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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File No. 1-6639

MAGELLAN HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

        Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý    No o

        The number of shares of the registrant's Ordinary Common Stock and Multi-Vote Common Stock outstanding as of June 30, 2004 was 26,882,997 and 8,487,750, respectively.

FORM 10-Q

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

INDEX

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PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements.

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

See accompanying notes.

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

(1)

Net of income tax provision (benefit) of $—and $14 for the three months ended June 30, 2003 and 2004, respectively, and $(433) and $22 for the six months ended June 30, 2003 and 2004, respectively.

(2)

Net of income tax benefit of $—and $(22) for the three months ended June 30, 2003 and 2004, respectively, and $(52) and $(22) for the six months ended June 30, 2003 and 2004, respectively.

See accompanying notes.

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

See accompanying notes.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)

NOTE A—General

Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements of Magellan Health Services, Inc., a Delaware corporation ("Magellan" or the "Company"), include the accounts of the Company, its majority owned subsidiaries, and all variable interest entities ("VIEs") for which the Company is the primary beneficiary. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange Commission's (the "SEC") instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States 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. The results of operations for the three-month period and six-month period ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. All intercompany accounts and transactions have been eliminated in consolidation.

        These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2003 and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 30, 2004.

Recent Events

        On January 5, 2004 (the "Effective Date"), the Company's plan of reorganization (the "Plan") became effective and the Company emerged from bankruptcy. The principal terms of the Plan, including the treatment afforded under the Plan to the holders of the Company's pre-existing indebtedness and other liabilities and equity interests, are summarized in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003, previously filed with the SEC. In the discussion herein of periods prior to the Effective Date, references to such pre-existing indebtedness and other securities shall have the meaning set forth therein. The Company, as of December 31, 2003 and subsequently, is referred to herein as the "Reorganized Company" and, in connection with prior periods, is referred to herein as the "Predecessor Company".

        Giving effect to the Plan, Magellan and its subsidiaries continued, in their previous organizational form, to conduct their business as previously conducted, with the same assets in all material respects (except for cash to be distributed under the Plan to former creditors of the Company), but the Company was recapitalized. Specifically, Onex Corporation, a Canadian corporation, through an affiliate (together, "Onex"), invested approximately $101.9 million in the equity of Magellan in the form of Multi-Vote Common Stock (the "Onex Investment"), which entitles it to maintain a fifty percent voting interest in all matters that come before Magellan's stockholders, with certain exceptions. Pursuant to the Plan, the Company received additional equity infusions totaling $63.3 million from holders of the Company's Old Subordinated Notes (the "Holders") and other general unsecured creditors (the "Other GUCs"), which elected to purchase common stock in the form of Ordinary Common Stock of the Company in an equity offering. Onex's equity investment included initial capital contributions to the Company pursuant to the Plan of $86.7 million and additional capital contributions of $15.2 million under its commitment to fund the election by creditors to receive cash in lieu of common stock distributions in satisfaction of their claims (the "Cash-Out Election") by purchasing that amount of shares of Multi-Vote Common Stock equal to the amount of shares of

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Ordinary Common Stock cashed out by the Holders and the Other GUCs pursuant to the Cash-Out Election. Capital contributions of $146.9 million, net of approximately $3.1 million of issuance costs and excluding funds received from the Cash-Out Election, are reflected as "Stock subscriptions receivable" in the accompanying condensed consolidated balance sheet as of December 31, 2003. Funds received by the Company pursuant to the Cash-Out Election of $15.2 million are included in "Other current assets" in the accompanying condensed consolidated balance sheet as of December 31, 2003. The cash related to these equity contributions was received and the shares of the corresponding classes of common stock were issued by the Company in the three months ended March 31, 2004. All previously existing equity interests in Magellan were cancelled as of the Effective Date.

        Also pursuant to the Plan, the Company entered into a new credit agreement with Deutsche Bank AG (the "Credit Agreement"), issued $233.4 million of Series A Senior Notes and $6.9 million of Series B Senior Notes (together, the "Senior Notes"), renewed its agreement with Aetna, Inc. ("Aetna") to manage the behavioral healthcare of members of Aetna's healthcare programs and issued to Aetna an interest bearing note in the amount of $48.9 million (the "Aetna Note"). The Company's secured bank loans under its old credit agreement, as existing before the Effective Date (the "Old Credit Agreement"), were paid in full, and other then existing indebtedness (i.e., two classes of notes and general unsecured creditor claims) was cancelled as of the Effective Date.

        The discussion above represents a summary of certain transactions which occurred as of and subsequent to the Effective Date pursuant to the Plan. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 for a more detailed description of the recapitalization of the Company and other transactions pursuant to the Plan.

Accounting Impact of Chapter 11 Filing

        In connection with the consummation of the Plan, the Company adopted the fresh start reporting provisions of American Institute of Certified Public Accountants ("AICPA") Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") with respect to its financial reports, which required the Company to restate its assets and liabilities to their fair values based upon the provisions of the Plan and certain valuations which the Company made in connection with the implementation of the Plan. The Company applied the fresh start reporting provisions as of December 31, 2003. Upon adoption of fresh start reporting, the Company created, in substance, per SOP 90-7, a new reporting entity. Accordingly, the unaudited condensed consolidated statements of operations for the three months and six months ended June 30, 2004 and statement of cash flows for the six months ended June 30, 2004 are not comparable with the unaudited condensed consolidated statements of operations for the three months and six months ended June 30, 2003 and statement of cash flows for the six months ended June 30, 2003. Therefore, all statements of operations data for the three months and six months ended June 30, 2004 and statement of cash flows data for the six months ended June 30, 2004 have been disclosed herein as results of operations and cash flows of the Reorganized Company, and all statements of operations data for the three months and six months ended June 30, 2003 and statement of cash flows data for the six months ended June 30, 2003 have been disclosed herein as results of operations and cash flows of the Predecessor Company. Balance sheet data as of December 31, 2003 and June 30, 2004 presented herein represents balances of the Reorganized Company. All references to the Company with respect to disclosures of amounts recorded for the three months and six months ended June 30, 2003 in relation to income statement items and recorded for the six months ended June 30, 2003 in relation to cash flow items pertain to the Predecessor Company. All references to the Company with respect to disclosures of amounts recorded for the three months and six months ended June 30, 2004 or to be recorded subsequent to June 30, 2004 in relation to income statement items and recorded for the six months ended June 30, 2004 or recorded subsequent to June 30, 2004 in relation to cash flow items pertain to the Reorganized Company.

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        The unaudited condensed consolidated statements of operations for the three months and six months ended June 30, 2003 and statement of cash flows for the six months ended June 30, 2003 in this Form 10-Q were prepared in accordance with SOP 90-7, as the Predecessor Company was under bankruptcy protection during those periods. As such, the Predecessor Company's unaudited condensed consolidated statements of operations for the three months and six months ended June 30, 2003 and statement of cash flows for the six months ended June 30, 2003 distinguished transactions and events that were directly associated with the reorganization from the Predecessor Company's ongoing operations. In accordance with SOP 90-7, the write-off of deferred financing fees associated with the Old Senior Notes and the Old Subordinated Notes, as well as certain professional fees and expenses and other amounts directly associated with the bankruptcy process, were recorded as reorganization expenses, and are included in the unaudited condensed consolidated statement of operations caption "Reorganization expense, net" for the three months and six months ended June 30, 2003.

        The following table summarizes reorganization expense (benefit) for the three months and six months ended June 30, 2003 (in thousands):

        In accordance with SOP 90-7, the Predecessor Company's redeemable preferred stock was recorded at the amount expected to be allowed as a claim by the Bankruptcy Court. Accordingly, during the three months ended March 31, 2003, the Predecessor Company recorded a net $2.7 million adjustment, which was mainly composed of the write-off of unamortized issuance costs related to the redeemable preferred stock. Such amount is reflected in "Preferred stock reorganization items, net" in the accompanying unaudited condensed consolidated statements of operations for the six months ended June 30, 2003.

NOTE B—Summary of Significant Accounting Policies

Review of Significant Accounting Policies

        The Reorganized Company has adopted the same accounting policies as the Predecessor Company with the exception of the date on which the Reorganized Company intends to perform its annual goodwill impairment test (see "Goodwill" below).

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization,

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valuation allowances for deferred tax assets, valuation of goodwill and other intangible assets, medical claims payable and legal liabilities. Actual results could differ from those estimates.

Managed Care Revenue

        Managed care revenue is recognized over the applicable coverage period on a per member basis for covered members. Managed care risk revenue earned by the Predecessor Company for the three months and six months ended June 30, 2003 approximated $331.1 million and $683.1 million, respectively. Managed care risk revenue earned by the Reorganized Company for the three months and six months ended June 30, 2004 approximated $396.7 million and $783.0 million, respectively.

        The Company has the ability to earn performance-based revenue, primarily under certain non-risk contracts. Performance-based revenue generally is based on the ability of the Company to manage care for its administrative services only ("ASO") clients below specified cost targets. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue is recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. The Predecessor Company recognized performance-based revenue of approximately $2.2 million and $4.3 million for the three months and six months ended June 30, 2003, respectively. The Reorganized Company recognized performance-based revenue of approximately $2.8 million and $3.7 million for the three months and six months ended June 30, 2004, respectively.

Significant Customers

        Net revenues from two customers each exceeded ten percent of consolidated net revenues in each of the three-month and six-month periods ended June 30, 2003 and 2004. In addition, the Company has a significant concentration of business from individual customers which are part of the Pennsylvania Medicaid program.

        Net revenue from Aetna earned by the Predecessor Company approximated $46.9 million and $96.7 million for the three months and six months ended June 30, 2003, respectively. Net revenue from Aetna earned by the Reorganized Company approximated $56.2 and $112.0 million for the three months and six months ended June 30, 2004, respectively. The current Aetna contract extends through December 31, 2005, and includes an option for Aetna at that time to either extend the agreement or to purchase certain assets of the Company used solely in the management of the behavioral healthcare of Aetna members (the "Aetna-Dedicated Assets").

        The Company provides managed behavioral healthcare services to the State of Tennessee's TennCare program, both through a direct contract with the Company's wholly owned subsidiary Tennessee Behavioral Health, Inc. ("TBH") and through a contract held by Premier Behavioral Systems of Tennessee, LLC ("Premier"), a joint venture in which the Company owns a fifty percent interest. The direct TennCare contract (exclusive of Premier's contract with TennCare) accounted for approximately $35.4 million and $85.2 million of the Predecessor Company's net revenues in the three months and six months ended June 30, 2003, respectively. Such revenue included approximately $5.3 million and $29.0 million for the three and six months ended June 30, 2003, respectively, associated with services performed by the Predecessor Company on behalf of Premier. The direct TennCare contract accounted for approximately $32.7 million and $64.7 million of the Reorganized Company's net revenues in the three months and six months ended June 30, 2004, respectively. The Company no longer performs certain services on behalf of Premier due to a program change. In the three months and six months ended June 30, 2004, the Reorganized Company recorded approximately $76.3 and $148.0 million, respectively, in net revenues related to Premier's contract with TennCare, which represents 100 percent of Premier's net revenue derived from such contract, due to the adoption

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of FIN 46 (see "Recent Accounting Pronouncements" below) pursuant to which the results of operations of Premier were consolidated with the Reorganized Company's results of operations. In the three months and six months ended June 30, 2003, the results of operations of Premier were accounted for by the Predecessor Company under the equity method of accounting.

        In September 2003, the State of Tennessee issued a request for proposal ("RFP") relating to the TennCare program under which the program would be divided into three regions. The Company, through TBH, submitted a proposal for the East region only and was awarded the contract. The Company and the State are finalizing the terms of the new contract with respect to the East region, which is to have a term from July 1, 2004 through December 31, 2005, with extensions at the State's option through December 31, 2008. When contract negotiations between the State and the vendor that had been awarded the contracts for the Middle and West regions were discontinued, the State asked TBH and Premier to continue with their current contracts for those regions through December 31, 2004. The Company, Premier and the State are finalizing the terms of the amendments to the current contracts for such extension.

        A significant portion of revenue is derived from contracts with various counties in the state of Pennsylvania (the "Pennsylvania Counties"). Although these are separate contracts with individual counties, they all pertain to the Pennsylvania Medicaid program. Revenues earned by the Predecessor Company from the Pennsylvania Counties in the aggregate totaled approximately $59.4 million and $115.7 million in the three months and six months ended June 30, 2003, respectively. Revenues earned by the Reorganized Company from the Pennsylvania Counties in the aggregate totaled approximately $47.3 million and $91.2 million in the three months and six months ended June 30, 2004, respectively. The contract with one of the counties was terminated as of December 31, 2003. Revenue related to this particular county earned by the Predecessor Company totaled approximately $6.9 million and $13.5 million in the three months and six months ended June 30, 2003, respectively.

Property and Equipment

        Property and equipment acquired subsequent to December 31, 2003 is stated at cost. Property and equipment owned at December 31, 2003 was adjusted to their then fair value as part of the Company's application of fresh start reporting. Expenditures for renewals and improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Internal-use software is capitalized in accordance with AICPA Statement of Position 98-1, "Accounting for Cost of Computer Software Developed or Obtained for Internal Use". Amortization of capital lease assets is included in depreciation expense. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which is generally two to ten years for buildings and improvements, three to ten years for equipment and three to five years for capitalized internal-use software. Depreciation expense recorded by the Predecessor Company for the three months and six months ended June 30, 2003 was $7.2 million and $16.0 million, respectively. Depreciation expense recorded by the Reorganized Company for the three months and six months ended June 30, 2004 was $7.0 million and $13.8 million, respectively.

Goodwill

        Goodwill was recorded by the Reorganized Company at December 31, 2003 for the amount of reorganization value in excess of amounts allocated to tangible and identified intangible assets resulting from the application of the fresh start reporting provisions of SOP 90-7. Goodwill is accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, the Company no longer amortizes goodwill; instead, the Company is required to test the goodwill for impairment based upon fair values at least on an annual basis, or more frequently should there be indicators that the goodwill may be impaired. The

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Reorganized Company has selected October 1 as the date of its annual impairment test, as opposed to September 1, which was the date used by the Predecessor Company.

Intangible Assets

        Intangible assets were valued, and related estimated useful lives were determined, based upon independent appraisals at December 31, 2003 as a result of the application of fresh start reporting. At June 30, 2004, the Company had identifiable intangible assets (primarily customer agreements and lists