Health Net 2002 Annual Report Download - page 45

HEALTH NET, INC. | 43
The other covenants in the credit agreements
include, among other things, limitations on incurrence of
indebtedness by subsidiaries of Health Net, Inc. and on
our ability to:
■incur liens;
■extend credit and make investments in non-affiliates;
■merge, consolidate, dispose of stock in subsidiaries, lease
or otherwise dispose of assets and liquidate or dissolve;
■substantially alter the character or conduct of the busi-
ness of Health Net, Inc. or any of its “significant
subsidiaries” within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC;
■make restricted payments, including dividends and other
distributions on capital stock and redemptions of capital
stock if the Company’s debt is rated below investment
grade by either Standard and Poor’s Rating Service or
Moody’s Investor Services; and
■become subject to other agreements or arrangements that
restrict (i) the payment of dividends by any Health Net,
Inc. subsidiary, (ii) the ability of Health Net, Inc.
subsidiaries to make or repay loans or advances to
lenders, (iii) the ability of any subsidiary of Health Net,
Inc. to guarantee our indebtedness or (iv) the creation of
any lien on property, provided that the foregoing shall
not apply to (a) restrictions and conditions imposed by
regulatory authorities, or (b) restrictions imposed under
either the 364-day Revolving Credit Facility or the five-
year Revolving Credit Facility.
As of December 31, 2002 and 2001, we were in
compliance with the covenants of the credit facilities.
Committed loans under the credit facilities bear
interest at a rate equal to either (1) the greater of the
federal funds rate plus 0.5% and the applicable prime rate
or (2) LIBOR plus a margin that depends on our senior
unsecured credit rating. Loans obtained through the
bidding process bear interest at a rate determined in the
bidding process. We pay fees on outstanding letters of
credit and a facility fee, computed as a percentage of the
lenders’ commitments under the credit facilities, which
varies from 0.130% to 0.320% per annum for the 364-
day credit facility and from 0.155% to 0.375% per annum
for the five-year credit facility, depending on our senior
unsecured credit rating.
We lease office space under various operating leases.
In addition, we have entered into long-term service agree-
ments with third parties. As of December 31, 2002, there
are seven years remaining on these service agreements with
minimum future commitments totaling $61.4 million. These
lease and service agreements are cancelable with substan-
tial penalties. Our future minimum lease and service fee
commitments are as follows (amounts in thousands):
2003 $ 61,614
2004 54,286
2005 38,594
2006 32,930
2007 30,836
Thereafter 90,140
Total minimum commitments $ 308,400
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America (GAAP) requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contin-
gent assets and liabilities at the date of the financial state-
ments, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ
from those estimates. Principle areas requiring the use of
estimates include revenue recognition, reserves for claims
and other settlements, reserves for contingent liabilities,
amounts receivable or payable under government contracts
and recoverability of long-lived assets. Accordingly, we
consider accounting policies on these areas to be critical in
preparing our consolidated financial statements. A signifi-
cant change in any one of these amounts may have a signif-
icant impact on our consolidated results of operations and
financial condition. A more detailed description of the
significant accounting policies that we use in preparing our
financial statements is included in the notes to our consoli-
dated financial statements which are described elsewhere in
this Annual Report to Stockholders for the year ended
December 31, 2002.
REVENUE RECOGNITION
Health plan services premiums include HMO, POS and
PPO premiums from employer groups and individuals and
from Medicare recipients who have purchased supple-
mental benefit coverage, for which premiums are based on
a predetermined prepaid fee, Medicaid revenues based on
multi-year contracts to provide care to Medicaid recipi-
ents, and revenue under Medicare risk contracts to provide
care to enrolled Medicare recipients. Revenue is recognized
in the month in which the related enrollees are entitled to
health care services. Premiums collected in advance of the
month in which enrollees are entitled to health care
services are recorded as unearned premiums.