-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UnMwK/Qwbx6bIMDH/jxTNNhV0FovkZjgqPnH0cZ0dY6g0iK4CmMQUo7BQtC9ZNWF x+5efx7qiksfwCjJcb2RHA== 0000754009-00-000018.txt : 20000327 0000754009-00-000018.hdr.sgml : 20000327 ACCESSION NUMBER: 0000754009-00-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA HEALTH SERVICES INC CENTRAL INDEX KEY: 0000754009 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 880200415 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08865 FILM NUMBER: 578320 BUSINESS ADDRESS: STREET 1: 2724 N TENAYA WAY CITY: LAS VEGAS STATE: NV ZIP: 89128 BUSINESS PHONE: 7022427000 MAIL ADDRESS: STREET 1: 2724 NORTH TENAYA WAY STREET 2: 2724 NORTH TENAYA WAY CITY: LAS VEGAS STATE: NV ZIP: 89128 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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 (State or other jurisdiction of incorporation or organization) 88-0200415 (I.R.S. Employer Identification Number) 2724 NORTH TENAYA WAY LAS VEGAS, NEVADA 89128 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (702) 242-7000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.005 New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None 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 X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on February 28, 2000 was $145,661,000. The number of shares of the registrant's common stock outstanding on February 28, 2000 was 27,041,000. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT WHERE INCORPORATED Registrant's Current Report on Form 8-K dated Part I March 15, 2000. Part II, Item 7 Part III Portions of the registrant's definitive proxy statement for its 2000 annual meeting to be filed with the SEC not later than 120 days after the end of the fiscal year. SIERRA HEALTH SERVICES, INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page PART I Item 1. Business ................................................................................. 1 Item 2. Properties................................................................................ 15 Item 3. Legal Proceedings......................................................................... 16 Item 4. Submission of Matters to a Vote of Security Holders....................................... 16 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............................................................ 17 Item 6. Selected Financial Data................................................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................................. 19 Item 7a. Quantitative and Qualitative Disclosures about Market Risk ............................... 31 Item 8. Financial Statements and Supplementary Data............................................... 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................... 61 PART III Item 10. Directors and Executive Officers of the Registrant........................................ 61 Item 11. Executive Compensation.................................................................... 61 Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 61 Item 13. Certain Relationships and Related Transactions............................................ 61 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 62
i PART I ITEM 1. BUSINESS GENERAL The Company filed a Current Report on Form 8-K dated March 15, 2000, which is incorporated by reference, that set forth cautionary statements pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and identified important risk factors that could cause the Company's actual results to differ materially from those expressed in any projected, estimated or forward-looking statements relating to Sierra Health Services, Inc. and its subsidiaries. Sierra Health Services, Inc. ("Sierra") and its subsidiaries (collectively referred to as the "Company"), is a managed health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. The Company's strategy has been to develop and offer a portfolio of managed health care and workers' compensation products to employer groups and individuals. The Company's broad range of managed health care services is provided through its federally qualified health maintenance organizations ("HMOs"), managed indemnity plans, a third-party administrative services program for employer-funded health benefit plans, workers' compensation medical management programs and a subsidiary that administers a managed care federal contact for the Department of Defense's TRICARE program in Region 1. This contract is currently structured as five one-year option periods. If all option periods are exercised by the Department of Defense ("DoD") and no extensions of the performance period are made, health care delivery will end on May 31, 2003 for Region 1. Ancillary products and services that complement the Company's managed health care and workers' compensation product lines are also offered. On October 31, 1998, Sierra and one of its subsidiaries, Texas Health Choice, L.C. ("TXHC"), completed the acquisition of certain assets of Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"), a health plan operating in Dallas/Ft. Worth and Permanente Medical Association of Texas ("Permanente"), a medical group with approximately 150 physicians. The purchase price allocation included a premium deficiency reserve of $25 million for estimated losses on the contracts acquired from Kaiser-Texas. The purchase price was $124 million, which is net $20 million in operating cost support paid to Sierra by Kaiser Foundation Hospitals in four quarterly installments following the closing of the transaction. The purchase price included amounts for real estate and eight medical and office facilities with approximately 500,000 square feet. In December 1998, certain accreditation goals were met by the health plan resulting in a purchase price increase of $3.0 million, to $127 million. The purchase price may increase up to an additional $27 million over three years if certain growth and member retention goals are met by the health plan; however, preliminary results indicate these goals were not met for the first year. Sierra assumed no prior liabilities for malpractice or other litigation, or for any unanticipated future adjustments to claims expenses for periods prior to closing. The transaction was financed with a five-year revolving credit facility and a $35.2 million note payable to Kaiser Foundation Health Plan of Texas. The note is secured by the acquired real estate. Approximately $110 million of the $200 million revolving credit facility was used to fund the transaction. The original liability for the estimated premium deficiency was based upon assumptions of membership and other operating information, some of which had not been received as of December 31, 1998. During 1999, the Company continued to gather such data, including data from the seller, and based upon the receipt and analysis of this data, the Company revised the initial estimate of the premium deficiency accrual. In total the Company recorded a $72.0 million premium deficiency in conjunction with the acquisition. Of this amount, $6.8 million was utilized in 1998 to offset losses on the acquired contracts and the remainder was utilized in 1999. Total goodwill recorded in conjunction with the acquisition was $126.8 million, of which $24.8 million was a result of adjustments in 1999. On December 31, 1998, Sierra completed the acquisition of the Nevada health care business of Exclusive Healthcare, Inc. ("EHI"), United of Omaha Life Insurance Company and United World Life Insurance Company ("United"), all of which were subsidiaries of Mutual of Omaha Insurance Company. Sierra initially retained 1 approximately 9,000 members (approximately 4,400 HMO members) subsequent to the acquisition. Effective June 1, 1999, the Company completed the purchase of the Texas operations of EHI (approximately 1,000 HMO members) and United's related preferred provider organization ("PPO") that was part of the dual option HMO/PPO plan. The purchase price of both the Nevada and Texas transactions is contingent based on how many members are retained through 2000 and 2001. No cash will be paid until group renewals begin in 2000. The principal executive offices of the Company are located at 2724 North Tenaya Way, Las Vegas, Nevada 89128, and its telephone number is (702) 242-7000. Managed Care Products and Services The Company's primary types of health care coverage are HMO plans, HMO Point of Service ("POS") plans, and managed indemnity plans, which include a PPO option. As of December 31, 1999, the Company provided HMO products to approximately 198,900 members in Nevada, 92,200 in Dallas/Ft. Worth, 33,300 in Houston and 3,100 in Arizona. The POS products allow members to choose one of the various coverage options when medical services are required instead of one plan for the entire year. The Company also provides managed indemnity products to approximately 36,700 members, Medicare supplement products to approximately 28,300 members, and administrative services to approximately 297,500 members. Medical premiums account for approximately 64% of total revenues. Approximately 72% and 28% of such medical premiums were derived from Nevada HMO and insurance subsidiaries, and the Texas HMO, respectively in 1999. Health Maintenance Organizations. The Company operates mixed group network model HMOs in Las Vegas, Nevada and Dallas/Ft. Worth, Texas and a network model HMO in Reno, Nevada and Houston, Texas. Contracted primary care physicians and specialists for the HMOs are compensated on a capitation or modified fee-for-service basis. Contracts with their primary hospitals are on a capitation or discounted per diem basis. Members receive a wide range of coverage after paying a nominal co-payment and are eligible for preventive care coverage. The HMOs do not require deductibles or claim forms. Most of the Company's managed health care services in Nevada are provided through its independently contracted network of approximately 2,000 providers and 12 hospitals. These Nevada networks include the Company's multi-specialty medical group, which provides medical services to approximately 73% of the Company's southern Nevada HMO members and employs over 170 primary care and other providers in various medical specialties. The Company directly provides home health care, hospice care and behavioral health care services and operates a company that provides home infusion, oxygen and durable medical equipment services. In addition, the Company operates two 24-hour urgent care centers, a radiology department, a vision department, an occupational medicine department and two free-standing, state-licensed and Medicare-approved ambulatory surgery centers. The Company believes that this vertical integration of its health care delivery system in Nevada provides a competitive advantage as it has helped it to effectively manage health care costs while delivering quality care. In Dallas/Ft. Worth, Texas, the Company's affiliated medical group provides professional services from seven health centers; all of which offer primary care services while two offer specialty and urgent care services. Approximately 95% of the Company's 92,200 Dallas/Ft. Worth HMO members are provided care by this medical group. In addition, TXHC has contracts with 13 hospitals for inpatient care in Dallas/Ft. Worth. Shortly after the acquisition, the Company changed the provider model in Dallas/Ft. Worth from a group model to a mixed network model by overlaying individual practice association ("IPA") delivery systems on top of the existing group model to provide members with more choice. Currently, the Dallas/Ft. Worth members are served by approximately 1,500 independently contracted providers. The 33,300 Houston HMO members are served by approximately 1,600 independently contracted providers and 15 hospitals. The Company's commercial plans offer traditional HMO benefits and POS benefits. At December 31, 1999, the Company had approximately 263,100 commercial members of which 148,400 were located in Nevada, 114,400 in Texas and 300 in Arizona. 2 The Company offers a Medicare risk product for Medicare-eligible beneficiaries called Senior Dimensions in Nevada and Golden Choice in Texas. Senior Dimensions is marketed directly to Medicare-eligible beneficiaries in the Company's Nevada service area. In the first quarter of 2000, the Company eliminated active sales and marketing for Golden Choice. The Company will continue to offer the plan to potential customers who contact the Company, as well as provide service to existing members. The monthly payment received from the Health Care Financing Administration ("HCFA") for Medicare members is determined by formula established by Federal law. The Balanced Budget Act of 1997 included legislative changes which affected the way health plans are compensated for Medicare members by eliminating over five years amounts paid for graduate medical education and by increasing the blend of national cost factors applied in determining local reimbursement rates over a six-year phase-in period. Both changes will have the effect of reducing reimbursement in high cost metropolitan areas with a large number of teaching hospitals; however, the legislation includes a provision for a minimum increase of 2% annually in health plan Medicare reimbursement through 2003. Under the authority provided by the 1997 Balanced Budget Act (see "Government Regulation and Recent Legislation"), HCFA has begun to collect hospital encounter data from Medicare risk contractors. The data will be used to implement a new risk adjustment mechanism which will be phased in over a five-year period which began January 1, 2000. Given the relatively high Medicare risk premium levels in certain of the Company's market areas, the Company is in jeopardy that the new risk adjustment mechanism to be developed could adversely affect the Company's Medicare premium rates going forward. The risk adjustment factors have not been applied to the Social HMO capitation payments for the Year 2000 and the Company does not believe that the risk adjustment mechanism will be applied to Social HMO capitation payments in the future. As of December 31, 1999, the Company had 52,900 Medicare members, of which 39,000 were located in Nevada, 11,100 in Texas and 2,900 in Arizona. Approximately 35,000 of the Nevada Medicare members were enrolled in a Social HMO (See "Social Health Maintenance Organization" following). In addition, as of December 31, 1999, the Company had approximately 11,500 members enrolled in its HMO Medicaid risk products. To enroll in these products, an individual must be eligible for Medicaid benefits in the state of Nevada. The state's managed care division pays the Company's HMO a monthly fee for each Medicaid member enrolled. Social Health Maintenance Organization. Effective November 1, 1996, the Company entered into a Social HMO II contract with HCFA pursuant to which a large portion of the Company's Medicare risk enrollees will receive certain expanded benefits. Sierra was one of six HMOs nationally to be awarded this contract, and is currently the only company to have implemented the program as of December 31, 1999. The Company receives additional revenues for providing these expanded benefits. The additional revenues are determined based on health risk assessments that have been, and will continue to be, performed on the Company's eligible Medicare risk members. The additional benefits include, among other things, assisting the eligible Medicare risk members with typical daily living functions such as bathing, dressing and walking. These members, as identified in the health risk assessments, are those who currently have difficulty performing such daily living functions because of a health or physical problem. HCFA is considering adjusting the reimbursement factors for the Social HMO members in the future. At this time, however, there can be no assurance as to what the final per member reimbursement will be or that the Social HMO contract will be renewed. If the reimbursement for these members decreases significantly and related benefit changes are not made timely, there could be a material adverse effect on the Company's business. Preferred Provider Organizations. The Company also offers health insurance through its PPO. The Company's managed indemnity plans generally offer insureds the option of receiving their medical care from either contracted or non-contracted providers. Insureds pay higher deductibles and co-insurance or co- payments when they receive care from non-contracted providers. Out-of-pocket costs are lowered by utilizing contracted providers who are part of the Company's PPO network. As of December 31, 1999, approximately 36,700 members were enrolled in Sierra's managed indemnity plans. The Company currently provides managed indemnity, accidental death and disability, and Medicare supplement services to individuals in Arizona, California, Colorado, Iowa, Louisiana, Maryland, Mississippi, 3 Missouri, Nevada, South Carolina and Texas. The Company is also exploring further expansion in certain other states and currently provides other insurance services in Missouri. As of December 31, 1999 the managed indemnity subsidiary was licensed in a total of 43 states and the District of Columbia. Ancillary Medical Services. Among the ancillary medical services offered by the Company are outpatient surgical care, diagnostic tests, medical and surgical procedures, inpatient and outpatient laboratory tests, x- ray, CAT scans, nuclear medicine services, and mental health and substance abuse services. In Nevada, the Company also provides home health care services, a hospice program and vision services. These services are provided to members of the Company's HMOs, managed indemnity and administrative services plans. The mental health and substance abuse services are also provided to approximately 145,000 participants from non-affiliated employer groups and insurance companies. In addition, the Company offers home infusion, oxygen and durable medical equipment services. Administrative Services. The Company's administrative services products provide, among other things, utilization review and PPO services to large employer groups that are usually self-insured. As of December 31, 1999, approximately 298,000 members were enrolled in the Company's administrative services plans. The results of operations for these services are included in specialty product revenues and expenses in the Consolidated Statements of Operations. Military Contract Services Sierra Military Health Services, Inc. On September 30, 1997, the DoD awarded the Company a triple-option health benefits ("TRICARE") contract to provide managed health care coverage to eligible beneficiaries in Region 1. This region includes approximately 610,000 eligible individuals in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Washington, D.C. SMHS completed an eight month implementation phase in May 1998 and began providing health care benefits on June 1, 1998 under the TRICARE contract. Under the TRICARE contract, Sierra Military Health Services, Inc. ("SMHS") provides health care services to dependents of active duty military personnel and military retirees and their dependents through subcontractor partnerships and individual providers. Through such partnerships, SMHS also performs specific administrative services, such as health care appointment scheduling, enrollment, network management and health care advice line services. SMHS performs such services using DoD information systems. If all five option periods are exercised by the DoD and no extensions of the performance period are made, health care delivery will end on May 31, 2003, followed by an additional eight month phaseout of the Region 1 managed care support contract. In June 1996, the DoD awarded a TRICARE contract to TriWest Healthcare Alliance ("TriWest"), a consortium consisting of Sierra and 13 other health care companies, to provide health services to Regions 7 and 8, which include a total of 16 states. The Company's interest in this equity investee is approximately 12%. In April 1997, TriWest began providing health care to approximately 700,000 individuals, of which the Company is responsible for providing care to approximately 93,000 beneficiaries in Nevada and Missouri. Workers' Compensation Operations Workers' Compensation Subsidiary. On October 31, 1995, the Company acquired CII Financial, Inc. ("CII"), for approximately $76.3 million of common stock in a transaction accounted for as a pooling of interests. CII writes workers' compensation insurance in the states of California, Colorado, Kansas, Missouri, Nebraska, Nevada, New Mexico, Texas and Utah. CII has licenses in 32 states and the District of Columbia. California, Colorado, Texas and Nevada represent approximately 81%, 8%, 5% and 2%, respectively, of CII's fully insured workers' compensation insurance premiums in 1999. Workers' compensation insurance premiums account for approximately 6% of the Company's total revenue. The workers' compensation subsidiary applies the discipline of managed care concepts to its operations. These concepts include, but are not limited to, the use of specialized preferred provider networks, utilization reviews by an employed board certified occupational 4 medicine physician as well as nurse case managers, medical bill reviewers and job developers who facilitate early return to work. Effective September 30, 1997, the Company terminated its workers' compensation administrative services contract with the state of Nevada. The contract served approximately 200,000 enrollees and provided approximately $3.2 million in revenues for the year ended December 31, 1997. The contract was terminated to allow the Company to participate in the Nevada workers' compensation insurance market which was opened to competition in July 1999. Marketing The Company's marketing efforts for its commercial managed care products usually involve a two-step process. The Company first makes presentations to employers and then provides information directly to employees once the employer has decided to offer the Company's products. Once a relationship with a group is established and a group agreement is negotiated and signed, the Company's marketing efforts focus on individual employees. During a designated "open enrollment" period each year, usually the month preceding the annual renewal of the agreement with the group, employees choose whether to remain with, join or terminate their membership with a specific health plan offered by the employer. New employees decide whether to join one of the employers' health insurance options at the time of their employment. Although contracts with employers are generally terminable on 60 days notice, changes in membership occur primarily during open enrollment periods. Medicare risk products are primarily marketed by the HMOs' sales employees. Retention of employer groups and membership growth is accomplished through print advertising directed to employers and through consumer media campaigns. Media communications convey the Company's emphasis on preventive care, ready access to health care providers and quality service. Other communications to customers include employer and member newsletters, member education brochures, prenatal information packets, employer/broker seminars and direct mail advertising to clients. Members' satisfaction with Company benefits and services is monitored by customer surveys. Results from these surveys and other primary and secondary research guide the sales and advertising efforts throughout the year. The Company's workers' compensation insurance policies are sold through independent insurance agents, who may also represent other insurance companies. The Company believes that independent insurance agents and brokers choose to market the Company's insurance policies primarily because of the price the Company charges. Additional considerations include the quality of service that the Company provides and the commissions the Company pays. The Company employs full-time employees as marketing representatives to make personal contacts with agents, to maintain regular communication with them, to advise them of the Company's services and products, and to recruit additional agents. In addition, the Company employs full-time field underwriters who meet with agents and can provide an immediate quote on a policy. As of December 31, 1999, the Company had relationships with approximately 881 agents and paid its agents commissions based on a percentage of the gross written premium produced by such agents and brokers. The Company also has various agency incentive programs that enable an agent to earn additional compensation if certain premium production and/or agency loss ratio goals are met. The Company also utilizes a number of promotional media, including advertising in publications and at trade fairs, to support the efforts of its independent agents. SMHS administers marketing initiatives in accordance with the TRICARE Region 1 managed care support contract. SMHS' dedicated Marketing Division uses a multi-faceted marketing approach to ensure that all beneficiaries within Region 1 have the opportunity to learn about the health care benefits under TRICARE and have the opportunity to make health care choices that best fit their specific needs. Marketing initiatives include direct beneficiary briefings, direct mail, newspaper advertising, newsletters and web page briefs. 5 Membership Period End Membership:
At December 31, 1999 1998 1997 1996 1995 -------- -------- -------- ------- ------ HMO: Commercial.............................. 263,000 272,000 154,000 147,000 116,000 Medicare................................ 53,000 47,000 36,000 30,000 25,000 Medicaid................................ 11,000 5,000 2,000 Managed Indemnity........................... 37,000 41,000 64,000 46,000 31,000 Medicare Supplement......................... 28,000 26,000 25,000 23,000 15,000 Administrative Services (1) ................ 298,000 318,000 328,000 338,000 117,000 TRICARE Eligibles........................... 610,000 606,000 ______ ______ ______ ---------- ---------- Total Membership........................ 1,300,000 1,315,000 609,000 584,000 304,000 ========= ========= ======= ======= =======
(1) For comparability purposes, enrollment information has been restated to reflect the September 30, 1997 termination of the Company's workers' compensation administrative services contract with the state of Nevada. Enrollment in the terminated plan was 163,000 and 94,000 members at December 31, 1996 and 1995, respectively. For the years ended December 31, 1999, 1998 and 1997, the Company received approximately 23.5%, 23.0% and 23.7%, respectively, of its total revenues from its contract with HCFA to provide health care services to Medicare enrollees. The Company's contract with HCFA is subject to annual renewal at the election of HCFA, and requires the Company to comply with federal HMO and Medicare laws and regulations and may be terminated if the Company fails to so comply. The termination of the Company's contract with HCFA would have a material adverse effect on the Company's business. In addition, there have been, and the Company expects that there will continue to be, a number of legislative proposals to limit Medicare reimbursements and to require additional benefits. Future levels of funding of the Medicare program by the federal government cannot be predicted with certainty. (See "Government Regulation and Recent Regulation"). The Company's ability to obtain and maintain favorable group benefit agreements with employer groups affects the Company's profitability. The agreements are generally renewable on an annual basis but are subject to termination on 60 days prior notice. For the fiscal year ended December 31, 1999, the Company's ten largest HMO employer groups were, in the aggregate, responsible for less than 10% of the Company's total revenues. Although none of such employer groups accounted for more than 2% of total revenues during that period, the loss of one or more of the larger employer groups would, if not replaced with similar membership, have a material adverse effect upon the Company's business. The Company has generally been successful in retaining these employer groups. However, there can be no assurance that the Company will be able to renew its agreements with such employer groups in the future or that it will not experience a decline in enrollment within its employer groups. Additionally, revenues received under certain government contracts are subject to audit and retroactive adjustment. Provider Arrangements and Cost Management HMO and Managed Indemnity Products. A significant distinction between the Company's health care delivery system and that of many other managed care providers is the fact that approximately 73% of the Company's southern Nevada HMO members and 95% of its Dallas/Ft. Worth, Texas HMO members receive primary health care through the Company's affiliated multi-specialty medical groups. The Company makes health care available through independently contracted providers employed by the multi-specialty medical groups and other independently contracted networks of physicians, hospitals and other providers. Under the Company's HMOs, the member selects a primary care physician who provides or authorizes any non-emergency medical care given to that member. These primary care physicians and some specialists are compensated to a limited extent on the basis of how well they coordinate appropriate medical care. The Company has a system of limited incentive risk arrangements and utilization management with respect to its 6 independently contracted primary care physicians. The Company compensates its independently contracted primary care physicians and specialists by using both capitation and modified fee-for-service payment methods. In Nevada, under both the capitation and modified fee-for-service methods, an incentive risk arrangement is established for institutional services. Additional amounts may be made available to certain capitated physicians if hospital costs are less than anticipated for the Company's HMO members. For those primary care physicians receiving payments on a modified fee-for-service basis, portions of the payments otherwise due the physicians are withheld. The amounts withheld are available for payment to the physicians if, at year-end, the expenditures for both institutional and non-institutional medical services are within predetermined, contractually agreed upon ranges. It is believed that this method of limited incentive risk payment is advantageous to the physician, the Company and the members because all share in the benefits of managing health care costs. The Company has, however, negotiated capitation and reduced fee-for- service agreements with certain specialists and primary care providers who do not participate in the incentive risk arrangements. The Company monitors health care utilization, including evaluation of elective surgical procedures, quality of care and financial stability of its capitated providers to facilitate access to service and to ensure member satisfaction. The Company provides or negotiates discounted contracts with hospitals for the provision of inpatient and outpatient hospital care, including room and board, diagnostic tests and medical and surgical procedures. The Company believes that it currently has a favorable contract with its primary southern Nevada contracted hospital, Columbia Sunrise Hospital. Subject to certain limitations, the contract provides, among other things, guaranteed contracted per diem rate increases on an annual basis after December 31, 1997. The per diem rate increased 2% in 1999 and is scheduled to increase 3% in 2000. Since a majority of the Company's southern Nevada hospital days are at Columbia Sunrise Hospital, this contract assists the Company in managing a significant portion of its medical costs. The contract expires in the year 2012. Columbia Sunrise Hospital has requested to renegotiate the contract. While the Company intends to enforce the existing terms of the contract, legal and other expenses will be incurred. In Texas, the Company has negotiated a per diem arrangement with Columbia Hospital, Inc., for hospital services provided through 15 hospitals in Houston and has contracts with 13 Columbia hospitals and several tertiary hospitals for inpatient care in Dallas/Ft. Worth. The Company believes that it has negotiated favorable rates with its contracted hospitals. For hospitals other than Columbia Sunrise Hospital, the Company's contracts with its hospital providers typically renew automatically with both parties granted the right to terminate after a notice period ranging from between three and eighteen months. Reimbursement arrangements with other health care providers, including pharmacies, generally renew automatically or are negotiated annually and are based on several different payment methods, including per diems (where the reimbursement rate varies and is based on a per day of service charge for specified types of care), capitation or modified fee-for-service arrangements. To the extent possible, when negotiating non-physician provider arrangements, the Company solicits competitive bids. The Company utilizes two reimbursement methods for health care providers rendering services under the Company's indemnity plans. For services to members utilizing a PPO plan, the Company reimburses participating physicians on a modified fee-for-service basis which incorporates a limited fee schedule and reimburses hospitals on a per diem or discounted fee-for-service basis. For services rendered under a standard indemnity plan, pursuant to which a member may select a non-plan provider, the Company reimburses non-contracted physicians and hospitals at pre-established rates, less deductibles and co- insurance amounts. The Company manages health care costs through its large case management program, urgent care centers and by educating its members on how and when to use the services of its plans and how to manage chronic disease conditions. The Company also audits hospital bills to identify inappropriate charges. Further, in Nevada, the Company utilizes its home health care agency and its hospice which helps to minimize hospital admissions and lengths of stay. Military Health Services. Under the TRICARE contract, dependents of active duty military personnel and military retirees and their dependents choose one of three option plans available to them for health care 7 services: (1) TRICARE Prime (an HMO style option with a self-selected primary care manager and no deductibles), (2) TRICARE Extra (a PPO style option), or (3) TRICARE Standard (an indemnity style option with deductibles and cost shares). Approximately 35% of eligible beneficiaries receive their primary care through existing Military Treatment Facilities. SMHS negotiated discounted contracts with approximately 25,000 individual providers, 1,500 institutions and 5,000 pharmacies to provide supplemental network access for TRICARE Prime and Extra beneficiaries. SMHS' contracts with providers are primarily on a discounted fee-for-service basis with renewal and termination terms similar to Sierra's commercial practice. SMHS is at- risk for and manages the health care service cost of all TRICARE Extra and Standard beneficiaries as well as a small percentage of TRICARE Prime beneficiaries. Risk Management The Company maintains general and professional liability, property and fidelity insurance coverage in amounts that it believes are adequate for its operations. The Company's multi-specialty medical groups maintain excess malpractice insurance for the providers presently employed by the group. In Nevada and Arizona, the Company has assumed the risk for the first $250,000 per malpractice claim, not to exceed $1.5 million in the aggregate per contract year up to its limits of coverage. In Texas, the Company has assumed no self-insured retention per claim. The aggregate maximum limits for each of these policies is $30 million per year. In addition, the Company requires all of its independently contracted provider physician groups, individual practice physicians, specialists, dentists, podiatrists and other health care providers (with the exception of certain hospitals) to maintain professional liability coverage. Certain of the hospitals with which the Company contracts are self-insured. The Company also maintains stop-loss insurance that reimburses the Company between 50% and 90% of hospital charges for each individual member of its HMO or managed indemnity plans whose hospital expenses exceed, depending on the contract, $75,000 to $200,000, during the contract year and up to $2.0 million per member per lifetime. Effective July 1, 1997, the Company also maintains excess catastrophic coverage for one of the Company's wholly-owned HMOs, Health Plan of Nevada, Inc. ("HPN"), that reimburses the Company for amounts by which the ultimate net loss exceeds $400,000, but does not exceed the annual maximum of $19.6 million per occurrence and $39.2 million per contract. In the ordinary course of its business, however, the Company is subject to claims that are not insured, principally claims for punitive damages. Effective January 1, 1998, workers' compensation claims are reinsured between $500,000 and $100 million per occurrence. For claims occurring on and after July 1, 1998, that are below $500,000, the Company obtained quota share and excess of loss reinsurance. Under this agreement, the Company reinsures 30% of the first $10,000 of each claim, 75% of the next $40,000 and 100% of the next $450,000. The Company receives a ceding commission from the reinsurer as a partial reimbursement of operating expenses. This agreement expires June 30, 2000 and there is a provision for optional twelve-month run-off coverage on policies in force at June 30, 2000. Effective January 1, 2000, the reinsurance on workers' compensation claims between $500,000 and $100 million was replaced with a three-year agreement which provides coverage for claims exceeding $500,000 per occurrence with no upper limit. The Company is unaware of any pending disputes with any of its reinsurers that could result in termination, recision, arbitration or litigation of its reinsurance agreements. Information System The Company has in place certain data systems which assist the Company in, among other things, pricing its services, monitoring utilization and other cost factors, providing bills on a timely basis, identifying accounts for collection and handling various accounting and reporting functions. Its imaging and workflow systems are used to process and track claims and coordinate customer service. Where it is cost efficient, the Company's system is connected to large provider groups, doctors' offices, payors and brokers to enable efficient transfer of information and communication. In 2000, the Company plans to implement an internet-based health access 8 system to serve its members, providers and employees. The Company views its information systems capability as critical to the performance of ongoing administrative functions and integral to quality assurance and to the coordination of patient care across care sites. The Company is continually modifying or improving its information systems capabilities in an effort to improve operating efficiencies. Year 2000 The Year 2000 issue existed because many computer systems and applications used two-digit date fields to designate a year. As the century date change occurred, date-sensitive non-compliant systems may have recognized the year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may have caused systems to process critical financial and operational information incorrectly. The Company replaced or remediated its mission critical financial systems as well as its mission critical operational computer systems, remediated databases and validated the readiness of all computing and non- computing systems. The Company also engaged in a thorough evaluation to validate that all systems, computing and non-computing, were functioning. The Company is unaware of any Year 2000 related outages over the century date change. The Company implemented two major systems in 1999 and is in the process of implementing a third, at an estimated cost of over $50 million, which includes the implementation costs related to the acquired Kaiser- Texas operations. To date the Company has spent approximately $48.9 million on the new computer systems and other Year 2000 items. The Company expensed the costs to make modifications to existing computer systems and non-computer equipment. Management currently estimates the remaining new computer system costs to be $4.0 million to $6.0 million. While this has been a substantial effort, the results should give the Company the benefits of new technology and functionality for many of its financial and operational computer systems and applications. Quality Assurance and Improvement The Company has developed programs to help ensure that the health care services provided by its HMO and managed indemnity plans meet the professional standards of care established by the medical community. The Company believes that its emphasis on quality allows it to increase and retain its members. The Company monitors and evaluates the availability and quality of the medical care rendered by the providers in its HMO and insurance plans and periodically audits selected diagnoses, problems and referrals to determine adherence to appropriate standards of medical care. In addition, the Company has medical directors who, supported by a professional medical staff, monitor the quality and appropriateness of health care by analyzing a physician's utilization of diagnostic tests, laboratory and radiology procedures, specialty referrals, prescriptions and hospitals. Physicians and hospitals selected to provide services to the Company's members are subject to the Company's quality assurance programs including a formal credentialing process of all physicians. The Company also has internal quality assurance and improvement review committees that meet on a regular basis to review specialist referrals, monitor the performance of physicians and review practice patterns, complaints and other patient issues. Staff members regularly visit hospitals to review medical records, meet with patients and review treatment programs and discharge plans with attending physicians. In addition, the Company solicits information from both existing and former members as to their satisfaction with the care delivered. Several independent organizations have been formed for the purpose of responding to external demands for accountability in the health care industry. The Company has voluntarily elected to be evaluated by these external organizations, including the National Committee for Quality Assurance ("NCQA") and the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). The NCQA is an independent, not-for-profit organization dedicated to measuring the quality of America's health care. The NCQA survey includes rigorous on-site and off-site evaluations of over 60 standards. A team of physicians and managed care experts conducts accreditation surveys. A national oversight committee of physicians analyzes the team's findings and assigns an accreditation level based on the performance level of each plan being evaluated to NCQA's standards. Health Plan of Nevada, Inc., has received a Commendable Accreditation from NCQA, for the Commercial HMO and Medicare HMO product 9 lines in the Las Vegas metropolitan area and Pahrump. TXHC has earned an Accredited status from NCQA for its commercial HMO product in the Dallas/Ft. Worth service area. The TXHC accreditation will expire in April of 2000. At this time, the Company has voluntarily postponed its accreditation renewal process for TXHC and a scheduled site examination visit of TXHC by the NCQA in the second quarter of 2000 was cancelled. The Company expects to reschedule the site examination for the first quarter of 2001 depending on the NCQA's availability. There can be no assurance, however, that the Company will maintain or re-obtain NCQA or other accreditations in the future and there is no basis to predict what effect, if any, the lack of NCQA or other accreditations could have on HPN's or TXHC's competitive positions in southern Nevada and Dallas/Ft. Worth, Texas respectively. The JCAHO reviews rights, responsibilities and ethics, continuum of care, education and communication, leadership, management of information, and human resources and network performance. The Company's home health care and hospice subsidiaries are JCAHO accredited. Underwriting HMO. The Company structures premium rates for its various health plans primarily through community rating and community rating by class method. Under the community rating method, all costs of basic benefit plans for the Company's entire membership population are aggregated. These aggregated costs are calculated on a "per member per month" basis and converted to premium rates for various coverage types, such as single or family coverage. The community rating by class method is based on the same principles as community rating, except that actuarial adjustments to premium rates are made for demographic variations specific to each employer group such as the average age and sex of their employees, group size and industry. All employees of an employer group are charged the same premium rate if the same coverage is selected. In addition to premiums paid by employers, members also pay co-payments at the time certain services are provided. The Company believes that such co-payments encourage appropriate utilization of health care services while allowing the Company to offer competitive premium rates. The Company also believes that the capitation method of provider compensation encourages physicians to provide only medically necessary and appropriate care. Managed Indemnity. Premium charges for the Company's managed indemnity products are set in a manner similar to the community rating by class method described above. This rate calculation utilizes similar demographic adjustment factors such as age, sex and industry factors to develop group-specific adjustments from a given per member per month base rate by plan. Actual health claims experience is used in whole or in part to develop premium rates for larger insurance member groups. This process includes the use of utilization experience, adjustments for incurred but not reported claims, inflationary factors, credibility and specific reinsurance pooling levels for large claims. Workers' Compensation. Prior to insuring a particular risk, the Company reviews, among other factors, a standard industry application, a supplemental questionnaire and the employer's prior loss experience. Additionally, the Company determines whether the employer's employment classifications are among the classifications that the Company has elected to insure and if the amounts of the premiums for the classifications are within the Company's guidelines. The Company reviews these classifications periodically to evaluate whether they are profitable. A member of the Company's loss control department may conduct an on-site safety inspection before the Company insures the employer. The Company generally initiates this inspection for enterprises classified as higher hazard or ones identified as needing loss control attention or service such as manufacturing and construction. The Company may also initiate inspections if the enterprise previously has had a high loss ratio, a high experience modification factor or frequency of losses. If the on-site inspection reveals hazards that can be corrected, and an agreement can be reached with the employer that these hazards will be corrected in a time frame established by the Company's underwriting department, the Company may issue a policy subject to correction of those hazards. In the event the Company has issued a policy where no previous inspection has been conducted, and subsequently learns through an inspection the employer has hazards that must be corrected, the Company will request that the employer correct the hazards within a specified period of time. If these hazards are not corrected, the Company may cancel the policy for non-compliance of the hazard correction, within legal requirements. With regard to new business, the agent or broker will usually submit the claims history on the prospective account. In those situations where the claims history is not supplied by the agent or broker, other sources (such as the Industry Experience Modification Worksheets) are used to obtain the appropriate claims history if possible. 10 Competition HMO and Managed Indemnity. Managed care companies and HMOs operate in a highly competitive environment. The Company's major competition is from self-funded employer plans, PPO networks, other HMOs, such as Humana Care Plus, Pacificare Health Systems, Inc., Aetna and United Healthcare Corp. and traditional indemnity carriers, such as Blue Cross/Blue Shield. Many of the Company's competitors have substantially larger total enrollments, have greater financial resources and offer a broader range of products than the Company. Additional competitors with greater financial resources than the Company may enter the Company's markets in the future. The Company believes that the most important competitive factors are the delivery of reasonably priced, quality medical benefits to members and the adequacy and availability of health care delivery services and facilities. The Company depends on a large PPO network and flexible benefit plans to attract new members. Competitive pressures may result in reduced membership levels. Any such reductions could materially affect the Company's results of operations. Workers' Compensation. The Company's workers' compensation business is concentrated in California, a state where the workers' compensation insurance industry is extremely competitive. Since open rating became effective for policyholders in 1995, there have been substantial reductions in premiums. However, for renewal policies issued year to date in 2000, Sierra's workers' compensation business has obtained premium rate increases in excess of 15%. The increase seen so far in 2000 is a material positive change from the previous rate trend. Based on public information, other California workers' compensation companies are issuing year 2000 policies at rates 15% to 20% in excess of the expiring premiums. The Company believes that there are more than 200 insurance companies writing workers' compensation insurance in California. Many of the Company's competitors have been in business longer, have a larger volume of business, offer a more diversified line of insurance coverage, have greater financial resources and have greater distribution capability than the Company. The largest writer of workers' compensation insurance in California is the State Compensation Insurance Fund. Losses and Loss Adjustment Expenses Often, in workers' compensation insurance, several years may elapse between the occurrence of a loss and the final settlement of the loss. To recognize liabilities for unpaid losses, the Company establishes reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses for insured events, including reserves for events that have been incurred but have not yet been reported to the Company ("incurred but not reported" or "IBNR"). When a claim is reported, the Company's claims personnel initially establish reserves on a case-by-case basis for the estimated amount of the ultimate payment. These estimates reflect the judgment of the claims personnel based on their experience and knowledge of the nature and value of the specific type of claim and the available facts at the time of reporting as to severity of injury and initial medical prognosis. Included in these reserves are estimates of the expenses of settling claims, including legal and other fees. Claims personnel adjust the amount of the case reserves as the claim develops and as the facts warrant. IBNR reserves are established for unreported claims and loss development relating to current and prior accident years. In the event that a claim that occurred during a prior accident year was not reported until the current accident year, the case reserve for such claim typically will be established out of previously established IBNR reserves for that prior accident year. Unallocated loss adjustment expense reserves are established for the estimated costs related to the general administration of the claims adjustment process. The Company reviews the adequacy of its reserves on a periodic basis and considers external forces such as changes in the rate of inflation, the regulatory environment, the judicial administration of claims, medical costs and other factors that could cause actual losses and loss adjustment expenses ("LAE") to change. Reserves are reviewed with the Company's independent actuary at least annually. The actuarial projections include a range of estimates reflecting the uncertainty of projections. Management evaluates the reserves 11 in the aggregate, based upon the actuarial indications, and makes adjustments where appropriate. The consolidated financial statements of the Company provide for reserves based on the anticipated ultimate cost of losses. Government Regulation and Recent Legislation HMOs and Managed Indemnity. Federal and state governments have enacted statutes extensively regulating the activities of HMOs. In addition, growing government concerns over increasing health care costs and quality of care could result in new or additional state or federal legislation that could affect health care providers, including HMOs, PPOs and other health insurers. Among the areas regulated by federal and state law are the scope of benefits available to members, premium structure, procedures for review of quality assurance, enrollment requirements, the relationship between an HMO and its health care providers and members, licensing and financial condition. Government regulation of health care coverage products and services is a changing area of law that varies from jurisdiction to jurisdiction. Changes in applicable laws and regulations are continually being considered and interpretation of existing laws and rules also may change from time to time. Regulatory agencies generally have broad discretion in promulgating regulations and in interpreting and enforcing laws and regulations. While the Company is unable to predict what regulatory changes may occur or the impact on the Company of any particular change, the Company's operations and financial results could be negatively affected by regulatory revisions. For example, any proposals to eliminate or reduce ERISA pre-emption of state laws that would increase litigation exposure, affecting underwriting practices, limiting rate increases, requiring new or additional benefits or affecting contracting arrangements (including proposals to require HMOs and PPOs to accept any health care provider willing to abide by an HMO's or PPO's contract terms) may have a material adverse effect on the Company's business. The continued consideration and enactment of "anti-managed care" laws and regulations by federal and state bodies may make it more difficult for the Company to control medical costs and may adversely affect financial results. In addition to changes in applicable laws and regulations, the Company is subject to various audits, investigations and enforcement actions. These include possible government actions relating to the federal Employee Retirement Income Security Act, which regulates insured and self-insured health coverage plans offered by employers, the Federal Employees Health Benefit Plan, federal and state fraud and abuse laws, and laws relating to utilization management and the delivery of health care and payment or reimbursement therefor. In addition, the Company is subject to Medicare regulations promulgated by HCFA. Any violation of such government laws and regulations could result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect the Company's reputation in various markets and make it more difficult for the Company to sell its products and services. The Company has HMO licenses in Nevada, Texas and Arizona. The Company's HMO operations are subject to regulation by the Nevada Division of Insurance, the Board of Health, the Texas Department of Insurance and the Arizona Department of Insurance. The Company's health insurance subsidiary is domiciled and incorporated in California and is licensed in 43 states and the District of Columbia. It is subject to licensing and other regulations of the California Department of Insurance as well as the insurance departments of other states in which it operates or holds licenses. The Company's HMO and insurance premium rate increases are subject to various state insurance department approvals. The Company's Nevada HMO and health insurance subsidiaries currently maintain home offices and a regional home office, respectively, in Las Vegas and, accordingly, are eligible for certain premium tax credits in Nevada. The Company intends to take all necessary steps to continue to comply with eligibility requirements for these credits. The elimination or reduction of the premium tax credit would have a material adverse effect on the Company's results of operations. 12 The Company is subject to the Federal HMO Act and its regulations. The Company's HMOs are federally- qualified under this Act. In order to obtain federal qualification, an HMO must, among other things, provide its members certain services on a fixed, prepaid fee basis and set its premium rates in accordance with certain rating principles established by federal law and regulation. The HMO must also have quality assurance programs in place with respect to its health care providers. Furthermore, an HMO may not refuse to enroll an employee, in most circumstances, because of such person's health, and may not expel or refuse to re-enroll individual members because of their health or their need for health services. Under the "corporate practice of medicine" doctrine, in most states, business organizations, other than those authorized to do so, are prohibited from providing, or holding themselves out as providers of, medical care. Some states, including Nevada, exempt HMOs from this doctrine. The laws relating to this doctrine are subject to numerous conflicting interpretations. Although the Company seeks to structure its operations to comply with corporate practice of medicine laws in all states in which it operates, there can be no assurance that, given the varying and uncertain interpretations of those laws, the Company would be found to be in compliance with those laws in all states. A determination that the Company is not in compliance with applicable corporate practice of medicine laws in any state in which it operates could have a material adverse effect on the Company if it were unable to restructure its operations to comply with the laws of that state. Medicare and Medicaid antifraud and abuse provisions are codified at 42 U.S.C. Sections 1320a-7(b) (the "Anti-kickback Statute") and 1395nn (the "Stark Amendments"). Many states have similar anti-kickback and anti-referral laws. These statutes prohibit certain business practices and relationships involving the referral of patients for the provision of health care items or services under certain circumstances. Violations of the Anti-kickback Statute and the Stark Amendments include criminal penalties and civil sanctions, including fines and possible exclusion from the Medicare and Medicaid programs. Similar penalties are provided for violation of state anti-kickback and anti-referral laws. The Department of Health and Human Services ("HHS") has issued regulations establishing "safe harbors" with respect to the Anti-kickback Statute. The Company believes that its business arrangements and operations are in compliance with the Anti-kickback Statute and the Stark Amendments and the exceptions set forth therein, regardless of the availability of regulatory safe harbor protection with respect to those statutes. There can, however, be no assurance that (i) government officials charged with responsibility for enforcing the prohibitions of the Anti-kickback Statute and the Stark Amendments will not assert that the Company or certain transactions in which it is involved are in violation of those statutes; and (ii) such statutes will ultimately be interpreted by the courts in a manner consistent with the Company's interpretation. In 1997, Congress passed the Balanced Budget Act ("Act") which revised the structure of and reimbursement for private health plan options for Medicare enrollees. The Act seeks to expand the options available to Medicare enrollees by permitting HCFA to contract with a variety of types of managed care plans, creating a new Medicare fee-for-service option and establishing a Medicare Medical Savings Account Demonstration Program. The legislation also encourages provider sponsored organizations to contract directly with HCFA to provide coverage for Medicare enrollees. Federal reimbursement was modified so that the premiums paid by HCFA will be adjusted to take into account, on an increasing basis, a blend of national and local health care cost factors, rather than only local costs--starting with a 10% national factor in 1998 and moving to a 50% national factor by 2003. Congress also provided for gradual removal of a graduate medical education factor in determining reimbursement and, for the phase in of a risk adjustment payment methodology. As a result, it is likely that premiums paid by HCFA will not match the rate of increase for medical costs. The legislation includes a provision for a minimum increase of 2% annually in health plan Medicare reimbursement through 2003. The legislation also provides for expedited licensure of provider-sponsored Medicare plans and a repeal of the rule requiring health plans to have one commercial enrollee for each Medicare or Medicaid enrollee. These changes could have the effect of increasing competition in the Medicare market. Further, effective January 1, 1999, the Company was required to implement new Medicare regulations including, but not limited to, discharge notices, additional provider contract language and extensive new quality improvement programs. In 1999, Congress changed a number of the Act provisions in the Balanced Budget Refinement Act ("BBRA"). The BBRA made numerous changes in Medicare payment, 13 contracting, enrollment rules, and altered the risk adjustment phase-in schedule. These new regulations are likely to increase the burden of administering the Company's Medicare plans and may adversely impact the Company's operations. The Health Insurance Portability and Accountability Act of 1996 (the "Accountability Act") was passed by Congress and signed into law by President Clinton on August 21, 1996 and effective beginning July 1, 1997. While the Accountability Act contains provisions regarding health insurance or health plans, such as portability and limitations on pre-existing condition exclusions, guaranteed availability and renewability, it also contains several anti-fraud measures that significantly change health care fraud and abuse provisions. Some of the provisions include (i) creation of an anti-fraud and abuse trust fund and coordination of fraud and abuse efforts by federal, state and local authorities; (ii) extension of the criminal anti-kickback statues to all federal health programs; (iii) expansion of and increase in the amount of civil monetary penalties and establishment of a knowledge standard for individuals or entities potentially subject to civil monetary penalties; and (iv) revisions to current sanctions for fraud and abuse, including mandatory and permissive exclusion from participation in the Medicare or Medicaid programs. Workers' Compensation. The Company is subject to extensive governmental regulation and supervision in each state in which it conducts workers' compensation business. The primary purpose of such regulation and supervision is to provide safeguards for policyholders and injured workers rather than protect the interests of shareholders. The extent and form of the regulation may vary, but generally has its source in statutes that establish regulatory agencies and delegate to the regulatory agencies broad regulatory, supervisory and administrative authority. Typically, state regulations extend to such matters as licensing companies; restricting the types or quality of investments; requiring triennial financial examinations and market conduct surveys of insurance companies; licensing agents; regulating aspects of a company's relationship with its agents; restricting use of some underwriting criteria; regulating premium rates, forms and advertising; limiting the grounds for cancellation or nonrenewal of policies; solicitation and replacement practices; and specifying what might constitute unfair practices. Moreover, the payment of dividends and the making of other distributions to the Company by its workers' compensation insurance company subsidiaries are contingent upon the earnings of those subsidiaries and are subject to various business considerations, applicable state corporate laws and regulations, the terms of agreements to which they may become a party and government regulations, which restrict in certain circumstances the payment of dividends and distributions, and the transfer of assets to the Company. In the normal course of business, the Company and the various state agencies that regulate the activities of the Company may disagree on interpretations of laws and regulations, policy wording and disclosures or other related issues. These disagreements, if left unresolved, could result in administrative hearings and/or litigation. The Company attempts to resolve all issues with the regulatory agencies, but is willing to litigate issues where it believes it has a strong position. The ultimate outcome of these disagreements could result in sanctions and/or penalties and fines assessed against the Company. Currently, there are no litigation matters pending with any department of insurance. Typically, states mandate participation in insurance guaranty associations, which assess solvent insurance companies in order to fund claims of policyholders of insolvent insurance companies. Under this arrangement, insurers can be assessed up to 1% (or 2% in certain states) of premiums written for workers' compensation insurance in that state each year to pay losses and LAE on covered claims of insolvent insurers. In California and certain other states, insurance companies are allowed to recoup such assessments from policyholders while several states allow an offset against premium taxes. Potential assessment expenses, net of recoupment, if any, for insolvencies are not accrued until after an insolvency has occurred since the likelihood and the amount of the assessment expense cannot be reasonably determined or estimated. In California, there have been no new assessments for insolvent workers' compensation insurance companies since 1990. General. Besides state insurance laws, the Company is subject to general business and corporation laws, federal and state securities laws, consumer protection laws, fair credit reporting acts and other laws regulating the conduct and operation of its subsidiaries. 14 Deposits. The Company's HMO and insurance subsidiaries are required by state regulatory agencies to maintain certain deposits and must also meet certain net worth and reserve requirements. The Company has restricted assets on deposit in various states ranging from $20,000 to $2.0 million and totaling $21.7 million at December 31, 1999. The Company's HMO and insurance subsidiaries meet requirements to maintain minimum stockholder's equity ranging from $1.1 million to $5.2 million. In addition, in conjunction with the Kaiser-Texas acquisition, TXHC entered into a letter agreement with the Texas Department of Insurance whereby TXHC agreed to maintain a net worth of $20.0 million. Dividends. The Company's HMO and insurance subsidiaries are also restricted by state law as to the amount of dividends that can be declared and paid. Moreover, insurance companies and HMOs domiciled in Texas, Nevada and California generally may not pay extraordinary dividends without providing the state insurance commissioner with 30 days prior notice, during which period the commissioner may disapprove the payment. An "extraordinary dividend" is generally defined as a dividend whose fair market value together with that of other dividends or distributions made within the preceding 12 months exceeds the greater of (i) ten percent of the insurer's surplus as of the preceding December 31 or (ii) the net gain from operations of such insurer for the 12-month period ending on the preceding December 31. The Company is not in a position to assess the likelihood of obtaining future approval for the payment of "extraordinary dividends" or dividends other than those specifically allowed by law in each of its subsidiaries' states of domicile. No prediction can be made as to whether any legislative proposals relating to dividend rules in the domiciliary states of the Company's subsidiaries will be made or adopted in the future, whether the insurance departments of such states will impose either additional restrictions in the future or a prohibition on the ability of the Company's regulated subsidiaries to declare and pay dividends or as to the effect of any such proposals or restrictions on the Company's regulated subsidiaries. Employees The Company had approximately 4,700 employees as of December 31, 1999. None of these employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES The Company owns several administrative facilities in southern Nevada totaling approximately 400,000 square feet. Such facilities include an approximate 110,000 square foot six-story home office building and an approximate 43,000 square foot two-story corporate administrative headquarters. These buildings are subject to liens securing a $400,000 loan balance. Also included in this total is a 198,000 square foot six-story administrative headquarters building which became fully occupied in 1998. This building is subject to a $11.6 million loan balance. The Company also owns clinical facilities in the southern Nevada area totaling approximately 425,000 square feet and consisting primarily of ten medical clinics including one medical clinic that opened for business in January 2000 and two surgery centers. The Company leases additional office and clinical space in Nevada totaling approximately 129,000 and 90,000 square feet, respectively. In conjunction with the Kaiser-Texas acquisition, the Company purchased eight medical and office facilities with approximately 323,000 square feet of clinical facilities and approximately 175,000 square feet of administrative facilities. These buildings are subject to a deed of trust note securing a $34.7 million note balance. In addition, the Company leases additional office and clinical space in Texas totaling approximately 24,000 square feet and 56,000 square feet, respectively. The above properties are utilized primarily for the managed care operations. The workers' compensation subsidiary is headquartered in Nevada and occupies approximately 25% of the 198,000 square foot administrative building as well as leases approximately 64,000 square feet of office space in California. The Company leases approximately 150,000 square feet of office space in other various states as needed for the military subsidiary's administrative headquarters, for TRICARE service centers and for other regional operations. 15 The Company believes that current and planned clinical space will be adequate for its present needs. Additional clinical space may be required, however, if membership continues to expand in southern Nevada. The Company owns real estate and a building in Park City, Utah purchased in 1996 to provide entertainment and a meeting environment for significant current and prospective clients, brokers and others who assist in the Company's marketing efforts. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various claims and other litigation in the ordinary course of business. Such litigation includes claims of medical malpractice, claims for coverage or payment for medical services rendered to HMO members and claims by providers for payment for medical services rendered to HMO members. Also included in such litigation are claims for workers' compensation and claims by providers for payment for medical services rendered to injured workers. In the opinion of the Company's management, the ultimate resolution of pending legal proceedings should not have a material adverse effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information The Company's common stock, par value $.005 per share (the "Common Stock"), has been listed on the New York Stock Exchange under the symbol SIE since April 26, 1994 and, prior to that, had been listed on the American Stock Exchange since the Company's initial public offering on April 11, 1985. The following table sets forth the high and low sales prices for the Common Stock for each quarter of 1999 and 1998.
Period High Low 1999 First Quarter........................................ $22 1/8 $11 9/16 Second Quarter....................................... 16 1/4 10 7/16 Third Quarter........................................ 14 9/16 10 1/16 Fourth Quarter....................................... 10 4 5/8 1998 First Quarter........................................ $26 7/8 $20 9/16 Second Quarter....................................... 27 37/64 23 1/4 Third Quarter........................................ 26 15 7/8 Fourth Quarter....................................... 24 15/16 17 15/16
On February 28, 2000 the closing sale price of the Common Stock was $6.00 per share. Note: The above stock prices have been adjusted to account for the three-for-two stock split of the Company's Common Stock to stockholders of record as of May 18, 1998. Holders The number of record holders of Common Stock at February 28, 2000 was 241. Based upon information available to it, the Company believes there are several thousand beneficial holders of the Common Stock. Dividends No cash dividends have been paid on the Common Stock since the Company's inception. The Company currently intends to retain its earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. As a holding company, the Company's ability to declare and to pay dividends is dependent upon cash distributions from its operating subsidiaries. The ability of the Company's health maintenance organizations ("HMOs") and insurance subsidiaries to declare and to pay dividends is limited by state regulations applicable to the maintenance of minimum deposits, reserves and net worth. (See Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources). The declaration of any future dividends will be at the discretion of the Company's Board of Directors and will depend on, among other things, future earnings, debt covenants, operations, capital requirements and the financial condition of the Company and upon general business conditions. 17 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of Sierra Health Services, Inc., and subsidiaries (the "Company"), for each of the fiscal years in the five-year period ended December 31, 1999 should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information which appears elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data below has been derived from the audited Consolidated Financial Statements of the Company.
Years Ended December 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- -------- (Amounts in thousands, except per share data) Statement of Operations Data: OPERATING REVENUES: Medical Premiums............................................. $ 827,779 $ 609,404 $513,857 $386,968 $319,475 Military Contract Revenues .................................. 287,398 204,838 4,346 Specialty Product Revenues .................................. 94,221 148,368 146,211 133,324 102,807 Professional Fees............................................ 51,842 45,363 31,238 28,836 19,417 Investment and Other Revenues................................ 22,571 29,230 26,072 26,283 25,310 ------------- ------------ ---------- ---------- ---------- Total...................................................... 1,283,811 1,037,203 721,724 575,411 467,009 ----------- ---------- --------- --------- --------- OPERATING EXPENSES: Medical Expenses............................................. 749,797 513,209 419,272 315,915 245,135 Military Contract Expenses ................................. 276,493 196,625 4,193 Specialty Product Expenses................................... 96,487 142,258 143,082 130,758 102,859 General, Administrative and Marketing Expenses............... 137,812 110,687 93,919 72,237 63,562 Impairment, Settlement and Other Costs (1) .................. 18,808 13,851 29,350 12,064 11,614 ------------- ------------ ---------- ---------- ---------- Total...................................................... 1,279,397 976,630 689,816 530,974 423,170 ----------- ----------- --------- --------- --------- OPERATING INCOME ............................................... 4,414 60,573 31,908 44,437 43,839 INTEREST EXPENSE AND OTHER, NET................................. (14,980) (7,181) (4,433) (2,823) (3,737) ------------ ------------ ----------- ---------- ---------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ....................................... (10,566) 53,392 27,475 41,614 40,102 BENEFIT (PROVISION) FOR INCOME TAXES............................ 5,935 (13,796) ( 3,234) (10,471) (12,198) -------------- ----------- ----------- --------- --------- (LOSS) INCOME FROM CONTINUING OPERATIONS........................ (4,631) 39,596 24,241 31,143 27,904 LOSS FROM DISCONTINUED OPERATIONS .............................. (6,600) ----------------- ----------------- --------------- ------------- NET (LOSS) INCOME .............................................. $ (4,631) $ 39,596 $ 24,241 $ 31,143 $ 21,304 ============ =========== ========= ========= ========= EARNINGS PER COMMON SHARE (2): (Loss) Income from Continuing Operations Per Share .......... $(.17) $1.45 $.90 $1.17 $1.07 Loss Per Share from Discontinued Operations ................. (.25) -------- -------- ------ -------- ------- Net (Loss) Income Per Share ................................. $(.17) $1.45 $.90 $1.17 $ .82 ===== ===== ==== ===== ====== Weighted Average Number of Common Shares Outstanding ........................................ 26,927 27,391 27,013 26,589 26,121 ====== ====== ====== ====== ====== EARNINGS PER COMMON SHARE ASSUMING DILUTION (2): (Loss) Income from Continuing Operations Per Share ...... $(.17) $1.43 $.88 $1.15 $1.05 Loss Per Share from Discontinued Operations ............. (.25) -------- --------- ----- --------- ------ Net (Loss) Income Per Share ............................. $(.17) $1.43 $.88 $1.15 $ .80 ===== ===== ==== ===== ====== Weighted Average Number of Common Shares Outstanding Assuming Dilution ...................... 26,927 27,747 27,426 27,191 26,601 ====== ====== ====== ====== ======
18
Years Ended December 31, 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- -------- (Amounts in thousands) Balance Sheet Data: Working Capital ............................................. $ 114,740 $ 198,092 $ 211,911 $189,943 $192,873 Total Assets................................................. 1,130,112 1,045,120 723,936 629,462 575,146 Long-term Debt (Net of Current Maturities)................... 258,854 242,398 90,841 66,189 71,257 Cash Dividends Per Common Share.............................. none none none none none Stockholders' Equity......................................... 278,412 303,714 265,682 234,482 207,715
(1) The Company recorded certain identifiable impairment, settlement and other costs. See Note 15 of Notes to the Consolidated Financial Statements. (2) Adjusted to account for three-for-two stock split of the Company's common stock to stockholders of record as of May 18, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant for an assessment and understanding of the Company's consolidated financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements and Related Notes thereto. Any forward-looking information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and any other sections of this 1999 Annual Report on Form 10-K should be considered in connection with certain cautionary statements contained in the Company's Current Report on Form 8-K filing dated March 15, 2000, incorporated herein by reference. Such cautionary statements are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and identify important risk factors that could cause the Company's actual results to differ materially from those expressed in any projected, estimated or forward-looking statements relating to the Company. Acquisitions On October 31, 1998, Sierra Health Services, Inc. ("Sierra") and one of its subsidiaries, Texas Health Choice, L.C. (formerly HMO Texas L.C.) completed the acquisition of certain assets of Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"), a health plan operating in Dallas/Ft. Worth, and Permanente Medical Association of Texas ("Permanente"), a medical group with approximately 150 physicians. The purchase price was $124 million, which was net $20 million in operating cost support paid to Sierra by Kaiser Foundation Hospitals in four quarterly installments following the closing of the transaction. The purchase price allocation included a premium deficiency reserve of $25 million for estimated losses on the contracts acquired from Kaiser-Texas. The purchase price also included amounts for real estate and eight medical and office facilities with approximately 500,000 square feet. In December 1998, certain accreditation goals were met by the health plan resulting in a purchase price increase of $3.0 million to $127 million. The purchase price may increase up to an additional $27 million over three years if certain growth and member retention goals are met by the health plan; however, preliminary results indicate these goals were not met for the first year. Sierra assumed no prior liabilities for malpractice or other litigation, or for any unanticipated future adjustments to claims expenses for periods prior to closing. The transaction was financed with a five-year revolving credit facility and a $35.2 million note payable to Kaiser Foundation Health Plan of Texas. The note is secured by the acquired real estate. Approximately $110 million of the $200 million revolving credit facility was used to fund the transaction. The original liability for the estimated premium deficiency was based upon assumptions of membership and other operating information, some of which had not been received as of December 31, 1998. During 1999, the Company continued to gather such data, including data from the seller, and based upon the receipt and 19 analysis of this data, the Company revised the initial estimate of the premium deficiency accrual. In total the Company recorded a $72.0 million premium deficiency in conjunction with the acquisition. Of this amount, $6.8 million was utilized in 1998 to offset losses on the acquired contracts, and the remainder was utilized in 1999. Total goodwill recorded in conjunction with the acquisition was $126.8 million of which $24.8 million was a result of adjustments in 1999. On December 31, 1998, Sierra completed the acquisition of the Nevada health care business of Exclusive Healthcare, Inc. ("EHI"), United of Omaha Life Insurance Company and United World Life Insurance Company ("United"), all of which were subsidiaries of Mutual of Omaha Insurance Company. Sierra initially retained approximately 9,000 members (approximately 4,400 HMO members) subsequent to the acquisition. Effective June 1, 1999, the Company completed the purchase of the Texas operations of EHI (approximately 1,000 HMO members) and United's related preferred provider organization ("PPO") that is part of the dual option HMO/PPO plan. The purchase price of both the Nevada and Texas transaction is contingent based on how many members are retained through 2000 and 2001. No cash will be paid until group renewals begin in 2000. In August 1997, the Company acquired the assets and operations of Total Home Care, Inc. ("THC") for approximately $3.1 million, net of cash acquired. THC provides home infusion, oxygen, and durable medical equipment services in Nevada and Arizona. The Company sold the Arizona operations in the first quarter of 1998 for approximately $1.5 million. Also, in the first quarter of 1998, the Company purchased three medical clinics in southern Nevada for approximately $7.3 million. Overview The Company derives revenues from its health maintenance organizations, managed indemnity, military health care services and workers' compensation insurance subsidiaries. To a lesser extent, the Company also derives additional specialty product revenues from non-HMO and insurance products (consisting of fees for workers' compensation administration, utilization management services and ancillary products), professional fees (consisting primarily of fees for providing health care services to non-members and co- payment fees received from members), and investment and other revenue. Medical premium revenues accounted for approximately 64.5%, 58.8% and 71.2% of the Company's total revenues for 1999, 1998 and 1997, respectively. The decrease in medical premiums as a percentage of total revenues in 1998 is primarily due to the addition of military contract revenues. The increase in the percentage of medical premiums as a percentage of total revenues in 1999 is due to the acquisitions discussed previously. Continued medical premium revenue growth is principally dependent upon continued enrollment in the Company's products and upon competitive and regulatory factors. The Company's principal expenses consist of medical expenses, military contract expenses, specialty product expenses, and general, administrative and marketing expenses. Medical expenses represent capitation fees and other fee-for-service payments paid to independently contracted physicians, hospitals and other health care providers to cover enrollees, as well as the aggregate expenses to operate and manage the Company's multi-specialty medical groups and other provider subsidiaries. As a provider of health care management services, the Company seeks to positively effect quality of care and expenses by employing or contracting with physicians, hospitals and other health care providers at negotiated price levels, by adopting quality assurance programs, by monitoring and managing utilization of physicians and hospital services and by providing incentives to use cost-effective providers. Military contract expenses represent the expenses of delivering health care, as agreed to in the TRICARE contract with the federal government, as well as administrative costs to operate the military health care subsidiary. Specialty product expenses primarily consist of losses and loss adjustment expenses, policy acquisition expenses and other general and administrative expenses associated with the Company's workers' compensation insurance subsidiaries. General, administrative and marketing expenses generally represent operational costs other than those associated with the delivery of health care services, military contract services and specialty product services. On September 30, 1997, Sierra Military Health Services, Inc. ("SMHS"), a wholly owned subsidiary of the Company, was awarded a TRICARE contract to provide managed health care coverage to eligible 20 beneficiaries in Region 1. Under the contact, SMHS provides health care services to approximately 610,000 dependents of active duty military personnel and military retirees and their dependents through subcontractor partnerships and individual providers. In June 1998, the Company began providing health care benefits to individuals in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Washington, D.C. SMHS was notified on February 13, 1998 that the United States General Accounting Office sustained a competitor's protest of the contract award for TRICARE Managed Care Support Region 1 and recommended that the contract be re-bid. In December 1998, the Company reached an agreement to settle the protest. As part of the settlement, the competitor has foregone any and all rights it may have to challenge the contract award and seek a re-bid. (See Note 15 of Notes to the Consolidated Financial Statements). Impairment, settlement and other costs represent identifiable incremental costs the Company has incurred primarily in connection with various mergers, acquisitions and planned dispositions as well as expenses associated with the Company's proposal to serve TRICARE beneficiaries in Region 1 and the ultimate cost to settle the bid protest. Start-up expenses associated with the proposal to serve TRICARE beneficiaries were charged to operations upon notification of award. (See Note 15 of Notes to the Consolidated Financial Statements). Results of Operations The following table sets forth selected operating data as a percentage of revenues for the periods indicated:
Years Ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- ------- OPERATING REVENUES: Medical Premiums........................................ 64.5% 58.8% 71.2% Military Contract Revenues.............................. 22.4 19.7 .6 Specialty Product Revenues ............................. 7.3 14.3 20.3 Professional Fees....................................... 4.0 4.4 4.3 Investment and Other Revenues .......................... 1.8 2.8 3.6 ------- ------ ------ Total................................................ 100.0 100.0 100.0 ----- ----- ----- OPERATING EXPENSES: Medical Expenses........................................ 58.4 49.5 58.1 Military Contract Expenses ............................. 21.6 19.0 .6 Specialty Product Expenses.............................. 7.5 13.7 19.8 General, Administrative and Marketing Expenses.......... 10.7 10.7 13.0 Impairment, Settlement and Other Costs.................. 1.5 1.3 4.1 ----- ----- ------ Total................................................ 99.7 94.2 95.6 ---- ---- ---- OPERATING INCOME ............................................ .3 5.8 4.4 INTEREST EXPENSE AND OTHER, NET.............................. (1.1) (.7) (.6) ----- ---- ---- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .................................... (.8) 5.1 3.8 BENEFIT (PROVISION) FOR INCOME TAXES......................... .4 (1.3) ( .4) ------ ----- ----- NET (LOSS) INCOME ........................................... (.4)% 3.8% 3.4% ====== ==== ====
21 1999 Compared to 1998 Revenues. The Company's total operating revenues for 1999 increased approximately 23.8% to $1.28 billion from $1.04 billion for 1998. The increase was primarily due to an increase in premium revenue of $218.4 million and increases in military contract revenue of $82.6 million, offset by a decrease in specialty product revenue of $54.1 million. Medical premium revenue from the Company's HMO and managed indemnity insurance subsidiaries increased $218.4 million, or 35.8%. Excluding the effect of the Kaiser-Texas acquisition, premium revenue increased $84.9 million, or 14.6%. The $84.9 million increase in premium revenue reflects a 7.9% increase in member months (the number of months of each year that an individual is enrolled in a plan). Additionally, Medicare member months increased 16.2%. Such growth in Medicare member months contributes significantly to the increase in premium revenues as the Medicare per member premium rates are over three times higher than the average commercial premium rate. The Company's premium rates increased approximately 4% for its Nevada HMO commercial groups and 11% for its Houston, Texas commercial groups. Compared to the fourth quarter of 1998, the commercial rates for the Company's acquired Dallas/ Ft. Worth operations have increased approximately 8%. The Company's managed indemnity rates increased approximately 8% and Medicare rates increased approximately 2%. Over 90% of the Company's Nevada Medicare members are enrolled in the Social HMO Medicare program. The Health Care Financing Administration ("HCFA") is considering adjusting the reimbursement factor for the Social HMO members in the future. If the reimbursement for these members decreases significantly and related benefit changes are not made timely, there could be a material adverse effect on the Company's business. Military contract revenues increased $82.6 million, or 40.3%. Military contact revenue is recorded based on the contract price as agreed to by the federal government, adjusted for certain provisions based on actual experience. In addition, the Company records revenue based on estimates of the earned portion of any contract change orders not originally specified in the contract. The revenue recorded in 1999 is a result of the provision of health care services for twelve months. Revenue recorded in 1998 was comprised of revenue earned for five months of contract implementation and seven months of health care delivery. Specialty product revenue decreased $54.1 million, or 36.5%, for the year ended December 31, 1999 compared to the prior year. Of the decrease, $51.1 million was due to a decrease in revenue in the workers' compensation operations segment and $3.0 million was due to a decrease in administrative services revenue. The decrease in specialty product revenues related to the workers' compensation insurance segment was primarily due to a full year of additional ceded reinsurance premiums on the low level reinsurance agreement effective July 1, 1998, totaling $60.7 million. This agreement was entered into in the fourth quarter of 1998. In addition, ongoing price competition, especially in California, is contributing to the reduction in revenue. The decrease in administrative services revenue was primarily attributable to a decrease in membership. Professional fee revenue increased $6.5 million primarily due to the Company's medical group operations in Dallas/Ft. Worth related to the Kaiser-Texas acquisition. Investment and other revenue decreased approximately $6.7 million over the comparable prior year period. Of this decrease, $2.7 million was due primarily to capital gains realized on the sale of investments in the prior year period. The remaining decrease was primarily due to a decrease in invested balances. Medical Expenses. Total medical expenses for the year ended December 31, 1999 increased $236.6 million compared to the prior year. The following costs were included in 1999 medical expenses: Premium Deficiency. In the first quarter of 1999, the Company recorded a premium deficiency charge of $8.1 million related to losses in underperforming markets primarily in Arizona and rural Nevada. This deficiency reserve was utilized during 1999 to offset losses as they occurred. In the fourth quarter of 1999, the Company recorded $21.0 million for estimated deficient premiums associated with contracts in the Texas market. Of this amount $10.0 million was included in medical expenses and $11.0 million was recorded in impairment, settlement and other costs. 22 Adverse Development and Contractual Adjustments. In the fourth quarter of 1999, the Company recorded approximately $18.0 million in non-recurring medical expenses, of which $11.2 million primarily related to an adjustment to the estimate for medical expenses recorded in previous periods. The remaining non-recurring amount primarily relates to contractual settlements with providers of medical services. (See Note 15 of Notes to the Consolidated Financial Statements). Excluding the effect of the Dallas/Ft. Worth operations, as well as the non-recurring charges, medical expenses increased approximately $83.4 million or 17.0% compared to the prior year. Medical expenses as a percentage of medical premiums and professional fees ("Medical Care Ratio") increased from 78.4% to 85.2%, or 81.1% excluding the non-recurring charges, for the year ended December 31, 1999 compared to the prior year. The increase in the medical care ratio reflects the Kaiser-Texas membership which has a higher medical care ratio, and the charges discussed previously, as well as an increase in Medicare members as a percentage of fully-insured members, and higher pharmacy costs. The cost of providing medical care to Medicare members generally requires a greater percentage of the premiums received. Pharmacy costs increased as the management of the pharmacy benefit was transitioned from a capitated pharmacy benefits contract to in-house management in the third quarter of 1998. The costs under such capitation contract were substantially below actual claims experience. Included in medical expenses is the utilization of $43.9 million of premium deficiency reserve to offset losses on contracts from the Kaiser-Texas acquisition. Although not reflected in earnings, $20 million of these losses were funded by Kaiser as agreed to in the purchase agreement. Military Contract Expenses. Military contract expenses for the twelve months ended December 31, 1999, increased approximately $79.9 million or 40.6%, compared to the prior year. The military contract expenses in 1999 are a result of twelve months of health care delivery. Expense in 1998 was for five months of contract implementation and seven months of health care delivery. Health care delivery expense consists primarily of costs to provide managed health care services to eligible beneficiaries in accordance with the Company's TRICARE contract. Under the contract, SMHS provides health care services to approximately 610,000 dependents of active duty military personnel and military retirees and their dependents through subcontractor partnerships and individual providers. Health care costs are recorded in the period when services are provided to eligible beneficiaries, including estimates for provider costs which have been incurred but not reported to the Company. Also, included in military contract expenses are costs incurred to perform specific administrative services, such as health care appointment scheduling, enrollment, network management and health care advice line services, and other administrative functions of the military health care subsidiary. Specialty Product Expenses. Specialty product expenses decreased approximately $45.8 million, or 32.2%, due primarily to the implementation of the low level reinsurance agreement as discussed previously, offset by adverse development of $9.9 million on prior accident years for the Company's workers' compensation business. Effective January 1, 1998, workers' compensation claims are 100% reinsured between $500,000 and $100 million per occurrence. For claims occurring on and after July 1, 1998, that are below $500,000, the Company obtained low level quota share and excess of loss reinsurance. Under this agreement, which was not reflected in the financial statements until the fourth quarter of 1998, the Company reinsures 30% of the first $10,000 of each claim, 75% of the next $40,000 and 100% of the next $450,000. Claims occurring in the third quarter of 1998 are accounted for as retroactive reinsurance. (See Note 6 of Notes to the Consolidated Financial Statements). The combined ratio for the workers' compensation insurance business was 105.5% in 1999 compared to 98.7% for the prior year. The increase was due to a 380 basis point increase in the net loss and loss adjustment expense ("LAE") ratio, a 290 basis point increase in the underwriting expense ratio and 10 basis points of policyholders' dividend expense incurred in 1999. The increase in the loss and LAE ratio was primarily due to 1999 net adverse loss development of $9.9 million on prior accident years compared to 1998 net favorable loss development of $9.6 million. The increase in the underwriting expense ratio was primarily due to the lower net earned premium base that resulted from higher ceded reinsurance premiums in 1999. The adverse development recorded in 1999 for the prior accident years is primarily attributable to increased California claim severity. Higher claim severity has had a negative impact on the entire California workers' compensation industry. The historical claim frequency development patterns have not significantly changed 23 in 1999. In addition, continuing price competition in California has negatively affected operating ratios. However, for renewal policies issued year to date in 2000, Sierra's workers' compensation business has obtained premium rate increases in excess of 15%. The increase seen so far in 2000 is a material positive change of the previous rate trend. Based on public information, other California workers' compensation companies are issuing year 2000 policies at rates 15% to 20% in excess of the expiring premiums. The loss and loss adjustment expense reserves booked as of December 31, 1999 reflect the Company's best estimate of the ultimate loss costs for reported and unreported claims occurring in accident year 1999 as well as those occurring in accident years prior to 1999. The loss estimates are subject to change in subsequent accounting periods and any change to the current reserve estimates would be accounted for in future results of operations. The Company may incur future adverse or favorable loss development. Workers' compensation claim payments are made over several years from the date of the claim. Until the final payments for reported claims are made, reserves are invested and the interest proceeds are included in investment income. General, Administrative and Marketing Expenses. General, administrative and marketing ("G&A") cost increased $27.1 million, or 24.5%, compared to 1998. As a percentage of revenues, G&A costs for 1999 was 10.7% which is consistent with 1998. Of the $27.1 million increase in G&A, $14.3 million was due to additional G&A related to the acquired HMO business in the Dallas/Ft. Worth area, net of premium deficiency utilization of $20.9 million. The remaining increase of $12.8 million included a $6.9 million increase in compensation expense, resulting primarily from additional employees supporting expanded services. Broker and premium tax expense increased approximately $2.2 million due to increased membership. In addition, depreciation expense increased $2.4 million. Impairment, Settlement and Other Costs. In March 1999, the Company closed all inpatient operations at Mohave Valley Hospital, a 12-bed acute care facility in Bullhead City, Arizona, and terminated approximately 45 employees. The Company recorded a charge of $4.3 million related primarily to the write-off of goodwill associated with the Mohave Valley operations. The Company also incurred $450,000 for certain legal and contractual settlements and $400,000 to provide for the Company's portion of the write-off of start-up costs at the Company's equity investee, TriWest HealthCare Alliance in accordance with Statement of Position 98-5. During the fourth quarter of 1999, the Company recorded $13.7 million of non-recurring costs. Of this amount $11.0 million was recorded in conjunction with a premium deficiency accrual for contracts in the Texas market and represents general and administrative costs, in excess of those covered by premiums, the Company will incur to service these contracts. The remaining expense is primarily related to contractual settlements. Interest Expense and Other. Interest expense and other increased approximately $7.8 million for the year ended December 31, 1999, compared to the prior year due to an increase in debt primarily as a result of the Kaiser-Texas acquisition, offset by a net gain of $1.8 million on the sale of certain pharmacy assets purchased in conjunction with the Kaiser-Texas acquisition. Income Taxes. For 1999, the Company recorded approximately $5.9 million of tax benefit compared to a tax expense of $13.8 million in the prior year. Due to a change in tax law, which took effect in 1999, the Company was able to utilize a $1.6 million net operating loss carryover that had previously not been recognized in the financial statements due to uncertainty about its realization. Excluding the effect of this change, the effective tax rate was 41.3% compared to 25.8% in 1998. Including the effect of this change, the effective tax rate for 1999 was 56.2%. The difference between the effective tax rate, excluding the change in the deferred tax valuation allowance, and the statutory rate is due to income earned on tax preferred investments. The effective tax rate for the year 2000 is projected to range from 33% to 35%. The difference between the anticipated tax rate and the statutory tax rate is due primarily to investments in tax preferred investments offset by state income taxes. 24 1998 Compared to 1997 Revenues. The Company's total operating revenues for 1998 increased approximately 43.7% to $1.04 billion from $721.7 million for 1997. The increase was primarily due to military contract revenue of $204.8 million and an increase in premium revenue of $95.5 million. The military contract revenue is a result of the implementation of the TRICARE contract as well as the first seven months of health care delivery. Revenue under the TRICARE contract is recorded based on the contract price as agreed to by the federal government. The contract also contains provisions which adjust the contract price based on actual experience. The estimated effects of these adjustments are recognized on a monthly basis. Medical premium revenue from the Company's HMO and managed indemnity insurance subsidiaries increased $95.5 million, or 18.6%. Excluding the effect of the Kaiser-Texas acquisition in the fourth quarter of 1998, premium revenue increased $66.9 million, or 13.0%. The $66.9 million increase in premium revenue reflects a 3.4% increase in member months. Medicare member months increased 20.1% which contributed to the increase in medical premium revenue. Such growth in Medicare member months contributes significantly to the increase in premium revenues as the Medicare per member premium rates are over three times higher than the average commercial premium rate. The Company's premium rates increased an average of 3% to 4% for its HMO commercial groups and in excess of 10% for managed indemnity commercial groups. The Company also realized a slight increase in its capitation rate established by HCFA. Specialty product revenue increased $2.2 million, or 1.5%, for the year ended December 31, 1998 compared to the prior year. The increase was due to revenue growth of $5.1 million in the workers' compensation insurance operation offset in part by a decrease in administrative services and other revenue of $2.9 million due primarily to the termination of the Company's workers' compensation administrative services contract with the State of Nevada. The Company's workers' compensation subsidiary signed a reinsurance agreement whereby a greater portion of premium is ceded thus reducing revenue. The agreement results in a reduction of specialty product expenses as discussed later in this section. Excluding the effect of the new reinsurance agreement, the workers' compensation subsidiaries' revenue would have increased $21.2 million compared to the prior year. Professional fee revenue increased approximately $14.1 million primarily due to the January 1998 acquisition of the operations of two medical clinics in southern Nevada and the clinics acquired in the Dallas/Ft. Worth area. In addition approximately $3.5 million of the increase in professional fees was due to the operations of Total Home Care, Inc. ("THC") which was acquired in August 1997. Investment and other revenue increased approximately $3.2 million over the prior year primarily due to an increase in invested balances and capital gains realized on the sale of investments. Medical and Specialty Product Expenses. The Medical Care Ratio increased from 76.9% to 78.4% for the year ended December 31, 1998 compared to the prior year. The increase in the medical care ratio was due to an increase in Medicare members as a percentage of fully-insured members, continued expansion in Texas, northern Nevada and Arizona which have higher medical care ratios, higher pharmacy costs and the acquisitions of THC and two medical clinics for which costs of operations are included in medical expenses. The cost of providing medical care to Medicare members generally requires a greater percentage of the premiums received. Pharmacy costs increased as the management of the pharmacy benefit was transitioned from a capitated pharmacy benefits contract to in-house management in the third quarter of 1998. The costs under such capitation contract were substantially below actual claims experience. Included in medical expenses is the reversal of $4.4 million of premium deficiency reserve that was used to offset losses on contracts from the Kaiser-Texas operations that were acquired on October 31, 1998. Specialty product expenses decreased approximately $800,000, or less than 1.0%, due primarily to the implementation of the low level reinsurance agreement as discussed previously. Specialty product revenue and expense is primarily related to the workers' compensation insurance business. Effective January 1, 1998, workers' compensation claims are reinsured between $500,000 and $100 million per occurrence. For claims occurring on and after July 1, 1998, that are below $500,000, the Company obtained quota share and excess of loss reinsurance. Under this agreement, the Company reinsures 30% of the first $10,000 of each claim, 25 75% of the next $40,000 and 100% of the next $450,000. The Company receives a ceding commission from the reinsurer as a partial reimbursement of operating expenses. Excluding the effect of the reinsurance agreement, specialty product expenses would have increased $19.5 million compared to the prior year. The combined ratio for the workers' compensation insurance business was 98.7% compared to 101.9% for the prior year. The reduction was due to a 198 basis point decrease in the LAE ratio and a 122 basis point decrease in the underwriting expense ratio. The decrease in the loss ratio was largely due to the new reinsurance agreement for losses occurring on and after July 1, 1998 and as a result of the Company's ability to overlay and implement managed care techniques to the workers' compensation claims. The combined ratio excluding the effect of the new reinsurance agreement was 101.6% for the year ended December 31, 1998. In addition, favorable loss development on prior accident years totaled $9.6 million for the year ended December 31, 1998, compared to net favorable loss development of $9.0 million for the prior year. The favorable loss development is largely due to actual paid losses being below projected losses. There can be no assurance that favorable development, or the magnitude thereof, will continue in the future. The reduction in the expense ratio was largely due to a reduction in agents' commissions, as a result of a ceding commission related to the new reinsurance agreement and from lower salaries and related benefits expenses. Military Contract Expenses. The military contract expenses are comprised of those expenses incurred in 1998 for five months of contract implementation and seven months of health care delivery. This expense consists primarily of costs to provide managed health care services to eligible beneficiaries in accordance with the Company's TRICARE contract. Under the contract, SMHS provides health care services to dependents of active duty military personnel and military retirees and their dependents through subcontractor partnerships and individual providers. Health care costs are recorded in the period when services are provided to eligible beneficiaries, including estimates for provider costs which have been incurred but not reported to the Company. Also, included in military contract expenses are costs incurred to perform specific administrative services, such as health care appointment scheduling, enrollment, network management and health care advice line services, and other administrative functions of the military health care subsidiary. General, Administrative and Marketing Expenses. G&A cost increased $16.8 million, or 17.9%, compared to 1997. As a percentage of revenues, G&A costs for 1998 decreased to 10.7% from 13.0% during 1997. The decrease in the G&A ratio is primarily due to the addition of military contract revenues offset in part by costs for additional infrastructure needed to support overall Company growth. Excluding military revenues, G&A as a percentage of revenues was 13.3% in 1998. Of the $16.8 million increase in G&A, $3.2 million was due to additional G&A related to the acquired HMO business in the Dallas/Ft. Worth area. The remaining increase of $13.6 million consisted of $3.8 million increased compensation expense, resulting primarily from additional employees supporting expanded services and new benefit programs for management. Broker, third party administration and premium tax expense increased approximately $900,000 due to increased membership. In addition, depreciation expense increased $1.7 million. Impairment, Settlement and Other Costs. In the fourth quarter of 1998, the Company expensed approximately $13.9 million, $10.3 million after tax, of costs primarily associated with the settlement of the protest pertaining to its military services contract as well as costs associated with the integration of the Kaiser-Texas business acquired October 31, 1998. (See Note 15 of Notes to the Consolidated Financial Statements). On March 18, 1997, the Company announced it had terminated its merger agreement with Physician Corporation of America, Inc. and recorded expenses of $11.0 million, $8.4 million after tax, for merger-related costs. During the third quarter of 1997, SMHS was awarded a contract to serve TRICARE eligible beneficiaries in Region 1. Development expenses of $18.4 million, $10.6 million after tax, were recorded in the third quarter primarily for expenses associated with the Company's proposal to serve TRICARE Region 1. Such expenses had been deferred until award notification. Interest Expense and Other. Interest expense and other increased approximately $2.7 million for the year ended December 31, 1998, compared to the prior year due to an increase in debt as a result of the Kaiser- Texas acquisition. 26 Income Taxes. For 1998, the Company recorded approximately $13.8 million of tax expense for an effective tax rate of 25.8% compared to 23.9% in 1997, excluding the tax effects of identifiable integration, settlement and other costs. The Company's low operating tax rate is primarily a result of tax-preferred investments and the change in the deferred tax valuation allowance, which is due primarily to the ability to use a portion of net operating loss carryovers. LIQUIDITY AND CAPITAL RESOURCES The Company had negative cash flows from operating activities of $7.7 million for the twelve months ended December 31, 1999, resulting primarily from a net change in assets and liabilities of $41.9 and a net loss of $4.6 million, offset by $28.1 million in depreciation and amortization, $7.2 million in provision for doubtful accounts and a $3.5 million provision for goodwill impairment. The decrease in cash flow resulting from the change in assets and liabilities was primarily due to increases in reinsurance recoverable of $69.8 million, as well as the utilization of premium deficiency reserves. The increase in reinsurance recoverable is primarily due to the low level reinsurance agreement implemented by the Company's workers' compensation insurance business in the fourth quarter of 1998. Offsetting the cash outflows related to changes in assets and liabilities is a $32.1 million increase in the reserve for workers' compensation losses and loss adjustment expense due to increased business as well as a $9.9 million adjustment related to adverse development on prior accident years. Additionally, medical claims payable increased $13.6 million due to overall growth of the Company and military accounts receivable decreased $8.9 million due to payments received from DoD. SMHS receives monthly cash payments equivalent to one-twelfth of its annual contractual price with the Department of Defense ("DoD"). SMHS accrues health care revenue on a monthly basis for any monies owed above its monthly cash receipt based on the number of at-risk eligible beneficiaries and the level of military direct care system utilization. The contractual Bid Price Adjustment ("BPA") process serves to adjust the DoD's monthly payments to SMHS, because such payments are based in part on 1996 DoD estimates for beneficiary population, beneficiary population baseline health care cost, inflation and military direct care system utilization. As actual information has been made available for the above items, quarterly adjustments are made to SMHS' monthly health care payment in addition to lump sum adjustments for past months. In addition, SMHS accrues change order revenue for DoD directed contract changes. During the second and fourth quarters of 1999, SMHS received $46.3 million and $34.6 million, respectively, as partial payments from the BPA process covering the period June 1, 1998 through December 31, 1999. As a result of preliminary data accumulated from the BPA process, SMHS received a partial upward adjustment of approximately $2.2 million to its monthly DoD payments for January 2000 through May 2000. SMHS received $2 million as an interim payment in the first quarter of 1999 as a result of contract change order related activities. The Company's business and cash flows could be adversely affected if the timing or amount of the BPA and change order reimbursements varies significantly from the Company's expectations. (See Note 2 of Notes to the Consolidated Financial Statements). Net cash used for investing activities during 1999 included $58.5 million in capital expenditures associated with continued implementation of three new computer systems, as well as construction, furniture, equipment and other capital needs to support the Company's growth. Additionally, in the first quarter of 1999, $3.0 million was paid to Kaiser Foundation Health Plan of Texas in accordance with the purchase agreement as certain accreditation goals were met by the health plan. The purchase price may increase up to an additional $27 million over three years if certain goals are met by the health plan; however, preliminary results indicate these goals were not met for the first year. Offsetting the above cash outflows was $29.9 million net change in investments. Cash flows from financing activities included net proceeds from long-term borrowings (proceeds less payments) of $15.9 million. In 1998 the Company utilized a five-year revolving credit facility to finance the Kaiser-Texas acquisition. As of December 31, 1999, the Company had $160 million in borrowings on the $200 million line of credit. Interest under the credit facility is variable and based on the London Interbank Offering Rate ("LIBOR") plus a margin determined by reference to the Company's leverage ratio. In addition, $50 million of the outstanding balance is covered by interest-rate swap agreements. The average cost of 27 borrowing on this line of credit for 1999, including the impact of the swap agreements, was approximately 7.8%. The terms of the credit facility contain a mandatory payment schedule that begins on June 30, 2001 and ends on September 30, 2003 if the principal balance exceeds certain thresholds. The terms of the credit facility contain certain covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio. For the quarter ended September 30, 1999, the Company exceeded the limits of certain covenants. The Company was able to obtain a waiver and re-negotiate the covenant limits. These negotiations resulted in a borrowing rate of LIBOR plus 2.375%, through September 30, 2000. The Company believes it is in compliance with debt covenants as of December 31, 1999. Of the remaining $40 million available balance on the line of credit as of December 31, 1999, $4.2 million is reserved for use by the Company's equity investee, TriWest Healthcare Alliance and the remainder may be used for general corporate purposes, including working capital. During 1999, the Company used $8.0 million to buy back Company stock on the open market. Under the current terms of the Company's revolving credit facility, the Company may not continue to buy back its stock without the consent of the lenders or until after December 31, 2000 if certain covenant ratios are met. In the second quarter of 1997, the Company's Board of Directors authorized a $3.0 million line of credit from the Company to the Company's Chief Executive Officer ("CEO"). The CEO borrowed a total of $650,000 in 1998 and $2 million in 1997 at an interest rate equal to the rate at which the Company is able to borrow funds under the credit facility at the time of the borrowing plus 10 basis points. During the first quarter of 1999, the CEO repaid approximately $360,000 of the line of credit. The line of credit is collateralized by certain of the CEO's rights to compensation from the Company and is due and payable no later than August 15, 2001. In September 1991, CII issued convertible subordinated debentures (the "Debentures") due September 15, 2001. The Debentures bear interest at 7 1/2% which is due semi-annually on March 15 and September 15. Each $1,000 in principal is convertible into 25.382 shares of the Company's common stock at a conversion price of $39.40 per share. Unamortized issuance costs of $362,000 are included in other assets on the balance sheet and are being amortized over the life of the Debentures. The Debentures are general unsecured obligations of CII only and are not guaranteed by Sierra Health Services, Inc. ("Sierra"). At December 31, 1999, CII had total assets of $402.4 million, consisting primarily of investments and reinsurance recoverable, and total liabilities of $336.3 million, consisting primarily of reserves for losses and loss adjustment expense and the debentures. For the year ended December 31, 1999, CII had net premiums earned of $82.9 million and investment and other revenue of $15.4 million, and total operating expenses of $91.0 million. During the twelve months ended December 31, 1999, the Company purchased $753,000 of the Debentures on the open market. The holding company may receive dividends from its HMO and insurance subsidiaries which generally must be approved by certain state insurance departments. During 1999, the holding company received $9.7 million in dividends from its HMO and insurance subsidiaries. The Company's HMO and insurance subsidiaries are required by state regulatory agencies to maintain certain deposits and must also meet certain net worth and reserve requirements. The Company had restricted assets on deposit in various states totaling $21.7 million as of December 31, 1999. The HMO and insurance subsidiaries must also meet requirements to maintain minimum stockholder's equity, on a statutory basis, ranging from $1.1 million to $5.2 million. In addition, in conjunction with the Kaiser-Texas acquisition, Texas Health Choice, L.C. ("TXHC") entered into a letter agreement with the Texas Department of Insurance whereby TXHC agreed to maintain a net worth of $20.0 million. Of the $274.9 million of cash and cash equivalents and current investments held at December 31, 1999, $267.5 million is designated for use only by the regulated subsidiaries. Such amounts are available for transfer to the holding company from the HMO and insurance subsidiaries only to the extent that they can be remitted in accordance with the terms of existing management agreements and by dividends. Remaining amounts are generally available on an unrestricted basis. The National Association of Insurance Commissioners ("NAIC") has adopted minimum capitalization requirements for HMOs, health care insurance entities and other risk-bearing health care entities. The state of Nevada has not adopted these regulations as of December 31, 1999. If the regulations were adopted as 28 recommended by the NAIC, the Nevada HMO would not require material contributions. The state of Texas did pass legislation in 1999 regarding risk-based capitalization requirements. As of December 31, 1999, the Texas HMO is in compliance with the requirements. Additional legislation could be passed in either state. Depending on the nature and extent of any new capitalization requirements ultimately adopted, there could be an increase in the capital required. The Company intends to fund any increase from available parent company cash reserves; however, there can be no assurance that such cash reserves will be sufficient to fund these requirements. The workers' compensation insurance subsidiaries are also subject to minimum capitalization requirements for property-casualty insurers. As of December 31, 1999, these entities were in compliance with the requirements. The holding company will not receive dividends from its regulated subsidiaries if such dividend payment would cause violation of statutory net worth and reserve requirements. The Company has a 2000 capital budget of approximately $25 million, primarily for computer hardware and software, furniture and equipment and other requirements due to the Company's computer system conversion and projected growth and expansion. The Company's liquidity needs over the next 12 months will primarily be for the capital items noted above, debt service and expansion of the Company's operations, including potential acquisitions. The Company believes that existing working capital, operating cash flow and, if necessary, mortgage financing, equipment leasing, divestitures of certain non-core assets, and amounts available under its credit facility should be sufficient to fund its capital expenditures and debt service. Additionally, subject to unanticipated cash requirements, the Company believes that its existing working capital and operating cash flow and, if necessary, its access to new credit facilities, should enable it to meet its liquidity needs on a longer term basis. 29 Year 2000 The Year 2000 issue existed because many computer systems and applications used two-digit date fields to designate a year. As the century date change occurred, date-sensitive non-compliant systems may have recognized the year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may have caused systems to process critical financial and operational information incorrectly. The Company replaced or remediated its mission critical financial systems as well as its mission critical operational computer systems, remediated databases and validated the readiness of all computing and non computing systems. The Company also engaged in a thorough evaluation to validate that all systems, computing and non-computing, were functioning. The Company is unaware of any Year 2000 related outages over the century date change. The Company implemented two major systems in 1999 and is in the process of implementing a third, at an estimated cost of over $50 million, which includes the implementation costs related to the recently acquired Kaiser-Texas operations. To date the Company has spent approximately $48.9 million on the new computer systems and other Year 2000 items. The Company expensed the costs to make modifications to existing computer systems and non-computer equipment. Management currently estimates the remaining new computer system costs to be $4.0 million to $6.0 million. While this has been a substantial effort, the results should give the Company the benefits of new technology and functionality for many of its financial and operational computer systems and applications. Inflation Health care costs continue to rise at a faster rate than the Consumer Price Index. The Company uses various strategies to mitigate the negative effects of health care cost inflation, including setting commercial premiums based on its anticipated health care costs, risk-sharing arrangements with the Company's 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, the Company's 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. Government Regulation The Company's business, offering health care coverage, health care management services, workers' compensation programs and, to a lesser extent, the delivery of medical services, is heavily regulated at both the federal and state levels. Government regulation of health care coverage products and services is a changing area of law that varies from jurisdiction to jurisdiction. Changes in applicable laws and regulations are continually being considered, including legislative proposals to eliminate or reduce ERISA pre-emption of state laws, that would increase potential litigation exposure and interpretation of existing laws and rules also may change from time to time. Regulatory agencies generally have broad discretion in promulgating regulations and in interpreting and enforcing laws and regulations. While the Company is unable to predict what regulatory changes may occur or the impact on the Company of any particular change, the Company's operations and financial results could be negatively affected by regulatory revisions. For example, any proposals affecting underwriting practices, limiting rate increases, increasing litigation exposure, requiring new or additional benefits or affecting contracting arrangements (including proposals to require HMOs and PPOs to accept any health care providers willing to abide by an HMO's or PPO's contract terms) may have a material adverse effect on the Company's business. The continued consideration and enactment of "anti-managed care" laws and regulations by federal and state bodies may make it more difficult for the Company to manage medical costs and may adversely affect financial results. 30 In addition to changes in applicable laws and regulations, the Company is subject to various audits, investigations and enforcement actions. These include possible government actions relating to the federal Employee Retirement Income Security Act, which regulates insured and self-insured health coverage plans offered by employers, the Federal Employees Health Benefit Plan, federal and state fraud and abuse laws, and laws relating to utilization management and the delivery of health care. Any such government action could result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect the Company's reputation in various markets and make it more difficult for the Company to sell its products and services. Recently Issued Accounting Standards In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AcSEC") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed For or Obtained For Internal Use". SOP 98-1 requires certain computer software costs to be capitalized and amortized over the software's estimated useful life. In June 1998, the AcSEC issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities". This standard requires organization costs and costs associated with start-up activities to be expensed as incurred. Both statements are effective for years beginning after December 15, 1998. The Company adopted SOP 98- 1 and SOP 98-5 for the fiscal year ending December 31, 1999. These statements did not have a material impact on its financial statements. In June 1998, The Financial Accounting Standards Board issued "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective for fiscal years beginning after June 15, 2000. FAS 133 addresses the accounting for derivative instruments including certain derivative instruments embedded in other contracts, and hedging activities. The Company does not believe this statement will have a material impact on its financial statements. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 1999, the Company has approximately $ 311.5 million in cash and cash equivalents, and current, long-term and restricted investments. Of the investments, approximately $230.5 million is classified as available-for-sale investments and $25.0 million is classified as held-to-maturity investments. These investments are primarily in fixed income, investment grade securities. The Company's investment policies emphasize return of principal and liquidity and are focused on fixed returns that limit volatility and risk of principal. Because of the Company's investment policies, the primary market risk associated with the Company's portfolio is interest rate risk. Assuming an immediate 10% increase in interest rates, the net hypothetical loss in fair value of shareholders' equity related to financial instruments is estimated to be approximately $9.3 million after tax (3.3% of total shareholders' equity). The Company believes that such an increase in interest rates would not have a material impact on future earnings or cash flows as it is unlikely that the Company would need or choose to substantially liquidate its investment portfolio. The effect of interest rate risk on potential near-term net income, cash flow and fair value was determined based on commonly used sensitivity analyses. The models project the impact of interest rate changes on a wide range of factors, including duration and prepayment. Fair value was estimated based on the net present value of cash flows or duration estimates, assuming an immediate 10% increase in interest rates. As of December 31, 1999, the Company had $160 million in borrowings outstanding under a revolving credit facility that was entered into in October 1998. Interest under the credit facility is variable and based on LIBOR plus a margin. To mitigate the risk of interest rate fluctuation on the credit facility, the Company entered into a five-year $50 million interest-rate swap agreement during the fourth quarter of 1998. The intent of the agreement is to keep the Company's interest rate on $50 million of the borrowings relatively fixed. The average cost of borrowing on this line of credit was approximately 7.8% for 1999. The specified rate of borrowing related to the last renewed borrowing amount prior to December 31, 1999 under the credit facility was 8.9%. The renewal occurred on December 16, 1999. If the average cost of borrowing on the amount outstanding as of December 31, 1999, was to increase by 10%, annual income before tax would decrease by approximately $976,000. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page Management Report on Consolidated Financial Statements.................................................... 33 Independent Auditors' Report.............................................................................. 34 Consolidated Balance Sheets at December 31, 1999 and 1998................................................. 35 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997....................................................................... 36 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997................................................... 37 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997....................................................................... 38 Notes to Consolidated Financial Statements................................................................ 39
Page 32 MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS The management of Sierra Health Services, Inc. is responsible for the integrity and objectivity of the accompanying Consolidated Financial Statements. The statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and are not misstated due to fraud or material error. The statements include some amounts that are based upon the Company's best estimates and judgment. The accounting systems and controls of the Company are designed to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the financial records are reliable for preparing financial statements and maintaining accountability for assets, and that assets are safeguarded against losses from unauthorized use or disposition. Management believes that for the year ended December 31, 1999, such systems and controls were adequate to meet the objectives discussed herein. The accompanying Consolidated Financial Statements have been audited by independent certified public accountants, whose audits thereof were made in accordance with generally accepted auditing standards and included a review of internal accounting controls to the extent necessary to design audit procedures aimed at gathering sufficient evidence to provide a reasonable basis for their opinion on the fairness of presentation of the Consolidated Financial Statements taken as a whole. The Audit Committee of the Board of Directors, comprised solely of directors from outside the Company, meets regularly with management and the independent auditors to review the work procedures of each. The independent auditors have free access to the Audit Committee, without management being present, to discuss the results of their opinions on the adequacy of the Company's accounting controls and the quality of the Company's financial reporting. The Board of Directors, upon the recommendation of the Audit Committee, appoints the independent auditors, subject to stockholder ratification. Anthony M. Marlon, M.D. Chairman and Chief Executive Officer Paul H. Palmer Vice President, Finance Chief Financial Officer, and Treasurer Page 33 INDEPENDENT AUDITORS' REPORT Board of Directors Sierra Health Services, Inc.: We have audited the accompanying consolidated balance sheets of Sierra Health Services, Inc., and its subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the index at Item 14 (a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sierra Health Services, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Las Vegas, Nevada February 14, 2000 Page 34 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 ASSETS
1999 1998 ---------------- ---------- CURRENT ASSETS: Cash and Cash Equivalents............................................... $ 55,936,000 $ 83,910,000 Investments............................................................. 218,951,000 260,337,000 Accounts Receivable (Less: Allowance for Doubtful Accounts 1999 - $15,551,000; 1998 - $10,540,000)................... 43,036,000 44,100,000 Military Accounts Receivable (Less: Allowance for Doubtful Accounts 1999 - $800,000; 1998 - $444,000)......................... 60,340,000 69,552,000 Current Portion of Deferred Tax Asset .................................. 40,199,000 14,311,000 Reinsurance Recoverable................................................. 54,563,000 32,076,000 Other Current Receivables............................................... 39,276,000 24,898,000 Prepaid Expenses and Other Current Assets............................... 12,292,000 15,076,000 ----------------- ----------------- Total Current Assets............................................... 524,593,000 544,260,000 PROPERTY AND EQUIPMENT, NET................................................... 264,549,000 229,164,000 LONG-TERM INVESTMENTS......................................................... 14,862,000 30,487,000 RESTRICTED CASH AND INVESTMENTS............................................... 21,705,000 17,758,000 REINSURANCE RECOVERABLE, Net of Current Portion............................... 82,300,000 34,946,000 GOODWILL (Less: Accumulated Amortization 1999 - $8,828,000; 1998 - $5,213,000).................................. 159,514,000 142,471,000 OTHER ASSETS.................................................................. 62,589,000 46,034,000 ----------------- ----------------- TOTAL ASSETS.................................................................. $1,130,112,000 $1,045,120,000 ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued Liabilities....................................................... $ 59,556,000 $ 25,196,000 Trade Accounts Payable.................................................... 21,052,000 25,904,000 Premium Deficiency Reserve................................................ 21,000,000 18,184,000 Accrued Payroll and Taxes................................................. 21,965,000 19,942,000 Medical Claims Payable.................................................... 91,607,000 78,022,000 Current Portion of Reserve for Losses and Loss Adjustment Expense .................................. 93,768,000 79,869,000 Unearned Premium Revenue.................................................. 45,333,000 39,968,000 Military Health Care Payable.............................................. 50,831,000 53,820,000 Current Portion of Long-term Debt......................................... 4,741,000 5,263,000 ------------------- ------------------ Total Current Liabilities............................................ 409,853,000 346,168,000 RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSE (Less Current Portion) ........................... 150,626,000 132,394,000 LONG-TERM DEBT (Less Current Portion) ........................................ 258,854,000 242,398,000 OTHER LIABILITIES ............................................................ 32,367,000 20,446,000 ----------------- ----------------- TOTAL LIABILITIES............................................................. 851,700,000 741,406,000 ----------------- ---------------- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 Par Value, 1,000,000 Shares Authorized; None Issued or Outstanding Common Stock, $.005 Par Value, 40,000,000 Shares Authorized; Shares Issued: 1999-- 28,400,000; 1998-- 28,236,000.................................................... 142,000 141,000 Additional Paid-in Capital................................................ 175,915,000 173,583,000 Treasury Stock: 1999-- 1,523,000; 1998-- 967,000 Common Shares........................................................ (22,789,000) (14,821,000) Accumulated Other Comprehensive Loss: Unrealized Holding Loss on Available-for-Sale Investments..................................................... (16,063,000) (1,027,000) Retained Earnings......................................................... 141,207,000 145,838,000 ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY.................................................... 278,412,000 303,714,000 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $1,130,112,000 $1,045,120,000 ============== ==============
See the accompanying notes to consolidated financial statements. Page 35 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------------ ----------------- ----------- OPERATING REVENUES: Medical Premiums............................................. $ 827,779,000 $ 609,404,000 $513,857,000 Military Contract Revenues .................................. 287,398,000 204,838,000 4,346,000 Specialty Product Revenues .................................. 94,221,000 148,368,000 146,211,000 Professional Fees............................................ 51,842,000 45,363,000 31,238,000 Investment and Other Revenues ............................... 22,571,000 29,230,000 26,072,000 ---------------- ---------------- -------------- Total..................................................... 1,283,811,000 1,037,203,000 721,724,000 -------------- -------------- ------------- OPERATING EXPENSES: Medical Expenses............................................. 749,797,000 513,209,000 419,272,000 Military Contract Expenses .................................. 276,493,000 196,625,000 4,193,000 Specialty Product Expenses................................... 96,487,000 142,258,000 143,082,000 General, Administrative and Marketing Expenses............... 137,812,000 110,687,000 93,919,000 Impairment, Settlement and Other Costs....................... 18,808,000 13,851,000 29,350,000 ---------------- ---------------- -------------- Total..................................................... 1,279,397,000 976,630,000 689,816,000 -------------- --------------- ------------- OPERATING INCOME.................................................. 4,414,000 60,573,000 31,908,000 INTEREST EXPENSE AND OTHER, NET................................... (14,980,000) (7,181,000) (4,433,000) ---------------- ---------------- --------------- (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES ......................................... (10,566,000) 53,392,000 27,475,000 BENEFIT (PROVISION) FOR INCOME TAXES.............................. 5,935,000 (13,796,000) (3,234,000) ----------------- --------------- --------------- NET (LOSS) INCOME ................................................ $ (4,631,000) $ 39,596,000 $ 24,241,000 ================ =============== ============= EARNINGS PER COMMON SHARE: Net (Loss) Income Per Share ............................. $(.17) $1.45 $.90 ==== ===== ==== EARNINGS PER COMMON SHARE ASSUMING DILUTION: Net (Loss) Income Per Share ............................. $(.17) $1.43 $.88 ==== ===== ====
See the accompanying notes to consolidated financial statements. Page 36 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997 (Amounts in thousands)
Accumu- lated Other Addi- Compre- Compre- Total tional hensive hensive Stock- Common Stock Paid-In Treasury Income Income Retained holders' Shares Amount Capital Stock (Loss) (Loss) Earnings Equity BALANCE, JANUARY 1, 1997 ............. 26,865 $134 $151,990 $ (130) $ 487 - $ 82,001 $234,482 Comprehensive Income: Net Income....................... $ 24,241 24,241 24,241 Other Comprehensive Income, Net of Tax Unrealized Gain on Available-for-sale- Investments ............ 168 168 168 ----------- Comprehensive Income................. $ 24,409 ======== Common Stock Issued in Connection with Stock Plans................. 844 5 10,253 10,258 Purchase of Treasury Stock ......... (5,471) (5,471) Income Tax Benefit Realized Upon Exercise of Stock Options........ 2,004 2,004 ----------- -------- ------------------------ -------------- ------------- ---------- BALANCE, DECEMBER 31, 1997 ........... 27,709 139 164,247 (5,601) 655 106,242 265,682 Comprehensive Income: Net Income....................... $ 39,596 39,596 39,596 Other Comprehensive Income, Net of Tax Unrealized Holding Loss on Available- for-sale Investments Arising During Period. (201) (201) (201) Reclassification Adjustment for Gains Included in Net Income (1,481) (1,481) (1,481) ---------- Comprehensive Income................. $ 37,914 ======== Common Stock Issued in Connection with Stock Plans................. 527 2 8,052 8,054 Purchase of Treasury Stock ......... (9,220) (9,220) Income Tax Benefit Realized Upon Exercise of Stock Options........ 1,284 1,284 ----------- -------- ------------------------------------- ---------- -------- BALANCE, DECEMBER 31, 1998 ......... 28,236 141 173,583 (14,821) (1,027) 145,838 303,714 Comprehensive Income: Net Loss......................... $ (4,631) (4,631) (4,631) Other Comprehensive Loss, Net of Tax Unrealized Holding Loss on Available- for-sale Investments Arising During Period. (15,295) (15,295) (15,295) Reclassification Adjustment for Losses Included in Net Loss 259 259 259 ----------- Comprehensive Loss................... $(19,667) ======== Common Stock Issued in Connection with Stock Plans................. 164 1 2,331 2,332 Purchase of Treasury Stock ......... (7,968) (7,968) Income Tax Benefit Realized Upon Exercise of Stock Options........ 1 1 ----------- ----------------------------------------------- ---------- --------- BALANCE, DECEMBER 31, 1999 ......... 28,400 $142 $175,915 $(22,789) $(16,063) $141,207 $278,412 ====== ==== ======== ======== ======== ======== ========
See the accompanying notes to consolidated financial statements. Page 37 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 -------------- ------------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) Income ................................................. $ (4,631,000) $ 39,596,000 $ 24,241,000 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization.................................. 28,079,000 19,263,000 13,510,000 Provision for Doubtful Accounts................................ 7,201,000 6,379,000 4,283,000 Provision for Goodwill Impairment.............................. 3,509,000 Change in Assets and Liabilities, Net of Effects from Acquisitions: Other Assets................................................... 7,991,000 (5,362,000) (5,851,000) Reinsurance Recoverable ....................................... (69,841,000) (41,618,000) (5,635,000) Reserve for Losses and Loss Adjustment Expense ................ 32,131,000 9,564,000 14,923,000 Other Liabilities ............................................. 11,921,000 4,603,000 6,826,000 Accounts Receivable............................................ (11,810,000) (2,870,000) (7,944,000) Other Current Assets........................................... (22,952,000) (10,674,000) (11,853,000) Military Accounts Receivable................................... 8,857,000 (69,552,000) (4,346,000) Military Health Care Payable................................... (2,989,000) 53,820,000 Medical Claims Payable......................................... 13,585,000 12,333,000 8,974,000 Other Current Liabilities...................................... (8,755,000) 34,606,000 15,692,000 -------------- -------------- --------------- Net Cash (Used For) Provided by Operating Activities ............................... (7,704,000) 50,088,000 52,820,000 -------------- -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures............................................... (58,512,000) (40,743,000) (55,642,000) Property and Equipment Dispositions, Net........................... 1,018,000 772,000 Purchase of Available-for-Sale Investments......................... (357,810,000) (901,542,000) (1,078,396,000) Proceeds from Sales/Maturities of Available-for-Sale Investments................................. 358,792,000 884,288,000 1,046,523,000 Purchase of Held-to-Maturity Investments........................... (7,133,000) (51,887,000) (7,523,000) Proceeds from Maturities of Held-to-Maturity Investments........... 36,077,000 44,964,000 10,449,000 Corporate Acquisitions, Net of Cash Acquired....................... (3,000,000) (111,408,000) (3,145,000) Corporate Disposition, Net of Cash Disposed........................ 1,373,000 --------------------- --------------- Net Cash Used for Investing Activities......................... (30,568,000) (174,955,000) (86,962,000) ------------- ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Long-term Borrowing.................................. 79,000,000 172,200,000 25,000,000 Payments on Debt and Capital Leases................................ (63,066,000) (59,098,000) (2,391,000) Purchase of Treasury Stock ........................................ (7,968,000) (9,220,000) (5,471,000) Exercise of Stock in Connection with Stock Plans................... 2,332,000 8,054,000 10,258,000 --------------- --------------- --------------- Net Cash Provided by Financing Activities...................... 10,298,000 111,936,000 27,396,000 -------------- ------------- --------------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................................... (27,974,000) (12,931,000) (6,746,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ....................................................... 83,910,000 96,841,000 103,587,000 -------------- --------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 55,936,000 $ 83,910,000 $ 96,841,000 ============= ============= ==============
See the accompanying notes to consolidated financial statements. Page 38 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 1. BUSINESS Business. The consolidated financial statements include the accounts of Sierra Health Services, Inc. ("Sierra") and its subsidiaries (collectively referred to as the "Company"). The Company is a managed health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. The Company's broad range of managed health care services is provided through its health maintenance organizations ("HMOs"), managed indemnity plans, military health services programs, third-party administrative services programs for employer-funded health benefit plans and its workers' compensation medical management programs. Ancillary products and services that complement the Company's managed health care product lines are also offered. Acquisitions. On October 31, 1998, Texas Health Choice, L.C. ("TXHC") (formerly HMO Texas, L.C.), a subsidiary of Sierra, completed the acquisition of certain assets of Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"), a health plan operating in Dallas/Ft. Worth and Permanente Medical Association of Texas ("Permanente"), a 150 physician medical group operating in that area. The purchase price was $124 million, which was net of $20 million in operating cost support paid to Sierra by Kaiser Foundation Hospitals in four quarterly installments following the closing of the transaction. The purchase price allocation included a premium deficiency reserve of approximately $25 million for estimated losses on the contracts acquired from Kaiser-Texas. The purchase price also included amounts for real estate and eight medical and office facilities encompassing approximately 500,000 square feet. During the first quarter of 1999, certain accreditation goals were met by the health plan resulting in a purchase price increase of $3.0 million, to $127 million. The purchase price may increase an additional $27 million over three years if certain growth and member retention goals are met by the health plan; however, preliminary results indicate these goals were not met for the first year. The original liability for the estimated premium deficiency was based upon assumptions of membership and other operating information, some of which had yet to be received. During 1999, the Company continued to gather such data, including obtaining data from the seller, and based upon the receipt and analysis of this data, the Company revised the initial estimate of the premium deficiency accrual resulting in a total recorded amount of $72.0 million. The acquisition has been recorded using purchase accounting and the excess of the purchase price over the fair value of the assets acquired was recorded as goodwill. Total goodwill, in the amount of $126.8 million, is being amortized on a straight line basis over 40 years. On December 31, 1998, Sierra completed the acquisition of the Nevada health care business of Exclusive Healthcare, Inc. ("EHI"), United of Omaha Life Insurance Company and United World Life Insurance Company ("United"), all of which are subsidiaries of Mutual of Omaha Insurance Company. Sierra initially retained approximately 9,000 members (approximately 4,400 HMO members) subsequent to the acquisition. Effective June 1, 1999, the company completed the purchase of the Texas operations of EHI (approximately 1,000 HMO members) and United's related preferred provider organization ("PPO") that is part of the dual option HMO/PPO plan. The purchase price of both the Nevada and Texas transactions is contingent based on how many members are retained through 2000 and 2001. No cash will be paid until group renewals begin in 2000. In August 1997, the Company acquired the assets and operations of Total Home Care, Inc. ("THC") for approximately $3.1 million, net of cash acquired. THC provides home infusion, oxygen, and durable medical equipment services in Nevada and Arizona. The Company sold the Arizona operations in the first quarter of 1998 for approximately $1.5 million. Also, in the first quarter of 1998, the Company purchased three medical clinics in southern Nevada for approximately $7.3 million. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. All significant intercompany transactions and balances have been eliminated. Sierra's consolidated subsidiaries include: Health Plan of Nevada, Inc. ("HPN") and TXHC, licensed HMOs; Sierra Health and Life Insurance Company, Inc. ("SHL"), a health and life insurance company; Southwest Page 39 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 Medical Associates, Inc. ("SMA") and The Medical Group of Texas ("TMGT"), multi-specialty medical provider groups; Sierra Military Health Services, Inc. ("SMHS"), a company that has been contracted to provide and administer managed care services to certain TRICARE eligible beneficiaries from June 1, 1998 to May 31, 2003; CII Financial, Inc. ("CII"), a holding company primarily engaged in writing workers' compensation insurance through its wholly owned subsidiaries; administrative services companies; a home health care agency; a hospice; a home medical products subsidiary; and a company that provides and manages mental health and substance abuse services. Medical Premiums. Non-Medicare member enrollment is represented principally by employer groups. Medical premiums are billed to each employer group in accordance with negotiated contracts, and such premium revenue is recognized when earned. Unearned premium revenue includes payments under prepaid Medicare contracts with the Health Care Financing Administration ("HCFA") and prepaid HPN and TXHC commercial and SHL indemnity premiums. HPN and TXHC offer a prepaid health care program to Medicare recipients. Revenues associated with Medicare recipients were approximately $301,141,000, $238,913,000 and $186,105,000 in 1999, 1998 and 1997, respectively. Military Contract Revenues. Revenue under the Department of Defense TRICARE contract is recorded based on the contract price as agreed to by the federal government. The contract also contains provisions which adjust the contract price based on actual experience and for government directed change orders. The estimated effects of these adjustments are recognized on a monthly basis. In addition, the Company records revenue based on estimates of the earned portion of any contract change orders not originally specified in the contract. Specialty Product Revenues. These revenues consist primarily of workers' compensation premiums. Premiums are calculated by formula such that the premium written is earned pro rata over the term of the policy. Also included in specialty product revenues are administrative services and certain ancillary product revenues. Such revenues are recognized in the period in which the service is performed or the period that coverage for services is provided. Premiums written in excess of premiums earned are recorded as an unearned premium revenue liability. Premiums earned include an estimate for earned but unbilled premiums. Professional Fees. Revenue for professional medical services is recorded on the accrual basis in the period in which the services are provided. Such revenue is recorded at established rates net of provisions for estimated contractual allowances and a provision for estimated uncollectible amounts. Medical Expenses. The Company contracts with hospitals, physicians and other providers of health care under capitated or discounted fee-for-service arrangements including hospital per diems to provide medical care services to enrollees. Capitated providers are at risk for the cost of medical care services provided to the Company's enrollees in the relevant geographic areas; however, the Company is ultimately responsible for the provision of services to its enrollees should the capitated provider be unable to provide the contracted services. Health care costs are recorded in the period when services are provided to enrolled members, including estimates for provider costs which have been incurred as of the balance sheet date but not reported to the Company. Premium Deficiency Reserves. Premium deficiency expenses are recognized when it is probable that the future costs associated with a group of existing contracts will exceed the anticipated future premiums on those contacts. The Company calculates expected premium deficiency expense based on budgeted revenues and expenses. Premium deficiency reserves are evaluated quarterly for adequacy. Military Contract Expenses. This expense consists primarily of costs to provide managed health care services to eligible beneficiaries in accordance with the Company's TRICARE contract. Under the contract, SMHS provides health care services to approximately 610,000 dependents of active duty military personnel and military retirees and their dependents through subcontractor partnerships and individual providers. Health care costs are recorded in the period when services are provided to eligible beneficiaries including estimates for provider costs which have been incurred as of the balance sheet date but not reported to the Company. Also included in military contract expenses are costs incurred to perform specific administrative services, such as health care appointment scheduling, enrollment, network management and health care advice line services, and other administrative functions of the military health care subsidiary. Page 40 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 Specialty Product Expenses. This expense consists primarily of losses and loss adjustment expense ("LAE"), policy acquisition costs and other general and administrative expenses associated with issued workers' compensation policies. Losses and LAE are based upon the accumulation of cost estimates for reported claims occurring during the period as well as an estimate for losses that have occurred but have not yet been reported. Policy acquisition costs consist of commissions, premium taxes and other underwriting costs, which are directly related to the production and retention of new and renewal business and are deferred and amortized as the related premiums are earned. Should it be determined that future policy revenues and earnings on invested funds relating to existing insurance contracts will not be adequate to cover related costs and expenses, deferred costs are expensed. Also included in specialty product expenses are costs associated with administrative services and certain ancillary products. These costs are recorded when incurred. Cash and Cash Equivalents. The Company considers cash and cash equivalents as all highly liquid instruments with a maturity of three months or less at time of purchase. The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of these instruments. Investments. Investments consist principally of U.S. Government securities and municipal bonds, as well as corporate and mortgage backed securities. All non-restricted investments that are designated as available-for- sale are classified as current assets. These investments are available for use in the current operations regardless of contractual maturity dates. Non-restricted investments designated as held-to-maturity are classified as current assets if expected maturity is within one year of the balance sheet date. Otherwise, they are classified as long-term investments. Restricted Cash and Investments. Certain subsidiaries are required by state regulatory agencies to maintain certain deposits and must also meet certain net worth and reserve requirements. The Company and its subsidiaries are in compliance with the applicable minimum regulatory and capital requirements. Military Accounts Receivable. Amounts receivable under government contracts are comprised primarily of one month's contract payment from the government in arrears, estimates of adjustments under the contract based on actual experience, and estimates of the earned portion of any change orders not originally specified in the contract. Property and Equipment. Property and equipment are stated at cost. Maintenance and repairs that do not improve or extend the life of the respective assets are charged to operations. Depreciation and amortization is computed using the straight-line method over the estimated service lives of the assets or terms of leases if shorter. Estimated useful lives are as follows: Buildings and Improvements 10 - 30 years Leasehold Improvements 3 - 10 years Furniture, Fixtures and Equipment 3 - 5 years Data Processing Hardware and Software 3 - 10 years Goodwill. Goodwill has been recorded primarily as a result of various business acquisitions by the Company. Amortization is provided on a straight line basis over periods not exceeding 40 years. The Company periodically evaluates the carrying value of its intangible assets. The Company utilizes the discounted cash flow method for evaluating the recoverability of goodwill. Future cash flows are estimated based on Company projections and are discounted based on the interest rates approximating long-term bond yields. Amortization expense associated with goodwill was $4,345,000, $2,321,000 and $1,850,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Medical Claims Payable and Military Health Care Payable. Medical claims payable and Military health care payable include the estimated cost for unpaid claims for which health care services have been provided to enrollees and TRICARE eligibles. Such provision included an estimate for the costs of claims that have been incurred but have not been reported. Reserve for Losses and Loss Adjustment Expense. The reserve for workers' compensation losses and LAE consists of estimated costs of each unpaid claim reported to the Company prior to the close of the accounting Page 41 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 period, as well as those incurred but not yet reported. The methods for establishing and reviewing such liabilities are continually reviewed and adjustments are reflected in current operations. Income Taxes. The Company accounts for income taxes using the liability method. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The Company's temporary differences arise principally from certain net operating losses, accrued expenses, reserves and depreciation. Concentration of Credit Risk. The Company's financial instruments that are exposed to credit risk consist primarily of investments and accounts receivable. The Company maintains cash and cash equivalents and investments with various financial institutions. These financial institutions are located in many different regions, and company policy is designed to limit exposure with any one institution. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries. These customers are primarily located in the states in which the Company operates. Such operations are principally in California, Nevada and Texas. However, the Company is licensed and does business in several other states as well. As of December 31, 1999, the Company has receivables outstanding from the federal government related to its TRICARE contract in the amount of $60.3 million. The Company also has receivables from certain reinsurers. Reinsurance contracts do not relieve the Company from its obligations to enrollees or policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. All reinsurers that the Company has reinsurance contracts with are rated A- or better by the A.M. Best Company. Recently Issued Accounting Standards. In June 1998, The Financial Accounting Standards Board issued "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective for fiscal years beginning after June 15, 2000. FAS 133 addresses the accounting for derivative instruments including certain derivative instruments embedded in other contracts, and hedging activities. The Company does not believe this statement will have a material impact on its financial statements. Estimates and Assumptions. The preparation of financial statements in conformity with generally accepted accounting principles 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. Estimates and assumptions include, but are not limited to, medical and specialty product expenses, military revenue and expenses and goodwill recoverability. Actual results may materially differ from estimates. Reclassifications. Certain amounts in the Consolidated Financial Statements for the years ended December 31, 1998 and 1997 have been reclassified to conform with the current year presentation. Page 42 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 3. EARNINGS PER SHARE The following table provides a reconciliation of basic and diluted earnings per share ("EPS"):
Dilutive Basic Stock Options Diluted For the Year Ended December 31, 1999: Net Loss....................................... $(4,631,000) $(4,631,000) Shares......................................... 26,927,000 26,927,000 Per Share Amount............................... $(.17) $(.17) For the Year Ended December 31, 1998: Net Income..................................... $39,596,000 $39,596,000 Shares......................................... 27,391,000 356,000 27,747,000 Per Share Amount............................... $1.45 $1.43 For the Year Ended December 31, 1997: Net Income..................................... $24,241,000 $24,241,000 Shares......................................... 27,013,000 413,000 27,426,000 Per Share Amount............................... $.90 $.88
Options to purchase 3,904,000 shares of common stock were outstanding at December 31, 1999 but were not included in the computation of 1999 diluted earnings per share because the Company had a net loss for 1999 and their inclusion would have been antidilutive. Stock Split. On May 5, 1998, the Company announced a three-for-two stock split. Each stockholder of record of the Company owning one share of common stock, par value of $.005, as of the close of business on the record date of May 18, 1998, received an additional one-half share on June 18, 1998. In lieu of any fractional share resulting from the stock split, a stockholder received a cash payment based on the closing price of the Company's common stock on the record date. The par value remains $.005 per share. Common stock and earnings per share amounts have been retroactively adjusted to account for the split. CII issued convertible subordinated debentures (the "Debentures") due September 15, 2001. Each $1,000 in principal is convertible into 25.382 shares of the Company's common stock at a conversion price of $39.40 per share. The Debentures were not included in the computation of EPS because their effect would be anti-dilutive. At December 31, 1999, common stock shares reserved for potential issuance in connection with the subordinated debentures were 1,442,000. Page 43 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 4. PROPERTY AND EQUIPMENT Property and equipment at December 31, consists of the following:
1999 1998 ---------------- ---------- Land................................................... $ 28,643,000 $ 28,588,000 Buildings and Improvements............................. 152,284,000 145,308,000 Furniture, Fixtures and Equipment...................... 61,793,000 57,261,000 Data Processing Equipment and Software................. 97,204,000 43,643,000 Software in Development and Construction in Progress......................................... 14,157,000 20,324,000 Less: Accumulated Depreciation ........................ (89,532,000) (65,960,000) -------------- -------------- Net Property and Equipment......................... $264,549,000 $229,164,000 ============ ============
The following is an analysis of property and equipment under capital leases by classification as of December 31:
1999 1998 --------------- ---------- Data Processing Equipment and Software ................ $4,736,000 $4,736,000 Furniture, Fixtures and Equipment...................... 4,426,000 4,426,000 Building............................................... 245,000 245,000 Less: Accumulated Depreciation......................... (4,376,000) (2,255,000) ---------- ----------- Net Property and Equipment.......................... $5,031,000 $7,152,000 ========== ==========
The Company capitalizes interest expense as part of the cost of construction of facilities and the implementation of computer systems. Interest expense capitalized in 1999, 1998 and 1997 was $2,140,000, $1,037,000 and $1,621,000, respectively. Depreciation expense in 1999, 1998 and 1997 was $23,577,000, $16,767,000 and $10,921,000, respectively. 5. CASH AND INVESTMENTS Investments that the Company has the intention and ability to hold to maturity are stated at amortized cost and categorized as held-to-maturity. The remaining investments have been categorized as available-for-sale and are stated at their fair value. Fair value is estimated primarily from published market values as of the balance sheet date. Unrealized holding gains and losses on available-for-sale securities are included as a separate component of stockholders' equity until realized. Gross realized gains on investments in 1999, 1998 and 1997 were $334,000, $4,789,000 and $2,878,000, respectively. Gross realized losses on investments in 1999, 1998 and 1997 were $733,000, $2,511,000 and $2,373,000, respectively. Realized gains and losses are calculated using the specific identification method and are included in net income. Page 44 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 The following table summarizes the Company's current, long-term restricted investments as of December 31, 1999:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-Sale Investments: Classified as Current: U.S. Government and its Agencies........................... $112,211,000 $ 37,000 $16,294,000 $ 95,954,000 Municipal Obligations......................... 60,245,000 97,000 2,316,000 58,026,000 Corporate Bonds............................... 33,756,000 34,000 1,715,000 32,075,000 Other . . . . . .............................. 28,683,000 21,000 3,796,000 24,908,000 -------------- ---------- ------------- -------------- Total Current.............................. 234,895,000 189,000 24,121,000 210,963,000 ------------- --------- ------------ ------------- Classified as Restricted: U.S. Government and its Agencies........................... 12,021,000 104,000 670,000 11,455,000 Municipal Obligations......................... 2,485,000 29,000 101,000 2,413,000 Corporate Bonds............................... 989,000 11,000 33,000 967,000 Other. . . . . . . . . ....................... 4,815,000 118,000 4,697,000 --------------- --------------- -------------- --------------- Total Restricted .......................... 20,310,000 144,000 922,000 19,532,000 -------------- --------- -------------- -------------- Total Available-for-Sale ............... $255,205,000 $333,000 $25,043,000 $230,495,000 ============ ======== =========== ============ Held-to-Maturity Investments: Classified as Current: U.S. Government and its Agencies........................... $ 5,129,000 $341,000 $ 317,000 $ 5,153,000 Municipal Obligations......................... 2,759,000 32,000 55,000 2,736,000 Other ................................. 100,000 100,000 ---------------- ----------------------------------- ---------------- Total Current.............................. 7,988,000 373,000 372,000 7,989,000 --------------- --------- -------------- --------------- Classified as Long-term: U.S. Government and its Agencies........................... 4,034,000 390,000 3,644,000 Municipal Obligations......................... 2,284,000 33,000 2,317,000 Corporate Bonds............................... 5,239,000 115,000 5,354,000 Other ................................. 3,305,000 751,000 2,554,000 --------------- --------------- -------------- --------------- Total Long-term............................ 14,862,000 148,000 1,141,000 13,869,000 -------------- --------- ------------- -------------- Classified as Restricted: U.S. Government and its Agencies........................... 619,000 619,000 Municipal Obligations.......................... 515,000 515,000 Corporate Bonds............................... 499,000 499,000 Other ................................. 540,000 540,000 ---------------- ---------------- Total Restricted .......................... 2,173,000 2,173,000 --------------- --------------- Total Held-to-Maturity ................. $ 25,023,000 $521,000 $ 1,513,000 $ 24,031,000 ============= ======== ============ =============
Page 45 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 The following table summarizes the Company's current, long-term and restricted investments as of December 31, 1998:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-Sale Investments: Classified as Current: U.S. Government and its Agencies..................... $ 80,214,000 $ 660,000 $1,576,000 $ 79,298,000 Mortgage Backed......................... 6,209,000 1,000 216,000 5,994,000 Municipal Obligations................... 58,060,000 317,000 413,000 57,964,000 Corporate Bonds......................... 82,617,000 759,000 829,000 82,547,000 Other ............................. 13,795,000 41,000 548,000 13,288,000 -------------- ------------- ------------ -------------- Total Current........................ 240,895,000 1,778,000 3,582,000 239,091,000 ------------- ----------- ----------- ------------- Classified as Restricted: U.S. Government and its Agencies..................... 8,549,000 87,000 8,636,000 Municipal Obligations................... 2,594,000 124,000 2,718,000 Corporate Bonds......................... 2,071,000 19,000 2,090,000 Other ............................. 2,081,000 2,081,000 --------------- ------------------ --------------- Total Restricted .................... 15,295,000 230,000 15,525,000 -------------- ------------ -------------- Total Available-for-Sale ......... $256,190,000 $2,008,000 $3,582,000 $254,616,000 ============ ========== ========== ============ Held-to-Maturity Investments: Classified as Current: U.S. Government and its Agencies..................... $ 8,468,000 $ 9,000 $ 432,000 $ 8,045,000 Mortgage Backed......................... 5,936,000 266,000 5,670,000 Municipal Obligations................... 1,570,000 44,000 1,614,000 Corporate Bonds......................... 5,272,000 66,000 5,338,000 --------------- ------------- ------------------ --------------- Total Current........................ 21,246,000 119,000 698,000 20,667,000 -------------- ------------ ------------ -------------- Classified as Long-term: U.S. Government and its Agencies..................... 6,529,000 29,000 51,000 6,507,000 Mortgage Backed.......................... 14,331,000 672,000 13,659,000 Municipal Obligations.................... 4,154,000 259,000 4,413,000 Corporate Bonds.......................... 5,473,000 441,000 5,914,000 --------------- ------------ ------------------ --------------- Total Long-term...................... 30,487,000 729,000 723,000 30,493,000 -------------- ------------ ------------ -------------- Classified as Restricted: U.S. Government and its Agencies..................... 495,000 9,000 504,000 Municipal Obligations................... 574,000 17,000 591,000 Corporate Bonds......................... 1,164,000 50,000 1,214,000 --------------- ------------- --------------- Total Restricted .................... 2,233,000 76,000 2,309,000 --------------- ------------- --------------- Total Held-to-Maturity ........... $ 53,966,000 $ 924,000 $1,421,000 $ 53,469,000 ============= =========== ========== =============
Page 46 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 The contractual maturities of available-for-sale investments at December 31, 1999 are shown below.
Amortized Cost Fair Value Due in one year or less...................................... $ 25,114,000 $ 25,094,000 Due after one year through five years........................ 53,477,000 52,317,000 Due after five years through ten years....................... 18,052,000 17,369,000 Due after ten years.......................................... 158,562,000 135,715,000 ------------- ------------- Total................................................... $255,205,000 $230,495,000 ============ ============
The contractual maturities of held-to-maturity investments at December 31, 1999 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Amortized Cost Fair Value
Due in one year or less...................................... $ 2,580,000 $ 2,611,000 Due after one year through five years........................ 9,565,000 9,585,000 Due after five years through ten years....................... 776,000 775,000 Due after ten years.......................................... 12,102,000 11,060,000 ------------ ------------ Total................................................... $25,023,000 $24,031,000 =========== ===========
Of the cash and cash equivalents and current investments that total $274.9 million in the accompanying Consolidated Balance Sheet at December 31, 1999, $267.5 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. 6. REINSURANCE In the normal course of business, the Company seeks to reduce potential losses that may arise from catastrophic events that cause unfavorable underwriting results by reinsuring certain levels of such risk with other reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsurance policy. The Company is covered under medical reinsurance agreements that provide coverage for 50% - 90% of hospital and other costs in excess of, depending on the contract, $75,000 to $200,000 per case, up to a maximum of $2,000,000 per member per lifetime for both the managed indemnity and HMO subsidiaries. In addition, certain of the Company's HMO members are covered by an excess catastrophe reinsurance contract. Reinsurance premiums of $3,269,000, $2,860,000 and $3,156,000, net of reinsurance recoveries of $2,904,000, $1,185,000 and $1,729,000, are included in medical expenses for 1999, 1998 and 1997, respectively. In addition, SHL maintains reinsurance on certain other insurance products. CII also has reinsurance treaties in effect. In 1999 and 1998, workers' compensation claims between $500,000 and $100,000,000 per occurrence are 100% reinsured. In 1997, workers' compensation claims between $350,000 and $60,000,000 per occurrence were 100% reinsured. In addition, effective July 1, 1998, workers' compensation claims below $500,000 per occurrence are reinsured under quota share and excess reinsurance agreements (referred to as "low level reinsurance") with an A+ rated carrier. Under this agreement, CII reinsures 30% of the first $10,000 of each loss, 75% of the next $40,000 and 100% of the next $450,000. CII receives a ceding commission from the reinsurer as a partial reimbursement of its operating expenses. Page 47 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 The low level reinsurance agreement contains both retroactive and prospective reinsurance coverage and CII has bifurcated the low level reinsurance agreement to account for the different accounting treatments. The amount by which the estimated ceded liabilities exceed the amount paid for the retroactive coverage is reported as a deferred gain and amortized to income over the estimated remaining settlement period using the interest method. Any subsequent changes in estimated or actual cash flows related to the retroactive coverage are accounted for by adjusting the previously recorded deferred gain to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transactions, with a corresponding charge or credit to income. During 1999, CII recorded an adjustment to increase its deferred gain related to retroactive reinsurance coverage by $4,615,000. For the years ended December 31, 1999 and 1998, CII amortized deferred gains of $3,850,000 and $1,038,000, respectively. The balance of unamortized deferred gains related to retroactive reinsurance was $7,015,000 and $6,250,000 at December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, the amount of reinsurance recoverable under prospective reinsurance contracts for unpaid losses and loss adjustment expenses for CII was $110,089,000 and $37,797,000, respectively. At December 31, 1999 and 1998, the amount of reinsurance recoverable under the retroactive reinsurance contract was $14,842,000 and $18,710,000, respectively. The amount of reinsurance receivable for paid losses and loss adjustment expenses was $6,931,000 and $1,917,000, at December 31, 1999 and 1998, respectively. Reinsurance contracts do not relieve the Company from its obligations to enrollees or policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. All reinsurers that the Company has reinsurance contracts with are rated A- or better by the A.M. Best Company. The following table provides workers' compensation prospective reinsurance information for the three years ended December 31, 1999:
Change in Recoveries Recoverable on Paid on Unpaid Premiums Losses/LAE Losses/LAE Ceded 1999: Travelers Indemnity Company of Illinois........................... $21,941,000 $69,104,000 $60,702,000 General Reinsurance Corporation........... 1,730,000 3,188,000 2,912,000 Others.................................... 169,000 -------------------- -------------------- -------------- Total .................................... $23,671,000 $72,292,000 $63,783,000 =========== =========== =========== 1998: Travelers Indemnity Company of Illinois........................... $ 1,379,000 $19,664,000 $16,095,000 General Reinsurance Corporation........... 3,292,000 (2,923,000) 3,533,000 Others ................................... 202,000 ------------------- -------------------- -------------- Total .................................... $ 4,671,000 $16,741,000 $19,830,000 =========== =========== =========== 1997: General Reinsurance Corporation............. $ 841,000 $ 5,380,000 $ 4,872,000 Others ..................................... 187,000 ------------------- -------------------- ------------- Total ...................................... $ 841,000 $ 5,380,000 $ 5,059,000 ============ ============ ===========
Page 48 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 7. LOSSES AND LOSS ADJUSTMENT EXPENSES The following table provides a reconciliation of the beginning and ending reserve balances for unpaid losses and LAE. The loss estimates are subject to change in subsequent accounting periods and any change to the current reserve estimates would be accounted for in future results of operations. While management of the Company believes that current estimates are reasonable, significant adverse or favorable loss development could occur in the future.
Year ended December 31, ---------------------------------- 1999 1998 1997 ------------------------------- ---------- Net Beginning Losses and LAE Reserve ..................... $174,466,000 $181,643,000 $172,100,000 ------------ ------------ ------------ Net Provision for Insured Events Incurred in: Current Year .......................................... 51,541,000 103,990,000 102,301,000 Prior Years............................................ 9,920,000 (9,643,000) (8,970,000) --------------- -------------- -------------- Total Net Provision.................................. 61,461,000 94,347,000 93,331,000 -------------- -------------- -------------- Net Payments for Losses and LAE Attributable to Insured Events Incurred in: Current Year .......................................... 21,206,000 29,592,000 26,811,000 Prior Years............................................ 80,416,000 71,932,000 56,977,000 -------------- -------------- -------------- Total Net Payments .................................. 101,622,000 101,524,000 83,788,000 ------------- ------------- -------------- Net Ending Losses and LAE Reserve ........................ 134,305,000 174,466,000 181,643,000 Reinsurance Recoverable .................................. 110,089,000 37,797,000 21,056,000 ------------- -------------- -------------- Gross Ending Losses and LAE Reserve ...................... $244,394,000 $212,263,000 $202,699,000 ============ ============ ============
8. LONG-TERM DEBT Long-term debt at December 31, consists of the following:
1999 1998 ---------------- --------- Revolving Credit Facility............................................ $160,000,000 $139,000,000 7 1/2% Convertible Subordinated Debentures .......................... 50,498,000 51,251,000 6% Mortgage Note..................................................... 34,693,000 35,171,000 7 1/5% Mortgage Note................................................. 11,614,000 13,440,000 7 3/8% Mortgage Note ............................................... 393,000 821,000 Other................................................................ 6,397,000 7,978,000 --------------- --------------- Total.............................................................. 263,595,000 247,661,000 Less Current Portion................................................. (4,741,000) (5,263,000) --------------- -------------- Long-term Debt....................................................... $258,854,000 $242,398,000 ============ ============
Revolving Credit Facility. On October 31, 1998, the Company replaced its prior line of credit with a $200 million credit facility under which it has $160 million in borrowings outstanding as of December 31, 1999. Interest under the credit facility is variable and based on the London Interbank Offering Rate plus a margin determined by reference to the Company's leverage ratio. Of the outstanding balance, $50 million is covered by interest-rate swap agreements. To mitigate the risk of interest rate fluctuation on the credit facility, the Company entered into a five-year $50 million interest-rate swap agreement during the fourth quarter of 1998. The intent of the agreement is to keep the Company's interest rate on $50 million of the borrowing relatively fixed. The average cost of borrowing on this line of credit for 1999, including the impact of the swap agreements, was approximately 7.8%. The terms of the credit facility contain a mandatory payment schedule Page 49 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 that begins on June 30, 2001 and ends September 30, 2003 if the principal balance exceeds certain thresholds. The terms of the credit facility contain certain covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio. For the quarter ended September 30, 1999, the Company exceeded the limits of certain covenants. The Company was able to obtain a waiver and re-negotiate the covenant limits. These negotiations resulted in a borrowing rate of LIBOR plus 2.375% through September 30, 2000. The Company believes it is in compliance with debt covenants as of December 31, 1999. 7 1/2% Convertible Subordinated Debentures. In September 1991, CII issued convertible subordinated debentures (the "Debentures") due September 15, 2001. The Debentures bear interest at 7 1/2%, which is due semi-annually on March 15 and September 15. Each $1,000 in principal is convertible into 25.382 shares of the Company's common stock at a conversion price of $39.40 per share. Unamortized issuance costs of $362,000 are included in other assets on the balance sheet and are being amortized over the life of the Debentures. Accrued interest on the Debentures as of December 31, 1999 and 1998 was $1,099,000 and $1,117,000, respectively. The Debentures are redeemable by CII, in whole or in part, at a redemption price of 100.75%, plus accrued interest. The Debentures are general unsecured obligations of CII only and were not assumed or guaranteed by Sierra. During the twelve months ended December 31, 1999 and 1998, the Company purchased $753,000 and $3,216,000, respectively, of the debentures on the open market. 6.0% Mortgage Note. In conjunction with the acquisition of Kaiser-Texas, TXHC executed a deed of trust note for $35,200,000. The note is secured by deeds of trust covering the underlying real estate and fixtures. The terms of the note include fixed monthly payments of $211,000 for five years at which time the remaining principal is due. 7 1/5% Mortgage Note. In January 1998, the Company obtained a $15,000,000 loan from Bank of America, Nevada at an interest rate of 7 1/5%. This loan is secured by a deed of trust, assignment of rents and leases, and a security agreement and fixture filing covering a portion of the Company's administrative headquarters complex and underlying real property. 7 3/8% Mortgage Note. In December 1993, the Company obtained a loan from Bank of America, Nevada. This loan is secured by a deed of trust, assignment of rents and leases, and a security agreement and fixture filing covering a portion of the Company's administrative headquarters complex and underlying real property. Other. The Company has obligations under capital leases with interest rates from 6.7% to 13.4%. In addition, the Company has term loans with the City of Baltimore and the State of Maryland. Page 50 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 Scheduled maturities of the Company's notes payable and future minimum payments under capital leases, together with the present value of the net minimum lease payments at December 31, 1999, are as follows:
Obligations Notes Under Capital Year ending December 31, Payable Leases ------------------------------------------------------- --------------------------------- 2000................................................. $ 2,920,000 $ 2,192,000 2001................................................. 53,205,000 1,769,000 2002................................................. 2,897,000 1,523,000 2003 ................................................ 195,740,000 425,000 2004................................................. 2,644,000 31,000 Thereafter........................................... 854,000 245,000 ---------------- --------------- Total............................................. $258,260,000 6,185,000 ============ Less: Amounts Representing Interest................. (850,000) -------------- Present Value of Minimum Lease Payments.............. $ 5,335,000 =============
The fair value of the Debentures at December 31, 1999 was $35,601,000, which was determined based on the estimated market price on December 31, 1999. Excluding the Debentures, the fair value of long-term debt, including the current portion, is estimated to be approximately $209,446,000 based on the borrowing rates currently available to the Company . 9. INCOME TAXES A summary of the provision for income taxes for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ------------ ------------ -------- (Benefit) Provision for Income Taxes: Current..................................... $(12,919,000) $12,595,000 $5,528,000 Deferred.................................... 6,984,000 1,201,000 (2,294,000) -------------- ----------- ---------- Total $ (5,935,000) $13,796,000 $3,234,000 ============= =========== ==========
The following reconciles the difference between the 1999, 1998 and 1997 reported and statutory provision for income taxes:
1999 1998 1997 ------------ ------------ -------- Statutory Rate .................................. 35% 35% 35% State Income Taxes ......................... (12) 1 1 Tax Preferred Investments .................. 12 (2) (5) Change in Valuation Allowance .............. 15 (9) (17) Other ...................................... 6 1 (2) -- -- -- Provision for Income Taxes .............. 56% 26% 12% === == ==
Page 51 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 The tax effects of significant items comprising the Company's net deferred tax assets are as follows:
1999 1998 ---------------- ---------- Deferred Tax Assets: Medical and Losses and LAE Reserves ...................... $11,699,000 $ 4,398,000 Accruals Not Currently Deductible......................... 12,635,000 4,875,000 Compensation Accruals .................................... 6,218,000 4,569,000 Bad Debt Allowances....................................... 4,373,000 2,189,000 Loss Carryforwards and Credits............................ 18,886,000 9,878,000 Unearned Premiums......................................... 1,029,000 850,000 Deferred Reinsurance Gains................................ 2,455,000 2,188,000 Unrealized Investment Losses.............................. 8,648,000 551,000 Other .................................................... 90,000 --------------- Total................................................... 66,033,000 29,498,000 ------------ ------------ Deferred Tax Liabilities: Deferred Policy Acquisition Costs ........................ 777,000 586,000 Depreciation and Amortization ............................ 17,729,000 6,249,000 Other .................................................... 684,000 558,000 -------------- -------------- Total................................................... 19,190,000 7,393,000 ------------ ------------- Net Deferred Tax Asset Before Valuation Allowance.................................... 46,843,000 22,105,000 Valuation Allowance ...................................... (1,575,000) -------------------- ------------ Net Deferred Tax Asset ................................... $46,843,000 $20,530,000 =========== ===========
At December 31, 1999, the Company had approximately $29,530,000 of regular tax net operating loss carryforwards. The net operating loss carryforwards can be used to reduce future taxable income until they expire through the year 2019. In addition to the net operating loss carryforwards, the Company has alternative minimum tax credits of approximately $7,216,000 which can be used to reduce regular tax liabilities in future years. There is no expiration date for the alternative minimum tax credits. A valuation allowance was established to reflect the Company's inability to use tax benefits from certain acquisitions currently or in the near future. Due to a change in tax laws and the Company's ability to realize tax benefits for which a valuation allowance had been previously established, the Company reduced its valuation allowance by $1,575,000, $4,691,000 and $4,663,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Included in other current receivables in the December 31, 1999 balance sheet is a tax receivable of $10,518,000. Page 52 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 10. COMMITMENTS AND CONTINGENCIES Leases. The Company is the lessee under several operating leases, most of which relate to office facilities and equipment. The rentals on these leases are charged to expense over the lease term as the Company becomes obligated for payment and, where applicable, provide for rent escalations based on certain costs and price index factors. The following is a schedule, by year, of the future minimum lease payments under existing operating leases:
Year Ending December 31, 2000................................................... $ 7,955,000 2001................................................... 7,165,000 2002................................................... 6,554,000 2003 .................................................. 4,679,000 2004................................................... 3,634,000 Thereafter............................................. 9,347,000 ------------- Total............................................. $39,334,000 ===========
Rent expense totaled $9,098,000, $8,763,000 and $5,827,000 in 1999, 1998 and 1997, respectively. Litigation and Legal Matters. The Company is subject to various claims and other litigation in the ordinary course of business. Such litigation includes claims of medical malpractice, claims for coverage or payment for medical services rendered to HMO members and claims by providers for payment for medical services rendered to HMO members. Also included in such litigation are claims for workers' compensation and claims by providers for payment for medical services rendered to injured workers. In the opinion of the Company's management, the ultimate resolution of pending legal proceedings should not have a material adverse effect on the Company's financial condition. 11. RELATED PARTY TRANSACTIONS The Company's Board of Directors has authorized a line of credit from the Company to the Chief Executive Officer (the "CEO"). The CEO borrowed amounts under this line of credit during 1998 which resulted in aggregate borrowings of $2,650,000. The CEO repaid approximately $360,000 of the indebtedness during the first quarter of 1999. The borrowed amounts bear interest at a rate equal to the rate at which the Company could have borrowed funds under the credit facility at the time of the borrowing plus 10 basis points. Indebtedness under the line of credit is secured by certain of the CEO's rights to compensation from the Company. At December 31, 1999, the aggregate outstanding principal of and accrued interest on this indebtedness was $2,635,000. The Company expensed $289,000, $78,000 and $27,000 in the years ended December 31, 1999, 1998 and 1997 respectively, for legal fees to a Nevada law firm of which a non-employee director of the Company is a shareholder. 12. EMPLOYEE BENEFIT PLANS Defined Contribution Plan. The Company has a defined contribution pension and 401(k) plan (the "Plan") for its employees. The Plan covers all employees who meet certain age and length of service requirements. For the years ended December 31, 1998 and 1997 and for the six months ended June 30, 1999, the Company contributed a maximum of 2% of eligible employees' compensation and matched 50% of a participant's elective deferral up to a maximum of either 10% of an employee's compensation or the maximum allowable under current IRS statute. Effective July 1, 1999, the Plan was modified such that the Company matches 50%-100% of an employee's elective deferral and the maximum Company match is 6% of a participant's annual compensation, subject to Internal Revenue Service limits. The Plan does not require additional Company contributions. Expense under the plan totaled $6,736,000, $4,522,000 and $3,929,000 in 1999, 1998 and 1997, respectively. Page 53 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 Supplemental Retirement Plans. The Company has Supplemental Retirement Plans (the "SRPs") for certain officers, directors and highly compensated employees. The SRPs are non-qualified deferred compensation plans through which participants may elect to postpone the receipt and taxation of all or a portion of their salary and bonuses received from the Company. The Company also matches 50% of those contributions that participants are restricted from deferring, if any, under the Company's pension and 401(k) plan. As contracted with the Company, the participants or their designated beneficiaries may begin to receive benefits under the SRPs upon participant death, disability, retirement, termination of employment or certain other circumstances including financial hardship. Executive Life Insurance Plan. Effective July 1, 1997, the Company has funded and entered into split dollar life insurance agreements with certain officers and key executives (selected and approved by the Sierra Board of Directors). The premiums paid by the Company will be reimbursed upon the occurrence of certain events as specified in the contract. Page 54 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 Supplemental Executive Retirement Plan ("SERP"). Effective July 1, 1997, the Company adopted a defined benefit retirement plan covering certain key employees. The Company is funding the benefits through the purchase of certain life insurance policies. Benefits are based on, among other things, the employee's average earnings over the five-year period prior to retirement or termination, and length of service. Benefits attributable to service prior to the adoption of the plan are amortized over the estimated remaining service period for those employees participating in the plan. In 1998, the Company expanded the SERP to include more participants. The effect of adding these participants is included in plan amendments in the reconciliation below. A reconciliation of ending year balances is as follows:
For the Year Ended December 31, ------------------------------- 1999 1998 1997 -------- -------- ------ Change in Benefit Obligation: Projected Benefit Obligation at Beginning of Period (Inception for 1997) ....................................... $14,198,000 $ 9,515,000 $ 9,008,000 Service Cost ................................................... 365,000 408,000 132,000 Interest Cost .................................................. 829,000 875,000 375,000 Plan Amendments................................................. 1,572,000 Actuarial (Gains) Losses........................................ (2,391,000) 1,925,000 Benefits Paid .................................................. (193,000) (97,000) -------------- --------------- Benefit Obligation at End of Period............................. 12,808,000 14,198,000 9,515,000 ------------ ----------- ------------ Change in Plan Assets: Fair Value of Plan Assets at Beginning of Period................ 4,493,000 1,872,000 Actual Return on Plan Assets ................................... 123,000 (58,000) (308,000) Company Contributions .......................................... 2,679,000 2,679,000 2,180,000 ------------- ------------ ------------ Fair Value of Plan Assets at End of Period...................... 7,295,000 4,493,000 1,872,000 ------------- ------------ ------------ Funded Status of the Plan ...................................... (5,513,000) (9,705,000) (7,643,000) Unrecognized Actuarial Change................................... (532,000) 1,858,000 Unrecognized Prior Service Credit .............................. 8,412,000 9,334,000 8,647,000 Unrecognized Net Loss .......................................... 1,150,000 748,000 394,000 -------------- ------------- ------------- Total Recognized ............................................... $ 3,517,000 $ 2,235,000 $ 1,398,000 ============ =========== =========== Total Recognized Amounts in the Financial Statements Consist of: Accrued Benefit Liability ...................................... $(2,439,000) $(3,325,000) $(2,964,000) Intangible Asset ............................................... 5,956,000 5,560,000 4,362,000 -------------- ------------ ------------ Total .......................................................... $ 3,517,000 $ 2,235,000 $ 1,398,000 ============ =========== =========== Assumptions: Discount Rate .................................................. 7.0% 7.0% 7.0% Expected Return on Plan Assets ................................. 8.0% 8.0% 8.0% Rate of Compensation Increase .................................. 3.0% 5.0% 5.0% Components of Net Periodic Benefit Cost: Service Cost.................................................... $ 365,000 $ 408,000 $ 132,000 Interest Cost .................................................. 829,000 875,000 375,000 Expected Return on Plan Assets.................................. (525,000) (295,000) (87,000) Amortization of Prior Service Credits........................... 922,000 885,000 361,000 Recognized Actuarial (Gain) Loss................................ (1,000) 68,000 --------------- -------------- Net Periodic Benefit Cost....................................... $ 1,590,000 $ 1,941,000 $ 781,000 ============ =========== ============
Page 55 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 13. CAPITAL STOCK PLANS Stockholders' Rights Plan. Each share of Sierra common stock, par value $.005 per share, contains one right (a "Right"). Each Right entitles the registered holder to purchase from Sierra a unit consisting of one one- hundredth (.001) of a share of the Sierra Series A Junior Participating Preferred Shares (a "Unit"), par value $.01 per share, or a combination of securities and assets of equivalent value, at a purchase price of $100.00 per Unit, subject to adjustment. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire Sierra on terms not approved by Sierra's Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since Sierra may redeem the Rights at the price of $.02 per Right prior to the time that a person or group has acquired beneficial ownership of 20% or more of Sierra common stock. Stock Option Plans. The Company has several plans that provide common stock-based awards to employees and to non-employee directors. The plans provide for the granting of Options, Stock, and other stock-based awards. Awards are granted by a committee appointed by the Board of Directors. Options become exercisable at such times and in such installments as set by the committee. The exercise price of each option equals the market price of the Company's stock on the date of grant. Stock options generally vest at a rate of 20% - 25% per year. Options generally expire one year after the end of the vesting period. The following table reflects the activity of the stock option plans:
Number of Option Weighted Shares Price Average Price Outstanding January 1, 1997 ................ 2,998,000 $ 5.00 - $23.33 $15.34 Granted.................................. 459,000 16.25 - 24.50 23.15 Exercised................................ (705,000) 5.00 - 21.17 11.81 Canceled................................. (97,000) 6.31 - 23.33 17.33 ----------- Outstanding December 31, 1997 .............. 2,655,000 6.31 - 24.50 17.53 Granted.................................. 468,000 16.94 - 24.83 22.49 Exercised................................ (386,000) 6.31 - 23.33 14.25 Canceled................................. (7,000) 7.13 - 24.50 17.01 ------------ Outstanding December 31, 1998............... 2,730,000 6.31 - 24.83 18.89 Granted.................................. 1,436,000 6.69 - 21.00 9.44 Exercised................................ (2,000) 6.31 - 12.08 9.41 Canceled................................. (260,000) 11.71 - 24.83 19.65 ---------- Outstanding December 31, 1999............... 3,904,000 6.31 - 24.69 15.37 ========== Exercisable at December 31, 1999 ........... 1,737,000 $ 6.31 - $24.69 $17.70 ========= Available for Grant at December 31, 1999 ....................... 2,047,000 =========
Page 56 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 The following table summarizes information about stock options outstanding at December 31, 1999:
Weighted Average Weighted Average Range of Exercise Contractual Life Options Exercise Price -------------------------------- ----------------------- Prices Remaining in Days Outstanding Exercisable Outstanding Exercisable $ 6.31 - $ 8.00 2,324 1,239,000 15,000 $ 7.78 $ 6.31 9.91 - 12.88 2,515 187,000 133,000 11.19 11.07 14.94 - 21.28 1,189 1,724,000 1,362,000 17.69 17.46 22.17 - 24.69 1,615 754,000 227,000 23.53 23.80
Employee Stock Purchase Plans. The Company has employee stock purchase plans (the "Purchase Plans") whereby employees may purchase newly issued shares of stock through payroll deductions at 85% of the fair market value of such shares on specified dates as defined in the Purchase Plans. As of December 31, 1999, the Company had 294,000 shares reserved for purchase under the Purchase Plans. During 1999, a total of 163,000 shares were purchased at prices of $17.85 and $11.70 per share. During January 2000, 164,000 shares were purchased by employees at $5.68 per share in connection with the Purchase Plans. Accounting for Stock-Based Compensation. The Company uses the intrinsic value method in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its employee stock option plans nor the Purchase Plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, the Company's net income and earnings per share for the years ended December 31, would have been reduced to the pro forma amounts indicated below:
For the Years Ended 1999 1998 1997 ---- ---- ---- Net (Loss) Income As reported $(4,631,000) $39,596,000 $24,241,000 Pro forma (9,204,000) 37,106,000 22,177,000 Net (Loss) Income Per Share As reported $(.17) $1.45 $.90 Pro forma (.34) 1.35 .82 Net (Loss) Income Per Share Assuming Dilution As reported $(.17) $1.43 $.88 Pro forma (.34) 1.34 .81
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 0% for all years; expected volatility of 43%, 37% and 35%; risk-free interest rates of 5.87%, 4.46% and 5.89%; and expected lives of four to five years. The weighted average fair value of options granted in 1999, 1998 and 1997 was $3.77, $9.92 and $8.27, respectively. The fair value of the look-back option implicit in each offering of the Purchase Plans is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 0% for all years; expected volatility of 45%, 32% and 35%; risk-free interest rates of 4.66%, 5.30% and 5.32%; and expected lives of six months for all years. During 1999, the Company extended by three years the expiration date for 1,035,000 options covering shares that would have expired in 1999 and 2000. The exercise price per share for these options ranges from $10.92 to $20.50. No expense was recognized in the consolidated statement of operations related to these options. Expense of $1,445,000 is included in the Pro forma information presented. Page 57 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 Due to the fact that the Company's stock option programs vest over many years and additional awards are made each year, the above pro forma numbers are not indicative of the financial impact had the disclosure provisions of FAS 123 been applicable to all years of previous option grants. The above numbers do not include the effect of options granted prior to 1995. 14. STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION Supplemental statements of cash flows information for the years ended December 31, is presented below:
1999 1998 1997 ------------ ------------ -------- Cash Paid During the Year for Interest (Net of Amount Capitalized)............................... $17,721,000 $ 8,737,000 $4,463,000 Cash (Received) Paid During the Year for Income Taxes.......................................... (4,590,000) 15,003,000 7,943,000 Noncash Investing and Financing Activities: Liabilities Assumed in Connection with Corporate Acquisitions................................. 53,461,000 195,000 Reductions to Funds Withheld by Ceding Insurance Company and Future Policy Benefits........................................ 8,471,000 Stock Issued for Exercise of Options and Related Tax Benefits............................... 1,000 1,284,000 2,004,000 Additions to Capital Leases............................... 3,070,000 4,574,000
15. PREMIUM DEFICIENCY, IMPAIRMENT, SETTLEMENT AND OTHER COSTS 1999 Medical expenses reported in the first quarter of 1999 included a premium deficiency charge of $8.1 million related to losses in under-performing markets primarily in Arizona and rural Nevada. In the fourth quarter of 1999, the Company recorded a premium deficiency charge of $21.0 million related to HMO contracts in the Texas market. Of this amount, $10.0 million was recorded in medical expenses and $11.0 million was recorded in the impairment, settlement and other costs line item. The $11.0 million is an estimate of general and administrative costs, in excess of those covered by premiums, the Company will incur to service the Dallas/Ft. Worth contracts. Also recorded in medical expenses during the fourth quarter is $11.2 million primarily related to an adjustment to the estimate for medical expenses recorded in previous years, and $6.8 million primarily related to contractual settlements with providers of medical services. The remaining $7.8 million of impairment, settlement and other costs consists of charges in the first quarter of $5.1 million and additional charges of $2.7 million in the fourth quarter. In the first quarter of 1999, the Company recorded a charge of $4.3 million related primarily to the write-off of goodwill associated with the Mohave Valley operations. During the first quarter of 1999, the Company closed all inpatient operations at Mohave Valley Hospital, a 12-bed acute care facility in Bullhead City, Arizona, and terminated approximately 45 employees. The Company also incurred $450,000 for certain legal and contractual settlements and $400,000 to provide for the Company's portion of the write-off of start-up costs at the Company's equity investee, TriWest Healthcare Alliance. The remaining charges in the fourth quarter of 1999 consist primarily of legal and contractual settlements. 1998 During the fourth quarter of 1998, the Company incurred settlement expenses totaling $8 million, $5.9 million after tax, related to the settlement of a competitor's protest for the Region 1 TRICARE contract. All of this amount was paid during fiscal year 1998. On September 30, 1997, SMHS was awarded a five-year, $1.2 billion contract to administer managed health care services to military families and retirees in 13 northeastern states and Washington, D.C. A competing bidder Page 58 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 protested the contract award and claimed, among other issues, that the United States Department of Defense failed to adequately disclose the weights of the significant factors used to evaluate proposals. In December 1998, SMHS reached an agreement to settle the protest. As part of the settlement, the competitor has foregone any and all rights it may have to challenge the contract award and seek re-bid. During the fourth quarter of 1998, the Company incurred integration, transition and other charges totaling $3.1 million, $2.3 million after tax, related primarily to its acquisition of the Texas operations of Kaiser Foundation Health Plan. In addition, the Company incurred certain legal expenses totaling $2.7 million, $2.0 million after tax, resulting primarily from the TRICARE settlement and acquisition and integration activity. As of December 31, 1998, $2.8 million was included in accrued expenses for these integration, transition and legal costs incurred through December 31, 1998. 1997 During 1997, the Company recorded and paid expenses of approximately $11.0 million, $8.4 million after tax, for merger- related costs. On March 18, 1997, the Company announced it had terminated its merger agreement with Physician Corporation of America. The original agreement had been entered into in November 1996. During the third quarter of 1997, SMHS was notified it had been awarded a TRICARE managed care contract by the Department of Defense to serve eligible beneficiaries in Region 1. This region includes more than 600,000 beneficiaries in 13 northeastern states and the District of Columbia. Development expenses of $18.4 million, $10.6 million net of taxes, were recorded in the third quarter, primarily for expenses associated with the Company's proposal to serve TRICARE beneficiaries in Region 1. Such expenses had been deferred until award notification. SMHS began health care delivery on June 1, 1998. 16. UNAUDITED QUARTERLY INFORMATION (Amounts in thousands, except per share data)
March June September December 31 30 30 31 --------------- --------------- --------------- -------- Year Ended December 31, 1999: Operating Revenues.................................... $318,074 $315,818 $322,570 $327,349 Operating Income (Loss)............................... 2,989 16,972 17,436 (32,983) (Loss) Income Before Income Taxes .................... (1,060) 12,846 13,267 (35,619) Net (Loss) Income..................................... (706) 8,556 8,863 (21,344) (Loss) Earnings Per Share ............................ (.03) .32 .33 (.79) (Loss) Earnings Per Share Assuming Dilution .......... (.03) .32 .33 (.79) Year Ended December 31, 1998: Operating Revenues.................................... $210,409 $244,545 $281,082 $301,167 Operating Income ..................................... 17,663 18,550 18,213 6,147 Income Before Income Taxes ........................... 16,382 16,931 17,006 3,073 Net Income............................................ 12,187 12,551 12,584 2,274 Earnings Per Share ................................... .44 .46 .46 .08 Earnings Per Share Assuming Dilution ................. .44 .45 .46 .08
17. SEGMENT REPORTING The Company has three reportable segments based on the products and services offered: managed care and corporate operations, military health services operations and workers' compensation operations. The managed care segment includes managed health care services provided through HMOs, managed indemnity plans, third-party administrative services programs for employer-funded health benefit plans, multi-specialty medical groups, other ancillary services and corporate operations. The military health services segment administers a five-year, managed care federal contract for the Department of Defense's TRICARE program in Region 1. The workers' compensation segment assumes workers' compensation claims risk in return for premium revenues and third party administrative services. Page 59 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 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: (Amounts in thousands)
Managed Care Military Workers' and Corporate Health Services Compensation Operations Operations Operations Total 1999 Medical Premiums.................................. $827,779 $ 827,779 Military Contract Revenues........................ $287,398 287,398 Specialty Product Revenues........................ 9,869 $ 84,352 94,221 Professional Fees................................. 51,842 51,842 Investment and Other Revenues..................... 6,445 706 15,420 22,571 ----------- ------------ ---------- ------------- Total Revenue.................................. $895,935 $288,104 $ 99,772 $1,283,811 ======== ======== ========= ========== Segment Operating Profit.......................... $ 23,332 $ 11,612 $ 21,091 $ 56,035 Interest Expense and Other........................ (12,589) (910) (3,256) (16,755) Impairment, Settlement and Other Costs............ (39,926) (9,920) (49,846) ---------- --------------- ----------- ------------- Net (Loss) Income Before Income Taxes............. $ (29,183) $ 10,702 $ 7,915 $ (10,566) ========= ========= ========== ============ Segment Operating Assets.......................... $650,505 $ 76,187 $403,420 $1,130,112 Capital Expenditures.............................. 53,741 570 4,201 58,512 Depreciation and Amortization..................... 23,891 2,758 1,430 28,079 1998 Medical Premiums.................................. $609,404 $ 609,404 Military Contract Revenues........................ $204,838 204,838 Specialty Product Revenues........................ 12,843 $135,525 148,368 Professional Fees................................. 45,363 45,363 Investment and Other Revenues..................... 8,581 407 20,242 29,230 ----------- ------------ ---------- ------------- Total Revenue.................................. $676,191 $205,245 $155,767 $1,037,203 ======== ======== ======== ========== Segment Operating Profit.......................... $ 43,314 $ 8,620 $ 22,490 $ 74,424 Interest Expense and Other........................ (2,610) (573) (3,998) (7,181) Impairment, Settlement and Other Costs............ (4,869) (8,982) (13,851) ------------ ----------- --------------- -------------- Net Income (Loss) Before Income Taxes............. $ 35,835 $ ( 935) $ 18,492 $ 53,392 ========= =========== ========= ============ Segment Assets.................................... $593,332 $ 73,877 $377,911 $1,045,120 Capital Expenditures.............................. 32,520 5,015 3,208 40,743 Depreciation and Amortization..................... 15,545 2,167 1,551 19,263 1997 Medical Premiums.................................. $513,857 $ 513,857 Military Contract Revenues........................ $ 4,346 4,346 Specialty Product Revenues........................ 16,297 $129,914 146,211 Professional Fees................................. 31,238 31,238 Investment and Other Revenues..................... 8,711 17,361 26,072 ----------- --------------- ---------- ------------- Total Revenue.................................. $570,103 $ 4,346 $147,275 $ 721,724 ======== ========== ======== =========== Segment Operating Profit.......................... $ 46,033 $ 153 $ 15,072 $ 61,258 Interest Expense and Other........................ (371) (4,062) (4,433) Impairment, Settlement and Other Costs............ (12,600) (16,750) (29,350) ---------- ---------- --------------- ------------- Net Income (Loss) Before Income Taxes............. $ 33,062 $ (16,597) $ 11,010 $ 27,475 ========= ========== ========= ============ Segment Assets.................................... $373,652 $ 6,859 $343,425 $ 723,936 Capital Expenditures.............................. 43,825 639 11,178 55,642 Depreciation and Amortization..................... 12,491 69 950 13,510
Page 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Election of Directors" in Sierra's Proxy Statement for its 2000 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Compensation of Executive Officers" in Sierra's Proxy Statement for its 2000 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in Sierra's Proxy Statement for its 2000 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" in Sierra's Proxy Statement for its 2000 Annual Meeting of Stockholders, is incorporated herein by reference. Page 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements are included in Part II, Item 8 of this Report:
Page Independent Auditors' Report............................................................. 34 Consolidated Balance Sheets at December 31, 1999 and 1998................................ 35 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997...................................................... 36 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.................................. 37 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997...................................................... 38 Notes to Consolidated Financial Statements............................................... 39 (a)(2) Financial Statement Schedules: Schedule I - Condensed Financial Information of Registrant................... S-1 Schedule V - Supplemental Information Concerning Property-Casualty Insurance .................................. S-4 Section 403.04 b - Reconciliation of Beginning and Ending Loss and Loss Adjustment Expense Reserves and Exhibit of Redundancies (Deficiencies) ................... S-5
All other schedules are omitted because they are not applicable, not required, or because the required information is in the consolidated financial statements or notes thereto. (a)(3) The following exhibits are filed as part of, or incorporated by reference into, this Report as required by Item 601 of Regulation S-K: (3.1) Articles of Incorporation, together with amendments thereto to date, incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (3.2) Certificate of Division of Shares into Smaller Denominations of the Registrant, incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (3.3) Amended and Restated Bylaws of the Registrant, as amended through December 12, 1997, incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (4.1) Rights Agreement, dated as of June 14, 1994, between the Registrant and Continental Stock Transfer & Trust Company, incorporated by reference to Exhibit 3.4 to the Registrant's Registration Statement on Form S-3 effective October 11, 1994 (Reg. No. 33-83664). (4.2) Specimen Common Stock Certificate, incorporated by reference to Exhibit 4(e) to the Registrant's Registration Statement on Form S-8 as filed and effective on August 5, 1994 (Reg. No. 33-82474). Page 62 (4.3) Form of Indenture, of 7 1/2% convertible subordinated debentures due 2001 from CII Financial, Inc. to Manufacturers Hanover Trust Company as Trustee dated September 15, 1991, incorporated by reference to Exhibit 4.2 of Post-Effective Amendment No. 1 on Form S-3 to Registration Statement on Form S-4 dated October 6, 1995 (Reg. No. 33-60591). (4.4) First Supplemental Indenture between CII Financial, Inc., Sierra Health Services, Inc. and Chemical Bank as Trustee, dated as of October 31, 1995, to Indenture dated September 15, 1991, incorporated by reference to Exhibit 4.3 of Post-Effective Amendment No. 2 on Form S-3 to Registration Statement on form S-4 dated October 31, 1995 (Reg. No. 33-60591). (10.1) Administrative Services agreement between Health Plan of Nevada, Inc. and the Registrant dated December 1, 1987, incorporated by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (10.2) Administrative Services agreement between Sierra Health and Life Insurance Company, Inc. and the Registrant dated April 1, 1989, incorporated by reference to Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (10.3) Agreement between Health Plan of Nevada, Inc. and the United States Health Care Financing Administration dated July 24, 1992, incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1992. (10.4) Credit Agreement dated as of October 30, 1998, among Sierra Health Services, Inc. as Borrower, Bank of America National Trust and Savings Association as Administrative Agent and Issuing Bank, First Union National Bank as Syndication Agent, and the Other Financial Institutions Party Thereto, dated as of October 30, 1998, incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998. (10.5) First Amendment to Credit Agreement among Sierra Health Services, Inc., as Borrower, Bank of America National Trust and Savings Association as Administrative Agent and Issuing Bank and the Other Financial Institutions Party Thereto, dated as of November 23, 1998, incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998. (10.6) Second Amendment to Credit Agreement among Sierra Health Services, Inc. as borrower, Bank of America National Trust and Savings Association as Administrative Agent and the Other Financial Institutions Party Thereto, dated as of January 15, 1999, incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998. (10.7) Third Amendment to Credit Agreement among Sierra Health Services, Inc. as borrower, Bank of America National Trust and Savings Association as Administrative Agent and the Other Financial Institutions Party Thereto, dated as of September 30, 1999. (10.8) Compensatory Plans, Contracts and Arrangements. (1) Employment Agreement with Jonathon W. Bunker dated November 15, 1997, incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (2) Employment Agreement with Frank E. Collins dated November 15, 1997, incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Page 63 (3) Employment Agreement with William R. Godfrey dated December 10, 1999. (4) Employment Agreement with Laurence S. Howard dated December 10, 1999. (5) Employment Agreement with Anthony M. Marlon, M.D. dated November 15, 1997, incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (6) Employment Agreement with Erin E. MacDonald dated November 15, 1997, incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (7) Employment Agreement with Michael A. Montalvo dated November 15, 1997, incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (8) Employment Agreement with Marie H. Soldo dated November 15, 1997, incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (9) Employment Agreement with Paul H. Palmer dated November 20, 1998, incorporated by reference to Exhibit 10.7(10) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (10) Draft of Split Dollar Life Insurance Agreement effective as of July 1, 1997, by and between Sierra Health Services, Inc., and Jonathon W. Bunker, Ria Marie Carlson, Frank E. Collins, William R. Godfrey, Laurence S. Howard, Erin E. MacDonald, Anthony M. Marlon, M.D., Kathleen M. Marlon, Michael A. Montalvo, John A. Nanson, M.D., Marie H. Soldo, and James L. Starr, incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (11) Sierra Health Services, Inc. Deferred Compensation Plan effective May 1, 1996 as Amended and Restated Effective January 1, 2000, dated as of January 1, 2000. (12) Sierra Health Services, Inc. Supplemental Executive Retirement Plan effective as of July 1, 1997, dated as of July 7, 1997, incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (13) Sierra Health Services, Inc. Supplemental Executive Retirement Plan effective as of March 1, 1998, incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998. (14) The Registrant's Second Amended and Restated 1986 Stock Option Plan as amended to date, incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (15) The Registrant's Second Restated Capital Accumulation Plan, as amended to date, incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (16) Sierra Health Services, Inc. Management Incentive Compensation Plan. (17) Sierra Health Services, Inc. 1995 Long-Term Incentive Plan, as amended and restated through May 18, 1998, incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. Page 64 (18) Sierra Health Services, Inc. 1995 Non-Employee Directors' Stock Plan, as amended and restated through May 18, 1998, incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (19) First Amendment to Sierra Health Services, Inc. 1995 Non-Employee Directors' Stock Plan, as amended and restated through May 18, 1998, dated November 6, 1999. (10.9) Agreement and Plan of Merger dated as of June 12, 1995 among the Registrant, Health Acquisition Corp., and CII Financial, Inc., incorporated by reference to the Report on Form 8-K dated June 13, 1995, as amended. (10.10) Loan Agreement dated August 11, 1997 between the Company and Anthony M. Marlon for a revolving credit facility in the maximum aggregate amount of $3,000,000, incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. (10.11) Master Purchase and Sale Agreement between Kaiser Foundation Health Plan of Texas (as Seller) and HMO Texas, L.C. (as Buyer), dated June 5, 1998, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998.* (10.12) Asset Sale and Purchase Agreement between Kaiser Foundation Health Plan of Texas, A Texas Non-Profit Corporation and HMO Texas, L.C., a Texas Limited Liability Company, dated June 5, 1998, incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998.* (10.13) Asset Sale and Purchase Agreement between Permanente Medical Association of Texas, a Texas Professional Association and HMO Texas, L.C., a Texas Limited Liability Company, dated June 5, 1998, incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998.* (10.14) Amendment No. 2 to Asset Sale and Purchase Agreement between Kaiser Foundation Health Plan of Texas and Texas Health Choice, L.C. (formerly HMO Texas, L.C.), incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. Page 65 (21) Subsidiaries of the Registrant (listed herein): There is no parent of the Registrant. The following is a listing of the active subsidiaries of the Registrant: Jurisdiction of Incorporation Sierra Health and Life Insurance Company, Inc. California Health Plan of Nevada, Inc. Nevada Sierra Health-Care Options, Inc. Nevada Behavioral Healthcare Options, Inc. Nevada Family Health Care Services Nevada Family Home Hospice, Inc. Nevada Southwest Medical Associates, Inc. Nevada Sierra Medical Management, Inc. and Subsidiaries Nevada Southwest Realty, Inc. Nevada Sierra Health Holdings, Inc. (Texas Health Choice, L.C.) Nevada (Texas) Sierra Texas Systems, Inc. Texas CII Financial, Inc., and Subsidiaries California Northern Nevada Health Network, Inc. Nevada Intermed, Inc. Arizona Prime Holdings, Inc. and Subsidiaries Nevada Sierra Military Health Services, Inc. Delaware Sierra Home Medical Products, Inc. Nevada Nevada Administrators, Inc. Nevada Med One Health Plan, Inc. Nevada (23.1) Consent of Deloitte & Touche LLP (27.1) Financial Data Schedule -- 1999 (99) Registrant's current report on Form 8-K dated March 15, 2000, incorporated herein. All other Exhibits are omitted because they are not applicable. (b) Reports on Form 8-K (d) Financial Statement Schedules The Exhibits set forth in Item 14 (a)(2) are filed herewith. *The agreements contain certain schedules and exhibits which were not included in this filing. The Company will furnish supplementally a copy of any omitted schedule or exhibit to the Commission upon request. Page 66 SIGNATURES 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. By: /S/ ANTHONY M. MARLON ------------------------ Anthony M. Marlon, M.D. Date: March 24, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /S/ ANTHONY M. MARLON, M.D. Chief Executive Officer March 24, 2000 - ------------------------------------------ Anthony M. Marlon, M.D. and Chairman of the Board (Chief Executive Officer) /S/ PAUL H. PALMER Vice President of Finance, March 24, 2000 - ------------------------------------------ Paul H. Palmer Chief Financial Officer, and Treasurer (Chief Accounting Officer) /S/ ERIN E. MACDONALD President and March 24, 2000 - ------------------------------------------ Erin E. MacDonald Chief Operating Officer Director /S/ CHARLES L. RUTHE Director March 24, 2000 - ------------------------------------------ Charles L. Ruthe /S/ WILLIAM J. RAGGIO Director March 24, 2000 - ------------------------------------------ William J. Raggio /S/ THOMAS Y. HARTLEY Director March 24, 2000 - ------------------------------------------ Thomas Y. Hartley
Page 67 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS - Parent Company Only
December 31, 1999 1998 ---------------- ---------- CURRENT ASSETS: Cash and Cash Equivalents .......................................... $ 194,000 $ 7,945,000 Short-term Investments.............................................. 1,149,000 3,919,000 Prepaid Expenses and Other Current Assets........................... 32,606,000 9,189,000 ------------- -------------- Total Current Assets.......................................... 33,949,000 21,053,000 PROPERTY AND EQUIPMENT - NET ............................................ 71,121,000 45,699,000 EQUITY IN NET ASSETS OF SUBSIDIARIES .................................... 341,994,000 375,910,000 NOTES RECEIVABLE FROM SUBSIDIARIES ...................................... 9,517,000 9,677,000 GOODWILL ................................................................ 2,188,000 2,275,000 OTHER ................................................................... 50,271,000 30,817,000 ------------- ------------- TOTAL ASSETS ............................................................ $509,040,000 $485,431,000 ============ ============ CURRENT LIABILITIES: Accounts Payable and Other Accrued Liabilities ..................... $ 41,212,000 $ 24,422,000 Current Portion of Long-term Debt .................................. 393,000 393,000 ---------------- --------------- Total Current Liabilities .................................... 41,605,000 24,815,000 LONG-TERM DEBT (Less Current Portion).................................... 160,000,000 139,429,000 OTHER LIABILITIES ....................................................... 29,023,000 17,473,000 -------------- -------------- TOTAL LIABILITIES ....................................................... 230,628,000 181,717,000 ------------- ------------- STOCKHOLDERS' EQUITY: Capital Stock ...................................................... 142,000 141,000 Additional Paid-in Capital ......................................... 175,915,000 173,583,000 Treasury Stock ..................................................... (22,789,000) (14,821,000) Accumulated Other Comprehensive Income: Unrealized Holding (Loss) on Available-for-sale Investments ............................................. (16,063,000) (1,027,000) Retained Earnings .................................................. 141,207,000 145,838,000 ------------- ------------- Total Stockholders' Equity ................................... 278,412,000 303,714,000 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $509,040,000 $485,431,000 ============ ============ Note: Scheduled maturities of long-term debt, including the principal portion of obligations under capital leases, are as follows: Year Ending December 31, 2001........................................................... $ 393,000 2003........................................................... 160,000,000 ------------- Total...................................................... $160,393,000 ============
S-1 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENT OF OPERATIONS -- Parent Company Only
Year Ended December 31, ----------------------------------- 1999 1998 1997 ---------------- ------------------------- OPERATING REVENUES: Management Fees........................................ $52,109,000 $52,773,000 $47,303,000 Subsidiary Dividends................................... 9,700,000 4,085,000 1,700,000 Investment and Other Income............................ 4,600,000 5,564,000 6,688,000 ------------- ------------- ----------- Total Operating Revenues............................ 66,409,000 62,422,000 55,691,000 ------------ ------------ ----------- GENERAL AND ADMINISTRATIVE EXPENSES: Depreciation........................................... 6,311,000 5,329,000 3,707,000 Other.................................................. 43,789,000 34,715,000 26,799,000 Impairment, Settlement and Other Costs................. 14,552,000 4,569,000 29,350,000 ------------ ------------- ----------- Total General and Administrative.................... 64,652,000 44,613,000 59,856,000 INTEREST EXPENSE AND OTHER, NET............................ (12,741,000) (2,566,000) (676,000) EQUITY IN UNDISTRIBUTED (LOSS) EARNINGS OF SUBSIDIARIES........................ (10,461,000) 28,364,000 25,615,000 ----------- ------------ ----------- (LOSS) INCOME BEFORE INCOME TAXES.......................... (21,445,000) 43,607,000 20,774,000 BENEFIT (PROVISION) FOR INCOME TAXES.......................................... 16,814,000 (4,011,000) 3,467,000 ------------- ------------ ----------- NET (LOSS) INCOME.......................................... $(4,631,000) $39,596,000 $24,241,000 =========== =========== ===========
S-2 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF CASH FLOWS -- Parent Company Only
Year Ended December 31, ---------------------------------- 1999 1998 1997 -------------- -------------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) Income.................................................... $ (4,631,000) $39,596,000 $24,241,000 Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities: Depreciation and Amortization................................. 6,398,000 5,416,000 3,885,000 Equity in Undistributed Earnings of Subsidiaries.............. 10,461,000 (28,364,000) (25,615,000) Change in Assets and Liabilities.............................. (14,505,000) 8,021,000 8,638,000 ------------ ------------- ------------- Net Cash (Used For) Provided by Operating Activities...... (2,277,000) 24,669,000 11,149,000 ------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures, Net ........................................... (31,804,000) (22,294,000) (26,453,000) Decrease (Increase) in Investments................................... 2,655,000 (1,492,000) 15,552,000 Dividends from Subsidiaries.......................................... 9,700,000 4,085,000 1,700,000 Acquisitions, Net of Cash Acquired .................................. (3,000,000) (7,500,000) (3,145,000) Dispositions, Net of Cash Disposed .................................. 1,373,000 Decrease (Increase) in Net Assets in Subsidiaries.................... (7,080,000) (125,488,000) (30,816,000) ------------- ------------ ------------ Net Cash Used for Investing Activities .......................... (29,529,000) (151,316,000) (43,162,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Long-term Borrowing ................................... 79,000,000 166,000,000 25,000,000 Reductions in Long-term Obligations and Payments on Capital Leases....................................... (49,469,000) (45,424,000) (480,000) Proceeds from Note Receivable to Subsidiaries........................ 160,000 67,000 60,000 Purchase of Treasury Stock .......................................... (7,968,000) (9,220,000) (5,471,000) Exercise of Stock in Connection with Stock Plans..................... 2,332,000 8,054,000 10,258,000 -------------- ------------ ------------ Net Cash Provided by Financing Activities........................ 24,055,000 119,477,000 29,367,000 ------------- ----------- ------------ Net Decrease in Cash and Cash Equivalents.................................. (7,751,000) (7,170,000) (2,646,000) Cash and Cash Equivalents at Beginning of Year............................. 7,945,000 15,115,000 17,761,000 -------------- ------------ ------------ Cash and Cash Equivalents at End of Year................................... $ 194,000 $ 7,945,000 $15,115,000 ============== ============ =========== Supplemental condensed statements of cash flows information: Cash Paid During the Year for Interest (Net of Amount Capitalized).......................................... $ 11,210,000 $ 2,030,000 $ 632,000 Cash (Received) Paid During the Year for Income Taxes...................... (4,702,000) 14,788,000 7,916,000 Noncash Investing and Financing Activities: Stock Issued for Exercise of Options and Related Tax Benefits......................................... 1,000 1,284,000 2,004,000 Liabilities Assumed in Connection with Corporate Acquisition....................................... 1,233,000
S-3 SIERRA HEALTH SERVICES, INC. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY -- CASUALTY INSURANCE (amounts in thousands)
Gross Reserves Deferred for Unpaid Policy Claims and Discount if any Gross Acquisition Adjustment Deducted in Unearned Earned Affiliation With Costs Expenses Column C Premiums Premiums Registrant Column A Column B Column C Column D Column E Column F - ------------------- -------- -------- -------- -------- -------- Consolidated Property and Casualty Entities of CII Financial, Inc. for Years Ended: December 31, 1999........ $2,378 $244,394 -- $13,300 $146,698 December 31, 1998........ 1,804 212,263 -- 11,158 154,104 December 31, 1997........ 1,800 202,699 -- 11,285 134,262
Claims & Claim Adjustment Amortization Expenses Incurred of Deferred Paid Claims Net Related to Policy and Claims Direct -------------------------- Investment (1) (2) Acquisition Adjustment Premiums Affiliation With Income Current Prior Year Costs Expenses Written Registrant Column A Column G Year Column H Column I Column J Column K - ------------------- -------- ---------- -------- -------- -------- -------- Consolidated Property and Casualty Entities of CII Financial, Inc. for Years Ended: December 31, 1999........ $15,772 $51,541 $ 9,920 $11,260 $101,622 $148,856 December 31, 1998........ 18,241 103,990 (9,643) 24,783 101,524 153,914 December 31, 1997........ 16,780 102,301 (8,970) 26,211 83,788 135,580
S-4 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES SECTION 403.04b RECONCILIATION OF BEGINNING AND ENDING LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES) (in thousands) Year ended December 31 ------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----- Losses and LAE Reserve........... $244,394 $212,263 $202,699 $187,776 $182,318 $190,962 $200,356 $178,460 $112,749 $ 67,593 $37,466 Less Reinsurance Recoverables (1).. 110,089 37,797 21,056 15,676 25,871 29,342 25,841 20,207 -------- -------- -------- -------- -------- -------- -------- -------- Net Loss and LAE Reserves ......... 134,305 174,466 181,643 172,100 156,447 161,620 174,515 158,253 Net Reserve Re-estimated as of: 1 Year Later ..... 184,386 172,000 163,130 141,163 139,741 160,562 154,388 140,815 83,841 37,463 2 Years Later .... 173,596 146,987 132,193 125,279 141,100 147,167 142,447 96,011 39,753 3 Years Later .... 140,563 113,766 117,792 126,483 134,747 143,433 97,142 43,528 4 Years Later .... 102,652 102,955 122,517 132,193 137,143 97,942 44,404 5 Years Later .... 95,997 114,443 131,112 135,249 94,852 45,027 6 Years Later .... 112,284 127,258 135,299 93,561 44,543 7 Years Later .... 125,936 133,729 93,672 43,741 8 Years Later .... 132,696 92,851 43,682 9 Years Later .... 92,104 43,682 10 Years Later.... 43,219 Cumulative Redundancy (Deficiency) ..... (9,920) 8,047 31,537 53,795 65,623 62,231 32,317 (19,947) (24,511) (5,753) Cumulative Net Paid as of: 1 Year Later ..... 80,416 71,933 56,977 45,731 44,519 50,210 50,360 57,611 39,118 14,820 2 Years Later .... 117,794 91,765 70,854 68,619 79,788 84,465 89,177 65,165 28,657 3 Years Later .... 113,054 83,674 80,645 94,865 104,569 108,849 76,988 36,579 4 Years Later .... 91,115 86,381 102,395 114,293 120,539 83,822 39,345 5 Years Later .... 89,601 106,012 119,462 126,100 87,618 41,043 6 Years Later .... 107,850 122,000 129,060 89,607 41,962 7 Years Later .... 123,291 130,649 90,721 42,541 8 Years Later .... 131,346 91,354 42,818 9 Years Later .... 91,598 43,054 10 Years Later.... 43,116 Net Reserve........... 134,305 174,466 181,643 172,100 56,447 161,620 174,515 Reins. Recoverables... 110,089 37,797 21,056 15,676 25,871 29,342 25,841 -------- ---------- -------- -------- -------- -------- -------- Gross Reserve ........ $244,394 212,263 202,699 187,776 182,318 190,962 200,356 ======== ------- ------- ------- ------- ------- ------- Net Re-estimated Reserve ............ 184,386 173,596 140,563 102,652 95,997 112,284 Re-estimated Reins. Recoverables ..... 43,732 18,822 15,537 15,484 13,894 11,834 --------- -------- ------- ------- ------- ------- Gross Re-estimated Reserve .......... 228,118 192,418 156,100 118,136 109,891 124,118 --------- -------- ------- ------- ------- -------- Gross Cumulative Redundancy (Deficiency).... $(15,855) $ 10,281 $ 31,676 $64,182 $ 81,071 $ 76,238 ======== ======== ======== ======= ======== ========
(1) Amounts reflect reinsurance recoverable under prospective reinsurance contracts only. The Company adopted Financial Accounting Standards Board Statement No. 113 ("FAS 113"), "Accounting and Reporting for Short-Duration and Long-Duration Reinsurance Contracts" for the year ended December 31, 1992. As permitted, prior financial statements have not been restated. Reinsurance recoverables on unpaid losses and LAE are shown as an asset on the balance sheets at December 31, 1999 and 1998. However, for purposes of the reconciliation and development tables, loss and LAE information are shown net of reinsurance. S-5 EX-10 2 Exhibit 10.7 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT is made and dated as of December 14, 1999 (the "Third Amendment") among SIERRA HEALTH SERVICES, INC. (the "Company"), the Banks party to the Credit Agreement referred to below, and BANK OF AMERICA, N.A., a national banking association, as Administrative Agent (the "Agent"), and amends that certain Credit Agreement dated as of October 30, 1998, as amended by that certain First Amendment dated as of November 23, 1998 and that certain Second Amendment to Credit Agreement dated as of January 15, 1999 (as further amended or modified from time to time, the "Credit Agreement"). RECITALS WHEREAS, the Company has requested the Agent and the Banks to amend certain provisions of the Credit Agreement, and the Agent and the Banks are willing to do so, on the terms and conditions specified herein; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Terms. All terms used herein shall have the same meanings as in the Credit Agreement unless otherwise defined herein. 2. Amendment. The Credit Agreement is hereby amended as follows: --------- 2.1 Amendments to Section 1.01. -------------------------- (a) The definition of the term "Applicable Commitment Fee Rate" in Section 1.01 of the Credit Agreement is hereby amended by adding the following clause to the end of the first sentence following the chart set forth therein: ", and from December 10, 1999 through the delivery of the Compliance Certificate for the fiscal quarter ending September 30, 2000, the Applicable Commitment Fee Rate shall be Level 6." (b) The definition of the term "Applicable Margin" in Section 1.01 of the Credit Agreement is hereby amended by adding the following clause to the end of the first sentence following the chart set forth therein: ", and from December 10, 1999 until the delivery of the Compliance Certificate for the fiscal quarter ending September 30, 2000, the Applicable Margin shall be Level 6." (c) The definition of the term "Sierra Adjusted EBITDA" in Section 1.01 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: 1 "Sierra Adjusted EBITDA" means, for any period, the net income of the Company and its consolidated Subsidiaries (other than, for the fiscal quarters ending on December 31, 1998, March 31, 1999, June 30, 1999 and September 30, 1999, HMO Texas and PMAT) plus, to the extent deducted in determining net income, total book taxes, Interest Expense, depreciation and amortization expenses and solely for the final fiscal quarter of 1998 and the first three fiscal quarters of 1999, the Specified Charges set forth on Schedule 1.01 and, in addition to the foregoing, all of the charges set forth in clauses (ii), (iii) and (iv) of the definition of the term "Specified Charges", minus any non-cash extraordinary gains. Sierra Adjusted EBITDA shall be calculated as of the last day of the most recently ended fiscal quarter of the Company for the period of four consecutive full fiscal quarters then ended (the "Measurement Period"), and such calculation shall include, on a pro forma basis, the Consolidated Adjusted EBITDA of any Person (other than Kaiser-Texas) acquired by the Company pursuant to an Acquisition during the Measurement Period, as if such Acquisition had occurred on the first day of the Measurement Period. (d) The definition of the term "Specified Charges" in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Specified Charges" means (i) those charges set forth in Schedule 1.01 hereof, (ii) up to $13,200,000 of one-time charges prior to taxes incurred by the Company in the first fiscal quarter of 1999, (iii) up to $47,000,000 of one-time charges (after adjustment for $2,000,000 of gains on a sale of pharmacy assets) incurred by the Company in the fourth quarter of 1999 ; provided, however that not more than $21,000,000 of such charges shall be attributable to premium deficiency reserves for Kaiser Texas and such charges for Kaiser Texas shall be applied only to the operations of Kaiser Texas in the year 2000 and to corporate- related support services provided by the Company for Kaiser Texas in the year 2000; and provided further that not more than $10,000,000 of such charges shall be used to strengthen CII's reserves, and (iv) up to $8,000,000 of charges incurred by the Company in connection with a bid for the TRICARE Region 6 MCS contract during the period from March 1, 2000 through June 30, 2001; provided, however, that not more than $500,000 of such charges may be incurred during the period from March 1, 2000 through March 31, 2000 and that not more than $2,500,000 of such charges may be incurred during any fiscal quarter thereafter. 2.2 Amendment to Section 7.02. Subsection (b) of Section 7.02 of the Credit Agreement is hereby amended by adding the following immediately prior to the end thereof: "plus, for each reporting period ending in the year 2000, a certificate from a Responsible Officer of the Company, showing the application of any charges taken by the Company for premium deficiency reserves for Kaiser Texas during such period;" 2 2.3 Amendment to Section 8.01. Subsection (h) of Section 8.01 of the Credit Agreement is hereby amended by deleting the figure "$100,000,000" and replacing it with the figure "$50,000,000". 2.4 Amendment to Section 8.08. Subsection (e) of Section 8.08 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "(e) Guarantees by the Company of (i) leases by its Subsidiaries of office and medical space and (ii) the obligations of Health Plan of Nevada, Inc. and Sierra Health and Life Insurance Company, Inc. under their insurance policies issued to clients of J&H Marsh & McLennan, Inc.; and" 2.5 Amendments to Section 8.10. Clauses (ii) and (iii) of Section 8.10 of the Credit Agreement are hereby amended and restated to read in their entirety as follows: (ii) in the case of purchases or redemptions of the Convertible Debt only, such purchases or redemptions are funded by CII from internally generated funds and not from funds advanced by the Company or any Subsidiary of the Company and the aggregate amount expended by CII in connection therewith does not exceed $10,000,000 during the period from December 10, 1999 through December 31, 2000, it being understood that no other Restricted Payments shall be made from December 10, 1999 through December 31, 2000; (iii) commencing January 1, 2001, if the Company's Leverage Ratio as of December 31, 2000 or as of the end of any fiscal quarter thereafter shall be less than 2.75 to 1.00, after giving effect to such Restricted Payment, the aggregate amount of all such Restricted Payments made in any fiscal year does not exceed $15,000,000, it being understood that until the Company's Leverage Ratio shall be less than 2.75 to 1.00, except for the purchases or redemptions permitted under clause (ii) above, no Restricted Payments shall be made; and (iv) after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments after the Closing Date does not exceed $50,000,000; 2.6 Amendment to Section 8.14. ------------------------- (a) Subsection (a) of Section 8.14 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (a) permit its Leverage Ratio at the end of any fiscal quarter set forth below to exceed the ratio set forth below opposite such date: 3
For the Quarter Ended: Ratio December 31, 1998 3.75 to 1.00 March 31, 1999 3.50 to 1.00 June 30, 1999 3.25 to 1.00 December 31, 1999 3.25 to 1.00 March 31, 2000 3.25 to 1.00 June 30, 2000 3.00 to 1.00 September 30, 2000 3.00 to 1.00 December 31, 2000 2.75 to 1.00 Thereafter 2.50 to 1.00
(b) Subsection (c) of Section 8.14 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (c) permit its Fixed Charges Coverage Ratio at the end of any fiscal quarter set forth below to be less than the ratio set forth below opposite such date:
For the Quarter Ended: Ratio December 31, 1998 1.50 to 1.00 March 31, 1999 1.50 to 1.00 June 30, 1999 1.50 to 1.00 December 31, 1999 1.50 to 1.00 March 31, 2000 1.75 to 1.00 June 30, 2000 2.00 to 1.00 September 30, 2000 2.00 to 1.00 December 31, 2000 2.00 to 1.00 March 31, 2001 2.25 to 1.00 June 30, 2001 2.50 to 1.00 September 30, 2001 2.75 to 1.00 December 31, 2001 2.75 to 1.00 Thereafter 3.00 to 1.00
3. Representations and Warranties. The Company represents and warrants to the Agent and the Banks that, on and as of the date hereof, and after giving effect to this Third Amendment: 3.1 Authorization. The execution, delivery and performance by the Company of this Third Amendment has been duly authorized by all necessary corporate action, and this Third Amendment has been duly executed and delivered by the Company. 3.2 Binding Obligation. This Third Amendment constitutes the legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws 4 affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 3.3 No Legal Obstacle to Amendment. The execution, delivery and performance of this Third Amendment will not (a) contravene the Organization Documents of the Company; (b) constitute a breach or default under any contractual restriction or violate or contravene any law or governmental regulation or court decree or order binding on or affecting the Company which individually or in the aggregate does or could reasonably be expected to have a Material Adverse Effect; or (c) result in, or require the creation or imposition of, any Lien on any of the Company's properties. No approval or authorization of any governmental authority is required to permit the execution, delivery or performance by the Company of this Third Amendment, or the transactions contemplated hereby. 3.4 Incorporation of Certain Representations. After giving effect to the terms of this Third Amendment, the representations and warranties of the Company set forth in Article VI of the Credit Agreement are true and correct in all respects on and as of the date hereof as though made on and as of the date hereof, except to the extent such representations relate solely to an earlier specified date. 3.5 Default. No Default or Event of Default under the Credit Agreement has occurred and is continuing. 4. Conditions, Effectiveness. The effectiveness of this Third Amendment shall be subject to the compliance by the Company with its agreements herein contained, and to the delivery of the following to Agent in form and substance satisfactory to Agent on or before December 20, 1999: 4.1 Execution of Third Amendment. The Company, the Agent and the Majority Banks shall have signed a copy hereof and the same shall have been delivered to the Agent. 4.2 Pledge Agreement Affirmations. The Agent shall have received affirmation letters in respect of the Pledge Agreement, substantially in the form of Exhibit A, from each Pledgor Subsidiary. 4.3 Amendment Fees. Payment to the Agent, for the pro rata benefit of each Bank approving this Third Amendment on or before 5:00 p.m., Pacific time, on December 20, 1999, of an amendment fee in an amount equal to .325% of the aggregate amount of the Commitments held by the Banks that have executed and delivered this Third Amendment by such time; and payment of all other fees and expenses of the Agent in connection with this Third Amendment (including, without limitation, the fees and expenses of the counsel to the Agent). 4.4 Other Evidence. Such other evidence with respect to the Company or any other person as the Agent or any Bank may reasonably request to establish the consummation of 5 the transactions contemplated hereby, the taking of all corporate action in connection with this Third Amendment and the Credit Agreement and the compliance with the conditions set forth herein. Upon satisfaction of the foregoing conditions, the effectiveness of this Third Amendment shall be retroactive to September 30, 1999. 5. Miscellaneous. ------------- 5.1 Effectiveness of the Credit Agreement and the Notes. Except as hereby expressly amended, the Credit Agreement and the Notes shall each remain in full force and effect, and are hereby ratified and confirmed in all respects on and as of the date hereof. 5.2 Waivers. This Third Amendment is limited solely to the matters expressly set forth herein and is specific in time and in intent and does not constitute, nor should it be construed as, a waiver or amendment of any other term or condition, right, power or privilege under the Credit Agreement or under any agreement, contract, indenture, document or instrument mentioned therein; nor does it preclude or prejudice any rights of the Agent or the Banks thereunder, or any exercise thereof or the exercise of any other right, power or privilege, nor shall it require the Majority Banks to agree to an amendment, waiver or consent for a similar transaction or on a future occasion, nor shall any future waiver of any right, power, privilege or default hereunder, or under any agreement, contract, indenture, document or instrument mentioned in the Credit Agreement, constitute a waiver of any other right, power, privilege or default of the same or of any other term or provision. 5.3 Counterparts. This Third Amendment may be executed in any number of counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. 5.4 Governing Law. This Third Amendment shall be governed by and construed in accordance with the laws of the State of California. 6 IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed and delivered as of the date first written above. SIERRA HEALTH SERVICES, INC. By: Name: Title: BANK OF AMERICA, N.A., as Administrative Agent By: Name: Title: BANK OF AMERICA, N.A., as a Bank By: Name: Title: FIRST UNION NATIONAL BANK, as a Bank By: Name: Title: CREDIT LYONNAIS NEW YORK BRANCH, as a Bank By: Name: Title: 7 BANK ONE, NA, as a Bank By: Name: Title: WELLS FARGO BANK, N.A., as a Bank By: Name: Title: UNION BANK OF CALIFORNIA, N.A., as a Bank By: Name: Title: DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a Bank By: Name: Title: By: Name: Title: EXHIBIT A to Third Amendment to Credit Agreement December 14, 1999 Sierra Health Services, Inc. Sierra Medical Management, Inc. Prime Holdings, Inc. c/o Sierra Health Services, Inc. 2724 North Tenaya Way Las Vegas, Nevada 89128 Re: Sierra Health Services, Inc. Gentlemen: Please refer to (1) the Credit Agreement, dated as of October 30, 1998, as amended by that certain First Amendment dated as of November 23, 1998 and that certain Second Amendment dated as of January 15, 1999 (the "Credit Agreement"), by and among Sierra Health Services, Inc., as the Borrower, the commercial lending institutions party thereto (collectively, the "Lenders") and Bank of America, N.A., as agent (herein, in such capacity, called the "Agent") and (2) the Pledge Agreements dated October 30, 1998 from each of the addressees in favor of the Lenders and the Agent (the "Pledge Agreements"). Pursuant to an amendment dated of even date herewith, a copy of which is attached hereto, certain terms of the Credit Agreement were amended. We hereby request that you (i) acknowledge and reaffirm all of your obligations and undertakings under your Pledge Agreement and (ii) acknowledge and agree that your Pledge Agreement is and shall remain in full force and effect in accordance with the terms thereof. Please indicate your agreement to the foregoing by signing in the space provided below, and returning the executed copy to the undersigned. BANK OF AMERICA, N.A., as Agent By:______________________________ Title: Acknowledged and Agreed to as of the date hereof SIERRA HEALTH SERVICES, INC. SIERRA MEDICAL MANAGEMENT, INC. By:____________________________ Its:___________________________ PRIME HOLDINGS, INC. By:____________________________ Its:___________________________ EX-10 3 Exhibit 10.8(3) EMPLOYMENT AGREEMENT This Agreement is made this 10th day of December 1999 , by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and William R. Godfrey , (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Executive Vice President, Administrative Services, and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 1 2. Employee shall perform such duties as are assigned by the President of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's President or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 5 year period starting December 10, 1999 and terminating December 31, 2004 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 2004 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 2004, at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. 2 ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of Employer at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the benefits available under said programs. Notwithstanding this subparagraph, Employer shall have the right to retroactively amend Employer's policies concerning vacation and paid time off accruals. 3 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any public exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of 4 interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. 5 ARTICLE VI NON-COMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such 6 harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. 7 (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or 8 remedies, whether in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Non-Competition Agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee is terminated during such sixty (60) day notice period, Employee shall be entitled to be paid his customary salary during the remainder of the notice period. If Employee 9 shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder, or subsequent to the termination of this Agreement or any similar agreements, without cause, except as otherwise set forth in Paragraphs 6 and 7 of this Article, Employee shall be entitled to twelve (12) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, as set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care, dental, vision and life coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 30 days, 37 1/2% after the first 60 days, and the remaining 37 1/2% at the end of 180 days, except in the event of a change in control. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments or such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall 10 be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment for Cause, which is defined as (1) Employee's conduct that is materially detrimental to Employer's reputation or business relationships, or (2) Employee's misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 11 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more 12 of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by Employer that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by Employer within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of Employer's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, Employer has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after 13 the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 or 7 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 14 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. 15 ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. 16 ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. 17 ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of 18 Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. 19 IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ President P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ William R. Godfrey 9520 Coral Way Las Vegas, NV 89117 20 EX-10 4 Exhibit 10.8(4) EMPLOYMENT AGREEMENT This Agreement is made this 10th day of December 1999 , by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and Laurence S. Howard, (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Sr. Vice President, HMO and Insurance Operations, and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 1 2 Employee shall perform such duties as are assigned by the President of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's President or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 5 year period starting December 10, 1999 and terminating December 31, 2004 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 2004 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 2004, at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. 2 ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of Employer at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the benefits available under said 3 programs. Notwithstanding this subparagraph, Employer shall have the right to retroactively amend Employer's policies concerning vacation and paid time off accruals. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any public exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in 4 real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. 5 ARTICLE VI NON-COMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such 6 harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. 7 (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any 8 rights or remedies, whether in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Non-Competition Agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee is terminated during such sixty (60) day notice period, Employee shall be entitled to be paid his customary salary during the remainder of the notice period. If Employee 9 shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder, or subsequent to the termination of this Agreement or any similar agreements, without cause, except as otherwise set forth in Paragraphs 6 and 7 of this Article, Employee shall be entitled to twelve (12) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, as set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care, dental, vision and life coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 30 days, 37 1/2% after the first 60 days, and the remaining 37 1/2% at the end of 180 days, except in the event of a change in control. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments or such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall 10 be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment for Cause, which is defined as (1) Employee's conduct that is materially detrimental to Employer's reputation or business relationships, or (2) Employee's misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 11 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% 12 or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by Employer that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by Employer within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of Employer's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, Employer has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after 13 the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 or 7 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 14 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. 15 ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. 16 ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. 17 ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of 18 Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. 19 IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ President P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ Laurence S. Howard 7429 Bush Garden Las Vegas, NV 89129 20 EX-10 5 Exhibit 10.8(11) SIERRA HEALTH SERVICES, INC. DEFERRED COMPENSATION PLAN Effective May 1, 1996, as Amended and Restated January 1, 2000 TABLE OF CONTENTS
Page Purpose ....................................................................................................... 1 ARTICLE 1 Definitions.................................................................................. 1 ARTICLE 2 Selection, Enrollment, Eligibility........................................................... 6 2.1 Selection by Committee....................................................................... 6 2.2 Enrollment Requirements...................................................................... 7 2.3 Eligibility; Commencement of Participation................................................... 7 2.4 Termination of Participation and/or Deferrals................................................ 7 ARTICLE 3 Deferral Commitments/Company Matching/Crediting/Taxes........................................ 7 3.1 Minimum Deferral............................................................................. 7 3.2 Maximum Deferral............................................................................. 8 3.3 Election to Defer; Effect of Election Form................................................... 8 3.4 Withholding of Annual Deferral Amounts....................................................... 9 3.5 Annual Company Matching Amount............................................................... 9 3.6 Annual Company Restoration Amount........................................................... 10 3.7 Vested Company Matching Account, Vested Company Restoration Account, and Deferral Account........................................... 10 3.8 Crediting/Debiting of Account Balances....................................................... 10 3.9 FICA, Withholding and Other Taxes............................................................ 12 3.10 Rollovers From Prior Deferred Compensation Plan.............................................. 13 ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election................................................................. 13 4.1 Short-Term Payout............................................................................ 13 4.2 Other Benefits Take Precedence Over Short-Term Payout........................................ 13 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies........................ 14 4.4 Withdrawal Election.......................................................................... 14 ARTICLE 5 Retirement Benefit........................................................................... 14 5.1 Retirement Benefit........................................................................... 14 5.2 Payment of Retirement Benefit................................................................ 14 5.3 Death Prior to Completion of Retirement Benefit.............................................. 15 ARTICLE 6 Pre-Retirement Survivor Benefit.............................................................. 15 6.1 Pre-Retirement Survivor Benefit.............................................................. 15 6.2 Payment of Pre-Retirement Survivor Benefit................................................... 15 ARTICLE 7 Termination Benefit.......................................................................... 15 7.1 Termination Benefit.......................................................................... 15 7.2 Payment of Termination Benefit............................................................... 15 ARTICLE 8 Disability Waiver and Benefit................................................................ 16 8.1 Disability Waiver............................................................................ 16 8.2 Continued Eligibility; Disability Benefit.................................................... 16 ARTICLE 9 Beneficiary Designation...................................................................... 17 9.1 Beneficiary.................................................................................. 17 9.2 Beneficiary Designation; Change; Spousal Consent.............................................. 17 9.3 Acknowledgment............................................................................... 17 9.4 No Beneficiary Designation................................................................... 17 9.5 Doubt as to Beneficiary...................................................................... 18 9.6 Discharge of Obligations..................................................................... 18 ARTICLE 10 Leave of Absence; Consulting................................................................. 18 10.1 Paid Leave of Absence........................................................................ 18 10.2 Unpaid Leave of Absence...................................................................... 18 10.3 Consulting Arrangements...................................................................... 18 ARTICLE 11 Termination, Amendment or Modification....................................................... 19 11.1 Termination.................................................................................. 19 11.2 Amendment.................................................................................... 19 11.3 Plan Agreement............................................................................... 20 11.4 Effect of Payment............................................................................ 20 ARTICLE 12 Administration............................................................................... 20 12.1 Committee Duties............................................................................. 20 12.2 Agents........................................................................................ 20 12.3 Binding Effect of Decisions.................................................................. 20 12.4 Indemnity of Committee....................................................................... 20 12.5 Employer Information......................................................................... 21 ARTICLE 13 Other Benefits and Agreements................................................................ 21 13.1 Coordination with Other Benefits............................................................. 21 ARTICLE 14 Claims Procedures............................................................................ 21 14.1 Presentation of Claim........................................................................ 21 14.2 Notification of Decision..................................................................... 21 14.3 Review of a Denied Claim..................................................................... 22 14.4 Decision on Review........................................................................... 22 14.5 Legal Action................................................................................. 22 ARTICLE 15 Trust........................................................................................ 22 15.1 Establishment of the Trust................................................................... 22 15.2 Interrelationship of the Plan and the Trust.................................................. 23 15.3 Distributions From the Trust................................................................. 23 ARTICLE 16 Miscellaneous................................................................................ 23 16.1 Unsecured General Creditor................................................................... 23 16.2 Employer's Liability......................................................................... 23 16.3 Nonassignability............................................................................. 23 16.4 Not a Contract of Employment................................................................. 24 16.5 Furnishing Information....................................................................... 24 16.6 Terms........................................................................................ 24 16.7 Captions..................................................................................... 24 16.8 Governing Law................................................................................ 24 16.9 Notice....................................................................................... 24 16.10 Successors................................................................................... 25 16.11 Spouse's Interest............................................................................ 25 16.12 Validity..................................................................................... 25 16.13 Incompetent.................................................................................. 25 16.14 Court Order.................................................................................. 25 16.15 Distribution in the Event of Taxation........................................................ 25 16.16 Legal Fees To Enforce Rights After Change in Control......................................... 26
SIERRA HEALTH SERVICES, INC. DEFERRED COMPENSATION PLAN Effective May 1, 1996, as Amended and Restated January 1, 2000 Purpose The purpose of this Plan is to provide specified benefits to a select group of management or highly compensated Employees who contribute materially to the continued growth, development and future business success of the Sierra Health Services, Inc., a Nevada corporation, and its subsidiaries (including lower-tier subsidiaries), if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 Definitions For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean, with respect to a Participant, the sum of (i) the Deferral Account plus (ii) the Vested Company Matching Account plus (iii) the Vested Company Restoration Account. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant pursuant to this Plan. 1.2 "Annual Bonus" shall mean any annual cash compensation in addition to Base Annual Salary relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, payable to a Participant as an Employee under any Employer's annual bonus and incentive plans, including any such bonuses payable to physician employees. 1.3 "Annual Company Matching Amount" for any one Plan Year shall be the amount determined in accordance with Section 3.5. 1.4 "Annual Company Restoration Amount" for any one Plan Year shall be the amount determined in accordance with Section 3.6. 1.5 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary and/or Annual Bonus that a Participant elects to have, and is, deferred in accordance with 1 Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.6 "Base Annual Salary" shall mean the annual cash compensation relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year including bonuses (other than the Annual Bonus), commissions, and overtime, but excluding relocation expenses, incentive payments, non-monetary awards, fringe benefits, retainers, directors fees and other fees, severance allowances, pay in lieu of vacations, insurance premiums paid by an Employer, insurance benefits paid to the Participant or his or her beneficiary, Employer contributions to qualified or nonqualified plans and automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), or 402(h) pursuant to plans established by any Employer; provided however that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. 1.7 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.8 "Beneficiary Designation Form" shall mean the form, established from time to time by the Committee, that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.9 "Board" shall mean the board of directors of the Company. 1.10 "Change in Control" shall mean a transaction or event in which, after the effective date of the Plan, (i) the Company shall merge or consolidate with any other corporation and shall not be the surviving corporation; (ii) the Company shall transfer all or substantially all of its assets to any other person; or (iii) any person shall have become the beneficial owner of more than 50% of the voting power of outstanding voting securities of the Company. 1.11 "Claimant" shall have the meaning set forth in Section 14.1. 1.12 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.13 "Committee" shall mean the committee described in Article 12. 2 1.14 "Company" shall mean Sierra Health Services, Inc., a Nevada corporation. 1.15 "Company Matching Account" shall mean the sum of all of a Participant's Annual Company Matching Amounts plus amounts credited and debited in accordance with all the applicable crediting provisions of this Plan, less all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Company Matching Account. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan. 1.16 "Company Restoration Account" shall mean the sum of all of a Participant's Annual Company Restoration Amounts plus amounts credited and debited in accordance with all the applicable provisions of the Plan, less all distributions made to the Participant or his or her Beneficiary pursuant to the Plan that relate to his or her Company Restoration Account. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan. 1.17 "Deferral Account" shall mean the sum of all of a Participant's Annual Deferral Amounts, plus amounts credited and debited in accordance with all the applicable provisions of the Plan, less all distributions made to the Participant or his or her Beneficiary pursuant to the Plan that relate to his or her Deferral Account. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan. 1.18 "Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall be credited and debited with additional amounts in accordance with Section 3.8 below, even if such amount is being paid out in installments. The amounts so deferred adjusted to reflect amounts credited and debited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. 3 1.19 "Disability" shall mean a period of disability during which a Participant qualifies for disability benefits under the Participant's Employer's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for disability benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. If the Participant's Employer does not sponsor such a plan, or discontinues to sponsor such a plan, Disability shall be determined by the Committee in its sole discretion. 1.20 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.21 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.22 "Employee" shall mean a person who is an employee of any Employer. 1.23 "Employer(s)" shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan. 1.24 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.25 "401(k) Plan" shall be that certain Sierra Health Services, Inc. Profit Sharing/401(k) Plan & Trust, dated January 1, 1989 and adopted by the Company. 1.26 "Monthly Installment Method" shall be an installment payment method over the duration selected by the Participant in accordance with this Plan, calculated as follows: The Participant's Account Balance, as of the date of the Participant's Retirement, death, Disability or Termination of Employment, shall be multiplied by a fraction, the numerator of which is 1 and the denominator of which is the number of periods over which the installment payments shall be paid. The result of this multiplication shall be the amount of each installment payment for the Plan Year in which the Participant Retired, died, suffered a Disability or experienced a Termination of Employment and this amount shall be paid starting on the first day of the month following the Participant's Retirement, death, Disability or Termination of Employment and shall continue to be paid on the first day of each month thereafter during that Plan Year. For each subsequent Plan Year during the installment payment period, the Participant's Account Balance shall be determined as of January 1 of that Plan Year, in accordance with Section 3.8, after taking into account all previous installment payments, and such balance shall be multiplied by the fraction described above, except that the denominator shall be the number of remaining periods over which the installment payments are to be paid. The resulting amount shall be the amount of each installment payment for the Plan Year, which amount shall be paid on the first day of each month during the Plan Year. If a 4 Participant has a positive Account Balance after the end of the elected installment payment period, the remaining Account Balance shall be paid in a lump sum on the first day of the month following the month in which the installment period ends. If any installment, if paid, would reduce the Participant's Account Balance to zero or below, that installment payment shall be reduced so that the Participant's Account Balance does not go below zero and all future installment payments shall cease. 1.27 "Participant" shall mean any person (i) who, as an Employee, is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan, even if he or she has an interest in the Participant's benefits under the Plan under applicable law or as a result of property settlements resulting from legal separation or divorce. 1.28 "Plan" shall mean the Company's Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time. 1.29 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. The terms of any Plan Agreement may vary any of the terms set forth in this Plan and such changes shall be binding on the Employer and the Participant if the Plan Agreement is signed by the Participant and accepted by the Employer. The Plan Agreement executed by a Participant and accepted by the Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern the agreement between the parties. 1.30 "Plan Year" shall, for the first Plan Year, begin on May 1, 1996 and end on December 31, 1996. For each Plan Year thereafter, the Plan Year shall begin on January 1 of each year and continue through December 31. 1.31 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.32 "Retirement," "Retire(s)" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after age sixty-five (65) or on or after age fifty-five (55) with ten (10) Years of Service, subject to Section 10.3. 1.33 "Retirement Benefit" shall mean the benefit set forth in Article 5. 5 1.34 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.35 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.36 "Termination of Employment" shall mean the ceasing of employment with all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence, subject to Section 10.3. 1.37 "Trust" shall mean the trust established pursuant to that certain Master Trust Agreement, dated as of May 1, 1996 between the Company and the trustee named therein, as amended from time to time. 1.38 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.39 "Unvested Accrued Amounts" shall mean the part of a Participant's Company Matching Account and Company Restoration Account which is not vested under Section 3.7. 1.40 "Vested Company Matching Account" shall have the meaning set forth in Section 3.7. 1.41 "Vested Company Restoration Account" shall have the meaning set forth in Section 3.7. 1.42 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. ARTICLE 2 Selection, Enrollment, Eligibility 2.1 Selection by Committee. Participation in the Plan shall be limited to a select group of management or highly compensated Employees of the Employers, as determined by the Committee in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees to participate in the Plan. For this purpose, the term "highly compensated" shall be interpreted in a manner consistent with regulations and other guidance under the Code. 6 2.2 Enrollment Requirements. As a condition to participation, each selected Employee shall complete, execute and return to the Committee, within 30 days of selection, a Plan Agreement, an Election Form and a Beneficiary Designation Form. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. 2.3 Eligibility; Commencement of Participation. Provided an Employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within 30 days of selection, that Employee shall commence participation in the Plan on the first day of the next month which begins following the date the Employee completes all enrollment requirements. If an Employee fails to meet all such requirements within the required 30 day period, that Employee shall not be eligible to participate in the Plan until the first day of a month during the Plan Year following the delivery to and acceptance by the Committee of the required documents. 2.4 Termination of Participation and/or Deferrals. If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Section 2.1 or otherwise under Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant's then Account Balance, determined as if there has occurred a Termination of Employment and terminate the Participant's participation in the Plan. If the Committee chooses to terminate the Participant's participation in the Plan, the Committee may, in its sole discretion, reinstate the Participant to full Plan participation at such time in the future as the Participant again becomes a member of the select group described above. The foregoing notwithstanding, if the Participant ceases to qualify as "highly compensated" under Section 2.1, the Committee may permit the Participant to continue participation for a reasonable period thereafter in order to permit the Participant an opportunity to reattain "highly compensated" status. ARTICLE 3 Deferral Commitments/Company Matching/Crediting/Taxes 3.1 Minimum Deferral. ---------------- (a) Minimum. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, a minimum of $2,000 from either his or her Base Annual Salary or Annual Bonus. If an election is made for less than the stated minimum amount, or if no election is made, the amount deferred shall be zero. 7 (b) Short Plan Year. If a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the minimum deferral shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12. 3.2 Maximum Deferral. ---------------- (a) Maximum. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary and/or Annual Bonus up to the following maximum percentages for each deferral elected: Maximum Deferral Amount Base Annual Salary 90% Annual Bonus 90% (b) Short Plan Year. If a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year itself, for such Plan Year only, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary and/or Annual Bonus that accrue after the date of entry into the Plan, a dollar amount up to an amount equal to the limits set forth in Section 3.2(a) above multiplied by such Participant's total amount of Base Annual Salary and/or Annual Bonus for the entire Plan Year. 3.3 Election to Defer; Effect of Election Form. ------------------------------------------ (a) First Plan Year. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.3 above), and accepted by the Committee. (b) Subsequent Plan Years. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no Election Form is timely delivered for a Plan Year, no Annual Deferral Amount shall be withheld for that Plan Year. 8 3.4 Withholding of Annual Deferral Amounts. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld in equal amounts from each regularly scheduled Base Annual Salary payroll, commencing at the earliest practicable payroll after participation begins. The Annual Bonus portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus is or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. 3.5 Annual Company Matching Amount. With respect to Plan Years prior to and including the 1999 Plan Year, if, and only if, a Participant participates in the 401(k) Plan to the maximum extent possible under the limits applicable to the Plan for the Plan Year, the Participant's Annual Company Matching Amount for such Plan Year shall be equal to 50% of the Participant's Annual Deferral Amount for such Plan Year, up to an amount that does not exceed the lesser of 5% of the Participant's Base Annual Salary or 50% of the IRC 402(g)(i) limit in the effect for the Plan Year, reduced by the amount of any Company matching contributions made to the 401(k) Plan on his or her behalf for the plan year of the 401(k) Plan that corresponds to the Plan Year. The Annual Company Matching Amount shall be credited to the Participant's Company Matching Account as of the first day of February of the Plan Year following the Plan Year to which it relates. Notwithstanding the above, if a Participant is not employed by an Employer as of the last day of a Plan Year other than by reason of his or her Retirement, Disability or death, the Annual Company Matching Amount for such Plan Year shall be zero. In the event of Retirement, Disability or death, a Participant shall be credited with the Annual Company Matching Amount for the Plan Year in which he or she Retires, dies or becomes disabled. The foregoing notwithstanding, for any Plan Year beginning after 1999, no Annual Company Matching Amount shall be credited to the Participant's Company Matching Account, although prior Annual Company Matching Amounts credited to such Account shall remain subject to the Plan. 3.6 Annual Company Restoration Amount. The Participant's Annual Company Restoration Amount for each Plan Year beginning on or after January 1, 1997 shall be equal to the amount of employer contributions other than matching contributions under the 401(k) Plan which would have been made on the Participant's behalf and allocated to the Participant's account on or after July 1, 1997 for such Plan Year but for one or more limitations imposed by the 401(k) Plan pursuant to the Code, including but not limited to any such amounts resulting from the application of the compensation limitations contained in Code Section 401(a)(17) or the limitations contained in Code Section 415. For purposes of this Section 3.6, employer contributions under the 401(k) Plan exclude contributions resulting from the cash or deferred arrangement under the 401(k) Plan but include contributions resulting from the reallocation of prior employer contributions (other than matching contributions) forfeited by other 401(k) Plan participants. The Annual Company Restoration Amount shall be credited to the Participant's Company Restoration Account as of the date or dates such amounts would have been allocated to the Participant's account(s) under the 401(k) Plan if such amounts had in fact been allocated under the 401(k) Plan. The foregoing notwithstanding the above, if a Participant is not employed by an Employer as of the last day of a Plan Year other than 9 by reason of his or her Retirement, Disability or death, the Annual Company Restoration Amount for such Plan Year shall be zero. In the event of Retirement, Disability or death, a Participant shall be credited with the Annual Company Restoration Amount for the Plan Year in which he or she Retires, dies or becomes disabled. The Participant's Annual Company Restoration Amount for each Plan Year prior to the Plan Year beginning January 1, 1997 shall be zero. It is understood that the Company will discontinue employer contributions other than matching contributions under the 401(k) Plan in Plan Years after 1999, so that no amount will be credited as an Annual Company Restoration Amounts in respect of such Plan Years. 3.7 Vested Company Matching Account, Vested Company Restoration Account and Deferral Account. With respect to all benefits under this Plan other than the Termination Benefit, a Participant's Vested Company Matching Account shall equal 100% of such Participant's Company Matching Account and a Participant's Vested Company Restoration Account shall equal 100% of such Participant's Company Restoration Account. With respect to the Termination Benefit, in the case of a Termination of Employment prior to July 1, 1999, the vesting of a Participant's Company Matching Account and Company Restoration Account shall be governed by the terms of this Plan as in effect at the time of such Termination of Employment. With respect to the Termination Benefit, in the case of a Termination of Employment on or after July 1, 1999, a Participant's Company Matching Account and Company Restoration Account shall vest on the basis of the Participant's Years of Service at the time the Participant experiences a Termination of Employment, in accordance with the following schedule for balances resulting from Company Matching Amounts and Company Restoration Amounts for the Plan Year after 1999: Vested Percentage of Years of Service at Date of Company Matching Account and Termination of Employment Company Restoration Account Less than 1 year 0% 1 year or more, but less than 2 33% 2 years or more, but less than 3 66% 3 years or more 100% The foregoing notwithstanding, after a Change in Control, a Participant's Vested Company Matching Account shall equal 100% of such Participant's Company Matching Account and a Participant's Vested Company Restoration Account shall equal 100% of such Participant's Company Restoration Account. A Participant's Deferral Account shall always be 100% vested. 3.8 Crediting/Debiting of Account Balances. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance (and to the Participant's Unvested Accrued Amounts) in accordance with the following rules: 10 (a) Election of Measurement Funds. A Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.8(c) below) to be used to determine the additional amounts to be credited or debited to his or her Account Balance (and Unvested Accrued Amounts) from the date on which the Participant commences participation in the Plan and continuing thereafter, unless changed in accordance with the next sentence. Commencing with the January 1 or July 1 ("Investment Election Date") that follows the Participant's commencement of participation in the Plan and on each subsequent Investment Election Date during which the Participant participates in the Plan, no later than the day before an Investment Election Date, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the amounts to be credited or debited to his or her Account Balance (and Unvested Accrued Amounts), or to change the portion of his or her Account Balance (and Unvested Accrued Amounts) allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply to the next Investment Election Date and continue thereafter, unless changed in accordance with the previous sentence. Notwithstanding the foregoing, the maximum transfer that may be made from the Declared Rate Measurement Fund to another Measurement Fund in any one Plan Year cannot exceed 20% of the maximum balance in the Participant's account in the Declared Rate Measurement Fund in the current Plan Year and the four prior Plan Years, provided that this restriction shall no longer apply upon termination of the Declared Rate Measurement Fund in accordance with Section 3.8(c). (b) Proportionate Allocation. In making any election described in Section 3.8(a) above, the Participant shall specify on the Election Form, in whole percentage points (1%), the percentage of his or her Account Balance (and Unvested Accrued Amounts) to be allocated to a Measurement Fund (as if the Participant was making an investment in that Measurement Fund with that portion of his or her Account Balance and Unvested Accrued Amounts). (c) Measurement Funds. The Participant may elect one or more measurement funds, based on certain mutual funds (the "Measurement Funds"), for the purpose of crediting or debiting amounts to his or her Account Balance (and Unvested Accrued Amounts). The Committee shall select the mutual funds that are to be used as Measurement Funds. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund at any time. Each such action will take effect as of the first day of the calendar quarter that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change. In addition, a Declared Rate Measurement Fund shall be maintained until December 31, 1999, under which interest shall be credited at a rate as specified by the Company on the November 1 of the year prior to the Plan Year for which the amount of interest is being determined; 11 provided, however, that as of January 1, 2000, the Declared Rate Measurement Fund will be terminated and all balances therein shall be transferred to such other Measurement Funds as may have been elected by the Participant or, in the absence of any election, to a Measurement Fund consisting of one or more Guaranteed Interest Contracts. (d) Crediting or Debiting Method. The performance of each selected Measurement Fund (either positive or negative) will be determined by the Committee in its sole discretion based on the performance of the Measurement Funds themselves or, in the case of the Declared Rate Measurement Fund (prior to its termination), based on the amount of accrued interest credited to the fund. A Participant's Account Balance (and Unvested Accrued Amounts) shall be credited or debited based on such performance of the Measurement Funds as determined by the Committee in its sole discretion. As of each Investment Election Date, the Committee shall distribute to the Participants a statement of their respective Account Balances (and Unvested Accrued Amounts). Furthermore, in the event of a Participant's termination of employment or any other event requiring a determination of the Participant's Benefit or the value of a Participant's Account Balance, the Account Balance shall be determined based on the performance of the relevant Measurement Fund(s) through the last date of the pay period during which the event occurs and shall not be further adjusted thereafter. (e) No Actual Investment. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation to his or her Account Balance (and Unvested Accrued Amounts) thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance (and Unvested Accrued Amounts) shall not be considered or construed in any manner as an actual investment of his or her Account Balance (or Unvested Accrued Amounts) in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance (and Unvested Accrued Amounts) shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company. 3.9 FICA, Withholding and Other Taxes. For each Plan Year in which an Annual Deferral Amount is being withheld or an Annual Company Matching Amount or Annual Company Restoration Amount is credited to a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and/or Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee 12 shall reduce the Annual Deferral Amount in order to comply with this Section 3.9. In addition, the Participant's Employer(s) or the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) or the Trust. 3.10 Rollovers From Prior Deferred Compensation Plan. A Participant who participated in the Company's prior nonqualified deferred compensation plan shall have the right, under such rules and at such times as are prescribed by the Committee, to roll over the benefit that the Participant is entitled to receive pursuant to such prior nonqualified deferred compensation plan so that such amount shall be held and administered pursuant to the terms of this Plan and shall be received at the same time that benefits are received pursuant to this Plan. ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election 4.1 Short-Term Payout. In connection with each election to defer an Annual Deferral Amount, a Participant may elect to receive a future "Short-Term Payout" from the Plan with respect to that Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount plus amounts credited or debited in the manner provided in Section 3.8 above on that amount, determined at the time of the Short-Term Payout becomes payable. If the Annual Deferral Amount is deferred in the 1999 Plan Year or an earlier Plan Year, each Short-Term Payout elected shall be paid, subject to the Deduction Limitation, within 60 days of the first day of the Plan Year that is at least four years after the last day of the Plan Year in which the Annual Deferral Amount is actually deferred, subject to the terms and conditions of this Plan. If the Annual Deferral Amount is deferred after the 1999 Plan Year, each Short-Term Payout elected shall be paid, subject to the Deduction Limitation, within 60 days of the first day of the Plan Year elected by the Participant that is two or more years after the last day of the Plan Year in which the Annual Deferral Amount is actually deferred, subject to the terms and conditions of this Plan. By way of example, if a Short-Term Payout is elected for amounts that are deferred in the Plan Year commencing January 1, 1997, the Short-Term Payout becomes payable within 60 days after January 1, 2002; if a Short-Term Payout is elected for amounts that are deferred in the Plan Year commencing January 1, 2000, the earliest that the Participant could elect to receive such Short-Term Payout would be 60 days after January 1, 2003 (although the Participant would be permitted to elect a greater number of years of deferral for the Short-Term Payout). 4.2 Other Benefits Take Precedence Over Short-Term Payout. Should an event occur that triggers a benefit under Articles 5, 6, 7 or 8, any Annual Deferral Amount, plus amounts credited or debited thereon, that is subject to a Short-Term Payout election under Section 13 4.1 shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article. 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation. 4.4 Withdrawal Election. A Participant may elect, at any time, to withdraw all of his or her Account Balance, less a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time, before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. If made before Retirement, Disability or death, a Participant's Withdrawal Amount shall be his or her Account Balance calculated as if there had occurred a Termination of Employment as of the day of the election. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate, the Participant's Unvested Accrued Amounts will be forfeited and the Participant shall not be eligible to participate in the Plan until the first month that begins more than one year after his or her participation in the Plan terminated, at which time he or she will be eligible to reenroll on terms similar to those applicable to a newly hired employee. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. ARTICLE 5 Retirement Benefit 5.1 Retirement Benefit. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance. 5.2 Payment of Retirement Benefit. A Participant, in connection with his or her commence ment of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to a Monthly Installment Method of 60, 120 or 180 months. The Participant may annually change his or her election to an 14 allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least one year prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Participant Retires, subject to Section 10.3 (which delays commencement of payment of the Retirement Benefit if the Participant enters into a consulting arrangement with the Company following the Participant's Retirement). Any payment made shall be subject to the Deduction Limitation. 5.3 Death Prior to Completion of Retirement Benefit. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of months and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if reques ted by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance. ARTICLE 6 Pre-Retirement Survivor Benefit 6.1 Pre-Retirement Survivor Benefit. Subject to the Deduction Limitation, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability. 6.2 Payment of Pre-Retirement Survivor Benefit. The Pre-Retirement Survivor Benefit shall be paid in the same manner and at the same time as specified in the election made by the Participant pursuant to Section 5.2. ARTICLE 7 Termination Benefit 7.1 Termination Benefit. Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance (i.e., determined based on Vested Company Matching Contributions and Vested Company Restoration Contributions) if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability. 7.2 Payment of Termination Benefit. The Termination Benefit shall be paid in a lump sum within 60 days of the Termination of Employment, subject to Section 10.3. 15 Notwithstanding the foregoing, a Participant may elect either (i) upon his election to participate in the Plan or (ii) at any time at least one year prior to Termination of Employment to receive the Termination Benefit in three, five, or ten annual installments. In such case, the Termination Benefit shall be paid in the applicable number of installments, commencing no later than 60 days after the Participant's Termination of Employment, subject to Section 10.3 (which delays commencement of payment of the Termination Benefit if the Participant enters into a consulting arrangement with the Company following the Participant's Termination of Employment). Any payment made shall be subject to the Deduction Limitation. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least one year prior to the Participant's Termination of Employment and is accepted by the Committee in its sole discretion. ARTICLE 8 Disability Waiver and Benefit 8.1 Disability Waiver. (a) Waiver of Deferral. A Participant who is determined by the Committee to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary and/or Annual Bonus for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan. Notwithstanding the foregoing, if the Disability is determined by the Committee to be expected to be of a short term duration, the Annual Deferral Amount shall continue to be withheld from a Participant's Base Annual Salary and/or Annual Bonus. (b) Return to Work. If a Participant returns to employment with an Employer, after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 8.2 Continued Eligibility; Disability Benefit. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed, and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right to, in its sole and absolute discretion and for purposes of this Plan only, and must in the case of a Participant who is otherwise eligible to Retire, deem the Participant to have 16 experienced a Termination of Employment, or in the case of a Participant who is eligible to Retire, to have Retired, at any time (or in the case of a Participant who is eligible to Retire, as soon as practicable) after such Participant is determined to be permanently disabled (i) under the Participant Employer's long-term disability plan (or would have been determined to be permanently disabled had he or she participated in that plan), or (ii) if such a plan does not exist, by the Committee in its sole discretion, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time the Committee's determination. The Disability Benefit shall be paid in the same manner and at the same time as specified in the election made by the Participant pursuant to Section 5.2, unless the Committee in its sole discretion elects at any time to pay such amount or any remaining amount in a lump sum payment. Any payment made shall be subject to the Deduction Limitation. ARTICLE 9 Beneficiary Designation 9.1 Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary for more than 50% of the Participant's benefits, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee (subject to any procedural requirements as may be imposed by the Committee). Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 9.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Committee or its designated agent. 9.4 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If 17 the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 9.5 Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge the Company, all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. ARTICLE 10 Leave of Absence; Consulting 10.1 Paid Leave of Absence. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 Unpaid Leave of Absence. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. 10.3 Consulting Arrangements. Other provisions of the Plan notwithstanding, if the Company enters into a consulting arrangement with a Participant effective upon the Participant's Retirement or Termination of Employment, the payment of the Retirement Benefit or Termination Benefit shall be delayed. In this case, the Participant will be treated as though employment continued until the consulting arrangement terminates for purposes of determining the time at which payment of the Retirement Benefit or Termination Benefit will commence. This provision will not limit the Participant's withdrawal rights under Section 4.3 or 4.4 during the pendency of the consulting arrangement, but the Participant will not be permitted to defer compensation payable in connection with such consulting arrangement under the Plan. Any determination of whether the Participant's severance from employment constitutes a Retirement or Termination of Employment shall be determined based on his or her circumstances at the time employment 18 terminates, without regard to any continued service pursuant to the consulting arrangement. ARTICLE 11 Termination, Amendment or Modification 11.1 Termination. Each Employer reserves the right to terminate the Plan at any time with respect to any or all of its Participants by the actions of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer shall terminate and their Account Balance, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum promptly after termination or pursuant to a Monthly Installment Method of up to 15 years, with amounts credited and debited during the installment period as provided herein, except that, if the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum promptly after termination. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum except that, if a Participant has elected, upon his election to participate in the Plan or at least one year prior to such termination of the Plan, to receive the benefits in three, five, or ten annual installments under Section 7.2, the Employer shall pay such benefits in the applicable number of annual installments commencing promptly after such termination. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan prior to such termination; provided however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or pursuant to a Monthly Installment Method using fewer months (except following a Change in Control in the case of Participant who has elected under Section 7.2 to receive the benefits in a three, five or ten annual installments). 11.2 Amendment. Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the actions of its board of directors; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification, or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of 19 the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or pursuant to a Monthly Installment Method using fewer months. 11.3 Plan Agreement. Despite the provisions of Sections 11.1 and 11.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the consent of the Participant. 11.4 Effect of Payment. The full payment of the applicable benefit under Section 4.4 or Articles 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. ARTICLE 12 Administration 12.1 Committee Duties. This Plan shall be administered by a Committee which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. The Committee may, in its sole discretion, waive or modify the length of the advance-election period a Participant is required to make an election as to the manner and timing of payment of Retirement or Termination Benefits under Sections 5.2 or 7.2 or in connection with the termination of the Plan under Section 11.1. 12.2 Agents. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.3 Binding Effect of Decisions. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 12.4 Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members. 20 12.5 Employer Information. To enable the Committee to perform its functions, each Employer shall supply full and timely information to the Committee on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require. ARTICLE 13 Other Benefits and Agreements 13.1 Coordination with Other Benefits. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 14 Claims Procedures 14.1 Presentation of Claim. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 Notification of Decision. The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; 21 (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3 below. 14.3 Review of a Denied Claim. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 Decision on Review. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 Legal Action. A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 15 Trust 15.1 Establishment of the Trust. The Company shall establish the Trust, and the each Employer shall at least annually transfer over to the Trust such assets as the Employer determines are necessary to provide, on a present value basis, for its future liabilities created with respect to all Annual Deferral Amounts, Company Matching Amounts and Company Restoration Amounts for such Employer's Participants for all periods prior to the transfer, as well as the credits and debits to the Participants' Account Balance (and 22 Unvested Accrued Amounts) for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer. 15.2 Interrelationship of the Plan and the Trust. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. 15.3 Distributions From the Trust. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan. ARTICLE 16 Miscellaneous 16.1 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. If any right of a Participant under the Plan would cause such Participant to be in constructive receipt or have the economic benefit of any funds or other assets such that the Participant would be subject to federal income taxation in respect of such funds or other assets prior to the Participant's actual receipt thereof as a Termination or Retirement Benefit or other payout of benefits under the Plan, such right of the Participant shall be restricted to the extent necessary so that the Participant does not have such constructive receipt or economic benefit. 16.2 Employer's Liability. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 16.3 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable, except that the foregoing shall not apply to any family support obligations set forth in a court order. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance 23 owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 16.4 Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Company or any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Company or any Employer or to interfere with the right of the Company or any Employer to discipline or discharge the Participant at any time. 16.5 Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.6 Terms. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.7 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.8 Governing Law. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Nevada without regard to its conflicts of laws principles. 16.9 Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: Sierra Health Services Deferred Compensation Plan Committee P.O. Box 15645 Las Vegas, Nevada 89114-5645 Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 24 Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 16.10 Successors. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 16.11 Spouse's Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.12 Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidly shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.13 Incompetent. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetency, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.14 Court Order. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Plan as the result of a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse's or former spouse's interest in the Plan to that spouse or former spouse. 16.15 Distribution in the Event of Taxation. (a) In General. If, for any reason, all or any portion of a Participant's benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available 25 funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. (b) Trust. If the Trust terminates in accordance with Section 3.7(e) of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. 16.16 Legal Fees To Enforce Rights After Change in Control. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of the Employer (which might then be composed of new members) or a shareholder of the Company or the Employer, or of any successor corporation might then cause or attempt to cause the Company, the Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, its Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Employer or any director, officer, shareholder or other person affiliated with the Company, the Employer or any successor thereto in any jurisdiction. IN WITNESS WHEREOF, the Company has signed this amended and restated Plan document as of January 1, 2000. SIERRA HEALTH SERVICES, INC., a Nevada corporation By: __________________________________ Title: _______________________________ 26 EX-10 6 Exhibit 10.8(16) SIERRA HEALTH SERVICES, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN You have been selected to participate in the Sierra Health Services, Inc. ("SHS" hereafter referred to as "the Company") Management Incentive Compensation Plan. The Management Incentive Compensation Plan is intended to reward key employee performance for assisting the Company in achieving financial success and maximizing shareholder value. Your participation in the Plan is subject to the Terms and Conditions, contained herein, and being employed in an eligible position as determined annually by the Company. The Plan is designed to reward Participants for meeting specific individual and Company objectives, and for assisting the Company in achieving specific financial objectives. TARGET PAYOUT: Participants will be eligible for an incentive payout expressed as a percent of base annual salary. If 100% of all objectives are achieved, Participants will be eligible for the following awards as a percent of the Participant's base annual salary: Corporate Staff Subsidiary/Division Staff Vice President 50% President, Region 50% President, Subsidiary 40% Associate Vice President 35% Vice President 25% - 30% Director 25% Director 15% - 20% PLAN DESIGN Corporate Staff Subsidiary/Regional Staff Company Financial Performance 60% Company Financial Performance 20% Company Annual Objectives 15% Company Annual Objectives 15% Individual/Dept. Objectives 25% Subsidiary/Region Financial Obj. 40% --- Individual/ Dept. Objectives 25% --- Total 100% Total 100% Notes: o Subsidiary or Region Financial Performance is defined as Earnings Before Interest Expense and Taxes (EBIT), before management fees and net of bonus payments, expressed as a percent of targeted EBIT and Revenue expressed as a percent of Target Revenue (Cash Flow for SMHS). Sierra Health Services Inc.'s Financial Performance is defined as Earnings after Taxes (PAT) and Revenue expressed as a percent of Targeted PAT and Revenue, respectively. The Company's Chief Financial Officer will determine the interpretation of Earnings before Interest Expense and Revenues. Disputes regarding Plan definitions will be resolved as provided in the Plan's Terms and Conditions. o Subsidiary or Region Financial Objectives are defined as the Subsidiary's or the Region's gross revenue (Cash Flow for SMHS) and EBIT, expressed as a percent of target revenue and/or EBIT profit, respectively. o During the Plan Year, both the Company's and the Subsidiary/Region's financial performance will be published as a percent of target, but the Company will nevertheless comply with SEC disclosure regulations. POOL THRESHOLD & SIZE An incentive pool will be established and used as the basis for payouts under the Plan based upon the degree to which SHS achieves specific financial objectives. For Subsidiary/Region Participants, NO Plan payouts OF ANY AMOUNT will be made unless the Sierra Health Services Financial Performance (95% of Targeted Revenue and After-Tax Profit) AND Subsidiary Financial Performance minimum thresholds have been achieved. Threshold levels of achievement for SHS Inc. must be achieved before Corporate Participants are eligible for any payout. The following charts summarize the `Company' and `Subsidiary' / `Region' payout levels when the specified level of financial performance has been achieved. The President, Sierra Health Services, has the discretion to review and alter the threshold based on specific business circumstances and conditions. For the SHS Company and individual Subsidiary/Region payout schedules, refer to the appropriate Profit/Revenue (or Cash Flow) matrices. COMPANY/SUBSIDIARY OR REGION ACHIEVEMENT Financial Threshold for Central Region, 90% of Targets Sierra Military Health Services, Behavioral Health Options and California Indemnity Insurance, Inc., including NVA. Financial Threshold for Sierra Health 95% of Targets Services, Inc. Corporation, Corporate Participants and Western Region Financial Target for All Plans 100% of Targets Financial Targets High Achievement Over 100% of Targets Payouts in the Profit/Revenue Matrices are based on the achievement of sample financial results. Actual Plan payments will be interpolated for actual results achieved between these levels. COMPANY OBJECTIVES (15%) The Chairman and the President will establish Company-wide objectives that each Participant is responsible for assisting the Company achieve. Categories may include, but are not limited to: quality of care, quality of service, turnover rates, growth objectives, expense management, specific management objectives, community or public relations, or specific individual competency development objectives. The Chairman and the President will determine the weight given to each of the Company objectives. The FY 2000 Company Objectives are: 1. Quality of Service (5%) 2. Quality of Care (5%) 3. Reduction in Employee Voluntary Turnover by 20%. (5%) Each Company will use their actual 1999 voluntary turnover percent as the baseline from which the objective will be determined. INDIVIDUAL/DEPARTMENT OBJECTIVES Accomplishment of individual/department objectives may range from 0% to 125% of the Participant's Individual Objective target. The Participant's immediate manager will recommend a percentage to the Compensation Committee (whose membership is defined in the Plan document). However, the Committee will, in its sole discretion, determine the percentage award for the Participant. Business objectives may include, but are not limited to: meeting specified revenue, market penetration, geographic business expansion goals, cost targets and goals relating to acquisitions or divestitures. MINIMUM PERFORMANCE To be eligible, a participant must have achieved at least a `successful' performance review in his/her most recent formal or informal review and may not be on any Performance Improvement Plan on the date of the payout. A Participant who has successfully completed a Performance Improvement Plan shall have his/her incentive plan payout prorated by the length of time on the Plan. PLAN DOCUMENT FOR THE FY 2000 MANAGEMENT INCENTIVE COMPENSATION PLAN TERMS & CONDITIONS 1. The Plan shall be known as "The FY 2000 Sierra Health Services Inc. (hereafter known as the "Company") Management Incentive Compensation Plan". 2. Plan Year will be January 1, 2000 - December 31, 2000. 3. Participants are defined as active eligible employees as defined by the Compensation Committee, Sierra Health Services, Inc. The Compensation Committee is comprised of the President, SHS, the Vice President of Human Resources, the General Counsel for Sierra Health Services, the Chief Financial Officer for Sierra Health Services and the Presidents of the Subsidiary or Region, and/or their designated representatives. A. The participant must be employed at Sierra Health Services or one of its Subsidiaries. B. If the employee is no longer employed by Sierra Health Services on the date of the Payout, he/she will be ineligible for a bonus payout unless otherwise recommended by the Compensation Committee. C. Participants who are not in an eligible position for the full plan year may receive a prorated bonus if all other eligibility and performance requirements are otherwise satisfied. D. The participant's performance appraisal rating for the plan year must be at least a "Successful" to be eligible for a payout under the Plan. 4. Payment under this plan, if any, shall be based on the employee's accomplishment of the specified objectives, subject to the approval of the Incentive Plan Compensation Committee and the Compensation Committee of the Sierra Health Services Board of Directors. Accomplishment of individual objectives shall fall within the attached bonus range and may exceed or may be less than 100% of target and shall be determined by Incentive Plan Compensation Committee. The Committee reserves the right to offer Sierra Health Services stock options to Participants up to 50% of value of their incentive payment. 5. Participant's rights under the Plan may not be assigned or transferred in any way. PLAN DOCUMENT FOR THE 2000 MANAGEMENT INCENTIVE COMPENSATION PLAN TERMS & CONDITIONS - CONTINUED 6. The Management Incentive Compensation Plan may be amended, modified, suspended or terminated by the Company at any time without prior consent by or notice to employees. The Company at its sole discretion without prior consent or notice may change objectives at any time for eligible participants. 7. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of the amounts under the Plan. Rights to the payment of amounts under the Plan shall be no greater than the rights of the Company's general creditors. 8. Nevada State law governs the validity, construction, interpretation, administration and effect of the Plan, and the substantive laws, except for the choice of law, and rules of the State of Nevada shall govern rights relating to the Plan. If any part of this Plan is ruled to be invalid by any judicial body, the remainder of the document shall continue to be in force. 9. All applicable employment, benefit and tax deductions will be withheld from the incentive payout. 10. Participant - A Participant in the Plan is an employee of Sierra Health Services Inc., or its subsidiaries who has been: 1) selected by the Company to participate for the Plan Year; 2) who executes this agreement to participate in the Plan for the Plan Year and 3) who is employed by the Company on the date of the payout. No employee of the Company has the right or is guaranteed the right to participate in the Plan by virtue of being an employee of the Company or fulfilling any specific position with the Company. Selection for participation in the Plan is solely within the discretion of the Company. Sierra Health Services, Inc. may offer participation in the Plan to additional employees or terminate the participation of any Participant in the Plan any time during the Plan Year. 11. Transfer/Promotion within the Business Unit Organization - Plan Participants who are transferred or promoted during the Plan Year to another job within Sierra Health Services, Inc. or its subsidiaries, not covered by the Plan will receive, subject to approvals, a prorated payment following year-end based on their achievement of specified objectives during eligible month(s) as determined by Company. Similarly, an employee who becomes an eligible Participant in the Plan Year, with at least 3 months service as an eligible Participant, will receive, subject to approvals, a prorated payment following year-end based on their PLAN DOCUMENT FOR THE 2000 MANAGEMENT INCENTIVE COMPENSATION PLAN TERMS & CONDITIONS - CONTINUED achievement of specified objectives during eligible month(s) as determined by Company in its sole discretion. 12. Termination of Employment - Participants, who terminate their employment voluntarily or involuntarily from the Company during the Plan Year and until the Plan date of payout, will not be eligible for any bonus payment under the Plan. Any exceptions will be determined on an individual basis at the sole discretion of the President or Chief Executive Officer. 13. Retirement/Death/Disability - Termination of employment during the Plan Year and until the Plan date of payout as a result of retirement, death, or disability may constitute eligibility for a prorated payment as determined by the Company. 14. Windfalls/Business Losses - Revenues classified as "windfalls" or business losses or charges against net income may or may not be excluded in whole or in part from the calculation of revenue or profit objectives at the sole discretion of the President or the Chief Executive Officer. Similarly, significant declines in revenue volume will be reviewed prior to any bonus award. Examples of such circumstances include, but are not limited to: excluding acquisition-related and year 2000 charges and non operating unusual charges, windfalls or business losses resulting from any acquisition or disposition by the corporation as determined by the Compensation Committee of Sierra Health Services Board of Directors. 15. Company Rights - Notice of participation in the Plan shall not impair or limit the Company's right to transfer, promote, or demote plan participants to other jobs or to terminate their employment. Nor shall the Plan create any claim nor right to receive any payment under the Plan nor any right to be retained in the employment of the Company or its affiliates. 16. Non-Continuation - The Plan is established for the current fiscal year. There shall be no obligation on the part of the Company to continue the Plan in the same or a modified form for any future years. 17. Resolution of Disputes - In the event that a Participant has a dispute concerning the administration of this Plan, it should first be submitted in writing to the Vice PLAN DOCUMENT FOR THE 2000 MANAGEMENT INCENTIVE COMPENSATION PLAN TERMS & CONDITIONS - CONTINUED President, Human Resources. In the event that the Vice President does not provide a response satisfactory to the participant with fifteen (15) days, the Participant may submit the dispute in writing, within five (5) working days thereafter, to the Compensation Committee - Sierra Health Services, Inc., whose decision regarding the dispute shall be final and binding on each Participant or person making a claim under the Plan. 18. Effect on Previous Plans - The Plan is effective January 1, 2000, and supersedes and replaces all previous management bonus plans. All such previous Plans, unless earlier terminated, are terminated effective at midnight, December 31, 1999. If not renewed by the Company or its designated representative(s), the Plan will automatically terminate on December 31 of each year. Sierra Health Services, Inc. After Tax Profit/Revenue Matrix Matrix for Total Corporation & For Corporate Staff Incentive Calculation
Revenue Vs. Plan (Horizontal Axis) After Tax Profit vs. Plan (Vertical Axis) (In 000s) $ $ $ $ $ $ $ 1,595,330 1,603,720 1,612,120 1,620,510 1,628,910 1,637,310 1,645,700 % Achieved 95.0% 95.5% 96.0% 96.5% 97.0% 97.5% 98.0% $ 34,340 95.0% 50.0% 52.5% 55.0% 57.5% 60.0% 62.5% 65.0% $ 34,520 95.5% 52.5% 55.0% 57.5% 60.0% 62.5% 65.0% 67.5% $ 34,700 96.0% 55.0% 57.5% 60.0% 62.5% 65.0% 67.5% 70.0% $ 34,880 96.5% 57.5% 60.0% 62.5% 65.0% 67.5% 70.0% 72.5% $ 35,070 97.0% 60.0% 62.5% 65.0% 67.5% 70.0% 72.5% 75.0% $ 35,250 97.5% 62.5% 65.0% 67.5% 70.0% 72.5% 75.0% 77.5% $ 35,430 98.0% 65.0% 67.5% 70.0% 72.5% 75.0% 77.5% 80.0% $ 35,610 98.5% 67.5% 70.0% 72.5% 75.0% 77.5% 80.0% 82.5% $ 35,790 99.0% 70.0% 72.5% 75.0% 77.5% 80.0% 82.5% 85.0% $ 35,970 99.5% 72.5% 75.0% 77.5% 80.0% 82.5% 85.0% 87.5% $ 36,150 100.0% 75.0% 77.5% 80.0% 82.5% 85.0% 87.5% 90.0% $ 36,873 102.0% 80.0% 83.6% 87.3% 90.9% 94.5% 98.2% 101.8% $ 37,600 104.0% 85.0% 89.6% 94.2% 98.7% 103.3% 107.9% 112.5% $ 38,320 106.0% 90.0% 95.4% 100.8% 106.2% 111.5% 116.9% 122.3% $ 39,040 108.0% 95.0% 101.1% 107.1% 113.2% 119.3% 125.4% 131.4% $ 39,770 110.0% 100.0% 106.7% 113.3% 120.0% 126.7% 133.3% 140.0% $ 40,490 112.0% 110.0% 116.9% 123.8% 130.6% 137.5% 144.4% 151.3% $ 41,210 114.0% 120.0% 127.1% 134.1% 141.2% 148.2% 155.3% 162.4% $ 41,930 116.0% 130.0% 137.2% 144.4% 151.7% 158.9% 166.1% 173.3% $ 42,660 118.0% 140.0% 146.7% 153.5% 160.2% 166.9% 173.7% 180.4% $ 43,380 120.0% 150.0% 157.5% 165.0% 172.5% 180.0% 187.5% 195.0%
** At 27,300,000 Shares Payout as a Percent of Eligible Bonus Sierra Health Services, Inc. After Tax Profit/Revenue Matrix
Matrix for Total Corporation & For Corporate Staff Incentive Calculation $ $ $ $ $ $ $ 1,654,100 1,662,500 1,670,890 1,679,290 1,712,880 1,746,460 1,780,050 % Achieved 98.5% 99.0% 99.5% 100.0% 102.0% 104.0% 106.0% $ 34,340 95.0% 67.5% 70.0% 72.5% 75.0% 80.0% 85.0% 90.0% $ 34,520 95.5% 70.0% 72.5% 75.0% 77.5% 83.6% 89.6% 95.4% $ 34,700 96.0% 72.5% 75.0% 77.5% 80.0% 87.3% 94.2% 100.8% $ 34,880 96.5% 75.0% 77.5% 80.0% 82.5% 90.9% 98.7% 106.2% $ 35,070 97.0% 77.5% 80.0% 82.5% 85.0% 94.5% 103.3% 111.5% $ 35,250 97.5% 80.0% 82.5% 85.0% 87.5% 98.2% 107.9% 116.9% $ 35,430 98.0% 82.5% 85.0% 87.5% 90.0% 101.8% 112.5% 122.3% $ 35,610 98.5% 85.0% 87.5% 90.0% 92.5% 105.5% 117.1% 127.7% $ 35,790 99.0% 87.5% 90.0% 92.5% 95.0% 109.1% 121.7% 133.1% $ 35,970 99.5% 90.0% 92.5% 95.0% 97.5% 112.7% 126.2% 138.5% $ 36,150 100.0% 92.5% 95.0% 97.5% 100.0% 116.4% 130.8% 143.8% $ 36,873 102.0% 105.5% 109.1% 112.7% 116.4% 120.0% 135.4% 149.2% $ 37,600 104.0% 117.1% 121.7% 126.2% 130.8% 135.4% 140.0% 154.6% $ 38,320 106.0% 127.7% 133.1% 138.5% 143.8% 149.2% 154.6% 160.0% $ 39,040 108.0% 137.5% 143.6% 149.6% 155.7% 161.8% 167.9% 173.9% $ 39,770 110.0% 146.7% 153.3% 160.0% 166.7% 173.3% 180.0% 186.7% $ 40,490 112.0% 158.1% 165.0% 171.9% 178.8% 185.6% 192.5% 199.4% $ 41,210 114.0% 169.4% 176.5% 183.5% 190.6% 197.6% 204.7% 211.8% $ 41,930 116.0% 180.6% 187.8% 195.0% 202.2% 209.4% 216.7% 223.9% $ 42,660 118.0% 187.2% 193.9% 200.6% 207.4% 214.1% 220.8% 227.6% $ 43,380 120.0% 202.5% 210.0% 217.5% 225.0% 232.5% 240.0% 247.5%
Sierra Health Services, Inc. After Tax Profit/Revenue Matrix
Matrix for Total Corporation & For Corporate Staff Incentive Calculation $ $ $ $ $ $ $ 1,813,630 1,847,220 1,880,800 1,914,390 1,947,980 1,981,560 2,015,150 % Achieved 108.0% 110.0% 112.0% 114.0% 116.0% 118.0% 120.0% $ 34,340 95.0% 95.0% 100.0% 110.0% 120.0% 130.0% 140.0% 150.0% $ 34,520 95.5% 101.1% 106.7% 116.9% 127.1% 137.2% 146.7% 157.5% $ 34,700 96.0% 107.1% 113.3% 123.8% 134.1% 144.4% 153.5% 165.0% $ 34,880 96.5% 113.2% 120.0% 130.6% 141.2% 151.7% 160.2% 172.5% $ 35,070 97.0% 119.3% 126.7% 137.5% 148.2% 158.9% 166.9% 180.0% $ 35,250 97.5% 125.4% 133.3% 144.4% 155.3% 166.1% 173.7% 187.5% $ 35,430 98.0% 131.4% 140.0% 151.3% 162.4% 173.3% 180.4% 195.0% $ 35,610 98.5% 137.5% 146.7% 158.1% 169.4% 180.6% 187.2% 202.5% $ 35,790 99.0% 143.6% 153.3% 165.0% 176.5% 187.8% 193.9% 210.0% $ 35,970 99.5% 149.6% 160.0% 171.9% 183.5% 195.0% 200.6% 217.5% $ 36,150 100.0% 155.7% 166.7% 178.8% 190.6% 202.2% 207.4% 225.0% $ 36,873 102.0% 161.8% 173.3% 185.6% 197.6% 209.4% 214.1% 232.5% $ 37,600 104.0% 167.9% 180.0% 192.5% 204.7% 216.7% 220.8% 240.0% $ 38,320 106.0% 173.9% 186.7% 199.4% 211.8% 223.9% 227.6% 247.5% $ 39,040 108.0% 180.0% 193.3% 206.3% 218.8% 231.1% 234.3% 255.0% $ 39,770 110.0% 193.3% 200.0% 213.1% 225.9% 238.3% 241.1% 262.5% $ 40,490 112.0% 206.3% 213.1% 220.0% 232.9% 245.6% 247.8% 270.0% $ 41,210 114.0% 218.8% 225.9% 232.9% 240.0% 252.8% 254.5% 277.5% $ 41,930 116.0% 231.1% 238.3% 245.6% 252.8% 260.0% 261.3% 285.0% $ 42,660 118.0% 234.3% 241.1% 247.8% 254.5% 261.3% 280.0% 292.5% $ 43,380 120.0% 255.0% 262.5% 270.0% 277.5% 285.0% 292.5% 300.0%
CII (California) REVENUE/PROFIT MATRIX
PRE-TAX PROFIT* VS PLAN (HORIZONATAL AXIS) REVENUE VS PLAN (VERTICAL AXIS) (IN 000s) $ $ $ $ $ $ $ 13,050 13,200 13,340 13,490 13,630 13,780 13,920 % Achieved 90% 91% 92% 93% 94% 95% 96% $ 86,360 90% 50.0% 54.0% 58.0% 62.0% 66.0% 70.0% 74.0% $ 87,310 91% 51.0% 55.0% 59.0% 63.0% 67.0% 71.0% 75.0% $ 88,270 92% 52.0% 56.0% 60.0% 64.0% 68.0% 72.0% 76.0% $ 89,230 93% 53.0% 57.0% 61.0% 65.0% 69.0% 73.0% 77.0% $ 90,190 94% 54.0% 58.0% 62.0% 66.0% 70.0% 74.0% 78.0% $ 91,150 95% 55.0% 59.0% 63.0% 67.0% 71.0% 75.0% 79.0% $ 92,110 96% 56.0% 60.0% 64.0% 68.0% 72.0% 76.0% 80.0% $ 93,070 97% 57.0% 61.0% 65.0% 69.0% 73.0% 77.0% 81.0% $ 94,030 98% 58.0% 62.0% 66.0% 70.0% 74.0% 78.0% 82.0% $ 94,990 99% 59.0% 63.0% 67.0% 71.0% 75.0% 79.0% 83.0% $ 95,950 100% 60.0% 64.0% 68.0% 72.0% 76.0% 80.0% 84.0% $ 97,870 102% 62.0% 66.4% 70.7% 75.1% 79.5% 83.8% 88.2% $ 99,790 104% 64.0% 68.7% 73.3% 78.0% 82.7% 87.3% 92.0% $ 101,710 106% 66.0% 70.9% 75.8% 80.8% 85.7% 90.6% 95.5% $ 103,630 108% 68.0% 73.1% 78.3% 83.4% 88.6% 93.7% 98.9% $ 105,550 110% 70.0% 75.3% 80.7% 86.0% 91.3% 96.7% 102.0% $ 107,460 112% 74.0% 79.4% 84.8% 90.1% 95.5% 100.9% 106.3% $ 109,380 114% 78.0% 83.4% 88.8% 94.2% 99.6% 105.1% 110.5% $ 111,300 116% 82.0% 87.4% 92.9% 98.3% 103.8% 109.2% 114.7% $ 113,220 118% 86.0% 92.9% 98.4% 103.8% 109.3% 114.7% 120.1% $ 115,140 120% 90.0% 98.4% 103.9% 109.3% 114.8% 120.2% 125.6%
* Denotes Earnings Before Interest Expense & Taxes, and Net of Bonus Expense PAYOUT AS A PERCENT OF ELIGIBLE BONUS CII (California)
REVENUE/PROFIT MATRIX $ $ $ $ $ $ $ 14,070 14,210 14,360 14,500 14,790 15,080 15,370 % Achieved 97% 98% 99% 100% 102% 104% 106.0% $ 86,360 90% 78.0% 82.0% 86.0% 90.0% 96.0% 102.0% 108.0% $ 87,310 91% 79.0% 83.0% 87.0% 91.0% 97.3% 103.5% 109.7% $ 88,270 92% 80.0% 84.0% 88.0% 92.0% 98.5% 105.0% 111.4% $ 89,230 93% 81.0% 85.0% 89.0% 93.0% 99.8% 106.5% 113.1% $ 90,190 94% 82.0% 86.0% 90.0% 94.0% 101.1% 108.0% 114.8% $ 91,150 95% 83.0% 87.0% 91.0% 95.0% 102.4% 109.5% 116.5% $ 92,110 96% 84.0% 88.0% 92.0% 96.0% 103.6% 111.0% 118.2% $ 93,070 97% 85.0% 89.0% 93.0% 97.0% 104.9% 112.5% 119.8% $ 94,030 98% 86.0% 90.0% 94.0% 98.0% 106.2% 114.0% 121.5% $ 94,990 99% 87.0% 91.0% 95.0% 99.0% 107.5% 115.5% 123.2% $ 95,950 100% 88.0% 92.0% 96.0% 100.0% 108.7% 117.0% 124.9% $ 97,870 102% 92.5% 96.9% 101.3% 105.6% 110.0% 118.5% 126.6% $ 99,790 104% 96.7% 101.3% 106.0% 110.7% 115.3% 120.0% 128.3% $ 101,710 106% 100.5% 105.4% 110.3% 115.2% 120.2% 125.1% 130.0% $ 103,630 108% 104.0% 109.1% 114.3% 119.4% 124.6% 129.7% 134.9% $ 105,550 110% 107.3% 112.7% 118.0% 123.3% 128.7% 134.0% 139.3% $ 107,460 112% 111.6% 117.0% 122.4% 127.8% 133.1% 138.5% 143.9% $ 109,380 114% 115.9% 121.3% 126.7% 132.1% 137.5% 142.9% 148.4% $ 111,300 116% 120.1% 125.6% 131.0% 136.4% 141.9% 147.3% 152.8% $ 113,220 118% 125.6% 131.0% 136.5% 141.9% 147.4% 152.8% 158.3% $ 115,140 120% 131.1% 136.5% 142.0% 147.4% 152.9% 158.3% 163.8%
CII (California)
REVENUE/PROFIT MATRIX $ $ $ $ $ $ $ 15,660 15,950 16,240 16,530 16,820 17,110 17,400 % Achieved 108.0% 110.0% 112.0% 114.0% 116.0% 118.0% 120.0% $ 86,360 90% 114.0% 120.0% 128.0% 136.0% 144.0% 152.0% 160.0% $ 87,310 91% 115.9% 122.0% 130.0% 138.0% 146.0% 154.0% 162.0% $ 88,270 92% 117.7% 124.0% 132.0% 140.0% 148.0% 156.0% 164.0% $ 89,230 93% 119.6% 126.0% 134.0% 142.0% 150.0% 158.0% 166.0% $ 90,190 94% 121.4% 128.0% 136.0% 144.0% 152.0% 160.0% 168.0% $ 91,150 95% 123.3% 130.0% 138.0% 146.0% 154.0% 162.0% 170.0% $ 92,110 96% 125.1% 132.0% 140.0% 148.0% 156.0% 164.0% 172.0% $ 93,070 97% 127.0% 134.0% 142.0% 150.0% 158.0% 166.0% 174.0% $ 94,030 98% 128.9% 136.0% 144.0% 152.0% 160.0% 168.0% 176.0% $ 94,990 99% 130.7% 138.0% 146.0% 154.0% 162.0% 170.0% 178.0% $ 95,950 100% 132.6% 140.0% 148.0% 156.0% 164.0% 172.0% 180.0% $ 97,870 102% 134.4% 142.0% 150.0% 158.0% 166.0% 174.0% 182.0% $ 99,790 104% 136.3% 144.0% 152.0% 160.0% 168.0% 176.0% 184.0% $ 101,710 106% 138.1% 146.0% 154.0% 162.0% 170.0% 178.0% 186.0% $ 103,630 108% 140.0% 148.0% 156.0% 164.0% 172.0% 180.0% 188.0% $ 105,550 110% 144.7% 150.0% 158.0% 166.0% 174.0% 182.0% 190.0% $ 107,460 112% 149.3% 154.6% 160.0% 168.0% 176.0% 184.0% 192.0% $ 109,380 114% 153.8% 159.2% 164.6% 170.0% 178.0% 186.0% 194.0% $ 111,300 116% 158.2% 163.7% 169.1% 174.6% 180.0% 188.0% 196.0% $ 113,220 118% 163.7% 169.1% 174.6% 180.0% 185.5% 190.0% 198.0% $ 115,140 120% 169.2% 174.6% 180.1% 185.5% 191.0% 195.5% 200.0%
CII (OUTSIDE CALIFORNIA) PLUS NVA
PROFIT/REVENUE MATRIX REVENUE VS PLAN (Horizontal Axis) PRE-TAX PROFIT* VS PLAN (Vertical Axis) (In 000s) $ $ $ $ $ $ $ 42,170 42,630 43,100 43,570 44,040 44,510 44,980 % Achieved 90% 91% 92% 93% 94% 95% 96% $ 6,770 90% 50.0% 54.0% 58.0% 62.0% 66.0% 70.0% 74.0% $ 6,840 91% 51.0% 55.0% 59.0% 63.0% 67.0% 71.0% 75.0% $ 6,920 92% 52.0% 56.0% 60.0% 64.0% 68.0% 72.0% 76.0% $ 6,990 93% 53.0% 57.0% 61.0% 65.0% 69.0% 73.0% 77.0% $ 7,070 94% 54.0% 58.0% 62.0% 66.0% 70.0% 74.0% 78.0% $ 7,140 95% 55.0% 59.0% 63.0% 67.0% 71.0% 75.0% 79.0% $ 7,220 96% 56.0% 60.0% 64.0% 68.0% 72.0% 76.0% 80.0% $ 7,290 97% 57.0% 61.0% 65.0% 69.0% 73.0% 77.0% 81.0% $ 7,370 98% 58.0% 62.0% 66.0% 70.0% 74.0% 78.0% 82.0% $ 7,440 99% 59.0% 63.0% 67.0% 71.0% 75.0% 79.0% 83.0% $ 7,520 100% 60.0% 64.0% 68.0% 72.0% 76.0% 80.0% 84.0% $ 7,670 102% 62.0% 66.4% 70.7% 75.1% 79.5% 83.8% 88.2% $ 7,820 104% 64.0% 68.7% 73.3% 78.0% 82.7% 87.3% 92.0% $ 7,970 106% 66.0% 70.9% 75.8% 80.8% 85.7% 90.6% 95.5% $ 8,120 108% 68.0% 73.1% 78.3% 83.4% 88.6% 93.7% 98.9% $ 8,270 110% 70.0% 75.3% 80.7% 86.0% 91.3% 96.7% 102.0% $ 8,420 112% 74.0% 79.4% 84.8% 90.1% 95.5% 100.9% 106.3% $ 8,570 114% 78.0% 83.4% 88.8% 94.2% 99.6% 105.1% 110.5% $ 8,720 116% 82.0% 87.4% 92.9% 98.3% 103.8% 109.2% 114.7% $ 8,870 118% 86.0% 92.9% 98.4% 103.8% 109.3% 114.7% 120.1% $ 9,020 120% 90.0% 98.4% 103.9% 109.3% 114.8% 120.2% 125.6%
* Denotes Earnings Before Interest Expense & Taxes, and Net of Bonus Expense PAYOUT AS A PERCENT OF ELIGIBLE BONUS CII (OUTSIDE CALIFORNIA) PLUS NVA
PROFIT/REVENUE MATRIX $ $ $ $ $ $ $ 45,440 45,910 46,380 46,850 47,790 48,720 49,660 % Achieved 97% 98% 99% 100% 102% 104% 106.0% $ 6,770 90% 78.0% 82.0% 86.0% 90.0% 96.0% 102.0% 108.0% $ 6,840 91% 79.0% 83.0% 87.0% 91.0% 97.3% 103.5% 109.7% $ 6,920 92% 80.0% 84.0% 88.0% 92.0% 98.5% 105.0% 111.4% $ 6,990 93% 81.0% 85.0% 89.0% 93.0% 99.8% 106.5% 113.1% $ 7,070 94% 82.0% 86.0% 90.0% 94.0% 101.1% 108.0% 114.8% $ 7,140 95% 83.0% 87.0% 91.0% 95.0% 102.4% 109.5% 116.5% $ 7,220 96% 84.0% 88.0% 92.0% 96.0% 103.6% 111.0% 118.2% $ 7,290 97% 85.0% 89.0% 93.0% 97.0% 104.9% 112.5% 119.8% $ 7,370 98% 86.0% 90.0% 94.0% 98.0% 106.2% 114.0% 121.5% $ 7,440 99% 87.0% 91.0% 95.0% 99.0% 107.5% 115.5% 123.2% $ 7,520 100% 88.0% 92.0% 96.0% 100.0% 108.7% 117.0% 124.9% $ 7,670 102% 92.5% 96.9% 101.3% 105.6% 110.0% 118.5% 126.6% $ 7,820 104% 96.7% 101.3% 106.0% 110.7% 115.3% 120.0% 128.3% $ 7,970 106% 100.5% 105.4% 110.3% 115.2% 120.2% 125.1% 130.0% $ 8,120 108% 104.0% 109.1% 114.3% 119.4% 124.6% 129.7% 134.9% $ 8,270 110% 107.3% 112.7% 118.0% 123.3% 128.7% 134.0% 139.3% $ 8,420 112% 111.6% 117.0% 122.4% 127.8% 133.1% 138.5% 143.9% $ 8,570 114% 115.9% 121.3% 126.7% 132.1% 137.5% 142.9% 148.4% $ 8,720 116% 120.1% 125.6% 131.0% 136.4% 141.9% 147.3% 152.8% $ 8,870 118% 125.6% 131.0% 136.5% 141.9% 147.4% 152.8% 158.3% $ 9,020 120% 131.1% 136.5% 142.0% 147.4% 152.9% 158.3% 163.8%
CII (OUTSIDE CALIFORNIA) PLUS NVA
PROFIT/REVENUE MATRIX $ $ $ $ $ $ $ 50,600 51,540 52,470 53,410 54,350 55,280 56,220 % Achieved 108.0% 110.0% 112% 114% 116% 118% 120% $ 6,770 90% 114.0% 120.0% 128.0% 136.0% 144.0% 152.0% 160.0% $ 6,840 91% 115.9% 122.0% 130.0% 138.0% 146.0% 154.0% 162.0% $ 6,920 92% 117.7% 124.0% 132.0% 140.0% 148.0% 156.0% 164.0% $ 6,990 93% 119.6% 126.0% 134.0% 142.0% 150.0% 158.0% 166.0% $ 7,070 94% 121.4% 128.0% 136.0% 144.0% 152.0% 160.0% 168.0% $ 7,140 95% 123.3% 130.0% 138.0% 146.0% 154.0% 162.0% 170.0% $ 7,220 96% 125.1% 132.0% 140.0% 148.0% 156.0% 164.0% 172.0% $ 7,290 97% 127.0% 134.0% 142.0% 150.0% 158.0% 166.0% 174.0% $ 7,370 98% 128.9% 136.0% 144.0% 152.0% 160.0% 168.0% 176.0% $ 7,440 99% 130.7% 138.0% 146.0% 154.0% 162.0% 170.0% 178.0% $ 7,520 100% 132.6% 140.0% 148.0% 156.0% 164.0% 172.0% 180.0% $ 7,670 102% 134.4% 142.0% 150.0% 158.0% 166.0% 174.0% 182.0% $ 7,820 104% 136.3% 144.0% 152.0% 160.0% 168.0% 176.0% 184.0% $ 7,970 106% 138.1% 146.0% 154.0% 162.0% 170.0% 178.0% 186.0% $ 8,120 108% 140.0% 148.0% 156.0% 164.0% 172.0% 180.0% 188.0% $ 8,270 110% 144.7% 150.0% 158.0% 166.0% 174.0% 182.0% 190.0% $ 8,420 112% 149.3% 154.6% 160.0% 168.0% 176.0% 184.0% 192.0% $ 8,570 114% 153.8% 159.2% 164.6% 170.0% 178.0% 186.0% 194.0% $ 8,720 116% 158.2% 163.7% 169.1% 174.6% 180.0% 188.0% 196.0% $ 8,870 118% 163.7% 169.1% 174.6% 180.0% 185.5% 190.0% 198.0% $ 9,020 120% 169.2% 174.6% 180.1% 185.5% 191.0% 195.5% 200.0%
SIERRA MILITARY HEALTH SERVICES CASH FLOW/PROFIT MATRIX
CASH FLOW (Horizontal Axis) PRE-TAX PROFIT* VS PLAN (Vertical Axis) (In 000s) $ $ $ $ $ $ $ 24,430 24,700 24,970 25,240 25,510 25,780 26,050 90% 91% 92% 93% 94% 95% 96% % Achieved $ 13,710 90% 50.0% 52.5% 55.0% 57.5% 60.0% 62.5% 65.0% $ 13,860 91% 52.5% 55.0% 57.5% 60.0% 62.5% 65.0% 67.5% $ 14,010 92% 55.0% 57.5% 60.0% 62.5% 65.0% 67.5% 70.0% $ 14,160 93% 57.5% 60.0% 62.5% 65.0% 67.5% 70.0% 72.5% $ 14,320 94% 60.0% 62.5% 65.0% 67.5% 70.0% 72.5% 75.0% $ 14,470 95% 62.5% 65.0% 67.5% 70.0% 72.5% 75.0% 77.5% $ 14,620 96% 65.0% 67.5% 70.0% 72.5% 75.0% 77.5% 80.0% $ 14,770 97% 67.5% 70.0% 72.5% 75.0% 77.5% 80.0% 82.5% $ 14,930 98% 70.0% 72.5% 75.0% 77.5% 80.0% 82.5% 85.0% $ 15,080 99% 72.5% 75.0% 77.5% 80.0% 82.5% 85.0% 87.5% $ 15,230 100% 75.0% 77.5% 80.0% 82.5% 85.0% 87.5% 90.0% $ 15,530 102% 80.0% 82.7% 85.5% 88.2% 90.9% 93.6% 96.4% $ 15,840 104% 85.0% 87.9% 90.8% 93.8% 96.7% 99.6% 102.5% $ 16,140 106% 90.0% 93.1% 96.2% 99.2% 102.3% 105.4% 108.5% $ 16,450 108% 95.0% 98.2% 101.4% 104.6% 107.9% 111.1% 114.3% $ 16,750 110% 100.0% 103.3% 106.7% 110.0% 113.3% 116.7% 120.0% $ 17,060 112% 110.0% 113.1% 116.3% 119.4% 122.5% 125.6% 128.8% $ 17,360 114% 120.0% 122.9% 125.9% 128.8% 131.8% 134.7% 137.6% $ 17,670 116% 130.0% 132.8% 135.6% 138.3% 141.1% 143.9% 146.7% $ 17,970 118% 140.0% 135.4% 138.2% 141.0% 143.7% 146.5% 149.3% $ 18,280 120% 150.0% 137.9% 140.7% 143.5% 146.2% 149.0% 151.8%
* Denotes Earnings Before Interest Expense & Taxes, and Net of Bonus Expense PAYOUT AS A PERCENT OF ELIGIBLE BONUS SIERRA MILITARY HEALTH SERVICES
CASH FLOW/PROFIT MATRIX $ $ $ $ $ $ $ 26,330 26,600 26,870 27,140 27,680 28,230 28,770 % Achieved 97% 98% 99% 100% 102% 104% 106% $ 13,710 90% 67.5% 70.0% 72.5% 75.0% 80.0% 85.0% 90.0% $ 13,860 91% 70.0% 72.5% 75.0% 77.5% 82.7% 87.9% 93.1% $ 14,010 92% 72.5% 75.0% 77.5% 80.0% 85.5% 90.8% 96.2% $ 14,160 93% 75.0% 77.5% 80.0% 82.5% 88.2% 93.8% 99.2% $ 14,320 94% 77.5% 80.0% 82.5% 85.0% 90.9% 96.7% 102.3% $ 14,470 95% 80.0% 82.5% 85.0% 87.5% 93.6% 99.6% 105.4% $ 14,620 96% 82.5% 85.0% 87.5% 90.0% 96.4% 102.5% 108.5% $ 14,770 97% 85.0% 87.5% 90.0% 92.5% 99.1% 105.4% 111.5% $ 14,930 98% 87.5% 90.0% 92.5% 95.0% 101.8% 108.3% 114.6% $ 15,080 99% 90.0% 92.5% 95.0% 97.5% 104.5% 111.3% 117.7% $ 15,230 100% 92.5% 95.0% 97.5% 100.0% 107.3% 114.2% 120.8% $ 15,530 102% 99.1% 101.8% 104.5% 107.3% 110.0% 117.1% 123.8% $ 15,840 104% 105.4% 108.3% 111.3% 114.2% 117.1% 120.0% 126.9% $ 16,140 106% 111.5% 114.6% 117.7% 120.8% 123.8% 126.9% 130.0% $ 16,450 108% 117.5% 120.7% 123.9% 127.1% 130.4% 133.6% 136.8% $ 16,750 110% 123.3% 126.7% 130.0% 133.3% 136.7% 140.0% 143.3% $ 17,060 112% 131.9% 135.0% 138.1% 141.3% 144.4% 147.5% 150.6% $ 17,360 114% 140.6% 143.5% 146.5% 149.4% 152.4% 155.3% 158.2% $ 17,670 116% 149.4% 152.2% 155.0% 157.8% 160.6% 163.3% 166.1% $ 17,970 118% 152.1% 154.9% 157.6% 160.4% 163.2% 166.0% 168.7% $ 18,280 120% 154.6% 157.4% 160.1% 162.9% 165.7% 168.5% 171.2%
SIERRA MILITARY HEALTH SERVICES
CASH FLOW/PROFIT MATRIX $ $ $ $ $ $ $ 29,310 29,850 30,400 30,940 31,480 32,030 32,570 % Achieved 108% 110% 112% 114% 116% 118% 120% $ 13,710 90% 95.0% 100.0% 110.0% 120.0% 130.0% 140.0% 150.0% $ 13,860 91% 98.2% 103.3% 113.1% 122.9% 132.8% 142.6% 152.5% $ 14,010 92% 101.4% 106.7% 116.3% 125.9% 135.6% 145.3% 155.0% $ 14,160 93% 104.6% 110.0% 119.4% 128.8% 138.3% 147.9% 157.5% $ 14,320 94% 107.9% 113.3% 122.5% 131.8% 141.1% 150.5% 160.0% $ 14,470 95% 111.1% 116.7% 125.6% 134.7% 143.9% 153.2% 162.5% $ 14,620 96% 114.3% 120.0% 128.8% 137.6% 146.7% 155.8% 165.0% $ 14,770 97% 117.5% 123.3% 131.9% 140.6% 149.4% 158.4% 167.5% $ 14,930 98% 120.7% 126.7% 135.0% 143.5% 152.2% 161.1% 170.0% $ 15,080 99% 123.9% 130.0% 138.1% 146.5% 155.0% 163.7% 172.5% $ 15,230 100% 127.1% 133.3% 141.3% 149.4% 157.8% 166.3% 175.0% $ 15,530 102% 130.4% 136.7% 144.4% 152.4% 160.6% 168.9% 177.5% $ 15,840 104% 133.6% 140.0% 147.5% 155.3% 163.3% 171.6% 180.0% $ 16,140 106% 136.8% 143.3% 150.6% 158.2% 166.1% 174.2% 182.5% $ 16,450 108% 140.0% 146.7% 153.8% 161.2% 168.9% 176.8% 185.0% $ 16,750 110% 146.7% 150.0% 156.9% 164.1% 171.7% 179.5% 187.5% $ 17,060 112% 153.8% 156.9% 160.0% 167.1% 174.4% 182.1% 190.0% $ 17,360 114% 161.2% 164.1% 167.1% 170.0% 177.2% 184.7% 192.5% $ 17,670 116% 168.9% 171.7% 174.4% 177.2% 180.0% 187.4% 195.0% $ 17,970 118% 171.5% 174.3% 177.1% 179.9% 182.6% 190.0% 197.5% $ 18,280 120% 174.0% 176.8% 179.6% 182.4% 185.1% 192.5% 200.0%
WESTERN REGION
PROFIT/REVENUE MATRIX PRETAX PROFIT* VS PLAN (Horizontal Axis) REVENUE VS PLAN (Vertical Axis) (In 000s) $ $ $ $ $ $ $ 74,170 74,560 74,950 75,340 75,730 76,120 76,510 % Achieved 95.0% 95.5% 96.0% 96.5% 97.0% 97.5% 98.0% $ 832,030 95.0% 50.0% 54.0% 58.0% 62.0% 66.0% 70.0% 74.0% $ 836,410 95.5% 51.0% 55.0% 59.0% 63.0% 67.0% 71.0% 75.0% $ 840,790 96.0% 52.0% 56.0% 60.0% 64.0% 68.0% 72.0% 76.0% $ 845,170 96.5% 53.0% 57.0% 61.0% 65.0% 69.0% 73.0% 77.0% $ 849,550 97.0% 54.0% 58.0% 62.0% 66.0% 70.0% 74.0% 78.0% $ 853,920 97.5% 55.0% 59.0% 63.0% 67.0% 71.0% 75.0% 79.0% $ 858,300 98.0% 56.0% 60.0% 64.0% 68.0% 72.0% 76.0% 80.0% $ 862,680 98.5% 57.0% 61.0% 65.0% 69.0% 73.0% 77.0% 81.0% $ 867,060 99.0% 58.0% 62.0% 66.0% 70.0% 74.0% 78.0% 82.0% $ 871,440 99.5% 59.0% 63.0% 67.0% 71.0% 75.0% 79.0% 83.0% $ 875,820 100.0% 60.0% 64.0% 68.0% 72.0% 76.0% 80.0% 84.0% $ 893,340 102.0% 62.0% 67.3% 72.5% 77.8% 83.1% 88.4% 93.6% $ 910,850 104.0% 64.0% 70.3% 76.7% 83.0% 89.3% 95.7% 102.0% $ 928,370 106.0% 66.0% 73.2% 80.5% 87.7% 94.9% 102.2% 109.4% $ 945,890 108.0% 68.0% 76.0% 84.0% 92.0% 100.0% 108.0% 116.0% $ 963,400 110.0% 70.0% 78.7% 87.3% 96.0% 104.7% 113.3% 122.0% $ 980,920 112.0% 74.0% 83.1% 92.3% 101.4% 110.5% 119.6% 128.8% $ 998,430 114.0% 78.0% 87.5% 97.1% 106.6% 116.1% 125.6% 135.2% $ 1,015,950 116.0% 82.0% 91.9% 101.8% 111.7% 121.6% 131.4% 141.3% $ 1,033,470 118.0% 86.0% 102.1% 112.0% 121.9% 131.8% 141.7% 151.5% $ 1,050,980 120.0% 90.0% 112.6% 122.5% 132.4% 142.3% 152.2% 162.0%
* Denotes Earnings Before Interest Expense & Taxes, and Net of Bonus Expense PAYOUT AS A PERCENT OF ELIGIBLE BONUS WESTERN REGION
PROFIT/REVENUE MATRIX $ $ $ $ $ $ $ 76,900 77,290 77,680 78,070 79,630 81,190 82,750 % Achieved 98.5% 99.0% 99.5% 100.0% 102.0% 104.0% 106.0% $ 832,030 95.0% 78.0% 82.0% 86.0% 90.0% 98.0% 106.0% 114.0% $ 836,410 95.5% 79.0% 83.0% 87.0% 91.0% 100.0% 108.8% 117.5% $ 840,790 96.0% 80.0% 84.0% 88.0% 92.0% 102.0% 111.7% 121.1% $ 845,170 96.5% 81.0% 85.0% 89.0% 93.0% 104.0% 114.5% 124.6% $ 849,550 97.0% 82.0% 86.0% 90.0% 94.0% 106.0% 117.3% 128.2% $ 853,920 97.5% 83.0% 87.0% 91.0% 95.0% 108.0% 120.2% 131.7% $ 858,300 98.0% 84.0% 88.0% 92.0% 96.0% 110.0% 123.0% 135.2% $ 862,680 98.5% 85.0% 89.0% 93.0% 97.0% 112.0% 125.8% 138.8% $ 867,060 99.0% 86.0% 90.0% 94.0% 98.0% 114.0% 128.7% 142.3% $ 871,440 99.5% 87.0% 91.0% 95.0% 99.0% 116.0% 131.5% 145.8% $ 875,820 100.0% 88.0% 92.0% 96.0% 100.0% 118.0% 134.3% 149.4% $ 893,340 102.0% 98.9% 104.2% 109.5% 114.7% 120.0% 137.2% 152.9% $ 910,850 104.0% 108.3% 114.7% 121.0% 127.3% 133.7% 140.0% 156.5% $ 928,370 106.0% 116.6% 123.8% 131.1% 138.3% 145.5% 152.8% 160.0% $ 945,890 108.0% 124.0% 132.0% 140.0% 148.0% 156.0% 164.0% 172.0% $ 963,400 110.0% 130.7% 139.3% 148.0% 156.7% 165.3% 174.0% 182.7% $ 980,920 112.0% 137.9% 147.0% 156.1% 165.3% 174.4% 183.5% 192.6% $ 998,430 114.0% 144.7% 154.2% 163.8% 173.3% 182.8% 192.4% 201.9% $ 1,015,950 116.0% 151.2% 161.1% 171.0% 180.9% 190.8% 200.7% 210.6% $ 1,033,470 118.0% 161.4% 171.3% 181.2% 191.1% 201.0% 210.9% 220.8% $ 1,050,980 120.0% 171.9% 181.8% 191.7% 201.6% 211.5% 221.4% 231.3%
WESTERN REGION
PROFIT/REVENUE MATRIX $ $ $ $ $ $ $ 84,320 85,880 87,440 89,000 90,560 92,120 93,680 % Achieved 108.0% 110.0% 112.0% 114.0% 116.0% 118.0% 120.0% $ 832,030 95.0% 122.0% 130.0% 142.0% 154.0% 166.0% 178.0% 190.0% $ 836,410 95.5% 126.1% 134.7% 146.9% 159.1% 171.2% 183.4% 195.5% $ 840,790 96.0% 130.3% 139.3% 151.8% 164.1% 176.4% 188.7% 201.0% $ 845,170 96.5% 134.4% 144.0% 156.6% 169.2% 181.7% 194.1% 206.5% $ 849,550 97.0% 138.6% 148.7% 161.5% 174.2% 186.9% 199.5% 212.0% $ 853,920 97.5% 142.7% 153.3% 166.4% 179.3% 192.1% 204.8% 217.5% $ 858,300 98.0% 146.9% 158.0% 171.3% 184.4% 197.3% 210.2% 223.0% $ 862,680 98.5% 151.0% 162.7% 176.1% 189.4% 202.6% 215.6% 228.5% $ 867,060 99.0% 155.1% 167.3% 181.0% 194.5% 207.8% 220.9% 234.0% $ 871,440 99.5% 159.3% 172.0% 185.9% 199.5% 213.0% 226.3% 239.5% $ 875,820 100.0% 163.4% 176.7% 190.8% 204.6% 218.2% 231.7% 245.0% $ 893,340 102.0% 167.6% 181.3% 195.6% 209.6% 223.4% 237.1% 250.5% $ 910,850 104.0% 171.7% 186.0% 200.5% 214.7% 228.7% 242.4% 256.0% $ 928,370 106.0% 175.9% 190.7% 205.4% 219.8% 233.9% 247.8% 261.5% $ 945,890 108.0% 180.0% 195.3% 210.3% 224.8% 239.1% 253.2% 267.0% $ 963,400 110.0% 191.3% 200.0% 215.1% 229.9% 244.3% 258.5% 272.5% $ 980,920 112.0% 201.8% 210.9% 220.0% 234.9% 249.6% 263.9% 278.0% $ 998,430 114.0% 211.4% 220.9% 230.5% 240.0% 254.8% 269.3% 283.5% $ 1,015,950 116.0% 220.4% 230.3% 240.2% 250.1% 260.0% 274.6% 289.0% $ 1,033,470 118.0% 230.7% 240.5% 250.4% 260.3% 270.2% 280.0% 294.5% $ 1,050,980 120.0% 241.2% 251.0% 260.9% 270.8% 280.7% 290.5% 300.0%
BHO PROFIT GRID PROFIT/REVENUE MATRIX
REVENUE VS PLAN (Horizontal Axis) PRE-TAX PROFIT* VS PLAN (Vertical Axis) (In 000s) $ $ $ $ $ $ $ 12,660 12,800 12,940 13,090 13,230 13,370 13,510 90% 91% 92% 93% 94% 95% 96% % Achieved $ 1,780 90% 50.0% 52.5% 55.0% 57.5% 60.0% 62.5% 65.0% $ 1,800 91% 52.5% 55.0% 57.5% 60.0% 62.5% 65.0% 67.5% $ 1,820 92% 55.0% 57.5% 60.0% 62.5% 65.0% 67.5% 70.0% $ 1,840 93% 57.5% 60.0% 62.5% 65.0% 67.5% 70.0% 72.5% $ 1,860 94% 60.0% 62.5% 65.0% 67.5% 70.0% 72.5% 75.0% $ 1,880 95% 62.5% 65.0% 67.5% 70.0% 72.5% 75.0% 77.5% $ 1,900 96% 65.0% 67.5% 70.0% 72.5% 75.0% 77.5% 80.0% $ 1,920 97% 67.5% 70.0% 72.5% 75.0% 77.5% 80.0% 82.5% $ 1,940 98% 70.0% 72.5% 75.0% 77.5% 80.0% 82.5% 85.0% $ 1,960 99% 72.5% 75.0% 77.5% 80.0% 82.5% 85.0% 87.5% $ 1,980 100% 75.0% 77.5% 80.0% 82.5% 85.0% 87.5% 90.0% $ 2,020 102% 80.0% 82.7% 85.5% 88.2% 90.9% 93.6% 96.4% $ 2,060 104% 85.0% 87.9% 90.8% 93.8% 96.7% 99.6% 102.5% $ 2,100 106% 90.0% 93.1% 96.2% 99.2% 102.3% 105.4% 108.5% $ 2,140 108% 95.0% 98.2% 101.4% 104.6% 107.9% 111.1% 114.3% $ 2,180 110% 100.0% 103.3% 106.7% 110.0% 113.3% 116.7% 120.0% $ 2,220 112% 110.0% 113.1% 116.3% 119.4% 122.5% 125.6% 128.8% $ 2,260 114% 120.0% 122.9% 125.9% 128.8% 131.8% 134.7% 137.6% $ 2,300 116% 130.0% 132.8% 135.6% 138.3% 141.1% 143.9% 146.7% $ 2,340 118% 140.0% 135.4% 138.2% 141.0% 143.7% 146.5% 149.3% $ 2,380 120% 150.0% 137.9% 140.7% 143.5% 146.2% 149.0% 151.8%
* Denotes Earnings Before Interest Expense & Taxes, and Net of Bonus Expense PAYOYUT AS A PERCENT OF ELIGIBLE BONUS BHO PROFIT GRID
PROFIT/REVENUE MATRIX $ $ $ $ $ $ $ 13,650 13,790 13,930 14,070 14,350 14,630 14,910 % 97% 98% 99% 100% 102% 104% 106% Achieved $ 1,780 90% 67.5% 70.0% 72.5% 75.0% 80.0% 85.0% 90.0% $ 1,800 91% 70.0% 72.5% 75.0% 77.5% 82.7% 87.9% 93.1% $ 1,820 92% 72.5% 75.0% 77.5% 80.0% 85.5% 90.8% 96.2% $ 1,840 93% 75.0% 77.5% 80.0% 82.5% 88.2% 93.8% 99.2% $ 1,860 94% 77.5% 80.0% 82.5% 85.0% 90.9% 96.7% 102.3% $ 1,880 95% 80.0% 82.5% 85.0% 87.5% 93.6% 99.6% 105.4% $ 1,900 96% 82.5% 85.0% 87.5% 90.0% 96.4% 102.5% 108.5% $ 1,920 97% 85.0% 87.5% 90.0% 92.5% 99.1% 105.4% 111.5% $ 1,940 98% 87.5% 90.0% 92.5% 95.0% 101.8% 108.3% 114.6% $ 1,960 99% 90.0% 92.5% 95.0% 97.5% 104.5% 111.3% 117.7% $ 1,980 100% 92.5% 95.0% 97.5% 100.0% 107.3% 114.2% 120.8% $ 2,020 102% 99.1% 101.8% 104.5% 107.3% 110.0% 117.1% 123.8% $ 2,060 104% 105.4% 108.3% 111.3% 114.2% 117.1% 120.0% 126.9% $ 2,100 106% 111.5% 114.6% 117.7% 120.8% 123.8% 126.9% 130.0% $ 2,140 108% 117.5% 120.7% 123.9% 127.1% 130.4% 133.6% 136.8% $ 2,180 110% 123.3% 126.7% 130.0% 133.3% 136.7% 140.0% 143.3% $ 2,220 112% 131.9% 135.0% 138.1% 141.3% 144.4% 147.5% 150.6% $ 2,260 114% 140.6% 143.5% 146.5% 149.4% 152.4% 155.3% 158.2% $ 2,300 116% 149.4% 152.2% 155.0% 157.8% 160.6% 163.3% 166.1% $ 2,340 118% 152.1% 154.9% 157.6% 160.4% 163.2% 166.0% 168.7% $ 2,380 120% 154.6% 157.4% 160.1% 162.9% 165.7% 168.5% 171.2%
BHO PROFIT GRID
PROFIT/REVENUE MATRIX $ $ $ $ $ $ $ 15,200 15,480 15,760 16,040 16,320 16,600 16,880 % 108% 110% 112% 114% 116% 118% 120% Achieved $ 1,780 90% 95.0% 100.0% 110.0% 120.0% 130.0% 140.0% 150.0% $ 1,800 91% 98.2% 103.3% 113.1% 122.9% 132.8% 142.6% 152.5% $ 1,820 92% 101.4% 106.7% 116.3% 125.9% 135.6% 145.3% 155.0% $ 1,840 93% 104.6% 110.0% 119.4% 128.8% 138.3% 147.9% 157.5% $ 1,860 94% 107.9% 113.3% 122.5% 131.8% 141.1% 150.5% 160.0% $ 1,880 95% 111.1% 116.7% 125.6% 134.7% 143.9% 153.2% 162.5% $ 1,900 96% 114.3% 120.0% 128.8% 137.6% 146.7% 155.8% 165.0% $ 1,920 97% 117.5% 123.3% 131.9% 140.6% 149.4% 158.4% 167.5% $ 1,940 98% 120.7% 126.7% 135.0% 143.5% 152.2% 161.1% 170.0% $ 1,960 99% 123.9% 130.0% 138.1% 146.5% 155.0% 163.7% 172.5% $ 1,980 100% 127.1% 133.3% 141.3% 149.4% 157.8% 166.3% 175.0% $ 2,020 102% 130.4% 136.7% 144.4% 152.4% 160.6% 168.9% 177.5% $ 2,060 104% 133.6% 140.0% 147.5% 155.3% 163.3% 171.6% 180.0% $ 2,100 106% 136.8% 143.3% 150.6% 158.2% 166.1% 174.2% 182.5% $ 2,140 108% 140.0% 146.7% 153.8% 161.2% 168.9% 176.8% 185.0% $ 2,180 110% 146.7% 150.0% 156.9% 164.1% 171.7% 179.5% 187.5% $ 2,220 112% 153.8% 156.9% 160.0% 167.1% 174.4% 182.1% 190.0% $ 2,260 114% 161.2% 164.1% 167.1% 170.0% 177.2% 184.7% 192.5% $ 2,300 116% 168.9% 171.7% 174.4% 177.2% 180.0% 187.4% 195.0% $ 2,340 118% 171.5% 174.3% 177.1% 179.9% 182.6% 190.0% 197.5% $ 2,380 120% 174.0% 176.8% 179.6% 182.4% 185.1% 192.5% 200.0%
CENTRAL REGION REVENUE/PROFIT MATRIX
REVENUE VS PLAN (Horizontal Axis) PRE-TAX PROFIT* VS PLAN (Vertical Axis) (In 000s) $ $ $ $ $ $ $ 329,990 333,650 337,320 340,980 344,650 348,320 351,980 % Achieved 90% 91% 92% 93% 94% 95% 96% $ (6,670) 90% 50.0% 52.5% 55.0% 57.5% 60.0% 62.5% 65.0% $ (6,600) 91% 52.5% 55.0% 57.5% 60.0% 62.5% 65.0% 67.5% $ (6,530) 92% 55.0% 57.5% 60.0% 62.5% 65.0% 67.5% 70.0% $ (6,470) 93% 57.5% 60.0% 62.5% 65.0% 67.5% 70.0% 72.5% $ (6,410) 94% 60.0% 62.5% 65.0% 67.5% 70.0% 72.5% 75.0% $ (6,350) 95% 62.5% 65.0% 67.5% 70.0% 72.5% 75.0% 77.5% $ (6,290) 96% 65.0% 67.5% 70.0% 72.5% 75.0% 77.5% 80.0% $ (6,230) 97% 67.5% 70.0% 72.5% 75.0% 77.5% 80.0% 82.5% $ (6,170) 98% 70.0% 72.5% 75.0% 77.5% 80.0% 82.5% 85.0% $ (6,110) 99% 72.5% 75.0% 77.5% 80.0% 82.5% 85.0% 87.5% $ (6,050) 100% 75.0% 77.5% 80.0% 82.5% 85.0% 87.5% 90.0% $ (5,930) 102% 80.0% 82.7% 85.5% 88.2% 90.9% 93.6% 96.4% $ (5,811) 104% 85.0% 87.9% 90.8% 93.8% 96.7% 99.6% 102.5% $ (5,695) 106% 90.0% 93.1% 96.2% 99.2% 102.3% 105.4% 108.5% $ (5,581) 108% 95.0% 98.2% 101.4% 104.6% 107.9% 111.1% 114.3% $ (5,470) 110% 100.0% 103.3% 106.7% 110.0% 113.3% 116.7% 120.0% $ (5,360) 112% 110.0% 113.1% 116.3% 119.4% 122.5% 125.6% 128.8% $ (5,253) 114% 120.0% 122.9% 125.9% 128.8% 131.8% 134.7% 137.6% $ (5,148) 116% 130.0% 132.8% 135.6% 138.3% 141.1% 143.9% 146.7% $ (5,045) 118% 140.0% 135.4% 138.2% 141.0% 143.7% 146.5% 149.3% $ (4,944) 120% 150.0% 137.9% 140.7% 143.5% 146.2% 149.0% 151.8%
* Denotes Earnings Before Interest Expense & Taxes, and Net of Bonus Expense PAYOUT AS A PERCENT OF ELIGIBLE BONUS CENTRAL REGION
REVENUE/PROFIT MATRIX $ $ $ $ $ $ $ 355,650 359,320 362,980 366,650 373,980 381,320 388,650 % Achieved 97% 98% 99% 100% 102% 104% 106.0% $ (6,670) 90% 67.5% 70.0% 72.5% 75.0% 80.0% 85.0% 90.0% $ (6,600) 91% 70.0% 72.5% 75.0% 77.5% 82.7% 87.9% 93.1% $ (6,530) 92% 72.5% 75.0% 77.5% 80.0% 85.5% 90.8% 96.2% $ (6,470) 93% 75.0% 77.5% 80.0% 82.5% 88.2% 93.8% 99.2% $ (6,410) 94% 77.5% 80.0% 82.5% 85.0% 90.9% 96.7% 102.3% $ (6,350) 95% 80.0% 82.5% 85.0% 87.5% 93.6% 99.6% 105.4% $ (6,290) 96% 82.5% 85.0% 87.5% 90.0% 96.4% 102.5% 108.5% $ (6,230) 97% 85.0% 87.5% 90.0% 92.5% 99.1% 105.4% 111.5% $ (6,170) 98% 87.5% 90.0% 92.5% 95.0% 101.8% 108.3% 114.6% $ (6,110) 99% 90.0% 92.5% 95.0% 97.5% 104.5% 111.3% 117.7% $ (6,050) 100% 92.5% 95.0% 97.5% 100.0% 107.3% 114.2% 120.8% $ (5,930) 102% 99.1% 101.8% 104.5% 107.3% 110.0% 117.1% 123.8% $ (5,811) 104% 105.4% 108.3% 111.3% 114.2% 117.1% 120.0% 126.9% $ (5,695) 106% 111.5% 114.6% 117.7% 120.8% 123.8% 126.9% 130.0% $ (5,581) 108% 117.5% 120.7% 123.9% 127.1% 130.4% 133.6% 136.8% $ (5,470) 110% 123.3% 126.7% 130.0% 133.3% 136.7% 140.0% 143.3% $ (5,360) 112% 131.9% 135.0% 138.1% 141.3% 144.4% 147.5% 150.6% $ (5,253) 114% 140.6% 143.5% 146.5% 149.4% 152.4% 155.3% 158.2% $ (5,148) 116% 149.4% 152.2% 155.0% 157.8% 160.6% 163.3% 166.1% $ (5,045) 118% 152.1% 154.9% 157.6% 160.4% 163.2% 166.0% 168.7% $ (4,944) 120% 154.6% 157.4% 160.1% 162.9% 165.7% 168.5% 171.2%
CENTRAL REGION
REVENUE/PROFIT MATRIX $ $ $ $ $ $ $ 395,980 403,320 410,650 417,980 425,310 432,650 439,980 % Achieved 108.0% 110.0% 112.0% 114.0% 116.0% 118.0% 120.0% $ (6,670) 90% 95.0% 100.0% 110.0% 120.0% 130.0% 140.0% 150.0% $ (6,600) 91% 98.2% 103.3% 113.1% 122.9% 132.8% 142.6% 152.5% $ (6,530) 92% 101.4% 106.7% 116.3% 125.9% 135.6% 145.3% 155.0% $ (6,470) 93% 104.6% 110.0% 119.4% 128.8% 138.3% 147.9% 157.5% $ (6,410) 94% 107.9% 113.3% 122.5% 131.8% 141.1% 150.5% 160.0% $ (6,350) 95% 111.1% 116.7% 125.6% 134.7% 143.9% 153.2% 162.5% $ (6,290) 96% 114.3% 120.0% 128.8% 137.6% 146.7% 155.8% 165.0% $ (6,230) 97% 117.5% 123.3% 131.9% 140.6% 149.4% 158.4% 167.5% $ (6,170) 98% 120.7% 126.7% 135.0% 143.5% 152.2% 161.1% 170.0% $ (6,110) 99% 123.9% 130.0% 138.1% 146.5% 155.0% 163.7% 172.5% $ (6,050) 100% 127.1% 133.3% 141.3% 149.4% 157.8% 166.3% 175.0% $ (5,930) 102% 130.4% 136.7% 144.4% 152.4% 160.6% 168.9% 177.5% $ (5,811) 104% 133.6% 140.0% 147.5% 155.3% 163.3% 171.6% 180.0% $ (5,695) 106% 136.8% 143.3% 150.6% 158.2% 166.1% 174.2% 182.5% $ (5,581) 108% 140.0% 146.7% 153.8% 161.2% 168.9% 176.8% 185.0% $ (5,470) 110% 146.7% 150.0% 156.9% 164.1% 171.7% 179.5% 187.5% $ (5,360) 112% 153.8% 156.9% 160.0% 167.1% 174.4% 182.1% 190.0% $ (5,253) 114% 161.2% 164.1% 167.1% 170.0% 177.2% 184.7% 192.5% $ (5,148) 116% 168.9% 171.7% 174.4% 177.2% 180.0% 187.4% 195.0% $ (5,045) 118% 171.5% 174.3% 177.1% 179.9% 182.6% 190.0% 197.5% $ (4,944) 120% 174.0% 176.8% 179.6% 182.4% 185.1% 192.5% 200.0%
EX-10 7 Exhibit 10.8(19) AMENDMENT NO. 1 to the AMENDED AND RESTATED NON-EMPLOYEE DIRECTORS' STOCK PLAN of SIERRA HEALTH SERVICES, INC. as amended and restated May 18, 1998 Pursuant to Section 9 of the 1995 Non-Employee Directors' Stock Plan (the "Plan") of Sierra Health Services, Inc. (the "Company"), as amended and restated May 18, 1998, the Board of Directors of the Company, at its meeting on November 6, 1999, authorized amending the Plan as follows: (1) Section 3 of the Plan is hereby amended by deleting the existing text and inserting in its stead the following: Subject to adjustment as provided in Section 8, the total number of shares of Stock reserved and available for issuance or delivery under the Plan is 340,000. Of these, the 90,000 shares authorized for issuance under the Plan as amended and restated at May 18, 1998, may be authorized but unissued shares, treasury shares, or shares acquired in the market for the account of the Participant, and any shares delivered under the Plan in excess of that 90,000 shall be treasury shares or shares acquired in the market for the account of the Participant. For purposes of the Plan, shares that may be purchased upon exercise of an Option or delivered in settlement of Deferred Stock will not be considered to be available after such Option has been granted or Deferred Stock credited, except for purposes of issuance or delivery in connection with such Option or Deferred Stock; provided, however, that, if an Option expires for any reason without having been exercised in full, the shares subject to the unexercised portion of such Option will again be available for issuance or delivery under the Plan. (2) The effective date of this amendment shall be November 6 1999. Except as otherwise amended hereby, the terms of the Plan shall remain in full force and effect. EX-23 8 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-42222, 33-41542, 33-41543, 33-59187, 33-60901, 33-60591, 33-82474, 333-68399 and 333-95113 of Sierra Health Services, Inc. on Forms S-8 of our report dated February 14, 2000, appearing in this Annual Report on Form 10-K of Sierra Health Services, Inc. for the year ended December 31, 1999. Las Vegas, Nevada March 24, 2000 EX-27 9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF CONSOLIDATED OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 DEC-31-1999 55,936,000 218,951,000 119,727,000 16,351,000 0 524,593,000 354,081,000 89,532,000 1,130,112,000 409,853,000 258,854,000 0 0 142,000 278,270,000 1,130,112,000 0 1,283,811,000 0 1,260,589,000 18,808,000 0 14,980,000 (10,566,000) (5,935,000) (4,631,000) 0 0 0 (4,631,000) (0.17) (0.17) identifiable impairment, settlement, and other costs
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