Health Net 2000 Annual Report Download - page 55

Notes to Consolidated Financial Statements HEALTH NET 53
Severance and Benefit Related Costs – During the year ended
December 31, 1998, the Company recorded severance
costs of $21.2 million related to staff reductions in selected
health plans and the corporate centralization and consoli-
dation.This plan included the termination of 683 employ-
ees in seven geographic locations primarily relating to
corporate finance and human resources functions and
California operations. As of December 31, 1999, the termi-
nation of employees had been completed and $20.1 mil-
lion had been recorded as severance under this plan.
FPA Medical Management – On July 19, 1998, FPA Medical
Management, Inc. (“FPA”) filed for bankruptcy protection
under Chapter 11 of the Federal Bankruptcy Code. FPA,
through its affiliated medical groups, provided services to
approximately 190,000 of the Company’s affiliated members
in Arizona and California and also leased health care facilities
from the Company. FPA has discontinued its medical group
operations in these markets and the Company has made
other arrangements for health care services to the Company’s
affiliated members.The FPA bankruptcy and related events
and circumstances caused management to re-evaluate the
decision to continue to operate the facilities and manage-
ment determined to sell the 14 properties, subject to
bankruptcy court approval. Management immediately
commenced the sale process upon such determination.The
estimated fair value of the assets held for disposal was deter-
mined based on the estimated sales prices less the related
costs to sell the assets. Management believed that the net pro-
ceeds from a sale of the facilities would be inadequate to
enable the Company to recover their carrying value. Based
on management’s best estimate of the net realizable values,
the Company recorded charges totaling approximately $84.1
million.These charges were comprised of $63.0 million for
real estate asset impairments, $10.0 million impairment
adjustment of a note received as consideration in connection
with the 1996 sale of the Company’s physician practice man-
agement business and $11.1 million for other items.These
other items included payments made to Arizona physician
specialists totaling $3.4 million for certain obligations that
FPA had assumed but was unable to pay due to its bank-
ruptcy, advances to FPA to fund certain operating expenses
totaling $3.0 million, and other various costs totaling $4.7
million.The carrying value of the assets held for disposal
totaled $9.9 million at December 31, 2000.There have been
no further adjustments to the carrying value of these assets
held for disposal. As of December 31, 2000, 12 properties
have been sold which has resulted in net gains of $5.0 mil-
lion during 1999 and $3.6 million in 1998 which are
included in net gains on sale of businesses and buildings.The
remaining properties are expected to be sold during 2001.
The effects of the suspension of real estate depreciation on
the respective properties had an impact of approximately $2.0
million in 1998 and were immaterial during 2000 and 1999.
The results of operations attributable to FPA real estate assets
were immaterial during 1998, 1999 and 2000.
Asset Impairment and Other Charges – During the fourth
quarter ended December 31, 1998, the Company
recorded impairment and other charges totaling $118.4
million. Of this amount, $112.4 million related to
impairment of certain long-lived assets held for dis-
posal (see Note 15) and $6 million related to the FPA
bankruptcy.
Other Costs – The Company recorded other costs of $22.4
million which included the adjustment of amounts due
from a third-party hospital system that filed for bank-
ruptcy which were not related to the normal business of
the Company totaling $18.6 million, and $3.8 million
related to other items such as fees for consulting services
from one of the Company’s prior executives and costs
related to exiting certain rural Medicare markets.
During 1999, modifications of $12.6 million to the ini-
tial estimates were recorded.These credits to the 1998 charges
included: $10.7 million from reductions to asset impairment
costs and $1.9 million from reductions to initially anticipated
involuntary severance costs and other adjustments.
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 pro-
gram. Pursuant to SFAS No. 121, the Company evaluated
the carrying values of the assets for these health plans and
the related service 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 negotiation, including letters of intent, definitive
agreements, and sales discussions, net of expected transac-
tion costs.
In the case of the Colorado regional processing cen-
ter and holding company operations, buildings, furniture,
fixtures, equipment and software development projects
were determined by management 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
Company 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 mil-
lion consists of $40.3 million for write-downs of abandoned
furniture, 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 mil-
lion for other impairments and other charges.The fair value
is based on expected net realizable value. Revenue and
pretax loss were $7.7 million and $0.4 million for the year
ended December 31, 2000. Revenue and pretax income
attributed to these Central Division plans were $191.3
million 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, 2000, 1999,
and 1998 was $3.9 million, $22.1 million, and $42.8 million,
respectively. No subsequent adjustments were made to these
assets in 1998, 1999 and 2000.
During the fourth quarter of 1999, the Company
recorded asset impairment costs totaling $6.2 million in