Health Net 1998 Annual Report Download - page 43

F O U N D AT IO N H EALTH SYST EMS, I N C. 4 1
Note 3 – Acquisitions and Dispositions
The following summarizes acquisitions,strategic
investments, and dispositions by the Company
during the three years ended December 31,1998.
1998 Transactions
Wo r k e r s ’ Compensation – In December 1997,the
Company adopted a formal plan to sell its workers’
compensation segment 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
p ri m a rily of inve s t m e n t s ,p remiums and re i n s u r a n c e
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 mil-
lion 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’com-
pensation segment would approximate $99.0 million
(net of income tax benefit of $21.0 million) which
included an anticipated loss from operations during
the phase-out period from December 1997 through
the date of disposal.The pre-tax loss in 1998 was
an additional $30.2 million.This was offset by an
increase in the rate of the tax benefit of the trans-
action to 35%.A c c o rd i n g l y, the accompanying state-
ment of operations for the year ended December 31,
1998 does not reflect any additional net gain or
loss from the disposition.
L o u i s i a n a , O k l a h o m a , and Texas – I n
N ovember 1998, the Company entered into a
d e f i n i t ive agreement to sell its health plan sub-
s i d i a ries in Louisiana, Oklahoma and Te x a s .T h e
transaction is subject to va rious closing conditions,
including the receipt of all necessary re g u l a t o ry
a p p rovals and certain financial contingencies, a n d
is expected to close in the first half of 1999.
I m p a i rment charges re c o rded in 1998 include a
w rite down of the carrying value of these plans
to their expected net re a l i z a ble va l u e.
Call Center Operations–In December 19 98 , t h e
Company sold the clinical algorithms used in its call
center operations for $36.3 million in cash,net of
transaction costs, and re c o rded a gain of $1.2 million.
In addition, the Company entered into a long-term
s e rvices agreement with the bu yer to provide such
s e rvices to its members for a period of 10 ye a rs .
1997 Transactions
Advantage Health – On April 1,1997, the Company
completed the acquisition of Advantage Health,
a group of managed health care companies based
in Pittsbu r g h , P e n n s y l va n i a , for $12.5 million in cash.
The acquisition was re c o rded using purchase account-
ing and the excess of the purchase price over the
fair value of the net liabilities assumed of $19.7 mil-
lion was recorded as goodwill.In December 1998,
the Company adjusted the carrying value of the
goodwill to its estimated fair value (see Note 15).
Advantage Health remains a party to long-term
provider agreements with the seller.
PACC – On October 22,1997,effective
October 1,1997,the Company completed the
acquisitions of PACC HMO and PACC Health
Plans (collectively,“PACC”), which are managed
health care companies based near Portland,Oregon,
for a purchase price of approximately $43.7 million
in cash.The acquisition was re c o rded using pur-
chase accounting and the excess of the purchase
price over the fair value of the assets acquired was
recorded as goodwill.The goodwill,in the amount
of $32.2 million, is being amortized on a straight-
line basis over 40 years.
FOHP – On April 30,1997,the Company
made a $51.7 million investment in FOHP, Inc.
(“FOHP”).FOHP was owned by physicians, hospi-
tals and other health care providers and was the sole
shareholder of First Option Health Plan of New
Jersey, Inc. (“FOHP-NJ”),a managed health care
company.The Company’s initial investment was in
the form of FOHP debentures convertible into up
to 71 percent of FOHP’s outstanding equity at the
Company’s discretion.As of December 1,1997, the
Company converted these initial FOHP debentures
into 71 percent of FOHP’s equity. Additionally,
effective December 8,1997,FOHP issued an addi-
tional $29.0 million of convertible debentures to
the Company which immediately converted approx-
imately $18.9 million of these debentures into an
additional 27 percent of FOHP’s outstanding equity
increasing FHS’ equity holding in FOHP to approx-
imately 98 percent.Goodwill of $107.7 million was
recorded as a result of these transactions and is being
amortized on a straight-line basis over 40 years.On
December 31,1997,the Company purchased non-
convertible debentures in the amount of $24 million
from FOHP. On December 31,1998,the Company
converted approximately $1.2 million of its remain-
ing principal amount of c o nve rt i ble debentures of