Health Net 2007 Annual Report Download - page 108

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
method, compensation cost recognized in the year ended December 31, 2006 includes: (a) compensation cost for
all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-
based payments granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS No. 123(R). Results for prior periods have not been restated. The compensation cost
that has been charged against income under our various long-term incentive plans was $24.3 million, $20.1
million and $2.5 million during the years ended December 31, 2007, 2006 and 2005, respectively. The total
income tax benefit recognized in the income statement for share-based compensation arrangements was $9.4
million, $7.8 million and $1.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Prior to the adoption of SFAS No. 123(R), we presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in our Consolidated Statements of Cash Flows. SFAS
No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The
$18.0 million and $11.9 million excess tax benefits classified as a financing cash inflow for the years ended
December 31, 2007 and 2006, respectively, would have been classified as operating cash inflows had we not
adopted SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R) and upon issuance of the restricted shares
pursuant to the restricted stock agreements, an unamortized compensation expense equivalent to the market value
of the shares on the date of grant was charged to stockholders’ equity as unearned compensation and amortized
over the applicable restricted periods. As a result of adopting SFAS No. 123(R) on January 1, 2006, we
transferred the remaining unearned compensation balance in our stockholders’ equity to additional paid in
capital. Prior to the adoption of SFAS No. 123(R), we recorded forfeitures of restricted stock, if any, and any
compensation cost previously recognized for unvested awards was reversed in the period of forfeiture. Beginning
in 2006, we record forfeitures in accordance with SFAS No. 123(R) by estimating the forfeiture rates for share-
based awards upfront and recording a true-up adjustment for the actual forfeitures.
The following table illustrates the effect on net income and earnings per share if we had applied the fair
value recognition provisions of SFAS No. 123 to options granted under the company’s stock option plans to the
prior period. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-
Scholes option-pricing model and amortized to expense over the options’ vesting periods.
(Amounts in millions, except per share data) 2005
Net income, as reported ................................................................ $229.8
Add: Stock- based employee compensation expense included in reported net income, net of
related tax effects 1.5
Deduct: Total pro forma stock-based employee compensation expense determined under fair value
based method, net of related tax effects .................................................. (12.2)
Net income, pro forma ................................................................. $219.1
Basic net income per share:
As reported ...................................................................... $ 2.03
Pro forma ....................................................................... 1.94
Diluted net income per share:
As reported ...................................................................... 1.99
Pro forma ....................................................................... 1.90
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with maturity of three months or less when
purchased.
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