Health Net 2005 Annual Report Download - page 130

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
from Lessor under an operating lease for an initial term of three years, which term may be extended at our option
for an additional term of four quarters subject to the terms of the Lease Agreement. In connection with the sale-
leaseback transaction, we granted Lessor a security interest of $80 million in certain of our non-real estate fixed
assets. The gain of $2.5 million on the sale of the fixed assets has been deferred in accordance with SFAS No. 13
“Accounting for Leases” and will be recognized in proportion to the lease expense over the lease term. Payments
under the Lease Agreement are $2.8 million per quarter, plus an interest component subject to adjustment based
on three-month LIBOR on a quarterly basis. At the expiration of the term of the Lease Agreement, we will have
the option to purchase from, or return to, Lessor all, but not less than all, of the leased assets, subject to the terms
of the Lease Agreement. The total future minimum lease commitments under the lease are approximately $63.7
million.
Other Purchase Obligations
We have entered into long-term agreements to receive services related to nurse advice line and other related
services, disease and condition management and pharmacy benefit management. The remaining terms are three
years for nurse advice line and other related services, three years for disease and condition management and one
year for pharmacy benefit management. The total future minimum commitments under these agreements are
$34.5 millions and are included in the table below. We have also entered into contracts with our health care
providers and facilities, the federal government, IT service companies and other parties within the normal course
of our business for the purpose of providing health care services. Certain of these contracts are cancelable with
substantial penalties.
In connection with our participation in the new Medicare Prescription Drug Program (Medicare Part D), we
entered into a new four-year agreement with an external third-party service provider for it to provide pharmacy
claims processing services for our Medicare Part D programs and other pharmacy benefits effective January 1,
2006. Termination of this agreement is subject to certain termination provisions which include liquidated
damages of minimum amounts per month for the remaining months of the contract. The total future minimum
commitment under the agreement is approximately $6.9 million.
As of December 31, 2005, future minimum commitments for operating leases and other purchase
obligations for the years ending December 31 are as follows:
Operating
Leases
Other
Purchase
Obligations
(Dollars in millions)
2006 .................................................. $ 67.5 $25.4
2007 .................................................. 64.3 3.6
2008 .................................................. 85.8 2.7
2009 .................................................. 38.2 2.3
2010 .................................................. 32.3 0.5
Thereafter ............................................. 83.8 —
Total minimum commitments .............................. $371.9 $34.5
Lease expense totaled $54.1 million, $50.4 million and $52.1 million for the years ended December 31,
2005, 2004 and 2003, respectively. Other purchase obligation expenses totaled $29.9 million, $31.0 million and
$26.9 million for the years ended December 31, 2005, 2004 and 2003, respectively.
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