The Company owns and leases several administrative and clinical facilities in southern Nevada. Facilities owned by the Company include (i) a recently completed complex located in Las Vegas consisting of an approximately 134,000 square foot six-story home office building and an approximately 43,000 square foot two-story corporate administrative headquarters and (ii) approximately 151,000 square feet of clinical facilities in various locations throughout southern Nevada including a recently completed two-story, 44,000 square foot, medical facility on land contiguous to its administrative headquarters in northwest Las Vegas. The Company's home office building and corporate administrative headquarters are subject to liens securing an $11.8 million loan balance from Bank of America, Nevada and certain clinical space is subject to a $3.3 million mortgage in favor of GE Capital Asset Management Corporation as well as a $4.8 million mortgage in favor of Key Bank of Washington. Additionally, the Company leases approximately 51,000 square feet of clinical space in southern Nevada, with leases extending through September 1996, and leases approximately 67,000 square feet of office space in southern Nevada and approximately 6,000 square feet of office space in other areas to support regional operations. The Company has begun the construction of an approximately 28,000 square foot outpatient surgical facility in Las Vegas with an estimated total cost of $4.3 million. Completion is expected in mid-1995. The Company believes that its current clinical space is adequate for its present needs. Additional clinical space may be required, however, if membership continues to expand.
The following selected consolidated financial data of the Company for the years ended December 31, 1994, 1993, 1992, 1991, and 1990 should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information which appears elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data as of December 31, 1994, 1993, 1992, 1991, and 1990 and for each of the five years ended December 31, 1994 have been derived from the audited Consolidated Financial Statements of the Company.
The Company's total operating revenues for 1994 increased 14.6% to $295.8 million from $258.1 million for 1993. The increase was primarily due to premium revenue increases of approximately $28.7 million, or 11.9%, from the Company's HMO and insurance subsidiaries. Such additional premium growth resulted principally from an 11.3% increase in member months (the number of months of each year that an individual is enrolled in a plan). The Company realized minimal rate changes for the HMO subsidiary's commercial groups, and a slight rate increase by the Company's insurance subsidiary. Additionally, the Company experienced an overall rate reduction for its Medicare members due to an approximate 1.8% decrease in its capitation rate established by the Health Care Financing Administration ("HCFA"), along with the transfer by some members to the Company's lower priced Medicare plans. The Company's specialty product revenue increased approximately $6.4 million principally due to the Company's contract, effective January 1994, to provide managed care utilization review services to Nevadans under a state insured workers' compensation medical management program.
Total medical expenses increased by approximately $21.7 million in 1994 compared to 1993. This 12.2% increase resulted from the consolidated member month growth discussed above, along with inflationary and other medical cost increases approximating .9%. These factors slightly increased the Company's medical loss ratio to 74.3% for the twelve months ended December 31, 1994 from 74.2% for the comparable twelve months in 1993.
The Company's effective federal income tax rate for the year ended December 31, 1994 was 34.9% compared to 32.0% for the year ended 1993. During the third quarter of 1993, Congress passed the "Omnibus Budget Reconciliation Act of 1993" (the "Act"). Certain provisions of the Act increased the statutory federal income tax rate to 35% from 34%. The increase in the effective tax rate was largely due to certain provisions of the Act which disallowed previously deductible items, along with other factors.
Net income for 1994 increased 27.3% to $22.2 million from $17.4 million in 1993. The $4.8 million increase was primarily due to increased operating revenues and a reduction in G&A expenses as a percentage of revenues, partially offset by additional interest expense and an increase in the effective federal income tax rate.
The Company's total Operating Revenues for 1993 increased 10.3% to $258.1 million from $234.0 million for 1992. The increase was primarily due to a 10.6% premium revenue increase, or $23.1 million, from the Company's HMO and insurance subsidiary as a result of an average 4.4% premium rate increase and an approximate 6.2% increase in member months. The Company's HMO realized rate increases approximating $3.6 million, or 3.2%, for commercial groups and $7.2 million, or 12.0%, for its Medicare members. The Company's 1993 effective Medicare capitation rate increase of 16.5% was somewhat offset by a reduction in individual Medicare premium rates which resulted from some members transferring to the Company's lower priced Medicare plans. The insurance subsidiary's managed indemnity plans realized premium rate increases of approximately 4.9%, or $3.1 million. The remaining overall consolidated premium revenue increase of $9.2 million was primarily due to membership growth. Commercial HMO member months increased 9.1% and Medicare HMO member months increased 4.4% while fully insured managed indemnity member months decreased 6.1%. The Company's professional fees increased approximately $1.0 million principally due to increased home hospice and mental health fee-for-service revenue.
Total medical expenses increased by $12.0 million in 1993 compared to 1992. This 7.2% increase resulted primarily from the member month growth along with inflationary and other medical cost increases approximating 1.8%. The medical loss ratio decreased to 74.2% in 1993 from 76.5% in 1992. The consolidated medical loss ratio decreased primarily due to favorable HMO hospital rates and increased provider efficiencies and increased Medicare capitation revenue. Although the Company experienced higher overall HMO hospital utilization, such higher utilization was generally offset by bed days of a lower intensity and favorable amendments to the contracted per diem rates at its primary contracted hospital.
The Company's cash, cash equivalents and short-term securities increased by $56.1 million to $104.6 million at December 31, 1994 from $48.5 million at December 31, 1993. At December 31, 1994 the Company had working capital of $59.7 million, and a current ratio of 2.0, compared to $5.7 million in working capital at December 31, 1993, and a current ratio of 1.1. The primary sources of cash received during the year ended December 31, 1994 included $38.1 million generated from operations and $44.6 million in net proceeds received from the Company's public offering of common stock completed on October 11, 1994.
The $40.2 million provided by financing activities since December 31, 1993 consisted principally of $44.6 million in net proceeds received from the Company's public offering of common stock and an additional $4.3 million received pursuant to the exercise of certain outstanding Company stock options. Such proceeds were partially offset by debt reductions of approximately $8.7 million, consisting largely of a promissory note in the principal amount of $2.8 million secured by a deed of trust encumbering the land for the Company's new home office, regional home office and administrative headquarters and a mortgage note of $2.4 million secured by one of the Company's recently acquired medical clinics. Additional uses of cash included $10.7 million for net capital expenditures, including medical clinic construction and equipment, and $4.0 million for the purchase of certain affiliated companies which owned and operated certain medical buildings. This related party transaction is further described in Note 8 in Notes to Consolidated Financial Statements.
Numerous proposals relating to health care and insurance reform have been and may continue to be introduced in the United States Congress and in state legislatures. At this time, the Company cannot determine which legislation, if any, will be enacted or what effect such legislation may have on the Company.
During May 1993, Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115") was issued. FAS 115 became effective on January 1, 1994 and requires the Company to classify its investments in debt securities in three distinct categories with certain unrealized gains and losses included in earnings or as a separate component of stockholders' equity. The adoption of FAS 115 did not impact the Company's earnings in 1994 and is more fully discussed in Note 3 in Notes to Consolidated Financial Statements.
/s/ ANTHONY M. MARLON, M.D. Anthony M. Marlon, M.D. Chairman and Chief Executive Officer
/s/ JAMES L. STARR James L. Starr Vice President, Chief Financial Officer and Treasurer
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sierra Health Services, Inc. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules taken as a whole, present fairly in all material respects the information set forth therein.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
BUSINESS. The consolidated financial statements include the accounts of Sierra Health Services, Inc. ("Sierra" -- a holding company incorporated in Nevada) and its nine subsidiaries (collectively referred to as the "Company"). The Company is a managed health care organization that provides and administers the delivery of comprehensive health care programs with an emphasis on quality care and cost management. The Company's broad range of managed health care services is provided through its HMO, managed indemnity plans, a third-party administrative services program for employer-funded health benefit plans and workers' compensation medical management programs. Ancillary products and services that complement the Company's managed health care product lines are also offered.
PREMIUM REVENUE RECOGNITION. Non-Medicare member enrollment is represented principally by employer groups. Premiums are billed to each employer group in accordance with negotiated contracts, and such premium revenue is recognized when earned. Unearned premium revenue consists primarily of payments under prepaid Medicare contracts with the Health Care Financing Administration ("HCFA") and prepaid HPN commercial and SHL indemnity premiums. HPN offers a prepaid health care program to Medicare recipients. Revenues associated with these Medicare recipients were approximately $82,792,000, $70,323,000 and $60,114,000 in 1994, 1993 and 1992, respectively.
CASH AND CASH EQUIVALENTS. The Company considers cash and cash equivalents as all highly liquid instruments with a maturity of three months or less at time of purchase. The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of these instruments.
Buildings and Improvements 30 years Leasehold Improvements 3 - 10 years Furniture, Fixtures and Equipment 3 - 5 years
The Company is covered under a medical reinsurance agreement that provides coverage for 50-90% of hospital costs in excess of $75,000 per case, up to a maximum of $2,000,000 per member per lifetime for both SHL and HPN. Reinsurance premiums of $2,234,000, $2,097,000 and $1,733,000, net of reinsurance recoveries of $584,000, $363,000 and $1,910,000, are included in Medical Expenses for 1994, 1993 and 1992, respectively.
EARNINGS PER SHARE AND STOCK SPLIT. In January, 1993, the Company consummated a two-for-one common stock split. All common stock, earnings per share and stock plan amounts included in the accompanying Consolidated Financial Statements and Notes thereto have been retroactively adjusted to account for the split. Earnings per common share for the years ended December 31, 1994, 1993 and 1992 have been calculated using the weighted average number of common shares outstanding of 13,021,000, 12,296,000 and 11,949,000, respectively. Common share equivalents are not dilutive.
INCOME TAXES. The Company accounts for income taxes using the liability method. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The Company's temporary differences arise principally from certain accrued expenses, reserves and depreciation.
Land, Building and Equipment at December 31 consists of the following:
At December 31, 1994 marketable equity and debt securities have been categorized as available for sale and as a result are stated at their fair value. Unrealized holding gains and losses are included as a separate component of stockholders' equity until realized. Gross realized gains and losses in 1994 were $41,000 and $163,000 respectively. Realized gains and losses are included in net income.
Of the cash and cash equivalents and short-term securities that total $104,577,000 in the accompanying Consolidated Balance Sheet at December 31, 1994, $47,967,000 is limited for use only by HPN and SHL. Such amounts are available for transfer to Sierra from HPN and SHL only to the extent that they can be remitted in accordance with terms of existing management agreements and by dividends which customarily must be approved by regulating state insurance departments. The remainder is available to Sierra on an unrestricted basis. HPN is incorporated in and subject to the regulations of the state of Nevada.
The Company assumed a $4,860,000 mortgage note in conjunction with the related party transaction described in Note 8. Monthly installments of $36,144, including interest at 7.12%, are due through July 1996, at which time the balance of the note is due. This loan is secured by a medical facility.
Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). Pursuant to FAS 109, the Company must record deferred taxes or benefits which result from temporary differences between the tax and financial statement treatment of certain assets or liabilities. The adoption of FAS 109 had no material impact on the Company's operations.
During the third quarter of 1993, Congress passed the "Omnibus Budget Reconciliation Act of 1993" (the "Act"). Certain provisions of the Act increased the statutory federal income tax rate to 35% from 34% and made the impact of such change retroactive to January 1, 1993. Aside from the increased statutory rate, the Company does not expect other provisions of the Act to have a material impact on the Company's income taxes.
In June, 1992, HPN and SHL settled a dispute with the Nevada Department of Insurance concerning the availability of premium tax credits to HPN and SHL and paid the Department $784,000. This settlement was for the years 1988 through 1992. In February, 1994, the Department of Insurance conducted a special examination of HPN and SHL regarding HPN's and SHL's eligibility for premium tax credits. This examination concluded with a recommendation from the examiner that HPN and SHL both be considered as fully qualified for the credits under Nevada Revised Statutes.
The Company has a defined contribution pension and 401(k) plan (the "Plan") for its employees. The Plan covers all employees who meet certain age and length of service requirements. The Company contributes 2% of an employee's compensation for all employees who meet the Plan's eligibility requirements and matches 50% of a participant's elective deferral
up to a maximum deferral of either 10% of an employee's compensation or the maximum allowable under current IRS statute. Expense under the plan totaled $2,214,000, $1,955,000 and $1,483,000 in 1994, 1993 and 1992, respectively. The base employer contribution of 2% is vested 100% while the employer's matching contribution vests based on the employee's length of service.
In March, 1994, the Company purchased two companies which owned and operated medical buildings that were previously leased by the Company. The two companies and their predecessor limited partnerships were entities that were partially owned by affiliates of the Company. The Company's Chief Executive Officer had interests in both companies and another officer of the Company had an interest in one company. The Company purchased all the outstanding stock of the two companies for approximately $11.4 million which consisted of $4.0 million in cash and $7.4 million in assumed liabilities. The purchase price was based on the appraised value of the two companies' land and medical buildings; all other assets purchased were not material. The two companies were then merged into one of Sierra's subsidiaries. In August, 1994, the Company paid off $2.4 million of the assumed liabilities. Lease payments to the affiliated entities for the years ended December 31, 1993 and 1992 were $1,663,000 and $1,612,000, respectively.
The Company has a stock option plan (the "Stock Option Plan") for employees and directors, with 827,430 shares reserved for issuance as either qualified or non-qualified stock options as of December 31, 1994. The Stock Option Plan provides for the granting of stock options, stock appreciation rights ("SARs") and tax equalization payments. Options are granted at fair market value and are currently exercisable in 20% or 33-1/3% annual increments, commencing one year after the date of grant.
The following table reflects the activity of the Stock Option Plan:
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 and 1992