<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(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, 1994
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 88-0200415
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS 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 20, 1995 was $383,340,000.
The number of shares of the registrant's common stock outstanding on March 20,
1995 was 14,714,000.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
-------- ------------------
Portions of the registrant's Part III
definitive proxy statement for its
1995 annual meeting to be filed by
March 31, 1995.
<PAGE>
SIERRA HEALTH SERVICES, INC.
1994 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
Item 1. Business................................................... 1
Item 2. Properties................................................. 10
Item 3. Legal Proceedings.......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders........ 11
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters........................................ 12
Item 6. Selected Financial Data.................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation................................... 14
Item 8. Financial Statements and Supplementary Data................ 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 43
PART III
Item 10. Directors and Executive Officers of the Registrant......... 43
Item 11. Executive Compensation..................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 43
Item 13. Certain Relationships and Related Transactions............. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... 44
</TABLE>
i
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Sierra Health Services, Inc. (the "Company") is a managed health care company
that provides and administers the delivery of comprehensive health care 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 products to
employer groups and individuals. The Company's broad range of managed health
care services is provided through its federally qualified health maintenance
organization ("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.
The Company's primary types of coverage are an HMO plan and a managed
indemnity plan, which includes a preferred provider organization ("PPO") option.
In 1994, the Company enhanced its product line by introducing the first HMO
Point of Service ("POS") plan in Nevada. This new product allows members to
choose one of the above coverage options when medical services are required
instead of one plan for the entire year. As of December 31, 1994 the POS
membership was approximately 22,000 in southern Nevada or 17% of the total HMO
membership.
As of December 31, 1994, the Company provided HMO products to 126,460 members,
managed indemnity products to 24,428 members and administrative services to
65,454 members. Of these members, approximately 95% reside in Nevada and the
balance reside in six other states. In addition, the Company provides workers'
compensation medical management programs for 78,868 employees in Nevada. The
Company estimates that, as of December 31, 1994, enrollees in its HMO
represented approximately 60% of all HMO enrollees in Nevada. 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 as well as a PPO. Most
of its managed health care services in southern Nevada are provided through its
networks of over 1,500 providers and 12 hospitals. This network includes the
Company's multi-specialty medical group, which provides medical services to
approximately 80% of the Company's HMO members and employs 113 primary care and
other providers in over 20 medical specialties. The Company directly provides
home health care, hospice care and behavioral health care services. In
addition, the Company operates a 24-hour urgent care center, a radiology
department, a vision department, an occupational medicine department and a free-
standing, state licensed and Medicare approved ambulatory surgery center. 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. For the twelve months
ended December 31, 1994, the Company's medical-loss ratio was 74.3%.
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.
1
<PAGE>
PRODUCT 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 HMO was established in 1981 and began enrolling members in
southern Nevada in October 1982. As of December 31, 1994, the HMO had 126,460
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, 1994, the HMO's
members were served by 113 primary care and other providers employed by the
Company, approximately 750 additional contracted health care providers, and 11
hospitals. Contracted primary care physicians and specialists are compensated
on a capitation or modified fee-for-service basis. Contracts with its primary
hospitals are generally on a 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 HMO does 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 HMO also provides vision care and dental services on a
capitation and modified fee-for-service basis through contractual arrangements
with independent providers and its optometry group. It contracts for
prescription drugs with a national drug chain on a discounted fee-for-service
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, 1994,
approximately 19,760, or 15.6%, of the Company's total 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 1,500 providers and 11 hospitals. The
Company contracts with PPO's 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 care to insureds that is
medically necessary and appropriate. The Company is expanding into certain
areas to service small groups which historically have been underserved by
managed care. As of December 31, 1994, 24,428 persons were enrolled in the
Company's managed indemnity plans.
2
<PAGE>
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 subject to applicable 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.
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, 1994, 65,454 persons were enrolled in the
Company's administrative services plans. In January 1994, the Company began
providing worker's compensation medical management services in Nevada. As of
December 31, 1994, enrollment in this program was 78,868.
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 120,000 participants from non-affiliated
employer groups and an insurance company.
3
<PAGE>
MARKETING
The Company's marketing efforts 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 are developed through print advertising
directed to employers, primarily in the spring and summer of each year, and
through a consumer media campaign, held in the fall of each year. 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.
MEMBERSHIP.
PERIOD END MEMBERSHIP:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
HMO:
Commercial................. 106,700 89,426 82,227 76,889 69,993
Medicare................... 19,760 15,391 13,990 12,449 11,069
Managed indemnity........... 24,428 29,491 29,935 34,154 38,872
Medicare supplement......... 8,912 4,048 1,922 -- --
Administrative services..... 65,454 58,433 58,852 40,426 32,891
Workers' compensation (1)... 78,868 -- -- -- --
------- ------- ------- ------- -------
Total membership........... 304,122 196,789 186,926 163,918 152,825
</TABLE>
(1) Approximately 44% of persons enrolled in the workers' compensation medical
management program, which began in January 1994, were also enrolled in other
programs offered by the Company.
For the years ended December 31, 1993 and 1994, the Company received
approximately 27.2% and 28.0%, 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
4
<PAGE>
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,
1994, the Company's ten largest HMO employer groups were, in the aggregate,
responsible for approximately 20% of its total revenues. Although none of such
employer groups accounted for more than 5% of total revenues during that period,
the loss of one or more of the larger employer groups would 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
A significant distinction between the Company's health care delivery system
and that of many other managed care providers is the fact that approximately 80%
of the Company's 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 HMO, 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-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.
5
<PAGE>
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 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 3.0% but
not to exceed the lesser of the increase in the Consumer Price Index or 6.0%.
Since a majority of the Company's 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 and may be
extended by mutual consent.
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 center 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.
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 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 $1.0 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 for the HMO and
6
<PAGE>
$2.0 million per member per lifetime for the managed indemnity plans. In the
ordinary course of its business, however, the Company is subject to claims that
are not insured, principally claims for punitive damages.
MANAGEMENT INFORMATION SYSTEM
The Company's management 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 management information system. Recently, the
Company entered into an arrangement with an outside vendor to develop and
maintain software programs for the Company.
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 a formal credentialing process
and to the Company's quality assurance programs.
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 recently applied for accreditation from the National Committee
on Quality Assurance (the "NCQA"). Such accreditation is provided to HMOs which
satisfy certain quality standards established by the NCQA. The Company's site
visit occurred in the early part of 1995, results are expected by mid-year.
There can be no assurance that the Company will receive full accreditation from
the NCQA.
7
<PAGE>
UNDERWRITING
HMO. The Company structures premium rates for its various health plans
primarily through community rating and community rating by class methods. 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.
COMPETITION
Managed care companies and HMOs operate in a highly competitive environment.
The Company's major competition 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 would materially affect the Company's results of operations.
8
<PAGE>
GOVERNMENT REGULATION AND RECENT LEGISLATION
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's HMO is
licensed in southern Nevada and portions of northern Nevada and is subject to
regulation by the Nevada Division of Insurance. The Company's 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 new worth and reserve requirements. The Company also has certain
other deposit requirements. The Company has restricted assets on deposit in
various states ranging from $100,000 to $850,000 and totalling $3.8 million at
December 31, 1994. The Company's HMO and insurance subsidiaries meet
requirements to maintain minimum stockholder's equity of $200,000 and $3.0
million, respectively. The Company's HMO and insurance subsidiaries currently
maintain a home 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 HMO's. Such proposals are being
reviewed and evaluated by many organizations including professional trade
organizations for HMO's, 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 will not have a material adverse impact to the Company's
operations.
The Company is subject to the HMO Act and the regulations promulgated
thereunder. The Company's HMO is federally qualified under this Act. In
general, the HMO Act and regulations promulgated thereunder provide that, with
certain exceptions, all employers of at least 25 employees, who offer a health
benefit plan and have been appropriately requested by a federally qualified HMO
to offer HMO coverage to their employees must permit the HMO to market such a
plan to their employees, with the employer contributing an amount which does not
financially discriminate against an employee who enrolls in the HMO. This
requirement of the HMO Act expires in October 1995. 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.
In 1993, the Nevada legislature approved legislation which requires the Nevada
Legislative Health Care Committee to develop a mandatory managed care system for
the state's Medicaid recipients. The legislation further imposes certain
coverage requirements on HMOs that participate in the new program. Medicaid
reimbursements presently comprise only a small portion of the Company's revenues
on a consolidated basis. The Company believes that several HMOs
9
<PAGE>
will bid for the new Medicaid program. Although the recommended Medicaid program
may create new business opportunities for HMOs in Nevada, it is difficult to
determine what effect, if any, the recent Nevada legislation may have on the
Company and its business operations.
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.
Medicare and Medicaid antifraud and abuse provisions are codified at 42 U.S.C.
(S)(S) 1320-7(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.
EMPLOYEES.
The Company had approximately 1,600 employees on December 31, 1994. None of
these employees is covered by a collective bargaining agreement. The Company
believes that its relations with its employees are good.
10
<PAGE>
ITEM 2. PROPERTIES.
The Company owns and leases several administrative and clinical facilities in
southern Nevada. Facilities owned by the Company include (i) a recently
completed complex located in Las Vegas consisting of an approximately 134,000
square foot six-story home office building and an approximately 43,000 square
foot two-story corporate administrative headquarters and (ii) approximately
151,000 square feet of clinical facilities in various locations throughout
southern Nevada including a recently completed two-story, 44,000 square foot,
medical facility on land contiguous to its administrative headquarters in
northwest Las Vegas. The Company's home office building and corporate
administrative headquarters are subject to liens securing an $11.8 million loan
balance from Bank of America, Nevada and certain clinical space is subject to a
$3.3 million mortgage in favor of GE Capital Asset Management Corporation as
well as a $4.8 million mortgage in favor of Key Bank of Washington.
Additionally, the Company leases approximately 51,000 square feet of clinical
space in southern Nevada, with leases extending through September 1996, and
leases approximately 67,000 square feet of office space in southern Nevada and
approximately 6,000 square feet of office space in other areas to support
regional operations. The Company has begun the construction of an approximately
28,000 square foot outpatient surgical facility in Las Vegas with an estimated
total cost of $4.3 million. Completion is expected in mid-1995. The Company
believes that its current clinical space is 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, a significant portion of which involve claims of medical
malpractice, claims for coverage or payment for medical services rendered to HMO
members and for claims by providers for payment for medical services rendered to
HMO members. In the opinion of its management, the ultimate resolution of
pending legal proceedings will not have a material adverse effect on the
Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1994.
11
<PAGE>
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 ("NYSE") 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 1994 and 1993.
<TABLE>
<CAPTION>
Period High Low
------ ------- -------
<S> <C> <C>
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
1993
First Quarter.... 21 11/16 12 3/4
Second Quarter... 21 1/4 11 1/2
Third Quarter.... 22 15 1/8
Fourth Quarter... 22 5/8 15 1/2
</TABLE>
HOLDERS
The number of record holders of Common Stock at February 28, 1995 was 213.
Based upon information available to it, the Company believes there are
approximately 5,400 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.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company for the
years ended December 31, 1994, 1993, 1992, 1991, and 1990 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, 1994, 1993, 1992, 1991, and 1990 and for each of the five years
ended December 31, 1994 have been derived from the audited Consolidated
Financial Statements of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA/(1)/:
OPERATING REVENUES:
Premiums $269,382 $240,691 $217,624 $192,904 $158,643
Professional Fees 12,331 11,254 10,206 10,306 8,375
Specialty Product Revenue 10,487 4,100 4,063 3,296 2,117
Investment and Other Revenue 3,601 2,032 2,060 2,515 2,725
-------- -------- -------- -------- --------
Total 295,801 258,077 233,953 209,021 171,860
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Medical Expense 200,229 178,526 166,495 147,169 121,811
General, Administrative and Other 53,671 50,715 44,176 43,363 38,362
Specialty Product Expense 5,823 2,977 2,451 1,502 879
-------- -------- -------- -------- --------
Total 259,723 232,218 213,122 192,034 161,052
-------- -------- -------- -------- --------
OPERATING INCOME 36,078 25,859 20,831 16,987 10,808
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest Expense and Other, Net (1,830) 2 (505) (429) (573)
Litigation Settlement/(2)/ (784) (1,500) (5,500)
-------- -------- -------- -------- --------
Total (1,830) 2 (1,289) (1,929) (6,073)
-------- -------- -------- -------- --------
Income Before Income Taxes and
Minority Interests 34,248 25,861 19,542 15,058 4,735
Provision for Income Taxes (11,950) (8,275) (5,755) (4,384) (1,495)
-------- -------- -------- -------- --------
Income Before Minority Interests 22,298 17,586 13,787 10,674 3,240
Minority Interests in Subsidiary (Income)
Losses (94) (143) (184) 96 7
-------- -------- -------- -------- --------
NET INCOME $ 22,204 $ 17,443 $ 13,603 $ 10,770 $ 3,247
======== ======== ======== ======== ========
EARNINGS PER COMMON SHARE/(3)/ $1.71 $1.42 $1.14 $.92 $.28
======== ======== ======== ======== ========
Weighted Average Number of Common
Shares Outstanding/(3)/ 13,021 12,296 11,949 11,739 11,607
======== ======== ======== ======== ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)/(4)/ $ 59,690 $ 5,727 $ 9,243 $(2,138) $(5,770)
Total Assets 223,250 144,424 108,113 85,487 82,421
Long-term Debt (Net of Current Maturities) . 18,409 16,002 7,661 6,318 6,114
Cash Dividends Per Common Share None None None None None
Stockholders' Equity 134,372 62,132 42,327 24,079 11,886
</TABLE>
(1) Effective January 1994, the Company reclassified amounts in its Consolidated
Statements of Operations to provide additional information to reflect
expanded operations. See Note 1 of Notes to the Consolidated Financial
Statements.
(2) For uncertainties regarding litigation and legal matters see Note 6 of Notes
to Consolidated Financial Statements.
(3) Adjusted to account for the two-for-one stock split of the Common Stock
distributed on or about January 11, 1993 to stockholders of record as of
November 13, 1992.
(4) The Company's operations were not adversely affected by negative working
capital amounts in 1990 and 1991 because, as in the case of other HMOs and
insurance companies, there is a lag period between the time services are
provided and the time claims are paid to physicians, hospitals and other
providers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company derives revenues principally from premiums, which include
capitation payments, received by its HMO and insurance subsidiaries. To a
lesser extent, the Company also derives revenues from professional fees
(consisting primarily of fees for providing health care services to non-members
and co-payment fees received from members), specialty products (consisting of
fees for administrative services and ancillary products) and investment and
other revenue. Premium revenues accounted for approximately 91.1%, 93.2% and
93.0% of the Company's total revenues for 1994, 1993 and 1992, respectively.
Continued premium revenue growth is principally dependent upon continued
enrollment in the Company's plans and upon competitive and regulatory factors
which are expected to limit the Company's ability to implement annual premium
rate increases and, to a lesser extent, to result in declining premium rates.
In addition, enrollment in the Company's managed indemnity plans has declined
since 1990 principally due to increased competitive pressures and, more
recently, the transfer of certain members to the Company's HMO Point of Service
plan.
The Company's principal expenses consist of medical 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 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. General, administrative and other
expenses generally represent operational costs other than those associated with
the delivery of health care services.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected operating data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
OPERATING REVENUES:
Premiums 91.1% 93.2% 93.0%
Professional Fees 4.2 4.4 4.4
Specialty Product Revenue 3.5 1.6 1.7
Investment and Other Revenue 1.2 0.8 0.9
----- ----- -----
Total 100.0 100.0 100.0
----- ----- -----
OPERATING EXPENSES:
Medical Expense 67.7 69.2 71.2
General, Administrative and Other 18.1 19.7 18.9
Specialty Product Expense 2.0 1.1 1.0
----- ----- -----
Total 87.8 90.0 91.1
----- ----- -----
OPERATING INCOME 12.2 10.0 8.9
OTHER INCOME (EXPENSE):
Interest Expense and Other, Net (0.6) 0.0 (0.2)
Litigation Settlement 0.0 0.0 (0.3)
----- ----- -----
Total (0.6) 0.0 (0.5)
----- ----- -----
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 11.6 10.0 8.4
PROVISION FOR INCOME TAXES 4.1 3.2 2.5
----- ----- -----
INCOME BEFORE MINORITY INTERESTS 7.5 6.8 5.9
MINORITY INTERESTS IN SUBSIDIARY
INCOME 0.0 0.0 0.1
----- ----- -----
NET INCOME 7.5% 6.8% 5.8%
===== ===== =====
</TABLE>
15
<PAGE>
1994 COMPARED TO 1993
The Company's total operating revenues for 1994 increased 14.6% to $295.8
million from $258.1 million for 1993. The increase was primarily due to premium
revenue increases of approximately $28.7 million, or 11.9%, from the Company's
HMO and insurance subsidiaries. Such additional premium growth resulted
principally from an 11.3% increase in member months (the number of months of
each year that an individual is enrolled in a plan). The Company realized
minimal rate changes for the HMO subsidiary's commercial groups, and a slight
rate increase by the Company's 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 the Health Care
Financing Administration ("HCFA"), along with the transfer by some members to
the Company's lower priced Medicare plans. The Company's specialty product
revenue increased approximately $6.4 million principally due to the Company's
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 74.3% for the twelve months ended December 31, 1994 from
74.2% for the comparable twelve months in 1993. Specialty product expenses
increased 96% to $5.8 million substantially due to the new workers' compensation
medical management contract discussed above. Such additional costs include
utilization review and other administrative services.
General, administrative and other ("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 decreased to 18.1% from 19.7%
during the comparable period in 1993. 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 of 1993. Additionally, interest expense increased
approximately $1.7 million principally due to new mortgage financing on certain
of the Company's owned facilities. The Company's allowance for doubtful
accounts, as a percentage of total accounts receivable increased to 27% at
December 31, 1994 from 22% in 1993. The increase is principally due to a
slightly higher rate of retroactive member terminations in 1994 over 1993.
The Company's effective federal income tax rate for the year ended December
31, 1994 was 34.9% compared to 32.0% for the year ended 1993. During the third
quarter of 1993, Congress passed the "Omnibus Budget Reconciliation Act of 1993"
(the "Act"). Certain provisions of the Act increased the statutory federal
income tax rate to 35% from 34%. The increase in the effective tax rate was
largely due to certain provisions of the Act which disallowed previously
deductible items, along with other factors.
Net income for 1994 increased 27.3% to $22.2 million from $17.4 million in
1993. The $4.8 million increase was primarily due to increased operating
revenues and a reduction in G&A expenses as a percentage of revenues, partially
offset by additional interest expense and an increase in the effective federal
income tax rate.
16
<PAGE>
1993 COMPARED TO 1992
The Company's total Operating Revenues for 1993 increased 10.3% to $258.1
million from $234.0 million for 1992. The increase was primarily due to a 10.6%
premium revenue increase, or $23.1 million, from the Company's HMO and insurance
subsidiary as a result of an average 4.4% premium rate increase and an
approximate 6.2% increase in member months. The Company's HMO realized rate
increases approximating $3.6 million, or 3.2%, for commercial groups and $7.2
million, or 12.0%, for its Medicare members. The Company's 1993 effective
Medicare capitation rate increase of 16.5% was somewhat offset by a reduction in
individual Medicare premium rates which resulted from some members transferring
to the Company's lower priced Medicare plans. The insurance subsidiary's
managed indemnity plans realized premium rate increases of approximately 4.9%,
or $3.1 million. The remaining overall consolidated premium revenue increase of
$9.2 million was primarily due to membership growth. Commercial HMO member
months increased 9.1% and Medicare HMO member months increased 4.4% while fully
insured managed indemnity member months decreased 6.1%. The Company's
professional fees increased approximately $1.0 million principally due to
increased home hospice and mental health fee-for-service revenue.
Total medical expenses increased by $12.0 million in 1993 compared to 1992.
This 7.2% increase resulted primarily from the member month growth along with
inflationary and other medical cost increases approximating 1.8%. The medical
loss ratio decreased to 74.2% in 1993 from 76.5% in 1992. The consolidated
medical loss ratio decreased primarily due to favorable HMO hospital rates and
increased provider efficiencies and increased Medicare capitation revenue.
Although the Company experienced higher overall HMO hospital utilization, such
higher utilization was generally offset by bed days of a lower intensity and
favorable amendments to the contracted per diem rates at its primary contracted
hospital.
In 1993, G&A costs were $50.7 million, a 14.8% increase over 1992. As a
percentage of revenues, 1993 G&A costs increased slightly to 19.7% from 18.9% in
1992. Compensation costs increased approximately $3.5 million resulting
primarily from additional employees supporting expanding services. Other G&A
expense increases were associated with ongoing operations and membership
increases including, among other things, premium taxes and brokers' fees which
together totaled $1.4 million. The increases in G&A costs were partially offset
by a reduction in stock based incentive compensation expense of approximately
$896,000. G&A cost decreases were also realized in legal and consulting
services.
The Company's effective federal income tax rate for 1993 increased to 32.0%
compared to 29.4% in 1992 due to the provisions of the Act (described above)
along with reduced tax-exempt investment income which resulted from generally
lower interest rates and decreased invested cash balances due to 1993 capital
expenditures.
17
<PAGE>
Net income for 1993 increased 28.2% to $17.4 million from $13.6 million in
1992. The $3.8 million increase in earnings is primarily due to increased
operating revenues and an improved medical loss ratio offset by a slight
increase in G&A expenses as a percentage of revenues and the increased
effective federal income tax rate. During June 1992, the Company settled
certain litigation with the Nevada Department of Insurance. Under the terms of
the settlement, the Department of Insurance received $784,000 and released all
claims against the Company, which resulted in a 1992 second quarter charge of
approximately $567,000, net of taxes.
INFLATION
Health care costs generally continue to rise at a faster rate than the
Consumer Price Index. The Company has been able to somewhat lessen 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 short-term securities increased by
$56.1 million to $104.6 million at December 31, 1994 from $48.5 million at
December 31, 1993. At December 31, 1994 the Company had working capital of
$59.7 million, and a current ratio of 2.0, compared to $5.7 million in working
capital at December 31, 1993, and a current ratio of 1.1. The primary sources
of cash received during the year ended December 31, 1994 included $38.1 million
generated from operations and $44.6 million in net proceeds received from the
Company's public offering of common stock completed on October 11, 1994.
The Company's $38.1 million cash flow from operating activities during the
twelve months ended December 31, 1994 resulted primarily from $22.2 million of
net income and $7.4 million in depreciation and amortization and an $8.5 million
net increase in working capital accounts. The increase in cash from
fluctuations in working capital accounts is principally due to increased medical
claims payable, unearned premium revenues and certain other accrued liabilities
partially offset by increases in accounts receivable and other current assets.
The $40.2 million provided by financing activities since December 31, 1993
consisted principally of $44.6 million in net proceeds received from the
Company's public offering of common stock and an additional $4.3 million
received pursuant to the exercise of certain outstanding Company stock options.
Such proceeds were partially offset by debt reductions of approximately $8.7
million, consisting largely of a promissory note in the principal amount of $2.8
million secured by a deed of trust encumbering the land for the Company's new
home office, regional home office and administrative headquarters and a mortgage
note of $2.4 million secured by one of the Company's recently acquired medical
clinics. Additional uses of cash included $10.7 million for net capital
expenditures, including medical clinic construction and equipment, and $4.0
million for the purchase of certain affiliated companies which owned and
operated certain medical buildings. This related party transaction is further
described in Note 8 in Notes to Consolidated Financial Statements.
18
<PAGE>
In September 1994, the Company completed construction of a 44,000 square foot
medical facility on land contiguous to its administrative headquarters in
northwest Las Vegas. Construction and equipment costs were approximately $5.5
million. In addition, the Company has begun construction on a 28,000 square
foot outpatient surgical facility in Las Vegas with an estimated total cost of
$4.3 million. Completion is expected in mid-1995. The Company's liquidity
needs over the next 12 months will primarily be for certain new computer,
medical and other equipment, the acquisition and construction of medical clinics
to support growing membership in Nevada, debt service and any expansion of the
Company's operations. The Company has a 1995 capital budget of approximately
$25.0 million. The Company believes that existing working capital, operating
cash flow and, if necessary, equipment leasing, amounts available under its
credit facility and the proceeds from the recent public offering 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 $2.9 million, as of
December 31, 1993 and December 31, 1994. The HMO and insurance subsidiaries
also meet requirements to maintain minimum stockholder's equity of $200,000 and
$3,000,000 respectively. Of the cash and cash equivalents and short-term
securities held at December 31, 1994, $13.6 million is designated for use only
by the insurance subsidiary and another $34.4 million only by the HMO. Such
amounts are available for transfer to the holding company from the HMO and
insurance subsidiary 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 subsidiary that would cause either
to violate its statutory net worth and reserve requirements.
In June 1994, the Company renewed its $5.0 million unsecured line of credit
from PriMerit Bank, F.S.B. for an additional one year term at an interest rate
of prime plus 1%. 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
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). This
pronouncement supersedes FAS 96 which the Company adopted effective in 1989.
The adoption of FAS 109 had no material impact on the Company's operations.
19
<PAGE>
During May 1993, Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115")
was issued. FAS 115 became effective on January 1, 1994 and requires the
Company to classify its investments in debt securities in three distinct
categories with certain unrealized gains and losses included in earnings or as a
separate component of stockholders' equity. The adoption of FAS 115 did not
impact the Company's earnings in 1994 and is more fully discussed in Note 3 in
Notes to Consolidated Financial Statements.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management Report on Consolidated Financial Statements........................... 22
Independent Auditors' Report..................................................... 23
Consolidated Balance Sheets at December 31, 1994 and 1993........................ 24
Statements of Consolidated Operations for the years ended December 31, 1994,
1993, and 1992.................................................................. 26
Statements of Changes in Consolidated Stockholders' Equity for the years ended
December 31, 1994, 1993, and 1992............................................... 27
Statements of Consolidated Cash Flows for the years ended
December 31, 1994, 1993, and 1992............................................... 28
Notes to Consolidated Financial Statements....................................... 29
</TABLE>
21
<PAGE>
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, 1994, such systems and
controls were adequate to meet the objectives discussed herein.
The accompanying Consolidated Financial Statements have been audited by Deloitte
& Touche LLP, 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
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sierra Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of Sierra Health
Services, Inc. and its subsidiaries as of December 31, 1994 and 1993, and the
related statements of consolidated operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. 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.
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 provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sierra Health Services, Inc. and
its subsidiaries at December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 10, 1995
23
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
ASSETS
------
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents......................... $ 17,227,000 $ 23,188,000
Short-term Securities.............................. 87,350,000 25,305,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts 1994 - $2,465,000; 1993 - $1,594,000)... 6,571,000 5,802,000
Prepaid Expenses and Other Assets.................. 7,683 000 6,458,000
------------ ------------
Total Current Assets............................. 118,831,000 60,753,000
------------ ------------
LAND, BUILDING AND EQUIPMENT......................... 88,449,000 71,823,000
Less-Accumulated Depreciation...................... 22,386,000 20,939,000
------------ ------------
Land, Building and Equipment--Net................ 66,063,000 50,884,000
------------ ------------
OTHER ASSETS:........................................
Funds Withheld by Ceding Insurance Company......... 10,234,000 10,681,000
Long-term Securities............................... 18,824,000 13,926,000
Restricted Cash and Securities..................... 3,771,000 3,566,000
Goodwill........................................... 3,292,000 1,849,000
Other.............................................. 2,235,000 2,765,000
------------ ------------
Total Other Assets............................... 38,356,000 32,787,000
------------ ------------
TOTAL ASSETS......................................... $223,250,000 $144,424,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements.
24
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accrued Liabilities........................................ $ 6,987,000 $ 7,365,000
Accrued Payroll and Taxes.................................. 8,216,000 8,026,000
Medical Claims Payable..................................... 31,122,000 27,264,000
Unearned Premium Revenue................................... 10,637,000 6,881,000
Current Portion of Long-term Debt.......................... 2,179,000 5,490,000
------------ ------------
Total Current Liabilities................................ 59,141,000 55,026,000
FUTURE POLICY BENEFITS....................................... 10,234,000 10,681,000
LONG-TERM DEBT--LESS CURRENT PORTION......................... 18,409,000 16,002,000
MINORITY INTERESTS........................................... 1,094,000 583,000
------------ ------------
TOTAL LIABILITIES............................................ 88,878,000 82,292,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
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: 1994 --
14,677,000; 1993 -- 12,470,000........................... 73,000 62,000
Additional Paid-in Capital................................. 79,256,000 27,666,000
Treasury Stock; 1994 and 1993 - 100,200
Common Shares............................................ (130,000) (130,000)
Unrealized Holding Loss on Available-for-Sale Securities... (1,565,000)
Retained Earnings.......................................... 56,738,000 34,534,000
------------ ------------
Total Stockholders' Equity............................... 134,372,000 62,132,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $223,250,000 $144,424,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements.
25
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------ -------------
<S> <C> <C> <C>
OPERATING REVENUES:
Premiums............................ $269,382,000 $240,691,000 $217,624,000
Professional Fees................... 12,331,000 11,254,000 10,206,000
Specialty Product Revenue........... 10,487,000 4,100,000 4,063,000
Investment and Other Revenue........ 3,601,000 2,032,000 2,060,000
------------ ------------ ------------
Total............................. 295,801,000 258,077,000 233,953,000
------------ ------------ ------------
OPERATING EXPENSES:
Medical Expense..................... 200,229,000 178,526,000 166,495,000
General, Administrative and Other... 53,671,000 50,715,000 44,176,000
Specialty Product Expense........... 5,823,000 2,977,000 2,451,000
------------ ------------ ------------
Total............................. 259,723,000 232,218,000 213,122,000
------------ ------------ ------------
OPERATING INCOME...................... 36,078,000 25,859,000 20,831,000
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest Expense and Other, Net..... (1,830,000) 2,000 (505,000)
Litigation Settlement............... (784,000)
------------ ------------ ------------
Total............................. (1,830,000) 2,000 (1,289,000)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS.................... 34,248,000 25,861,000 19,542,000
PROVISION FOR INCOME TAXES............ 11,950,000 8,275,000 5,755,000
------------ ------------ ------------
INCOME BEFORE MINORITY INTERESTS...... 22,298,000 17,586,000 13,787,000
MINORITY INTERESTS IN
SUBSIDIARY INCOME.................... 94,000 143,000 184,000
------------ ------------ ------------
NET INCOME............................ $ 22,204,000 $ 17,443,000 $ 13,603,000
============ ============ ============
EARNINGS PER COMMON SHARE............. $1.71 $1.42 $1.14
===== ===== =====
</TABLE>
See the accompanying notes to consolidated financial statements.
26
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL HOLDING LOSS ON TOTAL
COMMON PAID-IN TREASURY AVAILABLE-FOR-SALE RETAINED STOCKHOLDERS'
STOCK CAPITAL STOCK SECURITIES EARNINGS EQUITY
------- ----------- ---------- ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1992.................. $60,000 $20,661,000 $(130,000) $ 3,488,000 $ 24,079,000
Issuance of common stock in
connection with stock plans.......... 1,000 4,124,000 4,125,000
Income tax benefit realized upon
exercise of stock options............ 520,000 520,000
Net Income.............................. 13,603,000 13,603,000
------- ----------- --------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1992................ 61,000 25,305,000 (130,000) 17,091,000 42,327,000
Issuance of common stock in
connection with stock plans.......... 1,000 2,098,000 2,099,000
Income tax benefit realized upon
exercise of stock options............ 263,000 263,000
Net Income.............................. 17,443,000 17,443,000
------- ----------- --------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1993................ 62,000 27,666,000 (130,000) 34,534,000 62,132,000
Issuance of common stock in
connection with stock plans.......... 2,000 5,065,000 5,067,000
Issuance of 1,800,000 shares of
common stock in connection
with public offering, net........... 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... $(1,565,000) (1,565,000)
Net Income.............................. 22,204,000 22,204,000
------- ----------- --------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1994................ $73,000 $79,256,000 $(130,000) $(1,565,000) $56,738,000 $134,372,000
======= =========== ========= =========== =========== ============
</TABLE>
See the accompanying notes to consolidated financial statements.
27
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................ $ 22,204,000 $ 17,443,000 $ 13,603,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization................... 7,422,000 5,424,000 4,735,000
Provision for Doubtful Accounts................. 2,080,000 1,003,000 583,000
Decrease (Increase) in Other Assets.............. 415,000 (884,000) 60,000
Increase (Decrease) in Minority Interests........ 511,000 (78,000) 272,000
Changes in Working Capital Accounts:
Accounts Receivable............................ (2,174,000) (331,000) (1,286,000)
Other Current Assets........................... (2,457,000) (2,256,000) (956,000)
Medical Claims Payable......................... 3,858,000 1,532,000 1,523,000
Other Current Liabilities...................... 6,253,000 3,824,000 4,962,000
------------ ------------ ------------
Net Cash Provided by Operating Activities....... 38,112,000 25,677,000 23,496,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures............................. (11,159,000) (31,991,000) (6,540,000)
Land, Building and Equipment Dispositions, Net... 461,000 689,000 2,446,000
(Increase) Decrease in Short-term Securities..... (62,966,000) 2,690,000 (9,495,000)
(Increase) Decrease in Restricted Cash
and Securities................................. (221,000) (986,000) 52,000
Increase in Long-term Securities................. (6,369,000) (3,836,000) (4,654,000)
Corporate Acquisitions, Net...................... (4,000,000)
Increase in Other Assets......................... (1,792,000)
------------ ------------ ------------
Net Cash Used for Investing Activities......... (84,254,000) (33,434,000) (19,983,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:..............
Proceeds from Long-term Borrowings............... 14,000,000
Payments on Debt and Capital Leases.............. (8,735,000) (1,533,000) (2,195,000)
Proceeds from Issuance of Common Stock........... 44,579,000
Exercise of Stock Options........................ 4,337,000 1,245,000 2,266,000
------------ ------------ ------------
Net Cash Provided by Financing Activities....... 40,181,000 13,712,000 71,000
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH....................
AND CASH EQUIVALENTS.............................. (5,961,000) 5,955,000 3,584,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 23,188,000 17,233,000 13,649,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 17,227,000 $ 23,188,000 $ 17,233,000
============ ============ ============
</TABLE>
See the accompanying notes to consolidated financial statements.
28
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. The consolidated financial statements include the accounts of
Sierra Health Services, Inc. ("Sierra" -- a holding company incorporated in
Nevada) and its nine 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 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.
Principles of Consolidation. All significant intercompany transactions and
balances have been eliminated. Sierra's wholly owned subsidiaries include a
health maintenance organization, Health Plan of Nevada ("HPN"), a health and
life insurance company, Sierra Health and Life Insurance Company ("SHL"), a
multi-specialty medical group, Southwest Medical Associates, ("SMA"), a home
health care agency, a hospice, an administrative services company and a company
which has an interest in a building partnership. Sierra also owns a majority
interest in a company that provides and manages mental health and substance
abuse services, Behavioral Healthcare Options ("BHO"). 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. The remaining interests of BHO, HMO Texas and the
other partners in the building partnership are reflected as Minority Interests
in the accompanying Consolidated Balance Sheets.
Premium Revenue Recognition. Non-Medicare member enrollment is represented
principally by employer groups. Premiums are billed to each employer group in
accordance with negotiated contracts, and such premium revenue is recognized
when earned. Unearned premium revenue consists primarily of 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 $82,792,000, $70,323,000 and
$60,114,000 in 1994, 1993 and 1992, respectively.
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.
Specialty Product Revenues consist primarily of administrative services and
certain ancillary product revenues. Such revenues are recognized in the period
in which the service is provided.
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. 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.
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.
29
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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. HPN and SHL are 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
$100,000 to $850,000 and totaling $3,771,000 at December 31, 1994. HPN and SHL
also meet requirements to maintain minimum stockholder's equity of $200,000 and
$3,000,000, respectively.
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
Goodwill represents cost in excess of the fair value of net tangible assets
acquired and is amortized on a straight-line basis over a period of 20 to 40
years. Accumulated amortization at December 31, 1994 and 1993 was $377,000 and
$308,000, respectively.
Medical Claims Payable includes the estimated cost for unpaid claims for which
health care services have been performed and a provision of the estimated costs
for claims that have occurred but have not been reported.
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 $2,234,000, $2,097,000 and $1,733,000, net of reinsurance recoveries
of $584,000, $363,000 and $1,910,000, are included in Medical Expenses for 1994,
1993 and 1992, respectively.
30
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Funds Withheld by Ceding Insurance Company and Future Policy Benefits. SHL
has a reinsurance agreement whereby it purchases actuarially determined life
insurance reserves and thereby has an interest in a related life insurance
premium pool. These reinsurance premiums, commissions, expense reimbursements
and reserves related to reinsured business are accounted for on a basis
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. 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 reinsured
policy. Funds Withheld by Ceding Insurance Company and Future Policy Benefits in
connection with this agreement were $10,234,000 and $10,681,000 for December 31,
1994 and 1993, respectively.
Reinsurance contracts do not relieve the Company from its obligations to
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. At December 31, 1994 and 1993 the Company had no significant
reinsurance receivables.
Earnings per share and stock split. In January, 1993, the Company consummated
a two-for-one common stock split. All common stock, earnings per share and
stock plan amounts included in the accompanying Consolidated Financial
Statements and Notes thereto have been retroactively adjusted to account for the
split. Earnings per common share for the years ended December 31, 1994, 1993
and 1992 have been calculated using the weighted average number of common shares
outstanding of 13,021,000, 12,296,000 and 11,949,000, respectively. Common
share equivalents are not dilutive.
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 accrued expenses, reserves and depreciation.
Reclassifications. Effective January, 1994, the Company reclassified amounts
in its Consolidated Statements of Operations to provide additional information
to reflect expanded operations. Specialty Product Revenue (previously included
in Premiums and Other Revenue) and Specialty Product Expenses (previously
included in General and Administrative Expenses and Other Operating Expenses)
are now reflected in separate line items. Certain other operating costs were
reclassified to Medical Expenses. Amounts in the Consolidated Statements of
Operations for the years ended December 31, 1993 and 1992 have been reclassified
to conform with the current year presentation.
2. LAND, BUILDING AND EQUIPMENT
Land, Building and Equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
CLASSIFICATION 1994 1993
-------------- ----------- -----------
<S> <C> <C>
Land................................ $ 7,531,000 $ 6,040,000
Buildings and Improvements.......... 42,851,000 27,269,000
Leasehold Improvements.............. 2,578,000 3,822,000
Furniture, Fixtures and Equipment... 33,190,000 34,100,000
Construction in Progress............ 2,299,000 592,000
----------- -----------
$88,449,000 $71,823,000
=========== ===========
</TABLE>
31
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The following is an analysis of building and equipment under capital leases by
classification:
<TABLE>
<CAPTION>
CLASSIFICATION 1994 1993
-------------- ----------- ------------
<S> <C> <C>
Building......................... $ 245,000 $ 245,000
Equipment........................ 1,190,000 5,321,000
Less: Accumulated Depreciation... (808,000) (4,518,000)
---------- -----------
Net........................... $ 627,000 $ 1,048,000
========== ===========
</TABLE>
The Company capitalizes interest expense as part of the cost of construction
of facilities. Interest expense capitalized in 1994, 1993, and 1992 was
$119,000, $700,000 and $42,000, respectively.
3. CASH AND SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115 ("FAS
115") "Accounting for Certain Investments in Debt & Equity Securities",
effective January 1, 1994. In accordance with FAS 115, the adoption had no
effect on net income but resulted in a net decrease in short-term, long-term and
restricted marketable securities of $2,407,000 and a decrease in stockholders'
equity of $1,565,000 (net unrealized losses less deferred income taxes of
$842,000). Pursuant to implementation guidelines set-forth in FAS 115, the
consolidated balance sheet at December 31, 1993 was not restated.
At December 31, 1994 marketable equity and debt securities have been
categorized as available for sale and as a result are stated at their fair
value. Unrealized holding gains and losses are included as a separate component
of stockholders' equity until realized. Proceeds from the sales and maturities
of available-for-sale securities during 1994 were $49,988,000. Gross realized
gains and losses in 1994 were $41,000 and $163,000 respectively. Realized gains
and losses are calculated using the specific identification method and are
included in net income.
32
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The following table summarizes the Company's short-term, long-term and
restricted investments as of December 31, 1994:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Classified as short-term:
U.S Government and its
agencies.............. $ 4,637,000 $ (60,000) $ 4,577,000
Municipal Obligations.... 74,906,000 $ 52,000 (746,000) 74,212,000
Corporate bonds.......... 2,853,000 (13,000) 2,840,000
Other.................... 5,875,000 47,000 (201,000) 5,721,000
------------ -------- ----------- ------------
Total short-term...... 88,271,000 99,000 (1,020,000) 87,350,000
Classified as long-term:
U.S. Government
and its agencies...... 3,722,000 (452,000) 3,270,000
Municipal Obligations.... 8,119,000 8,000 (163,000) 7,964,000
Corporate bonds.......... 3,705,000 (398,000) 3,307,000
Other.................... 4,749,000 (466,000) 4,283,000
------------ -------- ----------- ------------
Total long-term....... 20,295,000 8,000 (1,479,000) 18,824,000
Classified as restricted:
U.S. Government
and its agencies...... 1,221,000 1,000 (8,000) 1,214,000
Municipal Obligations.... 150,000 150,000
Corporate bonds.......... 1,005,000 (8,000) 997,000
Other.................... 1,410,000 1,410,000
------------ -------- ----------- ------------
Total restricted...... 3,786,000 1,000 (16,000) 3,771,000
------------ -------- ----------- ------------
TOTAL.............. $112,352,000 $108,000 $(2,515,000) $109,945,000
============ ======== =========== ============
</TABLE>
The contractual maturities of short-term, long-term and restricted investments
at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
Due in one year or less.................. $ 91,717,000 $ 90,775,000
Due after one year through five years.... 8,611,000 8,407,000
Due after five years through ten years... 7,567,000 6,760,000
Due after ten years...................... 4,457,000 4,003,000
------------ ------------
Total............................. $112,352,000 $109,945,000
============ ============
</TABLE>
33
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Of the cash and cash equivalents and short-term securities that total
$104,577,000 in the accompanying Consolidated Balance Sheet at December 31,
1994, $47,967,000 is limited for use only by HPN and SHL. Such amounts are
available for transfer to Sierra from HPN and SHL 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.
HPN is incorporated in and subject to the regulations of the state of Nevada.
4. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Due in equal monthly principal installments of $166,667
plus interest at 7-3/8% through December, 2000..................................... $11,834,000 $14,000,000
Due in monthly installments through July, 1996
as described below................................................................. 4,785,000
Due in monthly installments through October, 1999
with adjustable interest rate as described below................................... 3,256,000 3,296,000
Other............................................................................... 713,000 4,196,000
----------- -----------
Total............................................................................ 20,588,000 21,492,000
Less current portion................................................................. (2,179,000) (5,490,000)
----------- -----------
Long-term debt....................................................................... $18,409,000 $16,002,000
=========== ===========
</TABLE>
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. In March,
1994, the Company paid off a $2,789,000 note encumbering the underlying real
property.
The Company assumed a $4,860,000 mortgage note in conjunction with the related
party transaction described in Note 8. 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 $3,256,000 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, 1994 was 8%. This term loan is secured by a medical facility.
In June 1994, the Company renewed its $5.0 million unsecured line of credit
from PriMerit Bank, F.S.B. for an additional one year term at an interest rate
of prime plus 1%. The line of credit, if drawn upon, will be used for general
corporate purposes and will be available for additional working capital, if
necessary.
34
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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, 1994, are as follows:
<TABLE>
<CAPTION>
OBLIGATIONS
YEAR ENDING NOTES UNDER CAPITAL
DECEMBER 31, PAYABLE LEASES
------------ ----------- --------------
<S> <C> <C>
1995...................................... $ 1,974,000 $ 237,000
1996...................................... 6,736,000 252,000
1997...................................... 2,051,000 98,000
1998...................................... 2,055,000 31,000
1999...................................... 5,060,000 31,000
Thereafter................................ 1,999,000 399,000
----------- ----------
Total................................. $19,875,000 1,048,000
===========
Less: Amounts representing interest...... (335,000)
----------
Present value of minimum lease payments... $ 713,000
==========
</TABLE>
Based on the borrowing rates currently available to the corporation for bank
loans with similar terms and average maturities, the fair value of long-term
debt, including the current portion, is $18,696,000.
5. INCOME TAXES
A summary of the provision for income taxes for the years ended December 31,
1994, 1993 and 1992 is as follows:
Provision for Income Taxes:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
Current................... $10,745,000 $10,647,000 $5,729,000
Deferred.................. 1,205,000 (2,372,000) 26,000
----------- ----------- ----------
$11,950,000 $ 8,275,000 $5,755,000
=========== =========== ==========
</TABLE>
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109").
Pursuant to FAS 109, the Company must record deferred taxes or benefits which
result from temporary differences between the tax and financial statement
treatment of certain assets or liabilities. The adoption of FAS 109 had no
material impact on the Company's operations.
35
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The following reconciles the difference between the 1994, 1993 and 1992
current and statutory provision for income taxes.
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Statutory Provision................ 35.0% 35.0% 34.0%
Tax Preferred Investment Income.... (.9) (1.0) (2.0)
Insurance Company Statutory Rate... (.7) (2.2) (2.0)
Loss Carryforwards................. (.3)
Other Items, Net................... 1.5 .2 (.3)
---- ---- ----
Provision for Income Taxes....... 34.9% 32.0% 29.4%
==== ==== ====
</TABLE>
During the third quarter of 1993, Congress passed the "Omnibus Budget
Reconciliation Act of 1993" (the "Act"). Certain provisions of the Act
increased the statutory federal income tax rate to 35% from 34% and made the
impact of such change retroactive to January 1, 1993. Aside from the increased
statutory rate, the Company does not expect other provisions of the Act to have
a material impact on the Company's income taxes.
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:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Accruals not currently deductible....... $ 628,000 $1,048,000 $ 26,000
Compensation accruals................... 1,279,000 1,328,000 1,248,000
Bad debt allowances..................... 1,111,000 839,000 453,000
Loss carryforwards...................... 554,000 601,000 278,000
Unrealized investment losses............ 842,000
Other................................... 34,000 18,000 334,000
---------- ---------- ----------
4,448,000 3,834,000 2,339,000
Deferred tax liabilities:
Reserve differential for HMO and
Insurance activities.................. 1,402,000 845,000 1,480,000
Difference between book and
tax basis of Building and Equipment... 2,208,000 376,000 8,000
Other................................... 28,000 40,000 650,000
---------- ---------- ----------
3,638,000 1,261,000 2,138,000
---------- ---------- ----------
Net deferred tax asset.................. $ 810,000 $2,573,000 $ 201,000
========== ========== ==========
</TABLE>
At December 31, 1994, the Company had approximately $600,000 of tax Net
Operating Loss Carryforward ("NOL") which is limited to use at the rate of
approximately $91,000 per year during the carryforward period. The NOL can be
used to reduce future taxes payable until it expires in 2001. The Company has
tax capital loss carryforwards of approximately $1,000,000 expiring through 1999
which can be used to reduce future capital gains income.
36
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
6. 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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------
<S> <C>
1995........... $2,285,000
1996........... 1,480,000
1997........... 814,000
1998........... 450,000
1999........... 382,000
Thereafter..... 1,451,000
----------
Total....... $6,862,000
==========
</TABLE>
Rent expense totaled $3,256,000, $5,410,000 and $4,953,000 in 1994, 1993 and
1992, respectively.
Litigation and Legal Matters
In June, 1992, HPN and SHL settled a dispute with the Nevada Department of
Insurance concerning the availability of premium tax credits to HPN and SHL and
paid the Department $784,000. This settlement was for the years 1988 through
1992. In February, 1994, the Department of Insurance conducted a special
examination of HPN and SHL regarding HPN's and SHL's eligibility for premium tax
credits. This examination concluded with a recommendation from the examiner that
HPN and SHL both be considered as fully qualified for the credits under Nevada
Revised Statutes.
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.
7. PENSION AND SUPPLEMENTAL RETIREMENT PLANS
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 an employee's
compensation for all employees who meet the Plan's eligibility requirements
and matches 50% of a participant's elective deferral
37
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
up to a maximum deferral of either 10% of an employee's compensation or the
maximum allowable under current IRS statute. Expense under the plan totaled
$2,214,000, $1,955,000 and $1,483,000 in 1994, 1993 and 1992, respectively. The
base employer contribution of 2% is vested 100% while the employer's matching
contribution vests based on the employee's length of service.
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 $550,000, $408,000 and $445,000 to the SRP in 1994, 1993 and
1992, respectively.
8. 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
years ended December 31, 1993 and 1992 were $1,663,000 and $1,612,000,
respectively.
9. STOCK PLANS
The Company has a stock option plan (the "Stock Option Plan") for employees
and directors, with 827,430 shares reserved for issuance as either qualified or
non-qualified stock options as of December 31, 1994. The Stock Option Plan
provides for the granting of stock options, stock appreciation rights ("SARs")
and tax equalization payments. Options are granted at fair market value and are
currently exercisable in 20% or 33-1/3% annual increments, commencing one year
after the date of grant.
38
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The following table reflects the activity of the Stock Option Plan:
<TABLE>
<CAPTION>
Number of Option
Shares Price
---------- --------------
<S> <C> <C>
Outstanding January 1, 1992..... 862,460 $ .81 - 12.00
Granted...................... 157,600 $ 8.88 - 21.00
Exercised.................... (282,646) $ .81 - 12.00
Canceled..................... (31,214) $ .81 - 11.94
--------
Outstanding December 31, 1992... 706,200 $ .81 - 21.00
Granted...................... 341,400 $16.38 - 19.13
Exercised.................... (101,395) $ .81 - 21.00
Canceled..................... (10,220) $ .81 - 21.00
--------
Outstanding December 31, 1993... 935,985 $ .81 - 21.00
Granted...................... 161,700 $26.38 - 28.63
Exercised.................... (348,668) $ 3.38 - 21.00
Canceled..................... (3,400) $ 3.38 - 21.00
--------
Outstanding December 31, 1994... 745,617 $ 2.44 - 28.63
========
</TABLE>
At December 31, 1994, 191,607 options were exercisable.
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, 1994, the Company had 534,114 shares
reserved for purchase under the Purchase Plan. During 1994, a total of 36,176
shares were purchased at prices of $17.00 and $19.23 a share. During January,
1995, 21,907 shares were issued to these employees at $19.98 per share in
connection with the Purchase Plan.
The Company also has a Capital Accumulation Plan (the "CAP Plan") whereby
share units or fractions thereof may be awarded by a disinterested committee
appointed by the Board of Directors to designated key employees and executive
officers of the Company which entitle the recipient to benefits based upon the
increase, if any, in the fair market value of the common stock of the Company.
The units vest over a five year period, subject to divestiture under certain
circumstances. The amount payable is determined by a formula relating to the
increase in fair market value of the common stock of the Company at the time of
payment, not exceeding $11.94, over the fair market value of such stock at the
grant date. All amounts are payable at the option of the Company in cash,
shares of common stock, or a combination of both. At December 31, 1994, there
were 435,983 shares reserved for issuance under the CAP Plan.
39
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The following table reflects the activity of the CAP Plan:
<TABLE>
<CAPTION>
NUMBER OF GRANT
SHARE UNITS PRICE
------------ ------------
<S> <C> <C>
Outstanding January 1, 1992..... 442,000 3.38; 5.94
Paid Out..................... (120,000) 3.38; 5.94
Canceled..................... (16,000) 3.38; 5.94
--------
Outstanding December 31, 1992... 306,000 3.38; 5.94
Paid Out..................... (102,000) 3.38; 5.94
--------
Outstanding December 31, 1993... 204,000 3.38; 5.94
Paid Out..................... (102,000) 3.38; 5.94
--------
Outstanding December 31, 1994... 102,000 3.38; 5.94
========
</TABLE>
Total expense recorded for SARs and the CAP Plan was $280,000, $525,000 and
$1,421,000 for 1994, 1993 and 1992, respectively.
All stock plans and the related information have been retroactively adjusted
to account for the stock split discussed in Note 1.
10. STOCKHOLDERS' EQUITY
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.
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 "Common Shares"). The Rights were
distributed to the holders of record of Common Shares of 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 the Common Stock.
40
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
11. STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
Supplemental statements of cash flows information is presented below:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for interest
(net of amount capitalized)............... $1,975,000 -- $ 783,000
Cash paid during the year for
Federal Income Taxes...................... 9,550,000 $9,703,000 5,106,000
Noncash investing and financing activities:
Liabilities assumed in connection with
corporate acquisition .................... 7,279,000 -- --
Reductions to funds withheld by ceding
insurance company and future policy
benefits.................................. 447,000 122,000 594,000
Stock issued for exercise of options
and related tax benefits.................. 2,685,000 1,117,000 2,378,000
Assumption of liability in connection with...
land purchase............................. -- -- 2,789,000
Additions to capital leases.................. 552,000 -- --
</TABLE>
41
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
12. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Operating revenues............... $69,403,000 $72,683,000 $75,332,000 $78,383,000
Operating income................. 7,347,000 9,086,000 9,433,000 10,212,000
Income before income taxes and
minority interests............. 6,910,000 8,518,000 8,952,000 9,868,000
Net income....................... 4,475,000 5,501,000 5,828,000 6,400,000
Earnings per share (a)........... $ .36 $ .44 $ .46 $ .45
YEAR ENDED DECEMBER 31, 1993:......
Operating revenues............... $63,731,000 $63,463,000 $65,658,000 $65,225,000
Operating income................. 5,565,000 5,888,000 6,909,000 7,497,000
Income before income taxes and
minority interests............. 5,284,000 6,020,000 7,011,000 7,546,000
Net income....................... 3,650,000 4,156,000 4,559,000 5,078,000
Earnings per share (a)........... $ .30 $ .34 $ .37 $ .41
</TABLE>
-------------
(a) Quarterly earnings per share have been adjusted to account for the stock
split discussed in Note 1.
************************************************
42
<PAGE>
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 set for May 16,
1995, 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 set
for May 16, 1995 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 set for May 16, 1995 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 set for May 16, 1995 is incorporated herein by reference.
43
<PAGE>
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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report..................................... 23
Consolidated Balance Sheets at December 31, 1994 and 1993........ 24
Statements of Consolidated Operations for the years ended
December 31, 1994, 1993 and 1992................................ 26
Statements of Changes in Consolidated Stockholders' Equity for
the years ended December 31, 1994, 1993 and 1992................ 27
Statements of Consolidated Cash Flows for the years ended
December 31, 1994, 1993 and 1992................................ 28
Notes to Consolidated Financial Statements....................... 29
</TABLE>
(a)(2) Financial Statement Schedules:
<TABLE>
<S> <C>
Schedule I - Condensed Financial Information of Registrant....... 50
</TABLE>
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.
(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).
44
<PAGE>
***(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).
*(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.
(10.4) Reinsurance agreement 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.
(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.
45
<PAGE>
(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 the
$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 and severance agreement with Robert A. Mayer, dated
August 31, 1994, 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.
46
<PAGE>
(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.
(10.18) Agreement between the Registrant and PriMerit Bank for $5,000,000
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) Agreement between the Registrant and First Option Health Plan to
develop and implement a Medicare risk product in New Jersey dated
January 6, 1995.
***(11) Computation of earnings per share.
(21) Subsidiaries of the Registrant (listed herein):
Health Plan of Nevada, Inc., a Nevada corporation.
Southwest Medical Associates, Inc., a Nevada corporation.
Sierra Health and Life Insurance Company, Inc., a Nevada
corporation.
Family Health Care Services, a Nevada corporation.
Southwest Realty, Inc., a Nevada corporation.
Family Home Hospice, Inc., a Nevada corporation.
Sierra Healthcare Options, Inc., a Nevada corporation.
Behavioral Healthcare Options, Inc., a Nevada corporation
HMO Texas, L.C., a Texas Limited Liability Corporation
**(23) Consent of Deloitte & Touche LLP.
***(27) Financial Data Schedule
All other Exhibits are omitted because they are not applicable.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated March 2, 1995 with the
Securities and Exchange Commission in connection with the signing of a
Business Affiliation Agreement among the Registrant, the Galtney Group,
Inc. and HMO Texas Holdings, Inc.;
47
<PAGE>
as well as the signing of reinsurance agreements between Sierra Health &
Life Insurance and Allianz Life Insurance Company of North America dated
October 1, 1994.
(d) Financial Statement Schedules
The Exhibits set forth in Item 14(a)(2) have been previously filed.
---------
* 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.
** Filed herewith.
*** Previously filed.
48
<PAGE>
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
---------------------------
James L. Starr
Vice President of Finance,
Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
Date: September 1, 1995
49
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1993
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 6,577,000 $ 3,262,000
Short-term Securities..................................... 48,523,000 3,840,000
Prepaid Expenses and Other Assets......................... 1,640,000 2,835,000
------------ -----------
Total Current Assets.................................. 56,740,000 9,937,000
LAND, BUILDING AND EQUIPMENT - NET........................... 19,154,000 20,160,000
OTHER ASSETS:
Equity in Net Assets of Subsidiaries...................... 58,108,000 39,768,000
Other..................................................... 8,672,000 5,043,000
------------ -----------
TOTAL ASSETS................................................. $142,674,000 $74,908,000
============ ===========
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities............ $ 4,235,000 $ 5,783,000
Current Portion of Long-term Debt......................... 556,000 3,524,000
Current Portion of Note Payable to Subsidiary............. 898,000
----------- -----------
Total Current Liabilities............................. 4,791,000 10,205,000
LONG-TERM DEBT--LESS CURRENT PORTION......................... 2,402,000 2,571,000
------------ -----------
TOTAL LIABILITIES............................................ 7,193,000 12,776,000
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital Stock............................................. 73,000 62,000
Additional Paid-in Capital................................ 79,256,000 27,666,000
Treasury Stock............................................ (130,000) (130,000)
Unrealized Holding Loss on Available-for-Sale Securities.. (456,000)
Retained Earnings......................................... 56,738,000 34,534,000
------------ -----------
Total Stockholders' Equity............................ 135,481,000 62,132,000
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $142,674,000 $74,908,000
============ ===========
</TABLE>
Note: Scheduled maturities of long-term debt, including the principal portion
of obligations under capital leases, are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1995 $ 556,000
1996 620,000
1997 495,000
1998 429,000
1999 429,000
Thereafter 429,000
----------
Total $2,958,000
==========
</TABLE>
50
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Management Fees..................... $37,324,000 $33,806,000 $29,562,000
Subsidiary Dividends................ 1,350,000 3,460,000 1,750,000
Investment and Other Income......... 928,000 229,000 1,365,000
----------- ----------- -----------
Total Operating Revenues........... 39,602,000 37,495,000 32,677,000
----------- ----------- -----------
GENERAL & ADMINISTRATIVE EXPENSES:
Payroll & benefits.................. 12,162,000 12,591,000 10,811,000
Depreciation........................ 3,494,000 3,051,000 2,889,000
Rent................................ 1,186,000 1,630,000 1,512,000
Repairs & Maintenance............... 303,000 455,000 965,000
Legal............................... 1,109,000 632,000 583,000
Consulting.......................... 480,000 421,000 257,000
Other............................... 5,053,000 4,240,000 4,110,000
----------- ----------- -----------
Total General and Administrative... 23,787,000 23,020,000 21,127,000
----------- ----------- -----------
INTEREST EXPENSE AND OTHER, NET....... (467,000) (168,000) (515,000)
----------- ----------- -----------
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES............ 12,549,000 6,876,000 5,502,000
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............ 27,897,000 21,183,000 16,537,000
PROVISION FOR INCOME TAXES............ (5,693,000) (3,740,000) (2,934,000)
----------- ----------- -----------
NET INCOME............................ $22,204,000 $17,443,000 $13,603,000
=========== =========== ===========
</TABLE>
51
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1994 1993 1992
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 22,204,000 $ 17,443,000 $13,603,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 3,533,000 3,091,000 2,929,000
Equity in Undistributed Earnings
of Subsidiaries............................ (12,549,000) (6,876,000) (5,502,000)
Other assets................................... 996,000 (415,000) (356,000)
Changes in working capital accounts:
Current assets................................ (635,000) (1,311,000) (718,000)
Current liabilities........................... 239,000 1,696,000 1,558,000
------------ ------------ -----------
Net cash provided by operating activities..... 13,788,000 13,628,000 11,514,000
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures........................... (2,048,000) (11,979,000) (3,319,000)
Land, Building and Equipment dispositions, Net. 113,000 504,000 1,989,000
Increase in Short-Term Securities.............. (45,316,000) (1,529,000) (2,311,000)
Increase in Other Assets....................... (2,659,000) (1,792,000)
Dividends from Subsidiary...................... 1,350,000 3,460,000 1,750,000
Increase in net assets in subsidiaries......... (7,141,000) (5,691,000) (5,481,000)
------------ ------------ -----------
Net cash used for investing activities........ (55,701,000) (15,235,000) (9,164,000)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................... 3,000,000
Reductions in long-term obligations and
payments on capital leases.................... (3,688,000) (959,000) (1,749,000)
Reductions in Note Payable to Subsidiary....... (931,000) (1,165,000)
Proceeds from Issuance of Common Stock......... 44,579,000
Exercise of Stock Options...................... 4,337,000 1,245,000 2,266,000
------------ ------------ -----------
Net cash used for financing activities........ 45,228,000 2,355,000 (648,000)
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents............................... 3,315,000 748,000 1,702,000
Cash and cash equivalents at beginning of year.. 3,262,000 2,514,000 812,000
------------ ------------ -----------
Cash and cash equivalents at end of year........ $ 6,577,000 $ 3,262,000 $ 2,514,000
============ ============ ===========
Supplemental condensed statements of
cash flows information:
Additions to capital leases..................... $ 552,000 -- --
Assumptions of liability in connection with
land purchase.................................. -- -- $ 2,789,000
Stock issued for exercise of options............ 2,685,000 $ 1,117,000 2,378,000
Cash paid during the year for interest
(net of amount capitalized).................... 662,000 -- 284,000
Cash paid during the year for
Federal Income Taxes........................... 2,592,000 3,338,000 4,475,000
</TABLE>
52
<PAGE>
EXHIBIT 10.20
AGREEMENT
BETWEEN
SIERRA HEALTH SERVICES, INC.
AND
FIRST OPTION HEALTH PLAN, INC.
THIS AGREEMENT is entered into this 6th day of January, 1995 (the
"Effective Date"), by and between Sierra Health Services, Inc. ("SHS") and First
Option Health Plan, Inc. ("First Option").
WHEREAS, First Option operates a state licensed health maintenance
organization ("HMO") in the state of New Jersey and desires to contract with the
Health Care Financing Administration ("HCFA") on a risk basis to arrange for the
provision of covered services to Medicare beneficiaries under 42 U.S.C. (S)
1395mm (hereafter the "Medicare Risk Contract");
WHEREAS, First Option desires to obtain SHS's assistance in applying for a
Medicare Risk Contract and developing a program (hereafter the "Risk Program")
in compliance with the requirements of such contract.
NOW THEREFORE, in consideration of the promises and mutual covenants
contained herein, it is hereby agreed by and between the parties as follows:
1. OBLIGATIONS OF SHS
1.1 Pre-Application Services. SHS shall perform the following services on
------------------------
behalf of First Option prior to completing and submitting an application to the
Health Care Financing Administration ("HCFA") for a Medicare Risk Contract (the
"Application") with a service area that includes the state of New Jersey or
subareas of the state.
1.1.1 Development of Work Plan. SHS staff will meet with First Option to
------------------------
establish a work plan for completing the Application in accordance with Section
1.1.2.1. The work plan will identify tasks which must be completed in order to
submit the Application to HCFA as well as deadlines for completing those tasks.
SHS will have primary responsibility for developing the work plan but will seek
input from First Option. SHS and First Option will jointly identify and agree
upon the members of a "Medicare Project Team" which will be responsible for
implementing the work plan.
<PAGE>
1.1.2 Site Visit.
----------
1.1.2.1 Within ten (10) days following the Effective Date of this
Agreement, SHS staff will meet with First Option staff at First Option's
headquarters in New Jersey to discuss the Risk Program. Prior to such site
visit, SHS shall provide First Option with a summary of the federal requirements
relating to the implementation of a Risk Program by a federally qualified HMO.
During the site visit, the Medicare Project Team will discuss those requirements
and prioritize the issues and tasks which must be completed in order to submit
the Application to HCFA. SHS shall develop a list of deliverables which shall
describe the deliverables SHS will require from First Option in order to
complete the Application. These shall include, but not be limited to, executed
provider contracts that meet applicable federal requirements, and copies of
First Option's applications for state licensure and for federal qualification.
In the event First Option is unable to provide the deliverables to SHS in a
timely manner, the parties shall mutually agree to an extension of the deadlines
or time frames set forth in Section 3.4 for completion of the Application
without any penalty to SHS.
1.1.2.2 During the site visit, SHS will interview key First Option staff
to ascertain First Option's current capabilities in the following areas of
operation:
a. claims adjudication;
b. customer/member services and related communications;
c. provider relations including a review of provider
agreements;
d. product design and pricing philosophy;
e. competitive marketing analysis;
f. data collection, analysis and maintenance;
g. medical management review;
h. quality assurance;
i. finance and accounting; and
j. eligibility and enrollment.
1.1.3 Identification of Operational Needs. Based upon the review of
-----------------------------------
First Option's current capabilities as described in Section 1.1.2.2 above and
information provided by First Option regarding the intended structure of the
Risk Program, SHS shall identify in writing for First Option any significant
operational functions which First Option does not have adequate capacity to
provide and which will be required pursuant to the Medicare Risk Contract. SHS
will also identify areas of operational capacity relating to the Medicare Risk
Contract which may require expansion in order to satisfy First Option's fiscal
considerations, member service needs, and/or management objectives. SHS will
prepare
2
<PAGE>
recommendations for addressing areas of potential or existing incapacity for
First Option's consideration.
1.1.4 Review of Information Systems. SHS will review First Option's
-----------------------------
information systems and evaluate the adequacy of those systems for meeting any
material requirements under the Medicare Risk Contract. The review and
evaluation will be limited to First Option's current claims, billing,
utilization management and eligibility systems. SHS will identify those areas
in which First Option's systems are materially inadequate and prepare a report
for First Option which shall summarize estimated costs and time frames for
enhancing First Option's systems internally and compare those costs to estimated
costs of implementing other systems.
1.1.5 Program Analysis. SHS will perform an analysis of market and
----------------
other factors which materially affect the financial viability of a Risk Program
by First Option. SHS's analysis will include the following:
1.1.5.1 Competition. SHS, with the assistance of First Option, will
-----------
gather data from relevant industry sources and identify existing and potential
competitors of First Option with respect to the Medicare market. SHS will
provide First Option with a written market analysis which will include the
following information on existing and potential competitors to the extent such
information is available:
a. approved and proposed service areas;
b. composition of competing delivery systems and a
comparison to First Option's delivery system;
c. benefit design and premium rates;
d. sales distribution methods and sales incentives;
e. current and estimated enrollment trends;
f. current demographics for senior population in the
proposed service area; and
g. future demographic trends in the proposed service area.
1.1.5.2 Provider Contracting Strategy. SHS shall assist First Option
-----------------------------
in developing a strategy for amending First Option's current contracts with
participating providers to provide services to enrollees under the Medicare Risk
Contract. SHS shall assist First Option in evaluating First Option's current
participating provider compensation levels and methodologies and comparing those
arrangements with the provider reimbursement levels under the Medicare program.
SHS shall recommend to First Option changes to First Option's provider
compensation levels and methodologies based on the projected utilization of
covered
3
<PAGE>
services by Medicare beneficiaries, cost factors provided by First Option and
estimated payment levels from HCFA under the Medicare risk contract.
1.1.5.3 Marketing Plan. SHS shall assist First Option in developing
--------------
a marketing plan for the Risk Program. Such plan shall address key marketing
messages; marketing staffing and training requirements; sales, advertising, and
promotion strategies; and necessary marketing materials. In addition, SHS shall
interview brokers and agents identified by First Option regarding the market
need for and consumer interest in an individual Medicare product to be offered
by First Option. SHS shall work with First Option sales staff to identify major
employers in First Option's proposed service area who provide health care
benefits to their retirees and to solicit their interest in a group Medicare
product. SHS shall also interview key organizations identified by First Option
in the relevant senior community regarding potential interest in a First Option
Medicare product, and shall conduct at least two (2) but no more than three (3)
group interviews with potential Medicare enrollees.
1.1.5.4 Actuarial Services.
------------------
1.1.5.4.1 SHS and First Option shall review the adjusted average per
capita cost ("AAPCC") payment levels for each county in New Jersey. In
addition, SHS shall assist First Option in evaluating the differences in the
AAPCC payments levels for each such county. SHS shall also assist First Option
in analyzing historical utilization and cost experience data for each such
county in an effort to identify material variances among the counties.
1.1.5.4.2 SHS shall engage Bob Gold of Bob Gold & Associates, Inc. to
develop an adjusted community rate ("ACR") proposal for submission with the
Application. SHS's obligation to engage Bob Gold is subject to his agreement to
develop an ACR proposal within the time frame established by the Medicare
Project Team which will permit the timely filing of the Application and upon
such terms and conditions as are acceptable to SHS and Bob Gold. Bob Gold shall
be primarily responsible for estimating the utilization of Medicare covered
services by the Medicare population and comparing it to the estimated
utilization of such services by First Option's under 65 commercial enrollment.
1.1.5.4.3 First Option, with assistance from SHS, shall estimate
First Option's level of reimbursement from HCFA on a per member per month
("PMPM") basis for each county in New Jersey. SHS shall assist First Option in
developing projected demographics and age/sex factors of the Medicare population
that would be served under the Risk Program. Such projections shall be based on
the current demographics of each county and such other factors agreed to by the
parties.
4
<PAGE>
1.1.5.5 Financial Projections. SHS shall assist First Option in
---------------------
developing financial projections for the Risk Program. SHS shall provide
assistance to First Option in developing a financial model which shall capture
information about the anticipated revenues and operating expenses of the Risk
Program. The financial model shall capture information in the following areas:
a. Data derived from the actuarial calculations relative
to the AAPCC payments;
b. Estimated utilization and cost of care expenses based
on First Option's negotiated payment rates with
providers;
c. Projections of enrollment from individuals and groups
which shall be estimated after completion of the
competitive market analysis described in Section
1.1.5.1; and
d. Assumptions regarding the administrative costs
associated with the development, implementation and
operations of the Risk Program.
1.2 Development of Enrollee Materials. In connection with the submission
---------------------------------
of the Application, First Option, with the assistance of SHS, shall develop the
sample benefit plans for the individual Medicare market. At First Option's
request, SHS shall provide comments and recommendations regarding the need for
and adequacy of other information customarily required for Medicare risk
contract enrollees. SHS will provide sample form documents as part of its
assistance under this Section 1.2.
1.3 Enrollment Projections. SHS shall assist First Option in preparing
----------------------
enrollment projections required to be included in the Application. These
include enrollment projections by product type on a monthly basis through break
even and subsequently on a quarterly basis.
1.4 Contract Review. SHS shall review First Option's contracts with
---------------
providers and other entities which will be providing services in connection with
the Risk Program. The purpose of such review shall be to assess the contracts'
compliance with applicable state and federal laws.
1.5 Completion and Submission of the Application. SHS shall have primary
--------------------------------------------
responsibility for completing the Application and First Option shall file any
Application prepared by SHS with HCFA within three (3) working days of receipt.
Following submission of
5
<PAGE>
the Application to HCFA, SHS shall assist First Option in responding to any
questions or issues raised by HCFA in connection with the Application. SHS
shall also assist First Option in the preparation of any amendments to the
Application or supplemental information requested by HCFA. To the extent that
submission of the Application is delayed due to issues and concerns raised by
HCFA in connection with First Option's application for federal qualification,
then the time frames established hereunder for SHS's submission of the
Application and any payments and bonuses related thereto shall be extended until
such time as HCFA's issues and concerns are resolved.
2. OBLIGATIONS OF FIRST OPTION
2.1 Support of SHS. First Option shall make available to SHS appropriate
--------------
personnel to assist SHS in performing its obligations as described in Article 1.
First Option agrees that SHS shall not be penalized (including, but not limited
to, eligibility for bonus and development fee payments and rights to file future
applications) for failure to meet the time frames set forth in Article 3 if such
failure is caused by First Option's failure to make sufficient and appropriate
personnel available to SHS (or by the lack of cooperation of such personnel) or
First Option's failure to provide other deliverables which are identified in the
work plan as provided in Article 1 above. First Option agrees to hire on a
full-time basis, with advice from SHS, a project coordinator who shall be
responsible for coordinating with SHS staff in implementing the work plan and
ensuring the availability of the First Option's personnel.
2.2 Provider Contracting. First Option shall be solely responsible for
--------------------
negotiating contracts or amendments to existing contracts with sufficient
providers and vendors for the provision of services and supplies to Medicare
enrollees. Such contracts or amendments shall be executed within the deadlines
established by the Medicare Project Team.
2.3 Federal Qualification Process. First Option, prior to the execution
-----------------------------
of this Agreement, has submitted a federal qualification application to the
HCFA's Office of Managed Care. First Option also agrees to secure HCFA's
determination that its federal qualification application is complete. First
Option and its personnel will be responsible for directly interfacing with
federal site team members and responding to any questions they may have during
any scheduled federal site visit related to First Option's application for
federal qualification. First Option is solely responsible for securing federal
qualification status and resolving any issues or informational requests
identified by the Office of Managed Care.
2.4 Expenses. In addition to reimbursing SHS in accordance with Article 3
--------
for the costs it incurs on behalf of First Option,
6
<PAGE>
First Option shall be solely responsible for costs it incurs in connection with
the completion of the Application and the implementation and operation of the
Risk Program including, but not limited to, legal and accounting expenses.
2.5 SHS Compensation. First Option shall compensate SHS for its services
----------------
hereunder in accordance with Article 3.
2.6 No Guarantee. First Option acknowledges and agrees that SHS does not
------------
make any guarantees regarding the financial viability of the Risk Program nor
any guarantees regarding the award of a Medicare Risk Contract to First Option.
First Option understands that the role of SHS is that of a consultant and
developer and that ultimate responsibility for the implementation and
administration of the Medicare Risk Contract remains with First Option.
2.7 Indemnification. First Option agrees to indemnify and hold harmless
---------------
SHS, its directors, officers, employees and agents from any and all liability,
loss, damage, claim or expense of any kind, including costs and attorney's fees,
which result from willful or negligent acts or omissions by First Option, its
agents, or employees. SHS agrees to indemnify and hold harmless First Option,
its directors, officers, employees and agents from any and all liability, loss,
damage, claim or expense of any kind, including costs and attorney's fees, which
result from willful or negligent acts or omissions by SHS, its agents, or
employees.
3. BILLING AND COMPENSATION
3.1 Development Costs. For the period from the Effective Date through
-----------------
December 31, 1995, SHS's compensation hereunder shall be limited to
reimbursement of its development costs and the incentive payments as set forth
in Section 3.4. SHS shall use its best efforts to provide the services during
the pre-application phase and complete the Application for an amount not to
exceed $800,000, exclusive of any incentive payments made under Section 3.4.
For purposes of this Agreement, "development costs" are the hourly charges for
SHS personnel set forth in Attachment A plus costs incurred by SHS for staffing,
consultants, and any other expenses (excluding travel time) in performance of
its obligations set forth in Article 1.
3.2 Retainer. Within five (5) days following the Effective Date, First
--------
Option shall pay SHS a retainer of $100,000. SHS shall deduct from such
retainer the costs it incurs pursuant to this Agreement plus any additional
amounts described in Section 3.4. below until the retainer is exhausted.
Thereafter, First Option shall pay SHS in accordance with SHS's monthly
statements. Payment shall be due within thirty (30) days of First Option's
receipt of such statement.
7
<PAGE>
3.3 Monthly Statements. SHS shall provide First Option with detailed
------------------
monthly statements for services provided pursuant to this Agreement. Such
statement shall reflect any applicable credits to and debits against SHS's
retainer. The monthly statements shall describe all costs and charges being
billed to First Option by SHS.
3.4 SHS Incentive Payments. In addition to the payment of its
----------------------
development costs, SHS shall receive the following incentive payments: (a) ten
percent (10%) of its development costs if the Application is filed with HCFA
within one hundred twenty (120) days after the Effective Date; or five percent
(5%) if the Application is filed after the one hundred twentieth (120th) day and
before the one hundred fifty-first (151st) day from the Effective Date. If the
Application is filed more than one hundred fifty (150) days after the Effective
Date, then SHS's compensation shall be limited to reimbursement for its
development costs; provided that if the Application is filed more than one
hundred eighty (180) days after the Effective Date, then SHS's compensation
shall be limited to reimbursement for fifty percent (50%) of SHS's development
costs commencing with the one hundred eighty-first (181st) day after the
Effective Date. In addition, SHS shall forfeit its rights described in Section
3.7 below.
3.5 Bonus Payments. In addition to the compensation described in Section
--------------
3.4 above, SHS shall be entitled to receive bonus payments from First Option in
accordance with the schedule set forth in Attachment B. Bonus payments shall
not be subject to the limitation set forth in Section 3.1 and shall be paid
within thirty (30) days from the time the condition set forth in Attachment B
has been satisfied.
3.6 Development Fee.
---------------
3.6.1 Payment to SHS. In addition to the compensation described in
--------------
Sections 3.3, 3.4 and 3.5, and for each calendar year this Agreement remains in
effect commencing with the 1996 calendar year, SHS shall also be entitled to
receive a development fee from First Option based on the percentage indicated on
Attachment C (as well as the applicable minimum and maximum limits set forth
therein) of the total annual gross revenues received by First Option under its
Medicare Risk Contract in New Jersey and in any other state identified in
Section 3.7 for which SHS prepared an Application for First Option to file with
HCFA. One half of the minimum fee set forth on Attachment C ($500,000) shall be
due by January 1 of each calendar year. The remaining $500,000 shall be due on
the succeeding July 1. Any additional amounts due SHS pursuant to this Section
3.6 and Attachment C beyond the minimum fee for that contract year shall be
payable by January 31 of the subsequent calendar year. To ensure payment of
such amounts, First Option agrees to establish at the request of SHS an escrow
account acceptable to SHS with a minimum balance of $1,000,000 in the event
First Option's net worth falls below $6,000,000.
8
<PAGE>
3.6.2 Changes to Development Fee. Notwithstanding the foregoing, the
--------------------------
Development Fee due SHS for a state, other than First Option's New Jersey plan,
may be reduced in the event of an "adverse selection" condition as defined
below. In any calendar year in which an adverse selection condition first
occurs, SHS shall only be entitled to receive the minimum fee set forth in
Attachment C for that state for that calendar year only. In no event shall this
Section 3.6.2 be operative with respect to an adverse selection condition which
occurs in any calendar year immediately following the calendar year in which
such condition first occurred. If SHS's payment is reduced pursuant to this
Section 3.6.2, then the terms of this Agreement, including SHS's compensation
under this Article 3, shall be extended for one additional year for that state
in which the adverse selection condition occurred. For purposes of this Section
3.6.2, an adverse selection condition means that a First Option's plan operating
in one of the states set forth in Section 3.7 below (excluding New Jersey) has
incurred a medical loss ratio of one hundred ten percent (110%) on its Medicare
Risk Contract operations in a calendar year.
3.7 SHS Rights to File Future Applications. SHS shall have the right to
--------------------------------------
prepare for filing with HCFA First Option's Medicare Risk Contract Applications
for the states of Connecticut, Delaware, New York and Pennsylvania in the event
First Option determines to establish a Risk Program in any of those states and
SHS shall be compensated in accordance with the terms and conditions of this
Agreement, subject to the provisions set forth below. Such right shall be
exercised within 90 days from the date First Option provides SHS with written
notice of its intention to establish a Medicare Risk program in the applicable
state. SHS's right is subject to: (a) the filing by First Option of the
Application for New Jersey within one hundred fifty (150) days of the Effective
Date; and (b) the approval of the Application for New Jersey by HCFA within ten
(10) months from the date the Application was filed by First Option. SHS's
compensation for Medicare Risk Program applications for other states shall be in
accordance with the terms and conditions of this Agreement provided that SHS
shall seek to complete such applications for approximately fifty percent (50%)
of the costs incurred for the completion of the Application for New Jersey. If
costs are expected to exceed such levels, SHS shall notify First Option.
3.8 Adjustments to SHS's Compensation. In the event HCFA significantly
---------------------------------
reduces its payments to First Option under its Medicare Risk Contract in New
Jersey or any other state set forth in Section 3.7, the compensation due SHS
under this Agreement for that state shall be adjusted as hereinafter described.
For purposes of this Section 3.8, a "significant reduction" means a decrease in
the current year's trend factor for the published AAPCC by an amount which
exceeds by 1% the average trend factor over the last five (5) years for the
affected state. In the event of a
9
<PAGE>
significant reduction, then at First Option's written request which shall be
made within thirty (30) days of HCFA's publication of the AAPCC, SHS's
compensation under this Agreement for the affected state or service area shall
be limited to its development costs and the minimum fee set forth in Attachment
C plus, at SHS's option, either (a) SHS shall receive 1/4 of 1% of Medicare
Revenues for the state or service area for the calendar year in which the
significant reduction occurred; or (b) SHS's compensation under this Agreement
shall be limited for one year to its development costs and the minimum fee set
forth in Attachment C, but the term of this Agreement shall be extended for one
additional year for that state. Payments shall resume in the succeeding
calendar year if the published AAPCC for that year is at least equal to the base
rate for the prior year plus the average trend factor used for determining the
significant reduction for that prior year. If the published AAPCC is less than
that amount, then SHS's compensation shall be limited to development costs and
the minimum fee set forth in Attachment C. SHS's compensation shall not be
limited for a third consecutive year unless specifically agreed to by the
parties. An example of this adjustment is set forth in Attachment D.
3.9 Acquisition of First Option Shares. Subject to the approval of First
----------------------------------
Option's Board of Directors and any rights of Guardian Life, the parties agree
that SHS will be granted certain rights to acquire shares in First Option (or
any holding company established for First Option) under the terms of a separate
shareholders agreement to be negotiated in good faith within ninety (90) days
from the Effective Date of this Agreement.
4. TERM AND TERMINATION
4.1 Term. This Agreement shall commence on the Effective Date and shall
----
remain in effect unless terminated by either party as provided below.
4.2 Termination Without Cause. Subject to Section 4.5 below, either party
-------------------------
may terminate this Agreement upon one hundred fifty (150) days prior written
notice to the other party. Any payments due SHS shall be paid within thirty
(30) days from the date of termination.
4.3 Termination With Cause. Either party may terminate this Agreement as
----------------------
follows in the event of a material breach hereof by the other party. In the
event of a material breach, the non-breaching party shall provide the other
party with written notice specifying the alleged breach. The breaching party
shall have thirty (30) days from receipt of such written notice in which to cure
the breach and thereby avoid termination of this Agreement. In the event the
breach is not cured to the non-breaching party's reasonable satisfaction within
that thirty (30) day period, the non-breaching party may terminate this
Agreement by informing the
10
<PAGE>
other party in writing that the breach has not been cured. Termination shall be
effective upon the other party's receipt of such notice.
4.4 Other Rights of Termination. Notwithstanding the foregoing, First
---------------------------
Option may terminate this Agreement effective upon written notice in the event
the Application for New Jersey (in accordance with Section 1.5) is not completed
by SHS so that it may be filed by First Option within one hundred eighty (180)
days after First Option's federal qualification application is deemed complete
or in the event the costs billed to First Option by SHS pursuant to this
Agreement exceed $800,000.
4.5 Effect of Termination. Termination shall not relieve First Option of
---------------------
the obligation to compensate SHS for services provided pursuant to this
Agreement prior to the effective date of termination in accordance with the
terms set forth herein. In addition, SHS shall be entitled to receive any
applicable development costs and fees under Sections 3.1 and 3.6 and Attachments
A and C related to any Applications filed with HCFA at the time of termination
or of which SHS had begun preparation and a period of sixty (60) days has
elapsed from the date SHS began preparing any such Applications and SHS's
receipt of notice of termination.
5 MISCELLANEOUS
5.1 Assignment of Agreement. No party to this Agreement may assign any of
-----------------------
its rights or obligations under this Agreement without the express written
consent of the other party. Notwithstanding the foregoing, in the event either
party is acquired by a merger or a sale of substantially all its assets to
another entity and the acquiring entity does not offer a managed care health
benefits program in the other party's service area(s), then this Agreement shall
be automatically assigned to and inure to the benefit of such acquiring entity.
If the acquiring party later offers a managed care benefits program in the other
party's service area, then the other party may terminate this Agreement upon
ninety (90) days prior written notice.
5.2 Enforceability. If any term, provision, covenant or condition of this
--------------
Agreement is invalid, void or unenforceable, the rest of the Agreement shall
remain in full force and effect. The invalidity or unenforceability of any term
or provision hereof shall in no way affect the validity or enforceability of any
other term or provision.
5.3 Complete Agreement. This Agreement contains the complete
------------------
understanding and agreement between SHS and First Option and supersedes all
representations, understandings or agreements prior to the execution hereof.
11
<PAGE>
5.4 Amendments. No waiver, alteration, amendment or modification of this
----------
Agreement shall be valid unless in each instance a written memorandum
specifically expressing such waiver, alteration, amendment, or modification is
made and subscribed by a duly authorized officer of SHS and a duly authorized
officer of First Option.
5.5 Governing Law. This Agreement shall be construed in accordance with
-------------
the laws of the State of Nevada.
5.6 Headings. The headings and numbers of sections and paragraphs
--------
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
5.7 Proprietary Information. The parties acknowledge that each party has
-----------------------
executed the Confidentiality Agreement annexed hereto and incorporated herein.
5.8 Notice. Any notice required or permitted to be given pursuant to the
------
terms and provisions of this Agreement shall be sent by registered mail or
certified mail, return receipt requested, postage prepaid, to SHS at:
________________________________________________
________________________________________________
________________________________________________
and to First Option at:
_________________________________________________
_________________________________________________
_________________________________________________
12
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers to be effective on the Effective Date set
forth above.
SIERRA HEALTH SERVICES, INC.
By: ANTHONY M. MARLON
(Signature)
Title: CEO
Date: 1-6-95
FIRST OPTION HEALTH PLAN, INC.
By: John L. Adessa
(Signature)
Title: President and CEO
Date: 1-6-95
13
<PAGE>
ATTACHMENT A
SHS HOURLY CHARGES
FOR SHS PERSONNEL
<TABLE>
<CAPTION>
EMPLOYEE RATE EMPLOYEE RATE
------------------ ------- ------------- -------
<S> <C> <C> <C>
A.M. MARLON $367.79 B. NELSON $25.50
E. MacDONALD $245.12 S. CRANLEY $31.97
F. COLLINS $118.99 J. PRIMAKY $24.94
L. HOWARD $117.40 G. GILBERTSON $15.36
M. MONTALVO $118.99 A. DINSE $17.23
J. REEVES $166.44 B. TOLLEFSON $17.45
M. SOLDO $118.99 L. SHEA $21.24
S. STARR $ 71.53 S. KRAMBULE $14.63
J. STARR $111.06 D. ODOM $19.03
J. NANSON $126.24 P. JONES $12.69
R. MOLNAR $14.91
B. CHRISTIANSEN $ 53.12 A. REEVES $28.31
T. COULTER $ 51.92 P. SMITH $19.66
W. HADDAD $ 65.99 K. MONETTE $23.16
F. HEAVY $ 76.51 A. HOLT $12.30
B. HILLEGASS $ 70.31 C. WHITE $19.18
P. SHARER $ 49.10 D. HATHAWAY $50.89
C. SIGNORINO $115.13
R. MOLVIK $ 56.32
A. AKITI $ 52.36
C. CHEN $ 32.20
K. ENGLEHART $ 38.62
M. GOLENIAK $ 49.84
J. HURD $ 45.31
J. JACKSON $ 37.30
T. JUERGENS $ 51.66
K. LAMAR $ 45.31
D. MARLON $ 43.99
W. NIPPE $ 53.02
M. STANEVICH $ 34.79
S. JENSON-BUNCH $ 48.70
J. PERRY $ 45.31
T. GREESON $ 40.78
</TABLE>
14
<PAGE>
ATTACHMENT B
SCHEDULE OF SHS BONUS PAYMENTS
Condition Bonus
--------- -----
Filing of the Medicare Risk $100,000
Application within 60 days from
the Effective Date
Filing of the Medicare Risk $ 50,000
Application within 90 days from
the Effective Date
If HCFA approves First Option's Medicare $100,000
Risk Application within 6 months of its
submission to HCFA
If HCFA approves First Option's Medicare $ 50,000
Risk Application within 7 months of its
submission to HCFA
15
<PAGE>
ATTACHMENT C
SHS DEVELOPMENT FEE
<TABLE>
<CAPTION>
Percent of
Year Medicare Revenues Minimum Fee Maximum Fee
---- ----------------- ----------- -----------
<S> <C> <C> <C>
1 1 $1,000,000 $3,500,000
2 1 $1,000,000 $3,500,000
3 1 $1,000,000 $3,500,000
4 0.5 $1,000,000 $3,500,000
5 0.5 $1,000,000 $3,500,000
6 0.5 $1,000,000 $3,500,000
7 0.5 $1,000,000 $3,500,000
8 0.5 $1,000,000 $3,500,000
</TABLE>
16
<PAGE>
ATTACHMENT D
ADJUSTMENTS TO SHS COMPENSATION
Average Trend in Published AAPCC
for New Jersey for 1991 - 1995.................................plus 4%
Published AAPCC for 1996.......................1995 Base Rate minus 1%
(constitutes "significant reduction" under Section 3.8 since equates to 5%
deviation from expected AAPCC based on 1991 - 1995 Trend of +4%)
SHS's Compensation for 1996 =
(a) development costs plus
(b) $1,000,000 (minimum fee under Attachment C)
plus either
(c) 1/4 of 1% of Medicare Revenues; or
(d) (a) + (b) only and extension of agreement for additional year
SHS's Compensation for 1997:
*If 1997 published AAPCC is greater than or equal to 1995 base minus 1%
plus 4%, then regular payments resume.
If 1997 published AAPCC is less than 1995 base minus 1% plus 4%, then SHS's
compensation shall be based on (a) and (b) above.
17
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-99954, 33-6920, 33-41542, 33-41543, 33-82474 and 33-60901 of Sierra Health
Services, Inc. on Forms S-8 and Registration Statement Nos. 33-59187 and
33-60591 of Sierra Health Services, Inc. on Forms S-4 of our report dated
February 10, 1995 appearing in the Annual Report on Form 10-K as amended by this
Form 10-K/A of Sierra Health Services, Inc. for the year ended December 31,
1994.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
September 1, 1995
