<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 1996
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-13879
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SALICK HEALTH CARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-4333272
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) identification number)
8201 Beverly Boulevard, Los Angeles, California 90048-4520
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(Address of principal executive offices) (Zip code)
(213) 966-3400
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO_____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
5,657,115 shares of common stock, $.001 par value at March 31, 1996
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5,640,082 shares of callable puttable common stock,
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$.001 par value, at March 31, 1996
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Exhibit Index on Page 21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS February 29, 1996 August 31, 1995
------------------ ----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash $ 378,000 $ 642,000
Marketable securities 46,580,000 44,631,000
Accounts receivable, less allowance
for doubtful accounts of $3,353,000
and $2,885,000 42,253,000 36,248,000
Inventories 1,801,000 1,305,000
Prepaid expenses 2,256,000 1,677,000
Other current assets 2,333,000 1,967,000
Refundable income taxes 2,545,000 2,545,000
Deferred income taxes 3,326,000 5,047,000
------------ ------------
Total current assets 101,472,000 94,062,000
Property and equipment, at cost, less
accumulated depreciation and amortization
of $36,735,000 and $32,841,000 105,736,000 101,651,000
Deposits 706,000 725,000
Deferred income taxes 862,000
Goodwill, net 5,613,000 5,494,000
Other assets 5,838,000 5,166,000
------------ ------------
$220,227,000 $207,098,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 33,379,000 $ 18,072,000
Accounts payable and accrued liabilities 35,092,000 41,063,000
Income taxes payable 2,311,000
Current portion of long-term
obligations 3,169,000 4,952,000
------------ ------------
Total current liabilities 73,951,000 64,087,000
Deferred income taxes 67,000
Capitalized lease obligations, less
current portion 4,792,000 5,235,000
Long-term debt, less current portion 4,842,000 5,910,000
Other liabilities 2,000,000 2,400,000
Minority interest (30,000) (29,000)
------------ ------------
Total liabilities 85,555,000 77,670,000
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</TABLE>
2
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SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 29, 1996 August 31, 1995
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par
value, 5,000,000 shares
authorized, none issued
Common stock, $.001 par value,
15,000,000 shares authorized,
5,657,115 shares issued and
outstanding 6,000 6,000
Callable puttable common stock,
$.001 par value, 7,500,000 shares
authorized, 5,640,082 and
5,634,082 shares issued and
outstanding 5,000 5,000
Additional paid in capital 79,810,000 79,738,000
Unrealized holding gains 229,000 44,000
Retained earnings 54,622,000 49,635,000
------------ ------------
Total stockholders' equity 134,672,000 129,428,000
------------ ------------
$220,227,000 $207,098,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
------------------ ----------------- ------------- -------------
1996 1995 1996 1995
------------------ ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Operating revenues, net $39,110,000 $38,170,000 $76,624,000 $74,346,000
Operating expenses:
Medical supplies and services 7,459,000 6,601,000 14,300,000 12,982,000
Salaries and related costs 16,400,000 15,774,000 31,621,000 30,344,000
Other administrative expenses 5,606,000 5,048,000 11,080,000 10,455,000
Contract and occupancy costs 4,250,000 4,183,000 8,234,000 7,886,000
Depreciation and amortization 2,211,000 2,039,000 4,377,000 4,079,000
----------- ----------- ----------- -----------
Total expenses 35,926,000 33,645,000 69,612,000 65,746,000
----------- ----------- ----------- -----------
Operating income 3,184,000 4,525,000 7,012,000 8,600,000
Merger transaction expenses (526,000) (526,000)
Net interest income 252,000 264,000 956,000 281,000
Net investment gains (losses) 192,000 (63,000) 277,000 (124,000)
Minority interest 225,000 550,000
----------- ----------- ----------- -----------
Income before income taxes
and cumulative effect of
change in accounting principle 3,628,000 4,425,000 8,245,000 8,781,000
Provision for income taxes 1,411,000 1,825,000 3,258,000 3,543,000
----------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle 2,217,000 2,600,000 4,987,000 5,238,000
Cumulative effect on prior years (to
August 31, 1994) of expensing
pre-operating costs as incurred,
net of income taxes (3,588,000)
----------- ----------- ----------- -----------
Net income $ 2,217,000 $ 2,600,000 $ 4,987,000 $ 1,650,000
=========== =========== =========== ===========
</TABLE>
4
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SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
------------------ ----------------- ------------ -------------
1996 1995 1996 1995
------------------ ----------------- ------------ -------------
<S> <C> <C> <C> <C>
Earnings per share:
Primary:
Income before cumulative effect
of change in accounting
principle $ 0.20 $ 0.26 $ 0.44 $ 0.56
Cumulative effect on prior
years (to August 31, 1994) of
expensing pre-operating costs
as incurred (0.38)
------------ ------------ ------------ ------------
Net earnings per share $ 0.20 $ 0.26 $ 0.44 $ 0.18
============ ============ ============ ============
Fully diluted:
Income before cumulative effect
change in accounting principle $ 0.20 $ 0.25 $ 0.44 $ 0.53
Cumulative effect on prior years
(to August 31, 1994) of
expensing pre-operating costs
as incurred (0.34)
------------ ------------ ------------ ------------
Net earnings per share $ 0.20 $ 0.25 $ 0.44 $ 0.19
============ ============ ============ ============
Weighted average number of
shares used in computing
earnings per share:
Primary 11,309,000 9,985,000 11,308,000 9,414,000
============ ============ ============ ============
Fully diluted 11,309,000 10,738,000 11,309,000 10,736,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
February 29, February 28,
------------- -------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flow provided (used) by operations:
Net income $ 4,987,000 $ 1,650,000
Add items not requiring cash:
Depreciation and amortization 4,377,000 4,079,000
Amortization of debt issue costs 23,000
Deferred income taxes 792,000 (248,000)
Minority interest in net loss,
net of distributions (1,000) (673,000)
Cumulative effect on prior years (to
August 31, 1994) of expensing
pre-operating costs as incurred 5,981,000
Changes in assets and liabilities:
Accounts receivable (6,005,000) (8,049,000)
Inventories (496,000) (203,000)
Prepaid expenses (579,000) (679,000)
Other current assets (366,000) 121,000
Deposits and other assets (807,000) 92,000
Accounts payable and accrued liabilities (6,379,000) 1,997,000
Income taxes payable 2,311,000 (1,718,000)
------------ ------------
Net cash flow provided (used) by operations (2,166,000) 2,373,000
------------ ------------
Cash flow provided (used) by investing
activities:
Increase in marketable securities (1,764,000) (921,000)
Additions to property and equipment (8,180,000) (14,428,000)
Payment for purchase of acquisitions (168,000) (150,000)
------------ ------------
Net cash flow used by investing
activities (10,112,000) (15,499,000)
------------ ------------
Cash flow provided (used) by financing
activities:
Reduction of capitalized lease
obligations (530,000) (470,000)
Decrease of long-term debt (2,835,000) (876,000)
Notes payable to bank 15,307,000 12,172,000
Issuance of common stock 72,000 811,000
------------ ------------
Net cash flow provided by
financing activities 12,014,000 11,637,000
------------ ------------
</TABLE>
6
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SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
February 29, February 28,
------------ ------------
1996 1995
------------ ------------
<S> <C> <C>
Decrease in cash $(264,000) $(1,489,000)
Cash, beginning of period 642,000 1,692,000
--------- -----------
Cash, end of period $ 378,000 $ 203,000
========= ===========
Schedule of non-cash investing and
financing activities:
Conversion of 7.25% convertible
subordinated debentures due
January 31, 2001 into common stock $25,575,000
===========
Capital lease obligations incurred
for property and equipment $ 70,000 $ 2,265,000
========= ===========
Deferred bond issue costs $ 400,000
===========
Unrealized holding gains (losses) $ 185,000 $ (100,000)
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
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SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - In the opinion of management, the information furnished reflects all
adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair statement of the interim financial information.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's August
31, 1995 audited financial statements. The results of operations for
the three and six month periods ended February 29, 1996 are not
necessarily indicative of the operating results for the full year.
Note 2 - In fiscal 1995, the Company changed its method of accounting from
deferral to expensing pre-operating costs as incurred. In prior years,
pre-operating costs had been deferred and amortized over a three year
period upon commencement of facility operations. In fiscal 1995 fourth
quarter, giving effect to the first quarter, the Company recorded the
cumulative effect of the change in accounting principle of $3,588,000,
net of income taxes of $2,393,000. In the accompanying financial
statements, the fiscal 1995 periods have been restated to reflect the
current and cumulative effects of the change in accounting principle.
This change in accounting for pre-operating costs was adopted as
management believes this method of accounting better reflects the
Company's current methods of operations and it conforms to the method
followed by Zeneca Group, PLC, the beneficial owner of more than 50% of
the Company's common equity.
Note 3 - On December 27, 1995, a Columbia/HCA Healthcare Corporation subsidiary,
the owner of one of the Company's Cancer Center affiliated hospitals,
Westlake Medical Center, announced that it was closing Westlake Medical
Center. Under the terms of the agreement with Columbia/HCA, a
subsidiary of the Company had the right to and gave notice of its
intent to purchase Westlake Medical Center with the purchase price of
the hospital being determined by three appraisers taking into account,
among others, the fact that the hospital is intended to be used for the
treatment of patients with cancer, kidney disease, organ
transplantation, AIDS and related illnesses. The Company expects the
purchase to be consummated during the summer of 1996.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SECOND FISCAL QUARTER ENDED FEBRUARY 29, 1996 COMPARED TO SECOND FISCAL QUARTER
- -------------------------------------------------------------------------------
ENDED FEBRUARY 28, 1995
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Operating revenues increased in the second quarter of fiscal 1996 by 2.5%
to $39,110,000 from $38,170,000 in the second quarter of fiscal 1995. Operating
income was $3,184,000 or 29.6% below the prior year's second quarter and
operating margins were 8.1% and 11.9% in the quarters ended February 29, 1996
and February 28, 1995, respectively. Income before taxes and the cumulative
effect of change in accounting principle described below and in the notes to the
consolidated financial statements was reduced by 18% to $3,628,000 in the
current fiscal quarter from $4,425,000 in fiscal 1995. Net income was
$2,217,000, as compared to $2,600,000 in the prior year's second quarter. For
the six month periods, operating revenues increased by 3.1% to $76,624,000 from
$74,346,000 with operating income of $7,012,000 or 18.5% less than the prior six
month period. Income before the cumulative effect of change in accounting
principle decreased $251,000 or 4.8% representing 6.5% of operating revenues,
down from 7% for the corresponding six month period. Weighted average shares
outstanding used in computing earnings per share increased over the second
quarter and six month periods in fiscal 1995 due to exercise of stock options in
connection with the Company's April 13, 1995 merger with a subsidiary of Zeneca
Limited and conversion of the Company's subordinated convertible debentures in
January 1995.
The quarter and six month results reflect an increase in business
particularly in the volume of the Company's managed care business which
generally has lower reimbursement rates, an increase in the total dollar amounts
of payments received for the Company's services and programs under capitated
(per member per month) agreements and other changes, primarily consisting of
reductions in reimbursement resulting in an increase in the Company's
contractual allowance expense. Revenues, operating income and net income were
also affected by expansion of the Company's services and programs, additional
costs in connection with the opening and operations of permanent facilities at
Alta Bates and Mount Sinai Comprehensive Cancer Centers, the results of
operations of the Company's recently acquired Walnut Creek, California facility
which is affiliated with the Alta Bates Comprehensive Cancer Center, the
expansion of programs and the addition of personnel and related costs to support
and expand the Company's development, strategic planning, information systems
and physician network activities.
During second quarter fiscal 1996 the Company has acquired The Breast
Center in Van Nuys, California, the first free-standing multidisciplinary breast
center in the United States and one of the nation's most highly respected
medical facilities in the field of breast disease. In addition, the Company
entered into an agreement with Pacific Hematology-Oncology Associates (PHOA), a
highly respected physician group specializing in oncology in San Francisco.
Under the terms of this agreement, PHOA facilities and physicians are a San
Francisco affiliate facility for the Alta Bates Comprehensive Cancer Center.
9
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The Company's change in accounting principle from deferring to expensing
pre-operating costs when incurred, as described in Note 2 to the consolidated
financial statements adversely affected both fiscal 1995 and 1996 second quarter
and six month operating income, net income and earnings per share. The Company
adopted this method of accounting for pre-operating costs in fiscal 1995 based
on management's belief that this method of accounting better reflects the
Company's current methods of operations and as it also conforms to the method
followed by Zeneca Group, PLC, the beneficial owner of more than 50% of the
Company's common equity. The cumulative effect of the change in accounting
principle resulted in a non-recurring, non-cash charge of $3,588,000 net of
income taxes of $2,393,000, as of the beginning of fiscal year 1995.
Second quarter primary and fully diluted earnings per share decreased to
$0.20 from $0.26 and $0.25, respectively. For the six months ended February 29,
1996, earnings per share, on a primary basis, increased to $0.44 from $0.18 and
on a fully diluted basis to $0.44 from $0.19 due to the cumulative effect on
prior years in the change of accounting method. Net interest income increased
to $956,000 from $281,000 in the six month period primarily as the result of the
call of the Company's 7-1/4% Convertible Debentures. Net investment income
increased over the second quarter and six month 1995 amounts due to capital
gains realized in the Company's marketable securities portfolio. No assurances
can be made that investment income will continue as it is dependent on a variety
of sources which are beyond the Company's control. Fiscal 1995 second quarter
net income and earnings per share were adversely affected due to non-recurring
transaction expenses of $526,000 in connection with the Company's Agreement and
Plan of Merger with Zeneca Limited.
Operating results have been and will continue to be adversely affected by
reductions in reimbursement rates mandated by Congress, including those pursuant
to the Omnibus Budget Reconciliation Acts (OBRA) of 1990-1993 which impact
health care providers for many services provided to Medicare beneficiaries. The
principal reductions applicable to the Company are a continuation of the 5.8%
reduction in reimbursement of outpatient cost-based programs through fiscal year
1998; a continuation of the 10% reduction in hospital outpatient capital
reimbursement through fiscal year 1998; and a change in the manner of
reimbursement for Erythropoietin for dialysis patients, effective January 1,
1991 which was further reduced beginning on January 1, 1994. The Company has
implemented strategies, including programs to increase both Medicare and non-
Medicare patient volume and the implementation of cost control programs, that
have substantially mitigated the effect of these changes. See "Impact of
Inflation and Changing Regulation."
Total operating expenses relative to operating revenues increased 3.7% for
the second quarter of fiscal 1996 and 2.4% for the six months of fiscal 1996,
before interest and investment expense, as compared to the prior year. Medical
supplies and services expense increased by $858,000 and $1,318,000 during the
quarter and six month periods, a 1.8% and 1.2% increase, respectively, as a
percentage of revenues, primarily the result of activity under the Company's
capitated fee program, increasing complexity in cancer
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<PAGE>
and dialysis treatment modalities and supplier price escalations. The addition
of professional, corporate, administrative and other personnel necessitated by
current and anticipated expansion and growth, primarily in Cancer Center and
related operations, and increases in compensation and payroll taxes caused
salaries and related costs to increase by $626,000 and $1,277,000 in the three
and six month periods in 1996 compared to 1995. As compared to the prior year
periods, other administrative expenses for fiscal 1996 increased 1.1% for the
quarter and .4% for the six months, as a percent of operating revenues. Contract
and occupancy costs decreased .1% in the quarter and increased .1% in the six
month period, respectively, as a percentage of net operating revenues,
principally resulting from increased contract costs under contractual agreement
terms with certain of the Company's affiliated hospitals. Depreciation and
amortization increased by $172,000 and $298,000 as compared to the second fiscal
quarter and six months of 1995 due to depreciation of additional clinic
equipment placed in service during the past year.
Income taxes were calculated at a 39.5% rate in the fiscal 1996 six month
period versus 40.3% in the prior year six month period. The Company expects to
utilize available federal capital loss carrryforwards in the current fiscal
year, lowering the Company's tax rates and increasing cash flow.
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 February 29, 1996 was $27,521,000. The decrease in
working capital during the current period as compared to fiscal 1995 year end is
principally due to increased short term borrowings to finance facilities
construction. The increase in accounts receivable at February 29, 1996 as
compared to August 31, 1995 is due to the previously mentioned increased
revenues which resulted from growth in patient volumes and services provided at
the Company's cancer centers and dialysis facilities.
The Company's principal sources of liquidity consist of cash on hand,
interest-bearing investments, internal cash flow and a revolving bank line of
credit of $80,000,000. At February 29, 1996, $33,379,000 had been borrowed
under the revolving bank line of credit. The line of credit agreement provides
various options for interest rates. Unless the Company elects an optional
interest rate, borrowings under the line of credit are subject to the bank's
prime rate of interest.
At February 29, 1996, the Company held in its portfolio cash, government
and investment grade debt securities and equity securities. These investments
represent 100% of the total portfolio at fair value and reflect the Company's
policy to invest its funds in government and investment grade
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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 $46,580,000 from cost of $46,351,000. As of February 29, 1996, the
Company's five largest investments in municipal and corporate debt securities,
all of which were investment grade aggregated $6,871,000 at fair value, with
cost of $6,949,000. The single largest investment approximated $2,425,000 with
a cost of $2,431,000.
Capital expenditures for the remainder of fiscal year 1996 and the April
1996 distribution to former common stockholders pursuant to the merger are
presently estimated to be approximately $48,000,000. As to these and other
needs, certain equipment and/or facilities may be acquired through leases or
purchase-finance agreements.
IMPACT OF INFLATION AND CHANGING REGULATION
The largest single component of the Company's revenue continues to be
reimbursement at rates which are set or regulated by federal or individual state
authorities. These reimbursement rates are also subject to periodic adjustment
for certain factors, including changes in legislation and regulations, those
imposed pursuant to the federal and individual state budgets, inflation, area
wage indices and costs incurred in rendering the services. The reimbursement
rates may in the future, as they have in the past, also be affected by the
impact of managed care organizations, cost containment and other legislation,
competition, third party payor changes or other governmental administrative
controls or limitations. Changes in the Medicare and Medicaid system and
reimbursement have been proposed by both Republican and Democrat members of
Congress. While the Company expects changes in reimbursement to occur, this may
be limited to extensions of previously implemented reductions scheduled to
expire or may include additional changes. The ultimate impact of any of the
above described and other changes that may occur and their effect on the
Company's business cannot be predicted, in part due to budgetary constraints and
the rapidly evolving changes in the health care system generally.
Under federal Medicare law, most hospital inpatients covered by Medicare
are classified into diagnostic related groups ("DRGs") based on such factors as
primary admitting diagnosis and surgical procedure. Payment to hospitals for
the care of a patient covered under the DRG system is generally set at a
predetermined amount based on the DRG assigned the patient. The federal
government, as well as many states and third party payors, are investigating or
have adopted these or other modifications to their reimbursement formula in an
effort to contain costs. This type of program provides an incentive for
hospitals to plan and deliver their services more efficiently.
The Omnibus Budget Reconciliation Act of 1990 amended the definition of
"inpatient hospital services" to include all services for which payment may be
made under the DRG system that are provided by a hospital or an entity wholly-
owned or operated by the hospital to a patient during the three days immediately
preceding the date of the patient's admission (or one day for hospitals and
hospital units excluded from the DRG system under technical
12
<PAGE>
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 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
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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 1996, the new system
would not likely be implemented until January 1997, at the earliest. Under
HCFA's proposal, services other than surgery, radiology, and other diagnostic
services would not be reimbursed under a new prospective payment system until
further research is completed. The Company cannot predict what will be the
effect, if any, on revenues or income which may result from the adoption by
Congress of HCFA's recommendations for a Medicare prospective payment for
hospital outpatient services.
HCFA in its March 1995 report to Congress made two other recommendations
concerning proposed changes in the Medicare law. First, HCFA proposed that the
Medicare law be changed to modify the way that the amount of beneficiary
coinsurance for outpatient services is computed. Second, HCFA proposed that
Medicare law be changed to correct what has been described as the "formula
driven overpayment" which HCFA states results in Medicare payments for hospital
outpatient surgery, radiology and other diagnostic services that are greater
than what was intended by Congress. In its report, HCFA suggested several ways
in which the Medicare law could be changed to address these issues, either with
or without the enactment of a prospective payment system for hospital outpatient
services. The alternatives suggested by HCFA generally would result in an
overall reduction in payments for hospital outpatient services furnished to
Medicare beneficiaries and, if enacted, could adversely affect the Company's
revenues and income. However, it is uncertain which alternative, if any,
Congress will enact, and it is impossible to determine what impact, if any, such
changes might have on the Company's revenues and income.
Effective October 1, 1991, Medicare payments for hospital outpatient
services made on a reasonable cost basis and the cost portion of outpatient
services paid on the basis of a blended amount, were reduced by 5.8%. Under the
Omnibus Reconciliation Act of 1993 ("OBRA 1993"), Congress extended this
reduction through federal fiscal year 1998. Effective October 1, 1991, Medicare
has reimbursed the capital costs allocated to outpatient departments on the
basis of 90% of reasonable costs. Under OBRA 1993, Congress extended this 10%
reduction in hospital outpatient capital cost reimbursement through federal
fiscal year 1998. Also under OBRA 1993, the amount which Medicare reimburses
for clinical laboratory services was reduced.
Effective November 1, 1990, the Medicare fiscal intermediary for the
Company's dialysis facilities changed the method of reimbursing medications
provided to Medicare dialysis patients from charge-based reimbursement to
reimbursement based on reasonable costs. This change has reduced the amount of
reimbursement to the Company for such medications and other regulatory changes
potentially could further reduce such reimbursement. In addition, effective
January 1, 1991, the method of reimbursement for EPO furnished to dialysis
patients was changed from its former structure (80% of $40 per treatment dosage
for up to 10,000 units and 80% of $70 per treatment dosage of 10,000 or more
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
14
<PAGE>
dialysis services. In addition, pursuant to OBRA 1993, reimbursement for EPO
was further reduced beginning January 1, 1994 to 80% of $10.00 per 1,000 units.
The Secretary announced on September 1, 1995 that she will not at this time
adjust the current composite rate. The overall impact of the EPO reimbursement
change has adversely affected the Company's revenues and earnings.
The effect of these changes may be mitigated by the Company's ability to
increase its patient volume both at the same sites and at additional centers, to
increase its non-Medicare and other regulated patient volume and to implement
other cost controls and cost reduction strategies. To address these changes,
the Company has expanded its programs and services in order to increase patient
volume, and instituted other programs to achieve efficiencies in staffing,
purchasing and scheduling.
Legislation in Florida limits charges for certain health care services
provided to non-Medicare/Medicaid patients. A substantial portion of this law
has been challenged, a portion declared unconstitutional and is being appealed
in the federal court system and will not be enforced until after such
resolution; however, the limitations on rates respecting radiation therapy
services provided at freestanding, not hospital-based facilities, presently
remains in effect. As substantially all of the Company's radiation therapy
services are hospital-based, the effect of the legislation has not had a
material effect on the Company's operations. Florida also has legislation
precluding or limiting referrals by physicians to facilities in which they have
an ownership, control or investment relationship (the Florida Patient/Self-
Referral Act). 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.
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
15
<PAGE>
which generally would result in reducing reimbursement amounts; (2) an extension
of the current 5.8% reduction in hospital outpatient reasonable cost
reimbursement through the year 2002; (3) a reduction in reimbursement for
hospital outpatient department capital-related costs of 85% of such reasonable
costs for federal fiscal years 1996-2002; (4) the introduction of a prospective
payment system for home health services, effective October 1996; (5) reductions
in payment for clinical laboratory services; (6) the elimination of updates in
payments for ambulatory surgical center services from 1996-2002; (7) various
other reductions in the amount of payment for physician and hospital services;
and (8) the introduction of additional choices of health plans for Medicare
beneficiaries in addition to the current fee-for-service and Medicare HMO
option. Proposed Medicaid changes include the replacement of the existing
federal/state program with block grants to the states and reduced federal
oversight over state plans. The enactment of large cuts in the amount of
Medicare and Medicaid reimbursement for providers could have an adverse effect
on the Company's revenues. At this point in time, however, it is uncertain
which, if any, of these or other changes to the Medicare and Medicaid programs
will be enacted into law, and the Company is unable to predict how the enactment
of any such changes might affect the Company in the future.
The Company believes that the provision of health care will continue to
evolve, that rules and regulations will continue to change and, therefore,
regularly monitors developments. The Company may modify its agreements and
operations from time to time as the business and regulatory environments change.
While the Company believes it will be able to structure its agreements and
operations in accordance with applicable law, there can be no assurance that its
arrangements will be as successful or not be successfully challenged.
Labor costs represent the largest dollar component of the Company's total
expenses and necessary increases in the number of personnel, salaries, hourly
rates and insurance costs have resulted in higher dollar amounts of operating
expenses. Rental rates are subject to annual adjustments pursuant to escalation
clauses in the respective leases. In addition, suppliers have sought to pass
along their rising costs to the Company. A significant portion of these higher
costs, however, has been offset by the use of new procedures and equipment,
changes in staff scheduling, improvement in purchase price negotiations and
utilization of supplies, and by increases in treatment and services volume.
Changes in reimbursement rates for Medicare patients have a significant impact
on the results of operations. The rate of inflation has not had a significant
impact on the results of operations.
16
<PAGE>
SALICK HEALTH CARE, INC.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) On January 18, 1996, the Registrant held its Annual Meeting of
Stockholders.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees as listed in the Proxy Statement
and all of such nominees were elected.
(c) At the Annual Meeting, a proposal to consider and approve amendments to
the Company's certificate of incorporation to increase the authorized
number of Directors from ten to twelve, six of whom would be elected by
the holders of the Company's Common Stock and six of whom would be
elected by the holders of the Company's Callable Puttable Common Stock
was approved by 100% of the outstanding Common Stock (5,657,115 shares)
voting separately as a class and by the following vote of the Callable
Puttable Common Stock voting separately as a class and voting together
with the Common Stock as a single class (there were no broker non-
votes):
Callable Puttable Common Stock:
For Against Abstained
----------- ------- ---------
15,774,588 3,664 945
Callable Puttable Common Stock and Common Stock voting together as a
class:
For Against Abstained
----------- ------- ---------
10,736,555 3,664 945
17
<PAGE>
SALICK HEALTH CARE, INC.
PART II
OTHER INFORMATION
At the Meeting, the following persons were elected by the vote
indicated (there were no abstentions or broker non-votes) to serve
until the next annual meeting of stockholders and until their
successors are duly elected and qualified:
Elected by Holders of Callable Puttable Common Stock:
<TABLE>
<CAPTION>
Vote
Name For Withheld
---- ---------- --------
<S> <C> <C>
Bernard Salick, M.D. 21,415,004 21,308
Leslie F. Bell 21,415,004 21,308
Michael T. Fiore 21,415,004 21,308
Barbara Bromley-Williams 21,415,004 21,308
Thomas Mintz, M.D. 21,415,004 21,308
Patrick W. Jeffries 21,415,004 21,308
</TABLE>
Elected by Holders of Common Stock:
<TABLE>
<CAPTION>
Name For
---- ---------
<S> <C>
Dr. Thomas F. W. McKillop 5,657,115
Robert C. Black 5,657,115
John G. Goddard 5,657,115
Dr. Michael G. Carter 5,657,115
Alan I. H. Pink 5,657,115
</TABLE>
Item 5. Other Information
At the Board of Directors' meeting on January 18, 1996, Allen L.
Johnson was elected as a Director of the Company to fill the vacancy
on the Board of Directors to be elected by the holders of Common
Stock. Since 1986 Mr. Allen has served as President and Chief
Executive Officer of the Medical Center of Delaware. Previously, Mr.
Allen was President and Chief Executive Officer of St. Vincent Medical
Center in Toledo, Ohio. Mr. Allen has also held executive management
positions with Farley Health Care Corporation and St. Vincent
Corporate Services, Inc. in Toledo, Ohio and with Henry Ford Hospital
Services Corporation and Henry Ford Hospital in Detroit, Michigan.
18
<PAGE>
SALICK HEALTH CARE, INC.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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) Certificate of Amendment of Certificate of Incorporation of
Salick Health Care, Inc.
10(a) Employment Agreement with Patrick W. Jeffries.
11 Computation of Net Earnings per Common Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter ended February 29, 1996 no
reports on Form 8-K were filed.
19
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALICK HEALTH CARE, INC.
------------------------------------
(Registrant)
/s/ BERNARD SALICK, M.D.
------------------------------------
Date: April 15, 1996 Bernard Salick, M.D.
Chairman and Chief Executive Officer
(Duly Authorized Officer)
/s/ BLAIR L. HUNDAHL
------------------------------------
Date: April 15, 1996 Blair L. Hundahl
Senior Vice President-Finance
(Principal Accounting Officer)
20
<PAGE>
SALICK HEALTH CARE, INC.
EXHIBIT INDEX
Exhibit
-------
3(b) Certificate of Amendment of Certificate of Incorporation of
Salick Health Care, Inc.
10(a) Employment Agreement with Patrick W. Jeffries.
11 Computation of Net Earnings per Common Share.
27 Financial Data Schedule
21
<PAGE>
EXHIBIT 3(b)
SALICK HEALTH CARE, INC.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
SALICK HEALTH CARE, INC.
Salick Health Care, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
The amendments set forth in the following resolutions approved by the
Corporation's Board of Directors and stockholders were duly adopted in
accordance with the provisions of Section 242 of the General Corporation Law of
the State of Delaware:
RESOLVED, that the first sentence of Section C(ii) of Article FOURTH of the
Corporation's certificate of incorporation be amended to read as follows:
"Notwithstanding the voting rights set forth in subsection (i) of this
Section C of Article FOURTH of this Certificate of Incorporation, until the
Termination Date, the holders of the Common Stock, voting separately as a
class, shall be entitled to elect six (6) Directors to the Board and the
holders of the Special Common Stock, voting separately as a class, shall be
entitled to elect six (6) Directors to the Board."
RESOLVED, FURTHER, that the second sentence of Section A of Article FIFTH of
the Corporation's certificate of incorporation be amended to read as follows:
"Subject to Article FOURTH hereof, the authorized number of Directors of
the Corporation shall be twelve (12)."
IN WITNESS WHEREOF, Salick Health Care, Inc. has caused this Certificate to
be signed by its duly authorized officer this 18th day of January, 1996.
SALICK HEALTH CARE, INC.
By: /s/ Bernard Salick, M.D.
------------------------------
Bernard Salick, M.D., Chairman
EXHIBIT 3(b)
22
<PAGE>
EXHIBIT 10(a)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") dated December 1, 1995 is between
SALICK HEALTH CARE, INC., a Delaware corporation, hereinafter referred to as
"Employer", and Patrick Jeffries, hereinafter referred to as "Employee".
I. Employment and Compensation.
A. Employer hereby employs Employee as its Executive Vice President, Chief
Development Officer. Employee shall receive a base annual salary payable in bi-
weekly installments, in advance, during the term hereof. Initially, Employee's
base annual salary shall be $500,000 payable in bi-weekly installments of
$19,230.77. For purposes of this Agreement, the base annual salary is
hereinafter referred to as the "Base Annual Salary."
B. Base Annual Salary shall be increased at least annually during the term
hereof by an amount at least equal to the annual increase in the All Urban
Consumers Los Angeles-Long Beach-Anaheim consumer price index, as applicable
each year for the same month as the month in which the term hereof begins. If
the above-described index is discontinued, a comparable index shall be used.
Notwithstanding the use of the index, in no event shall the Base Annual Salary
of Employee be subject to downward modification. For purposes of calculating
increases to Base Annual Salary, the formula shall apply to the amount payable
pursuant to Paragraph I.A.
C. In addition to the above, Employee shall continue to be a participant
in Employer's Management Incentive Compensation Plan.
D. At the first Board of Directors meeting after the execution date hereof
and during the term of this Agreement, Employer shall nominate Employee to serve
as a director of Employer, and use its best efforts to cause his election.
II. Duties and Authority.
A. Subject to the provisions of Paragraph II.D, and consistent with
Employee's practice prior to the date hereof, Employee shall devote such of his
working time as is necessary to the discharge of his duties for Employer.
B. Employee shall have such duties and authority as shall be determined
from time to time by Employer's Board of Directors or its designee, consistent
with Employee's duties and authority and shall report to the Chief Executive
Officer and the Employer's Board of Directors as a whole.
C. As a result of the transactions contemplated by the Merger Agreement
dated as of December 22, 1994 among Employer, the Acquiring Company and Atkemix
Thirty-Nine Inc. (the "Merger Agreement") and pursuant to the Governance
Agreement, all employees of Employer will be bound by Employer's Employee
Handbook, Employer's Personnel Policy & Procedure Manual and the Policy on the
Ethical Conduct of Business faxed to Employee on December 19, 1994
(collectively, the "Code of Conduct"). Employee acknowledges that he has read
and agrees to be bound by the Code of Conduct; provided that, to the
23
<PAGE>
extent the Code of Conduct conflicts with the express provisions of Section VII
of this Agreement, the provisions of Section VII shall govern.
D. Notwithstanding anything to the contrary in this Agreement or the Code
of Conduct, Employer acknowledges that Employee devotes a portion of his time to
(i) serving as Executor or Co-Executor, Trustee or Co-Trustee for the estates
and/or trusts of two unrelated individuals, (ii) serving as a director or
advisor of charitable research or educational foundations, (iii) engaging in
certain real estate activities, (iv) investments in four privately held
businesses, (v) providing occasional counsel to former consulting clients, and
(vi) engaging in philanthropic activities including without limitation, in
respect of charitable foundations (collectively, the "Outside Activities"). The
Outside Activities are deemed and acknowledged not to be competitive with the
business of Employer or violative of Paragraphs XI.A(iv) or (v) of this
Agreement. Employee may maintain his level of involvement in his Outside
Activities and shall not be accountable to Employer in any way for his Outside
Activities. In addition, Employee may engage in other business and
philanthropic activities in the future provided that they are not competitive
with the business of Employer.
E. Employer and Employee acknowledge and confirm that the position
conferred on Employee pursuant to Paragraph I.A on the Commencement Date (the
"New Position") is substantially the same as the position discussed and
negotiated immediately prior to the Commencement Date (the "Negotiated
Position") and that when the New Position is compared to the Negotiated
Position, there is (i) no reduction in total compensation and benefits, (ii) no
significant change in the nature or scope of Employee's authority, duties or
status, and (iii) no significant change in circumstances that affect his
position, the duties attached to his position or his ability to exercise the
authority, powers, functions, or duties attached thereto, such as would give
rise to an event of "Good Reason" as defined in Paragraph XI.B. Such
acknowledgment by Employee does not waive his right to take action pursuant to
Paragraph XI.B with respect to changes in the New Position which arise after the
Commencement Date.
III. Benefit Plans.
A. All Employer benefits presently available to Employee as listed on
Exhibit "A" shall continue to be available to Employee, on the same basis as
they are currently available, throughout the term of this Agreement. Any other
benefits (whether under a plan or otherwise) provided by Employer in the future
for key executives shall also be made available to Employee, and shall be deemed
incorporated into Exhibit A hereto.
B. If the Acquiring Company (as defined in Paragraph IV), acquires all
shares of Employee's common stock, it may, at its option, offer a package of
benefit programs to Employee. If the Acquiring Company makes such an offer,
Employee may choose to be entitled to either, but not both, Employer's or the
Acquiring Company's package of benefits (in the latter case, all of Employee's
years of service with Employer shall be included in calculating years of
employment for purposes of eligibility and benefit participation in such
programs).
24
<PAGE>
IV. Term.
The term of this Agreement is through April 13, 2000, commencing upon the
date hereof (the "Commencement Date"). Employer shall, not less than eighteen
months prior to the expiration of the employment term, notify Employee if
Employer intends to retain Employee following the expiration of the then current
term, in which event the parties shall enter into good faith negotiations with
regard to the terms of such continued employment.
V. Vacation and Sick Leave.
Employee shall be entitled to six weeks vacation every year during the term
of this Agreement, with up to a maximum of six weeks of unused vacation time
being carried forward during the term hereof. Employee shall be entitled
annually during the term of this Agreement to sick days equal to the number of
days of the waiting period for the earliest period of eligibility under any
Employer disability plan. Sick days not taken during the calendar year shall be
forfeited.
VI. Death and Disability.
If Employee shall die during the term hereof or should he become so ill
that he is unable to substantially perform his duties hereunder and should such
illness continue for a period of six (6) consecutive months during the term
hereof, then Employer may, at its option, terminate this Agreement subject to
the following: (1) in the event of death, all Compensation shall continue to be
paid to Employee's surviving spouse and in the absence of a surviving spouse,
Employee's heirs for twenty four (24) additional months; (2) in the event of
permanent disability, Employee's Compensation shall be paid for the first twelve
(12) months of such disability, sixty-six percent (66%) thereof shall be paid
during the succeeding six (6) month period and thirty-three percent (33%)
thereof shall be paid during the second succeeding six (6) month period. All
payments due Employee hereunder shall be accrued and paid at, as and when due.
Disability shall only give rise to Employer's option to terminate hereunder if a
physician selected by Employer, and reasonably acceptable to Employee or his
legal representative has determined that such disability is total and permanent.
For purposes of this Paragraph VI, "Compensation" shall mean the amounts
described in paragraphs I.A and I.C and the Items set forth in Exhibit "A".
VII. Expenses of Employee.
A. Employee shall receive reimbursement for all business expenses incurred
by him during the term hereof (including the cost of first class travel, lodging
and related expenses) for which he shall account in accordance with the regular
and standard practices maintained by Employer in that regard.
B. In addition, during the term hereof, Employer shall directly pay or
reimburse Employee for professional publications, professional society dues,
professional licensing fees (including but not limited to continuing education
requirements required for license maintenance), conventions, lectures and
seminars (including but not limited to fees, first class travel, lodging and
related expenses), and similar expenses, all consistent with
25
<PAGE>
prior practice. Such expenses have averaged less than $12,500 per year during
the past three years.
VIII. Insurance.
In addition to the insurance benefits listed in Exhibit "A", Employer
shall, during the term hereof, provide Employee, at no cost to Employee, with
general and professional liability and malpractice insurance coverage (as an
officer) to be not less than the amount currently in existence for other like
officers. To the extent available at a reasonable cost (e.g. market rates),
Employer shall procure and maintain a policy of officers' and directors'
insurance in a mutually acceptable amount (not less than at present) with
Employee as a named insured thereunder. Further, Employer shall cause Employee
to be added as a named insured under all of its other liability policies, to the
extent such addition is permitted by the insurer in respect of such policies.
IX. Employee and Employer Representations.
Employee warrants and represents that he is legally able to and authorized
to make and enter into this Agreement and that the execution hereof is in no way
in breach or violation of any agreement to which Employee is a party. Employer
represents and warrants that (a) this Agreement and all acts contemplated
hereunder will have been duly authorized by Employer and approved by a majority
of the disinterested directors of Employer following thorough review and
discussion of the terms hereof; (b) this Agreement is fully binding upon
Employer; and (c) this Agreement does not violate any of the organizational or
governing documents of Employer.
X. Covenants.
A. At any and all times, both during employment by Employer and after
termination thereof, Employee will, promptly upon request of Employer, do all
acts and execute, acknowledge and deliver all written instruments as may be
necessary to vest in Employer, its affiliates or successors, the entire right,
title, and interest of Employee to any patentable inventions made by Employee
either solely or jointly with any other person or persons, at any time during
the period of employment by Employer, while working on Employer's business
("Inventions"), and to enable it (at Employer's sole cost and expense) properly
to prepare, file, and prosecute applications for, and to obtain, Letters Patent
thereon in any and all countries selected by Employer, its affiliates or
successors, as well as reissues, renewals and extensions thereof, and to obtain
the record title to such applications and Letters Patent, so that Employer, its
affiliates or successor shall be the sole and absolute owner thereof to the
extent of Employee's interest. Employee will cooperate with Employer, to
include its affiliates and successors, and its counsel in the prosecution and
defense, or either, of any litigation which may arise in connection with any of
the Inventions, provided, however, that any requested cooperation shall be
reasonable in amount, shall not interfere with other obligations of Employee and
shall be provided in Los Angeles, California. Should such services be rendered
after the termination of employment with Employer, a reasonable compensation
shall be paid to Employee on a per diem basis, based on the Base Annual Salary
which Employee was receiving from Employer at the termination of employment, in
addition to
26
<PAGE>
first class travel and personal expenses incurred by Employee in rendering the
services.
B. Employee and Employer acknowledge that the terms and conditions of this
Agreement are confidential and may be disclosed, in the case of Employee, only
to family members, attorneys, accountants and as required by law and, in the
case of Employer, only to members of the Boards of Directors of Employer and the
Acquiring Company, attorneys, accountants and employees of Employer and the
Acquiring Company on a "need to know" basis.
C. At any and all times, Employee agrees not to, except to the extent
required to properly perform Employee's duties as an officer of Employer in the
ordinary course of business, directly or indirectly, disclose or communicate any
trade secrets (as defined in Section 3426.1 of the California Civil Code) of
Employer or its subsidiaries or the Zeneca Group or relating to the "Business"
of Employer or the Zeneca Group; provided, however, that the foregoing shall not
apply to information which is not unique to Employer or its subsidiaries or the
Zeneca Group or which is generally known to the industry or the public other
than as a result of Employee's breach of this covenant. The term "Business"
shall have the meaning set forth in "Core Business" in Section 1.1 of the
Governance Agreement.
D. Any "Written Matter" prepared by Employee during employment by
Employer, whether during working hours or at any other time, for use by Employer
or related to the actual or contemplated operations of Employer at the time the
matter is prepared shall be considered a work made for hire, and the copyright
in such Written Matter shall belong exclusively to Employer, its affiliates and
successors, or any member of the Zeneca Group. Employer, its affiliates and
successors, or any member of the Zeneca Group shall further have the unlimited
right to use, copy, reproduce, publish or otherwise disseminate any such Written
Matter. At any and all times, both during employment by Employer or after
termination thereof, Employee will promptly on request of Employer do all things
as may be necessary to vest in Employer, its affiliates or successors, or any
member of the Zeneca Group, the entire right, title, and interest to the
copyright in any such Written Matter; provided, however, that any requested
cooperation shall be reasonable in amount, not interfere with other obligations
of Employee and shall be provided in Los Angeles, California. Should such
services be rendered after the termination of employment with Employer, a
reasonable compensation shall be paid to Employee on a per diem basis, based on
the Base Annual Salary which Employee was receiving from Employer at the
termination of employment, in addition to first class travel and personal
expenses incurred by Employee in rendering the services. All rights being
conferred hereunder by Employee relate only to the extent of ownership of such
right by Employee. The term "Written Matter" shall include practice guidelines,
managed care standard operating procedures, marketing literature and brochures,
journal articles or other publications and data acquisition proformas and
quality satisfaction instruments.
E. Upon termination of employment, Employee shall deliver to Employer all
writings, records, data, memoranda, contracts, orders, sales literature, price
lists, customer lists, data processing materials, manufacturing and production
materials, and other documents, whether or not obtained from Employer, which
pertain to or were used by Employee in connection with
27
<PAGE>
employment by Employer (but Employee may keep any of his personal writings,
documents and personal possessions).
XI. Termination.
A. Other than as provided in Paragraph VI, this Agreement may be
terminated by Employer only for "Good Cause." Good Cause shall mean and be
deemed to exist only if:
(i) (x) a final court judgment has been entered that Employee has been
convicted of a felony, or (y) Employee has engaged in intentional acts of fraud;
(ii) Employee has misappropriated Employer funds;
(iii) Employee engages in "repeated willful misconduct" (as defined in
Paragraph XIII.B), or a single act of wanton and egregious misconduct (e.g.
embezzlement);
(iv) Employee obtains a material personal benefit from a transaction with
Employer in which Employee has an interest which is adverse to the interest of
Employer, unless Employee shall have first obtained the consent of Employer's
Board of Directors;
(v) Employee engages in any other business, profession or occupation which is
competitive with the business of Employer after being notified by the Board of
Directors to cease engaging in such other business, profession or occupation; or
(vi) there is a breach by Employee of a covenant set forth in Paragraph X.
In addition, consistent with the treatment of all employees of Employer, any
violation of the Code of Conduct is grounds for appropriate disciplinary action,
up to and including dismissal for "Good Cause". Disciplinary action, if any,
will suit the nature of the infraction. Notwithstanding anything to the
contrary set forth in this Paragraph XI.A., (a) the conduct set forth in
Paragraph II.D., (b) any pending or presently threatened investigation, claim,
action, suit or proceeding, whether civil, criminal, administrative or
investigative, with respect to which Employee has actual knowledge and has
specifically disclosed to the Acquiring Company in the disclosure schedule faxed
to Employer on December 20, 1994 (the "Disclosure Schedule"), and (c) any other
action which is inadvertent or based upon a reasonable or good faith mistake or
de minimis, shall not, at any time, constitute Good Cause for termination.
B. This Agreement may be terminated by Employee only for "Good Reason."
Good reason shall mean and be deemed to exist if:
(i) there is a reduction in Employee's Base Annual Salary;
(ii) Employer changes the principal offices of Employer (presently located at
8201 Beverly Boulevard, Los Angeles), unless relocated to substantially similar
size and quality facilities in West Los Angeles, Beverly Hills, or Santa Monica,
California (Employer acknowledges and agrees that (a) Employee
28
<PAGE>
may perform services from his home and locations other than Employer's principal
office and (b) Employee will not be required to perform any services at any
other location, except in connection with ordinary business travel of the type
engaged in the past, without his consent);
(iii) If, as the result of an action of Employer's Board of Directors initiated
and supported by the members of the Board designated by the Acquiring Company
and any of its affiliates ("Zeneca Initiated"), Employer reduces Employer's
employees or employee working hours by at least 30% and such action is not
caused by a significant decline in the economic performance of Employer;
(iv) There is a material adverse change in the operations, policies, funding,
procedures, practices, or professionalism relating to the overall quality of
patient care by Employer that is inconsistent with Employer's past or existing
practices;
(v) The name of Employer is changed to not include the name "Salick" therein;
(vi) There is (a) a reduction in Employee's benefits as set forth in Exhibit A
(provided Employer may substitute different benefits so long as they are not
significantly different from Employee's current benefits and so long as
Employee's years of service with Employer are included in calculating years of
employment for purposes of eligibility and benefit participation in such
different benefits), or (b) a change in the calculation for Employee's bonus
pursuant to Employer's Management Incentive Compensation Plan (provided Employer
may substitute a new bonus plan, so long as the new bonus plan does not
significantly affect the accounting method for or calculation of the bonus);
(vii) There is a reasonable determination by Employee that, as a result of any
Salick, Zeneca or Board-level initiated change that significantly adversely
affects Employee's position (including a change in his title, status or position
as director), Employee is unable to exercise the nature or scope of his
authority, duties, powers, or functions that Employee agreed to as described in
Exhibit "B" at the time of Execution of this Agreement;
(viii) Employer has breached this Agreement; or
(ix) If there is a Change in Control of Employer, as defined in Paragraph XV,
during the period ending October 13, 1998.
C. Notwithstanding anything herein to the contrary, if either party claims
a breach or default hereunder by the other party or a right to terminate
hereunder or Employer claims a violation of the Code of Conduct (whether for
purposes of termination pursuant to Paragraph XI or otherwise), the party
claiming such breach, violation or right to terminate shall first give written
notice specifying the nature of the alleged breach, violation or cause for
termination to the other party, and that party shall have 10 business days after
receipt of notice to cure a monetary breach, if curable, and 30 days after
receipt of notice to cure a nonmonetary breach, if curable, provided, however,
that if the alleged nonmonetary breach cannot be cured within 30 days and the
party makes reasonable efforts to cure such alleged
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breach, the time shall be extended as necessary to complete the cure.
D. Employer hereby agrees that, notwithstanding anything to the contrary
set forth herein, if Employee terminates employment with Employer for Good
Reason, such termination shall not be deemed to be or constitute a breach or
default of or under this Agreement by Employee.
XII. Severance Pay.
If any of the matters hereinafter set forth occur (and with all capitalized
terms, unless otherwise defined, having the meaning therefore set forth in
Paragraph XV), the following provisions are applicable and supersede the amounts
owed but not paid set forth in Paragraphs I, III, V and VII.
A. Entitlement to Severance Pay. If at any time during the term of this
Agreement, (a) Employee's employment with Employer is terminated by Employer for
any reason other than Good Cause, or (b) Employee terminates employment with
Employer for Good Reason, then, in such event, Employer, within a period of
thirty (30) days, shall pay to Employee an amount equal to 299% of Employee's
Base Salary ("Severance Pay"); Provided, however, that if Employee would, except
for this provision, be subject to a tax pursuant to Section 4999 of the Code or
any successor provision that may be in effect, as a result of a "parachute
payment" (as that term is defined in Section 28OG of the Code) being made
pursuant to this Agreement, or a deduction would not be allowed to Employer for
all or any part of such payment by reason of Section 28OG of the Code, or any
successor provision that may be in effect, then there shall be deducted from the
amounts payable hereunder such amounts ("Excess Payment") as are required to
reduce the aggregate "present value" (as that term is defined in Section 280G of
the Code) of such payment to 299% of an amount equal to Employee's "base amount"
(as that term is defined in Section 280G of the Code), to the end that Employee
is not subject to tax pursuant to such Section 4999 and no deduction is
disallowed by reason of such Section 280G. The entire amount payable hereunder
shall be paid to Employee in one lump sum payment within 30 days following the
date of termination of employment as provided in this Paragraph XII.A. If after
payment is made pursuant to this Paragraph XII.A, it is determined by the
Internal Revenue Service (or any court to which the determination is appealed)
that, notwithstanding the foregoing provision in the first sentence of this
Paragraph, the aggregate "present value" (as that term is defined in Section
280G of the Code) of the payment made to Employee pursuant to this Paragraph XII
equalled or exceeded three times of an amount equal to Employee's "base amount"
(as that term is defined in Section 280G of the Code) so that Employee is
subject to tax pursuant to Section 4999 or a deduction will not be allowed to
Employer by reason of Section 280G, Employee shall, within 30 days thereafter
reimburse Employer for that portion of the payment equal to the amount of such
excess plus $1.00.
B. Termination for Good Cause or Without Good Reason. If Employee's
employment with Employer is terminated by Employer for Good Cause, or by
voluntary action by Employee without Good Reason, Employer shall have no
obligation to Employee under Paragraph XII.A hereof.
C. Benefits Unfunded. Except as provided in Paragraph XII.A, all of
Employee's rights under Paragraph XII.A shall at all times be entirely
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unfunded and no provision shall at any time be made with respect to segregating
any assets of Employer for payment of any amounts due hereunder and Employee
shall have no interest in or rights against any specific assets of Employer and
Employee shall have only the rights of a general creditor of Employer.
XIII. Indemnification.
A. Pre Commencement Date Indemnifiable Litigation. With respect to
Indemnifiable Litigation (as defined below) which arises in connection with
actions taken or omitted to be taken prior to the Commencement Date, Employer
shall hold harmless, indemnify, and defend Employee against all claims, damages,
expenses, liabilities and losses (including, without limitation, attorneys'
fees, judgments, fines, taxes or penalties and amounts paid or be paid in any
settlement with the approval of Employer, which approval shall not be
unreasonably withheld) (collectively, "Indemnifiable Expenses") incurred or
suffered by Employee in connection with any present or future threatened,
pending or contemplated investigation, claim, action, suit or proceeding,
whether civil, criminal, administrative or investigative (collectively,
"Indemnifiable Litigation"), (i) to which Employee is a party or is threatened
to be made a party by reason of conduct of Employee in any manner related to his
service as an officer, director, employee, or agent of Employer; or (ii) based
in whole or in part on or arising in whole or part out of the fact that Employee
is or was a director, officer, employee or agent of Employer or any subsidiary
affiliate thereof, or is or was serving at the request of Employer as a
director, officer, employee or agent of another corporation. Notwithstanding
the foregoing, for the purposes of this Paragraph XIII.A., Indemnifiable
Litigation shall not include pending or presently threatened investigations,
claims, actions, suits or proceedings, whether civil, criminal, administrative
or investigative, with respect to which Employee has actual knowledge and has
failed to specifically disclose in the Disclosure Schedule.
B. Post Commencement Date Indemnifiable Litigation. With respect to any
Indemnifiable Litigation which arises in connection with actions taken or
omitted to be taken after the Commencement Date, Employer shall hold harmless,
indemnify, and defend Employee against all Indemnifiable Expenses incurred or
suffered by Employee in connection with any such Indemnifiable Litigation (i) to
which Employee is a party or is threatened to be made a party by reason of
conduct of Employee in any manner related to his service as an officer,
director, employee or agent of Employee, (ii) based in whole or in part on or
arising in whole or in part out of the fact that Employee is or was a director,
officer, employee or agent of Employer or any subsidiary or affiliate thereof,
or is or was serving at the request of Employer as a director, officer, employee
or agent of another corporation, or (iii) which Employee may incur in connection
with any audit, appeal, court, or other governmental proceeding involving
Employee's or Employer's tax returns (collectively, "Audit") in which a matter
under contest is the applicability or amount of tax pursuant to Section 4999 of
the Code on account of the payment of any Severance Pay pursuant to Paragraph
XII.A hereof. Notwithstanding the foregoing, for the purposes of this Paragraph
XIII.B., (x) Indemnifiable Litigation shall not include threatened or pending
investigations, claims, actions, suits or proceedings, whether civil, criminal,
administrative or investigative which arise as a result of
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Employee's "repeated willful misconduct" (as described below) or a single act of
wanton and egregious misconduct (e.g. embezzlement) on the part of Employee,
which, in either case, is engaged in after the Commencement Date, and (y)
Indemnifiable Expenses shall not include any costs and expenses incurred in an
audit in connection with a matter other than the matter described in clause
(iii) above and, if other matters are involved in an Audit of the matter
described in clause (iii), an equitable apportionment as to the payment of the
costs and expenses as between Employee and Employer shall be made. For purposes
of this Paragraph XIII.B, Employee shall have engaged in "repeated willful
misconduct" if, following an initial act of willful misconduct and the receipt
of a written warning from Employer, Employee engages in the same or a similar
act of misconduct.
C. Procedures. Employer shall pay Indemnifiable Expenses incurred by
Employee in connection with any Indemnifiable Litigation as incurred and in
advance of the final disposition thereof, it being understood that attorneys'
fees of Employee in connection with Indemnifiable Litigation will be so paid as
incurred, subject to reimbursement by Employee to Employer if same are
ultimately determined not to constitute Indemnifiable Expenses.
If Employer acknowledges, in writing, that a particular claim asserted is
subject to its obligation to indemnify Employee, without reservation of rights,
and agrees to, and does, pay the costs and fees (including attorneys' fees)
incurred in the defense of the claim and agrees in writing to pay all
Indemnifiable Expenses in connection with such claim, subject to the provisions
of any insurance policy which covers such claim, the Acquiring Company's Board
of Director nominees shall have the right to select counsel for Employee,
control the litigation and assume the defense, and may settle or compromise such
claim on behalf of Employee; provided that such right to settle or compromise
such claim shall require the consent of Employee only if (i) Employee would be
compelled or required to admit to guilt or responsibility or to the truth of any
material, significant, injurious or charging allegations, (ii) Employee would be
compelled or required to contribute to such settlement or compromise, or (iii)
any such settlement or compromise does not involve the settlement and general
release of any and all claims of claimant against or involving Employee (whether
or not included in the proceeding). Any order or judgment related to any claim
shall be paid and satisfied by Employer prior to any levy, distraint or
execution against Employee without any right of subrogation.
If Employee provides to Employer written notice of his desire to accept a
settlement offer made by the party asserting claims against Employee, and
Employer does not approve the settlement, Employee shall have the right, but not
the obligation, to accept the settlement, and Employer shall pay the full amount
of the settlement, less only such portion of the settlement amount that Employer
contests and provides the written reasons why it is not obligated to pay such
portion in settlement. Employee shall have the right to commence an action
against Employer to reimburse Employee for that portion of the settlement that
is reasonably allocable to claims which Employer is obligated to indemnify
hereunder. Employee shall promptly give notice to Employer after Employee has
knowledge that any legal proceeding has been instituted or any claim or other
matter has been asserted in respect of which indemnification may be sought
hereunder, provided that failure to give such notice shall not preclude
indemnification except to the extent of actual
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prejudice directly caused by such failure. If Employer, within a reasonable
period of time after receipt of notice of a claim, fails to assume the defense
(including the retention of legal counsel), Employee shall have the right to
undertake the defense, compromise, or settlement on behalf of and for the
account and risk of Employer.
If Employee is required to bring any action to enforce his rights pursuant
to this Paragraph, if Employee prevails, Employee shall also be entitled to be
paid all expenses (including attorneys' fees), in bringing such action.
Employer shall not amend its Certificate of Incorporation or bylaws in any way
that adversely affects Employee's rights under this Paragraph XIII. This
Paragraph XIII shall not apply to any action which involves only claims between
the parties and which is otherwise provided for pursuant to Paragraph XVI.J.
D. Conflicts of Interest. Notwithstanding anything set forth above, if
(x) the use of counsel selected by Employer pursuant to Paragraph XIII.C would
present such counsel a conflict of interest or (y) Employer and Employee shall
have reasonably concluded that there may be legal defenses available to Employee
or other employees which are inconsistent with or in conflict with those
available to Employer (collectively, "Conflicts"), Employee shall have the right
to select, subject to Employer's consent (which consent shall not be
unreasonably withheld), and employ separate counsel (at the Employer's expense)
to represent Employee and, solely to the extent required to mitigate the
Conflict, Employer shall not have the right to control the Indemnifiable
Litigation on behalf of Employee. The existence of a Conflict shall not affect
Employer's right to settle or compromise a claim in accordance with the
provisions of Paragraph XIII.C. For purposes of this Paragraph XIII.D, the
parties acknowledge and agree that, with respect to matters set forth in the
Disclosure Schedule, there was no Conflict at the time counsel was selected,
there has been no conflict to date and, based upon the facts available to the
parties to date, the parties do not anticipate a future Conflict. Employer
shall bear the cost of independent counsel up to a maximum of $100,000 in the
aggregate (which $100,000 shall include any amounts paid by Employer in
connection with independent counsel retained for Dr. Salick's defense and shall
be divided between Dr. Salick and Employer as Dr. Salick and Employer shall
agree) for defense costs incurred after the Commencement Date with respect to
the matter referred to in Item 1 of the Disclosure Schedule. In addition,
Employee may, at his own expense, retain independent counsel to act in an
advisory capacity as to all other matters. Employer shall cause the counsel
which it has selected to consult with Employee's counsel in good faith with
respect to all significant aspects of a claim.
XIV. Covenant Not to Compete. Employee agrees that during the term hereof, and
if his employment is terminated pursuant to Paragraph XI.A by Employer or other
than pursuant to Paragraph XI.B by Employee, the provisions of the Covenant Not
to Compete attached hereto as Exhibit B shall be effective for the term set
forth therein; provided, however, that if Employee terminates his employment
pursuant to Paragraph XI.B(vii) on or before October 13, 1997, the provisions of
the Covenant Not to Compete shall also be effective.
XV. Definitions.
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A. For purposes of Paragraph XI.B, "Affiliate" shall have the meaning set
forth in the Securities Exchange Act of 1934.
B. For purposes of Paragraph XII, "Base Salary" shall mean the amounts
described in paragraphs I.A and I.C and the Items set forth in Exhibit "A"; such
annualized includable compensation for such period to be determined in
accordance with Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code").
C. For purposes of Paragraph XI.B, a "Change in Control" shall mean and be
deemed to have occurred in connection with any of the following events:
(i) The acquisition, other than from Bernard Salick, M.D., by an entity, person
or group (including all Affiliates of such entity, person or group, but
excluding the Acquiring Company or affiliates thereof, Bernard Salick, M.D.,
Leslie F. Bell or the Family Members of any of the foregoing, and trusts for the
benefit of any of the foregoing described persons or Family Members or any
entity operated, managed or in substantial part owned by any of them) of
beneficial ownership, as that term is defined in Rule 13d-3 under the Securities
Exchange Act of 1934, of capital stock of Employer: (a) entitled to exercise 30%
or more of the outstanding voting power of all capital stock of Employer
("Voting Stock"), or (b) equal to 30% or more of the outstanding Capital Stock
of Employer; or
(ii) The commencement by any entity, person, group (including any Affiliates of
such entity, person or group, but excluding Employer or an Affiliate of Employer
or any entity owned by any of them) of a tender offer or an exchange offer for
more than 30% of the outstanding Capital Stock irrespective of voting rights; or
(iii) (A) a merger or consolidation of Employer, other than as approved by
Bernard Salick, M.D., with one or more other corporations as a result of which
the holders of the outstanding Voting Stock immediately prior to such merger or
consolidation (other than the surviving or resulting corporation or any
Affiliate thereof) hold 70% or less of the Capital Stock of the surviving or
resulting corporation, or (B) a transfer, other than by Bernard Salick, M.D., of
a majority of the Capital Stock (excluding transfers to Bernard Salick, M.D.,
Leslie F. Bell or the Family Members of any of the foregoing, and trusts for the
benefit of any of the foregoing described persons or Family Members or any
entity operated, managed or in substantial part owned by any of them), or of a
Substantial Portion of the Property, of Employer other than to an entity of
which Employer owns at least 70% of the Capital Stock.
D. For purposes of Paragraph XV.C, "Family Members" shall mean Employee's
spouse, ancestors, lineal descendants, siblings and their descendants, aunts and
uncles, mother-in-law, father-in-law, sons-in-law, daughters-in-law, brothers-
in-law, sisters-in-law and first cousins; and a child legally adopted by
Employee shall be treated as your child by blood.
E. For purposes of Paragraph XV.C, "Substantial Portion of the Property of
Employer" shall mean 50% or more of the aggregate book value of the assets of
Employer as set forth on the most recent balance sheet of Employer, prepared on
a consolidated basis, by its regularly employed accountants.
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XVI. Miscellaneous.
A. Entire Agreement. This is the entire agreement of the parties relating
to the subject matter set forth herein. Except as specifically set forth in
this Agreement, or in other agreements related to or entered into at the time of
the Merger Agreement, there are no other understandings or agreements concerning
the subject matter hereof between the parties which have been relied upon or
which shall survive the execution hereof. This Agreement supersedes any and all
other agreements or understandings, oral or written, between the parties
concerning the subject matter set forth herein, including, without limitation,
the prior Employment Agreement of Employee, as amended, except as to accrued but
unpaid rights; provided that in the event the transactions contemplated by the
Merger Agreement are not consummated, this Agreement shall terminate.
B. Modification. This Agreement may not be modified or varied in any way,
except by a subsequent writing signed by each of the parties hereto.
C. Assignment. This Agreement is binding on and inures to the benefit of
the parties hereto and their respective heirs, successors, or assigns. This
Agreement may not be assigned by either party, except that, in the event
Employer is adjudicated bankrupt, Employer may assign this Agreement to another
member of the Zeneca Group with the prior written consent of Employee.
D. Gender and Number. As used herein, where the context so indicates,
reference to one gender includes the other and the neuter and vice versa, if
applicable under the circumstances. When the context so indicates that such is
the intent, words in the singular include the plural and vice versa.
E. Invalidity and Severability. In the event any provision herein (or any
portion of any provision) contained shall be declared by a court of competent
jurisdiction to be invalid, that provision shall be limited to the extent
necessary to make it enforceable, and, if necessary, severed from the Agreement.
Notwithstanding the unenforceable provision, the remaining provisions (or
portions of any provision), hereof shall be deemed severable therefrom and
remain in full force and effect.
F. Governing Law; Jurisdiction and Venue. This Agreement and any dispute
or claims arising hereunder shall be governed by, and construed according to,
and enforced under the laws of the State of California, without regard to the
conflict of laws provisions of California law. The State and Federal courts
located in Los Angeles, California shall be the sole forum for any action for
relief arising out of or pursuant to, or to enforce or interpret this Agreement.
Each party to this Agreement consents to the personal jurisdiction in such forum
and courts and each party hereto waives any right to seek a transfer of venue
from such jurisdiction on any grounds. It is the specific intent of the parties
that no part of this Agreement be construed in accordance with or governed by
the laws of any other country.
G. Notices. Any notice or demand hereunder shall be given in writing to
each person at the addresses set forth below by personal service or
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registered or certified mail, postage prepaid, return receipt requested, or
overnight courier:
To Employer at:
8201 Beverly Blvd.
Los Angeles, CA 90048-4520
Attn: Chief Financial Officer
To Employee at:
8201 Beverly Blvd.
Los Angeles, CA 90048-4520
and
1170 Embury Street
Pacific Palisades, CA 90272
With copies to:
Leslie F. Bell, Esq.
704 North Oakhurst Drive
Beverly Hills, CA 90210
Such addresses may be changed by notice to the other party given as above
provided. Notices so given shall be deemed given upon receipt.
H. Waiver. No waiver of any default or breach shall be implied from any
failure to take action on account of such default. No express written waiver
shall be deemed to waive or render unnecessary the consent or approval to or of
any subsequent act.
I. Captions. Section captions used in this Agreement are descriptive and
for convenience only, and shall not affect the construction of this Agreement.
J. Attorneys' Fees. In any proceeding or any action at law or in equity
commenced hereunder, the prevailing party shall receive its attorneys' fees,
costs and disbursements in addition to any other relief granted. Each party may
be represented by counsel of its choice, even though such counsel may have
represented the other party in matters related to the business of Employer.
K. No Mitigation. Without limiting any other provision hereof, any
compensation and other benefits received by Employee from any and all sources
other than Employer before or after the expiration or termination of this
Agreement for any reason whatever shall in no way reduce or effect Employer's
obligation to make payments hereunder.
L. Independent Counsel: Interpretation. Each of the parties hereto has
been represented by independent counsel in the negotiation and review of this
Agreement. The provisions of this Agreement were negotiated by each of the
parties hereto and this Agreement shall be deemed to have been drafted by each
party.
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M. Survival. The provisions of Paragraphs X, XII, XIII, XIV and XVI.F, G,
J and K shall survive any termination of this Agreement.
N. Reimbursement for Negotiation. Employer shall reimburse Employee for
all professional fees and costs incurred by Employee in the drafting and
negotiation of this Agreement and any amendments or extensions hereto and any
other agreements related to or entered into at the time of the Merger Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective the day and year first above written.
EMPLOYER:
Salick Health Care, Inc., a Delaware corporation
By /s/ Leslie F. Bell
___________________________
Its Duly Authorized Officer
EMPLOYEE:
/s/ Patrick W. Jeffries
______________________________
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EXHIBIT A
BENEFIT PLANS OF EMPLOYER IN EFFECT
AS OF DECEMBER 1, 1995
1. Participation in Employer's Management Incentive Compensation Plan.
2. Participation in Employer's long-term management incentive compensation
plans intended to reward key managers which are currently being reviewed to be
revised to establish Management incentives for substantial growth, value
enhancement and performance improvement of the Employer.
3. Participation in Employer's Life Insurance policy.
4. The Salick Health Care, Inc. Salary Savings Plan (401(k) Plan), to which
Employer makes a percentage matching contribution.
5. Participation in Employer's medical, dental, visual and psychiatric/
psychological insurance policies by Employee and immediate family.
6. Disability and accidental death and dismemberment rights and insurance.
7. Use of company automobile of Employee's choice, selected every three years,
consistent with that currently being provided to Messrs Bell and Fiore,
including gas, maintenance, car telephone, and insurance, and licensing.
Employee may, at his option, acquire the company car that Employee is using for
the greater of 7.5% of the original cost or book value (and Employer will then
provide a replacement car).
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EXHIBIT B
Agreement Not to Compete
------------------------
This Agreement Not to Compete ("Agreement"), dated as of December 1,
1995, is made, entered into and executed by and between Zeneca Limited, an
English company ("Zeneca"), Patrick W. Jeffries (for ease of reference herafter
the "Stockholder"), and Salick Health Care, Inc., a Delaware corporation (the
"Company").
WHEREAS, this Agreement is only effective if triggered by Paragraph XIV
of the Employment Agreement of even date between Stockholder and Salick Health
Care, Inc. (the "Employment Agreement").
WHEREAS, for good and valuable consideration, the receipt of which is
expressly acknowledged, the Stockholder agrees to undertake the covenants with
the Company and Zeneca not to compete with the business of the Company on the
terms herein specified.
WHEREAS, the Stockholder recognized and acknowledges that this Agreement
Not to Compete is integral to the entering into and executing of the Employment
Agreement.
WHEREAS, but for this Agreement Not to Compete the Company would not
make, execute or enter into the Employment Agreement of even date between the
Company and Stockholder.
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Capitalized terms used but not defined herein have the respective
meanings attached thereto in the Merger Agreement.
Now, therefore, the parties hereto agree as follows:
1. Covenant. During the Non-Compete Period, as hereinafter defined,
--------
and within the Non-Compete Geographic Limits, as hereinafter defined, the
Stockholder agrees, except for those activities permitted pursuant to Paragraph
II.B of the Employment Agreement, not to be employed by, be an officer, agent,
or director of, or consult with or directly or indirectly own, manage,
participate in, operate or control, any interest in any business which competes
with the business of the Company or any of its Subsidiaries, as such business is
defined below (the "Business"); provided that the foregoing shall not prevent
the Stockholder from making and holding investments of up to 5% of the equity of
any entity engaged in such Business, if such equity is listed on a national
securities exchange or regularly traded in the over-the-counter market.
The Non-Compete Period shall be a period commencing on the date it is
triggered pursuant to the Employment Agreement and ending on October 13, 1997.
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The Non-Compete Geographic Limits are defined as the counties listed on
Schedule A hereto. With respect to each listed county in the State of California
set forth above, this covenant not to compete is intended as a separate
covenant. If any one of such covenants is declared invalid for any reason, this
determination shall not affect the validity of the remainder of the covenants or
any covenant covering territory other than the State of California. The other
covenants in the non-competiton provision shall remain in effect as if the
provision had been executed without the invalid covenants. The parties hereby
declare that they intend that the remaining covenants of the provision continue
to be effective without any covenants that have been declared invalid.
The term "Business" shall have the meaning set forth in Section 1.1
("Core Business") of the governance Agreement dated December 22, 1994.
2. Solicitation of Employees. During the Non-Compete Period and within
-------------------------
the Non-Compete Geographic Limits, the Stockholder shall not, without the prior
written consent of the Company, solicit or assist in the solicitation of any
employee or former employee of the Company or its Subsidiaries unless such
person shall have ceased to be employed by the Company or such Subsidiary, other
than as a result of the Stockholder's actions. The parties acknowledge that mere
knowledge by a Company employee of the
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existence of a competing business by Stockholder shall not constitute a
solicitation of such employee.
3. Reasonableness of Covenants. The Stockholder expressly understands
---------------------------
and agrees that although the Company and Zeneca consider the restrictions
contained in Paragraph 1 and 2 above to be reasonable, if a final judicial
determination is made by a court of competent jurisdiction that the time or
territory or any other restriction contained in this Agreement is an
unenforceable restriction against the Stockholder, the provisions of this
Agreement shall not be rendered void but shall be deemed amended to apply as to
such maximum time and territory and to such maximum extent as such court may
judicially determine or indicate to be enforceable. Alternatively, if any court
of competent jurisdiction finds that any restriction contained in this Agreement
is unenforceable, and such restriction cannot be amended so as to make it
enforceable, such finding shall not affect the enforceability of any of the
other restrictions contained herein.
4. Injunctive Relief and Specific Performance. The Stockholder
------------------------------------------
acknowledges and agrees that Zeneca's and the Company's remedies at law for
breach of any of the provisions of this Agreement would be inadequate and, in
recognition of this fact, the Stockholder agrees that, in the event of such a
breach, in addition to any remedies at law, the Company and Zeneca, or either,
without posting any
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bond, shall be entitled to obtain equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent injunction or
any other equitable remedy which may then be available in any county in which
the Company or its Subsidiaries are engaged in the Business or from which they
derive a reasonable amount of their Business at the time of the breach. The
Stockholder further acknowledges that should the Stockholder violate any of the
provisions of this Agreement, it will be difficult to determine the amount of
damages resulting to the Company and in addition to any other remedies which it
may have, the Company and Zeneca or either shall be entitled to temporary and
permanent injunctive relief without the necessity of proving damages.
5. Acknowledgment. Each of the Stockholder, Zeneca and the Company
--------------
acknowledges and agrees that the covenants contained in Agreement have been
negotiated in good faith by the parties, are reasonable and are not more
restrictive or broader than necessary to protect the interests of the parties
hereto, and would not achieve their intended purpose if they were on different
terms or for periods of time shorter than the periods of time provided herein or
applied in more restrictive geographical areas than are provided herein. Each
party further acknowledges and agrees that Zeneca would not enter into the
Merger Agreement and the transactions contemplated thereby
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(including, without limitation, the acquisition of the shares of the Company
outstanding prior to the Merger from the Stockholder pursuant to the Merger
Agreement) but for the covenants contained in this Agreement and that such
covenants are essential to protect the value of the Business. Each party agrees
further that the transactions of which this Agreement is a part involves more
than $100,000.
6. Miscellaneous.
-------------
A. Entire Agreement. This is the entire agreement of the parties
----------------
relating to the subject matter set fort herein. Except as specifically set
forth in this Agreement, there are no other understandings or agreements
concerning the subject matter hereof between the parties which have been relied
upon or which shall survive the execution hereof. This Agreement supersedes any
and all other agreements or understandings, oral or written, between the parties
concerning the subject matter set forth herein. Notwithstanding the foregoing,
in the event that the transactions contemplated by the Merger Agreement are not
consummated, this Agreement shall terminate.
B. Modification. This Agreement may not be modified or varied in any
------------
way, except by a subsequent writing signed by each of the parties hereto.
C. Assignment. This Agreement may not, in whole or in part, be
----------
assigned by any party.
44
<PAGE>
D. Gender and Number. As used herein, where the content so indicates,
-----------------
reference to one gender includes the other and the neuter and vice versa, if
applicable under the circumstances. When the context so indicates that such is
the intent, words in the singular include the plural and vice versa.
E. Invalidity and Severability. In the event any provision herein
---------------------------
contained shall be declared by a court of competent jurisdiction to be invalid,
that provision shall be limited to the extent necessary to make it enforceable,
and if necessary, severed from the Agreement. Notwithstanding the unenforceable
provision, the remaining provisions hereof shall be deemed severable therefrom
and remain in full force and effect.
F. Governing Law: Jurisdiction and Venue. This Agreement and any
-------------
dispute or claims arising hereunder shall be governed by, and construed
according to, and enforced under the laws of the State of Delaware, without
regard to the conflict of laws provisions of Delaware law. The State and Federal
courts located in Delaware shall be the sole forum for any action for relief
arising out of or pursuant to, or to enforce or interpret this Agreement. Each
party to this Agreement consents to the personal jurisdiction in such forum and
courts and each party hereto waives any right to seek a transfer of venue from
such jurisdiction on any grounds. It is the specific intent of the parties that
no
45
<PAGE>
part of this Agreement be construed in accordance with or governed by the laws
of any other country.
G. Notices. any notice or demand hereunder shall be given in writing
-------
at the address set forth below by personal service or registered or certified
mail, postage prepaid, return receipt requested or overnight courier:
1. To Company at:
8201 Beverly Blvd.
Los Angeles, CA 90048-4520
2. To Zeneca at:
15 Stanhope Gate
London W1Y 6LN
3. To the Stockholder at:
8201 Beverly Blvd.
Los Angeles, CA 90048-4520
and:
1170 Embury Street
Pacific Palisades, CA 90272
With copies to Marshall Grossman, Dr. Bernard Salick and Leslie Bell at
8201 Beverly Blvd., Los Angeles, CA 90048-4520.
Such address may be changed by notice to the other party given as above
provided. Notices so given shall be deemed given upon receipt.
H. Waiver. No waiver of any default or breach shall be implied from
------
any failure to take action on account of such default. No express written
waiver shall be deemed to waiver or render unnecessary the consent or approval
to or of any subsequent act.
46
<PAGE>
I. Captions. Section captions used in this Agreement are descriptive
--------
and for convenience only, and shall not affect the construction of this
agreement.
J. Independent Counsel; Interpretation. Each of the parties hereto has
-----------------------------------
been represented by independent counsel in the negotiation and review of this
Agreement. The provisions of this Agreement were negotiated by each of the
parties hereto and this Agreement shall be deemed to have been drafted by each
party.
47
<PAGE>
I. Captions. Section captions used in this Agreement are descriptive
--------
and for convenience only, and shall not affect the construction of this
agreement.
J. Independent Counsel; Interpretation. Each of the parties hereto has
-----------------------------------
been represented by independent counsel in the negotiation and review of this
Agreement. The provisions of this Agreement were negotiated by each of the
parties hereto and this Agreement shall be deemed to have been drafted by each
party.
IN WITNESS HEREOF, the parties hereto have executed this Agreement
effective the day and year first above written.
ZENECA LIMITED
an English Company
By: /s/ Michael G. Carter, M.D.
---------------------------
Michael G. Carter, M.D.
SALICK HEALTH CARE, INC. a
Delaware Corporation
By: /s/ Leslie F. Bell
---------------------------
Leslie F. Bell
/s/ Patrick W. Jeffries
---------------------------
Patrick W. Jeffries
48
<PAGE>
SCHEDULE A
California
- ----------
Alameda County, Alpine County, Amador County, Butte County, Calaveras County,
Colusa County, Contra Costa County, Del Note County, El Dorado County, Fresno
County, Glenn County, Humboldt County, Imperial County, Inyo County, Kern
County, Kings County, Lake County, Lassen County, Los Angeles County, Madera
County, Marin County, Mariposa County, Mendocino County, Merced County, Modoc
County, Mono County, Monterey County, Napa County, Nevada County, Orange County,
Placer County, Plumas County, Riverside County, Sacramento County, San Benito
County, San Bernardino County, San Diego County, San Francisco County, San
Juaquin County, San Luis Obispo County, San Mateo County, San Barbara County,
Santa Clara County, Santa Cruz County, Shasta County, Sierra County , Siskiyou
County, Solano County, Sonoma County, Stanislaus County, Sutter County, Tehama
County, Trinity County, Tulare County, Tuolumne County, Ventura County, Yolo
County, Yuba County
Delaware
- --------
Kent County, New Castle County, Sussex County
Florida
- -------
Bradford County, Brevard County, Charlotte County, Citrus County, Columbia
County, De Soto County, Gadsden County, Gilchrist County, Glades County,
Hernando County, Hillsborough County, Lafayette County, Lake County, Lee County,
Leon County, Madison County, Nassua County, Okaloosa County, Okeechobee County,
Orange County, Palm Beach County, Pasco County, Santa Rosa County, Suwannee
County, Walton County
Kansas
- ------
Brown County, Chase County, Clark County, Cloud County, Cowley County, Crawford
County, Decatur County, Douglas County, Elk County, Finney County,
Franklin County, Geary County, Greeley County, Greenwood County, Kearny County,
Lane County, Leavenworth County, Lyon County, Marion County, Marshall County,
Meade County, Mitchell County, Neosho County, Osborne County, Phillips County,
Pratt County, Reno County, Republic County, Rush County, Saline County, Scott
County, Sedgwick County, Shawnee County, Sherman County, Sumner County, Thomas
County, Wichita County, Wyandotte County
49
<PAGE>
Missouri
- --------
Adair County, Andrew County, Atchison County, Audrain County, Barry County,
Barton County, Bates County, Benton County, Bollinger County, Boone County,
Buchanan County, Butler County, Caldwell County, Callaway County, Camden County,
Cape Girardeau County, Carroll Conty, Carter County, Cass County, Cedar County,
Charlton County, Christian County, Clark County, Clay County, Clinton County,
Cole County, Cooper County, Carwford County, Dade County, Dallas County, Daviess
County, De Kalb County, Dent County, Douglas County, Dunklin County, Franklin
County, Gasconade County, Gentry County, Greene County, Grundy County, Harrison
County, Henry County, Hickory County, Holt County, Howard County, Howell County,
Iron County, Jackson County, Jasper County, Jefferson County, Johnson County,
Knox County, Laclede County, Lafayette County, Lawrence County, Lewis County,
Lincoln County, Linn County, Livingston County, Macon County, Madison County,
Maries County, Marion County, McDonald County, Mercer County, Miller County,
Mississippi County, Moniteau County, Monroe County, Montgomery County, Morgan
County, New Madrid County, Newton County, Nodaway County, Oregon County, Osage
County, Ozark Couanty, Pemiscot County, Perry County, Pettis County, Phelps
County, Pike County, Platte County, Polk County, Pulaski County, Putnam County,
Ralls County, Randolph County, Ray County, Reynolds County, Ripley County,
Saline County, Schuyler County, Scotland County, Scott County, Shannon County,
Shelby County, St. Charles County, St. Clair County, St. Francois County, St.
Louis County, Ste. Genevieve County, Stoddard County, Stone County, Sullivan
County, Taney County, Texas County, Vernon County, Warren County, Washington
County, Wayne County, Webster County, Worth County, Wright County
New Jersey
- ----------
Atlantic County, Bergen County, Burlington County, Camden County, Cape May
County, Cumberland County, Essex County, Gloucester County, Hudson County,
Hunterdon County, Mercer County, Middlesex County, Monmouth County, Morris
County, Ocean County, Passaic County, Salem County, Somerset County, Sussex
County, Union County, Warren County
Pennsylvania
- ------------
Adams County, Allegheny County, Armstrong County, Beaver County, Bedford
County, Berks County, Blair County, Bradford County, Bucks County, Butler
County, Cambria County, Cameron County, Carbon County, Centre County, Chester
County, Clairon County, Clearfield County, Clinton County, Columbia
50
<PAGE>
County, Crawford County, Cumberland County, Dauphin County, Delaware County, Elk
County, Erie County, Fayette County, Forest County, Franklin County, Fulton
County, Greene County, Huntingdon County, Indiana County, Jefferson County,
Juniata County, Lackawanna County, Lancaster County, Lawrence County, Lebanon
County, Lehigh County, Luzerne County, Lycoming County, McKean County, Mercer
County, Mifflin County, Monroe County, Montgomery County, Montour
County, Northampton County, Northumberland County, Perry County, Philadelphia
County, Pike County, Potter County, Schuylkill County, Snyder County, Somerset
County, Sullivan County, Susquehanna County, Tioga County, Union County, Venango
County, Warren County, Washington County, Wayne County, Westmoreland County,
Wyoming County, York County
Virginia
- --------
Albemarle County, Alleghany County, Bath County, Bland County, Buckingham
County, Campbell County, Caroline County, Carroll County, Fairfax County, Floyd
County, Fluvanna County, Gloucester County, Isle of Wright County, King and
Queen County, Louisa County, Madison County, Mecklenburg County, Nelson County,
Northampton County, Page County, Patrick County, Powhatan County, Prince William
County, Pulaski County, Rappahannock County, Roanoke County, Rockbridge County,
Shenandoah County, Southampton County, Sussex County, Tazewell County, Wise
County, Wythe County
51
<PAGE>
EXHIBIT 11
COMPUTATION OF NET EARNINGS PER COMMON SHARE (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary
Average shares outstanding 11,297 9,578 11,295 9,026
Net effect of dilutive stock
options--based on the
treasury stock method
using average market price 12 407 13 388
------- ------- ------- -------
Total 11,309 9,985 11,308 9,414
======= ======= ======= =======
Net income $ 2,217 $ 2,600 $ 4,987 $ 5,238
======= ======= ======= =======
Per share data:
Net income $ 0.20 $ 0.26 $ 0.44 $ .56
======= ======= ======= =======
Fully diluted
Average shares outstanding 11,297 9,578 11,295 9,026
Net effect of dilutive stock
options--based on the
treasury stock method
using average market price
or closing price if higher 12 417 14 428
Net effect of dilutive
convertible debentures--
based on the stated conversion
price of $14 per share 743 1,282
------- ------- ------- -------
Total 11,309 10,738 11,309 10,736
======= ======= ======= =======
Net income $ 2,217 $ 2,600 $ 4,987 $ 5,238
Convertible bond interest,
net of income tax effect 118 408
------- ------- ------- -------
$ 2,217 $ 2,718 $ 4,987 $ 5,646
======= ======= ======= =======
Per share data:
Net income $ 0.20 $ 0.25 $ 0.44 $ 0.53
======= ======= ======= =======
</TABLE>
EXHIBIT 11
52
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Form 10-Q for the
quarterly period ended February 29, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 378
<SECURITIES> 46,580
<RECEIVABLES> 45,606
<ALLOWANCES> 3,353
<INVENTORY> 1,801
<CURRENT-ASSETS> 101,472
<PP&E> 142,471
<DEPRECIATION> 36,735
<TOTAL-ASSETS> 220,227
<CURRENT-LIABILITIES> 73,951
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 134,661
<TOTAL-LIABILITY-AND-EQUITY> 220,227
<SALES> 0
<TOTAL-REVENUES> 76,624
<CGS> 0
<TOTAL-COSTS> 69,612
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 392
<INCOME-PRETAX> 8,245
<INCOME-TAX> 3,258
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,987
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
