Health Net 2006 Annual Report Download - page 111

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
respectively. The federal government is the only customer of our Government Contracts segment, with premiums
and fees accounting for 100% of our Government Contracts revenue. In addition, the federal Government is a
significant customer of the Company’s Health Plan Services segment as a result of its contract with CMS for
coverage of Medicare-eligible individuals. Medicare revenues accounted for 22% of our health plan premiums in
2006.
Earnings Per Share
Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of
common stock outstanding during the periods presented. Diluted earnings per share is based upon the weighted
average shares of common stock and dilutive common stock equivalents (this reflects the potential dilution that
could occur if stock options were exercised and restricted stock units (RSUs) and restricted shares were vested)
outstanding during the periods presented.
Common stock equivalents arising from dilutive stock options, restricted common stock and RSUs are
computed using the treasury stock method; for the years ended December 31, 2006, 2005 and 2004, this
amounted to 3,182,000, 2,723,000 and 1,179,000 shares, respectively which include 145,000, 157,000 and
110,000 common stock equivalents from dilutive RSUs and restricted common stock, respectively.
Options to purchase an aggregate of 1,258,000, 669,000 and 8,549,000 shares of common stock were
considered anti-dilutive during 2006, 2005 and 2004, 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 2016 (see Note 7).
We are authorized to repurchase our common stock under our stock repurchase program authorized by our
Board of Directors. As a result of the ratings action taken by Moody’s Investor Services (Moody’s) in September
2004 and Standard & Poor’s Rating Service (S&P) in November 2004 with respect to our senior unsecured debt
rating, we had placed our stock repurchase program on hold. On October 14, 2006, the Board of Directors
authorized the Company to resume repurchases of its common stock under our existing stock repurchase
program. The Board of Directors also increased the size of the stock repurchase program by $235 million to $450
million. The remaining authorization under our stock repurchase program as of December 31, 2006 was $200
million (see Note 8).
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 changes in pension assets and liabilities including minimum pension liabilities (see Note
9). Reclassification adjustments for net gains (losses) realized, net of tax, in net income were $2.6 million, $(2.9)
million and $(4.7) million for the years ended December 31, 2006, 2005 and 2004, respectively.
Taxes Based on Premiums
We provide services in certain states which require premium taxes to be paid by us based on membership or
billed premiums. These taxes are paid in lieu of or in addition to state income taxes and totaled $36.2 million in
2006, $34.4 million in 2005 and $34.8 million in 2004. These amounts are recorded in general and administrative
expenses on our consolidated statements of operations.
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