Health Net 2009 Annual Report Download - page 115

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Amounts receivable of $59 million (net of $21 million discount) from United for the remaining
adjusted tangible net equity at fair value due on the second anniversary of closing recorded as other
noncurrent assets;
• Amounts payable of $18 million to United for true-up of adjusted tangible net equity recorded as a
current liability;
• Value of future services to be provided under the United Administrative Services Agreements of $48
million as deferred revenue at fair value;
• Indemnification guarantee of $5 million at fair value; and
• Pretax loss on sale of $106 million.
The fair value of the amounts receivable from United for the remaining adjusted tangible net equity was
determined on the basis of discounted present value technique. That measure is based on significant Level 3
inputs that are not observable in the market. Key assumptions include (a) a discount rate of 16% and (b) a
probability adjusted level of payment of $80 million in each of 2010 and 2011.
The fair value of the United Administrative Services Agreements was determined by applying the income
approach and a market approach. This fair value measurement is based on significant Level 3 inputs that are not
observable in the market. Key assumptions include (a) a discount rate of 12% and (b) a range of historical EBITDA
multiples for the Company as well as those of companies deemed to be in similar lines of business as the Company.
A liability of $5 million has been recognized at fair value for an indemnification on certain tax positions taken
by United. We expect that the majority of this expenditure, if any, will be incurred within the first years subsequent
to closing.
We recognized a pretax loss of $106 million related to the sale of the Acquired Companies, which is
reported as a separate line item on our consolidated statement of operations for the year ended December 31,
2009. Prior to the consummation of the sale of the Acquired Companies, we classified the Acquired Companies’
assets and liabilities as available for sale. Upon the classification of the Northeast business to available for sale,
we were required to assess the Northeast business’ goodwill and intangibles for impairment and then adjust the
carrying value of the Northeast business to equal the lower of its carrying value or its fair value less cost to sell.
In determining the fair value of the Northeast business we considered the fair value of the additional contingent
membership consideration expected to be received in accordance with the provisions of the Stock Purchase
Agreement. This arrangement allows us to be paid additional consideration based on how many members renew
with a legacy United entity after closing. Because our accounting policy is to recognize contingent consideration
expected to be received in connection with a sale of a business on a deposit accounting basis, upon the
consummation of the sale we did not record a receivable for the additional contingent membership consideration
expected to be received and we did not include such contingent membership consideration in our loss calculation
related to the Northeast Sale. Therefore, the pretax loss related to the Northeast Sale approximates the estimated
fair value of the additional contingent membership consideration expected to be received under the provisions of
the Stock Purchase Agreement. As such contingent consideration is received it will be realized and recognized as
an adjustment to the pretax loss estimate. We expect that the majority of the membership renewal with United
will occur within the first two years after closing. No portion of the loss is related to the re-measurement of any
retained investment in the former subsidiary to its fair value.
We did not recognize anything for the non-competition agreement since the estimated fair value was minimal.
F-21