Health Net 1998 Annual Report Download - page 52

5 0 F O U N DAT IO N H EALTH SYSTEMS, I N C.
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:
1998 1997 1996
Statutory federal income
tax rate (35)% (35)% 35%
State and local taxes,net
of federal income tax effect (1) (3) 3
Tax exempt interest income (1) (2) (3)
Goodwill amortization 66 6
Valuation allowance adjustment —(2) (5)
Merger transaction costs (3) 8 —
Pooling transactions —— (4)
IRS settlement —— (4)
Other, net (1) 4 (1)
Effective income tax rate (35)% (24)% 27%
Significant components of the Company’s
deferred tax assets and liabilities as of December 31
are as follows:
(in thousands) 1998 1997
D e f e rred Tax Assets:
Accrued liabilities $ 91,993 $ 70,547
Accrued compensation
and benefits 31,097 28,150
Restructuring reserves 30,462 30,057
Net operating loss carry f o r wa rd s 190,913 140,862
Other, net 9,283 1,524
Deferred tax assets
before valuation allowance 353,748 271,140
Valuation allowance (48,452) (57,445)
Net deferred tax assets $305,296 $213,695
D e f e rred Tax Liabilities:
Depreciable and amortizable
property $ 26,077 $ 66,608
Other, net 14 839
Deferred tax liabilities $ 26,091 $ 67,447
As of December 31,1998,the Company had
federal net operating loss carryforwards of approxi-
mately $469.0 million of which $111.0 million may
be subject to carryover limitations under Section
382 of the Internal Revenue Code. A valuation
allowance has been provided to account for the
potential limitations associated with utilization of
net operating loss carryforwards.The net operating
loss carryforwards expire between 2006 and 2018.
N o n c u rrent deferred tax assets of $144.9 mil-
lion at December 31,1998 are included, net of non-
c u rrent deferred tax liabilities of $26.1 million, i n
other noncurrent assets. N o n c u rrent deferred tax
liabilities at December 31, 1997 of $67.4 million are
included in other noncurrent liabilities.
The valuation allowance increase of $56.2 mil-
lion in 1997 (decreased by $9.0 million in 1998) was
due to the acquisition of a subsidiary for which the
future realizability of such subsidiary’s deferred tax
assets,primarily related to net operating loss carry-
forwards,is uncertain.In the event that the deferred
tax assets related to this subsidiary are realized, the
future tax benefits will be allocated to reduce the
associated goodwill.
Note 11 – Regulatory Require m e n t s
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,Cali-
fornia plans must comply with certain minimum
capital or tangible net equity requirements.The
Company’s non-California health plans, as well as its
health and life insurance companies, must comply
with their respective state’s minimum regulatory net
worth requirements generally under the regulation
of the respective state’s department of insurance
and in certain cases,maintain minimum investment
amounts for the re s t ricted use of the re g u l a t o rs which
as of December 31,1998 totaled $127.3 million.
Also, under certain government contracts, certain
subsidiaries are required to maintain a current ratio
of 1:1.As a result of the above requirements and
c e rtain other re g u l a t o ry re q u i re m e n t s ,c e rtain subsid-
iaries 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 gener-
ated by these subsidiaries to pay obligations of the
Company. Management believes that as of Decem-
ber 31,1998, substantially all of the Company’s
health plans and insurance subsidiaries met their
respective regulatory requirements.
Note 12 – Commitments and Contingencies
Legal Proceedings
Complaints have been filed in federal and state
courts seeking an unspecified amount of damages
on behalf of an alleged class of persons who pur-
chased shares of common stock,convertible subordi-
nated debentures and options to purchase common
stock of FPA at various times between February 3,
1997 and May 15,1998.The complaints allege that