The workers' compensation subsidiary is headquartered in Nevada and subleases space from us as well as an additional approximately 63,000 square feet of leased office space in California, Colorado and Texas.
We lease approximately 169,000 square feet of office space in other various states as needed for the SMHS administrative headquarters, TRICARE service centers and other regional operations.
The table below presents our selected consolidated financial information for the years indicated. The table 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 2002 Form 10-K. The selected consolidated financial data below has been derived from our audited Consolidated Financial Statements. Due to the classification of the workers' compensation operations as discontinued, the amounts presented below were reclassified to conform with the current year presentation.
December 31, ---------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (In thousands) Balance Sheet Data: Working Capital.................................. $ 122,252 $ 65,986 $ 46,201 $ 326,841 $ 217,743 Total Assets..................................... 1,065,966 1,064,846 1,162,773 1,130,112 1,045,120 Long-term Debt (Net of Current Portion).......... 60,710 163,993 224,970 173,578 155,697 Cash Dividends Per Common Share.................. none none none none none Stockholders' Equity............................. 156,565 96,519 90,473 278,412 303,714
(1)	We recorded certain identifiable asset impairment, restructuring, reorganization and other costs. See Note 16 of the Notes to the 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 accordance with SFAS No. 144, beginning January 1, 2001, our Texas HMO health care operations were reclassified and presented as discontinued operations.
On January 15, 2003, we announced that we were exploring strategic alternatives for our workers' compensation insurance company, CII Financial, Inc., or CII. The alternatives may include a sale, spin-off or management buyout. The disposal of the operations was approved by our Board of Directors on December 31, 2002. Accordingly, beginning in the fourth quarter of 2002, we reclassified our workers' compensation insurance business as discontinued operations. We will continue to operate the business until a disposal occurs.
Health care medical expenses are recorded in the period when services are provided to enrolled members, including estimates for provider costs which have been incurred as of the balance sheet date but not yet reported to us. We use a variety of standard actuarial projection methods to make these estimates and we must use our judgment in selecting development factors and assumed trends. In making our projections, we consider medical cost utilization and trends, changes in internal processes, the average interval between the date services are rendered and the date claims are received and/or paid, denied claims activity, disputed claims activity, utilization, seasonality patterns and changes in membership. Our assumptions could be affected by the timing of the receipt of claims, the timing of processing claims and unanticipated changes, such as adverse legal outcomes, legislative or regulatory changes, new interpretations of existing laws or regulations or disputed contract provisions that result in our having to provide new or extended benefits and changes in our health care delivery system or costs. Any subsequent changes in an estimate for a prior year would be reflected in that subsequent year's operating results.
Management believes, based on information presently available, that the recorded liability for medical claims payable, which at December 31, 2002, represented 10.8% of our total consolidated liabilities or $98.0 million, are reasonable and adequate to cover future health care claim payments. However, a difference between the recorded liability and actual developed claim payments could have a material impact to our financial results. For example, a 1% increase in medical claims payable as of December 31, 2002, would reduce reported net income for the year 2002 by $637,000 or 1.75% and diluted earnings per share would be reduced by $0.02.
Military Contract Revenues and Expenses. Military contract revenue is recorded based on the contract price as agreed to by the federal government. The contract was based on prior years' data provided by the government along with assumptions of future trends. The contract contains provisions that adjust the contract price based on actual experience, which we call the bid price adjustment, or BPA, and for government-directed change orders. For the year ended December 31, 2002, we estimate that approximately $149 million or 40% of the total military contract revenues were for BPA and change orders. At December 31, 2002, military accounts receivable due from the federal government was $47.1 million of which approximately $19.6 million was for accrued BPA and change order revenues. As the data becomes available from the government, we compare the actual results to the contract assumptions and the estimated effects of these adjustments are recognized on a monthly basis. In addition, we record revenue based on estimates of the earned portion of any contract change orders not originally specified in the contract. The BPA and government-directed change orders are subject to negotiation and we must use our judgment in making our estimates. The actual negotiated price could be substantially different from what we had originally estimated. Any subsequent difference would be reported in that subsequent year's operations.
Military contract health care costs are recorded in the period when services are provided to eligible beneficiaries, including estimates for provider costs which have been incurred as of the balance sheet date but not reported to us. We use a variety of actuarial projection methods to make these estimates and we must use our judgment in selecting development factors and assumed trends. Our assumptions, which are in large part related to the same assumptions we use in estimating military contract revenues, could be affected by unanticipated changes, such as new interpretations of contract provisions that result in our having to provide new or extended benefits and changes in our health care delivery system or costs. We must also factor into our assumptions the limited risk sharing that we have with the government in providing health care services. Any substantial change in our estimates may to a large degree be mitigated by the risk-sharing contract provision. At December 31, 2002, our military health care payable was $65.2 million. Any subsequent changes in an estimate for a prior year would be reflected in that subsequent year's operating results.
Our discontinued operations had total investments of $291.5 million of which $286.4 million was classified as available-for-sale and the balance of $5.1 million was classified as held-to-maturity. Held-to-maturity investments are reported at amortized cost because we have the intent and ability to hold these investments until they mature.
We periodically review our investment portfolio to determine if there is an impairment that is other than temporary. We must use our judgment in testing for impairment and we consider, among other factors, the length of time and the extent of a security's unrealized loss, the financial condition and near term prospects of the issuer, economic forecasts and market or industry trends. If the impairment is determined to be other than temporary, a realized loss is recognized at the date of determination. To date, we have not experienced any significant impairments that were other than temporary in our investments. However, due to the current economic environment and the volatility of the securities market, testing for impairment has become more difficult and there is no assurance that future impairments may not be sustained, which could adversely impact our business and results of operations. For example, if an other than temporary impairment occurred that reduced our investments by 1% at December 31, 2002, our reported net income for the year 2002 would be reduced by $3.2 million or 8.8% and fully diluted earnings per share would be reduced by $0.10.
Management believes, based on information presently available, that the recorded balance for reinsurance recoverables is reasonable and collectible. A change between the recorded balance and the actual developed recoverable could have a material impact to our business and results of operations. For example, a 1% decrease in reinsurance recoverables as of December 31, 2002, would reduce reported net income for the year 2002 by $1.2 million or 3.4% and diluted earnings per share would be reduced by $0.04.
Other. In addition to the most critical accounting policies and estimates discussed above, other areas requiring us to use judgment, assumptions and estimates include, but are not limited to, workers' compensation earned but unbilled premiums, contractual discounts on professional fee revenue, allowances for doubtful receivables, other accrued liabilities, accrued payroll and taxes, post-employment benefit liabilities, accrued policyholders' dividends, unearned premium revenue and contingent assets and liabilities. For a more extensive discussion of our accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements.
HMO and POS premium rates for renewing commercial groups increased on average 9% to 12% while the overall rate increase, including continuing business and new members, resulted in an approximate 9.6% increase. Managed indemnity rates increased approximately 10.6%. We did not receive a Medicaid rate increase in 2002 and we do not anticipate one in 2003. The basic Medicare rate increase received in 2002 for the Las Vegas area was approximately 2%. Our overall Medicare rate increase was approximately 6.4% due primarily to the following:
An increase in the Social HMO membership as a percentage of our total Medicare membership. The Social HMO members have a higher average rate than our other Medicare members. Over 97% of our Las Vegas, Nevada Medicare members are enrolled in the Social HMO Medicare program.
We experienced increased risk factors in our Social HMO membership which contributes to higher rates and corresponding medical expenses.
We received rate increases in excess of 2% for membership outside of the Las Vegas area.
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. At this time, however, the final reimbursement per member for 2004 has not been determined and there is no guaranty that the Social HMO contract will be renewed beyond 2003. It should be noted that Congress has in the past agreed to extend the contract. If the reimbursement for these members decreases significantly and related benefit changes are not made timely, there could be a materially 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 $34.7 million or 10.2%. 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. Likewise, in October 2001, SMHS implemented TRICARE for Life which is a comprehensive health care benefit to those retired military beneficiaries over age 65. Both of these modifications resulted from Congressional changes to the program. SMHS administers the expanded benefits only to the over age 65 retiree military population. SMHS does not directly fund claims payment or bear any health care underwriting risk on these program modifications for the actual level of health care service utilization and does not record any claim payments or related revenue on these program modifications.
Professional Fees increased $1.9 million or 6.7% as a result of higher average co-pays and increased visits at our provider subsidiaries.
Medical Expenses increased $103.5 million or 17.0% due primarily to our increased membership. Medical expenses as a percentage of medical premiums and professional fees decreased to 80.2% from 81.4%. The decrease is primarily due to premium yields in excess of cost and utilization increases which were partially offset by higher bed days in 2002. Our medical claims payable liability requires us to make significant estimates. See the discussion of our medical claims payable liability under critical accounting policies and estimates for a further explanation.
Military Contract Expenses increased $28.8 million or 8.7%. 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 678,000 eligible individuals of active duty military personnel, military retirees under the age of 65 and dependents of military retirees through a network of approximately 55,000 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, medical and network management services as well as 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.
Interest Expense decreased $8.3 million or 52.6%. Interest expense related to the revolving credit facility decreased $3.7 million due to a decrease in the average balance of outstanding debt during the period and a decrease 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 4.6% in 2002, compared to 8.1% in 2001. We incur a fee of 0.5% on the unused portion of the revolving credit facility. In addition, we are amortizing approximately $300,000 per quarter of deferred financing fees.
Interest expense related to the sale-leaseback transaction decreased by $4.9 million as the remaining buildings qualified as a sale during 2002. See Note 4 of the Notes to the Consolidated Financial Statements for a further explanation of the sale-leaseback transaction. We had various increases in interest expense of approximately $300,000.
Other Income (Expense), Net increased $2.0 million. We had a net loss on sale of assets of $2.3 million in 2001. In addition, we had an increase between 2002 and 2001 for various other expense items totaling approximately $300,000.
Discontinued Operations consist of our Texas HMO health care operations and the CII workers' compensation operations. The loss from discontinued operations for 2002 was $5.9 million compared to $12.0 million for 2001. The Texas HMO health care operations had a gain of $8.5 million for 2002 which was offset by a loss on the CII workers' compensation operations of $14.3 million.
Investment and other revenue decreased by $2.2 million due to a $500,000 investment valuation adjustment and a decrease in the average investment yield during the period offset by an increase in the average invested balance.
Expenses increased in the CII workers' compensation operations by approximately $26.3 million or 14.3%. The increase in expenses is primarily due to the following:
Approximately $2.3 million in additional loss and LAE is related to the increase in net earned premiums in 2002 compared to 2001.
In 2002, we recorded $24.0 million of net adverse loss development for prior accident years compared to net adverse loss development of $8.7 million recorded in 2001. Of the $24.0 million recorded, $1.4 million is related to our mandatory participation in assumed reinsurance pools and $5.0 million was recorded in conjunction with the valuation adjustments described above. The net adverse loss development recorded was largely attributable to higher costs per claim, or claim severity, in California, primarily on accident years 1996, 1997, 2000 and 2001. Higher claim severity has had a negative impact on the entire California workers' compensation industry in the past few periods and this trend may continue.
The loss and LAE reserves recorded as of December 31, 2002 reflect our best estimate of the ultimate loss costs for reported and unreported claims occurring in accident year 2002 as well as those occurring in accident years prior to 2002 and are slightly in excess of our independent actuary's point estimate. 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.
In the wake of the events of September 11, 2001 and the ensuing hardening of the reinsurance market, our new reinsurance agreements, which cover new and renewal policies effective on and after January 1, 2003, will cost more and has reduced coverage limits, including exclusions for terrorist acts. We continue to retain the first $500,000 per occurrence but the maximum coverage has been reduced from statutory (i.e., unlimited) limits to $20.0 million per occurrence. We also must meet certain annual aggregate deductibles before we can begin to recover from some of our reinsurers. This new coverage will result in our retaining more of the losses and LAE. We have factored these higher costs into our premium rates but there is no assurance that our rates will be adequate to cover these additional costs. The reinsurers on the new agreement consist of domestic as well as foreign reinsurers, and all are rated at least A- or better by A.M. Best Company as of December 31, 2002.
Reinsurance contracts do not relieve us from our obligations to injured workers or policyholders. At December 31, 2002, we had $189.4 million in reinsurance recoverable. We evaluate the financial condition of our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We also periodically review the financial strength ratings of our reinsurers to determine if an allowance for uncollectible reinsurance is warranted. As of December 31, 2002 and 2001, no allowance was established. At December 31, 2002, all of our reinsurers were rated AA- and A+ or better by Fitch Ratings and the A.M. Best Company, respectively. Should these companies be unable to perform their obligations to reimburse us for ceded losses, we would experience significant losses.
Medical Premiums from our HMO and managed indemnity insurance subsidiaries increased $81.2 million or 12.7%. The $81.2 million increase in premium revenue reflects a 7.9% increase in Medicare member months (the number of months individuals are enrolled in a plan) and a 10.9% 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 6.6%, managed indemnity rates increased approximately 14.6% and Medicare rates increased approximately 4.0%.
Professional Fees decreased $4.1 million or 12.4% due primarily to the closing of our affiliated medical group in Arizona during 2000.
Investment and Other Revenues decreased $1.8 million or 9.7% due primarily to a decrease in the average investment yield during the period offset by an increase in the average invested balance. Investment and other revenues now include the revenue associated with administrative services which were previously reported as part of specialty product revenues.
Medical Expenses increased $32.0 million or 5.6%. Excluding the effects of changes in estimate charges for 2000, medical expenses increased approximately $58.0 million or 10.5%. Medical expenses as a percentage of medical premiums and professional fees decreased from 82.1% to 81.4%, excluding changes in estimate charges as described below. The improvement is primarily due to the closing of our rural Nevada clinical operation with a higher medical care ratio and premium yields in excess of cost increases.
Asset Impairment, Restructuring, Reorganization and Other Costs for 2000 are discussed below.
The charges recorded for the write-off of goodwill totaled $15.1 million related primarily to the Prime Holdings, Inc. acquisition. The charges recorded for fixed asset impairment totaled $9.5 million for the Arizona and Nevada operations.
Other Income (Expense), Net decreased $3.2 million. We had a net loss on sale of assets in 2001 of $2.3 million compared to a gain of $1.2 million in 2000. In addition, we had an increase between 2001 and 2000 for various other income items totaling approximately $300,000.
Discontinued Texas HMO health care operations. The 2001 loss includes costs to exit the Texas HMO health care market of $17.1 million offset by various other income from operations. Included in the 2000 loss were the following: (a) asset impairment charges of $126.4 million for impaired goodwill; (b) $36.5 million for impaired real estate and other fixed assets; (c) medical expenses of $14.7 million, primarily for adverse development on prior periods' medical claims; (d) $15.5 million for premium deficiency medical costs; (e) $10.4 million for premium deficiency maintenance costs; and (f) other restructuring, reorganization and other costs of $13.3 million.
Discontinued CII workers' compensation operations. The discontinued workers' compensation operations for 2001 had a profit of $2.0 million compared to a loss of $7.8 million in 2000. Net earned premiums increased by $47.7 million or 38.0% due primarily to a decrease in ceded reinsurance premiums. Ceded reinsurance premiums decreased as our low level reinsurance agreement expired on June 30, 2000 and was replaced by a new reinsurance agreement with lower ceded premiums.
In 2001, we recorded $8.7 million of net adverse loss development for prior accident years compared to net adverse loss development of $23.3 million recorded in 2000. The net adverse loss 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 and this trend may continue.
We established a higher loss and LAE ratio for the 2001 accident year, which has resulted in an increase of approximately $12.5 million. The majority of the increase is due to the termination of the low level reinsurance agreement on June 30, 2000, which results in a higher risk exposure on policies effective after that date and a higher amount of net incurred loss and LAE.
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 106.1% in 2001 compared to 115.8% for 2000. The decrease was primarily due to significantly higher prior year adverse loss development recorded during 2000. Excluding adverse loss development, the combined ratio would have been 101.1% for 2001 and 97.3% for 2000. The increase in the accident year loss and LAE ratio was primarily due to the run off of the low level reinsurance, which resulted in our retaining more of the incurred losses. The underwriting expense ratio decreased primarily due to higher retained net earned premiums.
The cash flow resulting from the change in assets and liabilities of $72.6 million was primarily due to the following:
a source of cash due to the decrease in the deferred tax asset balance of $37.9 million
a source of cash due to the increase in medical claims payable of $16.4 million
a source of cash due to the decrease in other current assets of $6.5 million
In the event SMHS wins the competitive procurement for the North Region T-Nex contract, SMHS has received a commitment from General Electric Capital Corporation to provide a $200.0 million senior secured revolving credit facility to support SMHS' additional working capital needs and to refinance its existing securitization agreement.
The new 9½% senior debentures pay interest, which is due semi-annually on March 15 and September 15 of each year, commencing on September 15, 2001. The new 9½% 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 new 9½% 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 new 9½% senior debentures may require that CII Financial repurchase them at the then applicable redemption price, plus accrued and unpaid interest.
CII is a holding company and its only significant asset is its' investment in California Indemnity. Of the $23.1 million in cash and cash equivalents it held at December 31, 2002, approximately $21.5 million was designated for use only by the regulated insurance companies. CII has limited sources of cash and is dependent upon dividends paid by California Indemnity. California Indemnity may only pay a dividend without the prior approval of the state insurance commissioner 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 2003, California Indemnity cannot pay dividends without the prior approval of the state insurance commissioner. In 2002 California Indemnity paid a total of $1.5 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.
Of the $68.8 million in cash and cash equivalents held at December 31, 2002, including discontinued operations, $23.0 million was held by discontinued operations and of the remainder, $11.7 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.
Long- Term Capital Operating Debt Leases Leases Total ----------- ------------ --------- --------- (In thousands) Continuing Operations Payments due in less than 1 year.... $ 98 $ 121 $ 18,428 $ 18,647 Payments due in 1 to 3 years........ 71 114 34,980 35,165 Payments due in 4 to 5 years........ 60,071 62 32,805 92,938 Payments due after 5 years.......... 362 153 123,420 123,935 ----------- ------------ --------- --------- Total Continuing Operations.... $ 60,602 $ 450 $ 209,633 $ 270,685 =========== ============ ========= ========= Discontinued Operations Payments due in less than 1 year.... $ 3,954 $ 235 $ 422 $ 4,611 Payments due in 1 to 3 years........ 20,408 -- 69 20,477 Payments due in 4 to 5 years........ 7,364 -- -- 7,364 Payments due after 5 years.......... -- -- -- -- ----------- ------------ --------- --------- Total Discontinued Operations.. $ 31,726 $ 235 $ 491 $ 32,452 =========== ============ ========= =========
While we are unable to predict what legislative or regulatory changes may occur or the impact of any particular change, our operations and financial results could be negatively affected by any legislative or regulatory requirements. For example, any proposals to eliminate or reduce the Employee Retirement Income Security Act, or ERISA, which regulates insured and self-insured health care coverage plans offered by employers, pre-emption of state laws that would increase litigation exposure, affect underwriting practices, limit rate increases, require new or additional benefits or affect contracting arrangements (including proposals to require HMOs and PPOs to accept any health care provider willing to abide by an HMO's or PPO's contract terms) may have a material adverse effect on our business. The continued consideration and enactment of "anti-managed care" laws and regulations by federal and state bodies may make it more difficult for us to manage medical costs and may adversely affect financial results.
In addition to the items described above, we urge you to review carefully the section "Risk Factors" in this 2002 Form 10-K 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.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees", or FIN 45. FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing the guarantee. We will apply FIN 45 to guarantees, if any, issued after December 31, 2002. We do not expect the adoption of FIN 45 to have a material effect on our consolidated financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", or FIN 46. FIN 46 requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling interest or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from the other parties. We do not expect the adoption of FIN 46 to have a material effect on our consolidated financial position or results of operations.
for the Years Ended December 31, 2002, 2001 and 2000
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sierra Health Services, Inc. and its subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
January 29, 2003, (March 14, 2003 as to Notes 6 and 19.)
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued Liabilities.............................................. $ 50,349 $ 40,691 Trade Accounts Payable........................................... 29,249 22,500 Accrued Payroll and Taxes........................................ 13,660 13,465 Medical Claims Payable........................................... 98,031 81,662 Unearned Premium Revenue......................................... 40,758 38,592 Military Health Care Payable..................................... 65,223 77,261 Current Portion of Long-term Debt................................ 186 191 Liabilities of Discontinued Operations........................... 500,720 516,742 ------------ ------------ Total Current Liabilities................................... 798,176 791,104
LONG-TERM DEBT (Less Current Portion)................................ 60,710 163,993 OTHER LIABILITIES.................................................... 50,515 13,230 ------------ ------------ TOTAL LIABILITIES.................................................... 909,401 968,327 ------------ ------------ COMMITMENTS AND CONTINGENCIES
Business. The consolidated financial statements include the accounts of Sierra Health Services, Inc. and its subsidiaries (collectively referred to as "Sierra" or the "Company"). Sierra 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. Sierra's broad range of managed health care services is provided through its health maintenance organization ("HMO"), managed indemnity plans, military health services programs, third-party administrative services programs for employer-funded health benefit plans and medical management programs. Ancillary products and services that complement the Company's managed health care product lines are also offered.
Discontinued Operations. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), during the fourth quarter of 2002, the Company reclassified it's workers' compensation insurance operations as discontinued operations. Sierra is seeking strategic alternatives for the workers' compensation insurance subsidiaries and has retained Banc of America Securities to explore strategic alternatives for the operations.
The individual line items on the consolidated balance sheets have been presented net of the discontinued operations with the total assets and liabilities of the discontinued operations presented on one line within current assets and current liabilities, respectively. The results of operations from the discontinued operations have been reported net of tax as a separate component of income on the consolidated statements of operations. The cash flows from the discontinued operations have been reported as a separate component on the consolidated statements of cash flows. See Notes 8 and 9 for disclosure on and a description of the discontinued operations.
Investment and Other Revenues. Investment income is recognized in the period earned, realized gains and losses are recognized as incurred and are calculated using the specific identification method. Other revenues include administrative services fees and certain ancillary product revenues. In prior years these revenues had been reported as specialty product revenues. Such revenues are recognized in the period in which the service is performed or the period that coverage for services is provided.
The Company contracts with hospitals, physicians and other independently contracted providers of health care under capitated or discounted fee-for-service arrangements including hospital per diems to provide medical care services to enrollees. Capitated providers are at risk for a portion of the cost of medical care services provided to the Company's enrollees in the relevant geographic areas; however, the Company is ultimately responsible for the provision of services to its enrollees should the capitated provider be unable to provide the contracted services.
Investments. Investments consist principally of U.S. Government and its agencies' securities and municipal bonds, as well as corporate and mortgage-backed securities. All non-restricted investments that are designated as available-for-sale are classified as current assets. These investments are available for use in the current operations regardless of contractual maturity dates. Non-restricted investments designated as held-to-maturity are classified as current assets if expected maturity is within one year of the balance sheet date. Otherwise, they are classified as long-term investments. All of the Company's held-to-maturity investments are held by the discontinued operations. Realized gains and losses are calculated using the specific identification method and are included in investment and other revenues. Unrealized holding gains and losses on available-for-sale securities are included as a separate component of stockholders' equity, net of income tax effects, until realized.
During 2001, SMHS adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which provides accounting and reporting standards for securitizations and other transfers of financial assets and extinguishments of liabilities. On November 16, 2001, SMHS entered into a securitization arrangement with General Electric Capital Corporation. The arrangement provides for the assignment of SMHS' Federal Government accounts receivable to SMHS Funding. 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 assign 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.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation. Maintenance and repairs that do not significantly improve or extend the life of the respective assets are charged to operations. Depreciation is computed using the straight-line method over the estimated service lives of the assets or terms of leases if shorter. Estimated useful lives are as follows:
In connection with the restructuring plans adopted and announced by the Company in the second quarter of 2000, the Company re-evaluated the recoverability of certain long-lived assets, primarily those associated with the Texas HMO health care operations, in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121") and Accounting Principles Board Opinion No. 17, "Intangible Assets" ("APB No. 17"), and determined that the carrying value of certain goodwill was impaired. In assessing the asset impairment of the long- lived assets, the Company first allocated a portion of related goodwill to the fixed assets to be disposed of, in accordance with SFAS No. 121. The remainder of the related goodwill was then assessed for recoverability in accordance with APB No. 17 based on projected discounted cash flows and an impairment of $141.5 million was recorded. Of the total impairment, $126.4 million was related to and has been recorded as part of discontinued operations. See Notes 8 and 16 for a description of the primary facts and circumstances related to the impairment.
Treasury Stock. Shares purchased and placed in treasury are valued at cost. Subsequent sales of treasury stock at amounts in excess of their cost are credited to additional paid-in capital. Sale of treasury stock at amounts below their cost are charged to additional paid-in capital to the extent it includes gains from previous sales and the remainder to retained earnings (accumulated deficit). Sales of treasury shares in 2002, at amounts below their cost of $4.3 million, were charged to accumulated deficit as the Company did not previously have gains in additional paid-in capital. All sales of treasury shares in 2002 were in connection with the exercise of stock options.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 is an amendment of Statement of Financial Accounting Standards No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires prominent disclosures in interim as well as annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported net income. The disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The Company has not yet determined if it will implement the voluntary change to the fair value based method of accounting as allowed under SFAS No. 148 for 2003.
Premium Deficiency Reserves. Premium deficiency expenses are recognized when it is probable that the future costs associated with a group of existing contracts will exceed the anticipated future premiums on those contracts. The Company calculates expected premium deficiency expense based on budgeted revenues and expenses. Premium deficiency reserves are evaluated quarterly for adequacy.
Concentration of Credit Risk. The Company's financial instruments that are exposed to credit risk consist primarily of cash equivalents, investments and accounts receivable. The Company maintains cash and cash equivalents and investments with various financial institutions. These financial institutions are located in many different regions and company policy is designed to limit exposure with any one institution.
Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries. These customers are primarily located in the states in which the Company operates and are principally in California and Nevada. However, the Company is licensed and does business in several other states. As of December 31, 2002, the Company had receivables outstanding from the federal government related to its TRICARE contract in the amount of $47.1 million. The Company also has receivables from its reinsurers. Reinsurance contracts do not relieve the Company from its obligations to enrollees or policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. All reinsurers with whom the Company has reinsurance contracts are rated AA- and A+ or better by Fitch Ratings and the A.M. Best Company, respectively.
Use of Estimates and Assumptions in the Preparation of Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management must exercise its judgment taking into consideration the facts and circumstances in selecting assumptions and other factors in calculating its estimates. On an on-going basis, management re-evaluates its assumptions and the methods of calculating its estimates. Estimates and assumptions include, but are not limited to, medical and workers' compensation expenses and reserves, military revenue and expenses, reinsurance recoverables, legal reserves, fair values of investments, amounts receivable or payable under government contracts, deferred income taxes, remaining reserves for restructuring and other charges and the net realizable values for assets where impairment charges have been recorded. Actual results may materially differ from estimates.
Income (loss) from continuing operations..... $ 42,308 $ 15,481 $ (31,019) Loss from discontinued operations............ (5,860) (11,995) (168,896) ---------- ---------- ---------- Net income (loss)............................ $ 36,448 $ 3,486 $ (199,915) ========== ========== ========== Earnings per common share: Income (loss) from continuing operations..... $ 1.47 $ 0.56 $ (1.15) Loss from discontinued operations............ (0.20) (0.43) (6.22) ---------- ---------- ---------- Net income (loss)............................ $ 1.27 $ 0.13 $ (7.37) ========== ========== ========== Earnings per common share assuming dilution: Income (loss) from continuing operations..... $ 1.36 $ 0.54 $ (1.15) Loss from discontinued operations............ (0.19) (0.42) (6.22) ---------- ---------- ---------- Net income (loss)............................ $ 1.17 $ 0.12 $ (7.37) ========== ========== ==========
2002 2001 ---------- ---------- (In thousands) Land......................................... $ 2,984 $ 11,147 Buildings and Improvements................... 22,415 99,472 Furniture, Fixtures and Equipment............ 39,286 36,945 Data Processing Equipment and Software....... 98,216 91,060 Software in Development and Construction in Progress............................... 697 2,331 Less: Accumulated Depreciation ............. (98,730) (104,459) ---------- ---------- Property and Equipment, Net.............. $ 64,868 $ 136,496 ========== ==========
2002 2001 ---------- ---------- ( In thousands) Buildings and Improvements................... $ 245 $ 245 Data Processing Equipment and Software....... 333 333 Less: Accumulated Depreciation............... (413) (316) ---------- ---------- Property and Equipment, Net............... $ 165 $ 262 ========== ==========
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. As part of the transaction, the Company financed a portion of the sales price with mortgage notes receivable of $22.2 million and provided deposits of $4.3 million. The mortgages and deposits constituted continuing involvement as defined in Statement of Financial Accounting Standards No. 98, "Accounting for Leases" ("SFAS No. 98"), and as such the transaction did not qualify as a sale. In accordance with SFAS No. 98, the Company recorded the transaction as a financing obligation of $113.7 million, offset by the mortgage notes receivable of $22.2 million. The net book value of the assets included in the transaction was $86.9 million at December 31, 2000. For the assets that did not qualify for sale treatment, depreciation expense and interest expense were recognized on the net book value of the assets and net financing obligation outstanding, respectively.
As of September 30, 2002, the Company had received the deposits back and full payment of the outstanding mortgage obligations. The payments cured the continuing involvement criteria of SFAS No. 98 and the transaction 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 13 year term of the lease. The impact of the sale of the buildings recorded during 2002 was a net reduction of $68.8 million in property and equipment, a net reduction of $89.8 million in the associated financing obligation and a deferred gain of $21.0 million. The total deferred gain recorded on the transaction in 2001 and 2002 was $25.7 million; $1.9 million will be recognized annually over the remaining term of the lease.
2002 2001 ---------- ---------- (In thousands) Revolving Credit Facility...................................... $ 60,000 $ 89,000 Net Financing Obligations...................................... -- 73,948 Other.......................................................... 896 1,236 ---------- ---------- Total........................................................ 60,896 164,184 Less Current Portion........................................... (186) (191) ---------- ---------- Long-term Debt................................................. $ 60,710 $ 163,993 ========== ==========
Net Financing Obligations represent amounts recorded as a financing obligation as part of the sale-leaseback transaction described in Note 4. Amounts were recorded as a financing obligation as required by SFAS No. 98 using the interest method with effective interest rates of 8.16% to 8.53%. In conjunction with the transaction qualifying as a sale, as described in Note 4, the Company no longer reflects a net financing obligation.
Scheduled maturities of the Company's notes payable, net financing obligations and future minimum payments under capital leases, together with the present value of the net minimum lease payments at December 31, 2002, are as follows:
The following reconciles the difference between the reported and statutory provision (benefit) for income taxes, from continuing operations, for the years ended December 31:
2002 2001 2000 ---------- ---------- ---------- Statutory Rate................................................. 35 % 35 % (35)% State Income Taxes............................................. -- (1) 1 Tax Preferred Investments...................................... (1) (1) (1) Change in Valuation Allowance.................................. (3) (2) (3) Intangible Amortization........................................ -- 1 14 Compensation and Benefit Plans................................. 3 1 -- Other.......................................................... -- (1) 1 ---------- ---------- ---------- Provision (Benefit) for Income Taxes........................... 34 % 32 % (23)% ========== ========== ==========
2002 2001 ---------- ---------- (In thousands) Deferred Tax Assets: Medical Claims Payable and Losses and Loss Adjustment Expense Reserves.............. $15,611 $10,502 Accruals Not Currently Deductible.......................... 16,125 16,542 Compensation Accruals...................................... 11,259 9,974 Bad Debt Allowances........................................ 3,140 4,091 Loss Carryforwards and Credits............................. 28,696 59,756 Depreciation and Amortization.............................. 3,642 5,038 Unearned Premiums.......................................... 2,976 1,757 Deferred Reinsurance Gains................................. 1,806 2,022 Unrealized Investment (Gains) Losses....................... (777) 3,033 Other...................................................... 844 190 ---------- ---------- Total.................................................... 83,322 112,905 ---------- ----------
Deferred Tax Liabilities: Deferred Policy Acquisition Costs.......................... 758 741 Other...................................................... 242 947 ---------- ---------- Total.................................................... 1,000 1,688 ---------- ---------- Net Deferred Tax Asset.................................... $ 82,322 $111,217 ========== ==========
2002 2001 ---------- ---------- Deferred Tax Assets: (In thousands) Medical Claims Payable..................................... $ 4,587 $ 5,099 Accruals Not Currently Deductible.......................... 15,162 14,592 Compensation Accruals...................................... 10,772 9,190 Bad Debt Allowances........................................ 2,769 3,600 Loss Carryforwards and Credits............................. 28,544 58,163
Unrealized Investment (Gains) Losses....................... (353) 645 Depreciation and Amortization.............................. 3,650 5,294 Other...................................................... 218 243 ---------- ---------- Total.................................................... 65,349 96,826 ---------- ---------- Deferred Tax Liabilities: Other...................................................... 849 554 ---------- ---------- Total.................................................... 849 554 ---------- ---------- Net Deferred Tax Asset..................................... $ 64,500 $ 96,272 ========== ==========
The Company, at a consolidated level including discontinued operations, does not have a valuation allowance at December 31, 2002 or 2001. Under the Company's tax sharing agreements, the discontinued operations do have a valuation allowance at December 31, 2002 and 2001, which is eliminated in the Company's consolidated financial statements.
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 received a limited waiver under its revolving credit facility agreement for covenants affected by exiting the Texas HMO health care market.
Included in the Texas HMO health care operations medical expenses for the year ended December 31, 2000, are $14.7 million, primarily for adverse development on prior periods' medical claims, and $15.5 million in premium deficiency medical expense related to under-performing markets in the Dallas/Ft. Worth and Houston areas. The recorded premium deficiency reflected anticipated costs after restructuring and reorganization actions taken in the first six months of 2000. During the second quarter of 2001, management revised their estimates of premium deficiency reserves and reclassified $7.8 million from premium deficiency maintenance reserve to premium deficiency medical reserve. This reclassification was based on the latest available medical cost trends, which did not become evident until late in the second quarter of 2001, and is reflected as an increase in medical expense and a decrease in general and administrative expenses on the condensed statements of operations of the discontinued Texas HMO health care operations.
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.
December 31, ------------------------- 2002 2001 ----------- ------------ (In thousands) ASSETS Cash and Cash Equivalents.................................. $ -- $ -- Investments................................................ 4,263 4,274 Other Assets............................................... 916 4,023 Property and Equipment, Net................................ 11,967 20,107 ----------- ------------ TOTAL ASSETS............................................... 17,146 28,404 ----------- ------------ LIABILITIES Accounts Payable and Other Liabilities..................... 9,059 16,475 Medical Claims Payable..................................... 1,754 36,567 Premium Deficiency Reserve................................. -- 1,700 Mortgage Loan.............................................. 14,961 29,189 ----------- ------------ TOTAL LIABLIITIES.......................................... 25,774 83,931 ----------- ------------ NET LIABILITIES OF DISCONTINUED OPERATIONS................. $ (8,628) $ (55,527) =========== ============
During 2001, Sierra participated in negotiations with Kaiser- Texas relating 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.
During 2002, TXHC sold four of the eight real estate properties and a piece of land for net proceeds of $8.8 million. The sales resulted in a gain on sale, net of tax, of $700,000. As required under the terms of the mortgage loan agreement, pre-determined minimum amounts of the mortgage note are required to be paid as each piece of real estate is sold. Accordingly total payments of $11.3 million were made to Kaiser-Texas on the mortgage loan. Since the principal payments resulted in a reduction of future interest, future accrued interest was reduced and a gain, net of tax, of $1.9 million was recorded. At December 31, 2002, the mortgage loan has a carrying value of $15.0 million, which consists of a principal balance of $12.7 million and $2.3 million in future accrued interest.
On January 15, 2003, the Company announced that it is exploring strategic alternatives for its workers' compensation company, CII. The alternatives may include a sale, spin-off or management buyout. The disposal of the operations was approved by Sierra's Board of Directors on December 31, 2002. Accordingly, beginning in the fourth quarter of 2002, the Company reclassified its workers' compensation insurance business as discontinued operations. CII represented the majority of the Company's previous workers' compensation operations segment and specialty product income and expenses. See Note 17 for a discussion of the recasted segment presentation.
In conjunction with the decision to dispose of the workers' compensation operations CII recorded valuation adjustments of $17.3 million, $11.3 million after tax, to reduce the operations to its estimated net realizable value upon disposition. The valuation adjustments included the write down of accounts receivable, fixed assets and certain other assets of $3.5 million, an investment valuation adjustment of $500,000 and additional loss reserves of $8.3 million for the 2002 accident year and $5.0 million for prior accident years. The Company received a limited waiver under its revolving credit facility agreement for covenants affected by this decision.
Specialty Product Expenses. These expenses consist primarily of losses and loss adjustment expense ("LAE"), policy acquisition costs and other general and administrative expenses associated with issued workers' compensation policies. Losses and LAE are based upon the accumulation of cost estimates for reported claims occurring during the period as well as an estimate for losses that have occurred but have not yet been reported. Policy acquisition costs consist of commissions, premium taxes and other underwriting costs, which are directly related to the production and retention of new and renewal business and are deferred and amortized as the related premiums are earned. Should it be determined that future policy revenues and earnings on invested funds relating to existing insurance contracts will not be adequate to cover related costs and expenses, deferred costs are expensed.
Loss and LAE reserves have a significant degree of uncertainty when related to their subsequent payments. Although reserves are established on the basis of a reasonable estimate, it is not only possible but probable that reserves will differ from their related subsequent developments. Underlying causes for this uncertainty include, but are not limited to, uncertainty in development patterns and unanticipated inflationary trends affecting the cost of services covered by the insurance contract. This uncertainty can result in both adverse as well as favorable development of actual subsequent activity when compared to the reserve established. Any subsequent change in loss and LAE reserves established in a prior year would be reflected in that subsequent year's operating results.
Income Tax Benefit (Provision)......................... 7,506 (1,643) 3,670 --------- --------- --------- Net (Loss) Income from Discontinued Operations......... $ (14,332) $ 1,985 $ (7,774) ========= ========= =========
All of the discontinued operations of CII were a component of the "workers' compensation operations" segment.
The following table summarizes the investments of CII as of December 31, 2001:
Held-to-Maturity Investments: Classified as Current: Corporate Bonds............................................ $ 2,999 $ 22 $ $ 3,021 ---------- ---------- ---------- ---------- Total Current................................................. 2,999 22 -- 3,021 ---------- ---------- ---------- ----------
Classified as Long-term: U.S. Government and its Agencies........................... 5,608 258 5,350 Municipal Obligations...................................... 328 15 313 Corporate Bonds............................................ 2,498 175 2,673 ---------- ---------- ---------- ---------- Total Long-term .............................................. 8,434 175 273 8,336 ---------- ---------- ---------- ---------- Classified as Restricted: U.S. Government and its Agencies........................... 626 24 650 Municipal Obligations...................................... 636 29 607 Corporate Bonds............................................ 1,114 42 1,156 ---------- ---------- ---------- ---------- Total Restricted .............................................. 2,376 66 29 2,413 ---------- ---------- ---------- ---------- Total Held-to-Maturity............................... $ 13,809 $ 263 $ 302 $ 13,770 ========== ========== ========== ==========
The contractual maturities of held-to-maturity investments at December 31, 2002 are shown below:
Reinsurance. CII has reinsurance agreements or treaties in effect with unrelated entities. Effective July 1, 1998, all claims with dates of injury occurring on or after that date were reinsured under a quota share and excess of loss agreement ("low level reinsurance"), with Travelers Indemnity Company of Illinois ("Travelers"). Travelers is rated AA and A++ by Fitch Ratings and the A.M. Best Company, respectively. The low level reinsurance provided quota share protection for 30% of the first $10,000 of each loss, and excess of loss protection of 75% of the next $40,000 of each loss, and 100% of the next $450,000 on a per occurrence basis. The maximum net loss retained on any one claim ceded under this treaty was $17,000. This agreement continued until June 30, 2000, when CII exercised an option for a twelve month extension relating to the run-off of policies in force as of June 30, 2000, which covered claims arising under such policies during the term of the extension.
In accordance with SFAS No. 113, losses ceded under prospective reinsurance reduce direct incurred losses and amounts recoverable are reported as an asset. At December 31, 2002 and 2001, the amount of reinsurance recoverable under prospective reinsurance contracts for unpaid loss and LAE was $169.0 million and $187.5 million, respectively. At December 31, 2002 and 2001, the amount of reinsurance recoverable under the retroactive reinsurance contract was $6.9 million and $8.8 million, respectively. The amount of reinsurance receivable for paid loss and LAE was $13.5 million and $21.8 million at December 31, 2002 and 2001, respectively.
Change in Recoveries Recoverable on Paid on Unpaid Premiums Losses/LAE Losses/LAE Ceded ---------- ---------- ---------- (In thousands) Year Ended December 31, 2002: Low level reinsurance carrier................................. $ 60,314 $ (37,854) $ (2,184) Excess of loss reinsurance carriers........................... 2,308 19,403 2,617 ---------- ---------- ---------- Total ........................................................ $ 62,622 $ (18,451) $ 433 ========== ========== ========== Year Ended December 31, 2001: Low level reinsurance carrier................................. $ 80,932 $ (40,430) $ 9,136 Excess of loss reinsurance carriers........................... 4,407 9,125 4,244 ---------- ---------- ---------- Total ........................................................ $ 85,339 $ (31,305) $ 13,380 ========== ========== ========== Year Ended December 31, 2000: Low level reinsurance carrier................................. $ 53,408 $ 100,240 $ 74,071 Excess of loss reinsurance carriers........................... 2,324 8,428 3,449 ---------- ---------- ---------- Total ........................................................ $ 55,732 $ 108,668 $ 77,520 ========== ========== ==========
Rent expense totaled $15.8 million, $7.9 million and $7.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Years ended December 31, -------------------------------------- 2002 2001 2000 ----------- ------------ ----------- (In thousands) Changes in Projected Benefit Obligation: Projected Benefit Obligation at Beginning of Period........ $ 19,143 $ 13,698 $ 12,813 Service Cost .............................................. 292 322 365 Interest Cost ............................................. 1,375 1,162 887 Actuarial Losses (Gains)................................... 3,435 4,745 (174) Benefits Paid ............................................. (784) (784) (193) ----------- ------------ ----------- Projected Benefit Obligation at End of Period.............. $ 23,461 $ 19,143 $ 13,698 =========== ============ ===========
Funded Status of the Plan ................................. $ (23,461) $ (19,143) $ (13,698) Unrecognized Net Actuarial (Gain)/Loss..................... 6,761 3,900 (685) Unrecognized Prior Service Credit ......................... 5,640 6,566 7,491 ----------- ------------ ----------- Accrued Net Benefit Costs ................................. $ (11,060) $ (8,677) $ (6,892) =========== ============ =========== Amounts Recognized in the Consolidated Balance Sheets: Accrued Net Benefit Costs ................................. $ (11,060) $ (8,677) $ (6,892) Additional Minimum Liability .............................. (7,270) (7,773) (3,459) Intangible Asset .......................................... 5,640 7,773 3,459 Accumulated Other Comprehensive Loss....................... 1,630 -- -- ----------- ------------ ----------- Net Liability Reflected in the Consolidated Balance Sheets: $ (11,060) $ (8,677) $ (6,892) =========== ============ ===========
Components of Net Periodic Benefit Cost: Service Cost............................................... $ 292 $ 322 $ 365 Interest Cost ............................................. 1,375 1,162 887 Amortization of Prior Service Credits...................... 925 925 925 Recognized Actuarial Loss (Gain)........................... 575 159 (20) ----------- ------------ ----------- Net Periodic Benefit Cost.................................. $ 3,167 $ 2,568 $ 2,157 =========== ============ ===========
While the SERP is an unfunded plan, the Company is informally funding the plan through life insurance contracts on certain Company employees. The life insurance contracts had cash surrender values of $11.7 million, $10.3 million and $8.4 million at December 31, 2002, 2001 and 2000, respectively.
Outstanding January 1, 2000................................ 3,904 $6.31 - 24.69 $ 15.37 Granted................................................. 2,458 3.13 - 7.19 3.87 Canceled................................................ (2,112) 3.75 - 24.69 18.17 ----------- Outstanding December 31, 2000.............................. 4,250 3.13 - 24.69 7.31 Granted................................................. 2,218 4.24 - 8.93 6.57 Exercised............................................... (72) 3.75 - 8.00 5.25 Canceled................................................ (393) 3.19 - 24.69 10.98 ----------- Outstanding December 31, 2001.............................. 6,003 3.13 - 24.69 6.81 Granted................................................. 944 8.13 - 13.17 10.88 Exercised............................................... (995) 3.25 - 22.38 5.73 Canceled................................................ (100) 3.25 - 24.69 11.32 ----------- Outstanding December 31, 2002.............................. 5,852 3.13 - 24.69 7.56 ===========
Weighted Average Weighted Average Options Exercise Price Range of Exercise Contractual Life ----------------------- ------------------------ Price Remaining in DaysOutstanding Exercisable Outstanding Exercisable -------------------- ---------------- ----------- ----------- ----------- ----------- $3.13 - 3.75 2,709 1,515 297 $ 3.71 $ 3.68 4.24 - 5.73 3,031 1,409 581 5.55 5.68 6.19 - 8.93 2,186 1,837 672 8.21 8.08 9.91 - 24.69 2,801 1,091 316 14.40 19.37
Restricted Stock Units. The Company issued 244,000 restricted stock units ("units"), to certain executives during 2001. The first half of the units vest in 2003 with the remainder vesting in 2004. Each unit represents a nontransferable right to receive one share of Sierra stock and there is no cost by the recipient to exercise the units. The units are included in total outstanding common shares. In the calculation of earnings per share, the units are not included in the common shares outstanding but are included in the calculation of common shares outstanding assuming dilution. The transaction was recorded by including the value of the units as common stock and additional paid-in capital offset by a contra-equity account, deferred compensation. The value of the transaction was based on the number of units issued and the Company stock price on the date of issuance, which was $5.73. Compensation expense will be recognized over the period of vesting. Total expense associated with the plan was $585,000 and $342,000 for 2002 and 2001, respectively.
The fair value of the look-back option implicit in each offering of the Purchase Plans is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield of 0% for all years; expected volatility of 56%, 85% and 46%; risk-free interest rates of 1.48%, 4.36% and 5.79%; and expected lives of six months for all years.
Years ended December 31, ------------------------------- 2002 2001 2000 --------- --------- --------- (In thousands) Cash Paid During the Year for Interest (Net of Amount Capitalized)....................... $ 7,205 $ 17,164 $ 23,704 Cash Received During the Year for Income Taxes.................................. (12,796) (221) (10,615) Non-cash Investing and Financing Activities: Retired Sale-Leaseback Assets, Liabilities and Financing Obligations....................... 89,751 14,552 -- Note Received for Sale of Investment.............. -- -- 3,700 Stock Issued for Exercise of Options and Related Tax Benefits........................ 6,837 97 -- Additions to Capital Leases....................... -- -- 1,835 Debentures Exchanged.............................. -- 19,692 --
Included in reported medical expenses for 2000 are changes in estimate charges of $16.5 million of reserve strengthening primarily due to adverse development on prior periods' medical claims. In addition, the Company recorded $9.5 million of other non-recurring medical costs primarily relating to the write-down of medical subsidiary assets.
The $4.3 million of costs recorded in the second quarter of 2000 relate primarily to the write-down of certain receivables as well as an accrual for legal settlements.
The remaining other costs of $3.9 million are related to legal claims. Management believes that the remaining reserves, as of December 31, 2002, are appropriate and that no revisions to the estimates are necessary at this time.
Managed Military Care and Health Corporate Services Operations Operations Total ---------- ---------- ---------- (In thousands) Year Ended December 31, 2002 Medical Premiums......................................... $ 857,741 $ -- $ 857,741 Military Contract Revenues............................... -- 373,589 373,589 Professional Fees........................................ 30,923 -- 30,923 Investment and Other Revenues............................ 14,305 2,077 16,382 ---------- ---------- ---------- Total Revenue......................................... $ 902,969 $ 375,666 $1,278,635 ========== ========== ==========
Year Ended December 31, 2001 Medical Premiums......................................... $ 718,994 $ -- $ 718,994 Military Contract Revenues............................... -- 338,918 338,918 Professional Fees........................................ 28,985 -- 28,985 Investment and Other Revenues............................ 14,199 2,404 16,603 ---------- ---------- ---------- Total Revenue......................................... $ 762,178 $ 341,322 $1,103,500 ========== ========== ==========
Segment Assets........................................... $ 413,871 $ 117,302 $ 531,173 Capital Expenditures..................................... 5,759 1,377 7,136 Depreciation and Amortization (1)........................ 20,159 4,025 24,184
Segment Operating Profit (2)............................. $ 25,412 $ 7,992 $ 33,404 Interest Expense Other................................... (17,511) (354) (17,865) Other Income (Expense), Net.............................. 1,341 (257) 1,084 Changes in Estimate Charges (3).......................... (26,011) -- (26,011) Asset Impairment, Restructuring, Reorganization and Other Costs...................... (30,836) -- (30,836) ---------- ---------- ---------- (Loss) Income from Continuing Operations Before Income Taxes................................. $ (47,605) $ 7,381 $ (40,224) ========== ========== ==========
Segment Assets........................................... $ 485,208 $ 115,520 $ 600,728 Capital Expenditures..................................... 13,957 717 14,674 Depreciation and Amortization (1)........................ 21,219 2,926 24,145
Goodwill amortization of $805,000 and $1,131,000 is included as part of the managed care and corporate operations segment for 2001 and 2000, respectively.
Represents changes in estimate charges in the current year for services or liabilities of a prior year that are reclassified to Medical Expenses for presentation in accordance with accounting principles generally accepted in the United States of America.
The following table presents the results of operations as though the adoption of SFAS No. 142 occurred as of January 1, 2000:
Year Ended December 31, 2001 Adjustments for Amortization As Reported of Goodwill As Adjusted ------------ ----------- ------------ (In thousands, except per share data)
Earnings per Common Share: ---------------------------- Income from Continuing Operations............ $ 0.56 $ 0.02 $ 0.58 Loss from Discontinued Operations............ (0.43) -- (0.43) ------------ ----------- ------------ Net Income................................ $ 0.13 $ 0.02 $ 0.15 ============ =========== ============
Earnings per Common Share Assuming Dilution: --------------------------------------------- Income from Continuing Operations............ $ 0.54 $ 0.02 $ 0.56 Loss from Discontinued Operations............ (0.42) -- (0.42) ------------ ----------- ------------ Net Income................................ $ 0.12 $ 0.02 $ 0.14 ============ =========== ============
Year Ended December 31, 2000 Adjustments for Amortization As Reported of Goodwill As Adjusted ------------ ----------- ------------ (In thousands, except per share data)
Earnings per Common Share Assuming Dilution: --------------------------------------------- (Loss) Income from Continuing Operations..... $ (1.15) $ 0.03 $ (1.12) (Loss) Income from Discontinued Operations... (6.22) 0.04 (6.18) ------------ ----------- ------------ Net (Loss) Income......................... $ (7.37) $ 0.07 $ (7.30) ============ =========== ============
On January 7, 2003, the Company announced that the Board of Directors authorized a program for the repurchase of up to 2.0 million shares of the Company's common stock. On February 25, 2003, the Company announced that it had repurchased approximately 600,000 shares of its common stock and that its Board of Directors had authorized it to purchase up to an additional 600,000 shares of Sierra common stock under its share repurchase program. Such purchases have been made from time to time at prevailing prices in the open market, by block purchase or in private transactions. As of March 6, 2003, the Company had purchased a total of 2.2 million shares for $27.6 million (see debenture use of proceeds below).
The debentures are convertible, at the option of the holders, into shares of Sierra Health Services, Inc. common stock at a conversion price of $18.29, upon certain conditions including the sale price of Sierra's common stock exceeding 120% of the conversion price at specified times. The debentures are puttable to the Company for cash or Sierra common stock, at the Company's election, on March 15 in 2008, 2013 and 2018 and upon certain corporate events including a change in control. The debentures can be called for cash beginning on March 20, 2008.
The new credit facility is secured by guarantees by certain of the Company's subsidiaries and a first priority perfected security interest in (i) all the capital stock of each of the unregulated, material domestic subsidiaries (direct or indirect) as well as all of the capital stock of certain regulated, material domestic subsidiaries and (ii) all other present and future assets and properties of those subsidiaries that guarantee the credit agreement obligations (including, without limitation, accounts receivable, inventory, real property, equipment, contracts, trademarks, copyrights, patents, license rights and general intangibles) subject, in each case to the exclusion of the capital stock of CII Financial, Inc. or any of its subsidiaries and certain other exclusions.
Basic earnings per share: Income from Continuing Operations as Reported....... $ 0.26 $ 0.37 $ 0.42 $ 0.41 Reclassification for Discontinued Operations........ 0.01 -- -- -- ---------- ---------- ---------- ---------- Income from Continuing Operations................... 0.25 0.37 0.42 0.41 ---------- ---------- ---------- ---------- Net Income ......................................... $ 0.26 $ 0.37 $ 0.48 $ 0.15 ========== ========== ========== ==========
Diluted earnings per share: Income from Continuing Operations as Reported....... $ 0.25 $ 0.34 $ 0.38 $ 0.39 Reclassification for Discontinued Operations........ 0.01 -- (0.01) -- ---------- ---------- ---------- ---------- Income from Continuing Operations................... 0.24 0.34 0.39 0.39 ---------- ---------- ---------- ---------- Net Income.......................................... $ 0.25 $ 0.34 $ 0.44 $ 0.14 ========== ========== ========== ==========
March June September December Quarter Ended 2001: 31 30 30 31 ---------- ---------- ---------- ---------- (In thousands, except per share data)
Operating Revenues as Reported......................... $ 303,228 $ 318,327 $ 330,854 $ 339,092 Reclassification for Discontinued Operations........... 43,385 46,076 50,061 48,479 ---------- ---------- ---------- ---------- Operating Revenues..................................... 259,843 272,251 280,793 290,613 ---------- ---------- ---------- ----------
Income from Continuing Operations as Reported.......... 3,466 3,777 4,572 5,651 Reclassification for Discontinued Operations........... (84) 1,711 277 81 ---------- ---------- ---------- ---------- Income from Continuing Operations...................... 3,550 2,066 4,295 5,570 ---------- ---------- ---------- ---------- Net Income (Loss)...................................... $ 3,205 $ 2,795 $ (7,554) $ 5,040 ========== ========== ========== ==========
Basic earnings per share: Income from Continuing Operations as Reported....... $ 0.13 $ 0.14 $ 0.16 $ 0.20 Reclassification for Discontinued Operations........ -- 0.06 0.01 -- ---------- ---------- ---------- ---------- Income from Continuing Operations................... 0.13 0.08 0.15 0.20 ---------- ---------- ---------- ---------- Net Income (Loss)................................... $ 0.12 $ 0.10 $ (0.27) $ 0.18 ========== ========== ========== ==========
Diluted earnings per share: Income from Continuing Operations as Reported....... $ 0.13 $ 0.13 $ 0.16 $ 0.19 Reclassification for Discontinued Operations........ -- 0.06 0.01 -- ---------- ---------- ---------- ---------- Income from Continuing Operations................... 0.13 0.07 0.15 0.19 ---------- ---------- ---------- ---------- Net Income (Loss)................................... $ 0.12 $ 0.10 $ (0.26) $ 0.17 ========== ========== ========== ==========