Form 10Q
United
States
Securities
And Exchange Commission
Washington,
DC 20549
FORM
10-Q
(Mark
One)
R
|
Quarterly
Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of
1934
|
For
the quarterly period ended September 30, 2006
or
¨
|
Transition
Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of
1934
|
For
the transition period from
to
Commission
File Number: 1-8865
SIERRA
HEALTH SERVICES, INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
|
|
Nevada
|
|
88-0200415
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
2724
North Tenaya Way, Las Vegas, NV
|
|
89128
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
Registrant’s
Telephone Number, Including Area Code: (702) 242-7000
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes R No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act
(check one).
Large
accelerated filer R
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yeso
No R
The
number of shares outstanding of the registrant’s Common Stock as of
October 25, 2006 was 57,115,000.
Quarterly
Report on Form 10-Q
For
The Period Ended September 30, 2006
Part
I.
Financial Information
|
Page
No.
|
|
|
|
1
|
|
2
|
|
3
|
|
4
|
|
5-16
|
|
17-29
|
|
30
|
|
30
|
|
|
Part
II. Other Information
|
|
|
31
|
|
32
|
|
32-33
|
|
33
|
|
33
|
|
33
|
|
33
|
|
34
|
Part
I. Financial Information
Condensed
Consolidated Balance Sheets
(in
thousands, except per share data)
(Unaudited)
|
|
September
30, 2006
|
|
December
31, 2005
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
77,925
|
|
$
|
88,059
|
|
Investments
|
|
|
243,332
|
|
|
281,250
|
|
Accounts
receivable (less allowance for doubtful accounts: 2006 - $4,920;
2005 -
$5,792)
|
|
|
26,445
|
|
|
14,501
|
|
Current
portion of deferred tax asset
|
|
|
26,092
|
|
|
23,949
|
|
Prepaid
expenses and other current assets
|
|
|
81,688
|
|
|
30,596
|
|
Total
current assets
|
|
|
455,482
|
|
|
438,355
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
72,001
|
|
|
71,357
|
|
Restricted
cash and investments
|
|
|
19,311
|
|
|
18,252
|
|
Goodwill
(less accumulated amortization: 2006 and 2005 - $6,972)
|
|
|
14,782
|
|
|
14,782
|
|
Deferred
tax asset (less current portion)
|
|
|
14,354
|
|
|
13,266
|
|
Note
receivable (less valuation allowance: 2006 and 2005 -
$15,000)
|
|
|
47,000
|
|
|
47,000
|
|
Other
assets
|
|
|
95,187
|
|
|
65,834
|
|
Total
assets
|
|
$
|
718,117
|
|
$
|
668,846
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accrued
and other current liabilities
|
|
$
|
73,078
|
|
$
|
58,238
|
|
Trade
accounts payable
|
|
|
2,165
|
|
|
2,347
|
|
Accrued
payroll and taxes
|
|
|
28,216
|
|
|
21,469
|
|
Medical
claims payable
|
|
|
157,263
|
|
|
135,867
|
|
Unearned
premium revenue
|
|
|
52,566
|
|
|
49,067
|
|
Current
portion of long-term debt
|
|
|
104
|
|
|
106
|
|
Total
current liabilities
|
|
|
313,392
|
|
|
267,094
|
|
|
|
|
|
|
|
|
|
Long-term
debt (less current portion)
|
|
|
43,729
|
|
|
52,307
|
|
Other
liabilities
|
|
|
64,057
|
|
|
65,193
|
|
Total
liabilities
|
|
|
421,178
|
|
|
384,594
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 1,000 shares authorized; none issued or
outstanding
|
|
|
|
|
|
|
|
Common
stock, $.005 par value, 120,000 shares authorized; 2006 - 70,689;
2005 -
69,136 shares issued
|
|
|
354
|
|
|
346
|
|
Treasury
stock: 2006 - 13,579; 2005 - 11,006 common stock shares
|
|
|
(485,852
|
)
|
|
(377,190
|
)
|
Additional
paid-in capital
|
|
|
434,543
|
|
|
400,287
|
|
Accumulated
other comprehensive loss
|
|
|
(2,235
|
)
|
|
(1,750
|
)
|
Retained
earnings
|
|
|
350,129
|
|
|
262,559
|
|
Total
stockholders’ equity
|
|
|
296,939
|
|
|
284,252
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
718,117
|
|
$
|
668,846
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements
Sierra
Health Services, Inc. And Subsidiaries
(In
thousands, except per share data)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Medical
premiums
|
|
$
|
405,618
|
|
$
|
327,084
|
|
$
|
1,220,726
|
|
$
|
958,834
|
|
Military
contract revenues
|
|
|
¾
|
|
|
11
|
|
|
¾
|
|
|
16,322
|
|
Professional
fees
|
|
|
13,300
|
|
|
11,133
|
|
|
39,097
|
|
|
31,102
|
|
Investment
and other revenues
|
|
|
11,079
|
|
|
9,215
|
|
|
32,860
|
|
|
25,071
|
|
Total
|
|
|
429,997
|
|
|
347,443
|
|
|
1,292,683
|
|
|
1,031,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
expenses
|
|
|
323,694
|
|
|
259,591
|
|
|
981,758
|
|
|
755,779
|
|
Military
contract expenses
|
|
|
¾
|
|
|
(108
|
)
|
|
138
|
|
|
2,265
|
|
General
and administrative expenses
|
|
|
51,291
|
|
|
43,451
|
|
|
152,914
|
|
|
127,082
|
|
Total
|
|
|
374,985
|
|
|
302,934
|
|
|
1,134,810
|
|
|
885,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
55,012
|
|
|
44,509
|
|
|
157,873
|
|
|
146,203
|
|
Interest
expense
|
|
|
(1,015
|
)
|
|
(1,991
|
)
|
|
(2,793
|
)
|
|
(7,971
|
)
|
Other
income (expense), net
|
|
|
14
|
|
|
427
|
|
|
(10
|
)
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
54,011
|
|
|
42,945
|
|
|
155,070
|
|
|
139,060
|
|
Provision
for income taxes
|
|
|
(19,082
|
)
|
|
(14,503
|
)
|
|
(53,936
|
)
|
|
(47,377
|
)
|
Net
income
|
|
$
|
34,929
|
|
$
|
28,442
|
|
$
|
101,134
|
|
$
|
91,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
$
|
0.62
|
|
$
|
0.50
|
|
$
|
1.78
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share assuming dilution
|
|
$
|
0.56
|
|
$
|
0.43
|
|
$
|
1.61
|
|
$
|
1.38
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements
Sierra
Health Services, Inc. And Subsidiaries
(In
thousands)
(Unaudited)
|
|
Common
Stock
|
|
In
Treasury
|
|
Additional
Paid-in
|
|
Deferred
Compen-
|
|
Accumulated
Other
Comprehensive
|
|
Retained
|
|
Total
Stock-
holders’
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
sation
|
|
Loss
|
|
Earnings
|
|
Equity
|
|
Balance,
January 1, 2005
|
|
|
61,954
|
|
$
|
310
|
|
|
9,192
|
|
$
|
(237,876
|
)
|
$
|
286,439
|
|
$
|
(288
|
)
|
$
|
(245
|
)
|
$
|
153,357
|
|
$
|
201,697
|
|
Common
stock issued in connection with stock plans
|
|
|
1,822
|
|
|
9
|
|
|
(317
|
)
|
|
8,731
|
|
|
21,875
|
|
|
(5,248
|
)
|
|
¾
|
|
|
(5,771
|
)
|
|
19,596
|
|
Stock-based
compensation expense
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
1,080
|
|
|
3,797
|
|
|
¾
|
|
|
¾
|
|
|
4,877
|
|
Common
stock issued in connection with conversion of debentures
|
|
|
6,890
|
|
|
34
|
|
|
¾
|
|
|
¾
|
|
|
62,966
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
63,000
|
|
Tax
benefits from share-based payment arrangements
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
17,470
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
17,470
|
|
Repurchase
of common stock shares
|
|
|
¾
|
|
|
¾
|
|
|
2,186
|
|
|
(144,421
|
)
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
(144,421
|
)
|
Treasury
shares not included in stock dividend
|
|
|
(1,869
|
)
|
|
(9
|
)
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
(9
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
91,683
|
|
|
91,683
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding loss on
available-for-sale
investments ($231 pretax)
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
(1,059
|
)
|
|
¾
|
|
|
(1,059
|
)
|
Total
comprehensive income
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
(1,059
|
)
|
|
91,683
|
|
|
90,624
|
|
Balance,
September 30, 2005
|
|
|
68,797
|
|
$
|
344
|
|
|
11,061
|
|
$
|
(373,566
|
)
|
$ |
389,830
|
|
$ |
(1,739
|
)
|
$ |
(1,304
|
)
|
$
|
239,269
|
|
$
|
252,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
|
69,136
|
|
$
|
346
|
|
|
11,006
|
|
$
|
(377,190
|
)
|
$
|
400,287
|
|
$
|
¾
|
|
$
|
(1,750
|
)
|
$
|
262,559
|
|
$
|
284,252
|
|
Common
stock issued in connection with stock plans
|
|
|
624
|
|
|
3
|
|
|
(562
|
)
|
|
19,095
|
|
|
8,534
|
|
|
¾
|
|
|
¾
|
|
|
(13,569
|
)
|
|
14,063
|
|
Stock-based
compensation expense
|
|
|
¾
|
|
|
¾
|
|
|
(1
|
)
|
|
23
|
|
|
5,782
|
|
|
¾
|
|
|
¾
|
|
|
5
|
|
|
5,810
|
|
Common
stock issued in connection with conversion of debentures
|
|
|
929
|
|
|
5
|
|
|
¾
|
|
|
¾
|
|
|
8,495
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
8,500
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
11,445
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
11,445
|
|
Repurchase
of common stock shares
|
|
|
¾
|
|
|
¾
|
|
|
3,136
|
|
|
(127,780
|
)
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
(127,780
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
101,134
|
|
|
101,134
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding loss on available-for-sale investments ($746
pretax)
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
(485
|
)
|
|
¾
|
|
|
(485
|
)
|
Total
comprehensive income
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
(485
|
)
|
|
101,134
|
|
|
100,649
|
|
Balance,
September 30, 2006
|
|
|
70,689
|
|
$
|
354
|
|
|
13,579
|
|
$
|
(485,852
|
)
|
$
|
434,543
|
|
$
|
¾
|
|
$
|
(2,235
|
)
|
$
|
350,129
|
|
$
|
296,939
|
|
All
applicable shares, excluding treasury shares, reflect the retroactive effects
of
the two-for-one common stock split in the form of a stock dividend that was
effective December 30, 2005. See Note 1 in the Notes to Condensed Consolidated
Financial Statements for more information.
See
accompanying Notes to Condensed Consolidated Financial
Statements
Sierra
Health Services, Inc. And Subsidiaries
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
101,134
|
|
$
|
91,683
|
|
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
12,327
|
|
|
11,167
|
|
Stock-based
compensation expense
|
|
|
5,810
|
|
|
4,877
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
(11,445
|
)
|
|
¾
|
|
Provision
for doubtful accounts
|
|
|
1,796
|
|
|
1,910
|
|
Loss
on property and equipment dispositions
|
|
|
213
|
|
|
131
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Military
accounts receivable
|
|
|
21
|
|
|
24,487
|
|
Deferred
tax asset
|
|
|
8,459
|
|
|
13,801
|
|
Other
current assets
|
|
|
(64,769
|
)
|
|
2,521
|
|
Other
assets
|
|
|
(4,270
|
)
|
|
(323
|
)
|
Accrued
payroll and taxes
|
|
|
6,747
|
|
|
(4,141
|
)
|
Medical
claims payable
|
|
|
21,396
|
|
|
7,695
|
|
Military
health care payable
|
|
|
¾
|
|
|
(17,061
|
)
|
Other
current liabilities
|
|
|
14,121
|
|
|
(19,928
|
)
|
Unearned
premium revenue
|
|
|
3,499
|
|
|
40,511
|
|
Other
liabilities
|
|
|
(1,136
|
)
|
|
(4,385
|
)
|
Net
cash provided by operating activities
|
|
|
93,903
|
|
|
152,945
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures, net of dispositions
|
|
|
(13,183
|
)
|
|
(8,566
|
)
|
Purchase
of investments, net of proceeds
|
|
|
11,500
|
|
|
(138,572
|
)
|
Net
cash used for investing activities
|
|
|
(1,683
|
)
|
|
(147,138
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
on debt and capital leases , net of proceeds
|
|
|
(82
|
)
|
|
(84
|
)
|
Purchase
of treasury stock
|
|
|
(127,780
|
)
|
|
(144,421
|
)
|
Excess
tax benefits from share-based payment arrangements
|
|
|
11,445
|
|
|
¾
|
|
Exercise
of stock in connection with stock plans
|
|
|
14,063
|
|
|
19,596
|
|
Net
cash used for financing activities
|
|
|
(102,354
|
)
|
|
(124,909
|
)
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(10,134
|
)
|
|
(119,102
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
88,059
|
|
|
207,619
|
|
Cash
and cash equivalents at end of period
|
|
$
|
77,925
|
|
$
|
88,517
|
|
|
|
|
|
|
|
|
|
Supplemental
condensed consolidated statement of cash flows
information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
(2,672
|
)
|
$
|
(8,533
|
)
|
Net
cash paid during the period for income taxes
|
|
|
(37,398
|
)
|
|
(33,410
|
)
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Senior
convertible debentures converted into Sierra common stock
|
|
|
8,500
|
|
|
63,000
|
|
Additions
to capital leases
|
|
|
¾
|
|
|
19
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
accompanying unaudited condensed consolidated financial statements include
the
consolidated accounts of Sierra Health Services, Inc. (“Sierra”, a holding
company, together with its subsidiaries, collectively referred to herein as
the
“Company"). All material intercompany balances and transactions have been
eliminated. These statements and the Company’s annual audited consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America; however, these statements
do
not contain all of the information and disclosures that would be required in
a
complete set of audited financial statements. They should, therefore, be read
in
conjunction with the Company's annual audited consolidated financial statements
and related notes thereto for the year ended December 31, 2005. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements reflect all material adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial results for
the
interim periods presented.
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. Such estimates and assumptions could change in
the
future as more information becomes available, which could impact the amounts
reported and disclosed herein. Actual results may differ materially from
estimates.
Certain
amounts in the condensed consolidated financial statements for the three and
nine months ended September 30, 2005 have been reclassified to conform to the
current year presentation.
On
December 7, 2005, the Company’s Board of Directors approved a two-for-one stock
split in the form of a 100% stock dividend effective December 30, 2005.
Consequently, all common stock shares and per share amounts, including the
number of shares and average prices per share paid under the Company’s share
repurchase program reflect the retroactive effects of the two-for-one common
stock split. Since the common stock dividend was issued on outstanding shares,
the shares held as treasury stock at December 30, 2005 were not adjusted to
reflect the two-for-one split.
2. Significant
Accounting Policies
Medicare
Part D Prescription Drug Program (“PDP”)
For
2006,
the Company contracted with the Centers for Medicare and Medicaid Services
(“CMS”) to offer a stand-alone PDP to eligible Medicare beneficiaries effective
January 1, 2006. The Company offers a stand-alone PDP in eight regions covering
Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah
and Washington. The Company has also been selected as a PDP sponsor in the
same
states for auto-enrolled Medicare and Medicaid beneficiaries.
The
Company recognizes premium revenue as earned over the contract period; however,
pharmacy and administrative costs are recognized as incurred with
no
allocation or annualized estimation of the impact of deductibles, the coverage
gap or “donut hole,” prior to it being reached by the member, or reinsurance.
This method of recognizing revenues and expenses results in a disproportionate
amount of expense in the first part of each contract year when the plan is
responsible for a larger portion of the drug cost.
CMS
shares in the risk of pharmacy costs related to the PDP. The Company recognizes
a risk sharing payable or receivable based on the year-to-date activity. The
risk sharing payable or receivable is accumulated for each contract and recorded
in the Condensed Consolidated Balance Sheet in prepaid expenses and other
current assets or accrued and other current liabilities depending on the net
contract balance at the end of the reporting period.
Payments
from CMS for reinsurance and for cost sharing related to low income individuals
(“Subsidies”) are recorded as a payable when received. This payable is reduced
when reinsurance is utilized and Subsidies are provided by the Company. This
activity is accumulated, and when the net balance for each contract is negative,
it is reclassed to a receivable. The payable or receivable is recorded in the
Condensed Consolidated Balance Sheet in
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
prepaid
expenses and other current assets or accrued and other current liabilities
depending on the net contract balance at the end of the reporting period.
A
reconciliation of the final risk sharing, Subsidies, and reinsurance amounts
is
performed following the end of the contract year and is expected to be finalized
in the third quarter of 2007.
3. Investments
Of
the
cash and cash equivalents and current unrestricted investments that total $321.3
million in the accompanying Condensed Consolidated Balance Sheet at September
30, 2006, $274.5 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.
Investments
consist primarily of U.S. Government and its agencies’ securities, municipal
bonds, corporate bonds, securities, trust deed mortgage notes, and real estate
joint ventures. At September 30, 2006, approximately 66% of the Company’s
investment portfolio is invested in U.S. Government and its agencies' securities
and municipal bonds. All non-restricted investments that are designated as
available-for-sale are classified as current assets and stated at fair value.
Fair value is estimated primarily from published market values at the balance
sheet date. These investments are available for use in the current operations
regardless of contractual maturity dates. Restricted investments are classified
as non-current assets. The Company calculates realized gains and losses using
the specific identification method and includes them in investment and other
revenues. Unrealized holding gains and losses on available-for-sale investments
are included as a separate component of stockholders' equity, net of income
tax
effects, until realized. The Company does not have any held-to-maturity
investments. The Company does not believe any of its available-for-sale and
restricted investments are other than temporarily impaired at September 30,
2006.
The
Company classifies investments in trust deed mortgage notes and real estate
joint ventures as other investments. These investments are classified as current
assets if expected maturity is within one year of the balance sheet date.
Otherwise, they are classified as long-term investments. The Company believes
that no adjustments are required to its recorded amounts of investments in
trust
deed mortgage notes and real estate joint ventures at September 30,
2006.
4. Long-Term
Debt
Sierra
Debentures
- In
March 2003, the Company issued $115.0 million aggregate principal amount of
its
2¼% senior convertible debentures due March 15, 2023. The debentures are not
guaranteed by any of Sierra’s subsidiaries. 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 109.3494 shares of the Company’s common stock before March 15, 2023 if: (i)
the market price of the Company’s 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
the
Company’s 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. Beginning December 2003, and for each
subsequent period, the market price of the Company’s common stock exceeded 120%
of the conversion price for at least 20 trading days in a period of 30
consecutive trading days. The conversion rate is subject to certain adjustments.
This conversion rate represents a conversion price of $9.145 per share. Holders
of the debentures may require the Company 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, the Company may choose
to
pay the purchase price of such debentures in cash or common stock or a
combination of cash and common stock. The Company can redeem the debentures
for
cash beginning on or after March 20, 2008.
During
2005, the Company received offers and entered into five separate privately
negotiated transactions with debenture holders (“holders”) pursuant to which the
holders converted an aggregate of $63.0 million of debentures
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
they
owned into approximately 6.9 million shares of Sierra common stock in accordance
with the indenture governing the debentures. During the first quarter of 2006,
a
holder converted $500,000 in debentures for approximately 54,000 shares of
common stock. During
the third quarter of 2006, the Company entered into a privately negotiated
transaction with a holder pursuant to which the holder converted $8,000,000
in
debentures for approximately 875,000 shares of common stock in accordance with
the indenture governing the debentures.
Revolving
Credit Facility - On
March
3, 2003, the Company entered into a revolving credit facility. Effective June
26, 2006, the current facility was amended to extend the maturity from December
31, 2009 to June 26, 2011, increase the availability from $140.0
million to $250.0 million and reduce the drawn and undrawn fees.
The current incremental borrowing rate is LIBOR plus .60%. The facility is
available for general corporate purposes and at September 30, 2006, the Company
had nothing drawn on this facility.
The
credit facility remains secured by guarantees by certain of the Company’s
subsidiaries and a first priority perfected security interest in (i) all of
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, 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 Financial,
Inc. (“CII”) and certain other exclusions.
The
revolving credit facility's covenants limit the Company’s ability to dispose of
assets, incur indebtedness, incur other liens, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations, make capital
expenditures and otherwise restrict certain corporate activities. The Company’s
ability to pay dividends, repurchase its common stock and prepay other debt
is
unlimited provided that the Company can still exceed a certain required leverage
ratio after such transaction or any borrowing incurred as a result of such
transaction. In addition, the Company is required to comply with specified
financial ratios as set forth in the credit agreement. The Company believes
it
is in compliance with all covenants of the credit agreement.
5. Employee
and Director Benefit Plans
Stock-Based
Compensation -
The
Company's employee stock plan and non-employee director stock plan provide
common stock-based awards to employees and to non-employee directors. The plans
provide for the granting of restricted stock units, options, and other
stock-based awards. At September 30, 2006, the employee plan and the
non-employee director plan permit the granting of share options and shares
of up
to 4.0 million and 232,000 shares, respectively, of common stock. A committee
appointed by the Board of Directors grants awards. Awards become exercisable
at
such times and in such installments as set by the committee.
In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
(“SFAS 123R”), which replaced Statement of Financial Accounting Standards No.
123, “Accounting for Stock-Based Compensation” ("SFAS 123") and superseded
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” ("APB 25") as amended. SFAS 123R requires all share-based payments,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. The pro forma disclosures previously
permitted under SFAS 123 are no longer an alternative to financial statement
recognition. On January 1, 2006, the
Company adopted SFAS 123R using a modified prospective application.
Accordingly, prior period amounts have not been restated. Under this
application, the Company is required to record compensation expense for all
awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of
adoption.
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
following table summarizes the stock-based compensation expense included in
the
Condensed Consolidated Statements of Income for all stock-based compensation
plans that were recorded in accordance with SFAS 123R:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
|
|
(In
thousands)
|
Medical
expenses
|
|
$
|
250
|
|
$
|
671
|
|
General
and administrative expenses
|
|
|
2,518
|
|
|
5,139
|
|
Stock-based
compensation expense before income taxes
|
|
|
2,768
|
|
|
5,810
|
|
Income
tax benefit
|
|
|
(969
|
)
|
|
(2,034
|
)
|
Total
stock-based compensation expense after income taxes
|
|
$
|
1,799
|
|
$
|
3,776
|
|
The
application of SFAS 123R had the following effect on reported amounts relative
to the amounts that would have been reported using the intrinsic value method
prescribed by APB 25, which the Company used before adopting SFAS
123R.
|
|
Three
Months Ended September 30, 2006
|
|
|
|
Under
APB
25
|
|
As
Reported Under
SFAS
123R
|
|
Difference
|
|
|
|
(In
thousands, except per share data)
|
Operating
income
|
|
$
|
55,999
|
|
$
|
55,012
|
|
$
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
54,998
|
|
$
|
54,011
|
|
$
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
35,571
|
|
$
|
34,929
|
|
$
|
(642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.63
|
|
$
|
0.62
|
|
$
|
(0.01
|
)
|
Net
income per share assuming dilution
|
|
|
0.57
|
|
|
0.56
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
$
|
(45,009
|
)
|
$
|
(46,194
|
)
|
$
|
(1,185
|
)
|
Cash
flow from financing activities
|
|
|
(16,685
|
)
|
|
(15,500
|
)
|
|
1,185
|
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
Under
APB
25
|
|
As
Reported Under
SFAS
123R
|
|
Difference
|
|
|
|
(In
thousands, except per share data)
|
Operating
income
|
|
$
|
161,645
|
|
$
|
157,873
|
|
$
|
(3,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
158,842
|
|
$
|
155,070
|
|
$
|
(3,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
103,586
|
|
$
|
101,134
|
|
$
|
(2,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
1.82
|
|
$
|
1.78
|
|
$
|
(0.04
|
)
|
Net
income per share assuming dilution
|
|
|
1.64
|
|
|
1.61
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
$
|
105,348
|
|
$
|
93,903
|
|
$
|
(11,445
|
)
|
Cash
flow from financing activities
|
|
|
(113,799
|
)
|
|
(102,354
|
)
|
|
11,445
|
|
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
For
the
nine months ended September 30, 2006, net cash proceeds realized from stock
option exercises and purchases under the Company’s Employee Stock Purchase Plan
(“Purchase Plan”) were $14.1 million and the actual tax benefit realized from
stock option exercises and purchases under the Purchase Plan was $11.4 million.
Before
January 1, 2006, the Company accounted for its stock-based compensation using
the intrinsic value method prescribed by APB 25. Accordingly, no compensation
cost was recognized for the Company’s employee stock plans except for those
expenses associated with restricted stock units and certain stock options in
which vesting was or had been agreed to be accelerated.
The
following table represents the effect on net income and earnings per share
if
the Company had applied the fair value based method and recognition provisions
of SFAS 123 to stock-based compensation for the three and nine months ended
September 30, 2005.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2005
|
|
|
|
(In
thousands, except per share data)
|
Net
income, as reported
|
|
$
|
28,442
|
|
$
|
91,683
|
|
Less:
total stock-based employee compensation expense determined
under fair value based methods for all awards,
net of tax
|
|
|
(1,420
|
)
|
|
(4,957
|
)
|
Pro
forma net income
|
|
$
|
27,022
|
|
$
|
86,726
|
|
|
|
|
|
|
|
|
|
Net
income per share, as reported
|
|
$
|
0.50
|
|
$
|
1.67
|
|
Pro
forma net income, per share
|
|
|
0.48
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
Net
income per share assuming dilution, as reported
|
|
$
|
0.43
|
|
$
|
1.38
|
|
Pro
forma net income, per share
|
|
|
0.41
|
|
|
1.31
|
|
Stock
Options and Employee Stock Purchase Plan
The
fair
value of stock options granted was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
|
|
Stock
Options
|
|
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2006
(1)
|
|
|
2005
(1)
|
|
|
2006
(1)
|
|
|
2005
|
|
Average
expected term (years)
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
2.16
|
|
Risk-free
interest rates
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
3.68
|
%
|
Expected
volatility
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
50.60
|
%
|
Dividend
yield
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
Weighted-average
fair value at grant date
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
$
|
15.23
|
|
|
(1)
|
No
stock options were granted during the
period.
|
The
exercise price of options equals the market price of the Company's stock on
the
date of grant. Stock options generally vest at a rate of 20% - 100% per year
and
expire from five to ten years from the date of grant.
The
Company's Purchase Plan allows employees to purchase newly issued shares of
common stock through payroll deductions at 85% of the fair market value of
such
shares on the lower of the first trading day of the plan period or the last
trading day of the plan period as defined in the Purchase Plan. During 2006,
158,000 and 49,000 shares were purchased at prices of $30.67 and $34.43 per
share, respectively. At September 30, 2006, the Company had 770,000 shares
reserved for purchase under the Purchase Plan.
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
fair
value shares purchased under the Purchase Plan were estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
|
|
Purchase
Plan
|
|
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2006
(1)
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Average
expected term (years)
|
|
|
¾
|
|
|
¾
|
|
|
.50
|
|
|
.50
|
|
Risk-free
interest rates
|
|
|
¾
|
|
|
¾
|
|
|
4.32
|
%
|
|
2.58
|
%
|
Expected
volatility
|
|
|
¾
|
|
|
¾
|
|
|
34.70
|
%
|
|
27.76
|
%
|
Dividend
yield
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
|
¾
|
|
Weighted-average
fair value at grant date
|
|
|
¾
|
|
|
¾
|
|
$
|
9.95
|
|
$
|
6.30
|
|
|
(1)
|
No
shares were granted under the Purchase Plan during the
period.
|
The
computation of expected volatility is based on a combination of the Company’s
historical and market-based implied volatility. The computation of average
expected term is based on the Company’s historical exercise patterns. The
risk-free interest rate for periods within the contractual life of the award
is
based on the U.S. Treasury yield curve in effect at the time of
grant.
The
following table reflects the activity of the stock option plans for the nine
months ended September 30, 2006:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
Of
|
|
Average
|
|
Contractual
Life
|
|
Intrinsic
|
|
|
|
Shares
|
|
Exercise
Price
|
|
Remaining
|
|
Value
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
years)
|
|
|
(In
thousands)
|
|
Outstanding,
January 1, 2006
|
|
|
2,844
|
|
$
|
11.09
|
|
|
|
|
|
|
|
Granted
|
|
|
¾
|
|
|
¾
|
|
|
|
|
|
|
|
Exercised
|
|
|
(966
|
)
|
|
8.03
|
|
|
|
|
|
|
|
Canceled
|
|
|
(50
|
)
|
|
9.04
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2006
|
|
|
1,828
|
|
|
12.78
|
|
|
5.82
|
|
$
|
45,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2006
|
|
|
659
|
|
$
|
12.69
|
|
|
5.28
|
|
$
|
16,573
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (the difference between the market price of the Company’s stock
on September 30, 2006 and the exercise price, times the number of shares) that
would have been received by the option holders had all option holders exercised
their options on September 30, 2006. This amount changes based on the market
value of the Company’s stock. The total intrinsic value of options exercised
during the three months ended September 30, 2006 and 2005 was $3.4 million
and
$6.5 million, respectively. The total intrinsic value of options exercised
during the nine months ended September 30, 2006 and 2005 was $32.1 million
and
$47.6 million, respectively.
The
following table reflects the activity of the nonvested stock options for the
nine months ended September 30, 2006:
|
|
Number
|
|
Weighted-Average
|
|
|
|
Of
|
|
Grant
Date
|
|
|
|
Shares
|
|
Fair
Value
|
|
|
|
|
(In
thousands)
|
|
|
|
|
Nonvested
shares, January 1, 2006 (1)
|
|
|
1,558
|
|
$
|
6.44
|
|
Granted
|
|
|
¾
|
|
|
¾
|
|
Vested
|
|
|
(523
|
)
|
|
5.92
|
|
Canceled
|
|
|
(33
|
)
|
|
5.72
|
|
Nonvested
shares, September 30, 2006 (1)
|
|
|
1,002
|
|
$
|
6.74
|
|
(1)
|
Excludes
172,000 and 167,000 shares at January 1, 2006 and September 30, 2006,
respectively, which vested in 2005, but are not exercisable until
2008.
|
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
As
of
September 30, 2006, the Company expects to recognize future total compensation
cost of $5.2 million related to nonvested stock options over a weighted-average
period of 1.1 years.
Restricted
Stock Units
In
January 2006, the Company issued 4,000 units of restricted stock (“Units”) to
each of the six non-employee Directors. Each Unit represents a nontransferable
right to receive one share of the Company’s common stock and there is no cost by
the recipient to exercise the Units. The Units vest on the fourth anniversary
of
the grant date or earlier based on the occurrence of certain events. The fair
value of the transaction was based on the number of Units issued and the Company
stock price on the date of issuance, which was $38.49, and an estimated
forfeiture rate. Total expense associated with the Units was $48,000 and
$287,000 for the three and nine months ended September 30, 2006.
In
August
2006, the Company issued 210,000 Units to certain members of its management.
The
Units vest according to a variety of vesting schedules, or earlier based on
the
occurrence of certain events. The majority of Units have a three year holding
period from the date of grant. The fair value of the transaction was based
on
the number of Units issued, the Company stock price on the date of issuance,
which was $43.60, and an estimated forfeiture rate. A discount was applied
to
the Units with a holding period as a result of the lack of marketability between
the vesting dates and settlement dates. The fair value of Units granted with
a
three year holding period was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 32.3%, risk-free interest rate of 4.8%
and
dividend rate of 0%. Total expense associated with the Units was $1.7 million
for the three and nine months ended September 30, 2006.
The
following table reflects the activity of the restricted stock unit plans for
the
nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
Number
|
|
Aggregate
|
|
|
|
Of
|
|
Intrinsic
|
|
|
|
Shares
|
|
Value
|
|
|
|
|
(In
thousands)
|
|
Outstanding,
January 1, 2006
|
|
|
¾
|
|
|
|
|
Granted
|
|
|
234
|
|
|
|
|
Vested
|
|
|
¾
|
|
|
|
|
Canceled
|
|
|
¾
|
|
|
|
|
Outstanding, September
30, 2006(1)(2)
|
|
|
234
|
|
$
|
8,855
|
|
(1)
|
Exercise
price for all Units is $0.00. (2) Does not include
406,000
shares that have vested but have not
settled.
|
As
of
September 30, 2006, the Company expects to recognize future total compensation
cost of $6.9 million related to current nonvested units over a weighted-average
period of 1.1 years.
Supplemental
Executive Retirement Plan (“SERP”) -
The
Company has a SERP that provides retirement benefits for selected senior
managers. The Company has a $25.0 million liability related to the SERP at
September 30, 2006 and a $22.9 million liability at December 31, 2005. This
liability is recorded in other liabilities in the Condensed Consolidated Balance
Sheet.
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
For
the
nine months ended September 30, 2006, the Company contributed $548,000 to its
SERP to fund benefit payments and anticipates making approximately $182,000
in
additional contributions during the remainder of the year.
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
(In
thousands)
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
126
|
|
$
|
94
|
|
$
|
378
|
|
$
|
283
|
Interest
cost
|
|
|
399
|
|
|
321
|
|
|
1,197
|
|
|
962
|
Amortization
of prior service credits
|
|
|
302
|
|
|
303
|
|
|
908
|
|
|
908
|
Recognized
actuarial loss
|
|
|
32
|
|
|
¾
|
|
|
96
|
|
|
¾
|
Net
periodic benefit cost
|
|
$
|
859
|
|
$
|
718
|
|
$
|
2,579
|
|
$
|
2,153
|
6. Share
Repurchases
From
January 1, 2006 through September 30, 2006, the Company purchased 3.1 million
shares of its common stock, in the open market or through negotiated
transactions, for $127.8 million at an average cost per share of $40.91. Since
the repurchase program began in early 2003 and through September 30, 2006,
the
Company purchased, in the open market or through negotiated transactions, 25.2
million shares for $515.5 million at an average cost per share of $20.45.
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, for
a
total of $225.0 million in share repurchases. At October 25, 2006, $139.4
million was available under the Board of Directors’ authorized plan.
The
repurchase program has no stated expiration date. The Company’s revolving credit
facility, as amended, allows for unlimited stock repurchases based on meeting
the required leverage ratio.
7. Earnings
Per Share
The
following table provides a reconciliation of basic and diluted earnings per
share:
|
|
Three
Months Ended September
30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(In
thousands, except per share data)
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
34,929
|
|
$
|
28,442
|
|
$
|
101,134
|
|
$
|
91,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
56,332
|
|
|
56,770
|
|
|
56,706
|
|
|
54,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
$
|
0.62
|
|
$
|
0.50
|
|
$
|
1.78
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
34,929
|
|
$
|
28,442
|
|
$
|
101,134
|
|
$
|
91,683
|
|
Interest
expense on Sierra debentures, net of tax
|
|
|
185
|
|
|
239
|
|
|
562
|
|
|
1,066
|
|
Income
for purposes of computing diluted net income per share
|
|
$
|
35,114
|
|
$
|
28,681
|
|
$
|
101,696
|
|
$
|
92,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
56,332
|
|
|
56,770
|
|
|
56,706
|
|
|
54,818
|
|
Dilutive
options and restricted shares outstanding
|
|
|
807
|
|
|
1,676
|
|
|
943
|
|
|
2,020
|
|
Dilutive
impact of conversion of Sierra debentures
|
|
|
5,517
|
|
|
7,798
|
|
|
5,598
|
|
|
10,554
|
|
Weighted
average common shares outstanding assuming dilution
|
|
|
62,656
|
|
|
66,244
|
|
|
63,247
|
|
|
67,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share assuming dilution
|
|
$
|
0.56
|
|
$
|
0.43
|
|
$
|
1.61
|
|
$
|
1.38
|
|
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
8. Comprehensive
Income
The
following table presents comprehensive income for the periods
indicated:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
34,929
|
|
$
|
28,442
|
|
$
|
101,134
|
|
$
|
91,683
|
|
Change
in net unrealized holding gain (loss) on available-for-sale
investments
|
|
|
1,640
|
|
|
(909
|
)
|
|
(485
|
)
|
|
(1,059
|
)
|
Comprehensive
income
|
|
$
|
36,569
|
|
$
|
27,533
|
|
$
|
100,649
|
|
$
|
90,624
|
|
9. Recently
Issued Accounting Standards
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes”.
FIN
48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning
after
December 15, 2006. The Company is currently evaluating the impact
that the
adoption of FIN 48 will have on its consolidated financial position or results
of operations.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 applies only to other accounting pronouncements that require or permit
fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. The
Company does not believe the
adoption
of SFAS 157 will have a material impact on its consolidated financial position
or results of operations.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (“SFAS
158”). SFAS 158 requires the recognition of the unfunded status of pension and
other postretirement benefit plans on the balance sheet. SFAS
158
is effective for fiscal years ending after December 15, 2006. The Company is
currently evaluating the impact of the adoption of SFAS 158
on its
consolidated financial position or results of operations.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (“SAB 108”) addressing how the effects of prior-year
uncorrected financial statement misstatements should be considered in
current-year financial statements. SAB 108 requires registrants to quantify
misstatements using both balance-sheet and income-statement approaches in
evaluating whether or not a misstatement is material. SAB
108
is
effective for fiscal years ending after November 15, 2006. The
Company does not believe the
adoption
of SAB 108 will have a material impact on its consolidated financial position
or
results of operations.
10. Segment
Reporting
The
Company has two reportable segments based on the products and services offered:
managed care and corporate operations, and military health services operations.
The managed care segment includes managed health care services provided through
a health maintenance organization (“HMO”), managed indemnity plans, third-party
administrative services programs for employer-funded health benefit plans and
self-insured workers’ compensation plans, multi-specialty medical groups, other
ancillary services and corporate operations. The military health services
segment administered a managed care federal contract for the Department of
Defense's TRICARE program in Region 1.
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Sierra
Military Health Services LLC (“SMHS”) completed the fifth year of a five-year
contract in May 2003. SMHS then operated under a negotiated contract extension
period, which ended August 31, 2004. The new contractor became operational
on
September 1, 2004 and the new contract superseded the remainder of the Company’s
TRICARE Region 1 contract. On September 1, 2004, SMHS commenced a phase-out
of
operations at prices previously negotiated with the Department of Defense
(“DoD”). SMHS did not meet the definition of discontinued operations since the
Company did not have plans to dispose of the operations before the phase-out
was
completed.
During
2005, the Company reached a negotiated settlement with the DoD for certain
outstanding change orders and bid price adjustments related to option period
six
and the phase-out of its military health care operations. Included in the
settlement was the determination of the final military health care payable
balance.
Through
participation in Medicare, TRICARE and the Federal Employees Health Benefit
Plan
programs, the Company generated approximately 43% and 37% of its total
consolidated revenues from agencies of the U.S. government for the three months
ended September 30, 2006 and 2005, respectively. The Company generated
approximately 45% and 39% of its total consolidated revenues from agencies
of
the U.S. government for the nine months ended September 30, 2006 and 2005,
respectively. The TRICARE revenue is presented below in the military health
services operations segment and the remainder of the revenue described above
is
included in the managed care and corporate operations segment.
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company evaluates each segment's performance based on segment operating profit.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.
Information
concerning the operations of the reportable segments is as follows:
|
|
Managed
Care And Corporate Operations
|
|
Military
Health Services Operations
|
|
Total
|
|
|
|
(In
thousands)
|
|
Three
months ended September 30, 2006
|
|
|
Medical
premiums
|
|
$
|
405,618
|
|
$
|
¾
|
|
$
|
405,618
|
|
Professional
fees
|
|
|
13,300
|
|
|
¾
|
|
|
13,300
|
|
Investment
and other revenues
|
|
|
11,075
|
|
|
4
|
|
|
11,079
|
|
Total
revenue
|
|
$
|
429,993
|
|
$
|
4
|
|
$
|
429,997
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating profit
|
|
$
|
55,008
|
|
$
|
4
|
|
$
|
55,012
|
|
Interest
expense
|
|
|
(1,015
|
)
|
|
¾
|
|
|
(1,015
|
)
|
Other
income (expense), net
|
|
|
14
|
|
|
¾
|
|
|
14
|
|
Income
before income taxes
|
|
$
|
54,007
|
|
$
|
4
|
|
$
|
54,011
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
Medical
premiums
|
|
$
|
327,084
|
|
$
|
¾
|
|
$
|
327,084
|
|
Military
contract revenues
|
|
|
¾
|
|
|
11
|
|
|
11
|
|
Professional
fees
|
|
|
11,133
|
|
|
¾
|
|
|
11,133
|
|
Investment
and other revenues
|
|
|
9,171
|
|
|
44
|
|
|
9,215
|
|
Total
revenue
|
|
$
|
347,388
|
|
$
|
55
|
|
$
|
347,443
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating profit
|
|
$
|
44,346
|
|
$
|
163
|
|
$
|
44,509
|
|
Interest
expense
|
|
|
(1,991
|
)
|
|
¾
|
|
|
(1,991
|
)
|
Other
income (expense), net
|
|
|
408
|
|
|
19
|
|
|
427
|
|
Income
before income taxes
|
|
$
|
42,763
|
|
$
|
182
|
|
$
|
42,945
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
Medical
premiums
|
|
$
|
1,220,726
|
|
$
|
¾
|
|
$
|
1,220,726
|
|
Professional
fees
|
|
|
39,097
|
|
|
¾
|
|
|
39,097
|
|
Investment
and other revenues
|
|
|
32,812
|
|
|
48
|
|
|
32,860
|
|
Total
revenue
|
|
$
|
1,292,635
|
|
$
|
48
|
|
$
|
1,292,683
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating profit (loss)
|
|
$
|
157,963
|
|
$
|
(90
|
)
|
$
|
157,873
|
|
Interest
expense
|
|
|
(2,793
|
)
|
|
¾
|
|
|
(2,793
|
)
|
Other
income (expense), net
|
|
|
(10
|
)
|
|
¾
|
|
|
(10
|
)
|
Income
(loss) before income taxes
|
|
$
|
155,160
|
|
$
|
(90
|
)
|
$
|
155,070
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
Medical
premiums
|
|
$
|
958,834
|
|
$
|
¾
|
|
$
|
958,834
|
|
Military
contract revenues
|
|
|
¾
|
|
|
16,322
|
|
|
16,322
|
|
Professional
fees
|
|
|
31,102
|
|
|
¾
|
|
|
31,102
|
|
Investment
and other revenues
|
|
|
24,551
|
|
|
520
|
|
|
25,071
|
|
Total
revenue
|
|
$
|
1,014,487
|
|
$
|
16,842
|
|
$
|
1,031,329
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating profit
|
|
$
|
131,626
|
|
$
|
14,577
|
|
$
|
146,203
|
|
Interest
expense
|
|
|
(7,961
|
)
|
|
(10
|
)
|
|
(7,971
|
)
|
Other
income (expense), net
|
|
|
1,136
|
|
|
(308
|
)
|
|
828
|
|
Income
before income taxes
|
|
$
|
124,801
|
|
$
|
14,259
|
|
$
|
139,060
|
|
Sierra
Health Services, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
11. Commitments
and Contingencies
Litigation
and Legal Matters - Although
the Company has not been sued, Sierra was identified in discovery submissions
in
pending class action litigation against major managed care companies, as having
allegedly participated in an unlawful conspiracy to improperly deny, diminish
or
delay payments to physicians. In Re: Managed Care Litigation, MDL No. 1334
(S.D.Fl.).
Beginning
in 1999, a series of class action lawsuits were filed against many major firms
in the health benefits business alleging an unlawful conspiracy to deny,
diminish or delay payments to physicians. The Company has not been named as
a
defendant in these lawsuits. A multi-district litigation panel has consolidated
some of these cases in the United States District Court for the Southern
District of Florida, Miami Division. In the lead case, known as Shane,
the
amended complaint alleges multiple violations under the Racketeer Influenced
and
Corrupt Organizations Act ("RICO"). The suit seeks injunctive, compensatory
and
equitable relief as well as restitution, costs, fees and interest payments.
On
April 7, 2003, the United States Supreme Court determined that certain claims
against certain defendants should be arbitrated.
Subsequent
lower court rulings have further resolved which of the plaintiffs' claims are
subject to arbitration. In 2004, the Court of Appeals for the Eleventh Circuit
upheld a district court ruling certifying a plaintiff class in the Shane
case. In
February 2005, the district court determined to bifurcate the case, holding
a
trial phase limited to liability issues, and a second, if necessary, regarding
damages.
Aetna,
Inc., CIGNA Corporation, the Prudential Insurance Company of America, Wellpoint
Inc., Health Net Inc. and Humana Inc. have entered into settlement agreements
which have been approved by the district court. On January 31, 2006, the trial
court granted summary judgment on all claims to defendant PacifiCare Health
Systems, Inc. (“PacifiCare”), finding that plaintiffs had failed to provide
documents or other evidence showing that PacifiCare agreed to participate in
the
alleged conspiracy. On June 19, 2006, the trial court granted summary judgment
on all remaining claims against the two remaining defendants, UnitedHealth
Group, Inc. and Coventry Health Care, Inc., because the plaintiffs had not
submitted evidence that would allow a jury to reasonably find that either had
been part of a conspiracy to underpay doctors or that either had aided or
abetted alleged RICO violations. Plaintiffs have announced that they intend
to
appeal this decision. Plaintiffs in the Shane
proceeding had stated their intention to introduce evidence at trial concerning
Sierra and other parties not named as defendants in the litigation.
The
Company is subject to other various claims and 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
and other members, and claims by providers for payment for medical services
rendered to HMO and other members. Some litigation may also include claims
for
punitive or other damages that are not covered by insurance. These actions
are
in various stages of litigation and some may ultimately be brought to trial.
For
all
claims that are considered probable and for which the amount of loss can be
reasonably estimated, the Company accrued amounts it believes to be appropriate,
based on information presently available. With respect to certain pending
actions, the Company maintains commercial insurance coverage with varying
deductibles for which the Company maintains estimated reserves for its
self-insured portion based upon its current assessment of such litigation.
Due
to recent unfavorable changes in the commercial insurance market, the Company
has for certain risks, purchased coverage with higher deductibles and lower
limits of coverage. In the opinion of management, based on information presently
available, the amount or range of any potential loss for certain claims and
litigation cannot be reasonably estimated or is not considered probable.
However, the ultimate resolutions of these pending legal proceedings are not
expected to have a material adverse effect on the Company’s financial
condition.
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
The
following discussion and analysis provides information that management believes
is relevant for an assessment and understanding of our consolidated financial
condition and results of operations. The discussion should be read in
conjunction with our audited consolidated financial statements and accompanying
notes for the year ended December 31, 2005, and "Management’s Discussion and
Analysis of Financial Condition and Results of Operations," included in our
2005
Annual Report on Form 10-K filed with the Securities and Exchange Commission
on
February 21, 2006, and in conjunction with our unaudited condensed consolidated
financial statements and accompanying notes for the three and nine month periods
ended September 30, 2006 and 2005, included in this Form 10-Q. The information
contained below is subject to risk factors. We urge the reader to review
carefully the sections "Forward-Looking Statements” in Part 1, Item 1 and "Risk
Factors" in Part 1, Item 1A of our 2005 Annual Report on Form 10-K for a more
complete discussion of the risks associated with an investment in our
securities.
This
report on Form 10-Q contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, both as amended. The forward-looking statements regarding
our business and results of operations should be considered by our stockholders
or any reader of our business or financial information along with the risk
factors discussed in our 2005 Annual Report on Form 10-K. All statements, other
than statements of historical fact, are forward-looking statements for purposes
of federal and state securities laws. The cautionary statements are made
pursuant to the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995, as amended, and identify important factors that could cause
our actual results to differ materially from those expressed in any projected,
estimated or forward-looking statements relating to us. These forward-looking
statements are generally identified by their use of terms and phrases such
as
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “hope,”
“intend,” “may,” “plan,” “predict,” “project,” “seeks,” “will,” and other
similar terms and phrases, including all references to assumptions.
Although
we believe that the expectations reflected in any of our forward-looking
statements are reasonable, actual results could differ materially from those
projected or assumed in any of our forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements that
speak only as of the date hereof. We undertake no obligation to publish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
Summary
of Consolidated Results - Three Months Ended September 30, 2006 and
2005
|
|
Three
Months Ended
September
30,
|
|
Percent
Of Revenue
Three
Months Ended
September
30,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
vs. 2005
|
|
(In
thousands, except percentages, per share and
membership)
|
|
|
|
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
premiums
|
|
$
|
405,618
|
|
$
|
327,084
|
|
|
94.3
|
%
|
|
94.1
|
%
|
$
|
78,534
|
|
|
24.0
|
%
|
Military
contract revenues
|
|
|
¾
|
|
|
11
|
|
|
¾
|
|
|
¾
|
|
|
(11
|
)
|
|
(100.0
|
)
|
Professional
fees
|
|
|
13,300
|
|
|
11,133
|
|
|
3.1
|
|
|
3.2
|
|
|
2,167
|
|
|
19.5
|
|
Investment
and other revenues
|
|
|
11,079
|
|
|
9,215
|
|
|
2.6
|
|
|
2.7
|
|
|
1,864
|
|
|
20.2
|
|
Total
|
|
|
429,997
|
|
|
347,443
|
|
|
100.0
|
|
|
100.0
|
|
|
82,554
|
|
|
23.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
expenses
|
|
|
323,694
|
|
|
259,591
|
|
|
75.3
|
|
|
74.7
|
|
|
64,103
|
|
|
24.7
|
|
Medical
care ratio
|
|
|
77.3
|
%
|
|
76.8
|
%
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Military
contract expenses
|
|
|
¾
|
|
|
(108
|
)
|
|
¾
|
|
|
¾
|
|
|
108
|
|
|
(100.0
|
)
|
General
and administrative expenses
|
|
|
51,291
|
|
|
43,451
|
|
|
11.9
|
|
|
12.5
|
|
|
7,840
|
|
|
18.0
|
|
Total
|
|
|
374,985
|
|
|
302,934
|
|
|
87.2
|
|
|
87.2
|
|
|
72,051
|
|
|
23.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
55,012
|
|
|
44,509
|
|
|
12.8
|
|
|
12.8
|
|
|
10,503
|
|
|
23.6
|
|
Interest
expense
|
|
|
(1,015
|
)
|
|
(1,991
|
)
|
|
(0.2
|
)
|
|
(0.5
|
)
|
|
976
|
|
|
(49.0
|
)
|
Other
income (expense), net
|
|
|
14
|
|
|
427
|
|
|
¾
|
|
|
0.1
|
|
|
(413
|
)
|
|
(96.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
54,011
|
|
|
42,945
|
|
|
12.6
|
|
|
12.4
|
|
|
11,066
|
|
|
25.8
|
|
Provision
for income taxes
|
|
|
(19,082
|
)
|
|
(14,503
|
)
|
|
(4.5
|
)
|
|
(4.2
|
)
|
|
(4,579
|
)
|
|
31.6
|
|
Tax
rate
|
|
|
35.3
|
%
|
|
33.8
|
%
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
Net
income
|
|
$
|
34,929
|
|
$
|
28,442
|
|
|
8.1
|
%
|
|
8.2
|
%
|
$
|
6,487
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share assuming dilution
|
|
$
|
0.56
|
|
$
|
0.43
|
|
|
|
|
|
|
|
$
|
0.13
|
|
|
30.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HMO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
273,600
|
|
|
251,000
|
|
|
|
|
|
|
|
|
22,600
|
|
|
9.0
|
%
|
Medicare
|
|
|
57,000
|
|
|
55,200
|
|
|
|
|
|
|
|
|
1,800
|
|
|
3.3
|
|
Medicaid
|
|
|
57,000
|
|
|
53,300
|
|
|
|
|
|
|
|
|
3,700
|
|
|
6.9
|
|
Subtotal
HMO
|
|
|
387,600
|
|
|
359,500
|
|
|
|
|
|
|
|
|
28,100
|
|
|
7.8
|
|
PPO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
31,300
|
|
|
27,000
|
|
|
|
|
|
|
|
|
4,300
|
|
|
15.9
|
|
Medicare
|
|
|
1,700
|
|
|
¾
|
|
|
|
|
|
|
|
|
1,700
|
|
|
100.0
|
|
Subtotal
PPO
|
|
|
33,000
|
|
|
27,000
|
|
|
|
|
|
|
|
|
6,000
|
|
|
22.2
|
|
Medicare
Part D
|
|
|
183,300
|
|
|
¾
|
|
|
|
|
|
|
|
|
183,300
|
|
|
100.0
|
|
Medicare
supplement
|
|
|
13,700
|
|
|
15,900
|
|
|
|
|
|
|
|
|
(2,200
|
)
|
|
(13.8
|
)
|
Administrative
services
|
|
|
221,100
|
|
|
202,000
|
|
|
|
|
|
|
|
|
19,100
|
|
|
9.5
|
|
Total
membership
|
|
|
838,700
|
|
|
604,400
|
|
|
|
|
|
|
|
|
234,300
|
|
|
38.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HMO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
810,900
|
|
|
745,700
|
|
|
|
|
|
|
|
|
65,200
|
|
|
8.7
|
%
|
Medicare
|
|
|
171,000
|
|
|
165,000
|
|
|
|
|
|
|
|
|
6,000
|
|
|
3.6
|
|
Medicaid
|
|
|
171,600
|
|
|
159,000
|
|
|
|
|
|
|
|
|
12,600
|
|
|
7.9
|
|
The
table
above should be reviewed in association with the discussion that
follows.
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
Summary
of Consolidated Results - Nine Months Ended September 30, 2006 and
2005
|
|
Nine
Months Ended
September
30,
|
|
Percent
Of Revenue
Nine
Months Ended
September
30,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
vs. 2005
|
|
(In
thousands, except percentages, per share and
membership)
|
|
|
|
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
premiums
|
|
$
|
1,220,726
|
|
$
|
958,834
|
|
|
94.4
|
%
|
|
93.0
|
%
|
$
|
261,892
|
|
|
27.3
|
%
|
Military
contract revenues
|
|
|
¾
|
|
|
16,322
|
|
|
¾
|
|
|
1.6
|
|
|
(16,322
|
)
|
|
(100.0
|
)
|
Professional
fees
|
|
|
39,097
|
|
|
31,102
|
|
|
3.0
|
|
|
3.0
|
|
|
7,995
|
|
|
25.7
|
|
Investment
and other revenues
|
|
|
32,860
|
|
|
25,071
|
|
|
2.6
|
|
|
2.4
|
|
|
7,789
|
|
|
31.1
|
|
Total
|
|
|
1,292,683
|
|
|
1,031,329
|
|
|
100.0
|
|
|
100.0
|
|
|
261,354
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
expenses
|
|
|
981,758
|
|
|
755,779
|
|
|
76.0
|
|
|
73.3
|
|
|
225,979
|
|
|
29.9
|
|
Medical
care ratio
|
|
|
77.9
|
%
|
|
76.3
|
%
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
Military
contract expenses
|
|
|
138
|
|
|
2,265
|
|
|
¾
|
|
|
0.2
|
|
|
(2,127
|
)
|
|
(93.9
|
)
|
General
and administrative expenses
|
|
|
152,914
|
|
|
127,082
|
|
|
11.8
|
|
|
12.3
|
|
|
25,832
|
|
|
20.3
|
|
Total
|
|
|
1,134,810
|
|
|
885,126
|
|
|
87.8
|
|
|
85.8
|
|
|
249,684
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
157,873
|
|
|
146,203
|
|
|
12.2
|
|
|
14.2
|
|
|
11,670
|
|
|
8.0
|
|
Interest
expense
|
|
|
(2,793
|
)
|
|
(7,971
|
)
|
|
(0.2
|
)
|
|
(0.8
|
)
|
|
5,178
|
|
|
(65.0
|
)
|
Other
income (expense), net
|
|
|
(10
|
)
|
|
828
|
|
|
¾
|
|
|
0.1
|
|
|
(838
|
)
|
|
(101.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
155,070
|
|
|
139,060
|
|
|
12.0
|
|
|
13.5
|
|
|
16,010
|
|
|
11.5
|
|
Provision
for income taxes
|
|
|
(53,936
|
)
|
|
(47,377
|
)
|
|
(4.2
|
)
|
|
(4.6
|
)
|
|
(6,559
|
)
|
|
13.8
|
|
Tax
rate
|
|
|
34.8
|
%
|
|
34.1
|
%
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
Net
income
|
|
$
|
101,134
|
|
$
|
91,683
|
|
|
7.8
|
%
|
|
8.9
|
%
|
$
|
9,451
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share assuming dilution
|
|
$
|
1.61
|
|
$
|
1.38
|
|
|
|
|
|
|
|
$
|
0.23
|
|
|
16.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HMO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,378,200
|
|
|
2,192,300
|
|
|
|
|
|
|
|
|
185,900
|
|
|
8.5
|
%
|
Medicare
|
|
|
509,700
|
|
|
489,600
|
|
|
|
|
|
|
|
|
20,100
|
|
|
4.1
|
|
Medicaid
|
|
|
507,600
|
|
|
465,500
|
|
|
|
|
|
|
|
|
42,100
|
|
|
9.0
|
|
The
table
above should be reviewed in association with the discussion that
follows.
Overview
We
are 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. Our strategy has been to develop and offer a portfolio of managed
health care products to government agencies, employer groups, and individuals.
We derive revenues primarily from our health maintenance organization (HMO)
and
managed indemnity plans. To a lesser extent, we also derive revenues from
professional fees (consisting primarily of fees for providing health care
services to non-members, co-payment fees received from members and ancillary
products), and investment and other revenue (including fees for workers'
compensation third party administration, utilization management services and
ancillary products).
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
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
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.
Executive
Summary
Our
highlights for the nine months ended September 30, 2006 compared to the nine
months ended September 30, 2005 include:
·
|
Total
operating revenues improved by 25.3%. This increase was primarily
driven
by a 27.3% increase in medical premiums due to our participation
in the
new Medicare Part D prescription drug program (PDP), an increase
in our
HMO membership and premium rate increases. Also contributing to the
improvement in operating revenues was a 31.1% increase in investment
and
other revenues, which increased due to an increase in yield during
2006
and higher average invested
balances.
|
·
|
HMO
membership increased 7.8% as a result of new accounts and in-case
growth.
|
·
|
Medical
expenses, as a percentage of medical premiums and professional fees,
or
medical care ratio, increased by 160 basis points as a result of
the much
higher medical care ratio related to the
PDP.
|
·
|
General
and administrative (G&A) expenses as a percentage of medical premiums
decreased to 12.5% in 2006 from 13.3% in 2005. G&A expenses increased
20.3% primarily due to PDP related expenses, higher employee compensation
related expenses, premium taxes, and brokers’ fees.
|
·
|
Operating
income from our managed care and corporate operations improved 20.0%
primarily driven by medical premium revenue growth from new members
and
premium rate increases. Our operating margin from our managed care
and
corporate operations, which is operating income divided by total
revenues,
decreased 80 basis points as a result of the lower operating margin
for
the PDP.
|
·
|
We
repurchased 3.1 million shares of our common stock during 2006. Our
weighted average common shares outstanding assuming dilution has
decreased
from 67.4 million in 2005 to 63.2 million in 2006.
|
·
|
Our
net income per common share assuming dilution increased
16.7%.
|
·
|
It
currently appears unlikely that we will extend our contract with
our
current primary southern Nevada contracted hospital group, HCA Inc.
(HCA).
Our current contract is scheduled to expire on December 31, 2006.
While we
are now engaged in an effort to move our HCA hospital days to other
contracted hospitals, there will be emergency situations that will
require
us to use one or more HCA hospitals in 2007. See Medical Expenses
below
for more details.
|
·
|
Cash
flows from operating activities decreased to $93.9 million from $152.9
during 2005. This decrease is mostly due to additional payments from
CMS
received in 2005 and not in 2006, see Medical Premiums below for
more
details, and negative cash flow of $39.1 million related to the PDP.
The
negative cash flow is primarily due to CMS reconciliation issues
and
insufficient funding from CMS for our reimbursable low-income subsidy
costs. These costs will be fully reimbursed after CMS performs their
year-end reconciliation. These decreases were partially offset by
an
increase in medical claims payable during 2006 compared to
2005.
|
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
Results
Of Operations, Three Months Ended September 30, 2006, Compared To Three Months
Ended September 30, 2005
Medical
Premiums
- The
increase in medical premiums for 2006 reflects an 8.7% increase in commercial
HMO member months (the number of months individuals are enrolled in a plan),
which is attributed to in-case growth, movement from self-insured plans to
our
commercial products and other new accounts. HMO and HMO Point of Service premium
rates for renewing commercial groups increased approximately 7.1% while the
overall recorded per member per month revenue increase, including new and
continuing business, was approximately 3.1%, net of changes in
benefits.
The
increase in medical premiums for 2006 includes $43.3 million from our
stand-alone PDP described below, which was effective January 1, 2006. We
recognize medical premiums from the PDP as earned over the contract period.
The
increase in medical premiums for 2006 also reflects the annual Medicare increase
described below and a 3.6% increase in HMO Medicare member months. The growth
in
Medicare member months contributes significantly to the increase in medical
premiums as the Medicare per member premium rates are more than three times
the
average commercial premium rate.
PDP States
|
CMS selected us to participate in
the
new voluntary PDP for our Medicare Advantage plans as well as a
stand-alone program for 2006. We were also selected to participate
in a
local and regional Medicare Advantage PPO plans. Sierra Health and
Life
Insurance Company, Inc. (SHL) offers 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 has also been selected as a PDP sponsor in the same states for
auto-enrolled Medicare and Medicaid 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 September 30, 2006, we had 183,300
beneficiaries enrolled in the PDP, the |
majority of which were
auto-enrolled beneficiaries. |
In
2007,
we will continue our participation in the PDP for our Medicare Advantage plans
and our stand-alone program. SHL will offer its stand-alone PDP in 30 states
and
the District of Columbia. SHL will market its plan in only a few selected
states. Enrollment in those states in which no active marketing will occur,
will
be based solely on potential beneficiaries identifying the plan from the CMS
website. Additionally, SHL will remain eligible as a PDP sponsor for its current
auto-enrolled Medicare and Medicaid beneficiaries in California and Nevada,
and
for its current and 2007 auto-enrolled beneficiaries in Arizona, Colorado,
Idaho, Oregon, Utah and Washington. SHL will no longer be a PDP sponsor for
auto-enrolled beneficiaries in New Mexico and Texas. At September 30, 2006,
auto-enrolled members in New Mexico and Texas accounted for approximately 13.1%
of SHL's total stand-alone PDP membership.
In
2007,
SHL will continue to offer its local and regional Medicare Advantage PPO plans
and for the first time, SHL will offer a Medicare Advantage Private
Fee-For-Service plan. The plan will be available in 28 states and the District
of Columbia. The plan does not include Medicare Part D prescription drug
coverage but does provide hospital and physician coverage. Members will pay
a
monthly premium, co-payments and coinsurance, with reasonable out-of-pocket
maximum amounts. Members will also have unlimited network access.
Effective
January 2004, CMS adopted a new risk adjustment payment methodology for Medicare
beneficiaries enrolled in managed care programs, including the Social HMO,
which
has been administratively extended by CMS through 2007. For Social HMO members,
the new methodology includes a frailty adjuster that uses measures of functional
impairment to predict expenditures. CMS is transitioning to the new payment
methodology on a graduated basis from 2004 through 2007 and we will be
completely transitioned to the new methodology effective
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
January
1, 2008. In 2005, we were paid 70% based on the previous payment methodology
and
30% based on the new methodology. For 2006 and 2007, we will be paid 50% and
25%, based on the previous payment methodology and 50% and 75%, based on the
new
methodology, respectively. The new payment methodology reduced our 2006 annual
Medicare increase by 240 basis points. Including the effect of the revised
Medicare Advantage bid process, changes in membership mix and the additional
payments for the PDP, our net 2006 Medicare increase was approximately 7%.
We
expect a net Medicare increase of approximately 1% in 2007.
Early
in
2005, CMS replaced its legacy Group Health Plan system. The transition to the
new system had led to some incorrect transactions and inconsistencies in the
payments and data we received from CMS. We received overpayments, of over $30
million, from CMS in excess of our current best estimate of Medicare premiums
in
2005.
We
have
made CMS aware of the issue and they are in the process of researching it.
We
expect these funds to be settled with CMS over the course of the next several
quarters. Additionally, we have some membership discrepancies with some of
the
data received from CMS for 2006. We are currently working with CMS to resolve
these discrepancies and have recorded our Medicare premium based on our best
estimate.
Pursuant
to an existing contract with the Division of Healthcare Financing and Policy
of
the state of Nevada (DHCFP), we provide health care coverage to certain Medicaid
eligible individuals and uninsured children who do not qualify for Medicaid.
At
September 30, 2006, we had approximately 43,400 members enrolled in our HMO
Medicaid risk program. To enroll in this program, an individual must be eligible
for the Temporary Assistance for Needy Families or the Children's Health
Assurance Program categories of the state’s Medicaid program. At September 30,
2006, we also have approximately 13,600 Nevada Check Up members. Nevada Check
Up
is the state’s Children's Health Insurance Program, which covers certain
uninsured children who do not qualify for Medicaid. We receive a monthly fee
for
each Medicaid and Nevada Check Up member enrolled by the state's Managed Care
Division and we also receive a per case fee for each Medicaid and Nevada Check
Up eligible newborn delivery. We received a 1.0% increase in Medicaid rates
for
2005 compared to a 0.9% decrease on January 1, 2006, due in large part to our
mix of Medicaid members; however, we received a 2.6% rate increase on July
1,
2006.
Effective
November 1, 2006, the DHCFP awarded a contract to Health Plan of Nevada, Inc.
as
one of two Medicaid managed care contractors in the state of Nevada. The new
contract is effective until June 30, 2009. The new contract includes a provision
that allows the DHCFP, at its sole option, to extend the contact for up to
two
additional years.
Continued
medical premium revenue growth is principally dependent upon continued
enrollment in our products and upon competitive and regulatory
factors.
Professional
Fees
- The
increase in professional fees primarily resulted from increased visits to our
clinical subsidiaries.
Investment
and Other Revenues - Higher
average invested balances and an increase in yield during 2006 primarily
contributed to the increase in investment and other revenues. See Note 3,
Investments, in the Notes to the Condensed Consolidated Financial Statements.
Medical
Expenses -
Our
medical care ratio increased 50 basis points. The increase in our medical care
ratio is due primarily to increased prescription drug costs along with other
medical cost trends. Included in medical expenses is $33.4 million of pharmacy
costs related to our PDP. Our PDP medical care ratio was 77.0% for the quarter
and had minimal impact on our consolidated medical care ratio. Medical premiums
from the PDP are recognized as earned over the contract period; however,
pharmacy and administrative costs are recognized as incurred with
no
allocation or annualized estimation of the impact of deductibles, the coverage
gap or “donut hole,” prior to it being reached by the
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
member,
or reinsurance. This method of recognizing revenues and expenses results in
a
disproportionate amount of expense in the first part of each contract year
when
the plan is responsible for a larger portion of the drug cost.
The
number of days in claims payable, which is the medical claims payable balance
divided by the average medical expense per day, for 2006, was 44.7 compared
to
45.0 for 2005. The
decrease is due to the increase in pharmacy claims related to the PDP, which
have a shorter payment cycle than our other medical claims. This decrease was
largely offset by an increase in
bed days
per thousand in the third quarter of 2006 and an increase in amounts related
to
provider disputes.
We
contract with hospitals, physicians and other independent providers of health
care under capitated or discounted fee-for-service arrangements, including
hospital per diems, to provide medical care services to members. We also
have
an
extensive pharmacy network to provide pharmaceuticals to our members. Capitated
providers are at risk for a portion of the cost of medical care services
provided to our members in the relevant geographic areas; however, we are
ultimately responsible for the provision of services to our members should
the
capitated provider be unable to provide the contracted services. We incurred
capitation expenses with non-affiliated providers of $34.1 million and $31.9
million, or 10.5% and 12.3%, of our total medical expenses for 2006 and 2005,
respectively. Also included in medical expenses are the operating expenses
of
the Company’s medical provider subsidiaries and certain claims-related
administrative expenses, which accounted for 28.2% and 33.1% of our total
medical expenses for 2006 and 2005, respectively.
The
Las
Vegas area includes twelve hospitals with a thirteenth hospital scheduled to
open in November 2006. Our current primary southern Nevada contracted hospital
organization includes three hospitals, Sunrise Hospital and Medical Center,
Mountain View Hospital and Southern Hills Hospital and Medical Center, which
are
owned by HCA. While we have been in negotiations to extend our contract, which
expires December 31, 2006, it currently appears unlikely that we will extend
our
contract with HCA. We have contracts in place through the middle of 2008 with
all of the other hospitals in the Las Vegas area. These contracts are based
on a
fixed per diem rate structure and are generally competitive with our overall
costs at HCA hospitals. While we are now engaged in an effort to move our HCA
hospital days to other contracted hospitals for 2007, there will be emergency
situations that will require us to use one or more HCA hospitals in 2007. If
we
do not contract with HCA in 2007, we may be required to pay full- billed charges
for services rendered to our commercial members at an HCA hospital. Full-billed
charges are substantially higher then our current commercial rates with HCA.
We
will receive a significant discount to full-billed charges for services rendered
to Medicare and Medicaid members at an HCA hospital, as HCA will be required
to
bill us at the Medicare and Medicaid fee schedule. Currently, we cannot project
the utilization of HCA hospitals in 2007; however, we believe there is
sufficient hospital capacity in the Las Vegas area to service all of our
members. We do expect the loss of this contract to have an adverse impact on
our
medical loss ratio in 2007.
General
and Administrative Expenses
- G&A
expenses increased primarily due to PDP related expenses, higher employee
compensation related expenses, premium taxes, and brokers’ fees. As a percentage
of medical premiums, G&A expenses were 12.6% for 2006, compared to 13.3% for
2005.
Interest
Expense
-
Debenture holders converted $29.0 million of our senior convertible debentures
in the third quarter of 2005. This conversion resulted in a decrease in interest
expense in 2006 compared to 2005.
Provision
for Income Taxes
- Our
effective tax rate is slightly higher than the statutory rate. The 2006 tax
rate
was higher than 2005 primarily due to a favorable state tax settlement during
2005.
Our
effective tax rate is based on actual or expected income, statutory tax rates
and tax planning opportunities available to us. We use significant estimates
and
judgments in determining our effective tax rate. We are occasionally audited
by
federal, state or local jurisdictions regarding compliance with federal, state
and local tax laws and the recognition of income and deductibility of expenses.
Tax assessments may not arise until several years
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
after
tax
returns are filed. While there is an element of uncertainty in predicting the
outcome of tax audits, we believe that the recorded tax assets and liabilities
are appropriately stated based on our analyses of probable outcomes, including
interest and other potential adjustments. Our tax assets and liabilities are
adjusted based on the most current facts and circumstances, including the
progress of audits, case law and emerging legislation; any adjustments are
included in the effective tax rate in the current period.
Results
Of Operations, Nine Months Ended September 30, 2006, Compared To Nine Months
Ended September 30, 2005
Medical
Premiums
- The
increase in medical premiums for 2006 reflects an 8.5% increase in commercial
HMO member months, a 9.0% increase in Medicaid member months and a 4.1% increase
in Medicare 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 the average commercial premium rate.
The
increase in
medical premiums for 2006 also includes $155.0 million from our stand-alone
PDP,
which was effective January 1, 2006.
HMO
and
HMO Point of Service premium rates for renewing commercial groups increased
approximately 5.7% while the overall recorded per member per month revenue
increase, including new and continuing business, was approximately 2.8%, net
of
changes in benefits. The annual Medicare rate increase was approximately
7%.
Military
Contract Revenues
- The
decrease in military contract revenues resulted from Sierra Military Health
Services LLC (SMHS) completing its health care operations under the TRICARE
contract on August 31, 2004. On September 1, 2004, SMHS commenced a phase-out
of
operations at prices previously negotiated with the Department of Defense (DoD).
Revenues for 2005 primarily related to the phase-out and final settlement of
the
military health care operations.
Professional
Fees
- The
increase in professional fees primarily resulted from increased visits to our
clinical subsidiaries and a new contract to provide anesthesiology services
to a
local hospital, which started in the third quarter of 2005.
Investment
and Other Revenues - Higher
average invested balances and an increase in yield during 2006 primarily
contributed to the increase in investment and other revenues. See Note 3,
Investments, in the Notes to the Condensed Consolidated Financial Statements.
Medical
Expenses -
Our
medical care ratio increased 160 basis points primarily due to the PDP, which
had medical expenses of $135.5 million and has a much higher medical care ratio
than our other products. Our medical loss for the PDP was 87.4%, which accounted
for 130 basis points of the increase. We incurred capitation expenses with
non-affiliated providers of $99.9 million and $96.2 million, or 10.2% and 12.7%,
of our total medical expenses for 2006 and 2005, respectively. Also included
in
medical expenses are the operating expenses of the Company’s medical provider
subsidiaries and certain claims-related administrative expenses, which accounted
for 26.0% and 32.0% of our total medical expenses for 2006 and 2005,
respectively.
Military
Contract Expenses
- The
decrease in military contract expenses resulted from SMHS completing its final
month of health care operations under the TRICARE contract in August 2004.
Expenses for 2005 primarily related to the phase-out and final settlement of
the
military health care operations.
General
and Administrative Expenses
- G&A
expenses increased primarily due to PDP related expenses, and higher employee
compensation related expenses, premium taxes, and brokers’ fees. As a percentage
of medical premiums, G&A expenses were 12.5% for 2006, compared to 13.3% for
2005.
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
Interest
Expense
-
Debenture holders converted $63.0 million of our senior convertible debentures
in the second and third quarters of 2005. This conversion resulted in a decrease
in interest expense in 2006 compared to 2005.
Provision
for Income Taxes
- Our
effective tax rate is less than the statutory rate due primarily to
tax-preferred investments. The 2006 tax rate was higher than 2005 due to a
tax
benefit recorded in the first quarter of 2005 based on a reconciliation of
our
tax accounts to the previously filed income tax returns. The benefit in 2005
was
partially offset by higher state income taxes from our military health services
operations segment, which had no state income taxes in 2006.
Liquidity
and Capital Resources
A
summary
of our major sources and uses of cash for the nine months ended September 30,
2006 and 2005 is reflected in the table below.
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Sources
of cash:
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$
|
93,903
|
|
$
|
152,945
|
|
Exercise
of stock in connection with stock plans
|
|
|
14,063
|
|
|
19,596
|
|
Other
|
|
|
22,945
|
|
|
¾
|
|
Total
cash sources
|
|
|
130,911
|
|
|
172,541
|
|
|
|
|
|
|
|
|
|
Uses
of cash:
|
|
|
|
|
|
|
|
Purchase
of investments, net of proceeds (1)
|
|
|
¾
|
|
|
(138,572
|
)
|
Purchase
of treasury stock
|
|
|
(127,780
|
)
|
|
(144,421
|
)
|
Other
|
|
|
(13,265
|
)
|
|
(8,650
|
)
|
Total
cash uses
|
|
|
(141,045
|
)
|
|
(291,643
|
)
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
$
|
(10,134
|
)
|
$
|
(119,102
|
)
|
(1)
-
Purchase of investments, net of proceeds was a $11.5 million source of cash
for
the nine months ended September 30, 2006 and is included in Other.
Our
primary sources of cash are from premiums, professional fees, and income
received on investments. Cash is used primarily for claim and benefit payments
and operating expenses. We manage our cash, investments and capital structure
so
we are able to meet the short- and long-term obligations of our business while
maintaining financial flexibility and liquidity. We forecast, analyze and
monitor our cash flows to enable prudent investment management and financing
within the confines of our investment policies.
Cash
flows from operating activities decreased to $93.9 million from $152.9 million
during 2005. This decrease is mostly due to additional payments from CMS
received in 2005 and not in 2006, see Medical Premiums above for more details,
and negative cash flow of $39.1 million related to the PDP. The negative cash
flow is primarily due to CMS reconciliation issues and insufficient funding
from
CMS for our reimbursable low-income subsidy costs. These costs will be fully
reimbursed after CMS performs their year-end reconciliation, which is expected
to be finalized in the third quarter of 2007. These decreases were partially
offset by an increase in medical claims payable during 2006 compared to 2005.
Net
cash used for investing activities during 2006
included capital expenditures associated with the continued implementation
of
new computer systems, leasehold improvements on facilities, furniture and
equipment and other
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
capital
purchases to support our growth. The net cash change in investments for the
period was a decrease in investments, as investments were sold to fund
operations.
Sierra
Debentures
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 109.3494 shares of
our
common stock before 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. Beginning December 2003 and for each subsequent
period, the market price of our common stock has exceeded 120% of the conversion
price for at least 20 trading days in a period of 30 consecutive trading days.
The conversion rate is subject to certain adjustments. This conversion rate
represents a conversion price of $9.145 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.
We
can redeem the debentures for cash beginning on or after March 20,
2008.
During
2005, we received offers and entered into five separate privately negotiated
transactions with debenture holders (holders) pursuant to which the holders
converted an aggregate of $63.0 million of debentures they owned into
approximately 6.9 million shares of our common stock in accordance with the
indenture governing the debentures. During the first quarter of 2006, a holder
converted $500,000 in debentures for approximately 54,000 shares of common
stock. During the third quarter of 2006, we entered into a privately negotiated
transaction with a holder pursuant to which the holder converted $8,000,000
in
debentures for approximately 875,000 shares of common stock in accordance with
the indenture governing the debentures.
Revolving
Credit Facility
On
March
3, 2003, we entered into a revolving credit facility.
Effective June 26, 2006, this facility was amended to extend the maturity from
December 31, 2009 to June 26, 2011, increase the availability from $140.0
million to $250.0 million and reduce the drawn and undrawn fees.
The current incremental borrowing rate is LIBOR plus 0.60%. The
facility is available for general corporate purposes and at September 30, 2006,
we had nothing drawn on this facility.
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.
The
revolving credit facility's covenants 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, make capital expenditures and otherwise restrict certain
corporate activities. Our ability to pay dividends, repurchase our common stock
and prepay other debt is unlimited provided that we can still exceed a certain
required leverage ratio after such transaction or any borrowing incurred as
a
result of such transaction. In
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
addition,
we are required to comply with specified financial ratios as set forth in the
credit agreement. We believe that we are in compliance with all covenants of
the
credit agreement.
Sierra
Share Repurchases
From
January 1, 2006 through September 30, 2006, we purchased 3.1 million shares
of
our common stock, in the open market or through negotiated transactions, for
$127.8 million at an average cost per share of $40.91. Since the repurchase
program began in early 2003 and through September 30, 2006, we purchased, in
the
open market or through negotiated transactions, 25.2 million shares for $515.5
million at an average cost per share of $20.45.
On
February 16, 2006,
April
20, 2006 and October 19, 2006 our Board of Directors authorized us to purchase
an additional $75.0 million,
for a
total of $225.0 million in
share
repurchases. At
October 25, 2006, $139.4 million was available under the Board of Directors’
authorized plan. The
repurchase program has no stated expiration date.
Statutory
Capital and Deposit Requirements
Our
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 $18.7 million at September 30, 2006. The HMO and insurance
subsidiaries must also meet requirements to maintain minimum stockholders’
equity, on a statutory basis, as well as minimum risk-based capital
requirements, which are determined annually. In conjunction with the exit from
the Texas HMO health care market, the Texas Department of Insurance approved
a
plan of withdrawal and Texas Health Choice, L.C., is now required to maintain
deposits of $1.5 million and net worth of at least $3.5 million. We believe
we
are in material compliance with our regulatory requirements.
Of
the
$77.9 million in cash and cash equivalents held at September 30, 2006, $69.1
million was designated for use only by the regulated subsidiaries. Amounts
are
available for transfer to the parent 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 parent company
will not receive dividends from its regulated subsidiaries if such dividend
payment would cause violation of statutory net worth and reserve
requirements.
Obligations
and Commitments
We
believe that funds from future operating cash flows, cash and investments and
funds available under our credit agreement will be sufficient for future
operations and commitments and for capital acquisitions and other strategic
transactions.
For
additional information regarding our estimated contractual obligations and
commitments at December 31, 2005, see “Contractual Obligations, Commitments and
Off-Balance Sheet Arrangements” included in the “Liquidity and Capital
Resources” section of our 2005 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on February 21, 2006.
Recently
Issued Accounting Standards
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes”.
FIN
48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 also provides guidance on derecognition,
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We are currently evaluating the impact
that the
adoption of FIN 48 will have on our consolidated financial position or results
of operations.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 applies only to other accounting pronouncements that require or permit
fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. We
do not
believe the
adoption
of SFAS 157 will have a material impact on
our
consolidated financial position or results of operations.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (SFAS
158). SFAS 158 requires the recognition of the unfunded status of pension and
other postretirement benefit plans on the balance sheet. SFAS
158
is effective for fiscal years ending after December 15, 2006. We are currently
evaluating the impact of the adoption of
SFAS
158 on our consolidated financial position or results of operations.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (SAB 108) addressing how the effects of prior-year
uncorrected financial statement misstatements should be considered in
current-year financial statements. SAB 108 requires registrants to quantify
misstatements using both balance-sheet and income-statement approaches in
evaluating whether or not a misstatement is material. SAB
108
is
effective for fiscal years ending after November 15, 2006. We
do not
believe the
adoption
of SAB 108 will have a material impact on our consolidated financial position
or
results of operations.
Ratings
Financial
strength ratings are the opinion of the rating agencies and the significance
of
individual ratings varies from agency to agency. Companies with higher ratings
generally, in the opinion of the rating agency, have the strongest capacity
for
repayment of debt or payment of claims, while companies at the bottom end of
the
range have the weakest capacity. Rating agencies continually review the
financial performance and condition of insurers. The current financial strength
ratings of our HMO and health and life insurance subsidiaries and senior
convertible debentures are as follows:
|
|
A.M.
Best Company, Inc. (2)
|
|
Fitch
Ratings (1)
|
|
Standard
& Poor's Corp. (2)
|
|
|
|
Rating
|
|
Ranking
|
|
Rating
|
|
Ranking
|
|
Rating
|
|
Ranking
|
|
Financial
strength rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HMO
and health and life insurance subsidiaries
|
|
|
B++
Very Good
|
|
|
5th
of 16
|
|
|
A-
Strong
|
|
|
7th
of 23
|
|
|
n/a
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
credit ratings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HMO
and health and life insurance subsidiaries
|
|
|
bbb+
Very Good
|
|
|
8th
of 22
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Parent
company
|
|
|
bb+
Speculative
|
|
|
11th
of 22
|
|
|
BBB
Good
|
|
|
9th
of 23
|
|
|
n/a
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
credit rating
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
BB+
Speculative
|
|
|
11th
of 22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible debentures
|
|
|
bb+
Speculative
|
|
|
11th
of 22
|
|
|
BBB-
Investment Grade
|
|
|
10th
of 23
|
|
|
BB+
Speculative
|
|
|
11th
of 22
|
|
(1)
Rating outlook is stable. (2)
Rating outlook is
positive.
The
financial strength ratings reflect the opinion of each rating agency on our
operating performance and ability to meet obligations to policyholders and
debenture holders, and are not evaluations directed toward the protection of
investors in our common stock or senior convertible debentures.
Management's
Discussion And Analysis Of Financial
Condition
And Results Of Operations
Other
We
expect
to spend $20 to $25 million in capital expenditures in 2006, which is less
than
the limit under our revolving credit facility. We believe that our existing
working capital, operating cash flow and amounts available under our credit
facility should be sufficient to fund our capital expenditures and liquidity
needs on a short- and long-term basis. 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.
Inflation
Health
care costs continue to rise at a rate faster than the Consumer Price Index.
We
use various strategies to mitigate the negative effects of health care cost
inflation, including setting commercial premiums based on our anticipated health
care costs, risk-sharing arrangements with our various health care providers
and
other health care cost containment measures including member co-payments. There
can be no assurance, however, that in the future, our ability to manage medical
costs will not be negatively impacted by items such as technological advances,
competitive pressures, applicable regulations, increases in pharmacy costs,
utilization changes and catastrophic items, which could, in turn, result in
medical cost increases equaling or exceeding premium increases.
Critical
Accounting Policies and Estimates
We
prepared our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. In preparing
these financial statements, we are required to make judgments, assumptions
and
estimates, which we believe are reasonable and prudent based on the available
facts and circumstances. These judgments, assumptions and estimates affect
certain of our revenues and expenses and their related balance sheet accounts
and disclosure of our contingent assets and liabilities. We base our assumptions
and estimates primarily on historical experience and trends and factor in known
and projected trends. On an on-going basis, we re-evaluate our selection of
assumptions and the method of calculating our estimates. Actual results,
however, may materially differ from our calculated estimates and this difference
would be reported in our current operations. Our critical accounting policies
and estimates have been reviewed by the Audit Committee of our Board of
Directors.
For
a
more detailed description of all our critical accounting policies and estimates,
see Part II, Item 7 of our 2005 Annual Report on Form 10-K. As of September
30,
2006, our critical accounting policies have not changed from those described
on
our 2005 Annual Report on Form 10-K. For a more extensive discussion of our
accounting policies, see Note 2, Summary of Significant Accounting Policies,
in
the Notes to the Consolidated Financial Statements in our 2005 Annual Report
on
Form 10-K.
At
September 30, 2006, we had unrealized holding losses on available for sale
investments of $2.2 million, net of tax, compared to unrealized holding losses
of $1.8 million, net of tax, at December 31, 2005. We believe that changes
in
market interest rates, resulting in unrealized holding gains or losses, should
not have a material impact on future earnings or cash flows, as it is unlikely
that we would need or choose to substantially liquidate our investment
portfolio.
At
September 30, 2006, we had outstanding $43.5 million in aggregate principal
amount of our 2¼% senior convertible debentures due March 15, 2023. The
debentures are fixed rate, and therefore, the interest expense on the debentures
will not be impacted by future interest rate fluctuations. The borrowing rate
on
our revolving credit facility is currently LIBOR plus 0.60%. At September 30,
2006, we had nothing drawn on this facility.
At
September 30, 2006, we had approximately $82.3 million invested in trust deed
mortgage notes and real estate joint ventures. Trust deed mortgage notes and
real estate joint ventures are classified and accounted for as other
investments. Our investments in trust deed mortgage notes are with numerous
independent borrowers and are secured by real estate in several states. All
of
our trust deed mortgage notes require interest only payments with a balloon
payment of the principal at maturity. Loan to value ratios for these investments
are typically based on appraisals obtained at the time of loan origination
and
may not reflect subsequent changes in value estimates. As a result, there may
be
less security than anticipated at the time the loan was originally made. If
the
values of the underlying assets decrease and default occurs, we may not recover
the full amount of the loan or any interest due. Our investments in real estate
joint ventures consist of three independent projects and are secured by real
estate in California, Nevada, and Utah. We have made assessments as to the
value
and recoverability of our investments in our trust deed mortgage notes and
real
estate joint ventures. We
believe that no adjustments are required to the recorded amounts of our
investments in trust deed mortgage notes and real estate joint ventures are
properly stated at September 30, 2006.
Evaluation
of Disclosure Controls and Procedures
The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures as of the end of the period covered by this report were designed
and
were functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under
the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. The Company
believes that a system of controls, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
Management is required to apply its judgment in evaluating the cost-benefit
relationship of such controls and procedures.
Change
in Internal Control over Financial Reporting
No
change
in the Company’s internal control over financial reporting occurred during the
Company’s most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Part
II. Other Information
Although
we have not been sued, we were identified in discovery submissions in pending
class action litigation against major managed care companies, as having
allegedly participated in an unlawful conspiracy to improperly deny, diminish
or
delay payments to physicians. In Re: Managed Care Litigation, MDL No. 1334
(S.D.Fl.).
Beginning
in 1999, a series of class action lawsuits were filed against many major firms
in the health benefits business alleging an unlawful conspiracy to deny,
diminish or delay payments to physicians. We have not been named as a defendant
in these lawsuits. A multi-district litigation panel has consolidated some
of
these cases in the United States District Court for the Southern District of
Florida, Miami Division. In the lead case, known as Shane,
the
amended complaint alleges multiple violations under the Racketeer Influenced
and
Corrupt Organizations Act (RICO). The suit seeks injunctive, compensatory and
equitable relief as well as restitution, costs, fees and interest payments.
On
April 7, 2003, the United States Supreme Court determined that certain claims
against certain defendants should be arbitrated.
Subsequent
lower court rulings have further resolved which of the plaintiffs' claims are
subject to arbitration. In 2004, the Court of Appeals for the Eleventh Circuit
upheld a district court ruling certifying a plaintiff class in the Shane
case. In
February 2005, the district court determined to bifurcate the case, holding
a
trial phase limited to liability issues, and a second, if necessary, regarding
damages.
Aetna,
Inc., CIGNA Corporation, the Prudential Insurance Company of America, Wellpoint
Inc., Health Net Inc. and Humana Inc. have entered into settlement agreements
which have been approved by the district court. On January 31, 2006, the trial
court granted summary judgment on all claims to defendant PacifiCare Health
Systems, Inc. (PacifiCare), finding that plaintiffs had failed to provide
documents or other evidence showing that PacifiCare agreed to participate in
the
alleged conspiracy. On June 19, 2006, the trial court granted summary judgment
on all remaining claims against the two remaining defendants, United Health
Group, Inc. and Coventry Health Care, Inc., because the plaintiffs had not
submitted evidence that would allow a jury to find reasonably that either had
been part of a conspiracy to underpay doctors or that either had aided or
abetted alleged RICO violations. Plaintiffs have announced that they intend
to
appeal this decision. Plaintiffs in the Shane
proceeding had stated their intention to introduce evidence at trial concerning
Sierra and other parties not named as defendants in the litigation.
We
are
subject to other various claims and 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
and other members and claims by providers for payment for medical services
rendered to HMO and other members. Some litigation may also include claims
for
punitive or other damages that are not covered by insurance. These actions
are
in various stages of litigation and some may ultimately be brought to trial.
For
all
claims that are considered probable and for which the amount of loss can be
reasonably estimated, we accrued amounts we believe to be appropriate, based
on
information presently available. 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. Due to recent unfavorable changes in the
commercial insurance market, we have, for certain risks, purchased coverage
with
higher deductibles and lower limits of coverage. In the opinion of management,
based on information presently available, the amount or range of any potential
loss for certain claims and litigation cannot be reasonably estimated or is
not
considered probable. However, the ultimate resolutions of these pending legal
proceedings are not expected to have a material adverse effect on our financial
condition.
As
of
September 30, 2006, our risk factors have not changed from those described
in
our 2005 Annual Report on Form 10-K. For a detailed discussion of the risks
associated with an investment in our securities, see "Risk Factors" in Part
1,
Item 1A of our 2005 Annual Report on Form 10-K.
|
(c)
|
Below,
is a summary of stock repurchases for the nine months ended September
30,
2006. See Note 5, Share Repurchases, of our Notes to Condensed
Consolidated Financial Statements for information regarding our stock
repurchase plan.
|
Period
|
|
Total
Number
Of
Shares
Repurchased
(1)
|
|
Average
Price
Paid
Per
Share
|
|
Total
Number
Of
Shares Purchased
As
Part Of Publicly
Announced
Plan
Or
Program
|
|
Approximate
Dollar
Value
Of Shares
That
May Yet Be
Purchased
Under
The
Plan (2)
|
|
|
(In
thousands, except per share data)
|
Beginning
approximate dollar value of shares that may yet be
purchased
|
|
|
|
$42,125
|
January
1, 2006 - January 31, 2006
|
|
70
|
|
$39.30
|
|
70
|
|
39,392
|
February
1, 2006 - February 28, 2006
|
|
1,010
|
|
40.35
|
|
1,010
|
|
73,675
|
March
1, 2006 - March 31, 2006
|
|
1,121
|
|
42.49
|
|
1,121
|
|
26,056
|
April
1, 2006 - April 30, 2006
|
|
633
|
|
39.97
|
|
633
|
|
75,764
|
May
1, 2006 - May 31, 2006
|
|
290
|
|
39.15
|
|
290
|
|
64,427
|
June
1, 2006 - June 30, 2006
|
|
¾
|
|
¾
|
|
¾
|
|
64,427
|
July
1, 2006 - July 31, 2006
|
|
¾
|
|
¾
|
|
¾
|
|
64,427
|
August
1, 2006 - August 31, 2006
|
|
¾
|
|
¾
|
|
¾
|
|
64,427
|
September
1, 2006 - September 30, 2006
|
|
¾
|
|
¾
|
|
¾
|
|
64,427
|
|
(1)
|
Certain
repurchases were made pursuant to a 10b5-1
plan.
|
|
(2)
|
At
January 1, 2006, $42.1 million remained available for purchase under
previously approved plans. On February 16, 2006, April 20, 2006 and
October 19, 2006 our Board of Directors authorized $75.0 million
in
additional share repurchases for a total of $225.0 million. At
October 25, 2006, $139.4 million was available under the Board of
Directors’ authorized plan. The repurchase program has no stated
expiration date.
|
|
(d)
|
Below,
is a summary of 2¼% senior convertible debenture conversions for the nine
months ended September 30, 2006. See Note 4, Long-Term Debt, of our
Notes
to Condensed Consolidated Financial Statements for information regarding
our senior convertible debentures.
|
Period
|
Total
Dollar Value of Debentures Converted
|
Average
Price
Paid
Per
Debenture
|
Total
Dollar Value
Of
Debentures
Purchased
As
Part Of Publicly
Announced
Plan
Or
Program
|
Approximate
Dollar
Value
Of Debentures
That
May Yet Be
Purchased
Under
The
Plan
|
January
1, 2006 - January 31, 2006
|
$500,000
|
109.35
shares of common stock for each $1,000 principal amount of
debentures
|
none
|
none
|
February
1, 2006 - February 28, 2006
|
¾
|
¾
|
¾
|
¾
|
March
1, 2006 - March 31, 2006
|
¾
|
¾
|
¾
|
¾
|
April
1, 2006 - April 30, 2006
|
¾
|
¾
|
¾
|
¾
|
May
1, 2006 - May 31, 2006
|
¾
|
¾
|
¾
|
¾
|
June
1, 2006 - June 30, 2006
|
¾
|
¾
|
¾
|
¾
|
July
1, 2006 - July 31, 2006
|
¾
|
¾
|
¾
|
¾
|
August
1, 2006 - August 31, 2006
|
¾
|
¾
|
¾
|
¾
|
September
1, 2006 - September 30, 2006
|
8,000,000
|
109.35
shares of common stock for each $1,000 principal amount of
debentures
|
none
|
none
|
None
None
None
(10.1)
|
Sierra
Health Services, Inc. Supplemental Executive Retirement Plan III
effective
January 1, 2005.
|
(31.1)
|
Rule
13a - 14(a) or 15d - 14(a) Certification of Chief Executive Officer.
|
(31.2)
|
Rule
13a - 14(a) or 15d - 14(a) Certification of Chief Financial Officer.
|
(32.1)
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 of Principal Executive Officer.
|
(32.2)
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 of Principal Financial Officer.
|
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
|
SIERRA
HEALTH SERVICES, INC.
Registrant
By:/s/
MARC R. BRIGGS
Marc
R. Briggs
Vice
President of Finance,
Chief
Accounting Officer
|
Date:
October 25, 2006