution provisions. The Option Agreement also obligates the Selling Stockholder to not dispose of any of the CMR Shares owned by him, with certain exceptions. In connection with the execution of the Option Agreement, the Selling Stockholder executed an Irrevocable Proxy, dated December 4, 1997, granting the Company the right to vote the CMR Shares owned by the Selling Stockholder at any and all annual, regular and special meetings of CMR and in any actions by written consent of the shareholders of CMR, provided such meetings are held or actions by written consent are executed by November 1, 1998. The Selling Stockholder entered into an employment agreement, dated April 1, 1997, as amended (the "Employment Agreement"), with the Company, pursuant to which the Selling Stockholder agreed to serve as the Executive Vice President of Managed Care of the Company in a part-time capacity. The term of the Employment Agreement is from April 1, 1997 until December 31, 2001 and will automatically renew on January 1 of each year thereafter for successive one year terms until either party elects not to renew the agreement. The Selling Stockholder is compensated $40,000 per year for his employment under the Employment Agreement. In connection with amendments to the Employment Agreement, the Company and the Selling Stockholder entered into a Stock Option Waiver Agreement whereby the Selling Stockholder waived his rights to all stock option awards made to him under the Company's 1994 and 1996 Stock Option Plans. The Selling Stockholder also entered into a letter agreement, dated February 3, 1994, as amended (the "Letter Agreement"), with Green Spring pursuant to which the Selling Stockholder agreed to serve as a consultant to Green Spring under the title of Vice Chairman from the date thereof until April 1, 2000. Prior to entering into the Letter Agreement, the Selling Stockholder served as President and Chief Executive Officer of Green Spring and his consulting role pursuant to the Letter Agreement is to provide assistance to Green Spring with respect to matters with which he was involved during his employment with Green Spring and to provide other assistance to facilitate such endeavors. The Selling Stockholder is compensated $4,167 per month for his consulting services. The Selling Stockholder also serves as a director of Green Spring. PLAN OF DISTRIBUTION The sale or distribution of all or any portion of the Shares may be effected from time to time by the Selling Stockholder directly, indirectly through brokers or dealers or in a distribution by one or more underwriters on a firm commitment or best efforts basis, on the New York Stock Exchange, in the over- the-counter market, on any national securities exchange on which shares of the Common Stock are listed or traded, in privately negotiated transactions or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Certain transfer restrictions have been placed on the Shares offered hereby pursuant to the Option Agreement. See "Selling Stockholder." The methods by which the Shares may be sold or distributed include, without limitation, (i) a block trade (which may involve crosses) in which the broker or dealer so engaged will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction, (ii) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus, (iii) exchange distributions and/or secondary distributions in accordance with the rules of the New York Stock Exchange, (iv) ordinary brokerage transactions and transactions in which the broker solicits purchasers, and (v) privately negotiated transactions. The Selling Stockholder may from time to time deliver all or a portion of the Shares to cover a short sale or sales or upon the exercise, settlement or 22 closing of a call equivalent position or a put equivalent position. The Shares may be sold from time to time at varying prices determined at the time of sale or at negotiated prices. At the time a particular offer is made, a Prospectus Supplement, if required, will be distributed that sets forth the name or names of agents, broker-dealers or underwriters, any commissions and other terms constituting compensation and any other required information. In effecting sales, broker-dealers engaged by the Selling Stockholder and/or the purchasers of the Shares may arrange for other broker-dealers to participate. Broker-dealers will receive commissions, concessions or discounts from the Selling Stockholder and/or the purchasers of the Shares in amounts to be negotiated prior to the sale. Sales will be made only through broker-dealers registered as such in a subject jurisdiction or in transactions exempt from such registration. As of the date of this Prospectus, there are no selling arrangements between the Selling Stockholder and any broker or dealer. In offering the Shares, the Selling Stockholder and any brokers, dealers or agents who participate in a sale of the Shares by the Selling Stockholder may be considered "underwriters" within the meaning of Section 2(11) of the 1933 Act, and any profits realized by the Selling Stockholder and the compensation of any broker/dealers may be deemed to be underwriting discounts and commissions. As required by the Option Agreement, the Company has filed the Registration Statement, of which this Prospectus forms a part, with respect to the sale of the Shares. The Company has agreed to keep the Registration Statement effective on a continuous basis until December 31, 2001, subject to certain extensions. Shares not sold pursuant to the Registration Statement of which this Prospectus is a part may be subject to certain restrictions under the 1933 Act and could be sold, if at all, only pursuant to Rule 144 under the 1933 Act or another exemption from the registration requirements of the 1933 Act. In general, under Rule 144, a person (or persons whose Shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period a number of Shares which does not exceed the greater of one percent of the Company's outstanding Common Stock or the average weekly reported trading volume of the Company's Common Stock during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of Shares by a person who is not an affiliate of the Company and who has satisfied a two-year holding period without any volume limitation. Therefore, both during and after the effectiveness of the Registration Statement, sales of the Shares may be made by the Selling Stockholder pursuant to Rule 144. The Company will not receive any of the proceeds from the sale of the Shares by the Selling Stockholder. The Company will bear the costs of registering the Shares under the 1933 Act, including the registration fee under the 1933 Act, its legal and accounting fees and any printing fees. The Selling Stockholder will bear the cost of underwriting commissions and/or discounts, if any, and selling commissions. Underwriters, brokers, dealers or agents may be entitled, under agreements with the Company, to indemnification against and contribution toward certain civil liabilities, including liabilities under the 1933 Act in connection with the registration of the Shares. LEGAL MATTERS The legality of the Shares is being passed upon for the Selling Stockholder by King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303. EXPERTS The audited consolidated financial statements and schedule of the Company as of September 30, 1996 and 1997 and for each of the three years in the period ended September 30, 1997, included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997 and incorporated by 23 reference in this Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are incorporated by reference herein in reliance upon the authority of said firm as experts in giving said report. The consolidated financial statements of Merit as of September 30, 1996 and 1997 and for each of the three years in the period ended September 30, 1997, included in the Company's Current Report on Form 8-K/A, which was filed April 3, 1998 and incorporated by reference in this Prospectus and elsewhere in this Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report with respect thereto which report expresses an unqualified opinion and includes an explanatory paragraph which refers to the change in the method of accounting for deferred contract start-up costs related to new contracts or expansion of existing contracts and are incorporated by reference herein in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The audited consolidated financial statements and schedule of CBHS as of September 30, 1997 and for the 106 days ended September 30, 1997, included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997 and incorporated by reference in this Prospectus and elsewhere in this Registration Statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are incorporated by reference herein in reliance upon the authority of said firm as experts in giving said report. The audited consolidated financial statements of HAI as of December 31, 1995 and 1996 and for each of the years in the two year period ended December 31, 1996, included in the Company's Current Report on Form 8-K, which was filed on December 17, 1997, have been incorporated by reference herein and in this Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountant, incorporated by reference herein and upon the authority of said firm as experts in accounting and auditing. Future consolidated financial statements and schedules of Magellan Health Services, Inc. and subsidiaries and Charter Behavioral Health Systems, LLC and the reports thereon of Arthur Andersen LLP also will be incorporated by reference in this Registration Statement of which this Prospectus is a part in reliance upon the authority of said firm as experts in giving said reports to the extent said firm has audited those financial statements and consented to the use of their reports thereon. 24 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MAGELLAN OR THE SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 2 Incorporation of Certain Documents by Reference........................... 3 Summary................................................................... 4 Risk Factors.............................................................. 9 Use of Proceeds........................................................... 20 Selling Stockholder....................................................... 21 Plan of Distribution...................................................... 22 Legal Matters............................................................. 23 Experts................................................................... 23
37,825 SHARES MAGELLAN HEALTH SERVICES, INC. COMMON STOCK --------------------- PROSPECTUS --------------------- MAY , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission Registration Fee............................ $ .09 Legal Fees and Expenses........................................................ 10,000.00 Accounting Fees and Expenses................................................... 10,000.00 Printing....................................................................... 18,000.00 Miscellaneous.................................................................. 4,999.91 ---------- Total.......................................................................... $43,000.00 ---------- ----------
All of the above items, except for the registration fee, are estimates. Although the Selling Stockholder will not bear any of the expenses set forth above, the Selling Stockholder will bear the cost of underwriting commissions and/or discounts, if any, and selling commissions. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is a Delaware corporation. Section 145 of the Delaware General Corporation Law (the "DGCL") provides that a Delaware corporation has the power to indemnify its officers and directors in certain circumstances. Subsection (a) of Section 145 of the DGCL empowers a corporation to indemnify any director or officer, or former director or officer, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of his service as director, officer, employee or agent of the corporation, or his service, at the corporation's request, as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding provided that such director or officer acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, provided that such director or officer had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 empowers a corporation to indemnify any director or officer, or former director or officer, who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit provided that such director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such director or officer shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such director or officer is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) or (b) or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; provided that indemnification II-1 provided for by Section 145 or granted pursuant thereto shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and empowers the corporation to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Article VII of the By-laws of the Company provide in substance that the Company shall indemnify directors and officers against all liability and related expenses incurred in connection with the affairs of the Company if: (a), in the case of action not by or in the right of the Company, the director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and (with respect to a criminal proceeding) had no reasonable cause to believe his conduct was unlawful; and (b), in the case of actions by or in the right of the Company, the director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, provided that no indemnification shall be made for a claim as to which the director or officer is adjudged liable for negligence or misconduct unless (and only to the extent that) an appropriate court determines that, in view of all the circumstances, such person is fairly and reasonably entitled to indemnity. In addition, Section 102(b)(7) of the DGCL permits Delaware corporations to include a provision in their certificates of incorporation eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provisions shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for unlawful payment of dividends or other unlawful distributions, or (iv) for any transactions from which the director derived an improper personal benefit. Article Twelfth of the Company's Certificate of Incorporation sets forth such a provision. The Company maintains directors' and officers' liability insurance with various providers in the aggregate amount of $80 million. The foregoing summaries are necessarily subject to the complete text of the statutes, Certificate of Incorporation, Bylaws, insurance policies and agreements referred to above and are qualified in their entirety by reference thereto. For the undertaking with respect to indemnification, see Item 17. ITEM 16. EXHIBITS 2.1 Stock Purchase Agreement, dated February 6, 1997, between the Company, Care Management Resources, Inc. and John T. Lincoln. 2.2 Shareholders Agreement, dated February 6, 1997, between the Company, Care Management Resources, Inc., Paul G. Shoffeitt and John T. Lincoln. 2.3 Option Agreement, dated December 4, 1997, between the Company and Paul G. Shoffeitt. 2.4 Stock Option Waiver Agreement, dated December 4, 1997, between the Company and Paul G. Shoffeitt. 2.5 Letter Agreement, dated February 3, 1994, between Green Spring Health Services, Inc. and Paul G. Shoffeitt. 2.6 Amendment to Letter Agreement, dated December 4, 1997, between Green Spring Health Services, Inc. and Paul G. Shoffeitt. 2.7 Employment Agreement, dated April 1, 1997, between the Company and Paul G. Shoffeitt.
II-2 2.8 Amendment to Employment Agreement, dated December 4, 1997, between the Company and Paul G. Shoffeitt. 2.9 Irrevocable Proxy, dated December 4, 1997, by Paul G. Shoffeitt regarding shares of Care Management Resources, Inc. 2.10 Stock Purchase Agreement, dated August 5, 1997, between the Company and Aetna Insurance Company of Connecticut, which was filed as Exhibit 2(a) to the Company's Current Report on Form 8-K, which was filed on December 17, 1997, and is incorporated herein by reference. 2.11 Amendment to Stock Purchase Agreement, dated December 4, 1997, between the Company and Aetna Insurance Company of Connecticut, which was filed as Exhibit 2(c) to the Company's Current Report on Form 8-K, which was filed on December 17, 1997, and is incorporated herein by reference. 2.12 Asset Purchase Agreement, dated October 16, 1997, among the Company; Allied Health Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida Specialty Network, LTD; Surgical Associates of South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.; David Russin, M.D. and Lawrence Schimmel, M.D., which was filed as Exhibit 2(e) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997, and is incorporated herein by reference. 2.13 First Amendment to Asset Purchase Agreement, dated December 5, 1997, among the Company; Allied Health Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida Specialty Network, LTD; Surgical Associates of South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.; David Russin M.D.; and Lawrence Schimmel, M.D., which was filed as Exhibit 2(f) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997, and is incorporated herein by reference. 2.14 Agreement and Plan of Merger, dated October 24, 1997, among the Company, Merit Behavioral Care Corporation and MBC Merger Corporation which was filed as Exhibit 2(g) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997, and is incorporated herein by reference. 2.15 Purchase Agreement, dated March 3, 1998, between the Company, Charter Behavioral Corporation, Charter Behavioral Health Systems,Inc., Green Spring Health Services, Inc., Advantage Behavioral Systems, Inc. and Charter Behavioral Health Systems, LLC which was filed as Exhibit 2(f) to the Company's Registration Statement on Form S-4 (No. 333-49335) filed April 3, 1998, and is incorporated herein by reference. 2.16 Equity Purchase Agreement, dated March 3, 1998, between the Company, Charter Behavioral Health Systems, Inc. and Crescent Operating, Inc. which was filed as Exhibit 2(g) to the Company's Registration Statement on Form S-4 (No. 333-49335) filed April 3, 1998, and is incorporated herein by reference. 2.17 Support Agreement, dated March 3, 1998, between the Company and Crescent Operating, Inc. which was filed as Exhibit 2(h) to the Company's Registration Statement on Form S-4 (No. 333-49335) filed April 3, 1998, and is incorporated herein by reference. 2.18 Master Service Agreement, dated August 5, 1997, between the Company, Aetna U.S. Healthcare, Inc. and Human Affairs International, Incorporated, which was filed as Exhibit 2(b) to the Company's Current Report on Form 8-K, which was filed on December 17, 1997, and is incorporated herein by reference.
II-3 2.19 First Amendment to Master Services Agreement, dated December 4, 1997, between the Company, Aetna U.S. Healthcare, Inc. and Human Affairs International, Incorporated, which was filed as Exhibit 2(d) to the Company's Current Report on Form 8-K, which was filed on December 17, 1997, and is incorporated herein by reference. 2.20 Real Estate Purchase and Sale Agreement, dated January 29, 1997, between the Company and Crescent Real Estate Equities Limited Partnership, which was filed as Exhibit 2(a) to the Company's Current Report on Form 8-K which was filed on April 23, 1997, and is incorporated herein by reference. 2.21 Amendment No. 1, dated February 28, 1997, to the Real Estate Purchase and Sale Agreement, dated January 29, 1997, between the Company and Crescent Real Estate Equities Limited Partnership, which was filed as Exhibit 2(b) to the Company's Current Report on Form 8-K filed on April 23, 1997, and is incorporated herein by reference. 2.22 Amendment No. 2, dated May 29, 1997, to the Real Estate Purchase and Sale Agreement, dated January 29, 1997, between the Company and Crescent Real Estate Equities Limited Partnership, which was filed as Exhibit 2(c) to the Company's Current Report on Form 8-K filed on June 30, 1997, and is incorporated herein by reference. 2.23 Contribution Agreement, dated June 16, 1997, between the Company and Crescent Operating, Inc., which was filed as Exhibit 2(d) to the Company's Current Report on Form 8-K which was filed on June 30, 1997, and is incorporated herein by reference. 2.24 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. 2.25 First Amendment to Stockholders' Agreement, dated February 28, 1997, 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 10(af) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, and is incorporated herein by reference. 2.26 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. 4.1 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. 4.2 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. 4.3 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.
II-4 4.4 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. 4.5 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 (File No. 333-01217) filed on February 26, 1996, and is incorporated herein by reference. 5.1 Opinion of King & Spalding as to the legality of the Common Stock to be registered. 23.1 Consent of King & Spalding (included in Exhibit 5.1). 23.2 Consents of Arthur Andersen LLP. 23.3 Consent of Deloitte & Touche LLP. 23.4 Consent of KPMG Peat Marwick LLP. 24.1 Powers of Attorney (included on signature pages).
ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: To file, during any period in which offers or sales are being made of securities registered hereby, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the 1933 Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. Provided, however, that the undertakings set forth in paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Exchange Act, that are incorporated by reference in this Registration Statement. That, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-5 The undersigned registrant hereby undertakes that, for purposes of determining any liability under the 1933 Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling persons of the registrant in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on May 22, 1998. MAGELLAN HEALTH SERVICES, INC. By: /s/ CRAIG L. MCKNIGHT ----------------------------------------- Craig L. McKnight Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Craig L. McKnight, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ HENRY T. HARBIN - ------------------------------ President, Chief Executive May 22, 1998 Henry T. Harbin Officer and Director /s/ CRAIG L. MCKNIGHT Executive Vice President - ------------------------------ and Chief Financial May 22, 1998 Craig L. McKnight Officer /s/ JEFFREY T. HUDKINS Vice President and - ------------------------------ Controller May 22, 1998 Jeffrey T. Hudkins (Chief Accounting Officer) /s/ EDWIN M. BANKS - ------------------------------ Director May 22, 1998 Edwin M. Banks /s/ G. FRED DIBONA, JR. - ------------------------------ Director May 22, 1998 G. Fred DiBona, Jr. /s/ ANDRE C. DIMITRIADIS - ------------------------------ Director May 22, 1998 Andre C. Dimitriadis
II-7
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ A.D. FRAZIER, JR. - ------------------------------ Director May 22, 1998 A.D. Frazier, Jr. - ------------------------------ Director Raymond H. Kiefer - ------------------------------ Director Gerald L. McManis /s/ DANIEL S. MESSINA - ------------------------------ Director May 22, 1998 Daniel S. Messina /s/ ROBERT W. MILLER - ------------------------------ Chairman of the May 22, 1998 Robert W. Miller Board of Directors - ------------------------------ Director Darla D. Moore /s/ JEFFREY A. SONNENFELD - ------------------------------ Director May 22, 1998 Jeffrey A. Sonnenfeld
II-8 EX-2.1 2 EXHIBIT 2.1 Exhibit 2.1 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement"), is made this 6th day of February, 1997, by and between Magellan Health Services, Inc., a Delaware corporation ("Purchaser"), John T. Lincoln ("Shareholder") and Care Management Resources, Inc., a Florida corporation (the "Corporation"). W I T N E S S E T H: WHEREAS, Shareholder owns all of the issued and outstanding securities of the Corporation; WHEREAS, the parties hereto desire to enter into this Agreement pursuant to which Purchaser will purchase from Shareholder eighty-five percent (85%) of the issued and outstanding shares of capital stock of the Corporation (the "Shares"), all upon the terms and subject to the conditions set forth herein: NOW, THEREFORE, in consideration of the premises and the mutual promises, representations, warranties and covenants hereinafter set forth, the parties hereto agree as follows: 1. DEFINITIONS. As used herein, the following terms shall have the following meanings unless the context otherwise requires: 1.1. "Closing" shall mean the consummation of the transactions provided for in this Agreement, which shall occur in accordance with Section 5 hereof. 1.2. "Employment Agreement" shall mean the Employment Agreement substantially in the form attached hereto as Exhibit A. 1.3. "Intellectual Property" shall have the meaning set forth in Section 3.16 hereof. 1.4. "Noncompete Agreement" shall mean the Covenant Not to Compete to be entered into between Shareholder and the Corporation substantially in the form attached hereto as Exhibit B. 1.5. "Package" shall mean the comprehensive business package which will enable the Corporation to offer managed care services and products that will include care management and case management, as more specifically described in Exhibit C attached hereto. 1.6. "Shareholders' Agreement" shall mean the Shareholders' Agreement between Purchaser and Shareholder, substantially in the form attached hereto as Exhibit D. 2. COVENANTS AND UNDERTAKINGS. 2.1. Purchase and Sale of Shares. At the Closing, Shareholder shall sell, assign, transfer, convey and deliver the Shares to Purchaser, free and clear of all liens, claims, charges, security interests, and other encumbrances of any nature whatsoever. Such sale, assignment, transfer and conveyance shall be evidenced by the delivery to Purchaser of duly endorsed in blank share certificates or by instruments of transfer reasonably satisfactory in form and substance to Purchaser and its counsel. 2.2. Consideration. In consideration of the sale, assignment, transfer, conveyance and delivery of the Shares and in reliance upon the covenants, representations and warranties made herein by Shareholder and the Corporation, Purchaser shall pay to Shareholder a total amount equal to One Million Six Hundred Fifty Thousand Dollars ($1,650,000.00) in full payment for the Shares, which payment shall be made by wire transfer at Closing to an account designated by Shareholder. 2.3 Resignation. Shareholder agrees to cause to be delivered to Purchaser at the Closing the resignation of each of the directors and officers of the Corporation, except for Shareholder, who shall remain a director. 3. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER AND THE CORPORATION. Shareholder and the Corporation represent and warrant to Purchaser, its successors and assigns, as of the date hereof, as follows: 3.1. Organization, Standing and Foreign Qualification. The Corporation is a corporation duly organized, validly existing, and in good standing under the laws of Florida. The Corporation has the full power and authority to carry on its business in the places and as it is now being conducted and to own and lease the properties and assets which it now owns or leases. 3.2. Authority and Status. Shareholder and the Corporation have the capacity and authority to execute and deliver this Agreement, to perform hereunder and to consummate the transactions contemplated hereby without the necessity of any act or consent of any other person whomsoever. This Agreement and each and every agreement, document and instrument to be executed, delivered and performed by Shareholder and the Corporation in connection herewith constitute or will, when executed and delivered, constitute the valid and legally binding obligations of Shareholder and the Corporation, enforceable against Shareholder and the Corporation in accordance with their respective terms. Attached hereto as Schedule 3.2 are true, correct and complete copies of the Articles of Incorporation and Bylaws of the Corporation. 3.3 Capitalization The entire authorized capital stock of the Corporation consists of 500,000 shares of common stock, no par value, of which 400,000 shares are issued and outstanding. All of the shares of capital stock of the Corporation are owned by Shareholder, free and clear of all 2 liens, claims, charges and encumbrances of any nature whatsoever, and no other person or entity has any equitable or beneficial interest in the Corporation, except that prior to the closing, Shareholder may sell to Paul G. Shoffeitt up to seven and one half percent (7.5%) of the issued and outstanding shares of common stock of the Corporation (the "Option"). The Shares are validly authorized and issued, fully paid and non-assessable. Except for the Option, there are no outstanding options, warrants, calls, commitments, or plans by the Corporation to issue any additional shares of its capital stock, or to pay any dividends on its capital stock or to purchase, redeem, or retire any outstanding shares of its capital stock, nor are there outstanding any securities or obligations which are convertible into or exchangeable for any shares of capital stock of the Corporation. 3.4. Absence of Equity Investments. The Corporation does not, either directly or indirectly, own of record or beneficially any shares or other equity interests in any corporation, partnership, limited partnership, joint venture, trust or other business entity. 3.5. Liabilities and Obligations of the Corporation 3.5.1. Attached hereto as Schedule 3.5.1 is a true, correct and complete unaudited balance sheet of the Corporation as of January 31, 1997, and the Corporation's statement of cash flows as of January 31, 1996. Such balance sheet is complete, has been prepared in accordance with generally accepted accounting principles, consistently applied, and discloses all liabilities of the Corporation, whether absolute, contingent, accrued or otherwise, existing as of the date thereof except those which are of a nature not required to be reflected in financial statements prepared in accordance with generally accepted accounting principles and those which have been incurred in the ordinary course of business since January 31, 1997 and prior to Closing, all of which shall be discharged by the Corporation from funds of the Corporation held prior to Closing. Such statement of cash flows has been prepared in accordance with generally accepted accounting principles. All debts owed by the Corporation to Shareholder, whether or not shown on Schedule 3.5.1, have been discharged prior to the date hereof. 3.5.2. The Corporation is not in default with respect to any of its liabilities or obligations, all of which have been, or are being, paid and discharged as they become due. 3.6. Taxes. The Corporation is a subchapter S corporation within the meaning of the Internal Revenue Code of 1986, as amended, and has timely and accurately filed all federal and local tax returns and reports required to be filed by it, and Shareholder has timely paid all taxes owed in respect thereof. The Corporation agrees to authorize Shareholder to prepare, execute and file all federal, state and local tax returns to be filed by the Corporation for all periods prior to the Closing, regardless of whether such returns are prepared prior to or after the Closing. 3.7. Personal Property. Attached hereto as Schedule 3.7 is a list of all items of tangible personal property owned by the Corporation, and the Corporation has good title to all such property, free and clear of all liens, claims, charges and encumbrances of any nature whatsoever. 3 3.8. Real Property. The Corporation does not own, lease or have any interest, direct or indirect, in any real property. 3.9. Bank Accounts, Powers of Attorney. Set forth and described on Schedule 3.9 hereto is a complete list of all bank accounts (with account reflected as of the close of business on January 31, 1997) and all safe deposit boxes of the Corporation, all powers of attorney in connection with such accounts, and the names of all persons authorized to draw thereon or to have access thereto. The parties hereto agree that the cash and bank accounts of the Corporation (and its accounts receivables) may have zero balances as of the date hereof. Other than as set forth and described on Schedule 3.9, the Corporation has not granted any powers of attorney in favor of any person or entity. 3.10. Agreement Does Not Violate Other Instruments. The execution and delivery of this Agreement by Shareholder does not, and the consummation of the transactions contemplated hereby will not, violate any provision of the Articles of Incorporation, as amended, or Bylaws, as amended, of the Corporation or violate or constitute an occurrence of default under any provision of, or conflict with, or result in acceleration of any obligation under, or give rise to a right by any party to terminate its obligations under, any agreement, instrument, or any order, judgment, decree, or other arrangement to which Shareholder or the Corporation is a party or is bound or by which the assets or business of the Corporation are affected. 3.11. Litigation. There is no suit, action, proceeding, judgment, claim or investigation instituted by or against the Corporation; no suit, action, proceeding, judgment, claim or investigation has been threatened against the Corporation. There exists no basis or grounds for any suit, action, proceedings, judgment, claim or investigation against the Corporation. The foregoing sentence shall not be deemed a representation or warranty with respect to the quality or reliability of the manuals, guidelines, criteria, and protocols contained in the Package; however, Shareholder has no knowledge of any material defect or deficiency in such components of the Package. 3.12. Licenses and Permits; Compliance With Law. To the knowledge of Shareholder, the Corporation holds all licenses, certificates, permits, franchises and rights from all appropriate federal, state or other public authorities necessary for the conduct of its business. The parties hereto acknowledge that the Corporation shall have no UR (utilization review) licenses and that no applications for such licenses have been made. The Corporation is presently in compliance, and has at all times since its formation complied with, all applicable statutes, ordinances, rules, regulations and orders of any governmental authority. 3.13. Contracts, Etc. Schedule 3.13 hereto consists of a true and complete list of all written contracts and a summary of all oral agreements to which the Corporation is a party as of the date hereof. 3.14. Labor Matters. The Corporation has no employees other than Shareholder. Listed on Schedule 3.14 hereto is the present salary or rate of compensation for Shareholder. 4 3.15. Benefit Plans. The Corporation has no employee benefit plans or agreements except for those set forth in the Employment Agreement or set forth in the employment agreement between the Corporation and the Shareholder. 3.16. Intellectual Property. The Corporation has good and marketable title to all of the copyrights, patents, designs and other intellectual property used or proposed to be used in the business of the Corporation (all of the foregoing referred to herein as the "Intellectual Property"), in each case free and clear of any liens, claims, charges, encumbrances or rights of others of any nature whatsoever, and the Corporation has the sole ownership rights in said Intellectual Property, except that the Corporation has applied for trademark registration of the name and logo described on Schedule 3.16 and makes no warranty or representation with respect to the outcome of such application or the likelihood of the grant of any trademark protection with respect thereto. 3.17. Schedules and Exhibits. All Schedules and Exhibits attached hereto are true, correct and complete as of the date hereof. 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Shareholder, as of the date hereof, as follows: 4.1. Organization and Standing. Purchaser is a corporation duly organized, validly existing, and in good standing under the laws of Delaware. 4.2. Authority and Status. Purchaser has the full corporate power and authority to execute and deliver this Agreement, to perform hereunder, and to consummate the transactions contemplated hereby without the necessity of any act, approval or consent of any other person or entity whomsoever. The execution, delivery and performance by Purchaser of this Agreement and each and every agreement, document and instrument provided for herein have been duly authorized and approved by the Board of Directors of Purchaser. This Agreement, and each and every other agreement, document and instrument to be executed and delivered by Purchaser in connection herewith constitute or will, when executed and delivered, constitute the valid and binding obligation of Purchaser, enforceable against it in accordance with their respective terms. 4.3. No Violation. The execution and delivery by Purchaser of this Agreement and the consummation of the transactions contemplated hereby do not and will not (a) violate any provision of the charter or bylaws of Purchaser, (b) violate, conflict with or result in a breach of any agreement, instrument or understanding to which Purchaser is a party or to which any of its assets are subject or (c) violate any order, decree, judgment, statute, regulation, ordinance or other law or requirement to which the Purchaser or any of its parents, subsidiaries or affiliates are subject. 4.4. Consents and Approvals. No consent, approval, authorization, order, filing or registration by or with any person not a party to this Agreement or any governmental or quasi- 5 governmental or regulatory agency is required to be obtained by the Purchaser with regard to the execution of this Agreement or of any other agreement or instrument contemplated herein, including, without limitation, the Shareholders Agreement, the Noncompete Agreement or the Employment Agreement, or of the consummation of the transactions contemplated hereby or thereby. 4.5. Litigation. There is no litigation or proceeding pending or threatened against the Purchaser or any of its parents, subsidiaries or affiliates which would question or challenge the execution of this Agreement or any other agreement or instrument herein contemplated, including, without limitation, the Shareholders Agreement, the Noncompete Agreement and the Employment Agreement, or the consummation of the transaction contemplated hereby and thereby. 4.6. No Bankruptcy or Insolvency. No bankruptcy, insolvency, reorganization, rearrangement or similar action or proceeding, whether voluntary or involuntary, is pending, threatened or otherwise contemplated by or against Purchaser. 4.7. Broker and Finder Fees. Purchaser has not used any broker, finder or other agent in connection with this transaction. Purchaser agrees to indemnify Shareholder for any claims brought by any broker, finder or other agent claiming to have acted on behalf of Purchaser in connection with the transactions contemplated herein. 4.8. Due Diligence. Purchaser acknowledges that the Corporation was only recently incorporated and has virtually no financial or business history, has no customers or immediate sources of income and owns virtually no tangible assets except those described in the Package. Purchaser further acknowledges that, except as specifically set forth in this Agreement, neither Shareholder nor the Corporation nor any of their agents has made any representation or warranty to Purchaser regarding the Corporation, its business or assets or the prospects for its success. Purchaser acknowledges that it is buying the Shares for investment purposes only and not with a view toward resale. 4.9. Bylaws. The Corporation agrees that it shall maintain the indemnification provisions set forth in Article XI of the Bylaws of the Corporation, as set forth in Schedule 3.2, so long as either of John T. Lincoln or Paul G. Shoffeitt is an officer or director of the Corporation, and any amendment thereto after they cease to be shareholders shall not retroactively affect any right of any Shareholder thereunder. Notwithstanding the foregoing, the parties agree that the Corporation shall have no obligation to indemnify any officer or director for any act, omission or circumstance occurring or existing prior to the Closing, and Article XI of the Bylaws shall be amended immediately after Closing consistent with this sentence. 5. CLOSING. The Closing shall occur simultaneously with the execution hereof, in the offices of Dow, Lohnes & Albertson in Atlanta. At the Closing, each of the following transactions shall occur: 6 5.1.2. the resignation of each of the directors and officers of the Corporation described in Section 2.3; 5.1.3. certificate of status of the Corporation, as of the most recent practicable date, from the State of Florida; 5.1.4. the Noncompete Agreement executed by Shareholder and the Corporation; 5.1.5. the Employment Agreement executed by Shareholder and the Corporation; 5.1.6. the Shareholders' Agreement executed by Shareholder; 5.1.7. an opinion of counsel in substantially the form attached hereto as Exhibit E; 5.1.8. all books of account, contracts, files and other data and documents pertaining to the business and operations of the Corporation; and 5.1.9. such other evidence of the performance of all covenants and satisfaction of all conditions required of Shareholder and the Corporation by this Agreement, at or prior to the Closing, as Purchaser or its counsel may reasonably require. 5.2. Performance by Purchaser. Purchaser shall deliver to Shareholder the following: 5.2.1. cash, by certified check or wire transfer, in the amount of the purchase price as provided for in Section 2.2; 5.2.2. the Shareholders Agreement and the Noncompete Agreement executed by Purchaser; 5.2.3. the Employment Agreement executed by the Corporation; 5.2.4. such other evidence of the performance of all the covenants and satisfaction of all of the conditions required of Purchaser by this Agreement, at or prior to the Closing, as Shareholder or Shareholder's counsel may reasonably require; 5.2.5. within 15 days after Closing, certified copies of resolutions of the Board of Directors of Purchaser, reasonably acceptable to Shareholder's counsel, ratifying and approving the transactions contemplated hereby; 5.2.6. a written statement indicating that the Package is fully complete; and 5.2.7. an opinion of counsel in substantially the form shown in Exhibit F attached hereto. 7 5.2.5. within 15 days after Closing, certified copies of resolutions of the Board of Directors of Purchaser, reasonably acceptable to Shareholder's counsel, ratifying and approving the transactions contemplated hereby; 5.2.6. a written statement indicating that the Package is fully complete; and 5.2.7. an opinion of counsel in substantially the form shown in Exhibit F attached hereto. 6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION 6.1. Representations and Warranties. All representations, warranties and covenants contained in Sections 3 and 4 hereof shall be deemed continuing representations, warranties and covenants and shall survive the Closing for a period of eighteen (18) months. 6.2. Indemnification of Purchaser by Shareholder. Shareholder agrees to indemnify and hold harmless Purchaser against and with respect to: 6.2.1. For a period of eighteen (18) months after the Closing, any and all actual losses, liabilities or damages arising from or in connection with any untrue representation, breach of warranty or nonfulfillment of any covenant by Shareholder contained herein or in any certificate, document or instrument delivered by Shareholder to Purchaser hereunder; 6.2.2. For a period of three (3) years after the Closing Date, any and all actual losses, liabilities or damages resulting from the activities of Shareholder or the Corporation prior to the Closing, except that with respect to any tax issues, the indemnification provided in this Section 6.2 shall survive for the entire relevant statute of limitations period; and 6.2.3. Any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including reasonable legal fees and expenses, incident to any of the foregoing matters set forth in subsection 6.2.1 or 6.2.2 or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnity. Notwithstanding any other provision of this Agreement to the contrary, the Shareholder shall not have any liability under this Section 6.2 until the aggregate amount of all claims against the Shareholder hereunder exceed Forty Thousand Dollars ($40,000), and at such time as the aggregate amount of all claims exceeds such amount, then the Shareholder shall be liable for the full amount of all such claims, and not limited to the excess. 6.3. Indemnification of Shareholder by the Corporation. The Corporation agrees to indemnify and hold harmless Shareholder against and with respect to: 8 foregoing matters set forth in subsection 6.3.1 or 6.3.2 or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnity. 6.4. Investigation. Any investigation made at any time by or on behalf of any party hereto shall not diminish in any respect whatsoever such party's right to rely on the representations and warranties made by or on behalf of any other party herein or pursuant to this Agreement. 7. GENERAL PROVISIONS 7.1. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be delivered by hand or by overnight courier service, addressed as follows: 7.1.1. If to Shareholder: Mr. John T. Lincoln Care Management Resources, Inc. 1500 Atlantic Boulevard #308 Key West, Florida 33040 With a copy to: Alan M. Schwartz, Esq. 9861 Broken Land Parkway Suite 340 Columbia, Maryland 21046 9 7.1.2. If to the Corporation: Care Management Resources, Inc. c/o Magellan Health Services, Inc. 3414 Peachtree Road, N.E., Suite 1400 Atlanta, Georgia 30326 Attn: Cherie Fuzzell, Esq. 7.1.3. If to Purchaser: Magellan Health Services, Inc. 3414 Peachtree Road, N.E., Suite 1400 Atlanta, Georgia 30326 Attn: Cherie Fuzzell, Esq. 7.2. Further Assurances. Each party covenants that at any time, and from time to time after the Closing, it will execute such additional instruments and take such actions as may be reasonably requested by the other parties to confirm or perfect or otherwise to carry out the intent and purposes of this Agreement. 7.3. Waiver. Any failure on the part of any party hereto to comply with any of its obligations, agreements or conditions hereunder may be waived by any other party to whom such compliance is owed. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. 7.4. Expenses. All expenses incurred by the parties hereto in connection with or related to the authorization, preparation and execution of this Agreement and the Closing of the transactions contemplated hereby, including, without limitation of the generality of the foregoing, all fees and expenses of agents, representatives, counsel and accountants employed by any such party, shall be borne solely and entirely by the party which has incurred the same. 7.5. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and permitted assigns. 7.6. Headings. The section and other headings in this Agreement are inserted solely as a matter of convenience and for reference, and are not a part of this Agreement. 7.7. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto and supersedes and cancels any prior agreements, representations, warranties, or communications, whether oral, written or collateral, among the parties hereto relating to the 10 transactions contemplated hereby or the subject matter herein. This Agreement does not modify or supersede the Confidentiality Agreement dated December 10, 1996 between the parties hereto, a copy of which is attached hereto as Exhibit G , which agreement shall remain in full force and effect. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, except by an agreement in writing signed by the party against whom or which the enforcement of such change, waiver, discharge or termination is sought. 7.8. Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Georgia which apply to a contract executed and to be performed entirely within the State of Georgia, without regard to principles of conflicts of laws. 7.9. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.10. Pronouns. All pronouns used herein shall be deemed to refer to the masculine, feminine or neuter gender as the context requires. 7.11. Schedules and Exhibits Incorporated. All Schedules and Exhibits attached hereto are incorporated herein by reference, and all blanks in such Schedules and Exhibits, if any, will be filled in as required in order to consummate the transactions contemplated herein and in accordance with this Agreement. 7.12. Construction. The parties acknowledge and agree that this Agreement is the result of extensive negotiations between the parties and their respective counsel, and that this Agreement shall not be construed against either party by virtue of its role or its counsel's in drafting it. 7.13. Assignment. This Agreement may only be assigned with the prior, written consent of the other parties hereto. 7.14. Time of Essence. Time is of the essence with respect to all provisions of this Agreement. 11 IN WITNESS WHEREOF, each party hereto has executed this Agreement on the day and year first above written. SHAREHOLDER: Witness: /s/ Cherie Fuzzell, Esq. /s/ John T. Lincoln - -------------------------------- ------------------------------------- John T. Lincoln THE CORPORATION: Care Management Resources, Inc. Attest: By: /s/ John T. Lincoln /s/ Cherie Fuzzell, Esq. ------------------------------- - ----------------------------------- Name: John T. Lincoln Title: President PURCHASER: Magellan Health Services, Inc. Attest: By: /s/ E. Mac Crawford /s/ Cherie Fuzzell, Esq. -------------------------------- - ---------------------------------- Name: E. Mac Crawford Title: Chairman, CEO and President 12 EX-2.2 3 EX-2.2 Exhibit 2.2 SHAREHOLDERS AGREEMENT This Shareholders Agreement (this "Agreement") is entered into as of this 6th day of February, 1997, by and among Magellan Health Services, Inc., a Delaware corporation ("Magellan"), John T. Lincoln ("Lincoln"), Paul G. Shoffeitt ("Shoffeitt") (Magellan, Lincoln and Shoffeitt hereinafter referred to collectively as the "Shareholders" or individually as a "Shareholder") and Care Management Resources, Inc., a Florida corporation (the "Corporation"). W I T N E S S E T H: WHEREAS, the Corporation is authorized to issue 500,000 shares of common stock (the "Common Stock"); WHEREAS, pursuant to the transactions contemplated by that certain Stock Purchase Agreement dated of even date herewith between Lincoln, Shoffeitt and Magellan (the "Stock Purchase Agreement"), each of the Shareholders is or will be the owner of the number of shares of the Common Stock set forth on Exhibit A attached hereto (all or a portion of which are sometimes hereinafter referred to as the "Shares"); WHEREAS, the Shareholders desire to set forth certain rights and obligations among themselves and the Corporation; and WHEREAS, the parties hereto desire that certain limitations and restrictions should be placed upon the sale and transfer of the Shares; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby covenant and agree as follows: 1 Restrictive Legend. 1.1 So long as this Agreement shall remain in force, there shall be inscribed conspicuously upon each certificate representing the Shares, the following restrictive legend; The shares represented by this certificate are subject to a certain Shareholders Agreement effective as of February 6, 1997, and all amendments thereto, copies of which Agreement and all amendments thereto are on file at the principal office of the Corporation, and any sale, bequest, pledge, encumbrance, mortgage, transfer, gift, assignment, distribution or other disposition of this certificate in violation of said Agreement shall be invalid. The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws. They may not be sold, transferred, conveyed, pledged or hypothecated unless they have first been registered under said laws or unless the shares are exempt from registration under said laws. 1.2 All references in this Agreement to the Shares shall be deemed to include all subsequent acquisitions of shares of the capital stock of the Corporation by any of the Shareholders, including without limitation, the acquisition of shares of capital stock of the Corporation in connection with any stock dividend, stock split, recapitalization, combination or exchange of shares, merger, consolidation, acquisition of property or stock, separation, reorganization or the like, occurring after the date hereof. 2 Right of Co-Sale 2.1 In the event that Magellan desires to make a disposition of all or any of its Shares pursuant to the terms of a bona fide, written, third party offer (the "Offer"), Magellan shall deliver written notice of such intention to each of the other Shareholders (the "Other Shareholders"). If the Offer is for the purchase of Shares, Magellan shall not sell any Shares unless the party who has offered to purchase the Shares also extends the Offer in writing (the "Offer Notice") to each of the Other Shareholders to purchase a proportional amount of their Shares on the same terms and conditions and at the same price per share as specified in the Offer, including any remuneration or other benefit paid to Magellan or any of its parents or subsidiaries, or their respective affiliates or stockholders. In the case of the Offer being made for consideration other than cash, the amount of the consideration other than cash shall be deemed to be the fair market value of such consideration as determined mutually by the Other Shareholders and the Board of Directors of the Corporation acting in good faith, as evidenced by a resolution of the Board of Directors, and the Offer Notice will be deemed to include such cash price terms. 2.2 The Other Shareholders shall have 30 days from the date of receipt of the Offer Notice to exercise the right of co-sale by delivering to the Corporation and Magellan notice of such exercise. 2.3 Magellan shall have the right to compel the Other Shareholders to sell a proportional amount of their Shares pursuant to the terms and conditions contained in the Offer, provided that Magellan notifies each of the Other Shareholders of its election to compel such sale in its Offer Notice delivered to the Other Shareholders, and also provided that the offeror is not an affiliate, subsidiary or parent of the Corporation or Magellan. 2.4 No Closing shall occur with respect to Magellan unless a Closing will also occur with respect to the Other Shareholders (if any) who have elected to participate in the Offer; provided however that in the event the Closing with respect to the Other Shareholders fails to occur due to a reason other than the breach of the offeror's duty, the Closing with respect to Magellan shall be allowed to occur, notwithstanding the failure to close with respect to the Other Shareholder(s). The Closing of the transactions pursuant to an Offer shall occur contemporaneously with respect to Magellan's and the Other Shareholder's Shares and shall be in accordance with the provisions of Section 8 hereof. 2.5 Magellan agrees that in the event that it sells, transfers, conveys or disposes of all or any of its Shares in a transaction other than as described in Section 2.1 hereof, whether or not it is part of a reorganization, recapitalization or other similar event, each of the Other Shareholders shall be entitled to receive its proportionate share, based on its percentage of the issued and outstanding shares of capital stock of the Corporation held immediately prior to such event, of any remuneration, payment or other benefit paid to Magellan or to any of its parents, subsidiaries, affiliates or stockholders in connection with such transaction. 2 3 OTHER SHAREHOLDERS' PUT RIGHT. At any time after two years from the date hereof, each of the Other Shareholders shall have the right to sell to Magellan, and Magellan hereby agrees to purchase, all of the number of shares of Common Stock specified by the Other Shareholder(s) of either (or both) of the Other Shareholder's Shares (but in no event shall an Other Shareholder specify less than the greater of (i) all of his then issued and outstanding Shares or (ii) 2.5% of the total number of shares of Common Stock then issued and outstanding) at ninety percent (90%) of the fair market value of such Shares, as determined at the time of such put notice by an appraiser selected by mutual agreement of Magellan and the Other Shareholder(s) who elect to exercise such put option. If the Other Shareholder(s) and Magellan cannot agree upon an appraiser, each of the Other Shareholder(s) and Magellan shall select an appraiser (the "Individual Appraisers"), and the Individual Appraisers shall then mutually select an independent appraiser of national reputation (the "Independent Appraisers"). The Independent Appraiser shall then perform the appraisal, and its determination shall be binding and conclusive on the parties hereto. Each party shall pay all costs and fees of its Individual Appraiser, and the parties shall each pay one-half (or one-third, if both of the Other Shareholders are selling) of the costs of the Independent Appraiser; provided that the Other Shareholder shall pay the entire costs of the Independent Appraiser in connection with any exercise of his rights under this Section 3 following the first such exercise of his rights hereunder. The Other Shareholders may only exercise their rights under this Section 3 in writing and may do so no more than once in any twelve month period. In the event that one of the Other Shareholders exercises his rights under this Section 3, such Other Shareholder and Magellan shall schedule a Closing, in accordance with the provisions of Section 8 hereof, for the purchase and sale of such Shares to be held within sixty (60) days of the exercise of such notice. 4 RIGHT OF FIRST REFUSAL. No Shareholder (a "Selling Shareholder") shall dispose of any of its Shares without first delivering, in writing, to each of the other Shareholders (the "Non-Selling Shareholders") notice of such intended disposition (the "First Notice"), including a summary of the terms and conditions thereof (the "Section 4 Offer"). The Non-Selling Shareholders shall have the right and option, which shall be non-assignable, to purchase, at the price and on the terms and conditions provided in the Section 4 Offer, all (but not less than all) of the Shares to which the Section 4 Offer relates (the "Offered Shares"), in proportion to their then current holdings of shares of the Corporation, or in such other proportion as the Non-Selling Shareholders may agree. If either or both of the Non-Selling Shareholders desire to exercise their option, they shall deliver a notice (the "Second Notice") to that effect to the Selling Shareholder and to the other Non-Selling Shareholder within twenty (20) days after the receipt of the Section 4 Offer. In the event that one of the Non-Selling Shareholders gives a timely Second Notice and other Non-Selling Shareholder does not, then the electing Non-Selling Shareholder shall have the right to purchase the remaining Offered Shares by giving notice (the "THIRD NOTICE") to the first Non-Selling Shareholder and to the Selling Shareholder no later than ten (10) days after the expiration of the time by which Second Notices were to have been delivered, and if such Non-Selling Shareholder fails to timely send a Third Notice electing to purchase all of the Offered Shares, then the Non-Selling Shareholders shall be deemed to have elected not to purchase any of the Offered Shares. The Selling Shareholder and the Non-Selling Shareholders who elect to purchase the Offered Shares shall agree upon a date, not later than twenty (20) days from the service of the Second Notice (or Third Notice, if applicable), on which the Closing shall be held in accordance with Section 8 hereof. In the event that the Non-Selling Shareholders do not give timely notice of the exercise of their option to purchase all of the Offered Shares, then within ninety (90) days from the expiration or termination of such option period, the Offered Shares may be sold by the Selling Shareholder to a third party; provided 3 that the sale is made pursuant to the terms of the Section 4 Offer included in the First Notice and provided that such third party purchaser executes and delivers to each of the Non-Selling Shareholders executed counterparts of this agreement (substituting the name of such third party purchaser in place of each reference herein to the Selling Shareholder). If for any reason no such transfer occurs within such ninety (90) day period, the Offered Shares shall remain subject to this Agreement, and any subsequent disposition of the Shares must be made in accordance with the provisions hereof. 5 Maintenance of Pro Rate Share ----------------------------- 5.1 During the period commencing on the date hereof and terminating at such time, if ever, as Magellan and/or its majority owned subsidiaries have invested or loaned to the Corporation funds equal to Ten Million Dollars ($10,000,000) (the "Funding Period"), the Corporation shall not issue any equity securities which would reduce the percentage of the issued and outstanding capital stock of the Corporation held by either of the Other Shareholders below the percentage held immediately prior to such issuance, without the consent of each of the Other Shareholders, which may be granted or denied in their sole and absolute discretion; provided however, that the Corporation shall be permitted to issue at any time equity securities of any class to any third party customer of the Corporation in connection with a transaction pursuant to which the Corporation is acquiring substantial business and operating revenues from such customer. Nothing contained in this Section 5.1 or any other provision of this Agreement shall be construed to obligate Magellan to invest or loan to the Corporation any amount of funds, all such investments and loans being in the sole discretion of Magellan. 5.2 After the Funding Period, for as long as one of the Other Shareholders owns some or all of his Shares, such Other Shareholder shall have the right to purchase any or all of his pro rata share of any New Securities (as defined below) which the Corporation may propose to issue and sell, on the same terms and conditions under which the New Securities are to be offered to third parties. Such right shall be exercisable by written notice delivered within 45 days of receipt of written notice from the Corporation of the proposed issuance of New Securities, which notice shall include a detailed description of all facts and circumstances relating to such issuance. The Other shareholder's pro rata share, for purposes of this section, is the ratio of the number of Shares owned by such Other Shareholder immediately prior to the issuance of New Securities to the total number of issued and outstanding shares of Common stock, determined on a fully diluted basis, immediately prior to the issuance of the New Securities. 5.3 "New Securities" shall mean any capital stock of the Corporation, whether now authorized or not (including, but not limited to, shares of the Corporation's capital stock held in its treasury), and rights, options or warrants to purchase capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock, but shall not include any securities issued in connection with (i) any requirement that the Corporation issue securities for distribution to a third party customer from whom the Corporation is receiving or will immediately receive substantial business and operating revenues or (ii) any additional equity investment by a third party investor, if all parties hereto consent to such investment. 5.4 The rights granted pursuant to this Section 5 shall expire upon, and shall not be applicable to, the first sale of Common Stock of the Corporation to the public, which sale is effected 4 pursuant to an underwritten registration statement filed with, and declared effective by, the Securities and Exchange Commission. 5.5 The rights granted pursuant to this Section 5 shall not be construed as granting to any Shareholder preemptive rights with respect to the issuance of New Securities to employees of the Corporation pursuant to employee incentive stock options. 5.6 Any purchase of New Securities under this Section 5 shall be made in accordance with the provisions of Section 8 hereof. 5.7 In the event of a stock split, stock dividend, combination of shares, recapitalization, reorganization or other change in the capital structure of the Corporation, then the number and the kind of shares covered by this Agreement shall be appropriately adjusted to reflect such change in such manner as the Corporation may, in good faith, deem equitable to prevent dilution of the Shareholders. 6 Incidental Registration Rights ------------------------------ 6.1 If the Corporation at any time proposes to register any of its securities for sale for its own account or for the account of any other person, it shall give written notice (the "Corporation's Notice") to each of the Other Shareholders of its intention to do so at least fifteen (15) days prior to the filing of a registration statement with respect to such registration with the Securities and Exchange Commission (the "Commission"). If either (or both) of the Other Shareholders desires to exercise his registration rights hereunder with respect to his Shares, he may demand the registration of his Shares in connection with the Corporation's registration at no cost or expense to the Other Shareholder (including without limitation, for filing fees, attorney fees or any other items) be delivering to the Corporation, within thirty (30) business days after the delivery of the Corporation's Notice, written notice of such request (the "Shareholder's Notice") stating the number of Shares to be registered. The Corporation shall use its commercially reasonable best efforts to cause all Shares specified in the Shareholder's Notice to be registered under the Securities Act of 1933, as amended (the "Securities Act"), so as to permit the sale or other disposition by such Shareholder. 6.2 If the managing underwriter of such public offering advises the Corporation in writing that the inclusion in the offering of some or all of the Shares sought to be registered by the Other Shareholder(s) creates a significant risk that the price per share which the Corporation will derive from such offering will be adversely affected, or that the number of shares sought to be registered is too large a number to be reasonably sold, then Magellan and the Other Shareholders will proportionally decrease the number of their Shares to be included in such offering so that no more than the number of Shares as the managing underwriter advises can be sold without such adverse impact will be included. 6.3 The Corporation may, for any reason and without the consent of the Other Shareholders, determine not to proceed with any registration and abandon the proposed offering, whereupon the Corporation shall be relieved of any further obligations under the terms of this Section 6 to proceed with such registration or offering. 6.4 At any time more than 270 days following an offering of Common Stock of the Corporation, the Other Shareholders shall be entitled to cause the Corporation to file, by demand made 5 jointly or individually by the Other Shareholders (the "Shareholder Demand"), at no cost or expense to them (including without limitation, for filing fees, attorney fees or any other items), an additional registration statement with the Commission to cover all, but not less than all, of their unregistered Shares of the same class of Shares; provided however, that if a Shareholder Demand is made independently by one of the Other Shareholders and the second Other Shareholder elects not to join in the Shareholder Demand, such second Other Shareholder shall be barred from making a Shareholder Demand for a period of eighteen (18) months after the expiration of the effectiveness of the registration statement filed in connection with the earlier Shareholder Demand. 6.4.1 If all of the Shares sought to be registered under any Shareholder Demand can be lawfully sold immediately (i.e., without reduction in quantity due to volume restrictions) pursuant to Rule 144 or Rule 144A of the Securities Act, then the Corporation shall notify the Shareholder submitting such Shareholder Demand that Rule 144 or Rule 144A, as applicable, is available, in which event, the Corporation shall not be required to register such Shares. 6.4.2 The Other Shareholders shall not be entitled to make or participate in more than one Shareholder Demand, notwithstanding any subsequent acquisition by either of them of additional, unregistered Shares. 6.5 Pursuant to any registration subject to a Shareholder's Notice or Shareholder Demand, the Corporation shall use its commercially reasonable best efforts to register or qualify the shares covered by such registration statement under such state securities, blue sky or other applicable laws of such jurisdictions as each Shareholder with Shares to be covered by the registration shall reasonably request to enable such Shareholder to consummate the public sale or other disposition of the Shares owned by such Shareholder; provided that the Corporation shall not be required in connection therewith or as an election thereto to qualify to do business or to file a general consent to service in any such jurisdiction. Notwithstanding the foregoing, such Shareholder shall have the right to require the Corporation to complete a registration in any or all of the states listed on Schedule 6.5 regardless of whether the Corporation is required thereby to file a qualification to do business or a consent to service of process. 6.6 Upon receipt of a written notice from the Corporation to suspend sales to permit the Corporation to correct or update a registration statement or prospectus, each of the Shareholders shall not (until further notice, not more than ninety (90) days following the date of the notice to suspend sales) effect any sales of his Shares. 6.7 Following the effective date of a registration statement filed by the Corporation hereunder, the Corporation shall prepare and file with the Commission such amendments and supplements to such registration statement and the prospectuses used in connection therewith as may be necessary to keep such registration statement effective and current, until the earlier of (i) the sale of all securities offered for sale pursuant to the registration statement, or (ii) one hundred eighty (180) days after the effective date of the registration statement. 6.8 Immediately after the date on which a registration statement filed by the Corporation under the Securities Act becomes effective, the Corporation shall use its commercially reasonable best efforts to file with the Commission all reports, financial statements and other documents and to take all other actions necessary to make available current public information with regard to the Corporation to 6 enable the Shareholders to make sales of Shares pursuant to Rule 144 and/or Rule 144A of the Commission under the Securities Act. 6.9 If the Corporation files a registration statement in connection with an underwritten public offering, each of the Shareholders, if so requested by the managing underwriter of such public offering, shall not effect any sale or distribution of any Shares (except pursuant to such registration statement) of the capital stock of the Company, whether now owned or hereafter acquired, during the period commencing with the effective date of such registration statement and ending on the close of business on the one hundred and eightieth (180th) day thereafter or such time as the registration statement is withdrawn, whichever is earlier. 6.10 Notwithstanding anything to the contrary contained herein, any Other Shareholder who elects to have his Shares registered for sale hereunder, shall bear all fees and expenses of any counsel engaged by such Other Shareholder in connection therewith, and all underwriting discounts, brokerage fees or commissions relating to the sale of his Shares. 7 Successor Entity and Subsequent Shareholders -------------------------------------------- 7.1 If the Corporation is merged into or consolidated with another corporation or other legal entity and the Corporation is not the surviving entity, (i) in the event Magellan shall be the majority shareholder in the new entity, Magellan shall make appropriate provision for the preservation of the rights and obligations of the parties hereto under this Agreement and (ii) in the event Magellan shall be a minority shareholder in the new entity, Magellan shall make appropriate provisions such that the Other Shareholders, if any, who will also become minority shareholders of the new entity will have the same rights and obligations as Magellan with respect to their status as minority shareholders in the new entity. 7.2 In the event that a third party shall become a shareholder of the Corporation prior to any public offering of any securities of the Corporation pursuant to a transfer under Sections 2 or 4 hereof (a "Subsequent Shareholder"), such Subsequent Shareholder shall be bound by the terms and obligations of this Agreement to the same extent as an Other Shareholder. 7.3 In the event that an officer, director or employee of Magellan or of any of its subsidiaries shall become a shareholder of the Corporation and shall have additional or differing shareholder rights (and obligations directly related to those rights) from those set forth herein, the Other Shareholders, upon their written consent (such consent to be as to the entire set of rights and obligations and not only as to selected rights and obligations), shall be deemed to also have such additional or differing shareholder rights (and obligations directly related to those rights); provided however, that nothing in this Section 7.3 shall apply to the purchase price paid by any such shareholder for his or her Shares. 8 CLOSING. At any closing held to transfer Shares pursuant to the provisions of any sections of this Agreement (a "Closing"): 8.1 The location shall be at the offices of the Corporation unless otherwise agreed to by all of the parties to the Closing. 8.2 The selling party or parties shall deliver to the purchasing party certificates representing the Shares to be sold, duly endorsed in blank or accompanied by stock powers endorsed in blank. In the 7 event that the selling party is an Other Shareholder, and that such Other Shareholder will, after such sale hold less than two percent of the outstanding Shares, such Other Shareholder shall also deliver to the Corporation, to the extent applicable, his resignation as a director, officer and/or employee of the Corporation as well as that of any individual who holds such a position with the Corporation due to his or her affiliation with the selling party. 8.3 The purchasing party shall pay to the selling party the applicable purchase price at the closing by delivery of a cashier's check for the full amount of the purchase price. 8.4 Except as otherwise provided herein, each party shall pay its own expenses incidental to any transaction provided for in this Agreement. 9 Election of Directors. Magellan agrees to vote its shares to cause John T. Lincoln to be a member of the Board of Directors of the Corporation until the later to occur of (i) he no longer holds at least a two percent (2%) interest in the outstanding Common Stock of the Corporation or (ii) the termination of his employment with the Corporation. 10 Financial Information. So long as an Other Shareholder holds any Shares, the Corporation shall deliver to such Other Shareholder (i) such periodic financial information regarding the Corporation as is routinely prepared by or on behalf of the Corporation, and (ii) notice of all material transactions involving the Corporation; provided however, that such notice may, at the Corporation's discretion, be delivered after the consummation of such material transaction or transactions. 11 Competing Activities. 11.1 Magellan convenants and agrees, that so long as Magellan holds any Shares, Magellan and each entity which controls, is controlled by, or is under common control with Magellan, will refrain from, directly or indirectly entering into, conducting, carrying on or engaging in the Business (as defined in Exhibit B attached hereto) anywhere in the United States. 11.2 Each of the Other Shareholders convenants and agrees, that, subject to the terms of any current or subsequent agreements, including, but not limited to the Employment Agreement, and any other employment agreements or noncompete agreements entered into by an Other Shareholder and Magellan or the Corporation, (i) so long as an Other Shareholder shall be either a director, officer, employee or consultant of the Corporation, such Other Shareholder shall refrain from directly or indirectly entering into, conducting, carrying on or engaging in the Business anywhere in the United States and (ii) so long as an Other Shareholder owns any Shares, such Other Shareholder shall refrain from obtaining or having any equity interest in any entity which is directly or indirectly entering into, conducting, carrying on or engaging in the Business anywhere in the United States, except for the ownership of less than 2% of the shares of any company, the shares of which are traded on any national securities exchange or are quoted on NASDAQ. 11.3 For purposes of this Agreement, the words "directly or indirectly" shall include participating in any entity or enterprise as an owner, partner, limited partner, joint venturer, stockholder or in any other capacity, including without limitation, as principal or agent, or through any person, subsidiary or employee acting as nominee, agent or otherwise. 8 11.4 Notwithstanding anything to the contrary contained herein, the Business shall not include (i) any consulting business related to behavioral health care, or (ii) the business conducted by Public Solutions, Inc., which consists of providing or managing behavioral health care services pursuant to contracts with federal, state and local governments and governmental agencies, providing health and human services, including behavioral healthcare services, to the mentally retarded, the developmentally disabled, the elderly, persons under the control or supervision of criminal/juvenile justice systems and other designated populations. 12 Representations and Warranties of Magellan. Magellan represents and warrants to Shareholder, as of the date hereof, as follows: 12.1 Magellan is a corporation duly organized, validly existing, and in good standing under the laws of Delaware. 12.2 Magellan has the full corporate power and authority to execute and deliver this Agreement, to perform hereunder, and to consummate the transactions contemplated hereby without the necessity of any act, approval or consent of any other person or entity whomsoever. The execution, delivery and performance by Magellan of this Agreement and each and every agreement, document and instrument provided for herein have been duly authorized and approved by the Board of Directors of Magellan. This Agreement, and each and every other agreement, document and instrument to be executed and delivered by Magellan in connection herewith constitute or will, when executed and delivered, constitute the valid and binding obligation of Magellan, enforceable against it in accordance with their respective terms. 12.3 The execution and delivery by Magellan of this Agreement and the consummation of the transactions contemplated hereby do not and will not (a) violate any provision of the charter or bylaws of Magellan, (b) violate, conflict with or result in a breach of any agreement, instrument or understanding to which Magellan is a party or to which any of its assets are subject or (c) violate any order, decree, judgment, statute, regulation, ordinance or other law or requirement to which the Magellan or any of its parents, subsidiaries or affiliates are subject. 12.4 No consent, approval, authorization, order, filing or registration by or with any person not a party to this Agreement or any governmental or quasi-governmental or regulatory agency is required to be obtained by Magellan with regard to the execution of this Agreement or of any other agreement or instrument contemplated herein or of the consummation of the transactions contemplated hereby or thereby. 13 Non-Exclusive Remedy. The enforcement by any party hereto of its rights and remedies pursuant to this Agreement shall not be construed as a waiver of any other rights or available remedies which it may possess in law or equity absent this Agreement. 14 Equitable Relief. Each of the Shareholders acknowledges and agrees that a breach by it of any of the provisions contained in this Agreement will cause the Corporation and the other Shareholders irreparable injury and damage. By reason thereof, each of the Shareholders agrees that each party hereto shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise and 9 without the posting of any bond, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of this Agreement; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. 15. Severability; Independence of Covenants. In the event that any one or more of the provisions of this Agreement or any word, phrase, clause, sentence or other portion thereof shall be deemed to be illegal or unenforceable for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Agreement, as modified, legal and enforceable to the fullest extent permitted under applicable laws. Each of the parties hereto does hereby expressly authorize any court of competent jurisdiction to enforce any such provision or portion thereof or to modify any such provision or portion thereof in order that any such provision or portion thereof shall be enforced by such court to the fullest extent permitted by applicable laws. 16. Notices. All notices, demands, requests, consents and approvals which may be or are required to be given or made pursuant to any provisions of this Agreement shall be given or made in writing and shall be served personally, by overnight courier or mailed by prepaid certified or registered mail, return receipt requested, to the address of each of the parties hereto as set forth below: If to the Corporation: Mr. Steve Davis Care Management Resources, Inc. 3414 Peachtree Road, N.E., Suite 1400 Atlanta, Georgia 30326 If to Lincoln: Mr. John T. Lincoln 1500 Atlantic Boulevard #308 Key West, Florida 33040 With a copy to: Alan M. Schwartz, Esq. 9861 Broken Land Parkway Suite 340 Columbia, Maryland 21046 If to Shoffeitt: Paul G. Shoffeitt 2640 Jennings Chapel Road Woodbine, Maryland 21797 10 With a copy to: Alan M. Schwartz, Esq. 9861 Broken Land Parkway Suite 340 Columbia, Maryland 21046 If to Magellan: Magellan Health Services, Inc. 3414 Peachtree Road, N.E., Suite 1400 Atlanta, Georgia 30326 Attn: Cherie Fuzzell, Esq. or such other address as any of the parties may from time to time advise the other parties hereto by notice in writing. The date of receipt of any such notice, demand or request shall be deemed to be the date of giving of such notice, demand or request if delivered personally, or if mailed or couriered as aforesaid, the date such notice was delivered to the recipient. 17 Successors and Assigns. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto and their respective administrators, legal representatives, personal representatives, nominees, heirs, successors and permitted assigns and transferees. 18 Counterparts. This Agreement may be executed in multiple counterpart copies, each of which will be considered an original and all of which constitute one and the same instrument, binding on all parties hereto, even though all the parties are not signatory to the same counterpart. 19 Assignment. The Shareholders may only assign this Agreement with the prior, written consent of the other parties hereto. 20 No Waiver. The failure of any party hereto to enforce the terms of this Agreement on one or more occasions shall not act to waive any of such party's rights with respect to any subsequent breach of this Agreement by any other party. 21 Amendments. This Agreement may not be amended except in a writing duly executed by each of the parties hereto. 22 Construction. The parties acknowledge and agree that this Agreement is the result of extensive negotiations between the parties and their respective counsel, and that this Agreement shall not be construed against either party by virtue of its role or its counsel's role in the drafting hereof. 23 Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Georgia which apply to a contract executed and to be performed entirely within the State of Georgia, without regard to principles of conflicts of laws. 11 24 Headings. The headings in this Agreement are provided for convenience of reference only and are not to be deemed a part of this Agreement. 25 Conflicts With By-Laws. In the event of a conflict between the provisions of this Agreement and the By-laws of the Corporation, the provisions of this Agreement shall govern the conflicting By-law provision. 26 Termination. This Agreement shall remain in effect until terminated by the mutual written agreement of all the parties hereto; provided however, that in the event that any Shareholder ceases to hold any Shares, this Agreement shall terminate with respect to such Shareholder. 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. LINCOLN: Witness: /s/ Illegible /s/ John T. Lincoln - ----------------------------- ---------------------------------------- John T. Lincoln SHOFFEITT: Witness: /s/ Illegible /s/ Paul G. Shoffeitt - ----------------------------- ---------------------------------------- Paul G. Shoffeitt MAGELLAN: Magellan Health Services, Inc. Attest: By: /s/ E.M. Crawford ------------------------------------- Name: E. Mac Crawford ----------------------------------- /s/ Illegible Title: Chairman, CEO and President - ----------------------------- ---------------------------------- CORPORATION: Care Management Resources, Inc. By: /s/ John T. Lincoln ------------------------------------ Attest: Name: John T. Lincoln /s/ Illegible --------------------------------- - ----------------------------- Title: President --------------------------------- 13 EXHIBIT A LIST OF SHAREHOLDERS' SHARES Party Number of Shares ----- ---------------- Magellan Health Services, Inc. 340,000 John T. Lincoln 30,000 Paul G. Shoffeitt 30,000 14 Schedule 6.5 Registration Territory California, Florida, Georgia, Illinois, Indiana, Maine, New Jersey, New York, Pennsylvania, Rhode Island and Texas. 15 EXHIBIT B --------- DEFINITION OF BUSINESS The term "Business" shall mean the business of providing specialty managed health care services in the areas of cardiology, ophthalmology, diabetes, asthma, oncology and other medical sub-specialty areas, including related case or care management, administrative services, utilization management, quality management, certification or pre-admission or pre-treatment certification, assessment and referral, staff clinical services, provider network services and preferred/exclusive provider organization services. Notwithstanding the foregoing, the term "Business" shall not include telemedicine services (e.g., member retention, member/patient satisfaction, compliance monitoring, physician scheduling and nurse triage), whether relating to the specialty managed care services provided by the Corporation otherwise. Notwithstanding the foregoing, it is anticipated that the Corporation and such subsidiary offering telemedicine services will offer their respective services in a "bundled" fashion to their respective customers on such basis as may be mutually agreed by the Corporation and such subsidiary. 16 EX-2.3 4 EX-2.3 Exhibit 2.3 OPTION AGREEMENT This Option Agreement (this "Agreement") is entered into as of this 4th day of December, 1997, by and among Magellan Health Services, Inc., a Delaware corporation ("Magellan") and Paul G. Shoffeitt ("Shoffeitt"). WITNESSETH: WHEREAS, Magellan, John T. Lincoln ("Lincoln"), Shoffeitt and Care Management Resources, Inc. (the "Corporation") entered into that certain Shareholders Agreement dated February 6, 1997 (the "Shareholders Agreement"); WHEREAS, Magellan and Shoffeitt desire to set forth additional agreements as between themselves, which shall not affect or impair the rights of Lincoln or the Corporation under the Shareholders Agreement; WHEREAS, Shoffeitt is the owner of 30,000 shares of the Corporation's stock, which shares represent all of his ownership of shares of the Corporation, and which represent 7.5% of the total number of issued and outstanding shares of stock of the Corporation on the date hereof; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby covenant and agree as follows: 1 SHOFFEITT'S PUT RIGHT 1.1 At any time during the period commencing on November 1,1998 and ending at the close of business on November 30, 1998, Shoffeitt will have the right to sell Magellan, and Magellan will agree to purchase, Fifteen Thousand (15,000) shares of the Corporation's stock, in consideration for the issuance of a number of shares of Magellan's common stock which shall be determined by dividing Five Hundred Thousand Dollars ($500,000) by the average closing price per share of Magellan's common stock on the ten Trading Days immediately prior to the second Trading Day preceding the date on which such stock is to be issued; provided however, that the number of shares of Magellan's common stock to be issued shall be adjusted appropriately to account for stock splits, stock dividends, recapitalizations or other events affecting the number of issued and outstanding shares of Magellan's common stock, which occur after ten Trading Days on which such average closing price per share is based. 1.2 At any time during the period commencing on November 1, 1999 and ending at the close of business on November 30, 1999, Shoffeitt will have the right to sell to Magellan, and Magellan will agree to purchase, Seven Thousand Five Hundred (7,500) shares of the Corporation's stock, in consideration for the issuance of a number of shares of Magellan's common stock which shall be determined by dividing Two Hundred Fifty Thousand Dollars ($250,000) by the average closing price per share of Magellan's common stock on the ten Trading Days immediately prior to the second Trading Day preceding the date on which such stock is to be issued; provided however, that the number of shares of Magellan's common stock to be issued shall be adjusted appropriately to account for stock splits, stock dividends, recapitalizations or other events affecting the number of issued and outstanding shares of Magellan's common stock, which occur after the ten Trading Days on which such average closing price per share is based. 1.3 At any time during the period commencing on November 1, 2000 and ending at the close of business on November 30, 2000, Shoffeitt will have the right to sell to Magellan and Magellan will agree to purchase, Seven Thousand Five Hundred (7,500) shares of the Corporation's stock, in consideration for the issuance of a number of shares of Magellan's common stock which shall be determined by dividing Two Hundred Fifty Thousand Dollars ($250,000) by the average closing price per share of Magellan's common stock on the ten Trading Days immediately prior to the second Trading Day preceding the date on which such stock is to be issued; provided however, that the number of shares of Magellan's common stock to be issued shall be adjusted appropriately to account for stock splits, stock dividends, recapitalizations or other events affecting the number of issued and outstanding shares of Magellan's common stock, which occur after the ten Trading Days on which such average closing price per share is based. 1.4 Notwithstanding anything to the contrary contained herein, the period within which the options described in Sections 1.1, 1.2 and 1.3 may be exercised may, at Shoffeitt's election, be delayed and extended as provided in Section 4 below, but in such event, Shoffeitt shall continue to be entitled to exercise the rights set forth in this Section 1. 1.5 Notwithstanding any other provision of this Agreement to the contrary, no merger, reorganization, reverse stock split, recapitalization, consolidation or any other event (a "Reorganization"), shall in any way reduce or diminish the number of shares of Magellan's stock which Shoffeitt is entitled to receive upon the exercise of his options under this Section 1 or upon the exercise of Magellan's call option under Section 5, or the amount of the cash consideration which is payable to Shoffeitt if Magellan elects to pay cash to Shoffeitt under Section 1.6 or Section 5, or otherwise reduce or impair any other rights which Shoffeitt has under this Agreement. Notwithstanding any such Reorganization, Shoffeitt shall be entitled to exercise all of his rights under this Agreement, including without limitation, the option to sell and transfer to Magellan (in which event Magellan shall be obligated to purchase) his original shares of the Corporation or such substitute securities as he may then hold as a result of the Reorganization ("Substitute Securities"), in the same manner as he is entitled to sell to Magellan his shares of the Corporation under this Section 1, so long as the number of Substitute Securities being sold by Shoffeitt to Magellan at any one time represents 50% (in the case of the exercise of options under Section 1.1), or 25% (in the case of the exercise of options under Section 1.2 or 1.3) of his total holdings of Substitute Securities (calculated immediately after such Reorganization). For example, if Shoffeitt were exercising his option under Section 1.1 and immediately prior to such exercise, he held a total of 3.45 shares of Substitute Securities, he would sell 50% of his 3.45 Substitute Securities to Magellan under Section 1.1. Without limiting the generality of the foregoing, Shoffeitt specifically acknowledges and agrees that the parties anticipate that the Corporation will be merged with and into Allied Specialty Care Services, Inc., a Florida corporation, and that in the event such merger is consummated as anticipated, his ownership interest in the surviving entity will be approximately .63%, but the parties 2 agree that such reduced percentage to be held by Shoffeitt shall have no impact whatsoever on the amount of consideration to be paid (in Magellan stock or cash) upon the exercise of Shoffeitt's options under this Section 1 or upon the exercise of Magellan's options under Section 5. The parties hereto agree that all references in this Agreement to shares of the Corporation held by Shoffeitt shall be deemed to include Substitute Securities resulting from any Reorganization. 1.6 Notwithstanding any other provision of this Agreement to the contrary, Magellan may, in its sole discretion, elect to pay cash to Shoffeitt in the amount referenced in Section 1.1, 1.2 or 1.3, as applicable, in lieu of the issuance of shares of Magellan's common stock under such applicable Section, as consideration for the payment of the Corporation's shares being sold to Magellan pursuant to such applicable Section. 2 Trading Day Defined. A "Trading Day" is defined as a day on which Magellan's common stock (i) is not suspended from trading on the New York Stock Exchange (or such other exchange as may then be the primary market for the trading of Magellan stock) at the close of business; and (ii) has traded at least once on such exchange. 3 Registration and Resales. 3.1 No later than January 15, 1998, Magellan shall file a registration statement under the Securities Act of 1933 (the "Securities Act") with respect to the issuance and resale of the shares of Magellan's common stock upon the exercise of the options set forth in Section 1 hereof, and shall use its reasonable efforts to cause such registration statement to become effective by March 1, 1998. Magellan shall use reasonable efforts to maintain the effectiveness of such registration statement for a period commencing on the initial effective date of such registration statement and terminating on the later of (i) December 31, 2001, or (ii) one year following the issuance of shares pursuant to the option set forth in Section 1.3 if such issuance occurs later than December 31, 2000 due to the delay in the exercise of such options pursuant to Section 4.2 hereof. Shoffeitt agrees to provide to Magellan such information regarding himself as Magellan may from time to time reasonably request in writing, and as required by the Securities Act, and he agrees to immediately notify Magellan of any change in such information. Shoffeitt agrees to enter into such agreements as are customary in connection with the registration of shares for resale, including without limitation, underwriting agreements and powers of attorney in customary form, substance and scope, and to take such other actions as Magellan or the underwriters, if any, may reasonably request in order to expedite or facilitate the resale of the registered shares. 3.2 During any period in which the registration statement filed pursuant to Section 3.1 is effective, Magellan shall have the right, upon giving notice to Shoffeitt, to require Shoffeitt not to sell any such shares pursuant to such registration statement for a period of time which Magellan deems reasonably necessary (which time shall be specified in such notice but in no event longer than a period of 90 days), if (i) Magellan is engaged in an offering of shares of Magellan's common stock by Magellan for its own account or is engaged in or proposes to engage in discussions or negotiations with respect to, any merger, acquisition, other form of business combination, divestiture, tender offer, financing or other transaction, or there is any other event or state of facts 3 relating to Magellan which is material to Magellan (any such transaction, event or state of facts referred to herein as a "Material Activity"), and (ii) such Material Activity has not been publicly announced and would, in the opinion of counsel for Magellan, require disclosure so as to permit the registered shares to be sold in compliance with applicable law. 3.3 Shoffeitt acknowledges and agrees that the offer and sale of all shares of Magellan's common stock received upon exercise of the options contained herein shall be subject to Magellan's Stock Trading Policy dated August 1, 1997, as it may be amended from time to time (the "Stock Trading Policy"), to the extent that such Stock Trading Policy is then applicable to Shoffeitt, and (ii) by applicable federal and state securities laws. In addition, Shoffeitt hereby agrees that in the event he exercises any such options, he shall not sell more than Ten Thousand (10,000) shares of Magellan's common stock on any single Trading Day (such figure to be adjusted appropriately to account for stock splits, stock dividends, recapitalizations or other events affecting the number of issued and outstanding shares). 3.4 All expenses incident to the registration of the shares of Magellan's common stock pursuant to the provisions of this Section 3, including without limitation, all registration and filing fees, fees and expenses of compliance with securities laws, printing and engraving expenses, messenger and delivery expenses and fees and disbursements of counsel for Magellan and all independent certified public accountants, underwriters (excluding underwriter discounts and any selling commissions) and any persons retained by Magellan (all such expenses referred to herein as "Registration Expenses"), will be paid by Magellan; provided that all expenses incurred by Shoffeitt to retain any counsel, accountant or other advisor (if any), will not be deemed Registration Expenses and will be paid by Shoffeitt. The underwriting discounts or commissions and any selling commissions together with any stock transfer or similar taxes attributable to sales by Shoffeitt of the shares of Magellan's common stock, will be paid by Shoffeitt. 4 Exercise of Put Options 4.1 If Shoffeitt desires to exercise his put options hereunder, he shall give written notice to Magellan during the period in which the option may be exercised, and such options may only be exercised as to all of the shares of the Corporation's stock which he is entitled to put to Magellan at any one time. 4.2 Upon receipt of notice from Shoffeitt of the exercise of his option hereunder, Magellan shall notify Shoffeitt if (i) Shoffeitt is then deemed to be a Designated Individual under the Stock Trading Policy, and if so, whether there is any circumstance or condition then existing that would cause Shoffeitt's ability to sell all of the shares of Magellan's common stock which Shoffeitt would receive upon the exercise of such option, during a then-current Window Period (as defined in the Stock Trading Policy) or during the next scheduled Window Period, to be suspended or cancelled altogether, or (ii) the registration statement contemplated by Section 3.1 is not then effective. In the event that Magellan notifies Shoffeitt of such anticipated suspension or cancellation of a Window Period, or of the non-effective status of such registration statement, then Shoffeitt shall have the right to notify Magellan of his election to delay the exercise of such option (i) until the then-current Window Period is re-opened (provided that any such Window Period remains open for not less than twenty (20) consecutive days after 4 Magellan provides written notice to Shoffeitt, and Magellan hereby agrees to provide written notice of any such re-opening), or the next scheduled Window Period is opened, as applicable (and such option shall not expire until the closing of such Window Period), or (ii) in the case of a delay due to a non-effective registration statement, until such registration statement is effective. 5 Magellan's Call Option. At any time during the period commencing upon the expiration of any of the options set forth in Section 1.1, 1.2 or 1.3, and ending at the close of business one year after the commencement of such call option hereunder (except in the case of an extension of the exercise period as set forth below), Magellan shall have the right to acquire from Shoffeitt, and Shoffeitt shall be obligated to sell to Magellan following written notice of the exercise of such option, the number of shares of the Corporation's stock to which the expired put option relates; provided however, that Lincoln shall be afforded the opportunity to purchase, in accordance with the terms of the Shareholders Agreement, his pro rata share of Shoffeitt's shares to be acquired by Magellan. In consideration for such shares, Magellan shall issue to Shoffeitt a number of shares of Magellan's common stock determined by dividing the dollar value specified in Section 1.1, 1.2 or 1.3, as applicable, by the average closing price per share of Magellan's common stock on the ten Trading Days immediately prior to the second Trading Day preceding the date on which such stock is to be issued; provided however, that the number of shares of Magellan's common stock to be issued shall be adjusted appropriately to account for stock splits, stock dividends, recapitalizations or other events affecting the number of issued and outstanding shares of Magellan's common stock, which occur after the ten Trading Days on which such average closing price per share is based. Notwithstanding the foregoing, Magellan shall not be entitled to exercise any option under this Section 5 unless there is at the time of exercise an open Window Period which will remain open for at least 20 consecutive days after the exercise of such option. In the event that there would not be an open Window Period for a period of at least 20 consecutive days after the exercise of the option, then the period in which Magellan may exercise its option hereunder shall be automatically extended until either a Window Period is open for at least 20 consecutive days, or until one year after Magellan notifies Shoffeitt that he is no longer subject to Magellan's Stock Trading Policy. Notwithstanding any other provision of this Section 5 to the contrary, Magellan may, in its sole discretion, elect to pay cash to Shoffeitt in the amount referenced in Section 1.1, 1.2 or 1.3, as applicable, in lieu of the issuance of the number of shares of Magellan's common stock specified under such applicable Section, as consideration for the payment of the Corporation's shares being sold to Magellan upon the exercise of Magellan's option hereunder. In addition, notwithstanding anything to the contrary contained herein, Magellan may elect, by delivering ten (10) days' prior written notice at any time after January 1, 1998, to acquire all of the shares of the Corporation held by Shoffeitt for a total cash purchase price of One Million Dollars ($1,000,000) plus such additional amount, if any, necessary to offset, on an after-tax basis, any adverse tax consequences which may be suffered by Shoffeitt as a result of the exercise of such option prior to the time when Shoffeitt would have been entitled to exercise his options under Section 1, with such cash purchase price payable at the Closing for the purchase of such shares. In the event that Magellan exercises such option, Lincoln shall be afforded the opportunity to purchase, in accordance with the terms of the Shareholders Agreement, his pro rata share of Shoffeitt's shares to be acquired by Magellan. 6 Closing. In the event that Shoffeitt exercises his rights under Section 1, or Magellan exercises its rights under Section 5 as to shares of the Corporation's stock held by Shoffeitt, Magellan shall schedule a Closing for the purchase and sale of such shares of the Corporation's stock to be held as soon as practicable considering that Shoffeitt may desire to immediately sell the shares of Magellan stock to 5 be received at the Closing, and in no event more than 30 days after the delivery of such exercise notice, or at Shoffeitt's election made by delivering written notice of such election to Magellan, on a day which is within the first ten (10) days of the next open Window Period. At any closing held to transfer shares of the Corporation's stock pursuant to the provisions of Section 1 or 5 of this Agreement (a "Closing"); 6.1 The location shall be at the offices of the Corporation unless otherwise agreed to by all of the parties to the Closing. 6.2 Shoffeitt shall deliver to Magellan (or its assignee) the certificates representing the shares of the Corporation's stock to be sold, duly endorsed in blank or accompanied by stock powers endorsed in blank. 6.3 Magellan shall deliver to Shoffeitt at the Closing, stock certificates representing the number of shares of Magellan's common stock required to be issued under Section 1.1, 1.2 or 1.3, as applicable, in payment for such stock of the Corporation being sold. 6.4 Except as otherwise provided herein, each party shall pay its own expenses incidental to any transaction provided for in this Agreement. 7 No Transfer Prior to Expiration of Option. Shoffeitt hereby agrees that during the period commencing on the date hereof and continuing until one year after the expiration of all of the options granted to Shoffeitt hereunder, Shoffeitt shall not sell, transfer, assign, pledge, encumber or otherwise dispose of any of the shares of the Corporation held by Shoffeitt, other than a transfer to Magellan in a Closing pursuant to Section 6 above (and to Lincoln to the extent he elects to exercise his right of first refusal under Section 4 of the Shareholders Agreement), and any sale, transfer, assignment, pledge, encumbrance or other disposition prior to such date shall be void and of no effect. Notwithstanding anything to the contrary contained herein, Shoffeitt shall have no obligation under this Section 7 in the event that Magellan breaches any material obligation to Shoffeitt hereunder if such breach is not cured within 30 days of receipt of written notice of such breach from Shoffeitt. 8 Waiver of Duties 8.1 Shoffeitt hereby agrees that neither Magellan nor the Corporation, nor the officers or directors of Magellan or the Corporation, shall have any fiduciary duty, quasi-fiduciary duty or any other express or implied duty, at law or in equity (in their capacity as officers, directors, majority shareholder or otherwise), to the Corporation or Shoffeitt as shareholders, officers, directors, or employees of the Corporation. Accordingly, Magellan and its affiliates shall be free to engage in any business or activity which Magellan may desire, in its sole discretion, without regard to whether such business or activity is competitive with the business of the Corporation, and without providing any opportunity to Shoffeitt or the Corporation to participate in any such activity or business, and without any compensation to Shoffeitt or the Corporation. Shoffeitt further acknowledges that subject to agreement by Lincoln, Magellan shall be free to cause the Corporation to transfer or license the right to use any and all of the assets of the Corporation to any other subsidiary of Magellan for no consideration or for nominal consideration, as Magellan deems in the best interest of Magellan, in its sole discretion. Notwithstanding the foregoing, Magellan hereby 6 agrees that it shall not cause or permit the Corporation to be dissolved prior to the expiration of the options granted herein or to take any action which adversely affects any of Shoffeitt's rights under this Agreement, it being understood and agreed that notwithstanding any sale, dissolution, cessation of business, or Reorganization, all of Shoffeitt's rights hereunder, including the put options set forth in Section 1, are absolute, nonvoidable and vested immediately upon the execution and delivery hereof by each of the parties. Following the expiration or termination of the options granted herein, Magellan shall be free to cause the dissolution of the Corporation in accordance with the Florida Business Corporation Act, and Shoffeitt acknowedges that he is unlikely to receive any distributions in connection with any such dissolution after appropriate reserves are established for the Corporation's known and contingent liabilites. The parties further agree that the rights of Shoffeitt under this Agreement shall not be increased, diminished or otherwise affected by any transaction entered into by the Corporation, by any increase or decrease in the net worth of the Corporation, or by the insolvency or bankruptcy of the Corporation. 8.2 In consideration of the rights granted to Shoffeitt herein, Shoffeitt hereby releases and forever discharges Magellan and the Corporation from any and all obligations and liabilities under the Shareholders Agreement, including without limitation, all obligations and liabilities arising under the provisions of Sections 2, 3, 4, 5, 6, 7, 11.1 and 12 of the Shareholders Agreement. In addition, Shoffeitt hereby agrees that in the event that Magellan desires to purchase all or any of the shares of the Corporation from Lincoln, Shoffeitt shall have no right to exercise any right of first refusal with respect thereto, notwithstanding the provisions of Section 4 of the Shareholders Agreement. However, Shoffeitt and Magellan acknowledge and agree that Lincoln continues to have a right of first refusal with respect to the sale of Shoffeitt's shares of the Corporation, and in the event that Shoffeitt desires to exercise his option under Section 1.1., 1.2 or 1.3 hereof. Shoffeitt shall give written notice of such intent to Lincoln at the same time as Shoffeitt gives notice to Magellan of his intent to exercise such option, and each of Shoffeitt and Magellan acknowledge and agree that in the event that Lincoln desires to exercise his right of first refusal under Section 4 of the Shareholders Agreement with respect to Lincoln's pro rata share of the shares of the Corporation to be sold by Shoffeitt, then each of Magellan and Shoffeitt shall comply with the provisions of Section 4 of the Shareholders Agreement with respect thereto, and in such event, both the number of shares of the Corporation's stock to be sold to Magellan hereunder, and the number of shares of Magellan's common stock to be issued to Shoffeitt by Magellan, shall each be reduced accordingly. Shoffeitt further agrees that in the event that Magellan presents Shoffeitt with an amendment to the Shareholders Agreement which incorporates the provisions of this Agreement and imposes no additional duties, obligations, costs or expenses on Shoffeitt, does not adversely affect any of his rights under this Agreement, and which includes Lincoln as a party, Shoffeitt shall execute such agreement and deliver same to Magellan within 10 days of presentment of such amendment. 9 Representations and Warranties of Magellan. Magellan represents and warrants to Shoffeitt, as of the date hereof, as follows: 9.1 Magellan is a corporation duly organized, validly existing, and in good standing under the laws of Delaware. 7 9.2 Magellan has the full corporate power and authority to execute and deliver this Agreement, to perform hereunder, and to consummate the transactions contemplated hereby without the necessity of any act, approval or consent of any other person, entity or governmental authority. This Agreement, and each and every other agreement, document and instrument to be executed and delivered by Magellan in connection herewith, constitute or will, when executed and delivered, constitute the valid and binding obligation of Magellan, enforceable against it in accordance with their respective terms. 9.3 The execution and delivery by Magellan of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) violate any provision of the charter or bylaws of Magellan, (ii) violate, conflict with or result in a breach of any agreement, instrument or understanding to which Magellan or the Corporation is a party or to which any of its assets are subject or (iii) violate any order, decree, judgment, statute, regulation, ordinance or other law or requirement to which Magellan or any of its parents, subsidiaries or affiliates are subject. 9.4 No consent, approval, authorization, order, filing or registration by or with any person not a party to this Agreement or any governmental or quasi-governmental or regulatory agency is required to be obtained by Magellan or the Corporation with regard to the execution of this Agreement or of any other agreement or instrument contemplated herein or of the consummation of the transactions contemplated hereby or thereby. 10 Representations and Warranties of Shoffeitt. Shoffeitt represents and warrants to Magellan, as of the date hereof, as follows: 10.1 Shoffeitt has the full capacity to execute and deliver this Agreement, to perform hereunder, and to consummate the transactions contemplated hereby without the necessity of any act, approval or consent of any other person or entity whomsoever. This Agreement, and each and every other agreement, document and instrument to be executed and delivered by Shoffeitt in connection herewith constitute or will, when executed and delivered, constitute the valid and binding obligation of Shoffeitt, enforceable against him in accordance with their respective terms. 10.2 The execution and delivery by Shoffeitt of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) violate, conflict with or result in a breach of any agreement, instrument or understanding to which Shoffeitt is a party, or (ii) violate any order, decree, judgment, statute, regulation, ordinance or other law or requirement to which Shoffeitt is subject. 10.3 Shoffeitt has been represented by legal counsel in the negotiation of this Agreement, and has reviewed this Agreement with counsel and fully understands each of the provisions contained herein. 11 Notices. All notices, demands, requests, consents and approvals which may be or are required to be given or made pursuant to any provisions of this Agreement shall be given or made in writing and shall be served personally, by overnight courier or mailed by prepaid certified or 8 registered mail, return receipt requested, to the address of each of the parties hereto as set forth below: If to Shoffeitt: Mr. Paul G. Shoffeitt 2640 Jennings Chapel Road Woodbine, Maryland 21797 With a copy to: Alan M. Schwartz, Esq. 9861 Broken Land Parkway Suite 340 Columbia, Maryland 21046 If to Magellan: Magellan Health Services, Inc. 3414 Peachtree Road, N.E., Suite 1400 Atlanta, Georgia 30326 Attn: Cherie Fuzzell with a copy to: J. Eric Dahlgren, Esq. One Ravinia Drive Suite 1600 Atlanta, Georgia 30346 or such other address as any of the parties may from time to time advise the other parties hereto by notice in writing. The date of receipt of any such notice, demand or request shall be deemed to be the date of giving of such notice, demand or request if delivered personally, or if mailed or couriered as aforesaid, the date such notice was delivered to the recipient. 12 Non-Exclusive Remedy. The enforcement by any party hereto of its rights and remedies pursuant to this Agreement shall not be construed as an election of remedies or a waiver of any other rights or available remedies which it may possess in law or equity absent this Agreement. The failure of any party hereto to enforce the terms of this Agreement on one or more occasions shall not act to waive any of such party's rights with respect to any subsequent breach of this Agreement by any other party. 13 Equitable Relief. Each of the parties hereto hereby acknowledges and agrees that a breach by such party of any of the provisions contained in this Agreement will cause the other party irreparable 9 injury and damage. By reason thereof, each party hereby agrees that the other party shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise and without the posting of any bond, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of this Agreement; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. 14 Severability; Independence of Covenants. In the event that any one or more of the provisions of this Agreement or any word, phrase, clause, sentence or other portion thereof shall be deemed to be illegal or unenforceable for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Agreement, as modified, legal and enforceable to the fullest extent permitted under applicable laws without destroying the purpose and intent of this Agreement. Each of the parties hereto does hereby expressly authorize any court of competent jurisdiction to enforce any such provision or portion thereof or to modify any such provision or portion thereof in order that any such provision or portion thereof shall be enforced by such court to the fullest extent permitted by applicable laws. 15 Counterparts. This Agreement may be executed in multiple counterpart copies, each of which will be considered an original and all of which constitute one and the same instrument, binding on all parties hereto, even though all the parties are not signatory to the same counterpart. 16 Assignment. Shoffeitt acknowledges and agrees that he may not assign, pledge or otherwise dispose of any of his rights under this Agreement without the prior written consent of Magellan, which may be granted or denied in its sole discretion; provided however, that in the event of the death of Shoffeitt, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective administrators, legal representatives, personal representatives and heirs of Shoffeitt. Magellan acknowledges and agrees that it may not assign, delegate or otherwise dispose of any of its duties or obligations under this Agreement. 17 Amendments. This Agreement may not be amended except in a writing duly executed by each of the parties hereto. 18 Construction. The parties acknowledge and agree that this Agreement is the result of extensive negotiations between the parties and their respective counsel, and that this Agreement shall not be construed against either party by virtue of its role or its counsel's role in the drafting hereto. 19 Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Georgia which apply to a contract executed and to be performed entirely within the State of Georgia, without regard to principles of conflicts of laws. 20 Headings. The headings in this Agreement are provided for convenience of reference only and are not to be deemed a part of this Agreement. 21 Conflicts With By-Laws. In the event of a conflict between the provisions of this Agreement and the By-laws of the Corporation, the provisions of this Agreement shall govern the conflicting By-law provision. 10 22 Attorneys' Fees. In the event of any dispute or litigation between Magellan (and/or any of its affiliates) and Shoffeitt arising from or in connection with this Agreement or with respect to the subject matter of the Mutual Release, the prevailing party shall be entitled to recover from the other party all reasonable costs and expenses incurred in connection therewith, including without limitation, reasonable attorneys' fees. 23 Entire Agreement. This Agreement, together with the Mutual Release entered into as of the date hereof by and between Magellan, the Corporation and Shoffeitt, constitutes the entire agreement among the parties hereto and supersedes and cancels any prior agreements, representations, warranties, or communications, whether oral, written or collateral, among the parties hereto relating to the transactions contemplated hereby or the subject matter herein. The parties hereto acknowledge that notwithstanding anything to the contrary contained herein, this Agreement shall not operate or be construed in any manner to affect or modify any of Lincoln's rights under the Shareholders Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. SHOFFEITT: Witness: [illegible] /s/ Paul G. Shoffeitt - ------------------------------ ------------------------------------- Paul G. Shoffeitt MAGELLAN: Magellan Health Services, Inc. Attest: By: Craig L. McKnight (SEAL) ------------------------------------- Name: Craig McKnight ------------------------------ Title: Executive Vice President, [illegible] Finance & Accounting (CFO) - ------------------------------ ------------------------------ 12 EX-2.4 5 EX-2.4 Exhibit 2.4 STOCK OPTION WAIVER AGREEMENT THIS STOCK OPTION WAIVER AGREEMENT (the "Agreement"), effective as of December 4, 1997, by and between MAGELLAN HEALTH SERVICES, INC., a Delaware corporation (the "Company"), and PAUL G. SHOFFEITT ("Executive"). WITNESSETH: ---------- WHEREAS, the Company previously granted to Executive stock option awards (the "Awards") under the Magellan Health Services, Inc. In 1994 Stock Option Plan and the Magellan Health Services, Inc. 1996 Stock Option Plan (collectively, the "Plans"), and, pursuant to the Awards, Executive was granted the right to purchase an aggregate number of 45,000 shares of the common stock of the Company (the "Stock"); WHEREAS, Executive has requested that the Company renegotiate certain terms of his employment agreement, dated as of April 1, 1997 (the "Employment Agreement"), to result in a reduction in his required workload to take into account his current medical situation, to extend the term thereof, to entitle Executive to compensation in the event of early termination due to his disability and to make other modifications to the Employment Agreement; and WHEREAS, in consideration of the willingness of the Company to renegotiate Executive's Employment Agreement, the Company and Executive now desire to negotiate an agreement pursuant to which Executive shall waive and extinguish all rights to purchase the Stock under the Awards in accordance with the terms of this Agreement. NOW, THEREFORE, the Company and Executive agree, for the consideration set forth herein, the sufficiency of which hereby is acknowledged, as follows: 1. Waiver. Effective as of the date hereof, Executive permanently and ------ unconditionally waives all rights he possesses under the Awards, whether or not his rights under the Awards currently are vested. Executive agrees that the Company, upon execution of this Agreement, shall be under no obligation to issue shares of Stock to Executive under the Awards. This Agreement shall have no application to any other rights or benefits of Executive, including without limitation, those under the PER Plan of Green Spring Health Services, Inc. or the Company's Capital Accumulation Account. 2. Miscellaneous. ------------- (a) This Agreement shall be construed under the laws of the State of Georgia without reference to the principals of conflicts of laws thereof. (b) This Agreement is binding upon the heirs, executors and administrators of Executive and on the successors and assigns of the Company. (c) This Agreement may be modified only in writing, signed by both parties hereto. (d) If any provision of this Agreement is invalid or unenforceable, it shall not affect the other provisions, and this Agreement shall remain in effect as though the invalid or unenforceable provisions were omitted. Upon a court determination that any term or other provision is invalid or unenforceable, the court shall modify such provision so that it is enforceable to the extent permitted by applicable law. IN WITNESS WHEREOF, each of the parties, agreeing to be bound hereby, adopts this Agreement, effective as set forth herein, by executing, or causing their authorized representative to execute, this Agreement below. SHOEFFEITT Witness: /s/ Bill [illegible] /s/ Paul G. Shoffeitt - ---------------------- --------------------------- Paul G. Shoffeitt MAGELLAN: Magellan Health Services, Inc. Attest: By: /s/ Craig McKnight (SEAL) ------------------------------------ Name: Craig McKnight ---------------------------------- /s/ [illegible] Title: Executive Vice President, Finance - ----------------------- --------------------------------- and accounting (CFO) 2 EX-2.5 6 EX-2.5 Exhibit 2.5 February 3, 1994 Mr. Paul G. Shoffeitt 2640 Jennings Chapel Road Woodbine, Maryland 21797 Dear Paul: This letter agreement ("Agreement") is in response to your recent proposal to the Board of Directors of Green Spring Health Services, Inc. ("Green Spring") to alter your role at Green Spring from an employee position as the President and Chief Executive Officer of Green Spring (and of Green Spring's subsidiary, Green Spring Mental Health Services of New Jersey, Inc. ("GSNJ")) to a consultant position to the Board of Directors and management of Green Spring, GSNJ and any other existing subsidiaries or divisions of Green Spring (sometimes collectively referred to as, the "Company"). More specifically, you have requested that the Company agree to an arrangement under which you devote less than full time to the business and affairs of the Company and modify the restrictive covenants (including, but not limited to, non-competition and non-solicitation covenants) contained in the Employment Agreement dated as of April 28, 1993 between you and the Company (the "Employment Agreement"), in order that you may pursue additional personal opportunities. Subject to the provisions of Section 15, this Agreement shall supersede the Employment Agreement and terminate the duties and obligations of both parties under the Employment Agreement. The Board of Directors of the Company is willing to accept your decision and agrees that it would be mutually beneficial for you to continue your relationship with the Company as a consultant, subject to the terms and conditions regarding your continuing relationship with the Company set forth in this letter. Your transition from an employee, as well as the President and Chief Executive Officer of the Company, to a consultant position with the Company is subject to the following terms and conditions: 1. POSITION: Effective as of February 3, 1994, you will assume a consulting position with the Company (the "Consultancy"), with the title "Vice Chairman" and only with such powers and duties as from time to time may be assigned to you by Dr. Paul G. Shoffeitt February 3, 1994 Page 2 the Chairman or the Board of Directors of Green Spring in accordance with the terms and conditions of this Agreement, thereby resigning your position as an employee, officer and President and Chief Executive Officer of each of Green Spring and GSNJ. 2. DUTIES: From February 3, 1994 until written notice of termination of the Consultancy is given by either party to the other party, you hereby agree to: (a) upon the direction of the President and the Board of Directors, provide assistance to the Company with respect to matters that you were responsible for or otherwise involved with during your employment with the Company, as a consultant to the Company, including but not limited to, the following areas, (i) account relations and marketing and sales support, (ii) management recruitment and employee relations, and (iii) Board of Directors and management consultation and support, and (b) take such reasonable steps as are requested by the Company and apply yourself to facilitate the above endeavors. 3. COMPENSATION: In connection with your relationship with the Company as a consultant and in consideration of your covenants and agreements set forth in this Agreement and subject to the terms and conditions of this Agreement, Green Spring agrees as follows: commencing February 3, 1994, to pay you at the rate of Four Thousand One Hundred Sixty-seven and 00/100 Dollars ($4,167.00) per month (the "Monthly Payments"), payable in accordance with Green Spring's normal payroll practices until termination, by either party, of the Consultancy hereunder. The Company is currently developing a long term incentive compensation plan (the "Long Term Plan") for its employees. In the event that such Long Term Plan is adopted and arrangements can be made to include you as a participant in the Long Term Plan, notwithstanding that you will not be an employee of the Company, the Company will do so. The terms of your participation shall be determined by the Company's Board of Directors in their sole reasonable discretion. Dr. Paul G. Shoffeitt February 3, 1994 Page 3 4. EXPENSES. For the duration of the Consultancy, the company shall reimburse you for all reasonable and necessary business expenses incurred by you in the performance of your consulting services hereunder, consistent with the Company's expense reimbursement policies as in effect from time to time. 5. INDEPENDENT CONTRACTOR; TERMINATION Notwithstanding any title you may have, you expressly understand and agree that, for the duration of the Consultancy, (i) you are an independent contractor, (ii) you are not an officer, director, agent for, or an employee of, the company, and (iii) you have no authority to bind the Company. You further acknowledge and agree that either party to this Agreement can terminate the Consultancy established under this Agreement at any time, with or without cause, upon fourteen (14) days written notice to the other at the address set forth in Section 16 of this Agreement; provided however, that termination of the Consultancy shall not constitute termination of Sections 6-10, 12-13 and 17-23 inclusive of this Agreement which shall continue to apply and remain in full force and effect as set forth therein. 6. CONFIDENTIALITY; NON-DISCLOSURE Except as otherwise authorized by the company, its officers, directors, employees or agents, or except as required by law or judicial process, you agree not to reveal either directly or indirectly any proprietary information of the Company. For purposes of this Agreement, "proprietary information" shall mean any information relating to the Company's Business (as defined in Section 7) that has not previously been publicly released by duly authorized representatives of the Company and shall include (but shall not be limited to) information encompassed in all designs, plans, proposals, marketing and sales plans, financial information, costs, pricing information, customer information, and all methods, concepts or ideas in or reasonably related to the Company's Business (as defined in Section 7). You further agree to regard and preserve as confidential all proprietary information pertaining to the Company's Business (as defined in Section 7) that was obtained by you in the course of your employment with the Company or during the period of the Consultancy, whether you have such information in your memory or in writing or Dr. Paul G. Shoffeitt February 3, 1994 Page 4 other physical form. You will not, for the duration of the Consultancy, without authority from the company to do so, and, after termination of the consultancy, without written authority from the Company to do so, use for your benefit or purposes, except as reasonably required for the discharge of your duties as set forth in this Agreement, nor disclose to others, either during the term of this Agreement or thereafter, except as permitted hereunder, any proprietary information connected with the Company's Business (as defined in Section 7), or plans or developments of the Company. This provision shall not apply after the proprietary information has been voluntarily disclosed to the public, independently developed and disclosed by others, or otherwise enters the public domain. Further, in the event that the company expands its business beyond the scope of the Company's Business (as defined in Section 7), and you provide consulting services to the Company in relation to such expanded business and the Company shares proprietary information regarding such expanded business with you, you hereby agree to keep such proprietary information confidential in accordance with the terms of the Section 6. 7. NON-COMPETITION For the duration of the Consultancy, and for a period of three (3) years following the termination of the Consultancy by either party, you agree that you will not in any way, directly or indirectly, manage, operate, control or accept employment or a consulting position with or otherwise advise or assist or be connected with, or own, or have any other interest in or right with respect to (other than through ownership of not more than five percent (5%) of the outstanding shares of a corporation's stock which is listed on a national securities exchange) any enterprise which competes (or is deemed to compete by fulfilling the conditions stated in the following sentence) with the Company or a subsidiary or affiliate of the Company in the business engaged in by the Company, which, for purposes of this Section 7, shall be deemed to be limited to mental health and substance abuse, utilization review of inpatient and outpatient care, mental health and/or substance abuse network management, mental health and/or substance abuse managed care programs, EAP services, mental health and substance abuse treatment, mental health and/or substance abuse review guidelines licensure and training, facility site survey or certification for mental health and/or substance abuse treatment facilities, mental health Dr. Paul G. Shoffeitt February 3, 1996 Page 5 and/or substance abuse care management services, mental health and/or substance abuse benefit utilization and cost analysis or a mental health and/or substance abuse managed care network (the "Company's Business"), in any state or territory, including the District of Columbia. For purposes of this Section 7, an enterprise shall be deemed to be competing with the Company's Business notwithstanding the fact that it does not within the three (3) year period following the termination of the Consultancy actually compete with the Company if (i) within the three (3) year period following the termination of the Consultancy the enterprise is actively developing the capability to compete with the Company (such as by developing mental health criteria), (ii) you have knowledge of such efforts and (iii) within six (6) months of developing such capability but in no event later than six (6) months following three (3) years from the date of termination of the Consultancy the enterprise actively competes with the Company. Nothwithstanding any provision of this Agreement to the contrary, nothing in this Agreement shall be interpreted to restrict you from working for the Patuxent Medical Group, Incorporated or Columbia Medical Plan, Incorporated or their subsidiaries or the successors or assigns thereof after the termination of the Consultancy hereunder or treating clinical patients during or after the term of this Agreement; provided, however, that except for treating clincal patients, you shall not provide any services to Patuxent Medical Group, Incorporated or Columbia Medical Plan, Incorporated or their subsidiaries, or the successors or assigns thereof which compete with the Company's Business. 8. NON-SOLICITATION. You further agree that for the duration of the Consultancy, and for a period of three (3) years following the termination of the Consultancy by either party, you will refrain from, directly or indirectly: (i) interfering with the employment of any other employee of the Company or a subsidiary of the Company; (ii) urging, soliciting or inducing any employee of the Company to leave the employ of the Company; (iii) hiring or attempting to hire any employee of the Company; and (iv) soliciting the trade of, trading with, or contracting with customers of the Company (including subsidiaries, affiliates or organizations related to such customers) for any purpose that competes with the Company's Business (as defined in Section 7). Dr Paul G. Shoffeitt February 3, 1994 Page 6 9. RETURN OF MATERIALS Upon termination of the Consultancy as provided in Section 5 hereof, you agree to return immediately any and all of the Company's files and documents (including all copies thereof) and other Company property and Company issued credit cards in your possession. 10. MUTUAL GENERAL RELEASE In connection with your transition from an employee and officer to of the Company to a consultant to the Company and the payments and other consideration provided for in this Agreement, you hereby release and forever discharge the Company, its stockholders, directors, officers, employees, agents and representatives, successors and assigns, and the Company, its successors and assigns, hereby release and forever discharge you, your heirs, executors, administrators, agents, and representatives, (hereinafter collectively the ""Released Parties''), except for any non-vicarious gross negligence or wilful misconduct by you (excluding any non-vicarious gross negligence or willful misconduct arising from any act or event about which any member of the Board of Directors of the Company has any knowledge as of the date of this Agreement), from any and all obligations arising from all prior agreements, whether written or oral, between the Company and you, including, but not limited to, the Employment Agreement and the Letter Agreement dated November 9, 1993 between the Company and you (as provided in paragraph 4 of such letter agreement). Additionally, you hereby release and forever discharge the Company, its stockholders, directors, officer, employees, agents and representative, successors and assigns (hereinafter collectively the "Persons") from any claim you or your heirs, executors or administrators may now have, or will have, against the Persons in connection with your prior employment or termination from employment with the Company and the Company, its successors and assigns, hereby release and forever discharge the Released Parties, except for any non-vicarious gross negligence or willful misconduct arising from any act or event about which any member of the Board of Directors of the Company has any knowledge as of the date of this Agreement), from any claim the Company, its successors and assigns, may now have, or will have, against you in connection with your prior employment or termination of your employment with the Company, including, as set forth in the preceding sentence, any Dr. Paul G. Shoffeitt February 3, 1994 Page 7 claims arising from the Employment Agreement. You hereby confirm and agree that it is your intention by this general release to release the Persons from any and all claims, demands, damages, actions, suits of any and every nature, known or unknown, from the beginning of the world to the date of this release, including, but not limited to, claims arising under federal or state statutes, including claims brought under the Age Discrimination in Employment Act, 29 U.S.C. sections 621-634, or at common law, for wrongful discharge, breach of contract, or any other claims growing out of any legal restriction on the Company's right to terminate its employees and further including, without limitation any claim for incentive compensation, bonuses [(excluding bonuses accrued through December 31, 1993)], vacation or severance pay. The Company on behalf of itself, its successors and assigns hereby confirms and agrees that it is the Company's intention by this general release to release the Released Parties from any and all claims, demands, damages, actions, suits of every and any nature, known or unknown, from the beginning of the world to the date of this release. Notwithstanding any other provision of this Section 10 to the contrary, this mutual general release shall not (i) release you or the Company from your or its obligations under this Agreement, (ii) release you from any non-vicarious gross negligence or wilful misconduct by you (excluding any non-vicarious gross negligence or wilful misconduct arising from any act or event about which any member of the Board of Directors of the Company has any knowledge as of the date of this Agreement) as described above in this Section 10, (iii) in any way alter, amend or extinguish any rights that you may have under the Green Spring Health Services, Inc. Savings Plan, (iv) have any effect with respect to the parties hereto as it may relate to claims brought by third parties against either party hereto, or (v) in any way alter, amend or extinguish any right of indemnification you may have under the Certificate of Incorporation or By-Laws of the Company, or the General Corporation Law of the State of Delaware or the Corporation and Associations Article of the Annotated Code of the State of Maryland. 11. ANNOUNCEMENTS. The parties agree that, except for employee announcements in the form attached hereto, no press release or general public communications shall be issued by any of the parties thereto with respect to your transition from President and Chief Executive Officer to the Company to a consultant to the Company; provided that it is not the Dr. Pual G. Shoffeitt February 3, 1994 Page 8 intention of the parties to create the appearance that you have not terminated your duties and responsibilities under the Employment Agreement. 12. BREACH You understand and agree that in the event you breach in any material respect any of your covenants or agreements hereunder, any and all payments under this Agreement shall cease immediately; provided, however, you shall continue to remain bound by all of the provisions of this Agreement (except Sections 1 through 5, 11, 14, 15 and 16 inclusive that pertain to the Consultancy). Provided, further, notwithstanding any other provision of this Agreement to the contrary, in the event of any alleged breach of this Agreement by you, the Company shall provide you with written notice of such breach and you shall have fourteen (14) days to cure such breach. 13. REMEDIES AND INJUNCTIVE RELIEF In the event of any breach by you of your obligations under this Agreement, you shall be liable to the Company for any and all direct (but not consequential except in the event you breach the non-competition provisions of Section 7 hereof, which shall be limited for the purposes of the limitation on consequential damages in this Section 13 to mean working for, consulting with, or advising competitors of the Company in the mental health, substance abuse, or EAP service areas) loss, cost or expense, incurred by the Company because of such breach. The Company shall have any and all remedies available at law or in equity. It is further understood and agreed by the parties hereto that the rights and privileges granted to the Company in Sections 6, 7, 8 and 9 of this Agreement by you hereunder are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and that a breach by you of any of the provisions contained in Sections 5, 7, 8 and 9 of this Agreement will cause the Company great and irreparable injury and damage. You hereby expressly agree that the Company shall be entitled to the remedies of injunction, specific performance and other equitable relief to Dr. Paul G. Shoffeitt February 3, 1994 Page 9 prevent a breach of Sections 6, 7, 8 and 9 of this Agreement by you. This provision shall not, however, be construed as a waiver of any of the rights which the Company may otherwise have for damages. 14. REVIEW AND CONSULTATION Each party hereto certifies that it has consulted with counsel regarding the terms and conditions set forth in this Agreement, that it knows and understands the contents and effects hereof and that it knowingly, voluntarily and freely executes and delivers this Agreement. 15. AGE DISCRIMINATION NOTIFICATION. This Agreement affects certain rights you may have under the Age Discrimination in Employment Act, as amended, and, therefore, you should consult with an attorney before executing this Agreement. By executing this Agreement, you certify that in accordance with 29 U.S.C. Section 626(f), you have carefully read the foregoing Agreement, you know and understand the contents and effects hereof, and this Agreement is being executed by you knowingly, voluntarily, freely and after consultation with counsel. You further certify that you have had the opportunity to consider this Agreement for a period of twenty-one (21) days prior to its execution, and that neither the Company nor any of its officers, directors, stockholders, employees, agents, representatives, affiliates, subsidiaries, parent or holding companies, successor or assigns have made any representations concerning the terms, conditions or effects of this Agreement other than these contained herein. Furthermore, the parties acknowledge that this Agreement may be revoked by you within seven (7) days following the execution hereof, by sending written notice of revocation 16 below, in which case the Company shall have no Agreement, the terms contained in Section 4 of the Employment Agreement shall remain unaltered and shall continue to apply through December 31, 1996. 16. NOTICES All notices and other communications which are required or may be given under this Agreement shall be in writing Dr. Paul G. Shoffeitt: February 3, 1994 Page 10 and shall be deemed to have been given if delivered personally or sent by registered or certified mail, return receipt requested postage prepaid: If to the Company: Green Spring Health Services, Inc. 5565 Starrett Place Suite 500 Columbia, MD 21044 Attention: President If to you: Dr. Paul G. Shoffeit: 2640 Jennings Chapel Road Woodbine, Maryland 21797 With a copy to: Alan M. Schwartz, Esquire Suite 209 9861 Broken Land Parkway Columbia, Maryland 21046 or to such other place as either party shall have specified by notice in writing to the other. 17. ASSIGNMENT. You understand and agree that you may not assign this Agreement nor assign or delegate any of your rights or obligations under this Agreement. The Company may not assign this Agreement or any of its rights or obligations hereunder except for an assignment in connection with any reorganization, merger, consolidation, dissolution, or sale of substantially all of the stock or assets of the Company; provided however, that, upon such permitted assignment, you shall not be obligated to perform any services or duties under this Agreement. This Agreement shall be binding upon and inure to the benefit of any permitted assigns. 18. INVALIDITY; SEVERABILITY The authorship of this Agreement shall not be relevant to the interpretation of any provision thereof. If any term or provision of this Agreement shall to any extent be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision or Dr. Paul G. Shoffeitt February 3, 1994 Page 11 part of a provision of this Agreement, but that this Agreement shall be reformed and construed as if such invalid or unenforceable provision had never been contained herein and such provision or part shall be reformed to that it would be valid and enforceable to the fullest extent permitted by law. 19. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which shall be deemed to constitute one agreement. 20. ENTIRE AGREEMENT. This Agreement (inclusive of Exhibit 1 attached hereto and incorporated herein) constitutes the entire agreement between the Company and you with respect to the subject matter hereof, it may only be modified in writing and it supersedes any and all prior agreements between the parties. 21. WAIVER. The waiver by a party hereto of any breach by the other party of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by a party hereto. 22. AUTHORIZATION. The Company represents and warrants that its execution and delivery of this Agreement and its performance of this Agreement have been duly authorized and ratified by any requisite corporate acts and this Agreement has been approved by all of the directors of the Company. Each party hereto represents and warrants that its execution and delivery of this Agreement and its performance of this Agreement shall not conflict with, violate, result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which such party is bound or affected. Dr. Paul G. Shoffeitt February 3, 1994 Page 12 23. APPLICABLE LAW. This Agreement shall be governed by and interpreted under the laws of the State of Maryland. If you are in agreement with the foregoing, please sign the enclosed acknowledgement below, and return it to me, whereupon we both become legally bound. Very truly yours, GREEN SPRING HEALTH SERVICES, INC. By: /s/ Neil Hollander ------------------------------- Neil Hollander, Chairman ACCEPTED AND AGREED TO INTENDING TO BE LEGALLY BOUND. THIS 7TH DAY OF Feb., 1994 /s/ Paul G. Shoffeitt - ---------------------- Paul G. Shoffeitt r EX-2.6 7 EX-2.6 Exhibit 2.6 AMENDMENT TO LETTER AGREEMENT This Amendment to Letter Agreement (this "Amendment") is effective as of December 4, 1997, by and among Green Spring Health Services, Inc., a Delaware corporation (the "Company") and Paul G. Shoffeitt ("You"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, you and the Company entered into that certain Letter Agreement dated February 3, 1994 (the "Letter Agreement"); WHEREAS, the parties recognize that due to a current medical condition, you are unable to fully perform your duties under the Letter Agreement, and the parties therefore desire to amend the terms of the Letter Agreement as set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby covenant and agree as follows: 1. The introductory clause in Section 2 of the Letter Agreement is hereby amended to read as follows: "From February 3, 1994 until April 1, 2000 (unless this Agreement is terminated earlier by you by giving fourteen (14) days written notice, or is terminated earlier by the Company in accordance with Section 5.2), you hereby agree to:" 2. Section 5 is amended by redesignating such section as Section 5.1 entitled "INDEPENDENT CONTRACTOR" and by deleting the second sentence from such Section 5.1. 3. A new Section 5.2 is hereby added to the Agreement, to read in its entirety as follows: 5.2 TERMINATION. ----------- (a) TERMINATION DUE TO RESIGNATION AND TERMINATION WITH CAUSE. Your engagement under this Agreement and all of your rights to receive the compensation set forth in Section 3 will cease upon the occurrence of any of the following events: (i) the effective date of your resignation (which you may provide at any time upon fourteen (14) days written notice), or (ii) termination for cause at the discretion of the Company under the following circumstances: (A) you are guilty of fraud or dishonesty involving you duties on behalf of the Company; (B) you have deliberately and intentionally failed or refused to faithfully and diligently perform significant duties assigned to you pursuant to the terms of this Agreement, or otherwise to have breached any material term under this Agreement; (C) you have willfully failed or refused to abide by the Company's policies, rules, procedures or directives; or (D) you are convicted of a misdemeanor involving moral turpitude or any felony. For the events described in clauses (ii)(B) and (ii)(C) of the preceding sentence, the Company shall give you written notice of such event and an opportunity to cure such circumstance for a period of thirty (30) days; provided, however, such opportunity to cure shall be given only once for the same or related events arising from the same factual circumstances. (b) TERMINATION WITHOUT CAUSE. You and/or the Company may terminate this Agreement without cause at any time upon the giving of thirty (30) days' prior written notice to the other party. If the Company terminates this Agreement under this Section 5.2(b), the Company may direct you to immediately cease providing services. If the Company terminates this Agreement under this Section 5.2(b), the Company shall continue to pay you the compensation provided for pursuant to Section 3 of this Agreement for the remaining balance of the period of engagement set forth in Section 2 (without regard to such early termination) or for a period of one (1) year from the effective termination date, whichever is greater in length or time. No other compensation or benefits set forth in Sections 3 and 4 of this Agreement shall be paid, unless otherwise provided in the terms of the applicable plan or benefit. (c) DISABILITY. If you become Disabled, the Company may terminate this Agreement at any time, and any such termination shall be deemed a termination without cause under Section 5.2(b) above, and in the event of such termination, you shall be entitled to all of the rights set forth in Section 5.2(b) above. You shall be deemed Disabled if Employer determines that you are, by reason of any physical or mental condition, unable to perform a substantial portion of your essential duties on a part-time basis pursuant to this Agreement. (d) EFFECT OF TERMINATION. Upon termination of this Agreement, all rights and obligations under this Agreement shall cease except for the rights and obligations under Sections 5.2(b), 5.2(c), 6 through 10, 12 through 13 and 17 through 23 of this Agreement, and all procedural and remedial provisions of this Agreement. A termination of this Agreement shall constitute a termination of your engagement with the Company for all purposes of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. Witness: /s/ Illegible /s/ Paul G. Shoffeitt - ------------------ ---------------------- Paul G. Shoffeitt COMPANY: Green Spring Health Services, Inc. Attest: By: /s/ Henry Harbin ------------------------------- /s/ Illegible Name: Henry Harbin - ------------------- ----------------------------- Title: President ---------------------------- EX-2.7 8 EX-2.7 Exhibit 2.7 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by and between Paul G. Shoffeitt, a resident of the State of Maryland ("Officer"), and Magellan Health Services, Inc., a Delaware corporation ("Employer"). WHEREAS, Employer is engaged in the business of developing and providing managed care health services and products; and WHEREAS, Employer desires to obtain the services of Officer and Officer desires to render services to Employer; and WHEREAS, Employer and Officer desire to set forth the terms and conditions of Officer's employment with Employer under this Agreement; and NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and agreements contained in this Agreement, the parties agree as follows: STATEMENT OF AGREEMENT ---------------------- 1. EMPLOYMENT. Employer agrees to employ Officer on a part-time basis, and Officer accepts such part-time employment, commencing on April 1, 1997, and continuing up to and including April 1, 2000, unless terminated earlier pursuant to Section 6 below. After the initial three (3) year term (the "Term") has expired, this Agreement will automatically renew on April 1st each year for a one (1) year term. Either party may terminate the Agreement during a renewal year by providing the other party with thirty (30) days written notice of their intent to terminate the Agreement. 2. POSITION AND DUTIES OF OFFICER. Officer will serve as Executive Vice President of Managed Care reporting to Employer's Chief Executive Officer. Officer agrees to serve in such position or in such other Senior Officer level position as Employer determines from time to time, and to perform the Officer level duties commensurate with Officer's professional abilities and qualifications on a part-time basis as Employer may assign from time to time to Officer until the expiration of the term or such time as Officer's employment with Employer is terminated. 3. TIME DEVOTED AND LOCATION OF OFFICER. (a) Employer recognizes that, due to a current medical condition, Officer is unable to perform duties on a full-time basis that would necessitate extensive business travel. As such, Employer agrees to employ Officer on a part-time basis. Further, Employer agrees Officer shall not be required to travel more than one business day per week (a business day is defined as a full day which could include an overnight stay at the business destination). Officer agrees that he will diligently endeavor to perform services contemplated by this Agreement in accordance with the policies and directives the Employer's Chief Executive Officer establishes. Notwithstanding any provisions of this Agreement to the contrary, this Agreement does not prohibit Officer from providing services to or on behalf of Green Spring Health Services, Inc., its successors, assigns ("Green Spring"), or affiliates. (b) Officer may elect to locate his primary business office either at Green Spring's Corporate Offices located in Columbia, Maryland, or at Officer's personal residence. 4. COMPENSATION. (a) BASE SALARY. Employer shall pay Officer a salary in the amount of Fifty Thousand Dollars (50,000.00) per year which amount shall be paid semi-monthly, minus required withholdings for federal, state, and local taxes, and deductions authorized by Officer. Such salary shall be subject to review and adjustment by Employer's Chief Executive Officer and Board of Directors from time to time consistent with past practice and consistent with other officers at his level. (b) TIME DEVOTED. Officer's travel and other work assignments associated with the services he performs on behalf of Green Springs shall be included in determining the part-time travel and duties he performs under this Agreement. 5. BENEFITS. (a) BENEFITS. In addition to the compensation provided for in Section (4), Officer shall be entitled during the term of this Agreement to such other benefits of employment with Employer as are now or may later be in effect for part-time Exempt Employees. Additionally, Officer shall be entitled to participate in Employer's Executive Benefit Plan except as to any insurance policies which require full-time status for eligibility. (b) EXPENSES. During the term of this Agreement, Employer shall reimburse Officer promptly for all reasonable travel, entertainment, parking, business meeting and similar expenditures in pursuance and furtherance of Employer's business upon receipt of reasonably supporting documentation as required by Employer's policies applicable on its Officers generally. Officer may elect and be reimbursed for first class air travel due to Officer's medical condition. 6. TERMINATION. (a) TERMINATION DUE TO RESIGNATION AND TERMINATION WITH CAUSE. Officer's employment under this Agreement and all of his rights to receive the salary and benefits, set forth in Section 4 and 5, will cease upon the occurrence of any of the following events: (i) The effective date of Officer's resignation, or (ii) termination for cause at the discretion of Employer under the following circumstances: (A) Officer shall be guilty of fraud or dishonesty involving his duties on behalf of Employer; (B) Officer shall have deliberately and intentionally failed or 2 refused to faithfully and diligently perform significant duties assigned to Officer pursuant to the terms of this Agreement, or otherwise to have breached any material term under this Agreement; (C) Officer shall have willfully failed or refused to abide by Employer's policies, rules, procedures or directives; or (D) Officer shall be convicted of a felony or a misdemeanor involving moral turpitude. For the events in subsections (B) and (C), Employer shall give Officer written notice of such event and an opportunity to cure such situation for a period of thirty (30) days. Provided, however, such opportunity to cure must only be given once for the same or related events arising from the same factual circumstances. (b) Termination without Cause. Employer and/or Officer may terminate this Agreement without cause at any time upon the giving of thirty (30) days prior written notice to the other party. If Employer terminates this Agreement without cause, Employer may direct Officer to immediately cease from providing services. If Employer terminates this Agreement without cause, Employer shall continue to pay Officer the base salary and automobile allowance compensation provided for pursuant to Section 4 of this Agreement for the remaining balance of the period of employment set forth in Section 1 or for a period of one (1) year, whichever is greater in length of time upon the effective termination date. No other compensation or benefits set forth in Sections 4 and 5 of this Agreement, shall be paid, unless otherwise provided in the terms of the applicable plan or benefit. (c) Automatic Termination. This Agreement shall automatically terminate upon death or permanent disability of Officer. Officer shall be deemed to be "Disabled" or to suffer from a "Disability" within the meaning of this Agreement if Officer is deemed to be permanently disabled within the meaning of any disability insurance policy maintained by Employer for Officer or, in the absence of such policy, if Officer is, by reason of any medically determinable physical or mental condition, unable to perform a substantial portion of his essential duties on a part-time basis pursuant to this Agreement for a period of six (6) consecutive months. The term "essential duties" is defined as the ability to consistently perform his assigned part-time duties, including travel requirements, with or without reasonable accommodation. (d) Effect of Termination. Upon termination of this Agreement, all rights and obligations under this Agreement shall cease except for the rights and obligations under paragraphs 4 and 5 of this Agreement to the extent Officer has not been compensated for services performed prior to termination (the amount to be prorated for the portion of the pay period prior to termination), and the rights and obligations under paragraphs 6(b), 7, 8 and 9 and all procedural and remedial provisions of this Agreement. A termination of this Agreement shall constitute a termination of Officer's employment with Employer for all purposes of this Agreement. (e) Termination Upon a Change of Control. Officer shall be entitled to terminate his employment upon a change of control and shall be entitled to all of the salary, 3 benefits and other rights provided in this Agreement as though the termination had been initiated by Employer without cause upon the occurrence of any of the following events: (a) the acquisition after the beginning of the Term or any renewal term 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 Officer or E. Mac Crawford) or any group of person or entities (other than Officer) who constitute a group (within the meaning of Section 13d-5 of the Exchange Act) of any securities of Employer 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 Employer's then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of Employer; or (b) the sale of all or substantially all of the assets of Employer (including, without limitation, by way of merger, consolidation, lease or transfer) in a transaction (except for a sale-leaseback transaction) where Employer or the holders of common stock of Employer do not receive (i) 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 ocntrols the acquiring entity, or (ii) securities representing a majority of the equity interest in the acquiring entity or of an affiliate that controls the acquiring entity, if other than a corporation; provided, that if Officer becomes entitled to any payments (whether hereunder or otherwise) by reason of an event described in Internal Revenue Code Section 280G (a "Parachute Event") that would constitute "excess parachute payments" (as defined in Internal Revenue Code Section 280G) if paid then Officer's entitlement to such payments shall be reduced by such amount as will cause none of such payments to constitute excess parachute payments, if, and only if, the net amount received by Officer 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. This provision specifically does not apply to any change in control which may result from the transactions set forth in the Real Estate Purchase and Sale Agreement, dated January 29, 1997, between Magellan Health Services, Inc. and Crescent Real Estate Equities Limited Partnership currently scheduled to close in May 1997. 7. Protection of Confidential Information/Non-Solicitation. Officer covenants and agrees as follows: (a) During the period beginning upon the execution of this Agreement and continuing for a period of two (2) years after the term or termination for any reason, Officer shall not use or disclose, directly or indirectly, for any reason whatsoever or in any way, other than at the direction of Employer during the course of Officer's employment or after receipt of the prior written consent of Employer, any confidential information or other information of Employer deemed to be trade secrets of Employer, including, but not limited to, information with respect to Employer and its Subsidiaries as follows: the lists of past, current or potential customers of Employer and it Subsidiaries, all systems, manuals, materials, processes and other intellectual property of any type used by Employer or its Subsidiaries in connection with their respective business operations; financial statements, cost reports and other financial information; contract 4 proposals and bidding information; rate and fee structures; policies and procedures developed as part of a confidential business plan; and management systems and procedures, including manuals and supplements (collectively, the "Confidential Information"). The obligation not to use or disclose any of the Confidential Information shall not apply, to: (i) any Confidential Information known by Officer before commencing employment with Employer; or (ii) Confidential Information which Officer obtains from a third party, provided, Officer did not himself provide the third party the Confidential Information by wrongful or inappropriate means; or (iii) any information that is or becomes public knowledge, through no fault of Officer, and that may be utilized by the public without any direct or indirect obligation to Employer, but the termination of the obligation for non-use or nondisclosure by reason of such information becoming public shall be only from the date such information becomes public knowledge; or (iv) as may be required by judicial process or as a matter of law. The above shall be without prejudice to any rights or remedies of Employer under any state law protecting trade secrets or information. (b) During Employer's employment of Officer and for a period of one (1) year following the termination of Officer's employment with Employer for any reason, Officer shall not solicit for employment or employ, directly or indirectly, any Officer of Employer or any of its Subsidiaries who was employed with Employer or its Subsidiaries within the one (1) year period immediately prior to such solicitation or employment. 9. Work Made for Hire. Officer agrees that any written program materials, protocols, research papers and all other writings (the "Work"), which Officer develops for Employer's use during the term of this Agreement, will be considered "work made for hire" within the meaning of the United States Copyright Act, Title 17, United States Code, which vests all copyright interest in and to the Work in the Employer. In the event, however, that any court of competent jurisdiction finally declares that the Work is not or was not a work made for hire as agreed, Officer agrees to assign, convey, and transfer to the Employer all right, title and interest Officer may presently have or may have or be deemed to have in and to any such Work and in the copyright of such work, including but not limited to, all rights of reproduction, distribution, publication, public performance, public display and preparation of derivative works, and all rights of ownership and possession of the original fixation of the Work and any and all copies. Additionally, Officer agrees to execute any documents necessary for Employer to record and/or perfect its ownership of the Work and the applicable copyright. The foregoing will not apply to any writings Officer develop which are not for Employer's use or are in each instance specifically excluded in advance of publication from the coverage of the foregoing by Employer's Board of Directors. 10. Property of Employer. Officer agrees that, upon the termination of Officer's employment with Employer, Officer will immediately surrender to Employer all property, equipment, funds, lists, books, records and other materials of Employer in the possession of or provided to Officer. 5 10. Governing Law. This Agreement and all issues relating to the validity, interpretation and performance shall be governed by and interpreted under the laws of the State of Georgia. 11. Remedies. With respect to each and every breach, violation or threatened breach or violation by Officer or any of the covenants set forth in this Agreement, Employer, in addition to all other remedies available at law or in equity, including specific performance of the Agreement's provisions, shall be entitled to enjoin the commencement or continuance of such conduct and may apply for entry of an immediate restraining order or injunction, subject to Section 12 of this Agreement. Employer may pursue any of the remedies described in this paragraph 11 concurrently or consecutively, in any order, as to any such breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the rights to pursue any of the other such remedies. 12. Arbitration. Except for an action for injunctive relief, any disputes or controversies arising under this Agreement shall be settled by arbitration in Atlanta, Georgia, by a panel of three Arbitrators, in accordance with the rules of the American Arbitration Association relating to the arbitration of commercial disputes. The determination and findings of such arbitrators shall be final and binding on all parties and may be enforced, if necessary, in the courts of the State of Georgia. 13. Notices. Any notice or request required or permitted to be given to any party shall be given in writing and shall be personally delivered or sent to such party by United States mail at the address set forth below or at such other address as such other address as such party may designate by written communication to the other party to this Agreement: To Officer: Paul G. Shoffeitt 2640 Jennings Chapel Road Woodbine, Maryland 21797 To Employer: Magellan Health Services, Inc. 3414 Peachtree Road, N.E. Suite 1400 Atlanta, Georgia 30326 Attention: Chief Executive Officer With a copy to: Magellan Health Services, Inc. 3414 Peachtree Road, N.E. Suite 1400 Atlanta, Georgia 30326 Attention: Vice President of Administrative Services 6 Each notice given in accordance with this paragraph shall be deemed to have been given, if personally delivered, on the date personally delivered, if delivered by facsimile transmission, be deemed given when sent and confirmation of receipt is received, or, if mailed, on the third (3rd) day following the day on which it is deposited in the United States mail, certified or registered mail, return receipt requested, with postage prepaid, to the address last given in accordance with this paragraph. 14. Headings. The headings of the paragraphs of this Agreement have been inserted for convenience of reference only and shall not be construed or interpreted to restrict or modify any of the terms or provisions of this Agreement. 15. Severability. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement and each separate provision shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. In addition, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically, as a part of this Agreement, a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable, if such reformation is allowable under applicable law. 16. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of each party and each party's respective successors, heirs, personal representatives, assigns and legal representatives. 17. Employer Policies, Regulations and Guidelines for Officers. Employer may issue policies, rules, regulations, guidelines, procedures or other informational material, whether in the form of handbooks, memoranda, or otherwise, relating to its Officers. These materials are general guidelines for Officer's information and shall not be construed to alter, modify or amend this Agreement for any purpose whatsoever. 18. Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties with respect to the subject matter and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter, unless expressly provided otherwise within this Agreement. No amendment, modification or termination of this Agreement, unless expressly provided otherwise, shall be valid unless made in writing and signed by each of the parties whose rights, duties or obligations would in any way be affected by an amendment, modification or termination. No representations, inducements or agreements have been made to induce either Officer or Employer to enter into this Agreement which are not expressly set forth within this Agreement. This Agreement is the sole source of rights and duties as between Employer and Officer relating to the subject matter of this Agreement. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 1st day of April, 1997. PAUL G. SHOFFEITT MAGELLAN HEALTH SERVICES, INC. "Officer" "Employer" /s/ Paul G. Shoffeitt /s/ E. Mac Crawford - ------------------------- --------------------- E. MAC CRAWFORD CEO, PRESIDENT, and CHAIRMAN EX-2.8 9 EX-2.8 Exhibit 2.8 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement (this "Amendment") is effective as of December 4, 1997, by and among Magellan Health Services, Inc., a Delaware corporation ("Employer") and Paul G. Shoffeitt ("Officer"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Employer and Shoffeitt entered into that certain Letter Agreement dated April 1, 1997 (the "Employment Agreement"); WHEREAS, the parties recognize that due to a current medical condition, Shoffeitt is unable to fully perform his duties under the Employment Agreement, and the parties therefore desire to amend the terms of the Employment Agreement as set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby covenant and agree as follows: 1. Section 1 of the Employment Agreement is hereby deleted and amended to read in its entirety as follows: 1. Employment. Employer agrees to employ Officer on a part-time ---------- basis, and Officer accepts such part-time employment, commencing on April 1, 1997, and continuing up to and including December 31, 2001, unless terminated earlier pursuant to Section 6 below. After the initial term, this Agreement will automatically renew on January 1 of each year for successive one year terms (on the same terms and conditions) unless either party gives written notice to the other at least 30 days prior to the expiration of the then current term, of its election not to renew this Agreement. If during the term hereof, Officer's medical condition permits an increase in the time he is able to devote to his duties hereunder, Officer shall inform Employer of such increased availability, and subject to Employer's needs, the parties shall negotiate in good faith with respect to a possible increase in Officer's duties, and with respect to a possible increase in compensation which may be appropriate in light of such increase in Officer's duties. 2. Section 3(a) is hereby amended by deleting the third sentence thereof and replacing it with the following: "Further, Employer agrees Officer shall only be required to travel to the extent he is reasonably able, estimated to be one business day every other week." 3. Section 6(c) is hereby amended by deleting such Section in its entirety and replacing it with the following: (c) DISABILITY OF OFFICER. If Officer becomes Disabled, Employer may ---------------------- terminate this Agreement at any time, and any such termination shall be deemed a termination without cause under Section 6(b) above, and in the event of such a termination, Officer shall be entitled to all of the rights set forth in Section 6(b) above. Officer shall be deemed Disabled if Employer determines that Officer is, by reason of any physical or mental condition, unable to perform a substantial portion of his essential duties on a part-time basis pursuant to this Agreement. This Section 6(c) shall survive the termination of this Agreement. 3. A new Section 8 is hereby added (and each subsequent section renumbered accordingly), to read in its entirety as follows: 8. COMPETING ACTIVITIES -------------------- (a) Officer hereby covenants and agrees, that during the period commencing on the date hereof and ending one year following the expiration or termination of this Agreement (the "Covenant Period"), he shall not accept employment or consulting work with, or advise, assist or be connected in any way, with any person or entity which is or proposes to be, conducting, carrying on or engaging in the Business (as defined below) anywhere in the United States (the "Territory"). (b) Officer hereby covenants and agrees that during the Covenant Period, he shall refrain from soliciting business from customers of Employer or its subsidiaries which were customers of Employer or its subsidiaries on the date hereof or at any time during the Covenant Period, or from any person sought as a prospective customer of Employer or its subsidiaries on the date hereof or at any time during the Covenant Period, for purposes of providing services within the Territory which are competitive with the business conducted by Employer and/or its subsidiaries. (c) For purposes of this Agreement, the term "Business" shall mean the business of providing specialty managed health care services in the areas of cardiology, ophthalmology, diabetes, asthma, oncology and other medical sub-specialty areas, including related case or care management, administrative services, utilization management, quality management, certification or pre-admission or pre-treatment certification, assessment and referral, staff clinical services, provider network services and preferred/exclusive provider organization services. (d) Notwithstanding anything to the contrary contained herein, Officer shall not be restricted during or after the term of this Agreement from (i) being an employee or consultant to Green Spring Health Services, Inc., or (ii) treating clinical patients and practicing clinical psychology. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. SHOFFEITT: Witness: /s/ /s/ Paul G. Shoffeitt - ------------------------------------ ------------------------------------ Paul G. Shoffeitt MAGELLAN: -------- Magellan Health Services, Inc. Attest: By: /s/ Craig McKnight SEAL --------------------------------- Name: Craig McKnight /s/ Title: Executive Vice President & - ------------------------------------ Financial Officer (CFO) EX-2.9 10 EX-2.9 Exhibit 2.9 IRREVOCABLE PROXY CARE MANAGEMENT RESOURCES, INC. ATLANTA, GEORGIA THIS IRREVOCABLE PROXY IS SOLICITED BY MAGELLAN HEALTH SERVICES, INC. WHEN THIS IRREVOCABLE PROXY IS PROPERLY EXECUTED AND RETURNED, MAGELLAN HEALTH SERVICES, INC. ("MAGELLAN") WILL VOTE AT ANY AND ALL ANNUAL, REGULAR AND SPECIAL MEETINGS, AND IN ANY ACTIONS BY WRITTEN CONSENT OF THE SHAREHOLDERS, ALL OF THE SHARES OF CARE MANAGEMENT RESOURCES, INC. OR ITS SUCCESSORS (THE "CORPORATION"), AS MAGELLAN, IN ITS SOLE DISCRETION, SEES FIT. The undersigned shareholder of the Corporation hereby appoints Magellan, with full power of substitution, the proxy of the undersigned shareholder to vote as Magellan, in its sole discretion, sees fit , on behalf of the undersigned at each and every annual meeting, regular meeting or special meeting of the shareholders of the Corporation and/or its successor(s), and at any adjournment thereof, or in any action by written consent of the shareholders of the Corporation and/or its successors, provided that such meetings or actions by written consent are held or executed, as applicable, no later than November 1, 1998 ( the period from the date hereof through November 1, 1998 referred to herein as the "Term"). THIS PROXY IS IRREVOCABLE DURING THE TERM HEREOF. In accordance with Section 607.0722(5) of the Florida Business Corporation Act, this Proxy is irrevocable and is coupled with an interest by virtue of the Option Agreement between Magellan and the undersigned shareholder dated as of the date hereof. This proxy shall not be assigned by Magellan to any third party other than a subsidiary of which Magellan has majority control. IN WITNESS WHEREOF, the undersigned shareholder has caused this Proxy to be executed on this 4th day of December, 1997. /s/ Paul G. Shoffeitt ------------------------------------- Shareholder's name: Paul G. Shoffeitt EX-5.1 11 EX-5.1 EXHIBIT 5.1 [LETTERHEAD] 404/572-4676 404/572-5147 May 22, 1998 Magellan Health Services, Inc. 3414 Peachtree Road, N.E. Suite 1400 Atlanta, Georgia 30326 Re: 35,875 Shares of Common Stock, $.25 par value per share, of Magellan Health Services, Inc. --------------------------------------------------------------- Gentlemen: We have acted as counsel to Magellan Health Services, Inc. (the "Company"), in connection with the preparation and filing of the Registration Statement on Form S-3 (the "Registration Statement"), for registration under the Securities Act of 1933, as amended, of 37,825 shares of Common Stock, $.25 par value per share, of the Company (the "Common Stock"). The shares of Common Stock will be issued to Paul G. Shoffeitt pursuant to an Option Agreement, dated December 4, 1997 (the "Option Agreement"). In rendering the opinions expressed below we have examined the Registration Statement, as amended, the Option Agreement, and such other documents as we have deemed necessary to enable us to express the opinions hereinafter set forth. In addition, we have examined and relied, to the extent we deemed proper, on certificates of officers of the Company as to factual matters, on the originals or copies certified or otherwise identified to our satisfaction of all such corporate records of the Company and such other instruments and certificates of public officials and other persons as we have deemed appropriate. In our examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies, and the genuineness of all signatures on documents reviewed by us and the legal capacity of natural persons. Based upon and subject to the foregoing, we are of the opinion that all legal and corporate proceedings necessary for the authorization and issuance of the shares of Common Stock have been duly taken and the shares of Common Stock were duly authorized and validly issued and are fully paid and nonassessable. We hereby consent to (a) the filing of the foregoing legal opinion as an exhibit to the Registration Statment and all further amendments thereto and (b) all references to our firm in the Registration Statement. Very truly yours, /s/ King & Spalding King & Spalding EX-23.2 12 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Registration Statement of our reports dated November 14, 1997 on the consolidated financial statements and schedules of Magellan Health Services, Inc. and subsidiaries and Charter Behavioral Health Systems, LLC and subsidiaries included in Magellan Health Services, Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and to all references to our Firm included in this Registration Statement. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia May 18, 1998 EX-23.3 13 EXHIBIT 23.3 EXHIBIT.23.3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Magellan Health Services, Inc. on Form S-3, to be filed on or about May 21, 1998, of our report dated November 14, 1997, appearing in the Current Report on Form 8-K/A of Magellan Health Services, Inc., filed on April 3, 1998. Such report expresses an unqualified opinion on the consolidated balance sheets of Merit Behavioral Care Corporation (the "Company") as of September 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1997 and includes an explanatory paragraph relating to the fact that effective October 1, 1995, the Company changed its method of accounting for deferred contract start-up costs related to new contracts or expansion of existing contracts. We also consent to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. /s/ DELOITTE & TOUCHE LLP New York, New York May 21, 1998 EX-23.4 14 EXIBIT 23.4 Exhibit 23.4 INDEPENDENT AUDITORS' CONSENT The Board of Directors Human Affairs International, Incorporated We consent to the incorporation by reference in the registration statement on Form S-3 of Magellan Health Services, Inc. of our report dated February 7, 1997, except as to note 10 which is as of February 27, 1997, with respect to the consolidated balance sheets of Human Affairs International, Incorporated and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholder's equity, and cash flows for the years then ended, which report appears in the Form 8-K of Magellan Health Services, Inc. dated December 17, 1997 and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Salt Lake City, Utah May 20, 1998 -----END PRIVACY-ENHANCED MESSAGE-----