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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, 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
(State or other jurisdiction of
incorporation or organization)
88-0200415
(I.R.S. Employer
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 July 31, 1996 there were 17,780,000 shares of common stock outstanding.
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<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets --
June 30, 1996, and December 31, 1995.................. 3
Condensed Consolidated Statements of Operations --
Three and six months ended June 30, 1996
and June 30, 1995..................................... 4
Condensed Consolidated Statements of Cash Flows --
Six months ended June 30, 1996
and June 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........................ 15
Signature................................................................. 16
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
1996 1995
-------------- -------------
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents.......................................... $ 79,758,000 $ 57,044,000
Short-term Securities.............................................. 62,661,000 72,579,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts: 1996 - $4,960,000, 1995 - $5,000,000) ................ 23,210,000 21,723,000
Prepaid Expenses and Other Assets.................................. 30,217,000 24,071,000
------------- -------------
Total Current Assets............................................ 195,846,000 175,417,000
------------ ------------
LAND, BUILDING AND EQUIPMENT.......................................... 129,689,000 122,725,000
Less: Accumulated Depreciation..................................... 36,274,000 31,549,000
------------ ------------
Land, Building and Equipment - Net.............................. 93,415,000 91,176,000
------------ ------------
OTHER ASSETS:
Long-term Securities .............................................. 213,570,000 234,698,000
Restricted Cash and Securities .................................... 12,793,000 12,482,000
Reinsurance Recoverable (Less Current Portion)..................... 18,408,000 24,952,000
Other. .............................................. 36,058,000 36,421,000
------------ ------------
Total Other Assets.............................................. 280,829,000 308,553,000
------------ ------------
TOTAL ASSETS.......................................................... $570,090,000 $575,146,000
============ ============
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities..................... $ 19,415,000 $21,576,000
Accrued Payroll and Taxes.......................................... 13,388,000 14,174,000
Medical Claims Payable............................................. 36,447,000 37,463,000
Current Portion of Reserves for Losses and
Loss Adjustment Expense ........................................ 50,931,000 54,679,000
Unearned Premium Revenue........................................... 13,549,000 22,260,000
Current Portion of Long-term Debt.................................. 2,395,000 7,108,000
------------ ------------
Total Current Liabilities....................................... 136,125,000 157,260,000
RESERVES FOR LOSSES AND LOSS
ADJUSTMENT EXPENSE (Less Current Portion) ........................ 132,987,000 127,639,000
LONG-TERM DEBT (Less Current Portion)................................. 67,449,000 71,257,000
OTHER LIABILITIES .................................................... 12,420,000 11,275,000
------------ ------------
TOTAL LIABILITIES..................................................... 348,981,000 367,431,000
------------ ------------
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 - 17,847,000; 1995 - 17,677,000;............ 89,000 88,000
Additional Paid-in Capital......................................... 150,648,000 147,240,000
Treasury Stock, 100,200 Common Shares.............................. (130,000) (130,000)
Unrealized Holding (Loss) Gain on
Available-for-Sale Securities................................... (731,000) 9,659,000
Retained Earnings.................................................. 71,233,000 50,858,000
------------ ------------
Total Stockholders' Equity...................................... 221,109,000 207,715,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $570,090,000 $575,146,000
============ ============
</TABLE>
See accompanying 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
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ -----------
OPERATING REVENUES:
<S> <C> <C> <C> <C>
Medical Premiums........................................ $ 93,431,000 $ 77,877,000 $184,036,000 $153,425,000
Specialty Product Revenue............................... 33,348,000 23,682,000 64,287,000 46,757,000
Professional Fees....................................... 7,723,000 3,852,000 15,295,000 7,670,000
Investment and Other Revenue............................ 6,860,000 6,332,000 13,756,000 12,163,000
------------ ------------ ------------ ------------
Total ................................................ 141,362,000 111,743,000 277,374,000 220,015,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Medical Expenses........................................ 75,866,000 58,770,000 149,817,000 116,490,000
Specialty Product Expenses.............................. 33,660,000 24,502,000 64,183,000 47,123,000
General, Administrative and Other ...................... 17,316,000 15,694,000 34,479,000 30,803,000
------------ ------------ ------------ ------------
Total ................................................ 126,842,000 98,966,000 248,479,000 194,416,000
------------ ------------ ------------ ------------
OPERATING INCOME.......................................... 14,520,000 12,777,000 28,895,000 25,599,000
OTHER INCOME AND EXPENSE:
Minority Interests in Subsidiary Loss .................. 565,000 595,000 953,000 1,096,000
Interest Expense and Other, Net ....................... (1,397,000) (1,678,000) (2,594,000) (3,215,000)
------------ ------------ ------------ ------------
Total ................................................ (832,000) (1,083,000) (1,641,000) (2,119,000)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................................. 13,688,000 11,694,000 27,254,000 23,480,000
PROVISION FOR INCOME TAXES................................ 3,477,000 2,798,000 6,879,000 5,945,000
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ........................ 10,211,000 8,896,000 20,375,000 17,535,000
NET OPERATING LOSS ON
DISCONTINUED OPERATIONS .............................. 1,046,000 2,010,000
NET LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS............................... 4,590,000 4,590,000
----------------- --------- ----------------- ---------
NET INCOME................................................ $ 10,211,000 $ 3,260,000 $ 20,375,000 $ 10,935,000
============ ============ ============ ============
EARNINGS PER SHARE
Income from Continuing Operations....................... $ .58 $ .51 $1.15 $1.01
Net Operating Loss on Discontinued
Operations ......................................... .06 .12
Net Loss on Disposal of
Discontinued Operations ............................ .26 .26
------- ----- ------- -----
Earnings per share ..................................... $ .58 $ .19 $1.15 $ .63
===== ===== ===== =====
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING............................... 17,706,000 17,381,000 17,667,000 17,340,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 JUNE 30
1996 1995
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income.............................................................. $20,375,000 $10,935,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization........................................ 5,022,000 4,350,000
Provision for Doubtful Accounts...................................... 1,251,000 321,000
Effect from Discontinued Operations ................................. 2,595,000
Changes in Assets and Liabilities ...................................... (11,934,000) (3,804,000)
----------- -----------
Net Cash Provided by Operating Activities ........................... 14,714,000 14,397,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures.................................................... (7,095,000) (7,560,000)
Land, Building and Equipment Dispositions, Net.......................... 118,000 138,000
Decrease in Short-term Securities....................................... 9,929,000 33,362,000
Decrease (Increase) in Long-term Securities............................. 10,349,000 (29,000,000)
Increase in Restricted Cash and Securities.............................. (166,000) (786,000)
Other .................................................................. 2,803,000
-------------- -----------
Net Cash Provided by (Used for) Investing Activities................. 13,135,000 (1,043,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-term Borrowings...................................... 500,000 1,375,000
Payments on Debt and Capital Leases..................................... (8,035,000) (2,160,000)
Exercise of Stock in Connection with Stock Plans........................ 2,400,000 2,084,000
----------- -----------
Net Cash Provided by (Used for) Financing Activities................. (5,135,000) 1,299,000
----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS.................................................... 22,714,000 14,653,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 57,044,000 38,045,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ 79,758,000 52,698,000
=========== ===========
SIX MONTHS ENDED
Supplemental Condensed Consolidated JUNE 30 JUNE 30
STATEMENTS OF CASH FLOWS INFORMATION: 1996 1995
------------------------------------------------------------------ -------------- --------------
Cash paid during the period for interest
(net of amount capitalized)............................................. $2,806,000 $3,179,000
Cash paid during the period for income taxes.............................. 6,887,000 4,300,000
Non-cash Investing and Financing Activities:
Reductions to funds withheld by ceding
insurance company and future policy benefits......................... 446,000 657,000
Additions to capital leases ............................................ 189,000
Tax benefits of stock issued for exercise of options ................... 1,009,000 1,141,000
</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"). 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 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, 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 six-month periods ended June 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
5.855% at June 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. Amounts in the accompanying Condensed Consolidated Financial Statements
for the three months and six months ended June 30, 1995 have been
reclassified to conform with the current period 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 JUNE 30, 1996, COMPARED TO THREE
MONTHS ENDED JUNE 30, 1995.
The Company's total operating revenues for the three months ended June
30, 1996 increased 26.5% to $141.4 million compared to the three months ended
June 30, 1995. The increase was primarily due to medical premium revenue
increases of $15.6 million, or 20.0%, from the Company's HMO and managed
indemnity insurance subsidiaries. Such additional premium revenue resulted
principally from a 19.1% 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 established
by the Health Care Financing Administration ("HCFA"). The Company realized
minimal rate changes for the HMO subsidiaries' commercial groups and the managed
indemnity subsidiary. Specialty product revenue increased $9.7 million, or
40.8%, in the three months ended June 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 revenues
increased by $3.9 million, or 100.5%, primarily due to the acquisition of a
medical facility in October 1995. Investment and other revenue increased
approximately $500,000, or 8.3%, due to certain investment gains recognized in
the second quarter of 1996, as well as an increase in the balance of invested
funds.
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 JUNE 30, 1996, COMPARED TO THREE
MONTHS ENDED JUNE 30, 1995 (CONTINUED).
Total medical expenses increased by approximately $17.1 million over the
same three-month period last year. This 29.1% 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 71.9% to 75.0%. The
cost of providing medical care to Medicare members generally requires a greater
percentage of the premium received. Specialty product expenses increased $9.2
million, or 37.4% due primarily to the 40.8% increase in specialty product
revenue discussed previously. Specialty product revenue and expense is primarily
related to workers' compensation insurance business.
On the workers' compensation insurance business the combined ratio was
105.1% compared to 109.7% for the same period in the prior year. The decrease in
the combined ratio is due primarily to a 20.7% decrease in the underwriting
ratio partially offset by a 16.1% 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. The incurred losses for the current
accident year were partially offset by favorable loss development on prior
accident years totaling $3.1 million compared to favorable loss development of
$6.3 million for the comparable prior year period. The loss and loss adjustment
expense ratio for the three months ended June 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 $1.6 million,
or 10.3%, compared to the second quarter of 1995. As a percentage of revenues,
however, G&A costs for the second quarter of 1996 decreased to 12.2% from 14.0%
during the comparable period in 1995. Of the $1.6 million increase in G&A,
$500,000 consisted of increased compensation expense resulting primarily from
additional employees supporting expanded services. Broker, third-party
administration, and premium tax expenses increased approximately $800,000 due to
increased membership. Additional increases in other G&A costs were offset by
savings in advertising and legal 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 June 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.
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, THREE MONTHS ENDED JUNE 30, 1996, COMPARED TO THREE
MONTHS ENDED JUNE 30, 1995 (CONTINUED).
The Company's effective tax rate for the second quarter of 1996 was
approximately 25.4% compared to 23.9% in the second quarter of 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 use of net operating loss carryovers.
Income from continuing operations for the three months ended June 30,
1996, increased 14.8% to $10.2 million. The approximate $1.3 million increase in
earnings was primarily due to increased operating revenues and decreased G&A
expenses as a percentage of revenues. During 1995, CII sold its interest in an
unprofitable subsidiary. The net loss on the operations and disposal of the
subsidiary was approximately $5.6 million in the quarter ended June 30, 1995.
RESULTS OF OPERATIONS, SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS
ENDED JUNE 30, 1995.
The Company's total operating revenues for the six months ended June 30,
1996 increased 26.1% to $277.4 million from $220.0 million, for the six months
ended June 30, 1995. The increase was primarily due to medical premium revenue
increases of approximately $30.6 million, or 20.0%, from the Company's HMO and
managed indemnity insurance subsidiaries. Such additional premium revenue
resulted principally from an 18.8% increase in member months. The Company's HMO
and insurance subsidiaries' premium rates increased approximately 1.2% overall
primarily due to an 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 $17.5 million, or 37.5%, in the six months ended June
30, 1996 compared to the same six-month period in the prior year. The increase
was primarily due to specialty product revenue growth in the workers'
compensation insurance market of approximately $17.1 million and a $400,000
increase in the specialty product revenue relating to administrative services
for the six months ended June 30, 1996, compared to the same six-month period in
the prior year. Professional fee revenues increased by $7.6 million, or 99.4%,
primarily due to the acquisition of a medical facility in October 1995.
Investment and other revenue increased $1.6 million, or 13.1%, due to certain
investment gains recognized in the first six months of 1996, as well as an
increase in the balance of invested funds.
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, SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS
ENDED JUNE 30, 1995 (CONTINUED).
Total medical expenses increased by approximately $33.3 million over the
same six-month period last year. This 28.6% 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 72.3% to 75.2%.
The cost of providing medical care to Medicare members generally requires a
greater percentage of the premium received. Specialty product expenses increased
$17.1 million, or 36.2% due primarily to the 37.5% increase in specialty product
revenue discussed previously. Specialty product revenue and expense is primarily
related to workers' compensation insurance business.
On the workers' compensation insurance business, the combined ratio was
104.9% for the first six months of 1996 compared to 106.7% for the same period
in the prior year. The decrease in the combined ratio is due primarily to a
16.1% decrease in the underwriting ratio partially offset by a 14.3% 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. The incurred losses for the
current accident year were partially offset by favorable loss development on
prior accident years totaling $7.1 million compared to favorable loss
development of $10.7 million for the comparable prior year period. The loss and
loss adjustment expense ratio for the six months ended June 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.
G&A costs increased $3.7 million, or 11.9%, compared to the first six
months of 1995. As a percentage of revenues, however, G&A costs for the first
six months of 1996 decreased to 12.4% from 14.0% during the comparable period in
1995. Of the $3.7 million increase in G&A, $2.0 million consisted of
compensation expense resulting primarily from additional employees supporting
expanded services. Broker, third-party administration, and premium tax expenses
increased approximately $1.4 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 six months ended June 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.
Page 10
<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, SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS
ENDED JUNE 30, 1995 (CONTINUED).
The Company's effective tax rate for the first six months of 1996 was
approximately 25.2% compared to 25.3% in the first six months of 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 use of net operating loss carryovers.
Net income for the six months ended June 30, 1996, increased 86.3% to
$20.4 million compared to the same period in 1995. The approximate $9.4 million
increase in earnings was primarily due to the effects of the operations of the
disposed subsidiary. During 1995, CII sold its interest in an unprofitable
subsidiary. The net loss on the operations and disposal of the subsidiary was
approximately $6.6 million in the six months ended June 30, 1995. Income from
continuing operations for the six-month period ended June 30, 1996 increased
16.2% to $20.4 million compared to the same period in the prior year.
The increase in income from continuing operations was due primarily to increased
operating revenues and decreased G&A expenses as a percentage of revenues.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company's working capital increased $41.6 million to
$59.7 million. The primary source of cash during this six-month period was
operations.
The Company's cash flow from operating activities during the six months
ended June 30, 1996 resulted primarily from $20.4 million of net income, $5.0
million in depreciation and amortization and $1.3 million in provision for
doubtful accounts. This source of cash was offset by an $11.9 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, as well as accounts receivable
and other current assets. 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 $8.0 million provided by investing and financing activities since
December 31, 1995 primarily consisted of $20.1 million net decrease in
investments offset by $7.0 million in net capital expenditures including
construction costs associated with medical facilities, computer and medical
equipment, and other capital needs to support the Company's growth.
Additionally, $8.0 million used for the reduction of debt was offset in part by
$2.4 million received in connection with the purchase of stock through the
Company's stock plans, as well as $500,000 from borrowings.
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)
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 $12.8 million, as of
June 30, 1996. The HMO and insurance subsidiaries must also meet requirements to
maintain minimum stockholder's equity, on a statutory basis, ranging from
$200,000 to $5.2 million. Of the cash and cash equivalents held at June 30,
1996, $58.1 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 that would cause
violation of statutory net worth and reserve requirements.
In June 1996, the Company received notification regarding the CHAMPUS
bid for Regions 7 and 8, which the Company made as part of a consortium of
managed care companies. The consortium was awarded that contract. The Company
expects to be providing health care services to the approximately 93,000 CHAMPUS
eligibles in Nevada and parts of Missouri beginning in February 1997.
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 by the beginning of 1997. The Company expects to incur total expenses of
approximately $6 million during the proposal process for the contract.
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 5.855% at June 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 six months
ended June 30, 1996 Sierra purchased $2,143,000 of CII Debentures on the open
market.
Page 12
<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)
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. The Company's liquidity needs over the next 12 months will
primarily be for the capital items noted above to support growing membership, as
well as debt service and expansion of the Company's operations. The Company
believes that existing working capital, operating cash flow and, if necessary,
equipment leasing, and amounts available under its credit facility will be
sufficient to meet its liquidity needs.
Additionally, 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.
The Company's membership at June 30, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER OF MEMBERS AT PERIOD ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
HMO
<S> <C> <C>
Commercial................................................ 123,175 109,541
Medicare.................................................. 27,428 21,771
Managed Indemnity........................................... 33,157 27,636
Medicare Supplement......................................... 19,217 11,726
Administrative Services..................................... 306,691 178,256
------- -------
Total Members............................................... 509,668 348,930
======= =======
</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
Sierra held its Annual Meeting of Stockholders on May 9, 1996
in Las Vegas, Nevada.
The following persons were elected directors for a two-year term
ending in 1998 based on the voting results below:
<TABLE>
<CAPTION>
BROKER
NAME FOR WITHHELD ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
Charles L. Ruthe 16,910,801 182,906 0 0
William J. Raggio 16,309,852 783,855 0 0
Erin E. MacDonald 16,912,964 180,743 0 0
</TABLE>
The following persons' terms as directors continued after the
meeting and end in 1997.
Anthony M. Marlon, M.D.
Thomas Y. Hartley
The stockholders also ratified the appointment of Deloitte &
Touche LLP as the Company's independent auditors for the year
ending 1996. The voting results were as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
17,025,730 26,942 41,035 0
</TABLE>
Item 5. OTHER INFORMATION
None
Page 14
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Computation of earnings per share.
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
Page 15
<PAGE>
SIGNATURES
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 14, 1996 JAMES L. STARR
-------------------- --------------------
James L. Starr
Vice President of Finance
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
Page 16
<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
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET INCOME...................................... $10,211,000 $ 3,260,000 $20,375,000 $10,935,000
EARNINGS PER COMMON SHARE....................... $.58 $.19 $1.15 $.63
Weighted Average Number
of Common Shares............................... 17,706,000 17,381,000 17,667,000 17,340,000
...................................................................................................................................
PRIMARY EARNINGS PER COMMON
SHARE AND COMMON SHARE
EQUIVALENTS.................................... $.56 $.18 $1.12 $.62
Weighted Average Number of
Common and Common
Equivalent Shares.............................. 18,203,000 17,669,000 18,175,000 17,606,000
...................................................................................................................................
FULLY DILUTED PRIMARY EARNINGS
PER COMMON AND COMMON SHARE
EQUIVALENTS................................... $.56 $.18 $1.12 $.62
Weighted Average Number of Common
and Common Equivalent Shares Assuming
Full Dilution.................................. 18,204,000 17,749,000 18,176,000 17,729,000
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 79,758,000
<SECURITIES> 289,024,000
<RECEIVABLES> 28,170,000
<ALLOWANCES> 4,960,000
<INVENTORY> 0
<CURRENT-ASSETS> 195,846,000
<PP&E> 129,689,000
<DEPRECIATION> 36,274,000
<TOTAL-ASSETS> 570,090,000
<CURRENT-LIABILITIES> 136,125,000
<BONDS> 67,449,000
0
0
<COMMON> 89,000
<OTHER-SE> 221,020,000
<TOTAL-LIABILITY-AND-EQUITY> 570,090,000
<SALES> 0
<TOTAL-REVENUES> 277,374,000
<CGS> 0
<TOTAL-COSTS> 248,479,000
<OTHER-EXPENSES> 953,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,594,000
<INCOME-PRETAX> 27,254,000
<INCOME-TAX> 6,879,000
<INCOME-CONTINUING> 20,375,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,375,000
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 0.00
</TABLE>
