Health Net 2003 Annual Report Download - page 89

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN No. 45). This interpretation elaborates on
the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. This interpretation’s initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor’s fiscal year-end. See Note 3 for indemnification guarantee disclosure on pending and
threatened litigation related to the sale of our Florida health plan completed on August 1, 2001 and the sales of our dental
and vision plans and our employer services group subsidiary completed on October 31, 2003.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”
(SFAS No. 146). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (Issue 94-3). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-
3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity’s commitment to an
exit plan. A fundamental conclusion reached by the FASB in SFAS No. 146 is that an entity’s commitment to a plan, by
itself, does not create an obligation that meets the definition of a liability. Therefore, SFAS No. 146 eliminates the
definition and requirements for recognition of exit costs in Issue 94-3. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of any exit or disposal liability. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. As of December 31, 2003, the adoption of SFAS No. 146 has
had no impact on our consolidated financial position or results of operations.
Effective January 1, 2002, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets” (SFAS No. 144). SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of,” and some provisions of Accounting Principles Board (APB)
Opinion 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 sets new criteria for
determining when an asset can be classified as held-for-sale as well as modifying the financial statement presentation
requirements of operating losses from discontinued operations. See Notes 3 and 14 for asset impairments we recorded
during 2003 and 2002.
Note 3—Divestitures and Assets Held for Sale
The divestitures of our employer services group subsidiary, dental, vision, and claims services subsidiaries during
2003 and 2002 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, 2003, 2002 and 2001. The sales agreements
for our employer services group subsidiary and our dental and vision subsidiaries included an indemnification obligation
for certain pending and threatened litigation as of the closing date and certain litigation arising from disputes prior to the
closing date. We have recorded liabilities of $1.2 million related to these obligations as of December 31, 2003.
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, $47.1 million and $62.1 million of total revenues and
income (loss) from operations before income taxes of $1.2 million, $1.2 million and $(5.6) million for the years ended
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