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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 March 31, 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
(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 April 30, 1997 there were 18,006,000 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 --
March 31, 1997, and December 31, 1996............... 3
Condensed Consolidated Statements of Operations--
Three months ended March 31, 1997, and
March 31, 1996....................................... 4
Condensed Consolidated Statements of Cash Flows--
Three months ended March 31, 1997, and
March 31, 1996....................................... 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 7
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ........................................... 11
Part II - OTHER INFORMATION
Item l. Legal Proceedings...................................... 12
Item 2. Changes in Securities.................................. 12
Item 3. Defaults upon Senior Securities........................ 12
Item 4. Submission of Matters to a Vote of Security Holders.... 12
Item 5. Other Information...................................... 12
Item 6. Exhibits and Reports on Form 8-K....................... 13
Signatures............................................................... 14
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents................................................... $ 87,077,000 $103,587,000
Short-term Investments...................................................... 73,769,000 83,688,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts: 1997 - $7,518,000, 1996 - $7,324,000) .................... 29,662,000 31,849,000
Prepaid Expenses and Other Assets........................................... 53,640,000 33,811,000
Total Current Assets................................................ 244,148,000 252,935,000
PROPERTY AND EQUIPMENT ........................................................ 149,189,000 140,130,000
Less: Accumulated Depreciation.............................................. 42,907,000 40,326,000
Land, Building and Equipment - Net.................................. 106,282,000 99,804,000
LONG-TERM INVESTMENTS ......................................................... 184,208,000 160,482,000
RESTRICTED CASH AND INVESTMENTS ............................................... 12,783,000 13,648,000
REINSURANCE RECOVERABLE, Net of Current Portion................................ 14,705,000 14,721,000
GOODWILL ...................................................................... 44,139,000 44,602,000
OTHER ASSETS .................................................................. 39,094,000 43,270,000
TOTAL ASSETS................................................................... $645,359,000 $629,462,000
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities.............................. $ 55,684,000 $ 50,153,000
Medical Claims Payable...................................................... 54,458,000 46,969,000
Current Portion of Reserve for Losses and
Loss Adjustment Expense ............................................ 52,345,000 52,878,000
Unearned Premium Revenue.................................................... 16,712,000 24,210,000
Current Portion of Long-term Debt........................................... 19,110,000 2,195,000
Total Current Liabilities........................................... 198,309,000 176,405,000
RESERVE FOR LOSSES AND LOSS
ADJUSTMENT EXPENSE (Less Current Portion) ................................. 137,312,000 134,898,000
LONG-TERM DEBT (Less Current Portion).......................................... 65,641,000 66,189,000
OTHER LIABILITIES ............................................................. 8,768,000 17,488,000
TOTAL LIABILITIES.............................................................. 410,030,000 394,980,000
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 - 17,966,000; 1996 - 17,910,000;................ 89,000 89,000
Additional Paid-in Capital................................................... 153,151,000 152,035,000
Treasury Stock, 100,200 Common Shares........................................ (130,000) (130,000)
Unrealized Holding (Loss) Gain on Available-for-Sale Securities.............. (1,180,000) 487,000
Retained Earnings............................................................ 83,399,000 82,001,000
Total Stockholders' Equity............................................. 235,329,000 234,482,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $645,359,000 $629,462,000
</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
March 31 March 31
1997 1996
OPERATING REVENUES:
<S> <C> <C>
Medical Premiums...................................................... $122,339,000 $90,605,000
Specialty Product Revenue............................................. 34,713,000 30,939,000
Professional Fees..................................................... 7,521,000 7,572,000
Investment and Other Revenue.......................................... 6,005,000 6,896,000
Total.............................................................. 170,578,000 136,012,000
OPERATING EXPENSES:
Medical Expenses...................................................... 99,676,000 73,951,000
Specialty Product Expenses............................................ 34,651,000 30,523,000
General, Administrative and Marketing Expenses ....................... 22,009,000 17,163,000
Merger and Related Expenses .......................................... 11,000,000
Total.............................................................. 167,336,000 121,637,000
OPERATING INCOME.......................................................... 3,242,000 14,375,000
INTEREST EXPENSE AND OTHER, NET........................................... (1,402,000) (809,000)
INCOME BEFORE INCOME TAXES ............................................... 1,840,000 13,566,000
PROVISION FOR INCOME TAXES................................................ 442,000 3,402,000
NET INCOME ............................................................ $ 1,398,000 $ 10,164,000
EARNINGS PER COMMON SHARE ................................................ $.08 $.58
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................ 17,849,000 17,627,000
</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>
Three Months Ended
March 31 March 31
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income.............................................................. $1,398,000 $10,164,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization..................................... 3,263,000 2,468,000
Provision for Doubtful Accounts................................... 967,000 536,000
Changes in Assets and Liabilities ...................................... 916,000 (7,210,000)
Net Cash Provided by Operating Activities .............................. 6,544,000 5,958,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net of Equipment Dispositions..................... (9,059,000) (1,914,000)
Decrease (Increase) in Short-term Securities............................ 9,847,000 (622,000)
(Increase) Decrease in Long-term Securities............................. (25,243,000) 460,000
Decrease in Restricted Cash and Securities.............................. 753,000 195,000
Loan to Third Party..................................................... (16,750,000)
Net Cash Used for Investing Activities............................ (40,452,000) (1,881,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings ............................................... 17,000,000
Payments on Debt and Capital Leases..................................... (648,000) (1,868,000)
Exercise of Stock in Connection with Stock Plans........................ 1,046,000 1,519,000
Net Cash Provided by (Used for) Financing Activities................. 17,398,000 (349,000)
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS.................................................... (16,510,000) 3,728,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 103,587,000 57,044,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 87,077,000 $60,772,000
Three Months Ended
Supplemental Condensed Consolidated March 31 March 31
Statements of Cash Flows Information: 1997 1996
Cash paid during the period for Interest
(net of amount Capitalized)............................................. $2,203,000 $ 2,503,000
Cash paid during the period for Income Taxes.............................. 3,520,000 650,000
Non-cash Investing and Financing Activities:
Tax Benefits of Stock Issued for Exercise of Options ................... 70,000 377,000
</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").
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, all adjustments, consisting only of
recurring adjustments necessary for a fair statement of the results of
operations for the three-month period ended March 31, 1997, have been made.
2. In March 1997, the Company drew $17.0 million on its $50 million line
of credit for general corporate purposes at a current interest rate of
6.075%. The amount owed on the line of credit is included in current
liabilities at March 31, 1997. The remaining line of credit may be used
for general corporate purposes, including acquisitions, and may be
available for additional working capital, if necessary.
3. The Company has recorded $11.0 million, $8.4 million after taxes, for
certain estimated costs and expenses incurred in association with the
merger agreement with Physician Corporation of America ("PCA") which
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 first quarter of 1997, Statement of Financial Accounting
Standards No. 128 "Earnings per Share" was issued. This standard
relates to the computation of earnings per share. The Company does not
believe this pronouncement will materially impact its consolidated
financial statements when it is required to be adopted on December 31,
1997.
5. In the second quarter of 1997 the Company's Board of Directors
authorized a stock repurchase program of up to $25 million of the
Company's outstanding stock.
6. Amounts in the accompanying Condensed Consolidated Statement of
Operations for the three months ended March 31, 1996 have been
reclassified to conform with the current year presentation.
Page 6
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant for assessment and understanding of the Company's
consolidated financial condition and results of operations. The discussion
should be read in conjunction with the Condensed Consolidated Financial
Statements and Related Notes thereto. Any forward-looking information contained
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations should be considered in connection with certain cautionary
statements contained in the Company's Current Report on Form 8-K filing dated
March 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 March 31, 1997, compared to three
months ended March 31, 1996
The Company's total operating revenues for the three months ended March 31, 1997
increased 25.4% to $170.6 million, from $136.0 million for the three months
ended March 31, 1996. The increase was primarily due to medical premium revenue
increases of $31.7 million, or 35.0%, from the Company's health maintenance
organization ("HMO") and managed indemnity insurance subsidiaries. Such
additional premium revenue resulted principally from a 32.1% 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 3%, primarily due to an increase in its capitation rate for its
Medicare members as established by the Health Care Finance 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 rates realized
by a newly-acquired HMO, MedOne Health Plan, acquired on December 31, 1996.
Specialty product revenue increased $3.8 million, or 12.2%, in the three months
ended March 31, 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. Professional fee revenue decreased slightly from
the comparable period in the prior year. Investment and other revenue decreased
$0.9 million, or 12.9%, primarily due to certain capital gains in the comparable
period in the prior year.
Total medical expenses increased by $25.7 million over the same three-month
period last year. This 34.8% 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
75.3% to 76.8% due primarily to member growth and expansion in areas with higher
medical expenses, such as northern Nevada and Texas. In addition, the
newly-acquired HMO has a higher Medical Loss Ratio which further contributed to
the increase in the overall Medical Loss Ratio. Specialty product expenses
increased $4.1 million, or 13.5%, primarily due to the 12.2% increase in
specialty product revenue discussed previously. Specialty product revenue and
expense is primarily related to the workers' compensation insurance business.
The combined ratio for the workers' compensation insurance business was
104.5% compared to 104.6% for the same period in the prior year. The decrease in
the combined ratio is due primarily to a 2.8% decrease in the operating expense
ratio partially offset by a net 2.7% increase in the loss ratio. The
Page 7
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 favorable loss development in California
totaling $1.8 million compared to favorable loss development of $4.0 million for
the comparable prior year period. The loss and loss adjustment expense ratio for
the three months ended March 31, 1997 reflects the Company's current projection
of the ultimate costs of claims occurring in the current as well as prior
accident years. 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 $4.8 million, or
28.2%, compared to the first quarter of 1996. As a percentage of revenues G&A
costs for the first quarter of 1997 increased slightly to 12.9% from 12.6%
during the comparable period in 1996. Of the $4.8 million increase in G&A, $1.5
million consisted of increased compensation expense resulting primarily from
additional employees supporting expanded services. Broker, third-party
administration and premium tax expenses increased approximately $2.5 million due
to increased membership. 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 March 31, 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.
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. Although the Company believes the PCA
lawsuit is without merit, there can be no assurance as to the outcome of the PCA
lawsuit. The Company has filed a motion in the District Court seeking a
dismissal of the PCA lawsuit. The Company has also initiated a lawsuit 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 or that PCA will have sufficient funds to pay any
damages that the Company may be awarded.
Excluding the effect of the merger-related costs, operating income for the three
months ended March 31, 1997 decreased $400,000, or 4.0%, from the three months
ended March 31, 1996. The decrease was due in part to almost $500,000 in gains
realized on the sale of certain investments during the first quarter of 1996 as
well as the $400,000 benefit recorded in 1996 for minority interests. During the
4th quarter of 1996 the Company purchased the remaining interests of HMO Texas,
L.C. Net income decreased by $8.8 million, primarily due to merger-related
expenses offset by a $3.0 million decrease in the provision for income taxes.
The decrease in the effective tax rate from 25.1% to 24.0% resulted from the
Company's investment in tax-preferred investments and the change in the deferred
tax valuation allowance which is due primarily to the ability to use a portion
of net operating loss carryovers.
Page 8
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
The Company's cash flow from operating activities during the three months ended
March 31, 1997 resulted from $1.4 million of net income and $3.3 million in
depreciation and amortization as well as a $1.9 million net change in assets and
liabilities, excluding cash and cash equivalents. The increase in cash which
resulted from the change in operating assets and liabilities was primarily due
to increases in medical claims payable and accrued and other liabilities,
partially offset by a decrease in unearned premium revenue, and an increase in
other current assets.
The $23.1 million used for investing and financing activities since December 31,
1996 primarily consisted of $9.1 million in net capital expenditures including
construction costs associated with medical facilities, office facilities,
computer and medical equipment, and other capital needs to support the Company's
growth as well as a $14.6 million net increase in investments. Additionally,
$600,000 used for the reduction of debt was offset in part by $1.0 million
received in connection with the purchase 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.
There can be no assurance that PCA will have sufficient funds to pay the PCA
Credit Facility and the PCA Loan in full.
Sierra has a $50.0 million unsecured line of credit from Bank of America
National Trust & Savings Association ("B of A") for a term of five years at an
interest rate indexed to the London InterBank Offering Rate ("LIBOR") plus 32
basis points. Such rate was 6.075% at March 31, 1997. In March 1997, the Company
drew $17.0 million on the line of credit for general corporate purposes. The
remaining line of credit may be used for general corporate purposes, including
acquisitions, and may be available for additional working capital, if necessary.
The Company is currently negotiating with B of A to expand its line of credit to
$100 million.
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
March 31, 1997. The HMO and insurance subsidiaries must also meet requirements
to maintain minimum capital and surplus on a statutory basis, ranging from
$200,000 to $5.2 million. Of the cash and cash equivalents held at March 31,
1997, $69.1 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 if such dividend
payment would cause violation of statutory net worth and reserve requirements.
The Company has submitted a proposal as the prime contractor to the Office of
the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS") to
provide managed health care coverage to CHAMPUS eligible beneficiaries in Region
1. This region includes approximately 665,000 individuals in Connecticut,
Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island, Vermont, northern Virginia and Washington, D.C. The
Company expects to
Page 9
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
incur expenses of approximately $8.0 to $10.0 million during the Region 1
contract proposal process. The Company submitted its final bid on February 14,
1997 and anticipates learning of the result of its bid in the second quarter of
1997. The contract, if awarded to the Company, will result in approximately $1.8
billion in estimated revenues over the five-year term of the contract. The
expenses incurred in connection with the contract have been capitalized, and
will be amortized over the term of the contract. If the Company is not awarded
the contract, the costs will be expensed in the period that notification is
received.
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 three months ended March 31,
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 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
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 acquisition and integration.
Page 10
<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 March 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
March 31 March 31
1997 1996
HMO
<S> <C> <C>
Commercial.................................................. 156,000 119,000
Medicare.................................................... 31,000 27,000
Managed Indemnity............................................. 48,000 32,000
Medicare Supplement........................................... 24,000 17,000
Administrative Services....................................... 505,000 303,000
Total Members................................................. 764,000 498,000
</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.
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 11
<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. Although the Company believes the PCA lawsuit is without
merit, there can be no assurance as to the outcome of the PCA
lawsuit. The Company has filed a motion in the District Court
seeking a dismissal of the PCA lawsuit. The Company has also
initiated a lawsuit 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 or that PCA will have
sufficient funds to pay any damages that the Company may be
awarded.
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
Page 12
<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
The Company filed a Current Report on Form 8-K, dated March
28, 1997, with the Securities and Exchange Commission in
connection with certain cautionary statements made pursuant
to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
Page 13
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA HEALTH SERVICES, INC.
(Registrant)
Date May 14, 1997 /S/ JAMES L. STARR
James L. Starr
Vice President
Chief Financial Officer and Treasurer
(Chief Accounting Officer)
Page 14
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH MARCH
1997 1996
-------------- ---------
<S> <C> <C>
NET INCOME...........................................$1,398,000... $10,164,000
EARNINGS PER COMMON SHARE............................$.08......... $.58
Weighted Average Number of
Common Shares Outstanding.........................17,849,000... 17,627,000
PRIMARY EARNINGS PER COMMON
AND COMMON SHARE EQUIVALENTS......................$.08... $.56
Weighted Average Number of Common
and Common Equivalent Shares Outstanding.............18,065,000......... 18,057,000
FULLY DILUTED PRIMARY EARNINGS
PER COMMON AND COMMON
SHARE EQUIVALENTS.................................$.08... $.56
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
Assuming Full Dilution...............................18,110,000......... 18,058,000
</TABLE>
Note: Common Equivalent Shares represent the incremental effect of
outstanding stock options and stock appreciation rights.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE STATEMENTS OF CONSOLIDATED OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 87,077,000
<SECURITIES> 270,760,000
<RECEIVABLES> 37,180,000
<ALLOWANCES> 7,518,000
<INVENTORY> 0
<CURRENT-ASSETS> 244,148,000
<PP&E> 149,189,000
<DEPRECIATION> 42,907,000
<TOTAL-ASSETS> 645,359,000
<CURRENT-LIABILITIES> 198,309,000
<BONDS> 65,641,000
0
0
<COMMON> 89,000
<OTHER-SE> 235,240,000
<TOTAL-LIABILITY-AND-EQUITY> 645,359,000
<SALES> 0
<TOTAL-REVENUES> 170,578,000
<CGS> 0
<TOTAL-COSTS> 156,336,000
<OTHER-EXPENSES> 11,000,000<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,402,000
<INCOME-PRETAX> 1,840,000
<INCOME-TAX> 442,000
<INCOME-CONTINUING> 1,398,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,398,000
<EPS-PRIMARY> .08
<EPS-DILUTED> 0.00
<FN>
<F1>Merger and Related Expenses
</FN>
</TABLE>
