Health Net 2002 Annual Report Download - page 65

HEALTH NET, INC. | 63
share would have been reduced to the pro forma amounts indicated below for the years ended December 31 (amounts in
thousands, except per share data):
2002 2001 2000
Net income, as reported $228,626 $86,529 $163,623
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 315 ––
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards subject to SFAS No. 123, net of
related tax effects (15,674) (19,135) (6,922)
Net income, pro forma $ 213,267 $ 67,394 $156,701
Basic earnings per share As reported $1.84 $0.70 $ 1.34
Pro forma 1.72 0.55 1.28
Diluted earnings per share As reported 1.82 0.69 1.33
Pro forma 1.69 0.54 1.27
The weighted average fair value for options granted
during 2002, 2001 and 2000 was $9.40, $9.14 and $5.18,
respectively. The fair values were estimated using the
Black-Scholes option-pricing model. The following
weighted average assumptions were used in the fair value
calculation for 2002, 2001 and 2000, respectively:
(i) risk-free interest rate of 3.21%, 4.88% and 5.97%;
(ii) expected option lives of 3.8 years, 3.6 years and 4.2 years;
(iii) expected volatility for options of 47.2%, 55.9% and
63.7%; and (iv) no expected dividend yield.
As fair value criteria was not applied to option grants
and employee purchase rights prior to 1995, and addi-
tional awards in future years are anticipated, the effects on
net income and earnings per share in this pro forma disclo-
sure may not be indicative of future amounts.
Restricted Stock
During 2002, we entered into Restricted Stock Agreements
with certain employees and issued 80,000 shares of
nonvested common stock. The shares issued pursuant to
the agreements are subject to restrictions on transfers, voting
rights and certain other conditions. Upon issuance of the
80,000 shares pursuant to the agreements, an unamortized
compensation expense equivalent to the market value of the
shares on the date of grant was charged to stockholders’
equity as unearned compensation. This unearned compensa-
tion will be amortized over the five-year restricted period.
Compensation expense recorded for these restricted shares
during the year ended December 31, 2002 was $472,000.
We become entitled to an income tax deduction in an
amount equal to the taxable income reported by the
holders of the restricted shares when the restrictions are
released and the shares are issued. Restricted shares are
forfeited if the employees terminate prior to the lapsing of
restrictions. We record forfeitures of restricted stock, if any,
as treasury share repurchases and any compensation cost
previously recognized is reversed in the period of forfeiture.
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” estab-
lishes standards for reporting and presenting comprehen-
sive income and its components. Comprehensive income
includes all changes in stockholders’ equity (except those
arising from transactions with stockholders) and includes
net income and net unrealized appreciation (depreciation),
after tax, on investments available for sale. Reclassification
adjustments for net gains (losses) realized, net of tax, in
net income were $3.0 million, $0.8 million and $(0.04)
million for the years ended December 31, 2002, 2001 and
2000, respectively.