Health Net 1998 Annual Report Download - page 38

3 6 F O U N DAT IO N H EALTH SYSTEMS, I N C.
Notes to Consolidated Fina ncial Statements
December 31, 1998, 1997 and 1996
Note 1 – Descr iption of Business
The current operations of Foundation Health
Systems,Inc. (the “Company”or “FHS”) are a result
of the April 1, 1997 merger transaction (the “FHS
Combination”) involving Health Systems Interna-
tional,Inc.(“HSI”) and Foundation Health Corpo-
ration (“FHC”).Pursuant to the FHS Combination,
FH Acquisition Corp.,a wholly owned subsidiary of
HSI (“Merger Sub”),merged with and into FHC
and FHC survived as a wholly-owned subsidiary
of HSI,which changed its name to “Foundation
Health Systems,Inc.” and thereby became the
Company. Pursuant to the Agreement and Plan of
Merger (the “Merger Agreement”) that evidenced
the FHS Combination, FHC stockholders received
1.3 shares of the Company’s Class A Common
Stock for every share of FHC common stock held,
resulting in the issuance of approximately 76.7 mil-
lion shares of the Company ’s Class A Common Stock
to FHC stockholders.The shares of the Company’s
Class A Common Stock issued to FHC’s stockholders
in the FHS Combination constituted approximately
61% of the outstanding stock of the Company after
the FHS Combination and the shares held by the
C o m p a ny ’s stockholders prior to the FHS Combina-
tion (i.e.,the prior stockholders of HSI) constituted
approximately 39% of the outstanding stock of the
Company after the FHS Combination.
The FHS Combination was accounted for as
a pooling of interests for accounting and financial
reporting purposes.The pooling of interests method
of accounting is intended to present, as a single
interest,two or more common stockholder interests
which were previously independent and assumes
that the combining companies have been merged
from inception.Consequently, the Company’s con-
solidated financial statements have been prepared
and/ or restated as though HSI and FHC always had
been combined.Although prior to the FHS Combi-
nation FHC reported on a fiscal year ended June 30
basis,the consolidated financial statements have been
restated to reflect the Company’s calendar year basis.
The consolidated financial statements give
retroactive effect to the FHS combination which
was accounted for as a pooling of interests and to
the sale of the Company’s workers’compensation
business which was accounted for as discontinued
operations (see Note 3).
Continuing Operations
The Company is an integrated managed care organi-
zation which administers the delivery of managed
health care services.Continuing operations consist
of two segments:Health Plan Services and Govern-
ment Contracts/ Specialty Serv i c e s .T h rough its sub-
s i d i a ri e s , the Company offers group, individual,
Medicaid and M e d i c a r e health maintenance organi-
zation (“HMO”) and pre f e rred provider organization
(“PPO”) plans; government sponsored managed care
plans;and managed care products related to admin-
istration and cost containment,behavioral health,
dental,vision and pharmaceutical products and
other services.
The Health Plan Services segment consists
of HMOs organized into four operational divisions
located in the following geographic regions:the
C a l i f o rnia Div i s i o n , the Northeast Div i s i o n , the Cen-
tral Division, and the Arizona Division.These health
plans are located in Arizona, California,Colorado,
Connecticut, Florida,Idaho,Louisiana,New Jersey,
New Mexico, NewYork,Ohio,Oklahoma,Oregon,
Pennsylvania,Texas,Utah,Washington, and West
Virginia.The Company’s health plans p r ovide a wide
range of managed health care services throughout
the United States with approximately 4.2 million
at-risk and administrative services only members.
The Company’s commercial HMO subsidiaries con-
tract to provide medical care services to a defined,
enrolled population for a predetermined,prepaid
monthly fee for group, Medicaid,individual and
Medicare HMO plans throughout their respective
service areas.All of the HMOs are state licensed and
some are also federally qualified.The Company also
operates PPO networks which provide access
to health care services and owns six health and life
insurance companies licensed to sell insurance
throughout the United States.
The Gove rnment Contracts/Specialty Serv i c e s
segment administers large, multi-year managed care
government contracts.This segment subcontracts to
affiliated and unrelated third parties the administra-
tion and health care risk of parts of these contracts
and currently administers health care programs
covering 1.6 million eligible individuals under
the Civilian Health and Medical Program of the
Uniformed Services (“CHAMPUS”) through the
TRICARE program.Currently, there are three
TRICARE contracts that cover Alaska,Arkansas,
California,Hawaii,Oklahoma,Oregon,Texas,
and Washington, and parts of Arizona,Idaho and
Louisiana.This segment also offers behavioral health,
dental,vision,and pharmaceutical products and