Health Net 2005 Annual Report Download - page 105

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HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
improvements acquired in the periods beginning after July 1, 2005. We do not expect the full adoption of EITF
No. 05-6 to have a material effect on our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections.” SFAS No. 154
replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting
Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of
a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to
changes required by an accounting pronouncement in the instance that the pronouncement does not include
specific transition provisions. APB Opinion No. 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of the change the cumulative effect
of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of changes in accounting principle, unless it is impracticable to determine either the period-
specific effects or the cumulative effect of the change. SFAS No. 154 defines retrospective application as the
application of a different accounting principle to prior accounting periods as if that principle had always been
used or as the adjustment of previously issued financial statements to reflect a change in the reporting
entity. SFAS No. 154 also redefines restatement as the revising of previously issued financial statements to
reflect the correction of an error. SFAS No. 154 carries forward without change the guidance contained in APB
Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in
accounting estimate. SFAS No. 154 also carries forward the guidance in APB Opinion No. 20 requiring
justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective in fiscal
years beginning after December 31, 2005. We do not expect the adoption of SFAS No. 154 to have a material
effect on our consolidated financial statements.
Note 3—Acquisition and Divestitures
Universal Care
On January 5, 2006, we announced that we have entered into a definitive agreement to acquire certain health
plan assets of Universal Care, Inc. (Universal Care), a California-based health care company. Upon closing of
this acquisition, we will add approximately 20,000 Medi-Cal and Healthy Families beneficiaries in addition to
approximately 700,000 Medi-Cal and Healthy Families beneficiaries that we already serve in nine California
counties: Los Angeles, Fresno, Kern, Stanislaus, Riverside, Sacramento, San Bernardino, San Diego and
Tulare. Further, we will have the opportunity to enroll an additional 20,000 Medi-Cal and Healthy Families
beneficiaries in Orange County. In addition, upon closing, we will add approximately 5,000 Medicare Advantage
beneficiaries and approximately 75,000 commercial members that have received coverage through contracts with
Universal Care’s health plans. The closing of the Universal Care transaction is contingent on numerous
customary closing conditions including regulatory approval by a number of California authorities, such as the
Department of Managed Health Care and the Department of Health Services. We expect the transaction to close
in the first half of 2006.
Gem Holding Corporation and Gem Insurance Company
Effective February 28, 2005, we completed the sale of our wholly-owned subsidiaries Gem Holding
Corporation and Gem Insurance Company (the Gem Companies), to SafeGuard Health Enterprises, Inc. (the
Gem Sale). In connection with the Gem Sale, we received a promissory note of approximately $3.1 million,
which was paid in full in cash on March 1, 2005. We did not recognize any pretax gain or loss but did recognize
a $2.2 million income tax benefit related to the Gem Sale in the three months ended March 31, 2005.
The Gem Companies were historically reported as part of our Health Plan Services reportable segment. The
Gem Companies had been inactive subsidiaries and their revenues and expenses were negligible for the years
ended December 31, 2005, 2004 and 2003.
F-17