Health Net 1999 Annual Report Download - page 48

46 FOUNDATION HEALTH SYSTEMS, IN C.
Complaints have been filed in federal and state courts
seeking an unspecified amount of damages on behalf of an
alleged class of persons who purchased shares of common
stock, convertible subordinated debentures and options to
purchase common stock of FPA at various times between
February 3, 1997 and May 15, 1998.The complaints allege
that the Company and certain former officers violated fed-
eral and state securities laws by misrepresenting and failing
to disclose certain information about a 1996 transaction
between the Company and FPA, about FPA’s business and
about the Company’s 1997 sale of FPA common stock held
by the Company. Based in part on advice from litigation
counsel to the Company and upon information presently
available, management believes these suits are without merit
and intends to vigorously defend the actions.
In November 1999, a complaint was filed seeking certi-
fication of a nationwide class action and alleging that cost
containment measures used by FHS-affiliated health mainte-
nance organizations, preferred provider organizations and
point-of-service health plans violate provisions of the federal
R acketeer Influenced and Corrupt Organizations Act and
the federal Employee R etirement Income Security Act
(“ERISA”).The action seeks unspecified damages and
injunctive relief. In January 2000, the court stayed the case
pending resolution of matters in an action pending against
one of the Company’s competitors. Based in part on advice
from litigation counsel to the Company and upon informa-
tion presently available, management believes this suit is
without merit and intends to vigorously defend the action.
In September 1983, a lawsuit was filed by Baja, Inc.
(“Baja”) against a hospital that was subsequently acquired by
the Company in October 1992.The lawsuit arose out of a
multi-phase written contract for operation of a pharmacy at
the hospital during the period September 1978 through Sep-
tember 1983. In August 1993, Baja was awarded $549,532 on
a portion of its claim. In July 1995, Baja was awarded an addi-
tional $1,015,173 plus interest in lost profits damages. In
October 1995, both parties appealed the decision and por-
tions of the judgment were reversed. In January 2000, after
further proceedings on the issue of Baja’s lost profits, Baja was
awarded an additional $4,996,019 plus pre-judgment interest.
The Company is in the process of preparing appropriate
post-trial motions in this case, and is also considering an
appeal of the final judgment. Such costs have been accrued
and recorded in the consolidated financial statements.
In December 1999, one of the Company’s subsidiaries
was sued by the Attorney General of Connecticut on behalf
of a group of state residents.The lawsuit is premised on
ERISA, and alleges that the Company has violated its duties
under that act and seeks to have the Company revamp its
formulary system, and to provide patients with written denial
notices and instructions on how to appeal.The Company
intends to defend the lawsuit vigorously, and has filed a
motion to dismiss which asserts that the state residents all
received a prescription drug appropriate for their conditions
and therefore suffered no injuries whatsoever, that the Attor-
ney General’s office lacks standing to bring the suit, and that
the allegations fail to state a claim under ER ISA. A decision
is expected in the second quarter of 2000.
The Company is involved in various other legal pro-
ceedings, which are routine in its business.
Based in part on advice from litigation counsel to the
Company and upon information presently available, the
resolution of all of the above matters should not have a
material 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 1995, the Company entered into a $60 million 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 “TROL Agreement”) for the construction of
health care centers and a corporate facility. Under the
TROL Agreement, rental payments commenced upon
completion 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 par-
ties or the Company must purchase or arrange for sale of
the leased properties.The Company has committed to a
maximum guaranteed residual value of $30.8 million under
this agreement at December 31, 1999.
Future minimum lease commitments for noncance-
lable operating leases at December 31, 1999 are as follows
(amounts in thousands):
R ent expense totaled $49.0 million, $50.3 million and
$48.7 million in 1999, 1998 and 1997, respectively.
2000 $ 44,440
2001 37,969
2002 23,411
2003 13,349
2004 7,656
Thereafter 6,224
Total minimum lease commitments $133,049