Health Net 2005 Annual Report Download - page 29

programs in our Northeast and Arizona health plans. Our HSA programs represented a very small percentage of
our total revenue in 2005, primarily as a consequence of limited demand for such products in these two markets.
Among our commercial customers in California, we do not currently see meaningful demand for consumer-
directed products. Some of our large competitors, such as Aetna and Blue Cross Blue Shield plans, have made
large investments in, and heavily marketed, their consumer-directed health plans and in 2005 gained more
enrollment in many markets across the country. If their enrollment trend continues, it may widen the competitive
gap between us over the next several years. If we fail to design, maintain and effectively market consumer-
directed health care programs that are attractive to consumers and, as a result, are unable to achieve a competitive
market share in the consumer-directed care category, it could have a material adverse effect on our business,
financial condition or results of operations.
We have a material amount of indebtedness and may incur additional indebtedness, or need to refinance
existing indebtedness, in the future, which may adversely affect our operations.
Our indebtedness includes $400 million in unsecured Senior Notes. In addition, to provide liquidity, we
have a $700 million five-year revolving senior credit facility that expires in June 2009. As of December 31, 2005,
no amounts were outstanding under our credit facility. We may incur additional debt in the future. If we were to
draw on our senior credit facility, or incur other additional debt in the future, it could have an adverse effect on
our business and future operations. For example, it could:
• require us to dedicate a substantial portion of cash flow from operations to pay principal and interest on
our debt, which would reduce funds available to fund future working capital, capital expenditures and
other general operating requirements;
• increase our vulnerability to general adverse economic and industry conditions or a downturn in our
business; and
• place us at a competitive disadvantage compared to our competitors that have less debt.
In an effort to lower our interest expense, we are currently considering our financing alternatives, including
refinancing or repurchasing our Senior Notes. Our ability to obtain any financing, whether through the issuance
of new debt securities or otherwise, and the terms of any such financing are dependent on, among other things,
our financial condition, financial market conditions within our industry and generally, credit ratings and
numerous other factors. There can be no assurance that we will be able to refinance our Senior Notes and obtain
financing on acceptable terms or within an acceptable time, if at all. If we are unable to obtain financing on terms
and within a time acceptable to us it could, in addition to other negative effects, have a material adverse effect on
our operations, financial condition, ability to compete or ability to comply with regulatory requirements.
We are a holding company and a substantial amount of our cash flow is generated by our subsidiaries.
As a holding company, our subsidiaries conduct substantially all of our consolidated operations and own
substantially all of our consolidated assets. Consequently, our cash flow and our ability to pay our debt depends,
in part, on the amount of cash that we receive from our subsidiaries. Our subsidiaries’ ability to make any
payments to us will depend on their earnings, business and tax considerations, legal and regulatory restrictions
and economic conditions. Our regulated subsidiaries are subject to HMO and insurance regulations that require
them to meet or exceed various capital standards and may restrict their ability to pay dividends or make cash
transfers to us. If our regulated subsidiaries are restricted from paying us dividends or otherwise making cash
transfers to us, it could have material adverse effect on our results of operations and Health Net, Inc.’s cash flow.
For additional information regarding our regulated subsidiaries’ statutory capital requirements, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital
Resources—Statutory Capital Requirements.”
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