3. Acquisitions and Joint Ventures

Magellan Complete Care of Arizona, Inc. ("MCCAZ"), a joint venture owned 80 percent by the Company and 20 percent by VHS Phoenix Health Plan, LLC (a subsidiary of Vanguard Health Systems, Inc.), was formed to manage integrated behavioral and physical healthcare for recipients with SMI and behavioral healthcare for other Medicaid beneficiaries in Maricopa County. MCCAZ previously responded to a Request for Proposal ("RFP") released by the Arizona Department of Health Services ("ADHS"). See further discussion related to the status of this RFP in Note 2—"Summary of Significant Accounting Policies". During the year ended December 31, 2012, the Company invested $1.5 million in MCCAZ, which is included within restricted cash on the accompanying consolidated balance sheets. The Company has consolidated the balance sheet and results of operations of MCCAZ in its consolidated financial statements as of December 31, 2012 and December 31, 2013.

Acquisition of Partners Rx Management LLC

Pursuant to the September 6, 2013 Agreement and Plan of Merger (the "Merger Agreement") with Partners Rx, on October 1, 2013 the Company acquired all of the outstanding ownership interests of Partners Rx. Partners Rx is a full-service commercial PBM with a strong focus on health plans and self-funded employers primarily through sales through third party administrators, consultants and brokers. As consideration for the transaction, the Company paid $100 million in cash, subject to working capital adjustments. At closing, cash consideration paid was reduced by a preliminary working capital adjustment of $1.5 million. The Company funded the acquisition with cash on hand.

Pursuant to the Merger Agreement, certain principal owners of Partners Rx purchased a total of $10 million in the Company's restricted stock at a price equal to the average of the closing prices of the Company's stock for the five trading day period ended on the day prior to the execution of the Merger Agreement. The shares received by such principal owners of Partners Rx are subject to vesting over three years with 50% vesting on the second anniversary of the acquisition and 50% vesting on the third anniversary of the acquisition, conditioned on continued employment with the Company on the applicable vesting dates.

The Company reports the results of operations of Partners Rx within its Pharmacy Management segment.

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 $40.8 million, consisting of customer contracts in the amount of $38.7 million, which is being amortized over 2.5 to 10 years, tradenames in the amount of $0.4 million, which is being amortized over 15 months, and non-compete agreements in the amount of $1.7 million, which is being amortized over 5 years. The entire purchase price is amortizable for tax purposes, although the Company's effective tax rate will not be impacted by the tax amortization of the goodwill recorded with the Partners Rx transaction.

The estimated fair values of Partners Rx assets acquired and liabilities assumed at the date of the acquisition are summarized as follows (in thousands):


Assets acquired:
Current assets (includes $58,038 of accounts receivable)	$	58,164
Property and equipment, net		4,327
Deferred tax assets		254
Other identified intangible assets		40,760
Goodwill		40,385


Total assets acquired		143,890


Liabilities assumed:
Current liabilities		56,125


Total liabilities assumed		56,125


Net assets acquired	$	87,765

As of December 31, 2013, the Company established a working capital receivable of $0.7 million that was reflected as a reduction to goodwill.

As of December 31, 2013, settlement of the working capital and certain contractual liabilities remain open and therefore are subject to further estimation. In addition, the amount recognized for deferred tax assets may be impacted by the determination of these items. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required.

In connection with the Partners Rx acquisition, the Company incurred $0.8 million of acquisition related costs that were expensed during the year ended December 31, 2013. These costs are included within direct service costs and other operating expenses in the accompanying consolidated statements of comprehensive income.

Pro Forma disclosures related to the Partners Rx acquisition have been excluded as immaterial.

Acquisition of AlphaCare Holdings, Inc.

Pursuant to the August 13, 2013 stock purchase agreement (the "Stock Purchase Agreement"), on December 31, 2013 (the "Closing Date") the Company acquired a 65% equity interest in AlphaCare Holdings, the holding company for AlphaCare New York, Inc. ("AlphaCare"), a Health Maintenance Organization ("HMO") in New York that operates a New York Managed Long-Term Care Plan ("MLTCP") in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in Bronx, New York, Queens and Kings Counties.

The Company previously held a 7% equity interest in AlphaCare through a previous equity investment of $2.0 million in preferred membership units of AlphaCare's previous holding company, AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to AlphaCare Holdings, LLC. As part of the Stock Purchase Agreement, AlphaCare Holdings, LLC was reorganized into a Delaware corporation, the preferred membership units and the loan were converted into Series A Participating Preferred Stock ("Series A Preferred") of AlphaCare Holdings and the Company purchased an additional $17.4 million of Series A Preferred. The Company holds a 65% voting interest and the remaining shareholders hold a 35% voting interest in AlphaCare Holdings.

Based on the Company's 65% equity and voting interest in AlphaCare Holdings, the Company has included the results of operations in its consolidated financial statements. The Company reports the results of operations of AlphaCare Holdings within the Public Sector segment.

During the year ended December 31, 2013, the Company accounted for its 7% interest in AlphaCare using the equity method and reported its results within the Public Sector segment. The incremental 58% interest was accounted for as a business combination achieved in stages. The acquisition was accounted for using the acquisition method of accounting.

On the Closing Date, the Company remeasured its preexisting investment in AlphaCare and recognized a gain from such remeasurement. The fair value of the Company's interest immediately before the Closing Date was $2.2 million, which resulted in the Company recognizing a non-cash gain of approximately $0.7 million which is included within interest and other income on the consolidated statements of comprehensive income for the year ended December 31, 2013. The Company used the guideline transaction method of the market approach to measure both the fair value of the Company's preexisting investment and the fair value of the noncontrolling interest.

The other shareholders of AlphaCare Holdings have the right to exercise put options, requiring the Company to purchase 50 percent of the remaining shares prior to January 1, 2017 provided certain membership levels are attained. After December 31, 2016 the other shareholders of AlphaCare Holdings have the right to exercise put options requiring the Company to purchase all or any portion of the remaining shares. In addition, after December 31, 2016 the Company has the right to purchase all remaining shares. Noncontrolling interests with redemption features, such as put options, that are not solely within the Company's control are considered redeemable noncontrolling interest. Redeemable non-controlling interest is considered to be temporary and is therefore reported in a mezzanine level between liabilities and stockholders' equity on the Company's consolidated balance sheet at the greater of the initial carrying amount adjusted for the non-controlling interest's share of net income or loss or its redemption value. The Company recorded $10.6 million of redeemable non-controlling interest in relation to the acquisition. As of December 31, 2013 the carrying value of the noncontrolling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

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 $4.6 million, consisting of customer contracts in the amount of $3.8 million, which is being amortized over 10 years, and provider networks in the amount of $0.8 million, which is being amortized over 10 years. The Company's effective tax rate will not be impacted by the non-deductible amortization of these identified intangibles. None of the goodwill is deductible for tax purposes.

The estimated fair values of AlphaCare Holdings assets acquired and liabilities assumed at the date of the acquisition are summarized as follows (in thousands):


Assets acquired:
Current assets (includes $6,249 of cash and $7,900 of restricted cash)	$	15,053
Property and equipment, net		310
Other assets		188
Other identified intangible assets		4,590
Goodwill		20,882


Total assets acquired		41,023


Liabilities assumed:
Current liabilities		3,323
Deferred tax liabilities		1,830


Total liabilities assumed		5,153


Net assets acquired		35,870
Less: net assets attributable to noncontrolling interest		(10,554	)


Net consideration	$	25,316

As of December 31, 2013, finalization of the estimated intangibles remain open and therefore are subject to further estimation. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required.

In connection with the AlphaCare Holdings acquisition, the Company incurred $0.3 million of acquisition related costs that were expensed during the year ended December 31, 2013. These costs are included within direct service costs and other operating expenses in the accompanying consolidated statements of comprehensive income.

Pro Forma disclosures related to the AlphaCare Holdings acquisition have been excluded as immaterial.