8-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

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

Date of report (Date of earliest event reported):

April 30, 2014

MAGELLAN HEALTH, INC.

(Exact Name of Registrant as Specified in Charter)

DELAWARE	1-6639	58-1076937
(State or Other Jurisdiction	(Commission File	(IRS Employer
of Incorporation)	Number)	Identification No.)

55 NOD ROAD
AVON, CONNECTICUT	06001
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (860) 507-1900

N/A

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01. Completion of Acquisition or Disposition of Assets.

On April 30, 2014, Magellan Health, Inc. (“Magellan”) filed a Current Report on Form 8-K (the “Original Filing”) in connection with the completion on April 30, 2014 of the acquisition of CDMI, LLC (“CDMI”).  Pursuant to the Purchase Agreement (the “Purchase Agreement”), dated as of March 31, 2014, as amended by Amendment No. 1 to the Purchase Agreement, dated April 30, 2014, by and among Magellan, CDMI, George N. Petrovas, Susan C. Petrovas and The Susan C. Petrovas Qualified Annuity Trust — 2011, as holders of the outstanding equity interests in CDMI (collectively, the “Sellers”) and George N. Petrovas in his capacity as the Seller Representative.  As a result of the Acquisition, CDMI will operate as a wholly-owned subsidiary of Magellan Rx Management, Inc.

This Current Report on Form 8-K/A amends the Original Filing to include the financial statements and pro forma information required by Item 9.01 of Form 8-K.  Except for the filing of such financial statements and pro forma information, this Form 8-K/A does not modify or update other disclosures in, or exhibits to, the Original Filing.

Item 9.01. Financial Statements, Pro Forma Financial Information and Exhibits

(a)Financial Statements of Business Acquired.

The audited balance sheet of CDMI, LLC as of December 31, 2013, and the related statement of income, statement of changes in members’ equity and statement of cash flows for the year ended December, 31, 2013, together with the report thereon of Mayer Hoffman McCann P.C., are attached hereto as Exhibit 99.1.

(b)Pro Forma Financial Information.

The unaudited pro forma condensed combined balance sheet as of March 31, 2014 and unaudited pro forma condensed combined statements of comprehensive income for the three months ended March 31, 2014 and the year ended December 31, 2013 are attached hereto as Exhibit 99.2.

(d)Exhibits.

Exhibit Number	Description
23.1	Consent of Mayer Hoffman McCann P.C.
99.1	Audited balance sheet of CDMI, LLC as of December 31, 2013, and the related statement of income, statement of changes in members’ equity and statement of cash flows for the year ended December 31, 2013, together with the report thereon of Mayer Hoffman McCann P.C.
99.2	Unaudited pro forma condensed combined balance sheet as of March 31, 2014 and unaudited pro forma condensed combined statements of comprehensive income for the three months ended March 31, 2014 and the year ended December 31, 2013.

2

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

MAGELLAN HEALTH, INC.

Date: July 7, 2014	By:	/s/ Jonathan N. Rubin
		Name: Jonathan N. Rubin
		Title: Executive Vice President and Chief Financial Officer

3

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the inclusion in this Current Report on Form 8-K/A and the incorporation by reference in the Registration Statements on Form S-8 (No. 333-196497, No. 333-174315, No. 333-174314, No. 333-151059, No. 333-141056, No. 333-134202, No. 333-134201, No. 333-134199, and No. 333-123222), of Magellan Health, Inc. of our report dated June 20, 2014, with respect to the financial statements of CDMI, LLC as of and for the year ended December 31, 2013, appearing in this Form 8-K/A.

/s/ Mayer Hoffman McCann P.C.

Providence, Rhode Island

July 7, 2014

EX-99.1

Exhibit 99.1

Financial Statements

CDMI, LLC

December 31, 2013

CDMI, LLC

Financial Statements

Table of Contents

Financial Statements:
Independent Auditors’ Report	1
Balance Sheet	2
Statement of Income	3
Statement of Changes in Members’ Equity	4
Statement of Cash Flows	5
Notes to Financial Statements	6 – 11

Independent Auditors’ Report

To the Members

CDMI, LLC

Newport, Rhode Island

We have audited the accompanying financial statements of CDMI, LLC (the “Company”), which comprise the balance sheet as of December 31, 2013, and the related statements of income, changes in members’ equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CDMI, LLC as of December 31, 2013, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ Mayer Hoffman McCann P.C.

June 20, 2014

Providence, Rhode Island

CDMI, LLC

Balance Sheet

December 31, 2013

Assets
Current assets:
Cash	$	4,691,539
Accounts receivable, net of allowance of $88,840	48,904,959
Prepaid expenses	52,900
Total current assets	53,649,398
Property and equipment, net	564,446
Security deposit	9,000
Total assets	$	54,222,844
Liabilities and Members’ Equity
Current liabilities:
Rebates payable	$	30,396,695
Accounts payable	266,438
Accrued expenses	184,810
Deferred revenue	300,000
Current portion of deferred rent	8,018
Total current liabilities	31,155,961
Deferred rent	38,454
Total liabilities	31,194,415
Total members’ equity	23,028,429
Total liabilities and members’ equity	$	54,222,844

See accompanying notes to the financial statements.

2

CDMI, LLC

Statement of Income

Year Ended December 31, 2013

Revenue
Rebate income	$	28,031,321
Clinical initiatives income	12,936,635
Managed market income	1,689,590
Total revenue	42,657,546
General and administrative expenses	(6,678,637		)
Net income	$	35,978,909

See accompanying notes to the financial statements.

3

CDMI, LLC

Statement of Changes in Members’ Equity

Year Ended December 31, 2013

Balance at January 1, 2013	$	15,341,851
Member distributions	(28,292,331		)
Net income	35,978,909
Balance at December 31, 2013	$	23,028,429

See accompanying notes to the financial statements.

4

CDMI, LLC

Statement of Cash Flows

Year Ended December 31, 2013

Cash flows from operating activities:
Net income	$	35,978,909
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization	202,377
Deferred rent	21,982
Changes in operating assets and liabilities:
Accounts receivable	(20,434,801		)
Prepaid expenses and other assets	(38,675		)
Rebates payable	15,334,128
Accounts payable	213,077
Accrued expenses	89,895
Deferred revenue	150,000
Total adjustments	(4,462,017		)
Net cash provided by operating activities	31,516,892
Cash flows from investing activities:
Purchases of property and equipment	(192,767		)
Cash flows from financing activities:
Member distributions	(28,292,331		)
Net increase in cash	3,031,794
Cash, beginning	1,659,745
Cash, ending	$	4,691,539

See accompanying notes to the financial statements.

5

CDMI, LLC

Notes to Financial Statements

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

CDMI, LLC (the “Company” or “CDMI”), was organized in the State of Rhode Island as a limited liability company on July 1, 2009.  The Company was originally founded under the name Pharma Promo LLC in November 2005; in July 2009 the Company’s name was officially amended to CDMI, LLC.

CDMI is a premier Medical and Pharmacy Benefit Management company that manages roughly 35 health plans representing approximately 45 million lives as of December 31, 2013.  CDMI supports its’ clients (both health plans and manufacturers) through comprehensive and integrated offerings, providing innovative solutions and services. CDMI supports its clients with rebate contracting management and formulary compliance to improve preferred product utilization and offers a variety of comprehensive clinical programs managed by a certified clinical team.

A summary of the accounting policies consistently applied in the financial statements follows:

Financial Statement Presentation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include the allowance for doubtful accounts for accounts receivable, useful lives of property and equipment and accrued expenses.  Actual results could differ from those estimates.

Cash

The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits.  The Company monitors its exposure associated with cash balances and has not experienced any losses in such accounts.

Revenue Recognition and Accounts Receivable

General

The Company has four sources of revenue: (1) rebates generated from contracts with pharmaceutical manufacturers, a portion of which are remitted to the Company’s health plan customers; this revenue is typically driven by formulary compliance and/or market share position; (2) clinical initiatives performed for health plans under contractual arrangements or statements of work; (3) market research as defined in negotiated contracts or statements of work; and (4) advertising revenue generated from the publication of a tri-annual magazine.  Market research revenue and advertising sales are reported in Managed Market Income on the income statement.  Revenue is recognized when persuasive evidence of an arrangement exists, the services have been provided, pricing is fixed and determinable and collection is reasonably assured.

6

CDMI, LLC

Notes to Financial Statements

Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)

Revenue Recognition and Accounts Receivable (Continued)

Rebate Revenue

The Company recognizes revenue for rebate transactions in the period in which the related prescription is dispensed and meets the eligible utilization criteria as defined by the contract with the Company’s pharmaceutical customers and as evidenced by the utilization data that is provided by the health plans.  Utilization data is generally available subsequent to the end of a fiscal quarter.  At times, estimates are made to account for utilization adjustments that are made upon final reconciliation of the related data among the health plans and pharmaceutical customers.  These estimates are based on management’s assessment of the related contracts and historical experience.

The rebate revenue that is earned is based on various metrics and utilization data such as wholesale acquisition cost and market share.  In all cases, persuasive evidence of the arrangement exists, the rebate percent is fixed or determinable and collection is reasonably assured.  The Company does not record as rebate revenue any rebates that are contractually obligated to be passed through to its health plan customers; as such, rebate revenue is recorded on a net basis.

Clinical Initiatives, Market Research and Advertising Revenue

The Company generally recognizes non-rebate revenue under the completed performance method.  Under the completed performance method, revenue is not recognized before the final act is executed, as the final act is significant to the arrangement as a whole.  The customer does not receive any value from the service until the final act is completed.

In some cases, the Company will recognize revenue before the final act is completed, but only when: (1) the performance milestone payments are specifically called out in the contract; (2) specific services are easily separated from the final act; and (3) the delivered items have stand-alone value to the customer.

The Company allocates a portion of net rebate revenues to clinical initiatives income for health plans where clinical support is provided.  While this does not affect the overall reporting of revenue, it allows the Company to more accurately evaluate the financial return of its clinical initiatives. The Company has estimated that for plans where they provide these services, 50% of the net revenue relates to clinical support.

Accounts receivable allowances are maintained for the Company’s estimated differences in payments from its customers compared to the amount invoiced and reported as reductions of rebate revenue.  As a common practice, pharmaceutical manufacturers will deduct prescriptions that have been submitted for rebates due to various exclusions, and in turn, will pay an amount that is less than invoiced.  The Company establishes its reserve based upon historical experience, and current trends.  These deductions have historically been less than 1% of total rebates invoiced.  Accounts are considered past due based on payment terms.  The Company writes off accounts receivable only after all reasonable collection efforts have been exhausted.  Since the Company’s inception, there has not been an instance where the pharmaceutical manufacturer has not paid the amounts due under the provisions of the contracts.  The allowance for these deductions was $88,840 at December 31, 2013.

7

CDMI, LLC

Notes to Financial Statements

Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)

Deferred Revenue

Deferred revenue represents advance payments for revenue for advertisements that will appear in the Company’s 2014 magazines and deferred market research revenue for services to be provided during 2014.

Advertising Costs

Advertising costs are expensed as incurred and totaled approximately $290,000 for the year ended December 31, 2013.

Property and Equipment

Property and equipment are recorded at cost and are depreciated/amortized over the estimated useful lives of the related assets. Expenditures for repairs and maintenance are expensed as incurred.  Depreciation/amortization is computed on the straight-line method.  Estimated useful lives are as follows:

Assets	Years
Computer and office equipment	3
Furniture and fixtures	7
Motor vehicles	5
Software	3

Capitalized Software Development Costs

Certain costs of software, developed for internal use, are capitalized during the development stage.  Costs incurred for maintenance and support are charged to expense as incurred.  The capitalized costs of computer software developed or obtained for internal use are amortized on a straight-line basis unless another systematic and rational basis is more representative of the software’s use, not to exceed five years.  The Company had capitalized software development in process of $103,029 at December 31, 2013.

Deferred Rent

The Company records rent expense on a straight-line basis over the term of the lease.  The difference between the lease payments and the related expense for the year is recorded as deferred rent.

Income Taxes

The Company is treated as a manager-managed limited liability company for Federal and state income tax purposes. Consequently, members are taxed individually on their proportionate share of the Company’s income or losses. The Company’s net income or loss is allocated among the members in accordance with the Company’s operating agreement. Accordingly, the financial statements do not reflect a provision for income taxes.

8

CDMI, LLC

Notes to Financial Statements

Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)

Uncertain Tax Positions

The Company accounts for the effect of any uncertain tax positions based on a “more likely than not” threshold to the recognition of the tax positions being sustained based on the technical merits of the position under scrutiny by the applicable taxing authority.  If a tax position or positions are deemed to result in uncertainties of those positions, the unrecognized tax benefit is estimated based on a “cumulative probability assessment” that aggregates the estimated tax liability for all uncertain tax positions. Interest and penalties assessed, if any, are accrued as income tax expense.

The Company has identified its tax status as a limited liability company electing to be taxed as a pass through entity as a tax position; however, the Company has determined that such tax position does not result in an uncertainty requiring recognition. In addition to its tax status, the Company has other tax positions that have been determined to be highly certain and, therefore, no reserve for unrecognized tax liabilities is deemed necessary. The Company is not currently under examination by any taxing jurisdiction.  Its Federal and state partnership returns are generally open for examination for 3 years from the date filed.

Fair Value Measurements

The Company measures fair value in accordance with Accounting Standards Codification (“ASC”) No. 820, Fair Value Measurements and Disclosures, which provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The carrying amounts reported in the Company’s balance sheet for cash, accounts receivable, rebates payable, accounts payable and accrued expenses approximate fair value due to the short-term maturity of those financial instruments. The fair value of such instruments has been derived, in part, by management’s assumptions, utilizing Level 2 inputs.

Subsequent Events

The Company has evaluated subsequent events through June 20, 2014, the date that the financial statements were available to be issued and has concluded that, other than the matters discussed in Note 6, there were no events that require adjustment to or disclosure in the financial statements.

9

CDMI, LLC

Notes to Financial Statements

Note 2 - Property and Equipment

Property and equipment consist of the following at December 31, 2013:

Furniture and fixtures	$	343,012
Motor vehicles	163,581
Computer and office equipment	238,160
Software	229,836
Subtotal	974,589
Accumulated depreciation and amortization	(410,143		)
Property and equipment, net	$	564,446

Note 3 - Members’ Equity

In accordance with the Company’s Operating Agreement (“the Operating Agreement”), the Company has two classes of members — voting and non-voting members.  Additional members may be admitted based on approval of the voting members. The following is a summary of the membership units issued and outstanding and the economic rights of each class of units:

Voting and Non-Voting Members

Voting members hold 0.25% of the member interests and non-voting members hold 99.75% of the member interests at December 31, 2013.

Allocation of Profit and Loss and Distributions

Profits and losses and distributions are allocated to the members in proportion to their member interests.

Note 4 - Commitments and Contingencies

Operating Leases

The Company leases certain copiers and office space under various non-cancelable operating leases.  The leases expire at various times through June 2017 and require monthly payments varying from $333 to $10,600.  Rent expense for the year ended December 31, 2013 was $140,747.

10

CDMI, LLC

Notes to Financial Statements

Note 4 - Commitments and Contingencies (Continued)

Operating Leases (Continued)

Future minimum rental payments under the leases are as follows:

Years	Amount
2014	$	121,000
2015	125,800
2016	129,400
2017	65,700
Total	$	441,900

Contingencies

The Company is involved in legal proceedings generally incidental to its businesses. While it is not feasible to predict or determine the outcome of such proceedings, management, under the advice of counsel, believes that they will not result in a materially adverse effect on the Company’s financial position, results of operations or liquidity based on the nature of the claims.

Note 5 - Concentrations

For the year ended December 31, 2013, two health plan customers accounted for 62% of the Company’s revenues. At December 31, 2013, four pharmaceutical manufacturers accounted for 69% of the Company’s accounts receivable balance. At December 31, 2013, three health plans accounted for 71% of the Company’s rebates payable.

Note 6 - Subsequent Events

On April 30, 2014, Magellan Health Services acquired all of the outstanding equity interests of the Company.  Under the terms of the Agreement, the base purchase price is $205 million plus potential contingent consideration up to a maximum aggregate amount of $165 million primarily depending on future performance.

During 2013, one of the Company’s health plans terminated its contract with the Company.  The Company initially disputed this termination.  Subsequent to year end, the Company and the health plan settled this matter, which resulted in the Company receiving a payment in the amount of $1,000,000.  This gain will be reported during 2014. This health plan accounted for 47% of the total revenue in 2013.

11

EX-99.2

Exhibit 99.2

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION INTRODUCTORY NOTE

On April 30, 2014, Magellan Health, Inc., a Delaware corporation (“Magellan”), consummated and closed (the “Closing”) the previously announced acquisition of CDMI, LLC, a Rhode Island limited liability company (“CDMI”) (such acquisition, the “Acquisition”), pursuant to the Purchase Agreement (the “Purchase Agreement”), dated as of March 31, 2014, as amended by Amendment No.1 to the Purchase Agreement (the “Amendment”), dated April 30, 2014, by and among Magellan, CDMI, George N. Petrovas, Susan C. Petrovas and The Susan C. Petrovas Qualified Annuity Trust — 2011, as holders of the outstanding equity interests in CDMI (collectively, the “Sellers”) and George N. Petrovas in his capacity as the Seller Representative.  Magellan recorded the business combination using the purchase method of accounting.  As a result of the Acquisition, CDMI will operate as a wholly-owned subsidiary of Magellan Rx Management, Inc. (“Magellan Rx Management”).

As consideration for the Acquisition, Magellan Rx Management paid $205.0 million in cash (the “Base Price”) for all of the outstanding equity interests in CDMI, subject to working capital adjustments as provided in the Purchase Agreement.  Pursuant to the Purchase Agreement, the Sellers and certain key management of CDMI purchased a total of $80.0 million in Magellan restricted common stock, which will generally vest over a 42-month period, conditioned upon certain employment and performance targets.  In addition to the Base Price, the Purchase Agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million.  The contingent payment provisions provide for (i) cash payments of up to $65.0 million based on the amount of rebates retained in respect of 2015 by CDMI and Magellan’s ICORE specialty pharmacy management business, (ii) cash payments of up to $65.0 million based on the number of CDMI customers that become full service PBM clients of Magellan during 2015 and 2016 and (iii) cash payments of up to $35.0 million based on the gross profit performance of CDMI and ICORE’s rebates business during 2014 and 2015.  Of the $205.0 million paid by Magellan Rx Management at the Closing, $15.0 million was deposited in an escrow account in connection with the Sellers’ indemnification obligations under the Purchase Agreement.  To the extent Magellan’s claims for indemnification do not exceed this amount, the holdback will be released to Sellers on the fifteen-month anniversary of the Closing.

Based in Newport, Rhode Island, CDMI is a provider of a range of clinical consulting programs and negotiates and administers drug rebates for managed care organizations and other customers.  CDMI works with over 30 health plans, and in 2013 had net revenues of approximately $43 million, primarily derived from rebate management.

The purchase price of CDMI was initially reported on a Current Report on Form 8-K dated and filed on April 30, 2014, and is being amended hereby to include the financial statements required by Item 9.01.

The transaction will be accounted for as a purchase of CDMI by Magellan under the purchase method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations. Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets acquired by Magellan in connection with the transaction, based on their fair values as of the completion of the transaction. The excess cost over the net tangible and identifiable intangible assets is allocated to goodwill.

The unaudited pro forma condensed combined financial statements present the purchase of CDMI under the purchase method of accounting.  The unaudited pro forma condensed combined financial statements reflect the preliminary purchase price allocation based on Magellan’s estimate of the fair value of the assets acquired and liabilities assumed. The preliminary purchase allocation is subject to finalization of the valuation of intangible assets, and other assets acquired and liabilities assumed.

The unaudited pro forma condensed combined balance sheet of Magellan gives effect to the transaction as if it occurred on March 31, 2014. The unaudited pro forma condensed combined statements of comprehensive income for the three months ended March 31, 2014 and the year ended December 31, 2013 give effect to the transaction as if it had occurred on January 1, 2013.

The preliminary pro forma acquisition adjustments are based on available information and certain assumptions made by Magellan’s management and may be revised as additional information becomes available. The unaudited pro forma condensed combined financial information is not intended to represent what Magellan’s financial position was or results of operations would have been if the acquisition had occurred on those dates or to project Magellan’s financial position or results of operations for any future period. Since Magellan and CDMI were not under common control or management for any period presented, the unaudited pro forma condensed combined financial results may not be comparable to, or indicative of, future performance.

The pro forma adjustments are based upon information and assumptions available at the time of the filing of this Form 8-K/A and results of the preliminary allocation of the purchase price based on estimates of the fair value of the assets acquired and liabilities assumed. The unaudited pro forma statements do not reflect synergies, if any, expected from the combination of the two entities. The unaudited pro forma condensed combined financial statements and the accompanying notes thereto should be read in conjunction with and are qualified by the historical financial statements and notes thereto of Magellan and CDMI. Magellan’s historical financial statements are included in Magellan’s Annual Report on Form 10-K for the year ended December 31, 2013 and Magellan’s Quarterly Report on Form 10-Q for the three months ended March 31, 2014. The historical financial statements and related notes thereto for CDMI for the year ended December 31, 2013 are attached as Exhibit 99.1 to this Form 8-K/A. The historical financial information of CDMI as of and, for the three months ended March 31, 2014 included in the pro forma condensed combined financial statements has been derived from the underlying accounting records.

There can be no assurance that Magellan will be successful in its efforts to integrate the operations of the companies.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

MARCH 31, 2014

(in thousands)

	Historical					Pro Forma				Pro Forma
	Magellan			CDMI		Adjustments				Combined
ASSETS
Current Assets:
Cash and cash equivalents	$	261,300		$	2,595	$	(125,000	)	(A)	$	138,895
Restricted cash	264,566			—		—				264,566
Accounts receivable, net	202,767			52,994		—				255,761
Short-term investments	181,788			—		—				181,788
Deferred income taxes	37,044			—		—				37,044
Pharmaceutical inventory	47,105			—		—				47,105
Other current assets	62,656			265		—				62,921
Total Current Assets	1,057,226			55,854		(125,000		)		988,080
Property and equipment, net	167,110			519		—				167,629
Restricted long-term investments	27,060			—		—				27,060
Other long-term assets	9,888			9		—				9,897
Goodwill	488,203			—		68,998			(C)	557,201
Other intangible assets, net	68,386			—		84,300			(C)	152,686
Total Assets	$	1,817,873		$	56,382	$	28,298			$	1,902,553
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	35,742		$	34,445	$	—			$	70,187
Accrued liabilities	173,372			235		4,200			(A)	177,807
Medical claims payable	240,046			—		—				240,046
Other medical liabilities	65,288			—		—				65,288
Current maturities of long-term capital lease obligations	3,040			—		—				3,040
Total Current Liabilities	517,488			34,680		4,200				556,368
Long-term capital lease obligations	22,568			—		—				22,568
Deferred income taxes	38,445			—		—				38,445
Tax contingencies	33,593			—		—				33,593
Deferred credits and other long-term liabilities	20,336			—		45,800			(B)	66,136
Total Liabilities	632,430			34,680		50,000				717,110
Redeemable non-controlling interest	9,214			—		—				9,214
Preferred stock	—			—		—				—
Ordinary common stock	476			—		—				476
Multi-Vote common stock	—			—		—				—
Additional paid-in capital	933,274			—		—				933,274
Members’ equity	—			21,702		(21,702		)	(D)	—
Retained earnings	1,126,213			—		—				1,126,213
Accumulated other comprehensive loss	(50		)	—		—				(50		)
Ordinary common stock in treasury, at cost	(883,684		)	—		—				(883,684		)
Total Stockholders’ Equity	1,176,229			21,702		(21,702		)		1,176,229
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity	$	1,817,873		$	56,382	$	28,298			$	1,902,553

See accompanying notes to unaudited pro forma condensed financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2014

(in thousands)

	Historical						Pro Forma				Pro Forma
	Magellan			CDMI			Adjustments				Combined
Net revenue:
Managed care and other	$	829,591		$	8,367		$	—			$	837,958
PBM and dispensing	136,884			—			—				136,884
Total net revenue	966,475			8,367			—				974,842
Cost and expenses:
Cost of care	605,708			—			—				605,708
Cost of goods sold	125,298			—			—				125,298
Direct service costs and other operating expenses	164,722			1,538			7,800			(E)	174,060
Depreciation and amortization	20,229			55			2,700			(C)	22,984
Interest expense	836			—			1,800			(B)	2,636
Interest and other income	(311		)	(1,000		)	50			(F)	(1,261		)
Total costs and expenses	916,482			593			12,350				929,425
Income before income taxes	49,993			7,774			(12,350		)		45,417
Provision for income taxes	25,613			—			(1,850		)	(G)	23,763
Net income	24,380			7,774			(10,500		)		21,654
Non-controlling interest	1,340			—			—				1,340
Net income attributable to Magellan Health, Inc.	25,720			7,774			(10,500		)		22,994
Weighted average number of common shares outstanding - basic	27,370			—			—				27,370
Weighted average number of common shares outstanding - diluted	28,051			—			405			(H)	28,456
Net income per common share attributable to Magellan Health, Inc.:
Basic	$	0.94									$	0.84
Diluted	$	0.92									$	0.81
Other comprehensive income:
Unrealized gains on available-for-sale securities	43			—			—				43
Comprehensive income	24,423			7,774			(10,500		)		21,697
Less: Comprehensive income (loss) attributable to non-controlling interest	(1,340		)	—			—				(1,340		)
Comprehensive income attributable to Magellan Health, Inc.	$	25,763		$	7,774		$	(10,500	)		$	23,037

See accompanying notes to unaudited pro forma condensed financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED DECEMBER 31, 2013

(in thousands)

	Historical					Pro Forma				Pro Forma
	Magellan			CDMI		Adjustments				Combined
Net revenue:
Managed care and other	$	3,063,049		$	42,658	$	—			$	3,105,707
PBM and dispensing	483,268			—		—				483,268
Total net revenue	3,546,317			42,658		—				3,588,975
Cost and expenses:
Cost of care	2,232,976			—		—				2,232,976
Cost of goods sold	455,601			—		—				455,601
Direct service costs and other operating expenses	619,546			6,477		31,000			(E)	657,023
Depreciation and amortization	71,994			202		10,800			(C)	82,996
Interest expense	3,000			—		7,200			(B)	10,200
Interest and other income	(1,985		)	—		200			(F)	(1,785		)
Total costs and expenses	3,381,132			6,679		49,200				3,437,011
Income before income taxes	165,185			35,979		(49,200		)		151,964
Provision for income taxes	39,924			—		(5,400		)	(G)	34,524
Net income	125,261			35,979		(43,800		)		117,440
Weighted average number of common shares outstanding - basic	27,054			—		—				27,054
Weighted average number of common shares outstanding - diluted	27,675			—		156			(H)	27,831
Net income per common share attributable to Magellan Health, Inc.:
Basic	$	4.63								$	4.34
Diluted	$	4.53								$	4.22
Other comprehensive income:
Unrealized losses on available-for-sale securities	(58		)	—		—				(58		)
Comprehensive income	$	125,203		$	35,979	$	(43,800	)		$	117,382

See accompanying notes to unaudited pro forma condensed financial statements.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma adjustments relate to the Acquisition as if it had occurred as of  March 31, 2014 for the unaudited pro forma condensed combined balance sheet, and as of January 1, 2013 for the unaudited pro forma condensed combined statements of comprehensive income. The pro forma  adjustments are based on preliminary estimates that may change as additional information is obtained. Dollar amounts are in thousands, unless otherwise noted.

(A) Purchase Price

The purchase price and related adjustments reflect the cash payment made for the purchase of CDMI, as follows:

Base purchase price	$	205,000
Estimated contingent payments	45,800
Estimated working capital payable	4,200
Cash received for reinvestment in Magellan restricted stock	(80,000		)
Total purchase price	175,000
Less estimated contingent payments	(45,800		)
Less estimated working capital payable	(4,200		)
Net cash paid at closing	$	125,000

The estimated working capital payable represents the difference in CDMI working capital at March 31, 2014 of approximately $21.2 million less the working capital target per the Purchase Agreement of $17.0 million.

(B) Deferred Payments Related to the Acquisition of CDMI

The Purchase Agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million.  This adjustment of $45.8 million represents Magellan’s estimate as of the Closing Date of the discounted present value of the contingent payments that will be earned by the Sellers.  It is estimated that the gross amount of contingent payments is approximately $61.7 million, and that such payments will be made at various dates from Mid 2015 through Mid 2017. 

The discount from the estimated gross potential contingent payments will be recorded as interest expense by Magellan.  Such estimated interest expense is $1.8 million and $7.2 million for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively.

(C) Purchase Price Allocation

The following represents the preliminary allocation of the purchase price to the acquired assets and assumed liabilities of CDMI and is based on March 31, 2014 balances for pro forma purposes only. These amounts differ from the preliminary allocation of purchase price based on the April 30, 2014 closing date balances.

Net tangible assets acquired	$	21,702
Identified intangible assets	84,300
Goodwill	68,998
Total purchase price	$	175,000

The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. A portion of the excess purchase price over tangible net assets acquired has been allocated to identified intangible assets totaling $84.3 million, mainly consisting of customer contracts which are being amortized over 8 years. In addition, the excess of purchase price over tangible net assets and identified intangible assets acquired resulted in $69.0 million of goodwill. All of the excess purchase price over tangible net assets is amortizable for tax purposes, although the Company’s effective rate will not be impacted by the tax amortization.

The pro forma adjustments for amortization expense are estimated to be $2.7 million and $10.8 million for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively.

(D) This adjustment represents the elimination of CDMI’s stockholders’ equity accounts.

(E) This adjustment represents stock compensation expense related to the purchase price of CDMI. A portion of the base purchase price was payable through a reinvestment in the restricted stock of Magellan valued at $80 million.  Of this amount, $20.0 million vests over an 18-month period, and is conditional upon

certain employment and performance targets.  The remaining $60.0 million vests over a 42-month period based upon continuing employment.  The stock compensation expense that would have been recognized for the three months ended March 31, 2014 and the year ended December 31, 2013 is estimated to be approximately $7.8 million and $31.0 million, respectively.

(F) This adjustment represents a reduction in interest income as a result of the reduction of cash balances used to fund the direct purchase of CDMI.

(G) This adjustment represents the effect on income tax provision resulting from the application of Magellan’s statutory tax rate for the income before income taxes pertaining to CDMI and the pro forma adjustments, which differs from the treatment of income taxes in CDMI’s historical financial statements, since CDMI formerly operated as a limited liability company and elected to be taxed as a partnership.

(H) This adjustment represents an increase in common stock equivalents for restricted stock awards attributable to the shares of restricted stock issued for the Acquisition.  See further discussion in Note (E).