UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
- -------------------------------------------------------------------------------
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 1, 2000, there were 27,041,000 shares of common stock outstanding.
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets -
<S> <C> <C> <C> <C> <C>
March 31, 2000 and December 31, 1999..................................................... 3
Condensed Consolidated Statements of Operations -
three months ended March 31, 2000 and 1999............................................... 4
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 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............................................ 9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk........................................................................ 14
Part II - OTHER INFORMATION
Item l. Legal Proceedings.......................................................................... 15
Item 2. Changes in Securities and Use Of Proceeds.................................................. 15
Item 3. Defaults Upon Senior Securities............................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders........................................ 15
Item 5. Other Information.......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
Signatures................................................................................................... 16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents.............................................. $ 39,616,000 $ 55,936,000
Investments............................................................ 203,592,000 218,951,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts 2000 - $15,496,000; 1999 - $15,551,000)............................. 49,015,000 43,036,000
Military Accounts Receivable (Less: Allowance for Doubtful
Accounts 2000 - $899,000, 1999 - $800,000)......................... 81,000,000 60,340,000
Reinsurance Recoverable................................................ 59,627,000 54,563,000
Prepaid Expenses and Other Current Assets.............................. 93,591,000 91,767,000
----------------- -----------------
Total Current Assets............................................... 526,441,000 524,593,000
PROPERTY AND EQUIPMENT, NET................................................. 261,858,000 264,549,000
LONG-TERM INVESTMENTS....................................................... 20,631,000 14,862,000
RESTRICTED CASH AND INVESTMENTS............................................. 22,092,000 21,705,000
REINSURANCE RECOVERABLE, Net of Current Portion............................. 91,780,000 82,300,000
GOODWILL ................................................................... 158,300,000 159,514,000
OTHER ASSETS................................................................ 57,605,000 62,589,000
----------------- -----------------
TOTAL ASSETS................................................................ $1,138,707,000 $1,130,112,000
============== ==============
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C>
Accounts Payable and Accrued Liabilities.................................. $ 98,916,000 $ 102,573,000
Medical Claims Payable.................................................... 74,817,000 91,607,000
Current Portion of Reserve for
Losses and Loss Adjustment Expense .................................. 101,317,000 93,768,000
Unearned Premium Revenue.................................................. 47,585,000 45,333,000
Military Health Care Payable.............................................. 59,710,000 50,831,000
Premium Deficiency Reserve................................................ 9,115,000 21,000,000
Current Portion of Long-term Debt......................................... 4,591,000 4,741,000
------------------ ------------------
Total Current Liabilities............................................ 396,051,000 409,853,000
RESERVE FOR LOSSES AND
LOSS ADJUSTMENT EXPENSE, Net of Current Portion........................... 152,859,000 150,626,000
LONG-TERM DEBT.............................................................. 273,320,000 258,854,000
OTHER LIABILITIES .......................................................... 31,531,000 32,367,000
----------------- -----------------
TOTAL LIABILITIES........................................................... 853,761,000 851,700,000
---------------- ----------------
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................................................ 176,818,000 175,915,000
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..................................................... (11,989,000) (16,063,000)
Retained Earnings......................................................... 142,763,000 141,207,000
---------------- ----------------
Total Stockholders' Equity........................................... 284,946,000 278,412,000
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $1,138,707,000 $1,130,112,000
============== ==============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
---- ----
OPERATING REVENUES:
<S> <C> <C>
Medical Premiums................................................................ $218,678,000 $207,311,000
Military Contract Revenues...................................................... 64,881,000 70,088,000
Specialty Product Revenues...................................................... 28,024,000 20,679,000
Professional Fees............................................................... 11,021,000 14,017,000
Investment and Other Revenues................................................... 4,572,000 5,979,000
--------------- ---------------
Total ........................................................................ 327,176,000 318,074,000
------------- -------------
OPERATING EXPENSES:
Medical Expenses (Note 2)....................................................... 192,338,000 189,042,000
Military Contract Expenses...................................................... 62,833,000 67,644,000
Specialty Product Expenses...................................................... 26,848,000 19,396,000
General, Administrative and Marketing Expenses.................................. 34,329,000 33,897,000
Reorganization, Impairment and Other Costs (Note 2)............................. 2,900,000 5,106,000
--------------- --------------
Total ........................................................................ 319,248,000 315,085,000
OPERATING INCOME................................................................. 7,928,000 2,989,000
INTEREST EXPENSE AND OTHER, NET ................................................. (5,588,000) (4,049,000)
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES................................................. 2,340,000 (1,060,000)
(PROVISION) BENEFIT FOR INCOME TAXES.............................................. (784,000) 354,000
---------------- ---------------
NET INCOME (LOSS)................................................................. $ 1,556,000 $ (706,000)
============= ==============
NET INCOME (LOSS) PER COMMON SHARE................................................ $.06 $(.03)
==== ======
NET INCOME (LOSS) PER COMMON SHARE ASSUMING DILUTION.............................. $.06 $(.03)
==== ======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........................................ 26,985,000 27,186,000
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
ASSUMING DILUTION............................................................... 26,985,000 27,186,000
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss)....................................................... $ 1,556,000 $ (706,000)
Adjustments to Reconcile Net Income to Net Cash
Used For Operating Activities:
Depreciation and Amortization.................................... 8,693,000 6,823,000
Provision for Doubtful Accounts.................................. 1,072,000 1,306,000
Changes in Assets and Liabilities ...................................... (52,691,000) (57,200,000)
------------ ------------
Net Cash Used for Operating Activities ............................. (41,370,000) (49,777,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net of Equipment Dispositions..................... (6,246,000) (14,160,000)
Changes in Investments.................................................. 16,076,000 (13,293,000)
Corporate Acquisition................................................... (3,000,000)
Net Cash Provided By (Used for) Investing Activities.................... 9,830,000 (30,453,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings................................................ 32,000,000 21,000,000
Payments on Debt and Capital Leases..................................... (17,684,000) (1,001,000)
Purchase of Treasury Stock.............................................. (6,792,000)
Exercise of Stock in Connection with Stock Plans........................ 904,000 1,239,000
-------------- --------------
Net Cash Provided by Financing Activities........................ 15,220,000 14,446,000
------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................. (16,320,000) (65,784,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 55,936,000 83,910,000
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $39,616,000 $ 18,126,000
=========== ============
Three Months Ended March 31
Supplemental Condensed Consolidated
Statements of Cash Flows Information: 2000 1999
- ------------------------------------------------------------------------ ---- ----
Cash Paid During the Period for Interest
(Net of Amount Capitalized)............................................. $ 6,298,000 $5,387,000
Net Cash Received (Paid) During the Period for Income Taxes................ 2,628,000 (27,000)
Non-cash Investing and Financing Activities:
Note Received for Sale of Investment.................................... 3,700,000
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements include the consolidated
accounts of Sierra Health Services, Inc. ("Sierra", a holding company, together
with its subsidiaries, collectively referred to herein as the "Company"). All
material intercompany balances and transactions have been eliminated. These
statements have been prepared in conformity with 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, Reorganization, 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.
Reorganization, Impairment and Other Charges:
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 2000, the Company announced a major
restructuring of its managed healthcare 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 $550,000 has been paid
as of March 31, 2000. The remainder is expected to
be paid by the end of the year 2000. The
restructuring involves changes in senior management
at the Texas facilities and centralization of key
services in Las Vegas.
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.
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.
<PAGE>
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 March 31, 2000:
<S> <C> <C>
Net Income $ 1,556,000 $ 1,556,000
Shares 26,985,000 26,985,000
Per Share Amount $.06 $.06
For the Three Months ended March 31, 1999:
Net Loss $ (706,000) $ (706,000)
Shares 27,186,000 27,186,000
Per Share Amount $(.03) $(.03)
</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 antidilutive. Outstanding stock
options were not included in the computation of diluted EPS in 2000
and 1999 because their effect would have been antidilutive in both
periods.
5. The following table presents comprehensive income for the
three-month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended March 31
2000 1999
---- ----
<S> <C> <C>
NET INCOME (LOSS)......................... $1,556,000 $ (706,000)
Change in net Unrealized Holding
Gains and Losses on Investments,
net of income taxes.............. 4,074,000 (5,471,000)
---------- ------------
COMPREHENSIVE INCOME (LOSS)............... $5,630,000 $(6,177,000)
========== ============
</TABLE>
6. 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 currently
structured as five one-year option periods with option period three
commencing June 1, 2000. 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 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>
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 Total
Three Months Ended March 31, 2000
<S> <C> <C> <C> <C>
Medical Premiums........................... $218,678 0 0 $218,678
Military Contract Revenues................. $64,881 64,881
Specialty Product Revenues................. 2,322 $25,702 28,024
Professional Fees.......................... 11,021 11,021
Investment and Other Revenues.............. 995 202 3,375 4,572
------------ ---------- --------- -----------
Total Revenue........................... $233,016 $65,083 $29,077 $327,176
======== ======= ======= ========
Segment Operating Profit................... $ 4,245 $ 3,250 $ 5,833 $ 13,328
Interest Expense and Other................. (4,528) (242) (818) (5,588)
Reorganization, Impairment and Other Costs. (3,900) _ (1,500) (5,400)
------------ ------------ --------- ----------
Net (Loss) Income Before Income Taxes ..... $ (4,183) $ 3,008 $ 3,515 $ 2,340
========== ======== ======== ==========
Three Months Ended March 31, 1999
Medical Premiums........................... $207,311 $207,311
Military Contract Revenues................. $70,088 70,088
Specialty Product Revenues................. 2,446 $18,233 20,679
Professional Fees.......................... 14,017 14,017
Investment and Other Revenues.............. 1,649 153 4,177 5,979
----------- ---------- --------- -----------
Total Revenue........................... $225,423 $70,241 $22,410 $318,074
======== ======= ======= ========
Segment Operating Profit................... $ 8,555 $ 2,678 $ 4,962 $ 16,195
Interest Expense and Other................. (2,953) (168) (928) (4,049)
Premium Deficiency, Impairment and Other Costs (13,206) (13,206)
Net (Loss) Income Before Income Taxes...... $ (7,604) $ 2,510 $ 4,034 $ (1,060)
=========== ======== ======== ==========
</TABLE>
7. 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"). As of March 31, 2000, the
aggregate principal outstanding and accrued interest was $2.7 million.
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. 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.
8. Certain amounts in the Condensed Consolidated Financial Statements for
the three months ended March 31, 1999 have been reclassified to conform
with the current year presentation.
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant for an assessment and understanding of the Company's
consolidated financial condition and results of operations. The discussion
should be read in conjunction with the Condensed Consolidated Financial
Statements and Related Notes thereto. Any forward-looking information contained
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations and any other sections of this Quarterly Report on Form 10-Q
should be considered in connection with certain cautionary statements contained
in the Company's Current Report on Form 8-K dated March 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 March 31, 2000, compared to three
months ended March 31, 1999.
The Company's total operating revenues for the three months ended March 31,
2000, increased approximately 2.9% to $327.2 million from $318.1 million for the
three months ended March 31, 1999. The increase was primarily due to increases
in medical premium revenue of $11.4 million, or 5.5%, and specialty product
revenues of $7.3 million, offset by a decrease in military contract revenue of
$5.2 million. Approximately 90% of the increase in medical premium revenue was
attributable to the Company's HMO and insurance subsidiaries in Nevada.
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 4%. Commercial and Medicaid HMO member months in total decreased
approximately 5% and managed indemnity member months decreased approximately 8%.
These decreases were partially offset by an increase in Medicare member months
of approximately 6%. In Nevada, commercial and Medicaid HMO member months
decreased approximately 3% and Medicare member months remained relatively
constant. In Texas commercial member months decreased approximately 8%, 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 three months ended March 31, 2000 compared
to the same three-month period in the prior year. Nevada commercial and Medicaid
HMO average premium rate per member increased approximately 6% and Nevada
Medicare HMO average rate per member increased approximately 12%. 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. The increase in 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 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. Managed indemnity
premium rates per member increased approximately 5%.
Texas commercial HMO average premium rate per member increased approximately 7%
in the quarter ended March 31, 2000 compared to the same quarter of the prior
year. Commercial rate increases on renewals were greater than 10% for Dallas.
Texas Medicare rates decreased approximately 3% primarily due to an increase in
Medicare membership in Dallas as a percentage of total Texas Medicare
membership.
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
-------------------------------------------------------------
Results of Operations, three months ended March 31, 2000, compared to three
months ended March 31, 1999 (continued).
Medicare premium rates as established by HCFA for the Dallas area are lower than
rates for certain counties in the Houston area. 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.
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 March 31, 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 decreased to $64.9 million from $70.1 million, a 7.4%
decrease. The reduction in revenue is primarily attributable to a decrease in
the at-risk health care population of beneficiaries from approximately 440,000
to 400,000 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. This decrease was
offset by a $1.0 million increase in change order revenue for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999.
Specialty product revenue increased $7.3 million, or 35.5%, for the three months
ended March 31, 2000, compared to the same prior year period. Specialty product
revenue and expense are primarily related to the workers' compensation insurance
business. The increase was due to workers' compensation insurance, which
increased $7.5 million, offset by a slight decrease in administrative services
revenue. 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, 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 fee revenue decreased approximately $3.0 million primarily due to
the sale of the pharmacy operations in Texas and the closure of inpatient
operations at Mohave Valley Hospital in the first quarter of 1999.
Investment and other revenue decreased approximately $1.4 million over the
comparable prior year period primarily due to a decrease in invested balances.
Approximately $451,000 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 $3.3 million over the same three-month period
last year. Included in medical expense for the three-month period ended March
31, 2000, is $1.0 million of adverse development related to prior years' medical
claims. Included in medical expense for the three-month period ended March 31,
1999 is $8.1 million of premium deficiency expense. Excluding the adverse
development in 2000 and the premium deficiency accrual in 1999, medical expenses
increased $10.4 million, or 5.7%, and medical expenses as a percentage of
medical premiums and professional fees ("Medical Care Ratio") increased from
81.8% to 83.3% for the quarter ended March 31, 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 Houston
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
---------------------------------------------------------------
Results of Operations, three months ended March 31, 2000, compared to three
months ended March 31, 1999 (continued).
hospital costs were higher due to increased cost of care. Included in medical
expenses is the utilization of $6.3 million and $4.6 million of premium
deficiency reserve to offset losses on contracts in Texas for the periods ended
March 31, 2000 and 1999, respectively. Also included in medical expense for the
three months ended March 31, 1999 is the utilization of $2.6 million of premium
deficiency reserve to offset losses primarily on Medicare risk members in
Arizona and rural Nevada.
Total military contract expense decreased approximately $4.8 million, or 7.1%.
This decrease is consistent with the decrease in revenues discussed previously.
Specialty product expenses increased $7.5 million. The combined ratio for the
workers' compensation insurance business for the three months ended March 31,
2000 was 98.6% compared to 96.4% for the comparable prior year period. The
increase was due to an increase in the loss and loss adjustment expense ("LAE")
ratio to 65.7% from 59.0% in 1999, partially offset by a decrease in the expense
ratio to 31.7% from 37.4% 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 1.2%, while no
dividends were incurred in 1999.
The higher loss and LAE ratio for 2000 is due to $1.5 million in adverse
development related to accident years 1999 and prior. In the first quarter of
1999, no prior accident year development was incurred. While accident years 1995
and prior continue to develop favorably, estimated ultimate losses and LAE
incurred in accident years 1996 to 1999 have been increased 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 will expire at June 30, 2000, on which date the Company has
the option to continue ceding premiums and losses under the treaty on a run-off
basis for all policies in force at June 30, 2000. The Company is in the process
of exploring various reinsurance options to replace the expiring coverage 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 March 31, 2000, net premiums earned
are 41.4% higher than the comparable quarter in 1999. While policy acquisition
costs, comprised of commissions, premium taxes and boards and bureaus expense,
increased to 10.2% of net premiums earned from 9.7% in 1999, general and
administrative expenses decreased to 21.5% from 27.7% in 1999. The expense ratio
reduction is also due to continued cost containment and expense efficiencies
employed by the Company. Total non-policy acquisition expenses, including
policyholders' dividends, in the quarter were $5.8 million compared to $5.0
million in 1999, an increase of 16.0%. Gross premiums earned for 2000 increased
from $32.1 million in 1999 to $44.4 million in 2000, an increase of 38.2%.
General, administrative and marketing ("G&A") costs increased $432,000 or 1.3%
compared to the first quarter of 1999. As a percentage of revenues, G&A costs
for the first quarter of 2000 decreased slightly from 10.7% to 10.5% compared to
the same period in 1999. G&A expense is net of utilization of premium deficiency
reserves for maintenance costs of approximately $5.6 million and $2.3 million
for the three-month periods ended March 31, 2000 and 1999, respectively. A $1.6
million increase in depreciation expense, primarily related to the
implementation of new computer systems, was offset by decreases in other G&A
expenses, including printing, postage and freight.
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. Also recorded in the
first quarter of 2000 was $1.4 million in restructuring charges consisting
primarily of
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
------------------------------------------------------------
Results of Operations, three months ended March 31, 2000, compared to three
months ended March 31, 1999 (continued).
severance pay for employees who were terminated in conjunction with a
restructuring of the Company's managed healthcare operations in Texas. The
restructuring involves changes in senior management at the Texas facilities and
centralization of key services in Las Vegas.
In the first quarter of 1999, the Company recorded impairment and other charges
of $5.1 million, of which $4.3 million related primarily to the write-off of
goodwill associated with Mohave Valley Hospital, a 12-bed acute care facility in
Bullhead City, Arizona for which all inpatient operations were closed in March
1999. Also in the first quarter of 1999, the Company 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.
Interest expense and other increased $1.5 million for the three months ended
March 31, 2000, compared to the same prior year period 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 $784,000 of tax expense for an
effective tax rate of 33.5% 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 tax preferred investments.
Liquidity and Capital Resources
The Company had negative cash flows from operations of approximately $41.4
million for the three months ended March 31, 2000, resulting primarily from a
net change in assets and liabilities of $52.7 million offset by $8.7 million in
depreciation and amortization, $1.1 million in provision for doubtful accounts
and $1.6 million of net income. The decrease in cash flow resulting from the
change in assets and liabilities was primarily due to increases in military
receivable of $20.8 million and reinsurance recoverable of $14.5 million, as
well as decreases in medical claims payable of $16.8 million and the utilization
of premium deficiency reserves of $11.9 million.
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"). The contractual Bid Price Adjustment ("BPA") process 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. In addition, SMHS accrues change order
revenue for DoD-directed contract changes.
The increase in military accounts receivable is primarily related to accrued
change order revenue and uncompensated health care revenue that will be paid as
part of the BPA process. During April 2000, the Company received payments from
the DoD of $6.0 million related to change orders and $13.0 million as a result
of the BPA process. If the timing or amount of DoD payments vary significantly
from the Company's expectations, there could be a material adverse effect on the
Company's business and cash flows including the possibility the Company will be
unable to maintain compliance with certain covenants related to its line of
credit.
The Company had net borrowings of $16.0 million under the line of credit which
was offset by $1.7 million used for the reduction of other debt. The remaining
$24.0 million available under the line of credit will be used for additional
working capital. In addition to the borrowings, cash inflows included a $16.1
million net change in investments and $904,000 received in connection with the
sale of stock through the Company's stock plans. Offsetting the above cash
inflows was $6.2 million in net capital expenditures including costs
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
--------------------------------------------------------------------------
Liquidity and Capital Resources (continued).
associated with continued implementation of a new computer system, as well
as furniture, equipment and
other capital needs to support the Company's growth. 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 2000 capital budget of approximately $25.0 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 nine months
will primarily be for the capital items noted above, debt service and expansion
of the Company's operations. 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,
should enable it to meet its liquidity needs on a longer term basis.
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"). As of March 31, 2000, the aggregate principal outstanding and
accrued interest was $2.7 million. 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. 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 $22.1 million as of
March 31, 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 March 31, 2000,
$33.5 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 $50.0 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 three months ended March 31,
2000, the Company purchased $473,000 of the Debentures on the open market.
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
----------------------------------------------------------------------
Membership
The Company's membership at March 31, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
March 31 March 31
-------- --------
2000 1999
---- ----
HMO
<S> <C> <C>
Commercial.................................................. 252,900 268,100
Medicare.................................................... 53,500 50,000
Medicaid (1)................................................ 11,900 7,400
Managed Indemnity............................................. 34,700 42,900
Medicare Supplement........................................... 29,100 27,400
Administrative Services....................................... 293,400 298,300
TRICARE Eligibles............................................. 610,000 606,400
---------- ----------
Total Members................................................. 1,285,500 1,300,500
========= =========
</TABLE>
(1) In prior years Medicaid was included in commercial membership.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2000, unrealized holding losses on available for sale
investments have decreased by $4.1 million since the 1999 year end 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.
<PAGE>
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,
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 15, 2000, incorporated
herein by reference.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated
March 15, 2000, with the Securities and Exchange
Commission in connection with certain cautionary
statements made pursuant to the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA HEALTH SERVICES, INC.
(Registrant)
Date: May 12, 2000 /S/ PAUL H. PALMER
---------------------
Paul H. Palmer
Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE STATEMENTS OF CONSOLIDATED OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 39,616,000
<SECURITIES> 203,592,000
<RECEIVABLES> 146,410,000
<ALLOWANCES> 16,395,000
<INVENTORY> 0
<CURRENT-ASSETS> 526,441,000
<PP&E> 346,488,000
<DEPRECIATION> 84,630,000
<TOTAL-ASSETS> 1,138,707,000
<CURRENT-LIABILITIES> 396,051,000
<BONDS> 273,320,000
0
0
<COMMON> 143,000
<OTHER-SE> 284,803,000
<TOTAL-LIABILITY-AND-EQUITY> 1,138,707,000
<SALES> 0
<TOTAL-REVENUES> 327,176,000
<CGS> 0
<TOTAL-COSTS> 316,348,000
<OTHER-EXPENSES> 2,900,000<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,588,000
<INCOME-PRETAX> 2,340,000
<INCOME-TAX> 784,000
<INCOME-CONTINUING> 1,556,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,556,000
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
<FN>
<F1>Reorganization, Impairment and Other Costs
</FN>
</TABLE>
