Health Net 2006 Annual Report Download - page 140

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
employment litigation, wage and hour claims, real estate and intellectual property claims and claims brought by
members seeking coverage or additional reimbursement for services allegedly rendered to our members, but
which allegedly were either denied, underpaid or not paid, and claims arising out of the acquisition or divestiture
of various business units or other assets. We are also subject to claims relating to the performance of contractual
obligations to providers, members, employer groups and others, including the alleged failure to properly pay
claims and challenges to the manner in which we process claims. In addition, we are subject to claims relating to
the insurance industry in general, such as claims relating to reinsurance agreements and rescission of coverage
and other types of insurance coverage obligations.
These other legal proceedings are subject to many uncertainties, and, given their complexity and scope, their
final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period our
results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of any or
all of these other legal proceedings depending, in part, upon the results of operations or cash flow for such
period. However, at this time, management believes that the ultimate outcome of all of these other legal
proceedings that are pending, after consideration of applicable reserves and potentially available insurance
coverage benefits, should not have a material adverse effect on our financial condition and liquidity.
Potential Settlements
We regularly evaluate litigation matters pending against us, including those described in this Note 12, to
determine if settlement of such matters would be in the best interests of the Company and its stockholders. The
costs associated with any such settlement could be substantial and, in certain cases, could result in an earnings
charge in any particular quarter in which we enter into a settlement agreement. Although we have recorded
litigation reserves that represent our best estimate on probable losses, both known and incurred but not reported,
our recorded reserves might prove not to be adequate to cover an adverse result or settlement for extraordinary
matters such as the matters described in this Note 12. Therefore, the costs associated with the various litigation
matters to which we are subject and any earnings charge recorded in connection with a settlement agreement
could have a material adverse effect on our financial condition or results of operations.
Operating Leases and Other Purchase Obligations
Operating Leases
We lease administrative office space throughout the country under various operating leases. Certain leases
contain renewal options and rent escalation clauses. Certain leases are cancelable with substantial penalties.
Effective January 1, 2005, we entered into an operating lease agreement to renew our leased office space in
Woodland Hills, California for our corporate headquarters. The new lease is for a term of 10 years and has
provisions for space reduction at specific times over the term of the lease, but it does not provide for complete
cancellation rights. The total future minimum lease commitments under the lease are approximately $25.1
million.
On June 30, 2005, we entered into a Master Lease Financing Agreement (Lease Agreement) with an
independent third party (Lessor). Pursuant to the terms of the Lease Agreement, we sold certain of our non-real
estate fixed assets with a net book value of $76.5 million as of June 30, 2005 to Lessor for the sale price of $80
million (less approximately $1.0 million in certain costs and expenses) and simultaneously leased such assets
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
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