Health Net 2005 Annual Report Download - page 103

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Common stock equivalents arising from dilutive stock options and restricted common stock are computed
using the treasury stock method; for the years ended December 31, 2005, 2004 and 2003, this amounted to
2,723,000, 1,179,000 and 2,278,000 shares, respectively which include 157,000, 110,000 and 56,000 common
stock equivalents from dilutive restricted common stock, respectively.
Options to purchase an aggregate of 669,000, 8,549,000 and 1,376,000 shares of common stock were
considered anti-dilutive during 2005, 2004 and 2003, respectively, and were not included in the computation of
diluted EPS because the options’ exercise price was greater than the average market price of the common stock
for each respective period. These options expire through December 2015 (see Note 7).
We are authorized to repurchase our common stock under our stock repurchase program authorized by our
Board of Directors (see Note 8). As a result of the ratings action taken by Moody’s Investor Services (Moody’s)
in September 2004 and Standard & Poor’s Rating Service (S&P) in November 2004 with respect to our senior
unsecured debt rating, we placed our stock repurchase program on hold. We did not repurchase any of our
common stocks during the year ended December 31, 2005 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 (see Note 6).
Comprehensive Income
Comprehensive income includes all changes in stockholders’ equity (except those arising from transactions
with stockholders) and includes net income, net unrealized appreciation (depreciation), after tax, on investments
available for sale and changes in minimum pension liabilities (see Note 9). Reclassification adjustments for net
(losses) gains realized, net of tax, in net income were $(2.9) million, $(4.7) million and $3.2 million for the years
ended December 31, 2005, 2004 and 2003, respectively.
Taxes Based on Premiums
We provide services in certain states which require premium taxes to be paid by us based on membership or
billed premiums. These taxes are paid in lieu of or in addition to state income taxes and totaled $34.4 million in
2005, $34.8 million in 2004 and $31.8 million in 2003. These amounts are recorded in general and administrative
expenses on our consolidated statements of operations.
Income Taxes
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets
and liabilities (see Note 10). The deferred tax assets and liabilities are calculated by applying enacted tax rates
and laws to taxable years in which such differences are expected to reverse. We establish a valuation allowance
in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” We continually review the
adequacy of the valuation allowance and recognize the benefits from our deferred tax assets only when an
analysis of both positive and negative factors indicate that it is more likely than not that the benefits will be
realized.
We file tax returns in many tax jurisdictions, and often, application of tax rules within the various
jurisdictions is subject to differing interpretation. Despite our belief that our tax return positions are fully
supportable, we believe that it is probable certain positions will be challenged by taxing authorities, and we may
not prevail on the positions as filed. Accordingly, we maintain a reserve for the estimated amount of contingent
tax challenges by taxing authorities upon examination, in accordance with SFAS No. 5, “Accounting for
Contingencies.” The reserve is comprised of amounts for specific issues arising in periods subject to
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