Health Net 1999 Annual Report Download - page 53

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tion was not ultimately consummated due to the unantici-
pated failure to satisfy certain closing conditions, including
the failure to receive certain regulatory approvals. As a result,
Gem established a reserve for the estimated premium defi-
ciency related to these policies for the intervening period.
These losses were determined by projecting premiums,
health care costs and expenses by state separately for group
and individual contracts (including state insurance depart-
ment mandated renewals).Actual premium and health care
costs were used as the basis of the projection. Expenses were
projected using historically adjusted costs as a percentage of
premium or per member basis.This method is consistent
with the Company’s manner of acquiring, servicing and
measuring the profitability of its insurance contracts.
OTHER COSTS - During the quarter ended June 30,
1997, the Company recorded $12.6 million for the loss on
sale of the United Kingdom operations. In addition, during
the two quarters ended June 30 and December 31, 1997,
$77.1 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 renewed; $17.2 million
for government receivables related to prior contracts and
adjustments on current contracts being negotiated with the
Department of Defense; $15.1 million for litigation settle-
ment estimates primarily related to former FHC subsidiar-
ies; $16.1 million for loss contract accruals, including $10.1
million related to the Company’s health plans in Texas,
Louisiana and O klahoma; $7.7 million related to contract
termination costs; $8.2 million in other receivables; and
$14.6 million of other costs. Approximately $53.8 million
was recorded as health plan services, $38.4 million as SG&A
and $17.2 million as government health care services in the
consolidated statement of operations. In addition, $2.7 mil-
lion in credits related to modifications of the Company’s
1996 restructuring plan were recorded in 1997.
Note 15 – Impairment of Long-Lived Assets
During 1998, the Company initiated a formal plan to dis-
pose of certain Central Division health plans included in the
Company’s Health Plan Services segment in accordance with
its previously disclosed anticipated divestitures program. Pur-
suant to SFAS No. 121, the Company evaluated the carrying
values of the assets for these health plans and the related ser-
vice center and holding company, and determined that the
carrying value of these assets exceeded the estimated fair
values of these assets. Estimated fair value is determined by
the Company based on the current stages of sales negotia-
tion, including letters of intent, definitive agreements, and
sales discussions, net of expected transaction costs.
In the case of the service center and holding company
operations, buildings, furniture, fixtures, equipment and
software development projects were determined by man-
agement to have no continuing value to the Company, due
to the Company abandoning plans for the development of
this location and its systems and programs as a centralized
operations center.
Accordingly, in the fourth quarter of 1998, the Com-
pany adjusted the carrying value of these long-lived assets to
their estimated fair value, resulting in a non-cash 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-downs of abandoned fur-
niture, equipment and software development projects; $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. R evenue and pretax income
attributable to these Central Division plans were $191.3 mil-
lion and $9.8 million for the year ended December 31, 1999
and revenue and pretax loss were $346.8 million and $36.1
million for the year ended December 31, 1998.The carrying
value of these assets as of December 31, 1999 and 1998 was
$22.1 million and $42.8 million, respectively. No subsequent
adjustments were made to these assets in 1998. Further
adjustments to carrying value of $4.7 million were recorded
in 1999.The annual impact of suspending depreciation is
approximately $13.0 million.
During the fourth quarter of 1999, the Company
recorded asset impairment costs totaling $6.2 million in
connection with pending dispositions of non-core busi-
nesses.These charges included a further adjustment of $4.7
million to adjust the carrying value of the Company’s
Pittsburgh health plans to fair value.The Company also
adjusted the carrying value of its subacute operations by
$1.5 million to fair value.The revenue and pretax losses
attributable to these operations were $66.2 million and $1.4
million for the year ended December 31, 1999.The carry-
ing value of these assets as of December 31, 1999 was $16.2
million.
FOUNDATION HEALTH SYSTEMS, IN C. 51