Health Net 1999 Annual Report Download - page 47

Significant components of the Company’s deferred tax
assets and liabilities as of December 31 are as follows
(amounts in thousands):
In 1998 and 1997, income tax benefits attributable to
employee stock option transactions of $6.3 million and $4.5
million, respectively, were allocated to stockholders’ equity.
No income tax benefits were allocated to stockholders’
equity during 1999.
As of December 31, 1999, the Company had federal
and state net operating loss carryforwards of approximately
$439.9 million and $246.2 million, respectively.The net
operating loss carryforwards expire between 2001 and 2019.
Limitations on utilization may apply to approximately
$111.2 million and $143.4 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.The
valuation allowance decrease of $1.4 million in 1999 was
due primarily to utilization of state net operating loss carry-
forwards. O f the $47.1 million (tax effected) remaining valu-
ation allowance, $45.4 million, pertains primarily to an
acquired subsidiary’s deferred tax assets. In the event that any
portion of the deferred tax assets related to this subsidiary is
realized, the future tax benefits will be allocated to reduce
the associated goodwill.
Note 11 – Regulatory Requirements
All of the Company’s health plans as well as its insurance
subsidiaries are required to periodically file financial state-
ments 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 mini-
mum capital or tangible net equity requirements.The Com-
pany’s non-California health plans, as well as its health and
life insurance companies, must comply with their respective
state’s minimum regulatory capital requirements and in cer-
tain cases, maintain minimum investment amounts for the
restricted use of the regulators which as of December 31,
1999 totaled $84.7 million. Also, under certain government
regulations, certain subsidiaries 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 regula-
tory requirements, certain subsidiaries are subject to restric-
tions 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 Com-
pany. Management believes that as of December 31, 1999,
substantially all of the Company’s health plans and insurance
subsidiaries met their respective regulatory requirements.
Note 12 – Commitments and Contingencies
Legal Proceedings
In July 1996, the Company’s predecessor, HSI, the owner of
1,234,544 shares of Series F Preferred Stock of Health Data
Sciences Corporation (“HDS”), voted its HDS shares in
favor of the acquisition of HDS by Medaphis Corporation
(“Medaphis”). HSI received as the result of the acquisition
976,771 shares of Medaphis common stock in exchange for
its Series F Preferred Stock. In November 1996, HSI filed a
lawsuit against Medaphis and its former Chairman and Chief
Executive Officer.The Company alleged that Medaphis and
certain insiders deceived the Company by presenting materi-
ally false financial statements and by failing to disclose that
Medaphis would shortly reveal a “write off” of up to $40
million in reorganization costs and would lower its earnings
estimate for the following year, thereby more than halving
the value of the Medaphis shares received by the Company.
In September 1999, the Company and Medaphis (which
changed its name to Per-Se Technologies, Inc. (“Per-Se”))
entered into a Settlement Agreement and R elease pursuant to
which the Company received net proceeds of approximately
$25 million consisting of cash from Per-Se and Per-Se’s insur-
ers and proceeds from the sale of both the 976,771 shares of
Medaphis (now Per-Se) common stock then owned by the
Company and additional shares of Per-Se common stock
issued to the Company as part of the settlement. In exchange,
the Company and Per-Se terminated the ongoing litigation
and granted each other a general release.The gain recognized
in the consolidated statement of operations as of December
31, 1999 was immaterial.
1999 1998
Deferred Tax Assets:
Accrued liabilities $ 52,491 $ 91,993
Insurance loss reserves and
unearned premiums 6,144 3,616
Tax credit carryforwards 8,059 –
Accrued compensation and
benefits 33,838 31,097
R estructuring reserves 4,025 30,462
Net operating loss carryforwards 165,023 190,913
Other 16,363 5,667
Deferred tax assets before
valuation allowance 285,943 353,748
Valuation allowance (47,092) (48,452)
Net deferred tax assets $238,851 $305,296
Deferred Tax Liabilities:
Depreciable and amortizable
property $35,388 $26,077
Other 50 14
Deferred tax liabilities $35,438 $26,091
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