The Company has begun construction of an approximately 59,000 square foot medical facility in Las Vegas with an estimated total cost of $7.3 million. Completion is expected in the fourth quarter of 1997. The Company believes that current and planned clinical space will be adequate for its present needs. Additional clinical space may be required, however, if membership continues to expand in southern Nevada. The Company has also begun construction of an additional administrative building of approximately 180,000 square feet. Costs are expected to be approximately $35.0 million, and completion is scheduled for the fourth quarter of 1997. The land was purchased for approximately $2.0 million in December 1995.
The following selected consolidated financial data of Sierra Health Services, Inc., and subsidiaries (the "Company"), for each of the fiscal years in the five-year period ended December 31, 1996 should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information which appears elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data below has been derived from the audited Consolidated Financial Statements of the Company.
The following discussion and analysis provides information which management believes is relevant for assessment and understanding of the Company's consolidated financial condition and results of operations. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Related Notes thereto. Any forward-looking information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and any other sections of this 1996 Annual Report on Form 10-K should be considered in connection with certain cautionary statements contained in the Company's Current Report on Form 8-K filing dated March 28, 1997. Such cautionary statements are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and identify important risk factors that could cause the Company's actual results to differ from those expressed in any projected, estimated or forward-looking statements relating to the Company.
Effective December 31, 1996, the Company purchased Prime for approximately $32.2 million in cash. At December 31, 1996, Prime operated MedOne Health Plan, Inc., a 12,800 member HMO, and also served 215,000 people through preferred provider organizations, workers' compensation programs, and administrative services products for self-insured employers and union welfare funds, primarily in the state of Nevada. The acquisition of Prime has been accounted for as a purchase and, therefore, none of Prime's prior operations have been included in the information contained in this discussion and analysis; however, all of the acquired assets and liabilities have been reflected in the Company's ending consolidated balance sheet, along with the associated goodwill.
In November 1996, the Company acquired the remaining ownership interests of HMO Texas for $5.0 million. The Company had previously held a 50 percent interest in the Houston-based health plan which had approximately 12,700 members at the end of 1996.
Medical and Specialty Product Expenses. Total medical expenses increased by $70.8 million in 1996 compared to 1995. This 28.9% increase resulted from the consolidated member month growth discussed above, as well as the clinical expansions and increases associated with professional fee growth. These factors, as well as an increase in Medicare members as a percentage of total members, increased the Company's medical loss ratio to 76.0% for the twelve months ended December 31, 1996, from 72.3% for the comparable twelve months in 1995. The cost of providing medical care to Medicare members generally requires a greater percentage of the premium revenue received. Specialty product expenses increased $27.9 million, or 27.1%, over 1995. This increase is due primarily to the increase in workers' compensation premiums noted above, offset in part by the Company's ability to overlay managed care techniques on the management and payment of certain workers' compensation claims. In addition, specialty product expenses for 1996 and 1995 were impacted by the loss development on prior accident years. During the year, the Company had net favorable loss development on prior accident years of $15.3 million, compared to net favorable loss development of $20.1 million for the comparable prior year period. The majority of the favorable loss development occurred on the 1992 through 1994 accident years. The favorable development on the 1992 accident year appears to be primarily due to the Company's aggressive actions to resolve claims. The favorable development on the 1993 and 1994 accident years appears to have been aided by the workers' compensation reforms that were enacted in July 1993 to combat the abuses in the California workers' compensation system. There can be no assurances that favorable development, or the magnitude of the development, will continue in the future. See Note 6 of Notes to Consolidated Financial Statements.
Acquisition, Restructuring and Other Expenses. During 1995, as part of the Company's clinical expansion and growth efforts, the Company acquired a medical facility in Mohave County, Arizona, across the border from Laughlin, Nevada. This medical facility included a small 12 bed hospital. During 1996 the Company implemented a plan to exit the hospital business and has actively pursued buyers for this business. As a result of this plan, the Company took a charge of $3.8 million ($2.8 million after tax) in the fourth quarter of 1996, primarily to recognize the estimated costs to dispose of the hospital.
Net Income. Net income for 1996 increased $9.8 million, or 46.2%, over 1995. This increase was impacted in part by several non-recurring items including the restructurings in 1996 and discontinued operations and merger costs in 1995. Excluding non-recurring items and the related tax effects, income from ongoing operations for 1996 increased $2.6 million, or 6.9%.
Revenues. The Company's total operating revenues for 1995 increased 16.1% to $467.0 million from $402.1 million for 1994. The increase was primarily due to medical premium revenue increases of approximately $50.1 million, or 18.6% from the Company's HMO and managed indemnity insurance subsidiaries. Such premium growth resulted principally from a 12.5% increase in member months. The Company experienced an overall rate increase for its Medicare members due to an approximate 7.5% increase in its capitation rate established by HCFA. Additionally, the Company realized minimal rate changes for the HMO subsidiary's commercial groups and managed indemnity insurance subsidiary. The Company's specialty product revenue increased slightly to $102.8 million in 1995 from $101.3 million in 1994. Specialty product revenue increased by $1.7 million in Nevada and $2.0 million in all other states excluding California. Such increases were offset by a $2.2 million decrease in the amount of specialty product revenue earned in California. The decrease in California specialty product revenues is primarily due to the abolishment of minimum premium rates in the California workers' compensation market and the commencement of open rating effective January 1, 1995, as well as a 16% rate decrease which had occurred October 1, 1994. Professional fees increased by $7.1 million, or 57.5% over 1994 due principally to the opening of three new medical clinics (one in the latter part of 1994 and two in 1995), a new surgery center, and the acquisition of a medical facility. Investment and other revenue increased $6.2 million, or 32.6%, primarily due to increased investment balances from the Company's common stock offering completed in October 1994.
General, Administrative and Marketing Expenses. General, administrative and marketing ("G&A") costs increased 18.4% to $63.6 million for the twelve months ended December 31, 1995 compared to the twelve months ended December 31, 1994. As a percentage of revenues, however, G&A costs for the twelve months ended December 31, 1995 increased to 13.6% from 13.3% during the comparable period in 1994. Excluding the operations of HMO Texas, however, G&A as a percentage of revenue for 1995 decreased to 12.6%. Of the $9.9 million increase in G&A, approximately $4.8 million was due to the HMO Texas operations. Additional increases include $3.2 million of compensation costs primarily resulting from additional employees supporting expanded services, and $1.6 million in additional marketing and related fees.
Income Tax. The Company's effective income tax rate for the year ended December 31, 1995, was 30.4% compared to 18.2% for the year ended 1994. This change is primarily due to the non-deductibility of a significant portion of the merger costs incurred in 1995 and a $4.0 million tax benefit recorded as part of the 1994 provision as a result of a reduction of the deferred tax valuation allowance. See Note 8 of Notes to Consolidated Financial statements.
Discontinued Operations. During 1995, CII sold its interest in an unprofitable subsidiary for approximately $1.0 million in cash and securities. This disposal resulted in a loss on discontinued operations, net of tax effects, of $6.6 million in 1995 compared to losses of $2.5 million from the discontinued operations in 1994.
Net Income. Net income for 1995 decreased to $21.3 million, from $34.4 million in 1994. This decrease is primarily due to the non-recurring items previously discussed, discontinued operations, merger and integration expenses, and the change in the deferred tax valuation allowance. Excluding non-recurring items and the related tax effects, income from ongoing operations for 1995 increased 11.9% to $36.8 million from $32.9 million in 1994.
In 1996 the Company spent $36.3 million on the acquisition, net of cash acquired, of Prime and the remaining interests of HMO Texas and $17.9 million in capital expenditures. Capital expenditures were primarily for new facilities as well as the expansion of existing medical facilities and include the construction costs of a 59,000 square foot medical facility in Las Vegas with completion expected in the fourth quarter of 1997, medical equipment for the Breast Care Center and 23 hour recovery unit, remodeling of certain existing medical space and construction costs on an additional administrative headquarters building of approximately 180,000 square feet. Such facilities accounted for $8.5 million of the total capital expenditures. Other capital expenditures were primarily for business expansion of the HMO and insurance operations, along with general corporate expansion. Such amounts include $3.2 million in computer hardware and software. In addition, the Company reduced debt obligations by $9.6 million in 1996. Most of this debt reduction was a result of the Company paying off a mortgage on one of the clinics. These cash outflows were offset through the net change of marketable securities, as well as $3.6 million received in connection with the purchase of stock through the Company's employee stock plans.
In April 1996, the Company obtained a $50.0 million unsecured line of credit from Bank of America National Trust & Savings Association ("BofA") for a term of five years at an interest rate equal to the London InterBank Offering Rate ("LIBOR") plus 32 basis points. Such rate would have been 5.875% at December 31, 1996 if the line of credit had been drawn upon.
The holding company may receive dividends from its HMO and insurance subsidiaries which generally must be approved by certain state insurance departments. The Company's HMO and insurance subsidiaries are required by state regulatory agencies to maintain certain deposits and must also meet certain net worth and reserve requirements. The HMO and insurance subsidiaries had restricted assets on deposit in various states totaling $13.6 million and $12.5 million, as of December 31, 1996 and December 31, 1995, respectively. The HMO and insurance subsidiaries also meet requirements to maintain minimum stockholder's equity ranging from $200,000 to $5.2 million. Of the cash and cash equivalents held at December 31, 1996, $85.2 million is designated for use only by the regulated subsidiaries. Such 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 terms of existing management agreements and by dividends. Remaining amounts are available on an unrestricted basis. The holding company will not receive dividends from its HMO or insurance subsidiaries that would cause violation of statutory net worth and reserve requirements.
On January 10, 1997, the Company and PCA entered into a credit and share pledge agreement (the "PCA Loan") pursuant to which the Company made a demand loan to PCA in the amount of $16.8 million with an 8.25% fixed rate of interest. The proceeds of the PCA Loan were used by PCA to make a principal payment under PCA's existing credit facility in which Citibank N.A. is the agent ("PCA Credit Facility"). The PCA Loan is subordinated as to payment of principal and interest to the amount due under the PCA Credit Facility (estimated to be in excess of $100 million) and is secured by a lien on the stock of certain of PCA's subsidiaries, second in priority to the lien securing the PCA Credit Facility. The PCA Loan provides that the Company will not take any action to collect payment until the earlier of the PCA Credit Facility being paid in full or six months from the date the Company notifies Citibank N.A., as agent, that it intends to take such action. On March 20, 1997 the Company notified Citibank N.A. of its intent to demand payment. There can be no assurance that PCA will have sufficient funds to pay the PCA Credit Facility and the PCA Loan in full.
For example, recent news reports indicate that President Clinton may submit a budget proposal to Congress that will reduce Medicare spending by $100 billion and impose certain limits on Medicaid spending. Although neither the present administration's health care reform proposals nor alternative health care reform proposals introduced by certain members of Congress were previously adopted, the Health Insurance Portability and Accountability Act of 1996 (the "Accountability Act") was passed by Congress and signed into law by President Clinton on August 21, 1996 and will generally take effect beginning July 1, 1997. While the Accountability Act contains provisions regarding health insurance or health plans, such as portability and limitations on pre-existing condition exclusions, guaranteed availability and renewability, it also contains several anti-fraud measures that significantly change health care fraud and abuse provisions. Some of the provisions include (i) creation of an anti-fraud and abuse trust fund and coordination of fraud and abuse efforts by federal, state and local authorities, (ii) extension of the criminal anti-kickback statues to all federal health programs, (iii) expansion of and increase in the amount of civil monetary penalties and establishment of a knowledge standard for individuals or entities potentially subject to civil monetary penalties, and (iv) revisions to current sanctions for fraud and abuse, including mandatory and permissive exclusion from participation in the Medicare or Medicaid programs. The Company does not believe that the Accountability Act should have a material adverse effect on the Company's operations, but is unable to predict the ultimate impact of any federal or state restructuring of the health care financing and delivery system, which ultimately could have a material adverse impact on the operations, financial condition and prospects of the Company.
DELOITTE & TOUCHE LLP Las Vegas, Nevada February 21, 1997 (March 28, 1997 as to Note 14)
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1996, 1995 and 1994
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996, 1995 and 1994
Business. The consolidated financial statements include the accounts of Sierra Health Services, Inc. ("Sierra") and its subsidiaries (collectively referred to as the "Company"). The Company is a managed health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. The Company's broad range of managed health care services is provided through its health maintenance organizations ("HMOs"), managed indemnity plans, third-party administrative services programs for employer-funded health benefit plans and workers' compensation medical management programs. Ancillary products and services that complement the Company's managed health care product lines are also offered.
Effective December 31, 1996 the Company purchased Prime Holdings, Inc. ("Prime"), for approximately $32,219,000 in cash. At December 31, 1996 Prime operated MedOne Health Plan, Inc. ("MedOne"), a 12,800 member HMO. Prime also served 215,000 people through preferred provider organizations, workers' compensation programs and administrative service products for self-insured employers and union welfare trust funds, primarily in the state of Nevada. The acquisition resulted in goodwill of $31,117,000.
The following pro forma information (unaudited) has been prepared assuming that this acquisition had taken place at the beginning of the respective periods. The pro forma information includes adjustments for interest expense that would have been incurred to finance the purchase and the amortization of intangibles arising from the transaction. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed dates, as Prime incurred significant startup costs associated with their HMO.
Medical Expenses. Sierra contracts with hospitals, physicians and other providers of health care under capitated or discounted fee-for-service arrangements including hospital per diems to provide medical care services to enrollees. Capitated providers are at risk for the cost of medical care services provided to the Company's enrollees in the relevant geographic areas; however, the Company is ultimately responsible for the provision of services to its enrollees should the capitated provider be unable to provide the contracted services. Health care costs are recorded in the period when services are provided to enrolled members, including estimates for provider costs which have been incurred as of the balance sheet date but not reported. Losses on specific contracts, if any, are accrued when measurable.
Specialty Product Expenses. This expense consists primarily of losses and loss adjustment expense ("LAE") and policy acquisition costs associated with issued workers' compensation policies. Losses and LAE is based upon the accumulation of cost estimates for reported claims occurring during the period as well as an estimate for losses that have occurred but have not yet been reported. Policy acquisition costs consist of commissions, premium taxes and other underwriting costs, which are directly related to the production and retention of new and renewal business and are deferred and amortized as the related premiums are earned. Should it be determined that future policy revenues and earnings on invested funds relating to existing insurance contracts will not be adequate to cover related costs and expenses, deferred costs are expensed. Also included in specialty product expense are costs associated with administrative services and certain ancillary products. These costs are recorded when incurred.
Marketable Investments. Short- and long-term investments consist principally of U.S. Government securities and municipal bonds, as well as corporate and mortgage backed securities. Short-term investments have maturities of one year or less. Long-term investments have maturities in excess of one year.
Goodwill. Goodwill has been recorded primarily as a result of various business acquisitions by the Company. Amortization is provided on a straight line basis over periods not exceeding 30 years. The Company evaluates the carrying value of its intangible assets at each balance sheet date.
Reserve For Losses and Loss Adjustment Expense. The reserve for losses and LAE consists of estimated costs of each unpaid claim reported prior to the close of the accounting period, as well as those incurred but not yet reported. The methods for establishing and reviewing such liabilities are continually reviewed and adjustments are reflected in current operations.
Earnings Per Share. Earnings per common share for the years ended December 31, 1996, 1995, and 1994 have been calculated using the weighted average number of common shares outstanding of 17,726,000, 17,414,000, and 15,678,000 respectively. Earnings per share have been restated to reflect the merger of CII accounted for as a pooling of interests.
Accounting for Stock-Based Compensation. Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation" provides an alternative to APB Opinion No. 25 ("APB 25"). FAS 123 encourages, but does not require, recognition against earnings of compensation expense for grants of stock, stock options and other equity instruments by employers (collectively, "options"), based on fair value at the date of grant. FAS 123 provides a methodology for the determination of fair value; however, FAS 123 also allows companies to continue to measure compensation cost using the intrinsic value method of accounting provided by APB 25. FAS 123 requires companies that choose not to adopt the new fair value accounting rules to disclose pro forma net income and earnings per share under the new method as if it had been adopted. The Company has continued with the intrinsic value method prescribed in APB 25 as disclosed in Note 11.
Acquisition, Restructuring and Other Expenses. Acquisition, restructuring and other expenses represent the non-recurring incremental costs the Company has incurred in connection with various mergers, acquisitions and planned dispositions. Costs recorded for restructurings satisfy the definitions and criteria set forth in Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," that are directly related to the restructurings.
Reclassifications. Certain amounts in the Consolidated Financial Statements for the year ended December 31, 1995 and 1994 have been reclassified to conform with the current year presentation.
After the merger of CII, the Company evaluated the consolidated security portfolio and reclassified $80,597,000 held-to-maturity investments to available-for-sale investments. The reclassification of these investments resulted in $5,641,000 of net unrealized gains as of December 31, 1995. Also, an unrealized holding gain of $1,711,000 resulting from the transfer of certain investments from available-for-sale to the held-to-maturity category was included in the net unrealized gains section of stockholders' equity and will be amortized over the remaining lives of the maturities.
The following table summarizes the Company's short-term, long-term and restricted investments as of December 31, 1995:
The contractual maturities of available-for-sale short-term, long-term and restricted investments at December 31, 1996 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
The contractual maturities of held-to-maturity short-term, long-term and restricted investments at December 31, 1996 were as follows:
In the normal course of business, the Company seeks to reduce potential losses that may arise from catastrophic events that cause unfavorable underwriting results by reinsuring certain levels of such risk with other reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsurance policy.
The Company is covered under a medical reinsurance agreement that provides coverage for 50-90% of hospital costs in excess of $75,000 per case, up to a maximum of $2,000,000 per member per lifetime for both the managed indemnity and HMO subsidiaries. Reinsurance premiums of $3,235,000, $2,827,000 and $2,234,000, net of reinsurance recoveries of $2,276,000, $1,133,000 and $584,000, are included in medical expense for 1996, 1995 and 1994, respectively. In addition, SHL maintains reinsurance on certain other insurance products.
CII also has reinsurance treaties in effect. The reinsurers have assumed the liability on that portion of workers' compensation claims between $350,000 and $60,000,000 per occurrence for 1996 and between $250,000 and $60,000,000 per occurrence for 1995 and 1994. At December 31, 1996 and 1995, the amount of reinsurance recoverable for unpaid losses and loss adjustment expense was $15,676,000 and $25,871,000, respectively. The amount of reinsurance receivable for paid losses and loss adjustment expense was $103,000 and $73,000, respectively.
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 that the Company has reinsurance contracts with are rated A+ or better by the A.M. Best Company.
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1996, 1995 and 1994
7 3/8% Mortgage Note. In December 1993, the Company obtained a loan from Bank of America, Nevada. This loan is secured by a deed of trust, assignment of rents and leases, and a security agreement and fixture filing covering the Company's administrative headquarters complex and underlying real property.
In April 1996, the Company obtained a $50.0 million unsecured line of credit from Bank of America National Trust & Savings Association ("BofA") for a term of five years at an interest rate equal to the LIBOR plus 32 basis points. Such rate would have been 5.875% at December 31, 1996 if the line of credit had been drawn upon.
The fair value of the Debentures at December 31, 1996 was $48,502,000, which was determined based on the quoted market price at December 31, 1996. Excluding the Debentures, the fair value of long-term debt, including the current portion, is $13,582,000, based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities.
A summary of the provision for income taxes for the years ended December 31 is as follows:
The following reconciles the difference between the 1996, 1995 and 1994 current and statutory provision for income taxes:
At December 31, 1996, the Company had approximately $30,100,000 of regular tax net operating loss carryforwards which are limited to use at the rate of approximately $6,600,000 per year during the carryforward period. The net operating loss carryforwards can be used to reduce future taxable income until they expire through the year 2011. The Company has alternative minimum tax net operating loss carryforwards of approximately $11,000,000 which expire through the year 2011. The Company also has California net operating loss carryforwards of approximately $15,900,000 which expire through the year 2001. In addition to these net operating loss carryforwards, the Company has alternative minimum tax credits of approximately $800,000 which can be used to reduce regular tax liabilities in future years. There is no expiration date for the alternative minimum tax credits. The majority of the above items are subject to both annual and separate company limitations required by the Internal Revenue Code.
Due to the above referenced limitations, a valuation allowance has been set up to reflect the Company's inability to use tax benefits from recent acquisitions currently or in the near future. As the benefits are realizable by the Company, the valuation allowance will be reduced as required by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). For the years ended December 31, 1996 and 1995, the Company was able to realize a portion of the tax benefits previously allowed for. As a result, the Company reduced its valuation allowance by $2,685,000 and $750,000 for the years ended December 31, 1996 and 1995, respectively. In addition, the Company recorded a $1,575,000 valuation allowance in connection with the acquisition of Prime on a gross deferred tax asset of $5,300,000. The valuation allowance of $10,929,000 at December 31, 1996 is necessary under the more likely than not criteria required by FAS 109.
Litigation and Legal Matters. The Company is subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these legal proceedings will not materially impact the consolidated financial statements of the Company. See Note 14 "Subsequent Events".
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. The Company contributes 2% of eligible employees' compensation and matches 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 statute. Prior to the merger, CII maintained a 401(k) plan as well. As part of the merger of CII, the CII plan was frozen in November 1995. The Company merged the two plans during 1996. Expense under both Sierra plans totaled $3,216,000, $2,516,000 and $2,573,000 in 1996, 1995 and 1994, respectively.
Stock Option Plans. During 1995 the shareholders of the Company approved the 1995 Long-Term Incentive Plan ("LTIP"). The LTIP provides for the granting of Options, Stock, and other stock-based awards. Under the LTIP 1.2 million shares were reserved along with remaining shares reserved from certain previous stock option and capital accumulation plans which have not been and will not be issued under those plans. Awards are granted by a committee appointed by the Board of Directors. Options become exercisable at such times and in such installments as set by the committee. Under this plan, the exercise price of each option equals the market price of the Company's stock on the date of grant. Options currently granted under the LTIP vest for the employees at a rate of 20-25% per year. Options expire one year after the end of the vesting period.
During 1995, as part of the Company's clinical expansion and growth efforts, the Company acquired a medical facility in Mohave County, Arizona, across the border from Laughlin, Nevada. This medical facility included a 12 bed hospital. During 1996 the Company implemented a plan to exit the hospital business and has actively pursued buyers for this business. As a result of this plan, the Company recorded a charge of $3,814,000 ($2,860,000 after tax) in the fourth quarter of 1996, primarily to recognize the estimated costs to dispose of the hospital.
In connection with the merger and integration of CII, $11,614,000 of costs and expenses ($9,677,000 after tax) were incurred and charged to expense in the fourth quarter of 1995. These costs include $6,400,000 in professional fees, $1,700,000 for the write-off of certain redundant hardware and software, $1,300,000 for the cancellation of certain contractual obligations and other settlement costs, $900,000 related to transition and severance-related payments and approximately $1,314,000 for other integration costs.
On January 10, 1997, the Company and PCA entered into a credit and share pledge agreement (the "PCA Loan") pursuant to which the Company made a demand loan to PCA in the amount of $16,750,000 with an 8.25% fixed rate of interest. The proceeds of the PCA Loan were used by PCA to make a principal payment under PCA's existing credit facility in which Citibank N.A. is the agent ("PCA Credit Facility"). The PCA Loan is subordinated as to payment of principal and interest to the amount due under the PCA Credit Facility (estimated to be in excess of $100,000,000) and is secured by a lien on the stock of certain of PCA's subsidiaries, second in priority to the lien securing the PCA Credit Facility. The PCA Loan provides that the Company will not take any action to collect payment until the earlier of the PCA Credit Facility being paid in full or six months from the date the Company notifies Citibank N.A., as agent, that it intends to take such action. On March 20, 1997 the Company notified Citibank N.A. of its intent to demand payment. There can be no assurance that PCA will have sufficient funds to pay the PCA Credit Facility and the PCA Loan in full.