UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------------
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 July 31, 2000, there were 27,292,000 shares of common stock outstanding.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
Part I - FINANCIAL INFORMATION
Item l. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
<S> <C> <C> <C> <C> <C>
June 30, 2000 and December 31, 1999...................................................... 3
Condensed Consolidated Statements of Operations -
three and six months ended June 30, 2000 and 1999........................................ 4
Condensed Consolidated Statements of Cash Flows -
six months ended June 30, 2000 and 1999.................................................. 5
Notes to Condensed Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk........................................................................ 20
Part II - OTHER INFORMATION
Item l. Legal Proceedings.......................................................................... 21
Item 2. Changes in Securities and Use Of Proceeds.................................................. 21
Item 3. Defaults Upon Senior Securities............................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders........................................ 21
Item 5. Other Information.......................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
Signatures................................................................................................... 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents.............................................. $ 62,486,000 $ 55,936,000
Investments............................................................ 199,182,000 218,951,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts: 2000 - $22,605,000; 1999 - $15,551,000)............................ 34,870,000 43,036,000
Military Accounts Receivable (Less: Allowance for Doubtful
Accounts: 2000 - $1,002,000; 1999 - $800,000)...................... 66,631,000 60,340,000
Reinsurance Recoverable................................................ 76,374,000 54,563,000
Prepaid Expenses and Other Current Assets.............................. 93,306,000 91,767,000
Assets Held For Sale................................................... 22,942,000 ____________
--------------
Total Current Assets............................................... 555,791,000 524,593,000
PROPERTY AND EQUIPMENT, NET................................................. 186,864,000 264,549,000
LONG-TERM INVESTMENTS....................................................... 20,680,000 14,862,000
RESTRICTED CASH AND INVESTMENTS............................................. 24,595,000 21,705,000
REINSURANCE RECOVERABLE, Net of Current Portion............................. 119,895,000 82,300,000
GOODWILL ................................................................... 15,578,000 159,514,000
OTHER ASSETS................................................................ 113,884,000 62,589,000
---------------- -----------------
TOTAL ASSETS................................................................ $1,037,287,000 $1,130,112,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities.................................. $ 107,594,000 $ 102,573,000
Medical Claims Payable.................................................... 98,367,000 91,607,000
Current Portion of Reserve for
Losses and Loss Adjustment Expense .................................. 112,974,000 93,768,000
Unearned Premium Revenue.................................................. 50,066,000 45,333,000
Military Health Care Payable.............................................. 53,726,000 50,831,000
Payable Under Revolving Credit Facility................................... 185,000,000
Premium Deficiency Reserve................................................ 23,036,000 21,000,000
Current Portion of Long-term Debt......................................... 38,470,000 4,741,000
------------------- ------------------
Total Current Liabilities............................................ 669,233,000 409,853,000
RESERVE FOR LOSSES AND
LOSS ADJUSTMENT EXPENSE, Net of Current Portion........................... 197,045,000 150,626,000
LONG-TERM DEBT.............................................................. 59,698,000 258,854,000
OTHER LIABILITIES .......................................................... 33,310,000 32,367,000
----------------- -----------------
TOTAL LIABILITIES........................................................... 959,286,000 851,700,000
---------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value, 1,000,000
Shares Authorized; None Issued or Outstanding
Common Stock, $.005 Par Value, 40,000,000
Shares Authorized; Shares Issued: 2000 - 28,564,000;
1999 - 28,400,000...................................................... 143,000 142,000
Additional Paid-in Capital................................................ 176,814,000 175,915,000
Treasury Stock, 2000 - 1,523,000; 1999 - 1,523,000
Common Shares........................................................ (22,789,000) (22,789,000)
Accumulated Other Comprehensive Income:
Unrealized Holding Loss on Available-for-Sale
Investments..................................................... (12,213,000) (16,063,000)
(Accumulated Deficit) Retained Earnings................................... (63,954,000) 141,207,000
------------------ ----------------
Total Stockholders' Equity........................................... 78,001,000 278,412,000
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $1,037,287,000 $1,130,112,000
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
OPERATING REVENUES:
<S> <C> <C> <C> <C>
Medical Premiums.................................... $ 219,751,000 $204,649,000 $ 438,429,000 $411,960,000
Military Contract Revenues.......................... 72,374,000 71,093,000 137,255,000 141,181,000
Specialty Product Revenues.......................... 30,090,000 20,949,000 58,114,000 41,628,000
Professional Fees................................... 9,695,000 13,352,000 20,716,000 27,369,000
Investment and Other Revenues....................... 5,144,000 5,775,000 9,716,000 11,754,000
--------------- -------------- ---------------- -------------
Total ............................................ 337,054,000 315,818,000 664,230,000 633,892,000
------------- ------------ -------------- ------------
OPERATING EXPENSES:
Medical Expenses ................................... 246,969,000 176,265,000 439,307,000 365,307,000
Military Contract Expenses.......................... 70,150,000 68,460,000 132,983,000 136,104,000
Specialty Product Expenses.......................... 46,884,000 19,475,000 73,732,000 38,871,000
General, Administrative and Marketing
Expenses.......................................... 34,656,000 34,646,000 68,985,000 68,543,000
Asset Impairment, Restructuring, Reorganization
and Other Costs (Note 2).......................... 217,540,000 220,440,000 5,106,000
------------------------------------------------ --------------
Total ............................................ 616,199,000 298,846,000 935,447,000 613,931,000
------------- ------------- -------------- ------------
OPERATING (LOSS) INCOME............................... (279,145,000) 16,972,000 (271,217,000) 19,961,000
INTEREST EXPENSE AND OTHER, NET ..................... (5,149,000) (4,126,000) (10,737,000) (8,175,000)
--------------- ------------- --------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES .................... (284,294,000) 12,846,000 (281,954,000) 11,786,000
BENEFIT (PROVISION) FOR INCOME TAXES.................. 77,577,000 (4,290,000) 76,793,000 (3,936,000)
-------------- ------------ --------------- --------------
NET (LOSS) INCOME .................................... $(206,717,000) $ 8,556,000 $(205,161,000) $ 7,850,000
============ ============ ============= ============
NET (LOSS) INCOME PER COMMON SHARE.................... $(7.64) $.32 $(7.59) $.29
====== ==== ====== ====
NET (LOSS) INCOME PER COMMON SHARE
ASSUMING DILUTION .................................. $(7.64) $.32 $(7.59) $.29
====== ==== ====== ====
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING .................................. 27,041,000 26,795,000 27,013,000 26,989,000
=============== =========== ============== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ASSUMING DILUTION....................... 27,041,000 26,825,000 27,013,000 27,029,000
=============== ============ ============== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (Loss) Income ........................................................... $(205,161,000) $ 7,850,000
Adjustments to Reconcile Net (Loss) Income to Net Cash
Used for Operating Activities:
Provision for Asset Impairment and Other Charges...................... 202,951,000 3,509,000
Depreciation and Amortization......................................... 17,673,000 13,767,000
Provision for Doubtful Accounts....................................... 2,173,000 2,277,000
Changes in Assets and Liabilities ........................................... (37,679,000) (55,213,000)
---------------- ------------
Net Cash Used for Operating Activities .................................. (20,043,000) (27,810,000)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net of Equipment Dispositions.......................... (10,894,000) (26,984,000)
Changes in Investments....................................................... 17,014,000 6,926,000
Corporate Acquisition........................................................ (3,000,000)
---------------------- --------------
Net Cash Provided by (Used for) Investing Activities......................... 6,120,000 (23,058,000)
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings..................................................... 48,000,000 43,000,000
Payments on Debt and Capital Leases.......................................... (28,427,000) (40,121,000)
Purchase of Treasury Stock................................................... (7,968,000)
Exercise of Stock in Connection with Stock Plans............................. 900,000 1,248,000
---------------- --------------
Net Cash Provided by (Used for) Financing Activities.................. 20,473,000 (3,841,000)
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 6,550,000 (54,709,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 55,936,000 83,910,000
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 62,486,000 $ 29,201,000
============= ============
Six Months Ended June 30
Supplemental Condensed Consolidated
Statements of Cash Flows Information: 2000 1999
------------------------------------------------------------------------ ---- ----
Cash Paid During the Period for Interest
(Net of Amount Capitalized).................................................. $11,613,000 $8,976,000
Net Cash Received (Paid) During the Period for Income Taxes..................... 10,773,000 (3,029,000)
Non-cash Investing and Financing Activities:
Note Received for Sale of Investment......................................... 3,700,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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 accounting principles generally
accepted in the United States of America and 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, 1999 and 1998. 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, Adverse Development, Reorganization, Impairment and
Other Charges:
Medical Expenses: Included in reported medical expenses for the quarter
ended June 30, 2000 is $29.5 million of reserve strengthening primarily due to
adverse development on prior periods' medical claims, as well as $15.5 million
in premium deficiency expense related to under-performing markets in the
Dallas/Ft. Worth and Houston areas. The recorded premium deficiency reflects
anticipated cost savings from restructuring and reorganization actions discussed
below. In addition, the Company recorded $10.2 million of other non-recurring
medical costs primarily relating to the write-down of medical subsidiary assets.
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.
Asset Impairment, Restructuring, Reorganization and Other Charges: Asset
impairment, restructuring, reorganization and other charges recorded in the
quarter ended June 30, 2000 consist of the following:
Goodwill Impairment......................................... $141,506,000
Fixed Asset Impairment...................................... 48,984,000
Restructuring............................................... 10,592,000
Premium Deficiency Maintenance Costs........................ 10,358,000
Other Costs................................................. 6,100,000
--------------
Total .......................................... $217,540,000
============
Goodwill and Fixed Asset Impairments: In connection with restructuring
plans adopted and announced by the Company in the quarter ended June 30, 2000,
the Company re-evaluated the recoverability of certain long-lived assets,
primarily associated with the Texas operations, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121")
and Accounting Principles Board Opinion No. 17, "Intangible Assets" ("APB No.
17") and determined that the carrying values of certain goodwill and other
long-lived assets were impaired.
Based on financial projections for 2000, the Company recorded a $21.0
million premium deficiency at the end of 1999, relative to the Company's Texas
operations. In the first quarter of 2000, the Company engaged a consultant to
help it assess the Texas operations. In late February, the consultant issued its
report and the Company implemented strategic action plans to turn around the
Texas operations. These actions included the replacement of the Texas senior
management, a reduction in staffing along with a consolidation of certain
services to Las Vegas and a revision of product strategy.
The new management was charged with further assessing the Dallas/Ft. Worth
health care delivery system. In May, the Company decided that the delivery
system, which emphasized the Company's affiliated medical group as the primary
provider network, would be replaced by an expanded network of contracted
physician groups and individuals. In addition, the contracted hospital network
would be significantly expanded. As a result, during the second quarter of 2000,
the Company adopted and announced a further restructuring of the Dallas/Ft.
Worth operations, which entailed a significant reduction of physicians and staff
and the closing of several clinic sites. In addition, management decided that
the real estate assets would be sold.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Management also adopted a plan in the second quarter of 2000 to discontinue
medical delivery operations in Mohave County, Arizona and to sell the real
estate assets located there, as well as an underperforming medical clinic in Las
Vegas.
In assessing the asset impairment of the long-lived assets, the Company
first allocated a portion of related goodwill to the fixed assets to be disposed
of, in accordance with SFAS No. 121. The fixed assets were then written down to
estimated fair value less costs to sell, which was determined from independent
appraisals. The remainder of the related goodwill was then assessed for
recoverability in accordance with APB No. 17 based on projected discounted cash
flows.
Restructuring: In the second quarter of 2000, the Company adopted a plan
and announced additional restructuring of its managed health care operations,
primarily in Texas and Arizona. As a result of this restructuring, the Company
recorded charges in accordance with Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" of
approximately $10.6 million. Of the costs recorded, $5.9 million was for
severance, $2.9 million was related to clinic closures and lease terminations,
and $1.8 million was for other costs.
Of these amounts, the Company anticipates paying $8.7 million during 2000
and the remainder in 2001. No amounts were expended as of June 30, 2000.
As compared to the quarter ended June 30, 2000, management anticipates the
restructuring and reorganization activities to result in cash flow savings of
approximately $2.0 to $3.0 million per quarter beginning in the fourth quarter
of 2000. The severance charge resulted from the termination of 315 employees at
the Company's subsidiaries and affiliated medical groups.
In the first quarter of 2000, the Company announced a restructuring of its
managed health care operations in Texas. As a result of this restructuring, the
Company incurred approximately $1.4 million of severance pay for employees who
were terminated. Of this amount, approximately $1.3 million has been paid as of
June 30, 2000. The remainder is expected to be paid by the end of the year 2000.
The restructuring involved changes in senior management at the Texas facilities
and centralization of key services to Las Vegas.
Premium Deficiency Maintenance Costs: The premium deficiency maintenance
costs recorded in the second quarter of 2000 are an estimate of general and
administrative costs, in excess of those covered by premiums, the Company will
incur to service the Texas contracts. The amount reflects anticipated cost
reductions from the restructuring actions noted above. Of this amount, the
company expects to utilize $7.3 million in 2000 and $3.1 million in 2001.
Other Costs: The remaining $6.1 million of costs recorded in the second
quarter of 2000 relate primarily to the write-down of certain receivables as
well as an accrual for litigation expense.
In the first quarter of 2000, the Company incurred $1.5 million of costs,
consisting primarily of consulting fees, in conjunction with a review and
reorganization of its managed care operations in Texas.
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.
In the first quarter of 1999, 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 expensed all remaining start-up costs in their fiscal year
beginning April 1, 1999.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. During the first quarter of 2000, the Company sold its interest in
TriWest Healthcare Alliance. The Company received a note for $3.7 million, which
approximated the carrying value of this investment.
4. The assets designated as held for sale on the balance sheet at June 30,
2000 consist of real estate for which the Company is actively seeking a buyer
and expects to sell within twelve months. All assets are owned by subsidiaries
in the managed care and corporate operations segment. See Note 2 for a
description of the primary facts and circumstances leading to the decision to
sell this real estate. A related mortgage note in the amount of $34.5 million is
included in the current portion of long-term debt on the balance sheet. Because
these assets have been written down to fair market value, in accordance with
SFAS No. 121, the Company will cease depreciating them. In addition, the Company
has announced that it is evaluating the possible sale and leaseback of certain
other properties that are included in the property and equipment line on the
balance sheet.
5. As of June 30, 2000, the Company was not in compliance with certain
financial covenants relating to its line of credit. Under the terms of its line
of credit, noncompliance with the covenants constitutes an event of default,
which permits the Company's lenders to accelerate repayment of the Company's
outstanding obligations under its line of credit. The Company's compliance with
these covenants under its line of credit has been waived by its lenders. The
waiver is effective as of June 30, 2000 and will remain effective until
mid-September by which time the Company expects to have negotiated a new
amendment with revised covenants. In accordance with Statement of Financial
Accounting Standards No. 78, "Classification of Obligations that are Callable by
the Creditor", the Company has classified the entire outstanding balance under
its line of credit as a current liability as of June 30, 2000. The waiver
includes an amendment to the line of credit, which, among other things, requires
that the Company grant its lenders a security interest in certain personal
property of the Company, reduces the availability under the line of credit to
$185 million, increases the Company's borrowing rate by 87.5 basis points and
provides for the payment of additional fees by the Company. There can be no
assurances that a new amendment with revised covenants will be obtained.
6. 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 June 30, 2000:
<S> <C> <C> <C>
Loss from Continuing Operations $(206,717,000) 0 $(206,717,000)
Shares 27,041,000 27,041,000
Per Share Amount $(7.64) $(7.64)
For the Three Months ended June 30, 1999:
Income from Continuing Operations $ 8,556,000 $ 8,556,000
Shares 26,795,000 30,000 26,825,000
Per Share Amount $.32 $.32
For the Six Months ended June 30, 2000:
Loss from Continuing Operations $(205,161,000) $(205,161,000)
Shares 27,013,000 27,013,000
Per Share Amount $(7.59) $(7.59)
For the Six Months ended June 30, 1999:
Income from Continuing Operations $ 7,850,000 $ 7,850,000
Shares 26,989,000 40,000 27,029,000
Per Share Amount $.29 $.29
</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. Outstanding stock options were not included in the computation of
diluted EPS in 2000 because their effect would be anti-dilutive in both periods.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. The following table presents comprehensive income for the three-month
and six-month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
NET (LOSS) INCOME:............................... $(206,717,000) $8,556,000 $(205,161,000) $ 7,850,000
Change in net Unrealized Holding
Losses on Investments,
net of income taxes................ (224,000) (4,092,000) 3,850,000 (9,563,000)
---------------- ------------ ---------------- ----------
COMPREHENSIVE (LOSS) INCOME...................... $(206,941,000) $4,464,000 $(201,311,000) $(1,713,000)
============= ========== ============= ============
</TABLE>
8. Segment Reporting
The Company has three reportable segments based on the products and
services offered: managed care and corporate operations, military health
services operations and workers' compensation 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 military health services
segment administers a managed care federal contract for the Department of
Defense's TRICARE program in Region 1. This contract is structured as five
one-year option periods and is currently in its third year. The workers'
compensation segment insures workers' compensation claims risk in return for
premium revenues.
Sierra evaluates each segment's performance based on segment operating
profit before interest expense and income taxes and excludes charges that
obscure current period operating results, and unusual and non-recurring charges,
such as: prior-period development in medical and loss reserves, premium
deficiencies, asset impairment, restructuring and other non-recurring gains and
losses. Other than excluding such charges, the accounting policies of the
operating segments are the same as those of the consolidated company.
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 Military Workers'
and Corporate Health Services Compensation
Operations Operations Operations Total
Three Months Ended June 30, 2000
<S> <C> <C> <C> <C>
Medical Premiums............................. $ 219,751 0 0 $219,751
Military Contract Revenues................... $ 72,374 72,374
Specialty Product Revenues................... 2,370 $27,720 30,090
Professional Fees............................ 9,695 9,695
Investment and Other Revenues................ 1,301 252 3,591 5,144
----------- ---------- --------- -----------
Total Revenue............................. $233,117 $72,626 $31,311 $337,054
======== ======= ===========================
Segment Operating Profit..................... $ 5,154 $ 2,477 $ 1,061 $ 8,692
Interest Expense and Other, Net.............. (4,874) (123) (152) (5,149)
Impairment, Restructuring, Premium Deficiency
and Other Charges......................... (269,837) ______ (18,000) (287,837)
--------- -------- ---------
Net (Loss) Income Before Income Taxes........ $(269,557) $ 2,354 $(17,091) $(284,294)
========= ======= ========
Three Months Ended June 30, 1999
Medical Premiums............................. $204,649 $204,649
Military Contract Revenues................... $ 71,093 71,093
Specialty Product Revenues................... 2,110 $18,839 20,949
Professional Fees............................ 13,352 13,352
Investment and Other Revenues................ 1,732 96 3,947 5,775
------------ ----------- --------- ------------
Total Revenue............................. 221,843 $71,189 $22,786 $315,818
====== =======
Segment Operating Profit..................... $ 9,327 $ 2,642 $ 5,003 $16,972
Interest Expense and Other, Net.............. (2,863) (382) (881) (4,126)
-------- ---------- ---------- ------------
Net Income Before Income Taxes............... $ 6,464 $ 2,260 $ 4,122 $ 12,846
======== ========= ======== ==========
Six Months Ended June 30, 2000
Medical Premiums............................. $438,429 $438,429
Military Contract Revenues................... $137,255 137,255
Specialty Product Revenues................... 4,692 $53,422 58,114
Professional Fees............................ 20,716 20,716
Investment and Other Revenues................ 2,296 454 6,966 9,716
----------- ------------ --------- -----------
Total Revenue............................. $466,133 $137,709 $60,388 $664,230
======== ======== =============================
Segment Operating Profit..................... $ 10,799 $ 4,727 $ 6,494 $ 22,020
Interest Expense and Other, Net.............. (9,402) (365) (970) (10,737)
Impairment, Restructuring, Premium Deficiency
and Other Charges......................... (273,737) _______ (19,500) (293,237)
--------- ------- ----------
Net (Loss) Income Before Income Taxes........ $(272,340) $ 4,362 $ (13,976) $(281,954)
========= ========== ========= =========
Six Months Ended June 30, 1999
Medical Premiums............................. $ 411,960 $411,960
Military Contract Revenues................... $141,181 141,181
Specialty Product Revenues................... 4,556 $ 37,072 41,628
Professional Fees............................ 27,369 27,369
Investment and Other Revenues................ 3,381 249 8,124 11,754
---------- ------------ ----------- ----------
Total Revenue............................. $447,266 $141,430 $ 45,196 $633,892
======== ======== =============================
Segment Operating Profit..................... $ 17,882 $ 5,320 $ 9,965 $ 33,167
Interest Expense and Other, Net.............. (5,816) (550) (1,809) (8,175)
Impairment, Restructuring, Premium Deficiency
and Other Charges......................... (13,206) (13,206)
--------- -------------- -------------- ---------
Net (Loss) Income Before Income Taxes........ $ (1,140) $ 4,770 $ 8,156 $ 11,786
========== ========= ========= ========
</TABLE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. In the second quarter of 1997, the Company's Board of Directors
authorized a $3.0 million line of credit from the Company to the Company's Chief
Executive Officer ("CEO"). In April 2000, the Company's Board of Directors
authorized a $2.5 million loan from the Company to the CEO which, along with
accrued interest, is due on June 30, 2002. As of June 30, 2000, the aggregate
principal outstanding and accrued interest for both instruments was $5.3
million. All borrowed amounts bear interest at a rate equal to the rate at which
the Company could have borrowed funds under its line of credit facility at the
time of the borrowing plus 10 basis points.
10. In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101,"Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 clarifies existing accounting principles related to revenue
recognition in financial statements. The Company is required to comply with the
provisions of SAB 101 by the fourth quarter of 2000. Management has not yet
completed an analysis of the impact that SAB 101 will have on the Company's
current revenue recognition practices.
11. Certain amounts in the Condensed Consolidated Financial Statements for
the three and six months ended June 30, 1999 have been reclassified to conform
with the current year presentation.
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 15, 2000, 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 June 30, 2000, compared to three
months ended June 30, 1999.
The Company's total operating revenues for the three months ended June 30,
2000, increased approximately 6.7% to $337.1 million from $315.8 million for the
three months ended June 30, 1999. The increase was primarily due to increases in
medical premium revenues of $15.1 million and specialty product revenues of $9.1
million, offset by a decrease in professional fees of $3.7 million.
Total member months (the number of months of each period that an individual
is enrolled in a plan) for the HMO and insurance subsidiaries decreased
approximately 2%. Commercial and Medicaid HMO member months in total decreased
approximately 2% and managed indemnity member months decreased approximately
10%. These decreases were partially offset by an increase in Medicare member
months of approximately 8%. In Nevada, commercial and Medicaid HMO member months
increased approximately 3% and Medicare member months increased approximately
2%. In Texas, commercial member months decreased approximately 9%, while
Medicare member months increased 30%. 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.
The Company's HMO and insurance subsidiaries' average premium rate per
member increased approximately 10% for the three months ended June 30, 2000
compared to the same three-month period in the prior year. The Nevada commercial
and Medicaid HMO average premium rate per member increased approximately 3% and
the Nevada Medicare HMO average rate per member increased approximately 8%. The
increase in Nevada Medicare HMO rates is primarily due to a shift in members to
the Las Vegas area from other parts of Nevada as well as from Arizona. The
amount of premium received from the Health Care Financing Administration
("HCFA") per Medicare member is higher in Las Vegas. HCFA's established rate per
member increased 4% for the Las Vegas area. Over 95% of the Company's Las Vegas
Medicare members are enrolled in the HCFA Social HMO Medicare Program ("Social
HMO"). The Company's premium received from HCFA is higher for Social HMO
members. HCFA might adjust 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. Managed indemnity premium rates per
member increased approximately 14%.
The Texas commercial HMO average premium rate per member increased
approximately 11% in the quarter ended June 30, 2000 compared to the same
quarter of the prior year. Commercial rate increases on renewals were greater
than 10% for Dallas. The Texas Medicare average rate decreased approximately 3%
primarily due to an increase in Medicare membership in Dallas, which has a lower
rate than most of the Company's Medicare members in the Houston area.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- -------- -- --------- --------- ---
RESULTS OF OPERATIONS (continued)
Results of Operations, three months ended June 30, 2000, compared to three
months ended June 30, 1999 (continued).
As part of the Company's reorganization, it will no longer actively market
its HMO Medicare product in Texas for the remainder of calendar year 2000. The
Company will continue to enroll Medicare eligible members who proactively seek
coverage in Texas and will continue customer service to its existing membership
through 2000. The Company has notified HCFA, that effective January 1, 2001,
it will cease its Medicare products in 14 counties in the Houston area, which
will affect approximately 1,500 members.
The Company markets its HMO and managed indemnity insurance products
primarily to employer groups, labor unions and individuals enrolled in Medicare,
through its internal sales personnel and independent insurance brokers. Such
brokers receive commissions based on the premiums received from each group. The
Company's agreements with its member groups are usually for twelve months and
are subject to annual renewal. For the quarter ended June 30, 2000, 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.
Military contract revenue increased to $72.4 million from $71.1 million.
The 1.8% increase is primarily attributable to increased change order activity
and associated revenue offset slightly by a smaller population of at-risk
beneficiaries.
Specialty product revenue increased $9.1 million, or 43.6%, for the three
months ended June 30, 2000, compared to the same prior year period. Specialty
product revenue and expense are primarily related to the workers' compensation
insurance business. The increase in specialty product revenues related to the
workers' compensation insurance segment was primarily due to premium growth,
which has occurred since July 1999, and premium rate increases for California
policies issued in 2000, which have averaged over 30% on renewal policies, as
well as new business in Nevada and Colorado. Beginning in July 1999, the State
of Nevada allowed private insurance companies to offer workers' compensation
products.
Professional fees decreased approximately $3.7 million primarily
due to the sale of the pharmacy operations in Texas in the fourth quarter of
1999.
Investment and other revenues decreased approximately $600,000 over the
comparable prior year period primarily due to a decrease in invested balances.
Approximately $400,000 of the difference was due to realized losses recognized
in the current year compared to slight gains in the prior year.
Total medical expenses increased $70.7 million over the same three-month
period last year. Included in medical expenses for the three-month period ended
June 30, 2000, is $29.5 million of reserve strengthening primarily for adverse
development related to prior periods' medical claims, $15.5 million of premium
deficiency and $10.2 million of other non-recurring medical costs. Excluding
these items, medical expenses increased $15.5 million, or 8.8%, and medical
expenses as a percentage of medical premiums and professional fees ("Medical
Care Ratio") increased from 80.9% to 83.6% for the quarter ended June 30, 2000
compared to the same prior year period. The increase in the Medical Care Ratio
is primarily due to the increase in Medicare members as a percentage of fully
insured members. The cost of providing medical care to Medicare members
generally requires a greater percentage of the premiums received. In addition,
hospital costs in southern Nevada were higher primarily due to an increase in
bed days and in Houston, hospital costs were higher due to increased cost of
care.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- -------- -- --------- --------- ---
RESULTS OF OPERATIONS (continued)
Results of Operations, three months ended June 30, 2000, compared to three
months ended June 30, 1999 (continued).
Included in medical expenses is the utilization of $8.5 million and $7.6
million of premium deficiency reserve to offset losses on contracts in Texas for
the periods ended June 30, 2000 and 1999, respectively. Also included in medical
expenses for the three months ended June 30, 1999 is the utilization of $2.7
million of premium deficiency reserve to offset losses primarily on Medicare
risk members in Arizona and rural Nevada.
Total military contract expenses increased to $70.2 million from $68.5
million. The $1.7 million, or 2.5% increase is consistent with the two factors
contributing to the revenue increase previously discussed.
Specialty product expenses increased $27.4 million. The combined ratio for
the workers' compensation insurance business for the three months ended June 30,
2000 was 164.8% compared to 95.3% for the comparable prior year period. The
increase was due to an increase in the loss and loss adjustment expense ("LAE")
ratio to 135.6% from 59.0% in 1999, partially offset by a decrease in the
expense ratio to 27.0% from 36.3% in 1999. The remaining variance is due to
policyholders' dividends incurred for participating policies issued in the state
of Nevada. The policyholders' dividend ratio in 2000 was 2.2% while no dividends
were incurred in 1999.
The higher loss and LAE ratio for 2000 is due to $19.2 million in adverse
development related to accident years 1999 and prior. In the second quarter of
1999, no prior accident year development was incurred. Estimated ultimate losses
and LAE incurred in accident years 1996 to 1998 have developed significantly in
response to the continuation of increasing claim severity patterns on the
Company's California book of business. Many workers' compensation insurance
carriers in California are experiencing higher claim severity. For claims
occurring on and after July 1, 1998, the Company has reinsured a percentage of
the higher claim severity to its reinsurer under the Company's low-level
reinsurance treaty. The low-level reinsurance treaty expired on June 30, 2000;
however, the Company opted to continue ceding premiums and losses under the
treaty on a run-off basis for all policies in force at June 30, 2000. On July 1,
2000, the Company entered into a reinsurance treaty that covers losses on claims
in excess of $250,000 for policies issued after June 30, 2000.
The reduction in the expense ratio is due to the higher premium volume
earned in 2000 compared to 1999. For the quarter ended June 30, 2000, net
premiums earned were 48.0% higher than the comparable quarter in 1999. Moreover,
policy acquisition costs, comprised of commissions, premium taxes and boards and
bureaus expense, decreased to 6.9% of net premiums earned from 9.6% in 1999 and
non-policy acquisition expenses decreased to 18.7% from 25.0% in 1999. Total
non-policy acquisition expenses were $5.1 million compared to $4.6 million in
1999, an increase of 10.9%. Gross premiums earned for the quarter increased
from $32.8 million in 1999 to $48.6 million in 2000, an increase of 48.2%.
General, administrative and marketing ("G&A") costs increased slightly
compared to the second quarter of 1999. As a percentage of revenues, G&A costs
for the second quarter of 2000 decreased to 10.3% from 11.0% in 1999. A $1.5
million increase in depreciation expense, primarily related to the
implementation of new computer systems, was partially offset by a $1.2 million
decrease in legal expense. G&A expense is net of utilization of premium
deficiency reserves for maintenance costs of approximately $3.4 million and $4.7
million for the three-month periods ended June 30, 2000 and 1999, respectively.
In the second quarter of 2000, the Company incurred certain asset
impairment, restructuring, reorganization and other costs. See Note 2 to the
Condensed Consolidated Financial Statements for a discussion of these charges.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- -------- -- --------- --------- ---
RESULTS OF OPERATIONS (continued)
Results of Operations, three months ended June 30, 2000, compared to three
months ended June 30, 1999 (continued).
Interest expense and other increased $1.0 million for the three months
ended June 30, 2000, compared to the same prior year period primarily due to an
increase in debt as well as an increase in the Company's cost of borrowing.
For the current year period, the Company recorded $77.6 million of tax
benefit for an effective tax rate of 27.3% compared to 33.4% for the same prior
year period. The Company's effective tax rate is less than the 35% statutory
rate primarily due to the non-deductibility of certain portions of the goodwill
impairment expense recorded in the second quarter of 2000. Excluding the effect
of the expenses discussed in Notes 2 and 8 to the Condensed Consolidated
Financial Statements, the effective tax rate for the period was 33.5%. The
Company's ongoing effective tax rate is less than the 35% statutory rate
primarily due to tax preferred investments.
Results of Operations, six months ended June 30, 2000, compared to six
months ended June 30, 1999.
The Company's total operating revenues for the six months ended June 30,
2000, increased approximately 4.8% to $664.2 million from $633.9 million for the
six months ended June 30, 1999. The increase was primarily due to increases in
medical premium revenues of $26.5 million, or 6.4%, and specialty product
revenues of $16.5 million, offset by a decrease in professional fees of $6.7
million and military contract revenue of $3.9 million.
Total member months for the HMO and insurance subsidiaries decreased
approximately 3%. Commercial and Medicaid HMO member months in total decreased
approximately 4% and managed indemnity member months decreased approximately 9%.
These decreases were partially offset by an increase in Medicare member months
of approximately 7%. In Nevada, commercial and Medicaid HMO member months
remained relatively constant and Medicare member months increased approximately
1%. In Texas, commercial member months decreased approximately 9%, while
Medicare member months increased 31%. 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.
The Company's HMO and insurance subsidiaries' average premium rate per
member increased approximately 10% for the six months ended June 30, 2000
compared to the same six-month period in the prior year. The Nevada commercial
and Medicaid HMO average premium rate per member increased approximately 4% and
the Nevada Medicare HMO average rate per member increased approximately 10%. The
increase in Nevada Medicare HMO rates is primarily due to a shift in members to
the Las Vegas area from other parts of Nevada as well as from Arizona. The
amount of premium received from HCFA per Medicare member is higher in Las Vegas.
HCFA's established rate per member increased 4% for the Las Vegas area. Over 95%
of the Company's Las Vegas Medicare members are enrolled in the HCFA Social HMO.
The Company's premium received from HCFA is higher for Social HMO members. HCFA
might adjust 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. Managed indemnity premium rates per member increased
approximately 9%.
The Texas commercial HMO average premium rate per member increased
approximately 9% in the six months ended June 30, 2000 compared to the same
period in the prior year. Commercial rate increases on renewals were greater
than 10% for Dallas. The Texas Medicare average rate decreased approximately 3%
primarily due to an increase in Medicare membership in Dallas, which has a lower
rate than most of the Company's Medicare members in the Houston area.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- -------- -- --------- --------- ---
RESULTS OF OPERATIONS (continued)
Results of Operations, six months ended June 30, 2000, compared to six
months ended June 30, 1999 (continued).
As part of the Company's reorganization, it will no longer actively market
its HMO Medicare product in Texas for the remainder of calendar year 2000. The
Company will continue to enroll Medicare eligible members who proactively seek
coverage in Texas and will continue customer service to its existing membership
through 2000. The Company has notified HCFA, that effective January 1, 2001,
it will cease its Medicare products in 14 counties in the Houston area, which
will affect approximately 1,500 members.
The Company markets its HMO and managed indemnity insurance 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 six months ended June 30, 2000, 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.
Military contract revenues decreased to $137.3 million from $141.2 million,
or 2.8%. The reduction in revenue is primarily attributable to a first quarter
2000 decrease in the at-risk health care population of beneficiaries as
additional beneficiaries enrolled with military treatment facility primary care
managers. The Company is not at-risk for those TRICARE eligibles and receives
less revenue related to them from the government.
Specialty product revenues increased $16.5 million, or 39.6%, for the six
months ended June 30, 2000, compared to the same prior year period. Specialty
product revenues and expenses are primarily related to the workers' compensation
insurance business. The increase in specialty product revenues related to the
workers' compensation insurance segment was primarily due to premium growth,
which has occurred since July 1999 and premium rate increases for California
policies issued in 2000, which have averaged over 30% on renewal policies, as
well as new business in Nevada and Colorado. Beginning in July 1999, the State
of Nevada allowed private insurance companies to offer workers' compensation
products.
Professional fees decreased approximately $6.7 million primarily due to the
sale of the pharmacy operations in Texas in the fourth quarter of 1999 and the
closure of inpatient operations at Mohave Valley Hospital in the first quarter
of 1999.
Investment and other revenues decreased approximately $2.0 million over the
comparable prior year period primarily due to a decrease in invested balances.
Approximately $800,000 of the difference was due to realized losses recognized
in the current year compared to slight gains in the prior year.
Total medical expenses increased $74.0 million over the same six-month
period last year. Included in medical expenses for the six-month period ended
June 30, 2000, are $30.5 million of reserve strengthening primarily for adverse
development related to prior periods' medical claims, $15.5 million of premium
deficiency and $10.2 million of other non-recurring medical costs. Included in
medical expenses for the six-month period ended June 30, 1999 is $8.1 million of
premium deficiency expense. Excluding these items, medical expenses increased
$25.9 million, or 7.2%, and the Medical Care Ratio increased from 81.3% to 83.4%
for the six months ended June 30, 2000 compared to the same prior year period.
The increase in the Medical Care Ratio is primarily due to the increase in
Medicare members as a percentage of fully insured members. The cost of providing
medical care to Medicare members generally requires a greater percentage of the
premiums received. In addition, hospital costs in southern Nevada were higher
primarily due to an increase in bed days and in Houston hospital costs were
higher due to increased cost of care.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- -------- -- --------- --------- ---
RESULTS OF OPERATIONS (continued)
Results of Operations, six months ended June 30, 2000, compared to six
months ended June 30, 1999 (continued).
Included in medical expenses is the utilization of $14.8 million and $12.2
million of premium deficiency reserve to offset losses on contracts in Texas for
the six-month periods ended June 30, 2000 and 1999, respectively. Also included
in medical expenses for the six months ended June 30, 1999 is the utilization of
$5.3 million of premium deficiency reserve to offset losses primarily on
Medicare risk members in Arizona and rural Nevada.
Total military contract expenses decreased approximately $3.1 million, or
2.3%. This decrease is consistent with the decrease in revenues discussed
previously.
Specialty product expenses increased $34.9 million. The combined ratio for
the workers' compensation insurance business for the six months ended June 30,
2000 was 132.9% compared to 95.9% for the comparable prior year period. The
increase was due to an increase in the loss and LAE ratio to 102.0% from 59.0%
in 1999, partially offset by a decrease in the expense ratio to 29.2% from 36.9%
in 1999. The remaining variance is due to policyholders' dividends incurred for
participating policies issued in the state of Nevada. The policyholders'
dividend ratio in 2000 was 1.7%, while no dividends were incurred in 1999.
The higher loss and LAE ratio for 2000 is due to $20.7 million in adverse
development related to accident years 1999 and prior. In the first six months of
1999, no prior accident year development was incurred. Estimated ultimate losses
and LAE incurred in accident years 1996 to 1998 have developed significantly in
response to the continuation of increasing claim severity patterns on the
Company's California book of business. Many workers compensation insurance
carriers in California are experiencing higher claim severity. For claims
occurring on and after July 1, 1998, the Company has reinsured a percentage of
the higher claim severity to its reinsurer under the Company's low-level
reinsurance treaty. The low-level reinsurance treaty expired on June 30, 2000;
however, the Company opted to continue ceding premiums and losses under the
treaty on a run-off basis for all policies in force at June 30, 2000. On July 1,
2000, the Company entered into a reinsurance treaty that covers losses on claims
in excess of $250,000 for policies issued after June 30, 2000.
The reduction in the expense ratio is due to the higher premium volume
earned in 2000 compared to 1999. For the six months ended June 30, 2000, net
premiums earned are 44.8% higher than the comparable period in 1999. Moreover,
policy acquisition costs, comprised of commissions, premium taxes and boards and
bureaus expense, decreased to 8.5% of net premiums earned from 9.7% in 1999, and
non-policy expenses decreased to 19.3% from 25.5% in 1999. Total
non-policy acquisition expenses were $10.2 million compared to $9.3 million
in 1999, an increase of 9.7%. Gross premiums earned for 2000 increased from
$64.9 million in 1999 to $93.0 million in 2000, an increase of 43.2%.
General, administrative and marketing ("G&A") costs increased $400,000 or
less than 1% compared to the first six months of 1999. As a percentage of
revenues, G&A costs for the first six months of 2000 decreased to 10.4% from
10.8% in 1999. A $3.1 million increase in depreciation expense, primarily
related to the implementation of new computer systems, was offset by decreases
in other G&A expenses, including legal expense. G&A expense is net of
utilization of premium deficiency reserves for maintenance costs of
approximately $9.0 million and $7.0 million for the six-month periods ended June
30, 2000 and 1999, respectively.
In the first six months of 2000 and 1999, the Company incurred certain
asset impairment, restructuring and other costs. See Note 2 to the condensed
consolidated financial statements for a discussion of these charges.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- -------- -- --------- --------- ---
RESULTS OF OPERATIONS (continued)
Results of Operations, six months ended June 30, 2000, compared to six
months ended June 30, 1999 (continued).
Interest expense and other increased $2.6 million for the six months ended
June 30, 2000, compared to the same prior year period primarily due to an
increase in debt as well as an increase in the Company's cost of borrowing.
For the current year period, the Company recorded $76.8 million of tax
benefit for an effective tax rate of 27.2% compared to 33.4% for the same prior
year period. The Company's effective tax rate is less than the 35% statutory
rate primarily due to the non-deductibility of certain portions of goodwill
impairment expense in the second quarter of 2000. Excluding the effect of the
expenses discussed in Notes 2 and 8 to the Condensed Consolidated Financial
Statements, the effective tax rate for the period was 33.5%. The Company's
ongoing 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 $20.0
million for the six months ended June 30, 2000, resulting primarily from a loss
of $205.2 million and a net change in assets and liabilities of $37.7 million
offset by a non-cash impairment provision of $203.0 million, $17.7 million in
depreciation and amortization and $2.2 million in provision for doubtful
accounts. The decrease in cash flow resulting from the change in assets and
liabilities was primarily due to increases in deferred tax assets of $64.7
million primarily related to the charges discussed in Note 2 to the Condensed
Consolidated Financial Statements. In addition, reinsurance recoverable
increased approximately $59.4 million, primarily due to increased business
as well as development on prior year loss estimates. These cash outflows were
partially offset by an increase in losses and LAE of $65.6 million and
increases in current liabilities, including medical claims payable.
Sierra Military Health Services, Inc. ("SMHS") receives monthly cash
payments equivalent to one-twelfth of its annual contractual price with the
Department of Defense ("DoD"). SMHS also accrues revenue on a monthly basis for
the contractually specified Bid Price Adjustment ("BPA") process and for
contract change orders.
The BPA serves to adjust the DoD's monthly payments to SMHS because such
payments are based in part on DoD estimates for beneficiary population,
beneficiary population baseline health care cost, inflation and military direct
care system utilization. As actual information has been made available for the
above items, quarterly adjustments are made to SMHS' monthly health care payment
in addition to lump sum adjustments for past months. During April 2000, the
Company completed BPA's 2 and 3 with the DoD resulting in a cash payment to the
Company of $13.0 million in the second quarter.
As SMHS implements DoD-directed contract changes, revenue is accrued on a
percentage of completion basis until price negotiation is settled. In the second
quarter, the Company received payments from the DoD of $6.0 million related to
three specific change orders.
As of June 30, 2000, the Company was not in compliance with certain
financial covenants relating to its line of credit. Under the terms of its line
of credit, noncompliance with the covenants constitutes an event of default,
which permits the Company's lenders to accelerate repayment of the Company's
outstanding obligations under its line of credit. The Company's compliance with
these covenants under its line of credit has been waived by its lenders. The
waiver is effective as of June 30, 2000 and will remain effective until
mid-September by which time the Company expects to have negotiated a new
amendment with revised covenants. In accordance with Statement of Financial
Accounting Standards No. 78, "Classification of Obligations that are Callable by
the Creditor", the Company has classified the entire outstanding balance under
its line of credit as a current liability as of June 30, 2000. The waiver
includes an amendment to the line of credit, which, among other things, requires
that the Company grant its lenders a security interest in certain personal
property of the Company, reduces the availability under the line of credit to
$185 million, increases the Company's borrowing rate by 87.5 basis points and
provides for the payment of additional fees by the Company.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- -------- -- --------- --------- ---
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued).
The Company is negotiating a further amendment to its line of credit with
its lenders which the Company expects will, among other things, amend some of
the covenants in its line of credit such that the Company will be in compliance.
While the Company believes that its best interests, and those of its lenders,
would be served through an amendment to the line of credit, there can be no
assurance that the Company's lenders will ultimately agree that such an
amendment will ultimately be consummated, or that in the event the Company does
obtain such an amendment to its line of credit, the Company will be able to
maintain compliance with its covenants. In the meantime, the Company has been
aggressively exploring various strategic options, and has been taking steps to
conserve and manage its cash flow; however, there is no assurance that these
actions will be successful.
During the six months ended June 30, 2000, the Company had net borrowings
of $25.0 million under its line of credit, which was offset by $5.4 million used
for the reduction of other debt. In addition to the borrowings, cash inflows in
the six months ended June 30, 2000 included a $17.0 million net change in
investments and $900,000 received in connection with the sale of stock through
the Company's stock plans. Offsetting the above cash inflows was $10.9 million
in net capital expenditures including costs associated with the Company's
technology initiatives to improve new systems and to establish web-based
applications. In March 2000, the Company sold its interest in TRIWEST Healthcare
Alliance in exchange for a note receivable in the amount of $3.7 million.
The Company has a revised 2000 capital budget of under $20.0 million,
primarily for computer hardware and software, furniture and equipment and other
requirements due to the Company's computer system initiatives and projected
growth. The Company's liquidity needs over the next six months will primarily be
to fund anticipated temporary negative cash flow at SMHS as well as continuing
operating losses in Texas, and for the debt service and capital items noted
above. To facilitate a reduction of the balance on its line of credit, the
Company anticipates the following actions:
o Sale of the Company's Houston operations
o Sale of the Company's Texas and Arizona real estate
o Sale of the Company's jet
o Sale-leaseback of substantially all of the Company's Nevada real estate
In addition, the Company has restructured its Dallas operations. (See Note
2 to the Company's Condensed Consolidated Financial Statements.) Furthermore,
the Company is initiating a plan through which an overhead reduction of over $7
million is expected. The Company believes the actions delineated above along
with operating cash flow should enable it to fund its debt service and capital
expenditures, as well as meet its liquidity needs.
In the second quarter of 1997, the Company's Board of Directors authorized
a $3.0 million line of credit from the Company to the Company's Chief Executive
Officer ("CEO"). In April 2000, the Company's Board of Directors authorized a
$2.5 million loan from the Company to the CEO which, along with accrued
interest, is due on June 30, 2002. As of June 30, 2000, the aggregate principal
outstanding and accrued interest for both instruments was $5.3 million. All
borrowed amounts bear interest at a rate equal to the rate at which the Company
could have borrowed funds under its line of credit facility at the time of the
borrowing plus 10 basis points.
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 $24.6 million as of June
30, 2000. 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 June 30, 2000,
$55.5 million is designated for use only by the regulated subsidiaries.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- -------- -- --------- --------- ---
RESULTS OF OPERATIONS (continued)
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 $47.5 million of 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 six months ended
June 30, 2000, the Company purchased $3.0 million of the Debentures on the open
market.
Membership
The Company's membership at June 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
June 30 June 30
2000 1999
---- ----
HMO
<S> <C> <C>
Commercial.................................................. 250,700 263,100
Medicare.................................................... 53,100 48,900
Medicaid (1)................................................ 12,200 9,400
Managed Indemnity............................................. 32,900 42,800
Medicare Supplement........................................... 28,700 27,400
Administrative Services....................................... 278,100 301,500
TRICARE Eligibles............................................. 613,500 599,000
---------- ----------
Total Members................................................. 1,269,200 1,292,110
========= =========
</TABLE>
(1) In prior years Medicaid was included in commercial membership.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's available for sale investments are substantially owned by
the HMO and insurance subsidiaries. As of June 30, 2000, unrealized holding
losses on available for sale investments have decreased by $3.9 million
since the 1999 year end primarily due to a decrease in interest rates, and
thus, an increase in the market value of bonds. The Company believes that
changes in market interest rates, resulting in unrealized holding gains or
losses, 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.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various claims and other litigation in the
ordinary course of business. Such litigation includes claims of medical
malpractice, coverage related claims 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
Sierra held its annual meeting of stockholders on May 18, 2000 in Las
Vegas, Nevada.
The following persons were elected directors for a two-year term ending in
2002 based on the voting results below:
<TABLE>
<CAPTION>
Broker
Name For Withheld Abstain Non-votes
<S> <C> <C> <C> <C>
Erin MacDonald 24,291,845 682,492 0 0
William J. Raggio 24,256,799 717,538 0 0
Charles L. Ruthe 24,272,082 702,255 0 0
</TABLE>
The following person was elected to a one-year term ending in 2001 based on
the voting results below:
<TABLE>
<CAPTION>
Broker
Name For Withheld Abstain Non-votes
<S> <C> <C> <C> <C>
Anthony L. Watson 24,321,963 652,374 0 0
</TABLE>
The following persons' terms as directors continued after the meeting and
end in 2001.
Anthony M. Marlon, M.D.
Thomas Y. Hartley
The stockholders also ratified the appointment of Deloitte & Touche LLP as
the Company's independent auditors for the year ending December 31, 2000. The
voting results were as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
<S> <C> <C> <C> <C>
24,488,847 464,627 20,863 0
</TABLE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
---------------------------------------------------------------
The stockholders also voted to amend the Company's Employee Stock Purchase
Plan to increase by 1,250,000 the number of shares of common stock for issuance
to participants and to extend the plan to 2010. The voting results were as
follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
<S> <C> <C> <C> <C>
21,702,597 3,171,125 100,615 0
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Loan Agreement
(10.2) Collateral Assignment of Rights
(27) Financial Data Schedule
(99) Registrant's current report on Form 8-K
dated March 15, 2000, incorporated herein by
reference.
(b) Reports on Form 8-K
The Company has not filed any Reports on Form 8-K during this reporting
period.
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
duly authorized undersigned.
SIERRA HEALTH SERVICES, INC.
----------------------------
(Registrant)
Date: August 14, 2000 /S/ PAUL H. PALMER
---------------------
Paul H. Palmer
Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
