Health Net 2003 Annual Report Download - page 94

Our outstanding $400 million in aggregate principal amount of 8.375% Senior Notes are due in April 2011, with no
principal amount payable prior to this date.
The Senior Notes are redeemable, at our option, at a price equal to the greater of (A) 100% of the principal amount of
the Senior Notes to be redeemed; and (B) 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 through 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 treasury yield plus 40
basis points plus accrued interest to the date of redemption.
Revolving Credit Facilities
Our revolving credit facilities, which provide for an aggregate of $700 million in borrowings, consist of a $175
million 364-day revolving credit facility and a $525 million five-year revolving credit and competitive advance facility.
Under the five-year facility, we can obtain letters of credit in an aggregate amount of up to $200 million. The 364-day
credit facility was amended on June 25, 2003 to extend the existing credit agreement for an additional 364-day period. We
must repay all borrowings, if any, under the 364-day credit facility by June 23, 2004, unless we avail ourself of a two-year
term-out option in the 364-day credit facility. The five-year credit facility expires in June 2006, and we must repay all
borrowings, if any, under the five-year credit facility by June 28, 2006. The five-year credit facility may be extended at
our request under certain circumstances for up to two twelve-month periods. Swingline loans under the five-year credit
facility are subject to repayment within seven days. 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. The credit agreements provide for acceleration of repayment of indebtedness under the
credit facilities upon the occurrence of customary events of default such as failing to pay any principal or interest when
due; providing materially incorrect representations; failing to observe any covenant or condition; judgments against us
involving in the aggregate an unsecured liability of $25 million or more not paid, vacated, discharged, stayed or bonded
pending appeal within 60 days of the final order; our non-compliance with any material terms of HMO or insurance
regulations pertaining to fiscal soundness and not cured or waived within 30 days, solvency or financial condition; the
occurrence of specified adverse events in connection with any employee pension benefit plan of ours; our failure to
comply with the terms of other indebtedness with an aggregate amount exceeding $40 million such that the other
indebtedness can be or is accelerated; or a change in control. As of December 31, 2003 and 2002, we had no outstanding
balances under these credit facilities. No amounts were outstanding under the facilities during 2003 and the maximum
commitment level is $700 million as of December 31, 2003. The maximum amount outstanding under the facilities during
2003 and 2002 was $0 and $120 million, respectively. The credit agreements contain negative covenants, including
financial covenants that impose performance requirements on our operations and other covenants, including, among other
things, limitations on incurrence of indebtedness by subsidiaries of Health Net, Inc. As of December 31, 2003, we were in
compliance with the covenants of the credit facilities.
The weighted average annual interest rate on our financing arrangements was approximately 8.4%, 7.6% and 7.1%
for the years ended December 31, 2003, 2002 and 2001, respectively.
Interest Rate Swap Contracts
We use interest rate swap contracts (swaps) as a part of our hedging strategy to manage certain exposures related to
changes in interest rates on the fair value of our outstanding $400 million in aggregate principal amount of 8.375% Senior
Notes due on April 15, 2011 (Senior Notes). Under the swaps, we agree to pay an amount equal to a specified variable rate
of interest times a notional principal amount and to receive in return an amount equal to a specified fixed rate of interest
times the same notional principal amount. The swaps are entered into with a number of major financial institutions in
order to minimize counterparty credit risk.
On February 20, 2004, we entered into four swaps on our Senior Notes. The swaps have an aggregate notional
amount of $400 million and convert the 8.375% fixed rate to a variable rate of six-month London Interbank Offered Rate
(“LIBOR”) plus 399.625 basis points. The swaps will be reflected at fair value in our consolidated balance sheet and the
related Senior Notes will be reflected at an amount equal to the sum of their carrying value plus an adjustment
representing the change in fair value of the Senior Notes attributable to the interest risk being hedged. Because the terms
of the swaps match the terms of our Senior Notes, the changes in the fair value of the swaps offset the changes in the
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