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 29, 1996
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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
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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, $.001 par value at March 31, 1996
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5,640,082 shares of callable puttable common stock,
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$.001 par value, at March 31, 1996
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Exhibit Index on Page 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS February 29, 1996 August 31, 1995
------------------ ----------------
(UNAUDITED)
Current assets:
Cash $ 378,000 $ 642,000
Marketable securities 46,580,000 44,631,000
Accounts receivable, less allowance
for doubtful accounts of $3,353,000
and $2,885,000 42,253,000 36,248,000
Inventories 1,801,000 1,305,000
Prepaid expenses 2,256,000 1,677,000
Other current assets 2,333,000 1,967,000
Refundable income taxes 2,545,000 2,545,000
Deferred income taxes 3,326,000 5,047,000
------------ ------------
Total current assets 101,472,000 94,062,000
Property and equipment, at cost, less
accumulated depreciation and amortization
of $36,735,000 and $32,841,000 105,736,000 101,651,000
Deposits 706,000 725,000
Deferred income taxes 862,000
Goodwill, net 5,613,000 5,494,000
Other assets 5,838,000 5,166,000
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$220,227,000 $207,098,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 33,379,000 $ 18,072,000
Accounts payable and accrued liabilities 35,092,000 41,063,000
Income taxes payable 2,311,000
Current portion of long-term
obligations 3,169,000 4,952,000
------------ ------------
Total current liabilities 73,951,000 64,087,000
Deferred income taxes 67,000
Capitalized lease obligations, less
current portion 4,792,000 5,235,000
Long-term debt, less current portion 4,842,000 5,910,000
Other liabilities 2,000,000 2,400,000
Minority interest (30,000) (29,000)
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Total liabilities 85,555,000 77,670,000
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2
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
February 29, 1996 August 31, 1995
----------------- ---------------
(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 shares authorized,
5,657,115 shares issued and
outstanding 6,000 6,000
Callable puttable common stock,
$.001 par value, 7,500,000 shares
authorized, 5,640,082 and
5,634,082 shares issued and
outstanding 5,000 5,000
Additional paid in capital 79,810,000 79,738,000
Unrealized holding gains 229,000 44,000
Retained earnings 54,622,000 49,635,000
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Total stockholders' equity 134,672,000 129,428,000
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$220,227,000 $207,098,000
============ ============
See accompanying notes to consolidated financial statements.
3
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
------------------ ----------------- ------------- -------------
1996 1995 1996 1995
------------------ ----------------- ------------- -------------
Revenues:
Operating revenues, net $39,110,000 $38,170,000 $76,624,000 $74,346,000
Operating expenses:
Medical supplies and services 7,459,000 6,601,000 14,300,000 12,982,000
Salaries and related costs 16,400,000 15,774,000 31,621,000 30,344,000
Other administrative expenses 5,606,000 5,048,000 11,080,000 10,455,000
Contract and occupancy costs 4,250,000 4,183,000 8,234,000 7,886,000
Depreciation and amortization 2,211,000 2,039,000 4,377,000 4,079,000
----------- ----------- ----------- -----------
Total expenses 35,926,000 33,645,000 69,612,000 65,746,000
----------- ----------- ----------- -----------
Operating income 3,184,000 4,525,000 7,012,000 8,600,000
Merger transaction expenses (526,000) (526,000)
Net interest income 252,000 264,000 956,000 281,000
Net investment gains (losses) 192,000 (63,000) 277,000 (124,000)
Minority interest 225,000 550,000
----------- ----------- ----------- -----------
Income before income taxes
and cumulative effect of
change in accounting principle 3,628,000 4,425,000 8,245,000 8,781,000
Provision for income taxes 1,411,000 1,825,000 3,258,000 3,543,000
----------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle 2,217,000 2,600,000 4,987,000 5,238,000
Cumulative effect on prior years (to
August 31, 1994) of expensing
pre-operating costs as incurred,
net of income taxes (3,588,000)
----------- ----------- ----------- -----------
Net income $ 2,217,000 $ 2,600,000 $ 4,987,000 $ 1,650,000
=========== =========== =========== ===========
4
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
------------------ ----------------- ------------ -------------
1996 1995 1996 1995
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Earnings per share:
Primary:
Income before cumulative effect
of change in accounting
principle $ 0.20 $ 0.26 $ 0.44 $ 0.56
Cumulative effect on prior
years (to August 31, 1994) of
expensing pre-operating costs
as incurred (0.38)
------------ ------------ ------------ ------------
Net earnings per share $ 0.20 $ 0.26 $ 0.44 $ 0.18
============ ============ ============ ============
Fully diluted:
Income before cumulative effect
change in accounting principle $ 0.20 $ 0.25 $ 0.44 $ 0.53
Cumulative effect on prior years
(to August 31, 1994) of
expensing pre-operating costs
as incurred (0.34)
------------ ------------ ------------ ------------
Net earnings per share $ 0.20 $ 0.25 $ 0.44 $ 0.19
============ ============ ============ ============
Weighted average number of
shares used in computing
earnings per share:
Primary 11,309,000 9,985,000 11,308,000 9,414,000
============ ============ ============ ============
Fully diluted 11,309,000 10,738,000 11,309,000 10,736,000
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
February 29, February 28,
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1996 1995
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Cash flow provided (used) by operations:
Net income $ 4,987,000 $ 1,650,000
Add items not requiring cash:
Depreciation and amortization 4,377,000 4,079,000
Amortization of debt issue costs 23,000
Deferred income taxes 792,000 (248,000)
Minority interest in net loss,
net of distributions (1,000) (673,000)
Cumulative effect on prior years (to
August 31, 1994) of expensing
pre-operating costs as incurred 5,981,000
Changes in assets and liabilities:
Accounts receivable (6,005,000) (8,049,000)
Inventories (496,000) (203,000)
Prepaid expenses (579,000) (679,000)
Other current assets (366,000) 121,000
Deposits and other assets (807,000) 92,000
Accounts payable and accrued liabilities (6,379,000) 1,997,000
Income taxes payable 2,311,000 (1,718,000)
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Net cash flow provided (used) by operations (2,166,000) 2,373,000
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Cash flow provided (used) by investing
activities:
Increase in marketable securities (1,764,000) (921,000)
Additions to property and equipment (8,180,000) (14,428,000)
Payment for purchase of acquisitions (168,000) (150,000)
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Net cash flow used by investing
activities (10,112,000) (15,499,000)
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Cash flow provided (used) by financing
activities:
Reduction of capitalized lease
obligations (530,000) (470,000)
Decrease of long-term debt (2,835,000) (876,000)
Notes payable to bank 15,307,000 12,172,000
Issuance of common stock 72,000 811,000
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Net cash flow provided by
financing activities 12,014,000 11,637,000
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6
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Six Months Ended
February 29, February 28,
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1996 1995
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Decrease in cash $(264,000) $(1,489,000)
Cash, beginning of period 642,000 1,692,000
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Cash, end of period $ 378,000 $ 203,000
========= ===========
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
===========
Capital lease obligations incurred
for property and equipment $ 70,000 $ 2,265,000
========= ===========
Deferred bond issue costs $ 400,000
===========
Unrealized holding gains (losses) $ 185,000 $ (100,000)
========= ===========
See accompanying notes to consolidated financial statements.
7
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, 1995 audited financial statements. The results of operations for
the three and six month periods ended February 29, 1996 are not
necessarily indicative of the operating results for the full year.
Note 2 - In fiscal 1995, the Company changed its method of accounting from
deferral to expensing pre-operating costs as incurred. In prior years,
pre-operating costs had been deferred and amortized over a three year
period upon commencement of facility operations. In fiscal 1995 fourth
quarter, giving effect to the first quarter, the Company recorded the
cumulative effect of the change in accounting principle of $3,588,000,
net of income taxes of $2,393,000. In the accompanying financial
statements, the fiscal 1995 periods have been restated to reflect the
current and cumulative effects of the change in accounting principle.
This change in accounting for pre-operating costs was adopted as
management believes this method of accounting better reflects the
Company's current methods of operations and it conforms to the method
followed by Zeneca Group, PLC, the beneficial owner of more than 50% of
the Company's common equity.
Note 3 - On December 27, 1995, a Columbia/HCA Healthcare Corporation subsidiary,
the owner of one of the Company's Cancer Center affiliated hospitals,
Westlake Medical Center, announced that it was closing Westlake Medical
Center. Under the terms of the agreement with Columbia/HCA, a
subsidiary of the Company had the right to and gave notice of its
intent to purchase Westlake Medical Center with the purchase price of
the hospital being determined by three appraisers taking into account,
among others, the fact that the hospital is intended to be used for the
treatment of patients with cancer, kidney disease, organ
transplantation, AIDS and related illnesses. The Company expects the
purchase to be consummated during the summer of 1996.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SECOND FISCAL QUARTER ENDED FEBRUARY 29, 1996 COMPARED TO SECOND FISCAL QUARTER
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ENDED FEBRUARY 28, 1995
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Operating revenues increased in the second quarter of fiscal 1996 by 2.5%
to $39,110,000 from $38,170,000 in the second quarter of fiscal 1995. Operating
income was $3,184,000 or 29.6% below the prior year's second quarter and
operating margins were 8.1% and 11.9% in the quarters ended February 29, 1996
and February 28, 1995, respectively. Income before taxes and the cumulative
effect of change in accounting principle described below and in the notes to the
consolidated financial statements was reduced by 18% to $3,628,000 in the
current fiscal quarter from $4,425,000 in fiscal 1995. Net income was
$2,217,000, as compared to $2,600,000 in the prior year's second quarter. For
the six month periods, operating revenues increased by 3.1% to $76,624,000 from
$74,346,000 with operating income of $7,012,000 or 18.5% less than the prior six
month period. Income before the cumulative effect of change in accounting
principle decreased $251,000 or 4.8% representing 6.5% of operating revenues,
down from 7% for the corresponding six month period. Weighted average shares
outstanding used in computing earnings per share increased over the second
quarter and six month periods in fiscal 1995 due to exercise of stock options in
connection with the Company's April 13, 1995 merger with a subsidiary of Zeneca
Limited and conversion of the Company's subordinated convertible debentures in
January 1995.
The quarter and six month results reflect an increase in business
particularly in the volume of the Company's managed care business which
generally has lower reimbursement rates, an increase in the total dollar amounts
of payments received for the Company's services and programs under capitated
(per member per month) agreements and other changes, primarily consisting of
reductions in reimbursement resulting in an increase in the Company's
contractual allowance expense. Revenues, operating income and net income were
also affected by expansion of the Company's services and programs, additional
costs in connection with the opening and operations of permanent facilities at
Alta Bates and Mount Sinai Comprehensive Cancer Centers, the results of
operations of the Company's recently acquired Walnut Creek, California facility
which is affiliated with the Alta Bates Comprehensive Cancer Center, the
expansion of programs and the addition of personnel and related costs to support
and expand the Company's development, strategic planning, information systems
and physician network activities.
During second quarter fiscal 1996 the Company has acquired The Breast
Center in Van Nuys, California, the first free-standing multidisciplinary breast
center in the United States and one of the nation's most highly respected
medical facilities in the field of breast disease. In addition, the Company
entered into an agreement with Pacific Hematology-Oncology Associates (PHOA), a
highly respected physician group specializing in oncology in San Francisco.
Under the terms of this agreement, PHOA facilities and physicians are a San
Francisco affiliate facility for the Alta Bates Comprehensive Cancer Center.
9
The Company's change in accounting principle from deferring to expensing
pre-operating costs when incurred, as described in Note 2 to the consolidated
financial statements adversely affected both fiscal 1995 and 1996 second quarter
and six month operating income, net income and earnings per share. The Company
adopted this method of accounting for pre-operating costs in fiscal 1995 based
on management's belief that this method of accounting better reflects the
Company's current methods of operations and as it also conforms to the method
followed by Zeneca Group, PLC, the beneficial owner of more than 50% of the
Company's common equity. The cumulative effect of the change in accounting
principle resulted in a non-recurring, non-cash charge of $3,588,000 net of
income taxes of $2,393,000, as of the beginning of fiscal year 1995.
Second quarter primary and fully diluted earnings per share decreased to
$0.20 from $0.26 and $0.25, respectively. For the six months ended February 29,
1996, earnings per share, on a primary basis, increased to $0.44 from $0.18 and
on a fully diluted basis to $0.44 from $0.19 due to the cumulative effect on
prior years in the change of accounting method. Net interest income increased
to $956,000 from $281,000 in the six month period primarily as the result of the
call of the Company's 7-1/4% Convertible Debentures. Net investment income
increased over the second quarter and six month 1995 amounts due to capital
gains realized in the Company's marketable securities portfolio. No assurances
can be made that investment income will continue as it is dependent on a variety
of sources which are beyond the Company's control. Fiscal 1995 second quarter
net income and earnings per share were adversely affected due to non-recurring
transaction expenses of $526,000 in connection with the Company's Agreement and
Plan of Merger with Zeneca Limited.
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 increased 3.7% for
the second quarter of fiscal 1996 and 2.4% for the six months of fiscal 1996,
before interest and investment expense, as compared to the prior year. Medical
supplies and services expense increased by $858,000 and $1,318,000 during the
quarter and six month periods, a 1.8% and 1.2% increase, respectively, as a
percentage of revenues, primarily the result of activity under the Company's
capitated fee program, increasing complexity in cancer
10
and dialysis treatment modalities and supplier price escalations. The addition
of professional, corporate, administrative and other personnel necessitated by
current and anticipated expansion and growth, primarily in Cancer Center and
related operations, and increases in compensation and payroll taxes caused
salaries and related costs to increase by $626,000 and $1,277,000 in the three
and six month periods in 1996 compared to 1995. As compared to the prior year
periods, other administrative expenses for fiscal 1996 increased 1.1% for the
quarter and .4% for the six months, as a percent of operating revenues. Contract
and occupancy costs decreased .1% in the quarter and increased .1% in the six
month period, 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 $172,000 and $298,000 as compared to the second fiscal
quarter and six months of 1995 due to depreciation of additional clinic
equipment placed in service during the past year.
Income taxes were calculated at a 39.5% rate in the fiscal 1996 six month
period versus 40.3% in the prior year six month period. The Company expects to
utilize available federal capital loss carrryforwards in the current fiscal
year, 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
1996. The accelerated development, establishment or acquisition of a
significant number of additional Cancer Centers and/or dialysis centers or other
acquisitions or operations may require borrowing or equity financing by the
Company. Working capital at February 29, 1996 was $27,521,000. The decrease in
working capital during the current period as compared to fiscal 1995 year end is
principally due to increased short term borrowings to finance facilities
construction. The increase in accounts receivable at February 29, 1996 as
compared to August 31, 1995 is due to the previously mentioned increased
revenues which resulted from growth in patient volumes and services provided at
the Company's cancer centers and dialysis facilities.
The Company's principal sources of liquidity consist of cash on hand,
interest-bearing investments, internal cash flow and a revolving bank line of
credit of $80,000,000. At February 29, 1996, $33,379,000 had been borrowed
under the revolving bank line of credit. 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 February 29, 1996, the Company held in its 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
11
securities. In accordance with Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS
115"), the Company has increased the carrying value of its portfolio to fair
value of $46,580,000 from cost of $46,351,000. As of February 29, 1996, the
Company's five largest investments in municipal and corporate debt securities,
all of which were investment grade aggregated $6,871,000 at fair value, with
cost of $6,949,000. The single largest investment approximated $2,425,000 with
a cost of $2,431,000.
Capital expenditures for the remainder of fiscal year 1996 and the April
1996 distribution to former common stockholders pursuant to the merger are
presently estimated to be approximately $48,000,000. As to these and other
needs, certain equipment and/or facilities may be acquired through leases or
purchase-finance agreements.
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 or individual state
authorities. These reimbursement rates are also subject to periodic adjustment
for certain factors, including changes in legislation and regulations, those
imposed pursuant to the federal and individual state budgets, 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 the
impact of managed care organizations, cost containment and other legislation,
competition, third party payor changes or other governmental administrative
controls or limitations. Changes in the Medicare and Medicaid system and
reimbursement have been proposed by both Republican and Democrat members of
Congress. While the Company expects changes in reimbursement to occur, this may
be limited to extensions of previously implemented reductions scheduled to
expire or may include additional changes. The ultimate impact of any of the
above described and other changes that may occur and their effect on the
Company's business cannot be predicted, in part due to budgetary constraints and
the rapidly evolving changes in the health care system generally.
Under federal Medicare law, most hospital inpatients covered by Medicare
are classified into diagnostic related groups ("DRGs") based on such factors as
primary admitting diagnosis and surgical procedure. Payment to hospitals for
the care of a patient covered under the DRG system is generally set at a
predetermined amount based on the DRG assigned the patient. The federal
government, as well as many states and third party payors, are investigating or
have adopted these or other 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.
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 (or one day for hospitals and
hospital units excluded from the DRG system under technical
12
changes enacted in October 1994), if such services are diagnostic services
(including clinical diagnostic laboratory tests) or are other services related
to the admission, as defined by the Secretary of Health and Human Services ("the
Secretary"). Such services are not reimbursable separately as hospital
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 and on September 1, 1995, the Secretary announced
she will revise the regulations to recognize that only the one day immediately
preceding the date of the patient's admission would be considered to be not
reimbursable separately as hospital outpatient services for hospitals and
hospital units excluded from the DRG system.
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 (as determined
pursuant to regulations) 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 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.
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.
There is also the possibility of the establishment of a prospective payment
for certain Medicare-reimbursed hospital outpatient services. Congress had
requested that the Health Care Financing Administration ("HCFA"), which
administers Medicare, prepare recommendations concerning the establishment of
such a prospective payment system. HCFA submitted its recommendations to
Congress in March 1995 and included a proposal to phase in such a prospective
payment system, 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
13
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 1996, the new system
would not likely 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.
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, were reduced by 5.8%. Under the
Omnibus Reconciliation Act of 1993 ("OBRA 1993"), Congress extended this
reduction through federal 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 cost reimbursement through federal
fiscal year 1998. Also under OBRA 1993, the amount which Medicare reimburses
for clinical laboratory services 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
14
dialysis services. In addition, pursuant to OBRA 1993, reimbursement for EPO
was further reduced beginning January 1, 1994 to 80% of $10.00 per 1,000 units.
The Secretary announced on September 1, 1995 that she will not at this time
adjust the current composite rate. The overall impact of the EPO reimbursement
change 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 and other regulated patient volume and to implement
other cost controls and cost reduction strategies. To address these changes,
the Company has expanded its programs and services in order to increase patient
volume, and instituted other programs to achieve efficiencies in staffing,
purchasing and scheduling.
Legislation in Florida limits charges for certain health care services
provided to non-Medicare/Medicaid patients. A substantial portion of this law
has been challenged, a portion declared unconstitutional and is being appealed
in the federal court system and will not be enforced until after such
resolution; however, the limitations on rates respecting radiation therapy
services provided at freestanding, not hospital-based facilities, presently
remains 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 also has legislation
precluding or limiting referrals by physicians to facilities in which they have
an ownership, control or investment relationship (the Florida Patient/Self-
Referral Act). One of the Company's radiation facilities in South Florida
currently has three physician investors who own less than two percent (2%) in
total and who make no referrals to the facility. The Company believes it is in
full compliance with the law.
Florida 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 it is now configured, the Company cannot
predict its future 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, health maintenance
organizations, managed care and other payors. The first of these plans has been
successfully marketed in Florida with a major capitated (per member, per month)
agreement entered into with Physician's Corporation of America currently
covering 120,000 members in South Florida.
To the extent that legislation or regulations may be enacted in the future
which may include outpatient services furnished to Medicare beneficiaries in a
prospective payment system, the Company cannot predict whether or to what extent
such a change would adversely affect its revenues or earnings. In addition, in
1995 Congress began considering extensive changes to the Medicare and Medicaid
programs. Medicare changes under consideration include, among others, (1) a
change in the formula used to calculate hospital outpatient reimbursement under
the blended payment system
15
which generally would result in reducing reimbursement amounts; (2) an extension
of the current 5.8% reduction in hospital outpatient reasonable cost
reimbursement through the year 2002; (3) a reduction in reimbursement for
hospital outpatient department capital-related costs of 85% of such reasonable
costs for federal fiscal years 1996-2002; (4) the introduction of a prospective
payment system for home health services, effective October 1996; (5) reductions
in payment for clinical laboratory services; (6) the elimination of updates in
payments for ambulatory surgical center services from 1996-2002; (7) various
other reductions in the amount of payment for physician and hospital services;
and (8) the introduction of additional choices of health plans for Medicare
beneficiaries in addition to the current fee-for-service and Medicare HMO
option. Proposed Medicaid changes include the replacement of the existing
federal/state program with block grants to the states and reduced federal
oversight over state plans. The enactment of large cuts in the amount of
Medicare and Medicaid reimbursement for providers could have an adverse effect
on the Company's revenues. At this point in time, however, it is uncertain
which, if any, of these or other changes to the Medicare and Medicaid programs
will be enacted into law, and the Company is unable to predict how the enactment
of any such changes might affect the Company in the future.
The Company believes that the provision of health care will continue to
evolve, that rules and regulations will continue to change and, therefore,
regularly monitors developments. The Company may 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 be as successful or 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 the 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 January 18, 1996, 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 consider and approve amendments to
the Company's certificate of incorporation to increase the authorized
number of Directors from ten to twelve, six of whom would be elected by
the holders of the Company's Common Stock and six of whom would be
elected by the holders of the Company's Callable Puttable Common Stock
was approved by 100% of the outstanding Common Stock (5,657,115 shares)
voting separately as a class and by the following vote of the Callable
Puttable Common Stock voting separately as a class and voting together
with the Common Stock as a single class (there were no broker non-
votes):
Callable Puttable Common Stock:
For Against Abstained
----------- ------- ---------
15,774,588 3,664 945
Callable Puttable Common Stock and Common Stock voting together as a
class:
For Against Abstained
----------- ------- ---------
10,736,555 3,664 945
17
SALICK HEALTH CARE, INC.
PART II
OTHER INFORMATION
At the Meeting, the following persons were elected by the vote
indicated (there were no abstentions or broker non-votes) to serve
until the next annual meeting of stockholders and until their
successors are duly elected and qualified:
Elected by Holders of Callable Puttable Common Stock:
Vote
Name For Withheld
---- ---------- --------
Bernard Salick, M.D. 21,415,004 21,308
Leslie F. Bell 21,415,004 21,308
Michael T. Fiore 21,415,004 21,308
Barbara Bromley-Williams 21,415,004 21,308
Thomas Mintz, M.D. 21,415,004 21,308
Patrick W. Jeffries 21,415,004 21,308
Elected by Holders of Common Stock:
Name For
---- ---------
Dr. Thomas F. W. McKillop 5,657,115
Robert C. Black 5,657,115
John G. Goddard 5,657,115
Dr. Michael G. Carter 5,657,115
Alan I. H. Pink 5,657,115
Item 5. Other Information
At the Board of Directors' meeting on January 18, 1996, Allen L.
Johnson was elected as a Director of the Company to fill the vacancy
on the Board of Directors to be elected by the holders of Common
Stock. Since 1986 Mr. Allen has served as President and Chief
Executive Officer of the Medical Center of Delaware. Previously, Mr.
Allen was President and Chief Executive Officer of St. Vincent Medical
Center in Toledo, Ohio. Mr. Allen has also held executive management
positions with Farley Health Care Corporation and St. Vincent
Corporate Services, Inc. in Toledo, Ohio and with Henry Ford Hospital
Services Corporation and Henry Ford Hospital in Detroit, Michigan.
18
SALICK HEALTH CARE, INC.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3(a) Certificate of Incorporation of Salick Health Care, Inc.
Incorporated by reference to Annex B to the Proxy Statement
Prospectus of the Company dated March 13, 1995 forming part of
the Company's Registration Statement on Form S-4 dated March 13,
1995 - No. 33-58057.
3(b) Certificate of Amendment of Certificate of Incorporation of
Salick Health Care, Inc.
10(a) Employment Agreement with Patrick W. Jeffries.
11 Computation of Net Earnings per Common Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter ended February 29, 1996 no
reports on Form 8-K were filed.
19
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 15, 1996 Bernard Salick, M.D.
Chairman and Chief Executive Officer
(Duly Authorized Officer)
/s/ BLAIR L. HUNDAHL
------------------------------------
Date: April 15, 1996 Blair L. Hundahl
Senior Vice President-Finance
(Principal Accounting Officer)
20
SALICK HEALTH CARE, INC.
EXHIBIT INDEX
Exhibit
-------
3(b) Certificate of Amendment of Certificate of Incorporation of
Salick Health Care, Inc.
10(a) Employment Agreement with Patrick W. Jeffries.
11 Computation of Net Earnings per Common Share.
27 Financial Data Schedule
21