-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eo0Z92Zxm1SlZ69hKsBGXOjp14RkgQJynGmGZI50fFi+pHF3IkMDY/f/wxOiRXbi 3hid6z4+Jd6XzObZYOiJ4A== 0000950149-97-000683.txt : 19970401 0000950149-97-000683.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950149-97-000683 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SHARED HOSPITAL SERVICES CENTRAL INDEX KEY: 0000744825 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 942918118 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08789 FILM NUMBER: 97569298 BUSINESS ADDRESS: STREET 1: 4 EMARCADERO CENTER STE 3620 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157885300 MAIL ADDRESS: STREET 1: 4 EMBARCADERO CENTER CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-K405 1 FORM 10-K405 FOR AMERICAN SHARED HOSPITAL SERVICES 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ---------------- Commission file number 0-12849 American Shared Hospital Services ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 94-2918118 - ------------------------------ ----------------------------------- State or other jurisdiction of (I.R.S Employer Identification No.) incorporation or organization Four Embarcadero Center, Suite 3620, San Francisco, California 94111 - -------------------------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (415)788-5300 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock No Par Value American Stock Exchange Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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. [x] As of March 24, 1997, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $5,311,555. Number of shares of common stock of the registrant outstanding as of March 24, 1997: 4,769,384. NO DOCUMENTS ARE INCORPORATED BY REFERENCE IN THIS REPORT. 2 PART I ITEM 1. BUSINESS GENERAL American Shared Hospital Services ("ASHS" and together with its subsidiaries, the "Company") primarily provides shared diagnostic imaging services and radiosurgery services to approximately 209 hospitals, medical centers and medical offices located in 23 states. The four principal diagnostic imaging services provided by the Company are Magnetic Resonance Imaging (MRI), Computed Axial Tomography Scanning (CT), Ultrasound, and Nuclear Medicine. Radiosurgery services are performed by the Company through its subsidiary, GK Financing, LLC, a California limited liability company ("GKF"), which provides Gamma Knife units to two major university medical centers. The Company also provides Cardiac Catheterization Laboratory and Respiratory Therapy services. ASHS was incorporated in the state of California in September 1983. ASHS's predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital Services), a California limited partnership, was formed in June 1980. In October 1987, the Company acquired CuraCare, Inc.("CuraCare") from Tenet Healthcare Corporation (formerly known as National Medical Enterprises, Inc., "Tenet") for $22,250,000. The acquisition of CuraCare significantly expanded and diversified the services offered by the Company and increased its market penetration. Prior to May 1989, the MRI services were provided through American Shared - CuraCare ("AS-C"), which was a joint venture between the Company and MMRI, Inc. ("MMRI"), a California corporation and a wholly-owned subsidiary of Tenet. Effective May 1, 1989, the Company purchased 100% of MMRI, ASHS's co-venturer in AS-C, from Tenet for $4,200,000. MMRI's only asset is its 50% interest in AS-C. In November 1990, the Company started a new wholly-owned subsidiary, European Shared Medical Services Limited, an English registered company, to provide MRI services in the United Kingdom. In addition, in August 1993, the Company incorporated a new wholly-owned subsidiary in California, American Shared Radiosurgery Services ("ASRS"), to provide Gamma Knife services. Following its acquisition of CuraCare, the Company provided 2 3 Respiratory Therapy services to acute care hospitals. On December 31, 1994, the Company sold a majority of its Respiratory Therapy department contracts and its Respiratory Registry for approximately $4,000,000 in cash plus the assumption by the buyer of $300,000 in liabilities. In June 1995, ASHS incorporated two new wholly-owned subsidiaries: African American Church Health & Economic Services, Inc. ("ACHES"), a California corporation, and ACHES Insurance Services, Inc., ("AIS"), a California corporation and insurance agency qualified to sell life, health and disability insurance in California and New York. On October 17, 1995, ASHS, through its wholly-owned subsidiary, ASRS, and Elekta Holdings U.S., Inc. ("Elekta"), through its wholly-owned subsidiary, GKV Investments, Inc., a Georgia corporation ("GKV"), entered into an agreement to form GKF to provide alternative financing of Elekta Gamma Knife units in the United States and Brazil. See "Gamma Knife Joint Venture." Recent Developments On December 11, 1996, the Company and US Diagnostic Inc. ("USD") entered into a letter of intent pursuant to which USD would acquire the Company for $2.25 per share in cash. On January 29, 1997, the Company and USD agreed to revised terms. Under the revised terms, USD proposed to acquire the outstanding securities of the Company for USD common shares at the rate of $2.40 per share of the Company in a transaction that would be accounted for under pooling instead of under the purchase method of accounting. Subsequently, on February 11, 1997, USD and the Company announced that there would be a delay in the consummation of their proposed merger. Both companies stated, in addition, that they had not yet entered into a definitive merger agreement and that the terms of the merger had not yet been submitted to their respective board of directors. In light of the continuing delay in negotiations, the Company can provide no assurance that the proposed merger will be consummated. 3 4 OPERATIONS Diagnostic Imaging Services General. Medical diagnostic imaging systems facilitate the diagnosis of diseases and disorders at an early stage, often minimizing the amount and cost of care needed to stabilize, treat or cure the patient and frequently obviating the need for exploratory surgery. This diagnostic procedure can often be performed on an out-patient basis eliminating the need for hospitalization. Diagnostic imaging systems utilize energy waves to penetrate human tissue and generate computer-processed cross-sectional images of the body which can be displayed either on film or on a video monitor. The Company provides its diagnostic imaging services to approximately 205 health care providers including hospitals, clinics and physicians' offices located in 23 states. The Company's technologists operate the equipment under the direction of licensed physicians on the customer's staff who order procedures, interpret examination results and maintain general responsibility for the patient. Generally, the Company directly charges the hospitals, medical centers and medical offices that have contracted for its services. The Company, to a significantly lesser extent, bills patients directly or relies on third party reimbursement. Third party reimbursement comprises approximately 9% of the Company's medical services revenues. Non-MRI diagnostic imaging services revenues as a percentage of total medical services revenues were 17%, 19% and 21% in 1996, 1995 and 1994, respectively. Following the sale of a substantial portion of its Respiratory Therapy contracts and two associated Ultrasound department contracts in December 1994 and contract terminations during 1995, the portion of the Company's revenues provided by non-MRI diagnostic imaging services has declined. See "Management's Discussion and Analysis-Total Revenues." The Company provides its diagnostic imaging services on both a shared and a full-time basis. Shared services are provided based on agreed upon time periods. The Company contracts with health care providers to provide equipment, operating technologists, patient care coordinators and, in some cases, operating supplies. 4 5 The major advantages to a health care provider in contracting with the Company for such services include: (i) avoiding the high cost of owning and operating the equipment, (ii) avoiding the cost of hiring and training technical personnel and support staff, (iii) reducing the risks associated with technological obsolescence or under-utilization of the equipment and services, and (iv) not being required to incur the cost of complying with certain governmental regulations. Magnetic Resonance Imaging. MRI utilizes magnetic fields and applied radio waves to obtain computer processed cross-sectional images of the body. MRI provides clinical images superior to alternative technologies in many applications by providing information concerning neurologic, orthopedic, vascular and oncologic diseases. MRI benefits from multiplanar imaging, obviates the need for ionizing radiation and generally offers superior image resolution than previously available from CT. The Company is a leading provider of high field strength MRI units on a shared-service basis. The Company believes that it has a competitive advantage because of its strategy of operating primarily top-of-the-line, high magnetic field strength (1.5 Tesla superconductive magnet systems) mobile MRI units. MRI units containing higher strength magnets are preferred technology because they provide improved image quality, faster operating speed and greater potential for new applications than do MRI units with less powerful magnets. Of the Company's 29 MRI units operating at December 31, 1996, 19 of such units are 1.5 Tesla units, 6 are 1.0 Tesla units, and 4 are 0.5 Tesla units. All of the company's MRI units are mobile or transportable. The Company had 144 MRI customers at December 31, 1996, compared to 143 customers as of December 31, 1995. MRI revenues constituted 75%, 73% and 59% of total medical services revenues in years 1996, 1995 and 1994, respectively. To a greater extent during the past several years, increased indications of MRI utility plus reductions in equipment costs have allowed more hospitals to purchase their own system instead of utilizing the Company's services. This has contributed to a more competitive marketplace for the Company's services. Computed Axial Tomography. The Company operated 17 CT units, as of December 31, 1996. CT utilizes multiple X-Ray beams and detectors to derive information which is then synthesized by 5 6 computers to produce cross-sectional images of organs or other areas of the body. CT can be used to perform examinations of any part of the human anatomy and provides a delineation of tissue not possible with conventional X-Ray. CT eliminates the problem of overlapping structures such as bone and soft tissue inherent in images produced by conventional X-Ray. The most commonly performed CT examinations are of the brain, abdomen, and lumbosacral region, although examinations of the chest, pelvis and extremities are also performed. With the advent of MRI, the relative benefits of CT have decreased. Due to a variety of factors, including increased competition among manufacturers of CT units, the selling price of CT units has decreased thereby enabling more hospitals and health care providers to acquire their own units instead of utilizing the Company's services. Consequently, the Company has reduced its services in this area in response to these changes in the market. CT revenues were approximately 10%, 10% and 10% of medical services revenues in 1996, 1995 and 1994, respectively. Ultrasound and Nuclear Medicine. The Company owns and operates approximately 25 systems providing ultrasound and nuclear medicine services. Ultrasound technology applies high-frequency pulsed and continuous sound waves to the body. These sound waves strike vessels and other internal body structures and echo back to the equipment, where they register upon a video monitor. Ultrasound systems provide a low medical risk, non-invasive procedure for determining the primary diagnosis in renal, pancreatic, vascular and abdominal diseases and obstetrics. Nuclear Medicine is a diagnostic imaging system utilizing short-lived radioactive isotopes and computers to perform various examinations and process the resulting medical data for the physician to establish the presence or absence of disease. Nuclear Medicine not only provides an anatomic image but also provides functional information which cannot be provided by MRI or CT. Nuclear Medicine services of the Company are primarily composed of Single Photon Emission Computed Tomography ("SPECT") wherein radioisotopes are injected into the patient and the patient is subsequently imaged by a camera which moves around the patient. The information received by the camera is then reconstructed by computer to produce a three dimensional image. Although more costly, this three dimensional image yields a more accurate image when compared to other Nuclear Medicine techniques. The Company 6 7 provides SPECT services on both a shared service and full-time basis. Smaller health care providers which require fewer studies on a regular basis may find it more cost-efficient to utilize SPECT on a mobile-shared service basis than acquiring their own unit. Ultrasound and Nuclear Medicine revenues were approximately 7% of medical services revenues in 1996 and 8% and 10% in 1995 and 1994, respectively. Gamma Knife The Gamma Knife treats certain vascular malformations and intracranial tumors without surgery. The Gamma Knife defines a small three dimensional intracranial target volume and delivers a clinically significant dose of radiation (Cobalt-60) within the target volume while avoiding the delivery of a clinically significant dose beyond the target volume. The Company's first Gamma Knife, which is operated at a major university medical center on a fee-per-procedure basis, commenced operation in September 1991. In January 1993, the Company entered into a purchase agreement with the manufacturer for $2,900,000 plus sales tax on its second Gamma Knife and a fee-for-service lease with a university medical center. The Company was unable to fund all the required advance payments and was notified by the manufacturer that the Company was in default under the provisions of the purchase agreement. On April 6, 1994, the Company's agreements to purchase the Gamma Knife from the manufacturer and lease the Gamma Knife to such university medical center were formally terminated. The Company's Chairman and Chief Executive Officer simultaneously agreed to enter into substantially identical purchase and lease obligations as those previously executed by the Company. On April 6, 1994, new purchase and lease agreements were entered into by the Company's Chairman and Chief Executive Officer, and the manufacturer and the university medical center. As a condition to entering into this transaction, the Company advanced $290,000 to the Chairman and Chief Executive Officer who executed a promissory note (the "Promissory Note".) Concurrently, a third party lessor agreed to fund the remaining $2,610,000 purchase price of the Gamma Knife on behalf of the Chairman and Chief Executive Officer and the Company received an option to purchase the Gamma Knife. The option 7 8 entitled ASHS to purchase the Gamma Knife from its Chairman and Chief Executive Officer for an amount equal to the remaining debt obligation associated with the Gamma Knife plus costs and losses, if any, incurred by the Chairman and Chief Executive Officer. This option was assigned by ASHS to its subsidiary, GKF, through ASRS and was exercised to purchase the Gamma Knife from Dr. Bates on February 3, 1996. Upon exercise of the option, the subsidiary also assumed obligations of the Company relating to the Gamma Knife. Additionally, in connection with GKF's exercise of the option to acquire the Gamma Knife, the Promissory Note was cancelled. The Gamma Knife became operational on August 3, 1994. Gamma Knife Joint Venture ASHS, through ASRS, a California corporation, and Elekta, through its wholly-owned subsidiary, GKV, entered into an operating agreement on October 17, 1995, to form GKF, a California limited liability corporation. Pursuant to the operating agreement, as amended, the Company contributed its Gamma Knife units and related assets to GKF in exchange for an 81% ownership interest held by ASRS in GKF. GKV contributed cash for a 19% ownership interest in GKF and loaned funds to GKF. GKF will be the preferred alternative financing provider in the United States and Brazil for the purchase of Gamma Knife units sold by Elekta Instruments, Inc., a U.S. subsidiary of the Gamma Knife manufacturer. GKF's primary business will be to provide financing on a fee-for-service basis. The results of operations of GKF are included in the consolidated financial statements of the Company. Customers and Marketing The market for services offered by the Company consists of major urban medical centers, suburban and rural hospitals, health maintenance organizations ("HMOs") and other managed care providers, governmental institutions, large multi-specialty medical groups, physician offices and medical clinics. The type of services offered by the Company in a given area may vary, depending upon such factors as the size of the client medical care provider, the treatment needs of specific patient groups within the client's service area, the modalities and services required by the client and the number and nature of competitive services available. The more capital intensive services, such as MRI, CT, and Gamma Knife, may be effectively offered to urban medical centers, hospitals, 8 9 large multi-specialty medical groups, governmental institutions, larger HMOs and large third-party purchasers of health services. The less capital intensive services, such as Ultrasound, Nuclear Medicine and, under certain circumstances, CT, are most effectively offered to suburban and rural hospitals, physicians' offices and medical clinics. The Company believes that it offers among the broadest range of services to health care providers of companies in the shared diagnostic imaging services industry and therefore has a unique ability to service a broad spectrum of the health care market. The Company continually monitors developments in the medical equipment industry and makes an effort to acquire new modalities and equipment as the opportunity arises in order to maintain its technologically-advanced services and to expand its market share. When the Company's medical equipment does not generate adequate revenues, the Company seeks to sell such equipment and to upgrade existing equipment or acquire newer, more advanced replacement equipment when appropriate. During the normal course of business, the Company has customer contracts which terminate. The Company's sales representatives and operational managers must replace terminating customers with new customers to maintain the Company's revenues. Revenue fluctuations may occur dependent upon the maturation cycle of terminating existing contracts and how quickly replacement customers can attain the revenue levels of terminating customers. Revenues per customer are historically higher for established customers. Revenue on all contracts and contract amendments is recognized as earned based upon services provided for each monthly period. The Company employed at the end of 1996, 10 sales and marketing as well as 3 regional operational managers located in the Western, Southeastern, and Midwest regions of the country. The Company markets its services through a direct sales effort emphasizing the quality of its equipment, the reliability and efficiency of its services, the ability to tailor its services to specific customer needs and the cost containment benefits realized by the customer when it utilizes the Company's services. No single customer accounted for 10% or more of the Company's total revenues in 1996 or 1995. 9 10 Competition Utilization of the Company's diagnostic imaging services depends upon several factors, including the number of physicians and their respective areas of practice, the number and nature of competitive diagnostic units available, and the size and demographics of the service areas. The market for diagnostic imaging services is highly competitive. The Company faces competition from other providers of mobile diagnostic services, some of which may have greater financial resources than those of the Company, and from equipment manufacturers, hospitals, imaging centers and health care providers owning in-house diagnostic units. Significant competitive factors in the diagnostic services market include equipment price and availability, performance quality, ability to upgrade equipment performance and software, service and reliability. Adverse market conditions have significantly impacted providers of mobile services of which there are only approximately five operating on a national basis. Those with greater financial resources are better able to withstand adverse market conditions. The increased competition among MRI equipment manufacturers has resulted in greater availability to end users of new imaging equipment from manufacturers at more competitive prices. Lower equipment pricing may make it more advantageous for the end user to purchase the equipment rather than contracting with full-service providers such as the Company. Government Regulation Customers to whom the Company provides services receive payments for patient care from federal government and private insurer reimbursement programs. As a result of federal cost-containment legislation currently in effect, a prospective payment system ("PPS") is utilized to reimburse hospitals for care given to hospital in-patients covered by federally funded reimbursement programs. Patients are classified into a Diagnosis Related Group ("DRG") in accordance with the patient's diagnosis, necessary medical procedures and other factors. Patient reimbursement is limited to a predetermined amount for each DRG placing material limitations on actual reimbursement for imaging services. Because the reimbursement payment is predetermined, it does not necessarily cover the cost of all medical services actually provided. Currently the DRG system is not applicable to 10 11 out-patient services. In 1986 and again in 1990 the Congress enacted legislation requiring the Department of Health and Human Services ("DHHS") to develop proposals for a PPS for hospital outpatient services. DHHS has not as yet developed such a proposal, and the effect on the Company's business of such a proposal, if made, cannot be predicted at this time. The Company's experience suggests that the hospital in-patient DRG system and the expansion of managed care has had a favorable impact on the Company's business. Rising costs in the health care field, together with the implementation of the DRG system, have encouraged hospitals and other health care providers to minimize costs. The Company's shared diagnostic imaging services allow hospitals and other medical care providers to provide sophisticated diagnostic equipment and qualified personnel at a cost directly related to each service rendered to the patient. In recent years, however, competitive factors (such as equipment availability and pricing) have limited the Company's ability to benefit from the favorable impact of DRGs and managed care. Several health care reform proposals have been promulgated during the Clinton administration. These proposals attempt to increase access to care and to control rising health care expenditures. Since a specific health care reform policy has not been enacted, the impact on the Company's business of such a proposal, if made, cannot be determined at this time. The payment of remuneration to induce the referral of health care business has been a subject of increasing governmental and regulatory focus in recent years. Section 1128B(b) of the Social Security Act (sometimes referred to as the "federal anti-kickback statute") provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services for which payment may be made under the Medicare and Medicaid programs and certain other government funded programs. The Social Security Act provides authority to the Office of Inspector General through civil proceedings to exclude an individual or entity from participation in the Medicare and state health programs if it is determined any such party has violated Section 1128B(b) of the Social Security Act. The Company believes that it is in compliance with the federal anti-kickback statute. Additionally, the Omnibus 11 12 Budget Reconciliation Act of 1993, often referred to as "Stark II" bans physician self referrals to providers of designated health services with which the physician has a financial relationship. The term "designated health services" includes: clinical laboratory services, physical therapy services, occupational therapy services, radiology or other diagnostic services, radiation therapy services, durable medical equipment, parenteral and enteral nutrients, equipment and supplies, home health services, outpatient prescription drugs, inpatient and outpatient hospital services. On January 1, 1995, the Physician Ownership and Referral Act of 1993 became effective in California. This legislation prohibits physician self-referrals for covered goods and services including diagnostic nuclear medicine and diagnostic imaging if the physician (or the physician's immediate family) concurrently has a financial interest in the entity receiving the referral. The Company believes that it is in compliance with the Physician Ownership and Referral Act of 1993. The Company cannot determine what impact this legislation will have on the demand for its services. Legislation in various jurisdictions requires that health facilities obtain a Certificate of Need ("CON") prior to making expenditures for medical technology in excess of specified amounts. The CON procedure can be expensive and time consuming, and consequently a health care facility may elect to use the Company's services rather than purchase imaging equipment subject to CON requirements. CON requirements vary from state to state in their application to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures to provide its services and in other jurisdictions customers must comply with CON procedures before using the Company's services. The Company's nuclear medicine imaging equipment requires the use of radioactive isotopes for which there are existing governmental regulations covering storage, use and disposal. All contracts for nuclear medicine imaging include arrangements for the disposal of radioactive isotopes either by the supplier of the isotopes or by agreement with the nuclear medicine department of the client hospital. The Company is also subject to periodic review concerning the storage, use and disposal of isotopes used in its nuclear medicine imaging equipment. The Company's Gamma Knife units contain Cobalt-60 radioactive 12 13 sources. The medical centers which house the Company's Gamma Knife units are responsible for obtaining possession and user's licenses for the Cobalt-60 source. Mobile diagnostic imaging equipment must, where applicable, comply with federal and state regulations concerning patient safety, equipment operating specifications and radiation exposure levels. The equipment manufacturer is primarily responsible for assuring compliance. The Company believes that its equipment complies with all such regulations based on the quality control features and specifications of the equipment manufacturers and the Company's preventative maintenance program. Certain states in which the Company operates require that certain of the Company's personnel be licensed or certified. Such requirements generally involve educational requirements and the payment of specified fees. All of the Company's technical personnel are duly licensed or certified where required to perform the services provided by the Company. The Company continually monitors the compliance of its personnel with such licensing and certification requirements. The Company believes it is in substantial compliance with the various rules and regulations which effect its businesses. Insurance and Indemnification The Company's contracts with equipment vendors generally do not contain indemnification provisions. The Company maintains a comprehensive insurance program covering the value of its property, equipment and vehicles, subject to deductibles which the Company believes are reasonable. The Company's customer contracts generally contain mutual indemnification provisions. The Company maintains general and professional liability insurance and believes its present insurance coverage and indemnification agreements are adequate for its business. 13 14 Employees At December 31, 1996, the Company employed approximately 207 employees on a full-time basis and approximately 118 on a part-time basis. None of these employees is subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes its employee relations are good. ITEM 2. PROPERTIES The Company's corporate offices are located at Four Embarcadero Center, Suite 3620, San Francisco, California, where it leases 2,996 square feet for $8,160 per month. This lease runs through September 1999. The Company also leases office and warehouse space in Modesto, California. An additional property leased by the Company principally for field operations and sales support is located in West Chicago, Illinois. For the year ended December 31, 1996, the Company's aggregate net rental expenses for all properties and equipment was approximately $3,841,000. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings involving the Company or any of its property. The Company knows of no legal or administrative proceedings against the Company contemplated by governmental authorities. 14 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common shares, no par value (the "Common Shares"), are currently traded on the American Stock Exchange ("AMEX") and the Pacific Exchange ("PCX"). The Company's losses and net capital deficiency have caused the Company to no longer satisfy the minimum criteria with respect to net income and net worth for continued listing published by the AMEX. The per share trading price is also below the minimum criteria of such exchange. The closing per share price of the Common Shares was $1.4375 at March 24, 1997. The Company has been advised that its net capital deficiency is inconsistent with the criteria applied by the PCX for continued listing on such exchange. The AMEX and the PCX are continuing to monitor the Company's financial condition in order to determine whether the Common Shares will continue to be listed for trading thereon. The table below sets forth the high and low closing sales prices of the Common Shares of ASHS on the American Stock Exchange Consolidated Reporting System for each full quarter for the last two fiscal years. 15 16 Prices For Common Shares
Quarter Ending High Low - -------------- ---- --- March 31, 1995 5/8 1/4 June 30, 1995 2 5/16 September 30, 1995 2 - 5/8 1 - 3/8 December 31, 1995 1 - 11/16 1 - 1/4 March 31, 1996 2 1 - 1/4 June 30, 1996 2 1 - 1/4 September 30, 1996 1 - 3/4 1 - 1/4 December 31, 1996 1 - 15/16 1 - 3/16
The Company estimates that there were approximately 1,100 beneficial holders of its Common Shares as of December 31, 1996. The Company did not pay cash dividends in 1996 and does not intend to pay dividends in the near future. The Company is prohibited by its credit agreements from paying dividends on the Common Shares and does not anticipate being in a position to pay dividends for the foreseeable future. 16 17 ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS
Year Ended December 31, 1996 1995(1) 1994 1993(2) 1992 ------------------------------------------------------------ (Amounts in thousands, except per share data) Medical services revenues .......... $ 36,989 $ 34,077 $ 38,545 $ 39,485 $ 48,834 ======== ======== ======== ======== ======== Costs of operations ................ 28,071 32,675 34,145 37,071 45,169 Selling and administrative expense ........................... 5,309 8,432 5,971 6,820 6,273 Interest expense ................... 4,199 5,310 7,423 6,752 7,520 Write-down of intangible assets .... 0 600 0 5,308 0 -------- -------- -------- -------- -------- Total costs and expenses ........... 37,579 47,017 47,539 55,951 58,962 -------- -------- -------- -------- -------- (590) (12,940) (8,994) (16,466) (10,128) Gain on sale of assets and early termination of capital leases ............................ 3 226 3,294 124 270 Equity in earnings (losses) of partnerships ...................... 46 54 85 (51) 51 Interest and other income .......... 181 204 98 742 181 -------- -------- -------- -------- -------- Loss before income taxes and extraordinary item ................ (360) (12,456) (5,517) (15,651) (9,626) Income tax provision (benefit) ..... (7) 3 20 (7) (111) -------- -------- -------- -------- -------- Loss before extraordinary item ..... (353) (12,459) (5,537) (15,644) (9,515) Extraordinary item ................. 0 19,803 362 0 0 -------- -------- -------- -------- -------- Net income (loss) .................. $ (353) $ 7,344 ($ 5,175) ($15,644) ($ 9,515) ======== ======== ======== ======== ======== Primary Earnings per share: Income (loss) before extraordinary item ......... $ (0.08) $ (2.96) $ (1.93) $ (5.46) $ (3.39) Extraordinary item ............... $ 0.00 $ 4.71 $ 0.13 $ 0.00 $ 0.00 -------- -------- -------- -------- -------- Net income (loss) ................ $ (0.08) $ 1.75 $ (1.80) $ (5.46) $ (3.39) ======== ======== ======== ======== ========
17 18
BALANCE SHEET DATA DECEMBER 31, 1996 1995(1) 1994 1993 (2) 1992 --------------------------------------------------------------- (Amounts in thousands) Working capital deficiency ................................ $(10,888) $ (6,793) $(33,369) $(56,518) $(33,244) Total assets .............................................. 32,969 31,335 47,222 50,179 61,440 Current portion of long-term debt and obligations under capitalized leases ...................................... 13,182 8,720 11,214 26,635 15,288 Long term debt and obligations under capitalized leases less current portion .................................... 23,935 26,125 24,244 3,106 19,792 Senior subordinated notes ................................. 0 773 18,467 18,788 18,788 Stockholders' equity (Net capital deficiency) ............. $(10,475) $(10,576) $(22,341) $(17,754) $ (2,151)
(1) In June 1995, ASHS incorporated a new wholly-owned subsidiary, African American Church Health And Economic Services, Inc. ("ACHES") and ACHES' wholly-owned subsidiary, ACHES Insurance Services, Inc. ("AIS"), and in October 1995, entered into an operating agreement granting ASRS an 81% ownership interest in GK Financing, LLC. Accordingly, the financial data for the Company presented above include the results of the establishment of ACHES, AIS, and GK Financing, LLC for 1995 and 1996. (2) In August 1993, ASHS incorporated a new wholly-owned subsidiary, American Shared Radiosurgery Services ("ASRS"). Accordingly, the financial data for the Company presented above include the results of the establishment of the subsidiary for 1993 through 1996. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company had a net loss of $353,000 ($(0.08) per share) on medical services revenues of $36,989,000 in 1996. The Company had a net income of $7,344,000 ($1.75 per share) in 1995 on revenues of $34,077,000. Included in 1995 results was an extraordinary gain of $19,803,000. Total Revenues
Increase Increase (In Thousands) 1996 (Decrease) 1995 (Decrease) 1994 -------------- ---- ---------- ---- ---------- ---- Medical Services $36,989 8.6% $34,077 (11.6%) $38,545
Medical services revenues increased 8.6% in 1996 compared to 18 19 1995 and decreased 11.6% in 1995 compared to 1994. The 8.6% increase in 1996 compared to 1995 was due to an increase in MRI revenues. The 11.6% decrease in 1995 compared to 1994 was caused primarily by the sale of eight Respiratory Therapy contracts and the Respiratory Registry in December 1994. MRI revenues increased 11% ($2,667,000) in 1996 compared to 1995 and increased 11% ($2,413,000) in 1995 compared to 1994. The increases in 1996 and 1995 were primarily due to the commencement of new customer contracts and increased utilization from contracts commenced in prior periods. MRI revenues as a percentage of total medical services revenues were 75%, 73% and 59% in years 1996, 1995 and 1994, respectively. The Company's non-MRI diagnostic imaging services revenues declined 1% ($60,000) in 1996 compared to 1995 after a 21% ($1,673,000) decrease in 1995 compared to 1994. The revenue decline in 1995 compared to 1994 was attributable to decreased CT revenue due to a two scanner reduction in the CT fleet in 1994 and lower revenue generated on mobile routes, reductions in per-study wholesale prices, and competition. The Company had to convert the majority of its CT fleet from higher revenue and cost mobile routes to lower revenue and cost interim rental placement units to maintain utilization. Revenues from CT operations decreased $26,000 in 1996 and $453,000 in 1995 from 1994 revenues of $4,016,000. The decrease in Nuclear Medicine and Ultrasound revenues was $34,000 in 1996 and $1,220,000 in 1995 from a 1994 revenue base of $4,001,000. The 1995 decrease resulted primarily from the inclusion of two Ultrasound department contracts in the sale of its Respiratory Therapy contract sale on December 31, 1994. These two contracts had 1994 revenues of approximately $850,000. Non-MRI diagnostic imaging services revenues as a percentage of total medical services revenues was 17%, 18% and 21% for the years ended 1996, 1995 and 1994, respectively. Contract service revenues consisting of Respiratory Therapy services and Cardiac Catheterization Laboratory revenues decreased $415,000 in 1996 compared to 1995 and $4,670,000 in 1995 compared to 1994. The decrease in 1996 from 1995 resulted primarily from four terminated contracts in 1995 and the decrease in 1995 from 1994 is due primarily to the sale of Respiratory Therapy contracts on December 31, 1994. Gamma Knife revenues increased $705,000 in 1996 and decreased $86,000 in 1995 compared to the prior years. The 1996 increase was primarily due to the commencement of a second Gamma Knife unit. The decrease in 1995 was a result of reduced pricing in connection 19 20 with a contract extension. Cost of Operations
Increase Increase (In Thousands) 1996 (Decrease) 1995 (Decrease) 1994 -------------- ---- ---------- ---- ---------- ---- Cost of Operations, Exclusive of Write- Down of Equipment $ 28,071 (2.7%) $ 28,850 (15.5%) $34,145 Percentage of Revenue 75.9% 84.7% 88.6% Write-down of $ 0 (100.0%) $ 3,825 NM $ 0 equipment Percentage of Revenue 0.0% 11.2% 0.0%
The Company's cost of operations, consisting of payroll, maintenance and supplies, depreciation and amortization, equipment rental and other operating expenses (such as vehicle fuel, building rents, regional office costs, insurance, property taxes, bad debt expense, fees and training expenses) decreased $4,604,000 in 1996 and $1,470,000 in 1995 compared to prior years. Medical services payroll costs, the largest component of total cost of operations, increased by $328,000 in 1996 compared to 1995 and decreased by $3,300,000 in 1995 compared to 1994. Medical services payroll costs have stabilized after the 1995 decline as a percent of medical services revenues (20% in 1996, 20% in 1995 and 27% in 1994). The 1996 increase was primarily due to staffing increases to service additional MRI customer volumes. The significant decline in 1995 reflects the December 31, 1994 sale of Respiratory Therapy contracts (a labor intensive service). The Company's maintenance and supplies costs were 18%, 20% and 20% of medical service revenues in 1996, 1995 and 1994 respectively. Maintenance and supplies costs decreased $68,000 in 1996 compared to 1995 and decreased $1,042,000 in 1995 compared to 1994. The decreases in 1996 and 1995 are primarily attributable to pricing reductions on MRI maintenance contracts achieved by the Company and decreased supply usage associated with the sale and termination of Respiratory Therapy contracts. Depreciation and amortization decreased $1,671,000 in 1996 compared to 1995 and $1,202,000 in 1995 compared to 1994. The decreases in 1996 and 1995 are primarily attributable to the early 20 21 adoption of Financial Accounting Standards No. 121 (FAS 121) during the second quarter of 1995 as explained in detail below. In addition, the majority of capital leases were extended as of October 1, 1995 thereby extending the depreciable life of the asset (as leased assets are depreciated based on lease terms) and decreasing depreciation expense commencing the fourth quarter of 1995. Equipment rental as a percentage of medical services revenues was 9% in 1996, 8% in 1995 and 4% in 1994. Equipment rental increased $641,000 in 1996 compared to 1995 and $1,228,000 in 1995 compared to 1994. The increases in 1996 and 1995 are primarily attributable to the utilization of short term MRI and CT rentals to meet customer commitments. Other costs of operations as a percentage of medical services revenues was 11%, 12% and 13% in 1996, 1995 and 1994, respectively. The decrease of $9,000 in 1996 compared to 1995 reflects a decrease in equipment and CON related costs and regional office administrative costs offset by increased fuel costs, MRI space rental costs and physician reading fees. The $979,000 decrease in 1995 compared to 1994 was primarily attributable to a significant reduction in regional office administrative costs, property related and bad debt costs. In connection with the early adoption of the statement of Financial Accounting Standards No. 121 (FAS 121) during the second quarter of 1995, management reviewed the recoverability of the carrying value of long-lived assets, primarily fixed assets, goodwill and deferred costs. The Company initiated its review of potential loss impairment due to the continuing changes in the health care environment which have put downward pressure on customers and equipment and reduced forecasted operating results for certain assets to a level below previous expectations. Following its review, management concluded that there was an impairment in the recorded value of fixed assets, goodwill and deferred costs under FAS 121 based on management's estimate of future undiscounted cash flows over the estimated remaining useful life of certain assets. Accordingly, an impairment loss of $4,425,000 was recorded in the second quarter of 1995 based on the differences between the fair value of such assets as determined by third parties and the recorded values. The impairment loss is comprised of a charge for the write-downs of equipment and deferred assets of $3,825,000 (primarily MRI, CT and Nuclear Medicine) and goodwill of $600,000. 21 22 Selling and Administrative
Increase Increase (In Thousands) 1996 (Decrease) 1995 (Decrease) 1994 -------------- ---- ---------- ---- ---------- ---- Selling and Administrative Costs $5,309 (37.0%) $8,432 41.2% $5,971 Percentage of Revenue 14.4% 24.7% 15.5%
The Company's selling and administrative costs decreased $3,123,000 in 1996 compared to 1995 and increased $2,461,000 in 1995 compared to 1994. The decrease in 1996 and increase in 1995 is primarily attributable to a 1995 stock compensation expense totalling $2,679,000 which is comprised of shares and options issued to the Company's Chairman and Chief Executive Officer, Ernest A. Bates, M.D. Salary and wage expense was charged $265,000 in the second quarter of 1995 for the issuance of 184,000 Common Shares to Dr. Bates for his continued services to the Company and his personal guarantee of $6,500,000 of indebtedness of the Company. In addition, during the fourth quarter of 1995, a charge to salary and wage expense of $2,414,000 was recorded in connection with the grant to Dr. Bates, following shareholder approval, of an option to acquire 1,495,000 additional Common Shares for $0.01 per share as further consideration for his continued service to the Company and his personal guarantee of $6,500,000 of the Company's new credit facilities. See "Liquidity and Capital Resources." The decrease in 1996 was also related to reduced legal and insurance costs. Interest Expense
Increase Increase (In Thousands) 1996 (Decrease) 1995 (Decrease) 1994 -------------- ---- ---------- ---- ---------- ---- Interest Expense $4,199 (20.9%) $5,310 (28.5%) $7,423 Percentage of Revenue 11.4% 15.6% 19.3%
The Company's interest expense decreased $1,111,000 in 1996 compared to 1995 and $2,113,000 in 1995 compared to 1994. The decreases in 1996 and 1995 are primarily attributable to the repurchase by the Company on May 17, 1995 of $17,694,000 aggregate 22 23 principal amount of its Senior Subordinated Notes. See "Net Income (Loss)" below. Write-down of Intangible Assets
Increase Increase (In Thousands) 1996 (Decrease) 1995 (Decrease) 1994 -------------- ------ ---------- ------ ---------- ----- Write-down of Intangible Assets $ 0 (100%) $600 NM $ 0 Percentage of Revenue 0.0% 1.8% 0.0%
The Company's write-down of intangible assets decreased $600,000 in 1996 as compared to 1995 and increased $600,000 in 1995 as compared to 1994. The decrease in 1996 and increase in 1995 compared to prior years is solely attributable to the early adoption of FAS 121 in the second quarter of 1995. See "Cost of Operations" above. Other Income and Expense
Increase Increase (In Thousands) 1996 (Decrease) 1995 (Decrease) 1994 -------------- ---- ---------- ---- ---------- ---- Gain on Sale of Assets and Early Termination of Capital Leases $ 3 (98.7%) $ 226 (93.1%) $3,294 Percentage of Revenue 0.0% 0.7% 8.6% Equity in Earnings of Partnerships 46 (14.8%) 54 (36.5%) 85 Percentage of Revenue 0.1% 0.2% 0.2% Interest and Other Income 181 (11.3%) 204 108.2% 98 Percentage of Revenue 0.5% 0.6% 0.3%
The Company's gain on sale of assets and early termination of capital leases decreased $223,000 in 1996 compared to 1995 and $3,068,000 in 1995 compared to 1994. The gain on sale of assets in 1994 of $3,294,000 was primarily due to the Respiratory Therapy department contracts sale gain of $3,199,000. The sale resulted in the Company receiving cash of approximately $4,000,000 and the 23 24 buyer assuming approximately $300,000 in liabilities. Gain on sale of equipment fluctuates depending on the timing of asset dispositions. The Company continues to sell non-essential assets in the normal course of business. Net Income (Loss)
Increase Increase (In Thousands) 1996 (Decrease) 1995 (Decrease) 1994 -------------- ---- ---------- ---- ---------- ---- Loss Before Income Taxes and Extraordinary Item $ (360) (97.1%) $ (12,456) 125.8% $ (5,517) Percentage of Revenue (1.0%) (36.6%) (14.3%) Loss Per Share $ (0.08) (97.3%) $ (2.96) 53.4 $ (1.93) Extraordinary item $ 0 (100.0%) $ 19,803 5,370.4% $ 362 Extraordinary Item, Per share $ 0.00 (100.0%) $ 4.71 3,523.1% $ 0.13 Net Income (Loss) $ (353) (104.8%) $ 7,344 241.9% $ (5,175) Net Income (Loss), Per Share $ (0.08) (104.6%) $ 1.75 197.2% $ (1.80)
The Company had a loss before income taxes and extraordinary item of $360,000 in 1996 compared to a loss before income taxes and extraordinary item of $12,456,000 for 1995. Included in the Company's loss for 1995 was a charge of $4,425,000 due to adoption of FAS 121 and stock compensation expense of $2,679,000. The Company had a net loss of $353,000 for 1996 compared to a net income of $7,344,000 for 1995. The Company's net income for 1995 included an extraordinary gain of $19,803,000 from its debt restructuring recorded on May 17, 1995. The gain resulted from the purchase of $17,694,000 aggregate face amount plus $8,853,000 of accrued and unpaid interest of the Company's 14-3/4% and 16-1/2% Senior Subordinated Notes due October 15, 1996 net of cash, Common Shares and warrants to purchase Common Shares issued and transaction related costs of $3,893,000, $1,836,000 and $1,015,000 respectively. The Company had net income of $7,344,000 for 1995 compared to a loss of $5,175,000 for 1994. The Company's net income for 1995 included an extraordinary gain of $19,803,000 as enumerated above. 24 25 The 1994 net loss was primarily attributable to the reduction in medical services revenues and interest on the Subordinated Notes. The loss was partially offset by a gain on the sale of assets. During September 1994, the Company recognized an extraordinary gain on the early extinguishment of indebtedness of $362,000. The extraordinary gain resulted from the repurchase of $321,000 face amount plus $115,000 of accrued and unpaid interest of the Company's 14-3/4% Senior Subordinated Notes net of income tax and deferred financing costs of $10,000 for $64,000 in cash. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $368,000 at December 31, 1996 compared to $452,000 at December 31, 1995. The Company's cash position decreased due to its net loss of $353,000 in 1996. On May 17, 1995, the Company repurchased (the "Notes Repurchase") for cash and securities approximately 96% of its outstanding Senior Subordinated Notes (the "Subordinated Notes"). The Notes Repurchase, together with a December 1994 lease restructuring and the availability of up to $8,000,000 of new debt financing, concluded a broad restructuring of the Company's obligations as more fully explained in the Company's 1995 Form 10-K. On December 29, 1995 and March 1, 1996, the Company further restructured certain of its medical equipment leases and its outstanding notes (the "GE Notes") to extend the terms of the leases for periods of up to an additional 26 months, to defer certain monthly lease payments and to defer certain installment payments due at the beginning of 1996. This further restructuring resulted in payment reductions of approximately $1,200,000 for the Company in 1996. In connection with the issuance of the GE Notes, the Company issued warrants to GE to purchase an aggregate of 225,000 Common Shares for $0.01 per share. Effective March 5, 1996 and September 26, 1996, 97,853 and 127,147 of the GE Warrants were exercised to purchase 97,853 and 127,147 Common Shares, respectively. 25 26 The various restructuring transactions described above cured all of the Company's outstanding defaults relating to its debt and lease obligations. The Company nevertheless remains highly leveraged and has significant cash payment requirements under its equipment leases and credit facilities. Scheduled equipment capital lease payments and operating lease payments during the 12 months ending December 31, 1997 are $8,606,000 and $1,641,000, respectively, with related maintenance commitments of approximately $1,685,000. Scheduled interest and principal payments under the Company's other debt obligations during such period are approximately $7,917,000. The Company does not expect to have the cash resources to pay all of its obligations when they are due. Accordingly, the Company will continue its program of expense reductions and revenue enhancements as well as attempting to refinance or renegotiate the terms of its fixed obligations. There can be no assurance that these measures will enable the Company to meet its scheduled obligations. Any inability of the Company to meet its obligations when due would result in a default which could permit the relevant obligor to accelerate the obligation and seek other remedies including seizure of the Company's medical imaging equipment. In such event, the Company would be forced to seek a liquidation under Chapter 7 or a reorganization under Chapter 11 of the United States Bankruptcy Code. As part of its efforts, the Company in March 1996 sold its Modesto buildings for $650,000 in cash, and negotiated an increase of $500,000 in its working capital line of credit. The Company also completed an exchange offer (the "Exchange Offer") for $413,000 aggregate principal amount of Subordinated Notes. In the Exchange Offer, the Company offered to exchange approximately 700 shares of its Common Stock for each $1,000 principal amount of Subordinated Notes (and all accrued interest thereon). The purpose of the Exchange Offer was to improve the Company's capital structure and relieve the Company of the requirement to pay $836,000 of principal and interest in October, 1996 when the Subordinated Notes were to mature. In the Exchange Offer, the Company issued approximately 287,000 additional shares of Common Stock. The remaining $360,000 of the Subordinated Notes were paid at maturity on October 16, 1996. In the longer term, the Company believes that it must respond to fundamental changes in the industry. The medical diagnostic 26 27 imaging business, both mobile and fixed, is in a period of consolidation as a result of the growth of managed care and other competitive forces. Smaller companies, such as the Company, must either grow through acquisitions or become part of larger enterprises in order to compete successfully and achieve acceptable returns for their shareholders. The Company is pursuing the proposed merger with USD in response to the industry trend toward consolidation and because the transaction would enable the Company's shareholders to obtain a fair price and liquidity for their investment. See Part I - Item 1 "Business-General Recent Developments". In light of the continuing delay in negotiations with USD, however, the Company can provide no assurance that the proposed merger will be consummated or that the Company will be able to successfully respond to these changes in the industry. IMPACT OF INFLATION AND CHANGING PRICES The Company does not believe inflation has had a significant impact on operations, because most of its customer contracts include a cost of living price adjustment provision, which the Company believes will be sufficient to offset the impact of any future inflation on the Company's costs of operation. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to Consolidated Financial Statements and Financial Statement Schedules included at page A-1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Board of Directors The following provides current information concerning those persons who serve on the Company's Board of Directors. 27 28 ERNEST A. BATES, M.D. has been a director, the Chairman of the Board and Chief Executive Officer of the Company since it was incorporated in 1983. He founded the Company's predecessor limited partnership in 1980. Dr. Bates is 60 years old. WILLIE R. BARNES has been a director and Corporate Secretary of the Company since 1984. He has been a partner in the law firm of Musick Peeler & Garrett since June 1992, was in solo practice from February 1992 until June 1992, was a partner in the law firm of Katten Muchin Zavis & Weitzman from March 1991 until January 1992, was a partner in the law firm of Wyman Bautzer Kuchel & Silbert from April 1989 until its dissolution effective March 14, 1991, and was a partner in the law firm of Manatt Phelps Rothenberg & Phillips from April 1979 until March 1989. He is a Director of Franchise Finance Corporation of America. Mr. Barnes is 65 years old. MATTHEW HILLS became a director of the Company effective February 16, 1996 and has been the Chief Planning Officer and a Senior Vice President of The Berkshire Group, a healthcare and financial services company, since 1993. From 1990 to 1993, Mr. Hills was a Manager and Consultant at The LEK Partnership. Prior to joining LEK, Mr. Hills was an Associate in the Corporate Finance Department at Drexel Burnham Lambert from 1987 to 1990. He is also a Director of K-Bro Linen Systems. Mr. Hills graduated from Brandeis University in 1981 and from Harvard Business School in 1987. Mr. Hills was nominated to serve on the Board of Directors by certain shareholders who were participants in the Notes Repurchase. Mr. Hills is 37 years old. JOHN F. RUFFLE was elected a Director of the Company on May 18, 1995. He retired in 1993 as Vice-Chairman of the Board and a Director of J.P. Morgan & Co. Incorporated and Morgan Guaranty Trust Co. of New York. He also is a Director of Bethlehem Steel Corporation; a Director of J.P.M. Series Trust II; a Director of Trident Corp.; a Director of Wackenhut Corrections Corp; and a Trustee of The Johns Hopkins University. He is a graduate of The Johns Hopkins University, with an M.B.A. in finance from Rutgers University, and is a Certified Public Accountant. Mr. Ruffle is 59 years old. STANLEY S. TROTMAN, JR., became a director of the Company effective February 16, 1996. He has been a Managing Director with the Health Care Group of PaineWebber, an investment banking firm, since 1995 following the consolidation of Kidder, Peabody, also an investment banking firm, with PaineWebber, and had previously co-directed Kidder, Peabody's Health Care Group since April 1990. 28 29 Formerly he had been head of the Health Care Group at Drexel Burnham Lambert, Inc. where he had been employed for approximately 22 years. He received his undergraduate degree from Yale University in 1965 and holds an M.B.A from Columbia Business School in 1967. Mr. Trotman is 53 years old. AUGUSTUS A. WHITE III, M.D. has been a director of the Company since 1990. He has been a Professor of Orthopaedic Surgery at Harvard Medical School since 1978. He was Orthopaedic Surgeon-in- Chief at Beth Israel Hospital, Boston, MA., from 1978 to 1991. He also is a director of Orthologic Corporation. Dr. White is 60 years old. CHARLES B. WILSON, M.D. has most recently been a director of the Company since June 1993. He also was a director of the Company from March 1984 until March 1989. He has been a Professor and Director of the Brain Tumor Research Foundation at the University of California Medical Center, San Francisco, since 1968, and from 1968 until April 1, 1994 and March 8, 1996 to present, has held the position of Chief of its Department of Neurosurgery. Dr. Wilson is 67 years old. Executive Officers The following table provides current information, concerning those persons who serve as executive officers of the Company. The executive officers were appointed by the Board of Directors and serve at the discretion of the Board of Directors.
Name Age Position - -------------------------------------------------------------------------------- Ernest A. Bates, M.D. 60 Chairman of the Board of Directors, Chief Executive Officer and Acting President and Chief Operating Officer Craig K. Tagawa 43 Senior Vice President - Chief Financial Officer Richard Magary 56 Senior Vice President - Administration, Assistant Secretary David Neally 44 Senior Vice President - Operations Gregory Pape 41 Senior Vice President - Sales and Marketing - --------------------------------------------------------------------------------
ERNEST A. BATES, M.D., founder of the Company, has served in the positions listed above since the incorporation of the Company, except for the periods May 1, 1991 through November 6, 1992 and February 1989 through August 1989, during which time Dr. Bates did 29 30 not serve in the capacity of President and Chief Operating Officer. Dr. Bates is a graduate of The Johns Hopkins University and the University of Rochester School of Medicine. He is currently an Assistant Clinical Professor of Neurosurgery at the University of California Medical Center at San Francisco, and a member of the Board of Trustees of The Johns Hopkins University and the University of Rochester. CRAIG K. TAGAWA has served as Chief Financial Officer since May 1996. Mr. Tagawa also served as Chief Financial Officer from January 1992 through October 1995. Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice President on February 28, 1993. He is also the Chief Executive Officer of GK Financing, LLC. From September 1988 through January 1992, Mr. Tagawa served in various positions with the Company. From 1982 through August 1988, Mr. Tagawa served as Vice President of Finance and Controller of Medical Ambulatory Care, Inc., the Dialysis division of National Medical Enterprises, Inc. (now Tenet Healthcare Corporation), an owner and operator of hospitals and other health care businesses. Mr. Tagawa received his Undergraduate degree from the University of California at Berkeley and his M.B.A from Cornell University. RICHARD MAGARY has served as Senior Vice President Administration since February 28, 1993 and Assistant Secretary since 1985. From April 1987 through February 1993, Mr. Magary served as a Vice President in the same capacity. From 1982 through March 1987, he served as Chief Financial Officer of the Company and its predecessor. Mr. Magary is a graduate of the University of San Francisco. DAVID NEALLY has served as Senior Vice President - Operations since May 1994. From January 1993 through May 1994, Mr. Neally was a Zone Vice President for Operations. Prior to January 1993, Mr. Neally had served in a variety of sales and operations positions since joining CuraCare in 1980. Mr. Neally received his undergraduate degree from John Wood College in Quincy, Illinois and is also a graduate of St. Mary's School of Cardiopulmonary Technology in Quincy, Illinois. GREGORY PAPE has served as Senior Vice President - Sales and Marketing since June 1994. From January 1993 through June 1994, Mr. Pape was a Zone Vice President - Sales and Marketing for the Company. Mr. Pape served in the capacity of Regional Sales Manager for the Company for the period from March 1991 through January 1993. From September 1989 through February 1991, Mr. Pape was a 30 31 Regional Sales Manager for Medical Imaging Corporation of America, Inc. Mr. Pape earned his undergraduate degree at the University of Miami, with postgraduate work in law at the University of Dayton, Ohio. Compliance with Section 16(a) under the Securities Exchange Act of 1934 Reports filed under the Exchange Act and received by the Company on or after January 1, 1996, indicate that during 1996 directors, officers and 10% shareholders of the Company filed all required reports within the periods established by applicable rules. ITEM 11. EXECUTIVE COMPENSATION Compensation of Directors During 1996 and 1995, non-employee directors were scheduled to receive an annual retainer fee of $5,000 each. The non-employee directors agreed to defer payment of the 1996 and 1995 retainer fees until late 1996 to assist the Company with its cash flow. The Board also approved the election by a director to receive a portion of his 1995 and/or 1996 retainer fees in Common Shares in an amount approximately equalling such fees otherwise payable in cash. Non-employee directors also were entitled in 1995 and 1996 to receive $1,000 for attendance in person at each regular and special meeting of the Board of Directors, as well as an automatic grant of Options from the Company's 1995 Stock Option Plan, to acquire up to 4,000 common shares annually of the Company's common stock at the market price on date of grant, until a Director has options for a total of 12,000 shares in all Company plans. In addition, non-employee directors who were members of a committee of the Board of Directors were entitled to receive $200 for attendance in person at each committee meeting. Non-employee directors are not entitled to any fee for Board of Directors or committee meetings held by conference telephone at which they are not present in person. Of the six Board meetings held during 1996, four were regular meetings which directors attended in person, and two were special meetings which were held by conference telephone. Non-employee directors also received reimbursement of expenses incurred in attending meetings. No payment is made for attendance at meetings by any director who is an employee of the Company. 31 32 Directors fees in 1997 will include the issuance of options to acquire 10,000 shares of the Company's common stock at $0.01 per share to each non-employee Director in lieu of annual retainer fees. Non-employee directors will continue in 1997 also to receive $1,000 for attendance in person at each regular and special meeting of the Board of Directors, and $200 for attendance in person at each committee meeting, as well as an automatic grant of Options from the Company's 1995 Stock Option Plan, to acquire up to 4,000 common shares annually of the Company's common stock at the market price on date of grant, until a Director has options for a total of 12,000 shares in all Company plans. The Company had no employment contracts with its directors or executive officers named in the Summary Compensation Table in 1996. Compensation of Executive Officers The following table sets forth the compensation paid by the Company for the fiscal years ending December 31, 1994, December 31, 1995 and December 31, 1996 and paid in those years for services rendered in all capacities during 1994, 1995 and 1996, respectively, to the Chief Executive Officer and each executive officer other than the Chief Executive Officer who served as an officer at December 31, 1996 and earned cash compensation of $100,000 or more during 1996. 32 33 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS(3) ------------ SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION(2) OPTIONS - --------------------------- ---- ---------- ----- --------------- ------------ Ernest A. Bates , M.D 1996 $223,412 -- -- -- Chairman of the Board, 1995 $223,253 -- -- 1,495,000 Chief Executive Officer 1994 $225,218 -- -- -- Craig K. Tagawa, 1996 $165,747 -- -- -- Senior Vice President, 1995 $129,328 $26,003 -- 90,000 Chief Financial Officer 1994 $119,426 -- -- -- David Neally 1996 $101,000 $38,500 -- -- Senior Vice President 1995 $104,654 $48,076 -- 45,000 Operations 1994 $ 91,000 $17,322 -- -- Gregory Pape 1996 $278,895(4) -- -- -- Senior Vice President 1995 $265,745(5) -- -- 45,000 Sales and Marketing 1994 $238,186(6) -- -- --
- --------- (1) Each amount under this column includes amounts accrued in 1994, 1995 and 1996 that would have been paid to such persons in such years, except that such amounts were instead deferred pursuant to the Retirement Plan for Employees of American Shared Hospital Services and CuraCare, a defined contribution plan and ASHS' Flexible Benefit Plan, a defined contribution plan. Both plans are available to employees of the Company generally. (2) The Company has determined that, with respect to the executive officers named in the Summary Compensation Table, the aggregate amount of other benefits does not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported in the Summary Compensation Table as paid to such executive officer in the relevant year. (3) No restricted stock awards or long-term incentive plan payouts were made to the executive officers named in the Summary Compensation Table during the years listed in the Summary Compensation Table. (4) Includes Sales Commissions of approximately $82,000 earned in 1995 and paid in 1996 and $107,000 earned and paid in 1996. (5) Includes sales commissions of approximately $83,000 earned in 1994 and paid in 1995 and approximately $92,000 earned and paid in 1995. (6) Includes sales commissions of approximately $80,000 earned in 1993 and paid in 1994 and $68,000 earned and paid in 1994. 33 34 OPTION GRANTS IN LAST FISCAL YEAR "The Option Grants for the Fiscal Year" Table has been omitted because no options were granted during 1996 to the Company's executive officers named in the Summary Compensation Table. LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR The "Long-Term Incentive Plan Awards" ("LTIP Awards") table has been omitted because no LTIP Awards were made during 1996 to the Company's executive officers named in the Summary Compensation Table. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth the number of shares acquired on exercise of stock options and the aggregate gains realized upon exercise of such options during 1996, by the Company's executive officers named in the Summary Compensation Table. The following table also sets forth the number of shares underlying exercisable and unexercisable options held by such executive officers on December 31, 1996. 34 35 1984 AND 1995 STOCK OPTION PLANS AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)(1) -------------------------------- --------------------------------- SHARES ACQUIRED ON VALUE NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------- ----------- ----------- ----------- ------------- ----------- ------------- Ernest A. Bates, M.D -- -- 1,495,000 -- $2,694,738 -- Craig K. Tagawa -- -- 125,000 -- $ 23,437 -- David Neally -- -- 51,700 3,300 $ 9,693 $ 618 Gregory Pape -- -- 57,000 8,000 $ 10,688 $1,500
(1) This amount is calculated by multiplying the number of Common Shares underlying the options at December 31, 1996 by the market price per Common Share on such date less the option exercise price. 35 36 Employment Agreements The Company had no employment contracts with its directors or executive officers named in the Summary Compensation Table in 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Shares as of March 5, 1997, of (i) each person known to the Company to own beneficially 5% or more of the Common Shares, (ii) each director of the Company, (iii) the chief executive officer and each other executive officer named in the Summary Compensation Table, and (iv) all directors and executive officers as a group. 36 37 Security Ownership of Certain Beneficial Owners and Management
COMMON SHARES OWNED BENEFICIALLY ------------------------------------------ AMOUNT AND NATURE OF NAME AND ADDRESS OF BENEFICIAL OWNERSHIP PERCENT OF CLASS BENEFICIAL OWNER (4) (9) - ------------------------------- -------------------- ---------------- Total Number of Shares 6,652,300(5) 100.0% Ernest A. Bates, M.D. (1) 2,342,642(6) 37.4% SunAmerica Inc.(2) 128,066(2) 2.6% SunAmerica Life Insurance 277,473(2) 5.5% Company(2) Anchor National Life 406,819(2) 7.9% Insurance Company(2) Lion Advisors, L.P. 384,195(7) 7.5% 1301 Avenue of the Americas New York, NY 10019 AIF II, L.P. 170,752(7) 3.5% c/o Apollo Advisors, L.P. 1999 Avenue of the Stars Los Angeles, CA 90071 General Electric Company 225,000(8) 4.7% c/o GE Medical Systems 20825 Swenson Drive Waukesha, WI 53186 Willie R. Barnes (1) 7,000(6) * Matthew Hills(1)(3) 2,915(6) * John F. Ruffle (1)(4) 80,711(6) 1.7% Stanley S. Trotman, Jr.(1)(3) 104,295(6) 2.2% Augustus A. White,III, M.D.(1) 17,992(6) * Charles B. Wilson, M.D. (1) 7,200(6) * Craig K. Tagawa (1) 137,600(6) 2.8% Senior Vice President- Chief Financial Officer David Neally (1) 54,450(6) 1.1% Senior Vice President- Operations Gregory Pape (1) 61,500(6) 1.3% Senior Vice President- Sales and Marketing All Directors & Executive 2,899,605(6) 44.0% Officers as a Group (11 persons)
- -------------- * Less than 1% (1) The address of each such individual is c/o American Shared Hospital Services, Four Embarcadero Center, Suite 3620, San Francisco, California 94111-4155. 37 38 (2) Based on information contained in the Schedule 13D dated May 17, 1995, as amended November 22, 1995, and March 11, 1996 and filed with the Securities and Exchange Commission by SunAmerica Inc. and its direct and indirect subsidiaries, SunAmerica Life Insurance Company (formerly known as Sun Life Insurance Company of America) and Anchor National Life Insurance Company, such entities then owned beneficially 812,358 Common Shares, including immediately exercisable Warrants to acquire 169,264 Common Shares. The address of each Beneficial Owner is c/o SunAmerica, Inc., 1 SunAmerica Center, Los Angeles, CA 90067. (3) Mr. Hills and Mr. Trotman were elected to the Board of Directors effective February 16, 1996. (4) Each person directly or indirectly has sole voting and investment power with respect to the shares listed under this column as being owned by such person. (5) Represents the aggregate of issued and outstanding Common Shares plus Common Shares that all persons or groups of persons are entitled to acquire upon the exercise of options or warrants within 60 days after March 5, 1997. (6) Includes shares underlying options that are currently exercisable or which will become exercisable within 60 days following March 5, 1997: Dr. Bates, 1,495,000; Mr. Barnes, 6,000 shares; Mr. Hills, 1,333 shares; Mr. Ruffle, 4,000 shares; Mr. Trotman, 1,333 shares; Dr. White, 12,000 shares; Dr. Wilson, 7,200 shares; Mr. Tagawa, 125,000 shares; Mr. Neally, 53,350 shares; Mr. Pape, 61,000 shares; and Directors and Executive Officers as a group, 1,826,216 shares. (7) Based on information contained in the Schedule 13D dated May 17, 1995, as amended November 13, 1995 and November 27, 1995, and filed jointly with the Securities and Exchange Commission by Lion Advisors, L.P. ("Lion") and AIF II, L.P. ("AIF II"), such entities then owned beneficially 554,947 Common Shares, including immediately exercisable Warrants to acquire 115,629 Common Shares. The managing general partner of AIF II is Apollo Advisors, L.P. ("Advisors"). Advisors and Lion are affiliates. Lion beneficially holds the indicated securities for an investment account under management over which Lion has investment, dispositive and voting power. The Company does not believe that Lion and AIF II are affiliates of the Company under the Act. (8) Represents Common Shares acquired upon exercise of Warrants including 97,853 shares on March 5, 1996 and 127,147 shares on September 26, 1996. (9) Shares that any person or group of persons is entitled to acquire upon the exercise of options or warrants within 60 days after March 5, 1997, are treated as issued and outstanding for the purpose of computing the percent of the class owned by such person or group of persons but not for the purpose of computing the percent of the class owned by any other person. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 6, 1994, the Company entered into settlement agreements with each of Elekta Instruments, Inc. ("Elekta"), the manufacturer of the Gamma Knife, and NME Hospitals, Inc., d/b/a USC University Hospital ("USC Hospital"), the lessor of a Gamma Knife, to resolve disputes arising out of the Company's inability to make a required progress payment under the agreement to purchase such Gamma Knife. The settlement agreements required that the Company terminate its original agreement to purchase the Gamma Knife from Elekta and to lease the Gamma Knife to USC Hospital. Further conditions to execution of the settlement agreements included that 38 39 Dr. Bates, the Company's Chairman and Chief Executive Officer, enter into a purchase agreement and lease agreement with Elekta and USC Hospital, respectively, substantially identical to the respective terminated agreements. Pursuant to the new purchase agreement, Dr. Bates was entitled to purchase the Gamma Knife from Elekta for an aggregate purchase price of $2,900,000 plus sales tax. Dr. Bates obtained financing for the Gamma Knife purchase from an unaffiliated third party. Dr. Bates' lender financed the total purchase price, less $290,000 advanced by the Company, pursuant to an interest bearing installment note and security agreement. The Company advanced $290,000 of the purchase price, to be repaid by Dr. Bates over the term of the new lease agreement, pursuant to a promissory note bearing interest at 6% per annum and repayable over 60 months. The Company and Dr. Bates entered into an option agreement entitling the Company to purchase the Gamma Knife from Dr. Bates for an amount equal to the remaining debt obligations associated with the Gamma Knife plus costs and losses, if any, incurred by the Chief Executive Officer. This option was assigned to GKF and exercised on February 3, 1996. In connection with the exercise of the option by GKF, the interest bearing installment note was cancelled. On October 6, 1995, the Company entered into the Option Agreement with its Chairman and Chief Executive Officer. Under the Option Agreement, Dr. Bates was granted a ten-year option to purchase 1,495,000 Common Shares for an initial exercise price of $0.01 per share. In addition, on May 17, 1995, as part of the Notes Repurchase, the Company issued 184,000 Common Shares to Dr. Bates in partial consideration of his personal guarantee of $6,500,000 of indebtedness of the Company. Willie R. Barnes, the Secretary and a director of the Company, is a partner in the law firm of Musick, Peeler & Garrett. That law firm performed legal services for the Company in 1996. The management of the Company is of the opinion that the fees paid to Mr. Barnes' law firm are comparable to those fees that would have been paid for comparable legal services from a law firm not affiliated with the Company. 39 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules. The following Financial Statements and Schedules are filed with this Report. Report of Independent Auditors Audited Consolidated Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Financial Statement Schedules Valuation and Qualifying Accounts All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. Consent of Independent Auditors (b) Exhibits. The following Exhibits are filed with this Report. Exhibit Number Description - ------ ----------- 3.1 Articles of Incorporation of the Company, as amended. (1) 3.2 By-laws for the Company, as amended. (2) 4.6 Form of Common Stock Purchase Warrant of American Shared Hospital Services. (2) 4.8 Registration Rights Agreement, dated as of May 17, 1995, by and among American Shared Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems.(2) 4.9 Promissory Note, dated May 17, 1995, by American Shared Hospital Services in favor of General Electric Company in the principal sum of $1,500,000, as amended. (2) 4.10 Promissory Note, dated January 31, 1996, by American Shared -CuraCare and CuraCare, Inc. in favor of DVI Business Credit Receivables Corporation, in the principal sum of $4,000,000. (3) 4.11 Promissory Note, dated May 17, 1995, by American Shared-CuraCare and CuraCare, Inc. in favor of DVI Financial Services Inc. in the principal sum of $2,500,000. (2) 4.12 Security Agreement dated as of May 17, 1995 by and between American Shared Hospital Services and General Electric Company, acting through GE Medical Systems. (2) 4.13 Agreement and Proxy, dated as of May 12, 1995 by Ernest A. Bates, M.D., Accepted and Agreed to by Anchor National Life Insurance Company, Sun Life Insurance Company of America, SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd., and Upchurch Living Trust U/A/D 12/14/90.(2) 4.14 Assignment and Assumption Agreement, dated as of December 31, 1995, between American Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee). (3) 4.15 Assignment and Assumption Agreement, dated as of February 3, 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee).(3) 4.16 USC University Hospital Option Agreement, dated February 3, 1996, among American Shared Hospital Services, Ernest A. Bates, M.D. and GK Financing, LLC. (3) 4.17 Assignment and Assumption Agreement, dated as of February 3, 1996, among Ernest A. Bates, M.D. (assignor) and GK Financing, LLC (assignee). (3) 40 41 4.18 Assignment and Assumption Agreement, effective as of February 3, 1996, among Ernest A. Bates, M.D. (assignor) and GK Financing, LLC (assignee). (3) 4.19 Promissory Note, dated January 1, 1995, by American Shared-CuraCare in favor in General Electric Company, acting through GE Medical Systems, in the principal sum of $2,000,000, as amended. (3) 4.20 Promissory Note, dated December 30, 1994, by American Shared-CuraCare in favor of General Electric Company, in the principal sum of $481,667.81, as amended. (3) 4.21 Promissory Note, dated April 29, 1996 by GK Financing, LLC in favor of Skandinaviska Enskilda Banken in the principal amount of $1,300,000. 4.22 Promissory Note, dated December 23, 1996 by American Shared-CuraCare in favor of General Electric company, in the principal amount of $1,631,595.10 10.1 The Company's 1984 Stock Option Plan, as amended. (4) 10.2 The Company's 1995 Stock Option Plan, as amended. (5) 10.3 Form of Indemnification Agreement between American Shared Hospital Services and members of its Board of Directors. (4) 10.4 Agreement, effective as of November 1, 1994, by and among General Electric Company, acting through GE Medical Systems, and American Shared Hospital Services, and certain of its subsidiaries, as amended. (6) 10.5 Note Purchase Agreement, dated as of May 12, 1995, by and among Anchor National Life Insurance Company, Sun Life Insurance Company of America, and SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd. and Upchurch Living Trust U/A/D 12/14/90, American Shared Hospital Services and Ernest A. Bates, M.D. (2) 10.6 Loan and Security Agreement, dated as of January 31, 1996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation. (3) 10.7 Loan and Security Agreement, dated as of May 17, 1995, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Financial Services Inc. (2) 10.8 Form of Unconditional Continuing Guaranty of American Shared Hospital Services. (3) 10.9 Form of Unconditional Continuing Guaranty of Ernest A. Bates, M.D. (3) 10.10 Intercreditor Agreement among American Shared Hospital Services, American Shared-Curacare, DVI Financial Services Inc. and DVI Business Credit Receivables Corporation and General Electric Company, acting through GE Medical Systems, dated as of January 31, 1996. (3) 41 42 10.11 Ernest A. Bates, Stock Option Agreement dated as of August 15, 1995. (7) 10.12 Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. (2) 10.13 Amendments dated as of October 26, 1995 and as of December 20, 1995 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (3) 10.14 Amendment No. 1, dated March 29, 1996, to Loan and Security Agreement, dated as of January 31, 1996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation (Exhibit 10.6). 10.15 Amendment No. 2, dated January 31, 1996, to Loan and Security Agreement, dated as of January 31, 996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation (Exhibit 10.6). 21 Subsidiaries of American Shared Hospital Services. (3) 23.1 Consent of Ernst & Young LLP. - -------------- (1) These documents were filed as Exhibits 3.1, 4.1 and 4.2, respectively, to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (2) These documents were filed as Exhibits 3.2, 4.6, 4.8, 4.9, 4.11, 4.12, 4.13, 10.5, 10.7 and 10.12, to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on October 26, 1995, which is incorporated herein by this reference. These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (3) These documents were filed as Exhibits 4.10, 4.14, 4.15, 4.16, 4.17,4.18, 4.19, 4.20, 10.6, 10.8, 10.9, 10.10, 10.13 and 21, respectively, to the registrant's Pre-Effective Amendment No. 1 to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996, which is incorporated herein by this reference. (4) These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant's Registration Statement on Form S-2 (Registration NO. 33-23416), which is incorporated herein by this reference. (5) This document was filed as Exhibit A to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. (6) This document was filed as Exhibit 10.49 to registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1994, which is incorporated herein by this reference. (7) This document was filed as Exhibit B to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. (c) Reports on Form 8-K. The Company filed no reports on Form 8-K during the quarter ended December 31, 1996. 42 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN SHARED HOSPITAL SERVICES (Registrant) March 28, 1997 By: /s/ Ernest A. Bates, M.D. ------------------------------------- Ernest A. Bates, M.D. Chairman and Chief Executive Officer 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 registrant in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Ernest A. Bates, M.D. Chief Executive Officer March 28, 1997 - ---------------------------- and Chairman of the Board Ernest A. Bates, M.D. /s/ Willie R. Barnes Director and March 28, 1997 - ---------------------------- Secretary Willie R. Barnes /s/ Matthew Hills Director March 28, 1997 - ---------------------------- Matthew Hills /s/ John F. Ruffle Director March 28, 1997 - ---------------------------- John F. Ruffle /s/ Stanley S. Trotman, Jr. Director March 28, 1997 - ---------------------------- Stanley S. Trotman, Jr.
43 44 /s/ Augustus A. White, III, M.D. Director March 28, 1997 - -------------------------------- Augustus A. White, III, M.D. /s/ Charles B. Wilson, M.D. Director March 28, 1997 - -------------------------------- Charles B. Wilson, M.D. /s/ Craig K. Tagawa Chief Financial March 28, 1997 - ---------------------------- Officer (Principal Craig K. Tagawa Accounting Officer)
44 45 CONSOLIDATED FINANCIAL STATEMENTS AMERICAN SHARED HOSPITAL SERVICES YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 46 American Shared Hospital Services Consolidated Financial Statements and Financial Statement Schedule (Item 14(a)) Years ended December 31, 1996, 1995 and 1994 CONTENTS Report of Independent Auditors............................................................... B-1 Audited Consolidated Financial Statements Consolidated Balance Sheets.................................................................. B-2 Consolidated Statements of Operations........................................................ B-4 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)..................... B-5 Consolidated Statements of Cash Flows........................................................ B-6 Notes to Consolidated Financial Statements................................................... B-8 Financial Statement Schedule Valuation and Qualifying Accounts............................................................ B-30 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. Consent of Independent Auditors.............................................................. C-1
A-1 47 Report of Independent Auditors The Board of Directors and Stockholders American Shared Hospital Services We have audited the accompanying consolidated balance sheets of American Shared Hospital Services as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Shared Hospital Services at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that American Shared Hospital Services will continue as a going concern. As more fully described in Note 1, the Company incurred operating losses in 1996, 1995 and 1994 and has a significant working capital deficiency and a net capital deficiency at December 31, 1996. In addition, the Company does not have sufficient cash resources to meet debt obligations maturing in 1997. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. As discussed in Note 3 to the financial statements, in 1995, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". ERNST & YOUNG LLP March 6, 1997 Walnut Creek, California B-1 48 American Shared Hospital Services Consolidated Balance Sheets
DECEMBER 31 1996 1995 ------------------------------- ASSETS Current assets: Cash and cash equivalents $ 368,000 $ 452,000 Restricted cash 218,000 493,000 Receivables, less allowance for uncollectible accounts of $1,240,000 ($1,448,000 in 1995): Trade accounts receivable 6,341,000 6,251,000 Other 207,000 259,000 ------------------------------- 6,548,000 6,510,000 Prepaid expenses, inventories and other current assets 698,000 1,191,000 ------------------------------- Total current assets 7,832,000 8,646,000 Note receivable from officer, less current portion -- 191,000 Property and equipment: Land, buildings and improvements 1,226,000 1,560,000 Medical, transportation and office equipment 9,880,000 7,453,000 Capitalized leased medical and transportation equipment 29,318,000 24,673,000 Deposits and construction in progress 1,530,000 1,000,000 ------------------------------- 41,954,000 34,686,000 Accumulated depreciation and amortization (18,523,000) (14,015,000) ------------------------------- Net property and equipment 23,431,000 20,671,000 Other assets 468,000 452,000 Intangible assets, less accumulated amortization of $1,330,000 ($1,136,000 in 1995) 1,238,000 1,375,000 ------------------------------- Total assets $ 32,969,000 $ 31,335,000 ===============================
B-2 49 American Shared Hospital Services Consolidated Balance Sheets (continued)
DECEMBER 31 1996 1995 ------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable $ 3,705,000 $ 3,524,000 Accrued interest 50,000 170,000 Employee compensation and benefits 944,000 1,175,000 Other accrued liabilities 839,000 1,077,000 Current portion of long-term debt 6,816,000 2,796,000 Current portion of obligations under capital leases 6,366,000 5,924,000 Senior subordinated notes -- 773,000 ------------------------------- Total current liabilities 18,720,000 15,439,000 Long-term debt, less current portion 7,690,000 9,278,000 Obligations under capital leases, less current portion 16,245,000 16,847,000 Deferred income taxes 164,000 164,000 Minority interest 625,000 183,000 Stockholders' equity (net capital deficiency): Common stock, without par value: Authorized shares - 10,000,000 Issued and outstanding shares - 4,769,000 in 1996 and 4,244,000 in 1995 11,089,000 10,635,000 Common stock options issued to officer 2,414,000 2,414,000 Additional paid-in capital 930,000 930,000 Accumulated deficit (24,908,000) (24,555,000) ------------------------------- Total stockholders' equity (net capital deficiency) (10,475,000) (10,576,000) ------------------------------- Total liabilities and stockholders' equity (net capital deficiency) $ 32,969,000 $ 31,335,000 ===============================
See accompanying notes. B-3 50 American Shared Hospital Services Consolidated Statements of Operations
YEAR ENDED DECEMBER 31 1996 1995 1994 -------------------------------------------------- Revenues: Medical services $ 36,989,000 $ 34,077,000 $ 38,545,000 Costs and expenses: Costs of operations: Medical services payroll 7,312,000 6,984,000 10,284,000 Maintenance and supplies 6,698,000 6,766,000 7,808,000 Depreciation 6,631,000 8,302,000 9,504,000 Write-down of equipment -- 3,825,000 -- Equipment rental 3,449,000 2,808,000 1,580,000 Other 3,981,000 3,990,000 4,969,000 Selling and administrative 5,309,000 8,432,000 5,971,000 Interest 4,199,000 5,310,000 7,423,000 Write-down of intangible assets -- 600,000 -- -------------------------------------------------- Total costs and expenses 37,579,000 47,017,000 47,539,000 -------------------------------------------------- (590,000) (12,940,000) (8,994,000) Gain on sale of assets and early termination of capital leases 3,000 226,000 3,294,000 Equity in earnings of partnerships 46,000 54,000 85,000 Interest and other income 181,000 204,000 98,000 -------------------------------------------------- Loss before income taxes and extraordinary item (360,000) (12,456,000) (5,517,000) Income tax expense (benefit) (7,000) 3,000 20,000 -------------------------------------------------- Loss before extraordinary item (353,000) (12,459,000) (5,537,000) Extraordinary item--gain on early extinguishment of debt (net of income tax expense of $0, $0 and $7,000 in 1996, 1995 and 1994, respectively) -- 19,803,000 362,000 -------------------------------------------------- Net income (loss) $ (353,000) $ 7,344,000 $ (5,175,000) ================================================== Primary earnings per share: Loss before extraordinary item $ (0.08) $ (2.96) $ (1.93) Extraordinary item $ 0.00 $ 4.71 $ .13 -------------------------------------------------- Net income (loss) $ (0.08) $ 1.75 $ (1.80) ================================================== Common shares and equivalents used in computing per share amounts: 4,498,000 4,201,000 2,867,000 ==================================================
See accompanying notes. B-4 51 American Shared Hospital Services Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)
Common Stock Options Additional Common Common Issued to Paid-In Accumulated Shares Stock Officer Capital Deficit Total --------- ------------------------------------------------------------------------------ Balances at December 31, 1994 2,867,000 $ 8,795,000 $ -- $ 763,000 $(31,899,000) $(22,341,000) Issuance of warrants to purchase 216,000 shares of common stock -- -- -- 180,000 -- 180,000 Issuance of warrants to purchase 127,147 shares of common stock -- -- -- 156,000 -- 156,000 Issuance of warrants to purchase 98,000 shares of common stock -- -- -- 81,000 -- 81,000 Stock issuance costs -- -- -- (250,000) -- (250,000) Issuance of common stock to officer 184,000 265,000 -- -- -- 265,000 Issuance of common stock to noteholders 1,193,000 1,575,000 -- -- -- 1,575,000 Issuance of common stock options to officer -- -- 2,414,000 -- -- 2,414,000 Net income -- -- -- -- 7,344,000 7,344,000 --------- ------------------------------------------------------------------------------ Balances at December 31, 1995 4,244,000 10,635,000 2,414,000 930,000 (24,555,000) (10,576,000) Exercise of warrants to purchase 225,000 shares of common stock 225,000 2,000 -- -- -- 2,000 Issuance of common stock to noteholders 287,000 430,000 -- -- -- 430,000 Issuance of common stock to Board members 13,000 22,000 -- -- -- 22,000 Net loss -- -- -- -- (353,000) (353,000) --------- ------------------------------------------------------------------------------ Balances at December 31, 1996 4,769,000 $11,089,000 $2,414,000 $ 930,000 $(24,908,000) $(10,475,000) ========= ==============================================================================
See accompanying notes. B-5 52 American Shared Hospital Services Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1996 1995 1994 ----------------------------------------------- Operating activities Net income (loss) $ (353,000) $ 7,344,000 $ (5,175,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary gain, after income taxes -- (19,803,000) (362,000) Gain on sale of assets (3,000) (23,000) (3,294,000) Gain on early termination of capital leases -- (203,000) -- Depreciation and amortization 6,978,000 8,818,000 10,206,000 Write-down of equipment -- 3,825,000 -- Write-down of intangible assets -- 600,000 -- Equity in (earnings) of partnerships (46,000) (54,000) (85,000) Compensation expense related to stock grants -- 2,679,000 -- Changes in operating assets and liabilities: Decrease (increase) in restricted cash 275,000 2,390,000 (2,883,000) (Increase) decrease in receivables (95,000) 264,000 (573,000) Decrease (increase) in prepaid expenses, inventories and other assets 493,000 (287,000) 137,000 Increase (decrease) in accounts payable and accrued liabilities 1,563,000 (674,000) (335,000) ----------------------------------------------- Net cash (used in) provided by operating activities 8,812,000 4,876,000 (2,364,000) INVESTING ACTIVITIES Proceeds from sale of respiratory therapy contracts -- -- 4,002,000 Deposits made to purchase Gamma Knives (500,000) (1,000,000) -- Refund of deposit on Gamma Knife -- -- 1,090,000 Proceeds from sale and disposition of equipment 70,000 157,000 900,000 Increase in minority interest 442,000 183,000 -- Payment for purchase of property and equipment (293,000) (226,000) (393,000) Note receivable to related party -- -- (290,000) Distributions received from partnerships 15,000 55,000 58,000 Other (38,000) 210,000 -- ----------------------------------------------- Net cash (used in) provided by investing activities (304,000) (621,000) 5,367,000 FINANCING ACTIVITIES Principal payments on long-term debt and obligations under capital leases (8,234,000) (9,612,000) (4,357,000) Issuance of restructuring notes -- -- 2,486,000 Payment for exercise of warrants 2,000 -- -- Repayment of advance for equipment purchase -- -- (800,000) Proceeds from loan agreement -- 7,000,000 -- Note payable from related party -- 1,300,000 -- Payment for repurchase of senior subordinated notes (360,000) (3,893,000) (64,000) Other -- 177,000 -- ----------------------------------------------- Net cash used in financing activities (8,592,000) (5,028,000) (2,735,000) ----------------------------------------------- Net (decrease) increase in cash and cash equivalents (84,000) (773,000) 268,000 Cash and cash equivalents at beginning of year 452,000 1,225,000 957,000 ----------------------------------------------- Cash and cash equivalents at end of year $ 368,000 $ 452,000 $ 1,225,000 ===============================================
B-6 53 American Shared Hospital Services Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31 1996 1995 1994 ---------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid $ 4,320,000 $ 3,625,000 $ 2,730,000 ==================================================== Income taxes paid $ 31,000 $ 82,000 $ 25,000 ==================================================== SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment with lease/debt financing $ 9,996,000 $ 1,342,000 $ 2,358,000 (Decrease) increase in medical and capitalized lease equipment due to lease restructuring (1,461,000) (480,000) 1,710,000 (Decrease) increase in capitalized lease obligations due to lease restructuring (1,461,000) (480,000) 4,946,000 Decrease in accounts payable due to lease restructuring -- -- 4,602,000 Decrease in capitalized lease obligations due to sale of respiratory therapy contracts -- -- (300,000) Accrued interest payable not paid as part of Senior Subordinated Notes Repurchase 17,000 8,853,000 -- Stock and warrants issued to bondholders as part of Senior Subordinated Notes Repurchase 430,000 1,836,000 588,000 Noncash portion of Senior Subordinated Notes redemption 413,000 13,801,000 257,000 Note receivable from officer added to basis of acquired asset 248,000 -- -- Accounts payable converted to notes 1,971,000 -- --
See accompanying notes. B-7 54 American Shared Hospital Services Notes to Consolidated Financial Statements December 31, 1996 1. BUSINESS AND BASIS OF PRESENTATION BUSINESS American Shared Hospital Services (the "Company") provides shared diagnostic imaging services to health care providers located in approximately 23 states in various geographic regions of the United States. The four diagnostic imaging services provided by the Company are Magnetic Resonance Imaging, Computed Axial Tomography Scanning, Ultrasound, and Nuclear Medicine. In addition, the Company provides Gamma Knife units to two major university medical centers. The Company also provides Cardiac Catheterization Laboratory and Respiratory Therapy services. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, CuraCare, Inc. ("CuraCare"), MMRI, Inc., European Shared Medical Services Ltd., American Shared Radiosurgery Services ("ASRS"), African American Church Health and Economic Services, Inc. ("ACHES"), ACHES Insurance Services, Inc. ("AIS") and its majority-owned subsidiary, GK Financing, LLC. In June 1995, ACHES and AIS were incorporated. AIS is a wholly owned subsidiary of ACHES. ACHES is an integrated health service organization to develop and promote the delivery of high quality healthcare services, primarily to the African American community. AIS is an insurance agency qualified to sell life, health, and disability insurance in the states of California and New York. On October 17, 1995, the Company (through ASRS) and Elekta AB, the manufacturer of the Gamma Knife (through its wholly owned United States subsidiary GKV Investments, Inc. ("GKV")), entered into an operating agreement which formed GK Financing, LLC ("GKF"). GKF provides alternative financing of Elekta Gamma Knife units in the United States. GKF will be the preferred provider for Elekta AB of financing arrangements such as fee-for-service lease arrangements. All significant intercompany accounts and transactions have been eliminated in consolidation. B-8 55 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 1. BUSINESS AND BASIS OF PRESENTATION (CONTINUED) BUSINESS (CONTINUED) The Company faces severe competition from other providers of diagnostic imaging services, some of which have greater financial resources than the Company, and from equipment manufacturers, hospitals, imaging centers and physician groups owning in-house diagnostic units. Significant competitive factors in the diagnostic services market include equipment price and availability, performance quality, ability to upgrade equipment performance and software, service and reliability. The Company's current financial problems may adversely affect its ability to obtain and retain certain profitable customer contracts, and its current high debt burden may affect its ability to offer technologically advanced equipment in the future. Due to the Company's financial condition, the two stock exchanges which list the Company's stock are continuing to monitor the Company's financial condition to determine whether the Company's common shares will remain listed. The Company leases substantially all of its medical equipment from one primary provider. BASIS OF PRESENTATION The Company has incurred net losses before extraordinary items of $353,000, $12,459,000 and $5,537,000 in 1996, 1995 and 1994, respectively. At December 31, 1996, the Company has a working capital deficiency of $10,888,000 and a net capital deficiency of $10,475,000. In addition, the Company will not have sufficient cash resources to repay its debt obligations at maturity and will be required to seek new financing. There can be no assurance that such financing will be available or that the terms of any such financing will be acceptable to the Company. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. Management's plans with regard to these operating issues include the following: Continue to implement its program of expense reductions; identify and sell non-essential assets; negotiate favorable concessions from major creditors and enhance revenues by increasing customer contracts and equipment utilization. It is uncertain as to whether these events will occur, and if they do, the extent to which they will address the Company's operating issues. B-9 56 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 2. ACCOUNTING POLICIES USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of the financial statements requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash in depository institutions which offer varying levels of federal insurance. Restricted cash is not considered a cash and cash equivalent for purposes of the consolidated statements of cash flows. RESTRICTED CASH Restricted cash represents cash limited as to use by a contractual arrangement. Restricted cash at December 31, 1996 and 1995 reflects cash that may only be used for the operations of GK Financing, LLC. REVENUES AND ACCOUNTS RECEIVABLE Revenue is recognized on a fee-for-service basis when the service is delivered. Trade accounts receivable are principally from hospitals and other health care providers located throughout the U.S., with no one customer providing a significant percent of revenues. The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential credit losses. A substantial portion of the Company's receivables collateralize its credit facilities (see Note 6). ACCOUNTING FOR MAJORITY OWNED SUBSIDIARY The Company accounts for GK Financing, LLC, as a consolidated entity due to its 81% majority equity interest. The minority interest's 19% share of earnings (loss) is netted against "Equity in Earnings of Partnerships" in the consolidated statements of operations. B-10 57 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 2. ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories, which consist of minor medical equipment and supplies used in the Company's business, are valued at the lower of cost or market, using a valuation method which approximates FIFO (first-in, first-out). PROPERTY AND EQUIPMENT In 1995, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (see Note 3). As a result of such adoption, property and equipment is stated at cost, or the estimated fair value as determined by third parties, if less. Depreciation is determined using the straight-line method over the estimated useful lives of the assets which for medical and transportation equipment is generally 2 - 10 years. Capitalized leased equipment consists primarily of mobile Magnetic Resonance Imaging ("MRI") units, which include scanners and mobile vans. Capitalized leased equipment is amortized over the term of the lease, which ranges from 24 to 96 months. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. INTANGIBLE ASSETS Intangible assets represent the excess of cost of net assets acquired as the result of the acquisition of businesses and are being amortized by the straight-line method over 15 years. The Company annually assesses the recoverability of these intangible assets by determining whether the amortization of the intangible balance (for each business acquisition) over its remaining life can be recovered through forecasted future operations using an undiscounted cash flow methodology. INCOME TAXES The liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. B-11 58 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 2. ACCOUNTING POLICIES (CONTINUED) PER SHARE AMOUNTS Per share information has been computed based on the weighted average number of common shares outstanding. The Company incurred a net loss for the year, therefore, the incremental shares that arise as a result of the stock options and warrants outstanding are anti-dilutive as they reduce the loss per share. Dual presentation of primary and fully diluted EPS is not required as there is no dilution. STOCK BASED COMPENSATION Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments approximate their recorded values except as discussed below. An estimate of the fair value of the Company's long-term debt would require the use of a discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Management believes that the Company's creditors entered into the borrowing arrangements as a result of the personal guarantees of an officer of the Company and believes that the Company would be unable to obtain similar financing given this fact and the current state of its financial matters. Accordingly, management is unable, without incurring excessive costs, to estimate its incremental borrowing rate, and considers estimation of fair value to be impracticable. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the current year presentation. B-12 59 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 3. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" In connection with the adoption of statement of Financial Accounting Standards No. 121 ("FAS 121"), during the second quarter of 1995, management reviewed the recoverability of the carrying value of long-lived assets, primarily fixed assets, goodwill and deferred costs based on the life of the assets. The Company initiated its review of potential loss impairment due to the continuing changes in the health care environment which have put downward pressure on customer and equipment pricing. These changes have resulted in recent operating results and revised future forecasted operating results for certain assets being less than previously planned. This situation led to the conclusion that there was a potential impairment in the recorded value of fixed assets, goodwill and deferred costs. Management's estimate of future undiscounted cash flows over the useful life of certain assets was determined to be less than their recorded values, indicating impairment of these assets under the provisions of FAS 121. An impairment loss of $4,425,000 was recorded as of the second quarter of 1995 based on the differences between the fair value, as determined by third parties, and the recorded values of certain assets. The impairment loss is comprised of write-downs of equipment of $3,825,000 (primarily MRI, CT, nuclear medicine, and deferred assets); and a write-down of goodwill of $600,000. No such impairment loss adjustment was required in 1996. 4. OTHER ASSETS Other assets consist of the following:
DECEMBER 31 1996 1995 ------------------------ Capitalized regulatory licensing fees $ 90,000 $ 70,000 Prepaid commissions 114,000 114,000 Purchased software, less accumulated amortization of $417,000 and $558,000 in 1996 and 1995, respectively 51,000 42,000 Investment in partnerships 33,000 49,000 Other assets 180,000 177,000 ------------------------ $468,000 $452,000 ========================
B-13 60 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 5. SENIOR SUBORDINATED NOTES During 1996 and 1995, the Company repurchased certain of its Senior Subordinated Notes resulting in extraordinary gains of $0 and $19,803,000, respectively. The extraordinary gain in 1995 was the result of a debt restructuring agreement with four holders of $17,694,000 face value of its Senior Subordinated Notes. On May 17, 1995, these Senior Subordinated Note holders (the "ex-Noteholders") received approximately $3,900,000 in cash, plus 819,000 shares of common stock and warrants for an additional 216,000 shares of common stock. As a result of the additional options awarded to an officer of the Company, the ex-Noteholders were granted 374,000 additional common shares and 98,000 additional warrants to purchase common shares, to maintain their ownership interest at approximately 25% of the then fully diluted common shares. The warrants are immediately exercisable at $0.75 per share. The remaining Senior Subordinated Noteholders held $773,000 of the notes as of December 31, 1995. In addition, the debt covenants were amended which thereby cured the events of default on the Senior Subordinated Notes. During 1996, the Company extended an exchange offer for the remaining $773,000 of Senior Subordinated Notes for common stock. On August 30, 1996, the Company exchanged $413,000 of its Senior Subordinated Notes, and the interest accrued thereon, for 287,000 shares of common stock valued at $430,000, using the market price on the date of exchange. The remaining $360,000 of the Senior Subordinated Notes, and the accrued interest thereon, was settled by the Company in cash on October 15, 1996, the stated maturity date of the Senior Subordinated Notes. The following table summarizes the early extinguishment of debt during 1996 and 1995, as follows:
1996 1995 --------------------------------- Principal amount of Notes repurchased $ 413,000 $ 17,694,000 Accrued interest related to the Notes 17,000 8,853,000 Unamortized debt issuance costs -- (525,000) Stock and warrants issued to note holders (430,000) (1,836,000) Estimated tax liability -- -- Closing costs -- (490,000) --------------------------------- -- 23,696,000 Payment for repurchase -- (3,893,000) --------------------------------- Extraordinary gain $ -- $ 19,803,000 =================================
B-14 61 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31 1996 1995 ---------------------------- Notes Issued in Conjunction with Lease Restructuring Promissory note payable to primary provider of medical equipment bearing interest at 5% (effective February 1996) and 4% during 1995, payable in 86 monthly installments, maturing in February 2002, secured by the Company's accounts receivable and certain medical equipment $1,823,000 $1,976,000 Promissory note payable to primary provider of medical equipment bearing interest at 10.75%, payable in 60 monthly installments with the remaining balance due in January 2002 1,632,000 -- Promissory note payable to primary provider of medical equipment bearing interest at 10.5%, payable in 60 monthly installments, maturing in February 2000 353,000 404,000 Promissory note payable to primary provider of medical equipment bearing interest at 10.75%, payable in 36 monthly installments with the remaining balance due in January 2000 147,000 -- Borrowings for Repurchase of Senior Subordinated Notes Borrowings under $4.5 million Revolving Line of Credit bearing interest at prime rate plus 5% (13.25% at December 31, 1996) for repurchase of Senior Subordinated Notes maturing in May 1997 3,875,000 3,883,000 Borrowings under Term Loan for repurchase of Senior Subordinated Notes bearing interest at 15%, payable in 48 monthly installments, maturing in June 1999 1,764,000 2,305,000 Gamma Knife loan payable to primary provider of medical equipment bearing interest at 10.5%, payable in 40 monthly installments, maturing in September 1998 768,000 1,135,000 Other Notes and Borrowings Gamma Knife loan payable to primary provider of medical equipment bearing interest at 10.5%, payable in 60 monthly installments, maturing in July 1999 (Note 13) 1,752,000 -- Promissory note payable, bearing interest at prime rate plus 2% (10.25% at December 31, 1996) due in October 1998 (Note 14) 1,300,000 -- Promissory note payable to related party, bearing interest at prime rate plus 2%; $1,000,000 due in October 1996 and $300,000 due in 1997 (Note 14) -- 1,300,000
B-15 62 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 6. LONG-TERM DEBT (CONTINUED)
DECEMBER 31 1996 1995 --------------------------------- Promissory note payable to related party in the amount of $1,320,000, bearing interest at prime rate plus 2% (10.25% at December 31, 1996) maturing in October 1997 for capital expenditures relating to GK Financing, LLC. No amounts outstanding (Note 14) $ -- $ -- Installment notes payable in monthly installments through January 1999, bearing interest at 8.25% to 22%, secured by certain medical equipment 983,000 836,000 Promissory note payable, bearing interest at 11.25%, payable in 25 monthly installments, maturing in July 1997 109,000 235,000 --------------------------------- 14,506,000 12,074,000 Less current portion (6,816,000) (2,796,000) --------------------------------- $ 7,690,000 $ 9,278,000 =================================
Annual contracted maturities under the initial terms of long-term debt for the five years after December 31, 1996 are as follows: $6,816,000 in 1997, $4,119,000 in 1998, $1,772,000 in 1999, $786,000 in 2000, $848,000 in 2001, and $165,000 thereafter. The Company is severely limited by covenants in its credit agreements which limit the Company's ability to merge with any other entity, to create subsidiaries, to pay cash dividends, to repurchase stock for cash, incur additional indebtedness, or to change the status of the equipment acting as collateral in such a way as to impair its value. In addition, the Company has pledged substantially all of its liquid assets and substantially all of its personal property to secure its existing debt. Notes Issued in Conjunction with Lease Restructuring On December 30, 1994 the Company converted various service and other payments that were due and unpaid into a $2,000,000 promissory note with its primary provider of medical equipment. The note is dated January 1, 1995 and was issued by the Company in conjunction with the lease restructuring (see Note 10). The note matures in February 2002 and bears interest at an annual rate of 4% payable in arrears. Monthly payments of interest only are due for the first eleven months through November 1995. Thereafter, the principal balance of the note will amortize in 75 equal monthly installments until maturity. The note is secured by a second priority lien on the accounts receivable of the Company and a first priority lien on certain medical equipment. B-16 63 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 6. LONG-TERM DEBT (CONTINUED) Notes Issued in Conjunction with Lease Restructuring (continued) In March 1996, the Company amended the $2,000,000 promissory note agreement to provide for an additional six months of interest-only payments and to increase the interest rate to 5% and revise the remaining monthly payments until maturity. All other terms from the original note remained unchanged. On December 23, 1996, the Company converted past due service payments into a $1,632,000 promissory note with its primary provider of medical equipment. The note matures in January 2002 and bears interest at an annual rate of 10.75%. The note is unsecured. The Company also converted $481,000 of unpaid use taxes into a note payable to its primary provider of medical equipment. The note bears interest at 10.5% payable in 60 monthly payments beginning February 1, 1995. The Company also converted $147,000 of unpaid property taxes into a promissory note payable to its primary provider of medical equipment. The note bears interest at an annual rate of 10.75%, payable in 36 consecutive monthly installments with the remaining balance due in January 2000. Borrowings for Repurchase of Senior Subordinated Notes The repurchase of Senior Subordinated Notes (the "Notes Repurchase") was completed with the proceeds of three new credit facilities: a new revolving line of credit (the "New Revolver"), a term loan, and a Gamma Knife Loan. Under the New Revolver, the Company currently has available up to $4,500,000 according to a formula based on eligible accounts receivable. The New Revolver provides for interest payments only (computed at the Bank of America prime rate plus 5%, 13.25% at December 31, 1996) until maturity on May 31, 1997, when all amounts are due and payable. The initial proceeds of $3,000,000 drawn under the New Revolver were used primarily to fund the cash consideration in the Notes Repurchase. At December 31, 1996, the Company had drawn $3,875,000 under the New Revolver and, based on eligible accounts receivable, had an additional $625,000 available under the facility. Under the terms of the agreement, the Company's cash receipts are processed through bank accounts controlled by the lender and the lender has a first priority lien on all of the Company's accounts receivable, certain equipment, inventory and general intangibles. The New Revolver is personally guaranteed by an officer of the Company. B-17 64 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 6. LONG-TERM DEBT (CONTINUED) Borrowings for Repurchase of Senior Subordinated Notes (continued) The Company also entered into a $2,500,000 four-year loan agreement that will amortize in 48 equal installments with interest at an annual rate of 15% (the "Term Loan"). The Term Loan is secured by a first priority lien on certain equipment, inventory and certain real property of the Company and a second priority lien on the Company's accounts receivable and general intangibles. In addition to funding the repurchase of the Subordinated Notes, the proceeds of the Term Loan were applied to the refinancing of certain medical imaging equipment and to provide working capital to the Company. The Term Loan is also guaranteed by an officer of the Company. The Company also entered into a $1,500,000 18-month level amortizing loan at an interest rate of 10.5% (the "Gamma Knife Loan"). The proceeds of the Gamma Knife Loan were used to refinance the Company's Gamma Knife, to fund in part the Notes Repurchase, and to provide working capital. The Gamma Knife Loan is collateralized with a first priority security interest in the Gamma Knife owned by the Company. The payments on this loan were restructured from $90,431 per month to $40,203 per month effective September 17, 1995, and to extend the loan term to September 17, 1998, to match renegotiated terms of the underlying customer contract. Proceeds from the borrowings funding the repurchase of the Senior Subordinated Notes in 1995 were used as follows: Repurchase of Senior Subordinated Notes $3,900,000 Reduction of other term debt 400,000 Closing costs 570,000 Refinance of certain equipment 1,000,000 Payment of accrued and unpaid interest through April 15, 1995 to remaining bondholders 500,000 Working capital 630,000 ---------- Total originally drawn $7,000,000 ==========
Closing costs include approximately $80,000 of loan origination fees which have been capitalized. B-18 65 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996 and 1995 are as follows:
1996 1995 -------------------------------- Deferred tax liabilities: Other - net $ (164,000) $ (164,000) -------------------------------- Total deferred tax liabilities (164,000) (164,000) Deferred tax assets: Net operating loss carryforwards 5,700,000 6,400,000 Fixed assets 3,100,000 2,900,000 Other - net 800,000 600,000 -------------------------------- Net deferred tax assets 9,600,000 9,900,000 Valuation allowance for deferred tax assets (9,600,000) (9,900,000) -------------------------------- Total deferred tax assets -- -- -------------------------------- Net deferred tax liabilities $ (164,000) $ (164,000) ================================
The decrease in the valuation allowance during 1996 was $300,000. The components of the provision (benefit) for income taxes consist of the following:
LIABILITY METHOD ---------------------------------------------------------- 1996 1995 1994 ------------------------------------------------------------ Current: Federal $ - $ - $ - State (7,000) 3,000 27,000 Deferred (reduction): Federal - - - State - - - ------------------------------------------------------------ $ (7,000) $ 3,000 $ 27,000 ============================================================
The amounts relate to state income taxes, miscellaneous payments and refunds of federal and state income taxes and adjustments of amounts paid and accrued in prior years. B-19 66 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) The provision (benefit) for income taxes as included in the consolidated financial statements is as follows:
1996 1995 1994 --------------------------------------------------------------- Income (loss) before extraordinary gain $ (7,000) $ 3,000 $ 20,000 Extraordinary gain - - 7,000 --------------------------------------------------------------- $ (7,000) $ 3,000 $ 27,000 ===============================================================
The provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (35% in 1996, 1995 and 1994) to income (loss) before taxes as follows:
1996 1995 1994 -------------------------------------------------- Computed expected tax, including tax on extraordinary gain $(126,000) $ 2,570,000 $(1,802,000) Change in valuation allowance (300,000) (2,660,000) 1,735,000 State income taxes (benefit), net of federal benefit (7,000) 3,000 27,000 Amortization and write-down of intangible assets -- 77,000 67,000 Reduction in carryovers and tax attributes 323,000 -- -- Other 103,000 13,000 -- ------------------------------------------------- $ (7,000) $ 3,000 $ 27,000 =================================================
At December 31, 1996, the Company has a net operating loss carryforward for federal income tax return purposes of approximately $14,400,000 which expires between 1999 and 2011. This carryforward is subject, in part, to separate return limitations. It also has state carryforwards of varying amounts. The Company's ability to utilize its net operating loss carryforward may be limited in the event of a 50% or more ownership change within any three-year period. Approximately $16,000,000 of the previous net operating loss carryforward was used to offset the gain on early extinguishment of the Senior Subordinated Notes in May 1995. 8. STOCKHOLDERS' EQUITY 1984 Stock Option Plan Under the Company's 1984 Stock Option Plan (the "Plan"), as amended, a total of 475,000 stock options were authorized for grant. The Plan terminated according to its terms on March 1, 1994. Options granted pursuant to the Plan generally had lives of 10 years from the date of grant, subject to earlier expiration in certain cases, such as termination of the grantee's employment. B-20 67 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) 1984 Stock Option Plan (continued) On August 15, 1995, the Stock Option Committee of the Board of Directors approved the amendment of the terms of substantially all options outstanding under the Company's 1984 Stock Option Plan, covering an aggregate of approximately 165,000 shares, to reduce the initial exercise price to $1.625 per share, which was the closing price of common shares on such date. 1995 Stock Option Plan The Company's 1995 Stock Option Plan, providing for nonqualified stock options and "incentive stock options," was approved by the Company's Board of Directors on August 15, 1995, subject to shareholder approval, which was given on October 6, 1995. Under the 1995 Plan, 330,000 common shares are reserved for awards to officers and other key employees, non-employee directors, and advisors. Provisions of the 1995 Stock Option Plan include an automatic grant to each non-employee director of up to 4,000 shares annually on the date of the Company's Annual Shareholder Meeting, at an exercise price equal to the market price of the Company's common shares on that date, until the non-employee director has options for a total of 12,000 shares of the Company's common stock in all Company plans. Directors who are appointed or elected to the Company's Board of Directors on a date other than that of the Annual Shareholder Meeting receive a pro-rata grant of such shares, at an exercise price equal to the market price of the Company's common shares on the date of grant. Grants of options for 19,000 shares were made pursuant to this provision during 1996. B-21 68 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) Changes in options outstanding under the 1984 and 1995 Stock Option Plans from January 1, 1994 to December 31, 1996 are as follows:
NUMBER Price Weighted Average OF SHARES Per Share Exercise Price ------------------------------------------------------------ Balance at January 1, 1994 308,000 $1.375 - $7.50 - Granted - - - Exercised - - - Forfeited (52,000) $1.375 - $5.00 - ---------------- Balance at December 31, 1994 256,000 $1.375 - $7.50 - Granted 256,000 $1.625 - Exercised - - - Forfeited (92,000) $3.00 - $7.125 - ---------------- Balance at December 31, 1995 420,000 $1.375-$1.625 - Granted 19,000 $1.634 Forfeited (22,000) $1.625 ---------------- Balance at December 31, 1996 417,000 $1.625 ================
At December 31, 1996, 64,000 options were available for grant and 330,000 shares were reserved for future issuance under the 1995 Plan. Shares and Options Issued to Officer - ------------------------------------ Simultaneous with the Notes repurchase in 1995 (Note 5), the Company's Chairman and Chief Executive Officer was issued an additional 184,000 shares of the Company's stock, for which the Company recorded compensation expense of $265,000. The common shares were granted to the officer in partial considera- tion for a personal guarantee of $6.5 million of new credit facilities and for continued employment with the Company. In addition, on August 15, 1995, the officer was granted a ten-year, immediately exercisable option to purchase 1,495,000 common shares for an exercise price of $0.01 per share for which the Company has recorded compensation expense of $2,414,000. These options were granted to the officer as final consideration for personal guarantees of the new credit facilities and for continued employment with the Company. B-22 69 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes information about all options outstanding at December 31, 1996:
OPTIONS OUTSTANDING Options Exercisable ------------------------------------------------------------------------------------------------------ Weighted Average Remaining Weighted Weighted Contractual Life Average Average Range of NUMBER (Years) Exercise Number Exercise Price Exercise Prices OUTSTANDING Price Exercisable - ----------------------------------------------------------------------------------------------------------------------------- $ .01 1,495,000 8.8 $ .01 1,495,000 $ .01 1.625-1.6875 417,000 7.3 1.625 377,000 1.625 - ----------------------------------------------------------------------------------------------------------------------------- $ .01-1.6875 1,912,000 8.4 $ .36 1,872,000 $ .33 =============================================================================================================================
At December 31, 1996 and 1995, 1,873,000 and 1,870,000 options, respectively, were vested and exercisable. Pro Forma Information related to Option Grants - ---------------------------------------------- Pro forma information regarding net income and earnings per share is required by SFAS 123 for awards granted after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes options valuation model was developed for use in estimating the fair value of traded option which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's option grants under the 1984 and 1995 Plans was estimated assuming no expected dividends and the following weighted-average assumptions:
1996 1995 -------------------------------- Expected life (years) 9.5 9.5 Expected volatility 99.3% 100.0% Risk-free interest rate 7.9% 7.9%
B-23 70 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) The weighted-average fair value of options granted during 1996 was $1.49. For pro forma purposes, the estimated fair value of the Company's options is amortized over the options' vesting period. The Company's pro forma information follows:
1996 1995 ------------------------------------- Net income (loss) As reported $(353,000) $7,344,000 Pro forma (387,000) 6,798,000 Net Income (loss) As reported (0.08) 1.75 per share Pro forma (0.09) 1.62
Because SFAS 123 is applicable only to awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 1999. 1995-1996 Director Retainer Shares - ---------------------------------- On February 16, 1996, the Company's Board of Directors agreed that non-employee directors could elect to receive some or all of their $5,000 annual Directors' Retainer Fees for 1995 and/or 1996 in shares of the Company's common stock, instead of in cash, at the rate of $1.6875 per share, which was the closing price of the Company's common stock on that date. A total of 13,047 shares were issued during 1996 for that purpose. The remaining Director Retainer Fees due to non-employee directors for 1995 and/or 1996 were paid in cash during 1996. Warrants Issued in Conjunction with Lease Restructuring - ------------------------------------------------------- In 1994 and 1995, as consideration for the financial accommodations granted in the restructuring of the Company's lease obligations, the Company issued immediately exercisable warrants to its primary provider of leased equipment, granting the right to purchase 97,853 and 127,147 common shares, respectively, at a price of $0.01 per share. In 1996, these warrants were exercised to purchase 225,000 common shares. B-24 71 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) Options and Warrants Issued in Conjunction with Repurchase of Senior Subordinated Notes On May 17, 1995, simultaneous with the Notes repurchase (Note 5), the Company issued 819,000 common shares (equal to approximately 20% of the Company's then fully diluted common shares) and warrants to purchase 216,000 shares of common stock (equal to approximately 5% of the then fully diluted common shares) to the holders of $17,694,000 face value of the Company's Senior Subordinated Notes that were repurchased. The warrants are immediately exercisable at $0.75 per share, expiring on May 17, 2002. As a result of the additional options awarded to an officer of the Company, the ex-Noteholders were granted 374,000 additional common shares and 98,000 additional warrants to purchase common shares, to maintain their ownership interest at approximately 25% of the then fully diluted common shares. The warrants are immediately exercisable at $0.75 per share, expiring on May 17, 2002. Capital shares reserved for future issuances total 2,291,000 shares at December 31, 1996. 9. RETIREMENT PLAN The Company has a defined contribution retirement plan for which substantially all full-time employees are eligible. Under the terms of the plan, the Company may contribute a discretionary matching contribution on behalf of each participant, determined each year by the Company, equal to a percentage of each participant's contributions and applicable to the first 6% of each participant's salary. The Company made no contributions to the plan in 1996, 1995 or 1994. 10. OBLIGATIONS UNDER CAPITAL LEASES The Company leases MRI units and other equipment under capital leases having an aggregate net book value of $17,475,000 at December 31, 1996. Amortization of assets recorded under capital leases is included with depreciation expense, and is primarily amortized over the life of the lease. On December 30, 1994 (effective as of November 1, 1994 for most leases that were considered capital prior to that date, and January 1, 1994 for leases that were considered operating prior to that date) and at the end of 1995 and certain leases again in early 1996, the Company and its major provider of medical equipment entered into a restructuring of the obligations of the Company under lease agreements. B-25 72 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 10. OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED) Substantially all capital leases of the Company were restructured and after restructuring continued to meet the criteria to be accounted for as capitalized leases. Under these modified leases, required payments by the Company are scheduled to retire the unpaid principal balance over the extended lease terms which will expire on various dates through December 31, 1999. All the operating leases covered by the restructuring agreement in effect on October 31, 1994 were modified to extend the payment schedules. As a result of modification of lease terms, these leases met the criteria for capitalization, and were accounted for as capital leases in the accompanying financial statements. Under all the modified leases the Company is entitled to purchase the equipment at its fair market value, or to extend the relevant lease, at the end of the lease term. The modified leases, as identified above, were further restructured effective October 1, 1995. No payments were required for the months of October through December 1995. During these months interest was accrued and was added to the outstanding principal balance of the capital leases. In addition, the leases were extended up to an additional 26 months, where possible, to coincide with the probable termination of the Company's end user contracts. After this restructuring, the modified leases continue to meet the criteria to be accounted for as capitalized leases. Under all the modified leases, the Company will be entitled to purchase the equipment at its fair value or to extend the relevant lease at the end of the lease term. On March 1, 1996, the Company received an offer from its primary provider of medical equipment to restructure certain of its capital lease obligations. The general terms of the restructuring provide for various months of no payments in 1996 followed by increased payments in the latter part of the agreements. The Company completed this restructuring on March 8, 1996. B-26 73 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 10. OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED) Future minimum lease payments, together with the present value of the net minimum lease payments under capital leases at December 31, 1996, are summarized as follows:
Maintenance and NPV OF MINIMUM Other Lease LEASE PAYMENTS Related Costs ----------------------------------- 1997 $ 8,606,000 $ 1,685,000 1998 8,179,000 619,000 1999 6,450,000 301,000 2000 2,973,000 133,000 2001 776,000 53,000 Thereafter 666,000 - ----------------------------------- Total 27,650,000 $ 2,791,000 =============== Less amounts representing interest 5,039,000 --------------- Present value of net minimum lease payments 22,611,000 Less current portion 6,366,000 --------------- $ 16,245,000 ===============
As shown above, in addition to the capital lease payments, the Company is also required to make repair, maintenance, and other lease related payments. These payments vary primarily on the level and amount of repairs and service needed. During 1996, 1995 and 1994, the Company financed approximately $7,263,000, $1,342,000 and $2,358,000, respectively, of equipment purchases with capital lease obligations. During 1996, 1995 and 1994, the Company incurred interest costs of $4,199,000, $5,310,000 and $7,423,000, respectively. 11. OPERATING LEASES The Company leases MRI and CT scanning equipment, automobiles, transportation equipment, and office space under operating leases expiring at various dates through 2003. B-27 74 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 11. OPERATING LEASES (CONTINUED) Future minimum payments under noncancelable operating leases having initial terms of more than one year consisted of the following at December 31, 1996: 1997 $ 1,641,000 1998 1,622,000 1999 1,450,000 2000 1,052,000 2001 310,000 Thereafter 93,000 -------------- $ 6,168,000 ==============
Payments for repair and maintenance agreements are included in the future minimum operating lease payments shown above. Rent expense was $3,841,000, $3,458,000 and $2,326,000 for the years ended December 31, 1996, 1995 and 1994, respectively, and includes the above operating leases as well as month-to-month rental and certain capital lease executory costs. 12. SALE OF RESPIRATORY THERAPY CONTRACTS The Company sold eight of fourteen respiratory therapy contracts to an unrelated third party on December 31, 1994 for approximately $4,000,000 in cash. As a result of the sale, the Company wrote off $180,000 in assets relating to the contracts. In addition, the purchaser agreed to assume $300,000 in lease obligations related to the assets. The Company recognized a gain on this transaction of $3,199,000. Revenue generated under these contracts was approximately $5,300,000 in 1994. A net loss in 1994 of $400,000 was recognized on the operation of these contracts on a fully costed basis. The sale of the contracts constitutes a sale of a portion of a product line in which the Company is reducing its emphasis. 13. PURCHASE OF GAMMA KNIFE FROM RELATED PARTY On February 3, 1996, the Company purchased a Gamma Knife through its subsidiary, GK Financing, LLC from its Chief Executive Officer in exchange for forgiveness of the outstanding balance of a note due to the Company of $248,000 at December 31, 1996, plus assumption of a note payable in the amount of $2,270,000. The note is payable to the Company's primary provider of medical equipment, bearing interest at 10.5%, due in 60 monthly installments, with final payment due July 1999. B-28 75 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 14. COMMITMENTS AND CONTINGENCIES On October 11, 1996 and October 17, 1995, the Company, through GKF, entered into quotation agreements to purchase a total of seven Gamma Knife units from the equipment manufacturer. Under the terms of the quotation agreements, the Company is committed to purchase this equipment for $19,654,000, effective when the equipment is placed in service at each customer location. At December 31, 1996, the Company had a $1,500,000 deposit related to these purchase commitments which is classified as construction in progress. On October 31, 1996, GKF accepted assignment of a Gamma Knife unit from the equipment manufacturer's original purchaser. Under the assignment agreement, GKF has a commitment to purchase the equipment for the remaining amount owed to the manufacturer of approximately $2,150,000 effective when the equipment is placed in service at the customer location. The Company has an agreement with the original purchaser to allow usage of the Gamma Knife unit in exchange for the $625,000 deposit made by the original purchaser. In 1995, GKF entered into a promissory note for $1,320,000 with the equipment manufacturer to provide funds for future capital expendi- tures. As of December 31, 1996 there have been no borrowings under this note. In addition, during 1996, a bank assumed the $1.3 million promissory note that had been payable to the equipment manufacturer and extended the maturity date to October 1998. 15. PROPOSED MERGER The Company is currently involved in merger discussions with US Diagnostic Inc. ("USD") whereby American Shared common stock would be exchanged for USD shares. In addition, USD proposes to provide similar terms for the outstanding options and warrants. The parties have not yet entered into a definitive merger agreement nor have the material terms of the transaction been presented for approval by their respective Boards of Directors. The closing of the transaction will be subject to the satisfaction of numerous conditions, including the consent of the Company's lenders, the receipt of certain regulatory approvals, and the approval of the Company's shareholders. US Diagnostic Inc. is a provider of radiology services focused on the acquisition, operations and management of multi-modality diagnostic imaging center and related medical facilities in the United States. B-29 76 American Shared Hospital Services Valuation and Qualifying Accounts
Additions Additions Balance at Charged to Amounts Balance at Charged to Amounts Balance at December 31, Costs and Written Off December 31, Costs and Written Off December 31, 1993 Expenses 1994 Expenses 1995 --------------- ------------- -------------- ------------- ------------ ------------- -------------- Allowance for uncollectible accounts $ (1,143,000) $ (1,101,000) $ 820,000 $ (1,424,000) $ (1,347,000) $ 1,323,000 $ (1,448,000)
Additions Charged to Balance at Costs and Amounts December 31, Expenses Written Off 1996 ------------- ------------ ------------ Allowance for uncollectible accounts $ (1,014,000) $ 1,222,000 $ (1,240,000)
B-30 77 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement, as amended, (Forms S-8, No. 2-90646; No. 33-21509; No. 33-48980) pertaining to the 1984 Stock Option Plan of American Shared Hospital Services; the Registration Statement (Form S-8, No. 33-45999) pertaining to the American Shared Hospital Services 1991 Employee Stock Bonus Plan; the Registration Statement (Form S-8, No. 333-08009) pertaining to the 1995 Stock Option Plan of American Shared Hospital Services; and the Registration Statement, as amended, (Form S-3, No. 333-12879) pertaining to the registration of 2,679,047 Common Shares of American Shared Hospital Services and in the related Prospectuses of our report dated March 6, 1997, with respect to the consolidated financial statements and schedule of American Shared Hospital Services included in this Annual Report (Form 10-K) for the year ended December 31, 1996. March 25, 1997 /s/ Ernst & Young LLP Walnut Creek, California --------------------- Ernst & Young LLP C-1 78 Index to Exhibits
Exhibit Sequential Page Number Description Number - ------ ----------- ------ 3.1 Articles of Incorporation of the Company, as amended.(1) * 3.2 By-laws for the Company, as amended. (2) * 4.6 Form of Common Stock Purchase Warrant of American Shared Hospital Services. (2) * 4.8 Registration Rights Agreement, dated as of May 17, 1995, by and among American Shared Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems.(2) * 4.9 Promissory Note, dated May 17, 1995, by American Shared Hospital Services in favor of General Electric Company in the principal sum of $1,500,000, as amended. (2) * 4.10 Promissory Note, dated January 31, 1996, by American Shared - CuraCare and CuraCare, Inc. in favor of DVI Business Credit Receivables Corporation, in the principal sum of $4,000,000. (3) * 4.11 Promissory Note, dated May 17, 1995, by American Shared- CuraCare and CuraCare, Inc. in favor of DVI Financial Services Inc. in the principal sum of $2,500,000. (2) * 4.12 Security Agreement dated as of May 17, 1995 by and between American Shared Hospital Services and General Electric Company, acting through GE Medical Systems. (2) * 4.13 Agreement and Proxy, dated as of May 12, 1995 by Ernest A. Bates, M.D., Accepted and Agreed to by Anchor National Life Insurance Company, Sun Life Insurance Company of America, SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd., and Upchurch Living Trust U/A/D 12/14/90.(2) * 4.14 Assignment and Assumption Agreement, dated as of December 31, 1995, between American Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee). (3) * 4.15 Assignment and Assumption Agreement, dated as of February 3, 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee).(3) *
79 4.16 USC University Hospital Option Agreement, dated February 3, 1996, among American Shared Hospital Services, Ernest A. Bates, M.D. and GK Financing, LLC. (3) * 4.17 Assignment and Assumption Agreement, dated as of February 3, 1996, among Ernest A. Bates, M.D. (assignor) and GK Financing, LLC (assignee). (3) * 4.18 Assignment and Assumption Agreement, effective as of February 3, 1996, among Ernest A. Bates, M.D. (assignor) and GK Financing, LLC (assignee). (3) * 4.19 Promissory Note, dated January 1, 1995, by American Shared-CuraCare in favor in General Electric Company, acting through GE Medical Systems, in the principal sum of $2,000,000, as amended. (3) * 4.20 Promissory Note, dated December 30, 1994, by American Shared-CuraCare in favor of General Electric Company, in the principal sum of $481,667.81, as amended. (3) * 4.21 Promissory Note, dated April 29, 1996 by GK Financing, LLC in favor of Skandinaviska Enskilda Banken in the principal amount of $1,300,000. 4.22 Promissory Note, dated December 23, 1996 by American Shared-CuraCare in favor of General Electric company, in the principal amount of $1,631,595.10 10.1 The Company's 1984 Stock Option Plan, as amended. (4) * 10.2 The Company's 1995 Stock Option Plan, as amended. (5) * 10.3 Form of Indemnification Agreement between American Shared Hospital Services and members of its Board of Directors. (4) * 10.4 Agreement, effective as of November 1, 1994, by and among General Electric Company, acting through GE Medical Systems, and American Shared Hospital Services, and certain of its subsidiaries, as amended. (6) * 10.5 Note Purchase Agreement, dated as of May 12, 1995, by and among Anchor National Life Insurance Company, Sun Life Insurance Company of America, and SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd. and Upchurch Living Trust U/A/D 12/14/90, American Shared Hospital Services and Ernest A. Bates, M.D. (2) *
80 10.6 Loan and Security Agreement, dated as of January 31, 1996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation. (3) * 10.7 Loan and Security Agreement, dated as of May 17, 1995, among American Shared- CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Financial Services Inc. (2) * 10.8 Form of Unconditional Continuing Guaranty of American Shared Hospital Services. (3) * 10.9 Form of Unconditional Continuing Guaranty of Ernest A. Bates, M.D. (3) * 10.10 Intercreditor Agreement among American Shared Hospital Services, American Shared-Curacare, DVI Financial Services Inc. and DVI Business Credit Receivables Corporation and General Electric Company, acting through GE Medical Systems, dated as of January 31, 1996. (3) * 10.11 Ernest A. Bates, Stock Option Agreement dated as of August 15, 1995. (7) * 10.12 Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. (2) * 10.13 Amendments dated as of October 26, 1995 and as of December 20, 1995 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (3) * 10.14 Amendment No. 1, dated March 29, 1996, to Loan and Security Agreement, dated as of January 31, 1996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation (Exhibit 10.6). 10.15 Amendment No. 2, dated January 31, 1996, to Loan and Security Agreement, dated as of January 31, 996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation (Exhibit 10.6). 21 Subsidiaries of American Shared Hospital Services. (3) * 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule.
81 - ------------ (1) These documents were filed as Exhibits 3.1, 4.1 and 4.2, respectively, to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (2) These documents were filed as Exhibits 3.2, 4.6, 4.8, 4.9, 4.11, 4.12, 4.13, 10.5, 10.7 and 10.12, to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on October 26, 1995, which is incorporated herein by this reference. These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (3) These documents were filed as Exhibits 4.10, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19, 4.20, 10.6, 10.8, 10.9, 10.10, 10.13 and 21, respectively, to the registrant's Pre-Effective Amendment No. 1 to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996, which is incorporated herein by this reference. (4) These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant's Registration Statement on Form S-2 (Registration NO. 33-23416), which is incorporated herein by this reference. (5) This document was filed as Exhibit A to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. (6) This document was filed as Exhibit 10.49 to registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1994, which is incorporated herein by this reference. (7) This document was filed as Exhibit B to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. EX-4.21 2 PROMISSORY NOTE, DATED APRIL 29, 1996 1 Exhibit 4.21 PROMISSORY NOTE $1,300,000.00 New York, New York April 29, 1996 FOR VALUE RECEIVED, the undersigned GK FINANCING, LLC, a California limited liability company (the "Borrower"), hereby unconditionally promises to pay ON OR BEFORE October 17, 1998 (the "Maturity Date"), to the order of Skandinaviska Enskilda Banken, New York Branch (the "Bank"), or its successors or assigns, at 245 Park Avenue, New York, New York, 10167, or at such other place as the Bank may designate in writing, the principal sum of ONE MILLION THREE HUNDRED THOUSAND DOLLARS ($1,300,000.00), in lawful money of the United States of America, with interest from the date of this Promissory Note (the "Note") on the principal amount from time to time outstanding at the rate of the base prime rate from time to time charged by the Bank, plus two percent (2%) (the "Interest Rate"), said interest and principal payable as set forth below together with all costs, disbursements, expenses, and attorney's fees incurred in any action to enforce this Note. Interest shall be paid every 6 months on October 29 and April 29 respectively. The Bank shall use its best efforts to invoice Borrower for amounts due, however, the Bank's failure to invoice the Borrower shall not relieve the Borrower of any obligations under this Note. If interest is due on a weekend or Bank holiday, then such payment shall be due on the next preceding day on which the Bank is open. Anything herein to the contrary notwithstanding, any unpaid principal hereof or interest hereon outstanding on the Maturity Date shall be due and payable on the Maturity Date. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Default in the payment of interest and/or principal as provided herein for a period of ten (10) days after any of the same become due and payable, or the filing or a petition in bankruptcy filed by or against the Borrower, if such petition if filed against Borrower is not dismissed within 60 days, or if the Borrower shall be dissolved for any reason, or if substantially all of the assets of Borrower shall be sold, or if Borrower shall be merged with any other entity, shall render the entire principal balance herein bearing interest at a rate equal to sixteen percent (16%) per annum, immediately due and payable at the option of the Bank, without necessity for demand and notice, and any failure to exercise the said option, in whole or in part, shall not constitute a waiver of the right to exercise the same, with respect to a continuing or subsequent default, at any other time. Notwithstanding anything herein, the interest payable hereunder shall not exceed the maximum amount allowable under applicable law. The Note may be prepaid in whole or in part in increments of not less than $100,000, at any time, without prepayment penalty or premium, provided that any prepayment in whole shall also be accompanied by payment of all accrued and unpaid interest due under the Note and all other fees, expenses, and other sums (if any) due and owing thereunder. Notwithstanding anything contained herein to the contrary, the Borrower shall make a mandatory prepayment in the total amount of proceeds received by the Borrower each time a Gamma Knife is sold, or a Gamma Knife loan or lease financing is obtained by the Borrower, but in no event greater than $250,000 for such occurrence, however, Borrower shall not make such a prepayment if such monies received are less than $100,000 in the aggregate. Presentment, demand, protest, notice of dishonor and notice of nonpayment are hereby waived to the extent permitted by applicable law. In the event of any action or proceeding with respect to any matter pertaining to this Note, the Borrower hereby waives the right to a trial by jury. The Note and the rights and obligation of the Borrower and the Bank shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York without regard to any conflicts of laws rules which would require the application of the laws of any other jurisdiction. The Borrower hereby irrevocably 2 consents to the nonexclusive jurisdiction and venue of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City. This Note contains the entire agreement between the Bank and the Borrower with respect to all subject matters contained herein. This Note cannot be amended, modified or changed in any way except by a written instrument executed by all parties to this Note. Borrower GK FINANCING, LLC By: /s/ Craig K. Tagawa -------------------------------- Name: Craig K. Tagawa -------------------------------- Its: Chief Executive Officer -------------------------------- EX-4.22 3 PROMISSORY NOTE DATED DECEMBER 23, 1996 1 Exhibit 4.22 PROMISSORY NOTE DECEMBER 23, 1996 FOUR EMBARCADERO CENTER #3620 SAN FRANCISCO CA FOR VALUE RECEIVED, American Shared - Curacare ("Maker") promises, jointly and severally if more than one, to pay to the order of GENERAL ELECTRIC COMPANY or any subsequent holder hereof (each, a "Payee") at its office located at 20825 Swenson Drive, Waukesha, WI 53186 or at such other place as Payee may designate, the principal sum of ONE MILLION SIX HUNDRED THIRTY-ONE THOUSAND FIVE HUNDRED NINETY-FIVE AND 10/100 DOLLARS ($1,631,595.10), with interest on the unpaid principal balance from and including the date hereof at the rate of TEN AND 75/100 percent (10.75%) per annun, to be paid in lawful money of the United States, in Sixty (60) consecutive monthly installments of principal and interest of THIRTY-FOUR THOUSAND NINE HUNDRED FIFTY NINE AND 00/100 ($34,959.00) and a final installment which shall be in the amount of the total outstanding principal and interest. The first installment shall be due and payable JANUARY 1, 1997 and the following installments shall be due and payable on the same day of each succeeding month (each, a "Payment Date"). All payments shall be applied first to interest and then to principal. The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver of Payee's right to receive payment in full at such time or at any prior or subsequent time. Interest shall be calculated on the basis of a 365 day year and will be charged for each calendar day on which any principal is outstanding. The Maker hereby expressly authorizes General Electric Company to insert the date value is actually given in the blank space on the face hereof. Time is of the essence hereof. If any installment of principal and interest or any other sum due under this Note is not received within ten (10) days after the applicable Payment Date, the Maker agrees to pay in addition to the amount of each such installment a late payment charge of five percent (5%) of said installment, but not exceeding any lawful maximum. In the event that (i) Maker fails to make payment of any amount due hereunder within ten (10) days after the same becomes due and payable; or (ii) Maker defaults or fails to perform under any term or condition contained in any other agreement with Payee, then the entire principal sum remaining unpaid, together with all interest thereon and any other sum payable under this Note, at the election of Payee, shall immediately become due and payable, with interest thereon at 20% per annum from the date of such accelerated maturity until paid. The Maker may prepay in full, but not in part, its entire indebtedness hereunder upon payment of an additional sum as a premium equal to the following percentages of the original principal balance for the indicated period: Prior to the first annual anniversary date of this Note: five percent (5%) Prior to the second annual anniversary date of this Note: four percent (4%) Prior to the third annual anniversary date of this Note: three percent (3%) Prior to the fourth annual anniversary date of this Note: two percent (2%) Prior to the fifth annual anniversary date of this Note: one percent (1%) and zero percent (0%) thereafter, plus all other sums due hereunder. Your default under a Schedule by you or any entity managed or controlled by you or by any principal of yours under any other agreement or contract with us, regardless of when the agreement or contract was entered into, will, at our sole option, if the default is not cured within ten days after written notice of default, constitute a default of that Schedule and all other agreements and contracts between you and/or such a principal or entity and us. 2 It is the intention of the parties hereto to comply with the applicable usury laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in this Note, in no event shall this Note require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under this Note, or in the event that all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under this Note on the principal balance shall exceed the maximum amount of interest permitted by applicable law, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither Maker nor any other person or entity now or hereafter liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to Maker, at the option of the Payee, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under this Note which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise by Payee in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for the Payee to receive a greater simple interest per annum rate that is presently allowed, the Maker agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to the maximum simple interest per annum rate allowed by the higher of the amended state law or the law of the United States of America. The Maker and all sureties, endorsers, guarantors or any others (each such person, other than the Maker, an "Obligor") who may at any time become liable for the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions or releases of any party primarily or secondarily liable on this Note or any term and provision hereof, which may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, which may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee without joinder of any other as a party thereto. The Maker and each Obligor hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note, and agrees to pay (if permitted by law) all expenses incurred in collection, including Payee's actual attorneys' fees. Maker and each Obligor agrees that fees not in excess of twenty percent (20%) of the amount then due shall be deemed reasonable. Maker and Obligor hereby waives all benefits of valuation, appraisement, and exemption laws. American Shared - CuraCare A California partnership /s/ Richard Magary By: /s/ Ernest A. Bates (Seal) - ------------------------------------- ----------------------------------------------------- Witness Ernest A. Bates, M.D., Chairman and CEO American Shared Hospital Services, general partner ACKNOWLEDGED: GENERAL ELECTRIC COMPANY By: /s/ R. Schueller (Seal) - ------------------------------------- --------------------------------------------------- Witness Signature R. Schueller --------------------------------------------------- Print name (and title, if applicable)
EX-10.14 4 AM #1 TO LOAN & SECURITY AGREEMENT DATED 1/31/97 1 Exhibit 10.14 AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT ("AGREEMENT") DATED JANUARY 31, 1996 AMONG AMERICAN SHARED-CURACARE AND CURACARE, INC. ("BORROWER"), AMERICAN SHARED HOSPITAL SERVICES ("GUARANTOR"), ERNEST A. BATES, M.D. ("INDIVIDUAL GUARANTOR") AND DVI BUSINESS CREDIT RECEIVABLES CORP. ("LENDER") 1. Section 2.1 (The Loan) shall remain entirely the same with the exception of (i) (The Commitment Amount) which shall be amended as follows: (i) Four Million Five Hundred Thousand Dollars ($4,500,000.00) (the "Commitment Amount") 2. Section 2.7 (Lender's Fees) shall be amended by adding the following: Upon execution hereof, Borrower shall pay Lender an origination fee of one percent (1%) of the $500,000.00 increased Commitment Amount. Borrower shall continue to pay Lender an utilized loan fee based on the original Commitment Amount of $4,000,000.00 in accordance with the Agreement. Any provision in Amendment No. 1 ("Amendment") hereof that may be contrary to any provision of the Agreement shall prevail and override the Agreement. Except as expressly set forth herein, all other provisions of this Amendment shall be interpreted in light of the provisions of the Agreement. Both parties warrant to each other that this Amendment has been authorized and duly executed and is binding on both parties hereto as of 29th day of March, 1996. LENDER: DVI BUSINESS CREDIT RECEIVABLES CORP. By: /s/ Steven R. Garfunkel --------------------------------------------- Name: Steven R. Garfunkel --------------------------------------------- Title: -------------------------------------------- BORROWER: AMERICAN SHARED-CURACARE CURACARE, INC. By: /s/ Ernest A. Bates By: /s/ Ernest A. Bates -------------------------------------- ------------------------------------------ Name: Ernest A. Bates Name: Ernest A. Bates -------------------------------------- ------------------------------------------ Title: Title: --------------------------------------------- -------------------------------------------------
The undersigned acknowledges that DVI has no obligation to provide it with notice of, or to obtain its consent to, the terms of this Amendment to Loan and Security Agreement. The undersigned nevertheless acknowledges and agrees to the terms and conditions of this Amendment and acknowledges that it Guaranty remains fully valid, binding and enforceable against it in accordance with its terms. GUARANTOR: ERNEST A. BATES, M.D., AMERICAN SHARED HOSPITAL SERVICES INDIVIDUAL By: /s/ Ernest A. Bates By: /s/ Ernest A. Bates -------------------------------------- ------------------------------------------ Ernest A. Bates Ernest A. Bates -------------------------------------- ------------------------------------------ (Print Name) (Print Name) Title: -------------------------------------- Date: Date: -------------------------------------- ------------------------------------------
EX-10.15 5 AM #2 TO LOAN & SECURITY AGREEMENT DATED 1/31/97 1 Exhibit 10.15 AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT ("AGREEMENT") DATED JANUARY 31, 1996 AMONG AMERICAN SHARED-CURACARE AND CURACARE, INC. ("BORROWER"), AMERICAN SHARED HOSPITAL SERVICES ("GUARANTOR"), ERNEST A. BATES, M.D. ("INDIVIDUAL GUARANTOR") AND DVI BUSINESS CREDIT RECEIVABLES CORP. ("LENDER") FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Agreement as follows: 1. Section 1.1(g)(i) "BORROWING BASE" shall be replaced with the following: "(i) eighty percent (80%) of the Net Collectible Value for each Retail Account and eighty percent (80%) of the Net Collectible Value for each Institutional Account." 2. Section 1.1(l) "ELIGIBLE ACCOUNTS" shall be replaced in its entirety with the following: "(l) "ELIGIBLE ACCOUNTS" shall mean Borrower's accounts receivable from commercial insurance, Medicare, Medi-Cal, managed care providers, workers' compensation and personal injury claims (collectively referred to as "RETAIL ACCOUNTS"), which have been due and payable for 120 or fewer days, and Borrower's account receivable under contracts with hospitals and other similar health service providers (referred to as "INSTITUTIONAL ACCOUNTS") which have been due and payable for 120 or fewer days. Any provision in Amendment No. 2 ("Amendment") hereof that may be contrary to any provision of the Agreement shall prevail and override the Agreement. Except as expressly set forth herein, all other provisions of this Amendment shall be interpreted in light of the provisions of the Agreement. Both parties warrant to each other that this Amendment has been authorized and duly executed and is binding on both parties hereto as of 31st day of January, 1997. LENDER: DVI BUSINESS CREDIT RECEIVABLES CORP. By: /s/ Cynthia J. Cohn ------------------------------------ Name: Cynthia J. Cohn ------------------------------------ Title: Executive Vice President ------------------------------------ BORROWER: AMERICAN SHARED-CURACARE CURACARE, INC. By: /s/ Ernest A. Bates, M.D. By: /s/ Ernest A. Bates ------------------------------- -------------------------- Name: Ernest A. Bates Name: Ernest A. Bates ------------------------------- -------------------------- Title: Chief Executive Officer Title: Chief Executive Officer ------------------------------- ------------------------
The undersigned acknowledges that DVI has no obligation to provide it with notice of, or to obtain its consent to, the terms of this Amendment to Loan and Security Agreement. The undersigned nevertheless acknowledges and 2 agrees to the terms and conditions of this Amendment and acknowledges that its Guaranty remains fully valid, binding and enforceable against it in accordance with its terms. GUARANTOR: GUARANTOR: AMERICAN SHARED HOSPITAL SERVICES ERNEST A. BATES, M.D., INDIVIDUAL By: /s/ Ernest A. Bates, M.D. By: /s/ Ernest A. Bates, M.D. ---------------------------------------- ----------------------------------------------- Print Name: Ernest A. Bates, M.D. Print Name: Ernest A. Bates, M.D. ------------------------------------ ---------------------------------------- Title: Chief Executive Officer ---------------------------------------- Date: March 10, 1997 Date: March 10, 1997
EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement, as amended, (Forms S-8, No. 2-90646; No. 33-21509; No. 33-48980) pertaining to the 1984 Stock Option Plan of American Shared Hospital Services; the Registration Statement (Form S-8, No. 33-45999) pertaining to the American Shared Hospital Services 1991 Employee Stock Bonus Plan; the Registration Statement (Form S-8, No. 333-08009) pertaining to the 1995 Stock Option Plan of American Shared Hospital Services; and the Registration Statement, as amended, (Form S-3, No. 333-12879) pertaining to the registration of 2,679,047 Common Shares of American Shared Hospital Services and in the related Prospectuses of our report dated March 6, 1997, with respect to the consolidated financial statements and schedule of American Shared Hospital Services included in this Annual Report (Form 10-K) for the year ended December 31, 1996. March 25, 1997 /s/ Ernst & Young LLP Walnut Creek, California --------------------- Ernst & Young LLP EX-27 7 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 586 0 7,463 1,112 45 7,832 41,954 18,523 32,969 18,720 23,935 0 0 11,089 3,344 32,969 36,989 36,989 0 28,071 5,309 0 4,199 (360) (7) (353) 0 0 0 (353) (.08) 0
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