<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A(1)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-8789
AMERICAN SHARED HOSPITAL SERVICES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 94-2918118
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
FOUR EMBARCADERO CENTER, SUITE 3620,
SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415)788-5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<C> <S>
COMMON STOCK NO PAR VALUE AMERICAN STOCK EXCHANGE
PACIFIC EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 20, 1998, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $6,229,519.
Number of shares of common stock of the registrant outstanding as of March
20, 1998: 4,769,384.
NO DOCUMENTS ARE INCORPORATED BY REFERENCE IN THIS REPORT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995(1) 1994 1993(2)
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Medical services revenues.............. $37,172 $36,989 $ 34,077 $38,545 $ 39,485
======= ======= ======== ======= ========
Costs of operations.................... 27,044 28,071 32,675 34,145 37,071
Selling and administrative expense..... 5,901 5,309 8,432 5,971 6,820
Interest expense....................... 3,671 4,199 5,310 7,423 6,752
Write-down of intangible assets........ 0 0 600 0 5,308
------- ------- -------- ------- --------
Total costs and expenses..... 36,616 37,579 47,017 47,539 55,951
------- ------- -------- ------- --------
556 (590) (12,940) (8,994) (16,466)
Gain on sale of assets and early
termination of capital leases........ 821 3 226 3,294 124
Interest and other income.............. 155 227 258 183 691
------- ------- -------- ------- --------
Income (loss) before income taxes and
extraordinary item................... 1,532 (360) (12,456) (5,517) (15,651)
Income tax provision (benefit)......... 10 (7) 3 20 (7)
------- ------- -------- ------- --------
Income (loss) before extraordinary
item................................. 1,522 (353) (12,459) (5,537) (15,644)
Extraordinary item..................... 0 0 19,803 362 0
------- ------- -------- ------- --------
Net income (loss)...................... $ 1,522 $ (353) $ 7,344 $(5,175) $(15,644)
======= ======= ======== ======= ========
Earnings (loss) per common share:
Income (loss) before extraordinary
item.............................. $ 0.32 $ (0.08) $ (2.96) $ (1.93) $ (5.46)
Extraordinary item................... $ 0.00 $ 0.00 $ 4.71 $ 0.13 $ 0.00
------- ------- -------- ------- --------
Net income (loss).................... $ 0.32 $ (0.08) $ 1.75 $ (1.80) $ (5.46)
======= ======= ======== ======= ========
Earnings (loss) per common share
assuming dilution:
Income (loss) before extraordinary
item.............................. $ 0.24 $ (0.08) $ (2.96) $ (1.93) $ (5.46)
Extraordinary item................... $ 0.00 $ 0.00 $ 4.71 $ 0.13 $ 0.00
------- ------- -------- ------- --------
Net income (loss) per common share
assuming dilution.................... $ 0.24 $ (0.08) $ 1.75 $ (1.80) $ (5.46)
======= ======= ======== ======= ========
</TABLE>
See Accompanying Notes.
2
<PAGE> 3
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1997 1996 1995(1) 1994 1993(2)
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital deficiency........... $(8,039) $(10,888) $ (6,793) $(33,369) $(56,518)
Total assets......................... 30,209 32,969 31,335 47,222 50,179
Current portion of long-term debt and
obligation under capitalized
leases............................. 10,929 13,182 8,720 11,214 26,635
Long-term debt and obligations under
capitalized leases less current
portion............................ 21,569 23,935 26,125 24,244 3,106
Senior subordinated notes............ 0 0 773 18,467 18,788
Stockholders' equity (Net capital
deficiency)........................ $(8,953) $(10,475) $(10,576) $(22,341) $(17,754)
</TABLE>
- ---------------
(1) In June 1995, ASHS incorporated a new wholly-owned subsidiary, African
American Church Health And Economic Services, Inc. ("ACHES") and ACHES'
wholly-owned subsidiary, ACHES Insurance Services, Inc. ("AIS"), and in
October 1995, entered into an operating agreement granting ASRS an 81%
ownership interest in GK Financing, LLC. Accordingly, the financial data for
the Company presented above include the results of the establishment of
ACHES, AIS, and GK Financing, LLC for 1995 through 1997.
(2) In August 1993, ASHS incorporated a new wholly owned subsidiary, American
Shared Radiosurgery Services ("ASRS"). Accordingly, the financial data for
the Company presented above include the results of the establishment of the
subsidiary for 1993 through 1997.
See Accompanying Notes.
3
<PAGE> 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company had net income of $1,522,000 ($0.32 per share) on medical
services revenues of $37,172,000 in 1997. The Company had a net loss of $353,000
($(0.08) per share) on medical services revenues of $36,989,000 in 1996.
TOTAL REVENUES
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1996 (DECREASE) 1995
------- ---------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Medical Services............... $37,172 0.5% $36,989 8.6% $34,077
</TABLE>
Medical services revenues increased 0.5% in 1997 compared to 1996, and
increased 8.6% in 1996 compared to 1995. The 0.5% increase in 1997 and the 8.6%
increase in 1996 compared to prior years were primarily due to increases in MRI
revenues.
MRI revenues increased 2% ($650,000) in 1997 compared to 1996 and increased
11% ($2,667,000) in 1996 compared to 1995. The increases in 1997 and 1996 were
primarily due to the commencement of new customer contracts and increased
utilization from contracts commenced in prior periods. MRI revenues as a
percentage of total medical services revenues were 76%, 75% and 73% in years
1997, 1996 and 1995, respectively.
The Company's non-MRI diagnostic imaging services revenues decreased 19%
($1,176,000) in 1997 compared to 1996 after a 1% ($60,000) decrease in 1996
compared to 1995. The revenue decline in 1997, compared to 1996, was primarily
attributable to decreased CT revenue which was due to utilization of two (2)
fewer CT units in 1997, and decreased nuclear medicine revenue due to the
termination of an in-house nuclear medicine contract in March 1997. Revenues
from CT operations decreased $614,000 in 1997 and $26,000 in 1996 from 1995
revenues of $3,563,000. The decrease in Nuclear Medicine and Ultrasound revenues
was $562,000 in 1997 and $34,000 in 1996 from a 1995 revenue base of $2,782,000.
Non-MRI diagnostic imaging services revenues as a percentage of total medical
services revenues was 14%, 17% and 18% for the years ended 1997, 1996 and 1995,
respectively. The Company's CT, Ultrasound, and Nuclear Medicine services
revenues continue to decline because customers are increasingly buying their own
equipment.
Contract service revenues consisting of Respiratory Therapy services and
Cardiac Catheterization Laboratory revenues increased $354,000 in 1997 compared
to 1996 and decreased $415,000 in 1996 compared to 1995. The increase in 1997
was primarily due to revenues from the Cardiac Catheterization Laboratory
contracts which commenced May 1996 and December 1996, respectively. The decrease
in 1996 compared to 1995 resulted primarily from four terminated Respiratory
Therapy service contracts in 1995. The Company currently has one Respiratory
Therapy service contract.
Gamma Knife revenues increased $354,000 and $705,000 in 1997 and 1996,
respectively, compared to the prior years. The 1997 increase was primarily due
to the commencement of a third Gamma Knife unit in September 1997. The increase
in 1996 was a result of the inclusion of results of the Company's second Gamma
Knife beginning in February 1996.
COST OF OPERATIONS
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1996 (DECREASE) 1995
------- ---------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cost of Operations, Exclusive
of Write-Down of Equipment... $27,044 (3.7)% $28,071 (2.7)% $28,850
Percentage of Revenue.......... 72.8% 75.9% 84.7%
Write-Down of Equipment........ $ 0 0% $ 0 (100.0)% $ 3,825
Percentage of Revenue.......... 0.0% 0.0% 11.2%
</TABLE>
4
<PAGE> 5
The Company's cost of operations, consisting of payroll, maintenance and
supplies, depreciation and amortization, equipment rental and other operating
expenses (such as vehicle fuel, building rents, regional office costs,
insurance, property taxes, bad debt expense, fees and training expenses)
decreased $1,027,000 in 1997 and $4,604,000 in 1996 compared to prior years.
Medical services payroll costs, the largest component of total cost of
operations, increased by $221,000 in 1997 compared to 1996 and increased by
$328,000 in 1996 compared to 1995. Medical services payroll costs as a percent
of medical services remains constant at 20% in years 1997, 1996 and 1995. The
1997 and 1996 increase was primarily due to staffing increases to service
additional MRI customer volumes and an increase in staffed units in 1997.
The Company's maintenance and supplies costs were 16%, 18% and 20% of
medical service revenues in 1997, 1996 and 1995 respectively. Maintenance and
supplies costs decreased $739,000 in 1997 compared to 1996 and decreased $68,000
in 1996 compared to 1995. The decreases in 1997 and 1996 are primarily
attributable to MRI maintenance cost savings.
Depreciation and amortization decreased $233,000 in 1997 compared to 1996
and $1,671,000 in 1996 compared to 1995. The decrease in 1997 was primarily
attributable to decreased MRI and nuclear medicine depreciation as a result of
fewer MRI units accounted for as capital leases in 1997. The decrease in 1996 is
primarily attributable to the early adoption of Financial Accounting Standards
No. 121 (FAS 121) during the second quarter of 1995 as explained in detail
below. In addition, the majority of capital leases were extended as of October
1, 1995 thereby extending the depreciable life of the asset (as leased assets
are depreciated based on lease terms) and decreasing depreciation expense
commencing the fourth quarter of 1995.
Equipment rental as a percentage of medical services revenues was 7% in
1997, 9% in 1996 and 8% in 1995. Equipment rental decreased $763,000 in 1997
compared to 1996 and increased $641,000 in 1996 compared to 1995. The decrease
in 1997 is primarily attributable to the return of five (5) MRI rental units
which resulted from mobile route consolidation and customer contract
terminations. The increase in 1996 is primarily attributable to the utilization
of short-term MRI and CT rentals to meet customer commitments.
Other costs of operations as a percentage of medical services revenues was
12%, 11% and 12% in 1997, 1996 and 1995, respectively. The increase of $487,000
in 1997 compared to 1996 reflects increased fuel, personal property tax costs,
insurance, and bad debt expenses. The decrease of $9,000 in 1996 compared to
1995 reflects a decrease in equipment and CON related costs and regional office
administrative costs offset by increased fuel costs, MRI space rental costs and
physician reading fees.
In connection with the early adoption of the statement of Financial
Accounting Standards No. 121 (FAS 121) during the second quarter of 1995,
management reviewed the recoverability of the carrying value of long-lived
assets, primarily fixed assets, goodwill and deferred costs. The Company
initiated its review of potential loss impairment due to the continuing changes
in the health care environment which have put downward pressure on customer and
equipment pricing and reduced forecasted operating results for certain assets to
a level below previous expectations. Following its review, management concluded
that there was an impairment in the recorded value of fixed assets, goodwill and
deferred costs under FAS 121 based on management's estimate of future
undiscounted cash flows over the estimated remaining useful life of certain
assets. Accordingly, an impairment loss of $4,425,000 was recorded in the second
quarter of 1995 based on the differences between the fair value of such assets
as determined by third parties and the recorded values. The impairment loss is
comprised of a charge for the write-downs of equipment and deferred assets of
$3,825,000 (primarily MRI, CT and Nuclear Medicine) and goodwill of $600,000.
SELLING AND ADMINISTRATIVE
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1996 (DECREASE) 1995
------ ---------- ------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling and Administrative
Costs........................... $5,901 11.2% $5,309 (37.0)% $8,432
Percentage of Revenue............. 15.9% 14.4% 24.7%
</TABLE>
5
<PAGE> 6
The Company's selling and administrative costs increased $592,000 in 1997
compared to 1996 and decreased $3,123,000 in 1996 compared to 1995. The increase
in 1997 was primarily due to increased sales and administrative payroll costs,
building rental costs, audit and tax fees and legal fees associated with a
proposed acquisition of the Company which was not consummated. The decrease in
1996 is primarily attributable to a 1995 stock compensation expense totaling
$2,679,000 which is comprised of shares and options issued to the Company's
Chairman and Chief Executive Officer, Ernest A. Bates, M.D. Salary and wage
expense was charged $265,000 in the second quarter of 1995 for the issuance of
184,000 Common Shares to Dr. Bates for his continued services to the Company and
his personal guarantee of $6,500,000 of indebtedness of the Company. In
addition, during the fourth quarter of 1995, a charge to salary and wage expense
of $2,414,000 was recorded in connection with the grant to Dr. Bates, following
shareholder approval, of an option to acquire 1,495,000 additional Common Shares
for $0.01 per share as further consideration for his continued service to the
Company and his personal guarantee of $6,500,000 of the Company's new credit
facilities. See "Liquidity and Capital Resources." The decrease in 1996 was also
related to reduced legal and insurance costs.
INTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1996 (DECREASE) 1995
------ ---------- ------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest Expense.................. $3,671 (12.6)% $4,199 (20.9)% $5,310
Percentage of Revenue............. 9.9% 11.4% 15.6%
</TABLE>
The Company's interest expense decreased $528,000 in 1997 compared to 1996
and $1,111,000 in 1996 compared to 1995. The decreases in 1997 and 1996 are
primarily attributable to a lower outstanding amount of interest bearing debt
due to the repurchase by the Company on May 17, 1995 of $17,964,000 aggregate
principal amount of its Senior Subordinated Notes, the exchange for common
shares ($413,000 aggregate principal amount) and payment at maturity ($360,000
aggregate principal amount) of its Senior Subordinated Notes in the third and
fourth quarters of 1996, respectively, and decreased capitalized lease-related
interest.
WRITE-DOWN OF INTANGIBLE ASSETS
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1996 (DECREASE) 1995
------ ---------- ------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Write-down of Intangible Assets... 0 0.0% $ 0 (100)% $ 600
Percentage of Revenue............. 0.0% 0.0% 1.8%
</TABLE>
The Company's write-down of intangible assets decreased $600,000 in 1996 as
compared to 1995. The decrease in 1996 compared to 1995 is solely attributable
to the early adoption of FAS 121 in the second quarter of 1995. See "Cost of
Operations" above.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost has not been estimated, but is not expected to be material.
The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made or are not completed timely, the Year 2000 issue
could have a material impact on the operations of the Company.
6
<PAGE> 7
OTHER INCOME AND EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1996 (DECREASE) 1995
---- ---------- -------------- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gain on Sale of Assets and
Early Termination of Capital
Leases....................... $821 27,267% $ 3 (98.7)% $226
Percentage of Revenue.......... 2.2% 0.0% 0.7%
Interest and Other Income...... $155 (31.7)% $227 (12.0)% $258
Percentage of Revenue.......... 0.4% 0.6% 0.8%
</TABLE>
The Company's gain on sale of assets and early termination of capital
leases increased $818,000 in 1997 compared to 1996 and decreased $223,000 in
1996 compared to 1995. The increase in 1997 was the result of a gain on the
early termination of a capital lease ($141,000) when the customer's in-house
nuclear medicine contract was terminated during March 1997, an insurance
settlement ($388,000) following the loss of a mobile MRI unit in an accident
during second quarter 1997, a gain on sale of another MRI unit ($140,000) during
third quarter 1997 and a gain on sale of a mobile SPECT unit ($115,000) in the
fourth quarter of 1997. Gain on sale of equipment fluctuates depending on the
timing of asset dispositions. The Company continues to sell non-essential assets
in the normal course of business.
NET INCOME (LOSS)
<TABLE>
<CAPTION>
INCREASE INCREASE
1997 (DECREASE) 1996 (DECREASE) 1995
------ ---------- ------ ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Income (loss) Before Income
Taxes and Extraordinary
Item.......................... $1,532 525.6% $ (360) (97.1)% $(12,456)
Percentage of Revenue........... 4.1% (1.0)% (36.6)%
Income (loss) per Share......... $ 0.32 500.0% $(0.08) (97.3)% $ (2.96)
Extraordinary Item.............. $ 0 0.0% $ 0 (100.0)% $ 19,803
Extraordinary Item, per Share... $ 0.00 0.00% $ 0.00 (100.0)% $ 4.71
Net Income (loss)............... $1,522 531.2% $ (353) (104.8)% $ 7,344
Net Income (loss) per Share..... $ 0.32 500.0% $(0.08) (104.6)% $ 1.75
</TABLE>
The Company had net income of $1,522,000 in 1997 compared to a net loss of
$353,000 for 1996. Net income for 1997 resulted in part from increased operating
margins and in part from gains from early termination of capital leases and sale
of assets.
The Company had a net loss of $353,000 for 1996 compared to net income of
$7,344,000 for 1995. The Company's net income for 1995 included an extraordinary
gain of $19,803,000 from its debt restructuring recorded on May 17, 1995. The
gain resulted from the purchase of $17,694,000 aggregate face amount plus
$8,853,000 of accrued and unpaid interest of the Company's 14 3/4% and 16 1/2%
Senior Subordinated Notes due October 15, 1996 net of cash, Common Shares and
warrants to purchase Common Shares issued and transaction related costs of
$3,893,000, $1,836,000 and $1,015,000, respectively. Included in the Company's
1995 results was a charge of $4,425,000 due to adoption of FAS 121 and stock
compensation expense of $2,679,000 (see "Selling and Administrative").
The Company's net income (loss) for 1997, 1996 and 1995 was enhanced by
$526,000, $0, and $2,567,000, respectively, due to the realization of deferred
tax assets in conformity with FAS 109. The Company has maintained a valuation
allowance completely off-setting its deferred tax assets based on Management's
evaluation of the realizability of these deferred tax assets based on FAS 109.
At the end of 1996 and 1997, the Company had deferred tax asset valuation
allowances of $9,600,000 and $8,000,000. These valuation allowances were
established after weighing the potential effect of negative and positive
evidence regarding the realizability of the Company's deferred tax assets. The
Company's prior history of net operating losses was given significant weight, as
required under Statement of Financial Accounting Standards No. 109. The Company
did not consider the gain which would be recognized in connection with the
7
<PAGE> 8
transaction with Alliance Imaging, Inc. (discussed below) because of the lack of
assurance that the transaction will be consummated. Reductions in previously
established valuation allowances increased reported earnings by $2,660,000 in
1995, $300,000 in 1996 and $1,600,000 in 1997. The reduction in 1995 resulted
from the recognition of financial statement income, adjusted for permanent
differences, of $7,600,000. The decreases in 1996 and 1997 resulted in part from
the recognition of financial statement losses, adjusted for permanent
differences, of $66,000 in 1996 and the recognition of financial statement
income, adjusted for permanent differences, of $1,760,000 in 1997. Virtually all
of the additional decrease in 1996 resulted from decreases in the carrying
amount of net operating loss carryover. Additional decreases in 1997 resulted
from decreases in the carrying amount of deferred tax assets for carryovers,
fixed assets, and other items because of decreases in the amount of net
operating loss carryover and decreases in the tax attributes associated with
fixed assets and other items during 1997. The decreases in the carrying amounts
of net operating losses and tax attributes associated with fixed assets and
other items in 1996 and 1997 were made because it was determined that the tax
carrying amounts for those carryovers and attributes were overstated. The
effects of these additional decreases were $194,000, $500,000 and $290,000
respectively.
In the event that the proposed sale transaction (see Part I, Item 1
"Business -- General -- Recent Developments") is consummated, the Company
anticipates that it will fully realize its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $17,000 at December 31, 1997
compared to $368,000 at December 31, 1996. The Company's cash position decreased
$351,000 due primarily to the Company's debt payment requirements and working
capital needs.
Restricted cash of $651,000 and $218,000 at December 31, 1997 and December
31, 1996, respectively, reflects cash that may only be used for the operations
of GK Financing, LLC. The increase in restricted cash is due to cash flow from
Gamma Knife operations.
On May 17, 1995, the Company repurchased (the "Notes Repurchase") for cash
and securities approximately 96% of its outstanding Senior Subordinated Notes
("Subordinated Notes"). The Notes Repurchase, together with a December 1994
lease restructuring and the availability of up to $8,000,000 of new debt
financing, concluded a broad restructuring of the Company's obligations as more
fully explained in the Company's 1996 Form 10-K.
On December 29, 1995 and March 1, 1996, the Company further restructured
certain of its medical equipment leases and related notes (the "GE Notes") to
extend the terms of the leases for periods of up to an additional 26 months, to
defer certain monthly lease payments and to defer certain installment payments
due at the beginning of 1996. This further restructuring resulted in payment
reductions of approximately $1,200,000 for the Company in 1996 and subsequent
years.
The various restructuring transactions described above cured all of the
Company's then-outstanding defaults relating to its debt and lease obligations.
The Company nevertheless remains highly leveraged and has significant cash
payment requirements under its equipment leases and credit facilities. Scheduled
equipment capital lease payments and operating lease payments during the 12
months ending December 31, 1998 are $7,487,000 and $2,551,000, respectively,
with related maintenance commitments of approximately $1,916,000. Scheduled
interest and principal payments under the Company's other debt obligations
during such period are approximately $4,855,000 which excludes the Company's
revolving line of credit balance of $5,438,000 at December 31, 1997 ($5,207,000
at February 28, 1998) whose maturity has been extended to May 31, 1999. Although
the Company's operating performance has improved, the Company is uncertain it
will have the cash resources to pay all of its obligations when they are due.
Accordingly, the Company will continue its program of expense reductions,
revenue enhancements and asset sales as well as refinancing or renegotiating the
terms of its fixed obligations ("Program"). The Company's ability to meet its
obligations when due are dependent upon the success of the Company's Program.
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 obligations
and seek other remedies including seizure of the Company's medical imaging
equipment. In such event, the Company would
8
<PAGE> 9
be forced to seek a liquidation under Chapter 7 or a reorganization under
Chapter 11 of the United States Bankruptcy Code.
As part of the Program, the Company in March 1996 sold its Modesto
buildings for $650,000 in cash, and negotiated an increase in its working
capital line of credit to $5,500,000 and extended its maturity date by two years
to May 31, 1999. The Company also completed in August 1996 an exchange offer
(the "Exchange Offer") for $413,000 aggregate principal amount of Subordinated
Notes. The purpose of the Exchange Offer was to improve the Company's capital
structure and relieve the Company of the requirement to pay $836,000 of
principal and interest in October, 1996 when the Subordinated Notes were to
mature. In the Exchange Offer, the Company issued approximately 287,000
additional shares of Common Stock for $413,000 principal amount of Subordinated
Notes. The remaining $360,000 of the Subordinated Notes was paid at maturity on
October 16, 1996.
In the long term, the Company believes that it must respond to fundamental
changes in the industry. The medical diagnostic imaging business, both mobile
and fixed, is in a period of consolidation as a result of the growth of managed
care and other competitive forces. Smaller companies, such as the Company, must
either grow through acquisitions or become part of larger enterprises in order
to compete successfully and achieve acceptable returns for their shareholders.
In light of the unavailability of capital to the Company and continuing weakness
in the price of its common stock, the Company has been willing to entertain
acquisition offers. In late 1996 and early 1997, the Company unsuccessfully
pursued a merger with a larger industry participant. In late 1997, the Company
was approached by Alliance Imaging, Inc., another major industry participant,
with respect to a sale of the Company's medical diagnostic imaging business. On
March 12, 1998, the Company and Alliance entered into an agreement under which
the Company would sell its medical diagnostic imaging assets to Alliance for
consideration consisting of cash and the assumption of related liabilities. See
Part I, Item 1 "Business -- General -- Recent Developments". The Company
accepted the proposed transaction in response to the industry trend toward
consolidation, the increasingly difficult competitive environment for smaller
participants, such as the Company, and to provide capital for the expansion of
the Company's radiosurgery services business. There can be no assurance that the
transaction will be consummated. If the transaction is not consummated, the
Company will be required to continue to operate as an independent entity, and to
face the serious liquidity and other problems referred to above.
IMPACT OF INFLATION AND CHANGING PRICES
The Company does not believe inflation has had a significant impact on
operations, because most of its customer contracts include a cost of living
price adjustment provision, which the Company believes will be sufficient to
offset the impact of any future inflation on the Company's costs of operation.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. The following Financial Statements and
Schedules are filed with this Report:
Report of Independent Auditors
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules
Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
9
<PAGE> 10
Consent of Independent Auditors
(b) Exhibits. The following Exhibits are filed with this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: DESCRIPTION:
- ------- ------------
<C> <S>
2.1 Securities Purchase Agreement, dated as of March 12, 1998,
by and among Alliance Imaging, Inc.; Embarcadero Holding
Corp. I; Embarcadero Holding Corp. II; American Shared
Hospital Services; and MMRI, Inc.(9)
3.1 Articles of Incorporation of the Company, as amended.(1)
3.2 By-laws for the Company, as amended.(2)
4.6 Form of Common Stock Purchase Warrant of American Shared
Hospital Services.(2)
4.8 Registration Rights Agreement, dated as of May 17, 1995, by
and among American Shared Hospital Services, the Holders
referred to in the Note Purchase Agreement, dated as of May
12, 1995 and General Electric Company, acting through GE
Medical Systems.(2)
4.9 Promissory Note, dated May 17, 1995, by American Shared
Hospital Services in favor of General Electric Company in
the principal sum of $1,500,000, as amended.(2)
4.10 Promissory Note, dated January 31, 1996, by American
Shared-CuraCare and CuraCare, Inc. in favor of DVI Business
Credit Receivables Corporation, in the principal sum of
$4,000,000.(3)
4.11 Promissory Note, dated May 17, 1995, by American
Shared-CuraCare and CuraCare, Inc. in favor of DVI Financial
Services Inc. in the principal sum of $2,500,000.(2)
4.12 Security Agreement dated as of May 17, 1995 by and between
American Shared Hospital Services and General Electric
Company, acting through GE Medical Systems.(2)
4.13 Agreement and Proxy, dated as of May 12, 1995 by Ernest A.
Bates, M.D., Accepted and Agreed to by Anchor National Life
Insurance Company, Sun Life Insurance Company of America,
SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace
Brothers, Ltd., and Upchurch Living Trust U/A/D 12/14/90.(2)
4.14 Assignment and Assumption Agreement, dated as of December
31, 1995, between American Shared Hospital Services
(assignor) and American Shared Radiosurgery Services
(assignee).(3)
4.15 Assignment and Assumption Agreement, dated as of February 3,
1996, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(3)
4.16 USC University Hospital Option Agreement, dated February 3,
1996, among American Shared Hospital Services, Ernest A.
Bates, M.D. and GK Financing, LLC.(3)
4.17 Assignment and Assumption Agreement, dated as of February 3,
1996, among Ernest A. Bates, M.D. (assignor) and GK
Financing, LLC (assignee).(3)
4.18 Assignment and Assumption Agreement, effective as of
February 3, 1996, among Ernest A. Bates, M.D. (assignor) and
GK Financing, LLC (assignee).(3)
4.19 Promissory Note, dated January 1, 1995, by American
Shared-CuraCare in favor in General Electric Company, acting
through GE Medical Systems, in the principal sum of
$2,000,000, as amended.(3)
4.20 Promissory Note, dated December 30, 1994, by American
Shared-CuraCare in favor of General Electric Company, in the
principal sum of $481,667.81, as amended.(3)
4.21 Promissory Note, dated April 29, 1996 by GK Financing, LLC
in favor of Skandinaviska Enskilda Banken in the principal
amount of $1,300,000.(4)
4.22 Promissory Note, dated December 23, 1996 by American
Shared-CuraCare in favor of General Electric Company, in the
principal amount of $1,631,595.10.(4)
10.1 The Company's 1984 Stock Option Plan, as amended.(5)
10.2 The Company's 1995 Stock Option Plan, as amended.(6)
10.3 Form of Indemnification Agreement between American Shared
Hospital Services and members of its Board of Directors.(5)
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: DESCRIPTION:
- ------- ------------
<C> <S>
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.(7)
10.5 Note Purchase Agreement, dated as of May 12, 1995, by and
among Anchor National Life Insurance Company, Sun Life
Insurance Company of America, and SunAmerica Inc., AIF II,
L.P., Lion Advisors, L.P., Grace Brothers, Ltd. and Upchurch
Living Trust U/A/D 12/14/90, American Shared Hospital
Services and Ernest A. Bates, M.D.(2)
10.6 Loan and Security Agreement, dated as of January 31, 1996,
among American Shared-CuraCare and CuraCare, Inc., American
Shared Hospital Services, Ernest A. Bates, M.D. and DVI
Business Credit Receivables Corporation.(3)
10.7 Loan and Security Agreement, dated as of May 17, 1995, among
American Shared-CuraCare and CuraCare, Inc., American Shared
Hospital Services, Ernest A. Bates, M.D. and DVI Financial
Services Inc.(2)
10.8 Form of Unconditional Continuing Guaranty of American Shared
Hospital Services.(3)
10.9 Form of Unconditional Continuing Guaranty of Ernest A.
Bates, M.D.(3)
10.10 Intercreditor Agreement among American Shared Hospital
Services, American Shared-CuraCare, DVI Financial Services
Inc. and DVI Business Credit Receivables Corporation and
General Electric Company, acting through GE Medical Systems,
dated as of January 31, 1996.(3)
10.11 Ernest A. Bates, Stock Option Agreement dated as of August
15, 1995.(8)
10.12 Operating Agreement for GK Financing, LLC, dated as of
October 17, 1995.(2)
10.13a Amendments dated as of October 26, 1995 and as of December
20, 1995 to the GK Financing, LLC Operating Agreement, dated
as of October 17, 1995.(3)
10.13b Amendment dated as of October 16, 1996 to the GK Financing,
LLC Operating Agreement, dated as of October 17, 1995.(9)
10.14 Amendment No. 1, dated March 29, 1996, to Loan and Security
Agreement, dated as of January 31, 1996, among American
Shared-CuraCare and CuraCare, Inc., American Shared Hospital
Services, Ernest A. Bates, M.D. and DVI Business Credit
Receivables Corporation (Exhibit 10.6).(4)
10.15 Amendment No. 2, dated January 31, 1996, to Loan and
Security Agreement, dated as of January 31, 1996, among
American Shared-CuraCare and CuraCare, Inc., American Shared
Hospital Services, Ernest A. Bates, M.D. and DVI Business
Credit Receivables Corporation (Exhibit 10.6).(4)
10.16 Amendment No. 3, dated April 23, 1997, to Loan and Security
Agreement, dated January 31, 1996 among American
Shared-CuraCare and CuraCare, Inc., American Shared Hospital
Services, Ernest A. Bates, M.D. and DVI Business Credit
Receivables Corp. (Exhibit 10.6).(9)
10.17 Amendment No. 4, dated July 31, 1997, to Loan and Security
Agreement, dated January 31, 1996 among American
Shared-CuraCare and CuraCare, Inc., American Shared Shared
Hospital Services, Ernest A. Bates, M.D. and DVI Business
Credit Receivables Corp. (Exhibit 10.6).(9)
10.18 Amendment No. 5, dated November 26, 1997, to Loan and
Security Agreement, dated January 31, 1996 among American
Shared-CuraCare and CuraCare, Inc., American Shared Shared
Hospital Services, Ernest A. Bates, M.D. and DVI Business
Credit Receivables Corp. (Exhibit 10.6).(9)
21 Subsidiaries of American Shared Hospital Services.(9)
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule for the year ended December 31,
1997.(9)
27.a Restated Financial Data Schedule for the fiscal year ended
December 31, 1995.(9)
27.b Restated Financial Data Schedule for the three months ended
March 31, 1996.(9)
27.c Restated Financial Data Schedule for the six months ended
June 30, 1996.(9)
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: DESCRIPTION:
- ------- ------------
<C> <S>
27.d Restated Financial Data Schedule for the nine months ended
September 30, 1996.(9)
27.e Restated Financial Data Schedule for the fiscal year ended
December 31, 1996.(9)
27.f Restated Financial Data Schedule for the three months ended
March 31, 1997.(9)
27.g Restated Financial Data Schedule for the six months ended
June 30, 1997.(9)
27.h Restated Financial Data Schedule for the nine months ended
September 30, 1997.(9)
</TABLE>
- ---------------
(1) This document was filed as Exhibit 3.1 to registrant's Registration
Statement on Form S-2 (Registration No. 33-23416), which is incorporated
herein by this reference.
(2) These documents were filed as Exhibits 3.2, 4.6, 4.8, 4.9, 4.11, 4.12, 4.13,
10.5, 10.7 and 10.12, to registrant's Registration Statement on Form S-1
(Registration No. 33-63721) filed on October 26, 1995, which is incorporated
herein by this reference.
(3) These documents were filed as Exhibits 4.10, 4.14, 4.15, 4.16, 4.17,4.18,
4.19, 4.20, 10.6, 10.8, 10.9, 10.10 and 10.13, respectively, to the
registrant's Pre-Effective Amendment No. 1 to registrant's Registration
Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996,
which is incorporated herein by this reference.
(4) These documents were filed as Exhibits 4.21, 4.22, 10.14, and 10.15,
respectively, to registrant's Annual Report on Form 10-K for fiscal year
ended December 31, 1996, which is incorporated herein by this reference.
(5) These documents were filed as Exhibits 10.24 and 10.35 respectively, to
registrant's Registration Statement on Form S-2 (Registration NO. 33-23416),
which is incorporated herein by this reference.
(6) This document was filed as Exhibit A to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(7) This document was filed as Exhibit 10.49 to registrant's Annual Report on
Form 10-K for fiscal year ended December 31, 1994, which is incorporated
herein by this reference.
(8) This document was filed as Exhibit B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(9) These documents were filed as Exhibits 2.1, 10.13(b), 10.16, 10.17, 10.18,
21, 27, 27.a, 27.b, 27.c, 27.d, 27.e, 27.f, 27.h, respectively, to
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, which is incorporated herein by this reference.
(c) Reports on Form 8-K. The Company filed no reports on Form 8-K during the
quarter ended December 31, 1997.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN SHARED HOSPITAL SERVICES
(Registrant)
August 28, 1998 By: /s/ ERNEST A. BATES
------------------------------------
Ernest A. Bates
Chairman and Chief Executive Officer
13
<PAGE> 14
CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN SHARED HOSPITAL SERVICES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<PAGE> 15
American Shared Hospital Services
Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors...........................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets..............................................................2
Consolidated Statements of Operations....................................................4
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency).................5
Consolidated Statements of Cash Flows....................................................6
Notes to Consolidated Financial Statements...............................................8
Financial Statement Schedule..............................................................
Valuation and Qualifying Accounts.......................................................33
</TABLE>
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements and
notes thereto.
<PAGE> 16
[ERNST & YOUNG LLP LETTERHEAD]
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, 1997 and 1996, 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, 1997.
Our audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements and the schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Shared Hospital Services at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that American
Shared Hospital Services will continue as a going concern. As more fully
described in Note 1, the Company incurred operating losses in 1996 and 1995 and
has a significant working capital deficiency and a net capital deficiency at
December 31, 1997. In addition, the Company does not have sufficient cash
resources to meet debt obligations maturing in 1998. 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,
including a discussion of the proposed sale of certain significant assets
subsequent to December 31, 1997. 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".
/s/ Ernst & Young LLP
Walnut Creek, California
February 27, 1998
Ernst & Young LLP is a member of Ernst & Young International, LTD.
B-1
<PAGE> 17
American Shared Hospital Services
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,000 $ 368,000
Restricted cash 651,000 218,000
Receivables, less allowance for uncollectible
accounts of $1,302,000 ($1,240,000 in 1996):
Trade accounts receivable 6,658,000 6,341,000
Other 472,000 207,000
------------ ------------
7,130,000 6,548,000
Prepaid expenses, inventories and other current
assets 708,000 698,000
------------ ------------
Total current assets 8,506,000 7,832,000
Property and equipment:
Land, buildings and improvements 1,572,000 1,226,000
Medical, transportation, office and leased equipment 12,202,000 9,880,000
Capitalized leased medical and transportation
equipment 26,410,000 29,318,000
Deposits and construction in progress 1,901,000 1,530,000
------------ ------------
42,085,000 41,954,000
Accumulated depreciation and amortization (21,983,000) (18,523,000)
------------ ------------
Net property and equipment 20,102,000 23,431,000
Other assets 563,000 468,000
Intangible assets, less accumulated amortization of
$1,529,000 ($1,330,000 in 1996) 1,038,000 1,238,000
------------ ------------
Total assets $ 30,209,000 $ 32,969,000
============ ============
</TABLE>
2
<PAGE> 18
American Shared Hospital Services
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable $ 3,693,000 $ 3,705,000
Accrued interest 32,000 50,000
Employee compensation and benefits 1,050,000 944,000
Other accrued liabilities 841,000 839,000
Current portion of long-term debt 4,784,000 6,816,000
Current portion of obligations under capital leases 6,145,000 6,366,000
------------ ------------
Total current liabilities 16,545,000 18,720,000
Long-term debt, less current portion 11,936,000 7,690,000
Obligations under capital leases, less current portion 9,633,000 16,245,000
Deferred gain on early lease termination 296,000 --
Deferred income taxes 164,000 164,000
Minority interest 588,000 625,000
Stockholders' equity (net capital deficiency):
Common stock, without par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 4,769,000 in 1997
and 1996 11,089,000 11,089,000
Common stock options issued to officer 2,414,000 2,414,000
Additional paid-in capital 930,000 930,000
Accumulated deficit (23,386,000) (24,908,000)
------------ ------------
Total stockholders' equity (net capital deficiency) (8,953,000) (10,475,000)
------------ ------------
Total liabilities and stockholders' equity (net
capital deficiency) $ 30,209,000 $ 32,969,000
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 19
American Shared Hospital Services
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Medical services $37,172,000 $36,989,000 $ 34,077,000
Costs and expenses:
Costs of operations:
Medical services payroll 7,533,000 7,312,000 6,984,000
Maintenance and supplies 5,959,000 6,698,000 6,766,000
Depreciation 6,398,000 6,631,000 8,302,000
Write-down of equipment -- -- 3,825,000
Equipment rental 2,686,000 3,449,000 2,808,000
Other 4,468,000 3,981,000 3,990,000
Selling and administrative 5,901,000 5,309,000 8,432,000
Interest 3,671,000 4,199,000 5,310,000
Write-down of intangible assets -- -- 600,000
----------- ----------- ------------
Total costs and expenses 36,616,000 37,579,000 47,017,000
----------- ----------- ------------
556,000 (590,000) (12,940,000)
Gain on sale of assets and early
termination of capital leases due to 821,000 3,000 226,000
casualty loss
Interest and other income 155,000 227,000 258,000
----------- ----------- ------------
Income (loss) before income taxes and
extraordinary item 1,532,000 (360,000) (12,456,000)
Income tax expense (benefit) 10,000 (7,000) 3,000
----------- ----------- ------------
Income (loss) before extraordinary item 1,522,000 (353,000) (12,459,000)
Extraordinary item--gain on early
extinguishment of debt (net of income
tax expense of $0) -- -- 19,803,000
----------- ----------- ------------
Net income (loss) $ 1,522,000 $ (353,000) $ 7,344,000
=========== =========== ============
Earnings (loss) per common share:
Income (loss) before extraordinary item $ 0.32 $ (0.08) $ (2.96)
Extraordinary item $ 0.00 $ 0.00 $ 4.71
----------- ----------- ------------
Net income (loss) per common share $ 0.32 $ (0.08) $ 1.75
=========== =========== ============
Earnings (loss) per common share assuming dilution:
Income (loss) before extraordinary item $ 0.24 $ (0.08) $ (2.96)
Extraordinary item $ 0.00 $ 0.00 $ 4.71
----------- ----------- ------------
Net income (loss) per common share assuming
dilution $ 0.24 $ (0.08) $ 1.75
=========== =========== ============
</TABLE>
See accompanying notes.
4
<PAGE> 20
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, 1994 2,867,000 $ 8,795,000 $ -- $ 763,000 $(31,899,000) $(22,341,000)
Issuance of warrants
to purchase 216,000
shares of common stock -- -- -- 180,000 -- 180,000
Issuance of warrants
to purchase 127,147
shares of common stock -- -- -- 156,000 -- 156,000
Issuance of warrants
to purchase 98,000
shares of common stock -- -- -- 81,000 -- 81,000
Stock issuance costs -- -- -- (250,000) -- (250,000)
Issuance of common
stock to officer 184,000 265,000 -- -- -- 265,000
Issuance of common
stock to noteholders 1,193,000 1,575,000 -- -- -- 1,575,000
Issuance of common
stock options to officer -- -- 2,414,000 -- -- 2,414,000
Net income -- -- -- -- 7,344,000 7,344,000
--------- ----------- ---------- --------- ------------ ------------
Balances at December 31, 1995 4,244,000 10,635,000 2,414,000 930,000 (24,555,000) (10,576,000)
Exercise of warrants
to purchase 225,000
shares of common stock 225,000 2,000 -- -- -- 2,000
Issuance of common
stock to noteholders 287,000 430,000 -- -- -- 430,000
Issuance of common
stock to Board members 13,000 22,000 -- -- -- 22,000
Net loss -- -- -- -- (353,000) (353,000)
--------- ----------- ---------- --------- ------------ ------------
Balances at December 31, 1996 4,769,000 11,089,000 2,414,000 930,000 (24,908,000) (10,475,000)
Net income -- -- -- -- 1,522,000 1,522,000
--------- ----------- ---------- --------- ------------ ------------
Balances at December 31, 1997 4,769,000 $11,089,000 $2,414,000 $ 930,000 $(23,386,000) $ (8,953,000)
========= =========== ========== ========= ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 21
American Shared Hospital Services
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,522,000 $ (353,000) $ 7,344,000
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary gain, after income taxes -- -- (19,803,000)
Gain on sale of assets (270,000) (3,000) (23,000)
Gain on early termination of capital leases (551,000) -- (203,000)
Depreciation 6,752,000 6,978,000 8,818,000
Write-down of equipment -- -- 3,825,000
Write-down of intangible assets -- -- 600,000
Compensation expense related to stock grants -- -- 2,679,000
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash (433,000) 275,000 2,390,000
(Increase) decrease in receivables (582,000) (95,000) 264,000
(Increase) decrease in prepaid
expenses, inventories and other assets (10,000) 493,000 (287,000)
Increase (decrease) in accounts payable
and accrued liabilities 843,000 1,563,000 (674,000)
----------- ----------- ------------
Net cash provided by operating activities 7,271,000 8,858,000 4,930,000
INVESTING ACTIVITIES
Deposits made to purchase Gamma Knives -- (500,000) (1,000,000)
Proceeds from sale and disposition of equipment 331,000 70,000 157,000
(Decrease) increase in minority interest (37,000) 442,000 129,000
Payment for purchase of property and equipment (349,000) (293,000) (226,000)
Distributions received from partnerships -- 15,000 55,000
Other (168,000) (84,000) 210,000
----------- ----------- ------------
Net cash used in investing activities (223,000) (350,000) (675,000)
FINANCING ACTIVITIES
Principal payments on long-term debt and
obligations under capital leases (8,962,000) (8,226,000) (8,612,000)
Payment for exercise of warrants -- 2,000 --
Net proceeds (payments) from revolving line of credit 1,563,000 (8,000) (1,000,000)
Proceeds from loan agreement -- -- 7,000,000
Note payable from related party -- -- 1,300,000
Payment for repurchase of senior subordinated notes -- (360,000) (3,893,000)
Other -- -- 177,000
----------- ----------- ------------
Net cash used in financing activities (7,399,000) (8,592,000) (5,028,000)
----------- ----------- ------------
Net decrease in cash and cash equivalents (351,000) (84,000) (773,000)
Cash and cash equivalents at beginning of year 368,000 452,000 1,225,000
----------- ----------- ------------
Cash and cash equivalents at end of year $ 17,000 $ 368,000 $ 452,000
=========== =========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 3,689,000 $ 4,320,000 $ 3,625,000
=========== =========== ============
Income taxes paid $ 29,000 $ 31,000 $ 82,000
=========== =========== ============
</TABLE>
6
<PAGE> 22
American Shared Hospital Services
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment with lease/debt financing $ 3,999,000 $ 9,996,000 $ 1,342,000
(Decrease) increase in medical and capitalized
lease equipment due to lease restructuring -- (1,461,000) (480,000)
Decrease in medical and capitalized lease
equipment due to early termination of leases (1,137,000) -- --
(Decrease) increase in capitalized lease
obligations due to lease restructuring -- (1,461,000) (480,000)
Decrease in capitalized lease obligations due
to early termination of leases (2,036,000) -- --
Accrued interest payable not paid as part of
Senior Subordinated Notes Repurchase -- 17,000 8,853,000
Stock and warrants issued to noteholders as
part of Senior Subordinated Notes Repurchase -- 430,000 1,836,000
Noncash portion of Senior Subordinated Notes redemption -- 413,000 13,801,000
Note receivable from officer added to basis of
acquired asset -- 248,000 --
Accounts payable converted to notes 817,000 1,971,000 --
</TABLE>
See accompanying notes.
7
<PAGE> 23
American Shared Hospital Services
Notes to Consolidated Financial Statements
December 31, 1997
1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS
American Shared Hospital Services (the "Company") provides shared diagnostic
imaging services to health care providers located in approximately 22 states in
various geographic regions of the United States. The four diagnostic imaging
services provided by the Company are Magnetic Resonance Imaging, Computed Axial
Tomography Scanning, Ultrasound, and Nuclear Medicine. In addition, the Company
provides Gamma Knife units to three medical centers. The Company also provides
Cardiac Catheterization Laboratory and Respiratory Therapy services.
In June 1995, African American Church Health and Economic Services, Inc.
("ACHES") and ACHES Insurance Services, Inc. ("AIS") were incorporated. AIS is a
wholly owned subsidiary of ACHES. AIS is an insurance agency qualified to sell
life, health, and disability insurance in the states of California and New York.
ACHES through AIS sells life, health and disability insurance primarily to the
African-American Community.
On October 17, 1995, the Company (through American Shared Radiosurgery Services
("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
Brazil. GKF is the preferred provider for Elekta AB of financing arrangements,
such as fee-for-service lease arrangements with health care institutions in the
United States and Brazil.
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, CuraCare, Inc. ("CuraCare"), MMRI, Inc., European
Shared Medical Services Ltd., ACHES, AIS and its majority-owned subsidiary, GK
Financing, LLC.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
8
<PAGE> 24
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
1. BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
BUSINESS (CONTINUED)
The Company faces severe competition from other providers of diagnostic imaging
services, some of which have greater financial resources than the Company, and
from equipment manufacturers, hospitals, imaging centers and physician groups
owning in-house diagnostic units. Significant competitive factors in the
diagnostic services market include equipment price and availability, performance
quality, ability to upgrade equipment performance and software, service and
reliability. The Company's current financial problems may adversely affect its
ability to obtain and retain certain profitable customer contracts, and its
current high debt burden may affect its ability to offer technologically
advanced equipment in the future. Due to the Company's financial condition, the
two stock exchanges which list the Company's stock are continuing to monitor the
Company's financial condition to determine whether the Company's common shares
will remain listed. The Company is currently negotiating the sale of a
significant amount of its operating assets. (See Note 14 Subsequent Event.)
The Company leases substantially all of its medical equipment from one primary
provider.
BASIS OF PRESENTATION
The Company has reported net income of $1,522,000 in 1997, and net losses before
extraordinary items of $353,000, and $12,459,000 in 1996 and 1995, respectively.
At December 31, 1997, the Company has a working capital deficiency of $8,039,000
and a net capital deficiency of $8,953,000. In addition, the Company will not
have sufficient cash resources to repay its debt obligations at maturity and
will be required to seek new financing. There can be no assurance that such
financing will be available or that the terms of any such financing will be
acceptable to the Company.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. These financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
9
<PAGE> 25
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
1. BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
Management's plans with regard to these operating issues include the following:
continue to implement its program of expense reductions; identify and sell
non-essential assets; negotiate favorable concessions from major creditors and
enhance revenues by increasing customer contracts and equipment utilization. It
is uncertain as to whether these events will occur, and if they do, the extent
to which they will address the Company's operating issues. The Company is
currently negotiating the sale of a significant amount of its operating assets.
(See Note 14 - Subsequent Event.)
2. ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of the financial statements requires management to make
estimates and assumptions that affect reported amounts. These estimates are
based on information available as of the date of the financial statements.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of three
months or less at the date of purchase to be cash equivalents. The Company
maintains its cash in depository institutions which offer varying levels of
federal insurance. Restricted cash is not considered a cash and cash equivalent
for purposes of the consolidated statements of cash flows.
RESTRICTED CASH
Restricted cash represents cash limited as to use by a contractual arrangement.
Restricted cash at December 31, 1997 and 1996 reflects cash that may only be
used for the operations of GK Financing, LLC.
10
<PAGE> 26
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
REVENUES AND ACCOUNTS RECEIVABLE
Revenue is recognized on a fee-for-service basis when the service is delivered.
Trade accounts receivable are principally from hospitals and other health care
providers located throughout the U.S., with no one customer providing a
significant percent of revenues. The Company performs credit evaluations of its
customers and generally does not require collateral. The Company maintains an
allowance for doubtful accounts at a level which management believes is
sufficient to cover potential credit losses. A substantial portion of the
Company's receivables collateralize its credit facilities (see Note 6).
ACCOUNTING FOR MAJORITY-OWNED SUBSIDIARY
The Company accounts for GK Financing, LLC, as a consolidated entity due to its
81% majority-equity interest. The minority interest's 19% share of earnings
(loss) is netted against "Interest and Other Income" in the consolidated
statements of operations.
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 are stated at cost, or the estimated fair value as determined by
third parties, if less.
Depreciation is determined using the straight-line method over the estimated
useful lives of the assets which for medical and transportation equipment is
generally 2 - 10 years.
Capitalized leased equipment consists primarily of mobile Magnetic Resonance
Imaging ("MRI") units, which include scanners and mobile vans. Capitalized
leased equipment is amortized over the term of the lease, which ranges from 24
to 96 months. Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful life.
11
<PAGE> 27
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
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.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements.
Basic earnings per share has been computed based on the weighted-average number
of common shares outstanding. The Company incurred a net loss for 1996 and 1995,
therefore, the incremental shares that arise as a result of the stock options
and warrants outstanding are anti-dilutive as they reduce the loss per share.
12
<PAGE> 28
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------- --------------
<S> <C> <C> <C>
Numerator:
Net income (loss) before extraordinary
item $1,522,000 $ (353,000) $ (12,459,000)
Extraordinary item -- -- 19,803,000
---------- ------------- --------------
Numerator for basic and diluted earnings
(loss) per share $1,522,000 $ (353,000) $ 7,344,000
========== ============= ==============
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares 4,769,000 4,498,000 4,201,000
Effect of dilutive securities
Employee stock options 1,574,000 -- --
---------- ------------- --------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares 6,343,000 4,498,000 4,201,000
========== ============= ==============
Basic earnings per share:
Income before extraordinary item $ 0.32 $ (0.08) $ (2.97)
Extraordinary item -- -- 4.71
---------- ------------- --------------
Net income $ 0.32 $ (0.08) $ 1.75
========== ============= ==============
Diluted earnings per share:
Income before extraordinary item $ 0.24 $ (0.08) $ (2.97)
Extraordinary item -- -- 4.71
---------- ------------- --------------
Net income $ 0.24 $ (0.08) $ 1.75
========== ============= ==============
</TABLE>
13
<PAGE> 29
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based employee
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company believes that adoption of SFAS 130 will not have a
material impact on the Company's consolidated financial statements.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 will change the way
companies report selected segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial reports to stockholders. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company believes that the application of
the new rules will not have a material impact on the Company's consolidated
financial statements.
14
<PAGE> 30
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
The fair value of all other financial instruments approximate its recorded
values.
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 ("SFAS 121"), during the second quarter of 1995, management reviewed the
recoverability of the carrying value of long-lived assets, primarily fixed
assets, goodwill and deferred costs based on the life of the assets. The Company
initiated its review of potential loss impairment due to the continuing changes
in the health care environment, which have put downward pressure on customer and
equipment pricing. These changes have resulted in recent operating results and
revised future forecasted operating results for certain assets being less than
previously planned. This situation led to the conclusion that there was a
potential impairment in the recorded value of fixed assets, goodwill and
deferred costs. Management's estimate of future undiscounted cash flows over the
useful life of certain assets was determined to be less than their recorded
values, indicating impairment of these assets under the provisions of SFAS 121.
An impairment loss of $4,425,000 was recorded as of the second quarter of 1995
based on the differences between the fair value, as determined by third parties,
and the recorded values of certain assets. The impairment loss is comprised of
write-downs of equipment of $3,825,000 (primarily MRI, CT, nuclear medicine, and
deferred assets), and a write-down of goodwill of $600,000.
No such impairment loss adjustment was required in 1997 or 1996.
15
<PAGE> 31
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------- --------
<S> <C> <C>
Capitalized regulatory licensing fees $110,000 $ 90,000
Prepaid commissions 114,000 114,000
Purchased software, less accumulated amortization of
$424,000 and $417,000 in 1997 and 1996, respectively 50,000 51,000
Investment in partnerships -- 33,000
Other assets 289,000 180,000
-------- --------
$563,000 $468,000
======== ========
</TABLE>
5. SENIOR SUBORDINATED NOTES
During 1996 and 1995, the Company repurchased certain of its Senior Subordinated
Notes resulting in extraordinary gains of $0 and $19,803,000, respectively.
The extraordinary gain in 1995 was the result of a debt restructuring agreement
with four holders of $17,694,000 face value of its Senior Subordinated Notes. On
May 17, 1995, these Senior Subordinated Noteholders ("ex-Noteholders") received
approximately $3,900,000 in cash, plus 819,000 shares of common stock and
warrants for an additional 216,000 shares of common stock. As a result of the
additional options awarded to an officer of the Company, the ex-Noteholders were
granted 374,000 additional common shares and 98,000 additional warrants to
purchase common shares, to maintain their ownership interest at approximately
25% of the then fully diluted common shares. The warrants are immediately
exercisable at $0.75 per share. The remaining Senior Subordinated Noteholders
held $773,000 of the notes as of December 31, 1995. In addition, the debt
covenants were amended which thereby cured the events of default on the Senior
Subordinated Notes.
During 1996, the Company extended an exchange offer for the remaining $773,000
of Senior Subordinated Notes for common stock. On August 30, 1996, the Company
exchanged $413,000 of its Senior Subordinated Notes, and the interest accrued
thereon, for 287,000 shares of common stock valued at $430,000, using the market
price on the date of exchange. The remaining $360,000 of the Senior Subordinated
Notes, and the accrued interest thereon, was settled by the Company in cash on
October 15, 1996, the stated maturity date of the Senior Subordinated Notes.
16
<PAGE> 32
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
5. SENIOR SUBORDINATED NOTES (CONTINUED)
The following table summarizes the early extinguishment of debt during 1996 and
1995, as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Principal amount of Notes repurchased $ 413,000 $ 17,694,000
Accrued interest related to the Notes 17,000 8,853,000
Unamortized debt issuance costs -- (525,000)
Stock and warrants issued to note holders (430,000) (1,836,000)
Estimated tax liability -- --
Closing costs -- (490,000)
------------ ------------
-- 23,696,000
Payment for repurchase -- (3,893,000)
------------ ------------
Extraordinary gain $ -- $ 19,803,000
============ ============
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------- ----------
<S> <C> <C>
Notes Issued in Conjunction with Lease Restructuring
Promissory note payable to primary provider of medical
equipment bearing interest at 5% (effective February 1996)
and 4% during 1995, payable in 86 monthly installments
maturing in February 2002, secured by the Company's
accounts receivable and certain medical equipment $1,505,000 $1,823,000
Promissory note payable to primary provider of medical
equipment bearing interest at 10.75%, payable in 60
monthly installments with the remaining balance due in
January 2002 1,341,000 1,632,000
Promissory note payable to primary provider of medical
equipment bearing interest at 10.5%, payable in 60 monthly
installments maturing in February 2000 248,000 353,000
Promissory note payable to primary provider of medical
equipment bearing interest at 10.75%, payable in 36 monthly
installments with the remaining balance due in January 2000 104,000 147,000
</TABLE>
17
<PAGE> 33
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
Borrowings for Repurchase of Senior Subordinated Notes
Borrowings under $5.5 million Revolving Line of Credit
bearing interest at prime rate plus 3.75% (12.25% at
December 31, 1997) for repurchase of Senior Subordinated
Notes maturing in May 1999 $ 5,438,000 $ 3,875,000
Borrowings under Term Loan for repurchase of Senior
Subordinated Notes bearing interest at 15%, payable in 48
monthly installments maturing in June 1999 1,066,000 1,764,000
Gamma Knife loan payable to primary provider of medical
equipment bearing interest at 10.5%, payable in 40
monthly installments maturing in September 1998 346,000 768,000
Other Notes and Borrowings
Gamma Knife loan payable to primary provider of medical
equipment bearing interest at 10.5%, payable in 60 monthly
installments maturing in July 1999 (Note 13) 1,128,000 1,752,000
Promissory note payable, bearing interest at prime rate
plus 2% (10.25% at December 31, 1996) due in October 1998
(Note 13) 550,000 1,300,000
Borrowings under term loan bearing interest at 10.6%, payable
in 84 monthly installments maturing in September 2004 2,271,000 --
Installment notes payable in monthly installments through
March 2003, bearing interest at 9.9% to 22%, secured by
certain medical equipment 985,000 983,000
Promissory note payable, bearing interest at 11.25%,
payable in 25 monthly installments maturing in July 1997 -- 109,000
Promissory note payable, bearing interest at 10.6%, payable
in 30 monthly installments maturing in March 2000 738,000 --
Borrowings for Gamma Knife deposits under promissory note,
bearing interest at prime rate plus 2% (10.5% at
December 31, 1997) payable when Gamma Knife units
commence operation 1,000,000 --
------------ ------------
16,720,000 14,506,000
Less current portion (4,784,000) (6,816,000)
------------ ------------
$ 11,936,000 $ 7,690,000
============ ============
</TABLE>
18
<PAGE> 34
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
Annual contracted maturities under the initial terms of long-term debt for the
five years after December 31, 1997 are as follows: $4,784,000 in 1998,
$8,136,000 in 1999, $1,325,000 in 2000, $1,181,000 in 2001, $519,000 in 2002 and
$775,000 thereafter.
The Company is severely limited by covenants in its credit agreements which
limit the Company's ability to merge with any other entity, to create
subsidiaries, to pay cash dividends, to repurchase stock for cash, incur
additional indebtedness, or to change the status of the equipment acting as
collateral in such a way as to impair its value.
In addition, the Company has pledged substantially all of its liquid assets and
substantially all of its personal property to secure its existing debt.
Notes Issued in Conjunction with Lease Restructuring
The Company 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.
On December 23, 1996, the Company also converted past due service payments into
a $1,632,000 promissory note with its primary provider of medical equipment. The
note matures in January 2002 and bears interest at an annual rate of 10.75%. The
note is unsecured.
The Company also converted $147,000 of unpaid property taxes into a promissory
note payable to its primary provider of medical equipment. The note bears
interest at an annual rate of 10.75%, payable in 36 consecutive monthly
installments with the remaining balance due in January 2000.
19
<PAGE> 35
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
Borrowings for Repurchase of Senior Subordinated Notes
The repurchase of Senior Subordinated Notes (the "Notes Repurchase") was
completed with the proceeds of three new credit facilities: a new revolving line
of credit (the "Revolver"), a term loan, and a Gamma Knife Loan. Under the
Revolver, the Company has available up to $5,500,000 according to a formula
based on eligible accounts receivable. The Revolver provides for interest
payments only (computed at the Bank of America prime rate plus 3.75%, 12.25% at
December 31, 1997) until maturity on May 31, 1999, when all amounts are due and
payable. The initial proceeds of $3,000,000 drawn under the Revolver were used
primarily to fund the cash consideration in the Notes Repurchase. At December
31, 1997, the Company had drawn $5,438,000 under the Revolver and, based on
eligible accounts receivable, had an additional $62,000 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 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 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 first 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 one of the Gamma Knife units owned by the
Company. The payments on this loan were restructured from $90,431 per month to
$40,203 per month effective September 17, 1995, and to extend the loan term to
September 17, 1998, to match renegotiated terms of the underlying customer
contract.
20
<PAGE> 36
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<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 5,300,000 5,700,000
Fixed assets 2,200,000 3,100,000
Other - net 500,000 800,000
----------- -----------
Net deferred tax assets 8,000,000 9,600,000
Valuation allowance for deferred tax assets 8,000,000 9,600,000
----------- -----------
Total deferred tax assets -- --
----------- -----------
Net deferred tax liabilities $ (164,000) $ (164,000)
=========== ===========
</TABLE>
The decrease in the valuation allowance during 1997 was $1,600,000.
The components of the provision (benefit) for income taxes consist of the
following:
<TABLE>
<CAPTION>
LIABILITY METHOD
---------------------------------------
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 10,000 (7,000) 3,000
Deferred (reduction):
Federal -- -- --
State -- -- --
-------- ------- ------
$ 10,000 $(7,000) $3,000
======== ======= ======
</TABLE>
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.
21
<PAGE> 37
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes as included in the consolidated
financial statements is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Income (loss) before extraordinary gain $ 10,000 $(7,000) $3,000
Extraordinary gain -- -- --
-------- ------- ------
$ 10,000 $(7,000) $3,000
======== ======= ======
</TABLE>
The provision (benefit) for income taxes differs from the amount computed by
applying the U.S. federal statutory tax rate (35% in 1997, 1996 and 1995) to
income (loss) before taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- -----------
<S> <C> <C> <C>
Computed expected tax, including tax on
extraordinary gain $ 536,000 $(126,000) $ 2,570,000
Change in valuation allowance (1,600,000) (300,000) (2,660,000)
State income taxes (benefit), net of federal 10,000 (7,000) 3,000
benefit
Reduction in carryovers and tax attributes 984,000 323,000 --
Goodwill 59,000 88,000 77,000
Other 21,000 15,000 13,000
----------- --------- -----------
$ 10,000 $ (7,000) $ 3,000
=========== ========= ===========
</TABLE>
At December 31, 1997, the Company has a net operating loss carryforward for
federal income tax return purposes of approximately $13,000,000 which expires
between 1999 and 2011. A substantial part of this carryforward is subject to
separate return limitations. The company has state carryforwards of varying
amounts. The Company's ability to utilize its net operating loss carryforwards
and other deferred tax assets may be limited in the event of a 50% or more
ownership change within any three-year period. Approximately $16,000,000 of net
operating loss carryforwards were used to offset the gain on early
extinguishment of the Senior Subordinated Notes in May 1995. (See Note 6 -
Long-Term Debt.)
22
<PAGE> 38
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY
1984 Stock Option Plan
Under the Company's 1984 Stock Option Plan (the "Plan"), as amended, a total of
475,000 stock options were authorized for grant. The Plan terminated according
to its terms on March 1, 1994. Options granted pursuant to the Plan generally
had lives of 10 years from the date of grant, subject to earlier expiration in
certain cases, such as termination of the grantee's employment.
On August 15, 1995, the Stock Option Committee of the Board of Directors
approved the amendment of the terms of substantially all options outstanding
under the Company's 1984 Stock Option Plan, covering an aggregate of
approximately 165,000 shares, to reduce the initial exercise price to $1.625 per
share, which was the closing price of common shares on such date.
1995 Stock Option Plan
The Company's 1995 Stock Option Plan, providing for nonqualified stock options
and "incentive stock options," was approved by the Company's Board of Directors
on August 15, 1995, subject to shareholder approval, which was given on October
6, 1995. Under the 1995 Plan, 330,000 common shares are reserved for awards to
officers and other key employees, non-employee directors, and advisors.
Provisions of the 1995 Stock Option Plan include an automatic grant to each
non-employee director of up to 4,000 shares annually on the date of the
Company's Annual Shareholder Meeting, at an exercise price equal to the market
price of the Company's common shares on that date, until the non-employee
director has options for a total of 12,000 shares of the Company's common stock
in all Company plans. Directors who are appointed or elected to the Company's
Board of Directors on a date other than that of the Annual Shareholder Meeting
receive a pro-rata grant of such shares, at an exercise price equal to the
market price of the Company's common shares on the date of grant. Grants of
options for 19,000 shares were made pursuant to this provision during 1995.
23
<PAGE> 39
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
1995 Stock Option Plan (continued)
Changes in options outstanding under the 1984 and 1995 Stock Option Plans from
January 1, 1995 to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER PRICE AVERAGE
OF SHARES PER SHARE EXERCISE PRICE
-------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1995 256,000 $1.375-$7.50 --
Granted 256,000 $ 1.625 --
Exercised -- -- --
Forfeited (92,000) $3.00 - $7.125 --
-------
Balance at December 31, 1995 42,000 $1.375-$1.625 --
Granted 19,000 $ 1.634
Forfeited (22,000) $ 1.625
-------
Balance at December 31, 1996 417,000 $ 1.625
Granted 14,000 $ 1.688
Exercised -- --
Forfeited (2,000) $ 1.596
-------
Balance at December 31, 1997 429,000 $ 1.627
=======
</TABLE>
At December 31, 1997, 43,000 options were available for grant and 7,000 shares
were reserved for future issuance under the 1995 Plan.
Shares and Options Issued to Officer
Simultaneous with the Notes repurchase in 1995 (Note 5), the Company's Chairman
and Chief Executive Officer was issued an additional 184,000 shares of the
Company's stock, for which the Company recorded compensation expense of
$265,000. The common shares were granted to the officer in partial consideration
for a personal guarantee of $6.5 million of new credit facilities and for
continued employment with the Company.
24
<PAGE> 40
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Shares and Options Issued to Officer (continued)
In addition, on August 15, 1995, the officer was granted a ten-year, immediately
exercisable option to purchase 1,495,000 common shares for an exercise price of
$.01 per share for which the Company has recorded compensation expense of
$2,414,000. These options were granted to the officer as final consideration for
personal guarantees of the new credit facilities and for continued employment
with the Company.
The following table summarizes information about all options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
---------------- ------------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 0.01 1,495,000 7.80 $ 0.01 1,495,000 $ 0.01
1.625 - 1.6875 470,600 6.27 1.627 406,316 1.627
--------------- --------- --------- -------- --------- ---------
$ .01 - 1.6875 1,965,600 7.46 $ 0.372 1,901,316 $ 0.355
=============== ========= ========= ======== ========= =========
</TABLE>
At December 31, 1997 and 1996, 1,890,000 and 1,873,000 options, respectively,
were vested and exercisable.
25
<PAGE> 41
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Pro Forma Information related to Option Grants
Pro forma information regarding net income and earnings per share is required by
SFAS 123 for awards granted after December 31, 1995, as if the Company had
accounted for its stock-based awards to employees under the fair value method of
SFAS 123. The fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The Black-Scholes options
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's option grants under the 1984 and 1996 Plans was estimated
assuming no expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Expected life (years) 9.5 9.5
Expected volatility 93.8% 99.3%
Risk-free interest rate 6.3% 7.9%
</TABLE>
The weighted-average fair value of options granted during 1997 was $1.50. For
pro forma purposes, the estimated fair value of the Company's options is
amortized over the options' vesting period. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income (loss) As reported $ 1,522,000 $ (353,000)
Pro forma 1,458,000 (387,000)
Net income (loss)
per share As reported .24 (0.08)
Pro forma .23 (0.06)
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to December 31,
1995, its pro forma effect will not be fully reflected until approximately 1999.
26
<PAGE> 42
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
1995-1996 Director Retainer Shares
On February 16, 1996, the Company's Board of Directors agreed that non-employee
directors could elect to receive some or all of their $5,000 annual Directors'
Retainer Fees for 1995 and/or 1996 in shares of the Company's common stock,
instead of in cash, at the rate of $1.6875 per share, which was the closing
price of the Company's common stock on that date. A total of 13,047 shares was
issued during 1996 for that purpose. The remaining Director Retainer Fees due to
non-employee directors for 1995 and/or 1996 were paid in cash during 1996.
Warrants Issued in Conjunction with Lease Restructuring
In 1995 and 1996, as consideration for the financial accommodations granted in
the restructuring of the Company's lease obligations, the Company issued
immediately exercisable warrants to its primary provider of leased equipment,
granting the right to purchase 97,853 and 127,147 common shares, respectively,
at a price of $.01 per share. The Company recorded the transactions as a
reduction of the debt payable to its primary provider, and of the extraordinary
gain on the notes repurchase, and adjusted common stock and additional paid-in
capital by the appraised value of the warrants. In 1996, these warrants were
exercised to purchase 225,000 common shares.
Options and Warrants Issued in Conjunction with Repurchase of Senior
Subordinated Notes
On May 17, 1995, simultaneous with the Notes repurchase (Note 5), the Company
issued 819,000 common shares (equal to approximately 20% of the Company's then
fully diluted common shares) and warrants to purchase 216,000 shares of common
stock (equal to approximately 5% of the then fully diluted common shares) to the
holders of $17,694,000 face value of the Company's Senior Subordinated Notes
that were repurchased. The warrants are immediately exercisable at $0.75 per
share, expiring on May 17, 2002.
As a result of the additional options awarded to an officer of the Company, the
ex-Noteholders were granted 374,000 additional common shares and 98,000
additional warrants to purchase common shares, to maintain their ownership
interest at approximately 25% of the then fully diluted common shares. The
warrants are immediately exercisable at $0.75 per share, expiring on May 17,
2002.
Capital shares reserved for future issuances total 2,951,000 shares at December
31, 1997.
27
<PAGE> 43
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLAN
The Company has a defined contribution retirement plan for which substantially
all full-time employees are eligible. Under the terms of the plan, the Company
may contribute a discretionary matching contribution on behalf of each
participant, determined each year by the Company, equal to a percentage of each
participant's contributions and applicable to the first 6% of each participant's
salary. The Company made no contributions to the plan in 1997, 1996 or 1995.
10. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases MRI units and other equipment under capital leases having an
aggregate net book value of $12,284,000 at December 31, 1997. Amortization of
assets recorded under capital leases is included with depreciation expense, and
is primarily amortized over the life of the lease.
On December 30, 1994 (effective as of November 1, 1994 for most leases that were
considered capital prior to that date, and January 1, 1994 for leases that were
considered operating prior to that date) and at the end of 1995 and certain
leases again in early 1996, the Company and its major provider of medical
equipment entered into a restructuring of the obligations of the Company under
lease agreements.
Substantially all capital leases of the Company have been restructured and after
restructuring continued to meet the criteria to be accounted for as capitalized
leases. Under these modified leases, required payments by the Company are
scheduled to retire the unpaid principal balance over the extended lease terms
which will expire on various dates through December 31, 1999. All the operating
leases covered by the restructuring agreement in effect on October 31, 1994 were
modified to extend the payment schedules. As a result of modification of lease
terms, these leases met the criteria for capitalization, and were accounted for
as capital leases in the accompanying financial statements. Under all the
modified leases, the Company is entitled to purchase the equipment at its fair
market value, or to extend the relevant lease, at the end of the lease term.
The modified leases, as identified above, were further restructured effective
October 1, 1995. No payments were required for the months of October through
December 1995. During these months, interest was accrued and was added to the
outstanding principal balance of the capital leases. In addition, the leases
were extended up to an additional 26 months, where possible, to coincide with
the probable termination of the Company's end-user contracts. After this
restructuring, the modified leases continue to meet the criteria to be accounted
for as capitalized leases. Under all the modified leases, the Company will be
entitled to purchase the equipment at its fair value or to extend the relevant
lease at the end of the lease term.
28
<PAGE> 44
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
10. OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
On March 1, 1996, the Company received an offer from its primary provider of
medical equipment to restructure certain of its capital lease obligations. The
general terms of the restructuring provide for various months of no payments in
1996 followed by increased payments in the latter part of the agreements. The
Company completed this restructuring on March 8, 1996.
Future minimum lease payments, together with the present value of the net
minimum lease payments under capital leases at December 31, 1997, are summarized
as follows:
<TABLE>
<CAPTION>
NPV OF MAINTENANCE
MINIMUM AND OTHER LEASE
LEASE LEASE RELATED PAYMENT
PAYMENTS COSTS TOTAL
------------- ------------- ------------
<S> <C> <C> <C>
1998 $ 7,487,000 $ 1,916,000 $ 9,403,000
1999 6,157,000 1,580,000 7,737,000
2000 3,261,000 653,000 3,914,000
2001 917,000 158,000 1,075,000
2002 442,000 46,000 488,000
Thereafter 226,000 16,000 242,000
------------- ------------- ------------
Total 18,490,000 $ 4,369,000 $ 22,859,000
============= ============
Less amounts representing interest 2,712,000
-------------
Present value of net minimum lease payments 15,778,000
Less current portion 6,145,000
-------------
$ 9,633,000
=============
</TABLE>
As shown above, in addition to the capital lease payments, the Company is also
required to make maintenance and other executory cost lease related payments.
During 1997, 1996 and 1995, the Company financed approximately $1,049,000,
$7,263,000, and $1,342,000, respectively, of equipment purchases with capital
lease obligations. During 1997, 1996 and 1995, the Company incurred interest
costs of $3,671,000, $4,199,000, and $5,310,000, respectively.
The deferred gain on early lease termination of $296,000 included on the balance
sheet as of December 31, 1997, reflects gains on a lease which was terminated in
1997 for which the lessor agreed to waive the obligations under that lease
contingent upon the Company entering into two new leases with the lessor. The
deferred gain on the lease termination will be amortized over the terms of the
two new leases, which commence in the second quarter of 1998.
29
<PAGE> 45
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
11. OPERATING LEASES
The Company leases certain MRI and CT scanning equipment, automobiles,
transportation equipment, and office space under operating leases expiring at
various dates through 2003.
Future minimum payments under noncancelable operating leases having initial
terms of more than one year consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
1998 $ 2,551,000
1999 2,353,000
2000 1,926,000
2001 1,139,000
2002 886,000
Thereafter 156,000
-----------
$ 9,011,000
===========
</TABLE>
Payments for repair and maintenance agreements are included in the future
minimum operating lease payments shown above.
Rent expense was $3,285,000 $3,841,000, and $3,458,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, and includes the above operating
leases as well as month-to-month rental and certain capital lease executory
costs.
12. PURCHASE OF GAMMA KNIFE FROM RELATED PARTY
In January 1993, the Company entered into a commitment to purchase a Gamma Knife
for $2,900,000 and lease the Gamma Knife to a hospital. During 1993, $1,090,000
was advanced to the equipment manufacturer (the "Manufacturer") including
$800,000 advanced by a third-party lessor and guaranteed by the Chief Executive
officer of the Company. The Company was unable to pay or finance scheduled
progress payments and had been informed by the Manufacturer that the Company was
in default under the terns of the purchase agreement and that such agreement was
terminated.
30
<PAGE> 46
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
12. PURCHASE OF GAMMA KNIFE FROM RELATED PARTY (CONTINUED)
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. 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.
On February 3, 1996, the Company purchased a Gamma Knife through its subsidiary,
GK Financing, LLC from its Chief Executive Officer in exchange for forgiveness
of the outstanding balance of a note due to the Company of $248,000 at December
31, 1996, plus assumption of a note payable in the amount of $2,270,000. The
note is payable to the Company's primary provider of medical equipment, bearing
interest at 10.5%, due in 60 monthly installments, with final payment due July
1999.
13. COMMITMENTS AND CONTINGENCIES
On October 11, 1996 and October 17, 1995, the Company, through GKF, entered into
quotation agreements to purchase a total of seven Gamma Knife units from the
equipment manufacturer. Under the terms of the quotation agreements, the Company
is committed to purchase this equipment for $19,654,000, effective when the
equipment is placed in service at each customer location. At December 31, 1997,
the Company had a $1,750,000 deposit related to these purchase commitments which
is classified as construction in progress. GKF has a promissory note for
$1,320,000 with the equipment manufacturer to provide funds for future capital
expenditures. As of December 31, 1997, there have been no borrowings under this
note.
31
<PAGE> 47
American Shared Hospital Services
Notes to Consolidated Financial Statements (continued)
14. SUBSEQUENT EVENT - SALE OF ASSETS (UNAUDITED)
On March 12, 1998, the Company entered into a definitive agreement to sell
certain of its medical diagnostic imaging assets to Alliance Imaging, Inc.
("Alliance") an affiliate of Apollo Management, L.P. for $13.6 million in cash
and the assumption of liabilities associated with the Company's diagnostic
imaging business, including approximately $26.1 million of debt. The Company is
in the process of finalizing its calculation of the gain it would expect to
recognize on the sale.
The following table presents certain financial information of the assets to be
sold:
<TABLE>
<S> <C>
Revenues for the year ended December 31, 1997 were approximately $ 34,772,000
Total assets at December 31, 1997 were approximately 22,100,000
Total liabilities at December 31, 1997 were approximately 31,900,000
</TABLE>
The proposed transaction is subject to certain conditions, including receipt of
regulatory approvals and the approving vote of a majority of the shareholders of
the Company.
32
<PAGE> 48
Financial Statement Schedule
<PAGE> 49
American Shared Hospital Services
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Additions Additions
Balance at Charged to Balance at Charged to Balance at Charged to
December 31, Costs and Amounts December 31, Costs and Amounts December 31, Costs and
1994 Expenses Written Off 1995 Expenses Written Off 1996 Expenses
----------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for
uncollectible
accounts $(1,424,000) $(1,347,000) $1,323,000 $(1,448,000) $(1,014,000) $ 1,222,000 $(1,240,000) $(1,296,000)
</TABLE>
<TABLE>
<CAPTION>
Balance at
Amounts December 31,
Written Off 1997
----------- -----------
<S> <C> <C>
Allowance for
uncollectible
accounts $ 1,234,000 $(1,302,000)
</TABLE>
33
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
23.1 Consent of Ernst & Young LLP.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement, as
amended, (Forms S-8, No. 2-90646; No. 33-21509; No. 33-48980) pertaining to the
1984 Stock Option and Employment Agreement of American Shared Hospital Services;
the Registration Statement (Form S-8, No. 33-45999) pertaining to the American
Shared Hospital Services 1991 Employee Stock Bonus Plan; the Registration
Statement (Form S-8, No. 333-08009) pertaining to the 1995 Stock Option Plan of
American Shared Hospital Services; the Registration Statement, as amended, (Form
S-3, No. 333-12879) pertaining to the registration of 2,679,047 of Common Shares
of American Shared Hospital Services; and the Registration Statement, as
amended, (Form S-3, No. 33-63721) pertaining to the registration of 1,290,853 of
Common Shares of American Shared Hospital Services and 441,147 Warrants to
purchase Common Shares of American Shared Hospital Services and in the related
Prospectuses of our report dated February 27, 1998 with respect to the
consolidated financial statements and schedule of American Shared Hospital
Services included in this Annual Report (Form 10-K) for the year ended December
31, 1997.
Ernst & Young LLP
March 30, 1998
Walnut Creek, California
