Health Net 2005 Annual Report Download - page 65

Capital Structure
Stock Repurchase Program
Our Board of Directors has previously authorized us to repurchase up to $450 million (net of exercise
proceeds and tax benefits from the exercise of employee stock options) of our common stock under a stock
repurchase program. After giving effect to realized exercise proceeds and tax benefits from the exercise of
employee stock options, our total authority under our stock repurchase program is estimated at $687 million.
Share repurchases are made under our stock repurchase program from time to time through open market
purchases or through privately negotiated transactions. As of December 31, 2005, we had repurchased an
aggregate of 19,978,655 shares of our common stock under our stock repurchase program at an average price of
$26.86 for aggregate consideration of approximately $537 million. The remaining authorization under our stock
repurchase program as of December 31, 2005 was $150 million after taking into account exercise proceeds and
tax benefits from the exercise of employee stock options. We used net free cash available to the parent company
to fund the share repurchases. As a result of the Moody’s downgrade in September 2004 and S&P’s downgrade
in November 2004 with respect to our senior unsecured debt rating, we have currently discontinued our
repurchases of common stock under our stock repurchase program. 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. Our
stock repurchase program does not have an expiration date. As of December 31, 2005, we have not terminated
any repurchase program prior to its expiration date.
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+, and on March 1, 2005, S&P further downgraded our senior
unsecured debt rating from BB+ to BB. On May 16, 2005, Moody’s further downgraded our senior unsecured
debt rating from Ba1 to Ba2. 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. Semi-annual interest is payable on April 15 and October 15 of each
year.
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
• 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.
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