Health Net 2002 Annual Report Download - page 76

74 | HEALTH NET, INC.
Significant components of our deferred tax assets and
liabilities as of December 31 are as follows:
(Amounts in thousands) 2002 2001
DEFERRED TAX ASSETS:
Accrued liabilities $51,818 $48,556
Insurance loss reserves and
unearned premiums 5,019 4,953
Tax credit carryforwards 834 3,154
Accrued compensation
and benefits 26,782 34,964
Net operating loss
carryforwards 42,492 52,128
Other 13,513 10,391
Deferred tax assets before
valuation allowance 140,458 154,146
Valuation allowance (16,664) (16,813)
Net deferred tax assets $123,794 $137,333
DEFERRED TAX LIABILITIES:
Depreciable and
amortizable property $40,840 $35,810
Other 14,389 5,255
Deferred tax liabilities $55,229 $41,065
In 2002, 2001 and 2000, income tax benefits attribut-
able to employee stock option transactions of $18.2
million, $2.8 million and $0.5 million, respectively, were
allocated to stockholders' equity.
As of December 31, 2002, we had federal and state
net operating loss carryforwards of approximately $96.7
million and $165.8 million, respectively. The net operating
loss carryforwards expire between 2003 and 2019.
Limitations on utilization may apply to approximately
$36.4 million and $65.6 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.
NOTE 11—Regulatory Requirements
All of our health plans as well as our 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 requirements. Our non-California
health plans, as well as our health and life insurance
companies, must comply with their respective state’s
minimum regulatory capital requirements and, in certain
cases, maintain minimum investment amounts for the
restricted use of the regulators which, as of December 31,
2002 and 2001, totaled $5.6 million and $5.9 million,
respectively. Short-term investments held by trustees or
agencies pursuant to state regulatory requirements were
$109.1 million and $86.1 million as of December 31, 2002
and 2001, respectively. 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 regu-
latory requirements, certain subsidiaries are subject to
restrictions on their ability to make dividend payments,
loans or other transfers of cash to us. Such restrictions,
unless amended or waived, limit the use of any cash gener-
ated by these subsidiaries to pay our obligations. The
maximum amount of dividends which can be paid by the
insurance company subsidiaries to us without prior
approval of the insurance departments is subject to restric-
tions relating to statutory surplus, statutory income and
unassigned surplus. Management believes that as of
December 31, 2002, all of our health plans and insurance
subsidiaries met their respective regulatory requirements.
NOTE 12—Commitments and Contingencies
LEGAL PROCEEDINGS
SUPERIOR NATIONAL INSURANCE GROUP, INC.
We and our former wholly-owned subsidiary, Foundation
Health Corporation (FHC), which merged into Health
Net, Inc. in January 2001, 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, case number
SV00-14099GM. The lawsuit relates to the 1998 sale of
Business Insurance Group, Inc. (BIG), a holding company
of workers’ compensation insurance companies operating
primarily in California, by FHC to Superior National
Insurance Group, Inc. (Superior).
On March 3, 2000, the California Department of
Insurance seized BIG and Superior’s other California insur-
ance subsidiaries. On April 26, 2000, Superior filed for
bankruptcy. Two days later, Superior filed its lawsuit
against us, FHC and M&R. Superior alleges in the
lawsuit that:
■the BIG transaction was a fraudulent transfer under
federal and California bankruptcy laws in that Superior
did not receive reasonably equivalent value for the $285
million in consideration paid for BIG;
■we, FHC and M&R defrauded Superior by making
misstatements as to the adequacy of BIG’s reserves;
■Superior is entitled to rescind its purchase of BIG;
■Superior is entitled to indemnification for losses it
allegedly incurred in connection with the BIG transaction;
■FHC breached the stock purchase agreement relating to
the sale of BIG; and