Health Net 2002 Annual Report Download - page 37

HEALTH NET, INC. | 35
new cost basis in our investment in CareScience, Inc. was
$2.6 million as of September 30, 2002. Our remaining
holdings in CareScience, Inc. are included in investments-
available for sale on the consolidated balance sheets.
Pursuant to SFAS No. 115 and SFAS No. 118,
“Accounting by Creditors for Impairment of a Loan—
Income Recognition and Disclosures”, we evaluated the
carrying value of our investments in convertible preferred
stock and subordinated notes of AmCareco, Inc. arising
from a previous divestiture of health plans in Louisiana,
Oklahoma and Texas in 1999. Since August 2002, authori-
ties in these states have taken various actions, including
license denials and liquidation-related processes, that
caused us to determine that the carrying value of these
assets was no longer recoverable. Accordingly, we wrote
off the total carrying value of our investment of $7.1
million which was included in asset impairment and
restructuring charges during the third quarter ended
September 30, 2002. Our investment in AmCareco had
been included in other noncurrent assets on the consoli-
dated balance sheets.
2001 Charges
As part of our ongoing general and administrative expense
reduction efforts, during the third quarter of 2001, we
finalized a formal plan to reduce operating and administra-
tive expenses for all business units within the Company
(the 2001 Plan). In connection with the 2001 Plan, we
decided on enterprise-wide staff reductions and consolida-
tions of certain administrative, financial and technology
functions. We recorded pretax restructuring charges of
$79.7 million during the third quarter ended September
30, 2001 (2001 Charge). As of September 30, 2002, we
had completed the 2001 Plan. As of December 31, 2002,
we had $3.4 million in lease termination payments
remaining to be paid under the 2001 Plan. These payments
will be made during the remainder of the respective
lease terms.
Severance and Benefit Related Costs—During the third
quarter ended September 30, 2001, we recorded severance
and benefit related costs of $43.3 million related to enter-
prise-wide staff reductions, which costs were included in
the 2001 Charge. These reductions include the elimination
of approximately 1,517 positions throughout all functional
groups, divisions and corporate offices within the
Company. As of September 30, 2002, the termination of
positions in connection with the 2001 Plan had been
completed and we recorded a modification of $1.5 million
to reflect an increase in the severance and related benefits
in connection with the 2001 Plan from the initial amount
of $43.3 million included in the 2001 Charge to a total of
$44.8 million. No additional payments remain to be paid
related to severance and related benefit-related costs
included in the 2001 Charge.
Asset Impairment Costs— Pursuant to SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of,” we evaluated
the carrying value of certain long-lived assets that were
affected by the 2001 Plan. The affected assets were
primarily comprised of information technology systems
and equipment, software development projects and lease-
hold improvements. We determined that the carrying value
of these assets exceeded their estimated fair values. The
fair values of these assets were determined based on
market information available for similar assets. For certain
of the assets, we determined that they had no continuing
value to us due to our abandoning certain plans and
projects in connection with our workforce reductions.
Accordingly, we recorded asset impairment charges of
$27.9 million consisting entirely of non-cash write-downs
of equipment, building improvements and software appli-
cation and development costs, which charges were
included in the 2001 Charge. The carrying value of these
assets was $6.9 million as of December 31, 2002.
The asset impairment charges of $27.9 million
consisted of $10.8 million for write-downs of assets related
to the consolidation of four data centers, including all
computer platforms, networks and applications into a
single processing facility at our Hazel Data Center; $16.3
million related to abandoned software applications and
development projects resulting from the workforce reduc-
tions, migration of certain systems and investments to
more robust technologies; and $0.8 million for write-
downs of leasehold improvements.
Real Estate Lease Termination Costs— The 2001 Charge
included charges of $5.1 million related to termination of
lease obligations and non-cancelable lease costs for excess
office space resulting from streamlined operations and
consolidation efforts. Through December 31, 2002, we
had paid $1.7 million of the termination obligations. The
remainder of the termination obligations of $3.4 million
will be paid during the remainder of the respective
lease terms.
Other Costs— The 2001 Charge included charges of $3.4
million related to costs associated with closing certain data
center operations and systems and other activities which
were completed and paid for in the first quarter ended
March 31, 2002.