HAI ACQUISITION. On December 4, 1997, the Company acquired the outstanding common stock of Human Affairs International, Incorporated ("HAI"), a wholly-owned subsidiary of Aetna Insurance Company of Connecticut and a unit of Aetna U.S. Healthcare ("Aetna"), for approximately $122.1 million. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 NOTE H--ACQUISITIONS (CONTINUED) HAI provides managed care services to approximately 16.3 million covered lives, primarily through employee assistance programs and other managed behavioral healthcare plans. The Company funded the acquisition of HAI with cash on hand and has accounted for the acquisition of HAI using the purchase method of accounting. The Company may be required to make additional contingent payments of up to $300 million to Aetna (the "Contingent Payments") over the five-year period (each year a "Contract Year") subsequent to closing. The amount and timing of the Contingent Payments will depend upon HAI's receipt of additional covered lives as computed under two separate calculations. Under the first calculation, the Company may be required to pay up to $25 million per year for each of five years following the acquisition based on the net annual growth in the number of lives covered in specified HAI products. Under the second calculation, the Company may be required to pay up to $35 million per Contract Year, based on the net cumulative increase in lives covered by certain other HAI products. The Company is obligated to make contingent payments under two separate calculations (as previously described) as follows: in respect of each Contract Year, the Company may be required to pay to Aetna the "Tranche 1 Payments" (as defined) and the "Tranche 2 Payments" (as defined). Upon the expiration of each Contract Year, the Tranche 1 Payment shall vest with respect to such Contract Year in an amount equal to the product of (i) the Tranche 1 Cumulative Incremental Members (as defined) for such Contract Year and
Appears in 1 contract
Samples: Quarterly Report
HAI ACQUISITION. On December 4, 1997, the Company acquired the outstanding common stock of Human Affairs International, Incorporated ("HAI"), a wholly-owned subsidiary of Aetna Insurance Company of Connecticut and a unit of Aetna U.S. Healthcare ("Aetna"), for approximately $122.1 million. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 NOTE H--ACQUISITIONS (CONTINUED) HAI provides managed manages the care services to approximately 16.3 of over 16 million covered lives, primarily through employee assistance programs and other managed behavioral healthcare plans. The Company funded the acquisition of HAI with cash on hand and has accounted for the acquisition of HAI using the purchase method of accounting. The Company may be required to make additional contingent payments of up to $300 million to Aetna (the "Contingent Payments") over the five-year period (each year a "Contract Year") subsequent to closing. The amount and timing of the Contingent Payments will depend upon HAI's receipt of additional covered lives as computed lives, under two separate calculations. Under the first calculation, the Company may be required NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 NOTE H--ACQUISITIONS (CONTINUED) to pay up to $25 million per year for each of five years following the acquisition based on the net annual growth in the number of lives covered in specified HAI products. Under the second calculation, the Company may be required to pay up to $35 million per Contract Year, based on the net cumulative increase in lives covered by certain other HAI products. The Company is obligated expects to make contingent payments fund the Contingent Payments, if any, with a combination of cash on hand, future cash flows from operations and borrowing capacity under two separate calculations (as previously described) as follows: in respect of each Contract Year, the Company may be required to pay to Aetna the "Tranche 1 Payments" (as defined) and the "Tranche 2 Payments" New Credit Agreement (as defined). Upon The preliminary allocation of the expiration HAI purchase price to goodwill and identifiable intangible assets was based on the Company's preliminary valuations, which are subject to change upon receiving independent appraisals of each Contract Yearidentifiable intangible assets. The unaudited pro forma information for the quarters ended December 31, 1996 and 1997 have been prepared assuming the Crescent Transactions (as defined), Allied acquisition and HAI acquisition were consummated on October 1, 1996. The unaudited pro forma information does not purport to be indicative of the results that would have actually been obtained had such transactions been consummated, or which may be attained in future periods (in thousands, except per share data): 1996 1997 Net revenue...................................................... $ 235,506 $ 264,427 Income before extraordinary item................................. 10,317 10,384 Net income....................................................... 7,367 10,384 Income per common share--basic: Income per common share--diluted: NOTE I--CONTINGENCIES The Company is self-insured for a substantial portion of its general and professional liability risks. The reserves for self-insured general and professional liability losses, including loss adjustment expenses, are based on actuarial estimates that are discounted at an average rate of 6% to their present value based on the Company's historical claims experience adjusted for current industry trends. The reserve for unpaid claims is adjusted periodically as such claims mature, to reflect changes in actuarial estimates based on actual experience. During the quarter ended December 31, 1997, the Tranche Company recorded reductions in malpractice claim reserves of approximately $4.1 million as a result of updated actuarial estimates. This reduction resulted primarily from updates to actuarial assumptions regarding the Company's expected losses for more recent policy years. These revisions are based on changes in expected values of ultimate losses resulting from the Company's claim experience, and increased reliance on such claim experience. While management and its actuaries believe that the present reserve is reasonable, ultimate settlement of losses may vary from the amount provided. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 NOTE I--CONTINGENCIES (CONTINUED) Certain of the Company's subsidiaries are subject to claims, civil suits, and governmental investigations and inquiries relating to their operations and certain alleged business practices. In the opinion of management, based on consultation with counsel, resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. On August 1, 1996, the United States Department of Justice, Civil Division, filed an Amended Complaint in a civil QUI TAM action initiated in November 1994 against the Company and its Orlando South hospital subsidiary ("Charter Orlando") by two former employees. The First Amended Complaint alleges that Charter Orlando violated the federal False Claims Act (the "Act") in billing for impatient treatment provided to elderly patients. The Court granted the Company's motion to dismiss the government's First Amended Complaint yet granted the government leave to amend its First Amended Complaint. The government filed a Second Amended Complaint on December 12, 1996 which, similar to the First Amended Complaint, alleges that the Company and its subsidiary violated the Act in billing for the treatment of geriatric patients. Like the First Amended Complaints, the Second Amended Complaint is based on disputed clinical and factual issues which the Company believes do not constitute a violation of the Act. On the Company's motion, the Court has ordered the ordered the parties to participate in mediation of the matter. As a result of the mediation, the parties are engaged in settlement discussions which may lead to a resolution of the matter. The parties have reached a tentative financial settlement of this matter for approximately $4.8 million, which has been accrued, however, negotiations concerning substantive non-monetary issues continue, and resolution of such non-monetary issues will be material in connection with the Company's decision to finalize a settlement. There can be no assurance at this time that the non-monetary terms will be resolved to the Company's satisfaction. In any event, the Company and its subsidiary deny the allegations made in the Second Amended Complaint and will vigorously defend against its claims. The Company does not believe this matter will have a material adverse effect on its financial position or results of operations. In October 1996, a group of eight plaintiffs purporting to represent an uncertified class of psychiatrists, psychologists and clinical social workers brought an action under the federal antitrust laws in the United States District Court for the Southern District of New York against nine behavioral health managed care organizations, including Merit, CMG, Green Spring and HAI (collectively, the "Defendants"). The complaint alleges that the Defendants violated Section 1 Payment shall vest of the Xxxxxxx Act by engaging in a conspiracy to fix the prices at which the Defendants purchase services from mental healthcare providers such as the plaintiffs. The complaint further alleges that the Defendants engaged in a group boycott to exclude mental healthcare providers from the Defendants' networks in order to further the goals of the alleged conspiracy. The complaint also challenges the propriety of the Defendants' capitation arrangements with respect their respective customers, although it is unclear from the complaint whether the plaintiffs allege that the Defendants unlawfully conspired to such Contract Year enter into capitation arrangements with their respective customers. The complaint seeks treble damages against the Defendants in an unspecified amount equal and a permanent injunction prohibiting the Defendants from engaging in the alleged conduct which forms the basis of the complaint, plus costs and attorney's fees. Subsequent to the product quarterly period ended December 31, 1997 for which this Report on Form 10-Q was filed, on May 12, 1998, the District Court granted the Defendants' motion to dismiss the complaint with prejudice. On May 27, 1998, the plaintiffs filed a notice of appeal of the District Court's dismissal of their complaint with the United States Second Circuit Court of Appeals. The Defendants intend to vigorously contest this appeal and to further defend themselves in NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 NOTE I--CONTINGENCIES (CONTINUED) this matter. The Company does not believe this matter will have a material adverse effect on its financial position or results of operations. NOTE J--SUBSEQUENT EVENTS MERIT ACQUISITION. On February 12, 1998, the Company acquired all of the outstanding stock of Merit for approximately $448.9 million in cash plus the repayment of long-term debt. The Company refinanced its $375 million 11.25% Senior Subordinated Notes as part of the Merit acquisition. The Company will account for the Merit acquisition using the purchase method of accounting. Merit manages healthcare programs for over 21 million covered lives 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 government agencies, and various state Medicaid programs. In connection with the consummation of the Merit acquisition, the Company consummated certain related transactions (together with the Merit acquisition, collectively, the "Transactions"), as follows: (i) the Tranche 1 Cumulative Incremental Members Company terminated its Credit Agreement; (as definedii) the Company repaid all loans outstanding pursuant to and terminated Merit's existing credit agreement (the "Merit Existing Credit Agreement"); (iii) the Company completed a tender offer for such Contract Year andits 11 1/4% Series A Senior Subordinated Notes due 2004 (the "Magellan Outstanding Notes"); (iv) Merit completed a tender offer for its 11 1/2% Senior Subordinated Notes due 2005 (the "Merit Outstanding Notes"); (v) the Company entered into a new senior secured bank credit agreement (the "New Credit Agreement") with The Chase Manhattan Bank and a syndicate of financial institutions, providing for credit facilities of up to $700 million; and (vi) the Company issued $625 million in 9% Senior Subordinated Notes due 2008 (the "Notes"). NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 NOTE J--SUBSEQUENT EVENTS (CONTINUED) The following table sets forth the sources and uses of funds for the Transactions at closing (in thousands): SOURCES: Cash and cash equivalents....................................... $ 59,290 New Credit Agreement: Revolving Facility (1)........................................ 20,000 The Notes....................................................... 625,000 Total sources................................................. --------- $1,254,290 --------- --------- USES: Cash paid to Merit shareholders................................. $ 448,867 Total uses $1,254,290 --------- --------- - ------------------------
Appears in 1 contract
Samples: Form 10 Q
HAI ACQUISITION. On December 4, 1997, the Company acquired the outstanding common stock of Human Affairs International, Incorporated ("HAI"), a wholly-owned subsidiary of Aetna Insurance Company of Connecticut and a unit of Aetna U.S. Healthcare ("Aetna"), for approximately $122.1 million. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 NOTE H--ACQUISITIONS (CONTINUED) HAI provides managed care services to approximately 16.3 million covered lives, primarily through employee assistance programs and other managed behavioral healthcare plans. The Company funded the acquisition of HAI with cash on hand and has accounted for the acquisition of HAI using the purchase method of accounting. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE H--ACQUISITIONS (CONTINUED) The Company may be required to make additional contingent payments of up to $300 million to Aetna (the "Contingent Payments") over the five-year period (each year a "Contract Year") subsequent to closing. The amount and timing of the Contingent Payments will depend upon HAI's receipt of additional covered lives as computed under two separate calculations. Under the first calculation, the Company may be required to pay up to $25 million per year for each of five years following the acquisition based on the net annual growth in the number of lives covered in specified HAI products. Under the second calculation, the Company may be required to pay up to $35 million per Contract Year, based on the net cumulative increase in lives covered by certain other HAI products. The preliminary allocation of the HAI purchase price to goodwill and identifiable intangible assets was based on the Company's preliminary valuations, which are subject to change upon receiving independent appraisals of identifiable intangible assets. The Company is obligated expects the HAI purchase price allocation to make contingent payments under two separate calculations (as previously described) as follows: in respect of each Contract Yearbe finalized by September 30, 1998. MERIT ACQUISITION. On February 12, 1998, the Company may be required acquired all of the outstanding stock of Merit for approximately $448.9 million in cash plus the repayment of Merit's debt. The Company refinanced its $375 million 11.25% Series A Senior Subordinated Notes as part of the Merit acquisition. The Company accounted for the Merit acquisition using the purchase method of accounting. Merit provides managed care services to pay to Aetna approximately 21.6 million covered lives 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 government agencies, and various state Medicaid programs. The following table sets forth the sources and uses of funds for the Merit acquisition and related transactions (the "Tranche 1 Payments" Transactions") at closing (as defined) in thousands): SOURCES: Cash and cash equivalents............................................... $ 59,290 New Credit Agreement: --------- Total sources......................................................... $1,254,290 --------- --------- USES: Cash paid to Merit Shareholders......................................... $ 448,867 Repayment of Merit existing credit agreement (2)........................ 196,357 Purchase of the "Tranche 2 Payments" Old Notes (as defined3). Upon the expiration ........................................... 432,102 Purchase of each Contract Year, the Tranche 1 Payment shall vest with respect to such Contract Year in an amount equal to the product of Merit Outstanding Notes (i) the Tranche 1 Cumulative Incremental Members 4)................................. 121,651 Transaction costs (as defined) for such Contract Year and5)................................................... 55,313 --------- Total uses.......................................................... $1,254,290 --------- --------- - ------------------------
Appears in 1 contract
Samples: Quarterly Report
HAI ACQUISITION. On December 4, 1997, the Company acquired the outstanding common stock of Human Affairs International, Incorporated ("HAI"), a wholly-owned subsidiary of Aetna Insurance Company of Connecticut and a unit of Aetna U.S. Healthcare ("Aetna"), for approximately $122.1 million. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 NOTE H--ACQUISITIONS (CONTINUED) HAI provides managed care services to approximately 16.3 million covered lives, primarily through employee assistance programs and other managed behavioral healthcare plans. The Company funded the acquisition of HAI with cash on hand and has accounted for the acquisition of HAI using the purchase method of accounting. The Company may be required to make additional contingent payments of up to $300 million to Aetna (the "Contingent Payments") over the five-year period (each year a "Contract Year") subsequent to closing. The amount and timing of the Contingent Payments will depend upon HAI's receipt of additional NOTE H--ACQUISITIONS (CONTINUED) covered lives as computed under two separate calculations. Under the first calculation, the Company may be required to pay up to $25 million per year for each of five years following the acquisition based on the net annual growth in the number of lives covered in specified HAI products. Under the second calculation, the Company may be required to pay up to $35 million per Contract Year, based on the net cumulative increase in lives covered by certain other HAI products. The preliminary allocation of the HAI purchase price to goodwill and identifiable intangible assets was based on the Company's preliminary valuations, which are subject to change upon receiving independent appraisals of identifiable intangible assets. The Company is obligated expects the HAI purchase price allocation to make contingent payments under two separate calculations (as previously described) as follows: in respect of each Contract Yearbe finalized by September 30, 1998. MERIT ACQUISITION. On February 12, 1998, the Company may be required acquired all of the outstanding stock of Merit for approximately $448.9 million in cash plus the repayment of Merit's debt. The Company refinanced its $375 million 11.25% Series A Senior Subordinated Notes as part of the Merit acquisition. The Company accounted for the Merit acquisition using the purchase method of accounting. Merit provides managed care services to pay to Aetna approximately 21.6 million covered lives 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 government agencies, and various state Medicaid programs. The following table sets forth the sources and uses of funds for the Merit acquisition and related transactions (the "Tranche 1 Payments" Transactions") at closing (as defined) in thousands): SOURCES: Cash and cash equivalents............................................... $ 59,290 New Credit Agreement: --------- Total sources......................................................... $1,254,290 --------- --------- USES: Cash paid to Merit Shareholders......................................... $ 448,867 Repayment of Merit existing credit agreement (2)........................ 196,357 Purchase of the "Tranche 2 Payments" Old Notes (as defined3). Upon the expiration ........................................... 432,102 Purchase of each Contract Year, the Tranche 1 Payment shall vest with respect to such Contract Year in an amount equal to the product of Merit Outstanding Notes (i) the Tranche 1 Cumulative Incremental Members 4)................................. 121,651 Transaction costs (as defined) for such Contract Year and5)................................................... 55,313 --------- Total uses.......................................................... $1,254,290 --------- --------- - ------------------------
Appears in 1 contract
Samples: Form 10 Q
