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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 September 30, 1997
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, 1997 there were 18,106,000 shares of common stock outstanding.
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<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
INDEX
Page No.
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996........... 3
Condensed Consolidated Statements of Operations -
three and nine months ended September 30, 1997
and September 30, 1996............................. 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 1997
and September 30, 1996............................. 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..................... 16
Signature.............................................................. 17
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
1997 1996
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents................................................... $ 94,065,000 $103,587,000
Short-term Investments...................................................... 65,007,000 83,688,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts: 1997 - 7,539,000; 1996 - 7,324,000)........................... 34,437,000 31,849,000
Prepaid Expenses and Other Assets........................................... 37,885,000 33,811,000
Total Current Assets..................................................... 231,394,000 252,935,000
LAND, BUILDINGS AND EQUIPMENT................................................. 174,447,000 140,130,000
Less-Accumulated Depreciation............................................... (48,116,000) (40,326,000)
Land, Buildings and Equipment - Net...................................... 126,331,000 99,804,000
LONG-TERM INVESTMENTS....................................................... 198,096,000 160,482,000
RESTRICTED CASH AND INVESTMENTS............................................. 15,616,000 13,648,000
REINSURANCE RECOVERABLE (Less Current Portion) ............................ 15,770,000 14,721,000
GOODWILL ................................................................... 43,264,000 44,602,000
OTHER ASSETS................................................................ 48,874,000 43,270,000
TOTAL ASSETS.................................................................. $679,345,000 $629,462,000
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities.............................. $ 60,585,000 $ 50,153,000
Medical Claims Payable...................................................... 58,386,000 46,969,000
Current Portion of Reserves for Losses and
Loss Adjustment Expense ................................................. 63,856,000 52,878,000
Unearned Premium Revenue.................................................... 15,726,000 24,210,000
Current Portion of Long-term Debt........................................... 4,032,000 2,195,000
Total Current Liabilities................................................ 202,585,000 176,405,000
RESERVES FOR LOSSES AND LOSS ADJUSTMENT
EXPENSE (Less Current Portion) ............................................. 131,667,000 134,898,000
LONG-TERM DEBT (Less Current Portion)......................................... 79,539,000 66,189,000
OTHER LIABILITIES............................................................. 13,973,000 17,488,000
TOTAL LIABILITIES............................................................. 427,764,000 394,980,000
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: 1997 - 18,378,000; 1996 - 17,910,000...................... 92,000 89,000
Additional Paid-in Capital.................................................. 161,904,000 152,035,000
Treasury Stock: 1997 - 284,500; 1996 - 100,200 Common Shares................ (5,601,000) (130,000)
Unrealized Holding Gain on
Available-for-Sale Securities .......................................... 731,000 487,000
Retained Earnings........................................................... 94,455,000 82,001,000
TOTAL STOCKHOLDERS' EQUITY.................................................... 251,581,000 234,482,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $679,345,000 $629,462,000
</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
1997 1996 1997 1996
OPERATING REVENUES:
<S> <C> <C> <C> <C>
Medical Premiums.......................................... $131,528,000 $ 97,480,000 $379,117,000 $281,516,000
Specialty Product Revenues................................ 37,596,000 34,644,000 109,388,000 98,931,000
Professional Fees......................................... 8,004,000 7,498,000 23,063,000 22,793,000
Investment and Other Revenues............................. 6,731,000 6,623,000 19,190,000 20,379,000
Total .................................................. 183,859,000 146,245,000 530,758,000 423,619,000
OPERATING EXPENSES:
Medical Expenses.......................................... 107,258,000 79,528,000 308,747,000 229,345,000
Specialty Product Expenses................................ 36,361,000 34,025,000 107,360,000 98,208,000
General, Administrative and Marketing .................... 24,655,000 18,305,000 69,721,000 52,784,000
Merger, Restructuring and Start-up Expenses .............. 18,350,000 8,250,000 29,350,000 8,250,000
Total .................................................. 186,624,000 140,108,000 515,178,000 388,587,000
OPERATING (LOSS) INCOME..................................... (2,765,000) 6,137,000 15,580,000 35,032,000
INTEREST EXPENSE AND OTHER, NET ........................... (940,000) (715,000) (3,549,000) (2,356,000)
(LOSS) INCOME BEFORE INCOME TAXES .......................... (3,705,000) 5,422,000 12,031,000 32,676,000
BENEFIT (PROVISION) FOR INCOME TAXES........................ 4,200,000 (1,355,000) 423,000 (8,234,000)
NET INCOME ................................................. $ 495,000 $ 4,067,000 $ 12,454,000 $24,442,000
EARNINGS PER COMMON SHARE ................................. $.03 $.23 $.69 $1.38
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING................................. 18,076,000 17,775,000 17,965,000 17,703,000
</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
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income.............................................................. $12,454,000 $24,442,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization.................................... 9,921,000 7,781,000
Provision for Doubtful Accounts.................................. 3,161,000 2,044,000
Changes in Assets and Liabilities ...................................... 4,753,000 (11,488,000)
Net Cash Provided by Operating Activities .......................... 30,289,000 22,779,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net of Equipment Dispositions..................... (34,102,000) (11,162,000)
Changes in Short-term Investments....................................... 18,708,000 (17,024,000)
Changes in Long-term Investments........................................ (37,292,000) 26,986,000
Changes in Restricted Cash and Investments.............................. (2,106,000) (327,000)
Net Cash Used for Investing Activities.............................. (54,792,000) (1,527,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings................................................ 17,000,000 1,000,000
Payments on Debt and Capital Leases..................................... (1,812,000) (8,964,000)
Exercise of Stock in Connection with Stock Plans........................ 8,464,000 3,359,000
Purchase of Treasury Stock ............................................. (5,471,000)
Corporate Acquisition .................................................. (3,200,000) _________
Net Cash Provided by (Used for) Financing Activities................ 14,981,000 (4,605,000)
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS.................................................... (9,522,000) 16,647,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 103,587,000 57,044,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 94,065,000 $ 73,691,000
For the Nine Months Ended
Supplemental Condensed Consolidated September 30 September 30
Statements of Cash Flows Information: 1997 1996
Cash Paid During the Period for Interest
(Net of Amount Capitalized)............................................. $4,267,000 $5,199,000
Cash Paid During the Period for Income Taxes............................... 7,651,000 6,940,000
Non-cash Investing and Financing Activities:
Tax Benefits of Stock Issued for Exercise of Options ................... 1,405,000 1,065,000
</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 herein as the "Company"). 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
annual audited consolidated financial statements and related notes thereto for
the years ended December 31, 1996 and 1995. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial results for the interim periods presented.
2. In the second quarter of 1997, the line of credit agreement the
("Credit Agreement"), among Sierra, Bank of America National Trust
and Savings Association as Agent, and other lenders, was amended and
increased to $100.0 million. In March 1997, the Company borrowed
$17.0 million on its line of credit for general corporate purposes.
Currently the interest rate is 6.3%. The amount owed on the line of
credit is included in long-term debt at September 30, 1997. The
remaining line of credit may be used for additional working capital,
if necessary.
3. During the first quarter of 1997, the Company recorded $11.0 million,
$8.4 million after taxes, for certain estimated costs and expenses
incurred in association with a merger agreement with Physician
Corporation of America ("PCA"), such agreement was terminated on
March 18, 1997, as disclosed in the Company's Annual Report filed on
Form 10-K for the fiscal year ended December 31, 1996.
4. During the third quarter of 1997 Sierra Military Health Services, Inc.
("SMHS"), a wholly owned subsidiary of the Company, was awarded a contract to
serve the Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") eligible beneficiaries in Region 1. This region includes more than
600,000 CHAMPUS beneficiaries in 13 northeastern states and the District of
Columbia. The Company is also part of a consortium including 13 other companies
which in April 1997 began providing health care to approximately 700,000 CHAMPUS
eligible beneficiaries in Regions 7 and 8, which includes 17 states. The Company
is responsible for providing care under the Regions 7 and 8 contract to
approximately 93,000 individuals in Nevada and Missouri. Development expenses of
$18.4 million, $10.6 million net of taxes, were recorded in the third quarter
primarily for expenses associated with the Company's proposal to serve CHAMPUS
Region 1. Such expenses had been deferred until award notification.
5. Effective July 1, 1997, the Company adopted a defined benefit
retirement plan covering certain key employees. The Company is
funding the benefits through the purchase of certain life insurance
policies. Benefits are based on, among other things, the employee's
average earnings over the five-year period prior to retirement or
termination, and length of service. Benefits attributable to service
prior to the adoption of the plan will be amortized over the
estimated remaining service periods for those employees participating
in the plan.
Page 6
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. In the second quarter of 1997, the Company's Board of Directors
authorized a stock repurchase program of up to one million shares of
the Company's outstanding stock. As of September 30, 1997, the
Company had repurchased 184,300 shares during 1997 for approximately
$5.5 million.
7. During 1997 the Financial Accounting Standards Board ("FASB") issued
the following statements of financial accounting standards ("FAS"):
FAS No. 128, "Earnings per Share", FAS No. 129, "Disclosure of
Information about Capital Structure", FAS No. 130, "Reporting
Comprehensive Income", and FAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information".
FAS No. 128 and FAS No. 129 are effective for periods ending after
December 15, 1997, and establish standards for computing and
presenting earnings per share ("EPS"), and for disclosing information
about an entity's capital structure, respectively. Management
believes that these standards will not have a significant impact on
its EPS or financial statement disclosure. FAS No. 130 and FAS No.
131 are effective for periods beginning after December 15, 1997. FAS
No. 130 requires companies to classify items of other comprehensive
income by their nature in a financial statement. Management does not
believe this statement will have a material impact on the Company's
financial statements. FAS No. 131 establishes additional standards
for segment disclosures in the financial statements. Management has
not determined the effect of this statement on its financial
statement disclosure.
Page 7
<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 28, 1997. 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.
Results of Operations, three months ended September 30, 1997, compared to three
months ended September 30, 1996.
The Company's total operating revenues for the three months ended September 30,
1997 increased approximately 25.8% to $183.9 from $146.2 million for the three
months ended September 30, 1996. The increase was primarily due to medical
premium revenue increases of $34.0 million, or 34.9%, from the Company's HMO and
managed indemnity insurance subsidiaries. Such additional premium revenue
resulted principally from a 33.1% 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 approximately 1.9%
primarily due to an increase in its capitation rate for its Medicare members as
established by the Health Care Financing Administration ("HCFA"). The increase
was due in part to the Company's participation in HCFA's social HMO program. The
Company realized 1% to 3% rate increases for its existing HMO subsidiaries'
commercial groups and the managed indemnity subsidiary. However, these increases
were offset in part by lower premium rates at MedOne Health Plan, an HMO
acquired on December 31, 1996. Specialty product revenue increased $3.0 million,
or 8.5%, for the three months ended September 30, 1997 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 of $1.6 million and
an increase in administrative services and other of $1.4 million due primarily
to the acquisition of Prime Health, Inc. at the end of 1996. Some of this
increase in administrative services revenue will be offset in the future by the
loss of a portion of the state of Nevada's self-insured medical business. Also,
effective September 30, 1997, the Company terminated its workers' compensation
administrative services contract within the state of Nevada. The contract served
approximately 200,000 enrollees and provided approximately $1.3 million of
revenues for the three months ended September 30, 1997. Professional fee revenue
increased approximately $500,000 primarily due to the acquisition of the assets
and operations of Total Home Care, Inc. ("THC") during the quarter. THC provides
home infusion, oxygen and durable medical equipment services in Nevada and
Arizona. Investment and other revenue was consistent with the comparable period
in the prior year.
Total medical expenses increased $27.7 million over the same three-month period
last year. This 34.9% increase resulted primarily from the consolidated member
month growth discussed previously. Medical expenses as a percentage of medical
premiums and professional fees ("Medical Loss Ratio") increased from 75.8% to
76.9% due primarily to member growth and expansion in areas with higher medical
expenses, such as northern Nevada and Texas. In addition, MedOne Health Plan has
a higher Medical Loss Ratio, which further contributed to the increase in the
Company's overall Medical Loss Ratio. Specialty product expenses increased $2.3
million, or 6.9%, due primarily to the 8.5% increase in specialty product
revenue discussed previously. Specialty product revenue and expense is primarily
related to the workers' compensation insurance 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 September 30, 1997, compared to three
months ended September 30, 1996 (continued).
The combined ratio for the workers' compensation insurance business was 100.9%
compared to 104.4% for the comparable prior year period. The reduction was due
to a 1.4 percentage point decrease in the loss ratio and a 1.5 percentage point
decrease in the expense ratio. Incurred losses for the current accident year
were reduced as a result of the Company's ability to overlay and implement
managed care techniques to the workers' compensation claims as well as net
favorable loss development on prior accident years totaling $2.3 million
compared to net favorable loss development of $3.4 million for the comparable
prior year period. There can be no assurance that favorable development, or the
magnitude thereof, will continue in the future. The losses and loss adjustment
expense ratio for the three months ended September 30, 1997 reflects the
Company's current projection of the ultimate costs of claims occurring in the
current as well as prior accident years. Such projections are subject to change
and any change would be reflected in the income statement. 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 marketing ("G&A") costs increased $6.4 million, or
34.7%, compared to the third quarter of 1996. As a percentage of revenues, G&A
costs for the third quarter of 1997 increased to 13.4% from 12.5% during the
comparable period in 1996. Of the $6.4 million increase in G&A, $2.7 million
consisted of increased compensation expense resulting primarily from additional
employees supporting expanded services and increased incentive amounts for
management. Broker, third-party administration, and premium tax expenses
increased approximately $2.4 million due to increased membership. Amortization
costs increased approximately $400,000. The remaining G&A increase is due to
additional expenses in several areas including data processing maintenance. 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, 1997, 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 expense and other increased approximately $200,000 over the same period
in the prior year primarily due to the $600,000 benefit for minority interests
recorded in 1996, offset in part by an increase in capitalized interest related
to various construction projects in 1997. In November 1996, the Company acquired
complete ownership of a Texas HMO in which it had previously held a 50%
interest. That HMO began business in March 1995 and experienced losses in both
three-month periods. In the prior period, these losses resulted in a benefit
from minority interests.
During the third quarter of 1997 SMHS, a wholly owned subsidiary of the Company,
was awarded a contract to serve CHAMPUS eligible beneficiaries in Region 1. This
region includes more than 600,000 CHAMPUS beneficiaries in 13 northeastern
states and the District of Columbia. Development expenses of $18.4 million,
$10.6 million net of taxes, were recorded in the third quarter primarily for
expenses associated with the Company's proposal to serve CHAMPUS Region 1. Such
expenses had been deferred until award notification. The Company believes the
CHAMPUS contract will add approximately $270 to $300 million of annual revenues
beginning in the second or third quarter of 1998.
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, three months ended September 30, 1997, compared to three
months ended September 30, 1996 (continued).
For the period, the Company recorded approximately $3.6 million of tax expense
associated with recurring operations for an effective tax rate of 24.0% compared
to 25.0% in 1996. The Company's low operating tax rate is a 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. The operating tax expense for the period was
offset by approximately $7.8 million in federal and state tax benefit resulting
from the write off of the CHAMPUS start-up costs of $18.4 million. Such offset
resulted in an overall net tax benefit of $4.2 million.
Excluding the effect of the merger, restructuring and CHAMPUS start-up expenses,
net income for the three months ended September 30, 1997 increased $900,000, or
8.6%, from the three months ended September 30, 1996. The increase in operating
income was primarily due to increased operating revenues offset by a higher
Medical Loss Ratio and increased G&A expenses as a percentage of revenues.
Results of Operations, nine months ended September 30, 1997, compared to nine
months ended September 30, 1996.
The Company's total operating revenues for the nine months ended September 30,
1997 increased 25.3% to $530.8 million, from $423.6 million for the nine months
ended September 30, 1996. The increase was primarily due to medical premium
revenue increases of approximately $97.6 million, or 34.7%, from the Company's
HMO and managed indemnity insurance subsidiaries. Such additional premium
revenue resulted principally from a 31.9% increase in member months. The
Company's HMO and insurance subsidiaries' premium rates increased approximately
2.8% overall, primarily due to an increase in its capitation rate for its
Medicare members as established by HCFA. The increase was due in part to the
Company's participation in HCFA's social HMO program. The Company realized 1% to
3% rate increases for its existing HMO subsidiaries' commercial groups and the
managed indemnity subsidiary. However, these increases were offset in part by
lower premium rates at MedOne Health Plan, an HMO acquired on December 31, 1996.
Specialty product revenue increased $10.5 million, or 10.6%, in the nine months
ended September 30, 1997 compared to the same nine-month period in the prior
year. The increase was due to specialty product revenue growth of $5.9 million
in the workers' compensation insurance market and an increase in administrative
services and other of $4.6 million due primarily to the acquisition of Prime
Health, Inc. at the end of 1996. Some of this increase in administrative
services revenue will be offset in the future by the loss of a portion of the
state of Nevada's self-insured medical business. Also, effective September 30,
1997, the Company terminated its workers' compensation administrative services
contract within the state of Nevada. The contract served approximately 200,000
enrollees and provided approximately $3.1 million of revenues for the nine
months ended September 30, 1997. Professional fee revenue increased slightly
from the comparable period in the prior year primarily due to the acquisition of
the assets and operations of THC discussed previously. Investment and other
revenue decreased $1.2 million, or 5.8%, due to certain investment gains
recognized in the first nine months of 1996.
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, nine months ended September 30, 1997, compared to nine
months ended September 30, 1996 (continued).
Total medical expenses increased by $79.4 million over the same nine-month
period last year. This 34.6% increase resulted primarily from the consolidated
member month growth discussed previously. The Medical Loss Ratio increased from
75.4% to 76.8% due primarily to member growth and expansion in areas with higher
medical expenses, such as northern Nevada and Texas. In addition, MedOne Health
Plan has a higher Medical Loss Ratio, which further contributed to the increase
in the Company's overall Medical Loss Ratio. Specialty product expenses
increased $9.2 million, or 9.3%, due primarily to the 10.6% 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 102.3%
compared to 104.7% for the comparable prior year period. The reduction was due
to a 1.2 percentage point decrease in the loss ratio along with a 1.0 percentage
point decrease in the expense ratio. Compared to the prior year period, incurred
losses for the current accident year were reduced as a result of the Company's
ability to overlay and implement managed care techniques to the workers'
compensation claims. In addition, the Company had net favorable loss development
totaling $6.7 million compared to net favorable loss development of $10.5
million for the comparable prior year period. There can be no assurances that
favorable development, or the magnitude thereof, will continue in the future.
The losses and loss adjustment expense ratio for the nine months ended September
30, 1997 reflects the Company's current projection of the ultimate costs of
claims occurring in the current as well as prior accident years. Such
projections are subject to change and any change would be reflected in the
income statement. 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 $16.9 million, or 32.1%, compared to the first nine months
of 1996. As a percentage of revenues, G&A costs for the first nine months of
1997 increased to 13.1% from 12.5% during the comparable period in 1996. Of the
$16.9 million increase in G&A, $6.1 million consisted of compensation expense
resulting primarily from additional employees supporting expanded services and
increased incentive amounts for management. Broker, third-party administration,
and premium tax expenses increased approximately $6.9 million due to increased
membership. Amortization costs increased $1.1 million. The remaining G&A
increase is due to additional expenses in several areas including data
processing maintenance. 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 nine months ended September 30, 1997, 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 11
<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, 1997, compared to nine
months ended September 30, 1996 (continued).
In the first quarter of 1997, the Company recorded estimated expenses of $11.0
million, $8.4 million after tax, for merger-related costs. On March 18, 1997,
the Company announced it had terminated its merger agreement with PCA. The
original agreement had been entered into in November 1996. On March 18, 1997,
prior to termination of the merger agreement, PCA filed a lawsuit against the
Company in the United States District Court for the Southern District of Florida
(the "District Court"), seeking, among other things, specific performance of the
merger agreement and monetary damages. The lawsuit has been dismissed for
failure to join a necessary party. The Company has also initiated a lawsuit
against PCA in the Court of Chancery of the State of Delaware seeking a
declaratory judgment as well as other remedies. The Company intends to
vigorously pursue all remedies available to it; however, there can be no
assurance that the Company will prevail in such litigation.
During the third quarter of 1997 SMHS, a wholly owned subsidiary of the Company,
was awarded a contract to serve CHAMPUS eligible beneficiaries in Region 1. This
region includes more than 600,000 CHAMPUS beneficiaries in 13 northeastern
states and the District of Columbia. Development expenses of $18.4 million,
$10.6 million net of taxes, were recorded in the third quarter primarily for
expenses associated with the Company's proposal to serve CHAMPUS Region 1. Such
expenses had been deferred until award notification. The Company believes the
CHAMPUS contract will add approximately $270 to $300 million of annual revenues
beginning in the second or third quarter of 1998.
Interest expense and other increased approximately $1.2 million from the
comparable prior year period primarily due to the almost $1.6 million benefit
for minority interests recorded in 1996 offset in part by an increase in
capitalized interest related to various construction projects in 1997. In
November 1996, the Company acquired complete ownership of a Texas HMO in which
it had previously held a 50% interest. That HMO began business in March 1995 and
experienced losses in both nine-month periods. In the prior period, these losses
resulted in a benefit from minority interests.
For the period, the Company recorded $9.9 million of tax expense on recurring
operations for an effective tax rate of 24.0% compared to 25.2% in 1996. The
Company's low tax rate is a 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. Tax
expense for the period was offset by approximately $7.8 million in federal and
state tax benefit resulting from the write off of the CHAMPUS start-up costs of
$18.4 million and $2.6 federal tax benefit resulting from the merger-related
expenses.
Excluding the effect of merger, restructuring and CHAMPUS start-up expenses, net
income increased approximately $800,000 from the comparable prior year period.
The increase was due primarily to increased operating revenues offset by a
higher Medical Loss Ratio, increased G&A expenses as a percentage of revenues,
as well as the effect of the prior period benefit related to minority interests.
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
The Company's cash flow from operating activities during the nine months ended
September 30, 1997 resulted primarily from $12.5 million of net income, $9.9
million in depreciation and amortization and $3.2 million in provision for
doubtful accounts as well as a $4.8 million net change in assets and
liabilities, excluding cash and cash equivalents. The increase in cash which
resulted from the change in assets and liabilities was primarily due to
increases in medical claims payable, the reserve for losses and loss adjustment
expenses and accrued and other liabilities, offset in part by a decrease in
unearned premium revenue resulting from early receipt of the subsequent month's
HCFA Medicare capitation payment as of December 31, 1996, as well as increases
in other assets.
The $39.8 million used for investing and financing activities since December 31,
1996 primarily consisted of a $20.7 million net increase in investments, and
$34.1 million in net capital expenditures including construction costs
associated with office and medical facilities, computer and medical equipment,
and other capital needs to support the Company's growth. Additionally, the
Company used $5.5 million to purchase treasury stock on the open market and $1.8
million for the reduction of debt. The Company also used $3.2 million to acquire
the operations and assets of THC as discussed previously. These uses of cash
were offset in part by $8.5 million received in connection with the sale of
stock through the Company's stock plans. On January 10, 1997, the Company and
PCA entered into a credit and share pledge agreement (the "PCA Loan") pursuant
to which the Company made a demand loan to PCA in the amount of $16.8 million
with an 8.25% fixed rate of interest.
The loan and accrued interest was repaid in the third quarter.
In the second quarter of 1997 the Credit Agreement was amended and increased to
$100.0 million. In March 1997, the Company borrowed $17.0 million on its line of
credit for general corporate purposes. The remaining line of credit may be used
for additional working capital, if necessary. Also in the second quarter of
1997, the Company's Board of Directors authorized a $3.0 million line of credit
from the Company to the Company's Chief Executive Officer ("CEO"). The CEO
borrowed $200,000 on August 8, 1997 and $500,000 on August 7 and September 22,
1997 at an interest rate equal to the London InterBank Offering Rate plus 53
basis points. The line of credit is collateralized by certain amounts of the
CEO's Sierra stock options and is due and payable no later than June 30, 1998.
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 $15.6 million as of
September 30, 1997. 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
September 30, 1997, $78.4 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 the 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.
Page 13
<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)
On September 30, 1997, the Company was awarded a contract with the Office of the
Civilian Health and Medical Program of the Uniformed Services to provide managed
health care coverage to CHAMPUS eligible beneficiaries in Region 1. This region
includes more than 600,000 individuals in Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island, Vermont, Virginia, West Virginia and Washington, D.C. The contract
will result in approximately $1.5 billion in estimated revenues over the
five-year term of the contract. The expenses incurred in connection with
obtaining this contract were expensed in the third quarter as previously
discussed. The Company will fund approximately $30.0 million to SMHS during the
seven month phase-in period of the CHAMPUS Region 1 contract. These monies will
be reimbursed by the Department of Defense in accordance with the provisions of
the contract.
CII Financial, Inc., a California workers' compensation company that the Company
acquired in 1995, has convertible subordinated debentures (the "Debentures") due
September 15, 2001 and bearing 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 and are not guaranteed
by Sierra. During the nine months ended September 30, 1997 Sierra purchased
$30,000 of the Debentures on the open market.
The Company has a 1997 capital budget of approximately $45.0 million, primarily
for the construction of a new 59,000 square-foot medical facility, a six-story
180,000 square foot corporate headquarters building and accompanying parking
structure, 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 fourth quarter of 1997 at an
estimated total cost of $7.3 million. Completion of the additional building at
the corporate headquarters complex is expected in the fourth quarter of 1997 at
a total cost of $35.0 million. The Company believes that existing working
capital, operating cash flow and, if necessary, mortgage financing and equipment
leasing, and additional amounts available under its credit facility will be
sufficient to fund its capital expenditures, debt service and any expansion
activities during the next 12 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 and existing credit
facilities, will enable it to meet its liquidity needs on a longer term basis.
The Company's liquidity needs over the next 12 months will primarily be for
implementation of the Region 1 CHAMPUS contract, capital items to support
growing membership, the Company's stock repurchase program, as well as debt
service and expansion of the Company's operations, including potential
acquisitions.
Page 14
<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, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
September 30 September 30
1997 1996
HMO
<S> <C> <C>
Commercial................................................... 151,500 127,300
Medicare..................................................... 34,400 28,500
Managed Indemnity.............................................. 68,400 35,000
Medicare Supplement............................................ 25,200 20,900
Administrative Services........................................ 506,900 291,800
Total Members.................................................. 786,400 503,500
</TABLE>
Effective September 30, 1997, the Company terminated its workers' compensation
administrative services contract within the state of Nevada. The contract served
approximately 200,000 enrollees.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
Page 15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 18, 1997, the Company announced it had terminated its merger
agreement with PCA. The original agreement had been entered into in
November 1996. On March 18, 1997, prior to termination of the merger
agreement, PCA filed a lawsuit against the Company in the District
Court, seeking, among other things, specific performance of the merger
agreement and monetary damages. The lawsuit has been dismissed for
failure to join a necessary party. The Company has also initiated a
lawsuit against PCA in the Court of Chancery of the State of Delaware
seeking a declaratory judgment as well as other remedies. The Company
intends to vigorously pursue all remedies available to it; however,
there can be no assurance that the Company will prevail in such
litigation.
The Company is subject to various other claims and litigation in
the ordinary course of business. Such litigation includes claims
of medical malpractice, claims for coverage or payment for
medical services rendered to HMO members and claims by providers
for payment for medical services rendered to HMO members. Also
included in such litigation are claims for workers' compensation
and claims by providers for payment for medical services rendered
to injured workers. In the opinion of the Company's management,
the ultimate resolution of these claims and legal proceedings
should not have a material adverse effect on the Company's
financial condition.
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
(10) Loan Agreement dated August 11, 1997 between the Company and
Anthony M. Marlon for a revolving credit facility in the
maximum aggregate amount of $3,000,000.
(11) Computation of earnings per share.
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
Page 16
<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 November 14, 1997 /S/ JAMES L. STARR
James L. Starr
Senior Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial and
Accounting Officer)
Page 17
<PAGE>
EXHIBIT 10
LOAN AGREEMENT
THIS LOAN AGREEMENT dated as of August 11, 1997 (as the same may be
amended, supplemented or otherwise modified from time to time, the "Agreement"),
by and for Sierra Health Services , Inc., a Nevada corporation (the "Lender")
and Anthony M. Marlon (the "Borrower"). This Agreement establishes the terms and
conditions that will govern the Loans from the Lender.
RECITALS
All terms not otherwise defined above or in this Introductory Statement are
as defined in Article 1 hereof, or as defined elsewhere herein.
The Borrower has requested the Lender to provide a revolving credit
facility in the maximum aggregate amount of $3,000,000.
The Loans will also be secured by an assignment of the Borrower's rights in
the Collateral (as hereinafter defined) pursuant to the Collateral Assignment of
Rights dated as of August 11, 1997 (the "Assignment") between the Lender as
assignee and the Borrower as assignor.
Subject to the terms and conditions set forth herein, the Lender is willing
to make the Loans to the Borrower.
Accordingly, the parties hereto hereby agree as follows:
1. DEFINITIONS
For the purposes hereof unless the context otherwise requires, the
following terms shall have the meanings indicated. Unless the context otherwise
requires, any of the following terms may be used in the singular or the plural,
depending on the reference:
"Business Day" means a day on which banks are open in Las Vegas.
"Collateral" shall mean the Assigned Rights, as such term is defined in the
Assignment.
"Default" has the meaning given to that term in Section 6.1 below.
"Dollars" means the lawful currency of the United States of America.
"Interest Period" shall mean (i) a period of three months or (ii) as
otherwise agreed by the Borrower and the Lender. In the case of each Loan, the
first Interest Period shall begin on the proposed date of such Loan and each
subsequent Interest Period shall begin on the last day of the previous Interest
Period. If any Interest Period would end on a day which is not a Business Day,
the last day of such Interest Period shall be extended to occur on the next
<PAGE>
succeeding Business Day, provided, however, if such extension would cause
such interest period to occur in the next following calendar month, the last day
of such Interest Period shall occur on the next preceding Business Day.
"Interest Rate" shall mean, with respect to each Loan, a rate per annum during
each Interest Period of 0.10% plus the interest rate at which the Lender is able
to borrow funds pursuant to the Sierra Credit Agreement at the time of the
making of the relevant Loan in an amount and for the approximate period of the
relevant Loan, it being understood and agreed that a written statement by the
Lender of the interest rate at which it is able to borrow shall be conclusive
evidence of such rate absent manifest error.
"Loan" means a loan or loans made by the Lender to the Borrower under this
Agreement or, as the case may be, the outstanding principal balance of any such
loan.
"Maximum Loan Amount" means three million dollars ($3,000,000).
"Obligations" means the due and punctual payment of principal of and
interest on the Loans, all fees and other monetary obligations of the Borrower
to the Lender under this Agreement.
"Persons" includes any individual, company, corporation, firm, partnership,
joint venture, association, organization, trust, state or agency of a state (in
each case, whether or not having separate legal personality).
"Sierra Credit Agreement" means the Credit Agreement dated as of April 11,
1996, as amended, among the Lender, as borrower, various lenders and Bank of
America National Trust and Savings Association as Agent.
"Sum Outstanding" means the total principal amount of any outstanding
Loans, together with all accrued but unpaid interest, fees and other amounts
payable hereunder.
"Termination Date" means June 30,1998, unless extended or terminated
earlier pursuant to Section 2.4 of the Agreement.
2. THE LOAN
2.1. Making the Loan. The Lender agrees, upon the terms and subject to the
conditions set forth in this Agreement, from and including the date hereof
through and including the Termination Date, to make Loans to the Borrower from
time to time, each in an amount which will not exceed the Maximum Loan Amount
less the Sum Outstanding. Subject to the terms of this Agreement, the Borrower
may borrow, repay and reborrow Loans at any time prior to the Termination Date.
2.2. Borrowing Notice. The Borrower shall give the Lender irrevocable
notice not later than 12:00 noon (Las Vegas time) at least three Business Days
before the proposed borrowing date (the "Borrowing Date") of any Loan specifying
(i) the Borrowing Date of such Loan which shall be a Business Day and (ii) the
principal amount of such Loan.
2.3. Interest. Subject to the provisions of Section 2.8, the Loans shall
bear interest at a rate per annum (computed on the basis of the actual days
elapsed over a year of 360 days) equal to the Interest Rate. Interest shall be
payable [(subject to the next sentence)] quarterly on the last Business Day of
each March, June, September, and December, and at maturity. Interest shall
automatically be capitalized when due and payable until June 30, 1998, so long
as all other conditions of borrowing described herein are satisfied and there is
sufficient availability under the Maximum Loan Amount. Interest shall accrue
from and including the date of each Loan to but excluding the date on which such
Loan is paid.
2.4. Repayments. (a) The Borrower promises to pay to the Lender (or to the
Lender's order) the outstanding amount of all Loans, interest and other charges
permitted under and in accordance with this Agreement on the Termination Date.
(b) In the event the Borrower sells any shares of stock of the Lender now
owned of record or beneficially by the Borrower or hereafter acquired by him in
excess of 50,000 shares, the Borrower promises to pay to the Lender, as a
prepayment of the Loans, 25% of the net proceeds of any such sale up to the
extent of the Sum Outstanding. Such payment shall be made to the Lender (or to
the Lender's order) not more than one Business Day after the receipt by the
Borrower of the proceeds of such sale.
(c) The Borrower shall have the right at his option on any Business Day to
prepay the Loans, in whole or in part, upon at least three Business Days prior
written notice to the Lender, in a minimum amount of not less than $100,000, or
such lesser amount as is then outstanding.
(d) Any prepayment of Loans which is made on a day other than the last day
of an Interest Period shall be accompanied by any amount due under Section
7.2(b)(4) hereof in respect of such prepayment. Each notice of prepayment shall
specify the prepayment date, the principal amount of the Loan to be prepaid,
shall be irrevocable and shall commit the Borrower to prepay the Loan in the
amount and on the date stated therein.
2.5. Default Interest. So long as a Default shall have occurred and be
continuing (after as well as before judgment), the Borrower shall on demand from
time to time pay interest on the then unpaid amount of the Obligations then
outstanding at a rate per annum of 200 basis points (2%) in excess of the rate
then in effect, subject to the provisions of Section 2.8.
2.6. Manner of Payments. All payments by the Borrower hereunder shall be
made in Dollars in federal or other immediately available funds to the account
of the Lender in accordance with the wire transfer instructions provided by the
Lender from time to time. Any such payment received after 11:00 a.m. Las Vegas
time on the date when due shall be deemed received on the following Business
Day.
2.7. Purpose. The Borrower may use proceeds of Loans for payment of accrued
interest, fees and expenses due hereunder or incurred in connection herewith, or
for any other lawful purposes.
2.8. Applicable Law. Anything in this Agreement to the contrary
notwithstanding, the interest rate on the Loans shall in no event be in excess
of the maximum interest rate permitted by applicable law.
3. REPRESENTATIONS AND WARRANTIES
On a continuing basis, the Borrower represents, warrants and covenants to
the Lender that:
3.1. No Consents. No order, consent, license, authorization, recording or
registration is required to authorize or is required in connection with the
execution, delivery and performance or the legality, validity, binding effect or
enforceability of this Agreement or the Assignment Agreement, any documents
executed in connection with this Agreement or the Assignment Agreement or any
transactions contemplated by this Agreement or the Assignment Agreement.
3.2. No Litigation. There are no actions, suits, litigation or
investigations, pending or threatened, against the Borrower that could (i) have
a material adverse effect on his financial condition or (ii) affect his ability
to enter into and perform his obligations under this Agreement or any of the
transactions contemplated by this Agreement.
3.3. No Material Adverse Change. Since the date of the most recent
financial statements of the Borrower delivered to the Lender, there has been no
material adverse change in the financial condition of the Borrower.
3.4. Disclosure. Neither this Agreement nor the Borrower's financial
statements furnished to the Lender by the Borrower, at the time it was furnished
or delivered, contained any untrue statement of a material fact or, omitted to
state a material fact necessary under the circumstances under which it was made
in order to make the statements contained herein or therein not misleading.
4. AFFIRMATIVE COVENANTS
Until this Agreement has terminated and all amounts and Obligations
outstanding hereunder or any other documents executed in connection therewith,
have been indefeasibly paid in full, the Borrower will:
4.1. Compliance with Laws. Comply in all material respects, with all
applicable laws, statutes, codes, ordinances, regulations, rules, orders,
awards, judgments, decrees, injunctions, approvals and permits applicable to
him.
4.2. Payment of Taxes. Pay all taxes, assessments and governmental charges
imposed upon him or upon his property and all claims (including, without
limitation, claims for labor, materials, supplies or services) which would, if
unpaid, become a lien upon his property, unless, in each case, the validity or
amount thereof is being contested in good faith by appropriate proceedings and
he has maintained adequate reserves with respect thereto.
4.3. Bankruptcy. Notify the Lender in writing before filing any petition
seeking the protection of any bankruptcy, insolvency or any similar statutes.
4.4. Financial and Credit Information. (a) Notify the Lender immediately,
in writing, of any change in his financial condition or prospects which would
materially and adversely affect his ability to repay any obligation(s) to the
Lender according to the terms of this Agreement.
(b) Comply with any requests from the Lender for additional documentation
required to be filed or executed by the Borrower from time to time by applicable
law or otherwise reasonably requested by the Lender.
5. CONDITIONS PRECEDENT TO LOANS
5.1. Conditions Precedent to Initial Loan. It shall be a condition
precedent to the effectiveness of this Agreement and the making of the initial
Loan hereunder that the Lender shall have received the following, in form and
substance satisfactory to the Lender in its sole discretion:
(a) this Agreement shall have been fully executed;
(b) the Assignment Agreement shall have been fully executed;
(c) duly executed UCC-1 financing statement(s) in proper form for filing at
the filing office(s) for the jurisdiction(s) in which the Borrower is "located"
within the meaning of Section 9-103 of the Uniform Commercial Code; and
(d) such other documents as the Lender may request.
5.2. Conditions Precedent to All Loans. It shall be a condition precedent
to each Loan that on the date of such Loan the following statements shall be
true (and each request for a Loan shall constitute a representation and warranty
by the Borrower that on the date of such Loan such statements are true):
(a) The amount of such Loan does not exceed the amount permitted by Section
2.1 hereof;
(b) The representations and warranties contained in Article 4 are true and
correct in all material respects on and as of the date of such Loan, except to
the extent such representations and warranties specifically relate to an earlier
date; and
(c) No event has occurred or is continuing or would result from the making
of such Loan which would constitute a Default or an event, act or condition
which with the passage of time or notice, or both, would constitute a Default.
6. DEFAULTS; REMEDIES
6.1. Defaults. A default ("Default") will occur under this Agreement if:
(a) the Borrower fails to make any payment of principal when it is due as
required by this Agreement or fails to make any payment of interest or fees
within 10 days after it is due as required by this Agreement;
(b) any representation or warranty contained in this Agreement or any
document delivered to the Lender in connection herewith shall prove to have been
false or misleading in any material respect at the time when made or deemed
made;
(c) the Borrower shall breach any other provision of this Agreement or the
Assignment Agreement which breach is not cured within 30 days after its
occurrence;
(d) the Borrower shall generally not pay his debts as they become due or
shall admit in writing his inability to pay his debts, or shall make a general
assignment for the benefit of creditors; or the Borrower shall commence any
case, proceeding or other action seeking to have an order for relief entered on
his behalf as debtor or to adjudicate him a bankrupt or insolvent, or seeking
arrangement, adjustment or composition of his debts under any law relating to
bankruptcy, insolvency or relief of debtors or seeking appointment of a trustee,
custodian or other similar official for his or for all or any substantial part
of his property or shall file an answer or other pleading in any such case,
proceeding or other action admitting the material allegations of any petition,
complaint or similar pleading filed against him or consenting to the relief
sought therein; or the Borrower shall take any action to authorize any of the
foregoing;
(e) any involuntary case, proceeding or other action against the Borrower
shall be commenced seeking to have an order for relief entered against him as
debtor or to adjudicate him a bankrupt or insolvent, or seeking arrangement,
adjustment or composition of his debts under any law relating to bankruptcy,
insolvency or relief of debtors, or seeking appointment of a trustee, custodian
or other similar official for him or for all or any substantial part of his
property, and such case, proceeding or other action (i) results in the entry of
any order for relief against him or (ii) shall remain undismissed for a period
of thirty (30) days;
(f) an attachment is levied against all or any portion of the Collateral;
or
(g) final judgment(s) for the payment of money in an aggregate amount in
excess of $5,000,000 shall be rendered against the Borrower and within thirty
(30) days from the entry of judgment shall not have been discharged or stayed
pending appeal or shall not have been discharged within thirty (30) days from
the entry of a final order of affirmance on appeal;
(h) the Lender determines that there is a material adverse change in the
Borrower's financial condition, as compared to his condition on the date hereof
after giving effect to the making of the Loans hereunder and the application of
the proceeds thereof in accordance with Section 2.7 hereof.
6.2. Remedies. Upon the occurrence of a Default, the Lender may, at its
option, declare all Loans together with all accrued interest and fees to be
immediately due and payable, and terminate the Lender's commitment to make Loans
hereunder.
7. INDEMNIFICATION
7.1. Indemnification of the Lender. The Borrower hereby agrees to hold
harmless the Lender, its affiliates, and its employees from any and all claims,
liabilities, and/or damages, in any way related to, or arising out of, or in
connection with, the Assignor's assigning of the Assigned Rights, the Lender's
exercise of rights under this Agreement or the Assignment Agreement, except to
the extent any such claim results from the Lender's gross negligence or willful
misconduct.
7.2. Miscellaneous Indemnities. The Borrower shall on demand indemnify the
Lender against:
(a) any cost or increased cost in maintaining the Lender's commitment to
make Loans hereunder, all or any part of any Loan, or any other amount
outstanding under this Agreement or any reduction in the effective return to the
Lender under this Agreement or in the rate of overall return on its capital
below that which it would have been able to achieve but for its entering into or
giving effect to this Agreement, in each case, which, in the Lender's
determination, is sustained or incurred directly or indirectly as a consequence
of, or of compliance with, any change in law or regulation or any directive or
the like (whether or not having the force of law) of any governmental or other
regulatory body or authority including any law, regulation, directive or the
like relating to reserve assets, liquidity or monetary control or affecting the
manner in which the Lender allocates capital resources to its obligations under
this Agreement;
(b) any funding and any other cost, expense or liability (including loss of
profit, legal fees and taxes) sustained or incurred by the Lender (1) to render
this Agreement and the Assignment Agreement enforceable and admissible in
evidence in any enforcement proceedings commenced by the Lender in connection
with this Agreement or the Assignment Agreement, (2) in connection with the
administration of, or in protecting or enforcing the Lender's rights under this
Agreement or the Assignment Agreement and/or any amendment thereto, (3) as a
result of the occurrence or continuance of any Default (whether in connection
with any act or thing done as set out in Article 9 or otherwise), or (4) as a
result of the receipt or recovery by the Lender of all or any part of a Loan or
an overdue sum otherwise than on the last day of an Interest Period applicable
to a Loan or, as the case may be, a period selected by the Lender and applicable
to that overdue sum; and
(c) any stamp, documentary, registration or similar tax payable in
connection with the entry into, registration, performance, enforcement or
admissibility in evidence of this Agreement and/or any such amendment,
supplement or waiver, promptly and in any event before any interest or penalty
becomes payable, together with any liability with respect to or resulting from
any delay in paying or omission to pay any such tax.
8. MISCELLANEOUS
8.1. Cost of Collection. If the Borrower fails to make any payment under
this Agreement as and when required, the Borrower must pay, to the extent
permitted by applicable law, the Lender's court and collection costs, including
legal fees actually incurred, any costs incurred in the disposition of the
Collateral, and, if the Borrower's Loan is referred for collection to any
attorney not employed by the Lender or one of its affiliates, the Lender's
reasonable attorney fees actually incurred.
8.2. Delay in Enforcement; No Waiver. The Lender can choose to delay or not
to enforce any of its rights under this Agreement without losing such rights. If
the Lender chooses not to exercise or enforce any of its rights, the Borrower
agrees that the Lender is not waiving the right to enforce such rights at a
later time or any of its other rights. Any waiver of the Lender's rights under
this Agreement must be in writing.
8.3. Waivers. To the extent permitted by applicable law, the Borrower
waives his rights to require the Lender, (a) to demand payments of amounts due
(known as "presentment"); (b) to give notice that amounts due have not been paid
(known as "notice of dishonor"); and (c) to obtain an official certification of
non-payment (known as "protest").
8.4. Successors and Assigns. (a) Subject to Section 8.5 hereof, this
Agreement shall be binding upon and inure to the benefit of the heirs,
executors, administrators, legal representatives, successors and assigns of all
the parties to this Agreement. So long as no Default shall have occurred and be
continuing the Lender will not make any assignment of all or part of its rights,
obligations and remedies under this Agreement or the Assignment Agreement
without the consent of the Borrower (such consent not to unreasonably be
withheld). Any such assignee of such rights and obligations shall be entitled to
the full benefit of this Agreement and the Assignment Agreement to the same
extent as if it were an original party in respect of the rights or obligations
assigned or transferred to it. The Borrower shall not assign any of his rights
or obligations under this Agreement.
(b) The Lender may at any time change the office through which it is acting
for the purpose of this Agreement and may at any time act for this purpose
through more than one office.
(c) The Lender may disclose to a potential assignee or transferee or any
other Person who has entered or proposes to enter into contractual arrangements
with the Lender in relation to or concerning this Agreement such information
about the Borrower, this Agreement and the Assignment Agreement as it may deem
appropriate.
8.5. GOVERNING LAW. THIS AGREEMENT IN ALL RESPECTS SHALL BE GOVERNED BY AND
INTERPRETED UNDER THE LAWS OF THE STATE OF NEVADA APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE WITHOUT REFERENCE TO ANY CONFLICTS
OF LAWS PRINCIPLES AND, IN THE CASE OF PROVISIONS RELATING TO INTEREST RATES,
ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
8.6. WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW WHICH
CANNOT BE WAIVED, THE BORROWER HEREBY WAIVES AND COVENANTS THAT HE WILL NOT
ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY
JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF,
IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR
TORT OR OTHERWISE. THE BORROWER ACKNOWLEDGES THAT IS HAS BEEN INFORMED BY THE
LENDER THAT THE PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT UPON
WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN ENTERING INTO THIS
AGREEMENT AND ANY DOCUMENT RELATED THERETO. THE LENDER MAY FILE AN ORIGINAL
COUNTERPART OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF
THE BORROWER TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY.
8.7. Amendments. No modification, amendment or waiver of any provision of
this Agreement, and no consent to any departure herefrom or therefrom, shall in
any event be enforceable against any party unless the same shall be in writing
and signed or consented to in writing by such party.
8.8. Headings. The heading of each provision of this Agreement is for
descriptive purposes only and shall not be deemed to modify or qualify any of
the rights or obligations described in each such provision.
8.9. Severability. If any provision of this Agreement is held to be
invalid, illegal, void or unenforceable, by reason of any law, rule,
administrative order or judicial or arbitral decision, such determination shall
not affect the validity of the remaining provisions of this Agreement.
8.10. Entire Agreement. This Agreement, together with the Assignment
Agreement, constitutes the entire agreement between the Borrower and the Lender
regarding the matters contemplated by this Agreement, and supersedes any and all
prior agreements (whether written or oral).
8.11. Notices. All communications hereunder shall be in writing and
delivered or mailed by registered or certified mail or overnight carrier or by
telecopy. Statements, notices and all other communications to the Borrower will
be sent to the address set forth below or to such other address as may be
designated in a written notice delivered in the manner provided herein. The
Borrower agrees to send correspondence to the Lender at the address set forth
below or such other address for notices provided by the Lender from time to
time.
If to Borrower:
Anthony M. Marlon, M.D.
P.O. Box 15645
Las Vegas, Nevada 89114-5645
Telephone: 702-242-7180
Facsimile: 702-242-7195
If to the Lender:
Sierra Health Services, Inc.
2724 North Tenaya Way
Las Vegas, Nevada 89128
Attn:
Telephone:
Facsimile:
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly executed or caused
this Agreement to be duly executed by its authorized officer as of the day and
year first written above.
BORROWER:
/S/ Anthony M. Marlon
Anthony M. Marlon, M.D.
LENDER:
SIERRA HEALTH SERVICES, INC.
By: /S/ Erin MacDonald
Title: President
Executed by the Lender at
10:00 a.m.on
August 13, 1997
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
1997 1996 1997 1996
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
NET INCOME................................................ $495,000 $4,067,000 $12,454,000 $24,442,000
EARNINGS PER COMMON SHARE................................. $.03 $.23 $.69 $1.38
Weighted Average Common Shares
Outstanding.............................................. 18,075,000 17,775,000 17,965,000 17,703,000
PRIMARY EARNINGS PER COMMON
SHARE AND COMMON SHARE
EQUIVALENT............................................... $.03 $.23 $.68 $1.35
Weighted Average Common and Common
Equivalent Shares Outstanding............................ 18,387,000 18,154,000 18,233,000 18,167,000
FULLY DILUTED EARNINGS
PER COMMON AND COMMON
SHARE EQUIVALENT......................................... $.03 $.22 $.68 $1.34
Weighted Average Common and Common
Equivalent Shares Outstanding Assuming
Full Dilution............................................ 18,444,000 18,260,000 18,389,000 18,224,000
</TABLE>
Note: Common Equivalent Shares represent the incremental effect of
outstanding stockoptions 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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 94,065,000
<SECURITIES> 278,719,000
<RECEIVABLES> 41,976,000
<ALLOWANCES> 7,539,000
<INVENTORY> 0
<CURRENT-ASSETS> 231,394,000
<PP&E> 174,447,000
<DEPRECIATION> 48,116,000
<TOTAL-ASSETS> 679,345,000
<CURRENT-LIABILITIES> 202,585,000
<BONDS> 79,539,000
0
0
<COMMON> 92,000
<OTHER-SE> 251,489,000
<TOTAL-LIABILITY-AND-EQUITY> 679,345,000
<SALES> 0
<TOTAL-REVENUES> 530,758,000
<CGS> 0
<TOTAL-COSTS> 485,828,000
<OTHER-EXPENSES> 29,350,000<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,549,000
<INCOME-PRETAX> 12,031,000
<INCOME-TAX> (423,000)<F2>
<INCOME-CONTINUING> 12,454,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,454,000
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.00
<FN>
<F1>Merger, Restructuring and CHAMPUS Start-up Expenses
<F2>Income Tax Benefit
</FN>
</TABLE>
