Health Net 2004 Annual Report Download - page 103

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
service in exchange for the award. This statement eliminates the alternative to use APB Opinion No. 25’s intrinsic value method of
accounting. The provisions of SFAS No. 123R are effective for financial statements with first interim or annual reporting period
beginning after June 15, 2005. We currently disclose pro forma compensation expense quarterly and annually by calculating the stock
option grants’ fair value using the Black-Scholes model and the pro forma impact on net income and earnings per share. Upon
adoption, pro forma disclosure will no longer be an alternative. We expect the impact of SFAS No. 123R on our consolidated
financial position or results of operations to approximate our currently disclosed pro forma compensation expense. We will apply
SFAS No. 123R using the most appropriate fair value model as of the interim reporting period ending September 30, 2005.
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on the remaining issues for Issue No. 03-1 “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” and as a result reached a final consensus
on an other-than-temporary impairment model for debt and equity securities within the scope of SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” and equity securities that are not subject to the scope of SFAS No. 115 and not
accounted for under the equity method of accounting (i.e., cost method investments). The EITF also reached a consensus that the
three-step model used to determine other-than-temporary impairments must be applied prospectively to all current and future
investments, in interim or annual reporting periods beginning after June 15, 2004. On September 30, 2004, the FASB issued FASB
Staff Position (FSP) EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other Than
Temporary Impairment and Its Application to Certain Investments,’ delaying the effective date for the recognition and measurement
guidance of EITF 03-1 on impairment loss that is other than temporary (i.e., steps two and three of the three-step impairment model),
as contained in paragraphs 10-20, until certain implementation issues are addressed and a final FSP providing implementation
guidance is issued. Quantitative and qualitative disclosure requirements for investments accounted for under SFAS No. 115 remain in
effect (see Note 4). We do not expect the full adoption of EITF 03-01 to have a material impact on our consolidated financial position
or results of operations.
Note 3—Divestitures and Assets Held for Sale
The divestitures of our American VitalCare and Managed Alternative Care subsidiaries, employer services group subsidiary,
dental, vision, and claims services subsidiaries during 2004, 2003 and 2002 are not presented as discontinued operations since they
are collectively not material to the accompanying consolidated financial statements as of and for the years ended December 31, 2004,
2003 and 2002.
Florida Health Plan
Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc. (the Florida
Plan), to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received $23 million in cash and approximately $26
million in a secured six-year note bearing 8% interest per annum for which we recorded a full reserve. We also sold the corporate
facility building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing
8% interest per annum. We estimated and recorded a $72.4 million pre-tax loss on the sales of our Florida Plan and the related
corporate facility building during the three months ended June 30, 2001.
Under the Stock Purchase Agreement that evidenced the sale (as amended, the SPA), we, through our subsidiary FH Assurance
Company (FH Assurance), entered into a reinsurance agreement (the Reinsurance Agreement) with the Florida Plan. Under the terms
of the Reinsurance Agreement, FH Assurance must reimburse the Florida Plan for certain medical and hospital expenses arising after
the sale of the Florida Plan. As of September 30, 2004, we had paid the maximum amount of $28 million under the Reinsurance
Agreement.
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