Health Net 2005 Annual Report Download - page 98

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted average fair value for options granted during 2005, 2004 and 2003 was $9.31, $6.85 and
$8.02, 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:
2005 2004 2003
Risk-free interest rate ................................... 4.29% 2.65% 2.65%
Expected option lives (in years) ........................... 3.7 3.6 3.9
Expected volatility for options ............................ 30.6% 28.6% 37.5%
Expected dividend yield ................................. None None None
Since we anticipate granting additional awards in future years, the effects on net income and earnings per
share in this pro forma disclosure may not be indicative of future amounts.
Restricted Stock
We have entered into restricted stock agreements with certain employees and have awarded shares of
restricted common stock under these agreements. The shares issued pursuant to the agreements are subject to
vesting and to restrictions, including transfers, voting rights and certain other conditions. During the years ended
December 31, 2005, 2004 and 2003, we awarded 30,000, 96,000 and 190,000 shares of nonvested common stock,
respectively. Upon issuance of the restricted shares pursuant to the agreements, an unamortized compensation
expense equivalent to the fair 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 applicable restricted periods.
Compensation expense recorded for these restricted shares was $2.5 million, $1.9 million and $2.1 million during
the years ended December 31, 2005, 2004 and 2003, respectively.
Under the company’s stock option plans, employees may elect for the Company to withhold shares to satisfy
minimum statutory federal, state and local tax withholding obligations arising from the vesting of restricted stock
awards made thereunder. During the year ended December 31, 2005, we withheld 9,833 shares of common stock
at the election of employees to satisfy their tax withholding obligations arising from the vesting of restricted
stock awards.
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 vesting. We record forfeitures of restricted stock, if any, and any
compensation cost previously recognized for unvested awards is reversed in the period of forfeiture.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with a maturity of three months or less when
purchased.
Investments
Investments classified as available-for-sale are reported at fair value based on quoted market prices, with
unrealized gains and losses excluded from earnings and reported as other comprehensive income, net of income
tax effects. The cost of investments sold is determined in accordance with the specific identification method and
realized gains and losses are included in net investment income. We periodically assess our available-for-sale
investments for other-than-temporary impairment. Any such other-than-temporary impairment loss is recognized
as a realized loss and measured as the excess of carrying value over fair value at the time the assessment is made.
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