form10q
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, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number 1-8865
SIERRA HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0200415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2724 NORTH TENAYA WAY
LAS VEGAS, NV 89128
(Address of principal executive offices) (Zip Code)
(702) 242-7000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of April 30, 2002, there were 28,135,000 shares of common stock outstanding.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2002
INDEX
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001..................................................... 3
Condensed Consolidated Statements of Operations -
three months ended March 31, 2002 and 2001............................................... 4
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 2002 and 2001............................................... 5
Notes to Condensed Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk........................................................................ 19
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 20
Item 2. Changes in Securities and Use Of Proceeds.................................................. 20
Item 3. Defaults Upon Senior Securities............................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders........................................ 20
Item 5. Other Information.......................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................... 20
Signatures................................................................................................... 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
(Unaudited)
March 31, December 31,
2002 2001
---- ----
Current Assets:
Cash and Cash Equivalents.............................................. $ 100,617 $ 115,754
Investments............................................................ 282,062 260,762
Accounts Receivable (Less Allowance for Doubtful
Accounts: 2002 - $12,018; 2001 - $12,655).......................... 25,403 26,003
Military Accounts Receivable (Less Allowance for Doubtful
Accounts: 2002 - $0; 2001 - $0).................................... 46,139 40,166
Current Portion of Deferred Tax Asset.................................. 36,284 35,869
Current Portion of Reinsurance Recoverable............................. 89,612 96,762
Prepaid Expenses and Other Current Assets.............................. 39,710 31,640
Assets of Discontinued Operations...................................... 24,833 28,404
--------- ---------
Total Current Assets............................................... 644,660 635,360
Property and Equipment, Net................................................. 95,866 141,451
Long-Term Investments....................................................... 7,778 8,434
Restricted Cash and Investments............................................. 26,857 26,011
Reinsurance Recoverable, Net of Current Portion............................. 113,794 123,383
Deferred Tax Asset, Net of Current Portion.................................. 60,996 77,036
Goodwill ................................................................... 14,782 14,782
Other Assets................................................................ 46,479 43,505
--------- ---------
TOTAL ASSETS................................................................ $1,011,212 $1,069,962
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities............................... $ 93,335 $ 89,514
Medical Claims Payable................................................. 93,544 81,662
Current Portion of Reserve for Losses and Loss Adjustment Expense...... 143,546 142,342
Unearned Premium Revenue............................................... 29,844 52,919
Military Health Care Payable........................................... 77,638 77,261
Current Portion of Long-term Debt...................................... 1,622 1,612
Liabilities of Discontinued Operations................................. 58,830 83,931
--------- ---------
Total Current Liabilities.......................................... 498,359 529,241
Reserve For Losses and
Loss Adjustment Expense, Net of Current Portion........................... 245,420 243,363
Long-Term Debt, Net of Current Portion...................................... 134,011 181,759
Other Liabilities........................................................... 30,993 19,080
--------- ---------
TOTAL LIABILITIES........................................................... 908,783 973,443
--------- ---------
Stockholders' Equity:
Preferred Stock, $.01 Par Value, 1,000
Shares Authorized; None Issued or Outstanding
Common Stock, $.005 Par Value, 60,000 Shares Authorized;
Shares Issued: 29,886 and 29,648 issued as of 2002
and 2001, respectively.............................................. 149 148
Additional Paid-in Capital................................................ 182,541 181,076
Deferred Compensation..................................................... (912) (1,058)
Treasury Stock; 2002 and 2001 - 1,523 Common Stock Shares................. (22,789) (22,789)
Accumulated Other Comprehensive Loss...................................... (8,719) (5,636)
Accumulated Deficit....................................................... (47,841) (55,222)
--------- ---------
Total Stockholders' Equity......................................... 102,429 96,519
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $1,011,212 $1,069,962
========= =========
See accompanying notes to condensed consolidated financial statements.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
2002 2001
---- ----
Operating Revenues:
Medical Premiums...................................................... $206,644 $166,002
Military Contract Revenues............................................ 85,454 81,912
Specialty Product Revenues............................................ 44,097 41,426
Professional Fees..................................................... 7,522 7,329
Investment and Other Revenues......................................... 4,863 6,559
------- -------
Total........................................................... 348,580 303,228
------- -------
Operating Expenses:
Medical Expenses...................................................... 175,332 141,687
Military Contract Expenses............................................ 82,354 80,438
Specialty Product Expenses............................................ 46,266 43,871
General, Administrative and Marketing Expenses (Note 2)............... 30,652 27,170
------- -------
Total .......................................................... 334,604 293,166
------- -------
Operating Income......................................................... 13,976 10,062
Interest Expense and Other, Net.......................................... (2,877) (4,850)
------- -------
Income from Continuing Operations Before Taxes........................... 11,099 5,212
Income Tax Provision..................................................... (3,718) (1,746)
------- -------
Net Income from Continuing Operations.................................... 7,381 3,466
Loss from Discontinued Operations (Note 3)............................... (261)
------- -------
Net Income............................................................... $ 7,381 $ 3,205
======= =======
Earnings per Common Share:
-------------------------
Net Income from Continuing Operations.................................... $.26 $ .13
Loss from Discontinued Operations........................................ (.01)
--- ----
Net Income............................................................ $.26 $ .12
=== ====
Earnings per Common Share Assuming Dilution:
-------------------------------------------
Net Income from Continuing Operations.................................... $.25 $ .13
Loss from Discontinued Operations........................................ (.01)
--- ----
Net Income............................................................ $.25 $ .12
=== ====
Weighted Average Common Shares Outstanding............................... 28,083 27,488
Weighted Average Common Shares Outstanding
Assuming Dilution..................................................... 29,882 27,770
See accompanying notes to condensed consolidated financial statements.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
2002 2001
---- ----
Cash Flows From Operating Activities:
Net Income.............................................................. $ 7,381 $ 3,205
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Loss from Discontinued Operations................................ 261
Depreciation and Amortization.................................... 5,299 6,112
Provision for Doubtful Accounts.................................. 658 653
Deferred Compensation Expense.................................... 146
Changes in Assets and Liabilities
Reinsurance Recoverable.......................................... 16,739 877
Medical Claims Payable........................................... 11,882 2,953
Military Accounts Receivable..................................... (5,973) 18,380
Unearned Premiums................................................ (23,075) 3,841
Other Assets and Liabilities..................................... 17,140 8,729
------- -------
Net Cash Provided by Operating Activities .......................... 30,197 45,011
------- -------
Cash Flows From Investing Activities:
Capital Expenditures, Net of Dispositions............................... (2,672) (2,554)
Changes in Investments.................................................. (27,165) (37,922)
------- -------
Net Cash Used for Investing Activities.............................. (29,837) (40,476)
------- -------
Cash Flows From Financing Activities:
Proceeds from Borrowings................................................ 6,000
Payments on Debt and Capital Leases..................................... (1,412) (34,906)
Issuance of Stock in Connection with Stock Plans........................ 1,445 645
------- -------
Net Cash Provided by (Used for) Financing Activities................ 6,033 (34,261)
------- -------
Cash Used for Discontinued Operations...................................... (21,530) (13,122)
------- -------
Net Decrease In Cash and Cash Equivalents.................................. (15,137) (42,848)
Cash and Cash Equivalents at Beginning of Period........................... 115,754 157,564
------- -------
Cash and Cash Equivalents at End Of Period................................. $100,617 $114,716
======= =======
Supplemental Condensed Consolidated Continuing Operations Three Months Ended March 31,
Statements of Cash Flows Information: 2002 2001
------------------------------------------------------------------------ ---- ----
Cash Paid During the Period for Interest
(Net of Amount Capitalized)............................................. $2,182 $4,663
Net Cash Received (Paid) During the Period for Income Taxes................ 28 (14)
Non-cash Investing and Financing Activities:
Retired Sale-Leaseback Assets, Liabilities
and Financing Obligations (Note 6).................................. 51,326
See accompanying notes to condensed consolidated financial statements.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
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, 2001 and 2000. 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. Asset Impairment, Restructuring, Reorganization and Other Costs
The table below presents a summary of asset impairment, restructuring,
reorganization and other cost activity for the periods indicated that are
included in general, administrative and marketing expenses. Discontinued
Texas health care operations are excluded from this table and discussed in
Note 3.
Restructuring
and
Reorganization Other Total
-------------- ----- -----
(In thousands)
Balance, January 1, 2001........... $ 594 $4,447 $5,041
Charges recorded...................
Cash used.......................... (594) (594)
Noncash activity...................
Changes in estimate................
---- ----- -----
Balance, December 31, 2001......... - 4,447 4,447
Charges recorded...................
Cash used..........................
Noncash activity................... (500) (500)
Changes in estimate................
---- ----- -----
Balance, March 31, 2002............ $ - $3,947 $3,947
==== ===== =====
The remaining other costs of $3.9 million are related to legal claims.
Management believes that the remaining reserves, as of March 31, 2002, are
appropriate and that no revisions to the estimates are necessary at this
time.
3. Discontinued Operations
Throughout 2001, the Company continued to focus on making the Texas HMO
health care operations profitable. Significant premium rate increases were
made on renewing membership and during the third quarter the Company
embarked on a recontracting effort to reduce medical costs. It was during
this recontracting effort that unsustainable cost increases were
identified, including the fact that the operations' primary hospital
contract, if renewed, would be at a substantially higher rate than was
previously indicated by the hospital.
Although considerable efforts had been made to achieve profitability in
Texas, it was determined that under the current operating environment, the
Company would not be able to turn around the operating results and the best
course of action was to exit the market as soon as possible to limit future
losses and exposure. During the third quarter of 2001, the Company
announced its plan to exit the Texas HMO health care market and received
formal approval from the Texas Department of Insurance to withdraw its HMO
operations in mid-October. The Company ceased providing HMO health care
coverage in Texas on April 17, 2002.
The Company elected to early adopt SFAS No. 144 effective January 1, 2001.
In accordance with SFAS No. 144, the Company's Texas HMO health care
operations were reclassified as discontinued operations. The Company has
received a limited waiver under its revolving credit facility agreement for
covenants affected by exiting the Texas HMO health care market.
The following are condensed statements of operations of the discontinued
Texas HMO health care operations:
Three Months Ended March 31,
2002 2001
---- ----
(In thousands)
Operating Revenues............................................................ $3,488 $46,261
----- ------
Medical Expenses.............................................................. 2,035 39,841
General, Administrative and Marketing Expenses................................ 2,055 6,506
Interest Expense and Other, Net (including rental income)..................... (602) 307
----- ------
Loss from Discontinued Operations Before Tax.................................. - (393)
Income Tax Benefit............................................................ - 132
----- ------
Net Loss from Discontinued Operations......................................... $ - $ (261)
===== ======
Prior to the adoption of SFAS No. 144, all of the discontinued Texas HMO
health care operations were presented as a component of the "managed care
and corporate operations" segment.
In conjunction with the Company's plan to exit Texas, during the third
quarter of 2001 the Company recorded charges of $10.6 million for premium
deficiency medical costs, $1.6 million to write down certain Texas
furniture and equipment, $2.0 million in lease and other termination costs,
$1.8 million in legal and restitution costs, $500,000 in various other exit
related costs and $570,000 in premium deficiency maintenance.
The table below presents a summary of discontinued Texas HMO health care
operations' asset impairment, restructuring, reorganization and other cost
activity for the periods indicated. These expenses are included in general,
administrative and marketing expenses.
Restructuring Premium
Asset and Deficiency
Impairment Reorganization Maintenance Other Total
---------- -------------- ----------- ----- -----
(In thousands)
Balance, January 1, 2001........ - $ 3,755 $ 9,278 $ 800 $13,833
Charges recorded................ $ 1,600 4,380 570 6,550
Cash used....................... (3,716) (1,478) (800) (5,994)
Noncash activity................ (1,600) (125) (1,725)
Changes in estimate............. (7,800) (7,800)
------ ------ ------ ---- ------
Balance, December 31, 2001...... - 4,294 570 - 4,864
Charges recorded................
Cash used....................... (809) (809)
Noncash activity................
Changes in estimate.............
------ ------ ------ ---- ------
Balance, March 31, 2002......... $ - $ 3,485 $ 570 $ - $ 4,055
====== ====== ====== ==== ======
The remaining restructuring and reorganization costs of $3.5 million are
primarily related to legal and restitution costs, lease and other
termination costs, the cost to provide malpractice insurance on our
discontinued affiliated medical groups and various other exit related
costs. Management believes that the remaining reserves, as of March 31,
2002, are appropriate and that no revisions to the estimates are necessary
at this time. Based on the current estimated Texas HMO healthcare run-out
costs and recorded reserves, we believe we have adequate funds available
and the ability to invest adequate funds in Texas to meet the anticipated
obligations.
The following are the unaudited assets and liabilities of the discontinued
Texas health care operations:
March 31 December 31
2002 2001
---- ----
(In thousands)
ASSETS
Cash and Cash Equivalents............................. $ - $ -
Accounts Receivable, Net.............................. 72 1,402
Other Assets.......................................... 4,843 6,895
Property and Equipment, Net........................... 19,918 20,107
------- ------
TOTAL ASSETS............................................ 24,833 28,404
------- -------
LIABILITIES
Accounts Payable and Other Liabilities................ 11,880 16,407
Medical Claims Payable................................ 16,849 36,567
Unearned Premium Revenue.............................. 11 68
Premium Deficiency Reserve............................ 901 1,700
Mortgage Loan Payable................................. 29,189 29,189
------- -------
TOTAL LIABILITIES....................................... 58,830 83,931
------- -------
NET LIABILITIES OF DISCONTINUED OPERATIONS.............. $(33,997) $(55,527)
======= =======
The assets and liabilities above do not include an intercompany liability
of $21.5 million from Texas Health Choice, L.C., ("TXHC") to Sierra at
March 31, 2002. The liability has been eliminated upon consolidation.
Property and equipment consists mainly of real estate properties located in
the Dallas/Fort Worth metroplex areas. TXHC acquired these properties from
Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"), for $44 million as
part of the acquisition of certain assets of Kaiser-Texas in October 1998.
In June 2000, as part of its restructuring and reorganization of the Texas
HMO health care operations, the Company announced its intentions to sell
these properties. The real estate was written down to its estimated fair
value and the Company took an asset impairment charge of $27 million. The
real estate is encumbered by a mortgage loan to Kaiser-Texas, which is
guaranteed by Sierra.
During 2001, Sierra participated in negotiations with Kaiser-Texas relative
to the real estate properties and associated mortgage loan to Kaiser-Texas
along with other matters. Sierra reached an agreement with Kaiser-Texas,
effective December 31, 2001, whereby Kaiser-Texas forgave $8.5 million of
the outstanding principal balance of the mortgage loan and extended the
maturity from November 1, 2003 to November 1, 2006. In exchange for the
consideration by Kaiser-Texas, Sierra agreed to an unconditional guaranty
of the mortgage loan. In conjunction with the agreement, Sierra applied a
$2.5 million outstanding receivable from Kaiser-Texas to the outstanding
balance of the mortgage loan on December 31, 2001.
In accordance with accounting principles generally accepted in the United
States of America, the agreement was accounted for as a restructuring of
debt. In the transaction, total future cash payments (interest and
principal) were less than the balance of the mortgage loan at the time of
the agreement. Accordingly, a gain on restructuring was recognized for the
difference and the carrying amount of the mortgage loan is equal to the
total future cash payments. Costs incurred in connection with the agreement
were offset against the gain on restructuring. At March 31, 2002, the
mortgage loan has a carrying value of $29.2 million, which consists of a
principal balance of $22.7 million and $6.5 million in future accrued
interest. Effective January 1, 2002, all future cash payments, including
interest, related to the mortgage loan are reductions of the carrying
amount; therefore, no future interest expense will be recognized. The
transaction resulted in an immaterial gain.
4. Earnings Per Share:
The following table provides a reconciliation of basic and diluted earnings
per share ("EPS") for continuing operations:
Dilutive
Basic Stock Options Diluted
----- ------------- -------
(In thousands, except per share data)
For the Three Months ended March 31, 2002:
Income from Continuing Operations $ 7,381 $ 7,381
Shares 28,083 1,799 29,882
Per Share Amount $.26 $.25
For the Three Months ended March 31, 2001:
Income from Continuing Operations $ 3,466 $ 3,466
Shares 27,488 282 27,770
Per Share Amount $.13 $.13
5. The following table presents comprehensive income for the periods
indicated:
Three Months Ended March 31,
2002 2001
---- ----
(In thousands)
Net Income........................................................... $ 7,381 $3,205
Change in Accumulated Other
Comprehensive (Loss) Income, Net................................... (3,083) 969
------ -----
Comprehensive Income................................................. $ 4,298 $4,174
====== =====
6. Sale-Leaseback
On December 28, 2000, the Company sold the majority of its Las Vegas,
Nevada administrative and medical clinic real estate holdings in a
sale-leaseback transaction. Due to continuing involvement as defined in
Statement of Financial Accounting Standards No. 98, "Accounting for Leases"
("SFAS No. 98"), the transaction did not qualify as a sale. The Company
recorded the transaction as a financing obligation offset by the mortgage
notes receivable.
During 2001, the Company received full payment on the outstanding mortgage
notes receivable associated with three of the medical clinics. During the
first quarter of 2002, the Company received the deposit back on the three
administrative buildings. This receipt of funds cured the continuing
involvement criteria from SFAS No. 98 and the associated buildings then
qualified as a sale. To record the sale, the Company retired the assets and
their associated accumulated depreciation and financing obligation and
recorded a deferred gain to be recognized over the remaining 14 year term
of the lease. The impact of the sale of the administrative buildings
recorded during the first quarter of 2002 was a net reduction of $43.0
million in property and equipment, a net reduction of $51.3 million in the
associated financing obligation and a deferred gain of $8.3 million. As of
March 31, 2002, the remaining financing obligation was $38.8 million offset
by mortgage notes receivable of $16.9 million.
The Company expects that the remaining mortgages and deposits will be
repaid to Sierra before the end of 2002, at which time the rest of the
transaction will qualify as a sale.
7. 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
and corporate 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. Discontinued
Texas health care operations are excluded. The military health services
segment administers a managed care federal contract for the Department of
Defense's TRICARE program in Region 1. The workers' compensation segment
assumes workers' compensation claims risk in return for premium revenues
and third party administrative services.
The Company evaluates each segment's performance based on segment operating
profit. Information concerning reportable segments for continuing
operations is as follows:
Managed Care Military Workers'
and Corporate Health Services Compensation
Operations Operations Operations Total
---------------- ---------------- ----------------- -----
(In thousands)
Three Months Ended March 31, 2002
Medical Premiums.......................... $ 206,644 $206,644
Military Contract Revenues................ $85,454 85,454
Specialty Product Revenues................ 1,951 $42,146 44,097
Professional Fees......................... 7,522 7,522
Investment and Other Revenues............. 544 459 3,860 4,863
-------- ------ ------ -------
Total Revenue.......................... $ 216,661 $85,913 $46,006 $348,580
======== ====== ====== =======
Segment Operating Profit.................. $ 9,628 $ 3,559 $ 789 $ 13,976
Interest Expense and Other, Net........... (2,508) (2) (367) (2,877)
-------- ------ ------ -------
Income Before Income Taxes................ $ 7,120 $ 3,557 $ 422 $ 11,099
======== ====== ====== =======
Three Months Ended March 31, 2001
Medical Premiums.......................... $ 166,002 $166,002
Military Contract Revenues................ $81,912 81,912
Specialty Product Revenues................ 1,972 $39,454 41,426
Professional Fees......................... 7,329 7,329
Investment and Other Revenues............. 1,524 521 4,514 6,559
-------- ------ ------ -------
Total Revenue.......................... $ 176,827 $82,433 $43,968 $303,228
======== ====== ====== =======
Segment Operating Profit.................. $ 6,730 $ 1,995 $ 1,337 $ 10,062
Interest Expense and Other, Net........... (3,954) (17) (879) (4,850)
-------- ------ ------ -------
Income Before Income Taxes................ $ 2,776 $ 1,978 $ 458 $ 5,212
======== ====== ====== =======
For the three months ended March 31, 2001, goodwill expense of $201,000 is
included as part of the managed care and corporate operations segment.
8. CII Financial Debentures
In December 2000, CII Financial commenced an offer to exchange the
subordinated debentures for cash and/or new debentures. On May 7, 2001, CII
Financial closed its exchange offer on $42.1 million of its outstanding
subordinated debentures. CII Financial purchased $27.1 million in principal
amount of subordinated debentures for $20.0 million in cash and issued
$15.0 million in new 9 1/2% senior debentures, due September 15, 2004, in
exchange for $15.0 million in subordinated debentures. The remaining $5.0
million in subordinated debentures were paid at maturity. Since the time of
the exchange, Sierra has purchased $1.0 million in outstanding 9 1/2%
senior debentures which are eliminated upon consolidation.
The transaction was accounted for as a restructuring of debt, therefore all
future cash payments, including interest, related to the debentures will be
reductions of the carrying amount of the debentures and no future interest
expense will be recognized. Accordingly, the 9 1/2% senior debentures have
a carrying amount of $17.5 million, which consists of principal amount of
$14.0 million and $3.5 million in future accrued interest.
The 9 1/2% senior debentures pay interest, which is due semi-annually on
March 15 and September 15 of each year, commencing on September 15, 2001.
The 9 1/2% senior debentures rank senior to outstanding notes payable from
CII Financial to Sierra and CII Financial's guarantee of Sierra's revolving
credit facility. The 9 1/2% senior debentures may be redeemed by CII
Financial at any time at premiums starting at 110% and declining to 100%
for redemptions after April 1, 2004. In the event of a change in control of
CII Financial, the holders of the 9 1/2% senior debentures may require that
CII Financial repurchase them at the then applicable redemption price, plus
accrued and unpaid interest.
9. Goodwill
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which is
effective January 1, 2002. SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the pronouncement
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No.
142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The net amortized
goodwill balance at December 31, 2001 was $14.8 million. In conjunction
with implementing SFAS No. 142 the Company determined that the recorded
goodwill was not impaired under the guidelines of the pronouncement. The
Company has also discontinued the amortization of goodwill.
The following table presents the results of our operations as though the
adoption of SFAS No. 142 occurred as of January 1, 2001:
For the Three Months Ended March 31, 2001
As Reported Adjustments As Adjusted
----------- ----------- -----------
(In thousands, except per share data)
Net Income from Continuing Operations $3,466 $131 $3,597
Loss from Discontinued Operations (261) (261)
----- --- -----
Net Income $3,205 $131 $3,336
===== === =====
Earnings per Common Share:
-------------------------
Net Income from Continuing Operations $ .13 - $ .13
Loss from Discontinued Operations (.01) (.01)
---- --- ----
Net Income $ .12 - $ .12
==== === ====
Earnings per Common Share Assuming Dilution:
-------------------------------------------
Net Income from Continuing Operations $ .13 - $ .13
Loss from Discontinued Operations (.01) (.01)
---- --- ----
Net Income $ .12 - $ .12
==== === ====
10. Recent Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, which is effective for
fiscal years beginning after December 15, 2001 with early adoption
recommended. As described in Note 3 above, Sierra elected to early adopt
SFAS No. 144 effective January 1, 2001. SFAS No. 144 requires that
long-lived assets that are to be sold within one year must be separately
identified and carried at the lower of carrying value or fair value less
costs to sell. Long-lived assets expected to be held longer than one year
are subject to depreciation and must be written down to fair value upon
impairment. Long-lived assets no longer expected to be sold within one
year, such as foreclosed real estate, must be written down to the lower of
current fair value or fair value at the date of foreclosure adjusted to
reflect depreciation since acquisition.
In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145
requires that gains and losses from extinguishment of debt be classified as
extraordinary items only if they meet the criteria in Accounting Principles
Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of Opinion
No. 30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent that meet the
criteria for classification as an extraordinary item. SFAS No. 145 is
effective for the Company beginning January 1, 2003, but the Company may
adopt the provisions of SFAS No. 145 prior to this date. The Company has
net yet evaluated the impact from SFAS No. 145 on its financial position
and results of operations.
11. Reclassifications
Certain amounts in the Condensed Consolidated Financial Statements for the
three months ended March 31, 2001 have been reclassified to conform with
the current year presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
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 our consolidated
financial condition and results of operations. The discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and related
Notes thereto. The information contained below is subject to risk factors. We
urge you to review carefully the section "Risk Factors" in our 2001 Form 10-K
filed on March 29, 2002 for a more complete discussion of the risks associated
with an investment in our securities. See "Note on Forward-Looking Statements
and Risk Factors" under Item 1 of our 2001 Form 10-K.
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, both as amended. All statements other than statements of historical
fact are forward-looking statements for purposes of federal and state securities
laws. The cautionary statements are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, as amended,
and identify important factors that could cause our actual results to differ
materially from those expressed in any projected, estimated or forward-looking
statements relating to us. These forward-looking statements are identified by
their use of terms and phrases such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "plan," "project," "will," "continue,"
and other similar terms and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements.
Critical Accounting Policies and Estimates
A description of our critical accounting policies and estimates can be found in
Item 7 of our 2001 Form 10-K and for a more extensive discussion of our
accounting policies, see Note 2, Summary of Significant Accounting Policies, in
the Notes to the Consolidated Financial Statements in our 2001 Form 10-K filed
on March 29, 2002.
RESULTS OF OPERATIONS, THREE MONTHS ENDED MARCH 31, 2002, COMPARED TO THREE
MONTHS ENDED MARCH 31, 2001.
Total Operating Revenues increased approximately 15.0% to $348.6 million from
$303.2 million for 2001.
Medical Premiums from our HMO and managed indemnity insurance subsidiaries
increased $40.6 million or 24.5%. The $40.6 million increase in premium revenue
reflects a 5.8% increase in Medicare member months (the number of months
individuals are enrolled in a plan) and a 35.3% increase in commercial member
months. The 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. HMO premium rates
for commercial groups increased approximately 7.3%, managed indemnity rates
increased approximately 16.7% and Medicare rates increased approximately 2.5%.
Over 97% of our Las Vegas, Nevada Medicare members are enrolled in the Social
HMO Medicare program. The Centers for Medicare and Medicaid Services, or CMS,
formerly known as the Health Care Financing Administration, or HCFA, may
consider adjusting the reimbursement factor or changing the program 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 our business. Continued medical premium
revenue growth is principally dependent upon continued enrollment in our
products and upon competitive and regulatory factors.
Military Contract Revenues increased $3.5 million or 4.3%. The increase in
revenue is primarily the result of additive change order work and is
significantly offset by increased military contract expenses associated with
those change orders. The Congressionally approved Department of Defense, or DoD,
fiscal year 2001 budget included several sweeping changes to the TRICARE
program. In April 2001, SMHS began implementation of a prescription drug program
for beneficiaries over age 65 and the implementation of a waiver of co-payments
for active duty family members. Both of these program modifications resulted
from Congressional changes to the program. Likewise, in October 2001, SMHS
implemented TRICARE for Life which is a comprehensive health care benefit to
those retired military beneficiaries over age 65. SMHS administers the expanded
benefits only to the over age 65 retiree military population. SMHS does not
directly fund claims payment or bear any risk for the actual level of health
care service utilization.
If all five option periods of the contract with the DoD are exercised and no
extensions of the performance period are made, health care delivery will end on
May 31, 2003, followed by an additional eight month phase out of the Region 1
managed care support contract. The DoD has extended expiring TRICARE contracts
in other regions and SMHS has begun negotiations with the DoD about a possible
extension to the base contract.
Specialty Product Revenues increased $2.7 million or 6.5%. The revenue increase
was from the workers' compensation insurance segment as administrative services
revenue remained consistent between the quarters.
Workers' compensation net earned premiums are the end result of direct written
premiums, plus the change in unearned premiums, less premiums ceded to
reinsurers. Direct written premiums decreased by 11.4% due primarily to a 33%
decrease in premium production that was partially offset by a 25% increase in
composite premium rates. Ceded reinsurance premiums decreased by 94.3% due to
the expiration of our low level reinsurance agreement on June 30, 2000 and a new
reinsurance agreement with lower ceded premiums. Direct written premiums
decreased from $50.2 million in 2001 to $44.5 million in 2002.
As compared to the low level reinsurance agreement that expired on June 30,
2000, the new reinsurance agreement results in higher net earned premium
revenues, as we retain more of the premium dollars, but also leads to our
keeping more of the incurred losses. This could, if not offset by increases in
composite premium rates, result in a higher loss and loss adjustment expense
ratio, or LAE ratio, if the percentage increase in the additional incurred
losses is greater than the percentage increase in the additional premiums
retained. The effect on the balance sheet of the new reinsurance agreement
compared to the low level agreements will eventually result in a lower amount of
reinsurance recoverables, and due to the length of time over which claims
expenses are typically paid, we expect to see an increase in future operating
cash flow and amounts available to be invested.
Professional Fees increased $200,000 or 2.6% as a result of the increased
membership.
Investment and Other Revenues decreased $1.7 million or 25.9% due primarily to a
decrease in the average investment yield during the period offset by a slight
increase in the average invested balance.
Medical Expenses increased $33.6 million or 23.7% due primarily to our increased
membership. Medical expenses as a percentage of medical premiums and
professional fees increased to 81.9% from 81.7%. The increase is primarily due
to higher bed days in 2002 which was partially offset by premium yields in
excess of cost increases.
Military Contract Expenses increased $1.9 million or 2.4%. The increase is
consistent with the increase in revenues discussed previously. Health care
delivery expense consists primarily of costs to provide managed health care
services to eligible beneficiaries in accordance with Sierra's TRICARE contract.
Under the contract, SMHS provides health care services to approximately 639,000
dependents of active duty military personnel and military retirees under the age
of 65 and their dependents through a network of nearly 50,000 health care
providers and certain other subcontractor partnerships. Also included in
military contract expenses are costs incurred to perform specific administrative
services, such as health care appointment scheduling, enrollment, network
management and health care advice line services, and other administrative
functions of the military health care subsidiary. These administrative services
are performed for active duty personnel and family members as well as retired
military families.
Specialty Product Expenses increased $2.4 million or 5.5%. Expenses increased in
the workers' compensation operations by approximately $2.6 million which was
offset by a slight decrease in administrative services expense of $200,000.
The increase in the workers' compensation insurance segment expenses is
primarily due to the following:
o Approximately $2.1 million in additional loss and LAE related to the
increase in net earned premiums in 2002 compared to 2001.
o In 2002, we recorded $2.0 million of net adverse loss development for prior
accident years compared to net adverse loss development of $1.6 million
recorded in 2001. The net adverse development recorded was largely
attributable to higher costs per claim, or claim severity, in California.
Higher claim severity has had a negative impact on the entire California
workers' compensation industry. Approximately $400,000 of the net adverse
loss development recorded in 2002 is due to the effects of Assembly Bill
749 as described below.
o The loss and LAE ratio for the 2002 accident year was lower due to
significant premium increases offset by termination of the low level
reinsurance agreement. The lower loss and LAE ratio resulted in a decrease
in expense of approximately $1.3 million. The low level reinsurance
agreement terminated on June 30, 2000, which resulted in a higher risk
exposure on policies effective after that date and a higher amount of net
incurred loss and LAE.
o A net increase in underwriting expenses, policyholders' dividends and other
operating expenses of $1.4 million related primarily to the increase in net
earned premiums.
The net adverse loss development on prior accident years included those years
that were covered by our low level reinsurance agreement. This resulted in an
increase in the reinsurance recoverable balance which is then reduced by amounts
collected from reinsurers. Net reinsurance recoverable decreased by $16.9
million in 2002 compared to a decrease of $1.0 million in 2001.
In February 2002, California enacted Assembly Bill 749. This new legislation
will increase benefits paid to injured workers starting January 1, 2003. The
Workers' Compensation Insurance Rating Bureau of California, or WCIRB, has
preliminarily estimated that the new legislation will increase the loss costs
for accident year 2003 by approximately 7%. Increased loss costs, such as
benefit increases, are normally built into the rating-making process so that
premiums are increased to cover the increase in costs. Although we intend to
increase our premiums, there is no assurance that our increase will be
sufficient enough to cover the estimated costs increases or that the WCIRB's
estimate is accurate.
The loss and LAE reserves recorded as of March 31, 2002 reflect our best
estimate of the ultimate loss costs for reported and unreported claims occurring
in the current accident year as well as those occurring in accident years 2001
and prior. Workers' compensation claim payments are made over several years from
the date of the claim. Until the final payments for reported claims are made,
reserves are invested to generate investment income.
Reinsurance contracts do not relieve us from our obligations to enrollees or
policyholders. At March 31, 2002, we had over $203 million in reinsurance
recoverable. We evaluate the financial condition of our reinsurers to minimize
our exposure to significant losses from reinsurer insolvencies. At March 31,
2002, all of our reinsurers were rated A+ or better by Fitch Ratings and the
A.M. Best Company. Should these companies be unable to perform their obligations
to reimburse us for ceded losses, we would experience significant losses.
The combined ratio is a measurement of the workers' compensation underwriting
profit or loss and is the sum of the loss and LAE ratio, underwriting expense
ratio and policyholders' dividend ratio. A combined ratio of less than 100%
indicates an underwriting profit. Our combined ratio was 106.6% compared to
108.9% for 2001. The decrease was primarily due to significant composite rate
increases. Excluding adverse loss development, the combined ratio would have
been 101.7% for 2002 and 104.8% for 2001.
General, Administrative and Marketing Expenses, or G&A, increased $3.5 million
or 12.8%. The primary increases in G&A expenses were payroll and benefits,
brokers fees and general insurance costs. As a percentage of revenues, G&A
expenses were 8.8% compared to 9.0% in 2001. As a percentage of medical premium
revenue, G&A expenses were 14.8% for 2002 compared to 16.4% for 2001. We expect
the remainder of our sale-leaseback transaction to qualify as a sale before the
end of 2002. We expect this will result in a quarterly increase in G&A expenses
of approximately $1.1 million and medical expenses of approximately $600,000 and
a decrease in interest expense of approximately $1.7 million.
Interest Expense and Other, Net decreased $2.0 million or 40.7%. Interest
expense related to the revolving credit facility decreased $1.4 million due to a
decrease in the average balance of outstanding debt during the period offset by
an increase in the weighted average cost of borrowing. Our average interest rate
on the revolving credit facility, excluding the amortization of deferred
financing fees, our interest rate swap agreement and fees on the unused portion
of the credit facility was 5.4% in 2002 compared to 9.6% in 2001. We incur a fee
of 0.5% on the unused portion of the revolving credit facility. In addition, we
are amortizing $284,000 per quarter of deferred financing fees. CII Financial
debenture interest decreased by $882,000 in 2002, as a result of the
restructuring of the debentures which occurred during the second quarter of
2001.
Provision for Income Taxes was recorded at $3.7 million for 2002 compared to
$1.7 million for 2001. The effective tax rate for both periods was 33.5%. Our
ongoing effective tax rate is less than the statutory rate due primarily to tax
preferred investments.
Discontinued Operations consist entirely of our Texas HMO health care
operations. See Note 3 of the Notes to Condensed Consolidated Financial
Statements. We elected to early adopt Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", or SFAS No. 144, effective January 1, 2001. In the third quarter of
2001, we decided to exit the Texas HMO health care market and received approval
from the Texas Department of Insurance in mid-October 2001. We ceased providing
HMO health care coverage on April 17, 2002. In accordance with SFAS No. 144, our
Texas HMO health care operations are now reclassified as a discontinued
operation. The net loss from discontinued operations was $0 and $261,000 for the
first quarter of 2002 and 2001, respectively. The utilization of prior premium
deficiency reserves were $799,000 in 2002 and $2.3 million in 2001.
LIQUIDITY AND CAPITAL RESOURCES
For continuing operations, we had cash in-flows from operating activities of
$30.2 million during the first quarter of 2002 compared to $45.0 million in
2001. After adjusting for the timing of our Medicare payment received April 1,
2002, cash in-flows for 2002 would have been $57.6 million. The improvement over
2001 is primarily attributable to increased cash from earnings, reinsurance
recoveries and increased medical claims payable.
SMHS receives monthly cash payments equivalent to one-twelfth of its annual
contractual price with the DoD. SMHS accrues health care revenue on a monthly
basis for any monies owed above its monthly cash receipt based on the number of
at-risk eligible beneficiaries and the level of military direct care system
utilization. The contractual bid price adjustment, or BPA, process serves to
adjust the DoD's monthly payments to SMHS, because the payments are based in
part on 1996 DoD estimates for beneficiary population and beneficiary population
baseline health care cost, inflation and military direct care system
utilization. As actual information becomes 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. Our business and cash flows could be
adversely affected if the timing or amount of the BPA and change order
reimbursements vary significantly from our expectations.
On November 16, 2001, SMHS entered into a securitization arrangement with
General Electric Capital Corporation. The arrangement provides for the sale of
SMHS' Federal Government accounts receivable to SMHS Funding, LLC. SMHS Funding
is a special purpose limited liability company owned by SMHS and was formed for
the purpose of purchasing all receivables of SMHS. This entity is fully
consolidated into SMHS. SMHS Funding, LLC may sell an undivided interest in
certain of the receivables to a subsidiary of General Electric Capital
Corporation in the event that additional financing by SMHS is warranted. This
securitization arrangement has not yet been utilized and we do not anticipate
utilizing it in 2002.
For continuing operations, cash used in investing activities during 2002 was
$29.8 million compared to $40.5 million in 2001. The 2002 amount included $2.7
million in net capital expenditures compared to $2.6 million in 2001. The net
change in investments for the period was an increase in investments of $27.2
million for 2002 and $37.9 million for 2001 as investments were purchased with
cash from operations.
For continuing operations, cash provided by financing activities during 2002 was
$6.0 million compared to cash used in financing activities of $34.3 million in
2001. The 2002 amount included net receipts of $6.0 million on the revolving
credit facility compared to net payments of $33.0 million in 2001. Additional
payments of $1.4 million and $1.9 million were made on other outstanding debt
and capital leases for 2002 and 2001, respectively. Proceeds from the issuance
of stock were $1.4 million in 2002 compared to $645,000 in 2001.
Discontinued Texas health care operations used cash of $21.5 million in 2002
compared to $13.1 million in 2001. The cash used in 2002 was primarily for the
run-out of claims offset in part by premiums collected. Based on the current
estimated Texas HMO healthcare run-out costs and recorded reserves, we believe
we have adequate funds available and the ability to invest adequate funds in
Texas to meet the anticipated obligations.
Revolving Credit Facility
Our revolving credit facility balance increased from $89 million to $95 million
during the three month period. The balance is reflected as long-term debt since
no portion of the outstanding balance is due in the next twelve months. The
availability under the credit facility has been reduced to $114 million at March
31, 2002 leaving $19 million available under the credit facility. The total
availability, however, will be reduced by $6.0 million on June 30, 2002, another
$6.0 million on December 31, 2002 and finally by $10.0 million on June 30, 2003.
The credit facility matures on September 30, 2003. Interest under the revolving
credit facility is variable and is based on Bank of America's "prime rate" plus
a margin. The rate was 5.375% during the first quarter of 2002, which is a
combination of the prime rate of 4.75% plus a margin of .625%. The margin was
reduced by 1.0% on April 1, 2002 since we exceeded certain ratio requirements as
of December 31, 2001. The margin can fluctuate in the future based on our
completing certain transactions or if we fail to exceed certain financial
ratios. Of the outstanding balance, $25 million is covered by an interest-rate
swap agreement. In accordance with Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", we
reduced our recorded liability of the interest-rate swap agreement during the
first quarter of 2002 by $100,000.
Debentures
In December 2000, CII Financial commenced an offer to exchange the subordinated
debentures for cash and/or new debentures. On May 7, 2001, CII Financial closed
its exchange offer on $42.1 million of its outstanding subordinated debentures.
CII Financial purchased $27.1 million in principal amount of subordinated
debentures for $20.0 million in cash and issued $15.0 million in new 9 1/2%
senior debentures, due September 15, 2004, in exchange for $15.0 million in
subordinated debentures. The remaining $5.0 million in subordinated debentures
were paid at maturity. Since the time of the exchange, Sierra has purchased $1.0
million in outstanding 9 1/2% senior debentures which are eliminated upon
consolidation.
The transaction was accounted for as a restructuring of debt; therefore, all
future cash payments, including interest, related to the debentures will be
reductions of the carrying amount of the debentures and no future interest
expense will be recognized. Accordingly, the 9 1/2% senior debentures have a
carrying amount of $17.5 million, which consists of principal amount of $14.0
million and $3.5 million in future accrued interest.
The 9 1/2% senior debentures pay interest, which is due semi-annually on March
15 and September 15 of each year, commencing on September 15, 2001. The 9 1/2%
senior debentures rank senior to outstanding notes payable from CII Financial to
Sierra and CII Financial's guarantee of Sierra's revolving credit facility. The
9 1/2% senior debentures may be redeemed by CII Financial at any time at
premiums starting at 110% and declining to 100% for redemptions after April 1,
2004. In the event of a change in control of CII Financial, the holders of the 9
1/2% senior debentures may require that CII Financial repurchase them at the
then applicable redemption price, plus accrued and unpaid interest.
CII Financial is a holding company and its only significant asset is its
investment in California Indemnity. Of the $9.1 million in cash and cash
equivalents it held at December 31, 2001, approximately $9.0 million was
designated for use only by the regulated insurance companies. CII Financial has
limited sources of cash and is dependent upon dividends paid by California
Indemnity. California Indemnity may pay a dividend, without the prior approval
of the state insurance commissioner, only to the extent the cumulative amount of
dividends or distributions paid or proposed to be paid in any year does not
exceed the amount shown as unassigned funds (reduced by any unrealized gains or
losses included in any such amount) on its statutory statement as of the
previous December 31. In 2002, California Indemnity can pay dividends of up to
$2.1 million without the prior approval of the state insurance commissioner. In
2001, California Indemnity received prior approval to pay an aggregate of $10
million in dividends. We are not in a position to assess the likelihood of
obtaining future approval for the payment of dividends other than those
specifically allowed by law in each of our subsidiaries' state of domicile.
Statutory Capital and Deposit Requirements
Our 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 $26.5 million at March 31, 2002. The HMO and
insurance subsidiaries must also meet requirements to maintain minimum
stockholders' equity, on a statutory basis, as well as minimum risk-based
capital requirements, which are determined annually. Additionally, in
conjunction with the exit from the Texas HMO health care market, the Texas
Department of Insurance approved a plan of withdrawal and TXHC is now required
to maintain deposits and net worth of at least $3.5 million. We believe we are
in compliance with our regulatory requirements. We are limited by our credit
facility in the amount of funds we can invest in our Texas operations.
Of the $100.6 million in cash and cash equivalents held at March 31, 2002, $66.5
million was designated for use only by the regulated subsidiaries. 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. 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.
Obligations and Commitments
A schedule of obligations and commitments as of December 31, 2001 can be found
in Item 7 under Liquidity and Capital Resources in our 2001 Form 10-K filed on
March 29, 2002.
Other
We have a 2002 capital budget of $16.1 million and we are limited to $19.6
million by our revolving credit facility. The planned expenditures are primarily
for the purchase of computer hardware and software, furniture and equipment and
other normal capital requirements. Our liquidity needs over the next 12 months
will primarily be for the capital items noted above, debt service and funds
required to exit the Texas HMO health care market. We believe that our existing
working capital, operating cash flow and, if necessary, equipment leasing,
divestitures of certain non-core assets and amounts available under our credit
facility and securitization arrangement should be sufficient to fund our capital
expenditures and debt service. Additionally, subject to unanticipated cash
requirements, we believe that our existing working capital and operating cash
flow should enable us to meet our liquidity needs on a long-term basis.
Membership
----------
Number of Members at March 31,
2002 2001
---- ----
Continuing Operations:
---------------------
HMO
Commercial.................................................. 187,000 143,500
Medicare.................................................... 45,400 43,400
Medicaid.................................................... 27,300 16,100
Managed Indemnity............................................. 29,500 29,700
Medicare Supplement........................................... 21,500 28,100
Administrative Services....................................... 318,200 280,400
TRICARE Eligibles............................................. 639,200 640,300
--------- ---------
Total Members, Continuing Operations.......................... 1,268,100 1,181,500
========= =========
Discontinued Texas Operations:
-----------------------------
HMO
Commercial.................................................. 1,700 53,600
Medicare (1) ............................................... 13,800
----- ------
Total Members, Discontinued Operations........................ 1,700 67,400
===== ======
(1) The 2001 Medicare membership does not include 5,300 Houston members that the
Company ceded to AmCare Health Plans of Texas, Inc., under a reinsurance
agreement on December 1, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2002, unrealized holding losses on available for sale
investments have increased by $3.1 million since 2001 due primarily to an
increase in the yield on Government obligations. We believe 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 we would need or choose to substantially liquidate our investment
portfolio.
SIERRA HEALTH SERVICES, INC. AND SUBSIDAIRES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various claims and other litigation in the ordinary course of
business. Such litigation includes, for example, 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 and other
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 management, the ultimate resolution of these pending
legal proceedings should not have a material adverse effect on our 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
None
(b) Reports on Form 8-K
Current Report on Form 8-K, dated January 4, 2002, with the
Securities and Exchange Commission in connection with the
announcement of the Company's participation in a health care
conference on January 8, 2002.
Current Report on Form 8-K, dated February 1, 2002, with the
Securities and Exchange Commission in connection with the
announcement of the Company's participation in a health care
conference on February 5, 2002.
Current Report on Form 8-K, dated February 21, 2002, with the
Securities and Exchange Commission in connection with the
announcement of the Company's participation in a health care
conference on February 27, 2002.
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 10, 2002 /S/ PAUL H. PALMER
-----------------------------------
Paul H. Palmer
Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)