Common use of Condensed Consolidated Statements of Operations Clause in Contracts

Condensed Consolidated Statements of Operations. For the Three Months and the Six Months ended March 31, 1997 and 1998................................................................................... 4 Condensed Consolidated Statements of Cash Flows--For the Six Months ended March 31, 1997 and 1998..... 5 Notes to Condensed Consolidated Financial Statements.................................................. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 20 PART II--OTHER INFORMATION: Item 1.--Legal Proceedings............................................................................ 30 Item 4.--Submission of Matters to a Vote of Security Holders.......................................... 30 Item 6.--Exhibits and Reports on Form 8-K............................................................. 30 Signatures............................................................................................ 32 MAGELLAN HEALTH SERVICES, INC. QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I--FINANCIAL INFORMATION‌ MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) SEPTEMBER 30, MARCH 31, 1997 1998 ASSETS Current Assets: Cash and cash equivalents........................................................ $ 372,878 $ 160,986 Accounts receivable, net......................................................... 107,998 181,622 Refundable income taxes.......................................................... 2,466 1,361 Other current assets............................................................. 23,696 42,335 Total Current Assets........................................................... 507,038 386,304 Assets restricted for settlement of unpaid claims and other long-term liabilities.... 87,532 69,226 Property and equipment: Land............................................................................. 11,667 11,477 Buildings and improvements....................................................... 70,174 75,580 Equipment........................................................................ 63,719 131,013 145,560 218,070 Accumulated depreciation......................................................... (37,038) (46,169) 108,522 171,901 Construction in progress......................................................... 692 1,078 Total property and equipment................................................... 109,214 172,979 Deferred income taxes................................................................ 1,158 75,651 Investment in CBHS................................................................... 16,878 -- Other long-term assets............................................................... 20,893 45,906 Goodwill, net........................................................................ 114,234 919,500 Other intangible assets, net......................................................... 38,673 243,332 $ 895,620 $ 1,912,898 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, MARCH 31, 1997 1998 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................................................... $ 45,346 $ 42,478 Accrued liabilities................................................................ 170,429 382,626 Current maturities of long-term debt and capital lease obligations................. 3,601 10,131 Total Current Liabilities.................................................... 219,376 435,235 Long-term debt and capital lease obligations......................................... 391,693 1,208,715 Reserve for unpaid claims............................................................ 49,113 36,642 Deferred credits and other long-term liabilities..................................... 16,110 19,710 Minority interest.................................................................... 61,078 30,619 Commitments and contingencies Stockholders' Equity: Preferred Stock, without par value Authorized--10,000 shares Issued and outstanding--none........................... -- -- Common Stock, par value $0.25 per share Authorized--80,000 shares Issued and outstanding--33,439 shares at September 30, 1997 and 33,625 shares at March 31, 1998....................................... 8,361 8,407 Other Stockholders' Equity Additional paid-in capital....................................................... 340,645 351,858 Accumulated deficit.............................................................. (129,955) (157,634) Warrants outstanding............................................................. 25,050 25,050 Common Stock in Treasury, 4,424 shares at September 30, 1997 and 2,137 shares at March 31, 1998................................................................. (82,731) (42,413) Cumulative foreign currency adjustments.......................................... (3,120) (3,291) Total stockholders' equity................................................... 158,250 181,977 $ 895,620 $ 1,912,898 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. MAGELLAN HEALTH SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, 1997 1998 1997 1998 Net revenue...................................................... $ 349,922 $ 372,223 $ 696,741 $ 588,320 Costs and expenses: Salaries, cost of care and other operating expenses............ 282,210 324,507 566,333 500,128 Bad debt expense............................................... 15,140 686 35,375 1,756 Depreciation and amortization.................................. 13,088 12,956 26,187 19,925 Interest, net.................................................. 13,153 17,526 26,722 24,927 Stock option expense (credit).................................. 829 420 1,433 (3,539) Managed Care integration costs................................. -- 11,074 -- 11,074 Equity in loss of CBHS......................................... -- 5,575 -- 17,063 Unusual Items.................................................. 1,395 49 1,395 49 325,815 372,793 657,445 571,383 Income (loss) before provision for income taxes, minority interest and extraordinary items............................... 24,107 (570) 39,296 16,937 Provision for income taxes....................................... 9,643 630 15,718 7,633 Income (loss) before minority interest and extraordinary items... 14,464 (1,200) 23,578 9,304 Minority interest................................................ 2,572 1,092 4,545 3,968 Income (loss) before extraordinary items......................... 11,892 (2,292) 19,033 5,336 Extraordinary items--losses on early extinguishments of debt (net of income tax benefit of $1,967 in 1997 and $22,010 in 1998)... -- (33,015) (2,950) (33,015) Net income (loss)................................................ $ 11,892 $ (35,307) $ 16,083 $ (27,679) Average number of common shares outstanding--basic............... 28,726 31,012 28,657 29,995 Average number of common shares outstanding--diluted............. 29,343 31,012 29,155 30,587 Income (loss) per common share--basic: Income (loss) before extraordinary items....................... $ 0.41 $ (0.07) $ 0.66 $ 0.18 Extraordinary losses on early extinguishments of debt.......... $ -- $ (1.06) $ (0.10) $ (1.10) Net income (loss).............................................. $ 0.41 $ (1.14) $ 0.56 $ (0.92) Income (loss) per common share--diluted: Income (loss) before extraordinary items....................... $ 0.41 $ (0.07) $ 0.65 $ 0.17 Extraordinary losses on early extinguishments of debt.......... $ -- $ (1.06) $ (0.10) $ (1.08) Net income (loss).............................................. $ 0.41 $ (1.14) $ 0.55 $ (0.90) The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) FOR THE SIX MONTHS ENDED MARCH 31, 1997 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..................................................................... $ 16,083 $ (27,679) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization................................................. 26,187 19,925 Equity in loss of CBHS........................................................ -- 17,063 Stock option expense (credit)................................................. 1,433 (3,539) Non-cash interest expense..................................................... 882 1,110 Loss (gain) on sale of assets................................................. (3,302) 49 Impairment of long-lived assets............................................... -- 2,160 Extraordinary losses on early extinguishments of debt......................... 4,917 55,025 Cash flows from changes in assets and liabilities, net of effects from sales and acquisitions of businesses: Accounts receivable, net.................................................. (2,474) (8,933) Other assets.............................................................. (4,214) (8,210) Accounts payable and other accrued liabilities............................ (30,981) (25,475) Reserve for unpaid claims................................................. (13,694) (12,815) Income taxes payable and deferred income taxes............................ 4,638 (23,275) Other liabilities......................................................... (15,154) (4,126) Minority interest, net of dividends paid.................................. 5,219 2,705 Other..................................................................... (1,063) (1,026) Total adjustments..................................................... (27,606) 10,638 Net cash used in operating activities............................... (11,523) (17,041) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.................................................................. (14,373) (13,467) Acquisitions and investments in businesses, net of cash acquired...................... (12,962) (936,663) Decrease in assets restricted for settlement of unpaid claims......................... 8,626 18,007 Proceeds from sale of assets.......................................................... 10,386 5,983 Crescent Transaction costs............................................................ -- (5,865) Net cash used in investing activities............................... (8,323) (932,005) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of debt, net of issuance costs................................. 126,825 1,171,681 Payments on debt and capital lease obligations........................................ (117,521) (425,433) Proceeds from exercise of stock options and warrants.................................. 3,842 3,362 Purchases of treasury stock........................................................... -- (12,456) Net cash provided by financing activities........................... 13,146 737,154 Net decrease in cash and cash equivalents............................................... (6,700) (211,892) Cash and cash equivalents at beginning of period........................................ 120,945 372,878 Cash and cash equivalents at end of period.............................................. $ 114,245 $ 160,986 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended September 30, 1997, included in the Company's Annual Report on Form 10-K. NOTE B--NATURE OF BUSINESS The Company's 50% owned hospital business, Charter Behavioral Health Systems, LLC ("CBHS"), is seasonal in nature, with a reduced demand for certain services generally occurring in the first fiscal quarter around major holidays, such as Thanksgiving and Christmas, and during the summer months comprising the fourth fiscal quarter. The Company's businesses are also subject to general economic conditions and other factors. Accordingly, the results of operations for the interim periods are not necessarily indicative of the actual results expected for the year. NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION Below is supplemental cash flow information related to the six months ended March 31, 1997 and 1998: FOR THE SIX MONTHS ENDED MARCH 31, -------------------- 1997 1998 --------- --------- (In thousands) Income taxes paid, net of refunds received........................................ $ 9,064 $ 8,095 Interest paid, net of amounts capitalized......................................... 28,704 40,747 Non-cash transactions: Common Stock in Treasury issued in connection with the purchase of the remaining 39% interest in Green Spring Health Services, Inc............................. $ -- $ 63,496 Cash and cash equivalents at March 31, 1998 include approximately $57.6 million that is held for the payment of claims under the terms of certain behavioral managed care contracts and for regulatory purposes related to the payment of claims in certain jurisdictions. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE D--LONG-TERM DEBT AND LEASES Information with regard to the Company's long-term debt and capital lease obligations at September 30, 1997 and March 31, 1998 is as follows (in thousands): SEPTEMBER 30, MARCH 31, 1997 1998

Condensed Consolidated Statements of Operations. For the Three Months and the Six Months ended March December 31, 1997 and 1998................................................................................... 4 ............................................... 2 Condensed Consolidated Statements of Cash Flows--Flows-- For the Six Three Months ended March December 31, 1997 and 1998..... 5 ............................................... 3 Notes to Condensed Consolidated Financial Statements.................................................. 6 4 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 20 ................................................................. 17 PART II--OTHER INFORMATION: Item 1.--Legal Proceedings............................................................................ 30 Item 4.--Submission of Matters to a Vote of Security Holders.......................................... 30 Item 6.--Exhibits and Reports on Form 8-K............................................................. 30 29 Signatures............................................................................................ 32 30 MAGELLAN HEALTH SERVICES, INC. QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I--FINANCIAL INFORMATION‌ MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, MARCH DECEMBER 31, 1997 1998 1998 ASSETS Current Assets: Cash and cash equivalents........................................................ ......................................................... $ 372,878 92,050 $ 160,986 49,358 Accounts receivable, net......................................................... 107,998 181,622 .......................................................... 174,846 172,990 Restricted cash and investments................................................... 89,212 132,099 Refundable income taxes.......................................................... 2,466 1,361 ........................................................... 4,939 -- Other current assets............................................................. 23,696 42,335 .............................................................. 38,677 33,916 Total Current Assets........................................................... 507,038 386,304 .......................................................... 399,724 388,363 Assets restricted for settlement of unpaid claims and other long-term liabilities.... 87,532 69,226 ............. 37,910 33,978 Property and equipment: Land............................................................................. 11,667 11,477 Buildings , net of accumulated depreciation of $60,100 at September 30, 1998 and improvements....................................................... 70,174 75,580 Equipment........................................................................ 63,719 131,013 145,560 218,070 Accumulated depreciation......................................................... (37,038) (46,169) 108,522 171,901 Construction in progress......................................................... 692 1,078 Total property and equipment................................................... 109,214 172,979 $60,231 at December 31, 1998............................................. 177,169 156,436 Deferred income taxes................................................................ 1,158 75,651 Investment ............................................................... 97,386 94,069 Investments in CBHS................................................................... 16,878 -- unconsolidated subsidiaries.......................................... 11,066 31,814 Other long-term assets............................................................... 20,893 45,906 .............................................................. 35,415 18,751 Goodwill, net........................................................................ 114,234 919,500 ....................................................................... 992,431 1,067,085 Other intangible assets, net......................................................... 38,673 243,332 ........................................................ 165,189 160,447 $ 895,620 1,916,290 $1,950,943 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.................................................................. $ 1,912,898 42,873 $ 33,593 Accrued liabilities............................................................... 193,530 242,199 Medical claims payable............................................................ 195,330 191,384 Income taxes payable.............................................................. -- 681 Current maturities of long-term debt and capital lease obligations................ 23,033 29,428 Total Current Liabilities..................................................... 454,766 497,285 Long-term debt and capital lease obligations........................................ 1,202,613 1,156,020 Reserve for unpaid claims........................................................... 30,280 27,149 Deferred credits and other long-term liabilities.................................... 14,011 74,633 Minority interest................................................................... 26,985 4,683 Commitments and Contingencies Stockholders' Equity: Preferred stock, without par value Authorized--10,000 shares Issued and outstanding--none.................................................... -- -- Common Stock, par value $0.25 per share Authorized--80,000 shares Issued and outstanding--33,898 shares at September 30, 1998 and December 31, 1998.......................................................................... 8,476 8,476 Other Stockholders' Equity: Additional paid-in capital...................................................... 349,651 349,663 Accumulated deficit............................................................. (149,238) (145,057) Warrants outstanding............................................................ 25,050 25,050 Common stock in treasury, 2,289 shares at September 30, 1998 and December 31, 1998.......................................................................... (44,309) (44,309) Cumulative foreign currency adjustments included in comprehensive income........ (1,995) (2,650) Total Stockholders' Equity.................................................... 187,635 191,173 $ 1,916,290 $1,950,943 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, MARCH 31, 1997 1998 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................................................... $ 45,346 $ 42,478 Accrued liabilities................................................................ 170,429 382,626 Current maturities of long-term debt and capital lease obligations................. 3,601 10,131 Total Current Liabilities.................................................... 219,376 435,235 Long-term debt and capital lease obligations......................................... 391,693 1,208,715 Reserve for unpaid claims............................................................ 49,113 36,642 Deferred credits and other long-term liabilities..................................... 16,110 19,710 Minority interest.................................................................... 61,078 30,619 Commitments and contingencies Stockholders' Equity: Preferred Stock, without par value Authorized--10,000 shares Issued and outstanding--none........................... -- -- Common Stock, par value $0.25 per share Authorized--80,000 shares Issued and outstanding--33,439 shares at September 30, 1997 and 33,625 shares at March 31, 1998....................................... 8,361 8,407 Other Stockholders' Equity Additional paid-in capital....................................................... 340,645 351,858 Accumulated deficit.............................................................. (129,955) (157,634) Warrants outstanding............................................................. 25,050 25,050 Common Stock in Treasury, 4,424 shares at September 30, 1997 and 2,137 shares at March 31, 1998................................................................. (82,731) (42,413) Cumulative foreign currency adjustments.......................................... (3,120) (3,291) Total stockholders' equity................................................... 158,250 181,977 $ 895,620 $ 1,912,898 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. MAGELLAN HEALTH SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATAAMOUNTS) FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED MARCH DECEMBER 31, MARCH 31, -------------------- 1997 1998 1997 1998 --------- --------- Net revenue...................................................... ............................................................. $ 349,922 212,371 $ 372,223 $ 696,741 $ 588,320 463,143 Costs and expenses: --------- --------- Salaries, cost of care and other operating expenses................... 172,331 413,216 Equity in (earnings) losses of unconsolidated subsidiaries............ 282,210 324,507 566,333 500,128 Bad debt expense............................................... 15,140 686 35,375 1,756 12,122 (4,982) Depreciation and amortization.................................. 13,088 12,956 26,187 19,925 ......................................... 6,969 18,391 Interest, net.................................................. 13,153 17,526 26,722 24,927 ......................................................... 7,401 24,109 Stock option expense (credit).................................. 829 420 1,433 ......................................... (3,5393,959) 12 Managed Care care integration costs................................. ........................................ -- 11,074 1,750 Unusual items......................................................... -- 11,074 Equity in loss of CBHS......................................... -- 5,575 -- 17,063 Unusual Items.................................................. 1,395 49 1,395 49 325,815 372,793 657,445 571,383 22 --------- --------- 194,864 452,518 --------- --------- Income (loss) before provision for income taxes, taxes and minority interest and extraordinary items............................... 24,107 (570) 39,296 16,937 interest.......... 17,507 10,625 Provision for income taxes....................................... 9,643 630 15,718 7,633 .............................................. 7,003 6,037 --------- --------- Income (loss) before minority interest and extraordinary items... 14,464 (1,200) 23,578 9,304 interest......................................... 10,504 4,588 Minority interest................................................ 2,572 1,092 4,545 3,968 Income (loss) before extraordinary items......................... 11,892 (2,292) 19,033 5,336 Extraordinary items--losses on early extinguishments of debt (....................................................... 2,876 407 --------- --------- Net income.............................................................. 7,628 4,181 Unrealized foreign currency adjustment, net of income tax benefit (benefit) provision of $1,967 39 in 1997 and $22,010 (436) in 1998)... -- ........................... 59 (33,015655) (2,950) (33,015) Net income (loss)................................................ --------- --------- Comprehensive income.................................................... $ 11,892 7,687 $ (35,307) $ 16,083 $ (27,679) 3,526 --------- --------- --------- --------- Average number of common shares outstanding--basic............... 28,726 31,012 28,657 29,995 ...................... 28,969 31,613 --------- --------- --------- --------- Average number of common shares outstanding--diluted............. 29,343 31,012 29,155 30,587 Income (loss) .................... 29,784 31,660 --------- --------- --------- --------- Net income per common share--basic: Income (loss) before extraordinary items....................... ...................................... $ 0.41 0.26 $ (0.07) $ 0.66 $ 0.18 Extraordinary losses on early extinguishments of debt.......... $ -- $ (1.06) $ (0.10) $ (1.10) 0.13 --------- --------- --------- --------- Net income (loss).............................................. $ 0.41 $ (1.14) $ 0.56 $ (0.92) Income (loss) per common share--diluted: Income (loss) before extraordinary items....................... .................................... $ 0.41 0.26 $ (0.07) $ 0.65 $ 0.17 Extraordinary losses on early extinguishments of debt.......... $ -- $ (1.06) $ (0.10) $ (1.08) Net income (loss).............................................. $ 0.41 $ (1.14) $ 0.55 $ (0.90) 0.13 --------- --------- --------- --------- The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) FOR THE SIX THREE MONTHS ENDED MARCH DECEMBER 31, 1997 1998 CASH FLOWS FROM OPERATING ACTIVITIES ACTIVITIES: Net income (loss)..................................................................... income................................................................................. $ 16,083 7,628 $ (27,679) 4,181 Adjustments to reconcile net income (loss) to net cash provided by (used in in) operating activities: Depreciation and amortization................................................. 26,187 19,925 .......................................................... 6,969 18,391 Equity in loss (earnings) losses of CBHS........................................................ -- 17,063 unconsolidated subsidiaries............................. 12,122 (4,982) Stock option expense (credit)................................................. 1,433 .......................................................... (3,5393,959) 12 Non-cash interest expense..................................................... 882 1,110 Loss (gain) .............................................................. 422 954 Gain on sale of assets................................................. ................................................................. -- (3,3021,062) 49 Impairment of long-lived assets............................................... -- 2,160 Extraordinary losses on early extinguishments of debt......................... 4,917 55,025 Cash flows from changes in assets and liabilities, net of effects from sales and acquisitions of businesses: Accounts receivable, net.................................................. ............................................................. (2,47416,304) (8,9336,267) Restricted cash and investments...................................................... -- (42,887) Other assets.............................................................. ......................................................................... (4,21410,633) (8,210) 3,289 Accounts payable and other accrued liabilities............................ ....................................... (30,98127,776) 34,142 Medical claims payable............................................................... 6,592 (25,4753,946) Reserve for unpaid claims................................................. ............................................................ (13,6949,256) (12,8153,131) Income taxes payable and deferred income taxes............................ 4,638 (23,275) ....................................... 2,056 9,363 Other liabilities......................................................... .................................................................... (15,1541,623) (4,126223) Minority interest, net of dividends paid.................................. 5,219 2,705 ............................................. 3,199 924 Other..................................................................... ................................................................................ (1,0631,162) (1,0261,099) Total adjustments..................................................... .................................................................. (27,60639,353) 10,638 3,478 Net cash provided by (used in in) operating activities............................... .............................. (11,52331,725) (17,041) 7,659 CASH FLOWS FROM INVESTING ACTIVITIES ACTIVITIES: Capital expenditures.................................................................. ....................................................................... (14,3734,578) (13,46714,357) Acquisitions and investments in businesses, net of cash acquired...................... acquired and return of escrowed funds.................................................................................... (12,962165,548) 6,444 Conversion of joint ventures from consolidation to equity method........................... -- (936,66321,092) Distributions received from unconsolidated subsidiaries.................................... -- 9,303 Decrease in assets restricted for settlement of unpaid claims......................... 8,626 18,007 claims and other liabilities........ 14,364 5,808 Proceeds from sale of assets.......................................................... 10,386 5,983 Crescent ............................................................... -- 3,619 Cresent Transaction costs............................................................ -- .................................................................. (5,8654,253) (7) Net cash used in investing activities............................... ................................................ (8,323160,015) (932,00510,282) CASH FLOWS FROM FINANCING ACTIVITIES ACTIVITIES: Proceeds from issuance of debt, net of issuance costs................................. 126,825 1,171,681 ...................................... -- (69) Payments on debt and capital lease obligations........................................ ............................................. (117,521140) (425,43340,000) Proceeds from exercise of stock options and warrants.................................. 3,842 3,362 ....................................... 1,917 -- Purchases of treasury stock........................................................... -- ................................................................ (12,456) -- Net cash provided by used in financing activities........................... 13,146 737,154 ................................................ (10,679) (40,069) Net decrease in cash and cash equivalents............................................... .................................................... (6,700202,419) (211,89242,692) Cash and cash equivalents at beginning of period........................................ 120,945 ............................................. 372,878 92,050 Cash and cash equivalents at end of period.............................................. ................................................... $ 114,245 170,459 $ 160,986 49,358 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH DECEMBER 31, 1998 (UNAUDITED) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These financial statements should be read in conjunction with the audited consolidated financial statements of Magellan Health Services, Inc. and Subsidiaries ("Magellan" or the Company "Company") for the fiscal year ended September 30, 19971998, included in the Company's Annual Report on Form 10-K. Certain reclassifications have been made to fiscal 1998 amounts to conform to fiscal 1999 presentation. NOTE B--NATURE OF BUSINESS The Company's 50% owned hospital business, Charter Behavioral Health Systems, LLC ("CBHS"), is seasonal in nature, with a reduced demand for certain services generally occurring in the first fiscal quarter around major holidays, such as Thanksgiving and Christmas, and during the summer months comprising the fourth fiscal quarter. The Company's businesses are also subject to general economic conditions and other factors. Accordingly, the results of operations for the interim periods are not necessarily indicative of the actual results expected for the year. NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION Below is supplemental cash flow information related to the six three months ended March December 31, 1997 and 1998: 1998 (in thousands): FOR THE SIX THREE MONTHS ENDED MARCH DECEMBER 31, -------------------- 1997 --------- 1998 --------- --------- (In thousands) Income taxes paid, net of refunds received........................................ received $ 9,064 4,752 $ 8,095 (3,570) Interest paid, net of amounts capitalized......................................... 28,704 40,747 Non-cash transactions: Common Stock in Treasury issued in connection with the purchase of the remaining 39% interest in Green Spring Health Services, Inc............................. $ -- $ 63,496 Cash and cash equivalents at March 31, 1998 include approximately $57.6 million that is held for the payment of claims under the terms of certain behavioral managed care contracts and for regulatory purposes related to the payment of claims in certain jurisdictions. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) ............... 21,550 12,601 NOTE DC--LONG-TERM DEBT AND LEASES Information with regard to the Company's long-term debt and capital lease obligations at September 30, 1997 1998 and March December 31, 1998 is as follows (in thousands): SEPTEMBER 30, MARCH DECEMBER 31, 1998 1998 Credit Agreement: Revolving Facility due through 2004........................... $ 40,000 $ -- Term Loan Facility (7.3725% to 7.8725% at December 31, 1998) due through 2006............................................ 550,000 550,000 9.0% Senior Subordinated Notes due 2008....................... 625,000 625,000 6.07% to 11.5% Mortgage and other notes payable through 2005........................................................ 4,198 4,010 4.05% Capital lease obligations due through 2014.............. 6,448 6,438 1,225,646 1,185,448 Less amounts due within one year.......................... 23,033 29,428 $ 1,202,613 $1,156,020 MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (UNAUDITED) NOTE D--ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands): SEPTEMBER 30, 1998 DECEMBER 31,1998 Salaries, wages and other benefits.............................. $ 23,893 $ 12,504 Interest........................................................ 9,271 23,200 CHAMPUS adjustments............................................. 25,484 29,330 Other........................................................... 134,882 177,165 $ 193,530 $ 242,199 NOTE E--INCOME PER COMMON SHARE The following table presents the components of average number of common shares outstanding-diluted (in thousands): THREE MONTHS ENDED DECEMBER 31, -------------------- 1997 1998 --------- --------- Average number of common shares outstanding--basic... 28,969 31,613 Common stock equivalents--stock options.............. 762 39 Common stock equivalents--warrants................... 53 8 Average number of common shares --------- --------- outstanding--diluted............................... 29,784 31,660 --------- --------- --------- --------- Options to purchase approximately 1,649,000 shares of common stock at $14.56 to $31.00 per share were outstanding during the quarter ended December 31, 1998, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. Approximately 1,315,000 of these options, which expire between fiscal 2001 and 2009, were outstanding at December 31, 1998. Warrants to purchase approximately 4,713,000 shares of common stock at $26.15 to $38.70 per share were outstanding during the quarter ended December 31, 1998, but were not included in the computation of diluted EPS because the warrants' exercise prices were greater than the average market price of the common shares. The warrants, which expire between fiscal 2000 and 2009, were outstanding at December 31, 1998. On November 17, 1998, the Company's Board of Directors approved the repricing of stock options outstanding under the Company's existing stock option plans which were held by current directors and full-time employees (the "Stock Option Repricing"). Each holder of 10,000 or more stock options that was NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (UNAUDITED) NOTE E--INCOME PER COMMON SHARE (CONTINUED) eligible to participate in the Stock Option Repricing was required to forfeit a percentage of outstanding stock options as follows:

Condensed Consolidated Statements of Operations. For the Three Months and the Six Months ended March 31, 1997 and 1998................................................................................... 4 Condensed Consolidated Statements of Cash Flows--For the Six Months ended March 31, 1997 and 1998..... 5 Notes to Condensed Consolidated Financial Statements.................................................. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 20 PART II--OTHER INFORMATION: Item 1.--Legal Proceedings............................................................................ 30 Item 4.--Submission of Matters to a Vote of Security Holders.......................................... 30 Item 6.--Exhibits and Reports on Form 8-K............................................................. 30 Signatures............................................................................................ 32 The undersigned Registrant hereby amends Note I--Contingencies of the Notes to Condensed Consolidated Financial Statements of its Report on Form 10-Q for the quarterly period ended March 31, 1998. MAGELLAN HEALTH SERVICES, INC. QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I--FINANCIAL INFORMATION‌ MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) SEPTEMBER 30, MARCH 31, 1997 1998 ASSETS Current Assets: Cash and cash equivalents........................................................ $ 372,878 $ 160,986 Accounts receivable, net......................................................... 107,998 181,622 Refundable income taxes.......................................................... 2,466 1,361 Other current assets............................................................. 23,696 42,335 Total Current Assets........................................................... 507,038 386,304 Assets restricted for settlement of unpaid claims and other long-term liabilities.... 87,532 69,226 Property and equipment: Land............................................................................. 11,667 11,477 Buildings and improvements....................................................... 70,174 75,580 Equipment........................................................................ 63,719 131,013 145,560 218,070 Accumulated depreciation......................................................... (37,038) (46,169) 108,522 171,901 Construction in progress......................................................... 692 1,078 Total property and equipment................................................... 109,214 172,979 Deferred income taxes................................................................ 1,158 75,651 Investment in CBHS................................................................... 16,878 -- Other long-term assets............................................................... 20,893 45,906 Goodwill, net........................................................................ 114,234 919,500 Other intangible assets, net......................................................... 38,673 243,332 $ 895,620 $ 1,912,898 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, MARCH 31, 1997 1998 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................................................... $ 45,346 $ 42,478 Accrued liabilities................................................................ 170,429 382,626 Current maturities of long-term debt and capital lease obligations................. 3,601 10,131 Total Current Liabilities.................................................... 219,376 435,235 Long-term debt and capital lease obligations......................................... 391,693 1,208,715 Reserve for unpaid claims............................................................ 49,113 36,642 Deferred credits and other long-term liabilities..................................... 16,110 19,710 Minority interest.................................................................... 61,078 30,619 Commitments and contingencies Stockholders' Equity: Preferred Stock, without par value Authorized--10,000 shares Issued and outstanding--none........................... -- -- Common Stock, par value $0.25 per share Authorized--80,000 shares Issued and outstanding--33,439 shares at September 30, 1997 and 33,625 shares at March 31, 1998....................................... 8,361 8,407 Other Stockholders' Equity Additional paid-in capital....................................................... 340,645 351,858 Accumulated deficit.............................................................. (129,955) (157,634) Warrants outstanding............................................................. 25,050 25,050 Common Stock in Treasury, 4,424 shares at September 30, 1997 and 2,137 shares at March 31, 1998................................................................. (82,731) (42,413) Cumulative foreign currency adjustments.......................................... (3,120) (3,291) Total stockholders' equity................................................... 158,250 181,977 $ 895,620 $ 1,912,898 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. MAGELLAN HEALTH SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, 1997 1998 1997 1998 Net revenue...................................................... $ 349,922 $ 372,223 $ 696,741 $ 588,320 Costs and expenses: Salaries, cost of care and other operating expenses............ 282,210 324,507 566,333 500,128 Bad debt expense............................................... 15,140 686 35,375 1,756 Depreciation and amortization.................................. 13,088 12,956 26,187 19,925 Interest, net.................................................. 13,153 17,526 26,722 24,927 Stock option expense (credit).................................. 829 420 1,433 (3,539) Managed Care integration costs................................. -- 11,074 -- 11,074 Equity in loss of CBHS......................................... -- 5,575 -- 17,063 Unusual Items.................................................. 1,395 49 1,395 49 325,815 372,793 657,445 571,383 Income (loss) before provision for income taxes, minority interest and extraordinary items............................... 24,107 (570) 39,296 16,937 Provision for income taxes....................................... 9,643 630 15,718 7,633 Income (loss) before minority interest and extraordinary items... 14,464 (1,200) 23,578 9,304 Minority interest................................................ 2,572 1,092 4,545 3,968 Income (loss) before extraordinary items......................... 11,892 (2,292) 19,033 5,336 Extraordinary items--losses on early extinguishments of debt (net of income tax benefit of $1,967 in 1997 and $22,010 in 1998)... 11,892 -- (2,292) (33,015) 19,033 (2,950) 5,336 (33,015) Net income (loss)................................................ $ 11,892 $ (35,307) $ 16,083 $ (27,679) Average number of common shares outstanding--basic............... 28,726 31,012 28,657 29,995 Average number of common shares outstanding--diluted............. 29,343 31,012 29,155 30,587 Income (loss) per common share--basic: Income (loss) before extraordinary items....................... $ 0.41 $ (0.07) $ 0.66 $ 0.18 Extraordinary losses on early extinguishments of debt.......... $ -- $ (1.06) $ (0.10) $ (1.10) Net income (loss).............................................. $ 0.41 $ (1.14) $ 0.56 $ (0.92) Income (loss) per common share--diluted: Income (loss) before extraordinary items....................... $ 0.41 $ (0.07) $ 0.65 $ 0.17 Extraordinary losses on early extinguishments of debt.......... $ -- $ (1.06) $ (0.10) $ (1.08) Net income (loss).............................................. $ 0.41 $ (1.14) $ 0.55 $ (0.90) The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) FOR THE SIX MONTHS ENDED MARCH 31, 1997 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..................................................................... $ 16,083 $ (27,679) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization................................................. 26,187 19,925 Equity in loss of CBHS........................................................ -- 17,063 Stock option expense (credit)................................................. 1,433 (3,539) Non-cash interest expense..................................................... 882 1,110 Loss (gain) on sale of assets................................................. (3,302) 49 Impairment of long-lived assets............................................... -- 2,160 Extraordinary losses on early extinguishments of debt......................... 4,917 55,025 Cash flows from changes in assets and liabilities, net of effects from sales and acquisitions of businesses: Accounts receivable, net.................................................. (2,474) (8,933) Other assets.............................................................. (4,214) (8,210) Accounts payable and other accrued liabilities............................ (30,981) (25,475) Reserve for unpaid claims................................................. (13,694) (12,815) Income taxes payable and deferred income taxes............................ 4,638 (23,275) Other liabilities......................................................... (15,154) (4,126) Minority interest, net of dividends paid.................................. 5,219 2,705 Other..................................................................... (1,063) (1,026) Total adjustments..................................................... (27,606) 10,638 Net cash used in operating activities............................... (11,523) (17,041) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.................................................................. (14,373) (13,467) Acquisitions and investments in businesses, net of cash acquired...................... (12,962) (936,663) Decrease in assets restricted for settlement of unpaid claims......................... 8,626 18,007 Proceeds from sale of assets.......................................................... 10,386 5,983 Crescent Transaction costs............................................................ -- (5,865) Net cash used in investing activities............................... (8,323) (932,005) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of debt, net of issuance costs................................. 126,825 1,171,681 Payments on debt and capital lease obligations........................................ (117,521) (425,433) Proceeds from exercise of stock options and warrants.................................. 3,842 3,362 Purchases of treasury stock........................................................... -- (12,456) Net cash provided by financing activities........................... 13,146 737,154 Net decrease in cash and cash equivalents............................................... (6,700) (211,892) Cash and cash equivalents at beginning of period........................................ 120,945 372,878 Cash and cash equivalents at end of period.............................................. $ 114,245 $ 160,986 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended September 30, 1997, included in the Company's Annual Report on Form 10-K. NOTE B--NATURE OF BUSINESS The Company's 50% owned hospital business, Charter Behavioral Health Systems, LLC ("CBHS"), is seasonal in nature, with a reduced demand for certain services generally occurring in the first fiscal quarter around major holidays, such as Thanksgiving and Christmas, and during the summer months comprising the fourth fiscal quarter. The Company's businesses are also subject to general economic conditions and other factors. Accordingly, the results of operations for the interim periods are not necessarily indicative of the actual results expected for the year. NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION Below is supplemental cash flow information related to the six months ended March 31, 1997 and 1998: FOR THE SIX MONTHS ENDED MARCH 31, -------------------- 1997 1998 --------- --------- (In thousands) Income taxes paid, net of refunds received........................................ $ 9,064 $ 8,095 Interest paid, net of amounts capitalized......................................... 28,704 40,747 Non-cash transactions: Common Stock in Treasury issued in connection with the purchase of the remaining 39% interest in Green Spring Health Services, Inc............................. $ -- $ 63,496 Cash and cash equivalents at March 31, 1998 include approximately $57.6 million that is held for the payment of claims under the terms of certain behavioral managed care contracts and for regulatory purposes related to the payment of claims in certain jurisdictions. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE D--LONG-TERM DEBT AND LEASES Information with regard to the Company's long-term debt and capital lease obligations at September 30, 1997 and March 31, 1998 is as follows (in thousands): SEPTEMBER 30, MARCH 31, 1997 1998

Condensed Consolidated Statements of Operations. For the Three Months and the Six Nine Months ended March 31June 30, 1997 1998 and 1998................................................................................... 4 1999............................... 2 Condensed Consolidated Statements of Cash Flows--Flows-- For the Six Nine Months ended March 31June 30, 1997 1998 and 1998..... 5 1999.................................................... 3 Notes to Condensed Consolidated Financial Statements.................................................. 6 4 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 20 PART II--OTHER INFORMATION: Item 1.--Legal Proceedings5.--Other Information............................................................................ 30 Item 4.--Submission of Matters to a Vote of Security Holders.......................................... 30 35 Item 6.--Exhibits and Reports on Form 8-K............................................................. 30 35 Signatures............................................................................................ 32 37 MAGELLAN HEALTH SERVICES, INC. QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I--FINANCIAL INFORMATION‌ MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, MARCH 31JUNE 30, 1997 1998 1999 ASSETS Current Assetsassets: Cash and cash equivalents........................................................ ............................................................ $ 372,878 92,050 $ 160,986 40,307 Accounts receivable, net......................................................... 107,998 181,622 ............................................................. 174,846 156,349 Restricted cash and investments...................................................... 89,212 111,882 Refundable income taxes.......................................................... 2,466 1,361 .............................................................. 4,939 -- Other current assets............................................................. 23,696 42,335 ................................................................. 38,677 24,634 Total Current Assets........................................................... 507,038 386,304 current assets............................................................... 399,724 333,172 Assets restricted for settlement of unpaid claims and other long-term liabilities.... 87,532 69,226 ................ 37,910 28,751 Property and equipment: Land............................................................................. 11,667 11,477 Buildings , net of accumulated depreciation of $60,100 at September 30, 1998, and improvements....................................................... 70,174 75,580 Equipment........................................................................ 63,719 131,013 145,560 218,070 Accumulated depreciation......................................................... (37,038) (46,169) 108,522 171,901 Construction in progress......................................................... 692 1,078 Total property and equipment$68,043 at June 30, 1999................................................... 109,214 172,979 177,169 137,314 Deferred income taxes................................................................ 1,158 75,651 Investment .................................................................. 97,386 85,767 Investments in CBHS................................................................... 16,878 -- unconsolidated subsidiaries............................................. 11,066 38,174 Other long-term assets............................................................... 20,893 45,906 ................................................................. 35,415 21,172 Goodwill, net........................................................................ 114,234 919,500 .......................................................................... 992,431 1,066,787 Other intangible assets, net......................................................... 38,673 243,332 ........................................................... 165,189 152,336 $ 895,620 $ 1,912,898 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, MARCH 31, 1997 1998 1,916,290 $1,863,473 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilitiesliabilities: Accounts payable................................................................... ..................................................................... $ 45,346 42,873 $ 42,478 22,182 Accrued liabilities................................................................ 170,429 382,626 .................................................................. 193,530 213,591 Medical claims payable............................................................... 195,330 218,915 Income taxes payable................................................................. -- 200 Current maturities of long-term debt and capital lease obligations................. 3,601 10,131 ................... 23,033 31,260 Total Current Liabilities.................................................... 219,376 435,235 current liabilities.......................................................... 454,766 486,148 Long-term debt and capital lease obligations......................................... 391,693 1,208,715 ........................................... 1,202,613 1,102,184 Reserve for unpaid claims............................................................ 49,113 36,642 .............................................................. 30,280 21,366 Deferred credits and other long-term liabilities..................................... 16,110 19,710 ....................................... 14,011 31,435 Minority interest.................................................................... 61,078 30,619 ...................................................................... 26,985 1,955 Commitments and contingencies Stockholders' Equityequity: Preferred Stockstock, without par value Authorized--10,000 shares Issued and outstanding--none........................... ....................................................... -- -- Common Stockstock, par value $0.25 per share Authorized--80,000 shares Issued and outstanding--33,439 outstanding--33,898 shares at September 30, 1997 1998 and 33,625 34,067 shares at March 31, 1998....................................... 8,361 8,407 Other Stockholders' Equity Additional paid-in capital....................................................... 340,645 351,858 Accumulated deficit.............................................................. (129,955) (157,634) Warrants outstanding............................................................. 25,050 25,050 Common Stock in Treasury, 4,424 shares at September June 30, 1997 and 2,137 shares at March 31, 1998................................................................. (82,731) (42,413) Cumulative foreign currency adjustments.......................................... (3,120) (3,291) Total 1999..................................................................... 8,476 8,516 Other stockholders' equity................................................... 158,250 181,977 $ 895,620 $ 1,912,898 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these balance sheets. MAGELLAN HEALTH SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, 1997 1998 1997 1998 Net revenue...................................................... $ 349,922 $ 372,223 $ 696,741 $ 588,320 Costs and expenses: Salaries, cost of care and other operating expenses............ 282,210 324,507 566,333 500,128 Bad debt expense............................................... 15,140 686 35,375 1,756 Depreciation and amortization.................................. 13,088 12,956 26,187 19,925 Interest, net.................................................. 13,153 17,526 26,722 24,927 Stock option expense (credit).................................. 829 420 1,433 (3,539) Managed Care integration costs................................. -- 11,074 -- 11,074 Equity in loss of CBHS......................................... -- 5,575 -- 17,063 Unusual Items.................................................. 1,395 49 1,395 49 325,815 372,793 657,445 571,383 Income (loss) before provision for income taxes, minority interest and extraordinary items............................... 24,107 (570) 39,296 16,937 Provision for income taxes....................................... 9,643 630 15,718 7,633 Income (loss) before minority interest and extraordinary items... 14,464 (1,200) 23,578 9,304 Minority interest................................................ 2,572 1,092 4,545 3,968 Income (loss) before extraordinary items......................... 11,892 (2,292) 19,033 5,336 Extraordinary items--losses on early extinguishments of debt (net of income tax benefit of $1,967 in 1997 and $22,010 in 1998)... -- (33,015) (2,950) (33,015) Net income (loss)................................................ $ 11,892 $ (35,307) $ 16,083 $ (27,679) Average number of common shares outstanding--basic............... 28,726 31,012 28,657 29,995 Average number of common shares outstanding--diluted............. 29,343 31,012 29,155 30,587 Income (loss) per common share--basic: Income (loss) before extraordinary items....................... $ 0.41 $ (0.07) $ 0.66 $ 0.18 Extraordinary losses on early extinguishments of debt.......... $ -- $ (1.06) $ (0.10) $ (1.10) Net income (loss).............................................. $ 0.41 $ (1.14) $ 0.56 $ (0.92) Income (loss) per common share--diluted: Income (loss) before extraordinary items....................... $ 0.41 $ (0.07) $ 0.65 $ 0.17 Extraordinary losses on early extinguishments of debt.......... $ -- $ (1.06) $ (0.10) $ (1.08) Net income (loss).............................................. $ 0.41 $ (1.14) $ 0.55 $ (0.90) The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) FOR THE SIX MONTHS ENDED MARCH 31, 1997 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..................................................................... $ 16,083 $ (27,679) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization................................................. 26,187 19,925 Equity in loss of CBHS........................................................ -- 17,063 Stock option expense (credit)................................................. 1,433 (3,539) Non-cash interest expense..................................................... 882 1,110 Loss (gain) on sale of assets................................................. (3,302) 49 Impairment of long-lived assets............................................... -- 2,160 Extraordinary losses on early extinguishments of debt......................... 4,917 55,025 Cash flows from changes in assets and liabilities, net of effects from sales and acquisitions of businesses: Accounts receivable, net.................................................. (2,474) (8,933) Other assets.............................................................. (4,214) (8,210) Accounts payable and other accrued liabilities............................ (30,981) (25,475) Reserve for unpaid claims................................................. (13,694) (12,815) Income taxes payable and deferred income taxes............................ 4,638 (23,275) Other liabilities......................................................... (15,154) (4,126) Minority interest, net of dividends paid.................................. 5,219 2,705 Other..................................................................... (1,063) (1,026) Total adjustments..................................................... (27,606) 10,638 Net cash used in operating activities............................... (11,523) (17,041) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.................................................................. (14,373) (13,467) Acquisitions and investments in businesses, net of cash acquired...................... (12,962) (936,663) Decrease in assets restricted for settlement of unpaid claims......................... 8,626 18,007 Proceeds from sale of assets.......................................................... 10,386 5,983 Crescent Transaction costs............................................................ -- (5,865) Net cash used in investing activities............................... (8,323) (932,005) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of debt, net of issuance costs................................. 126,825 1,171,681 Payments on debt and capital lease obligations........................................ (117,521) (425,433) Proceeds from exercise of stock options and warrants.................................. 3,842 3,362 Purchases of treasury stock........................................................... -- (12,456) Net cash provided by financing activities........................... 13,146 737,154 Net decrease in cash and cash equivalents............................................... (6,700) (211,892) Cash and cash equivalents at beginning of period........................................ 120,945 372,878 Cash and cash equivalents at end of period.............................................. $ 114,245 $ 160,986 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended September 30, 1997, included in the Company's Annual Report on Form 10-K. NOTE B--NATURE OF BUSINESS The Company's 50% owned hospital business, Charter Behavioral Health Systems, LLC ("CBHS"), is seasonal in nature, with a reduced demand for certain services generally occurring in the first fiscal quarter around major holidays, such as Thanksgiving and Christmas, and during the summer months comprising the fourth fiscal quarter. The Company's businesses are also subject to general economic conditions and other factors. Accordingly, the results of operations for the interim periods are not necessarily indicative of the actual results expected for the year. NOTE C--SUPPLEMENTAL CASH FLOW INFORMATION Below is supplemental cash flow information related to the six months ended March 31, 1997 and 1998: FOR THE SIX MONTHS ENDED MARCH 31, -------------------- 1997 1998 --------- --------- (In thousands) Income taxes paid, net of refunds received........................................ $ 9,064 $ 8,095 Interest paid, net of amounts capitalized......................................... 28,704 40,747 Non-cash transactions: Common Stock in Treasury issued in connection with the purchase of the remaining 39% interest in Green Spring Health Services, Inc............................. $ -- $ 63,496 Cash and cash equivalents at March 31, 1998 include approximately $57.6 million that is held for the payment of claims under the terms of certain behavioral managed care contracts and for regulatory purposes related to the payment of claims in certain jurisdictions. MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) NOTE D--LONG-TERM DEBT AND LEASES Information with regard to the Company's long-term debt and capital lease obligations at September 30, 1997 and March 31, 1998 is as follows (in thousands): SEPTEMBER 30, MARCH 31, 1997 1998: