Health Net 2007 Annual Report Download - page 123

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
general, stock options and other equity awards vest based on one to five years of continuous service, except for
certain awards where vesting may be accelerated by virtue of attaining certain performance targets. As of
December 31, 2007, there were no outstanding options or awards that had market or performance condition
accelerated vesting provisions. Certain stock options and other equity awards also provide for accelerated vesting
under the circumstances set forth in the Plans and equity award agreements upon the occurrence of a change in
control (as defined in the Plans). At the end of the ten-year term, unexercised stock options are set to expire. 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.
Performance share awards were granted in 2007 with 100% cliff vesting at the end of a three-year
performance period and provide for vesting in 0% to 200% of shares granted. Shares delivered pursuant to each
performance share award will take into account the Company’s attainment of specific performance conditions as
outlined in each performance share award agreement.
We have reserved up to an aggregate of 12.2 million shares of our common stock for issuance under the
Plans.
The fair value of each option award is estimated on the date of grant using a closed-form option valuation
model (Black-Scholes) based on the assumptions noted in the following table. Expected volatilities are based on
implied volatilities from traded options on our stock and historical volatility of our stock. We estimated the
expected term of options by using historical data to estimate option exercise and employee termination within a
lattice-based valuation model; separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected term of options granted is derived from a lattice-
based option valuation model and represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury
Strip yields in effect at the time of grant with maturity dates approximately equal to the expected life of the
option at the grant date.
The following table provides the weighted-average values of assumptions used in the calculation of grant-
date fair values during the years ended December 31:
2007 2006 2005
Risk-free interest rate ................................................ 4.53% 4.83% 4.29%
Expected option lives (in years) ........................................ 4.8 4.4 3.7
Expected volatility for options ......................................... 27.3% 27.7% 30.6%
Expected dividend yield .............................................. None None None
The weighted-average grant-date fair values for options granted during 2007, 2006 and 2005 were $16.91,
$14.52 and $9.31, respectively. The total intrinsic value of options exercised was $69.4 million, $52.6 million
and $55.3 million during the years ended December 31, 2007, 2006 and 2005, respectively.
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