Health Net 2006 Annual Report Download - page 141

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $52.5
million.
Other Purchase Obligations
We have entered into long-term agreements to receive services related to a nurse advice line and other
related services, disease and condition management and pharmacy benefit management. The remaining terms are
two years for nurse advice line and other related services, two years for disease and condition management and
three years for pharmacy benefit management. The total future minimum commitments under these agreements
are $10.8 million 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 2006, we entered into a new three-year contract agreement with an external third party service provider
for it to provide outsourcing services such as enrollment and member billing services as well as claims
processing services for our Prescription Drug Plan and Private Fee for Service products. Termination of this
agreement is subject to certain termination provisions. The total future commitment under the agreement is
approximately $10 million.
As of December 31, 2006, 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)
2007 .................................................. $ 74.9 $35.5
2008 .................................................. 97.1 9.7
2009 .................................................. 48.4 8.0
2010 .................................................. 38.7 2.9
2011 .................................................. 36.7 0.4
Thereafter ............................................. 63.9 0.5
Total minimum commitments .............................. $359.7 $57.0
Lease expense totaled $69.3 million, $54.1 million and $50.4 million for the years ended December 31,
2006, 2005 and 2004, respectively. Other purchase obligation expenses totaled $33.8 million, $29.9 million and
$31.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Surety Bonds
During December 2005, the Company elected to post $114.7 million of surety bonds to suspend the effect,
and secure appeal, of the final judgment entered against the Company in connection with the AmCareco
litigation. The surety bonds are secured by $90.1 million of irrevocable standby letters of credit (the “LC”) issued
under the Company’s revolving credit facility in favor of the issuers of the surety bonds.
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