Health Net 1998 Annual Report Download - page 53

F O U N DAT IO N HEALTH SYSTEMS, I N C . 5 1
the Company and certain former officers violated
federal and state securities laws by misrepresenting
and failing to disclose certain information about a
1996 agreement between the Company and FPA,
about FPA’s business and about the Company’s 1997
sale of FPA common stock held by the Company.
Management believes these suits are without merit
and intends to vigorously defend the actions.
The Company is involved in various other
legal proceedings,which are routine in its business.
In the opinion of management,based upon current
facts and circumstances known by the Company, the
resolution of these matters should not have a mater-
ial adverse effect on the financial position or results
of operations of the Company.
Operating Leases
The Company leases administrative and medical
office space under various operating leases.Certain
medical office space is subleased to participating
medical groups doing business with the Company.
Certain leases contain renewal options and rent
escalation clauses.
In 19 9 5 , the Company entered into a $60 mil-
lion tax retention operating lease with NationsBank
of Texas, N.A., as Administrative Agent for the
Lenders who are parties thereto, and First Security
Bank of Utah, N.A.,as Owner Trustee, (the “T ROL
Agreement”) for the construction of health care
centers and corporate facilities. Under the TR OL
Agreement, rental payments commence upon com-
pletion of construction, with a guarantee of 87% to
the lessor of the residual value of properties leased at
the end of the lease term.After the initial five year
noncancelable lease term,the lease may be extended
by agreement of the parties or the Company must
purchase or arrange for sale of the leased properties.
The Company has committed to a guaranteed resid-
ual value of $35.3 million under this agreement at
December 31,1998.
Future minimum lease commitments for
noncancelable operating leases at December 31,
1998 are as follows (amounts in thousands):
1999 $ 47,933
2000 41,084
2001 36,161
2002 22,453
2003 12,203
Thereafter 9,582
Total minimum lease commitments $169,416
Rent expense totaled $50.3 million,
$48.7 million and $46.8 million in 1998,1997
and 1996, respectively.
Note 13 – Rela ted Part i e s
Two current directors of the Company and one
prior director are partners in law firms which
re c e i ved legal fees totaling $1.0 million, $1.1 million,
and $1.0 million in 1998,1997, and 1996, respec-
tively. One current director is an officer of IBM
which the Company paid $8.0 million for services
in 1998,and one current director is also a director
of a temporary staffing company which the Com-
pany paid $20.4 million for services in1998.An offi-
cer of a contracted hospital was also a member of
the Company’s Board of Directors until April 1,
1997.Medical costs paid to the provider totaled
$67.1 million and $58.7 million in 1997 and 1996,
respectively. Such contracted hospital is also
an employer group of the Company from which the
C o m p a ny re c e i ves premium reve nues at standard rates.
Note 1 4 – Asset I mpairment, Me rg e r, Re str ucturing and
Othe r Charg e s
The following sets forth the principal components
of merger, restructuring and other costs for the year
ended December 31:
(amounts in millions) 1998 1997 1996
Severance and benefit
related costs $ 21.2 $ 61.4 $ 5.4
Provider network
consolidation costs —36.2 —
Asset impairment costs —44.0 17.4
Real estate lease
termination costs —5.2 4.6
Total restructuring costs 21.2 146.8 27.4
Asset impairments and other
charges related to FPA
Medical Management 84.1 — —
Asset impairment charges
and other 112.4 — —
Merger related costs —69.6 —
Gem costs —57.5 —
Other costs 57.3 122.0 16.7
Total $275.0 $395.9 $44.1
1998 Charges
On July 19, 1 9 9 8 ,F PA Medical Management, I n c.
( “ F PA”) filed for bankruptcy protection under Chap-
ter 11 of the Federal Bankruptcy Code. F PA ,t h ro u g h
its affiliated medical gro u p s ,p rovided services to
a p p r oximately 190,000 of the Company ’s affiliated
m e m b e rs in A rizona and Californ i a . F PA has discon-
t i nued its medical group operations in these marke t s .
As a re s u l t , the Company is seeking new tenants for,
or will sell, the 13 healthcare facilities it leased to FPA
in these markets and has made other arrangements for
p r ovider services to the Company ’s affiliated members .