UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-8865
SIERRA HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0200415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2724 NORTH TENAYA WAY
LAS VEGAS, NV 89128
(Address of principal executive offices) (Zip Code)
(702) 242-7000
(Registrant's telephone number, including area code)
N/A (Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of October 29, 1999 there were 26,876,000 shares of common stock
outstanding.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets -
<S> <C> <C> <C> <C> <C>
September 30, 1999 and December 31, 1998................................................. 3
Condensed Consolidated Statements of Operations -
three and nine months ended September 30, 1999 and September 30, 1998.................... 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 1999 and September 30, 1998.............................. 5
Notes to Condensed Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk........................................................................ 17
Part II - OTHER INFORMATION
Item l. Legal Proceedings.......................................................................... 18
Item 2. Changes in Securities...................................................................... 18
Item 3. Defaults Upon Senior Securities............................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders........................................ 18
Item 5. Other Information.......................................................................... 18
Item 6. Exhibits and Reports on Form 8-K........................................................... 18
Signature .................................................................................................19
</TABLE>
Page 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents................................................... $ 36,847,000 $ 83,910,000
Short-term Investments...................................................... 74,882,000 110,008,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts: 1999 - $12,948,000; 1998 - $10,540,000)....................... 42,280,000 44,100,000
Military Accounts Receivable................................................ 74,188,000 69,552,000
Reinsurance Recoverable..................................................... 46,049,000 32,076,000
Prepaid Expenses and Other Assets........................................... 58,414,000 54,285,000
Total Current Assets..................................................... 332,660,000 393,931,000
PROPERTY AND EQUIPMENT, NET................................................... 252,750,000 229,164,000
LONG-TERM INVESTMENTS......................................................... 188,373,000 180,816,000
RESTRICTED CASH AND INVESTMENTS............................................... 18,971,000 17,758,000
REINSURANCE RECOVERABLE (Less Current Portion)................................ 57,986,000 34,946,000
GOODWILL ..................................................................... 185,785,000 142,471,000
OTHER ASSETS.................................................................. 52,026,000 46,034,000
TOTAL ASSETS.................................................................. $1,088,551,000 $1,045,120,000
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities.................................... $ 86,169,000 $ 69,284,000
Accrued Payroll and Taxes................................................... 25,875,000 19,942,000
Medical Claims Payable...................................................... 78,942,000 78,022,000
Current Portion of Reserve for Losses and
Loss Adjustment Expense ................................................. 81,444,000 79,869,000
Unearned Premium Revenue.................................................... 20,043,000 39,968,000
Military Health Care Payable................................................ 56,005,000 53,820,000
Current Portion of Long-term Debt........................................... 4,690,000 5,263,000
Total Current Liabilities................................................ 353,168,000 346,168,000
RESERVE FOR LOSSES AND LOSS ADJUSTMENT
EXPENSE (Less Current Portion) ............................................. 131,698,000 132,394,000
LONG-TERM DEBT (Less Current Portion)......................................... 280,721,000 242,398,000
OTHER LIABILITIES............................................................. 20,907,000 20,446,000
TOTAL LIABILITIES............................................................. 786,494,000 741,406,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value,
1,000,000 Shares Authorized; None Issued
Common Stock, $.005 Par Value
60,000,000 Shares Authorized;
Shares Issued: 1999 - 28,399,000; 1998 - 28,236,000...................... 142,000 141,000
Additional Paid-in Capital.................................................. 175,915,000 173,583,000
Treasury Stock; 1999 - 1,523,000; 1998 - 967,000............................ (22,789,000) (14,821,000)
Accumulated Other Comprehensive Income:
Unrealized Holding Loss on
Available-for-Sale Securities ....................................... (13,762,000) (1,027,000)
Retained Earnings........................................................... 162,551,000 145,838,000
TOTAL STOCKHOLDERS' EQUITY.................................................... 302,057,000 303,714,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $1,088,551,000 $1,045,120,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
OPERATING REVENUES:
<S> <C> <C> <C> <C>
Medical Premiums.................................... $202,643,000 $145,990,000 $614,603,000 $427,029,000
Military Contract Revenues.......................... 77,012,000 72,418,000 218,193,000 132,806,000
Specialty Product Revenues.......................... 24,589,000 44,016,000 66,217,000 120,898,000
Professional Fees................................... 12,743,000 10,939,000 40,112,000 33,033,000
Investment and Other Revenues....................... 5,583,000 7,719,000 17,337,000 22,270,000
Total ............................................ 322,570,000 281,082,000 956,462,000 736,036,000
OPERATING EXPENSES:
Medical Expenses (Note 2)........................... 173,787,000 122,261,000 539,094,000 356,059,000
Military Contract Expenses.......................... 74,139,000 71,082,000 210,243,000 128,101,000
Specialty Product Expenses.......................... 22,962,000 42,390,000 61,833,000 118,149,000
General, Administrative and
Marketing Expenses................................ 34,246,000 27,136,000 102,789,000 79,301,000
Impairment and Other Costs (Note 2)................. 5,106,000
Total ............................................ 305,134,000 262,869,000 919,065,000 681,610,000
OPERATING INCOME...................................... 17,436,000 18,213,000 37,397,000 54,426,000
INTEREST EXPENSE AND OTHER, NET ..................... (4,169,000) (1,207,000) (12,344,000) (4,107,000)
INCOME BEFORE INCOME TAXES ........................... 13,267,000 17,006,000 25,053,000 50,319,000
PROVISION FOR INCOME TAXES............................ (4,404,000) (4,422,000) (8,340,000) (12,997,000)
NET INCOME ........................................... $ 8,863,000 $ 12,584,000 $ 16,713,000 $ 37,322,000
NET INCOME PER COMMON SHARE........................... $.33 $.46 $.62 $1.36
NET INCOME PER COMMON SHARE
ASSUMING DILUTION .................................. $.33 $.46 $.62 $1.34
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING .................................. 26,856,000 27,433,000 26,944,000 27,462,000
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ASSUMING DILUTION....................... 26,873,000 27,633,000 26,976,000 27,836,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 16,713,000 $ 37,322,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization............................ 20,946,000 13,274,000
Provision for Doubtful Accounts .................. 4,290,000 4,314,000
Changes in Assets and Liabilities (85,278,000) (11,725,000)
Net Cash (Used for) Provided by Operating Activities (43,329,000) 43,185,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net of Equipment Dispositions (41,072,000) (25,597,000)
Changes in Short-term Investments. 32,680,000 (18,345,000)
Changes in Long-term Investments. (22,548,000) (38,000,000)
Changes in Restricted Cash and Investments. (1,908,000) (1,228,000)
Corporate Acquisition (3,000,000)
Corporate Disposition, net of cash disposed 1,373,000
Net Cash Used for Investing Activities. (35,848,000) (43,835,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings. 79,000,000 30,200,000
Payments on Debt and Capital Leases. (41,250,000) (39,357,000)
Exercise of Stock in Connection with Stock Plans. 2,332,000 6,161,000
Purchase of Treasury Stock. (7,968,000) (9,016,000)
Net Cash Provided by (Used for) Financing Activities. 32,114,000 (12,012,000)
NET DECREASE IN CASH AND CASH EQUIVALENTS. (47,063,000) (12,662,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 83,910,000 96,841,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD. $ 36,847,000 $ 84,179,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30
Supplemental Condensed Consolidated
Statements of Cash Flows Information: 1999 1998
Cash Paid During the Period for Interest
<S> <C> <C>
(Net of Amount Capitalized). $14,077,000 $ 7,744,000
Cash Paid During the Period for Income Taxes 3,029,000 13,285,000
Non-cash Investing and Financing Activities:
Tax Benefits of Stock Issued for Exercise of Options . 1,000 808,000
Additions to Capital Leases .................................... 3,070,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 5
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, 1998 and 1997. 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. Premium Deficiency, Impairment and Other Charges:
Medical Expenses:
Medical expenses reported in the first quarter of 1999 included a premium
deficiency charge of $8.1 million related to losses in under performing markets
primarily in Arizona and rural Nevada.
Impairment and Other Charges:
In March 1999, the Company closed all inpatient operations at Mohave Valley
Hospital, a 12-bed acute care facility in Bullhead City, Arizona, and terminated
approximately 45 employees. The Company recorded a charge of $4.3 million
related primarily to the write-off of goodwill associated with the Mohave Valley
operations.
The Company also incurred $450,000 for certain legal and contractual
settlements and $400,000 to provide for the Company's portion of the write-off
of start-up costs at the Company's equity investee, TriWest Healthcare Alliance.
In accordance with Statement of Position 98-5, TriWest wrote off all remaining
start-up costs in 1999.
On October 31, 1998, a subsidiary of Sierra completed the acquisition of
certain assets of Kaiser Foundation Health Plan of Texas. In conjunction with
this acquisition, the Company recorded a liability for the estimated premium
deficiency associated with existing contracts. The original liability for the
estimated premium deficiency was based upon assumptions of membership and other
operating information, some of which had yet to be received. During 1999, the
Company continued to gather such data, including obtaining data from the seller,
and based upon the receipt and analysis of this data, the Company has revised
the initial estimate of the premium deficiency accrual with a corresponding
increase in goodwill.
Page 6
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. 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 September 30, 1999:
<S> <C> <C> <C>
Income from Continuing Operations $ 8,863,000 0 $ 8,863,000
Shares 26,856,000 17,000 26,873,000
Per Share Amount $.33 $.33
For the Three Months ended September 30, 1998:
Income from Continuing Operations $12,584,000 $12,584,000
Shares 27,433,000 200,000 27,633,000
Per Share Amount $.46 $.46
For the Nine Months ended September 30, 1999:
Income from Continuing Operations $16,713,000 $16,713,000
Shares 26,944,000 32,000 26,976,000
Per Share Amount $.62 $.62
For the Nine Months ended September 30, 1998:
Income from Continuing Operations $37,322,000 $37,322,000
Shares 27,462,000 374,000 27,836,000
Per Share Amount $1.36 $1.34
</TABLE>
CII Financial, Inc., a wholly-owned subsidiary of the Company, has
outstanding convertible subordinated debentures (the "Debentures") due September
15, 2001. Each $1,000 in principal is convertible into 25.382 shares of the
Company's common stock at a conversion price of $39.40 per share. The Debentures
were not included in the computation of EPS because their effect would be
anti-dilutive.
5. The following table presents comprehensive income for the three-month
and nine-month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET INCOME: ...................... $8,863,000 $12,584,000 $16,713,000 $37,322,000
Change in net Unrealized Holding
Gains (Losses) on Investments,
net of income taxes .. (3,172,000) 662,000 (12,735,000) 853,000
COMPREHENSIVE NET INCOME ........... $5,691,000 $13,246,000 $ 3,978,000 $38,175,000
</TABLE>
6. Segment Reporting
The Company has three reportable segments based on the products and
services offered: managed care and corporate operations, workers' compensation
operations and military health services operations. The managed care segment
includes managed health care services provided through HMOs, managed indemnity
plans, third- party administrative services programs for employer-funded health
benefit plans, multi-specialty medical groups, other ancillary services and
corporate operations. The workers' compensation segment insures workers'
compensation claims risk in return for premium revenues. The military health
services segment administers a managed care federal contract for the Department
of Defense's TRICARE program in Region 1. This contract is currently structured
as five one-year option periods.
Sierra evaluates each segment's performance based on segment operating
profit before interest expense and income taxes and not including charges for
premium deficiencies, impairment and non-recurring gains and losses. The
accounting policies of the operating segments are the same as those of the
consolidated company.
Page 7
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Information concerning the operations of the reportable segments is as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
Managed Care Workers' Military
and Corporate Compensation Health Services
Operations Operations Operations Total
Three Months Ended September 30, 1999
<S> <C> <C> <C> <C>
Medical Premiums $202,643 0 0 $202,643
Specialty Product Revenues. 2,395 $ 22,194 24,589
Professional Fees ...................... 12,743 12,743
Military Contract Revenues ....................... $ 77,012 77,012
Investment and Other Revenues. 1,625 3,797 161 5,583
Total Revenue. ....................... $219,406 $ 25,991 $ 77,173 $322,570
Segment Operating Profit. $ 9,295 $ 5,102 $ 3,039 $ 17,436
Interest Expense and Other (3,105) (932) (132) (4,169)
Net Income Before Income Taxes $ 6,190 $ 4,170 $ 2,907 $ 13,267
Three Months Ended September 30, 1998
Medical Premiums $145,990 $145,990
Specialty Product Revenues. 3,566 $ 40,450 44,016
Professional Fees ........................ 10,939 10,939
Military Contract Revenues ....................... $ 72,418 72,418
Investment and Other Revenues. 2,064 5,450 205 7,719
Total Revenue. ...................... $162,559 $ 45,900 $ 72,623 $281,082
Segment Operating Profit $ 10,967 $ 5,705 $ 1,541 $ 18,213
Interest Expense and Other (304) (820) (83) (1,207)
Net Income Before Income Taxes. $ 10,663 $ 4,885 $ 1,458 $ 17,006
Nine Months Ended September 30, 1999
Medical Premiums $614,603 $614,603
Specialty Product Revenues 6,951 $ 59,266 66,217
Professional Fees ....................... 40,112 40,112
Military Contract Revenues ....................... $218,193 218,193
Investment and Other Revenues. 5,006 11,921 410 17,337
Total Revenue. ..................... $666,672 $ 71,187 $218,603 $956,462
Segment Operating Profit. $ 27,177 $ 15,067 $ 8,359 $ 50,603
Interest Expense and Other. (8,921) (2,741) (682) (12,344)
Premium Deficiency, Impairment and Other Costs (13,206) (13,206)
Net Income Before Income Taxes $ 5,050 $ 12,326 $ 7,677 $ 25,053
Nine Months Ended September 30, 1998
Medical Premiums $427,029 $427,029
Specialty Product Revenues. 9,963 $110,935 120,898
Professional Fees ....................... 33,033 33,033
Military Contract Revenues ....................... $132,806 132,806
Investment and Other Revenues 6,325 15,728 217 22,270
Total Revenue. ...................... $476,350 $126,663 $133,023 $736,036
Segment Operating Profit $ 33,913 $ 15,590 $ 4,923 $ 54,426
Interest Expense and Other (631) (3,071) (405) (4,107)
Net Income Before Income Taxes. $ 33,282 $ 12,519 $ 4,518 $ 50,319
</TABLE>
Page 8
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. In the second quarter of 1999, the Company filed a motion for
preliminary injunction in Clark County District Court against Universal Health
Services and the Valley Health System ("Universal"). The Company has reimbursed
Universal for services provided to health plan members based on predetermined
rates established through one of its subsidiaries. However, Universal is
disputing the validity of the contract and is billing the Company and its
members additional charges. The Company is currently engaged in settlement
negotiations and the outcome of these negotiations could result in a material
expense to the Company; however, the range of this potential loss cannot be
reasonably estimated at this time, and has not been accrued as of September 30,
1999.
8. Certain amounts in the Condensed Consolidated Financial Statements and
accompanying notes for the three and nine months ended September 30, 1998 have
been reclassified to conform with the current year presentation.
Page 9
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 17, 1999, 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 September 30, 1999, compared to
three months ended September 30, 1998.
The Company's total operating revenues for the three months ended September
30, 1999, increased approximately 14.8% to $322.6 million from $281.1 million
for the three months ended September 30, 1998. The increase was primarily due to
increases in medical premium revenue of $56.7 million and military contract
revenue of $4.6 million offset by a decrease in specialty product revenues of
$19.4 million.
Of the $56.7 million or 38.8% increase in medical premium revenue,
approximately $36.2 million is attributed to the Company's Dallas/Ft. Worth
operations which were acquired in the fourth quarter of 1998. On October 31,
1998, the Company completed the acquisition of certain assets of Kaiser
Foundation Health Plan of Texas ("Kaiser-Texas"), a health plan operating in
Dallas/Ft. Worth with approximately 109,000 members at October 31, 1998, and
Permanente Medical Association of Texas ("Permanente"), a medical group with
approximately 150 physicians. The remaining increase of $20.5 million or 14.0%
is due to additional premium revenue at the Company's other HMO and insurance
subsidiaries. Excluding the Dallas/Ft. Worth operations, member months (the
number of months of each period that an individual is enrolled in a plan)
increased approximately 7%. Medicare member months increased 13%. Such growth in
Medicare member months contributes significantly to the increase in premium
revenues as the Medicare per member premium rates are over three times higher
than the average commercial premium rate. Excluding the Dallas/Ft. Worth
operations, the Company's HMO and insurance subsidiaries' premium rates
increased approximately 6%. The Company's HMO commercial rates increased
approximately 4% in Nevada and approximately 15% in Texas. Compared to the
fourth quarter of 1998, commercial rates for the Company's recently acquired
Dallas/Ft. Worth operations have increased approximately 7%. The Company's
managed indemnity rates increased approximately 9% and Medicare rates increased
approximately 2%. Over 90% of the Company's Nevada Medicare members are enrolled
in the Health Care Financing Administration's ("HCFA") Social HMO Medicare
program. HCFA is considering adjusting the reimbursement factor for the Social
HMO members in the future. If the reimbursement for these members decreases
significantly and related benefit changes are not made timely, there could be a
material adverse effect on the Company's business.
Military contract revenue increased from $72.4 million to $77.0 million, a
6.3% increase. The revenue is a result of health care delivery under the Region
1 TRICARE contract that began in June 1998. The increased revenue is primarily a
result of an increase in eligible beneficiaries and a shift of health care
services from military treatment facilities to the Company's physician network.
The Company has also recorded additional revenue associated with contract
changes requested by the Department of Defense. Specialty product revenue
decreased $19.4 million, or 44.1%, for the three months ended September 30,
1999, compared to the same prior year period. Of the decrease, $18.2 million was
due to a decrease in revenue in the workers' compensation insurance segment and
$1.2 million was due to a decrease in administrative services revenue. The
decrease in specialty product revenues related to the workers' compensation
insurance segment was primarily due to additional ceded reinsurance premiums on
the low level reinsurance agreement totaling $16.1 million. This agreement was
entered into in the fourth quarter of 1998. In addition, ongoing price
competition,
Page 10
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, three months ended September 30, 1999, compared to
three months ended September 30, 1998 (continued).
especially in California, is contributing to the reduction in revenue. The
decrease in administrative services revenue was primarily attributable to a
decrease in membership. Professional fee revenue increased approximately $1.8
million primarily due to the medical group operations in Dallas/Ft. Worth.
Investment and other revenue decreased approximately $2.1 million over the
comparable prior year period primarily due to a decrease in invested balances
and a decrease in net capital gains realized on the sale of investments compared
to the prior year quarter.
Total medical expenses increased $51.5 million over the same three month
period last year. This increase resulted primarily from the Company's recently
acquired Dallas/Ft. Worth operations discussed previously. Excluding the effect
of the Dallas/Ft. Worth operations, medical expenses increased $18.8 million or
15.4% compared to the same prior year period. Medical expenses as a percentage
of medical premiums and professional fees ("Medical Care Ratio") increased from
77.9% to 80.7% for the quarter ended September 30, 1999 compared to the same
prior year period. The increase in the Medical Care Ratio reflects the acquired
Kaiser-Texas membership which has a higher medical care ratio as well as an
increase in Medicare members as a percentage of fully-insured members and higher
pharmacy costs. The cost of providing medical care to Medicare members generally
requires a greater percentage of the premiums received. Included in medical
expenses is the utilization of $13.0 million of premium deficiency reserve to
offset losses on contracts from the Kaiser-Texas acquisition. Also included in
medical expense is the utilization of $1.4 million of premium deficiency reserve
to offset losses primarily on Medicare risk members in Arizona and rural Nevada.
Specialty product expenses decreased $19.4 million or 45.8% due primarily
to ceded workers' compensation losses resulting from the low level reinsurance
agreement. In addition, the Company receives a ceding commission from the
reinsurer as a partial reimbursement of operating expenses. Under the low level
reinsurance agreement, in the current year period, ceded premiums were $16.1
million, ceded losses were $19.2 million and ceding commissions were $3.4
million. Specialty product revenue and expense are primarily related to the
workers' compensation insurance business.
The combined ratio for the workers' compensation insurance business was
94.5% compared to 99.6% for the comparable prior year period. The reduction was
due to a 10.6% decrease in the loss ratio, which was partially offset by a 5.5%
increase in the expense ratio. The reduction in the loss ratio was largely due
to a greater portion of losses being reinsured under the low level reinsurance
agreement. The current year period had no net development on prior accident
years, whereas the loss ratio for the prior year period included net favorable
loss development on prior accident years totaling $2.6 million. The prior year
favorable loss development was largely due to actual paid losses being below
projected losses. The loss and loss adjustment expense ratio for the three
months ended September 30, 1999, reflects the Company's current projection of
the ultimate costs of claims occurring in the current as well as prior accident
years. The increase in the expense ratio was largely due to a reduction in the
net earned premium denominator base, which resulted from the increase in ceded
reinsurance premiums. This change was offset by a decrease in expenses due to a
credit for ceding commissions of $3.4 million. Workers' compensation claims are
paid over several years. Until payment is made, the Company invests the
premiums, earning a yield on the invested balance.
General, administrative and marketing ("G&A") costs increased $7.1 million
or 26.2% compared to the third quarter of 1998. As a percentage of revenues, G&A
costs for the third quarter of 1999 increased from 9.7% to 10.6% compared to the
same period in 1998. Of the $7.1 million increase, $3.5 million was due to
additional G&A, including amortization of goodwill, related to the acquired HMO
business in the Dallas/Ft. Worth area, net of utilization of premium deficiency
reserves for maintenance costs of approximately $8.5 million. The most
significant items included in the remaining portion of the increase consisted of
$1.8 million of additional compensation expense, resulting primarily from
additional employees supporting expanded services, and increased depreciation
expense of $500,000. The Company markets its products primarily to
Page 11
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, three months ended September 30, 1999, compared to
three months ended September 30, 1998 (continued).
employer groups, labor unions and individuals enrolled in Medicare, through
its internal sales personnel and independent insurance brokers. Such brokers
receive commissions based on the premiums received from each group. The
Company's agreements with its member groups are usually for twelve months and
are subject to annual renewal. For the quarter ended September 30, 1999, 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 increased $3.0 million for the three months
ended September 30, 1999, compared to the same prior year period due to an
increase in debt primarily related to the Kaiser-Texas acquisition as well as an
increase in the Company's cost of borrowing.
For the current year period, the Company recorded approximately $4.4
million of tax expense for an effective tax rate of 33.2% compared to 26.0% for
the same prior year period. This significant increase in the effective tax rate
is the result of the tax loss valuation allowances being fully utilized by the
end of 1998. The Company's effective tax rate is less than the 35% statutory
rate primarily due to tax preferred investments.
Results of Operations, nine months ended September 30, 1999, compared to
nine months ended September 30, 1998.
The Company's total operating revenues for the nine months ended September
30, 1999, increased approximately 29.9% to $956.5 million from $736.0 million
for the nine months ended September 30, 1998. The increase was primarily due to
increases in premium revenue of $187.6 million and military contract revenue of
$85.4 million, offset by a decrease in specialty product revenues of $54.7
million.
Of the $187.6 million or 43.9% increase in medical premium revenue,
approximately $119.3 million is attributed to the Company's Dallas/Ft. Worth
operations which were acquired in the fourth quarter of 1998. The remaining
increase of $68.3 million or 16.0% is due to additional premium revenue at the
Company's other HMO and insurance subsidiaries. Excluding the Dallas/Ft. Worth
operations, member months increased approximately 8%. Medicare member months
increased 19%. Such growth in Medicare member months contributes significantly
to the increase in premium revenues as the Medicare per member premium rates are
over three times higher than the average commercial premium rate. Excluding the
Dallas/Ft. Worth operations, the Company's HMO and insurance subsidiaries'
premium rates increased approximately 7%. The Company's HMO commercial rates
increased approximately 4% in Nevada and approximately 15% in Texas. Compared to
the fourth quarter of 1998, the commercial rates for the Company's recently
acquired Dallas/Ft. Worth operations have increased approximately 7%. The
Company's managed indemnity rates increased approximately 4% and Medicare rates
increased approximately 2%. Over 90% of the Company's Nevada Medicare members
are enrolled in the HCFA Social HMO Medicare program. HCFA is considering
adjusting the reimbursement factor for the Social HMO members in the future. If
the reimbursement for these members decreases significantly and related benefit
changes are not made timely, there could be a material adverse effect on the
Company's business.
Military contract revenue increased from $132.8 million to $218.2 million.
The increased revenue is a result of health care delivery under the Region 1
TRICARE contract that began in June 1998. Military contract revenue in the same
period of the prior year resulted from implementation of the contract and four
months of health care delivery. Specialty product revenue decreased $54.7
million or 45.2% for the nine months ended September 30, 1999, compared to the
same nine month prior year period. Of the decrease, $51.7 million was due to a
decrease in revenue in the workers' compensation insurance segment and $3.0
million was due to
Page 12
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Operations, nine months ended September 30, 1999, compared to
nine months ended September 30, 1998 (continued).
a decrease in administrative services revenue. The decrease in specialty
product revenues related to the workers compensation insurance segment was
primarily due to additional ceded reinsurance premiums on the low level
reinsurance agreement totaling $43.2 million. This agreement was entered into in
the fourth quarter of 1998. In addition, ongoing price competition especially in
California is contributing to the reduction in revenue. The decrease in
administrative services revenue was primarily attributable to a decrease in
membership.
Professional fee revenue increased approximately $7.1 million primarily due
to the Company's recently acquired medical group operations in Dallas/Ft. Worth.
Investment and other revenue decreased approximately $4.9 million over the
comparable prior year period primarily due to a decrease in invested balances
and a decrease in capital gains realized on the sale of investments compared to
the prior year period.
Total medical expenses increased $183.0 million over the same nine-month
period last year. This increase resulted primarily from the Company's recently
acquired Dallas/Ft. Worth operations discussed previously, as well as the
premium deficiency charge of $8.1 million recorded in the first quarter of this
year, related to under performing markets primarily in Arizona and rural Nevada
(see note 2 to the Condensed Consolidated Financial Statements). Excluding the
effect of the Company's recently acquired Dallas/Ft. Worth operations and the
premium deficiency charge, medical expenses increased $67.7 million or 19.0%
compared to the same prior year period. The Medical Care Ratio increased from
77.4% to 82.3% or 81.1% excluding the $8.1 million premium deficiency charge,
for the nine months ended September 30, 1999, compared to the prior year period.
The increase in the Medical Care Ratio reflects the acquired Kaiser-Texas
membership which has a higher medical care ratio, and the premium deficiency
charge discussed above, as well as an increase in Medicare members as a
percentage of fully-insured members and higher pharmacy costs. The cost of
providing medical care to Medicare members generally requires a greater
percentage of the premiums received. Included in medical expenses is the
utilization of $25.2 million of premium deficiency reserve to offset losses on
contracts from the Kaiser-Texas acquisition. Also included in medical expense is
the utilization of $6.7 million of premium deficiency reserve to offset losses
primarily on Medicare risk members in Arizona and rural Nevada.
Specialty product expenses decreased $56.3 million or 47.7% due primarily
to ceded workers' compensation losses resulting from the low level reinsurance
agreement. In addition, the Company receives a ceding commission from the
reinsurer as a partial reimbursement of operating expenses. Under the low level
reinsurance agreement, in the nine month current year period, ceded premiums
were $43.2 million, ceded losses were $51.9 million and ceding commissions were
$9.9 million. Specialty product revenue and expense are primarily related to the
workers' compensation insurance business.
The combined ratio for the workers' compensation insurance business was
95.4% compared to 100.5% for the comparable prior year period. The reduction was
due to an 11.9% decrease in the loss ratio, which was partially offset by a 6.8%
increase in the expense ratio. The reduction in the loss ratio was largely due
to a greater portion of losses being reinsured under the low level reinsurance
agreement. The current year period had no net development on prior accident
years, whereas the loss ratio for the prior year period included net
Page 13
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, nine months ended September 30, 1999, compared to
nine months ended September 30, 1998 (continued).
favorable loss development on prior accident years totaling $7.2 million.
The prior year favorable loss development was largely due to actual paid losses
being below projected losses. The loss and loss adjustment expense ratio for the
nine months ended September 30, 1999, reflects the Company's current projection
of the ultimate costs of claims occurring in the current as well as prior
accident years. The increase in the expense ratio was largely due to a reduction
in the net earned premium denominator base, which resulted from the increase in
ceded reinsurance premiums. This change was offset by a decrease in expenses due
to a credit for ceding commissions of $9.9 million. Workers' compensation claims
are paid over several years. Until payment is made, the Company invests the
premiums, earning a yield on the invested balance.
G&A costs increased $23.5 million or 29.6% compared to the first nine
months of 1998. As a percentage of revenues, G&A costs for the first nine months
of 1999 decreased slightly to 10.7% from 10.8% during the comparable period in
1998. Of the $23.5 million increase in G&A, $12.0 million was due to additional
G&A, including amortization of goodwill, related to the acquired HMO business in
the Dallas/Ft. Worth area, net of utilization of premium deficiency reserves for
maintenance costs of approximately $15.5 million. The most significant items
included in the remaining portion of the increase consisted of $4.3 million of
additional compensation expense, resulting primarily from additional employees
supporting expanded services, increased depreciation expense of $2.1 million and
increased legal expenses. The Company markets its products primarily to employer
groups, labor unions and individuals enrolled in Medicare, through its internal
sales personnel and independent insurance brokers. Such brokers receive
commissions based on the premiums received from each group. The Company's
agreements with its member groups are usually for twelve months and are subject
to annual renewal. For the nine months ended September 30, 1999, 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 increased $8.2 million for the nine months ended September 30,
1999, compared to the same prior year period due to an increase in debt
primarily related to the Kaiser-Texas acquisition as well as an increase in the
Company's cost of borrowing.
For the period, the Company recorded approximately $8.3 million of tax
expense for an effective tax rate of 33.3% compared to 25.8% in the same prior
year period. This significant increase in the effective tax rate is the result
of the tax loss valuation allowances being fully utilized by the end of 1998.
The Company's effective tax rate is less than the 35% statutory rate primarily
due to tax-preferred investments.
Liquidity and Capital Resources
The Company had negative cash flows from operations of approximately $43.3
million for the nine months ended September 30, 1999, resulting primarily from a
net change in assets and liabilities of $85.3 million offset by $20.9 million in
depreciation and amortization, $4.3 million in provision for doubtful accounts
and $16.7 million of net income. The decrease in cash flow resulting from the
change in assets and liabilities was primarily due to increases in reinsurance
recoverable of $37.0 million, as well as decreases in unearned revenue of $19.9
million and the utilization of premium deficiency reserves. The increase in
reinsurance recoverable is primarily due to the reinsurance agreement
implemented by the Company's workers' compensation subsidiary in the fourth
quarter of 1998 with an effective date of July 1, 1998. The decrease in unearned
revenue resulted primarily from the early receipt of the subsequent month's HCFA
Medicare capitation payments as of December 31, 1998.
The $3.7 million used for investing and financing activities since December
31, 1998 included $8.0 million used for the purchase of treasury stock and $41.1
million in net capital expenditures including costs associated with continued
implementation of three new computer systems, as well as furniture, equipment
Page 14
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued).
and other capital needs to support the Company's growth. In the first
quarter of 1999 an additional $3.0 million was paid to Kaiser Foundation Health
Plan of Texas, in accordance with the purchase agreement as certain
accreditation goals were met by the health plan. The purchase price may increase
up to an additional $27 million over three years if certain goals are met by the
health plan. The Company had net borrowings of $41.0 million under the line of
credit which was offset by $3.3 million used for the reduction of other debt.
The remaining $20.0 million available under the line of credit may be used for
additional working capital, if necessary. Offsetting the above cash outflows,
was an $8.2 million net change in investments and $2.3 million received in
connection with the sale of stock through the Company's stock plans.
The Company accrued additional revenues due from the government in the form
of a bid price adjustment ("BPA"). The BPA is a result of providing health care
services for a larger than expected beneficiary population in TRICARE Region 1.
During the second quarter of 1999, the Company received $46.3 million from the
government as a partial settlement of its BPA. In addition, the Company received
approximately $8.6 million in early November and expects to receive an
additional $4.2 million in December.
The Company has a 1999 capital budget of approximately $60 million,
primarily for computer hardware and software, furniture and equipment and other
requirements due to the Company's computer system conversion and projected
growth and expansion. The Company's liquidity needs over the next three months
will primarily be for the capital items noted above, the Company's stock
repurchase program, 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, equipment
leasing, and amounts available under its credit facility will be sufficient to
fund its capital expenditures and debt service. 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 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 $19.0 million as of
September 30, 1999. The HMO and insurance subsidiaries must also meet
requirements to maintain minimum stockholder's equity, on a statutory basis,
ranging from $1.5 million to $5.2 million. Additionally, in conjunction with the
Kaiser-Texas acquisition, Texas Health Choice, L.C. ("TXHC") entered into a
letter agreement with the Texas Department of Insurance whereby TXHC agreed to
maintain a net worth of $20.0 million. Of the cash and cash equivalents held at
September 30, 1999, $35.3 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.
CII Financial, Inc., a wholly-owned subsidiary 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 25.382 shares of
the Company's common stock at a conversion price of $39.40 per share. The
Debentures are general unsecured obligations of CII and are not guaranteed by
Sierra. During the nine months ended September 30, 1999, the Company purchased
$55,000 of the Debentures on the open market.
Page 15
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 has completed replacement of its mission critical financial
systems and is in the process of replacing its mission critical operational
computer systems. The Company has completed validation of its non- information
system technology for Year 2000 compliance. The Year 2000 project has five
phases: (1) inventorying Year 2000 items; (2) assessing the Year 2000 items that
are determined to be material to the Company; (3) renovating/replacing material
items that are determined not to be Year 2000 compliant; (4) testing and
validating material items; and (5) implementing renovated/replaced and validated
systems.
At September 30, 1999, the inventory and assessment phases are complete and
the renovation/replacement and validation phases are substantially complete as
it relates to all material computer systems and non- information system
technology. The Company estimates that it was approximately 95% complete with
the total project as of September 30, 1999.
Contingency planning for the mission critical business operations was
completed in July 1999. These plans focus on business operations involving
information systems and non-information systems technologies.
The Company has initiated formal communications with entities with which it
does business to assess their Year 2000 issues. Evaluations of the most critical
third parties have been initiated, and follow-up reviews will be conducted
through 1999. Contingency plans are being finalized based on the evaluations
which were completed by the middle of 1999. There can be no assurances that the
systems of other companies or governmental agencies, such as HCFA and the
Department of Defense ("DOD"), on which the Company relies will be timely
modified for Year 2000, or that the failure to modify by another company would
not have a material adverse effect on the Company. Based upon two separate
reports issued by the United States General Accounting Office it is doubtful
that the computer systems at both HCFA and the DOD will be fully Year 2000
compliant by the end of 1999. The Company does not currently have available data
to predict the impact of such non-compliance on its business operations. Should
there be any material delays caused by Year 2000 issues, the Company anticipates
that the governmental entities will make estimated payments.
The Company is in the process of implementing three major computer systems
at an estimated cost of $41 million to $43 million, which includes the
implementation costs related to the recently acquired Dallas/Ft. Worth
operations. Due to a dispute with the software vendor for the new system related
to its workers' compensation business, the company implemented its backup plan
to remediate the existing system. The Year 2000 remediation has been completed.
To date the Company has spent approximately $40.7 million on the new computer
systems and other Year 2000 items. The Company is expensing the costs to make
modifications to existing computer systems and non-computer equipment.
Management currently estimates the remaining new computer system costs and other
Year 2000 costs to be $4.0 million to $6.0 million. 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 failure to correct a material Year 2000 problem could result in an
interruption of, or a failure of, certain business activities or operations.
Such failures could materially adversely affect the Company's operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from uncertainty of the Year 2000
readiness of third parties with which the Company does business, the Company is
unable to determine at this time whether the consequences of potential Year 2000
failures will have a material adverse impact on the Company's results of
operations, liquidity or financial condition. The Company believes that, with
the implementation of the new computer systems and completion of the
Page 16
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Year 2000 (continued).
entire project as scheduled, the possibility of significant interruptions
of operations should be reduced.
Should utility service be disrupted by forces that are outside the control
of the company, contingency plans have been established which include the use of
gasoline-powered generators to preserve mission critical business systems until
such time as utilities are restored. Contingency plans were built upon the
assumption that continued operations are subject to established safety and
environmental regulations.
Additionally, the Company has developed "Day One" plans that will be
initiated January 1, 2000. These plans mandate that staff from various
departments perform tests on all material computer systems and non- information
systems to validate that the Company's Year 2000 renovation/replacement efforts
were effective. Issues discovered as a result of the Day One plan
implementations will be resolved as soon as possible.
The above discussion contains forward-looking statements including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that forward-looking statements contained in the
Year 2000 disclosure should be read in conjunction with the following disclosure
of the Company:
The costs of the project and the dates on which the Company plans to
complete the necessary Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability, retention and cost of personnel trained in this area, the ability
to locate and correct all relevant computer codes, the ability of the Company's
significant suppliers, customers and others with which it conducts business,
including federal and state governmental agencies, to identify and resolve their
own Year 2000 issues and similar uncertainties.
Membership
The Company's membership at September 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
September 30 September 30
1999 1998
HMO
<S> <C> <C>
Commercial.................................................. 269,100 162,600
Medicare.................................................... 50,400 40,800
Managed Indemnity............................................. 37,300 45,600
Medicare Supplement........................................... 27,800 25,500
Administrative Services....................................... 290,300 316,000
TRICARE Eligibles............................................. 610,000 606,400
Total Members................................................. 1,284,900 1,196,900
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 1999, unrealized holding losses on available for sale
investments have increased by $12.7 million since the year end due to an
increase in interest rates, and thus, a decline in the market value of bonds.
The Company believes that this increase in interest rates should not have a
material impact on future earnings or cash flows as it is unlikely that the
Company would need or choose to substantially liquidate its investment
portfolio.
Page 17
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the second quarter of 1999, the Company filed a motion for preliminary
injunction in Clark County District Court against Universal Health Services and
the Valley Health System ("Universal"). The Company has reimbursed Universal for
services provided to health plan members based on predetermined rates
established through one of its subsidiaries. However, Universal is disputing the
validity of the contract and is billing the Company and its members additional
charges. The Company is currently engaged in settlement negotiations and the
outcome of these negotiations could result in a material expense to the Company;
however, the range of this potential loss cannot be reasonably estimated at this
time, and has not been accrued as of September 30, 1999.
In addition, 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 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 pending legal proceedings should not have a material adverse effect on the
Company's financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
(27) Financial Data Schedule
(99) Registrant's current report on Form 8-K dated
March 17, 1999, incorporated herein by reference.
(b) Reports on Form 8-K
None
Page 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA HEALTH SERVICES, INC.
(Registrant)
Date November 15, 1999 /S/ PAUL H. PALMER
Paul H. Palmer
Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF CONSOLIDATED OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 36,847,000
<SECURITIES> 74,882,000
<RECEIVABLES> 129,416,000
<ALLOWANCES> 12,948,000
<INVENTORY> 0
<CURRENT-ASSETS> 332,660,000
<PP&E> 336,141,000
<DEPRECIATION> 83,391,000
<TOTAL-ASSETS> 1,088,551,000
<CURRENT-LIABILITIES> 353,168,000
<BONDS> 280,721,000
0
0
<COMMON> 142,000
<OTHER-SE> 301,915,000
<TOTAL-LIABILITY-AND-EQUITY> 1,088,551,000
<SALES> 0
<TOTAL-REVENUES> 956,462,000
<CGS> 0
<TOTAL-COSTS> 913,959,000
<OTHER-EXPENSES> 5,106,000<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,344,000
<INCOME-PRETAX> 25,053,000
<INCOME-TAX> 8,340,000
<INCOME-CONTINUING> 16,713,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,713,000
<EPS-BASIC> 0.62
<EPS-DILUTED> 0.62
<FN>
<F1>Impairment and Other Costs
</FN>
</TABLE>
