UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
March 6, 2006
Magellan Health Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-6639 58-1076937
(State or Other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
55 Nod Road
Avon, Connecticut 06001
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (860) 507-1900
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Magellan Health Services, Inc. (the "Company") on March 7, 2006
issued a press release concerning its results of operations and financial
condition for the year ended December 31, 2005. The Company also announced that
it is restating information regarding its results of operations and financial
condition for the year ended December 31, 2004 and the nine months ended
September 30, 2005, and each of the quarters in those periods. The Company also
reaffirmed its 2006 segment profit and EPS guidance. A copy of the release is
attached hereto as an exhibit.
ITEM 4.02. NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED
AUDIT REPORT OR COMPLETED INTERIM REVIEW.
On February 25, 2006, Ernst & Young LLP, the independent registered
public accounting firm of Magellan Health Services, Inc. (the "Company"),
notified the Company that it had potential concerns about the Company's
accounting treatment for the reversal of valuation allowances related to
deferred tax assets, other than net operating losses (NOLs), that existed prior
to the Company's January 5, 2004 emergence from bankruptcy. Because the impact
of any error related to this treatment could be material, the Company announced
on February 27, 2006 that it was delaying the previously scheduled release of
its 2005 financial results pending a review of the subject.
A full review of the subject was conducted by management together
with Ernst & Young LLP. At a March 6, 2006 meeting of the Audit Committee of the
Company's Board of Directors, management reported that the appropriate
accounting treatment to reflect the reversal of the valuation allowances with
respect to the use of deferred tax assets that existed prior to the Company's
emergence from bankruptcy, other than NOLs, was different from that which the
Company had previously utilized, and represented an error (within the meaning of
Accounting Principles Board Opinion No. 20, as modified and supplemented).
Specifically, the Company determined that the reversal of the valuation
allowance with respect to the use of deferred tax assets that existed prior to
the Company's emergence from bankruptcy, other than NOLs, should be credited to
goodwill, rather than credited to the Company's provision for income taxes, with
a corresponding impact on the Company's net income. This treatment would match
the accounting that has been followed by the Company since its emergence from
bankruptcy for the reversal of valuation allowances with respect to the
utilization of NOLs that existed prior to its emergence from bankruptcy. To
assist the Audit Committee in its assessment of the error, management provided
the Audit Committee with information showing the estimated impact of the error
on the Company's financial statements for the year ended December 31, 2004 and
the nine months ended September 30, 2005 and for each of the quarters in those
periods. In addition, the effect of this same accounting treatment on the
Company's financial statements for the year ended December 31, 2005, which had
previously been considered by the Committee, was also reviewed by the Committee
at that time. The Committee discussed these matters with representatives of
Ernst & Young LLP in attendance at such meeting.
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Accordingly, management reported to the Committee that the Company's
previously released financial statements for the year ended December 31, 2004
and the related audit report of Ernst & Young LLP, and for the nine months ended
September 30, 2005 and each of the quarters in these periods, all of which
reflected the previous treatment, as included and discussed in the Company's
Form 10-K Annual Report for the year ended December 31, 2004 and its Quarterly
Reports for the periods ended March 31, June 30 and September 30, 2004 and 2005,
and any press releases, Current Reports on Forms 8-K or other announcements or
communications by the Company incorporating such information, should no longer
be relied upon because of such error. The Committee accepted the report of
management, with which Ernst & Young concurred, and the conclusion that the
previously issued financial statements and related reports, press releases,
announcements and communications should not be relied upon.
The restatement of the Company's financial statements for the periods
referred to above will correct the Company's accounting for the reversal of
valuation allowances with respect to the use of deferred tax assets (excluding
deferred tax assets related to the Company's NOLs) that existed prior to the
Company's emergence from bankruptcy. The Company had recorded such reversals as
reductions to the Company's income tax provision. In accordance with American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" and the
Financial Accounting Standards Board's Emerging Task Force Topic No. D-33,
"Timing of Recognition of Tax Benefits for Pre-Reorganization Temporary
Differences and Carryforwards", such reversals of valuation allowances should be
recorded as reductions to goodwill, the same treatment that the Company had
previously utilized for reversals of valuation allowances with respect to use of
NOLs that existed prior to its emergence from bankruptcy. Although management
concluded that the error was the result of an incorrect interpretation of very
complex accounting guidance, management informed the Audit Committee at its
March 6 meeting that management has determined that this accounting resulted in
a material error and reflects a material weakness as defined by the Public
Company Accounting Oversight Board, which would be reported in the Company's
Form 10-K Annual Report for the year ended December 31, 2005. To address this
material weakness, management explained that it has since reviewed and corrected
its accounting policy for income taxes to accurately track and record the
reversal of valuation allowances established under fresh start reporting prior
to its emergence from bankruptcy with respect to deferred tax assets other than
NOLs.
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 Company has included pertinent restated financial information
in its press release announcing its 2005 results of operations and financial
condition attached hereto as an exhibit, is attaching hereto as an exhibit the
restated information for fiscal year 2004 and the quarters ended March 31, June
30, September 30 and December 31, 2004 and March 31, June 30 and September 30,
2005, and is restating its financial statements as of and for the year ended
December 31, 2004 and for the quarters ended March 31, June 30 and September 30,
2004 and 2005 in its upcoming Form 10-K Annual Report for the year ended
December 31, 2005.
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ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
EXHIBIT NO. DESCRIPTION
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99.1 Press Release, dated March 7, 2006
99.2 Restated Financial Information for the Fiscal Year 2004 and
the Nine Months Ended September 30, 2005 and the quarters
ended March 31, June 30, September 30 and December 31, 2004
and March 31, June 30 and September 30, 2005.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MAGELLAN HEALTH SERVICES, INC.
By: /s/ Mark S. Demilio
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Name: Mark S. Demilio
Title: Executive Vice President and
Chief Financial Officer
Dated: March 8, 2006
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EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
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99.1 Press Release, dated March 7, 2006.
99.2 Restated Financial Information for the Fiscal Year 2004 and
the Nine Months Ended September 30, 2005 and the quarters
ended March 31, June 30, September 30 and December 31, 2004
and March 31, June 30 and September 30, 2005.
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