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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended August 31, 1995
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-13879
Salick Health Care, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-4333272
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8201 Beverly Boulevard, Los Angeles, California 90048-4520
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 966-3400
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
Callable Puttable Common Stock
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of callable puttable common stock held by
nonaffiliates of the registrant was $155,532,756 based on the closing price of
the callable puttable common stock on the NASDAQ reporting system on November
15, 1995.
The number of shares outstanding of the issuer's common stock as of
November 15, 1995: 5,657,115. The number of shares outstanding of the issuers'
callable puttable common stock at November 15, 1995: 5,638,082.
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DOCUMENTS INCORPORATED BY REFERENCE
Information called for by Part III of Form 10-K is incorporated by reference to
the Proxy Statement of the Registrant to be filed by December 29, 1995 pursuant
to Regulation 14A in connection with the Annual Meeting of Stockholders. Except
for the information incorporated herein by reference, said Proxy Statement shall
not be deemed "filed" as part of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Salick Health Care, Inc. ("Salick" or the "Company") provides disease-
specific health care services and risk-based and other products and programs to
health care 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 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 overall direct and
indirect costs of cancer are in excess of $100 billion. Published reports
indicate that the market for dialysis services is currently in excess of $4
billion. 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 diagnosis and treatment of cancer. The
Company believes that its experience and expertise in delivering such outpatient
medical services, and its ability to provide cost effective, quality and
convenient care, provides significant advantages to cancer patients over
outpatient services offered at physicians' offices, acute care hospitals or
other clinical settings. Traditionally, many of the cancer diagnostic and
treatment services provided by Salick 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, 1995, the Company 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 Kendall
Medical Center in the Miami, Florida area, Temple University Medical Center in
Philadelphia, Pennsylvania, 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 Westlake Medical Center in Westlake, California. These ten 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
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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 nine 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 its Cancer Centers and dialysis facilities, the Company provides
the supervision, medical personnel, technicians and equipment for patient
treatments. However, with the exception of certain South Florida locations, the
Company does not provide any part of 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 and
dialysis treatment programs to managed care entities including Health
Maintenance Organizations ("HMO"), Preferred Provider Organizations ("PPO")
Independent Practice Associations ("IPA"), 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 120,000 persons in South Florida, and a non-
capitated global fixed fee agreement with CAPP CARE, a national managed PPO for
the Company's services.
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 5,634,115 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 5,657,082 shares of the Company's Common Stock. As a result,
Zeneca Limited beneficially owns at least 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)
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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 1995 alone, estimates are
that approximately 1,300,000 people will be diagnosed as having cancer,
excluding nonmelanoma skin cancer and carcinoma in situ. The National Cancer
Institute estimates that the overall direct and indirect costs of cancer exceed
$100 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 has been adding alternate sites and
began providing inpatient services at selected Centers. Each of the Cancer
Centers addresses the critical needs of the cancer patient, 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 interim to permanent facilities, 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
Company 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 its 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."
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ADDITIONAL SERVICES
The American Cancer Society estimates that one out of every nine 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, the Company operates breast centers
affiliated with its Cancer Centers at the Mount Sinai Medical Center, in Miami
Beach, Florida, at Desert Hospital in Palm Springs, California, at Westlake
Medical Center in Westlake, California and in 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
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. The
Company provides cancer risk assessment at its Alta Bates, Westlake and JFK
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 to add inpatient services
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, which entered into its first two major agreements in 1994,
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 differs from most managed care
companies in that it offers an integrated system of care, which includes
physician services, inpatient, outpatient, and home care services at
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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.
Salick believes that there are numerous locations at which its and the
SalickNet 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 nascent 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 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
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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 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
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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.
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Studies published in The Journal of Clinical Oncology and Cancer have
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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 diagnosis and
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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
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management 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
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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
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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
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cancer patient, including infusion and bolus chemotherapy, radiation therapy,
pharmacy, laboratory, blood transfusions, psychosocial services and oncology
nursing. This Cancer Center 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 has obtained nearby space which it may use for expansion of the
Cancer Center at Cedars-Sinai to meet increasing demands for patient care and to
accommodate additional physicians.
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 are 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 pending 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.
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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 35,000 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.
DESERT HOSPITAL CANCER CENTER
In September 1990, 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 35,000
square feet is expected to become operational in 1996, pending regulatory
approvals. 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 has acquired all but 2%
of the remaining interest.
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.
WESTLAKE MEDICAL CENTER CANCER CENTER
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 Columbia/HCA and the Company acquired UHS' interest in the Cancer
Center. Under the agreement with Columbia/HCA the Company is the
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exclusive provider of inpatient and outpatient cancer services and programs at
Westlake Medical Center. Initially, services are being provided in 18,000 square
feet of existing space including dedicated inpatient facilities. The Center
contractually utilizes the Hospital's radiology and surgical facilities and
arranges for radiation oncology services with plans to incorporate into an
expanded facility. A separate Breast Center was opened in September 1994 with
nationally recognized medical and radiation oncology specialists. Among these
are specialists in reconstructive surgery, bone marrow and stem cell
transplantation and breast cancer. The Company is the exclusive provider of a
full range of home care services to cancer patients of Westlake Medical Center.
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.
PAYMENT AND BILLING
The Cancer Centers 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. 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 for services provided. Currently,
Medicare reimbursement for certain surgery, radiology and diagnostic services is
based on 80% of the lower of the hospital's reasonable cost (reduced by 5.8% -
see "Governmental Regulation-Medicare 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 80% of the hospital's
reasonable costs, reduced by 5.8%. 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 contracts generally pay a percentage of reasonable
and customary charges. Some of the payors with which the Company does 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 state
Medicaid programs is based on their schedules of allowable charges. 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 nine 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
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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 the highest quality of 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 15% 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 90% 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 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
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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.
The Company is in the process of developing its 10th outpatient dialysis
center at Hi-Desert Hospital in Yucca Valley (Riverside County), California.
This center will have 15 treatment stations in its 5450 square feet and the
agreement is for a five-year term with three five-year renewal options. The
Company expects to begin operations at this center by the spring of 1996.
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/Missouri areas. Operations will also be established or acquired in
other areas 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), certain major acute care hospitals, other
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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.
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. While the Company expects changes
in reimbursement to occur, this may be limited to extensions of previously
implemented reductions scheduled to expire or may include additional changes.
The ultimate impact of any such changes on the Company's business cannot be
predicted, in part due to budgetary constraints and the rapidly evolving changes
in the health care system generally. The Company has developed and/or
implemented plans to deal with this situation and notes that in the past as
reimbursement reductions or changes have occurred, the Company has previously
been able to improve operations by an increased market share and greater
efficiency.
Under federal Medicare law, most hospital inpatients covered by Medicare
are classified into diagnostic related groups ("DRGs") based on such factors as
primary admitting diagnosis and surgical procedure. Payment to hospitals for
the care of a patient covered under the DRG system is generally set at a
predetermined amount based on the DRG assigned the patient. The federal
government, as well as many states and third party payors, are investigating or
have adopted these or other modifications to their reimbursement formula in an
effort to contain costs. This type of program provides an incentive for
hospitals to plan and deliver their services more efficiently.
The Omnibus Budget Reconciliation Act of 1990 amended the definition of
"inpatient hospital services" to include all services for which payment may be
made under the DRG system that are provided by a hospital or an entity wholly-
owned or operated by the hospital to a patient during the three days immediately
preceding the date of the patient's admission (or one day for hospitals and
hospital units excluded from the DRG system under technical changes enacted in
October 1994), if such services are diagnostic services
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(including clinical diagnostic laboratory tests) or are other services related
to the admission, as defined by the Secretary of Health and Human Services ("the
Secretary"). Such services are not reimbursable separately as hospital
outpatient services under Medicare Part B. These provisions have been in effect
since 1991. On January 12, 1994, the Secretary issued interim final regulations
implementing this provision and on September 1, 1995, the Secretary announced
she will revise the regulations to recognize that only the one day immediately
preceding the date of the patient's admission would be considered to be not
reimbursable separately as hospital outpatient services for hospitals and
hospital units excluded from the DRG system.
In recent years there have been a number of statutory and regulatory
changes that affect Medicare reimbursement for services furnished to hospital
outpatients. Prior to October 1, 1987, Medicare generally had reimbursed
hospital outpatient services on the basis of the reasonable costs (as determined
pursuant to regulations) incurred by the hospital. On October 1, 1987, Medicare
began reimbursing hospitals for certain surgery services furnished to hospital
outpatients on the basis of the lower of reasonable costs or an amount based on
a blend of the hospital's reasonable costs and a prospectively set fee schedule
amount. On October 1, 1988, this blended payment system was extended to
radiology services furnished to hospital outpatient patients; the blended
payment system was extended further to certain other diagnostic services on
October 1, 1989. In addition, the amount of the blend that is based on the
hospital's reasonable costs has decreased; currently, the blend is based 42% on
hospital costs for surgery and radiology services, and 50% on hospital costs for
other diagnostic services. For surgery services reimbursed under the blend, the
fee schedule portion of the blend is based on the amount of payment that
ambulatory surgery centers would receive for the procedure. For radiology and
diagnostic services reimbursed under the blend, the fee schedule portion of the
blend is based on the amount that physicians would receive if the procedure were
furnished in a physician's office under the Medicare physician fee schedule.
Under the Omnibus Budget Reconciliation Act of 1989, effective January 1,
1992, Medicare reimbursement for physician services began a five year transition
to the use of a physician fee schedule based on a "resource-based relative value
scale." That physician fee schedule, through the blended payment system
described above, has affected the amount of Medicare reimbursement for hospital
outpatient departments providing outpatient radiology, radiation therapy,
surgery and certain diagnostic services.
There is also the possibility of the establishment of a prospective payment
for certain Medicare-reimbursed hospital outpatient services. Congress had
requested that the Health Care Financing Administration ("HCFA"), which
administers Medicare, prepare recommendations concerning the establishment of
such a prospective payment system. HCFA submitted its recommendations to
Congress in March 1995 and included a proposal to phase in such a prospective
payment system, beginning first with outpatient surgery, radiology, and other
diagnostic services. The details of the proposed payment system, including the
amounts of payment that would be made for each procedure, have not been
finalized by HCFA. Adoption of HCFA's recommendation would require a change in
the Medicare law by Congress,and senior HCFA staff have stated that even if
Congress enacted such a change in 1995, the new system would not likely be
implemented until January 1997, at the earliest. Under HCFA's proposal,
services other than surgery, radiology, and other diagnostic services would not
be reimbursed under a new prospective payment system until further research is
completed. The Company cannot predict what will be the effect, if any, on
revenues or income which may result from the adoption by Congress of HCFA's
recommendations for a Medicare prospective payment for hospital outpatient
services.
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HCFA in its March 1995 report to Congress made two other recommendations
concerning proposed changes in the Medicare law. First, HCFA proposed that the
Medicare law be changed to modify the way that the amount of beneficiary
coinsurance for outpatient services is computed. Second, HCFA proposed that
Medicare law be changed to correct what has been described as the "formula
driven overpayment" which HCFA states results in Medicare payments for hospital
outpatient surgery, radiology and other diagnostic services that are greater
than what was intended by Congress. In its report, HCFA suggested several ways
in which the Medicare law could be changed to address these issues, either with
or without the enactment of a prospective payment system for hospital outpatient
services. The alternatives suggested by HCFA generally would result in an
overall reduction in payments for hospital outpatient services furnished to
Medicare beneficiaries and, if enacted, could adversely affect the Company's
revenues and income. However, it is uncertain which alternative, if any,
Congress will enact, and it is impossible to determine what impact, if any, such
changes might have on the Company's revenues and income.
Effective October 1, 1991, Medicare payments for hospital outpatient
services made on a reasonable cost basis and the cost portion of outpatient
services paid on the basis of a blended amount, were reduced by 5.8%. Under the
Omnibus Reconciliation Act of 1993 ("OBRA 1993"), Congress extended this
reduction through federal fiscal year 1998. Effective October 1, 1991, Medicare
has reimbursed the capital costs allocated to outpatient departments on the
basis of 90% of reasonable costs. Under OBRA 1993, Congress extended this 10%
reduction in hospital outpatient capital cost reimbursement through federal
fiscal year 1998. Also under OBRA 1993, the amount which Medicare reimburses
for clinical laboratory services was reduced.
Effective November 1, 1990, the Medicare fiscal intermediary for the
Company's dialysis facilities changed the method of reimbursing medications
provided to Medicare dialysis patients from charge-based reimbursement to
reimbursement based on reasonable costs. This change has reduced the amount of
reimbursement to the Company for such medications and other regulatory changes
potentially could further reduce such reimbursement. In addition, effective
January 1, 1991, the method of reimbursement for EPO furnished to dialysis
patients was changed from its former structure (80% of $40 per treatment dosage
for up to 10,000 units and 80% of $70 per treatment dosage of 10,000 or more
units) to provide for payment of 80% of $11.00 per 1,000 units. This change in
EPO reimbursement has been partially offset by a $1.00 per treatment increase in
the composite rate reimbursement for outpatient dialysis services. In addition,
pursuant to OBRA 1993, reimbursement for EPO was further reduced beginning
January 1, 1994 to 80% of $10.00 per 1,000 units. The Secretary announced on
September 1, 1995 that she will not at this time adjust the current composite
rate. The overall impact of the EPO reimbursement change has adversely affected
the Company's revenues and earnings.
The effect of these changes may be mitigated by the Company's ability to
increase its patient volume both at the same sites and at additional centers, to
increase its non-Medicare 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.
Legislation in Florida limits charges for certain healthcare services
provided to non-Medicare/Medicaid patients. A substantial portion of this law
has been challenged, a portion declared unconstitutional and is being appealed
in the federal court system and will not be enforced until after such
resolution; however, the limitations on rates respecting radiation therapy
services provided at freestanding, not hospital-based facilities, presently
remains in effect. As substantially all of the Company's radiation therapy
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services are hospital-based, the effect of the legislation has not had a
material effect on the Company's operations. Florida also has legislation
precluding or limiting referrals by physicians to facilities in which they have
an ownership, control or investment relationship (the Florida Patient/Self-
Referral Act). One of the Company's radiation facilities in South Florida
currently has three physician investors who own less than two percent (2%) in
total and who make no referrals to the facility. The Company believes it is in
full compliance with the law.
Florida adopted legislation effective in 1994 which is aimed at health care
coverage for presently uninsured residents and encouraging the formation of
purchasing alliances for health care services. This legislation is principally
aimed at small employer groups. As it is now configured, the Company cannot
predict its future effect upon the Company and its operations. However, the
Company, as part of its overall strategy is in the process of developing various
plans to be offered to employer groups, purchasing alliances, health maintenance
organizations, managed care and other payors. The first of these plans has been
successfully marketed in Florida with a major capitated (per member, per month)
agreement entered into with Physician's Corporation of America currently
covering 120,000 members in South Florida (See "Additional Services" discussion
of SalickNet).
To the extent that legislation or regulations may be enacted in the future
which may include outpatient services furnished to Medicare beneficiaries in a
prospective payment system, the Company cannot predict whether or to what extent
such a change would adversely affect its revenues or earnings. In addition, in
1995 Congress began considering extensive changes to the Medicare and Medicaid
programs. Medicare changes under consideration include, among others, (1) a
change in the formula used to calculate hospital outpatient reimbursement under
the blended payment system which generally would result in reducing
reimbursement amounts; (2) an extension of the current 5.8% reduction in
hospital outpatient reasonable cost reimbursement through the year 2002; (3) a
reduction in reimbursement for hospital outpatient department capital-related
costs of 85% of such reasonable costs for federal fiscal years 1996-2002; (4)
the introduction of a prospective payment system for home health services,
effective October 1996; (5) reductions in payment for clinical laboratory
services; (6) the elimination of updates in payments for ambulatory surgical
center services from 1996-2002: (7) various other reductions in the amount of
payment for physician and hospital services; and (8) the introduction of
additional choices of health plans for Medicare beneficiaries in addition to the
current fee-for-service and Medicare HMO option. Proposed Medicaid changes
include the replacement of the existing federal/state program with block grants
to the states and reduced federal oversight over state plans. The enactment of
large cuts in the amount of Medicare and Medicaid reimbursement for providers
could have an adverse effect on the Company's revenues. At this point in time,
however, it is uncertain which, if any, of these or other changes to the
Medicare and Medicaid programs will be enacted into law, and the Company is
unable to predict how the enactment of any such changes might affect the Company
in the future.
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.
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LICENSING
Outpatient dialysis facilities 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 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.
Presently in California, and certain other states, there is no license
category for the independent licensure of the Cancer Centers. Under these
circumstances, the Company is a provider of the Cancer Centers' services under
the license of and agreements with affiliated medical centers. A Cancer
Center's continued operations as presently structured is dependent upon such
agreements with hospitals. The Company will also consider management agreements
and other relationships as are appropriate.
INFUSX currently operates as a licensed home health agency. It either has
a pharmacy license or arrangements with a licensed pharmacy in those states
where it may not be able to or it is not essential to its operations to have a
pharmacy license. In states where INFUSX provides direct nursing services it
will require licensure as a home health agency. It is also possible that in
some locations INFUSX may become subject to certain regulatory certifications
including Medicare and/or the Joint Commission on the Accreditation of
Healthcare Organizations ("JCAHO") accreditation. In its California, South
Florida and Kansas operations, 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. The Company has submitted an application for
licensure as a Third Party Administrator to the Florida Department of Insurance
because of the anticipated expansion of administrative services it provides and
to ensure continued compliance with the law. The Company anticipates it will be
able to obtain any required licensure.
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.
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. 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
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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.
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 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 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.
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. However, the Company has interests as a limited
partner in certain independent radiology
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facilities that it believes may 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 or is in the process of being acquired. While this situation may not,
technically, completely 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 for several reasons, including the fact that 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.
While the Company does not believe this to be so, 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.
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.
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,
referral services safe harbor and the discount safe harbor. It is unknown
whether the regulations will be finalized in their present form.
In October 1994, the Inspector General issued a Special Fraud Alert
respecting arrangements for the provision of clinical laboratory services. The
Fraud Alerts are publications which reflect the view of the Office of Inspector
General but are not formally promulgated as regulations or enacted as laws. The
October 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
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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.
HHS has designed an interdisciplinary project 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. The project is called "Operation Restore Trust."
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. HHS
has stated that the project activities will include, 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. 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.
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 or Medicaid patient to any entity for the provision of laboratory
services if the physician or family member of the physician had an ownership
interest or compensation relationship with the entity. The OBRA 1993 revisions
expand the scope of the Stark Law by prohibiting a referral to an entity in
which the physician or family member has an ownership 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 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, diagnostic radiology and radiation therapy
services. Technical amendments to the Medicare Act passed by Congress in
October 1994 and signed by the President on October 31, 1994, include an
amendment which revises the designated health service of "radiology and other
diagnostic services" to "radiology services, including magnetic resonance
imaging, computerized axial tomography scans and ultrasound services." Because
all of the 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
radiation therapy, the legislation specifically provides that a request by a
radiation oncologist for radiation therapy does not constitute a referral if
such services are furnished by or under the supervision of the radiation
oncologist pursuant to a consultation requested by another physician. That
self-referral statute also includes a variety of exceptions from this
21
<PAGE>
prohibition, 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 and the Secretary stated an intention in the Stark I Final Regulations
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 reviews 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 for services furnished in an Ambulatory
Surgical Center or an End Stage Renal Dialysis ("ESRD") 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 charge,
respectively. HCFA reasons that in such instances there is no incentive to
overutilize the clinical laboratory services. HCFA continues to work on issuing
proposed regulations to implement the Stark II expanded physician self-referral
law.
Congress is now poised to consider "Stark III." Congressman Stark himself
already has introduced a bill that would significantly modify the law. For
example, it would, among other things, collapse all of the compensation
exceptions into one generic exception. Congressman Thomas, who now chairs the
House Ways and Means Health Subcommittee that generated the original physician
self-referral law, also has introduced a bill that would even more extensively
revise and dilute the scope of the Stark Bill, to limit, for example, the list
of Designated Health Services to clinical laboratory, community pharmacy,
MRI/computerized tomography and physical therapy services. Also, under Thomas'
bill, the law would no longer prohibit referrals on the basis of compensation
relationships and the Secretary would not be permitted to take enforcement
action based on the Stark II provisions until the Secretary promulgates its
Stark II regulations.
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 that, 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 adversely affect the operations of the
Company.
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 with direct or indirect ownership interest 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,
22
<PAGE>
diagnostic imaging, home infusion therapy and diagnostic nuclear medicine.
Violations of that statute may result in criminal penalties, civil monetary
penalties of up to $5,000 for each offense, and professional disciplinary action
against the physician, including revocation of licensure. In addition, no
payment may be made by any payor for services furnished pursuant to a prohibited
referral. 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, the Company intends to
modify or eliminate those relationships so that they either comply or qualify
for one of the Speier Bill's exemptions. For this reason, among others, the
Company does not believe that the Speier Bill will 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. One of the Company's radiation
facilities in South Florida currently has three physician investors who own less
than two percent (2%) in total and who make no referrals to the facility. The
Company believes it is in full compliance with the law.
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. Moreover, although the pending budget
reconciliation bill as passed by the House would narrow the scope of the Stark
Law by, among other things, (1) eliminating its application to compensation
relationships between physicians and the entities to which they make referrals
and (2) shortening the list of Designated Health Services, both the House and
the Senate bills now currently under discussion contemplate expanding some of
the fraud and abuse laws to cover all patients (not just Medicare and Medicaid
patients), and increasing the penalties for violation. There is still a
relative scarcity of both case law and binding administrative interpretations of
the statutes and regulations in this area of fraud and abuse. As the law
develops in this area and particularly if the Congress provides 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, 1995, the Company had approximately 1,300 employees. Less
than twenty employees (primarily clerical workers) are subject to a collective
bargaining agreement and all of such employees are employed at one location.
The Company considers its relations with its employees to be good.
23
<PAGE>
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.
24
<PAGE>
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:
<TABLE>
<CAPTION>
Date
Approximate Operations Term of
Size Commenced Agreement
------------------ ------------ ---------------
<S> <C> <C> <C>
Cedars-Sinai 20,000 sq. ft. June 1985 To September 30,
Comprehensive (interim space) 1999
Cancer Center 53,000 sq. ft. January 1988
Los Angeles, CA (permanent center)
Comprehensive 17,500 sq. ft. November 10 years and
Cancer Center (interim space) 1988 3 five-year
at Mount Sinai 35,000 sq. ft. renewal options
Medical Center (permanent center)
Miami Beach, FL
Comprehensive 15,000 sq. ft. March 1989 10 years from
Cancer Center (interim space) completion of
at Temple 45,000 sq. ft. all construction
University (proposed and 2 five-year
Philadelphia, PA permanent center) renewal options
JFK Medical Center 20,000 sq. ft. October To September 30,
Comprehensive 1987 1997
Cancer Center
Atlantis, FL
Alta Bates Medical 10,000 sq. ft. December 15 years
Center Comprehensive (interim space) 1990
Cancer Center 35,000 sq. ft. September
Berkeley, CA (permanent-partial 1994
center)
Desert Hospital 15,000 sq. ft. September 10 years from
Comprehensive 1989 opening of the
Cancer Center permanent Center
Palm Springs, CA and 3 five-year
renewal options
South Florida 9,000 sq. ft. June 1987 10 years
Comprehensive
Cancer Center at
Parkway Regional
Medical Center
No. Miami Beach, FL
South Florida 9,000 sq. ft. June 1987 10 years
Comprehensive
Cancer Center at
Kendall Regional
Medical Center
Miami, FL
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Approximate Operations Term of
Size Commenced Agreement
----------------- ------------ ---------
<S> <C> <C> <C>
University of 25,000 sq. ft. April 1992 35 years
Kansas Cancer (interim space)
Center, Kansas 45,000 sq. ft
City, Kansas (proposed
permanent center)
Westlake Medical 18,000 sq. ft. October 1993 20 years
Center Comprehensive (interim space)
Cancer Center
</TABLE>
In addition, the Company provides its services at a number of satellite and
alternate site facilities in Florida and California located primarily in medical
office services developments.
DIALYSIS CENTERS
The Company operates the following nine 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:
<TABLE>
<CAPTION>
Licensed Year
Stations Facility Lease
As of Opened Expiration
8/31/95 or Acquired Date
-------- ----------- ---------------
<S> <C> <C> <C>
USHAWL-Cedars-Sinai Dialysis 25 1983 August 2004
8635 W. Third
Cedars-Sinai
Medical Towers
Los Angeles, CA 90048
USHAWL-Villa Gardens Dialysis 35 1972 December 2006
2723 W. Temple Street
Los Angeles, CA 90026
USHAWL-Doctors Dialysis 42 1972 June 1996
706 E. 32nd Street
Los Angeles, CA 90011
USHAWL-Orange County 6 1987 September 1998
Dialysis - North (one additional
1830 W. Romneya Drive 5-year renewal
Anaheim, CA 92801 option)
USHAWL-Mission 12 1987 June 1999
Dialysis (two additional
27862 Puerta Real 5-year renewal
Mission Viejo, CA 92691 options)
USHAWL-Orange County 10 1988 December
Dialysis West 1995 (one
16892 Bolsa Chica Road additional
Huntington Beach, CA 92661 5-year renewal
option)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Licensed Year
Stations Facility Lease
As of Opened Expiration
8/31/95 or Acquired Date
-------- ----------------------------
<S> <C> <C> <C>
USHAWL-Orange County 10 1988 April 1997
Dialysis South
31736 Rancho Viejo Road
San Juan Capistrano, CA
92675
USHAWL-Desert Dialysis 20 1990 December 1996
345 Tachevah
Palms Springs, CA 92263
USHAWL-Orange County 25 1993 September 1998
Dialysis - La Palma (three additional
1107 La Palma Ave 5-year renewal
Anaheim, CA 92803 options)
</TABLE>
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 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. The transaction is expected to be consummated during the 1996 fiscal
year. See Note 3 to the consolidated financial statements.
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. The Company expects to renovate the
building and use it in connection with its SalickNet and other business
operations and to enable it to expand its programs and services and provide new
and additional outpatient and ambulatory health care services. If the
additional land is built upon it will be used for similar purposes.
27
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
ended August 31, 1995 to a vote of security holders through the solicitation of
proxies or otherwise.
28
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR
NAME AGE POSITION HELD WITH COMPANY
- ---- --- --------------------------
<S> <C> <C>
Bernard Salick, M.D. 56 Chairman of the Board of
Directors, Chief Executive
Officer and President
Leslie F. Bell 55 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Michael T. Fiore 41 Executive Vice President-
Chief Operating Officer
and Director
Sheldon S. King 64 Executive Vice President
Barbara Bromley-Williams 56 Senior Vice President-Professional
Services and Director
Anthony LaMacchia 41 Senior Vice President-Operations
Blair L. Hundahl 41 Senior Vice President-Finance
Patricia Wilkinson 54 Vice President-Dialysis Operations
</TABLE>
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. ("AMI") 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
29
<PAGE>
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. The
Company has entered into an agreement with UCLA whereby Mr. King serves through
December 1995 as the Director of UCLA Medical Center.
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 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.
30
<PAGE>
PART II
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 past two fiscal years
through April 13, 1995 by fiscal quarter are set forth on the following table:
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
1st quarter ended November 30, 1993 16 1/2 13
2nd quarter ended February 29, 1994 17 1/4 14
3rd quarter ended May 31, 1994 19 15 1/2
4th quarter ended August 31, 1994 18 1/2 14 1/4
1st quarter ended November 30, 1994 25 1/8 17 7/8
2nd quarter ended February 28, 1995 35 1/2 24
3rd quarter through April 13, 1995 36 1/2 35 1/8
</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 SCHID. The high and low closing prices during the two fiscal quarters
since April 13, 1995 are set forth below:
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
3rd quarter, April 13 to May 31, 1995 35 5/8 34 1/4
4th quarter ended August 31, 1995 37 35
No shares of Preferred Stock have been issued.
</TABLE>
Based upon security position listings and the Company's belief, it is
estimated there were more than 1,200 holders of its callable puttable common
stock as of November 15, 1995.
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.
31
<PAGE>
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.
<TABLE>
<CAPTION>
Years ended August 31,
(In thousands except per share amounts)
-----------------------------------------------
1995 1994 1993 1992 1991
--------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenues, net $151,308 $131,529 $115,893 $95,056 $73,773
Operating income $ 17,442 $ 16,679 $ 14,418 $11,686 $ 9,134
Income before income taxes
and cumulative effect
of change in accounting
principle $ 11,451 $ 16,882 $ 14,387 $11,252 $ 7,236
Cumulative effect on
prior years (to August
31, 1994) of expensing
pre-operating costs as
incurred, net of income
taxes $ (3,588)
Net income (Note A) $ 923 $ 10,380 $ 8,976 $ 6,920 $ 4,518
Earnings per share (Note A):
Primary:
Income before
cumulative effect of
change in accounting
principle $ 0.44 $ 1.19 $ 1.05 $ 0.94 $ 0.80
Cumulative effect on
prior years (to
August 31, 1994) of
expensing pre-operating
costs as incurred (0.35)
-------- -------- -------- ------- -------
Net earnings per share $ 0.09 $ 1.19 $ 1.05 $ 0.94 $ 0.80
======== ======== ======== ======= =======
Fully diluted:
Income before
cumulative effect of
change in accounting
principle $ 0.45 $ 1.10 $ 0.98 $ 0.88 $ 0.75
Cumulative effect on
prior years (to August
31, 1994) of expensing
pre-operating costs as
incurred (0.33)
-------- -------- -------- ------- -------
Net earnings per share $ 0.12 $ 1.10 $ 0.98 $ 0.88 $ 0.75
======== ======== ======== ======= =======
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Years ended August 31,
(In thousands except per share amounts)
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Proforma amounts assuming
pre-operating costs are
retroactively expensed
as incurred:
Net income $ 4,511 $ 9,382 $ 7,531 $ 6,555 $ 4,668
Earnings per common
share-assuming no
dilution $ 0.44 $ 1.08 $ 0.88 $ 0.89 $ 0.83
Earnings per common
share-assuming full
dilution $ 0.45 $ 1.00 $ 0.84 $ 0.84 $ 0.77
</TABLE>
Note A: Pre-operating costs of $2,224,000 have been 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 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 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.
<TABLE>
<CAPTION>
August 31,
(In thousands)
-----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Working capital $ 29,975 $ 67,940 $ 63,503 $ 58,732 $26,719
Total assets $207,098 $166,082 $146,401 $131,018 $87,819
Long-term debt and
capitalized leases $ 11,145 $ 39,548 $ 37,231 $ 33,676 $32,541
Stockholders' equity $129,428 $102,295 $ 91,431 $ 82,214 $39,262
</TABLE>
33
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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
$0.24, 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
34
<PAGE>
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.
35
<PAGE>
FISCAL YEAR 1994 COMPARED TO 1993
Operating revenues increased for fiscal 1994 by 13.5% to $131,529,000 from
$115,893,000 for fiscal 1993. Operating income increased by 15.7% to
$16,679,000 versus $14,418,000 for the previous year. In the 1994 fiscal year's
fourth quarter, operating income increased 24% over the prior year's fourth
quarter. Income before taxes for fiscal 1994 increased 17.3% to $16,882,000
from $14,387,000 in fiscal 1993. Net income increased 15.6% to $10,380,000 from
$8,976,000 for the prior fiscal year and represented 7.9% and 7.7% respectively,
of operating revenues in the corresponding periods. Primary earnings per share
increased 13.3% to $1.19 from $1.05 and fully diluted earnings per share
increased 12.2% to $1.10 from $0.98 in the respective fiscal periods. Fourth
quarter primary earnings per share increased 18.5% to $0.32 from $0.27, and
fully diluted earnings per share increased 20% to $0.30 from $0.25. Increases
in revenues, operating income, net income and earnings per share resulted from
growth in patient volumes and services at the Company's existing facilities.
Operations of the Company's tenth cancer center at Westlake Medical Center in
Westlake, California were included for the first time in the 1994 second
quarter. Although the Company incurred costs in the development of its
SalickNet programs and the Company's bone marrow and stem cell transplantation
program over the past year and one half, revenues realized from these programs
were insignificant in fiscal 1994.
Net interest expense declined 41.4% due to capitalization of interest on
borrowings for construction projects, and higher interest rate yields on funds
invested in marketable securities. Net investment income declined $899,000 due
to trading transactions resulting from restructuring of the Company's portfolio.
The company expects this trend toward lower investment income to continue as
substantially all portfolio capital gains have been realized. 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 1994 declined 0.2%
before interest and investment expense, as compared to the prior year. Medical
supplies expense increased by $2,632,000 during the period, a 0.2% increase as a
percentage of revenues, reflecting the 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 $5,513,000 in the period, and decreased 0.8% as a
percentage of operating revenues. As compared to the prior year, other
administrative expenses for fiscal 1994 remained the same, relative to operating
revenues, primarily due to the incremental effect of increased operations.
Contract and occupancy costs increased 0.1% during the period, as
36
<PAGE>
a percentage of net operating revenues, principally resulting from establishment
of the Company's tenth Comprehensive Cancer Center and expansion of operations
into home care and managed care. Depreciation and amortization increased by
$1,379,000 during fiscal 1994 due to depreciation of additional clinic equipment
placed in service during the past year. Pre-operating and start-up costs, which
are capitalized, are being amortized over three years, beginning with the
commencement of operations.
Income taxes were calculated at a 38.5% rate in fiscal 1994 versus 37.6% in
fiscal 1993. In fiscal 1993, the Company utilized available federal capital
loss carrryforwards, lowering the Company's tax rates and increasing cash flow.
The primary cause for the increase in the effective rate for fiscal 1994 was an
increase in the federal statutory rate. 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
1996. The accelerated development, establishment or acquisition of a
significant number of additional Cancer Centers and/or dialysis centers or other
acquisitions or operations may require borrowing or equity financing by the
Company. Working capital at August 31, 1995 was $29,975,000. The decrease in
working capital during the current fiscal year as compared to fiscal 1994 is
principally the result of merger and related transaction expenses, the $0.3125
cash distribution per share to the former common stockholders as the result of
the merger and substantial completion of two permanent cancer centers. The
increase in accounts receivable at August 31, 1995 as compared to August 31,
1994 is due to the previously mentioned increased revenues which resulted from
growth in patient volumes and services provided at the Company's cancer centers
and dialysis facilities.
The Company's principal sources of liquidity consist of cash on hand,
interest-bearing investments, internal cash flow and bank lines of credit which
have been increased from $35,000,000 to $80,000,000. At August 31, 1995,
$18,072,000 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, 1995, the Company held in its portfolio cash, government and
investment grade debt securities and equity securities. These investments
represent 100% of the total portfolio at fair value and reflect the Company's
policy to invest its funds in government and investment grade securities. In
accordance with Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"), the Company
has increased the carrying value of its portfolio to fair value of $44,631,000
from cost of $44,587,000. As of August 31, 1995, the Company's five largest
investments in municipal and corporate debt securities, all of which were
investment grade aggregated $5,733,000 at fair value, with cost of $5,825,000.
The single largest investment in one company's securities approximated
$1,329,000 with fair value of $1,275,000.
Capital expenditures and the distributions to former common stockholders
pursuant to the merger for fiscal year 1996 are presently estimated to be
37
<PAGE>
approximately $57,000,000. 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. While the company expects changes
in reimbursement to occur, this may be limited to extensions of previously
implemented reductions scheduled to expire or may include additional changes.
The ultimate impact of any such changes on the Company's business cannot be
predicted, in part due to budgetary constraints and the rapidly evolving changes
in the health care system generally. The Company has developed and/or
implemented plans to deal with this situation and notes that in the past as
reimbursement reductions or changes have occurred, the Company has previously
been able to improve operations by an increased market share and greater
efficiency.
Under federal Medicare law, most hospital inpatients covered by Medicare
are classified into diagnostic related groups ("DRGs") based on such factors as
primary admitting diagnosis and surgical procedure. Payment to hospitals for
the care of a patient covered under the DRG system is generally set at a
predetermined amount based on the DRG assigned the patient. The federal
government, as well as many states and third party payors, are investigating or
have adopted these or other modifications to their reimbursement formula in an
effort to contain costs. This type of program provides an incentive for
hospitals to plan and deliver their services more efficiently.
The Omnibus Budget Reconciliation Act of 1990 amended the definition of
"inpatient hospital services" to include all services for which payment may be
made under the DRG system that are provided by a hospital or an entity wholly-
owned or operated by the hospital to a patient during the three days immediately
preceding the date of the patient's admission (or one day for hospitals and
hospital units excluded from the DRG system under technical changes enacted in
October 1994), if such services are diagnostic services (including clinical
diagnostic laboratory tests) or are other services related to the admission, as
defined by the Secretary of Health and Human Services ("the Secretary"). Such
services are not reimbursable separately as hospital outpatient services under
Medicare Part B. These provisions have been in effect since 1991. On January
12, 1994, the Secretary issued interim final regulations implementing this
provision and on September 1, 1995, the Secretary announced she will revise the
regulations to recognize that only the one day immediately preceding the date of
the patient's admission would be considered to be not reimbursable separately as
hospital outpatient services for hospitals and hospital units excluded from the
DRG system.
In recent years there have been a number of statutory and regulatory
changes that affect Medicare reimbursement for services furnished to hospital
outpatients. Prior to October 1, 1987, Medicare generally had reimbursed
hospital outpatient services on the basis of the reasonable costs (as determined
pursuant to regulations) incurred by the hospital. On October 1, 1987, Medicare
began reimbursing hospitals for certain surgery services
38
<PAGE>
furnished to hospital outpatients on the basis of the lower of reasonable costs
or an amount based on a blend of the hospital's reasonable costs and a
prospectively set fee schedule amount. On October 1, 1988, this blended payment
system was extended to radiology services furnished to hospital outpatient
patients; the blended payment system was extended further to certain other
diagnostic services on October 1, 1989. In addition, the amount of the blend
that is based on the hospital's reasonable costs has decreased; currently, the
blend is based 42% on hospital costs for surgery and radiology services, and 50%
on hospital costs for other diagnostic services. For surgery services reimbursed
under the blend, the fee schedule portion of the blend is based on the amount of
payment that ambulatory surgery centers would receive for the procedure. For
radiology and diagnostic services reimbursed under the blend, the fee schedule
portion of the blend is based on the amount that physicians would receive if the
procedure were furnished in a physician's office under the Medicare physician
fee schedule.
Under the Omnibus Budget Reconciliation Act of 1989, effective January 1,
1992, Medicare reimbursement for physician services began a five year transition
to the use of a physician fee schedule based on a "resource-based relative value
scale." That physician fee schedule, through the blended payment system
described above, has affected the amount of Medicare reimbursement for hospital
outpatient departments providing outpatient radiology, radiation therapy,
surgery and certain diagnostic services.
There is also the possibility of the establishment of a prospective payment
for certain Medicare-reimbursed hospital outpatient services. Congress had
requested that the Health Care Financing Administration ("HCFA"), which
administers Medicare, prepare recommendations concerning the establishment of
such a prospective payment system. HCFA submitted its recommendations to
Congress in March 1995 and included a proposal to phase in such a prospective
payment system, beginning first with outpatient surgery, radiology, and other
diagnostic services. The details of the proposed payment system, including the
amounts of payment that would be made for each procedure, have not been
finalized by HCFA. Adoption of HCFA's recommendation would require a change in
the Medicare law by Congress,and senior HCFA staff have stated that even if
Congress enacted such a change in 1995, the new system would not likely be
implemented until January 1997, at the earliest. Under HCFA's proposal,
services other than surgery, radiology, and other diagnostic services would not
be reimbursed under a new prospective payment system until further research is
completed. The Company cannot predict what will be the effect, if any, on
revenues or income which may result from the adoption by Congress of HCFA's
recommendations for a Medicare prospective payment for hospital outpatient
services.
HCFA in its March 1995 report to Congress made two other recommendations
concerning proposed changes in the Medicare law. First, HCFA proposed that the
Medicare law be changed to modify the way that the amount of beneficiary
coinsurance for outpatient services is computed. Second, HCFA proposed that
Medicare law be changed to correct what has been described as the "formula
driven overpayment" which HCFA states results in Medicare payments for hospital
outpatient surgery, radiology and other diagnostic services that are greater
than what was intended by Congress. In its report, HCFA suggested several ways
in which the Medicare law could be changed to address these issues, either with
or without the enactment of a prospective payment system for hospital outpatient
services. The alternatives suggested by HCFA generally would result in an
overall reduction in payments for hospital outpatient services furnished to
Medicare beneficiaries and, if enacted, could adversely affect the Company's
revenues and income. However, it is uncertain which alternative, if any,
Congress will enact, and it is impossible to determine what impact, if any, such
changes might have on the Company's revenues and income.
39
<PAGE>
Effective October 1, 1991, Medicare payments for hospital outpatient
services made on a reasonable cost basis and the cost portion of outpatient
services paid on the basis of a blended amount, were reduced by 5.8%. Under the
Omnibus Reconciliation Act of 1993 ("OBRA 1993"), Congress extended this
reduction through federal fiscal year 1998. Effective October 1, 1991, Medicare
has reimbursed the capital costs allocated to outpatient departments on the
basis of 90% of reasonable costs. Under OBRA 1993, Congress extended this 10%
reduction in hospital outpatient capital cost reimbursement through federal
fiscal year 1998. Also under OBRA 1993, the amount which Medicare reimburses
for clinical laboratory services was reduced.
Effective November 1, 1990, the Medicare fiscal intermediary for the
Company's dialysis facilities changed the method of reimbursing medications
provided to Medicare dialysis patients from charge-based reimbursement to
reimbursement based on reasonable costs. This change has reduced the amount of
reimbursement to the Company for such medications and other regulatory changes
potentially could further reduce such reimbursement. In addition, effective
January 1, 1991, the method of reimbursement for EPO furnished to dialysis
patients was changed from its former structure (80% of $40 per treatment dosage
for up to 10,000 units and 80% of $70 per treatment dosage of 10,000 or more
units) to provide for payment of 80% of $11.00 per 1,000 units. This change in
EPO reimbursement has been partially offset by a $1.00 per treatment increase in
the composite rate reimbursement for outpatient dialysis services. In addition,
pursuant to OBRA 1993, reimbursement for EPO was further reduced beginning
January 1, 1994 to 80% of $10.00 per 1,000 units. The Secretary announced on
September 1, 1995 that she will not at this time adjust the current composite
rate. The overall impact of the EPO reimbursement change has adversely affected
the Company's revenues and earnings.
The effect of these changes may be mitigated by the Company's ability to
increase its patient volume both at the same sites and at additional centers, to
increase its non-Medicare 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.
Legislation in Florida limits charges for certain healthcare services
provided to non-Medicare/Medicaid patients. A substantial portion of this law
has been challenged, a portion declared unconstitutional and is being appealed
in the federal court system and will not be enforced until after such
resolution; however, the limitations on rates respecting radiation therapy
services provided at freestanding, not hospital-based facilities, presently
remains in effect. As substantially all of the Company's radiation therapy
services are hospital-based, the effect of the legislation has not had a
material effect on the Company's operations. Florida also has legislation
precluding or limiting referrals by physicians to facilities in which they have
an ownership, control or investment relationship (the Florida Patient/Self-
Referral Act). One of the Company's radiation facilities in South Florida
currently has three physician investors who own less than two percent (2%) in
total and who make no referrals to the facility. The Company believes it is in
full compliance with the law.
Florida adopted legislation effective in 1994 which is aimed at health care
coverage for presently uninsured residents and encouraging the formation of
purchasing alliances for health care services. This legislation is principally
aimed at small employer groups. As it is now configured, the Company cannot
predict its future effect upon the Company and its operations. However, the
Company, as part of its overall strategy is in the process of developing various
plans to be offered to employer groups, purchasing alliances, health maintenance
organizations, managed care and other payors.
40
<PAGE>
The first of these plans has been successfully marketed in Florida with a major
capitated (per member, per month) agreement entered into with Physician's
Corporation of America currently covering 120,000 members in South Florida (See
"Additional Services" discussion of SalickNet).
To the extent that legislation or regulations may be enacted in the future
which may include outpatient services furnished to Medicare beneficiaries in a
prospective payment system, the Company cannot predict whether or to what extent
such a change would adversely affect its revenues or earnings. In addition, in
1995 Congress began considering extensive changes to the Medicare and Medicaid
programs. Medicare changes under consideration include, among others, (1) a
change in the formula used to calculate hospital outpatient reimbursement under
the blended payment system which generally would result in reducing
reimbursement amounts; (2) an extension of the current 5.8% reduction in
hospital outpatient reasonable cost reimbursement through the year 2002; (3) a
reduction in reimbursement for hospital outpatient department capital-related
costs of 85% of such reasonable costs for federal fiscal years 1996-2002; (4)
the introduction of a prospective payment system for home health services,
effective October 1996; (5) reductions in payment for clinical laboratory
services; (6) the elimination of updates in payments for ambulatory surgical
center services from 1996-2002: (7) various other reductions in the amount of
payment for physician and hospital services; and (8) the introduction of
additional choices of health plans for Medicare beneficiaries in addition to the
current fee-for-service and Medicare HMO option. Proposed Medicaid changes
include the replacement of the existing federal/state program with block grants
to the states and reduced federal oversight over state plans. The enactment of
large cuts in the amount of Medicare and Medicaid reimbursement for providers
could have an adverse effect on the Company's revenues. At this point in time.
however, it is uncertain which, if any, of these or other changes to the
Medicare and Medicaid programs will be enacted into law, and the Company is
unable to predict how the enactment of any such changes might affect the Company
in the future.
The Company believes that 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.
41
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
and Supplementary Data
<TABLE>
<CAPTION>
Page
Numbers
-------
<S> <C>
Report of Independent Accountants................... 43
Consolidated Statements of Income for each of the
Three Years in the Period Ended August 31, 1995... 44 - 45
Consolidated Balance Sheets at August 31,
1995 and 1994..................................... 46 - 47
Consolidated Statements of Cash Flows
for each of the Three Years in the
Period Ended August 31, 1995...................... 48 - 49
Consolidated Statements of Stockholders'
Equity for each of the Three Years in the Period
Ended August 31, 1995............................. 50 - 52
Notes to Consolidated Financial Statements.......... 53 - 64
Financial Statement Schedule
VIII - Allowance for Doubtful Accounts........ 65
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
42
<PAGE>
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 42 present fairly, in all material respects, the
financial position of Salick Health Care, Inc. and its subsidiaries at August
31, 1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended August 31, 1995, 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 Notes 1 and 8 to the consolidated financial
statements, the Company changed its method of accounting for pre-operating costs
in fiscal 1995 and adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" and SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" in fiscal 1994.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Los Angeles, California
November 16, 1995
43
<PAGE>
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Operating revenues, net (Note 1) $151,308,000 $131,529,000 $115,893,000
------------ ------------ ------------
Expenses:
Medical supplies and services 26,598,000 20,121,000 17,489,000
Salaries and related costs 61,572,000 54,497,000 48,984,000
Other administrative expenses 21,736,000 17,851,000 15,785,000
Contract and occupancy costs
(Notes 3 and 4) 15,749,000 13,867,000 12,082,000
Depreciation and amortization
(Note 1) 8,211,000 8,514,000 7,135,000
------------ ------------ ------------
Total expenses 133,866,000 114,850,000 101,475,000
------------ ------------ ------------
Operating income 17,442,000 16,679,000 14,418,000
Merger transaction expenses (Note 7) (7,685,000)
Net interest income (expense)
(Notes 1,4,5 and 6) 1,223,000 (663,000) (1,131,000)
Net investment (losses) gains
(Note 1) (104,000) 219,000 1,118,000
Minority interest (Note 9) 575,000 647,000 (18,000)
------------ ------------ ------------
Income before income taxes and
cumulative effect of change in
accounting principle 11,451,000 16,882,000 14,387,000
Provision for income taxes
(Note 8) 6,940,000 6,502,000 5,411,000
------------ ------------ ------------
Income before cumulative effect
of change in accounting
principle 4,511,000 10,380,000 8,976,000
Cumulative effect on prior years
(to August 31, 1994) of
expensing pre-operating costs
as incurred (Note 1) (3,588,000)
------------ ------------ ------------
Net income $ 923,000 $ 10,380,000 $ 8,976,000
============ ============ ============
Earnings per share (Note 1)
Primary:
Income before cumulative effect
of change in accounting
principle $ 0.44 $ 1.19 $ 1.05
Cumulative effect on prior years
(to August 31, 1994) of
expensing pre-operating costs
as incurred (0.35)
------------ ------------ ------------
Net earnings per share $ 0.09 $ 1.19 $ 1.05
============ ============ ============
Fully diluted:
Income before cumulative effect
of change in accounting
principle $ 0.45 $ 1.10 $ 0.98
Cumulative effect on prior years
(to August 31, 1994) of
expensing pre-operating costs
as incurred (0.33)
------------ ------------ ------------
Net earnings per share $ 0.12 $ 1.10 $ 0.98
============ ============ ============
</TABLE>
44
<PAGE>
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------------------------
1995 1994 1993
--------------- -------------- -------------
<S> <C> <C> <C>
Weighted average number of
shares used in computing
earnings per share:
Primary 10,311,000 8,709,000 8,565,000
=============== ============== =============
Fully diluted 10,960,000 10,576,000 10,442,000
=============== ============== =============
Proforma amounts assuming
pre-operating costs are
retroactively expensed
as incurred:
Net income $ 4,511,000 $ 9,382,000 $ 7,531,000
Earnings per share:
Primary $ 0.44 $ 1.08 $ 0.88
Fully diluted $ 0.45 $ 1.00 $ 0.84
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
ASSETS 1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 642,000 $ 1,692,000
Marketable securities (Note 1) 44,631,000 45,378,000
Accounts receivable, less allowance
for doubtful accounts of $2,885,000 and
$3,502,000 (Note 1) 36,248,000 31,772,000
Inventories (Note 1) 1,305,000 1,171,000
Prepaid expenses 1,677,000 2,252,000
Other current assets 1,967,000 2,881,000
Refundable income taxes (Note 8) 2,545,000
Deferred income taxes (Note 8) 5,047,000 2,241,000
------------ ------------
Total current assets 94,062,000 87,387,000
Property and equipment, at cost, less
accumulated depreciation and amortization
of $32,841,000 and $25,365,000
(Notes 1 and 4) 101,651,000 60,280,000
Pre-operating costs (Note 1) 5,250,000
Deposits 725,000 3,090,000
Goodwill, net (Notes 1 and 9) 5,494,000 5,421,000
Other assets 5,166,000 4,654,000
------------ ------------
$207,098,000 $166,082,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable to bank (Notes 5 and 6) $ 18,072,000 $ 3,000,000
Accounts payable and accrued liabilities
(Note 2) 41,063,000 13,162,000
Income taxes payable (Note 8) 537,000
Current portion of long-term
obligations (Notes 4 and 6) 4,952,000 2,748,000
------------ ------------
Total current liabilities 64,087,000 19,447,000
Deferred income taxes (Note 8) 67,000 1,545,000
Capitalized lease obligations, less
current portion (Note 4) 5,235,000 4,276,000
Long-term debt, less current portion
(Notes 5 and 6) 5,910,000 35,272,000
Other liabilities 2,400,000
Minority interest (Note 9) (29,000) 3,247,000
------------ ------------
Total liabilities 77,670,000 63,787,000
------------ ------------
</TABLE>
46
<PAGE>
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Commitments and contingencies (Notes 3 and 4)
Stockholders' equity (Note 7)
Preferred stock, $.001 par value
5,000,000 shares authorized,
none issued
Common stock, $.001 par value, 15,000,000
and 25,000,000 shares authorized,
5,657,115 and 8,456,513 shares issued
and outstanding 6,000 8,000
Callable puttable common stock,
$.001 par value, 7,500,000 shares
authorized, 5,634,082 and no shares
issued and outstanding 5,000
Additional paid in capital 79,738,000 54,107,000
Unearned stock awards (6,000)
Unrealized holding gains (losses) 44,000 (526,000)
Retained earnings 49,635,000 48,712,000
------------ ------------
Total stockholders' equity 129,428,000 102,295,000
------------ ------------
$207,098,000 $166,082,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flow provided (used)
by operations:
Net income $ 923,000 $ 10,380,000 $ 8,976,000
Add items not requiring cash:
Depreciation and amortization 8,211,000 8,514,000 7,135,000
Amortization of debt issue
costs 23,000 66,000 66,000
Vested shares issued under
management incentive plan 6,000 49,000 197,000
Deferred income taxes (4,284,000) (477,000) 236,000
Minority interest in loss,
net of distributions (711,000) (666,000) (28,000)
Cumulative effect on prior
years (to August 31, 1994) of
expensing pre-operating costs
as incurred 5,981,000
Merger transaction expenses 6,423,000
Changes in assets and liabilities:
Accounts receivable (6,564,000) (3,318,000) (1,065,000)
Inventories (134,000) (238,000) 353,000
Prepaid expenses 575,000 (394,000) (251,000)
Other current assets 437,000 26,000 (985,000)
Pre-operating costs (728,000) (2,644,000) (2,690,000)
Deposits and other assets 1,170,000 (667,000) 73,000
Accounts payable and
accrued liabilities 2,692,000 228,000 2,380,000
Refundable income taxes (2,545,000) 1,296,000 (1,296,000)
Income taxes payable (537,000) 537,000 (87,000)
------------ ------------ ------------
Net cash flow provided
by operations 10,938,000 12,692,000 13,014,000
------------ ------------ ------------
Cash flow provided (used) by
investing activities:
Proceeds from sales of
marketable securities 58,049,000 32,338,000 27,763,000
Investment in marketable
securities (56,732,000) (34,742,000) (30,809,000)
Additions to property
and equipment (32,264,000) (18,105,000) (12,202,000)
Payment for purchase
of acquisitions (231,000) (248,000) (226,000)
Payments received on amounts
due from minority interest 3,314,000
------------ ------------ ------------
Net cash flow used by
investing activities (31,178,000) (17,443,000) (15,474,000)
------------ ------------ ------------
</TABLE>
48
<PAGE>
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flow provided (used)
by financing activities:
Exercise of stock options $ 4,777,000 $ 619,000 $ 44,000
Tax effect of stock options
exercised credited to
paid in capital 1,985,000
Reduction of capitalized
lease obligations (1,017,000) (711,000) (716,000)
Increase (decrease) in
long-term debt (1,857,000) 4,105,000 5,081,000
Notes payable to bank, net 15,072,000 (593,000)
Stock registration costs
charged to paid in capital (580,000)
Accrued interest on
convertible debentures
credited to paid in capital 810,000
----------- ---------- -----------
Net cash flow provided by
financing activities 19,190,000 4,013,000 3,816,000
----------- ---------- -----------
Increase (decrease) in cash $(1,050,000) $ (738,000) $ 1,356,000
Cash, beginning of period 1,692,000 2,430,000 1,074,000
----------- ---------- -----------
Cash, end of period $ 642,000 $1,692,000 $ 2,430,000
=========== ========== ===========
Schedule of non-cash investing
and financing activities:
Conversion of 7.25% convertible
subordinated debentures due
January 31, 2001 into
common stock $25,573,000 $ 342,000
=========== ==========
Capital lease
obligations incurred for
property and equipment $ 2,250,000 $ 321,000 $ 134,000
=========== ========== ===========
Unrealized holding gains
(losses) $ 570,000 $ (526,000)
=========== ==========
Accrual for purchase of
corporate headquarters $14,650,000
===========
Deferred bond issue costs
charged to paid in capital
upon conversion of the
the subordinated debentures $ 400,000
===========
Special distribution payable
to stockholders $ 6,534,000
===========
Westlake Joint Venture
settlement credited against
amounts due from venture
partner $ 2,565,000
===========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
<TABLE>
<CAPTION>
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK (NOTE 7)
-----------------------------------------------------------------------------------
CALLABLE PUTTABLE
COMMON STOCK COMMON STOCK UNREALIZED
----------------- -------------------
ADDITIONAL UNEARNED HOLDING
PAR PAR PAID IN STOCK GAINS RETAINED
SHARES VALUE SHARES VALUE CAPITAL AWARDS (LOSSES) EARNINGS
--------- --------- --------- ------------ ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31,
1992 8,318,492 $ 8,000 $ $ 52,948,000 $ (98,000) $ $ 29,356,000
Shares issued on exer-
cise of stock options 9,557 58,000
Shares issued under
management incentive
plan, less amortiza-
tion of $109,000 15,023 154,000 (45,000)
Amortization of shares
issued in prior years
under management
incentive plan 88,000
Forfeiture of shares
issued under manage-
ment incentive plan (1,336) (14,000)
Net income 8,976,000
---------- --------- --------- ------------ ------------ --------- ---------- ------------
Balance at August 31,
1993 8,341,736 8,000 53,146,000 (55,000) 38,332,000
Shares issued on exer-
cise of stock options 91,469 630,000
Conversion of 7.25%
subordinated deben-
tures 24,425 342,000
Amortization of shares
issued in prior years
under management
incentive plan 49,000
Forfeiture of shares
issued under manage-
ment incentive plan (1,117) (11,000)
Valuation allowance to
reduce portfolio to
fair value (526,000)
Net income 10,380,000
---------- --------- --------- ------------ ------------ --------- ---------- ------------
Balance at August 31,
1994 8,456,513 $8,000 $54,107,000 $ (6,000) $ (526,000) $ 48,712,000
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK (NOTE 7)
--------------------------------------------------------------------------------
CALLABLE PUTTABLE
COMMON STOCK COMMON STOCK
------------------ ------------------
UNREALIZED
ADDITIONAL UNEARNED HOLDING
PAR PAR PAID IN STOCK GAINS RETAINED
SHARES VALUE SHARES VALUE CAPITAL AWARDS (LOSSES) EARNINGS
--------- --------- --------- ------- ------------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares issued on
exercise of stock
options 578,354 $ 1,000 406,625 $ $ 4,777,000 $ $ $
Additional shares
issued upon
recapitalization 23,000
Tax effect of stock
options exercised
credited to paid
in capital 1,985,000
Conversion of 7.25%
subordinated deben-
tures 1,826,734 2,000 25,573,000
Accrued interest on
debentures at
conversion 810,000
Conversion of common
stock into callable
puttable common
stock at merger (5,227,486) (5,000) 5,227,457 5,000
Deferred bond issue
costs charged to
paid in capital (400,000)
Stock registration
costs charged to
paid in capital (580,000)
Special distribution
payable to stock-
holders (6,534,000)
Amortization of
shares issued in
prior years under
management incentive
plan 6,000
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK (NOTE 7)
-------------------------------------------------------------------------
CALLABLE PUTTABLE
COMMON STOCK COMMON STOCK
--------------------- ------------------
UNREALIZED
ADDITIONAL UNEARNED HOLDING
PAR PAR PAID IN STOCK GAINS RETAINED
SHARES VALUE SHARES VALUE CAPITAL AWARDS (LOSSES) EARNINGS
-------- ------ -------- ------ ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Valuation allowance to
increase portfolio to
fair value 570,000
Net income 923,000
--------- ------- --------- ------ ----------- -------- ---------- -----------
5,657,115 $ 6,000 5,634,082 $5,000 $79,738,000 $ -0- $ 44,000 $49,635,000
========= ======= ========= ====== =========== ========= ========== ===========
</TABLE>
52
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 $102,439,000, $87,029,000, and
$67,084,000 for the years ended August 31, 1995, 1994, and 1993, 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 $44,631,000 and $45,378,000 as of August 31, 1995 and
1994, respectively. Cost of the marketable securities portfolio was $44,587,000
and $45,904,000 at August 31, 1995 and 1994, respectively. Net realized losses
of $177,000 and $386,000, and net realized gains of $1,027,000, for the years
ended August 31, 1995, 1994 and 1993, respectively, are recorded in net
investment gains (losses). The costs of marketable securities sold are
determined by the specific identification method.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. SFAS 115, effective for fiscal years beginning
after December 15, 1993, 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. The Company adopted SFAS 115
in the fourth quarter of fiscal 1994, and consequently, reported unrealized
holding gains of $44,000 and losses of $526,000 as separate components of
stockholders' equity in the Company's balance sheets as of August 31, 1995 and
1994, respectively. Proceeds from sales of available-for-sale securities were
$58,049,000 and $32,338,000 for the years ended August 31, 1995 and 1994,
respectively. Gross
53
<PAGE>
realized gains were $281,000 and $606,000 and gross realized losses were
$458,000 and $992,000 on these sales.
Aggregate cost, market value and unrealized holding gains (losses) for the
major components of the Company's portfolio, at August 31, 1995, are as follows:
<TABLE>
<CAPTION>
Unrealized
Market Holding
Cost Value Gain(Loss)
----------- ----------- ----------
<S> <C> <C> <C>
Government debt securities
(due 1995-2025).......... $37,714,000 $37,581,000 $(133,000)
Corporate debt securities
(due 1995-2029).......... 4,551,000 4,548,000 (3,000)
Equity securities.......... 2,094,000 2,274,000 180,000
Cash....................... 228,000 228,000
----------- ----------- ---------
$44,587,000 $44,631,000 $ 44,000
=========== =========== =========
</TABLE>
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:
<TABLE>
<CAPTION>
Estimated August 31,
----------------------------
Useful Lives 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Land.................... $ 2,822,000 $ 932,000
Buildings............... 20-25 years 38,851,000 21,119,000
Leasehold improvements.. 3-25 years 14,296,000 12,668,000
Clinic equipment........ 5-15 years 26,536,000 23,200,000
Furniture and fixtures.. 5-7 years 13,109,000 11,094,000
Automobiles and trucks.. 3-7 years 678,000 610,000
------------ ------------
96,292,000 69,623,000
Less accumulated
depreciation and amortization (32,841,000) (25,365,000)
------------ ------------
63,451,000 44,258,000
Construction in progress 38,200,000 16,022,000
------------ ------------
$101,651,000 $ 60,280,000
============ ============
</TABLE>
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,
1995, 1994 and 1993 was $1,920,000, $563,000 and $214,000, respectively.
INCOME TAXES
In 1994 the Company adopted Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. SFAS 109 requires the use of the liability
method for computing deferred income taxes. Under the new standard deferred tax
liabilities are recognized for taxable temporary differences and deferred tax
54
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. The cumulative effect of prior years at the
date of adoption was not material to the results of operations or the financial
position of the Company. Through August 31, 1993, income taxes were accounted
for under Accounting Principles Board Opinion No. 11.
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 fiscal periods presented
(Note 6).
PRE-OPERATING COSTS
Pre-operating costs have been expensed for fiscal 1995. 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 and $371,000 during the years ended August 31, 1994 and
1993, respectively. Unamortized pre-operating costs were $5,250,000 at August
31, 1994. In the fourth quarter, giving effect to the first quarter of fiscal
1995, 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 Zeneca Group, PLC, the
beneficial owner of more than 50% of the Company's common equity.
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, $66,000 and $66,000 during the years ended
August 31, 1995, 1994 and 1993, 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, 1995, 1994 and 1993 was $159,000, $151,000, and $146,000, 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
55
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
instruments. The fair value of the convertible subordinated debentures at August
31, 1994 was estimated based on the trading price of the underlying marketable
securities to which the debentures could be converted. 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.
NOTE 2-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
August 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Accounts payable................. $ 6,733,000 $ 4,516,000
Accrued compensation............. 4,485,000 3,107,000
Corporate headquarters purchase.. 14,650,000
Special distribution to
stockholders................... 6,534,000
Merger transaction expenses...... 4,023,000
Other accrued liabilities........ 4,638,000 5,539,000
----------- -----------
$41,063,000 $13,162,000
=========== ===========
</TABLE>
NOTE 3-RELATED PARTY TRANSACTIONS
LEASES
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 16 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, 1995, 1994 and 1993 were approximately
$1,041,000, $1,008,000, and $969,000, 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.
NOTE 4-LEASES AND COMMITMENTS
The Company leases from the Lessors (See Note 3) a chronic dialysis
treatment center at minimum annual rental of $617,000. The lease has a
remaining term of approximately 11 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.
56
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Annual future minimum lease payments as of August 31, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Capital
August 31, Leases Leases
------------ ---------- -----------
<S> <C> <C> <C>
1996............................ $1,745,000 $ 1,581,000
1997............................ 1,030,000 1,534,000
1998............................ 927,000 1,509,000
1999............................ 702,000 1,279,000
2000............................ 620,000 568,000
Thereafter...................... 2,676,000 2,735,000
---------- -----------
Total minimum lease payments,
including $2,637,000 under operating
leases and $4,895,000 under capital
leases payable to the Company's
lessors described in Note 3........... $7,700,000 9,206,000
==========
Less interest and
executory costs....................... 2,949,000
-----------
Present value of minimum
lease payments........................ 6,257,000
Less current portion................... (1,022,000)
-----------
$ 5,235,000
===========
</TABLE>
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:
<TABLE>
<CAPTION>
August 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Buildings......... $ 2,858,000 $ 2,858,000
Clinic equipment.. 6,867,000 4,829,000
----------- -----------
9,725,000 7,687,000
Less accumulated
amortization..... (3,373,000) (2,888,000)
----------- -----------
$ 6,352,000 $ 4,799,000
=========== ===========
</TABLE>
During the years ended August 31, 1995, 1994 and 1993 rent expense under
operating leases totalled $2,427,000, $2,438,000, and $2,469,000, respectively.
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 $4,752,000
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 was renewed
during the current fiscal year and is subject to renewal in 1998, for lines of
credit of $80,000,000 with interest payable at the bank's prime rate (8.75% at
August 31, 1995) 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, 1995,
there was $18,072,000 in outstanding borrowings under the revolving line of
credit. During the year ended August 31, 1995 the Company paid $1,227,000 in
interest expense relating to the revolving line of credit. Under the prior
agreement, the Company
57
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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:
<TABLE>
<CAPTION>
August 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Term bank loan............................. $ 7,083,000 $ 9,000,000
Equipment purchase debt.................... 2,757,000 2,697,000
7.25% convertible subordinated
debentures................................ 25,575,000
----------- -----------
Total long-term debt....................... 9,840,000 37,272,000
Less current portion....................... (3,930,000) (2,000,000)
----------- -----------
$ 5,910,000 $35,272,000
=========== ===========
</TABLE>
Equipment purchased under agreements from hospitals at which the Company
operates Cancer Centers becomes payable in full, upon opening of the permanent
Cancer Centers, which are presently expected in fiscal 1996. Interest under one
of the agreements accrues at the rate of 7% per annum and is due upon opening of
the permanent Cancer Center. Under the other agreement, $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, 1994 and
1993, 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, 1995, 1994 and 1993, interest payments
made on long-term debt totalled $1,452,000, $2,286,000 and $1,879,000,
respectively. During the years ended August 31, 1995, 1994 and 1993, interest
expense on the lines of credit, capital leases and long-term debt totalled
$3,279,000, $3,605,000 and $3,460,000, respectively.
58
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Long-term debt maturing during the five years subsequent to August 31,
1995 is as follows:
<TABLE>
<CAPTION>
Year Amount
---- -----------
<S> <C>
1996........................ $ 3,930,000
1997........................ 2,826,000
1998........................ 2,000,000
1999........................ 1,000,000
2000........................ 83,000
-----------
$ 9,839,000
===========
</TABLE>
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 ("Salick California"), 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 has been 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 Company from Zeneca to fund the Put and/or the Call will be credited to
stockholders' equity.
59
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MANAGEMENT INCENTIVE COMPENSATION PLAN
The Company adopted a Management Incentive Compensation Plan following
stockholder approval in August 1991 which provides for payment of cash and/or
the award of shares of common stock which may or may not be subject to
conditions or restrictions on the participant's right to transfer or sell such
shares. This Incentive Plan covers an aggregate of 200,000 shares of common
stock which may be granted to certain officers and key employees of the Company.
During fiscal year 1993 (as respects prior fiscal year results) 15,023 shares of
common stock were issued under this Incentive Plan, none of which are subject to
restrictions as of August 31, 1995.
Unearned stock awards of $6,000 and $55,000 at August 31, 1994 and 1993,
respectively, are recorded as a reduction in stockholders' equity.
STOCK OPTIONS
The Company has authorized 1,100,000 shares of common stock to be granted
as options under its Stock Option Plan. The Company has granted options at fair
market values on the dates of the grants. Transactions for fiscal years 1993,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Range
---------- ---------------
<S> <C> <C>
Balance, August 31, 1992 492,083
Granted 227,500 $10.13 - $11.14
Exercised (9,557) $ 4.50 - $10.50
Forfeited or expired (11,433) $ 5.50 - $10.50
--------
Balance, August 31, 1993 698,593
Granted 5,000 $13.25
Exercised (91,469) $ 5.50 - $10.50
Forfeited (21,669) $10.13 - $10.50
--------
Balance, August 31, 1994 590,455
Exercised (570,354) $ 5.50 - $13.25
Forfeited (1,101) $10.13
--------
Balance, August 31, 1995 19,000
========
</TABLE>
The options when granted became exercisable in varying terms of up to
thirty-six months from the grant date and expired five years thereafter. In
case of termination of employment, options not yet exercisable and those not
exercised as provided in the Stock Option Plan are subject to risk of
forfeiture. 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.
In October 1987, options outstanding under the Company's Stock Option
Plan which had been granted at prices ranging from $9.33 to $12.62 per share
were canceled and options at an exercise price of $7.00 to $7.70 per share were
granted to the persons whose options were canceled. Options granted prior to
and during the period of September 1, 1987 through May 31, 1990 at exercise
prices ranging from $7.00 to $12.50 per share were canceled and new options
issued on June 1, 1990 at exercise prices of $5.50 to $6.05 per share.
In 1994 the stockholders approved the Company's adoption of a Non-
Employee Director Stock Option Plan (the "Director Plan"), pursuant to which up
to 100,000
60
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
shares of the Company common stock may be issued upon exercise of options
granted thereunder. The Director Plan provides that on the last business day of
each April, commencing with April 30, 1993, during the term of the Director
Plan, each non-employee Director of the Company will 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 per share to be paid upon exercise of an option granted under
the Director Plan is 100% of the fair market value of a share of common stock on
the date of grant of such option. Each option granted under the Director Plan
has a five-year term and will be exercisable as to fifty percent of the shares
covered thereby on the first anniversary date of the date of grant thereof and
as to all of the shares covered thereby from and after the second anniversary
date of the date of grant thereof. Options for 6,000 shares in 1993 were
granted to three director participants at an exercise price of $10.13 per share.
In addition, on April 30, 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 were eligible to convert their options into options for
purchase of the new callable puttable common stock and the Director Plan was
terminated. During fiscal 1995, 8,000 options were exercised at an exercise
price of $10.13 to $15.50 per share. Four thousand options remain outstanding
at August 31, 1995.
NOTE 8-INCOME TAXES
The components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
Years Ended August 31,
------------------------------------
1995 1994 1993
------------ ---------- ----------
<S> <C> <C> <C>
Current:
Federal............ $ 6,581,000 $4,436,000 $3,890,000
State.............. 2,308,000 1,589,000 1,285,000
----------- ---------- ----------
8,889,000 6,025,000 5,175,000
----------- ---------- ----------
Deferred:
Federal............ (1,227,000) 418,000 130,000
State.............. (722,000) 59,000 106,000
----------- ---------- ----------
(1,949,000) 477,000 236,000
----------- ---------- ----------
$ 6,940,000 $6,502,000 $5,411,000
=========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended August 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Provision computed at
statutory rate.............. $4,008,000 $5,909,000 $4,913,000
State taxes, net of federal
income tax benefit.......... 1,137,000 1,071,000 916,000
Non deductible merger costs 2,489,000
Markup (markdown) of
investment portfolio...... 62,000 (76,000) (382,000)
Other........................ (756,000) (402,000) (36,000)
---------- ---------- ----------
$6,940,000 $6,502,000 $5,411,000
========== ========== ==========
</TABLE>
61
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 1993, 1994 and 1995. At August 31, 1995, the Company had
approximately $1,125,000 of capital losses available for carryforward to future
years. The capital losses will expire, if not utilized, in the years ending
August 31, 1996 through 1999. A 100% valuation allowance has been established
to offset the deferred tax benefit associated with the capital loss
carryforward.
The Company's deferred tax assets (liabilities) were comprised of the
following:
<TABLE>
<CAPTION>
August 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Salary accrual............................. $ 143,000 $ 239,000
State taxes................................ 245,000 522,000
Bad debts.................................. 1,243,000 1,480,000
Capital transactions....................... 506,000 482,000
Stock options.............................. 1,703,000
Business expansion......................... 1,713,000
---------- -----------
Gross deferred tax assets.................. 5,553,000 2,723,000
---------- -----------
Deferred Tax Liabilities:
Depreciation............................... (22,000) (281,000)
Partnerships............................... (45,000) (38,000)
Business expansion......................... (1,226,000)
---------- -----------
Gross deferred tax liabilities............. (67,000) (1,545,000)
---------- -----------
Valuation allowance........................ (506,000) (482,000)
---------- -----------
Net deferred tax assets.................... $4,980,000 $ 696,000
========== ===========
</TABLE>
During the years ended August 31, 1995, 1994 and 1993, total tax payments were
$9,931,000, $5,257,000 and $6,559,000, 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 $195,000, $248,000 and $226,000 has
been paid under a contractual formula for the years ended August 31, 1995, 1994
and 1993, 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.
62
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
The three investments are accounted for using the equity method. The combined
carrying value, recorded in other assets, of the investments at August 31, 1995
and 1994 was $1,604,000 and $1,772,000, 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. The financial results of SFROC, net
of the 20% minority interest, have been consolidated with the results of the
Company. During fiscal 1995, the Company acquired substantially all of the
remaining 20% ownership interest from the previous owners.
63
<PAGE>
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10-QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data in thousands (except for per share data)
for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 QUARTER (1) (2) 1ST 2ND 3RD 4TH
-------------------------------------
<S> <C> <C> <C> <C>
Operating revenues, net $36,176 $38,170 $39,017 $37,945
Operating income 4,075 4,525 5,180 3,662
Net income (loss) (950) 2,600 (3,556) 2,829
Earnings (loss) per share:
Primary (0.10) 0.26 (0.32) 0.25
Fully diluted (0.06) 0.25 (0.32) 0.25
As previously reported:
Operating revenues, net 35,965 37,981 38,754
Operating income 4,606 4,981 5,575
Net income (loss) 2,960 2,874 (3,319)
Earnings per share:
Primary 0.34 0.29 (0.30)
Fully diluted 0.31 0.28 (0.30)
<CAPTION>
1994 QUARTER 1ST 2ND 3RD 4TH
------------------------------------
<S> <C> <C> <C> <C>
Proforma results assuming
the new method of accounting
is applied retroactively:
Operating revenues, net $29,463 $32,507 $34,436 $35,302
Operating income 2,916 3,649 4,262 4,244
Net income 1,925 2,323 2,472 2,662
Earnings per share:
Primary 0.22 0.27 0.28 0.30
Fully diluted 0.21 0.25 0.26 0.28
As previously reported:
Operating income 3,658 4,016 4,486 4,519
Net income 2,392 2,554 2,606 2,828
Earnings per share:
Primary 0.28 0.29 0.30 0.32
Fully diluted 0.26 0.27 0.28 0.30
</TABLE>
(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 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.
64
<PAGE>
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, 1995
<TABLE>
<CAPTION>
Balance at Additions Reductions Balance
Beginning Charged to Net of at End
of Year Income Recoveries of Year
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
1993 $3,958,000 $ 9,603,000 $(10,188,000) $3,373,000
1994 $3,373,000 $ 9,992,000 $ (9,863,000) $3,502,000
1995 $3,502,000 $10,521,000 $(11,138,000) $2,885,000
</TABLE>
65
<PAGE>
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. 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. 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. 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. 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. 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.
66
<PAGE>
(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(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.
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.
67
<PAGE>
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.
68
<PAGE>
*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.
69
<PAGE>
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.
70
<PAGE>
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) Employee 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.
11 Computation of Net Earnings per Common Share.
18 Letter from Price Waterhouse LLP regarding change in
method of accounting.
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 requires 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, 1995.
71
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ BERNARD SALICK, M.D. Chairman of the Board, 11/28/95
- ------------------------------ --------
Bernard Salick, M.D. Chief Executive Officer and
President
/s/ LESLIE F. BELL Executive Vice President, Chief 11/28/95
- ------------------------------ --------
Leslie F. Bell Financial Officer, Secretary
and Director
/s/ MICHAEL T. FIORE Executive Vice President, Chief 11/28/95
- ------------------------------ --------
Michael T. Fiore Operating Officer and Director
/s/ BARBARA BROMLEY-WILLIAMS Senior Vice President- 11/28/95
- ------------------------------ --------
Barbara Bromley-Williams Professional Services and
Director
/s/ THOMAS MINTZ, M.D. Director 11/28/95
- ------------------------------ --------
Thomas Mintz, M.D.
Director
- ------------------------------ --------
Thomas F. W. McKillop
/s/ MICHAEL CARTER, M.D. Director 11/28/95
- ------------------------------ --------
Michael Carter, M.D.
Director
- ------------------------------ --------
Clifford Richard Guy, M.D.
Director
- ------------------------------ --------
John G. Goddard
Director
- ------------------------------ --------
Robert Black
/s/ BLAIR L. HUNDAHL Senior Vice President-Finance 11/28/95
- ----------------------------- --------
Blair L. Hundahl (Principal Accounting Officer)
</TABLE>
72
<PAGE>
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(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.
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.
73
<PAGE>
Exhibit
- -------
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.
74
<PAGE>
Exhibit
- -------
*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.
75
<PAGE>
Exhibit
- -------
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.
76
<PAGE>
Exhibit
- -------
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) Employee 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.
11 Computation of Net Earnings per Common Share.
18 Letter from Price Waterhouse LLP regarding change
in method of accounting.
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 requires to be filed as an exhibit to this
Form 10-K.
77
<PAGE>
BANK OF AMERICA
National Trust and Savings Association
BUSINESS LOAN AGREEMENT
This Agreement dated as of August 1, 1995, is among Bank of American National
Trust and Savings Association (the "Bank"), Salick Health Care, Inc. ("Salick"),
USHAWL, Inc. ("USHAWL"), Century Dialysis Corporation ("Century"), Comprehensive
Cancer Centers, Inc., a California Corporation ("CCC"), Ambulatory Diagnostic
Services, Inc. ("ADS"), Aurora Medical Supplies Inc., a California Corporation
("Aurora"), Comprehensive Cancer Centers, Inc.-Philadelphia ("CCC-Penn"),
Comprehensive Cancer Centers, Inc., Kansas City ("CCC-Kansas"), SHC
Laboratories, Inc. ("SHC"), and Comprehensive Cancer Centers-West Valley, Inc.
("CCC-West") (Salick, USHAWL, Century, CCC, ADS, Aurora, CCC-Penn, CCC-Kansas,
SHC, and CCC-West are sometimes referred to collectively as the "Borrowers" and
individually as the "Borrower").
1. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit ("Facility No. 1") to the Borrowers. The amount of the line
of credit (the "Facility No. 1 Commitment") is Eighty Million Dollars
($80,000,000).
(b) This is a revolving line of credit with a within line facility for letters
of credit. During the availability period, the Borrowers may repay
principal amounts and reborrow them.
(c) The Borrowers agree not to permit the outstanding principal balance of the
line of credit plus the outstanding amounts of any letters of credit,
including amounts drawn on letters of credit and not yet reimbursed, to
exceed the Facility No. 1 Commitment.
1.2 Availability Period. The line of credit is available between the date of
this Agreement and July 1, 1998 (the "Expiration Date") unless any Borrower is
in default.
1.3 Interest Rate.
(a) Unless the Borrowers elect an optional interest rate as described below,
the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time to
time by the Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by the Bank
EXHIBIT 4 (a)
<PAGE>
based on various factors, including the Bank's costs and desired return,
general economic conditions and other factors, and is used as a reference
point for pricing some loans. The Bank may price loans to its customers
at, above, or below the Reference Rate. Any change in the Reference Rate
shall take effect at the opening of business on the day specified in the
public announcement of a change in the Bank's Reference Rate.
1.4 Repayment Terms.
(a) The Borrowers will pay interest on July 1, 1995, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrowers will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date. Any amount bearing interest at an optional interest rate
(as described below) may be repaid at the end of the applicable interest
period, which shall be no later than the Expiration Date.
1.5 Optional Interest Rates. Instead of the interest rate based on the Bank's
Reference Rate, the Borrowers may elect to have all or portions of the line of
credit (during the availability period) bear interest at the rate(s) described
below during an interest period agreed to by the Bank and the Borrowers. Each
interest rate is a rate per year. Interest will be paid on the last day of each
interest period, and, if the interest period is longer than one month, then on
the first day of each month during the interest period. At the end of any
interest period, the interest rate will revert to the rate based on the
Reference Rate, unless the Borrowers have designated another optional interest
rate for the portion. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
1.6 Short Term Fixed Rate. The Borrower may elect to have all or portions of
the principal balance of the line of credit bear interest at the Short Term
Fixed Rate, subject to the following requirements:
(a) The "Short Term Fixed Rate" means the Short Term Base Rate plus thirty five
one hundredths (.35) percentage point.
(b) The "Short Term Base Rate" means the fixed interest rate per annum,
determined solely by the Bank on the first day of applicable interest
period for the Short Term Fixed Rate portion, as the rate at which the Bank
would be able to borrow funds in the Money Market in the amount of the
Short Term Fixed Rate portion and with an interest and principal payment
schedule equal to the Short Term Fixed Rate portion and for a
EXHIBIT 4 (a)
<PAGE>
term equal to the applicable interest period. The Short Term Base Rate
shall include adjustments for reserve requirements, federal deposit
insurance, and any other similar adjustment which the Bank deems
appropriate. The Short Term Base Rate is the Bank's estimate only and the
Bank is under no obligation to actually purchase or match funds for any
transaction.
(c) "Money Market" means one or more wholesale funding markets available to the
Bank, including domestic negotiable certificates of deposit, eurodollar
deposits, bank deposit notes or other appropriate money market instruments
selected by the Bank.
(d) The interest period during which the Short Term Fixed Rate will be in
effect will be no shorter than 30 days and no longer than one year.
(e) Each Short Term Fixed Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(f) Any portion of the principal balance of the line of credit already bearing
interest at the Short Term Fixed Rate will not be converted to a different
rate during its interest period.
(g) Each prepayment of a Short Term Fixed Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to the
amount (if any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the Money Market for a period
starting on the date on which it was prepaid and ending on the last
day of the interest period for such portion (or the scheduled payment
date for the amount prepaid, if earlier).
1.7 LIBOR Rate. The Borrower may elect to have all or portions of the
principal balance bear interest at the LIBOR Rate plus thirty five one
hundredths (.35) percentage point.
Designation of a LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will be in effect will be
30, 60, 90, 180 or 365 days. The last day of the interest period will be
determined by the Bank using the practices of the London inter-bank market.
EXHIBIT 4 (a)
<PAGE>
(b) Each LIBOR Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(c) The Borrower shall irrevocably request a LIBOR Rate portion no later than
9:00 a.m. San Francisco time three (3) banking days before the commencement
of the interest period.
(d) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
LIBOR Rate = London Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward to the nearest
1/16th of one percent) at which the Bank's London Branch, London,
Great Britain, would offer U.S. dollar deposits for the applicable
interest period to other major banks in the London inter-bank market
at approximately 11:00 a.m. London time two (2) banking days before
the commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in Federal Reserve Board Regulation D, rounded upward to the
nearest 1/100 of one percent. The percentage will be expressed as a
decimal, and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
(e) The Borrower may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Any portion of the principal balance already bearing interest at the LIBOR
Rate will not be converted to a different rate during its interest period.
(g) Each prepayment of a LIBOR Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid and a prepayment fee as described below. A
"prepayment" is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement. The prepayment
fee shall be equal to the amount (if any) by which:
EXHIBIT 4 (a)
<PAGE>
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the London inter-bank market for a
period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion (or the scheduled
payment date for the amount prepaid, if earlier).
(h) The Bank will have no obligation to accept an election for a LIBOR Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period of a LIBOR Rate portion are not available in the
London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate
portion.
1.8 Letters of Credit. This line of credit may be used for financing.
(i) standby letters of credit with a maximum maturity of one year but not
to extend more than six months beyond the Expiration Date.
(ii) The amount of standby letters of credit outstanding at any one time,
(including amounts drawn on standby letters of credit and not yet
reimbursed) may not exceed Ten Million Dollars ($10,000,000).
Each Borrower agrees:
(a) any sum drawn under a standby letter of credit may, at the option of the
Bank, be added to the principal amount outstanding under this Agreement.
The amount will bear interest and be due as described elsewhere in this
Agreement.
(b) if there is a default under this Agreement, to immediately prepay and make
the Bank whole for any outstanding standby letters of credit.
(c) The issuance of any standby letter of credit and any amendment to a standby
letter of credit is subject to the Bank's written approval and must be in
form and content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank.
(d) to sign the Bank's form Application and Agreement for Standby Letter of
Credit.
EXHIBIT 4 (a)
<PAGE>
(e) to pay any issuance and/or other fees that the Bank notifies the Borrowers
will be charged for issuing and processing standby letters of credit for
the Borrowers.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
(g) to pay the Bank a non-refundable fee equal to thirty five one hundredths
percent (.35%) per annum of the outstanding undrawn amount of each standby
letter of credit, payable quarterly in advance, calculated on the basis of
the face amount outstanding on the day the fee is calculated.
(h) not to issue any standby letters of credit to the State of California Self
Insurance Plans.
2. FACILITY NO. 2: TERM LOAN AMOUNT AND TERMS
2.1 Outstanding Term Loan. There is outstanding from the Bank to the Borrowers
a term loan in the original principal amount of Five Million Dollars
($5,000,000). This term loan is currently subject to the terms and conditions
of the Business Loan Agreement dated January 1, 1993. As of the date of the
Agreement, the term loan shall be deemed to be outstanding as Facility No. 2
under this Agreement, and shall be subject to all the terms and conditions
stated in this Agreement.
2.2 Interest Rate. The interest rate is 6.85% per year.
2.3 Repayment Terms.
(a) The Borrowers will pay all accrued but unpaid interest on the twenty-sixth
day of each month and upon payment in full of the principal of this loan.
(b) The Borrowers will repay principal in thirty-eight (38) successive monthly
installments of Eighty Three Thousand Three Hundred Thirty Three and No/100
Dollars ($83,333.00) starting June 26, 1995. On August 26, 1998, the
Borrowers will repay the remaining principal balance plus any interest then
due.
2.4 Prepayments.
(a) The Borrowers may prepay the loan in full or in part at any time in an
amount not less than Five Hundred Thousand Dollars ($500,000). The
Borrowers will give the Bank irrevocable written notice of the Borrowers'
intention to make the prepayment, specifying the date and amount of the
prepayment. The notice must be received by the Bank at least 5 banking
days in advance of the prepayment. The prepayment will be applied to the
most remote installment of principal due under this Agreement.
EXHIBIT 4 (a)
<PAGE>
(b) Each prepayment, whether voluntary, by reason of acceleration or otherwise,
will be accompanied by the amount of accrued interest on the amount
prepaid, and the prepayment fee described below.
(c) The prepayment fee will be the sum of fees calculated separately for each
Prepaid Installment, as follows:
(i) The Bank will first determine the amount of interest which would have
accrued each month for the Prepaid Installment had it remained
outstanding until the applicable Original Payment Date, using the loan
rate specified above;
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would accrue
for that Prepaid Installment if it were reinvested from the date of
prepayment through the Original Payment Date, using the following
rate:
(A) If the Original Payment Date is more than 5 years after the date
of prepayment: the Treasury Rate plus one-quarter of one
percentage point;
(B) If the Original Payment Date is 5 years or less after the date of
prepayment: the Money Market Rate.
(iii) If (i) minus (ii) for the Prepaid Installment is greater than zero the
Bank will discount the monthly differences to the date of prepayment
by the rate used in (ii) above. The sum of the discounted monthly
differences is the prepayment fee for that Prepaid Installment.
(iv) The following definitions will apply to the calculation of the
prepayment fee:
"Money Market" means the domestic certificate of deposit market, the
eurodollar deposit market or other appropriate money market selected
by the Bank.
"Money Market Rate" means the fixed interest rate per annum which the
Bank determines could be obtained by reinvesting a specified Prepaid
Installment in the Money Market from the date of prepayment through
the Original Payment Date.
"Original Payment Dates" means the dates on which principal of the
loan would have been paid if there had been no prepayment. If a
portion of the principal would have been paid later than the end of
the interest period in effect at the time of prepayment, then the
Original
EXHIBIT 4 (a)
<PAGE>
Payment Date for that portion will be the last day of the interest
period.
"Prepaid installment" means the amount of the prepaid principal of the
loan which would have been paid on a single Original Payment Date.
"Treasury Rate" means the interest rate yield for U.S. Government
Treasury Securities which the Bank determines could be obtained by
reinvesting a specified Prepaid Installment in such securities from
the date of prepayment through the Original Payment Date.
(v) The Bank may adjust the Treasury Rate and Money Market Rate to reflect
the compounding, accrual basis, or other costs of the loan. Each of
the rates is the Bank's estimate only and the Bank is under no
obligation to actually reinvest any prepayment. The rates will be
based on information from either the Telerate or Reuters information
services, The Wall Street Journal, or other information sources the
-----------------------
Bank deems appropriate.
3. FACILITY NO. 3: TERM LOAN AMOUNT AND TERMS
3.1 Outstanding Term Loan. There is outstanding from the Bank to the Borrowers
a term loan in the original principal amount of Five Million Dollars
($5,000,000). This term loan is currently subject to the terms and conditions
of the Business Loan Agreement dated January 1, 1993. As of the date of this
Agreement, the term loan shall be deemed to be outstanding as Facility No. 3
under this Agreement, and shall be subject to all the terms and conditions
stated in this Agreement.
3.2 Interest Rate. The interest rate is 8.62% per year.
3.3 Repayment Terms.
(a) The Borrowers will pay all accrued but unpaid interest on the first day of
each month and upon payment in full of the principal of this loan.
(b) The Borrowers will repay principal in forty-nine (49) successive monthly
installments of Eighty Three Thousand Three Hundred Thirty Three and 33/100
Dollars ($83,333.33) starting July 1, 1995. On August 2, 1999, the
Borrowers will repay the remaining principal balance plus any interest then
due.
3.4 Prepayments.
(a) The Borrowers may prepay the loan in full or in part at any time in an
amount not less than Five Hundred Thousand Dollars ($500,000). The
Borrowers will give the Bank irrevocable
EXHIBIT 4 (a)
<PAGE>
written notice of the Borrowers' intention to make the prepayment,
specifying the date and amount of the prepayment. The notice must be
received by the Bank at least 5 banking days in advance of the prepayment.
The prepayment will be applied to the most remote installment of principal
due under this Agreement.
(b) Each prepayment, whether voluntary, by reason of acceleration or otherwise,
will be accompanied by the amount of accrued interest on the amount
prepaid, and the prepayment fee described below.
(c) The prepayment fee will be the sum of fees calculated separately for each
Prepaid Installment, as follows:
(i) The Bank will first determine the amount of interest which would have
accrued each month for the Prepaid Installment had it remained
outstanding until the applicable Original Payment Date, using the loan
rate specified above;
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would accrue
for that Prepaid Installment if it were reinvested from the date of
prepayment through the Original Payment Date, using the following
rate:
(A) If the Original Payment Date is more than 5 years after the date
of prepayment: the Treasury Rate plus one-quarter of one
percentage point;
(B) If the Original Payment Date is 5 years or less after the date of
prepayment: the Money Market Rate.
(iii) If (i) minus (ii) for the Prepaid Installment is greater than zero,
the Bank will discount the monthly differences to the date of
prepayment by the rate used in (ii) above. The sum of the discounted
monthly differences is the prepayment fee for that Prepaid
Installment.
(iv) The following definitions will apply to the calculation of the
prepayment fee:
"Money Market" means the domestic certificate of deposit market, the
eurodollar deposit market or other appropriate money market selected
by the Bank.
"Money Market Rate" means the fixed interest rate per annum which the
Bank determines could be obtained by reinvesting a specified Prepaid
Installment in the Money market from the date of prepayment through
the Original
EXHIBIT 4 (a)
<PAGE>
Payment Date.
"Original Payment Dates" means the dates on which principal of the
loan would have been paid if there had been no prepayment. If a
portion of the principal would have been paid later than the end of
the interest period in effect at the time of prepayment, then the
Original Payment Date for that portion will be the last day of the
interest period.
"Prepaid Installment" means the amount of the prepaid principal of the
loan which would have been paid on a single Original Payment Date.
"Treasury Rate" means the interest rate yield for U.S. Government
Treasury Securities which the Bank determines could be obtained by
reinvesting a specified Prepaid Installment in such securities from
the date of prepayment through the Original Payment Date.
(v) The Bank may adjust the Treasury Rate and Money Market Rate to reflect
the compounding, accrual basis, or other costs of the loan. Each of
the rates is the Bank's estimate only and the Bank is under no
obligation to actually reinvest any prepayment. The rates will be
based on information from either the Telerate or Reuters information
services, The Wall Street Journal, or other information sources the
-----------------------
Bank deems appropriate.
4. FEES AND EXPENSES
4.1 Unused Commitment Fee. The Borrowers agree to pay a fee on any difference
between the Facility No. 1 Commitment and the amount of credit the Borrowers
actually use, determined by the weighted average loan balance maintained during
the specified period. The fee will be calculated at .10% per year. This fee is
due on June 30, 1995, and quarterly thereafter until the expiration of the
availability period.
4.2 Expenses. The Borrowers agree to reimburse the Bank for any expenses it
incurs in the preparation of this Agreement and any agreement or instrument
required by this Agreement up to a maximum of One Thousand Dollars ($1,000).
Expenses include, but are not limited to, reasonable attorneys' fees, including
any allocated costs of the Bank's in-house counsel.
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1 Requests for Credit. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
EXHIBIT 4 (a)
<PAGE>
5.2 Disbursements and Payments. Each disbursement by the Bank and each payment
by the Borrowers will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time to
time;
(c) made in immediately available funds, or such other type of funds selected
by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrowers to sign one or more promissory notes.
5.3 Telephone Authorization.
(a) The Bank may honor telephone instructions for advances or repayments or for
the designation of optional interest rates given by any one of the
individual signer(s) of this Agreement or a person or persons authorized by
any one of the signer(s) of the Agreement.
(b) Advances will be deposited in and repayments will be withdrawn from
Salick's account number 14176-02801, or such other accounts with the Bank
as designated in writing by the Borrowers.
(c) The Borrowers will provide written confirmation to the Bank of any
telephone instructions within 30 days. If there is a discrepancy and the
Bank has already acted on the telephone instructions, the telephone
instructions will prevail over the written confirmation.
(d) The Borrowers indemnify and excuse the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone instructions it reasonable believes
are made by any individual authorized by the Borrowers to give such
instructions. This indemnity and excuse will survive this Agreement's
termination.
5.4 Direct Debit (Pre-Billing).
(a) The Borrowers agree that the Bank will debit Salick's deposit account
number 14176-02801 (the "Designated Account") on the date each payment of
principal under Facility No. 2 and Facility No. 3 becomes due and on the
date any interest and any fees from the Borrowers becomes due (the "Due
Date"). If the Due Date is not a banking day, the Designated Account will
be debited on the next banking day.
EXHIBIT 4 (a)
<PAGE>
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrowers a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in
the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount").
If the Billed Amount debited to the Designated Account differs from the
Accrued Amount the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount of
the discrepancy. The Borrowers will not be in default by reason of
any such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount of
the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue
based on the actual amount of principal outstanding without
compounding. The Bank will not pay the Borrowers interest on any
overpayment.
(d) The Borrowers will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this Agreement,
the debit will be reversed.
5.5 Banking Days. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at an LIBOR Rate a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in California, New York and London and dealing in offshore dollars.
All payments and disbursements which would be due on a day which is not a
banking day will be due on the next banking day. All payments received on a day
which is not a banking day will be applied to the credit on the next banking
day.
5.6 Taxes. The Borrowers will not deduct any taxes from any payments they make
to the Bank. If any government authority imposes any taxes on any payments made
by the Borrowers, the Borrowers will pay the taxes and will also pay to the
Bank, at the time interest is paid, any additional amount which the Bank
specifies as necessary to preserve the after-tax yield the Bank
EXHIBIT 4 (a)
<PAGE>
would have received if such taxes had not been imposed. Upon request by the
Bank, the Borrowers will confirm that they have paid the taxes by giving the
Bank official tax receipts (or notarized copies) within 30 days after the due
date. However, the Borrowers will not pay the Bank's net income taxes.
5.7 Additional Costs. The Borrowers will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
5.8 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher
fee than if a 365-day year is used.
5.9 Interest on Late Payments. At the Bank's sole option in each instance, any
amount not paid when due under this Agreement (including interest) shall bear
interest from the due date at the Bank's Reference Rate plus two (2.0)
percentage points. This may result in compounding of interest.
5.10 Default rate. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is three (3.0) percentage
points higher than the rate of interest otherwise provided under this Agreement.
This will not constitute a waiver of any event of default.
6. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrowers under this
Agreement:
6.1 Authorizations. Evidence that the execution, delivery and performance by
each borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
7. REPRESENTATIONS AND WARRANTIES
When the Borrowers sign this Agreement, and until the Bank is
EXHIBIT 4 (a)
<PAGE>
repaid in full, each Borrower makes the following representations and
warranties. Each request for an extension of credit constitutes a renewed
representation:
7.1 Organization of Borrowers. Each Borrower is a corporation duly formed and
existing under the laws of the state where organized.
7.2 Authorization. This Agreement, and any instrument or agreement required
hereunder, are within each Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
7.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of each Borrower, enforceable against each Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
7.4 Good Standing. In each state in which each Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
7.5 No Conflicts. This Agreement does not conflict with any law, agreement, or
obligation by which any Borrower is bound.
7.6 Financial Information. All financial and other information that has been
or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the Borrowers'
financial condition.
(b) in the Borrowers' standard format for such information.
(c) in compliance with all government regulations that apply.
7.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against any Borrower, which, if lost, would impair the Borrowers' or
any Borrower's financial condition or that of any Borrower's business, or would
impair any Borrower's ability to repay the loan, except as have been disclosed
in writing to the Bank.
7.8 Permits, Franchises. Each Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights which such Borrower considers
to be necessary to enable it to conduct the business in which it is now engaged.
7.9 Other Obligations. No Borrower is in default on any material obligation
for borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or
EXHIBIT 4 (a)
<PAGE>
obligation.
7.10 Income Tax Returns. No Borrower has any knowledge of any pending material
assessments or adjustments of its income tax for any year.
7.11 No Event of Default. There is no event which is, or with notice or lapse
of time or both would be, a default under this Agreement.
7.12 Location of Borrowers. Each Borrower's place of business (or, if any
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrowers' signature on this Agreement.
8. COVENANTS
The Borrowers agree, so long as credit is available under this Agreement and
until the Bank is repaid in full:
8.1 Use of Proceeds. To use the proceeds of Facility No. 1 only for working
capital, for the financing of fixed, capital and acquired assets, for
acquisitions as permitted under paragraph 8.15(e) below, and for the issuance of
standby letters of credit.
8.2 Financial Information. To provide the following financial information and
statements and such additional information as requested by the Bank from time to
time:
(a) Within 100 days of the Borrowers' fiscal year end, the Borrowers' annual
financial statements with consolidating schedules. The consolidating
schedules may be prepared by each Borrower. These financial statements
must be audited (with an unqualified opinion) by a Certified Public
Accountant ("CPA") reasonably acceptable to the Bank. Any of the so-called
"Big Six" accounting firms are acceptable. The statements shall be
prepared on a consolidated basis.
(b) Copies of the Borrowers' Form 10-K Annual Report within 100 days of the
Borrowers' fiscal year end.
(c) Copies of the Borrowers' Form 10-Q Quarterly Report within 50 days of the
period's end.
8.3 Total Liabilities to Tangible Net Worth. To maintain on a consolidated
basis a ratio of total liabilities excluding minority interest, to tangible net
worth not exceeding 1.00:1.00.
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
"Tangible net worth" means the gross book value of the Borrowers'
EXHIBIT 4 (a)
<PAGE>
assets (excluding goodwill, patents, trademarks, trade names, organization
expense, treasury stock, unamortized debt discount and expense, deferred
research and development costs, deferred marketing expenses, and other like
intangibles, and monies due from affiliates, officers, directors or shareholders
of the Borrowers) less total liabilities, including but not limited to accrued
and deferred income taxes, and any reserves against assets.
8.4 Fixed Charge Coverage Ratio. To maintain on a consolidated basis a Fixed
Charge Coverage Ratio of at least the amounts indicated for each period
specified below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the first fiscal quarter of 1996
through the first fiscal quarter of 1998 1.1:1.0
From the second fiscal quarter of 1998
through the fourth fiscal quarter of 1998 1.0:1.0
</TABLE>
"Fixed Charge Coverage Ratio" means the ratio of cash flow to fixed charges.
"Cash flow" means the sum of net income before taxes and minority interests,
plus interest expense, less cash dividends paid (excluding the first seven
Million Dollars ($7,000,000) in cash dividends paid in the aggregate during the
1995 and 1996 fiscal years). "Fixed charges" means the sum of interest expense
(including capitalized interest), income taxes paid and the current portion of
long term debt (excluding the principal amount outstanding under Facility No. 1)
and capital leases. During fiscal year 1996, this ratio will be calculated at
the end of each fiscal quarter, using fiscal year-to-date results on an
annualized basis. Beginning with the first quarter of fiscal year 1997, this
ratio will be calculated at the end of each fiscal quarter, using the results of
that quarter and each of the 3 immediately preceding quarters. The current
portion of long term debt will be measured as of the last day of the preceding
fiscal year. From the second quarter through the fourth quarter of fiscal year
1998, the current portion of long term debt will include a portion of the
Facility No. 1 Commitment in the amount of Eleven Million Four Hundred Twenty
Eight Thousand Dollars ($11,428,000).
8.5 Other Debts. Not to have outstanding or incur any direct or contingent
debts (other than those to the Bank), or become liable for the debts of others
without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of business.
(c) Obtaining surety bonds in the usual course of business.
EXHIBIT 4 (a)
<PAGE>
(d) Debts, lines of credit and leases in existence on the date of this
Agreement disclosed in writing to the Bank.
(e) Additional debts and lease obligations for the acquisition of fixed or
capital assets, to the extent permitted under Paragraph 8.6(d) below.
(f) The obligations of any Borrower under guarantees in favor or third parties
to guarantee the performance of any Borrower's subsidiaries.
(g) The obligations of any Borrower to the Zeneca Group.
(h) Additional debts for the acquisition and renovation of real property after
the date of this Agreement to the extent permitted under paragraph 8.6(f)
below.
8.6 Other Liens. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property any Borrower now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to the
Bank.
(d) Additional purchase money security interests in property acquired by the
Borrowers or any one of them after the date of this Agreement if the total
principal amount of debts secured by such liens does not exceed Ten Million
Dollars ($10,000,000) in any fiscal year.
(e) Liens pledging cash and marketable securities in support of performance
bonds required under construction contracts of the Borrowers or any one of
them in a total principal amount not exceeding Five Million Dollars
($5,000,000).
(f) Liens on real property security debts arising from the acquisition and
renovation of that real property if the total principal amount of debts
secured by such liens does not exceed Fifteen Million Dollars ($15,000,000)
outstanding at any one time.
8.7 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit against any one or more of the Borrowers in an aggregate amount
of One Million Dollars ($1,000,000) or more in excess of any insurance
coverage.
(b) any substantial dispute between any Borrower and any
EXHIBIT 4 (a)
<PAGE>
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in any Borrower's financial condition or
operations.
(e) any change in any Borrower's name, legal structure, place of business, or
chief executive office if such Borrower has more than one place of
business;
8.8 Books and Records. To maintain adequate books and records.
8.9 Audits. To allow the Bank and its agents to inspect the Borrowers'
properties and examine, audit and make copies of books and records at any
reasonable time provided, however, that the Bank shall not engage in such
inspections and audits unless a default under Article 9 hereof has occurred. If
any of the Borrowers' properties, books or records are in the possession of a
third party, the Borrowers authorize that third party to permit the Bank or its
agents to have access to perform inspections or audits and to respond to the
Bank's requests for information concerning such properties, books and records.
8.10 Compliance with Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over each Borrower's business.
8.11 Preservation of Rights. To maintain and preserve all rights, privileges,
and franchises each Borrower now has.
8.12 Maintenance of Properties. To make any material repairs, renewals, or
replacements to keep each Borrower's properties in good working condition.
8.13 Cooperation. To take any action reasonably requested by the Bank to carry
out the intent of this Agreement.
8.14 General Business Insurance. To maintain insurance as is usual for the
business each Borrower is in.
8.15 Additional Negative Covenants. Not to, without the Bank's written consent,
which will not be unreasonably withheld:
(a) engage in any business activities substantially different from Borrowers'
or any Borrower's present business or that of Zeneca or its affiliates.
(b) liquidate or dissolve Borrowers' of any Borrower's business.
(c) enter into any consolidation, merger, pool, syndicate, or other combination
unless it is between a wholly owned
EXHIBIT 4 (a)
<PAGE>
subsidiary of any Borrower.
(d) enter into any joint venture unless it is related to the health care field.
(e) lease, or dispose of all or a substantial part of Borrowers' or any
Borrower's business or the Borrowers' or any Borrower's assets.
(f) acquire or purchase a business or its assets, other than for the
acquisition of companies in the Borrowers' lines of business, provided that
the terms and conditions of such acquisitions are mutually agreeable
between the seller and the Borrowers.
(g) sell or otherwise dispose of any assets for less than fair market value, or
enter into any sale and leaseback agreement covering any of the Borrowers'
or any Borrower's fixed or capital assets. Bank's prior written consent is
not to be unreasonably withheld.
(h) voluntarily suspend the Borrowers' or any Borrower's business for more than
7 days in any 30 day period.
9. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrowers in default, stop making any additional credit
available to the Borrowers, and require the Borrowers to repay their entire debt
immediately and without prior notice; provided, further, the Bank may stop
making any additional credit available to any Borrower during any cure period
specified below. Except as provided in Paragraph 9.3, if a bankruptcy petition
is filed with respect to any Borrower, then the entire debt outstanding under
this Agreement will automatically become due immediately.
9.1 Failure to Pay. Any Borrower fails to make a payment under this Agreement
within 15 days after the date when due.
9.2 False Information. Any Borrower has given the Bank false or misleading
information or representations.
9.3 Bankruptcy. Any Borrower files a bankruptcy petition, a bankruptcy
petition is filed against any Borrower, or any Borrower makes a general
assignment for the benefit of creditors. The default will be deemed cured if
any bankruptcy petition filed against any Borrower is dismissed within a period
of thirty (30) days after the filing.
9.4 Receivers. A receiver or similar official is appointed for any Borrower's
business, or the business is terminated. The
EXHIBIT 4 (a)
<PAGE>
default will be deemed cured if any receiver or similar official, other than one
appointed at the Borrowers' request or, is dismissed within a period of thirty
(30) days after the appointment.
9.5 Judgments. Any judgments or arbitration awards are entered against any one
or more of Borrowers, or any one or more of Borrowers enters into any settlement
agreements with respect to any litigation or arbitration, in an aggregate amount
of Three Million Dollars ($3,000,000) or more in excess of any insurance
coverage, provided that said judgments, arbitration awards or settlement
agreements are not vacated or discharged within thirty (30) days.
9.6 Government Action. Any government authority takes action that the Bank
believes materially adversely affects any Borrower's financial condition or
ability to repay and such action continues for thirty (30) days.
9.7 Material Adverse Change. A material adverse change occurs in any
Borrower's financial condition, properties, or ability to repay the loan.
9.8 Cross-default. Any default occurs under any agreement in connection with
any credit any Borrower has obtained from anyone else or which any Borrower has
guaranteed in the amount of Two Million Dollars ($2,000,000) or more in the
aggregate if the default consists of failing to make a payment when due or gives
the other lender the right to accelerate the obligation. If, in the Bank's
opinion, the breach is capable of being remedied, the breach will not be
considered an event of default under this Agreement for a period of 30 days
after the date on which the Bank gives written notice of the breach to such
Borrower; provided, however, that the Bank will not be obligated to extend any
additional credit to the Borrowers during that period.
9.9 Other Bank Agreements. Any Borrower fails to meet the conditions of, or
fails to perform any obligation under any other agreement in the amount to Two
Million Dollars ($2,000,000) or more in the aggregate that any Borrower has with
the Bank or any affiliate of the Bank which has not been cured within any
applicable cure period.
9.10 Other Breach Under Agreement. Any Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
EXHIBIT 4 (a)
<PAGE>
10.2 California Law. This Agreement is governed by California law.
10.3 Successors and Assigns. This Agreement is binding on the Borrowers' and
the Bank's successors and assignees. The Borrowers agree that they may not
assign this Agreement without the Bank's prior consent.
10.4 Arbitration.
(a) This paragraph concerns the resolution of any controversies or claims
between any one or more of Borrowers and the Bank, including but not
limited to those that arise from:
(i) This Agreement (including any renewals, extensions or modifications of
this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted between
any one or more of Borrowers and the Bank, including claims for injury
to persons, property or business interests (torts).
(b) At the request of any Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply even though
this Agreement provides that it is governed by California law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated
under this paragraph is subject to any applicable statute of limitations.
The arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss
the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the arbitrators
will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be submitted
to any authorized court of law to be confirmed and enforced.
EXHIBIT 4 (a)
<PAGE>
(g) The procedure described above will not apply if the controversy or claim,
at the time of the proposed submission to arbitration, arises from or
relates to an obligation to the Bank secured by real property located in
California. In this case, both the Borrowers and the Bank must consent to
submission of the claim or controversy to arbitration. If both parties do
not consent to arbitration, the controversy or claim will be settled as
follows:
(i) The Borrowers and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be appointed by
a court as provided in California Code of Civil Procedure Section 638
and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an active
attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the panel)
will be entered as a judgment in the court that appointed the referee,
in accordance with the provisions of California Code of Civil
Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrowers or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrowers or the Bank, including
the suing party, to submit the controversy or claim to arbitration if the
other party contests the lawsuit. However, if the controversy or claim
arises from or relates to an obligation to the Bank which is secured by
real property located in California at the time of the proposed
EXHIBIT 4 (a)
<PAGE>
submission to arbitration, this right is limited according to the provision
above requiring the consent of both the Borrowers and the Bank to seek
resolution through arbitration.
(j) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
10.5 Severability; Waivers. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even it
if makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
10.6 Attorneys' Fees. The Borrowers shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this paragraph, "attorneys' fees" includes the allocated costs of in-
house counsel.
10.7 Joint and Several Liability.
(a) Each Borrower agrees that it is jointly and severally liable to the Bank
for the payment of all obligations arising under this Agreement, and that
such liability is independent of the obligations of the other Borrower(s).
The Bank may bring an action against any Borrower, whether an action is
brought against the other Borrower(s).
(b) Each Borrower agrees that any release which may be given by the Bank to the
other Borrower(s) will not release such Borrower from its obligations under
this Agreement.
(c) Each Borrower waives any right to assert against the Bank any defense,
setoff, counterclaim, or claims which such Borrower may have against the
other Borrower(s) or any other party liable to the Bank for the obligations
of the Borrowers under this Agreement.
(d) Each Borrower agrees that it is solely responsible for keeping itself
informed as to the financial condition of the other Borrower(s) and of all
circumstances which bear upon the risk of nonpayment. Each Borrower waives
any right it may have to require the Bank to disclose to such Borrower any
information
EXHIBIT 4 (a)
<PAGE>
which the Bank may now or hereafter acquire concerning the financial
condition of the other Borrower(s).
(e) Each Borrower waives all rights to notices of default or nonperformance by
any other Borrower under this Agreement. Each Borrower further waives all
rights to notices of the existence or the creation of new indebtedness by
any other Borrower.
(f) The Borrowers represent and warrant to the Bank that each will derive
benefit, directly and indirectly, from the collective administration and
availability of credit under this Agreement. The Borrowers agree that the
Bank will not be required to inquire as to the disposition by any Borrower
of funds disbursed in accordance with the terms of this Agreement.
(g) Each Borrower waives any right of subrogation, reimbursement,
indemnification and contribution (contractual, statutory or otherwise),
including without limitation, any claim or right of subrogation under the
Bankruptcy Code (Title 11 of the U.S. Code) or any successor statute, which
such Borrower may now or hereafter have against any other Borrower with
respect to the indebtedness incurred under this Agreement. Each Borrower
waives any right to enforce any remedy which the Bank now has or may
hereafter have against any other Borrower, and waives any benefit of, and
any right to participate in, any security now or hereafter held by the
Bank.
10.8 One Agreement. This Agreement and any related security or other agreements
required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank and
the Borrowers concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrowers concerning this credit; and
(c) are intended by the Bank and the Borrowers as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
10.9 Notices. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrowers may specify from time to time in writing.
10.10 Headings. Article and paragraph headings are for reference
EXHIBIT 4 (a)
<PAGE>
only and shall not affect the interpretation or meaning of any provisions of
this Agreement.
10.11 Counterparts. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
10.12 Prior Agreement Superseded. This Agreement supersedes the Business Loan
Agreement entered into as of January 1, 1993, between the Bank and the
Borrowers, and any credit outstanding thereunder shall be deemed to be
outstanding under this Agreement.
EXHIBIT 4 (a)
<PAGE>
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS
ASSOCIATION SALICK HEALTH CARE, INC.
/S/ SCOTT ANEY /S/ BERNARD SALICK, M.D.
- ---------------------------- -------------------------------
By: Scott Aney By: Bernard Salick, M.D.
Title: Vice President Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
USHAWL, Inc.
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
EXHIBIT 4 (a)
<PAGE>
Century Dialysis Corporation
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
Comprehensive Cancer Centers, Inc.,
a California Corporation
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
EXHIBIT 4 (a)
<PAGE>
Ambulatory Diagnostic Services, Inc.
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
Aurora Medical Supplies, Inc.,
a California Corporation
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
EXHIBIT 4 (a)
<PAGE>
Comprehensive Cancer Center, Inc.-
Philadelphia
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
Comprehensive Cancer Center, Inc.-
Kansas City
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
EXHIBIT 4 (a)
<PAGE>
SHC Laboratories, Inc.
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
Comprehensive Cancer Centers-
West Valley, Inc.
/S/ BERNARD SALICK, M.D.
-------------------------------
By: Bernard Salick, M.D.
Title: Chairman of the Board of
Directors, Chief
Executive Officer and
President
/S/ LESLIE F. BELL
-------------------------------
By: Leslie F. Bell
Title: Executive Vice President,
Chief Financial Officer,
Secretary and Director
Address where notices to the Address where notices to the
Bank are to be sent: Borrowers are to be sent:
Century City Regional Salick Health Care, Inc.
Commercial Banking 8201 Beverly Blvd.
Office #1417 Los Angeles, CA 90048
2049 Century Park East
Los Angeles, CA 90067
EXHIBIT 4(a)
<PAGE>
December 22, 1994
Salick Health Care, Inc.
8201 Beverly Blvd.
Los Angeles, CA 90048-4520
Atkemix Thirty-nine Inc.
c/o Zeneca Inc.
1800 Concord Pike
Wilmington, DE 19897
Re: Beverly Boulevard Property
--------------------------
Dear Ladies and Gentlemen:
This letter sets forth the understandings and agreements between Salick Health
Care, Inc., a Delaware corporation, Atkemix Thirty-nine, Inc., a Delaware
corporation ("Atkemix"), Bernard Salick, Trustee of the Bernard and Gloria
Salick Trust, dated April 24, 1979, as amended, a trust existing under the laws
of the State of California, (the "Trust"), Dr. Bernard Salick, a resident of the
State of California, and Gloria Salick, a resident of the State of California
(the Trust, Dr. Bernard Salick and Gloria Salick collectively, "B&G Salick") in
connection with the real property and improvements commonly known as 8201
Beverly Boulevard, Los Angeles, CA 90048 (the "Beverly Boulevard Property").
Each capitalized term used herein and not otherwise defined herein shall have
the meaning provided therefor in the Agreement and Plan of Merger (the "Merger
Agreement") among Salick Health Care, Inc., Zeneca Limited and Atkemix Thirty-
nine Inc. dated as of the date hereof.
1. Option Notice. The parties hereto agree that, subject to Section 2
-------------
hereof, before the Effective Time B&G Salick shall elect, by written notice to
the Company (the "Option Notice"), either of the following two options, which
election shall be at B&G Salick's sole discretion:
A. Option 1. B&G Salick will continue to own the Beverly Boulevard Property,
--------
in which event the Lease dated May 15, 1991 by and between B&G Salick as Lessor
and the Company as Lessee, as modified (the "Lease") shall continue in full
force and effect without amendment to any of the terms thereof, provided that
--------
B&G Salick would waive any rights (including, without limitation, under
paragraph 4 of the Modification to Lease Agreement dated June 20, 1991 (the
"Modification") to require the Surviving Corporation to purchase the Beverly
Boulevard Property as a result of the transactions contemplated by the Merger
(including, without limitation, acquisition by Buyer of all capital stock of the
Surviving Corporation outstanding after the Effective Time) but without waiving
their right under paragraph 4 of the Modification as to any future events of
change of control. This transaction shall be referred to as "Option 1."
B. Option 2. B&G Salick shall convey the Beverly Boulevard Property to the
--------
Surviving Corporation, and the Surviving Corporation shall purchase the Beverly
Boulevard Property on the terms and conditions set forth in paragraph 4 of the
Modification except that (w) the purchase price of the Beverly Boulevard
Property, which is the result of an arm's-length negotiation, shall be
$14,650,000 in cash; (x) the closing of the conveyance and purchase of the
Beverly Boulevard Property from B&G Salick to the Surviving Corporation shall
occur on the earlier of (A) 120 days after the Effective Time or (B) the date
set forth in a notice from B&G Salick to the Surviving Corporation of a date for
such closing, which date shall be not less than 10 business days after such
notice from B&G Salick to the Surviving Corporation; (y) B&G Salick intend to
effect the conveyance of the Beverly Boulevard Property to the Surviving
Corporation by means of a tax-deferred
EXHIBIT 10(j-1)
<PAGE>
exchange meeting all of the requirements of Section 1031 of the Code and reserve
the right to convey the Beverly Boulevard Property to a third party who would be
required to sell the Beverly Boulevard Property to the Surviving Corporation on
the terms set forth in this Option 2; and (z) the conveyance of the Beverly
Boulevard Property to the Surviving Corporation shall be effected through an
escrow at City National Bank and each party shall share the escrow and title
charges in accordance with customary practices for real estate transactions in
Los Angeles County, California. Until the Closing, the Surviving Corporation
will continue to pay rent and perform its obligations under the Lease and rent
shall be prorated through the date of close of escrow. This transaction shall be
referred to as "Option 2."
2. Option Election. In the event B&G Salick fail to give the Surviving
---------------
Corporation the Option Notice on or before the Effective Time, then B&G Salick
shall be deemed to have elected Option 1. In the event B&G Salick elect Option
2, Surviving Corporation shall purchase the Beverly Boulevard Property "AS IS,
WHERE IS, WITH ALL FAULTS" without representations or warranties, other than a
grant deed. In the event B&G Salick elect Option 2, the Surviving Corporation
shall not be required, as part of such exchange, to take title to any other real
property other than the Beverly Boulevard Property or to incur any additional
escrow, title or other charges as a result of the exchange but the Surviving
Corporation agrees to cooperate with B&G Salick in such a tax-deferred exchange,
including purchasing the Beverly Boulevard Property from a third party who
acquired it from B&G Salick. In the event B&G Salick elect Option 2 but fail to
effect an exchange, the conveyance of the Beverly Boulevard Property to the
Surviving Corporation shall nevertheless be effected on terms described above
within 120 days of the Effective Time as a straight purchase and sale between
B&G Salick and the Surviving Corporation.
3. Representations. Each party to this letter agreement represents and
---------------
warrants that the execution, delivery and performance by such party to this
letter agreement (A) are within such party's powers, (B) in the case of
corporate parties, have been duly authorized by any necessary corporate action
and (C) require no material consents or approvals.
4. Broker's Fees. No real estate broker or investment banker, broker or
-------------
finder is entitled to a commission or fee in respect of the Beverly Boulevard
Property based upon any arrangement or agreement made by or on behalf of Bernard
Salick, Gloria Salick, the Trust or Atkemix.
5. Amendments; Termination. (a) This letter agreement may not be modified,
-----------------------
amended, altered or supplemented, except upon the execution and delivery of a
written agreement executed by the parties hereto.
(b) This letter agreement shall terminate on the date of the termination of
the Merger Agreement in accordance with its terms.
6. Governing Law. This letter agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York without regard to its
conflict of law provisions.
7. Costs and Expenses. Except as otherwise provided for herein, all costs
------------------
and expenses incurred in connection with this letter agreement shall be paid for
by the party incurring such cost or expense.
8. Limited Obligation. Other than pursuant to the Merger Agreement, Atkemix
------------------
undertakes no obligation to buy the Beverly Boulevard Property or any other
obligation whatsoever in respect of the Beverly Boulevard Property.
EXHIBIT 10(j-1)
<PAGE>
9. Counterparts. This letter agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
10. Entire Agreement. This letter agreement contains the entire agreement of
----------------
the parties hereto with respect to the transactions contemplated hereby, and
supersedes all prior understandings and agreements (oral and written) of the
parties with respect to the subject matter hereof.
If the foregoing correctly sets forth the understanding between you and us,
please so indicate in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement between us.
Very truly yours,
/s/ Bernard Salick
--------------------------------
BERNARD SALICK, individually
/s/ Gloria Salick
--------------------------------
GLORIA SALICK, individually
/s/ Bernard Salick
-------------------------------
BERNARD SALICK, as sole
trustee of Bernard and
Gloria Salick Trust
Accepted and agreed:
SALICK HEALTH CARE, INC.
By: /s/ Leslie F. Bell
----------------------------
Title: Executive Vice President,
Chief Financial Officer &
Secretary
ATKEMIX THIRTY-NINE INC.
By: /s/ Glenn Englemann
----------------------------
Title: Vice President
EXHIBIT 10(j-1)
<PAGE>
EXHIBIT 11 - COMPUTATION OF NET EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Years Ended August 31,
1995 1994 1993
-----------------------------
(Amounts in thousands,
except per share data)
<S> <C> <C> <C>
Primary
Average shares outstanding 10,029 8,392 8,318
Net effect of dilutive stock
options and unearned stock
awards based on the
treasury stock method
using average market price 282 317 247
------ ----- -----
Total 10,311 8,709 8,565
====== ===== =====
Net income $ 923 $10,380 $ 8,976
======= ======= =======
Per share data:
Net income $ 0.09 $ 1.19 $ 1.05
======= ======= =======
Fully diluted
Average shares outstanding 10,029 8,392 8,318
Net effect of dilutive stock
options and unearned stock
awards based on the
treasury stock method
using average market price
or closing price if higher 296 358 273
Net effect of dilutive convertible
debentures--based on the stated
conversion price of $14 per share 635 1,826 1,851
------- ------- -------
Total 10,960 10,576 10,442
======= ======= =======
Net income $ 923 $10,380 $ 8,976
Convertible bond interest, net of
income tax effect 405 1,210 1,214
------- ------- -------
Net income $ 1,328 $11,590 $10,190
======= ======= =======
Per share data:
Net income $ 0.12 $ 1.10 $ 0.98
======= ======= =======
</TABLE>
EXHIBIT 11
<PAGE>
To the Board of Directors
of Salick Health Care, Inc.
Dear Directors:
We have audited the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended August 31, 1995 and issued our
report thereon dated November 16, 1995. Note 1 to the consolidated financial
statements describes a change in the Company's method of accounting for pre-
operating costs. It should be understood that the preferability of one
acceptable method of pre-operating cost accounting over another has not been
addressed in any authoritative accounting literature and in arriving at our
opinion expressed below, we have relied on management's business planning and
judgment. Based on our discussions with management and the stated reasons for
the change, we believe that such change represents, in your circumstances, the
adoption of a preferable alternative accounting principle for pre-operating
costs in conformity with Accounting Principles Board Opinion No. 20.
Yours very truly,
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Los Angeles, California
November 16, 1995
EXHIBIT 18
<PAGE>
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No's. 33-4043, 33-26942, 33-38811, 33-42983, and 33-
75888) of Salick Health Care, Inc. of our report dated November 16, 1995
appearing on page 43 of this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Los Angeles, California
November 27, 1995
EXHIBIT 23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<CASH> 642
<SECURITIES> 44,631
<RECEIVABLES> 39,133
<ALLOWANCES> 2,885
<INVENTORY> 1,305
<CURRENT-ASSETS> 94,062
<PP&E> 134,492
<DEPRECIATION> 32,841
<TOTAL-ASSETS> 207,098
<CURRENT-LIABILITIES> 64,087
<BONDS> 0
<COMMON> 11
0
0
<OTHER-SE> 129,417
<TOTAL-LIABILITY-AND-EQUITY> 207,098
<SALES> 0
<TOTAL-REVENUES> 151,308
<CGS> 0
<TOTAL-COSTS> 133,866
<OTHER-EXPENSES> 7,685
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,499
<INCOME-PRETAX> 11,451
<INCOME-TAX> 6,940
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,588)
<NET-INCOME> 923
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.12
</TABLE>