Health Net 2005 Annual Report Download - page 108

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Employer Services Group Subsidiary
On October 31, 2003, we consummated the sale of our workers’ compensation services subsidiary, Health
Net Employer Services, Inc. (Health Net Employer Services), along with its subsidiaries Health Net Plus
Managed Care Services, Inc. and Health Net CompAmerica, Inc., collectively known as our employer services
group division, to First Health Group Corp. (First Health). Our agreement with First Health provides Health Net
Employer Services customers with continued access to Health Net’s workers’ compensation provider network,
and provides us with access to First Health’s preferred provider organization network. We also entered into a
non-compete agreement with First Health. In connection with this sale, we received $79.5 million in cash and
recognized a pretax gain of $12.3 million. We deferred approximately $15.9 million of the gain on the sale of our
employer services division related to non-compete and network access agreements. The deferred revenue is
earned over the terms of the agreements (four to seven years). Employer services group subsidiary revenue
through the date of the sale was reported as part of other income on the consolidated statements of operations.
Our employer services group subsidiary had $45.6 million and $47.1 million of total revenues and income
from operations before income taxes of $1.2 million and $1.2 million for the years ended December 31, 2003 and
2002, respectively. As of the date of sale, our employer services group subsidiary had net equity of $42.3 million.
EOS Claims Services Subsidiary
Effective July 1, 2002, we sold our claims processing subsidiary, EOS Claims Services, Inc. (EOS Claims),
to Tristar Insurance Group, Inc. (Tristar). In connection with the sale, we received $500,000 in cash, and also
entered into a Payor Services Agreement. Under the Payor Services Agreement, Tristar has agreed to exclusively
use EOS Managed Care Services, Inc. (one of our then remaining subsidiaries) for various managed care services
to its customers and clients. We estimated and recorded a $2.6 million pretax loss on the sale of EOS Claims
during the second quarter ended June 30, 2002. During the fourth quarter ended December 31, 2003, we recorded
an additional $1.2 million pretax loss on the sale due to the sale price true-up as provided for in the sale
agreement. EOS Claims revenue through the date of the sale was reported as part of other income on the
consolidated statements of operations.
Our EOS claims services subsidiary had $7.2 million of total revenues and income from operations before
income taxes of $0.1 million for the year ended December 31, 2002. As of the date of sale, our EOS claims
services subsidiary had no net equity.
Superior National Insurance Group
On October 22, 2003, we entered into an agreement with SNTL Litigation Trust, successor-in-interest to
Superior, to settle all outstanding claims under the Superior National Insurance Group, Inc. v. Foundation
Health Corporation, et. al. litigation. As part of the settlement agreement, we agreed to pay the SNTL Litigation
Trust $137 million and receive a release of all of the SNTL Litigation Trust’s claims against us. We have
accounted for the settlement with SNTL Litigation Trust as discontinued operations, net of tax, on our
consolidated statements of operations for the year ended December 31, 2003. See Note 12 for additional
information on Superior litigation.
The divestitures of our wholly-owned subsidiaries Gem Holding Corporation and Gem Insurance Company,
our American VitalCare and Managed Alternative Care subsidiaries, employer services group subsidiary, and
dental and vision subsidiaries during 2005, 2004 and 2003 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, 2005, 2004 and 2003.
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