- -------------------------------------------------------------------------------
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, 1996.
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 89128
(Address of principal executive offices) (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 October 31,1996 there were 17,789,000 shares of common stock outstanding.
- -------------------------------------------------------------------------------
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
INDEX
Page No.
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995.......... 3
Condensed Consolidated Statements of Operations -
three and nine months ended September 30, 1996
and September 30, 1995............................ 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 1996
and September 30, 1995............................ 5
Notes to Condensed Consolidated
Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 7
Part II - OTHER INFORMATION
Item l. Legal Proceedings................................... 14
Item 2. Changes in Securities............................... 14
Item 3. Defaults Upon Senior Securities..................... 14
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 14
Item 5. Other Information................................... 14
Item 6. Exhibits and Reports on Form 8-K.................... 14
Signature............................................................. 15
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
1996 1995
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents......................................... $ 73,691,000 $ 57,044,000
Short-term Securities............................................. 89,782,000 72,579,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts: 1996 - $5,722,000; 1995 - $5,000,000)............... 23,348,000 21,723,000
Prepaid Expenses and Other Assets................................. 36,077,000 24,071,000
Total Current Assets........................................... 222,898,000 175,417,000
LAND, BUILDINGS AND EQUIPMENT....................................... 131,767,000 122,725,000
Less-Accumulated Depreciation..................................... (37,717,000) (31,549,000)
Land, Buildings and Equipment - Net............................ 94,050,000 91,176,000
OTHER ASSETS:
Long-term Securities.............................................. 196,810,000 234,698,000
Restricted Cash and Securities.................................... 12,959,000 12,482,000
Reinsurance Recoverable (Less Current Portion) ................... 17,697,000 24,952,000
Other............................................................. 35,100,000 36,421,000
Total Other Assets............................................. 262,566,000 308,553,000
TOTAL ASSETS........................................................ $579,514,000 $575,146,000
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities.................... $ 35,953,000 $ 35,750,000
Medical Claims Payable............................................ 34,776,000 37,463,000
Current Portion of Reserves for Losses and
Loss Adjustment Expense ....................................... 51,942,000 54,679,000
Unearned Premium Revenue.......................................... 13,155,000 22,260,000
Current Portion of Long-term Debt................................. 2,178,000 7,108,000
Total Current Liabilities...................................... 138,004,000 157,260,000
RESERVES FOR LOSSES AND LOSS ADJUSTMENT
EXPENSE (Less Current Portion) ................................... 136,672,000 127,639,000
LONG-TERM DEBT (Less Current Portion)............................... 66,612,000 71,257,000
OTHER LIABILITIES................................................... 11,976,000 11,275,000
TOTAL LIABILITIES................................................... 353,264,000 367,431,000
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: 1996 - 17,889,000
1995 - 17,677,000............................................. 89,000 88,000
Additional Paid-in Capital........................................ 151,662,000 147,240,000
Treasury Stock 100,200 Common Shares.............................. (130,000) (130,000)
Unrealized Holding Gain (Loss) on
Available-for-Sale Securities ................................ (671,000) 9,659,000
Retained Earnings................................................. 75,300,000 50,858,000
Total Stockholders' Equity..................................... 226,250,000 207,715,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $579,514,000 $575,146,000
</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
1996 1995 1996 1995
OPERATING REVENUES:
<S> <C> <C> <C> <C>
Medical Premiums.......................................... $ 97,480,000 $ 80,592,000 $281,516,000 $234,017,000
Specialty Product Revenue................................. 34,644,000 24,259,000 98,931,000 71,016,000
Professional Fees......................................... 7,498,000 4,174,000 22,793,000 11,844,000
Investment and Other Revenue.............................. 6,623,000 6,591,000 20,379,000 18,754,000
Total .................................................. 146,245,000 115,616,000 423,619,000 335,631,000
OPERATING EXPENSES:
Medical Expenses.......................................... 79,528,000 60,073,000 229,345,000 176,563,000
Specialty Product Expenses................................ 34,025,000 24,534,000 98,208,000 71,657,000
General, Administrative and Other ........................ 18,305,000 16,579,000 52,784,000 47,382,000
Restructuring and Integration Expenses ................... 8,250,000 8,250,000
Total .................................................. 140,108,000 101,186,000 388,587,000 295,602,000
OPERATING INCOME............................................ 6,137,000 14,430,000 35,032,000 40,029,000
OTHER INCOME AND EXPENSE:
Minority Interests in Subsidiary Loss .................... 615,000 734,000 1,568,000 1,830,000
Interest Expense and Other, Net ......................... (1,330,000) (1,437,000) (3,924,000) (4,652,000)
Total .................................................. (715,000) (703,000) (2,356,000) (2,822,000)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ...................................... 5,422,000 13,727,000 32,676,000 37,207,000
PROVISION FOR INCOME TAXES.................................. 1,355,000 4,028,000 8,234,000 9,973,000
INCOME FROM CONTINUING OPERATIONS .......................... 4,067,000 9,699,000 24,442,000 27,234,000
NET OPERATING LOSS ON
DISCONTINUED OPERATIONS .................................. 2,010,000
NET LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS .................................. ________ ________ ________ 4,590,000
NET INCOME.................................................. $ 4,067,000 $ 9,699,000 $ 24,442,000 $ 20,634,000
EARNINGS PER SHARE
Income from Continuing Operations ........................ $.23 $.56 $1.38 $1.57
Net Operating Loss on Discontinued
Operations ............................................ .12
Net Loss on Disposal of
Discontinued Operations ............................... .26
Earnings Per Share ...................................... $.23 $.56 $1.38 $1.19
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING................................. 17,775,000 17,470,000 17,703,000 17,384,000
</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
September 30 September 30
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income........................................................... $24,442,000 $20,634,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization..................................... 7,781,000 6,718,000
Provision for Doubtful Accounts................................... 2,044,000 585,000
Effect from Discontinued Operations .............................. 2,595,000
Changes in Assets and Liabilities ................................... (11,488,000) (3,783,000)
Net Cash Provided by Operating Activities ........................ 22,779,000 26,749,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures................................................. (11,295,000) (13,335,000)
Land, Building and Equipment Dispositions, Net....................... 133,000 185,000
Changes in Short-term Securities..................................... (17,024,000) 52,506,000
Changes in Long-term Securities...................................... 26,986,000 (42,516,000)
Changes in Restricted Cash and Securities............................ (327,000) 14,000
Other ............................................................... 2,355,000
Net Cash Used for Investing Activities............................ (1,527,000) ( 791,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-term Borrowings................................... 1,000,000 1,875,000
Payments on Debt and Capital Leases.................................. (8,964,000) (2,758,000)
Exercise of Stock in Connection with Stock Plans..................... 3,359,000 2,576,000
Net Cash (Used for) Provided by Financing Activities.............. (4,605,000) 1,693,000
NET INCREASE IN CASH
AND CASH EQUIVALENTS................................................. 16,647,000 27,651,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... 57,044,000 38,045,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $73,691,000 $65,696,000
For the Nine Months Ended
Supplemental Condensed Consolidated September 30 September 30
Statements of Cash Flows Information: 1996 1995
Cash Paid During the Period for Interest
(Net of Amount Capitalized).......................................... $5,199,000 $5,836,000
Cash Paid During the Period for Income Taxes........................... 6,940,000 6,907,000
Non-cash Investing and Financing Activities:
Reductions to Funds Withheld by Ceding
Insurance Company and Future Policy Benefits...................... 692,000 896,000
Additions to Capital Leases ......................................... 189,000
Tax Benefits of Stock Issued for Exercise of Options ................ 1,065,000 1,291,000
</TABLE>
See accompanying 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"). As of September 30, 1996
the Company owned a 50% interest in HMO Texas and manages the HMO's
operations. HMO Texas has an agreement with a key employee whereby he
may be granted up to a 5% equity interest in HMO Texas if certain
employment requirements are fulfilled in the future. In October 1996
the Company agreed to acquire full ownership of HMO Texas for $5.0
million. 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, 1995 and 1994. 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, 1996, have been made.
2. On October 31, 1995, the Company issued approximately 2.7 million
shares of its common stock in exchange for all of the outstanding stock
of CII Financial, Inc. ("CII"). The merger was accounted for as a
pooling of interests and, accordingly, the Company's consolidated
financial statements have been restated to include the accounts and
operations of CII for all periods prior to the merger.
3. In April, 1996, Sierra obtained a $50.0 million unsecured line of
credit from Bank of America National Trust & Savings Association for a
term of five years at an interest rate indexed from the London
InterBank Offering Rate ("LIBOR") plus 32 basis points. Such rate would
have been 5.905% at September 30, 1996 if the line of credit had been
drawn upon. The line of credit may be used for general corporate
purposes, including acquisitions, and may be available for additional
working capital, if necessary.
4. As previously announced on November 4, 1996, the Company has proposed a
merger with Physician Corporation of America ("PCA") by merger,
providing for the exchange of .45 share of Sierra's common stock for
each share of PCA common stock.
5. Amounts in the accompanying Condensed Consolidated Statement of
Operations for the three months and nine months ended September 30,
1995 have been reclassified to conform with the current year
presentation.
Page 6
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant for assessment and understanding of the
Company's consolidated financial condition and results of operations. The
discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and Related Notes thereto. Any forward-looking information
contained in this Management's Discussion and Analysis of Financial Condition
and Results of Operations should be considered in connection with certain
cautionary statements contained in the Company's Current Report on Form 8-K
filing dated March 4, 1996. Such cautionary statements are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and identify important risk factors that could cause the Company's actual
results to differ from those expressed in any projected, estimated or
forward-looking statements relating to the Company.
On October 31, 1995, the Company acquired CII, a workers' compensation
insurance company, for approximately $76.3 million of common stock in a
transaction accounted for as a pooling of interests. The information contained
in this discussion and analysis has been restated to include the results of CII.
Results of Operations, three months ended September 30, 1996, compared to three
months ended September 30, 1995
The Company's total operating revenues for the three months ended
September 30, 1996 increased 26.5% to $146.2 million, from $115.6 million for
the three months ended September 30, 1995. The increase was primarily due to
medical premium revenue increases of $16.9 million, or 21.0%, from the Company's
HMO and managed indemnity insurance subsidiaries. Such additional premium
revenue resulted principally from a 19.4% 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 slightly
overall, primarily due to a small increase in its capitation rate for its
Medicare members as established by the Health Care Finance Administration
("HCFA"). The Company realized minimal rate changes for the HMO subsidiaries'
commercial groups and the managed indemnity subsidiary. Specialty product
revenue increased $10.4 million, or 42.8%, in the three months ended September
30, 1996, compared to the same three-month period in the prior year. The
increase was due to specialty product revenue growth in the workers'
compensation insurance market. Professional fee revenue increased by $3.3
million, or 79.6%, due primarily to the acquisition of a medical facility in
October 1995. Investment and other revenue increased slightly from the
comparable period in the prior year.
Total medical expenses increased by $19.5 million over the same
three-month period last year. This 32.4% increase resulted primarily from the
consolidated member month growth discussed previously as well as clinical
expansions and increases associated with professional fee growth. These factors,
as well as an increase in Medicare members as a percentage of fully-insured
members, resulted in an increase in medical expenses as a percentage of medical
premiums and professional fees ("Medical Loss Ratio") from 70.9% to 75.8%. The
cost of providing medical care to Medicare members generally requires a greater
percentage of the premiums received. Specialty product expenses increased $9.5
million, or 38.7%, primarily due to the 42.8% increase in specialty product
revenue discussed previously. Specialty product revenue and expense is primarily
related to the workers' compensation insurance business.
Page 7
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, three months ended September 30, 1996, compared to three
months ended September 30, 1995 (continued)
The combined ratio for the workers' compensation insurance business was
104.4% compared to 108.1% for the same period in the prior year. The decrease in
the combined ratio is due primarily to a 14.7% decrease in the operating expense
ratio partially offset by an 11.0% increase in the loss ratio. The higher loss
ratio was impacted by the effects of the reduction in premium rates from the
competitive open rating environment in California. The incurred losses for the
current accident year were partially offset by the Company's ability to overlay
and implement managed care techniques to the workers' compensation claims as
well as favorable loss development in California on prior accident years
totaling $3.4 million compared to favorable loss development of $4.8 million for
the comparable prior year period. The loss and loss adjustment expense ratio for
the three months ended September 30, 1996 reflects the Company's current
projection of the ultimate costs of claims occurring in the current as well as
prior accident years and is within the range of reserves recommended by the
Company's independent consulting actuary. Workers' compensation claims are paid
over several years. Until payment is made, the Company invests the monies,
earning a yield on the invested balance.
General, administrative and other ("G&A") costs increased $1.7 million,
or 10.4%, compared to the third quarter of 1995. As a percentage of revenues,
however, G&A costs for the third quarter of 1996 decreased to 12.5% from 14.3%
during the comparable period in 1995. Of the $1.7 million increase in G&A,
$400,000 consisted of increased compensation expense resulting primarily from
additional employees supporting expanded services. Broker, third-party
administration and premium tax expenses increased approximately $1.0 million due
to increased membership. Additional increases in other G&A costs were offset by
savings in advertising, promotion, and public relations costs. The Company
markets its products primarily to employer groups, labor unions and individuals
enrolled in Medicare, 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 quarter
ended September 30, 1996 the Company's ten largest commercial HMO employer
groups were, in the aggregate, responsible for less than 15% of its total
revenues. Although none of such employer groups accounted for more than 3% of
total revenues for that period, the loss of one or more of the larger employer
groups could, if not replaced with similar membership, have a material adverse
effect on the Company's business.
In the third quarter of 1996, the Company recorded expenses of $8.3
million for the restructuring and integration of certain insurance operations in
California, Arizona, and Colorado. Consolidation of these operations will
improve operating efficiencies and allow the Company to focus more on its core
operating markets.
Excluding the effect of the restructure and integration costs,
operating income for the three months ended September 30, 1996 remained
consistent with the three months ended September 30, 1995. Increases in
operating revenues were offset by corresponding increases in operating expenses.
Net income decreased by $5.6 million, primarily due to the restructuring and
integration expenses offset by a $2.7 million decrease in the provision for
income taxes. The decrease in the effective tax rate from 29.3% to 25.0%
resulted from the Company's investment in tax-preferred investments and the
change in the deferred tax valuation allowance which is due primarily to the
ability to use a portion of net operating loss carryovers.
Page 8
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, nine months ended September 30, 1996, compared to nine
months ended September 30, 1995
The Company's total operating revenues for the nine months ended
September 30, 1996 increased 26.2% to $423.6 million, from $335.6 million for
the nine months ended September 30, 1995. The increase was primarily due to
medical premium revenue increases of $47.5 million, or 20.3%, from the Company's
HMO and managed indemnity insurance subsidiaries. Such additional premium
revenue resulted principally from a 19.1% increase in member months for the
period. The Company's HMO and managed indemnity insurance subsidiaries' premium
rates increased slightly, primarily due to a small increase in its capitation
rate for its Medicare members established by HCFA. The Company realized minimal
rate changes for the HMO subsidiaries' commercial groups and the managed
indemnity subsidiary. Specialty product revenue increased $27.9 million, or
39.3%, in the nine months ended September 30, 1996 compared to the same
nine-month period in the prior year. The increase was primarily due to specialty
product revenue growth in the workers' compensation insurance market and a
$500,000 increase in specialty product revenue relating to administrative
services for the nine months ended September 30, 1996, compared to the same
nine-month period in the prior year. Professional fees increased by $10.9
million, or 92.4%, primarily due to the acquisition of a medical facility in
October 1995. Investment and other revenue increased $1.6 million, or 8.7%, due
to certain investment gains recognized in the first six months of 1996, as well
as an overall increase in the balance of invested funds.
Total medical expenses increased by $52.8 million over the same
nine-month period last year. This 29.9% increase resulted primarily from the
consolidated member month growth discussed previously as well as clinical
expansions and increases associated with professional fee growth. These factors,
as well as an increase in Medicare members as a percentage of fully-insured
members, resulted in an increase in the Medical Loss Ratio from 71.8% to 75.4%.
The cost of providing medical care to Medicare members generally requires a
greater percentage of the premium received. Specialty product expenses increased
$26.6 million, or 37.1%, due primarily to the 39.3% increase in specialty
product revenue discussed previously. Specialty product revenue and expense is
primarily related to the workers' compensation insurance business.
The combined ratio for the workers' compensation insurance business was
104.7% for the first nine months of 1996 compared to 107.2% for the same period
in the prior year. The decrease in the combined ratio is due primarily to a
15.6% decrease in the operating expense ratio partially offset by a 13.2%
increase in the loss ratio. The increase in the loss and loss adjustment expense
ratio is primarily attributable to a higher loss ratio for the current accident
year. The higher loss ratio was impacted by the effects of the reduction in
premium rates from the competitive open rating environment in California. The
incurred losses for the current accident year were partially offset by the
Company's ability to overlay and implement managed care techniques to the
workers' compensation claims, as well as favorable loss development on prior
accident years totaling $10.5 million compared to favorable loss development of
$15.6 million for the comparable prior year period. The loss and loss adjustment
expense ratio for the nine months ended September 30, 1996 reflects the
Company's current projection of the ultimate costs of claims occurring in the
current as well as prior accident years and is within the range of reserves
recommended by the Company's independent consulting actuary. Workers'
compensation claims are paid over several years. Until payment is made, the
Company invests the monies, earning a yield on the invested balance.
Page 9
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, nine months ended September 30, 1996, compared to nine
months ended September 30, 1995 (continued)
G&A costs increased $5.4 million, or 11.4%, compared to the first nine
months of 1995. As a percentage of revenues, however, G&A costs for the first
nine months of 1996 decreased to 12.5% from 14.1% during the comparable period
in 1995. Of the $5.4 million increase in G&A, $2.4 million consisted of
compensation expense resulting primarily from additional employees supporting
expanded services. Broker, third-party administration, and premium tax expenses
increased approximately $2.4 million due to increased membership. Additional
increases in other G&A costs were partially offset by savings in advertising
expense. 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 nine months ended September 30, 1996
the Company's ten largest commercial HMO employer groups were, in the aggregate,
responsible for less than 15% of its total revenues. Although none of such
employer groups accounted for more than 3% of total revenues for that period,
the loss of one or more of the larger employer groups could, if not replaced
with similar membership, have a material adverse effect on the Company's
business. Interest and other expense decreased approximately $700,000 due
primarily to the reduction of debt.
In the third quarter of 1996, the Company recorded expenses of $8.3
million for the restructuring and integration of certain insurance operations in
California, Arizona, and Colorado. Consolidation of these operations will
improve operating efficiencies and allow the Company to focus more on its core
operating markets.
The Company's effective tax rate for the nine months ended September
30, 1996 was approximately 25.2% compared to 26.8% for the same period in 1995.
Such tax rates are the result of the Company's investment in tax preferred
investments and the change in the deferred tax valuation allowance which is due
primarily to the ability to use a portion of net operating loss carryovers.
Excluding the effect of the restructure and integration costs,
operating income increased approximately $3.3 million for the nine months ended
September 30, 1996 compared to the same period of the prior year. The increase
was due primarily to increased operating revenues, and decreased G&A expenses as
a percentage of revenues, partially offset by an increase in the medical loss
ratio. Net income for the nine-month period increased $3.8 million primarily due
to the reasons discussed above, offset by $8.3 million of expenses relating to
integration and restructuring of the insurance operations in California,
Arizona, and Colorado. In addition, CII sold its interest in an unprofitable
subsidiary during 1995 resulting in a net loss on the operations and disposal of
the subsidiary of approximately $6.6 million in the nine months ended September
30, 1995.
Page 10
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
During 1996, the Company's working capital increased $66.7 million to
$84.9 million. The primary source of cash during this nine-month period was
operations.
The Company's cash flow from operating activities during the nine
months ended September 30, 1996 resulted primarily from $24.4 million of net
income and $7.8 million in depreciation and amortization. This source of cash
was offset by a $9.4 million net change in assets and liabilities, excluding
cash and cash equivalents. The decrease in cash which resulted from the change
in operating assets and liabilities was primarily due to the change in unearned
revenue and other current assets, as well as net accounts receivable. These
decreases in cash were partially offset by increases in the reserve for losses
and loss adjustment expense and a decrease in the reinsurance recoverable.
The $6.1 million used for investing and financing activities since
December 31, 1995 primarily consisted of $11.3 million in net capital
expenditures including construction costs associated with medical facilities,
office facilities, computer and medical equipment, and other capital needs to
support the Company's growth offset by a $9.6 million net decrease in
investments. Additionally, $9.0 million used for the reduction of debt was
offset in part by $3.4 million received in connection with the purchase of stock
through the Company's stock plans, as well as $1.0 million from borrowings.
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 $13.0 million, as of
September 30, 1996. The HMO and insurance subsidiaries must also meet
requirements to maintain minimum capital and surplus on a statutory basis,
ranging from $200,000 to $5.2 million. Of the cash and cash equivalents held at
September 30, 1996, $59.9 million is designated for use only by the regulated
subsidiaries. Such amounts are available for transfer to the holding company
from the HMO and insurance subsidiaries only to the extent that they can be
remitted in accordance with terms of existing management agreements and by
dividends. Remaining amounts are available on an unrestricted basis. The holding
company will not receive dividends from its regulated subsidiaries if such
dividend payment would cause violation of statutory net worth and reserve
requirements.
The Company is part of a consortium of managed care companies that
submitted a bid to CHAMPUS for Regions 7 and 8. In June 1996, the consortium
received notification that it had been awarded the contract.
The Company has submitted an initial response to the government's
request for proposal for providing managed health care services to the 665,000
CHAMPUS eligibles living in 12 northeastern states plus the District of Columbia
that comprise Region 1. The Company expects final notification of its bid
results in the first quarter of 1997. The Company expects to incur total
expenses of approximately $7 million during the proposal process for the
contract.
Page 11
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
In April, 1996, Sierra obtained a $50.0 million unsecured line of
credit from Bank of America National Trust & Savings Association for a term of
five years at an interest rate equal to the LIBOR plus 32 basis points. Such
rate would have been 5.905% at September 30, 1996 if the line of credit had been
drawn upon. The line of credit may be used for general corporate purposes,
including acquisitions, and may be available for additional working capital, if
necessary.
In September 1991, CII issued convertible subordinated debentures (the
"Debentures") due September 15, 2001. The Debentures bear interest at 7 1/2%
which is due semi-annually on March 15 and September 15. Each $1,000 in
principal is convertible into 16.921 shares of the Company's common stock at a
conversion price of $59.097 per share. The Debentures are general unsecured
obligations of CII only and were not guaranteed by Sierra. During the nine
months ended September 30, 1996 Sierra purchased $2,303,000 of the Debentures on
the open market.
The Company has a 1996 capital budget of approximately $25.0 million,
primarily for the construction of a new 59,000 square-foot medical facility,
computer hardware and software, furniture and equipment, and other requirements
needed for the Company's projected growth and expansion. Completion of the
medical facility is expected in the first half of 1997 at an estimated cost of
$7.3 million. In addition, in the third quarter of 1996 the Company broke ground
on a six-story office building and a five-story parking structure on land
contiguous to the existing administrative headquarters and other Company-owned
buildings in northwest Las Vegas. Construction is scheduled for completion in
late 1997 at an estimated cost of $29 million, exclusive of the cost of the
land. The land was purchased for approximately $2.0 million in December 1995.
The Company anticipates financing the building through a leasing arrangement.
The Company's liquidity needs over the next 12 months will primarily be
for capital items to support growing membership, as well as debt service and
expansion of the Company's operations, including acquisition and integration.
Subject to significant unanticipated cash requirements, the Company
believes that its existing working capital and operating cash flow and, if
necessary, its access to new credit facilities, will enable it to meet its
liquidity needs on a longer term basis.
Page 12
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Membership
The Company's membership at September 30, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
September 30 September 30
1996 1995
HMO
<S> <C> <C>
Commercial.................................................. 127,329 111,783
Medicare.................................................... 28,539 23,931
Managed Indemnity............................................. 34,940 29,245
Medicare Supplement........................................... 20,937 13,367
Administrative Services....................................... 291,754 183,036
Total Members................................................. 503,499 361,362
</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 effect such legislation may have on
the Company.
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,
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
continuing to equal or exceed premium increases.
Page 13
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of earnings per share
(27) Financial Data Schedule
(99) Press Release announcing the merger of
Sierra Health Services, Inc. with
Physician Corporation of America
(b) Reports on Form 8-K
None
Page 14
<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 14, 1996 /S/ JAMES L. STARR
James L. Starr
Vice President
Chief Financial Officer
and Treasurer
(Chief Accounting Officer)
Page 15
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September September September
1996 1995 1996 1995
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
NET INCOME................................................ $4,067,000 $9,699,000 $24,442,000 $20,634,000
EARNINGS PER COMMON SHARE................................. $.23 $.56 $1.38 $1.19
Weighted Average Common Shares
Outstanding.............................................. 17,775,000 17,470,000 17,703,000 17,384,000
PRIMARY EARNINGS PER COMMON
SHARE AND COMMON SHARE
EQUIVALENT............................................... $.23 $.54 $1.35 $1.17
Weighted Average Common and Common
Equivalent Shares Outstanding............................ 18,154,000 17,824,000 18,167,000 17,692,000
FULLY DILUTED EARNINGS
PER COMMON AND COMMON
SHARE EQUIVALENT......................................... $.22 $.54 $1.34 $1.16
Weighted Average Common and Common
Equivalent Shares Outstanding Assuming
Full Dilution............................................ 18,260,000 17,838,000 18,224,000 17,791,000
</TABLE>
Note: Common Equivalent Shares represent the incremental effect of
outstanding stock options and stock appreciation rights.
<PAGE>
<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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 73,691,000
<SECURITIES> 299,551,000
<RECEIVABLES> 29,070,000
<ALLOWANCES> 5,722,000
<INVENTORY> 0
<CURRENT-ASSETS> 222,898,000
<PP&E> 131,767,000
<DEPRECIATION> 37,717,000
<TOTAL-ASSETS> 579,514,000
<CURRENT-LIABILITIES> 138,004,000
<BONDS> 66,612,000
0
0
<COMMON> 89,000
<OTHER-SE> 226,161,000
<TOTAL-LIABILITY-AND-EQUITY> 579,514,000
<SALES> 0
<TOTAL-REVENUES> 423,619,000
<CGS> 0
<TOTAL-COSTS> 388,587,000
<OTHER-EXPENSES> 1,568,000 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,924,000
<INCOME-PRETAX> 32,676,000
<INCOME-TAX> 8,234,000
<INCOME-CONTINUING> 24,442,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,442,000
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 0.00
<FN>
<F1>MINORITY INTERESTS IN SUBSIDIARY LOSS
</FN>
</TABLE>
EXHIBIT 99
SIERRA HEALTH SERVICES, INC.(R)
ALL THE BENEFITS OF GOOD HEALTH.SM
PRESS RELEASE
SIERRA CONTACTS: PCA CONTACTS:
James L. Starr, Vice President and CFO David K. Barker
(702) 242-7112 Director of Investor Relations
Ria Marie Carlson, Vice President, (305) 265-2921
Public & Investor Relations http://www.pcam.com
(702) 242-7156
SIERRA HEALTH SERVICES ANNOUNCES MERGER WITH
PHYSICIAN CORPORATION OF AMERICA
LAS VEGAS, November 4, 1996 -- Sierra Health Services, Inc. (NYSE: SIE)
announced today it has signed a definitive agreement to merge with Physician
Corporation of America (NASDAQ: PCAM), a managed health care company with
operations in Florida, Texas and Puerto Rico. The merger is expected to close by
March 31, 1997, pending normal shareholder and regulatory approvals.
The combined company will generate more than $2 billion in annual
revenues and serve nearly 1.5 million people in 18 states and Puerto Rico,
becoming the nation's eighth largest publicly traded managed care company.
Under the terms of the agreement, which will be accounted for as a
tax-free pooling of interests, each Physician Corporation of America (PCA)
shareholder will receive 0.45 shares of Sierra Health Services, Inc. (Sierra)
stock for every PCA share held. The combined company will be named Sierra Health
Services, Inc., with national headquarters in Las Vegas.
MORE ...
<PAGE>
Sierra Health Services, Inc. - Page 2
"This merger represents an excellent strategic opportunity for Sierra
to gain a strong multi-state presence," said Anthony M. Marlon, M.D., Chairman
and Chief Executive Officer. "We will be able to substantially broaden our
existing service area in Texas, and become one of the market leaders in Florida
and Puerto Rico."
Marlon said that PCA, which has over 468,000 commercial & Medicare
members, is also "a leading Medicaid provider in each of its respective markets,
which really complements our experience with Medicare and CHAMPUS."
Stanley Kardatzke, M.D., Chairman and Chief Executive Officer of PCA,
added, "Sierra is an excellent merger partner for PCA. They are financially
solid and operationally provide a wealth of experience. In addition, the two
companies have similar cultures, with expertise in government programs and the
direct delivery of care through medical groups."
Dr. Kardatzke will become Chairman of the Board of the combined
organization, while Dr. Marlon will be Vice Chairman of the Board and Chief
Executive Officer. Erin MacDonald who currently serves as President and Chief
Operating Officer of Sierra will remain in those positions. The eight member
board of directors of the combined company will consist of Sierra's current
five-member board, plus three members appointed by PCA.
"While there is minimal geographic overlap between the two
companies," Dr. Marlon said, "we expect to realize operating efficiencies
through the consolidation of corporate and administrative functions. We are also
excited about the opportunities presented by creatively combining our workers'
compensation functions."
MORE ...
<PAGE>
Sierra Health Services, Inc. - Page 3
PCA, founded in 1985 and headquartered in Miami, provides comprehensive
health care services through health maintenance organizations, third party
administrators, and workers' compensation and insurance companies. Its HMOs'
serve nearly 950,000 members in Florida, Texas and Puerto Rico and is the
largest provider of managed care services to Florida's Medicaid recipients.
Sierra, established in 1984, is a diversified health care company that
provides and administers the delivery of comprehensive managed care benefit
programs for individuals and employers. The company serves 504,000 individuals
through subsidiaries that operate health maintenance organizations, preferred
provider organizations, managed indemnity and workers' compensation insurers,
third party administration for self-insured employers and a multi-specialty
medical group.
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995: The statements contained in this release that are not historical
facts are forward looking. Actual results may differ materially from those
projected in such forward looking statements; such statements involve risks and
uncertainties, including but not limited to the following; completion of the
merger which is subject to regulatory and shareholder approval; Medicare and
Medicaid premium rates set by state and federal government agencies change
unexpectedly; increased competition in the Company's markets or change in
product mix may unexpectedly reduce premium yield; health care costs in any
given period may be greater than expected due to incidence of major illnesses,
natural disasters, epidemics, changes in physician practice policies and new
technologies;
MORE ...
<PAGE>
Sierra Health Services, Inc. - Page 4
and, the Company may be unable to obtain or maintain acceptable provider
arrangements on satisfactory terms in key markets. Investors are also directed
to the other risks discussed in documents filed by the Company with the
Securities and Exchange Commission.
# # # #
