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 May 31, 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
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(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:
5,657,115 shares of common stock, $.001 par value at June 30, 1995
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5,634,115 shares of callable puttable common stock,
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$.001 par value at June 30, 1995
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Page 1 of 22 Pages
Exhibit Index on Page 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS May 31, 1995 August 31, 1994
------------ ---------------
(UNAUDITED)
Current assets:
Cash $ 363,000 $ 1,692,000
Marketable securities 43,949,000 45,378,000
Accounts receivable, less allowance
for doubtful accounts of $3,800,000
and $3,502,000 38,685,000 31,772,000
Inventories 1,322,000 1,171,000
Prepaid expenses 2,132,000 2,252,000
Other current assets 3,893,000 2,881,000
Deferred income taxes 2,359,000 2,241,000
Total current assets ------------ ------------
92,703,000 87,387,000
Property and equipment, at cost, less
accumulated depreciation and amortization
of $31,025,000 and $25,365,000 98,053,000 60,280,000
Pre-operating costs 6,720,000 5,250,000
Deposits 866,000 3,090,000
Goodwill, net 5,477,000 5,421,000
Other assets 5,151,000 4,654,000
------------ ------------
$208,970,000 $166,082,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 16,072,000 $ 3,000,000
Accounts payable 5,691,000 4,516,000
Accrued liabilities 33,884,000 8,646,000
Income taxes payable 336,000 537,000
Current portion of long-term
obligations 5,063,000 2,748,000
------------ ------------
Total current liabilities 61,046,000 19,447,000
Deferred income taxes 1,221,000 1,545,000
Capitalized lease obligations, less
current portion 5,389,000 4,276,000
Long-term debt, less current portion 6,432,000 35,272,000
Other liabilities 2,400,000
Minority interest 3,975,000 3,247,000
------------ ------------
Total liabilities 80,463,000 63,787,000
------------ ------------
2
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
May 31, 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,
15,000,000 and 25,000,000 shares
authorized, 5,657,115 and
8,456,513 shares issued and
outstanding 6,000 8,000
Callable puttable common stock,
$.001 par value, 7,500,000 shares
authorized, 5,589,415 shares and
no shares outstanding 5,000
Additional paid in capital 77,162,000 54,107,000
Unearned stock awards (6,000)
Unrealized holding gains (losses) 107,000 (526,000)
Retained earnings 51,227,000 48,712,000
------------ ------------
Total stockholders' equity 128,507,000 102,295,000
------------ ------------
$208,970,000 $166,082,000
============ ============
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
May 31, May 31,
-------------------------- --------------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Operating revenues, net $38,754,000 $34,381,000 $112,700,000 $96,351,000
Operating expenses:
Medical supplies and services 6,618,000 5,195,000 19,483,000 14,766,000
Salaries and related costs 15,258,000 14,186,000 44,546,000 40,347,000
Other administrative expenses 4,984,000 4,605,000 14,844,000 12,692,000
Contract and occupancy costs 4,000,000 3,707,000 11,843,000 10,081,000
Depreciation and amortization 2,319,000 2,202,000 6,822,000 6,305,000
----------- ----------- ------------ -----------
Total operating expenses 33,179,000 29,895,000 97,538,000 84,191,000
----------- ----------- ------------ -----------
Operating income 5,575,000 4,486,000 15,162,000 12,160,000
Merger transaction expenses (6,907,000) (7,433,000)
Net interest income (expense) 391,000 (233,000) 675,000 (543,000)
Net investment gains (losses) (124,000) (166,000) (248,000) 268,000
Minority interest 27,000 239,000 577,000 302,000
----------- ----------- ------------ -----------
Income (loss) before income
taxes (1,038,000) 4,326,000 8,733,000 12,187,000
Provision for income taxes 2,281,000 1,720,000 6,218,000 4,635,000
----------- ----------- ------------ -----------
Net income (loss) $(3,319,000) $ 2,606,000 $ 2,515,000 $ 7,552,000
=========== =========== ============ ===========
Earnings (loss) per share:
Primary $ (0.30) $ 0.30 $ 0.25 $ 0.87
=========== =========== ============ ===========
Fully diluted (1) $ 0.28 $ 0.80
=========== ===========
Weighted average number of
shares used in computing
earnings (loss) per share:
Primary 11,016,000 8,731,000 10,236,000 8,699,000
=========== =========== ============ ===========
Fully diluted (1) 10,579,000 10,547,000
=========== ===========
See accompanying notes to consolidated financial statements.
(1) The fully diluted calculation is not presented as it is anti-dilutive.
4
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
May 31,
----------------------------------
1995 1994
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Cash flow provided (used) by operations:
Net Income $ 2,515,000 $ 7,552,000
Add items not requiring cash:
Depreciation and amortization 6,822,000 6,305,000
Amortization of debt issue costs 23,000 49,000
Deferred income taxes (442,000) (606,000)
Minority interest in loss,
net of distributions (702,000) (321,000)
Merger transaction expense 6,185,000
Changes in assets and liabilities:
Accounts receivable (6,913,000) (5,374,000)
Inventories (151,000) (160,000)
Prepaid expenses 120,000 (803,000)
Other current assets 418,000 (106,000)
Pre-operating costs (2,258,000) (2,072,000)
Deposits and other assets 1,164,000 (155,000)
Accounts payable 1,175,000 (250,000)
Accrued liabilities 1,061,000 (1,519,000)
Income taxes payable (201,000) 1,375,000
Refundable income taxes 1,296,000
------------ ------------
Net cash flow provided by operations 8,816,000 5,211,000
------------ ------------
Cash flow provided (used) by
investing activities:
(Increase) decrease in marketable
securities 2,062,000 (1,884,000)
Additions to property and equipment (26,647,000) (11,267,000)
Payment for purchase of acquisitions (157,000) (181,000)
Payments received on amounts due
from minority interest 1,274,000
------------ ------------
Net cash flow used by investing
activities (24,742,000) (12,058,000)
------------ ------------
Cash flow provided (used) by
financing activities:
Reduction of capitalized lease
obligations (732,000) (534,000)
Decrease of long-term debt (1,355,000) (666,000)
Notes payable to bank 13,072,000 6,990,000
Exercise of stock options 4,192,000 531,000
Stock registration costs charged
to paid in capital (580,000)
------------ ------------
Net cash flow provided by financing
activities 14,597,000 6,321,000
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5
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine Months Ended
May 31,
------------------------------
1995 1994
-------- --------
Decrease in cash $(1,329,000) $ (526,000)
Cash, beginning of period 1,692,000 2,430,000
----------- -----------
Cash, end of period $ 363,000 $ 1,904,000
=========== ===========
Schedule of non-cash operations,
investing and financing activities:
Conversion of 7.25% convertible
subordinated debentures due
January 31, 2001 into common stock $25,575,000 $ 40,000
=========== ===========
Purchase of corporate headquarters $14,650,000
===========
Special distribution payable to
stockholders $ 6,534,000
===========
Merger transaction expense $ 6,185,000
===========
Capital lease obligations incurred
for property and equipment $ 2,250,000 $ 111,000
=========== ===========
Unrealized holding gains $ 633,000
===========
Deferred bond issue costs charged
to paid in capital $ 400,000
===========
See accompanying notes to consolidated financial statements.
6
SALICK HEALTH CARE, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - In the opinion of management, the information furnished reflects all
adjustments, consisting only of normal recurring adjustments, and
adjustments related to the recapitalization transactions described
herein 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 nine month periods ended May
31, 1995 and May 31, 1994 are not necessarily indicative of the
operating results for the full year.
Note 2 - 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 nine month periods ended May 31, 1995 and 1994,
these Debentures were assumed to have been converted into common stock
as of the beginning of the respective periods.
Note 3 - Agreement and Plan of Merger
On April 13, 1995 the Company consummated the Agreement and Plan of
Merger with Zeneca Limited, pursuant to which Zeneca acquired
approximately 50% of the equity of the Company on a fully diluted
basis. Under the terms of the Agreement, Company stockholders received
in exchange for each share of common stock held: $18.875 in cash from
Zeneca; one-half share of a new callable puttable common stock 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 carries 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 also carries
a right on behalf of the Company to call (buy) the callable puttable
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 Merger has been accounted for as a recapitalization of the
Company. The common stock issued to Zeneca was capitalized in an
amount equal to the cash consideration received by existing
stockholders of the Company in exchange for their shares. The cash
proceeds paid to existing stockholders in exchange for their shares
(including the distribution payable by the Company) was charged to
7
stockholders' equity. The callable puttable common stock issued to
existing stockholders was capitalized at par value. Cash consideration
paid to existing stockholders upon exercise of the Put and/or the Call
will be charged against stockholders' equity at the date of exercise.
Cash consideration received by the Company from Zeneca to fund the Put
and/or the Call will be credited to stockholders' equity.
The following merger related items are included in accrued liabilities
and other liabilities as of May 31, 1995:
Purchase of corporate headquarters $14,650,000
Special distribution payable to stockholders 6,534,000
Investment banking fees 6,100,000
Note 4 - Subsequent Event
On July 7, 1995, one of the Company's affiliated hospitals, Westlake
Medical Center, was sold by Universal Health Services ("UHS") to
Columbia/HCA. The Westlake Medical Center Cancer Center was operated
as a joint venture between the Company and UHS. The Company has agreed
to purchase UHS's investment in certain fixed and other assets at
UHS's cost. The Cancer Center will no longer be operated as a joint
venture and the Company now owns all operations. The Company does not
expect the dissolution of the Joint Venture agreement to materially
affect the Company.
Note 5 - Related Party Transaction
The Company, Dr. Salick and his spouse were parties to a lease for the
Company's corporate headquarters and related offices. Dr. and Mrs.
Salick, the Company and Zeneca executed an agreement, dated December
22, 1994 pursuant to which Dr. Salick and his spouse have elected to
sell the corporate headquarters to the Company for an aggregate
purchase price of $14,650,000 in cash, which purchase price is
approximately $1,160,000 less than the formula purchase price in the
lease under which Dr. Salick and his spouse had the right under
certain circumstances to require the lessee to purchase the corporate
headquarters.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIRD FISCAL QUARTER ENDED MAY 31, 1995 COMPARED TO THIRD FISCAL QUARTER ENDED
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MAY 31, 1994
- ------------
Operating revenues increased in the third quarter of fiscal 1995 by 12.7%
to $38,754,000 from $34,381,000 in the third quarter of fiscal 1994. Operating
income increased $1,089,000 or 24.3% over the prior year's third quarter and
operating margins were 14.4% and 13% in the three month periods ended May 31,
1995 and 1994, respectively. Income (loss) before income taxes decreased to
$(1,038,000) in the current fiscal quarter, from $4,326,000 in fiscal 1994 due
to merger transaction expenses discussed below. Net income (loss) decreased to
$(3,319,000), as compared to $2,606,000 in the prior year's third quarter. For
the nine month periods, operating revenues increased by 17% to $112,700,000 from
$96,351,000. Operating income increased $3,002,000 or 24.7% over the prior year
nine month period and was 13.5% and 12.6% of operating revenues in the current
and prior periods, respectively. Net income for the nine months ended May 31,
1995 decreased $5,037,000 due to merger transaction expenses. 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 in both the
quarter and nine month period due to non-recurring merger transaction expenses
of $7,433,000 recorded in the nine month period of fiscal 1995 ($6,907,000 of
which were recorded in the quarter ending May 31, 1995) in connection with the
Company's Agreement and Plan of Merger with Zeneca Limited. Additionally, in the
nine month period the Company incurred $580,000 in legal, accounting and other
fees associated with the proxy and registration statement which were charged
directly to paid in capital. 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 callable puttable common stock. Without the
impact of the merger transaction expenses, net income in the third quarter of
fiscal 1995 would have increased by 37.7% to $3,588,000 compared to fiscal 1994.
Net income, without the impact of the merger transaction expenses for the nine
months ended May 31, 1995 would have been $10,078,000, an increase of 33.4% over
the prior year nine month period.
Third quarter primary earnings (loss) per share declined to $(0.30) from
$0.30 in the prior year period. The fully diluted calculation for the three and
nine month period ending May 31, 1995 was anti-dilutive. Fully diluted earnings
per share for the three and nine months periods ending May 31, 1994 were $0.28
and $0.80, respectively. For the nine months ended May 31, 1995, primary
earnings per share were $0.25 compared to $0.87 in the prior year period.
Earnings per share for the third quarter and nine month period of fiscal 1995
were also adversely affected by an increase of 429,625 in the number of
outstanding shares of all classes of common stock, including those
9
reserved for exercise of options, due to the terms of the merger. Excluding
merger transaction expenses, earnings per share for the third quarter would have
been $0.33 on a primary and fully diluted basis. For the nine months ended May
31, 1995, primary and fully diluted earnings per share, excluding merger
transaction expenses and issuance of additional shares due to the merger, would
have been $1.01 and $0.96, respectively.
Net interest income increased to $391,000 in the quarter versus net
interest expense of $233,000 in the prior year quarter due to the call of the
Company's 7-1/4% Convertible Debentures in the second fiscal quarter. The
Company incurred capital losses in both third quarter periods from trading
losses in the Company's marketable securities portfolio. As of May 31, 1995 the
Company has unrealized holding gains in its investment portfolio.
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 1.3% for
the third quarter of fiscal 1995 and 0.8% for the nine months of fiscal 1995,
before interest and investment expense, as compared to the prior year. Medical
supplies and services expense increased by $1,423,000 and $4,717,000 during the
quarter and nine month periods, a 2% increase, respectively, as a percentage of
revenues, because of medical claims expense related to 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 $1,072,000 and $4,199,000 in the
three and nine month periods, actually decreased 1.9% and 2.3%, 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 0.5% for the quarter and remained constant for the nine
months, as a percent of operating revenues. Contract and occupancy costs
decreased 0.5% during the quarter and remained constant for the nine month
periods, respectively, as a percentage of net operating revenues. Depreciation
and amortization increased by $117,000 and $517,000 as compared to the third
fiscal quarter and nine months of 1994 due to depreciation of additional clinic
equipment placed in service
10
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.
Income taxes were calculated at a 71.2% rate in the fiscal 1995 nine month
period versus 38% in the prior year nine month period due to the non-
deductibility of substantially all merger transaction expenses. In the prior
year period, the Company utilized available federal capital loss carrryforwards,
lowering the Company's tax rates and increasing cash flow.
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 the remainder of
fiscal 1995 are anticipated to be approximately $12,000,000. In addition, the
Company anticipates expenditures related to the merger with Zeneca which have
been accrued at approximately $28,617,000 and include a) the estimated expenses
of the merger ($7,433,000), b) the $0.625 per share distribution to be paid in
two installments to the Company's existing stockholders ($6,534,000), and c) the
purchase of the Company's headquarters for a purchase price of $14,650,000. The
Company believes that it will have sufficient capital, which may necessitate
liquidation of 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 or other forms of financing by the Company.
Working capital at May 31, 1995 was $31,657,000. The decrease in working
capital during the current fiscal period as compared to the fiscal 1994 year end
is principally the result of increased short-term bank borrowings for financing
acquisitions and capital expenditures (primarily construction in progress) and
accrual of merger related expenditures. The increase in accounts receivable at
May 31, 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 May 31, 1995, $16,072,000 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 $2,417,000 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.
At May 31, 1995, the Company held in its investment portfolio cash,
government and investment grade debt securities and equity securities. These
11
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 increased the carrying
value of its portfolio from cost of $43,842,000 to fair value of $43,949,000.
The increase of $107,000 is reflected in stockholders' equity as unrealized
holding gains. To the extent that the Company liquidates investments whose
carrying value has been so increased for working capital requirements or capital
expenditures, investment gains will be recognized in the income statement and
unrealized holding gains in stockholders' equity will be reduced accordingly. As
of May 31, 1995, the Company's five largest investments in municipal and
corporate debt securities, all of which were investment grade, aggregated
$5,828,000 at fair value, with cost of $5,897,000. The single largest investment
in one company's securities approximated $1,286,000 at fair value with cost of
$1,329,000.
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 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
12
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 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
13
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 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
14
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 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
15
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 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.
16
SALICK HEALTH CARE, INC.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 13, 1995, the Registrant held its Annual Meeting of
Stockholders.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees as listed in the Proxy Statement
and all of such nominees were elected.
(c) At the Annual Meeting, a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of December 22, 1994, as amended, (the
"Merger Agreement") among the Company, Zeneca Limited, an English
company ("Zeneca"), and Atkemix Thirty-nine Inc. was approved by the
following vote:
Broker
For Against Abstained Non Votes
---------- ------- --------- ---------
11,757,449 4,814 15,095 1,622,046
At the Meeting, the following persons were elected by the vote
indicated (there were no abstentions or broker non-votes) as Class I
directors to serve for a three year term and until their successors
are duly elected and qualified:
Vote
Name For Withheld
---- ---------- --------
Bernard Salick, M.D 13,364,550 34,854
Leslie F. Bell 13,364,550 34,854
Upon consummation of the Merger, the term of the Class I directors
elected at the Annual Meeting (as well as the classification of the
Company's Board of Directors) terminated.
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Net Earnings per Common Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter ended May 31, 1995 a report on
Form 8-K with date of earliest event reported being April 13, 1995 was
filed. The report which is dated April 21, 1995 reports on Item 1.
"Changes in Control of Registrant."
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/ Leslie F. Bell
-----------------------------------------
Date: July 14, 1995 Leslie F. Bell
Executive Vice President, Secretary
and Chief Financial Officer
/s/ Blair L. Hundahl
-----------------------------------------
Date: July 14, 1995 Blair L. Hundahl
Vice President-Finance
19
SALICK HEALTH CARE, INC.
EXHIBIT INDEX
Exhibit Page
------- ----
11 Computation of Net Earnings per Common Share. 21
27 Financial Data Schedule.
20