We own approximately 27,000 square feet of space in Las Vegas, Nevada, which houses our in-house print shop operations and information systems data center. We lease office and clinical space in Nevada totaling approximately 347,000 and 389,000 square feet, respectively, with the majority of the lease agreements running through January, 2016. HPN and SHL own a 134,000 square foot administrative building as their Las Vegas headquarters, which serves as the home office and a regional home office for our Nevada HMO and health insurance subsidiaries, respectively.
The workers' compensation subsidiary is headquartered in Nevada and subleases space from us as well as approximately 37,000 square feet of additional leased office space in California and Colorado with some lease agreements running through 2008. Sierra will be required to assume all outstanding lease agreements upon the sale of Cal Indemnity.
We lease approximately 162,000 square feet of office space in other various states as needed for the SMHS administrative headquarters, TRICARE service centers and other regional operations with some lease agreements running through 2012. We are attempting to sublease certain space we have already vacated and we will attempt to sublease any remaining space that will be vacant at the completion of the phase-out period.
Years Ended December 31, ---------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- (In thousands, except per share data) Statements of Operations Data: OPERATING REVENUES: Medical Premiums................................. $ 962,176 $ 857,741 $ 718,994 $ 637,769 $ 594,966 Military Contract Revenues....................... 465,313 373,589 338,918 330,352 287,398 Professional Fees................................ 37,367 30,923 28,985 33,102 42,069 Investment and Other Revenues.................... 20,223 16,382 16,603 18,393 16,286 ---------- ---------- ---------- ---------- ---------- Total.......................................... 1,485,079 1,278,635 1,103,500 1,019,616 940,719 ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES: Medical Expenses................................. 762,865 712,290 608,757 576,738 534,606 Military Contract Expenses....................... 452,554 360,375 331,621 323,265 276,493 General and Administrative Expenses.............. 137,263 133,979 122,623 112,220 103,340 Asset Impairment, Restructuring, Reorganization and Other Costs (1)............ -- -- -- 30,836 7,808 ---------- ---------- ---------- ---------- ---------- Total.......................................... 1,352,682 1,206,644 1,063,001 1,043,059 922,247 ---------- ---------- ---------- ---------- ---------- OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS........................... 132,397 71,991 40,499 (23,443) 18,472 Interest Expense.................................... (5,491) (7,650) (15,738) (17,865) (12,306) Other Income (Expense), Net......................... (223) 55 (2,119) 1,084 (674) ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.................. 126,683 64,396 22,642 (40,224) 5,492 (PROVISION) BENEFIT FOR INCOME TAXES................ (44,565) (22,088) (7,161) 9,205 1,431 ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) FROM CONTINUING OPERATIONS............................ 82,118 42,308 15,481 (31,019) 6,923 LOSS FROM DISCONTINUED OPERATIONS................... (19,792) (5,860) (11,995) (168,896) (11,554) ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS)................................... $ 62,326 $ 36,448 $ 3,486 $ (199,915) $ (4,631) ========== ========== ========== ========== ========== EARNINGS PER COMMON SHARE: Income (Loss) From Continuing Operations......... $ 2.93 $ 1.47 $ 0.56 $ (1.15) $ 0.26 Loss from Discontinued Operations................ (0.71) (0.20) (0.43) (6.22) (0.43) ---------- ---------- ---------- ---------- ---------- Net Income (Loss)................................ $ 2.22 $ 1.27 $ 0.13 $ (7.37) $ (0.17) ========== ========== ========== ========== ========== Weighted Average Number of Common Shares Outstanding............................. 28,053 28,756 27,685 27,142 26,927 ========== ========== ========== ========== ========== EARNINGS PER COMMON SHARE ASSUMING DILUTION: Income (Loss) From Continuing Operations......... $ 2.70 $ 1.36 $ 0.54 $ (1.15) $ 0.26 Loss from Discontinued Operations................ (0.65) (0.19) (0.42) (6.22) (0.43) ---------- ---------- ---------- ---------- ---------- Net Income (Loss)................................ $ 2.05 $ 1.17 $ 0.12 $ (7.37) $ (0.17) ========== ========== ========== ========== ========== Weighted Average Number of Common Shares Outstanding Assuming Dilution........... 30,421 31,141 28,509 27,142 26,996 ========== ========== ========== ========== ==========
December 31, ---------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- (In thousands) Balance Sheet Data: Working Capital.................................. $ 171,652 $ 122,252 $ 65,986 $ 46,201 $ 326,841 Total Assets..................................... 1,134,121 1,065,966 1,064,846 1,162,773 1,130,112 Long-term Debt (Net of Current Portion).......... 116,645 60,710 163,993 224,970 173,578 Cash Dividends Per Common Share.................. none none none none none Stockholders' Equity............................. 150,764 156,565 96,519 90,473 278,412
(1) We recorded certain identifiable asset impairment, restructuring, reorganization and other costs.
(In thousands, except ratio data) Income (Loss) from Continuing Operations Before Income Taxes............................... $ 126,683 $ 64,396 $ 22,642 $ (40,224) $ 5,492 --------- --------- --------- --------- --------- Fixed Charges: Interest expense (including capitalized interest)... 5,506 7,700 15,767 17,932 14,315 Interest relating to rental expense (1)............. 6,795 5,205 2,609 2,387 2,428 --------- --------- --------- --------- --------- Total fixed charges............................. 12,301 12,905 18,376 20,319 16,743 --------- --------- --------- --------- --------- Earnings available for fixed charges................ $ 138,984 $ 77,301 $ 41,018 $ (19,905) $ 22,235 ========= ========= ========= ========= =========
Ratio of earnings to fixed charges (2).............. 11.30 5.99 2.23 - 1.33
(1)The representative interest portion of rental expense was deemed to be one-third of all rental expense.
consolidated financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto. The information contained below may be subject to risk factors. We urge you to review carefully the section "Risk Factors" in Part 1, Item 1 of this 2003 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.
Our principal expenses consist of medical expenses, military contract expenses, and general and administrative expenses. Medical expenses represent capitation fees and other fee-for-service payments paid to independent contracted physicians, hospitals and other health care providers to cover members, pharmacy costs, as well as the aggregate expenses to operate and manage our wholly-owned multi-specialty medical group and other provider subsidiaries. As a provider of health care management services, we seek to positively affect quality of care and expenses by contracting with physicians, hospitals and other health care providers at negotiated price levels, by adopting quality assurance programs, monitoring and managing utilization of physician and hospital services and providing incentives to use cost-effective providers. Military contract expenses represent payments to providers for health care services rendered under the TRICARE program, as well as administrative costs to operate the military health care subsidiary. General and administrative expenses generally represent operational costs other than those directly associated with the delivery of health care services and military contract services.
Continuing Operations. Our 2003 operating results were significantly improved over 2002. Our fully diluted income from continuing operations per common share increased by 98.5% to $2.70 and our income from continuing operations increased by 94.1% to $82.1 million. The improvement in the 2003 operating results was primarily driven by medical premium revenue growth from new members, rate increases and an expansion of our operating margin. Our HMO membership increased by 7.4% from 272,000 at December 31, 2002 to 292,000 at December 31, 2003. Our overall 2003 premium rates increased by approximately 7.6% over 2002. The combination of these factors resulted in a 12.2% increase in our medical premium revenues to $962.2 million. Our medical expenses, on the other hand, only increased by 7.1% to $762.9 million. Medical expenses, as a percentage of medical premiums and professional fees, decreased to 76.3% from 80.2%, or 390 basis points. In addition, our general and administrative expenses only increased by 2.5% to $137.3 million. As a percentage of total revenues, our general and administration expense ratio was reduced by 130 basis points to 9.2%. Our operating margin, which is the operating income from continuing operations divided by total revenues, improved by 330 basis points to 8.9%.
Years Ended December 31, ---------------------------------- 2003 2002 2001 ---------- ---------- ---------- OPERATING REVENUES: Medical Premiums............................... 64.8 % 67.1 % 65.2 % Military Contract Revenues..................... 31.3 29.2 30.7 Professional Fees.............................. 2.5 2.4 2.6 Investment and Other Revenues ................. 1.4 1.3 1.5 ---------- ---------- ---------- Total....................................... 100.0 100.0 100.0 ---------- ---------- ---------- OPERATING EXPENSES: Medical Expenses............................... 51.4 55.7 55.2 Military Contract Expenses .................... 30.5 28.2 30.0 General and Administrative Expenses............ 9.2 10.5 11.1 ---------- ---------- ---------- Total....................................... 91.1 94.4 96.3 ---------- ---------- ---------- OPERATING INCOME FROM CONTINUING OPERATIONS..................................... 8.9 5.6 3.7 INTEREST EXPENSE.................................... (0.4) (0.6) (1.4) OTHER INCOME (EXPENSE), NET......................... -- -- (0.2) ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........................... 8.5 5.0 2.1 PROVISION FOR INCOME TAXES.......................... (3.0) (1.7) (0.7) ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS................... 5.5 3.3 1.4 LOSS FROM DISCONTINUED OPERATIONS................... (1.3) (0.5) (1.1) ---------- ---------- ---------- NET INCOME.......................................... 4.2 % 2.8 % 0.3 % ========== ========== ==========
Total Operating Revenues increased approximately 16.1% to $1.49 billion from $1.28 billion for 2002.
Medical Premiums from our HMO and managed indemnity insurance subsidiaries increased from $857.7 million to $962.2 million, an increase of $104.5 million or 12.2%. The increase in premium revenue reflects a 7.2% increase in Medicare member months (the number of months individuals are enrolled in a plan), a 19.9% increase in Medicaid member months and a 4.8% 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 more than three times higher than the average commercial premium rate.
HMO and POS premium rates for renewing commercial groups increased approximately 13% while the overall recorded per member per month revenue increase, including new and continuing business, was approximately 11%. Managed indemnity rates on renewing groups increased approximately 9%. We did not receive a Medicaid rate increase in 2002 or 2003. The basic Medicare rate increase received in 2003 was approximately 2.0%. Our overall Medicare rate increase was approximately 2.8% due primarily to an increase in the Social HMO membership as a percentage of our total Medicare membership.
Effective January 2004, the Centers for Medicare and Medicaid Services, or CMS, has adopted a new risk adjustment payment methodology for Medicare beneficiaries who are enrolled in managed care programs, including the Social HMO. In addition, CMS has revised the payment factors for the Social HMO members to include a frailty adjuster that uses measures of functional impairment to predict expenditures. Under the new payment methodology, in 2004, we will be paid 90% based on the current payment approach and 10% based on the new approach. The Social HMO program was due to expire at the end of 2003; however CMS administratively extended the Social HMO program for one year, through 2004. If the Social HMO contract is not renewed beyond 2004, we would seek to transfer the members into one of our traditional Medicare plans. This transfer would allow for the continuity of care of our members but without the additional Social HMO specific benefits that are currently available to them and the associated higher premiums we receive. There are activities taking place on a federal level to continue the program, but there is no guarantee at this time that the Social HMO contract will be renewed beyond 2004. Continued medical premium revenue growth is principally dependent upon continued enrollment in our products and upon competitive and regulatory factors.
amount of Medicare Part B premium that our members pay to the Federal government, and to stabilize our provider network.
Our commercial membership increased from 187,000 at December 31, 2002 to 202,000 at December 31, 2003. In the first two months of 2004, we have added almost 9,000 additional members. Our commercial member retention was approximately 95% for our January 2004 renewals, which represent approximately 50% of our total commercial membership. The increase in commercial membership during 2003 is primarily attributed to in-case growth, movement from self-insured plans to our commercial products and new accounts.
Military Contract Revenues increased from $373.6 million to $465.3 million, an increase of $91.7 million or 24.6%. Included in the total military contract revenues are incremental change order and bid price adjustments for 2002 and 2003 of $149 million and $148 million, respectively. The increase in revenue is the result of higher base contract revenue primarily due to increased eligible beneficiaries from the call up of reservists in Region 1 and their family members who are eligible for the TRICARE program after 30 days and the positive impact of the first year of our contract extension, which began June 2003. The base monthly revenue under the contract extension is higher than it was under the previous contract. There were no final settlements of bid price adjustments in 2002 or 2003.
SMHS completed the fifth year of a five-year contract in May 2003 and is in the first year of a contract extension. In August 2002, the DoD requested proposals for managed care services under the Next Generation TRICARE, or T-Nex, contract. We submitted our proposal in January 2003 for the T-Nex North Region contract, which includes Region 1, as well as Michigan, Ohio, Kentucky, Indiana, Illinois, Wisconsin, Virginia and North Carolina. However, in August 2003, the DoD awarded the T-Nex North Region contract to a competitor and the General Accounting Office denied our protest of the award in December 2003. The new contractor is scheduled to be operational in Region 1 on September 1, 2004 and the new contract would supersede the remainder of our current TRICARE Region 1 contract. After the new contractor is operational on September 1, 2004, SMHS will commence a six-month phase-out of operations at prices previously negotiated with the DoD. SMHS does not meet the definition of discontinued operations since we do not have plans to dispose of the operations before the phase-out is complete. For more detail on SMHS' results of operations see Note 19, Segment Reporting, in the Notes to the Consolidated Financial Statements.
Investment and Other Revenues increased from $16.4 million to $20.2 million, an increase of $3.8 million or 23.4%. Investment revenues increased due to higher average invested balances, an increase in net gains on the sale of investments of $600,000 and an increase in revenues associated with administrative services of $1.1 million.
Medical Expenses increased from $712.3 million to $762.9 million, an increase of $50.6 million or 7.1%. The increase is due primarily to our increased membership, which is in part offset by a lower medical care ratio. This ratio, which is medical expenses as a percentage of medical premiums and professional fees, decreased to 76.3% from 80.2%. The favorable decrease in our medical care ratio is due primarily to premium increases in excess of cost increases, lower average cost per hospital bed day as a result of a new hospital contract we entered into in the third quarter of 2002, favorable pharmacy costs and favorable claims development from prior periods. The favorable decrease was partially offset by malpractice cost
Our medical claims payable liability requires us to make significant estimates. Any changes to the estimates would be reflected in the year the adjustments are made. Included in medical expenses is favorable development on prior years' estimates of $14.0 million and $10.9 million for the years ended December 31, 2003 and 2002, respectively. The favorable development is a result of claims being settled for amounts less than originally estimated.
Included in military contract expenses is favorable development of prior years' estimates having an earnings impact of $3.2 million and $4.6 million for the years ended December 31, 2003 and 2002, respectively. In addition, favorable development of prior years estimates having a non- earnings impact were $10.8 million and $16.5 million for 2003 and 2002, respectively. The non-earnings impact was offset by a reduction in military contract revenues pursuant to the gain/loss risk-sharing with the government. The favorable development was a result of claims being settled for amounts less than originally estimated.
General and Administrative Expenses, or G&A, increased from $134.0 million to $137.3 million, an increase of approximately $3.3 million or 2.4%. G&A expenses increased due to increases in payroll and benefits and facility lease expense partially offset by a decrease in legal expenses. The increase in facility lease expense is due to the rent payments associated with the sale-leaseback transaction for our administrative buildings now being recorded as an operating expense. Previously, the rent payments were recorded as interest and a reduction of principal and the assets were being depreciated. As a percentage of revenues, G&A expenses were 9.2% for 2003, compared to 10.5% in 2002 as result of the items described above and the overall increase in revenues. As a percentage of medical premium revenue, G&A expenses were 14.3% for 2003, compared to 15.6% for 2002 due to the overall increase in medical premium revenue.
Interest Expense decreased from $7.7 million to $5.5 million, a decrease of approximately $2.2 million or 28.2%. Interest expense related to the sale-leaseback transaction decreased by approximately $2.8 million as the remaining buildings qualified as a sale during 2002. The decrease in the interest expense related to our revolving credit facility was primarily offset by an increase in interest related to the new senior convertible debentures. We currently incur a fee of 0.375% on the unused portion of our new revolving credit facility.
Discontinued Texas HMO health care operations. The income from the Texas HMO health care operations for 2003 included a pre-tax gain on the early payoff of the remaining Kaiser-Texas mortgage loan of $2.1 million, a net decrease in litigation accruals of $3.0 million and, favorable development in medical claim liabilities of $1.8 million partially offset by a loss on the sale/write down of real estate of approximately $400,000 and other operating expense and adjustments of $1.7 million. The combined adjustments resulted in income from the discontinued Texas HMO health care operations of $4.8 million pre-tax or net income of $3.1 million.
Discontinued CII workers' compensation operations. The discontinued workers' compensation operations for 2003 had a net loss of $22.9 million. Net earned premiums decreased by $53.2 million or 30.2% due primarily to a decrease in direct earned premiums of $48.4 million and an increase in ceded reinsurance premiums of $5.7 million partially offset by an increase in assumed premiums of approximately $900,000.
In the second quarter of 2003, we recorded $4.0 million, $2.6 million after tax, in additional valuation adjustments. On November 25, 2003, we announced that we had reached an agreement to sell Cal Indemnity and its subsidiaries. In the fourth quarter of 2003, we recorded a charge of $15.6 million, gross and net of tax, to write down the investment in Cal Indemnity to its estimated net sales proceeds. We did not recognize a tax benefit on the charge since our tax basis was less than our investment in Cal Indemnity. The sale is subject to regulatory approvals and is expected to close by April 30, 2004.
The loss and loss adjustment expense, or LAE, ratio for the 2003 accident year compared to the 2002 accident year was lower by 7.0%, which resulted in a decrease in loss and LAE of approximately $8.6 million. The reduction is primarily related to our premium rate increases.
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, have reduced coverage limits and exclusions for terrorist acts. We continue to retain the first
Total Operating Revenues increased approximately 15.9% to $1.28 billion from $1.10 billion for 2001.
The 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 age 65 and over. Both of these modifications resulted from
Professional Fees increased from $29.0 million to $30.9 million, an increase of $1.9 million or 6.7% as a result of higher average co-pays and increased visits at our provider subsidiaries.
General and Administrative Expenses, or G&A, increased from $122.6 million to $134.0 million, an increase of $11.4 million or 9.3%. As a percentage of revenues, G&A expenses were 10.5% for 2002, compared to 11.1% in 2001. As a percentage of medical premium revenue, G&A expenses were 15.6% for 2002, compared to 17.1% for 2001.
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 $14.4 million.
Discontinued Texas HMO health care operations. The gain from the Texas HMO health care operations for 2002 included gains, net of tax, related to reserves and accrued liabilities of $5.9 million and to real estate of $2.6 million. During 2002, we had favorable development in both medical claims and legal, restitution and other exit related costs. As a result, we reduced our estimate for medical claims payable by $4.8 million and our legal, restitution and other exit related costs by $4.2 million. The adjustments resulted in income, net of tax, from the discontinued Texas HMO health care operations of $5.9 million.
In conjunction with the decision to dispose of the workers' compensation operations, CII recorded valuation adjustments, which included the write down of accounts receivable, fixed assets and certain other assets of $3.5 million and an increase in loss and LAE reserves of $13.3 million.
Approximately $2.3 million in additional loss and LAE was 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.
The loss and LAE ratio for the 2002 accident year was higher by 3.0% which resulted in an increase of approximately $5.3 million in additional losses including the $8.3 million recorded as part of the valuation adjustments. Excluding the valuation adjustment, which represents 4.7% of net earned premiums, the 2002 accident year loss and LAE ratio would have been 1.7% less than the 2001 accident year loss ratio. The decrease is due to the higher premium rates, which were substantially offset by higher estimated average incurred claims.
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, net of valuation adjustments of 9.6%, was 110.0% compared to 106.1% for 2001. The increase was primarily due to increased net adverse loss development for prior accident years. Excluding valuation adjustments and prior accident years' adverse loss development, the combined ratio would have been 99.3% for 2002 and 101.1% for 2001.
We had cash flows from operating activities for continuing operations of $151.9 million for the year ended December 31, 2003 compared to $136.6 million in 2002. We used the majority of the cash flow for the repurchase of the Company's common stock and for capital expenditures. The improvement in cash flows from continuing operations over 2002 is primarily attributable to cash from earnings and the change in operating assets and liabilities.
The cash flow resulting from the change in operating assets and liabilities of $49.5 million was primarily due to the following:
a source of cash due to the increase in medical claims payable of $5.7 million
a use of cash due to the increase in other assets of $7.4 million
a use of cash due to the increase in other current assets of $19.1 million
various other changes in assets and liabilities accounting for the remaining use of cash of $4.1 million
owed above its monthly cash receipt based on the number of at-risk eligible beneficiaries and the level of military direct care system utilization. The contractual bid price adjustment, or BPA, process serves to adjust the DoD's monthly payments to SMHS, because the payments are based in part on 1996 DoD estimates for beneficiary population and beneficiary population baseline health care cost, inflation and military direct care system utilization. As actual information becomes available for the above items, quarterly adjustments are made to SMHS' monthly health care payment in addition to lump sum adjustments for past months. In addition, SMHS accrues change order revenue for DoD directed contract changes. Our business and cash flows could be adversely affected if the timing or amount of the BPA and change order reimbursements vary significantly from our expectations.
On December 28, 2000, the majority of our Las Vegas, Nevada administrative and medical clinic real estate holdings were sold in a sale-leaseback transaction. As part of the transaction, a portion of the sales price was financed with mortgage notes receivable of $22.2 million and deposits of $4.3 million were provided. In accordance with Statement of Financial Accounting Standards No. 98, "Accounting for Leases", or SFAS No. 98, we recorded the transaction as a financing obligation of $113.7 million offset by the mortgage notes receivable of $22.2 million. As of September 30, 2002, we had received the deposits back and full payment of the outstanding mortgage obligations. The payments cured the continuing involvement criteria from SFAS No. 98 and the transaction then qualified as a sale.
In March 2003, we issued $115.0 million aggregate principal amount of 2¼% senior convertible debentures due March 15, 2023. The debentures pay interest, which is due semi-annually on March 15 and September 15 of each year. Each $1,000 principal amount of debentures is convertible, at the option
of the holders, into 54.6747 shares of Sierra Health Services, Inc., common stock prior to March 15, 2023 if (i) the market price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds 120% of the conversion price per share of our common stock; (ii) the debentures are called for redemption; (iii) there is an event of default with respect to the debentures; or (iv) specified corporate transactions have occurred. The conversion rate is subject to certain adjustments. This conversion rate initially represents a conversion price of $18.29 per share. Holders of the debentures may require us to repurchase all or a portion of their debentures on March 15 in 2008, 2013 and 2018 or upon certain corporate events including a change in control. In either case, we may choose to pay the purchase price of such debentures in cash or common stock or a combination of cash and common stock. The debentures can be redeemed by us for cash beginning on or after March 20, 2008.
On March 3, 2003, we entered into a new $65.0 million revolving credit facility, which replaced the amended and restated credit facility. The new facility may be increased up to an aggregate amount of $125.0 million upon receipt of new commitments from existing or additional lenders. Interest on the facility was initially LIBOR plus 2.25% and is currently LIBOR plus 2.00%. The facility will expire on April 30, 2006, but can be extended, at the sole discretion of each of the lenders, until March 3, 2008. The new facility is available for general corporate purposes. We have not yet utilized this facility.
The new credit facility is secured by guarantees by certain of our subsidiaries and a first priority perfected security interest in (i) all the capital stock of each of our 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 ours and those of our subsidiaries that guarantee our 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.
The new revolving credit facility has covenants that limit our ability and the ability of our subsidiaries to dispose of assets, incur indebtedness, incur other liens, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, repurchase our common stock or make capital
As of December 31, 2003, our Board of Directors had authorized a program for the repurchase of up to 7.6 million shares of our common stock. Through December 31, 2003, we had purchased, at prevailing prices in the open market by block purchase or private transactions, 5.3 million shares for $99.5 million. As of December 31, 2003, we had Board authorization to purchase approximately 2.3 million shares of common stock.
Our new revolving credit facility, as amended, allows for additional stock repurchases of up to $60 million during the remainder of 2004. As of March 1, 2004, the Company has repurchased an additional 708,000 shares for $22.6 million.
Of the $177.2 million in cash and cash equivalents held at December 31, 2003, including discontinued operations, $58.7 million was held by discontinued operations and of the remainder, $51.5 million, was designated for use only by the regulated subsidiaries. Amounts are available for transfer to the holding company from the HMO and insurance subsidiaries only to the extent that they can be remitted in accordance with the terms of existing management agreements and by dividends. The holding company will not receive dividends from its regulated subsidiaries if such dividend payment would cause violation of statutory net worth and reserve requirements.
We have a 2004 capital budget of $16.9 million and are also limited in the amount of capital expenditures we can purchase by our new revolving credit facility. The 2004 planned expenditures are primarily for a new medical clinic, the purchase of computer hardware and software, furniture and equipment and other normal capital requirements. Our liquidity needs over the next 12 months will primarily be for the capital items noted above and debt service. We believe that our existing working capital, operating cash flow and, if necessary, equipment leasing, divestitures of certain non-core assets and amounts available under our credit facility should be sufficient to fund our capital expenditures and debt service. Additionally, subject to unanticipated cash requirements, we believe that our existing working capital and operating cash flow should enable us to meet our liquidity needs on a long-term basis.
Our business, offering health care coverage, health care management services, workers' compensation programs and, to a lesser extent, the delivery of medical services, is heavily regulated at both the federal and state levels.
In addition to changes in existing laws and regulations, we are subject to audits, investigations and enforcement actions. These include possible government actions relating to ERISA, the Federal Employees Health Benefit Plan, or FEHBP, federal and state fraud and abuse laws and laws relating to utilization management and the delivery and payment of health care. In addition, our Medicare business is subject to Medicare regulations promulgated by CMS. Violation of government laws and regulations may result in an assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect our reputation in various markets and make it more difficult for us to sell our products and services.
In December 2003, the FASB, issued Statement of Financial Accounting Standards No. 132 (Revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88 and 106" or Revised SFAS No. 132. Revised SFAS No. 132 retains the disclosure requirement contained in the original FASB Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which it replaces. The statement also requires additional disclosures to those in the original FASB Statement No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement plans. See Note 15 for disclosure on our defined benefit plan.
Management believes, based on information presently available, that the recorded liability for medical claims payable, which at December 31, 2003, represented 10.6% of our total consolidated liabilities or $103.7 million, is 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, 2003, would reduce reported net income for the year 2003 by $674,000 or 1.1% 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, 2003, we estimate that approximately $148 million or 32% of the total military contract revenues were for BPA and change orders. At December 31, 2003, military accounts receivable due from the federal government was $47.4 million of which approximately $9.9 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, 2003, our military health care payable was $76.6 million. Any subsequent changes in an estimate for a prior year would be reflected in that subsequent year's operating results.
Litigation and Legal Accruals. We are subject to various claims and other litigation in the ordinary course of business. Such litigation includes, but is not limited to, claims of medical malpractice, claims for coverage or payment for medical services rendered to HMO members and claims by providers for payment for medical services rendered to HMO and other members. We may also face claims for punitive damages that are not covered by insurance. We are also subject to claims for workers' compensation and claims by providers for payment for medical services rendered to injured workers. With respect to certain pending actions, we maintain commercial insurance coverage with varying deductibles for which we maintain estimated reserves for our self- insured portion based upon our current assessment of such litigation. In addition, we accrue estimated legal defense and other settlement costs based on our assessment of the available information, including our outside legal counsel's assessment of the case. We also assess potential legal exposure, based on currently available information, to determine if a precautionary notice of potential claim should be reported to our insurers and if an accrual should be established.
Management believes, based on information presently available, that the recorded liability for loss and LAE reserves is reasonable and adequate to cover future workers' compensation claim payments. At December 31, 2003, loss and LAE reserves represented 87.9% of the liabilities of discontinued operations and 42.2% of our total consolidated liabilities. A change between the recorded liability and actual developed claim payments could have a material impact to our business and results of operations. For example, a 1% increase in loss and LAE reserves, not covered by reinsurance, as of December 31, 2003, would reduce reported net income for the year 2003 by $2.7 million or 4.3% and diluted earnings per share would be reduced by $0.09.
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, 2003, would reduce reported net income for the year 2003 by $1.2 million or 1.8% and diluted earnings per share would be reduced by $0.04.
Deferred Tax Assets and Liabilities. 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. Our temporary differences arise principally from certain net operating losses, accrued expenses, reserves that are discounted for tax return purposes and depreciation. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income and the expected timing of the reversals of the existing temporary differences. A valuation allowance is established for those portions of the deferred tax assets that we consider to be more likely than not unrealizable. At December 31, 2003, our total deferred tax assets, including discontinued operations, were $62.7 million and our total deferred tax liabilities were $5.4 million.
Net Proceeds From the Sale of Cal Indemnity. On November 25, 2003, we entered into an agreement to sell Cal Indemnity and its insurance subsidiaries. The sale requires regulatory approval and is expected to be completed by April 30, 2004. The cash portion of the purchase price, which will be paid when the agreement becomes effective, is subject to certain adjustments that will not be determined until the transaction is consummated. The value of certain assets will be subject to further adjustments at future dates. The contingent payment portion of the purchase price will be based on the development that occurs on the loss and allocated loss adjustment expense reserves from the consummation date through December 31, 2009. In addition, we will be obligated to perform, or be responsible for the performance of, certain transition services through December 31, 2009 for which we will receive a limited amount of funds for these services.
In the fourth quarter of 2003, we recorded a charge of $15.6 million, gross and net of tax, to write-down the investment in Cal Indemnity to its estimated net sales proceeds of approximately $73 million. We did not recognize a tax benefit on the charge since our tax basis was less than our investment in Cal Indemnity. We used estimates and assumptions to project Cal Indemnity's future operating results, the costs to perform transition services, the funds to be received for transition services, the expected value of certain assets, the development of loss and allocated loss adjustment expense reserves, and the sales transaction costs. Prior to the effective date, any change to the net sales proceeds will be included in the results for discontinued operations. After the effective date, any change to the net sales proceeds will be included in operating results of continuing operations. A change to the net sales proceeds could have a material effect on our financial results. For example, a 1% decrease in the net sales proceeds as of December 31, 2003, would have reduced our reported net income for the year 2003 by $730,000 or 1.2% and diluted earnings per share would be reduced by $.02.
for the Years Ended December 31, 2003, 2002 and 2001
We have audited the accompanying consolidated balance sheets of Sierra Health Services, Inc. and its subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15 (a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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.
2003 2002 ------------ ------------ ASSETS CURRENT ASSETS: Cash and Cash Equivalents........................................ $ 118,473 $ 45,778 Investments...................................................... 197,573 182,452 Accounts Receivable (Less Allowance for Doubtful Accounts: 2003 - $7,342; 2002 - $10,626).................... 12,080 11,232 Military Accounts Receivable (Less Allowance for Doubtful Accounts: 2003 and 2002 - $100)............................. 47,389 47,126 Current Portion of Deferred Tax Asset............................ 33,708 50,402 Prepaid Expenses and Other Current Assets........................ 37,478 18,380 Assets of Discontinued Operations................................ 533,756 565,058 ------------ ------------ Total Current Assets........................................ 980,457 920,428
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued Liabilities.............................................. $ 56,327 $ 50,349 Trade Accounts Payable........................................... 37,787 29,249 Accrued Payroll and Taxes........................................ 15,879 13,660 Medical Claims Payable........................................... 103,749 98,031 Unearned Premium Revenue......................................... 45,888 40,758 Military Health Care Payable..................................... 76,605 65,223 Current Portion of Long-Term Debt................................ 163 186 Liabilities of Discontinued Operations........................... 472,407 500,720 ------------ ------------ Total Current Liabilities................................... 808,805 798,176
LONG-TERM DEBT (Less Current Portion)................................ 116,645 60,710 OTHER LIABILITIES.................................................... 57,907 50,515 ------------ ------------ TOTAL LIABILITIES.................................................... 983,357 909,401 ------------ ------------ COMMITMENTS AND CONTINGENCIES
Accumulated Retained Total Common Stock In Treasury Additional Deferred Other Earnings Stock- ------------------- -------------------- Paid-In Compensa- Comprehensive (Accumulated holders' Shares Amount Shares Amount Capital tion Gain (Loss) Deficit) Equity --------- -------- --------- --------- ----------- --------- ------------- ------------- ---------- BALANCE, JANUARY 1, 2001........................... 28,815 $ 144 1,523 $ (22,789) $ 177,493 $ -- $ (5,667) $ (58,708) $ 90,473 Common Stock Issued in Connection with Stock Plans.............................. 589 3 -- -- 2,087 -- -- -- 2,090 Income Tax Benefit Realized Upon Exercise of Stock Options..................... -- -- -- -- 97 -- -- -- 97 Issuance of Restricted Stock....................... 244 1 -- -- 1,399 (1,400) -- -- -- Amortization of Deferred Compensation.............. -- -- -- -- -- 342 -- -- 342 Comprehensive Income: Net Income...................................... -- -- -- -- -- -- -- 3,486 3,486 Other Comprehensive Income: Unrealized Holding Gain on Available- for-Sale Investments ($374 pretax).......... -- -- -- -- -- -- 243 -- 243 Reclassification Adjustment for Gains Included in Net Income ($326 pretax)........ -- -- -- -- -- -- (212) -- (212) ------------- ------------- ---------- Total Comprehensive Income......................... -- -- -- -- -- -- 31 3,486 3,517 --------- -------- --------- --------- ----------- --------- ------------- ------------- ---------- BALANCE, DECEMBER 31, 2001......................... 29,648 148 1,523 (22,789) 181,076 (1,058) (5,636) (55,222) 96,519
Common Stock Issued in Connection with Stock Plans.............................. 1,305 7 (360) 5,641 8,798 -- -- (4,287) 10,159 Income Tax Benefit Realized Upon Exercise of Stock Options..................... -- -- -- -- 6,837 -- -- -- 6,837 Amortization of Deferred Compensation.............. -- -- -- -- -- 585 -- -- 585 Comprehensive Income: Net Income...................................... -- -- -- -- -- -- -- 36,448 36,448 Other Comprehensive Income: Unrealized Holding Gain on Available- for-Sale Investments ($10,671 pretax)....... -- -- -- -- -- -- 6,936 -- 6,936 Reclassification Adjustment for Losses Included in Net Income ($217 pretax)........ -- -- -- -- -- -- 141 -- 141 Minimum Pension Liability Adjustment ($1,630 pretax).................. -- -- -- -- -- -- (1,060) -- (1,060) ------------- ------------- ---------- Total Comprehensive Income......................... -- -- -- -- -- -- 6,017 36,448 42,465 --------- -------- --------- --------- ----------- --------- ------------- ------------- ---------- BALANCE, DECEMBER 31, 2002......................... 30,953 155 1,163 (17,148) 196,711 (473) 381 (23,061) 156,565
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 are 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.
The Company's continuing operations currently operate in two reportable segments: managed care and corporate operations and military health services operations. The Company's prior third reportable segment, workers' compensation operations, has been classified as a discontinued operation.
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 9 and 10 for disclosure on and a description of the discontinued operations.
Medical Premiums. Membership contracts are generally established on an annual basis subject to cancellation by the employer group or Sierra generally upon 60 days written notice. Premiums, including
premiums from both commercial and governmental programs, are due monthly and are recognized as revenue during the period in which members are entitled to receive services and are net of estimated retroactive adjustments of members and groups. Non- Medicare member enrollment is represented principally by employer groups. HPN offers a prepaid health care program to Medicare recipients. Revenues associated with Medicare recipients were approximately $375.2 million, $340.1 million and $304.7 million in 2003, 2002 and 2001, respectively. Premiums collected in advance are recorded as unearned premium revenue and can include payments under prepaid Medicare contracts with the Centers for Medicare and Medicaid Services ("CMS") and prepaid HPN commercial and SHL preferred provider organization premiums.
While the BPA relates to the original contract and is an ongoing part of the contract, modifications to the original contract are referred to by the Company as change orders. The government negotiates both the cost and profit to be paid on each contract modification. As SMHS incurs costs under the government's direction to proceed with a modification to the contract, the government is contractually obligated to reimburse SMHS for all of its incremental, allowable costs incurred through the final negotiation date. The allowable costs are those costs determined in accordance with Federal Acquisition Regulation Part 31. Revenue is realizable and earned when SMHS starts performing as contractually required, even though the change order profit has not been fully negotiated. As costs are incurred, SMHS records an estimate of its revenue earned under the modification. The estimate recorded does not include profit until the profit is determined when it is negotiated and finalized with the government. Enrollment fees collected in advance of the service period are recorded as unearned premium revenue and are earned over the service period.
Professional Fees. Revenue for professional medical services is recorded on the accrual basis in the period in which the services are provided. Such revenue is recorded at established rates, net of provisions for estimated contractual allowances and allowances for doubtful accounts.
Military Contract Expenses. This expense consists primarily of costs to provide managed health care services to eligible beneficiaries in accordance with the Company's TRICARE contract. Under the contract, SMHS provides health care services to approximately 707,000 dependents of active duty military personnel, military retirees under the age of 65 and dependents of military retirees through a network of approximately 49,700 health care providers and certain other subcontractor partnerships. 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 the Company. Also included in military contract expenses are costs incurred to perform specific administrative services, such as health care appointment scheduling, enrollment, network management and health care advice line services and other administrative functions of the military health care subsidiary. These administrative services are performed for active duty personnel and dependants as well as retired military families.
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
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 2003 and 2002, at amounts below their cost of $2.8 million and $4.3 million, respectively were charged to retained earnings (accumulated deficit), as the Company did not previously have gains in
Net income, as reported................................ $ 62,326 $ 36,448 $ 3,486 Less: total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax.................. (7,173) (4,598) (3,506) ----------- ----------- ----------- Pro forma net income (loss)............................ $ 55,153 $ 31,850 $ (20) =========== =========== ===========
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 Nevada and California. However, the Company is licensed and does business in several other states. In addition, as of December 31, 2003, the Company had receivables outstanding from the federal government related to its TRICARE contract in the amount of $47.4 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 A- or better by Fitch Ratings (7th of 23) and the A.M. Best Company (4th of 16).
Recently Issued Accounting Standards. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The adoption of SFAS No. 149 did not have a material effect on the Company's consolidated financial position or results of operations.
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, goodwill, accrued liabilities, malpractice reserves, 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.
Reclassifications. Certain amounts in the Consolidated Financial Statements as of and for the years ended December 31, 2002 and 2001 have been reclassified to conform with the current year presentation. The reclassifications have no effect on net income or stockholders' equity as previously reported.
Years ended December 31, ------------------------------------- 2003 2002 2001 ----------- ----------- ----------- (In thousands, except per share data)
The following is an analysis of property and equipment under capital lease by classification as of December 31:
Investments that the Company has the intention and ability to hold to maturity are stated at amortized cost and categorized as held-to-maturity. All of the held-to-maturity investments are part of the discontinued workers' compensation operations. The remaining investments have been categorized as available-for-sale and are stated at their fair value. Fair value is estimated primarily from published market values as of the balance sheet date. Gross realized gains on investments, from continuing operations, for 2003, 2002 and 2001 were $905,000, $82,000 and $27,000, respectively. Gross realized losses on investments, from continuing operations, for 2003, 2002 and 2001 were $313,000, $84,000 and $92,000, respectively.
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (In thousands) Available-for-Sale Investments: Classified as Current: U.S. Government and its Agencies................................ $ 73,461 $ 168 $ 925 $ 72,704 Municipal Obligations........................................... 102,469 283 194 102,558 Mortgage Backed Securities........................................ 961 4 -- 965 Corporate Bonds................................................. 178 8 -- 186 Other Debt Securities........................................... 18,559 -- -- 18,559 ---------- ---------- ---------- ---------- Total Debt Securities........................................ 195,628 463 1,119 194,972 Preferred Stock................................................. 2,663 -- 62 2,601 ---------- ---------- ---------- ---------- Total Current...................................................... 198,291 463 1,181 197,573 ---------- ---------- ---------- ---------- Classified as Restricted: U.S. Government and its Agencies................................ 7,764 99 -- 7,863 Municipal Obligations........................................... 2,260 39 21 2,278 Other Debt Securities........................................... 7,505 -- -- 7,505 ---------- ---------- ---------- ---------- Total Restricted................................................... 17,529 138 21 17,646 ---------- ---------- ---------- ---------- Total Available-for-Sale.................................. $ 215,820 $ 601 $ 1,202 $ 215,219 ========== ========== ========== ==========
The fair value of investments with unrealized losses is $116.6 million. The fair value of investments with unrealized losses for more than 12 months is $3.3 million with unrealized losses that total $141,000. The Company has not experienced any investment impairments that were considered other than temporary.
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Of the cash and cash equivalents and current investments that total $316.0 million in the accompanying Consolidated Balance Sheet at December 31, 2003, $209.9 million is limited for use only by the Company's regulated subsidiaries. Such amounts are available for transfer to Sierra from the regulated subsidiaries 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.
2¼% Senior Convertible Debentures................................... $ 115,000 $ -- Revolving Credit Facility........................................... -- 60,000 Other............................................................... 1,808 896 ---------- ---------- Total............................................................. 116,808 60,896 Less Current Portion................................................ (163) (186) ---------- ---------- Long-term Debt...................................................... $ 116,645 $ 60,710 ========== ==========
The Company evaluates the market price condition each quarter to determine whether the debentures will be convertible, at the option of the holder, during the subsequent quarter. For the quarter ended December 31, 2003, the market price condition was satisfied. As a result, the debentures will be convertible, at the option of the holder, at any time during the quarter ending March 31, 2004. When dilutive, the debentures are considered common stock equivalents and will be included in the calculation of weighted average common shares outstanding on a diluted basis for the first quarter of 2004.
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 Company's 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 the Company and those of its 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) other than cash and cash equivalents, subject, in each case, to the exclusion of the capital stock of CII or any of its subsidiaries and certain other exclusions.
The new revolving credit facility has covenants that limit the Company's ability and the ability of the Company's subsidiaries to dispose of assets, incur indebtedness, incur other liens, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, repurchase Company common stock or make capital expenditures and otherwise restricts certain corporate activities. In addition, the Company is required to comply with specified financial ratios as set forth in the new credit agreement. The Company believes it is in compliance with all covenants of the new credit agreement.
Obligations Long-Term Under Capital Debt Leases ---------- ------------- (In thousands) Years ending December 31, 2004............................................. $ 80 $ 117 2005............................................. 80 72 2006 ............................................ 82 72 2007............................................. 611 67 2008............................................. 339 34 Thereafter....................................... 115,265 123 ---------- ------------- Total......................................... $ 116,457 485 ========== Less: Amounts Representing Interest............. (134) ------------- Present Value of Minimum Lease Payments.......... $ 351 =============
The Company's new revolving credit facility, as amended, allows for additional stock repurchases of up to $60 million during the remainder of 2004. As of March 1, 2004, the Company has repurchased an additional 708,000 shares for $22.6 million.
A summary of the provision for income taxes for continuing operations for the years ended December 31, is as follows:
At December 31, 2003, the Company had approximately $41.9 million of regular tax net operating loss carryforwards. The net operating loss carryforwards can be used to reduce future taxable income until they expire through the year 2020. In addition to the net operating loss carryforwards, the Company has alternative minimum tax credits of approximately $3.4 million, which can be used to reduce regular tax liabilities in future years. There is no expiration date for the alternative minimum tax credits.
The Company, at a consolidated level including discontinued operations, does not have a valuation allowance at December 31, 2003 or 2002. Under the Company's tax sharing agreements, the discontinued operations do have a valuation allowance at December 31, 2003 and 2002, which is eliminated in the Company's consolidated financial statements.
Current income tax receivables, including discontinued operations, total $10.0 million at December 31, 2003 and $2.3 million at December 31, 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 assets and liabilities above do not include an intercompany liability of $6.9 million and $38.4 million from Texas Health Choice, L.C., ("TXHC") to Sierra at December 31, 2003 and 2002, respectively. The liability has been eliminated upon consolidation.
Property and equipment consisted mainly of real estate properties located in the Dallas/Fort Worth metroplex areas. TXHC acquired these properties from Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"), for $44.0 million as part of the acquisition of certain assets of Kaiser-Texas in October 1998. In June 2000, as part of its restructuring and reorganization of the Texas HMO health care operations, the Company announced its intention to sell these properties. The real estate was written down to its estimated fair value and the Company recorded an asset impairment charge of $27.0 million. The real estate was encumbered by a mortgage loan payable to Kaiser-Texas, which was guaranteed by Sierra. In December 2001, the mortgage loan was restructured and 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 accordance with accounting principles generally accepted in the United States of America, the carrying amount of the mortgage loan was equal to the total future cash payments (interest and principal).
Years ended December 31, ---------------------------------- 2003 2002 2001 ---------- ---------- ---------- (In thousands)
Operating Revenues................................................ $ 217 $ 4,791 $ 181,132 ---------- ---------- ----------
Medical Expenses.................................................. (1,802) (8,933) 175,333 General and Administrative Expenses.............................. 624 1,906 29,607 Asset Impairment, Restructuring, Reorganization and Other Costs................................. -- 5,000 (1,250) Interest Expense and Other, Net................................... (3,399) (6,216) (1,532) ---------- ---------- ---------- Income (Loss) from Discontinued Operations Before Income Tax...... 4,794 13,034 (21,026) Income Tax (Provision) Benefit.................................... (1,703) (4,562) 7,046 ---------- ---------- ---------- Income (Loss) from Discontinued Operations........................ $ 3,091 $ 8,472 $ (13,980) ========== ========== ==========
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.
In conjunction with the Company's plan to exit the Texas HMO health care market, during the third quarter of 2001, the Company recorded charges of $10.6 million for premium deficiency medical costs, $1.6 million to write down certain Texas furniture and equipment, $2.0 million in lease and other termination costs, $1.8 million in legal and restitution costs, $500,000 in various other exit related costs and $570,000 in premium deficiency maintenance.
Based on the current estimated Texas HMO health care run-out costs and recorded reserves, the Company believes it has adequate funds available and the ability to fund the anticipated obligations for our former members health care claims.
Specialty Product Revenues. These revenues consist of workers' compensation premiums. Premiums are calculated by formula such that the premium written is earned pro rata over the term of the policy. Premiums written in excess of premiums earned are recorded as an unearned premium revenue liability. Premiums earned include an estimate for earned but unbilled premiums.
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 also 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.
LIABILITIES Accounts Payable and Other Accrued Expenses..................... 54,208 30,989 Senior Debentures............................................... -- 16,765 Reserve for Loss and Loss Adjustment Expenses................... 415,339 427,192 ----------- ------------ TOTAL LIABILITIES............................................... 469,547 474,946 ----------- ------------ NET ASSETS OF DISCONTINUED OPERATIONS........................... $ 59,999 $ 72,966 =========== ============
Years ended December 31, ------------------------------------- 2003 2002 2001 ----------- ----------- ----------- OPERATING REVENUES: (In thousands)
Specialty Product Revenues............................. $ 123,001 $ 176,189 $ 173,215 Investment and Other Revenues.......................... 9,301 12,633 14,786 ----------- ----------- ----------- Total Revenues..................................... 132,302 188,822 188,001 ----------- ----------- -----------
OPERATING EXPENSES: Specialty Product Expenses............................. 145,824 209,601 183,666 Asset Impairment....................................... 15,610 -- -- Interest Expense and Other, Net........................ (968) 1,059 707 ----------- ----------- ----------- Total Expenses..................................... 160,466 210,660 184,373 ----------- ----------- -----------
Income Tax Benefit (Provision)......................... 5,281 7,506 (1,643) ----------- ----------- ----------- Net (Loss) Income from Discontinued Operations......... $ (22,883) $ (14,332) $ 1,985 =========== =========== ===========
Property and equipment of the discontinued operations of CII at December 31, consists of the following:
The following table summarizes the investments of CII as of December 31, 2003:
Held-to-Maturity Investments: Classified as Current: U.S. Government and its Agencies................................ $ 1,748 $ 25 $ -- $ 1,773 ---------- ---------- ---------- ---------- Classified as Long-term: Municipal Obligations........................................... 328 18 -- 346 ---------- ---------- ---------- ---------- Classified as Restricted: Municipal Obligations........................................... 638 34 -- 672 Corporate Bonds................................................. 500 11 -- 511 Other........................................................... 325 -- -- 325 ---------- ---------- ---------- ---------- Total Restricted.................................................... 1,463 45 -- 1,508 ---------- ---------- ---------- ---------- Total Held-to-Maturity.................................... $ 3,539 $ 88 $ -- $ 3,627 ========== ========== ========== ==========
The fair value of investments with unrealized losses is $111.1 million. The fair value of investments with unrealized losses for more than 12 months is $2.6 million with current unrealized losses that total $20,000. CII has not experienced any investment impairments that were considered other than temporary.
The following table summarizes the investments of CII as of December 31, 2002:
Held-to-Maturity Investments: Classified as Current: Corporate Bonds................................................. $ 799 $ 3 $ -- $ 802 ---------- ---------- ---------- ---------- Classified as Long-term: U.S. Government and its Agencies................................ 662 10 -- 672 Municipal Obligations........................................... 328 25 -- 353 Corporate Bonds................................................. 1,749 113 -- 1,862 ---------- ---------- ---------- ---------- Total Long-term..................................................... 2,739 148 -- 2,887 ---------- ---------- ---------- ---------- Classified as Restricted: Municipal Obligations........................................... 637 49 -- 686 Corporate Bonds................................................. 974 39 -- 1,013 ---------- ---------- ---------- ---------- Total Restricted.................................................... 1,611 88 -- 1,699 ---------- ---------- ---------- ---------- Total Held-to-Maturity.................................... $ 5,149 $ 239 $ -- $ 5,388 ========== ========== ========== ==========
Due in one year or less............................................. $ 11,722 $ 11,907 Due after one year through five years............................... 137,705 138,088 Due after five years through ten years.............................. 63,650 63,435 Due after ten years through fifteen years........................... 12,806 12,976 Due after fifteen years............................................. 14,324 13,627 ---------- ---------- Total.......................................................... $ 240,207 $ 240,033 ========== ==========
Due in one year or less............................................. $ 2,549 $ 2,585 Due after one year through five years............................... 25 25 Due after five years through ten years.............................. -- -- Due after ten years through fifteen years........................... 965 1,017 Due after fifteen years............................................. -- -- ---------- ---------- Total.......................................................... $ 3,539 $ 3,627 ========== ==========
The low level reinsurance agreement was consummated early in the fourth quarter of 1998 but coverage was made retroactive to July 1, 1998. Therefore, this agreement contained both retroactive (covering claims occurring in the third calendar quarter of 1998) and prospective reinsurance coverage (covering claims occurring after September 30, 1998). In accordance with Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS No. 113"), CII bifurcated the low level reinsurance agreement between the retroactive and prospective components due to the different accounting treatments for each respective piece. The amount by which the estimated ceded liabilities exceeded the amount paid for the retroactive coverage was reported as a deferred gain and is amortized to income as a reduction of incurred losses over the estimated remaining settlement period using the interest method. Any subsequent changes in estimated or actual cash flows related to the retroactive coverage are accounted for by adjusting the previously recorded deferred gain to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transactions, with a corresponding charge or credit to income. CII recorded an adjustment to increase its deferred gain related to retroactive reinsurance coverage by $1.2 million, $1.2 million and $3.0 million in 2003, 2002 and 2001, respectively. For the years ended December 31, 2003, 2002 and 2001, CII amortized deferred gains of $1.7 million, $1.9 million and $2.7 million, respectively. Such amortization is included as a credit to specialty product expense on the accompanying condensed consolidated statements of operations.
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, have reduced coverage limits and exclusions for terrorist acts. The Company continues to retain the first $500,000 per occurrence but the maximum coverage has been reduced from statutory limits (i.e., unlimited) to $20.0 million per occurrence. The Company also must meet certain annual aggregate deductibles before it can begin to recover from some of its reinsurers. This new coverage will result in the Company retaining more of the losses and LAE. The reinsurers on the new agreement consist of domestic as well as foreign reinsurers, and all are rated at least A- or better by the A.M. Best Company as of December 31, 2003.
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, 2003 and 2002, the amount of reinsurance recoverable under prospective reinsurance contracts for unpaid loss and LAE was $159.9 million and $169.0 million, respectively. At December 31, 2003 and 2002, the amount of reinsurance recoverable under the retroactive reinsurance contract was $5.3 million and $6.9 million, respectively. The amount of reinsurance receivable for paid loss and LAE was $12.1 million and $13.5 million at December 31, 2003 and 2002, respectively.
Reinsurance contracts do not relieve CII from its obligations to claimants or policyholders. Failure of reinsurers to honor their obligations could result in losses to CII. CII evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, CII has never had to write-off a reinsurance recoverable balance and no allowance for uncollectible amounts has been established. All of the reinsurance recoverables are due from reinsurers rated AA- and A+ or better by Fitch Ratings and the A.M. Best Company, respectively, and all amounts are considered to be collectible.
Losses and Loss Adjustment Expenses. The following table provides a reconciliation of the beginning and ending reserve balances for workers' compensation unpaid losses and LAE. The loss estimates are subject to change in subsequent accounting periods and any change to the current reserve estimates would be accounted for in the period when the change occurs.
Years Ended December 31, ---------------------------------- 2003 2002 2001 ---------- ---------- ---------- (In thousands)
Net Beginning Losses and LAE Reserve................................ $ 258,190 $ 198,252 $ 155,797 ---------- ---------- ---------- Net Provision for Insured Events Incurred in: Current Year..................................................... 88,819 139,513 131,923 Prior Years...................................................... 16,877 23,998 8,691 ---------- ---------- ---------- Total Net Provision............................................ 105,696 163,511 140,614 ---------- ---------- ---------- Net Payments for Losses and LAE Attributable to Insured Events Incurred in: Current Year..................................................... 16,236 29,448 28,560 Prior Years...................................................... 92,183 74,125 69,599 ---------- ---------- ---------- Total Net Payments............................................. 108,419 103,573 98,159 ---------- ---------- ---------- Net Ending Losses and LAE Reserve................................... 255,467 258,190 198,252 Reinsurance Recoverable............................................. 159,872 169,002 187,453 ---------- ---------- ---------- Gross Ending Losses and LAE Reserve................................. $ 415,339 $ 427,192 $ 385,705 ========== ========== ==========
On June 3, 2003, CII called the outstanding 9½% senior debentures and redeemed them at the applicable premium of 102.5% along with all outstanding accrued interest. The transaction resulted in a gain of $1.4 million, or $1.3 million net of tax.
Also in connection with the exchange offer for the subordinated debentures, Cal Indemnity, a wholly-owned subsidiary of CII, loaned Sierra $7.5 million. The loan bears interest at 8.5%, which is due semi-annually on March 31 and September 30 of each year, commencing September 30, 2001. All outstanding principal and accrued interest is due on September 30, 2004. The loan is secured by the common stock of Sierra Health and Life Insurance Company, Inc., a wholly-owned subsidiary of Sierra, equal to 120% of the principal amount outstanding.
2004......................................................... $ 21,384 2005......................................................... 20,402 2006......................................................... 19,769 2007......................................................... 19,080 2008......................................................... 17,328 Thereafter................................................... 117,471 ----------- Total.................................................. $ 215,434 ===========
Military Health Care Payable, Beginning of the Period... $ 65,223 $ 77,261 $ 84,859 Add: Components of Incurred Medical Expenses Current Period Medical Claims........................ 318,833 251,632 219,569 Changes in Prior Periods' Estimates Earnings Related Changes......................... (3,235) (4,601) 2,088 Non-Earnings Related Changes..................... (10,777) (16,509) (11,896) ------------ ------------ ------------ Total Incurred Medical Expenses......................... 304,821 230,522 209,761 ------------ ------------ ------------ Less: Military Contract Claims Paid Current Period....................................... 244,644 194,659 158,971 Prior Period......................................... 48,795 47,901 58,388 ------------ ------------ ------------ Total Military Contract Claims Paid..................... 293,439 242,560 217,359 ------------ ------------ ------------ Military Health Care Payable, End of Period............. $ 76,605 $ 65,223 $ 77,261 ============ ============ ============
The military contract expenses presented in the Consolidated Statements of Operations include the total incurred medical expenses presented above and the general and administrative expenses for SMHS. SMHS' general and administrative expenses under the military contract totaled $147.7 million, $129.9 million and $121.9 million for the years ended December 31, 2003, 2002, and 2001, respectively. Total incurred medical expenses include the current year expenses plus adjustments to prior periods' estimates. Any subsequent change in an estimate for a prior period is reflected in the current year. Certain adjustments to prior periods have a current year earnings impact while other adjustments do not have a current year earnings impact. The adjustments that do not have a current year earnings impact are the result of an offsetting revenue adjustment in accordance with SMHS' risk-sharing terms under SMHS' contract with the Department of Defense ("DoD"). For example in 2003, SMHS had total adjustments to prior period estimates of $14.0 million. These adjustments resulted in a reduction of current period expense of $14.0 million and current period revenue of $10.8 million for a pre-tax increase of $3.2 million to current period earnings. The favorable development in the earnings related changes for the years ended December 31, 2003 and 2002 have primarily been a result of claims being settled for amounts less than originally estimated.
Defined Contribution Plan. 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. For the six months ended June 30, 1999, the Company contributed a maximum of 2% of eligible employees' compensation and matched 50% of a participant's elective deferral up to a maximum of either 10% of an employee's compensation or the maximum allowable under current IRS regulations. Effective July 1, 1999, the Plan was modified such that the Company matches 50%-100% of an employee's elective deferral up to a maximum of 6% of a participant's annual compensation, subject to IRS limits. The Plan does not require additional Company contributions. Expense under the plan totaled $5.3 million, $4.4 million and $4.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Supplemental Retirement Plans. The Company has Supplemental Retirement Plans (the "SRPs") for certain officers, directors and highly compensated employees. The SRPs are non-qualified deferred compensation plans through which participants may elect to postpone the receipt and taxation of all or a portion of their salary and bonuses received from the Company. Until July 1, 1999, the Company matched 50% of those contributions that participants were restricted from deferring, if any, under the Company's pension and 401(k) plan. As contracted with the Company, the participants or their designated beneficiaries may begin to receive benefits under the SRPs upon a participant's death, disability, retirement, termination of employment or certain other circumstances including financial hardship.
Stockholders' Rights Plan. Each share of Sierra common stock, par value $.005 per share, contains one right (a "Right"). Each Right entitles the registered holder to purchase from Sierra a unit consisting of one one-hundredth (.01) of a share of the Sierra Series A Junior Participating Preferred Shares (a "Unit"), par value $.01 per share, or a combination of securities and assets of equivalent value, at a purchase price of $100.00 per Unit, subject to adjustment. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire Sierra on terms not approved by Sierra's Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since Sierra may redeem the Rights at the price of $.02 per Right prior to or within ten days of the time that a person or group has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of Sierra common stock.
Stock Option Plans. The Company has several plans that provide common stock-based awards to employees and to non-employee directors. The plans provide for the granting of options, stock and other stock-based awards. A committee appointed by the Board of Directors grants awards. Options become exercisable at such times and in such installments as set by the committee. The exercise price of each option equals the market price of the Company's stock on the date of grant. Stock options generally vest at a rate of 20% - 33% per year. Options expire from one to eight years after the end of the vesting period.
Number Weighted of Options Option Average Shares Exercisable Price Price ----------- ----------- ------------ -------- (Number of shares in thousands)
Employee Stock Purchase Plans. The Company has an employee stock purchase plan (the "Purchase Plan") whereby employees may purchase newly issued shares of common stock through payroll deductions at 85% of the fair market value of such shares on specified dates as defined in the Purchase Plan. During 2003, a total of 574,000 shares were purchased at prices of $10.21 and $10.38 per share. At December 31, 2003, the Company had 191,000 shares reserved for purchase under the Purchase Plan of which 119,000 shares were purchased by employees at $16.28 per share in January 2004.
Accounting for Stock-Based Compensation. The Company uses the intrinsic value method in accounting for its stock-based compensation plans. The fair value pro forma presentation presented in Note 2 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2003, 2002 and 2001, respectively: dividend yield of 0% for all years; expected volatility of 73%, 74% and 83%; risk-free interest rates of 2.93%, 3.32% and 4.34%; and expected lives of two to five years. The weighted average fair value of options granted in 2003, 2002 and 2001 was $10.94, $8.60 and $5.58, respectively.
Years ended December 31, ------------------------------------- 2003 2002 2001 ----------- ----------- ----------- (In thousands) Cash Paid During the Year for Interest (Net of Amount Capitalized)....................... $ 3,342 $ 7,205 $ 17,164 Cash (Paid) Received During the Year for Income Taxes.................................. (10,741) 12,796 221 Non-cash Investing and Financing Activities: Retired Sale-Leaseback Assets, Liabilities and Financing Obligations....................... -- 89,751 14,552 Stock Issued for Exercise of Options and Related Tax Benefits........................ 12,596 6,837 97 Additions to Capital Leases....................... 153 -- -- Debentures Exchanged.............................. -- -- 19,692
The table below presents a summary of asset impairment, restructuring, reorganization and other cost activity for the periods indicated that were included in general and administrative expenses. Discontinued operations are excluded from this presentation.
The remaining other costs of $3.9 million are related to legal claims. Management believes that the remaining reserves, as of December 31, 2003, are appropriate and that no revisions to the estimates are necessary at this time.
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 ========== ========== ==========
Segment Operating Profit.................................... $ 56,700 $ 15,291 $ 71,991 Interest Expense............................................ (7,455) (195) (7,650) Other Income (Expense), Net................................. (309) 364 55 ---------- ---------- ---------- Income from Continuing Operations Before Income Taxes.................................... $ 48,936 $ 15,460 $ 64,396 ========== ========== ==========
Segment Assets.............................................. $ 387,097 $ 113,811 $ 500,908 Capital Expenditures........................................ (10,829) (1,563) (12,392) Depreciation and Amortization............................... 15,730 2,515 18,245
Segment Operating Profit.................................... $ 30,798 $ 9,701 $ 40,499 Interest Expense............................................ (15,578) (160) (15,738) Other Income (Expense), Net................................. (2,290) 171 (2,119) ---------- ---------- ---------- Income from Continuing Operations Before Income Taxes.................................... $ 12,930 $ 9,712 $ 22,642 ========== ========== ==========
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
(1)	Goodwill amortization of $805,000 is included as part of the managed care and corporate operations segment for 2001.
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 ============= ============== =============
March June September December Quarter Ended 2003: 31 30 30 31 ---------- ---------- ---------- ---------- (In thousands, except per share data)
Operating Revenues.......................................... $ 352,270 $ 370,205 $ 389,237 $ 373,367 Operating Income from Continuing Operations................. 25,275 33,296 35,178 38,648 Net Income from Continuing Operations....................... 15,428 20,510 22,177 24,003 Net Income.................................................. 15,022 20,265 22,207 4,832
Basic Earnings per Share: Income from Continuing Operations........................ $ 0.53 $ 0.75 $ 0.78 $ 0.88 Net Income............................................... 0.52 0.74 0.78 0.18
Diluted Earnings per Share: Income from Continuing Operations........................ $ 0.50 $ 0.68 $ 0.72 $ 0.80 Net Income............................................... 0.49 0.67 0.72 0.16
Basic Earnings per Share: 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........................ $ 0.24 $ 0.34 $ 0.39 $ 0.39 Net Income............................................... 0.25 0.34 0.44 0.14