UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K/A
(Mark
One)
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R
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2006
or
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from ________
to ________
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Commission
File Number: 1-8865
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SIERRA
HEALTH SERVICES, INC.
(Exact
Name of Registrant as Specified in Its
Charter)
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Nevada
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88-0200415
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(State
or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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2724
North Tenaya Way, Las Vegas, NV
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89128
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code: (702) 242-7000
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange which registered
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Common
Stock, par value $.005
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New
York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
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Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act. YesR
No
ྈ
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yes ྈNo R
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Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes R No ྈ
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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. ྈ
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Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of
the Exchange Act (check one).
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Large
accelerated filerR Accelerated
filer Non-accelerated
filer
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Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act). Yes NoR
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The
aggregate market value of the voting stock held by non-affiliates
of the
registrant at June 30, 2006 was $2,301,974,000 (which represents
shares of 51,121,000 Common Stock held by such non-affiliates multiplied
by $45.03, the closing sales price of such stock on the New York
Stock
Exchange on June 30, 2006).
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The
number of shares outstanding of the registrant’s Common Stock as of
April 26, 2007 was 55,967,000.
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Documents
Incorporated By Reference
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Sierra
Health Services, Inc. (the “Company,” “Sierra,” “we,” or “us”) hereby amends its
Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Each
of
the below-referenced Items in Part III is amended by deleting the Items in
their
entirety and replacing them with the Items set forth in this amendment. Any
Items in the original filing not expressly changed by this amendment shall
be as
set forth in the original filing.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
following lists our executive officers and directors and their respective ages
and positions as of December 31, 2006:
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Name
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Age
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Position
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Anthony
M. Marlon, M.D.
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64
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Chief
Executive Officer and Chairman of the Board
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Jonathon
W. Bunker
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48
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President and
Chief Operating Officer
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Frank
E. Collins
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52
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Senior
Executive Vice President, Legal and Administration and
Secretary
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Donald
J. Giancursio
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48
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Senior
Vice President, Sales and Marketing
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Paul
H. Palmer
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45
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Senior
Vice President, Chief Financial Officer and Treasurer
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Darren
G.D. Sivertsen
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45
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Senior
Vice President, Operations
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Marc
R. Briggs
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37
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Vice
President, Finance and Chief Accounting Officer
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Thomas
Y. Hartley
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73
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Lead
Director
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Charles
L. Ruthe
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72
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Director
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Albert
L. Greene
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57
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Director
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Michael
E. Luce
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56
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Director
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Anthony
L. Watson
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65
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Director
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Anthony
M. Marlon, M.D., has been the Chief Executive Officer and Chairman of the Board
of the Company since its inception in 1984. He also served as President from
1984 until 1994. In 2001, Dr. Marlon reassumed the role of President, which
he held until August 2006. He held similar executive positions with several
of
the Company’s predecessors dating back to 1972, the year of inception of the
Company’s predecessor physician group. In those capacities, he organized and
managed the Company’s predecessor physician group, ambulatory surgical facility,
management company and Health Plan of Nevada, Inc. (“HPN”). Dr. Marlon has
served on the board of America’s Health Insurance Plans since 1997.
Dr. Marlon has served as Associate Professor of Medicine at the University
of Nevada School of Medical Sciences since 1975 and held positions as Chief,
Division of Cardiology, and Medical Director, Cardiac Rehabilitation, of
University Medical Center of Southern Nevada from 1972 to 1985; Clinical
Associate of the Department of Medicine at the University of Arizona from 1973
to 1979; and Clinical Associate Professor, Department of Medicine, Tulane
University, New Orleans, from 1973 to 1977. Dr. Marlon is a board-certified
specialist in internal medicine and cardiovascular diseases. In 1967,
Dr. Marlon received his M.D. from State University of New York. In 1972,
Dr. Marlon completed his internship, residency and cardiology fellowship at
Stanford University. Dr. Marlon was appointed to the Federal Task Force on
Long Term Health Care Policies in 1986 by Dr. Otis R. Bowen, then Secretary
of Health and Human Services. In July 1988, Dr. Marlon was appointed
and continues to serve on the Board of Trustees of the Nevada Development
Authority, a non-profit organization dedicated to the expansion and
diversification of the southern Nevada business community.
Jonathon
W. Bunker joined the Company in 1996 as Vice President, HMO and Insurance
Operations and has served as President of HPN and Sierra Health and Life
Insurance Company, Inc. (“SHL”) since then. In March 2000, Mr. Bunker
was promoted to Senior Vice President, HMO and Insurance Operations, and
President of the Managed Healthcare Division, which encompassed all of Sierra’s
managed health care and group practice management operations, including
responsibility for sales and marketing. He was promoted to the office of
President and Chief Operating Officer of the Company in August of 2006. Prior
to
joining the Company, he served as Vice President of John Alden Horizon Health
from 1989 to 1996 and Vice President of Prime Health from 1988 to 1989.
From 1984 to
1988,
Mr. Bunker was Vice President of SHL. From 1982 to 1984, he was a Staff
Accountant with Deloitte Haskins & Sells (now Deloitte &
Touche LLP). Mr. Bunker received his degree in accounting from Utah State
University.
Frank
E.
Collins joined the Company in 1986 as General Counsel and Secretary. In 1997,
he
was also appointed Executive Vice President. In 2001 he was promoted to the
position of Senior Vice President, Legal and Administration and Secretary,
and
in August of 2006, he was promoted to Senior Executive Vice President, Legal
and
Administration and Secretary. From 1981 to 1986, Mr. Collins was employed
by Blue Cross and Blue Shield of Kansas City, originally as Staff Legal Counsel
and in early 1986 as Associate General Counsel. Mr. Collins also served as
counsel for the Missouri Division of Insurance from 1979 to 1981, where he
was
responsible for providing legal advice on insurance and HMO-related regulatory
issues. Mr. Collins received his Juris Doctor from the University of
Missouri at Kansas City School of Law and is a member of the Missouri Bar
Association.
Donald
J.
Giancursio joined the Company in 1996 as Vice President of Sales and Marketing,
Western Region, for HPN, and served as Vice President of Sales for the Managed
Healthcare Division from March 2000 until August 2006. He was promoted to Senior
Vice President of Sales and Marketing of the Company in August 2006. He
currently oversees sales, account retention, marketing and advertising, product
development, telemarketing and broker relations. From 1988 to 1996 Mr.
Giancursio worked for EBP Health Plans, which at the time was one of the largest
publicly held third-party administrators in the country. During his tenure
he
held a series of increasingly responsible positions, including Vice President
of
Sales for the western region. He held Group Underwriter and Sales Executive
positions for United Insurance Company of America in California from 1982 to
1988. Mr. Giancursio is a business administration graduate of California State
University, Fullerton.
Paul
H.
Palmer joined the Company in 1993 as the Finance Director for one of the
Company’s subsidiaries, Southwest Medical Associates, Inc. (“SMA”). In
1994, he became the Assistant Vice President and Corporate Controller of the
Company. In April 1998, Mr. Palmer was appointed Vice President,
Finance, Acting Chief Financial Officer and Treasurer of the Company. In
November 1998, he became the Chief Financial Officer and in May 2002,
he was appointed Senior Vice President, Chief Financial Officer and Treasurer.
Prior to joining the Company, Mr. Palmer was a manager at
Deloitte & Touche LLP, where he worked from 1988 to 1993.
Mr. Palmer received a Masters Degree in Business Administration and a
Masters of Accountancy from Brigham Young University and is a Certified Public
Accountant. Mr. Palmer retired from the position of Senior Vice President,
Chief
Financial Officer and Treasurer on April 6, 2007. He will remain on a full-time
basis in a transitional role through May 4, 2007, and will continue to work
part-time for the Company from May 7 through May 30, 2007.
Darren
G.D. Sivertsen joined the Company in January 1997 as Director of Project
Analysis. Shortly afterward, he was promoted to CFO of the Western Region (now
the Managed Healthcare Division). He was promoted to the office of Senior Vice
President of Operations of the Company in August 2006, and he currently oversees
clinical, insurance and pharmacy operations, government programs and health
education. Mr. Sivertsen is also the Vice President and Chief Operating Officer
for SHL, and HPN, as well as CEO of SMA and President of Sierra Health-Care
Options, Inc., Behavioral Healthcare Options, Inc. and Sierra Home Medical
Products, Inc., dba THC of Nevada, wholly-owned subsidiaries of the Company.
Prior to joining the Company, Mr. Sivertsen was CFO for Hi Tech Healthcare
Services, a healthcare company offering TPA, PPO, utilization review, physician
practice management and home healthcare services. He began his career with
KPMG
Peat Marwick, working in its healthcare and banking groups. Mr. Sivertsen earned
an M.B.A. degree from the University of Utah and is a Certified Public
Accountant.
Marc
R.
Briggs joined the Company in 2000 as Assistant Corporate Controller. In 2005,
he
was appointed to the position of Assistant Vice President, Corporate Controller.
In January 2006, he was promoted to the position of Vice President, Finance,
and
in May 2006 was also given the title of Chief Accounting Officer. He was
promoted to the position of Senior Vice President, Chief Financial Officer
and
Treasurer of the Company on April 6, 2007. From 1997 to 2000, Mr. Briggs was
employed by OB Sports, the owner and operator of golf course projects throughout
the west coast, eventually serving as Corporate Controller for the company.
Mr.
Briggs was previously an auditor in the Las Vegas office of Deloitte &
Touche LLP. He is a Certified Public Accountant and earned his bachelor's degree
in accounting from the University of Utah and an M.B.A. from the University
of
Nevada Las Vegas. He is a member of the American Institute of Certified Public
Accountants and the Nevada State Society of Certified Public
Accountants.
Thomas
Y.
Hartley has been a Director of the Company since 1992. Mr. Hartley served
on the Board of Southwest Gas Corporation from 1991 until May 2006 and served
as
its Chairman from 1997 through May 2006. He is currently a Director on the
Board
of Medicor, Ltd. He served on the Board of Directors of Ameritrade Holdings
Corporation from November 1996 to September 2002 and on the Board of
Directors of the Rio Suite Hotel & Casino, Inc. from 1990 to
1998. Mr. Hartley was associated with Deloitte Haskins & Sells
(now Deloitte & Touche LLP) from 1959 until his retirement in 1988 as
area managing partner in charge of Las Vegas, Reno, Phoenix and Tucson offices.
Mr. Hartley, who obtained his degree in business from Ohio University, is a
Certified Public Accountant. He is active in many Las Vegas civic and charitable
organizations.
Charles
L. Ruthe has been a Director of the Company and Chairman of the Board of
Directors of HPN since 1984. He was also a member of the Board of Directors
of
one of the Company’s predecessors. Mr. Ruthe has been the owner since 1975
of Charles L. Ruthe and Associates, Inc., a real estate brokerage firm in
Las Vegas, Nevada, and served as its President until 1988, at which time he
assumed the position of Chairman of the Board. Mr. Ruthe held the position
of Consultant to Boyd Gaming Corporation, a corporation which operates several
Nevada hotel/casinos, from January 1997 to June 1999. From 1988
through 1996, he served as President and a Director of Boyd Gaming Corporation.
From 1996 through 1999, he served as President and a Director of Boyd
Development Corporation, a subsidiary of Boyd Gaming Corporation. He was a
Director of First Interstate Bank of Nevada from 1979 to 1983, Vice Chairman
of
the Board of Directors of First Western Financial Corporation, the parent
company of a savings and loan company, from 1985 to 1991, and was President
of
the Nevada State Chamber of Commerce in 1977. Mr. Ruthe served on the Board
of Directors of Pioneer Citizens Bank of Nevada from January 1998 to
November 1999.
Albert
L.
Greene has been a Director of the Company since August 2000. He is
currently Chief Executive Officer of Valley Presbyterian Hospital in Van Nuys,
California, a position he accepted in March 2006. Since November 1,
2005, he has also been a Managing Partner of Radius Healthcare Management Group,
a hospital turnaround and management company. From January 2002 through
October 2005, he served as Chief Executive Officer of Hollywood
Presbyterian Medical Center, formerly known as Queen of Angels-Hollywood
Presbyterian Medical Center, in Los Angeles, California. From 1998 to 2001,
he
served as Chairman of the Board and Chief Executive Officer of
HealthCentral.com, a provider of healthcare e-commerce to consumers through
a
network of sites on the Internet. He also served as President of
HealthCentral.com from July 1998 to November 2000. In
October 2001, HealthCentral.com and its wholly-owned subsidiaries filed
voluntary petitions for protection under the U.S. Bankruptcy Code. From
May 1990 to February 1998, Mr. Greene served as President of Alta
Bates Medical Center, a hospital in Berkeley, California. From January 1996
to July 1998, Mr. Greene simultaneously served as Chief Executive
Officer of the East Bay Service Area of Sutter Health, a healthcare provider.
Mr. Greene received a B.A. in Psychology from Ithaca College and an M.H.A.
in Hospital Administration from the University of Michigan.
Michael
E. Luce has been a Director of the Company since August 2000. Mr. Luce
is currently President of the Walters Group, a Las Vegas-based holding company
for diversified investments and business ventures in the areas of real estate
and recreation. From 1991 to 1997, Mr. Luce was the Director of Finance for
Bigelow Companies. Between 1985 and 1991, Mr. Luce was engaged in financial
consulting and development in Nevada, Idaho and Hawaii. From 1981 to 1985,
he
was Vice President of Commercial Lending at Idaho Bank and Trust and from 1972
to 1981 he was a Commercial Loan Officer of First National Bank of Nevada in
Reno, Nevada. Mr. Luce received a B.S. in Business Administration from the
University of Nevada, Reno.
Anthony
L. Watson has been a Director of the Company since March 2000. He is currently
the Chairman and Chief Executive Officer of EmblemHealth, Inc., the parent
company of recently affiliated HIP Health Plan (HIP) and Group Health, Inc.
(GHI). In addition to his role at EmblemHealth, since 2006, Mr. Watson
has been a Director and Chairman and Chief Executive Officer of HIP since 1991,
and was the Executive Vice President of HIP from 1985 to 1990; he was also
Chairman of the Board of Directors of HIP Health Plan in New Jersey from 1995
to
1999. Mr. Watson served as Chairman of the American Association of Health Plans
from June 2000 through December 2001. From 1966 to 1970, he was Supervising
Public Health Advisor at the Center for Disease Control of the United States
Department of Health, Education and Welfare. From 1970 to 1976, he was Deputy
Director of the New York City Comprehensive Health Planning Agency. From 1976
to
1985, he was Executive Director of the Health Systems Agency of New York City.
From 1972 to 1974, he also was an instructor in health planning at the Herbert
J. Lehman College of the City of New York. Mr. Watson was named by President
Clinton to serve as a member of the National Bipartisan Commission on the Future
of Medicare and served during the Commission’s 1998-1999 duration.
The
Board
of Directors oversees the management of our business in accordance with the
corporation law of the State of Nevada and our Articles of Incorporation and
Bylaws. Members of the Board are kept informed regarding our business through
discussions with the Chairman and Chief Executive Officer, the President and
Chief Operating Officer and other officers, by reviewing materials provided
to
them and by participating in meetings of the Board and its
committees.
The
Company has adopted a number of key documents that are the foundation of its
corporate governance:
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Corporate
Governance Guidelines
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Code
of Ethics
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Code
of Ethics for Directors
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Code
of Conduct for the Chief Executive Officer and Senior Financial
Officers
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Audit
Committee Charter
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Nominating
and Governance Committee Charter
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·
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Compensation
Committee Charter
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These
documents and other important information on our governance are posted in the
“Investors” section of the Sierra Health Services, Inc. website, and may be
viewed at http://www.sierrahealth.com.
We will
also provide any of these documents in print to a stockholder who requests
it.
You may direct your request to the Senior Executive Vice President, Legal and
Administration, Sierra Health Services, Inc.,
P. O. Box 15645, Las Vegas, Nevada 89114-5645.
The
Board
of Directors has a long-standing commitment to sound and effective corporate
governance practices. The Board’s Corporate Governance Guidelines address a
number of important governance issues such as:
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Selection
and monitoring of the performance of senior
management;
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Succession
planning for senior management;
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Qualifications
for Board membership, including mandatory retirement for Board members
upon completion of a term after attaining age
78;
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Functioning
of the Board, including the requirement for meetings of the independent
Directors; and
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Standards
and procedures for determining independence of
Directors.
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The
Board
believes that the Corporate Governance Guidelines and other governance documents
meet current requirements and reflect a high standard of corporate
governance.
Independence
of Directors
The
foundation for the Company’s corporate governance is the Board’s policy that a
substantial majority of the members of the Board should be independent. The
Board of Directors has adopted the following statement as of April 27,
2007:
We
have
determined that the following Sierra Health Services, Inc. Directors are
currently independent: Messrs. Greene, Hartley, Luce, Ruthe and Watson. Our
determination of “independence” means that we find that each of those Directors
has no material relationship with Sierra, either directly or as a partner,
stockholder or officer of an organization that has a relationship with the
Company. Those Directors meet the objective, categorical standards of
independence set forth in our Corporate Governance Guidelines. Regarding
Directors who serve as members of the Audit Committee, we find that each
Director meets an additional high standard of independence, in that each of
them
has not, other than in his or her capacity as a member of the Board or Board
committee (or the board of an HMO subsidiary of Sierra), accepted directly
or
indirectly any consulting, advisory or compensatory fee from, or been an
affiliated person of, Sierra Health Services, Inc. or any of its
subsidiaries.
The
Board
made its determination of independence in accordance with its Corporate
Governance Guidelines, which specify standards and a process for evaluating
Director independence. The Corporate Governance Guidelines provide:
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A
Director cannot be independent if he or she fails to meet the objective
requirements as to “independence” under the New York Stock Exchange
(“NYSE”) listing standards.
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If
a Director meets the objective NYSE standards, he or she will be
deemed
independent, absent unusual circumstances, if in the current year
and the
past three years the Director has had no related-party transaction
or
relationship with the Company or an “interlocking” relationship with
another entity triggering disclosure under the SEC disclosure
rules (such disclosure is required in the Company’s proxy statements
and Form 10-K).
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If
a Director who meets the objective NYSE independence requirements
has had
a disclosable transaction or relationship, or if the Nominating and
Governance Committee or the Senior Executive Vice President, Legal
and
Administration request that the Board consider any other circumstances
in
determining the Director’s independence, the Board will make a subjective
determination of independence.
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The
independence of Audit Committee members is determined in accordance with all
applicable standards, referred to by the Board in its statement
above.
The
NYSE
requires a listed company to disclose in its proxy statement its specific
categorical standards of Director independence. The following is an excerpt
from
Section 4 of our Corporate Governance Guidelines, setting forth our
categorical standards for Director independence:
Objective
Factors Demonstrating Director Independence—Sierra’s Categorical
Standards.
Absent
unusual circumstances, a Director meeting the requirements of (1) above
will
be
deemed to be independent under Sierra’s categorical standards if, during the
current year and the preceding three years, the Director and his or her
immediate family members:
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(a)
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Have
not had, during 2005 or earlier years, a transaction or relationship
with
Sierra triggering disclosure under Item 404(a) or (b) of
Regulation S-K under the Securities Exchange Act of 1934 as then
in
effect;
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Note:
A charitable organization that employs the Director will be treated
as a
business entity and Sierra contributions to it will be treated as
payments
in applying Item 404(b);
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(b)
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Have
not had, during 2006 and later years, a direct or indirect material
interest in a transaction in which Sierra was a participant triggering
disclosure under Item 404(a) of Regulation S-K as in effect from
November 7, 2006;
and
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(c)
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Have
not had an “interlocking” relationship in 2005 or earlier years, of the
type required to be disclosed under Item 402(j)(3) of Regulation S-K
or, in 2006 or later years, of the type required to be disclosed
under
Item 407(e)(iii) of Regulation S-K as in effect from November 7,
2006 (in both cases this can arise where a Director is an executive
officer of another entity and an executive officer of Sierra is a
Director
of the other entity, if either of the two individuals has authority
to set
the compensation of the other).
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Explanatory
Note: Section (1) contains the stated NYSE bright line
criteria for director “independence;” it is not reprinted
here.
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As
disclosed in our proxy statement dated April 14, 2006 for our 2006 Annual
Meeting, the Board had determined that William J. Raggio was independent. Mr.
Raggio served on the Nominating and Governance Committee and the Compensation
Committee during 2006, until his retirement under our mandatory retirement
policy effective at the date of our 2006 Annual Meeting, May 23, 2006.
In
accordance with our Bylaws, the Board of Directors has specified that the number
of Directors currently is six. Our Bylaws provide for two classes of Directors,
as nearly equal in number as possible, with each class serving for a term of
two
years.
To
promote open discussion among the independent Directors, those Directors have
met and will meet in 2007 in regularly scheduled executive sessions without
management participation. Mr. Hartley serves as the Lead Director for
purposes of these meetings.
The
Board
of Directors has an Audit Committee, the current members of which are
Messrs. Greene, Hartley, Luce, Ruthe and Watson. As stated above, the Board
of Directors has determined that the current members of the Audit Committee,
who
served throughout 2006, have met all applicable independence requirements.
The
Board also has determined that Mr. Hartley fulfills the requirements for
being the Audit Committee financial expert.
The
Board
has a Compensation Committee, the current members of which are
Messrs. Greene, Hartley, Luce, Ruthe and Watson. As stated above, the Board
of Directors has determined that these current members of the Compensation
Committee, who served throughout 2006 and Mr. Raggio, who served until his
retirement in May 2006, each was an independent Director.
The
Board
has a Nominating and Governance Committee, the current members of which are
Messrs. Greene, Hartley, Luce, Ruthe and Watson. As stated above, the Board
of Directors has determined that these current members of the Nominating and
Governance Compensation Committee, who served throughout 2006 and Mr. Raggio,
who served until his retirement in May 2006, each was an independent Director.
We
have
established a process by which stockholders and other interested persons can
contact our Board of Directors, the Lead Director, the non-management
Directors as a group or any committee of the Board of Directors. To contact
any
of these parties, you can send an email to
communications@sierrahealth.com,
or
write to either of the following addresses:
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Board
of Directors
Sierra
Health Services, Inc.
c/o
Audit Committee
2724
North Tenaya Way
Las
Vegas, NV 89128
(overnight
mail)
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or
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Board
of Directors
Sierra
Health Services, Inc.
c/o
Lead Director
P.
O. Box 15645
Las
Vegas, NV 89114-5645
(regular
mail)
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·
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All
concerns and complaints will be received and processed by the Sierra
Health Services Corporate Compliance Officer and/or the Company’s Director
of Internal Audit.
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·
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Any
communications that such officers deem to be credible and to contain
substantive allegations will be reported to the Lead Director and
to the
Chair of the Audit Committee.
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·
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Priority
will be assigned to communications involving an allegation of a threat
to
a person, property or the environment, and to ongoing or time-sensitive
issues.
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·
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If
you have provided your name, or have received a control number to
permit
anonymous or confidential treatment, you will receive a response
to your
communication, by telephone or in
writing.
|
|
·
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The
Lead Director or Chair of the Audit Committee will decide whether
to
forward your communication to other Directors, including the
non-management Directors, taking into account the substance of your
communication and any request you may have made regarding such
dissemination.
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The
members of the Compensation Committee, each of whom is a non-employee Director,
are Messrs. Greene, Hartley, Luce, Ruthe and Watson. These Directors also
served on the Compensation Committee during 2006, together with Mr. Raggio
prior
to his retirement in May 2006. The members of the Compensation Committee, other
than Mr. Raggio, formed a subcommittee to act with respect to certain items
of
compensation of senior executive officers, in order to ensure that such
compensation could qualify for full tax deductibility by Sierra without
limitation under Section 162(m) of the Internal Revenue Code.
Mr.
Raggio was a stockholder of Jones Vargas, a Nevada law firm which during 2006
rendered legal services to the Company for which it was paid approximately
$112,000. The legal fees paid to Jones Vargas for services rendered in 2006
were
higher than the historic norm because a law firm that we had previously engaged
merged with Jones Vargas in late 2004.
ITEM
11. EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
This
discussion and analysis of our compensation program for named executive officers
(“NEOs”) should be read in conjunction with the accompanying tables and text
disclosing the compensation awarded to, earned by or paid to the NEOs for
2006.
We
intend
that our compensation program for the NEOs help ensure that outstanding
individuals lead and manage Sierra. Furthermore, we intend that our program
for
compensating executives not only attract and retain such outstanding
individuals, but also motivate them to achieve our annual and longer-term
strategic goals.
As
discussed in more detail below, we are pleased to report that our senior
executive pay-for-performance alignment is strong. Based on fiscal 2005 (the
most recently completed fiscal year for which a comparative pay-for-performance
assessment could be performed), our measurement of both relative corporate
financial performance and relative senior executive compensation placed us
at
about the 65th
percentile of 14 selected peer companies. Based on additional short and
long-term perspectives (covering both the annual average and full three-year
duration of fiscal years 2003 to 2005), our relative corporate financial
performance and relative senior executive compensation were each at about the
80th
percentile of the 14 selected peer companies. These findings indicate a strong
alignment of relative pay and performance. The results of our review are
discussed further below under the caption Senior
Executive Pay-for-Performance Alignment.
Our
executive compensation program is currently comprised of:
|
Ÿ
|
Base
salary;
|
|
Ÿ
|
Long-term
incentives (“LTIs”), which are comprised of annual grants of restricted
stock units (“RSUs”), with most RSUs granted to NEOs subject to
achievement of a performance
condition;
|
|
Ÿ
|
Broad-based
benefits, which are generally available to all of Sierra’s employees ,
including retirement, health care, life insurance and employee stock
purchase plan benefits;
|
|
Ÿ
|
Supplemental
executive benefits, including supplemental executive retirement plans
(“SERPs”) and supplemental life insurance and certain
perquisites;
|
|
Ÿ
|
Employment
agreements and severance provisions;
and
|
|
Ÿ
|
Executive
stock ownership guidelines.
|
Each
of
these program components is discussed in further detail below under Discussion
of Each Component of the Executive Compensation Program.
Executive
Compensation Program
Guiding Principles For Our NEOs
Our
Board
of Directors oversees and guides management in the conduct of Sierra’s
operations, executing the business strategy under the direction of our Chief
Executive Officer (“CEO”). To ensure that the CEO and management maintain a
strong focus on advancing stockholders’
interests, the Board strives to ensure that the CEO and management:
|
Ÿ
|
Responsibly
address the concerns of other stakeholders and interested parties
including employees, customers, suppliers, communities served by
the
Company, government officials and the public at large;
and
|
|
Ÿ
|
Possess
the skills, knowledge, experience and dedication required to lead
Sierra
toward realizing its mission while adhering to our values. A key
part of
this is achievement of our strategic and competitive business
objectives.
|
In
support of the latter objective, the Board has crafted an executive compensation
program that is grounded in the following guiding principles:
|
·
|
Helps
attract
high quality individuals; helps retain
them, particularly in a competitive talent market in which our executives
may be strongly sought after by other organizations, including larger
organizations; and helps motivate
them to achieve our annual and longer-term strategic
goals;
|
|
·
|
Aligns
pay with performance, by augmenting salary and other fixed elements
of
compensation with “upside” pay opportunities through cash and stock-based
incentive compensation tied to Sierra’s performance; which ties
executives’ interests to Sierra’s success and further encourages
executives to optimize stockholder
returns;
|
|
·
|
References
but is not bound entirely by “competitive” or “typical” practices; rather,
reflects those practices which best support our objectives and serve
stockholders’ interests; and
|
|
·
|
Is
relatively simple and straightforward for both stockholders and executive
participants to understand.
|
These
guiding principles drive our strategy, design and decision-making related to
the
compensation provided to key executives, including our five NEOs. Our NEOs
for
2006 include the following five senior executives: Anthony M. Marlon, M.D.,
Chairman and Chief Executive Officer; Jonathon W. Bunker, President and Chief
Operating Officer; Frank E. Collins, Senior Executive Vice President, Legal
and
Administration and Secretary; Donald J. Giancursio, Senior Vice President,
Sales
and Marketing; and Paul H. Palmer, Senior Vice President, Chief Financial
Officer and Treasurer.
Competitive
Compensation Positioning in Relation to Our Market for Executive
Talent
We
seek
to evaluate our executive compensation program using a holistic approach that
takes into account not only each element of executive pay, benefits and
perquisites, but also the effectiveness and competitiveness of the overall
program. To assess the program’s competitive positioning in relation to the
“market,” we define market as those companies with which we compete for
executive talent, as follows:
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Ÿ
|
Primary
market for executive talent:
U.S.-based health insurers and health care providers, which have
a
business mix similar to the Company’s, are not closely held, and are of
similar size to us (i.e., generally ranging from one-half to two-times
Sierra’s size with respect to market capitalization and annual
revenue);
|
|
Ÿ
|
Secondary
market for executive talent (for tracking broader competitive
practices):
Other U.S.-based health insurers and health care providers which
may fall
outside designated company-size parameters of the primary market
for
executive talent but with which we also compete for such talent;
also
similar size companies in other service-based industries, particularly
for
functional executives who may be recruited from or to such
organizations.
|
We
assess
the competitiveness of compensation design and levels, covering both the overall
executive compensation program and individual program components, using a
variety of sources providing competitive market data on the defined talent
markets described above. Competitive data sources include published executive
compensation surveys as well as public disclosures of selected peer companies.
In 2006, we reviewed public disclosures of 14 selected peer companies, listed
below, to supplement published survey data for purposes of benchmarking both
executive compensation and corporate financial performance.
|
AMERIGROUP
Corporation
|
Great
American Financial Resources
|
|
Aviva,
fka AmerUs Group Co.
|
Health
Net, Inc.
|
|
Apria
Healthcare Group, Inc.
|
HealthMarkets,
Inc., fka UICI
|
|
Centene
Corporation
|
Humana,
Inc.
|
|
Chemed
Corporation
|
Molina
Healthcare, Inc.
|
|
Coventry
Health Care, Inc.
|
Universal
American Financial Corporation
|
|
FBL
Financial Group, Inc.
|
Wellcare
Health Plans, Inc.
|
In
relation to the defined executive talent markets, we generally seek to
maintain:
|
Ÿ
|
Aggregate
base salaries near
the 50th
percentile;
|
|
Ÿ
|
Aggregate
target total direct compensation
(“TDC”), which is base salary, annual bonus and LTI opportunities for
target level performance near the 50th
percentile, while providing for upper-quartile TDC opportunities
for
achieving sustained, superior performance at the individual, business
unit
and corporate levels; and
|
|
Ÿ
|
Aggregate
target total remuneration
(which is TDC plus benefits and perquisites) at competitive levels
in the
market by maintaining benefits and perquisites at market-competitive
levels.
|
For
individual executives, we may set compensation at levels above or below these
targeted market positions to reflect an individual’s performance, experience,
role and breadth of responsibilities. In this regard, with respect to Dr.
Marlon, whose role and performance have been critical to Sierra’s success since
its founding, we have set target TDC and total remuneration at levels which
are
substantially above the 50th
percentile. We
have
taken this approach in view of Dr. Marlon’s sustained excellence in leading
Sierra since its founding, and particularly in view of the outstanding results
achieved by Sierra in the past five years. This strong performance has resulted
in sharply increased performance targets in successive years in this five-year
period.
Role
of the Compensation Committee and Executive Officers in Determining Executive
Compensation
The
Board’s Compensation Committee (“Committee”), which is composed entirely of
non-employee Directors who the Board has determined to be independent, operates
under a Charter adopted by the Board. The Charter assigns to
the
Committee the responsibility to develop and make recommendations to the Board
with respect to the Company’s compensation policies. In addition, the Committee
has the authority to determine the compensation to be paid to the CEO and other
NEOs and executive officers. Prior to May 23, 2006, compensation decisions
with
respect to the CEO and certain other NEOs and executive officers were subject
to
the approval of a subcommittee, the five members of which all qualify as
“outside Directors” for purposes of Section 162(m) of the Internal
Revenue Code.
In
addition to determining appropriate targeted levels of executive compensation,
the Committee makes other key determinations that affect executive compensation,
including:
|
·
|
Setting
the amount of additional compensation that should be paid for performance
that exceeds targeted levels to provide an incentive for outstanding
performance;
|
|
·
|
Setting
reduced rates of payment of compensation for performance below targeted
levels;
|
|
·
|
Establishing
the nature of the performance goals and levels of performance set
as
targets;
|
|
·
|
Allocating
TDC between salary, annual bonus and LTIs;
and
|
|
·
|
Determining
the forms in which to grant LTIs.
|
The
Committee’s determination of performance goals used for annual bonus and LTIs is
driven largely by its assessment, together with that of the Board, of Sierra’s
unique business strategy. The Committee makes many of its decisions on
compensation for a given year before the year begins or early in the year.
In
this way, it can set performance goals for executives to achieve in the coming
year, with actual performance in that year to control the amount of compensation
earned. By setting a range of payouts that vary with performance, the annual
bonus program can continue to serve as an incentive throughout the year even
if
business performance is particularly strong or particularly weak in the early
part of the year.
In
2006,
the Committee retained the services of Watson Wyatt Worldwide (“Watson Wyatt”),
an independent executive compensation consultant, to assist the Committee in
evaluating and designing the overall executive compensation program. Watson
Wyatt assisted the Committee in performing a strategic executive compensation
assessment, and its reports and recommendations to the Committee encompassed
an
update on trends and developments in executive compensation; suggestions to
enhance our executive pay and performance strategy; a competitive assessment
of
executive pay, benefits and perquisites; an evaluation of LTI design; a
pay-for-performance assessment covering NEOs; and development of senior
executive “tally sheets” for the Committee’s reference in making executive pay
decisions.
The
CEO
makes compensation recommendations, including base salary adjustments and annual
bonus and LTI awards, to the Committee for other executive officers based on
the
CEO’s annual review of each officer’s performance. The CEO’s recommendations are
presented to the Committee for review and approval, and the Committee retains
full authority to act in its discretion. In some cases, certain executive
officers (including the CEO, the President and Chief Operating Officer, the
Senior Executive Vice President, Legal and Administration and Secretary, and/or
the Senior Vice President, Chief Financial Officer and Treasurer) participate
in
portions of Committee meetings to perform such functions as reviewing and
recommending performance metrics and goals for the annual bonus plan and
performance RSU grants and reviewing and discussing changes to the executive
compensation program.
Senior
Executive Pay-for-Performance Alignment
The
Company’s senior executive pay-for-performance alignment is strong, as
determined by a pay-for-performance analysis performed by Watson Wyatt on behalf
of the Committee in 2006. The analysis encompassed both a one-year (short-term)
perspective and a three-year (longer-term) perspective of NEO
pay-for-performance in relation to that of the peer companies listed above
under
Competitive
Compensation Positioning in Relation to Our Market for Executive
Talent.
Each
perspective showed a high degree of alignment between the Company’s relative
senior executive compensation and its relative corporate financial performance.
Each perspective and related findings of the pay-for-performance analysis are
summarized below.
|
Annual
(Short-term) Pay-for-Performance Assessment
|
|
|
Senior
Executive Pay
|
Corporate
Financial Performance
|
|
Approach:
Compared the actual realized total cash compensation (i.e., base
salary
plus annual bonus) given to our fiscal 2005 NEOs with actual realized
total cash compensation delivered to 14 selected peer companies’ NEOs.
Expressed Sierra’s pay results as a percentile ranking.
|
Approach:
Compared Sierra’s annual corporate financial performance with that of the
14 selected peer companies, based on a composite of four corporate
financial performance metrics: total stockholder return (“TSR”), growth in
sales, growth in earnings per share (“EPS”), and growth in earnings before
interest, taxes, depreciation and amortization (“EBITDA”, as a measure of
cash flow).
Omitted
discontinued Texas and military operations from the Company’s income
statement results. Expressed the Company’s performance results as a
percentile ranking.
|
|
Findings:
Sierra’s
relative senior executive pay was between
the 65th
percentile and about the 80th
percentile,
based on a one-year only view and a three-year average view.
- Fiscal
2005: 67th
percentile
- Average
of fiscal 2003-2005: 81st
percentile
|
Findings:
Sierra’s
relative corporate financial performance was also between
the 65th
percentile and about the 80th
percentile,
based on a one-year only view and a three-year average view.
- Fiscal
2005: 65th
percentile
- Average
of fiscal 2003-2005: 78th
percentile
|
|
Three-year
(Longer-term) Pay-for-Performance Assessment
|
|
|
Senior
Executive Pay
|
Corporate
Financial Performance
|
|
Approach:
Compared three-year stock compensation gains realizable by our fiscal
2005
NEOs with three-year stock compensation gains realizable by the 14
selected peer companies’ NEOs. Expressed Sierra’s pay results as a
percentile ranking.
|
Approach:
Compared our three-year corporate financial performance with that
of the
14 selected peer companies, based on a composite of four corporate
financial performance metrics: TSR, growth in sales, growth in EPS,
and
growth in (EBITDA, as a measure of cash flow.)
Omitted
discontinued Texas and military operations from the Company’s income
statement results. Expressed Sierra’s performance results as a percentile
ranking.
|
|
Findings:
Sierra’s
relative senior executive pay for the three-year period from fiscal
2003
to 2005 was at the 78th
percentile.
|
Findings:
Sierra’s
relative corporate financial performance for the three-year period
from
fiscal 2003 to 2005 was also at the 78th
percentile.
|
The
report provided to us by our compensation consultants in 2006 also benchmarked
compensation levels of our NEOs. This report established median compensation
levels for comparable positions by blending survey information with information
for our peer group. For this purpose, the survey information was weighted 75%
and the market information was weighted 25%. The survey information provides
a
specific percentile ranking only up to the 75th
percentile. For our NEOs other than the CEO, salary levels fell within a range
near the 50th
percentile, with one salary level, that of Mr. Collins, being 9% above the
calculated market median and the others being very close to or less than the
calculated market median. For our CEO, the report showed that his salary was
above the 75th
percentile of the calculated market median. Total cash compensation levels,
summing salary and target annual bonuses, were above the calculated market
medians, ranging from the 58th
to
68th
percentile of the calculated market for NEOs other than the CEO, and with the
CEO’s total cash compensation level exceeding the 75th
percentile.
Total
direct compensation consists of salary, target bonus, and grant-date value
of
long-term incentives, which in 2006 were mostly in the form of performance-based
restricted stock units. Taking into account our equity award grants in 2006,
the
total direct remuneration of NEOs ranged from the below median to above the
75th
percentile, with Mr. Bunker at the 64th
percentile and Dr. Marlon and Mr. Collins above the 75th
percentile of the calculated market for the given job, based on 2005 competitive
data. In the case of the CEO, we have set salary, annual bonus and long-term
incentive award levels in view of his long and outstanding service to Sierra,
in
particular his critical role in our outstanding performance over the past five
years. In addition, our CEO has long held a substantial equity position in
Sierra, so that we have weighted his compensation more heavily in its cash
components and less heavily in its equity components. Viewed in the context
of
the peer group of companies, the resulting 2006 total direct compensation for
the CEO is at approximately the 80th
percentile of the market based on 2005 competitive compensation
data.
Discussion
of Each Component of the Executive Compensation
Program
Base
Salary
Base
salary provides executives with a fixed level of cash income to compensate
them
for primary services rendered. In setting base salaries, the Company takes
into
account such factors as the individual’s performance, experience, role, breadth
of responsibilities as well as competitive base salary levels. To some extent,
the Committee’s final determination of base salary levels is a subjective one,
giving weight to our ongoing performance and appropriateness of salary increases
to our leaders. Each year, the Committee reviews the CEO’s base salary and
adjusts it based on these factors. For other NEOs, the CEO reviews base salaries
and recommends adjustments to the Committee. The Committee confers with the
CEO
closely in assessing other NEOs’ individual performance, taking into account
achievement of Company and individual goals. Finally, in making NEO salary
adjustments the Committee takes into account our annual “merit” salary increases
for the general employee population. Thus, while the Committee takes into
consideration market positioning, other considerations result in our setting
salaries that may vary above or below the 50th
percentile of our peer group.
Before
the beginning of 2006, the Committee determined to increase the CEO’s base
salary for 2006 to $1.538 million, which represented a 2.5% merit increase
from
the CEO’s 2005 base salary. Three other NEOs also received a merit increase of
2.5% for 2006. The other NEO, Mr. Giancursio, received a merit increase of
3.8%
for 2006. Such 2006 merit increases provided to NEOs were below the average
merit increase of 4.1% for the general employee population.
In
August
2006, Mr. Bunker received an additional salary increase of 21% in consideration
of his promotion to President and Chief Operating Officer. The effect of this
was to raise his base salary from 3% below market median (as calculated by
our
consultants) to 19% above the market median figure.
Effective
January 1, 2007, each NEO received a merit increase of 2%, which also falls
below the 2007 merit increase budget of 3.3% for the general employee
population.
Annual
Bonus
Annual
bonuses for NEOs (except for certain bonuses for Mr. Giancursio, discussed
below) are provided for under the Company’s Management Incentive Compensation
Plan (“MICP”) and are intended to reward NEO performance for assisting us in
achieving short-term financial success. For 2006, the Committee determined
that:
|
Ÿ
|
NEOs’
target 2006 annual bonus amounts, as a percentage of 2006 base salary,
were as follows: Dr. Marlon, 100%; Mr. Bunker, 100%; Mr. Collins,
100%;
Mr. Palmer, 90%; Mr. Giancursio, 60%.
|
|
Ÿ
|
NEOs’
2006 annual bonuses under the MICP would be payable only if 2006
EPS,
fully diluted, was at or above $2.02; otherwise, no bonuses would
be
payable to the NEOs.
This designated EPS level was based on our budgeted EPS as of December
2005, and represented a target level that was 11.6% above our 2005
fully
diluted EPS of $1.81.
|
|
|
Ÿ
|
Assuming
2006 EPS was at or above $2.02 as discussed above, NEOs’ 2006 MICP annual
bonus payouts would be determined based on achievement of other financial
and operational and/or individual objectives, with the Committee
having
discretion to pay additional bonus up to the designated maximum.
The
specified additional performance measures and their weighting under
the
2006 MICP were as follows:
|
|
Performance
Metric
|
Weighting
in Bonus Calculation
|
Range
of Earnings
|
|
Operating
income as a percentage of targeted operating income (for this purpose,
operating income included the expense of the bonuses to be paid under
the
MICP) and
Financial
cash flow (measured as EBITDA) as a percentage of targeted financial
cash
flow
|
Weighted
85% for purposes of preliminary bonus amount
|
0%
to 175% (of the 85%)
|
|
Measures
of quality of care and quality of service
|
Weighted
10% for purposes of preliminary bonus amount
|
0%
to 150% (of the 10%)
|
|
Voluntary
employee turnover rates
|
Weighted
5% for purposes of preliminary bonus amount
|
0%
to 200% (of the 5%)
|
|
Individual
performance and development
|
Multiplier
|
0%
to 125% times preliminary bonus amount
|
|
CEO’s
challenge - prescription drug program profit margin
|
A
pool equal to 10% of the aggregate bonus pool
|
Allocated
to participants at the Committee’s discretion
|
For
the
NEOs participating in the MICP, we established a matrix for measuring combined
operating income and cash flow (EBITDA) results. The 2006 target operating
income level was $204.99 million, and the 2006 targeted cash flow level was
$223.04 million. These performance objectives were set in an effort to focus
management on Sierra’s increasing cashflows and earnings to improve our
financial strength and leverage ratios as well as to maximize earnings and
stockholder value. The matrix provided payout levels for achievement of between
90% and 110% of the target amounts. Threshold, target and maximum earnings
levels were as follows: A 50% earnings level for achievement of 90% of each
of
operating income and cash flow targets; a 100% earnings level for achievement
of
100% of each of operating income and cash flow targets, and a 175% earnings
level for achievement of 110% of each of operating income and cash flow targets.
As shown in the table above, the percentage earnings level would be multiplied
by 85% of the NEO’s target bonus. Based on our 2006 operating income of $217.4
million and EBITDA of $234.0 million, the resulting earnings level for this
element of MICP annual bonus was 147.2%, which, when weighted 85% for purposes
of the preliminary bonus amount calculation, contributed 125.1% to the
preliminary bonus amount.
For
purposes of the MICP, we measure quality of care and quality of service based
on
a combination of third-party quality measures and our measured customer
satisfaction levels. This performance element was met at target levels in 2006,
resulting in an additional 10% of target accruing to each NEO’s preliminary
bonus amount.
The
employee turnover performance measure rewards executives for retaining our
staff
(i.e., holding down employee turnover). We view this as an important element
of
our long-term success in providing quality care. This performance measure,
applied to Mr. Bunker and Mr. Giancursio, was based on turnover at specified
business units other than the parent company, while other NEOs were measured
based on the turnover rate at our parent company. Under this measure, Mr. Bunker
and Mr. Giancursio received credit of 3.3% toward their preliminary bonus
amount, while other NEOs received credit of 10% toward their preliminary bonus
amount.
Once
the
preliminary bonus amount is calculated, individual performance can then modify
it, from a low of 0% to a high of 125% of the preliminary amount. An individual
rating of less than 50% is considered unsatisfactory and may result in no bonus
being payable. Individual objectives may include meeting specified revenue
goals, business expansion goals, cost targets or goals relating to acquisitions
or divestitures. For 2006, each of the NEOs achieved a high individual
performance rating that resulted in a 25% enhancement of the executive’s
calculated preliminary bonus amount.
As
a
result, the 2006 MICP bonuses were payable at the following calculated
percentages of 2006 base salary: Dr. Marlon, 181%; Mr. Bunker, 173%; Mr.
Collins, 181%; Mr. Palmer, 163%; and Mr. Giancursio, 104%. The Compensation
Committee retains discretion regarding the final amount of the annual incentive
payable under the MICP to increase or decrease the final amount payable, subject
to (i) the requirement that the EPS goal has been met, (ii) the maximum
per-person limitation under the LTIP (4% of pre-tax operating income), and
(iii)
the maximum payout level under the MICP formulas presented above but with the
Committee given discretion to award an additional amount equal to the added
bonus that would have resulted from operating income and cash flow at levels
triggering a 300% earning level under the financial goals matrix (projected
to
that level) plus allocation of up to the full amount of a designated additional
bonus pool to the named executive. For 2006, the Committee authorized this
additional bonus pool - referred to as the “CEO’s challenge” - based on
profitability of our Medicare Part D Prescription Drug Program (“PDP”). The
amount of this pool was equal to 10% of the calculated bonus pool for all MICP
participants resulting under the above calculations, with the amounts in this
pool distributable by the Committee at its discretion. In exercising this
discretion, the Committee took into account a number of factors, including
(i)
success in the control of general and administrative expenses, (ii) the extent
to which EPS exceeded plan and resulted in increases in street estimates during
the year, (iii) growth in commercial membership, (iv) an increased credit
facility and lowered drawn and undrawn borrowing costs, (v) investment income
in
excess of plan, and (vi) credit upgrades by rating agencies. The Committee
also
took into account business challenges, in particular the fact that some large
accounts that had become self insured, and the strength of Sierra’s 2006
business performance in the face of those challenges. The Committee determined
to increase the bonus payouts to NEOs, other than Dr. Marlon, as an allocation
of the CEO’s challenge bonus pool and as additional bonus in recognition of this
performance. As a result, the bonuses under the MICP, as reflected in the
“Non-Equity Incentive Plan Payouts” column of the Summary Compensation Table,
for Messrs. Collins, Bunker, Palmer, and Giancursio substantially exceeded
the
preliminary bonus amount calculated under the MICP. The Committee elected to
round Dr. Marlon’s bonus amount downward slightly from the preliminary bonus
amount calculation.
The
Committee designated a portion of the bonus amounts as subject to a delay in
payment until the final reconciliation of the results of our PDP for 2006.
As
discussed in this Form 10-K (as originally filed), the PDP was new for 2006,
and
the final reconciliation of the results of the 2006 program is not expected
to
occur with the Centers for Medicare and Medicaid Services (CMS) until around
the
third quarter of 2007. If the results of this final reconciliation are not
what
we have estimated, the actual results may have a materially adverse effect
on
our operating results. In such case, the Committee reserves the right to adjust
the bonus amounts subject to the delay in payment. These delayed bonus amounts
are as follows: Dr. Marlon, $1 million; Mr. Bunker, $250,000; Mr. Collins,
$150,000; Mr. Palmer, $100,000; and Mr. Giancursio, $100,000.
As
Senior
Vice President, Sales and Marketing, Mr. Giancursio also participates in a
separate bonus plan under which he receives quarterly payouts tied directly
to
1) quarterly gross sales goals; 2) quarterly account retention goals; and 3)
quarterly new business and renewal yield targets. Actual performance in relation
to goals is determined based on our quarterly financial results. For 2006,
Mr.
Giancursio received the quarterly bonus payouts under this bonus program
aggregating $100,852 out of a potential maximum of $120,000.
Long
Term Incentives
We
deliver LTIs in the form of stock-based incentive compensation. As stated above,
we generally seek to award LTIs at competitive market levels but provide further
performance-based “upside” compensation opportunities which are
potentially well above median market levels. Because such upside opportunities
would be a direct result of growth in the value of our common stock, our LTI
program is well aligned with stockholder interests.
The
primary objectives of the LTI program, listed below, fully support our executive
compensation guiding principles
.
|
·
|
Encourage
efforts to increase stockholder
value;
|
|
·
|
Promote
achievement of strategic goals;
|
|
·
|
Design
LTIs which are relatively simple to
understand;
|
|
·
|
Encourage
ownership of Sierra stock; and
|
|
·
|
Effectively
manage stock compensation cost with regards to accounting expense,
stockholder value transfer (i.e., expense as a percentage of market
capitalization), share utilization and tax
deductibility.
|
Historically,
the Company delivered LTIs in the form of stock options, which supported the
objectives listed above including effective cost management, since stock options
had incurred no accounting expense under accounting rules in effect before
2006.
In 2006, new accounting rules required “fair value” accounting for all forms of
stock-based compensation, including stock options, effectively increasing the
expense of stock options as compared to other types of stock-based compensation.
This event provided a new opportunity for us to consider the advantages and
disadvantages of all forms of stock-based compensation, including other
effective forms of performance-based LTIs. Consequently, in 2006, the Committee
determined to grant annual LTI awards to NEOs in the form of RSUs. Most of
the
RSUs granted in 2006 to NEOs were performance-based, but we granted time-based
RSUs to Mr. Palmer and 40% of the grant to Mr. Giancursio was
time-based.
Performance-based
RSUs are units denominated in shares of our stock which vest (i.e., the risk
of
forfeiture upon a voluntary termination of employment lapses) only upon the
achievement of an EPS performance goal, providing that the NEO generally also
must remain employed through that vesting date. We selected performance-based
RSUs as our ongoing, primary form of LTI for a variety of reasons,
including:
|
·
|
Reduced
levels of stock utilization (including dilution and potential dilution
from outstanding awards) caused by full-value
awards;
|
|
·
|
The
ability to qualify performance-based RSUs for full tax-deductibility
as
“performance-based compensation” under Internal Revenue Code
Section 162(m); and
|
|
·
|
Their
effectiveness toward motivating executives to achieve annual goals
(i.e.,
EPS performance) and longer-term, stockholder-related goals (i.e.,
stock
price growth), as well as encouraging executive retention (i.e.,
time-based service requirements applicable to a grant each
year).
|
To
evaluate performance-based RSU grants as a component of overall compensation,
we
value the RSUs based on current market prices of our common stock. We consider
other factors as well in making grants, including the individual’s past and
current performance, the strength of prior year performance, the budgeted effect
of expense from the long-term incentive grant on current-year performance and
projected expense levels for future years, compliance with stock ownership
requirements under the Executive Stock Ownership Program and other subjective
factors. We generally do not assign any particular weighting to these
considerations.
As
shown
under the caption Grants
of Plan-Based Awards for 2006
and
Option
Exercises and Stock Vested -- 2006
below,
we granted performance-based RSUs on August 17, 2006. On that date, Dr. Marlon
received 40,000 performance RSUs; Mr. Bunker received 28,000 performance RSUs;
Mr. Collins received 22,000 performance RSUs; and Mr. Giancursio received 8,400
performance RSUs. Such performance-based RSUs were scheduled to vest on December
31, 2006 if fully diluted EPS for the fourth quarter of 2006 was at least $0.53,
representing 20% growth over fourth quarter 2005 EPS. If vested based on
performance, the stock units would be settled on August 17, 2009, subject to
accelerated settlement in the case of certain terminations or a change in
control. Actual fourth quarter 2006 EPS was $0.65, so the EPS performance goal
was achieved and the performance-based RSUs vested on December 31, 2006. We
selected a relatively short-term performance goal to ensure full deductibility
under Code Section 162(m) and consistent with our practice in recent years
to
recognize the expense for our long-term incentive awards predominantly in the
year in which the award is granted rather than over multiple years.
We
granted time-vested RSUs to two NEOs in 2006. In the case of Mr. Palmer, we
granted 500 RSUs that would vest if he continued in employment through December
31, 2006. We set the amount and vesting terms of this award taking into account
Mr. Palmer’s announcement that he was stepping down from his position during
2007 but working with us on a transition of his duties to a successor. In the
case of Mr. Giancursio, we granted 40% of his LTI award for 2006 in the form
of
5,600 time-vested RSUs which vest over a four-year period. We structured LTI
awards to a group of executives below the most senior level as partly
performance-based RSUs and partly time-vested RSUs based on our view that their
exposure to performance risk should not be as great as in the case of the most
senior executives, and with the view that time-vested RSUs provided for a
greater long-term retention effect.
Whether
for past grants of stock options or more recent grants of performance RSUs,
we
have not maintained a formal policy which prescribes specific timing of grants.
However, prior to 2006, we typically made annual grants to all recipients on
the
date of the spring (normally April or May) Board meeting. In 2006, we delayed
the annual grant until the August Board meeting due to a management
reorganization which we implemented in spring and summer 2006. The Committee
determined that 2006 performance RSU grants should not be made until completion
of the reorganization so that, in determining individual grant levels, the
Committee could take into account such factors as recipients’ new roles and
breadth of responsibilities.
Executive
stock ownership requirements
In
1995,
the Company implemented the Executive Stock Ownership Program to further align
management’s interests with stockholders. The program requires that certain
stock ownership levels be reached and maintained by executive officers of the
Company. Ownership requirements are determined by the executive’s base salary at
date of hire or promotion date. Once the initial goal is achieved after three
years, the executive’s ownership requirement is modified annually to tie it to
his or her next year’s salary and then-current market prices of our common
stock. Longer periods are allowed for executives to reach required ownership
levels if the levels rise due to large stock price movements. Executive
officers, other than the CEO, are required to acquire stock or hold vested
stock
options and vested RSUs equal in value to the executive’s targeted salary. The
CEO is required to maintain stock ownership (determined on the same basis)
equal
in value to four times his target salary. As of fiscal year-end 2006, all NEOs
exceeded their ownership requirements: the CEO exceeded his ownership
requirement 25 times over; the other NEOs on average exceeded their ownership
requirements nine times over. Our Policy on Insider Trading prohibits short
sales and transactions in derivative securities which would effectively “hedge”
an executive’s risk of ownership of Sierra stock. The Policy permits
case-by-case exceptions upon a finding that a proposed transaction in derivative
securities is not part of a speculative or short-term trading strategy.
Broad-based
benefits
NEOs
participate in various benefit programs that are generally available to all
employees of the Company, including broad-based defined contribution retirement
benefits, health care benefits, group term life insurance and an employee stock
purchase plan (“ESPP”). These are meant to provide a competitive level of
benefits that helps us attract and retain all employees, including NEOs.
The
purpose of the Company’s 401(k) defined contribution retirement plan is to
provide employees the opportunity to save income for retirement on a
tax-deferred basis. The 401(k) plan is a tax-qualified
retirement savings plan that permits employees to defer the lesser of up to
75%
of their annual salary or the limit prescribed by the Internal Revenue Service
to the 401(k) plan on a before-tax basis. Employees’ elective deferrals are
immediately vested and non-forfeitable upon contribution to the 401(k) plan.
We
currently make matching contributions to the 401(k) Plan in an amount up to
a
maximum of 6% of
the
participant’s annual salary contributed and subject to certain other limits. The
employee is immediately vested in the first 4% of contributions by the Company.
After 3 years of service, the employee is vested for the remaining 2% of
contributions by the Company. Employees of the Company are eligible to
participate in the 401(k) Plan after six months of service.
The
purpose of the Company’s ESPP is to encourage employees to own Sierra stock and,
in turn, share in the success of our stock performance. Under the ESPP,
employees may purchase through payroll deductions newly issued shares of our
common stock at 85% of the fair market value of such shares on the lower of
the
first or last trading day of each six-month plan purchase
period.
Supplemental
executive benefits and perquisites
NEOs
also
participate in certain supplemental benefit and perquisites programs which
are
generally not available to all employees of the Company but which are intended
to serve a particular business purpose, help retain key executives, or both.
These include supplemental executive retirement plan (“SERP”) benefits, a
deferred compensation program, split-dollar life insurance, and perquisites
in
the form of company-sponsored country club memberships and personal use of
the
Company’s aircraft.
SERP.
The
SERP is designed to provide a select group of executives with non-qualified
retirement benefits that supplement those provided under the 401(k) plan, since
such executives’ ability to save for retirement under the 401(k) plan is
relatively limited due to Internal Revenue Service regulations for qualified
defined contribution plans. The SERP also provides an inducement for
participating executives to remain with the Company. The Company currently
maintains three SERP plans: SERP I, SERP II, and SERP III. We established SERPs
I and II in 1997 and 1998 to provide a competitive retirement program that
would
have a strong retention effect on members of our management team. Those SERPs
included terms that offset the value of our previous retirement contributions
under defined contribution plans from the ultimate payout of benefits under
the
SERPs. These offset accounts are currently relatively substantial amounts,
reducing the cost of SERP I and SERP II.
Deferred
compensation.
The
Company maintains a non-qualified deferred compensation program to provide
specified tax-deferred savings benefits to a select group of management or
highly compensated employees, including NEOs. Under the plan, a participating
executive may elect to defer up to 90% of annual base salary and annual bonus
and, if the participant also participates in the 401(k) plan, we provide a
matching contribution to offset certain limitations on the Sierra matching
contributions to the participant’s 401(k) plan account. In 2006, none of the
NEOs elected to defer any compensation under the plan.
Split
dollar life insurance.
We
implemented a program in 1997 under which we purchased life insurance policies
for senior executive officers for which we would pay the premiums over a period
of years under terms that would provide that we ultimately would be repaid
those
premiums without interest at the end of a 15-year period, or earlier in the
event a death benefit were paid. The program provided a relatively low-cost
and
tax-favorable means for us to provide additional life insurance protection
for
senior executives and an additional retirement savings vehicle, with terms
that
promoted retention and long-term service by our executives. The benefit to
participants and costs to us arose essentially from the fact that our payment
of
premiums in a given year had the economic effect of a no-interest loan to the
participant, and we reported this value (on a present-value basis) as
compensation to the executive in our proxy statements in the year in which
we
paid the premiums. The Sarbanes-Oxley Act of 2002 prohibited loans to executive
officers, as a result of which we determined to cease paying premiums under
the
policies. The policies remain in effect, but in the absence of payment of
premiums, a portion of the built-up policy value is being applied to pay for
insurance protection each year. It is possible that the effect of this would
be
to reduce the value of the policies to a level which would not provide for
full
repayment to Sierra for premiums it has paid. We therefore have elected to
show
the value of the insurance protection being provided under these continuing
policies as additional income to the NEOs.
Company-sponsored
country club memberships.
The
purpose of Company-sponsored country club memberships is to provide selected
NEOs with an additional forum and location to conduct business with customers
and other business contacts. In 2006, the Company paid membership dues for
Mr.
Bunker and Mr. Giancursio. We do this primarily for business purposes but,
recognizing that such memberships confer an element of personal benefit, we
disclose the full amount of these payments as a perquisite as required by SEC
disclosure rules.
Personal
use of the Company’s aircraft.
Sierra
has an ownership interest in aircraft to be used primarily for business-related
travel of executive officers. Use of our aircraft enables executives to meet
demanding travel required in performing duties assigned to them. On occasion,
NEOs may use our aircraft for personal travel. This serves to recognize the
executive’s contributions to Sierra and to save valuable time for the executive.
We treat the value of this perquisite as a portion of the executive’s
compensation, as reported in the “All Other Compensation” column of the Summary
Compensation Table below. In January 2007, the Company implemented a policy
for
use of the aircraft, limiting aggregate personal use to less than 35% of total
use (based on occupied seat hours). The CEO must approve personal use and
personal use by NEOs must be disclosed to stockholders in relevant SEC public
filings. Under applicable IRS rules, no tax deduction will be allowed to us
for
expenses attributed to personal use, based on occupied seat hours, to the extent
the expense exceeds the Standard
Industry Fare Level (SIFL) amount deemed to be
income
to
the executive resulting from such personal use. For 2006, we estimate the value
of the disallowed tax deduction relating to personal use of our corporate
aircraft, based on our estimated marginal federal income tax rate, was
approximately $293,000.
Employment
agreements and severance provisions
We
have
entered into employment agreements with all NEOs to help promote their long-term
service to us and, in turn, reduce the risk that our talented and experienced
executives will be recruited away from us, particularly by large competitors
with national reach. The principal terms of the agreements are described below
under the captions Additional
Information Relating to Summary Compensation Table and Grants of Plan-Based
Awards Table
and
Potential
Termination and Change-in-Control Payments.
We
provide severance protection to our NEOs under the terms of their employment
agreements. We believe this protection fosters a long-term perspective and
permits executives to focus upon executing our strategy and enhancing
stockholder value without undue concern or distraction. This protection is
also
intended to be fair and competitive to aid in attracting and retaining
experienced executives, who generally seek to be protected in the event of
termination without cause or as a result of actions we may take giving him
or
her good reason to terminate employment. We believe that the protection we
provide, including the level of severance payments and post-termination
benefits, is appropriate in fostering long-term stockholder-value enhancing
performance, and within the range of competitive practice.
In
line
with competitive practices, we provide for increased severance payments and
benefits should the executive be terminated without cause or terminate for
good
reason after a change in control. This protection, while potentially costly,
provides a number of important benefits to Sierra. First, it permits an
executive to evaluate a potential change-in-control transaction while relatively
free of concern for his or her own situation, reducing the potential for
conflict between his or her own interests and those of our stockholders. Second,
change-in-control transactions take time to unfold, and a stable management
team
can help to preserve our operations in order to enhance the value delivered
to
our stockholders from a transaction or, if no transaction is consummated, to
ensure that our business will continue without undue disruption afterwards.
We
believe that the potential cost of executive change-in-control severance
payments and benefits, as a percentage of the potential transaction price,
would
be well within the range of reasonable industry practice, and represents an
appropriate cost relative to the benefits to us and our stockholders. As
indicated in the section captioned Potential
Termination and Change-in-Control Payment below,
while we provide for payments to named executives to keep them whole for any
golden parachute excise taxes, the overall design of our compensation program
and recent compensation history have reduced the likelihood that such “gross-up”
payments would be paid by us in connection with a change in control.
Tax
Deductibility of Compensation Under Internal Revenue Code
Section 162(m)
In
implementing our compensation programs, the Compensation Committee’s general
policy is to consider any significant effects of Section 162(m) of the
Internal Revenue Code. Section 162(m), under certain circumstances,
disallows a public company’s tax deduction for certain compensation paid to the
NEOs to the extent that compensation exceeds $1 million in any tax year.
Compensation that qualifies as “performance-based” compensation is excluded from
the $1 million deductibility cap, and therefore remains fully tax
deductible. The Committee has taken steps so that annual incentive compensation
and performance-based RSUs granted to senior executive officers are subject
to
performance conditions and can qualify as “performance-based” compensation and,
therefore, be fully deductible by us. The regulations under
Section 162(m) impose a number of technical requirements in order for
such compensation to qualify as “performance-based.” In addition, some forms of
compensation, such as salary and time-based RSUs, do not currently qualify
as
“performance-based” compensation. There can be no assurance that compensation in
excess of $1 million paid to any executive officer will be fully tax
deductible under Section 162(m). As a result of payment to Dr. Marlon of
salary in excess of $1 million, for 2006, he received compensation that was
non-deductible by us under Code Section 162(m). We estimate the value of this
lost tax deduction for 2006, based on our estimated marginal federal income
tax
rate, at $221,729. Preserving deductibility under Section 162(m) is
only one consideration among many in implementing our executive compensation
program. In some cases, we have concluded that compliance with
Section 162(m) in connection with any component of compensation may
interfere with more important objectives or impose burdens or costs that
outweigh the benefit of preserving full tax deductibility under
Section 162(m).
COMPENSATION
COMMITTEE REPORT
The
Compensation Committee of the Board of Directors of Sierra Health Services,
Inc.
has reviewed and discussed with management the Compensation Discussion and
Analysis that appears above. Based on such review and discussion with
management, the Compensation Committee recommended to the Board that the
Compensation Discussion and Analysis be included in this Annual Report on Form
10-K/A for filing with the Securities and Exchange Commission.
| THE COMPENSATION COMMITTEE |
| CHARLES L. RUTHE, CHAIRMAN |
| ALBERT L. GREENE |
| THOMAS Y. HARTLEY |
| MICHAEL E. LUCE |
| ANTHONY L. WATSON |
COMPENSATION
OF NAMED EXECUTIVE OFFICERS
The
following table sets forth information concerning the compensation for services
for the fiscal year ended December 31, 2006 for the Chief Executive Officer,
the
Chief Financial Officer, and each of our three other most highly compensated
executive officers (referred to as the NEOs):
SUMMARY
COMPENSATION TABLE FOR 2006
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
(1)
|
Stock
Awards
($)
(2)
|
Option
Awards
($)
(3)
|
Non-Equity
Incentive Plan Compensation ($) (4)
|
Change
in Pension Value and Non-qualified Deferred Compensa-
tion
Earnings
($)
(5)
|
All
Other Compensa-tion
($)
(6 )
|
Total
($)
|
|||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||
|
Anthony
M. Marlon, M.D.
CEO
and Chairman of the
Board
|
2006
|
1,536,058
|
--
|
1,497,608
|
357,500
|
2,750,000
|
4,147,140
|
341,349
|
10,629,655
|
|||||||||||||||||||
|
Paul
H. Palmer
Sr.
Vice President and Chief
Financial
Officer
|
2006
|
327,692
|
--
|
21,800
|
175,275
|
700,000
|
695,908
|
90,987
|
2,011,662
|
|||||||||||||||||||
|
Jonathon
W. Bunker
President
and Chief Operating
Officer
|
2006
|
466,154
|
--
|
1,048,325
|
175,275
|
1,250,000
|
1,900,000
|
36,566
|
4,876,320
|
|||||||||||||||||||
|
Frank
E. Collins
Sr.
Exec. Vice President
Legal
& Administration & Secy
|
2006
|
368,654
|
--
|
823,684
|
175,275
|
900,000
|
1,358,618
|
60,229
|
3,686,460
|
|||||||||||||||||||
|
Donald
J. Giancursio
Sr.
Vice President,
Sales
|
2006
|
219,746
|
176,308
|
338,900
|
106,355
|
600,000
|
105,682
|
41,645
|
1,588,636
|
|||||||||||||||||||
| (1) |
The
amount in column (d) represents a sales bonus to Mr. Giancursio in
the
amount of $101,308 and a payment for entering into a non-competition
agreement in the amount of $75,000.
|
| (2) |
The
amounts in column (e) reflect the expense we recognized for financial
statement reporting purposes for 2006, in accordance with Statement
of
Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), for stock
awards under our 1995 Long-Term Incentive Plan (“LTIP”), without regard to
estimated forfeitures of such awards. The amount includes expense
from
awards granted in 2006. Assumptions used in the calculation of
these
amounts are discussed in Note 9 to our audited
|
|
financial
statements for the fiscal year ended December 31, 2006, included
in our
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on February 27,
2007.
|
| (3) |
The
amounts in column (f) reflect the amount of expense we recognized
for
financial statement reporting purposes for 2006, in accordance with
SFAS
123(R), for options under our LTIP, without regard to estimated
forfeitures of such awards. The amount includes expense from options
granted before 2006 which remained unvested in any part of 2006.
We
granted no stock options in 2006. Assumptions used in the calculation
of
this amount for fiscal years ended December 31, 2001, 2002, and 2003
are
discussed in Note 16 to our audited financial statements for the
fiscal
year ended December 31, 2003, included in our Annual Report on Form
10-K
filed with the Securities and Exchange Commission on March 5, 2004,
and
assumptions used in the calculation of this amount for fiscal years
ended
December 31, 2004, and 2005 are discussed in Note 9 to the Company’s
audited financial statements for the fiscal year ended December 31,
2006,
included in the Company’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on February 27, 2007.
|
| (4) |
The
amounts in column (g) reflect the cash awards paid under the FY 2006
Management Incentive Compensation Plan, which is discussed further
below
under the heading Additional
Information Relating to Summary Compensation Table and Grants of
Plan-Based Awards Table.
This includes bonus amounts earned by performance in 2006, certain
portions of which were paid in 2007.
|
| (5) |
The
amounts in column (h) reflect the increase in the present value of
the
NEO’s benefits under our pension plans determined using interest rate
and
related assumptions consistent with those used in our financial
statements, and, in the case of Mr. Giancursio, includes amounts
that the
NEO currently may not be entitled to receive because such amounts
are not
vested. The present values of pensions are calculated for this purpose
in
a manner consistent with the calculation of present value for purposes
of
the table under the caption “Pension Benefits”
below.
|
| (6) |
The
table below shows the items comprising compensation in column (i),
which
include our matching contributions for each individual’s contributions
under our Profit Sharing/401(k) Plan and Trust (“401(k) Plan”), a defined
contribution retirement plan available to our employees; imputed
income
charge for the Company’s Split Dollar Life (“SDL”) Insurance premium; and
perquisites. We calculate our incremental cost of permitting personal
use
of the corporate aircraft based on the cost of fuel, trip-related
maintenance and maintenance and depreciation based on hours of use,
crew
travel expenses, on-board catering, landing fees, trip-related hangar
and
parking costs, and similar variable costs, offset by any time-share
lease
payments by the executive. Because the company-owned aircraft are
used
primarily for business travel, we do not include the fixed costs
that do
not change based on usage, such as pilots’ salaries, the purchase costs of
the company-owned aircraft, and the cost of maintenance not related
to
trips and hours of use.
|
|
Name
|
401(k)
Matching
Contribution
|
Imputed
Income Charge for SDL (a)
|
Perquisites
- Aircraft Use
|
Other
Perquisites (b)
|
Total
“All Other Compensation”
|
|||||||||||
|
Anthony
M. Marlon, M.D.
|
$
|
13,200
|
$
|
15,059
|
$
|
311,705
|
$
|
1,385
|
$
|
341,349
|
||||||
|
Paul
H. Palmer
|
10,800
|
914
|
77,869
|
1,404
|
90,987
|
|||||||||||
|
Jonathon
W. Bunker
|
10,800
|
1,391
|
12,431
|
11,944
|
36,566
|
|||||||||||
|
Frank
E. Collins
|
12,880
|
1,700
|
44,264
|
1,385
|
60,229
|
|||||||||||
|
Donald
J. Giancursio
|
10,800
|
¾
|
22,457
|
8,388
|
41,645
|
|||||||||||
|
(a)
|
Amounts
in this column represent imputed income resulting from split-dollar
life
insurance policies. These amounts represent the taxable value of
the life
insurance provided to the NEO.
|
|
(b)
|
These
amounts include country club membership dues for Messrs. Bunker
and
Giancursio, spousal travel to a Board of Directors meeting
for NEOs other
than Mr. Giancursio and spousal travel to a sales conference
for Mr.
Bunker.
|
Grants
of Plan-Based Awards For 2006
The
following table shows all plan-based awards granted to the NEOs for 2006. The
payouts for 2006 resulting from the non-equity incentive plan awards are
reflected in the Summary
Compensation Table
under
the column “Non-Equity Incentive Plan Compensation,” and the stock awards
identified in this table also appear in the Outstanding
Equity Awards at Fiscal Year-End - 2006 Table
below.
All stock awards were granted under our LTIP.
GRANTS
OF PLAN-BASED AWARDS FOR 2006
|
Name
|
Grant
Date
|
Estimated
Future Payouts Under Non-Equity Incentive Plan Awards
|
Estimated
Possible Payouts Under Equity Incentive Plan Awards
|
All
Other Stock Awards: Number of Shares or Stock Units (#)
(4)
|
Grant
Date Fair Value of Stock and Option Awards
($)
(5)
|
||||
|
Threshold
($)
|
Target
($)
(1)
|
Maximum
($)
|
Threshold
(#
)
|
Target
(#
) (3)
|
Maximum
(#
) (3)
|
||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
Anthony
M. Marlon, M.D.
|
8/17/06
|
|
|
|
¾
|
40,000
|
40,000
|
¾
|
1,497,608
|
|
3/14/06
|
¾
|
1,537,500
|
(2)
|
|
|
|
|
|
|
|
Paul
H. Palmer
|
8/17/06
|
|
|
|
|
|
|
500
|
21,800
|
|
|
3/14/06
|
¾
|
295,200
|
(2)
|
|
|
|
|
|
|
Jonathon
W. Bunker
|
8/17/06
|
|
|
|
¾
|
28,000
|
28,000
|
¾
|
1,048,325
|
|
|
3/14/06
|
¾
|
525,000
|
(2)
|
|
|
|
|
|
|
Frank
E. Collins
|
8/17/06
|
|
|
|
¾
|
22,000
|
22,000
|
¾
|
823,684
|
|
|
3/14/06
|
¾
|
369,000
|
(2)
|
|
|
|
|
|
|
Donald
J. Giancursio
|
8/17/06
|
|
|
|
¾
|
8,400
|
8,400
|
5,600
|
518,781
|
|
|
3/14/06
|
¾
|
132,034
|
(2)
|
|
|
|
|
|
|
(1)
|
This
is an amount equal to the NEO’s 2006 salary.
|
|
(2)
|
The
maximum amounts payable under this award were subject to two formulaic
limitations. First, under the LTIP, the maximum award could not exceed
4%
of pre-tax operating income for 2006 (for the year, this amount was
$8,619,720). Second, under the MICP, the maximum individual award
was
subject to limits based on the Plan’s formulas and bonus pools, as
explained in the Compensation Discussion and Analysis—Discussion of Each
Component of the Executive Compensation Program—Annual Bonus.
|
|
(3)
|
The
amounts shown in these columns represent the number of performance-related
restricted stock units (“RSUs”) that were granted to each of the NEOs on
August 17, 2006. At that date, the closing price of our common stock
was
$43.60 a share. The vesting of these RSUs was subject to Sierra meeting
its earnings per share goal for 4th
quarter 2006 of $0.53. We met this goal and all of the RSUs in this
column
vested on December 31, 2006. The vested performance-based RSUs will
be
settled on August 17, 2009, subject to accelerated settlement in
certain
cases.
|
|
(4)
|
The
amounts shown in this column represent time-vested RSUs granted on
August
17, 2006. In the case of Mr. Palmer, all of his RSUs vested and became
settleable on December 31, 2006. In the case of Mr. Giancursio, the
non-performance-based RSUs shown in this column represent 40% of
his 2006
grant of RSUs. These RSUs will vest as to 25% on each of May 10,
2007, May
10, 2008, May 10, 2009 and May 10, 2010.
The first three tranches that vest will be settled on August 17,
2009; the
fourth tranche will vest and be settled on May 10, 2010. Vesting
and
settlement are subject to acceleration in the event of certain types
of
termination of employment or a change in
control.
|
|
(5)
|
The amounts shown in this column represent the fair value of the stock awards at the date of grant, as computed in accordance with SFAS 123(R). See also footnote (1) to the Summary Compensation Table. |
|
|
The closing price of our stock on the date of grant was $43.60. Fair value, determined in accordance with SFAS 123(R), is lower than the grant-date market price of common stock in the case of RSUs that are subject to a mandatory deferral period after vesting. |
The
following provides background information to give a better understanding of
the
compensation amounts shown in the Summary Compensation Table and Grants of
Plan-Based Awards Table above.
The
amounts shown in the two tables above as “Non-Equity Incentive Plan
Compensation” result from cash-based awards under our Management Incentive
Compensation Plan (the “MICP”) for all NEOs. Before the beginning of 2006, the
Compensation Committee established a target level of EPS which was required
to
be reached as a condition to payment of MICP awards to the NEOs. The 2006 EPS
goal was set at $2.02 per share, which was based on our budgeted EPS level
as of
December 2005. If this EPS goal were achieved, the MICP provided for bonuses
to
be paid based on other performance measures, including operating income
(including eligible bonus expense) financial cash flow (measured as EBITDA)
and
other operational and/or individual objectives. A more complete explanation
of
the operation of the MICP and results thereunder for 2006 appears above under
the caption, Compensation
Discussion and Analysis—Discussion of Each Component
of the Executive Compensation Program—Annual Bonus.
Bonus
Mr.
Giancursio also participates in a separate bonus program with quarterly payout
amounts tied to quarterly gross sales goals, quarterly account retention goals,
and quarterly new business and renewal yield targets. Payouts under this program
for 2006, together with a payment for Mr. Giancursio’s entry into a
non-competition agreement, appear in the “Bonus” column of the Summary
Compensation Table.
See
also Compensation
Discussion and Analysis—Discussion of Each Component
of the Executive Compensation Program—Annual Bonus.
The
Summary
Compensation Table
and
Grants
of Plan-Based Awards Table
contain
amounts that result from two types of equity incentive plan awards. One type
are
stock options, all of which were granted before 2006. To the extent a portion
of
those options remained unvested in 2006, we recognized expense under SFAS 123(R)
for those options. Expense reflected in the Stock Awards column resulted from
the RSUs which we granted in August 2006; no RSUs granted before 2006 remained
unvested in 2006 and therefore no expense in the Stock Awards column resulted
from pre-2006 awards. Except for the RSUs granted to Mr. Palmer and 40% of
those
granted to Mr. Giancursio, which were time-vested RSUs, these awards are
reflected in the Grants
of Plan-Based Awards Table
in the
columns captioned “Estimated Possible Payouts Under Equity Incentive Plan
Awards,” and their grant date fair value (in column (j) of that table) is the
same as the expense amount appearing in the Summary
Compensation Table’s
Stock
Awards column. The performance-based RSUs included a holding requirement; they
are scheduled to be settled in August 2009.
We
included a performance requirement for the performance-based RSUs granted to
NEOs requiring that Sierra attain earnings per share in the fourth quarter
of
2006 equal to at least $0.53 per share, fully diluted. Actual fourth quarter
EPS
was $0.65, fully diluted. A major reason for specifying this performance goal,
which was substantive (20% higher than 2005 fourth quarter EPS) was to ensure
that the RSUs would qualify as performance-based compensation under Code Section
162(m) and regulations thereunder, so that we would be entitled to claim tax
deductions for any compensation resulting from the awards. Mr. Palmer received
500 time-vested RSUs which vested on December 31, 2006. Mr. Palmer is retiring
from full-time employment with us on May 4, 2007. He will continue in a
part-time position for an additional period thereafter. Mr. Giancursio received
5,600 time-vested RSUs, in addition to the performance-based RSUs. These
time-vested RSUs are subject to vesting in four equal annual installments from
May 2007 through May 2010. The first three tranches include a holding
requirement; they are scheduled to settle in August 2009. The final tranche
would be settled at the time of vesting in May 2010.
Change
in Pension Value
A
significant component of compensation reported in the Summary Compensation
Table
for 2006 appears in the column “Change in Pension Value and Non-qualified
Deferred Compensation Earnings.” The amount appearing in that column relates
entirely to the increase in the present value of the NEO’s defined benefit
pension under our Supplemental Executive Retirement Plans (SERP I for
participants other than Mr. Giancursio and SERP III for Mr. Giancursio). These
plans are explained in greater detail under the caption Pension
Benefits
below.
Several factors contributed to the reported changes in pension value under
SERP
I in 2006, including (i) for Mr. Bunker and Mr. Palmer, the accrual of an
additional year of service, (ii) for all four SERP I participants, an increase
in final average compensation due to the levels of salary and annual incentive
awards for 2006, and (iii) reduced certain account balances in our defined
contributions plans that offset the SERP I benefit, due to the investment
performance of those accounts. For Dr. Marlon, the increase in pension value
resulted primarily from an increase in final average compensation, with
decreases in the offset account balances contributing to a lesser extent.
Employment
Agreements
The
Company has entered into employment agreements with its CEO and other NEOs.
Each
of these agreements currently has a term extending until December 31, 2009,
except the employment agreements with Dr. Marlon and Mr. Palmer extend until
December 31, 2007. Mr. Palmer has agreed that he will resign as a full-time
employee on May 4, 2007 and continue to work part-time through May 30, 2007.
These agreements specify a level of base salary and provide for participation
in
our bonus and equity award programs, retirement programs (i.e., a SERP), and
fringe benefit programs. The agreements contemplate annual adjustments in
compensation based on job duties and performance, and other reasonable standards
deemed appropriate by the Committee. Termination provisions of these agreements
are described in more detail below under the caption Potential Termination
and
Change-in-Control Payments.
The
employment agreements restrict each NEO’s use and disclosure of confidential
information and interference with the Company’s business relationships and
competition with the Company, including an agreement that, for one year
following any termination of employment (whether before or after a change in
control), the NEO is prohibited from working for any competitor which operates
in Nevada.
In
connection with our proposed merger with UnitedHealth Group, the following
NEOs
have entered into employment agreements with UnitedHealth Group: Jonathon W.
Bunker, Frank E. Collins and Donald J. Giancursio. These employment agreements
will commence on the effective time of the merger and are intended to supersede
and replace the current employment agreements those NEOs have with
us.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2006 (1)
|
Option
Awards (2)
|
Stock
Awards
|
|||||
|
Name
|
Number
of Securities Underlying Unexercised
Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Number
of Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
|
Market
Value of Shares of Units of
Stock
That Have Not Vested
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
|
Anthony
M. Marlon, M.D.
|
24,000
(3)
|
¾
|
30.06
|
04/20/2010
|
¾
|
¾
|
|
Paul
H. Palmer
|
12,000
(3)
|
¾
|
30.06
|
04/20/2010
|
¾
|
¾
|
|
|
|
23,750
(4)
|
6.31
|
04/13/2013
|
¾
|
¾
|
|
Jonathon
W. Bunker
|
12,000
(3)
|
¾
|
30.06
|
04/20/2010
|
¾
|
¾
|
|
|
|
23,750
(4)
|
6.31
|
04/13/2013
|
¾
|
¾
|
|
Frank
E. Collins
|
6,332
(5)
|
¾
|
5.83
|
12/09/2012
|
¾
|
¾
|
|
|
12,000
(3)
|
¾
|
30.06
|
04/20/2010
|
¾
|
¾
|
|
|
40,000
(4)
|
23,750
(4)
|
6.31
|
04/13/2013
|
¾
|
¾
|
|
Donald
J. Giancursio
|
3,000
(6)
|
|
4.47
|
12/09/2011
|
¾
|
¾
|
|
|
3,000
(5)
|
3,000
(5)
|
5.83
|
12/09/2012
|
5,600
(7)
|
201,824
(8)
|
|
|
|
10,000
(4)
|
6.31
|
04/13/2013
|
|
|
|
|
|
3,000
(9)
|
38.62
|
12/06/2010
|
|
|
|
(1)
|
No
NEO had any unearned equity awards outstanding at December 31,
2006.
|
|
(2)
|
All
options were granted at an exercise price equal to the fair market
value
of our Common Stock on the option grant date. The exercise price
may be
paid by the optionee in cash or, if permitted by the Compensation
Committee, by surrender of unrestricted shares of our Common Stock
(at
their fair market value on the date of exercise). All awards were
non-qualified stock options granted pursuant to our LTIP. Upon a
change in
control of Sierra, as defined in the LTIP, the vesting of the options
will
be automatically accelerated. With the exception of the options granted
on
December 7, 2005, the options shown above will terminate and may
no longer
be exercised if the optionee ceases to be an employee or Director
of
Sierra, except post-termination exercise periods are specified in
the case
of death, disability, or other involuntary termination other than
a
termination by us for “cause.” The options, together with a portion of the
gains realized upon exercise of the options during a specified period,
will be subject to forfeiture if the optionee engages in competition
with
us, misuses our proprietary information, or fails to assist us in
litigation. Cashless withholding of option shares to satisfy tax
obligations may be permitted by the Compensation
Committee.
|
|
(3)
|
These
options were granted on April 21, 2005 and became vested and
exercisable in full on December 30,
2005.
|
|
(4)
|
These
options were granted on April 14, 2003. The options originally granted
to
Messrs. Palmer, Bunker and Collins vested at 25% a year over four
years;
the unvested options shown in column (c) became vested on April 14,
2007.
The options originally granted to Mr. Giancursio vested at 20% a
year over
five years, so the remaining unvested options became vested as to
5,000
shares on April 14, 2007 and will vest as to 5,000 shares on April
14,
2008.
|
|
(5)
|
These
options were part of grants made on December 10, 2002. Mr. Collins’
original option grant vested at 33 1/3% a year over three years.
Mr.
Giancursio’s original grant vested at 20% a year over five years, so the
remaining unvested options will vest December 10,
2007.
|
|
(6)
|
These
options were part of a grant made on December 10, 2001 which vested
at 20%
a year over five years.
|
|
(7)
|
These
RSUs were granted on August 17, 2006 and will vest at 25% on each
of May
10, 2007, May 10, 2008, May 10, 2009 and May 10, 2010. The first
three
tranches will be settled on August 17, 2009 and the
fourth
|
tranche
settles on May 10, 2010. RSUs are subject to accelerated vesting in full in
the
event of a change in control and in the case of death or disability, and to
pro
rata vesting in the event of a termination by us not for cause.
|
(8)
|
The
value of these RSUs is based on the closing price of our Common Stock,
$36.04 per share, on December 29, 2006.
|
|
(9)
|
These
options were granted on December 7, 2005 and vested 100% on December
30,
2005. They have a three-year holding period from date of grant. Upon
termination of employment other than for “cause,” the employee has 30 days
in which to exercise these options.
|
OPTION
EXERCISES AND STOCK VESTED
The
following table presents information relating to the option exercises and stock
vested for our NEOs during the fiscal year ended December 31, 2006.
Option
Exercises and Stock Vested -- 2006
|
Option
Awards
|
Stock
Awards
|
|||
|
Name
|
Number
of Shares Acquired on Exercise (#)
|
Value
Realized on Exercise
($)
(1)
|
Number
of Shares Acquired on Vesting
(#)
(2)
|
Value
Realized on Vesting
($)
(2)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
|
Anthony
M. Marlon, M.D.
|
229,544
|
8,388,857
|
40,000
|
1,441,600
|
|
Paul
H. Palmer
|
52,150
|
1,779,549
|
500
|
18,020
|
|
Jonathon
W. Bunker
|
50,416
|
1,751,323
|
28,000
|
1,009,120
|
|
Frank
E. Collins
|
28,500
|
999,135
|
22,000
|
792,880
|
|
Donald
J. Giancursio
|
18,750
|
417,307
|
8,400
|
302,736
|
|
(1)
|
Amounts
reflect the difference between the exercise price of the option and
the
market value of the shares acquired upon exercise at the time of
exercise.
|
|
(2)
|
These
RSUs were granted on August 17, 2006. Amounts in column (e) reflect
the
market value of the stock underlying the restricted stock units (“RSUs”),
based on the closing price of our Common Stock on December 29, 2006
($36.04), the last trading date preceding the vesting date of December
31,
2006. The vesting of the RSUs for NEOs other than Mr. Palmer was
subject
to a requirement that Sierra achieve fourth quarter earnings of at
least
$0.53 per share, and such RSUs remain subject to a mandatory holding
period, deferring the settlement of the award until August 17,
2009.
|
The
following table shows information regarding the present value as of
December 31, 2006 of the accumulated benefits of our named executives under
our pension arrangements.
Pension Benefits for Fiscal 2006
|
Name
|
Plan
Name
|
Number
of Years of Credited Service
|
Present
Value of Accumulated Benefit
($)
(2)
|
Payments
During Last Fiscal Year
($)
|
|
Anthony
M. Marlon, M.D.
|
SERP
I
|
34
|
19,328,804
|
¾
|
|
Paul
H. Palmer
|
SERP
I
|
17
|
3,087,571
|
¾
|
|
Jonathon
W. Bunker
|
SERP
I
|
18
|
5,649,684
|
¾
|
|
Frank
E. Collins
|
SERP
I
|
24
|
6,312,608
|
¾
|
|
Donald
J. Giancursio
|
SERP
III
|
2
|
351,683
|
¾
|
|
Number
of years of credited service as of December 31, 2006 valuation date.
The maximum number of years of service used in calculating the benefit
under the Supplemental Executive Retirement Plan (“SERP I”) is 20, so any
years of service in excess of 20 do not result in any additional
benefit
for the participant. Since the inception of the SERP I in 1997, we
have
provided for the crediting of four years of additional service to
Messrs.
Palmer, Collins and Bunker, and in 2005, at the inception of the
Supplemental Executive Retirement Plan III (“SERP III”), we provided that
Mr. Giancursio could earn two additional years of service by continuing
in
employment through December 31, 2008. We have agreed to credit Mr.
Palmer
with a full year of service if he continues in employment until May
4,
2007, the scheduled date of his resignation from full-time employment.
At
that date, Mr. Palmer would have served approximately three-fourths
of a
year of service, so in effect he will be credited with approximately
three
months of additional service.
|
|
(2)
|
The
present value of accumulated benefits is based on a discount rate
of 5.6%
at December 31, 2006 and, in the case of SERP I participants, employment
termination and commencement of SERP benefits at December 31, 2006
in the
case of Dr. Marlon, or the later date at which the participant has
attained both age 55 and 20 years of service (in the case of Mr.
Palmer,
Feb. 22, 2016; Mr. Bunker, December 2, 2013; and Mr. Collins, April
10,
2009). In the case of Mr. Giancursio, present value under SERP III
is
based on assumed termination at the date he has attained age 55 with
eight
years of participation (April 28, 2013). Pre-retirement mortality
is
ignored in the calculation of the present value of accumulated plan
benefits. All other assumptions were those reflected in Note 9 to
our
audited financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 2006.
|
We
provide retirement benefits to NEOs, other than Mr. Giancursio, under SERP
I and
to Mr. Giancursio under SERP III. Each of these is a non-qualified defined
benefit plan. Under SERP I, each participant is, or may become, entitled to
receive annual payments, following retirement, disability or certain other
terminations of employment, for a 15-year period. The annual benefit will equal
3.75% of the executive’s “final average compensation” for each year of service
credited to the executive up to 20 years, reduced by an “offset” amount
equal to the annualized payout over a 15-year period that would be payable
to
the executive as a result of Sierra contributions under our qualified plans,
including the current 401(k) Plan, and under the Deferred Compensation
Plan. The annual benefit is not reduced for social security payments. Final
average compensation generally means the average of the NEO’s three highest
years of compensation out of the last five years, with compensation being
generally the amounts reported as salary, non-equity incentive plan payouts
and
other bonus amounts in the Summary Compensation Table which appears in each
of
our annual proxy statements.
Under
SERP III, Mr. Giancursio may become entitled to receive annual payments,
following retirement, disability or certain other terminations of employment,
for an eight-year period. Mr. Giancursio’s maximum annual benefit will be
$150,000, which accrues as to 12.5% of such amount for each year of
participation in SERP III credited beginning January 1, 2005. The annual benefit
is not reduced or offset for benefits under other Sierra plans or social
security payments.
The
table
above shows the present value of accumulated benefits calculated as described
in
footnote (2) to the table, including the offset for SERP I participants’ account
balances resulting from Sierra contributions under our qualified plans,
including our 401(k) plan and Deferred Compensation Plan. An NEO’s right to
benefits under SERP I vests when he or she has five years of service credited
or, in the case of Mr. Giancursio under SERP III, at December 31,
2008,
or
earlier upon the executive’s death or disability or upon occurrence of a change
in control (defined in the same way as under our other compensatory plans).
Upon
the death of the executive, benefits will be payable to the executive’s
beneficiary over the 15-year period (eight-year period in the case of Mr.
Giancursio). Otherwise, benefits will begin after retirement at or after age
65,
a termination at or after age 55 if the executive has ten years of credited
service, or a termination due to disability. In the case of other terminations
(except a termination for “cause,” as defined, in which case all benefits are
forfeited) before a change in control, benefits will begin at the later of
termination or the date the executive would have completed ten years of service
(or, in the case of Mr. Giancursio, five years of SERP III participation) but
for the termination. Under this provision, Messrs. Palmer, Bunker or Collins
could have voluntarily terminated at December 31, 2006 and received a SERP
benefit with a present value exceeding the present value of SERP benefits shown
in the above table (Mr. Palmer, $5.4 million; Mr. Bunker, $8.0 million; and
Mr.
Collins, $6.5 million).
Upon
a
change in control, the year of service then in progress will be deemed
completed, and an additional year of service will be credited if the NEO’s
employment terminates within six years after the change in control for any
reason other than by us for cause or due to death. An executive’s benefits are
payable in a lump sum in the event of a termination within six years following
a
change in control, if the termination would not otherwise have qualified as
a
normal or early retirement. Some payments under the SERP following termination
of employment will be delayed for at least six months in order to meet
requirements of Section 409A of the Internal Revenue Code.
We
have
provided a limited number of additional years of credited service to four of
the
NEOs, as stated in Note (1) to the above table. In most cases, this was done
at
the initiation of the plan (in 1997 in the case of SERP I and in 2005 in the
case of SERP III) to provide a more competitive level of retirement benefits
at
an earlier date for the participant, at the inception of the particular
plan.
Lump-sum
payouts (payable for certain terminations that do not qualify as a retirement,
including following a change in control) are converted to a present value using
an interest rate specified in the SERP. For purposes of SERP I, this interest
rate is fixed at 7.0%, which would have the effect of reducing the amount of
any
lump-sum payout as compared to the present value amount shown in the table
above
for SERP I (which uses 5.6% for present valuing purposes). Offset accounts
have
been present valued for purposes of the table above using the 7.0% rate, as
required by SERP I (this has the effect of reducing the SERP I benefit by a
greater amount than would be the case using a lower assumed interest rate in
the
present value calculation). The interest rate used under SERP III for
determining lump-sum payouts currently is 6.0%.
NON-QUALIFIED
DEFERRED COMPENSATION FOR 2006
|
Name
|
Executive
Contributions in Last FY
($)
(1)
|
Registrant
Contributions in Last FY ($)
|
Aggregate
Earnings in Last FY
($)
(2)
|
Aggregate
Withdrawals/Distributions
($)
|
Aggregate
Balance at Last FYE
($)
(3)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
|
Anthony
M. Marlon, M.D.
|
1,441,600
|
¾
|
¾
|
¾
|
6,054,720
|
|
Paul
H. Palmer
|
¾
|
¾
|
4,016
|
¾
|
2,432,901
|
|
Jonathon
W. Bunker
|
1,009,120
|
¾
|
¾
|
¾
|
4,468,960
|
|
Frank
E. Collins
|
792,880
|
¾
|
31,670
|
¾
|
3,412,481
|
|
Donald
J. Giancursio
|
302,736
|
¾
|
¾
|
¾
|
302,736
|
|
(1)
|
Amounts
in this column represent the market value of shares deliverable in
settlement of RSUs at their vesting date in 2006. Such RSUs are subject
to
a mandatory deferral of settlement until August 17, 2009. These amounts
are the same as shown in the “Stock Awards” column of the Option
Exercises and Stock Vested - 2006 Table.
Such a deferral delays the date at which we will deliver shares but
does
not result in additional compensation expense for financial reporting
purposes in connection with the award or enhance the value of the
award to
the executive, although the executive may benefit through the delay
in
taxation. The grant-date market value of the shares underlying the
RSUs is
reflected in full as compensation for each named executive in the
“Stock
Awards” column of the Summary
Compensation Table,
and in the right-most column of the Grants
of Plan-Based Awards Table.
|
|
(2)
|
Earnings
represents the appreciation in value of cash-denominated deferrals
under
the Deferred Compensation Plan in 2006. Earnings excludes the decrease
during 2006 in the value of shares deliverable in settlement of RSUs
that
had vested but the settlement of which has been mandatorily deferred,
as
follows: Dr. Marlon, a decrease of $504,320; Mr. Palmer, a decrease
of
$252,160; Mr. Bunker, a decrease of $378,240; Mr. Collins, a decrease
of
$252,160. This decrease resulted from the fact that the market price
of
our common stock was $39.98 per share on December 31, 2005 as compared
to
$36.04 on December 31, 2006.
|
|
(3)
|
The
aggregate balance at the end of the year consists of the market value
of
shares deliverable in the future to settle RSUs that have vested
but the
settlement of which has been deferred, and the aggregate value of
the
executive’s accounts under our Deferred Compensation Plan. Market value
per share is equal to the $36.04 closing price per share of common
stock
on December 29, 2006. Deferred RSUs include those which resulted
in the
amounts reflected in column (b) (see footnote (1) above) and the
following
RSUs which, prior to 2006, were mandatorily deferred: (i) RSUs deferred
until May 20, 2007: Dr. Marlon, 80,000; Mr. Palmer, 40,000; Mr. Bunker,
60,000, and Mr. Collins, 40,000; and (ii) RSUs deferred until April
21,
2008: Dr. Marlon, 48,000; Mr. Palmer, 24,000; Mr. Bunker, 36,000,
and Mr.
Collins, 24,000.
|
We
offer
to our executive officers and other senior employees an opportunity to defer
compensation under our Deferred Compensation Plan (the “DCP”). The DCP allows
these employees to elect to defer up to 90% of salary and annual cash bonuses.
The deferral period can extend for a specified number of years or until
retirement or termination of employment, and participants have a right to elect
to extend deferrals, subject to compliance with applicable rules under the
tax
laws. Hardship withdrawals are permitted, and amounts deferred before 2005
and
earnings thereon may be withdrawn with a 10% penalty. Compensation that is
deferred may be treated as though invested in a variety of equity and debt
mutual funds offered by Nationwide Life Insurance Company, or in an
interest-bearing account. For 2006 and 2007, this rate was 5.0%. For 2006,
the
NEOs with deferral account balances earned the following returns: Mr. Palmer,
3.3%; and Mr. Collins, 11.3%. Under the DCP, we also may make matching
contributions to augment the 401(k) plan, in cases in which tax laws limit
the
right of highly compensated employees to receive such matching contributions
under the 401(k) or the participant’s participation in the DCP adversely affects
the 401(k) matching contribution. The DCP matching contribution feature permits
a participant to receive combined matching contributions under the 401(k) plan
and the DCP at the same rate that would apply under the 401(k) up to the maximum
permissible company contribution under the 401(k). For 2006, all matching
contributions to NEOs were made under the 401(k) plan and not under the
DCP.
As
discussed above, we have provided for mandatory deferral of some RSU awards
to
senior executives for an extended period following vesting. Such deferred RSUs
are subject to accelerated settlement in the case of certain terminations or
upon a change in control on the same basis as the mandatorily deferred RSUs
granted in 2006 (see “Grants of Plan-Based Awards”).
We
have
entered into employment agreements with our CEO and the other NEOs. The
agreements with Dr. Marlon and Mr. Palmer currently have a term extending until
December 31, 2007, and the agreements with the other NEOs extend until
December 31, 2009. Under the agreements, the employee may voluntarily terminate
employment upon 60 days notice. We may terminate the employee’s employment,
with or without cause, in accordance with our usual policies and procedures,
except that the agreements impose some limitations on termination due to
disability. The agreements provide that, in the event of a termination by us
without cause, a severance payment will be paid as follows: Dr. Marlon,
24 months salary; Messrs. Bunker and Collins, 15 months salary; Messrs.
Palmer and Giancursio, 12 months salary. This amount would be payable in three
payments during the year following the termination, subject to any restriction
on payment during the six months following termination under Code Section 409A.
We may terminate the executive’s employment due to disability if the disability
has continued, beyond any period allowed for sick leave, for a period of 12
months in the case of Dr. Marlon and Messrs. Bunker and Collins, and six months
in the case of Messrs. Palmer and Giancursio. No severance is payable under
the
agreements in the case of a termination due to disability. We may terminate
the
executive’s employment if the executive has taken actions harmful to us,
specifically conduct that is materially detrimental to our reputation or
business relationships or misappropriation of our funds. In such case, we will
pay the executive four weeks of salary as a severance amount. In the case of
death, we would provide a payment to Mr. Giancursio’s beneficiary equal to three
months’ pay at the rate of salary and annual incentive compensation in effect
for the preceding year. Other named executives, who are
covered
by life insurance we previously provided, are not covered by a separate death
benefit provision in their employment agreements. In all cases, we are obligated
to provide any compensation and benefits that are provided under our plans
and
programs, including the SERPs and qualified retirement plans, and other
compensation and benefits routinely provided upon separation of a senior
executive.
In
the
event of a change in control, Dr. Marlon is entitled to terminate his employment
and trigger a severance payment. The other NEOs’ employment agreements provide
for severance payments if (i) our Board of Directors does not approve the change
in control, or (ii) the Board of Directors does approve the change in control
but the executive’s employment is terminated by us without cause within two
years after the change in control, or within two years after the change in
control the executive terminates his employment on account of (a) diminution
of
duties, (b) reduction of compensation, (c) relocation of our principal executive
offices more than 75 miles from its current location, or (d) our failure to
renew the employment agreement. The employment agreements provide for severance
payments equal to a multiple of current salary and target annual bonus as
follows: Dr. Marlon, four times; Messrs. Bunker, Collins and Palmer, 2.99 times;
and Mr. Giancursio, two times. For purposes of the table below, termination
by
an NEO following a change in control in circumstances that will qualify for
severance and other benefits is referred to as a termination for “good reason.”
In
addition, under each NEO’s employment agreement, if Code Section 4999 would
impose “golden parachute” excise taxes on the executive as a result of
compensation paid by us (under the agreement or otherwise in connection with
the
change in control), we will provide a “gross-up” payment sufficient to cause the
after-tax value of the compensation and the gross-up payment to the executive
to
be the same as if no such excise tax had applied.
The
employment agreements impose restrictions on the NEOs intended to protect our
business. These include restrictions on the executive’s use and disclosure of
confidential information, interference with our business relationships and
competition with us, including an agreement that, for a one-year period
following any termination of employment, the executive is prohibited from
working for any competitor which operates in Nevada. The non-competition
covenant applies following a termination after a change in control as well
as
before a change in control.
Other
programs provide for enhanced compensation to an NEO in the event of certain
terminations of employment or a change in control. In the case of unvested
RSUs,
the RSUs will vest in full and any performance condition would be deemed met
if
the executive officer’s employment terminates due to death or disability, or in
the event of a change in control (without regard to termination). In the event
of termination of the NEO’s employment by us without cause, the RSUs would vest
on a pro rata basis, determined by the percentage of the vesting period
completed from the date of grant to the date of termination. Some RSUs provide
for a mandatory deferral period following vesting; this period is disregarded
for purposes of determining pro rata vesting, and in most cases in which vesting
is accelerated (including upon a change in control) the RSUs would be
immediately settled (subject to any limitation under Code Section 409A). Options
held by NEOs that are not yet vested would become vested in full upon a change
in control. Termination of employment, including due to death or disability,
would not result in an acceleration of vesting of the options. Following a
termination of employment, the optionee has up to one year to exercise options
vested at the time of termination if due to death or disability and 90 days
to
exercise such vested options if termination was by us not for cause, but in
no
event may the option be exercised after the stated expiration date. In the
case
of termination in any other circumstance, the option terminates immediately.
Under
the
SERPs, in the event of a termination following a change in control other than
due to death, disability or by us for cause, an NEO will be deemed to have
completed a full year of service or year of participation for any year in
progress that included the change in control, and in the case of a termination
of employment for any reason other than cause within six years after the change
in control, will be credited with an additional year of service or year of
participation. The maximum benefit under SERP I is payable upon reaching 20
years of service, so that Messrs. Bunker and Palmer, who have not completed
20
years of service, would have their SERP benefit enhanced in this case. In the
case of SERP III, the maximum benefit is payable based on eight years of
participation. As a participant in SERP III, Mr. Giancursio has not yet
completed eight years of participation, so the crediting of a full and a partial
year of participation in these circumstances would enhance his benefit, and
two
additional years of participation that are being credited based on service
over
the 2005 - 2010 period would be credited as well. In addition, vesting would
accelerate under the SERPs upon a change in control. Of the current NEOs, only
Mr. Giancursio remains unvested; in the absence of a change in control, he
would
vest under SERP III on December 31, 2008. As discussed above under the caption
“Pension Benefits,” we have agreed to credit Mr. Palmer with a full year of
service if he continues in employment until May 4, 2007, the agreed date of
his
resignation from full-time employment. At that
date,
Mr.
Palmer would have served approximately three-fourths of a year of service,
so,
in effect, he will be credited with approximately three months of additional
service.
In
addition, in the case of any termination of employment other than by us for
cause (whether before or after a change in control), we will provide health
care
benefits to each NEO and his family, at no expense to the executive, for a
period equal to the length of the employee’s service or until the employee is
eligible for Medicare, whichever occurs first. We have agreed to provide this
benefit to Mr. Palmer and his eligible dependents upon his resignation from
part-time employment, which is to take effect June 1, 2007; we will provide
this
benefit until he is Medicare eligible.
For
purposes of our employment agreements, equity awards and the SERP plans, a
change in control will have occurred if any person becomes the beneficial owner
of 51% or more of the combined voting power of our voting securities. If we
complete our proposed merger with a subsidiary of UnitedHealth Group
Incorporated, in which UnitedHealth Group will become our parent company, the
merger transaction will constitute a change in control for purposes of the
employment agreements. Messrs. Bunker, Collins and Giancursio have entered
into
employment agreements with UnitedHealth Group that would become effective upon
the closing of the merger and supersede and replace the employment agreements
between each of them and Sierra. As a result, they would not be entitled to
severance payments provided in their employment agreements with the Company.
Dr.
Marlon may be entitled to severance payments if the UnitedHealth Group merger
is
completed.
The
following table shows the potential value of payments and benefits to each
NEO
serving at December 31, 2006 under their employment agreements and other
applicable arrangements and plans, assuming various employment termination
and
change-in-control scenarios had occurred as of December 31, 2006. The table
does not show all post-termination payments, but rather shows how a change
in
control or termination in the specified circumstances will enhance the payments
in benefits to be received by each NEO. For information on the value of NEOs’
interests in our SERPs and Deferred Compensation Plan, which will result in
post-termination payouts upon any termination of service (except for limitations
in the case of a termination for cause), see Pension
Benefits for Fiscal Year 2006
and
Non-qualified
Deferred Compensation for 2006
above.
Health benefits continuation amounts are a good faith estimate based on average
costs, and will vary in amount for a given executive following termination
of
employment.
|
Incremental
Value of Payments and Benefits Upon Change in Control (“CIC”)and Various
Types of Terminations
|
||||||||||||||||
|
Termination
Scenario (12/31/06)
|
Dr.
Marlon
|
|
Mr.
Bunker
|
|
Mr.
Collins
|
|
Mr.
Palmer
|
|
Mr.
Giancursio
|
|||||||
|
Events
Not Within Two Years After Change in Control
|
||||||||||||||||
|
Voluntary
Resignation
|
||||||||||||||||
|
Health
benefits continuation
|
$
|
7,688
|
$
|
259,665
|
$
|
184,315
|
$
|
366,853
|
$
|
175,669
|
||||||
|
Termination
for Cause
|
||||||||||||||||
|
Severance
pay
|
$
|
118,269
|
$
|
40,385
|
$
|
28,385
|
$
|
25,231
|
$
|
16,927
|
||||||
|
Termination
by Us Without Cause
|
||||||||||||||||
|
Severance
pay
|
$
|
3,075,000
|
$
|
656,250
|
$
|
461,250
|
$
|
328,000
|
$
|
220,056
|
||||||
|
Health
benefits continuation
|
7,688
|
259,665
|
184,315
|
366,853
|
175,669
|
|||||||||||
|
RSUs
- Pro rata vesting (1)
|
¾
|
¾
|
¾
|
¾
|
48,576
|
|||||||||||
|
Total
|
$
|
3,082,688
|
$
|
915,915
|
$
|
645,565
|
$
|
694,853
|
$
|
444,301
|
||||||
|
Disability
|
||||||||||||||||
|
Severance
pay (2)
|
$
|
3,072,116
|
$
|
932,308
|
$
|
737,308
|
$
|
311,307
|
$
|
175,797
|
||||||
|
RSUs
vesting
(1)
|
¾
|
¾
|
¾
|
¾
|
201,824
|
|||||||||||
|
Health
benefits continuation
|
7,688
|
259,665
|
184,315
|
366,853
|
175,669
|
|||||||||||
|
Total
|
$
|
3,079,804
|
$
|
1,191,973
|
$
|
921,623
|
$
|
678,160
|
$
|
553,290
|
||||||
|
Death
|
||||||||||||||||
|
Severance
pay
|
$
|
¾
|
$
|
¾
|
$
|
¾
|
$
|
¾
|
$
|
230,264
|
||||||
|
RSUs
vesting
(1)
|
¾
|
¾
|
¾
|
¾
|
201,824
|
|||||||||||
|
Total
|
$
|
¾
|
$
|
¾
|
$
|
¾
|
$
|
¾
|
$
|
432,088
|
||||||
|
Events
Within Two Years After Change in Control
|
||||||||||||||||
|
CIC
-- Assuming no termination
|
||||||||||||||||
|
Options/RSUs
vesting
(1)
|
$
|
¾
|
$
|
706,088
|
$
|
706,088
|
$
|
706,088
|
$
|
589,754
|
||||||
|
CIC
-- SERP Enhanced benefit for
|
||||||||||||||||
|
certain
terminations (3)
|
¾
|
793,347
|
¾
|
648,359
|
721,298
|
|||||||||||
|
Termination
Without Cause or for Good Reason
|
||||||||||||||||
|
Severance
pay
|
12,294,232
|
2,963,550
|
2,205,585
|
1,862,539
|
943,807
|
|||||||||||
|
Health
benefits continuation
|
7,688
|
259,665
|
184,315
|
366,853
|
175,669
|
|||||||||||
|
280G/4999
Tax Gross-Up (4)
|
¾
|
¾
|
¾
|
¾
|
¾
|
|||||||||||
|
Total
(including CIC items)
|
$
|
12,301,920
|
$
|
4,722,650
|
$
|
3,095,988
|
$
|
3,583,839
|
$
|
2,430,528
|
||||||
|
Death,
disability, and voluntary termination (5)
|
||||||||||||||||
|
(1)
|
These
amounts represent the market value of shares underlying RSUs and
the
aggregate in-the-money value of options which would become vested
as a
direct result of the termination event or change in control before
the
award's stated vesting date. This calculation of value does not attribute
any additional value to options based on their remaining term and
does not
discount the value of awards based on the portion of the vesting
period
elapsed at the date of the termination event or change in control.
Market
value and in-the-money value are based on the closing price of our
common
stock, $36.04, on December 29,
2006.
|
|
(2)
|
The
executive officer can be terminated by us for a disability only if
a
disability has continued for more than 12 months (for Dr. Marlon
and
Messrs. Collins and Bunker) or six months (for Messrs. Palmer and
Giancursio) beyond the executive’s accrued sick leave. For purposes of
calculating the severance payable in connection with a termination
due to
disability, we are showing the value of the applicable number of
months of
salary and target bonus as in effect during 2006.
|
|
(3)
|
These
amounts represent the enhanced present value of SERP benefits resulting
from crediting of full years of service upon certain terminations
following a change in control, except in the case of Mr. Giancursio
the
amount represents the present value at December 31, 2006 of his entire
SERP benefit which would be deemed vested upon a change in control.
For
Messrs. Bunker and Palmer, termination for any reason other than
death,
disability, or by us for cause before completing the year of service
which
includes the change in control would result in rounding up to a full
year
of service, which would confer one-half of the benefit amount shown,
and
any termination other than by us for cause within six years after
the
change in control would result in crediting of one additional year
of
service, which would confer one-half of the benefit amount
shown.
|
|
(4)
|
Executives
are entitled to gross-up payments if a golden parachute excise tax
would
be imposed under Section 4999 of the Internal Revenue Code, but we
estimate that in the illustrated change in control and termination
scenarios no golden parachute excise taxes would be incurred so no
tax
gross-up would be payable.
|
|
(5)
|
Severance
payments and health benefits continuation provided to Messrs. Bunker,
Collins, Palmer and Giancursio in the event of death, disability,
or a
voluntary termination of employment, which did not qualify as "good
reason" in the two-year period following a change in control would
be the
same as shown for those termination events not within the two-year
period
following a change in control, but would qualify for enhanced SERP
benefits as explained in footnote (3) above. RSUs and options would
have
vested upon the CIC, as shown in the row marked "CIC -- Assuming
no
termination."
|
DIRECTOR
COMPENSATION
The
table
below summarizes the compensation we paid to our non-executive officer Directors
for the fiscal year ended December 31, 2006.
Director
Compensation Table -- 2006
|
Name
(1)
|
Fees
Earned or Paid in Cash
($)
|
Stock
Awards
($)
(2)
|
Option
Awards
($)
(3)
|
All
Other Compensation
($)
|
Total
($)
|
|||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
|||||||||||
|
Albert
L. Greene
|
$
|
38,188
|
$
|
36,356
|
$
|
159,185
|
$
|
¾
|
$
|
233,728
|
||||||
|
Thomas
Y. Hartley
|
46,500
|
36,356
|
159,185
|
¾
|
242,041
|
|||||||||||
|
Michael
E. Luce
|
43,000
|
36,356
|
159,185
|
¾
|
238,541
|
|||||||||||
|
Erin
E. MacDonald (4)
|
283,539
|
¾
|
175,275
|
16,489(5
|
)
|
475,303
|
||||||||||
|
Charles
L. Ruthe
|
51,500
|
36,356
|
159,185
|
7,000
(6
|
)
|
254,041
|
||||||||||
|
Anthony
L. Watson (7)
|
38,188
|
36,356
|
159,185
|
¾
|
233,728
|
|||||||||||
|
William
J. Raggio (8)
|
16,000
|
153,958
|
¾
|
14,553
(9
|
)
|
184,511
|
||||||||||
|
(1)
|
Anthony
M. Marlon, M.D., our Chief Executive Officer and Chairman of the
Board, is
not included in this table. He is an employee of the Company and
thus
receives no separate compensation for his services as a Director.
His
compensation is shown in the Summary Compensation Table and related
compensation tables above.
|
|
(2)
|
The
amounts in column (c) reflect the amount of expense we recognized
for
financial statement reporting purposes for 2006, in accordance with
SFAS
123(R), for stock awards, without regard to estimated forfeitures
of such
awards. For the non-employee Directors, the amount includes expense
from
restricted stock units (“RSUs”) granted in 2006. No other unvested stock
awards were held by any non-employee Director in 2006. Assumptions
used in
the calculation of these amounts were the same as those for stock
awards
granted to employees, as discussed in footnote (1) to the Summary
Compensation Table. As of December 31, 2006, each Director held the
following number of RSUs: Mr. Greene: 4,000; Mr. Hartley: 4,000;
Mr. Luce:
4,000; Mr. Ruthe: 4,000; and Mr. Watson: 4,000. All of Mr. Raggio’s 4,000
RSUs vested on May 23, 2006, the
date
|
of his mandatory retirement from the Board pursuant to the terms of the 1995
Non-Employee Directors Stock Plan. Under that Plan, those vested RSUs will
be
settled at the earlier of the date one year after retirement, or the date the
RSUs would have been settled upon a change in control. As a result of this
accelerated vesting on May 23, 2006, we recognized expense under SFAS 123(R)
for
all of his RSUs in 2006. Ms. MacDonald did not receive a grant of restricted
stock units in 2006. As of December 31, 2006, Ms. MacDonald held 30,000 and
24,000 vested RSUs resulting from grants to her on May 20, 2004 and April 21,
2005, respectively. All of Ms. MacDonald’s RSUs vested in 2004 and 2005;
consequently, there was no expense taken for her in 2006.
|
(3)
|
The
amounts in column (d) reflect the amount of expense we recognized
for
financial statement reporting purposes for 2006, in accordance with
SFAS
123(R), without regard to estimated forfeitures of such awards. The
amounts include expense from options granted before 2006 which remained
unvested in any part of 2006. The Company granted no stock options
in
2006. Assumptions used in the calculation of these amounts were the
same
as those for stock options granted to employees, as discussed in
footnote
(2) to the Summary Compensation Table. As of December 31, 2006, the
non-employee Directors held the following number of outstanding options:
Mr. Greene: 85,200; Mr. Hartley: 37,000; Mr. Luce: 46,000; Mr. Ruthe:
81,000; and Mr. Watson: 85,000. Ms. MacDonald had 77,000 outstanding
options at year-end 2006. On November 23, 2005, all of Mr. Raggio’s
unvested options became immediately vested and exercisable pursuant
to the
terms of the 1995 Non-Employee Directors’ Stock Plan. Under that Plan, an
option becomes exercisable in full at the date six months prior to
the
expiration of the Participant’s term of office as a Director during which
term the Participant reaches the maximum age permitted for election
as a
Director our Bylaws. Consequently, all of the expense of Mr. Raggio’s
options that became exercisable in 2005 was recognized as expense
for 2005
and no expense was recognized for Mr. Raggio’s options in 2006.
|
(4)
Ms. MacDonald
was a non-officer employee of Sierra in 2006. On October 25, 2006, she retired
from the Board of Directors for health reasons. She continues to be an employee
of the Company in a part-time capacity through May of 2007, as special assistant
to the CEO. She was not compensated separately for her service as a Director.
Until February 2001, she had served as President and Chief Operating
Officer of the Company, at which time she assumed part-time duties in the
capacity of Chief of Staff. She was compensated under the terms of an employment
agreement, which provided for base salary, the rate of which was $233,539 per
year in 2006, with eligibility for an annual incentive payment, subject to
Sierra meeting specified financial and related targets applicable to executive
officers under the Management Incentive Compensation Plan. In December 2006,
the
Compensation Committee approved an annual incentive award for her in the amount
of $50,000. Ms. MacDonald did not receive any grants of stock options or awards
during 2006. Other terms of Ms. MacDonald’s employment were similar to
those of senior executives described above, including participation in
compensatory plans for executives and employees (except that she began in 2001
receiving her SERP I benefit in annual installments; in 2006, we made no future
benefit contributions under that plan on her behalf and she otherwise accrued
no
additional benefits under that plan).
(5)
Ms. MacDonald
received a total of $5,689 in perquisites in 2006 for personal use of the
Company’s aircraft. Ms. MacDonald also received a matching contribution from the
Company of $10,800 for her contribution in the Company’s Profit Sharing/401(k)
Plan and Trust.
(6)
This
amount is compensation paid to Mr. Ruthe in his capacity as Chairman of the
Board of Health Plan of Nevada, Inc., a wholly-owned subsidiary of the Company.
(7)
Mr.
Watson earned $38,188 in fees in 2006. Of this amount, $269 was paid to Mr.
Watson in cash and $37,919 was paid in shares of our stock.
(8)
Mr.
Raggio served as a non-employee Director in 2006 through May 23, 2006, the
date
of the Company’s 2006 Annual Meeting. At that time he retired in accordance with
our mandatory retirement policy and was given the honorary title of Director
Emeritus for a one-year term. As explained in footnote 2 above, all of Mr.
Raggio’s outstanding RSUs received accelerated vesting on May 23, 2006, his
mandatory retirement date.
(9)
The
amount shown includes a retirement gift to Mr. Raggio with a total value of
$12,432; an expense of $2,022, for his spouse to accompany him on an educational
Board Meeting retreat, at the invitation of the
Board.
Each of the non-employee directors is covered by a $50,000 group term life
and
$50,000 AD&D policy, paid for by the Company.
For
2006,
the Company paid Directors who are not officers or employees of Sierra $24,000
per annum, plus a $1,000 meeting fee for the first two hours and $500 for
each additional hour for Board meetings attended. The Company also paid
additional annual retainer fees as follows: Chairman of the Audit Committee,
$5,000; the Chairman of each of the Compensation Committee and the Nominating
and Governance Committee, $2,000; and the Lead Director, $2,000. The Company
paid Directors $1,000 for attendance at meetings of the Compensation Committee,
the Nominating and Governance Committee, and the Audit Committee, plus, in
the
case of the Audit Committee, $500 for each hour after the first hour. Telephonic
attendance at any meeting was paid at 50% of the standard rate. This payment
structure was changed in January 2007 as a result of a performance and
compensation evaluation conducted on the Directors by an independent consulting
firm, Watson Wyatt. As a result of this evaluation, Watson Wyatt recommended,
and the Nominating and Governance Committee approved and adopted, at its meeting
on January 25, 2007, a new schedule of fees for Directors effective January
2007, as follows: The Company pays Directors who are not officers or employees
of Sierra $36,000 per annum, plus a $2,000 meeting fee for Board meetings
attended. The Company also pays annual retainer fees as follows: Chairman of
the
Audit Committee, $10,000; the Chairman of each of the Compensation Committee
and
the Nominating and Governance Committee, $5,000; and the Lead Director, $10,000.
The Company pays Directors $1,500 for attendance at meetings of the Compensation
Committee, the Nominating and Governance Committee, and the Audit Committee.
Telephonic attendance at any meeting is paid at 50% of the standard rate. This
schedule of Board fees applies only to non-employee Directors. Directors who
are
also employees receive no additional compensation for service as a Director.
As
in
effect in 2005, the Non-Employee Directors’ Stock Plan (the “Directors’ Plan”)
provided for an annual grant to each non-employee Director of an option to
purchase 20,000 shares of Common Stock. Such grants were made automatically
on
the date on which a person was first elected to the Board of Directors and
on
each January 20 thereafter (unless the initial grant occurred within four
months prior to such date). The options’ exercise price per share is equal to
the fair market value of a share on the date of grant. Such options become
exercisable (i) as to 20% of the underlying shares on each of the first
five anniversaries of the date of grant, (ii) at the date six months prior
to the expiration of a Director’s term, if such Director continues to serve
through such date and will reach age 78 before the expiration of the term,
or
(iii) immediately (a) if the Director ceases to serve due to death or
disability, or (b) upon a change in control more than six months after
grant. The options expire at the earliest of (i) ten years after grant,
(ii) one year after the optionee ceases to serve as a Director due to
death, disability or retirement or (iii) six months after the optionee
ceases to serve as a Director for any other reason (the post-termination period
is extended for up to one year if the optionee dies during such period). Options
not exercisable at or before the time a Director ceases to be a Director are
canceled. The Directors’ Plan also permits a non-employee Director to elect to
forego cash fees that are otherwise payable and receive instead the equivalent
value in shares of Common Stock or credits of “deferred stock” that will be
settled at a future date by issuance of Common Stock. During 2006, one of our
Directors, Mr. Watson, elected to receive his board and committee fees in Common
Stock in lieu of cash.
In
2006,
the Board discontinued option grants to non-employee Directors, replacing them
with grants of restricted stock units. Stockholders approved an amendment to
our
Non-Employee Directors’ Stock Plan permitting grants of RSUs at the 2006 Annual
Meeting. For 2006, the Board authorized an annual grant of 4,000 RSUs to each
non-employee Director. These RSUs generally vest four years after grant, with
one-half of the vested RSUs to be settled at the time of vesting and one-half
of
the RSUs required to be held by the Director until retirement or other
termination of service. Vesting is subject to acceleration in the event of
death, disability, mandatory retirement, and change in control of Sierra (the
proposed merger with UnitedHealth Group, if completed, would constitute a change
in control for purposes of the RSUs). For 2007, the Board authorized an annual
grant of 2,000 RSUs in January 2007. The vesting of these RSUs is in two
tranches: 50% vest on March 1, 2008 and 50% vest on January 22, 2011. On each
vesting date, 50% of the 1,000 RSUs will settle (unless deferred at the election
of the Director) and 50% will settle at retirement or other termination of
service. Four of our five non-employee Directors elected to defer the settlement
of their first tranche to January 22, 2011.
No
stock
options were granted to non-employee Directors in 2006 or to date in 2007.
Options were granted to the Directors in earlier years, with vesting over five
years. Due to this long vesting period, we are continuing to recognize expense
for these options in 2006 and later years, which results in the dollar amounts
shown in the “Option Awards” column of the Director Compensation Table above.
Directors
are subject to stock ownership guidelines that call for Directors to reach
and
maintain ownership of our Common Stock equal in value to at least two times
the
amount of the annual retainer for Directors in 2006 and at least four times
the
amount of the annual retainer in 2007. Each current non-employee Director
currently owns Common Stock exceeding the level required by these guidelines.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2006, regarding
outstanding awards and shares remaining available for future issuance under
our
compensation plans under which equity securities are authorized for issuance
(excluding 401(k) plans and similar tax-qualified plans):
(columns
(a) and (c) in thousands)
|
(a)
|
(b)
|
(c)
|
|||||||||
|
Number
Of Securities
|
Number
Of Securities
|
||||||||||
|
To
Be Issued Upon
|
Weighted-Average
|
Remaining
Available For
|
|||||||||
|
Exercise
Of
|
Exercise
Price Of
|
Future
Issuance Under
|
|||||||||
|
Plan
Category
|
Outstanding
Awards
|
Outstanding
Awards
|
Equity
Compensation Plans
|
(1) | |||||||
|
|
|||||||||||
|
Equity
compensation plans approved by security holders
|
626
|
$
|
4.82
|
1,580
|
(2) | ||||||
|
|
|||||||||||
|
Equity
compensation plans not approved by security holders
(3)
|
1,689
|
11.81
|
3,406
|
||||||||
|
Total
|
2,315
|
9.92
|
4,986
|
||||||||
See
Note
9 of the Notes to the Consolidated Financial Statements for additional
information on our stock based compensation plans.
|
(1)
|
All
of the shares available for future issuance include: (i) 3,986,000
shares
under the 1995 Long-Term Incentive Plan (“LTIP”), as amended and restated,
issuable as restricted stock, as a bonus, or otherwise as “full-value”
awards; (ii) 230,000 shares under the 1995 Non-Employee Directors'
Stock
Plan (“Directors’ Plan”), as amended and restated, issuable as restricted
stock units or as shares or deferred shares in lieu of directors’ fees;
and (iii) 770,000 shares under the Amended and Restated 1985 Employee
Stock Purchase Plan (“ESPP”), which may be sold directly to employees at a
discount. Shares other than those under the ESPP may also be issued
in
connection with options, warrant and
rights.
|
|
(2)
|
Includes
770,000 shares remaining available for future issuance under the
ESPP, of
which 49,000 were issued in January
2007.
|
|
(3)
|
The
LTIP was approved by stockholders in 1995, with additional shares
authorized by stockholders in 1998. Subsequent amendments to the
Plan by
the Board of Directors reserved additional shares for the LTIP, resulting
in 1,354,000 shares in column (a) and 3,406,000 shares in column
(c) at
December 31, 2006. The LTIP authorizes grants of incentive and
non-qualified stock options, stock appreciation rights, restricted
stock,
deferred stock, bonus stock (including in lieu of other payment
obligations), dividend equivalents, and other stock-based awards.
To date,
we have granted primarily options and deferred stock (designated
as
restricted stock units) under the LTIP. Options must have an exercise
price of at least 100% of the fair market value of our Common Stock
on the
grant date, and generally have a term not exceeding ten years. The
exercise price may be paid in cash or by surrender of previously
acquired
shares. Restricted stock units granted under the LTIP are generally
to be
settled only in shares, and are subject to a risk of forfeiture upon
termination of employment for a specified period, except more favorable
terms apply to termination due to death, disability and in other
specified
cases. The LTIP provides that certain awards will become vested upon
a
change in control of Sierra.
|
The
Directors' Plan was approved by stockholders in 1995 and, as amended and
restated, was reapproved by stockholders in 2006. As amended, the Directors’
Plan accounts for 335,000 shares in column (a),
representing
shares subject to awards granted before the 2006 reapproval of the Directors’
Plan. The Directors’ Plan authorizes the grant of restricted stock units or
stock options.
SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of
the Securities Exchange Act of 1934, as amended, requires the Company’s
Directors and executive officers and persons who beneficially own more than
10%
of the Company’s outstanding Common Stock to file with the SEC initial reports
of beneficial ownership and reports of changes in beneficial ownership of Common
Stock and other equity securities of the Company on Forms 3, 4 and 5, and to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, the Company’s Directors and executive officers and
beneficial owners of more than 10% of the Company’s outstanding Common Stock
complied with all Section 16(a) reporting requirements in a timely
fashion during the fiscal year ended December 31, 2006.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table and the notes thereto set forth information with respect to
the
beneficial ownership, as of March 26, 2007, of Sierra’s Common Stock by the only
persons known to us to have beneficial ownership of more than 5% of such class,
by each of our Directors, by each of our NEOs and by our Directors and executive
officers as a group. Each person is believed to exercise sole voting and
dispositive power over the shares reported, except (i) in the case of shares
held for an employee’s account under our 401(k) plan, the employee has
dispositive power but his or her right to vote is not explicitly provided in
the
plan and plan trust documents, and (ii) in other cases, as indicated in the
footnotes to the table.
|
Name of Beneficial
Owner
|
Amount and Nature of
Beneficial Ownership |
Percentage of
Outstanding Common Stock |
||||
|
Anthony
M. Marlon, M.D.
|
4,452,080
|
(1)
|
8.0%
|
|||
|
Jonathon
W. Bunker
|
126,240
|
(2)
|
*
|
|||
|
Frank
E. Collins
|
201,420
|
(3)
|
*
|
|||
|
Paul
H. Palmer
|
86,159
|
(4)
|
*
|
|||
|
Donald
J. Giancursio
|
13,437
|
(5)
|
*
|
|||
|
Albert
L. Greene
|
69,051
|
(6)
|
*
|
|||
|
Thomas
Y. Hartley
|
20,000
|
(7)
|
*
|
|||
|
Michael
E. Luce
|
25,000
|
(8)
|
*
|
|||
|
Charles
L. Ruthe
|
76,900
|
(9)
|
*
|
|||
|
Anthony
L. Watson
|
63,253
|
(10)
|
*
|
|||
|
All
Directors and Executive Officers as a Group (12 persons)
|
5,155,088
|
(11)
|
9.2%
|
|||
|
Putnam,
LLC dba Putnam Investments
|
3,533,127
|
(12)
|
6.4%
|
|||
|
UnitedHealth
Group Incorporated
|
4,452,080
|
(13)
|
8.0%
|
|||
|
*
|
Indicates
beneficial ownership of less than
1%.
|
|
(1)
|
Includes
104,000 shares that can be acquired within 60 days of March 26, 2007,
upon
the exercise of stock options and settlement of restricted stock
units
(“RSUs”) that vested before 2006 but which are subject to mandatory
deferral of settlement until May 20, 2007. The number of shares reported
as beneficially owned includes 3,826,954 shares held indirectly through
a
total of four trusts established by Dr. Marlon and his wife, 3,000
shares
held indirectly through a limited partnership (the "Partnership"),
and
305,296 shares held indirectly by the AMM&RM Family Limited
Partnership ("ARFLP"). Dr. Marlon may be deemed to have or share
voting power and/or dispositive power over the shares held by the
four
trusts and, therefore, to have beneficial ownership with respect
to such
shares. Dr. Marlon, as managing general partner of the Partnership,
has
sole voting and dispositive power over the shares held by the Partnership.
Dr. Marlon, as a general
|
partner of ARFLP, may be deemed to have or share voting and/or dispositive
power
over the shares held by ARFLP (a limited partnership of which Dr. Marlon, his
spouse, and a trust for the benefit of Jeannine A. Zeller, Dr. Marlon's
daughter, are general and/or limited partners). Dr. Marlon disclaims
beneficial ownership as to the shares held by the four trusts, other than the
1,439,630 shares held by the Marlon Family Trust (a revocable trust of which
he
is a trustee), and the shares held by ARFLP. The number of shares reported
as
beneficially owned also includes 212,830 shares held for Dr. Marlon's account
under our 401(k) plan for employees. Dr. Marlon's beneficial ownership does
not
include 552,020 shares held in five trusts for the benefit of family members,
the trustee of each of which is Oshins & Associates, LLC. Dr. Marlon's
beneficial ownership also does not include 88,000 shares deliverable in the
future in settlement of vested RSUs, which do not constitute beneficial
ownership because the RSUs cannot be settled currently or within 60 days after
March 26, 2007.
|
(2)
|
Includes
95,750 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options and settlement of RSUs that vested
before 2006 but which are subject to mandatory deferral of settlement
until May 20, 2007. Mr. Bunker’s beneficial ownership includes 8,000
shares held in his 401(k) plan account; it does not include 64,000
shares
deliverable in the future in settlement of vested but deferred RSUs.
|
|
(3)
|
Includes
122,082 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options and settlement of RSUs that vested
before 2006 but which are subject to mandatory deferral of settlement
until May 20, 2007. Mr. Collins’ beneficial ownership includes 7,572
shares held in his 401(k) plan account; it does not include 46,000
shares
deliverable in the future in settlement of vested but deferred
RSUs.
|
|
(4)
|
Includes
75,750 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options and settlement of RSUs that vested
before 2006 but which are subject to mandatory deferral of settlement
until May 20, 2007. Mr. Palmer’s beneficial ownership includes 1,790
shares held in his 401(k) plan account; it does not include 24,000
shares
deliverable in the future in settlement of vested but deferred
RSUs.
|
|
(5)
|
Includes
11,000 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options. Mr. Giancursio’s beneficial ownership
includes 2,314 shares held in his 401(k) plan account; it does not
include
14,000 shares deliverable in the future in settlement of unvested
and
vested but deferred RSUs.
|
|
(6)
|
Includes
62,200 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options. Mr. Greene’s beneficial ownership does
not include 6,000 shares deliverable in the future in settlement
of
RSUs.
|
|
(7)
|
Includes
14,000 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options. Mr. Hartley’s beneficial ownership
does not include 6,000 shares deliverable in the future in settlement
of
RSUs.
|
|
(8)
|
Includes
23,000 shares that can be acquired within 60 days of March 26, 2007,
upon
the exercise of stock options. Mr. Luce’s beneficial ownership does not
include 6,000 shares deliverable in the future in settlement of
RSUs.
|
|
(9)
|
Includes
58,000 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options. Mr. Ruthe’s beneficial ownership does
not include 6,000 shares deliverable in the future in settlement
of
RSUs.
|
|
(10)
|
Includes
62,000 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options. Mr. Watson’s beneficial ownership does
not include 6,000 shares deliverable in the future in settlement
of
RSUs.
|
|
(11)
|
Includes
645,182 shares that can be acquired within 60 days of March 26, 2007,
upon the exercise of stock options and settlement of RSUs, and 232,957
shares held in 401(k) plan accounts for employees.
|
|
(12)
|
This
information is derived from this stockholder’s Schedule 13G/A filed with
the SEC on February 13, 2007, reporting the number of shares beneficially
owned at an unspecified date. The business address of Putnam LLC
dba
Putnam Investments (“Putnam”) is One Post Office Square, Boston, MA 02109.
Putnam, a wholly-owned subsidiary of Marsh & McLennan Companies, Inc.
(“MMC”), filed the Schedule 13G/A on behalf of itself and its parent, MMC,
and two of its wholly-owned subsidiaries: Putnam Investment Management,
LLC (“PIM”), which is the investment adviser to the Putnam family of
mutual funds, and The Putnam Advisory Company, LLC (“PAC”), which is the
investment adviser to Putnam’s institutional clients. Putnam reported
having shared voting power over 343,532 shares and shared dispositive
power over 3,533,127 shares, representing beneficial ownership of
6.2% of
the outstanding class. PIM reported having shared voting power over
14,600
shares and shared dispositive power over 2,918,183 shares, representing
beneficial ownership of 5.1% of the outstanding class. PAC reported
having
shared voting power over 328,932 shares and shared dispositive power
over
614,944 shares, representing beneficial ownership of 1.1% of the
outstanding class. MMC reported beneficial ownership of no shares
of our
Common Stock. PIM and PAC have dispositive power over the shares
as
investment managers, but the mutual fund’s trustees rather than PIM have
voting power over the shares held by each fund, and PAC has shared
voting
power over the shares held by institutional clients. Pursuant to
Rule
13d-4, MMC and PIM declared that the filing of the Schedule 13G/A
shall
not be deemed an admission by either or both of them that they are
the
beneficial owner of the securities covered by the filing, and further
stated that neither of them have any power to vote or dispose of,
or
direct the voting or disposition of, any of the securities covered
by the
filing.
|
|
(13)
|
These
shares may be deemed to be beneficially owned by UnitedHealth Group
Incorporated (“UNH”) by virtue of a Voting and Support Agreement, dated as
of March 11, 2007 (the “Voting Agreement”), between UNH and Anthony M.
Marlon. These are the same shares as are shown in the table as
beneficially owned by Dr. Marlon, as described more fully in footnote
(1)
above. UNH and Sierra entered into an Agreement and Plan of Merger,
dated
as of March 11, 2007, which provides for the merger of Sierra and a
subsidiary of UNH. If the merger is completed, Sierra will become
a
subsidiary of UNH and each share held by Sierra’s stockholders will be
converted into a right to receive $43.50. Before the merger is completed,
it must be approved by Sierra’s stockholders; completion of the merger is
also subject to a number of other conditions. Under the Voting Agreement,
Dr. Marlon agreed that his Sierra shares will be voted (i) in favor
of approval of the Merger Agreement and otherwise to cause the merger
to
be completed, and (ii) against any other action that could be
expected to result in Sierra breaching its agreements with UNH relating
to
the merger, including any competing takeover proposal. Dr. Marlon
also
granted UNH an irrevocable proxy coupled with an interest to vote
his
shares as provided for in the Voting Agreement. Dr. Marlon’s commitment
applies only to shares as to which he has the right to vote, including
shares he may acquire, but does not require that he in fact exercise
options or take other actions to acquire additional shares, and does
not
provide any right of UNH to acquire his shares. UNH disclaims beneficial
ownership of the shares subject to the Voting Agreement. The principal
executive offices of UNH are located at UnitedHealth Group Center,
9900
Bren Road East, Minnetonka, Minnesota.
|
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Certain
Relationships and Related Transactions
Jeannine
A. Zeller, the adult daughter of Dr. Marlon, our CEO, was formerly the
Director of Health Services, of Sierra Military Health Services, LLC.
During 2006, she worked as a part time attorney for the Legal Department. In
2006, she earned an aggregate annual compensation of $8,479. Dr. Marlon’s
adult son, Robert Marlon, was an employee of the Company during 2006, serving
as
Project Manager, Customer Service Operations. During 2006, he earned an
aggregate annual compensation of $82,437.
From
time
to time, the Company places a portion of its available cash reserves in various
investments. These investments have included equity participation in real estate
joint ventures and high yield trust deeds for commercial acquisition and/or
development of land by unrelated third-party developers and entities formed
to
invest in land that may be resold to developers. Licensed mortgage brokers
are
the source of proposals for such transactions and make proposals not only to
the
Company but to other investors. A committee of the Chief Financial Officer
and
other executives reviews and considers the terms based upon internally-developed
guidelines and recommends whether or not to make the investments, based on
its
view of the merits of the project and developer. The Company generally
attempts
to invest slightly more than a majority in each loan that the committee
determines is appropriate. The notes are secured by deeds of trusts and
generally by the personal guarantee of the developer. Dr. Marlon, Mr.
Palmer, Mr. Bunker, Mr. Collins, Mr. Briggs and certain other senior executives,
Directors and employees of the Company, along with other unrelated third-party
investors, also invest their personal funds in some of the same trust deeds
and real estate joint ventures discussed below. At December 31, 2006,
the Company had approximately $88.5 million invested in trust deed mortgage
notes and real estate joint ventures. The Company’s investments in trust deed
mortgage notes are with numerous independent borrowers and are secured by real
estate in several states. The Company’s investments in real estate joint
ventures consist of three independent projects and are secured by real estate
in
California, Nevada, and Utah. During 2006, the Company invested a total of
$63.4
million in new trust deed notes and real estate joint ventures, some of which
were repaid during the year. The Company has invested an additional $8.7 million
in new trust deed notes through the first three months of 2007.
On
March
11, 2007, we entered into separate Indemnity Agreements with each of our
directors and with a number of our officers and our subsidiaries’ officers. Each
of the Indemnity Agreements, which contain identical provisions, provides,
subject to specified exceptions, that the Company will indemnify the respective
director or officer to the fullest extent permitted by Nevada law and our
articles of incorporation and bylaws in proceedings commenced by third parties,
in derivative actions, and in situations where such director or officer is
a
witness or threatened to be made a witness. Each Indemnity Agreement also
provides for contribution in situations where indemnification is not available,
and contains provisions regarding advancement of expenses and our obligation,
subject to specified qualifications, to maintain directors' and officers'
liability insurance coverage.
Among
the
corporate officers who have separate Indemnity Agreements with us are: Anthony
M. Marlon, M.D., Chairman of the Board and Chief Executive Officer; Jonathon
W.
Bunker, President and Chief Operating Officer; Frank E. Collins, Senior
Executive Vice President, Legal and Administration; Donald J. Giancursio, Senior
Vice President, Sales and Marketing; Paul H. Palmer, Senior Vice President,
Chief Financial Officer and Treasurer; Darren G.D. Sivertsen, Senior Vice
President, Operations; Marc R. Briggs, Vice President , and Chief Accounting
Officer; and Lawrence S. Howard, Senior Vice President, Program Office. The
directors, in addition to Dr. Marlon, who signed Indemnity Agreements with
us
are: Charles L. Ruthe, Albert L. Greene, Thomas Y. Hartley, Michael E. Luce,
and
Anthony L. Watson.
The
foregoing description of the Indemnity Agreements does not purport to be
complete and is qualified in its entirety by reference to the form of Indemnity
Agreement, which is attached as Exhibit 10.1 to our Current Report on Form
8-K
filed with the SEC on March 13, 2007, and incorporated herein by
reference.
Director
Independence.
The
information presented above under Item 10 is incorporated into this Item 13
by
reference.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
following table sets forth the aggregate fees billed to the Company for services
rendered by Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively “Deloitte”) which
includes Deloitte Consulting, for the 2006 and 2005 fiscal years.
|
2006
|
2005
|
||||||
|
Audit
fees (1)
|
$
|
1,058,400
|
$
|
934,000
|
|||
|
Audit-related
fees (2)
|
81,000
|
32,000
|
|||||
|
Tax
fees (3)
|
¾
|
36,000
|
|||||
|
All
other fees (4)
|
¾
|
¾
|
|||||
|
Total
|
$
|
1,126,400
|
$
|
1,002,000
|
|||
|
(1)
|
Audit
fees consist of fees for the audit of our annual financial statements,
the
review of quarterly financial statements, consents related to SEC
registration statements, as well as work that generally only the
independent registered public accounting firm can reasonably be expected
to provide, such as statutory audits and financial audits of subsidiaries.
Audit fees also included fees for professional services rendered
for the
audit of (i) management’s assessment that the Company maintained effective
internal control over financial reporting, and (ii) the effectiveness
of
the Company’s internal control over financial
reporting.
|
|
(2)
|
Audit-related
fees consist principally of fees for assurance and related services
that
are reasonably related to the performance of an audit and fees for
the
audit of the Company’s employee benefit
plans.
|
|
(3)
|
There
were no fees paid to Deloitte for tax compliance, tax advice, or
tax
planning in 2006 or 2005. Tax fees for 2005 consisted of fees for
tax
compliance software and associated training.
|
|
(4)
|
There
were no other fees and no fees paid to Deloitte Consulting during
the
years ended December 31, 2006 or
2005.
|
The
Audit
Committee Charter sets forth the Company’s policy regarding retention of the
independent registered public accounting firm, requiring the Audit Committee
to
review and approve in advance the retention of the independent registered public
accounting firm for the performance of all audit and lawfully permitted
non-audit services. The Chair of the Audit Committee, or in the absence of
the
Chair, any member of the Audit Committee designated by the Chair, has authority
to approve in advance any lawfully permitted non-audit services. The Audit
Committee is authorized to establish other policies and procedures for the
pre-approval of such services. Where non-audit services are approved under
delegated authority, the action must be reported to the full Audit Committee
at
its next regularly scheduled meeting. All of the audit-related fees, tax fees
or
other fees shown in the table above were approved pursuant to the Audit
Committee’s pre-approval process, as such process was in effect at the time of
the approval of the particular fee.
The
Audit
Committee has considered the compatibility of non-audit services performed
by
Deloitte with the auditors’ independence. The Audit Committee has concluded that
the provision of non-audit services by Deloitte is compatible with that firm
maintaining its independence from the Company and its management.
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
Item
15
is hereby supplemented as follows:
The
following Exhibits are filed as part of this amended Report:
|
(31.1)
|
Rule
13a - 14(a) Certification of Chief Executive Officer.
|
|
(31.2)
|
Rule
13a - 14(a) Certification of Chief Financial Officer.
|
| (32.1) | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Executive Officer. |
| (32.2) | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Financial Officer. |
|
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, M.D.
|
|||||||||
|
Date:
April 30, 2007
|
Anthony
M. Marlon, M.D.
|
|||||||||
|
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.
Anthony
M. Marlon, M.D.
|
Chief
Executive Officer
and
Chairman of the Board
(Chief
Executive Officer)
|
April
30, 2007
|
||||||||
|
/s/
Marc R. Briggs
Marc
R. Briggs
|
Senior
Vice President of Finance,
Chief
Financial Officer
and
Treasurer
|
April
30, 2007
|
||||||||
|
/s/
Thomas Y. Hartley
Thomas
Y. Hartley
|
Lead
Director
|
April
30, 2007
|
||||||||
|
/s/
Charles L. Ruthe
Charles
L. Ruthe
|
Director
|
April
30, 2007
|
||||||||
|
/s/
Albert L. Greene
Albert
L. Greene
|
Director
|
April
30, 2007
|
||||||||
|
/s/
Michael E. Luce
|
Director
|
April
30, 2007
|
||||||||
|
Michael
E. Luce
|
||||||||||
|
/s/
Anthony L. Watson
Anthony
L. Watson
|
Director
|
April
30, 2007
|
||||||||
42