Health Net 2006 Annual Report Download - page 33

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 $200 million of borrowings under a bridge loan agreement, which are due in
March 2007, and $300 million of borrowings under a term loan agreement, which are due in June 2011. In
addition, to provide liquidity, we have a $700 million five-year revolving credit facility that expires in June 2009.
As of December 31, 2006, no borrowings were outstanding under our revolving credit facility. We may incur
additional debt in the future. Our existing indebtedness, and any additional debt we incur in the future through
drawings on our revolving credit facility or otherwise 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.
We are considering alternative financing options, including borrowings under our revolving credit facility
and/or potential structured financing arrangements, to repay the amounts outstanding under the bridge loan
agreement on or prior to maturity. 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 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. Our
regulated subsidiaries are subject to restrictions on the payment of dividends and maintenance of minimum
levels of capital.
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. In addition, in certain states our regulated subsidiaries are subject to risk-based capital
requirements, known as RBC. These laws require our regulated subsidiaries to report their results of risk-based
capital calculations to the departments of insurance in their state of domicile and the National Association of
Insurance Commissioners. Failure to maintain the minimum RBC standards could subject certain of our
regulated subsidiaries to corrective 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. Our regulated subsidiaries are currently in compliance with the risk-
based capital or other similar requirements imposed by their respective states of domicile. 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 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.”
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