Exhibit 10.14

 

EMPLOYMENT AGREEMENT

 

This EMPLOYMENT AGREEMENT is entered into as of May 15, 2002 by and between
Specialty Laboratories, Inc., a California corporation (the “Company”), and
Douglas S. Harrington, M.D. (“Executive”), and is effective upon approval of the
Compensation Committee of the Board of Directors.

 

1.             Duties and Responsibilities.

 

A.            Executive shall serve as the Company’s Chief Executive Officer or
such other title or position as may be designated from time to time by the
Company’s Board of Directors.  For no additional compensation, Executive shall
also serve as the Company’s Laboratory Director or Co-Laboratory Director.

 

B.            Executive agrees to devote his full time and attention to the
Company, to use his best efforts to advance the business and welfare of the
Company, to render his services under this Agreement fully, faithfully,
diligently, competently and to the best of his ability, and not to engage in any
other employment activities.

 

C.            Executive shall be based at the Company’s office located in Santa
Monica, California (which may be moved to Valencia, California), but Executive
shall be required to travel to other geographic locations in connection with the
performance of his Executive duties.

 

2.             Period of Employment.

 

Executive’s employment with the Company shall be governed by the provisions of
this Agreement for the period commencing May 15, 2002 and continuing until this
Agreement terminates pursuant to written notification by either the Company or
Executive, which notification may occur at any time for any reason.  The period
during which the Executive provides services to the Company pursuant to this
Agreement shall be referenced in this Agreement as the “Employment Period.”

 

3.             Cash Compensation.

 

A.            Executive’s initial base salary shall be Four Hundred Twenty
Thousand Dollars ($420,000) per year payable in accordance with the Company’s
standard payroll schedule (“Base Salary”).  Executive’s compensation shall be
subject to periodic review by the Company, and may be increased or decreased in
the Company’s discretion.

 

B.            For each fiscal year during the Employment Period, Executive shall
be eligible for an incentive bonus in the Company’s sole discretion (“Incentive
Bonus”).  For each full fiscal year of employment, Executive shall be eligible
for an Incentive Bonus of up to sixty percent (60%) of his annual base salary.
During the first year of employment, Executive shall be eligible for a pro rata
portion of the Incentive Bonus.  The Incentive Bonus amount will be based on the
following factors:  (1) the financial performance of the Company as determined
and measured by the Company’s Board of Directors, and (2) Executive’s
achievement of management targets and goals as set by the Company.  The
Incentive Bonus amount is intended

 

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to reward contribution to the Company’s performance over an entire fiscal year,
and on the basis of continuing, cumulative contribution, and consequently will
be paid only if Executive is employed and in good standing at the time of bonus
payments, which generally occurs within 45 days after the close of the Company’s
fiscal year.  Incentive Bonus determinations will be made in the Company’s sole
discretion.

 

C.            The Company shall deduct and withhold from the compensation
payable to Executive hereunder any and all applicable Federal, state and local
income and employment withholding taxes and any other amounts required or
authorized by Executive to be deducted or withheld by the Company under
applicable statutes, regulations, ordinances or orders governing or requiring
the withholding or deduction of amounts otherwise payable as compensation or
wages to employees.

 

4.             Equity Participation.

 

Pursuant and subject to the terms and conditions of this Agreement and the
Company’s 2000 Stock Incentive Plan and Stock Option Agreement, Executive will
be granted options to purchase Five Hundred Thousand (500,000) shares of the
Company’s common stock (the “Options”) as soon as possible following his
commencement of employment with the Company pursuant to this Agreement. The
Options shall vest as to twenty-five percent (25%) on the first anniversary of
such commencement date and in thirty-six (36) equal monthly installments
thereafter over his continued period of employment with the Company.

 

5.             Expense Reimbursement.

 

In addition to the compensation specified in Section 3, Executive shall be
entitled, in accordance with the Company’s reimbursement policies in effect from
time to time, to receive reimbursement from the Company for reasonable business
expenses incurred by Executive in the performance of his duties hereunder,
provided Executive furnishes the Company with vouchers, receipts and other
details of such expenses in the form required by the Company sufficient to
substantiate a deduction for such business expenses under all applicable rules
and regulations of Federal and state taxing authorities.

 

6.             Fringe Benefits.

 

A.            Executive shall, throughout the Employment Period, be eligible to
participate in all group term life insurance plans, group health plans,
accidental death and dismemberment plans and short-term disability programs and
other Executive perquisites which are made available to the Company’s Executives
and for which Executive qualifies.  The Company’s Employee Handbook and Summary
Plan Descriptions set forth further information concerning these benefits.

 

B.            Executive shall earn vacation time during the Employment Period at
the rate of four weeks per year. Vacation shall accrue and be taken pursuant to
the Company’s vacation benefit policy set forth in the Company’s Employee
Handbook.

 

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C.            The Company shall reimburse Executive for rental of an apartment
for the first twelve (12) months of the Employment Period in an amount not to
exceed $4,000 per month.

 

7.             Severance Pay for Exercise of the At-Will Clause.

 

Notwithstanding any of the provisions of this Agreement, Executive’s employment
with the Company is at will, which means that it is not for a specific term and
may be terminated by either the Company or Executive at any time, for any
reason, without advance notice.  Similarly the Company may change the terms and
conditions of Executive’s employment at any time, for any reason, without
advance notice.

 

Should the Company terminate Executive’s employment for Cause, as defined below,
or should Executive voluntarily resign other than for Good Reason, as defined
below, the Company shall have no obligation to Executive under this Agreement
other than for accrued but unpaid salary and vacation as of the date of
termination.  If during the first two years of the Employment Period, the
Company terminates Executive’s employment other than for Cause or Executive
resigns for Good Reason, the Company shall have no further obligation under this
Agreement, except that the Company shall continue to pay Executive’s Base Salary
on the normal payroll dates (subject to Section 3.C), and an Incentive Bonus of
up to thirty percent (30%) of Base Salary (pursuant to the terms and conditions
set forth in Section 3.B), for a one-year period following termination of
Executive’s employment.  If after the first two years of the Employment Period,
the Company terminates Executive’s employment other than for Cause or Executive
resigns for Good Reason, the Company shall have no further obligation under this
Agreement, except that the Company shall continue to pay Executive’s Base Salary
for a two-year period on the normal payroll dates (subject to Section 3.C), and
an Incentive Bonus of up to thirty percent (30%) of Base Salary (pursuant to the
terms and conditions set forth in Section 3.B) for a one-year period following
termination of Executive’s employment.

 

8.             Good Reason.

 

For Purposes of this Agreement, “Good Reason” shall mean:

 

A.            Except after a Change in Control (as defined below), a material
reduction in the duties, responsibilities, status, reporting responsibilities,
title, or offices that Executive had with the Company immediately before the
reduction (other than as Laboratory Director or Co-Laboratory Director);

 

B.            A reduction by more than 10% of the total annual cash compensation
(defined as Base Salary and Incentive Bonus) that Executive was eligible to
receive from the Company and its affiliates immediately before the reduction,
except a reduction that is part of, and consistent with, an across-the-board
reduction in the salaries of senior officers of the Company;

 

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C.            A Change in Control after which the Executive is not offered a
similar position at no less than ninety percent (90%) of Executive’s last total
compensation (defined as Base Salary plus Incentive Bonus of sixty percent (60%)
of Base Salary (“Last Total Compensation”));

 

D.            The failure of any successor to the Company by merger,
consolidation or acquisition of all or substantially all of the business of the
Company to assume the Company’s obligations under this Agreement; or

 

E.             A material breach by the Company of its obligations under this
Agreement.

 

9.             Cause.

 

For purposes of this Agreement, “Cause” shall mean a reasonable belief by the
Board of Directors that Executive has engaged in any one of the following:  (i)
financial dishonesty, including, without limitation, misappropriation of funds
or property, or any attempt by Executive to secure any personal profit related
to the business or business opportunities of the Company without the informed,
written approval of the Company’s Board of Directors; (ii) refusal to comply
with reasonable directives of the Board of Directors; (iii) gross negligence or
reckless or willful misconduct in the performance of Executive’s duties; (iv)
failure to perform, or continuing neglect in the performance of, duties assigned
to Executive; (v) misconduct which has a materially adverse effect upon the
Company’s business or reputation; (vi) the conviction of, or plea of nolo
contendre to, any felony or a misdemeanor involving moral turpitude or fraud;
(vii) the material breach of any provision of this Agreement; (viii) violation
of Company policies including, without limitation, the Company’s policies on
equal employment opportunity and prohibition of unlawful harassment; (ix) death
of the Executive; or (x) a disability which continues for a period in excess of
365 days.  A termination as a result of a Change in Control shall not constitute
“Cause”.

 

10.           Special Change In Control Payments.

 

A.            Change in Control Acceleration. The Options, to the extent
outstanding at the time of a Change in Control but not otherwise vested and
exercisable for all the shares of Common Stock subject to those Options will,
immediately prior to the effective date of that Change in Control, vest and
become exercisable for all of the shares of Common Stock at the time subject to
the Options and may be exercised for any or all of those shares as fully-vested
shares of Common Stock provided and only if any of the following conditions are
satisfied with respect to that Change in Control:

 

(i)            Executive is not offered employment with the surviving entity
(“Successor Company”) upon a Change of Control.

 

(ii)           The Options are not to be assumed by the Successor Company (or
its parent company) or otherwise continued in effect pursuant to the terms of
the Change in Control transaction,  or the Options are not to be replaced with

 

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substitute Options or cash incentives which preserve the spread existing at the
time of the Change in Control on any shares for which the Options are not
otherwise at that time vested and exercisable (the excess of the Fair Market
Value of those shares over the applicable option exercise price) and which vest
at the same or faster rate as in effect under the vesting schedule applicable to
the Options;

 

(iii)          Executive is offered employment with the Successor Company at
less than ninety percent (90%) of Executive’s Last Total Compensation; or

 

(iv)          Executive is offered employment at a location which is more than
one hundred (100) miles from the Company’s principal office at the time of
Change in Control.

 

Should Executive’s employment with the Company or Successor Company terminate
within twelve (12) months after a Change in Control by reason of (i) a
resignation qualifying as an Authorized Resignation, (ii) a resignation for Good
Reason, or (iii) an involuntary termination of Executive’s employment other than
a termination for Cause (“Involuntary Termination”), then Executive will become
entitled to receive the severance benefits set forth below in this Section 10,
provided and only if Executive executes and delivers to the Company or Successor
Company, at the time of Executive’s Authorized Resignation, resignation for Good
Reason or Involuntary Termination, a general release (in form and substance
reasonably satisfactory to the Company or Successor Company) in which Executive
releases the Company or Successor Company, as applicable, and its officers,
directors, employees and agents from any and all claims Executive may otherwise
have with respect to the terms and conditions of Executive’s employment with the
Company and Successor Company and the termination of that employment.  Such
benefits shall be in lieu of any other severance benefits to which Executive
might otherwise, by reason of the termination of Executive’s employment, be
entitled under any other severance plan, program or arrangement of the Company
or Successor Company.

 

(i)            Option Acceleration.   Each outstanding Option which Executive
holds at the time of Executive’s Authorized Resignation, resignation for Good
Reason or Involuntary Termination, to the extent not otherwise vested and
exercisable for all the shares subject to that Option, will immediately vest and
become exercisable for all those option shares and may be exercised for any or
all of those shares as fully vested shares.  Each Option so accelerated shall
remain exercisable until the earlier of (i) the expiration of the option term or
(ii) the end of the limited post-employment exercise period specified in the
option agreement for that Option.  Such acceleration may result in the loss of
favorable tax treatment under Internal Revenue

 

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Code Section 422 for Executive’s Options which might have otherwise qualified as
incentive stock options under Internal Revenue Code Section 422.

 

(ii)           Salary Continuation.  If the resignation or termination event
which triggers his benefit entitlement under this Section 10 occurs during the
first two years of the Employment Period, Executive will receive Executive’s
Base Salary on the normal payroll dates (subject to Section 3.C) for a period of
twelve (12) months following Executive’s Authorized Resignation, resignation for
Good Reason or Involuntary Termination. If the resignation or termination event
which triggers his benefit entitlement under this Section 10 occurs after the
first two years of the Employment Period, Executive will receive Executive’s
Base Salary on the normal payroll dates (subject to Section 3.C) for a period of
twenty-four (24) months following Executive’s Authorized Resignation,
resignation for Good Reason or Involuntary Termination.

 

(iii)          Incentive Bonus.  Executive will be entitled to up to thirty
percent (30%) of Executive’s Incentive Bonus (pursuant to the terms and
conditions set forth in Section 3.B) for the fiscal year in which Executive’s
Authorized Resignation, resignation for Good Reason or Involuntary Termination
occurs on the normal payroll dates (subject to Section 3.C).

 

B.            For purposes of this Agreement “Change In Control” shall mean any
of the following transactions effecting a change in ownership or control of the
Company:

 

(i)            a merger, consolidation or reorganization approved by the
Company’s stockholders, unless securities representing more than fifty percent
(50%) of the total combined voting power of the voting securities of the
Successor Company are immediately thereafter beneficially owned, directly or
indirectly and in substantially the same proportion, by the persons who
beneficially owned the Company’s outstanding voting securities immediately prior
to such transaction, or

 

(ii)           any stockholder-approved transfer or other disposition of all or
substantially all of the Company’s assets, or

 

(iii)          the acquisition, directly or indirectly, by any person or related
group of persons (other than the Company or a person that directly or indirectly
controls, is controlled by, or is under common control with, the Company), of
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total combined voting
power of the Company’s

 

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outstanding securities pursuant to a tender or exchange offer made directly to
the Company’s stockholders, or

 

(iv)          a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the Board
members ceases to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (A) who were still in office
at the time the Board approved such election or nomination; or

 

C.            For the purposes of this Agreement, Authorized Resignation means
Executive’s voluntary resignation from employment with the Company for any
reason within the period beginning nine (9) months after the closing of a Change
in Control and before twelve (12) months after the closing of such Change in
Control.  Executive’s resignation at any other time or under any other
circumstances will not constitute an Authorized Resignation and, unless such
resignation is otherwise for Good Reason, will not entitle Executive to any
severance benefits under Section 10 of this Agreement.

 

D.            For purposes of this Agreement, Fair Market Value shall have the
same meaning as set forth in the Company’s 2000 Stock Incentive Plan.

 

11.           Special Tax Gross-Up.

 

A.            In the event that (i) one or more of the Change in Control
payments to which the Executive becomes entitled under Section 10 of this
Agreement (“Change in Control Payments”) or any Other Parachute Payments to
which he may become entitled are deemed, in the opinion of the Independent
Auditors or by the Internal Revenue Service, to constitute an excess parachute
payment under Section 280(G) of the Internal Revenue Code and (ii) it is
determined that the Present Value (measured as of the Change in Control) of the
Parachute Payment attributable to those Change in Control Payments and the
Present Value of any Other Parachute Payments to which the Executive is entitled
exceeds 110% of the Permitted Parachute Amount, then Executive shall be entitled
to receive from the Company an additional payment (the “Gross-Up Payment”) in a
dollar amount determined pursuant to the following formula:

 

X  =  Y  ÷  [1 - (A + B + C)], where

 

X is the total dollar payment of the Gross-Up Payment

 

Y is the total excise tax (the “Excise Tax”) imposed on the Executive pursuant
to Internal Revenue Code Section 4999 (or any successor provision) with respect
to the excess parachute payment attributable to one or more of the Change in
Control Payments provided the Executive under Section 10 of this Agreement or
any Other Parachute Payment to which he is entitled,

 

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A is the Excise Tax rate in effect under Internal Revenue Code Section 4999 for
such excess parachute payment,

 

B is the highest combined marginal federal income and applicable state income
tax rate in effect for the Executive for the calendar year in which the Gross-Up
Payment is made, determined after taking into account the deductibility of state
income taxes against federal income taxes to the extent actually allowable for
that calendar year , and

 

C is the applicable hospital insurance (Medicare) tax rate in effect for the
Executive for the calendar year in which the Gross-Up Payment is made.

 

Should the  Present Value (measured as of the Change in Control) of the
Parachute Payment attributable to those Change in Control Payments plus the
Present Value of any Other Parachute Payments to which the Executive is entitled
not exceed 110% of the Permitted Parachute Amount, then no Gross-Up Payment
shall be made under this Paragraph 11, and the Change in Control Payments shall
instead be subject to reduction in accordance with the benefit limitation
provisions of Appendix I to this Agreement.

 

B.            Determination Procedures.  All determinations required to be made
under this Section 11 shall be made by the Independent Auditors in accordance
with the following procedures:

 

(i)            Within ten (10) business days after each receipt of notice from
the Company or the Executive that a Change in Control Payment or Other Parachute
Payment has or is to be made, the Independent Auditors shall provide both the
Executive and the Company with a written determination of the Parachute Payment
attributable to that Change in Control Payment, together with detailed
supporting calculations with respect to the Gross-Up Payment to which the
Executive is entitled by reason of that Parachute Payment or Other Parachute
Payment.  The Company shall pay the resulting Gross-Up Payment to the Executive
within three (3) business days after receipt of such determination or (if later)
contemporaneously with the Change in Control Payment or Other Parachute Payment
triggering such Gross-Up Payment.

 

(ii)           In the event temporary, proposed or final Treasury Regulations in
effect at the time under Internal Revenue Code Section 280G (or applicable
judicial decisions) specifically address the status of any Change in Control

 

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Payment or Other Parachute Payment or the method of valuation therefor, the
characterization afforded to such payment by the Regulations (or such decisions)
shall, together with the applicable valuation methodology, be controlling.  All
other determinations by the Independent Auditors shall be made on the basis of
“substantial authority” (within the meaning of Section 6662 of the Internal
Revenue Code).

 

(iii)          The value of the Executive’s non-competition covenant under
Paragraph 13.A of this Agreement shall be determined by independent appraisal by
a nationally-recognized business valuation firm acceptable to both the Executive
and the Company, and a portion of the Change in Control Payments shall, to the
extent of that appraised value, be specifically allocated as reasonable
compensation for such non-competition covenant and shall not be treated as a
Parachute Payment.

 

(iv)          The Company and the Executive shall each provide the Independent
Auditors with access to and copies of any books, records and documents in their
possession which may be reasonably requested by the Independent Auditors and
shall otherwise cooperate with the Independent Auditors in connection with the
preparation and issuance of the determinations contemplated by this Section 11.

 

(v)           All fees and expenses of the Independent Auditors and the
appraisers shall be borne solely by the Company.

 

C.            Additional Claims. The Executive shall provide written
notification to the Company of any claim made by the Internal Revenue Service
which would, if successful, require the payment by the Company of an additional
Gross-Up Payment.  Such notification shall be given as soon as practicable after
the Executive is informed in writing of such claim and shall apprise the Company
of the nature of such claim and the date on which such claim is requested to be
paid.  The Executive shall not pay such claim prior to the expiration of the
thirty (30)-day period following the date on which such notice is given to the
Company (or such shorter period ending on the date that any payment of taxes,
interest and/or penalties with respect to such claim is due).  Prior to the
expiration of such thirty (30)-day or shorter period, the Company shall ether
(i) make the additional Gross-Up Payment to the Executive attributable to the
Internal Revenue Service claim or (ii) provide written notice to the Executive
that the Company shall contest the claim on the Executive’s behalf.  In the
event, the Company provides the Executive with such written notice of its
decision to contest the claim, Executive shall:

 

(i)            give the Company any information reasonably requested by the
Company relating to such claim;

 

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(ii)           take such action in connection with contesting such claim as the
Company may reasonably request in writing from time to time, including (without
limitation) accepting legal representation with respect to such claim by an
attorney reasonably selected by the Company and reasonably satisfactory to the
Executive, with the fees and expenses of such attorney to be the sole
responsibility of the Company without any tax implications to the Executive in
accordance with the same tax indemnity/gross-up arrangement as under Section
11(C)(iv) below;

 

(iii)          cooperate with the Company in good faith in order to effectively
contest such claim; and

 

(iv)          permit the Company to participate in any proceedings relating to
such claim; provided, however, that the Company shall bear and pay directly all
additional Excise Taxes imposed upon the Executive and all costs, legal fees and
other expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify the Executive for and hold him
harmless from, on an after-tax basis, any additional Excise Tax (including
interest and penalties with respect thereto) imposed upon the Executive and any
Excise Tax or income or employment tax (including interest and penalties with
respect thereto) attributable to the Company’s payment of that additional Excise
Tax on Executive’s behalf or imposed as a result of such representation and
payment of all related costs, legal fees and expenses.  The amounts owed to the
Executive by reason of the foregoing shall be paid to him or on his behalf as
they become due and payable.  Without limiting the foregoing provisions of this
Section 11(C)(iv), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at the Company’s sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive shall prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that should the Company direct the Executive to
pay such claim and sue for a refund, the Company shall advance the amount of
such payment to the Executive, on an interest-free basis, and shall

 

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indemnify the Executive for and hold him harmless from, on an after-tax basis,
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance and any income resulting from the Company’s
forgiveness of such advance; provided, further, that the Company’s control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder, and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.

 

D.            Definitions.  For the purposes of this Section:

 

(i)            Acquisition-Accelerated Options means any outstanding Option (or
installment thereof) which immediately accelerates upon a Change in Control
pursuant to the acceleration provisions of Section 10 of this Agreement.

 

(ii)           Average Compensation means the average of Executive’s W-2 wages
from the Company for the five (5) calendar years (or such fewer number of
calendar years of employment with the Company) completed immediately prior to
the calendar year in which the Change in Control is effected.  Any W-2 wages for
a partial year of employment will be annualized, in accordance with the
frequency which such wages are paid during such partial year, before inclusion
in Executive’s Average Compensation.

 

(iii)          Independent Auditors means the accounting firm serving as the
independent auditors of the Company immediately prior to the Change in Control;
provided, however, that in the event such accounting firm also serves as the
independent auditors of the company or other entity effecting the Change in
Control transaction with the Company, then the Independent Auditors shall mean a
nationally-recognized accounting firm mutually acceptable to both the Company
and the Executive.

 

(iv)          Option Parachute Payment means, with respect to any
Acquisition-Accelerated Option or any Severance-Accelerated Option, the portion
of that Option deemed to be a parachute payment under Internal Revenue Code
Section 280G and the Treasury Regulations issued thereunder.  The portion of
such Option which is categorized as an Option

 

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Parachute Payment will be calculated in accordance with the valuation provisions
established under Internal Revenue Code Section 280G and the applicable Treasury
Regulations and will include an appropriate dollar adjustment to reflect the
lapse of Executive’s obligation to remain in the Company’s employ as a condition
to the vesting of the accelerated installment.

 

(v)           Other Parachute Payment means any payment in the nature of
compensation (other than the payments and benefits to which Executive becomes
entitled under Section 10 of this Agreement) which is made to Executive in
connection with the Change in Control and which constitutes a parachute payment
within the meaning of Internal Revenue Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder.

 

(vi)          Parachute Payment means (i) the Option Parachute Payment
attributable to the Executive’s Acquisition-Accelerated and
Severance-Accelerated Options and (ii) any other payment or benefit to be
provided Executive under Section 10 of this Agreement  which is deemed to
constitute a parachute payment within the meaning of Internal Revenue Code
Section 280G(b)(2) and the Treasury Regulations issued thereunder.

 

(vii)         Permitted Parachute Amount means a dollar amount equal to 2.99
times the Executive’s Average Compensation.

 

(viii)        Present Value means the value, determined as of the date of the
Change in Control, of any payment in the nature of compensation to which
Executive becomes entitled in connection with the Change in Control or
Executive’s subsequent Authorized Resignation, resignation for Good Reason or
Involuntary Termination, including (without limitation) the Option Parachute
Payment attributable to Executive’s Acquisition-Accelerated and
Severance-Acceleration Options and the Parachute Payment attributable to the
additional benefits to which Executive becomes entitled under Section 10 of this
Agreement.  The Present Value of each such payment shall be determined in

 

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accordance with the provisions of Internal Revenue Code Section 280G(d)(4),
utilizing a discount rate equal to one hundred twenty percent (120%) of the
applicable Federal rate in effect at the time of such determination, compounded
semi-annually to the effective date of the Change in Control.

 

(ix)           Severance-Accelerated Options means any outstanding Option (or
installment thereof) which, pursuant to Section 10 of this Agreement,
accelerates upon Executive’s Authorized Resignation, resignation for Good Reason
or Involuntary Termination.

 

12.           Restrictive Covenants During Employment Period.

 

During the Employment Period:

 

(i)            Executive shall devote Executive’s full time and energy solely
and exclusively to the performance of Executive’s duties described herein,
except during periods of illness or vacation periods.

 

(ii)           Executive shall not directly or indirectly provide services to or
through any person, firm or other entity except the Company, unless otherwise
authorized by the Board in writing.

 

(iii)          Executive shall not render any services of any kind or character
for Executive’s own account or for any other person, firm or entity without
first obtaining the Company’s written consent.

 

Executive, however, shall have the right to perform such incidental services as
are necessary in connection with (a) Executive’s private passive investments,
but only if Executive is not obligated or required to (and shall not in fact)
devote any managerial efforts which interfere with the services required to be
performed by him, or (b) Executive’s charitable or community activities, or
participation in trade or professional organizations, or Boards, but only if
such incidental services do not interfere with the performance of Executive’s
services to the Company.

 

13.           Additional Restrictive Covenants.

 

A.            Executive acknowledges and agrees that given the extent and nature
of the confidential and proprietary information he will obtain during the course
of his employment with the Company, it would be inevitable that such
confidential information would be disclosed or utilized by the Executive should
he obtain employment from, or otherwise become associated with, an entity or
person that is engaged in a business or enterprise that directly competes with
the Company.  Consequently, during the Employment Period and for any additional
period thereafter during which the Executive is receiving payments from the
Company as a severance benefit, including but not limited to severance pay
pursuant to Section 6 or any Change in Control Payments under Section 10, 
Executive shall not, without prior written consent of the

 

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Company’s Board of Directors, directly or indirectly own, manage, operate, join,
control or participate in the ownership, management, operation or control of, or
be employed by, render service to or be connected in any manner with, any
enterprise which is engaged in any business competitive with or similar to that
of the Company; provided, however, that such restriction shall not apply to any
passive investment representing an interest of less than two percent (2%) of an
outstanding class of publicly-traded securities of any Company or other
enterprise which is not, at the time of such investment, engaged in a business
competitive with the Company’s business.

 

B.            During the Employment Period and for any additional period
thereafter during which the Executive is receiving payments from the Company as
a severance benefit, including but not limited to severance pay pursuant to
Section 6 or any Change in Control Payments under Section 10, Executive shall
not encourage or solicit any of the Company’s employees to leave the Company’s
employ for any reason or interfere in any other manner with employment
relationships at the time existing between the Company and its employees.  In
addition, Executive shall not solicit, directly or indirectly, business from any
client of the Company, induce any of the Company’s clients to terminate their
existing business relationship with the Company or interfere in any other manner
with any existing business relationship between the Company and any client or
other third party.

 

C.            Executive acknowledges that monetary damages may not be sufficient
to compensate the Company for any economic loss which may be incurred by reason
of his breach of the foregoing restrictive covenants.  Accordingly, in the event
of any such breach, the Company shall, in addition to the termination of this
Agreement and any remedies available to the Company at law, be entitled to
obtain equitable relief in the form of an injunction precluding Executive from
continuing such breach.

 

14.           Proprietary Information.

 

As a condition precedent to Executive’s employment with the Company, Executive
will execute the Company’s standard Confidential Information and Assignment of
Inventions Agreement attached hereto as Exhibit A.  Executive’s obligations
pursuant to the Confidential Information and Assignment of Inventions Agreement
will survive termination of Executive’s employment with the Company.

 

15.           Successors and Assigns.

 

This Agreement is personal in its nature and the Executive shall not assign or
transfer his rights under this Agreement.  The provisions of this Agreement
shall inure to the benefit of, and be binding on each successor of the Company
whether by merger, consolidation, transfer of all or substantially all assets
(whether or not such transaction qualifies as a Change in Control) or otherwise
and the heirs and legal representatives of Executive.

 

16.           Notices.

 

Any notices, demands or other communications required or desired to be given by
any party shall be in writing and shall be validly given to another party if
served either personally or if deposited in the United States mail, certified or
registered, postage prepaid,

 

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return receipt requested.  If such notice, demand or other communication shall
be served personally, service shall be conclusively deemed made at the time of
such personal service.  If such notice, demand or other communication is given
by mail, such notice shall be conclusively deemed given forty-eight (48) hours
after the deposit thereof in the United States mail addressed to the party to
whom such notice, demand or other communication is to be given as hereinafter
set forth:

 

To the Company:

 

Human Resources Department

Specialty Laboratories, Inc.

2211 Michigan Avenue

Santa Monica, California 90404-3900

 

To Executive:

 

Douglas S. Harrington, M.D.

Current address as noted in

personnel file at Company

 

Any party may change its address for the purpose of receiving notices, demands
and other communications by providing written notice to the other party in the
manner described in this Section.

 

17.           Governing Documents.

 

This Agreement along with the documents expressly referenced in this Agreement
constitute the entire agreement and understanding of the Company and Executive
with respect to the terms and conditions of Executive’s employment with the
Company and the payment of severance benefits and supersedes all prior and
contemporaneous written or verbal agreements and understandings between
Executive and the Company relating to such subject matter.  This Agreement may
only be amended by written instrument signed by Executive and an authorized
officer of the Company.  Any and all prior agreements, understandings or
representations relating to the Executive’s employment with the Company are
terminated and cancelled in their entirety and are of no further force or
effect.

 

18.           Governing Law.

 

The provisions of this Agreement will be construed and interpreted under the
laws of the State of California. If any provision of this Agreement as applied
to any party or to any circumstance should be adjudged by a court of competent
jurisdiction to be void or unenforceable for any reason, the invalidity of that
provision shall in no way affect (to the maximum extent permissible by law) the
application of such provision under circumstances different from those
adjudicated by the court, the application of any other provision of this
Agreement, or the enforceability or invalidity of this Agreement as a whole. 
Should any provision of this Agreement become or be deemed invalid, illegal or
unenforceable in any

 

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jurisdiction by reason of the scope, extent or duration of its coverage, then
such provision shall be deemed amended to the extent necessary to conform to
applicable law so as to be valid and enforceable or, if such provision cannot be
so amended without materially altering the intention of the parties, then such
provision will be stricken and the remainder of this Agreement shall continue in
full force and effect.

 

19.           Remedies.

 

All rights and remedies provided pursuant to this Agreement or by law shall be
cumulative, and no such right or remedy shall be exclusive of any other.  A
party may pursue any one or more rights or remedies hereunder or may seek
damages or specific performance in the event of another party’s breach hereunder
or may pursue any other remedy by law or equity, whether or not stated in this
Agreement.

 

20.           Arbitration.

 

A.            To the fullest extent allowed by law, any controversy or claim
arising out of or relating to the termination of the Executive’s employment with
the Company or the benefits to which the Executive may be entitled by reason of
such termination shall be settled by binding and non-appealable arbitration,
conducted in the city in which the Executive is at the time residing, by an
arbitrator selected in accordance with the procedure set forth below.  Possible
disputes covered by the foregoing, include (without limitation) claims pursuant
to Title VII of the Civil Rights Act, the California Fair Employment and Housing
Act and comparable statutes in other states if applicable, the Americans with
Disabilities Act,  the Age Discrimination in Employment Act, and any other
statutes relating to an employee’s relationship with his employer. The Executive
and the Company shall initially confer and attempt to reach agreement on the
individual to be appointed as the arbitrator.  If no agreement is reached, the
Executive and the Company shall request from the Judicial Arbitration and
Mediation Services (“JAMS”) office in the city where the arbitration is to be
held a list of five retired judges affiliated with JAMS. The Executive and the
Company shall each alternately strike names from such list until only one name
remains, and such person shall thereby be selected as the arbitrator.  Except as
otherwise provided for herein, such arbitration shall be conducted in conformity
with the procedures specified in the California Arbitration Act (Cal. C.C.P. §§
1280 et seq.) or the comparable statute of the state in which the arbitration
proceedings are to be held.  The arbitrator shall allow the discovery authorized
by California Code of Civil Procedure section 1283.05 (or the comparable statute
of the state in which the arbitration proceedings are to be held)  or any other
discovery required by law in arbitration proceedings.  To the extent that
anything in this Agreement conflicts with the arbitration procedures required by
applicable law, the arbitration procedures required by applicable law shall
govern.  The arbitrator shall issue a written award that sets forth the
essential findings and conclusions on which the award is based.  The arbitrator
shall have the authority to award any relief authorized by law in connection
with the asserted claims or disputes.  The arbitrator’s award shall be subject
to correction, confirmation or vacation, as provided by any applicable law
setting forth the standard of judicial review of arbitration awards.

 

B.            The Company shall bear the entire cost of (i) the arbitrator’s
fee, (ii) any other type of expense or cost that the Executive would not be
required to bear if the Executive

 

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were free to bring the dispute or claim in court and (iii) any other expense or
cost that is unique to arbitration.  The parties intend that this Paragraph 30
shall be valid, binding, enforceable and irrevocable and shall survive the
termination of this Agreement.  Any final decision of the arbitrator so chosen
may be enforced by a court of competent jurisdiction.  The Executive
acknowledges and agrees that he is waiving his right to a jury trial and agrees
that the decision of the arbitrator shall be final and binding.  If the
Executive is determined by the arbitrator to be the prevailing party in the
arbitration, then the Executive shall be entitled to reimbursement from the
Company of all the reasonable fees (including attorney fees) and expenses the
Executive incurs in connection with such arbitration.

 

21.           No Waiver.

 

The waiver by either party of a breach of any provision of this Agreement shall
not operate as or be construed as a waiver of any later breach of that
provision.

 

22.           Counterparts.

 

This Agreement may be executed in more than one counterpart, each of which shall
be deemed an original, but all of which together shall constitute but one and
the same instrument.

 

 

SPECIALTY LABORATORIES, INC.

 

 

 

 

 

 

 

 

By:

/s/ THOMAS R. TESTMAN

 

 

Title:

Chairman of the Board

 

 

 

 

 

 

 

/s/  DOUGLAS S. HARRINGTON

 

 

DOUGLAS S. HARRINGTON, M.D.

 

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APPENDIX I

 

BENEFIT LIMIT

 

1.             Benefit Limit.  Should it be determined that the Present Value
(measured as of the Change in Control) of the Parachute Payment attributable to
the Change in Control Payments, when added to the Present Value of any Other
Parachute Payment to which the Executive may be entitled, does not exceed 110%
of the Permissible Parachute Amount, then no Gross-Up Payment shall be made to
Executive under Section 11 of the Agreement.  Instead, the limitations set forth
in this Appendix I to the Agreement shall apply.  Accordingly, the amount of the
Change in Control Payments otherwise due the Executive under Section 10 of the
Agreement shall be reduced to the extent necessary to assure that the Present
Value of the Parachute Payment attributable to his Change in Control Payments,
together with the Present Value of any Other Parachute Payments to which the
Executive may be entitled, does not exceed the greater of the following dollar
amounts (the “Benefit Limit”)

 

(a)           the Permitted Parachute Amount, or

 

(B)           THE AMOUNT WHICH YIELDS THE EXECUTIVE THE GREATEST AFTER-TAX
AMOUNT OF BENEFITS UNDER SECTION 10 OF THE AGREEMENT AFTER TAKING INTO ACCOUNT
ANY EXCISE TAX IMPOSED UNDER INTERNAL REVENUE CODE SECTION 4999 ON THE CHANGE IN
CONTROL PAYMENTS WHICH ARE PROVIDED TO EXECUTIVE UNDER SECTION 10 OR ANY OTHER
PARACHUTE PAYMENTS.

 

For purposes of applying the Benefit Limit to the Change in Control Payments
under Section 10 of the Agreement, the value of the Executive’s non-competition
covenant under Paragraph 13.A of the Agreement shall be determined by
independent appraisal by a nationally-recognized business valuation firm
acceptable to both the Executive and the Company, and a portion of the Change in
Control Payments shall, to the extent of that appraised value, be specifically
allocated as reasonable compensation for such non-competition covenant and shall
not be treated as a Parachute Payment.

 

2.             Reduction of Benefits.  Once the requisite determinations under
Section 1 hereof have been made, then to the extent the aggregate Present Value,
measured as of the Change in Control, of (i) the Option Parachute Payment
attributable to the Acquisition-Accelerated and Severance-Accelerated Options
(or installments thereof) plus (ii) the Parachute Payment attributable to the
Executive’s other benefit entitlements under Section 10 of the Agreement would,
when added to the Present Value of all of the Executive’s Other Parachute
Payments, exceed the Benefit Limit, the following reductions shall be made to
the Change in Control Payments to which the Executive is otherwise entitled
under Section 10 of the Agreement, to the extent necessary to assure that such
Benefit Limit is not exceeded:

 

first, the Executive’s salary continuation/Incentive Bonus payment shall be
reduced,

 

then the period of his continued healthcare coverage, if any, shall be
shortened.

 

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To the extent such Benefit Limit is still exceeded following such reductions,
then the number of shares purchasable under the Options which are to vest on an
accelerated basis pursuant to Section 10 (based on the amount of the Option
Parachute Payment attributable to each Option) shall be reduced to the extent
necessary to eliminate such excess.

 

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