<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
(Mark one)
    /X/   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended August 31, 1996
                          ______________________________________________________
                                       OR

    / /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

          THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from_________________ to______________________________
                         Commission file number 0-13879

                         Salick Health Care, Inc.
________________________________________________________________________________
             (Exact name of registrant as specified in its charter)
           Delaware                               95-4333272
________________________________________________________________________________
(State or other jurisdiction of                (I.R.S. Employer
 incorporation or organization)                Identification No.)

  8201 Beverly Boulevard, Los Angeles, California  90048-4520
________________________________________________________________________________
(Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code (213) 966-3400
                                                  _______________
  Securities registered pursuant to Section 12(b) of the Act:

      Title of each class         Name of each exchange on
                                    which registered

Not Applicable
________________________________________________________________________________
          Securities registered pursuant to Section 12(g) of the Act:
                         Callable Puttable Common Stock
________________________________________________________________________________
                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X   No
                                             ---    ---

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].

         The aggregate market value of Callable Puttable Common Stock held by
nonaffiliates of the registrant was $172,656,118 based on the closing price of
the Callable Puttable Common Stock on the NASDAQ reporting system on November
15, 1996.

         The number of shares outstanding of the issuer's Common Stock as of
November 15, 1996: 5,657,115. The number of shares outstanding of the issuer's
Callable Puttable Common Stock as of November 15, 1996:  5,657,082.

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                       DOCUMENTS INCORPORATED BY REFERENCE


Information called for by Part III of Form 10-K is incorporated by reference to
the Proxy Statement of the Registrant to be filed by December 29, 1996 pursuant
to Regulation 14A in connection with the Annual Meeting of Stockholders. Except
for the information incorporated herein by reference, said Proxy Statement shall
not be deemed "filed" as part of this Report on Form 10-K.


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                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         Salick Health Care, Inc. ("Salick" or the "Company") provides disease-
specific health care services, administrative services, facilities and risk-
based and other products and programs to health care providers and payors,
principally in the areas of the diagnosis and treatment of cancer and the
treatment of kidney failure, primarily through its operating subsidiaries,
Comprehensive Cancer Centers, Inc., USHAWL, Inc., Century Dialysis Corporation,
INFUSX, Inc. and SalickNet, Inc. The Company's strategy is to expand its
services throughout the United States, and to utilize the Company's expertise
and experience in providing and managing the provision of disease specific
outpatient services to its historic operations and to expand into additional and
new settings (inpatient, alternate site and home), into areas of diagnosis and
treatment of other complex illnesses and diseases requiring sophisticated,
long-term care and in providing unique disease state programs to payors and
managed care entities.

         The diagnosis and treatment of cancer and the treatment of kidney
failure represent significant and growing markets. The American Cancer Society
estimates that 33% of Americans now living will eventually be diagnosed with
cancer. The National Cancer Institute estimates that the annual overall direct
and indirect costs of cancer are in excess of $104 billion. Published reports
indicate that the market for dialysis services is currently in excess of $4
billion annually. The Company's facilities, and its ability to provide a full
range of services to cancer and kidney disease patients in any setting, e.g.,
outpatient, alternate site, home, etc., are designed to meet the growing demand
for cancer, kidney, organ transplant, immuno-deficient and other complex disease
medical treatment in a quality, cost effective manner, consistent with the
increasing focus on cost containment in the health care sector.

         The Company is a leader in the design, development and operation of
primarily outpatient facilities for the screening, diagnosis and treatment of
cancer. The Company believes that its experience and expertise in delivering and
managing the delivery of such outpatient medical services, and the ability of
its facilities to provide cost effective, quality and convenient care, provides
significant advantages to cancer patients over outpatient services offered at
physicians' offices, other acute care hospitals or other clinical settings.
Traditionally, many of the cancer diagnostic and treatment services provided by
Salick facilities on an outpatient basis have been principally available through
more costly hospital admissions. The Company's Cancer Centers provide
sophisticated, cost effective health care services, emphasizing quality of care
and patient convenience.

         At August 31, 1996, the Company through its subsidiaries operated ten
outpatient comprehensive diagnostic and treatment cancer centers in affiliation
with medical schools, teaching hospitals and private and community hospitals.
The centers are located at Cedars-Sinai Medical Center in Los Angeles,
California, Mount Sinai Medical Center in Miami Beach, Florida, Parkway Regional
Medical Center and Columbia Kendall Regional Medical Center in the Miami,
Florida area, Temple University Medical Center in Philadelphia, Pennsylvania,
Columbia JFK Medical Center in Palm Beach County, Florida, Desert Hospital in
Palm Springs, California, Alta Bates Medical Center in Berkeley, California, the
University of Kansas Medical Center in Kansas City, Kansas and as part of the
SHC Specialty Hospital in Westlake, California, formerly the Westlake Medical
Center. On July 25, 1996 the Company purchased the former Westlake Medical
Center at which this Cancer Center is located. In April 1996 one of the

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Company's subsidiaries entered into an agreement with Saint Vincents Hospital
and Medical Center to establish both a comprehensive cancer center under Saint
Vincents operating certificate and a managed care affiliate network in the
greater New York Metropolitan Area. This Cancer Center began providing services
in November 1996. These eleven centers are collectively referred to herein as
the "Cancer Centers".

         Salick is also one of Southern California's leading providers of
specialized facilities and services for the treatment of patients suffering from
kidney failure. Dialysis treatments provided by the Company generally utilize
artificial kidney machines that remove certain toxic substances from the blood
and return the cleansed blood to the patient. Salick currently operates or
manages ten outpatient (chronic) facilities, provides inpatient (acute) dialysis
services at more than twenty Southern California hospitals and provides dialysis
services to patients in their homes.

         Having the ability to provide services in all settings is, in the areas
of cancer and dialysis, a unique feature attractive to payors and provides a
continuum of care for patients and their physicians. This is an integral part of
the Company's strategy for dealing with cost controls and the changing health
care environment with its emphasis on managed care.

         At each of the Cancer Centers and dialysis facilities, the Company
provides the supervision and, subject to reimbursement and local regulatory
requirements, generally provides the medical personnel, technicians and
equipment for patient treatments. However, with the exception of certain South
Florida locations, the Company does not provide the physician component of the
services rendered.

         The Company's INFUSX subsidiary provides alternate site and home care
services (including chemotherapy, infusions, antibiotics, nursing visits, etc.)
for cancer, kidney disease, organ transplant and immuno-deficient patients in
the Southern California, South Florida, Kansas/Missouri and greater
Philadelphia areas.

         The Company's subsidiary, SalickNet, provides a range of cancer
treatment programs to managed care entities including Health Maintenance
Organizations ("HMOs"), Preferred Provider Organizations ("PPO") Independent
Practice Associations ("IPAs"), self insured and other payors of health care
services. The SalickNet programs offered include capitated contracts (a set
price calculation on the basis of a per member, per month charge), discounted
fee for service, case rate and visit group methodologies. These programs employ
proprietary practice guidelines and outcomes measurement to gauge the success
and effectiveness of the programs offered through contracted physicians and
facilities on the basis of quality, convenience, patient satisfaction and cost
effectiveness. The Company's programs, the first of their kind, have been well
received since being introduced in 1994 and include the first capitated covered
treatment agreement with Physician Corporation of America covering 115,000
persons in South Florida, and a non-capitated global fixed fee agreement with
CAPP CARE, a national managed PPO for the Company's services.

         In addition, in fiscal 1996 separate subsidiaries of the Company have
been formed to provide management services, facilities, personnel and other
items and services to certain physicians and medical groups for the operation of
their respective medical practices, some of which are located off-site from the
Cancer Centers or other Company operations or facilities. These supplement or
augment services the Company has been providing for several years.

         Salick is a Delaware corporation formed in July 1991 for the purpose of
changing the state of incorporation of Salick Health Care, Inc., a California

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corporation ("Salick California"), from California to Delaware by way of a
merger of Salick California with and into the Company which was consummated on
August 27, 1991. All references herein to Salick or the Company shall, unless
the context otherwise clearly indicates, refer to both the Company and Salick
California.

         In April 1995, an indirect wholly owned subsidiary of Zeneca Limited,
an English company, was merged into the Company, with the Company being the
surviving corporation. Pursuant to the merger, the then stockholders of the
Company received an aggregate of 5,634,082 shares of a new Callable Puttable
Common Stock of the Company and cash in exchange for their shares of the
Company's Common Stock and a wholly owned subsidiary of Zeneca Limited received
an aggregate of 5,657,115 shares of the Company's Common Stock. As a result,
Zeneca Limited beneficially owns more than 50% of the equity securities of the
Company. Zeneca Limited is a wholly owned subsidiary of Zeneca Group PLC, an
English company, which is a major international bioscience business engaged in
the research, development, manufacture and marketing of ethical (prescription)
pharmaceuticals, agricultural chemicals, specialty chemicals, seeds and
biological products.

         Salick's executive offices are located at 8201 Beverly Boulevard, Los
Angeles, California 90048-4520, telephone number (213)966-3400.

CANCER SERVICES

         GENERAL

         The American Cancer Society estimates that one of three Americans now
living will eventually be diagnosed with cancer. In 1996 alone, estimates are
that approximately 1,360,000 people will be diagnosed as having cancer,
excluding nonmelanoma skin cancer and carcinoma in situ. The National Cancer
Institute estimates that the overall annual direct and indirect costs of cancer
exceed $104 billion. Based on the trend shown in American Cancer Society
reports, the incidence of cancer as well as cancer related costs has continued
to grow. However, the incidence of certain forms of cancer can be reduced and
early detection and treatment of cancer can improve cure rates and increase life
expectancy. New developments in the treatment of certain types of cancer have
not only increased the ability to detect cancer in early stages but have
significantly increased the five year survival rate for cancer patients.

         The Company's strategy has been to provide, in affiliation with major
university, teaching and other hospitals, substantially all of the outpatient
health care services necessary to meet the needs of cancer patients and their
physicians. More recently, the Company's services have been expanded to
alternate sites and inpatient services at selected Centers. Each of the Cancer
Centers addresses the critical needs of cancer patients, their families and
partners in care by offering a wide range of services, delivered in a cost
effective setting. Each of the Cancer Centers is open for extended hours with
most services available seven days a week.

         Among the many diagnostic and therapeutic services available at or
through a Cancer Center are diagnostic radiology (including CT scanning,
magnetic resonance imaging and ultrasound), radiation therapy, infusion and
bolus chemotherapy, laboratory, pharmacy, blood banking, nutritional counseling,
pain management, educational and psychosocial services. Most of the Cancer
Centers presently in operation provide the majority of these services on site.
As a Cancer Center moves from an interim to a permanent facility, substantially
all services are provided on site.


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         Each Cancer Center is led by a Medical Director who is an acknowledged
expert in the diagnosis and treatment of cancer. The Medical Directors and other
physicians who treat patients at the Cancer Centers are supported by personnel
(including nurses, pharmacists, technicians, psychiatrists, psychologists,
social workers and nutritionists), who have substantial experience in providing
services to cancer patients. Each Cancer Center is the exclusive provider to the
affiliated hospital of substantially all of its outpatient diagnostic and
treatment programs related to cancer.

         Salick emphasizes interaction between the Cancer Centers' Medical
Directors and area affiliated physicians in order to enable all patients to have
access to and to share the latest clinical research and treatment protocols.
This enables physicians in one area of the country to have access to expertise,
as needed, without having to refer their patient to other facilities and lose
contact with their patient. See also "Artificial Kidney ("Dialysis") Services
and Medical Supplies."

         ADDITIONAL SERVICES

         The American Cancer Society estimates that one out of every eight women
will develop breast cancer. Breast cancer is the second leading cause of cancer
death in women. The Company believes that there is a clear need for increased
efforts and specialized attention to the prevention, detection and treatment of
breast cancer. In order to address this current need and to provide individuals
with prompt responses to their concerns, breast centers are operated in
affiliation with the Cancer Centers at the Mount Sinai Medical Center, in Miami
Beach, Florida, at Desert Hospital in Palm Springs, California, at SHC Specialty
Hospital in Westlake, California and freestanding facilities are located in Van
Nuys, California and Palm Beach, Florida. Certain breast cancer specific
services are also provided at the Company's Cedars-Sinai, Alta Bates, Temple
University and University of Kansas Cancer Centers. The Company is developing
additional comprehensive breast care centers (collectively, "Breast Centers")
proximate to or as an integral part of the Cancer Centers in order to take
advantage of the full range of services which the Company's programs offer. The
Breast Centers provide state of the art screening, detection, diagnostic and
treatment services to individuals, with and without the disease. Education and
counseling with respect to all aspects of breast health and disease are an
integral part of the Breast Center program. Cancer risk assessment is provided
at the Alta Bates, Westlake and JFK Cancer Centers. This program takes into
account genetic and epidemiologic factors as they relate to the potential of a
person's risk of contracting breast cancer. The Company believes that few health
care facilities provide such assessment and counseling services and that its
Breast Center program will aid in the early detection and prompt treatment of
breast cancer, thus increasing the potential for cure.

         Certain transplantation and surgical procedures relating to cancer are
or will soon be able to be done on an outpatient basis. Where appropriate and
authorized, certain of the Company's existing and future Cancer Centers will
have these facilities. Additionally, as some of these surgical and
transplantation procedures may continue to have to be done on an inpatient
basis, at certain Cancer Centers the Company expects inpatient services to be
added for such procedures to be done in Company facilities.

         The Company's alternate site and home infusion subsidiary, INFUSX, Inc.
("INFUSX") provides a range of infusions, nutrition, antibiotics, pain
management, blood products, nursing and other treatment services to patients
with chronic and complex illnesses requiring sophisticated, long term care,
matching disease treatment intensity with the resource intensity and Company
facility (Cancer Center, alternate site facility, home, etc.) necessary to

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service the patient's needs. In addition to its appeal to managed care entities,
employer groups, other health care payors and patients amenable to such
treatment, INFUSX provides the Company with the ability to service patients who
have historically been provided such care by others. It also allows the Company
to broaden the scope of its programs and services and, at greatly reduced
capital costs, to reach out to other payors, areas and patients that have not
previously been serviced by the Company.

         Increasing health care costs and decreasing reimbursements have
hastened the trend toward managed care and alternate site care. Managed care, in
its myriad forms, covers approximately 55% of U.S. workers and focuses on
limiting or sharing risk among payors and providers. SalickNet, the Company's
managed care subsidiary develops and oversees such arrangements with payors
including self insured employers and managed care companies for the provision of
complex care principally relating to cancer. SalickNet offers an integrated
system of care, which includes physician services, inpatient, outpatient, and
home care services at predetermined prices, using certain proprietary practice
guidelines developed by a group of experts, and evaluated on the basis of an
array of outcome measures, e.g., mortality, patient satisfaction and quality of
life. In 1994, a three year capitated (per member, per month) agreement was
marketed in Florida with Physician's Corporation of America which currently
covers more than 115,000 lives in South Florida.

         Salick believes that there are numerous locations at which its and
SalickNet's products can be sold and Cancer Centers and INFUSX operations
established or acquired. The Company regularly engages in discussions to
establish additional cancer centers with medical schools, private and public
hospitals, physician groups, prepaid health plans and third party payors. Some
of the entities with whom the Company may negotiate may already offer some of
the services provided by the Company.

         The market for disease state or disease specific managed care
arrangements on both a pricing and service to patients basis is rapidly
developing. The Company is a leader in this emerging line of business with long
experience and expertise in providing assorted services in a cost-effective,
quality manner. These programs include capitation, discounted fee for service,
visit groups and case rates. By offering a full array of services, patient
referrals and billing procedures are simplified. Discussions with managed care
organizations using various programs are ongoing. The Company has obtained
reinsurance to manage its risk exposure on its capitated contracts.

         BENEFITS OF A COMPREHENSIVE CANCER PROGRAM

         The Company believes that its multi-disciplinary Cancer Center program
represents an innovative approach offering an essential improvement in the
provision of services for the screening, diagnosis and treatment of cancer.
Significant aspects of the programs and services include:

         Convenience of Care. Convenience to the patient is an essential part of
the Company's strategy and a primary consideration in scheduling treatments and
procedures. Traditionally, a cancer patient has been treated in a variety of
settings, including the hospital, outpatient diagnostic radiology and radiation
therapy facilities, the physician's office and the emergency room, often
competing for access to services with patients having a variety of other
illnesses. A Salick Cancer Center provides substantially all diagnostic and
treatment services, on an outpatient basis, at a single site. The Cancer
Center's services are available seven days a week, providing patients with
continuous access to professional staff and services and generally not requiring
patients, during non-business hours, to utilize facilities such as emergency
rooms. Because of the breadth of services available, the Cancer

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Centers allow a physician to more rapidly establish a diagnosis and initiate
appropriate treatment. Substantially all of the Company's programs enable the
patient to receive care promptly and in a convenient setting and to return to
his or her family each day, thereby improving the quality of life for the
patient and the patient's family.

         Quality of Care. Each Cancer Center has sophisticated diagnostic
equipment and trained staff available to physicians and patients utilizing the
Cancer Center, is staffed by physicians, nurses and technicians with expertise
in cancer care and has a Medical Director who provides overall supervision of
quality, implements clinical and research developments, and accesses current
treatment protocols for use by patients and their physicians. A patient care
plan to facilitate interaction between all persons involved in the patient's
care is developed for each patient. The plan provides for individualized
objectives of care and protocol compliance, including formal treatment schedules
and diagnostic procedures monitoring the course of therapy in the Cancer Center,
the hospital and the home. Records documenting the patient's history, treatment
and clinical course are immediately available to the hospital staff if admission
of the patient is required.

         Studies published in The Journal of Clinical Oncology and Cancer have
indicated that reduced side effects from intensive chemotherapy can often be
achieved for patients treated during lengthier sessions. The Cancer Centers
provide this intensive chemotherapy to the numerous patients who may benefit
from this method of treatment. Physicians' offices, physician based practice
locations including those managed by others and home care entities often lack
the capacity to safely and efficiently provide this type of treatment or to
handle any severe complications which may arise as a result of the treatment.

         Cost Effectiveness. The Cancer Center program provides screening,
diagnosis and treatment in cost effective settings; not dependent upon
hospitalization or multiple site testing, record keeping and evaluations to
effect diagnosis or to institute treatment. The Company believes that the
overall cost of patient care is reduced because of the rapidity of diagnosis and
implementation of treatment as well as the avoidance of duplicative tests and
services, inconsistent procedures, unnecessary hospitalization and the ability
to match resources to the intensity of the care required.

         Benefits to Hospitals. The Cancer Centers provide a hospital with
practice management or consulting and administrative services, a truly
coordinated disease specific program providing quality medical care and support
which serve to enhance the hospital's reputation. The addition of these
sophisticated facilities and programs may also attract new patients to the
hospital for other health care services. Because of its resources, reputation in
the field of cancer and expertise, Salick is able to provide a hospital with the
services and facilities of a Cancer Center in a shorter period of time than if
the hospital were to seek to develop such a center on its own. Additionally, as
a Cancer Center provides its services principally on an outpatient basis, the
affiliated hospital is often able to discharge its cancer inpatients sooner.
This facilitates the hospital's ability to manage under present reimbursement
programs such as capitation. See "Governmental Regulation."

         Benefits to Physicians. The Cancer Centers provide physicians with
practice management services, a trained oncology staff, state of the art
facilities, access to many of the latest treatment protocols and clinical
research, a support staff, and continuing education. By affiliating with and
utilizing a Cancer Center, physicians can increase their income by freeing their
time to see an increasing number of patients and reducing their overhead
expenses.

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         Benefits to Employers and Payors. In addition to providing a high
quality program and establishing control over payor cost, the Company has
established "managed care" and "physician-facility network" teams to develop,
implement and operate programs aimed at the managed care market. These teams are
developing what the Company believes to be innovative programs dealing with
cancer in the areas of outcome studies (as to utilization measures, patient
satisfaction and survival rates), guidelines for the diagnosis and treatment of
cancer, case rate charges, preferred fee-for-service charges, capitation
programs and the establishment of physician stand alone and combined
physician-facility networks, all to be marketed and employed, as they are
developed, to employer groups, purchasing alliances, managed care and other
payors.


OPERATING CANCER CENTERS

         CEDARS-SINAI CANCER CENTER

         Salick's 53,000 square foot Cancer Center at Cedars-Sinai Medical
Center ("Cedars-Sinai") in Los Angeles, California provides, 24-hours a day,
seven days a week, substantially all of the programs and services required by a
cancer patient, including infusion and bolus chemotherapy, radiation therapy,
pharmacy, laboratory, blood transfusions, psychosocial services and oncology
nursing. This Cancer Center, which commenced operations in temporary space in
1985, has its own identity within and is located on the campus of the hospital.
The Company is the exclusive provider of substantially all the hospital's
outpatient cancer diagnostic and treatment programs and facilities in
conjunction with the hospital's teaching and research programs. All physicians
treating patients at the Cancer Center must be members of the Cedars-Sinai
staff. It is the Company's understanding that Cedars-Sinai has an open medical
staff in medical oncology and many other specialties.

         The Company owns the physical improvements and equipment located at the
Cancer Center, subject to the rights of Cedars-Sinai upon termination of the
agreement and the lessors or sellers under any equipment lease or purchase
contract. The Company has no ownership interest in the land upon which the
Cancer Center is located. If the Company elects to terminate the Cedars-Sinai
agreement without cause and liability, the Company must transfer all physical
improvements and all of the Company's interest in the Cancer Center's equipment
to Cedars-Sinai without payment. In the event the agreement is not extended or
is terminated by the Company for cause, Cedars-Sinai is required to purchase the
Company's interest in the Cancer Center's improvements at their book value
amortized over a twenty year life and may purchase or lease the Cancer Center's
equipment at its then fair market value reduced by existing obligations assumed
by Cedars-Sinai. The loss of the agreement with Cedars-Sinai would have a
material adverse effect on the Company.

         MOUNT SINAI CANCER CENTER

         Under its agreement with Mount Sinai Medical Center in Miami Beach,
Florida, the Company became the exclusive provider of outpatient cancer services
at Mount Sinai Medical Center's existing Radiation Therapy and Breast Center
Departments in November 1988 and has provided most of the hospital's other
outpatient cancer services, such as medical oncology, laboratory and pharmacy,
in interim space since April 1989. The Company began construction of the
permanent center in 1994 and completed and occupied it in November 1995. The
Mount Sinai Comprehensive Cancer Center's programs and services include
outpatient oncologic surgery and are otherwise similar to those of the Cedars-
Sinai Comprehensive Cancer Center.



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         TEMPLE UNIVERSITY CANCER CENTER

         Salick operates this Cancer Center in interim space on the Temple
University Health Sciences and Hospital campus in Philadelphia, Pennsylvania.
Services provided include radiation and medical oncology, laboratory, pharmacy
and psychosocial services. Stem-cell pheresis and stereotactic radiosurgery
services are also included in services provided at this facility. The
development of the permanent Cancer Center is being planned and will be subject
to regulatory and other approvals. At such time as the permanent center is
established, the Temple University Cancer Center's programs and services will be
similar to those of the Cedars-Sinai Cancer Center.

         JFK CANCER CENTER

         On October 1, 1987, Salick became the provider of services at the
20,000 square foot JFK Medical Center Outpatient Comprehensive Cancer Center
located in Palm Beach County, Florida. This Cancer Center provides medical and
radiation oncology programs and services including chemotherapy, pharmacy and
laboratory services as well as a full range of support services. The Company's
contract with JFK Medical Center expires September 30, 1997. It is highly
unlikely that the contract will be renewed. The Company is arranging for
alternate sites for this Cancer Center's operations.

         ALTA BATES CANCER CENTER

         In December 1990, the Company became the exclusive provider of a broad
range of medical oncology and radiation therapy services at Alta Bates Medical
Center in Berkeley, California in a 10,000 square foot interim facility. The
permanent Cancer Center of some 43,000 square feet was occupied in May 1995.
Most radiology services are presently provided at the Center with some at off
site locations in which the Company is a limited partner. The range of services
at the permanent Cancer Center include outpatient oncologic surgery, otherwise
they are similar to those provided by the Cedars-Sinai Cancer Center.

         DESERT HOSPITAL CANCER CENTER

         In September 1989, Salick became the exclusive provider of all
outpatient cancer services and programs at and in affiliation with Desert
Hospital in Palm Springs, California. The Company is presently providing its
services in a 15,000 square feet interim facility. A permanent center of
approximately 48,000 square feet is under construction and is expected to become
operational in 1997. The Center in its interim phase contracts with the hospital
for certain radiologic services and provides all of its other services on site.
The full range of the Company's programs and services will be provided in the
permanent center.

         PARKWAY AND KENDALL CANCER CENTERS

         In June 1987, the Company became the exclusive provider of certain of
its Cancer Center services and programs at Parkway and Kendall Regional Medical
Centers in the greater Miami, Florida area. Radiologic and certain other
services not presently provided at these Cancer Centers are available through
agreements with the hospitals. Neither of these Cancer Centers provides
radiation therapy services, although arrangements exist for patients to obtain
such services at a Company facility adjacent to Parkway and or through third
parties in the Kendall area. In October 1991, in order to service patients of
the Parkway Cancer Center, the Company acquired an 80% interest in a radiation
therapy center adjacent to the Parkway Cancer Center and subsequently acquired
the remaining 20% interest. The Company's contract with Kendall Regional Medical
Center expires in 1997. It is highly unlikely that the contract will

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be renewed.  The Company is considering making arrangements for an alternate
site for this Cancer Center's operations.  The Company's contract with Parkway
Regional Medical Center was extended through 2002.

         UNIVERSITY OF KANSAS CANCER CENTER

         In April 1992, Salick became the exclusive provider, under a thirty
five year agreement, of all outpatient cancer services and programs at and in
affiliation with the University of Kansas and its medical center based in Kansas
City. At the present time, the Company occupies approximately 25,000 square feet
of interim space and provides medical and radiation oncology services while
contracting with the medical center for radiologic and certain other ancillary
services. A permanent center is in the planning stage. When all approvals are
obtained and the Center is completed, the full range of the Company's services
and programs, including a breast center and surgical and radiological
facilities, will be on-site. Financing of the construction of the Center may be
through a bond issued by the Kansas Board of Regents for the University of
Kansas.

         SAINT VINCENTS CANCER CENTER

         In April 1996 a subsidiary of the Company entered into an agreement
with Saint Vincents Hospital and Medical Center to establish both a
comprehensive cancer center under Saint Vincents' operating certificate and a
managed care affiliate network in the greater New York Metropolitan Area. The
twenty-year contract is pending regulatory approval (a certificate of need and
certain other approvals must be obtained). The Company anticipates that Saint
Vincents will obtain such approvals during fiscal 1997. It is anticipated that
the Saint Vincents Comprehensive Cancer Center will provide a full range of
outpatient diagnostic and treatment services. The Cancer Center began providing
cancer services in November 1996 in space located at Saint Vincents. A permanent
center of approximately 70,000 square feet will be established in proximity to
Saint Vincents. Saint Vincents is the academic medical center for New York
Medical College in New York City and is sponsored by the Archdiocese of New York
and the Sisters of Charity which operates or are affiliated with many health
care facilities in New York, some of which could become affiliates of the
network.


         WESTLAKE CANCER CENTER/SHC SPECIALTY HOSPITAL

         In 1993, the Company established a Cancer Center, in a joint venture
with Universal Health Services ("UHS") the then owner of the Westlake Medical
Center, in Westlake, California. The Center, which began operations in October
1993, is the first Salick Center to provide both inpatient and outpatient
services, including a dedicated inpatient unit, comprehensive outpatient
diagnosis and treatment and surgical capabilities. In July 1995, UHS sold
Westlake Medical Center to a subsidiary of Columbia/HCA Healthcare Corporation
and the Company acquired UHS' interest in the Cancer Center. Under the agreement
with Columbia/HCA the Company was the exclusive provider of inpatient and
outpatient cancer services and programs at Westlake Medical Center. Initially,
services are provided in 18,000 square feet of existing space including
dedicated inpatient facilities. A separate Breast Center was opened in September
1994. Among the affiliated physicians are specialists in medical, surgical and
radiation oncology, reconstructive surgery, bone marrow and stem cell
transplantation and breast cancer. The features of this Center enable the
Company to deliver a comprehensive, quality, cost effective package of services
for the diagnosis and treatment of cancer to managed care entities and other
health care payors in any setting, and complements the Company's other
California operations.

                                       11
<PAGE>   12
         Effective July 25, 1996, a subsidiary of the Company acquired Westlake
Medical Center from a subsidiary of Columbia/HCA Healthcare Corporation. Under
the terms of the agreement with the Columbia/HCA subsidiary, the Company's
subsidiary had the right to purchase the hospital if Columbia/HCA decided to
close the hospital with the purchase price for the hospital being determined by
three appraisers. After Columbia/HCA gave notice of its decision to close the
hospital, the subsidiary of the Company exercised its right to purchase the
hospital. The agreement that contained the subsidiary's right to purchase the
hospital sought to impose restrictions on the Company subsidiary's medical use
of the hospital to services for cancer, dialysis (acute and chronic), organ
transplantation, and immuno-deficient disease treatment. The Columbia/HCA
subsidiary delayed providing documents to transfer title and when provided
included terms the Company believed violated the agreement and were
unacceptable. As a result, the Company commenced litigation to enforce its
rights under the agreement and the hospital was transferred to the Company's
subsidiary pursuant to an injunction issued by the Los Angeles Superior Court.
The litigation continues with the Company also contesting, among other claims,
the legality and enforceability of the restrictions. See "Item 3. LEGAL
PROCEEDINGS."

         PAYMENT AND BILLING

         The Company bills its charges to the hospitals with which each Cancer
Center is affiliated. The Company is paid by the hospital after the payment is
received by the hospital. Payors include the Medicare and Medicaid programs,
Blue Cross and other insurance plans, HMO's and other prepaid health plans and
the patient. Medicare makes interim payments to the hospitals for services
reimbursed on a cost basis including, among others, outpatient services.
Currently, Medicare reimbursement for certain outpatient surgery, radiology and
diagnostic services is based on the lower of the hospital's reasonable cost
(reduced by 5.8% of operating costs and 10% for capital costs - see
"Governmental Regulation-Reimbursement") or a blend of the hospital's reasonable
costs and a fee schedule amount; for other hospital outpatient services,
Medicare reimbursement is based on the hospital's reasonable costs, reduced by
5.8% of operating costs and 10% for capital costs. These payments are subject to
an annual audit which can result in an adjustment to payments previously made.
These audits may not be finalized for a number of years and final adjustments,
if any, made as the result thereof can have a positive or negative effect,
retroactively and/or prospectively, on the estimate of contractual allowances
used in the Company's financial statements for the periods involved, and a
corresponding impact, which could be material, on the Company's revenues and
income. See "Governmental Regulation - Reimbursement." Adjustments in these
payment methodologies may have an adverse impact on the Company's revenues and
profitability. Blue Cross and other private insurance plans and certain health
plans with whom the Company or affiliated hospitals contract generally pay a
percentage of reasonable and customary charges. Some of the payors with which
the Company or affiliated hospitals do business pay on a capitated basis, while
others pay on a case rate or visit basis. Reimbursement under the Medi-Cal
program and Pennsylvania and other certain state Medicaid programs is based on
their schedules of allowable charges and in some states may include a component
for capital costs. SalickNet is paid on a monthly basis on its capitated program
and it bills for services provided on its non-capitated programs.

ARTIFICIAL KIDNEY ("DIALYSIS") SERVICES AND MEDICAL SUPPLIES

         Published reports indicate that dialysis services generate in excess of
$4 billion per year in revenues. The Company believes it is one of the larger
dialysis services providers in the United States and one of the largest in
California, the only state in which it currently provides these services.

                                       12
<PAGE>   13
         The Company's ten outpatient (chronic) artificial kidney treatment
facilities are located in Southern California. Dialysis treatments are generally
provided through use of an artificial kidney machine which removes certain toxic
substances from the blood and returns the cleansed blood to the patient. As
required by Medicare, Salick employs and compensates physicians to provide
coverage, education, peer review, medical direction, quality assurance and other
services at these facilities during operating hours. Each facility is staffed by
a director of nursing and other nurses, administrative and support personnel.

         Chronic dialysis is generally performed three times a week, for four to
five hours per treatment. Improvements in technology now available have
shortened the treatment time for certain patients to approximately three to four
hours. This allows the Company to achieve efficiencies while continuing to
provide quality care. A substantial majority of the Company's chronic dialysis
patients presently receive this treatment.

         During the course of a dialysis treatment, the Company provides the
disposable and reusable supplies, including the dialyzer, blood tubing,
injectable medications, solutions, drugs and blood products. The Company's
capacity for treating patients is subject to a number of variables, including
length of time per treatment, type of treatment, individual patient requirements
and local operating practices and ordinances regulating a facility's hours of
operations. To date, none of these constraints have affected the Company's
ability to increase the number of patients treated or hours of operation.
Patients are generally referred to artificial kidney facilities by their managed
care entity, or if they are not part of a managed care entity, by physicians or
other medical personnel. Dr. Salick and physicians affiliated with him contract
to provide medical and administrative services in connection with the Company's
dialysis operations. All physicians retain professional fees which they receive
for providing services to dialysis patients treated at Company and other
facilities.

         Most dialysis treatments are performed in hospitals or outpatient
facilities, although dialysis can be performed at home or on an ambulatory basis
for certain patients. Less than 10% of the dialysis patients treated by the
Company presently receive either ambulatory or home dialysis. Support services,
such as supplies, patient education, counseling and self-care training, are also
provided to these patients by the Company.

         The Company's outpatient facilities are subject to extensive federal,
state and local government regulation, inspection and licensing.  The addition
of treatment stations at existing facilities is dependent upon approval of the
state licensing agency.  In addition, federal and state rules and standards
must be met to qualify for payments under Medicare, Medicaid and other
reimbursement programs.  See "Governmental Regulation."

         Approximately 78% of the outpatient dialysis revenues received by the
Company are paid by the Medicare and Medicaid programs. Under the current
Medicare reimbursement regulations (the "Medicare Regulations"), for Medicare
eligible beneficiaries, Medicare pays 80% of a prospectively determined
reimbursement rate for treatment at an outpatient dialysis facility and for
patients treated at home. Currently this prospective price varies from about
$117 to $139 per treatment at an outpatient facility, depending on regional wage
index differentials. The average reimbursement rate presently applicable to the
Company's facilities is approximately $136 per outpatient dialysis treatment,
including routine laboratory services, but excluding physician fees and certain
ancillary and non-routine laboratory and pharmacy charges. See "Governmental
Regulation-Reimbursement." Under the Medicare Regulations, home dialysis
patients may elect to have all of their dialysis supplies and back-up

                                       13
<PAGE>   14
services provided by an End Stage Renal Disease Program ("ESRD") facility, such
as those operated by the Company. If the patient so elects, the facility will
receive the same reimbursement as it receives for treatment of patients at an
outpatient facility.

         A technological development affecting the dialysis industry has been
the grant of approval from the Food and Drug Administration for the production
and sale of Erythropoietin ("EPO"), a drug produced by recombinant DNA
technology. EPO may be useful in treating the anemia associated with end stage
renal disease by reducing the need for transfusions in dialysis patients. The
Company provides EPO and the administration thereof to its patients according to
physicians' orders. Effective January 1, 1991, the manner of reimbursement for
EPO dialysis patients was changed from its former structure (80% of $40 per
treatment for up to 10,000 units and 80% of $70 for a treatment dosage of 10,000
or more units) to provide for payment of 80% of $11.00 per 1,000 units. If a
beneficiary requires 10,000 units or more, sufficient medical documentation must
accompany the claim. The effect of this change had an adverse impact on the
Company and the industry. Pursuant to the Omnibus Budget Reconciliation Act of
1993 ("OBRA 1993"), payment for EPO was further reduced to 80% of $10.00 per
1,000 units, effective January 1, 1994.

         The Company also provides inpatient ("acute") dialysis services to
hospitalized patients under separate contracts with 21 hospitals in Southern
California. The Company's inpatient facilities are located on hospital premises
and operated under hospital licenses, rules, by-laws and medical staff
requirements. Under each of the agreements, payments to the Company for its
services are made directly by the hospital and are at negotiated rates.

         In 1996, the Company opened its 10th outpatient dialysis center at Hi-
Desert Hospital in Yucca Valley (Riverside County), California. This center has
15 treatment stations in its 5445 square feet and the term of the agreement is
for a five-year period with three five-year renewal options.

MEDICAL PRODUCTS AND SUPPLIES

         Aurora Medical Supplies, Inc. ("Aurora"), a wholly-owned subsidiary of
the Company, arranges the acquisition of medical and pharmaceutical products and
supplies for the Company's Cancer Centers, dialysis facilities, as well as
physicians' offices, hospitals and medical clinics. These products and supplies
are manufactured by others.

ALTERNATE SITE AND HOME INFUSION SERVICES

         The Company's subsidiary, INFUSX, emphasizes the treatment of chronic,
complex and catastrophic illnesses requiring sophisticated, long term care in
non-Cancer Center and related satellite facility settings. INFUSX's initial
focus has been in providing services to cancer, dialysis, bone marrow, organ
transplant and immune suppressed patients. A number of these patients are or
have been treated in facilities operated by the Company. Among the services
provided by INFUSX are chemotherapy, antibiotics, parenteral and enteral
nutrition, blood products, pain management, nursing visits, related services,
certain equipment and supplies. INFUSX bills the payor or patient directly for
the services it provides. Presently INFUSX, a duly licensed home health agency,
operates in Southern California, South Florida and in the greater Philadelphia
and Kansas City, Kansas/Missouri areas. The Company intends to establish or
acquire or otherwise participate in operations in other areas such as New York
where appropriate to support the Company's operations.




                                       14
<PAGE>   15
COMPETITION

         Although the Company believes its Cancer Center operations and programs
are innovative and unique, they operate in a competitive environment. Some
services which may be considered to be competitive to those which are and will
be offered by the Cancer Centers, SalickNet and INFUSX are being provided by
comprehensive cancer centers established under federal law (whose primary
purpose is research and education), acute care hospitals, other primary health
care facilities, radiation therapy and diagnostic imaging centers, private and
group physicians, home and alternate site care entities, infusion centers and
prepaid and other forms of health plans. Certain of these providers have been
established in the general health care field for a number of years and have
greater financial and marketing resources than the Company.

         In its dialysis operations the Company competes with both
hospital-based and freestanding dialysis facilities. The Company competes on the
basis of its reputation for quality care and convenience. Certain of the
Company's competitors with respect to its dialysis services may also compete for
the development or acquisition of dialysis centers in markets which may be
targeted by the Company. Certain of the Company's competitors may have
substantially greater financial and marketing resources than the Company.

GOVERNMENTAL REGULATION

         Health care facilities are subject to extensive federal, state and
local legislation and regulations, including those relating to the reimbursement
and control of health care costs.

         Several significant pieces of legislation have been passed in calendar
year 1996. The Health Insurance Portability and Accountability Act of 1996,
signed by President Clinton on August 21, 1996, is a package of health insurance
reforms which includes several significant changes regarding Medicare and
Medicaid fraud and abuse laws. In addition to the provisions regarding fraud and
abuse, the key provisions of the Act establish portability of health insurance
(requiring health insurances to offer policies to anyone who has had insurance
in the preceding six months subject to certain exceptions), increase the
deductibility of health insurance premiums for self-employed individuals and
establish a limited demonstration project utilizing medical savings accounts
("MSAs"). The provisions of the Act relating to insurance reform are effective
July 1, 1997. Those relating to the MSA demonstration are effective for fiscal
years beginning after December 31, 1996.

         Welfare reform legislation was signed into law by President Clinton on
August 22, 1996 in the form of the Personal Responsibility and Work Opportunity
Reconciliation Act of 1996. That Act is designed to overhaul the nation's
welfare system, including the end of federally guaranteed payments to the poor
and substitution of annual block grants to states to operate their own welfare
programs. Medicaid coverage is assured only for recipients of cash benefits and
Medicaid eligibility for children receiving foster care and adoption aid. The
new law bars most federal aid, including Medicaid and cash welfare, to future
legal immigrants for five years. President Clinton has stated that he intends to
introduce legislation to compensate for the loss of Medicaid coverage and other
benefits, but no timetable for sending such legislation to Congress has been
provided. There is no assurance that such legislation, if introduced, will be
enacted.

         REIMBURSEMENT

         The largest single component of the Company's revenue continues to be
reimbursement at rates which are set or regulated by federal or individual

                                       15
<PAGE>   16
state authorities. These reimbursement rates are also subject to periodic
adjustment for certain factors, including changes in legislation and
regulations, those imposed pursuant to the federal and individual state budgets,
inflation, area wage indices and costs incurred in rendering the services. The
reimbursement rates may in the future, as they have in the past, also be
affected by cost containment and other legislation, competition, third party
payor changes or other governmental administrative controls or limitations.
Changes in the Medicare and Medicaid system and reimbursement have been proposed
by both Republican and Democrat members of Congress at various times. The
ultimate impact of any such changes on the Company's business cannot be
predicted, and there is no assurance that it will be able to do so in the
future, in part due to budgetary constraints and the rapidly evolving changes in
the health care system generally. The Company has developed and/or implemented
plans to deal with this situation and notes that in the past as reimbursement
reductions or changes have occurred, the Company has previously been able to
improve operations by an increased market share and greater efficiency although
there is no assurance that it will be able to do so in the future.

         Under federal Medicare law, most hospital inpatients covered by
Medicare are classified into diagnostic related groups ("DRGs") based on such
factors as primary admitting diagnosis and surgical procedure. Payment to
hospitals for the care of a patient covered under the DRG system is generally
set at a predetermined amount based on the DRG assigned to the patient. The
federal government, as well as many states and third party payors, are
investigating or have adopted these or other modifications to their
reimbursement formula in an effort to contain costs. This type of program
provides an incentive for hospitals to plan and deliver their services more
efficiently.

         The Omnibus Budget Reconciliation Act of 1990 amended the definition of
"inpatient hospital services" to include all services for which payment may be
made under the DRG system that are provided by a hospital or an entity
wholly-owned or operated by the hospital to a patient during the three days
immediately preceding the date of the patient's admission (or one day for
hospitals and hospital units excluded from the DRG system under technical
changes enacted in October 1994), if such services are diagnostic services
(including clinical diagnostic laboratory tests) or are other services related
to the admission, as defined by the Secretary of Health and Human Services ("the
Secretary"). Such services are not reimbursable separately as hospital
outpatient services under Medicare Part B. These provisions have been in effect
since 1991. On January 12, 1994, the Secretary issued interim final regulations
implementing this provision and on September 1, 1995, the Secretary announced
she would revise the regulations to recognize that only the one day immediately
preceding the date of the patient's admission would be considered to be not
reimbursable separately as hospital outpatient services for hospitals and
hospital units excluded from the DRG system. However, the Secretary has not yet
revised the regulations to this effect.

         In recent years there have been a number of statutory and regulatory
changes that affect Medicare reimbursement for services furnished to hospital
outpatients. Prior to October 1, 1987, Medicare generally had reimbursed
hospital outpatient services on the basis of the reasonable costs (as determined
pursuant to regulations) incurred by the hospital. On October 1, 1987, Medicare
began reimbursing hospitals for certain surgery services furnished to hospital
outpatients on the basis of the lower of reasonable costs or an amount based on
a blend of the hospital's reasonable costs and a prospectively set fee schedule
amount. On October 1, 1988, this blended payment system was extended to
radiology services furnished to hospital outpatients; the blended payment system
was extended further to certain other

                                       16
<PAGE>   17
diagnostic services on October 1, 1989. In addition, the amount of the blend
that is based on the hospital's reasonable costs has decreased; currently, the
blend is based 42% on hospital costs for surgery and radiology services, and 50%
on hospital costs for other diagnostic services. For surgery services reimbursed
under the blend, the fee schedule portion of the blend is based on the amount of
payment that ambulatory surgery centers would receive for the procedure. For
radiology and diagnostic services reimbursed under the blend, the fee schedule
portion of the blend is based on the amount that physicians would receive if the
procedure were furnished in a physician's office under the Medicare physician
fee schedule.

         Effective October 1, 1991, Medicare payments for hospital outpatient
services made on a reasonable cost basis and the cost portion of outpatient
services paid on the basis of a blended amount, were reduced by 5.8%. Under the
Omnibus Reconciliation Act of 1993 ("OBRA 1993"), Congress extended this
reduction through federal fiscal year 1998. Effective October 1, 1991, Medicare
has reimbursed the capital costs allocated to outpatient departments on the
basis of 90% of reasonable costs. Under OBRA 1993, Congress extended this 10%
reduction in hospital outpatient capital cost reimbursement through federal
fiscal year 1998. Also under OBRA 1993, the amount which Medicare reimburses for
clinical laboratory services was reduced.

         Under the Omnibus Budget Reconciliation Act of 1989, effective January
1, 1992, Medicare reimbursement for physician services began a five year
transition to the use of a physician fee schedule based on a "resource-based
relative value scale." That physician fee schedule, through the blended payment
system described above, has affected the amount of Medicare reimbursement for
hospital outpatient departments providing outpatient radiology, radiation
therapy, surgery and certain diagnostic services.

         The Health Care Financing Administration ("HCFA"), a division of the
Department of Health and Human Services ("HHS"), which administers the Medicare
program, issued on July 2, 1996 a proposed rule revising payment policies under
the Medicare physician fee schedule for calendar year 1997. Among other changes,
that proposed rule would make comprehensive changes in the way that the
geographic adjustment factors for physician fee schedule payments are
determined; HCFA would prefer to shift to statewide, rather than more local,
regions in setting the factors in the belief that administration will be
simplified and physicians will be encouraged to practice in rural areas by
reducing urban/rural payment differentials. By going to statewide regions, also
known as "localities," there may be "losing" (usually urban) areas and "winning"
(usually rural) areas within a state if a conversion is made. It is unknown what
the final rule will look like, if and when issued, but reimbursement for
hospital outpatient services covered by the blended rate, which is based in part
on the physician fee schedule amount, may decrease if the statewide region or
locality rule is promulgated.

         There is also the possibility of the establishment of a prospective
payment for certain Medicare-reimbursed hospital outpatient services. Congress
had requested that HCFA prepare recommendations concerning the establishment of
such a prospective payment system. HCFA submitted its recommendations to
Congress in March 1995 and included a proposal to phase in such a prospective
payment system, beginning first with outpatient surgery, radiology, and other
diagnostic services. The details of the proposed payment system, including the
amounts of payment that would be made for each procedure, have not been
finalized by HCFA. Adoption of HCFA's recommendation would require a change in
the Medicare law by Congress, and, to date, Congress has not included such a
change in any legislation. Under HCFA's proposal, services other than surgery,
radiology, and other diagnostic services would not be reimbursed under a new
prospective payment system until further research is completed. However,

                                       17
<PAGE>   18
HCFA has indicated recently that it may implement the system with respect to
ambulatory surgery services, because it believes it has sufficient statutory
authority, and expects to issue a regulation regarding such use perhaps as early
as late 1996. The Company cannot predict what will be the effect, if any, on
revenues or income which may result from the adoption by Congress of HCFA's
recommendations for a Medicare prospective payment for hospital outpatient
services.

         HCFA in its March 1995 report to Congress made two other
recommendations concerning proposed changes in the Medicare law. First, HCFA
proposed that the Medicare law be changed to modify the way that the amount of
beneficiary coinsurance for outpatient services is computed. Second, HCFA
proposed that Medicare law be changed to correct what has been described as the
"formula driven overpayment" which HCFA states results in Medicare payments for
hospital outpatient surgery, radiology and other diagnostic services that are
greater than what was intended by Congress. In its report, HCFA suggested
several ways in which the Medicare law could be changed to address these issues,
either with or without the enactment of a prospective payment system for
hospital outpatient services. The alternatives suggested by HCFA generally would
result in an overall reduction in payments for hospital outpatient services
furnished to Medicare beneficiaries and, if enacted, could adversely affect the
Company's revenues and income. However, it is uncertain which alternative, if
any, Congress will enact, and it is impossible to determine what impact, if any,
such changes might have on the Company's revenues and income.

         Through HCFA, HHS issued a program memorandum effective August, 1996
which sets forth the criteria for "provider-based designations," i.e., the
circumstances under which multiple provider facilities may be designated as one
facility for Medicare accounting and cost allocation purposes. Hospitals
frequently seek provider-based designations for skilled nursing facilities, home
health agencies, rural health clinics and physician clinics as "outpatient
departments" of the hospital. HCFA's intent in issuing this memorandum appears
to be to limit the granting of provider-based designations and thereby limit the
allocation of certain hospital costs from inpatient areas to outpatient areas.
Among other reasons, HCFA believes both that such allocations increase Medicare
payments and Medicare beneficiary copayments and that it pays more for services
rendered in provider-based facilities than in freestanding facilities. Eight
tests are set forth in the memorandum. Although the memorandum indicates that
each must be met before an entity may be designated part of a provider, HCFA has
subsequently taken the position that there may be some circumstances where not
all tests must be met. The memorandum has not yet been revised to reflect this
position. The eight tests include requirements for: common accreditation,
licensure and governance; physical proximity to the provider; service of the
same patient population; close integrated clinical services; and integrated 
financial operations. In addition, the director of the outpatient area must be
under the direct day-to-day supervision of the hospital-provider. The HCFA
Regional Offices continue to have the decision-making responsibility regarding
whether an entity meets the eight tests. However, HCFA has warned that in
applying this memorandum, the Regional Offices may identify previous
provider-based decisions that are not in accordance with the test criteria and
in those cases, the Regional Offices are free to correct those erroneous
designations. If such corrections result in loss of provider-based status, the
change will be prospective only in nature. This policy, termed a "clarification"
by the government, may be subject to challenge in the courts. It is difficult to
ascertain how such requirements will be interpreted (for example if all eight
tests must be met) and loss of such status would likely result in reduced
reimbursement in the future and could possibly require a restructuring of such
operations or other actions.

                                       18
<PAGE>   19
         Florida has legislation precluding or limiting referrals by physicians
to facilities in which they have an ownership, control or investment
relationship (the Florida Patient/Self-Referral Act). The Company believes it is
in compliance with the law.

         Florida has made a commitment to the utilization of Managed Care for
the Medicaid population of the state. To this end, the Florida Legislature
adopted Chapter 96-199, Laws of Florida. This Act provides that Medicaid
recipients who do not voluntarily select a managed care plan or MediPass
provider, must be enrolled by the Agency for Healthcare Administration (the
"Agency") into either a managed care plan or MediPass program. Accordingly,
Medicaid recipients who fail to make a voluntary choice will be given mandatory
assignment to a plan or the MediPass program. The Agency will contract with a
limited number of HMOs who meet a based scoring criteria. After implementation,
a substantial majority of the state's Medicaid population of more than 1.5
million will be in a prepaid plan as opposed to less than the current 25% of
that group who have voluntarily enrolled in HMOs. The Agency expects to reduce
per capita rate by competitive bidding process. The Request for Proposal ("RFP")
requires a bid range for rates that is substantially below the current contract
rate. It also expects to reduce number of Medicaid prepaid contractors in the
state through bid threshold elimination. The Agency has issued an RFP with a
scheduled award date of February 1, 1997.

         Florida adopted legislation effective in 1994 which is aimed at health
care coverage for presently uninsured residents and encouraging the formation of
purchasing alliances for health care services. This legislation is principally
aimed at small employer groups. As it is now configured, the Company cannot
predict its future effect upon the Company and its operations. However, the
Company, as part of its overall strategy is in the process of developing various
plans to be offered to employer groups, purchasing alliances, health maintenance
organizations, managed care and other payors.

         To the extent that legislation or regulations may be enacted in the
future which may include outpatient services furnished to Medicare beneficiaries
in a prospective payment system, the Company cannot predict whether or to what
extent such a change would adversely affect its revenues or earnings. For 1997
both parties have stated that Congress will consider extensive changes to the
Medicare and Medicaid programs. Medicare changes under consideration include,
among others, (1) a change in the formula used to calculate hospital outpatient
reimbursement under the blended payment system which generally would result in
reducing reimbursement amounts to hospitals; (2) an extension of the current
5.8% reduction in hospital outpatient reasonable cost reimbursement through the
year 2002; (3) an extension of the current 10% reduction in reimbursement for
hospital outpatient department capital-related costs through the year 2002; (4)
the introduction of a prospective payment system for home health services; (5)
the bundling of post-acute care services, such as skilled nursing facility
services and home health care, into the hospital prospective payment system; (6)
an extension in the reduction in updates to payment amounts for clinical
diagnostic laboratory tests through the year 2002; (7) the elimination of
updates in payments for ambulatory surgical center services through the year
2002; (8) various other reductions in the amount of payment for physician and
hospital services; and (9) the introduction of additional choices of health
plans for Medicare beneficiaries in addition to the current fee-for-service and
Medicare HMO option. Medicaid changes include the replacement of the existing
federal/state program with block grants to the states and reduced federal
oversight over state plans. The enactment of large cuts in the amount of
Medicare and Medicaid reimbursement for providers could have an adverse effect
on the Company's revenues. At this point in time, the Company is unable to
predict how the enactment of any such changes in the Medicaid Program and
proposed changes in Medicare might affect the Company in the future.

                                       19
<PAGE>   20
         The effect of these changes may be mitigated by the Company's ability
to increase its patient volume both at the same sites and at additional centers,
to increase its non-Medicare patient volume and to continue implementation of
cost controls and cost reduction strategies. To address these changes, the
Company has expanded its program to increase patient volume, and instituted
other programs to achieve efficiencies in staffing, purchasing and scheduling.

         Effective November 1, 1990, the Medicare fiscal intermediary for the
Company's dialysis facilities changed the method of reimbursing medications
provided to the Medicare dialysis patients from charge-based reimbursement to
reimbursement based on reasonable costs. This change has reduced the amount of
reimbursement to the Company for such medications and other regulatory changes
potentially could further reduce such reimbursement. In addition, effective
January 1, 1991, the method of reimbursement for EPO furnished to dialysis
patients was changed from its former structure (80% of $40 per treatment dosage
for up to 10,000 units and 80% of $70 per treatment dosage of 10,000 or more
units) to provide for payment of 80% of $11.00 per 1,000 units. This change in
EPO reimbursement has been partially offset by a $1.00 per treatment increase in
the composite rate reimbursement for outpatient dialysis services. In addition,
pursuant to OBRA 1993, reimbursement for EPO was further reduced beginning
January 1, 1994 to 80% of $10.00 per 1,000 units. The Secretary announced on
September 1, 1995 that she will not at this time adjust the current composite
rate. The overall impact of the EPO reimbursement change has adversely affected
the Company's revenues and earnings.

         In 1990, Congress required that HHS and the Prospective Payment
Assessment Commission ("PROPAC") study dialysis costs and reimbursement and make
findings as to the appropriateness of ESRD reimbursement rates. In March 1996,
PROPAC recommended that a 2% increase be made in the reimbursement rate.
However, Congress is not required to implement this recommendation and could
either raise or lower the reimbursement rate. The Company is unable to predict
what, if any, future changes may occur in the rate of reimbursement, or, if
made, whether any such changes will have a material effect on the Company's
revenues and net earnings.

         Reimbursement for INFUSX's services from all payors other than Medicare
is paid either at charges, a percentage of charges or a negotiated rate which
may include per diem charges. Medicare patient reimbursement falls under a cost
report-based methodology (skilled nursing services in the home) or a reasonable
cost or fee schedule basis (generally for drugs and related supplies and durable
medical equipment). OBRA 1993 prohibited the Secretary from updating the per
visit cost limits for home health services during cost years beginning on or
after July 1, 1994 and before June 30, 1996.

         Until recently, HCFA reimbursed suppliers for drugs to be dispensed
with durable medical equipment or prosthetic devices even where that supplier
could not dispense that drug under state law. Two recent HCFA memoranda revise
that Medicare policy to require that entities that dispense drugs for use with
durable medical equipment or prosthetic devices must furnish such drugs directly
to the patient for whom the prescription was written. Suppliers that do not
dispense drugs directly to patients may bill Medicare only for the devices. To
be reimbursed for the drugs dispensed with the devices under the revised policy,
suppliers will be required to have a Medicare supplier number, be licensed to
dispense the drugs in the state in which they are dispensed and bill and receive
payment in their own name. Although the revised policy is effective December 1,
1996, a lawsuit requesting preliminary injunction against implementation of this
policy has been filed recently in the United States District Court for the
Eastern District of California, by companies other than the Company, requesting
a temporary restraining order and preliminary injunction against implementation
of the revised policy. Although INFUSX

                                       20
<PAGE>   21
operations in all states except California are permitted under its licenses to
dispense drugs to be used with the devices, INFUSX does not have a pharmacy
license, and therefore is not licensed to dispense the drugs, in the State of
California. However, a subsidiary of the Company does have a California pharmacy
license and the Company has been informed by HCFA that a combined supplier
number may be issued for both INFUSX and the California subsidiary pharmacy to
permit INFUSX to continue to bill Medicare beneficiaries directly for both the
devices and the drugs to be used with the devices.

         The Company provides home health agency services and certain home
infusion products and services through INFUSX, which is a licensed home health
agency and/or pharmacy in the states in which it operates. In 1994, HCFA
undertook the Medicare Home Health Initiative to identify opportunities for
improvement in the Medicare home health benefit. As a result of that initiative,
the conditions of participation and coverage for home health agencies were
amended effective twice, on February 21, 1995 and July 27, 1995, respectively,
on a variety of matters, including notices of patient rights, plans of care,
home health aid services, outpatient physical therapy or speech therapy
services, and clinical records. The Company believes that its home health agency
services comply with the Medicare regulations respecting coverage and conditions
of participation. 

         LICENSING

         Outpatient dialysis facilities and hospitals are subject to state
licensing statutes which regulate the character and competence of the provider
and its staff, its financial resources, the fitness and adequacy of the facility
and its medical personnel and procedures. Licenses and approvals to operate
these facilities are subject to renewal periodically and to revocation upon
failure to comply with the conditions under which they are granted. Each of the
dialysis facilities owned, operated or at which services are provided by the
Company is and has been duly licensed continuously since its opening. Salick's
inpatient dialysis services and Cancer Center services are provided pursuant to
the contracting hospital's license except that the Westlake Cancer Center is
located within the SHC Specialty Hospital which is now owned by a subsidiary of
the Company.

         SHC Specialty Hospital is licensed as a general acute care hospital
under California law. In California, a variety of services, including offsite
outpatient departments and clinics, are operated under the general acute care
license. Special permits are required for provision of certain services,
including chronic dialysis, radiation therapy and renal transplant center
services. In addition to being licensed under California law, the hospital is
accredited by the Joint Commission on the Accreditation of Healthcare
Organizations ("JCAHO") and participates in the Medicare program pursuant to
such accreditation. The Westlake Cancer Center and the Breast Center are
operated as outpatient departments of the hospital.

         Presently in California, and certain other states, there is no license
category for the independent licensure of the Cancer Centers and in New York, a
publicly traded company is ineligible to own freestanding licensed Cancer
Centers. Under these circumstances, the Company is a provider of services at the
Cancer Centers under the license of and agreements with affiliated medical
centers. In New York, agreements with affiliated medical centers are subject to
regulatory restrictions regarding delegation of management authority in
operation of a Cancer Center and compensation based on participation in the
Center's gross revenue or net revenue is prohibited. The Cancer Centers'
continued operations as presently structured are dependent upon such agreements
with hospitals. The Company will also consider management agreements and other
relationships as are appropriate.


                                       21
<PAGE>   22
         Corporate practice of medicine restrictions in certain states other
than Florida in which the Company operates prohibit non-professional entities
including the Company from employing or engaging physicians to provide
professional services or from participating in their professional fees. In such
states, physicians may be employed or engaged by a professional corporation
managed by the Company which, in turn, enters into, e.g., a facilities and/or
management services agreement with the Company. In New York, restrictions
against professional fee splitting do not permit the compensation under such
agreements to be based or dependent on the professional income or receipts of
the physician or professional corporation.

         INFUSX currently operates as a licensed home health agency in
California, Kansas/Missouri and Pennsylvania. INFUSX operates a licensed
pharmacy in Florida, Kansas/Missouri and Pennsylvania. Another subsidiary of the
Company is a licensed pharmacy in California that provides the pharmacy services
in California. In states where INFUSX provides direct nursing services it is
required to be licensed as a home health agency. In some locations INFUSX may
become subject to certain regulatory certifications including Medicare and/or
JCAHO accreditation. In all its locations, INFUSX received the highest category 
of JCAHO accreditation.

         SalickNet's current operations do not require licensure; however, the
Company does anticipate expanding the administrative and professional services
provided to managed care entities. In anticipation of expanding its services,
Salicknet obtained licensure in Florida as a Third Party Administrator and has
the ability to process and adjudicate claims on behalf of the health maintenance
organizations, other third party payors and self insured employers.

         CERTIFICATE OF NEED

         Legislation in various jurisdictions requires a certificate of need in
order to establish or substantially expand certain health care activities or
facilities. In such states, a certificate of need must be obtained prior to a
subject party's offering certain new services or committing capital expenditures
in excess of statutory threshold amounts. The required approval is based on
various criteria, such as financial feasibility, impact on other health care
providers and need and access by indigents to the proposed services. Many states
require a certificate of need for either or both a dialysis facility and a
Cancer Center although none is required in California. The Company's operations
are either exempted from certificate of need requirements or the certificate is
not required in certain other states in which the Company is operating Cancer
Centers or considering for expansion, except in New York as discussed below.

         Each of the Company's current Cancer Centers is a part of the hospital
with which it is affiliated, and therefore a certificate of need for the
establishment of a Cancer Center is only necessary in certain states. Saint
Vincents has applied for a certificate of need which is required for the
establishment of the permanent center in New York. Neither of the USHAWL,
SalickNet nor INFUSX current operations require a certificate of need. It is
possible, however, that existing or future laws or regulations will be
interpreted or adopted so as to require certificates of need to be obtained.
Such a requirement could impair the Company's business and expansion in those
areas where a certificate of need is determined to be required. To date such
requirements have not adversely affected the Company's ability to establish its
operations.

         In those states where a certificate of need is required for a permanent
Cancer Center, the Company has found that an interim Cancer Center can

                                       22
<PAGE>   23
generally be opened without a certificate of need. The inability to ultimately
obtain a certificate of need for a particular location, new program or service
will not, in the Company's opinion, unduly preclude its ability to provide
services at or establish its operations. A certificate of need is required for
the permanent Saint Vincents Cancer Center in New York and if not obtained and 
if other arrangements cannot be made, these operations may not be established.

         FRAUD AND ABUSE

         The fraud and abuse provisions of the Social Security Act, as amended,
among other things, impose civil and criminal penalties (including exclusion
from the Medicare and Medicaid programs) upon persons who pay or offer to pay
any remuneration (direct or indirect, in cash or in kind) in return for or to
induce the ordering of, or the making of a referral for, a service or item
covered by Medicare or Medicaid. Law enforcement authorities, HHS and the courts
are giving increasing scrutiny to arrangements between health care providers and
referring physicians to ensure that the arrangements are not designed as
mechanisms to exchange remuneration for patient referrals for services or items
for which Medicare or Medicaid reimbursement may be provided. This scrutiny is
not limited to financial arrangements that involve a direct payment made for the
specific purpose of inducing patient referrals, but extends to payment or other
remuneration mechanisms that carry the potential for inducing referrals. Recent
court decisions have held that the fraud and abuse provisions have been violated
if one purpose (as opposed to a primary or sole purpose) of a payment to a
provider is to induce referrals. Some states (including those where the Company
engages in business) have prohibitions similar to the federal prohibitions, but
which are not limited in application to Medicare or Medicaid patients. Moreover,
some states (including those where the Company engages in business) either have
or are considering legislation that would prohibit, with limited exceptions,
referrals by any physician with an ownership or compensation relationship with
the entity to which the referral would be made regardless of whether the
financial relationship was intended to bring about such referrals.

         On July 29, 1991, the Inspector General of HHS published regulations
outlining certain "safe harbors", or defined business practices that will be
deemed not to violate the Medicare and Medicaid fraud and abuse provisions
described above. These include safe harbors for investment interests, personal
service agreements, space and equipment rental agreements, sales of medical
practices, routine waivers of certain deductibles and coinsurance, discounts
received by certain buyers from suppliers and employee-generated income. The
preamble to the final rule establishing the safe harbors also makes it clear
that not all arrangements that fail to qualify for a safe harbor will be deemed
unlawful.

         Among the safe harbors is one for investment interests in large
publicly-traded entities, defined as those with more than $50 million in net
tangible assets within the previous twelve months or fiscal year, so long as
five specified conditions are met. Another safe harbor is available for
investment interests in other entities if they meet eight conditions including
requirements that no more than 40% be owned by investors who are in a position
to make or influence referrals or furnish items or services to or otherwise
generate business for the entity, and that not more than 40% of the gross
revenues of the entity in the last fiscal year or 12 month period come from
referrals, items or services furnished, or business otherwise generated from
investors. The Company does not have referring physicians as owners or partners
in any of its Cancer Centers or dialysis facilities, although some may own stock
of the Company. However, the Company has interests as a limited partner in
certain independent radiology facilities that have physician investors. These
facilities provide services to patients of a Cancer Center

                                       23
<PAGE>   24
pursuant to orders of their physicians. The Company understands that the
interest of such physicians has been acquired although radiologists and
physicians who no longer practice in the area continue to have ownership
interests. While this situation may not, technically in all respects, conform to
the requirements of the investment interests safe harbors, the Company believes
that its interests in these facilities, if scrutinized, should be determined not
to violate the Medicare and Medicaid fraud and abuse law and state fraud and
abuse and self referral laws. In that regard, the Company believes that there is
a material absence of abusive features identified in a special Fraud Alert on
Joint Venture Arrangements issued by the Inspector General in 1989, associated
with the Company's involvement in these facilities. The regulations also include
a safe harbor for certain personal services agreements. The agreements under
which the Company compensates the physicians who serve as its medical directors
may not completely and technically conform to all of the requirements for this
safe harbor, which dictates, for example, that the exact schedule of work of non
full-time employees and the payment for each work session be established in
advance. However, the Inspector General has indicated that agreements not
completely conforming to a safe harbor will be analyzed on their merits and the
Company believes the arrangements it has with its Medical Directors are
reasonable and do not violate the Medicare and Medicaid fraud and abuse law.
Certain physicians who have patients at Company facilities contract for the use
of office space and related services and the Company believes that these
arrangements materially comply with the applicable safe harbors. Moreover, the
Company believes that both its personal services and rental agreements, as well
as its relationships generally with referring physicians, are appropriate, and
in any event, are materially distinguishable from those types of arrangements
described as potentially abusive by the Inspector General in a 1992 Special
Fraud Alert on Hospital Incentives to Physicians which, while directed at
hospitals, also could apply to other providers.

         On July 21, 1994, clarifications of the safe harbors were proposed by
the Inspector General. Those proposed rules are intended to clarify the original
set of final safe harbor provisions. A variety of modifications are proposed,
including those respecting the investment interest safe harbor, the space and
equipment rental and personal services and management contract safe harbors, the
referral services safe harbor and the discount safe harbor.

         To date, only revisions to the safe harbors for managed care plans have
been finalized. These new safe harbors, issued in final form on January 25,
1996, include provisions protecting negotiated price reduction agreements
between health care plans and contract health care providers. Under these
provisions, the protected remuneration is only the contract provider's reduction
of its usual charges for the services, the terms of the agreement between the
parties must be in writing and the agreement must be for the sole purpose of
having the contract provider furnish enrollees items or services that are
covered by the health plan, Medicare or Medicaid. The safe harbor does not
protect contracts for providing services that are not covered benefits.

         In October 1994, the Inspector General issued a Special Fraud Alert
regarding arrangements for the provision of clinical laboratory services. The
Fraud Alerts are publications which reflect the view of the Office of Inspector
General ("OIG"), but are not formally promulgated as regulations or enacted as
laws. The Fraud Alert concerns the Office of Inspector General's view of
practices it believes may implicate the anti-kickback statute when engaged in by
clinical laboratories and health care providers. Several examples of possibly
illegal laboratory services arrangements are given in that Fraud Alert. One of
the examples cited involves arrangements between ESRD facilities and
laboratories where the laboratory offers to perform, at a below market

                                       24
<PAGE>   25
rate, the tests paid for through the composite rate paid by Medicare to ESRD
facilities in order to obtain referral from the ESRD facility for non-composite
rate tests. Also mentioned as an example in the Fraud Alert are certain
situations involving laboratory waivers of charges to managed care patients
where a provider participates in a managed care plan which either provides a
bonus or other payment if utilization of ancillary services such as laboratory
testing is kept below a particular level or imposes financial penalties if the
provider's utilization of services exceeds pre-established levels. The Inspector
General is concerned that the provider may enter into an arrangement with a
laboratory that has not negotiated a fee schedule with a managed care plan under
which the laboratory, to keep the provider's non-managed care business, agrees
to write-off charges for the provider's managed care work. Other examples are
given of inducements offered by clinical laboratories which may implicate the
anti-kickback statute. The Company does not believe that it does not comply with
this Fraud Alert or that, if required to make changes or modifications,
compliance with this Fraud Alert will materially adversely affect the operations
of the Company.

         In 1995 HHS created and implemented an interdisciplinary project,
called "Operation Restore Trust," involving representatives of federal and state
governments and the private sector to detect and investigate Medicare and
Medicaid abuse and misuse in five states: California, Florida, Illinois, New
York and Texas. HHS has stated that these five states were selected because they
account for 40% of Medicare and Medicaid beneficiaries. Targeted for review are
skilled nursing facilities, home health agencies, and durable medical equipment
suppliers. Project activities have included, among others, financial audits by
the OIG and HCFA, criminal investigations, referrals by OIG to appropriate law
enforcement officials, and civil and administrative sanction and recovery
actions. HHS is focusing on home care because it is one of the fastest growing
areas in Medicare. Although the Company conducts home health agency activities
in some of the five states targeted for review, the Company believes that its
home health care business is in compliance with Medicare requirements.

         On August 21, 1996, President Clinton signed the "Health Insurance
Portability and Accountability Act of 1996" (the "Act"), a package of health
insurance reforms which include a variety of provisions important to health care
providers, such as a provision establishing portability of health insurance and
medical savings accounts and significant changes to the Medicare and Medicaid
fraud and abuse laws. The fraud and abuse provisions will be effective January
1, 1997. While many of the provisions are self-implementing, some require
further rulemaking by HHS. The Act established two programs that will coordinate
federal, state and local health care fraud and abuse activities, to be known as
the Fraud and Abuse Control Program and the Medicare Integrity Program. Under
these programs, governmental and, in some cases, private entities may undertake
a variety of activities (including medical, utilization and fraud review, cost
report audits, secondary payor determinations and education of providers and
beneficiaries with respect to program integrity and benefit quality assurance
issues), new safe harbors may be created or edited and reports of fraud and
abuse actions against providers will be shared. The Act further seeks to
encourage whistleblower reports by individuals, such as beneficiaries, by
providing for incentive payments for information that leads to recoveries or
criminal or civil sanctions under the Medicare program. The Act further extends
coverage of the fraud and abuse laws not only to all federally funded health
care programs, e.g., CHAMPUS, except the federal employee health benefits
program, but also to private health plans as well; however, the anti-kickback
statute does not apply to private health plans. By virtue of these provisions,
it may be that an individual provider has a greater risk of being subject to the
federal fraud and abuse laws than prior to such changes.

                                       25
<PAGE>   26
         The Act also adds an additional exception to the anti-kickback statute
for entities that have "risk sharing" arrangements that place the other party
"at substantial financial risk for the cost or utilization" of items or
services. The specifics of this exception are to be created by "negotiated
rulemaking."

         The Act also sets forth a program intended to assist providers in
understanding the requirements of the fraud and abuse laws. The Act first
permits individuals to petition the Department for written advisory opinions
regarding whether an arrangement constitutes prohibited remuneration under the
federal anti-fraud and abuse laws, satisfies the requirement of an existing safe
harbor and/or constitutes grounds for imposition of civil and criminal sanctions
under the federal anti-fraud and abuse laws. Such opinions will be binding on
HHS and the party receiving the opinions. HHS is required to publish regulations
specifying the procedures governing the application and response processes
respecting these advisory opinions. The Act further requires HHS to publish
annual notices in the Federal Register soliciting proposals for modification to
existing safe harbors and new safe harbors and to issue final rules implementing
such changes or additions as the Secretary of the Department deems appropriate.
Finally, any person may request that the Inspector General issue a special fraud
alert informing the public of practices the Inspector General considers to be
suspect or of a particular concern under Medicare or Medicaid.

         Under this Act, HHS must exclude individuals convicted of felony
offenses related to health care fraud or controlled substances from Medicare and
Medicaid for a minimum of five years. However, HHS retains its discretionary
authority to determine whether to exclude individuals convicted of misdemeanor
offenses related to health care fraud or controlled substances. The Act also
increases significantly the amount of civil monetary penalties for offenses
related to health care fraud and abuse, increasing civil monetary penalties from
$2,000 plus twice the amount of each false claim to $10,000 plus three times the
amount of each false claim. The Act newly and expressly prohibits four
practices, namely (1) submitting a claim that the person knows or has reason to
know is for medical items or services that are not medically necessary, (2)
transferring remuneration to Medicare and Medicaid beneficiaries that is likely
to influence such beneficiary to order or receive items or services (where
"remuneration" includes waiver of all or part of the coinsurance and deductible
amounts, unless not routine or based on the beneficiary's indigency, and
transfers of items and services for free or for other than fair market value),
(3) certifying the need for home health services knowing that all of the
coverage requirements have not been met, and (4) engaging in a pattern or
practice of upcoding claims in order to obtain greater reimbursement. However,
the Act creates a tougher burden of proof for the government by requiring that
the government establish that the person "knowingly presented" a false or
fraudulent claim, where "knowingly presented" is defined to require "deliberate
ignorance" or "reckless disregard" of the law. Merely negligent conduct should
not violate the Civil False Claims Act. The Act further adds health care fraud,
theft, embezzlement, obstruction of investigations and false statements to the
general federal criminal code with respect to federally funded health care
programs, thus subjecting such acts to criminal penalties. Moreover, a court
imposing a sentence on a person convicted of a federal health care offense may
order the person to forfeit all real or personal property that is derived from
the criminal offense. The Act did not clarify, modify or eliminate provisions of
the Stark law.

         President Clinton has said that he would press for repeal of three
provisions of the fraud package, namely those dealing with mandatory advisory
opinions, the standard of intent in cases involving civil monetary penalties and
an exception to the Medicare and Medicaid anti-kickback statute for managed care
plans.

                                       26
<PAGE>   27
         Included in OBRA 1993 were provisions that significantly expanded the
scope of the Ethics and Patient Referral Act, also known as the "Stark Law,"
beginning January 1, 1995. The Stark Law originally prohibited a physician from
referring a Medicare patient to any entity for the provision of laboratory
services if the physician or family member of the physician had an ownership or
investment interest or compensation relationship with the entity and provided
that the entity could not bill for services provided pursuant to a prohibited
referral. The OBRA 1993 revisions expand the scope of the Stark Law by
prohibiting the referral of a Medicare or Medicaid patient (and billing for such
services) to an entity in which the physician or family member has an ownership
or investment interest or compensation relationship if the referral is for any
of a list of "Designated Health Services". Violations of the Stark Law are
punishable by civil penalties which may include exclusion or suspension of a
provider from future participation in the Medicare and Medicaid programs and
substantial fines, such as civil monetary penalties of up to $15,000 per claim
against any person who presents or causes to be presented a claim for services
that the person knows or should have known were furnished pursuant to a
prohibited referral. In addition, civil monetary penalties of up to $100,000 can
be imposed on any physician or entity who enters into a circumvention scheme to
avoid the statutory prohibitions. The expanded Stark Law prohibits self
referrals for eleven categories of items and services, including not only
clinical laboratory services, but also inpatient and outpatient hospital
services, physical therapy, occupational therapy, radiation therapy, radiology
services, including magnetic resonance imaging, computerized axial tomography
scans and ultrasound services, durable medical equipment, parenteral and enteral
nutrients, equipment and supplies, prosthetics, orthotics and prosthetic
devices, home health services, and outpatient prescription drugs. Because all of
the Cancer Centers operate under the license of the hospital to which they are
attached, the Company's services (including the services of its Cancer Centers,
clinical laboratory and INFUSX) appear to be included in the list of Designated
Health Services. Although the list of Designated Health Services also includes
radiology services and radiation therapy, the legislation specifically provides
that a request by a radiologist or radiation oncologist for radiology services
or radiation therapy, respectively, does not constitute a referral if such
services are furnished by or under the supervision of the radiologist or
radiation oncologist pursuant to a consultation requested by another physician.
The self-referral statute also includes a variety of other exceptions from the
prohibitions, including exceptions involving rental of office space, bona fide
employment relationships and personal service arrangements. Final regulations
relating to clinical laboratory services only ("Stark I Final Regulations") were
issued on August 14, 1995 and were effective September 13, 1995. The Stark I
Final Regulations reflect substantial changes from the proposed rules published
on March 11, 1992. The changes are due, in part, to the comments received and in
part to retroactive statutory changes effected by the Omnibus Budget
Reconciliation Act of 1993 and the Social Security Amendments of 1994. The Stark
I Final Regulations address only referrals for clinical laboratory services. The
Secretary has stated she intends to cover the other Designated Health Services
under a separate rulemaking. However, she further took the position in the Stark
I Final Regulations that the Stark I Final Regulations will affect how HCFA
views referrals involving the Designated Health Services other than clinical
laboratory services where the statutory language appears to apply equally to
situations involving referrals for any of the Designated Health Services,
including clinical laboratory services.

         HCFA has added a new exception to the Stark Law for services furnished
in an ambulatory surgery center ("ASC") or an end stage renal dialysis facility
or by a hospice, provided that such services are reimbursed by Medicare through
the ASC rate, the ESRD composite rate, or as part of the per diem hospice rate,
respectively. The Company believes that the language and legislative history

                                       27
<PAGE>   28
of Stark I indicates that Congress did not intend to include laboratory services
provided incidentally to dialysis services within the Stark I prohibition.
However, laboratory services not included in the Medicare composite rate could
be included within the coverage of Stark I.

         Due to the breadth of the statutory provisions in the absence of
regulations or court decisions addressing the specific arrangements by which the
Company conducts its business, it is possible that the Company's practices might
be challenged under these laws. The existing Stark Law and regulations have the
effect of restricting the ability of a company to enter into financial
relationships with certain physicians and physician organizations. While the
Company does not believe it to be so, to the extent, if any, that it may be
determined, or the Company may come to believe that, any of its financial
relationships with physicians may not technically comply with the Stark Law, the
Company intends to modify or eliminate those relationships so that they will
either comply or qualify for one of the Stark Law's exemptions. For this reason,
among others, the Company does not believe that the Stark Law will materially
adversely affect the operations of the Company.

         Recent Congressional activity indicates that both Democrats and
Republicans are interested in making substantial revisions to the Stark Law. For
example, the 1994 budget reconciliation bill, which was vetoed by President
Clinton, among other things, would have: (1) eliminated the application of the
Stark Law to compensation relationships between physicians and the entities to
which they make referrals; (2) limited the list of Designated Health Services to
clinical laboratory services, items and services furnished by community
pharmacies, magnetic resonance imaging and computerized tomography services, and
outpatient physical therapy services; (3) delayed the implementation of the
Stark I regulations until the promulgation of the Stark II regulations; (4)
created a new exception for certain services provided in a "shared facility;"
(5) and revised certain current Stark Law exceptions and definitional language.
It is not possible to anticipate whether Congress will consider similar
legislation in the future, and no assurance can be given that the Company's
activities will not be limited by future amendments to the Stark law.

         California has also passed a physician self-referral statute, commonly
known as the "Speier Bill" or "PORA," which became effective January 1, 1995.
Under this statute, referrals of patients for certain designated services by
physicians if physicians or their immediate family members have direct or
indirect ownership interests in, or direct or indirect compensation
relationships with, the entity furnishing the services are prohibited unless the
ownership interests or compensation relationships fall within certain narrow
exceptions. The designated services subject to this prohibition include, but are
not limited to, radiation oncology, laboratory, diagnostic imaging, physical
therapy, physical rehabilitation, psychometric testing, home infusion therapy
and diagnostic nuclear medicine. New York has enacted a similar self referral
statute that prohibits physicians from referring patients for clinical
laboratory, X-ray or imaging or pharmacy services to a provider with which the
physician or his immediate family have any form of financial relationship,
including an ownership or investment interest or compensation arrangement unless
the financial interest falls within certain narrow exceptions. Violations of the
California statute may result in criminal penalties, civil monetary penalties of
up to $15,000 for each offense, and professional disciplinary action against the
physician, including revocation of licensure. In addition, under both the
California and New York statutes no payment may be made by any payor for
services furnished pursuant to a prohibited referral. During the 1996 session of
the California legislature, the Speier Bill was amended to provide that a
financial interest would not include the receipt of capitation payments or other
fixed prepayment amounts in exchange for a promise of the licensee to provide
specified health care

                                       28
<PAGE>   29
services to beneficiaries, or the receipt of remuneration by a medical director
of a hospice, if the arrangement meets certain criteria. Moreover, the Speier
Bill was further amended to exempt from the prohibition a referral by a licensee
to an organization that owns or leases the general acute care, acute psychiatric
or special hospital if the licensee is not compensated for the patient referral,
the licensee does not receive any payment from the recipient of the referral
that is based or determined on the number or value of any patient referrals and
any equipment lease arrangement between the licensee and the referral recipient
complies with other requirements of the Speier Bill. Due to the breadth of the
statutory provisions in the absence of regulations or court decisions addressing
the specific arrangements by which the Company conducts its business, it is
possible that the Company's practices might be challenged under these laws.
These existing laws have the effect of restricting the ability of a company to
enter into financial relationships with certain physicians and physician
organizations. While the Company does not believe it to be so, to the extent, if
any, that it may be determined that any of the Company's financial relationships
with physicians may not comply with the Speier Bill or the New York Self
Referral law, the Company intends to modify or eliminate those relationships so
that they either comply or qualify for one of the exemptions under these
statutes. For this reason, among others, the Company does not believe that these
state self referral statutes will materially adversely affect the operations of
the Company.

         Florida has been one of the leaders in enacting legislation to preclude
or limit referrals by physicians to facilities in which they have an ownership,
control or investment relationship. The Florida Patient Self-Referral Act
precludes or limits referrals by physicians to facilities in which they have an
ownership, control or investment relationship. The Company believes it is in
compliance with the law.

         The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) amended
the Social Security Act to require that if a physician incentive plan of a
prepaid health plan places a physician at substantial financial risk for
services not provided directly, the prepaid plan must provide the physician with
adequate and appropriate stop-loss protections, as specified by the Secretary of
HHS, and conduct surveys of currently and previously enrolled members to assess
access to services and satisfaction with the quality of such services. These
requirements have been included in a new Medicare regulation, along with
additional requirements limiting physician incentive arrangements, effective
April 26, 1996. The new regulation is intended to curb the use of financial
incentives by managed care organizations to reduce or limit medically necessary
services to Medicare or Medicaid patients. The regulation applies to physicians
furnishing care through health maintenance organizations, competitive medical
plans and health insuring organizations. The incentive plans must also be
disclosed to HCFA or the applicable state Medicaid agency, and, if requested, in
more summary form to enrollees. HCFA may impose intermediate sanctions and
authorize the Office of the Inspector General to impose civil monetary penalties
for failure to comply with the regulation.

         Although the Company believes it complies in all material respects with
currently applicable laws and regulations in the fraud and abuse area, the
health care services industry will continue to be subject to substantial
regulation in this area at the federal and state levels, the scope and effect of
which cannot be predicted.

         A number of proposals for health care reform have been made in recent
years, at both the federal and state level, some of which have included radical
changes in the health care system. Health care reform could result in material
changes in the financing and regulation of the health care business and the
Company is unable to predict the effect of such changes on the Company. It is

                                       29
<PAGE>   30
uncertain what, if any, legislation will ultimately be implemented or whether
any changes in the administration or interpretation of governmental health care
programs will occur. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material effect on the results
of the Company's operations.

         There is still a relative scarcity of both case law and binding
administrative interpretations of the statutes and regulations in the area of
fraud and abuse. As the law develops in this area and particularly now that the
Congress has provided for issuance of advisory opinions in response to specific
requests, more guidance may be available regarding the appropriateness of
certain types of relationships involving physicians and the health care services
industry generally. While the Company does not believe that any of its
arrangements are inappropriate, in the event any are so determined, the Company
will take appropriate action as may be necessary in order to be in compliance.
However, no assurance can be given that the Company's activities will not be
reviewed or challenged by regulatory authorities or prosecutors, will not be
limited by future legislation, or if such events occur, that the Company would
not be subject to significant penalties, including fines and exclusion from
Medicare, or that the Company's operations would not otherwise be adversely
affected.

EMPLOYEES

         At November 1, 1996, the Company had approximately 1,600 employees.
Less than twenty employees (primarily clerical workers) are subject to
collective bargaining agreements and all of such employees are employed at two
locations. The Company considers its relations with its employees to be good.

INSURANCE

         The Company maintains property, casualty, malpractice and various types
of liability insurance policies in significant amounts and, in addition,
requires each physician treating patients at its facilities to provide proof of
independent insurance coverage.


                                       30
<PAGE>   31
ITEM 2.           PROPERTIES

         The following table indicates the location, approximate size, date of
commencement of operations and term of agreement for each of the Cancer Centers:

<TABLE>
<CAPTION>

                                                                              Date
                                            Approximate                     Operations                         Term of
                                               Size                         Commenced                         Agreement
                                            -----------                     ----------                        ---------

<S>                                        <C>                              <C>                             <C>
    Cedars-Sinai                           20,000 sq. ft.                   June 1985                       To September 30,
    Comprehensive                          (interim space)                                                  1999
    Cancer Center                          53,000 sq. ft.                   January 1988
    Los Angeles, CA                        (permanent center)

    Comprehensive                          17,500 sq. ft.                   November                        10 years and
    Cancer Center                          (interim space)                  1988                            3 five-year
    at Mount Sinai                         58,000 sq. ft.                   November                        renewal options
    Medical Center                         (permanent center)               1995
    Miami Beach, FL

    Comprehensive                          15,000 sq. ft.                   March 1989                      10 years from
    Cancer Center                          (interim space)                                                  completion of
    at Temple                                                                                               all construction
    University                                                                                              and 2 five-year
    Philadelphia, PA                                                                                        renewal options

    Columbia JFK                           20,000 sq. ft.                   October                         To September 30,
    Medical Center                                                          1987                            1997
    Comprehensive
    Cancer Center
    Atlantis, FL

    Alta Bates Medical                     10,000 sq. ft.                   December                        15 years
    Center Comprehensive                   (interim space)                  1990
    Cancer Center                          43,000 sq. ft.                   May
    Berkeley, CA                           (permanent center)               1995

    Desert Hospital                        15,000 sq. ft.                   September                       10 years from
    Comprehensive                          (interim space)                  1989                            opening of the
    Cancer Center                          48,000 sq. ft                                                    permanent Center
    Palm Springs, CA                       (permanent center                                                and 3 five-year
                                           under construction)                                              renewal options

    South Florida                          9,000 sq. ft.                    June 1987                       15 years
    Comprehensive
    Cancer Center at
    Parkway Regional
    Medical Center
    No. Miami Beach, FL

    South Florida                          9,000 sq. ft.                    June 1987                       10 years
    Comprehensive
    Cancer Center at
    Columbia Kendall
    Regional Medical
    Center
    Miami, FL
</TABLE>




                                       31
<PAGE>   32
<TABLE>
<CAPTION>

                                           Approximate                      Operations                       Term of
                                               Size                         Commenced                       Agreement
                                           -----------                      ----------                      ---------

<S>                                        <C>                              <C>                             <C>
    University of                          25,000 sq. ft.                   April 1992                      35 years
    Kansas Cancer                          (interim space)
    Center, Kansas                         45,000 sq. ft
    City, Kansas                           (proposed
                                           permanent center)

    SHC Specialty                          95,000 sq. ft.                   October 1993                    Owned
    Hospital, Westlake,
    California

    Saint Vincents,                        25,000 sq. ft.                   November 1996                   20 years
    New York, New York                     (interim space)
                                           70,000 sq. ft.
                                           (proposed permanent
                                           center)
</TABLE>

     In addition, the Company provides its services at a number of satellite and
alternate site facilities primarily in Florida and California generally located
in medical office services developments.

DIALYSIS CENTERS

   The Company operates the following ten facilities which provide chronic
dialysis service on an outpatient basis. The following table indicates the
location of the facility, number of stations approved for licensure, the year
the facility was opened or acquired and the year in which the existing lease
terminates:

<TABLE>
<CAPTION>

                                                         Licensed                  Year
                                                         Stations                Facility                 Lease
                                                          As of                   Opened                Expiration
                                                         8/31/96                or Acquired                Date
                                                         --------               -----------             ----------
<S>                                                      <C>                    <C>                     <C>
USHAWL-Cedars-Sinai Dialysis                                  25                     1983               August 2004
8635 W. Third
Cedars-Sinai
Medical Towers
Los Angeles, CA  90048

USHAWL-Villa Gardens Dialysis                                 35                     1972               December 2006
2723 W. Temple Street
Los Angeles, CA  90026

USHAWL-Doctors Dialysis                                       42                     1972               August 2006
706 E. 32nd Street
Los Angeles, CA  90011

USHAWL-Orange County                                           6                     1987               September 1998
Dialysis - North                                                                                        (one additional
1830 W. Romneya Drive                                                                                   5-year renewal
Anaheim, CA  92801                                                                                      option)

USHAWL-Mission                                                12                     1987               June 1999
Dialysis                                                                                                (two additional
27862 Puerta Real                                                                                       5-year renewal
Mission Viejo, CA  92691                                                                                options)

</TABLE>


                                       32
<PAGE>   33
<TABLE>
<CAPTION>


                                                              Licensed                  Year
                                                              Stations                Facility              Lease
                                                               As of                   Opened             Expiration
                                                              8/31/96                or Acquired              Date
                                                              --------               -----------          ----------

<S>                                                           <C>                    <C>                <C>
USHAWL-Orange County                                            10                   1988               December 2000
Dialysis West
16892 Bolsa Chica Road
Huntington Beach, CA  92661

USHAWL-Orange County                                            10                   1988               April 1997
Dialysis South
31736 Rancho Viejo Road
San Juan Capistrano, CA
92675

USHAWL-Desert Dialysis                                          20                   1990               December 1996(1)
345 Tachevah
Palms Springs, CA  92263

USHAWL-Orange County                                            25                   1993               September 1998
Dialysis - La Palma                                                                                     (three additional
1107 La Palma Ave                                                                                       5-year renewal
Anaheim, CA  92803                                                                                      options)

USHAWL-Hi Desert Dialysis                                       14                   1996               December 2000
58457 Twenty Nine Palms Hwy.                                                                            (three additional
Yucca Valley, CA  92284                                                                                 5-year renewal
                                                                                                        options)
</TABLE>

(1)   In January 1997, the Desert Dialysis facility will be relocated to 1061
      Indian Canyon Drive North, Palm Springs, CA 92263. This facility will
      have 22 licensed stations, and a lease term expiring September 2001,
      with three additional five-year renewal options.

     In addition to the Cancer Centers and dialysis facilities described above,
the Company presently leases its corporate and subsidiary headquarters and
offices in Los Angeles, California. These headquarter premises are leased from
Dr. and Mrs. Bernard Salick (the "Lessors"). The offices have approximately
35,000 square feet of space. The lease took effect in July 1991, and, at the
time of occupying such premises, the Company vacated its prior premises which it
had leased under leases from the Lessors and an unrelated third party. The lease
contains a provision which, in the event of certain changes of control of the
Company and the termination or significant changes in the terms or authority of
Dr. Salick's employment with the Company thereafter and prior to the last two
years of the term of the lease, permits the Lessors, if then the lessors of the
building and at their option, to require the lessee of the building to (a)
purchase the building at a formula purchase price, or (b) pay an assumption fee
of $250,000. In light of these provisions, in connection with the April 1995
merger with Zeneca Limited, an agreement was entered into pursuant to which the
Company will purchase this real property from the Lessors for $14,650,000 which
purchase price is approximately $1,160,000 less than the formula purchase price
in the lease.

         In October 1993, the Company purchased a 20,000 square foot building
adjacent to its current corporate headquarters in Los Angeles for expansion of
its Corporate and facility activities. The purchase price was $1,200,000 and the
Company renovated and occupied the building in September 1995.


                                       33
<PAGE>   34
     In March 1995 the Company acquired at a cost of $4.675 million a 38,000
square foot building with adjacent land of some 15,000 square feet presently
used for parking available for additional construction located across from the
Cedars-Sinai Comprehensive Cancer Center in Los Angeles, California. The Company
is developing the property to use for expansion of its existing programs
including new and additional ambulatory and other outpatient services,
principally surgery. If the additional land is built upon it will be used for
similar purposes.

ITEM 3.  LEGAL PROCEEDINGS

         On July 3, 1996, Comprehensive Cancer Centers-West Valley, Inc.
("CCC"), a subsidiary of the Company, filed an action against C/HCA Development,
Inc. ("CDI"), seeking specific performance of CDI's obligation to convey to CCC
the former Westlake Medical Center and related assets ("the Hospital") pursuant
to an Agreement for Services between CCC and CDI, dated March 16, 1995 (the
"Agreement"). Pursuant to the Agreement, CCC was then operating the Westlake
Comprehensive Cancer Center and nearby Westlake Comprehensive Breast Center
(collectively, the "Center"), under the Hospital's license. CCC was compelled to
file this action because CDI would not close the transaction, and threatened to
shut down the Hospital and, therefore, the Center, on July 5, 1996, unless CCC
agreed to accept a conveyance of the Hospital by a grant deed which provided
that certain restrictions on the medical services CCC could offer following the
sale, as described in the Agreement imposed upon the Company, would run with the
land and bind all future purchasers of the Hospital. In 1995, CCC had rejected
CDI's proposal that such a provision be included in the Agreement.

         On July 3, 1996, the Los Angeles Superior Court issued a temporary
restraining order prohibiting CDI from closing the Hospital. CDI still refused
to convey the Hospital without the condition that the use restrictions be
binding on future purchasers so, on July 23, 1996, the Los Angeles Superior
Court issued a preliminary injunction (the "Injunction") ordering CDI to convey
the Hospital and related assets to CCC pursuant to the terms of the Agreement.
On July 25, 1996, CDI conveyed the Hospital and related assets to CCC pursuant
to the Injunction. On August 7, 1996, CCC and its indirect parent corporation
Salick Health Care, Inc., filed a First Amended Complaint, alleging contract,
tort and statutory causes of action against CDI and its indirect parent
corporation, Columbia/HCA Healthcare Corporation ("Columbia/HCA"), including
claims that the use restrictions in the Agreement are illegal and unenforceable
restraints on trade under California's antitrust laws. The case remains at the
pleading stage and neither CDI nor Columbia/HCA has yet filed an Answer to the
First Amended Complaint.

    In the course of its business, the Company and certain officers and
subsidiaries have been named as defendants in lawsuits alleging some form of
liability. The Company is insured for these matters in some instances or has
indemnified such officers. The Company has defenses to these actions which it
intends to vigorously pursue and is unaware of any such pending litigation which
is likely to have a materially adverse effect on the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matters were submitted during the fourth quarter of the fiscal year
ended August 31, 1996 to a vote of security holders through the solicitation of
proxies or otherwise.


                                       34
<PAGE>   35
                      EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>

                                              PRINCIPAL OCCUPATION OR
NAME                                AGE       POSITION HELD WITH COMPANY
----                                ---       --------------------------

<S>                                 <C>       <C>
Bernard Salick, M.D.                57        Chairman of the Board of
                                              Directors, Chief Executive
                                              Officer and President

Leslie F. Bell                      56        Executive Vice President, Chief
                                              Financial Officer and
                                              Director

Michael T. Fiore                    42        Executive Vice President,
                                              Chief Operating Officer
                                              and Director

Sheldon S. King                     65        Executive Vice President

Patrick W. Jeffries                 43        Executive Vice President, Chief
                                              Development Officer and Director

Barbara Bromley-Williams            57        Senior Vice President-Professional
                                              Services and Director

Anthony LaMacchia                   42        Senior Vice President-Operations

Blair L. Hundahl                    42        Senior Vice President-Finance

Patricia Wilkinson                  55        Vice President-Dialysis Operations
</TABLE>


         Dr. Salick, founder of the Company, has been Chairman of the Board of
Directors and Chief Executive Officer of the Company since its organization. He
also served as President and Chief Operating Officer until May 1, 1985 and
reassumed those positions on October 2, 1988. Dr. Salick relinquished the
position of Chief Operating Officer in 1993. Dr. Salick was the Medical Director
of USHAWL and Century through 1991. Dr. Salick is an Assistant Clinical
Professor of Medicine at UCLA and on the medical staff of Cedars-Sinai Medical
Center and other hospitals. He is also on the Board of Queens College (NY), and
is a member of the National Advisory Council of the National Kidney Foundation,
the American Society of Nephrology and the American Society of Clinical
Oncology.

         Mr. Bell has served as Senior Vice President, Secretary and a Director
of the Company since its organization in 1983. He became Chief Financial Officer
in January 1985. From 1976 through May 1983, Mr. Bell was managing partner in
the law firm of Katz, Hoyt, Bell & Siegel and its predecessor firms and served
as general counsel to the Company. Mr. Bell became Executive Vice President of
the Company in 1990 and is chairman of NATSA, a not-for-profit entity.

         Mr. Fiore joined the Company in May 1986 as Vice President and Director
of Operations. Prior to joining the Company, he was employed in various
capacities by American Medical International, Inc. for more than six years,
where he was a Corporate Vice President. Mr. Fiore, a CPA, was employed by Peat,
Marwick, Mitchell & Co. from 1976 to 1978. He received his MBA from the Harvard
Business School in 1980. Mr. Fiore became a Senior Vice

                                       35
<PAGE>   36
President of the Company in 1990 and assumed the position of Chief Operating
Officer in 1993.  In 1994 Mr. Fiore became Executive Vice President and a
Director of the Company.

         Mr. King joined the Company in February 1994 as Executive Vice
President. He was President of Cedars-Sinai Medical Center in Los Angeles from
May 1989 to February 1994. Prior to that, he had been at Stanford University
Medical Center since 1981, and its President since 1986. Mr. King has also
served as Director of the University of California Medical Center, San Diego,
and Executive Director of the Bronx Municipal Hospital Center in New York.

         Mr. Jeffries joined the Company in December 1995 as Executive Vice
President, Chief Development Officer and was elected a Director of the Company
in January 1996. From 1985 to 1995, he was at McKinsey & Company, Inc., 
management consultants, serving clients in several industries including health
care, aerospace electronics and information technology and became a partner in
1991. Prior to joining McKinsey & Company, Mr. Jeffries was a consultant with
Deloitte-Touche and received his MBA from Cornell University.

         Ms. Bromley-Williams has served as Vice President-Professional Services
and a Director of the Company since its organization. She has been employed as
Head Nurse and Director of Professional Services of USHAWL since 1972 and
Century and its predecessor since 1977. Ms. Bromley-Williams became a Senior
Vice President of the Company in 1990.

         Mr. LaMacchia, a Certified Public Accountant, joined the Company in
1984 as its Director of Strategic Planning and Reimbursement and became a Vice
President in 1987. In 1995 Mr. LaMacchia was promoted to Senior Vice President.
From 1981 to 1984, he was employed by Cedars-Sinai Medical Center as Assistant
Director of Finance specializing in financial feasibility and reimbursement.
From 1979 to 1981, Mr. LaMacchia was employed as an auditor by Ernst & Whinney.
From 1976 to 1979, he was a field auditor for Blue Cross of Southern California
specializing in health care audits.

         Ms. Hundahl, a Certified Public Accountant, has been employed by the
Company since 1982 as Corporate Controller except for seven months in 1984 when
she was employed by Centurion Savings as Vice President-Finance and Treasurer.
Ms. Hundahl became a Vice President in 1987 and a Senior Vice President in 1995.
For six years prior to joining the Company, Ms. Hundahl was employed by Arthur
Young & Co. and at the time she joined the Company she was an audit manager.

         Mrs. Wilkinson joined the Company and became a Vice President in
September 1987, upon the completion of the Company's acquisition of Orange
County Dialysis. She currently serves in that capacity managing the Company's
five Orange County dialysis centers, and Desert and Hi-Desert Dialysis (Palm
Springs). Prior to the acquisition, Mrs. Wilkinson was employed by Orange County
Dialysis, Inc. and, since its inception in 1972, served as its Chief Executive
Officer.



                                       36
<PAGE>   37
                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company's Common Stock was traded in the NASDAQ National Market
System under the symbol SHCI until the recapitalization resulting from the
merger of the Company with an indirect wholly owned subsidiary of Zeneca Limited
on April 13, 1995 as described in Note 7 to the Company's consolidated financial
statements. Since that date all of the issued and outstanding common stock of
the Company has been owned by a wholly owned subsidiary of Zeneca Limited. The
high and low closing prices of the Common Stock during the 1995 fiscal year
through April 13, 1995 by fiscal quarter are set forth on the following table:

<TABLE>
<CAPTION>

                                                      High             Low
                                                      ----             ---

<S>                                                  <C>              <C>
          1st quarter ended November 30, 1994        25 1/8           17 7/8

          2nd quarter ended February 28, 1995        35 1/2           24

          3rd quarter through April 13, 1995         36 1/2           35 1/8
</TABLE>

     The Company's Callable Puttable Common Stock issued in the recapitalization
has traded in the NASDAQ National Market System since April 13, 1995 under the
symbol SHCID. The high and low closing prices during the fiscal quarters since
April 13, 1995 are set forth below:

<TABLE>
<CAPTION>

                                                                  High             Low
                                                                  ----             ---

<S>                                                               <C>              <C>
          3rd quarter, April 13 to May 31, 1995                   35 5/8           34 1/4

          4th quarter ended August 31, 1995                       37               35

          1st quarter ended November 30, 1995                     37               35 3/4

          2nd quarter ended February 29, 1996                     38 1/4           36 1/4

          3rd quarter ended May 31, 1996                          39 1/2           37

          4th quarter ended August 31, 1996                       39 1/4           37 3/4

          No shares of Preferred Stock have been issued.
</TABLE>

     Based upon security position listings and the Company's belief, it is
estimated there were more than 1,100 holders of its Callable Puttable Common
Stock as of November 15, 1996.

     The Company has not declared any cash dividends on its common equity in the
past two years and has no present intention to pay cash dividends in the
foreseeable future.


                                       37
<PAGE>   38
ITEM 6.  SELECTED FINANCIAL DATA

         The following tables set forth selected consolidated financial
information regarding the Company's operating results and financial position.
This information should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere
herein.

<TABLE>
<CAPTION>
                                                                Years ended August 31,
                                                 (In thousands except per share amounts)
                                                 ------------------------------------------- 
                                                 1996      1995      1994      1993      1992
                                               --------  --------  -------   -------   ------

<S>                                            <C>       <C>       <C>       <C>       <C>
Operating revenues, net                        $163,439  $151,308  $131,529  $115,893  $95,056
Operating income                               $ 11,520  $ 17,442  $ 16,679  $ 14,418  $11,686
Income before income taxes
 and cumulative effect
 of change in accounting
 principle                                     $ 12,572  $ 11,451  $ 16,882  $ 14,387  $11,252
Cumulative effect on
 prior years (to August
 31, 1994) of expensing
 pre-operating costs as
 incurred, net of income
 taxes                                                   $ (3,588)
Net income (Note A)                            $  7,606  $    923  $ 10,380  $  8,976  $ 6,920
                                               ========  ========  ========  ========  =======

Earnings per share (Note A):
 Primary:
  Income before
   cumulative effect of
   change in accounting
   principle                                   $   0.67  $   0.44  $   1.19  $   1.05  $  0.94
  Cumulative effect on
   prior years (to
   August 31, 1994) of
   expensing pre-operating
   costs as incurred                                        (0.35)
                                               --------  --------  --------  --------  -------
  Net earnings per share                       $   0.67  $   0.09  $   1.19  $   1.05  $  0.94
                                               ========  ========  ========  ========  =======

 Fully diluted:
  Income before
   cumulative effect of
   change in accounting
   principle                                   $   0.67  $   0.45  $   1.10  $   0.98  $  0.88
  Cumulative effect on
   prior years (to August
   31, 1994) of expensing
   pre-operating costs as
   incurred                                                 (0.33)
                                               --------  --------  --------  --------  -------
  Net earnings per share                       $   0.67  $   0.12  $   1.10  $   0.98  $  0.88
                                               ========  ========  ========  ========  =======
</TABLE>




                                       38
<PAGE>   39
<TABLE>
<CAPTION>
                                                                Years ended August 31,
                                                 (In thousands except per share amounts)
                                                 ------------------------------------------- 
                                                 1996      1995      1994      1993      1992
                                               --------  --------  -------   -------   ------

<S>                                            <C>       <C>       <C>       <C>       <C>
Proforma amounts assuming 
pre-operating costs are 
retroactively expensed as
incurred:
  Net income                                   $  7,606  $  4,511  $  9,382  $  7,531  $  6,555
  Earnings per common
   share-assuming no
   dilution                                    $   0.67  $   0.44  $   1.08  $   0.88  $   0.89
  Earnings per common
   share-assuming full
   dilution                                    $   0.67  $   0.45  $   1.00  $   0.84  $   0.84
</TABLE>


Note A: Pre-operating costs of $2,224,000 were expensed in 1995. In addition,
net income was reduced by $3,588,000 due to the cumulative effect on prior years
of the change in accounting principle to expensing pre-operating costs as
incurred. In prior years, pre-operating costs were deferred and amortized over a
three year period upon commencement of facility operations. This change in
accounting for pre-operating costs was adopted as management believes this
method of accounting better reflects the Company's current methods of operations
and it conforms to accounting principles used by Zeneca Group, PLC, the 
beneficial owner of more than 50% of the Company's common equity. The pro forma
amounts shown in the five year comparative income statement, for the years prior
to 1995, have been adjusted for the effect of retroactive application of the
change.

         In addition, net income in 1995 was adversely affected due to
non-recurring merger transaction expenses of $7,685,000 recorded in connection
with the Company's Agreement and Plan of Merger with Zeneca.

<TABLE>
<CAPTION>
                                                                                August 31,
                                                                              (In thousands)
                                                  ------------------------------------------------------------------

                                                    1996          1995           1994           1993          1992
                                                  --------      --------       --------       --------      --------
<S>                                               <C>           <C>            <C>            <C>           <C>
Working capital                                   $ 12,836      $ 29,975       $ 67,940       $ 63,503      $ 58,732
Total assets                                      $234,036      $207,098       $166,082       $146,401      $131,018
Long-term debt and
 capitalized leases                               $  9,092      $ 11,145       $ 39,548       $ 37,231      $ 33,676
Stockholders' equity                              $136,503      $129,428       $102,295       $ 91,431      $ 82,214
</TABLE>




                                       39
<PAGE>   40
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

FISCAL 1996 COMPARED TO 1995

         Operating revenues increased for fiscal 1996 by 8% to $163,439,000 from
$151,308,000 for fiscal 1995. Operating income decreased to $11,520,000 versus
$17,442,000 for the previous year. In the 1996 fiscal year's fourth quarter,
operating income decreased to $734,000 from $3,662,000 in the prior year's
fourth quarter. For the fiscal year, income before income taxes and the
cumulative effect of the change in accounting principle (described in Note 1 to
the Company's consolidated financial statements), increased 10% to $12,572,000
in fiscal 1996 from $11,451,000 in fiscal 1995. Net income increased to
$7,606,000 from $923,000 for the prior fiscal year and was 4.7% as a percentage
of net revenues compared to 0.6% in the prior year. Primary and fully diluted
earnings per share were $0.67 in the current fiscal year compared to $0.09 and
$0.12, respectively, in the prior period. Fourth quarter primary and fully
diluted earnings per share were $0.01, down from $0.25 in the prior year
quarter.

         Net income and earnings per share were adversely affected in fiscal
1995 year due to non-recurring merger transaction expenses of $7,685,000
($252,000 of which were recorded in the fourth quarter) in connection with the
Company's Agreement and Plan of Merger with Zeneca Limited. The merger
transaction expenses primarily included legal and accounting fees, travel and
other expenses and investment banking fees,a portion of which the Company
believes is not payable until the acquisition of the remainder of the Company's
callable puttable common stock.

         Net income and earnings per share were adversely affected in fiscal
years 1996 and 1995 by the Company's change in accounting principle in fiscal
1995 from deferral of pre-operating costs to expensing such costs when incurred,
as described in Note 1 to the consolidated financial statements. The Company
adopted this new method of accounting for pre-operating costs as management
believes this method of accounting better reflects the Company's current methods
of operations and it conforms to the accounting principles used by Zeneca Group,
PLC, the beneficial owner of more than 50% of the Company's common equity.

         Fiscal year 1996 and fourth quarter results reflect an increase in
business, particularly in the volume of the Company's managed care business
which generally has lower reimbursement rates. Other changes, primarily
reductions in reimbursement rates, resulted in an increase in the Company's
contractual allowance expense. Operating income and net income were also
adversely affected by an increase in expenses related to the expansion of the
Company's services and programs, additional costs in connection with the opening
and operations of permanent facilities in Alta Bates and Mount Sinai
Comprehensive Cancer Centers, operations of the Company's recently acquired
Walnut Creek, California facility which is affiliated with Alta Bates
Comprehensive Cancer Center, start up costs for the Comprehensive Cancer 
Center at Saint Vincents Medical Center in New York, costs associated with the
purchase and startup of SHC Specialty Hospital, including litigation to protect
the Company's right to purchase the former Westlake Medical Center, and the
expansion of programs and the addition of personnel and related costs to support
and expand the Company's development, strategic planning, information systems
and physician network activities. The Company expects increased expenses
relating to the startup of SHC Specialty Hospital as well as expenses relating
to general business expansion to continue into fiscal 1997. 


                                       40
<PAGE>   41
         Net interest income decreased to $638,000 in the current fiscal year as
compared to $1,223,000 resulting from lower capitalization of interest on
borrowings for construction projects, increased borrowings under a bank line of
credit and reduced funds invested in marketable securities. Net investment gains
of $451,000 in the current fiscal year versus net investment losses of $104,000
in the prior period resulted from having realized capital gains in liquidating a
portion of the investment portfolio under improved market conditions. The
Company does not expect this trend to continue as portfolio reductions,
necessitated by the Company's expansion activities, cannot be timed to cyclical
market conditions. While not affecting operating income, this may reduce pre-tax
and net income.

         Operating results have been and will continue to be adversely affected
by reductions in reimbursement rates mandated by Congress, including those
pursuant to the Omnibus Budget Reconciliation Acts (OBRA) of 1990-1993 which
impact health care providers for many services provided to Medicare
beneficiaries. The principal reductions applicable to the Company are a
continuation of the 5.8% reduction in reimbursement of outpatient cost-based
programs through federal fiscal year 1998; a continuation of the 10% reduction
in hospital outpatient capital reimbursement through federal fiscal year 1998;
and a change in the manner of reimbursement for Erythropoietin for dialysis
patients, effective January 1, 1991 which was further reduced beginning on
January 1, 1994. The Company has implemented strategies, including programs to
increase both Medicare and non-Medicare patient volume and the implementation of
cost control programs, that have mitigated the effect of these changes. See
"Impact of Inflation and Changing Regulation" and Item 1. BUSINESS - 
"Governmental Regulations." 

         Total operating expenses relative to operating revenues for fiscal 1996
increased 4.5% before interest income and investment expense, as compared to the
prior year. Medical supplies and services expense increased by $6,440,000 during
the period, a 2.6% increase as a percentage of revenues, reflecting claims
payments resulting from the Company's disease state managed care program,
increasing complexity in cancer and dialysis treatment modalities and supplier
price escalations. Salaries and related costs including additional professional,
corporate, and administrative and other personnel necessitated by expansion and
growth, primarily in Cancer Center operations and increases in compensation and
payroll taxes, increased $5,483,000 in the period, and increased 0.3% as a
percentage of operating revenues. As compared to the prior year, other
administrative expenses for fiscal 1996 increased 0.9% relative to operating
revenues, primarily due to the incremental effect of increased operations.
Contract and occupancy costs increased 0.1% during the period, as a percentage
of net operating revenues, principally resulting from expansion of operations
and escalation provisions of facilities' rents and contractual obligations.
Depreciation and amortization increased by $1,529,000 during fiscal 1996
primarily because of completion of the permanent centers and equipment placed in
service at the Alta Bates and Mt.Sinai permanent Cancer Centers in fiscal 1996.

         Income taxes were calculated at a 39.5% effective rate in fiscal 1996
versus 60.6% in fiscal 1995 because merger transaction expenses incurred in
fiscal 1995 are substantially non-tax deductible.

FISCAL YEAR 1995 COMPARED TO 1994

         Operating revenues increased for fiscal 1995 by 15% to $151,308,000
from $131,529,000 for fiscal 1994. Operating income increased by 4.6% to
$17,442,000 versus $16,679,000 for the previous year. In the 1995 fiscal year's
fourth quarter, operating income decreased 19% over the prior year's fourth
quarter, resulting from a charge to operating revenues of $1,500,000,

                                       41
<PAGE>   42
reflecting a change in estimation of the collectibility of certain accounts
receivable. Income before income taxes and the cumulative effect of the change
in accounting principle (described in Note 1 to the Company's consolidated
financial statements), decreased 32.2% to $11,451,000 from $16,882,000 in fiscal
1994 due to merger transaction expenses and costs expensed in the current year
which were deferred as pre-operating costs in prior years, as discussed below.
Net income decreased 91% to $923,000 from $10,380,000 for the prior fiscal year
and was 0.6% as a percentage of net revenues compared to 7.9% in the prior year.
Primary and fully diluted earnings per share were $0.09 and $0.12, respectively,
in the current fiscal year, down from $1.19 and $1.10, respectively, in the
prior period. Fourth quarter primary and fully diluted earnings per share were
$0.25, down from $0.32 and $0.30, respectively, in the prior year quarter.
Increases in revenues and operating income resulted from growth in patient
volumes and services at the Company's existing facilities, as well as the
Company's recently introduced disease state managed care program, SalickNet, the
results of which were included for the first time in the first quarter of 1995.

         Net income and earnings per share were adversely affected in both the
current fiscal year and fourth quarter due to non-recurring merger transaction
expenses of $7,685,000 recorded in fiscal 1995 ($252,000 of which were recorded
in the fourth quarter) in connection with the Company's Agreement and Plan of
Merger with Zeneca Limited. The merger transaction expenses primarily include
legal and accounting fees, travel and other expenses and investment banking
fees, a portion of which the Company believes is not payable until the
acquisition of the remainder of the Company's callable puttable common stock.
Additionally, in the current fiscal year the Company incurred $580,000 in legal,
accounting and other fees associated with the proxy and registration statement
which were charged directly to paid in capital.

         Net income and earnings per share were also adversely affected by the
Company's change in accounting principle from deferral of pre-operating costs to
expensing such costs when incurred, as described in Note 1 to the consolidated
financial statements. The Company adopted this new method of accounting for
pre-operating costs as management believes this method of accounting better
reflects the Company's current methods of operations and it conforms to Zeneca
Group, PLC, the beneficial owner of more than 50% of the Company's common
equity. The cumulative effect of the change in accounting principle, $3,588,000
net of income taxes of $2,393,000, as of the beginning of the fiscal year is
reported in the income statement. Additionally, pre-operating costs of
$2,224,000 before income taxes, which would have been deferred under the
previous accounting method, have been expensed in fiscal 1995.

         Without giving effect to the above mentioned additional items in the
1995 fiscal year, operating income, income before income taxes and net income
would have been $20,666,000, $22,360,000 and $13,898,000, respectively.
Excluding also the effect of 430,000 additional shares issued to Zeneca Limited
as a result of the Company's merger, primary and fully diluted earnings per
share would have been $1.37 and $1.33, respectively. Without giving effect to
the above mentioned items, primary and fully diluted earnings per share would
have been $0.36 in the current year fourth quarter.

         The Company had net interest income of $1,223,000 in the current fiscal
year as compared to net interest expense of $663,000 in the prior year which is
due to conversion of the Company's 7 1/4% debentures in December 1994,
capitalization of interest on borrowings for construction projects, and higher
interest yields on funds invested in marketable securities. Net investment
losses of $104,000 in the current fiscal year versus net investment gains of
$219,000 in the prior period result from having realized substantially all

                                       42
<PAGE>   43
portfolio capital gains.  The Company expects this trend to continue.  While
not affecting operating income, this may reduce pre-tax and net income.

         Operating results have been and will continue to be adversely affected
by reductions in reimbursement rates mandated by Congress, including those
pursuant to the Omnibus Budget Reconciliation Acts (OBRA) of 1990-1993 which
impact health care providers for many services provided to Medicare
beneficiaries. The principal reductions applicable to the Company are a
continuation of the 5.8% reduction in reimbursement of outpatient cost-based
programs through federal fiscal year 1998; a continuation of the 10% reduction
in hospital outpatient capital reimbursement through federal fiscal year 1998;
and a change in the manner of reimbursement for Erythropoietin for dialysis
patients, effective January 1, 1991 which was further reduced beginning on
January 1, 1994. The Company has implemented strategies, including programs to
increase both Medicare and non-Medicare patient volume and the implementation of
cost control programs, that have mitigated the effect of these changes. See
"Impact of Inflation and Changing Regulation."

         Total expenses relative to operating revenues for fiscal 1995 increased
1.2% before interest income and investment expense, as compared to the prior
year. Medical supplies and services expense increased by $6,477,000 during the
period, a 2.3% increase as a percentage of revenues, reflecting claims payments
resulting from the Company's disease state managed care program, increasing
complexity in cancer and dialysis treatment modalities and supplier price
escalations. Salaries and related costs including additional professional,
corporate, and administrative and other personnel necessitated by expansion and
growth, primarily in Cancer Center operations, payments under the Management
Incentive Compensation Plan approved by the stockholders in August 1991, and
increases in compensation and payroll taxes, increased $7,075,000 in the period,
and decreased 0.7% as a percentage of operating revenues. As compared to the
prior year, other administrative expenses for fiscal 1995 increased 0.8%
relative to operating revenues, primarily due to the incremental effect of
increased operations. Contract and occupancy costs decreased 0.1% during the
period, as a percentage of net operating revenues, principally resulting from
expansion of operations into managed care. Depreciation and amortization
decreased by $303,000 during fiscal 1995 because amortization expense decreased
as a result of the Company's change in accounting principle for pre-operating
costs discussed above.

         Income taxes were calculated at a 60.6% effective rate in fiscal 1995
versus 38.5% in fiscal 1994 because merger transaction expenses are
substantially non-tax deductible. In fiscal 1994, the Company utilized available
federal capital loss carrryforwards, lowering the Company's tax rates and
increasing cash flow. During fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which did
not have a material effect on the Company's financial statements.


LIQUIDITY AND CAPITAL COMMITMENTS

         Presently existing and internally generated funds and credit facilities
are expected to be sufficient to satisfy the Company's requirements for working
capital and capital expenditures relating to its present operations in fiscal
1997. The accelerated development, establishment or acquisition of a significant
number of additional Cancer Centers and/or dialysis centers or other
acquisitions or operations may require borrowing or equity financing by the
Company. Working capital at August 31, 1996 was $12,836,000. The decrease in
working capital during the current fiscal year as compared to fiscal 1995 is
principally the result of completion of the Alta Bates and Mount Sinai permanent
cancer centers, as well as the acquisition of the SHC Specialty

                                       43
<PAGE>   44
Hospital, formerly Westlake Medical Center. The increase in accounts receivable
at August 31, 1996 as compared to August 31, 1995 is due to the previously
mentioned increased revenues which resulted from growth in patient volumes and
services provided at the Company's existing and newly established cancer centers
and dialysis facilities.

         The Company's principal sources of liquidity consist of cash on hand,
marketable securities, interest-bearing investments, internal cash flow and bank
lines of credit of $80,000,000. At August 31, 1996, $44,598,000 had been
borrowed under the revolving bank line of credit and $10,000,000 had been
converted to long-term debt payable over five years. The line of credit
agreement provides various options for interest rates. Unless the Company elects
an optional interest rate, borrowings under the line of credit are subject to
the bank's prime rate of interest.

         At August 31, 1996, the Company held in its portfolio cash, government
and investment grade debt securities and equity securities. These investments
represent 100% of the total portfolio at fair value and reflect the Company's
policy to invest its funds in government and investment grade securities. In
accordance with Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"), the Company
has decreased the carrying value of its portfolio to fair value of $39,070,000
from cost of $39,629,000. As of August 31, 1996, the Company's five largest
investments in municipal and corporate debt securities, all of which were
investment grade aggregated $5,153,000 at fair value, with cost of $5,257,000.
The single largest investment in one company's securities approximated
$1,095,000 in cost with fair value of $1,057,000.

         Capital expenditures for fiscal year 1997 are presently estimated to be
approximately $98,500,000. As to other needs, certain equipment and/or
facilities may be acquired through leases or purchase-finance agreements.

IMPACT OF INFLATION AND CHANGING REGULATION

         The largest single component of the Company's revenue continues to be
reimbursement at rates which are set or regulated by federal or individual state
authorities. These reimbursement rates are also subject to periodic adjustment
for certain factors, including changes in legislation and regulations, those
imposed pursuant to the federal and individual state budgets, inflation, area
wage indices and costs incurred in rendering the services. The reimbursement
rates may in the future, as they have in the past, also be affected by cost
containment and other legislation, competition, third party payor changes or
other governmental administrative controls or limitations. Changes in the
Medicare and Medicaid system and reimbursement have been proposed by both
Republican and Democrat members of Congress at various times. The ultimate
impact of any such changes on the Company's business cannot be predicted,
although there is not assurance that it will be able to do so in the future, in
part due to budgetary constraints and the rapidly evolving changes in the health
care system generally. The Company has developed and/or implemented plans to
deal with this situation and notes that in the past as reimbursement reductions
or changes have occurred, the Company has previously been able to improve
operations by an increased market share and greater efficiency although there is
not assurance that it will be able to do so in the future.

         Under federal Medicare law, most hospital inpatients covered by
Medicare are classified into diagnostic related groups ("DRGs") based on such
factors as primary admitting diagnosis and surgical procedure. Payment to
hospitals for the care of a patient covered under the DRG system is generally
set at a predetermined amount based on the DRG assigned to the patient. The
federal

                                       44
<PAGE>   45
government, as well as many states and third party payors, are investigating or
have adopted these or other modifications to their reimbursement formula in an
effort to contain costs. This type of program provides an incentive for
hospitals to plan and deliver their services more efficiently.

         The Omnibus Budget Reconciliation Act of 1990 amended the definition of
"inpatient hospital services" to include all services for which payment may be
made under the DRG system that are provided by a hospital or an entity
wholly-owned or operated by the hospital to a patient during the three days
immediately preceding the date of the patient's admission (or one day for
hospitals and hospital units excluded from the DRG system under technical
changes enacted in October 1994), if such services are diagnostic services
(including clinical diagnostic laboratory tests) or are other services related
to the admission, as defined by the Secretary of Health and Human Services ("the
Secretary"). Such services are not reimbursable separately as hospital
outpatient services under Medicare Part B. These provisions have been in effect
since 1991. On January 12, 1994, the Secretary issued interim final regulations
implementing this provision and on September 1, 1995, the Secretary announced
she would revise the regulations to recognize that only the one day immediately
preceding the date of the patient's admission would be considered to be not
reimbursable separately as hospital outpatient services for hospitals and
hospital units excluded from the DRG system. However, the Secretary has not yet
revised the regulations to this effect.

         In recent years there have been a number of statutory and regulatory
changes that affect Medicare reimbursement for services furnished to hospital
outpatients. Prior to October 1, 1987, Medicare generally had reimbursed
hospital outpatient services on the basis of the reasonable costs (as determined
pursuant to regulations) incurred by the hospital. On October 1, 1987, Medicare
began reimbursing hospitals for certain surgery services furnished to hospital
outpatients on the basis of the lower of reasonable costs or an amount based on
a blend of the hospital's reasonable costs and a prospectively set fee schedule
amount. On October 1, 1988, this blended payment system was extended to
radiology services furnished to hospital outpatients; the blended payment system
was extended further to certain other diagnostic services on October 1, 1989. In
addition, the amount of the blend that is based on the hospital's reasonable
costs has decreased; currently, the blend is based 42% on hospital costs for
surgery and radiology services, and 50% on hospital costs for other diagnostic
services. For surgery services reimbursed under the blend, the fee schedule
portion of the blend is based on the amount of payment that ambulatory surgery
centers would receive for the procedure. For radiology and diagnostic services
reimbursed under the blend, the fee schedule portion of the blend is based on
the amount that physicians would receive if the procedure were furnished in a
physician's office under the Medicare physician fee schedule.

         Effective October 1, 1991, Medicare payments for hospital outpatient
services made on a reasonable cost basis and the cost portion of outpatient
services paid on the basis of a blended amount, were reduced by 5.8%. Under the
Omnibus Reconciliation Act of 1993 ("OBRA 1993"), Congress extended this
reduction through federal fiscal year 1998. Effective October 1, 1991, Medicare
has reimbursed the capital costs allocated to outpatient departments on the
basis of 90% of reasonable costs. Under OBRA 1993, Congress extended this 10%
reduction in hospital outpatient capital cost reimbursement through federal
fiscal year 1998. Also under OBRA 1993, the amount which Medicare reimburses for
clinical laboratory services was reduced.

         Under the Omnibus Budget Reconciliation Act of 1989, effective January
1, 1992, Medicare reimbursement for physician services began a five year

                                       45
<PAGE>   46
transition to the use of a physician fee schedule based on a "resource-based
relative value scale." That physician fee schedule, through the blended payment
system described above, has affected the amount of Medicare reimbursement for
hospital outpatient departments providing outpatient radiology, radiation
therapy, surgery and certain diagnostic services.

         The Health Care Financing Administration ("HCFA"), a division of the
Department of Health and Human Services ("HHS"), which administers the Medicare
program, issued on July 2, 1996 a proposed rule revising payment policies under
the Medicare physician fee schedule for calendar year 1997. Among other changes,
that proposed rule would make comprehensive changes in the way that the
geographic adjustment factors for physician fee schedule payments are
determined; HCFA would prefer to shift to statewide, rather than more local,
regions in setting the factors in the belief that administration will be
simplified and physicians will be encouraged to practice in rural areas by
reducing urban/rural payment differentials. By going to statewide regions, also
known as "localities," there may be "losing" (usually urban) areas and "winning"
(usually rural) areas within a state if a conversion is made. It is unknown what
the final rule will look like, if and when issued, but reimbursement for
hospital outpatient services covered by the blended rate, which is based in part
on the physician fee schedule amount, may decrease if the statewide region or
locality rule is promulgated.

         There is also the possibility of the establishment of a prospective
payment for certain Medicare-reimbursed hospital outpatient services. Congress
had requested that HCFA prepare recommendations concerning the establishment of
such a prospective payment system. HCFA submitted its recommendations to
Congress in March 1995 and included a proposal to phase in such a prospective
payment system, beginning first with outpatient surgery, radiology, and other
diagnostic services. The details of the proposed payment system, including the
amounts of payment that would be made for each procedure, have not been
finalized by HCFA. Adoption of HCFA's recommendation would require a change in
the Medicare law by Congress, and, to date, Congress has not included such a
change in any legislation. Under HCFA's proposal, services other than surgery,
radiology, and other diagnostic services would not be reimbursed under a new
prospective payment system until further research is completed. However, HCFA
has indicated recently that it may implement the system with respect to
ambulatory surgery services, because it believes it has sufficient statutory
authority, and expects to issue a regulation regarding such use perhaps as early
as late 1996. The Company cannot predict what will be the effect, if any, on
revenues or income which may result from the adoption by Congress of HCFA's
recommendations for a Medicare prospective payment for hospital outpatient
services.

         HCFA in its March 1995 report to Congress made two other
recommendations concerning proposed changes in the Medicare law. First, HCFA
proposed that the Medicare law be changed to modify the way that the amount of
beneficiary coinsurance for outpatient services is computed. Second, HCFA
proposed that Medicare law be changed to correct what has been described as the
"formula driven overpayment" which HCFA states results in Medicare payments for
hospital outpatient surgery, radiology and other diagnostic services that are
greater than what was intended by Congress. In its report, HCFA suggested
several ways in which the Medicare law could be changed to address these issues,
either with or without the enactment of a prospective payment system for
hospital outpatient services. The alternatives suggested by HCFA generally would
result in an overall reduction in payments for hospital outpatient services
furnished to Medicare beneficiaries and, if enacted, could adversely affect the
Company's revenues and income. However, it is uncertain which alternative, if
any, Congress will enact, and it is impossible to determine what impact, if any,
such changes might have on the Company's revenues and income.

                                       46
<PAGE>   47
         Through HCFA, HHS issued a program memorandum effective August, 1996
which sets forth the criteria for "provider-based designations," i.e., the
circumstances under which multiple provider facilities may be designated as one
facility for Medicare accounting and cost allocation purposes. Hospitals
frequently seek provider-based designations for skilled nursing facilities, home
health agencies, rural health clinics and physician clinics as "outpatient
departments" of the hospital. HCFA's intent in issuing this memorandum appears
to be to limit the granting of provider-based designations and thereby limit the
allocation of certain hospital costs from inpatient areas to outpatient areas.
Among other reasons, HCFA believes both that such allocations increase Medicare
payments and Medicare beneficiary copayments and that it pays more for services
rendered in provider-based facilities than in freestanding facilities. Eight
tests are set forth in the memorandum. Although the memorandum indicates that
each must be met before an entity may be designated part of a provider, HCFA has
subsequently taken the position that there may be some circumstances where not
all tests must be met. The memorandum has not yet been revised to reflect this
position. The eight tests include requirements for: common accreditation,
licensure and governance; physical proximity to the provider; service of the
same patient population; integrated clinical services; and integrated financial
operations. In addition, the director of the outpatient area must be under the
direct day-to-day supervision of the hospital-provider. The HCFA Regional
Offices continue to have the decision-making responsibility regarding whether an
entity meets the eight tests. However, HCFA has warned that in applying this
memorandum, the Regional Offices may identify previous provider-based decisions
that are not in accordance with the test criteria and in those cases, the
Regional Offices are free to correct those erroneous designations. If such
corrections result in loss of provider-based status, the change will be
prospective only in nature. This policy, termed a "clarification" by the
government, may be subject to challenge in the courts. Although the Company
believes that its facilities meet the requirements of the Memorandum where they
have been designated provider-based entities, it is difficult to ascertain how
such requirements will be interpreted (most importantly if all eight tests must
be met) and loss of such status would likely result in reduced Medicare
reimbursement in the future.

         Florida has legislation precluding or limiting referrals by physicians
to facilities in which they have an ownership, control or investment
relationship (the Florida Patient/Self-Referral Act). The Company believes it is
in compliance with the law.

         Florida has made a commitment to the utilization of Managed Care for
the Medicaid population of the state. To this end, the Florida Legislature
adopted Chapter 96-199, Laws of Florida. This Act provides that Medicaid
recipients who do not voluntarily select a managed care plan or MediPass
provider, must be enrolled by the Agency for Healthcare Administration (the
"Agency") into either a managed care plan or MediPass program. Accordingly,
Medicaid recipients who fail to make a voluntary choice will be given mandatory
assignment to a plan or the MediPass program. The Agency will contract with a
limited number of HMOs who meet a based scoring criteria. After implementation,
a substantial majority of the state's Medicaid population of more than 1.5
million will be in a prepaid plan as opposed to less than the current 25% of
that group who have voluntarily enrolled in HMOs. The Agency expects to reduce
per capita rate by competitive bidding process. The Request for Proposal ("RFP")
requires a bid range for rates that is substantially below the current contract
rate. It also expects to reduce number of Medicaid prepaid contractors in the
state through bid threshold elimination. The Agency has issued an RFP with a
scheduled award date of February 1, 1997.

         Florida adopted legislation effective in 1994 which is aimed at health
care coverage for presently uninsured residents and encouraging the formation

                                       47
<PAGE>   48
of purchasing alliances for health care services. This legislation is
principally aimed at small employer groups. As it is now configured, the Company
cannot predict its future effect upon the Company and its operations. However,
the Company, as part of its overall strategy is in the process of developing
various plans to be offered to employer groups, purchasing alliances, health
maintenance organizations, managed care and other payors.

         To the extent that legislation or regulations may be enacted in the
future which may include outpatient services furnished to Medicare beneficiaries
in a prospective payment system, the Company cannot predict whether or to what
extent such a change would adversely affect its revenues or earnings. For 1997
both parties have stated that Congress will consider extensive changes to the
Medicare and Medicaid programs. Medicare changes under consideration include,
among others, (1) a change in the formula used to calculate hospital outpatient
reimbursement under the blended payment system which generally would result in
reducing reimbursement amounts to hospitals; (2) an extension of the current
5.8% reduction in hospital outpatient reasonable cost reimbursement through the
year 2002; (3) an extension of the current 10% reduction in reimbursement for
hospital outpatient department capital-related costs through the year 2002; (4)
the introduction of a prospective payment system for home health services; (5)
the bundling of post-acute care services, such as skilled nursing facility
services and home health care, into the hospital prospective payment system; (6)
an extension in the reduction in updates to payment amounts for clinical
diagnostic laboratory tests through the year 2002; (7) the elimination of
updates in payments for ambulatory surgical center services through the year
2002; (8) various other reductions in the amount of payment for physician and
hospital services; and (9) the introduction of additional choices of health
plans for Medicare beneficiaries in addition to the current fee-for-service and
Medicare HMO option. Medicaid changes include the replacement of the existing
federal/state program with block grants to the states and reduced federal
oversight over state plans. The enactment of large cuts in the amount of
Medicare and Medicaid reimbursement for providers could have an adverse effect
on the Company's revenues. At this point in time, the Company is unable to
predict how the enactment of any such changes in the Medicaid Program and
proposed changes in Medicare might affect the Company in the future.

         The Company believes that health care regulations will continue to
change and, therefore, regularly monitors developments. The Company may modify
its agreements and operations from time to time as the business and regulatory
environments change. While the Company believes it will be able to structure its
agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will be as successful or not be successfully
challenged.

         Labor costs represent the largest dollar component of the Company's
total expenses and necessary increases in the number of personnel, salaries,
hourly rates and insurance costs have resulted in higher dollar amounts of
operating expenses. Rental rates are subject to annual adjustments pursuant to
escalation clauses in the respective leases. In addition, suppliers have sought
to pass along their rising costs to the Company. A significant portion of these
higher costs, however, has been offset by the use of new procedures and
equipment, changes in staff scheduling, improvement in purchase price
negotiations and utilization of supplies, and by increases in treatment and
services volume. Changes in reimbursement rates for Medicare patients have a
significant impact on the results of operations. The rate of inflation has not
had a significant impact on the results of operations.





                                       48
<PAGE>   49
         FORWARD-LOOKING STATEMENTS

         Certain statements contained herein are forward-looking. These
statements involve risks and uncertainties, many of which are beyond the control
of the Company. Such risks and uncertainties could cause actual results to
differ materially from these forward-looking statements. Factors which could
cause actual results to differ materially include those described in "Impact of
Inflation and Changing Regulation" and Item 1. BUSINESS -- "Governmental
Regulation," the effects of changes in and/or interpretations of applicable law
and governmental regulations, changes in reimbursement rates and, requirements,
competition and the Company's ability to improve operations and, obtain any
required certificate of need or meet licensing standards or requirements,
increase market share, increase efficiencies and patient volumes, operations and
successfully continue implementation of cost controls.


                                       49
<PAGE>   50
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                   Index to Consolidated Financial Statements
                             and Supplementary Data
<TABLE>
<CAPTION>

                                                                Page
                                                               Numbers
                                                               -------
<S>                                                            <C>
Report of Independent Accountants......................          51

Consolidated Statements of Income for each of the
  Three Years in the Period Ended August 31, 1996......        52-53

Consolidated Balance Sheets at August 31,
  1996 and 1995........................................        54-55

Consolidated Statements of Cash Flows
  for each of the Three Years in the
  Period Ended August 31, 1996.........................        56-57

Consolidated Statements of Stockholders'
  Equity for each of the Three Years in the Period
  Ended August 31, 1996................................        58-60

Notes to Consolidated Financial Statements.............        61-73


Financial Statement Schedule

  VIII   -   Allowance for Doubtful Accounts...........          74
</TABLE>




All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.





                                       50
<PAGE>   51
                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders
of Salick Health Care, Inc.


                  In our opinion, the consolidated financial statements listed
in the index appearing on page 50 present fairly, in all material respects, the
financial position of Salick Health Care, Inc. and its subsidiaries at August
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended August 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

                  As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for pre-operating costs
in fiscal 1995.



/s/ Price Waterhouse LLP

PRICE WATERHOUSE LLP

Los Angeles, California
November 6, 1996



                                       51
<PAGE>   52
                            SALICK HEALTH CARE, INC.
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>


                                                              YEARS ENDED AUGUST 31,
                                               -------------------------------------------------
                                                   1996              1995               1994
                                               ------------      ------------       ------------
<S>                                            <C>               <C>                <C>
Revenues:
  Operating revenues, net (Note 1)             $163,439,000      $151,308,000       $131,529,000
                                               ------------      ------------       ------------
Expenses:
  Medical supplies and services                  33,038,000        26,598,000         20,121,000
  Salaries and related costs                     67,055,000        61,572,000         54,497,000
  Other administrative expenses                  24,869,000        21,736,000         17,851,000
  Contract and occupancy costs
   (Notes 3 and 4)                               17,217,000        15,749,000         13,867,000
  Depreciation and amortization
   (Note 1)                                       9,740,000         8,211,000          8,514,000
                                               ------------      ------------       ------------
    Total expenses                              151,919,000       133,866,000        114,850,000
                                               ------------      ------------       ------------
Operating income                                 11,520,000        17,442,000         16,679,000
Merger transaction expenses (Note 7)                               (7,685,000)
Net interest income (expense)
     (Notes 1,4,5 and 6)                            638,000         1,223,000           (663,000)
Net investment gains (losses)
   (Note 1)                                         451,000          (104,000)           219,000
Minority interest (Note 9)                          (37,000)          575,000            647,000
                                               ------------      ------------       ------------
Income before income taxes and
    cumulative effect of change in
    accounting principle                         12,572,000        11,451,000         16,882,000
Provision for income taxes
  (Note 8)                                        4,966,000         6,940,000          6,502,000
                                               ------------      ------------       ------------
Income before cumulative effect
    of change in accounting
    principle                                     7,606,000         4,511,000         10,380,000
Cumulative effect on prior years
    (to August 31, 1994) of
    expensing pre-operating costs
    as incurred (Note 1)                                           (3,588,000)
                                               ------------      ------------       ------------
Net income                                     $  7,606,000      $    923,000       $ 10,380,000
                                               ============      ============       ============

Earnings per share (Note 1)
 Primary:
    Income before cumulative effect
      of change in accounting
      principle                                $       0.67      $       0.44       $       1.19
    Cumulative effect on prior years
      (to August 31, 1994) of
      expensing pre-operating costs
      as incurred                                                       (0.35)
                                               ------------      ------------       ------------
    Net earnings per share                     $       0.67      $       0.09       $       1.19
                                               ============      ============       ============
 Fully diluted:
    Income before cumulative effect
      of change in accounting
      principle                                $       0.67      $       0.45       $       1.10
    Cumulative effect on prior years
      (to August 31, 1994) of
      expensing pre-operating costs
      as incurred                                                       (0.33)
                                               ------------      ------------       ------------
    Net earnings per share                     $       0.67      $       0.12       $       1.10
                                               ============      ============       ============
</TABLE>


                                       52
<PAGE>   53
                            SALICK HEALTH CARE, INC.
                  CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

<TABLE>
<CAPTION>


                                                             YEARS ENDED AUGUST 31,
                                               -------------------------------------------------
                                                   1996              1995               1994
                                               ------------      ------------       ------------
<S>                                            <C>               <C>                <C>


Weighted average number of 
  shares used in computing 
  earnings per share:

  Primary                                       11,309,000         10,311,000           8,709,000
                                               ===========        ===========         ============

  Fully diluted                                 11,309,000         10,960,000          10,576,000
                                               ===========        ===========         ============

Proforma amounts assuming 
  pre-operating costs are 
  retroactively expensed as
  incurred:
Net income                                     $ 7,606,000        $ 4,511,000         $ 9,382,000
Earnings per share:
    Primary                                    $      0.67        $      0.44         $      1.08
    Fully diluted                              $      0.67        $      0.45         $      1.00
</TABLE>


See accompanying notes to consolidated financial statements.

                                       53
<PAGE>   54
                            SALICK HEALTH CARE, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                         AUGUST 31,
                                                ---------------------------
      ASSETS                                        1996            1995
                                                ------------      ---------
<S>                                             <C>               <C>
Current assets:
  Cash                                          $     36,000      $    642,000
  Marketable securities (Note 1)                  39,070,000        44,631,000
  Accounts receivable, less allowance
   for doubtful accounts of $3,636,000
   and $2,885,000 (Note 1)                        50,470,000        36,248,000
  Inventories (Note 1)                             2,169,000         1,305,000
  Prepaid expenses                                 1,937,000         1,677,000
  Other current assets                             2,744,000         1,967,000
  Refundable income taxes (Note 8)                 1,415,000         2,545,000
  Deferred income taxes (Note 8)                   1,436,000         5,047,000
                                                ------------      ------------
    Total current assets                          99,277,000        94,062,000
Property and equipment, at cost, less
 accumulated depreciation and amortization
 of $41,711,000 and $32,841,000
 (Notes 1 and 4)                                 121,460,000       101,651,000
Deposits                                             745,000           725,000
Deferred income taxes (Note 8)                       321,000
Goodwill, net (Notes 1 and 9)                      6,213,000         5,494,000
Other assets                                       6,020,000         5,166,000
                                                ------------      ------------
                                                $234,036,000      $207,098,000
                                                ============      ============


      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Notes payable to bank (Notes 5 and 6)         $ 44,598,000      $ 18,072,000
  Accounts payable and accrued liabilities
   (Note 2)                                       38,767,000        41,063,000
  Current portion of long-term
   obligations (Notes 4 and 6)                     3,076,000         4,952,000
                                                ------------      ------------
    Total current liabilities                     86,441,000        64,087,000
Deferred income taxes (Note 8)                                          67,000
Capitalized lease obligations, less
 current portion (Note 4)                          4,278,000         5,235,000
Long-term debt, less current portion
  (Notes 5 and 6)                                  4,814,000         5,910,000
Other liabilities                                  2,000,000         2,400,000
Minority interest (Note 9)                                             (29,000)
                                                ------------      ------------
   Total liabilities                              97,533,000        77,670,000
                                                ------------      ------------
</TABLE>


                                       54
<PAGE>   55
                            SALICK HEALTH CARE, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                         AUGUST 31,
                                                ---------------------------
      ASSETS                                        1996            1995
                                                ------------      ---------
<S>                                             <C>               <C>

Commitments and contingencies (Notes 3 and 4)          
Stockholders' equity (Note 7)
  Preferred stock, $.001 par value
   5,000,000 shares authorized,
   none issued
  Common stock, $.001 par value,
   15,000,000 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
   issued and outstanding                              5,000          5,000
  Additional paid in capital                      79,810,000     79,738,000
  Unrealized holding (losses) gains                 (559,000)        44,000
  Retained earnings                               57,241,000     49,635,000
                                                ------------   ------------
   Total stockholders' equity                    136,503,000    129,428,000
                                                ------------   ------------
                                                $234,036,000   $207,098,000
                                                ============   ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       55
<PAGE>   56
<TABLE>
<CAPTION>


                            SALICK HEALTH CARE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                    YEARS ENDED AUGUST 31,
                                             -------------------------------------------
                                                1996            1995            1994
                                                ----            ----            ----
<S>                                          <C>            <C>              <C>
Cash flow provided (used) by operations:
  Net income                                 $  7,606,000   $    923,000     $ 10,380,000
Add items not requiring cash:
  Depreciation and amortization                 9,740,000      8,211,000        8,514,000
  Amortization of debt issue
      costs                                                       23,000           66,000
  Vested shares issued under
   management incentive plan                                       6,000           49,000
  Deferred income taxes                         3,223,000     (4,284,000)        (477,000)
  Minority interest in income
   (loss), net of distributions                    29,000       (711,000)        (666,000)
Cumulative effect on prior
 years (to August 31, 1994) of
 expensing pre-operating costs
 as incurred                                                   5,981,000
Merger transaction expenses                                    6,423,000
Changes in assets and liabilities:
  Accounts receivable                         (14,222,000)    (6,564,000)      (3,318,000)
  Inventories                                    (864,000)      (134,000)        (238,000)
  Prepaid expenses                               (260,000)       575,000         (394,000)
  Other current assets                           (777,000)       437,000           26,000
  Pre-operating costs                                           (728,000)      (2,644,000)
  Deposits and other assets                      (964,000)     1,170,000         (667,000)
  Accounts payable and
   accrued liabilities                          6,159,000      2,692,000          228,000
  Refundable income taxes                       1,130,000     (2,545,000)       1,296,000
  Income taxes payable                                          (537,000)         537,000
                                             ------------    ------------     ------------
Net cash flow provided
 by operations                                 10,800,000     10,938,000       12,692,000
                                             ------------    ------------     ------------

Cash flow provided (used) by investing 
activities:
  Proceeds from sales of
   marketable securities                       49,318,000     58,049,000       32,338,000
  Investment in marketable
   securities                                 (44,360,000)   (56,732,000)     (34,742,000)
  Additions to property
   and equipment                              (28,891,000)   (32,264,000)     (18,105,000)
  Payment for purchase
   of acquisitions                             (1,138,000)      (231,000)        (248,000)
  Payments received on amounts
   due from minority interest                                                   3,314,000
                                             ------------    ------------     ------------
Net cash flow used by
 investing activities                         (25,071,000)   (31,178,000)     (17,443,000)
                                             ------------   ------------      ------------
</TABLE>


                                       56
<PAGE>   57
                            SALICK HEALTH CARE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                    YEARS ENDED AUGUST 31,
                                             -------------------------------------------
                                                1996            1995            1994
                                                ----            ----            ----
<S>                                          <C>            <C>             <C>
Cash flow provided (used) by 
financing activities:
  Exercise of stock options                  $     72,000   $   4,777,000   $    619,000
  Tax effect of stock options
    exercised credited to
    paid in capital                                             1,985,000
  Reduction of capitalized
   lease obligations                             (973,000)     (1,017,000)      (711,000)
  Increase (decrease) in
   long-term debt                              (5,426,000)     (1,857,000)     4,105,000
  Notes payable to bank, net                   26,526,000      15,072,000
  Stock registration costs
   charged to paid in capital                                    (580,000)
  Accrued interest on
     convertible debentures
     credited to paid in capital                                  810,000
  Special distribution to
     stockholders                              (6,534,000)
                                             ------------    ------------    ------------
Net cash flow provided by
 financing activities                          13,665,000      19,190,000      4,013,000
                                             ------------    ------------    ------------

Decrease in cash                             $   (606,000)   $ (1,050,000)   $  (738,000)
Cash, beginning of period                         642,000       1,692,000      2,430,000
                                             ------------    ------------    ------------
Cash, end of period                          $     36,000    $    642,000    $ 1,692,000
                                             ============    ============    ============

Schedule of non-cash investing 
and financing activities:
  Conversion of 7.25% convertible
   subordinated debentures due
   January 31, 2001 into
   common stock                                              $ 25,573,000    $    342,000
                                                             ============    ============
  Capital lease
   obligations incurred for
   property and equipment                    $     70,000    $  2,250,000    $    321,000
                                             ============    ============    ============
  Unrealized holding gains
   (losses)                                  $    603,000    $    570,000    $   (526,000)
                                             ============    ============    ============
  Accrual for purchase of
   corporate headquarters                                    $ 14,650,000
                                                             ============
  Deferred bond issue costs
   charged to paid in capital
   upon conversion of the
   the subordinated debentures                               $    400,000
                                                             ============
  Special distribution payable
   to stockholders                                           $  6,534,000
                                                             ============
  Westlake Joint Venture
   settlement credited against
   amounts due from venture
   partner                                                   $  2,565,000
                                                             ============
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       57
<PAGE>   58
                            SALICK HEALTH CARE, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                          COMMON STOCK (NOTE 7)
                                 ----------------------------------------
                                                    CALLABLE PUTTABLE
                                 COMMON STOCK         COMMON STOCK                                         UNREALIZED
                                 ----------------   ---------------------     ADDITIONAL      UNEARNED       HOLDING          
                                            PAR                      PAR       PAID IN          STOCK         GAINS      RETAINED
                                 SHARES     VALUE   SHARES          VALUE      CAPITAL         AWARDS       (LOSSES)     EARNINGS
                                 ------     -----   -----           -----     ----------     ---------     ----------    --------

<S>                              <C>        <C>     <C>             <C>       <C>            <C>           <C>           <C>
Balance at August 31,
  1993                           8,341,736  $8,000                  $         $53,146,000    $(55,000)    $              $38,332,000
  Shares issued on exer-
    cise of stock options           91,469                                        630,000
  Conversion of 7.25%
    subordinated deben-
    tures                           24,425                                        342,000
  Amortization of shares
    issued in prior years
    under management
    incentive plan                                                                             49,000
  Forfeiture of shares
    issued under manage-
    ment incentive plan             (1,117)                                       (11,000)
  Valuation allowance to
    reduce portfolio to
    fair value                                                                                              (526,000)     
Net income                                                                                                                10,380,000
                                 ---------  ------  -------          -----    -----------     -------     ----------     -----------
Balance at August 31,
  1994                           8,456,513   8,000                             54,107,000      (6,000)      (526,000)     48,712,000
  Shares issued on
    exercise of stock
    options                        578,354   1,000  406,625                     4,777,000
  Additional shares
    issued upon
    recapitalization                23,000
  Tax effect of stock
    options exercised
    credited to paid
    in capital                                                                  1,985,000
  Conversion of 7.25%
    subordinated deben-
    tures                        1,826,734   2,000                             25,573,000
</TABLE>



                                       58
<PAGE>   59
                            SALICK HEALTH CARE, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             COMMON STOCK (NOTE 7)
                                   -----------------------------------------
                                                           CALLABLE PUTTABLE
                                      COMMON STOCK            COMMON STOCK                               UNREALIZED
                                   ------------------       ----------------    ADDITIONAL     UNEARNED    HOLDING          
                                                 PAR                    PAR      PAID IN        STOCK      GAINS        RETAINED
                                   SHARES       VALUE       SHARES     VALUE     CAPITAL        AWARDS    (LOSSES)      EARNINGS
                                   ------       -----       -----      -----    ----------    ---------  ----------     --------
<S>                              <C>           <C>        <C>         <C>      <C>              <C>      <C>          <C>

  Accrued interest on
    debentures at
    conversion                                 $                      $        $   810,000      $        $            $
  Conversion of common
    stock into callable
    puttable common
    stock at merger              (5,227,486)    (5,000)   5,227,457    5,000
  Deferred bond issue
    costs charged to
    paid in capital                                                               (400,000)
  Stock registration
    costs charged to
    paid in capital                                                               (580,000)
  Special distribution
    payable to stock-
    holders                                                                     (6,534,000)
  Amortization of
    shares issued in
    prior years under
    management incentive
    plan                                                                                         6,000
  Valuation allowance to
    increase portfolio to
    fair value                                                                                             570,000
  Net income                                                                                                              923,000
                                 ----------    - -----    ---------   ------   -----------      ------   ---------    -----------

Balance at August 31,
  1995                            5,657,115      6,000    5,634,082    5,000    79,738,000         -0-      44,000     49,635,000
  Shares issued on exer-
    cise of stock options                                     6,000                 72,000
  Valuation allowance to
    reduce portfolio to
    fair value                                                                                            (603,000)

</TABLE>



                                       59
<PAGE>   60
                            SALICK HEALTH CARE, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                       COMMON STOCK (NOTE 7)
                                 ----------------------------------------
                                                    CALLABLE PUTTABLE
                                 COMMON STOCK         COMMON STOCK                                         UNREALIZED
                                 ----------------   ---------------------     ADDITIONAL      UNEARNED       HOLDING          
                                            PAR                      PAR       PAID IN          STOCK         GAINS      RETAINED
                                 SHARES     VALUE   SHARES          VALUE      CAPITAL         AWARDS       (LOSSES)     EARNINGS
                                 ------     -----   -----           -----     ----------     ---------     ----------    --------

<S>                              <C>        <C>     <C>             <C>       <C>            <C>           <C>           <C>
Net income                                 $                        $         $              $             $             $ 7,606,000
                                 --------- -------  ---------       ------    -----------    ---------     ----------    -----------

Balance at August 31,
  1996                           5,657,115 $ 6,000  5,640,082       $5,000    $79,810,000    $   -0-       $(559,000)    $57,241,000
                                 ========= =======  =========       ======    ===========    =========     =========     ===========

</TABLE>



          See accompanying notes to consolidated financial statements.


                                       60
<PAGE>   61
                            SALICK HEALTH CARE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

      Salick Health Care, Inc. and its subsidiaries (the "Company") provides
disease-specific health care services and risk-based and other products and
programs to providers, health care payors, principally in the areas of the
diagnosis and treatment of cancer and the treatment of kidney failure. The
Company provides its services in selected geographical areas across the United
States in both inpatient and outpatient settings. At August 31, 1996, the
Company's ten Cancer Centers typically bill their charges to the hospitals with
which each is affiliated. Each Cancer Center is paid by the hospital after the
payment is received by the hospital. Contractual arrangements with the
affiliated hospitals generally provide incentive participation in the Company's
operating results.

      The Company's ten outpatient artificial kidney treatment facilities are
located in Southern California. Charges are billed directly to the patient or
the patients' payors, e.g., Medicare, commercial insurance, etc. The Company
extends its treatment of cancer and dialysis patients by providing Alternate
Site and Home Infusion Services in areas where the Company has outpatient
facilities. Charges are billed directly to the patient or his payor.

      Additionally, the Company provides a range of cancer and treatment
programs to providers, managed care entities including Health Maintenance
Organizations, Preferred Provider Organizations, Independent Practice
Associations, self insured and other payors of health care services. These
programs include capitated contracts, discounted fee for services, case rate and
visit group methodologies.

      The Company acquired in 1996, its first acute care hospital in Southern
California. This hospital will expand the Company's capabilities to provide
specialized treatment modalities for cancer, dialysis, organ transplant and
immuno-deficient patients.

      The Company was incorporated in Delaware in 1991 for the purpose of
changing the state of incorporation of Salick Health Care, Inc., a California
corporation incorporated in 1983, from California to Delaware by way of merger
of the California corporation into the Company. In 1995, an indirect wholly
owned subsidiary of Zeneca Limited, an English company, was merged into the
Company. As a result, Zeneca Limited beneficially owns more than 50% of the
common equity of the Company.

USE OF ESTIMATES

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.





                                       61
<PAGE>   62
PRINCIPLES OF CONSOLIDATION

      The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany items have been eliminated.

OPERATING REVENUES

      Operating revenues are recorded, net of contractual allowances and
allowances for doubtful accounts from standard treatment rates, when treatments
are rendered to patients. These allowances were $124,094,000, $102,439,000 and
$87,029,000 for the years ended August 31, 1996, 1995, and 1994, respectively. A
substantial portion of the Company's revenues is dependent on reimbursement
programs administered by Medicare and other governmental agencies.

PREPAID HEALTH CARE SERVICES

      The Company receives premiums as compensation for providing defined health
care services. The Company either provides cancer treatment services at its own
facilities, or pays other providers for cancer treatment services as those
services are performed. Premiums collected for health care services are
recognized as operating revenues in the period for which the member is entitled
to service. Cost of health care is accrued in the period it is provided to the
members and patients based in part on estimates, including a provision for
incurred but not recorded claims. Claims payments are reported as medical
supplies and services in the Company's consolidated statements of income.

MARKETABLE SECURITIES

      The marketable securities portfolio includes brokerage cash funds, equity
securities and corporate and government bonds. Marketable securities are stated
at their fair value of $39,070,000 and $44,631,000 as of August 31, 1996 and
1995, respectively. Cost of the marketable securities portfolio was $39,629,000
and $44,587,000 at August 31, 1996 and 1995, respectively. Net realized gains of
$383,000, and net realized losses of $177,000 and $386,000 for the years ended
August 31, 1996, 1995 and 1994, respectively, are recorded in net investment
gains (losses). The costs of marketable securities sold are determined by the
specific identification method.

      Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, which the Company adopted in
the fourth quarter of fiscal 1994, requires that debt and equity securities
which are available-for-sale, be recorded at fair value in the financial
statements and that unrealized holding gains (losses) be reported as a net
amount in a separate component of stockholders' equity until realized.
Unrealized holding losses of $559,000 and gains of $44,000 are recorded as
separate components of stockholders' equity in the Company's balance sheets as
of August 31, 1996 and 1995, respectively. Proceeds from sales of
available-for-sale securities were $49,318,000, $58,049,000 and $32,338,000 for
the years ended August 31, 1996, 1995 and 1994, respectively. Gross realized
gains were $853,000, $281,000 and $606,000, and gross realized losses were
$470,000, $458,000 and $992,000 on these sales.








                                       62
<PAGE>   63
      Aggregate cost, market value and unrealized holding (losses) gains for the
major components of the Company's portfolio, at August 31, 1996, are as follows:

<TABLE>
<CAPTION>


                                                                        Unrealized
                                                          Market         Holding
                                           Cost           Value         Gain(Loss)
                                        -----------     -----------     ----------

<S>                                     <C>             <C>             <C>
     Government debt securities
       (due 1996-2029)..........        $35,244,000     $34,641,000     $ (603,000)
     Corporate debt securities
       (due 1996-1997)..........            242,000         243,000          1,000
     Equity securities..........          2,928,000       2,971,000         43,000
     Cash.......................          1,215,000       1,215,000
                                        -----------     -----------     ----------

                                        $39,629,000     $39,070,000     $ (559,000)
                                        ===========     ===========     ==========
</TABLE>

INVENTORIES

     Inventories, which are comprised of medical supplies, are stated at the
lower of cost (FIFO) or market.

PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost less accumulated depreciation.
Depreciation is generally provided on the straight-line method over the
estimated useful life of the asset. The components of property and equipment and
the estimated useful lives by asset category are as follows:

<TABLE>
<CAPTION>

                                    Estimated               August 31,
                                    Useful Lives        1996              1995
                                    ------------    ------------      --------
<S>                                 <C>             <C>               <C>
Land........................                        $  4,987,000      $  2,822,000
Buildings...................        20-25 years       60,575,000        38,851,000
Leasehold improvements......         3-25 years       38,926,000        14,296,000
Clinic equipment............         5-15 years       31,285,000        26,536,000
Furniture and fixtures......         5-7  years       17,215,000        13,109,000
Automobiles and trucks......         3-7  years          763,000           678,000
                                                    ------------      ------------
                                                     153,751,000        96,292,000
Less accumulated
 depreciation and amortization...........            (41,711,000)      (32,841,000)
                                                    ------------      ------------
                                                     112,040,000        63,451,000
Construction in progress.................              9,420,000        38,200,000
                                                    ------------      ------------
                                                    $121,460,000      $101,651,000
                                                    ============      ============
</TABLE>


   The above summary of property and equipment includes capitalized leases (Note
4).

      Interest cost is capitalized for construction in progress during the
construction period. Interest capitalized during the years ended August 31,
1996, 1995 and 1994 was $1,340,000, $1,920,000 and $563,000, respectively.

INCOME TAXES

         The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Deferred tax liabilities and deferred tax assets are
recognized for taxable temporary differences and deductible temporary
differences, respectively. A valuation allowance reduces deferred tax assets if
it is more likely than not that all, or some portion, will not be realized.

                                       63
<PAGE>   64
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


EARNINGS PER SHARE

      Earnings per share, assuming no dilution, is calculated based upon the
weighted average number of common and common equivalent shares outstanding
during each year. Earnings per share, assuming full dilution, is computed as
above and, additionally, assumes conversion of the convertible subordinated
debentures into common stock at the beginning of the 1995 and 1994 fiscal
periods. The effect in fiscal 1995 was antidilutive (Note 6).

PRE-OPERATING COSTS

      Pre-operating costs have been expensed in fiscal 1996. In the fourth
quarter of fiscal 1995, giving effect to the first quarter, the Company recorded
the cumulative effect of the change from deferral to expensing pre-operating
costs as incurred of $3,588,000, net of income taxes of $2,393,000. This change
in accounting for pre-operating costs was adopted as management believes this
method of accounting better reflects the Company's current methods of operations
and it conforms to the accounting principles used by Zeneca Group, PLC, the
beneficial owner of more than 50% of the Company's common equity. In prior
years, pre-operating costs had been deferred and amortized over a three year
period upon commencement of facility operations. Amortization of these
pre-operating costs was $1,036,000 during the year ended August 31, 1994.

DEBT ISSUE COSTS

      Debt issue costs associated with the issuance of the Company's 7.25%
Convertible Subordinated Debentures in 1986 (Note 6) were $1,145,000. These
costs, recorded as other assets were deferred and amortized over the fifteen
year term of the debentures. On December 29, 1994 the Company called for the
redemption on January 20, 1995, of all its outstanding debentures at a
redemption price, including accrued interest through January 20, 1995 of
$1,049.34 per $1,000 of debentures redeemed. The debentures were convertible at
any time prior to the close of business on January 12, 1995 into shares of
common stock of the Company at the rate of $14.00 per share and all outstanding
debentures were converted into common stock. At the time of conversion,
remaining debt issue costs were charged to stockholders' equity. Amortization of
debt issue costs was $23,000 and $66,000 during the years ended August 31, 1995
and 1994, respectively.

GOODWILL

      Goodwill represents the excess of the purchase price over the fair value
of net assets acquired. Goodwill is amortized on a straight line basis over a
period of forty years. Amortization of goodwill during the years ended August
31, 1996, 1995 and 1994 was $166,000, $159,000 and $151,000, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amounts of cash, accounts receivable, accounts payable and
short-term debt approximate fair value because of the short maturity of these
financial instruments. The fair values of other long-term debt obligations are
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. The carrying values of other long-term debt obligations approximate
fair values.




                                       64
<PAGE>   65
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

LONG-LIVED ASSETS

      In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121).
SFAS 121 established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. Adoption of this new standard is required in the
first quarter of fiscal 1997. Implementation of this new accounting standard is
not expected to have a material impact on the consolidated financial statements
of the Company.

NOTE 2-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

      Accounts payable and accrued liabilities are comprised of the following:

<TABLE>
<CAPTION>

                                                 August 31,
                                        -----------------------------
                                           1996              1995
                                        -----------       -----------

<S>                                     <C>               <C>
Accounts payable .................      $12,673,000       $ 6,733,000
Accrued compensation .............        4,672,000         4,485,000
Corporate headquarters purchase ..       14,650,000        14,650,000
Special distribution to
  stockholders ...................                          6,534,000
Merger transaction expenses ......                          4,023,000
Accrued taxes payable ............        2,685,000
Other accrued liabilities ........        4,087,000         4,638,000
                                        -----------       -----------

                                        $38,767,000       $41,063,000
                                        ===========       ===========

</TABLE>

NOTE 3-RELATED PARTY TRANSACTIONS

      The Company and its subsidiaries lease corporate office space from its
Chairman and Chief Executive Officer and his spouse (the "Lessors") under an
operating lease containing operating cost escalation provisions. The lease has a
remaining term of approximately 15 years. Additional office space is leased for
the Company's operations from an entity owned by the Lessors and an unrelated
third party on a month-to-month basis. Aggregate minimum annual rentals for the
years ended August 31, 1996, 1995 and 1994 were approximately $1,094,000,
$1,041,000 and $1,008,000, respectively. The Company also leases a dialysis
treatment center from the Lessors, as more fully described in Note 4.

      The Company and the Lessors are parties to a lease for the Company's
corporate headquarters and related offices and the Lessors, the Company and
Zeneca executed an agreement, dated December 22, 1994 pursuant to which the
Lessors have elected to sell the corporate headquarters to the Company for an
aggregate purchase price of $14,650,000 in cash, which purchase price is
approximately $1,160,000 less than the formula purchase price in the lease under
which the Lessors had the right under certain circumstances to require the
Company to purchase the corporate headquarters.

      The Company and a subsidiary lease a dialysis treatment center from its
Executive Vice President and Chief Financial Officer under an operating lease
containing operating cost escalation provisions.  The lease has a term of
approximately five years with options for renewal for up to 15 years.  The

                                       65
<PAGE>   66
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

aggregate minimum annual rental is $60,000 per year and the amount paid during
the year ended August 31, 1996 was $5,000.

NOTE 4-LEASES AND COMMITMENTS

      The Company leases from the Lessors (See Note 3) a chronic dialysis
treatment center at minimum annual rental of $623,000. The lease has a remaining
term of approximately 10 years and is recorded as a capital lease at an imputed
interest rate of 13.8%. The Company also leases certain clinic equipment under
the terms of capital leases with unrelated third parties.


Annual future minimum lease payments as of August 31, 1996 are as follows:

<TABLE>
<CAPTION>

   Year Ending                              Operating        Capital
   August 31,                                  Leases        Leases
   -----------                              -----------     ---------
<S>                                         <C>             <C>
   1997...............................      $ 1,919,000     $ 1,570,000
   1998...............................        1,383,000       1,546,000
   1999...............................        1,139,000       1,315,000
   2000...............................        1,062,000         596,000
   2001...............................          945,000         443,000
   Thereafter.........................        2,711,000       2,304,000
                                            -----------    ------------

Total minimum lease payments, 
  including $2,334,000 ($370,000 
  of which relates to the 
  corporate headquarters) under 
  operating leases and $4,464,000 
  under capital leases payable to 
  the Company's lessors described 
  in Note 3...........................      $ 9,159,000       7,774,000
                                            ===========

Less interest and
 executory costs......................                       (2,420,000)
                                                            -----------
Present value of minimum
 lease payments.......................                        5,354,000
Less current portion..................                       (1,076,000)
                                                            -----------
                                                            $ 4,278,000
                                                            ===========
</TABLE>

      Interest rates on capital leases vary from 6% to 9% except as described
above. The following is an analysis of capitalized lease assets included in
property and equipment:
<TABLE>
<CAPTION>

                                       August 31,
                                -------------------------
                                    1996          1995
                                ----------     ----------

<S>                             <C>            <C>
Buildings.................      $2,858,000     $2,858,000
Clinic equipment..........       5,657,000      6,867,000
                                ----------     ----------
                                 8,515,000      9,725,000
Less accumulated
 amortization.............      (3,039,000)    (3,373,000)
                                ----------     ----------
                                $5,476,000     $6,352,000
                                ==========     ==========
</TABLE>

      During the years ended August 31, 1996, 1995 and 1994 rent expense under
operating leases totalled $2,724,000, $2,427,000 and $2,438,000, respectively.


                                       66
<PAGE>   67
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

      Under the terms of certain agreements that the Company has at various of
its Cancer Centers, it has, in total, annual commitments of up to $4,527,000
plus amounts based on center performance. These agreements terminate at various
dates through 2027, subject to renewal provisions.

NOTE 5-BANK AGREEMENTS

      The Company has a business loan agreement with a bank which is subject to
renewal in 1998, for lines of credit of $80,000,000 with interest payable at the
bank's prime rate (8.25% at August 31, 1996) unless the Company elects an
optional rate of interest. The loan agreement requires a 0.1% fee on the
difference between the $80,000,000 loan commitment and the amount the Company
actually uses. At August 31, 1996, there was $44,598,000 in outstanding
borrowings under the revolving line of credit. During the year ended August 31,
1996 the Company paid $733,000 in interest expense relating to the revolving
line of credit. Under the prior agreement, the Company was eligible at its
option to convert up to $10,000,000 of the then $35,000,000 available under the
business loan agreement to long-term debt payable monthly upon conversion. In
August 1993, the Company converted $5,000,000 of short-term revolving borrowings
to long-term debt and, in August 1994, converted another $5,000,000 to long-term
debt. The principal portion of each conversion is repayable in sixty monthly
installments beginning in the month following conversion. Interest accrues and
is paid monthly on the unpaid principal balance of the long-term debt portion at
8.62% and 6.85% per annum on the August 1994 and 1993 conversions, respectively.

NOTE 6-LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                    August 31,
                                          -------------------------------
                                              1996               1995
                                          -----------         -----------

<S>                                       <C>                 <C>
Term bank loan.....................       $ 5,083,000         $ 7,083,000
Equipment purchase debt............         1,731,000           2,757,000
                                          -----------         -----------
Total long-term debt...............         6,814,000           9,840,000
Less current portion...............        (2,000,000)         (3,930,000)
                                          -----------         -----------
                                          $ 4,814,000         $ 5,910,000
                                          ===========         ===========
</TABLE>

      The debt for equipment purchased under agreement with a hospital at which
the Company operates a Cancer Center becomes payable in full, upon opening of
the permanent Cancer Center, which is presently expected in fiscal 1998.
Interest of $5,500 is expensed monthly and is payable until opening of the
permanent Cancer Center.

      On December 29, 1994 the Company called for redemption on January 20, 1995
of all its outstanding 7 1/4% Convertible Debentures due 2001 at a redemption
price, including accrued interest through January 20, 1995, of $1,049.34 per
$1,000 of debenture redeemed. The debentures were convertible at any time prior
to the close of business on January 12, 1995 into shares of common stock of the
Company at the rate of $14.00 per share and all outstanding Debentures were
converted into common stock. For the purpose of calculating fully diluted
earnings per share for the periods ended August 31, 1995 and 1994, these
debentures were assumed to have been converted into common stock as of the
beginning of the respective periods presented.

      During the years ended August 31, 1996, 1995 and 1994, interest payments
made on long-term debt totalled $1,689,000, $1,452,000, and $2,286,000,
respectively.

                                       67
<PAGE>   68

                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

During the years ended August 31, 1996, 1995 and 1994, interest expense on the
lines of credit, capital leases and long-term debt, before capitalization of
interest to construction-in-progress, totalled $3,300,000, $3,279,000 and
$3,605,000, respectively.

      Long-term debt maturing during the five years subsequent to August 31,
1996 is as follows:

<TABLE>
<CAPTION>


                Year                                  Amount
                ----                                  ------
                <S>                                 <C>
                1997........................       $ 2,000,000
                1998........................         3,731,000
                1999........................         1,000,000
                2000........................            83,000
                                                   -----------
                                                   $ 6,814,000
                                                   ===========
</TABLE>


NOTE 7-STOCKHOLDERS' EQUITY

     DESCRIPTION OF CAPITAL STOCK

      In August 1991, the state of incorporation of the Company was changed from
California to Delaware by virtue of the merger of Salick Health Care, Inc., a
California corporation, into the Company. In connection with the merger, the
Company's authorized capital increased from 15,000,000 shares of common stock,
no par value, and 1,000,000 shares of preferred stock, no par value, to
25,000,000 shares of common stock, $.001 par value, and 5,000,000 shares of
preferred stock, $.001 par value, respectively. Other changes concerning the
charter and Bylaws of the Company were also affected by the merger.

      On April 13, 1995 the Company consummated the Agreement and Plan of Merger
with an indirect wholly owned subsidiary of Zeneca Limited ("Zeneca"), pursuant
to which a wholly owned subsidiary of Zeneca acquired approximately 50% of the
equity of the Company on a fully diluted basis. Under the terms of the
Agreement, Company stockholders received in exchange for each share of common
stock held: $18.875 in cash from Zeneca; one-half share of a new callable
puttable common stock issued by the Company and a payment to holders of record
at closing from the Company of $0.625, payable in two equal installments at 180
days and 360 days after closing. The callable puttable common stock carries a
right on the behalf of stockholders to put (sell) the stock to the Company and
an obligation on behalf of Zeneca to fund the purchase, at 2.5 years after
closing at a price of $42 per share. The callable puttable common stock also
carries a right on behalf of the Company to call (buy) the callable puttable
common stock for a period of four years at market price, subject, for the first
2.6 years, to a floor and ceiling per share price. The floor on the call is $42
per share, discounted by 4% per annum compounded if the call is made before 2.5
years, and the ceiling is $50 per share.

      The Merger was accounted for as a recapitalization of the Company. The
common stock issued to Zeneca was capitalized in an amount equal to the cash
consideration received by existing stockholders of the Company in exchange for
their shares. The cash proceeds paid to existing stockholders in exchange for
their shares (including the distribution payable by the Company) was charged to
stockholders' equity. The callable puttable common stock issued to existing
stockholders was capitalized at par value. Cash consideration paid to existing
stockholders upon exercise of the Put and/or the Call will be charged against
stockholders' equity at the date of exercise. Cash consideration received by the

                                       68
<PAGE>   69
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Company from Zeneca to fund the Put and/or the Call will be credited to
stockholders' equity.

      MANAGEMENT INCENTIVE COMPENSATION PLAN

      The Company's Management Incentive Compensation Plan, adopted in 1991,
provided for the award of shares of common stock some of which had conditions or
restrictions on the participant's right to transfer or sell such shares. This
Incentive Plan covered an aggregate of 200,000 shares of common stock eligible
to be granted to certain officers and key employees of the Company. During
fiscal year 1993 15,023 shares of common stock were issued under this Incentive
Plan, none of which are subject to restrictions as of August 31, 1995.

      STOCK OPTIONS

      Under its Stock Option Plan, the Company has granted options for shares of
common stock, 1,100,000 authorized, at fair market values on the dates of the
grants. The exercise prices of these shares ranged from $5.50 to $15.50. Upon
consummation of the Company's merger agreement with Zeneca Limited, holders of
unexercised options were eligible to convert their options into options for
purchase of the new callable puttable common stock. Transactions for fiscal
years 1994, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>

                                       Number of               Option Price
                                        Shares                     Range
                                       ---------               ----------------

<S>                                    <C>                     <C>
Balance, August 31, 1993                698,593
                     Granted              5,000                          $13.25
                     Exercised          (91,469)                $ 5.50 - $10.50
                     Forfeited          (21,669)                $10.13 - $10.50
                                        -------
Balance, August 31, 1994                590,455
                     Exercised         (570,354)                $ 5.50 - $13.25
                     Forfeited           (1,101)                         $10.13
                                        -------
Balance, August 31, 1995                 19,000
                     Exercised           (2,000)                         $10.13
                                        -------
Balance, August 31, 1996                 17,000
                                        =======
</TABLE>

The remaining 17,000 options outstanding under the Stock Option Plan at August
31, 1996 were all exercised in September and October 1996.

      In 1994 the stockholders approved the Company's Non-Employee Director
Stock Option Plan (the "Director Plan"), which provided that each April,
commencing April, 1993, each non-employee Director of the Company automatically
be granted a non-qualified stock option covering 2,000 shares of the common
stock of the Company. The Plan was terminated effective April 13, 1995 in
connection with the recapitalization.

      The price paid per share upon exercise of an option granted under the
Director Plan was the fair market value of the share of common stock on its date
of grant. Options for 6,000 shares were granted in fiscal year 1993 to three
director participants at an exercise price of $10.13 per share. In fiscal year
1994 options for 6,000 shares were granted to three director participants at an
exercise price of $15.50 per share. Upon consummation of the Company's merger
agreement with Zeneca, holders of unexercised options converted their options
into

                                       69
<PAGE>   70
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

options for purchase of the new callable puttable common stock and the Director
Plan was terminated. During fiscal years 1996 and 1995, 4,000 and 8,000 options
were exercised at an exercise price of $10.13 to $15.50 per share. No options
under the Director Plan remain outstanding at August 31, 1996.

NOTE 8-INCOME TAXES

      The components of the provision (benefit) for income taxes are as follows:

<TABLE>
<CAPTION>

                                        Years Ended August 31,
                                   1996          1995         1994
                                 ----------   ----------   ----------
<S>                              <C>          <C>          <C>
   Current:
          Federal............    $1,767,000   $6,581,000   $4,436,000
          State..............       855,000    2,308,000    1,589,000
                                 ----------   ----------   ----------
                                  2,622,000    8,889,000    6,025,000
                                 ----------   ----------   ----------

   Deferred:
          Federal............     1,852,000   (1,227,000)     418,000
          State..............       492,000     (722,000)      59,000
                                 ----------   ----------   ----------
                                  2,344,000   (1,949,000)     477,000
                                 ----------   ----------   ----------
                                 $4,966,000   $6,940,000   $6,502,000
                                 ==========   ==========   ==========
</TABLE>

      The reconciliation of the provision for income taxes computed at the
federal statutory rate to the reported provision for income taxes as above is as
follows:

<TABLE>
<CAPTION>

                                        Years Ended August 31,
                                   1996          1995         1994
                                 ----------   ----------   ----------
<S>                              <C>          <C>          <C>

Provision computed at
 statutory rate...............  $4,400,000    $4,008,000   $5,909,000
State taxes, net of federal
   income tax benefit..........    876,000     1,137,000    1,071,000
Non deductible merger costs...                 2,489,000
Tax-exempt interest...........    (502,000)     (280,000)    (117,000)
Markup (markdown) of
   investment portfolio.......    (239,000)       62,000      (76,000)
Other.........................     431,000      (476,000)    (285,000)
                                ----------    ----------   ----------
                                $4,966,000    $6,940,000   $6,502,000
                                ==========    ==========   ==========
</TABLE>

      The Company adopted SFAS 109 during the first quarter of fiscal 1994. The
adoption of SFAS 109 changed the Company's method of accounting for income taxes
from the deferred method to the asset and liability method of accounting for
income taxes. Under SFAS 109, deferred tax liabilities are recognized for
taxable temporary differences and deferred tax assets are recognized for
deductible temporary differences. A valuation allowance reduces deferred tax
assets if it is more likely than not that all, or some portion, will not be
realized. There was no material impact from the adoption of SFAS 109.

      The markdown of the investment portfolio represents a capital loss for
federal tax purposes. The effect of the markdown is to decrease the effective
tax rates for fiscal 1994 and 1996 and to increase the effective tax rate for
1995. At August 31, 1996, the Company had approximately $442,000 of capital
losses available for carryforward to future years. The capital losses will
expire, if not utilized, in the years ending August 31, 1999 and 2000. A 100%
valuation allowance has been established to offset the deferred tax benefit
associated with the capital loss carryforward.


                                       70
<PAGE>   71
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


      The Company's deferred tax assets (liabilities) were comprised of the
following:
<TABLE>
<CAPTION>

                                                           August 31,
                                                 -----------------------------
                                                     1996              1995
                                                 ----------        -----------

<S>                                              <C>               <C>
Deferred tax assets:
   Salary accrual...........................     $  161,000        $   143,000
   State taxes..............................        190,000            245,000
   Bad debts................................      1,243,000          1,243,000
   Capital transactions.....................        199,000            506,000
   Depreciation.............................        347,000
   Partnerships.............................        111,000
   Stock options............................                         1,703,000
   Business expansion.......................        672,000          1,713,000
                                                 ----------        -----------
   Total deferred tax assets................      2,923,000          5,553,000
                                                 ----------        -----------

Deferred Tax Liabilities:
   Depreciation.............................                           (22,000)
   Partnerships.............................                           (45,000)
   Accrual to cash..........................       (157,000)
   Amortization.............................       (810,000)
                                                 ----------        -----------
   Total deferred tax liabilities...........       (967,000)           (67,000)
                                                 ----------        -----------

   Valuation allowance......................       (199,000)          (506,000)
                                                 ----------        -----------
   Net deferred tax assets..................     $1,757,000        $ 4,980,000
                                                 ==========        ===========
</TABLE>


      During the years ended August 31, 1996, 1995 and 1994, total tax payments
were $1,493,000, $9,931,000 and $5,257,000, respectively.

NOTE 9-ACQUISITIONS

      In 1987, the Company purchased the assets and businesses of Orange County
Dialysis, Inc. and Mission Dialysis Inc. The acquisition has been accounted for
as a purchase. Additional consideration of $257,000, $195,000 and $248,000 has
been paid under a contractual formula for the years ended August 31, 1996, 1995
and 1994, respectively.

      In February 1991, the Company purchased for $304,000 a 3.5% limited
partnership interest in Magnetic Imaging Associates, a limited partnership
located in Alameda County, California which is engaged in the business of
providing magnetic resonance imaging services to patients and physicians.

      Additionally, in March 1991, the Company purchased for $1,152,000 a 40%
limited partnership interest in Alta CT Services, a limited partnership located
in Alameda County, California, which is engaged in the business of providing CT
scan services. The partnership agreement requires, among other provisions, that
Alta CT Services construct a CT scan facility at the Alta Bates Cancer Center
location.

      In November 1993, the Company purchased for $250,000 a 25% limited
partnership interest in Alta Imaging Associates, a limited partnership located
in Alameda County, California which is engaged in the business of providing
diagnostic imaging services.



                                       71
<PAGE>   72
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


      The three investments are accounted for using the equity method. The
combined carrying value, recorded in other assets, of the investments at August
31, 1996 and 1995 was $1,591,000 and $1,604,000, respectively.

      On October 8, 1991, the Company acquired an 80% ownership interest in the
South Florida Radiation Oncology Center (SFROC)in Miami, Florida for $1,315,000
and assumed management of its operations. During fiscal 1996, the Company
completed acquisition of the remaining 20% ownership interest from the previous
owners in fiscal 1996. The financial results of SFROC, net of the 20% minority
interest through date of acquisition, have been consolidated with the results of
the Company.

      On February 1, 1996, the Company purchased 100% of the capital stock of
The Breast Center, Inc. for $1,467,000. Additionally, the Company purchased a
portion of the entity's equipment for $500,000. The acquisition has been
accounted for as a purchase.

      On July 25, 1996, a subsidiary of the Company acquired Westlake Medical
Center, a licensed acute care hospital, adjacent land, a medical office building
and related assets for $8,150,000 from a subsidiary of Columbia/HCA Healthcare
Corporation. This subsidiary of the Company is operating the hospital as SHC
Specialty Hospital and is focusing its programs and services on diagnosis and
treatment of patients with cancer, kidney failure and immuno-deficient diseases.
The Company's subsidiary is currently involved in litigation with Columbia/HCA
Healthcare Corporation and its subsidiary regarding, among other things, the
legality  and enforceability of restrictions on medical services that could be
provided following the sale and whether such restrictions would apply to
subsequent owners or lessees of the hospital. 

NOTE 10-QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized quarterly financial data in thousands (except for per share
data) for 1996 and 1995 is as follows:

<TABLE>
<CAPTION>

1996 QUARTER                            1ST       2ND        3RD        4TH
                                     ------------------------------------------
<S>                                  <C>         <C>        <C>       <C>
Operating revenues, net              $37,513     $39,110    $43,985   $42,831
Operating income                       3,828       3,184      3,774       734
Net income                             2,771       2,217      2,478       140
Earnings per share:
   Primary                              0.25        0.20       0.22      0.01
   Fully diluted                        0.25        0.20       0.22      0.01
</TABLE>

<TABLE>
<CAPTION>

                 
1995 QUARTER (1) (2)                    1ST       2ND        3RD        4TH     
                                     ------------------------------------------ 
<S>                                  <C>         <C>        <C>       <C>     
                                     $36,176     $38,170    $39,017   $37,945
                                       4,075       4,525      5,180     3,662
Operating revenues, net                 (950)      2,600     (3,556)    2,829
Operating income            
Net income                             (0.10)       0.26      (0.32)     0.25
Earnings per share:                    (0.06)       0.25      (0.32)     0.25
   Primary                  
   Fully diluted                      35,965      37,981     38,754
As previously reported:                4,606       4,981      5,575
Operating revenues, net                2,960       2,874     (3,319)
Operating income            
Net income (loss)                       0.34        0.29      (0.30)
Earnings (loss) per share:              0.31        0.28      (0.30)
  Primary                   
  Fully diluted                                              
</TABLE>

                                       72
<PAGE>   73
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(1)      Fiscal 1995 quarterly results have been restated for the change in
         accounting principle from deferral to expensing pre-operating costs as
         incurred. See Note 1.

(2)      Fourth quarter 1995 results include a charge to operating revenues of
         $1.5 million, reflecting a change in management's estimation of the
         collectibility of certain accounts receivable.


                                       73
<PAGE>   74
                            SALICK HEALTH CARE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


                            SALICK HEALTH CARE, INC.
                 SCHEDULE VIII - ALLOWANCE FOR DOUBTFUL ACCOUNTS
                    FOR THE THREE YEARS ENDED AUGUST 31, 1996

<TABLE>
<CAPTION>

                Balance at       Additions       Reductions       Balance
                Beginning        Charged to      Net of           at End
                of Year          Income          Recoveries       of Year
                ----------       -----------     ------------     ----------

<S>             <C>              <C>             <C>              <C>
1994            $3,373,000       $ 9,992,000     $ (9,863,000)    $3,502,000

1995            $3,502,000       $10,521,000     $(11,138,000)    $2,885,000

1996            $2,885,000       $11,988,000     $(11,237,000)    $3,636,000
</TABLE>


                                       74
<PAGE>   75
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         During the past three fiscal years there have been no changes in the
Company's independent accountants and no disagreements on any matter of
accounting principles or practices or financial statement disclosure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required by this item for Directors is incorporated by
reference herein to the Proxy Statement of the Company to be filed pursuant to
Regulation 14A.

         The information required by this item for executive officers and
significant employees is set forth in Part I of this report under the heading
"EXECUTIVE OFFICERS OF THE REGISTRANT".

ITEM 11. EXECUTIVE COMPENSATION.

         The information required by this item is incorporated by reference
herein to the Proxy Statement of the Company to be filed pursuant to Regulation
14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by this item is incorporated by reference
herein to the Proxy Statement of the Company to be filed pursuant to Regulation
14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this item is incorporated by reference
herein to the Proxy Statement of the Company to be filed pursuant to Regulation
14A.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

         (A)  (1)  Financial Statements

         The financial statements required pursuant to this Item are listed and
have been filed as a part of this Report under Part II, Item 8.

              (2)  Financial Statement Schedules

         The financial statement schedule required pursuant to this Item is
listed and has been filed as a part of this Report under Part II, Item 8.

         Schedules not listed are omitted because they are inapplicable or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.


                                       75
<PAGE>   76
         (3)      Exhibits


2        Copy of Agreement and Plan of Merger between Salick Health Care, Inc.
         and the Company. Incorporated by reference to Exhibit 1 of the
         Registration Statement on Form 8-B of the Company dated August 28,
         1991.

2(a)     Agreement and Plan of Merger, dated as of December 22, 1994, as
         amended, by and among the Company, Zeneca Limited and Atkemix
         Thirty-nine Inc. Incorporated by reference to Annex A to the Proxy
         Statement Prospectus of the Company dated March 13, 1995 forming a part
         of the Company's Registration Statement on Form S-4 dated March 13,
         1995 - No. 33-58057.

3(a)     Certificate of Incorporation of Salick Health Care, Inc. Incorporated
         by reference to Annex B to the Proxy Statement Prospectus of the
         Company dated March 13, 1995 forming part of the Company's Registration
         Statement on Form S-4 dated March 13, 1995- No. 33-58057.

3(a-1)   Certificate of Amendment of Certificate of Incorporation of Salick
         Health Care, Inc. Incorporated by reference to Exhibit 3(b) of the Form
         10-Q of the Company dated February 29, 1996 for the quarterly period
         ended February 29, 1996.

3(b)     Bylaws of the Company. Incorporated by reference to Annex C to the
         Proxy Statement Prospectus dated March 13, 1995 forming a part of the
         Company's Registration Statement on Form S-4 dated March 13, 1995 - No.
         33-58057.

4(a)     Business Loan Agreement of the Company with Bank of America NT&SA dated
         August 1, 1995. Incorporated by reference to Exhibit of the same number
         of the Form 10-K of the Company for the year ended August 31, 1995.

4(b)     Specimen form of certificate of Callable Puttable Common Stock of the
         Company. Incorporated by reference to Exhibit 4.3 of the Registration
         Statement on Form S-4 of the Company dated March 13, 1995 - No.
         33-58057.

10(a)    Chronic Dialysis Unit Management Agreement, as amended, with
         Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by
         reference to Exhibit of same number of the Registration Statement on
         Form S-l of the Company dated March 6, 1985-No.2-95552.

10(a-1)  Fourth Amendment to Chronic Dialysis Unit Management Agreement, dated
         June 1987. Incorporated by reference to Exhibit of same number of the
         Registration Statement on Form 8-B of the Company dated August 28,
         1991.

10(a-2)  Fifth Amendment to Chronic Dialysis Unit Management Agreement, dated
         October 1990. Incorporated by reference to Exhibit of same number of
         the Registration Statement on Form 8-B of the Company dated August 28,
         1991.



                                       76
<PAGE>   77
 10(b)    Acute Dialysis Unit Management Agreement, as amended, with 
          Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by
          reference to Exhibit of same number of the Registration Statement on
          Form S-l of the Company dated March 6, 1985 - No. 2-95552.

 10(b-1)  Third Amendment to Acute Dialysis Unit Management Agreement, dated
          October 1990. Incorporated by reference to Exhibit of the same number
          of the Registration Statement on Form 8-B of the Company dated August
          28, 1991.

 10(c)    Acute Dialysis Unit Service Agreement, as amended, with Temple
          Hospital dated May 27, 1981. Incorporated by reference to Exhibit of
          same number of the Registration Statement on Form S-l of the Company
          dated March 6, 1985 - No. 2-95552.

 10(e)    Agreement of Company's subsidiary, Comprehensive Cancer Centers, Inc.,
          with Cedars-Sinai Medical Center dated December 12, 1984. Incorporated
          by reference to Exhibit of same number of the Registration Statement
          on Form S-l of the Company dated March 6, 1985 - No. 2-95552.

 10(f)    Lease Agreement with Hy-Norm Properties dated June 2, 1976.
          Incorporated by reference to Exhibit of same number of the
          Registration Statement on Form S-l of the Company dated March 6, 1985
          - No. 2-95552.

 10(h)    Lease Agreement with Cedars-Sinai Medical Center dated June 8, 1983.
          Incorporated by reference to Exhibit of same number of the
          Registration Statement on Form S-l of the Company dated March 6, 1985
          - No. 2-95552.

 10(i)    Lease Agreement of USHAWL, Inc. with Bernard and Gloria Salick, as
          amended, dated May l, 1983. Incorporated by reference to Exhibit of
          same number of the Registration Statement on Form S-l of the Company
          dated March 6, 1985 - No. 2-95552.

 10(j)    Commercial Lease between Bernard and Gloria and the Company dated May
          1991, as modified. Incorporated by reference to Exhibit of the same
          number of the Registration Statement on Form 8-B of the Company dated
          August 28, 1991.

 10(j-1)  Agreement among Bernard Salick, M.D. and Gloria Salick, individually,
          Bernard Salick, M.D., as Trustee, the Company and Atkemix Thirty-nine
          Inc. dated December 22, 1994 regarding an option to convey or continue
          to lease commercial real estate to the Company.

*10(k)    Stock Option Plan. Incorporated by reference to Exhibit of same number
          of the Registration Statement on Form S-l the Company dated March 6,
          1985 - No. 2-95552.

*10(k-1)  First amendment to Stock Option Plan. Incorporated by reference to
          Exhibit of same number of the Form 10-K of the Company for the year
          ended August 31, 1987.

*10(k-2)  Second amendment to Stock Option Plan effective January 20, 1987.
          Incorporated by reference to Exhibit of same number of the Form 10- K
          of the Company for the year ended August 31, 1990.

                                       77
<PAGE>   78
*10(k-3) Third amendment to Stock Option Plan effective November 1, 1990.
         Incorporated by reference to Exhibit of same number of the Form 10- K
         of the Company for the year ended August 31, 1990.

*10(k-4) Fourth amendment to Stock Option Plan effective January 13, 1994.
         Incorporated by reference to Exhibit of same number of the Form 10- K
         of the Company for the year ended August 31, 1994.

*10(l)   Second Amended and Restated Employment Agreement, dated as of December
         22, 1994, by and between the Company and Bernard Salick, M.D.
         Incorporated by reference to Exhibit 10.3 to the Form 8-K of the
         Company with date of earliest event reported being April 13, 1995.

*10(l-1) Agreement Not to Compete, dated as of December 22, 1994, between the
         Company and Bernard Salick, M.D. Incorporated by reference to Exhibit
         10.4 to the Form 8-K of the Company with date of earliest event
         reported being April 13, 1995.

*10(m)   Employment Agreement with Gerald Rosen, M.D. Incorporated by reference
         to Exhibit of same number of the Form 10-K of the Company for the year
         ended August 31, 1990.

*10(n)   Second Amended and Restated Employment Agreement, dated as of April 13,
         1995, by and between the Company and Leslie F. Bell. Incorporated by
         reference to Exhibit 10.5 to the Form 8-K with date of earliest event
         reported being April 13, 1995.

*10(n-1) Agreement Not to Compete, dated as of April 13, 1995, between the
         Company and Leslie F. Bell. Incorporated by reference to Exhibit 10.6
         to the Form 8-K with date of earliest event reported being April 13,
         1995.

 10(s)   Letter Agreement dated February 22, 1985 with Cedars-Sinai Medical
         Center concerning terms of Chronic Unit Management Agreement filed as
         Exhibit 10(a) and Acute Dialysis Unit Management Agreement filed as
         Exhibit 10(b). Incorporated by reference to Exhibit 10(t) of the
         Registration Statement on Form S-l of the Company dated March 6, 1985 -
         No. 2-95552.

 10(v)   Agreement in Principle between the Company and American Medical
         International, Inc. Incorporated by reference to Exhibit 10(x) of the
         Registration statement on Form S-1 of the Company dated January 31,
         1986 - No. 33-2898.

 10(w)   Letter agreement from Cedars-Sinai Medical Center dated as of August 1,
         1985 addressed to the Company's subsidiary Comprehensive Cancer
         Centers, Inc.Incorporated by reference to Exhibit of the same number of
         the Registration Statement on Form 8-B of the Company dated August 28,
         1991.

 10(x)   Agreement between the Company's subsidiary Comprehensive Cancer
         Centers, Inc. and Cedars-Sinai Medical Center dated February 26, 1990.
         Incorporated by reference to Exhibit of the same number of the
         Registration Statement on Form 8-B of the Company dated August 28,
         1991.



                                       78
<PAGE>   79
*10(y)    1988 Employee Qualified Stock Purchase Plan. Incorporated by
          reference to Exhibit "A" to the Proxy Statement of the Company dated
          January 12, 1989.

*10(y-1)  First amendment to 1988 Employee Qualified Stock Purchase Plan
          effective January 2, 1991. Incorporated by reference to Exhibit of the
          same number of the Form 10-K of the Company for the year ended August
          31, 1991.

*10(z)    Management Incentive Compensation Plan. Incorporated by reference to
          Annex C to the Proxy Statement of the Company dated July 29, 1991.

*10(aa)   Second Amended and Restated Employment Agreement, dated as of 
          April 13, 1995, by and between the Company and Michael T. Fiore.
          Incorporated by reference to Exhibit 10.7 to the Form 8-K with date of
          earliest event reported being April 13, 1995.

*10(aa-1) Agreement Not to Compete, dated as of April 13, 1995,between the
          Company and Michael T. Fiore. Incorporated by reference to Exhibit
          10.8 to the Form 8-K with date of earliest event reported being April
          13, 1995.

 10(bb)   Form of Indemnification Agreement. Incorporated by reference to
          Exhibit "C" to the Proxy Statement of the Company dated December 29,
          1987.

 10(cc)   Governance Agreement, dated as of December 22, 1994, as by and among
          the Company, Bernard Salick, M.D. and Zeneca Limited. Incorporated by
          reference to Exhibit 10.1 to the Form 8-K of the Company with date of
          earliest event reported being December 22, 1994.

 10(cc-1) Amendment No. 1 to Governance Agreement, dated as of March 7, 1995, by
          and among the Company, Bernard Salick, M.D. and Zeneca Limited.
          Incorporated by reference to Exhibit 2.5 of the Company's Registration
          Statement on Form 8-A relating to the Company's Callable Puttable
          Common Stock.

*10(dd)   Employment Agreement with Sheldon S. King. Incorporated by reference
          to Exhibit of the same number of the Form 10-K/A of the Company for
          the year ended August 31, 1994.

*10(ee)   Employment Agreement with Patrick W. Jeffries. Incorporated by
          reference to Exhibit 10(a) of the Form 10-Q of the Company dated
          February 29, 1996 for the quarterly period ended February 29, 1996.

 11       Computation of Net Earnings per Common Share.

 21       List of Subsidiaries. Incorporated by reference to Exhibit of the same
          number of the Form 10-K of the Company for the year ended August 31,
          1994.

 23       Consent of Independent Accountants.





                                       79
<PAGE>   80
 27               Financial Data Schedules.

*                 Indicates management contract or compensatory plan or
                  arrangement required to be filed as an exhibit to this Form
                  10-K.



                           (B)      Reports on Form 8-K.

No report was filed on Form 8-K by the Company during the quarter ended August
31, 1996.

                                       80
<PAGE>   81
                                   SIGNATURES

 Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                            Salick Health Care, Inc.
                                 (Company)


                            By:/s/BERNARD SALICK, M.D.
                               __________________________________________
                               Bernard Salick, M.D.
                               Chairman of the Board,
                               Chief Executive Officer
                               and President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature                        Title                                Date

<S>                              <C>                                  <C>
/s/ BERNARD SALICK, M.D.         Chairman of the Board, Chief         11/27/96
_______________________________  Executive Officer and President
Bernard Salick, M.D.             

/s/ LESLIE F. BELL               Executive Vice President, Chief      11/27/96
_______________________________  Financial Officer, Secretary
Leslie F. Bell                   and Director

/s/ MICHAEL T. FIORE             Executive Vice President, Chief      11/27/96
_______________________________  Operating Officer and Director
Michael T. Fiore                 

/s/ PATRICK W. JEFFRIES          Executive Vice President, Chief      11/27/96
_______________________________  Development Officer and Director
Patrick W. Jeffries              

/s/ BARBARA BROMLEY-WILLIAMS     Senior Vice President-Professional   11/27/96
_______________________________  Services and Director
Barbara Bromley-Williams        

/s/ THOMAS MINTZ, M.D.           Director                             11/27/96
_______________________________
Thomas Mintz, M.D.

_______________________________  Director                             _________
Thomas F. W. McKillop

/s/ MICHAEL CARTER, M.D.         Director                             11/27/96
_______________________________
Michael Carter, M.D.

_______________________________  Director                             _________
Alan I. H. Pink

_______________________________  Director                             _________
John G. Goddard

_______________________________  Director                             _________
Robert Black

_______________________________  Director                             _________
Allen L. Johnson

/s/ BLAIR L. HUNDAHL             Senior Vice President-Finance        11/27/96
_______________________________  (Principal Accounting Officer)
Blair L. Hundahl
</TABLE>


                                       81
<PAGE>   82
                            SALICK HEALTH CARE, INC.
                                  EXHIBIT INDEX

Exhibit
-------

2        Copy of Agreement and Plan of Merger between Salick Health Care, Inc.
         and the Company. Incorporated by reference to Exhibit 1 of the
         Registration Statement on Form 8-B of the Company dated August 28,
         1991.

2(a)     Agreement and Plan of Merger, dated as of December 22, 1994, as
         amended, by and among the Company, Zeneca Limited and Atkemix
         Thirty-nine Inc. Incorporated by reference to Annex A to the Proxy
         Statement Prospectus of the Company dated March 13, 1995 forming a part
         of the Company's Registration Statement on Form S-4 dated March 13,
         1995 - No. 33-58057.

3(a)     Certificate of Incorporation of Salick Health Care, Inc. Incorporated
         by reference to Annex B to the Proxy Statement Prospectus of the
         Company dated March 13, 1995 forming part of the Company's Registration
         Statement on Form S-4 dated March 13, 1995 - No. 33-58057.

3(a-1)   Certificate of Amendment of Certificate of Incorporation of Salick
         Health Care, Inc. Incorporated by reference to Exhibit 3(b) of the Form
         10-Q of the Company dated February 29, 1996 for the quarterly period
         ended February 29, 1996.

3(b)     Bylaws of the Company. Incorporated by reference to Annex C to the
         Proxy Statement Prospectus dated March 13, 1995 forming a part of the
         Company's Registration Statement on Form S-4 dated March 13, 1995 - No.
         33-58057.

4(a)     Business Loan Agreement of the Company with Bank of America NT&SA dated
         August 1, 1995. Incorporated by reference to Exhibit of the same number
         of the Form 10-K of the Company for the year ended August 31, 1995.

4(b)     Specimen form of certificate of Callable Puttable Common Stock of the
         Company. Incorporated by reference to Exhibit 4.3 of the Registration
         Statement on Form S-4 of the Company dated March 13, 1995 - No.
         33-58057.

10(a)    Chronic Dialysis Unit Management Agreement, as amended, with
         Cedars-Sinai Medical Center dated June 8, 1983. Incorporated by
         reference to Exhibit of same number of the Registration Statement on
         Form S-l of the Company dated March 6, 1985-No. 2-95552.

10(a-1)  Fourth Amendment to Chronic Dialysis Unit Management Agreement, dated
         June 1987. Incorporated by reference to Exhibit of same number of the
         Registration Statement on Form 8-B of the Company dated August 28,
         1991.

10(a-2)  Fifth Amendment to Chronic Dialysis Unit Management Agreement, dated
         October 1990. Incorporated by reference to Exhibit of same number of
         the Registration Statement on Form 8-B of the Company dated August 28,
         1991.

10(b)    Acute Dialysis Unit Management Agreement, as amended, with Cedars-Sinai
         Medical Center dated June 8, 1983. Incorporated by reference to Exhibit
         of same number of the Registration Statement on Form S-l of the Company
         dated March 6, 1985 - No. 2-95552.

10(b-1)  Third Amendment to Acute Dialysis Unit Management Agreement, dated
         October 1990. Incorporated by reference to Exhibit of the same number
         of the Registration Statement on Form 8-B of the Company dated August
         28, 1991.



                                       82
<PAGE>   83
Exhibit
-------

 10(c)    Acute Dialysis Unit Service Agreement, as amended, with Temple
          Hospital dated May 27, 1981. Incorporated by reference to Exhibit of
          same number of the Registration Statement on Form S-l of the Company
          dated March 6, 1985 - No. 2-95552.

 10(e)    Agreement of Company's subsidiary, Comprehensive Cancer Centers, Inc.,
          with Cedars-Sinai Medical Center dated December 12, 1984. Incorporated
          by reference to Exhibit of same number of the Registration Statement
          on Form S-l of the Company dated March 6, 1985 - No. 2-95552.

 10(f)    Lease Agreement with Hy-Norm Properties dated June 2, 1976.
          Incorporated by reference to Exhibit of same number of the
          Registration Statement on Form S-l of the Company dated March 6, 1985
          - No. 2-95552.

 10(h)    Lease Agreement with Cedars-Sinai Medical Center dated June 8, 1983.
          Incorporated by reference to Exhibit of same number of the
          Registration Statement on Form S-l of the Company dated March 6, 1985
          - No. 2-95552.

 10(i)    Lease Agreement of USHAWL, Inc. with Bernard and Gloria Salick, as
          amended, dated May l, 1983. Incorporated by reference to Exhibit of
          same number of the Registration Statement on Form S-l of the Company
          dated March 6, 1985 - No. 2-95552.

 10(j)    Commercial Lease between Bernard and Gloria and the Company dated May
          1991, as modified. Incorporated by reference to Exhibit of the same
          number of the Registration Statement on Form 8-B of the Company dated
          August 28, 1991.

 10(j-1)  Agreement among Bernard Salick, M.D. and Gloria Salick, individually,
          Bernard Salick, M.D., as Trustee, the Company and Atkemix Thirty-nine
          Inc. dated December 22, 1994 regarding an option to convey or continue
          to lease commercial real estate to the Company.

*10(k)    Stock Option Plan. Incorporated by reference to Exhibit of same number
          of the Registration Statement on Form S-l the Company dated March 6,
          1985 - No. 2-95552.

*10(k-1)  First amendment to Stock Option Plan. Incorporated by reference to
          Exhibit of same number of the Form 10-K of the Company for the year
          ended August 31, 1987.

*10(k-2)  Second amendment to Stock Option Plan effective January 20, 1987.
          Incorporated by reference to Exhibit of same number of the Form 10-K
          of the Company for the year ended August 31, 1990.

*10(k-3)  Third amendment to Stock Option Plan effective November 1, 1990.
          Incorporated by reference to Exhibit of same number of the Form 10-K
          of the Company for the year ended August 31, 1990.

*10(k-4)  Fourth amendment to Stock Option Plan effective January 13, 1994.
          Incorporated by reference to Exhibit of same number of the Form 10-K
          of the Company for the year ended August 31, 1994.

*10(l)    Second Amended and Restated Employment Agreement, dated as of December
          22, 1994, by and between the Company and Bernard Salick, M.D.
          Incorporated by reference to Exhibit 10.3 to the Form 8-K of the
          Company with date of earliest event reported being April 13, 1995.



                                       83
<PAGE>   84
Exhibit
-------

*10(l-1) Agreement Not to Compete, dated as of December 22, 1994, between the
         Company and Bernard Salick, M.D. Incorporated by reference to Exhibit
         10.4 to the Form 8-K of the Company with date of earliest event
         reported being April 13, 1995.

*10(m)   Employment Agreement with Gerald Rosen, M.D. Incorporated by reference
         to Exhibit of same number of the Form 10-K of the Company for the year
         ended August 31, 1990.

*10(n)    Second Amended and Restated Employment Agreement, dated as of April
          13, 1995, by and between the Company and Leslie F. Bell. Incorporated
          by reference to Exhibit 10.5 to the Form 8-K with date of earliest 
          event reported being April 13, 1995.

*10(n-1)  Agreement Not to Compete, dated as of April 13, 1995, between the
          Company and Leslie F. Bell. Incorporated by reference to Exhibit 10.6
          to the Form 8-K with date of earliest event reported being April 13,
          1995.

 10(s)    Letter Agreement dated February 22, 1985 with Cedars-Sinai Medical
          Center concerning terms of Chronic Unit Management Agreement filed as
          Exhibit 10(a) and Acute Dialysis Unit Management Agreement filed as
          Exhibit 10(b). Incorporated by reference to Exhibit 10(t) of the
          Registration Statement on Form S-l of the Company dated March 6,
          1985 - No. 2-95552.

 10(v)    Agreement in Principle between the Company and American Medical
          International, Inc. Incorporated by reference to Exhibit 10(x) of the
          Registration statement on Form S-1 of the Company dated January 31,
          1986 - No. 33-2898.

 10(w)    Letter agreement from Cedars-Sinai Medical Center dated as of August
          1, 1985 addressed to the Company's subsidiary Comprehensive Cancer
          Centers, Inc. Incorporated by reference to Exhibit of the same number
          of the Registration Statement on Form 8-B of the Company dated August
          28, 1991.

 10(x)    Agreement between the Company's subsidiary Comprehensive Cancer
          Centers, Inc. and Cedars-Sinai Medical Center dated February 26, 1990.
          Incorporated by reference to Exhibit of the same number of the
          Registration Statement on Form 8-B of the Company dated August 28,
          1991.

*10(y)    1988 Employee Qualified Stock Purchase Plan. Incorporated by reference
          to Exhibit "A" to the Proxy Statement of the Company dated January 12,
          1989.

*10(y-1)  First amendment to 1988 Employee Qualified Stock Purchase Plan
          effective January 2, 1991. Incorporated by reference to Exhibit of the
          same number of the Form 10-K of the Company for the year ended August
          31, 1991.

*10(z)    Management Incentive Compensation Plan. Incorporated by reference to
          Annex C to the Proxy Statement of the Company dated July 29, 1991.

*10(aa)   Second Amended and Restated Employment Agreement, dated as of April
          13, 1995, by and between the Company and Michael T. Fiore. 
          Incorporated by reference to Exhibit 10.7 to the Form 8-K with date
          of earliest event reported being April 13, 1995.




                                       84
<PAGE>   85
Exhibit
-------

*10(aa-1) Agreement Not to Compete, dated as of April 13, 1995, between the
          Company and Michael T. Fiore. Incorporated by reference to 
          Exhibit 10.8 to the Form 8-K with date of earliest event reported
          being April 13, 1995.

 10(bb)   Form of Indemnification Agreement. Incorporated by reference to
          Exhibit "C" to the Proxy Statement of the Company dated December 29,
          1987.

 10(cc)   Governance Agreement, dated as of December 22, 1994, as by and among
          the Company, Bernard Salick, M.D. and Zeneca Limited. Incorporated by
          reference to Exhibit 10.1 to the Form 8-K of the Company with date of
          earliest event reported being December 22, 1994.

 10(cc-1) Amendment No. 1 to Governance Agreement, dated as of March 7, 1995, by
          and among the Company, Bernard Salick, M.D. and Zeneca Limited.
          Incorporated by reference to Exhibit 2.5 of the Company's Registration
          Statement on Form 8-A relating to the Company's Callable Puttable
          Common Stock.

*10(dd)   Employment Agreement with Sheldon S. King. Incorporated by reference
          to Exhibit of the same number of the Form 10-K/A of the Company for
          the year ended August 31, 1994.

*10(ee)   Employment Agreement with Patrick W. Jeffries. Incorporated by
          reference to Exhibit 10(a) of the Form 10-Q of the Company dated
          February 29, 1996 for the quarterly period ended February 29, 1996.

 11       Computation of Net Earnings per Common Share.

 21       List of Subsidiaries. Incorporated by reference to Exhibit of the same
          number of the Form 10-K of the Company for the year ended August 31,
          1994.

 23       Consent of Independent Accountants.

 27       Financial Data Schedules.

 *        Indicates management contract or compensatory plan or arrangement
          required to be filed as an exhibit to this Form 10-K.




                                       85