Health Net 2003 Annual Report Download - page 87

of SFAS No. 123, our net income and earnings per 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):
2003 2002 2001
Net income, as reported ................................................... $234,030 $225,580 $ 80,942
Add: Stock-based employee compensation expense included in reported net income,
net of related tax effects ................................................ 1,293 315 —
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 .............................................................. (16,683) (15,674) (19,135)
Netincome,proforma ................................................... $218,640 $210,221 $ 61,807
Basic earnings per share
As reported ........................................................ $ 2.02 $ 1.82 $ 0.66
Proforma.......................................................... 1.88 1.69 0.50
Diluted earnings per share
As reported ........................................................ 1.98 1.79 0.65
Proforma.......................................................... 1.85 1.67 0.49
The weighted average fair value for options granted during 2003, 2002 and 2001 was $8.02, $9.40 and $9.14,
respectively. The fair values were estimated using the Black-Scholes option-pricing model.
The weighted average assumptions used in the fair value calculation for the following periods were:
2003 2002 2001
Risk-free interest rate ........................................... 2.65% 3.21% 4.88%
Expected option lives (in years) .................................. 3.9 3.8 3.6
Expected volatility for options ................................... 37.5% 47.2% 55.9%
Expected dividend yield ........................................ None None None
As fair value criteria were not applied to option grants and employee purchase rights prior to 1995, and additional
awards in future years are anticipated, the effects on net income and earnings per share in this pro forma disclosure may
not be indicative of future amounts.
Restricted Stock
During the years ended December 31, 2003 and 2002, we entered into Restricted Stock Agreements with certain
employees and issued 190,000 and 80,000 shares of nonvested common stock, respectively. The shares issued pursuant to
the agreements are subject to restrictions on transfers, voting rights and certain other conditions. Upon issuance of the
restricted 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 compensation
will be amortized over the respective restricted periods. Compensation expense recorded for these restricted shares was
$2,107,000 and $472,000 during the years ended December 31, 2003 and 2002, respectively.
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
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 minimum pension liabilities (see Note 9). Reclassification adjustments for net gains realized, net of tax, in net
income were $3.2 million, $3.0 million and $0.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
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