Health Net 1999 Annual Report Download - page 37

FOUNDATION HEALTH SYSTEMS, IN C. 35
Concentrations of Credit Risk
Financial instruments that potentially subject the Company
to concentrations of credit risk consist primarily of cash
equivalents, investments and premium receivables. All cash
equivalents and investments are managed within established
guidelines which limit the amounts which may be invested
with one issuer. Concentrations of credit risk with respect
to premiums receivable are limited due to the large number
of payers comprising the Company’s customer base.The
Company’s 10 largest employer groups accounted for 32%
and 17% of receivables and 15% and 12% of premium rev-
enue as of December 31, 1999 and 1998, respectively, and
for the years then ended.
Earnings Per Share
The Company adopted in 1997, SFAS No. 128,“Earnings
Per Share.” As required by SFAS No. 128, basic EPS
excludes dilution and reflects income divided by the
weighted average shares of common stock outstanding dur-
ing the periods presented. Diluted EPS is based upon the
weighted average shares of common stock and dilutive
common stock equivalents (stock options) outstanding dur-
ing the periods presented; no adjustment to income was
required. Common stock equivalents arising from dilutive
stock options are computed using the treasury stock
method; in 1999 this amounted to 54,000 shares. Such
shares amounting to 207,000 and 488,000 were anti-
dilutive in 1998 and 1997, respectively.
Options to purchase an aggregate of 11.4 million, 13.4
million, and 9.6 million shares of common stock during
1999, 1998, and 1997, respectively, were not included in the
computation of diluted EPS because the options’ exercise
price was greater than the average market price of the com-
mon stock.These options expire through December 2009.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of rev-
enues and expenses during the reporting period.Actual
results could differ from those estimates. Principal areas
requiring the use of estimates include the determination of
allowances for doubtful accounts, reserves for claims and
other settlements, reserves for professional and general lia-
bilities, amounts receivable or payable under government
contracts, remaining reserves for restructuring and other
charges, and net realizable values for assets where impair-
ment charges have been recorded.
Fair Value of Financial Instruments
The estimated fair value amounts of cash equivalents,
investments available for sale and notes payable approximate
their carrying amounts in the financial statements and have
been determined by the Company using available market
information and appropriate valuation methodologies.The
carrying amounts of cash equivalents approximate fair value
due to the short maturity of those instruments.The fair val-
ues of investments are estimated based on quoted market
prices and dealer quotes for similar investments.The fair
value of notes payable is estimated based on the quoted
market prices for the same or similar issues or on the cur-
rent rates offered to the Company for debt with the same
remaining maturities. Considerable judgment is required to
develop estimates of fair value. Accordingly, the estimates
are not necessarily indicative of the amounts the Company
could have realized in a current market exchange.The use
Goodwill and other intangible assets consisted of the following at December 31, 1999 (dollars in thousands):
Accumulated Amortization
Cost Amortization Net Balance Period
Goodwill $ 981,600 $ 157,924 $ 823,676 9-40 years
Provider network 69,466 15,515 53,951 14-40 years
Employer group contracts 92,900 68,874 24,026 11-23 years
Other 27,002 19,069 7,933 5-7 years
Total $1,170,968 $ 261,382 $ 909,586
Goodwill and other intangible assets consisted of the following at December 31, 1998 (dollars in thousands):
Accumulated Amortization
Cost Amortization Net Balance Period
Goodwill $1,031,122 $ 152,321 $ 878,801 9-40 years
Provider network 69,466 12,978 56,488 14-40 years
Employer group contracts 92,900 60,724 32,176 11-23 years
Other 27,114 16,669 10,445 5-7 years
Total $1,220,602 $ 242,692 $ 977,910