FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 0-13879
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Salick Health Care, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-4333272
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) identification number)
8201 Beverly Boulevard, Los Angeles, California 90048-4520
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(Address of principal executive offices)
(Zip code)
(213) 966-3400
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: _______
10,366,297 shares of common stock
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par value, at March 31, 1995
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Page 1 of 21 Pages
Exhibit Index on Page 20
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS February 28, 1995 August 31, 1994
------------------- ----------------
(UNAUDITED)
Current assets:
Cash $ 203,000 $ 1,692,000
Marketable securities 46,199,000 45,378,000
Accounts receivable, less allowance
for doubtful accounts of $3,827,000
and $3,502,000 39,421,000 31,772,000
Inventories 1,374,000 1,171,000
Prepaid expenses 2,931,000 2,252,000
Other current assets 4,271,000 2,881,000
Deferred income taxes 2,489,000 2,241,000
------------ ------------
Total current assets 96,888,000 87,387,000
Property and equipment, at cost, less
accumulated depreciation and amortization
of $29,083,000 and $25,365,000 73,159,000 60,280,000
Pre-operating costs 6,328,000 5,250,000
Deposits 2,773,000 3,090,000
Goodwill, net 5,447,000 5,421,000
Other assets 4,188,000 4,654,000
------------ ------------
$188,783,000 $166,082,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 15,172,000 $ 3,000,000
Accounts payable and accrued liabilities 15,113,000 13,162,000
Income taxes payable 1,212,000 537,000
Current portion of long-term
obligations 3,172,000 2,748,000
------------ -----------
Total current liabilities 34,669,000 19,447,000
Deferred income taxes 1,545,000 1,545,000
Capitalized lease obligations, less
current portion 5,648,000 4,276,000
Long-term debt, less current portion 8,822,000 35,272,000
Minority interest 4,085,000 3,247,000
------------ -----------
Total liabilities 54,769,000 63,787,000
------------ -----------
2
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
February 28, 1995 August 31, 1994
----------------- ---------------
(UNAUDITED)
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par
value, 5,000,000 shares
authorized, none issued
Common stock, $.001 par value,
25,000,000 shares authorized,
10,340,756 and 8,456,513 shares
issued and outstanding 10,000 8,000
Additional paid in capital 80,084,000 54,107,000
Unearned stock awards (6,000)
Unrealized holding losses (626,000) (526,000)
Retained earnings 54,546,000 48,712,000
----------- ------------
Total stockholders' equity 134,014,000 102,295,000
------------ ------------
$188,783,000 $166,082,000
============ ============
See accompanying notes to consolidated financial statements.
3
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
February 28, February 28,
-------------------------- --------------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Operating revenues, net $37,981,000 $32,507,000 $73,946,000 $61,970,000
Operating expenses:
Medical supplies and services 6,544,000 4,996,000 12,865,000 9,571,000
Salaries and related costs 15,186,000 13,761,000 29,288,000 26,161,000
Other administrative expenses 4,848,000 4,264,000 9,860,000 8,087,000
Contract and occupancy costs 4,160,000 3,330,000 7,843,000 6,374,000
Depreciation and amortization 2,262,000 2,140,000 4,503,000 4,103,000
----------- ----------- ----------- -----------
Total operating expenses 33,000,000 28,491,000 64,359,000 54,296,000
----------- ----------- ----------- -----------
Operating income 4,981,000 4,016,000 9,587,000 7,674,000
Merger transaction expenses (526,000) (526,000)
Net interest income (expense) 264,000 (193,000) 284,000 (310,000)
Net investment gains (losses) (63,000) 178,000 (124,000) 434,000
Minority interest 225,000 63,000 550,000 63,000
----------- ----------- ----------- -----------
Income before income taxes 4,881,000 4,064,000 9,771,000 7,861,000
Provision for income taxes 2,007,000 1,510,000 3,937,000 2,915,000
----------- ----------- ----------- -----------
Net income $ 2,874,000 $ 2,554,000 $ 5,834,000 $ 4,946,000
=========== =========== =========== ===========
Earnings per share:
Primary $ 0.29 $ 0.29 $ 0.62 $ 0.57
=========== =========== =========== ===========
Fully diluted $ 0.28 $ 0.27 $ 0.58 $ 0.53
=========== =========== =========== ===========
Weighted average number of
shares used in computing
earnings per share:
Primary 9,985,000 8,691,000 9,414,000 8,668,000
=========== =========== =========== ===========
Fully diluted 10,738,000 10,573,000 10,736,000 10,557,000
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
February 28,
--------------------------------
1995 1994
---- ----
Cash flow provided (used) by operations:
Net income $ 5,834,000 $ 4,946,000
Add items not requiring cash:
Depreciation and amortization 4,503,000 4,103,000
Amortization of debt issue costs 23,000 33,000
Deferred income taxes (248,000) (438,000)
Minority interest in net income,
net of distributions (673,000) (81,000)
Changes in assets and liabilities:
Accounts receivable (7,649,000) (3,928,000)
Inventories (203,000) (125,000)
Prepaid expenses (679,000) (711,000)
Other current assets 121,000 (125,000)
Pre-operating costs (1,593,000) (1,574,000)
Deposits and other assets 265,000 (176,000)
Accounts payable and accrued liabilities 1,997,000 (2,370,000)
Income taxes payable 675,000 1,096,000
Refundable income taxes 1,296,000
----------- -----------
Net cash flow provided by operations 2,373,000 1,946,000
------------ -----------
Cash flow provided (used) by investing
activities:
Increase in marketable securities (921,000) (1,662,000)
Additions to property and equipment (14,428,000) (7,391,000)
Payment for purchase of acquisitions (150,000) (86,000)
Payments received on amounts due
from minority interest 376,000
------------ -----------
Net cash flow used by investing
activities (15,499,000) (8,763,000)
------------ -----------
Cash flow provided (used) by financing
activities:
Reduction of capitalized lease
obligations (470,000) (358,000)
Decrease of long-term debt (876,000) (436,000)
Notes payable to bank 12,172,000 5,220,000
Issuance of common stock 811,000 304,000
------------ -----------
Net cash flow provided by
financing activities 11,637,000 4,730,000
------------ -----------
5
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
Six Months Ended
February 28,
-------------------------
1995 1994
---- ----
Decrease in cash $(1,489,000) $(2,087,000)
Cash, beginning of period 1,692,000 2,430,000
----------- -----------
Cash, end of period $ 203,000 $ 343,000
=========== ===========
Schedule of non-cash investing and
financing activities:
Conversion of 7.25% convertible
subordinated debentures due
January 31, 2001 into common stock $25,575,000 $ 10,000
=========== ===========
Capital lease obligations incurred
for property and equipment $ 2,265,000 $ 14,000
=========== ===========
Deferred bond issue costs $ 400,000
===========
Unrealized holding losses $ 100,000
===========
See accompanying notes to consolidated financial statements.
6
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - In the opinion of management, the information furnished reflects all
adjustments, consisting only of normal recurring adjustments, which
are necessary for a fair statement of the interim financial
information. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. It is suggested that
these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's
August 31, 1994 audited financial statements. The results of
operations for the three and six month periods ended February 28, 1995
and February 28, 1994 are not necessarily indicative of the operating
results for the full year.
Note 2 - Agreement and Plan of Merger
On December 22, 1994 the Company announced that it had entered into an
Agreement and Plan of Merger with Zeneca Limited, pursuant to which
Zeneca will purchase approximately 50% of the equity of the Company on
a fully diluted basis. Under the terms of the Agreement, which is
subject to stockholder approval, regulatory review and other customary
conditions, Company stockholders would receive in exchange for each
share of common stock held: $18.875 in cash from Zeneca; although no
fractional shares will be issued, one-half share of a new callable
puttable common stock to be issued by the Company; and a payment to
holders of record at closing from the Company of $0.625, payable in
two equal installments at 180 days and 360 days after closing. The new
stock would carry a right on the behalf of the stockholders to put
(sell) the stock to the Company and an obligation on behalf of Zeneca
to fund the purchase, at 2.5 years after closing at a price of $42 per
share. The new stock would also carry a right on behalf of the Company
to call (buy) the special common stock for a period of four years at
market price, subject for the first 2.6 years to a floor and ceiling
price. The floor on the call is $42, discounted by 4% per annum
compounded if the call is made before 2.5 years, and the ceiling is
$50. The closing is scheduled to occur on April 13, 1995.
Note 3 - Call of Convertible Subordinated Debentures
On December 29, 1994 the Company called for redemption on January 20,
1995 all of its outstanding 7 1/4% Convertible Debentures due 2001 at
a redemption price, including accrued interest through January 20,
1995 of $1,049.34 per $1,000 of Debenture redeemed. The Debentures
were convertible at any time prior to the close of business on January
12, 1995 into shares of common stock of the Company at the rate of
$14.00 per share and all outstanding Debentures were converted into
common stock. For the purpose of calculating fully diluted earnings
per share for the quarter and six month periods
7
ended February 28, 1995 and 1994, these Debentures were assumed to
have been converted into common stock as of the beginning of the
respective periods.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SECOND FISCAL QUARTER ENDED FEBRUARY 28, 1995 COMPARED TO SECOND FISCAL QUARTER
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ENDED FEBRUARY 28, 1994
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Operating revenues increased in the second quarter of fiscal 1995 by 16.8%
to $37,981,000 from $32,507,000 in the second quarter of fiscal 1994. Operating
income increased $965,000 or 24% over the prior year's second quarter and
operating margins were 13.1% and 12.4% in the three month periods ended February
28, 1995 and 1994, respectively. Income before taxes increased 20% to
$4,881,000 in the current fiscal quarter from $4,064,000 in fiscal 1994. Net
income increased 12.5% to $2,874,000, as compared to $2,554,000 in the prior
year's second quarter and represented 7.6% and 7.9%, respectively, of operating
revenues. For the six month periods, operating revenues increased by 19.3% to
$73,946,000 from $61,970,000. Operating income increased $1,913,000 or 24.9%
over the prior six month period and was 13% and 12.4% of operating revenues in
the current and prior periods, respectively. Net income increased $888,000 or
18% and was 7.9% of operating revenues, down from 8% for the corresponding six
month period. Increases in revenues and operating income resulted from growth
in patient volumes and services at the Company's existing facilities, as well as
the Company's recently introduced disease state managed care program, SalickNet,
the results of which were included for the first time in the first quarter of
1995.
Net income and earnings per share were adversely affected due to non-
recurring transaction expenses of $526,000 recorded in the second quarter of
fiscal 1995 in connection with the Company's Agreement and Plan of Merger with
Zeneca Limited. Additionally, the Company incurred $458,000 in legal,
accounting and other fees associated with the proxy and registration statement
which were charged directly to paid in capital. The Company estimates that
additional non-recurring transaction expenses of approximately $7,000,000 will
be expensed in the third quarter of fiscal 1995, a portion of which may not be
payable until subsequent periods. Other expenses associated with the proxy of
approximately $150,000 will be incurred and charged to paid in capital in the
third quarter of fiscal 1995. The transaction expenses primarily include legal
and accounting fees, travel and other expenses and investment banking fees, a
portion of which the Company believes is not payable until the acquisition of
the remainder of the Company's stock.
Second quarter primary earnings per share remained constant at $0.29, and
fully diluted earnings per share increased 3.7% to $0.28 from $0.27. For the
six months ended February 28, 1995, earnings per share, on a primary basis,
increased 8.8% to $0.62 from $0.57 and on a fully diluted basis, 9.4% to $0.58
from $0.53.
Net interest income increased to $264,000 in the quarter versus net
interest expense of $193,000 in the prior quarter due to the call of the
Company's 7-1/4% Convertible Debentures. Net investment income decreased from
second quarter 1994 due to capital losses realized in
9
trading transactions in the marketable securities portfolio. The Company
expects this trend toward lower investment income to continue through the
balance of fiscal 1995 as substantially all portfolio capital gains have been
utilized. While not affecting operating income, this will reduce pre-tax and
net income.
Operating results have been and will continue to be adversely affected by
reductions in reimbursement rates mandated by Congress, including those pursuant
to the Omnibus Budget Reconciliation Acts (OBRA) of 1990-1993 which impact
health care providers for many services provided to Medicare beneficiaries. The
principal reductions applicable to the Company are a continuation of the 5.8%
reduction in reimbursement of outpatient cost-based programs through fiscal year
1998; a continuation of the 10% reduction in hospital outpatient capital
reimbursement through fiscal year 1998; and a change in the manner of
reimbursement for Erythropoietin for dialysis patients, effective January 1,
1991 which was further reduced beginning on January 1, 1994. The Company has
implemented strategies, including programs to increase both Medicare and non-
Medicare patient volume and the implementation of cost control programs, that
have substantially mitigated the effect of these changes. See "Impact of
Inflation and Changing Regulation."
Total operating expenses relative to operating revenues declined 0.8% for
the second quarter of fiscal 1995 and 0.6% for the six months of fiscal 1995,
before interest and investment expense, as compared to the prior year. Medical
supplies and services expense increased by $1,548,000 and $3,294,000 during the
quarter and six month periods, a 1.9% and 2% increase, respectively, as a
percentage of revenues, because of claims payments made under the Company's
capitated fee program and increasing complexity in cancer and dialysis treatment
modalities and supplier price escalations. Despite the addition of
professional, corporate, and administrative and other personnel necessitated by
expansion and growth, primarily in Cancer Center operations, payments under the
Management Incentive Compensation Plan, and increases in compensation and
payroll taxes, salaries and related costs, which increased $1,425,000 and
$3,127,000 in the three and six month periods, actually decreased 2.3% and 2.6%,
respectively, as a percentage of operating revenues as the result of greater
operating efficiency. As compared to the prior year periods, other
administrative expenses for fiscal 1995 declined 0.4% for the quarter and
increased 0.3% for the six months, as a percent of operating revenues. Contract
and occupancy costs increased 0.7% and 0.3% during the quarter and six month
periods, respectively, as a percentage of net operating revenues, principally
resulting from increased contract costs under contractual agreement terms with
certain of the Company's affiliated hospitals. Depreciation and amortization
increased by $122,000 and $400,000 as compared to the second fiscal quarter and
six months of 1994 due to depreciation of additional clinic equipment placed in
service during the past year. Pre-operating and start-up costs, which are
capitalized, are being amortized over three years, beginning with the
commencement of operations.
10
Income taxes were calculated at a 40.3% rate in the fiscal 1995 six month
period versus 37.1% in the prior six month period. In the prior period, the
Company utilized available federal capital loss carrryforwards, lowering the
Company's tax rates and increasing cash flow. The primary cause for the
increase in the effective rate for the fiscal 1995 period was an increase in the
federal statutory rate.
Liquidity and Capital Commitments
Presently existing and internally generated funds and credit facilities are
expected to be sufficient to satisfy the Company's requirements for working
capital and capital expenditures relating to its present operations in fiscal
1995. Capital expenditures for the Company's operations for fiscal 1995 are
presently anticipated to be approximately $37,000,000 which includes $6,000,000
for the acquisition and carrying costs of real estate acquired in March 1995 for
expansion and development of the Company's programs and services. In addition,
the Company anticipates additional expenditures related to the merger with
Zeneca which are presently estimated at approximately $28,394,000 and include
the estimated expenses of the merger, the $0.625 per share distribution to be
paid in two installments to the Company's existing stockholders and the purchase
of the Company's headquarters for a purchase price of approximately $14,650,000.
The Company believes that it will have sufficient capital, which may necessitate
liquifying its investment portfolio and increasing its bank borrowings, to fund
these expenditures. As to other needs, certain equipment and/or facilities may
be acquired through leases or purchase-finance agreements. The accelerated
development, establishment or acquisition of a significant number of additional
cancer and/or dialysis centers or other acquisitions or operations may require
borrowing, equity or other forms of financing by the Company.
Working capital at February 28, 1995 was $62,219,000. The decrease in
working capital during the current fiscal period as compared to the fiscal 1994
year end is principally the result of short-term bank borrowings for financing
acquisitions and capital expenditures (primarily construction in progress). The
increase in accounts receivable at February 28, 1995 as compared to August 31,
1994 is due to the previously mentioned increased revenues which resulted from
growth in patient volumes and services provided at the Company's cancer centers,
dialysis facilities and home care operations.
The Company's principal sources of liquidity consist of cash on hand,
interest-bearing investments, internal cash flow and bank lines of credit of
$35,000,000. At February 28, 1995, $15,172,000 had been borrowed under the
revolving bank line of credit and $10,000,000 had been converted to long-term
debt payable over five years of which $1,917,000 has been repaid. The line of
credit agreement provides various options for interest rates. Unless the
Company elects an optional interest rate, borrowings under the line of credit
are subject to the bank's prime rate of interest.
11
At February 28, 1995, the Company held in its investment portfolio cash,
government and investment grade debt securities and equity securities. These
investments represent 100% of the total portfolio at fair value and reflect the
Company's policy to invest its funds in government and investment grade
securities. In accordance with SFAS 115, the Company has reduced the carrying
value of its portfolio from cost of $46,825,000 to fair value of $46,199,000.
The reduction of $626,000 is reflected in stockholders' equity as unrealized
holding losses. To the extent that the Company liquidates investments whose
carrying value has been so reduced for working capital requirements or capital
expenditures, investment losses will be recognized in the income statement and
unrealized holding losses in stockholders' equity will be reduced accordingly.
As of February 28, 1995, the Company's five largest investments in municipal and
corporate debt securities, all of which were investment grade, aggregated
$6,023,000 at fair value, with cost of $6,192,000. The single largest
investment in one company's securities approximated $1,419,000 at cost and fair
value.
Impact of Inflation and Changing Regulation
The largest single component of the Company's revenue continues to be
reimbursement at rates which are set or regulated by federal and individual
state authorities. These reimbursement rates are also subject to periodic
adjustment for certain factors, including inflation, area wage indices and costs
incurred in rendering the services. The reimbursement rates may in the future,
as they have in the past, also be affected by cost containment legislation
(including health care reform legislation), competition, third party payor
(including indemnity insurers, managed care organizations and self insured
employers) changes or other governmental administrative controls or limitations.
Under federal Medicare cost containment legislation that has been phased in
over a period that commenced October 1, 1983, most hospital inpatients covered
by Medicare are classified into diagnostic related groups ("DRGs") based on such
factors as primary admitting diagnosis and surgical procedure. Payments to
hospitals for the care of patients covered under the DRG system is generally set
at a predetermined amount. Many states and third party payors are investigating
similar modifications to their reimbursement formula in an effort to contain
costs. This type of program provides an incentive for hospitals to plan and
deliver their services more efficiently.
In recent years there have been a number of statutory and regulatory
changes that affect Medicare reimbursement for services furnished to hospital
outpatients. Prior to October 1, 1987, Medicare generally had reimbursed
hospital outpatient services on the basis of the reasonable costs incurred by
the hospital. On October 1, 1987, Medicare began reimbursing hospitals for
certain surgery services furnished to hospital outpatients on the basis of the
lower of reasonable costs or an amount based on a blend of the hospital's
reasonable costs and a prospectively set fee schedule amount. On October 1,
1988, this blended payment system was extended to radiology
12
services furnished to hospital outpatient patients; the blended payment system
was extended further to certain other diagnostic services on October 1, 1989.
In addition, the amount of the blend that is based on the hospital's reasonable
costs has decreased; currently, the blend is based 42% on hospital costs for
surgery and radiology services, and 50% on hospital costs for other diagnostic
services. For surgery services reimbursed under the blend, the fee schedule
portion of the blend is based on the amount of payment that ambulatory surgery
centers would receive for the procedure. For radiology and diagnostic services
reimbursed under the blend, the fee schedule portion of the blend is based on
the amount that physicians would receive if the procedure were furnished in a
physician's office under the Medicare physician fee schedule.
The Omnibus Budget Reconciliation Act of 1990 amended the definition of
"inpatient hospital services" to include all services for which payment may be
made under the DRG system that are provided by a hospital or an entity wholly-
owned or operated by the hospital to a patient during the three days immediately
preceding the date of the patient's admission, if such services are diagnostic
services (including clinical diagnostic laboratory tests) or are other services
related to the admission, as defined by the Secretary. Such services are not
reimbursable separately as outpatient services under Medicare Part B. These
provisions have been in effect since 1991. On January 12, 1994, the Secretary
issued interim final regulations implementing this provision.
Under the Omnibus Budget Reconciliation Act of 1989, effective January 1,
1992, Medicare reimbursement for physician services began a five year transition
to the use of a physician fee schedule based on a "resource-based relative value
scale." That physician fee schedule, through the blended payment system
described above, has affected the amount of Medicare reimbursement for hospital
outpatient departments providing outpatient radiology, radiation therapy,
surgery and certain diagnostic services.
Effective October 1, 1991, Medicare payments for hospital outpatient
services made on a reasonable cost basis and the cost portion of outpatient
services paid on the basis of a blended amount, have been reduced by 5.8%. Under
the Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993"), Congress extended
this reduction through Fiscal Year 1998. Effective October 1, 1991, Medicare
has reimbursed the capital costs allocated to outpatient departments on the
basis of 90% of reasonable costs. Under OBRA 1993, Congress extended this 10%
reduction in hospital outpatient capital reimbursement through Fiscal Year 1998.
Also, under OBRA 1993, the amount which Medicare reimburses for fixed rate
laboratory procedures was reduced.
Effective November 1, 1990, the Medicare fiscal intermediary for the
Company's dialysis facilities changed the method of reimbursing medications
provided to Medicare dialysis patients from charge based reimbursement to
reimbursement based on reasonable costs. This change
13
has reduced the amount of reimbursement to the Company for such medications and
other regulatory changes potentially could further reduce such reimbursement.
In addition, effective January 1, 1991, the method of reimbursement for EPO
furnished to dialysis patients was changed from its former structure (80% of $40
per treatment dosage for up to 10,000 units and 80% of $70 per treatment dosage
of 10,000 or more units) to provide for payment of 80% of $11.00 per 1,000
units. This change in EPO reimbursement has been partially offset by a $1.00
per treatment increase in the composite rate reimbursement for outpatient
dialysis services. Pursuant to OBRA 1993, reimbursement for EPO was further
reduced beginning January 1, 1994 to 80% of $10.00 per 1,000 units. The overall
impact of the EPO reimbursement changes has adversely affected the Company's
revenues and earnings.
The effect of these changes may be mitigated by the Company's ability to
increase its patient volume both at the same sites and at additional centers, to
increase its non-Medicare patient volume and to continue implementation of cost
reduction strategies and controls. To address these changes, the Company has
expanded its program to increase patient volume, and instituted other programs
to achieve even greater efficiencies in staffing, purchasing and scheduling.
Legislation has been enacted and/or proposed on the federal and certain
individual state levels dealing with fraud and abuse and so-called "self-
referral" prohibitions involving physicians and their relationships to providers
of health care services. This legislation includes, on the federal level an
expansion of the "Ethics In Patient Referral Act" also known as the "Stark
Bill," and, in California a physician self-referral statute commonly known as
"PORA" or the "Speier Bill," each of which is effective January 1, 1995.
Although there is a relative scarcity of both case law and binding
administrative interpretations of statutes or regulations in this area and the
potential penalties and fines for violations of these statutes are significant,
the Company believes that it is complying in all material respects with, or has
exemptions from, such legislation as well as previous legislation in these
areas. However, should it be determined that the Company is not in compliance
with such legislation, or is required to correct or modify any of its practices
or relationships to comply with the legislation, the Company expects to be able
to achieve such compliance without materially adversely affecting the Company's
operations.
Recent legislation in Florida limits charges for certain healthcare
services provided to non-Medicare/Medicaid patients. While a substantial
portion of this law was declared unconstitutional by a Florida Court, the
limitations on rates respecting radiation therapy services provided at
freestanding, not hospital-based facilities, presently remain in effect. As
substantially all of the Company's radiation therapy services are hospital
based, the effect of the legislation has not had a material effect on the
Company's operations. Florida has also enacted legislation to preclude or limit
referrals by physicians to facilities in which they have an ownership, control
or
14
investment relationship. Insofar as the Company's radiation therapy limited
partnership interest in South Florida is concerned, the legislation established
a period of time to restructure those relationships without penalty. The
Company has substantially completed restructuring the limited partnership in
accordance with the applicable requirements of federal law. Florida has adopted
legislation effective in 1994 which is aimed at health care coverage for
presently uninsured residents and encouraging the formation of purchasing
alliances for health care services. This legislation is principally aimed at
small employer groups. As the legislation is new, and as it is presently
configured, the Company cannot predict its effect upon the Company and its
operations. However, the Company, as part of its overall strategy, is in the
process of developing various plans to be offered to employer groups, purchasing
alliances, managed care and other payors. The first of these plans has been
introduced and successfully marketed in South Florida.
The legislative enactments described above are, the Company believes, a
harbinger of what will occur and is occurring on a national level and in other
states. Legislation such as described above, together with the disappearance
and/or weakening of the corporate practice of medicine doctrine in many states,
affords the Company opportunities to increase market share and the presence of
its facilities in other areas as the prevalence of physician ownership of such
ventures disappears and such relationships and facilities have to be closed or
sold.
There is also the possibility of the establishment of a prospective payment
system for certain Medicare reimbursed outpatient services. Congress has
requested that the Health Care Financing Administration ("HCFA"), which
administers Medicare, prepare recommendations concerning the establishment of
such a prospective payment system. Such recommendations were submitted to
Congress in March 1995 and included a proposal to phase in prospective payment,
beginning first with outpatient surgery, radiology, and other diagnostic
services. The details of the proposed payment system, including the amounts of
payment that would be made for each procedure, have not been finalized by HCFA.
Adoption of HCFA's recommendation would require a change in the Medicare law by
Congress, and senior HCFA staff have stated that even if Congress enacted such a
change in 1995, the new system could not be implemented until January 1997, at
the earliest. Under HCFA's proposal, services other than surgery, radiology,
and other diagnostic services would not be reimbursed under a new prospective
payment system until further research is completed. The Company cannot predict
what will be the effect, if any, on revenues or income which may result from the
adoption by Congress of HCFA's recommendations for a Medicare prospective
payment for hospital outpatient services.
HCFA in its March 1995 report to Congress made two other recommendations
concerning proposed changes in the Medicare law. First, HCFA proposed that the
Medicare law be changed to modify the way that the amount of beneficiary
coinsurance for outpatient services is
15
computed. Second, HCFA proposed that Medicare law be changed to correct what
has been described as the "formula driven overpayment" which HCFA states results
in Medicare payments for hospital outpatient surgery, radiology and other
diagnostic services that are greater than what was intended by Congress. In its
report, HCFA suggested several ways in which the Medicare law could be changed
to address these issues, either with or without the enactment of a prospective
payment system for hospital outpatient services. The alternatives suggested by
HCFA generally would result in an overall reduction in payments for hospital
outpatient services furnished to Medicare beneficiaries and, if enacted, could
adversely affect the Company's revenues and income. However, it is uncertain
which alternative, if any, Congress will enact, and it is impossible to
determine what impact, if any, such changes might have on the Company's revenues
and income.
In addition, several comprehensive bills were introduced in the United
States Congress during 1994 that would have, if enacted, created significant
changes in the way health care providers are reimbursed for services, drugs and
supplies. Although attempts to enact health care reform were unsuccessful thus
far, efforts to pass some form of health care reform may be renewed in 1995. At
this point in time, the Company is unable to predict what effect implementation
of national health care reform will have on the Company's revenues and profits.
In addition, in 1995 Congress may consider further changes to the Medicare
reimbursement system. These may be limited to extensions of previously
implemented reductions scheduled to expire or may include additional changes.
The ultimate impact of any of these changes, if enacted, on the Company's
business cannot be predicted, in part due to the rapidly evolving changes in the
health care system generally and in part due to the fact that the Company has
implemented plans to deal with this situation and also that as reimbursement
reductions have occurred historically, the Company has improved operations by
increased market share and greater efficiency.
The Company believes that health care regulations will continue to change
and, therefore, regularly monitors developments in health care law. The Company
expects to modify its agreements and operations from time to time as the
business and regulatory environments change. While the Company believes it will
be able to structure its agreements and operations in accordance with applicable
law, there can be no assurance that its arrangements will not be successfully
challenged.
Labor costs represent the largest dollar component of the Company's total
expenses and necessary increases in the number of personnel, salaries, hourly
rates and insurance costs have resulted in higher dollar amounts of operating
expenses. Rental rates are subject to annual adjustments pursuant to escalation
clauses in the respective leases. In addition, suppliers have sought to pass
along their rising costs to the Company. A significant portion of these higher
costs, however, has been offset by the use of new procedures and equipment,
changes in staff scheduling, improvement in purchase price negotiations and
utilization of supplies, and by increases in treatment and services
16
volume. Changes in reimbursement rates for Medicare patients have a significant
impact on the results of operations. The rate of inflation has not had a
significant impact on results of operations.
17
Part II.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Net Earnings per Common Share.
(b) Reports on Form 8-K. During the quarter ended February 28, 1995 a
report on Form 8-K with date of earliest event reported being December
22, 1994 was filed. The report which is dated January 5, 1995 reports
on Item 1. "Changes of Control of Registrant" and Item 5. "Other
Events."
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALICK HEALTH CARE, INC.
------------------------------------
(Registrant)
/s/ BERNARD SALICK, M.D.
------------------------------------
Date: April 13, 1995 Bernard Salick, M.D.
Chairman and Chief Executive Officer
(Duly Authorized Officer)
/s/ BLAIR L. HUNDAHL
------------------------------------
Date: April 13, 1995 Blair L. Hundahl
Vice President-Finance
(Principal Accounting Officer)
19
SALICK HEALTH CARE, INC.
EXHIBIT INDEX
Exhibit Page
------- ----
11 Computation of Net Earnings per Common Share. 21
20