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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO Section 13 OR 15(d) OF THE SECURITIES
EXHANGE 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 definitive Part III
proxy statement for its 1995 annual
meeting to be filed by March 31, 1995.
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SIERRA HEALTH SERVICES, INC.
1994 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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. . . . . . . . . . . 21
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
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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 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 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. These networks include 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.
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PRODUCTS AND SERVICES
The Company, through its own health care delivery system, provides a
comprehensive range of outpatient services encompassing most of the managed care
services required by its members with the primary exceptions of acute hospital
care and pharmaceutical services.
HMO. The Company's 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 PPOs and hospitals in areas other than southern Nevada
to provide health care benefits to its members in such areas. All of the
Company's managed indemnity products incorporate managed care components to help
manage costs and to help promote the delivery of 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.
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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.
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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
<FN>
(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.
</TABLE>
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
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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.
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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's multi-specialty medical group maintains excess
malpractice insurance for the providers presently employed by the group. The
Company has, however, assumed the risk for the first $250,000 per malpractice
case, not to exceed $1.0 million in the aggregate per contract year up to its
limits of coverage. In addition, the Company requires most of its independently
contracted provider physician groups, individual practice physicians,
specialists, hospitals and other health care providers to maintain professional
liability coverage. 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
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$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.
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.
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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.
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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 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 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 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. Sections 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(2) . . . . . . . . 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
---------------
<FN>
(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.
</TABLE>
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.
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 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.
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
PAGE
----
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
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.
/s/ ANTHONY M. MARLON, M.D.
Anthony M. Marlon, M.D.
Chairman and
Chief Executive Officer
/s/ JAMES L. STARR
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.
/s/ Deloitte & Touche LLP
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 CAPITOL 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
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
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 and owns a 50% interest in HMO Texas L.C. ("HMO Texas"), a health
maintenance organization which was licensed in February 1995 in the state of
Texas. 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.
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. 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.
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. Gross realized gains and losses in 1994
were $41,000 and $163,000 respectively. Realized gains and losses 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>
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 __ __
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
</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
<FN>
(a) Quarterly earnings per share have been adjusted to account for the stock
split discussed in Note 1.
</TABLE>
************************************************
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:
PAGE
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
(a)(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant . . . . . 50
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.
(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.
45
<PAGE>
(10.11) Agreement between Health Plan of Nevada, Inc. and the United
States Health Care Financing Administration dated July 24, 1992,
incorporated by reference to Exhibit 10.18 to the Registrant's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1992.
(10.12) Loan Agreement among Bank of America, Nevada, the Registrant,
Health Plan of Nevada, Inc. and Sierra Health and Life Insurance
Company, Inc. dated November 30, 1993 in the principal amount
of $14,000,000, incorporated by reference to Exhibit 10.19 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.
(10.13) Loan Agreement between Home Federal Savings and Loan Association
and 2314 West Charleston Partnership dated September 15, 1989 in
the principal amount of $3,400,000, incorporated by reference to
Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(10.14) Promissory note assumed by Southwest Medical Associates, Inc.
payable to Key Bank of Washington, formerly Savings Bank of
Puget Sound, with the principal amounts totaling $7,500,000,
incorporated by reference to Exhibit 10.22 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993.
(10.15) Assumption and Reaffirmation Agreements dated March 25, 1994,
incorporated by reference to Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
(10.16) Unconditional Guarantees dated March 25, 1994, incorporated by
reference to Exhibit 10.24 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
(10.17) Compensatory Plans, Contracts and Arrangements.
(1) Employment Agreements with Anthony M. Marlon, M.D.;
Erin E. MacDonald; Frank E. Collins; William R. Godfrey;
Laurence 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.
(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.
46
<PAGE>
(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.; 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) are filed herewith.
47
<PAGE>
* 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.
** Confidential treatment has been requested 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.
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/ ANTHONY M. MARLON, M.D.
--------------------------------------
Date: March 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ ANTHONY M. MARLON, M.D. Chief Executive Officer March 28, 1995
---------------------------------
Anthony M. Marlon, M.D. and Chairman of the Board
(Chief Executive Officer)
/S/ JAMES L. STARR Vice President of Finance, March 28, 1995
---------------------------------
James L. Starr Chief Financial Officer and Treasurer
(Chief Accounting Officer)
/S/ ERIN E. MACDONALD President and March 28, 1995
---------------------------------
Erin E. MacDonald Chief Operating Officer
Director
/S/ CHARLES L. RUTHE Director March 28, 1995
---------------------------------
Charles L. Ruthe
/S/ WILLIAM J. RAGGIO Director March 28, 1995
---------------------------------
William J. Raggio
/S/ THOMAS Y. HARTLEY Director March 28, 1995
---------------------------------
Thomas Y. Hartley
</TABLE>
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 Subsidiaries . . . . . . . . . . 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>
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
(A NEVADA CORPORATION)
<PAGE>
TABLE OF CONTENTS
PAGE NO.
--------
ARTICLE I
Offices and Fiscal Year
SECTION 1.01. Principal Executive Office................... 1
SECTION 1.02. Other Offices................................ 1
SECTION 1.03. Fiscal Year.................................. 1
ARTICLE II
Meetings of Stockholders
SECTION 2.01. Place of Meeting............................. 1
SECTION 2.02. Annual Meeting............................... 1
SECTION 2.03. Special Meetings............................. 2
SECTION 2.04. Notice of Meetings........................... 2
SECTION 2.05. Quorum, Manner of Acting and Adjournment..... 2
SECTION 2.06. Organization................................. 3
SECTION 2.07. Voting....................................... 3
SECTION 2.08. Voting Lists................................. 5
SECTION 2.09. Ballots: Inspectors of Election............. 5
SECTION 2.10. Determination of Stockholders of Record...... 5
SECTION 2.11. Consent of Stockholders in Lieu of Meeting... 6
SECTION 2.12 Participation by Telephone or Similar Means.. 6
ARTICLE III
Directors and Management
SECTION 3.01. Powers....................................... 6
SECTION 3.02. Election, Number and Term of Office.......... 6
SECTION 3.03. Organization................................. 7
SECTION 3.04. Resignations................................. 7
SECTION 3.05. Vacancies.................................... 7
SECTION 3.06. Removal...................................... 7
SECTION 3.07. Place of Meeting............................. 8
SECTION 3.08. Organization Meeting......................... 8
SECTION 3.09. Regular Meetings............................. 8
SECTION 3.10. Special Meetings............................. 8
SECTION 3.11. Quorum, Manner of Acting, and Adjournment.... 8
SECTION 3.12. Delegation of Board Authority to Committees.. 8
SECTION 3.13. Interested Directors or Officers; Quorum..... 9
SECTION 3.14. Fees......................................... 10
SECTION 3.15. Participation by Telephone or Similar Means...10
ARTICLE IV
Notice - Waivers
SECTION 4.01. Notice....................................... 10
SECTION 4.02. Waivers of Notice............................ 10
-i-
<PAGE>
ARTICLE V
Officers
SECTION 5.01. Number, Qualifications and Designation....... 11
SECTION 5.02. Election and Term of Office.................. 11
SECTION 5.03. Subordinate Officers, Committees and Agents.. 11
SECTION 5.04. Resignations................................. 11
SECTION 5.05. Removal...................................... 11
SECTION 5.06. Vacancies.................................... 12
SECTION 5.07. General Powers............................... 12
SECTION 5.08. Chairman and Vice-Chairman of Board of
Directors.................................... 12
SECTION 5.09. President.................................... 12
SECTION 5.10. Vice-Presidents.............................. 12
SECTION 5.11. Secretary.................................... 12
SECTION 5.12. Treasurer.................................... 13
SECTION 5.13. Officers' Bonds.............................. 13
SECTION 5.14. Salaries..................................... 13
ARTICLE VI
Certificates of Stock, Transfer, Etc
SECTION 6.01. Issuance..................................... 13
SECTION 6.02. Transfer..................................... 13
SECTION 6.03. Share Certificates........................... 14
SECTION 6.04. Record Holder of Shares...................... 14
SECTION 6.05. Lost, Destroyed or Mutilated Certificates.... 14
ARTICLE VII
Indemnification of Corporate Agents
SECTION 7.01. Indemnification of Authorized Representatives
in Third Party Proceedings................... 14
SECTION 7.02. Indemnification of Authorized Representatives
in Corporate Proceedings..................... 15
SECTION 7.03. Successful Defense........................... 15
SECTION 7.04. Determination that Indemnification is Proper. 15
SECTION 7.05. Advance Payment of Expenses.................. 15
SECTION 7.06. Preservation of Other Rights; Survival....... 16
SECTION 7.07. Severability................................. 16
SECTION 7.08. Subrogation.................................. 16
SECTION 7.09. No Duplication of Payments................... 16
SECTION 7.10. Insurance and Other Financial Arrangements... 16
SECTION 7.11. Nonapplicability to Fiduciaries of Employee
Benefit Plan................................. 17
SECTION 7.12. Retroactive Effect........................... 17
ARTICLE VIII
Corporate Records
SECTION 8.01. Access to Records of Corporation............. 17
SECTION 8.02. Stockholders' Rights of Inspection........... 18
-ii-
<PAGE>
ARTICLE IX
Director's Inspection of Records
SECTION 9.01. Absolute Right of Director to Inspect Records 18
ARTICLE X
Miscellaneous
SECTION 10.01. Corporate Seal............................... 19
SECTION 10.02. Checks....................................... 19
SECTION 10.03. Contracts.................................... 19
SECTION 10.04. Deposits..................................... 19
SECTION 10.05. Reports...................................... 19
SECTION 10.06. Amendment of Bylaws.......................... 19
-iii-
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
(A NEVADA CORPORATION)
...OOOOO...
ARTICLE I
OFFICES AND FISCAL YEAR
SECTION 1.01. PRINCIPAL EXECUTIVE OFFICE. The principal executive
office of the corporation in the State of Nevada shall be at 2724 North Tenaya
Way, Las Vegas, Nevada 89128, until otherwise established by a vote of a
majority of the board of directors in office, and a statement of such change is
filed with the Secretary of State.
SECTION 1.02. OTHER OFFICES. The corporation may also have offices at
such other places within or without the State of Nevada as the board of
directors may from time to time appoint or the business of the corporation
require.
SECTION 1.03. FISCAL YEAR. The fiscal year of the corporation shall
be established by a vote of a majority of the board of directors.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01. PLACE OF MEETING. All meetings of the stockholders of
the corporation shall be held at the principal executive office of the
corporation unless another place is designated by the board of directors in the
notice of such meeting.
SECTION 2.02. ANNUAL MEETING. The board of directors may fix the date
and time of the annual meeting of the stockholders, but if no such date and time
is fixed by the board, the meeting for any calendar year shall be held on the
second Tuesday of June in such year, if not a legal holiday under the laws of
Nevada, and, if a legal holiday, then on the next succeeding business day, not a
Saturday, at 10:00 a.m., and at said meeting the stockholders then entitled to
vote shall elect directors and shall transact such other business as may
properly be brought before the meeting; provided, however, that unless the
notice of meeting, or waiver of notice of such meeting, sets forth the general
nature of any proposal to (1) approve or ratify a contract or transaction with a
director or with a corporation, firm or association in which a director has
an interest; (2) amend the Articles of Incorporation of this corporation; (3)
approve a reorganization or merger involving this corporation; (4) elect to wind
up and dissolve this corporation; or (5) effect a plan of distribution upon
liquidation otherwise than in accordance with liquidation preferences
<PAGE>
of outstanding shares with liquidation preferences, no such proposal may be
approved at an annual meeting.
SECTION 2.03. SPECIAL MEETINGS. Special meetings of the stockholders
of the corporation for any purpose or purposes may be called at any time by the
president or by the board of directors, or by stockholders entitled to cast at
least 10 percent of the votes which all stockholders are entitled to cast at the
particular meeting.
At any time, upon written request to the chairman of the board, president,
vice-president or secretary by any person (other than the board) entitled to
call a special meeting of stockholders, the officer forthwith shall cause notice
to be given to the stockholders entitled to vote that a meeting will be held at
a time requested by the person or persons calling the meeting, not less than 35
nor more than 60 days after the receipt of the request. If the notice is not
given within 20 days after receipt of the request, the persons entitled to call
the meeting may give the notice.
SECTION 2.04. NOTICE OF MEETINGS. Written notice of meetings of the
stockholders, whether annual or special, shall be given to each stockholder of
record entitled to vote at the meeting, not less than 10 days (or, if sent by
third-class mail, 30 days), nor more than 60 days, prior to the day named for
the meeting. Every notice of a special meeting shall state briefly the purpose
or purposes thereof, and no business, other than that specified in such notice
and matters germane thereto, shall be transacted at any special meeting. Every
notice of an annual meeting shall state those matters (including nominees to the
board of directors which management intends to present) which the board of
directors intends, at the time the notice is mailed, to present to the
stockholders for action, but, subject to Section 2.02 above, any proper matter
may be presented to the meeting for action.
SECTION 2.05. QUORUM, MANNER OF ACTING AND ADJOURNMENT. The presence
in person or by proxy of stockholders holding at least a majority of the voting
power are necessary to constitute a quorum for the transaction of business.
Treasury shares shall not be counted in determining the total number of
outstanding shares for voting purposes. The stockholders present in person or
by proxy at a duly organized meeting may continue to do business until
adjournment, notwithstanding withdrawal of enough stockholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
If a meeting cannot be organized because a quorum has not attended, the
stockholders entitled to vote and present in person or represented by proxy may
adjourn the meeting to such time and place as they may determine. At any such
adjourned meeting at which a quorum may be present, such business may be
transacted as might have been transacted at the meeting as originally called.
No notice of any adjourned meeting of the stockholders of the corporation
shall be required to be given, except by announcement at the meeting, unless the
adjournment is for more than 45 days or unless after the adjournment a new
record date is fixed for the adjourned meeting.
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Except as otherwise specified in the articles or these bylaws or by
statute, the vote, at a duly organized meeting at which a quorum is present in
person or by proxy, of the stockholders who hold at least a majority of the
voting power of the issued and outstanding stock entitled to voting power, shall
be the act of the stockholders.
SECTION 2.06. ORGANIZATION. At every meeting of the stockholders, the
chairman of the board, if there be one, or in the case of vacancy in office or
absence of the chairman of the board, one of the following officers present in
the order stated: the vice-chairman of the board, if there be one, the
president, the vice-presidents in their order of rank and seniority, or a
chairman chosen by the stockholders entitled to cast a majority of the votes
which all stockholders present in person or by proxy are entitled to cast, shall
act as chairman, the secretary, or, in the absence of the secretary, an
assistant secretary, or in the absence of both the secretary and assistant
secretaries, a person appointed by the chairman, shall act as secretary.
SECTION 2.07. VOTING. Every stockholder entitled to vote at a meeting
of stockholders or to express consent or dissent to corporate action in writing
without a meeting may designate another person or persons to act for the
stockholder by proxy. Without limiting the manner in which a stockholder may
authorize another person or persons to act for him as proxy, the following
constitute valid means by which a stockholder may grant such authority:
(a) A stockholder may execute a writing authorizing another
person or persons to act for him as proxy. Execution may be
accomplished by the signing of the writing by the stockholder or his
authorized officer, director, employee or agent or by causing the
signature of the stockholder to be affixed to the writing by any
reasonable means, including, but not limited to, a facsimile
signature.
(b) A stockholder may authorize another person or persons to act
for him as proxy by transmitting or authorizing the transmission of a
telegram, cablegram or other means of electronic transmission to the
person who will be the holder of the proxy or to a firm which solicits
proxies or like agent who is authorized by the person who will be the
holder of the proxy to receive the transmission. Any such telegram,
cablegram or other means of electronic transmission must either set
forth or be submitted with information from which it can be determined
that the telegram, cablegram or other electronic transmission was
authorized by the stockholder. If it is determined that the telegram,
cablegram or other electronic transmission is valid, the persons
appointed by the corporation to count the votes of stockholders and
determine the validity of proxies and ballots or other persons making
those determinations must specify the information upon which they
relied.
Any copy, communication by telecopier, or other reliable reproduction
of the writing or transmission created pursuant to the foregoing, may
be substituted for the original writing or transmission for any
purpose for which the original writing or transmission could be used,
if the copy, communication by telecopier, or other reproduction is a
complete reproduction of the entire original writing or transmission.
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Every proxy shall be filed with the secretary of the corporation. No
proxy shall be valid after 6 months from the date of its creation,
unless it is coupled with an interest, or unless the stockholder
specifies in it the length for which it is to continue in force, which
may not exceed 7 years from the date of its creation. Subject to the
restrictions set forth herein, any proxy properly created is not
revoked and continues in full force and effect until another
instrument or transmission revoking it or a properly created proxy
bearing a later date is filed with or transmitted to the secretary of
the corporation or another person or persons appointed by the
corporation to count the votes of stockholders and determine the
validity of proxies and ballots, or unless the person giving the proxy
attends the meeting and votes in person. A proxy which states on its
face that it is irrevocable will be irrevocable for the period of time
specified in the proxy, if held by a person (or nominee of a person)
specified by law to have sufficient interest to make such proxy
irrevocable and only so long as he shall have such interest. A proxy
shall not be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised, written
notice of such death or incapacity is received by the corporation.
Except when a record date has been fixed, every stockholder of record at
the close of business on the business day next preceding the day on which notice
is given shall be entitled to notice of every stockholders' meeting, or, if
notice is waived, every stockholder of record at the close of business on the
business day next preceding the day on which the meeting is held shall be
entitled to vote at every stockholders' meeting.
Each stockholder entitled to vote is entitled to one vote for each share
except that at any election of directors, each stockholder possessing voting
power shall be entitled to as many votes as equal the number of his shares of
stock multiplied by the number of directors to be elected, and such holder may
cast all such votes for a single director or may distribute them among the
number to be voted for or any two or more of them, as such stockholder may see
fit. The stockholders and any proxyholders for such stockholders shall be
entitled to exercise the right of cumulative voting at any meeting held for the
election of directors if:
(1) Before the vote for election of directors, a stockholder of the
corporation shall have given written notice to the president or
secretary of the corporation that the stockholder desires that
the voting for the election of directors be cumulative; and
(2) The notice is given not less than 48 hours before the time fixed
for holding the meeting, if notice of the meeting has not been
given at least 10 days before the date of the meeting, and
otherwise not less than 24 hours before the meeting. At the
meeting, before the commencement of voting for the election of
directors, an announcement of the giving of notice must be made
by the chairman or the secretary of the meeting or by or on
behalf of the stockholder giving the notice.
Notice to stockholders of the requirement of subparagraphs (1) and (2)
shall be contained in the notice calling the meeting or in the proxy material
accompanying such notice.
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Any holder of shares entitled to vote on any matter may vote part of his
shares in favor of the proposal and refrain from voting the remaining shares or
vote them against the proposal. If a stockholder fails to specify the number of
shares that he is voting affirmatively, it will be conclusively presumed that
the stockholder's approving vote is with respect to all shares which such
stockholder is entitled to vote.
SECTION 2.08. VOTING LISTS. The officer or agent of the corporation
having charge of the transfer books for shares of the corporation shall make, at
least 5 days before each meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
with the address of and the number of shares held by each, which list shall be
kept on file at the registered office of the corporation, and shall be subject
to inspection by any stockholder at any time during usual business hours. The
original share ledger or transfer book, or a duplicate thereof, kept in Nevada,
shall be prima facie evidence as to who are the stockholders entitled to examine
such list or share ledger or transfer book, or to vote, in person or by proxy,
at any meeting of stockholders.
SECTION 2.09. BALLOTS: INSPECTORS OF ELECTION. The vote upon any
matter need not be by ballot, except that elections for directors shall be by
ballot if a stockholder so demands at the meeting and before the voting begins.
In advance of any meeting of stockholders, the board of directors may appoint
inspectors of election, who need not be stockholders, to act at such meeting or
any adjournment thereof. If inspectors of election are not so appointed, the
chairman of any such meeting may, and upon the demand of any stockholder or the
stockholder's proxy at the meeting and before voting begins shall appoint
inspectors of election. The number of inspectors shall be either one or three,
as determined, in the event that of inspectors appointed upon demand of a
stockholder, by stockholders present entitled to cast a majority of the votes
which all stockholders present are entitled to cast thereon. No person who is a
candidate for office shall act as an inspector. In case any person appointed as
inspector fails to appear or fails or refuses to act, the vacancy may be filled
by appointment made by the board of directors in advance of the convening of the
meeting, or at the meeting by the chairman of the meeting.
If inspectors of election are appointed as aforesaid, they shall determine
the number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes or ballots, hear and determine all
challenges and questions in any way arising in connection with the right to
vote, count and tabulate all votes, determine the result, and do such acts as
may be proper to conduct the election or vote with fairness to all stockholders.
If there be three inspectors of election, the decision, act or certificate of a
majority shall be effective in all respects as the decision, act or certificate
of all.
On request of the chairman of the meeting or of any stockholder or the
stockholder's proxy, the inspectors shall make a report in writing of any
challenge or question or matter determined by them, and execute a certificate
of any fact found by them.
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SECTION 2.10. DETERMINATION OF STOCKHOLDERS OF RECORD. The board of
directors may fix a date, not more than 60 nor less than 10 days prior to the
date of such meeting of stockholders, nor more than 60 days prior to the date
fixed for the payment of any dividend or distribution, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
shares will be made or go into effect, as a record date for the determination of
the stockholders entitled to notice of, or to vote at, any such meeting, or
entitled to receive payment of any such dividend or distribution, or to receive
any such allotment of rights, or to exercise the rights in respect to any such
change, conversion or exchange of shares; and in such case, if
otherwise entitled, all stockholders of record on the date so fixed, and no
others, shall be entitled to notice of, or to vote at, such meeting, or to
receive payment of such dividend or distribution or to receive such allotment of
rights, or exercise such rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after any such record
date fixed as aforesaid.
In the event any meeting of stockholders is adjourned for more than 45
days, the board shall fix a new record date for purposes of giving notice of,
and determining the holders of shares entitled to vote at, such adjourned
meeting.
SECTION 2.11. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action,
except for the election of directors, required or permitted to be taken at a
meeting of the stockholders may be taken without a meeting and without prior
notice if a consent or consents in writing, setting forth the action so taken,
shall be signed by stockholders holding at least a majority of the voting power,
except that if a different proportion of voting power is required for such an
action at a meeting, then that proportion of written consents is required.
SECTION 2.12 PARTICIPATION BY TELEPHONE OR SIMILAR MEANS.
Stockholders may participate in a meeting of stockholders by means of a
telephone conference or similar method of communication by which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this subsection constitutes presence in person at the meeting.
ARTICLE III
DIRECTORS AND MANAGEMENT
SECTION 3.01. POWERS. The board of directors shall have full power to
conduct, manage, and direct the business and affairs of the corporation; and all
powers of the corporation, except those specifically reserved or granted to the
stockholders by statute or by the articles or these bylaws, are hereby granted
to and vested in the board of directors.
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SECTION 3.02. ELECTION, NUMBER AND TERM OF OFFICE. The board of
directors shall be not less than 3 nor more than 7 directors; provided, however,
that in cases where all the shares of the corporation are owned beneficially and
of record by 1 or 2 stockholders, the number of directors may be less than 3 but
not less than the number of stockholders. The number of directors may be fixed
from time to time exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the directors. The number of directors is currently
fixed at five (5). The directors shall be divided into two (2) classes, as
nearly equal in number as possible, with the term of office of the first class
(to consist currently of Messrs. Anthony M. Marlon, Robert A. Mayer, and Bruce
D. Mansdorf) and the term of office of the second class (to consist currently of
Messrs. William J. Raggio and Charles L. Ruthe) each to expire at the 1992
annual meeting of stockholders. At the 1992 annual meeting of stockholders,
three (3) directors shall be elected to the first class, the term of which shall
expire at the 1993 annual meeting of stockholders, and two directors shall be
elected to the second class of directors, the term of which shall expire at the
1994 annual meeting of stockholders. At each annual meeting of stockholders
following the 1992 annual meeting, directors elected to succeed those directors
whose terms expire at such meeting shall be elected for a term of office to
expire at the second succeeding annual meeting of stockholders after this
election. Directors shall be elected to serve their respective terms and until
a successor shall have been elected and qualified, except in the event of death,
resignation or removal. Notwithstanding the foregoing, at least one-fourth in
number of the directors of the Corporation shall be elected annually.
SECTION 3.03. ORGANIZATION. At every meeting of the board of
directors, the chairman of the board, if there be one, or, in the case of a
vacancy in the office or absence of the chairman of the board, one of the
following officers present in the order stated: vice-chairman of the board, if
there be one, the president, the vice-presidents in their order of rank and
seniority, or a chairman chosen by a majority of the directors present, shall
preside, and the secretary, or in the absence of the secretary, an assistant
secretary, or in the absence of the secretary and the assistant secretaries, any
person appointed by the chairman of the meeting, shall act as secretary.
SECTION 3.04. RESIGNATIONS. Any director of the corporation may
resign effective upon giving written notice to the chairman of the board, the
president, the secretary, or the board of directors of the corporation, unless
the notice specifies a later time for the effectiveness of such resignation. If
the resignation is effective at a future time, a successor may be elected to
take office when the resignation becomes effective.
SECTION 3.05. VACANCIES. A vacancy or vacancies in the board shall be
deemed to exist in the case of death, resignation, or removal of any director,
or if the authorized number of directors be increased, or if the stockholders
fail, at any annual or special meeting of stockholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at the meeting. The board may declare vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony.
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Any vacancy or vacancies in the board of directors, except those resulting
from removal of a director, may be filled by a vote of the majority of the
remaining members of the board of directors though less than a quorum or by the
sole remaining director, at any regular or special meeting; and the director or
directors so elected shall continue in office until the next annual election of
directors of the corporation and until their successors shall have been elected
and qualified, or until their death, resignation or removal.
The stockholders may elect a director at any time to fill any vacancy not
filled by the directors. Any such election requires the affirmative vote of the
majority of the shares represented and voting at a duly held meeting at which a
quorum is present (which shares voting affirmatively also constitute at least a
majority of the required quorum).
SECTION 3.06. REMOVAL. All or any of the directors may be removed
from office without assigning any cause, by the vote or written consent of
stockholders representing at least two-thirds of the voting power of the issued
and outstanding stock entitled to voting power, except that no individual
director may be removed under the provisions of this Section except upon the
vote of stockholders owning sufficient shares to have prevented his election to
office in the first instance. A director may not be removed prior to the
expiration of such director's term of office except as provided in Section 3.05
and in this Section 3.06. Any reduction of the authorized number of directors
does not remove any director prior to the expiration of such director's term of
office.
SECTION 3.07. PLACE OF MEETING. The board of directors may hold its
meeting at such place or places within Nevada, or elsewhere as the board of
directors may from time to time appoint, or as may be designated in the notice
calling the meeting.
SECTION 3.08. ORGANIZATION MEETING. Immediately after each annual
election of directors or other meeting at which the entire board of directors is
elected, the newly elected board of directors shall meet for the purpose of
organization, election of officers, and the transaction of other business, at
the place where said election of directors was held. Notice of such meeting
need not be given. Such organization meeting may be held at any other time or
place which shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors.
SECTION 3.09. REGULAR MEETINGS. Regular meetings of the board of
directors shall be held at such time and place as shall be designated from time
to time by resolution of the board of directors. If the date fixed for any such
regular meeting be a legal holiday under the laws of the state where such
meeting is to be held, then the same shall be held on the next succeeding
business day, not a Saturday, or at such other time as may be determined by
resolution of the board of directors. At such meetings, the directors shall
transact such business as may properly be brought before the meeting. Notice of
regular meetings need not be given.
SECTION 3.10. SPECIAL MEETINGS. Special meetings of the board of
directors shall be held whenever called by the president or by 2 or more of the
directors. Notice of each such meeting shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice delivered
personally by telephone or by telegram) or 4 days (in the case of notice by
mail) before the time at which the meeting is to be held. Every such notice
shall state the time and place of the meeting.
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SECTION 3.11. QUORUM, MANNER OF ACTING, AND ADJOURNMENT. A majority
of the authorized number of directors shall be present at each meeting in order
to constitute a quorum for the transaction of business. Except as otherwise
specified in the articles or these bylaws or provided by statute, the act of the
directors holding a majority of the voting power of the directors, present at a
meeting at which a quorum is present shall be the act of the board of directors.
In the absence of a quorum, a majority of the directors present may adjourn the
meeting from time to time until a quorum is present, and no notice of any
adjourned meeting need be given, other than by announcement at the meeting. The
directors shall act only as a board and the individual directors shall have no
power as such; provided, however, that any action which may be taken at a
meeting of the board may be taken without a meeting if a consent or consents in
writing setting forth the action so taken shall be signed by all of the
directors and shall be filed with the minutes of the proceedings of the board.
SECTION 3.12. DELEGATION OF BOARD AUTHORITY TO COMMITTEES. The board
of directors may designate one or more committees, each of which must include at
least one director. The appointment of members of a committee requires the vote
of a majority of the whole board of directors.
Except as otherwise provided in this Section, the Executive Committee, if
any, shall have and exercise all of the authority of the board in the management
of the business and affairs of the corporation and any other committee shall
have and exercise the authority of the board to the extent provided in the
resolution designating the committee.
Any such committee of the board shall have the authority and powers of the
board in the management of the business and affairs of the corporation, except
with respect to the approval of any action which also requires stockholders'
approval or approval of outstanding shares.
A majority of the members designated to a committee, or alternates
designated to replace them as provided in this Section, shall constitute a
quorum for the transaction of business and the acts of a majority of the members
designated to a committee or their replacements shall be the acts of the
committee.
Each committee shall keep regular minutes of its proceedings and report
such proceedings periodically to the board of directors.
Sections 3.09, 3.10 and 3.11 shall apply MUTATIS MUTANDIS to committees of
the board of directors.
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SECTION 3.13. INTERESTED DIRECTORS OR OFFICERS; QUORUM.
(1) No contract or other transaction between the corporation and one or
more of its directors or officers, or between the corporation and any
corporation, firm or association in which one or more of its directors
or officers are directors or officers or are financially interested,
shall be void or voidable solely for this reason or solely because any
such director or officer shall be present at the meeting of the board
of directors or a committee thereof which authorizes or approves the
contract or transaction, or because the vote or votes of common or
interested directors shall be counted for that purpose, if the
circumstances specified in any of the following paragraphs exist:
(a) The fact of the common directorship, office or financial interest
is disclosed or known to the board of directors or committee and
noted in the minutes, and the board or committee authorizes,
approves or ratifies the contract or transaction in good faith by
a vote sufficient for the purpose without counting the vote or
votes of the common or interested director or directors;
(b) The fact of the common directorship, office or financial interest
is disclosed or known to the stockholders, and they approve or
ratify the contract or transaction in good faith by a majority
vote or written consent of stockholders holding a majority of the
voting power. The votes of the common or interested directors or
officers shall be counted in any such vote of stockholders;
(c) The fact of the common directorship, office or financial interest
is not disclosed or known to the director or officer at the time
the transaction is brought before the board of directors of the
corporation for action; or
(d) The contract or transaction is fair as to the corporation at the
time it is authorized or approved.
(2) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or a
committee thereof which authorizes, approves or ratifies a contract or
transaction, and if the votes of the common or interested directors
are not counted at such meeting, then a majority of the disinterested
directors may authorize, approve or ratify such contract or
transaction.
SECTION 3.14. FEES. Each director shall be paid such reasonable fee,
if any, as shall be fixed by the board of directors for each meeting of the
board of directors or committee of directors which such director shall attend
and may be paid such other compensation for services as a director as may be
fixed by the board of directors.
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SECTION 3.15. PARTICIPATION BY TELEPHONE OR SIMILAR MEANS. Members of
the board or of any committee designated by such board may participate in a
meeting of the board, or committee of the board by means of conference telephone
or similar method of communication by which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this
Section shall constitute presence in person at such meeting. Each person
participating in the meeting shall sign the minutes thereof.
ARTICLE IV
NOTICE - WAIVERS
SECTION 4.01. NOTICE. Whenever written notice is required to be given
to any person under the provisions of the articles, these bylaws, or the Nevada
Corporations Code, it may be given to such person, either personally or by
sending a copy thereof by first-class mail (or if the corporation has at least
500 stockholders of record, by third-class mail), or other means of written
communication, charges prepaid, to the address of such person appearing on the
books of the corporation, or supplied by such person to the corporation for the
purpose of notice. If the notice is sent by mail or by telegraph, it shall be
deemed to have been given to the person entitled thereto when deposited in the
United States mail or with a telegraph office for transmission to such person.
A notice of a meeting shall specify the place, day and hour of the meeting and
in the case of a special meeting of stockholders, the general nature of the
business to be transacted.
SECTION 4.02. WAIVERS OF NOTICE. Whenever any written notice is
required to be given under the provisions of the articles, these bylaws, or the
Nevada Corporations Code, a waiver thereof, in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. All waivers
and consents shall be filed with the minutes of the meeting or the records of
the corporation.
Attendance of a person, either in person or by proxy, at any meeting,
shall constitute a waiver of notice of such meeting, except where a person
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting was not lawfully called or convened.
ARTICLE V
OFFICERS
SECTION 5.01. NUMBER, QUALIFICATIONS AND DESIGNATION. The officers of
the corporation shall be a chairman of the board, president, one or more
vice-presidents, a secretary, a treasurer, and such other officers as may be
elected in accordance with the provisions of Section 5.03 of this Article. The
chairman of the board and any vice-chairman of the board shall be elected by the
board of directors from among the members of the board. Any natural person may
hold more than one office. Officers may but need not be directors or
stockholders of the corporation. All officers of the corporation shall be
natural persons of full age.
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SECTION 5.02. ELECTION AND TERM OF OFFICE. The officers of the
corporation, except those elected by delegated authority pursuant to Section
5.03 of this Article, shall be elected annually by the board of directors, and
each such officer shall hold office after the expiration of his term until a
successor is chosen or until his resignation or removal before the expiration of
his term. A failure to elect officers shall not require the corporation to be
dissolved.
SECTION 5.03. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The board
of directors may from time to time elect such other officers and appoint such
committees, employees, or other agents as the business of the corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws, or as the board of
directors may from time to time determine. The board of directors may delegate
to any officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents, or committees thereof, and to
prescribe the authority and duties of such subordinate officers, committees,
employees or other agents, but in no event shall this delegated power include
the power to expand upon the authority and duties of the vice-presidents as set
forth in Section 5.10.
SECTION 5.04. RESIGNATIONS. Any officer or agent may resign at any
time by giving written notice to the board of directors, or to the president or
the secretary of the corporation without prejudice to the rights, if any, of the
corporation under any contract to which the officer is a party. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 5.05. REMOVAL. Any officer, committee, employee or other
agent of the corporation may be removed, either for or without cause, by the
board of directors or other authority which elected or appointed such officer,
committee, or other agent whenever in the judgment of such authority, the best
interests of the corporation will be served thereby.
SECTION 5.06. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause, shall be filled by
the board of directors or by the officer or committee to which the power to fill
such office has been delegated pursuant to Section 5.03 of this Article, as the
case may be, and if the office is one for which these bylaws prescribe a term,
shall be filled for the unexpired portion of the term.
SECTION 5.07. GENERAL POWERS. All officers of the corporation as
between themselves and the corporation, shall, respectively, have such authority
and perform such duties in the management of the property and affairs of the
corporation as may be determined by resolution of the board of directors, or in
the absence of controlling provisions in a resolution of the board of directors,
as may be provided in these bylaws.
SECTION 5.08. CHAIRMAN AND VICE-CHAIRMAN OF BOARD OF DIRECTORS. The
chairman of the board or, in the absence of the chairman, the vice-chairman of
the board, shall preside at all meetings of the stockholders and of the board of
directors, and shall perform such other duties as may from time to time be
requested by the board of directors.
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SECTION 5.09. PRESIDENT. The president shall be the chief
executive officer of the corporation and shall have general supervision over the
business and operations of the corporation, subject, however, to the control of
the board of directors. The president shall sign, execute and acknowledge, in
the name of the corporation, deeds, mortgages, bonds, contracts or other
instruments, authorized by the board of directors, except in cases where the
signing and execution thereof shall be expressly delegated by the board of
directors, or by these bylaws, to some other officer or agent of the
corporation, and, in general, shall perform all duties incident to the office of
president and such other duties as from time to time may be assigned by the
board of directors.
SECTION 5.10. VICE-PRESIDENTS. The board of directors may appoint one
or more vice-presidents, as it shall deem proper. In the absence or disability
of the president, the vice-presidents, in order of rank as fixed by the board of
directors, shall perform all duties of the president, and when so acting, shall
have all of the powers of and be subject to all of the restrictions upon the
president. Vice-presidents shall have such powers and perform such duties as
from time to time may be prescribed for them by the board of directors.
SECTION 5.11. SECRETARY. The secretary or an assistant secretary
shall attend all meetings of the stockholders and of the board of directors and
shall record all the votes of the stockholders and of the directors and the
minutes of the meetings of the stockholders and of the board of directors and of
committees of the board in a book or books to be kept for that purpose; shall
see that notices are given and records and reports properly kept and filed by
the corporation as required by law; shall be the custodian of the seal of the
corporation and see that it is affixed to all documents to be executed on behalf
of the corporation under its seal; and, in general, shall perform all duties
incident to the office of secretary, and such other duties as may from time to
time be assigned by the board of directors or the president.
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SECTION 5.12. TREASURER. The treasurer is the chief financial officer
of the corporation.The treasurer or an assistant treasurer shall have or provide
for the custody of the funds or other property of the corporation and shall keep
a separate book account of the same to his or her credit as treasurer; shall
collect and receive or provide for the collection and receipt of monies earned
by or in any manner due to or received by the corporation; shall deposit all
funds in his or her custody as treasurer in such banks or other places of
deposit as the board of directors may from time to time designate; shall,
whenever so required by the board of directors, render an account showing all
transactions as treasurer, and the financial condition of the corporation; and,
in general, shall discharge such other duties as may from time to time be
assigned by the board of directors or the president.
SECTION 5.13. OFFICERS' BONDS. Any officer shall give a bond for the
faithful discharge of the duties of the officer in such sum, if any, and with
such surety or sureties as the board of directors shall require.
SECTION 5.14. SALARIES. The salaries of the officers elected by the
board of directors shall be fixed from time to time by the board of directors or
by such officer as may be designated by resolution of the board. The salaries or
other compensation of any other officers, employees and other agents shall be
fixed from time to time by the officer or committee to which the power to elect
such officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 5.03 of this Article. No officer shall be
prevented from receiving such salary or other compensation by reason of the fact
that the officer is also a director of the corporation.
ARTICLE VI
CERTIFICATES OF STOCK, TRANSFER, ETC.
SECTION 6.01. ISSUANCE. The share certificates of the corporation
shall be numbered and registered in the share ledger and transfer books of the
corporation as they are issued. They shall be signed by the president or a
vice-president and by the secretary or an assistant secretary or the treasurer
or an assistant treasurer, and shall bear the corporate seal, which may be a
facsimile, engraved or printed; provided, however, that where such certificate
is countersigned or otherwise authenticated by a transfer agent or a transfer
clerk and by a registrar, then a facsimile of the signatures of any corporate
officers or agents, the transfer agent or transfer clerk or the registrar of the
corporation may be printed or lithographed upon the certificate in lieu of the
actual signatures. In the event that any officer or officers who have signed,
or whose facsimile signatures have been used on any certificate or certificates
for stock cease to be an officer or officers because of death, resignation or
other reason, before the certificate or certificates for stock have been
delivered by the corporation, the certificate or certificates may nevertheless
be adopted by the corporation and be issued and delivered as though the person
or persons who signed the certificate or certificates, or whose facsimile
signature or signatures have been used thereon, had not ceased to be an officer
or officers of the corporation.
-14-
<PAGE>
SECTION 6.02. TRANSFER. Transfers of shares shall be made on the
books of the corporation upon surrender of the certificates therefore, endorsed
by the person named in the certificate or by attorney lawfully constituted in
writing. No transfer shall be made inconsistent with the provisions of the
Uniform Commercial Code of the State of Nevada and its amendments and
supplements.
SECTION 6.03. SHARE CERTIFICATES. Certificates for shares of the
corporation shall be in such form as provided by statute and approved by the
board of directors. The share record books and the blank share certificate books
shall be kept by the secretary or by any agent designated by the board of
directors for that purpose. Every certificate exchanged or returned to the
corporation shall be marked "Canceled," with the date of cancellation.
SECTION 6.04. RECORD HOLDER OF SHARES. The corporation shall be
entitled to treat the person in whose name any share or shares of the
corporation stand on the books of the corporation as the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share or shares on the part of any other person.
SECTION 6.05. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder
of any shares of the corporation shall immediately notify the corporation of any
loss, destruction or mutilation of the certificate therefore, and the board of
directors may, in its discretion, cause a new certificate or certificates to be
issued to such holder, in case of mutilation of the certificate, upon the
surrender of the mutilated certificate, or, in case of loss or destruction of
the certificate, upon satisfactory proof of such loss or destruction, and, if
the board of directors shall so determine, the deposit of a bond in such form
and in such sum, and with such surety or sureties, as it may direct.
ARTICLE VII
INDEMNIFICATION OF CORPORATE AGENTS
SECTION 7.01. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN THIRD
PARTY PROCEEDINGS. The corporation shall indemnify any person who was or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with the action, suit or proceeding if such person acted in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, does not, of itself, create a presumption that such person did
not act in good faith and in a manner which such person reasonably believed to
be in or not opposed to the best interests of the corporation, and that, with
respect to any criminal action or proceeding, such person had reasonable cause
to believe that such person's conduct was unlawful.
-15-
<PAGE>
SECTION 7.02. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN
CORPORATE PROCEEDINGS. The corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses, including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by such person in connection with the defense
or settlement of the action or suit if such person acted in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interests of the corporation. Indemnification may not be made for any claim,
issue or matter as to which such person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the corporation, unless
and only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
SECTION 7.03. SUCCESSFUL DEFENSE. To the extent that a director,
officer, employee or agent of the corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 7.01 and 7.02, or in defense of any claim, issue or matter therein,
such person must be indemnified by the corporation against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with the defense.
SECTION 7.04. DETERMINATION THAT INDEMNIFICATION IS PROPER. Any
indemnification under Sections 7.01 and 7.02, unless ordered by a court or
advanced pursuant to Section 7.05, must be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances. The
determination must be made:
(a) By the stockholders;
(b) By the board of directors by a majority vote of a quorum
consisting of directors who were not parties to the act, suit or
proceeding;
(c) If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion.
-16-
<PAGE>
SECTION 7.05. ADVANCE PAYMENT OF EXPENSES. The expenses of officers
and directors incurred in defending a civil or criminal action, suit or
proceeding must be paid by the corporation as they are incurred and in advance
of the final disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the director or officer to repay the amount if it
is ultimately determined by a court of competent jurisdiction that such person
is not entitled to be indemnified by the corporation. The provisions of this
subsection do not affect any rights to advancement of expenses to which
corporate personnel other than directors or officers may be entitled under any
contract or otherwise by law.
SECTION 7.06. PRESERVATION OF OTHER RIGHTS; SURVIVAL. The
indemnification and advancement of expenses authorized in or ordered by a court
pursuant to this Article VII:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
articles of incorporation or any agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in such
person's official capacity or an action in another capacity while
holding such person's office, except that indemnification, unless
ordered by a court pursuant to Section 7.02 or for the advancement of
expenses made pursuant to Section 7.05, may not be made to or on
behalf of any director or officer if a final adjudication establishes
that his acts or omissions involved intentional misconduct, fraud or a
knowing violation of the law and was material to the cause of action;
and
(b) Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs,
executors and administrators of such a person.
SECTION 7.07. SEVERABILITY. If this Article VII or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each employee or agent of the
corporation as to costs, charges and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the corporation, to the fullest extent
permitted by any applicable portion of this Article VII that shall not have been
invalidated and to the fullest extent permitted by applicable law.
SECTION 7.08. SUBROGATION. In the event of payment of indemnification
to a person described in Sections 7.01 and 7.02, the corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
corporation, shall execute all documents and do all things that the corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the corporation effectively to
enforce any such recovery.
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<PAGE>
SECTION 7.09. NO DUPLICATION OF PAYMENTS. The corporation shall not
be liable under this Article VII to make any payment in connection with any
claim made against a person described in Sections 7.01 and 7.02 to the extent
such person has otherwise received payment (under any insurance policy, bylaw or
otherwise) of the amounts otherwise payable as indemnity hereunder.
SECTION 7.10. INSURANCE AND OTHER FINANCIAL ARRANGEMENTS. The
corporation may purchase and maintain insurance or make other financial
arrangements on behalf of any person described in Sections 7.01 and 7.02 against
any liability asserted against, and liability and expenses incurred by, such
person in such person's capacity as a director, officer, employee or agent or
arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability and
expenses.
The other financial arrangements made by the corporation pursuant to this
Section may include (a) the creation of a trust fund; (b) the establishment of a
program of self-insurance; (c) the securing of the corporation's obligation of
indemnification by granting a security interest or other lien in any assets of
the corporation; (d) the establishment of a letter of credit, guaranty or
surety; or (e) any other arrangement legally available to the corporation.
No financial arrangement made pursuant to this Section may provide
protection for a person adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable for intentional misconduct,
fraud or a knowing violation of law, except with respect to the advancement of
expenses or indemnification ordered by a court.
Any insurance or other financial arrangement made on behalf of a person
pursuant to this Section may be provided by the corporation or any other person
approved by the Board of Directors, even if all or part of the other person's
stock or other securities is owned by the corporation.
In the absence of fraud, (a) the decision of the Board of Directors as to
the propriety of the terms and conditions of any insurance or other financial
arrangement made pursuant to this Section and the choice of the person to
provide the insurance or other financial arrangement is conclusive; and (b) the
insurance or other financial arrangement (i) is not void or voidable; and (ii)
does not subject any director approving it to personal liability for his action,
even if a director approving the insurance or other financial arrangement is a
beneficiary of the insurance or other financial arrangement.
SECTION 7.11. NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT
PLAN. This Article does not apply to any proceeding against any trustee,
investment manager, or other fiduciary of an employee benefit plan in such
person's capacity as such, even though such person may also be an authorized
representative of the corporation. The corporation shall have power to
indemnify such trustee, investment manager or other fiduciary to the extent
permitted by the Nevada Corporations Code.
SECTION 7.12. RETROACTIVE EFFECT. To the extent permitted by
applicable law, the rights and powers granted pursuant to this Article VII shall
apply to acts, actions, suits and proceedings occurring or in progress prior to
the adoption of these amended and restated bylaws.
-18-
<PAGE>
ARTICLE VIII
CORPORATE RECORDS
SECTION 8.01. ACCESS TO RECORDS OF CORPORATION. The accounting books
and records and minutes of proceedings of the stockholders and the board and
committees of the board shall be open to inspection upon the written demand on
the corporation of any stockholder or holder of a voting trust certificate at
any reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a stockholder or as the holder of such
voting trust certificate. Such inspection by a stockholder or holder of a
voting trust certificate may be made in person or by agent or attorney, and the
right of inspection includes the right to copy and make extracts.
SECTION 8.02. STOCKHOLDERS' RIGHTS OF INSPECTION. A stockholder or
stockholders holding at least fifteen (15) percent in the aggregate of the
outstanding voting shares of the corporation shall have an absolute right to do
either or both of the following:
(1) Inspect and copy the record of stockholders' names and addresses and
shareholdings during usual business hours upon five (5) business days'
prior written demand upon the corporation; or
(2) Obtain from the transfer agent for the corporation upon written demand
and upon the tender of its usual charges for such a list (the amount
of which charges shall be stated to the stockholder by the transfer
agent upon request) a list of the names and addresses of stockholders
who are entitled to vote for the election of directors, and their
shareholdings as of the most recent record date for which it has been
compiled or as of the date specified by the stockholder subsequent to
the date of demand. The list shall be made available on or before the
later of five (5) business days after the demand is received or the
date specified therein as the date as of which the list is to be
compiled. The corporation shall have the responsibility to cause its
transfer agent to comply with this Section.
Any delay by the corporation or the transfer agent in complying with a
demand under this Section beyond the time limits specified therein shall give
the stockholder or the stockholders properly making the demand a right to obtain
from the proper court, upon the filing of a verified complaint in the proper
county and after a hearing, notice of which shall be given to such person and in
such manner as the court may direct, an order postponing any stockholders'
meeting previously noticed for a period equal to the period of such delay. Such
right shall be in addition to any other legal or equitable remedies to which the
stockholder may be entitled.
The record of the stockholders shall also be open to inspection and
copying by any stockholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interests as a stockholder or holder
of a voting trust certificate. Any inspection and copying under this Section
may be made in person or by agent or attorney.
-19-
<PAGE>
ARTICLE IX
DIRECTOR'S INSPECTION OF RECORDS
SECTION 9.01. ABSOLUTE RIGHT OF DIRECTOR TO INSPECT RECORDS. Every
director shall have the absolute right at any reasonable time to inspect and
copy all books, records and documents of every kind and to inspect the physical
properties of the corporation and also of its subsidiary corporations, domestic
or foreign. Such inspection by a director may be made in person or by agent or
attorney and the right of inspection includes the right to copy and make
extracts.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. CORPORATE SEAL. The corporation shall have a corporate
seal in the form of a circle containing the name of the corporation, the year of
incorporation, and the word "Nevada," but failure to affix such seal to any
instrument shall not affect the validity thereof.
SECTION 10.02. CHECKS. All checks, notes, bills of exchange or other
orders in writing shall be signed by such person or persons as the board of
directors may from time to time designate.
SECTION 10.03. CONTRACTS. Except as otherwise provided in these
bylaws, the board of directors may authorize any officer or officers, agent or
agents, to enter into any contract or to execute or deliver any instrument on
behalf of the corporation and such authority may be general or confined to
specific instances.
SECTION 10.04. DEPOSITS. All funds of the corporation shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
SECTION 10.05. REPORTS. The board of directors shall present at the
annual meeting of stockholders a report of the financial condition of the
corporation as of the closing date of the preceding fiscal year. Such report
shall be in such form as shall be approved by the board of directors and shall
be available for inspection by the stockholders at the annual meeting. The
board of directors may, but shall not be required to, have such report prepared
and verified by an independent certified public accountant or by a firm of
practicing accountants.
SECTION 10.06. AMENDMENT OF BYLAWS. These bylaws may be amended or
repealed, or new bylaws may be adopted, by the vote or written consent of the
stockholders who hold at least a majority of the voting power of the issued and
outstanding stock entitled to voting power at any duly organized annual or
special meeting of stockholders; provided, however, that subject to the right of
stockholders to adopt, amend or repeal bylaws, bylaws (other than a bylaw or
amendment thereof changing the authorized number of directors) may be adopted,
amended or repealed by the board of directors.
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<PAGE>
Amendment No. 1 to
AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
The Amended and Restated bylaws of Sierra Health Services, Inc., a Nevada
corporation (the "Corporation"), are hereby amended as follows effective August
10, 1994:
1. The fourth sentence of Section 3.02 is hereby amended by deleting the
word "currently" as it appears twice therein.
2. Section 5.08 is hereby amended to read as follows:
SECTION 5.08. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The
chairman of the board of directors or, in the absence of the chairman, the
vice-chairman of the board, shall be the chief executive officer of the
corporation. Subject to the provisions of these bylaws and to the direction of
the board of directors, the chairman shall have the ultimate responsibility for
the management and control of the affairs and business of the corporation and
shall perform all duties and have all powers which are commonly incident to the
office of chief executive officer or which are delegated to him or her by the
board of directors.
The chairman of the board, or in the absence of the chairman, the
vice-chairman of the board, shall preside at all meetings of the stockholders
and of the board of directors.
The chairman of the board, or in the absence of the chairman, the
vice-chairman of the board, shall have power to execute and acknowledge, in the
name of the corporation, all stock certificates, mortgages, bonds, contracts and
other instruments of the corporation which are authorized by the board of
directors, except in cases where the execution thereof shall be expressly
delegated by the board of directors, or by these bylaws, to some other officer
or agent of the corporation. The chairman shall have general supervision and
direction of all of the other officers and agents of the corporation.
2. Section 5.09 is hereby amended to read as follows:
SECTION 5.09. PRESIDENT. The president shall be the chief operating
officer of the corporation, shall be in charge of day to day operations of the
corporation and shall have such duties and powers as may from time to time be
delegated to the president by the board of directors or by the chairman of the
board of directors. In the absence or disability of the chairman and
vice-chairman of the board of directors, or during a period of vacancy in such
offices, the president shall act as the chief executive officer of the
corporation and shall have the duties and powers of the chairman.
Except as amended hereby, the Amended and Restated Bylaws of the Company
shall remain in full force and effect.
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<PAGE>
Amendment No. 2 to
AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
The Amended and Restated Bylaws, as amended, of Sierra Health
Services, Inc., a Nevada corporation (the "Corporation"), are hereby amended as
follows effective March 22, 1995:
Section 2.05 is hereby amended by deleting the last paragraph thereof
in its entirety.
Except as amended hereby, the Amended and Restated Bylaws, as amended,
of the Company shall remain in full force and effect.
-22-
<PAGE>
EXCESS
MEDICAL PROFESSIONAL AND GENERAL LIABILITY
INSURANCE POLICY
Policy Number: Company:
NPD 0103388 [08] Reliance Insurance Company of Illinois
-------
Renewal of Home Office - Chicago, IL
NPD 0103388 Administrative Office - Philadelphia, PA
-------
DECLARATIONS
ITEM 1. NAMED INSURED AND ADDRESS:
Sierra Health Services, Inc.
888 S. Rancho Drive
P.O. Box 15645
Las Vegas, NV 89106
ITEM 2. POLICY PERIOD:
Effective Date : 6-1-94 Expiration Date: 6-1-95
------ ------
(12:01 A.M. - Standard Time at your address shown in Item 1)
ITEM 3. RETROACTIVE DATE: PROFESSIONAL LIABILITY: JULY 5, 1989
GENERAL LIABILITY: JUNE 1, 1991 UNLESS
SPECIFIED ELSEWHERE
ITEM 4 SELF-INSURED RETENTION: ITEM 5. LIMIT OF LIABILITY:
Per Medical Incident $ 250,000 For Coverage A - Medical Professional
---------- Liability
Per Occurrence $ 250,000 Per Medical Incident $5,000,000
---------- ----------
Aggregate $1,000,000 Aggregate $5,000,000
---------- ----------
[Damage & Defense Cost
exhaust SIR]
ITEM 6. PREMIUM: $500,000 For Coverage B - General Liability
--------
(minimum & deposit) Per Occurrence $5,000,000
----------
Aggregate $5,000,000
----------
(See endorsement No. 4)
ITEM 7 PROFESSION/BUSINESS OF THE NAMED INSURED: MULTI-SPECIALTY HEALTHCARE
PROVIDER
ITEM 8. FORMS/ENDORSEMENTS: SEE TABLE OF CONTENTS.
Producer Code: Producer: Professional Risk Management
81612 ---------------------------------------------
Services, Inc.,
---------------------------------------------
14441 Street N.W. Suite 1100
---------------------------------------------
Washington, DC 26005
---------------------------------------------
Date: 10/31/94 /s/ Lisa Trainor
-------- -----------------------------------
Authorized Representative
By: /s/ Eric Springall
---------------------------------
Surplus Lines Broker
<PAGE>
SIERRA HEALTH SERVICES, INC.
1994
PROTOCOLS FOR CASH BONUS AWARDS
<PAGE>
PROTOCOLS FOR 1994 CASH BONUS AWARDS
PURPOSE
To create a short term reward program that recognizes outstanding financial
performance on the part of the Company and eligible employees. The general
purpose of the plan is to promote the interest of the Company and its
stockholders by furnishing a means to attract and retain the services of
executives and directors by providing additional incentives through cash bonus.
PHILOSOPHY
It is the philosophy of Sierra to reward eligible employees who are responsible
for carrying out the mission of the Company. A cash bonus plan is intended to
reward Company performance and key employee performance for assisting the
Company in achieving financial success. It is also the philosophy of the
Company to hold the line financially when the Company's earnings are such that a
cash bonus plan is unwarranted.
DESCRIPTION OF PLAN
A. ELIGIBILITY
The categories of employees eligible for the cash bonus incentive plan are
divided into separate groups depending on the level of responsibilities.
The group identified below represents the eligibility list for the cash
bonus plan:
Senior Management
Presidents/Vice Presidents
Directors
Attachment "A" identifies the specific titles for the eligibility list and
bonus ranges outlined in the program.
The Company's Human Resources Department shall update names to the
eligibility list annually.
New executives and directors beginning employment after the approval of a
cash bonus plan, on any given year, will be eligible for a cash award on a
pro-rata basis.
<PAGE>
B. PLAN FUNDING
The plan will be funded based on a formula developed by the Compensation
Committee of the Board of Directors. The Company's annual earnings record
will be part of the formula for which the bonus program will be based upon
and funded. Based on the results of the formula, the Compensation
Committee will recommend the amount of bonus pool fund or recommend not to
fund the plan.
The eligible employee listing will be used to calculate potential bonus
dollars for the plan. Based on the Compensation Committee's
recommendation, a bonus percentage will be assigned to the plan.
EXAMPLE
<TABLE>
<CAPTION>
Eligibility List/ Compensation Committee
Potential Annual Bonus Recommendation
---------------------- ----------------------
<S> <C>
$1,000,000 $500,000
</TABLE>
Using the example above, all eligible members identified on the cash bonus
program would be eligible for fifty percent (50%) of their bonus potential
for that particular plan year.
C. BONUS CRITERIA
The bonus program is designed to reward eligible employees based on the
criteria listed below:
<TABLE>
<CAPTION>
Criteria % of Bonus
-------- ----------
<S> <C>
Company Performance Units 50%
Individual Employee Performance 40%
Tenure 10%
</TABLE>
1. COMPANY PERFORMANCE UNIT
This area involves specific performance units that can be identified
and measured internally. Budget goals, departmental and unit goals
are included in the Company's measurement of performance each year.
Performance units may also be integrated into individual employee
performance goals. This category represents fifty percent (50%) of
the bonus potential.
2
<PAGE>
2. INDIVIDUAL EMPLOYEE PERFORMANCE
Minimum requirements have been established for annual employee
performance ratings. Eligible employees for the cash bonus program
will receive the following percent of bonus potential allowed in this
category using the following ratings:
Fails to Meet (FM) = 0%
Nearly Meets (NM) = 0%
Meets (M) = 30%
Exceeds (E) = 40%
This category represents a maximum total of forty percent (40%) of the
bonus potential. Eligible employees receiving the ratings of "Fails
to Meet" or "Nearly Meets" will not receive a bonus award percentage
from this category. Employees rated as "Meets" will receive thirty
percent (30%) towards their bonus potential; and employees rated
"Exceeds" will receive forty percent (40%) towards their bonus
potential.
3. The bonus plan recognized tenure to ensure the Company's management
stability and experience, thereby, enhancing the achievement of
long-term profit goals. Tenure is recognized in two separate groups
as follows:
Years of Service Percentage
---------------- ----------
3 - 5 5%
6 and more 10%
This category represents ten percent (10%) of the total bonus
potential. Eligible employees will receive five percent (5%) or ten
percent credit for this category based on tenure. An employee is
credited with a year of service if the anniversary date is reached
during the calendar year.
The three categories combined equal one-hundred percent (100%) of the bonus
potential for each eligible employee and the bonus range they have been
assigned. The example on the following page represents how the system works.
3
<PAGE>
EXAMPLE
Director X earns $50,000.00 per year and is identified on the eligibility list
for the cash bonus program at a bonus rate of 10%. In December, the Board's
Compensation Committee approved a cash bonus pool that equaled one-hundred
percent (100%) of all eligible employees' bonus potential. In May, 1990,
Director X was evaluated and received an overall performance rating of "Meets".
Director X has been employed at SHS for six (6) years.
<TABLE>
<CAPTION>
Bonus
Criteria Status Potential
-------- ------ ---------
<S> <C> <C>
Company Performance Board Approved = 50% 5%
Individual Performance "Meets" = 30% 3%
Tenure 6 Years = 10% 1%
---
9%
Total Cash Bonus = $4,500.00 (9% x $50,000)
</TABLE>
D. PAYMENT MECHANISM
One the Board's Compensation Committee approves the bonus pool percentage
and dollars, it will be the Human Resources Departments' responsibility to
prepare the cash bonus authorization forms and obtain appropriate
authorization. Cash bonus checks will be drafted in the Finance Department
and returned to Human Resources. The Human Resources staff will distribute
the bonus checks immediately thereafter.
Eligible employees will receive bonus payments according to the
distribution method approved by the Compensation Committee. (See
attachment "B"). Bonus payments will not be prorated for employees
separating from the Company before the bonus is paid, they shall be
ineligible.
All payments authorized by the Company for the cash bonus plan will be
prepared in lump sum amounts.
PLAN INTEGRATION
Sierra's total compensation package allows for integration to protect and
preserve each program. Plan integration is illustrated below for discussion
purposes.
- Merit Pay Program
- Stock Option Program
- Cash Incentive Bonus Plan
Internally, a merit program is a fixed program that has minimal incentive value
for executives and directors. Merit plans should, however, be used in
conjunction with other bonus programs. Merit plans are tied into annual
performance for internal goals related to a position description.
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The incentive factor is very low under most merit programs.
Stock Option awards are tied into a long-term incentive process based on the
Company's earnings, growth, and success. Awards are sometimes tied into
specified periods of employment for employees who will ensure the Company's
management stability. Performance standards are also tied into this system.
The incentive factor is usually very high for most stock option plans, unless
the Company is not performing in a reasonable manner financially.
As previously expressed, a cash bonus system is a short-term reward largely
dependent on the Company's financial success. The incentive factor is also high
regarding this program.
Variable compensation recognizes all three of these plans mixed in most twelve
(12) month periods. Adjusting the size of awards for all three programs is
important to maintain an affordable program approach. Considerations for
variable compensation are illustrated below for informational purposes only.
EXAMPLE
Merit Pay Stock Awards Cash Bonuses
--------- ------------ ------------
+ - -
+ - +
- + +
- - +
+ + -
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<PAGE>
ATTACHMENT "A"
ELIGIBILITY LIST
CATEGORY I
Senior Management
CATEGORY II
Subsidiary Presidents
Subsidiary Vice Presidents
Medical Directors
CATEGORY III
Directors
<PAGE>
ATTACHMENT "B"
DISTRIBUTION SCHEDULE
The Compensation Committee of the Board of Directors approves the maximum amount
for the bonus pool fund.
The bonus Pool dollars are based on twelve (12) months of previous performances.
Eligible employees not working the full prior twelve (12) month period in which
the bonus pool dollars were based upon, shall receive a PRO-RATA cash bonus
award. Bonus payments will not be prorated for employees separating from the
Company before the bonus is paid.
The distribution schedule shall be the responsibility of the Human Resources
Department. Bonus payments shall be distributed as soon after the year end
results are released and approved by the Board.
<PAGE>
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF PAGES SEVEN THROUGH
EIGHTEEN HEREIN. SUCH CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
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. Section
(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
<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
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<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
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<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,
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<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 $ [*] 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.
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
7
<PAGE>
3.2 RETAINER. Within five (5) days following the Effective Date, First
Option shall pay SHS a retainer of $ [*] . 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.
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) [*]
of its development costs if the Application is filed with HCFA within one
hundred twenty (120) days after the Effective Date; or [*] 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 [*] 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.
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
8
<PAGE>
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 [*] shall
be due by January 1 of each calendar year. The remaining $ [*] 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 $ [*] in the event First
Option's net worth falls below $ [*] .
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 [*] on its Medicare Risk
Contract operations in a calendar year.
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
9
<PAGE>
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 [*] 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 [*] 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 [*] 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 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 [*] 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
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
10
<PAGE>
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 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 $ [*] .
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
11
<PAGE>
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.
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.
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
12
<PAGE>
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:
_________________________________________________
_________________________________________________
_________________________________________________
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
13
<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
14
<PAGE>
ATTACHMENT A
SHS HOURLY CHARGES
FOR SHS PERSONNEL
<TABLE>
<CAPTION>
EMPLOYEE RATE EMPLOYEE RATE
-------- ---- -------- ----
<S> <C> <C> <C>
A.M. MARLON [*] B. NELSON [*]
E. MacDONALD [*] S. CRANLEY [*]
F. COLLINS [*] J. PRIMAKY [*]
L. HOWARD [*] G. GILBERTSON [*]
M. MONTALVO [*] A. DINSE [*]
J. REEVES [*] B. TOLLEFSON [*]
M. SOLDO [*] L. SHEA [*]
S. STARR [*] S. KRAMBULE [*]
J. STARR [*] D. ODOM [*]
J. NANSON [*] P. JONES [*]
R. MOLNAR [*]
B. CHRISTIANSEN [*] A. REEVES [*]
T. COULTER [*] P. SMITH [*]
W. HADDAD [*] K. MONETTE [*]
F. HEAVY [*] A. HOLT [*]
B. HILLEGASS [*] C. WHITE [*]
P. SHARER [*] D. HATHAWAY [*]
C. SIGNORINO [*]
R. MOLVIK [*]
A. AKITI [*]
C. CHEN [*]
K. ENGLEHART [*]
M. GOLENIAK [*]
J. HURD [*]
J. JACKSON [*]
T. JUERGENS [*]
K. LAMAR [*]
D. MARLON [*]
W. NIPPE [*]
M. STANEVICH [*]
S. JENSON-BUNCH [*]
J. PERRY [*]
T. GREESON [*]
</TABLE>
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
15
<PAGE>
ATTACHMENT B
SCHEDULE OF SHS BONUS PAYMENTS
Condition Bonus
--------- -----
Filing of the Medicare Risk $ [*]
Application within 60 days from
the Effective Date
Filing of the Medicare Risk $ [*]
Application within 90 days from
the Effective Date
If HCFA approves First Option's Medicare $ [*]
Risk Application within 6 months of its
submission to HCFA
If HCFA approves First Option's Medicare $ [*]
Risk Application within 7 months of its
submission to HCFA
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
16
<PAGE>
ATTACHMENT C
SHS DEVELOPMENT FEE
<TABLE>
<CAPTION>
Percent of
Medicare
Year Revenues Minimum Fee Maximum Fee
---- -------- ----------- -----------
<S> <C> <C> <C>
1 1 $ [*] $3,500,000
2 1 $ [*] $3,500,000
3 1 $ [*] $3,500,000
4 0.5 $ [*] $3,500,000
5 0.5 $ [*] $3,500,000
6 0.5 $ [*] $3,500,000
7 0.5 $ [*] $3,500,000
8 0.5 $ [*] $3,500,000
</TABLE>
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
17
<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) $ [*] (minimum fee under Attachment C)
plus either
(c) 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.
[*] CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.
THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
18
<PAGE>
EXHIBIT 11
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME . . . . . . . . . . . . . . $22,204,000 $17,443,000 $13,603,000
EARNINGS PER COMMON SHARE. . . . . . . $1.71 $1.42 $1.14
----- ----- -----
----- ----- -----
Weighted Average Number
of Common Shares . . . . . . . . . . . 13,020,831 12,295,516 11,949,075
***************
PRIMARY EARNINGS
PER COMMON AND COMMON
SHARE EQUIVALENTS. . . . . . . . . . . $1.67 $1.39 $1.12
----- ----- -----
----- ----- -----
Weighted Average Number
of Common and Common
equivalent shares. . . . . . . . . . . 13,269,732 12,538,039 12,162,178
***************
FULLY DILUTED PRIMARY EARNINGS
PER COMMON AND COMMON
SHARE EQUIVALENTS. . . . . . . . . . . $1.67 $1.38 $1.11
----- ----- -----
----- ----- -----
Weighted Average Number of
Common and Common equivalent shares
assuming full dilution . . . . . . . . 13,310,909 12,615,303 12,302,900
<FN>
Note: Common Equivalent Shares represent the incremental effect of
outstanding stock options and stock appreciation rights.
</TABLE>
<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 and 33-82474 of Sierra Health Services, Inc.
on Forms S-8 of our report dated February 10, 1995 appearing in this Annual
Report on Form 10-K of Sierra Health Services, Inc. for the year ended
December 31, 1994.
Deloitte & Touche LLP
(Signature)
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 27, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF CONSOLIDATED OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 17,227,000
<SECURITIES> 109,945,000
<RECEIVABLES> 6,571,000
<ALLOWANCES> 2,465,000
<INVENTORY> 0
<CURRENT-ASSETS> 118,831,000
<PP&E> 88,449,000
<DEPRECIATION> 22,386,000
<TOTAL-ASSETS> 223,250,000
<CURRENT-LIABILITIES> 59,141,000
<BONDS> 18,409,000
<COMMON> 73,000
0
0
<OTHER-SE> 134,299,000
<TOTAL-LIABILITY-AND-EQUITY> 223,250,000
<SALES> 0
<TOTAL-REVENUES> 295,801,000
<CGS> 0
<TOTAL-COSTS> 259,723,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,080,000
<INTEREST-EXPENSE> 1,830,000
<INCOME-PRETAX> 34,248,000
<INCOME-TAX> 11,950,000
<INCOME-CONTINUING> 22,204,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,204,000
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 0
</TABLE>
