- -------------------------------------------------------------------------------
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 September 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
LAS VEGAS, NV
(Address of principal executive offices)
89128
(Zip Code)
(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 November 1, 1995 there were 17,480,000 shares of common
stock outstanding.
- -------------------------------------------------------------------------------
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994................................................. 3
Condensed Consolidated Statements of Operations three and nine
months ended September 30, 1995
and September 30, 1994................................................................... 4
Condensed Consolidated Statements of Cash Flows nine months
ended September 30, 1995
and September 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.......................................................................... 16
Item 2. Changes in Securities...................................................................... 16
Item 3. Defaults Upon Senior Securities............................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders........................................ 16
Item 5. Other Information.......................................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................................... 17
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>
September 30 December 31
1995 1994
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents......................................... $ 53,153,000 $ 17,227,000
Short-term Securities............................................. 63,573,000 87,350,000
Accounts Receivable - Net......................................... 7,883,000 6,571,000
Prepaid Expenses and Other Assets................................. 9,829,000 7,683,000
------------ ------------
Total Current Assets........................................... 134,438,000 118,831,000
------------ ------------
LAND, BUILDINGS AND EQUIPMENT....................................... 101,093,000 88,449,000
Less-Accumulated Depreciation..................................... 27,731,000 22,386,000
------------ ------------
Land, Buildings and Equipment - Net............................ 73,362,000 66,063,000
------------ ------------
OTHER ASSETS:
Funds Withheld by Ceding Insurance Company........................ 9,338,000 10,234,000
Long-term Securities.............................................. 28,416,000 18,824,000
Restricted Cash and Securities.................................... 3,945,000 3,771,000
Other............................................................. 8,289,000 5,527,000
------------ ------------
Total Other Assets............................................. 49,988,000 38,356,000
------------ ------------
TOTAL ASSETS........................................................ $257,788,000 $223,250,000
============ ============
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities.................... $ 10,537,000 $ 6,987,000
Accrued Payroll and Taxes......................................... 10,905,000 8,216,000
Medical Claims Payable............................................ 33,626,000 31,122,000
Unearned Premium Revenue.......................................... 11,617,000 10,637,000
Current Portion of Long-term Debt................................. 6,951,000 2,179,000
------------ ------------
Total Current Liabilities...................................... 73,636,000 59,141,000
FUTURE POLICY BENEFITS.............................................. 9,338,000 10,234,000
LONG-TERM DEBT--LESS CURRENT PORTION................................ 12,708,000 18,409,000
MINORITY INTERESTS.................................................. 358,000 1,094,000
------------ ------------
TOTAL LIABILITIES................................................... 96,040,000 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 - 14,913,000
1994 - 14,677,000............................................. 74,000 73,000
Additional Paid-in Capital........................................ 83,986,000 79,256,000
Treasury Stock 100,200 Common Shares.............................. (130,000) (130,000)
Unrealized Holding Loss on Available-for-Sale Securities ......... (206,000) (1,565,000)
Retained Earnings................................................. 78,024,000 56,738,000
------------ ------------
Total Stockholders' Equity..................................... 161,748,000 134,372,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $257,788,000 $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 Nine Months Ended
September 30 September 30
----------------------------- ------------------------------
1995 1994 1995 1994
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums.................................................... $ 80,592,000 $ 68,955,000 $234,017,000 $198,634,000
Professional Fees........................................... 4,174,000 3,051,000 11,844,000 8,951,000
Specialty Product Revenue................................... 2,905,000 2,533,000 8,625,000 7,730,000
Investment and Other Revenue................................ 1,998,000 793,000 5,453,000 2,103,000
----------- ----------- ------------ ------------
Total .................................................... 89,669,000 75,332,000 259,939,000 217,418,000
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Medical Expenses............................................ 60,073,000 50,907,000 176,563,000 147,426,000
General, Administrative and Other .......................... 16,579,000 13,348,000 47,382,000 39,792,000
Specialty Product Expenses.................................. 1,459,000 1,644,000 4,785,000 4,334,000
------------ ------------ ------------ ------------
Total .................................................... 78,111,000 65,899,000 228,730,000 191,552,000
------------ ------------ ------------ ------------
OPERATING INCOME.............................................. 11,558,000 9,433,000 31,209,000 25,866,000
OTHER INCOME AND EXPENSE:
Minority Interests in Subsidiary Loss (Income).............. 734,000 (36,000) 1,830,000 (96,000)
Interest Expense and Other, Net ........................... (269,000) (481,000) (1,030,000) (1,486,000)
------------ ------------ ------------- -------------
Total .................................................... 465,000 (517,000) 800,000 (1,582,000)
------------ ------------ ------------- -------------
INCOME BEFORE INCOME TAXES ................................... 12,023,000 8,916,000 32,009,000 24,284,000
PROVISION FOR INCOME TAXES.................................... 4,028,000 3,088,000 10,723,000 8,480,000
------------ ------------ ------------- -------------
NET INCOME.................................................... $ 7,995,000 $ 5,828,000 $ 21,286,000 $ 15,804,000
============ ============ ============ =============
EARNINGS PER COMMON SHARE..................................... $ .54 $ .46 $1.45 $1.26
===== ===== ===== =====
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING................................... 14,804,000 12,716,000 14,722,000 12,568,000
</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 Nine Months Ended
Sept. 30 Sept. 30
1995 1994
----------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income.......................................................... $21,286,000 $ 15,804,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization.................................. 6,064,000 5,532,000
Provision for Doubtful Accounts................................ 1,438,000 1,279,000
Other Assets................................................... (2,723,000) 41,000
Minority Interest.............................................. (1,971,000) (45,000)
Changes in Working Capital Accounts:
Accounts Receivable.......................................... (2,650,000) (2,229,000)
Other Current Assets......................................... (2,146,000) (254,000)
Medical Claims Payable....................................... 2,504,000 4,655,000
Other Current Liabilities.................................... 8,490,000 6,327,000
----------- -----------
Net Cash Provided by Operating Activities........................ 30,292,000 31,110,000
----------- -----------
Cash Flows From Investing Activities:
Capital Expenditures................................................ (13,198,000) (9,763,000)
Land, Building and Equipment Dispositions, Net...................... 181,000 438,000
Decrease (Increase) in Short-term Securities........................ 24,775,000 (18,383,000)
Increase in Long-term Securities.................................... (8,508,000) (3,810,000)
Increase in Restricted Cash and Securities.......................... (159,000) (64,000)
Acquisitions, Net......................................... (73,000) (4,000,000)
----------- -----------
Net Cash Provided by (Used for) Investing Activities............. 3,018,000 (35,582,000)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from Long-term Borrowing................................... 1,875,000
Reductions in Debt and Payments
on Capital Leases................................................ (1,758,000) (8,116,000)
Exercise of Stock Options........................................... 2,499,000 4,284,000
----------- -----------
Net Cash Provided by (Used for) Financing Activities............. 2,616,000 (3,832,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents................... 35,926,000 (8,304,000)
Cash and Cash Equivalents at Beginning of Year......................... 17,227,000 23,188,000
----------- -----------
Cash and Cash Equivalents at End of Period............................. $53,153,000 $14,884,000
=========== ===========
<CAPTION>
For the Nine Months Ended
Supplemental condensed consolidated statements of Sept. 30 Sept. 30
cash flows information: 1995 1994
-------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Cash paid during the period for interest
(net of amount capitalized) ........................................ $ 1,100,000 $1,143,000
Cash paid during the period for income taxes........................... 6,600,000 5,600,000
Non cash investing and financing activities:
Liabilities assumed in connection with
acquisition........................................................ 20,000 7,279,000
Additions to capital leases.......................................... 189,000 552,000
Reductions to funds withheld by ceding
insurance company and future policy benefits........................ 896,000 237,000
Stock issued for exercise of options and
related tax benefits................................................ 1,291,000 2,310,000
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. 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 nine-month periods ended September 30, 1995, have
been made.
2. On May 9, 1995, Sierra 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 October 24, 1995, the stockholders of Sierra and CII Financial,
Inc.("CII") approved an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of June 12, 1995, among Sierra, Health
Acquisition Corp, a wholly owned subsidiary of Sierra, and CII,
pursuant to which the Company acquired CII in a pooling of interests
transaction effective at the close of business on October 31, 1995.
As a result of the transaction, each outstanding share of common stock
of CII was converted into .37 of a share of Sierra common stock, and
CII became a wholly-owned subsidiary of Sierra. At October 31,
1995, approximately 7,209,000 shares of CII common stock were
outstanding.
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 was previously listed on the
American Stock Exchange.
4. In October 1995, the Company acquired Mohave Valley Medical Center
("MVMC") along with its related entities which include real estate,
medical services and a preferred provider network which encompasses
Southern Nevada and parts of Arizona. The medical clinic offers
services to residents in the Mohave Valley area of Arizona and
Laughlin, Nevada. The purchase price for MVMC of approximately $11.1
million was paid in cash.
Page 6
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. 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.
6. Amounts in the accompanying Condensed Consolidated Statement of
Operations for the three months and nine months ended September 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 September 30, 1995, compared to three
months ended September 30, 1994.
The total operating revenues of the Company for the three months ended
September 30, 1995, increased 19% to $89.7 million, from $75.3 million for the
three months ended September 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 15%
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 2% overall. The increase was primarily due
to a 7.5% increase in its capitation rate for its Medicare members established
by the Health Care Financing Administration ("HCFA.") Professional fees
increased by $1.1 million, or 37%, primarily due to the opening of two new
clinics and an increase in hospice patients. The Company's specialty product
revenue increased $400,000, or 15%, primarily due to an increase in the
Company's workers' compensation product enrollment. Investment and other revenue
increased $1.2 million due to increased invested cash balances from the
Company's common stock offering completed in October 1994.
Total medical expenses increased by $9.2 million over the same three
month period last year. This 18% increase resulted primarily from the
consolidated member month growth as well as additional staff and other costs to
support the new facilities and increased fee for service business discussed
above. The medical expenses as a percentage of premium revenues and professional
fees ("Medical Loss Ratio") increased to 70.9% for the three months ended
September 30, 1995, compared to 70.7% 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 decreased
$200,000, or 11%, primarily due to a change in the state mandated renewal date
for workers' compensation members, resulting in decreased advertising in the
third quarter of 1995, compared to the corresponding quarter in the prior year.
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 September 30, 1995, compared to three
months ended September 30, 1994 (continued).
General, administrative and other ("G&A") costs increased $3.2 million,
or 24%, compared to the third quarter of 1994. As a percentage of revenues,
however, the G&A costs for the third quarter of 1995 increased to 18.5%,
compared to 17.7% for the same period in 1994. Excluding the operations of HMO
Texas, however, G&A as a percentage of revenue for the three months ended
September 30, 1995, decreased to 17.1%. The G&A expense includes $1.3 million
associated with the operations of HMO Texas, which became licensed and began
marketing during the first quarter of 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 $400,000 as well as other expenses necessary to generate membership and to
operate the company.
Excluding the effect of HMO Texas, G&A expense increased approximately
$1.9 million, compared to the third quarter of 1994. Compensation expense
increased approximately $900,000, from additional employees supporting expanding
services. Additionally, brokers' fees increased by approximately $200,000 due to
member growth. Additional increases in advertising, promotions, and public
relations totalled approximately $200,000. Outside services including
consulting, computer systems maintenance and other increased approximately
$300,000. The remaining fluctuation is comprised primarily of smaller increases
necessary to support the increased membership and staff discussed above. 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 September 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 and other expense decreased approximately
$200,000, due primarily to the reduction of debt through scheduled payments and
prior year losses on the retirement of assets in the corresponding period.
The Company's effective tax rate for the third quarter of 1995 was
33.5%, compared to 34.6% in the third quarter of 1994. The decrease was due
primarily to increased investments in tax-preferred-municipal securities.
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, three months ended September 30, 1995, compared to three
months ended September 30, 1994 (continued).
Net income for the three months ended September 30, 1995, increased
approximately 37% to $8.0 million from $5.8 million for the comparable period in
1994. The approximate $2.2 million increase in earnings was primarily due to
increased operating revenues and a decrease in the effective tax rate. Such
decreases were partially offset by an increased Medical Loss Ratio and an
increase in G&A as a percentage of revenue.
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, nine months ended September 30, 1995, compared to nine
months ended September 30, 1994.
The total operating revenues of the Company for the nine months ended
September 30, 1995, increased 20% to $259.9 million, from $217.4 million for the
nine months ended September 30, 1994. The increase was primarily due to premium
revenue increases of $35.4 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 $2.9
million, or 32%, primarily due to the opening of two new clinics and an increase
in hospice patients. The Company's specialty product revenue increased
$900,000, or 12%, primarily due to an increase in the Company's workers'
compensation product enrollment. Investment and other revenue increased $3.4
million, or 159%, due to increased invested cash balances from the Company's
common stock offering completed in October, 1994.
Total medical expenses increased by $29.1 million over the same nine
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 fee for service business
discussed above. The Medical Loss Ratio increased to 71.8% for the nine months
ended September 30, 1995, compared to 71.0% 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 $500,000, or 10%, primarily due to the additional
workers' compensation enrollees.
Page 11
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued).
Results of Operations, nine months ended September 30, 1995, compared to nine
months ended September 30, 1994 (continued).
G&A costs increased $7.6 million, or 19%, compared to the first nine
months of 1994. As a percentage of revenues, however, the G&A costs for the
first nine months of 1995 decreased slightly to 18.2%, from 18.3% 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 $2.5 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 $1,200,000 and employee compensation of
$900,000, as well as other expenses necessary to generate membership and operate
the company. Excluding HMO Texas, G&A expense increased $4.1 million during the
nine months ended September 30, 1995, compared to the same period in the prior
year and G&A as a percentage of revenue in 1995 decreased to 16.9%. Compensation
expense increased $2.0 million, due primarily to additional employees supporting
expanded services. Brokers' fees and third-party administration fees increased
$900,000 and $400,000, respectively, due to member growth. Advertising and
premium taxes each increased $300,000. The remaining fluctuation is comprised
primarily of smaller increases in other areas necessary to support the increased
membership and staff discussed above. Interest and other expense decreased
$500,000, due to the reduction of debt through scheduled payments and prior year
losses on the retirement of assets in the corresponding period.
The Company's effective tax rate for the first nine months of 1995 was
33.5%, compared to 34.9% in the first nine months of 1994. The decrease was due
primarily to increased investments in tax preferred municipal securities.
Net income for the nine months ended September 30, 1995, increased
approximately 35% to $21.3 million, from $15.8 million for the comparable period
in 1994. The approximate $5.5 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 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
The Company's $30.3 million cash flow from Operating Activities during
the first nine months of 1995 resulted primarily from $21.3 million of net
income and $6.1 million in depreciation and amortization, along with increases
in Medical Claims Payable and Other Current Liabilities of approximately $2.5
million and $8.5 million, respectively. Such increases in cash were offset by an
approximate $8.1 million net decrease in other balance sheet accounts.
The $5.6 million provided by investing and financing activities since
December 31, 1994, consisted principally of a $24.8 million reduction in
short-term securities, $1.9 million received from long-term borrowing and $2.5
million received pursuant to the exercise of certain outstanding Company stock
options. Such proceeds were partially offset by an approximate $8.5 million
increase in long-term securities and $1.8 million used for the reduction of
debt. Additional uses of cash included $13.0 million for net capital
expenditures, including construction of an outpatient surgery facility along
with certain medical and computer equipment.
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 $3.2 million as of September 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 September 30, 1995, $12.9 million is designated for use only
by the insurance subsidiary, another $40.4 million only by the wholly owned HMO,
and $1.3 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 (see Notes 3 and 4 to Notes to Condensed
Consolidated Financial Statements), 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.
Page 13
<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 acquisitions of CII and MVMC
discussed in Notes 3 and 4 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 September 30, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
Sept. 30, 1995 Sept. 30, 1994
-------------- --------------
<S> <C> <C>
HMO
Commercial.................................................. 111,783 102,523
Medicare.................................................... 23,931 18,670
Managed Indemnity............................................. 29,245 25,146
Medicare Supplement........................................... 13,367 7,538
Administrative Services....................................... 88,302 67,740
Workers' Compensation Services................................ 94,734 78,265
------- -------
Total Members................................................. 361,362 299,882
======= =======
</TABLE>
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 impact such legislation may have
on the Company.
Page 14
<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 lessen somewhat 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 15
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
A final judgment dismissing an action challenging Sierra's
acquisition of CII was filed on October 23, 1995. The complaint
alleged, among other claims, that, by entering into the Agreement
and Plan of Merger, CII and its directors breached their
fiduciary duties to CII's stockholders and further alleged that
Sierra aided and abetted such breach. The complaint was reported
in a Form 8-K dated June 13, 1995, filed on June 21 and amended
on June 22, July 11, and November 1, 1995, and in the Quarterly
Report on Form 10-Q for the quarter ended June 30, 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
At a special meeting held on October 24, 1995, the stockholders
approved the Merger Agreement, dated as of June 12, 1995,
providing for the merger of Health Acquisition Corp., a
wholly owned subsidiary of Sierra, with and into CII Financial,
Inc., pursuant to which each share of common stock of CII will be
converted into .37 of a share of common stock, par value $.005
per share, of Sierra (see Note 3 to Notes to Condensed
Consolidated Financial Statements). The voting results were as
follows:
For Against Abstain
---------- ---------- ----------
11,487,607 63,014 66,167
Item 5. Other Information
None
Page 16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(4.1) Specimen Common Stock Certificate incorporated
by reference 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).
(10.1) Compensatory Plans, Contracts and Arrangements.
(1) The Company's 1995 Long-Term Incentive
Plan incorporated by reference to Exhibit
A to the Company's Proxy Statement for the
Annual Meeting of Stockholders on Tuesday,
May 16, 1995.
(2) The Company's 1995 Non-Employee Directors'
Stock Plan incorporated by reference to
Exhibit B to the Company's Proxy Statement
for the Annual Meeting of Stockholders on
Tuesday, May 16, 1995.
(11) Computation of earnings per share
(27) Financial Data Schedule
(b) Reports on Form 8-K
On November 1, 1995, the Company filed an amendment to a Form
8-K dated June 13, 1995, originally filed on June 21, 1995,
and previously amended on June 22, and July 11, 1995. The
amendment disclosed the approval of the Agreement and Plan of
Merger by the stockholders of both CII and the Company.
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 November 13, 1995 /S/ JAMES L. STARR
------------------------- ---------------------
James L. Starr
Vice President
Chief Financial Officer
and Treasurer
(Chief Accounting Officer)
Page 18
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
EXHIBIT 11
<CAPTION>
Three Months Ended Nine Months Ended
September September September September
1995 1994 1995 1994
<S> <C> <C> <C> <C>
NET INCOME................................................ $7,995,000 $5,828,000 $21,286,000 $15,804,000
EARNINGS PER COMMON SHARE................................. $.54 $.46 $1.45 $1.26
Weighted Average Common Shares
Outstanding.............................................. 14,804,000 12,716,000 14,722,000 12,568,000
PRIMARY EARNINGS PER COMMON
SHARE AND COMMON SHARE
EQUIVALENTS.............................................. $.54 $.45 $1.43 $1.23
Weighted Average Common and Common
Equivalent Shares Outstanding............................ 14,941,000 12,927,000 14,897,000 12,820,000
FULLY DILUTED PRIMARY EARNINGS
PER COMMON AND COMMON
SHARE EQUIVALENTS........................................ $.54 $.45 $1.43 $1.23
Weighted Average Common and Common
Equivalent Shares Outstanding Assuming
Full Dilution............................................ 14,944,000 12,927,000 14,902,000 12,831,000
</TABLE>
Note: Common Equivalent Shares represent the incremental effect of
outstanding stock options and stock appreciation rights.
<TABLE> <S> <C>
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 53,153,000
<SECURITIES> 95,934,000
<RECEIVABLES> 7,883,000
<ALLOWANCES> 1,838,000
<INVENTORY> 0
<CURRENT-ASSETS> 134,438,000
<PP&E> 101,093,000
<DEPRECIATION> 27,731,000
<TOTAL-ASSETS> 257,788,000
<CURRENT-LIABILITIES> 73,636,000
<BONDS> 12,708,000
<COMMON> 74,000
0
0
<OTHER-SE> 161,674,000
<TOTAL-LIABILITY-AND-EQUITY> 257,788,000
<SALES> 0
<TOTAL-REVENUES> 259,939,000
<CGS> 0
<TOTAL-COSTS> 228,730,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,438,000
<INTEREST-EXPENSE> 1,030,000
<INCOME-PRETAX> 32,009,000
<INCOME-TAX> 10,723,000
<INCOME-CONTINUING> 21,286,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,286,000
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 0
</TABLE>
