<PAGE>
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
-----------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
incorporation or organization.) Identification No.)
2724 NORTH TENAYA WAY 89128
LAS VEGAS, NV (Zip Code)
(Address of principal executive offices)
(702) 242-7000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
As of August 2, 1995 there were 14,812,000 shares of common stock
outstanding.
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<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994....................... 3
Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 1995 and
June 30, 1994............................................. 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1995 and June 30, 1994.......... 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 8
PART II - OTHER INFORMATION
Item l. Legal Proceedings.......................................... 15
Item 2. Changes in Securities...................................... 15
Item 3. Defaults Upon Senior Securities............................ 15
Item 4. Submission of Matters to a Vote of Security Holders........ 15
Item 5. Other Information.......................................... 16
Item 6. Exhibits and Reports on Form 8-K........................... 16
Signature............................................................... 18
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1995 1994
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents.................................. $ 46,644,000 $ 17,227,000
Short-term Securities...................................... 77,156,000 87,350,000
Accounts Receivable - Net.................................. 5,984,000 6,571,000
Prepaid Expenses and Other Assets.......................... 10,968,000 7,683,000
------------ ------------
Total Current Assets.................................. 140,752,000 118,831,000
------------ ------------
LAND, BUILDING AND EQUIPMENT................................. 95,960,000 88,449,000
Less-Accumulated Depreciation.............................. 26,116,000 22,386,000
------------ ------------
Land, Building and Equipment - Net.................... 69,844,000 66,063,000
------------ ------------
OTHER ASSETS:
Funds Withheld by Ceding Insurance Company................. 9,577,000 10,234,000
Long-term Securities....................................... 15,304,000 18,824,000
Restricted Cash and Securities............................. 3,819,000 3,771,000
Other...................................................... 6,690,000 5,527,000
------------ ------------
Total Other Assets.................................... 35,390,000 38,356,000
------------ ------------
TOTAL ASSETS................................................. $245,986,000 $223,250,000
============ ============
CURRENT LIABILITIES:
Accrued Liabilities........................................ $ 9,649,000 $ 6,987,000
Accrued Payroll and Taxes.................................. 9,982,000 8,216,000
Medical Claims Payable..................................... 32,255,000 31,122,000
Unearned Premium Revenue................................... 10,590,000 10,637,000
Current Portion of Long-term Debt.......................... 2,417,000 2,179,000
------------ ------------
Total Current Liabilities............................. 64,893,000 59,141,000
FUTURE POLICY BENEFITS....................................... 9,577,000 10,234,000
LONG-TERM DEBT--LESS CURRENT PORTION......................... 18,083,000 18,409,000
MINORITY INTERESTS........................................... 355,000 1,094,000
------------ ------------
TOTAL LIABILITIES............................................ 92,908,000 88,878,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value,
1,000,000 Shares Authorized,
None Issued
Common Stock, $.005 Par Value,
40,000,000 Shares Authorized,
Shares Issued: 1995 - 14,853,000
1994 - 14,677,000........................................ 74,000 73,000
Additional Paid-in Capital................................. 83,362,000 79,256,000
Treasury Stock, 100,200 Common Shares...................... (130,000) (130,000)
Unrealized Holding Loss on Available-For-Sale Securities... (257,000) (1,565,000)
Retained Earnings.......................................... 70,029,000 56,738,000
------------ ------------
Total Stockholders' Equity............................ 153,078,000 134,372,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $245,986,000 $223,250,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums......................................... $77,877,000 $66,323,000 $153,425,000 $129,679,000
Professional Fees................................ 3,852,000 2,925,000 7,670,000 5,900,000
Specialty Product Revenue........................ 2,929,000 2,766,000 5,720,000 5,197,000
Investment and Other Revenue..................... 1,983,000 669,000 3,455,000 1,310,000
----------- ----------- ------------ ------------
Total.......................................... 86,641,000 72,683,000 170,270,000 142,086,000
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Medical Expenses................................. 58,770,000 49,023,000 116,490,000 96,519,000
General, Administrative and Other................ 15,694,000 13,223,000 30,803,000 26,444,000
Specialty Product Expenses....................... 1,726,000 1,351,000 3,326,000 2,690,000
----------- ----------- ------------ ------------
Total.......................................... 76,190,000 63,597,000 150,619,000 125,653,000
----------- ----------- ------------ ------------
OPERATING INCOME................................... 10,451,000 9,086,000 19,651,000 16,433,000
OTHER INCOME AND EXPENSE:
Minority Interests in Subsidiary Loss (Income)... 595,000 (34,000) 1,096,000 (60,000)
Interest Expense and Other, Net.................. (454,000) (568,000) (761,000) (1,005,000)
----------- ----------- ------------ ------------
Total.......................................... 141,000 (602,000) 335,000 (1,065,000)
----------- ----------- ------------ ------------
INCOME BEFORE INCOME TAXES......................... 10,592,000 8,484,000 19,986,000 15,368,000
PROVISION FOR INCOME TAXES......................... 3,548,000 2,983,000 6,695,000 5,392,000
----------- ----------- ------------ ------------
NET INCOME......................................... $ 7,044,000 $ 5,501,000 $ 13,291,000 $ 9,976,000
=========== =========== ============ ============
EARNINGS PER COMMON SHARE.......................... $.48 $.44 $.91 $.80
=========== =========== ============ ============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING........................ 14,721,000 12,548,000 14,680,000 12,492,000
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
JUNE 30 JUNE 30
1995 1994
------------ -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income...................................................... $13,291,000 $ 9,976,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization................................ 3,934,000 3,713,000
Provision for Doubtful Accounts.............................. 991,000 491,000
Other Assets................................................. (1,051,000) (2,000)
Minority Interest............................................ (1,231,000) 3,000
Changes in Working Capital Accounts:
Accounts Receivable......................................... (304,000) (1,351,000)
Other Current Assets........................................ (3,285,000) (222,000)
Medical Claims Payable...................................... 1,133,000 1,819,000
Other Current Liabilities................................... 5,502,000 (3,734,000)
----------- ------------
Net Cash Provided by Operating Activities...................... 18,980,000 10,693,000
----------- ------------
Cash Flows From Investing Activities:
Capital Expenditures............................................ (7,549,000) (5,893,000)
Land, Building and Equipment Dispositions, Net.................. 133,000 331,000
Decrease (Increase) in Short-term Securities.................... 11,124,000 (11,544,000)
Decrease (Increase) in Long-term Securities..................... 4,596,000 (2,320,000)
Increase in Restricted Cash and Securities...................... (34,000) (22,000)
Corporate Acquisitions, Net..................................... (73,000) (4,000,000)
----------- ------------
Net Cash Provided by (Used for) Investing Activities........... 8,197,000 (23,448,000)
----------- ------------
Cash Flows From Financing Activities:
Proceeds from Long-term Borrowing............................... 1,375,000
Reductions in Debt and Payments
on Capital Leases.............................................. (1,160,000) (4,939,000)
Exercise of Stock Options....................................... 2,025,000 2,861,000
----------- ------------
Net Cash Provided by (Used for) Financing Activities........... 2,240,000 (2,078,000)
----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents............. 29,417,000 (14,833,000)
Cash and Cash Equivalents at Beginning of Year................... 17,227,000 23,188,000
----------- ------------
Cash and Cash Equivalents at End of Period....................... $46,644,000 $ 8,355,000
=========== ============
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF JUNE 30 JUNE 30
CASH FLOWS INFORMATION: 1995 1994
----------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Cash paid during the period for interest
(net of amount capitalized)................................. $ 725,000 $ 1,058,000
Cash paid during the period for income taxes..................... 4,000,000 3,900,000
Non cash investing and financing activities:
Liabilities assumed in connection with corporate acquisition... 20,000 7,279,000
Additions to capital leases.................................... 189,000 523,000
Additions to funds withheld by ceding
insurance company and future policy benefits................ 657,000 48,000
Stock issued for exercise of options and
related tax benefits........................................ 1,141,000 2,096,000
Stock issued in connection with acquisition.................... 941,000
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements include the consolidated
accounts of Sierra Health Services, Inc. ("Sierra", a holding company,
together with its subsidiaries collectively referred to as the "Company").
The financial statements also include the operations of HMO Texas L.C.
("HMO Texas"). The Company currently owns a 50% interest in HMO Texas and
manages the HMO's operations. HMO Texas has an agreement with a key
employee, however, whereby he may be granted up to a 5% equity interest in
HMO Texas, if certain employment requirements are fulfilled in the future.
This agreement is subject to certain regulatory approvals. All material
intercompany balances and transactions have been eliminated. These
statements have been prepared in conformity with the generally accepted
accounting principles used in preparing the Company's annual audited
consolidated financial statements, but do not contain all of the
information and disclosures that would be required in a complete set of
audited financial statements. They should, therefore, be read in
conjunction with the Company's audited consolidated financial statements
and notes thereto for the years ended December 31, 1994 and 1993. In the
opinion of management, all adjustments, consisting only of recurring
adjustments necessary for a fair statement of the results of operations for
the three and six month periods ended June 30, 1995, have been made.
2. On May 9, 1995, the Company filed a Registration Statement on Form S-4 with
the Securities and Exchange Commission for the listing of 700,000 shares of
its Common Stock, $.005 par value. These shares may be offered, issued and
sold from time to time by the Company in connection with the expansion of
the Company's business through various acquisitions and other business
combinations.
3. On June 13, 1995, the Company and CII Financial, Inc. ("CII") entered into
an Agreement and Plan of Merger, dated as of June 12, 1995, pursuant to
which the Company will acquire CII in a pooling of interests transaction.
As a result of the transaction, each outstanding share of common stock of
CII will be converted into .37 of a share of Sierra common stock, and CII
will become a wholly-owned subsidiary of Sierra. As of June 30, 1995,
approximately 7,203,000 shares of CII common stock were outstanding. The
transaction is subject to shareholder approval, receipt of regulatory
approvals and certain other closing conditions.
CII is a holding company primarily engaged in writing workers' compensation
insurance through its wholly-owned subsidiaries. CII also has two
operating insurance agencies and an insurance premium finance business.
CII writes workers' compensation insurance primarily in the state of
California and also in the states of Colorado, Nebraska, New Mexico and
Utah. The common stock of CII is listed on the American Stock Exchange.
4. In June 1995 Sierra acquired Northern Nevada Health Network ("NNHN"), a
Nevada-based company that provides utilization review services and access
to a preferred provider network for self-insured employer groups. NNHN was
acquired for 36,871 shares of Sierra stock and $73,000 cash.
Page 6
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Amounts in the accompanying Condensed Consolidated Statement of Operations
for the three months and six months ended June 30, 1994 have been
reclassified to conform with the current year presentation.
Page 7
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
-------------
Results of Operations, three months ended June 30, 1995 compared to three months
--------------------------------------------------------------------------------
ended June 30, 1994.
-------------------
The total operating revenues of the Company for the three months ended June
30, 1995 increased 19% to $86.6 million, from $72.7 million for the three months
ended June 30, 1994. The increase was primarily due to premium revenue
increases of $11.6 million, or 17%, from the Company's HMO and insurance
subsidiaries. Such additional premium revenue resulted principally from a 13%
increase in member months (the number of months of each period that an
individual is enrolled in a plan). The Company's HMO and insurance subsidiaries
premium rates increased approximately 4% overall, the increase was primarily due
to slightly higher commercial rates and a 7.5% increase in its capitation rate
for its Medicare members established by the Health Care Financing Administration
("HCFA"). Professional fees increased by $900,000, or 32%, primarily due to the
opening of two new clinics and an increase in the hospice census. The
Company's specialty product revenue increased $200,000, or 6%, primarily due to
an increase in the Company's workers' compensation product enrollment.
Investment and other revenue increased $1.3 million, or 196%, due to increased
invested cash balances from the Company's common stock offering completed in
October, 1994.
Total medical expenses increased by $9.7 million over the same three month
period last year. This 20% increase resulted primarily from the consolidated
member month growth as well as additional staff and other costs to support the
new facilities and increased hospice census discussed above. The medical
expenses as a percentage of premium revenues and professional fees ("Medical
Loss Ratio") increased to 71.9% for the three months ended June 30, 1995,
compared to 70.8% for the same period last year. This is due primarily to the
new medical facilities discussed above and an increase in Medicare members as a
percentage of total members. Medicare enrollees have a higher Medical Loss Ratio
and, accordingly, this results in a higher overall weighted average Medical Loss
Ratio. Specialty product expenses increased $400,000, or 28%, primarily due to
the additional workers' compensation enrollees.
Page 8
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued).
---------------------------------
Results of Operations, three months ended June 30, 1995, compared to three
--------------------------------------------------------------------------
months ended June 30, 1994 (continued).
--------------------------------------
General, administrative and other ("G&A") costs increased $2.5 million, or
19%, compared to the second quarter of 1994. As a percentage of revenues,
however, the G&A costs for the second quarter of 1995 remained relatively
constant at 18% compared to the same period in 1994. Excluding the operations
of HMO Texas, however, G&A as a percentage of revenue in 1995 decreased to
16.7%. The G&A expense includes $1.2 million associated with the operations of
HMO Texas, which became licensed and began marketing during March 1995. The
Company has an agreement to manage the operations of HMO Texas in addition to
its 50% ownership interest. Such operations are included in the accompanying
condensed consolidated financial statements with appropriate adjustments made to
minority interests. The HMO Texas expenses include advertising of $600,000 and
employee compensation of $300,000 as well as other expenses necessary to
generate membership, which was not significant in the second quarter, and to
operate the company.
Excluding the effect of HMO Texas, G&A expense increased approximately $1.3
million, compared to the second quarter of 1994. Compensation expense increased
approximately $700,000 from additional employees supporting expanding services.
Additionally, brokers' fees increased by approximately $300,000 due to member
growth. Advertising and third-party administration fees increased approximately
$200,000 each. These increases were partially offset by smaller net decreases
in other expenses. The Company markets its products primarily to employer
groups and labor unions through its internal sales personnel and independent
insurance brokers. Such brokers receive commissions based on the premiums
received from each group. The Company's agreements with its member groups are
usually for twelve months and are subject to annual renewal. For the fiscal
quarter ended June 30, 1995 the Company's ten largest 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 for that period, the loss of one or more of the larger employer groups
could have a material adverse effect on the Company's business. Interest
expense decreased approximately $100,000 due primarily to the reduction of debt
through scheduled payments.
The Company's effective tax rate for the second quarter of 1995 was 33.5%
compared to 35.2% in the second quarter of 1994. The decrease was due primarily
to increased investments in tax preferred municipal securities.
Net income for the three months ended June 30, 1995, increased
approximately 28% to $7.0 million from $5.5 million for the comparable period in
1994. The approximate $1.5 million increase in earnings was primarily due to
increased operating revenues, consistent G&A expenses as a percentage of
revenues, and a decrease in the effective tax rate. Such decreases were
partially offset by an increased Medical Loss Ratio.
Page 9
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued).
---------------------------------
Results of Operations, six months ended June 30, 1995 compared to six months
----------------------------------------------------------------------------
ended June 30, 1994.
-------------------
The total operating revenues of the Company for the six months ended June
30, 1995 increased 20% to $170.3 million, from $142.1 million for the six months
ended June 30, 1994. The increase was primarily due to premium revenue
increases of $23.7 million, or 18%, from the Company's HMO and insurance
subsidiaries. Such additional premium revenue resulted principally from a 15%
increase in member months. The Company's HMO and insurance subsidiaries premium
rates increased approximately 3% overall, the increase was primarily due to
slightly higher commercial rates and a 7.5% increase in its capitation rate for
its Medicare members established by HCFA. Professional fees increased by $1.8
million, or 30%, primarily due to the opening of two new clinics and an increase
in the hospice census. The Company's specialty product revenue increased
$500,000, or 10% primarily due to an increase in the Company's workers'
compensation product enrollment. Investment and other revenue increased $2.1
million, or 164%, due to increased invested cash balances from the Company's
common stock offering completed in October, 1994.
Total medical expenses increased by $20.0 million over the same six month
period last year. This 21% increase resulted primarily from the consolidated
member month growth as well as the additional staff and other costs to support
the new facilities and increased hospice census discussed above. The Medical
Loss Ratio increased to 72.3% for the six months ended June 30, 1995, compared
to 71.2% for the same period last year. This is due primarily to the new medical
facilities discussed above and an increase in Medicare members as a percentage
of total members. Medicare enrollees have a higher Medical Loss Ratio and,
accordingly, this results in a higher overall weighted average Medical Loss
Ratio. Specialty product expenses increased $600,000, or 24%, primarily due to
the additional workers' compensation enrollees.
Page 10
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued).
---------------------------------
Results of Operations, six months ended June 30, 1995, compared to six months
-----------------------------------------------------------------------------
ended June 30, 1994 (continued).
-------------------------------
G&A costs increased $4.4 million, or 16%, compared to the first six months
of 1994. As a percentage of revenues, however, the G&A costs for the first six
months of 1995 decreased to 18.1% from 18.6% during the comparable period in
1994. The G&A increase includes a $1.0 million charge for certain pre-opening
costs associated with HMO Texas, as well as $1.2 million of G&A expense
associated with the operations of HMO Texas subsequent to the first quarter of
1995 and prior to any significant enrollment. The HMO Texas G&A expenses
include advertising of $600,000 and employee compensation of $300,000 as well as
other expenses necessary to generate membership and operate the company.
Excluding HMO Texas, G&A expense increased $2.2 million during the six months
ended June 30, 1995, compared to the same period in the prior year and G&A as a
percentage of revenue in 1995 decreased to 16.8%. Compensation expense
increased $1.2 million due primarily to additional employees supporting expanded
services. Brokers' fees increased $600,000 due to member growth. The remaining
fluctuation was comprised of smaller increases in third-party administration
fees, advertising and premium taxes due to member and company growth. Interest
expense decreased $200,000 due to the reduction of debt through scheduled
payments.
The Company's effective tax rate for the first six months of 1995 was 33.5%
compared to 35.1% in the first six months of 1994. The decrease was due
primarily to increased investments in tax preferred municipal securities.
Net income for the six months ended June 30, 1995, increased approximately
33% to $13.3 million from $10.0 million for the comparable period in 1994. The
approximate $3.3 million increase in earnings was primarily due to increased
operating revenues, decreased G&A expenses as a percentage of revenues and a
decrease in the effective tax rate. Such decreases were partially offset by an
increased Medical Loss Ratio.
Page 11
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued).
---------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's $19.0 million cash flow from operating activities during the
first six months of 1995 resulted primarily from $13.3 million of net income and
$3.9 million in depreciation and amortization, along with an increase in other
current liabilities of approximately $5.5 million. Such increases in cash were
offset by an approximate $3.7 million net change in other balance sheet
accounts.
The $10.4 million provided by investing and financing activities since
December 31, 1994, consisted principally of a $4.6 million reduction in long-
term securities and of $11.1 million reduction in short-term securities.
Additional sources include $1.4 million received from long-term borrowing and
$2.0 million received pursuant to the exercise of certain outstanding Company
stock options. Cash receipts discussed above were partially offset by
approximately $7.4 million used for capital expenditures net of dispositions and
$1.2 million used for the reduction of debt.
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 insurance subsidiary and HMO subsidiaries are
required by state regulatory agencies to maintain certain deposits and must also
meet certain net worth and reserve requirements. The insurance subsidiary and
both HMO subsidiaries had restricted assets on deposit in various states
totaling $3.1 million as of June 30, 1995. The wholly-owned HMO, HMO Texas and
the insurance subsidiary also meet requirements to maintain minimum
stockholders' equity, on a statutory basis, of $200,000, $500,000 and $3.0
million, respectively. Of the cash and cash equivalents and short-term
securities held at June 30, 1995, $14.8 million is designated for use only by
the insurance subsidiary, another $38.7 million only by the wholly-owned HMO,
and $2.1 million only by HMO Texas. Such amounts are available for transfer to
the holding company from the insurance subsidiary and the HMO subsidiaries only
to the extent that they can be remitted in accordance with terms of existing
management agreements and by dividends. Remaining amounts are available on an
unrestricted basis.
The Company's liquidity needs over the next twelve months will primarily be
for merger related costs, certain new computer equipment, medical equipment and
other items, the acquisition and construction of medical facilities to support
growing membership, debt service and any further expansion of the Company's
operations. During 1994 the Company began construction of a 28,000 square foot
outpatient surgical facility in Las Vegas with an estimated total cost,
including equipment, of $6.5 million. Completion is expected in the third
quarter of 1995.
Page 12
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued).
---------------------------------
LIQUIDITY AND CAPITAL RESOURCES (continued)
In July, 1995, Sierra renewed its unsecured line of credit from PriMerit
Bank, F.S.B., for an additional one year term at an interest rate of prime plus
1%, and increased the available amount to $10.0 million. The line of credit, if
drawn upon, will be used for general corporate purposes and will be available
for additional working capital, if necessary.
The Company believes that existing working capital, operating cash flow
and, if necessary, amounts available under its line of credit will be sufficient
to fund the cash requirements pursuant to the acquisition of CII discussed in
Note 3 to Notes to Condensed Consolidated Financial Statements, its capital
expenditures, debt service and any further expansion activities during the next
twelve months. Additionally, subject to unanticipated cash requirements, the
Company believes that its existing working capital and operating cash flow and,
if necessary, its access to new credit facilities will enable it to meet its
needs on a longer-term basis.
The Company's membership at June 30, 1995 and 1994 was as follows:
Number of Members at Period Ended
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
HMO
Commercial................................. 109,541 102,325
Medicare................................... 21,771 17,320
Managed Indemnity............................ 27,636 25,928
Medicare Supplement.......................... 11,726 5,981
Administrative Services...................... 84,122 61,233
Workers' Compensation Services............... 94,134 74,790
------- -------
Total Members................................ 348,930 287,577
======= =======
</TABLE>
HEALTH CARE REFORM
Numerous proposals relating to healthcare 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 impact such legislation may have on the Company.
Page 13
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued).
---------------------------------
INFLATION
Health care costs generally continue to rise at a rate faster than the
Consumer Price Index. The Company has been able to somewhat lessen the impact
of such inflation by managing medical costs. There can be no assurance,
however, 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 claims or events, which could, in turn, result in
medical cost increases equaling or exceeding premium increases.
Page 14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On or about June 13, 1995, Crandon Capital Partners filed a purported
class action complaint in the Superior Court, Alameda County, California
against CII, certain of its directors and Sierra. The complaint
alleges, among other claims, that, by entering into the Agreement and
Plan of Merger (referred to in Note 3 to the Condensed Consolidated
Financial Statements), CII and its directors breached their fiduciary
duties to CII's shareholders and further alleges that Sierra aided and
abetted such breach. The plaintiff seeks damages, injunctive relief
against the consummation of the transaction, the appointment of a
shareholders' committee to participate in the sale of CII and other
relief. Sierra and the other defendants have filed motions to dismiss
the plaintiff's complaint on the grounds that the plaintiff's sole
remedy is to enforce its dissenter's rights. The motions are scheduled
to be heard by the court in early September 1995.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Sierra held its Annual Meeting of Stockholders on May 16, 1995 in Las
Vegas, Nevada.
The following persons were elected directors for a two year term ending
in 1997 based on the voting results below:
<TABLE>
<CAPTION>
Broker
Name For Against Abstain Non-votes
---- ---------- ------- ------- ---------
<S> <C> <C> <C> <C>
Anthony M. Marlon, M.D. 11,904,701 782,264 0 0
Thomas Y. Hartley 11,904,951 782,014 0 0
</TABLE>
The following persons' terms as directors continued after the meeting
and end in 1996.
Charles L. Ruthe
William J. Raggio
Erin E. MacDonald
Page 15
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders (continued)
---------------------------------------------------------------
The stockholders approved the adoption of the Company's 1995 Long-Term
Incentive Plan.
Broker
For Against Abstain Non-votes
--------- --------- ------- ---------
6,436,533 4,598,199 72,672 1,579,561
The stockholders also approved the adoption of the Company's 1995
Non-Employee Director's Stock Plan.
Broker
For Against Abstain Non-votes
--------- --------- ------- ---------
9,773,570 1,257,897 75,937 1,579,561
The stockholders also ratified the appointment of Deloitte & Touche LLP,
as the Company's independent auditors for the year ending 1995. The
voting results were as follows:
Broker
For Against Abstain Non-votes
---------- --------- ------- ---------
12,032,869 605,544 48,552 0
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(4) Specimen Common Stock Certificate incorporated by reference to
Exhibit (4)(e) to the Company's registration statement on Form
S-8 filed with the Securities and Exchange Commission and
effective August 5, 1994 (Reg. No. 33-82474).
Page 16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K (continued)
--------------------------------------------
(10.1) Modification and renewal agreement dated May 31, 1995, to
the Line of Credit Agreement between Sierra and PriMerit
Bank filed as Exhibit 10.18 to the company's Form 10-K for
the fiscal year ended December 31, 1993.
(10.2) Modification and renewal agreement dated July 6, 1995, to
the Line of Credit Agreement between Sierra and PriMerit
Bank filed as Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended December 31, 1993.
(10.3) Agreement and Plan of Merger dated as of June 12, 1995 among
the Registrant, Health Acquisition Corp., and CII Financial,
Inc., incorporated by reference to the Report on Form 8-K
dated June 13, 1995, as amended.
(11) Computation of earnings per share.
(27) Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K dated June 13, 1995 was filed with the
Securities and Exchange Commission on June 21, 1995, and
amended on June 22, and July 11, 1995, in connection with
the signing of a definitive agreement to acquire CII
Financial, Inc., in a stock-for-stock transaction.
Page 17
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA HEALTH SERVICES, INC.
-------------------------------------
(Registrant)
Date August 11, 1995 /s/ JAMES L. STARR
--------------------- -------------------------------------
Vice President
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
Page 18
<PAGE>
EXHIBIT 10.1
MODIFICATION AGREEMENT
----------------------
This Modification Agreement is entered into this 31st day of May, 1995, by
and between Sierra Health Services, Inc., a Nevada corporation ("Borrower") and
PriMerit Bank, Federal Savings Bank ("Bank").
RECITALS
--------
Borrower and Bank entered into that certain Revolving Credit Loan Agreement
dated May 14, 1993 ("Loan Agreement"), and Borrower executed in favor of Bank
that certain Revolving Credit Demand Note dated May 14, 1993 ("Note"), pursuant
to which Bank extended to Borrower a revolving line of credit in the original
principal amount of Five Million and no/100 dollars ($5,000,000.00).
The Loan Agreement was modified pursuant to the Modification Agreement
dated June 30, 1994.
Borrower and Bank desire to further amend the terms of the Loan Agreement
and Note.
Now therefore, in consideration of the above recitals, the covenants set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
A. The Maturity Date of the Note and Loan Agreement is extended from June
1, 1995 to August 1, 1995. All references to such date in the Note and Loan
Agreement shall reflect this extension.
B. The following sections of the Loan Agreement are amended and fully
restated as follows:
1. (d) Each Advance shall be made pursuant to a telephonic or
written request by James L. Starr, Vice President and Chief Financial
Officer, on behalf of Borrower, in such form and substance acceptable to
Bank. Borrower shall deliver such requests to the Bank at least one (1)
day prior to the date each Advance is requested to be made.
C. To the extent that there is any conflict between the provisions of the
Loan Agreement and Note referred to above and the provisions contained herein,
the provisions of this Modification Agreement shall prevail and the provisions
of the Loan Agreement and Note shall be deemed to be superseded and amended to
that extent. All terms not defined herein shall have the meanings ascribed to
them in the Note and Loan Agreement.
<PAGE>
D. This Modification Agreement is a modification of the Loan Agreement
and Note only, and is not a novation, and except as expressly provided herein to
the contrary, all of the terms and conditions of said Loan Agreement and Note
shall remain in full force and effect.
E. Borrower hereby waives, to the fullest extent such waiver is permitted
by law, the benefit of any statute of limitations in relation to any payment
extensions or renewals in respect to Borrower's obligations under the Loan
Agreement and Note, and agrees that any extensions or renewals or forbearances
with respect to any portion of the obligation evidenced by the Note shall in no
way impair its liability hereunder.
F. This Modification Agreement contains the entire agreement of the
parties hereto, with respect to the subject matter hereof and supersedes any
prior written or oral agreements between them concerning the subject matter
hereof. There are no representations, agreements, arrangements or
understandings, oral or written, between the parties hereto relating to the
subject matter hereof, which are not fully described herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
BANK: BORROWER:
PriMERIT BANK, FEDERAL SIERRA HEALTH SERVICES, INC.
SAVINGS BANK a Nevada corporation
By: BRIAN D. CALL By: JAMES L. STARR
--------------------- -----------------------
Vice President James L. Starr
for: Robert C. Glaser Its: Vice President and
Its: Senior Vice President Chief Financial Officer
<PAGE>
EXHIBIT 10.2
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT is entered into as of the 6th day of July,
1995, by and between Sierra Health Services, Inc., a Nevada corporation,
("Borrower") and PriMERIT Bank, Federal Savings Bank ("Bank").
RECITALS
Borrower and Bank entered into that certain Revolving Credit Loan Agreement
dated May 14, 1993 ("Loan Agreement") and the Revolving Credit Demand Note dated
May 14, 1993 ("Note"), pursuant to which Bank extended to Borrower a revolving
line of credit in the amount of Five Million and no/100 Dollars ($5,000,000.00).
The Loan Agreement and Note were modified pursuant to the terms of the
Modification Agreements dated June 30, 1994 and May 31, 1995.
Borrower and Bank desire to further amend and modify the terms of the Loan
Agreement and Note.
NOW, THEREFORE, in consideration of the above, the covenants set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. The maturity date of the Note and Loan Agreement of August 1, 1995 is
extended to June 5, 1996, at which time all outstanding principal, and all
accrued and unpaid interest and fees/charges shall be fully due and payable.
2. The available Loan amount (the total amount of principal which may be
outstanding at any one time) is increased from Five Million and no/100 Dollars
($5,000,000.00) to Ten Million and no/100 Dollars ($10,000,000.00) and all
references to such amount in the Loan Agreement and Note are amended to reflect
such increase.
3. On the date of the signing of this Agreement, Borrower shall pay Bank
a loan documentation fee in the amount of Twenty Five Thousand and no/100
Dollars ($25,000.00).
4. In the event that Borrower's acquisition of CII Financial, Inc. is
consummated, the following sections of the Loan Agreement shall be deemed fully
amended and restated in the following manner as of the date the acquisition is
consummated:
8(d) Minimum Tangible Net Worth. Borrower will at all times maintain
--------------------------
a consolidated Tangible Net Worth (or comparable capital account),
calculated in accordance with
<PAGE>
generally-accepted accounting principles, of not less than One Hundred
Fifty Million Dollars ($150,000,000.00).
(f) Debt to Worth Ratio. Borrower will maintain at all times during
-------------------
the term of this Agreement a ratio of total liabilities to net worth of not
greater than 2.5:01.
5. To the extent that there is any conflict between the provisions of the
Loan Agreement and Note referred to above and the provisions contained herein,
the provisions of this Modification Agreement shall prevail and the provisions
of the Loan Agreement and Note shall be deemed to be superseded and amended to
that extent.
6. This Modification Agreement is a modification of the Loan Agreement
and Note only, and is not a novation, and except as expressly provided herein to
the contrary, all of the terms and conditions of said Loan Agreement and Note
shall remain in full force and effect.
7. Borrower hereby waives, to the fullest extent such waiver is permitted
by law, the benefit of any statute of limitations in relation to any payment
extensions or renewals in respect to Borrowers obligations under the Loan
Agreement and Note, and agrees that any extensions or renewals or forbearances
with respect to any portion of the obligation evidenced by the Note shall in no
way impair its liability hereunder.
8. This Modification Agreement contains the entire agreement of the
parties hereto, with respect to the subject matter hereof, and supersedes any
prior written or oral agreements between them concerning the subject matter
hereof. There are no representations, agreements, arrangements or
understandings, oral or written, between the parties hereto relating to the
subject matter hereof, which are not fully described herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
BANK: BORROWER:
PriMERIT BANK, FEDERAL SIERRA HEALTH SERVICES, INC.
SAVINGS BANK a Nevada corporation
By:___________________________ By: ___________________________
Brian Call James L. Starr
Its: Vice President Its: Treasurer and Chief
Financial Officer
2
<PAGE>
Address where notices to Address where notices to
Bank are to be sent: Borrower are to be sent:
PriMerit Bank, 2724 N. Tenaya Way
Federal Savings Bank Las Vegas, Nevada 89114-5645
3300 W. Sahara Avenue
Las Vegas, Nevada 89102
Attn: Business Banking
Department
3
<PAGE>
SIERRA HEALTH SERVICES INC AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June June June June
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME................................... $ 7,044,000 $ 5,501,000 $13,291,000 $ 9,976,000
EARNINGS PER COMMON SHARE.................... $ .48 $ .44 $ .91 $ .80
Weighted Average Number
of Common Shares............................ 14,721,000 12,548,000 14,680,000 12,492,000
..........................................................................................................
PRIMARY EARNINGS PER COMMON
SHARE AND COMMON SHARE
EQUIVALENTS................................. $ .47 $ .43 $ .89 $ .78
Weighted Average Number of
Common and Common
Equivalent Shares........................... 14,888,000 12,828,000 14,866,000 12,779,000
.........................................................................................................
FULLY DILUTED PRIMARY EARNINGS
PER COMMON AND COMMON SHARE
EQUIVALENTS................................. $ .47 $ .43 $ .89 $ .78
Weighted Average Number of Common
and Common Equivalent Shares Assuming
Full Dilution............................... 14,891,000 12,828,000 14,870,000 12,792,000
</TABLE>
Note: Common Equivalent Shares represent the incremental effect of
outstanding stock options and stock appreciation rights.
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 46,644,000
<SECURITIES> 96,279,000
<RECEIVABLES> 5,984,000
<ALLOWANCES> 1,951,000
<INVENTORY> 0
<CURRENT-ASSETS> 140,752,000
<PP&E> 95,960,000
<DEPRECIATION> 26,116,000
<TOTAL-ASSETS> 245,986,000
<CURRENT-LIABILITIES> 64,893,000
<BONDS> 18,083,000
<COMMON> 0
0
74,000
<OTHER-SE> 153,004,000
<TOTAL-LIABILITY-AND-EQUITY> 245,986,000
<SALES> 0
<TOTAL-REVENUES> 170,270,000
<CGS> 0
<TOTAL-COSTS> 150,619,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 991,000
<INTEREST-EXPENSE> 761,000
<INCOME-PRETAX> 19,986,000
<INCOME-TAX> 6,695,000
<INCOME-CONTINUING> 13,291,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,291,000
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0
</TABLE>
