(1) Included in this amount is $176,000 and $1.5 million in prepaid interest and $91,000 and $1.2 million of deferred costs associated with the induced conversion of $8.5 million and $63.0 million in senior convertible debentures in 2006 and 2005, respectively.
Our principal expenses consist of medical expenses and general and administrative expenses. Medical expenses represent capitation fees and other fee-for-service payments, including hospital per diems, paid to independently 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 coordinating utilization of physician and hospital services and providing incentives to use cost-effective providers. General and administrative expenses generally represent operational costs other than those directly associated with the delivery of health care services.
Our contract with our 2006 primary Las Vegas area contracted hospital group, HCA Inc. (HCA) expired on December 31, 2006. While we believe our efforts to move the majority of our HCA hospital days to other contracted hospitals will be successful, there will be emergency situations that will require us to use the HCA hospitals in 2007. See Medical Expenses below for more details.
average commercial premium rate. CMS contracted with us to participate in the new voluntary PDP for our Medicare Advantage (MA) plans as well as a stand-alone program for 2006. We were also selected to participate in a local and regional Medicare Advantage PPO plan. During 2006, Sierra Health and Life Insurance Company, Inc. (SHL) offered the stand-alone PDP, marketed under the brand name SierraRx, in eight regions covering Arizona, California, Colorado, Idaho, Nevada, New Mexico , Oregon, Texas, Utah and Washington. SHL was also selected as a PDP sponsor in the same states for auto-enrolled CMS subsidized beneficiaries. SierraRx covers a wide variety of preferred generic and brand name prescription drugs that are distributed through most major retail pharmacy chains and a large number of independent pharmacies. At December 31, 2006, we had 184,900 beneficiaries enrolled in the PDP, the majority of which were auto-enrolled beneficiaries.
Cash flows from operating activities increased to $190.4 million from $166.8 million during 2005. This increase is mostly due to the fact that we had a $13.5 million increase in income taxes payable due to timing of tax payments, recorded an $11.8 million payable to CMS as of result of favorable pharmacy utilization in our Medicare Advantage PDP, and had an increase in our non-PDP medical claims payable during 2006 compared to 2005. This was partially offset by negative cash flow of $7.9 million related to our stand alone PDP. The negative cash flow is primarily due to insufficient funding from CMS for our reimbursable low-income subsidy and reinsurance costs. These costs should be fully reimbursed after CMS performs their year-end reconciliation which is currently expected to be completed by the third quarter of 2007. We also believe our 2007 cash flows will be sufficient to cover any reductions in cash flow related to probable losses from our enhanced benefit PDP stand alone product offering. See Note 13, “Commitments and Contingencies”, in the Notes to Consolidated Financial Statements for further discussion of our enhanced benefit plan.
The credit facility is secured by guarantees by certain of our subsidiaries and a first priority security interest in: (i) all of 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, certain 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 and certain other exclusions.
From January 1, 2006 through December 31, 2006, we purchased 6.6 million shares of our common stock, in the open market or through negotiated transactions, for $243.1 million at an average cost per share of $36.98. Since the repurchase program began in early 2003 and through December 31, 2006, we purchased, in the open market or through negotiated transactions, 28.7 million shares for $630.8 million at an average cost per share of $22.01. The
During our Board of Directors authorized us to purchase an additional $225.0 million in share repurchases. On January 25, 2007 our Board of Directors authorized us to purchase an additional $50.0 million in share repurchases. At February 23, 2007, $53.1 million was available under the Board of Directors’ authorized plan. The repurchase program has no stated expiration date.
Our contractual obligations and commitments at December 31, 2006 are summarized in the table below. The amounts presented include all future payments associated with each obligation including interest expense.
The senior convertible debentures mature in March 2023; however, 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. Since December 2003, our share price has exceeded 120% of the conversion price, which provides debenture holders the option to convert their debentures into our common stock. We can redeem the debentures for cash beginning on or after March 20, 2008. See Note 8 - "Long-Term Debt" in the Notes to Consolidated Financial Statements for additional information related to our senior convertible debentures.
SFAS would create a fair value option of accounting for qualifying financial assets and liabilities under which an irrevocable election could be made at inception to measure such assets and liabilities initially and subsequently at fair value, with all changes in fair value reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that the adoption of SFAS 159 will have on our consolidated financial position, results of operations or cash flows.
Management believes, based on information presently available, that the recorded liability for medical claims payable, which at December 31, 2006 represented 37.6% of our total consolidated liabilities or $222.9 million, is reasonable and adequate to cover the related future health care claim payments. However, a difference between the recorded liability and actual developed claim payments could have a material impact on our financial results. For example, a 1% increase in medical claims payable as of December 31, 2006 would reduce reported net income for the year ended 2006 by $1.4 million or 1.0%, and diluted earnings per share would be reduced by $0.02.
In making actuarial loss projections, there is no single “right” way or method. An actuary must exercise a significant amount of his or her judgment in selecting loss development factors and even a small change in one loss development factor can have a large impact when it is applied over several accident years. This can result in significant differences between one actuary’s best estimate of the projected loss reserves and another actuary’s best estimate of those same loss reserves. In addition, actuarial projections will change with the passage of time as new or additional information is obtained or experienced.
Medicare Part D Prescription Drug Program (“PDP”).The Company contracted with CMS to offer a basic stand-alone PDP to eligible Medicare beneficiaries effective January 1, 2006. The Company offered the basic PDP in eight regions covering Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington. The Company was also selected as a PDP sponsor in the same states for auto-enrolled CMS subsidized beneficiaries.
For the year ended December 31, 2006, net cash proceeds realized from stock option exercises and purchases under the Company’s Employee Stock Purchase Plan (“Purchase Plan”) were $14.5 million and the actual tax benefit realized from stock option exercises and purchases under the Purchase Plan was $10.1 million.
Share Repurchase Program - From January 1, 2006 through December 31, 2006, the Company purchased 6.6 million shares of its common stock in the open market for $243.1 million at an average cost per share of $36.98. Since the repurchase program began in early 2003 and through December 31, 2006, the Company purchased, in the open market or through negotiated transactions, 28.7 million shares for $630.8 million at an average cost per share of $22.01. On February 16, 2006, April 20, 2006 and October 19, 2006 the Company’s Board of Directors authorized the Company to purchase an additional $75.0 million each, for a total of $225.0 million in share repurchases. At December 31, 2006, $24.1 million was still available under the Board of Directors’ authorized plan. On January 25, 2007, the Company’s Board of Directors authorized an additional $50.0 million in share repurchases. The repurchase programs have no stated expiration date.
Rent expense totaled $19.0 million, $19.8 million and $23.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.
payments. On April 7, 2003, the United States Supreme Court determined that certain claims against certain defendants should be arbitrated.