Health Net 2011 Annual Report Download - page 49

action, including increased reporting and/or state supervision. In addition, in most states, we are required to seek
prior approval before we transfer money or pay dividends from our regulated subsidiaries that exceed specified
amounts. 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 free 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 Operations—Liquidity and Capital Resources—
Statutory Capital Requirements.”
Our revolving credit facility contains restrictive covenants that could limit our ability to pursue our business
strategies.
On October 24, 2011, we entered into a $600 million five-year revolving credit facility. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Capital Structure” for additional information regarding our revolving credit facility. Our revolving
credit facility requires us to comply with various covenants that impose restrictions on our operations, including
our ability to incur additional indebtedness, create liens, pay dividends, make investments or other restricted
payments, sell or otherwise dispose of assets and engage in other activities. Our revolving credit facility also
requires us to comply with certain financial covenants, including a maximum leverage ratio and a minimum fixed
charge coverage ratio. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Liquidity and Capital Resources—Capital Structure—Revolving Credit Facility” for details
regarding our revolving credit facility.
The restrictive covenants under our revolving credit facility could limit our ability to pursue our business
strategies. In addition, any failure by us to comply with these restrictive covenants could result in an event of
default under the revolving credit facility and, in some circumstances, under the indenture governing our Senior
Notes, which, in any case, could have a material adverse effect on our financial condition.
Acquisitions, divestitures and other significant transactions may adversely affect our business.
We continue to evaluate the profitability realized or that we expect to be realized by our existing businesses
and operations. From time to time we review, from a strategic standpoint, potential acquisitions and divestitures
in light of our core businesses and growth strategies. The success of any such acquisition or divestiture depends,
in part, upon our ability to identify suitable buyers or sellers, negotiate favorable contractual terms and, in many
cases, obtain governmental approval. For acquisitions, success is also dependent upon efficiently integrating the
acquired business into our existing operations. For divestitures, success may also be dependent upon efficiently
reducing general and administrative or other functions for our remaining operations. In the event the structure of
the transaction results in continuing obligations by the buyer to us or our customers, a buyer’s inability to fulfill
these obligations could lead to future financial loss on our part. As a seller, we may have significant continuing
indemnification, administrative services or other obligations to the buyer. Potential acquisitions or divestitures
present financial, managerial and operational challenges, including diversion of management attention from
existing businesses, difficulty with integrating or separating personnel and financial and other systems,
significant post-closing obligations, increased expenses, assumption of unknown liabilities, indemnities and
potential disputes with the buyers or sellers.
On January 9, 2012, we announced that our subsidiary, HNL, has entered into a definitive agreement to sell
its Medicare stand-alone Prescription Drug Plan business to an affiliate of CVS Caremark for approximately
$160 million in cash. The sale is subject to closing conditions and regulatory approvals, including approval from
CMS, and is expected to close in the second quarter of 2012. In addition, the Asset Purchase Agreement entered
into in connection with the transaction contains certain termination rights, including that either party may
terminate the Asset Purchase Agreement if the closing does not occur prior to May 1, 2012. If the Asset Purchase
Agreement is terminated for any reason, HNL will be obligated to pay a termination fee of $20 million to the
buyer. Among the other risks discussed above, if the transaction does not close or, if it closes and we are unable
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