We own approximately 27,000 square feet of space in Las Vegas, Nevada, which houses our in-house print shop operations and information systems data center. We lease office and clinical space in Nevada totaling approximately 408,000 and 322,000 square feet, respectively. HPN and SHL own a 134,000 square foot administrative building as their Las Vegas headquarters, which serves as the home office and a regional home office for our Nevada HMO and health insurance subsidiaries, respectively.
Our continuing operations derive revenues from our health maintenance organization, managed indemnity plans and military health care services. To a lesser extent, we also derive revenues from non-HMO and insurance products (consisting of fees for workers' compensation third party administration, utilization management services and ancillary products), professional fees (consisting primarily of fees for providing health care services to non-members and co-payment fees received from members), and investment and other revenue.
Discontinued Operations. During the third quarter of 2001, we announced our plan to exit the Texas HMO health care market and received formal approval from the Texas Department of Insurance to withdraw our HMO operations in mid-October. We ceased providing HMO health care coverage in Texas on April 17, 2002. As part of our plan to exit Texas, in the third quarter of 2001, we recorded a charge of $17.1 million for premium deficiency costs, the write down of certain assets, legal and restitution costs, and various other exit related costs.
Investment Securities. At December 31, 2002, we had total investments for continuing operations of $200.0 million. All of these investments are classified as available-for-sale and are presented at fair value. Except for restricted cash and investments, which totaled $17.6 million at December 31, 2002, and are reported as non-current assets, the remainder of these investments of $182.4 million are available to support current operations and are therefore reported as current assets.
General and Administrative Expenses, or G&A, increased approximately $11.4 million or 9.3%. The primary increases in G&A expenses were payroll and benefits, brokers fees, which were primarily due to increased premium revenues, and facility lease expense. The increase in facility lease expense is due to the rent payments associated with the sale- leaseback transaction for our administrative buildings now being recorded as an operating expense. Previously the rent payments were recorded as interest and a reduction of principal and the assets were being depreciated. Our administrative office buildings associated with the sale-leaseback transaction qualified as a sale at the end of the first quarter of 2002. This resulted in a quarterly increase in G&A expenses of approximately $1.1 million and a corresponding decrease in interest expense. See Note 4 of the Notes to the Consolidated Financial Statements for a further explanation of the sale- leaseback transaction. As a percentage of revenues, G&A expenses were 10.5% for 2002, compared to 11.1% in 2001. As a percentage of medical premium revenue, G&A expenses were 15.6% for 2002, compared to 17.1% for 2001. G&A expenses now include the expenses associated with administrative services which were previously reported as part of specialty product expenses.
Military Contract Expenses increased $8.4 million or 2.6%. The increase is consistent with the increase in revenues discussed previously. 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.
The $4.3 million of costs recorded in the second quarter of 2000 relate primarily to an accrual for certain legal settlements as wells as the write-down of certain receivables.
Provision for Income Taxes was recorded at $7.2 million for 2001 compared to a tax benefit of $9.2 million for 2000. The effective tax rate for 2001 was 31.6% compared to 22.9% for 2000. The effective tax rate for 2000 reflects the non-deductibility of certain portions of goodwill impairment expense recorded during the period.
Discontinued Operations consist of our Texas HMO health care operations and the CII workers' compensation operations. The loss from discontinued operations for 2001 was $12.0 million compared to $168.9 million for 2000. The Texas HMO health care operations had a loss of $14.0 million for 2001 compared to a gain of $2.0 million for the CII workers' compensation operations.
a source of cash due to the increase in other liabilities of $15.0 million
various other changes in assets and liabilities accounting for the remaining source of cash of $1.1 million
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", or 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 us beginning January 1, 2003. We do not expect the adoption of SFAS No. 145 to have a material effect on our consolidated financial position or results of operations.
Years Ended December 31, ---------------------------------- 2002 2001 2000 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss).......................................... $ 36,448 $ 3,486 $ (199,915) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Loss from Discontinued Operations...................... 5,860 11,995 168,896 Depreciation and Amortization.......................... 18,245 24,184 24,145 Deferred Compensation Expense.......................... 585 342 -- Provision for Doubtful Accounts........................ 2,835 1,251 1,278 Provision for Asset Impairment......................... -- -- 36,079 Loss (Gain) on Property and Equipment Dispositions..... 17 2,311 (1,114) Change in Assets and Liabilities: Other Assets........................................... (16) 2,839 (7,499) Deferred Tax Asset..................................... 37,931 2,107 (51,464) Other Current Liabilities.............................. 14,660 3,853 (19,427) Accounts Receivable.................................... 1,267 (2,921) 3,988 Other Current Assets................................... 6,454 (2,153) 2,411 Military Accounts Receivable........................... (6,960) 32,436 (11,462) Military Health Care Payable........................... (12,038) (7,598) 34,028 Medical Claims Payable................................. 16,369 7,258 9,146 Other Liabilities...................................... 14,980 18,774 8,399 ---------- ---------- ---------- Net Cash Provided by Operating Activities of Continuing Operations................................ 136,637 98,164 (2,511) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures....................................... (12,392) (7,136) (14,674) Property and Equipment Dispositions........................ 680 7,265 10,942 Purchase of Available-for-Sale Investments................. (847,437) (130,625) (37,865) Proceeds from Sales/Maturities of Available-for-Sale Investments......................... 712,483 107,540 57,638 ---------- ---------- ---------- Net Cash (Used for) Provided by Investing Activities of Continuing Operations................................ (146,666) (22,956) 16,041 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Long-term Borrowing.......................... -- -- 91,459 Proceeds on Sale-Leaseback Deposit......................... 16,862 -- -- Payments on Debt and Capital Leases........................ (30,399) (53,187) (39,225) Exercise of Stock in Connection with Stock Plans........... 10,159 2,090 1,580 ---------- ---------- ---------- Net Cash (Used for) Provided by Financing Activities of Continuing Operations................................ (3,378) (51,097) 53,814 ---------- ---------- ---------- NET CASH (USED FOR) PROVIDED BY DISCONTINUED OPERATIONS................................ (47,929) (45,954) 24,566 ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.......................................... (61,336) (21,843) 91,910 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................................... 107,114 128,957 37,047 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR......................... $ 45,778 $ 107,114 $ 128,957 ========== ========== ==========
Other. The Company has obligations under capital leases with interest rates from 8.0% to 12.2%. In addition, the Company has term loans with the City of Baltimore and the State of Maryland.
During the years ended December 31, 2002, 2001 and 2000, the Company experienced prior year net adverse loss development of $24.0 million, $8.7 million and $23.3 million, respectively. Estimated losses and LAE incurred in accident years 1996 to 1999 have developed significantly primarily due to the continuation of increasing claim severity patterns on CII's California book of business. Many workers' compensation insurance carriers in California are also experiencing high claim severity. Factors influencing the higher claim severity include rising average temporary disability costs, the increase in the number of major permanent disability claims, medical inflation and adverse court decisions related to medical control of a claimant's treatment.
Year Ended December 31, 2000 Medical Premiums......................................... $ 637,769 $ -- $ 637,769 Military Contract Revenues............................... -- 330,352 330,352 Professional Fees........................................ 33,102 -- 33,102 Investment and Other Revenues............................ 17,488 905 18,393 ---------- ---------- ---------- Total Revenue......................................... $ 688,359 $ 331,257 $1,019,616 ========== ========== ==========
In March 2003, the Company issued $115 million aggregate principal amount of 2¼% senior convertible debentures due March 15, 2023. The Company used the net proceeds of the offering to repay the $39 million outstanding under its existing amended and restated credit facility and to contribute $35.0 million to SMHS in furtherance of its bid for the TRICARE Next Generation contract. The Company also used $19.9 million of the proceeds to purchase 1.6 million shares of Sierra common stock under its repurchase program. The remainder of the net proceeds will be used for working capital and general corporate purposes, including, subject to board approval, additional share repurchases.
March June September December Quarter Ended 2002: 31 30 30 31 ---------- ---------- ---------- ---------- (In thousands, except per share data)
Income from Continuing Operations as Reported.......... 7,381 10,523 12,135 12,229 Reclassification for Discontinued Operations........... 239 (20) (259) -- ---------- ---------- ---------- ---------- Income from Continuing Operations...................... 7,142 10,543 12,394 12,229 ---------- ---------- ---------- ---------- Net Income............................................. $ 7,381 $ 10,523 $ 14,063 $ 4,481 ========== ========== ========== ==========