-----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, DuF95TPBg1TaRnilNfRC4KZbvdyW4hV4oYn2uZwC0zBFPJW6BAsXvlQ6lNpY48sB W8+oh5sy5jkFkj++hw5dYw== 0000019411-96-000018.txt : 19960429 0000019411-96-000018.hdr.sgml : 19960429 ACCESSION NUMBER: 0000019411-96-000018 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960426 SROS: AMEX 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: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-57817 FILM NUMBER: 96551737 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 424B3 1 PROSPECTUS 1,452,094 SHARES MAGELLAN HEALTH SERVICES, INC. COMMON STOCK ($.25 Par Value) ------------------------- The 1,452,094 shares (the "Shares") of common stock, $.25 par value ("Common Stock"), of Magellan Health Services, Inc. formerly Charter Medical Corporation ("Magellan" or the "Company"), may be offered for sale from time to time by and for the account of certain stockholders of Magellan (the "Selling Stockholders"). See "Selling Stockholders." The Selling Stockholders acquired the Shares on January 27, 1995, in connection with the acquisition of National Mentor, Inc., formerly Magellan Health Services, Inc. ("Mentor"), by the Company. Magellan is registering the Shares as required by an Investment and Registration Rights Agreement dated January 27, 1995, among the Company and each of the Selling Stockholders (the "Investment and Registration Rights Agreement"), to provide the Selling Stockholders with freely tradeable securities. Magellan will not receive any of the proceeds from the sale of the Shares by the Selling Stockholders, but has agreed to bear certain expenses of registration of the Shares. See "Plan of Distribution." The Common Stock is listed on the American Stock Exchange under the symbol "MGL." On April 25, 1996, the last reported sale price of the Common Stock on the American Stock Exchange was $21.625 per share. The Selling Stockholders from time to time may offer and sell the Shares directly or through agents or broker-dealers on terms to be determined at the time of sale. 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." Each of the Selling Stockholders 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 Stockholders and any agents or broker-dealers that participate with the Selling Stockholders 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. See "Plan of Distribution" herein for indemnification arrangements among Magellan and the Selling Stockholders. There are certain risks associated with an investment in Magellan Common Stock. For a discussion of such risks, see "Risk Factors." 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 April 26, 1996. 1 AVAILABLE INFORMATION Magellan is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, files reports, proxy statements and other information with the Securities and Exchange Commission ("Commission"). Such reports, proxy statements and other information filed with the Commission by Magellan can be inspected and copied at the office of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its Regional Offices located at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Common Stock of Magellan is listed on the American Stock Exchange, and such reports, proxy statements and other information concerning Magellan can be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York 10006. Magellan has filed with the Commission a registration statement on Form S-3 (together with any amendments, the "Registration Statement") under the 1933 Act, covering the shares of Magellan Common Stock being offered by this Prospectus. This Prospectus, which is part of the Registration Statement, does not contain all of the information and undertakings set forth in the Registration Statement and reference is made to such Registration Statement, including exhibits, which may be inspected and copied in the manner and at the locations specified above, for further information with respect to Magellan and the Magellan Common Stock. Statements contained in this Prospectus concerning the provisions of any documents are not necessarily complete and, in each instance, reference is made to the copy of such documents filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed with the Commission by Magellan (Commission File No. 1-6639) are incorporated by reference into this Prospectus: (i) Magellan's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, as amended on Form 10-K/A filed on December 28, 1995; (ii) Magellan's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995; (iii) The description of the Magellan Common Stock in Magellan's Registration Statement on Form 8-A filed on July 8, 1992. In addition, all documents filed by Magellan 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, 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. Magellan 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. Craig L. McKnight, Executive Vice President and Chief Financial Officer, Magellan Health Services, Inc., 3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326 , telephone (404) 841-9200. 2 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Magellan Common Stock. Acquisition Growth Strategy The Company has historically grown through acquisitions and internal growth. There can be no assurance that the Company will be able to make successful acquisitions in the future or that any such acquisitions will be successfully integrated into its operations. In addition, future acquisitions could have an adverse effect upon the Company's operating results, particularly in the fiscal quarters immediately following the consummation of such transactions while the acquired operations are being integrated into its operations. Green Spring Health Services, Inc. Acquisition and Potential Adverse Reaction On December 13, 1995, the Company acquired a controlling interest in Green Spring Health Services, Inc. ("Green Spring"), a leading provider of managed behavioral healthcare services. The Company's hospitals have contracts with behavioral managed care companies other than Green Spring. Such other companies could decide to terminate their contracts with the Company's hospitals in reaction to the Company's acquisition of a majority interest in one of their major competitors. In addition, there can be no assurance that Green Spring will be successfully integrated into the Company's operations. Historical Operating Losses The Company has experienced losses from continuing operations before reorganization items, extraordinary items and the cumulative effect of a change in accounting principle in each fiscal year since the completion of a management buyout in 1988. Such losses amounted to $167.2 million for the fiscal year ended September 30, 1991, $81.7 million for the ten-month period ended July 31, 1992, $8.1 million for the two-month period ended September 30, 1992 and $39.6 million, $47.0 million and $43.0 million for the fiscal years ended September 30, 1993, 1994 and 1995, respectively. Although the Company reported income from continuing operations of approximately $9.7 million in the quarter ended December 31, 1995, there can be no assurance that such profitability will continue. The Company's history of losses could have an adverse effect on its operations. Potential Hospital Closures The Company continually assesses events and changes in circumstances that could affect its business strategy and the viability of its operating facilities. During fiscal 1995, the Company consolidated, closed or sold fifteen psychiatric hospitals. The Company has consolidated or closed six psychiatric hospitals during fiscal 1996, including the April 1996 decision to close three psychiatric hospitals. The Company anticipates recording charges of approximately $200,000 and $2.5 million in the quarterly periods ended March 31, 1996 and June 30, 1996, respectively, as a result of these consolidations and closures. The Company may elect to consolidate services in selected markets and to close or sell additional facilities in future periods depending on market conditions and evolving business strategies. If the Company closes additional psychiatric hospitals in future periods, it could result in charges to income for the cost necessary to exit the hospital operations. Potential Reductions in Reimbursement by Third-Party Payers and Changes in Hospital Payor Mix The Company's hospitals have been adversely affected by factors influencing the entire psychiatric hospital industry. Factors which affect the Company include (i) the imposition of more stringent length of stay and admission criteria and other cost containment measures by payers; (ii) the failure of reimbursement rate increases from certain payers that reimburse on a per diem or other discounted basis to offset increases in the cost of providing services; (iii) 3 an increase in the percentage of its business that the Company derives from payers that reimburse on a per diem or other discounted basis; (iv) a trend toward higher deductible and co-insurance for individual patients; and (v) a trend toward limiting employee health benefits, such as reductions in annual and lifetime limits on mental health coverage. All of these factors may result in reductions in the amounts that the Company's hospitals can expect to collect per patient day for services provided. For the fiscal year ended September 30, 1995, the Company derived approximately 47% of its gross psychiatric patient service revenue from private-pay sources (including HMOs, PPOs, commercial insurance and Blue Cross), 26% from Medicare, 17% from Medicaid, 4% from the Civilian Health and Medical Program for the Uniformed Services ("CHAMPUS") and 6% from other government programs. Changes in the mix of the Company's patients among the private-pay, Medicare and Medicaid categories, and among different types of private-pay sources, can significantly affect the profitability of the Company's hospital operations. Therefore, there can be no assurance that payments under governmental and private third-party 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. Previous Bankruptcy Reorganization The Company was reorganized pursuant to Chapter 11 of the United States Bankruptcy Code, effective on July 21, 1992 (the "Reorganization"). Prior to the Reorganization, the Company's total indebtedness was approximately $1.8 billion; and from February 1991 until July 1992, the Company was in default in the payment of interest and principal, or both, on substantially all such indebtedness. The indebtedness was incurred by the Company in connection with a management buy-out of the Company in 1988 and a hospital-construction program. As a result of the Reorganization, the Company's long-term debt was reduced by approximately $700 million and its redeemable preferred stock of $233 million was eliminated. The holders of such debt and preferred stock received approximately 97% of Magellan's Common Stock outstanding on July 21, 1992. Governmental Budgetary Constraints and Healthcare Reform In the 1995 and 1996 sessions of the United States Congress, the focus of healthcare legislation has been on budgetary and related funding mechanism issues. A number of reports, including the 1995 Annual Report of the Board of Trustees of the Federal Hospital Insurance Program (Medicare) have projected that the Medicare "trust fund" is likely to become insolvent by the year 2002 if the current growth rate of approximately 10% per annum in Medicare expenditures continues. Similarly, federal and state expenditures under the Medicaid program are projected to increase significantly during the same seven-year period. In response to these projected expenditure increases, and as part of an effort to balance the federal budget, 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. Congress has passed legislation that would reduce projected expenditure increases substantially and would make significant changes in the Medicare and the Medicaid programs. The Clinton Administration has proposed alternate measures to reduce, to a lesser extent, projected increases in Medicare and Medicaid expenditures. As of the date of this Prospectus, neither proposal has become law. The Medicare legislation that has been adopted by Congress would, with some differences, reduce projected expenditure increases by a variety of means, including reduced payments to providers (including the Company), increased beneficiary premiums for physician and certain other services, and creation of incentives for Medicare beneficiaries to enroll in managed care plans or to accept Medicare coverage with a substantially increased deductible. Changes in the Medicaid program would reduce the number and extent of federal mandates concerning how state Medicaid programs operate (including levels of benefits provided and levels of payments to providers) and would change the funding mechanism from a sharing formula between the federal government and a state to "block grant" funding. The Company cannot predict the effect of any such legislation, if adopted, on its operations; but the Company anticipates that, although overall Medicare and Medicaid funding may be reduced from projected levels, the changes in such programs may provide opportunities to the Company to obtain increased Medicare and Medicaid business through risk-sharing or partial risk-sharing contracts with managed care plans and state Medicaid programs. 4 Although the United States Congress, in 1995 and 1996, has not considered healthcare reform proposals, the Company anticipates that numerous healthcare reform proposals will continue to be introduced in future sessions of Congress. The Company cannot predict whether any such proposal will be adopted or the effect on the Company of any proposal that does become law. A number of states in which the Company has operations have either adopted or are considering the adoption of healthcare reform proposals of general applicability or Medicaid reform proposals, partly in response to possible changes in Medicaid law. Where adopted, these state reform laws have often not yet been fully implemented. The Company cannot predict the effect of these state healthcare reform and Medicaid reform laws on its operations. Provider Business-Competition Each of the Company's hospitals competes with other hospitals, some of which are larger and have greater financial resources. Some competing hospitals are owned and operated by governmental agencies, others by nonprofit organizations supported by endowments and charitable contributions and others by proprietary hospital corporations. The hospitals frequently draw patients from areas outside their immediate locale and, therefore, the Company's hospitals may, in certain markets, compete with both local and distant hospitals. In addition, the Company's hospitals compete not only with other psychiatric hospitals, but also with psychiatric units in general hospitals, and outpatient services provided by the Company may compete with private practicing mental health professionals and publicly funded mental health centers. The competitive position of a hospital is, to a significant degree, dependent upon the number and quality of physicians who practice at the hospital and who are members of its medical staff. The Company has entered into joint venture arrangements with other healthcare providers in certain markets to promote more efficiency in the local delivery system. The Company believes that its provider business competes effectively with respect to the aforementioned factors. However, there can be no assurance that Magellan will be able to compete successfully in the provider business in the future. Competition among hospitals and other healthcare providers for patients has intensified in recent years. During this period, hospital occupancy rates for inpatient behavioral care patients in the United States have declined as a result of cost containment pressures, changing technology, changes in reimbursement, changes in practice patterns from inpatient to outpatient treatment and other factors. In recent years, the competitive position of hospitals has been affected by the ability of such hospitals to obtain contracts with Preferred Provider Organizations ("PPO's"), Health Maintenance Organizations ("HMO's") and other managed care programs to provide inpatient and other services. Such contracts normally involve a discount from the hospital's established charges, but provide a base of patient referrals. These contracts also frequently provide for pre-admission certification and for concurrent length of stay reviews. The importance of obtaining contracts with HMO's, PPO's and other managed care companies varies from market to market, depending on the individual market strength of the managed care companies. State certificate of need laws place limitations on the Company's and its competitors' ability to build new hospitals and to expand existing hospitals. Protection from new competition is reduced in those states where there is no certificate of need law, and opportunities for growth are limited by the certificate of need requirement in states having such laws. As of December 31, 1995, the Company operated 44 hospitals in 12 states (Arizona, Arkansas, California, Colorado, Indiana, Kansas, Louisiana, Nevada, New Mexico, South Dakota, Texas and Utah) which do not have certificate of need laws applicable to hospitals. In most cases, these laws do not restrict the ability of the Company or its competitors to offer new outpatient services. Proposals have been made in a number of jurisdictions to repeal currently applicable certificate of need laws. Several states have instituted moratoria on new certificates of need or otherwise stated their intent not to grant approval for new facilities. Managed Care Business - Competition The Company, through its Green Spring subsidiary, now operates in the managed healthcare industry. The managed healthcare industry is being affected by various external factors including rising healthcare costs, intense price competition, and market consolidation by major managed care companies. Magellan faces competition from a number of sources including other behavioral health managed care companies and traditional full service managed care 5 companies that contract to provide behavioral healthcare benefits. Also, to a lesser extent, competition exists from fully capitated multi-specialty medical groups and individual practice associations that directly contract with managed care companies and other customers to provide and manage all components of healthcare for the members including the behavioral healthcare component. The Company believes that the most significant factors in a customer's selection of a managed behavioral healthcare company include price, the extent and depth of provider networks and quality of services. The Company also believes that the acquisition of Green Spring creates opportunities to enhance its revenues through managed care contracts utilizing the continuum of care and through information systems that support care management and at-risk pricing mechanisms, although no such assurance can be given. Management believes that its managed care business competes effectively with respect to these factors. However, there can be no assurance that Magellan will be able to compete successfully in the managed care business in the future. Limitations Imposed by the Credit Agreement and Senior Note Indenture In May 1994, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement") with certain financial institutions and issued $375 million of Senior Subordinated Notes (the "Senior Notes") to institutional investors. The Credit Agreement and the indenture for the Senior Notes contain a number of restrictive covenants which, among other things, limit the ability of the Company and certain of its subsidiaries to incur other indebtedness, enter into certain joint venture transactions, incur liens, make certain restricted payments and investments, enter into certain business combination and asset sale transactions and make capital expenditures. These restrictions could adversely affect the Company's ability to conduct its operations, finance its capital needs or to pursue attractive business combinations and joint ventures if such opportunities arise. Under the Credit Agreement, the Company also is required to maintain certain specified financial ratios. Failure by the Company to maintain such financial ratios or to comply with the restrictions contained in the Credit Agreement and the indenture for the Senior Notes could cause such indebtedness (and by reason of cross-acceleration provisions, other indebtedness) to become immediately due and payable and/or could cause the cessation of funding under the Credit Agreement. Regulatory Environment The federal government and all states in which the Company operates regulate various aspects of the Company's businesses. Such regulations provide for periodic inspections or other reviews of the Company's provider operations by, among others, state agencies, the United States Department of Health and Human Services (the "Department") and CHAMPUS to determine compliance with their respective standards of care and other applicable conditions of participation which is necessary for continued licensure or participation in identified healthcare programs, including, but not limited to, Medicare, Medicaid and CHAMPUS. The Company is also subject to state regulation regarding the admission and treatment of patients and federal regulations regarding confidentiality of medical records of substance abuse patients. Although the Company endeavors to comply with such regulatory requirements, there can be no assurance that the Company will always be in full compliance. The failure to obtain or renew any required regulatory approvals or licenses or to qualify for continued participation in identified healthcare programs could adversely affect the Company's operations. In addition, there is currently pending before Congress legislation that would establish a program to control fraud and abuse with respect to health plans maintained by all public and private payers, as opposed to current fraud and abuse laws that relate only to specified governmental payers. The Company is also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments between healthcare providers that are designed to induce overutilization of services paid for by Medicare or Medicaid. Such laws include the anti-kickback provisions of the federal Medicare and Medicaid Patients and Program Protection Act of 1987. These provisions prohibit, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. GPA, the Company's subsidiary that owns or manages professional group practices, is subject to the federal and the state illegal remuneration, practice of medicine and certain other laws which prohibit the subsidiary from owning, but not managing, professional practices. In addition, some states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. The Company 6 endeavors to comply with all federal and state laws applicable to its business. However, a violation of these federal and state laws may result in civil or criminal penalties for individuals or entities or exclusion from participation in identified healthcare programs. Magellan's managed care business operations, in some states, are subject to utilization review, licensure and related state regulation procedures. Green Spring provides managed behavioral healthcare services to various Blue Cross/Blue Shield plans that operate Medicare and Medicaid health maintenance organizations or other at-risk managed care programs and that participate in the Blue Cross Federal Employees health program. As a contractor to these Blue Cross/Blue Shield plans, Green Spring is indirectly subject to federal and, with respect to the Medicaid program, state monitoring and regulation of performance and financial reporting requirements. Although Magellan believes that it is in compliance with all current state and federal regulatory requirements applicable to the managed care business it conducts, failure to do so could adversely affect its operations. Physician ownership of or investment in healthcare entities to which they refer patients has come under increasing scrutiny at both state and federal levels. Congress passed legislation (commonly referred to as "Stark I") which prohibits physicians from referring Medicare patients for clinical laboratory services to an entity with which the physician has a financial relationship. The Department recently published final Stark I regulations on August 14, 1995. Such regulations will govern how the Department views and reviews these financial relationships. Additionally, Congress passed legislation (commonly referred to as "Stark II") which prohibits physicians from referring Medicare or Medicaid patients for certain designated health services, including inpatient and outpatient hospital services, to entities in which they have an ownership or investment interest or with which they have a compensation arrangement. The entity is also prohibited from billing the Medicare or Medicaid programs for such services rendered pursuant to a prohibited referral. To the extent designated services are provided by the Company's provider and managed care operations, physicians who have a financial relationship with the Company and the Company will be subject to the provisions of Stark II. Some states have passed similar legislation which prohibits the referral of private pay patients. To date, the Department has not published Stark II regulations. However, the Department indicated that it will review referrals involving any of the designated services under the language and interpretations set forth in the Stark I rule. The Company's acquisitions and joint venture activities are also subject to federal antitrust laws. The healthcare industry has recently been an active area of antitrust enforcement action by the United States Federal Trade Commission (the "FTC") and the Department of Justice ("DOJ"). The Company's acquisitions and joint venture arrangements could be the subject of a DOJ or an FTC enforcement action which, if determined adversely to the Company, could have a material adverse effect upon the Company's operations. Changes in laws or regulations or new interpretations of existing laws or regulations can have an adverse effect on the Company's operating methods, costs, reimbursement amounts and acquisition and joint venture activities. In addition, the healthcare industry is subject to increasing governmental scrutiny, and additional laws and regulations may be enacted which could require changes in the Company's operations. A federal or state agency charged with enforcement of such laws and regulations might assert an interpretation of such laws and resolutions or may increase scrutiny of a previously ignored area, which may require changes in the Company's operations. Dependence on Healthcare Professionals Physicians traditionally have been the source of a significant portion of the patients treated at the Company's hospitals. Therefore, the success of the Company's hospitals is dependent in part on the number and quality of the physicians on the medical staffs of its hospitals and their admission practices. A small number of physicians account for a significant portion of patient admissions at some of the Company's hospitals. There can be no assurance that the Company can retain its current physicians on staff or that additional physician relationships will be developed in the future. Furthermore, hospital physicians generally are not employees of the Company and in general Magellan does not have contractual arrangements with hospital physicians restricting the ability of such physicians to practice elsewhere. 7 Potential General and Professional Liability Effective June 1, 1995, Plymouth Insurance Company, Ltd. ("Plymouth"), a wholly-owned Bermuda subsidiary of the Company, provides general and hospital professional liability insurance up to $25 million per occurrence for the Company's hospitals. All of the risk of losses from $1.5 million to $25 million per occurrence has been reinsured with unaffiliated insurers. The Company also insures with an unaffiliated insurer 100% of the risk of losses between $25 million and $100 million per occurrence, subject to an annual aggregate limit of $75 million. The Company's general and professional liability coverage is written on a "claims made or circumstances reported" basis. For reinsured claims between $10 and $25 million per occurrence, the Company has an annual aggregate limit of coverage of $30 million. For reinsured claims between $1.5 million and $10 million per occurrence, the Company has no significant limitations on the aggregate dollar amounts of coverage. For the six years from June 1, 1989 through May 31, 1995, the Company had a similar general and hospital professional liability insurance program. For those years, the per occurrence deductible (with respect to which the Company was self-insured) was $2.5 million for the years ended May 31, 1990 and 1991, $2 million for the years ended May 31, 1992 and 1993 and $1.5 million (relating to the Company's general hospitals sold on September 30, 1993) for the year ended May 31, 1994. For psychiatric hospitals, Plymouth's coverage did not contain a per occurrence deductible for the years ended May 31, 1994 and 1995. In December 1994, the per occurrence deductible for the years ended May 31, 1989 and 1990 was eliminated. Plymouth provides coverage with no per occurrence deductible for hospital system claims which had not been paid prior to December 31, 1994. Plymouth does not underwrite any insurance policies with any parties other than the Company or its affiliates and subsidiaries. The amount of expense relating to Magellan's malpractice insurance may materially increase or decrease from year to year depending, among other things, on the nature and number of new reported claims against Magellan and amounts of settlements of previously reported claims. To date, Magellan has not experienced a loss in excess of policy limits. Management believes that its coverage limits are adequate. However, losses in excess of the limits described above or for which insurance is otherwise unavailable could have a material adverse effect upon the Company. Potential Expiration and Realization Uncertainties Related to Estimated Tax Net Operating Loss Carryforwards As of September 30, 1995, the Company had estimated tax net operating loss ('NOL") carryforwards of approximately $233 million available to reduce future federal taxable income. These NOL carryforwards expire in 2006 through 2009 and are subject to adjustment upon examination by the Internal Revenue Service. Due to the ownership change which occurred as a result of the Reorganization, the Company's utilization of NOLs generated prior to the effective date of the Reorganization is limited. Based on this limitation and certain other factors, the Company has recorded a valuation allowance against the amount of the NOL deferred tax asset that in Management's opinion, is not likely to be recovered. There can be no assurance that these NOL carryforwards will not expire, be reduced or be made subject to further limitations prior to their potential utilization in future periods. Capitation Arrangements The Company's managed care business contracts with companies holding state HMO or insurance company licenses on a capitated or "at-risk" basis where the risk of patient care is assumed by the Company in exchange for a monthly fee per member regardless of utilization level. As of December 31, 1995, approximately 30% of Green Spring's managed care members were under capitated arrangements. During 1995, approximately 70% of Green Spring's revenues were from at-risk contracts. Increases in utilization levels under capitated contractual arrangements could adversely effect the operations of the managed care business. Some jurisdictions are taking the position that capitated agreements in which the provider bears the risk should be regulated by insurance laws. In this regard, Green Spring's primary customers are comprised of Blue Cross/Blue Shield Plans and other insurance entities which are licensed insurance organizations in their respective states. Green 8 Spring offers "carved out" managed mental health benefits, on a wholesale basis, as a vendor to the regulated insurance organizations. Most current employer group relationships are also contracted through the respective regulated insurance organizations. However, as Magellan and Green Spring develop more direct risk arrangements on a retail basis directly with employer groups or other non-insurance entity customers, the Company may be required to obtain insurance licenses in the respective states where the direct risk arrangements are to be pursued. There can be no assurance that the Company can obtain the insurance licenses required by the respective states in a timely or cost effective manner to respond to market demand. Shares Eligible for Future Sale Upon completion of this offering, the Shares will be eligible for sale in the open market without restriction. On January 25, 1996, the Company completed the sale of 4,000,000 shares of Common Stock (the "Rainwater Shares") to Rainwater-Magellan Holdings, L.P. ("Rainwater-Magellan") in a private placement transaction, along with a warrant to purchase an additional 2,000,000 shares of Common Stock (the "Warrant") pursuant to a Stock and Warrant Purchase Agreement (the "Stock and Warrant Purchase Agreement"). The Warrant, which expires in January 2000, entitles Rainwater-Magellan to purchase such additional shares of Common Stock at a per share price of $26.15, subject to adjustment for certain dilutive events, and provides registration rights for the shares of Common Stock underlying the Warrant. The aggregate purchase price for the Rainwater Shares and the Warrant was $69,732,000. Upon completion of the acquisition of the Rainwater Shares (and prior to exercise of the Warrant), Rainwater-Magellan owned approximately 12.2% of the outstanding voting securities of Magellan. The Warrant becomes exercisable on January 25, 1997 and expires on January 25, 2000. No more than 40,000 shares may be sold by Rainwater-Magellan or its affiliates prior to January 25, 1997. In addition, the 2,000,000 shares of Common Stock underlying the Warrant will be eligible for sale in the open market without restriction on or after January 25, 1997, assuming registration of the offer and sale of such shares in the manner required by the Stock and Warrant Purchase Agreement. In connection with the acquisition of a majority interest in Green Spring, the remaining Green Spring stockholders, consisting of four Blue Cross/Blue Shield plans (the "Minority Stockholders") have the option, under certain circumstances, to exchange their ownership interests in Green Spring for 2,831,739 shares of the Company's Common Stock or $65.1 million in the Company's subordinated notes (the "Exchange Option"). Assuming exercise by all of the Minority Stockholders of the Exchange Option, all 2,831,739 shares of Common Stock issuable upon exercise of the Exchange Option will be eligible for sale in the open market without restriction. As of March 31, 1996, the Company's officers, directors and employees held options for the purchase of 2,884,824 shares of Common Stock (973,848 of which are currently vested and 1,910,976 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 Magellan Common Stock to fluctuate substantially. Any such adverse announcement with respect to healthcare reform measures or program expenditures, acquisitions or any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of Magellan Common Stock in any given period. As a result, the market for Magellan Common Stock may experience price and volume fluctuations unrelated to the operating performance of Magellan. See "Price Range of Common Stock and Dividend Policy" on page 12. 9 THE COMPANY Magellan is an integrated national behavioral healthcare company. The Company operates through three principal subsidiaries engaging in (i) the provider business, (ii) the managed care business and (iii) the public sector business. Charter Behavioral Health Systems, Inc., the Company's wholly-owned subsidiary that engages in the provider business, operated 99 acute care psychiatric hospitals and three residential psychiatric treatment centers with an aggregate capacity of 9,070 licensed beds as of December 31, 1995. Ninety-three of the Company's hospitals operate partial hospitalization programs and the Company operates 141 outpatient centers, staffed by mental health professionals. Approximately 91% of the Company's fiscal 1995 consolidated revenue was contributed by the provider business. Management estimates that approximately 75% of its fiscal 1996 consolidated revenue will be contributed by the provider business. Green Spring, the Company's 61% owned subsidiary that engages in the managed care business, provides managed behavioral healthcare services, which include (i) Enhanced Utilization Management, a utilization review process that employs clinical criteria designed to provide each patient with accessible, appropriate and affordable treatment across the entire continuum of care and services; (ii) Care Management, a fully integrated healthcare model that offers utilization review services and provides care to patients through the management of a national network of contract providers and Green Spring-owned staff model clinics; (iii) Employee Assistance Plans, employer-paid assessment, counseling and referral programs that help employees address personal and workplace problems; and (iv) Comprehensive Administrative Services, including member assistance, management reporting, claims processing, clinical management information and provider referral systems that are adaptable to customer circumstances and requirements through a network of more than 30,000 providers nationwide covering approximately 12 million members as of December 31, 1995. The Company had no significant managed care revenue in fiscal 1995. Management estimates that approximately 15% of its fiscal 1996 consolidated revenue will be contributed by the managed care business. Magellan Public Solutions, Inc. ("Public Solutions"), the Company's wholly-owned subsidiary that engages in the public sector business, provides specialty home-based behavioral healthcare services, behavioral services in correctional facilities and troubled and delinquent adolescent facilities services pursuant to contractual arrangements with governmental agencies. Approximately 4% of the Company's fiscal 1995 consolidated revenue was provided by the public sector business. Management estimates that less than 10% of its fiscal 1996 consolidated revenue will be contributed by the public sector business. Magellan's business strategy is to provide access to a full continuum of behavioral healthcare and managed care services and to perform such services in a cost effective manner with predictable results. The Company's integrated national behavioral healthcare system has the capability to deliver and to manage the delivery of behavioral healthcare services for large public and private payers who need assistance in managing the risk of behavioral healthcare costs. Magellan was incorporated in 1969 under the laws of the State of Delaware. Magellan Common Stock is traded on the American Stock Exchange under the symbols "MGL." Unless the context otherwise requires, references to Magellan include Magellan Health Services, Inc. and its subsidiaries. Magellan'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. Certain Forward-Looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in certain forward-looking statements made by or on behalf of the Company. Specifically, the Company has projected the percentage contribution to total revenues for each of its lines 10 of business for the 1996 fiscal year. The projections are based on an analysis of prevailing conditions and trends in the behavioral healthcare industry which directly impact the Company. Industry conditions and trends considered by the Company in making the projections include (1) the effects of competition on each of the Company's lines of business; (2) increased payer pressures in the behavioral healthcare industry with respect to negotiated rates and other cost-containment measures; and (3) the effects of hospital closures.. Industry conditions and trends not considered by the Company in making the projections include (1) governmental budgetary constraints which could have the effect of restricting the aggregate amount of funds available to support governmental healthcare programs, including Medicare and Medicaid; (2) uncertainties in the regulatory environment due to proposed healthcare reform legislation, including changes in Medicare and Medicaid reimbursement programs; and (3) increased payor and governmental investigations and/or inquiries into alleged fraud and abuse concerns as the Company cannot project the effect of such items. Any legislation subsequently passed could adversely effect any such projection. There can be no assurances that the projected results will be achieved. As a result of the factors identified above, as well as the factors described under "Risk Factors" and other factors, the Company's actual results could vary significantly from the performance projected in the forward-looking statements. RECENT DEVELOPMENTS Green Spring Acquisition On December 13, 1995, the Company acquired a 51% ownership interest in Green Spring for approximately $68.9 million in cash, the issuance of 215,458 shares of Common Stock valued at approximately $4.3 million and the contribution of Group Practice Affiliates, a wholly-owned Magellan subsidiary, which became a wholly-owned subsidiary of Green Spring. On December 20, 1995, the Company acquired an additional 10% ownership interest in Green Spring for approximately $16.7 million in cash as a result of an exercise by a minority stockholder of its Exchange Option for a portion of the stockholder's interest in Green Spring. The Company currently has a 61% ownership interest in Green Spring. The Green Spring acquisition created the first fully integrated national behavioral healthcare system and gives the Company the capability to provide case management and delivery services to large private organizations and a public sector marketplace seeking increased privatization of services. The Company changed its name to Magellan Health Services, Inc. on December 21, 1995 to reflect the broader range of services it expects to provide as a result of the Green Spring acquisition and the creation of Public Solutions. The minority stockholders of Green Spring consist of four Blue Cross/Blue Shield organizations (the "Blues") that are key customers of Green Spring. In addition, two other Blues organizations that formerly owned a portion of Green Spring will continue as customers of Green Spring. As of December 31, 1995, the minority stockholders of Green Spring have the Exchange Option, which under certain circumstances, allows the minority stockholders to exchange their ownership interests in Green Spring for 2,831,739 shares of Magellan Common Stock or $65.1 million in subordinated notes. The Company may elect to pay cash in lieu of issuing the subordinated notes. The Exchange Option expires December 13, 1998. Sale of Common Stock and Warrant On January 25, 1996, the Company completed the sale to Rainwater-Magellan of the Rainwater Shares, along with a warrant to purchase an additional 2,000,000 shares of Common Stock, pursuant to the Stock and Warrant Purchase Agreement. The Warrant, which expires in January, 2000, entitles Rainwater-Magellan to purchase such additional shares of Common Stock at a per share price of $26.15, subject to adjustment for certain dilutive events, and provides registration rights for the shares of Common Stock underlying the Warrant. The aggregate purchase price for 11 the Rainwater Shares and the Warrant was $69,732,000. Upon completion of the acquisition of the Rainwater Shares (and prior to exercise of the Warrant), Rainwater-Magellan owned approximately 12.2% of the outstanding voting securities of Magellan. The Warrant becomes exercisable on January 25, 1997 and expires on January 25, 2000. The Stock and Warrant Purchase Agreement places certain restrictions on the sale or transfer of the Rainwater Shares and the Common Stock issuable upon exercise of the Warrants (the "Warrant Shares"). As a result, no more than 40,000 Rainwater Shares may be sold by Rainwater-Magellan or its affiliates prior to January 25, 1997. Further, prior to January 25, 2000, Rainwater-Magellan or its affiliates may not sell or transfer in a privately negotiated transaction to a single purchaser and its affiliates or a "group" (as defined in Rule 13d-5(b)(1) under the Exchange Act) Rainwater Shares or Warrant Shares which would equal or exceed five percent (5%) of the Common Stock then outstanding on a fully-diluted basis. Neither of these restrictions affect the free transferability of the Rainwater Shares among Rainwater-Magellan and its affiliates. In addition, the Stock and Warrant Purchase Agreement contains certain standstill covenants on the part of Rainwater-Magellan which, among other things, prohibit Rainwater-Magellan and its affiliates from purchasing additional shares of Common Stock so that they collectively own in excess of 20% of the outstanding shares of Common Stock prior to January, 1998. The Stock and Warrant Purchase Agreement also grants Rainwater-Magellan certain board representation rights. The Company used $68.0 million of the proceeds from the sale of the Rainwater Shares and the Warrant to Rainwater-Magellan to repay indebtedness incurred under the Company's Credit Agreement, which indebtedness was incurred in connection with the investments in Green Spring during the first quarter of fiscal 1996. Total debt outstanding under the Credit Agreement after the $68.0 million repayment was approximately $80.6 million. The loans outstanding under the Credit Agreement as of January 25, 1996 bear interest at a rate of 7.625% per annum and mature on March 31, 1999. 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 Stockholders. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is listed for trading on the American Stock Exchange (ticker symbol "MGL"). As of January 31, 1996, there were 12,221 holders of record of the Company's Common Stock. The following table sets forth the high and low sales prices of the Company's Common Stock as reported by the American Stock Exchange for the periods indicated: 12
Common Stock Sales Prices ------------------------- Calendar Year High Low - -------------------------------------------------- -------- --------- 1993 Fourth Quarter............................. $ 27 $ 21 1994 First Quarter.............................. $ 28 $21 3/8 Second Quarter............................. 26 1/8 21 3/4 Third Quarter.............................. 28 1/2 21 1/4 Fourth Quarter............................. 28 1/2 19 1995 First Quarter.............................. $21 1/4 $13 7/8 Second Quarter............................. 19 5/8 15 5/8 Third Quarter.............................. 23 1/4 16 1/4 Fourth Quarter............................. 24 1/4 17 3/8 1996 First Quarter ............................. $ 25 $21 3/8 Second Quarter (through April 25, 1996).. 23 21 3/8
The Company has not declared any cash dividends during the past three fiscal years. The Company is prohibited from paying dividends (other than dividends payable in shares of Common Stock) on its Common Stock under the terms of the Credit Agreement, except for cash dividends that, in the aggregate, from May 1994, do not exceed 6% of the net cash proceeds from issuances of capital stock, reduced by the aggregate cost of stock purchases since May 1994 and certain other limited circumstances. CAPITALIZATION The following table sets forth the consolidated capitalization of Magellan as of December 31, 1995 and as adjusted to reflect the sale by the Company of the Rainwater Shares and the Warrant on January 25, 1996 to Rainwater-Magellan.
December 31, 1995 ---------------------------------- Actual As Adjusted -------- --------------- (in thousands, except per share data) Revolving Credit Agreement............................... $148,593 $ 80,593 11.25% Senior Subordinated Notes due 2004................ 375,000 375,000 Other long-term debt..................................... 97,528 97,528 Stockholders' equity: Preferred stock, without par value; 10,000 authorized; none issued and outstanding.. -- -- Common Stock, $.25 par value; 80,000 authorized; 28,664 issued and outstanding; 32,664 issued and outstanding, as adjusted...... 7,166 8,166 Additional paid-in capital........................ 259,370 326,993 Accumulated deficit............................... (152,092) (152,092) Warrants outstanding.............................. 64 64 Common Stock in Treasury, 462 shares.............. (9,238) (9,238) Cumulative foreign currency adjustments........... (1,090) (1,090) ------- ------ Total stockholders' equity................... 104,180 172,803 ------- ------- Total capitalization......................... $725,301 $725,924 ======== =======
13 SELECTED FINANCIAL INFORMATION The following table sets forth selected historical financial data and selected pro forma financial data for Magellan for the year ended September 30, 1995 and the three months ended December 31, 1995. The selected historical financial data for the year ended September 30, 1995 has been derived from the historical financial statements of Magellan audited by Arthur Andersen LLP, independent public accountants. The selected historical financial data for the three months ended December 31, 1995 has been derived from unaudited interim statements of operations of Magellan. In the opinion of management, the unaudited interim financial information includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The selected pro forma financial data gives effect to the January 25, 1996 sale of the Rainwater Shares, as if such sale had occurred on October 1, 1994.
Fiscal year ended Three months ended September 30, 1995 December 31, 1995 -------------------------- ----------------------------- Actual Pro Forma (1) Actual Pro Forma (1) --------- ------------- ---------- --------------- Net income (loss)............................. $(42,963) $(39,731) $ 9,748 $ 10,493 Average number of common shares outstanding... 27,870 31,870 27,994 31,994 Income (loss) per common share................ (1.54) (1.25) 0.35 0.33
(1) The adjustments to pro forma net income (loss), income (loss) per common share and average number of common shares outstanding result from the issuance of the 4,000,000 shares to Rainwater-Magellan and a related adjustment to reduce interest expense, net of tax, for the use of $68.0 million of the proceeds from the issuance of such shares to reduce outstanding borrowings under the Credit Agreement for the fiscal year ended September 30, 1995 and the three months ended December 31, 1995. SELLING STOCKHOLDERS The Selling Stockholders are former Mentor Stockholders. The Shares were acquired by the Selling Stockholders in connection with the acquisition of Mentor by the Company and related transactions. The following table provides the names and the number of shares of Magellan Common Stock owned by each Selling Stockholder. Since the Selling Stockholders may sell all, some or none of their Shares, no estimate can be made of the aggregate number of Shares that are to be offered hereby or that will be owned by each Selling Stockholder upon completion of the offering to which this Prospectus relates. The Shares offered by this Prospectus may be offered from time to time by the Selling Stockholders named below:
Shares of Shares of Selling Stockholder Common Stock Selling Stockholder Common Stock - ------------------- ------------ ------------------- ------------ E. Byron Hensley, Jr.(1) 400,642 John G. Gleacher 7,997 Eric J. Gleacher 180,578 Sarah E. Gleacher 7,997 Olsten Service Corp. 127,534 Jeffrey H. Tepper 5,577 Thomas P. Riley(1)(2) 141,397 Susan MacKenzie Riley Charles G. Phillips 111,875 and Mark Morin, Trustees 5,572 Harris & Harris Group, Robert A. Engel 4,808 Inc.(2). 108,736 Leonard O. Henry 4,598
14
Shares of Shares of Selling Stockholder Common Stock Selling Stockholder Common Stock - ------------------- ------------ ------------------- ------------ James Goodwin 75,571 Alan L. Hollis 3,831 Gregory T. Torres 43,140 Donald R. Monack 3,831 Richard A. Derbes 23,970 Janice L. Quiram 3,831 H. Conrad Meyer 27,640 Andrew Gilman 3,199 Elizabeth J. Hopper 22,012 Lois Simon 3,065 Peter W. Mair 19,266 Lana Hensley Hoffman 2,476 Emil W. Henry, Jr. 16,309 Martha Faye Koysh 2,476 Robert W. Kitts 11,995 Ruth Ann Roberts 2,476 Gleacher 7 Investors L.P. 11,029 Frank N. Liguori(3) 5,520 Gerald M. Bereika 10,969 William F. Murdy(2) 2,148 Peter P. Polloni(2) 10,031 Marie A. Gentile 1,921 Eric J. Gleacher, as Christina Hensley Bair 1,857 custodian for Jay S. Dianne Hensley Ramponi Gleacher 7,997 and Thomas P. Eric J. Gleacher, as Riley, Trustees 1,857 custodian for Patricia Christina Hensley G. Gleacher 7,997 Bair and Thomas Eric J. Gleacher, as P. Riley, Trustees 1,609 custodian for William Wayne J. Stelk 766 R. Gleacher 7,997 James E. Gleacher 7,997 - ---------------------------- (1) As a condition to Magellan's obligation to consummate the Merger, each of Messrs. Riley and Hensley entered into a Noncompete and Confidentiality Agreement with Magellan. In accordance with the terms of such agreements, Messrs. Riley and Hensley agreed, among other things: (i) to maintain in confidence trade secrets of Magellan and Mentor at all times during such individuals' respective affiliation with Magellan and at all times thereafter, and to maintain any confidential information for periods of two years and five years, respectively, after the date of such agreements; and (ii) not to enter into certain arrangements competitive with Magellan for periods of one year and five years, respectively, after the date of such agreements. In consideration for the covenants set forth in the Noncompete and Confidentiality Agreements, Magellan agreed to pay Messrs. Riley and Hensley $350,339 and $230,839, respectively. Such amounts were to have been paid by the issuance of shares of Magellan Common Stock to Messrs. Riley and Hensley in July, 1995. The number of shares set forth in the table above includes 23,355 and 15,389 shares of Magellan Common Stock which were to have been issued to Messrs. Riley and Hensley, respectively, pursuant to the Noncompete and Confidentiality Agreements (assuming a $15 per share issuance price and payment of cash in lieu of fractional shares). Such amounts were paid in cash. (2) Harris & Harris Group, Inc. and Messrs. Riley, Polloni and Murdy own 50,000, 5,000, 500 and 500 shares of Magellan Common Stock, respectively, that were not acquired in connection with the Merger and which are excluded from the above table. (3) Pursuant to the Merger Agreement, Magellan agreed to pay Mr. Ligouri $50,585 for consulting services, which amount was paid by the issuance of shares of Magellan Common Stock to Mr. Ligouri in July, 1995. The number of shares set forth in the table above includes 2,911 shares of Magellan Common Stock issued to Mr. Ligouri in payment of such amount. PLAN OF DISTRIBUTION The Shares may be sold from time to time by the Selling Stockholders on the American Stock Exchange or any national securities exchange or automated interdealer quotation system on which shares of Magellan Common Stock are then listed, through negotiated transactions or otherwise. The Shares will be sold at prices and on terms then prevailing, at prices related to the then current market price or at negotiated prices. The Selling Stockholders may effect sales of the Shares directly or by or through agents, brokers, dealers or underwriters and the Shares may be sold by one or more of the following methods: (a) underwritten public offerings, (b) ordinary brokerage transactions, (c) purchases 15 by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this Prospectus, and (d) in "block" sales. 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 any 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 Stockholders and any broker or dealer. In offering the Shares covered by this Prospectus, the Selling Stockholders and any brokers, dealers or agents who participate in a sale of the Shares by the Selling Stockholders may be considered "underwriters" within the meaning of Section 2(11) of the 1933 Act, and any profits realized by the Selling Stockholders and the compensation of any broker/dealers may be deemed to be underwriting discounts and commissions. As required by the Investment and Registration Rights Agreement, Magellan has filed the Registration Statement, of which this Prospectus forms a part, with respect to the sale of the Shares. Magellan has agreed to use its best efforts to keep the Registration Statement current and effective through January 28, 1997, with certain exceptions. Magellan will not receive any of the proceeds from the sale of the Shares by the Selling Stockholders. Magellan will bear the costs of registering the Shares under the 1933 Act, including the registration fee under the 1933 Act, legal and accounting fees and any printing fees. In addition, Magellan will pay the reasonable fees and disbursements of one firm of counsel designated by the holders of a majority of the Shares to act as counsel for all holders of Shares in connection with the registration of such Shares. The Selling Stockholders will bear all other expenses in connection with this offering, including underwriting commissions and/or discounts, if any, and brokerage commissions. Pursuant to the terms of the Investment and Registration Rights Agreement and certain related agreements, Magellan and the Selling Stockholders have agreed to indemnify each other and certain other parties for certain liabilities, including liabilities under the 1933 Act, in connection with the registration of the Shares. LEGAL MATTERS The legality of the Shares has been passed upon for the Selling Stockholders by King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303-1763. EXPERTS The audited, consolidated financial statements of Magellan Health Services, Inc. and its subsidiaries and the related schedule included in the Magellan Annual Report on Form 10-K for the year ended September 30, 1995 have been incorporated by reference in this Prospectus and have been audited by Arthur Andersen LLP, independent auditors, as stated in their report appearing therein and are incorporated by reference in reliance upon the report of such firm and upon their authority as experts in accounting and auditing. 16 - ---------------------------------------- ----------------------------------- 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 1,452,094 SHARES information or representation must not be relied upon as having been authorized by Magellan, or the Selling Stockholders. This Prospectus does not MAGELLAN HEALTH constitute an offer to sell or a SERVICES, INC. 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 COMMON STOCK 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. --------------------------- --------------------------- PROSPECTUS --------------------------- TABLE OF CONTENTS Available Information..................2 Incorporation of Certain Documents by Reference.........................2 Risk Factors...........................3 The Company...........................10 Recent Developments...................11 Use of Proceeds.......................12 Price Range of Common Stock and Dividend Policy.................12 Capitalization........................13 Selected Financial Information........14 Selling Stockholders..................14 Plan of Distribution..................15 Legal Matters.........................16 APRIL 26, 1996 Experts .............................16 - ---------------------------------------- -----------------------------------
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