-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VuC15PPG2ord1zhVzjGSKBk2xfxv7QO7be0pAJprh6vhWCw5A/eOtSYDeLTTRZIb GF05Bvox6fj47T+aCcyU0w== 0000950148-97-000085.txt : 19970115 0000950148-97-000085.hdr.sgml : 19970115 ACCESSION NUMBER: 0000950148-97-000085 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALICK HEALTH CARE INC CENTRAL INDEX KEY: 0000762131 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 953843861 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13879 FILM NUMBER: 97505767 BUSINESS ADDRESS: STREET 1: 8201 BEVERLY BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048-4520 BUSINESS PHONE: 2139663400 MAIL ADDRESS: STREET 1: 8201 BEVERLY BLVD CITY: LOS ANGLES STATE: CA ZIP: 90048-4520 10-Q 1 FORM 10-Q (11/30/96) 1 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 ----------------- 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 --------------- SALICK HEALTH CARE, INC. - ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4333272 - ------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification number) 8201 Beverly Boulevard, Los Angeles, California 90048-4520 - ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (213) 966-3400 - ----------------------------------------------------------------------------- (Registrant's telephone number, including area code) No Change - ----------------------------------------------------------------------------- (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 - ----------------------------------------------------------------------------- 5,657,082 shares of callable puttable common stock, - ----------------------------------------------------------------------------- $.001 par value, at December 31, 1996 - ----------------------------------------------------------------------------- 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SALICK HEALTH CARE, INC. CONSOLIDATED BALANCE SHEETS
ASSETS November 30, 1996 August 31, 1996 ---------------- --------------- (UNAUDITED) 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 ------------ ------------ $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 ------------ ------------ 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 ------------ ------------ Total liabilities 110,469,000 97,533,000 ------------ ------------
2 3 SALICK HEALTH CARE, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
November 30, 1996 August 31, 1996 ------------------ --------------- (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, 5,657,082 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 ------------ ------------ Total stockholders' equity 138,200,000 136,503,000 ------------ ------------ $248,669,000 $234,036,000 ============ ============
See accompanying notes to consolidated financial statements. 3 4 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended November 30, ------------------------------------- 1996 1995 ------------ ------------ 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 ------------ ------------ Total operating expenses 43,872,000 33,685,000 ------------ ------------ Operating income 1,400,000 3,828,000 Net interest (expense) income (361,000) 704,000 Net investment (losses) gains (76,000) 86,000 ------------ ----------- Income before income taxes 963,000 4,618,000 Provision for income taxes 379,000 1,847,000 ------------ ------------ 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 ============ ============
See accompanying notes to consolidated financial statements. 4 5 SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended November 30, -------------------------------------- 1996 1995 ------------- ----------- 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 ------------ ------------ 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) ------------ ------------ 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 ------------ ------------
5 6 SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
Three Months Ended November 30, ------------------------------------- 1996 1995 ------------ ------------ (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 ============ ============
See accompanying notes to consolidated financial statements. 6 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, 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. 7 8 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. 8 9 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 9 10 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 10 11 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 11 12 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 12 13 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 13 14 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 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 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 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 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 19 SALICK HEALTH CARE, INC. EXHIBIT INDEX
Exhibit ------- 11 Computation of Net Earnings per Common Share. 27 Financial Data Schedule.
EX-11 2 EXHIBIT 11 1 EXHIBIT 11 - COMPUTATION OF NET EARNINGS PER COMMON SHARE (UNAUDITED)
Three Months Ended November 30, 1996 1995 ---------------------------------- (Amounts in thousands, except per share data) 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 ======= =======
EXHIBIT 11 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-31-1997 SEP-01-1996 NOV-30-1996 0 40,357 63,612 4,303 2,334 110,643 169,574 44,551 248,669 102,136 0 0 0 11 138,189 248,669 0 45,272 0 43,872 0 0 927 963 379 0 0 0 0 584 0.05 0.05
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