Health Net 1999 Annual Report Download - page 38

36 FOUNDATION HEALTH SYSTEMS, IN C.
of different market assumptions and/ or estimation method-
ologies may have a material effect on the estimated fair
value amounts.
The fair value estimates are based on pertinent infor-
mation available to management as of December 31, 1999
and 1998. Although management is not aware of any factors
that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that
date, and therefore, current estimates of fair value may differ
significantly.
Stock-based Compensation
The Financial Accounting Standards Board issued SFAS
No. 123,“Accounting for Stock-Based Compensation”
(“SFAS 123”).As permitted under SFAS 123, the Company
has elected to continue accounting for stock-based com-
pensation under the intrinsic value method prescribed in
APB Opinion No. 25,“Accounting for Stock Issued to
Employees.” Under the intrinsic value method, compensa-
tion cost for stock options is measured at the date of grant
as the excess, if any, of the quoted market price of the
Company’s stock over the exercise price of the option (see
Note 7).
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No.
130 “R eporting Comprehensive Income” (“SFAS 130”).
SFAS 130 establishes standards for reporting and presenting
comprehensive income and its components. Comprehensive
income includes all changes in stockholders’ equity (except
those arising from transactions with stockholders) and
includes net income and net unrealized appreciation
(depreciation), after tax, on investments available for sale.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133,“Accounting for Derivative Instru-
ments and Hedging Activities” (“SFAS 133”), which is
required to be adopted in fiscal years beginning after June
15, 2000. Management does not anticipate that the adop-
tion of SFAS 133 will have a significant effect on the finan-
cial position of the Company or its results of operations.
Note 3 – Acquisitions and Dispositions
The following summarizes acquisitions, strategic invest-
ments, and dispositions by the Company during the three
years ended December 31, 1999.
1999 Transactions
In connection with its planned divestiture of non-core oper-
ations, the Company completed the sale of certain of its
non-affiliate pharmacy benefits management operations for
net cash proceeds of $65.0 million and recognized a net gain
of $60.6 million. In addition, the Company also completed
the sale of its HMO operations in Utah,Washington, New
Mexico, Louisiana,Texas and Oklahoma, as well as the sale of
its two hospitals, a bill review subsidiary, a third-party admin-
istrator subsidiary and a PPO network subsidiary. For these
businesses, the Company received an aggregate of $60.5 mil-
lion in net cash proceeds, $12.2 million in notes receivable,
$10.7 million in stocks and recognized a net loss of $9.1 mil-
lion, before taxes. See Note 15 for impairment charges rec-
ognized during 1998 on certain of these dispositions.
In connection with the disposition of the HMO oper-
ation in Washington, the Company sold the Medicaid and
Basic Health Plan membership and retained under a rein-
surance and administrative agreement the commercial
membership. At the same time, the Company entered into
definitive agreements with PacifiCare of Washington, Inc.
and Premera Blue Cross to transition the Company’s com-
mercial membership in Washington.The Company antici-
pates substantially completing the transition during the first
half of 2000.The Company also entered into a definitive
agreement with PacifiCare of Colorado, Inc. to transition
the Company’s HMO membership in Colorado.The dispo-
sitions do not have a material effect on the consolidated
financial statements.
1998 Transactions
Workers’ Compensation – In December 1997, the Company
adopted a formal plan to sell its workers’ compensation seg-
ment which was accounted for as discontinued operations.
On December 10, 1998, the Company completed the sale
of the workers’ compensation segment.The net assets sold
consisted primarily of investments, premiums and reinsur-
ance receivables, and reserves for claims.The selling price
was $257.1 million in cash.
Total revenues for the workers’ compensation segment
amounted to $560.9 million and $518.7 million in 1997
and 1996, respectively. Net income (loss) amounted to a
$30.4 million loss in 1997 and income of $22.2 million in
1996 after applicable income tax benefits of $32.7 million
and expense of $1.2 million, respectively.
In December 1997, the Company estimated that the
loss on the disposal of the workers’ compensation segment
would approximate $99.0 million (net of income tax bene-
fit of $21.0 million) which included an anticipated loss