Health Net 2002 Annual Report Download - page 84

82 | HEALTH NET, INC.
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 adminis-
trative 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 benefit related costs included in
the 2001 Charge.
Asset Impairment Costs— Pursuant to SFAS No. 121, 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
leasehold 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 consist
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 develop-
ment projects resulting from the workforce reductions,
migration of certain systems and investments to more
robust technologies; and $0.8 million for write-downs of
leasehold improvements (see Note 15 for segment
information).
2001 CHARGES
The following table summarizes the charges we recorded in 2001:
2001 Activity
Balance at
December 31, Expected Future
(Amounts in millions) 2001 Charges Cash Payments Non-cash 2001 Cash Outlays
Severance and benefit related costs $ 43.3 $(20.5) $ – $ 22.8 $22.8
Asset impairment costs 27.9 – (27.9) – –
Real estate lease termination costs 5.1 (0.3) – 4.8 4.8
Other costs 3.4 (0.4) (2.3) 0.7 0.7
Total $ 79.7 $(21.2) $(30.2) $ 28.3 $28.3
2002 Activity
Balance at Balance at
December 31, Cash December 31, Expected Future
2001 Payments Non-cash Modification 2002 Cash Outlays
Severance and benefit related costs $22.8 $( 24.3) $ – $ 1.5 $ – $ –
Real estate lease termination costs 4.8 (1.4) – – 3.4 3.4
Other costs 0.7 ( 0.7) – – – –
Total $28.3 $ (26.4) $ – $ 1.5 $ 3.4 $ 3.4