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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____ to ____
Commission file number: 1-8865
SIERRA HEALTH SERVICES, INC.
(Exact name of Registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
88-0200415
(I.R.S. Employer Identification Number)
2724 NORTH TENAYA WAY
LAS VEGAS, NEVADA 89128
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 242-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, par value $.005 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 22, 1996 was $498,284,000.
The number of shares of the registrant's common stock outstanding on March
22, 1996 was 17,665,000.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of the registrant's definitive Part III
proxy statement for its 1996
annual meeting to be filed by March 31, 1996
Registrant's Current Report on Form 8-K Part I
dated March 4, 1996 Part II, Item 7
SIERRA HEALTH SERVICES, INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1. Business ..................................................... 1
Item 2. Properties.................................................... 13
Item 3. Legal Proceedings............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........... 14
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters................................ 15
Item 6. Selected Financial Data....................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation................................... 17
Item 8. Financial Statements and Supplementary Data................... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 53
PART III
Item 10. Directors and Executive Officers of the Registrant............ 53
Item 11. Executive Compensation........................................ 53
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 53
Item 13. Certain Relationships and Related Transactions................ 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 54
i
PART I
ITEM 1. BUSINESS
GENERAL
Sierra Health Services, Inc. ("Sierra") and its subsidiaries (collectively
referred to as the "Company"), is a managed health care organization that
provides and administers the delivery of comprehensive health care and workers'
compensation programs with an emphasis on quality care and cost management. The
Company's strategy has been to develop and offer a portfolio of managed health
care and workers' compensation products to employer groups and individuals. The
Company's broad range of managed health care services is provided through its
federally qualified health maintenance organizations ("HMOs"), insurance
companies, managed indemnity plans, a third-party administrative services
program for employer- funded health benefit plans and workers' compensation
medical management programs. Ancillary products and services that complement the
Company's managed health care and workers' compensation product lines are also
offered.
On October 31, 1995 the Company acquired CII Financial, Inc. ("CII"), a
workers' compensation insurance holding company, for approximately $76.3 million
of common stock in a transaction accounted for as a pooling of interests. In
conjunction with the acquisition a supplemental indenture was filed modifying
CII's 7 1/2% convertible subordinated debentures (the "Debentures"). Each $1,000
in principal is now convertible into 16.921 shares of Sierra's common stock at a
conversion price of $59.097 per share. CII is currently subject to the reporting
requirements of the Securities Exchange Act of 1934; however, CII has initiated
the process to delist the Debentures from the American Stock Exchange.
The Company's primary types of health care coverage are HMO plans, HMO
Point of Service ("POS") plans and managed indemnity plans, which include a
preferred provider organization ("PPO") option. The POS products allow members
to choose one of the other coverage options when medical services are required
instead of one plan for the entire year.
As of December 31, 1995, the Company provided HMO products to 141,177
members, of which approximately 31% are in the POS product, managed indemnity
products to 30,984 members, Medicare supplement products to 14,607 members, and
administrative services to 210,864 members. Of these members, approximately 83%
reside in Nevada and the balance reside in 9 other states. The Company's diverse
HMO membership includes governmental, union and commercial groups as well as
individual members.
The Company operates a mixed group/network model HMO in Nevada, and a
network model HMO in Texas, as well as managed indemnity PPO plans. Most of its
managed health care services in Nevada are provided through its networks of over
1,800 providers and 16 hospitals. These networks include the Company's
multi-specialty medical group, which provides medical services to approximately
82% of the Company's Nevada HMO members and employs 133 primary care and other
providers in over 17 medical specialties. The Company directly provides home
health care, hospice care and behavioral health care services. In addition, the
Company operates two 24-hour urgent care centers, a radiology department, a
vision department, an occupational medicine department and two free-standing,
state licensed and Medicare approved ambulatory surgery centers. The Company
believes that this vertical integration of its health care delivery system
provides a competitive advantage as it has helped it to manage health care costs
effectively while delivering quality care.
CII writes workers' compensation insurance in the states of California,
Colorado, Nebraska, New Mexico and Utah. The Company has licenses in 21 states
and the District of Columbia. California and Colorado represent approximately
84% and 13%, respectively, of CII's fully insured workers' compensation
insurance premiums in 1995.
1
The principal executive offices of the Company are located at 2724 North
Tenaya Way, Las Vegas, Nevada 89128, and its telephone number is (702) 242-7000.
Managed Care Products and Services
The Company, through its own health care delivery system, provides a
comprehensive range of outpatient services encompassing most of the managed care
services required by its members with the primary exceptions of acute hospital
care and pharmaceutical services.
HMO. The Company's Nevada HMO was established in 1981 and began enrolling
members in southern Nevada in October 1982. As of December 31, 1995, the HMO had
137,821 members. The HMO is a mixed group/network model with most of the primary
physician health care and many specialty services provided by the Company's
wholly owned multi-specialty medical group. As of December 31, 1995, the Nevada
HMO members were served by 133 primary care and other providers employed by the
Company, approximately 1,100 additional contracted health care providers, and 16
hospitals. The Company also owns a 50% interest in an HMO in Houston, Texas.
This HMO is a network model and had 3,356 members as of December 31, 1995. As of
December 31, 1995 the Texas HMO members were served by approximately 800
contracted providers, and 21 hospitals. Contracted primary care physicians and
specialists for the HMOs are compensated on a capitation or modified
fee-for-service basis. Contracts with their primary hospitals are on a
capitation or discounted per diem basis. Members receive a wide range of
coverage after paying a nominal co-payment and are eligible for preventive care
coverage. The HMOs do not require deductibles, co-insurance or claim forms.
Within the HMO system, physicians who practice in the fields of family
practice, internal medicine, pediatrics and obstetrics/gynecology provide
routine and preventive medical care and are responsible for managing referrals
to specialists. The HMOs also provide vision care and dental services on a
capitation and modified fee-for-service basis through contractual
arrangements with independent providers and the Nevada HMO's optometry group.
The HMOs contract for prescription drugs with a national drug chain on a
capitated basis.
In addition to its commercial HMO plan which involves traditional HMO
benefits and Point of Service benefits, the Company offers a prepaid health care
program for Medicare-eligible beneficiaries called Senior Dimensions. Senior
Dimensions is marketed directly to Medicare-eligible beneficiaries in the
Company's service area. Federal legislation has promoted delivery of health care
through HMOs to Medicare beneficiaries. Such legislation provides that the
federal government will reimburse HMOs for health care services to Medicare
beneficiaries in an amount equal to 95% of the Medicare payments to
fee-for-service providers in a defined service area. As of December 31, 1995,
approximately 25,000, or 18%, of the Company's total Nevada HMO members were
enrolled in Senior Dimensions. The Senior Dimensions plan enables Medicare
beneficiaries to reduce their out-of-pocket expenses and receive additional
benefits not covered by Medicare.
Managed Indemnity. The Company also offers health insurance through its
PPO. The Company's managed indemnity plans generally offer insureds the option
of receiving their medical care from either non- contracted or contracted
providers. Insureds pay higher deductibles and co-insurance or co-payments when
they receive care from non-contracted providers. Out-of-pocket costs are lowered
by utilizing contracted providers who are part of the Company's southern Nevada
PPO network, consisting of approximately 1,600 providers and 11 hospitals. The
Company contracts with PPOs and hospitals in areas other than southern Nevada to
provide health care benefits to its members in such areas. All of the Company's
managed indemnity products incorporate managed care components to help manage
costs and to help promote the delivery of medically necessary and appropriate
care to insureds. The Company is expanding into certain areas to service small
groups which historically have been underserved by managed care. As of December
31, 1995, 30,984 persons were enrolled in the Company's managed indemnity plans.
2
Multiple Option. The Company also offers a triple option benefit program
pursuant to which covered members can elect indemnity plan coverage, PPO
coverage or HMO coverage. Groups enrolled under this program receive one billing
statement and receive all of their health coverage through the Company. If a
member chooses to use a non-participating physician through the indemnity plan,
the member is generally subject to increased deductibles and co-insurance and
completion of claim forms. The PPO and HMO options operate similarly to the
Company's standard PPO and HMO products. Members choose the desired option at
the time of enrollment and may change options annually.
Workers' Compensation Insurance. The Company is engaged in writing workers'
compensation insurance in the states of California, Colorado, Nebraska, New
Mexico and Utah primarily through independent insurance agents and brokers. The
Company has licenses and has applications pending for licenses in other states.
The Company will continue to expand to other states. California and Colorado
represented approximately 84% and 13%, respectively, of the Company' direct
written premiums in 1995. Workers' compensation is a statutory system that
requires an employer to provide its employees with medical care and other
specified benefits for work-related injuries, even though the injuries may have
resulted from the negligence or wrongs of any person, including the employee.
Employers typically purchase workers' compensation insurance to provide these
benefits. The benefits payable are generally established by statute. In addition
to the workers' compensation insurance, the Company provides medical management
services of workers' compensation claims in the State of Nevada.
Administrative Services. The Company's administrative services products
provide, among other things, utilization review and PPO services to large
employer groups that are usually self-insured. Under self- funded medical plans,
an employer self-insures its health care expenses and pays for health care
claims only as they are incurred. The Company offers to these employers claims
processing and health care management services, whereby it acts as a third party
administrator on the employers' behalf. Administrative services products enable
employers to access the Company's provider network and utilization management
programs and to realize savings through certain of the Company's discounted fee
arrangements and medical cost containment capabilities, while allowing them to
provide health benefits in accordance with their own requirements and
objectives. As of December 31, 1995, approximately 117,000 persons were enrolled
in the Company's administrative services plans. In January 1994, the Company
began providing workers' compensation medical management services in Nevada. As
of December 31, 1995, enrollment in this program was approximately 94,000.
Other Products and Services. Among the ancillary medical services offered
by the Company are outpatient surgical care, diagnostic tests and medical and
surgical procedures, inpatient and outpatient laboratory tests, x-ray, CAT scans
and nuclear medicine services. The Company also provides home health care
services, a hospice program and mental health and substance abuse services. Home
health care services are provided to members of the Company's HMO, managed
indemnity and administrative services plans as well as to the general public.
The staff, which is comprised of nurses, therapists, social workers and home
health aides, provides skilled care to patients in their homes under the
direction of physicians. The Company provides or arranges for care 24 hours a
day, seven days a week. The Company's hospice program is available to all
terminally ill members of the Company's HMO, managed indemnity and
administrative services plans as well as to the general public. Services offered
include both inpatient and home-bound support to patients for whom curative
therapy is no longer indicated. Emphasis is placed on managing the patient's
pain and on assisting both the patient and the family with emotional support.
Home hospice services are overseen by a medical director and supported by a team
comprised of registered nurses, social workers, therapists, home care aides,
pastoral counselors and trained volunteers. The Company also arranges for and
manages the delivery of mental health and substance abuse services, including
contracting, utilization management, PPO access and marketing, direct clinical
services, stress management, claims services, employee assistance program
development and wellness programs. These services are provided to members of the
Company's HMO, managed indemnity and administrative services plans as well as to
approximately 125,000 participants from non-affiliated employer groups and an
insurance company.
3
Military Health Services. During 1995 the Company entered the bidding
process to provide health services for military dependents and retirees in
Nevada and a portion of Missouri. The Department of Defense TRICARE program, now
being implemented in stages across the country, relies on managed care to
improve access and provide a high-quality, consistent health care benefit. The
Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS") will
grant a 5-year contract to provide these services to Regions 7 and 8, including
a total of 17 states, sometime this spring. Sierra has teamed with 13 other
organizations in a bidding consortium, and, if successful, will begin providing
health care to approximately 93,000 individuals in January 1997. In addition,
the Company also anticipates submitting a proposal as the prime contractor to
the Office of the Civilian Health And Medical Program of the Uniformed Services
("OCHAMPUS") to provide managed health care coverage to CHAMPUS eligible
beneficiaries in Region 1. This region includes approximately 665,000
individuals in Connecticut, Delaware, Maine, Maryland, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, northern
Virginia and Washington, D.C. The Company anticipates learning of the status of
its bid by January 1, 1997.
Marketing
The Company's marketing efforts for its managed care products involve a
two-step process. The Company first makes presentations to employers and then
provides information directly to employees once the employer has decided to
offer the Company's products. Once a relationship with a group is established
and a group agreement is negotiated and signed, the Company's marketing efforts
focus on individual employees. During a designated "open enrollment" period each
year, usually the month preceding the annual renewal of the agreement with the
group, employees choose whether to remain with, join or terminate their
membership with a specific health plan offered by the employer. New employees
decide whether to join one of the employers' health insurance options at the
time of their employment. Although contracts with employers are generally
terminable on 60 days notice, changes in membership occur primarily during open
enrollment periods. Retention of employer groups and membership growth is
accomplished through print advertising directed to employers and through
consumer media campaigns. Media communications convey the Company's emphasis on
preventive care, ready access to health care providers and quality service.
Other communications to customers include employer and member newsletters,
member education brochures, prenatal information packets, employer/broker
seminars and direct mail advertising to clients. Members' satisfaction with
Company benefits and services is monitored by customer surveys. Results from
these surveys and other primary and secondary research guide the sales and
advertising efforts throughout the year.
The Company's workers' compensation insurance policies are sold primarily
through independent insurance agents and brokers, who may also represent other
insurance companies. The Company believes that independent insurance agents and
brokers choose to market the Company's insurance policies primarily because of
the price the Company charges. Additional considerations include the quality of
service that the Company provides and the commissions the Company pays. The
Company employs full- time employees as marketing representatives to make
personal contacts with agents and brokers, to maintain regular communication
with them, to advise them of the Company's services and products, and to recruit
additional agents and brokers. As of December 31, 1995, the Company had
relationships with approximately 420 agents and 30 brokers and paid its agents
and brokers commissions based on a percentage of the gross written premium
produced by such agents and brokers.
4
Membership
Period End Membership:
Years Ended December 31,
1995 1994 1993 1992 1991
HMO:
Commercial.............................. 116,111 106,700 89,426 82,227 76,889
Medicare................................ 25,066 19,760 15,391 13,990 12,449
Managed Indemnity........................... 30,984 24,428 29,491 29,935 34,154
Medicare Supplement......................... 14,607 8,912 4,048 1,922 --
Administrative Services..................... 210,864 144,322 58,433 58,852 40,426
Total Membership........................ 397,632 304,122 196,789 186,926 163,918
For the years ended December 31, 1995 and 1994, the Company received
approximately 23.9% and 20.6%, respectively, of its total revenues pursuant to
its contract with the United States Health Care Finance Administration ("HCFA")
to provide health care services to Medicare enrollees. The Company's contract
with HCFA is subject to annual renewal at the election of HCFA and requires the
Company to comply with federal HMO and Medicare laws and regulations and may be
terminated if the Company fails to so comply. The termination of the Company's
contract with HCFA would have a material adverse effect on the Company's
business. In addition, there have been, and the Company expects that there will
continue to be, a number of legislative proposals to limit Medicare
reimbursements. Future levels of funding of the Medicare program by the federal
government cannot be predicted with certainty.
The Company's ability to obtain and maintain favorable group benefit
agreements with employer groups affects the Company's profitability. The
agreements are generally renewable on an annual basis but are subject to
termination on 60 days' prior notice. For the fiscal year ended December 31,
1995, the Company's ten largest HMO employer groups were, in the aggregate,
responsible for approximately 13% of the Company's total revenues. Although none
of such employer groups accounted for more than 3% of total revenues during that
period, the loss of one or more of the larger employer groups would, if not
replaced with similar membership, have a material adverse effect upon the
Company's business. The Company has generally been successful in retaining these
employer groups. However, there can be no assurance that the Company will be
able to renew its agreements with such employer groups in the future or that it
will not experience a decline in enrollment within its employer groups.
Additionally, revenues received under certain government contracts are subject
to audit and retroactive adjustment.
Provider Arrangements and Cost Management
HMO and Managed Indemnity Products. A significant distinction between the
Company's health care delivery system and that of many other managed care
providers is the fact that approximately 82% of the Company's Nevada HMO members
receive primary health care through the Company's own multi-specialty medical
group. The Company makes health care available through providers employed by the
multi- specialty medical group and an independently contracted network of
physicians, hospitals and other providers.
Under the Company's HMOs, the member selects a primary care physician who
provides or authorizes any non-emergency medical care given to that member.
These primary care physicians and some specialists are compensated to a limited
extent on the basis of how well they coordinate appropriate medical care. The
Company has a system of incentive risk arrangements and utilization management
with respect to its independently contracted primary care physicians. The
Company compensates its independently contracted primary care physicians and
specialists by using both capitation and modified fee-
5
for-service payment methods. Under both the capitation and modified
fee-for-service methods, an incentive risk arrangement is established for
institutional services. Additional amounts may be made available to certain
capitated physicians if hospital costs are less than anticipated for the
Company's HMO members. For those primary care physicians receiving payments on a
modified fee-for-service basis, portions of the payments otherwise due the
physicians are withheld. The amounts withheld are available for payment to the
physicians if, at year-end, the expenditures for both institutional and
non-institutional medical services are within predetermined, contractually
agreed upon ranges. It is believed that this method of incentive risk payment is
advantageous to the physician, the Company and the members because all share in
the benefits of managing health care costs. The Company has, however, negotiated
capitation agreements with certain specialists who do not participate in the
incentive risk arrangements. The Company monitors the health care utilization,
including evaluation of elective surgical procedures, quality of care and
financial stability of its capitated providers to facilitate access to service
and to ensure member satisfaction.
The Company also believes that it has negotiated favorable rates with its
contracted hospitals. The Company's contracts with its primary hospital
providers typically renew automatically with both parties granted the right to
terminate after a notice period varying from between three and twelve months.
Reimbursement arrangements with hospitals and other health care providers,
including pharmacies, are generally negotiated annually and are based on several
different payment methods, including per diems (where the reimbursement rate
varies and is based on a per day of service charge for specified types of care),
capitation or modified fee-for-service arrangements. To the extent possible,
when negotiating non- physician provider arrangements, the Company solicits
competitive bids.
The Company provides, or negotiates discounted contracts with hospitals for
the provision of, inpatient and outpatient hospital care, including room and
board, diagnostic tests and medical and surgical procedures. The Company
believes that it currently has a favorable contract with its primary southern
Nevada contracted hospital, Sunrise Hospital and Medical Center. Subject to
certain limitations, the contract provides, among other things, guaranteed
contracted per diem rate increases on an annual basis after December 31, 1994,
of a minimum of 3% but not to exceed the lesser of the increase in the Consumer
Price Index or 6%. Since a majority of the Company's southern Nevada hospital
days are at Sunrise Hospital and Medical Center, this contract helps to allow
the Company to manage a significant portion of its medical costs. The contract
expires September 1998. The Company has negotiated a capitation arrangement with
Columbia Hospital, Inc., for hospital services provided in Houston to members of
the Company's Texas HMO.
The Company utilizes two reimbursement methods for health care providers
rendering services under the Company's indemnity plans. For services to members
utilizing a PPO plan, the Company reimburses participating physicians on a
modified fee-for-service basis which incorporates a limited fee schedule and
reimburses hospitals on a per diem or discounted fee-for-service basis. For
services rendered under a standard indemnity plan, pursuant to which a member
may select a non-plan provider, the Company reimburses non-contracted physicians
and hospitals at pre-established rates, less deductibles and co- insurance
amounts.
The Company also manages health care costs through its large case
management program, home health care agency, 24-hour urgent care centers and its
hospice which helps to minimize hospital admissions and lengths of stay. In
addition, the Company educates its members on how and when to use the services
of its plans and how to manage chronic disease conditions, and audits hospital
bills to identify inappropriate charges.
6
Risk Management
The Company maintains general and professional liability, property and
fidelity insurance coverage in amounts that it believes are adequate for its
operations. The Company's multi-specialty medical group maintains excess
malpractice insurance for the providers presently employed by the group. The
Company has, however, assumed the risk for the first $250,000 per malpractice
case, not to exceed $1.25 million in the aggregate per contract year up to its
limits of coverage. In addition, the Company requires all of its independently
contracted provider physician groups, individual practice physicians,
specialists, dentists, podiatrists and other health care providers (with the
exception of certain hospitals) to maintain professional liability coverage.
Certain of the hospitals with which the Company contracts are self-insured. The
Company also maintains stop-loss insurance that reimburses the Company between
50% and 90% of hospital charges for each individual member of its HMO or managed
indemnity plans whose hospital expenses exceed $75,000 during the contract year
and up to $2.0 million per member per lifetime. Workers' compensation claims are
reinsured between $250,000 and $60,000,000 per occurrence. In the ordinary
course of its business, however, the Company is subject to claims that are not
insured, principally claims for punitive damages.
Information System
The Company's information system is critical to the Company's current and
future operations. The information gathered and processed by this system assists
the Company in, among other things, pricing its services, monitoring utilization
and other cost factors, processing provider claims, providing bills on a timely
basis and identifying accounts for collection. The Company regularly modifies
its information system.
Quality Assurance and Improvement
The Company has developed programs to help ensure that the health care
services provided by its HMO and managed indemnity plans meet the professional
standards of care established by the medical community. The Company believes
that its emphasis on quality allows it to increase and retain its members. The
Company monitors and evaluates the availability and quality of the medical care
rendered by the providers in its HMO and insurance plans and periodically audits
selected diagnoses, problems and referrals to determine adherence to appropriate
standards of medical care. In addition, the Company has medical directors who,
supported by a professional medical staff, monitor the quality and
appropriateness of health care by analyzing a physician's utilization of
diagnostic tests, laboratory and radiology procedures, specialty referrals,
prescriptions, and hospitals. Physicians and hospitals selected to provide
services to the Company's members are subject to the Company's quality assurance
programs including a formal credentialing process of all physicians.
The Company also has internal quality assurance and improvement review
committees that meet on a regular basis to review specialist referrals, monitor
the performance of physicians and review practice patterns, complaints and other
patient issues. Staff members regularly visit hospitals to review medical
records, meet with patients and review treatment programs and discharge plans
with attending physicians. In addition, the Company solicits information from
both existing and former members as to their satisfaction with the care
delivered. Complaints and grievances are responded to on both an informal and
formal basis, depending on the nature of the complaint.
The Company has been denied accreditation from the National Committee on
Quality Assurance (the "NCQA"). In 1995, the Nevada HMO voluntarily applied for
accreditation from the NCQA with respect to its operations in southern Nevada.
The Company has addressed most of the NCQA's findings and intends to reapply in
1996. The Company's multi-specialty clinic has received a full three-year
accreditation from the American Association for Ambulatory Health Care -- the
highest accreditation issued to ambulatory care facilities. The clinic is the
only multi-specialty site in Nevada to be awarded this accreditation. Also, the
7
Nevada HMO, along with the Company's managed indemnity subsidiary, have received
"excellent" ratings from the A.M. Best Company, an independent insurance
industry rating organization. There can be no assurance, however, that the
Company will receive or maintain NCQA or other accreditations in the future and
there is no basis to predict what effect, if any, the lack of NCQA or other
accreditations will have on the Nevada HMO's competitive position in southern
Nevada.
Underwriting
HMO. The Company structures premium rates for its various health plans
primarily through community rating and community rating by class method. Under
the community rating method, all costs of basic benefit plans for the Company's
entire membership population are aggregated. These aggregated costs are
calculated on a "per member per month" basis and converted to premium rates for
coverage types, such as single or family coverage. The community rating by class
method is based on the same principles as community rating, except that
actuarial adjustments to premium rates are made for various employer groups
based on the average age and sex of their employees. All employees of an
employer group are charged the same premium rate if the same coverage is
selected.
In addition to those premium charges paid by the employers with whom the
Company's HMO contracts, members also pay co-payments at the time certain
services are provided. The Company believes that such co-payments encourage
appropriate utilization of health care services while allowing the Company to
offer competitive premium rates. The Company also believes that the capitation
method of provider compensation encourages physicians to limit services and
hospital utilization to those which are medically necessary and appropriate.
Managed Indemnity. Premium charges for the Company's managed indemnity
products are set in a manner similar to the community rating by class method
described above. This rate calculation utilizes age, sex and industry factors to
develop group-specific adjustments from a given base rate by plan. Actual health
claims experience is used to develop premium rates for larger insurance member
groups. This process includes the use of utilization experience, adjustments for
incurred but not reported claims, inflationary factors, credibility and specific
reinsurance pooling levels for large claims.
Workers' Compensation. Prior to insuring a particular risk, the Company
reviews, among other factors, the employer's prior loss experience and premium
payment history. Additionally, the Company determines whether the employer's
employment classifications are among the classifications that the Company has
elected to insure generally and if the amounts of the premiums for the
classifications are within the Company's guidelines. The Company reviews these
classifications periodically to evaluate whether they are profitable. A member
of the Company's loss control department may conduct an on-site safety
inspection before the Company insures the employer. The Company generally
initiates this inspection for enterprises with manufacturing or construction
classifications. The Company may also initiate inspections if the enterprise
previously has had a high loss ratio or frequent losses. If the on-site
inspection reveals hazards that can be corrected, and an agreement can be
reached with the employer that these hazards will be corrected in a time frame
established by the Company's Underwriting Department, the Company may issue a
policy subject to corrections of those hazards. In the event the Company has
issued a policy where no previous inspection has been conducted, and
subsequently learns through an inspection the employer has hazards that must be
corrected, the Company will request that the employer correct the hazards within
a specified period of time. If these hazards are not corrected, the Company may
cancel the policy for non-compliance of the hazard correction. With regard to
new business, the agent or broker will usually submit the claims history on the
prospective account. In those situations where the claims history is not
supplied by the agent or broker, other sources (such as the prior insurer) are
used to obtain the appropriate claims history if possible.
8
In California, under open rating as it became effective for policyholders
in 1995, the Company has subdivided many of the standard classifications. These
subclassifications have been determined on the Company's perception of
differences in risk exposure. As a result, different rates have been filed for
each of these subclassifications. The use of these subclassifications requires
more detailed information than was required prior to open rating. The Company
ascertains characteristics of various employers through the use of
questionnaires and telephone inquiries by underwriters. The responses are used
to properly subclassify. Subclassifications are subject to verification by loss
control and premium audits.
Competition
HMO and Managed Indemnity. Managed care companies and HMOs operate in a
highly competitive environment. The Company's major competition in Las Vegas is
from self-funded employer plans, PPO networks, other HMOs, such as Humana Care
Plus and FHP, Inc., and traditional indemnity carriers, such as Blue Cross/Blue
Shield. Many of the Company's competitors have substantially larger total
enrollments, have greater financial resources and offer a broader range of
products than the Company. Additional competitors with greater financial
resources than the Company may enter the Company's market in the future. The
Company believes that the most important competitive factors are the delivery of
reasonably priced, quality medical benefits to members and the adequacy and
availability of health care delivery services and facilities. The Company
depends on a large PPO network and flexible benefit plans to attract new
members. Competitive pressures are expected to limit the Company's ability to
increase premium rates and, to a lesser extent, to result in declining premium
rates. Accordingly, the profitability of the Company will, to a large extent,
depend on the Company's ability to manage the costs of providing health care
benefits to its members. The inability of the Company to manage these costs may
have an adverse impact on the Company's future results of operations by reducing
margins. In addition, competitive pressures may also result in reduced
membership levels. Any such reductions could materially affect the Company's
results of operations.
Workers' Compensation. The Company's workers' compensation business is
concentrated in California, a state where the workers' compensation insurance
industry is extremely competitive. Based upon data provided by the Workers'
Compensation Insurance Rating Bureau ("WCIRB"), for the year ended December 31,
1994, which is the latest data available, there were approximately 225 insurance
companies writing workers' compensation insurance in California. Many of the
Company's competitors have been in business longer, have a larger volume of
business, offer a more diversified line of insurance coverage, have greater
financial resources and have greater distribution capability than the Company.
The largest writer of workers' compensation insurance in California is the State
Compensation Insurance Fund. Prior to 1995, the Company concentrated on insuring
workers' compensation accounts in the small- to medium-size range. Under the
current open rating environment, the Company is actively pursuing accounts of
all sizes.
In all states in which the Company is currently writing business,
competition for workers' compensation insurance is primarily driven by price and
secondarily by services provided to insureds and agents. In states other than
California commissions are normally not a dominant competitive factor. In those
other states, the National Council on Compensation Insurance ("NCCI") is usually
the designated rating organization. Like the WCIRB in California, the NCCI
accumulates statistical information and recommends pure loss costs to the
state's Department of Insurance. As in California under the new open rating
environment, the Company then adds loss cost multipliers or expense loads to
derive premium rates. Rating plans in those states are more "standardized" and
are usually based on plans developed by the NCCI. Unlike California, where the
Company has developed subclasses, the Company will use standard classes in the
other states.
9
Losses and Loss Adjustment Expenses
Often, in workers' compensation insurance, several years may elapse between
the occurrence of a loss and the final settlement of the loss. To recognize
liabilities for unpaid losses, the Company establishes reserves, which are
balance sheet liabilities representing estimates of future amounts needed to pay
claims and related expenses for insured events, including reserves for events
that have occurred but have not yet been reported to the Company ("IBNR").
When a claim is reported, the Company's claims personnel initially
establish reserves on a case-by- case basis for the estimated amount of the
ultimate payment. These estimates reflect the judgment of the claims personnel
based on their experience and knowledge of the nature and value of the specific
type of claim and the available facts at the time of reporting as to severity of
injury and initial medical prognosis. Included in these reserves are estimates
of the expenses of settling claims, including legal and other fees, and the
general expenses of administering the claims adjustment process. Claims
personnel adjust the amount of the case reserves as the claim develops and as
the facts warrant.
IBNR reserves are established for unreported claims and loss development
relating to current and prior accident years. In the event that a claim that
occurred during a prior accident year was not reported until the current
accident year, the case reserve for such claim typically will be established out
of previously established IBNR reserves for that prior accident year.
The Company also reviews the adequacy of its reserves with its independent
actuary at the end of each quarter and considers external forces such as changes
in the rate of inflation, the regulatory environment, the judicial
administration of claims, medical costs and other factors that could cause
actual losses and loss adjustment expenses ("LAE") to change. The actuarial
projections include a range of estimates reflecting the uncertainty of
projections. Management evaluates the reserves in the aggregate, based upon the
actuarial indications and makes adjustments where appropriate. The consolidated
financial statements of the Company provide for reserves based on the
anticipated ultimate cost of losses.
Once an employer is insured by the Company, the Company's loss control
department may assist the insured in developing and maintaining safety programs
and procedures to minimize on-the-job injuries and industrial health hazards.
The safety programs and procedures vary from insured to insured. The Company's
loss control department may recommend to the employer that a safety committee
consisting of members of the employer's management staff and its general labor
force be established. The Company's loss control department may then assist the
committee members in isolating safety hazards, advising the committee on how to
correct the hazards and assisting the employer in establishing procedures to
enforce the corrections. The Company's loss control department may also revisit
the employer to determine whether the recommended corrections and procedures
have been implemented. Depending upon the size, classifications, and loss
experience of the employer, the Company's loss control department will
periodically inspect the employer's places of business and may recommend changes
that could prevent industrial accidents. In addition, severe or recurring
injuries may also warrant on-site inspections. In certain instances, members of
the Company's loss control department may conduct special educational training
sessions for insured employees to assist in the prevention of on-the-job
injuries. For example, employers engaged in manufacturing may be offered a
training session on how to prevent back injuries or employers engaged in
contracting may be offered a training session on general first aid and
prevention of injuries that may result from specific work exposures.
10
Government Regulation and Recent Legislation
HMOs and Managed Indemnity. Federal and state governments have enacted
statutes extensively regulating the activities of HMOs. In addition, growing
government concerns over increasing health care costs could result in new or
additional state or federal legislation that could affect health care providers,
including HMOs, PPOs and other health insurers. Among the areas regulated by
federal and state law are the scope of benefits available to members, premium
structure, procedures for review of quality assurance, enrollment requirements,
the relationship between an HMO and its health care providers, licensing and
financial condition.
The Company must file periodic reports with, and is subject to periodic
review and audit by, federal and state licensing authorities. The Company has
HMO licenses in Nevada and Texas and is subject to regulation by the Nevada
Division of Insurance, the Nevada Division of Health and the Texas Department of
Insurance. The Company's health insurance subsidiary is domiciled and
incorporated in California and is licensed in 23 states, with current operations
in Nevada, Arizona, New Mexico, Colorado, California, Missouri and Texas. It is
subject to licensing by and other regulations of the California Department of
Insurance as well as the insurance departments of other states in which it
operates or holds licenses. The Company's premium rate increases are subject to
various state insurance department approvals. The Company's HMO and insurance
subsidiaries are also required by state regulatory agencies to maintain certain
deposits and must also meet certain net worth and reserve requirements. The
Company also has certain other deposit requirements. The Company has restricted
assets on deposit in various states ranging from $200,000 to $2.2 million and
totalling $12.5 million at December 31, 1995. The Company's HMO and insurance
subsidiaries meet requirements to maintain minimum stockholder's equity ranging
from $200,000 to $5.2 million. The Company's Nevada HMO and health insurance
subsidiaries currently maintain a home office and a regional home office,
respectively, in Las Vegas and, accordingly, are eligible for certain premium
tax credits in Nevada. The National Association of Insurance Commissioners
("NAIC") has recently issued proposed risk-based capital requirements for HMOs.
Such proposals are being reviewed and evaluated by many organizations including
professional trade organizations for HMOs, actuaries and others to determine the
impact on affected entities. The proposals are subject to further review and
changes and the impact to the Company cannot be accurately determined at this
time. Management believes, however, that, based on the information available,
the proposed regulations should not have a material adverse impact to the
Company's operations.
The Company is subject to the Federal HMO Act and the regulations
promulgated thereunder. The Company's HMOs are federally qualified under this
Act. In order to obtain federal qualification, an HMO must, among other things,
provide its members certain services on a fixed, prepaid fee basis and set its
premium rates in accordance with certain rating principles established by
federal law and regulation. The HMO must also have quality assurance with
respect to its health care providers. Furthermore, an HMO may not refuse to
enroll an employee, in most circumstances, because of such person's health, and
may not expel or refuse to re-enroll individual members because of their health
or their need for health services.
Under the "corporate practice of medicine" doctrine, in most states,
business organizations, other than those authorized to do so, are prohibited
from providing, or holding themselves out as providers of, medical care. Some
states, including Nevada, exempt HMOs from this doctrine. The laws relating to
this doctrine are subject to numerous conflicting interpretations. Although the
Company seeks to structure its operations to comply with corporate practice of
medicine laws in all states in which it operates, there can be no assurance
that, given the varying and uncertain interpretations of those laws, the Company
would be found to be in compliance with those laws in all states. A
determination that the Company is not in compliance with applicable corporate
practice of medicine laws in any state in which it operates could have a
material adverse effect on the Company if it were unable to restructure its
operations to comply with the laws of that state.
11
Medicare and Medicaid antifraud and abuse provisions are codified at 42
U.S.C. Sections 1320a-7(b) (the "Anti-kickback Statute") and 1395nn (the "Stark
Amendments"). Many states have similar anti-kickback and anti-referral laws.
These statutes prohibit certain business practices and relationships involving
the referral of patients for the provision of health care items or services
under certain circumstances. Sanctions for violations of the Anti-kickback
Statute and the Stark Amendments include criminal penalties and civil sanctions,
including fines and possible exclusion from the Medicare and Medicaid programs.
Similar penalties are provided for violation of state anti-kickback and
anti-referral laws. The Department of Health and Human Services ("HHS") has
issued regulations establishing "safe harbors" with respect to the Anti-
kickback Statute. The Office of the Inspector General recently proposed new
rules to clarify those safe harbors. HHS has also proposed to establish certain
safe harbors under the Stark Amendments. The Company believes that its business
arrangements and operations are in compliance with the Anti-kickback Statute and
the Stark Amendments and the exceptions set forth therein, regardless of the
availability of regulatory safe harbor protection with respect to those
statutes. There can, however, be no assurance that (i) government officials
charged with responsibility for enforcing the prohibitions of the Anti-kickback
Statute and the Stark Amendments will not assert that the Company or certain
transactions in which it is involved are in violation of those statutes and (ii)
such statutes will ultimately be interpreted by the courts in a manner
consistent with the Company's interpretation.
Workers' Compensation. The Company is subject to extensive governmental
regulation and supervision in each state in which it does business. The primary
purpose of such regulation and supervision is to provide safeguards for
policyholders and injured workers rather than protect the interests of
shareholders. The extent and form of the regulation may vary, but generally has
its source in statutes that establish regulatory agencies and delegate to the
regulatory agencies broad regulatory, supervisory and administrative authority.
Typically, state regulations extend to such matters as licensing companies;
restricting the types or quality of investments; requiring triennial financial
examinations and market conduct surveys of insurance companies; licensing
agents; regulating aspects of a company's relationship with its agents;
restricting use of some underwriting criteria; regulating rates, forms and
advertising; limiting the grounds for cancellation or nonrenewal of policies,
solicitation and replacement practices; and specifying what might constitute
unfair practices.
In the normal course of business, the Company and the various state
agencies that regulate the activities of the Company may disagree on
interpretations of laws and regulations, policy wording and disclosures, or
other related issues. These disagreements, if left unresolved, could result in
administrative hearings and/or litigation. The Company attempts to resolve all
issues with the regulatory agencies, but is willing to litigate issues where it
believes it has a strong position. The ultimate outcome of these disagreements
could result in sanctions and/or penalties and fines assessed against the
Company. Currently, there are no litigation matters pending with any department
of insurance. During 1995, the Company was able to negotiate a settlement
agreement with the California Department of Insurance regarding the application
of the 7% rate reduction which was mandated by the July 1993 workers'
compensation legislative reforms. Included in net earned premiums is
approximately $2,000,000 representing the reduction of accrued return premiums
as a result of the settlement agreement.
Typically, states mandate participation in insurance guaranty associations,
which assess solvent insurance companies in order to fund claims of
policyholders of insolvent insurance companies. Under this arrangement, insurers
can be assessed up to 1% (or 2% in certain states) of premiums written for
workers' compensation insurance in that state each year to pay losses and LAE on
covered claims of insolvent insurers. In California and certain other states,
insurance companies are allowed to recoup such assessments from policyholders
while several states allow an offset against premium taxes. Potential assessment
expenses, net of recoupment, if any, for insolvencies are not accrued until
after an insolvency has occurred since the likelihood and the amount of the
assessment expense cannot be reasonably determined or estimated. In California,
there have been no new assessments for insolvent workers' compensation insurance
companies since 1990.
12
California's Insurance Holding Company Act regulates the payment of
shareholder dividends by insurance companies. To date, the workers' compensation
insurance subsidiaries have not paid dividends to the Company.
General. Besides state insurance laws, the Company is subject to general
business and corporation laws, federal and state securities laws, consumer
protection laws, fair credit reporting acts and other laws.
Employees
The Company had approximately 2,300 employees on December 31, 1995. None of
these employees is covered by a collective bargaining agreement. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company owns several administrative facilities in southern Nevada
totalling approximately 212,000 square feet. Such facilities include an
approximate 134,000 square foot six-story home office building and an
approximate 43,000 square foot two-story corporate administrative headquarters.
These buildings are subject to liens securing a $9.8 million loan balance from
Bank of America. The Company also owns several clinical facilities in the
southern Nevada area totalling approximately 309,000 square feet and consisting
primarily of six medical clinics and two surgery centers. Certain clinical space
is subject to a $3.2 million mortgage in favor of GE Capital Asset Management
Corporation as well as a $4.7 million mortgage in favor of Key Bank of
Washington. The Company leases additional office and clinical space in Nevada
totalling approximately 84,000 and 52,000 square feet, respectively.
In connection with its workers' compensation insurance subsidiary, the
Company leases approximately 151,000 square feet of office space in California.
The Company also leases approximately 27,000 square feet of office space in
various states as needed for other regional operations, including the Texas HMO.
The Company plans to begin construction of an approximately 59,000 square
foot medical facility in Las Vegas with an estimated total cost of $7.3 million.
Completion is expected in late 1996. The Company believes that current and
planned clinical space will be adequate for its present needs. Additional
clinical space may be required, however, if membership continues to expand.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and other litigation in the
ordinary course of business. Such litigation includes claims of medical
malpractice, claims for coverage or payment for medical services rendered to HMO
members and claims by providers for payment for medical services rendered to HMO
members. Also included in such litigation are claims for workers' compensation
and claims by providers for payment for medical services rendered to injured
workers. In the opinion of the Company's management, the ultimate resolution of
pending legal proceedings should not have a material adverse effect on the
Company's business or financial condition.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting held on October 24, 1995, the stockholders approved a
merger agreement, dated as of June 12, 1995, providing for the acquisition of
CII Financial, Inc., in which each share of common stock of CII was converted
into .37 of a share of common stock, par value $.005 per share, of Sierra. The
Company's voting results were as follows:
For Against Abstain
11,487,607 63,014 66,167
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market Information
The Company's common stock, par value $.005 per share (the "Common Stock"),
has been listed on the New York Stock Exchange under the symbol SIE since April
26, 1994 and, prior to that, was listed on the American Stock Exchange since the
Company's initial public offering on April 11, 1985. The following table sets
forth the high and low sales prices for the Common Stock on the respective
exchanges for each quarter of 1995 and 1994.
Period High Low
1995
First Quarter........................................ $32 7/8 $27 3/8
Second Quarter....................................... 33 5/8 22 1/8
Third Quarter........................................ 29 23
Fourth Quarter....................................... 33 1/8 24 1/8
1994
First Quarter........................................ 30 3/4 22
Second Quarter....................................... 29 21 1/4
Third Quarter........................................ 28 23 1/8
Fourth Quarter....................................... 33 1/2 25 5/8
Holders
The number of record holders of Common Stock at February 29, 1996 was 338.
Based upon information available to it, the Company believes there are several
thousand beneficial holders of the Common Stock.
Dividends
No cash dividends have been paid on the Common Stock since the Company's
inception. The Company currently intends to retain its earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. As a holding company, the Company's ability to declare and to pay
dividends is dependent upon cash distributions from its operating subsidiaries.
The ability of the Company's HMO and insurance subsidiaries to declare and to
pay dividends is limited by state regulations applicable to the maintenance of
minimum deposits, reserves and net worth. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.) The declaration of any future dividends will be at the
discretion of the Company's Board of Directors and will depend on, among other
things, future earnings, operations, capital requirements and the financial
condition of the Company and upon general business conditions.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of Sierra Health
Services, Inc., and subsidiaries (the "Company"), for the years ended December
31, 1995, 1994, 1993, 1992, and 1991 should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other information which appears elsewhere in this Annual Report on Form 10-K.
The selected consolidated financial data as of December 31, 1995, 1994, 1993,
1992, and 1991 and for each of the five years ended December 31, 1995 has been
derived from the audited Consolidated Financial Statements of the Company and
has been restated to include the results of CII Financial, Inc.
("CII") for all periods presented.
Years Ended December 31,
1995 1994 1993 1992 1991
(Amounts in thousands, except per share data)
Statement of Operations Data:
OPERATING REVENUES:
Medical Premiums.................................... $319,475 $269,382 $240,691 $217,624 $192,904
Specialty Product Revenue........................... 102,807 101,287 113,714 107,229 104,997
Professional Fees................................... 19,417 12,331 11,254 10,206 10,306
Investment and Other Revenue........................ 25,310 19,081 17,771 15,397 13,053
Total............................................. 467,009 402,081 383,430 350,456 321,260
OPERATING EXPENSES:
Medical Expense..................................... 245,135 200,229 178,526 166,495 147,169
Specialty Product Expense........................... 102,859 96,600 118,868 156,042 131,160
General, Administrative and Other................... 63,562 53,671 50,715 44,176 43,363
Acquisition and Integration Expenses ............... 11,614
Total............................................. 423,170 350,500 348,109 366,713 321,692
OPERATING INCOME (LOSS) ............................... 43,839 51,581 35,321 (16,257) (432)
OTHER INCOME (EXPENSE):
Minority Interests ................................. 2,471 (113) (179) (249) 134
Interest Expense and Other, Net..................... (6,208) (6,288) (4,258) (4,641) (1,772)
Litigation Settlement............................... (784) (1,500)
Total............................................. (3,737) (6,401) (4,437) (5,674) (3,138)
Income (Loss) from Continuing Operations
Before Income Taxes .............................. 40,102 45,180 30,884 (21,931) (3,570)
Provision for Income Taxes............................. 12,198 8,236 8,435 7,045 1,880
Income (Loss) from Continuing Operations............... 27,904 36,944 22,449 (28,976) (5,450)
Loss from Discontinued Operations ..................... (6,600) (2,501) (404)
Extraordinary Gain .................................... 457
Cumulative Effect (through December 31,
1992) on Prior Years of Adopting
Statement of Financial Accounting Standard
No. 109 "Accounting for Income Taxes"
("FAS 109")......................................... 5,250
NET INCOME (LOSS)...................................... $ 21,304 $ 34,443 $ 27,295 $( 28,519) $ (5,450)
EARNINGS PER COMMON SHARE
Income (Loss) from Continuing Operations
Per Share ........................................ $1.60 $2.36 $1.50 $ (1.98) $(.38)
Loss Per Share from Discontinued
Operations ....................................... (.38) (.16) (.02)
Extraordinary Gain Per Share ....................... .03
Cumulative Effect of Adopting FAS 109. ............. .35
Net Income (Loss) Per Share ........................ $1.22 $2.20 $1.83 $ (1.95) $( .38)
Weighted Average Number of Common
Shares Outstanding ............................... 17,414 15,678 14,939 14,601 14,407
16
December 31,
1995 1994 1993 1992 1991
(Amounts in Thousands)
Balance Sheet Data:
Working Capital ................................... $ 18,157 $ 71,337 $ 21,323 $ 10,578 $ 59,462
Total Assets....................................... 575,146 535,487 445,510 373,848 333,674
Long-term Debt (Net of Current Maturities)......... 71,257 75,209 72,802 64,461 64,568
Cash Dividends Per Common Share.................... NONE NONE NONE NONE NONE
Stockholders' Equity............................... 207,715 168,157 84,708 54,380 78,441
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provide information which management
believes is relevant to an assessment and understanding of the Company's
consolidated financial condition and results of operations. The discussion
should be read in conjunction with the Consolidated Financial Statements and
Related Notes thereto. Any forward looking information contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and any other sections of this 1995 Annual Report on Form 10-K should
be considered in connection with certain cautionary statements detailed in a
Form 8-K filing dated March 4, 1996. Such cautionary statements are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and identify important risk factors that could cause the
Company's actual results to differ from those expressed in any projected,
estimated or forward-looking statements relating to the Company.
Acquisition
On October 31, 1995, the Company acquired CII Financial, Inc., a workers'
compensation insurance holding company, for approximately $76.3 million of
common stock, in a transaction accounted for as a pooling of interests. The
information contained in this discussion and analysis has been restated to
include the results of CII for all periods presented.
Overview
The Company derives revenues from its health maintenance organization
("HMO"), managed indemnity and workers' compensation insurance subsidiaries. To
a lesser extent, the Company also derives additional specialty product revenues
from non-HMO and insurance products (consisting of fees for workers'
compensation administration, utilization management services and ancillary
products), professional fees (consisting primarily of fees for providing health
care services to non-members and co-payment fees received from members), and
investment and other revenue. Medical premium revenues accounted for
approximately 68.4%, 67.0%, and 62.8% of the Company's total revenues for 1995,
1994 and 1993, respectively. Continued medical premium revenue growth is
principally dependent upon continued enrollment in the Company's products and
upon competitive and regulatory factors which are expected to limit the
Company's ability to implement annual premium rate increases.
17
The Company's principal expenses consist of medical expenses, specialty
product expenses, and general and administrative expenses. Medical expenses
represent the aggregate expenses of operating the Company's multi-specialty
medical group and other provider subsidiaries as well as capitation fees and
other fee-for-service payments paid to contracted physicians, hospitals and
other health care providers. As a provider of managed care services, the Company
seeks to manage medical expenses by employing or contracting with physicians,
hospitals and other health care providers at negotiated price levels, by
adopting quality assurance programs, by monitoring and managing utilization of
physicians and hospital services and by providing incentives to use
cost-effective providers. Specialty product expenses primarily consist of losses
and loss adjustment expenses, and underwriting expenses associated with the
Company's workers' compensation insurance subsidiaries. General, administrative
and other expenses generally represent operational costs other than those
associated with the delivery of health care services and specialty product
services.
In connection with the merger of CII, the Company recorded acquisition and
integration expenses of $11.6 million. Within two months of the combination,
approximately two-thirds of the costs had been paid or otherwise charged against
the associated accrual.
The acquisition and integration expenses represent the costs of acquiring
and consolidating CII's administrative functions and information systems as well
as positioning the Company to begin implementing managed care techniques in
workers' compensation. These costs include: $6.4 million in professional fees,
$1.7 million for the write-off of certain redundant hardware and software, $1.3
million for the cancellation of certain contractual obligations and other
settlement costs, $900,000 for transition and severance-related payments, and
$1.3 million for other integration costs.
18
Results of Operations
The following table sets forth selected operating data as a percentage of
revenues for the periods indicated:
Years Ended December 31,
1995 1994 1993
OPERATING REVENUES:
Medical Premiums........................................ 68.4% 67.0% 62.8%
Specialty Product Revenue............................... 22.0 25.2 29.7
Professional Fees....................................... 4.2 3.1 2.9
Investment and Other Revenue............................ 5.4 4.7 4.6
Total................................................ 100.0 100.0 100.0
OPERATING EXPENSES:
Medical Expense......................................... 52.5 49.8 46.6
Specialty Product Expense............................... 22.0 24.0 31.0
General, Administrative and Other....................... 13.6 13.4 13.2
Acquisition and Integration Expense ................... 2.5
Total............................................... 90.6 87.2 90.8
OPERATING INCOME ........................................... 9.4 12.8 9.2
OTHER INCOME (EXPENSE):
Minority Interests .................................... 0.5 (0.1)
Interest Expense and Other, Net........................ (1.3) ( 1.6) (1.1)
Total............................................... (0.8) (1.6) (1.2)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ................................... 8.6 11.2 8.0
PROVISION FOR INCOME TAXES.................................. 2.6 2.0 2.2
INCOME FROM CONTINUING OPERATIONS .......................... 6.0 9.2 5.8
NET OPERATING LOSS ON DISCONTINUED
OPERATIONS ............................................. (.4) (.6) (.1)
NET LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS ................................. (1.0)
CUMULATIVE EFFECT OF
ADOPTING FAS 109 ...................................... 1.4
NET INCOME.................................................. 4.6% 8.6% 7.1%
19
1995 Compared to 1994
The Company's total operating revenues for 1995 increased 16.1% to $467.0
million from $402.1 million for 1994. The increase was primarily due to medical
premium revenue increases of approximately $50.1 million, or 18.6% from the
Company's HMO and managed indemnity insurance subsidiaries. Such premium growth
resulted principally from a 12.5% increase in member months (the number of
months of each year that an individual is enrolled in a plan). The Company
experienced an overall rate increase for its Medicare members due to an
approximate 7.5% increase in its capitation rate established by the Health Care
Financing Administration ("HCFA"). Additionally, the Company realized minimal
rate changes for the HMO subsidiary's commercial groups and managed indemnity
insurance subsidiary. The Company's specialty product revenue increased slightly
to $102.8 million in 1995 from $101.3 million in 1994. Specialty product revenue
increased by $1.7 million in Nevada and $2.0 million in all other states
excluding California. Such increases were offset by a $2.2 million decrease in
the amount of specialty product revenue earned in California. The decrease in
California specialty product revenues is primarily due to the abolishment of
minimum premium rates in the California workers' compensation market and the
commencement of open rating effective January 1, 1995, as well as a 16% rate
decrease which had occurred October 1, 1994. Professional fees increased by $7.1
million, or 57.5% over 1994 due principally to the opening of three new medical
clinics (one in the latter part of 1994 and two in 1995), a new surgery center,
and the acquisition of a medical facility. Investment and other revenue
increased $6.2 million, or 32.6%, primarily due to increased investment balances
from the Company's common stock offering completed in October 1994.
Total medical expenses increased by approximately $44.9 million in 1995
compared to 1994. This 22.4% increase resulted from the consolidated member
month growth discussed above, as well as the clinical expansions and increases
associated with professional fee growth. These factors, as well as an increase
in Medicare members as a percentage of total members, increased the Company's
medical loss ratio to 72.3% for the twelve months ended December 31, 1995, from
71.1% for the comparable twelve months in 1994. The cost of providing medical
care to Medicare members generally requires a greater percentage of the premium
revenue received. Specialty product expenses increased by 6.5% over 1994. This
increase is primarily the result of a higher loss ratio in 1995 due to the
decrease in premium rates discussed above, offset in part by favorable
development during 1995 in reserves for prior accident years. There can be no
assurances that favorable development, or the magnitude of the development, will
continue in the future. See Note 6 of Notes to Consolidated Financial
Statements.
General, administrative and other ("G&A") costs increased 18.4% to $63.6
million for the twelve months ended December 31, 1995 compared to the twelve
months ended December 31, 1994. As a percentage of revenues, however, G&A costs
for the twelve months ended December 31, 1995 increased to 13.6% from 13.3%
during the comparable period in 1994. Excluding the operations of HMO Texas,
however, G&A as a percentage of revenue for 1995 decreased to 12.6%. Of the $9.9
million increase in G&A, approximately $4.8 million was due to the HMO Texas
operations. Additional increases include $3.2 million of compensation costs
primarily resulting from additional employees supporting expanded services, and
$1.6 million in additional marketing and related fees.
The Company's effective income tax rate for the year ended December 31,
1995, was 30.4% compared to 18.2% for the year ended 1994. This change is
primarily due to the non-deductibility of a significant portion of the merger
costs incurred in 1995 and a $4.0 million tax benefit recorded as part of the
1994 provision as a result of a reduction of the deferred tax valuation
allowance. See Note 8 of Notes to Consolidated Financial statements.
During 1995, CII sold its interest in an unprofitable subsidiary for
approximately $1 million in cash and securities. This disposal resulted in a
loss on discontinued operations, net of tax effects, of $6.6 million in 1995
compared to losses of $2.5 million from the discontinued operations in 1994.
20
Net income for 1995 decreased to $21.3 million, from $34.4 million in 1994.
This decrease is primarily due to the non-recurring items previously discussed,
discontinued operations, merger and integration expenses, and the change in the
deferred tax valuation allowance. Excluding non-recurring items and the related
tax effects, income from ongoing operations for 1995 increased 11.9% to $36.8
million from $32.9 million in 1994.
1994 Compared to 1993
The Company's total operating revenues for 1994 increased 4.9%, to $402.1
million from $383.4 million for 1993. The increase was primarily due to medical
premium revenue increases of approximately $28.7 million, or 11.9%, from the
Company's HMO and managed indemnity insurance subsidiaries. Such additional
premium growth resulted principally from an 11.3% increase in member months. The
Company realized minimal rate changes for the HMO subsidiaries' commercial
groups, and a slight rate increase by the Company's managed indemnity insurance
subsidiary. Additionally, the Company experienced an overall rate reduction for
its Medicare members due to an approximate 1.8% decrease in its capitation rate
established by HCFA. Also, some Medicare members transferred to the Company's
lower-priced Medicare plans. The $12.4 million decrease in specialty product
revenues was due to an $18.8 million decrease in workers' compensation premiums.
This decrease was a result of mandatory premium rate reductions and certain
marketing limitations which included regulatory restrictions on certain
subsidiaries' ability to pay policyholder dividends. This decrease was partially
offset by a $6.4 million increase associated with a new contract, effective
January 1994, to provide managed care utilization review services to Nevadans
under a state insured workers' compensation medical management program.
Total medical expenses increased by approximately $21.7 million in 1994
compared to 1993. This 12.2% increase resulted from the consolidated member
month growth discussed above, along with inflationary and other medical cost
increases approximating .9%. These factors slightly increased the Company's
medical loss ratio to 71.1% for the twelve months ended December 31, 1994, from
70.9% for the comparable twelve months in 1993. Specialty product expenses
decreased $22.3 million from 1993. This decrease was primarily the result of a
decrease in the specialty product revenue noted above as well as a reduced loss
ratio for the 1994 accident year and favorable development of prior accident
years. These decreases were offset in part by a $5.8 million increase in the new
workers' compensation medical management contract discussed above. Such
additional costs include utilization review and other administrative services.
G&A costs increased 5.8% to $53.7 million for the twelve months ended
December 31, 1994, compared to the twelve months ended December 31, 1993. As a
percentage of revenues, however, G&A costs for the twelve months ended December
31, 1994 increased only slightly to 13.3%, which is comparable to the 1993 rate
of 13.2%. Compensation costs increased approximately $2.4 million primarily
resulting from additional employees supporting expanded services. Depreciation
expense increased approximately $1.2 million primarily due to the Company's
newly constructed home office, regional home office and administrative
headquarters which were occupied late in the fourth quarter 1993. Additionally,
interest expense increased approximately $2.0 million principally due to new
mortgage financing on certain Company-owned facilities.
The Company's effective federal income tax rate for the year ended December
31, 1994 was 18.2% compared to 27.3% for the year ended 1993. This change in the
tax rate was primarily due to a $4.0 million tax benefit recorded as part of the
1994 provision as a result of a reduction of the deferred tax valuation
allowance. In addition, the change in the valuation allowance was offset in part
due to the "Omnibus Budget Reconciliation Act of 1993" (the "Act") passed by
Congress during the third quarter of 1993. Certain provisions of the Act
increased the statutory federal income tax rate to 35% from 34% and disallowed
some previously deductible items.
21
Net income for 1994 increased 26.0% to $34.4 million from $27.3 million in
1993. The $7.1 million increase was primarily due to increased operating
revenues, a reduction in specialty product expenses, and a decrease in the
effective federal income tax rate, partially offset by additional interest
expense.
Inflation
Health care costs generally continue to rise at a faster rate than the
Consumer Price Index. The Company has been able to lessen somewhat the impact of
inflation by managing medical costs. There can be no assurance, however, that,
in the future, the Company's ability to manage medical costs will not be
negatively impacted by items such as technological advances, utilization changes
and catastrophic items, which could, in turn, result in medical cost increases
equaling or exceeding premium increases.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and non-restricted securities
increased by $23.9 million to $364.3 million at December 31, 1995, from $340.4
million at December 31, 1994. At December 31, 1995, the Company had working
capital of $18.2 million. The primary source of cash received during the year
ended December 31, 1995, was generated from operations.
The Company's cash flow from operating activities during the twelve months
ended December 31, 1995 resulted primarily from $27.9 million of net income from
continuing operations, $9.5 million in depreciation and amortization, offset by
cash used by discontinued operations of $2.7 million and a $200,000 net change
in operating assets and liabilities, excluding cash and cash equivalents. The
decrease in cash from fluctuations in such operating assets and liabilities is
principally due to increases in other assets and accounts receivable, as well as
changes in minority interests and losses and loss adjustment expense reserves.
These decreases in cash were offset by increases in other liabilities and
medical claims payable, as well as a decrease in reinsurance recoverable.
In 1995 the Company spent $11.0 million on the acquisition of a medical
facility and $20.5 million in capital expenditures. Capital expenditures were
primarily for new facilities as well as the expansion of existing medical
facilities and include the construction costs of a 28,000 square foot outpatient
surgical facility in Las Vegas, medical equipment for the surgery center as well
as equipment for two new leased medical facilities opened in 1995, and land
purchased to build a medical facility in 1996. Such facilities accounted for
$10.8 million of the total capital expenditures. Other capital expenditures were
primarily for business expansion of the HMO and insurance operations, along with
general corporate expansion. In addition, the Company reduced debt obligations
by $11.9 million in 1995. Most of this debt reduction was a result of the
Company paying off debt acquired in acquisitions or mergers which had terms and
interest rates less favorable than those currently available to the Company.
These cash out flows were partially offset by a decrease of $15.7 million in
financed premiums receivable, as well as $3.8 million received in connection
with the purchase of stock through the Company's stock plans.
In September 1991, CII issued convertible subordinated debentures (the
"Debentures") due September 15, 2001. The Debentures bear interest at 7 1/2%
which is due semi-annually on March 15 and September 15. Each $1,000 in
principal is convertible into 16.921 shares of the Company's common stock at a
conversion price of $59.097 per share. Unamortized issuance costs of $1,216,000
are included in other assets on the balance sheet and are being amortized over
the life of the Debentures. The Debentures are general unsecured obligations of
CII only and were not guaranteed by Sierra.
22
The Company has a 1996 capital budget of approximately $25.0 million,
primarily for the construction of a new 59,000 square-foot medical facility,
computer hardware and software, furniture and equipment, and other requirements
due to the Company's projected growth and expansion. Completion of the medical
facility is expected in late 1996 at an estimated cost of $7.3 million. The
Company's liquidity needs over the next 12 months will primarily be for the
capital items noted above to support growing membership in Nevada, as well as
debt service and expansion of the Company's operations. The Company believes
that existing working capital, operating cash flow and, if necessary, equipment
leasing, and amounts available under its credit facility will be sufficient to
fund its capital expenditures, debt service and any expansion activities during
the next 12 months. Additionally, subject to unanticipated cash requirements,
the Company believes that its existing working capital and operating cash flow
and, if necessary, its access to new credit facilities, will enable it to meet
its liquidity needs on a longer term basis.
The holding company may receive dividends from its HMO and insurance
subsidiaries which generally must be approved by certain state insurance
departments. The Company's HMO and insurance subsidiaries are required by state
regulatory agencies to maintain certain deposits and must also meet certain net
worth and reserve requirements. The HMO and insurance subsidiaries had
restricted assets on deposit in various states totaling $12.5 million and $9.4
million, as of December 31, 1995 and December 31, 1994, respectively. The HMO
and insurance subsidiaries also meet requirements to maintain minimum
stockholder's equity ranging from $200,000 to $5.2 million. Of the cash and cash
equivalents held at December 31, 1995, $44.8 million is designated for use only
by the regulated subsidiaries. Such amounts are available for transfer to the
holding company from the HMO and insurance subsidiaries only to the extent that
they can be remitted in accordance with terms of existing management agreements
and by dividends. Remaining amounts are available on an unrestricted basis. The
holding company will not receive dividends from its HMO or insurance
subsidiaries that would cause violation of statutory net worth and reserve
requirements.
In July 1995, the Company renewed its unsecured line of credit from
PriMerit Bank, F.S.B. for an additional one year term at an interest rate of
prime plus 1% and increased the available amount to $10.0 million. The line of
credit, if drawn upon, will be used for general corporate purposes and will be
available for additional working capital, if necessary.
Health Care Reform
Numerous proposals relating to health care and insurance reform have been
and may continue to be introduced in the United States Congress and in state
legislatures. At this time, the Company cannot determine which legislation, if
any, will be enacted or what effect such legislation may have on the Company.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("FAS 121"). In
accordance with FAS 121, long-lived assets to be held are reviewed for events or
changes in circumstances which would indicate that the carrying value may not be
recoverable. The adoption of FAS 121 had no effect on the consolidated financial
statements.
In October 1995, Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("FAS 123") was issued. FAS 123 is
effective for fiscal years that begin after December 15, 1995. When the Company
adopts FAS 123 in 1996, the Company intends to continue to account for
stock-based compensation in accordance with APB Opinion 25 as permitted by FAS
123. The additional information required by FAS 123 will be provided in a note
to the consolidated financial statements.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Management Report on Consolidated Financial Statements...................... 25
Independent Auditors' Report................................................ 26
Consolidated Balance Sheets at December 31, 1995 and 1994................... 27
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994, and 1993........................................ 29
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994, and 1993.................... 30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993........................................ 31
Notes to Consolidated Financial Statements.................................. 32
24
MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
The management of Sierra Health Services, Inc., is responsible for the integrity
and objectivity of the accompanying Consolidated Financial Statements. The
statements have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis and are not misstated due to fraud or
material error. The statements include some amounts that are based upon the
Company's best estimates and judgment.
The accounting systems and controls of the Company are designed to provide
reasonable assurance that transactions are executed in accordance with
management's authorization, that the financial records are reliable for
preparing financial statements and maintaining accountability for assets, and
that assets are safeguarded against losses from unauthorized use or disposition.
Management believes that for the year ended December 31, 1995, such systems and
controls were adequate to meet the objectives discussed herein.
The accompanying Consolidated Financial Statements have been audited by
independent certified public accountants, whose audits thereof were made in
accordance with generally accepted auditing standards and included a review of
internal accounting controls to the extent necessary to design audit procedures
aimed at gathering sufficient evidence to provide a reasonable basis for their
opinion on the fairness of presentation of the Consolidated Financial Statements
taken as a whole.
The Audit Committee of the Board of Directors, comprised solely of directors
from outside the Company, meets regularly with management and the independent
auditors to review the work procedures of each. The independent auditors have
free access to the Audit Committee, without management being present, to discuss
the results of their opinions on the adequacy of the Company's accounting
controls and the quality of the Company's financial reporting. The Board of
Directors, upon the recommendation of the Audit Committee, appoints the
independent auditors, subject to stockholder ratification.
Anthony M. Marlon, M.D.
Chairman and
Chief Executive Officer
James L. Starr
Vice President,
Chief Financial Officer and
Treasurer
25
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sierra Health Services, Inc.:
We have audited the consolidated balance sheets of Sierra Health Services, Inc.,
and its subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed in the index at Item 14
(a)(2). These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits. The consolidated financial statements give
retroactive effect to the merger of Sierra Health Services, Inc., and its
subsidiaries, and CII Financial, Inc., and its subsidiaries, which has been
accounted for as a pooling of interests as described in Note 1 to the
consolidated financial statements. We did not audit the balance sheet of CII
Financial, Inc., and its subsidiaries, as of December 31, 1994, or the related
statements of operations, stockholders' equity, and cash flows of CII Financial,
Inc., and its subsidiaries, for the years ended December 31, 1994 and 1993,
which statements reflect total assets of $306,987,000 as of December 31, 1994,
and total revenues of $106,280,000 and $125,353,000 for the years ended December
31, 1994 and 1993, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for CII Financial, Inc., and its subsidiaries, for 1994 and
1993, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Sierra Health Services, Inc. and
its subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 28, 1996
26
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
1995 1994
CURRENT ASSETS:
Cash and Cash Equivalents............................................. $ 57,044,000 $ 38,045,000
Short-term Securities.................................................. 72,579,000 122,427,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts 1995 - $5,000,000; 1994 - $4,656,000)..................... 21,723,000 21,604,000
Financed Premiums Receivable .......................................... 15,576,000
Prepaid Expenses and Other Assets...................................... 24,071,000 21,358,000
Total Current Assets............................................... 175,417,000 219,010,000
LAND, BUILDING AND EQUIPMENT............................................... 122,725,000 94,737,000
Less-Accumulated Depreciation.......................................... 31,549,000 24,639,000
Land, Building and Equipment-- Net................................ 91,176,000 70,098,000
OTHER ASSETS:
Long-term Securities................................................... 234,698,000 179,973,000
Restricted Cash and Securities......................................... 12,482,000 9,448,000
Reinsurance Recoverable, Net of Current Portion........................ 24,952,000 28,301,000
Other.................................................................. 36,421,000 28,657,000
Total Other Assets................................................. 308,553,000 246,379,000
TOTAL ASSETS............................................................... $575,146,000 $535,487,000
See the accompanying notes to consolidated financial statements.
27
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
CURRENT LIABILITIES:
Accrued Liabilities....................................................... $ 21,576,000 $ 9,632,000
Accrued Payroll and Taxes................................................. 14,174,000 19,321,000
Medical Claims Payable.................................................... 37,463,000 31,122,000
Current Portion of Reserve for
Losses and Loss Adjustment Expense .................................. 54,679,000 57,842,000
Unearned Premium Revenue.................................................. 22,260,000 19,577,000
Current Portion of Long-term Debt......................................... 7,108,000 10,179,000
Total Current Liabilities............................................ 157,260,000 147,673,000
RESERVE FOR LOSSES AND
LOSS ADJUSTMENT EXPENSE (Less Current Portion) ........................... 127,639,000 133,120,000
LONG-TERM DEBT (Less Current Portion) ........................................ 71,257,000 75,209,000
OTHER LIABILITIES ............................................................ 11,275,000 11,328,000
TOTAL LIABILITIES............................................................. 367,431,000 367,330,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value, 1,000,000
Shares Authorized; None Issued or Outstanding
Common Stock, $.005 Par Value, 40,000,000
Shares Authorized; Shares Issued: 1995 --
17,677,000; 1994-- 17,336,000........................................ 88,000 87,000
Additional Paid-in Capital................................................ 147,240,000 141,398,000
Treasury Stock; 1995 and 1994 - 100,200
Common Shares........................................................ (130,000) (130,000)
Unrealized Holding Gain (Loss) on
Available-for-sale Securities........................................ 9,659,000 (2,752,000)
Retained Earnings......................................................... 50,858,000 29,554,000
Total Stockholders' Equity........................................... 207,715,000 168,157,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $575,146,000 $535,487,000
See the accompanying notes to consolidated financial statements.
28
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
OPERATING REVENUES:
Medical Premiums......................................... $319,475,000 $269,382,000 $240,691,000
Specialty Product Revenue................................ 102,807,000 101,287,000 113,714,000
Professional Fees........................................ 19,417,000 12,331,000 11,254,000
Investment and Other Revenue............................. 25,310,000 19,081,000 17,771,000
Total................................................. 467,009,000 402,081,000 383,430,000
OPERATING EXPENSES:
Medical Expense.......................................... 245,135,000 200,229,000 178,526,000
Specialty Product Expense................................ 102,859,000 96,600,000 118,868,000
General, Administrative and Other........................ 63,562,000 53,671,000 50,715,000
Acquisition and Integration Expense .................... 11,614,000
Total................................................. 423,170,000 350,500,000 348,109,000
OPERATING INCOME.............................................. 43,839,000 51,581,000 35,321,000
OTHER INCOME (EXPENSE):
Minority Interests 2,471,000 (113,000) (179,000)
Interest Expense and Other, Net.......................... (6,208,000) (6,288,000) (4,258,000)
Total................................................. (3,737,000) (6,401,000) (4,437,000)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ..................................... 40,102,000 45,180,000 30,884,000
PROVISION FOR INCOME TAXES.................................... 12,198,000 8,236,000 8,435,000
INCOME FROM CONTINUING OPERATIONS............................. 27,904,000 36,944,000 22,449,000
NET OPERATING LOSS ON
DISCONTINUED OPERATIONS ................................. (2,010,000) (2,501,000) (404,000)
NET LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS ................................. (4,590,000)
CUMULATIVE EFFECT ON PRIOR YEARS of Adopting
Statement of Financial Accounting Standard No. 109 --
"Accounting for Income Taxes" ("FAS 109") ............... 5,250,000
NET INCOME.................................................... $ 21,304,000 $ 34,443,000 $ 27,295,000
EARNINGS PER SHARE
Income from Continuing Operations ....................... $1.60 $2.36 $1.50
Net Operating Loss on Discontinued Operations ........... (.12) (.16) (.02)
Net Loss on Disposal of Discontinued Operations ......... (.26)
Cumulative Effect on Prior Years of
Adopting FAS 109 ...................................... .35
Earnings Per Common Share................................ $1.22 $2.20 $1.83
See the accompanying notes to consolidated financial statements.
29
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1994 and 1993
Unrealized
(Loss)
Gain on Retained
Additional Available- Earnings Total
Common Stock Paid- In Treasury for-Sale (Accumulated Stockholders
Shares Amount Capital Stock Securities Deficit) Equity
-------- -------- ------------- ----------- ------------- ------------- -------------
BALANCE, JANUARY 1,
1993...................... 14,930,000 $74,000 $87,211,000 $(130,000) $(591,000) $(32,184,000) $54,380,000
Issuance of Common
Stock in Connection
with Stock Plans.......... 193,000 1,000 2,290,000 2,291,000
Shares Repurchased
and Retired .............. (3,000) (3,000)
Unrealized Holding
Gain on Available-
for-sale Securities,
Net ...................... 482,000 482,000
Income Tax Benefit
Realized Upon
Exercise of
Stock Options............. 263,000 263,000
Net Income.................. 27,295,000 27,295,000
------- ------- -------- -------- ------- ---------- ----------
BALANCE, DECEMBER 31,
1993...................... 15,123,000 75,000 89,761,000 (130,000) (109,000) ( 4,889,000) 84,708,000
Issuance of Common
Stock in Connection
with Stock Plans.......... 413,000 3,000 5,112,000 5,115,000
Issuance of Common
Stock in Connection
with Public Offering,
Net....................... 1,800,000 9,000 44,570,000 44,579,000
Income Tax Benefit
Realized Upon Exercise
of Stock Options.......... 1,955,000 1,955,000
Unrealized Holding
Loss on Available-
for-sale Securities,
Net....................... (2,643,000) (2,643,000)
Net Income.................. 34,443,000 34,443,000
------- ------- ------- ------- ------- ---------- ----------
BALANCE, DECEMBER 31,
1994...................... 17,336,000 87,000 141,398,000 (130,000) (2,752,000) 29,554,000 168,157,000
Issuance of Common
Stock in Connection
with Stock Plans.......... 304,000 1,000 4,297,000 4,298,000
Issuance of Stock
in Connection with
Acquisition .............. 37,000 87,000 87,000
Income Tax Benefit
Realized Upon
Exercise of Stock
Options................... 1,458,000 1,458,000
Unrealized Holding
Gain on Available-
for-sale Securities,
Net....................... 12,411,000 12,411,000
Net Income.................. 21,304,000 21,304,000
------- ------- ------- ------- ------- ---------- ----------
BALANCE, DECEMBER 31,
1995...................... 17,677,000 $88,000 $147,240,000 $(130,000) $9,659,000 $50,858,000 $207,715,000
========== ======= ============ ========= ========== =========== ============
See the accompanying notes to consolidated financial statements.
30
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .......................................................... $21,304,000 $34,443,000 $27,295,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Loss on Discontinued Operations .................................. 6,600,000 2,501,000 404,000
Cumulative Effect of Accounting Change ........................... (5,250,000)
Depreciation and Amortization..................................... 9,505,000 8,300,000 6,340,000
Provision for Doubtful Accounts................................... 1,694,000 2,156,000 676,000
Change in Assets and Liabilities, Net of
Effects from Acquisitions:
Other Assets..................................................... (7,542,000) (2,314,000) (923,000)
Reinsurance Recoverable ......................................... 3,349,000 (3,366,000) (5,321,000)
Reserve for Losses and Loss Adjustment Expense .................. (5,481,000) (6,548,000) 15,264,000
Other Liabilities ............................................... 1,665,000 (42,000)
Minority Interests............................................... (2,606,000) 511,000 (78,000)
Accounts Receivable.............................................. (923,000) 3,837,000 (2,990,000)
Other Current Assets............................................. (2,434,000) 1,341,000 (2,808,000)
Medical Claims Payable........................................... 6,341,000 3,858,000 1,532,000
Other Current Liabilities........................................ 5,709,000 4,743,000 13,582,000
Net Cash Provided by Continuing Operations ......................... 37,181,000 49,462,000 47,681,000
Net Cash Used by Discontinued Operations ............................ (2,651,000) (2,875,000) (2,625,000)
Net Cash Provided by Operating Activities ....................... 34,530,000 46,587,000 45,056,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures................................................. (20,522,000) (12,383,000) (32,506,000)
Land, Building and Equipment Dispositions, Net....................... 725,000 475,000 689,000
Decrease (Increase) in Short-term Securities......................... 60,836,000 (78,201,000) (5,630,000)
Increase in Restricted Cash and Securities........................... (3,001,000) (1,266,000) (1,434,000)
Increase in Long-term Securities..................................... (52,723,000) (2,816,000) (11,878,000)
Decrease (Increase) in Financed Premium Receivable .................. 15,676,000 (2,810,000) (1,095,000)
Acquisitions, Net of Cash Acquired................................... (11,023,000) (4,000,000)
Net Cash Used for Investing Activities........................... (10,032,000) (101,001,000) (51,854,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-term Borrowing.................................... 2,625,000 8,000,000 14,000,000
Payments on Debt and Capital Leases.................................. (11,931,000) (8,735,000) (1,533,000)
Proceeds from Issuance of Common Stock............................... 44,579,000
Exercise of Stock in Connection with Stock Plans..................... 3,807,000 4,385,000 1,435,000
Net Cash (Used for) Provided by Financing Activities............. (5,499,000) 48,229,000 13,902,000
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS................................................. 18,999,000 (6,185,000) 7,104,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 38,045,000 44,230,000 37,126,000
CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $57,044,000 $ 38,045,000 $44,230,000
See the accompanying notes to consolidated financial statements.
31
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
1. DESCRIPTION OF BUSINESS
Business. The consolidated financial statements include the accounts of
Sierra Health Services, Inc. ("Sierra") and its subsidiaries (collectively
referred to as the "Company"). The Company is a managed health care organization
that provides and administers the delivery of comprehensive health care and
workers' compensation programs with an emphasis on quality care and cost
management. The Company's broad range of managed health care services is
provided through its HMO, managed indemnity plans, a third-party administrative
services program for employer-funded health benefit plans and workers'
compensation medical management programs. Ancillary products and services that
complement the Company's managed health care product lines are also offered.
Acquisitions. On October 31, 1995, the Company issued approximately 2.7
million shares of its common stock in exchange for all of the outstanding common
stock of CII Financial, Inc., and subsidiaries ("CII"). In addition, all
outstanding CII options were converted into options to purchase up to
approximately 540,000 shares of the Company's common stock. The merger has been
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the accounts and
operations of CII for all periods prior to the merger.
Separate results of operations, excluding merger costs, for the periods
prior to the merger with CII are as follows:
Ten months
ended Twelve months ended December 31,
October 31, 1995 1994 1993
Revenues:
Sierra .................... $291,917,000 $295,801,000 $258,077,000
CII ....................... 86,619,000 106,280,000 125,353,000
Combined....................... $378,536,000 $402,081,000 $383,430,000
Net Income:
Sierra .................... $ 23,941,000 $ 22,204,000 $ 17,443,000
CII ....................... 708,000 12,239,000 9,852,000
Combined ...................... $ 24,649,000 $ 34,443,000 $ 27,295,000
In connection with the merger and integration of CII, $11.6 million of
costs and expenses ($9.7 million after tax, or $0.56 per share) were incurred
and have been charged to expense in the fourth quarter of 1995. These costs
include $6.4 million in professional fees, $1.7 million for the write-off of
certain redundant hardware and software, $1.3 million for the cancellation of
certain contractual obligations and other settlement costs, $.9 million related
to transition and severance-related payments, and $1.3 million for other
integration costs.
On October 1, 1995, the Company acquired a medical facility along with its
related entities which include real estate and a preferred provider network. The
medical facility and network serve southern Nevada and parts of Arizona. The
purchase price was approximately $11.1 million which was paid in cash. The
acquisition resulted in goodwill of approximately $4.9 million.
32
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. All significant intercompany transactions and
balances have been eliminated. Sierra's wholly owned subsidiaries include Health
Plan of Nevada, Inc. ("HPN"), a health maintenance organization, Sierra Health
and Life Insurance Company, Inc. ("SHL"), a health and life insurance company,
Southwest Medical Associates, Inc. ("SMA"), a multispecialty medical group, CII
Financial, Inc. ("CII"), a holding company primarily engaged in writing workers'
compensation insurance through its wholly owned subsidiaries, a home health care
agency, a hospice, an administrative services company, a company that provides
and manages mental health and substance abuse services, and others, including a
company which has an interest in a building partnership. In addition, Sierra
manages HMO Texas L.C. ("HMO Texas"), a health maintenance organization which
was licensed in February 1995 in the state of Texas. Sierra owns 50% of the
membership units in HMO Texas. Under the terms of the ownership agreement Sierra
currently has a 51% voting interest in HMO Texas and has a majority of the Board
seats. Such agreements provide for Sierra to control all decisions in the
ordinary course of business. HMO Texas has an agreement with a key employee,
however, where he may be granted up to a 5% equity interest in HMO Texas, if
certain employment requirements are fulfilled in the future. The remaining
interests of HMO Texas and the other partners in the building partnership are
reflected as Minority Interests in the accompanying Consolidated Balance Sheets.
Medical Premium Revenue. Non-Medicare member enrollment is represented
principally by employer groups. Medical premiums are billed to each employer
group in accordance with negotiated contracts, and such premium revenue is
recognized when earned. Unearned premium revenue includes payments under prepaid
Medicare contracts with the Health Care Financing Administration ("HCFA") and
prepaid HPN commercial and SHL indemnity premiums. HPN offers a prepaid health
care program to Medicare recipients. Revenues associated with these Medicare
recipients were approximately $111,584,000, $82,792,000, and $70,323,000 in
1995, 1994 and 1993, respectively.
Specialty Product Revenue. These revenues consist primarily of workers'
compensation premiums and other fees received for certain administrative
services. Premiums are calculated by formula such that the premium written is
earned pro rata over the term of the policy. Also included in specialty product
revenues are administrative services and certain ancillary product revenues.
Such revenues are recognized in the period in which the service is performed or
the period that coverage for services is provided. Premiums written in excess of
premiums earned are recorded as an unearned premium revenue liability. Premiums
earned include an estimate for earned but unbilled premiums.
Professional Fees. Revenue for professional services is recorded on the
accrual basis in the period in which the services are provided. Such revenue is
recorded at established rates net of provisions for estimated contractual and
charitable allowances.
Health Care Costs. Sierra contracts with hospitals, physicians and other
providers of health care under capitated or discounted fee-for-service
arrangements including hospital per diems to provide medical care services to
enrollees. Capitated providers are at risk for the cost of medical care services
provided to the Company's enrollees in the relevant geographic areas; however,
the Company is ultimately responsible for the provision of services to its
enrollees should the capitated provider be unable to provide the contracted
services. Health care costs are recorded in the period when services are
provided to enrolled members, including estimates for provider costs which have
been incurred as of the balance sheet date but not reported. Losses on specific
contracts, if any, are accrued when measurable.
33
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
Specialty Product Expense. This expense consists primarily of losses and
loss adjustment expense and policy acquisition costs associated with issued
workers' compensation policies. Losses and loss adjustment expense is based upon
the accumulation of cost estimates for reported claims occurring during the
period as well as an estimate for losses that have occurred but have not yet
been reported. Policy acquisition costs consist of commissions, premium taxes,
and other underwriting costs, which are directly related to the production and
retention of new and renewal business and are deferred and amortized as the
related premiums are earned. Should it be determined that future policy revenues
and earnings on invested funds relating to existing insurance contracts will not
be adequate to cover related costs and expenses, deferred costs are expensed.
Also included in specialty product expense are costs associated with
administrative services and certain ancillary products. These costs are recorded
when incurred.
Cash and Cash Equivalents. The Company considers cash and cash equivalents
as all highly liquid instruments with a maturity of three months or less at time
of purchase. The carrying amount of cash and cash equivalents approximates fair
value because of the short maturity of these instruments.
Marketable Securities. Short- and long-term securities consist principally
of U.S. Government Securities and municipal bonds, as well as corporate and
mortgage backed securities. Short-term securities have maturities of one year or
less. Long-term securities have maturities in excess of one year.
Restricted Cash and Securities. Certain subsidiaries are required by state
regulatory agencies to maintain certain deposits and must also meet certain net
worth and reserve requirements. The Company and its subsidiaries are in
compliance with the applicable minimum regulatory and capital requirements.
Land, Building and Equipment. Land, building and equipment are stated at
cost. Maintenance and repairs that do not improve or extend the life of the
respective assets are charged to operations. Depreciation and amortization is
computed using the straight-line method over the estimated service lives of the
assets or terms of leases if shorter. Estimated useful lives are as follows:
Buildings and Improvements 30 years
Leasehold Improvements 3 - 10 years
Furniture, Fixtures and Equipment 3 - 5 years
Medical Claims Payable. Medical claims payable includes the estimated cost
for unpaid claims for which health care services have been provided to enrollees
and a provision of the estimated costs for claims that have occurred but have
not been reported.
Reserve For Losses and Loss Adjustment Expense ("LAE"). The liability for
losses and LAE consists of estimated costs of each unpaid claim reported prior
to the close of the accounting period, as well as those incurred but not yet
reported. The methods for establishing and reviewing such liabilities are
continually reviewed and adjustments are reflected in current operations.
34
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
Unearned Premium Revenue Liability. This liability consists of the prepaid
premium and specialty product revenues. These prepayments are recorded as
revenue in the period in which the services are performed or the period that
coverage for services is provided.
Earnings Per Share. Earnings per common share for the years ended December
31, 1995, 1994 and 1993 have been calculated using the weighted average number
of common shares outstanding of 17,414,000, 15,678,000, and 14,939,000,
respectively. Earnings per share have been restated for all periods presented to
reflect the merger of CII accounted for as a pooling of interests.
Income Taxes. The Company accounts for income taxes using the liability
method. Deferred income tax assets and liabilities result from temporary
differences between the tax basis of assets and liabilities and the reported
amounts in the consolidated financial statements that will result in taxable or
deductible amounts in future years. The Company's temporary differences arise
principally from certain net operating losses, accrued expenses, reserves and
depreciation.
Discontinued Operations. During 1995 CII sold its interest in a subsidiary
to a publicly traded entity for a combination of 219,200 shares of common stock
and 138,400 shares of warrants of the purchaser, and cash of $5,000. The common
stock and warrants had a fair market value of approximately $1,000,000 at the
date of the sale and $2,658,000 at December 31, 1995. This transaction has been
recorded as a discontinued operation. Net assets of the discontinued operations
were $2,595,000 at December 31, 1994 and are included in other assets.
Concentration of Credit Risk. The Company's financial instruments that are
exposed to credit risk consist primarily of investments and accounts receivable.
The Company maintains cash and cash equivalents, and short- and long-term
investments with various financial institutions. These financial institutions
are located in many different geographies, and company policy is designed to
limit exposure with any one institution. As part of its cash management process,
the Company performs periodic evaluations of the relative credit standing of
these financial institutions.
Credit risk with respect to accounts receivable is generally diversified
due to the large number of entities comprising the Company's customer base and
their dispersion across many different industries. These customers are primarily
located in the states in which the Company operates. Such operations are
principally in Arizona, California, Colorado, Nevada and Texas. However, the
Company is licensed and does business in several other states as well. The
Company performs ongoing credit evaluations of its customers' financial
condition.
New Accounting Standards. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 ("FAS 121"),
"Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets
to be Disposed of." In accordance with FAS 121, long-lived assets to be held are
reviewed for events or changes in circumstances which would indicate that the
carrying value may not be recoverable. The adoption of FAS 121 had no effect on
the consolidated financial statements.
35
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
In October 1995, Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("FAS 123") was issued. FAS 123 is
effective for fiscal years that begin after December 15, 1995. When the Company
adopts FAS 123 in 1996, the Company intends to continue to account for
stock-based compensation in accordance with APB Opinion 25 as permitted by FAS
123. The additional information required by FAS 123 will be provided in a note
to the consolidated financial statements. The Company has not determined the
value of the stock compensation using the methods required by FAS 123 but
believes the amounts could be significant.
Estimates and Assumptions. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates and assumptions have been made in
recording medical and specialty product expenses. Actual results may differ from
estimates.
Reclassifications. Certain amounts in the Consolidated Financial Statements
for the year ended December 31, 1994 and 1993 have been reclassified to conform
with the current year presentation.
3. LAND, BUILDING AND EQUIPMENT
Land, building and equipment at December 31 consists of the following:
Classification 1995 1994
Land.............................................. $ 11,988,000 $ 7,531,000
Buildings and Improvements........................ 55,796,000 42,888,000
Leasehold Improvements............................ 3,545,000 3,379,000
Furniture, Fixtures and Equipment................. 50,196,000 38,640,000
Construction in Progress.......................... 1,200,000 2,299,000
$122,725,000 $94,737,000
The following is an analysis of building and equipment under capital leases
by classification:
Classification 1995 1994
Building.......................................... $ 245,000 $ 245,000
Equipment......................................... 2,173,000 1,341,000
Less: Accumulated Depreciation.................... (1,271,000) (897,000)
Net............................................... $ 1,147,000 $ 689,000
The Company capitalizes interest expense as part of the cost of
construction of facilities. Interest expense capitalized in 1995, 1994, and 1993
was $183,000, $119,000, and $700,000, respectively.
36
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
4. CASH AND SECURITIES
Marketable debt securities that the Company has the intention and ability
to hold to maturity are stated at amortized cost, and categorized as held to
maturity. The remaining marketable debt and equity securities have been
categorized as available-for-sale and as a result are stated at their fair
value. Unrealized holding gains and losses on available-for-sale securities are
included as a separate component of stockholders' equity until realized.
Proceeds from the sales and maturities of available-for-sale securities during
1995 were $365,539,000. Gross realized gains and losses in 1995 were $970,000
and $671,000 respectively. Realized gains and losses are calculated using the
specific identification method and are included in net income.
After the merger of CII, the Company evaluated the consolidated security
portfolio and reclassified $80,597,000 held-to-maturity securities to
available-for-sale securities. The reclassification of these securities resulted
in $5,641,000 of net unrealized gains as of December 31, 1995. Also, an
unrealized holding gain of $1,711,000 resulting from the transfer of certain
securities from available-for-sale to the held-to-maturity category is included
in the net unrealized gains section of stockholders' equity and will be
amortized over the remaining lives of the maturities.
37
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
The following table summarizes the Company's short-term, long-term and
restricted securities as of December 31, 1995:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale Securities:
Classified as Short-term:
U.S Government
and its Agencies..................... $ 6,229,000 $ 6,229,000
Municipal Obligations................... 55,317,000 $ 340,000 55,657,000
Corporate Bonds......................... 1,499,000 6,000 1,505,000
Other . . . . . ........................ 9,473,000 815,000 $1,250,000 9,038,000
Total Short-term..................... 72,518,000 1,161,000 1,250,000 72,429,000
Classified as Long-term:
U.S. Government
and its Agencies..................... 58,192,000 1,594,000 7,000 59,779,000
Municipal Obligations................... 85,559,000 6,125,000 16,000 91,668,000
Corporate Bonds......................... 21,397,000 815,000 47,000 22,165,000
Other . . . . . .......... 1,225,000 121,000 1,104,000
Total Long-term...................... 166,373,000 8,534,000 191,000 174,716,000
Classified as Restricted:
U.S. Government
and its Agencies..................... 5,432,000 9,000 76,000 5,365,000
Municipal Obligations................... 650,000 15,000 665,000
Corporate Bonds......................... 3,403,000 26,000 3,429,000
Other. . . . . . . . . ................. 435,000 435,000
Total Restricted .................... 9,920,000 50,000 76,000 9,894,000
Total Available-for-sale ......... $248,811,000 $ 9,745,000 $1,517,000 $257,039,000
Held-to-maturity Securities:
Classified as Short-term:
Municipal Obligations................... $ 150,000 $ 150,000
Total Short-term..................... 150,000 150,000
Classified as Long-term:
U.S. Government
and its Agencies..................... 22,590,000 $ 41,000 $ 5,000 22,626,000
Municipal Obligations................... 11,482,000 773,000 12,255,000
Corporate Bonds......................... 25,910,000 63,000 3,000 25,970,000
Total Long-term...................... 59,982,000 877,000 8,000 60,851,000
Classified as Restricted:
U.S. Government
and its Agencies ................... 1,000,000 1,000,000
Municipal Obligations................... 575,000 28,000 603,000
Corporate Bonds......................... 673,000 23,000 650,000
Other . . . . . ........... 340,000 340,000
Total Restricted .................... 2,588,000 28,000 23,000 2,593,000
Total Held-to-maturity ........... $ 62,720,000 $ 905,000 $ 31,000 $ 63,594,000
38
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
The following table summarizes the Company's short-term, long-term and
restricted securities as of December 31, 1994:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale Securities:
Classified as Short-term:
U.S Government
and its Agencies..................... $ 31,686,000 $ 312,000 $ 31,374,000
Municipal Obligations................... 82,471,000 $ 124,000 758,000 81,837,000
Corporate Bonds......................... 3,029,000 13,000 3,016,000
Other . . . . . ........................ 7,640,000 47,000 1,487,000 6,200,000
Total Short-term..................... 124,826,000 171,000 2,570,000 122,427,000
Classified as Long-term:
U.S. Government
and its Agencies..................... 22,341,000 468,000 721,000 22,088,000
Municipal Obligations................... 34,473,000 710,000 348,000 34,835,000
Corporate Bonds......................... 15,720,000 876,000 14,844,000
Other . . . . . .......... 4,749,000 466,000 4,283,000
Total Long-term...................... 77,283,000 1,178,000 2,411,000 76,050,000
Classified as Restricted:
U.S. Government
and its Agencies..................... 2,676,000 67,000 20,000 2,723,000
Municipal Obligations................... 150,000 150,000
Corporate Bonds......................... 1,345,000 8,000 1,337,000
Other. . . . . . . . . ................. 1,410,000 1,410,000
Total Restricted .................... 5,581,000 67,000 28,000 5,620,000
Total Available-for-sale ......... $207,690,000 $1,416,000 $5,009,000 $204,097,000
Held-to-maturity Securities:
Classified as Long-term:
U.S. Government
and its Agencies..................... $19,698,000 $ 25,000 $ 815,000 $ 18,908,000
Municipal Obligations................... 79,522,000 2,515,000 1,456,000 80,581,000
Corporate Bonds......................... 4,703,000 518,000 4,185,000
Total Long-term...................... 103,923,000 2,540,000 2,789,000 103,674,000
Classified as Restricted:
U.S. Government
and its Agencies ................... 2,290,000 64,000 14,000 2,340,000
Municipal Obligations................... 1,015,000 1,015,000
Corporate Bonds......................... 523,000 16,000 507,000
Total Restricted .................... 3,828,000 64,000 30,000 3,862,000
Total Held-to-maturity ........... $107,751,000 $2,604,000 $2,819,000 $107,536,000
39
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
The contractual maturities of available-for-sale short-term, long-term and
restricted securities at December 31, 1995 were as follows:
Amortized Estimated
Cost Fair Value
Due in one year or less...................................... $ 73,996,000 $ 74,266,000
Due after one year through five years........................ 78,256,000 79,897,000
Due after five years through ten years....................... 68,931,000 73,527,000
Due after ten years.......................................... 24,906,000 26,968,000
Equity securities ........................................... 2,722,000 2,381,000
Total................................................... $248,811,000 $257,039,000
The contractual maturities of held-to-maturity short-term, long-term and
restricted securities at December 31, 1995 were as follows:
Amortized Estimated
Cost Fair Value
Due in one year or less...................................... $ 1,490,000 $ 1,490,000
Due after one year through five years........................ 18,101,000 18,493,000
Due after five years through ten years....................... 27,365,000 27,834,000
Due after ten years.......................................... 15,764,000 15,777,000
Total................................................... $ 62,720,000 $ 63,594,000
Of the cash and cash equivalents that total $57,044,000 in the accompanying
Consolidated Balance Sheet at December 31, 1995, $44,794,000 is limited for use
only by the Company's regulated subsidiaries. Such amounts are available for
transfer to Sierra from the regulated securities only to the extent that they
can be remitted in accordance with terms of existing management agreements and
by dividends which customarily must be approved by regulating state insurance
departments. The remainder is available to Sierra on an unrestricted basis.
5. REINSURANCE
In the normal course of business, the Company seeks to reduce potential
losses that may arise from catastrophic events that cause unfavorable
underwriting results by reinsuring certain levels of such risk with other
reinsurers. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsurance policy.
The Company is covered under a medical reinsurance agreement that provides
coverage for 50-90% of hospital costs in excess of $75,000 per case, up to a
maximum of $2,000,000 per member per lifetime for both SHL and HPN. Reinsurance
premiums of $2,827,000, $2,234,000, and $2,097,000, net of reinsurance
recoveries of $1,133,000, $584,000, and $363,000, are included in medical
expense for 1995, 1994 and 1993, respectively. In addition, SHL maintains
reinsurance on certain life insurance policies.
40
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
CII also has reinsurance treaties in effect. The reinsurers have assumed
the liability on that portion of workers' compensation claims between $250,000
and $60,000,000 per occurrence for 1995, 1994 and 1993. At December 31, 1995 and
1994, the amount of reinsurance recoverable for unpaid losses and loss
adjustment expense was $25,871,000 and $29,342,000, respectively. The amount of
reinsurance receivable for paid losses and loss adjustment expense was $73,000
and $65,000, respectively.
Reinsurance contracts do not relieve the Company from its obligations to
enrollees or policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies. All reinsurers that the Company has reinsurance with are
rated A+ by the A.M. Best Company.
The following table provides workers' compensation reinsurance information
by reinsurer for the three years ended December 31, 1995:
Recoveries Recoverable
on Paid on Unpaid Premiums
Losses/LAE Losses/LAE Ceded
1995:
General Reinsurance Corporation............... $2,426,000 $(3,472,000) $3,727,000
Others ....................................... 300,000
Total ........................................ $2,426,000 $(3,472,000) $4,027,000
1994:
General Reinsurance Corporation............... $1,117,000 $ 3,501,000 $3,679,000
Others ....................................... 205,000
Total ........................................ $1,117,000 $ 3,501,000 $3,884,000
1993:
General Reinsurance Corporation............... $ 594,000 $ 5,495,000 $4,156,000
Others ....................................... 255,000
Total ........................................ $ 594,000 $ 5,495,000 $4,411,000
41
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
6. LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances for unpaid losses and loss adjustment expenses. There can be no
assurances that favorable development, or the magnitude of the development, will
continue in the future.
Year ended December 31,
1995 1994 1993
Net Beginning Losses and LAE Reserve ....................... $161,620,000 $174,515,000 $158,253,000
Net Provision for Insured Events Incurred in:
Current Year ............................................ 75,978,000 67,642,000 86,617,000
Prior Years.............................................. (20,079,000) (13,953,000) (3,865,000)
Total Net Provision.................................... 55,899,000 53,689,000 82,752,000
Net Payments for Losses and LAE Attributable
to Insured Events Incurred in:
Current Year ............................................ 16,553,000 16,374,000 16,130,000
Prior Years.............................................. 44,519,000 50,210,000 50,360,000
Total Net Payments .................................... 61,072,000 66,584,000 66,490,000
Net Ending Losses and LAE Reserve .......................... 156,447,000 161,620,000 174,515,000
Reinsurance Recoverable .................................... 25,871,000 29,342,000 25,841,000
Gross Ending Losses and LAE Reserve ........................ $182,318,000 $190,962,000 $200,356,000
42
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
7. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
1995 1994
Convertible Subordinated Debentures with
Terms as Described Below .......................................... $56,800,000 $ 56,800,000
Due in Equal Monthly Principal Installments of $166,667
Plus Interest at 7-3/8% Through December 2000
as Described Below ................................................ 9,802,000 11,834,000
Note Payable to Bank ................................................ 8,000,000
Due in Monthly Installments Through July 1996
as Described Below................................................. 4,689,000 4,785,000
Due in Monthly Installments Through October 1999
with Adjustable Interest Rate as Described Below................... 3,213,000 3,256,000
Other................................................................ 3,861,000 713,000
Total.............................................................. 78,365,000 85,388,000
Less Current Portion................................................. (7,108,000) (10,179,000)
Long-term Debt....................................................... $71,257,000 $75,209,000
In September 1991 CII issued convertible subordinated debentures (the
"Debentures") due September 15, 2001. The Debentures bear interest at 7-1/2%
which is due semi-annually on March 15 and September 15. Each $1,000 in
principal is convertible into 16.921 shares of the Company's common stock at a
conversion price of $59.097 per share. Unamortized issuance costs of $1,216,000
are included in other assets on the balance sheet and are being amortized over
the life of the Debentures. Accrued interest on the Debentures as of both
December 31, 1995 and 1994 was $1,243,000. The Debentures are redeemable by CII,
in whole or in part, at redemption prices ranging from 103.75% in 1996 to
100.75% in 2000, plus accrued interest for the twelve month period beginning
September 15 of the applicable year. The Debentures are general unsecured
obligations of CII only and were not assumed or guaranteed by Sierra.
In December 1993, the Company obtained a $14,000,000 loan from Bank of
America, Nevada. This loan is secured by a deed of trust, assignment of rents
and leases, and a security agreement and fixture filing covering the Company's
administrative headquarters complex and underlying real property.
During 1994, the Company assumed a $4,860,000 mortgage note in conjunction
with a related party transaction described in Note 10. Monthly installments of
$36,144, including interest at 7.12%, are due through July 1996, at which time
the balance of the note is due. This loan is secured by a medical facility.
The Company has a $3,213,000 term loan which has an adjustable rate with an
interest margin of 3% over the Federal Home Loan Bank Board 11th District Cost
of Funds Index, a maximum interest rate of five percentage points above the
initial rate of 11.85% and a minimum interest rate of 8%. The interest rate at
December 31, 1995 was 8.06%. This term loan is secured by a medical facility.
43
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
In July 1995, the Company renewed its unsecured line of credit from
PriMerit Bank, F.S.B. for an additional one year term at an interest rate of
prime plus 1%, and increased the available amount to $10,000,000. The line of
credit, if drawn upon, will be used for general corporate purposes and will be
available for additional working capital, if necessary.
Scheduled maturities of the Company's notes payable and future minimum
payments under capital leases, together with the present value of the net
minimum lease payments at December 31, 1995, are as follows:
Obligations
Notes Under Capital
Year ending December 31, Payable Leases
1996................................................. $ 6,538,000 $ 650,000
1997................................................. 2,050,000 273,000
1998................................................. 4,010,000 141,000
1999................................................. 5,063,000 64,000
2000................................................. 2,000,000 45,000
Thereafter........................................... 57,546,000 368,000
Total............................................. $77,207,000 1,541,000
Less: Amounts Representing Interest................. (383,000)
Present Value of Minimum Lease Payments.............. $1,158,000
The fair value of the Debentures at December 31, 1995 was $49,416,000,
which was determined based on the quoted market price at December 31, 1995.
Excluding the Debentures, the fair value of long- term debt, including the
current portion, is $19,747,000, based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities.
44
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
8. INCOME TAXES
A summary of the provision for income taxes for the years ended December
31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
Provision for Income Taxes:
Current............................. $11,736,000 $11,031,000 $10,807,000
Deferred............................ 462,000 (2,795,000) (2,372,000)
$12,198,000 $ 8,236,000 $ 8,435,000
The following reconciles the difference between the 1995, 1994 and 1993
current and statutory provision for income taxes:
1995 1994 1993
Statutory Rate ........................................... 35% 35% 35%
Tax Preferred Investments ................................ (9) (5) (8)
Insurance Company Statutory Rate ......................... (1) (2)
Change in Valuation Allowance ............................ (2) (9) 2
Non-deductible Acquisition Costs ......................... 5
Other .................................................... 1 (2)
Provision for Income Taxes ............................ 30% 18% 27%
45
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
The tax items comprising the Company's net deferred tax assets at December
31 which are included in Prepaid Expenses and Other Assets in the accompanying
Consolidated Balance Sheet are as follows:
1995 1994
Deferred Tax Assets:
Medical, Losses and LAE Reserves ......................... $ 7,147,000 $12,330,000
Accruals Not Currently Deductible......................... 2,254,000 647,000
Compensation Accruals..................................... 2,485,000 2,194,000
Bad Debt Allowances....................................... 1,637,000 1,906,000
Loss Carryforwards........................................ 12,202,000 8,256,000
Other .................................................... 744,000 1,578,000
26,469,000 26,911,000
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs ........................ 647,000 748,000
Depreciation and Amortization ............................ 3,164,000 2,685,000
Other .................................................... 1,021,000 629,000
4,832,000 4,062,000
Net Deferred Tax Asset Before
Valuation Allowance.................................... 21,637,000 22,849,000
Valuation Allowance ...................................... (12,039,000) (12,789,000)
Net Deferred Tax Asset ................................... $ 9,598,000 $10,060,000
At December 31, 1995, the Company had approximately $28,000,000 of regular
tax net operating loss carryforwards which are limited to use at the rate of
approximately $4,800,000 per year during the carryforward period. The net
operating loss carryforwards can be used to reduce future taxable income until
they expire through the year 2005. The Company has alternative minimum tax net
operating loss carryforwards of approximately $4,000,000 which expire through
the year 2005. The Company also has California net operating loss carryforwards
of approximately $13,000,000 which expire through the year 2000. In addition to
these net operating loss carryforwards, the Company has alternative minimum tax
credits of approximately $800,000 which can be used to reduce regular tax
liabilities in future years. There is no expiration date for the alternative
minimum tax credits. The Company has tax capital loss carryforwards of
approximately $600,000 expiring through 1999 which can be used to reduce future
capital gains income. The majority of the above items are subject to both annual
and separate company limitations required by the Internal Revenue Code.
As a result of including CII in the consolidated tax return with Sierra, it
is more likely than not that an additional $5,250,000 of the benefit of the
deferred tax asset will be utilized in subsequent years. Consequently, in
accordance with Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("FAS 109"), $5,250,000 of the valuation allowance related to
the net deferred tax asset was reduced and recorded as an increase in the amount
of the adjustment to the cumulative effect of adopting FAS 109, effective
January 1, 1993 and is reported in the statement of operations at December 31,
1993 after income from continuing operations. The remaining valuation allowance
of
46
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
$12,039,000 at December 31, 1995 is necessary under the more likely than not
criteria required by FAS 109.
9. COMMITMENTS AND CONTINGENCIES
Leases. The Company is the lessee under several operating leases, most of
which relate to equipment and office facilities. The rentals on these leases are
charged to expense over the lease term as the Company becomes obligated for
payment and, where applicable, provide for rent escalations based on certain
costs and price index factors. The following is a schedule, by year, of the
future minimum lease payments under existing operating leases:
Year Ending December 31,
1996................................................... $ 5,282,000
1997................................................... 4,102,000
1998................................................... 3,098,000
1999................................................... 1,852,000
2000................................................... 852,000
Thereafter............................................. 2,394,000
Total............................................. $17,580,000
Rent expense totaled $4,942,000, $4,873,000, and $4,942,000 in 1995,
1994 and 1993, respectively.
Litigation and Legal Matters. The Company is subject to legal proceedings
and claims that arise in the ordinary course of business. In the opinion of
management, the amount of ultimate liability with respect to these legal
proceedings will not materially impact the consolidated financial statements of
the Company.
10. RELATED PARTY TRANSACTIONS
In March 1994, the Company purchased two companies which owned and operated
medical buildings that were previously leased by the Company. The two companies
and their predecessor limited partnerships were entities that were partially
owned by affiliates of the Company. The Company's Chief Executive Officer had
interests in both companies and another officer of the Company had an interest
in one company. The Company purchased all the outstanding stock of the two
companies for approximately $11.4 million which consisted of $4.0 million in
cash and $7.4 million in assumed liabilities. The purchase price was based on
the appraised value of the two companies' land and medical buildings; all other
assets purchased were not material. The two companies were then merged into one
of Sierra's subsidiaries. In August 1994, the Company paid off $2.4 million of
the assumed liabilities. Lease payments to the affiliated entities for the year
ended December 31, 1993 was $1,663,000.
47
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
11. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan. The Company has an employee stock purchase
plan (the "Purchase Plan") whereby employees may purchase newly issued shares of
stock through payroll deductions at 85% of the fair market value of such shares
on specified dates as defined in the Purchase Plan. As of December 31, 1995, the
Company had 534,114 shares reserved for purchase under the Purchase Plan. During
1995, a total of 43,796 shares were purchased at prices of $19.98 and $20.83 a
share. During January 1996, 34,413 shares were issued to employees at $20.83 per
share in connection with the Purchase Plan.
Defined Contribution Plan. The Company has a defined contribution pension
and 401(k) plan (the "Plan") for its employees. The Plan covers all employees
who meet certain age and length of service requirements. The Company contributes
2% of eligible employees' compensation and matches 50% of a participant's
elective deferral up to a maximum of either 10% of an employee's compensation or
the maximum allowable under current IRS statute. Prior to the merger CII
maintained a 401(k) plan as well. As part of the merger of CII, the CII plan was
frozen in November 1995. The Company intends to merge the two plans during 1996.
Expense under both plans totaled $2,516,000, $2,573,000, and $2,199,000, in
1995, 1994 and 1993, respectively.
Supplemental Retirement Plan. The Company has a Supplemental Retirement
Plan (the "SRP") for certain officers, directors and highly compensated
employees. The SRP is a non-qualified deferred compensation plan through which
participants may elect to postpone the receipt and taxation of all or a portion
of their salary and bonuses received from the Company. The Company also matches
50% of those contributions that participants are restricted from deferring, if
any, under the Company's pension and 401(k) plan. As contracted with the
Company, the participants or their designated beneficiaries may begin to receive
benefits under the SRP upon participant death, disability, retirement,
termination of employment or certain other circumstances including financial
hardship. The Company contributed $601,000, $550,000, and $408,000 to the SRP in
1995, 1994 and 1993, respectively.
Other CII Plans. Prior to the acquisition of CII, CII maintained various
supplemental benefit, executive benefit, and profit sharing plans. Subsequent to
the merger all such plans have been, or are in the process of being,
discontinued, terminated, or merged into the Company's existing plans. During
the years ended December 31, 1995, 1994 and 1993, CII expensed $1,574,000,
$2,485,000, and $1,523,000, respectively, under the various plans. Eligible CII
employees are included in the Company's plans discussed above.
48
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
12. CAPITAL STOCK PLANS
Stockholders' Rights Plan. On June 14, 1994, the Board of Directors of
Sierra authorized and declared a dividend distribution of one right (a "Right")
for each share of Sierra common stock, par value $.005 per share. The Rights
were distributed to the holders of record of Common Shares at the close of
business on June 30, 1994. Each Right entitles the registered holder to purchase
from Sierra a unit consisting of one one-hundredth of a share of the Series A
Junior Participating Preferred Shares (a "Unit"), par value $.01 per share, of
Sierra, or a combination of securities and assets of equivalent value, at a
purchase price of $100.00 per Unit, subject to adjustment. The Rights have
certain anti-takeover effects. The Rights will cause substantial dilution to a
person or group that attempts to acquire Sierra on terms not approved by
Sierra's Board of Directors, except pursuant to an offer conditioned on a
substantial number of Rights being acquired. The Rights should not interfere
with any merger or other business combination approved by the Board of Directors
since Sierra may redeem the Rights at the price of $.02 per Right prior to the
time that a person or group has acquired beneficial ownership of 20% or more of
Sierra common stock.
Public Offering. On October 11, 1994, the Company completed a public
offering of 1,800,000 shares of its Common Stock, $.005 par value per share (the
"Common Stock"), at a price of $26.50 per share. Additionally, Anthony M.
Marlon, M.D., the Company's Chairman and Chief Executive Officer, sold 500,000
shares of Common Stock in such offering. The net proceeds to the Company from
the offering were approximately $44.6 million, after deducting the underwriting
discounts and commissions and the offering expenses payable by the Company.
Stock Option Plans. During 1995 the shareholders of the Company approved
the 1995 Long-Term Incentive Plan ("LTIP"). The LTIP provides for the granting
of Options, SARs, Restricted Stock, Deferred Stock, Stock and other stock-based
awards. Under the LTIP 1.2 million shares were reserved along with remaining
shares reserved from certain previous stock option and capital accumulation
plans which have not been and will not be issued under those plans. Awards are
granted by a committee appointed by the Board of Directors. Options become
exercisable at such times and in such installments as set by the committee.
In addition, in 1995 the shareholders of the Company approved the 1995
Non-Employee Directors' Stock Plan ("Directors' Plan"). Under the Directors'
Plan non-employee directors are granted an option to purchase 3,000 shares of
common stock. Options are granted annually on January 20 at the current fair
market value and become exercisable over a five-year period. The Company has
reserved 60,000 shares under the Directors' Plan.
Prior to the approval of the LTIP and the Directors' Plan, the Company and
CII had various other stock option plans that provided for the granting of
either qualified or non-qualified stock options, stock appreciation rights and
tax equalization payments. Grants will no longer be made under these plans.
49
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
The following table reflects the activity of the stock option plans:
Number of Option
Shares Price
Outstanding January 1, 1993............................... 936,000 $ .81 - $27.03
Granted................................................ 676,000 15.54 - 19.13
Exercised.............................................. (123,000) .81 - 21.00
Canceled............................................... (55,000) .81 - 21.00
Outstanding December 31, 1993............................. 1,434,000 .81 - 27.03
Granted................................................ 198,000 14.53 - 28.63
Exercised.............................................. (355,000) 3.38 - 21.00
Canceled............................................... (5,000) 3.38 - 21.00
Outstanding December 31, 1994............................. 1,272,000 2.44 - 28.63
Granted................................................ 882,000 14.86 - 31.75
Exercised.............................................. (241,000) 2.44 - 21.00
Canceled............................................... (53,000) 3.38 - 28.63
Outstanding December 31, 1995............................. 1,860,000 3.38 - 31.75
Exercisable at December 31, 1995 ......................... 594,000 $ 3.38 - $28.63
Available for Grant at
December 31, 1995 ..................................... 948,000
Capital Accumulation Plan. The Company has a Capital Accumulation Plan (the
"CAP Plan") whereby share units or fractions thereof may be awarded to key
employees and executive officers of the Company. All previous outstanding awards
were paid prior to December 31, 1995. Total expense recorded for SARs and the
CAP Plan was $90,000, $280,000, and $525,000 for 1995, 1994 and 1993,
respectively.
50
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
13. STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
Supplemental statements of cash flows information is presented below:
1995 1994 1993
Cash Paid During the Year for Interest
(Net of Amount Capitalized)............................... $ 6,430,000 $ 6,433,000 $4,260,000
Cash Paid During the Year for Income Taxes.................... 10,509,000 9,650,000 10,033,000
Noncash Investing and Financing Activities:
Liabilities Assumed in Connection with
Corporate Acquisitions................................. 3,113,000 7,279,000 --
Reductions to Funds Withheld by Ceding
Insurance Company and Future
Policy Benefits........................................... 990,000 447,000 122,000
Stock Issued for Exercise of Options
and Related Tax Benefits............................... 1,949,000 2,685,000 1,117,000
Assumption of Liability in Connection with
Land Purchase ......................................... 1,956,000 -- --
Additions to Capital Leases............................... 278,000 552,000 --
Stock and Warrants Received on Sale
of Discontinued Operations ............................ 1,000,000 -- --
51
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
14. UNAUDITED QUARTERLY INFORMATION
(In thousands, except per share data)
March June September December
31 30 30 31
Year Ended December 31, 1995:
Operating Revenues.............................. $108,272 $111,743 $115,616 $131,378
Operating Income................................ 12,822 12,777 14,430 3,810
Income From Continuing Operations
Before Income Taxes ......................... 11,786 11,694 13,727 2,895
Net Income...................................... 7,675 3,260 9,699 670
Earnings Per Share ............................. .44 .19 .56 .04
Year Ended December 31, 1994:
Operating Revenues.............................. $ 96,789 $ 98,505 $102,684 $104,103
Operating Income................................ 9,708 11,792 13,986 16,095
Income From Continuing Operations
Before Income Taxes ......................... 8,180 10,125 12,375 14,500
Net Income...................................... 5,492 6,742 8,792 13,417
Earnings Per Share ............................. .36 .44 .57 .79
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in
Sierra's Proxy Statement for its Annual Meeting of Stockholders to be held on
May 9, 1996, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation of Executive
Officers" in Sierra's Proxy Statement for its Annual Meeting of Stockholders to
be held on May 9, 1996, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in Sierra's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 9, 1996, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in Sierra's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 9, 1996, is incorporated herein by reference.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are included in Part
II, Item 8 of this Report:
Page
Independent Auditors' Report........................................ 26
Consolidated Balance Sheets at December 31, 1995 and 1994........... 27
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993................................. 29
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993............. 30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993................................. 31
Notes to Consolidated Financial Statements.......................... 32
The Independent Auditors' Report for a Predecessor Company
for the Years Ended December 31, 1994 and 1993 is
included in Exhibit 13.1
(a)(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of
Registrant.............................. S-1
Schedule V - Supplemental Information Concerning
Property-Casualty Insurance ........ S-4
Section 403.04 b - Reconciliation of Beginning and Ending Loss
and Loss Adjustment Expense Reserves
and Exhibit of Redundancies
(Deficiencies) ..................... S-5
All other schedules are omitted because they are not applicable, not
required, or because the required information is in the financial statements or
notes thereto.
(a)(3) and (c) The following exhibits are filed as part of this
Report as required by Item 601 of Regulation S-K:
(3.1) Articles of Incorporation, together with amendments thereto
to date, incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1990.
(3.2) Certificate of Division of Shares into Smaller Denominations
of the registrant, incorporated by reference to Exhibit 3.3
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
(3.3) Amended and Restated Bylaws of the Registrant, as amended
through March 22, 1995, incorporated by reference to Exhibit
3.3 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
54
(4.1) Rights Agreement, dated as of June 14, 1994, between the
registrant and Continental Stock Transfer & Trust Company,
incorporated by reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-3 effective October 11, 1994
(Reg. No. 33-83664).
(4.2) Specimen Common Stock Certificate, incorporated by reference
to Exhibit 4(e) to the Registrant's Registration Statement on
Form S-8 as filed and effective on August 5, 1994 (Reg. No.
33-82474).
(4.3) Form of Indenture, of 7 1/2% convertible subordinated
debentures due 2001 from CII Financial, Inc. to Manufacturers
Hanover Trust Company as Trustee dated September 15, 1991,
incorporated by reference to Exhibit 4.2 of Post-Effective
Amendment No. 1 on Form S-3 to Registration Statement on Form
S-4 dated October 6, 1995 (Reg. No. 33-60591).
(4.4) First Supplemental Indenture between CII Financial, Inc.,
Sierra Health Services, Inc. and Chemical Bank as Trustee,
dated as of October 31, 1995, to Indenture dated September
15, 1991, incorporated by reference to Exhibit 4.3 of
Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form S-4 dated October 31, 1995 (Reg. No.
33-60591).
*(10.1) Hospital Services Agreement with Sunrise Hospital and Medical
Center dated April 29, 1988, together with amendments thereto
to date, incorporated by reference to Exhibit 10.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 as amended.
(10.2) Excess Medical Professional and General Liability Insurance
policy dated June 11, 1991 with Reliance Insurance Company of
Illinois covering SMA, incorporated by reference to Exhibit
10.8 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
(10.3) Modification and renewal agreement dated October 31, 1994 to
the Excess Medical Professional and General Liability
Insurance policy dated June 11, 1991 with Reliance Insurance
Company of Illinois covering SMA, incorporated by reference
to Exhibit 10.3 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
(10.4) Reinsurance agreements between Sierra Health and Life
Insurance Company, Inc. and Lincoln National Life Insurance
Company effective December 31, 1991, incorporated by
reference to Exhibit 10.9 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
(10.5) Reinsurance agreements between Sierra Health and Life
Insurance Company, Inc. and Allianz Life Insurance Company
dated October 1, 1994, incorporated by reference to Exhibit
10.2 to Registrant's Report on Form 8-K dated March 2, 1995.
(10.6) Reinsurance agreement between Health Plan of Nevada, Inc. and
Allianz Life Insurance Company dated June 1, 1993,
incorporated by reference to Exhibit 10.10 to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993.
(10.7) Reinsurance agreement between Sierra Health and Life
Insurance Company, Inc. and Connecticut General Life
Insurance Company dated September 14, 1992, incorporated by
reference to Exhibit 10.21 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
55
(10.8) Administrative Services agreement between Health Plan of
Nevada, Inc. and the Registrant dated December 1, 1987,
incorporated by reference to Exhibit 10.17 to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
(10.9) Administrative Services agreement between Sierra Health and
Life Insurance Company, Inc. and the Registrant dated April
1, 1989, incorporated by reference to Exhibit 10.18 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
(10.10) Business Affiliation Agreement among the Registrant, Sierra
Health Holdings, Inc., the Galtney Group, Inc. and HMO Texas
Holdings, Inc. dated October 28, 1994, incorporated by
reference to Registrant's Report on Form 8-K dated March 2,
1995.
(10.11) Agreement between Health Plan of Nevada, Inc. and the United
States Health Care Financing Administration dated July 24,
1992, incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K filed for the fiscal
year ended December 31, 1992.
(10.12) Loan Agreement among Bank of America, Nevada, the Registrant,
Health Plan of Nevada, Inc. and Sierra Health and Life
Insurance Company, Inc. dated November 30, 1993 in the
principal amount of $14,000,000, incorporated by reference to
Exhibit 10.19 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.
(10.13) Loan Agreement between Home Federal Savings and Loan
Association and 2314 West Charleston Partnership dated
September 15, 1989 in the principal amount of $3,400,000,
incorporated by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.
(10.14) Promissory note assumed by Southwest Medical Associates, Inc.
payable to Key Bank of Washington, formerly Savings Bank of
Puget Sound, with the principal amounts totaling $7,500,000,
incorporated by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.
(10.15) Assumption and Reaffirmation Agreements dated March 25, 1994,
incorporated by reference to Exhibit 10.23 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.
(10.16) Unconditional Guarantees dated March 25, 1994, incorporated
by reference to Exhibit 10.24 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993.
(10.17) Compensatory Plans, Contracts and Arrangements.
(1) Employment Agreements with Anthony M. Marlon, M.D.;
Erin E. MacDonald; Frank E. Collins; William R.
Godfrey; Lawrence S. Howard; Michael A. Montalvo; Jerry
D. Reeves, M.D.; Marie H. Soldo; and James L. Starr
with various dates, incorporated by reference to
Exhibit 10 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1994.
(2) The Registrant's Second Amended and Restated 1986 Stock
Option Plan as amended to date, incorporated by
reference to Exhibit 10.24 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992.
56
(3) The Registrant's Second Restated Capital Accumulation
Plan, as amended to date, incorporated by reference to
Exhibit 10.24 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992.
(4) The Registrant's Supplemental Retirement Plan, as
amended to date, incorporated by reference to Exhibit
10.24 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992.
(5) Protocols for cash bonus awards, incorporated by
reference to Exhibit 10.17 (5) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(6) The Company's Long-Term Incentive Plan incorporated by
reference to Form S-8 filed July 7, 1995.
(7) The Company's 1995 Non-Employee Directors' Stock Plan
incorporated by reference to Form S-8 filed July 7,
1995.
(10.18) Agreement between the Registrant and PriMerit Bank for a
Line of Credit dated May 14, 1993, incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the three month period ended March 31, 1993.
(10.19) Modification and Renewal Agreement dated June 30, 1994 to
the Line of Credit Agreement dated May 14, 1993, between the
Registrant and PriMerit Bank, incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the three month period ended June 30, 1994.
(10.20) Modification and renewal agreement dated May 31, 1995, to
the Line of Credit Agreement between Sierra and PriMerit
Bank filed as Exhibit 10.18 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1993, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(10.21) Modification and renewal agreement dated July 6, 1995, to
the Line of Credit Agreement between Sierra and PriMerit
Bank filed as Exhibit 10.18 to the company's Form 10-K for
the fiscal year ended December 31, 1993, incorporated by
reference to the Registrant's Quarterly report on form 10-Q
for the fiscal quarter ended June 30, 1995.
(10.22) Agreement and Plan of Merger dated as of June 12, 1995 among
the Registrant, Health Acquisition Corp., and CII Financial,
Inc., incorporated by reference to the Report on Form 8-K
dated June 13, 1995, as amended.
(10.23) Agreement between the Registrant and First Option Health
Plan to develop and implement a Medicare risk product in New
Jersey dated January 6, 1995, incorporated by reference to
Exhibit 10.20 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
(11) Computation of earnings per share.
(13) Independent Auditors' Report for CII Financial, Inc. for the
years ended December 31, 1994 and 1993.
57
(21) Subsidiaries of the Registrant (listed herein):
There is no parent of the Registrant. The following is a
listing of the active subsidiaries of the Registrant, or if
indented, subsidiaries of the subsidiary under which they
are listed:
Jurisdiction of
Incorporation
Sierra Health and Life Insurance
Company, Inc. California
Health Plan of Nevada, Inc. Nevada
Sierra Healthcare Options, Inc. Nevada
Nevada Administrators, Inc. Nevada
Behavioral Healthcare Options, Inc. Nevada
Family Health Care Services Nevada
Family Home Hospice, Inc. Nevada
Southwest Medical Associates, Inc. Nevada
Mohave Valley Hospital, Inc. Arizona
Tolemac, Inc. Arizona
Sierra Medical Management, Inc. Nevada
Southwest Realty, Inc. Nevada
Sierra Health Holdings, Inc. Texas
HMO Texas, L.C. Texas
CII Financial, Inc. California
California Indemnity Insurance Co., Inc. California
Commercial Casualty Insurance Company California
CII Leasing, Inc. California
Financial Assurance Company, Ltd. Cayman Islands
Northern Nevada Health Network, Inc. Nevada
Intermed, Inc. Arizona
(23.1) Consent of Deloitte & Touche LLP
(23.2) Consent of BDO Seidman LLP
(27) Financial Data Schedules
(99) Current Report on Form 80K dated March 4, 1996 incorporated
by reference herein.
All other Exhibits are omitted because they are not
applicable.
58
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated
December 21, 1995 with the Securities and Exchange
Commission disclosing November 1995 revenue and net income.
Such amounts included the operations of CII Financial, Inc.
The Company filed a Current Report on Form 8-K dated March
4, 1996 with the Securities and Exchange Commission in
connection with certain cautionary statements made pursuant
to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
(d) Financial Statement Schedules
The Exhibits set forth in Item 14 (a)(2) are filed herewith.
* Confidential treatment has been requested and approved for portions
of this exhibit. The confidential portions have been omitted and
filed separately with the Securities and Exchange Commission
pursuant to Rule b-2 under the Securities Exchange Act of 1934, as
amended.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned thereto duly authorized.
SIERRA HEALTH SERVICES, INC.
By: /S/ JAMES L. STARR
Date: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ ANTHONY M. MARLON, M.D. Chief Executive Officer March 29, 1996
Anthony M. Marlon, M.D. and Chairman of the Board
(Chief Executive Officer)
/S/ JAMES L. STARR Vice President of Finance March 29, 1996
James L. Starr Chief Financial Officer and
Treasurer
(Chief Accounting Officer)
/S/ ERIN E. MACDONALD President and March 29, 1996
Erin E. MacDonald Chief Operating Officer
Director
/S/ CHARLES L. RUTHE Director March 29, 1996
Charles L. Ruthe
/S/ WILLIAM J. RAGGIO Director March 29, 1996
William J. Raggio
/S. THOMAS Y. HARTLEY Director March 29, 1996
Thomas Y. Hartley
60
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS - Parent Company Only
December 31
1995 1994
CURRENT ASSETS:
Cash and Cash Equivalents .......................................... $ 11,814,000 $ 6,577,000
Short-term Securities............................................... 26,196,000 48,523,000
Prepaid Expenses and Other Assets................................... 2,144,000 1,640,000
Total Current Assets.......................................... 40,154,000 56,740,000
LAND, BUILDING AND EQUIPMENT - NET ...................................... 26,828,000 19,154,000
OTHER ASSETS:
Equity in Net Assets of Subsidiaries ............................... 119,856,000 90,784,000
Notes Receivable from Subsidiaries ................................. 12,593,000
Long-term Investments .............................................. 12,940,000 3,771,000
Other .............................................................. 9,462,000 4,901,000
TOTAL ASSETS ............................................................ 221,833,000 $175,350,000
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities ..................... $ 9,715,000 $ 4,235,000
Current Portion of Long-term Debt .................................. 667,000 556,000
Total Current Liabilities .................................... 10,382,000 4,791,000
LONG-TERM DEBT--LESS CURRENT PORTION ..................................... 3,736,000 2,402,000
TOTAL LIABILITIES ....................................................... 14,118,000 7,193,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital Stock ...................................................... 88,000 87,000
Additional Paid-in Capital ......................................... 147,240,000 141,398,000
Treasury Stock ..................................................... (130,000) (130,000)
Unrealized Holding Loss on Available-for-sale Securities ........... 9,659,000 (2,752,000)
Retained Earnings .................................................. 50,858,000 29,554,000
Total Stockholders' Equity ................................... 207,715,000 168,157,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $221,833,000 $175,350,000
Note: Scheduled maturities of long-term debt, including the principal portion of obligations under capital
leases, are as follows:
Year Ending December 31,
1996................................................... $ 667,000
1997................................................... 495,000
1998................................................... 2,383,000
1999................................................... 429,000
2000................................................... 429,000
Thereafter............................................. 0
Total.................................................. $4,403,000
S-1
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENT OF OPERATIONS -- Parent Company Only
Year Ended December 31,
1995 1994 1993
OPERATING REVENUES:
Management Fees........................................ $40,115,000 $37,324,000 $33,806,000
Subsidiary Dividends................................... 250,000 1,350,000 3,460,000
Investment and Other Income............................ 4,087,000 928,000 229,000
Total Operating Revenues............................ 44,452,000 39,602,000 37,495,000
GENERAL AND ADMINISTRATIVE EXPENSES:
Payroll and Benefits................................... 12,805,000 12,162,000 12,591,000
Depreciation........................................... 3,323,000 3,494,000 3,051,000
Rent................................................... 738,000 1,186,000 1,630,000
Repairs and Maintenance................................ 382,000 303,000 455,000
Legal.................................................. 226,000 1,109,000 632,000
Consulting............................................. 583,000 480,000 421,000
Other.................................................. 4,252,000 5,053,000 4,240,000
Merger and Acquisition Expense ........................ 11,614,000
Total General and Administrative.................... 33,923,000 23,787,000 23,020,000
INTEREST EXPENSE AND OTHER, NET............................ (396,000) (467,000) (168,000)
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES............................... 15,785,000 24,788,000 16,728,000
INCOME BEFORE INCOME TAXES................................. 25,918,000 40,136,000 31,035,000
PROVISION FOR INCOME TAXES................................. (4,614,000) (5,693,000) (3,740,000)
NET INCOME................................................. $21,304,000 $34,443,000 $27,295,000
S-2
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS -- Parent Company Only
Year Ended December 31,
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................. $21,304,000 $34,443,000 $27,295,000
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization....................... 3,449,000 3,533,000 3,091,000
Equity in Undistributed Earnings
of Subsidiaries..................................... (15,787,000) (24,788,000) (16,728,000)
Change in Assets and Liabilities:
Other Assets........................................ (5,021,000) 996,000 (415,000)
Current Assets...................................... (504,000) (635,000) (1,311,000)
Current Liabilities................................. 7,429,000 239,000 1,696,000
Net Cash Provided by Operating Activities........... 10,870,000 13,788,000 13,628,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures................................... (8,770,000) (2,048,000) (11,979,000)
Land, Building and Equipment Dispositions, Net......... 7,000 113,000 504,000
Decrease (Increase) in Short-term Securities........... 22,990,000 (45,316,000) (1,529,000)
Increase in Other Assets............................... (8,963,000) (2,659,000)
Dividends from Subsidiary.............................. 250,000 1,350,000 3,460,000
Increase in Net Assets in Subsidiaries................. (1,572,000) (7,189,000) (5,881,000)
Net Cash Provided by (Used for)
Investing Activities.............................. 3,942,000 (55,749,000) (15,425,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to Subsidiaries ................................. (12,593,000)
Proceeds from Long-term Debt........................... 3,000,000
Reductions in Long-term Obligations and
Payments on Capital Leases.......................... (789,000) (3,688,000) (959,000)
Reductions in Note Payable to Subsidiary............... (931,000)
Proceeds from Issuance of Common Stock................. 44,579,000
Exercise of Stock Options.............................. 3,807,000 4,385,000 1,435,000
Net Cash (Used for) Provided
by Financing Activities.......................... (9,575,000) 45,276,000 2,545,000
Net increase in Cash and Cash Equivalents.................. 5,237,000 3,315,000 748,000
Cash and Cash Equivalents at Beginning of Year............. 6,577,000 3,262,000 2,514,000
Cash and Cash Equivalents at End of Year................... $11,814,000 $ 6,577,000 $3,262,000
Supplemental condensed statements of cash flows information:
Cash Paid During the Year for Interest
(Net of Amount Capitalized)............................ $ 455,000 $ 662,000 --
Cash Paid During the Year for Income Taxes................. 2,746,000 2,592,000 $3,338,000
Noncash Investing and Financing Activities:
Additions to Capital Leases............................ 278,000 552,000 --
Assumptions of Liability in Connection with
Land Purchase.......................................... 1,956,000 -- --
Stock Issued for Exercise of Options................... 1,949,000 2,685,000 $1,117,000
S-3
SIERRA HEALTH SERVICES, INC.
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY -- CASUALTY INSURANCE
(amounts in thousands)
Gross
Reserves
for Unpaid
Deferred Claims and Discount if any Gross Net
Acquisition Adjustment Deducted in Unearned Earned Investment
Affiliation With Costs Expenses Column C Premiums Premiums Income
Registrant Column A Column B Column C Column D Column E Column F Column G
Consolidated Property and
Casualty Entities ....... $6,928 $182,318 -- $9,282 $94,611 $14,301
Claims & Claim
Adjustment Amortization
Expenses Incurred of Deferred Paid Claims
Related to Policy and Claims Direct
(1) (2) Acquisition Adjustment Premiums
Affiliation With Current Prior Year Costs Expenses Written
Registrant Column A Year Column H Column I Column J Column K
Consolidated Property and
Casualty Entities ....... $75,978 ($20,079) $22,028 $61,071 $94,953
S-4
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SECTION 403.04b
RECONCILIATION OF BEGINNING AND ENDING LOSS AND LOSS
ADJUSTMENT EXPENSE RESERVES
AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES)
(in thousands)
Year ended December 31
1995 1994 1993 1992 1991 1990 1989 1988
Losses and LAE
Reserve................... $182,318 $190,962 $200,356 $178,460 $112,749 $67,593 $37,466 $10,277
Loss reinsurance
Recoverables (1).......... 25,870 29,342 25,841 20,207
Net Loss and LAE
Reserve .................. 156,448 161,620 174,515 158,253
Cumulative Net Paid as of:
One Year Later ........... 44,519 50,210 50,360 57,611 39,118 14,820 3,954
Two Years Later .......... 79,788 84,465 89,177 65,165 28,657 6,609
Three Years Later ........ 104,569 108,849 76,988 36,579 8,198
Four Years Later ......... 120,539 83,822 39,345 8,938
Five Years Later ......... 87,618 41,043 9,235
Six Years Later .......... 41,962 9,398
Seven Years Later ........ 9,471
Net Reserve Re-estimated as of:
One Year Later ........... 141,541 160,562 154,388 140,815 83,841 37,463 10,072
Two Years Later .......... 141,100 147,167 142,447 96,011 39,753 9,902
Three Years Later ........ 134,747 143,433 97,142 43,528 9,598
Four Years Later ......... 137,143 97,942 44,404 9,330
Five Years Later ......... 94,852 45,027 10,042
Six Years Later .......... 44,543 10,110
Seven Years Later ........ 10,124
Cumulative Redundancy
(Deficiency) ............. 20,079 33,415 23,506 (24,394) (27,259) (7,077) 153
Net Reserve................... 156,448 161,620 174,515
Reinsurance Recoverables...... 25,870 29,342 25,841
Gross Reserve ................ $182,318 190,962 200,356
Net Re-estimated Reserve ..... 141,541 141,100
Re-estimated Reinsurance
Recoverables ............. 24,564 16,865
Gross Re-Estimated
Reserve .................. 166,105 157,965
Gross Cumulative
Redundancy................ $ 24,857 $ 42,391
(1) The Company adopted Financial Accounting Standards Board Statement
No. 113 ("FAS 113"), "Accounting and Reporting for Short-Duration and
Long-Duration Reinsurance Contracts" for the year ended December 31,
1992. As permitted, prior financial statements have not been restated.
Reinsurance recoverables on unpaid losses and LAE are now shown as an
asset on the balance sheets at December 31, 1995 and 1994. However, for
purposes of the reconciliation and development tables, loss and LAE
information will be shown net of reinsurance.
See the notes to consolidated financial statements.
S-5