Health Net 2004 Annual Report Download - page 100

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, 2004, 2003 and 2002, this amounted to 1,179,000, 2,278,000 and 1,784,000 shares,
respectively which include 110,000, 56,000 and 3,000 common stock equivalents from dilutive restricted common stock, respectively.
Options to purchase an aggregate of 8,549,000, 1,376,000 and 2,630,000 shares of common stock were considered anti-dilutive
during 2004, 2003 and 2002, 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 2014 (see Note 7).
In April 2002, our Board of Directors authorized us to repurchase up to $250 million (net of exercise proceeds and tax benefits
from the exercise of employee stock options) of our common stock. In August 2003, our Board of Directors authorized us to
repurchase up to an additional $200 million (net of exercise proceeds and tax benefits from the exercise of employee stock options) of
our common stock (see Note 8). As a result of the ratings downgrade issued by Moody’s Investor Service (Moody’s) in September
2004 with respect to our senior unsecured debt rating, we announced on September 13, 2004 that we had no intention to continue
repurchasing shares of common stock under our stock repurchase program through the end of 2004. As of September 13, 2004, we
had repurchased an aggregate of 19,978,655 shares of our common stock under this repurchase program and did not repurchase any
additional shares of common stock through the remainder of 2004.
Fair Value of Financial Instruments
The estimated fair value amounts of cash equivalents, investments available for sale, trade accounts and notes receivable and
notes payable have been determined by us using available market information and appropriate valuation methodologies. The carrying
amounts of cash equivalents approximate fair value due to the short maturity of those instruments. The fair values of investments are
estimated based on quoted market prices and dealer quotes for similar investments. The carrying value of trade receivables, long-term
notes receivable and nonmarketable securities approximate the fair value of such financial instruments. The fair value of notes
payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt with
the same remaining maturities. The carrying values of our senior notes payable were $397.8 million and $399.0 million and the fair
values were $481 million and $483 million as of December 31, 2004 and 2003, respectively. Considerable judgment is required to
develop estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts we could realize in a current
market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure” (SFAS No. 148). SFAS No. 148 amended SFAS No. 123, “Accounting for Stock-Based
Compensation” (SFAS No. 123), to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No.
28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s
accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and
interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they
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