8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15 (D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported):

OCTOBER 27, 2005

MAGELLAN HEALTH SERVICES, INC.

(Exact Name of Registrant as Specified in Charter)

DELAWARE	1-6639	58-1076937
(State or Other Jurisdiction	(Commission File	(IRS Employer
of Incorporation)	Number)	Identification No.)
55 NOD ROAD
AVON, CONNECTICUT		06001
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (860) 507-1900

N/A

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act

(17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition

On October 27, 2005, Magellan Health Services, Inc. (the “Company”) reported operating results for the third quarter ended September 30, 2005.  The Company also announced plans to redeem its 9.375% Senior Notes, and provided a preliminary outlook for fiscal 2006.

Attached and incorporated herein by reference as Exhibit 99.1 is a copy of the press release dated October 27, 2005. 

Item 9.01. Financial Statements, Pro Forma Financial Information and Exhibits

(a)  Financial Statements of business acquired:              Not applicable.

(b)  Pro forma financial information:                  Not applicable.

(c)           Exhibits:

Exhibit Number	Description
99.1	Registrant’s press release dated October 27, 2005.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

MAGELLAN HEALTH SERVICES, INC.

Date: October 27, 2005	By:	/s/ Mark S. Demilio
		Name: Mark S. Demilio
		Title:  Executive Vice President and Chief Financial Officer

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EX-99.1

Exhibit 99.1

For Immediate Release

                                                                                                                                    Investor Contact:        & #160;    Melissa Rose

                                                                                                                                                     & #160;                          877-645-6464

                                                                                                                                    Media Contact:        ;          Erin Somers

                                                                                                                                                    &# 160;                           410-953-2405

MAGELLAN HEALTH SERVICES REPORTS

THIRD QUARTER 2005 FINANCIAL RESULTS

Announces It Will Redeem Senior Notes and Provides 2006 Preliminary Outlook

AVON, Conn. — October 27, 2005 — Magellan Health Services, Inc. (Nasdaq:MGLN) today reported operating results for the third quarter of fiscal year 2005.  The Company also announced that it will redeem its 9 3/8% Senior Notes and provided a preliminary outlook for segment profit for 2006.

Financial Results

For the quarter ended September 30, 2005, the Company reported net revenue of $454.3 million and net income of $34.4 million, or $.91 per diluted common share.  For the prior year quarter, net revenue was $458.0 million and net income was $26.6 million, or $.73 per diluted common share.  Segment profit (net revenue less cost of care, and direct service costs and other operating expenses plus equity in earnings of unconsolidated subsidiaries) for the current year quarter was $68.9 million, compared with $65.4 million in the prior year.  Results for the quarter were favorably impacted by net one-time adjustments to cost of care of $6.4 million.

For the nine months ended September 30, 2005, the Company reported net revenue of $1.37 billion and net income of $80.7 million, or $2.17 per diluted common share.  For the prior year period, the Company reported net revenue of $1.35 billion and net income of $67.9 million, or $1.87 per diluted common share.  Segment profit for the first nine months of 2005 was $189.1 million versus $173.6 million for the prior year period.

See the attached tables detailing the Company’s operating results, including results by segment.

The Company ended the quarter with unrestricted cash and investments of $478.9 million.  Cash flow from operations for the nine months ended September 30, 2005 was $144.4 million compared with $88.3 million for the prior year period.  Cash flow from operations for the prior year nine-month period included payments of $66.2 million for liabilities related to the Company’s Chapter 11 proceedings.  The Company has not drawn on its $50.0 million revolving credit facility.

“Magellan’s financial performance in the third quarter is testament to our expertise in managing our core behavioral health business and I am very pleased with our results,” said Steven J. Shulman, chairman and CEO of Magellan.  “Our exceptionally strong performance over the last several quarters gives us a solid foundation from which to address the challenges we face in the behavioral health marketplace, as will the continued development and marketing of our new products.”

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“We continue to be encouraged by the growing interest in our new product offerings — obesity management, med/psych integration and behavioral health pharmacy management.  For the latter, we expect to announce later today a pilot program with a large Medicaid customer that exemplifies the interest we are seeing among health care purchasers in more effective management of behavioral prescription drugs to yield improved health and lower costs,” Shulman added.

Repayment of Senior Notes

On November 30, 2005, Magellan will redeem its $240.6 million of 9 3/8% Senior Notes, which are scheduled to mature on November 15, 2008.  Including a premium payment of approximately $11.3 million, such redemption will utilize $251.9 million of the Company’s unrestricted cash and investments.

“As we have previously noted, repayment of Magellan’s Senior Notes is among the options we have been considering to make effective use of our cash position and November 2005 is our earliest opportunity to do so,” said Mark S. Demilio, chief financial officer.   “After repayment of the notes, our remaining cash as well as our capacity for future debt will continue to allow us to fund acquisitions and make other investments in our business.”

Outlook

The Company previously provided guidance of segment profit for 2005 in the range of $220 million to $240 million.  On the basis of its third quarter performance, the Company now expects to generate full-year segment profit for 2005 at the upper end of its guidance range.

The Company anticipates providing 2006 guidance in December; however, management preliminarily estimates that segment profit for 2006 will be in the range of $160 million to $180 million and earnings per share in the range of $1.40 to $1.70.

“Our early outlook for 2006 segment profit reflects the impact of previously announced contract terminations,  changes in enrollment and benefits related to the Company’s TennCare contract, a care cost trend of seven percent to nine percent, and lower margins on the renewal of certain contracts,” Shulman said.

“This outlook also reflects our anticipation of significant additional reductions in administrative expenses to ensure that our cost structure is appropriate, given the loss of business from contract terminations. Such expense reduction efforts, however, are being carefully balanced with the continuing need to deliver excellent service and to invest in our business to achieve future growth,” Shulman concluded.

Earnings Results Conference Call

A conference call will be held to discuss the earnings at 10:30 a.m. Eastern time on Thursday, October 27.  To participate in the call, interested parties should call 1-888-390-4698 and reference the passcode Third Quarter Earnings and conference leader Steve Shulman approximately 15 minutes before the start of the call.

The conference call also will be available via a live Webcast at the investor relations page of Magellan’s Web site, www.MagellanHealth.com.

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A taped replay of the conference call will be available from approximately 12:30 p.m. Eastern time on Thursday, October 27, until midnight on Thursday, November 3.  The call-in numbers for the replay are 1-800-739-2821 and 1-203-369-3329 (from outside the U.S.).

Those who plan to listen to the call and/or Webcast are encouraged to read Magellan’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission on March 3, 2005, and Form 10-Qs for the quarter ended June 30, 2005, filed July 28, 2005, and for the quarter ended September 30, 2005, to be filed today with the Securities and Exchange Commission. In addition, listeners are encouraged to read all other 2004 and 2005 reports filed with the Securities and Exchange Commission for material information regarding the Company’s operational and financial results.

About Magellan:  Headquartered in Avon, Conn., Magellan Health Services, Inc. (Nasdaq:MGLN) is the country’s leading behavioral health disease management organization.  Its customers include health plans, corporations and government agencies.

Cautionary Statement:  Certain of the statements made in this press release including, without limitation, statements regarding estimates of future financial performance, including revenue, segment profit and earnings per share, sales, product development, expectations concerning future investment and growth, execution of the Company’s business strategy, redemption of the Company’s Senior Notes, potential future uses of cash, impact of contract terminations, impact of new business and other matters constitute forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on management’s current expectations and are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those contemplated or implied by such forward-looking statements, including (among others) risk concerning the possible election of certain of the Company’s health plan customers to manage the behavioral health care services of their members directly; renegotiation of rates paid to and/or by the Company by customers and/or to providers; higher utilization of behavioral health treatment services by members; delays, higher costs or inability to implement the Company’s initiatives; termination or non-renewal of contracts by customers; the impact of new or amended laws or regulations; governmental inquiries and/or litigation; and the impact of increased competition on ability to maintain or obtain contracts; the impact of increased competition on rates paid to or by the Company; and other factors.  Any forward-looking statements made in this document are qualified in their entirety by the more complete discussion of risks set forth in the section entitled “Cautionary Statements” in Magellan’s Annual Report on Form 10-K for the year ended December 31, 2004 and in the section entitled “Forward-Looking Statements” in Magellan’s Form 10-Q for the quarter ended September 30, 2005 to be filed today with the Securities and Exchange Commission, each of which is currently or will be posted on the Company’s Web site, and the section entitled “Risk Factors” in the prospectus and prospectus supplement filed with the Securities and Exchange Commission in connection with the May 2005 secondary offering of Magellan common stock by certain shareholders, also posted on the Company’s Web site.  Segment profit information referred to in this press release may be considered a non-GAAP financial measure. Further information regarding this measure, including the reasons management considers this information useful to investors, is included in Magellan’s Annual Report on Form 10-K for the year ended December 31, 2004, and a reconciliation to the comparable GAAP measure is contained in Magellan’s Form 10-Q for the quarter ended September 30, 2005, as well as on the attached tables detailing the Company’s operating results.

# # #

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MAGELLAN HEALTH SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,							Nine Months Ended September 30,
	2004			2005 (1)				2004				2005 (1)
Net revenue	$	457,954		$	454,266			$	1,350,234			$	1,371,564
Cost and expenses:
Cost of care	303,368			299,134				898,795				920,263
Direct service costs and other operating expenses	91,006			88,012				283,386				266,934
Equity in earnings of unconsolidated subsidiaries	(1,863		)	(1,759			)	(5,561			)	(4,711		)
	392,511			385,387				1,176,620				1,182,486
Segment profit	65,443			68,879				173,614				189,078
Depreciation and amortization	10,712			12,161				31,478				36,952
Interest expense	9,109			8,711				27,499				25,961
Interest income	(1,760		)	(4,995			)	(3,593			)	(11,927		)
Stock compensation expense	2,580			3,855				15,898				12,024
Special charges	1,770			(556			)	4,304				(556		)
Income from continuing operations before income taxes and minority interest	43,032			49,703				98,028				126,624
Provision for income taxes	15,712			16,233				28,976				48,179
Income from continuing operations before minority interest	27,320			33,470				69,052				78,445
Minority interest, net	157			(25			)	526				47
Income from continuing operations	27,163			33,495				68,526				78,398
Discontinued operations:
Income (loss) from discontinued operations (2)	(607		)	904				(608			)	2,272
Net income	26,556			34,399				67,918				80,670
Other comprehensive income (loss)	—			44				—				(428		)
Comprehensive income	$	26,556		$		34,443		$		67,918		$	80,242
Weighted average number of common shares outstanding — basic (3)	35,371			36,436				35,365				35,795
Weighted average number of common shares outstanding — diluted (3)	36,594			37,605				36,235				37,200
Income per common share available to common stockholders — basic:
Income from continuing operations	$	0.77		$		0.92		$		1.94		$	2.19
Income (loss) from discontinued operations	$	(0.02	)	$		0.02		$		(0.02	)	$	0.06
Net income	$	0.75		$		0.94		$		1.92		$	2.25
Income per common share available to common stockholders — diluted:
Income from continuing operations	$	0.74		$		0.89		$		1.89		$	2.11
Income (loss) from discontinued operations	$	(0.01	)	$		0.02		$		(0.02	)	$	0.06
Net income	$	0.73		$		0.91		$		1.87		$	2.17

(1)For a more detailed discussion of Magellan's results for the three months and nine months ended September 30, 2005, refer to the Company's Quarterly Report on Form 10-Q, which will be filed with the SEC on October 27, 2005, and the live broadcast or taped replay of the Company's earnings conference call on October 27, 2005, which will be available at www.MagellanHealth.com.

(2)Net of income tax provision (benefit) of $(254) and $(180) for the three months ended September 30, 2004 and 2005, respectively, and $(254) and $327 for the nine months ended September 30, 2004 and 2005, respectively.

(3)Weighted average number of common shares outstanding for the three months and nine months ended September 30, 2004 and 2005 were calculated using outstanding shares of the Company's Ordinary Common Stock and Multi-Vote Common Stock.

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MAGELLAN HEALTH SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2004			2005
Cash Flows From Operating Activities:
Net income	$	67,918		$	80,670
Adjustments to reconcile net income to net cash from operating activities:
Loss on sale of assets	911			1,892
Depreciation and amortization	31,478			36,952
Equity in earnings of unconsolidated subsidiaries	(5,561		)	(4,711		)
Non-cash interest expense	1,197			1,042
Non-cash stock compensation expense	13,021			12,024
Non-cash income tax expense	—			42,511
Cash flows from changes in assets and liabilities:
Restricted cash	(12,937		)	(41,121		)
Accounts receivable, net	(8,977		)	(2,787		)
Other assets	15,619			3,544
Deferred income taxes	—			(2,719		)
Net cash flows related to unconsolidated subsidiaries	2,822			—
Accounts payable and accrued liabilities	(41,576		)	4,466
Medical claims payable	23,750			12,804
Other liabilities	(51		)	240
Minority interest	749			81
Other	(52		)	(446		)
Net cash provided by operating activities	88,311			144,442
Cash Flows From Investing Activities:
Capital expenditures	(12,445		)	(14,384		)
Purchases of investments	—			(462,011		)
Maturity of investments	—			331,642
Proceeds from note receivable	—			7,000
Proceeds from sale of assets, net of transaction costs	—			—
Net cash used in investing activities	(10,143		)	(137,753		)
Cash Flows From Financing Activities:
Proceeds from issuance of new equity, net of issuance costs	147,871			—
Proceeds from issuance of debt, net of issuance costs	92,806			—
Payments on long-term debt	(203,632		)	(16,875		)
Payments on capital lease obligations	(8,271		)	(2,391		)
Proceeds from exercise of stock options and warrants	—			12,787
Net cash provided by (used in) financing activities	28,774			(6,479		)
Net increase in cash and cash equivalents	106,942			210
Cash and cash equivalents at beginning of period	206,948			45,390
Cash and cash equivalents at end of period	$	313,890		$	45,600	A

ACash and cash equivalents as of September 30, 2005 does not include unrestricted investments of$433,334.

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MAGELLAN HEALTH SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except membership amounts in millions)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2005		2004		2005
Net revenue
- Health Plan Solutions	$233,769		$228,849		$684,094		$687,244
- Employer Solutions	32,991		31,437		102,254		94,839
- Public Sector Solutions	191,194		193,980		563,886		589,481
Total revenue	457,954		454,266		1,350,234		1,371,564
Cost of care
- Health Plan Solutions	126,681		128,674		370,254		382,545
- Employer Solutions	8,981		7,477		29,028		23,122
- Public Sector Solutions	167,706		162,983		499,513		514,596
Total cost of care	303,368		299,134		898,795		920,263
Direct service costs and other operating expenses
- Health Plan Solutions	41,483		39,617		128,981		121,493
- Employer Solutions	15,785		15,706		49,981		47,842
- Public Sector Solutions	10,746		6,991		31,190		22,193
- Corporate & Other	22,992		25,698		73,234		75,406
Total direct services costs and other operating expenses	91,006		88,012		283,386		266,934
Equity in earnings of unconsolidated subsidiaries
- Health Plan Solutions	(1,863	)	(1,759	)	(5,561	)	(4,711	)
Total equity in earnings of unconsolidated subsidiaries	(1,863	)	(1,759	)	(5,561	)	(4,711	)
Segment profit (loss)
- Health Plan Solutions	67,468		62,317		190,420		187,917
- Employer Solutions	8,225		8,254		23,245		23,875
- Public Sector Solutions	12,742		24,006		33,183		52,692
- Corporate & Other	(22,992	)	(25,698	)	(73,234	)	(75,406	)
Total segment profit	$65,443		$68,879		$173,614		$189,078
Reconciliation of segment profit to income from continuing operations before income taxes and minority interest:
Segment profit	$65,443		$68,879		$173,614		$189,078
Depreciation and amortization	(10,712	)	(12,161	)	(31,478	)	(36,952	)
Interest expense	(9,109	)	(8,711	)	(27,499	)	(25,961	)
Interest income	1,760		4,995		3,593		11,927
Stock compensation expense	(2,580	)	(3,855	)	(15,898	)	(12,024	)
Special charges	(1,770	)	556		(4,304	)	556
Income from continuing operations before income taxes and minority interest	$43,032		$49,703		$98,028		$126,624
Membership
- Health Plan Solutions							39.8
- Employer Solutions							13.5
- Public Sector Solutions							1.9
Total membership							55.2

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