News Release Details

Mar 7, 2006
Magellan Health Services Reports Fourth Quarter and Fiscal Year 2005 Financial Results; Company Restates 2004 and 2005 Net Income - Segment Profit and Cash Flow Unaffected; Company Also Reaffirms 2006 Segment Profit and EPS Guidance

Magellan Health Services Reports Fourth Quarter and Fiscal Year 2005 Financial Results; Company Restates 2004 and 2005 Net Income - Segment Profit and Cash Flow Unaffected; Company Also Reaffirms 2006 Segment Profit and EPS Guidance

AVON, Conn., Mar 07, 2006 (BUSINESS WIRE) -- Magellan Health Services, Inc. (Nasdaq:MGLN) today reported operating results for the fourth quarter and fiscal year 2005. The Company also announced that it has completed its evaluation of the accounting treatment relating to the use of deferred tax assets that existed prior to its emergence from bankruptcy, other than net operating loss carryforwards (NOLs), and has determined that the realization of the tax benefits associated with the use of such deferred tax assets should be credited to goodwill. As a result, it is restating previously reported net income and earnings per share for the year ended December 31, 2004 and for the nine months ended September 30, 2005. This revision does not affect segment profit or cash flow results, nor does it impact any of the Company's tax positions or its taxes payable now or in the future.

The Company reaffirmed that for 2006 it expects to generate segment profit in the range of $173 million to $193 million and net income in the range of $1.44 to $1.86 per diluted share, including the impact of the NIA acquisition.

Management will discuss the Company's financial results, the restatement, and its outlook in a conference call to be held Wednesday, March 8, at 8:30 a.m.

Steven J. Shulman, chairman and chief executive officer, said, "I am very pleased with the Company's position at year end and I am optimistic about its prospects for the coming year and beyond. We exceeded our previously announced guidance for segment profit, coming in at $246 million, while continuing to demonstrate operational excellence and diligent focus on positioning the Company strategically for the future. Restating certain results for 2004 and 2005 is disappointing, certainly, but we value the integrity of our accounting practices and I am pleased that this matter was resolved quickly and accurately. The restatement has no impact on the strong financial performance and strategic prospects for the Company."

Fourth Quarter and Fiscal Year 2005 Results

For the fiscal year ended December 31, 2005, the Company reported net revenue of $1.8 billion and net income of $130.6 million, or $3.46 per diluted common share. For the prior year, net revenue was $1.8 billion and net income, as restated, was $64.3 million, or $1.77 per diluted common share. Net income for the year ended December 31, 2005, as well as for the fourth quarter of 2005, was positively impacted by the previously announced sale of certain assets to Aetna, Inc. which generated a pre-tax gain of $56.4 million. Because of the revision in tax accounting referenced above, the Company has recorded tax expense of approximately $21.7 million with respect to this gain although, as previously disclosed, the cash taxes payable on such transaction are expected to be minimal. For 2005, the Company's segment profit (net revenue less cost of care, and direct service costs and other operating expenses plus equity in earnings of unconsolidated subsidiaries) was $246.0 million, compared with $233.2 million in the prior year.

For the fourth quarter of 2005, the Company reported net revenue of $436.4 million, compared with $445.2 million in the prior year fourth quarter. Net income in the quarter was $52.2 million, or $1.38 per diluted common share, compared with $9.9 million, or $0.27 per diluted common share in the fourth quarter of 2004, as restated. Segment profit for the fourth quarter was $56.9 million, compared with $59.6 million in the prior year quarter.

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 $274.2 million, of which approximately $122 million was subsequently used to fund the previously announced acquisition of National Imaging Associates, Inc. (NIA), which closed on January 31, 2006. Cash flow from operations for 2005 was $188.0 million compared with $163.4 million for the prior year period.

Mark S. Demilio, chief financial officer, said, "Magellan's strong financial performance in 2005 is the result of continued fiscal discipline and focus on operational efficiency. This diligence in managing our business yielded the financial flexibility to execute on two key initiatives - improving our capital structure and furthering our long-term business strategy through acquisition. In the fourth quarter we repaid our Senior Notes in the principal amount of $241 million and our Note payable to Aetna of $49 million. With just $63 million of debt and $274 million of unrestricted cash and investments at December 31, 2005, we have the financial foundation from which to fund additional market expansion and accelerated growth. Our acquisition of NIA in January was an example of such expansion."

Restated Results

The Company has completed its evaluation of the accounting treatment of the use of deferred tax assets and determined that the reversal of valuation allowances with respect to the use of deferred tax assets that existed prior to its emergence from bankruptcy, other than NOLs, should be credited to goodwill as opposed to the Company's treatment since its emergence from bankruptcy of recording such tax benefit as a reduction of its provision for income taxes. As a result, the Company is restating net income and earnings per share for fiscal year 2004 and the nine months ended September 30, 2005 and each of the quarters in those periods. As a result of the restatement, net income for 2004 was reduced by $24.1 million, or $0.66 per fully diluted share, and net income for the nine months ended September 30, 2005 was reduced by $2.3 million, or $0.06 per fully diluted share.

"The restatement arose out of a misinterpretation of the complex accounting literature on this topic," Demilio noted. "Because of the lack of guidance directly addressing this issue for companies emerging from bankruptcy, it was necessary to interpret various accounting pronouncements in order to conclude on the appropriate treatment. As we reviewed this literature again, we determined that the revised conclusion represents the proper tax accounting treatment and it now parallels the treatment the Company has been applying to reversals of valuation allowance with respect to the use of NOLs."

See the attached tables detailing the Company's restated results for the fourth quarter and fiscal year 2004. For the restated results for each of the first three quarters of 2004 and 2005, and other information concerning the restatement, please see the Company's Current Report on Form 8-K and Annual Report on Form 10-K for the year ended December 31, 2005 to be filed with the Securities and Exchange Commission tomorrow.

2006 Outlook

The Company reaffirmed its expectations for 2006 of segment profit in the range of $173 million to $193 million and net income in the range of $1.44 to $1.86 per diluted share, including the impact of the NIA acquisition.

"Magellan's expansion into the radiology benefits management space is an exciting step forward in our development into a diversified managed health care services company with significant growth prospects," Shulman added. "Radiology affords the opportunity for dramatic growth by addressing a fast-growing, relatively uncontrolled portion of medical expenses in a targeted manner."

"At the same time, we see opportunity to grow in the behavioral health sector, particularly in the Medicaid market, and have made investments in resources to support business development in that area. We have the strategic acumen, financial resources and discipline to seize additional opportunities that will benefit our customers and their constituents as well as our shareholders and employees," Shulman said.

Earnings Results Conference Call

A conference call will be held to discuss the Company's financial results at 8:30 a.m. Eastern time on Wednesday, March 8. To participate in the call, interested parties should call 1-888-390-4698 and reference the passcode Fourth 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.

A taped replay of the conference call will be available from approximately 10:30 a.m. Eastern time on Wednesday, March 8, until midnight on Wednesday, March 15. The call-in numbers for the replay are 1-888-566-0697 and 1-402-998-0831 (from outside the U.S.).

About Magellan: Headquartered in Avon, Conn., Magellan Health Services, Inc. (Nasdaq:MGLN) is the country's leading manager of behavioral health care and radiology benefits. 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 segment profit, net income and earnings per share 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 the Company's 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 "Risk Factors" in Magellan's Annual Report on Form 10-K for the year ended December 31, 2005, to be filed with the Securities and Exchange Commission tomorrow and 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, will be included in Magellan's Annual Report on Form 10-K for the year ended December 31, 2005.

           MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS
               (In thousands, except per share amounts)

                         Three Months Ended      Fiscal Year Ended
                             December 31,            December 31,
                       ----------------------- -----------------------
                          2004      2005 (1)      2004      2005 (1)
                       ----------- ----------- ----------- -----------
                       (Restated)              (Restated)
                       (unaudited) (unaudited)

Net revenue            $  445,168  $  436,439  $1,795,402  $1,808,003

Cost and expenses:
  Cost of care            291,799     284,396   1,190,594   1,204,659
  Direct service costs
   and other operating
   expenses                93,485      94,792     376,871     361,726
  Equity in loss
   (earnings) of
   unconsolidated
   subsidiaries               284         361      (5,277)     (4,350)
                       ----------- ----------- ----------- -----------
                          385,568     379,549   1,562,188   1,562,035
                       ----------- ----------- ----------- -----------
  Segment profit           59,600      56,890     233,214     245,968
                       ----------- ----------- ----------- -----------

  Depreciation and
   amortization            11,011      12,136      42,489      49,088
  Gain on disposition
   of Aetna Assets              -     (56,367)          -     (56,367)
  Interest expense          9,625      18,044      37,124      44,005
  Interest income          (2,534)     (5,537)     (6,127)    (17,464)
  Stock compensation
   expense                  7,254       3,783      23,152      15,807
  Special charges
   (benefits)                 734           -       5,038        (556)
                       ----------- ----------- ----------- -----------

Income from continuing
 operations before
 income taxes and
 minority interest         33,510      84,831     131,538     211,455
Provision for  income
 taxes                     22,257      32,709      64,835      82,405
                       ----------- ----------- ----------- -----------
Income from continuing
 operations before
 minority interest         11,253      52,122      66,703     129,050
Minority interest, net       (197)         11         347          58
                       ----------- ----------- ----------- -----------
Income from continuing
 operations                11,450      52,111      66,356     128,992
                       ----------- ----------- ----------- -----------
Discontinued
 operations:
Income (loss) from
 discontinued
 operations (2)            (1,534)         71      (2,041)      1,597
                       ----------- ----------- ----------- -----------
Net income                  9,916      52,182      64,315     130,589
Other comprehensive
 income (loss)               (506)        319        (506)       (109)
                       ----------- ----------- ----------- -----------
Comprehensive income   $    9,410  $   52,501  $   63,809  $  130,480
                       =========== =========== =========== ===========

Weighted average
 number of common
 shares outstanding --
 basic (3)                 35,371      36,474      35,367      35,966
                       =========== =========== =========== ===========
Weighted average
 number of common
 shares outstanding --
 diluted (3)               36,734      37,712      36,361      37,691
                       =========== =========== =========== ===========

Income per common
 share available to
 common stockholders
 -- basic:
  Income from
   continuing
   operations          $     0.33  $     1.43  $     1.88  $     3.59
                       =========== =========== =========== ===========
  Income (loss) from
   discontinued
   operations          $    (0.04) $        -  $    (0.06) $     0.04
                       =========== =========== =========== ===========
Net income             $     0.29  $     1.43  $     1.82  $     3.63
                       =========== =========== =========== ===========

Income per common
 share available to
 common stockholders
 -- diluted:
  Income from
   continuing
   operations          $     0.31  $     1.38  $     1.83  $     3.42
                       =========== =========== =========== ===========
  Income (loss) from
   discontinued
   operations          $    (0.04) $        -  $    (0.06) $     0.04
                       =========== =========== =========== ===========
Net income             $     0.27  $     1.38  $     1.77  $     3.46
                       =========== =========== =========== ===========

(1) For a more detailed discussion of Magellan's results for the
    fiscal year ended December 31, 2005, refer to the Company's Annual
    Report on Form 10-K, which will be filed with the SEC on March 8,
    2006, and the live broadcast or taped replay of the Company's
    earnings conference call on March 8, 2006, which will be available
    at www.MagellanHealth.com.

(2) Net of income tax (benefit) provision of $(1,074) and $(21) for
    the three months ended December 31, 2004 and 2005, respectively,
    and $(1,429) and $1,052 for the fiscal year ended December 31,
    2004 and 2005, respectively.

(3) Weighted average number of common shares outstanding for the three
    months and fiscal years ended December 31, 2004 and 2005 were
    calculated using outstanding shares of the Company's Ordinary
    Common Stock and Multi-Vote Common Stock.


           MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
           CONSOLIDATED SUMMARIZED STATEMENTS OF CASH FLOWS
                            (In thousands)

                                       Fiscal Year Ended December 31,
                                       ------------------------------
                                           2004              2005
                                       ------------      ------------
                                        (Restated)

Net cash provided by operating
 activities                            $   163,438       $   187,982
Net cash (used in) provided by
 investing activities                     (349,447)          150,239
Net cash provided by (used in)
 financing activities                       24,451          (302,572)
                                       ------------      ------------
Net (decrease) increase in cash and
 cash equivalents                         (161,558)           35,649
Cash and cash equivalents at beginning
 of period                                 206,948            45,390
                                       ------------      ------------
Cash and cash equivalents at end of
 period                                $    45,390       $    81,039 A
                                       ============      ============

A  Cash and cash equivalents as of December 31, 2005 does not include
   unrestricted investments of $193,177.


           MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS
        (In thousands, except membership amounts in millions)

                           Three Months Ended     Fiscal Year Ended
                               December 31,           December 31,
                         ----------------------- ---------------------
                            2004        2005       2004       2005
                         ----------- ----------- ---------- ----------
                         (unaudited) (unaudited)
Net revenue
   -  Health Plan
       Solutions         $  220,777  $  220,552  $ 904,872  $ 907,796
   -  Employer
       Solutions             33,422      32,252    135,676    127,090
   -  Public Sector
       Solutions            190,969     183,635    754,854    773,117
                         ----------- ----------- ---------- ----------
     Total revenue          445,168     436,439  1,795,402  1,808,003
                         ----------- ----------- ---------- ----------

Cost of care
   -  Health Plan
       Solutions            113,793     119,286    484,047    501,831
   -  Employer
       Solutions              8,140       7,134     37,168     30,256
   -  Public Sector
       Solutions            169,866     157,976    669,379    672,572
                         ----------- ----------- ---------- ----------
     Total cost of care     291,799     284,396  1,190,594  1,204,659
                         ----------- ----------- ---------- ----------

Direct service costs and
 other operating
 expenses
     -  Health Plan
         Solutions           41,151      41,013    170,131    162,507
     -  Employer
         Solutions           16,313      16,710     66,294     64,552
     -  Public Sector
         Solutions            9,337       7,283     40,528     29,475
     -  Corporate &
         Other               26,684      29,786     99,918    105,192
                         ----------- ----------- ---------- ----------
     Total direct
      services costs and
      other operating
      expenses               93,485      94,792    376,871    361,726
                         ----------- ----------- ---------- ----------

Equity in loss
 (earnings) of
 unconsolidated
 subsidiaries
     -  Health Plan
         Solutions              284         361     (5,277)    (4,350)
                         ----------- ----------- ---------- ----------
     Total equity in
      loss (earnings) of
      unconsolidated
      subsidiaries              284         361     (5,277)    (4,350)
                         ----------- ----------- ---------- ----------

Segment profit (loss)
     -  Health Plan
         Solutions           65,549      59,892    255,971    247,808
     -  Employer
         Solutions            8,969       8,408     32,214     32,282
     -  Public Sector
         Solutions           11,766      18,376     44,947     71,070
     -  Corporate &
         Other              (26,684)    (29,786)   (99,918)  (105,192)
                         ----------- ----------- ---------- ----------
     Total segment
      profit             $   59,600  $   56,890  $ 233,214  $ 245,968
                         =========== =========== ========== ==========

Reconciliation of
 segment profit to
 income from continuing
 operations before
 income taxes and
 minority interest:
  Segment profit         $   59,600  $   56,890  $ 233,214  $ 245,968
  Depreciation and
   amortization             (11,011)    (12,136)   (42,489)   (49,088)
  Gain on disposition of
   Aetna Assets                   -      56,367          -     56,367
  Interest expense           (9,625)    (18,044)   (37,124)   (44,005)
  Interest income             2,534       5,537      6,127     17,464
  Stock compensation
   expense                   (7,254)     (3,783)   (23,152)   (15,807)
  Special (charges)
   benefits                    (734)          -     (5,038)       556
                         ----------- ----------- ---------- ----------
   Income from
    continuing
    operations before
    income taxes and
    minority interest    $   33,510  $   84,831  $ 131,538  $ 211,455
                         =========== =========== ========== ==========


Membership
     -  Health Plan
         Solutions (1)                                           37.9
     -  Employer
         Solutions                                               13.6
     -  Public Sector
         Solutions                                                1.9
                                                            ----------
     Total membership                                            53.4
                                                            ==========

(1) Includes approximately 12.1 million covered lives related to
    contracts terminating effective December 31, 2005.


           MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
  SUMMARY OF FISCAL 2004 RESTATEMENT OF CONSOLIDATED STATEMENTS OF
                              OPERATIONS
               (In thousands, except per share amounts)

                                  Three Months Ended December 31, 2004
                                  ------------------------------------
                                  As Reported  Adjustments  Restated
                                  (unaudited)  (unaudited) (unaudited)

Net revenue                       $   445,168  $        -  $  445,168

Cost and expenses:
  Cost of care                        291,799           -     291,799
  Direct service costs and other
   operating expenses                  93,485           -      93,485
  Equity in loss (earnings) of
   unconsolidated subsidiaries            284           -         284
                                  ------------ ----------- -----------
                                      385,568           -     385,568
                                  ------------ ----------- -----------
  Segment profit                       59,600           -      59,600
                                  ------------ ----------- -----------

  Depreciation and amortization        11,011           -      11,011
  Interest expense                      9,625           -       9,625
  Interest income                      (2,534)          -      (2,534)
  Stock compensation expense            7,254           -       7,254
  Special charges                         734           -         734
                                  ------------ ----------- -----------

Income from continuing operations
 before income taxes and
 minority interest                     33,510           -      33,510
Provision for income taxes             17,608       4,649      22,257
                                  ------------ ----------- -----------
Income from continuing operations
 before minority interest              15,902      (4,649)     11,253
Minority interest, net                   (193)         (4)       (197)
                                  ------------ ----------- -----------
Income from continuing operations      16,095      (4,645)     11,450
                                  ------------ ----------- -----------
Discontinued operations:
Income (loss) from discontinued
 operations                             4,359      (5,893)     (1,534)
                                  ------------ ----------- -----------
Net income                             20,454     (10,538)      9,916
Other comprehensive loss                 (506)          -        (506)
                                  ------------ ----------- -----------
Comprehensive income              $    19,948  $  (10,538) $    9,410
                                  ============ =========== ===========

Weighted average number of common
 shares outstanding -- basic           35,371                  35,371
                                  ============             ===========
Weighted average number of common
 shares outstanding -- diluted         36,734                  36,734
                                  ============             ===========

Income per common share available
 to common stockholders -- basic:
  Income from continuing
   operations                     $      0.46  $    (0.13) $     0.33
                                  ============ =========== ===========
  Income (loss) from discontinued
   operations                     $      0.12  $    (0.16) $    (0.04)
                                  ============ =========== ===========
Net income                        $      0.58  $    (0.29) $     0.29
                                  ============ =========== ===========

Income per common share available
 to common stockholders --
 diluted:
  Income from continuing
   operations                     $      0.44  $    (0.13) $     0.31
                                  ============ =========== ===========
  Income (loss) from discontinued
   operations                     $      0.12  $    (0.16) $    (0.04)
                                  ============ =========== ===========
Net income                        $      0.56  $    (0.29) $     0.27
                                  ============ =========== ===========

                                  Fiscal Year Ended December 31, 2004
                                  ------------------------------------
                                  As Reported  Adjustments  Restated


Net revenue                       $ 1,795,402  $        -  $1,795,402

Cost and expenses:
  Cost of care                      1,190,594           -   1,190,594
  Direct service costs and other
   operating expenses                 376,871           -     376,871
  Equity in loss (earnings) of
   unconsolidated subsidiaries         (5,277)          -      (5,277)
                                  ------------ ----------- -----------
                                    1,562,188           -   1,562,188
                                  ------------ ----------- -----------
  Segment profit                      233,214           -     233,214
                                  ------------ ----------- -----------

  Depreciation and amortization        42,489           -      42,489
  Interest expense                     37,124           -      37,124
  Interest income                      (6,127)          -      (6,127)
  Stock compensation expense           23,152           -      23,152
  Special charges                       5,038           -       5,038
                                  ------------ ----------- -----------

Income from continuing operations
 before income taxes and
 minority interest                    131,538           -     131,538
Provision for income taxes             46,584      18,251      64,835
                                  ------------ ----------- -----------
Income from continuing operations
 before minority interest              84,954     (18,251)     66,703
Minority interest, net                    333          14         347
                                  ------------ ----------- -----------
Income from continuing operations      84,621     (18,265)     66,356
                                  ------------ ----------- -----------
Discontinued operations:
Income (loss) from discontinued
 operations                             3,751      (5,792)     (2,041)
                                  ------------ ----------- -----------
Net income                             88,372     (24,057)     64,315
Other comprehensive loss                 (506)          -        (506)
                                  ------------ ----------- -----------
Comprehensive income              $    87,866  $  (24,057) $   63,809
                                  ============ =========== ===========

Weighted average number of common
 shares outstanding -- basic           35,367                  35,367
                                  ============             ===========
Weighted average number of common
 shares outstanding -- diluted         36,361                  36,361
                                  ============             ===========

Income per common share available
 to common stockholders -- basic:
  Income from continuing
   operations                     $      2.39  $    (0.51) $     1.88
                                  ============ =========== ===========
  Income (loss) from discontinued
   operations                     $      0.11  $    (0.17) $    (0.06)
                                  ============ =========== ===========
Net income                        $      2.50  $    (0.68) $     1.82
                                  ============ =========== ===========

Income per common share available
 to common stockholders --
 diluted:
  Income from continuing
   operations                     $      2.33  $    (0.50) $     1.83
                                  ============ =========== ===========
  Income (loss) from discontinued
   operations                     $      0.10  $    (0.16) $    (0.06)
                                  ============ =========== ===========
Net income                        $      2.43  $    (0.66) $     1.77
                                  ============ =========== ===========

SOURCE: Magellan Health Services, Inc.

Magellan Health Services, Inc. Investor Contact: Melissa Rose, 877-645-6464 or Media Contact: Erin Somers, 410-953-2405