Health Net 2004 Annual Report Download - page 101

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HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of Opinion 25.
SFAS No. 123 encourages, but does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. As permitted under SFAS No. 123, we have elected to continue accounting for stock-based
compensation under the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees.”
Under the intrinsic value method, compensation cost for stock options is measured at the date of grant as the excess, if any, of the
quoted market price of our stock over the exercise price of the option. We apply APB Opinion No. 25 and related Interpretations in
accounting for our plans (see Note 7). Had compensation cost for our plans been determined based on the fair value at the grant dates
of options and employee purchase rights consistent with the method 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):
The weighted average fair value for options granted during 2004, 2003 and 2002 was $6.85, $8.02 and $9.40, 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:
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
2004
2003
2002
Net income, as reported
$42,604
$234,030
$225,580
Add: Stock-based employee compensation expense included in reported net income, net of
related tax effects
1,166
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
(13,715)
(16,683)
(15,674)
Net income, pro form
a
$30,055
$218,640
$210,221
Basic earnings per share
As reported
$ 0.38
$ 2.02
$ 1.82
Pro form
a
0.27
1.88
1.69
Diluted earnings per share
As reported
0.38
1.98
1.79
Pro form
a
0.27
1.85
1.67
2004
2003
2002
Risk-free interest rate
2.65%
2.65%
3.21%
Expected option lives (in years)
3.6
3.9
3.8
Expected volatility for options
28.6%
37.5%
47.2%
Expected dividend yiel
d
None None
None
During the years ended December 31, 2004, 2003 and 2002, we entered into Restricted Stock Agreements with certain
employees and issued 96,000, 190,000 and 80,000 shares of nonvested common stock, respectively.
F-15