Health Net 1999 Annual Report Download - page 52

50 FOUNDATION HEALTH SYSTEMS, IN C.
REST RUCT URING COSTS - The Company
adopted a restructuring plan during the quarter ended June
30, 1997 related to the merger of Foundation Health Cor-
poration and Health Systems International, Inc. (the “FHS
Combination”), which created the Company (the “June
1997 Plan”).The principal elements of the June 1997 Plan
included a workforce reduction, the consolidation of
employee benefit plans, the consolidation of facilities in
geographic locations where office space was duplicated, the
consolidation of overlapping provider networks as required
in obtaining regulatory approval for the FHS Combination,
and the consolidation of information systems at all locations
to standardized systems.The June 1997 Plan is substantially
completed as of December 31, 1999.
During December 1997, the Company adopted a
restructuring plan (the “December 1997 Plan”) and recorded
a $6.0 million restructuring charge related to the Company’s
Northeast Division health plans.The plan relates to the inte-
gration of the Company’s Eastern Division operations in con-
nection with its acquisition of PHS and FOHP in 1997.
SEVERAN CE AN D BEN EFIT RELATED COSTS -
Severance and benefit related costs of $61.4 million
included a termination benefits plan and contractually
required change of control payments to senior executives.
The two restructuring plans during 1997 included the ter-
mination of 1,235 employees in 13 geographic locations,
primarily related to duplicative claims processing functions
and sale forces. As of December 31, 1999, the termination
of employees had been completed and $54.3 million had
been paid in severance and related benefits under these
plans. Also included are changes in benefit plan costs that
were primarily related to the loss incurred on curtailment
and settlement of the Supplemental Executive R etirement
Plan of FHC and the expense for amounts credited to par-
ticipants’ accounts in connection with the termination of
future benefits under the FHC deferred compensation plan
(see Note 9).These benefit plan actions were effected pur-
suant to the change of control of FHC in connection with
the FHS Combination.
PROVIDER N ETW ORK COSTS - Asset Provider
network consolidation costs of $36.2 million relate to the
requirement to re-contract with many of the Company’s
providers in conjunction with obtaining regulatory approval
from the State of California for the FHS Combination.The
Company was required to resolve disputed claims with cer-
tain providers for contract releases in order to comply with
the regulatory conditions of approval imposed on the
Company; these costs totaled $36.2 million. R eal estate
lease termination costs include facilities consolidation costs
primarily in geographic regions where there was overlap-
ping office space usage.
ASSET IMPAIRMEN T CHARGES - Asset impair-
ment costs totaling $44.0 million are primarily a result of
the Company’s plan to be on common operating systems
and hardware platforms.These costs are primarily related to
software development projects that were abandoned totaling
$24.6 million, hardware totaling $4.8 million, various FHC
provider receivables totaling $8.8 million that the Company
determined not to pursue as a result of certain regulatory
approval conditions related to the FHS Combination, and
various other assets totaling $5.8 million.These assets were
written off since management determined that they would
not be used in operations. O f the total costs of $44.0 mil-
lion, approximately $31.4 million was related to the Health
Plans segment, $3.8 million was related to the Government
Contracts/ Specialty Services segment and the remaining
$8.8 million was related to Corporate functions.
The restructuring credits to the June 1997 Plan of
$42.0 million were subsequently recorded in 1997 and
resulted from the following: $22.2 million from the Com-
pany’s determination to continue to operate certain facili-
ties originally identified for lease termination; $9.7 million
from reductions to initially anticipated involuntary sever-
ance costs; $8.1 million from reductions to certain antici-
pated provider network consolidation and other contract
termination costs; and $2.0 million in reductions to asset
impairment costs primarily related to the reclassification
of workers’ compensation insurance subsidiaries related
charges to discontinued operations. During 1999, modifica-
tions to initial estimates of $1.6 million were recorded.
MERGER COSTS - In connection with the June 1997
Plan, $69.6 million in merger costs were recorded.The signif-
icant 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 former senior
executive consulting costs; $2.4 million of directors and offi-
cers liability coverage required by the merger agreement; $9.6
million in costs related to the early retirement of FHC public
debt; and $6.4 million of other merger related costs.
GEM COSTS - The Company established a premium
deficiency of $57.5 million related to the Company’s Gem
Insurance Company (“Gem”) during the year ended
December 31, 1997. During the quarter ended June 30,
1997, the Company had reached a definitive agreement
regarding a reinsurance 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 rein-
surance premium.The cost of the reinsurance along with the
write-down of certain Gem assets that were not recoverable
based on the terms of the agreement totaled $57.5 million.
These costs were recorded and disclosed as reinsurance costs.
During the quarter ended September 30, 1997, the transac-