Health Net 2005 Annual Report Download - page 62

On October 31, 2003, we consummated the sale of our workers’ compensation services subsidiaries to First
Health Group Corp. In connection with this sale, we received $79.5 million in cash.
See Note 3 to our consolidated financial statements for further information on the divestitures during the
years ended December 31, 2005, 2004 and 2003.
Income Tax Provision
Our income tax expense and the effective income tax rate for the years ended December 31, 2005, 2004 and
2003 are as follows:
2005 2004 2003
(Dollars in millions)
Income tax expense .................................. $146.5 $24.8 $193.9
Effective tax rate (1) .................................. 38.9% 36.8% 37.5%
(1) The effective income tax rate differs from the statutory federal tax rate of 35.0% in each year due primarily
to state income taxes, tax-exempt investment income and business divestitures. The effective income tax
rate increased from 2004 to 2005 primarily due to the reduction in the impact of the tax benefits associated
with tax return examination settlements and an increase in state taxes due to change in the business mix. The
effective income tax rate decreased from 2003 to 2004 due to an increase in the impact of tax benefits
associated with tax return examination settlements.
Loss on Settlement from Disposition of Discontinued Operations
During the third quarter ended September 30, 2003, we recognized an $89.1 million loss on settlement from
disposition of discontinued operations, net of tax of $47.9 million, or $0.77 per basic share and $0.75 per diluted
share, as a result of our settlement agreement with SNTL Litigation Trust, to settle all outstanding claims under
the Superior National Insurance Group, Inc v. Foundation Health Corporation, et. al. litigation. See “Item 3.
Legal Proceedings” and Notes 3 and 12 to our consolidated financial statements for additional information
regarding the Superior settlement.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We believe that cash flow from operating activities, existing working capital, lines of credit and cash
reserves are adequate to allow us to fund existing obligations, introduce new products and services, and continue
to develop health care-related businesses. We regularly evaluate cash requirements for current operations and
commitments, and for capital acquisitions and other strategic transactions. We may elect to raise additional funds
for these purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as
appropriate.
Our cash flow from operating activities is impacted by, among other things, the timing of collections on our
amounts receivable from our TRICARE contract for the North Region. Health care receivables related to
TRICARE are best estimates of payments that are ultimately collectible or payable. The timing of collection of
such receivables is impacted by government audit and negotiation and can extend for periods beyond a year.
Amounts receivable under government contracts were $122.8 million and $129.5 million as of December 31,
2005 and 2004, respectively. Cash flows from operating activities for 2005 and 2004 were impacted by the
effects of the transition to the new TRICARE contract. Under the old TRICARE contracts, we were required to
set aside $38.9 million in cash for the payment of run-out claims as of December 31, 2004 which we completed
in 2005. During the third quarter of 2005, we paid $40 million to the government in bid price adjustments which
had been previously accrued for as part of closing out the legacy contracts.
During the fourth quarter of 2004, we recorded a pretax charge of $169 million for expenses associated with
provider settlements that had been or are currently in the process of being resolved, principally involving the
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