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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, 1998
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 April 30, 1998 there were 18,350,000 shares of common stock outstanding.
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<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1998
INDEX
Page No.
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997................. 3
Condensed Consolidated Statements of Operations and
Comprehensive Income - three months ended
March 31, 1998 and March 31, 1997.................... 4
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 1998
and March 31, 1997................................... 5
Notes to Condensed Consolidated Financial
Statements........................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 8
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.................................... 13
Part II - OTHER INFORMATION
Item l. Legal Proceedings...................................... 14
Item 2. Changes in Securities.................................. 14
Item 3. Defaults Upon Senior Securities........................ 14
Item 4. Submission of Matters to a Vote of Security Holders.... 14
Item 5. Other Information...................................... 14
Item 6. Exhibits and Reports on Form 8-K....................... 14
Signature................................................................ 16
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
1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents................................................... $ 39,438,000 $ 96,841,000
Short-term Investments...................................................... 139,668,000 115,498,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts: 1998 - $8,982,000; 1997 - $7,916,000)......................... 55,623,000 42,041,000
Prepaid Expenses and Other Assets............................................ 47,692,000 46,226,000
Total Current Assets..................................................... 282,421,000 300,606,000
LAND, BUILDINGS AND EQUIPMENT................................................. 209,809,000 197,917,000
Less-Accumulated Depreciation............................................... (52,555,000) (49,086,000)
Land, Buildings and Equipment - Net...................................... 157,254,000 148,831,000
LONG-TERM INVESTMENTS....................................................... 183,700,000 155,153,000
RESTRICTED CASH AND INVESTMENTS............................................. 17,119,000 16,540,000
REINSURANCE RECOVERABLE (Less Current Portion) ............................. 18,781,000 20,245,000
GOODWILL ................................................................... 42,333,000 42,803,000
OTHER ASSETS................................................................ 39,096,000 39,758,000
TOTAL ASSETS.................................................................. $740,704,000 $723,936,000
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities.............................. $ 65,190,000 $ 58,439,000
Medical Claims Payable...................................................... 55,016,000 55,943,000
Current Portion of Reserves for Losses and
Loss Adjustment Expense ................................................. 67,767,000 63,358,000
Unearned Premium Revenue.................................................... 18,695,000 29,763,000
Current Portion of Long-term Debt........................................... 4,191,000 4,726,000
Total Current Liabilities................................................ 210,859,000 212,229,000
RESERVES FOR LOSSES AND LOSS ADJUSTMENT
EXPENSE (Less Current Portion) ............................................. 135,441,000 139,341,000
LONG-TERM DEBT (Less Current Portion)......................................... 98,239,000 90,841,000
OTHER LIABILITIES............................................................. 14,550,000 15,843,000
TOTAL LIABILITIES............................................................. 459,089,000 458,254,000
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: 1998 - 18,632,000; 1997 - 18,473,000...................... 93,000 92,000
Additional Paid-in Capital.................................................. 168,556,000 164,294,000
Treasury Stock: 284,500 Common Shares....................................... (5,601,000) (5,601,000)
Unrealized Holding Gain on
Available-for-Sale Securities .......................................... 138,000 655,000
Retained Earnings........................................................... 118,429,000 106,242,000
TOTAL STOCKHOLDERS' EQUITY.................................................... 281,615,000 265,682,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $740,704,000 $723,936,000
</TABLE>
See notes to condensed consolidated financial
statements.
Page 3
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
OPERATING REVENUES:
<S> <C> <C>
Medical Premiums.............................................................. $137,818,000 $122,339,000
Specialty Product Revenues.................................................... 36,161,000 34,713,000
Military Contract Revenues.................................................... 18,536,000
Professional Fees............................................................. 10,923,000 7,521,000
Investment and Other Revenues................................................. 6,971,000 6,005,000
Total ...................................................................... 210,409,000 170,578,000
OPERATING EXPENSES:
Medical Expenses.............................................................. 114,316,000 99,676,000
Specialty Product Expenses.................................................... 36,241,000 34,651,000
Military Contract Expenses.................................................... 16,981,000
General, Administrative and Marketing ........................................ 25,208,000 22,009,000
Merger Related Expenses ...................................................... 11,000,000
Total ...................................................................... 192,746,000 167,336,000
OPERATING INCOME............................................................... 17,663,000 3,242,000
INTEREST EXPENSE AND OTHER, NET ............................................... (1,281,000) (1,402,000)
INCOME BEFORE INCOME TAXES ..................................................... 16,382,000 1,840,000
PROVISION FOR INCOME TAXES...................................................... 4,195,000 442,000
NET INCOME ..................................................................... 12,187,000 1,398,000
OTHER COMPREHENSIVE (LOSS), NET OF TAX.......................................... (517,000) (1,667,000)
COMPREHENSIVE INCOME (LOSS)..................................................... $ 11,670,000 $ (269,000)
NET INCOME PER COMMON SHARE ................................................... $.67 $.08
NET INCOME PER COMMON SHARE ASSUMING DILUTION................................... $.66 $.08
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING...................................... 18,271,000 17,849,000
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING ASSUMING DILUTION.....................18,570,000 18,055,000
</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>
Three Months Ended March 31
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income.............................................................. $12,187,000 $ 1,398,000
Adjustments to Reconcile Net Income to Net Cash
(Used For) Provided by Operating Activities:
Depreciation and Amortization.................................... 4,048,000 3,263,000
Provision for Doubtful Accounts.................................. 1,215,000 967,000
Changes in Assets and Liabilities ...................................... (20,368,000) 916,000
Net Cash (Used for) Provided by Operating Activities ............... (2,918,000) 6,544,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net of Equipment Dispositions..................... (9,159,000) (9,059,000)
Changes in Short-term Investments....................................... (24,247,000) 9,847,000
Changes in Long-term Investments........................................ (29,475,000) (25,243,000)
Changes in Restricted Cash and Investments.............................. (567,000) 753,000
Corporate Disposition, net of cash disposed............................. 1,373,000
Loan to Third Party..................................................... _________ (16,750,000)
Net Cash Used for Investing Activities.............................. (62,075,000) (40,452,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings................................................ 15,000,000 17,000,000
Payments on Debt and Capital Leases..................................... (11,207,000) (648,000)
Exercise of Stock in Connection with Stock Plans........................ 3,797,000 1,046,000
Net Cash Provided by Financing Activities........................ 7,590,000 17,398,000
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................. (57,403,000) (16,510,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 96,841,000 103,587,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $39,438,000 $ 87,077,000
Three Months Ended March 31
Supplemental Condensed Consolidated
Statements of Cash Flows Information: 1998 1997
Cash Paid During the Period for Interest
(Net of Amount Capitalized)............................................. $2,292,000 $2,203,000
Cash Paid During the Period for Income Taxes............................... 1,532,000 3,520,000
Non-cash Investing and Financing Activities:
Tax Benefits of Stock Issued for Exercise of Options ................... 466,000 70,000
Additions to Capital Leases............................................. 3,070,000
</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, 1997 and 1996. 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. On May 5, 1998, the Company announced a three-for-two stock split.
Subject to certain statutory and regulatory approvals, each
stockholder of record of the Company owning one share of common
stock, par value of $.005, as of the close of business on the record
date of May 18, 1998 will be entitled to an additional one-half
share. In lieu of any fractional share resulting from the stock
split, a stockholder will receive a cash payment based on the closing
price of the Company's common stock on the record date. The par value
will remain $.005. Common stock and earnings per share amounts have
not been retroactively adjusted to account for the split.
3. The following table provides a reconciliation of basic and diluted earnings
per share ("EPS"):
<TABLE>
<CAPTION>
Dilutive
Basic Stock Options Diluted
For the Three Months ended March 31, 1998:
<S> <C> <C>
Income from Continuing Operations $12,187,000 $12,187,000
Shares 18,271,000 299,000 18,570,000
Per Share Amount $.67 $.66
For the Three Months ended March 31, 1997:
Income from Continuing Operations $ 1,398,000 $ 1,398,000
Shares 17,849,000 206,000 18,055,000
Per Share Amount $.08 $.08
</TABLE>
CII Financial, Inc., a wholly-owned subsidiary of the Company issued
convertible subordinated debentures (the "Debentures") due September
15, 2001. 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 without giving effect to the split. The Debentures were not
included in the computation of EPS because their effect would be
anti-dilutive.
4. Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("FAS 130") is effective for periods beginning
after December 15, 1997 and requires companies to classify items of
other comprehensive income by their nature in a financial statement.
The Company has implemented FAS 130 and reported other comprehensive
income in the Condensed Consolidated Statements of Operations and
Comprehensive Income. Other comprehensive income is comprised
entirely of unrealized holding gains and losses on available for-sale
investments, net of taxes, arising during the period, adjusted for
gains and losses included in net income.
Page 6
<PAGE>
During 1997 the Financial Accounting Standards Board issued
"Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 is effective for fiscal years beginning after
December 31, 1997; however, the statement need not be applied to
interim statements in the initial year of application. FAS 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. During the
first quarter of 1998, Statement of Financial Accounting Standards
No. 132 "Employers Disclosure about Pensions and Other Postretirement
Benefits" ("FAS 132") was issued. FAS 132 is effective for fiscal
years beginning after December 15, 1997. The Company has implemented
FAS 132.
5. Certain amounts in the Condensed Consolidated Financial Statements
for the three months ended March 31, 1997 have been reclassified to
conform with the current year presentation.
Page 7
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant for an 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 and any other sections of this Quarterly Report on Form 10-Q
should be considered in connection with certain cautionary statements contained
in the Company's Current Report on Form 8-K dated March 19, 1998 incorporated
herein by reference. 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, 1998, compared to three
months ended March 31, 1997.
The Company's total operating revenues for the three months ended March 31, 1998
increased approximately 23.3% to $210.4 from $170.6 million for the three months
ended March 31, 1997. The increase was primarily due to military contract
revenue of $18.5 million and an increase in premium revenue of $15.5 million.
During the fourth quarter of 1997 Sierra Military Health Services, Inc. ("SMHS")
began the implementation phase of its TRICARE contract. The military contract
revenue is a result of the continued implementation of that contract. Medical
premium revenue from the Company's HMO and managed indemnity insurance
subsidiaries increased $15.5 million, or 12.7%. Of such additional premium
revenue 7.5% of the increase resulted principally from additional 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 5.2% primarily due to rate increases of 3% to 4% for its existing
HMO subsidiaries' commercial groups and an average rate increase exceeding 10%
for managed indemnity commercial groups. The Company also realized a slight
increase in its capitation rate established by the Health Care Financing
Administration ("HCFA"). Specialty product revenue increased $1.4 million, or
4.2%, for the three months ended March 31, 1998 compared to the same three-month
period in the prior year. The increase was due to revenue growth in the workers'
compensation insurance market offset in part by a decrease in administrative
services revenue of $1.4 million due primarily to the termination of the
Company's workers' compensation administrative services contract with the State
of Nevada. Professional fee revenue increased approximately $3.4 million
primarily due to the acquisition of the operations of two medical clinics in
southern Nevada. In addition approximately $900,000 of the increase in
professional fees is due to the operations of Total Home Care, Inc. ("THC"). THC
was acquired in the third quarter of 1997 and provides home infusion, oxygen and
durable medical equipment services in Nevada and Arizona. The Company sold THC's
Arizona operations in the first quarter of 1998. Investment and other revenue
increased approximately $1.0 million over the comparable period in the prior
year primarily due to an increase in invested balances and capital gains
realized on the sale of investments.
Total medical expenses increased $14.6 million over the same three-month period
last year. This 14.7% increase resulted primarily from the consolidated member
month growth as well as the acquisitions discussed previously. The costs to
operate THC and the medical clinics are included in medical expenses. These
factors, as well as an increase in Medicare members as a percentage of
fully-insured members, resulted in an increase in medical expenses as a
percentage of medical premiums and professional fees ("Medical Loss Ratio") from
76.8% to 76.9%. The cost of providing medical care to Medicare members generally
requires a greater percentage of the premiums received. Specialty product
expenses increased $1.6 million, or 4.6%, due primarily to the 4.2% 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 March 31, 1998, compared to three
months ended March 31, 1997 (continued).
The combined ratio for the workers' compensation insurance business was 102.6%
compared to 104.5% for the comparable prior year period. The reduction was due
to a 105 basis point decrease in the loss ratio and an 84 basis 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 $ 1.9 million compared to net
favorable loss development of $1.8 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 March 31, 1998 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 $3.2 million, or
14.5%, compared to the first quarter of 1997. As a percentage of revenues, G&A
costs for the first quarter of 1998 decreased to 12.0% from 12.9% during the
comparable period in 1997. Of the $3.2 million increase in G&A, $1.3 million
consisted of increased compensation expense resulting primarily from additional
employees supporting expanded services and new benefit programs for management.
Expenses associated with owning and maintaining facilities and non data
processing equipment increased approximately $400,000. Broker, third-party
administration and premium tax expenses increased approximately $300,000 due to
increased membership. The remaining G&A increase is due to additional expenses
in several areas including increases in depreciation of $200,000 and data
processing maintenance of $300,000. 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, 1998, the
Company's ten largest commercial HMO employer groups were, in the aggregate,
responsible for less than 10% of its total revenues. Although none of such
employer groups accounted for more than 2% 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 was consistent with the same period in the
prior year.
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 Physician
Corporation of America. The original agreement had been entered into in November
1996.
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 March 31, 1998, compared to three
months ended March 31, 1997 (continued).
For the period, the Company recorded approximately $4.2 million of tax expense
for an effective tax rate of 25.6% compared to 24.0% in 1997. 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.
Net income for the three months ended March 31, 1998 increased $10.8 million,
compared to the three months ended March 31, 1997. Excluding the effect of the
merger related expenses, net income increased $2.4 million, or 24.9% compared to
the same quarter of the prior year. The increase in operating income was
primarily due to increased operating revenues including military contract
revenues and decreased G&A expense as a percentage of revenues offset by a
higher Medical Loss Ratio and an increased effective tax rate.
Liquidity and Capital Resources
The Company's cash flow from operating activities during the three months ended
March 31, 1998 resulted primarily from $12.2 million of net income, $4.0 million
in depreciation and amortization and $1.2 million in provision for doubtful
accounts offset by a $20.4 million net change in assets and liabilities. The
decrease in cash flow resulting from the change in assets and liabilities was
primarily due to an increase in accounts receivable and a decrease in unearned
premium revenue. The increase in accounts receivable resulted from work
performed in conjunction with the implementation of the Region 1 TRICARE
contract for which the Company has not yet been reimbursed. The decrease in
unearned revenue resulted primarily from the early receipt of the subsequent
month's HCFA Medicare capitation payment as of December 31, 1997.
The $54.5 million used for investing and financing activities since December 31,
1997 primarily consisted of a $54.3 million net increase in investments, and
$9.2 million in net capital expenditures including construction costs associated
with office facilities, furniture and equipment for the newly constructed
six-story headquarters building, computer and medical equipment, and other
capital needs to support the Company's growth. The Company received $15.0
million related to financing for the newly constructed headquarters building
offset in part by $11.2 million used for the reduction of debt, including an
$8.0 million payment on the Company's line of credit. The remaining $83.0
million of the line of credit may be used for additional working capital, if
necessary. In addition the Company received $3.8 million in connection with the
sale of stock through the Company's stock plans and $1.4 million in connection
with sale of THC's Arizona operations as discussed previously.
The Company has a 1998 capital budget of approximately $50.0 million, primarily
for computer hardware and software, furniture and equipment for the newly
constructed 180,000 square foot, six-story corporate headquarters building, and
other requirements due to the Company's projected growth and expansion. The
Company's liquidity needs over the next 12 months will primarily be for the
capital items noted above to support growing membership, implementation of the
Region 1 TRICARE contract, the Company's stock repurchase program, as well as
debt service and expansion of the Company's operations, including potential
acquisitions. The Company believes that existing working capital, operating cash
flow and, if necessary, mortgage financing and equipment leasing, and 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.
Page 10
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The holding company may receive dividends from its HMO and insurance
subsidiaries which generally must be approved by certain state insurance
departments. The Company's HMO and insurance subsidiaries are required by state
regulatory agencies to maintain certain deposits and must also meet certain net
worth and reserve requirements. The HMO and insurance subsidiaries had
restricted assets on deposit in various states totaling $17.1 million as of
March 31, 1998. The HMO and insurance subsidiaries must also meet requirements
to maintain minimum stockholder's equity, on a statutory basis, ranging from
$500,000 to $5.2 million. Of the cash and cash equivalents held at March 31,
1998, $32.8 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.
The National Association of Insurance Commissioners (the "NAIC") has an effort
underway that would impose new minimum capitalization requirements for HMOs,
health care insurance entities and other risk bearing health care entities. If
the capitalization requirements are enacted certain of the Company's
subsidiaries may have increased capital requirements. The Company does not
believe that the amount of funds that may be contributed to the subsidiaries
will be material.
On September 30, 1997, the Company was awarded a TRICARE contract to provide
managed health care coverage to 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. In 1998, the
award will result in a total of approximately $150.0 to $200.0 million of
revenue for the five-month implementation phase and seven months of health care
delivery. SMHS was notified on February 13, 1998 that the United States General
Accounting Office ("GAO") sustained a competitor's protest of the contract award
for TRICARE Managed Care Support Region 1 and recommended that the contract be
re-bid. The TRICARE Management Activity ("TMA") along with the Company, has
filed a motion requesting the GAO reconsider its recommendation. If the GAO does
not change its recommendation and the TMA follows the recommendation, there are
several possible outcomes, including litigation. The Company currently
anticipates providing health care delivery for one year of the contract should a
re-bid occur. The Company will fund approximately $30.0 million to SMHS during
the seven month phase-in period of the TRICARE 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
without giving effect to the split. The Debentures are general unsecured
obligations of CII and are not guaranteed by Sierra.
The Company is in the process of modifying or replacing its computer systems and
applications to accommodate the "Year 2000". The Year 2000 issue exists because
many computer systems and applications currently use two-digit date fields to
designate a year. As the century date change occurs, date-sensitive systems will
recognize the year 2000 as 1900, or not at all. This inability to recognize or
properly treat the Year 2000 may cause systems to process critical financial and
operational information incorrectly. The Company currently expects to complete
all material replacements or modifications of its computer systems and
applications sufficiently in advance of the Year 2000 to allow for adequate
testing so as not to have any material negative impact its operations. The
Company is in the process of implementing two major systems
Page 11
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
at an estimated cost of $20.0 million to $25.0 million. These systems will be
Year 2000 compliant. The Company is expensing the costs to make modifications as
incurred. Management currently estimates the remaining modification costs to be
approximately $3.0 million to $5.0 million over the next 12 to 18 months. While
this is a substantial effort, it will give the Company the benefits of new
technology and functionality for many of its financial and operational computer
systems and applications. The inability of the Company to timely complete its
Year 2000 modifications and replacements, or the inability of companies with
which the Company does business to timely complete their Year 2000
modifications, could have a material effect on the Company's operations. During
the first quarter of 1998, the Company spent approximately $4.0 million on both
system implementations and Year 2000 items.
The Company's liquidity needs over the next 12 months will primarily be for
implementation of the Region 1 TRICARE contract, Year 2000 costs, 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 12
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Membership
The Company's membership at March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
March 31 March 31
1998 1997
HMO
<S> <C> <C>
Commercial................................................... 158,800 155,600
Medicare..................................................... 37,200 31,200
Managed Indemnity.............................................. 52,800 48,100
Medicare Supplement............................................ 24,700 24,000
Administrative Services (1)................................... 347,700 328,700
Total Members.................................................. 621,200 587,600
</TABLE>
(1) For comparability purposes, enrollment information has been restated to
reflect the September 30, 1997 termination of the company's worker's
compensation administrative services contract with the State of Nevada.
Enrollment in the terminated plan was approximately 175,000 members at
March 31, 1997.
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 13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 18, 1997, the Company announced it had terminated its merger agreement
with Physician Corporation of America ("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 in excess of $20 million. The lawsuit has been dismissed
(without prejudice to PCA's claims) for failure to join an indispensable party.
On March 27, 1997, the Company commenced a lawsuit against PCA in the Court of
Chancery of the State of Delaware. On March 27, 1998, the Company filed a First
Amendment Complaint alleging, among other things, breach of the merger agreement
and equitable fraud, and seeking monetary damages and 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 claims and other 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,
claims by providers for payment for medical services rendered to HMO members.
Also included in such litigation are claims for dividends and claims denials in
the workers' compensation division 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 pending 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) Sierra Health Services, Inc. Supplemental Executive Retirement Plan
effective as of March 1, 1998.
(27) Financial Data Schedule
(99) Registrant's current report on Form 8-K dated March 19, 1998,
incorporated herein by reference.
Page 14
<PAGE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated
March 19, 1998, 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 15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA HEALTH SERVICES, INC.
(Registrant)
Date May 15, 1998 /S/ PAUL H. PALMER
Paul H. Palmer
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 16
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 39,438,000
<SECURITIES> 139,668,000
<RECEIVABLES> 64,605,000
<ALLOWANCES> 8,982,000
<INVENTORY> 0
<CURRENT-ASSETS> 282,421,000
<PP&E> 209,809,000
<DEPRECIATION> 52,555,000
<TOTAL-ASSETS> 740,704,000
<CURRENT-LIABILITIES> 210,859,000
<BONDS> 98,239,000
0
0
<COMMON> 93,000
<OTHER-SE> 281,522,000
<TOTAL-LIABILITY-AND-EQUITY> 740,704,000
<SALES> 0
<TOTAL-REVENUES> 210,409,000
<CGS> 0
<TOTAL-COSTS> 192,746,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,281,000
<INCOME-PRETAX> 16,382,000
<INCOME-TAX> 4,195,000
<INCOME-CONTINUING> 12,187,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,187,000
<EPS-PRIMARY> .67
<EPS-DILUTED> .66
</TABLE>
EXHIBIT 10
Sierra Health Services, Inc.
Supplemental Executive Retirement Plan II
<PAGE>
Sierra Health Services, Inc.
Supplemental Executive Retirement Plan II
Master Plan Document
TABLE OF CONTENTS
Page
<TABLE>
<CAPTION>
<S> <C>
Purpose...................................................................................................... 1
ARTICLE 1 Definitions........................................................................................ 1
ARTICLE 2 Eligibility........................................................................................ 6
2.1 Selection for Participation............................................................. 6
2.2 Enrollment Requirements................................................................. 6
2.3 Commencement of Participation........................................................... 6
ARTICLE 3 Vesting; Additional Years of Service............................................................... 7
3.1 Vesting................................................................................. 7
3.2 Crediting of Additional Years of Service................................................ 7
ARTICLE 4 Benefits........................................................................................... 7
4.1 Eligibility for Benefits................................................................ 7
4.2 Reemployment of Participant Who Has Received Benefits................................... 8
4.3 Alternative Payouts..................................................................... 9
4.4 Withholding and Payroll Taxes........................................................... 9
ARTICLE 5 Termination or Amendment of Plan or Agreements................................................... 10
5.1 Termination........................................................................... 10
5.2 Amendment.............................................................................. 10
5.3 Termination of Plan Agreement........................................................... 10
ARTICLE 6 Other Benefits and Agreements...................................................................... 10
ARTICLE 7 Administration of the Plan......................................................................... 10
7.1 Plan Administrator Duties............................................................... 10
7.2 Agents.................................................................................. 11
7.3 Binding Effect of Decisions............................................................. 11
7.4 Indemnity of Plan Administrator......................................................... 11
7.5 Employer Information.................................................................... 11
ARTICLE 8 Claims Procedures.................................................................................. 11
8.1 Presentation of Claim................................................................... 11
8.2 Notification of Decision................................................................ 11
8.3 Review of a Denied Claim................................................................ 12
8.4 Decision on Review...................................................................... 12
8.5 Legal Action............................................................................ 13
ARTICLE 9 Beneficiary Designation............................................................................ 13
9.1 Beneficiary............................................................................. 13
9.2 Beneficiary Designation; Change; Spousal Consent........................................ 13
9.3 Acknowledgment.......................................................................... 13
9.4 No Beneficiary Designation.............................................................. 13
9.5 Doubt as to Beneficiary................................................................. 13
9.6 Discharge of Obligations................................................................ 14
ARTICLE 10 Trust............................................................................................. 14
10.1 Establishment of the Trust.............................................................. 14
10.2 Interrelationship of the Plan and the Trust............................................. 14
ARTICLE 11 Miscellaneous..................................................................................... 14
11.1 Unsecured General Creditor.............................................................. 14
11.2 Employer's Liability.................................................................... 14
11.3 Nonassignability........................................................................ 14
11.4 Not a Contract of Employment............................................................ 15
11.5 Furnishing Information.................................................................. 15
11.6 Terms................................................................................... 15
11.7 Captions................................................................................ 15
11.8 Governing Law........................................................................... 15
11.9 Validity................................................................................ 15
11.10 Notice.................................................................................. 16
11.11 Successors.............................................................................. 16
11.12 Spouse's Interest....................................................................... 16
11.13 Incompetent............................................................................. 16
11.14 Court Order............................................................................. 16
11.15 Distribution in the Event of Taxation................................................... 16
</TABLE>
<PAGE>
Sierra Health Services, Inc.
Supplemental Executive Retirement Plan II
Master Plan Document
18
SIERRA HEALTH SERVICES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN II
Effective March 1, 1998
Purpose
The purpose of this Plan is to provide specified benefits to a
select group of management and highly compensated employees of Sierra Health
Services, Inc., a Nevada corporation, and its subsidiaries, if any, that sponsor
this Plan. This Plan shall be unfunded for tax purposes and for purposes of
Title I of ERISA.
ARTICLE 1
Definitions
For purposes hereof, unless otherwise clearly apparent from the
context, the following phrases or terms shall have the following indicated
meanings:
1.1 "Assumed Interest Rate" means an interest rate of seven percent
(7%) per annum, compounded annually; provided, however, that if the
Plan Administrator deems it necessary or appropriate, such Assumed
Interest Rate may be adjusted from time to time to an amount that
does not exceed the then-current prime interest rate of Bank of
America. No Participant shall be deemed to have any right, vested
or nonvested, regarding the continued use of any previously adopted
Assumed Interest Rate.
1.2 "Beneficiary" means the individual designated, in accordance with
Article 9, that is entitled to receive benefits under this Plan
upon the death of a Participant.
1.3 "Beneficiary Designation Form" means the form established from time
to time by the Plan Administrator that a Participant completes,
signs and returns to the Plan Administrator to designate a
Beneficiary.
1.4 "Board" means the board of directors of the Company.
1.5 "Cause" means:
(i) the Executive's willful and material breach of the
Executive's agreement to refrain from competition with
Employers;
(ii) the Executive, while an employee, is convicted of, or
pleads guilty or nolo contendere to, a felony;
(iii) The Executive's commission of a fraud or misappropriation
which causes material and demonstrable injury to any
Employer; or
(iv) The Executive commits a willful act of dishonesty,
including but not limited to embezzlement, resulting or
intended to result, directly or indirectly, in material
personal gain or enrichment at the expense of any
Employer.
For purposes of this definition, an act or failure to act on the
Executive's part shall be considered "willful" if it was done or
omitted to be done by the Executive intentionally and not in good
faith, and shall not include any act or failure to act resulting
from any incapacity of the Executive.
1.6 "Change in Control" shall mean the earliest transaction or event
occurring after the effective date of the Plan in which (i) the
Company shall merge or consolidate with any other corporation and
shall not be the surviving corporation; (ii) the Company shall
transfer all or substantially all of its assets to any other
person; or (iii) any person shall have become the beneficial owner
of more than 50% of the voting power of outstanding voting
securities of the Company.
1.7 "Claimant" shall have the meaning set forth in Section 8.1.
1.8 "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor
provisions and regulations thereto.
1.9 "Company" means Sierra Health Services, Inc., a Nevada corporation.
1.10 "Disability" means a period of disability during which a
Participant qualifies for benefits under the Participant's
Employer's long-term disability plan or, if a Participant does not
participate in such a plan, a period of disability during which the
Participant would have qualified for benefits under such a plan had
the Participant been a participant in such a plan, as determined in
the sole discretion of the Plan Administrator. If the Participant's
Employer does not sponsor such a plan or discontinues to sponsor
such a plan, Disability shall be determined by the Plan
Administrator in its sole discretion.
1.11 "Early Retirement" means a Participant ceasing to be an employee of
all Employers on or after his or her attainment of both age 55 and
ten Years of Service for any reason other than a leave of absence,
Normal Retirement, death, or Disability.
1.12 "Employer(s)" means the Company and any subsidiaries of the Company
that have been selected by the Board and have agreed to participate
in the Plan.
1.13 "Employer Contributions" means, with respect to a Participant, the
sum of the actual balances, as of a specified date, in (i) the
Participant=s account(s) holding allocated and vested employer
matching contributions, other employer contributions, and earnings
thereon under the Company's Profit-Sharing/401(k) Plan, as it may
be amended from time to time, and the Participant's account(s)
credited with vested employer matching contributions, Arestoration@
contributions, and other employer contributions, and earnings
thereon under the Company's Deferred Compensation Plan, as it may
be amended from time to time.
1.14 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.15 "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
1.16 "Final Average Compensation" means the average of a Participant's
Compensation for the three years in which such Compensation was
highest out of the last five calendar years of the Participant's
employment(including the annualized Compensation for the calendar
year in which the event that entitled the Participant to a
distribution of benefits under this Plan occurred), except as
provided in Section 4.2. For purposes of the preceding definition,
"Compensation" means the amounts earned by a Participant in respect
of a given year as salary and bonus within the meaning of Item
402(b)(2)(iii)(A) and (B) of Regulation S-K under the Exchange Act,
including amounts of salary and bonus (including the cash value of
any non-cash amount) deferred pursuant to Instruction 3 thereto on
a mandatory or elective basis; provided, however, that the amount
of bonus deemed earned for the calendar year in which the event
that entitled the Participant to a distribution of benefits under
this Plan occurred shall be not less than the target amount of
bonus specified as potentially earnable by the Participant for that
year, regardless of the amount of such bonus actually paid. In no
event shall severance or other payments following termination
constitute ACompensation@ for purposes of the Plan.
1.17 "Normal Retirement" means a Participant ceasing to be an employee
of all Employers on or after the attainment of age sixty-five (65)
for any reason other than a leave of absence, death, or Disability.
1.18 "Participant" means any employee (i) who is selected to participate
in the Plan, (ii) who elects to participate in the Plan by signing
a Plan Agreement and a Beneficiary Designation Form, (iii) whose
signed Plan Agreement Form and Beneficiary Designation Form are
accepted by the Plan Administrator, and (iv) whose Plan Agreement
has not terminated. If a Participant has a Termination of
Employment and thereafter becomes reemployed by an Employer, he or
she must be reselected to participate and again meet the other
requirements of this definition in order to accrue benefits under
the Plan beyond the Participant's Vested SERP Benefit prior to such
reemployment.
1.19 "Plan" means this Supplemental Executive Retirement Plan II of the
Company, as amended from time to time. The Plan is a different plan
from the Company=s Supplemental Executive Retirement Plan effective
July 1, 1997.
1.20 "Plan Administrator" means the plan administrator described in Article 7.
1.21 "Plan Agreement" means a written agreement, as may be amended from
time to time, which is entered into by and between an Employer and
a Participant. Each Plan Agreement executed by a Participant shall
provide for the entire benefit to which such Participant is
entitled under the Plan, and the Plan Agreement bearing the latest
date of acceptance by the Plan Administrator shall govern such
entitlement.
1.22 "Preretirement Survivor Benefit" means, in the case of a
Participant who dies prior to a Termination of Employment and not
during a Disability, the Participant's SERP Benefit as of the date
of death (which becomes Vested upon death) that is payable to such
Participant's Beneficiary, in accordance with Section 4.1(c).
1.23 "Present Value" means the present value at a specified date of a
Participant's Vested SERP Benefit calculated using the Assumed
Interest Rate (i), in the case of a Participant (or beneficiary) to
whom payments have already begun, based on the period over which
such SERP Benefit remains payable assuming the payment of the SERP
Benefit will continue in quarterly installments, and (ii), in the
case of a Participant (or beneficiary) to whom payments have not
already begun, based on the payment of such SERP Benefit in
quarterly installments for a 15-year period assuming such quarterly
installments begin on the later of the first day of the next
calendar quarter which begins at least 30 days after such specified
date or the first day of the calendar quarter which begins
immediately at or after the Participant would have completed ten
Years of Service but for the Participant=s Termination of
Employment.
1.24 "Retirement" or "Retires" means, in each instance, Early Retirement or
Normal Retirement, as the case
may be.
1.25 "SERP Benefit" means an amount payable each year in quarterly
installments over a period of 15 years to a Participant and,
following the Participant's death, his or her Beneficiary(ies),
which amount is equal to the following:
(i) the product of 0.025 multiplied by the Participant's Final
Average Compensation multiplied by his or her Years of
Service (not to exceed 20); less
(ii) the amount, calculated as of the date of the Participant's
Termination of Employment, of annual payments that would
be payable assuming the Participant's Employer
Contributions were to be paid out in quarterly
installments at the same dates as the SERP Benefit is to
be paid over a period of 15 years, and assuming the
earnings on such Employer Contributions (less amounts
assumed to be paid out over the 15-year period) continued
to accrue at the Assumed Interest Rate; less
(iii) in the case of Participant who has received payments of his or her
SERP Benefit prior to a later Termination of Employment that gives rise to a new
calculation of a SERP Benefit, the amount, calculated as of the date of such
later Termination of Employment, of annual payments that would be payable
assuming the amount equal to the present value of all such prior payments of the
Participant=s SERP Benefit (calculated based on the Assumed Interest Rate(s) in
effect during the period since such prior payments commenced) to the Participant
were to be paid out in quarterly installments at the same dates as the SERP
Benefit is to be paid over a period of 15 years, and assuming the earnings on
such amount (less amounts assumed to be paid out over the 15-year period)
continued to accrue at the Assumed Interest Rate.
1.26 "Termination of Employment" means a Participant ceasing to be an
employee of all Employers, voluntarily or involuntarily, for any
reason (including due to death or Disability).
1.27 "Trust" means the trust established pursuant to that certain Master
Trust Agreement, dated as of May 1, 1996, between the Company and
Imperial Trust Company (and any successor trustee), as it may be
amended from time to time.
1.28 "Vested" means that portion of a Participant's SERP Benefits under
this Plan in which the Participant has a nonforfeitable right and
vested interest, as determined in accordance with Article 3 below.
1.29 "Years of Service" at a specified date means the total number of
full years during which the Participant has been employed by one or
more Employers through such date plus any additional Years of
Service credited to such Participant under Section 3.2; provided,
however, that a Participant who has ceased to be designated for
participation for purposes of further accruals of benefits upon
reemployment shall not be credited with additional Years of Service
upon such reemployment. For purposes of this definition, a year of
"Service" shall be a 365-day period (or 366-day period in the case
of a leap year) commencing on the date of hiring and each
anniversary thereof (subject to adjustment by the Plan
Administrator to reflect leaves of absence or, with respect to
employment prior to commencement of participation in the Plan,
breaks in service). In the case of a Participant who has suffered a
Disability but thereafter returns to service or becomes reemployed
by an Employer promptly after the Disability ended, the period(s)
of such Disability in the year in which the Disability began and
the year in which the Disability ended will be counted as
employment solely for purposes of this definition, but any other
period (i.e. full years) of Disability shall not count as
employment and therefore shall not be treated as Years of Service.
In the case of a Participant who has a Termination of Employment
for any reason other than death or Disability following a Change in
Control, (i) if the Participant was not employed for a full 365-
(or 366-) day period that includes the date of the Change in
Control, such Participant shall be deemed to have completed a full
Year of Service in respect of that period which includes the Change
in Control, and (ii), if the Participant qualifies for payment of
his or her SERP Benefit under Section 4.1(b) or under Section
4.1(a) within six years after the Change in Control, such
Participant shall be credited with an additional Year of Service as
of the date immediately prior to his or her Termination of
Employment. Except as provided in this definition, no partial year
of employment shall be counted as a Year of Service. A
Participant's paid leave of absence or unpaid leave of absence for
90 days or less shall constitute employment for purposes of this
definition, but a Participant's unpaid leave of absence for more
than 90 days shall not constitute employment for purposes of this
definition.
ARTICLE 2
Eligibility
2.1 Selection for Participation. Participation in the Plan shall be
limited to a select group of management and highly compensated
employees of the Employers. An employee from that group shall
become Participant only if the employee has been previously
nominated by the Plan Administrator and approved for participation
by the Compensation Committee of the Board of Directors. The
employees initially selected to participate in the Plan are those
whose names are set forth on Exhibit A hereto.
2.2 Enrollment Requirements. As a condition to participation, each
selected employee shall complete, execute and return to the Plan
Administrator a Plan Agreement and a Beneficiary Designation Form.
In addition, the Plan Administrator shall establish from time to
time such other enrollment requirements as it determines in its
sole discretion are necessary.
2.3 Commencement of Participation. Provided an employee selected to
participate in the Plan has met all enrollment requirements set
forth in this Plan and required by the Plan Administrator at the
times required by the Plan Administrator, that employee shall
commence participation in the Plan on the date specified by the
Plan Administrator.
ARTICLE 3
Vesting; Additional Years of Service
3.1 Vesting. Each Participant shall become Vested in his or her SERP
Benefit beginning at the earlier of the time such Participant has
five Years of Service, the termination of such Participant's
employment with all Employers due to death or upon the occurrence
of a Disability or a Change in Control.
3.2 Crediting of Additional Years of Service. Prior to commencement of
payment of a Participant's Vested SERP Benefit, a Participant may
be credited with additional "deemed" Years of Service, if
recommended by the Plan Administrator and approved by the
Compensation Committee of the Board of Directors. In no event may
the number of such additional "deemed" Years of Service exceed five
for any one Participant.
ARTICLE 4
Benefits
4.1 Eligibility for Benefits.
(a) Benefit Upon Retirement or Disability. If a Participant
Retires or suffers a Disability, the Participant shall be
entitled to payment of his or her Vested SERP Benefit in
quarterly installments to the Participant and, following
Participant's death, to his or her Beneficiary(ies), for a
period of 15 years. Payment of benefits under this Section
4.1(a) shall commence on the first day of the next
calendar quarter that begins at least 30 days after such
Retirement or 30 days after the Plan Administrator's
receipt of written proof or determination of such
Participant's Disability.
(b) Benefit Upon Termination Following a Change in Control. If
a Participant has a Termination of Employment within six
years following a Change in Control, other than a
Retirement or termination due to death or Disability, he
or she shall be paid, as a lump-sum cash payment, the
Present Value of his or her Vested SERP Benefit determined
as of the date of such Termination of Employment, in full
settlement of the Participant=s rights under the Plan.
Such lump-sum cash payment shall be made within 15 days
after such Termination of Employment.
(c) Survivors' Benefit. If a Participant dies prior to his or her
Termination of Employment and ------------------- not while Participant is
receiving benefits under Section 4.1(a) due to a Disability, the Participant's
Beneficiary shall be entitled to receive the Participant's Vested SERP Benefit
in the form of a Preretirement Survivor Benefit, payable in quarterly
installments for a period of 15 years. Payments of benefits under this Section
4.1(c) shall commence on the first day of the next calendar quarter that begins
at least 60 days after the Plan Administrator has received written proof of such
Participant's death. The foregoing notwithstanding, a Beneficiary then entitled
to receive a SERP Benefit may petition the Plan Administrator in writing
requesting payment of such SERP Benefit in a lump-sum due to the financial
hardship of the Beneficiary or his or her dependents, stating with particularity
the reasons giving rise to constituting such hardship. The Plan Administrator
may approve or disapprove such request, in its sole discretion. If approved,
such Beneficiary shall be paid, as a lump-sum cash payment, the Present Value of
such SERP Benefit determined as of the payment date specified by the Plan
Administrator, in full settlement of the Beneficiary's rights under the Plan.
<PAGE>
(d) Benefit Upon Other Termination of Employment. If a Participant has a
Termination of ------------------------------------------------- Employment
which does not give rise to payment of benefits under Section 4.1(a) or (b) and
which is not due to death and is not a termination by the Company for Cause, the
Participant shall be entitled to payment of his or her Vested SERP Benefit in
quarterly installments to the Participant and, following Participant's death, to
his or her Beneficiary(ies), for a period of 15 years. Payment of benefits under
this Section 4.1(d) shall commence on the later of the first day of the next
calendar quarter that begins at least 90 days after such Termination of
Employment or the first day of the next calendar quarter that begins immediately
at or after the Participant would have completed ten Years of Service but for
the Participant=s Termination of Employment; provided, however, that the Plan
Administrator may elect to pay to the Participant (or, following his or her
death, to the Participant=s Beneficiary(ies)), as a lump-sum cash payment, the
Present Value of such Vested SERP Benefit determined as of the date of
Termination of Employment, in full settlement of the Participant=s (and such
Beneficiary=s(ies=)) rights under the Plan. Such lump-sum cash payment shall be
made on the first day of the next calendar quarter that begins at least 90 days
after such Termination of Employment.
(e) Circumstances in Which No Benefit is Payable. Upon a
Participant=s Termination of Employment, the Participant
(including his or her Beneficiaries) will forfeit all
rights to a SERP Benefit if such SERP Benefit did not
become Vested prior to or as a result of such Termination
of Employment. In addition, in the event of a
Participant=s Termination of Employment by the Company for
Cause which both is prior to a Change in Control and does
not qualify as a Retirement, the Participant (including
his or her Beneficiaries) will forfeit all rights to a
SERP Benefit whether or not such SERP Benefit had become
Vested.
4.2 Reemployment of Participant Who Has Received Benefits. Other
provisions of the Plan notwithstanding, if a Participant who has
received payments of his or her SERP Benefit thereafter becomes
reemployed by any Employer (i.e., following the end of a Disability
or as a result of being rehired), payments of such SERP Benefit
will be suspended for so long as the Participant is thereafter
employed by any Employer. Upon a subsequent Termination of
Employment or Disability, if the Participant did not accrue further
benefits under the Plan following such reemployment or if such
subsequent Termination of Employment does not give rise to payment
of benefits under the Plan, the payment of the Participant's
previous Vested SERP Benefit shall resume in accordance with its
original terms (for the remaining period such Vested SERP Benefit
is payable). Upon a subsequent Termination of Employment or
Disability, if the Participant accrued further benefits under the
Plan following such reemployment and if such subsequent Termination
of Employment or Disability gives rise to benefits under Section
4.1, the Participant's SERP Benefit shall become payable in
accordance with Section 4.1; provided, however, that such
Participant's Final Average Compensation for purposes of
calculating such SERP Benefit shall be the higher of his or her
Final Average Compensation at the date of the latest Termination of
Employment or the Final Average Compensation as previously
calculated in determining his or her previously paid SERP Benefit.
4.3 Alternative Payouts.
(a) Lump Sum. If a Participant's Vested SERP Benefit under
this Plan at the time he or she, or his or her Beneficiary
(whether primary or contingent), becomes eligible to
receive a distribution under this Plan, when expressed on
a Present Value basis as a lump sum, is less than $25,000,
the Plan Administrator, in its sole discretion, may pay
that benefit in a lump sum at the time that benefit
payments would otherwise commence.
(b) Withdrawal Election. A Participant or his or her Beneficiary, as the
case may be, may elect, ------------------- at any time after he or she
commences to receive benefits payments under this Plan, to receive those
payments in a lump sum, based on the Present Value of his or her remaining
Vested SERP Benefits as of a payment date specified by the Plan Administrator
less a 10% penalty (as described below) (the net amount shall be referred to as
the "Benefit Amount"). No election to partially accelerate benefits shall be
allowed. The Participant shall make this election by giving the Plan
Administrator advance written notice of the election in a form determined from
time to time by the Plan Administrator. The penalty shall be equal to 10% of the
Participant's remaining Vested SERP Benefits, determined on a Present Value
basis. The Participant shall be paid the Benefit Amount within 60 days after his
or her election. Once the Benefit Amount is paid, the Participant's
participation in the Plan shall terminate and the Participant shall not be
eligible to participate in the Plan in the future.
4.4 Withholding and Payroll Taxes. The Employers shall withhold from
any and all benefits paid under this Article 4 all federal, state
and local income, employment and other taxes required to be
withheld by the Employers in connection with the benefits
hereunder, in amounts to be determined in the sole discretion of
the Employers.
ARTICLE 5
Termination, Amendment or Modification of the Plan
5.1 Termination. Each Employer reserves the right to terminate the Plan
at any time with respect to its participating employees by the
action of its board of directors. A termination of the Plan shall
have the effect of terminating further accruals of Years of Service
that would accrue as a result of Participant=s continued employment
during periods more than six months after the termination of the
Plan. A termination of the Plan shall not otherwise materially
adversely affect the Participant=s SERP Benefit or rights under the
Plan or, in the case of a Beneficiary who has become entitled to
the payment of benefits under the Plan as of the date of
termination, the rights of such Beneficiary under the Plan.
5.2 Amendment. Any Employer may, at any time, amend or modify the Plan
in whole or in part with respect to its participating employees and
former employees by the actions of its board of directors;
provided, however, that no amendment or modification shall be
effective to decrease or materially adversely affect a
Participant's SERP Benefit or rights under the Plan or, in the case
of a Beneficiary who has become entitled to the payment of benefits
under the Plan as of the date of termination, the rights of such
Beneficiary under the Plan.
5.3 Termination of Plan Agreement. Absent the earlier termination,
modification or amendment of the Plan, the Plan Agreement of any
Participant shall terminate upon the full payment of the applicable
Vested SERP Benefit as provided under Article 4.
ARTICLE 6
Other Benefits and Agreements
The benefits provided for a Participant under this Plan are in
addition to any other benefits available to such Participant under any other
plan or program for employees of the Employers. The Plan shall supplement and
shall not supersede, modify or amend any other such plan or program except as
may otherwise be expressly provided.
ARTICLE 7
Administration of the Plan
7.1 Plan Administrator Duties. This Plan shall be administered by a
Plan Administrator which shall consist of the Compensation
Committee of the Board or such committee as the Board or the
Compensation Committee shall appoint. Members of the Plan
Administrator may be Participants under this Plan. The Plan
Administrator shall also have the discretion and authority to (i)
make, amend, interpret and enforce all appropriate rules and
regulations for the administration of this Plan and (ii) decide or
resolve any and all questions including interpretations of this
Plan, as may arise in connection with the Plan.
7.2 Agents. In the administration of this Plan, the Plan Administrator
may employ agents and delegate to them such administrative duties
as it sees fit, (including acting through a duly appointed
representative), and may from time to time consult with counsel,
who may be counsel to any Employer, or a compensation consultant,
who may be a consultant to any Employer.
7.3 Binding Effect of Decisions. The decision or action of the Plan
Administrator with respect to any question arising out of or in
connection with the administration, interpretation, and application
of the Plan and the rules and regulations promulgated hereunder
shall be final and conclusive and binding upon all persons having
any interest in the Plan.
7.4 Indemnity of Plan Administrator. All Employers shall indemnify and
hold harmless the members of the Plan Administrator against any and
all claims, losses, damages, expenses or liabilities arising from
any action or failure to act with respect to this Plan, except in
the case of willful misconduct by the Plan Administrator or any of
its members.
7.5 Employer Information. To enable the Plan Administrator to perform
its functions, each Employer shall supply full and timely
information to the Plan Administrator on all matters relating to
the compensation of its Participants, the date and circumstances of
the retirement, Disability, death or other Termination of
Employment of its Participants, and such other pertinent
information as the Plan Administrator may reasonably require.
ARTICLE 8
Claims Procedures
8.1 Presentation of Claim. Any Participant or Beneficiary of a deceased
Participant (such Participant or Beneficiary being referred to
below as a "Claimant") may deliver to the Plan Administrator a
written claim for a determination with respect to the amounts
distributable to such Claimant from the Plan. If such a claim
relates to the contents of a notice received by the Claimant, the
claim must be made within 60 days after such notice was received by
the Claimant. The claim must state with particularity the
determination desired by the Claimant. All other claims must be
made within 180 days of the date on which the event that caused the
claim to arise occurred. The claim must state with particularity
the determination desired by the Claimant.
8.2 Notification of Decision. The Plan Administrator shall consider a
Claimant's claim within a reasonable time, and shall notify the
Claimant in writing:
(i) that the Claimant's requested determination has been made, and that the
claim has been allowed in full; or
(ii) that the Plan Administrator has reached a
conclusion contrary, in whole or in part, to the
Claimant's requested determination, and such
notice must set forth in a manner calculated to be
understood by the Claimant:
(1) the specific reason(s) for the denial of the claim, or any part of it;
(2) specific reference(s) to pertinent
provisions of the Plan upon which such
denial was based;
(3) a description of any additional material
or information necessary for the Claimant
to perfect the claim, and an explanation
of why such material or information is
necessary; and
(4) an explanation of the claim review procedure set forth in Section 8.3
below.
8.3 Review of a Denied Claim. Within 60 days after receiving a notice
from the Plan Administrator that a claim has been denied, in whole
or in part, a Claimant (or the Claimant's duly authorized
representative) may file with the Plan Administrator a written
request for a review of the denial of the claim. Thereafter, but
not later than 30 days after the review procedure began, the
Claimant (or the Claimant's duly authorized representative):
(i) may review pertinent documents;
(ii) may submit written comments or other documents;
and/or
(iii) may request a hearing, which the Plan
Administrator, in its sole discretion, may grant.
8.4 Decision on Review. The Plan Administrator shall render its
decision on review promptly, and not later than 60 days after the
filing of a written request for review of the denial, unless a
hearing is held or other special circumstances require additional
time, in which case the Plan Administrator's decision must be
rendered within 120 days after such date. Such decision must be
written in a manner calculated to be understood by the Claimant,
and it must contain:
(i) specific reasons for the decision;
(ii) specific reference(s) to the pertinent Plan
provisions upon which the decision was based; and
(iii) such other matters as the Plan Administrator deems
relevant.
8.5 Legal Action. A Claimant's compliance with the foregoing provisions of
this Article 8 is a mandatory ------------- prerequisite to a Claimant's right
to commence any legal action with respect to any claim for benefits under this
Plan. Except to the extent otherwise required by law, any dispute or controversy
arising under the Plan or in connection with any Plan Agreement shall be settled
exclusively by arbitration in Las Vegas, Nevada, in accordance with the rules of
the American Arbitration Association in effect at the time of submission to
arbitration. Judgment may be entered on the arbitrators' award in any court
having jurisdiction.
ARTICLE 9
Beneficiary Designation
9.1 Beneficiary. Each Participant shall have the right, at any time, to
designate his or her Beneficiary(ies) (both primary as well as
contingent) to receive any benefits payable under the Plan to a
beneficiary upon the death of a Participant. The Beneficiary
designated under this Plan may be the same as or different from the
Beneficiary designation under any other plan of an Employer in
which the Participant participates.
9.2 Beneficiary Designation; Change; Spousal Consent. A Participant
shall designate his or her Beneficiary by completing and signing
the Beneficiary Designation Form, and returning it to the Plan
Administrator or its designated agent. A Participant shall have the
right to change a Beneficiary by completing, signing and otherwise
complying with the terms of the Beneficiary Designation Form and
the Plan Administrator's rules and procedures, as in effect from
time to time. If the Participant names someone other than his or
her spouse as a Beneficiary, a spousal consent, in the form
designated by the Plan Administrator, must be signed by that
Participant's spouse and returned to the Plan Administrator. Upon
the acceptance by the Plan Administrator of a new Beneficiary
Designation Form filed by the Participant, all Beneficiary
designations previously filed by the Participant shall be
cancelled. The Plan Administrator shall be entitled to rely on the
last Beneficiary Designation Form filed by the Participant and
accepted by the Plan Administrator prior to the Participant's
death.
9.3 Acknowledgment. No designation or change in designation of a
Beneficiary shall be effective until received, accepted and
acknowledged in writing by the Plan Administrator or its designated
agent.
9.4 No Beneficiary Designation. If a Participant fails to designate a
Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if
all designated Beneficiaries predecease the Participant or die
prior to complete distribution of the Participant's benefits, then
the Participant's spouse and children shall be the designated
Beneficiary.
9.5 Doubt as to Beneficiary. If the Plan Administrator has any doubt as
to the proper Beneficiary to receive payments pursuant to this
Plan, the Plan Administrator shall have the right, exercisable in
its discretion, to cause the Participant's Employer to withhold
such payments until this matter is resolved to the Plan
Administrator's satisfaction.
9.6 Discharge of Obligations. The payment of benefits under the Plan to
a Beneficiary shall fully and completely discharge all Employers
and the Plan Administrator from all further obligations under this
Plan with respect to the Participant, and that Participant's Plan
Agreement shall terminate upon such full payment of benefits.
ARTICLE 10
Trust
10.1 Establishment of the Trust. The Company shall have established and
shall maintain the Trust. The Employers shall transfer over to the
Trust such assets, if any, as the Employers determine, in their
sole discretion.
10.2 Interrelationship of the Plan and the Trust. The provisions of the
Plan and the Plan Agreement shall govern the rights of a
Participant to receive distributions pursuant to the Plan. The
provisions of the Trust shall govern the rights of the Employers,
Participants and the creditors of the Employers to the assets
transferred to the Trust. Each Employer shall at all times remain
liable to carry out its obligations under the Plan. Each Employer's
obligations under the Plan may be satisfied with Trust assets
distributed pursuant to the terms of the Trust, and any such
distribution shall reduce the Employer's obligations under this
Agreement.
ARTICLE 11
Miscellaneous
11.1 Unsecured General Creditor. Participants and their Beneficiaries
successors and assigns shall have no legal or equitable rights,
interests or claims in any property or assets of an Employer. Any
and all of an Employer's assets shall be, and remain, the general,
unpledged, unrestricted assets of the Employer. An Employer's
obligation under the Plan shall be merely that of an unfunded and
unsecured promise to pay money in the future.
11.2 Employer's Liability. An Employer's liability for the payment of
benefits shall be defined only by the Plan and the Plan Agreement,
as entered into between the Employer and a Participant. An Employer
shall have no obligation to a Participant under the Plan except as
expressly provided in the Plan and his or her Plan Agreement.
11.3 Nonassignability. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate
or convey in advance of actual receipt, the amounts, if any,
payable hereunder, or any part thereof, which are, and all rights
to which are, expressly declared to be, unassignable and
non-transferable. No part of the amounts payable shall, prior to
actual payment, be subject to seizure or sequestration for the
payment of any debts, judgments, alimony or separate maintenance
owed by a Participant or any other person, nor be transferable by
operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.
11.4 Not a Contract of Employment. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between
any Employer and the Participant. Such employment is hereby
acknowledged to be an "at will" employment relationship that can be
terminated at any time for any reason, with or without cause,
unless otherwise expressly provided in a written employment
agreement. Nothing in this Plan shall be deemed to give a
Participant the right to be retained in the service of any Employer
or to interfere with the right of any Employer to discipline or
discharge the Participant at any time.
11.5 Furnishing Information. A Participant or his or her Beneficiary
will cooperate with the Plan Administrator by furnishing any and
all information requested by the Plan Administrator and take such
other actions as may be requested in order to facilitate the
administration of the Plan and the payments of benefits hereunder,
including but not limited to taking such physical examinations as
the Plan Administrator may deem necessary.
11.6 Terms. Whenever any words are used herein in the masculine, they
shall be construed as though they were in the feminine in all cases
where they would so apply; and wherever any words are used herein
in the singular or in the plural, they shall be construed as though
they were used in the plural or the singular, as the case may be,
in all cases where they would so apply.
11.7 Captions. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect
the meaning or construction of any of its provisions.
11.8 Governing Law. Subject to ERISA, the provisions of this Plan shall
be construed and interpreted according to the internal laws of the
State of Nevada without regard to its conflict of laws principles.
11.9 Validity. In case any provision of this Plan shall be illegal or
invalid for any reason, said illegality or invalidity shall not
affect the remaining parts hereof, but this Plan shall be construed
and enforced as if such illegal and invalid provision had never
been inserted herein.
11.10 Notice. Any notice or filing required or permitted to be given to
the Plan Administrator under this Plan shall be sufficient if in
writing and hand-delivered, or sent by registered or certified
mail, to the address below:
Sierra Health Services, Inc.
2724 North Tenaya Way
Las Vegas, Nevada 89128
Attn.: Office of General Counsel
Such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on
the receipt for registration or certification.
Any notice or filing required or permitted to be given to a
Participant under this Plan shall be sufficient if in writing and
hand-delivered, or sent by mail, to the last known address of the
Participant.
11.11 Successors. The provisions of this Plan shall bind and inure to the
benefit of the Participant's Employer and its successors and
assigns and the Participant and the Participant's Beneficiary(ies).
11.12 Spouse's Interest. The interest in the benefits hereunder of a
spouse of a Participant who has predeceased the Participant shall
automatically pass to the Participant and shall not be transferable
by such spouse in any manner, including but not limited to such
spouse's will, nor shall such interest pass under the laws of
intestate succession.
11.13 Incompetent. If the Plan Administrator determines in its discretion
that a benefit under this Plan is to be paid to a minor, a person
declared incompetent or to a person incapable of handling the
disposition of that person's property, the Plan Administrator may
direct payment of such benefit to the guardian, legal
representative or person having the care and custody of such minor,
incompetent or incapable person. The Plan Administrator may require
proof of minority, incompetency, incapacity or guardianship, as it
may deem appropriate prior to distribution of the benefit. Any
payment of a benefit shall be a payment for the account of the
Participant and the Participant's Beneficiary, as the case may be,
and shall be a complete discharge of any liability under the Plan
for such payment amount.
11.14 Court Order. The Plan Administrator is authorized to make any
payments directed by court order in any action in which the Plan or
Plan Administrator has been named as a party.
11.15 Distribution in the Event of Taxation. If, for any reason, all or
any portion of a Participant's benefit under this Plan becomes
taxable to the Participant prior to receipt, a Participant may
petition the Plan Administrator for a distribution of that portion
of his or her benefit that has become taxable. Upon the grant of
such a petition, which grant shall not be unreasonably withheld, a
Participant's Employer shall distribute to the Participant
immediately available funds in an amount equal to the taxable
portion of his or her benefit (which amount shall not exceed a
Participant's unpaid Account Balance under the Plan). If the
petition is granted, the tax liability distribution shall be made
within 90 days of the date when the Participant's petition is
granted. Such a distribution shall affect and reduce the benefits
to be paid under this Plan.
<PAGE>
IN WITNESS WHEREOF, Sierra Health Services, Inc. has signed this Plan
document on ______________, 1998.
SIERRA HEALTH SERVICES, INC.
a Nevada corporation
By: ___________________________
Title: ________________________
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN II ("Plan")
EXHIBIT A
Name Date of Hire
Kathleen Marlon 12/01/86*
Jonathon Bunker 08/01/92*
Michael Montalvo 04/12/93
John Nanson, M.D. 10/19/87
Christine Petersen, M.D. 07/14/97
*The Date of Hire has been adjusted to reflect a break in employment in excess
of 90 days.
