Health Net 2005 Annual Report Download - page 113

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
specified fixed rate of interest times the same notional principal amount. The Swap Contracts have an aggregate
notional principal amount of $400 million and effectively convert the fixed rate on the Senior Notes to a variable
rate of six-month LIBOR plus 399.625 basis points. As of December 31, 2005, the Swap Contracts increased the
effective interest rate of the Senior Notes by 32 basis points from 8.38 % to 8.70%. The expected effective
variable rate on the Senior Notes was 10.20% as of December 31, 2005. As of December 31, 2005 and 2004, the
Swap Contracts were reflected at negative fair value of $11.3 million and $1.3 million, respectively, in our
consolidated balance sheet and the related Senior Notes were reflected at an amount equal to the sum of their
carrying value less $11.3 million and $1.3 million, respectively. The downgrades by Moody’s and S&P of our
senior unsecured debt rating had no impact on our accounting for the Swap Contracts.
Note 7—Stock Option and Employee Stock Purchase Plans
We have various stock option plans which cover certain employees, officers and non-employee directors.
On June 1, 2005, we terminated our employee stock purchase plan, under which substantially all of our full-time
employees were eligible to participate. The stockholders have approved our various stock option plans except for
the 1998 Stock Option Plan which was adopted by our Board of Directors. In May 2005, the stockholders
approved the Health Net, Inc. 2005 Long-Term Incentive Plan which is an amendment and restatement of the
2002 and 1997 stock option plans. During 2005, 2004 and 2003, we issued 30,000, 96,000 and 190,000 shares of
restricted stock, respectively, under our stock option plans (see Note 2). We also have a non-employee director
stock option plan pursuant to which non-employee directors receive annual stock option grants.
Under our various employee stock option plans and our non-employee director stock option plan, we grant
options at prices at or above the fair market value of the stock on the date of grant. The options carry a maximum
term of up to 10 years and in general vest ratably over three to five years, except for certain option grants under
the 1997 and 1998 plans where vesting is accelerated by virtue of attaining certain performance targets. We have
reserved a total of 13.5 million shares of our Common Stock for issuance under the stock option plans. As of
December 31, 2005, 333,334 outstanding options had market or performance condition accelerated vesting
provisions. Under our employee stock purchase plan, we provided employees with the opportunity to purchase
stock through payroll deductions. On March 4, 2005, the Board of Directors approved the termination of our
employee stock purchase plan effective June 1, 2005. Prior to June 1, 2005, eligible employees were able to
purchase on a monthly basis our Common Stock at 85% of the lower of the market price on either the first or last
day of each month.
Stock option activity and weighted average exercise prices for the years ended December 31 are presented
below:
2005 2004 2003
Number of
Options
Weighted
Average
Exercise
Price
Number of
Options
Weighted
Average
Exercise
Price
Number of
Options
Weighted
Average
Exercise
Price
Outstanding at January 1 ............ 14,044,529 $24.35 12,690,256 $23.32 12,767,849 $21.06
Granted .......................... 2,126,484 31.72 3,196,413 27.38 3,694,313 25.13
Exercised ........................ (3,410,991) 21.36 (897,030) 19.07 (2,685,966) 15.37
Canceled ......................... (947,372) 25.18 (945,110) 24.79 (1,085,940) 23.83
Outstanding at December 31 ......... 11,812,650 $26.47 14,044,529 $24.35 12,690,256 $23.32
Exercisable at December 31 ......... 5,708,419 6,672,450 5,238,455
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