ITEM 1. BUSINESS
THE COMPANY
Salick Health Care, Inc. ("Salick" or the "Company") provides disease- specific health care services, administrative services, facilities and risk- based and other products and programs to health care providers and payors, principally in the areas of the diagnosis and treatment of cancer and the treatment of kidney failure, primarily through its operating subsidiaries, Comprehensive Cancer Centers, Inc., USHAWL, Inc., Century Dialysis Corporation, INFUSX, Inc. and SalickNet, Inc. The Company's strategy is to expand its services throughout the United States, and to utilize the Company's expertise and experience in providing and managing the provision of disease specific outpatient services to its historic operations and to expand into additional and new settings (inpatient, alternate site and home), into areas of diagnosis and treatment of other complex illnesses and diseases requiring sophisticated, long-term care and in providing unique disease state programs to payors and managed care entities.
The diagnosis and treatment of cancer and the treatment of kidney failure represent significant and growing markets. The American Cancer Society estimates that 33% of Americans now living will eventually be diagnosed with cancer. The National Cancer Institute estimates that the annual overall direct and indirect costs of cancer are in excess of $104 billion. Published reports indicate that the market for dialysis services is currently in excess of $4 billion annually. The Company's facilities, and its ability to provide a full range of services to cancer and kidney disease patients in any setting, e.g., outpatient, alternate site, home, etc., are designed to meet the growing demand for cancer, kidney, organ transplant, immuno-deficient and other complex disease medical treatment in a quality, cost effective manner, consistent with the increasing focus on cost containment in the health care sector.
The Company is a leader in the design, development and operation of primarily outpatient facilities for the screening, diagnosis and treatment of cancer. The Company believes that its experience and expertise in delivering and managing the delivery of such outpatient medical services, and the ability of its facilities to provide cost effective, quality and convenient care, provides significant advantages to cancer patients over outpatient services offered at physicians' offices, other acute care hospitals or other clinical settings. Traditionally, many of the cancer diagnostic and treatment services provided by Salick facilities on an outpatient basis have been principally available through more costly hospital admissions. The Company's Cancer Centers provide sophisticated, cost effective health care services, emphasizing quality of care and patient convenience.
At August 31, 1996, the Company through its subsidiaries operated ten outpatient comprehensive diagnostic and treatment cancer centers in affiliation with medical schools, teaching hospitals and private and community hospitals. The centers are located at Cedars-Sinai Medical Center in Los Angeles, California, Mount Sinai Medical Center in Miami Beach, Florida, Parkway Regional Medical Center and Columbia Kendall Regional Medical Center in the Miami, Florida area, Temple University Medical Center in Philadelphia, Pennsylvania, Columbia JFK Medical Center in Palm Beach County, Florida, Desert Hospital in Palm Springs, California, Alta Bates Medical Center in Berkeley, California, the University of Kansas Medical Center in Kansas City, Kansas and as part of the SHC Specialty Hospital in Westlake, California, formerly the Westlake Medical Center. On July 25, 1996 the Company purchased the former Westlake Medical Center at which this Cancer Center is located. In April 1996 one of the
Company's subsidiaries entered into an agreement with Saint Vincents Hospital and Medical Center to establish both a comprehensive cancer center under Saint Vincents operating certificate and a managed care affiliate network in the greater New York Metropolitan Area. This Cancer Center began providing services in November 1996. These eleven centers are collectively referred to herein as the "Cancer Centers".
Salick is also one of Southern California's leading providers of specialized facilities and services for the treatment of patients suffering from kidney failure. Dialysis treatments provided by the Company generally utilize artificial kidney machines that remove certain toxic substances from the blood and return the cleansed blood to the patient. Salick currently operates or manages ten outpatient (chronic) facilities, provides inpatient (acute) dialysis services at more than twenty Southern California hospitals and provides dialysis services to patients in their homes.
Having the ability to provide services in all settings is, in the areas of cancer and dialysis, a unique feature attractive to payors and provides a continuum of care for patients and their physicians. This is an integral part of the Company's strategy for dealing with cost controls and the changing health care environment with its emphasis on managed care.
At each of the Cancer Centers and dialysis facilities, the Company provides the supervision and, subject to reimbursement and local regulatory requirements, generally provides the medical personnel, technicians and equipment for patient treatments. However, with the exception of certain South Florida locations, the Company does not provide the physician component of the services rendered.
The Company's INFUSX subsidiary provides alternate site and home care services (including chemotherapy, infusions, antibiotics, nursing visits, etc.) for cancer, kidney disease, organ transplant and immuno-deficient patients in the Southern California, South Florida, Kansas/Missouri and greater Philadelphia areas.
The Company's subsidiary, SalickNet, provides a range of cancer treatment programs to managed care entities including Health Maintenance Organizations ("HMOs"), Preferred Provider Organizations ("PPO") Independent Practice Associations ("IPAs"), self insured and other payors of health care services. The SalickNet programs offered include capitated contracts (a set price calculation on the basis of a per member, per month charge), discounted fee for service, case rate and visit group methodologies. These programs employ proprietary practice guidelines and outcomes measurement to gauge the success and effectiveness of the programs offered through contracted physicians and facilities on the basis of quality, convenience, patient satisfaction and cost effectiveness. The Company's programs, the first of their kind, have been well received since being introduced in 1994 and include the first capitated covered treatment agreement with Physician Corporation of America covering 115,000 persons in South Florida, and a non-capitated global fixed fee agreement with CAPP CARE, a national managed PPO for the Company's services.
In addition, in fiscal 1996 separate subsidiaries of the Company have been formed to provide management services, facilities, personnel and other items and services to certain physicians and medical groups for the operation of their respective medical practices, some of which are located off-site from the Cancer Centers or other Company operations or facilities. These supplement or augment services the Company has been providing for several years.
Salick is a Delaware corporation formed in July 1991 for the purpose of changing the state of incorporation of Salick Health Care, Inc., a California
corporation ("Salick California"), from California to Delaware by way of a merger of Salick California with and into the Company which was consummated on August 27, 1991. All references herein to Salick or the Company shall, unless the context otherwise clearly indicates, refer to both the Company and Salick California.
In April 1995, an indirect wholly owned subsidiary of Zeneca Limited, an English company, was merged into the Company, with the Company being the surviving corporation. Pursuant to the merger, the then stockholders of the Company received an aggregate of 5,634,082 shares of a new Callable Puttable Common Stock of the Company and cash in exchange for their shares of the Company's Common Stock and a wholly owned subsidiary of Zeneca Limited received an aggregate of 5,657,115 shares of the Company's Common Stock. As a result, Zeneca Limited beneficially owns more than 50% of the equity securities of the Company. Zeneca Limited is a wholly owned subsidiary of Zeneca Group PLC, an English company, which is a major international bioscience business engaged in the research, development, manufacture and marketing of ethical (prescription) pharmaceuticals, agricultural chemicals, specialty chemicals, seeds and biological products.
Salick's executive offices are located at 8201 Beverly Boulevard, Los Angeles, California 90048-4520, telephone number (213)966-3400.
CANCER SERVICES
GENERAL
The American Cancer Society estimates that one of three Americans now living will eventually be diagnosed with cancer. In 1996 alone, estimates are that approximately 1,360,000 people will be diagnosed as having cancer, excluding nonmelanoma skin cancer and carcinoma in situ. The National Cancer Institute estimates that the overall annual direct and indirect costs of cancer exceed $104 billion. Based on the trend shown in American Cancer Society reports, the incidence of cancer as well as cancer related costs has continued to grow. However, the incidence of certain forms of cancer can be reduced and early detection and treatment of cancer can improve cure rates and increase life expectancy. New developments in the treatment of certain types of cancer have not only increased the ability to detect cancer in early stages but have significantly increased the five year survival rate for cancer patients.
The Company's strategy has been to provide, in affiliation with major university, teaching and other hospitals, substantially all of the outpatient health care services necessary to meet the needs of cancer patients and their physicians. More recently, the Company's services have been expanded to alternate sites and inpatient services at selected Centers. Each of the Cancer Centers addresses the critical needs of cancer patients, their families and partners in care by offering a wide range of services, delivered in a cost effective setting. Each of the Cancer Centers is open for extended hours with most services available seven days a week.
Among the many diagnostic and therapeutic services available at or through a Cancer Center are diagnostic radiology (including CT scanning, magnetic resonance imaging and ultrasound), radiation therapy, infusion and bolus chemotherapy, laboratory, pharmacy, blood banking, nutritional counseling, pain management, educational and psychosocial services. Most of the Cancer Centers presently in operation provide the majority of these services on site. As a Cancer Center moves from an interim to a permanent facility, substantially all services are provided on site.
Each Cancer Center is led by a Medical Director who is an acknowledged expert in the diagnosis and treatment of cancer. The Medical Directors and other physicians who treat patients at the Cancer Centers are supported by personnel (including nurses, pharmacists, technicians, psychiatrists, psychologists, social workers and nutritionists), who have substantial experience in providing services to cancer patients. Each Cancer Center is the exclusive provider to the affiliated hospital of substantially all of its outpatient diagnostic and treatment programs related to cancer.
Salick emphasizes interaction between the Cancer Centers' Medical Directors and area affiliated physicians in order to enable all patients to have access to and to share the latest clinical research and treatment protocols. This enables physicians in one area of the country to have access to expertise, as needed, without having to refer their patient to other facilities and lose contact with their patient. See also "Artificial Kidney ("Dialysis") Services and Medical Supplies."
ADDITIONAL SERVICES
The American Cancer Society estimates that one out of every eight women will develop breast cancer. Breast cancer is the second leading cause of cancer death in women. The Company believes that there is a clear need for increased efforts and specialized attention to the prevention, detection and treatment of breast cancer. In order to address this current need and to provide individuals with prompt responses to their concerns, breast centers are operated in affiliation with the Cancer Centers at the Mount Sinai Medical Center, in Miami Beach, Florida, at Desert Hospital in Palm Springs, California, at SHC Specialty Hospital in Westlake, California and freestanding facilities are located in Van Nuys, California and Palm Beach, Florida. Certain breast cancer specific services are also provided at the Company's Cedars-Sinai, Alta Bates, Temple University and University of Kansas Cancer Centers. The Company is developing additional comprehensive breast care centers (collectively, "Breast Centers") proximate to or as an integral part of the Cancer Centers in order to take advantage of the full range of services which the Company's programs offer. The Breast Centers provide state of the art screening, detection, diagnostic and treatment services to individuals, with and without the disease. Education and counseling with respect to all aspects of breast health and disease are an integral part of the Breast Center program. Cancer risk assessment is provided at the Alta Bates, Westlake and JFK Cancer Centers. This program takes into account genetic and epidemiologic factors as they relate to the potential of a person's risk of contracting breast cancer. The Company believes that few health care facilities provide such assessment and counseling services and that its Breast Center program will aid in the early detection and prompt treatment of breast cancer, thus increasing the potential for cure.
Certain transplantation and surgical procedures relating to cancer are or will soon be able to be done on an outpatient basis. Where appropriate and authorized, certain of the Company's existing and future Cancer Centers will have these facilities. Additionally, as some of these surgical and transplantation procedures may continue to have to be done on an inpatient basis, at certain Cancer Centers the Company expects inpatient services to be added for such procedures to be done in Company facilities.
The Company's alternate site and home infusion subsidiary, INFUSX, Inc. ("INFUSX") provides a range of infusions, nutrition, antibiotics, pain management, blood products, nursing and other treatment services to patients with chronic and complex illnesses requiring sophisticated, long term care, matching disease treatment intensity with the resource intensity and Company facility (Cancer Center, alternate site facility, home, etc.) necessary to
service the patient's needs. In addition to its appeal to managed care entities, employer groups, other health care payors and patients amenable to such treatment, INFUSX provides the Company with the ability to service patients who have historically been provided such care by others. It also allows the Company to broaden the scope of its programs and services and, at greatly reduced capital costs, to reach out to other payors, areas and patients that have not previously been serviced by the Company.
Increasing health care costs and decreasing reimbursements have hastened the trend toward managed care and alternate site care. Managed care, in its myriad forms, covers approximately 55% of U.S. workers and focuses on limiting or sharing risk among payors and providers. SalickNet, the Company's managed care subsidiary develops and oversees such arrangements with payors including self insured employers and managed care companies for the provision of complex care principally relating to cancer. SalickNet offers an integrated system of care, which includes physician services, inpatient, outpatient, and home care services at predetermined prices, using certain proprietary practice guidelines developed by a group of experts, and evaluated on the basis of an array of outcome measures, e.g., mortality, patient satisfaction and quality of life. In 1994, a three year capitated (per member, per month) agreement was marketed in Florida with Physician's Corporation of America which currently covers more than 115,000 lives in South Florida.
Salick believes that there are numerous locations at which its and SalickNet's products can be sold and Cancer Centers and INFUSX operations established or acquired. The Company regularly engages in discussions to establish additional cancer centers with medical schools, private and public hospitals, physician groups, prepaid health plans and third party payors. Some of the entities with whom the Company may negotiate may already offer some of the services provided by the Company.
The market for disease state or disease specific managed care arrangements on both a pricing and service to patients basis is rapidly developing. The Company is a leader in this emerging line of business with long experience and expertise in providing assorted services in a cost-effective, quality manner. These programs include capitation, discounted fee for service, visit groups and case rates. By offering a full array of services, patient referrals and billing procedures are simplified. Discussions with managed care organizations using various programs are ongoing. The Company has obtained reinsurance to manage its risk exposure on its capitated contracts.
BENEFITS OF A COMPREHENSIVE CANCER PROGRAM
The Company believes that its multi-disciplinary Cancer Center program represents an innovative approach offering an essential improvement in the provision of services for the screening, diagnosis and treatment of cancer. Significant aspects of the programs and services include:
Convenience of Care. Convenience to the patient is an essential part of the Company's strategy and a primary consideration in scheduling treatments and procedures. Traditionally, a cancer patient has been treated in a variety of settings, including the hospital, outpatient diagnostic radiology and radiation therapy facilities, the physician's office and the emergency room, often competing for access to services with patients having a variety of other illnesses. A Salick Cancer Center provides substantially all diagnostic and treatment services, on an outpatient basis, at a single site. The Cancer Center's services are available seven days a week, providing patients with continuous access to professional staff and services and generally not requiring patients, during non-business hours, to utilize facilities such as emergency rooms. Because of the breadth of services available, the Cancer
Centers allow a physician to more rapidly establish a diagnosis and initiate appropriate treatment. Substantially all of the Company's programs enable the patient to receive care promptly and in a convenient setting and to return to his or her family each day, thereby improving the quality of life for the patient and the patient's family.
Quality of Care. Each Cancer Center has sophisticated diagnostic equipment and trained staff available to physicians and patients utilizing the Cancer Center, is staffed by physicians, nurses and technicians with expertise in cancer care and has a Medical Director who provides overall supervision of quality, implements clinical and research developments, and accesses current treatment protocols for use by patients and their physicians. A patient care plan to facilitate interaction between all persons involved in the patient's care is developed for each patient. The plan provides for individualized objectives of care and protocol compliance, including formal treatment schedules and diagnostic procedures monitoring the course of therapy in the Cancer Center, the hospital and the home. Records documenting the patient's history, treatment and clinical course are immediately available to the hospital staff if admission of the patient is required.
Studies published in The Journal of Clinical Oncology and Cancer have indicated that reduced side effects from intensive chemotherapy can often be achieved for patients treated during lengthier sessions. The Cancer Centers provide this intensive chemotherapy to the numerous patients who may benefit from this method of treatment. Physicians' offices, physician based practice locations including those managed by others and home care entities often lack the capacity to safely and efficiently provide this type of treatment or to handle any severe complications which may arise as a result of the treatment.
Cost Effectiveness. The Cancer Center program provides screening, diagnosis and treatment in cost effective settings; not dependent upon hospitalization or multiple site testing, record keeping and evaluations to effect diagnosis or to institute treatment. The Company believes that the overall cost of patient care is reduced because of the rapidity of diagnosis and implementation of treatment as well as the avoidance of duplicative tests and services, inconsistent procedures, unnecessary hospitalization and the ability to match resources to the intensity of the care required.
Benefits to Hospitals. The Cancer Centers provide a hospital with practice management or consulting and administrative services, a truly coordinated disease specific program providing quality medical care and support which serve to enhance the hospital's reputation. The addition of these sophisticated facilities and programs may also attract new patients to the hospital for other health care services. Because of its resources, reputation in the field of cancer and expertise, Salick is able to provide a hospital with the services and facilities of a Cancer Center in a shorter period of time than if the hospital were to seek to develop such a center on its own. Additionally, as a Cancer Center provides its services principally on an outpatient basis, the affiliated hospital is often able to discharge its cancer inpatients sooner. This facilitates the hospital's ability to manage under present reimbursement programs such as capitation. See "Governmental Regulation."
Benefits to Physicians. The Cancer Centers provide physicians with practice management services, a trained oncology staff, state of the art facilities, access to many of the latest treatment protocols and clinical research, a support staff, and continuing education. By affiliating with and utilizing a Cancer Center, physicians can increase their income by freeing their time to see an increasing number of patients and reducing their overhead expenses.
Benefits to Employers and Payors. In addition to providing a high quality program and establishing control over payor cost, the Company has established "managed care" and "physician-facility network" teams to develop, implement and operate programs aimed at the managed care market. These teams are developing what the Company believes to be innovative programs dealing with cancer in the areas of outcome studies (as to utilization measures, patient satisfaction and survival rates), guidelines for the diagnosis and treatment of cancer, case rate charges, preferred fee-for-service charges, capitation programs and the establishment of physician stand alone and combined physician-facility networks, all to be marketed and employed, as they are developed, to employer groups, purchasing alliances, managed care and other payors.
OPERATING CANCER CENTERS
CEDARS-SINAI CANCER CENTER
Salick's 53,000 square foot Cancer Center at Cedars-Sinai Medical Center ("Cedars-Sinai") in Los Angeles, California provides, 24-hours a day, seven days a week, substantially all of the programs and services required by a cancer patient, including infusion and bolus chemotherapy, radiation therapy, pharmacy, laboratory, blood transfusions, psychosocial services and oncology nursing. This Cancer Center, which commenced operations in temporary space in 1985, has its own identity within and is located on the campus of the hospital. The Company is the exclusive provider of substantially all the hospital's outpatient cancer diagnostic and treatment programs and facilities in conjunction with the hospital's teaching and research programs. All physicians treating patients at the Cancer Center must be members of the Cedars-Sinai staff. It is the Company's understanding that Cedars-Sinai has an open medical staff in medical oncology and many other specialties.
The Company owns the physical improvements and equipment located at the Cancer Center, subject to the rights of Cedars-Sinai upon termination of the agreement and the lessors or sellers under any equipment lease or purchase contract. The Company has no ownership interest in the land upon which the Cancer Center is located. If the Company elects to terminate the Cedars-Sinai agreement without cause and liability, the Company must transfer all physical improvements and all of the Company's interest in the Cancer Center's equipment to Cedars-Sinai without payment. In the event the agreement is not extended or is terminated by the Company for cause, Cedars-Sinai is required to purchase the Company's interest in the Cancer Center's improvements at their book value amortized over a twenty year life and may purchase or lease the Cancer Center's equipment at its then fair market value reduced by existing obligations assumed by Cedars-Sinai. The loss of the agreement with Cedars-Sinai would have a material adverse effect on the Company.
MOUNT SINAI CANCER CENTER
Under its agreement with Mount Sinai Medical Center in Miami Beach, Florida, the Company became the exclusive provider of outpatient cancer services at Mount Sinai Medical Center's existing Radiation Therapy and Breast Center Departments in November 1988 and has provided most of the hospital's other outpatient cancer services, such as medical oncology, laboratory and pharmacy, in interim space since April 1989. The Company began construction of the permanent center in 1994 and completed and occupied it in November 1995. The Mount Sinai Comprehensive Cancer Center's programs and services include outpatient oncologic surgery and are otherwise similar to those of the Cedars- Sinai Comprehensive Cancer Center.
TEMPLE UNIVERSITY CANCER CENTER
Salick operates this Cancer Center in interim space on the Temple University Health Sciences and Hospital campus in Philadelphia, Pennsylvania. Services provided include radiation and medical oncology, laboratory, pharmacy and psychosocial services. Stem-cell pheresis and stereotactic radiosurgery services are also included in services provided at this facility. The development of the permanent Cancer Center is being planned and will be subject to regulatory and other approvals. At such time as the permanent center is established, the Temple University Cancer Center's programs and services will be similar to those of the Cedars-Sinai Cancer Center.
JFK CANCER CENTER
On October 1, 1987, Salick became the provider of services at the 20,000 square foot JFK Medical Center Outpatient Comprehensive Cancer Center located in Palm Beach County, Florida. This Cancer Center provides medical and radiation oncology programs and services including chemotherapy, pharmacy and laboratory services as well as a full range of support services. The Company's contract with JFK Medical Center expires September 30, 1997. It is highly unlikely that the contract will be renewed. The Company is arranging for alternate sites for this Cancer Center's operations.
ALTA BATES CANCER CENTER
In December 1990, the Company became the exclusive provider of a broad range of medical oncology and radiation therapy services at Alta Bates Medical Center in Berkeley, California in a 10,000 square foot interim facility. The permanent Cancer Center of some 43,000 square feet was occupied in May 1995. Most radiology services are presently provided at the Center with some at off site locations in which the Company is a limited partner. The range of services at the permanent Cancer Center include outpatient oncologic surgery, otherwise they are similar to those provided by the Cedars-Sinai Cancer Center.
DESERT HOSPITAL CANCER CENTER
In September 1989, Salick became the exclusive provider of all outpatient cancer services and programs at and in affiliation with Desert Hospital in Palm Springs, California. The Company is presently providing its services in a 15,000 square feet interim facility. A permanent center of approximately 48,000 square feet is under construction and is expected to become operational in 1997. The Center in its interim phase contracts with the hospital for certain radiologic services and provides all of its other services on site. The full range of the Company's programs and services will be provided in the permanent center.
PARKWAY AND KENDALL CANCER CENTERS
In June 1987, the Company became the exclusive provider of certain of its Cancer Center services and programs at Parkway and Kendall Regional Medical Centers in the greater Miami, Florida area. Radiologic and certain other services not presently provided at these Cancer Centers are available through agreements with the hospitals. Neither of these Cancer Centers provides radiation therapy services, although arrangements exist for patients to obtain such services at a Company facility adjacent to Parkway and or through third parties in the Kendall area. In October 1991, in order to service patients of the Parkway Cancer Center, the Company acquired an 80% interest in a radiation therapy center adjacent to the Parkway Cancer Center and subsequently acquired the remaining 20% interest. The Company's contract with Kendall Regional Medical Center expires in 1997. It is highly unlikely that the contract will
be renewed. The Company is considering making arrangements for an alternate site for this Cancer Center's operations. The Company's contract with Parkway Regional Medical Center was extended through 2002.
UNIVERSITY OF KANSAS CANCER CENTER
In April 1992, Salick became the exclusive provider, under a thirty five year agreement, of all outpatient cancer services and programs at and in affiliation with the University of Kansas and its medical center based in Kansas City. At the present time, the Company occupies approximately 25,000 square feet of interim space and provides medical and radiation oncology services while contracting with the medical center for radiologic and certain other ancillary services. A permanent center is in the planning stage. When all approvals are obtained and the Center is completed, the full range of the Company's services and programs, including a breast center and surgical and radiological facilities, will be on-site. Financing of the construction of the Center may be through a bond issued by the Kansas Board of Regents for the University of Kansas.
SAINT VINCENTS CANCER CENTER
In April 1996 a subsidiary of the Company entered into an agreement with Saint Vincents Hospital and Medical Center to establish both a comprehensive cancer center under Saint Vincents' operating certificate and a managed care affiliate network in the greater New York Metropolitan Area. The twenty-year contract is pending regulatory approval (a certificate of need and certain other approvals must be obtained). The Company anticipates that Saint Vincents will obtain such approvals during fiscal 1997. It is anticipated that the Saint Vincents Comprehensive Cancer Center will provide a full range of outpatient diagnostic and treatment services. The Cancer Center began providing cancer services in November 1996 in space located at Saint Vincents. A permanent center of approximately 70,000 square feet will be established in proximity to Saint Vincents. Saint Vincents is the academic medical center for New York Medical College in New York City and is sponsored by the Archdiocese of New York and the Sisters of Charity which operates or are affiliated with many health care facilities in New York, some of which could become affiliates of the network.
WESTLAKE CANCER CENTER/SHC SPECIALTY HOSPITAL
In 1993, the Company established a Cancer Center, in a joint venture with Universal Health Services ("UHS") the then owner of the Westlake Medical Center, in Westlake, California. The Center, which began operations in October 1993, is the first Salick Center to provide both inpatient and outpatient services, including a dedicated inpatient unit, comprehensive outpatient diagnosis and treatment and surgical capabilities. In July 1995, UHS sold Westlake Medical Center to a subsidiary of Columbia/HCA Healthcare Corporation and the Company acquired UHS' interest in the Cancer Center. Under the agreement with Columbia/HCA the Company was the exclusive provider of inpatient and outpatient cancer services and programs at Westlake Medical Center. Initially, services are provided in 18,000 square feet of existing space including dedicated inpatient facilities. A separate Breast Center was opened in September 1994. Among the affiliated physicians are specialists in medical, surgical and radiation oncology, reconstructive surgery, bone marrow and stem cell transplantation and breast cancer. The features of this Center enable the Company to deliver a comprehensive, quality, cost effective package of services for the diagnosis and treatment of cancer to managed care entities and other health care payors in any setting, and complements the Company's other California operations.
Effective July 25, 1996, a subsidiary of the Company acquired Westlake Medical Center from a subsidiary of Columbia/HCA Healthcare Corporation. Under the terms of the agreement with the Columbia/HCA subsidiary, the Company's subsidiary had the right to purchase the hospital if Columbia/HCA decided to close the hospital with the purchase price for the hospital being determined by three appraisers. After Columbia/HCA gave notice of its decision to close the hospital, the subsidiary of the Company exercised its right to purchase the hospital. The agreement that contained the subsidiary's right to purchase the hospital sought to impose restrictions on 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 Columbia/HCA subsidiary delayed providing documents to transfer title and when provided included terms the Company believed violated the agreement and were unacceptable. As a result, the Company commenced litigation to enforce its rights under the agreement and the hospital was transferred to the Company's subsidiary pursuant to an injunction issued by the Los Angeles Superior Court. The litigation continues with the Company also contesting, among other claims, the legality and enforceability of the restrictions. See "Item 3. LEGAL PROCEEDINGS."
PAYMENT AND BILLING
The Company bills its charges to the hospitals with which each Cancer Center is affiliated. The Company is paid by the hospital after the payment is received by the hospital. Payors include the Medicare and Medicaid programs, Blue Cross and other insurance plans, HMO's and other prepaid health plans and the patient. Medicare makes interim payments to the hospitals for services reimbursed on a cost basis including, among others, outpatient services. Currently, Medicare reimbursement for certain outpatient surgery, radiology and diagnostic services is based on the lower of the hospital's reasonable cost (reduced by 5.8% of operating costs and 10% for capital costs - see "Governmental Regulation-Reimbursement") or a blend of the hospital's reasonable costs and a fee schedule amount; for other hospital outpatient services, Medicare reimbursement is based on the hospital's reasonable costs, reduced by 5.8% of operating costs and 10% for capital costs. These payments are subject to an annual audit which can result in an adjustment to payments previously made. These audits may not be finalized for a number of years and final adjustments, if any, made as the result thereof can have a positive or negative effect, retroactively and/or prospectively, on the estimate of contractual allowances used in the Company's financial statements for the periods involved, and a corresponding impact, which could be material, on the Company's revenues and income. See "Governmental Regulation - Reimbursement." Adjustments in these payment methodologies may have an adverse impact on the Company's revenues and profitability. Blue Cross and other private insurance plans and certain health plans with whom the Company or affiliated hospitals contract generally pay a percentage of reasonable and customary charges. Some of the payors with which the Company or affiliated hospitals do business pay on a capitated basis, while others pay on a case rate or visit basis. Reimbursement under the Medi-Cal program and Pennsylvania and other certain state Medicaid programs is based on their schedules of allowable charges and in some states may include a component for capital costs. SalickNet is paid on a monthly basis on its capitated program and it bills for services provided on its non-capitated programs.
ARTIFICIAL KIDNEY ("DIALYSIS") SERVICES AND MEDICAL SUPPLIES
Published reports indicate that dialysis services generate in excess of $4 billion per year in revenues. The Company believes it is one of the larger dialysis services providers in the United States and one of the largest in California, the only state in which it currently provides these services.
The Company's ten outpatient (chronic) artificial kidney treatment facilities are located in Southern California. Dialysis treatments are generally provided through use of an artificial kidney machine which removes certain toxic substances from the blood and returns the cleansed blood to the patient. As required by Medicare, Salick employs and compensates physicians to provide coverage, education, peer review, medical direction, quality assurance and other services at these facilities during operating hours. Each facility is staffed by a director of nursing and other nurses, administrative and support personnel.
Chronic dialysis is generally performed three times a week, for four to five hours per treatment. Improvements in technology now available have shortened the treatment time for certain patients to approximately three to four hours. This allows the Company to achieve efficiencies while continuing to provide quality care. A substantial majority of the Company's chronic dialysis patients presently receive this treatment.
During the course of a dialysis treatment, the Company provides the disposable and reusable supplies, including the dialyzer, blood tubing, injectable medications, solutions, drugs and blood products. The Company's capacity for treating patients is subject to a number of variables, including length of time per treatment, type of treatment, individual patient requirements and local operating practices and ordinances regulating a facility's hours of operations. To date, none of these constraints have affected the Company's ability to increase the number of patients treated or hours of operation. Patients are generally referred to artificial kidney facilities by their managed care entity, or if they are not part of a managed care entity, by physicians or other medical personnel. Dr. Salick and physicians affiliated with him contract to provide medical and administrative services in connection with the Company's dialysis operations. All physicians retain professional fees which they receive for providing services to dialysis patients treated at Company and other facilities.
Most dialysis treatments are performed in hospitals or outpatient facilities, although dialysis can be performed at home or on an ambulatory basis for certain patients. Less than 10% of the dialysis patients treated by the Company presently receive either ambulatory or home dialysis. Support services, such as supplies, patient education, counseling and self-care training, are also provided to these patients by the Company.
The Company's outpatient facilities are subject to extensive federal, state and local government regulation, inspection and licensing. The addition of treatment stations at existing facilities is dependent upon approval of the state licensing agency. In addition, federal and state rules and standards must be met to qualify for payments under Medicare, Medicaid and other reimbursement programs. See "Governmental Regulation."
Approximately 78% of the outpatient dialysis revenues received by the Company are paid by the Medicare and Medicaid programs. Under the current Medicare reimbursement regulations (the "Medicare Regulations"), for Medicare eligible beneficiaries, Medicare pays 80% of a prospectively determined reimbursement rate for treatment at an outpatient dialysis facility and for patients treated at home. Currently this prospective price varies from about $117 to $139 per treatment at an outpatient facility, depending on regional wage index differentials. The average reimbursement rate presently applicable to the Company's facilities is approximately $136 per outpatient dialysis treatment, including routine laboratory services, but excluding physician fees and certain ancillary and non-routine laboratory and pharmacy charges. See "Governmental Regulation-Reimbursement." Under the Medicare Regulations, home dialysis patients may elect to have all of their dialysis supplies and back-up
services provided by an End Stage Renal Disease Program ("ESRD") facility, such as those operated by the Company. If the patient so elects, the facility will receive the same reimbursement as it receives for treatment of patients at an outpatient facility.
A technological development affecting the dialysis industry has been the grant of approval from the Food and Drug Administration for the production and sale of Erythropoietin ("EPO"), a drug produced by recombinant DNA technology. EPO may be useful in treating the anemia associated with end stage renal disease by reducing the need for transfusions in dialysis patients. The Company provides EPO and the administration thereof to its patients according to physicians' orders. Effective January 1, 1991, the manner of reimbursement for EPO dialysis patients was changed from its former structure (80% of $40 per treatment for up to 10,000 units and 80% of $70 for a treatment dosage of 10,000 or more units) to provide for payment of 80% of $11.00 per 1,000 units. If a beneficiary requires 10,000 units or more, sufficient medical documentation must accompany the claim. The effect of this change had an adverse impact on the Company and the industry. Pursuant to the Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993"), payment for EPO was further reduced to 80% of $10.00 per 1,000 units, effective January 1, 1994.
The Company also provides inpatient ("acute") dialysis services to hospitalized patients under separate contracts with 21 hospitals in Southern California. The Company's inpatient facilities are located on hospital premises and operated under hospital licenses, rules, by-laws and medical staff requirements. Under each of the agreements, payments to the Company for its services are made directly by the hospital and are at negotiated rates.
In 1996, the Company opened its 10th outpatient dialysis center at Hi- Desert Hospital in Yucca Valley (Riverside County), California. This center has 15 treatment stations in its 5445 square feet and the term of the agreement is for a five-year period with three five-year renewal options.
MEDICAL PRODUCTS AND SUPPLIES
Aurora Medical Supplies, Inc. ("Aurora"), a wholly-owned subsidiary of the Company, arranges the acquisition of medical and pharmaceutical products and supplies for the Company's Cancer Centers, dialysis facilities, as well as physicians' offices, hospitals and medical clinics. These products and supplies are manufactured by others.
ALTERNATE SITE AND HOME INFUSION SERVICES
The Company's subsidiary, INFUSX, emphasizes the treatment of chronic, complex and catastrophic illnesses requiring sophisticated, long term care in non-Cancer Center and related satellite facility settings. INFUSX's initial focus has been in providing services to cancer, dialysis, bone marrow, organ transplant and immune suppressed patients. A number of these patients are or have been treated in facilities operated by the Company. Among the services provided by INFUSX are chemotherapy, antibiotics, parenteral and enteral nutrition, blood products, pain management, nursing visits, related services, certain equipment and supplies. INFUSX bills the payor or patient directly for the services it provides. Presently INFUSX, a duly licensed home health agency, operates in Southern California, South Florida and in the greater Philadelphia and Kansas City, Kansas/Missouri areas. The Company intends to establish or acquire or otherwise participate in operations in other areas such as New York where appropriate to support the Company's operations.
COMPETITION
Although the Company believes its Cancer Center operations and programs are innovative and unique, they operate in a competitive environment. Some services which may be considered to be competitive to those which are and will be offered by the Cancer Centers, SalickNet and INFUSX are being provided by comprehensive cancer centers established under federal law (whose primary purpose is research and education), acute care hospitals, other primary health care facilities, radiation therapy and diagnostic imaging centers, private and group physicians, home and alternate site care entities, infusion centers and prepaid and other forms of health plans. Certain of these providers have been established in the general health care field for a number of years and have greater financial and marketing resources than the Company.
In its dialysis operations the Company competes with both hospital-based and freestanding dialysis facilities. The Company competes on the basis of its reputation for quality care and convenience. Certain of the Company's competitors with respect to its dialysis services may also compete for the development or acquisition of dialysis centers in markets which may be targeted by the Company. Certain of the Company's competitors may have substantially greater financial and marketing resources than the Company.
GOVERNMENTAL REGULATION
Health care facilities are subject to extensive federal, state and local legislation and regulations, including those relating to the reimbursement and control of health care costs.
Several significant pieces of legislation have been passed in calendar year 1996. The Health Insurance Portability and Accountability Act of 1996, signed by President Clinton on August 21, 1996, is a package of health insurance reforms which includes several significant changes regarding Medicare and Medicaid fraud and abuse laws. In addition to the provisions regarding fraud and abuse, the key provisions of the Act establish portability of health insurance (requiring health insurances to offer policies to anyone who has had insurance in the preceding six months subject to certain exceptions), increase the deductibility of health insurance premiums for self-employed individuals and establish a limited demonstration project utilizing medical savings accounts ("MSAs"). The provisions of the Act relating to insurance reform are effective July 1, 1997. Those relating to the MSA demonstration are effective for fiscal years beginning after December 31, 1996.
Welfare reform legislation was signed into law by President Clinton on August 22, 1996 in the form of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. That Act is designed to overhaul the nation's welfare system, including the end of federally guaranteed payments to the poor and substitution of annual block grants to states to operate their own welfare programs. Medicaid coverage is assured only for recipients of cash benefits and Medicaid eligibility for children receiving foster care and adoption aid. The new law bars most federal aid, including Medicaid and cash welfare, to future legal immigrants for five years. President Clinton has stated that he intends to introduce legislation to compensate for the loss of Medicaid coverage and other benefits, but no timetable for sending such legislation to Congress has been provided. There is no assurance that such legislation, if introduced, will be enacted.
REIMBURSEMENT
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 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, and there is no assurance that it will be able to do so in the future, 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 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 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 early as late 1996. 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 memorandum has not yet been revised to reflect this position. The eight tests include requirements for: common accreditation, licensure and governance; physical proximity to the provider; service of the same patient population; close 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. It is difficult to ascertain how such requirements will be interpreted (for example if all eight tests must be met) and loss of such status would likely result in reduced reimbursement in the future and could possibly require a restructuring of such operations or other actions.
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 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.
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 effect of these changes may be mitigated by the Company's ability to increase its patient volume both at the same sites and at additional centers, to increase its non-Medicare patient volume and to continue implementation of cost controls and cost reduction strategies. To address these changes, the Company has expanded its program to increase patient volume, and instituted other programs to achieve efficiencies in staffing, purchasing and scheduling.
Effective November 1, 1990, the Medicare fiscal intermediary for the Company's dialysis facilities changed the method of reimbursing medications provided to the Medicare dialysis patients from charge-based reimbursement to reimbursement based on reasonable costs. This change has reduced the amount of reimbursement to the Company for such medications and other regulatory changes potentially could further reduce such reimbursement. In addition, effective January 1, 1991, the method of reimbursement for EPO furnished to dialysis patients was changed from its former structure (80% of $40 per treatment dosage for up to 10,000 units and 80% of $70 per treatment dosage of 10,000 or more units) to provide for payment of 80% of $11.00 per 1,000 units. This change in EPO reimbursement has been partially offset by a $1.00 per treatment increase in the composite rate reimbursement for outpatient dialysis services. 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.
In 1990, Congress required that HHS and the Prospective Payment Assessment Commission ("PROPAC") study dialysis costs and reimbursement and make findings as to the appropriateness of ESRD reimbursement rates. In March 1996, PROPAC recommended that a 2% increase be made in the reimbursement rate. However, Congress is not required to implement this recommendation and could either raise or lower the reimbursement rate. The Company is unable to predict what, if any, future changes may occur in the rate of reimbursement, or, if made, whether any such changes will have a material effect on the Company's revenues and net earnings.
Reimbursement for INFUSX's services from all payors other than Medicare is paid either at charges, a percentage of charges or a negotiated rate which may include per diem charges. Medicare patient reimbursement falls under a cost report-based methodology (skilled nursing services in the home) or a reasonable cost or fee schedule basis (generally for drugs and related supplies and durable medical equipment). OBRA 1993 prohibited the Secretary from updating the per visit cost limits for home health services during cost years beginning on or after July 1, 1994 and before June 30, 1996.
Until recently, HCFA reimbursed suppliers for drugs to be dispensed with durable medical equipment or prosthetic devices even where that supplier could not dispense that drug under state law. Two recent HCFA memoranda revise that Medicare policy to require that entities that dispense drugs for use with durable medical equipment or prosthetic devices must furnish such drugs directly to the patient for whom the prescription was written. Suppliers that do not dispense drugs directly to patients may bill Medicare only for the devices. To be reimbursed for the drugs dispensed with the devices under the revised policy, suppliers will be required to have a Medicare supplier number, be licensed to dispense the drugs in the state in which they are dispensed and bill and receive payment in their own name. Although the revised policy is effective December 1, 1996, a lawsuit requesting preliminary injunction against implementation of this policy has been filed recently in the United States District Court for the Eastern District of California, by companies other than the Company, requesting a temporary restraining order and preliminary injunction against implementation of the revised policy. Although INFUSX
operations in all states except California are permitted under its licenses to dispense drugs to be used with the devices, INFUSX does not have a pharmacy license, and therefore is not licensed to dispense the drugs, in the State of California. However, a subsidiary of the Company does have a California pharmacy license and the Company has been informed by HCFA that a combined supplier number may be issued for both INFUSX and the California subsidiary pharmacy to permit INFUSX to continue to bill Medicare beneficiaries directly for both the devices and the drugs to be used with the devices.
The Company provides home health agency services and certain home infusion products and services through INFUSX, which is a licensed home health agency and/or pharmacy in the states in which it operates. In 1994, HCFA undertook the Medicare Home Health Initiative to identify opportunities for improvement in the Medicare home health benefit. As a result of that initiative, the conditions of participation and coverage for home health agencies were amended effective twice, on February 21, 1995 and July 27, 1995, respectively, on a variety of matters, including notices of patient rights, plans of care, home health aid services, outpatient physical therapy or speech therapy services, and clinical records. The Company believes that its home health agency services comply with the Medicare regulations respecting coverage and conditions of participation.
LICENSING
Outpatient dialysis facilities and hospitals are subject to state licensing statutes which regulate the character and competence of the provider and its staff, its financial resources, the fitness and adequacy of the facility and its medical personnel and procedures. Licenses and approvals to operate these facilities are subject to renewal periodically and to revocation upon failure to comply with the conditions under which they are granted. Each of the dialysis facilities owned, operated or at which services are provided by the Company is and has been duly licensed continuously since its opening. Salick's inpatient dialysis services and Cancer Center services are provided pursuant to the contracting hospital's license except that the Westlake Cancer Center is located within the SHC Specialty Hospital which is now owned by a subsidiary of the Company.
SHC Specialty Hospital is licensed as a general acute care hospital under California law. In California, a variety of services, including offsite outpatient departments and clinics, are operated under the general acute care license. Special permits are required for provision of certain services, including chronic dialysis, radiation therapy and renal transplant center services. In addition to being licensed under California law, the hospital is accredited by the Joint Commission on the Accreditation of Healthcare Organizations ("JCAHO") and participates in the Medicare program pursuant to such accreditation. The Westlake Cancer Center and the Breast Center are operated as outpatient departments of the hospital.
Presently in California, and certain other states, there is no license category for the independent licensure of the Cancer Centers and in New York, a publicly traded company is ineligible to own freestanding licensed Cancer Centers. Under these circumstances, the Company is a provider of services at the Cancer Centers under the license of and agreements with affiliated medical centers. In New York, agreements with affiliated medical centers are subject to regulatory restrictions regarding delegation of management authority in operation of a Cancer Center and compensation based on participation in the Center's gross revenue or net revenue is prohibited. The Cancer Centers' continued operations as presently structured are dependent upon such agreements with hospitals. The Company will also consider management agreements and other relationships as are appropriate.
Corporate practice of medicine restrictions in certain states other than Florida in which the Company operates prohibit non-professional entities including the Company from employing or engaging physicians to provide professional services or from participating in their professional fees. In such states, physicians may be employed or engaged by a professional corporation managed by the Company which, in turn, enters into, e.g., a facilities and/or management services agreement with the Company. In New York, restrictions against professional fee splitting do not permit the compensation under such agreements to be based or dependent on the professional income or receipts of the physician or professional corporation.
INFUSX currently operates as a licensed home health agency in California, Kansas/Missouri and Pennsylvania. INFUSX operates a licensed pharmacy in Florida, Kansas/Missouri and Pennsylvania. Another subsidiary of the Company is a licensed pharmacy in California that provides the pharmacy services in California. In states where INFUSX provides direct nursing services it is required to be licensed as a home health agency. In some locations INFUSX may become subject to certain regulatory certifications including Medicare and/or JCAHO accreditation. In all its locations, INFUSX received the highest category of JCAHO accreditation.
SalickNet's current operations do not require licensure; however, the Company does anticipate expanding the administrative and professional services provided to managed care entities. In anticipation of expanding its services, Salicknet obtained licensure in Florida as a Third Party Administrator and has the ability to process and adjudicate claims on behalf of the health maintenance organizations, other third party payors and self insured employers.
CERTIFICATE OF NEED
Legislation in various jurisdictions requires a certificate of need in order to establish or substantially expand certain health care activities or facilities. In such states, a certificate of need must be obtained prior to a subject party's offering certain new services or committing capital expenditures in excess of statutory threshold amounts. The required approval is based on various criteria, such as financial feasibility, impact on other health care providers and need and access by indigents to the proposed services. Many states require a certificate of need for either or both a dialysis facility and a Cancer Center although none is required in California. The Company's operations are either exempted from certificate of need requirements or the certificate is not required in certain other states in which the Company is operating Cancer Centers or considering for expansion, except in New York as discussed below.
Each of the Company's current Cancer Centers is a part of the hospital with which it is affiliated, and therefore a certificate of need for the establishment of a Cancer Center is only necessary in certain states. Saint Vincents has applied for a certificate of need which is required for the establishment of the permanent center in New York. Neither of the USHAWL, SalickNet nor INFUSX current operations require a certificate of need. It is possible, however, that existing or future laws or regulations will be interpreted or adopted so as to require certificates of need to be obtained. Such a requirement could impair the Company's business and expansion in those areas where a certificate of need is determined to be required. To date such requirements have not adversely affected the Company's ability to establish its operations.
In those states where a certificate of need is required for a permanent Cancer Center, the Company has found that an interim Cancer Center can
generally be opened without a certificate of need. The inability to ultimately obtain a certificate of need for a particular location, new program or service will not, in the Company's opinion, unduly preclude its ability to provide services at or establish its operations. A certificate of need is required for the permanent Saint Vincents Cancer Center in New York and if not obtained and if other arrangements cannot be made, these operations may not be established.
FRAUD AND ABUSE
The fraud and abuse provisions of the Social Security Act, as amended, among other things, impose civil and criminal penalties (including exclusion from the Medicare and Medicaid programs) upon persons who pay or offer to pay any remuneration (direct or indirect, in cash or in kind) in return for or to induce the ordering of, or the making of a referral for, a service or item covered by Medicare or Medicaid. Law enforcement authorities, HHS and the courts are giving increasing scrutiny to arrangements between health care providers and referring physicians to ensure that the arrangements are not designed as mechanisms to exchange remuneration for patient referrals for services or items for which Medicare or Medicaid reimbursement may be provided. This scrutiny is not limited to financial arrangements that involve a direct payment made for the specific purpose of inducing patient referrals, but extends to payment or other remuneration mechanisms that carry the potential for inducing referrals. Recent court decisions have held that the fraud and abuse provisions have been violated if one purpose (as opposed to a primary or sole purpose) of a payment to a provider is to induce referrals. Some states (including those where the Company engages in business) have prohibitions similar to the federal prohibitions, but which are not limited in application to Medicare or Medicaid patients. Moreover, some states (including those where the Company engages in business) either have or are considering legislation that would prohibit, with limited exceptions, referrals by any physician with an ownership or compensation relationship with the entity to which the referral would be made regardless of whether the financial relationship was intended to bring about such referrals.
On July 29, 1991, the Inspector General of HHS published regulations outlining certain "safe harbors", or defined business practices that will be deemed not to violate the Medicare and Medicaid fraud and abuse provisions described above. These include safe harbors for investment interests, personal service agreements, space and equipment rental agreements, sales of medical practices, routine waivers of certain deductibles and coinsurance, discounts received by certain buyers from suppliers and employee-generated income. The preamble to the final rule establishing the safe harbors also makes it clear that not all arrangements that fail to qualify for a safe harbor will be deemed unlawful.
Among the safe harbors is one for investment interests in large publicly-traded entities, defined as those with more than $50 million in net tangible assets within the previous twelve months or fiscal year, so long as five specified conditions are met. Another safe harbor is available for investment interests in other entities if they meet eight conditions including requirements that no more than 40% be owned by investors who are in a position to make or influence referrals or furnish items or services to or otherwise generate business for the entity, and that not more than 40% of the gross revenues of the entity in the last fiscal year or 12 month period come from referrals, items or services furnished, or business otherwise generated from investors. The Company does not have referring physicians as owners or partners in any of its Cancer Centers or dialysis facilities, although some may own stock of the Company. However, the Company has interests as a limited partner in certain independent radiology facilities that have physician investors. These facilities provide services to patients of a Cancer Center
pursuant to orders of their physicians. The Company understands that the interest of such physicians has been acquired although radiologists and physicians who no longer practice in the area continue to have ownership interests. While this situation may not, technically in all respects, conform to the requirements of the investment interests safe harbors, the Company believes that its interests in these facilities, if scrutinized, should be determined not to violate the Medicare and Medicaid fraud and abuse law and state fraud and abuse and self referral laws. In that regard, the Company believes that there is a material absence of abusive features identified in a special Fraud Alert on Joint Venture Arrangements issued by the Inspector General in 1989, associated with the Company's involvement in these facilities. The regulations also include a safe harbor for certain personal services agreements. The agreements under which the Company compensates the physicians who serve as its medical directors may not completely and technically conform to all of the requirements for this safe harbor, which dictates, for example, that the exact schedule of work of non full-time employees and the payment for each work session be established in advance. However, the Inspector General has indicated that agreements not completely conforming to a safe harbor will be analyzed on their merits and the Company believes the arrangements it has with its Medical Directors are reasonable and do not violate the Medicare and Medicaid fraud and abuse law. Certain physicians who have patients at Company facilities contract for the use of office space and related services and the Company believes that these arrangements materially comply with the applicable safe harbors. Moreover, the Company believes that both its personal services and rental agreements, as well as its relationships generally with referring physicians, are appropriate, and in any event, are materially distinguishable from those types of arrangements described as potentially abusive by the Inspector General in a 1992 Special Fraud Alert on Hospital Incentives to Physicians which, while directed at hospitals, also could apply to other providers.
On July 21, 1994, clarifications of the safe harbors were proposed by the Inspector General. Those proposed rules are intended to clarify the original set of final safe harbor provisions. A variety of modifications are proposed, including those respecting the investment interest safe harbor, the space and equipment rental and personal services and management contract safe harbors, the referral services safe harbor and the discount safe harbor.
To date, only revisions to the safe harbors for managed care plans have been finalized. These new safe harbors, issued in final form on January 25, 1996, include provisions protecting negotiated price reduction agreements between health care plans and contract health care providers. Under these provisions, the protected remuneration is only the contract provider's reduction of its usual charges for the services, the terms of the agreement between the parties must be in writing and the agreement must be for the sole purpose of having the contract provider furnish enrollees items or services that are covered by the health plan, Medicare or Medicaid. The safe harbor does not protect contracts for providing services that are not covered benefits.
In October 1994, the Inspector General issued a Special Fraud Alert regarding arrangements for the provision of clinical laboratory services. The Fraud Alerts are publications which reflect the view of the Office of Inspector General ("OIG"), but are not formally promulgated as regulations or enacted as laws. The Fraud Alert concerns the Office of Inspector General's view of practices it believes may implicate the anti-kickback statute when engaged in by clinical laboratories and health care providers. Several examples of possibly illegal laboratory services arrangements are given in that Fraud Alert. One of the examples cited involves arrangements between ESRD facilities and laboratories where the laboratory offers to perform, at a below market
rate, the tests paid for through the composite rate paid by Medicare to ESRD facilities in order to obtain referral from the ESRD facility for non-composite rate tests. Also mentioned as an example in the Fraud Alert are certain situations involving laboratory waivers of charges to managed care patients where a provider participates in a managed care plan which either provides a bonus or other payment if utilization of ancillary services such as laboratory testing is kept below a particular level or imposes financial penalties if the provider's utilization of services exceeds pre-established levels. The Inspector General is concerned that the provider may enter into an arrangement with a laboratory that has not negotiated a fee schedule with a managed care plan under which the laboratory, to keep the provider's non-managed care business, agrees to write-off charges for the provider's managed care work. Other examples are given of inducements offered by clinical laboratories which may implicate the anti-kickback statute. The Company does not believe that it does not comply with this Fraud Alert or that, if required to make changes or modifications, compliance with this Fraud Alert will materially adversely affect the operations of the Company.
In 1995 HHS created and implemented an interdisciplinary project, called "Operation Restore Trust," involving representatives of federal and state governments and the private sector to detect and investigate Medicare and Medicaid abuse and misuse in five states: California, Florida, Illinois, New York and Texas. HHS has stated that these five states were selected because they account for 40% of Medicare and Medicaid beneficiaries. Targeted for review are skilled nursing facilities, home health agencies, and durable medical equipment suppliers. Project activities have included, among others, financial audits by the OIG and HCFA, criminal investigations, referrals by OIG to appropriate law enforcement officials, and civil and administrative sanction and recovery actions. HHS is focusing on home care because it is one of the fastest growing areas in Medicare. Although the Company conducts home health agency activities in some of the five states targeted for review, the Company believes that its home health care business is in compliance with Medicare requirements.
On August 21, 1996, President Clinton signed the "Health Insurance Portability and Accountability Act of 1996" (the "Act"), a package of health insurance reforms which include a variety of provisions important to health care providers, such as a provision establishing portability of health insurance and medical savings accounts and significant changes to the Medicare and Medicaid fraud and abuse laws. The fraud and abuse provisions will be effective January 1, 1997. While many of the provisions are self-implementing, some require further rulemaking by HHS. The Act established two programs that will coordinate federal, state and local health care fraud and abuse activities, to be known as the Fraud and Abuse Control Program and the Medicare Integrity Program. Under these programs, governmental and, in some cases, private entities may undertake a variety of activities (including medical, utilization and fraud review, cost report audits, secondary payor determinations and education of providers and beneficiaries with respect to program integrity and benefit quality assurance issues), new safe harbors may be created or edited and reports of fraud and abuse actions against providers will be shared. The Act further seeks to encourage whistleblower reports by individuals, such as beneficiaries, by providing for incentive payments for information that leads to recoveries or criminal or civil sanctions under the Medicare program. The Act further extends coverage of the fraud and abuse laws not only to all federally funded health care programs, e.g., CHAMPUS, except the federal employee health benefits program, but also to private health plans as well; however, the anti-kickback statute does not apply to private health plans. By virtue of these provisions, it may be that an individual provider has a greater risk of being subject to the federal fraud and abuse laws than prior to such changes.
The Act also adds an additional exception to the anti-kickback statute for entities that have "risk sharing" arrangements that place the other party "at substantial financial risk for the cost or utilization" of items or services. The specifics of this exception are to be created by "negotiated rulemaking."
The Act also sets forth a program intended to assist providers in understanding the requirements of the fraud and abuse laws. The Act first permits individuals to petition the Department for written advisory opinions regarding whether an arrangement constitutes prohibited remuneration under the federal anti-fraud and abuse laws, satisfies the requirement of an existing safe harbor and/or constitutes grounds for imposition of civil and criminal sanctions under the federal anti-fraud and abuse laws. Such opinions will be binding on HHS and the party receiving the opinions. HHS is required to publish regulations specifying the procedures governing the application and response processes respecting these advisory opinions. The Act further requires HHS to publish annual notices in the Federal Register soliciting proposals for modification to existing safe harbors and new safe harbors and to issue final rules implementing such changes or additions as the Secretary of the Department deems appropriate. Finally, any person may request that the Inspector General issue a special fraud alert informing the public of practices the Inspector General considers to be suspect or of a particular concern under Medicare or Medicaid.
Under this Act, HHS must exclude individuals convicted of felony offenses related to health care fraud or controlled substances from Medicare and Medicaid for a minimum of five years. However, HHS retains its discretionary authority to determine whether to exclude individuals convicted of misdemeanor offenses related to health care fraud or controlled substances. The Act also increases significantly the amount of civil monetary penalties for offenses related to health care fraud and abuse, increasing civil monetary penalties from $2,000 plus twice the amount of each false claim to $10,000 plus three times the amount of each false claim. The Act newly and expressly prohibits four practices, namely (1) submitting a claim that the person knows or has reason to know is for medical items or services that are not medically necessary, (2) transferring remuneration to Medicare and Medicaid beneficiaries that is likely to influence such beneficiary to order or receive items or services (where "remuneration" includes waiver of all or part of the coinsurance and deductible amounts, unless not routine or based on the beneficiary's indigency, and transfers of items and services for free or for other than fair market value), (3) certifying the need for home health services knowing that all of the coverage requirements have not been met, and (4) engaging in a pattern or practice of upcoding claims in order to obtain greater reimbursement. However, the Act creates a tougher burden of proof for the government by requiring that the government establish that the person "knowingly presented" a false or fraudulent claim, where "knowingly presented" is defined to require "deliberate ignorance" or "reckless disregard" of the law. Merely negligent conduct should not violate the Civil False Claims Act. The Act further adds health care fraud, theft, embezzlement, obstruction of investigations and false statements to the general federal criminal code with respect to federally funded health care programs, thus subjecting such acts to criminal penalties. Moreover, a court imposing a sentence on a person convicted of a federal health care offense may order the person to forfeit all real or personal property that is derived from the criminal offense. The Act did not clarify, modify or eliminate provisions of the Stark law.
President Clinton has said that he would press for repeal of three provisions of the fraud package, namely those dealing with mandatory advisory opinions, the standard of intent in cases involving civil monetary penalties and an exception to the Medicare and Medicaid anti-kickback statute for managed care plans.
Included in OBRA 1993 were provisions that significantly expanded the scope of the Ethics and Patient Referral Act, also known as the "Stark Law," beginning January 1, 1995. The Stark Law originally prohibited a physician from referring a Medicare patient to any entity for the provision of laboratory services if the physician or family member of the physician had an ownership or investment interest or compensation relationship with the entity and provided that the entity could not bill for services provided pursuant to a prohibited referral. The OBRA 1993 revisions expand the scope of the Stark Law by prohibiting the referral of a Medicare or Medicaid patient (and billing for such services) to an entity in which the physician or family member has an ownership or investment interest or compensation relationship if the referral is for any of a list of "Designated Health Services". Violations of the Stark Law are punishable by civil penalties which may include exclusion or suspension of a provider from future participation in the Medicare and Medicaid programs and substantial fines, such as civil monetary penalties of up to $15,000 per claim against any person who presents or causes to be presented a claim for services that the person knows or should have known were furnished pursuant to a prohibited referral. In addition, civil monetary penalties of up to $100,000 can be imposed on any physician or entity who enters into a circumvention scheme to avoid the statutory prohibitions. The expanded Stark Law prohibits self referrals for eleven categories of items and services, including not only clinical laboratory services, but also inpatient and outpatient hospital services, physical therapy, occupational therapy, radiation therapy, radiology services, including magnetic resonance imaging, computerized axial tomography scans and ultrasound services, durable medical equipment, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services, and outpatient prescription drugs. Because all of the Cancer Centers operate under the license of the hospital to which they are attached, the Company's services (including the services of its Cancer Centers, clinical laboratory and INFUSX) appear to be included in the list of Designated Health Services. Although the list of Designated Health Services also includes radiology services and radiation therapy, the legislation specifically provides that a request by a radiologist or radiation oncologist for radiology services or radiation therapy, respectively, does not constitute a referral if such services are furnished by or under the supervision of the radiologist or radiation oncologist pursuant to a consultation requested by another physician. The self-referral statute also includes a variety of other exceptions from the prohibitions, including exceptions involving rental of office space, bona fide employment relationships and personal service arrangements. Final regulations relating to clinical laboratory services only ("Stark I Final Regulations") were issued on August 14, 1995 and were effective September 13, 1995. The Stark I Final Regulations reflect substantial changes from the proposed rules published on March 11, 1992. The changes are due, in part, to the comments received and in part to retroactive statutory changes effected by the Omnibus Budget Reconciliation Act of 1993 and the Social Security Amendments of 1994. The Stark I Final Regulations address only referrals for clinical laboratory services. The Secretary has stated she intends to cover the other Designated Health Services under a separate rulemaking. However, she further took the position in the Stark I Final Regulations that the Stark I Final Regulations will affect how HCFA views referrals involving the Designated Health Services other than clinical laboratory services where the statutory language appears to apply equally to situations involving referrals for any of the Designated Health Services, including clinical laboratory services.
HCFA has added a new exception to the Stark Law for services furnished in an ambulatory surgery center ("ASC") or an end stage renal dialysis facility or by a hospice, provided that such services are reimbursed by Medicare through the ASC rate, the ESRD composite rate, or as part of the per diem hospice rate, respectively. The Company believes that the language and legislative history
of Stark I indicates that Congress did not intend to include laboratory services provided incidentally to dialysis services within the Stark I prohibition. However, laboratory services not included in the Medicare composite rate could be included within the coverage of Stark I.
Due to the breadth of the statutory provisions in the absence of regulations or court decisions addressing the specific arrangements by which the Company conducts its business, it is possible that the Company's practices might be challenged under these laws. The existing Stark Law and regulations have the effect of restricting the ability of a company to enter into financial relationships with certain physicians and physician organizations. While the Company does not believe it to be so, to the extent, if any, that it may be determined, or the Company may come to believe that, any of its financial relationships with physicians may not technically comply with the Stark Law, the Company intends to modify or eliminate those relationships so that they will either comply or qualify for one of the Stark Law's exemptions. For this reason, among others, the Company does not believe that the Stark Law will materially adversely affect the operations of the Company.
Recent Congressional activity indicates that both Democrats and Republicans are interested in making substantial revisions to the Stark Law. For example, the 1994 budget reconciliation bill, which was vetoed by President Clinton, among other things, would have: (1) eliminated the application of the Stark Law to compensation relationships between physicians and the entities to which they make referrals; (2) limited the list of Designated Health Services to clinical laboratory services, items and services furnished by community pharmacies, magnetic resonance imaging and computerized tomography services, and outpatient physical therapy services; (3) delayed the implementation of the Stark I regulations until the promulgation of the Stark II regulations; (4) created a new exception for certain services provided in a "shared facility;" (5) and revised certain current Stark Law exceptions and definitional language. It is not possible to anticipate whether Congress will consider similar legislation in the future, and no assurance can be given that the Company's activities will not be limited by future amendments to the Stark law.
California has also passed a physician self-referral statute, commonly known as the "Speier Bill" or "PORA," which became effective January 1, 1995. Under this statute, referrals of patients for certain designated services by physicians if physicians or their immediate family members have direct or indirect ownership interests in, or direct or indirect compensation relationships with, the entity furnishing the services are prohibited unless the ownership interests or compensation relationships fall within certain narrow exceptions. The designated services subject to this prohibition include, but are not limited to, radiation oncology, laboratory, diagnostic imaging, physical therapy, physical rehabilitation, psychometric testing, home infusion therapy and diagnostic nuclear medicine. New York has enacted a similar self referral statute that prohibits physicians from referring patients for clinical laboratory, X-ray or imaging or pharmacy services to a provider with which the physician or his immediate family have any form of financial relationship, including an ownership or investment interest or compensation arrangement unless the financial interest falls within certain narrow exceptions. Violations of the California statute may result in criminal penalties, civil monetary penalties of up to $15,000 for each offense, and professional disciplinary action against the physician, including revocation of licensure. In addition, under both the California and New York statutes no payment may be made by any payor for services furnished pursuant to a prohibited referral. During the 1996 session of the California legislature, the Speier Bill was amended to provide that a financial interest would not include the receipt of capitation payments or other fixed prepayment amounts in exchange for a promise of the licensee to provide specified health care
services to beneficiaries, or the receipt of remuneration by a medical director of a hospice, if the arrangement meets certain criteria. Moreover, the Speier Bill was further amended to exempt from the prohibition a referral by a licensee to an organization that owns or leases the general acute care, acute psychiatric or special hospital if the licensee is not compensated for the patient referral, the licensee does not receive any payment from the recipient of the referral that is based or determined on the number or value of any patient referrals and any equipment lease arrangement between the licensee and the referral recipient complies with other requirements of the Speier Bill. Due to the breadth of the statutory provisions in the absence of regulations or court decisions addressing the specific arrangements by which the Company conducts its business, it is possible that the Company's practices might be challenged under these laws. These existing laws have the effect of restricting the ability of a company to enter into financial relationships with certain physicians and physician organizations. While the Company does not believe it to be so, to the extent, if any, that it may be determined that any of the Company's financial relationships with physicians may not comply with the Speier Bill or the New York Self Referral law, the Company intends to modify or eliminate those relationships so that they either comply or qualify for one of the exemptions under these statutes. For this reason, among others, the Company does not believe that these state self referral statutes will materially adversely affect the operations of the Company.
Florida has been one of the leaders in enacting legislation to preclude or limit referrals by physicians to facilities in which they have an ownership, control or investment relationship. The Florida Patient Self-Referral Act precludes or limits referrals by physicians to facilities in which they have an ownership, control or investment relationship. The Company believes it is in compliance with the law.
The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) amended the Social Security Act to require that if a physician incentive plan of a prepaid health plan places a physician at substantial financial risk for services not provided directly, the prepaid plan must provide the physician with adequate and appropriate stop-loss protections, as specified by the Secretary of HHS, and conduct surveys of currently and previously enrolled members to assess access to services and satisfaction with the quality of such services. These requirements have been included in a new Medicare regulation, along with additional requirements limiting physician incentive arrangements, effective April 26, 1996. The new regulation is intended to curb the use of financial incentives by managed care organizations to reduce or limit medically necessary services to Medicare or Medicaid patients. The regulation applies to physicians furnishing care through health maintenance organizations, competitive medical plans and health insuring organizations. The incentive plans must also be disclosed to HCFA or the applicable state Medicaid agency, and, if requested, in more summary form to enrollees. HCFA may impose intermediate sanctions and authorize the Office of the Inspector General to impose civil monetary penalties for failure to comply with the regulation.
Although the Company believes it complies in all material respects with currently applicable laws and regulations in the fraud and abuse area, the health care services industry will continue to be subject to substantial regulation in this area at the federal and state levels, the scope and effect of which cannot be predicted.
A number of proposals for health care reform have been made in recent years, at both the federal and state level, some of which have included radical changes in the health care system. Health care reform could result in material changes in the financing and regulation of the health care business and the Company is unable to predict the effect of such changes on the Company. It is
uncertain what, if any, legislation will ultimately be implemented or whether any changes in the administration or interpretation of governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material effect on the results of the Company's operations.
There is still a relative scarcity of both case law and binding administrative interpretations of the statutes and regulations in the area of fraud and abuse. As the law develops in this area and particularly now that the Congress has provided for issuance of advisory opinions in response to specific requests, more guidance may be available regarding the appropriateness of certain types of relationships involving physicians and the health care services industry generally. While the Company does not believe that any of its arrangements are inappropriate, in the event any are so determined, the Company will take appropriate action as may be necessary in order to be in compliance. However, no assurance can be given that the Company's activities will not be reviewed or challenged by regulatory authorities or prosecutors, will not be limited by future legislation, or if such events occur, that the Company would not be subject to significant penalties, including fines and exclusion from Medicare, or that the Company's operations would not otherwise be adversely affected.
EMPLOYEES
At November 1, 1996, the Company had approximately 1,600 employees. Less than twenty employees (primarily clerical workers) are subject to collective bargaining agreements and all of such employees are employed at two locations. The Company considers its relations with its employees to be good.
INSURANCE
The Company maintains property, casualty, malpractice and various types of liability insurance policies in significant amounts and, in addition, requires each physician treating patients at its facilities to provide proof of independent insurance coverage.
ITEM 2.
ITEM 2. PROPERTIES
The following table indicates the location, approximate size, date of commencement of operations and term of agreement for each of the Cancer Centers:
In addition, the Company provides its services at a number of satellite and alternate site facilities primarily in Florida and California generally located in medical office services developments.
DIALYSIS CENTERS
The Company operates the following ten facilities which provide chronic dialysis service on an outpatient basis. The following table indicates the location of the facility, number of stations approved for licensure, the year the facility was opened or acquired and the year in which the existing lease terminates:
(1) In January 1997, the Desert Dialysis facility will be relocated to 1061 Indian Canyon Drive North, Palm Springs, CA 92263. This facility will have 22 licensed stations, and a lease term expiring September 2001, with three additional five-year renewal options.
In addition to the Cancer Centers and dialysis facilities described above, the Company presently leases its corporate and subsidiary headquarters and offices in Los Angeles, California. These headquarter premises are leased from Dr. and Mrs. Bernard Salick (the "Lessors"). The offices have approximately 35,000 square feet of space. The lease took effect in July 1991, and, at the time of occupying such premises, the Company vacated its prior premises which it had leased under leases from the Lessors and an unrelated third party. The lease contains a provision which, in the event of certain changes of control of the Company and the termination or significant changes in the terms or authority of Dr. Salick's employment with the Company thereafter and prior to the last two years of the term of the lease, permits the Lessors, if then the lessors of the building and at their option, to require the lessee of the building to (a) purchase the building at a formula purchase price, or (b) pay an assumption fee of $250,000. In light of these provisions, in connection with the April 1995 merger with Zeneca Limited, an agreement was entered into pursuant to which the Company will purchase this real property from the Lessors for $14,650,000 which purchase price is approximately $1,160,000 less than the formula purchase price in the lease.
In October 1993, the Company purchased a 20,000 square foot building adjacent to its current corporate headquarters in Los Angeles for expansion of its Corporate and facility activities. The purchase price was $1,200,000 and the Company renovated and occupied the building in September 1995.
In March 1995 the Company acquired at a cost of $4.675 million a 38,000 square foot building with adjacent land of some 15,000 square feet presently used for parking available for additional construction located across from the Cedars-Sinai Comprehensive Cancer Center in Los Angeles, California. The Company is developing the property to use for expansion of its existing programs including new and additional ambulatory and other outpatient services, principally surgery. If the additional land is built upon it will be used for similar purposes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On July 3, 1996, Comprehensive Cancer Centers-West Valley, Inc. ("CCC"), a subsidiary of the Company, filed an action against C/HCA Development, Inc. ("CDI"), seeking specific performance of CDI's obligation to convey to CCC the former Westlake Medical Center and related assets ("the Hospital") pursuant to an Agreement for Services between CCC and CDI, dated March 16, 1995 (the "Agreement"). Pursuant to the Agreement, CCC was then operating the Westlake Comprehensive Cancer Center and nearby Westlake Comprehensive Breast Center (collectively, the "Center"), under the Hospital's license. CCC was compelled to file this action because CDI would not close the transaction, and threatened to shut down the Hospital and, therefore, the Center, on July 5, 1996, unless CCC agreed to accept a conveyance of the Hospital by a grant deed which provided that certain restrictions on the medical services CCC could offer following the sale, as described in the Agreement imposed upon the Company, would run with the land and bind all future purchasers of the Hospital. In 1995, CCC had rejected CDI's proposal that such a provision be included in the Agreement.
On July 3, 1996, the Los Angeles Superior Court issued a temporary restraining order prohibiting CDI from closing the Hospital. CDI still refused to convey the Hospital without the condition that the use restrictions be binding on future purchasers so, on July 23, 1996, the Los Angeles Superior Court issued a preliminary injunction (the "Injunction") ordering CDI to convey the Hospital and related assets to CCC pursuant to the terms of the Agreement. On July 25, 1996, CDI conveyed the Hospital and related assets to CCC pursuant to the Injunction. On August 7, 1996, CCC and its indirect parent corporation Salick Health Care, Inc., filed a First Amended Complaint, alleging contract, tort and statutory causes of action against CDI and its indirect parent corporation, Columbia/HCA Healthcare Corporation ("Columbia/HCA"), including claims that the use restrictions in the Agreement are illegal and unenforceable restraints on trade under California's antitrust laws. The case remains at the pleading stage and neither CDI nor Columbia/HCA has yet filed an Answer to the First Amended Complaint.
In the course of its business, the Company and certain officers and subsidiaries have been named as defendants in lawsuits alleging some form of liability. The Company is insured for these matters in some instances or has indemnified such officers. The Company has defenses to these actions which it intends to vigorously pursue and is unaware of any such pending litigation which is likely to have a materially adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year ended August 31, 1996 to a vote of security holders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Dr. Salick, founder of the Company, has been Chairman of the Board of Directors and Chief Executive Officer of the Company since its organization. He also served as President and Chief Operating Officer until May 1, 1985 and reassumed those positions on October 2, 1988. Dr. Salick relinquished the position of Chief Operating Officer in 1993. Dr. Salick was the Medical Director of USHAWL and Century through 1991. Dr. Salick is an Assistant Clinical Professor of Medicine at UCLA and on the medical staff of Cedars-Sinai Medical Center and other hospitals. He is also on the Board of Queens College (NY), and is a member of the National Advisory Council of the National Kidney Foundation, the American Society of Nephrology and the American Society of Clinical Oncology.
Mr. Bell has served as Senior Vice President, Secretary and a Director of the Company since its organization in 1983. He became Chief Financial Officer in January 1985. From 1976 through May 1983, Mr. Bell was managing partner in the law firm of Katz, Hoyt, Bell & Siegel and its predecessor firms and served as general counsel to the Company. Mr. Bell became Executive Vice President of the Company in 1990 and is chairman of NATSA, a not-for-profit entity.
Mr. Fiore joined the Company in May 1986 as Vice President and Director of Operations. Prior to joining the Company, he was employed in various capacities by American Medical International, Inc. for more than six years, where he was a Corporate Vice President. Mr. Fiore, a CPA, was employed by Peat, Marwick, Mitchell & Co. from 1976 to 1978. He received his MBA from the Harvard Business School in 1980. Mr. Fiore became a Senior Vice
President of the Company in 1990 and assumed the position of Chief Operating Officer in 1993. In 1994 Mr. Fiore became Executive Vice President and a Director of the Company.
Mr. King joined the Company in February 1994 as Executive Vice President. He was President of Cedars-Sinai Medical Center in Los Angeles from May 1989 to February 1994. Prior to that, he had been at Stanford University Medical Center since 1981, and its President since 1986. Mr. King has also served as Director of the University of California Medical Center, San Diego, and Executive Director of the Bronx Municipal Hospital Center in New York.
Mr. Jeffries joined the Company in December 1995 as Executive Vice President, Chief Development Officer and was elected a Director of the Company in January 1996. From 1985 to 1995, he was at McKinsey & Company, Inc., management consultants, serving clients in several industries including health care, aerospace electronics and information technology and became a partner in 1991. Prior to joining McKinsey & Company, Mr. Jeffries was a consultant with Deloitte-Touche and received his MBA from Cornell University.
Ms. Bromley-Williams has served as Vice President-Professional Services and a Director of the Company since its organization. She has been employed as Head Nurse and Director of Professional Services of USHAWL since 1972 and Century and its predecessor since 1977. Ms. Bromley-Williams became a Senior Vice President of the Company in 1990.
Mr. LaMacchia, a Certified Public Accountant, joined the Company in 1984 as its Director of Strategic Planning and Reimbursement and became a Vice President in 1987. In 1995 Mr. LaMacchia was promoted to Senior Vice President. From 1981 to 1984, he was employed by Cedars-Sinai Medical Center as Assistant Director of Finance specializing in financial feasibility and reimbursement. From 1979 to 1981, Mr. LaMacchia was employed as an auditor by Ernst & Whinney. From 1976 to 1979, he was a field auditor for Blue Cross of Southern California specializing in health care audits.
Ms. Hundahl, a Certified Public Accountant, has been employed by the Company since 1982 as Corporate Controller except for seven months in 1984 when she was employed by Centurion Savings as Vice President-Finance and Treasurer. Ms. Hundahl became a Vice President in 1987 and a Senior Vice President in 1995. For six years prior to joining the Company, Ms. Hundahl was employed by Arthur Young & Co. and at the time she joined the Company she was an audit manager.
Mrs. Wilkinson joined the Company and became a Vice President in September 1987, upon the completion of the Company's acquisition of Orange County Dialysis. She currently serves in that capacity managing the Company's five Orange County dialysis centers, and Desert and Hi-Desert Dialysis (Palm Springs). Prior to the acquisition, Mrs. Wilkinson was employed by Orange County Dialysis, Inc. and, since its inception in 1972, served as its Chief Executive Officer.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock was traded in the NASDAQ National Market System under the symbol SHCI until the recapitalization resulting from the merger of the Company with an indirect wholly owned subsidiary of Zeneca Limited on April 13, 1995 as described in Note 7 to the Company's consolidated financial statements. Since that date all of the issued and outstanding common stock of the Company has been owned by a wholly owned subsidiary of Zeneca Limited. The high and low closing prices of the Common Stock during the 1995 fiscal year through April 13, 1995 by fiscal quarter are set forth on the following table:
The Company's Callable Puttable Common Stock issued in the recapitalization has traded in the NASDAQ National Market System since April 13, 1995 under the symbol SHCID. The high and low closing prices during the fiscal quarters since April 13, 1995 are set forth below:
Based upon security position listings and the Company's belief, it is estimated there were more than 1,100 holders of its Callable Puttable Common Stock as of November 15, 1996.
The Company has not declared any cash dividends on its common equity in the past two years and has no present intention to pay cash dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial information regarding the Company's operating results and financial position. This information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere herein.
Note A: Pre-operating costs of $2,224,000 were expensed in 1995. In addition, net income was reduced by $3,588,000 due to the cumulative effect on prior years of the change in accounting principle to expensing pre-operating costs as incurred. In prior years, pre-operating costs were deferred and amortized over a three year period upon commencement of facility operations. 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 accounting principles used by Zeneca Group, PLC, the beneficial owner of more than 50% of the Company's common equity. The pro forma amounts shown in the five year comparative income statement, for the years prior to 1995, have been adjusted for the effect of retroactive application of the change.
In addition, net income in 1995 was adversely affected due to non-recurring merger transaction expenses of $7,685,000 recorded in connection with the Company's Agreement and Plan of Merger with Zeneca.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO 1995
Operating revenues increased for fiscal 1996 by 8% to $163,439,000 from $151,308,000 for fiscal 1995. Operating income decreased to $11,520,000 versus $17,442,000 for the previous year. In the 1996 fiscal year's fourth quarter, operating income decreased to $734,000 from $3,662,000 in the prior year's fourth quarter. For the fiscal year, income before income taxes and the cumulative effect of the change in accounting principle (described in Note 1 to the Company's consolidated financial statements), increased 10% to $12,572,000 in fiscal 1996 from $11,451,000 in fiscal 1995. Net income increased to $7,606,000 from $923,000 for the prior fiscal year and was 4.7% as a percentage of net revenues compared to 0.6% in the prior year. Primary and fully diluted earnings per share were $0.67 in the current fiscal year compared to $0.09 and $0.12, respectively, in the prior period. Fourth quarter primary and fully diluted earnings per share were $0.01, down from $0.25 in the prior year quarter.
Net income and earnings per share were adversely affected in fiscal 1995 year due to non-recurring merger transaction expenses of $7,685,000 ($252,000 of which were recorded in the fourth quarter) in connection with the Company's Agreement and Plan of Merger with Zeneca Limited. The merger transaction expenses primarily included legal and accounting fees, travel and other expenses and investment banking fees,a portion of which the Company believes is not payable until the acquisition of the remainder of the Company's callable puttable common stock.
Net income and earnings per share were adversely affected in fiscal years 1996 and 1995 by the Company's change in accounting principle in fiscal 1995 from deferral of pre-operating costs to expensing such costs when incurred, as described in Note 1 to the consolidated financial statements. The Company adopted this new method of accounting for pre-operating costs as management believes this method of accounting better reflects the Company's current methods of operations and it conforms to the accounting principles used by Zeneca Group, PLC, the beneficial owner of more than 50% of the Company's common equity.
Fiscal year 1996 and fourth quarter 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, operations of the Company's recently acquired Walnut Creek, California facility which is affiliated with Alta Bates Comprehensive Cancer Center, start up costs for the Comprehensive Cancer Center at Saint Vincents Medical Center in New York, costs associated with the purchase and startup of SHC Specialty Hospital, including litigation to protect the Company's right to purchase the former Westlake Medical Center, and 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. The Company expects increased expenses relating to the startup of SHC Specialty Hospital as well as expenses relating to general business expansion to continue into fiscal 1997.
Net interest income decreased to $638,000 in the current fiscal year as compared to $1,223,000 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 gains of $451,000 in the current fiscal year versus net investment losses of $104,000 in the prior period resulted from having realized capital gains in liquidating a portion of the investment portfolio under improved market conditions. The Company does not expect this trend to continue 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.
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 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 the implementation of cost control programs, that have mitigated the effect of these changes. See "Impact of Inflation and Changing Regulation" and Item 1. BUSINESS - "Governmental Regulations."
Total operating expenses relative to operating revenues for fiscal 1996 increased 4.5% before interest income and investment expense, as compared to the prior year. Medical supplies and services expense increased by $6,440,000 during the period, a 2.6% increase as a percentage of revenues, reflecting 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 $5,483,000 in the period, and increased 0.3% as a percentage of operating revenues. As compared to the prior year, other administrative expenses for fiscal 1996 increased 0.9% relative to operating revenues, primarily due to the incremental effect of increased operations. Contract and occupancy costs increased 0.1% during the period, as a percentage of net operating revenues, principally resulting from expansion of operations and escalation provisions of facilities' rents and contractual obligations. Depreciation and amortization increased by $1,529,000 during fiscal 1996 primarily because of completion of the permanent centers and equipment placed in service at the Alta Bates and Mt.Sinai permanent Cancer Centers in fiscal 1996.
Income taxes were calculated at a 39.5% effective rate in fiscal 1996 versus 60.6% in fiscal 1995 because merger transaction expenses incurred in fiscal 1995 are substantially non-tax deductible.
FISCAL YEAR 1995 COMPARED TO 1994
Operating revenues increased for fiscal 1995 by 15% to $151,308,000 from $131,529,000 for fiscal 1994. Operating income increased by 4.6% to $17,442,000 versus $16,679,000 for the previous year. In the 1995 fiscal year's fourth quarter, operating income decreased 19% over the prior year's fourth quarter, resulting from a charge to operating revenues of $1,500,000,
reflecting a change in estimation of the collectibility of certain accounts receivable. Income before income taxes and the cumulative effect of the change in accounting principle (described in Note 1 to the Company's consolidated financial statements), decreased 32.2% to $11,451,000 from $16,882,000 in fiscal 1994 due to merger transaction expenses and costs expensed in the current year which were deferred as pre-operating costs in prior years, as discussed below. Net income decreased 91% to $923,000 from $10,380,000 for the prior fiscal year and was 0.6% as a percentage of net revenues compared to 7.9% in the prior year. Primary and fully diluted earnings per share were $0.09 and $0.12, respectively, in the current fiscal year, down from $1.19 and $1.10, respectively, in the prior period. Fourth quarter primary and fully diluted earnings per share were $0.25, down from $0.32 and $0.30, respectively, in the prior year quarter. Increases in revenues and operating income resulted from growth in patient volumes and services at the Company's existing facilities, as well as the Company's recently introduced disease state managed care program, SalickNet, the results of which were included for the first time in the first quarter of 1995.
Net income and earnings per share were adversely affected in both the current fiscal year and fourth quarter due to non-recurring merger transaction expenses of $7,685,000 recorded in fiscal 1995 ($252,000 of which were recorded in the fourth quarter) in connection with the Company's Agreement and Plan of Merger with Zeneca Limited. The merger transaction expenses primarily include legal and accounting fees, travel and other expenses and investment banking fees, a portion of which the Company believes is not payable until the acquisition of the remainder of the Company's callable puttable common stock. Additionally, in the current fiscal year the Company incurred $580,000 in legal, accounting and other fees associated with the proxy and registration statement which were charged directly to paid in capital.
Net income and earnings per share were also adversely affected by the Company's change in accounting principle from deferral of pre-operating costs to expensing such costs when incurred, as described in Note 1 to the consolidated financial statements. The Company adopted this new method of accounting for pre-operating costs as management believes this method of accounting better reflects the Company's current methods of operations and it conforms to 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, $3,588,000 net of income taxes of $2,393,000, as of the beginning of the fiscal year is reported in the income statement. Additionally, pre-operating costs of $2,224,000 before income taxes, which would have been deferred under the previous accounting method, have been expensed in fiscal 1995.
Without giving effect to the above mentioned additional items in the 1995 fiscal year, operating income, income before income taxes and net income would have been $20,666,000, $22,360,000 and $13,898,000, respectively. Excluding also the effect of 430,000 additional shares issued to Zeneca Limited as a result of the Company's merger, primary and fully diluted earnings per share would have been $1.37 and $1.33, respectively. Without giving effect to the above mentioned items, primary and fully diluted earnings per share would have been $0.36 in the current year fourth quarter.
The Company had net interest income of $1,223,000 in the current fiscal year as compared to net interest expense of $663,000 in the prior year which is due to conversion of the Company's 7 1/4% debentures in December 1994, capitalization of interest on borrowings for construction projects, and higher interest yields on funds invested in marketable securities. Net investment losses of $104,000 in the current fiscal year versus net investment gains of $219,000 in the prior period result from having realized substantially all
portfolio capital gains. The Company expects this trend to continue. While not affecting operating income, this may reduce pre-tax and net income.
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 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 the implementation of 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 fiscal 1995 increased 1.2% before interest income and investment expense, as compared to the prior year. Medical supplies and services expense increased by $6,477,000 during the period, a 2.3% increase as a percentage of revenues, reflecting 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, payments under the Management Incentive Compensation Plan approved by the stockholders in August 1991, and increases in compensation and payroll taxes, increased $7,075,000 in the period, and decreased 0.7% as a percentage of operating revenues. As compared to the prior year, other administrative expenses for fiscal 1995 increased 0.8% relative to operating revenues, primarily due to the incremental effect of increased operations. Contract and occupancy costs decreased 0.1% during the period, as a percentage of net operating revenues, principally resulting from expansion of operations into managed care. Depreciation and amortization decreased by $303,000 during fiscal 1995 because amortization expense decreased as a result of the Company's change in accounting principle for pre-operating costs discussed above.
Income taxes were calculated at a 60.6% effective rate in fiscal 1995 versus 38.5% in fiscal 1994 because merger transaction expenses are substantially non-tax deductible. In fiscal 1994, the Company utilized available federal capital loss carrryforwards, lowering the Company's tax rates and increasing cash flow. During fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which did not have a material effect on the Company's financial statements.
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 August 31, 1996 was $12,836,000. The decrease in working capital during the current fiscal year as compared to fiscal 1995 is principally the result of completion of the Alta Bates and Mount Sinai permanent cancer centers, as well as the acquisition of the SHC Specialty
Hospital, formerly Westlake Medical Center. The increase in accounts receivable at August 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 existing and newly established cancer centers and dialysis facilities.
The Company's principal sources of liquidity consist of cash on hand, marketable securities, interest-bearing investments, internal cash flow and bank lines of credit of $80,000,000. At August 31, 1996, $44,598,000 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 August 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 $39,070,000 from cost of $39,629,000. As of August 31, 1996, the Company's five largest investments in municipal and corporate debt securities, all of which were investment grade aggregated $5,153,000 at fair value, with cost of $5,257,000. The single largest investment in one company's securities approximated $1,095,000 in cost with fair value of $1,057,000.
Capital expenditures for fiscal year 1997 are presently estimated to be approximately $98,500,000. As to 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 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, although there is not assurance that it will be able to do so in the future, 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 not 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 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 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 early as late 1996. 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 memorandum has not yet been revised to reflect this position. The eight tests include requirements for: common accreditation, licensure and governance; 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 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.
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 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.
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 described in "Impact of Inflation and Changing Regulation" and Item 1. BUSINESS -- "Governmental 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 and, obtain any required certificate of need or meet licensing standards or requirements, increase market share, increase efficiencies and patient volumes, operations and successfully continue implementation of cost controls.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Data
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Salick Health Care, Inc.
In our opinion, the consolidated financial statements listed in the index appearing on page 50 present fairly, in all material respects, the financial position of Salick Health Care, Inc. and its subsidiaries at August 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for pre-operating costs in fiscal 1995.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Los Angeles, California November 6, 1996
SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF INCOME
SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
See accompanying notes to consolidated financial statements.
SALICK HEALTH CARE, INC. CONSOLIDATED BALANCE SHEETS
SALICK HEALTH CARE, INC. CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Salick Health Care, Inc. and its subsidiaries (the "Company") provides disease-specific health care services and risk-based and other products and programs to providers, health care payors, principally in the areas of the diagnosis and treatment of cancer and the treatment of kidney failure. The Company provides its services in selected geographical areas across the United States in both inpatient and outpatient settings. At August 31, 1996, the Company's ten Cancer Centers typically bill their charges to the hospitals with which each is affiliated. Each Cancer Center is paid by the hospital after the payment is received by the hospital. Contractual arrangements with the affiliated hospitals generally provide incentive participation in the Company's operating results.
The Company's ten outpatient artificial kidney treatment facilities are located in Southern California. Charges are billed directly to the patient or the patients' payors, e.g., Medicare, commercial insurance, etc. The Company extends its treatment of cancer and dialysis patients by providing Alternate Site and Home Infusion Services in areas where the Company has outpatient facilities. Charges are billed directly to the patient or his payor.
Additionally, the Company provides a range of cancer and treatment programs to providers, managed care entities including Health Maintenance Organizations, Preferred Provider Organizations, Independent Practice Associations, self insured and other payors of health care services. These programs include capitated contracts, discounted fee for services, case rate and visit group methodologies.
The Company acquired in 1996, its first acute care hospital in Southern California. This hospital will expand the Company's capabilities to provide specialized treatment modalities for cancer, dialysis, organ transplant and immuno-deficient patients.
The Company was incorporated in Delaware in 1991 for the purpose of changing the state of incorporation of Salick Health Care, Inc., a California corporation incorporated in 1983, from California to Delaware by way of merger of the California corporation into the Company. In 1995, an indirect wholly owned subsidiary of Zeneca Limited, an English company, was merged into the Company. As a result, Zeneca Limited beneficially owns more than 50% of the common equity of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany items have been eliminated.
OPERATING REVENUES
Operating revenues are recorded, net of contractual allowances and allowances for doubtful accounts from standard treatment rates, when treatments are rendered to patients. These allowances were $124,094,000, $102,439,000 and $87,029,000 for the years ended August 31, 1996, 1995, and 1994, respectively. A substantial portion of the Company's revenues is dependent on reimbursement programs administered by Medicare and other governmental agencies.
PREPAID HEALTH CARE SERVICES
The Company receives premiums as compensation for providing defined health care services. The Company either provides cancer treatment services at its own facilities, or pays other providers for cancer treatment services as those services are performed. Premiums collected for health care services are recognized as operating revenues in the period for which the member is entitled to service. Cost of health care is accrued in the period it is provided to the members and patients based in part on estimates, including a provision for incurred but not recorded claims. Claims payments are reported as medical supplies and services in the Company's consolidated statements of income.
MARKETABLE SECURITIES
The marketable securities portfolio includes brokerage cash funds, equity securities and corporate and government bonds. Marketable securities are stated at their fair value of $39,070,000 and $44,631,000 as of August 31, 1996 and 1995, respectively. Cost of the marketable securities portfolio was $39,629,000 and $44,587,000 at August 31, 1996 and 1995, respectively. Net realized gains of $383,000, and net realized losses of $177,000 and $386,000 for the years ended August 31, 1996, 1995 and 1994, respectively, are recorded in net investment gains (losses). The costs of marketable securities sold are determined by the specific identification method.
Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, which the Company adopted in the fourth quarter of fiscal 1994, requires that debt and equity securities which are available-for-sale, be recorded at fair value in the financial statements and that unrealized holding gains (losses) be reported as a net amount in a separate component of stockholders' equity until realized. Unrealized holding losses of $559,000 and gains of $44,000 are recorded as separate components of stockholders' equity in the Company's balance sheets as of August 31, 1996 and 1995, respectively. Proceeds from sales of available-for-sale securities were $49,318,000, $58,049,000 and $32,338,000 for the years ended August 31, 1996, 1995 and 1994, respectively. Gross realized gains were $853,000, $281,000 and $606,000, and gross realized losses were $470,000, $458,000 and $992,000 on these sales.
Aggregate cost, market value and unrealized holding (losses) gains for the major components of the Company's portfolio, at August 31, 1996, are as follows:
INVENTORIES
Inventories, which are comprised of medical supplies, are stated at the lower of cost (FIFO) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation. Depreciation is generally provided on the straight-line method over the estimated useful life of the asset. The components of property and equipment and the estimated useful lives by asset category are as follows:
The above summary of property and equipment includes capitalized leases (Note 4).
Interest cost is capitalized for construction in progress during the construction period. Interest capitalized during the years ended August 31, 1996, 1995 and 1994 was $1,340,000, $1,920,000 and $563,000, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred tax liabilities and deferred tax assets are recognized for taxable temporary differences and deductible temporary differences, respectively. A valuation allowance reduces deferred tax assets if it is more likely than not that all, or some portion, will not be realized.
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EARNINGS PER SHARE
Earnings per share, assuming no dilution, is calculated based upon the weighted average number of common and common equivalent shares outstanding during each year. Earnings per share, assuming full dilution, is computed as above and, additionally, assumes conversion of the convertible subordinated debentures into common stock at the beginning of the 1995 and 1994 fiscal periods. The effect in fiscal 1995 was antidilutive (Note 6).
PRE-OPERATING COSTS
Pre-operating costs have been expensed in fiscal 1996. In the fourth quarter of fiscal 1995, giving effect to the first quarter, the Company recorded the cumulative effect of the change from deferral to expensing pre-operating costs as incurred of $3,588,000, net of income taxes of $2,393,000. 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 accounting principles used by Zeneca Group, PLC, the beneficial owner of more than 50% of the Company's common equity. In prior years, pre-operating costs had been deferred and amortized over a three year period upon commencement of facility operations. Amortization of these pre-operating costs was $1,036,000 during the year ended August 31, 1994.
DEBT ISSUE COSTS
Debt issue costs associated with the issuance of the Company's 7.25% Convertible Subordinated Debentures in 1986 (Note 6) were $1,145,000. These costs, recorded as other assets were deferred and amortized over the fifteen year term of the debentures. On December 29, 1994 the Company called for the redemption on January 20, 1995, of all its outstanding debentures at a redemption price, including accrued interest through January 20, 1995 of $1,049.34 per $1,000 of debentures redeemed. The debentures were convertible at any time prior to the close of business on January 12, 1995 into shares of common stock of the Company at the rate of $14.00 per share and all outstanding debentures were converted into common stock. At the time of conversion, remaining debt issue costs were charged to stockholders' equity. Amortization of debt issue costs was $23,000 and $66,000 during the years ended August 31, 1995 and 1994, respectively.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is amortized on a straight line basis over a period of forty years. Amortization of goodwill during the years ended August 31, 1996, 1995 and 1994 was $166,000, $159,000 and $151,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable and short-term debt approximate fair value because of the short maturity of these financial instruments. The fair values of other long-term debt obligations are estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying values of other long-term debt obligations approximate fair values.
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). SFAS 121 established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Adoption of this new standard is required in the first quarter of fiscal 1997. Implementation of this new accounting standard is not expected to have a material impact on the consolidated financial statements of the Company.
NOTE 2-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are comprised of the following:
NOTE 3-RELATED PARTY TRANSACTIONS
The Company and its subsidiaries lease corporate office space from its Chairman and Chief Executive Officer and his spouse (the "Lessors") under an operating lease containing operating cost escalation provisions. The lease has a remaining term of approximately 15 years. Additional office space is leased for the Company's operations from an entity owned by the Lessors and an unrelated third party on a month-to-month basis. Aggregate minimum annual rentals for the years ended August 31, 1996, 1995 and 1994 were approximately $1,094,000, $1,041,000 and $1,008,000, respectively. The Company also leases a dialysis treatment center from the Lessors, as more fully described in Note 4.
The Company and the Lessors are parties to a lease for the Company's corporate headquarters and related offices and the Lessors, the Company and Zeneca executed an agreement, dated December 22, 1994 pursuant to which the Lessors have elected to sell the corporate headquarters to the Company for an aggregate purchase price of $14,650,000 in cash, which purchase price is approximately $1,160,000 less than the formula purchase price in the lease under which the Lessors had the right under certain circumstances to require the Company to purchase the corporate headquarters.
The Company and a subsidiary lease a dialysis treatment center from its Executive Vice President and Chief Financial Officer under an operating lease containing operating cost escalation provisions. The lease has a term of approximately five years with options for renewal for up to 15 years. The
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
aggregate minimum annual rental is $60,000 per year and the amount paid during the year ended August 31, 1996 was $5,000.
NOTE 4-LEASES AND COMMITMENTS
The Company leases from the Lessors (See Note 3) a chronic dialysis treatment center at minimum annual rental of $623,000. The lease has a remaining term of approximately 10 years and is recorded as a capital lease at an imputed interest rate of 13.8%. The Company also leases certain clinic equipment under the terms of capital leases with unrelated third parties.
Annual future minimum lease payments as of August 31, 1996 are as follows:
Interest rates on capital leases vary from 6% to 9% except as described above. The following is an analysis of capitalized lease assets included in property and equipment:
During the years ended August 31, 1996, 1995 and 1994 rent expense under operating leases totalled $2,724,000, $2,427,000 and $2,438,000, respectively.
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the terms of certain agreements that the Company has at various of its Cancer Centers, it has, in total, annual commitments of up to $4,527,000 plus amounts based on center performance. These agreements terminate at various dates through 2027, subject to renewal provisions.
NOTE 5-BANK AGREEMENTS
The Company has a business loan agreement with a bank which is subject to renewal in 1998, for lines of credit of $80,000,000 with interest payable at the bank's prime rate (8.25% at August 31, 1996) unless the Company elects an optional rate of interest. The loan agreement requires a 0.1% fee on the difference between the $80,000,000 loan commitment and the amount the Company actually uses. At August 31, 1996, there was $44,598,000 in outstanding borrowings under the revolving line of credit. During the year ended August 31, 1996 the Company paid $733,000 in interest expense relating to the revolving line of credit. Under the prior agreement, the Company was eligible at its option to convert up to $10,000,000 of the then $35,000,000 available under the business loan agreement to long-term debt payable monthly upon conversion. In August 1993, the Company converted $5,000,000 of short-term revolving borrowings to long-term debt and, in August 1994, converted another $5,000,000 to long-term debt. The principal portion of each conversion is repayable in sixty monthly installments beginning in the month following conversion. Interest accrues and is paid monthly on the unpaid principal balance of the long-term debt portion at 8.62% and 6.85% per annum on the August 1994 and 1993 conversions, respectively.
NOTE 6-LONG-TERM DEBT
Long-term debt consists of the following:
The debt for equipment purchased under agreement with a hospital at which the Company operates a Cancer Center becomes payable in full, upon opening of the permanent Cancer Center, which is presently expected in fiscal 1998. Interest of $5,500 is expensed monthly and is payable until opening of the permanent Cancer Center.
On December 29, 1994 the Company called for redemption on January 20, 1995 of all its outstanding 7 1/4% Convertible Debentures due 2001 at a redemption price, including accrued interest through January 20, 1995, of $1,049.34 per $1,000 of debenture redeemed. The debentures were convertible at any time prior to the close of business on January 12, 1995 into shares of common stock of the Company at the rate of $14.00 per share and all outstanding Debentures were converted into common stock. For the purpose of calculating fully diluted earnings per share for the periods ended August 31, 1995 and 1994, these debentures were assumed to have been converted into common stock as of the beginning of the respective periods presented.
During the years ended August 31, 1996, 1995 and 1994, interest payments made on long-term debt totalled $1,689,000, $1,452,000, and $2,286,000, respectively.
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the years ended August 31, 1996, 1995 and 1994, interest expense on the lines of credit, capital leases and long-term debt, before capitalization of interest to construction-in-progress, totalled $3,300,000, $3,279,000 and $3,605,000, respectively.
Long-term debt maturing during the five years subsequent to August 31, 1996 is as follows:
NOTE 7-STOCKHOLDERS' EQUITY
DESCRIPTION OF CAPITAL STOCK
In August 1991, the state of incorporation of the Company was changed from California to Delaware by virtue of the merger of Salick Health Care, Inc., a California corporation, into the Company. In connection with the merger, the Company's authorized capital increased from 15,000,000 shares of common stock, no par value, and 1,000,000 shares of preferred stock, no par value, to 25,000,000 shares of common stock, $.001 par value, and 5,000,000 shares of preferred stock, $.001 par value, respectively. Other changes concerning the charter and Bylaws of the Company were also affected by the merger.
On April 13, 1995 the Company consummated the Agreement and Plan of Merger with an indirect wholly owned subsidiary of Zeneca Limited ("Zeneca"), pursuant to which a wholly owned subsidiary of Zeneca acquired approximately 50% of the equity of the Company on a fully diluted basis. Under the terms of the Agreement, Company stockholders received in exchange for each share of common stock held: $18.875 in cash from Zeneca; one-half share of a new callable puttable common stock issued by the Company and a payment to holders of record at closing from the Company of $0.625, payable in two equal installments at 180 days and 360 days after closing. The 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, at 2.5 years after closing 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 at market price, subject, for the first 2.6 years, to a floor and ceiling per share price. The floor on the call is $42 per share, discounted by 4% per annum compounded if the call is made before 2.5 years, and the ceiling is $50 per share.
The Merger was accounted for as a recapitalization of the Company. The common stock issued to Zeneca was capitalized in an amount equal to the cash consideration received by existing stockholders of the Company in exchange for their shares. The cash proceeds paid to existing stockholders in exchange for their shares (including the distribution payable by the Company) was charged to stockholders' equity. The callable puttable common stock issued to existing stockholders was capitalized at par value. Cash consideration paid to existing stockholders upon exercise of the Put and/or the Call will be charged against stockholders' equity at the date of exercise. Cash consideration received by the
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company from Zeneca to fund the Put and/or the Call will be credited to stockholders' equity.
MANAGEMENT INCENTIVE COMPENSATION PLAN
The Company's Management Incentive Compensation Plan, adopted in 1991, provided for the award of shares of common stock some of which had conditions or restrictions on the participant's right to transfer or sell such shares. This Incentive Plan covered an aggregate of 200,000 shares of common stock eligible to be granted to certain officers and key employees of the Company. During fiscal year 1993 15,023 shares of common stock were issued under this Incentive Plan, none of which are subject to restrictions as of August 31, 1995.
STOCK OPTIONS
Under its Stock Option Plan, the Company has granted options for shares of common stock, 1,100,000 authorized, at fair market values on the dates of the grants. The exercise prices of these shares ranged from $5.50 to $15.50. Upon consummation of the Company's merger agreement with Zeneca Limited, holders of unexercised options were eligible to convert their options into options for purchase of the new callable puttable common stock. Transactions for fiscal years 1994, 1995 and 1996 are as follows:
The remaining 17,000 options outstanding under the Stock Option Plan at August 31, 1996 were all exercised in September and October 1996.
In 1994 the stockholders approved the Company's Non-Employee Director Stock Option Plan (the "Director Plan"), which provided that each April, commencing April, 1993, each non-employee Director of the Company automatically be granted a non-qualified stock option covering 2,000 shares of the common stock of the Company. The Plan was terminated effective April 13, 1995 in connection with the recapitalization.
The price paid per share upon exercise of an option granted under the Director Plan was the fair market value of the share of common stock on its date of grant. Options for 6,000 shares were granted in fiscal year 1993 to three director participants at an exercise price of $10.13 per share. In fiscal year 1994 options for 6,000 shares were granted to three director participants at an exercise price of $15.50 per share. Upon consummation of the Company's merger agreement with Zeneca, holders of unexercised options converted their options into
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
options for purchase of the new callable puttable common stock and the Director Plan was terminated. During fiscal years 1996 and 1995, 4,000 and 8,000 options were exercised at an exercise price of $10.13 to $15.50 per share. No options under the Director Plan remain outstanding at August 31, 1996.
NOTE 8-INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
The reconciliation of the provision for income taxes computed at the federal statutory rate to the reported provision for income taxes as above is as follows:
The Company adopted SFAS 109 during the first quarter of fiscal 1994. The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method to the asset and liability method of accounting for income taxes. Under SFAS 109, deferred tax liabilities are recognized for taxable temporary differences and deferred tax assets are recognized for deductible temporary differences. A valuation allowance reduces deferred tax assets if it is more likely than not that all, or some portion, will not be realized. There was no material impact from the adoption of SFAS 109.
The markdown of the investment portfolio represents a capital loss for federal tax purposes. The effect of the markdown is to decrease the effective tax rates for fiscal 1994 and 1996 and to increase the effective tax rate for 1995. At August 31, 1996, the Company had approximately $442,000 of capital losses available for carryforward to future years. The capital losses will expire, if not utilized, in the years ending August 31, 1999 and 2000. A 100% valuation allowance has been established to offset the deferred tax benefit associated with the capital loss carryforward.
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's deferred tax assets (liabilities) were comprised of the following:
During the years ended August 31, 1996, 1995 and 1994, total tax payments were $1,493,000, $9,931,000 and $5,257,000, respectively.
NOTE 9-ACQUISITIONS
In 1987, the Company purchased the assets and businesses of Orange County Dialysis, Inc. and Mission Dialysis Inc. The acquisition has been accounted for as a purchase. Additional consideration of $257,000, $195,000 and $248,000 has been paid under a contractual formula for the years ended August 31, 1996, 1995 and 1994, respectively.
In February 1991, the Company purchased for $304,000 a 3.5% limited partnership interest in Magnetic Imaging Associates, a limited partnership located in Alameda County, California which is engaged in the business of providing magnetic resonance imaging services to patients and physicians.
Additionally, in March 1991, the Company purchased for $1,152,000 a 40% limited partnership interest in Alta CT Services, a limited partnership located in Alameda County, California, which is engaged in the business of providing CT scan services. The partnership agreement requires, among other provisions, that Alta CT Services construct a CT scan facility at the Alta Bates Cancer Center location.
In November 1993, the Company purchased for $250,000 a 25% limited partnership interest in Alta Imaging Associates, a limited partnership located in Alameda County, California which is engaged in the business of providing diagnostic imaging services.
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The three investments are accounted for using the equity method. The combined carrying value, recorded in other assets, of the investments at August 31, 1996 and 1995 was $1,591,000 and $1,604,000, respectively.
On October 8, 1991, the Company acquired an 80% ownership interest in the South Florida Radiation Oncology Center (SFROC)in Miami, Florida for $1,315,000 and assumed management of its operations. During fiscal 1996, the Company completed acquisition of the remaining 20% ownership interest from the previous owners in fiscal 1996. The financial results of SFROC, net of the 20% minority interest through date of acquisition, have been consolidated with the results of the Company.
On February 1, 1996, the Company purchased 100% of the capital stock of The Breast Center, Inc. for $1,467,000. Additionally, the Company purchased a portion of the entity's equipment for $500,000. The acquisition has been accounted for as a purchase.
On July 25, 1996, a subsidiary of the Company acquired Westlake Medical Center, a licensed acute care hospital, adjacent land, a medical office building and related assets for $8,150,000 from a subsidiary of Columbia/HCA Healthcare Corporation. This subsidiary of the Company is operating the hospital as SHC Specialty Hospital and is focusing its programs and services on diagnosis and treatment of patients with cancer, kidney failure and immuno-deficient diseases. The Company's subsidiary is currently involved in litigation with Columbia/HCA Healthcare Corporation and its subsidiary regarding, among other things, the legality and enforceability of restrictions on medical services that could be provided following the sale and whether such restrictions would apply to subsequent owners or lessees of the hospital.
NOTE 10-QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data in thousands (except for per share data) for 1996 and 1995 is as follows:
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) Fiscal 1995 quarterly results have been restated for the change in accounting principle from deferral to expensing pre-operating costs as incurred. See Note 1.
(2) Fourth quarter 1995 results include a charge to operating revenues of $1.5 million, reflecting a change in management's estimation of the collectibility of certain accounts receivable.
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SALICK HEALTH CARE, INC. SCHEDULE VIII - ALLOWANCE FOR DOUBTFUL ACCOUNTS FOR THE THREE YEARS ENDED AUGUST 31, 1996
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
During the past three fiscal years there have been no changes in the Company's independent accountants and no disagreements on any matter of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item for Directors is incorporated by reference herein to the Proxy Statement of the Company to be filed pursuant to Regulation 14A.
The information required by this item for executive officers and significant employees is set forth in Part I of this report under the heading "EXECUTIVE OFFICERS OF THE REGISTRANT".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference herein to the Proxy Statement of the Company to be filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference herein to the Proxy Statement of the Company to be filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference herein to the Proxy Statement of the Company to be filed pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) (1) Financial Statements
The financial statements required pursuant to this Item are listed and have been filed as a part of this Report under Part II, Item 8.
(2) Financial Statement Schedules
The financial statement schedule required pursuant to this Item is listed and has been filed as a part of this Report under Part II, Item 8.
Schedules not listed are omitted because they are inapplicable or because the required information is given in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits
2 Copy of Agreement and Plan of Merger between Salick Health Care, Inc. and the Company. Incorporated by reference to Exhibit 1 of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
2(a) Agreement and Plan of Merger, dated as of December 22, 1994, as amended, by and among the Company, Zeneca Limited and Atkemix Thirty-nine Inc. Incorporated by reference to Annex A to the Proxy Statement Prospectus of the Company dated March 13, 1995 forming a part of the Company's Registration Statement on Form S-4 dated March 13, 1995 - No. 33-58057.
3(a) Certificate of Incorporation of Salick Health Care, Inc. Incorporated by reference to Annex B to the Proxy Statement Prospectus of the Company dated March 13, 1995 forming part of the Company's Registration Statement on Form S-4 dated March 13, 1995- No. 33-58057.
3(a-1) Certificate of Amendment of Certificate of Incorporation of Salick Health Care, Inc. Incorporated by reference to Exhibit 3(b) of the Form 10-Q of the Company dated February 29, 1996 for the quarterly period ended February 29, 1996.
3(b) Bylaws of the Company. Incorporated by reference to Annex C to the Proxy Statement Prospectus dated March 13, 1995 forming a part of the Company's Registration Statement on Form S-4 dated March 13, 1995 - No. 33-58057.
4(a) Business Loan Agreement of the Company with Bank of America NT&SA dated August 1, 1995. Incorporated by reference to Exhibit of the same number of the Form 10-K of the Company for the year ended August 31, 1995.
4(b) Specimen form of certificate of Callable Puttable Common Stock of the Company. Incorporated by reference to Exhibit 4.3 of the Registration Statement on Form S-4 of the Company dated March 13, 1995 - No. 33-58057.
10(a) Chronic Dialysis Unit Management Agreement, as amended, with Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985-No.2-95552.
10(a-1) Fourth Amendment to Chronic Dialysis Unit Management Agreement, dated June 1987. Incorporated by reference to Exhibit of same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(a-2) Fifth Amendment to Chronic Dialysis Unit Management Agreement, dated October 1990. Incorporated by reference to Exhibit of same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(b) Acute Dialysis Unit Management Agreement, as amended, with Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(b-1) Third Amendment to Acute Dialysis Unit Management Agreement, dated October 1990. Incorporated by reference to Exhibit of the same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(c) Acute Dialysis Unit Service Agreement, as amended, with Temple Hospital dated May 27, 1981. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(e) Agreement of Company's subsidiary, Comprehensive Cancer Centers, Inc., with Cedars-Sinai Medical Center dated December 12, 1984. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(f) Lease Agreement with Hy-Norm Properties dated June 2, 1976. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(h) Lease Agreement with Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(i) Lease Agreement of USHAWL, Inc. with Bernard and Gloria Salick, as amended, dated May l, 1983. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(j) Commercial Lease between Bernard and Gloria and the Company dated May 1991, as modified. Incorporated by reference to Exhibit of the same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(j-1) Agreement among Bernard Salick, M.D. and Gloria Salick, individually, Bernard Salick, M.D., as Trustee, the Company and Atkemix Thirty-nine Inc. dated December 22, 1994 regarding an option to convey or continue to lease commercial real estate to the Company.
*10(k) Stock Option Plan. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l the Company dated March 6, 1985 - No. 2-95552.
*10(k-1) First amendment to Stock Option Plan. Incorporated by reference to Exhibit of same number of the Form 10-K of the Company for the year ended August 31, 1987.
*10(k-2) Second amendment to Stock Option Plan effective January 20, 1987. Incorporated by reference to Exhibit of same number of the Form 10- K of the Company for the year ended August 31, 1990.
*10(k-3) Third amendment to Stock Option Plan effective November 1, 1990. Incorporated by reference to Exhibit of same number of the Form 10- K of the Company for the year ended August 31, 1990.
*10(k-4) Fourth amendment to Stock Option Plan effective January 13, 1994. Incorporated by reference to Exhibit of same number of the Form 10- K of the Company for the year ended August 31, 1994.
*10(l) Second Amended and Restated Employment Agreement, dated as of December 22, 1994, by and between the Company and Bernard Salick, M.D. Incorporated by reference to Exhibit 10.3 to the Form 8-K of the Company with date of earliest event reported being April 13, 1995.
*10(l-1) Agreement Not to Compete, dated as of December 22, 1994, between the Company and Bernard Salick, M.D. Incorporated by reference to Exhibit 10.4 to the Form 8-K of the Company with date of earliest event reported being April 13, 1995.
*10(m) Employment Agreement with Gerald Rosen, M.D. Incorporated by reference to Exhibit of same number of the Form 10-K of the Company for the year ended August 31, 1990.
*10(n) Second Amended and Restated Employment Agreement, dated as of April 13, 1995, by and between the Company and Leslie F. Bell. Incorporated by reference to Exhibit 10.5 to the Form 8-K with date of earliest event reported being April 13, 1995.
*10(n-1) Agreement Not to Compete, dated as of April 13, 1995, between the Company and Leslie F. Bell. Incorporated by reference to Exhibit 10.6 to the Form 8-K with date of earliest event reported being April 13, 1995.
10(s) Letter Agreement dated February 22, 1985 with Cedars-Sinai Medical Center concerning terms of Chronic Unit Management Agreement filed as Exhibit 10(a) and Acute Dialysis Unit Management Agreement filed as Exhibit 10(b). Incorporated by reference to Exhibit 10(t) of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(v) Agreement in Principle between the Company and American Medical International, Inc. Incorporated by reference to Exhibit 10(x) of the Registration statement on Form S-1 of the Company dated January 31, 1986 - No. 33-2898.
10(w) Letter agreement from Cedars-Sinai Medical Center dated as of August 1, 1985 addressed to the Company's subsidiary Comprehensive Cancer Centers, Inc.Incorporated by reference to Exhibit of the same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(x) Agreement between the Company's subsidiary Comprehensive Cancer Centers, Inc. and Cedars-Sinai Medical Center dated February 26, 1990. Incorporated by reference to Exhibit of the same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
*10(y) 1988 Employee Qualified Stock Purchase Plan. Incorporated by reference to Exhibit "A" to the Proxy Statement of the Company dated January 12, 1989.
*10(y-1) First amendment to 1988 Employee Qualified Stock Purchase Plan effective January 2, 1991. Incorporated by reference to Exhibit of the same number of the Form 10-K of the Company for the year ended August 31, 1991.
*10(z) Management Incentive Compensation Plan. Incorporated by reference to Annex C to the Proxy Statement of the Company dated July 29, 1991.
*10(aa) Second Amended and Restated Employment Agreement, dated as of April 13, 1995, by and between the Company and Michael T. Fiore. Incorporated by reference to Exhibit 10.7 to the Form 8-K with date of earliest event reported being April 13, 1995.
*10(aa-1) Agreement Not to Compete, dated as of April 13, 1995,between the Company and Michael T. Fiore. Incorporated by reference to Exhibit 10.8 to the Form 8-K with date of earliest event reported being April 13, 1995.
10(bb) Form of Indemnification Agreement. Incorporated by reference to Exhibit "C" to the Proxy Statement of the Company dated December 29, 1987.
10(cc) Governance Agreement, dated as of December 22, 1994, as by and among the Company, Bernard Salick, M.D. and Zeneca Limited. Incorporated by reference to Exhibit 10.1 to the Form 8-K of the Company with date of earliest event reported being December 22, 1994.
10(cc-1) Amendment No. 1 to Governance Agreement, dated as of March 7, 1995, by and among the Company, Bernard Salick, M.D. and Zeneca Limited. Incorporated by reference to Exhibit 2.5 of the Company's Registration Statement on Form 8-A relating to the Company's Callable Puttable Common Stock.
*10(dd) Employment Agreement with Sheldon S. King. Incorporated by reference to Exhibit of the same number of the Form 10-K/A of the Company for the year ended August 31, 1994.
*10(ee) Employment Agreement with Patrick W. Jeffries. Incorporated by reference to Exhibit 10(a) of the Form 10-Q of the Company dated February 29, 1996 for the quarterly period ended February 29, 1996.
11 Computation of Net Earnings per Common Share.
21 List of Subsidiaries. Incorporated by reference to Exhibit of the same number of the Form 10-K of the Company for the year ended August 31, 1994.
23 Consent of Independent Accountants.
27 Financial Data Schedules.
* Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
(B) Reports on Form 8-K.
No report was filed on Form 8-K by the Company during the quarter ended August 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Salick Health Care, Inc. (Company)
By:/s/BERNARD SALICK, M.D. __________________________________________ Bernard Salick, M.D. Chairman of the Board, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
SALICK HEALTH CARE, INC. EXHIBIT INDEX
Exhibit - -------
2 Copy of Agreement and Plan of Merger between Salick Health Care, Inc. and the Company. Incorporated by reference to Exhibit 1 of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
2(a) Agreement and Plan of Merger, dated as of December 22, 1994, as amended, by and among the Company, Zeneca Limited and Atkemix Thirty-nine Inc. Incorporated by reference to Annex A to the Proxy Statement Prospectus of the Company dated March 13, 1995 forming a part of the Company's Registration Statement on Form S-4 dated March 13, 1995 - No. 33-58057.
3(a) Certificate of Incorporation of Salick Health Care, Inc. Incorporated by reference to Annex B to the Proxy Statement Prospectus of the Company dated March 13, 1995 forming part of the Company's Registration Statement on Form S-4 dated March 13, 1995 - No. 33-58057.
3(a-1) Certificate of Amendment of Certificate of Incorporation of Salick Health Care, Inc. Incorporated by reference to Exhibit 3(b) of the Form 10-Q of the Company dated February 29, 1996 for the quarterly period ended February 29, 1996.
3(b) Bylaws of the Company. Incorporated by reference to Annex C to the Proxy Statement Prospectus dated March 13, 1995 forming a part of the Company's Registration Statement on Form S-4 dated March 13, 1995 - No. 33-58057.
4(a) Business Loan Agreement of the Company with Bank of America NT&SA dated August 1, 1995. Incorporated by reference to Exhibit of the same number of the Form 10-K of the Company for the year ended August 31, 1995.
4(b) Specimen form of certificate of Callable Puttable Common Stock of the Company. Incorporated by reference to Exhibit 4.3 of the Registration Statement on Form S-4 of the Company dated March 13, 1995 - No. 33-58057.
10(a) Chronic Dialysis Unit Management Agreement, as amended, with Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985-No. 2-95552.
10(a-1) Fourth Amendment to Chronic Dialysis Unit Management Agreement, dated June 1987. Incorporated by reference to Exhibit of same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(a-2) Fifth Amendment to Chronic Dialysis Unit Management Agreement, dated October 1990. Incorporated by reference to Exhibit of same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(b) Acute Dialysis Unit Management Agreement, as amended, with Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(b-1) Third Amendment to Acute Dialysis Unit Management Agreement, dated October 1990. Incorporated by reference to Exhibit of the same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
Exhibit - -------
10(c) Acute Dialysis Unit Service Agreement, as amended, with Temple Hospital dated May 27, 1981. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(e) Agreement of Company's subsidiary, Comprehensive Cancer Centers, Inc., with Cedars-Sinai Medical Center dated December 12, 1984. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(f) Lease Agreement with Hy-Norm Properties dated June 2, 1976. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(h) Lease Agreement with Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(i) Lease Agreement of USHAWL, Inc. with Bernard and Gloria Salick, as amended, dated May l, 1983. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(j) Commercial Lease between Bernard and Gloria and the Company dated May 1991, as modified. Incorporated by reference to Exhibit of the same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(j-1) Agreement among Bernard Salick, M.D. and Gloria Salick, individually, Bernard Salick, M.D., as Trustee, the Company and Atkemix Thirty-nine Inc. dated December 22, 1994 regarding an option to convey or continue to lease commercial real estate to the Company.
*10(k) Stock Option Plan. Incorporated by reference to Exhibit of same number of the Registration Statement on Form S-l the Company dated March 6, 1985 - No. 2-95552.
*10(k-1) First amendment to Stock Option Plan. Incorporated by reference to Exhibit of same number of the Form 10-K of the Company for the year ended August 31, 1987.
*10(k-2) Second amendment to Stock Option Plan effective January 20, 1987. Incorporated by reference to Exhibit of same number of the Form 10-K of the Company for the year ended August 31, 1990.
*10(k-3) Third amendment to Stock Option Plan effective November 1, 1990. Incorporated by reference to Exhibit of same number of the Form 10-K of the Company for the year ended August 31, 1990.
*10(k-4) Fourth amendment to Stock Option Plan effective January 13, 1994. Incorporated by reference to Exhibit of same number of the Form 10-K of the Company for the year ended August 31, 1994.
*10(l) Second Amended and Restated Employment Agreement, dated as of December 22, 1994, by and between the Company and Bernard Salick, M.D. Incorporated by reference to Exhibit 10.3 to the Form 8-K of the Company with date of earliest event reported being April 13, 1995.
Exhibit - -------
*10(l-1) Agreement Not to Compete, dated as of December 22, 1994, between the Company and Bernard Salick, M.D. Incorporated by reference to Exhibit 10.4 to the Form 8-K of the Company with date of earliest event reported being April 13, 1995.
*10(m) Employment Agreement with Gerald Rosen, M.D. Incorporated by reference to Exhibit of same number of the Form 10-K of the Company for the year ended August 31, 1990.
*10(n) Second Amended and Restated Employment Agreement, dated as of April 13, 1995, by and between the Company and Leslie F. Bell. Incorporated by reference to Exhibit 10.5 to the Form 8-K with date of earliest event reported being April 13, 1995.
*10(n-1) Agreement Not to Compete, dated as of April 13, 1995, between the Company and Leslie F. Bell. Incorporated by reference to Exhibit 10.6 to the Form 8-K with date of earliest event reported being April 13, 1995.
10(s) Letter Agreement dated February 22, 1985 with Cedars-Sinai Medical Center concerning terms of Chronic Unit Management Agreement filed as Exhibit 10(a) and Acute Dialysis Unit Management Agreement filed as Exhibit 10(b). Incorporated by reference to Exhibit 10(t) of the Registration Statement on Form S-l of the Company dated March 6, 1985 - No. 2-95552.
10(v) Agreement in Principle between the Company and American Medical International, Inc. Incorporated by reference to Exhibit 10(x) of the Registration statement on Form S-1 of the Company dated January 31, 1986 - No. 33-2898.
10(w) Letter agreement from Cedars-Sinai Medical Center dated as of August 1, 1985 addressed to the Company's subsidiary Comprehensive Cancer Centers, Inc. Incorporated by reference to Exhibit of the same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
10(x) Agreement between the Company's subsidiary Comprehensive Cancer Centers, Inc. and Cedars-Sinai Medical Center dated February 26, 1990. Incorporated by reference to Exhibit of the same number of the Registration Statement on Form 8-B of the Company dated August 28, 1991.
*10(y) 1988 Employee Qualified Stock Purchase Plan. Incorporated by reference to Exhibit "A" to the Proxy Statement of the Company dated January 12, 1989.
*10(y-1) First amendment to 1988 Employee Qualified Stock Purchase Plan effective January 2, 1991. Incorporated by reference to Exhibit of the same number of the Form 10-K of the Company for the year ended August 31, 1991.
*10(z) Management Incentive Compensation Plan. Incorporated by reference to Annex C to the Proxy Statement of the Company dated July 29, 1991.
*10(aa) Second Amended and Restated Employment Agreement, dated as of April 13, 1995, by and between the Company and Michael T. Fiore. Incorporated by reference to Exhibit 10.7 to the Form 8-K with date of earliest event reported being April 13, 1995.
Exhibit - -------
*10(aa-1) Agreement Not to Compete, dated as of April 13, 1995, between the Company and Michael T. Fiore. Incorporated by reference to Exhibit 10.8 to the Form 8-K with date of earliest event reported being April 13, 1995.
10(bb) Form of Indemnification Agreement. Incorporated by reference to Exhibit "C" to the Proxy Statement of the Company dated December 29, 1987.
10(cc) Governance Agreement, dated as of December 22, 1994, as by and among the Company, Bernard Salick, M.D. and Zeneca Limited. Incorporated by reference to Exhibit 10.1 to the Form 8-K of the Company with date of earliest event reported being December 22, 1994.
10(cc-1) Amendment No. 1 to Governance Agreement, dated as of March 7, 1995, by and among the Company, Bernard Salick, M.D. and Zeneca Limited. Incorporated by reference to Exhibit 2.5 of the Company's Registration Statement on Form 8-A relating to the Company's Callable Puttable Common Stock.
*10(dd) Employment Agreement with Sheldon S. King. Incorporated by reference to Exhibit of the same number of the Form 10-K/A of the Company for the year ended August 31, 1994.
*10(ee) Employment Agreement with Patrick W. Jeffries. Incorporated by reference to Exhibit 10(a) of the Form 10-Q of the Company dated February 29, 1996 for the quarterly period ended February 29, 1996.
11 Computation of Net Earnings per Common Share.
21 List of Subsidiaries. Incorporated by reference to Exhibit of the same number of the Form 10-K of the Company for the year ended August 31, 1994.
23 Consent of Independent Accountants.
27 Financial Data Schedules.
* Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.