<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY , 1996
REGISTRATION NO. 33-63721
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN SHARED HOSPITAL SERVICES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 8099 94-2918118
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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FOUR EMBARCADERO CENTER, SUITE 3620
SAN FRANCISCO, CALIFORNIA 94111-4155
(415) 788-5300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ERNEST A. BATES, M.D.
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
AMERICAN SHARED HOSPITAL SERVICES
FOUR EMBARCADERO CENTER, SUITE 3620
SAN FRANCISCO, CALIFORNIA 94111-4155
(415) 788-5300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
DANIEL G. KELLY, JR.
SIDLEY & AUSTIN
875 THIRD AVENUE
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
CALCULATION OF REGISTRATION FEE
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EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT(1)(2) PRICE(1)(2) FEE(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares No Par Value....... 1,290,853 shares $1.56 $2,013,750.68 $694.39
- ------------------------------------------------------------------------------------------------------
Warrants to purchase Common
Shares......................... 441,147 Warrants -- -- $0
- ------------------------------------------------------------------------------------------------------
Common Shares Underlying
Warrants....................... 441,147 shares $1.56 $688,189.32 $237.31
- ------------------------------------------------------------------------------------------------------
Total Registration Fee........... $931.70
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the
basis of average high and low prices of the Common Shares on the American
Stock Exchange on October 20, 1995. The maximum offering price of the Common
Shares is deemed to be the aggregate of their market value.
(2) Pursuant to Rule 457(g) under the Securities Act of 1933, as amended, no
separate registration fee is being paid in respect of the Warrants because a
full registration fee is being paid for the Common Shares underlying such
Warrants.
(3) The registration fee was paid on the date of the original filing of the
Registration Statement (October 26, 1995).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
AMERICAN SHARED HOSPITAL SERVICES
------------------------
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION
- ------------------------------------------------- LOCATION IN REGISTRATION STATEMENT OR
PROSPECTUS
-------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Front Cover Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front Cover Page and Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Determination of Offering Price
6. Dilution................................... *
7. Selling Security Holders................... Selling Securityholders
8. Plan of Distribution....................... Plan of Distribution
9. Description of Securities to be
Registered................................. Description of Securities
10. Interests of Named Experts and Counsel..... Experts
11. Information with Respect to the Registrant:
(a) Description of Business............... Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business
(b) Description of Property............... Properties
(c) Legal Proceedings..................... Legal Proceedings
(d) Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters................... Market Price of and Dividends on the Common
Shares
(e) Financial Statements.................. Index to Consolidated Financial Statements;
Consolidated Financial Statements
(f) Selected Financial Data............... Selected Consolidated Financial Data
(g) Supplementary Financial Information... Consolidated Financial Statements
(h) Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................. *
(j) Directors and Executive Officers..... Management
(k) Executive Compensation................ Management
</TABLE>
- ---------------
<TABLE>
<C> <S> <C>
* Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION
- ------------------------------------------------- LOCATION IN REGISTRATION STATEMENT OR
PROSPECTUS
-------------------------------------------
<C> <S> <C>
(l) Security Ownership of Certain
Beneficial Owners and Management........... Principal Shareholders
(m) Certain Relationships and Related
Transactions......................... Management
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Part II, Indemnification of Directors and
Officers; Undertakings
</TABLE>
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, MAY 8, 1996
PROSPECTUS
1,732,000 COMMON SHARES
(INCLUDING 441,147 COMMON SHARES ISSUABLE
UPON THE EXERCISE OF WARRANTS)
AND
WARRANTS TO PURCHASE 441,147 COMMON SHARES
AMERICAN SHARED HOSPITAL SERVICES
The common shares, no par value ("Common Shares"), of American Shared
Hospital Services, a California corporation ("ASHS" and together with its
subsidiaries, the "Company"), warrants to purchase Common Shares ("Warrants")
and the Common Shares issuable upon exercise of such Warrants (collectively, the
"Securities") covered by this Prospectus may be sold from time to time by the
securityholders specified in this Prospectus or their successors in interest
(the "Selling Securityholders"). See "Selling Securityholders."
On May 17, 1995, the Company repurchased $17,694,000 principal amount of
its senior subordinated notes from certain of the Selling Securityholders for
consideration comprised of cash, 819,000 Common Shares and 216,000 Warrants.
Pursuant to the terms of the Note Purchase Agreement dated as of May 12, 1995,
upon the occurrence of certain subsequent events the Company issued to such
Selling Securityholders an additional 374,000 Common Shares and 98,000 Warrants.
The repurchase of the senior subordinated notes was part of an overall financial
restructuring in which the Company also restructured most of its medical
equipment leases and issued its primary equipment lessor 225,000 Warrants of
which 97,853 Warrants have been exercised. The 1,290,853 Common Shares
(including 1,193,000 Common Shares issued in the restructuring and the 97,853
Common Shares received upon the exercise of 97,853 Warrants issued in the
restructuring) and the 441,147 unexercised Warrants issued in these transactions
and 441,147 Common Shares underlying such unexercised Warrants are the
Securities to which this Prospectus relates. Such Securities are being
registered by the Company under the Securities Act of 1933, as amended (the
"Act") pursuant to the terms of a Registration Rights Agreement dated as of May
17, 1995 among the Company and the Selling Securityholders (the "Registration
Rights Agreement").
The Common Shares are listed on the American Stock Exchange ("the AMEX")
under the trading symbol "AMS." The Common Shares are also listed on The Pacific
Stock Exchange ("The PSE"). Each such exchange has commenced a review procedure
to determine whether the Common Shares will remain listed. See "Risk
Factors -- Trading of Common Shares; Possible Delisting of Common Shares and
Loss of Active Trading Market." On May 6, 1996 the last reported sale price of
the Common Shares on the AMEX was $1.875 per share.
The Company will not receive any of the proceeds from the sale of the
Securities being offered by the Selling Securityholders. The Selling
Securityholders may, from time to time, sell the Securities at market prices
prevailing on the AMEX or The PSE, respectively, at the time of sale or sell the
Common Shares under certain other terms. See "Plan of Distribution."
THE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE SECURITIES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THE PROSPECTUS IS MAY , 1996
<PAGE> 5
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center,
New York, New York 10007 and Northwestern Atrium Center, 500 Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained upon written request addressed to the Commission, Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and its public reference facilities in New York, New York and Chicago,
Illinois, at prescribed rates. The Company's Common Shares are listed on the
American Stock Exchange and The Pacific Stock Exchange, and such reports, proxy
statements, and other information concerning the Company can also be inspected
at the offices of the American Stock Exchange, 86 Trinity Place, New York, New
York 10006 and at the offices of The Pacific Stock Exchange, 301 Pine Street,
San Francisco, California 94104. Statements contained in this Prospectus as to
the contents of any agreement or other document are not necessarily complete,
and in each instance reference is made to the copy of such agreement or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon oral or written
request, a copy of any or all of the documents incorporated herein by reference
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Written or telephone inquiries
should be directed to American Shared Hospital Services, Four Embarcadero
Center, Suite 3620, San Francisco, California 94111, Attention: Richard Magary
(telephone: (415) 788-5300).
Additional information regarding the Company and the Securities offered
hereby is contained in the Registration Statement on Form S-1 and the exhibits
(the "Registration Statement") filed with the Commission under the Act. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is made to the
Registration Statement which may be inspected without charge at, and copies
thereof may be obtained at prescribed rates from, the Commission at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with the offer and sale
of the Securities other than those contained in this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any of the Securities offered hereby
by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date of
this Prospectus.
2
<PAGE> 6
RISK FACTORS
In addition to the other information and financial data set forth elsewhere
in this Prospectus, the following specific factors should be considered
carefully by prospective investors in evaluating the Company, its businesses and
an investment in the Securities.
DEFAULTS, POTENTIAL BANKRUPTCY AND RESTRUCTURING
As a result of a serious cash shortage during the second half of 1992, the
Company failed to make the required semi-annual interest payments under its
14 3/4% Senior Subordinated Notes Due 1996 (the "14 3/4% Notes") and Senior
Subordinated Exchangeable Reset Notes Due 1996 (the "16 1/2% Notes") (the
14 3/4% Notes and the 16 1/2% Notes, collectively, are referred to as the
"Subordinated Notes") that were due beginning on October 15, 1992. In addition,
the Company suspended lease payments on a significant portion of its equipment
leases beginning on December 1, 1992.
The non-payment of interest and the suspension of lease payments caused
defaults under the Company's Subordinated Notes and equipment leases and gave
the holders of such obligations as well as the lender under the Company's senior
secured working capital facility the right to declare all amounts immediately
due and payable and to reclaim substantially all of the Company's diagnostic
imaging equipment and other assets. The Company stated that if any of such
creditors or lessors had exercised their rights, the Company would have been
forced to seek a liquidation under Chapter 7 or a reorganization under Chapter
11 of the United States Bankruptcy Code.
Following lengthy negotiations, the Company restructured its debt and most
of its lease obligations. See "The Company -- Financial Restructuring." The
restructuring had the effect of curing all defaults under the indentures
governing the Subordinated Notes and the equipment leases. The Company
nevertheless remains highly leveraged and has substantial fixed payment
obligations. If defaults occur in the future, the Company's creditors and
lessors would have the ability to accelerate the Company's obligations and seize
substantially all of its medical imaging equipment and other assets. There can
be no assurance that the Company will be able to avoid such defaults in the
future.
RECENT LOSSES; FINANCIAL CONDITION OF THE COMPANY
The Company has reported significant operating losses in each of the last
three fiscal years. The net loss of the Company (before extraordinary items) was
$15,644,000, $5,537,000 and $12,459,000 for the years ended December 31, 1993,
1994 and 1995, respectively. The Company had a net capital deficiency of
$10,576,000 at December 31, 1995. The Company reported net income of $7,344,000
and a corresponding reduction of its net capital deficiency in 1995 due to an
extraordinary gain of $19,803,000 from the early extinguishment of debt at a
discount. Unless the Company is able to increase its revenues and/or increase
its operating margins through a reduction in its cost of operations, it will be
unable to achieve profitability. There can be no assurance that the Company will
be profitable in the future.
HIGH DEBT LEVEL
Even following the restructuring, in which the Company was able to
repurchase at a significant discount and retire $17,694,000 principal amount of
Subordinated Notes, the Company remains highly leveraged. At December 31, 1995,
the Company had approximately $12,074,000 of long-term debt, $773,000 of
Subordinated Notes and approximately $22,771,000 of obligations under capital
leases. Scheduled payments of principal and interest under debt obligations and
capital leases are $13,137,000 during 1996. In addition, scheduled payments
under operating leases and related maintenance and service agreements are
approximately $2,681,000 in 1996. The Company during the next 12 months must
increase its revenues and reduce its cost structure and debt payment schedules
in order to meet its obligations as they become due. There can be no assurance
that the Company will be able to meet its scheduled obligations as they become
due in the next 12 months. Further, the high debt level may adversely affect the
Company's ability to offer technologically advanced equipment in the future to
customers, which may adversely affect the Company's ability to secure or retain
profitable contracts.
3
<PAGE> 7
LIMITED ACCESS TO CAPITAL AND FINANCING
The Company is severely limited by covenants in its credit agreements from
incurring additional indebtedness without the consent of its lenders. In
addition, the Company has pledged substantially all of its liquid assets and
substantially all of its tangible personal property and real property to secure
its existing debt. As a result, the Company has very little financial
flexibility to address unforeseen cash needs, to fund future growth or to
finance necessary equipment purchases and upgrades.
POTENTIAL INABILITY TO REPAY MATURING INDEBTEDNESS
A substantial portion of the Company's funded debt, including long-term
debt, capital lease obligations and the Subordinated Notes which mature in
October 1996, will mature in 9 to 36 months. During 1996 and 1997, $9,493,000
and $8,351,000 plus the then outstanding balance (currently approximately
$3,446,000 at February 29, 1996) of the New Revolver (as defined below) will
become due. The Company does not expect to have sufficient cash resources to pay
these obligations at maturity. Accordingly, the Company will be required to seek
new financing to meet its maturing obligations. 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.
TREND OF DECREASING REVENUES
The Company's revenues have decreased during the last three fiscal years.
During each of the three years ended December 31, 1993, 1994 and 1995, revenues
were $39,485,000, $38,545,000 and $34,077,000, respectively. This decrease in
revenues is a result of the sale by the Company of various revenue-producing
assets, reduced demand for certain of the Company's imaging services and severe
competition which have led to reduced pricing for the Company's services. This
trend has resulted in significant operating losses and during the period from
late 1992 until May 1995, the Company failed to meet certain of its fixed
obligations. The Company must increase its revenues or decrease its expenses in
order to remain viable. There can be no assurance that the Company will be able
to increase its revenues or decrease its expenses sufficiently to cover its
fixed obligations.
POSSIBLE DELISTING OF COMMON SHARES AND LOSS OF ACTIVE TRADING MARKET
The Common Shares are currently traded on the AMEX and The PSE. The
announcement by the Company of the terms of a restructuring in early April 1994
was followed by a significant decline in the market price of the Common Shares.
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 of the
Common Shares is also below the minimum criteria for continued listing on such
exchange. The closing per share price was $1.875 at May 6, 1996. The Company has
been advised that its net capital deficiency is inconsistent with the criteria
applied by The PSE for continued listing on such exchange. The AMEX and The PSE
are currently reviewing the Company's financial condition following the
restructuring in order to determine whether the Common Shares will continue to
be listed on such exchanges. Accordingly, no assurances can be given that a
holder of Common Shares will be able to sell Common Shares in the future on a
national or regional securities exchange, or that there will be an active
trading market for the Common Shares or as to the price at which the Common
Shares might trade.
OFFER AND SALE OF SECURITIES MAY DEPRESS MARKET PRICE OF COMMON SHARES
The Selling Securityholders may offer and sell Common Shares in a number of
different ways. See "Plan of Distribution." The offer and sale of the Common
Shares may result in temporary disruptions in the market and adversely affect
the price of Common Shares. The availability of the Securities (which represent
approximately 26% of the fully diluted Common Shares after exercise of the
Warrants) for sale by the Selling Securityholders may depress the market price
of Common Shares for a significant period.
4
<PAGE> 8
INABILITY OF COMPANY TO PAY DIVIDENDS
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.
CONTROL BY MAJOR SHAREHOLDERS; POTENTIAL CONFLICT OF SHAREHOLDER INTERESTS
As of March 5, 1996, Ernest A. Bates, M.D., the Company's Chairman of the
Board and Chief Executive Officer, owns 2,666,000 Common Shares through directly
owned shares and currently exercisable options, which represents approximately
40% of the Company's outstanding securities. In addition, as a result of
Securities issued to them pursuant to the terms of the Note Purchase Agreement
and in connection with the Company's lease restructuring, the Selling
Securityholders own directly or through immediately exercisable Warrants,
1,732,000 Common Shares, representing approximately 26% of the outstanding
securities of the Company. Dr. Bates and any of the Selling Securityholders
acting together will have the power to determine the outcome of a shareholder
vote with respect to any fundamental corporate transaction, including mergers
and the sale of all or substantially all of the Company's assets. This could
have the effect of blocking transactions that a majority of the other
shareholders would otherwise find attractive, or conversely, permitting such
shareholders to adopt transactions that a majority of the other shareholders
vote to reject. Accordingly, owners of Common Shares other than Dr. Bates and
the Selling Securityholders should recognize that their interests may conflict
and, as a result of the size of their shareholdings, Dr. Bates and the Selling
Securityholders will be able effectively to determine the course of action to be
taken by the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's operations and business are dependent to a significant extent
upon the continued active participation of its founder, Chairman of the Board
and Chief Executive Officer, Ernest A. Bates, M.D. In the past, Dr. Bates has
personally guaranteed various financial obligations of the Company, which has
enabled the Company to obtain credit. Certain of the Company's lenders have also
sought to insure the continued involvement of Dr. Bates by requiring his
personal guarantee of a significant amount of the Company's debt. Should Dr.
Bates become unavailable to the Company for any reason, it could have a material
adverse effect on the Company's business, results of operations, financial
condition and prospects.
INABILITY OF THE COMPANY TO ACQUIRE ADVANCED TECHNOLOGY
Diagnostic imaging technology is subject to continuous development and
change. New technological breakthroughs may require the Company to acquire new
or technologically improved products to service its customers. There can be no
assurance that the Company's financial resources will enable it to make the
investment necessary to acquire such products. The failure to acquire or use new
technology and products could have a material adverse effect on the Company's
business and results of operations.
EXPANSION OF REIMBURSEMENT PROGRAMS
Customers to which the Company provides services generally receive payment
for patient care from governmental and private insurer reimbursement programs.
As a result, a significant adverse change in such reimbursement policies might
have a material adverse effect on the Company's business and results of
operations. As a result of federal cost-containment legislation currently in
effect, hospital in-patients covered by federally funded reimbursement programs
are classified into diagnostic related groups ("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. 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 out-patient services, and consequently many health care providers
have an incentive to use contract shared services on an out-patient basis. If
the DRG program is at some future date expanded to include out-patient
reimbursement, such change could have a material adverse effect on the Company's
business and results of operations.
5
<PAGE> 9
RISK OF ADVERSE HEALTHCARE REFORM LEGISLATION
In addition to extensive existing government healthcare regulation, there
are numerous initiatives at the federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services,
including a number of proposals that would significantly limit reimbursement
under Medicare and Medicaid. It is not clear at this time what proposals, if
any, will be adopted or, if adopted, what effect such proposals would have on
the Company's business. Aspects of certain of these healthcare proposals, such
as cutbacks in the Medicare and Medicaid programs, containment of healthcare
costs on an interim basis by means that could include a short-term freeze on
prices charged by healthcare providers, and permitting greater state flexibility
in the administration of Medicaid, could adversely affect the Company. There can
be no assurance that any currently proposed or future healthcare legislation or
other changes in the administration or interpretation of governmental healthcare
programs will not have an adverse effect on the Company.
BURDEN AND COST OF GOVERNMENT REGULATION
Many aspects of the medical industry in the United States are subject to a
high degree of governmental regulation. Generally, failure to comply with any
such regulations may result in denial of the right to conduct business and
significant fines. For example, legislation in various jurisdictions requires
that health facilities obtain a Certificate of Need ("CON") prior to making
expenditures 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 equipment subject to CON requirements.
CON requirements vary from state to state as they apply to the operations of
both the Company and its customers. In some jurisdictions the Company is
required to comply with CON procedures before operating its services and in
other jurisdictions customers must comply with CON procedures before using the
Company's services. An increase in the complexity or substantive requirements of
such federal, state and local laws and regulations could adversely affect the
Company's business.
LABOR SHORTAGES
Shortages of licensed technicians in the diagnostic imaging field in
certain areas of the country could adversely affect the Company's labor costs in
those areas should the shortage become acute.
COMPETITION
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 financial problems have
adversely affected its ability to obtain and retain certain profitable customer
contracts, and its high debt burden may adversely affect its ability to offer
technologically advanced equipment in the future. There can be no assurance that
the Company will be able to retain its competitive position in the medical
imaging industry following the restructuring.
6
<PAGE> 10
THE COMPANY
The Company provides shared diagnostic imaging services and radiotherapy
services to approximately 220 hospitals, medical centers and medical offices
located in 22 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. Radiotherapy services are
performed by the Company through a subsidiary which provides gamma knives to two
major university medical centers.
ASHS's address is Four Embarcadero Center, Suite 3620, San Francisco,
California 94111 and its telephone number is (415) 788-5300.
7
<PAGE> 11
FINANCIAL RESTRUCTURING
GENERAL
On May 17, 1995, pursuant to the terms of the Note Purchase Agreement dated
as of May 12, 1995 (the "Note Purchase Agreement"), the Company repurchased (the
"Notes Repurchase") $17,694,000 principal amount of its Subordinated Notes from
certain holders for consideration consisting of $3,893,000 in cash, 819,000
Common Shares and immediately exercisable Warrants to purchase an additional
216,000 Common Shares, at an exercise price of $0.75 per share, representing 20%
and 5%, respectively, of the fully diluted Common Shares. Pursuant to the terms
of the Note Purchase Agreement, these holders were issued an additional 374,000
Common Shares and 98,000 Warrants following the approval by the Company's
shareholders of the grant to the Company's Chairman and Chief Executive Officer
of an option to purchase 1,495,000 Common Shares. The 1,193,000 Common Shares
and 314,000 Warrants issued as part of the Notes Repurchase, plus 97,853 Common
Shares issued upon exercise of Warrants issued pursuant to the Lease
Restructuring (as defined below) and 127,147 unexercised Warrants issued
pursuant to the Lease Restructuring, and the Common Shares issuable upon
exercise of such Warrants, are the Securities to which this Prospectus relates.
The Notes Repurchase was the culmination of a broad restructuring of the
Company's capital structure that commenced in mid-1992. As part of the
restructuring, the Company was able to amend most of the capital and operating
leases covering its medical equipment (the "Lease Restructuring") to reduce
monthly payments, eliminate $26,547,000 of indebtedness (including principal and
accrued and unpaid interest) through the Notes Repurchase and replace its
operating line of credit. On the date of the Notes Repurchase, the Company
entered into three new credit facilities totalling $8,000,000, which provided
funds for the Notes Repurchase and working capital, as well as term debt
reduction and the refinancing of certain medical equipment. As a result, the
Company was able to cure all existing defaults on its debt and equipment leases.
The Company's equipment leases were further restructured at the end of 1995 and
in March 1996. See "Financial Restructuring -- Lease Restructuring."
BACKGROUND
Beginning in 1992, the Company experienced substantial declines in revenues
from its businesses. The revenue declines, which were caused by increased
competition and reduced acceptance of the services offered by the Company,
combined with high fixed payment obligations under existing equipment leases and
the Subordinated Notes, led to a serious cash shortage in the second half of
1992. During this period the Company concluded that revenues from its operating
activities would be insufficient to meet its fixed obligations and determined
that these obligations would have to be restructured.
The Company failed to make the required semi-annual payments due under the
Subordinated Notes beginning on October 15, 1992. In addition, the Company
suspended lease payments on a significant portion of its leases beginning on
December 1, 1992. As a result of these actions, both the Subordinated Notes and
the equipment leases relating to substantially all of the Company's medical
imaging equipment were in default. This gave the holders of such obligations, as
well as the lender under the Company's secured working capital facility, the
right to declare all amounts immediately due and payable and, in the case of the
leases, reclaim substantially all of the Company's medical imaging equipment.
The Company stated that any such action by the holders would have forced the
Company to seek a liquidation under Chapter 7 or a reorganization under Chapter
11 of the United States Bankruptcy Code.
ELEMENTS OF RESTRUCTURING
In light of the foregoing, the Company began negotiations in late 1992 to
restructure its equipment lease and debt obligations to more closely match
anticipated revenues and costs. These negotiations led to the Lease
8
<PAGE> 12
Restructuring in December 1994, and the Notes Repurchase and replacement of the
Company's revolving credit facility in May 1995. Each of these events is
described below:
1. Revolving Credit Facility. The Company's previous revolving credit
facility provided for borrowings up to $5,000,000 was based on a formula
relating to eligible accounts receivable and was secured by a lien on the
accounts receivable and inventory of CuraCare, Inc. ("CuraCare"), a Delaware
corporation which is a wholly-owned subsidiary of ASHS. During the period in
which defaults existed under the Subordinated Notes and equipment leases, the
Company's revolving credit lender gradually reduced the funds available to the
Company under the facility. On December 31, 1994, in connection with the sale of
a majority of the Company's respiratory therapy contracts and its respiratory
registry, the Company provided cash collateral equal to the amount borrowed
under the revolving credit facility. The facility was repaid in full at maturity
on February 28, 1995 in the amount of $2,869,000.
2. Lease Restructuring. On December 30, 1994, (effective as of November 1,
1994 for most capital leases and January 1, 1994 for operating leases), the
Company and General Electric Company, a New York corporation acting through GE
Medical Systems ("GE Medical"), entered into the Lease Restructuring.
American Shared-CuraCare, a California general partnership ("AS-C") whose
partners are ASHS and a wholly-owned subsidiary of ASHS, is the entity through
which the Company leases its MRI medical imaging equipment. In the Lease
Restructuring, substantially all equipment financed by AS-C under capital leases
(the "Existing Capital Leases") for which GE Medical was the lessor, were
restructured and after restructuring continue to meet the financial statement
accounting criteria under generally accepted accounting principles ("GAAP") to
be accounted for as capital leases. Under the restructured leases, scheduled
payments by AS-C provide for the retirement of the unpaid principal balance
under the Existing Capital Leases over the extended and restructured lease terms
from September 30, 1996 to September 30, 2000. AS-C will be entitled to purchase
the leased equipment at its fair market value, or to extend the relevant lease,
at the end of the lease term, in each case on terms offered by GE Medical at
that time.
All operating leases in effect at January 1, 1994, under which GE Medical
was the lessor of equipment to AS-C (the "Restructured GE Operating Leases"),
were amended to extend and restructure the payment schedules. AS-C will be
entitled to purchase the leased equipment at its fair market value, or to extend
the relevant lease, at the end of the lease term, in each case on terms offered
by GE Medical at that time. As a result of the modification of lease terms, the
Restructured GE Operating Leases meet the financial statement accounting
criteria under generally accepted accounting principles to be accounted for as
capital leases and are accounted for as such.
The present value of the net minimum lease payments on the Company's
capital leases was $22,771,000 as of December 31, 1995.
As part of the Lease Restructuring, GE Medical converted various lease and
service payments that were due and unpaid, and a portion of the restructured
lease payments for the period from January 1, 1994 through March 31, 1994,
totalling approximately $3,552,000, into two promissory notes dated December 30,
1994 and January 1, 1995, respectively, in principal amounts of approximately
$2,000,000 and $500,000, respectively (the "GE Notes"). The GE Notes were issued
by AS-C to GE Medical and are guaranteed by ASHS and certain of its subsidiaries
and mature in February 2002 and on January 1, 2000, respectively. As amended,
the GE Notes bear interest at a rate of 5% and 10.5% per annum, respectively.
The GE Notes and the Company's guarantee are secured by a second priority lien
on the accounts receivable of ASHS and CuraCare and a first priority lien on
certain medical imaging equipment. The GE Notes contain restrictive covenants
that limit the ability of the Company to incur debt, create liens, pay dividends
on the Common Shares, make capital expenditures, acquire or dispose of assets
and merge with other companies.
The Company issued to GE Medical on December 31, 1994 immediately
exercisable warrants (the "December Warrants") to purchase 97,853 Common Shares
for $0.01 per share until March 31, 1996. On May 17, 1995, additional warrants
were issued to purchase 127,147 Common Shares for $0.01 per share until
September 30, 1996 (the "May Warrants", and collectively with the December
Warrants the "GE
9
<PAGE> 13
Warrants"). Effective March 5, 1996, GE Medical exercised the December Warrants
to purchase 97,853 Common Shares of the Company.
The issuance of the December Warrants resulted in an increase of
approximately $600,000 of additional paid-in capital. In addition, the Company
was required to accrue approximately $400,000 of deferred tax liabilities in
connection with the Lease Restructuring. No gain or loss was recognized as part
of the Lease Restructuring or the conversion of the accrued liabilities into the
GE Notes.
In December 1995 (effective as of October 1, 1995) and in March 1996, the
Company further restructured its leases with GE Medical. GE Medical deferred
certain lease payments due in the fourth quarter of 1995 and first quarter of
1996. Further, the lease terms for some of the Company's MRI units were extended
up to an additional 26 months to coincide with the potential termination of the
Company's end-user contracts. In addition, the GE Notes were amended to change
the interest rate and defer certain installment payments due in 1996.
3. Notes Repurchase and New Credit Facilities. As described above, the
Notes Repurchase was consummated on May 17, 1995. The Notes Repurchase was the
culmination of over two years of negotiations between the Company and a small
number of holders who owned in the aggregate approximately 96% of the
Subordinated Notes. Prior to consummating the Notes Repurchase, the Company and
such holders had agreed to a restructuring (the "Prior Restructuring") in which
the holders would have exchanged their debt for new Common Shares that would
have given them an 89.4% ownership interest in the outstanding common equity of
ASHS. The Notes Repurchase was consummated in lieu of the Prior Restructuring.
The Notes Repurchase was completed with the proceeds of three new credit
facilities. Concurrent with the Notes Repurchase on May 17, 1995, the Company
entered into a new revolving credit facility (the "New Revolver") with a
different lender than the previous revolving credit facility. On January 31,
1996, the lender under the New Revolver was replaced by an affiliate of such
lender under substantially identical terms. Under the New Revolver, the Company
will have available up to $4,000,000 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%) 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, 1995, the Company had drawn $3,883,000
under the New Revolver and, based on eligible accounts receivable, an additional
$117,000 was available under the facility. The New Revolver is secured by a
first priority lien on all of AS-C's and CuraCare's accounts receivable, certain
equipment, inventory and general intangibles and is guaranteed by ASHS and
Ernest A. Bates, M.D., individually. 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 of AS-C's and CuraCare's equipment and
inventory and a second priority lien on AS-C's and CuraCare'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.
On May 17, 1995, 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 Company's Gamma Knife. The payments on this loan were restructured in
September 1995 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.
In connection with the financing of the Notes Repurchase, the lenders that
provided the New Revolver and the Term Loan required a personal guarantee from
the Company's Chairman and Chief Executive Officer. In consideration of the
guarantee and of his continued service to the Company, the Chairman and Chief
Executive Officer was issued 184,000 Common Shares and, after obtaining
shareholder approval on October 6, 1995, an immediately exercisable 10-year
option to acquire 1,495,000 Common Shares for $0.01 per share.
10
<PAGE> 14
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities. All of the proceeds will be received by the Selling Securityholders.
See "Selling Securityholders." Upon exercise of any of the Warrants, the Company
will receive proceeds equal to the aggregate exercise price, unless the holder
of a Noteholder Warrant elects to pay the exercise price by directing the
Company to withhold Common Shares in an amount equal to the exercise price
divided by the market price of the Common Shares on date of exercise. See
"Description of Securities -- Noteholder Warrants." The aggregate exercise price
of the unexercised Warrants is approximately $236,771. Any portion of such
exercise price received in cash will be added to the Company's working capital
and used for general corporate purposes.
DETERMINATION OF OFFERING PRICE
The offering price of the Securities will be determined by the Selling
Securityholders in transactions entered into by them regarding the Securities.
See "Plan of Distribution."
11
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1995 as reflected on the Company's consolidated balance sheet. The
table should be read in conjunction with the Consolidated Financial Statements
and related Notes to Consolidated Financial Statements contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----------------
<S> <C>
Current portion of long-term debt(1)......................................... $ 2,796,000
Current portion of obligations under capital leases(1)..................... 5,924,000
Senior Subordinated Notes.................................................. 773,000
------------
Total current obligations............................................... 9,493,000
------------
Long-term debt, less current portion(1)...................................... 9,278,000
Obligations under Capital Leases less current portion(1)..................... 16,847,000
------------
Total long-term obligations................................................ 26,125,000
------------
Total Obligations.................................................. 35,618,000
------------
Stockholder's equity (Net Capital Deficiency):
Common stock, without par value:
authorized shares -- 10,000,000, 4,244,000 shares issued and
outstanding(2).......................................................... 10,635,000
Common stock options issued to officer..................................... 2,414,000
Additional paid-in capital................................................. 930,000
Accumulated deficit........................................................ (24,555,000)
------------
Total stockholders' equity (Net Capital Deficiency)................ (10,576,000)
------------
TOTAL CAPITALIZATION............................................... $ 25,042,000
============
</TABLE>
- ---------------
(1) See Notes 7 and 11 of the Notes to the Consolidated Financial Statements
which describe in detail the long-term debt and capitalized lease
obligations of the Company.
(2) Does not include (i) 330,000 Common Shares reserved for issuance under the
Company's 1995 Stock Option Plan, (ii) 165,100 Common Shares reserved for
issuance for options remaining exercisable in the Company's 1984 Stock
Option Plan, (iii) 539,000 Common Shares underlying the then unexercised
Warrants, of (iv) 1,495,000 Common Shares issuable under an option granted
to the Company's Chairman and Chief Executive Officer.
12
<PAGE> 16
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
SUMMARY OF OPERATIONS
The following selected condensed consolidated financial data for the five
years ended December 31, 1995 are derived from the consolidated financial
statements. The data should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included
herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1995(2) 1994 1993(1) 1992 1991
------- ------- -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Medical services revenues....................... $34,077 $38,545 $ 39,485 $48,834 $58,952
Costs of operations............................. 32,675 34,145 37,071 45,169 43,941
Selling and administrative expense.............. 8,432 5,971 6,820 6,273 7,051
Interest expense................................ 5,310 7,423 6,752 7,520 8,542
Write-down of intangible assets................. 600 0 5,308 -- --
------- ------- -------- ------- -------
Total costs and expenses........................ 47,017 47,539 55,951 58,962 59,534
------- ------- -------- ------- -------
(12,940) (8,994) (16,466) (10,128) (582)
Gain on sale of assets and early termination
of capital leases............................. 226 3,294 124 270 138
Equity in earnings (losses) of partnerships..... 54 85 (51) 51 221
Interest and other income....................... 204 98 742 181 310
------- ------- -------- ------- -------
(Loss)/income before income taxes and
extraordinary item............................ (12,456) (5,517) (15,651) (9,626) 87
Income tax provision (benefit).................. 3 20 (7) (111) 63
------- ------- -------- ------- -------
(Loss)/income before extraordinary item......... (12,459) (5,537) (15,644) (9,515) 24
Extraordinary item.............................. 19,803 362 -- -- 1,964
------- ------- -------- ------- -------
Net income (loss)............................... $ 7,344 $(5,175) $(15,644) $(9,515) $ 1,988
======= ======= ======== ======= =======
Primary earnings per share:
Income (loss) before extraordinary item....... $ (2.96) $ (1.93) $ (5.46) $ (3.39) $ 0.01
Extraordinary item............................ 4.71 0.13 0.00 0.00 0.69
------- ------- -------- ------- -------
Net income (loss)............................. $ 1.75 $ (1.80) $ (5.46) $ (3.39) $ 0.70
======= ======= ======== ======= =======
Fully diluted earnings per share:
Income (loss) before extraordinary item....... $ (2.96) $ (1.93) $ (5.46) $ (3.39) $ 0.01
Extraordinary item............................ 4.71 0.13 0.00 0.00 0.69
------- ------- -------- ------- -------
Net income (loss)............................. $ 1.75 $ (1.80) $ (5.46) $ (3.39) $ 0.70
======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
DECEMBER 31,
---------------------------------------------------
1995(2) 1994 1993(1) 1992 1991
-------- -------- -------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital deficiency................... $ (6,793) $(33,369) $(56,518) $(33,244) $(3,960)
Total assets................................. 31,345 47,222 50,179 61,440 75,723
Current portion of long-term debt and
obligations under capitalized leases....... 8,720 11,214 26,635 15,288 10,366
Long term debt and obligations under
capitalized leases less current portion.... 26,125 24,244 3,106 19,792 30,950
Senior subordinated notes.................... 773 18,467 18,788 18,788 18,788
Stockholders' equity (Net capital
deficiency)................................ $(10,576) $(22,341) $(17,754) $ (2,151) $ 7,192
</TABLE>
- ---------------
(1) 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 1995.
(2) 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.
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of 1995 to 1994
MEDICAL SERVICES REVENUES
Medical services revenues of $34,077,000 for the year ended December 31,
1995 represent an 11.6% decline compared to medical services revenues of
$38,545,000 for the prior year.
In 1995, revenues from MRI increased $2,413,000 or 11% compared to the
prior year and constituted 73% of medical services revenues compared to 59% in
1994. The increase was due primarily to the commencement of new customer
contracts and increased utilization from contracts commenced in prior periods.
The Company had a net increase of approximately 39 new customer contracts as of
December 31, 1995 compared to December 31, 1994.
CT revenues declined $453,000 or 11% compared to the prior year due to the
operation of two fewer scanners and lower revenue generation from mobile routes
and constituted 10% of medical services revenues in 1995. Nuclear medicine and
ultrasound revenues decreased $1,220,000 from those for the year ended December
31, 1994 because of the sale by the Company of two ultrasound contracts as a
part of its respiratory therapy department contract sale and the continued
decline in mobile ultrasound usage. Non-MRI diagnostic imaging services
constituted 19% and 21% of total medical services revenues in 1995 and 1994,
respectively.
Respiratory therapy services revenues decreased $5,124,000 for the year
ended December 31, 1995 compared to the prior year due to the sale of eight
respiratory therapy contracts and the respiratory registry in December 1994 and
the termination of five contracts in 1995.
Gamma Knife revenues remained constant for the year ended December 31, 1995
compared to the prior year. Gamma Knife revenues are currently not a significant
component of the Company's revenues.
COST OF OPERATIONS
Total Cost of Operations decreased $1,470,000 for the year ended December
31, 1995 compared to the prior year. This resulted primarily from decreases in
medical services payroll and maintenance and supplies which was a result of the
sale of most of the Company's respiratory therapy contracts and was partially
offset by a write-down of equipment and an increase in equipment rental expense.
Medical services payroll, the largest routine component of total cost of
operations, decreased $3,300,000 for the year ended December 31, 1995 compared
to the prior year. The decrease is primarily attributable to the Company's sale
of certain respiratory contracts and the respiratory registry in December 1994
and the related personnel reductions. Maintenance and supplies decreased
$1,042,000 for the year ended December 31, 1995 compared to the prior year. The
decrease is primarily attributable to pricing reductions on MRI maintenance
contracts achieved by the Company. Another factor was a decrease in supply usage
associated with the sale and termination of respiratory therapy contracts.
Depreciation and amortization decreased $1,202,000 for the year ended December
31, 1995 compared to the prior year. The decrease is primarily attributable to
the adoption of Financial Accounting Standards No. 121 (FAS 121) during the
second quarter of 1995 as explained in further 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 in the fourth quarter of 1995.
Equipment rental increased $1,228,000 for the year ended December 31, 1995
compared to the prior year. The increase is primarily attributable to the
commencement of five short term rentals during 1995. Other operating costs
decreased $979,000 for the year ended December 31, 1995 compared to the prior
year. The decrease is attributable to a significant reduction in regional office
administrative costs, property related and bad debt costs.
In connection with the early adoption of 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,
14
<PAGE> 18
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.
SELLING AND ADMINISTRATIVE COSTS
Selling and administrative costs increased $2,461,000 for the year ended
December 31, 1995 compared to the prior year. The increase is primarily
attributable to 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 service 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."
INTEREST EXPENSE
Interest expense decreased $2,113,000 for the year ended December 31, 1995
compared to the prior year. The decrease is primarily attributable to the Notes
Repurchase on May 17, 1995 (see "Liquidity and Capital Resources") and the
maturation of existing equipment leases and long-term debt. The decrease was
partially offset by the issuance on May 17, 1995 of Warrants to the Company's
primary equipment lessor, which resulted in a charge to interest expense of
$167,000. See "Liquidity and Capital Resources."
GAIN ON SALE OF ASSETS
Gain on sale of assets decreased $3,068,000 for the year ended December 31,
1995 compared to the prior year. The Company sold certain of its respiratory
therapy contracts and respiratory registry as of December 31, 1994 on terms that
resulted in a gain of $3,199,000. There were no material asset sales during
1995.
WRITE-DOWN OF INTANGIBLE ASSETS
Write-down of intangible assets increased $600,000 for the year ended
December 31, 1995 compared to the prior year. The increase is solely
attributable to the adoption of FAS 121 in the second quarter of 1995. See "Cost
of Operations."
EQUITY IN EARNINGS OF PARTNERSHIP
Equity in earnings of partnerships decreased $31,000 for the year ended
December 31, 1995 compared to the prior year due primarily to lower equipment
utilization on the partnership's two CT scanners during 1995.
INTEREST AND OTHER INCOME
Interest and other income increased $106,000 for the year ended December
31, 1995 compared to the prior year. The largest component of the increase was
the settlement of litigation related to a respiratory therapy contract included
in the December 31, 1994 sale.
15
<PAGE> 19
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
The Company had a loss before income taxes and extraordinary item of
$12,456,000 for the year ended December 31, 1995 compared to a loss of
$5,517,000 for the prior year. 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.
NET INCOME
The Company had net income of $7,344,000 for the year ended December 31,
1995 compared to a loss of $5,175,000 for the prior year. 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 Subordinated Notes net of cash, Common Shares and Warrants issued and
transaction related costs of $3,893,000, $1,836,000 and $1,015,000,
respectively.
Comparison of 1994 to 1993
MEDICAL SERVICES REVENUES
Medical services revenues decreased 2.4% in 1994 compared to 1993. The 2.4%
decrease in 1994 was caused primarily by an 18% decrease ($1,398,000) in
respiratory therapy revenues in 1994.
MRI revenues increased 11% ($2,224,000) in 1994 compared to 1993. The
increase in 1994 compared to 1993 was primarily due to the commencement of new
customer contracts and increased utilization from contracts commenced in 1993
which were partially offset by the termination of certain long-standing
contracts and the replacement of those contracts with new contracts with lower
pricing and procedure volumes. In addition, the marketing time required to
replace terminating customers lengthened because of increased competition and
the fact that more health care providers already had access to MRI services.
Revenues were also negatively impacted by delays in the commencement of
replacement contracts due to regulatory and site improvement delays and
termination notification periods which certain customers were obligated to
provide to previous providers. MRI revenues as a percentage of total medical
services revenues were 59% and 52% in years 1994 and 1993, respectively.
The Company's non-MRI diagnostic imaging services revenues declined 19%
($1,905,000) in 1994 compared to 1993. The decline was attributable to decreased
CT revenue from the reduction in the CT fleet by two scanners in 1994, lower
revenue generated on mobile routes, reductions in per study wholesale prices and
competition. The Company was required 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 $1,170,000 in 1994 from 1993 revenues of $5,186,000. In addition,
nuclear medicine and ultrasound revenues decreased in 1994 compared to 1993, as
a result of the Company's continued de-emphasis of mobile nuclear and ultrasound
contracts and the expiration of one in-house ultrasound contract in 1994. The
decrease in nuclear medicine and ultrasound revenues was $735,000 in 1994 from
1993 revenues of $4,737,000. Non-MRI diagnostic imaging services revenues as a
percentage of total medical services revenues was 21% and 25% for the years
ended 1994 and 1993, respectively. The Company on December 31, 1994 sold two
ultrasound contracts as a part of its respiratory therapy contract sale.
Revenues from these contracts in 1994 was approximately $850,000.
Respiratory therapy services revenues in 1994 decreased $1,398,000 compared
to 1993 due to the termination of six contracts at various periods during 1993.
The Company on December 31, 1994 sold eight respiratory therapy department
contracts and its respiratory registry which had aggregate revenues in 1994 of
approximately $5,300,000.
COST OF OPERATIONS
The Company's cost of operations, consisting of payroll, maintenance and
supplies, depreciation and amortization, equipment rental, other operating
expenses (such as vehicle fuel, building rents, regional office
16
<PAGE> 20
costs, insurance, property taxes, bad debt expense, fees and training expenses),
and write-down of equipment decreased $2,926,000 in 1994 compared to 1993.
Medical services payroll costs decreased by $1,158,000 in 1994 compared to
1993 and remained constant as a percent of medical services revenues (27% in
1994, 29% in 1993). The medical services payroll cost decline was due to the
continued decrease in labor intensive (Respiratory Therapy, mobile CT,
Ultrasound, Nuclear Medicine) service revenues due to contract expirations and
termination of marginally profitable and unprofitable contracts.
Depreciation and amortization increased $1,789,000 in 1994 compared to
1993. The increase in depreciation was primarily due to the impact of the Lease
Restructuring. Effective January 1, 1994, equipment leases previously accounted
for as rentals are accounted for as capitalized leases due to the Lease
Restructuring. Secondarily, depreciation increased due to the full year's impact
of depreciation on capital expenditures related to upgrades performed on certain
MRI units in the last half of 1993.
The Company's maintenance and supplies costs were 20% and 19% of medical
service revenues in 1994 and 1993, respectively. Maintenance and supplies costs
increased $377,000 in 1994 compared to 1993. The increase in 1994 was primarily
attributable to equipment aging and additional equipment utilization. In
addition, cost reductions were achieved in both 1994 and 1993 due to reduced
medical supplies costs associated with fewer respiratory therapy contracts and
fixed site MRI units and improved pricing on MRI cryogen supply contracts.
Equipment rental as a percentage of medical services revenue was 4% in 1994
and 13% in 1993. The decrease in equipment rental of $3,487,000 in 1994 compared
to 1993 was primarily attributable to the Lease Restructuring in which equipment
previously accounted for as rentals, effective as of January 1, 1994, is being
accounted for as capitalized leases and to less reliance on interim equipment
rentals.
Other costs of operations as a percentage of medical services revenue was
13% in both 1994 and 1993. In the fourth quarter of 1993, the Company wrote-down
the carrying value of certain equipment to estimated net realizable value which
reflects its future estimated income producing capacity. The write-down of
$443,000 resulted from the decline in market acceptance of two of the Company's
less technologically advanced MRI units. Efforts to re-market these units have
been unsuccessful.
SELLING AND ADMINISTRATIVE COSTS
The Company's selling and administrative costs decreased $849,000 in 1994
compared to 1993. The decrease in 1994 was primarily attributable to a reduction
in the costs associated with the fourth quarter of 1993 write-down of intangible
assets associated with the Company's CuraCare acquisition, reduced travel
related expenses and building rent.
INTEREST EXPENSE
The Company's interest expense increased by $671,000 in 1994 compared to
1993 due to the Lease Restructuring in which equipment previously accounted for
as rentals is treated as capitalized leases effective January 1, 1994.
GAIN ON SALE OF ASSETS
The gain on sale of assets of $3,294,000 in 1994 was primarily due to a
gain of $3,199,000 on the sale of certain respiratory therapy contracts. The
sale resulted in the Company receiving cash of approximately $4,000,000 and the
buyer assuming approximately $300,000 in liabilities. Gain (Loss) on sale of
equipment fluctuates depending on the timing of asset dispositions. The Company
continued selling non-essential assets during 1994.
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INTEREST AND OTHER INCOME
Interest and other income decreased $644,000 in 1994 compared to 1993
because during 1993 the Company's insurance carrier paid a business interruption
insurance claim of $575,000 for lost MRI service revenues in the United Kingdom.
INCOME TAX PROVISION
The 1994 and 1993 amounts relate to miscellaneous payments and refunds of
federal and state income taxes and adjustments of amounts paid and accrued in
prior years.
NET LOSS
The 1994 net loss of $5,175,000 was primarily attributable to a continued
decline in medical services revenues without a corresponding reduction in
operating costs, partially offset by the gain on the sale of respiratory therapy
contracts.
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% Notes, net of income tax and
deferred financing costs of $10,000, for $64,000 in cash.
The 1993 net loss of $15,644,000 was primarily attributable to the
significant reduction in medical services revenues, the write-down of intangible
CuraCare assets and interest on the Subordinated Notes.
BALANCE SHEET DATA
Liquidity and Capital Resources
The Company had cash and cash equivalents of $452,000 at December 31, 1995
compared to $1,225,000 at December 31, 1994. The Company's cash position
decreased in 1995 because the Company's cash flow was insufficient to meet its
debt and capital lease obligations.
On May 17, 1995, the Company repurchased for cash and securities
approximately 96% of its outstanding Subordinated Notes. The Notes Repurchase,
together with the 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.
In 1992, the Company determined that it would not generate sufficient
revenues or achieve sufficient expense reductions to meet in full its scheduled
debt and lease obligations. Accordingly, the Company suspended interest payments
under the Subordinated Notes beginning with the October 15, 1992 semi-annual
interest payment and suspended lease payments on a significant portion of its
equipment leases from December 1, 1992. As a result, the Company was in default
under substantially all of its debt and lease obligations and the holders had
the right to accelerate such obligations. The Company stated that any such
acceleration would cause it to seek a liquidation in bankruptcy.
The Company engaged in restructuring negotiations with its creditors
following the actions referred to in the immediately preceding paragraph. As a
result of these negotiations, the Company restructured certain of its
outstanding obligations as described below.
1. Secured Credit Facility. The Company's revolving credit facility was
repaid in full and terminated on February 28, 1995 with a portion of the
proceeds of the sale of eight respiratory therapy contracts. The New Revolver
was entered into in May 1995 in connection with the Notes Repurchase.
2. Equipment Leases. On December 30, 1994, the Company entered into the
Lease Restructuring. Under the Lease Restructuring, the leases covering
substantially all of the Company's medical equipment were modified to extend the
lease terms and to reduce scheduled lease payments. During 1994, the Company
made monthly aggregate payments based on the estimated restructured lease
payments. In addition, certain accrued and unpaid lease and service payments
were converted into the GE Notes in the principal amounts of
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approximately $2,000,000 and $500,000, respectively. As amended, the GE Notes
bear interest at an annual rate of 5% and 10.5%, respectively, payable in
arrears, and will mature in February 2002 and on January 1, 2000, respectively.
After November 1995, the principal balances of the GE Notes amortize in 75 equal
monthly installments until maturity. The GE Notes are secured by a lien on the
accounts receivable of CuraCare and AS-C and a lien on two CT units and one
Ultrasound unit.
On December 29, 1995 and March 1, 1996, the Company further restructured
certain of its medical equipment leases and 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 on the GE Notes
in the beginning of 1996. This further restructuring results in payment
reductions of approximately $1,200,000 for the Company in 1996.
In connection with the issuance of GE Notes, the Company issued the GE
Warrants to purchase an aggregate of 225,000 Common Shares for $0.01 per share.
Effective March 5, 1996, 97,853 of the GE Warrants were exercised to purchase
97,853 Common Shares.
3. Subordinated Notes. On May 12, 1995, in lieu of a previously negotiated
restructuring that would have resulted in the exchange of approximately 96% of
the Subordinated Notes for new Common Shares that would have represented
approximately 89.4% of the Company's common equity, the Company agreed to
repurchase such Subordinated Notes (including accrued and unpaid interest) for a
combination of cash and equity securities equal to approximately 25% of the
Company's fully diluted shares. On May 17, 1995, the Company completed the Notes
Repurchase. After giving effect to certain subsequent adjustments, these holders
received $3,892,681 in cash, plus a total of 1,193,000 Common Shares (equal to
approximately 20% of ASHS's then fully diluted Common Shares), and Warrants for
an additional 314,000 Common Shares (equal to approximately 5% of the then fully
diluted Common Shares). The Warrants are immediately exercisable at $0.75 per
share.
The Restructuring results in annual interest savings related to the
Subordinated Notes of approximately $2,890,000. After the Restructuring there
remain outstanding approximately $773,000 principal amount of Subordinated Notes
that mature in October 1996 with required annual interest payments of $125,000.
The Company paid accrued and unpaid interest through April 15, 1995 of
approximately $460,000 to holders of Subordinated Notes that were not purchased
on May 17, 1995. The subsequent semi-annual interest payment due October 15,
1995 was paid timely by the Company.
The Notes Repurchase was completed with the proceeds of the Term Loan, New
Revolver and the Gamma Knife Loan. The Term Loan is a 48-month level amortizing
loan of $2,500,000 at an annual interest rate of 15%. The Term Loan is secured
by various unencumbered equipment and inventory and certain accounts receivable
of AS-C CuraCare and is guaranteed by Dr. Bates and ASHS. The proceeds of the
Term Loan and New Revolver were used to repurchase the Subordinated Notes,
refinance certain equipment and provide working capital. As of January 31, 1996,
the lender under the New Revolver was replaced by an affiliate under
substantially identical terms. The New Revolver is a two year, $4,000,000
interest only revolving credit facility at Bank of America prime lending rate
plus 5%. The New Revolver is secured by AS-C's and CuraCare's accounts
receivable, certain equipment, inventory and general intangibles, is guaranteed
by Dr. Bates and ASHS, and had a balance of $3,446,000 as of February 29, 1996.
The Company had additional borrowing capacity under the New Revolver, based on
its eligible accounts receivable valuation, of $554,000 at February 29, 1996.
The Gamma Knife Loan is an 18-month level amortizing loan of $1,500,000 at an
annual interest rate of 10.5%. The proceeds were utilized to refinance the
Company's Gamma Knife and provide additional working capital. The payments on
this loan were restructured in September 1995 from $90,431 per month to $40,203
per month, effective September 17, 1995, and to extend the loan term until
September 17, 1998.
At the Company's annual shareholder meeting held on October 6, 1995, the
Company's shareholders approved the issuance of an option for additional Common
Shares to Dr. Bates 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. As a result of this issuance, Dr. Bates held approximately 46% of
the Company's then fully diluted
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outstanding shares and the Selling Securityholders received additional Common
Shares and Warrants to maintain their respective fully diluted ownership of the
Common Shares.
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 cash
equipment capital lease payments and operating lease payments during the 12
months ending December 31, 1996 are $8,313,000 and $834,000, respectively, with
related maintenance commitments of approximately $1,847,000. Scheduled interest
and principal payments under the Company's other debt obligations during such
period are approximately $4,824,000. In order to generate sufficient cash to
satisfy these obligations as they become due, the Company's management will do
the following: (i) continue to implement its program of expense reductions; (ii)
identify and sell non-essential assets; (iii) negotiate favorable concessions
from major creditors; (iv) enhance revenues by increasing customer contracts and
equipment utilization; and (v) offer to exchange equity in the Company for
interest bearing debt. There can be no assurance that these measures will
generate sufficient cash to 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.
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BUSINESS
GENERAL DEVELOPMENT
The Company provides shared diagnostic imaging services and radiotherapy
services to approximately 220 hospitals, medical centers and medical offices
located in 22 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. Radiotherapy services are
performed by the Company through its subsidiary, GK Financing, LLC, a California
limited liability company ("GKF"), which provides Gamma Knives to two major
university medical centers.
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. 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 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, Inc., 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 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 the states of California and New York.
On October 17, 1995, ASHS, through its wholly owned subsidiary, ASRS and
Elekta AB, through its wholly owned United States 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."
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 a
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 220 health care providers including hospitals, clinics and
physicians' offices located in 22 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.
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Third party reimbursement comprises approximately 11% of the Company's
medical services revenues. Non-MRI diagnostic imaging services revenues as a
percentage of total medical services revenues were 19%, 21%, and 25% in 1995,
1994 and 1993, respectively. Following the sale of a substantial portion of its
respiratory therapy 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.
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 MRIs 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 33 MRI units operating at December
31, 1995, 25 of such units are 1.5 Tesla units, four are 1.0 Tesla units, and
four are 0.5 Tesla units. All 33 of the MRI units are mobile or transportable.
The Company had 143 MRI customers at December 31, 1995 compared to 104 customers
as of December 31, 1994. MRI revenues constitute 73%, 59% and 52% of total
medical services revenues in years 1995, 1994 and 1993, 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 operates 16 CT units, 15 of which
are housed in specially designed mobile vans serving one or more hospitals and
one of which is a fixed-site unit. CT utilizes multiple X-Ray beams and
detectors to derive information which is then synthesized by 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 lumbo-sacral spine, 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 13% of medical services revenues in 1995, 1994 and 1993,
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
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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 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 8% of medical services revenues
in 1995 and 10% and 12% in 1994 and 1993, respectively.
GAMMA KNIFE
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. The Gamma Knife treats certain vascular malformations and intracranial
tumors without surgery.
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. During 1993, the Company
advanced $1,090,000 to the equipment manufacturer. Included in this amount was
$800,000 advanced by a third party lessor and guaranteed by the Company's
Chairman and Chief Executive Officer. The Company was unable to fund the next
required advance payment 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. Settlement of these agreements entailed the payment of
$130,000 in interest and costs to the manufacturer and the university medical
center. 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. Of the
$1,090,000 in advances previously paid to the manufacturer, $800,000 was
refunded to the third party lessor and $290,000 (less certain settlement costs)
was refunded to the Company and the Company simultaneously advanced $290,000 to
the Chairman and Chief Executive Officer who executed a promissory note (the
"Promissory Note"). Concurrently, the 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 entitled ASHS to purchase the Gamma Knife from its
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 on
February 3, 1996. Upon exercise of the option, GKF 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 Holdings U.S.,
Inc., through its wholly owned subsidiary, GKV, entered into an agreement on
October 17, 1995, to form GKF. Pursuant to the operating agreement, as amended,
the Company contributed its Gamma Knife 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-
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for-service basis. The results of operations of GKF will be 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,
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. Revenues for all contracts and
contract amendments is recognized as earned based upon services provided for
each monthly period.
The Company employed at the end of 1995 nine sales and marketing and four
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 1994 or 1995.
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.
Competition in the MRI service industry has increased since 1992 due to
deterioration of market conditions in that industry. Recent deterioration is
based partly upon a temporary increase in purchases of
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MRI units by physician partnerships in the late 1980s and early 1990s, which has
largely been halted by legislation that limits self-referrals. The increased
competition among MRI equipment manufacturers has resulted in greater
availability to end users of new imaging equipment from manufacturers at more
competitive pricing 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 out-patient services, and consequently many health
care providers have an incentive to use contracted shared services on an
out-patient basis. 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, or induce the
purchase, lease, order, or arrangement or the recommendation for the purchase,
lease on order of items or services, in each case 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 Budget Reconciliation Act of 1993, often referred to
as "Stark II" bans physician 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
25
<PAGE> 29
Referral Act of 1993. The Company cannot determine what impact this legislation
(which applies to all payors) will have upon 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 has passed all such reviews. The Company's other services
are not generally subject to inspection or review by regulatory bodies.
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.
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.
EMPLOYEES
At December 31, 1995, the Company employed approximately 194 employees on a
full-time basis and approximately 135 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.
26
<PAGE> 30
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
$8,122 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. The Company's Tennessee
office was closed in March 1995.
For the year ended December 31, 1995, the Company's aggregate net rental
expenses for all properties and equipment was approximately $3,458,000.
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.
27
<PAGE> 31
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON SHARES
The Common Shares are currently traded on the AMEX and The PSE. The
announcement by the Company of the terms of the Prior Restructuring in early
April 1994 was followed by a significant decline in the market price of the
Common Shares. 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 $1.25 at March 27, 1996. The Company has been
advised that its net capital deficiency is inconsistent with the criteria
applied by The PSE for continued listing on such exchange. The AMEX and The PSE
are currently reviewing the Company's financial condition following the
restructuring 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.
<TABLE>
<CAPTION>
PRICES FOR
COMMON SHARES
--------------
QUARTER ENDING HIGH LOW
-------------- ---- ---
<S> <C> <C>
March 31, 1994...................................... 3 1/2 2 3/4
June 30, 1994....................................... 13/16 1/2
September 30, 1994.................................. 11/16 3/16
December 31, 1994................................... 5/8 3/16
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
</TABLE>
The Company estimates that there were approximately 1700 beneficial holders
of its Common Shares as of December 31, 1995.
The Company did not pay cash dividends in 1995 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.
28
<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Set forth below is certain information as of March 5, 1996 regarding each
of the directors of the Company.
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 59
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 also is a director of Franchise Finance Corporation of
America. Mr. Barnes is 64 years old.
MATTHEW HILLS became a director of the Company effective February 16, 1996
and has been the Chief Planning Officer for 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. Mr. Hills graduated from Brandeis University in 1981 and from
Harvard Business School in 1987 and is 36 years old. Mr. Hills was nominated to
serve on the Board of Directors by the Selling Securityholders.
JOHN F. RUFFLE was elected a Director of the Company on May 18, 1995. He
retired in 1993 as Vice-Chairman of the Board of J.P. Morgan & Co. Incorporated
and from the Board of Directors of Morgan Guaranty Trust Co. New York. He also
is a Director of Bethlehem Steel Corporation; a Director of J.P.M. Advisor
Funds; a Director of Trident 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.
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 52 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 is a director of Orthologic Corporation. Dr. White is 58
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 the Chief of its Department of Neurosurgery. Dr. Wilson is 66
years old.
29
<PAGE> 33
EXECUTIVE OFFICERS
The following table provides certain information, as of March 5, 1996,
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------- --- --------------------------------------------------
<S> <C> <C>
Ernest A. Bates, M.D. 59 Chairman of the Board of Directors, Chief
Executive Officer and Acting President and Chief
Operating Officer
James A. Gordin 45 Acting Chief Financing Officer
Craig K. Tagawa 42 Senior Vice President
Richard Magary 55 Senior Vice President -- Administration, Assistant
Secretary
Gregory Pape 39 Senior Vice President -- Sales and Marketing
David Neally 43 Senior Vice President -- Operations
</TABLE>
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 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. 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.
JAMES A. GORDIN has served as Vice President and Acting Chief Financial
Officer of the Company since November 1, 1995. From October 1987 through October
1995, he was Vice President-Finance of the Company. From June 1985 through
September 1987, Mr. Gordin was Vice President and Chief Financial Officer of
CuraCare, Inc., then a wholly-owned subsidiary of National Medical Enterprises,
Inc. (now Tenet Healthcare Corporation), an owner and operator of hospitals and
other healthcare businesses. Mr. Gordin joined CuraCare, Inc. in September 1983,
as Controller. He is a graduate of California State University Stanislaus, and
is a Certified Public Accountant.
CRAIG K. TAGAWA has 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 GKF. 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.
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 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.
30
<PAGE> 34
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.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid by the Company for the
fiscal years ending December 31, 1993, December 31, 1994 and December 31, 1995
and paid in those years for services rendered in all capacities during 1993,
1994 and 1995, respectively, to the Chief Executive Officer and each executive
officer other than the Chief Executive Officer who served as an executive
officer at December 31, 1995 and earned cash compensation of $100,000 or more
during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS(6)
ANNUAL COMPENSATION -------------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) OPTIONS
- ---------------------------- ---- --------- ------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Ernest A. Bates(3).......... 1995 $ 223,253 -- -- 1,495,000
Chairman of the Board, 1994 $ 225,218 -- -- --
Chief Executive Officer 1993 $ 235,010 -- -- --
Craig K. Tagawa(4).......... 1995 $ 129,328 $26,003 -- 90,000
Senior Vice President 1994 $ 119,426 -- -- --
1993 $ 122,237 -- -- --
David Neally................ 1995 $ 104,654 $48,076 -- 45,000
Senior Vice President 1994 $ 91,000 $17,322 -- --
Operations 1993 $ 73,692 $ 5,137 -- 8,250
Gregory Pape................ 1995 $ 265,645 -- -- 45,000
Senior Vice President 1994 $ 238,186 -- -- --
Sales and Marketing 1993 $ 196,177 -- -- 20,000
Richard Magary(3)........... 1995 $ 99,780 $ 9,927 -- 45,000
Senior Vice President 1994 $ 99,822 -- -- --
Administration 1993 $ 104,701 -- -- --
</TABLE>
- ---------------
(1) Each amount under this column includes amounts accrued in 1993, 1994 and
1995 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's 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) The lower salary in 1994 compared with 1993 reflects a 5% salary reduction,
effective February 6, 1994.
(4) 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.
31
<PAGE> 35
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth stock options granted in 1995 to each of the
Company's executive officers named in the Summary Compensation Table. The table
also sets forth the hypothetical gains that would exist for the options at the
end of their ten-year terms, assuming compounded rates of stock appreciation of
5% and 10%. The actual future value of the options will depend on the market
value of the Company's Common Shares.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
PERCENT OF TOTAL EXERCISE OR ASSUMED ANNUAL RATES
OPTIONS BASE PRICE OF STOCK PRICE APPRECIATION FOR
GRANTED TO MARKET OPTION TERM(1)
OPTIONS EMPLOYEES PRICE ON EXPIRATION ----------------------------------
NAME GRANTED IN FISCAL YEAR 1995 GRANT DATE DATE 0% 5% 10%
- ----------------- --------- ------------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ernest A. Bates,
M.D............ 1,495,000 86.4% $ 0.01/shares 8/15/05 $2,414,425 $3,946,800 $6,279,000
$1.625
Craig K.
Tagawa......... 90,000 5.2% $ 1.625/share 8/15/05 -- $92,250 $232,650
(2)
David Neally..... 45,000 2.6% $ 1.625/share 8/15/05 -- $46,125 $116,325
(2)
Gregory Pape..... 45,000 2.6% $ 1.625/share 8/15/05 -- $46,125 $116,325
(2)
Richard Magary... 45,000 2.6% $ 1.625/share 8/15/05 -- $46,125 $116,325
(2)
</TABLE>
(1) These amounts, based on assumed annually compounded appreciation rates of
0%, 5% and 10% as prescribed by Securities and Exchange Commission rules,
are not intended to forecast possible future appreciation, if any, of the
Company's stock price. The Company did not use an alternative formula for a
grant date valuation of the options as it is not aware of any formula which
will determine with reasonable accuracy a present value based on future
unknown or volatile factors.
(2) All such options were granted pursuant to the Company's 1995 Stock Option
Plan and have an exercise price equal to the market price of a share of the
Company's Common Stock on the AMEX on the respective grant date.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
The "Long-Term Incentive Plan Awards" ("LTIP Awards") table has been
omitted because no LTIP Awards made during 1995 to the Company's executive
officers named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth the number of shares acquired on exercise of
stock options and the aggregate gains realized upon exercise of such options
during 1995, by the Company's executive officers named in the Summary
Compensation Table. The following table also sets forth the number of shares
underlying exercisable and unexercisable options held by such executive officers
on December 31, 1995.
32
<PAGE> 36
1984 AND 1995 STOCK OPTION PLANS
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END($)
ACQUIRED ON VALUE ----------------------------- ------------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------ ------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ernest A. Bates,
M.D. ................ -- -- 1,495,000 -- $1,947,238(2) --
Craig E. Tagawa........ -- -- 125,000 -- (1) --
David Neally........... -- -- 50,050 4,950 (1) (1)
Gregory Pape........... -- -- 53,000 12,000 (1) (1)
Richard Magary......... -- -- 60,000 -- (1) --
</TABLE>
- ---------------
(1) The table does not include the aggregate gains that would have been realized
had those options been exercised on December 31, 1995, because the option
exercise varies for each option exercised the market price per Common Share
on such date.
(2) This percent is calculated by multiplying the number of Common Shares
underlying the options at December 31, 1995 by the market price per Common
Share on such date less the option exercise price.
STOCK OPTION PLANS
On August 15, 1995, the Board of Directors approved the Company's 1995
Stock Option Plan (the "1995 Plan") providing for non-qualified stock options
and "incentive stock options," subject to approval by the Company's
shareholders. At the 1995 Annual Meeting held on October 6, 1995, the
shareholders approved the 1995 Plan. Under the 1995 Plan, 330,000 Common Shares
have been reserved for awards to officers and other key employees, non-employee
directors, and advisors subject to adjustment in the event of a stock split,
stock dividend, recapitalization, reorganization, merger or other similar event
or change in capitalization. Approximately six employees, one advisor, and five
non-employee directors currently participate in the 1995 Plan. Any person who
beneficially owns more than 15% of the outstanding Common Shares will not be
eligible to participate in the 1995 Plan.
The 1995 Plan is administered by the Stock Option Committee of the Board of
Directors (the "Committee") which determines when options become exercisable,
provided that no option shall be exercisable later than ten years after its date
of grant. Options may be exercised during the lifetime of the optionee only by
such optionee and are not transferable other than by optionee's will or by the
laws of descent or distribution or pursuant to beneficiary designation
procedures specified in the 1995 Plan.
Upon shareholder approval, the 1995 Plan became effective as of August 15,
1995, and will terminate ten years thereafter, unless terminated earlier by the
Board of Directors. The Board of Directors may amend the 1995 Plan at any time
except that, without the approval of the shareholders of the Company, no
amendment may, among other things, (i) increase the number of Common Shares
available under the 1995 Plan, (ii) reduce the minimum purchase price of a
Common Share subject to an option or (iii) extend the term of the 1995 Plan.
Non-qualified stock options. On August 15, 1995, the Committee granted
243,500 non-qualified options to certain officers of the Company and other
eligible persons, subject to approval of the 1995 Plan by the Company's
shareholders. See "Security Ownership of Certain Beneficial Owners and
Management." Each such option had an initial exercise price of $1.625 per Common
Share, which was the closing price of the Common Shares on the AMEX on the date
of grant, and vested immediately. The exercise price of all non-qualified stock
options must be no less than 25% of the fair market value of the Common Shares
on the date of the grant. Non-qualified options to purchase 4,000 Common Shares
are also granted automatically to non-employee directors (up to an aggregate of
12,000 options granted to each non-employee director under any plan of the
Company) on the date of each annual meeting of shareholders of the Company and,
on the date a
33
<PAGE> 37
person first becomes a non-employee director, such non-employee director will be
granted a number of options pro-rated for the period of time until the next
annual meeting of shareholders. Such options will be fully exercisable one year
after their date of grant with special provisions for death and termination for
disability and will expire ten years after the date of grant.
At its meeting on August 15, 1995, the Committee amended the terms of
substantially all options outstanding under the Company's 1984 Stock Option Plan
(covering an aggregate of approximately 165,000 Common Shares) to reduce the
initial exercise price to $1.625 per Common Share, which was the closing price
of Common Shares on the AMEX on such date.
In the event of certain change of control events or the approval by
shareholders of a reorganization, merger or consolidation (unless the Company's
shareholders receive 60% or more of the stock of the surviving company) or the
approval by shareholders of a liquidation, dissolution or sale of all or
substantially all of the Company's assets, all awards will become fully vested
and be "cashed-out" by the Company except, in the case of a merger or similar
transaction in which the shareholders receive publicly traded common stock, all
outstanding options will become exercisable in full, and each option will
represent a right to acquire the appropriate number of shares of common stock
received in the merger or similar transaction. Special provisions regarding
exercise exist in the event of death or termination for disability.
Incentive Stock Options. No incentive stock option will be exercisable
more than ten years after its date of grant, unless the recipient of the
incentive stock option owns greater than ten percent of the voting power of all
shares of capital stock of the Company (a "ten percent holder"), in which case
the option must be exercised within five years after its date of grant. The
option exercise price of an incentive stock option will not be less than the
fair market value of the Common Shares on the date of grant of such option,
unless the recipient of the incentive stock option is a ten percent holder, in
which case the option exercise price will be 110% of fair market value. Special
provisions regarding exercise exist in the event of death or termination for
disability.
1995 STOCK OPTION PLAN TABLE
The following table sets forth (i) the number of Common Shares underlying
options that were granted to the Chairman and Chief Executive Officer and each
executive officer named in the Summary Compensation Table under the 1995 Plan,
all executive officers as a group and to all persons (other than non-employee
directors and executive officers) eligible to receive awards under the 1995 Plan
and the value of such Common Shares at August 15, 1995, and (ii) the number of
Common Shares underlying options granted to non-employee directors at the 1995
Annual Meeting on October 6, 1995.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES DOLLAR
UNDERLYING VALUE(S)(5)
NAME AND POSITION OPTIONS ($)
------------------------------------------------ ------------- -----------
<S> <C> <C>
Ernest A. Bates, M.D............................ 0 $ 0
Chairman and Chief Executive Officer
Craig K. Tagawa................................. 90,000(1) $ 146,250
Senior Vice President
David Neally.................................... 45,000(1) 73,125
Senior Vice President -- Operations
Gregory Pape.................................... 45,000(1) 73,125
Senior Vice President -- Sales and Marketing
Richard Magary.................................. 45,000(1) 73,125
Senior Vice President -- Administration
Executive Group................................. 225,000(2) 365,625
Non-Executive Officer Group..................... 18,500(3) 30,063
Non-Executive Director Group (3 persons)........ 12,000(4) $ 19,500
</TABLE>
34
<PAGE> 38
- ---------------
(1) Represents options granted on August 15, 1995, subject to shareholder
approval of the 1995 Plan, at an exercise price equal to $1.625, which was
the closing price of the Common Shares on the AMEX on such date.
(2) Comprises four individuals who were granted options on August 15, 1995,
subject to shareholder approval of the 1995 Plan, at an exercise price equal
to $1.625, which was the closing price of the Common Shares on the AMEX on
such date.
(3) Comprises three individuals who were granted options on August 15, 1995,
subject to shareholder approval of the 1995 Plan, at an exercise price equal
to $1.625, which was the closing price of the Common Shares on the AMEX on
such date.
(4) The option exercise price per share would be the closing sale price of the
Common Shares on the AMEX on the date of grant. Each option will be fully
exercisable one year after the date of grant and will expire ten years after
the date of grant.
(5) Dollar value of options granted is calculated as the number of Common Shares
underlying the options multiplied by the closing sale price of the Common
Shares on the AMEX on the date of the grant. The taxable benefit received by
each grantee upon exercise of the options will consist of any increase in
the price of the Common Shares on the AMEX on the date of exercise from the
closing price on the date of grant.
In addition, the Board of Directors and the Company's shareholders have
approved the terms of a NonQualified Stock Option Agreement between the Company
and Dr. Bates. Pursuant to this Agreement, Dr. Bates may purchase, at any time
prior to August 15, 2005, up to 1,495,000 Common Shares at an initial exercise
price of $0.01 per share.
COMPENSATION OF DIRECTORS
During 1994 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 retainer fees during 1994 and 1995 to assist the Company with its
cash flow. The 1994 retainer fees were paid in February 1995. The Board has
approved the election by any director to receive a portion of his 1995 and 1996
retainer fees in Common Shares in an amount approximately equalling such fees
otherwise payable in cash. Non-employee directors also were entitled to receive
$1,000 for attendance in person at each regular and special meeting of the Board
of Directors. 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 four Board meetings
held during 1995, one was a regular meeting which directors attended in person,
and three 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. The director fee amounts for 1996 will not change
from the 1994 and 1995 schedules.
EMPLOYMENT AGREEMENTS
The Company had no employment agreements with its directors or executive
officers in 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION; 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
35
<PAGE> 39
settlement agreements included that 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 has financed the total purchase
price, less $290,000 advanced by the Company, pursuant to an interest bearing
installment note and security agreement. The Company has 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 have 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 Promissory 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 1995. 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.
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, 1994 indicate that during 1994 and 1995 executive officers of
the Company did not file timely reports as follows: James R. Brock, David Neally
and Gregory Pape each did not file an Initial Statement of Beneficial Ownership
of Securities within the required period following such person's appointment as
an Executive Officer of the Company. Each such person filed the required report
in June 1995. John F. Ruffle did not file an Initial Statement of Beneficial
Ownership of Securities within the required period following his appointment as
a Director of the Company. He filed the required report on June 20, 1995. James
R. Brock did not file a Statement of Changes of Beneficial Ownership of
Securities for a sale of Common Shares occurring in September 1995 within the
required period following the transaction. He filed the required report on
October 16, 1995. Augustus A. White, M.D. did not file a Statement of Changes of
Beneficial Ownership of Securities for a purchase of Common Shares occurring in
October 1995 within the required period following the transaction. The report
was filed on March 28, 1996. Ernest A. Bates, M.D. did not filed a Statement of
Changes in Beneficial Ownership for the 184,000 Common Shares issued to him in
May 1995. He filed the required report with a Statement of Beneficial Changes of
Ownership for the option for 1,495,000 Common Shares issued to him in October
1995 on November 10, 1995.
36
<PAGE> 40
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Shares as of March 5, 1996 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
COMMON SHARES OWNED BENEFICIALLY
--------------------------------------
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(5) CLASS(10)
------------------------------------------------------ ----------------------- ----------
<S> <C> <C>
Total Number of Shares................................ 6,662,101(6) 100.0%
Ernest A. Bates, M.D.(1).............................. 2,666,000(7) 45.7%
SunAmerica Inc.(2).................................... 128,066(2) 2.9%
SunAmerica Life Insurance Company(2).................. 277,473(2) 6.3%
Anchor National Life Insurance Company(2)............. 406,819 9.2%
Lion Advisors, L.P.................................... 384,195(8) 8.7%
1301 Avenue of the Americas
New York, NY 10019
AIF II, L.P........................................... 170,752(8) 3.9%
c/o Apollo Advisors, L.P.
1999 Avenue of the Stars
Los Angeles, CA 90071
General Electric Company.............................. 225,000(9) 5.0%
c/o GE Medical Systems
20825 Swenson Drive
Waukesha, WI 53186
Willie R. Barnes(1)................................... 3,000(7) *
Matthew Hills(1)(3)................................... -- --
John F. Ruffle(1)(4).................................. 21,200 *
Stanley S. Trotman, Jr.(1)(3)......................... -- --
Augustus A. White, III, M.D.(1)....................... 15,000(7) *
Charles B. Wilson, M.D.(1)............................ 4,800(7) *
Craig K. Tagawa(1).................................... 127,600(7) 2.9%
Senior Vice President
David Neally(1)....................................... 52,800(7) 1.2%
Senior Vice President -- Operations
Richard Magary(1)..................................... 73,300(7) 1.7%
Senior Vice President -- Administration
Gregory Pape(1)....................................... 57,500(7) 1.3%
Senior Vice President -- Sales and Marketing
All Directors & Executive Officers as a Group (12 3,054,300(7)
persons)............................................ 49.4%
</TABLE>
- ---------------
* 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.
(2) Based on information contained in the Schedule 13D dated May 17, 1995, as
amended November 13, 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 557,923 Common Shares, including
immediately exercisable Warrants to acquire 116,436 Common Shares. As of
March 5, 1996, such entities were issued an additional
37
<PAGE> 41
201,607 Common Shares and 52,828 Warrants. 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) Mr. Ruffle was elected to the Board of Directors effective May 18, 1995.
(5) 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.
(6) 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,
1996.
(7) Includes shares underlying options that are currently exercisable or which
will become exercisable within 60 days following March 5, 1996: Dr. Bates,
1,495,000; Mr. Barnes, 2,000 shares; Dr. White, 12,000 shares; Dr. Wilson,
4,800 shares; Mr. Tagawa, 125,000 shares; Mr. Neally, 51,700 shares; Mr.
Magary, 60,000 shares; Mr. Pape, 57,000 shares; and Directors and Executive
Officers as a group, 1,838,500 shares.
(8) 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 381,135 Common
Shares, including immediately exercisable Warrants to acquire 79,541 Common
Shares. As of October 6, 1995, such entities were issued an additional
137,724 Common Shares and Warrants to acquire 36,088 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.
(9) Represents immediately exercisable Warrants to acquire 127,147 Common
Shares and 97,853 Common Shares acquired upon exercise of Warrants
effective March 5, 1996.
(10) 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, 1996, 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.
38
<PAGE> 42
SELLING SECURITYHOLDERS
On May 17, 1995, in connection with the Notes Repurchase, the Company
issued 819,000 Common Shares and immediately exercisable Warrants (the
"Noteholder Warrants") to purchase 216,000 Common Shares to certain holders of
the Subordinated Notes. An additional 374,000 Common Shares and 98,000
Noteholder Warrants were issued to such holders as of October 6, 1995. The
Noteholder Warrants will expire on May 17, 2002 and have an initial exercise
price of $0.75 per Common Share.
In connection with the Lease Restructuring, on December 30, 1994, the
Company issued to GE Medical immediately exercisable Warrants to acquire 97,853
Common Shares at an initial exercise price of $0.01 per share until March 31,
1996. Effective March 5, 1996, such Warrants were exercised to purchase 97,853
Common Shares. On May 17, 1995, the Company issued additional Warrants to GE
Medical to acquire 127,147 Common Shares at an initial exercise price of $0.01
per share until September 30, 1996.
This Prospectus relates to the offer and sale by the Selling
Securityholders of the 1,290,853 Common Shares, the Noteholder Warrants and GE
Warrants and the 441,147 Common Shares underlying such unexercised Warrants. The
Prospectus is part of a registration statement filed under the Act pursuant to
the terms of the Registration Rights Agreement. In the Registration Rights
Agreement, the Company has agreed to keep the registration statement effective
for up to 36 months or until all of the Securities have been sold, if earlier.
The Registration Rights Agreement provides that certain rights of the parties
thereto are assignable in connection with a sale of Common Shares and/or
Warrants.
The Securities offered by this Prospectus are offered for the account of
the Selling Securityholders. The following table sets forth, as of March 5,
1996, the names of the Selling Securityholders offering the Securities, the
number and percentage of Common Shares owned by such Selling Securityholders,
and the number of Warrants owned by such Selling Securityholders.
<TABLE>
<CAPTION>
COMMON PERCENTAGE OF GE NOTEHOLDER PERCENTAGE
SHARES COMMON SHARES WARRANTS WARRANTS OF
OWNED OWNED OWNED OWNED WARRANTS
------- ------------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
SunAmerica Life Insurance Company.......... 219,659 5% -0- 57,814 13%
Anchor National Life Insurance Company..... 322,053 7% -0- 84,766 19%
SunAmerica Inc............................. 101,382 2% -0- 26,684 6%
Lion Advisors, L.P.(1)..................... 304,144 7% -0- 80,051 18%
AIF II, L.P.(2)............................ 135,174 3% -0- 35,578 8%
General Electric Company acting through GE
Medical Systems.......................... 97,853 2% 127,147 -0- 29%
Grace Brothers, Ltd........................ 105,385 2% -0- 27,737 6%
Upchurch Living Trust U/A/D 12/14/90....... 5,203 * -0- 1,370 *
</TABLE>
- ---------------
* less than one percent
(1) Represents shares held for the benefit of an investment account under
management over which Lion holds investment and voting power.
(2) The general partner of AIF II is Advisors, whose general partner is Apollo
Capital Management, Inc. Messrs. Leon Black and John Hannan, the directors
of Apollo Capital Management, Inc. disclaim beneficial ownership of all such
shares. Advisors is an affiliate of Lion.
Because the Selling Securityholders may sell all or a part of their Common
Shares and Warrants, no estimate can be given as to the number of Common Shares
or Warrants to be held by any Selling Securityholders upon termination of the
offering. The Common Shares owned by the Selling Securityholders represent
approximately 30% of the 4,342,254 issued and outstanding Common Shares as of
March 5, 1996, and the Common Shares underlying the Warrants represent
approximately 9% of such issued and outstanding Common Shares plus those Common
Shares underlying the Warrants.
39
<PAGE> 43
DESCRIPTION OF SECURITIES
COMMON SHARES
The authorized capital stock of the Company consists of 10,000,000 Common
Shares, no par value. At March 5, 1996, 4,342,254 shares were issued and
outstanding and were held of record by 400 persons. The Company estimates there
were approximately 1700 beneficial holders of its Common Shares as of March 5,
1996. The Common Shares of the Company are listed on the American Stock Exchange
and The Pacific Stock Exchange under the symbol "AMS." The Company's Board of
Directors has authorized completion of listing applications for the Common
Shares covered by this Prospectus and the Common Shares underlying the options
issued to Dr. Bates with the AMEX and The PSE with respect to the Securities.
See "Market Price of and Dividends on the Registrant's Common Shares."
Each Common Share has the same rights, privileges and preferences as every
other share and will share equally in the Company's net assets upon liquidation
or dissolution. The Common Shares have no conversion or redemption rights or
sinking fund provisions. All Common Shares outstanding are, and all Common
Shares issued upon exercise of the Warrants will be, validly issued, fully paid
and non-assessable. The Common Shares have no preemptive rights. Shareholders
are entitled to one vote for each share owned on all matters submitted to the
shareholders and have the right, subject to certain conditions, to elect to
cumulate their votes in the election of directors. Shareholders are entitled to
receive such dividends as may be declared by the Board of Directors out of funds
legally available therefor. The Company did not pay dividends in 1994 or 1995
and does not intend to pay dividends in the near future. See "Market Price on
and Dividends on the Registrant's Common Shares" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a description
of financing agreements that prohibit or restrict the declaration of dividends
on the Common Shares.
The transfer agent and registrar for the Common Shares is American Stock
Transfer & Trust Company, New York, New York.
WARRANTS
GE Warrants. Initially, an aggregate of 225,000 GE Warrants were issued at
an initial exercise price of $0.01 per share, of which 97,853 Warrants permitted
the purchase of up to 97,853 Common Shares to and including March 31, 1996.
After the exercise of the 97,853 GE Warrants effective March 5, 1996, the GE
Warrants entitle the registered holder thereof to acquire up to 127,147 Common
Shares at an exercise price of $0.01 per share to and including September 30,
1996. The GE Warrants were issued in certificated form. The GE Warrants may be
exercised by surrendering the warrant certificate evidencing such Warrants, a
written election to exercise the GE Warrant specifying the number of Common
Shares to be purchased and the payment of the exercise price. Payment of the
exercise price may be made by check payable to the Company. Upon surrender of
the warrant certificate and payment of the purchase price, the Company will
deliver or cause to be delivered stock certificates representing the number of
whole Common Shares to which such holder is entitled. If less than all of the GE
Warrants evidenced by a warrant certificate are to be exercised, a new warrant
certificate will be issued for the remaining number of GE Warrants. No
fractional Common Shares will be issued upon exercise of the GE Warrants. A
fractional share otherwise issuable will be rounded up to the nearest whole
share.
The number of Common Shares purchasable upon the exercise of the GE
Warrants and the exercise price are subject to adjustment in certain events (and
subject to certain limitations set forth in the warrant certificate) including:
(i) the payment by the Company of a dividend or the making of a distribution on
its Common Shares in additional Common Shares or in securities convertible into
Common Shares other than convertible indebtedness or convertible preferred
stock, (ii) subdivisions and combinations of the Common Shares, and (iii)
reclassifications of the Common Shares.
Until exercise of the GE Warrants and the purchase of Common Shares for
which such GE Warrants are exercisable, the holder of the GE Warrants has no
right to vote such Common Shares on matters submitted to the shareholders of the
Company and has no right to receive dividends. Until such time, the holder of
the GE
40
<PAGE> 44
Warrants is not entitled, in respect of such GE Warrants, to share in the net
assets of the Company in the event of liquidation, dissolution or the winding up
of the Company's affairs.
Noteholder Warrants. The Noteholder Warrants entitle the registered
holders thereof to acquire up to 314,000 Common Shares at an initial exercise
price of $0.75 per share up to and including May 17, 2002. The Noteholder
Warrants were issued in certificated form. The Noteholder Warrants may be
exercised by surrendering the warrant certificate evidencing such warrants, a
written election to exercise the Noteholder Warrant specifying the number of
Common Shares to be purchased and the payment of the exercise price. Payment of
the exercise price may be made at the holder's option (a) in cash, (b) by
certified or official bank check payable to order of the Company, or (c) by the
Company withholding that number of shares of Common Shares with a value as of
the date of exercise equal to the aggregate exercise price. Upon surrender of
the warrant certificate and the purchase price, the Company will deliver or
cause to be delivered stock certificates representing the number of Common
Shares designated to be exercised, less the number of Common Shares withheld by
the Company as payment therefor, if applicable. If less than all of the
Noteholder Warrants evidenced by a warrant certificate are to be exercised, a
new warrant certificate will be issued for the remaining number of Noteholder
Warrants. No fractional Common Shares will be issued upon exercise of the
Noteholder Warrants. The Company shall pay to the holder of the Noteholder
Warrant an amount in cash equal to the same fraction of the current value per
share on the date of the exercise.
The number of Common Shares purchasable upon the exercise of the Noteholder
Warrants and the exercise price are subject to adjustment in certain events (and
subject to certain limitations set forth in the warrant certificate) including:
(i) the payment of a dividend on its Common Shares in additional shares of
Common Shares, (ii) the payment of a dividend or other distribution on its
Common Shares or other issuance to all holders of its Common Shares of rights or
warrants entitling them to subscribe for Common Shares at a price per share less
than the current market price on the record date of such dividend, distribution
or issuance, (iii) subdivisions, combinations and reclassifications of the
Common Shares, (iv) subject to an election to receive such dividend or
distribution, the distribution to all holders of Common Shares of evidences of
indebtedness, shares of capital stock, cash or assets (including securities, but
excluding any dividend or distribution referred to in clauses (i) or (ii) above
for which an adjustment is made), and (v) the issuance or sale of shares of
Common Shares by the Company for consideration per share less than the current
market price.
No adjustment in the number of Common Shares purchasable and the exercise
price will be required unless such adjustment would require an increase or
decrease of at least 1% in the exercise price; provided, however, that any
adjustment that is not made will be carried forward and taken into account in
any subsequent adjustment.
In case of certain consolidations, mergers or capital reorganizations or
reclassifications of the Company, each holder of a Noteholder Warrant shall be
entitled to receive, in lieu of the Common Shares of the Company, the kind and
amount of securities, cash or other property to which such holder would have
been entitled upon such consummation if such holder had exercised the Noteholder
Warrant in full immediately prior thereto.
The holders of the Noteholder Warrants have no right to vote on matters
submitted to the shareholders of the Company. Except as set forth in the warrant
certificate with respect to the right to elect to receive certain distributions,
the holders of the Noteholder Warrants have no right to receive dividends. The
holders of the Noteholder Warrants are not entitled to share in the net assets
of the Company in the event of liquidation, dissolution or the winding up of the
Company's affairs.
PLAN OF DISTRIBUTION
The Selling Securityholders may sell the Securities: (i) in an underwritten
offering or offerings, (ii) through brokers and dealers, (iii) "at the market"
to or through a market maker or into an existing trading market, on an exchange
or otherwise, for such shares, (iv) in other ways not involving market makers or
established trading markets, including direct sales to purchasers and (v) to the
extent not prohibited by
41
<PAGE> 45
applicable securities law, in ways other than pursuant to the distribution plan
presented in the Prospectus. Pursuant to the terms of the Registration Rights
Agreement, the Company has agreed to maintain the effectiveness of the
registration statement for a period of 36 months or until all of the Securities
have been sold, if earlier.
The distribution of Securities may be effected from time to time in one or
more underwritten transactions at a fixed price or prices, which may be changed,
or at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Any such underwritten offering
may be on a "best efforts" or a "firm commitment" basis.
In connection with any such underwritten offering, underwriters or agents
may receive compensation from the Selling Securityholders for whom they may act
as agents in the form of discounts, concessions or commissions. Underwriters may
sell Securities to or through dealers, and such dealers may receive compensation
in the form of discounts, concessions or commissions from the underwriters
and/or commissions from the purchasers for whom they may act as agents.
At any time a particular offer of Securities is made, if required, a
Prospectus Supplement will be distributed that will set forth the names of the
Selling Securityholder(s) offering such Securities, the aggregate amount of such
Securities being offered and the terms of the offering, including the name or
names of any underwriters, dealers or agents, any discounts, commissions and
other items constituting compensation from the Selling Securityholders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
Such Prospectus Supplement and, if necessary, a post-effective amendment to the
Registration statement of which this Prospectus is a part will be filed with the
Commission to reflect the disclosure of additional information with respect to
the distribution of such Securities.
The Selling Securityholders and any underwriters, dealers or agents that
participate in the distribution of Securities may be deemed to be underwriters,
and any profit on the sale of Securities by the Selling Securityholders and any
discounts, commissions or concessions received by any such underwriters, dealers
or agents might be deemed to be underwriting discounts and commissions under the
Act.
Under an agreement that may be entered into by the Company, underwriters,
dealers, and agents who participate in the distribution of Securities may be
entitled to indemnification by the Company against certain liabilities,
including liabilities under the Act, or to contribution with respect to payments
which such underwriters, dealers or agents may be required to make in respect
thereof.
The sale of the Securities by the Selling Securityholders may also be
effected from time to time by Selling Securities directly to purchasers or to or
through certain broker-dealers. In connection with any such sale, any such
broker-dealer may act as agent for the Selling Securityholders or may purchase
from the Selling Securityholders all or a portion of the Securities as principal
and thereafter may resell any Securities so purchased. Sales by any such
broker-dealer, acting as agent or as principal, may be made pursuant to any of
the methods described below. Such sales may be made on the AMEX or The PSE or
other exchanges on which the Common Shares are then traded, in the
over-the-counter market, in negotiated transactions or otherwise at prices and
at terms then prevailing or at prices related to the then-current market prices
or at prices otherwise negotiated.
The Securities may also be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such shares as agent but may position
and resell all or a portion of the block as principal to facilitate the
transaction; (b) purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account pursuant to this Prospectus which is part
of the Registration Statement; (c) a special offering, an exchange distribution
or a secondary distribution in accordance with applicable stock exchange rules;
and (d) ordinary brokerage transactions and transactions in which any such
broker-dealer solicits purchasers. In effecting sales, broker-dealers engaged by
the Selling Securityholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation from the Selling
Securityholders in amounts to be negotiated immediately prior to the sale that
will not exceed those customary in the types of transaction
42
<PAGE> 46
involved. Broker-dealers may also receive compensation from purchasers of the
shares which is not expected to exceed that customary in the types of
transactions involved.
Unless prohibited by applicable law, the Selling Securityholders may assign
their right to sell the Securities.
No director, officer or agent of the Company is expected to be involved in
soliciting offers to purchase the Securities offered hereby, and no such person
will be compensated by the Company for the sale of any of such Securities.
Certain officers of the Company may assist such representatives of the Selling
Securityholders in such efforts but will not be compensated therefor.
The Company will pay all of the expenses incident to the offering and sale
of the Securities, other than commissions, discounts and fees of underwriters,
dealers or agents. The Company has agreed to indemnify the Selling
Securityholders against certain losses, claims, damages and liabilities,
including liabilities under the Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Securities
offered hereby will be passed upon for the Company by Sidley & Austin, Los
Angeles, California.
EXPERTS
The consolidated financial statements and schedule of American Shared
Hospital Services at December 31, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph with respect to the substantial doubt surrounding the Company's
ability to continue as a going concern mentioned in Note 1 to the consolidated
financial statements) appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
43
<PAGE> 47
AMERICAN SHARED HOSPITAL SERVICES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors........................................................ F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency).............. F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 48
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, 1995 and 1994, 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, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
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 substantial operating losses in
1995, 1994 and 1993 and has a significant working capital deficiency and a net
capital deficiency at December 31, 1995. 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
February 20, 1996, except for Note 16,
as to which the date is March 8, 1996
Walnut Creek, California
F-2
<PAGE> 49
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 452,000 $ 1,225,000
Restricted cash............................................... 493,000 2,883,000
Receivables, less allowance for uncollectible accounts of
$1,448,000 ($1,424,000 in 1994):
Trade accounts receivable.................................. 6,251,000 6,183,000
Other...................................................... 202,000 537,000
Note receivable from officer............................... 57,000 54,000
----------- -----------
6,510,000 6,774,000
Inventories................................................... 67,000 146,000
Prepaid expenses and other current assets..................... 1,124,000 758,000
----------- -----------
Total current assets............................................ 8,646,000 11,786,000
Note receivable from officer, less current portion.............. 191,000 248,000
Property and equipment:
Land, buildings and improvements.............................. 1,560,000 2,351,000
Medical, transportation and office equipment.................. 7,453,000 9,670,000
Capitalized leased medical and transportation equipment....... 24,673,000 38,271,000
----------- -----------
33,686,000 50,292,000
Accumulated depreciation and amortization..................... 14,015,000 18,165,000
----------- -----------
Net property and equipment...................................... 19,671,000 32,127,000
Other assets.................................................... 1,462,000 943,000
Intangible assets, less accumulated amortization of $1,136,000
($1,386,000 in 1994).......................................... 1,375,000 2,118,000
----------- -----------
Total assets.................................................... $ 31,345,000 $ 47,222,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (net capital deficiency)
Current liabilities:
Accounts payable........................................... $ 3,524,000 $ 4,450,000
Accrued interest........................................... 170,000 8,497,000
Employee compensation and benefits......................... 1,175,000 1,210,000
Other accrued liabilities.................................. 1,077,000 1,317,000
Current portion of long-term debt.......................... 2,796,000 3,079,000
Current portion of obligations under capital leases........ 5,924,000 8,135,000
Senior subordinated notes.................................. 773,000 18,467,000
----------- -----------
Total current liabilities....................................... 15,439,000 45,155,000
Long-term debt, less current portion............................ 9,278,000 2,539,000
Obligations under capital leases, less current portion.......... 16,847,000 21,705,000
Deferred income taxes........................................... 164,000 164,000
Minority interest............................................... 193,000 --
Stockholders' equity (net capital deficiency):
Common stock, without par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 4,244,000 in 1995 and
2,867,000 in 1994.......................................... 10,635,000 8,795,000
Common stock options issued to officer........................ 2,414,000 --
Additional paid-in capital.................................... 930,000 763,000
Accumulated deficit........................................... (24,555,000) (31,899,000)
----------- -----------
Total stockholders' equity (net capital deficiency)............. (10,576,000) (22,341,000)
----------- -----------
Total liabilities and stockholders' equity (net capital
deficiency)................................................... $ 31,345,000 $ 47,222,000
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 50
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Revenues:
Medical services................................ $ 34,077,000 $38,545,000 $ 39,485,000
Costs and expenses:
Costs of operations:
Medical services payroll..................... 6,984,000 10,284,000 11,442,000
Maintenance and supplies..................... 6,766,000 7,808,000 7,431,000
Depreciation and amortization................ 8,302,000 9,504,000 7,715,000
Write-down of equipment...................... 3,825,000 -- 443,000
Equipment rental............................. 2,808,000 1,580,000 5,067,000
Other........................................ 3,990,000 4,969,000 4,973,000
Selling and administrative...................... 8,432,000 5,971,000 6,820,000
Interest........................................ 5,310,000 7,423,000 6,752,000
Write-down of intangible assets................. 600,000 -- 5,308,000
------------ ------------ ------------
Total costs and expenses.......................... 47,017,000 47,539,000 55,951,000
------------ ------------ ------------
(12,940,000) (8,994,000) (16,466,000)
Gain on sale of assets and early termination of
capital leases.................................. 226,000 3,294,000 124,000
Equity in earnings (losses) of partnerships....... 54,000 85,000 (51,000)
Interest and other income......................... 204,000 98,000 742,000
------------ ------------ ------------
Loss before income taxes and extraordinary item... (12,456,000) (5,517,000) (15,651,000)
Income tax expense (benefit)...................... 3,000 20,000 (7,000)
------------ ------------ ------------
Loss before extraordinary item.................... (12,459,000) (5,537,000) (15,644,000)
Extraordinary item -- gain on early extinguishment
of debt, net of income tax provision of $0 in
1995 and $7,000 in 1994......................... 19,803,000 362,000 --
------------ ------------ ------------
Net income (loss)................................. $ 7,344,000 $(5,175,000) $(15,644,000)
============ ============ ============
Primary earnings per share:
Loss before extraordinary item.................. $ (2.96) $ (1.93) $ (5.46)
Extraordinary item.............................. $ 4.71 $ .13 $ -
------------ ------------ ------------
Net income (loss)................................. $ 1.75 $ (1.80) $ (5.46)
============ ============ ============
Fully diluted earnings per share:
Loss before extraordinary item.................. $ (2.96) $ (1.93) $ (5.46)
Extraordinary item.............................. $ 4.71 $ .13 $ -
------------ ------------ ------------
Net income (loss)................................. $ 1.75 $ (1.80) $ (5.46)
============ ============ ============
Common shares and equivalents used in computing
per share amounts:
Primary...................................... 4,201,000 2,867,000 2,863,000
============ ============ ============
Fully diluted................................ 4,204,000 2,867,000 2,863,000
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 51
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
COMMON
STOCK OPTIONS ADDITIONAL
COMMON COMMON ISSUED TO PAID-IN ACCUMULATED
SHARES STOCK OFFICER CAPITAL DEFICIT TOTAL
--------- ----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992...... 2,845,000 $ 8,754,000 $ -- $ 175,000 $(11,080,000) $ (2,151,000)
Issuance of common stock......... 22,000 41,000 -- -- -- 41,000
Net loss......................... -- -- -- -- (15,644,000) (15,644,000)
--------- ----------- ---------- -------- ------------ ------------
Balances at December 31, 1993...... 2,867,000 8,795,000 -- 175,000 (26,724,000) (17,754,000)
Issuance of warrants to purchase
97,853 shares of common
stock......................... -- -- -- 588,000 -- 588,000
Net loss......................... -- -- -- -- (5,175,000) (5,175,000)
--------- ----------- ---------- -------- ------------ ------------
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
bondholders................... 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)
========= =========== ========== ======== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 52
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................................... $ 7,344,000 $ (5,175,000) $(15,644,000)
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................................................. (23,000) (3,294,000) (124,000)
Gain on early termination of capital leases............................ (203,000) -- --
Depreciation and amortization.......................................... 8,818,000 10,206,000 8,600,000
Write-down of equipment................................................ 3,825,000 -- 443,000
Write-down of intangible assets........................................ 600,000 -- 5,308,000
Equity in (earnings) losses of partnerships............................ (54,000) (85,000) 51,000
Compensation expense related to stock grants........................... 2,679,000 -- --
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash............................... 2,390,000 (2,883,000) --
Decrease (increase) in receivables................................... 264,000 (573,000) 1,573,000
Decrease in inventories.............................................. 79,000 201,000 177,000
Decrease (increase) in prepaid expenses and other assets............. (366,000) (64,000) 212,000
(Decrease) increase in accounts payable and accrued liabilities...... (674,000) (335,000) 8,881,000
------------ ------------ ------------
Net cash provided by (used in) operating activities........................ 4,876,000 (2,364,000) 9,477,000
INVESTING ACTIVITIES
Proceeds from sale of respiratory therapy contracts........................ -- 4,002,000 --
Deposit on Gamma Knives.................................................... (1,000,000) -- --
Refund of deposit on Gamma Knife........................................... -- 1,090,000 --
Proceeds from sale and disposition of equipment............................ 157,000 900,000 1,005,000
Increase in minority interest.............................................. 193,000 -- --
Payment for purchase of property and equipment............................. (226,000) (393,000) (354,000)
Note receivable to related party........................................... -- (290,000) --
Distributions received from partnerships................................... 55,000 58,000 27,000
Other...................................................................... 200,000 -- (401,000)
------------ ------------ ------------
Net cash (used in) provided by investing activities........................ (621,000) 5,367,000 277,000
FINANCING ACTIVITIES
Principal payments on long-term debt and obligations under capital
leases................................................................... (9,612,000) (4,357,000) (10,264,000)
Issuance of restructuring notes............................................ -- 2,486,000 --
Proceeds from issuance of common stock..................................... -- -- 41,000
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........................ (3,893,000) (64,000) --
Other...................................................................... 177,000 -- --
------------ ------------ ------------
Net cash used in financing activities...................................... (5,028,000) (2,735,000) (10,223,000)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents....................... (773,000) 268,000 (469,000)
Cash and cash equivalents at beginning of year............................. 1,225,000 957,000 1,426,000
------------ ------------ ------------
Cash and cash equivalents at end of year................................... $ 452,000 $ 1,225,000 $ 957,000
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid.............................................................. $ 3,625,000 $ 2,730,000 $ 1,613,000
============ ============ ============
Income taxes paid.......................................................... $ 82,000 $ 25,000 $ 27,000
============ ============ ============
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Purchases of equipment with lease financing................................ $ 1,342,000 $ 2,358,000 $ 5,100,000
(Decrease) increase in medical and capitalized lease equipment due to lease
restructuring............................................................ (480,000) 1,710,000 --
(Decrease) increase in capitalized lease obligations due to lease
restructuring............................................................ (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............................................................... 8,853,000 -- --
Stock and warrants issued to bondholders as part of Senior Subordinated
Notes Repurchase......................................................... 1,836,000 588,000 --
Noncash portion of senior subordinated notes redemption.................... 13,801,000 257,000 --
</TABLE>
See accompanying notes.
F-6
<PAGE> 53
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BUSINESS AND BASIS OF PRESENTATION
Business
American Shared Hospital Services (the "Company") provides shared
diagnostic imaging services to hospitals located in approximately 22 states in
various geographic regions of the United States and to one hospital in the
United Kingdom. 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 a Gamma Knife to a major
university medical center and in February 1996, acquired a second Gamma Knife
located in another major university medical center.
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.
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 and in Brazil. GKF will be the
preferred provider for Elekta AB of financing arrangements such as
fee-for-service lease arrangements.
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.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
The Company accounts for its investment in partnerships using the equity
method.
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 have commenced
review procedures 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
$12,459,000, $5,537,000 and $15,644,000 in 1995, 1994 and 1993, respectively. At
December 31, 1995, the Company has a working capital deficiency of $6,793,000
and a net capital deficiency of $10,576,000. 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.
F-7
<PAGE> 54
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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;
enhance revenues by increasing customer contracts and equipment utilization; and
offer to exchange equity in the Company in place of interest bearing debt. 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.
2. ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of the Consolidated Financial Statements of the Company
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 highly 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, 1995 reflects cash that may only be
used for the operations of GK Financing, LLC. Restricted cash at December 31,
1994 represents cash pledged as collateral against borrowings under a now
extinguished loan agreement (see Note 7). This cash was used in 1995 to repay
the loan.
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's revenues from its
foreign operations comprised approximately 1% of total 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 7).
Accounting for Majority Owned Subsidiary
The Company accounts for GK Financing, LLC, as a consolidated entity due to
its majority ownership interest of 81%, which it acquired in exchange for its
contribution of assets with a net book value of $1,080,000 and fair value of
approximately $2,000,000 as of December 31, 1995. The increase between the net
book value and the fair value has been eliminated in consolidation. The minority
interest's 19% share of loss ($10,000 in 1995) is netted against "Equity in
Earnings (Losses) of Partnership" in the Statement of Operations.
F-8
<PAGE> 55
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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, as of December 31, 1995. In 1994, property and equipment
was stated at cost, or estimated net recoverable value if less.
Depreciation is determined using the straight-line method over the
estimated useful lives of the assets which are generally as follows:
<TABLE>
<S> <C>
Building and improvements............................... 25-40 years
Medical and transportation equipment.................... 2-10 years
</TABLE>
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
range from 17 to 82 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.
Per Share Amounts
Per share information has been computed based on the weighted average
number of common shares and dilutive common share equivalents outstanding.
Stock Options
The Company currently follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. The Company intends to follow the provisions of APB 25 for future
years.
F-9
<PAGE> 56
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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.
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 to be 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.
4. WRITE-DOWN OF INTANGIBLE ASSETS AND PROPERTY AND EQUIPMENT
During 1993, the Company's management continued to evaluate the
realizability of intangible assets recorded in connection with its acquisition
of CuraCare in 1987, which subsidiary conducts substantially all of the
Company's non-MRI operations, including CT scanning, respiratory therapy,
ultrasound and nuclear medicine. Revenues and operating profits from CuraCare,
continued to decline despite several strategic plans implemented by management.
In the fourth quarter of 1993, management continued to evaluate its non-MRI
operations and determined that significant revenue growth was unlikely and
reduced its operations management and sales force accordingly. These conditions
helped to contribute to higher than expected losses in 1992 and 1993 and an
accumulated deficit at December 31, 1993, before the write-off of goodwill. The
Company determined, based on its methodology of evaluating the recoverability of
goodwill, that the forecasted results of operations for non-MRI operations
(which were based on historic financial trends and current market conditions)
did not support the future amortization of the recorded goodwill balance of
$5,308,000 at December 31, 1993, for these modalities.
The methodology employed to assess the recoverability of the Company's
goodwill was to forecast results of operations, including interest expense,
forward five years. The Company then evaluated the recoverability of
F-10
<PAGE> 57
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
goodwill on the basis of these forecasts of future operations. In formulating
the financial forecasts, the Company considered the near-term, as well as the
longer-term business outlook. These near-term forecasts took into consideration
recent historical financial results and current market conditions, as well as
foreseeable opportunities for future growth. For the longer-term, the Company
also considered the possible emergence of new trends and their potential impact
upon each of the modalities. Based on such forecasts, the cumulative results of
operations for non-MRI operations were insufficient to recover any portion of
the respective goodwill balances. Accordingly, the Company wrote off its
remaining goodwill balances for these operations of $5,308,000 in the fourth
quarter of 1993.
Also during 1993, the Company experienced a decline in the market
acceptance of certain of its less advanced MRI and CT scanning equipment.
Accordingly, the Company reduced the carrying value of this equipment to the
Company's estimate of the future revenue generating capacities of the equipment.
This write-down resulted in a charge to operations of $443,000 in 1993.
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994
---------- --------
<S> <C> <C>
Deposit on Gamma Knives...................................... $1,000,000 $ --
Capitalized regulatory licensing fees, less accumulated
amortization of $38,000 and $0 in 1995 and 1994,
respectively............................................... 70,000 212,000
Prepaid commissions.......................................... 114,000 --
Debt issuance costs, less accumulated amortization of $0 and
$950,000 in 1995 and 1994, respectively.................... -- 129,000
Purchased software, less accumulated amortization of $558,000
and $471,000 in 1995 and 1994, respectively................ 42,000 110,000
Investment in partnerships................................... 59,000 60,000
Capitalized stock issuance costs............................. -- 327,000
Other, less allowance of $0 in 1995 and $165,000 in 1994..... 177,000 105,000
---------- --------
$1,462,000 $943,000
========== ========
</TABLE>
6. SENIOR SUBORDINATED NOTES
In 1988, the Company completed a concurrent public common stock and debt
offering consisting of $30,000,000 of senior subordinated exchangeable reset
notes (the "Senior Subordinated Notes") due in 1996. The Senior Subordinated
Notes bore interest at an initial rate of 14% per annum payable semiannually
commencing April 15, 1989. On October 15, 1989, the interest rate on the Senior
Subordinated Notes not previously exchanged, as described below, was reset to
16.5%.
Prior to the October 15, 1989 reset date, $2,140,000 of Senior Subordinated
Notes were exchanged into 14.75% senior subordinated notes due 1996. Except for
the interest rate, optional and mandatory redemption provisions of the Senior
Subordinated Notes and the fact that the 14.75% Senior Subordinated Notes were
not exchangeable, the terms of the 14.75% Senior Subordinated Notes are
substantially the same as the terms of the Senior Subordinated Notes. The
Company may redeem all or part of the Senior Subordinated Notes for 100% of the
principal amount, together with accrued and unpaid interest to the redemption
date.
F-11
<PAGE> 58
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
During 1995 and 1994, the Company repurchased certain of its Senior
Subordinated Notes resulting in extraordinary gains of $19,803,000 and $362,000
as follows:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
Principal amount of Notes repurchased....................... $17,694,000 $321,000
Accrued interest related to the Notes....................... 8,853,000 115,000
Unamortized debt issuance costs............................. (525,000) (3,000)
Stock and warrants issued to bond holders................... (1,836,000) --
Estimated tax liability..................................... -- (7,000)
Closing costs............................................... (490,000) --
----------- --------
23,696,000 426,000
Payment for repurchase...................................... (3,893,000) (64,000)
----------- --------
Extraordinary gain.......................................... $19,803,000 $362,000
=========== ========
</TABLE>
On May 12, 1995, the Company entered into 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 received approximately
$3,900,000 in cash, plus 819,000 shares of common stock (equal to approximately
20% of the Company's then fully diluted outstanding shares), and warrants for an
additional 216,000 shares of common stock (equal to approximately 5% of the then
fully diluted common shares). The warrants are immediately exercisable at $0.75
per share. The remaining Senior Subordinated Noteholders hold $773,000 of the
notes as of December 31, 1995 and as a result of the restructuring, were paid
their past due accrued interest. In addition, the debt covenants were amended
which thereby cured the events of default on the Senior Subordinated Notes.
Concurrent with the closing of the Senior Subordinated Notes repurchase in
1995, the Company obtained three new credit facilities totaling $8,000,000 of
which $7,000,000 was originally drawn (see Note 7). Proceeds from the new credit
facilities were used as follows:
<TABLE>
<S> <C>
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
==========
</TABLE>
Closing costs include approximately $80,000 of loan origination fees which
have been capitalized.
F-12
<PAGE> 59
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Notes Issued in Conjunction with Lease Restructuring
Promissory note payable to primary provider of medical
equipment bearing interest at 4%, payable in 86 monthly
installments due in February 2002, secured by the
Company's accounts receivable and certain medical
equipment............................................... $ 1,976,000 $ 2,000,000
Promissory note payable to primary provider of medical
equipment bearing interest at 10.5%, payable in 60
monthly installments due in February 2000............... 404,000 481,000
Borrowings for Repurchase of Senior Subordinated Notes
Borrowings under $4 million Revolving Line of Credit
bearing interest at prime rate plus 5% (13.5% at
December 31, 1995) for repurchase of senior subordinated
notes maturing in May 1997.............................. 3,883,000 --
Borrowings under Term Loan for repurchase of senior
subordinated notes bearing interest at 15%, payable in
48 monthly installments due in June 1999................ 2,305,000 --
Gamma Knife loan payable to primary provider of medical
equipment bearing interest at 10.5%, payable in 40
monthly installments due in September 1998.............. 1,135,000 --
Borrowings under former loan agreement for repurchase of
senior subordinated notes (repaid in 1995).............. -- 2,883,000
Other Notes and Borrowings
Promissory note payable to related party, bearing interest
at prime rate plus 2% (10.5% at December 31, 1995)
$1,000,000 due in October 1996 and $300,000 due in
October 1997 (Note 15).................................. 1,300,000 --
Promissory note payable to related party in the amount of
$1,320,000, bearing interest at prime rate plus 2%
(10.5% at December 31, 1995) maturing in October 1997
for capital expenditures relating to GK Financing, LLC.
No amounts outstanding (Note 15)........................ -- --
Installment notes payable in monthly installments through
January 1999, bearing interest at 10.5% to 22%, secured
by certain medical equipment............................ 836,000 242,000
Promissory note payable bearing interest at 11.25%,
payable in 25 monthly installments due in July 1997..... 235,000 --
Other..................................................... -- 12,000
---------- ----------
12,074,000 5,618,000
Less current portion...................................... (2,796,000) (3,079,000)
---------- ----------
$ 9,278,000 $ 2,539,000
========== ==========
</TABLE>
Annual contracted maturities under the initial terms of long-term debt for
the five years after December 31, 1995 are as follows: $2,796,000 in 1996,
$6,043,000 in 1997, $1,695,000 in 1998, $868,000 in 1999, $350,000 in 2000 and
$322,000 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
F-13
<PAGE> 60
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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 11).
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.
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.
Borrowings for Repurchase of Senior Subordinated Notes
The repurchase of Senior Subordinated Notes 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 has available up to $4,000,000 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%, 13.5% at December 31, 1995)
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, 1995,
the Company had drawn $3,883,000 under the New Revolver and, based on eligible
accounts receivable, had an additional $117,000 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.
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 in September 1995
from $90,431 per month to $40,203 per month
F-14
<PAGE> 61
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
effective September 17, 1995, and to extend the loan term to September 17, 1988,
to match renegotiated terms of the underlying customer contracts.
In March 1991, the Company entered into a loan agreement (as amended),
which initially expired in March 1993 and was extended for periodic terms
through February 1995, under which it could generally borrow up to 66% of
eligible accounts receivable, reduced to 50% if total borrowings equal or exceed
$4,000,000, up to a maximum of $5,000,000. Proceeds from loans under the
agreement could only be used to repurchase the Company's senior subordinated
notes. Borrowings under the agreement bore interest at the prime rate plus 4%,
payable monthly.
On December 31, 1994, with the proceeds from the sale of certain of the
Company's respiratory therapy contracts (see Note 13), the Company deposited
$2,883,000 cash as collateral with the lender. On February 28, 1995, the cash
collateral was applied against the outstanding borrowings and this loan
agreement was terminated.
8. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Other -- net.................................................. $ (164,000) $ (164,000)
--------- ---------
Total deferred tax liabilities.................................. (164,000) (164,000)
Deferred tax assets:
Net operating loss carryforwards.............................. 6,400,000 9,960,000
Fixed assets.................................................. 2,900,000 1,800,000
Other -- net.................................................. 600,000 800,000
--------- ---------
Net deferred tax assets......................................... 9,900,000 12,560,000
Valuation allowance for deferred tax assets..................... (9,900,000) (12,560,000)
--------- ---------
Total deferred tax assets....................................... -- --
--------- ---------
Net deferred tax liabilities.................................... $ (164,000) $ (164,000)
========= =========
</TABLE>
The decrease in the valuation allowance during 1995 was $2,660,000.
The components of the provision (benefit) for income taxes consist of the
following:
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
------------------ --------
1995 1994 1993
------ ------- --------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ -- $ --
State.................................................. 3,000 27,000 (7,000)
Deferred (reduction):
Federal................................................ -- -- --
State.................................................. -- -- --
------ ------- -------
$3,000 $27,000 $ (7,000)
====== ======= =======
</TABLE>
F-15
<PAGE> 62
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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.
The provision (benefit) for income taxes as included in the consolidated
financial statements is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Income (loss) before extraordinary gain................ $3,000 $20,000 $(7,000)
Extraordinary gain..................................... -- 7,000 --
------ ------- -------
$3,000 $27,000 $(7,000)
====== ======= =======
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. federal statutory tax rate (35% in 1995, 1994 and 1993) to
income (loss) before taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected tax, including tax on
extraordinary gain........................ $ 2,570,000 $(1,802,000) $(5,478,000)
Change in valuation allowance............... (2,660,000) 1,735,000
State income taxes (benefit), net of federal
benefit................................... 3,000 27,000 (7,000)
Amortization and write-down of intangible
assets.................................... 77,000 67,000 2,067,000
Limitation of net operating loss
carryback................................. -- -- 3,386,000
Other....................................... 13,000 -- 25,000
---------- ----------- -----------
$ 3,000 $ 27,000 $ (7,000)
========== =========== ===========
</TABLE>
At December 31, 1995, the Company has a net operating loss carryforward for
federal income tax return purposes of approximately $18,000,000 which expires
between 1999 and 2009. This carryforward is subject, in part, to separate return
limitations. The Company's ability to utilize the net operating loss
carryforward may be limited in the event of a 50% or more ownership change
within any three-year period. Approximately $19,800,000 of the previous net
operating loss carryforward was used to offset the gain on early extinguishment
of the senior subordinated notes in May 1995.
9. 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.
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 common shares, to reduce the initial exercise price to
$1.625 per common share, which was the closing price of common shares on such
date.
1995 Stock Option Plan
On August 15, 1995, the Board of Directors approved the Company's 1995
Stock Option Plan (the "1995 Plan") providing for non-qualified stock options
and "incentive stock options," subject to approval by the Company's
shareholders. At the 1995 Annual Meeting held on October 6, 1995, the
shareholders approved the
F-16
<PAGE> 63
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1995 Plan. Under the 1995 Plan, 330,000 Common Shares have been reserved for
awards to officers and other key employees, non-employee directors and advisors.
Approximately six employees, one advisor, and five non-employee directors
currently participate in the 1995 Plan. The 1995 Plan is administered by the
Stock Option Committee of the Board of Directors.
On August 15, 1995, the Stock Option Committee of the Board of Directors
approved the grant of 243,500 options under the Plan, subject to shareholder
approval. Additional grants of 12,000 were made to the Board of Directors under
the terms of the Plan. All such options are immediately exercisable at an
exercise price of $1.625 per share, which was the closing price of common shares
on such date.
Changes in options outstanding under the 1984 and 1995 Stock Option Plans
from December 31, 1992 to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ---------------
<S> <C> <C>
Options outstanding at December 31, 1992................. 385,000 $ 1.38 - $7.50
Granted................................................ 93,000 $3.375 - $3.875
Exercised.............................................. (22,000) $1.875
Forfeited.............................................. (148,000) $ 1.875 - $6.50
-------
Options outstanding at December 31, 1993................. 308,000 $ 1.38 - $7.50
Granted................................................ -- --
Exercised.............................................. -- --
Forfeited.............................................. (52,000) $ 1.38 - $5.00
-------
Options outstanding at December 31, 1994................. 256,000 $ 1.38 - $7.50
Granted................................................ 256,000 $1.625
Exercised.............................................. -- --
Forfeited.............................................. (92,000) $ 3.00 - $7.125
-------
Options outstanding at December 31, 1995................. 420,000
Outstanding options exercisable at:
December 31, 1993...................................... 213,000 $ 1.38 - $7.50
=======
December 31, 1994...................................... 190,000 $ 1.38 - $7.50
=======
December 31, 1995...................................... 375,000 $ 1.38 - $1.625
=======
Options available for grant at December 31, 1995......... 74,000
=======
</TABLE>
Warrants Issued in Conjunction with Lease Restructuring
On December 30, 1994, as partial 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 common shares at a price
of $0.01 per share until March 31, 1996.
On May 17, 1995, simultaneous with the Notes repurchase (Note 6), the
Company issued additional warrants to its primary provider of leased equipment
granting the right to purchase 127,147 common shares at a price of $0.01 per
share until September 30, 1996.
F-17
<PAGE> 64
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Options and Warrants Issued in Conjunction with Repurchase of Senior
Subordinated Notes
On May 17, 1995, simultaneous with the Notes repurchase (Note 6), 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 "ex-Noteholders"). 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 Company's then fully diluted common shares.
The warrants are immediately exercisable at $0.75 per share expiring on May 17,
2002.
Shares and Options Issued to Officer
Simultaneous with the Notes repurchase (Note 6), the Company's Chairman and
Chief Executive Officer, was issued an additional 184,000 shares of the
Company's common stock, which the Company has recorded as compensation expense
of $265,000. The common shares were granted to the officer in partial
consideration for a personal guarantee of $6.5 million of new credit facilities
and for continued employment with the Company.
In addition, on October 6, 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 which the Company has recorded as compensation
expense of $2,414,000. These options were granted to the officer as the final
consideration for personal guarantees of the new credit facilities and for
continued employment with the Company.
Capital shares reserved for future issuances total 2,529,000 shares at
December 31, 1995.
10. RETIREMENT PLAN
The Company has a defined contribution retirement plan which covers
substantially all employees. 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 1995, 1994 or 1993.
11. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases MRI units and other equipment under capital leases
having an aggregate net book value of $17,093,000 at December 31, 1995.
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 operating
leases that were considered operating leases prior to that date) and again at
the end of 1995 the Company and its major provider of medical equipment entered
into a restructuring of the obligations of the Company under lease agreements.
Substantially all equipment financed by the Company under capital leases
was 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
F-18
<PAGE> 65
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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.
Future minimum lease payments, together with the present value of the net
minimum lease payments under capital leases at December 31, 1995, are summarized
as follows:
<TABLE>
<S> <C>
1996.................................................... $ 8,313,000
1997.................................................... 7,871,000
1998.................................................... 6,792,000
1999.................................................... 4,211,000
2000.................................................... 985,000
-----------
Net minimum lease payments.............................. 28,172,000
Less amounts representing interest...................... (5,401,000)
-----------
Present value of net minimum lease payments............. 22,771,000
Less current portion.................................... (5,924,000)
-----------
$16,847,000
===========
</TABLE>
In addition to the above 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.
The estimated minimum payments under these agreements are approximately
$1,847,000, $1,820,000, $633,000, $253,000 and $59,000 from the years 1996 to
2000, respectively.
During 1995, 1994 and 1993, the Company financed approximately $1,342,000,
$2,358,000 and $5,100,000, respectively, of equipment purchases with capital
lease obligations. During 1995, 1994 and 1993, the Company incurred interest
costs of $5,310,000, $7,423,000 and $6,828,000, respectively, including
capitalized interest related to construction in progress of $-0- in 1995, $-0-
in 1994 and $76,000 in 1993.
12. OPERATING LEASES
The Company leases MRI and CT scanning equipment, automobiles,
transportation equipment, office space, and facilities to service and operate
scanners under operating leases expiring at various dates through 2000.
F-19
<PAGE> 66
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Future minimum payments under noncancelable operating leases having initial
terms of more than one year consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
1996..................................................... $ 834,000
1997..................................................... 783,000
1998..................................................... 764,000
1999..................................................... 605,000
2000..................................................... 207,000
----------
$3,193,000
==========
</TABLE>
Payments for repair and maintenance agreements are included in the future
minimum operating lease payments shown above.
Rent expense was $3,458,000, $2,326,000 and $6,083,000 for the years ended
December 31, 1995, 1994 and 1993, respectively, and includes the above operating
leases as well as month-to-month rental and certain capital lease executory
costs.
13. 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. Revenues 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.
14. NOTE RECEIVABLE FROM OFFICER
At December 31, 1994, the Company had advanced $290,000 to the Chief
Executive Officer who executed a promissory note payable to the Company. The
note bears interest at 6% and is payable in 60 monthly fully amortizing payments
beginning in January 1995. Interest income recognized in conjunction with the
note was $15,000 and $12,000 during 1995 and 1994, respectively.
15. COMMITMENTS AND CONTINGENCIES
On April 6, 1994, the Company's agreements to purchase a Gamma Knife from
an equipment manufacturer and lease the Gamma Knife to a hospital were
terminated. As a settlement, the Company paid approximately $130,000 in interest
and costs to the parties and the Company's Chief Executive Officer agreed to
enter into purchase and lease obligations substantially identical to those
previously entered into by the Company. The Manufacturer has agreed to sell the
Gamma Knife to, and the hospital agreed to lease the Gamma Knife from, the
Company's Chief Executive Officer. Of the $1,090,000 in deposits previously paid
to the Manufacturer, $800,000 was returned to the third party lessor and
$290,000 previously paid by the Company was advanced by the Company to the Chief
Executive Officer who executed a promissory note payable (see Note 13).
Concurrently, the third party lessor agreed to fund the remaining $2,610,000
purchase price of the Gamma Knife on behalf of the Chief Executive Officer and
the Company received an option to purchase the Gamma Knife from the Chief
Executive Officer for an amount equal to the remaining debt obligation
associated with the Gamma Knife plus costs and operating losses, if any, on the
Gamma Knife (see Note 16).
F-20
<PAGE> 67
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
On October 17, 1995, the Company through its 81% owned subsidiary, GK
Financing, LLC, entered into a quotation agreement to purchase four Gamma Knife
units from the equipment manufacturer. Under the terms of the quotation
agreement, the Company is committed to purchase this equipment for $11,744,000,
effective when the equipment is placed in service at a customer location. At
December 31, 1995, the Company had a $1,000,000 deposit related to this purchase
commitment which was classified as part of other assets. The equipment
manufacturer is a 19% owner of GK Financing, LLC, and provided the promissory
note payable of $1,300,000, $1,000,000 of which was subsequently used to make
the deposit on the equipment. Additionally, GK Financing, LLC signed another
promissory note for $1,320,000 with the equipment manufacturer to provide funds
for future capital expenditures. As of December 31, 1995 there have been no
borrowings under this note.
16. SUBSEQUENT EVENTS
Assignment and Exercise of Option to Purchase Gamma Knife
On February 3, 1996, the Company assigned its option to purchase the Gamma
Knife from the Chief Executive Officer (see Note 15) to its subsidiary GK
Financing, LLC; which then exercised the option to purchase the Gamma Knife.
Exercise of Warrants
The primary provider of leased equipment exercised 97,853 warrants at a
price of $.01 per share on March 5, 1996 (see Note 9).
Lease and Note Payable Restructuring
On March 1, 1996, the Company received an offer from its primary provider
of medical equipment to restructure certain of its capital lease obligations, as
well as its promissory note payable in the amount of $1,976,000 at December 31,
1995. 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.
F-21
<PAGE> 68
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Risk Factors.......................... 3
The Company........................... 7
Financial Restructuring............... 8
Use of Proceeds....................... 11
Determination of Offering Price....... 11
Capitalization........................ 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 21
Properties............................ 27
<CAPTION>
PAGE
----
<S> <C>
Legal Proceedings..................... 27
Market Price of and Dividends on the
Common Shares....................... 28
Management............................ 29
Certain Relationships and
Related Transactions................ 33
Principal Shareholders................ 37
Selling Securityholders............... 39
Description of Securities............. 40
Plan of Distribution.................. 41
Legal Matters......................... 43
Experts............................... 43
Consolidated Financial Statements..... F-1
</TABLE>
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of all fees and
expenses in connection with the distribution of the securities being registered
pursuant to this Registration Statement, all of which fees and expenses will be
paid by the Registrant:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee..................... $ 931.70
American Stock Exchange fee............................................. $ 17,500.00*
Pacific Stock Exchange fee.............................................. $ 1,000.00*
Printing................................................................ $ 30,000.00*
Accountants' fees and expenses.......................................... $ 90,000.00*
Legal fees and expenses................................................. $ 35,000.00*
Miscellaneous........................................................... $ 2,000.00*
-------------
-
Total......................................................... $176,431.70*
==============
</TABLE>
- ---------------
* Estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 204(10) of the California General Corporation Law ("GCL") permits
the inclusion in the articles of incorporation of a California corporation of a
provision eliminating or limiting the personal liability of a director for
monetary damages in an action brought by or in the right of the corporation for
breach of a director's duties to the corporation and its shareholders. The
foregoing provision is subject to certain qualifications set forth in the GCL
including, without limitation, that such provision may not limit or eliminate
liability of directors for (i) intentional misconduct, (ii) transactions from
which a director derived an improper personal benefit, (iii) reckless disregard
of the director's duties, and (iv) an unexcused pattern of inattention. The
Company's Articles of Incorporation, as amended, contains an article eliminating
the liability of the directors for monetary damages to the fullest extent
permissible under California law.
Section 317 of the GCL permits the indemnification of officers, directors,
employees and agents of California corporations. Article Fifth, Section 2, of
the Company's Articles of Incorporation, as amended, provides that the
Registrant is authorized to provide indemnification to its agents in excess of
the indemnification otherwise permitted by Section 317 of the GCL.
Article IX, Section 7, of the Bylaws of the Company contains the following
indemnification provision:
Section 7. Indemnification of Corporate Agents; Purchase of Liability
Insurance. (a) The Corporation shall, to the maximum extent permitted by the
General Corporation Law of the state of California, and as the same may from
time to time be amended, indemnify each of its agents against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding to which such person was or is a party or is
threatened to be made a party arising by reason of the fact that such person is
or was an agent of the Corporation. For purposes of this Section 7, an "agent"
of the Corporation includes any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
was a director, officer, employee or agent of a foreign or domestic corporation
which was a predecessor corporation of the Corporation or of another enterprise
at the request of the such predecessor corporation; "proceeding" means any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, and includes an action or proceeding by or in
the right of the Corporation to procure a judgment in its favor; and "expenses"
includes attorneys' fees and any expenses of establishing a right to
indemnification under this subdivision (a).
II-1
<PAGE> 70
(b) The Corporation shall, if and to the extent the Board of Directors so
determines by resolution, purchase and maintain insurance in an amount and on
behalf of such agents of the Corporation as the Board may specify in such
resolution against any liability asserted against or incurred by the agent in
such capacity or arising out of the agent's status as such whether or not the
Corporation would have the capacity to indemnify the agent against such
liability under the provisions of this Section 7.
Each of the directors of the Corporation has entered into an
Indemnification Agreement with the Company pursuant to which the Company is,
subject to the limitations in the following sentence, obligated to indemnify the
directors to the fullest extent provided by law, notwithstanding such
indemnification not specifically being provided in the Company's Articles,
Bylaws or by statute. The Company is not obligated under the Indemnification
Agreement to indemnify directors for the following: acts or omission or
transactions from which a director may not be relieved from liability under
Section 204 of the California General Corporation Law, a proceeding or action
instituted by an appropriate bank regulatory agency, claims initiated by such
director except with respect to proceedings to enforce a right of
indemnification unless the Board has approved the initiation or bringing of such
suit, a proceeding instituted by a director to enforce the Indemnification
Agreement which is found by a court of competent jurisdiction to be not in good
faith or frivolous, insured claims or claims under Section 16(b) of the
Securities Exchange Act of 1934.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Lease Restructuring and the Notes Repurchase (as
defined in the Prospectus included as part of this Registration Statement), the
Company issued various securities under the exemption provided by Section 4(2)
of the Act and Rule 506 promulgated by the Commission thereunder. Each such
issuance is described in the table of sales of unregistered securities below:
<TABLE>
<CAPTION>
DATE OF ISSUANCE SECURITIES ISSUED RECIPIENT
---------------- ----------------- ---------
<S> <C> <C>
December 30, 1994.... Warrants to acquire 97,853 Common Shares GE Medical
May 17, 1995......... Warrants to acquire 127,147 Common Shares GE Medical
May 17, 1995......... 184,000 Common Shares Ernest A. Bates, M.D.
May 17, 1995......... 819,000 Common Shares and Warrants to acquire Certain holders of
216,000 Common Shares Subordinated Notes
October 6, 1995...... Option to acquire 1,495,000 Common Shares Ernest A. Bates, M.D.
October 6, 1995...... 374,000 Common Shares and Warrants to acquire Certain holders of
98,000 Common Shares Subordinated Notes
March 5, 1996........ 97,853 Common Shares (upon conversion of the GE Medical
97,853 Warrants issued on December 30, 1994)
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1* Articles of Incorporation of the Company, as amended. (See Exhibit 3.1 to the
Company's Registration Statement on Form S-2, Registration No. 33-23416)
3.2* By-laws of the Company, as amended. (See Exhibit 3.2 to this Registration
Statement on Form S-1, Registration No. 33-63721, filed on October 26, 1995)
4.1* Indenture between American Shared Hospital Services and First Interstate Bank
of California, as Trustee, dated October 15, 1988, relating to the Senior
Subordinated Exchangeable Reset Notes Due 1996. (See Exhibit 4.1 to the
Company's Registration Statement on Form S-2, Registration No. 33-23416)
</TABLE>
II-2
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
4.2* Indenture between American Shared Hospital Services and First Interstate Bank
of California, as Trustee, dated October 15, 1988, relating to the 14 3/4%
Senior Subordinated Notes Due 1996. (See Exhibit 4.2 to the Company's
Registration Statement on Form S-2, Registration No. 33-23416)
4.3* Supplemental Indenture No. 1, dated as of October 15, 1989, to the Indenture
between American Shared Hospital Services and First Interstate Bank of
California, as Trustee, dated October 15, 1988, relating to the Senior
Subordinated Exchangeable Reset Notes Due 1996. (See Exhibit 4.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 3,
1989)
4.4* Supplemental Indenture No. 2 dated as of May 17, 1995 to the Indenture between
American Shared Hospital Services and First Interstate Bank of California, as
Trustee, dated October 15, 1988, relating to the Senior Subordinated
Exchangeable Reset Notes Due 1996. (See Exhibit 4.4 to this Registration
Statement on Form S-1, Registration No. 33-63721, filed on October 26, 1995)
4.5* Supplemental Indenture No. 1 dated as of May 17, 1995, to the Indenture
between American Shared Hospital Services and First Interstate Bank of
California, as Trustee, dated October 15, 1988, relating to the 14 3/4% Senior
Subordinated Notes Due 1996. (See Exhibit 4.5 to this Registration Statement
on Form S-1, Registration No. 33-63721, filed on October 26, 1995)
4.6* Form of Common Stock Purchase Warrant held by Selling Noteholders of American
Shared Hospital Services. (See Exhibit 4.6 to this Registration Statement on
Form S-1, Registration No. 33-63721, filed on October 26, 1995)
4.7* Common Stock Purchase Warrant for shares of Common Stock of American Shared
Hospital Services held by General Electric Company, acting through GE Medical
Systems dated May 17, 1995. (See Exhibit 4.7 to this Registration Statement on
Form S-1, Registration No. 33-63721, filed on October 26, 1995)
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. (See Exhibit 4.8 to this Registration Statement on
Form S-1, Registration No. 33-63721, filed on October 26, 1995)
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. (See Exhibit 4.9 to this Registration Statement on Form S-1,
Registration No. 33-63721, filed on October 26, 1995)
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. (See Exhibit 4.10 to Amendment No. 1 to this
Registration Statement on Form S-1, Registration No. 33-63721, filed on March
29, 1996)
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. (See Exhibit 4.11 to this Registration Statement on Form S-1,
Registration No. 33-63721, filed on October 26, 1995)
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. (See Exhibit 4.12 to this Registration Statement on Form S-1,
Registration No. 33-63721, filed on October 26, 1995)
</TABLE>
II-3
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
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. (See Exhibit 4.13 to
this Registration Statement on Form S-1, Registration No. 33-63721, filed on
October 26, 1995)
4.14* Assignment and Assumption Agreement, dated as of December 31, 1995, between
American Shared Hospital Services (assignor) and American Shared Radiosurgery
Services (assignee). (See Exhibit 4.14 to Amendment No. 1 to this Registration
Statement on Form S-1, Registration No. 33-63721, filed on March 29, 1996)
4.15* Assignment and Assumption Agreement, dated as of December 31, 1995, between
American Shared Radiosurgery Services (assignor) and GK Financing, LLC
(assignee). (See Exhibit 4.15 to Amendment No. 1 to this Registration
Statement on Form S-1, Registration No. 33-63721, filed on March 29, 1996)
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. (See Exhibit 4.16 to Amendment No. 1 to this Registration Statement on
Form S-1, Registration No. 33-63721, filed on March 29, 1996)
4.17* Assignment and Assumption Agreement, dated as of February 1, 1996, among
Ernest A. Bates, M.D. (assignor) and GK Financing, LLC (assignee). (See
Exhibit 4.17 to Amendment No. 1 to this Registration Statement on Form S-1,
Registration No. 33-63721, filed on March 29, 1996)
4.18* Assignment and Assumption Agreement, effective as of February 3, 1996, among
Ernest A. Bates, M.D. (assignor) and GK Financing, LLC (assignee). (See
Exhibit 4.18 to Amendment No. 1 to this Registration Statement on Form S-1,
Registration No. 33-63721, filed on March 29, 1996)
4.19* Promissory Note, dated January 1, 1995, by American Shared-CuraCare in favor
of General Electric Company, acting through GE Medical Systems, in the
principal sum of $2,000,000, as amended. (See Exhibit 4.19 to Amendment No. 1
to this Registration Statement on Form S-1, Registration No. 33-63721, filed
on March 29, 1996)
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.
(See Exhibit 4.20 to Amendment No. 1 to this Registration Statement on Form
S-1, Registration No. 33-63721, filed on March 29, 1996)
5* Opinion of Sidley and Austin regarding legality of securities being
registered. (See Exhibit 5 to Amendment No. 1 to this Registration Statement
on Form S-1, Registration No. 33-63721, filed on March 29, 1996)
10.1* The Company's 1984 Stock Option Plan, as amended. (See Exhibit 10.24 to the
Company's Registration Statement on Form S-2 Registration Statement No.
33-23416)
10.2* The Company's 1995 Stock Option Plan. (See Exhibit A to the Company's Proxy
Statement, filed on August 31, 1995)
10.3* Form of Indemnification Agreement between the Company and members of its Board
of Directors. (See Exhibit 10.35 to the Company's Registration Statement on
Form S-2, Registration No. 33-23416)
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. (See Exhibit 10.49 to
the Company's Annual Report on Form 10-K for fiscal year ended December 31,
1994)
</TABLE>
II-4
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
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. (See Exhibit 10.5 to this Registration Statement on Form
S-1, Registration No. 33-63721, filed on October 26, 1995)
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. (See Exhibit
10.6 to Amendment No. 1 to this Registration Statement on Form S-1,
Registration No. 33-63721, filed on March 29, 1996)
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. (See Exhibit 10.7 to this
Registration Statement on Form S-1, Registration No. 33-63721, filed on
October 26, 1995)
10.8* Form of Unconditional Continuing Guaranty of American Shared Hospital
Services. (See Exhibit 10.8 to Amendment No. 1 to this Registration Statement
on Form S-1, Registration No. 33-63721, filed on March 29, 1996)
10.9* Form of Unconditional Continuing Guaranty of Ernest A. Bates, M.D. (See
Exhibit 10.9 to Amendment No. 1 to this Registration Statement on Form S-1,
Registration No. 33-63721, filed on March 29, 1996)
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. (See Exhibit 10.10 to Amendment
No. 1 to this Registration Statement on Form S-1, Registration No. 33-63721,
filed on March 29, 1996)
10.11* Ernest A. Bates Stock Option Agreement dated as of August 15, 1995. (See
Exhibit B to the Company's Proxy Statement, filed on August 31, 1995)
10.12* Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. (See
Exhibit 4.11 to this Registration Statement on Form S-1, Registration No.
33-63721, filed on October 26, 1995)
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. (See Exhibit
10.13 to Amendment No. 1 to this Registration Statement on Form S-1,
Registration No. 33-63721, filed on March 29, 1996)
21* Subsidiaries of American Shared Hospital Services. (See Exhibit 21 to
Amendment No. 1 to this Registration Statement on Form S-1, Registration No.
33-63721, filed on March 29, 1996)
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Sidley & Austin, incorporated by reference to Exhibit 5 to this
Registration Statement.
24* Power of Attorney, incorporated by reference to the signature page to this
Registration Statement.
</TABLE>
- ---------------
* The exhibits thus designated are incorporated by reference as exhibits hereto.
Following the description of such exhibits is a reference to the copy of the
exhibit heretofore filed with the Commission, to which there have been no
amendments or changes.
II-5
<PAGE> 74
(b) Financial Statement Schedules
The following financial statement schedules are filed herewith:
<TABLE>
<CAPTION>
SCHEDULE NUMBER DESCRIPTION
- --------------- -----------
<C> <S>
5.02(4) Valuation and Qualifying Accounts.
</TABLE>
Schedules other than that listed above have been omitted since they are either
not required, are not applicable, or the required information is shown in the
consolidated financial statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(A) To include any prospectus required by Section 10(a)(3) of the
Act;
(B) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the
termination of the offering.
b. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-6
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Pre-effective Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Francisco, state of California on this 8th day of May, 1996.
AMERICAN SHARED HOSPITAL SERVICES
By /s/ RICHARD MAGARY
------------------------------------
Richard Magary
Senior Vice
President -- Administration
Pursuant to the requirements of the Securities Act of 1933, this
Pre-effective Amendment No. 2 to the Registration Statement has been signed by
the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ERNEST A. BATES, M.D. Chairman of the Board May 8, 1996
- ------------------------------------------ and Chief Executive Officer
Ernest A. Bates, M.D.*
- ------------------------------------------ Director and Secretary
Willie R. Barnes
/s/ MATTHEW HILLS Director May 8, 1996
- ------------------------------------------
Matthew Hills*
/s/ JOHN F. RUFFLE Director May 8, 1996
- ------------------------------------------
John F. Ruffle*
/s/ STANLEY S. TROTMAN, JR. Director May 8, 1996
- ------------------------------------------
Stanley S. Trotman, Jr.*
/s/ AUGUSTUS A. WHITE, M.D. Director May 8, 1996
- ------------------------------------------
Augustus A. White, III, M.D.*
/s/ CHARLES B. WILSON, M.D. Director May 8, 1996
- ------------------------------------------
Charles B. Wilson, M.D.*
/s/ JAMES A. GORDIN Acting Chief Financial Officer May 8, 1996
- ------------------------------------------ (Principal Accounting Officer)
James A. Gordin*
</TABLE>
* Executed by attorney-in-fact pursuant to power of attorney granted March 29,
1996.
/s/ RICHARD MAGARY
--------------------------------------
Richard Magary
Attorney-in-fact
II-7
<PAGE> 76
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
American Shared Hospital Services
We have audited the consolidated financial statements of American Shared
Hospital Services as of December 31, 1995 and 1994, and for each of the three
years in the period ended December 31, 1995, and have issued our report thereon
dated February 20, 1996, except for Note 16, as to which the date is March 8,
1996 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, 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 financial statement schedule does 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.
ERNST & YOUNG LLP
February 20, 1996
Walnut Creek, California
S-1
<PAGE> 77
SCHEDULE 5.02(4)
AMERICAN SHARED HOSPITAL SERVICES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO BALANCE AT CHARGED TO BALANCE AT
DECEMBER 31, COSTS AND AMOUNTS DECEMBER 31, COSTS AND AMOUNTS DECEMBER 31,
1992 EXPENSES WRITTEN OFF 1993 EXPENSES WRITTEN OFF 1994
------------ --------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for
uncollectible accounts $(1,311,000) $(986,000) $1,154,000 $(1,143,000) $(1,101,000) $ 820,000 $(1,424,000)
<CAPTION>
ADDITIONS
CHARGED TO BALANCE AT
COSTS AND AMOUNTS DECEMBER 31,
EXPENSES WRITTEN OFF 1995
----------- ----------- ------------
<S> <C> <C> <C>
Allowance for
uncollectible accounts $(1,347,000) $ 1,323,000 $(1,448,000)
</TABLE>
S-2
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
- ------ ------------------- -----------
<C> <S> <C>
3.1 Articles of Incorporation of the Company, as amended.(1) *
3.2 By-laws of the Company, as amended.(2) *
4.1 Indenture between American Shared Hospital Services and First *
Interstate Bank of California, as Trustee, dated October 15, 1988,
relating to the Senior Subordinated Exchangeable Reset Notes Due
1996.(3)
4.2 Indenture between American Shared Hospital Services and First *
Interstate Bank of California, as Trustee, dated October 15, 1988,
relating to the 14 3/4% Senior Subordinated Notes Due 1996.(4)
4.3 Supplemental Indenture No. 1, dated as of October 15, 1989, to the *
Indenture between American Shared Hospital Services and First
Interstate Bank of California, as Trustee, dated October 15, 1988,
relating to the Senior Subordinated Exchangeable Reset Notes Due
1996.(5)
</TABLE>
<TABLE>
<C> <S> <C>
4.4 Supplemental Indenture No. 2 dated as of May 17, 1995 to the Indenture *
between American Shared Hospital Services and First Interstate Bank of
California, as Trustee, dated October 15, 1988 relating to the Senior
Subordinated Exchangeable Reset Notes Due 1996.(6)
4.5 Supplemental Indenture No. 1 dated as of May 17, 1995, to the Indenture *
between American Shared Hospital Services and First Interstate Bank of
California, as Trustee, dated October 15, 1988, relating to the 14 3/4%
Senior Subordinated Notes Due 1996.(7)
4.6 Form of Common Stock Purchase Warrant held by Selling Noteholders of *
American Shared Hospital Services.(8)
4.7 Common Stock Purchase Warrant for Shares of Common Stock of American *
Shared Hospital Services held by General Electric Company, acting
through GE Medical Systems dated May 17, 1995.(9)
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.(10)
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.(11)
4.10 Promissory Note, dated May 17, 1995, by American Shared-CuraCare and *
CuraCare, Inc. in favor of DVI Business Credit Receivables Corporation,
in the principal sum of $4,000,000.(24)
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.(12)
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.(13)
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.(14)
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
- ------ ----------------------------------------------------------------------- -----------
<C> <S> <C>
4.14 Assignment and Assumption Agreement, dated as of December 31, 1995, *
between American Shared Hospital Services (assignor) and American
Shared Radiosurgery Services (assignee).(24)
4.15 Assignment and Assumption Agreement, dated as of December 31, 1995, *
between American Shared Radiosurgery Services (assignor) and GK
Financing, LLC (assignee).(24)
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.(24)
4.17 Assignment and Assumption Agreement, dated as of February 1, 1996, *
among Ernest A. Bates, M.D. (assignor) and GK Financing, LLC
(assignee).(24)
4.18 Assignment and Assumption Agreement, effective as of February 3, 1996, *
among Ernest A. Bates, M.D. (assignor) and GK Financing, LLC
(assignee).(24)
4.19 Promissory Note, dated January 1, 1995, by American Shared-CuraCare in *
favor of GE Company, acting through GE Medical Systems, in the
principal sum of $2,000,000, as amended.(24)
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.(24)
5 Opinion of Sidley and Austin regarding legality of securities being *
registered.(24)
10.1 The Company's 1984 Stock Option Plan, as amended.(15) *
10.2 The Company's 1995 Stock Option Plan.(16) *
10.3 Form of Indemnification Agreement between American Shared Hospital *
Services and members of its Board of Directors.(17)
10.4 Agreement, dated 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.(18)
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., Upchurch Living Trust U/A/D 12/14/90, American Shared Hospital
Services and Ernest A. Bates, M.D.(19)
10.6 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 Business Credit Receivables
Corporation.(24)
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.(20)
10.8 Form of Unconditional Continuing Guaranty of American Shared Hospital *
Services.(24)
10.9 Form of Unconditional Continuing Guaranty of Ernest A. Bates, M.D.(24) *
10.10 Intercreditor Agreement dated as of May 17, 1995 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.(24)
10.11 Ernest A. Bates Stock Option Agreement dated August 15, 1995.(21) *
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
- ------ ------------------- -----------
<C> <S> <C>
10.12 Operating Agreement for GK Financing, LLC, dated as of October 17, *
1995.
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.(24)
21 Subsidiaries of American Shared Hospital Services.(24) *
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Sidley & Austin, incorporated by reference to Exhibit 5 to *
this Registration Statement.
24 Power of Attorney.(22) *
</TABLE>
- ---------------
* Not applicable. See the footnote below for the reference to the copy of the
Exhibit incorporated by reference as an Exhibit hereto as such Exhibit has
been heretofore filed with the Commission, to which there have been no
amendments or changes; or to be filed by amendment hereto.
(1) This document was previously filed as Exhibit 3.1 to registrant's
Registration Statement on Form S-2 (Registration No. 33-23416) and is
incorporated herein by this reference.
(2) This document was previously filed as Exhibit 3.2 to registrant's
Registration Statement on Form S-2 (Registration No. 33-23416) and is
incorporated herein by this reference.
(3) This document was previously filed as Exhibit 4.1 to the registrant's
Registration Statement on Form S-2 (Registration No. 33-23416) and is
incorporated herein by this reference.
(4) This document was previously filed as Exhibit 4.2 to the registrant's
Registration Statement on Form S-2 (Registration No. 33-23416) and is
incorporated herein by this reference.
(5) This document was previously filed as Exhibit 4.3 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1989 and is
incorporated herein by this reference.
(6) This document was previously filed as Exhibit 4.4 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(7) This document was previously filed as Exhibit 4.5 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(8) This document was previously filed as Exhibit 4.6 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(9) This document was previously filed as Exhibit 4.7 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(10) This document was previously filed as Exhibit 4.8 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(11) This document was previously filed as Exhibit 4.9 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(12) This document was previously filed as Exhibit 4.11 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(13) This document was previously filed as Exhibit 4.12 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(14) This document was previously filed as Exhibit 4.13 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(15) This document was previously filed as Exhibit 10.24 to registrant's
Registration Statement on Form S-2 (Registration No. 33-23416), and is
incorporated herein by this reference.
(16) This document was previously filed as Exhibit A to registrant's Proxy
Statement filed on August 31, 1995, and is incorporated herein by this
reference.
<PAGE> 81
(17) This document was previously filed as Exhibit 10.35 to registrant's
Registration Statement on Form S-2 (Registration No. 33-23416), and is
incorporated herein by this reference.
(18) This document was previously filed as Exhibit 10.49 to this Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
(19) This document was previously filed as Exhibit 10.5 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(20) This document was previously filed as Exhibit 10.7 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(21) This document was previously filed as Exhibit B to registrant's Proxy
Statement on August 31, 1995, and is incorporated herein by this reference.
(22) This document was previously filed as Exhibit 10.12 to this Registration
Statement on Form S-1 (Registration No. 33-63721) and is incorporated
herein by this reference.
(23) Incorporated by reference to the signature page of this Amendment No. 1 to
the Registration Statement on Form S-1 (Registration No. 33-63721).
(24) These documents were previously filed as Exhibits 4.10, 4.14, 4.15, 4.16,
4.17, 4.18, 4.19, 4.20, 5, 10.6, 10.8, 10.9, 10.10, 10.13, and 21,
respectively, to Amendment No. 1 to this Registration Statement on Form S-1
(Registration No. 33-63721) and are incorporated herein by this reference.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 20, 1996 (except for Note 16, as to which
the date is March 8, 1996) in Amendment No. 2 to the Registration Statement
(Form S-1, No. 33-63721) and the related Prospectus of American Shared Hospital
Services for the registration of 1,732,000 shares of its common stock and
441,147 warrants to purchase its common stock.
ERNST & YOUNG, LLP
Walnut Creek, California
May 6, 1996
