Health Net 1998 Annual Report Download - page 55

F O U N DAT IO N HEALT H SYSTEMS, I N C . 5 3
represented cash payments and $42.2 million non-
cash activities through December 31, 1998. As of
December 31,1998, $13.8 million is expected to
require future outlays of cash and $3.9 million
represents future noncash activities.
Merger Costs – In connection with the June
1997 Plan,$69.6 million in merger costs were
recorded.The significant components of the charge
include the following:$22.6 million of transaction
costs,primarily consisting of investment banking,
legal, accounting, filing and printing fees; $22.7 mil-
lion of merger consulting costs;$5.9 million of for-
mer senior executive consulting costs;$2.4 million
of directors and officers liability coverage required
by the merger agreement;$9.6 million in costs
to consolidate debt facilities;and $6.4 million of
other merger related costs.
Other Costs – During the quarters ended
June 30,and December 31,1997,$89.7 million and
$32.3 million, respectively, in other costs were
recorded.The significant components of the charge
included the following:$30.5 million for receivables
related to provider contracts that will not be re n ewe d ;
$17.2 for government receivables related to prior
contracts and adjustments on current contracts
being negotiated with the Department of Defense;
$15.1 million for litigation settlement estimates
primarily related to former FHC subsidiaries;
$12.6 million for the loss on sale of the United
Kingdom operations;$16.1 million for loss contract
accruals,including $10.1 million related to the
Company’s health plans in Texas,Louisiana and
Oklahoma;$7.7 million related to contract termina-
tion costs;$8.2 million in other receivables;and
$14.6 million of other costs.
These costs are shown as other costs on the
Company’s consolidated statement of operations
because of their nature.If not for their nature, a p p r ox -
imately $53.8 million would have been recorded as
health plan services,$38.4 million as selling, general
and administrative and $17.2 million as government
health care services.
Gem Costs – The Company established a
premium deficiency of $57.5 million related to the
Company’s Gem Insurance Company (“Gem”) dur-
ing the year ended December 31,1997.During the
quarter ended June 30,1997,the Company had
reached a definitive agreement regarding a reinsur-
ance transaction with The Centennial Life Insurance
Company (“Centennial”).Pursuant to this agree-
ment,Centennial was to reinsure and manage Gem’s
accident and health, life and annuity policies in
exchange for a reinsurance premium.The cost of
the reinsurance along with the write-down of cer-
tain Gem assets that were not recoverable based on
the terms of the agreement totaled $57.5 million.
The transaction was not ultimately consummated due
to the unanticipated fa i l u re to satisfy certain closing
c o n d i t i o n s , including the fa i l u r e to re c e ive cert a i n
r e g u l a t o ry approva l s . Gem established a re s e rve for the
estimated premium deficiency related to these poli-
cies for the intervening peri o d .As of December 31,
1 9 9 8 , this charge was substantially completed.
1996 Charges
During 1996, the Company recorded restructuring
costs of $27.4 million which included $5.4 million
of executive and other involuntary severance costs,
$17.4 million of software, hardware and other asset
impairment costs, and $4.6 million of facilities
consolidation costs (the “December 1996 Plan”).
As stated above under “1997 Costs,” $2.7 million in
reductions to the December 1996 Plan we r e re c o rd e d
during 1997 as a result of the Company’s decision
to continue to operate certain facilities originally
identified for lease termination.
The Company also recorded $16.7 million
of other costs in 1996 including loss contract accru-
als related to governmental employer groups in the
Company’s non-California markets,consulting and
other costs. If not for their unusual nature, a p p r ox i -
mately $8.5 million of these costs would have been
recorded as health plan services and $8.2 million
as selling, general and a d m i n i s t r a t i ve expenses. N o
f u rther costs are expected.
Note 15 – Impairment of Long-Lived Assets
During 1998, the Company initiated a formal plan
to dispose of certain Central Division health plans
included in the Company’s Health Plan Services
segment in accordance with previously disclosed
anticipated divestitures program. It is anticipated
that the sales of these health plans will be completed
during the first half of 1999.Pursuant to SFAS
N o. 1 2 1 ,“Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be
Disposed of,” the Company evaluated the carrying
values of the assets for these health plans and deter-
mined that they exceeded their estimated fair values.
Accordingly, in the fourth quarter of 1998, the
Company adjusted the carrying value of these long-
lived assets to their estimated fair value, resulting in a
noncash asset impairment charge of approximately
$112.4 million (see Note 14).This asset impairment
charge of $112.4 million consists of $40.3 million
for write-down of furniture, equipment and soft-
ware, $20.9 million write-down of buildings and
improvements,$30.0 million for write-down of
goodwill and $21.2 million for other impairments
and other charges.The fair value is based on
expected net realizable value.