MAGELLAN HEALTH SERVICES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NO. 1-6639

MAGELLAN HEALTH SERVICES, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE 58-1076937
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(State or other jurisdiction of (I.R.S. Employer
Identification
incorporation or organization) No.)
3414 PEACHTREE ROAD, N.E.
SUITE 1400
ATLANTA, GEORGIA 30326
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(Address of principal executive
offices) (Zip Code)

Registrant's telephone number, including area code: (404) 841-9200

See Table of Additional Registrants below.

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Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock ($0.25 par value) New York Stock Exchange
11 1/4% Series A Senior Subordinated Notes due 2004 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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 /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

The aggregate market value of the voting stock held by non-affiliates of the
Registrant at November 30, 1997 was approximately $600 million.

Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 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 / / No / /

The number of shares of the Registrant's Common Stock outstanding as of
November 30, 1997 was 29,065,821.

DOCUMENTS INCORPORATED BY REFERENCE: None

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ADDITIONAL REGISTRANTS(1)

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
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Behavioral Heath Systems of Indiana,
Inc................................ Indiana 35-1990127 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Beltway Community Hospital, Inc...... Texas 58-1324281 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Blue Grass Physician Management
Group, Inc......................... Kentucky 66-1294402 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

C.A.C.O. Services, Inc............... Ohio 58-1751511 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

CCM, Inc............................. Nevada 58-1662418 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

CMCI, Inc............................ Nevada 88-0224620 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282

CMFC, Inc............................ Nevada 88-0215629 1061 East Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282

CMSF, Inc............................ Florida 58-1324269 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

CPS Associates, Inc.................. Virginia 58-1761039 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

i

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Alvarado Behavioral Health
System, Inc........................ California 58-1394959 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Asheville Behavioral Health
System, Inc........................ North Carolina 58-2097827 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

The Charter Arbor Indy Behavioral
Health System, LLC................. Delaware 58-2265776 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Augusta Behavioral Health
System, Inc........................ Georgia 58-1615676 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Bay Harbor Behavioral Health
System, Inc........................ Florida 58-1640244 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

The Charter Beacon Behavioral Health
System, LLC........................ Delaware 35-1994155 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Corporation....... Delaware 91-1819015 1061 E. Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282

Charter Behavioral Health System at
Fair Oaks, Inc..................... New Jersey 58-2097832 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

ii

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Behavioral Health System at
Hidden Brook, Inc.................. Maryland 52-1866212 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System at
Los Altos, Inc..................... California 33-0606642 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System at
Manatee Adolescent Treatment
Services, Inc...................... Florida 65-0519663 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System at
Potomac Ridge, Inc................. Maryland 52-1866221 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health Systems,
Inc................................ Delaware 58-2213642 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Athens, Inc........................ Georgia 58-1513304 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Austin, Inc........................ Texas 58-1440665 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Baywood, Inc....................... Texas 76-0430571 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

iii

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
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Charter Behavioral Health System of
Bradenton, Inc..................... Florida 58-1527678 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Central Georgia, Inc............... Georgia 58-1408670 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavorial Health System of
Central Virginia, Inc.............. Virginia 54-1765921 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Charleston, Inc.................... South Carolina 58-1761157 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Charlottesville, Inc............... Virginia 58-1616917 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Chicago, Inc....................... Illinois 58-1315760 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Chula Vista, Inc................... California 58-1473063 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Columbia, Inc...................... Missouri 61-1009977 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

iv

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
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Charter Behavioral Health System of
Corpus Christi, Inc................ Texas 58-1513305 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Dallas, Inc........................ Texas 58-1513306 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Delmarva, Inc...................... Maryland 52-1866214 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

The Charter Behavioral Health System
of Evansville, LLC................. Delaware 35-1994080 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Fort Worth, Inc.................... Texas 58-1643151 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Jackson, Inc....................... Mississippi 58-1616919 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Jacksonville, Inc.................. Florida 58-1483015 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

The Charter Behavioral Health System
of Jefferson, LLC.................. Delaware 35-1994087 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

v

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
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Charter Behavioral Health System of
Kansas City, Inc................... Kansas 58-1603154 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Lafayette, Inc..................... Louisiana 72-0686492 302 Dulles Drive
Lafayette, LA 70506
(318) 233-9024

Charter Behavioral Health System of
Lake Charles, Inc.................. Louisiana 62-1152811 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Maryland, Inc...................... Maryland 52-2026699 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

The Charter Behavioral Health System
of Michigan City, LLC.............. Delaware 35-1994736 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Mississippi, Inc................... Mississippi 58-2138622 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Mobile, Inc........................ Alabama 58-1569921 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Nashua, Inc........................ New Hampshire 02-0470752 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

vi

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
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Charter Behavioral Health System of
Nevada, Inc........................ Nevada 58-1321317 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
New Mexico, Inc.................... New Mexico 58-1479480 5901 Zuni Road, SE
Albuquerque, NM 87108
(505) 265-8800

Charter Behavioral Health System of
Northern California, Inc........... California 58-1857277 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Northwest Arkansas, Inc............ Arkansas 58-1449455 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

The Charter Behavioral Health System
of Northwest Indiana, LLC.......... Delaware 35-1994154 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Paducah, Inc....................... Kentucky 61-1006115 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health of Puerto
Rico, Inc.......................... Georgia 66-0523678 Caso Bldg., Suite 1504
1225 Ponce de Leon Avenue
Santurce, PR 00907

Charter Behavioral Health System of
San Jose, Inc...................... California 58-1747020 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

vii

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Behavioral Health System of
Savannah, Inc...................... Georgia 58-1750583 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Texarkana, Inc..................... Arkansas 71-0752815 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
the Inland Empire, Inc............. California 95-2685883 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Toledo, Inc........................ Ohio 58-1731068 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Tucson, Inc........................ Arizona 86-0757462 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Visalia, Inc....................... California 33-0606644 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Waverly, Inc....................... Minnesota 41-1775626 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health System of
Winston-Salem, Inc................. North Carolina 56-1050502 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

viii

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Behavioral Health System of
Yorba Linda, Inc................... California 33-0606646 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Behavioral Health Systems of
Atlanta, Inc....................... Georgia 58-1900736 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Talbott Behavioral Health
System, Inc........................ Georgia 58-0979827 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter By-The-Sea Behavioral Health
System, Inc........................ Georgia 58-1351301 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Call Center, Inc............. Georgia 58-2318455 2151 Peachford Road
Atlanta, GA 30338

Charter Call Center of Texas, Inc.... Texas 75-2709908 920 South Main Street
Suite 250
Grapevine, TX 76051

Charter Canyon Behavioral Health
System, Inc........................ Utah 58-1557925 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Canyon Springs Behavioral
Health System, Inc................. California 33-0606640 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Centennial Peaks Behavioral
Health System, Inc................. Colorado 58-1761037 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

ix

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Community Hospital, Inc...... California 58-1398708 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Contract Services, Inc....... Georgia 58-2100699 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Cove Forge Behavioral Health
System, Inc........................ Pennsylvania 25-1730464 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Fairmount Behavioral Health
System, Inc........................ Pennsylvania 58-1616921 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Fenwick Hall Behavioral
Health System, Inc................. South Carolina 57-0995766 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Financial Offices, Inc....... Georgia 58-1527680 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Forest Behavioral Health
System, Inc........................ Louisiana 58-1508454 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Advantage, LLC............... Delaware 58-2292977 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Grapevine Behavioral Health
System, Inc........................ Texas 58-1818492 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

x

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Greensboro Behavioral Health
System, Inc........................ North Carolina 58-1335184 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Health Management of Texas,
Inc................................ Texas 58-2025056 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Hospital of Columbus, Inc.... Ohio 58-1598899 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Hospital of Denver, Inc...... Colorado 58-1662413 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Hospital of Ft. Collins,
Inc................................ Colorado 58-1768534 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Hospital of Laredo, Inc. Texas 58-1491620 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

xi

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Hospital of
Miami, Inc......................... Florida 61-1061599 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Hospital of
Mobile, Inc........................ Alabama 58-1318870 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Hospital of Santa Teresa,
Inc................................ New Mexico 58-1584861 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Hospital of St. Louis,
Inc................................ Missouri 58-1583760 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Hospital of Torrance, Inc.... California 58-1402481 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Indiana BHS Holding, Inc..... Indiana 58-2247985 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

The Charter Indianapolis Behavioral
Health
System, LLC........................ Delaware 35-1994923 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

The Charter Lafayette Behavioral
Health System, LLC................. Delaware 35-1994151 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

xii

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Lakehurst Behavioral Health
System, Inc........................ New Jersey 22-3286879 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Lakeside Behavioral Health
Network, Inc....................... Tennessee Applied for 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Lakeside Behavioral Health
System, Inc........................ Tennessee 62-0892645 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Laurel Heights Behavioral
Health
System, Inc........................ Georgia 58-1558212 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Linden Oaks Behavioral Health
System, Inc........................ Illinois 36-3943776 852 West Street
Naperville, IL 60540
(708) 305-5500

Charter Little Rock Behavioral Health
System, Inc........................ Arkansas 58-1747019 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Louisiana Behavioral Health
System, Inc........................ Louisiana 72-1319231 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Louisville Behavioral Health
System, Inc........................ Kentucky 58-1517503 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

xiii

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Managed Care Services, LLC... Georgia 58-2324879 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Meadows Behavioral Health
System, Inc........................ Maryland 52-1866216 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical--California,
Inc................................ Georgia 58-1357345 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical--Clayton County,
Inc................................ Georgia 58-1579404 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical--Cleveland,
Inc................................ Texas 58-1448733 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical--Long Beach, Inc..... California 58-1366604 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical--New York,
Inc................................ New York 58-1761153 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical (Cayman Islands) Cayman Islands, 58-1841857 Caledonian Bank & Trust
Ltd................................ BWI Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050

xiv

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Medical Information Services,
Inc................................ Georgia 58-1530236 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical International, Cayman Islands, N/A Caledonian Bank & Trust
Inc................................ BWI Swiss Bank Building
Caledonian House
Georgetown-Grand Cayman
Cayman Islands
(809) 949-0050

Charter Medical International, S.A.,
Inc................................ Nevada 58-1605110 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Managed Care Sales and
Services, Inc...................... Georgia 58-1195352 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical of East Valley,
Inc................................ Arizona 58-1643158 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical of England Limited... United Kingdom N/A 111 Kings Road
Box 323
London SW3 4PB
London, England
44-71-351-1272

Charter Medical of North Phoenix,
Inc................................ Arizona 58-1643154 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Medical of Puerto Rico, Commonwealth of 58-1208667 Caso Building, Suite 1504
Inc................................ Puerto Rico 1225 Ponce De Leon Avenue
Santurce, P.R. 00907
(809) 723-8666

xv

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Milwaukee Behavioral Health
System, Inc........................ Wisconsin 58-1790135 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Mission Viejo Behavioral
Health System, Inc................. California 58-1761156 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter MOB of Charlottesville,
Inc................................ Virginia 58-1761158 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter North Behavioral Health
System, Inc........................ Alaska 58-1474550 2530 DeBarr Road
Anchorage, AK 99508-2996
(907) 258-7575

Charter Northbrooke Behavioral Health
System, Inc........................ Wisconsin 39-1784461 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter North Counseling Center,
Inc................................ Alaska 58-2067832 2530 DeBarr Road
Anchorage, AK 99508-2996
(907) 258-7575

Charter Northridge Behavioral Health
System, Inc........................ North Carolina 58-1463919 400 Newton Road
Raleigh, NC 27615
(919) 847-0008

Charter Oak Behavioral Health System,
Inc................................ California 58-1334120 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter of Alabama, Inc.............. Alabama 63-0649546 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

xvi

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Palms Behavioral Health
System, Inc........................ Texas 58-1416537 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter Peachford Behavioral Health
System, Inc........................ Georgia 58-1086165 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter Pines Behavioral Health
System, Inc........................ North Carolina 58-1462214 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter Plains Behavioral Health
System, Inc........................ Texas 58-1462211 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter-Provo School, Inc............ Utah 58-1647690 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter Real Behavioral Health
System, Inc........................ Texas 58-1485897 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter Ridge Behavioral Health
System, Inc........................ Kentucky 58-1393063 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter Rivers Behavioral Health
System, Inc........................ South Carolina 58-1408623 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

xvii

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Charter Rockford Behavioral Health
System, Inc........................ Delaware 51-0374617 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter San Diego Behavioral Health
System, Inc........................ California 58-1669160 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Charter Sioux Falls Behavioral Health
System, Inc........................ South Dakota 58-1674278 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

The Charter South Bend Behavioral
Health System,
LLC................................ Delaware 35-1994307 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Springs Behavioral Health
System, Inc........................ Florida 58-1517461 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Springwood Behavioral Health
System, Inc........................ Virginia 58-2097829 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Suburban Hospital of
Mesquite, Inc...................... Texas 75-1161721 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter System, LLC.................. Nevada 91-1819015 1061 E. Flamingo Road
Suite One
Las Vegas, NV 89119
(702) 737-0282

xviii

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

The Charter Terre Haute Behavioral
Health System,
LLC................................ Delaware 35-1994308 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Thousand Oaks Behavioral
Health System,
Inc................................ California 58-1731069 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Westbrook Behavioral Health
System, Inc........................ Virginia 54-0858777 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter White Oak Behavioral Health
System, Inc........................ Maryland 52-1866223 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Wichita Behavioral Health
System, Inc........................ Kansas 58-1634296 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Charter Woods Behavioral Health
System, Inc........................ Alabama 58-1330526 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Correctional Behavioral Solutions,
Inc................................ Delaware 58-2180940 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Correctional Behavioral Solutions of
Indiana, Inc....................... Indiana 35-1978792 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

xix

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Correctional Behavioral Solutions of
New Jersey, Inc.................... New Jersey 22-3436964 3000 Atrium Way
Suite 410
Mount Laurel, NJ
(609) 235-2339

Correctional Behavioral Solutions of
Ohio, Inc.......................... Ohio 34-1826431 Allen Correctional Institute
2338 North West Street
Lima, OH 45801
(419) 224-8000

Desert Springs Hospital, Inc......... Nevada 88-0117696 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, Georgia 30326
(404) 841-9200

Employee Assistance Services, Inc.... Georgia 58-1501282 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Florida Health Facilities, Inc....... Florida 58-1860493 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Gulf Coast EAP Services, Inc......... Alabama 58-2101394 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Hospital Investors, Inc.............. Georgia 58-1182191 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Illinois Mentor, Inc................. Illinois 36-3643670 313 Congress St.
Boston, MA 02210
(617) 790-4800

Magellan Executive
Corporation........................ Georgia 58-2310891 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Magellan Public Solutions, Inc....... Delaware 58-2227841 222 Berkley Street
Boston, MA 02117
(617) 437-6400

xx

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

Mandarin Meadows, Inc................ Florida 58-1761155 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Magellan Public Network, Inc......... Delaware 51-0374654 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Magellan Public Solutions of Ohio,
Inc................................ Ohio Applied for 222 Berkley Street
Boston, MA 02117
(617) 437-6400

Massachusetts Mentor, Inc............ Massachusetts 04-2799071 313 Congress St.
Boston, MA 02210
(617) 790-4800

Metroplex Behavioral Healthcare
Services, Inc...................... Texas 58-2138596 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

National Mentor, Inc................. Delaware 04-3250732 313 Congress St.
Boston, MA 02210
(617) 790-4800

National Mentor Healthcare,
Inc................................ Massachusetts 04-2893910 313 Congress St.
Boston, MA 02210
(617) 790-4800

NEPA--Massachusetts, Inc............. Massachusetts 58-2116751 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

NEPA--New Hampshire, Inc............. New Hampshire 58-2116398 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Ohio Mentor, Inc..................... Ohio 31-1098345 313 Congress St.
Boston, MA 02210
(617) 790-4800

Pacific-Charter Medical, Inc......... California 58-1336537 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

xxi

ADDRESS INCLUDING ZIP CODE,
STATE OR OTHER I.R.S. AND TELEPHONE NUMBER
JURISDICTION OF EMPLOYER INCLUDING AREA CODE,
EXACT NAME OF REGISTRANT INCORPORATION IDENTIFICATION OF REGISTRANT'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------------- ------------------ -------------- -------------------------------------

South Carolina Mentor, Inc........... South Carolina 57-0782160 313 Congress St.
Boston, MA 02210
(617) 790-4800

Southeast Behavioral Systems, Inc.... Georgia 58-2100700 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Schizophrenia Treatment and
Rehabilitation, Inc................ Georgia 58-1672912 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Sistemas De Terapia Respiratoria,
S.A., Inc.......................... Georgia 58-1181077 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Western Behavioral
Systems, Inc....................... California 58-1662416 3414 Peachtree Rd., N.E.
Suite 1400
Atlanta, GA 30326
(404) 841-9200

Wisconsin Mentor, Inc................ Wisconsin 39-1840054 313 Congress St.
Boston, MA 00210
(617) 790-4800

- ------------------------

(1) The Additional Registrants listed are wholly-owned subsidiaries of the
Registrant and are guarantors of the Registrant's 11 1/4% Series A Senior
Subordinated Notes due 2004. The Additional Registrants have been
conditionally exempted, pursuant to Section 12(h) of the Securities Exchange
Act of 1934, from filing reports under Section 13 of the Securities Exchange
Act of 1934.

xxii

MAGELLAN HEALTH SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS

PART I PAGE
-----

ITEM 1. Business.................................................................... 2
ITEM 2. Properties.................................................................. 40
ITEM 3. Legal Proceedings........................................................... 41
ITEM 4. Submission of Matters to a Vote of Security Holders......................... 41

PART II

ITEM 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters..................................................................... 42
ITEM 6. Selected Financial Data..................................................... 42
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 44
ITEM 8. Financial Statements and Supplementary Data................................. 53
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 53

PART III

ITEM 10. Directors and Executive Officers of the Registrant.......................... 54
ITEM 11. Executive Compensation...................................................... 54
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............. 54
ITEM 13. Certain Relationships and Related Transactions.............................. 54

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 55

PART I

ITEM 1. BUSINESS

Magellan Health Services, Inc. (the "Company"), which was incorporated in
1969 under the laws of the State of Delaware, is an international behavioral
healthcare company. The Company operates through four principal segments
engaging in (i) the managed care business, (ii) the public sector business,
(iii) the healthcare franchising business and (iv) the provider business. The
Company's executive offices are located at Suite 1400, 3414 Peachtree Road,
N.E., Atlanta, Georgia 30326, and its telephone number at that location is (404)
841-9200.

RECENT DEVELOPMENTS

ALLIED HEALTH GROUP, INC. ACQUISITION.

On December 5, 1997, the Company purchased the assets of Allied Health
Group, Inc. and certain affiliates ("Allied"). Allied provides specialty
risk-based products and administrative services to a variety of insurance
companies and other customers, including CIGNA, Blue Cross of New Jersey and
NYLCare, for approximately 25 million equivalent covered lives, determined by
multiplying Allied's 3.4 million members by the number of Allied's specialty
products covering each member. Allied manages over 80 physician networks across
the eastern United States. Allied's networks include physicians specializing in
cardiology, oncology and diabetes. The Company paid $70 million in cash for
Allied, of which $50 million was paid to the sellers at closing with the
remaining $20 million placed in escrow. The escrowed amount is payable if Allied
achieves specified earnings targets during the three years following the
closing. Additionally, the purchase price may be increased during the three year
period by $40 million, if Allied's performance exceeds specified earnings
targets. The maximum purchase price payable is $110 million. See "Item 7.--
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Liquidity and Capital Resources."

HUMAN AFFAIRS INTERNATIONAL, INC. ACQUISITION.

On December 4, 1997, the Company consummated the purchase of Human Affairs
International, Incorporated ("HAI"), formerly a unit of Aetna/U.S. Healthcare
("Aetna"), for approximately $122.1 million, which the Company funded from cash
on hand. HAI manages the care of over 15 million covered lives through employee
assistance programs ("EAPs") and other managed behavioral healthcare plans. The
Company may be required to make additional annual contingent payments of up to
$60 million annually to Aetna over the five-year period subsequent to closing.
The amount and timing of the payments will be contingent upon net increases in
the number of HAI's covered lives in specified products. See "Item
7.--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Liquidity and Capital Resources."

HISTORY

During the late 1980's and the early to mid 1990's, the healthcare provider
business began a rapid consolidation. The consolidation of the healthcare
provider business was necessitated by the need of hospitals to reduce costs
through economies of scale as a result of pressure on reimbursement rates and
average length of hospital stay by third-party payors. At the time, the Company
had a presence in both the psychiatric hospital industry and the general
hospital industry.

In fiscal 1993, the Company decided to focus solely on the psychiatric
hospital industry and to attempt to acquire additional behavioral healthcare
businesses. Accordingly, the Company sold its general hospitals and related
assets in fiscal 1993 for $338 million with the net proceeds used to reduce
long-term debt. In 1994, the Company acquired 40 psychiatric hospitals
("Acquired Hospitals") for approximately $171 million. The purchase of the
Acquired Hospitals included the refinancing of most of the Company's then

2

outstanding long-term debt, including the issuance of $375 million of 11 1/4%
Series A Senior Subordinated Notes, which mature on April 15, 2004 (the
"Magellan Outstanding Notes").

The Company has historically derived the majority of its revenue and
earnings from providing healthcare services in an inpatient setting. Payments
from third-party payors are the principal source of revenue for most healthcare
providers. In the early 1990's, many third-party payors sought to control the
cost of providing care to their patients by instituting managed care programs or
seeking the assistance of managed care companies. Providers participating in
managed care programs agree to provide services to patients for a discount from
established rates, which generally results in pricing concessions by the
providers and lower margins. Additionally, managed care programs generally
encourage alternatives to inpatient treatment settings and reduce utilization of
inpatient services. Third-party payors established managed care programs or
engaged managed care companies in many areas of healthcare, including behavioral
healthcare. The Company, which, until June 1997, was the largest operator of
psychiatric hospitals in the United States, was adversely affected by the
adoption of managed care programs as the principal cost control measure of the
third party payors.

Prior to the first quarter of fiscal 1996, the Company was not a provider of
behavioral managed care services. During the first quarter of fiscal 1996, the
Company acquired a 61% ownership interest in Green Spring Health Services, Inc.,
a managed care company specializing in mental health and substance abuse/
dependence services ("Green Spring"). At that time, the Company intended to
become a fully integrated behavioral healthcare provider by combining the
managed behavioral healthcare products offered by Green Spring with the direct
treatment services offered by the Company's psychiatric hospitals. The Company
believed that an entity that participated in both the managed care and provider
segments of the behavioral healthcare industry could more efficiently provide
and manage behavioral healthcare for insured populations than an entity that was
solely a managed care company. The Company also believed that earnings from its
managed care business would offset, in part, the negative impact on the
financial performance of its psychiatric hospitals caused by managed care. Green
Spring was the Company's first significant involvement in managed behavioral
healthcare.

Subsequent to the Company's acquisition of Green Spring, the growth of the
managed behavioral healthcare industry accelerated. Under the Company's majority
ownership, Green Spring increased its base of covered lives from 12.0 million as
of the end of calendar year 1995 to 16.6 million as of the end of fiscal 1997, a
compound annual growth rate of over 17%. Over the same period, Green Spring's
revenue increased from $205 million in fiscal 1995 to $364 million in fiscal
1997, a compound annual growth rate of over 33%. While growth in the industry
was accelerating, the managed behavioral healthcare industry also began to
consolidate. The Company concluded that consolidation presented an opportunity
for the Company to increase its participation in the managed behavioral
healthcare industry, which the Company believed offered growth and earnings
prospects superior to those of the psychiatric hospital industry. Therefore, the
Company decided to sell its domestic psychiatric facilities to obtain capital
for expansion in the managed behavioral healthcare business.

The Company took a significant step toward implementing this strategy during
the third quarter of fiscal 1997, when it sold substantially all of its domestic
acute-care psychiatric hospitals and residential treatment facilities
(collectively, the "Psychiatric Hospital Facilities") to Crescent Real Estate
Equities Limited Partnership ("Crescent") for $417.2 million in cash (before
costs of approximately $16.0 million) and certain other consideration.
Simultaneously with the sale of the Psychiatric Hospital Facilities, the Company
and Cresent Operating, Inc., an affiliate of Cresent ("COI"), formed Charter
Behavioral Health Systems, LLC ("CBHS") to conduct the operations of the
Psychiatric Hospital Facilities and certain other facilities transfered to CBHS
by the Company. The Company retained a 50% ownership of CBHS; the other 50% of
the equity of CBHS is owned by COI.

In related transactions, (i) Crescent leased the Psychiatric Hospital
Facilities to CBHS and (ii) the Company entered into a master franchise
agreement (the "Master Franchise Agreement") with CBHS and a franchise agreement
with each of the Psychiatric Hospital Facilities and other facilities operated
by

3

CBHS (collectively, the "Franchise Agreements"). The Company's sale of the
Psychiatric Hospital Facilities and the related transactions described above are
referred to as the "Crescent Transactions." Pursuant to the Franchise
Agreements, the Company franchises the "CHARTER" System of behavioral healthcare
to each of the Psychiatric Hospital Facilities and the other facilities operated
by CBHS. In exchange, CBHS agreed to pay the Company, pursuant to the Master
Franchise Agreement, annual franchise fees (the "Franchise Fees") of
approximately $78.3 million. However, CBHS's obligation to pay the Franchise
Fees is subordinate to its obligation to pay rent for the Psychiatric Hospital
Facilities to Crescent.

The sale of the Psychiatric Hospital Facilities provided the Company with
approximately $200 million of net cash proceeds, after debt repayment, for use
in implementing its business strategy. The Company used the proceeds to finance
the acquisitions of HAI and Allied in December 1997. The Company continues to
pursue a strategy of expanding its managed care operations and of reducing its
dependence on the psychiatric hospital business for its earnings. The Company
intends to further implement its business strategy through the announced
acquisition (the "Acquisition") of Merit Behavioral Care Corporation ("Merit").
See "--The Transactions."

THE TRANSACTIONS

GENERAL.

In connection with the Acquisition, the Company will consummate certain
related transactions (together with the Acquisition, collectively, the
"Transactions"), as follows: (i) the repayment of all amounts outstanding
pursuant to, and the termination of, the Existing Credit Agreements (as
defined); (ii) the consummation of the Debt Tender Offers (as defined); (iii)
the execution and delivery of the New Credit Agreement (as defined); and (v) the
issuance of the Notes (as defined). The Transactions are described in more
detail below. All of the Transactions must be consummated for the Company to
consummate the Acquisition.

THE ACQUISITION.

On October 24, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with respect to the acquisition of Merit. Under
the Merger Agreement, Merit will become a wholly-owned subsidiary of the Company
and the Company will pay an amount of cash equal to approximately $458.3
million, subject to an adjustment based on the fees and expenses incurred by
Merit in connection with the transactions contemplated by the Merger Agreement
at the closing (the "Direct Cash Merger Consideration"). The Company is also
obligated, pursuant to the Merger Agreement, to cause Merit to repay all amounts
outstanding under the Merit Existing Credit Agreement (as defined) and to
perform Merit's obligations under the indenture governing the Merit Outstanding
Notes (as defined) and to purchase the Merit Outstanding Notes following the
consummation of the Acquisition. The Company is further obligated by the Merger
Agreement to provide sufficient funds to Merit to permit it to take such
actions. The Company estimates that the total consideration it will pay to
acquire Merit will be approximately $750 million, excluding transaction costs.

Pursuant to the Merger Agreement, Merit made representations and warranties
customary for transactions of this type. None of Merit's representations and
warranties and agreements survive the consummation of the Transactions.
Therefore, if any of the representations and warranties prove to be inaccurate,
the Company will not be able to recover from Merit's former owners the amount of
any damage resulting from the inaccuracy.

Merit is one of the leading managed behavioral healthcare providers in the
nation, arranging for the provision of managed behavioral healthcare services to
more than 21 million people. Merit manages behavioral healthcare programs for
approximately 800 clients across all segments of the healthcare industry, with
particularly strong positions in the corporate and HMO segment. Merit is also a
leading

4

provider to Blue Cross/Blue Shield organizations and other insurance companies,
labor unions, federal, state and local governmental agencies and various state
Medicaid programs.

TERMINATION OF EXISTING CREDIT AGREEMENTS.

It is a condition to the Company's lenders' obligation to advance loans
pursuant to the New Credit Agreement (as defined) that the Magellan Existing
Credit Agreement (as defined) be terminated. Furthermore, Magellan has agreed,
in connection with the Acquisition, to repay all amounts outstanding pursuant to
the Merit Existing Credit Agreement (as defined). Such transactions will be
consummated simultaneously with the Offering (as defined).

The Magellan Existing Credit Agreement is that certain Amended and Restated
Credit Agreement, dated as of June 16, 1997, among the Company, Charter
Behavioral Health System of New Mexico, Inc., the lenders named therein, Chase
Manhattan Bank, N.A. as administrative agent, and First Union National Bank, as
syndication agent. Simultaneously with the consummation of the Offering, the
Magellan Existing Credit Agreement will be terminated. The Magellan Existing
Credit Agreement provides for a five-year senior secured revolving credit
facility in an aggregate committed amount of $200 million and also provides for
the support of letters of credit for general corporate purposes. At November 30,
1997, there were no loans outstanding under the Magellan Existing Credit
Agreement other than one letter of credit issued in the amount of approximately
$6.6 million. Any loans outstanding under the Magellan Existing Credit Agreement
bear interest (subject to certain potential adjustments) at a rate per annum
equal to one, two, three or six-month LIBOR plus 1.25% or the Alternate Base
Rate ("ABR"), as defined, plus 0.25%.

The Merit Existing Credit Agreement is that certain Credit Agreement, dated
as of October 6, 1995, among Merit and the lenders named therein. Simultaneously
with the consummation of the Transactions, the Merit Existing Credit Agreement
will be terminated.

DEBT TENDER OFFERS.

The Company agreed, in connection with the Acquisition, to pay on behalf of
Merit an amount sufficient to permit Merit to repurchase its $100 million,
11 1/2% Senior Subordinated Notes due 2005 (the "Merit Outstanding Notes".)
Furthermore, borrowings pursuant to the New Credit Agreement (as defined) and
the Notes (as defined) required to effect the Transactions would result in
events of default with respect to the Merit Outstanding Notes and the Magellan
Outstanding Notes ( the Merit Outstanding Notes and the Magellan Outstanding
Notes are hereinafter referred to, collectively, as the "Oustanding Notes").
Accordingly, the Company and Merit will commence tender offers for the
Outstanding Notes. Each tender offer will be conditioned upon, among other
things, (i) the receipt by the Company or Merit, as the case may be, of a
majority of the Merit Outstanding Notes and 66 2/3% of the Magellan Outstanding
Notes; (ii) the receipt by the Company or Merit, as the case may be, of valid
consents to certain amendments to the indentures for the Outstanding Notes from
the holders of two-thirds of the Magellan Outstanding Notes and of a majority of
the Merit Outstanding Notes; (iii) the consummation of the Offering (as
defined), the receipt of advances pursuant to the New Credit Agreement (as
defined) or the receipt of proceeds from borrowings pursuant to such other
arrangements as the Company determines are appropriate in an aggregate amount
that is sufficient to consummate the Debt Tender Offers; and (iv) the
consummation of the Acquisition. Any Outstanding Notes that are not tendered
will remain outstanding and will be general unsecured obligations of the Company
or Merit, as the case may be.

THE OFFERING.

The Company intends to issue $400 million of Senior Subordinated Notes due
2008 (the "Notes") in connection with the Transactions. The interest rate on the
Notes will depend on market conditions upon consummation of the Offering. The
Offering is conditioned upon consummation of the Transactions.

5

THE NEW CREDIT AGREEMENT.

The Company has obtained a commitment from a lender pursuant to which said
lender has agreed, subject to the satisfaction of certain conditions, to make
available to the Company credit facilities of $900 million (the "New Credit
Agreement"). Execution and delivery of the New Credit Agreement and satisfaction
of the conditions to an advance under the New Credit Agreement are conditions to
the consummation of the Offering.

The following table sets forth the sources and uses of funds for the
Transactions, as if they had been completed on September 30, 1997, and assuming
that all Outstanding Notes are purchased pursuant to the Debt Tender Offers.

SEPTEMBER 30, 1997
---------------------

(DOLLARS IN MILLIONS)
SOURCES:
Cash and cash equivalents.............................................. $ 137.6
New Credit Agreement
Revolving Credit Facility(1)......................................... 12.8
Term Loans........................................................... 750.0
The Notes.............................................................. 400.0
--------
Total Sources...................................................... $ 1,300.4
--------
--------

USES:
Direct Cash Merger Consideration, net(2)............................... $ 458.3
Repayment of Merit Existing Credit Agreement........................... 229.5
Purchase of Magellan Outstanding Notes................................. 375.0
Purchase of Merit Outstanding Notes.................................... 100.0
Transaction costs(3)................................................... 137.6
--------
Total Uses......................................................... $ 1,300.4
--------
--------

- ------------------------
(1) The Revolving Credit Facility under the New Credit Agreement will provide
for borrowings of up to $150 million.
(2) The amount shown is net of the aggregate exercise price of certain options
to purchase shares of Merit common stock.
(3) Transaction costs include, among other things, tender and consent expenses
associated with the Debt Tender Offers and the Offering, accrued interest on
the Outstanding Notes and costs associated with the Acquisition and the New
Credit Agreement.

INDUSTRY

OVERVIEW.

Behavioral healthcare costs have increased significantly in the United
States in recent years. According to industry sources, direct medical costs of
behavioral health problems, combined with the indirect costs, such as lost
productivity due to mental illness and alcohol and drug abuse, were estimated at
more than $300 billion in 1990, the latest year for which statistics are
available. In addition, according to industry sources, in 1994, direct
behavioral healthcare services treatment costs amounted to approximately $81
billion, or 8% of total healthcare industry spending. These direct costs have
grown, in part, as society has begun to recognize and address behavioral health
concerns and employers have realized that rehabilitation of employees suffering
from substance abuse and relatively mild mental health problems can reduce
losses due to absenteeism and decreased productivity.

In response to these escalating costs, managed behavioral healthcare
companies such as Green Spring, HAI and Merit have been formed. These companies
focus on care management techniques with the goal of arranging for the provision
of an appropriate level of care in a cost-efficient and effective manner by
improving early access to care and assuring an effective match between the
patient and the behavioral healthcare provider's specialty. As the growth of
managed behavioral healthcare has increased, there has

6

been a significant decrease in occupancy rates and average lengths of stay for
inpatient psychiatric facilities and an increase in outpatient treatment and
alternative care services.

According to "Managed Behavioral Health Market Share in the United States
1997-1998," published by OPEN MINDS ("Open Minds"), as of January 1997,
approximately 149.0 million beneficiaries were covered by some form of managed
behavioral healthcare plan and an additional 19.5 million beneficiaries were
enrolled in internally-managed behavioral healthcare programs within health
maintenance organizations ("HMOs"). The number of covered beneficiaries has
grown from approximately 86.0 million beneficiaries in 1993 to approximately
149.0 million in 1997, representing an approximate 14% compound annual growth
rate since 1993. In addition, according to OPEN MINDS, beneficiaries covered
under risk-based programs are growing even more rapidly, from approximately 13.6
million as of January 1993 to approximately 38.9 million as of January 1997,
representing a compound annual growth rate of over 30%. OPEN MINDS estimates
that the revenues of managed behavioral healthcare companies totaled
approximately $3.5 billion in 1996.

SEGMENTATION.

OPEN MINDS divides the managed behavioral healthcare industry as of January
1997 into the following categories of care, based on services provided, extent
of care management and level of risk assumption:

BENEFICIARIES PERCENT
CATEGORY OF CARE (IN MILLIONS) OF TOTAL
- ------------------------------------------------------------------------------------------ ------------- -----------

Utilization Review/Care Management Programs............................................... 39.2 26.3%
Risk-Based Network Products............................................................... 38.9 26.1
Non-Risk-Based Network Products........................................................... 31.9 21.4
Employee Assistance Programs ("EAPs")..................................................... 28.3 19.0
Integrated Programs....................................................................... 10.7 7.2
----- -----
Total............................................................................. 149.0 100.0%
----- -----
----- -----

Management believes the current trends in the behavioral healthcare industry
include increased utilization of risk-based network managed care products and
the integration of EAPs with such managed care products. Management believes
that these trends have developed in response to the attempt by payors to reduce
rapidly escalating behavioral healthcare costs and to limit their risk
associated with such costs while continuing to provide access to high quality
care. According to OPEN MINDS, risk-based network products, integrated programs
and EAPs are the most rapidly growing segments of the managed behavioral
healthcare industry.

UTILIZATION REVIEW/CARE MANAGEMENT PRODUCTS. Under utilization review/care
management products, a managed behavioral healthcare company manages and often
arranges for treatment, but does not maintain a network of providers or assume
any of the responsibility for the cost of providing treatment services. The
Company categorizes its products within this segment of the managed behavioral
healthcare industry (as it is defined by OPEN MINDS) as Administrative Service
Only ("ASO") products. The Company does not expect this segment of the industry
to experience significant growth, given the growth of risk-based products.

NON-RISK-BASED NETWORK PRODUCTS. Under non-risk-based network products, the
managed behavioral healthcare company provides a full array of managed care
services, including selecting, credentialing and managing a network of providers
(such as psychiatrists, psychologists, social workers and hospitals), and
performs utilization review, claims administration and care management
functions. The third-party payor remains responsible for the cost of providing
the treatment services rendered. The Company categorizes its products within
this segment of the managed behavioral healthcare industry (as it is defined by
OPEN MINDS) as ASO products.

RISK-BASED NETWORK PRODUCTS. Under risk-based network products, the managed
behavioral healthcare company assumes all or a portion of the responsibility for
the cost of providing a full or specified

7

range of behavioral healthcare treatment services. Most of these programs have
payment arrangements in which the managed care company agree