Health Net 1999 Annual Report Download - page 46

44 FOUNDATION HEALTH SYSTEMS, IN C.
The weighted average annual discount rate assumed
was 7.75% and 6.75% for the years ended December 31,
1999 and 1998, respectively, for both pension plan benefit
plans and other postretirement benefit plans.Weighted aver-
age compensation increases of between 2% to 6% for the
years ended December 31, 1999 and 1998, respectively,
were assumed for the pension benefit plans.
For measurement purposes, depending upon the type
of coverage offered, a 6% annual rate of increase in the per
capita cost covered health care benefits was assumed for
1999, and 6.25% was assumed for 1998.These rates were
assumed to decrease gradually to 4.5% in 2006 for 1999
and between 4.5% and 6.0% in 2005 for 1998.
The Company has multiple postretirement medical
benefit plans.The Company acquired PACC effective Sep-
tember 30, 1997, including its frozen postretirement benefit
plan.The PACC plan is non-contributory.The FHC plan is
contributory by certain participants.The account for the
FHC plan anticipates future cost-sharing changes to the
plan consistent with the Company’s expressed intent to
increase retiree contributions at the same rates as the Com-
pany’s premium increases.The Health Net plan is non-
contributory for employees retired prior to December 1,
1995 who have attained the age of 62; employees retiring
after December 1, 1995 who have attained age 62 con-
tribute from 25% to 100% of the cost of coverage depend-
ing upon years of service.
A one-percentage-point change in assumed health care
cost trend rates would have the following effects (amounts
in thousands):
The Company has no minimum pension liability
adjustment to be included in comprehensive income.
Performance-Based Annual Bonus Plan
In 1998, the Company adopted a Performance-Based
Annual Bonus Plan that qualified under Section 162(m) of
the Code (the “162(m) Plan”). Under the 162(m) Plan, if
the Company achieved greater than $250 million in con-
solidated income from operations before taxes (as deter-
mined under GAAP consistently applied, excluding any
non-recurring or extraordinary charges), certain executives
were potentially eligible to receive cash bonuses from a
pool of $7.5 million based on the executives’ salaries in
relation to the pool.Amounts payable to such executives
from such pool were subject to downward adjustment by
the Company’s Compensation and Stock Option Commit-
tee of the Board of Directors.The $250 million perfor-
mance goal for the 162(m) Plan was not met for 1999.This
existing 162(m) Plan will terminate effective December 31,
1999 in the event stockholder approval of a new Manage-
ment Incentive Plan is received at the Company’s 2000
Annual Stockholders Meeting.
Note 10 – Income Taxes
Significant components of the provision (benefit) for income
taxes are as follows for the years ended December 31
(amounts in thousands):
Income tax expense (benefit) is included in the con-
solidated financial statements as follows for the years ended
December 31 (amounts in thousands):
A reconciliation of the statutory federal income tax
rate and the effective income tax rate on income from con-
tinuing operations is as follows for the years ended Decem-
ber 31:
1999 1998 1997
Current:
Federal $29,080 $ 6,346 $(12,894)
State (6,448) 3,897 3,183
Total current 22,632 10,243 (9,711)
Deferred:
Federal 52,419 (121,800) (57,150)
State 21,175 (7,630) (5,478)
Total deferred 73,594 (129,430) (62,628)
Total provision
(benefit) for
income taxes $96,226 $(119,187) $ (72,339)
1999 1998 1997
Continuing
operations $96,226 $ (88,996) $ (21,418)
Discontinued
operations – (30,191) (50,921)
Total provision
(benefit) for
income taxes $96,226 $(119,187) $ (72,339)
1-percentage 1-percentage
point increase point decrease
Effect on total of service
and interest cost, 1999 $ 249 $ (182)
Effect on postretirement
benefit obligation,
12/ 31/ 99 1,171 (887)
1999 1998 1997
Statutory federal income
tax rate 35% (35)% (35)%
State and local taxes, net of
federal income tax effect 4 (1) (3)
Tax exempt interest income (1) (1) (2)
Goodwill amortization 3 6 6
Valuation allowance adjustment – – (2)
Examination settlements (2) – –
Merger transaction costs – (3) 8
Other, net – (1) 4
Effective income tax rate 39% (35)% (24)%