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, 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
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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, $.001 par value at June 30, 1996
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5,640,082 shares of callable puttable common stock,
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$.001 par value at June 30, 1996
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS May 31, 1996 August 31, 1995
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(UNAUDITED)
Current assets:
Cash $ 541,000 $ 642,000
Marketable securities 43,389,000 44,631,000
Accounts receivable, less allowance
for doubtful accounts of $3,582,000
and $2,885,000 46,451,000 36,248,000
Inventories 1,837,000 1,305,000
Prepaid expenses 2,168,000 1,677,000
Other current assets 2,575,000 1,967,000
Refundable income taxes 2,545,000
Deferred income taxes 2,596,000 5,047,000
------------ ------------
Total current assets 99,557,000 94,062,000
Property and equipment, at cost, less
accumulated depreciation and amortization
of $39,003,000 and $32,841,000 108,126,000 101,651,000
Deposits 714,000 725,000
Deferred income taxes 922,000
Goodwill, net 5,631,000 5,494,000
Other assets 5,886,000 5,166,000
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$220,836,000 $207,098,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 34,704,000 $ 18,072,000
Accounts payable and accrued liabilities 34,316,000 41,063,000
Income taxes payable 482,000
Current portion of long-term
obligations 3,189,000 4,952,000
------------ ------------
Total current liabilities 72,691,000 64,087,000
Deferred income taxes 67,000
Capitalized lease obligations, less
current portion 4,541,000 5,235,000
Long-term debt, less current portion 5,321,000 5,910,000
Other liabilities 2,000,000 2,400,000
Minority interest (38,000) (29,000)
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Total liabilities 84,515,000 77,670,000
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2
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
May 31, 1996 August 31, 1995
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(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 (losses) gains (600,000) 44,000
Retained earnings 57,100,000 49,635,000
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Total stockholders' equity 136,321,000 129,428,000
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$220,836,000 $207,098,000
============ ============
See accompanying notes to consolidated financial statements.
3
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
May 31, May 31,
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1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Operating revenues, net $43,985,000 $39,017,000 $120,609,000 $113,363,000
Operating expenses:
Medical supplies and services 9,127,000 6,707,000 23,427,000 19,689,000
Salaries and related costs 17,391,000 15,871,000 49,012,000 46,215,000
Other administrative expenses 6,435,000 5,140,000 17,515,000 15,595,000
Contract and occupancy costs 4,791,000 4,030,000 13,025,000 11,916,000
Depreciation and amortization 2,467,000 2,089,000 6,844,000 6,168,000
----------- ----------- ------------ ------------
Total operating expenses 40,211,000 33,837,000 109,823,000 99,583,000
----------- ----------- ------------ ------------
Operating income 3,774,000 5,180,000 10,786,000 13,780,000
Merger transaction expenses (6,907,000) (7,433,000)
Net interest income 40,000 391,000 996,000 672,000
Net investment gains (losses) 280,000 (124,000) 557,000 (248,000)
Minority interest 27,000 577,000
----------- ----------- ------------ ------------
Income (loss) before income
taxes and cumulative effect of
change in accounting principle 4,094,000 (1,433,000) 12,339,000 7,348,000
Provision for income taxes 1,616,000 2,123,000 4,874,000 5,666,000
----------- ----------- ------------ ------------
Income (loss) before cumulative
effect of change in accounting
principle 2,478,000 (3,556,000) 7,465,000 1,682,000
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 (loss) $ 2,478,000 $(3,556,000) $ 7,465,000 $ (1,906,000)
=========== =========== ============ ============
4
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
Three Months Ended Nine Months Ended
May 31, May 31,
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1996 1995 1996 1995
---- ---- ---- ----
Earnings (loss) per share:
Primary:
Income (loss) before
cumulative effect
of change in accounting
principle $ 0.22 $ (0.32) $ 0.66 $ 0.16
Cumulative effect on prior
years (to August 31, 1994) of
expensing pre-operating costs
as incurred (0.35)
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Net earnings (loss) per share $ 0.22 $ (0.32) $ 0.66 $ (0.19)
=========== =========== =========== ===========
Fully diluted:
Income (loss) before
cumulative effect
of change in accounting
principle $ 0.22 $ (0.32) $ 0.66 $ 0.19
Cumulative effect on prior years
(to August 31, 1994) of
expensing pre-operating costs
as incurred (0.32)
----------- ----------- ----------- -----------
Net earnings (loss) per share $ 0.22 $ (0.32) $ 0.66 $ (0.13)
=========== =========== =========== ===========
Weighted average number of
shares used in computing
earnings per share:
Primary 11,309,000 11,016,000 11,309,000 10,236,000
=========== =========== =========== ===========
Fully diluted 11,310,000 11,016,000 11,309,000 11,107,000
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
5
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
May 31,
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1996 1995
---- ----
Cash flow provided (used) by operations:
Net income (loss) $ 7,465,000 $ (1,906,000)
Add items not requiring cash:
Depreciation and amortization 6,844,000 6,168,000
Amortization of debt issue costs 23,000
Deferred income taxes 1,462,000 (442,000)
Minority interest in loss,
net of distributions (9,000) (702,000)
Merger transaction expense 6,185,000
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 (10,203,000) (7,576,000)
Inventories (532,000) (151,000)
Prepaid expenses (491,000) 120,000
Other current assets (608,000) 418,000
Deposits and other assets (986,000) 1,056,000
Accounts payable 2,467,000 1,175,000
Accrued liabilities (9,663,000) 1,061,000
Income taxes payable 482,000 (2,594,000)
Refundable income taxes 2,545,000
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Net cash flow (used) provided by
operations (1,227,000) 8,816,000
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Cash flow provided (used) by
investing activities:
Decrease in marketable securities 598,000 2,062,000
Additions to property and equipment (12,849,000) (26,647,000)
Payment for purchase of acquisitions (211,000) (157,000)
------------ ------------
Net cash flow used by investing
activities (12,462,000) (24,742,000)
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Cash flow provided (used) by
financing activities:
Reduction of capitalized lease
obligations (782,000) (732,000)
Decrease of long-term debt (2,334,000) (1,355,000)
Notes payable to bank 16,632,000 13,072,000
Exercise of stock options 72,000 4,192,000
Stock registration costs charged
to paid in capital (580,000)
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Net cash flow provided by financing
activities 13,588,000 14,597,000
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6
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine Months Ended
May 31,
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1996 1995
---- ----
Decrease in cash $(101,000) $(1,329,000)
Cash, beginning of period 642,000 1,692,000
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Cash, end of period $ 541,000 $ 363,000
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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
===========
Purchase of corporate headquarters $14,650,000
===========
Special distribution payable to
stockholders $ 6,534,000
===========
Capital lease obligations incurred
for property and equipment $ 70,000 $ 2,250,000
========= ===========
Unrealized holding (losses) gains $(644,000) $ 633,000
========= ===========
Deferred bond issue costs charged
to paid in capital $ 400,000
===========
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 nine month periods ended May 31, 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, advised the Company that it was closing
Westlake Medical Center. Under the terms of its agreement with the
Columbia/HCA entity, a subsidiary of the Company had the right to and
gave notice of its intent to purchase Westlake Medical Center with the
purchase price for the hospital being determined by three appraisers.
The agreement had terms required by the Columbia/HCA subsidiary that
restrict the Company subsidiary's medical use of the hospital to
services for cancer, dialysis (acute and chronic), organ
transplantation, and immuno deficient disease treatment. The Company
expected the purchase to be consummated during its fourth fiscal
quarter of 1996. The Columbia/HCA subsidiary delayed providing
documents to transfer title and when provided included terms the
Company believes violated the agreement and were unacceptable. As a
result the Company has been compelled to commence litigitation to
enforce its rights under the agreement.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIRD FISCAL QUARTER ENDED MAY 31, 1996 COMPARED TO THIRD FISCAL QUARTER ENDED
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MAY 31, 1995
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Operating revenues increased in the third quarter of fiscal 1996 by 12.7%
to $43,985,000 from $39,017,000 in the third quarter of fiscal 1995. Operating
income was $3,774,000 and $5,180,000 and operating margins were 8.6% and 13.3%
in the quarters ended May 31, 1996 and 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 $4,094,000 in the
current fiscal quarter compared to a loss of $1,433,000 in fiscal 1995. In last
year's third quarter, the Company incurred $6,907,000 of costs associated with
its merger with Zeneca, PLC. Net income in the third quarter was $2,478,000, as
compared to a loss of $3,556,000 in the prior year's third quarter. For the
comparative nine month periods, operating revenues increased by 6.4% to
$120,609,000 from $113,363,000 with operating income of $10,786,000 and
$13,780,000 and operating margins of 8.9% and 12.2%. Net income for the nine
months ended May 31, 1996 was $7,465,000 compared to a loss of $1,906,000 for
the nine months ended May 31, 1995. Weighted average shares outstanding used in
computing earnings per share increased over the third quarter and nine 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 nine month results reflect an increase in business,
particularly in the volume of the Company's managed care business which
generally has lower reimbursement rates. Other changes, primarily consisting of
reductions in reimbursement resulted in an increase in the Company's contractual
allowance expense. Operating income and net income were also affected by an
increase in expenses related to the 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,
operations of the Company's recently acquired Walnut Creek, California facility
which is affiliated with the Alta Bates Comprehensive Cancer Center, the
negotiation and implementation of the Saint Vincent's Medical Center agreement,
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.
Net interest income increased to $996,000 from $672,000 in the nine month
period primarily as the result of the call of the Company's 7-1/4% Convertible
Debentures in January 1995. Net investment income increased over nine 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.
The Company's change in accounting principle from deferring to expensing
pre-operating costs when incurred, as described in Note 2 to
9
the consolidated financial statements, adversely affected both fiscal 1995 and
1996 third quarter and nine 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.
Third quarter primary and fully diluted earnings per share increased to
$0.22 from a loss of $0.32 in the prior year quarter. For the nine months ended
May 31, 1996, earnings per share, on a primary basis, increased to $0.66 from a
loss of $0.19 and on a fully diluted basis to $0.66 from a loss of $0.13 due to
the cumulative effect on prior years of the change in accounting principle.
Fiscal 1995 third quarter and nine months net income and earnings per share were
adversely affected due to non-recurring transaction expenses of $6,907,000 and
$7,443,000, respectively, 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 4.7% for
the third quarter of fiscal 1996 and 3.2% for the nine months of fiscal 1996,
before interest and investment expense, as compared to the prior year. Medical
supplies and services expense increased by $2,420,000 and $3,738,000 during the
quarter and nine month periods, a 3.6% and 2.1% 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 $1,520,000 and
$2,797,000 in the three and nine month periods, actually decreased 1.1% and
0.1%, respectively, as a percentage of operating revenues as the result of
greater operating efficiency. As compared to the prior year periods, other
administrative
10
expenses for fiscal 1996 increased 1.5% and 0.8% for the quarter and the nine
months period, respectively, as a percent of operating revenues. Contract and
occupancy costs increased 0.6% and 0.3% during the quarter and the nine month
period, respectively, as a percentage of net operating revenues. Depreciation
and amortization increased by $378,000 and $676,000 as compared to the third
fiscal quarter and nine months of 1995 due to depreciation of additional clinic
equipment placed in service during the year.
Income taxes were calculated at a 39.5% effective rate in the fiscal 1996
nine month period versus 77% in the prior year nine month period due to the non-
deductibility of substantially all merger transaction expenses incurred by the
Company in the prior year period, as previously described.
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 May 31, 1996 was $26,866,000. 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 May 31, 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 May 31, 1996, $34,704,000 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 May 31, 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 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 decreased the carrying value of its portfolio to fair value of $43,389,000
from cost of $43,989,000 resulting in a $600,000 unrealized holding loss
reflected in the balance sheet. As of May 31, 1996, the Company's five largest
investments in municipal and corporate debt securities, all of which were
investment grade aggregated $6,654,000 at fair value, with cost of
11
$6,763,000. The single largest investment approximated $2,392,000 with a cost
of $2,431,000.
Capital expenditures for the remainder of fiscal year 1996 are presently
estimated to be approximately $17,000,000. 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 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
12
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 procedure, have not been
finalized by HCFA.
13
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
14
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. 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).
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
15
in the formula used to calculate hospital outpatient reimbursement under the
blended payment system 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Net Earnings (Loss) per Common Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter ended May 31, 1996 no reports
on Form 8-K were filed.
17
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: July 15, 1996 Bernard Salick, M.D.
Chairman of the Board,
Chief Executive Officer and President
/s/ Blair L. Hundahl
------------------------------------
Date: July 15, 1996 Blair L. Hundahl
Senior Vice President-Finance
18
SALICK HEALTH CARE, INC.
EXHIBIT INDEX
Exhibit
- -------
11 Computation of Net Earnings (Loss) per
Common Share.
27 Financial Data Schedule.
19
EXHIBIT 11 - COMPUTATION OF NET EARNINGS (LOSS) PER COMMON SHARE (UNAUDITED)
Three Months Ended Nine Months Ended
May 31, May 31,
1996 1995 1996 1995
------------------ ------------------
(Amounts in thousands, except per share data)
Primary
Average shares outstanding 11,297 10,757 11,296 9,886
Net effect of dilutive stock
options--based on the
treasury stock method
using average market price 12 259 13 350
------- ------- ------- -------
Total 11,309 11,016 11,309 10,236
======= ======= ======= =======
Net income (loss) $ 2,478 $(3,556) $ 7,465 $(1,906)
======= ======= ======= =======
Per share data:
Net income (loss) $ 0.22 $ (0.32) $ 0.66 $ (0.19)
======= ======= ======= =======
Fully diluted
Average shares outstanding 11,297 10,757 11,296 9,886
Net effect of dilutive stock
options--based on the
treasury stock method
using average market price
or closing price if higher 13 259 13 371
Net effect of dilutive
convertible debentures--
based on the stated conversion
price of $14 per share 850
------- ------- ------- -------
Total 11,310 11,016 11,309 11,107
======= ======= ======= =======
Net income (loss) $ 2,478 $(3,556) $ 7,465 $(1,906)
Convertible bond interest,
net of income tax effect 408
------- ------- ------- -------
$ 2,478 $(3,556) $ 7,465 $(1,498)
======= ======= ======= =======
Per share data:
Net income (loss) $ 0.22 $ (0.32) $ 0.66 $ (0.13)
======= ======= ======= =======
EXHIBIT 11
20