Magellan Health Inc – ‘POS AM’ on 5/1/98

As of:  Friday, 5/1/98   ·   Accession #:  1047469-98-17658   ·   File #:  333-01217

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Post-Effective Amendment
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: POS AM      Post-Effective Amendment                              33    204K 
 2: EX-5.1      Opinion re: Legality                                   2±     9K 
 3: EX-23.2     Consent of Experts or Counsel                          1      6K 
 4: EX-23.3     Consent of Experts or Counsel                          1      7K 
 5: EX-23.4     Consent of Experts or Counsel                          1      7K 

POS AM   —   Post-Effective Amendment
Document Table of Contents

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998 

                                                      REGISTRATION NO. 333-01217
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

POST EFFECTIVE
AMENDMENT NO. 1 
TO
FORM S-3
REGISTRATION STATEMENT
UNDER 
THE SECURITIES ACT OF 1933
------------------------

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

                                                                [Download Table]
                                                                             
            DELAWARE                                           58-1076937    
(State or other jurisdiction of                             (I.R.S. Employer 
 incorporation or organization)                           Identification No.)

3414 PEACHTREE ROAD, N.E.,
SUITE 1400
ATLANTA, GEORGIA 30326
(404) 841-9200
(Address, including zip code, and telephone number, 
including area code, of registrant's principal executive offices) 
------------------------------

DAVID J. HANSEN, ESQ.,
GENERAL COUNSEL 
MAGELLAN HEALTH SERVICES, INC.
3414 PEACHTREE ROAD, N.E.,
SUITE 1400
ATLANTA, GEORGIA 30326
(404) 841-9200
(Name, address, including zip code, and telephone number, 
including area code, of agent for service)
------------------------

COPY TO:
PHILIP A. THEODORE, ESQ.
KING & SPALDING 
191 PEACHTREE ROAD
ATLANTA, GEORGIA 30303-1763 
(404) 572-4600
------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of the Registration Statement. 
------------------------

If the only securities being registered on this Form are being offered  
pursuant to dividend or interest reinvestment plans, please check the following 
box. / /                                                                        

   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of  
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/                                

If this Form is filed to register additional securities for an offering 
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier        
effective registration statement for the same offering. / /                     
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION       
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF  
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME     
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), 
MAY DETERMINE.                                                                  

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PROSPECTUS                                                                      

2,457,278 SHARES
MAGELLAN HEALTH SERVICES, INC.
COMMON STOCK
($.25 PAR VALUE)
------------------

The 2,457,278 shares (the "Shares") of common stock, $.25 par value per 
share ("Common Stock"), of Magellan Health Services, Inc. ("Magellan" or the    
"Company") that are being hereby registered may be offered for sale from time to
time by and for the account of Rainwater, Inc., a Texas corporation ("Rainwater,
Inc."), or Mr. Richard E. Rainwater (Rainwater, Inc. and Mr. Rainwater are      
hereinafter referred to collectively as the "Selling Stockholders"). See        
"Selling Stockholders." Magellan will not receive any of the proceeds from the  
sale of the Shares by the Selling Stockholders. Rainwater-Magellan Holdings,    
L.P., a Texas limited partnership ("Rainwater-Magellan"), acquired the Shares on
January 25, 1996 in a private placement transaction with the Company.           
Rainwater-Magellan also acquired in the private placement transaction warrants  
to purchase an additional 2,000,000 shares of Common Stock (the "Warrants").    
Rainwater, Inc. and Mr. Rainwater were partners of Rainwater-Magellan who       
received the Shares pursuant to a pro rata distribution made by                 
Rainwater-Magellan.                                                             

  Magellan registered the Shares as required by a Stock and Warrant Purchase
Agreement dated as of December 22, 1995, as amended (the "Agreement"), between  
Magellan and Rainwater-Magellan to provide the Selling Stockholders with freely 
tradeable securities. Magellan has also agreed to pay all fees and expenses     
incident to such registration, other than any underwriting discounts or any     
selling commissions payable in respect of sales of the Shares, which will be    
paid by the applicable Selling Stockholder. Magellan paid fees and expenses of  
approximately $55,000 in connection with the original preparation and filing of 
the registration statement of which this Prospectus is a part (the "Registration
Statement"). Magellan expects to pay fees and expenses of approximately $45,000 
in connection with the post-effective amendment of such Registration Statement. 
Magellan has agreed to keep the Registration Statement effective on a continual 
basis for so long as Rainwater-Magellan and its affiliates collectively own more
than 1,500,000 of the Shares and the shares issuable upon exercise of the       
Warrant (the "Underlying Warrant Shares"). See "Plan of Distribution."          

  The Common Stock is listed on the New York Stock Exchange under the symbol
"MGL." On April 29, 1998, the last reported sale price of the Common Stock on   
the New York Stock Exchange was $27.875 per share.                              

   The sale or distribution of all or any portion of the Shares offered hereby
may be effected from time to time by the Selling Stockholders directly,         
indirectly through brokers or dealers or in a distribution by one or more       
underwriters on a firm commitment or best efforts basis, on the New York Stock  
Exchange, in the over-the-counter market, on any national securities exchange on
which shares of the Common Stock are listed or traded, in privately negotiated  
transactions or otherwise, at market prices prevailing at the time of sale, at  
prices related to such prevailing market prices or at negotiated prices. See    
"Plan of Distribution." To the extent required, the names of any agent or       
broker-dealer and applicable commissions or discounts and any other required    
information with respect to any particular offer will be set forth in an        
accompanying Prospectus Supplement. See "Plan of Distribution." The Selling     
Stockholders reserve the sole right to accept or reject, in whole or in part,   
any proposed purchase of the Shares to be made directly or through agents.      

   Certain transfer restrictions have been placed on the Shares offered hereby
pursuant to the Agreement. Prior to January 25, 2000, without the prior written 
consent of the Company, the Selling Stockholders may not sell or transfer in a  
privately negotiated transaction to a single purchaser and its affiliates, or   
any "group" (as defined in Rule 13d-5(b)(1) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) any combination of Shares, Warrants      
and/or Underlying Warrant Shares which would equal five percent (5%) or more of 
the Common Stock then outstanding on a fully-diluted basis.                     

  The Selling Stockholders and any agents or broker-dealers that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended  
(the "1933 Act"), and any commissions received by them and any profit on the    
resale of the Shares may be deemed to be underwriting commissions or discounts  
under the 1933 Act. See "Plan of Distribution" herein for indemnification       
arrangements between Magellan and Rainwater-Magellan.                           

  THERE ARE CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE SHARES. FOR A
DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS" BEGINNING ON PAGE 9.               

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES 
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE  
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE  
CONTRARY IS A CRIMINAL OFFENSE. 

THE DATE OF THIS PROSPECTUS IS MAY  , 1998. 

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AVAILABLE INFORMATION 

The Company has filed with the Securities and Exchange Commission (the  
"Commission") a Registration Statement on Form S-3 under the 1933 Act covering  
the Shares being offered by this Prospectus. This Prospectus, which constitutes 
a part of the Registration Statement, does not contain all of the information   
set forth in the Registration Statement, certain items of which are contained in
exhibits and schedules to the Registration Statement as permitted by the rules  
and regulations of the Commission. For further information with respect to the  
Company and the Shares offered hereby, reference is made to the Registration    
Statement, including the exhibits thereto, and financial statements and notes   
filed as a part thereof. Statements made in this Prospectus concerning the      
contents of any document referred to herein are not necessarily complete. With  
respect to each such document filed with the Commission as an exhibit to the    
Registration Statement, reference is made to the exhibit for a more complete    
description of the matter involved, and each such statement shall be deemed     
qualified in its entirety by such reference.                                    

  The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other         
information with the Commission. Copies of such material can be obtained from   
the Public Reference Section of the Commission, at Room 1024, Judiciary Plaza,  
450 Fifth Street, NW, Washington, D.C. 20549 at prescribed rates. In addition,  
such reports, proxy statements and other information can be inspected and copied
at the public reference facility referred to above and at Regional Offices of   
the Commission located at Seven World Trade Center, Suite 1300, New York, New   
York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission also maintains a Web site that contains reports, 
proxy statements and other information regarding registrants that file          
electronically with the SEC. The address of such site is http:// www.sec.gov.   
The Common Stock is listed for trading on the New York Stock Exchange and       
reports, proxy statements and other information concerning the Company may be   
inspected at the office of the New York Stock Exchange, 20 Broad Street, New    
York, New York 10005.                                                           

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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 

   The following documents previously filed with the Commission by the Company
(Commission File No. 1-6639) are incorporated by reference into this Prospectus:

(i) The Company's Annual Report on Form 10-K for the fiscal year ended  
September 30, 1997, filed on December 23, 1997;                 

(ii) The Company's Proxy Statement on Schedule 14A, filed on January 9, 
1998;                                                         

(iii) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 1997, filed on February 17, 1998;          

  (iv) The Company's Current Report on Form 8-K, filed on December 17, 1997;

(v) The Company's Current Report on Form 8-K/A, filed on April 3, 1998; 

(vi) The Company's Current Report on Form 8-K, filed on April 8, 1998;  

(vii) The description of the Common Stock in the Company's registration   
statement on Form 8-A filed on December 27, 1996.             

   In addition, all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the offering made pursuant to the Registration  
Statement shall be deemed to be incorporated by reference into and to be a part 
of this Prospectus from the date of filing of such documents. Any statement     
contained in a document so incorporated by reference shall be deemed to be      
modified or superseded for purposes of this Prospectus to the extent that a     
statement contained in this Prospectus, or in any other subsequently filed      
document which is also incorporated by reference or deemed to be incorporated by
reference, modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed to constitute a part of this Prospectus except
as so modified or superseded.                                                   

The Company will provide, without charge, to each person to whom this   
Prospectus is delivered, upon the written or oral request of any such person, a 
copy of any or all of the documents incorporated by reference (not including    
exhibits to such documents unless such exhibits are specifically incorporated by
reference in such documents). Requests for copies of such documents should be   
directed to Mr. Kevin Helmintoller, Vice President--Investor Relations, Magellan
Health Services, Inc., 3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia  
30326, telephone (404) 841-9200. These documents may also be accessed from the  
Commission's Web site which is located at http://www.sec.gov.                   

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SUMMARY 

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED 
INFORMATION AND FINANCIAL STATEMENTS SET FORTH BELOW OR INCORPORATED HEREIN BY  
REFERENCE. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES HEREIN TO THE  
"COMPANY" REFER TO MAGELLAN HEALTH SERVICES, INC. AND ITS CONSOLIDATED          
SUBSIDIARIES. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS REFER TO YEARS  
ENDED SEPTEMBER 30. ON FEBRUARY 12, 1998, THE COMPANY CONSUMMATED ITS           
ACQUISITION (THE "ACQUISITION") OF MERIT BEHAVIORAL CARE CORPORATION ("MERIT"). 
ON MARCH 3, 1998, THE COMPANY ENTERED INTO DEFINITIVE AGREEMENTS WITH CRESCENT  
OPERATING, INC. ("COI") AND CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC ("CBHS") TO, 
AMONG OTHER THINGS, SELL THE COMPANY'S FRANCHISE OPERATIONS, CERTAIN DOMESTIC   
PROVIDER OPERATIONS AND CERTAIN OTHER ASSETS AND OPERATIONS (THE "CBHS          
TRANSACTIONS"). SEE "--CBHS TRANSACTIONS." THE INFORMATION PROVIDED IN THIS     
PROSPECTUS WITHOUT REFERENCE TO A SPECIFIC DATE IS CURRENT AS OF THE DATE OF    
THIS PROSPECTUS.                                                                

THIS PROSPECTUS CONTAINS AND INCORPORATES BY REFERENCE CERTAIN          
"FORWARD-LOOKING STATEMENTS." THOSE STATEMENTS INCLUDE, AMONG OTHER THINGS, THE 
DISCUSSIONS OF THE COMPANY'S BUSINESS STRATEGY AND EXPECTATIONS CONCERNING THE  
COMPANY'S POSITION IN THE INDUSTRY, FUTURE OPERATIONS, MARGINS, PROFITABILITY,  
LIQUIDITY AND CAPITAL RESOURCES. ALL THESE FORWARD-LOOKING STATEMENTS ARE BASED 
ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY THAT, ALTHOUGH   
BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE  
SHOULD NOT BE PLACED UPON SUCH STATEMENTS AND ESTIMATES. NO ASSURANCE CAN BE    
GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED, AND IT IS      
LIKELY THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE IDENTIFIED IN THE RISK FACTORS DISCUSSED BELOW. IN    
LIGHT OF THESE AND OTHER UNCERTAINTIES, THE INCLUSION OF A FORWARD-LOOKING      
STATEMENT HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY THAT 
THE COMPANY'S PLANS AND OBJECTIVES WILL BE ACHIEVED.                            

THE COMPANY 

OVERVIEW                                                                        

The Company is the nation's largest provider of managed behavioral      
healthcare services, offering a broad array of cost-effective managed behavioral
healthcare products. As a result of the Acquisition, the Company has over 58.0  
million covered lives under managed behavioral healthcare contracts and manages 
behavioral healthcare programs for over 4,000 customers. Through its current    
network of over 34,000 providers and 2,000 treatment facilities, the Company    
manages behavioral healthcare programs for Blue Cross/Blue Shield organizations,
health maintenance organizations ("HMOs") and other insurance companies,        
corporations, federal, state and local governmental agencies, labor unions and  
various state Medicaid programs. The Company believes it has the largest and    
most comprehensive behavioral healthcare provider network in the United States  
as a result of the Acquisition. In addition to the Company's managed behavioral 
healthcare products, the Company offers specialty managed care products related 
to the management of certain chronic conditions. The Company also offers a broad
continuum of behavioral healthcare services to approximately 2,900 individuals  
who receive healthcare benefits funded by state and local governmental agencies 
through National Mentor, Inc., its wholly-owned public-sector provider          
("Mentor"). Furthermore, the Company franchises the "CHARTER" System of         
behavioral healthcare to the acute-care psychiatric hospitals and other         
behavioral care facilities operated by CBHS, an entity in which the Company owns
a 50% equity interest. If the CBHS Transactions are consummated, the Company    
will no longer have franchise operations or an ownership interest in CBHS.      

   The Company's professional care managers coordinate and manage the delivery
of behavioral healthcare treatment services through the Company's network of    
providers, which includes psychiatrists, psychologists, licensed clinical social
workers, marriage and family therapists and licensed clinical professional      
counselors. The treatment services provided by the Company's extensive          
behavioral provider network include outpatient programs (such as counseling and 
therapy), intermediate care programs (such as sub-acute emergency care,         
intensive outpatient programs and partial hospitalization services), inpatient  

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treatment services and alternative care services (such as residential treatment,
home and community-based programs and rehabilitative and support services). The 
Company provides these services through: (i) risk-based products, (ii) employee 
assistance programs ("EAPs"), (iii) administrative services-only products ("ASO 
products") and (iv) products that combine features of some or all of these      
products. Under risk-based products, the Company arranges for the provision of a
full range of behavioral healthcare services for beneficiaries of its customers'
healthcare benefit plans through fee arrangements under which the Company       
assumes all or a portion of the responsibility for the cost of providing such   
services in exchange for a fixed per member per month fee. Under EAPs, the      
Company provides assessment services to employees and dependents of its         
customers, and if required, referral services to the appropriate behavioral     
healthcare service provider. Under ASO products, the Company provides services  
such as utilization review, claims administration and provider network          
management. The Company does not assume the responsibility for the cost of      
providing healthcare services pursuant to its ASO products. As a result of the  
Acquisition, based on total covered lives, the Company is the industry leader   
with respect to risk-based, ASO, EAP and integrated products. For its fiscal    
year ended September 30, 1997, on a pro forma basis, risk-based, ASO, EAP and   
integrated products would have accounted for 73%, 12%, 9% and 5%, respectively, 
of the Company's managed behavioral healthcare net revenues.                    

The Company was incorporated in 1969 under the laws of the State of     
Delaware. The Company's principal executive offices are located at 3414         
Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326, and its telephone     
number is (404) 841-9200.                                                       

HISTORY                                                                         

The Company has historically derived the majority of its revenue as a   
provider of 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 the reduced          
utilization of inpatient services. As a result, 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 by third party      
payors.                                                                         

 The Company first entered the behavioral managed care industry during the
first quarter of fiscal 1996 with its acquisition of 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").         
Subsequent to the Company's acquisition of Green Spring, the growth of the      
managed behavioral healthcare industry accelerated and the industry began to    
consolidate. The Company concluded that consolidation presented an opportunity  
for the Company to enhance its stockholder value by increasing 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 COI, an affiliate of Crescent, formed CBHS, a joint venture, to operate the 
Psychiatric                                                                     

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Hospital Facilities and certain other facilities transferred 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 the other facilities       
operated by 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 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 net cash proceeds to   
finance the acquisition of additional managed care companies. Specifically, on  
December 4, 1997, the Company consummated the purchase of Human Affairs         
International, Incorporated ("HAI"), formerly a unit of Aetna/U.S. Healthcare   
("Aetna"). HAI manages the care of over 16.0 million covered lives, primarily   
through EAPs and other managed behavioral healthcare plans. In addition, 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 Blue Cross of New Jersey, CIGNA and NYLCare, for its 3.4   
million members. Allied has over 80 physician networks across the eastern United
States. Allied's networks include physicians specializing in cardiology,        
oncology and diabetes. The Company continues to pursue a strategy of expanding  
its managed care operations and of reducing the extent to which its earnings are
derived from the psychiatric hospital business. In this regard, the Company has 
further implemented its business strategy through the Acquisition.              

 On March 3, 1998, the Company entered into definitive agreements with COI
and CBHS to, among other things, sell the Company's franchise operations,       
certain domestic provider operations and certain other assets and operations. If
the CBHS Transactions are consummated, the Company will have completed the      
divestiture of substantially all of its domestic provider operations. See "CBHS 
Transactions."                                                                  

RECENT DEVELOPMENTS                                                             

THE ACQUISITION.  On February 12, 1998, the Company consummated its     
acquisition of Merit for cash consideration of approximately $448.9 million plus
the repayment of Merit's debt. Merit manages behavioral healthcare programs for 
approximately 800 customers across all segments of the healthcare industry,     
including HMOs, Blue Cross/Blue Shield organizations and other insurance        
companies, corporations and labor unions, federal, state and local governmental 
agencies and various state Medicaid programs, and had approximately 21.0 million
covered lives at the time of the Acquisition, including approximately 10.6      
million risk-based lives. On September 12, 1997, Merit completed the acquisition
of CMG Health, Inc. ("CMG"). CMG is a national managed behavioral healthcare    
company with over two million covered lives, including over 1.9 million         
risk-based lives. Merit paid approximately $48.7 million in cash and issued     
approximately 739,000 shares of Merit common stock as consideration for CMG.    

    THE TRANSACTIONS.  On February 12, 1998, in connection with the consummation
of the Acquisition, the Company consummated certain related transactions        
(together with the Acquisition, collectively, the "Transactions"), as follows:  
(i) the Company terminated its existing credit agreement (the "Magellan Existing
Credit Agreement"); (ii) the Company repaid all loans outstanding pursuant to   
and terminated                                                                  

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Merit's existing credit agreement (the "Merit Existing Credit Agreement") (the  
Magellan Existing Credit Agreement and the Merit Existing Credit Agreement are  
hereinafter referred to as the "Existing Credit Agreements"); (iii) the Company 
consummated a tender offer for its 11 1/4% Series A Senior Subordinated Notes   
due 2004 (the "Magellan Outstanding Notes"); (iv) Merit consummated a tender    
offer for its 11 1/2% Senior Subordinated Notes due 2005 (the "Merit Outstanding
Notes") (the Magellan Outstanding Notes and the Merit Outstanding Notes are     
hereinafter referred to collectively as the "Outstanding Notes" and such tender 
offers are hereinafter referred to collectively as the "Debt Tender Offers");   
(v) the Company entered into a new senior secured bank credit agreement (the    
"New Credit Agreement") with The Chase Manhattan Bank ("Chase") and a syndicate 
of financial institutions, providing for credit facilities of $700 million; and 
(vi) the Company issued its 9% Senior Subordinated Notes due 2008 (the "Old     
Notes") pursuant to an indenture, dated February 12, 1998, between the Company  
and Marine Midland Bank, as Trustee (the "Indenture"). The Company intends to   
effect an exchange offer in which it will exchange its 9% Series A Senior       
Subordinated Notes (the "New Notes") for the Old Notes. The Old Notes and the   
New Notes are collectively referred to hereinafter as the "Notes."              

   GREEN SPRING MINORITY SHAREHOLDER CONVERSION.  The minority shareholders of
Green Spring have converted their interests in Green Spring into an aggregate of
2,831,516 shares of Company Common Stock. Such conversion is referred to as the 
"Green Spring Minority Shareholder Conversion." As a result of the Green Spring 
Minority Shareholder Conversion, the Company owns 100% of Green Spring.         

   CBHS TRANSACTIONS.  On March 3, 1998, the Company and certain of its wholly
owned subsidiaries entered into definitive agreements with COI and CBHS pursuant
to which the Company will, among other things, sell the Company's franchise     
operations, certain domestic provider operations and certain other assets and   
operations. The definitive agreements include: (i) an equity purchase agreement 
between the Company and COI (the "Equity Purchase Agreement"); (ii) a purchase  
agreement between the Company, certain of its wholly owned subsidiaries and CBHS
(the "Purchase Agreement"); and (iii) a support agreement between the Company   
and COI (the "Support Agreement"). Pursuant to the Equity Purchase Agreement,   
the Company agreed to sell to COI the Company's common and preferred equity     
interest in CBHS. Pursuant to the Purchase Agreement, the Company and certain of
its wholly owned subsidiaries agreed to sell to CBHS: (i) Charter Advantage,    
LLC, the entity that conducts the Company's franchise operations; (ii) Charter  
System, LLC, which owns the intellectual property comprising the "CHARTER"      
system of behavioral healthcare; (iii) Group Practice Affiliates, Inc., the     
Company's physician practice management business ("GPA"); (iv) certain          
behavioral staff model operations; (v) the Company's Puerto Rican provider      
management business; (vi) Golden Isle Assurance Company, Ltd., one of the       
Company's captive insurance companies ("Golden Isle"); and (vii) Strategic      
Advantage, Inc., which owns certain intellectual property used by the Company to
monitor clinical results ("Strategic Advantage"). The obligations of CBHS and   
the Company to consummate the transactions contemplated by the Purchase         
Agreement are also subject to, among other things, the execution of either (i) a
Joint Venture Purchase Agreement pursuant to which the Company will sell to     
CBHS, for no additional consideration, its interest in six hospital-based joint 
ventures that are managed by CBHS on behalf of the Company (the "Joint          
Ventures") or (ii) amendments to the services agreements between the Company and
certain subsidiaries of CBHS relating to the Joint Ventures pursuant to which   
the Company will transfer to CBHS all rights to receive certain distributions   
with respect to the Joint Ventures and pursuant to which CBHS would assume all  
obligations of the Company with respect to the Joint Ventures, in each case     
arising after consummation of the CBHS Transactions.                            

Among other things, the Support Agreement obligates COI to provide CBHS 
assistance in obtaining financing for its payment obligation under the Purchase 
Agreement, including its agreement to: (i) provide assistance in the preparation
of any offering documents required in connection with CBHS's efforts to obtain  
financing, (ii) reimburse CBHS for all expenses incurred in connection with     
obtaining financing, whether or not the CBHS Transactions are consummated, and  
(iii) purchase up to $25.0 million of CBHS securities if necessary to permit    
CBHS to obtain the required financing. The Support Agreement also               

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obligates COI, under certain circumstances, to pay the Company a termination fee
equal to $2.5 million in cash and the number of shares of COI common stock      
obtained by dividing $2.5 million by the average closing price of a share of COI
common stock for the five trading days prior to the termination of the Purchase 
Agreement and for the five trading days after the termination of the Purchase   
Agreement, if the CBHS Transactions are not consummated as a result of the      
failure of CBHS to obtain sufficient financing for its payment obligations under
the Purchase Agreement.                                                         

   Upon consummation of the CBHS Transactions, the Company will receive $280.0
million in cash, pursuant to the Purchase Agreement and, pursuant to the Equity 
Purchase Agreement, the number of shares of COI common stock obtained by        
dividing $30.0 million by the average closing price of a share of COI common    
stock for the ten trading days preceding consummation of the CBHS Transactions. 
The Company expects to use the cash proceeds, after transaction costs of        
approximately $8.0 million, to repay indebtedness outstanding under the term    
loan facility of the New Credit Agreement (the "Term Loan Facility"). The CBHS  
Transactions are expected to close in the third quarter of fiscal 1998. There   
can be no assurance that the Company will consummate the CBHS Transactions.     

The obligations of the Company and CBHS to consummate the transactions  
contemplated by the Equity Purchase Agreement and the Support Agreement are     
conditioned upon the execution and delivery of a services purchase agreement    
(the "Services Purchase Agreement"). It is expected that the Services Purchase  
Agreement would obligate the Company to purchase from CBHS a designated minimum 
amount of behavioral healthcare services for gate-kept risk-based covered lives 
if CBHS meets certain standards required of it pursuant to the Provider Services
Agreement (as defined). If the CBHS Transactions are consummated, the Company   
also expects to enter into a provider services agreement (the "Provider Services
Agreement") with CBHS pursuant to which the Company would grant CBHS status as a
national preferred provider of behavioral healthcare services to the Company for
ten years provided that CBHS complies during the term of the Provider Services  
Agreement with enhanced clinical, quality assurance, reporting and customer     
service standards in addition to the standards currently required of other      
providers of such services to the Company.                                      

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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING  
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE       
SHARES.                                                                         

SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS                               

   As a result of the Transactions, the Company is currently highly leveraged,
with indebtedness that is substantial in relation to its stockholders' equity.  
As of December 31, 1997, on a pro forma basis, the Company's aggregate          
outstanding indebtedness would have been approximately $1.2 billion and the     
Company's stockholders' equity would have been approximately $179.0 million as  
of the same date. The New Credit Agreement and the Indenture permit the Company 
to incur or guarantee certain additional indebtedness, subject to certain       
limitations.                                                                    

  The Company's high degree of leverage could have important consequences to
owners of Common Stock, including, but not limited to, the following: (i) the   
Company's ability to obtain additional financing for working capital, capital   
expenditures, acquisitions, general corporate purposes or other purposes may be 
impaired in the future; (ii) a substantial portion of the Company's cash flow   
from operations must be dedicated to the payment of principal and interest on   
its indebtedness; (iii) the Company is substantially more leveraged than certain
of its competitors, which might place the Company at a competitive disadvantage;
(iv) the Company may be hindered in its ability to adjust rapidly to changing   
market conditions; and (v) the Company's high degree of leverage could make it  
more vulnerable in the event of a downturn in general economic conditions or its
business or in the event of adverse changes in the regulatory environment       
applicable to the Company.                                                      

  The Company's ability to repay or to refinance its indebtedness and to pay
interest on its indebtedness will depend on its financial and operating         
performance, which, in turn, is subject to prevailing economic and competitive  
conditions and to certain financial, business and other factors, many of which  
are beyond the Company's control. These factors could include operating         
difficulties, increased operating costs, the actions of competitors, regulatory 
developments and delays in implementing strategic projects. The Company's       
ability to meet its debt service and other obligations may depend in significant
part on the extent to which the Company can successfully implement its business 
strategy. There can be no assurance that the Company will be able to implement  
its strategy fully or that the anticipated results of its strategy will be      
realized.                                                                       

 If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay      
capital expenditures, sell assets or seek to obtain additional equity capital or
to restructure its debt. There can be no assurance that the Company's cash flow 
and capital resources will be sufficient for payment of principal of and        
interest on its indebtedness in the future, or that any such alternative        
measures would be successful or would permit the Company to meet its scheduled  
debt service obligations.                                                       

In addition, because the Company's obligations under the New Credit     
Agreement bear interest at floating rates, an increase in interest rates could  
adversely affect, among other things, the Company's ability to meet its debt    
service obligations.                                                            

HISTORY OF UNPROFITABLE OPERATIONS                                              

The Company experienced losses from continuing operations before        
extraordinary items in each fiscal year from 1993 through 1995. Such losses     
amounted to $39.6 million, $47.0 million and $43.0 million for the fiscal years 
ended September 30, 1993, 1994 and 1995, respectively. Merit experienced losses 
before cumulative effects of accounting changes in fiscal 1996 and 1997 of $16.9
million and $13.9 million, respectively. The Company reported net revenue and   
net income of approximately $1.35 billion and $32.4 million, respectively, for  
fiscal 1996 and net revenue and income before extraordinary items of            
approximately $1.2 billion and $4.8 million, respectively, for fiscal 1997. The 
Company's fiscal 1997 net income included a loss on the Crescent Transactions of
$35.9 million, net of taxes. There can be no assurance that the Company's       
profitability will continue in future periods.                                  

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RESTRICTIVE FINANCING COVENANTS                                                 

The New Credit Agreement and the Indenture contain a number of covenants
that restrict the operations of the Company and its subsidiaries. In addition,  
the New Credit Agreement requires the Company to comply with specified financial
ratios and tests, including a minimum interest coverage ratio, a maximum        
leverage ratio, a minimum net worth test, a maximum senior debt ratio and a     
minimum "EBITDA" (as defined in the New Credit Agreement). There can be no      
assurance that the Company will be able to comply with such covenants, ratios   
and tests in the future. The Company's ability to comply with such covenants,   
ratios and tests may be affected by events beyond its control, including        
prevailing economic, financial and industry conditions. The breach of any such  
covenants, ratios or tests could result in a default under the New Credit       
Agreement that would permit the lenders thereunder to declare all amounts       
outstanding thereunder to be immediately due and payable, together with accrued 
and unpaid interest. The breach of any such covenants, ratios or tests could    
result in a default under the Notes that would permit the trustee pursuant to   
the Indenture to declare the principal amount of the Notes to be immediately due
and payable, together with accrued and unpaid interest. If the indebtedness     
outstanding pursuant to the New Credit Agreement or the Notes were to be        
accelerated, there can be no assurance that the assets of the Company would be  
sufficient to repay such indebtedness and the other indebtedness of the Company.

CHANGE OF CONTROL                                                               

    The occurrence of a change of control with respect to the Company may result
in a default, or otherwise require repayment of indebtedness, under both the    
Indenture and the New Credit Agreement. In addition, the New Credit Agreement   
prohibits the repayment of the Notes by the Company upon the occurrence of a    
change of control, unless and until such time as the indebtedness under the New 
Credit Agreement is repaid in full. The Company's failure to make such          
repayments in such instances would result in a default under both the Indenture 
and the New Credit Agreement. Future indebtedness of the Company may also       
contain restrictions or repayment requirements with respect to certain events or
transactions that could constitute a change of control. In the event of a change
of control, there can be no assurance that the Company would have sufficient    
assets to satisfy all of its obligations under the Notes or the New Credit      
Agreement.                                                                      

RISK-BASED PRODUCTS                                                             

   As a result of the Acquisition, revenues under risk-based contracts are the
primary source of the Company's revenue from its managed behavioral care        
business. On a pro forma basis, such revenues would have accounted for          
approximately 50% of the Company's total revenue and 73% of its managed         
behavioral healthcare revenue in fiscal 1997. On a pro forma basis, after giving
effect to the CBHS Transactions, such revenue would have accounted for          
approximately 56% of the Company's total revenue and 73% of its managed         
behavioral healthcare revenue in fiscal 1997. In order for such contracts to be 
profitable, the Company must accurately estimate the rate of service utilization
by beneficiaries enrolled in programs managed by the Company and control the    
unit cost of such services. There can be no assurance that the Company's        
assumptions as to service utilization rates and costs will accurately and       
adequately reflect actual utilization rates and costs, nor can there be any     
assurance that increases in behavioral healthcare costs or                      
higher-than-anticipated utilization rates, significant aspects of which are     
outside the Company's control, will not cause expenses associated with such     
contracts to exceed the Company's revenue for such contracts. In addition, there
can be no assurance that adjustments will not be required to the estimates,     
particularly those regarding cost of care, made in reporting historical         
financial results. The Company will attempt to increase membership in its       
risk-based products following the Acquisition. If the Company is successful in  
this regard, the Company's exposure to potential losses from its risk-based     
products will also be increased. Furthermore, certain of such contracts and     
certain state regulations limit the profits that may be earned by the Company on
risk-based business and may require refunds if the loss experience is more      
favorable than that originally anticipated. Such contracts and regulations may  
also require the Company or certain of its subsidiaries to reserve a specified  
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under such contracts. As of December 31, 1997, on a pro forma basis, the Company
would have had cash reserves of $52.1 million pursuant to such contracts and    
regulations. Such amounts will not be available to the Company for general      
corporate purposes. Furthermore, certain state regulations restrict the ability 
of subsidiaries that offer risk-based products to pay dividends to the Company. 

RELIANCE ON CUSTOMER CONTRACTS                                                  

On a pro forma basis, before and after giving effect to the CBHS        
Transactions, and following the Company's acquisitions of Merit, HAI and Allied,
approximately 69% and 78%, respectively, of the Company's revenue in fiscal 1997
would have been derived from contracts with payors of behavioral healthcare     
benefits. The Company's managed care contracts typically have terms of one to   
three years, and in certain cases contain renewal provisions providing for      
successive terms of between one and two years (unless terminated earlier).      
Substantially all of these contracts are immediately terminable with cause and  
many, including some of the Company's most significant contracts, are terminable
without cause by the customer upon the provision of requisite notice and the    
passage of a specified period of time (typically between 60 and 180 days), or   
upon the occurrence of certain other specified events. On a pro forma basis,    
following the Company's acquisitions of Merit, HAI and Allied, both before and  
after giving effect to the CBHS Transactions, the Company's ten largest managed 
behavioral healthcare customers would have accounted for approximately 47% of   
the Company's managed behavioral healthcare revenue for fiscal 1997. One of such
contracts, an agreement between HAI and Aetna, represents 21% of the Company's  
pro forma covered lives and would have represented 5% of its pro forma managed  
behavioral healthcare revenues for fiscal 1997. The contract expires on December
3, 2003. There can be no assurance that such contracts will be extended or      
successfully renegotiated or that the terms of any new contracts will be        
comparable to those of existing contracts. Loss of all of these contracts or    
customers would, and loss of any one of these customers could, have a material  
adverse effect on the Company. In addition, price competition in bidding for    
contracts can significantly affect the financial terms of any new or            
renegotiated contract. The Company's customers may reevaluate their contractual 
arrangements with the Company as a result of the consummation of the            
Transactions.                                                                   

SERVICES PURCHASE AGREEMENT                                                     

The obligations of the Company and CBHS to consummate the transactions  
contemplated by the Equity Purchase Agreement and the Support Agreement are     
conditioned upon the execution and delivery of the Services Purchase Agreement. 
It is expected that the Services Purchase Agreement would obligate the Company  
to purchase from CBHS a designated minimum amount of behavioral healthcare      
services for gate-kept risk-based covered lives, subject to certain conditions, 
and to make certain payments to CBHS if it fails to do so. It is expected that  
such payments could equal up to $59.4 million, subject to increases pursuant to 
the terms of the Services Purchase Agreement. There can be no assurance that the
Company will not be required to make such payments.                             

DEPENDENCE ON GOVERNMENT SPENDING FOR MANAGED HEALTHCARE; POSSIBLE IMPACT OF    
HEALTHCARE REFORM                                                           

A significant portion of the Company's managed care revenue is derived, 
directly or indirectly, from federal, state and local governmental agencies,    
including state Medicaid programs. Reimbursement rates vary from state to state,
are subject to periodic negotiation and may limit the Company's ability to      
maintain or increase rates. The Company is unable to predict the impact on the  
Company's operations of future regulations or legislation affecting Medicaid or 
Medicare programs, or the healthcare industry in general, and there can be no   
assurance that future regulations or legislation will not have a material       
adverse effect on the Company. Moreover, any reduction in government spending   
for such programs could also have a material adverse effect on the Company. In  
addition, the Company's contracts with federal, state and local governmental    
agencies, under both direct contract and subcontract arrangements, generally are
conditioned upon financial appropriations by one or more governmental agencies, 
especially with respect to state Medicaid programs. These contracts generally   
can be terminated or modified by the customer if such appropriations are not    
made. Finally, some of the Company's contracts with federal, state and local    

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governmental agencies, under both direct contract and subcontract arrangements, 
require the Company to perform additional services if federal, state or local   
laws or regulations imposed after the contract is signed so require, in exchange
for additional compensation to be negotiated by the parties in good faith.      
Government and other third-party payors are generally seeking to impose lower   
reimbursement rates and to renegotiate reduced contract rates with service      
providers in a trend toward cost control.                                       

In August 1997, Congress enacted the Balanced Budget Act of 1997 (the   
"Budget Act"). The Medicare-related provisions of the Budget Act are designed to
reduce Medicare expenditures over the next five years by $115 billion, compared 
to projected Medicare expenditures before adoption of the Budget Act. The       
Congressional Budget Office projected in July 1997 that $43.8 billion of the    
reductions would come from reduced payments to hospitals, $21.8 billion from    
increased enrollment in managed care plans and $11.7 billion from reduced       
payments to physicians and ambulatory care providers. The five-year savings in  
projected Medicare payments to physicians and hospitals would be achieved under 
the Budget Act by reduced fee-for-service reimbursement and by changes in       
managed care programs designed to increase enrollment of Medicare beneficiaries 
in managed care plans. The increase in Medicare enrollment in managed care plans
would be achieved in part by allowing provider-sponsored organizations and      
preferred provider organizations to compete with Medicare HMOs for Medicare     
enrollees.                                                                      

 The Medicaid-related provisions of the Budget Act are designed to achieve
net federal Medicaid savings of $14.6 billion over the next five years and $56.4
billion over the next ten years. The Budget Act achieves federal Medicaid       
savings in three areas. First, two-thirds of the savings over the next ten years
are attributable to limitations on federal matching payments to states for      
reimbursements to "disproportionate share" hospitals. The next largest source of
federal savings is a provision allowing states to shift the cost of Medicaid    
deductibles and coinsurance requirements for low-income Medicaid beneficiaries  
from their Medicaid programs to physicians and other providers. Most of the     
remaining savings derive from the repeal of the "Boren Amendment" and other     
minimum payment guarantees for hospitals, nursing homes and community health    
centers that serve Medicaid patients. These changes may have an adverse effect  
on the Company if they result in reduced payment levels for providers of managed
behavioral healthcare services.                                                 

Prior to adoption of the Budget Act, the states were prohibited from    
requiring Medicaid recipients to enroll in managed care products that covered   
only Medicaid recipients. The Medicaid laws required that the states enroll     
Medicaid recipients in products that also covered a specific number of          
commercial enrollees. This requirement of the Medicaid laws was intended to     
limit the ability of the states to reduce coverage levels for Medicaid          
recipients below those offered to commercial enrollees. Under prior law, the    
Secretary of the United States Department of Health and Human Services (the     
"Department") could waive the prohibition. The Medicaid-related provisions of   
the Budget Act give states broad flexibility to require most Medicaid recipients
to enroll in managed care products that only cover Medicaid recipients, without 
obtaining a waiver from the Secretary of the Department that was required under 
prior law. The Budget Act also allows states to limit the number of managed care
organizations with which the state will contract to deliver care to Medicaid    
beneficiaries. These changes could have a positive impact on the Company's      
business, if they result in increased enrollment of Medicaid beneficiaries in   
managed care organizations and increased Medicaid spending on managed care.     
However, these changes also may have an adverse effect on the Company if a      
number of states decide to limit the number of managed care organizations with  
which they will contract and to select the organization solely on the basis of  
the cost of care, which could result in increased cost competition for state    
contracts.                                                                      

    The Company cannot predict the effect of the Budget Act, or other healthcare
reform measures that may be adopted by Congress or state legislatures, on its   
managed care operations and no assurance can be given that either the Budget Act
or other healthcare reform measures will not have an adverse effect on the      
Company.                                                                        

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REGULATION                                                                      

  The managed healthcare industry and the provision of behavioral healthcare
services are subject to extensive and evolving state and federal regulation. The
Company is subject to certain state laws and regulations, including those       
governing: (i) the licensing of insurance companies, HMOs, preferred provider   
organizations ("PPOs"), third-party administrators ("TPAs") and companies       
engaged in utilization review and (ii) the licensing of healthcare              
professionals, including restrictions on business corporations from practicing, 
controlling or exercising excessive influence over behavioral healthcare        
services through the direct employment of psychiatrists or, in a few states,    
psychologists and other behavioral healthcare professionals. In addition, the   
Company is subject to certain federal laws as a result of the role the Company  
assumes in connection with managing its customers' employee benefit plans. The  
Company's managed care operations are also indirectly affected by regulations   
applicable to the establishment and operation of behavioral healthcare clinics  
and facilities.                                                                 

    The Company believes its operations are structured to comply with applicable
laws and regulations in all material respects and that it has received, or is in
the process of applying for, all licenses and approvals material to the         
operation of its business. In many states, entities that assume risk under      
contracts with licensed insurance companies or HMOs have not been considered by 
state regulators to be conducting an insurance or HMO business. As a result, the
Company has not sought licensure as either an insurer or HMO in certain states. 
Regulators in some states, however, have determined that risk assuming activity 
by entities that are not themselves providers of care is an activity that       
requires some form of licensure. There can be no assurance that other states in 
which the Company operates will not adopt a similar view, thus requiring the    
Company to obtain additional licenses. Such additional licensure might require  
the Company to maintain minimum levels of deposits, net worth, capital, surplus 
or reserves, or limit the Company's ability to pay dividends, make investments  
or repay indebtedness. The imposition of these additional licensure requirements
could increase the Company's cost of doing business or delay the Company's      
conduct or expansion of its business.                                           

   Regulators may impose operational restrictions on entities granted licenses
to operate as insurance companies or HMOs. For example, the California          
Department of Corporations (the "DOC") imposed certain restrictions on the      
Company in connection with its issuance of an approval of the Company's         
acquisition of HAI, including restrictions on the ability of the California     
subsidiary of HAI to fund the Company's operations in other states and on the   
ability of the Company to make certain operational changes with respect to HAI's
California subsidiary. The DOC imposed substantially identical restrictions on  
the Company in connection with the Company's acquisition of Merit. The Company  
does not believe such restrictions will materially impact its integration plan. 
See "--Integration of Operations."                                              

   In addition, utilization review and TPA activities conducted by the Company
are regulated by many states, which states impose requirements upon the Company 
that increase its business costs. The Company believes that its TPA activities  
performed for its self-insured employee benefit plan customers are exempt from  
otherwise applicable state licensing or registration requirements based upon    
federal preemption under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and has relied on this general principle in determining not  
to seek licensure for certain of its activities in many states. Existing case   
law is not uniform on the applicability of ERISA preemption with respect to     
state regulation of utilization review or TPA activities. There can be no       
assurance that additional licensure will not be required with respect to        
utilization review or TPA activities in certain states.                         

    State regulatory agencies responsible for the administration and enforcement
of the laws and regulations to which the Company's operations are subject have  
broad discretionary powers. A regulatory agency or a court in a state in which  
the Company operates could take a position under existing or future laws or     
regulations, or change its interpretation or enforcement practices with respect 
thereto, that such laws or regulations apply to the Company differently than the
Company believes such laws and regulations apply or should be enforced. The     
resultant compliance with, or revocation of, or failure to obtain, required     
licenses and governmental approvals could result in significant alteration to   
the Company's business                                                          

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operations, delays in the expansion of the Company's business and lost business 
opportunities, any of which, under certain circumstances, could have a material 
adverse effect on the Company.                                                  

The laws of some states limit the ability of a business corporation to  
directly provide, control or exercise excessive influence over behavioral       
healthcare services through the direct employment of psychiatrists,             
psychologists, or other behavioral healthcare professionals. In addition, the   
laws of some states prohibit psychiatrists, psychologists, or other healthcare  
professionals from splitting fees with other persons or entities. These laws and
their interpretations vary from state to state and enforcement by the courts and
regulatory authorities may vary from state to state and may change over time.   
The Company believes that its operations as currently conducted are in material 
compliance with the applicable laws, however there can be no assurance that the 
Company's existing operations and its contractual arrangements with             
psychiatrists, psychologists and other healthcare professionals will not be     
successfully challenged under state laws prohibiting fee splitting or the       
practice of a profession by an unlicensed entity, or that the enforceability of 
such contractual arrangements will not be limited. The Company believes that it 
could, if necessary, restructure its operations to comply with changes in the   
interpretation or enforcement of such laws and regulations, and that such       
restructuring would not have a material adverse effect on its operations.       

Several states in which the Company does business have adopted, or are  
expected to adopt, "any willing provider" laws. Such laws typically impose upon 
insurance companies, PPOs, HMOs or other types of third-party payors an         
obligation to contract with, or pay for the services of, any healthcare provider
willing to meet the terms of the payor's contracts with similar providers.      
Compliance with any willing provider laws could increase the Company's costs of 
assembling and administering provider networks and could, therefore, have a     
material adverse effect on its operations.                                      

The Company's managed care operations are also generally affected by    
regulations applicable to the operations of healthcare clinics and facilities.  

INTEGRATION OF OPERATIONS                                                       

 As a result of the Company's acquisition of Merit and HAI, the Company is
the largest provider of managed behavioral healthcare services in the United    
States. The Company's ability to operate its acquired managed care businesses   
successfully depends on how well and how quickly it integrates the acquired     
businesses with its existing operations. The Company expects to achieve         
approximately $60.0 million of cost savings on an annual basis within eighteen  
months following the consummation of the Acquisition. However, as the Company   
implements the integration process, it may need to implement enhanced           
operational, financial and information systems and may require additional       
employees and management, operational and financial resources. There can be no  
assurance that the Company will be able to implement and maintain such          
operational, financial and information systems successfully or successfully     
obtain, integrate and utilize the required employees and management, operational
and financial resources to achieve the successful integration of the acquired   
businesses with its existing operations. Failure to implement such systems      
successfully and to use such resources effectively could have a material adverse
effect on the Company. Furthermore, implementing such operational, financial and
information systems or obtaining such employees and management could reduce the 
cost savings the Company expects to achieve.                                    

HIGHLY COMPETITIVE INDUSTRY                                                     

The industry in which the Company conducts its managed care business is 
highly competitive. The Company competes with large insurance companies, HMOs,  
PPOs, TPAs, provider groups and other managed care companies. Many of the       
Company's competitors are significantly larger and have greater financial,      
marketing and other resources than the Company, and some of the Company's       
competitors provide a broader range of services. The Company may also encounter 
substantial competition in the future from new market entrants. Many of the     
Company's customers that are managed care companies may, in the future, seek to 
provide managed behavioral healthcare services to their employees or subscribers
directly, rather than contracting with the Company for such services.           

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SUBORDINATION OF FRANCHISE FEES                                                 

  The Company owns a 50% equity interest in CBHS, from which it receives the
Franchise Fees. The Franchise Fees represent a significant portion of the       
Company's earnings and cash flows. The Franchise Fees payable to the Company by 
CBHS are subordinated in right of payment to the $41.7 million annual base rent,
5% minimum escalator rent and, in certain circumstances, certain additional rent
due to Crescent. If CBHS encounters a decline in earnings or financial          
difficulties, such amounts due to Crescent will be paid before any Franchise    
Fees are paid. The remainder of CBHS's available cash will then be applied in   
such order of priority as CBHS may determine, in the reasonable discretion of   
the CBHS governing board, to all other operating expenses of CBHS, including the
current and accumulated Franchise Fees. The Company will be entitled to pursue  
all available remedies for breach of the Master Franchise Agreement, except that
the Company does not have the right to take any action that could reasonably be 
expected to force CBHS into bankruptcy or receivership.                         

    As a result of the Crescent Transactions, the Company no longer controls the
operations of the Psychiatric Hospital Facilities and other facilities operated 
by CBHS. Accordingly, factors that the Company does not control will likely     
influence the amount of the equity in the earnings of CBHS and the amount of    
Franchise Fees that the Company will realize in the future. For example, CBHS   
may pursue acquisitions in markets where it does not currently have a presence  
and in markets where it has existing hospital operations. Furthermore, CBHS may 
consolidate services in selected markets by closing additional facilities       
depending on market conditions and evolving business strategies. If CBHS closes 
additional psychiatric hospitals, it could result in charges to income for the  
costs attributable to the closure, which would result in lower equity in        
earnings of CBHS for the Company and receipt by the Company of less than the    
agreed to amount of Franchise Fees.                                             

Based on projections of fiscal 1998 operations prepared by management of
CBHS, the Company believes that CBHS will be unable to pay the full amount of   
the Franchise Fees it is contractually obligated to pay the Company during      
fiscal 1998. The Company currently estimates that CBHS will be able to pay      
approximately $58.0 million to $68.0 million of the Franchise Fees in fiscal    
1998, a $10.0 million to $20.0 million shortfall relative to amounts payable    
under the Master Franchise Agreement.                                           

PROFESSIONAL LIABILITY; INSURANCE                                               

The management and administration of the delivery of managed behavioral 
healthcare services, like other healthcare services, entail significant risks of
liability. The Company is regularly subject to lawsuits alleging malpractice and
related legal theories, some of which involve situations in which participants  
in the Company's programs have committed suicide. The Company is also subject to
claims of professional liability for alleged negligence in performing           
utilization review activities, as well as for acts and omissions of independent 
contractors participating in the Company's third-party provider networks. The   
Company is subject to claims for the costs of services denied. There can be no  
assurance that the Company's procedures for limiting liability have been or will
be effective, or that one or more lawsuits will not have a material adverse     
effect on the Company in the future.                                            

The Company carries professional liability insurance, subject to certain
deductibles. There can be no assurance that such insurance will be sufficient to
cover any judgments, settlements or costs relating to present or future claims, 
suits or complaints or that, upon expiration thereof, sufficient insurance will 
be available on favorable terms, if at all. If the Company is unable to secure  
adequate insurance in the future, or if the insurance carried by the Company is 
not sufficient to cover any judgments, settlements or costs relating to any     
present or future actions or claims, there can be no assurance that the Company 
will not be subject to a liability that could have a material adverse effect on 
the Company.                                                                    

  The Company has certain liabilities relating to the self-insurance program
it maintained with respect to its provider business prior to the Crescent       
Transactions.                                                                   

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SHARES ELIGIBLE FOR FUTURE SALE                                                 

   The Shares are eligible for sale in the open market without restriction. In
connection with the issuance of the Shares in January 1996, the Company issued  
to Rainwater-Magellan, in a private placement transaction, the Warrants to      
purchase 2,000,000 shares of Common Stock (i.e., the Underlying Warrant Shares) 
for $26.15 per share. The Warrants expire on January 25, 2000. Any Underlying   
Warrant Shares issued upon exercise of the Warrants will be eligible for sale in
the open market without restriction. Warrants to purchase 57,004 shares of      
Common Stock were distributed by Rainwater-Magellan to three of its limited     
partners in redemption of their partnership interests. Pursuant to a pro-rata   
distribution, Rainwater, Inc. and Mr. Rainwater received 39,724 shares and      
2,417,554 shares, respectively, from Rainwater-Magellan. In connection with the 
Crescent Transactions in June 1997, the Company issued to Crescent and COI      
separate warrants to acquire a total of 2,566,622 shares of Common Stock for    
$30.00 per share that expire in installments during the years 2001 through 2009.
The shares of Common Stock issued upon the exercise of such Warrants will be    
eligible for sale in the open market without restriction. In connection with the
Green Spring Minority Shareholder Conversion, 2,831,516 shares of Common Stock  
are eligible for sale in the open market without restriction. The Company will  
file a registration statement under the Securities Act to register 35,875 shares
of Common Stock for sale by Paul G. Shoffeitt, who has the right to acquire such
shares upon the exercise of his option to sell shares of Care Management        
Resources, Inc. to the Company. Such options may be exercised in three annual   
installments in November of each of 1998, 1999 and 2000. As of March 31, 1998,  
the Company's officers, directors and employees held options for the purchase of
3,906,499 shares of Common Stock (2,698,507 of which are vested and 1,207,992 of
which are subject to vesting periods of up to four years in duration). Upon     
exercise, the shares of Common Stock underlying such options will be eligible   
for sale on the open market without restriction, except that directors and      
certain officers of the Company must effect such sales pursuant to Rule 144     
under the 1933 Act. Following this offering, sales and potential sales of shares
of Common Stock in the public market pursuant to Rule 144 or otherwise could    
adversely affect the prevailing market prices for the Common Stock and impair   
the Company's ability to raise additional equity capital.                       

POSSIBLE VOLATILITY OF STOCK PRICE                                              

The Company believes factors such as announcements with respect to      
healthcare reform measures, reductions in government healthcare program         
projected expenditures, acquisitions and quarter-to-quarter and year-to-year    
variations in financial results could cause the market price of the Company's   
Common Stock to fluctuate substantially. Any such adverse announcement with     
respect to healthcare reform measures or program expenditures, acquisitions or  
any shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of  
the Company's Common Stock in any given period. As a result, the market for the 
Company's Common Stock may experience price and volume fluctuations unrelated to
the operating performance of the Company.                                       

CBHS RISK FACTORS                                                               

The following factors are relevant to an understanding of the risks     
associated with CBHS's business and the ability of CBHS to pay Franchise Fees to
the Company.                                                                    

  POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS AND CHANGES IN
HOSPITAL PAYOR MIX. CBHS's hospitals have been adversely affected by factors    
influencing the entire psychiatric hospital industry. Such factors include: (i) 
the imposition of more stringent length of stay and admission criteria and other
cost containment measures by payors; (ii) the failure of reimbursement rate     
increases from certain payors that reimburse on a per diem or other discounted  
basis to offset increases in the cost of providing services; (iii) an increase  
in the percentage of business that CBHS derives from payors that reimburse on a 
per diem or other discounted basis; (iv) a trend toward higher deductibles and  
co-insurance for individual patients; (v) a trend toward limiting employee      
behavorial health benefits, such as reductions                                  

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in annual and lifetime limits on behavioral health coverage; and (vi) pricing   
pressure related to an increasing rate of claims denials by third party payors. 
Any of these factors may result in reductions in the amounts that CBHS's        
hospitals can expect to collect per patient day for services provided or the    
number of equivalent patient days.                                              

    For the fiscal year ended September 30, 1997, CBHS derived approximately 24%
of its gross psychiatric patient service revenue from managed care organizations
(primarily HMOs and PPOs), 22% from other private payors (primarily commercial  
insurance and Blue Cross), 27% from Medicare, 18% from Medicaid, 2% from the    
Civilian Health and Medical Program for the Uniformed Services ("CHAMPUS") and  
7% from other government programs. Changes in the mix of CBHS's patients among  
the private-pay, Medicare and Medicaid categories, and among different types of 
private-pay sources, could significantly affect the profitability of CBHS's     
hospital operations. Moreover, there can be no assurance that payments under    
governmental and private third-party payor programs will remain at levels       
comparable to present levels or will, in the future, be sufficient to cover the 
costs of providing care to patients covered by such programs.                   

  GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM.  In the 1995 and
1996 sessions of the United States Congress, the focus of healthcare legislation
was on budgetary and related funding mechanism issues. Both the Congress and the
Clinton Administration have made proposals to reduce the rate of increase in    
projected Medicare and Medicaid expenditures and to change funding mechanisms   
and other aspects of both programs. The Budget Act, which was signed into law by
President Clinton in August 1997, reduces federal spending by an estimated $140 
billion. The majority of the spending reduction will come from Medicare cuts of 
$115.0 billion. The Congressional Budget Office projected in July 1997 that     
$43.8 billion of the reductions would come from reduced payments to hospitals,  
$21.8 billion from increased enrollment in managed care plans and $11.7 billion 
from reduced payments to physicians and ambulatory care providers. The five-year
savings in projected Medicare payments to physicians and hospitals would be     
achieved under the Budget Act by reduced fee-for-service reimbursement and by   
changes in managed care programs designed to increase enrollment of Medicare    
beneficiaries in managed care plans. The increase in Medicare enrollment in     
managed care plans would be achieved in part by allowing provider-sponsored     
organizations and preferred provider organizations to compete with Medicare HMOs
for Medicare enrollees.                                                         

 The Medicaid-related provisions of the Budget Act are designed to achieve
net federal Medicaid savings of $14.6 billion over the next five years and $56.4
billion over the next ten years. The Budget Act achieves federal Medicaid       
savings in three areas. First, two-thirds of the savings over the next ten years
are attributable to limitations on federal matching payments to states for      
reimbursements to "disproportionate share" hospitals. The next largest source of
federal savings is a provision allowing states to shift the cost of Medicaid    
deductibles and coinsurance requirements for low-income Medicaid beneficiaries  
from their Medicaid programs to physicians and other providers. Most of the     
remaining savings derive from the repeal of the "Boren Amendment" and other     
minimum payment guarantees for hospitals, nursing homes and community health    
centers that service Medicaid patients.                                         

CBHS management estimates that the Budget Act will reduce the amount of 
revenue and earnings that CBHS will receive for the treatment of Medicare and   
Medicaid patients. CBHS management estimates that such reductions will          
approximate $10.0 million in fiscal 1998, and due to the phase in effects of the
bill, approximately $15.0 million in subsequent fiscal years.                   

  A number of states in which CBHS has operations have either adopted or are
considering the adoption of healthcare reform proposals of general applicability
or Medicaid reform proposals. Where adopted, these state reform laws have often 
not yet been fully implemented. The Company cannot predict the effect of these  
state healthcare reform proposals on CBHS's operations. The Company cannot      
predict the effect of other healthcare reform measures that may be adopted by   
Congress on the operations of                                                   

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CBHS and no assurance can be given that other federal healthcare reform measures
will not have an adverse effect on CBHS.                                        

   DEPENDENCE ON HEALTHCARE PROFESSIONALS.  Physicians traditionally have been
the source of a significant portion of the patients treated at CBHS's hospitals.
Therefore, the success of CBHS's hospitals is dependent in part on the number   
and quality of the physicians on the medical staffs of the hospitals and their  
admission practices. A small number of physicians account for a significant     
portion of patient admissions at some of CBHS's hospitals. There can be no      
assurance that CBHS can retain its current physicians on staff or that          
additional physician relationships will be developed in the future. Furthermore,
hospital physicians generally are not employees of CBHS and, in general, CBHS   
does not have contractual arrangements with hospital physicians restricting the 
ability of such physicians to practice elsewhere.                               

   POTENTIAL GENERAL AND PROFESSIONAL LIABILITY.  In recent years, physicians,
hospitals, and other healthcare professionals and providers have become subject 
to an increasing number of lawsuits alleging medical malpractice and related    
legal theories. Many of these lawsuits involve large claims and substantial     
defense costs. CBHS maintains a general and hospital professional liability     
insurance policy with an unaffiliated insurer. In addition, CBHS' hospitals     
require all physicians on each hospital's medical staff to maintain professional
liability coverage. Management believes that its coverage limits are adequate,  
however, there can be no assurance that a future claim or claims will not exceed
the limits of these existing insurance policies or that a loss or losses for    
which insurance is unavailable will not have a material adverse effect on CBHS. 

GOVERNMENT REGULATION.  The operation of psychiatric hospitals and other
behavioral healthcare facilities and the provision of behavioral healthcare     
services are subject to extensive federal, state and local laws and regulations.
These laws and regulations provide for periodic inspections or other reviews by 
state agencies, the Department and CHAMPUS to determine compliance with their   
respective standards of medical care, staffing, equipment and cleanliness       
necessary for continued licensing or participation in the Medicare, Medicaid or 
CHAMPUS programs. The admission and treatment of patients at psychiatric        
hospitals is also subject to substantial state regulation relating to           
involuntary admissions, confidentiality of patient medical information,         
patients' rights and federal regulation relating to confidentiality of medical  
records of substance abuse patients. CBHS is also subject to state certificate  
of need laws that regulate the construction of new hospitals and the expansion  
of existing hospital facilities and services.                                   

CBHS also is subject to federal and state laws that govern financial and
other arrangements between healthcare providers. Such laws include the illegal  
remuneration provisions of the Social Security Act, the physician self-referral 
provisions of the Omnibus Budget Reconciliation Act of 1993 and state illegal   
remuneration and self-referral statutes and regulations that prohibit payments  
in exchange for referrals and referrals by physicians or other healthcare       
providers to persons or entities with which the physician or other healthcare   
provider has a financial relationship.                                          

The Medicare and Medicaid Patient and Program Protection Act of 1987    
expanded the authority of the Department to exclude from participation in the   
Medicare and Medicaid programs those individuals and entities that engage in    
defined prohibited activities. The Department's exclusion authority was recently
expanded under the Health Insurance Portability and Accounting Act of 1996      
("HIPAA") and the Budget Act, which added additional grounds for exclusion,     
established minimum exclusion periods for certain offenses and expanded the     
scope of the exclusion to include all federal healthcare programs. The          
Department also has the authority to impose civil monetary penalties for certain
prohibited activities. HIPAA increased the amount of authorized penalties from  
$2,000 per item or service claimed to $10,000 per item or service claimed, and  
increased the assessment to which a person may be subject in lieu of damages    
from two times the amount claimed for each item or service to three times the   
amount claimed. Both HIPAA and the Budget Act expanded the Department's         
authority to impose civil monetary penalties by adding additional activities for
which civil monetary penalties may be imposed.                                  

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  Provisions contained in HIPAA and the Budget Act also created new criminal
healthcare fraud offenses that are applicable to both government programs and   
private health insurance plans and added new programs and increased funding for 
fraud and abuse detection and prevention.                                       

CHAMPUS regulations also authorize the exclusion of providers from the  
CHAMPUS program, if the provider has committed fraud or engaged in certain      
"abusive practices," which are defined broadly to include, among other things,  
the provision of medically unnecessary services, the provision of care of       
inferior quality and the failure to maintain adequate medical or financial      
records.                                                                        

    State regulatory agencies responsible for the administration and enforcement
of the laws and regulations to which CBHS' operations are subject have broad    
discretionary powers. A regulatory agency or a court in a state in which CBHS   
operates could take a position under existing or future laws or regulations, or 
change its interpretation or enforcement practices with respect thereto, that   
such laws or regulations apply to CBHS differently than CBHS believes such laws 
and regulations apply or should be enforced. The resultant compliance with, or  
revocation of, or failure to obtain, required licences and governmental         
approvals could result in significant alteration to CBHS' business operations,  
delays in the expansion of CBHS' business and lost business opportunities, any  
of which, under certain circumstances, could have a material adverse effect on  
CBHS.                                                                           

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USE OF PROCEEDS 

The Company will not receive any of the proceeds from the sale of the   
Shares. All of the proceeds from the sale of the Shares will be received by the 
Selling Stockholders.                                                           

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SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the  
ownership of the Shares as of March 31, 1998, and as adjusted to reflect the    
sale of the Shares offered hereby, by the Selling Stockholders. Each Selling    
Stockholder has sole voting and investment power with respect to the Shares     
owned by it.                                                                    

                                                        [Enlarge/Download Table]

                                                           OWNERSHIP OF COMMON                       OWNERSHIP OF      
                                                            STOCK BEFORE THE                      COMMON STOCK AFTER   
                                                                OFFERING                            THE OFFERING(2)    
                                                         -----------------------   NUMBER OF    -----------------------
                                                         NUMBER OF                SHARES BEING  NUMBER OF              
NAME                                                       SHARES      PERCENT     OFFERED(1)     SHARES      PERCENT  
-------------------------------------------------------  ----------  -----------  ------------  ----------  -----------
                                                                                                                       
Rainwater, Inc.........................................      39,724         .13%       39,724            0      --     
Richard E. Rainwater...................................   2,417,554        7.68     2,417,554            0      --     

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

(1) Prior to January 25, 2000, the Selling Stockholders may not sell or transfer
in a privately negotiated transaction to a single purchaser and its     
    affiliates or any "group" (as defined in Rule 13d-5(b)(1) under the Exchange
 Act) any combination of Shares, Warrants and/or Underlying Warrant Shares
which would equal five percent (5%) or more of the Common Stock then    
outstanding on a fully-diluted basis.                                   

(2) Assumes that all Shares being registered are sold.                          

    On the date of this Prospectus, Rainwater-Magellan owns Warrants to purchase
1,942,996 shares of Common Stock. Rainwater, Inc. is the sole general partner of
Rainwater-Magellan. Mr. Rainwater is the sole stockholder and a director of     
Rainwater, Inc. Mr. Rainwater has sole voting and dispositive power over the    
securities owned by Rainwater, Inc. As a result of such relationships, Mr.      
Rainwater is deemed to be the beneficial owner of the securities held by        
Rainwater, Inc.                                                                 

   As a result of the foregoing, on the date of this Prospectus, Mr. Rainwater
owns beneficially approximately 13.2% of the Common Stock.                      

The Warrants entitle the holders to purchase, at any time prior to their
January 25, 2000 expiration date, shares of Common Stock at a purchase price of 
$26.15 per share. The Agreement provides, among other things, for the adjustment
of the number of shares of Common Stock that can be purchased under the Warrants
and the purchase price, respectively, for certain dilutive events, for          
registration rights for the Shares and the Underlying Warrant Shares (which     
registration rights, as mentioned below, have been exercised), and for a variety
of other customary provisions, including, without limitation, certain           
restrictions on Rainwater-Magellan's private sale of such shares (as described  
above), certain preemptive rights of Rainwater-Magellan to acquire additional   
securities issued by the Company for cash in a private placement transaction and
standstill covenants restricting the purchase of additional shares of Common    
Stock by Rainwater-Magellan and its affiliates in certain circumstances.        

Darla D. Moore, a director of the Company, is the spouse of Richard E.  
Rainwater. Ms. Moore is the beneficial owner of 12,500 shares of Common Stock.  
Under the terms of the Agreement, Rainwater-Magellan has the right to designate 
a nominee acceptable to the Company for election as a director of the Company   
for so long as the Rainwater Group continues to own beneficially a specified    
minimum number of shares of Common Stock. Rainwater-Magellan proposed Ms. Moore 
as its nominee for director, and Ms. Moore was elected a director by the Board  
in February 1996. For purposes of this Prospectus, any reference to the         
"Rainwater Group" includes Rainwater-Magellan, Rainwater, Inc., Richard E.      
Rainwater, Darla D. Moore and their affiliates and associates.                  

In connection with the Agreement, the Company agreed (i) to pay a       
transaction fee of $150,000; (ii) to reimburse certain expenses of Rainwater,   
Inc. in connection with the transactions contemplated by the Agreement; (iii) to
pay the Rainwater Group an annual monitoring fee of $75,000 commencing on       

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March 31, 1996; and (iv) to reimburse the Rainwater Group for reasonable fees   
and expenses (up to a maximum of $25,000 annually) incurred in connection with  
its ownership of the Common Stock and the Warrant. The Company also agreed under
the Agreement to reimburse the Rainwater Group in the future for one additional 
filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as       
amended, if a filing under such act is required in connection with an exercise  
of the Warrants.                                                                

   During fiscal 1997, the Company paid an aggregate of $77,019 for the annual
monitoring fee and fees and expenses incurred in connection with                
Rainwater-Magellan's ownership of the Common Stock and the Warrant. Excluded    
from these amounts are directors' fees and expense reimbursement paid to Ms.    
Moore in her capacity as a director of the Company. The Company has incurred    
costs to date of approximately $55,000 in connection with its registration of   
the shares and approximately $40,000 in costs to register the Underlying Warrant
Shares. The Company expects to incur costs of approximately $45,000 in          
connection with the preparation of an amendment of the Registration Statement of
which this Prospectus is a part.                                                

During the third quarter of fiscal 1997, the Company consummated the    
Crescent Transactions, pursuant to which, among other things, it sold the       
Psychiatric Hospital Facilities to Crescent. Simultaneously with the sale of the
Psychiatric Hospital Facilities, the Company and COI formed CBHS to operate the 
Psychiatric Hospital Facilities. COI owns 50% of the equity interests in CBHS;  
the Company owns the remaining 50%. A subsidiary of Crescent leases the         
Psychiatric Hospital Facilities to CBHS. The Company has entered into certain   
agreements with COI in connection with the CBHS Transactions. See               
"Summary--Recent Developments."                                                 

Crescent is the operating partnership of Crescent Real Estate Equities  
Company ("CEI"). Richard E. Rainwater is the Chairman of the Board of Directors 
of CEI. The sole general partner of Crescent is Crescent Real Estate Equities,  
Ltd. ("Crescent GP"), which is a wholly-owned subsidiary of CEI. Mr. Rainwater  
owns beneficially 11.0% of Crescent, which interests consist of common stock in 
CEI (including common stock of CEI that may be acquired pursuant to the exercise
of options) and units of ownership in Crescent. Mr. Rainwater is an affiliate of
Crescent, Crescent GP, COI and CEI.                                             

PLAN OF DISTRIBUTION

    The sale or distribution of all or any portion of the Shares may be effected
from time to time by the Selling Stockholders or by their donees, transferees,  
or other successors in interest, directly, indirectly through brokers or dealers
or in a distribution by one or more underwriters on a firm commitment or best   
efforts basis, on the New York Stock Exchange, in the over-the-counter market,  
on any national securities exchange on which shares of the Common Stock are     
listed or traded, in privately negotiated transactions or otherwise, at market  
prices prevailing at the time of sale, at prices related to such prevailing     
market prices or at negotiated prices. Certain transfer restrictions have been  
placed on the Shares offered hereby pursuant to the Purchase Agreement. See     
"Selling Stockholders."                                                         

   The methods by which the Shares may be sold or distributed include, without
limitation, (i) a block trade (which may involve crosses) in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may position and 
resell a portion of the block as principal to facilitate the transaction, (ii)  
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus, (iii) exchange distributions and/or
secondary distributions in accordance with the rules of the New York Stock      
Exchange, (iv) ordinary brokerage transactions and transactions in which the    
broker solicits purchasers, (v) pro rata distributions as part of the           
liquidation and winding up of the affairs of the Selling Stockholders, and (vi) 
privately negotiated transactions. The Selling Stockholders may from time to    
time deliver all or a portion of the Shares to cover a short sale or sales or   
upon the exercise, settlement or closing of a call equivalent position or a put 
equivalent position. The Shares may be sold from time to time at varying prices 
determined at the time of sale or at negotiated prices.                         

At the time a particular offer is made, a Prospectus Supplement, if     
required, will be distributed that sets forth the name or names of agents,      
broker-dealers or underwriters, any commissions and other terms                 

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constituting compensation and any other required information. In effecting      
sales, broker-dealers engaged by the Selling Stockholders and/or the purchasers 
of the Shares may arrange for other broker-dealers to participate.              
Broker-dealers will receive commissions, concessions or discounts from the      
Selling Stockholders and/or the purchasers of the Shares in amounts to be       
negotiated prior to the sale. Sales will be made only through broker-dealers    
registered as such in a subject jurisdiction or in transactions exempt from such
registration. As of the date of this Prospectus, there are no selling           
arrangements between the Selling Stockholders and any broker or dealer.         

    In offering the Shares, the Selling Stockholders and any brokers, dealers or
agents who participate in a sale of the Shares by the Selling Stockholders may  
be considered "underwriters" within the meaning of Section 2(11) of the 1933    
Act, and any profits realized by the Selling Stockholders and the compensation  
of any broker/dealers may be deemed to be underwriting discounts and            
commissions.                                                                    

As required by the Agreement, the Company has filed the Registration    
Statement, of which this Prospectus forms a part, with respect to the sale of   
the Shares. The Company has agreed to keep the Registration Statement effective 
on a continuous basis, subject to certain exceptions, for so long as            
Rainwater-Magellan and its affiliates collectively own more than 1,500,000 of   
the Shares and the Underlying Warrant Shares.                                   

Shares not sold pursuant to the Registration Statement of which this    
Prospectus is a part may be subject to certain restrictions under the 1933 Act  
and could be sold, if at all, only pursuant to Rule 144 under the 1933 Act or   
another exemption from the registration requirements of the 1933 Act. In        
general, under Rule 144, a person (or persons whose Shares are aggregated) who  
has satisfied a one-year holding period may, under certain circumstances, sell  
within any three-month period a number of Shares which does not exceed the      
greater of one percent of the Company's outstanding Common Stock or the average 
weekly reported trading volume of the Company's Common Stock during the four    
calendar weeks prior to such sale. Rule 144 also permits, under certain         
circumstances, the sale of Shares by a person who is not an affiliate of the    
Company and who has satisfied a two-year holding period without any volume      
limitation. Therefore, both during and after the effectiveness of the           
Registration Statement, sales of the Shares may be made by the Selling          
Stockholders pursuant to Rule 144.                                              

    The Company will not receive any of the proceeds from the sale of the Shares
by the Selling Stockholders. The Company will bear the costs of registering the 
Shares under the 1933 Act, including the registration fee under the 1933 Act,   
its legal and accounting fees and any printing fees. The Selling Stockholders   
will bear the cost of underwriting commissions and/or discounts, if any, and    
selling commissions.                                                            

  Pursuant to the terms of the Agreement, the Company and Rainwater-Magellan
have agreed to indemnify each other and certain other related parties for       
certain liabilities, including liabilities under the 1933 Act, in connection    
with the registration of the Shares. In addition, underwriters, brokers, dealers
or agents may be entitled, under agreements with the Company, to indemnification
against and contribution toward certain civil liabilities, including liabilities
under the 1933 Act.                                                             

LEGAL MATTERS 

    The legality of the Shares is being passed upon for the Selling Stockholders
by King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303.               

EXPERTS 

    The audited consolidated financial statements and schedule of the Company as
of September 30, 1996 and 1997 and for each of the three years in the period    
ended September 30, 1997, included in the Company's Annual Report on Form 10-K  
for the year ended September 30, 1997 and incorporated by reference in this     
Prospectus and elsewhere in this Registration Statement have been audited by    
Arthur                                                                          

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Andersen LLP, independent public accountants, as indicated in their report with 
respect thereto, and are incorporated by reference herein in reliance upon the  
authority of said firm as experts in giving said report.                        

   The consolidated financial statements of Merit as of September 30, 1996 and
1997 and for each of the three years in the period ended September 30, 1997,    
included in the Company's Current Report on Form 8-K/A, which was filed April 3,
1998 and incorporated by reference in this Prospectus and elsewhere in this     
Registration Statement have been audited by Deloitte & Touche LLP, independent  
auditors, as stated in their report with respect thereto which report expresses 
an unqualified opinion and includes an explanatory paragraph which refers to the
change in the method of accounting for deferred contract start-up costs related 
to new contracts or expansion of existing contracts and are incorporated by     
reference herein in reliance upon the report of such firm given upon their      
authority as experts in accounting and auditing.                                

The audited consolidated financial statements and schedule of CBHS as of
September 30, 1997 and for the 106 days ended September 30, 1997, included in   
the Company's Annual Report on Form 10-K for the year ended September 30, 1997  
and incorporated by reference in this Prospectus and elsewhere in this          
Registration Statement, have been audited by Arthur Andersen LLP, independent   
public accountants, as indicated in their report with respect thereto, and are  
incorporated by reference herein in reliance upon the authority of said firm as 
experts in giving said report.                                                  

    The audited consolidated financial statements of HAI as of December 31, 1995
and 1996 and for each of the years in the two year period ended December 31,    
1996, included in the Company's Current Report on Form 8-K, which was filed on  
December 17, 1997, have been incorporated by reference herein and in this       
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,    
independent certified public accountants, incorporated by reference herein and  
upon the authority of said firm as experts in accounting and auditing.          

 Future consolidated financial statements and schedules of Magellan Health
Services, Inc. and subsidiaries and Charter Behavioral Health Systems, LLC and  
the reports thereon of Arthur Andersen LLP also will be incorporated by         
reference in this Registration Statement of which this Prospectus is a part in  
reliance upon the authority of said firm as experts in giving said reports to   
the extent said firm has audited those financial statements and consented to the
use of their reports thereon.                                                   

24

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    NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS        
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY MAGELLAN OR THE SELLING STOCKHOLDERS.  
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN    
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH  
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS 
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE   
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME 
SUBSEQUENT TO THE DATE HEREOF.                                                  

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

TABLE OF CONTENTS 

                                                                [Download Table]

                                                                            PAGE
                                                                            ----
                                                                                

Available Information.....................................................    2 

Incorporation of Certain Documents by Reference...........................    3 

Summary...................................................................    4 

Risk Factors..............................................................    9 

Use of Proceeds...........................................................   20 

Selling Stockholders......................................................   21 

Plan of Distribution......................................................   22 

Legal Matters.............................................................   23 

Experts...................................................................   23 

2,457,278 SHARES

MAGELLAN HEALTH 
SERVICES, INC.

COMMON STOCK

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

PROSPECTUS

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

MAY   , 1998

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PART II 

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION                            

                                                        [Enlarge/Download Table]
                                                                                           
Securities and Exchange Commission Registration Fee............................ $31,180.34 
Legal Fees and Expenses........................................................  20,000.00 
Accounting Fees and Expenses...................................................  19,000.00 
Printing.......................................................................  25,000.00 
Miscellaneous..................................................................   3,189.66 
                                                                                ---------- 
Total.......................................................................... $100,000.00
                                                                                ---------- 
                                                                                ---------- 

All of the above items, except for the registration fee, are estimates. 
Although the Selling Stockholders will not bear any of the expenses set forth   
above, the Selling Stockholders will bear the cost of underwriting commissions  
and/or discounts, if any, and selling commissions.                              

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS                              

  The Company is a Delaware corporation. Section 145 of the Delaware General
Corporation Law (the "DGCL") provides that a Delaware corporation has the power 
to indemnify its officers and directors in certain circumstances.               

Subsection (a) of Section 145 of the DGCL empowers a corporation to     
indemnify any director or officer, or former director or officer, who was or is 
a party or is threatened to be made a party to any threatened, pending or       
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by   
reason of his service as director, officer, employee or agent of the            
corporation, or his service, at the corporation's request, as a director,       
officer, employee or agent of another corporation or enterprise, against        
expenses (including attorneys' fees), judgments, fines and amounts paid in      
settlement actually and reasonably incurred in connection with such action, suit
or proceeding provided that such director or officer acted in good faith and in 
a manner reasonably believed to be in or not opposed to the best interests of   
the corporation, and, with respect to any criminal action or proceeding,        
provided that such director or officer had no reasonable cause to believe his   
conduct was unlawful.                                                           

Subsection (b) of Section 145 empowers a corporation to indemnify any   
director or officer, or former director or officer, who was or is a party or is 
threatened to be made a party to any threatened, pending or completed action or 
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth    
above, against expenses (including attorneys' fees) actually and reasonably     
incurred in connection with the defense or settlement of such action or suit    
provided that such director or officer acted in good faith and in a manner he   
reasonably believed to be in or not opposed to the best interests of the        
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such director or officer shall have been adjudged to
be liable to the corporation unless and only to the extent that the Court of    
Chancery or the court in which such action or suit was brought shall determine  
upon application that, despite the adjudication of liability but in view of all 
the circumstances of the case, such director or officer is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.      

  Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) or (b) or in the defense of any claim, issue or  
matter therein, he shall be indemnified against expenses (including attorneys'  
fees) actually and reasonably incurred by him in connection therewith; provided 
that indemnification                                                            

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provided for by Section 145 or granted pursuant thereto shall not be deemed     
exclusive of any other rights to which the indemnified party may be entitled;   
and empowers the corporation to purchase and maintain insurance on behalf of a  
director or officer of the corporation against any liability asserted against   
him or incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against    
such liabilities under Section 145.                                             

Article VII of the By-laws of the Company provide in substance that the 
Company shall indemnify directors and officers against all liability and related
expenses incurred in connection with the affairs of the Company if: (a), in the 
case of action not by or in the right of the Company, the director or officer   
acted in good faith and in a manner he reasonably believed to be in or not      
opposed to the best interests of the Company, and (with respect to a criminal   
proceeding) had no reasonable cause to believe his conduct was unlawful; and    
(b), in the case of actions by or in the right of the Company, the director or  
officer acted in good faith and in a manner he reasonably believed to be in or  
not opposed to the best interests of the Company, provided that no              
indemnification shall be made for a claim as to which the director or officer is
adjudged liable for negligence or misconduct unless (and only to the extent     
that) an appropriate court determines that, in view of all the circumstances,   
such person is fairly and reasonably entitled to indemnity.                     

   In addition, Section 102(b)(7) of the DGCL permits Delaware corporations to
include a provision in their certificates of incorporation eliminating or       
limiting the personal liability of a director to the corporation or its         
stockholders for monetary damages for breach of fiduciary duty as a director,   
provided that such provisions shall not eliminate or limit the liability of a   
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or that       
involve intentional misconduct or a knowing violation of law, (iii) for unlawful
payment of dividends or other unlawful distributions, or (iv) for any           
transactions from which the director derived an improper personal benefit.      
Article Twelfth of the Company's Certificate of Incorporation sets forth such a 
provision.                                                                      

The Company maintains directors' and officers' liability insurance with 
various providers in the aggregate amount of $80 million.                       

    The Selling Stockholders have agreed to indemnify the Company, its directors
and officers (who sign the Registration Statement), and certain controlling     
persons against certain liabilities, including liabilities under the 1933 Act   
subject to such limitations as set forth in the Agreement.                      

   The foregoing summaries are necessarily subject to the complete text of the
statutes, Certificate of Incorporation, Bylaws, insurance policies and          
agreements referred to above and are qualified in their entirety by reference   
thereto.                                                                        

For the undertaking with respect to indemnification, see Item 17.       

ITEM 16. EXHIBITS                                                               

                                                        [Enlarge/Download Table]
                                                                                          
2.1  Stock Purchase Agreement, dated August 5, 1997, between the Company and Aetna        
     Insurance Company of Connecticut, which was filed as Exhibit 2(a) to the Company's   
     Current Report on Form 8-K, which was filed on December 17, 1997, and is incorporated
     herein by reference.                                                                 

2.2  Amendment to Stock Purchase Agreement, dated December 4, 1997, between the Company   
     and Aetna Insurance Company of Connecticut, which was filed as Exhibit 2(c) to the   
     Company's Current Report on Form 8-K, which was filed on December 17, 1997, and is   
     incorporated herein by reference.                                                    

2.3  Asset Purchase Agreement, dated October 16, 1997, among the Company; Allied Health   
     Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida Specialty Network,    
     LTD; Surgical Associates of South Florida, Inc.; Surginet, Inc.; Jacob Nudel, M.D.;  
     David Russin, M.D. and Lawrence Schimmel, M.D., which was filed as Exhibit 2(e) to   
     the Company's Quarterly Report on                                                    

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                                                        [Enlarge/Download Table]
                                                                                           
      Form 10-Q for the quarterly period ended December 31, 1997, and is incorporated      
      herein by reference.                                                                 

 2.4  First Amendment to Asset Purchase Agreement, dated December 5, 1997, among the       
      Company; Allied Health Group, Inc.; Gut Management, Inc.; Sky Management Co.; Florida
      Specialty Network, LTD; Surgical Associates of South Florida, Inc.; Surginet, Inc.;  
      Jacob Nudel, M.D.; David Russin M.D.; and Lawrence Schimmel, M.D., which was filed as
      Exhibit 2(f) to the Company's Quarterly Report on Form 10-Q for the quarterly period 
      ended December 31, 1997, and is incorporated herein by reference.                    

 2.5  Agreement and Plan of Merger, dated October 24, 1997, among the Company, Merit       
      Behavioral Care Corporation and MBC Merger Corporation which was filed as Exhibit    
      2(g) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended   
      December 31, 1997, and is incorporated herein by reference.                          

 2.6  Purchase Agreement, dated March 3, 1998, between the Company, Charter Behavioral     
      Corporation, Charter Behavioral Health Systems,Inc., Green Spring Health Services,   
      Inc., Advantage Behavioral Systems, Inc. and Charter Behavioral Health Systems, LLC  
      which was filed as Exhibit 2(f) to the Company's Registration Statement on Form S-4  
      (No. 333-49335) filed April 3, 1998, and is incorporated herein by reference.        

 2.7  Equity Purchase Agreement, dated March 3, 1998, between the Company, Charter         
      Behavioral Health Systems, Inc. and Crescent Operating, Inc. which was filed as      
      Exhibit 2(g) to the Company's Registration Statement on Form S-4 (No. 333-49335)     
      filed April 3, 1998, and is incorporated herein by reference.                        

 2.8  Support Agreement, dated March 3, 1998, between the Company and Crescent Operating,  
      Inc. which was filed as Exhibit 2(h) to the Company's Registration Statement on Form 
      S-4 (No. 333-49335) filed April 3, 1998, and is incorporated herein by reference.    

 2.9  Master Service Agreement, dated August 5, 1997, between the Company, Aetna U.S.      
      Healthcare, Inc. and Human Affairs International, Incorporated, which was filed as   
      Exhibit 2(b) to the Company's Current Report on Form 8-K, which was filed on December
      17, 1997, and is incorporated herein by reference.                                   

2.10  First Amendment to Master Services Agreement, dated December 4, 1997, between the    
      Company, Aetna U.S. Healthcare, Inc. and Human Affairs International, Incorporated,  
      which was filed as Exhibit 2(d) to the Company's Current Report on Form 8-K, which   
      was filed on December 17, 1997, and is incorporated herein by reference.             

2.11  Real Estate Purchase and Sale Agreement, dated January 29, 1997, between the Company 
      and Crescent Real Estate Equities Limited Partnership, which was filed as Exhibit    
      2(a) to the Company's Current Report on Form 8-K which was filed on April 23, 1997,  
      and is incorporated herein by reference.                                             

2.12  Amendment No. 1, dated February 28, 1997, to the Real Estate Purchase and Sale       
      Agreement, dated January 29, 1997, between the Company and Crescent Real Estate      
      Equities Limited Partnership, which was filed as Exhibit 2(b) to the Company's       
      Current Report on Form 8-K filed on April 23, 1997, and is incorporated herein by    
      reference.                                                                           

2.13  Amendment No. 2, dated May 29, 1997, to the Real Estate Purchase and Sale Agreement, 
      dated January 29, 1997, between the Company and Crescent Real Estate Equities Limited
      Partnership, which was filed as Exhibit 2(c) to the Company's Current Report on Form 
      8-K filed on June 30, 1997, and is incorporated herein by reference.                 

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                                                        [Enlarge/Download Table]
                                                                                           
2.14  Contribution Agreement, dated June 16, 1997, between the Company and Crescent        
      Operating, Inc., which was filed as Exhibit 2(d) to the Company's Current Report on  
      Form 8-K which was filed on June 30, 1997, and is incorporated herein by reference.  

2.15  Stockholders' Agreement, dated December 13, 1995, among Green Spring Health Services,
      Inc., Blue Cross and Blue Shield of New Jersey, Inc., Health Care Service            
      Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc. and the     
      Company, which was filed as Exhibit 4(d) to the Company's Quarterly Report on Form   
      10-Q for the quarterly period ended December 31, 1995, and is incorporated herein by 
      reference.                                                                           

2.16  First Amendment to Stockholders' Agreement, dated February 28, 1997, among Green     
      Spring Health Services, Inc., Blue Cross and Blue Shield of New Jersey, Inc., Health 
      Care Service Corporation, Independence Blue Cross, Pierce County Medical Bureau, Inc.
      and the Company, which was filed as Exhibit 10(af) to the Company's Annual Report on 
      Form 10-K for the year ended September 30, 1997, and is incorporated herein by       
      reference.                                                                           

2.17  Exchange Agreement, dated December 13, 1995, among Blue Cross and Blue Shield of New 
      Jersey, Inc., Health Care Service Corporation, Independence Blue Cross, Pierce County
      Medical Bureau, Inc. and the Company, which was filed as Exhibit 4(e) to the         
      Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31,  
      1995, and is incorporated herein by reference.                                       

 4.1  Restated Certificate of Incorporation of the Company, as filed in Delaware on October
      16, 1992, which was filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K
      for the year ended September 30, 1992, and is incorporated herein by reference.      

 4.2  Bylaws of the Company, as amended, effective May 19, 1995, which was filed as Exhibit
      3(a) to the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended   
      June 30, 1995, and is incorporated herein by reference.                              

 4.3  Certificate of Ownership and Merger merging Magellan Health Services, Inc. (a        
      Delaware corporation) into Charter Medical Corporation (a Delaware corporation), as  
      filed in Delaware on December 21, 1995, which was filed as Exhibit 3(c) to the       
      Company's Annual Report on Form 10-K for the year ended September 30, 1995, and is   
      incorporated herein by reference.                                                    

 4.4  Stock and Warrant Purchase Agreement, dated December 22, 1995, between the Company   
      and Richard E. Rainwater, which was filed as Exhibit 4(f) to the Company's Quarterly 
      Report on Form 10-Q for the quarterly period ended December 31, 1995, and is         
      incorporated herein by reference.                                                    

 4.5  Amendment No. 1 to Stock and Warrant Purchase Agreement, dated January 25, 1996,     
      between the Company and Rainwater-Magellan Holdings, L.P. (previously filed).        

 5.1  Opinion of King & Spalding as to the legality of the Common Stock to be registered.  

23.1  Consent of King & Spalding (included in Exhibit 5.1).                                

23.2  Consent of Arthur Andersen LLP.                                                      

23.3  Consent of Deloitte & Touche LLP.                                                    

23.4  Consent of KPMG Peat Marwick LLP.                                                    

24.1  Powers of Attorney (previously filed).                                               

ITEM 17. UNDERTAKINGS                                                           

The undersigned registrant hereby undertakes:                           

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 (1) To file, during any period in which offers or sales are being made of
securities registered hereby, a post-effective amendment to this Registration   
Statement:                                                                      

      (i) To include any prospectus required by Section 10(a)(3) of the 1933
Act;                                                                    

       (ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent        
  post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the      
Registration Statement. Notwithstanding the foregoing, any increase or  
decrease in volume of securities offered (if the total dollar value of  
securities offered would not exceed that which was registered) and any  
  deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission    
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and 
price represent no more than 20 percent change in the maximum aggregate 
  offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.                                   

   (iii) To include any material information with respect to the plan of
  distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.      

        Provided, however, that the undertakings set forth in paragraphs (i) and
(ii) above do not apply if the information required to be included in a 
post-effective amendment by those paragraphs is contained in periodic   
    reports filed with or furnished to the Commission by the registrant pursuant
    to Section 13 or Section 15(d) of the Exchange Act, that are incorporated by
reference in this Registration Statement.                               

  (2) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration     
statement relating to the securities offered therein, and the offering of such  
securities at that time shall be deemed to be the initial bona fide offering    
thereof.                                                                        

  (3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.                                                                       

The undersigned registrant hereby undertakes that, for purposes of      
determining any liability under the 1933 Act, each filing of the registrant's   
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act    
that is incorporated by reference in this Registration Statement shall be deemed
to be a new registration statement relating to the securities offered therein,  
and the offering of such securities at that time shall be deemed to be the      
initial bona fide offering thereof.                                             

    Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the registrant, the 
registrant has been advised that in the opinion of the Commission such          
indemnification is against public policy as expressed in the 1933 Act and is,   
therefore, unenforceable. In the event that a claim for indemnification against 
such liabilities (other than the payment by the registrant of expenses incurred 
or paid by a director, officer or controlling person of the registrant in the   
successful defense of any action, suit or proceeding) is asserted by such       
director, officer or controlling persons of the registrant in connection with   
the securities being registered, the registrant will, unless in the opinion of  
its counsel the matter has been settled by controlling precedent, submit to a   
court of appropriate jurisdiction the question of whether such indemnification  
by it is against public policy as expressed in the 1933 Act and will be governed
by the final adjudication of such issue.                                        

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SIGNATURES

    Pursuant to the requirements of the Securities Act, the registrant certifies
that it has reasonable grounds to believe that it meets all the requirements for
filing on Form S-3 and has duly caused this Post Effective Amendment No. 1 to   
Registration Statement to be signed on its behalf by the undersigned, thereunto 
duly authorized, in the City of Atlanta, State of Georgia, on April 30, 1998.   

                                                                [Download Table]
                                              
MAGELLAN HEALTH SERVICES, INC.                

By:             /s/ HOWARD A. MCLURE          
     -----------------------------------------
                  Howard A. McLure            
             Senior Vice President and        
                     Controller               

Pursuant to the requirements of the Securities Act of 1933, this Post   
Effective Amendment No. 1 to Registration Statement has been signed by the      
following persons on April 30, 1998 in the capacities indicated.                

                                                                [Download Table]

             NAME                         TITLE                    DATE        
------------------------------  --------------------------  -------------------

                                                                               
     /s/ HENRY T. HARBIN                                                       
------------------------------  President, Chief Executive    April 30, 1998   
       Henry T. Harbin             Officer and Director                        

              *                  Executive Vice President                      
------------------------------     and Chief Financial        April 30, 1998   
      Craig L. McKnight                  Officer                               

     /s/ HOWARD A. MCLURE       Senior Vice President and                      
------------------------------          Controller            April 30, 1998   
       Howard A. McLure         (Chief Accounting Officer)                     

              *                                                                
------------------------------           Director             April 30, 1998   
        Edwin M. Banks                                                         

              *                                                                
------------------------------           Director             April 30, 1998   
     G. Fred DiBona, Jr.                                                       

              *                                                                
------------------------------           Director             April 30, 1998   
     Andre C. Dimitriadis                                                      

              *                                                                
------------------------------           Director             April 30, 1998   
      A.D. Frazier, Jr.                                                        

              *                                                                
------------------------------           Director             April 30, 1998   
      Raymond H. Kiefer                                                        

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                                                                [Download Table]

             NAME                         TITLE                    DATE        
------------------------------  --------------------------  -------------------

                                                                               
              *                                                                
------------------------------           Director             April 30, 1998   
      Gerald L. McManis                                                        

------------------------------           Director             April 30, 1998   
      Daniel S. Messina                                                        

     /s/ ROBERT W. MILLER                                                      
------------------------------       Chairman of the          April 30, 1998   
       Robert W. Miller             Board of Directors                         

              *                                                                
------------------------------           Director             April 30, 1998   
        Darla D. Moore                                                         

------------------------------           Director             April   , 1998   
    Jeffrey A. Sonnenfeld                                                      

* The undersigned Attorney-in-Fact, by signing his name below, does hereby sign 
this Post Effective Amendment No. 1 to the Registration Statement on behalf of  
the indicated officers and directors of the Registrant pursuant to a Power of   
Attorney executed by such persons and filed with the Securities and Exchange    
Commission.                                                                     

                                                                [Download Table]
                                                                          
                     /s/ HOWARD A. MCLURE                                 
By:        ----------------------------------------   Date: April 30, 1998
                       Howard A. McLure                                   

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Dates Referenced Herein   and   Documents Incorporated by Reference

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		4/23/97		29					10-K405/A,  8-K
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		12/31/96		25					10-Q
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		3/31/96		23					10-Q,  10-Q/A
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