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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 November 30, 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 _____________________
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, $.001 par value at December 31, 1996
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5,657,082 shares of callable puttable common stock,
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$.001 par value, at December 31, 1996
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS November 30, 1996 August 31, 1996
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash $ $ 36,000
Marketable securities 40,357,000 39,070,000
Accounts receivable, less allowance
for doubtful accounts of $4,303,000
and $3,636,000 59,309,000 50,470,000
Inventories 2,334,000 2,169,000
Prepaid expenses 2,722,000 1,937,000
Other current assets 3,014,000 2,744,000
Refundable income taxes 1,477,000 1,415,000
Deferred income taxes 1,430,000 1,436,000
------------ ------------
Total current assets 110,643,000 99,277,000
Property and equipment, at cost, less
accumulated depreciation and amortization
of $44,551,000 and $41,711,000 125,023,000 121,460,000
Deposits 736,000 745,000
Deferred income taxes 299,000 321,000
Goodwill, net 6,291,000 6,213,000
Other assets 5,677,000 6,020,000
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$248,669,000 $234,036,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 56,408,000 $ 44,598,000
Accounts payable and accrued liabilities 42,656,000 38,767,000
Current portion of long-term
obligations 3,072,000 3,076,000
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Total current liabilities 102,136,000 86,441,000
Capitalized lease obligations, less
current portion 4,019,000 4,278,000
Long-term debt, less current portion 4,314,000 4,814,000
Other liabilities 2,000,000
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Total liabilities 110,469,000 97,533,000
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</TABLE>
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SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
November 30, 1996 August 31, 1996
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
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, 5,657,082 and
5,640,082 shares issued and
outstanding 5,000 5,000
Additional paid in capital 79,987,000 79,810,000
Unrealized holding gains (losses) 377,000 (559,000)
Retained earnings 57,825,000 57,241,000
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Total stockholders' equity 138,200,000 136,503,000
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$248,669,000 $234,036,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
-------------------------------------
1996 1995
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<S> <C> <C>
Revenues:
Operating revenues, net $ 45,272,000 $ 37,513,000
Expenses:
Medical supplies and services 10,319,000 6,841,000
Salaries and related costs 19,022,000 15,221,000
Other administrative expenses 6,873,000 5,473,000
Contract and occupancy costs 4,576,000 3,984,000
Depreciation and amortization 3,082,000 2,166,000
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Total operating expenses 43,872,000 33,685,000
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Operating income 1,400,000 3,828,000
Net interest (expense) income (361,000) 704,000
Net investment (losses) gains (76,000) 86,000
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Income before income taxes 963,000 4,618,000
Provision for income taxes 379,000 1,847,000
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Net income $ 584,000 $ 2,771,000
============ ============
Earnings per share $ .05 $ 0.25
============ ============
Weighted average number of
shares used in computing
earnings per share: 11,313,000 11,308,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
--------------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Cash flow provided (used) by operations:
Net income $ 584,000 $ 2,771,000
Add items not requiring cash:
Depreciation and amortization 3,082,000 2,166,000
Minority interest in net loss,
net of distributions (1,000)
Changes in assets and liabilities:
Accounts receivable (8,839,000) (357,000)
Inventories (165,000) (323,000)
Prepaid expenses (785,000) (290,000)
Other current assets (270,000) (103,000)
Deposits and other assets 218,000 618,000
Accounts payable and accrued liabilities 1,863,000 (7,240,000)
Refundable income taxes (62,000)
Income taxes payable 1,388,000
Deferred income taxes 28,000 386,000
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Net cash flow used by operations (4,346,000) (985,000)
------------ ------------
Cash flow provided (used) by
investing activities:
Increase in marketable securities (351,000) (839,000)
Additions to property and equipment (6,469,000) (2,940,000)
Payment for purchase of acquisitions (94,000) (53,000)
------------ ------------
Net cash flow used by investing
activities (6,914,000) (3,832,000)
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Cash flow provided (used) by
financing activities:
Reduction of capitalized lease
obligations (263,000) (282,000)
Decrease of long-term debt (500,000) (513,000)
Notes payable to bank 11,810,000 6,260,000
Issuance of common stock 177,000 72,000
------------ ------------
Net cash flow provided by financing
activities 11,224,000 5,537,000
------------ ------------
</TABLE>
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SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
-------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
(Decrease) increase in cash $ (36,000) $ 720,000
Cash, beginning of period 36,000 642,000
------------ ------------
Cash, end of period $ $ 1,362,000
============ ============
Schedule of non-cash investing and
financing activities:
Capital lease obligations incurred
for property and equipment $ 70,000
============
Unrealized holding gains $ 936,000 $ 233,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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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, 1996 audited financial statements. The
results of operations for the three month period ended
November 30, 1996 are not necessarily indicative of the
operating results for the full year.
Note 2 - Subsequent Events
On December 31, 1996, the Company purchased its corporate
headquarters from its lessors, Dr. and Mrs. Salick, for
$14,650,000 in accordance with the parties' agreements,
obligations and intentions as previously disclosed. Funds for
the purchase were loaned to the Company by Zeneca Holdings,
Inc., the beneficial owner of more than 50% of the Company's
common equity. The loan is represented by a promissory note
of the Company in the principal amount of $14,650,000 payable
on August 31, 1999, bearing interest at the "Six Month LIBOR"
rate (5.625% at December 31, 1996) plus one-half percent.
Interest is payable semi-annually in arrears on June 30 and
December 30. On each interest payment date, the interest rate
is adjusted to current and remains fixed until the subsequent
interest payment date.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST FISCAL QUARTER ENDED NOVEMBER 30, 1996 COMPARED TO FIRST FISCAL QUARTER
ENDED NOVEMBER 30, 1995
Operating revenues increased 21% in the first quarter of fiscal 1997 to
$45,272,000 from $37,513,000 for fiscal 1996. Operating income was $1,400,000
in the first quarter of fiscal 1997 versus $3,828,000 in fiscal 1996. Operating
margins were 3.1% and 10.2% in the three month periods ended November 30, 1996
and 1995, respectively. Income before income taxes decreased to $963,000 from
$4,618,000 in fiscal 1996. Net income was $584,000 compared to $2,771,000 for
the prior fiscal year. First quarter earnings per share were $0.05, compared to
$0.25 in the prior year quarter. First quarter fiscal 1997 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
reductions in reimbursement rates, resulted in an increase in the Company's
contractual allowance expense. Operating income and net income were also
adversely 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 in Alta Bates and Mount Sinai
Comprehensive Cancer Centers, start up costs for the Comprehensive Cancer Center
at Saint Vincents Medical Center in New York, additional costs associated with
the acquisition and operation of SHC Specialty Hospital including litigation to
protect the Company's right to purchase the former Westlake Medical Center,
together with the expansion of its programs including the addition of personnel
and related costs to support and expand the Company's development, strategic
planning, information systems and physician network activities. The Company
expects increased operating expenses relating to the acquisition and operation
of SHC Special Hospital as well as expenses relating to general business
expansion to continue throughout fiscal 1997.
Net interest expense was $361,000 in the first quarter of fiscal 1997
as compared to net interest income of $704,000 for the first quarter 1996,
resulting from lower capitalization of interest on borrowings for construction
projects, increased borrowings under a bank line of credit and reduced funds
invested in marketable securities. Net investment losses of $76,000 were
recognized in the November 30, 1996 quarter versus net investment gains of
$86,000 in the November 30, 1995 quarter. At November 30, 1996 the Company had
unrecognized holding gains of $377,000 versus $559,000 in unrealized holding
losses at August 31, 1996 due to improved investment decisions and market
conditions. The Company is unable to project investment gains or losses as
portfolio reductions, necessitated by the Company's expansion activities,
cannot be timed to cyclical market conditions. While not affecting operating
income, this may reduce pre-tax and net income.
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Operating results also 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 federal fiscal year 1998; a continuation of the 10% reduction
in hospital outpatient capital reimbursement through federal 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 cost control
programs, that have mitigated the effect of these changes. See "Impact of
Inflation and Changing Regulation."
Total expenses relative to operating revenues for the first quarter of
fiscal 1997 increased 7.1% before interest income and investment income, as
compared to the prior year quarter. Medical supplies and services expense
increased by $3,478,000 during the period, a 4.6% increase as a percentage of
operating revenues, reflecting increased claims payments resulting from the
Company's disease state managed care program, increasing complexity in cancer
and dialysis treatment modalities and supplier price escalations. Salaries and
related costs including additional professional, corporate, and administrative
and other personnel necessitated by expansion and growth, primarily in Cancer
Center operations, and increases in compensation and payroll taxes, increased
$3,801,000 in the period, a 1.4% increase as a percentage of operating revenues.
As compared to the prior year quarter, other administrative expenses for fiscal
1997 increased 0.6% relative to operating revenues, primarily due to the
incremental effect of increased operations. Contract and occupancy costs
decreased 0.5% during the period as a percentage of operating revenues primarily
due to the affect of the purchase of the SHC Specialty Hospital from a
Columbia/HCA subsidiary. Depreciation and amortization increased by $916,000
during first quarter fiscal 1997 primarily because of the acquisition of SHC
Specialty Hospital mentioned above, completion of permanent cancer centers and
additional equipment placed in service during the first quarter of fiscal 1997
as well as during the second, third and fourth fiscal quarters of 1996.
Income taxes were calculated at a 39.4% effective rate in the first
fiscal quarter of 1997 versus 40% in the fiscal 1996 period.
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 1997. 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 November 30, 1996 was $8,507,000. The decrease
in working capital at November 30, 1996 as compared to August 31, 1996 is
principally the result of the use of Company assets for the construction of the
permanent cancer center facility at Desert Hospital. The
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increase in accounts receivable at November 30, 1996 as compared to August 31,
1996 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 November 30, 1996, $56,408,000 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. 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 November 30, 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 increased the carrying value of its portfolio to
fair value of $40,357,000 from cost of $39,980,000. As of November 30, 1996,
the Company's five largest investments in municipal and corporate debt
securities, all of which were investment grade, aggregated $5,195,000 at cost,
with fair value of $5,108,000. The single largest investment approximated
$1,093,000 with fair value of $1,075,000.
Capital expenditures for the remainder fiscal year 1997 are presently
estimated to be approximately $91,700,000. As to other needs, certain
equipment and/or facilities may be acquired through leases or purchase-finance
agreements.
The Company had 5,657,082 shares of callable puttable common stock
outstanding at November 30, 1996. The callable puttable common stock carries a
right on the behalf of stockholders to put (sell) the stock to the Company and
an obligation on behalf of Zeneca to fund the purchase for a twenty business
day period beginning in October 1997 at a price of $42 per share. The callable
puttable common stock also carries a right on behalf of the Company to call
(buy) the callable puttable common stock for a period of four years from April
13, 1995 at market price, subject until October 1997 to a per share floor and
ceiling price. The floor on the call is $42 per share, discounted by 4% per
annum compounded if the call is made before October 1997, and the ceiling is
$50 per share.
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
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services. The reimbursement rates may in the future, as they have in the past,
also be affected by 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 at
various times. The ultimate impact of any such changes 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. The Company has
developed and/or implemented plans to deal with this situation and notes that
in the past as reimbursement reductions or changes have occurred, the Company
has previously been able to improve operations by an increased market share and
greater efficiency although there is no assurance that it will be able to do
so in the future.
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 to 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 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 would 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. However, the Secretary has
not yet revised the regulations to this effect.
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
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payment system was extended to radiology services furnished to hospital
outpatients; 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.
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.
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.
The Health Care Financing Administration ("HCFA"), a division of the
Department of Health and Human Services ("HHS"), which administers the Medicare
program, issued on July 2, 1996 a proposed rule revising payment policies under
the Medicare physician fee schedule for calendar year 1997. Among other
changes, that proposed rule would make comprehensive changes in the way that
the geographic adjustment factors for physician fee schedule payments are
determined; HCFA would prefer to shift to statewide, rather than more local,
regions in setting the factors in the belief that administration will be
simplified and physicians will be encouraged to practice in rural areas by
reducing urban/rural payment differentials. By going to statewide regions,
also known as "localities," there may be "losing" (usually urban) areas and
"winning" (usually rural) areas within a state if a conversion is made. It is
unknown what the final rule will look like, if and when issued, but
reimbursement for hospital outpatient services covered by the blended rate,
which is based in part on the physician fee schedule amount, may decrease if
the statewide region or locality rule is promulgated.
There is also the possibility of the establishment of a prospective
payment for certain Medicare-reimbursed hospital outpatient services. Congress
had requested that HCFA prepare recommendations concerning the
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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. Adoption of HCFA's recommendation would
require a change in the Medicare law by Congress, and, to date, Congress has
not included such a change in any legislation. 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. However, HCFA has indicated recently that it may implement the
system with respect to ambulatory surgery services, because it believes it has
sufficient statutory authority, and expects to issue a regulation regarding
such use perhaps as soon as early 1997. 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.
Through HCFA, HHS issued a program memorandum effective August, 1996
which sets forth the criteria for "provider-based designations," i.e., the
circumstances under which multiple provider facilities may be designated as one
facility for Medicare accounting and cost allocation purposes. Hospitals
frequently seek provider-based designations for skilled nursing facilities,
home health agencies, rural health clinics and physician clinics as "outpatient
departments" of the hospital. HCFA's intent in issuing this memorandum appears
to be to limit the granting of provider-based designations and thereby limit
the allocation of certain hospital costs from inpatient areas to outpatient
areas. Among other reasons, HCFA believes both that such allocations increase
Medicare payments and Medicare beneficiary copayments and that it pays more for
services rendered in provider-based facilities than in freestanding facilities.
Eight tests are set forth in the memorandum. Although the memorandum indicates
that each must be met before an entity may be designated part of a provider,
HCFA has subsequently taken the position that there may be some circumstances
where not all tests must be met. The
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memorandum has not yet been revised to reflect this position. The eight tests
include requirements for: common accreditation, licensure and governance; close
physical proximity to the provider; service of the same patient population;
integrated clinical services; and integrated financial operations. In
addition, the director of the outpatient area must be under the direct
day-to-day supervision of the hospital-provider. The HCFA Regional Offices
continue to have the decision-making responsibility regarding whether an entity
meets the eight tests. However, HCFA has warned that in applying this
memorandum, the Regional Offices may identify previous provider-based decisions
that are not in accordance with the test criteria and in those cases, the
Regional Offices are free to correct those erroneous designations. If such
corrections result in loss of provider-based status, the change will be
prospective only in nature. This policy, termed a "clarification" by the
government, may be subject to challenge in the courts. Although the Company
believes that its facilities meet the requirements of the Memorandum where they
have been designated provider-based entities, it is difficult to ascertain how
such requirements will be interpreted (most importantly if all eight tests must
be met) and loss of such status would likely result in reduced Medicare
reimbursement in the future.
Florida 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). The Company believes it
is in compliance with the law.
Florida has made a commitment to the utilization of Managed Care for
the Medicaid population of the state. To this end, the Florida Legislature
adopted Chapter 96-199, Laws of Florida. This Act provides that Medicaid
recipients who do not voluntarily select a managed care plan or MediPass
provider, must be enrolled by the Agency for Healthcare Administration (the
"Agency") into either a managed care plan or MediPass program. Accordingly,
Medicaid recipients who fail to make a voluntary choice will be given mandatory
assignment to a plan or the MediPass program. The Agency will contract with a
limited number of HMOs who meet a based scoring criteria. After
implementation, a substantial majority of the state's Medicaid population of
more than 1.5 million will be in a prepaid plan as opposed to less than the
current 25% of that group who have voluntarily enrolled in HMOs. The Agency
expects to reduce per capita rate by competitive bidding process. The Request
for Proposal ("RFP") requires a bid range for rates that is substantially below
the current contract rate. It also expects to reduce the number of Medicaid
prepaid contractors in the state through bid threshold elimination. The Agency
has issued an RFP with a scheduled award date of February 1, 1997.
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.
14
<PAGE> 15
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. For 1997 both parties have stated that Congress will consider
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
which generally would result in reducing reimbursement amounts to hospitals;
(2) an extension of the current 5.8% reduction in hospital outpatient
reasonable cost reimbursement through the year 2002; (3) an extension of the
current 10% reduction in reimbursement for hospital outpatient department
capital-related costs through the year 2002; (4) the introduction of a
prospective payment system for home health services; (5) the bundling of
post-acute care services, such as skilled nursing facility services and home
health care, into the hospital prospective payment system; (6) an extension in
the reduction in updates to payment amounts for clinical diagnostic laboratory
tests through the year 2002; (7) the elimination of updates in payments for
ambulatory surgical center services through the year 2002; (8) various other
reductions in the amount of payment for physician and hospital services; and
(9) the introduction of additional choices of health plans for Medicare
beneficiaries in addition to the current fee-for-service and Medicare HMO
option. 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, the Company is unable to predict
how the enactment of any such changes in the Medicaid Program and proposed
changes in Medicare might affect the Company in the future.
The Company believes that health care 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 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.
15
<PAGE> 16
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking. These
statements involve risks and uncertainties, many of which are beyond the control
of the Company. Such risks and uncertainties could cause actual results to
differ materially from these forward-looking statements. Factors which could
cause actual results to differ materially include those disclosed in "Impact of
Inflation and Changing Regulation," the effects of changes in and/or
interpretations of applicable law and governmental regulations, changes in
reimbursement rates and, requirements, competition and the Company's ability to
improve operations, obtain any required certificate of need, meet licensing
standards or requirements, increase market share, increase efficiencies, patient
volumes and operations and successfully continue implementation of cost
controls.
16
<PAGE> 17
SALICK HEALTH CARE, INC.
PART II
OTHER INFORMATION
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 November 30, 1996 no
reports on Form 8-K were filed.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Salick Health Care, Inc.
------------------------------------
(Registrant)
/s/ Bernard Salick, M.D.
------------------------------------
Date: January 14, 1997 Bernard Salick, M.D.
Chairman and Chief Executive Officer
(Duly Authorized Officer)
/s/ Blair L. Hundahl
------------------------------------
Date: January 14, 1997 Blair L. Hundahl
Senior Vice President-Finance
18
<PAGE> 19
SALICK HEALTH CARE, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
11 Computation of Net Earnings per Common Share.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 11 - COMPUTATION OF NET EARNINGS PER COMMON SHARE (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1996 1995
----------------------------------
(Amounts in thousands,
except per share data)
<S> <C> <C>
Earnings per share:
Average shares outstanding 11,309 11,293
Net effect of dilutive stock
options--based on the
treasury stock method
using average market price 4 15
------- -------
Total 11,313 11,308
======= =======
Net income $ 584 $ 2,771
======= =======
Per share data:
Net income $ 0.05 $ 0.25
======= =======
</TABLE>
EXHIBIT 11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 0
<SECURITIES> 40,357
<RECEIVABLES> 63,612
<ALLOWANCES> 4,303
<INVENTORY> 2,334
<CURRENT-ASSETS> 110,643
<PP&E> 169,574
<DEPRECIATION> 44,551
<TOTAL-ASSETS> 248,669
<CURRENT-LIABILITIES> 102,136
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 138,189
<TOTAL-LIABILITY-AND-EQUITY> 248,669
<SALES> 0
<TOTAL-REVENUES> 45,272
<CGS> 0
<TOTAL-COSTS> 43,872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 927
<INCOME-PRETAX> 963
<INCOME-TAX> 379
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 584
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
