Health Net 2004 Annual Report Download - page 60

repurchase program. In August 2003, our Board of Directors authorized us to repurchase up to an additional $200 million (net of
exercise proceeds and tax benefits from the exercise of employee stock options) of our common stock under our stock repurchase
program. Based on the authorization we received from our Board of Directors to repurchase up to an aggregate of $450 million, our
total authority under our stock repurchase program through 2004 was estimated at $593 million, including the realized exercise
proceeds and tax benefits. Share repurchases are made under our stock repurchase program from time to time through open market
purchases or through privately negotiated transactions. We used net free cash available to the parent company to fund the share
repurchases. As a result of Moody’s downgrade in September 2004 and S&P’s downgrade in November 2004 with respect to our
senior unsecured debt rating, we discontinued our repurchases of common stock under our stock repurchase program through the end
of 2004. Our stock repurchase program currently remains on hold. Our decision to resume the repurchase of shares under our stock
repurchase program will depend on a number of factors, including, without limitation, any future ratings action taken by Moody’s or
S&P on our senior unsecured debt rating. See Note 6 to our consolidated financial statements for additional information regarding the
Moody’s and S&P downgrades.
Senior Notes
Our Senior Notes consist of $400 million in aggregate principal amount of 8.375% senior notes due 2011. The Senior Notes
were issued pursuant to an indenture dated as of April 12, 2001. The interest rate payable on our Senior Notes is subject to adjustment
from time to time if either Moody’s or S&P downgrades the rating ascribed to the Senior Notes below investment grade (as defined in
the indenture governing the Senior Notes). On September 8, 2004, Moody’s announced that it had downgraded our senior unsecured
debt rating from Baa3 to Ba1, which triggered an adjustment to the interest rate payable by us on our Senior Notes. As a result of the
Moody’s downgrade, effective September 8, 2004, the interest rate on the Senior Notes increased from the original rate of 8.375% per
annum to an adjusted rate of 9.875% per annum, resulting in an increase in our interest expense of $6 million on an annual basis. On
November 2, 2004, S&P announced that it had downgraded our senior unsecured debt rating from BBB- to BB+. The adjusted
interest rate of 9.875% per annum will remain in effect for so long as the Moody’s rating on our senior unsecured debt remains below
Baa3 (or the equivalent) or the S&P rating on our senior unsecured debt remains below BBB- (or the equivalent). During any period
in which the Moody’s rating on our senior unsecured debt is Baa3 (or the equivalent) or higher and the S&P rating on our senior
unsecured debt is BBB- (or the equivalent) or higher, the interest rate payable on the Senior Notes will be equal to the original rate of
8.375% per annum.
The Senior Notes are redeemable, at our option, at a price equal to the greater of:
• 100% of the principal amount of the Senior Notes to be redeemed; and
On February 20, 2004, we entered into Swap Contracts to hedge against interest rate risk associated with our fixed rate Senior
Notes. See “Quantitative and Qualitative Disclosures About Market Risk” for additional information regarding the Swap Contracts.
Senior Credit Facility
• the sum of the present values of the remaining scheduled payments on the Senior Notes to be redeemed consisting of
principal and interest, exclusive of interest accrued to the date of redemption, at the rate in effect on the date of calculation
of the redemption price, discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the applicable yield to maturity (as specified in the indenture governing the Senior Notes) plus 40
basis points plus, in each case, accrued interest to the date of redemption.
On June 30, 2004, we entered into a new five-year revolving credit agreement with Bank of America, N.A., as Administrative
Agent, Swing Line Lender and L/C Issuer, JP Morgan Chase Bank, as Syndication Agent, and the other lenders party thereto. The
senior credit facility refinanced and replaced our previous $175 million 364-
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