Health Net 2000 Annual Report Download - page 49

Notes to Consolidated Financial Statements HEALTH NET 47
A reconciliation of the statutory federal income tax
rate and the effective income tax rate on income from
continuing operations is as follows for the years ended
December 31:
2000 1999 1998
Statutory federal income
tax rate 35.0% 35.0% (35.0)%
State and local taxes, net of
federal income tax effect 4.0 3.9 (1.5)
Tax exempt interest income (0.9) (1.1) (1.3)
Goodwill amortization 3.3 3.4 5.7
Examination settlements (2.3) (1.9) –
Merger transaction costs ––(3.2)
Other, net (1.4) 0.1 0.3
Effective income tax rate 37.7% 39.4% (35.0)%
Significant components of the Company’s deferred
tax assets and liabilities as of December 31 are as follows
(amounts in thousands):
2000 1999
deferred tax assets:
Accrued liabilities $ 28,570 $ 52,491
Insurance loss reserves and
unearned premiums 4,627 6,144
Tax credit carryforwards 12,709 8,059
Accrued compensation and
benefits 33,089 33,838
Restructuring reserves –4,025
Net operating loss
carryforwards 115,462 165,023
Other 8,687 16,363
Deferred tax assets before
valuation allowance 203,144 285,943
Valuation allowance (16,813) (47,092)
Net deferred tax assets $186,331 $238,851
deferred tax liabilities:
Depreciable and amortizable
property $ 53,214 $ 35,388
Other – 50
Deferred tax liabilities $ 53,214 $ 35,438
In 2000 and 1998, income tax benefits attributable
to employee stock option transactions of $0.5 million and
$6.3 million, respectively, were allocated to stockholders’
equity. No income tax benefits were allocated to stock-
holders’equity during 1999.
As of December 31, 2000, the Company had federal
and state net operating loss carryforwards of approxi-
mately $296.7 million and $232.5 million, respectively.
The net operating loss carryforwards expire between 2001
and 2019. Limitations on utilization may apply to approxi-
mately $36.9 million and $80.7 million of the federal
and state net operating loss carryforwards, respectively.
Accordingly, valuation allowances have been provided to
account for the potential limitations on utilization of
these tax benefits. During the year ended December 31,
2000, the valuation allowance decreased by $30.3 million
resulting from changes in realizability of an acquired sub-
sidiary’s deferred tax assets.The tax benefit reduced associ-
ated goodwill. Of the remaining valuation allowance,
$14.9 million will also be allocated to goodwill in the
event certain deferred tax assets are realized.
NOTE 11 – Regulatory Requirements
All of the Company’s health plans as well as its insurance
subsidiaries are required to periodically file financial
statements with regulatory agencies in accordance with
statutory accounting and reporting practices. Under the
California Knox-Keene Health Care Service Plan Act of
1975, as amended, California plans must comply with
certain minimum capital or tangible net equity require-
ments.The Company’s non-California health plans, as
well as its health and life insurance companies, must com-
ply with their respective state’s minimum regulatory capi-
tal requirements and in certain cases, maintain minimum
investment amounts for the restricted use of the regula-
tors which as of December 31, 2000 totaled $7.2 million.
Also, under certain government regulations, certain sub-
sidiaries are required to maintain a current ratio of 1:1
and to meet other financial standards.
As a result of the above requirements and other reg-
ulatory requirements, certain subsidiaries are subject to
restrictions on their ability to make dividend payments,
loans or other transfers of cash to the Company. Such
restrictions, unless amended or waived, limit the use of
any cash generated by these subsidiaries to pay obligations
of the Company.The maximum amount of dividends
which can be paid by the insurance company subsidiaries
to the Company without prior approval of the insurance
departments is subject to restrictions relating to statutory
surplus, statutory income and unassigned surplus.
Management believes that as of December 31, 2000, all of
the Company’s health plans and insurance subsidiaries met
their respective regulatory requirements.
NOTE 12 – Commitments and
Contingencies
Legal Proceedings
The Company and its former wholly-owned subsidiary,
Foundation Health Corporation (“FHC”), were named
in an adversary proceeding, Superior National Insurance
Group, Inc. v. Foundation Health Corporation,
Foundation Health Systems, Inc. and Milliman &
Robertson, Inc. (“M&R”), filed on April 28, 2000, in the
United States Bankruptcy Court for the Central District
of California.The lawsuit relates to the 1998 sale of
Business Insurance Group, Inc., a holding company of
workers’compensation companies operating primarily in