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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
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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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
FOUR EMBARCADERO CENTER, SUITE 3620, SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 788-5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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. [ ]
As of March 15, 1999, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $3,286,054.
Number of shares of common stock of the registrant outstanding as of March
15, 1999: 3,972,372.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of its shareholders are incorporated by reference into Part III of this
report.
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PART I
ITEM 1. BUSINESS
GENERAL
American Shared Hospital Services ("ASHS" and, together with its
subsidiaries, the "Company") currently provides stereotactic radiosurgery
services to five medical centers in three states. The Company provides these
services through its 81% indirect interest in GK Financing, LLC, a California
limited liability company ("GKF"). The remaining 19% of GKF is owned by Elekta
Holdings U.S., Inc., a wholly owned subsidiary of Elekta AG, a Swedish company
("Elekta"). Elekta is the manufacturer of the Leksell Gamma Knife (the "Gamma
Knife"). GKF is a non-exclusive provider of alternative financing services for
Elekta.
At present, the Company is developing a business plan for "The Operating
Room for the 21st Century" (sm) concept and owns an insurance services business.
Neither The Operating Room for the 21st Century nor the Company's insurance
services business are expected to generate significant revenues within the next
twelve months.
During November 1998, the Company sold its diagnostic imaging business (the
"Sale") to affiliates of Alliance Imaging, Inc. (the "Purchaser") for
$13,552,000 in cash and the assumption by the Purchaser of substantially all of
the liabilities of the diagnostic imaging business, including approximately
$27.1 million in debt and other liabilities. Prior to this sale, the Company
provided Magnetic Resonance Imaging ("MRI"), Computed Axial Tomography ("CT"),
Ultrasound, Nuclear Medicine and Cardiac Catheterization Laboratory services to
approximately 190 customers in 22 states. The diagnostic imaging business
provided approximately 88%, 94% and 95% of the Company's revenues for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company was incorporated in the state of California in 1983 and its
predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital
Services), a California limited partnership, was formed in June 1980.
GAMMA KNIFE OPERATIONS
Gamma Knife stereotactic radiosurgery, a non-invasive procedure, is an
alternative to conventional brain surgery or can be an adjunct to conventional
brain surgery. Compared to conventional surgery, Gamma Knife surgery usually
involves shorter patient hospitalization, lower risk of complications and can be
provided at a lower cost. Typically, Gamma Knife patients resume their normal
activities one or two days after treatment. The Gamma Knife treats the patient
with 201 single doses of gamma rays that are focused with great precision on
small, well circumscribed and critically located structures in the brain. The
Gamma Knife delivers the concentrated dose of gamma rays from 201 sources of
Cobalt 60 housed in the Gamma Knife. The 201 Cobalt 60 sources converge at the
target area and deliver a dose that is high enough to destroy the diseased
tissue without damaging surrounding healthy tissue.
The Gamma Knife treats selected benign brain tumors (i.e. meningiomas,
pituitary and acoustic neuromas, craniopharyngiomas), malignant tumors (i.e.
gliomas, nasopharyngeal carcinomas, ocular meningiomas and solitary and multiple
metastatic tumors), arteriovenous malformations and trigeminal neuralgia.
Research is being conducted in the treatment of Parkinson's disease, epilepsy,
and other functional disorders.
There are currently 47 Gamma Knife units operating at 46 sites in the
United States and 119 units worldwide. As of December 31, 1998, approximately
100,000 procedures had been performed worldwide. An estimated percentage
breakdown of these 100,000 procedures by indications treated are as follows:
Benign (38%) and malignant (36%) tumors, vascular disorders (22%) and functional
disorders (4%).
The Company currently has five (5) Gamma Knife units at five (5) sites in
the United States. The Company's first Gamma Knife commenced operation in
September 1991. The Company's Gamma Knife units have performed approximately
2,060 procedures through December 31, 1998.
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Gamma Knife revenues for the Company during the five (5) years ended
December 31, 1998, and the percentage of total revenues of the Company
represented by the Gamma Knife for each of the last five years are set forth
below:
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TOTAL GAMMA KNIFE GAMMA KNIFE/
YEAR ENDED DECEMBER 31, REVENUES (IN THOUSANDS) TOTAL REVENUES
----------------------- ----------------------- --------------
<S> <C> <C>
1998...................... $4,156 11.8%
1997...................... $2,384 6.4%
1996...................... $2,030 5.5%
1995...................... $1,325 3.9%
1994...................... $1,411 3.7%
</TABLE>
The Company conducts its Gamma Knife business through its 81% indirect
interest in GKF. The remaining 19% interest is indirectly owned by Elekta. GKF,
a limited liability company, was formed in October 1995. The Company contributed
two customer contracts for its 81% membership interest and Elekta contributed
cash of approximately $700,000 for its 19% membership interest in GKF. At GKF's
inception, Elekta additionally guaranteed a loan in the amount of $1,300,000 by
a third party lender to GKF for deposits on four (4) Gamma Knife units and also
made available a loan in the amount of $1,320,000. The loan for $1,300,000 has
been refinanced by another third party lender without Elekta's guarantee. GKF
never drew down funds on the $1,320,000 loan and the loan commitment has
expired.
GKF is managed by its policy committee. The policy committee is composed of
one representative from the Company, Ernest A. Bates, M.D., and one
representative from Elekta. The policy committee sets the operating policy for
GKF. The policy committee may act only with the unanimous approval of all of its
members. The policy committee selects a manger to handle GKF's daily operations.
Craig K. Tagawa, Chief Executive Officer of GKF, serves as the GKF's manager.
GKF profits and/or losses and any cash distributions are allocated based on
membership interests. GKF is required to have a cash reserve of at least $50,000
prior to cash distributions to its members. As of December 31, 1998, $1,176,000
was available for distribution to members. From inception to December 31, 1998,
GKF had distributed in the aggregate $100,000 to the Company.
RISKS OF GAMMA KNIFE BUSINESS
There are significant risks involved in the Company's Gamma Knife business,
including the following:
- Each Gamma Knife unit requires a substantial capital investment. The
Company's cost for a Gamma Knife is approximately $2,900,000. Due to the
structure of its contracts with medical centers, there can be no
assurance that this cost will be fully recovered or that the Company will
earn a satisfactory return on its investment.
- There is a limited market for the Gamma Knife. Due to the substantial
costs of acquiring a Gamma Knife, the Company must identify medical
centers that possess large enough neurosurgery and oncology departments
capable of performing a large number of Gamma Knife procedures. The
Company has identified approximately 200 such medical centers in the
United States as potential future sites. There were 47 operating Gamma
Knife units in the United States at the end of February 1999, five (5) of
which are Company-supplied units. There can be no assurance that the
Company will be successful in placing units at a significant number of
sites in the future.
- There are currently four companies (in addition to the Company) that
supply the Gamma Knife to potential customers. Two of the four companies
have purchased a Gamma Knife within the last twelve months. The Company
does not currently have an exclusive relationship with Elekta and has
lost sales in the past to customers that choose to purchase a Gamma Knife
directly from Elekta. In addition, the Company may continue to lose sales
in the future to such customers and may also lose sales to competitors of
the Company. There can be no assurance that the Company will be able to
successfully compete against others to place units in the future.
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- There are several methods of radiosurgery that compete against the Gamma
Knife, including the modified linear accelerator and microsurgery.
Currently, there are approximately 200 medical centers in the United
States with modified linear accelerators. Each of the medical centers
targeted by the Company could decide to acquire a modified linear
accelerator instead of a Gamma Knife. In addition, surgeons who are
primarily responsible for referring patients for Gamma Knife surgery may
not be willing to make such referrals for various reasons. There can be
no assurance that the Company will be able to secure a sufficient number
of sites or Gamma Knife procedures to attain profitability and growth.
- The amount reimbursed to medical centers for each Gamma Knife treatment
may decline in the future. The reimbursement decrease may come from
Federally mandated programs (i.e. Medicare and Medicaid) and other third
party payor groups. A significant amount of the Company's existing
contracts are reimbursed by the medical center to the Company on a
fee-for-service basis. The primary risk to the Company under this type of
contract is that actual volumes of procedures were less than projected.
In July 1998, the Company began a contract on a shared revenue basis.
Revenues under this contract and any future shared revenue basis
contracts will be impacted by any reimbursement rate change. A
significant number of future contracts for Gamma Knife services may be
based on a shared revenue instead of a fee-for-service basis. There can
be no assurance that future changes in healthcare regulations and
reimbursement rates will not adversely affect the Company's Gamma Knife
revenues.
- As with other highly sophisticated medical equipment, there is constant
change and innovation in the market. New and improved medical equipment
can be introduced that could make the Gamma Knife technology obsolete and
that would make its operation uneconomic. It is expected that Elekta will
introduce an upgraded Gamma Knife in the near future. This upgrade is
anticipated to primarily automate the patient positioning process and
therefore involve less health care provider intervention. Three (3) of
the Company's existing Gamma Knife units are upgradeable. The cost for
the new unit or the upgrade package is not known at this time.
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CUSTOMERS
The Company's primary business is the outsourcing of Gamma Knife
stereotactic radiosurgery services. The market for these services primarily
consists of major urban medical centers. The Gamma Knife business is capital
intensive. Purchasing and installing each Gamma Knife costs between $3,200,000
and $4,000,000. Typically, the Company's costs for acquisition are approximately
$2,900,000, with the medical center paying for site and installation costs.
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ORIGINAL
CUSTOMER TERM OF CONTRACT BASIS OF PAYMENT
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<S> <C> <C>
EXISTING SITES
UCSF-Stanford Health Care 10 years fee per use
San Francisco, California
USC University Hospital 5 years fee per use
Los Angeles, California
Hoag Memorial Hospital Presbyterian 10 years fee per use
Newport Beach, California
Southwest Texas Methodist Hospital 10 years fee per use
San Antonio, Texas
Yale New Haven Ambulatory Services Corporation 10 years revenue sharing
New Haven, Connecticut
SITES UNDER DEVELOPMENT
Kettering Medical Center 10 years fee per use
Kettering, Ohio
New England Medical Center 10 years fee per use
Boston, Massachusetts
JFK Medical Center 10 years fee per use
Edison, New Jersey
University of Arkansas 15 years revenue sharing
Little Rock, Arkansas
Hospital Barra D'Or 10 years fee per use
Rio de Janeiro, Brazil
</TABLE>
One of the Company's contracts ends in the third quarter of 1999 and the
Company currently is negotiating an extension with that customer. If the Company
cannot negotiate an extension with that customer, the contract will terminate in
third quarter 1999. The Company estimates that one site under development will
become operational in second quarter 1999 and three additional sites under
development will become operational in third quarter 1999. The Company's
contract with Hospital Barra D'Or is currently being renegotiated with the
customer in light of the changes in the Brazilian economic environment. If the
contract cannot be successfully renegotiated, it will be terminated.
The Company's fee per use agreement is typically for a ten year term. The
fixed fee per use reimbursement amount the Company receives from the customer is
based on the Company's cost to provide the service and the anticipated volumes
of the customer. The contracts signed by the Company typically call for a fee
ranging from $7,500 to $9,500 per procedure. There are no minimum volume
guarantees required of the customer. Typically, GKF is responsible for providing
the Gamma Knife and related ongoing Gamma Knife expenses (i.e. personal property
taxes, insurance, equipment maintenance and marketing services). Typically, the
customer is obligated to pay site and installation costs and the costs of
operating the Gamma Knife. Generally, the customer can either renew the
agreement or terminate the agreement upon the termination date of the agreement.
If the customer chooses to terminate the agreement, then GKF removes the
equipment from the medical center.
The Company's revenue sharing agreement is typically for a period of ten to
fifteen years. Instead of receiving a fixed fee, the company receives a
percentage of the reimbursement (exclusive of physician fees) received by the
customer less the operating expenses of the Gamma Knife. The Company is at risk
to any reimbursement rate changes for Gamma Knife services by third party
payors. The Company is also at risk if it
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inefficiently operates its Gamma Knife services. There are no minimum volume
guarantees required of the customer.
No single customer accounted for 10% or more of the Company's total
revenues in 1998 or 1997, but each of the five Gamma Knife customers accounted
for more than 10% of the Company's Gamma Knife services revenues, in those years
of operation.
MARKETING
At the end of 1998, the Company employed one sales executive. The Company
markets its services through its preferred provider status with Elekta and a
direct sales effort. The major advantages to a health care provider in
contracting with the Company for Gamma Knife services include:
- The medical center avoids the high cost of owning the equipment. By not
acquiring the Gamma Knife unit, the medical center is able to allocate
the funds required to purchase the Gamma Knife to other projects.
- The medical center avoids the risk of Gamma Knife under-utilization. The
Company does not have minimum volume requirements. The medical center
pays the Company only for each Gamma Knife procedure performed on a
patient.
- The medical center transfers the risk of technological obsolescence to
the Company. The medical center and its physicians are not under any
obligation to utilize technologically obsolete equipment.
FINANCING
The Company's Gamma Knife business is operated through GKF. GKF has funded
its existing Gamma Knife units with loans from a single lender for 100% of the
cost of the Gamma Knife, plus any sales tax, customs and duties. The loans are
fully amortized over an 84 month period. The loans are collateralized by the
Gamma Knife and customer contracts and are without recourse to the Company and
Elekta.
GKF currently has loan commitments and has received progress payments from
its primary lender for four (4) of its five (5) Gamma Knife projects under
development. The loan commitments require that GKF has a debt to equity plus
subordinated debt ratio of 5 to 1. After recognition of a $810,000 and $190,000
cash distribution from GKF to the Company and Elekta, respectively, in January
1999, GKF must increase its equity and/or subordinated debt balances by
approximately $1,400,000 to be eligible for full funding of its approximately
$11,000,000 cash requirement for its four (4) projects in development. GKF
currently has the capability for additional borrowings of $3,800,000, which is
adequate to meet its customer obligations through the middle of the second
quarter of 1999.
GKF and the Company are exploring options as to how GKF can best meet its
customer obligations. These options include (i) requesting a waiver of GKF's
debt to equity covenant from GKF's primary lender, (ii) the Company and Elekta
making additional capital contributions when necessary, and (iii) the Company
providing subordinated debt to GKF. The Company has the financial resources to
allow GKF to meet its customer obligations and intends to provide these
financial resources so that GKF can meet its obligations to its customers.
COMPETITION
Conventional neurosurgery is the primary competitor of Gamma Knife
radiosurgery. Gamma Knife surgery is gaining acceptance as an alternative and/or
adjunct to conventional surgery due to its comparable morbidity outcomes for
certain procedures as well as its non-invasiveness. Utilization of the Company's
Gamma Knife units is contingent on the acceptance of Gamma Knife radiosurgery by
the customer's neurosurgeons, radiation oncologists and referring physicians. In
addition, the utilization of the Company's Gamma Knife units is impacted by the
proximity of competing Gamma Knife centers and providers using modified linear
accelerators to perform radiosurgery.
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The Company's ability to contract with additional customers for Gamma Knife
services is dependent on its ability to compete against (i) other companies that
outsource Gamma Knife services, (ii) Elekta, the manufacturer of the Gamma
Knife, and (iii) manufacturers of competing radiosurgery devices (primarily
modified linear accelerators). The Company does not have an exclusive
relationship with Elekta and has lost sales in the past to customers that choose
to purchase a Gamma Knife directly from Elekta. The Company may continue to lose
sales in the future to such customers and may also lose sales to competitors of
the Company.
GOVERNMENT REGULATION
The Company's Gamma Knife services customers receive payments for patient
care from federal government and private insurer reimbursement programs.
Currently, Gamma Knife services are performed predominantly on an in-patient
basis, although some are performed on an out-patient basis.
A Prospective Payment System ("PPS") is utilized to reimburse hospitals for
care given to hospital in-patients covered by federally funded reimbursement
programs. Patients are classified into a Diagnosis Related Group ("DRG") in
accordance with the patient's diagnosis, necessary medical procedures and other
factors. Patient reimbursement is limited to a predetermined amount for each
DRG. The reimbursement payment may not necessarily cover the cost of all medical
services actually provided because the payment is predetermined. Effective
October 1, 1997, Gamma Knife services for Medicare hospital in-patients were
reclassified from DRG 1 to either DRG 7 or DRG 8. This reclassification is
estimated to reduce medical center revenues from the Medicare DRG program by
approximately 30%. In the future, this reduction may lower reimbursement from
other third party payors.
In 1986 and again in 1990, Congress enacted legislation requiring the
Department of Health and Human Services ("DHHS") to develop proposals for a PPS
for hospital outpatient services. DHHS has proposed a new payment system,
Ambulatory Product Classifications ("APC"), which affects all outpatient
services, including those performed in a hospital based or free-standing
facility. APC were scheduled to take effect January 1, 2000. The implementation
of APC have been delayed due to year 2000 computer issues and the volume of
responses to the proposed APC system.
The APC consist of 346 clinically, homogenous classifications or groupings
of codes that are typically used in outpatient billing. Outpatient services will
be bundled with fixed rates of payment determined according to specific regional
and national factors, similar to that of the in-patient PPS. Overall, the system
is expected to reduce payments for select services and encourage the most
efficient use of resources for outpatient care.
The current APC proposal categorizes radiosurgery under conventional
radiation therapy. Therefore, both procedures would receive the same
reimbursement amounts. This categorization makes no distinction with regard to
the types of resources utilized (e.g. technology) for each procedure
classification. Therefore, regardless of resource consumption and clinical
outcomes, all procedures within a group qualify for equal reimbursement.
Specifically, stereotactic radiosurgery would receive the same reimbursement per
session as conventional radiation therapy. This would result in a significant
reimbursement decrease for Gamma Knife patients covered by Medicare treated on
an outpatient basis. Various groups are informing DHHS of the discrepancies of
these service levels in an attempt to be compensated in line with the intent of
the APC system. It is not the intent of the APC system to compensate providers
similarly for clinically different procedures.
The Company has one shared revenue basis contract that is directly affected
by changes in payment rates by Medicare and other third party payors. A number
of future contracts for Gamma Knife services may be on a shared revenue basis
instead of a fee-for-service basis. As a result of lower reimbursement rates,
profitability from future contracts will be reduced unless the number of Gamma
Knife procedures can be increased or if the costs to provide Gamma Knife
services can be lowered.
The payment of remuneration to induce the referral of health care business
has been a subject of increasing governmental and regulatory focus in recent
years. Section 1128B(b) of the Social Security Act
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(sometimes referred to as the "federal anti-kickback statute") provides criminal
penalties for individuals or entities that knowingly and willfully offer, pay,
solicit or receive remuneration in order to induce referrals for items or
services for which payment may be made under the Medicare and Medicaid programs
and certain other government funded programs. The Social Security Act provides
authority to the Office of Inspector General through civil proceedings to
exclude an individual or entity from participation in the Medicare and state
health programs if it is determined any such party has violated Section 1128B(b)
of the Social Security Act. The Company believes that it is in compliance with
the federal anti-kickback statute. Additionally, the Omnibus Budget
Reconciliation Act of 1993, often referred to as "Stark II", bans physician self
referrals to providers of designated health services with which the physician
has a financial relationship. The term "designated health services" includes:
clinical laboratory services, physical therapy services, occupational therapy
services, radiology or other diagnostic services, radiation therapy services,
durable medical equipment, parenteral and enteral nutrients, equipment and
supplies, home health services, outpatient prescription drugs, in-patient and
outpatient hospital services. On January 1, 1995, the Physician Ownership and
Referral Act of 1993 became effective in California. This legislation prohibits
physician self-referrals for covered goods and services including diagnostic
nuclear medicine and diagnostic imaging if the physician (or the physician's
immediate family) concurrently has a financial interest in the entity receiving
the referral. The Company believes that it is in compliance with these rules and
regulations.
Legislation in various jurisdictions requires that health facilities obtain
a Certificate of Need ("CON") prior to making expenditures for medical
technology in excess of specified amounts. One of the Company's existing
customers was required to obtain a CON. The CON procedure can be expensive and
time consuming and may impact the length of time before Gamma Knife services
commence. CON requirements vary from state to state in their application to the
operations of both the Company and its customers. In some jurisdictions the
Company is required to comply with CON procedures to provide its services and in
other jurisdictions customers must comply with CON procedures before using the
Company's services.
The Company's Gamma Knife units contain Cobalt 60 radioactive sources. The
medical centers that house the Company's Gamma Knife units are responsible for
obtaining possession and user's licenses for the Cobalt 60 source.
The Company believes it is in substantial compliance with the various rules
and regulations that affect its businesses.
INSURANCE AND INDEMNIFICATION
The Company's contracts with equipment vendors generally do not contain
indemnification provisions. The Company maintains a comprehensive insurance
program covering the value of its property and equipment, subject to deductibles
which the Company believes are reasonable.
The Company's customer contracts generally contain mutual indemnification
provisions. The Company maintains general and professional liability insurance.
The Company is not involved in the practice of medicine and therefore believes
its present insurance coverage and indemnification agreements are adequate for
its business.
EMPLOYEES
At December 31, 1998, the Company employed approximately 25 employees on a
full-time basis and approximately 2 employees on a part-time basis. None of
these employees is subject to a collective bargaining agreement and there is no
union representation within the Company. The Company maintains various employee
benefit plans and believes its employee relations are good. The Company expects
to employ fewer than ten (10) people after it completes its transition service
obligations to the purchaser of its diagnostic imaging business in April 1999.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table provides current information concerning those persons
who serve as executive officers of the Company. The executive officers were
appointed by the Board of Directors and serve at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
NAME: AGE: POSITION:
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<S> <C> <C>
Ernest A. Bates, M.D. 62 Chairman of the Board of Directors, Chief
Executive Officer
Craig K. Tagawa 45 Senior Vice President -- Chief Operating
and Financial Officer
Richard Magary 58 Senior Vice President -- Administration,
Assistant Secretary
Gregory Pape 43 Senior Vice President -- Sales and
Marketing
</TABLE>
ERNEST A. BATES, M.D., founder of the Company, has served in the positions
listed above since the incorporation of the Company, except for the periods May
1, 1991 through November 6, 1992 and February 1989 through August 1989, during
which time Dr. Bates did not serve in the capacity of President and Chief
Operating Officer. Dr. Bates is a graduate of the Johns Hopkins University and
the University of Rochester School of Medicine. He is currently an Assistant
Clinical Professor of Neurosurgery at the University of California Medical
Center at San Francisco, and a member of the Board of Trustees of the Johns
Hopkins University and the University of Rochester, a Director of the Industrial
Policy Advisory Committee of the Engineering Research Center (CISST) at Johns
Hopkins University, a Member of the State of California High Speed Rail
Authority, and a Member of the Board of Directors of Salzburg Seminar.
CRAIG K. TAGAWA has assumed the additional duties of Chief Operating
Officer since February 1999 in addition to serving as Chief Financial Officer
since May 1996. Mr. Tagawa also served as Chief Financial Officer from January
1992 through October 1995. Previously a Vice President in such capacity, Mr.
Tagawa became a Senior Vice President on February 28, 1993. He is also the Chief
Executive Officer of GK Financing, LLC. From September 1988 through January
1992, Mr. Tagawa served in various positions with the Company. From 1982 through
August 1988, Mr. Tagawa served as Vice President of Finance and Controller of
Medical Ambulatory Care, Inc., the Dialysis division of National Medical
Enterprises, Inc. (now Tenet Healthcare Corporation), an owner and operator of
hospitals and other health care businesses. Mr. Tagawa received his
Undergraduate degree from the University of California at Berkeley and his M.B.A
from Cornell University.
RICHARD MAGARY has served as Senior Vice President -- Administration since
February 28, 1993 and Assistant Secretary since 1985. Mr. Magary will conclude
his current duties in April or May of 1999 and become an advisor to the Company.
From April 1987 through February 1993, Mr. Magary served as a Vice President in
the same capacity. From 1982 through March 1987, he served as Chief Financial
Officer of the Company and its predecessor. Mr. Magary is a graduate of the
University of San Francisco.
GREGORY PAPE has served as Senior Vice President -- Sales and Marketing
since June 1994. From January 1993 through June 1994, Mr. Pape was a Zone Vice
President -- Sales and Marketing for the Company. Mr. Pape served in the
capacity of Regional Sales Manager for the Company for the period from March
1991 through January 1993. From September 1989 through February 1991, Mr. Pape
was a Regional Sales Manager for Medical Imaging Corporation of America, Inc.
Mr. Pape earned his undergraduate degree at the University of Miami, with
postgraduate work in law at the University of Dayton, Ohio.
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ITEM 2. PROPERTIES
The Company's corporate offices are located at Four Embarcadero Center,
Suite 3620, San Francisco, California, where it leases 2,996 square feet for
$9,275 per month. This lease runs through September 1999.
The Company's administrative office is located in Modesto, California,
where it leases 5,413 square feet for $6,135 per month. This lease runs through
May 1999.
For the year ended December 31, 1998, the Company's aggregate net rental
expenses for all properties and equipment were approximately $4,696,000.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings involving the Company or
any of its property. The Company knows of no legal or administrative proceedings
against the Company contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of shareholders on November 13, 1998, the shareholders
of the Company approved the Sale pursuant to the Securities Purchase Agreement
dated as of March 12, 1998 among the Company and the Purchaser. Holders of
3,494,291 common shares voted in favor of the sale, 13,675 common shares voted
against, and 3,500 shares abstained. The shares voting in favor of the sale
represented 98.6% of the total number of shares present in person or by proxy at
the Special Meeting of Shareholders and 73.3% of the outstanding common shares.
The Sale closed immediately following the Special Meeting.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common shares, no par value (the "Common Shares"), are
currently traded on the American Stock Exchange ("AMEX") and the Pacific
Exchange ("PCX"). The Company's losses and net capital deficiency have caused
the Company to no longer satisfy the minimum criteria with respect to net income
and net worth for continued listing published by the AMEX. The per share trading
price is also below the minimum criteria of such exchange. The closing per share
price of the Common Shares was $1.125 on March 12, 1999. The Company has been
advised that its net capital deficiency is inconsistent with the criteria
applied by the PCX for continued listing on such exchange. The AMEX and the PCX
are continuing to monitor the Company's financial condition in order to
determine whether the Common Shares will continue to be listed for trading
thereon. With the completion of the Sale, the Company believes it now meets
AMEX's and PCX's minimum criteria. The Company will submit its audited financial
statements to AMEX and PCX and believes rulings regarding continued listing will
be issued by AMEX and PCX in second quarter 1999.
The table below sets forth the high and low closing sales prices of the
Common Shares of the Company on the American Stock Exchange Consolidated
Reporting System for each full quarter for the last two fiscal years.
PRICES FOR COMMON SHARES
<TABLE>
<CAPTION>
QUARTER ENDING HIGH LOW
-------------- ------ -----
<S> <C> <C>
March 31, 1997......................................... 2 3/16 1 3/8
June 30, 1997.......................................... 1 5/8 3/4
September 30, 1997..................................... 1 7/8 1
December 31, 1997...................................... 2 3/16 1 7/16
March 31, 1998......................................... 1 15/16 1 3/8
June 30, 1998.......................................... 1 7/8 1 1/4
September 30, 1998..................................... 1 1/4 5/8
December 31, 1998...................................... 1 1/4 5/8
</TABLE>
The Company estimates that there were approximately 1200 beneficial holders
of its Common Shares as of December 31, 1998. On March 8, 1999, the Company
repurchased substantially all of its remaining securities owned by two major
holders who acquired them in the Company's 1995 restructuring (see "Subsequent
Events").
The Company did not pay cash dividends in 1998 and does not anticipate
paying cash dividends in 1999.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Medical services revenues..................... $35,162 $37,172 $ 36,989 $ 34,077 $ 38,545
======= ======= ======== ======== ========
Costs of operations........................... 25,826 27,044 28,071 32,675 34,145
Selling and administrative expense............ 5,116 5,901 5,309 8,432 5,971
Interest expense.............................. 3,186 3,671 4,199 5,310 7,423
Write-down of intangible assets............... 0 0 0 600 0
------- ------- -------- -------- --------
Total costs and expenses...................... 34,128 36,616 37,579 47,017 47,539
------- ------- -------- -------- --------
1,034 556 (590) (12,940) (8,994)
(Loss) gain on sale of assets and early
termination of capital leases............... (2) 821 3 226 3,294
Gain on disposal of product line.............. 20,478 N/A N/A N/A N/A
Interest and other income..................... 54 155 227 258 183
------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.......................... 21,564 1,532 (360) (12,456) (5,517)
Income tax provision (benefit)................ 1,513 10 (7) 3 20
------- ------- -------- -------- --------
Income (loss) before extraordinary item....... 20,051 1,522 (353) (12,549) (5,537)
Extraordinary Item............................ 0 0 0 19,803 362
------- ------- -------- -------- --------
Net income (loss)............................. $20,051 $ 1,522 $ (353) $ 7,344 $ (5,175)
======= ======= ======== ======== ========
Earnings (loss) per common share:
Income (loss) before extraordinary item..... $ 4.23 $ 0.32 ($ 0.08) $ (2.96) $ (1.93)
Extraordinary item.......................... $ 0.00 $ 0.00 $ 0.00 $ 4.71 $ 0.13
------- ------- -------- -------- --------
Net income (loss)........................... $ 4.23 $ 0.32 $ (0.08) $ 1.75 $ (1.80)
======= ======= ======== ======== ========
Earnings (loss) per common share assuming
dilution:
Income (loss) before extraordinary item..... $ 3.15 $ 0.24 $ (0.08) $ (2.96) $ (1.93)
Extraordinary item.......................... $ 0.00 $ 0.00 $ 0.00 $ 4.71 $ 0.13
------- ------- -------- -------- --------
Net income (loss)........................... $ 3.15 $ 0.24 $ (0.08) $ 1.75 $ (1.80)
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Restricted cash............................... $ 2,226 $ 651 $ 218 $ 493 $ 2,883
Working capital (deficiency).................. 9,088 (8,039) (10,888) (6,793) (33,369)
Total assets.................................. 26,919 30,209 32,969 31,335 47,222
Current portion of long-term debt and
obligations under capitalized leases........ 1,885 10,929 13,182 8,720 11,214
Long-term debt and obligations under
capitalized leases, less current portion.... 8,823 21,569 23,935 26,125 24,244
Senior subordinated notes..................... 0 0 0 773 18,467
Shareholders' equity (Net capital
deficiency)................................. $11,096 $(8,953) $(10,475) $(10,576) $(22,341)
</TABLE>
See accompanying notes
(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 to American
Shared Radiosurgery Services (a California corporation and a wholly-owned
subsidiary of the Company) 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 1998.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the years ended December 31, 1998, 1997 and 1996, approximately 88%,
94% and 95%, respectively, of the Company's revenues were derived from its
diagnostic imaging business. The Company sold its diagnostic imaging business in
November 1998. Currently, the Company's business consists of the provision of
Gamma Knife services, which accounted for only 12%, 6% and 5% of the Company's
total revenues during the years ended December 31, 1998, 1997 and 1996,
respectively. As a result of the Sale, the Company was relieved of substantially
all of the liabilities of the imaging division, consisting of approximately
$27,100,000 of debt and other obligations, and received approximately
$13,500,000 of cash. The Sale resulted in a one-time gain of $20,478,000, which
eliminated the Company's capital deficiency. Following the Sale, the Company's
operations were significantly reduced and it has substantially reduced its
staff. Accordingly, the discussion below, which largely reflects the Company's
operations prior to the Sale, is not an indication of results anticipated by the
Company for 1999 or future years.
The Company had net income of $20,051,000 ($4.23 per share) on medical
services revenues of $35,162,000 in 1998. Included in net income for 1998 is a
$20,478,000 gain on disposal of product line less Sale-related income taxes of
$1,500,000. The Company had net income of $1,522,000 ($0.32 per share) on
medical services revenues of $37,172,000 in 1997.
TOTAL REVENUES
<TABLE>
<CAPTION>
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------- ---------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Medical Services....................... $35,162 (5.4)% $37,172 0.5% $36,989
</TABLE>
Medical services revenues decreased 5.4% in 1998 compared to 1997, and
increased 0.5% in 1997 compared to 1996. The 5.4% decrease in 1998 was primarily
attributable to the Sale, which occurred in November 1998. The 0.5% increase in
1997 compared to 1996 was primarily due to an increase in MRI revenues.
Gamma Knife revenues increased $1,772,000 and $354,000 in 1998 and 1997,
respectively, compared to the prior years. The 1998 increase was primarily due
to the commencement of the Company's fourth Gamma Knife in March 1998 and the
fifth Gamma Knife in July 1998, and full year inclusion of the Company's third
Gamma Knife unit. The 1997 increase was primarily due to the commencement of a
third Gamma Knife unit in September 1997.
MRI revenues decreased 6% ($1,821,000) in 1998 compared to 1997 and
increased 2% ($650,000) in 1997 compared to 1996. The decrease in 1998 was
primarily attributable to the Sale. The increase in 1997 was primarily due to
the commencement of new customer contracts and increased utilization from
contracts commenced in prior periods. MRI revenues as a percentage of total
medical services revenues were 75%, 76%, and 75% in years 1998, 1997, and 1996,
respectively.
The Company's non-MRI diagnostic imaging services revenues decreased 35%
($1,763,000) in 1998 compared to 1997 after a 19% ($1,176,000) decrease in 1997
compared to 1996. The 1998 versus 1997 revenue decline was primarily due to the
continued decline of CT and Nuclear Medicine revenues and the Sale. The revenue
decline in 1997, compared to 1996, was primarily attributable to decreased CT
revenue that 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
$1,147,000 in 1998 and $614,000 in 1997 from 1996 revenues of $3,537,000. The
decrease in Ultrasound and Nuclear Medicine revenues was $616,000 in 1998 and
$562,000 in 1997 from a 1996 revenue base of $2,747,000. Non-MRI diagnostic
imaging services revenues as a percentage of total medical services revenues was
10%, 14% and 17% for the years ended 1998, 1997 and 1996, respectively. The
Company's CT, Ultrasound, and Nuclear Medicine services revenues continued to
decline because customers were increasingly buying their own equipment.
12
<PAGE> 14
Contract service revenues consisting of Respiratory Therapy services and
Cardiac Catheterization Laboratory revenues decreased $195,000 in 1998 compared
to 1997 and increased $354,000 in 1997 compared to 1996. The decrease in 1998
was primarily attributable to the Sale. The increase in 1997 was primarily due
to revenues from Cardiac Catheterization Laboratory contracts which commenced in
May 1996 and December 1996, respectively.
COST OF OPERATIONS
<TABLE>
<CAPTION>
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------- ---------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cost of Operations..................... $25,826 (4.5)% $27,044 (3.7)% $28,071
Percentage of Revenue.................. 73.5% 72.8% 75.9%
</TABLE>
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 $1,218,000 in 1998 and decreased $1,027,000 in 1997 compared to prior
years.
Medical services payroll costs, the largest component of total cost of
operations, decreased by $446,000 in 1998 compared to 1997 and increased by
$221,000 in 1997 compared to 1996. Medical services payroll costs decreased
primarily due to the Sale. Medical services payroll costs, as a percent of
medical services, remained constant at 20% in years 1998, 1997 and 1996. 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 Gamma Knife services currently do not involve staffing of its centers.
The Company's maintenance and supplies costs were 15%, 16% and 18% of
medical service revenues in 1998, 1997 and 1996, respectively. Maintenance and
supplies costs decreased $775,000 in 1998 compared to 1997 and decreased
$739,000 in 1997. The 1998 decrease was primarily due to the Sale. The $739,000
decrease in 1997 was primarily attributable to MRI maintenance cost savings.
Depreciation and amortization decreased $842,000 in 1998 compared to 1997
and decreased $233,000 in 1997 compared to 1996. The decrease in 1998 was
primarily attributable to the Sale and fewer MRI units accounted for as
capitalized leases in 1998, offset by increases in equipment depreciation due to
the addition of one Gamma Knife unit in late 1997 and two units during 1998. The
decrease in 1997 was primarily attributable to decreased MRI depreciation as a
result of fewer MRI units accounted for as capital leases in 1997.
Equipment rental as a percentage of medical services revenues was 12% in
1998, 7% in 1997 and 9% in 1996. Equipment rental increased $1,378,000 in 1998
compared to 1997 and decreased $763,000 in 1997 compared to 1996. The increase
in 1998 is primarily due to two (2) replacement and three (3) new MRI units
accounted for as operating leases during 1998 and fourth quarter 1997, offset by
decreases associated with the Sale. The decrease in 1997 is primarily
attributable to the return of five (5) MRI rental units that resulted from
mobile route consolidation and customer contract terminations.
Other costs of operations as a percentage of medical services revenues was
11%, 12% and 11% in 1998, 1997 and 1996, respectively. The decrease of $533,000
in 1998 compared to 1997 was primarily attributable to the Sale. The increase of
$487,000 in 1997 compared to 1996 reflects increased fuel, personal property tax
costs, insurance, and bad debt expenses.
SELLING AND ADMINISTRATIVE
<TABLE>
<CAPTION>
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------ ---------- ------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling and Administrative Costs......... $5,116 (13.3)% $5,901 11.2% $5,309
Percentage of Revenue.................... 14.6% 15.9% 14.4%
</TABLE>
13
<PAGE> 15
The Company's selling and administrative costs decreased $785,000 in 1998
compared to 1997 and increased $592,000 in 1997 compared to 1996. The decrease
in 1998 was primarily due to the Sale and decreased salary, investor relations
and legal expenses. 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 previously-proposed acquisition of the Company that
was not consummated.
INTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------ ---------- ------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest Expense.......................... $3,186 (13.2)% $3,671 (12.6)% $4,199
Percentage of Revenue..................... 9.1% 9.9% 11.4%
</TABLE>
The Company's interest expense decreased $485,000 in 1998 compared to 1997
and decreased $528,000 in 1997 compared to 1996. The decrease in 1998 was
primarily attributable to the Sale and decreased capitalized lease-related
interest, offset by increased interest related to additional Gamma Knife units.
The decrease in 1997 was primarily attributable to decreased capitalized
lease-related interest.
IMPACT OF YEAR 2000
The Year 2000 ("Y2K") issue results from programs 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.
Due to the Sale, the Company is in the process of downsizing its computer
operations. The Company is in the process of replacing much of its computer
hardware and programs with equipment and programs that are Y2K compatible. This
replacement process is expected to be completed in the second quarter of 1999
and the cost is not expected to exceed $60,000.
The Company's current revenue source, the Gamma Knife, is Y2K compliant.
The Company's five current operational customers, which are large urban medical
centers, all have disbursement systems that are or will be Y2K compliant during
1999.
Should the disbursement systems of the Company's operating customers not be
Y2K compliant, the Company would be materially impacted. The Company would
exercise its contractual rights due to non-payment, if necessary.
The Company believes that the Y2K issue, except for any customer
disbursement systems which are not Y2K compliant on January 1, 2000, and for
which the customer cannot produce manual checks, will not materially affect the
Company's business, results of operations, or financial condition.
OTHER INCOME AND EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------- ---------- ---- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
(Loss) gain on sale of assets and early
termination of capital leases............. $ (2) (100.2)% $821 27,267% $ 3
Percentage of revenue....................... 0.0% 2.2% 0.0%
Gain on sale of product line................ $20,478 NM $ 0 NM $ 0
Percentage of revenue....................... 58.2% 0.0% 0.0%
Interest and other income................... $ 54 (65.2)% $155 (31.7)% 227
Percentage of revenue....................... 0.2% 0.4% 0.6%
</TABLE>
14
<PAGE> 16
The Company's gain on sale of product line increased $20,478,000 in 1998
compared to 1997. Gain on sale of assets and early termination of capital leases
decreased $823,000 in 1998 compared to 1997. The gain on sale of product line
represents the gain associated with the Sale. The gain was net of transaction
costs of approximately $2,700,000. Transaction costs include legal, investment
banking, management bonuses related to the Sale, employee severance costs, and
the costs related to the discontinuance of the Diagnostic Imaging Business. The
gain on sale of assets and early termination of capital leases in 1997 compared
to 1996 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.
INCOME TAXES
<TABLE>
<CAPTION>
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------ ---------- ---- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income Tax Provision (Benefit)............... $1,513 15,030.0% $10 243% $ (7)
Percentage of Revenue........................ 4.3% 0% 0%
</TABLE>
The Company's income tax provision increased $1,503,000 in 1998 compared to
1997. The increase, approximately $1,500,000, was related to the gain on the
sale of product line and resulted in the Company's use of substantially all of
its available federal and state net operating loss carryforwards. At December
31, 1998, the Company had a net operating loss carryforward for federal income
tax return purposes of approximately $800,000. The Company's income tax
provision of $10,000 in 1997 was after utilization of its federal and state net
operating losses.
NET INCOME (LOSS)
<TABLE>
<CAPTION>
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------- ---------- ------ ---------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Income (loss)........................ $20,051 1,217% $1,522 531% $ (353)
Net Income (loss) per share.............. $ 4.23 1,222% $ 0.32 500% $(0.08)
</TABLE>
The Company had net income of $20,051,000 in 1998 compared to net income of
$1,522,000 in 1997. Net income for 1998 includes a $18,978,000 gain net of
income taxes ($1,500,000) primarily from the Sale. Net income for 1998,
exclusive of the net gain from the sale of product line was $1,073,000 and
reflects increased operating margins. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $11,114,000 at December 31,
1998 compared to $17,000 at December 31, 1997. The Company's cash position
increased $11,097,000 due primarily to the proceeds from the Sale. An additional
$1,000,000 is restricted until April 15, 1999 under the terms of the Sale. The
$1,000,000 related to the Sale is included under restricted cash.
Restricted cash of $2,226,000 at December 31, 1998 and $651,000 at December
31, 1997 reflects cash that may only be used for the operations of GK Financing,
LLC and amounts previously described as restricted under terms of the Sale. The
1998 increase in restricted cash of $1,575,000 is due to the $1,000,000 related
to the Sale and cash flow from Gamma Knife operations.
The Sale resulted in the Company receiving approximately $13,500,000 in
cash and the Purchaser assuming $27,100,000 of debt and other liabilities. The
Company estimates that after transaction costs and income taxes, it will retain
approximately $10,000,000 in cash.
15
<PAGE> 17
The Sale has resulted in the Company having shareholders' equity of
approximately $11,100,000, working capital of approximately $9,100,000 and total
assets of $26,919,000 as of December 31, 1998 compared to a net capital
deficiency of approximately $9,000,000, a working capital deficit of
approximately $8,000,000 and total assets of $30,209,000 at December 31, 1997.
The Company intends to invest its cash in overnight repurchase agreements
and commercial paper pending use in the Company's operations. The Company
believes its cash position combined with its working capital is adequate to
service the Company's cash requirements in 1999.
SUBSEQUENT EVENTS
In 1995, the Company completed a major restructuring of its medical
equipment leases and senior subordinated notes. As part of the restructuring,
the Company issued (a) warrants to acquire 225,000 common shares for $0.01 per
share to its equipment lessor and (b) 1,193,000 common shares and warrants to
acquire 314,000 common shares for $0.75 per share to the holders of
approximately 96% of the senior subordinated notes.
As part of the Sale, the Company re-acquired from its equipment lessor
225,000 common shares for cash consideration of $2,250.
On March 8, 1999, the Company completed the repurchase of substantially all
of its remaining securities owned by two major holders who acquired them in the
Company's 1995 restructuring. Repurchases were made directly from the holders.
The repurchased securities include shares of the Company's common stock,
and warrants to acquire additional shares of common stock. The repurchased
securities represented approximately 12.6% of the Company's issued and
outstanding common shares and about 12.6% of its fully diluted outstanding
shares. The aggregate repurchase price paid by the Company was approximately
$702,000.
Following the repurchases, the Company has 5,929,508 fully diluted shares
outstanding, including 3,972,372 issued and outstanding common shares, 29,107
common shares reserved for warrants and 1,922,200 common shares reserved for
options.
On March 22, 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of its common stock from time to time in the
open market at prevailing prices.
On March 22, 1999, the Company adopted a Shareholder Rights Plan ("Plan").
Under the Plan, the Company will make a dividend distribution of one Right for
each outstanding share of the Company's common stock as of the close of business
on April 1, 1999.
Prior to the date upon which the Rights would become exercisable under the
Plan, the Company's outstanding stock certificates will represent both the
shares of the Company's common stock and the Rights, and the Rights will trade
only with the shares of common stock.
The Rights become exercisable only if any person or group, with certain
exceptions, becomes an "acquiring person" (acquires 15 percent or more of the
Company's outstanding common stock) or announces a tender or exchange offer to
acquire 15 percent or more of the Company's outstanding common stock.
The Company may redeem the Rights at $0.01 per Right at the direction of
the Board prior to the earlier of ten days after the public announcement that
there is an acquiring person and the expiration of the Plan. The Rights will
expire in 10 years unless redeemed earlier or exchanged by the Company.
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 included a cost of living
price adjustment provision, or whose costs were primarily fixed at the date of
commencement. The Company believes these factors will be sufficient to offset
the impact of any future inflation on the Company's costs of operation.
16
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements and Financial Statement
Schedules included at page A-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company on December 14, 1998 engaged Grant Thornton, LLP as its
independent accountant to audit the Company's financial statements for the year
ended December 31, 1998. The Company and Grant Thornton, LLP have a long
established relationship as Grant Thornton has served as the Company's tax
advisor since 1990.
In light of its engagement of Grant Thornton, the Company will no longer
engage Ernst & Young, LLP to audit the Company's financial statements. Ernst &
Young had served as the Company's auditor since 1983.
The Company, during its two prior fiscal years (1997 and 1996) and any
subsequent interim period preceding its change of independent accountant, did
not have any disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
The Company did not have any disagreement with Grant Thornton on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure on the audit of 1998 financial statements.
17
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is incorporated herein by reference from
the Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders (the "1999 Proxy Statement"). Information regarding executive
officers of the Company, included herein under the caption "Executive Officers
of the Registrant" in Part I, Item 1 above, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the 1999 Proxy Statement.
18
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES.
The following Financial Statements and Schedules are filed with this
Report:
Report of Independent Auditors
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules
Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
CONSENT OF INDEPENDENT AUDITORS
(b) EXHIBITS.
The following Exhibits are filed with this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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.(1)
3.1 Articles of Incorporation of the Company, as amended.(2)
3.2 By-laws for the Company, as amended.(3)*
4.6 Form of Common Stock Purchase Warrant of American Shared
Hospital Services.(3)
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.(3)
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)
10.4 Ernest A. Bates Stock Option Agreement dated as of August
15, 1995.(7)
10.5 Operating Agreement for GK Financing, LLC, dated as of
October 17, 1995.(3)
10.6 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.(4)
10.7 Amendment dated as of October 16, 1996 to the GK Financing,
LLC Operating Agreement, dated as of October 17, 1995.(1)
10.8 Amendment dated as of March 31, 1998 ("Fourth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.9 Amendment dated as of March 31, 1998 ("Fifth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.
10.10 Amendment dated as of June 5, 1998 to the GK Financing, LLC
Operating Agreement dated as of October 17, 1995.
10.11a Assignment and Assumption Agreement, dated as of December
31, 1995, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).
10.11b Assignment and Assumption Agreement, dated as of November 1,
1995, between American Shared Hospital Services (assignor)
and American Shared Radiosurgery Services (assignee).(4)
10.11c Amendment Number One dated as of August 1, 1995 to the Lease
Agreement for a Gamma Knife Unit between The Regents of the
University of California and American Shared Hospital
Services. (Confidential material appearing in this document
has been omitted and filed separately with the Securities
and Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)
10.11d Lease Agreement dated as of July 3, 1990 for a Gamma Knife
Unit between American Shared Hospital Services and The
Regents of the University of California. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
Securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)
10.12 Amendment Number Two dated as of February 6, 1998 to the
Lease Agreement for a Gamma Knife Unit between UCSF-Stanford
Health Care and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)
10.13 Assignment and Assumption Agreement, dated as of February 3,
1996, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(4)
10.14 Lease Agreement for a Gamma Knife Unit dated as of April 6,
1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc.
dba USC University Hospital. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)
10.15 Assignment and Assumption and Agreement dated as of February
1, 1996 between Ernest A. Bates, M.D. and GK Financing, LLC
with respect to the Lease Agreement for a Gamma Knife dated
as of April 6, 1994 between Ernest A. Bates, M.D. and NME
Hospitals, Inc. dba USC University Hospital.
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.16 Lease Agreement for a Gamma Knife Unit dated as of October
31, 1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)
10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as
of December 1, 1998 between Hoag Memorial Hospital
Presbyterian and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)
10.18 Lease Agreement for a Gamma Knife Unit dated as of October
29, 1996 between Methodist Healthcare Systems of San
Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)
10.19 Lease Agreement for a Gamma Knife Unit dated as of April 10,
1997 between Yale-New Haven Ambulatory Services Corporation
and GK Financing, LLC. (Confidential material appearing in
this document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)
21. Subsidiaries of American Shared Hospital Services.
23.1 Consent of Grant Thornton, LLP.
23.2 Consent of Ernst & Young, LLP.
27. Financial Data Schedule for the year ended December 31,
1998.
</TABLE>
- ---------------
(1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the
registrant's Annual Report on Form 10-K for fiscal year ended December 31,
1997, which is incorporated herein by this reference.
(2) 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.
(3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, 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.
(4) These documents were filed as Exhibits 4.14 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.
(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 B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
21
<PAGE> 23
(c) REPORTS ON FORM 8-K:
The Company filed the following reports on Form 8-K during the quarter
ended December 31, 1998:
(i) Report on Form 8-K dated November 13, 1998 reporting shareholder
approval and closing of the Sale.
(ii) Report on Form 8-K dated December 14, 1998 reporting a change in
the Company's independent auditor.
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN SHARED HOSPITAL SERVICES
(Registrant)
March 29, 1999 By: /s/ ERNEST A. BATES
------------------------------------
Ernest A. Bates
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ ERNEST A. BATES Chief Executive Officer and March 29, 1999
- --------------------------------------------------- Chairman of the Board
Ernest A. Bates
/s/ WILLIE R. BARNES Director and Secretary March 29, 1999
- ---------------------------------------------------
Willie R. Barnes
/s/ JOHN F. RUFFLE Director March 29, 1999
- ---------------------------------------------------
John F. Ruffle
/s/ STANLEY S. TROTMAN, JR. Director March 29, 1999
- ---------------------------------------------------
Stanley S. Trotman, Jr.
/s/ AUGUSTUS A. WHITE, III Director March 29, 1999
- ---------------------------------------------------
Augustus A. White, III
/s/ CHARLES B. WILSON Director March 29, 1999
- ---------------------------------------------------
Charles B. Wilson
/s/ CRAIG K. TAGAWA Chief Operating Officer and March 29, 1999
- --------------------------------------------------- Chief Financial Officer
Craig K. Tagawa (Principal Accounting Officer)
</TABLE>
23
<PAGE> 25
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AMERICAN SHARED HOSPITAL SERVICES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<PAGE> 26
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS............................................ F-3
STATEMENTS OF OPERATIONS.................................. F-4
STATEMENT OF SHAREHOLDERS' EQUITY......................... F-5
STATEMENTS OF CASH FLOWS.................................. F-6
NOTES TO FINANCIAL STATEMENTS............................. F-7
</TABLE>
F-1
<PAGE> 27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
American Shared Hospital Services
We have audited the accompanying consolidated balance sheet of American
Shared Hospital Services as of December 31, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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, 1998, and the consolidated
results of their operations and consolidated cash flows for the year then ended
in conformity with generally accepted accounting principles.
We have also audited Schedule II for the year ended December 31, 1998. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
/s/ Grant Thornton LLP
San Francisco, California
March 12, 1999
F-2
<PAGE> 28
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $11,114,000 $ 17,000
Restricted cash........................................... 2,226,000 651,000
Receivables, less allowance for uncollectible accounts of
$0 ($1,302,000 in 1997):
Trade accounts receivable............................ 1,228,000 6,658,000
Other................................................ 104,000 472,000
----------- ------------
1,332,000 7,130,000
Prepaid expenses, inventories and other current assets.... 285,000 708,000
----------- ------------
Total current assets.............................. 14,957,000 8,506,000
PROPERTY AND EQUIPMENT
Land and building......................................... 247,000 1,572,000
Medical, transportation, and office equipment............. 15,447,000 12,202,000
Capitalized leased medical, transportation, and office
equipment.............................................. 83,000 26,410,000
Deposits and construction in progress..................... 1,079,000 1,901,000
----------- ------------
16,856,000 42,085,000
Accumulated depreciation and amortization................. (5,097,000) (21,983,000)
----------- ------------
Net property and equipment........................ 11,759,000 20,102,000
OTHER ASSETS................................................ 183,000 563,000
INTANGIBLE ASSETS, less accumulated amortization of $30,000
($1,529,000 in 1997)...................................... 20,000 1,038,000
----------- ------------
$26,919,000 $ 30,209,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 338,000 $ 3,693,000
Accrued interest.......................................... 54,000 32,000
Employee compensation and benefits........................ 814,000 1,050,000
Other accrued liabilities................................. 519,000 841,000
Income tax payable........................................ 1,664,000 --
Current portion of accrued exit costs..................... 595,000 --
Current portion of long-term debt......................... 1,873,000 4,784,000
Current portion of obligations under capital leases....... 12,000 6,145,000
----------- ------------
Total current liabilities......................... 5,869,000 16,545,000
LONG-TERM DEBT, less current portion........................ 8,792,000 11,936,000
OBLIGATIONS UNDER CAPITAL LEASES, less current portion...... 31,000 9,633,000
ACCRUED EXIT COSTS, less current portion.................... 400,000 --
DEFERRED GAIN ON EARLY LEASE TERMINATION.................... -- 296,000
DEFERRED INCOME TAXES....................................... -- 164,000
MINORITY INTEREST........................................... 731,000 588,000
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Common stock,
$0 par value Authorized -- 10,000,000 shares Issued and
outstanding shares -- 4,544,000 in 1998 and 4,769,000 in
1997...................................................... 11,087,000 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....................................... (3,335,000) (23,386,000)
----------- ------------
Total shareholders' equity (net capital
deficiency)..................................... 11,096,000 (8,953,000)
----------- ------------
$26,919,000 $ 30,209,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 29
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Medical services.................................. $35,162,000 $37,172,000 $36,989,000
COSTS AND EXPENSES:
Costs of operations:
Medical services payroll.......................... 7,087,000 7,533,000 7,312,000
Maintenance and supplies.......................... 5,184,000 5,959,000 6,698,000
Depreciation...................................... 5,556,000 6,398,000 6,631,000
Equipment rental.................................. 4,064,000 2,686,000 3,449,000
Other............................................. 3,935,000 4,468,000 3,981,000
Selling and administrative........................ 5,116,000 5,901,000 5,309,000
Interest.......................................... 3,186,000 3,671,000 4,199,000
----------- ----------- -----------
Total costs and expenses.................. 34,128,000 36,616,000 37,579,000
----------- ----------- -----------
1,034,000 556,000 (590,000)
(Loss) gain on sale of assets and early
termination of capital leases.................. (2,000) 821,000 3,000
Gain on sale of product line...................... 20,478,000 -- --
Interest and other income......................... 54,000 155,000 227,000
----------- ----------- -----------
Income (loss) before income taxes................. 21,564,000 1,532,000 (360,000)
Income tax expense (benefit)...................... 1,513,000 10,000 (7,000)
----------- ----------- -----------
Net income (loss)................................. $20,051,000 $ 1,522,000 $ (353,000)
=========== =========== ===========
Earnings (loss) per common share:
Earnings (loss) per common share -- basic........... $ 4.23 $ 0.32 $ (0.08)
=========== =========== ===========
Earnings (loss) per common share -- assuming
dilution.......................................... $ 3.15 $ 0.24 $ (0.08)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 30
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON
STOCK
OPTIONS ADDITIONAL
COMMON COMMON ISSUED TO PAID-IN ACCUMULATED
SHARES STOCK OFFICERS CAPITAL DEFICIT TOTAL
--------- ----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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)
Repurchase of Common
Stock............. (225,000) (2,000) -- -- -- (2,000)
Net income........... -- -- -- -- 20,051,000 20,051,000
--------- ----------- ---------- -------- ------------ ------------
Balances at December
31, 1998............. 4,544,000 $11,087,000 $2,414,000 $930,000 $ (3,335,000) $ 11,096,000
========= =========== ========== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 31
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 20,051,000 $ 1,522,000 $ (353,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of product line............................ (20,478,000) -- --
Loss (gain) on sale of equipment........................ 2,000 (270,000) (3,000)
Gain on early termination of capital leases............. -- (551,000) --
Depreciation and amortization........................... 6,095,000 6,752,000 6,978,000
Deferred income tax benefit............................. (164,000) -- --
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash.................... (1,575,000) (433,000) 275,000
Decrease in receivables................................... (154,000) (582,000) (95,000)
(Increase) decrease in prepaid expenses, inventories and
other assets............................................ 187,000 (10,000) 493,000
Increase in accounts payable, accrued liabilities and
income taxes payable.................................... 3,767,000 843,000 1,563,000
------------ ----------- -----------
Net cash provided by operating activities................... 7,731,000 7,271,000 8,858,000
INVESTING ACTIVITIES
Deposits made to purchase Gamma Knives...................... -- -- (500,000)
Proceeds from sale of product line, net of selling costs.... 12,240,000 -- --
Proceeds from sale and disposition of equipment............. 4,000 331,000 70,000
Increase (decrease) in minority interest.................... 143,000 (37,000) 442,000
Payment for purchase of property and equipment.............. (746,000) (349,000) (293,000)
Distributions received from partnerships.................... -- -- 15,000
Other....................................................... -- (168,000) (84,000)
------------ ----------- -----------
Net cash provided by (used in) investing activities......... 11,641,000 (223,000) (350,000)
FINANCING ACTIVITIES
Principal payments on long-term debt and obligations under
capital leases............................................ (8,291,000) (8,962,000) (8,226,000)
Proceeds from issuance of long-term debt.................... 855,000 -- --
Payment for exercise of warrants............................ -- -- 2,000
Net (payments on) proceeds from revolving line of credit.... (837,000) 1,563,000 (8,000)
Payment for repurchase of senior subordinated notes......... -- -- (360,000)
Repurchase of common stock.................................. (2,000) -- --
------------ ----------- -----------
Net cash used in financing activities....................... (8,275,000) (7,399,000) (8,592,000)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 11,097,000 (351,000) (84,000)
Cash and cash equivalents at beginning of year.............. 17,000 368,000 452,000
------------ ----------- -----------
Cash and cash equivalents at end of year.................... $ 11,114,000 $ 17,000 $ 368,000
============ =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................................... $ 3,163,000 $ 3,689,000 $ 4,320,000
============ =========== ===========
Income taxes paid........................................... $ 36,000 $ 29,000 $ 31,000
============ =========== ===========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment with lease/debt financing.......... $ 6,952,000 $ 3,999,000 $ 9,996,000
(Decrease) increase in medical and capitalized lease
equipment due to lease restructuring...................... -- (1,137,000) (1,461,000)
(Decrease) increase in capitalized lease obligations due to
lease restructuring....................................... -- (2,036,000) (1,461,000)
Accrued interest payable not paid as part of Senior
Subordinated Notes Repurchase............................. -- -- 17,000
Stock and warrants issued to noteholders as part of Senior
Subordinated Notes Repurchase............................. -- -- 430,000
Noncash portion of Senior Subordinated Notes redemption..... -- -- 413,000
Note receivable from officer added to basis of acquired
asset..................................................... -- -- 248,000
Accounts payable converted to notes......................... -- 817,000 1,971,000
Net liabilities, primarily trade accounts receivable and
payable, property and equipment, capital lease
obligations, and long-term debt, assumed by buyer in sale
of product line........................................... 9,808,000 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 32
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE A -- BUSINESS AND BASIS OF PRESENTATION
1. Business
American Shared Hospital Services (the "Company") provides Gamma Knife
units to five medical centers in California, Texas, and Connecticut. The Company
provided shared diagnostic imaging services to health care providers located in
various geographic regions of the United States through November of 1998. The
five diagnostic imaging services provided by the Company were Magnetic Resonance
Imaging, Computed Axial Topography Scanning, Ultrasound, Nuclear Medicine, and
Cardiac Catheterization Laboratory services. On November 13, 1998, the
diagnostic imaging services product line was sold to a third party.
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 and 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 and its wholly-owned subsidiary, AIS, and
ASRS and its majority-owned subsidiary, GK Financing, LLC. The stock of CuraCare
was sold on November 13, 1998 in conjunction with the sale of the diagnostic
imaging services product line.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
NOTE B -- ACCOUNTING POLICIES
1. Use of Estimates in the Preparation of Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. 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 equivalent for
purposes of the consolidated statements of cash flows.
3. Restricted Cash
Restricted cash represents cash limited as to use by contractual
arrangement. Of the restricted cash held at December 31, 1998, $1,000,000 is
restricted until April 15, 1999 to satisfy covenants of the securities
F-7
<PAGE> 33
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
purchase agreement between American Shared Hospital Services and buyer in
conjunction with the sale of diagnostic imaging services product line. The
remaining restricted cash reflects cash that may only be used for the operations
of GK Financing, LLC.
4. Accounts Receivable
Subsequent to November, 1998, substantially all of the Company's revenue is
provided by five customers. These customers constitute accounts receivable at
December 31, 1998. The Company performs credit evaluations of its customers and
generally does not require collateral. At December 31, 1998, the Company did not
maintain an allowance for doubtful accounts because management believes that
accounts receivable are fully collectible.
5. Accounting for Majority-Owned Subsidiary
The Company accounts for GK Financing, LLC (GKF), as a consolidated entity
due to its 81% majority-equity interest. The minority interest's 19% share of
GKF's earnings (loss) is netted against "Interest and Other Income" in the
consolidated statements of operations.
6. 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).
7. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. 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.
Through November of 1998, capitalized leased equipment consisted primarily
of mobile Magnetic Resonance Imaging ("MRI") units, which include scanners and
mobile vans. Following the sale of the diagnostic imaging services product line,
leased equipment consists primarily of office equipment. 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.
8. Operating Leases
The Company leases Gamma Knife equipment to its customers under
arrangements accounted for as operating leases. Revenue is provided for and
recognized on a fee-for-service or contingent rental basis when the service is
delivered. The lease agreements are generally over ten year terms. At December
31, 1998, the Company held equipment under operating lease contracts with
customers with an original cost of $15,447,000 and accumulated depreciation of
$4,531,000.
9. Intangible Assets
Intangible assets represent the excess of cost of net assets acquired as
the result of the acquisition of businesses and organization costs related to
the initiation of new businesses. Intangible assets are being amortized by the
straight-line method over 5 to 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.
F-8
<PAGE> 34
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. 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.
11. 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,
therefore, the incremental shares that arise as a result of the stock options
and warrants outstanding are antidilutive as they reduce the loss per share.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted earnings (loss) per
share............................................... $20,051,000 $1,522,000 $ (353,000)
Denominator:
Denominator for basic earnings (loss) per share --
weighted-average shares.......................... 4,735,000 4,769,000 4,498,000
Effect of dilutive securities Employee stock
options/warrants................................. 1,631,000 1,574,000 --
----------- ---------- ----------
Denominator for diluted earnings (loss) per share --
adjusted weighted-average shares................. 6,367,000 6,343,000 4,498,000
=========== ========== ==========
Earning (loss) per share -- basic..................... $ 4.23 $ 0.32 $ (0.08)
=========== ========== ==========
Earning (loss) per share -- assuming dilution......... $ 3.15 $ 0.24 $ (0.08)
=========== ========== ==========
</TABLE>
12. Stock-Based Compensation
SFAS No. 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. Disclosure
requirements in accordance with SFAS No. 123 are included in Note F.
13. Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, and other
accrued liabilities approximated their fair value as of December 31, 1998
because of the relatively short maturity of these instruments. The carrying
amounts of the
F-9
<PAGE> 35
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Company's various debt obligations approximated fair value as of December 31,
1998 based upon interest rates that are currently available for the Company for
issuance of instruments with similar terms and remaining maturities. In 1997
management was unable, without incurring excessive costs, to estimate its
incremental borrowing rate, and considered estimation of fair value to be
impracticable.
NOTE C -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Capitalized regulatory licensing fees....................... $ -- $110,000
Prepaid commissions......................................... -- 114,000
Purchased software, less accumulated amortization of
$211,000 and $424,000 in 1998 and 1997, respectively...... -- 50,000
Other deferred charges...................................... 183,000 289,000
-------- --------
$183,000 $563,000
======== ========
</TABLE>
NOTE D -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<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
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
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
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
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
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
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
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,
collateralized by equipment............................. 440,000 1,128,000
</TABLE>
F-10
<PAGE> 36
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Promissory note payable, bearing interest at prime rate
plus 2%, due October, 1998.............................. -- 550,000
Borrowings under term loan bearing interest at 10.6%,
payable in 84 monthly installments maturing in September
2004, collateralized by equipment....................... 2,044,000 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
Promissory note payable, bearing interest at 10.6%,
payable in 30 monthly installments maturing in March
2000.................................................... -- 738,000
Borrowings under term loan bearing interest at 10.6%,
payable in 84 monthly installments maturing in April
2005, collateralized by equipment....................... 2,926,000 --
Borrowings under term loan bearing interest at 10.6%,
payable in 85 monthly installments maturing in July
2005, collateralized by equipment....................... 3,073,000 --
Borrowings under term loan bearing interest at 10.7%,
payable in 84 monthly installments maturing in September
2005, collateralized by equipment....................... 1,077,000 --
Promissory note payable, bearing interest at prime rate
plus 2% (9.75% at December 1998) due in February 1999,
unsecured............................................... 330,000 --
Promissory note payable, bearing interest at prime rate
plus 2% (9.75% at December 1998) due in November 1999,
unsecured............................................... 25,000 --
Borrowings for Gamma Knife deposits under promissory note,
bearing interest at prime rate plus 2% (9.75% at
December 31, 1998) payable when Gamma Knife units
commence operation, collateralized by equipment......... 750,000 1,000,000
----------- -----------
10,665,000 16,720,000
Less current portion.................................... (1,873,000) (4,784,000)
----------- -----------
$ 8,792,000 $11,936,000
=========== ===========
</TABLE>
Annual contracted maturities under the initial terms of long-term debt for
the five years after December 31, 1998 are as follows: $1,873,000 in 1999,
$1,318,000 in 2000, $1,422,000 in 2001, $1,579,000 in 2002, $1,754,000 in 2003
and $2,719,000 thereafter.
F-11
<PAGE> 37
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE E -- INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax liabilities:
Fixed assets............................................. $(1,000,000) $ --
Other -- net............................................. -- (164,000)
----------- ----------
Total deferred tax liabilities................... (1,000,000) (164,000)
Deferred tax assets:
Net operating loss carryforwards......................... 275,000 5,300,000
State income taxes....................................... 450,000 --
Fixed assets............................................. -- 2,200,000
Accrued reserves......................................... 710,000 --
Other -- net............................................. 360,000 500,000
----------- ----------
Total deferred tax assets.................................. 1,795,000 8,000,000
Valuation allowance for deferred tax assets................ (795,000) 8,000,000
----------- ----------
Net deferred tax assets.................................... 1,000,000 --
----------- ----------
Net deferred tax liabilities............................... $ -- $ (164,000)
=========== ==========
</TABLE>
The components of the provision (benefit) for income taxes consist of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $ 360,000 $ -- $ --
State............................................. 1,317,000 10,000 (7,000)
---------- ------- -------
Deferred:
Federal........................................... -- -- --
State............................................. (164,000) -- --
---------- ------- -------
$1,513,000 $10,000 $(7,000)
========== ======= =======
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. federal statutory tax rate (35% in 1998, 1997 and 1996) to
income (loss) before taxes as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Computed expected tax........................ $ 7,500,000 $ 536,000 $(126,000)
Change in valuation allowance................ (7,205,000) (1,600,000) (300,000)
State income taxes (benefit), net of federal
benefit.................................... 1,400,000 10,000 (7,000)
Reduction in carryovers and tax attributes... -- 984,000 323,000
Other........................................ (182,000) 80,000 103,000
----------- ----------- ---------
$ 1,513,000 $ 10,000 $ (7,000)
=========== =========== =========
</TABLE>
At December 31, 1998 and 1997, the Company had a net operating loss
carryforward for federal income tax return purposes of approximately $800,000
and $13,000,000, respectively, which expires between 1999 and 2011. A
substantial part of this carryforward is subject to separate return limitations.
At December 31, 1997 the Company had state carryforwards of varying amounts.
These state carryforwards were utilized or expired
F-12
<PAGE> 38
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
during 1998. 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.
NOTE F -- SHAREHOLDERS' 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 options to purchase 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 options, at an exercise price equal to
the market price of the Company's common shares on the date of grant.
Changes in options outstanding under the 1984 and 1995 Stock Option Plans
from January 1, 1996 to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at January 1, 1996.................................. 420,000 --
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
Granted................................................... -- --
Exercised................................................. -- --
Forfeited................................................. (40,000) 1.625
-------
Balance at December 31, 1998................................ 389,000 $1.628
=======
</TABLE>
F-13
<PAGE> 39
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
At December 31, 1998, 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
On August 15, 1995, the Company's Chairman and Chief Executive 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 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, 1998:
<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 6.83 $ 0.01 1,495,000 $ 0.01
1.625 - 1.6875 389,000 5.84 1.628 389,000 1.628
- --------------- ----------- ------------ -------- ----------- --------
$ .01 - 1.6875 1,884,000 6.63 $ .344 1,884,000 $ .344
=============== =========== ============ ======== =========== ========
</TABLE>
At December 31, 1998 and 1997, 1,884,000 and 1,890,000 options,
respectively, were vested and exercisable.
At December 31, 1998, there were 314,000 warrants outstanding at an
exercise price of $.75 per warrant. These warrants are exercisable through May
2002 (see note L).
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 1995 Plans was estimated
assuming no expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years).................................. 9.5 9.5 9.5
Expected volatility.................................... 93.8% 93.8% 99.3%
Risk-free interest rate................................ 6.3 6.3 7.9
</TABLE>
F-14
<PAGE> 40
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
No options were granted during 1998. The weighted-average fair value of
options granted during 1997 and 1996 was $1.50 and $1.49, respectively. 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>
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Net income (loss)
As reported................................. $20,051,000 $1,522,000 $(353,000)
Pro forma................................... 20,040,000 1,458,000 (387,000)
Earnings (loss) per share -- basic
As reported................................. 4.23 .32 (0.08)
Pro forma................................... 4.23 .31 (0.06)
Earnings (loss) per share -- assuming dilution
As reported................................. 3.15 .24 (0.08)
Pro forma................................... 3.15 .23 (0.06)
</TABLE>
NOTE G -- 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 1998,
1997 or 1996.
NOTE H -- OPERATING LEASES
The Company leases certain office equipment and space under operating
leases expiring at various dates through 2001.
Future minimum payments under noncancelable operating leases having initial
terms of more than one year consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
1999............................ $157,000
2000............................ 40,000
2001............................ 2,000
--------
$199,000
========
</TABLE>
Payments for repair and maintenance agreements are included in the future
minimum operating lease payments shown above.
Rent expense was $4,696,000, $3,285,000, and $3,841,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, and includes the above operating
leases as well as month-to-month rental and certain capital lease executory
costs.
NOTE I -- COMMITMENTS AND CONTINGENCIES
Under the terms of various Gamma Knife quotation agreements, the Company is
committed to purchase Gamma Knife equipment for $13,838,000 effective when the
equipment is placed in service at each customer location. At December 31, 1998,
the Company had a $1,000,000 deposit related to these purchase commitments which
is classified as construction in progress.
F-15
<PAGE> 41
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE J -- REPORTABLE SEGMENTS
American Shared Hospital Services (ASHS) has two reportable segments:
Diagnostic Imaging Services and Gamma Knife. The Diagnostic Imaging Services
segment uses medical diagnostic imaging systems to facilitate the diagnosis of
diseases and disorders. The Gamma Knife segment treats certain vascular
malformations and intracranial tumors without surgery.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. ASHS evaluates performance based
on profit or loss from operations before income taxes not including nonrecurring
gains and losses. Applicable general and administrative expenses are allocated
to segments based on relative percentage of revenues. Certain corporate expenses
are not allocated to the segments.
ASHS does not have significant intersegment sales transactions. The
segments share common expenses and provide management activities to one another
in which they charge management fees. These management fees are not considered
significant.
ASHS's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
REPORTABLE SEGMENT INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
DIAGNOSTIC IMAGING SERVICES
Revenues.............................................. $30,993 $34,772 $34,944
Interest expense...................................... 1,770 2,571 2,972
Depreciation and Amortization......................... 4,514 5,590 5,969
Segment profit (loss)................................. 156 1,208 (192)
Segment assets........................................ -- 20,905 32,547
Other significant noncash items:
Acquisition of equipment with lease/debt
financing........................................ 820 1,767 7,701
Capitalized lease restructuring..................... -- (3,173) (2,922)
Accounts payable converted to notes payable......... -- 817 1,971
GAMMA KNIFE
Revenues.............................................. 4,156 2,384 2,030
Interest expense...................................... 773 303 327
Depreciation and Amortization......................... 1,042 808 661
Segment profit........................................ 1,115 392 305
Segment assets........................................ 15,125 7,859 5,268
Other significant noncash items:
Acquisition of equipment with lease/debt
financing........................................ 6,132 2,232 2,270
</TABLE>
F-16
<PAGE> 42
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
RECONCILIATION TO CONSOLIDATED AMOUNTS
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
REVENUES
Total revenues for reportable segments...................... $35,149 $37,156 $36,974
Other revenues.............................................. 13 16 15
------- ------- -------
Total consolidated revenues............................ $35,162 $37,172 $36,989
TOTAL PROFIT FOR REPORTABLE SEGMENTS
Total profit................................................ $ 1,271 $ 1,600 $ 113
Gain on sale of product line................................ 20,478 -- --
Other....................................................... (185) (68) (473)
------- ------- -------
Income before income taxes.................................. $21,564 $ 1,532 $ (360)
ASSETS
Total assets for reportable segments........................ $15,025 $28,764 $37,815
Other assets................................................ 12,042 1,907 845
Elimination of receivables from corporate headquarters...... (148) (462) (5,691)
------- ------- -------
Consolidated total..................................... $26,919 $30,209 $32,969
</TABLE>
OTHER SIGNIFICANT ITEMS
<TABLE>
<CAPTION>
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
------- ----------- ------------
(THOUSANDS)
<S> <C> <C> <C>
1998
Interest expense.......................................... $2,543 $643 $3,186
Expenditures for assets................................... 50 5 55
Depreciation and amortization............................. 5,556 -- 5,556
1997
Interest expense.......................................... $2,874 $797 $3,671
Expenditures for assets................................... 320 26 346
Depreciation and amortization............................. 6,398 -- 6,398
1996
Interest expense.......................................... $3,299 $900 $4,199
Expenditures for assets................................... 293 -- 293
Depreciation and amortization............................. 6,631 -- 6,631
</TABLE>
Adjustments to reconcile reportable segment totals to consolidated totals
include unallocated amounts and amounts from non-reportable segments.
MAJOR CUSTOMERS
Revenues from the Company's Gamma Knife segment were provided by five
customers in 1998, three customers in 1997 and two customers in 1996. Revenue
from the Diagnostic Imaging Services segment was provided by various customers
throughout the U.S.
NOTE K -- SALE OF PRODUCT LINE
On November 13, 1998, the Company consummated a sale of their diagnostic
imaging services product line to a third party. The diagnostic imaging services
line included Magnetic Resonance Imaging (MRI),
F-17
<PAGE> 43
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Computed Axial Tomography Scanning (CT), Ultrasound, Nuclear Medicine and
Cardiac Catheterization Laboratory services. The Company sold the assets of this
product line for $13.5 million in cash and the assumption by the third party of
approximately $27.1 million in liabilities of the Company. The Company
recognized a gain on disposal of product line of approximately $20 million in
conjunction with this transaction.
In conjunction with the product line sale, one of the Company's facility's
which provides certain administrative and scheduling functions will be closed
during 1999. At December 31, 1998, in accordance with the Emerging Issues Task
Force (EITF) Abstract 94-3, the Company has accrued certain future exit costs
related to the sale of the product line and corresponding facility closure which
totaled $995,000 at December 31, 1998. The accrued costs include employee
compensation of $215,000, tail coverage insurance costs of $500,000, legal and
professional fees of $105,000, administrative costs of $115,000 and other costs
totaling $60,000. Insurance costs of approximately $400,000 have been classified
as long-term as they will be incurred subsequent to 1999. The accrued costs have
been included as a reduction to the gain on sale of product line in the 1998
Statement of Operations.
The revenue and net operating income or losses from the disposed diagnostic
imaging services line for fiscal years ended 1998, 1997, and 1996 are presented
at Note J.
NOTE L -- SUBSEQUENT EVENT
On March 8, 1999, the Company repurchased approximately 572,000 common
shares and approximately 285,000 warrants for an aggregate repurchase price of
approximately $702,000.
F-18
<PAGE> 44
AMERICAN SHARED HOSPITAL SERVICES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO BALANCE AT CHARGED TO BALANCE AT
JANUARY 1, COSTS AND AMOUNTS DECEMBER 31, COSTS AND AMOUNTS DECEMBER 31,
1996 EXPENSES WRITTEN OFF 1996 EXPENSES WRITTEN OFF 1997
----------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for
uncollectible
accounts........... $(1,448,000) $(1,014,000) $1,222,000 $(1,240,000) $(1,296,000) $1,234,000 $(1,302,000)
<CAPTION>
ADDITIONS ASSUMED BY
CHARGED TO BUYER IN BALANCE AT
COST AMOUNTS PRODUCT LINE DECEMBER 31,
EXPENSES WRITTEN OFF SALE 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Allowance for
uncollectible
accounts........... $(1,095,000) $1,031,000 $1,366,000 $ --
</TABLE>
F-19
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
<S> <C> <C>
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.(1)........................
3.1 Articles of Incorporation of the Company, as amended.(2).... *
3.2 By-laws for the Company, as amended.(3)..................... *
4.6 Form of Common Stock Purchase Warrant of American Shared *
Hospital Services.(3).......................................
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.(3).........................................
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)...............................................
10.4 Ernest A. Bates Stock Option Agreement dated as of August *
15, 1995.(7)................................................
10.5 Operating Agreement for GK Financing, LLC, dated as of *
October 17, 1995.(3)........................................
10.6 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.(4)..................................
10.7 Amendment dated as of October 16, 1996 to the GK Financing, *
LLC Operating Agreement, dated as of October 17, 1995.(1)...
10.8 Amendment dated as of March 31, 1998 ("Fourth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995............................................
10.9 Amendment dated as of March 31, 1998 ("Fifth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995............................................
10.10 Amendment dated as of June 5, 1998 to the GK Financing, LLC
Operating Agreement dated as of October 17, 1995............
10.11a Assignment and Assumption Agreement, dated as of December
31, 1995, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).................
10.11b Assignment and Assumption Agreement, dated as of November 1, *
1995, between American Shared Hospital Services (assignor)
and American Shared Radiosurgery Services (assignee).(4)....
10.11c Amendment Number One dated as of August 1, 1995 to the Lease
Agreement for a Gamma Knife Unit between The Regents of the
University of California and American Shared Hospital
Services. (Confidential material appearing in this document
has been omitted and filed separately with the Securities
and Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.).................................................
</TABLE>
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
<S> <C> <C>
10.11d Lease Agreement dated as of July 3, 1990 for a Gamma Knife
Unit between American Shared Hospital Services and The
Regents of the University of California. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
Securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)..............
10.12 Amendment Number Two dated as of February 6, 1998 to the
Lease Agreement for a Gamma Knife Unit between UCSF-Stanford
Health Care and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)..........................
10.13 Assignment and Assumption Agreement, dated as of February 3, *
1996, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(4).............
10.14 Lease Agreement for a Gamma Knife Unit dated as of April 6,
1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc.
dba USC University Hospital. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)..........................
10.15 Assignment and Assumption and Agreement dated as of February
1, 1996 between Ernest A. Bates, M.D. and GK Financing, LLC
with respect to the Lease Agreement for a Gamma Knife dated
as of April 6, 1994 between Ernest A. Bates, M.D. and NME
Hospitals, Inc. dba USC University Hospital. ...............
10.16 Lease Agreement for a Gamma Knife Unit dated as of October
31, 1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.).................................................
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
<S> <C> <C>
10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as
of December 1, 1998 between Hoag Memorial Hospital
Presbyterian and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)..........................
10.18 Lease Agreement for a Gamma Knife Unit dated as of October
29, 1996 between Methodist Healthcare Systems of San
Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.).................................................
10.19 Lease Agreement for a Gamma Knife Unit dated as of April 10,
1997 between Yale-New Haven Ambulatory Services Corporation
and GK Financing, LLC. (Confidential material appearing in
this document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.).................................................
21. Subsidiaries of American Shared Hospital Services. .........
23.1 Consent of Grant Thornton, LLP. ............................
23.2 Consent of Ernst & Young, LLP. .............................
27. Financial Data Schedule for the year ended December 31,
1998. ......................................................
</TABLE>
- ---------------
(1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the
registrant's Annual Report on Form 10-K for fiscal year ended December 31,
1997, which is incorporated herein by this reference.
(2) 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.
(3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, 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.
(4) These documents were filed as Exhibits 4.14 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.
(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 B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
<PAGE> 1
Exhibit 10.8
FOURTH AMENDMENT AGREEMENT
This Amendment Agreement is made and entered into this 31st day of
March, 1998, by and between AMERICAN SHARED RADIOSURGERY SERVICES, INC. ("ASRS")
and GKV INVESTMENTS, INC. ("GKV").
WHEREAS, ASRS and GKV are parties to that certain Operating Agreement
for GK FINANCING, LLC dated October 17, 1995, as amended (the "Operating
Agreement");
WHEREAS, ELEKTA INSTRUMENTS, INC. and GK FINANCING, LLC have entered
into two separate LGK Purchase Agreements for the sale/purchase of total seven
Leksell Gamma Knives on October 11, 1995 and October 11, 1996 respectively and
to which two separate Amendment Agreements have been entered into on the same
date as this Fourth Amendment Agreement thereby absolving ELEKTA INSTRUMENTS,
INC. of any and all obligations to pay interest on monies received from GK
FINANCING, LLC for payments made under the Purchase Agreements;
WHEREAS, ASRS and GKV desire to amend the Operating Agreement in certain
respects;
NOW THEREFORE, in consideration of the mutual covenants and obligations
herein contained, ASRS and GKV agree as follows:
1. Defined Terms.
All capitalized terms and expressions used herein which are defined in
the Operating Agreement shall have the meaning set forth in the Operating
Agreement except for the term "Draw Down Loan" as amended herein.
2. Amendment.
Paragraph 12.23 "Draw Down Loan by GKV to the Company" is hereby amended
as per the following:
a) "Draw Down Loan" is redefined to mean the "Promissory Note" provided
to Skandinaviska Enskilda Banken, New York, and signed by GK FINANCING, LLC on
April 29, 1996, in consideration for the USD 1,300,000.- received by GK
FINANCING, LLC.
b) GKV will pay to GK FINANCING, LLC 50% of the interest charged by
Skandinaviska Enskilda Banken relating to the capital amount of USD 250,000 as
calculated from October 30, 1997 until either the date upon which this capital
amount is repaid to Skandinaviska Enskilda Banken or October 17, 1998, which
ever date comes
<PAGE> 2
first. This interest will be paid semiannually as per the Promissory Note terms
and conditions.
Amendment.
GKV will pay to GK FINANCING, LLC 50% of the interest (interest rate to
be equal to that of the Promissory Note above) relating to USD 500,000 received
by ELEKTA INSTRUMENTS, INC. as advance payment for the third (3) Leksell Gamma
Knife purchased by GK FINANCING, LLC as per the LGK Purchase Agreement dated
October 11, 1996. This interest will be calculated from October 30, 1997, and
will be paid semiannually on the same dates as payments of interest under the
Promissory Note above and until either October 17, 1998, or the date upon which
this Leksell Gamma Knife is delivered to enduser's site, which ever date comes
first.
3. Full Force and Effect.
Except as explicitly amended by this Fourth Amendment Agreement and all
previous amendments, the provisions of the Operating Agreement shall remain in
full force and effect.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
AMERICAN SHARED RADIOSURGERY
SERVICES, INC.
By: /s/ Ernest A. Bates
--------------------------------
Title: CEO
-----------------------------
GKV INVESTMENTS, INC.
By: /s/ Richard Grome
--------------------------------
Title: President
-----------------------------
<PAGE> 1
Exhibit 10.9
FIFTH AMENDMENT AGREEMENT
This Amendment Agreement is made and entered as of March 31, 1998, by
and between AMERICAN SHARED RADIOSURGERY SERVICES, INC. ("ASRS"), and GKV
INVESTMENTS, INC. ("GKV").
WHEREAS, ASRS AND GKV are parties to that certain Operating Agreement
for GK Financing, LLC dated as of October 17, 1995, as amended (the "Operating
Agreement");
WHEREAS, ASRS AND GKV desire to amend the Operating Agreement in certain
respects;
NOW THEREFORE, in consideration of the mutual covenants contained
herein, ASRS and GKV agree as follows:
1. Defined Terms.
All capitalized terms used herein which are defined in the Operating
Agreement shall have the meaning set forth in the Operating Agreement.
2. Amendment.
Paragraph 2.14A of the Operating Agreement is hereby amended whereby the
amount of cash reserve to be maintained by the Company is reduced from $800,000
to $600,000.
3. Full Force and Effect.
Except as explicitly amended by this Fifth Amendment Agreement, the
provisions of the Operating Agreement shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals as of the date first above-written.
GKV INVESTMENTS, INC.
By: Richard Grome
---------------------------------
Title: President
------------------------------
AMERICAN SHARED RADIOSURGERY
SERVICES, INC.
By: Ernest A. Bates
---------------------------------
Title: CEO
------------------------------
<PAGE> 1
Exhibit 10.10
SIXTH AMENDMENT AGREEMENT
This Amendment Agreement is made and entered as of June 5, 1998, by and
between AMERICAN SHARED RADIOSURGERY SERVICES, INC. ("ASRS"), and GKV
INVESTMENTS, INC. ("GKV").
WHEREAS, ASRS AND GKV are parties to that certain Operating Agreement
for GK Financing, LLC dated as of October 17, 1995, as amended (the "Operating
Agreement");
WHEREAS, ASRS AND GKV desire to amend the Operating Agreement in certain
respects;
NOW THEREFORE, in consideration of the mutual covenants contained
herein, ASRS and GKV agree as follows:
1. Defined Terms.
All capitalized terms used herein which are defined in the Operating
Agreement shall have the meaning set forth in the Operating Agreement.
2. Amendment.
Paragraph 2.14A of the Operating Agreement is hereby amended whereby the
amount of cash reserve to be maintained by the Company is reduced from $600,000
to $50,000.
3. Full Force and Effect.
Except as explicitly amended by this Sixth Amendment Agreement, the
provisions of the Operating Agreement shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals as of the date first above-written.
GKV INVESTMENTS, INC.
By: Jonas Serlachius
---------------------------------
Title: V.P.
------------------------------
AMERICAN SHARED RADIOSURGERY
SERVICES, INC.
By: Ernest A. Bates
---------------------------------
Title: CEO
------------------------------
<PAGE> 1
Exhibit 10.12
Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of 1934, as amended.
Omitted information has been replaced with asterisks.
AMENDMENT NUMBER TWO
TO
LEASE AGREEMENT FOR A GAMMA KNIFE UNIT
BETWEEN
UCSF-STANFORD HEALTH CARE
AND
GK FINANCING, LLC
This AMENDMENT NUMBER TWO TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT (the
"Amendment") is dated effective as of February 6, 1998, and is entered into
between GK FINANCING, LLC, a California limited liability company ("GKF"), and
UCSF- STANFORD HEALTH CARE, a California nonprofit public benefit corporation
("UCSF SHC"), with reference to the following facts:
RECITALS
A. Reference is made to a certain Lease Agreement for a Gamma Knife Unit
(as amended, the "Agreement") which was dated July 6, 1990 but which first
became effective on September 17, 1991, between The Regents of the University of
California ("University") and American Shared Hospital Services, a California
corporation ("ASHS").
B. The Agreement was amended pursuant to a certain Amendment Number One
to the Lease Agreement for a Gamma Knife Unit (the "First Amendment") dated
effective August 1, 1995 between University and ASHS.
C. ASHS subsequently assigned all of its right, title and interest in
and to the Agreement to its wholly-owned subsidiary, American Shared
Radiosurgery Services ("ASRS").
D. On December 31, 1995, ASRS assigned all of its right, title and
interest in and to the Agreement to GKF pursuant to a certain Assignment and
Assumption Agreement, which assignment was consented to by University pursuant
to a certain Estoppel Certificate and Consent to Assignment dated December 21,
1995.
E. UCSF SHC was incorporated on November 1, 1997 and was assigned
certain assets and assumed certain liabilities, including all of University's
rights and obligations under the Agreement.
F. GKF and UCSF SHC desire to further amend the Agreement as provided
below.
Page 1 of 7
<PAGE> 2
NOW THEREFORE, for valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties agree to amend the Agreement
as follows:
AGREEMENT
1. Defined Terms. Unless otherwise defined herein, the capitalized terms
used herein shall have the same meanings set forth in the Agreement.
2. Extension of Term. The Term of the Agreement shall be extended through
September 17, 2008.
3. Option to Purchase Equipment. UCSF SHC shall not exercise any of its
options set forth in Sections 14(a)(i) or 14(a)(ii) of the Agreement to
purchase the Leksell Gamma Knife Model U Unit (the "Original Unit") that
is currently being leased by GKF to UCSF SHC under the Agreement.
Accordingly, title to the Original Unit shall remain with GKF.
4. Replacement of the Original Unit. GKF shall be responsible for removing
the Original Unit from the Site, and replacing it with a new Leksell
Gamma Knife Model B (the "New Unit") to be located at such Site;
provided that UCSF SHC shall be responsible for repairing the Site to
its original condition and implementing any changes UCSF SHC wishes to
make to the Site or which are required to support the New Unit. UCSF SHC
shall indemnify GKF for any such repairs or changes made or implemented
by UCSF SHC, which indemnification shall be in the same manner as GKF is
indemnified in Section 8(d) of the Agreement.
a. The Original Unit shall be removed and the New Unit shall be
installed by GKF after all appropriate licenses, permits,
approvals, consents and authorizations (collectively, the
"Permits") have been obtained by (and at the sole cost and
expense of) UCSF SHC for such removal and installation,
including, without limitation, the removal and reloading of the
cobalt-60. The timing and procedure for such removal and
installation shall be as mutually agreed upon between the
parties. As used herein, the "installation" of the New Unit by
GKF shall mean the placement of the New Unit at the Site and the
loading of the cobalt-60.
b. If UCSF SHC has performed its obligations hereunder with respect
to the removal of the Original unit and the installation of the
New Unit, including, without limitation, obtaining the Permits,
but the New Unit has not been installed in accordance with the
agreement of the parties, UCSF SHC shall give written notice
thereof to GKF. Subject to Section 26(c) (Force Majeure) of the
Agreement, if the New Unit has not been so installed within
seven (7) days after GKF's receipt of such notice from UCSF SHC,
GKF shall pay liquidated damages to UCSF SHC in the amount of
One Thousand Dollars ($1,000) for each business day after the
expiration of such seven (7) day period until the New Unit has
been installed. The
Page 2 of 7
<PAGE> 3
parties agree that (i) it would be impractical and extremely
difficult to estimate the damages suffered by UCSF SHC as a
result of GKF's failure to complete the installation of the New
Unit; and (ii) the liquidated damages provided for above
represent a reasonable estimate of the damages which UCSF SHC
would incur as a result of such failure and that such liquidated
damages will be the full, agreed and liquidated damages for such
failure.
5. *
6. Per Procedure Payment. Effective on the date the first clinical
treatment is performed on the New Unit, Section 2 of the First Amendment
shall be deleted and replaced with the following:
*
7. Cobalt Reloading. It is anticipated that after the New Unit has been in
clinical operation for six (6) years, UCSF SHC will remove and reload
the cobalt-60 into the New Unit
Page 3 of 7
<PAGE> 4
during the seventh (7th) Rate Year. UCSF SHC shall be responsible for
all costs associated with the removal and disposal of the depleted
cobalt and the installation of the new cobalt-60 into the New Unit. In
addition, UCSF SHC shall indemnify GKF for the foregoing in the same
manner as GKF is indemnified in Section 8(d) of the Agreement.
8. Transfer of Title to New Unit. At the end of the seventh (7th) Rate
Year, GKF shall transfer all of its right, title and interest in and to
the New Unit to UCSF SHC in consideration for the payment by UCSF SHC to
GKF of One Dollar ($1.00).
9. Services Performed by GKF. In addition to GKF's responsibilities under
the Agreement, GKF shall provide marketing support and research funding
assistance, and use its efforts to include UCSF SHC in networks with
third party payors, where warranted, for the provision of Gamma Knife
services. Such services shall include the following:
a. Sponsoring a guest lecturer for Gamma Knife symposiums in each
for the first seven (7) Rate Years.
b. Assisting in the funding of, at minimum, one research project
related to the clinical applications of the Gamma Knife to
functional procedures (i.e., epilepsy, Parkinson). Additional
research projects with Gamma Knife clinical applications shall be
considered on a case-by-case basis.
c. Develop a marketing and sales plan within thirty (30) days of
execution of this Amendment for review by UCSF SHC. GKF and UCSF
SHC shall meet at minimum quarterly to review the effectiveness
of the marketing and sales plan.
*
10. Allocation of Responsibility. It is understood by the parties that GKF
is not responsible for any additional hardware, cobalt reloading,
software changes and/or other modifications to the New Unit except as
agreed upon in writing by UCSF SHC and GKF. The Agreement may be
modified to reflect any additional changes or modifications.
Page 4 of 7
<PAGE> 5
11. Financing. GKF shall ensure that the financing of its New Unit shall not
restrict or prohibit the transfer of title to the New Unit pursuant to
Section 8 above.
12. Service Liaison. UCSF SHC shall designate an individual to be
responsible for conveying any Gamma Knife service/maintenance issues to
Elekta. The designated individual, however, must obtain prior written
approval from GKF for any service and/or maintenance that is not covered
by warranty or under GKF's service agreement with Elekta.
Notwithstanding the foregoing, it is understood that upon transfer of
title to the New Unit to UCSF SHC pursuant to Section 8 above, the
Service Agreement between GKF and Elekta referenced in Section 16 of the
Agreement shall terminate and GKF shall have no further obligation to
service or repair the New Unit pursuant to this Section 12 or under the
Agreement.
13. Acknowledgment of Assignment. UCSF SHC acknowledges the assignment by
University to UCSF SHC of all of University's rights and obligations
under the Agreement and the LGU Agreement (as defined in the Agreement),
and UCSF SHC hereby accepts such assignment and assumes and agrees to
perform all of University's obligations arising thereunder. In
furtherance of the foregoing, UCSF SHC shall cause University to execute
this Amendment solely for the purpose of acknowledging such assignment.
14. Captions. The captions and paragraph headings used herein are for
convenience only and shall not be used in construing or interpreting
this Amendment.
15. Full Force and Effect. Except as amended by this Amendment, all of the
terms and provisions of the Agreement shall remain in full force and
effect.
16. Dispute Resolution. In the event any dispute should arise between the
parties hereto as to the validity, construction, enforceability or
performance of this Agreement or any of its provisions, such dispute
shall be settled by arbitration.
a. Arbitrators. There shall be one (1) arbitrator for the arbitration
hearing who shall be chosen as follows. Within ten (10) days following
any such election by either of the parties hereto to arbitrate, each
party shall provide the other with written notice of its designee, who
shall be a lawyer actively practicing in San Francisco with not less
than ten (10) years experience in commercial healthcare matters, who
shall have no prior relationship, attorney/client or otherwise, with any
of the parties and who shall have committed in writing his or her
willingness to timely serve hereunder. Within ten (10) days after such
exchange of such identification of such designees, the designees shall
meet and select and identify in writing to each of the parties a third
party ("Arbitrator") who either meets the eligibility requirements of
such designees, or who is a retired judge actively engaged in
alternative dispute
Page 5 of 7
<PAGE> 6
resolution matters in San Francisco, California, with not less than ten
(10) years experience on the bench or in alternative dispute resolution
matters. In the event that any party fails to timely designate its
designee, such dispute shall thereupon immediately be deemed determined
in accordance with the position of the other party, but only so long as
such other party has not also failed to timely designate its designee.
In the event that such designees are unable to timely select and
identify Arbitrator, such designees shall, without further action,
automatically be deemed dismissed and the parties hereto shall, within
ten (10) days thereafter, repeat the designation process provided for in
this Section.
b. Arbitrator Authority. Arbitrator (i) shall have all authority of a
court of competent jurisdiction, including the authority to issue
injunctive and/or other orders, including rules of discovery, procedure
and/or evidence, and to award damages, actual, compensatory and/or
punitive, (ii) shall designate another person to act in his or her place
in any instance in which he or she is unable to act within the mandated
time frame within ten (10) days after making such determination, and
(iii) shall determine and designate the prevailing and nonprevailing
parties to any dispute.
c. Law to be Applied. The substantive law of the State of California
shall be applied by Arbitrator to the resolution of the dispute;
provided that the arbitration shall be conducted in accordance with the
rules then prevailing of the American Arbitration Association. The
parties shall have the rights of discovery as provided for in Part 4 of
the California Code of Civil Procedure and the provisions of Section
1283.05 of the California Code of Civil Procedure are hereby
incorporated by reference into this Agreement pursuant to the provisions
of Section 1283.1(b) of the California Code of Civil Procedure. In the
event that either said Sections is amended in a manner which limits or
reduces the discovery rights contained in said Sections as of the date
hereof, said amendment shall not be deemed to apply to this Agreement
unless the parties agree in writing that the same shall apply. In the
event that either Section 1283.05 or 1283.1(b) is repealed, the
provisions of Section 1283.05 shall nevertheless continue to apply and
the parties shall have the discovery rights as provided therein as of
the date of this Agreement. The California Evidence Code shall apply to
all testimony and documents submitted to Arbitrator.
d. Place and Timing Arbitration. The arbitration shall take place in San
Francisco, California, unless the parties otherwise agree in writing. As
soon as reasonably practicable, a hearing with respect to the dispute or
matter to be resolved shall be conducted by Arbitrator. As soon as
reasonable practicable, but not later than thirty (30) days after the
hearing is completed, Arbitrator shall arrive at a final decision, which
shall be reduced to writing, signed by Arbitrator and mailed to each of
the parties and their respective legal counsel.
e. Limited Judicial Action. The designated prevailing party may, but
need not, apply to any court of competent jurisdiction to enter a
confirming award as to any Arbitrator decisions. No appeal may be taken
from any Arbitrator decision except on a claim of
Page 6 of 7
<PAGE> 7
fraud on the part of Arbitrator, provided that no such appeal shall in
any way stay or otherwise delay the effect of the appealed decision.
f. Fees and Costs. The designated nonprevailing party in any dispute
shall be required (i) to fully compensate Arbitrator, and each of the
designees, for their respective services hereunder at their respective
prevailing hourly rate of compensation, and (ii) to fully reimburse the
designated prevailing party in any dispute for all of its documented
attorneys' fees and costs in connection with such dispute, as confirmed
by Arbitrator without right of challenge by such nonprevailing party.
g. Rights Reserved by Parties. The provisions of this Section shall not
limit, require the postponement of implementation, or in any other way
preclude the exercise of any rights otherwise enjoyed by any party to
this Agreement under the provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Amendment effective
as of the date first written above.
GK FINANCING, LLC UCSF-STANFORD HEALTH CARE
BY: Craig K. Tagawa BY: /s/
----------------------------- --------------------------
TITLE: CEO TITLE: Administrative
-------------------------- Materials Manager
-----------------------
DATE: February 6, 1998 DATE: March 27, 1998
--------------------------- ------------------------
THE UNDERSIGNED PARTY IS EXECUTING THIS AMENDMENT SOLELY FOR THE PURPOSE OF
ACKNOWLEDGING AND CONFIRMING THE ASSIGNMENT SET FORTH IN SECTION 13 ABOVE:
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
BY: /s/ M. Gonzales
-----------------------------
TITLE:
--------------------------
DATE:
---------------------------
Page 7 of 7
<PAGE> 1
EXHIBIT 10.14
Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of 1934, as amended.
Omitted information has been replaced with asterisks.
LEASE AGREEMENT FOR A GAMMA KNIFE UNIT
THIS AGREEMENT FOR A GAMMA KNIFE UNIT, (hereinafter, referred to as the
"Agreement") is entered into on April 6, 1994 between Ernest A. Bates, M.D. an
individual, (hereinafter referred to as "PROVIDER"), and NME HOSPITALS, INC. a
Delaware corporation, dba USC University Hospital (hereinafter referred to as
"NME").
R E C I T A L S
WHEREAS, the Lease Agreement dated as of February 1, 1993 (the "Original
Lease") entered into by and between NME and American Shared Hospital Services
("ASHS") for the lease of a Leksell Stereotactic Gamma Unit (hereinafter
referred to as the "Equipment") manufactured by Elekta Instruments, Inc., a
Georgia corporation ("Elekta") was terminated pursuant to that certain Agreement
for Termination of Agreements and Mutual Release dated April 6, 1994 (the
"Termination Agreement") between NME and ASHS and Provider prior to the delivery
of the Equipment under the Original Lease;
WHEREAS, NME wants to lease the Equipment; and
WHEREAS, PROVIDER will enter into a LGK Purchase Agreement with Elekta for
the purchase of the Equipment in the form attached hereto as Exhibit A (the
"Purchase Agreement"), and an Installment Note and Security Agreement with
General Electric Company for the financing of the purchase of the Equipment in
the form attached hereto as Exhibit B (the "Note");
WHEREAS, PROVIDER is willing to lease the Equipment which PROVIDER has
acquired from Elekta to NME, pursuant to the terms and conditions of this
Agreement.
NOW, therefore, in consideration of the foregoing premises and the promises
contained herein, the parties hereto hereby agree as follows:
1. Execution of Related Agreements
(a) NME agrees that simultaneously with the execution of this Agreement it
shall execute that certain LGK Agreement with Elekta, (hereinafter referred to
as the "LGK Agreement"), a copy of which is attached hereto as Exhibit C and
incorporated herein by this reference. NME agrees to fulfill all of its
obligations under the LGK Agreement and acknowledges that PROVIDER is a third
party beneficiary of the LGK Agreement. NME shall fully indemnify and hold
harmless PROVIDER in the event that PROVIDER suffers any loss,
<PAGE> 2
damage, claim or expense (including attorneys' fees) solely as a result of NME's
breach or alleged breach of the LGK Agreement.
(b) PROVIDER agrees that on or before the execution of this Agreement,
PROVIDER shall execute the Purchase Agreement and the Note. PROVIDER agrees to
fulfill all of its obligations under the Purchase Agreement and the Note and
acknowledges that NME is a third party beneficiary of the Purchase Agreement and
the Note.
2. Delivery of the Equipment and Site Preparation. PROVIDER shall
arrange to have the Equipment delivered to NME, at 1500 San Pablo Street, Los
Angeles, California (the "Site") in coordination with Elekta on or before April
6, 1994. Elekta shall be responsible for transporting the Equipment from F.O.B.
loading dock to the Site and the subsequent positioning of the Equipment, as
well as, construction of the temporary hot cell to facilitate charging of the
Equipment with its cobalt supply. Elekta shall be reimbursed by NME for the
costs associated with transporting, installing and positioning the Equipment to
the Site as well as the construction of the temporary hot cell to facilitate
charging of the Equipment with its cobalt supply. Such costs shall not exceed
$70,000 and shall be paid upon presentation of documented expenses. PROVIDER
shall exert its best faith efforts to expedite the delivery of the Equipment in
accordance with the terms and conditions of the Purchase Agreement for the
Equipment by and between PROVIDER and Elekta. PROVIDER shall immediately inform
NME of any delay in the delivery of the Equipment. Should PROVIDER not deliver
the Equipment to NME on April 6, 1994 due to no fault of NME and except for
reasons of force majeure as defined under paragraph 25(c) PROVIDER shall
reimburse NME at an annual interest rate of Bank of America's prime rate plus 2%
on its actual cost expended to prepare the Site as of sixty (60) days subsequent
to April 6, 1994 until the Equipment is delivered.
NME shall provide a safe, convenient and properly prepared Site, at its own
expense, in accordance with all of the Equipment manufacturer's (Elekta's)
guidelines, specifications, technical instruments and Site Planning Criteria
(which Site Planning Criteria are attached hereto as Exhibit D and incorporated
herein by this reference). NME shall obtain a User License from the Nuclear
Regulatory Commission and/or appropriate state agency authorizing it to take
possession of the Cobalt Supply and shall obtain such other licenses, permits,
approvals, consents and authorisations, which may be required by local
governmental or other regulatory agencies for the Site, its preparation, the
charging of the Equipment with its Cobalt Supply, the conduct of the Acceptance
tests, and the use of the Equipment all as more fully set forth in Article 2.1
of the LGK Agreement.
3. Commencement of the Term. The Term (hereinafter defined) of this
Agreement shall commence upon the performance of the first Gamma Knife procedure
at the Site (the "Commencement Date"). NME
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<PAGE> 3
shall become liable to PROVIDER for the payments referred to in Paragraph 6
hereinbelow upon the Commencement Date.
4. Costs of Site Preparation; Costs of Installation. NME's obligations
shall include preparation of plans and specifications for the construction and
preparation of the Site in such form as will result in the Site, when
constructed in accordance with such plans and specifications, being in full
compliance with Elekta's Site Planning Criteria. NME shall at its own expense
and risk, prepare, construct and make ready the Site as necessary, for the
installation of the Equipment, including, but not limited to, providing any
temporary and/or permanent shielding of the charging of the Equipment and its
use, selecting and preparing a proper foundation for the Equipment and for such
shielding and walls, as well as proper alignment of the Site and wiring. NME
shall reimburse Elekta for the costs associated with transporting, installing
and positioning the LGK, up to a maximum of $70,000 in accordance with the LGK
Agreement.
NME shall also at its own expense select, purchase and install all
radiation monitoring Equipment and devices, safety circuits and radiation
warning signs needed for the Equipment at the Site, according to all applicable
federal, state and local laws, regulations, recommendations or custom.
Upon completion of the Site, NME shall warrant that the Site will be
safe and suitable for its use of the Equipment. NME shall fully indemnify and
hold harmless PROVIDER from any and all loss, liability, damage, expense or
claim (including attorneys' fees) which PROVIDER may suffer and incur and which
relate to the Site.
NME shall be liable to PROVIDER for any change to the Equipment caused
by (a) defects in construction of the Site; (b) defects arising out of materials
or parts provided, modified or designed by NME with respect to the SITE; or (c)
negligent or intentional acts or omission or commission by NME or any of its
officers, agents, physicians, and employees in connection with the Site
preparation or operation of the Equipment at the Site.
NME hereby warrants that all site preparations are complete and ready
for delivery of the Equipment.
5. Term of the Equipment. PROVIDER agrees to provide to NME the
Equipment pursuant to the terms of this Agreement, for a term of five (5) years
from the Commencement Date as described in Paragraph 3 hereinabove (the
"Term"), unless terminated earlier as provided herein.
6. *
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<PAGE> 4
*
7. Use of the Equipment. The Equipment may be used by NME only at the
location stated above and shall not be removed therefrom. NME shall not assign
or sublease the Equipment or its rights hereunder without the prior written
consent of PROVIDER; which consent shall not be unreasonably withheld. No
permitted assignment or sublease shall relieve NME of any of its obligations
hereunder. NME shall not use nor permit the Equipment to be used in any manner
nor for any purpose for which, in the opinion of Elekta or PROVIDER, the
Equipment is not designed or reasonably suitable. NME shall not permit any
liens, whether voluntary or involuntary, arising through NME to attach to the
Equipment, without the prior written consent of PROVIDER. NME shall have no
interest in the Equipment other than the rights acquired as a lessee hereunder
and the Equipment shall remain the property of PROVIDER regardless of the manner
in which it may be installed or attached at the Site. NME shall, at PROVIDER's
request, affix to the Equipment tags, decals, or plates furnished by PROVIDER,
indicating PROVIDER's ownership of the Equipment.
8. Additional Covenants of NME. In addition to the other covenants made
by NME, NME shall at its own cost and expense:
(a) Provide properly trained professional, technical and support
personnel required for the proper performance of medical procedures utilizing
the Equipment. PROVIDER shall be responsible to coordinate with Elekta adequate
training of initial hospital personnel.
(b) Assume all medical and financial responsibility for the overseers'
monitoring of all patients' medical condition and treatment.
(c) Fully comply with all of its obligations under the LGK Agreement.
(d) Indemnify PROVIDER as herein provided: (i) NME hereby agrees to fully
indemnify and/or reimburse (including reasonable attorneys' fees) PROVIDER on a
prompt basis for any and all damage to the Equipment (including any violations
by NME, its agents,
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<PAGE> 5
officers, physicians, employees, successors and assigns of the Service Agreement
described in Paragraph 15 hereof) to the extent such damages are caused by the
negligent or wrongful acts or omissions of NME, its agents, officers, physicians
and employees. In the event the Equipment is destroyed or rendered unusable,
this indemnification shall extend up to (but not exceed) the full replacement
value of the Equipment at the time of its destruction less salvage value, if
any, (ii) NME hereby further agrees to indemnify and hold PROVIDER, its agents,
officers, employees, successors and assigns, harmless from and against any and
all claims, liabilities, obligations, losses, damages, injuries, penalties,
actions, costs and expenses (including reasonable attorneys' fees) for all
events and/or occurrences described in Article 7.3 of the LGX Agreement to the
same extent that NME agrees to indemnify Electa thereunder. NME further agrees
to fully indemnify and hold harmless PROVIDER for any loss, damage, claim, or
expense (including reasonable attorneys' fees) PROVIDER may suffer or incur as a
result of NME's breach or breach alleged in litigation with the LGX Agreement.
9. Additional Covenants, Representations and Warranties of PROVIDER. In
addition to the other covenants, representations and warranties made by
PROVIDER in this Agreement:
(a) PROVIDER represents and warrants that PROVIDER has full power and
authority to enter into this Agreement, and that this Agreement does not and
will not violate any agreement, contract or instrument binding upon PROVIDER.
(b) PROVIDER represents and warrants to NME that, upon delivery of the
Equipment to NME, PROVIDER shall use its best faith efforts to require that
Electa meets its contractual obligations to PROVIDER and in putting the
Equipment, as soon as possible, into good, safe and serviceable condition and
fit for its intended use in accordance with the manufacturer's specifications,
guidelines and field modification instructions.
(c) PROVIDER represents and warrants that throughout the term of this
Agreement, NME shall enjoy the use of the Equipment, free of the rights of any
other persons except for those rights reserved by PROVIDER for granted to
Electa under the LGX Agreement or under Electa's Purchase Agreement with
PROVIDER. This provision shall in no way limit the rights of NME under Section
10.
(d) During the entire term of this Agreement and subsequent extension
thereof, PROVIDER shall maintain in full force and effect: (i) the Service
Agreement referenced in Paragraph 15 hereof; and (ii) any other service or
other agreements required to
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<PAGE> 6
fulfill PROVIDER's obligations to NME pursuant to this Paragraph 9(c), PROVIDER
represents and warrants that during the entire term of this Agreement and any
subsequent extensions thereof, that it will fully pursue any and all remedies
it may have against Elekta under the Service Agreement to insure that the
Equipment will be in conformity with Elekta's warranties so that it is free
from defects in design, materials, and workmanship which result in
noncompliance with the specifications and/or Elekta's warranties to PROVIDER.
In no event, however, shall the warranty obligations of PROVIDER to NME with
respect to the Equipment be greater or more extensive than Elekta's warranty
obligations to PROVIDER with respect to the Equipment.
PROVIDER's obligations to service the Equipment shall include that duty to
provide preventative maintenance, parts, and labor. The parties agree that the
necessity and financial responsibility for upgrades to the Equipment shall be
mutually discussed and decided by PROVIDER and NME.
NME warrants that it shall not knowingly allow or cause any acts by its
agents, officers, employees, patients, etc. which may or will jeopardize
PROVIDER's rights under the Service Agreement.
10. Ownership/Title. It is expressly understood that NME shall acquire no
right, title or interest in or to the Equipment other than the right to the
possession and use of the same in accordance with the terms of this Agreement.
PROVIDER may at its sole discretion finance the Equipment, subject to
obtaining an Attornment Agreement from the lender in form and substance
satisfactory to NME. Financing may be in the form of an installment loan or a
capitalized lease or other commercially available debt instrument, should
PROVIDER finance the Equipment through an installment loan, PROVIDER shall be
required to provide the Equipment and contract as collateral against the loan.
Should PROVIDER finance the Equipment through a capitalized lease, title shall
vest with the lessor. PROVIDER shall, however, structure the capitalized lease
or loan such that the default of PROVIDER shall not affect the rights of NME to
the quiet use and enjoyment of the Equipment provided that the lender shall
have all of the rights and obligations of PROVIDER under this Agreement
pursuant to the terms of the Attornment Agreement. PROVIDER is also authorized
to assign its rights under this LEASE as collateral for any such financing.
11. Cost of the Equipment. Except as is otherwise provided herein, NME
shall bear the entire cost of using the Equipment during the Term of this
Agreement. This shall include, but not be limited to, providing trained
professionals, technical and support personnel and supplies to properly operate
the Equipment. NME shall be fully responsible and liable for all acts
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<PAGE> 7
and/or omissions of such professional, technical and support personnel.
12. Taxes. PROVIDER shall pay any personal property taxes levied
against the Equipment and any other taxes or governmental fees or assessments,
however denoted, whether of the federal government, any state government or any
local government, levied or based on this Agreement or the use of the Equipment
except for those taxes, if any, pertaining to the gross income or gross
receipts of NME. In the event that PROVIDER fails to pay any such taxes, NME
shall have the right, in its sole and absolute discretion, to pay such taxes on
behalf of PROVIDER and offset such amounts against any payments owned under
Section 6.
13. Maintenance and Inspections. PROVIDER agrees to exercise due and
proper care in the maintenance of the Equipment and to keep the Equipment in a
good state of repair, reasonable wear and tear excepted. NME shall be liable to
PROVIDER for all damage to the Equipment caused by the misuse, negligence,
improper use or other intentional or negligent acts or omissions of NME's
employees, officers agents, and physicians.
PROVIDER (and Elekta) shall have the right of access to the Equipment
for the purpose of inspecting same at all reasonable times and upon reasonable
notice and with a minimum of interference to NME's operations. In the event the
Equipment is improperly used by NME or its employees, agents, officers, and
physicians, PROVIDER may service or repair the same as needed and such expense
shall be paid by NME, unless the repair is covered by the Service Agreement
described in Paragraph 15 hereof.
Any work so performed by or in the service or maintenance of the
Equipment as a result of NME's failure or neglect to do so shall not deprive
PROVIDER of any of its rights, remedies or actions against NME for damages
cause by such failure or neglect.
14. Options to Extend Agreement.
(a) NME shall have the option at the end of the five (5) year initial
Term to:
(i) *
(ii) *
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<PAGE> 8
*
(iii) Terminate this Agreement. If NME terminates this Agreement at
the end of the initial term and does not purchase the Gamma Knife, PROVIDER
shall remove the Gamma Knife within an agreed upon period of time after the
expiration of the five (5) year initial Term.
(iv) Renegotiate this Agreement for a specified renewal term taking
into account the first five (5) years of activity of the Equipment at the Site.
NME shall exercise one (1) of the four (4) options referred to above, by
mailing an irrevocable written notice thereof to PROVIDER at 444 Market Street,
Suite 2420, San Francisco, California 94111, by registered mail, postmarked on
or before the end of the fourth (4th) year of the five (5) year initial Term of
this Agreement. Any such notice shall be sufficient if it states in substance
that NME elects to exercise its option and states which of the four (4) options
referred to above NME is exercising. In the event that option *
In the event NME chooses to exercise either option (i) or (ii) of the
options listed above, the following terms shall apply to the transaction:
The "Closing Date" shall be the first (1st) business day sixty (60) months
after the Commencement Date. The Closing Date may be extended by mutual
agreement of the parties.
On or before the Closing Date, NME shall deliver to PROVIDER cash funds in
the amount of the purchase price.
On or before the Closing Date, PROVIDER shall deliver to NME four (4)
duplicate original copies of a bill of sale duly executed and acknowledged by
NME and the legal owner of the Equipment, which bills of sale shall warrant and
defend NME from
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<PAGE> 9
and against any and all liens, encumbrances, security interests for claims of
third parties, and shall be in a form reasonably satisfactory to counsel for
NME.
15. Service Agreement. PROVIDER warrants that it shall simultaneously with
the execution of this Agreement enter into a Service Agreement with Elekta (the
"Service Agreement") a copy of which is attached hereto as Exhibit S and
incorporated herein by this reference. Such Agreement shall be in full force and
effect for the initial term of this Agreement and shall be renewed for
subsequent extensions thereof.
16. No Warranties by PROVIDER. NME warrants that as of the Commencement
Date, it shall have (a) thoroughly inspected the Equipment; (b) determined for
(itself that all items of the Equipment are of a size, design, capacity and
manufacture selected by it; and (c) satisfied itself that to the best of its
knowledge the Equipment is suitable for NME's stated purposes. PROVIDER NOT
BEING THE MANUFACTURER OF THE EQUIPMENT OR THE MANUFACTURER'S AGENT, MAKES NO
WARRANTY OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, AS TO THE EQUIPMENT'S
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION,
DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR
THE LIKE. Any and all warranties made by Elekta will be in its good faith
best efforts enforced by PROVIDER on behalf of NME during the five (5) year
initial Term hereof and any subsequent extension thereof. NME agrees to
look solely to the manufacturer (Elekta) or to suppliers of the Equipment (and
its software) with respect to nonstary compensation for any and all warranty
claims. NME agrees that PROVIDER shall not be responsible for the delivery,
installation, or operation of the Equipment or for any delay or inadequacy of
any or all of the foregoing. PROVIDER shall not be responsible for any direct or
indirect consequential loss or damage resulting from the installation, negligent
operation or use of the Equipment or otherwise. NME expressly waives any right
to hold PROVIDER liable hereunder for any claims, demands and liabilities
arising out of or in connection with the design, manufacture, possession or
operation of the Equipment.
17. Events of Default and Remedies. The occurrence of any one of the
following shall constitute an Event of Default hereunder:
(a) NME fails to pay any installment of monthly procedure payments when
due when such default continues for a period of thirty (30) days after notice
thereof from PROVIDER or its assignee is given to NME;
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<PAGE> 10
(b) NME attempts to remove, sell, transfer, encumber, sublet or part
with possession of the Equipment or any items thereof, except as expressly
permitted herein;
(c) NME shall fail to observe or perform any of the other obligations
required to be observed or performed by NME hereunder and such failure shall
continue uncured for twenty (20) days after written notice thereof to NME by
PROVIDER;
(d) NME ceases doing business as a going concern, makes an assignment
for the benefit of creditors, admits in writing its inability to pay its debts
as they become due, files a voluntary petition in bankruptcy, is adjudicated a
bankrupt or an insolvent, files a petition seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar arrangement under any present or future statute, law or regulation or
files an answer admitting the material allegations of a petition filed against
it in any such proceeding, consents to or acquiesces in the appointment of a
trustee, receiver, or liquidator of it or of all or any substantial part of its
assets or properties, or it or its shareholders shall take any action looking to
its dissolution or liquidation.
(e) Within sixty (60) days after the commencement of any proceedings
against NME seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceedings shall not have been dismissed, or if within thirty
(30) days after the appointment without NME's consent or acquiescence of any
trustee, receiver or liquidator of it or of all or any substantial part of its
assets and properties, such appointment shall not be vacated.
Upon the occurrence of an Event of Default, PROVIDER may at its option
do any or all of the following: (i) by notice to NME, terminate this Agreement
as to the Equipment in default, wherever situated, and for such purpose, either
upon the Site without liability for so doing or PROVIDER may cause NME and NME
hereby agrees, to return the Equipment to PROVIDER at NME's sole cost and
expense: (ii) recover from, as liquidated damages for the loss of the bargain
and not as a penalty, an amount equal to the present value of the then unfunded
costs of the PROVIDER calculated in accordance with the formula set forth in
Paragraph 14a(ii) discounted at the rate of nine percent (9%), which payment
shall become immediately due and payable; (iii) sell, dispose of, hold, use or
lease the Equipment in default, as PROVIDER in its sole discretion may determine
(and PROVIDER shall not be obligated to give preference to the sale, lease or to
the disposition of the Equipment over the sale, lease or other disposition of
similar Equipment owned or leased by PROVIDER). In any event, NME shall, without
further demand, pay to PROVIDER an amount equal to all sums
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due and payable for all periods up to and including the date on which PROVIDER
has declared this Agreement to be in default.
In the event that NME shall have paid to PROVIDER the liquidated
damages referred to in (ii) above, PROVIDER hereby agrees to pay to NME
promptly after receipt thereof, all rentals or proceeds received from the
reletting or sale of the Equipment during the balance of the five (5) year
initial Term (after deduction of all expenses incurred by PROVIDER; said amount
never to exceed the amount of the liquidated damages paid by NME). NME agrees
that PROVIDER shall have no obligation to sell the Equipment. NME shall in any
event remain fully liable for reasonable damages as provided by law for all
costs and expenses incurred by PROVIDER on account of such default, including
but not limited to, all court costs and reasonable attorneys' fees. NME hereby
agrees that, in any event, it shall be liable for any deficiency after any
sale, lease or other disposition of the Equipment by PROVIDER. The rights
afforded PROVIDER hereunder shall not be deemed to be exclusive, but shall be
in addition to any other rights or remedies provided by law.
18. Insurance.
(a) During the five (5) year initial Term of this Agreement (and any
successive terms) PROVIDER shall, at its own cost and expense, keep in effect
an all risk and hazard insurance policy covering the Equipment. The all risk
and hazard insurance policy shall be for an amount not less than the
replacement cost of the Equipment. During the five (5) year initial Term of
this Agreement, NME shall, at its own cost and expense keep in effect public
liability and professional liability insurance policies or self insurance
concerning the operation of the Equipment by NME. Said policies shall be in the
amounts of not less than $1,000,000 per occurrence and $5,000,000 in aggregate
per year. NME and PROVIDER, their successors and assigns, shall be named as
additional insureds and/or loss payees on the insurance policies maintained
hereunder by the other party. Evidence of such insurance coverages shall be
furnished by both parties to the other party upon written request, by no later
than the Commencement Date.
(b) If the Equipment is rendered unusable as a result of any physical
damage to, or destruction of, the Equipment, NME shall give to PROVIDER
immediate notice. PROVIDER shall determine, within thirty (30) days after the
date of occurrence of such damage or destruction, whether the Equipment can be
repaired. In the event PROVIDER determines that the Equipment cannot be
repaired, PROVIDER at its sole cost and expense shall promptly replace the
Equipment. This Agreement shall continue in full force and effect as though such
damage or destruction had not occurred. In the
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<PAGE> 12
event PROVIDER determines that the Equipment can be repaired, PROVIDER shall
cause the Equipment to be promptly repaired. All proceeds of insurance received
by PROVIDER under said policy shall be applied toward the cost of any such
repair or replacement of the Equipment.
19. Notices. Any notices required under this Agreement shall be sent in
writing and shall be deemed to have been duly given if delivered by hand or
mailed by certified or registered mail to the following addresses:
To PROVIDER: E.A. Hates, M.D.
444 Market Street, Suite 2420
San Francisco, CA 94111
To NME: NME Hospitals, Inc.
c/o USC University Hospital
1500 San Pablo Street
Los Angeles, CA 90033
Attn: Jeff Green
With copy to: National Medical Enterprises, Inc.
2700 Colorado Avenue
Santa Monica, CA 90404
Attn: Regional Counsel
Or to such other addresses as either party may specify for the reception of
notice from time to time in writing to the other party. Any such notice shall
be effective only when actually received by the party to whom addressed.
20. Integration/Supersedure. This Agreement contains the full and
entire Agreement between the parties hereto, and no oral or written
understanding is of any force or effect whatsoever unless expressly contained
in a writing executed subsequent to the date of this Agreement.
21. Waivers. To the extent that PROVIDER fails or chooses not to pursue
any of its remedies under this Agreement or pursuant to applicable law, such
shall not prejudice PROVIDER's rights to pursue any of those remedies at any
future time and shall not constitute a waiver of PROVIDER's rights.
22. Assignments. This Agreement is binding upon and shall inure to the
benefit of the permitted successors or assigns of the respective parties
hereto, except that neither party may assign its rights or obligations under
this Agreement without the express written consent of the other (which consent
shall not be unreasonably withheld). Notwithstanding the foregoing, NME hereby
agrees to consent to the assignment of this Agreement and any collateral
agreements attached hereto by PROVIDER to ASHS or any affiliate upon reasonable
assurances that the signee has fully
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<PAGE> 13
assumed all of the obligations under the Lease collateral agreements.
23. Amendments. This Agreement shall not be amended or altered in any
manner unless such amendment or alteration is in a writing signed by both
parties.
24. Record-Keeping Requirements. To the extent required by the
regulations promulgated by the Health Care Financing Administration pursuant to
Section 952 of the Omnibus Reconciliation Act of 1980, PROVIDER shall:
(a) Until the expiration of four (4) years following the furnishing
of services pursuant to this Agreement, PROVIDER agrees to make available upon
written request of the Secretary of Health and Human Services or the U.S.
Comptroller General of any of their duly authorized representatives, this
Agreement, any books, documents and records necessary to verify the nature and
extent of costs incurred by NME by reason of the activities of PROVIDER under
this Agreement; and
(b) If PROVIDER elects to delegate any of its duties under this
Agreement (which have a cost or value of Ten Thousand Dollars ($10,000.00) or
more over a twelve (12) month period) to a related organization, PROVIDER may do
so only through a subcontractor which is consented to by NME, it being
understood that, inasmuch as NME is entering into this Agreement in reliance on
PROVIDER's reputation and expertise, that NME shall be the sole judge of the
reputation and expertise of the proposed delegates, and only through a
subcontractor which provides that, until the expiration of four (4) years
following the furnishing of services under such subcontract, the related
organization shall make available, on request of the Secretary of Health and
Human Services or the U.S. Comptroller General or any of their authorized
representatives, the subcontract, and books, documents and records of the
nature and extent of costs incurred by NME by reason of activities of such
related organization under such subcontract. No delegation by PROVIDER of its
duties hereunder shall relieve PROVIDER from liability hereunder.
25. Miscellaneous Provisions.
(a) The invalidity or unenforceability of any portion or provision
of this Agreement shall not affect the validity or enforceability of any other
portion, nor shall either party's implied or express consent to the breach or
waiver of any provision of this Agreement constitute a waiver of such provision
as to any subsequent breach.
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<PAGE> 14
(b) In the event of any claim controversy arising hereunder, the
prevailing party in such claim or controversy shall be entitled to a reasonable
attorneys' fee in addition to whatever other relief said party would be
otherwise entitled.
(c) Force Majeure. Failure to perform by either party will be excused
in the event of any delay or inability to perform its duties under this
Agreement directly or indirectly caused by conditions beyond its reasonable
control including without limitation, fires, floods, earthquakes, snow, ice,
disasters, Acts of God, accidents, riots, wars, operation of law, strikes,
governmental action or regulations, shortages of labor, fuel, power, materials,
manufacturer delays or transportation problems.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have signed this Agreement on the day and
year first above written.
NME Hospitals, Inc. Ernest A. Bates, M.D.
By: /s/ Gerald Bosworth By: /s/ ERNEST A. BATES, M.D.
-------------------------- ---------------------------
Ernest A. Bates, M.D.
an individual
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<PAGE> 16
EXHIBIT C
*
<PAGE> 17
EXHIBIT D
*
<PAGE> 1
EXHIBIT 10.15
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is made as of the 1st day of February
1996 by and between ERNEST A. BATES, M.D., an individual ("Assignor") and GKF
FINANCING, LLC, a California limited liability Company ("Assignee").
RECITALS:
A Assignor desires to Assign to Assignee that contract between
NME Hospitals, Inc., a Delaware corporation, dba USC University Hospital dated
April 6, 1994, a full copy of which is attached here as Exhibit A (the
"Contract").
AGREEMENT:
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in consideration of the
premises and mutual covenants herein contained, the parties hereby agree as
follows:
1. ASSIGNMENT. Assignor hereby grants, conveys, transfers and assigns
to Assignee, its successors and assigns, all of Assignor's rights, title and
interest under, in and to the Contract:
2. ASSUMPTION OF LIABILITIES. Assignee hereby accepts the grant,
conveyance, transfer and assignment by Assignor to Assignee, its successors and
assigns, of all of Assignor's rights, title and interest under, in and to the
Contract, and hereby assumes and agrees to perform and discharge all of
Assignor's executory obligations arising under the Contract (the "Assumed
Contract Liabilities").
3. NO ASSUMPTION OF OTHER LIABILITIES. Except for the Assumed
Contract Liabilities identified in Section 2. Assignee does not assume, and
shall not in any manner become responsible or liable for, and Assignor shall
retain, pay, discharge and perform in full, all other debts, obligations or
liabilities of Assignor, whether known or unknown, fixed, contingent or
otherwise.
4. MISCELLANEOUS PROVISIONS.
4.1 FURTHER ASSURANCES. Assignor and Assignee agree, at the
other party's request, whether on or after the date hereof, and without further
consideration, that each shall execute and deliver any and all further
instruments and documents, and take such further actions, as the other party may
reasonably request or as may reasonably be required in order more effectively
to vest in Assignee all of Assignor's rights, title and interest under, in and
to the Contract and to evidence Assignee's assumption of the Assumed Contract
Liabilities, or to otherwise carry out the provisions of this Agreement.
4.2 BINDING EFFECT. All of the terms, provisions and
conditions of this Agreement shall be binding on, and shall inure to and be
enforceable by, the parties hereto and their respective successors and assigns.
<PAGE> 2
4.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of California.
IN TESTIMONY WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
ERNEST A. BATES, M.D.
By: /s/ ERNEST A. BATES, M.D.
------------------------------
Ernest A. Bates
Title: (an Individual)
---------------------------
("Assignor")
GK FINANCING, LLC
By: /s/ C.K.TAGAWA
------------------------------
Craig K. Tagawa
Title: Chief Executive Officer
---------------------------
("Assignee")
<PAGE> 1
EXHIBIT 10.16
Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of 1934, as amended.
Omitted information has been replaced with asterisks.
LEASE AGREEMENT FOR A GAMMA KNIFE UNIT
THIS LEASE AGREEMENT FOR A GAMMA KNIFE UNIT on October 31, 1996
(hereinafter, referred to as the "Agreement") is entered into between GK
Financing, LLC, a California Limited Liability Company, (hereinafter referred
to as "GKF"), and HOAG MEMORIAL HOSPITAL PRESBYTERIAN, a California corporation
(hereinafter referred to as "Hospital")
R E C I T A L S
WHEREAS, Hospital wants to lease a Leksell Stereotactic Gamma Unit
distributed by Elekta Instruments, Inc. (hereinafter referred to as the
"Equipment"), and
WHEREAS, GKF is willing to lease the Equipment which GKF has acquired from
UCI Medical Center, a California corporation (hereinafter referred to as
"UCI"), to Hospital, pursuant to the terms and conditions of this Agreement.
NOW, therefore, in consideration of the foregoing premises and the
promises contained herein, the parties hereto hereby agree as follows:
1. Execution of LGK Agreement by and between Hospital and Elekta. GKF
hereby leases the Equipment to the Hospital on the terms and conditions
hereinafter set forth. Hospital agrees that simultaneously with the execution
of this Agreement it shall execute that certain LGK Agreement with Elekta,
(hereinafter referred to as the "LGK Agreement"), a copy of which is attached
hereto as Exhibit A and incorporated herein by this reference. Hospital agrees
to fulfill all of its obligations under the LGK Agreement and acknowledges that
GKF is a third party beneficiary of the LGK Agreement. Hospital shall fully
indemnify and hold harmless GKF in the event that GKF suffers any loss, damage,
claim or expense (including attorneys' fees) solely as a result of Hospital's
breach of the LGK Agreement.
2. Delivery of the Equipment and Site preparation. GKF shall arrange to
have the Equipment delivered to Hospital, at One Hoag Dr. (the "Site") in
coordination with Elekta. GKF shall exert its best faith efforts to expedite
the delivery of the Equipment in accordance with the terms and conditions of
the Purchase Agreement for the Equipment by and between GKF and Elekta.
Notwithstanding the preceding sentence, it is understood and agreed that GKF
has made no representations and warranties to Hospital concerning actual
delivery dates or schedules for the Equipment at the Site.
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October 29, 1996
Hospital shall provide a safe, convenient and properly prepared site on
Hospital controlled property (The "Site") for the proper performance of Gamma
Knife procedures, at its own expense, in accordance with all of the Equipment
manufacturer's (Elekta's) guidelines, specifications, technical instruments
and Site Planning Criteria (which Site Planning Criteria are attached hereto as
Exhibit B and incorporated herein by this reference). Site location shall be
acceptable to GKF. Hospital shall prepare at its sole cost and expense the
requisite site plans and specifications and shall submit them to Elekta and GKF
for approval. Hospital shall obtain, in a timely manner, a User License from
the Nuclear Regulatory Commission and/or appropriate state agency authorizing
it to take possession of the Cobalt Supply and shall obtain such other
licenses, permits, approvals, consents and authorizations, which may be
required by local governmental or other regulatory agencies for the Site, its
preparation, the charging of the Equipment with its Cobalt Supply, the conduct
of Acceptance tests, and the use of the Equipment all as more fully set forth
in Article 2.1 of the LGK Agreement.
3. Commencement of Term. The Term (hereinafter defined) of this
Agreement shall commence upon the performance of the first chargeable clinical
Gamma Knife procedure at the Site (the "Commencement Date"). Hospital shall
become liable to GKF for the payments referred to in Paragraph 6 hereinbelow
upon the Commencement Date.
4. Costs of Site Preparation; Costs of Installation. Hospital's
obligations shall include preparation of plans and specifications for the
construction and preparation of the Site in such form as will result in the
Site, when constructed in accordance with such plans and specifications, being
in full compliance with Elekta's Site Planning Criteria. Hospital shall at its
own expense and risk, prepare, construct and make ready the Site as necessary,
for the installation of the Equipment, including, but not limited to, providing
any temporary and/or permanent shielding for the charging of the equipment and
its use, selecting and preparing a proper foundation for the Equipment and for
such shielding and walls, as well as proper alignment of the Site and wiring.
Hospital shall be financially responsible for the positioning of the Equipment
on its foundation at the Site.
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Hospital shall also at its own expense select, purchase and install all
radiation monitoring equipment and devices, safety circuits and radiation
warning signs needed for the Equipment at the Site, according to all applicable
federal, state and local laws, regulations, recommendations or custom.
Upon completion of the Site, Hospital shall warrant that the Site will be
safe and suitable for its use of the Equipment. Hospital shall fully indemnify,
hold harmless and/or reimburse GKF (and its members and their respective
officers, directors, agents, employees and affiliates) for any loss, liability,
damage, penalty, action, claim, cost or expense (including reasonable
attorneys' fees)(hereinafter collectively referred to as "damages") which GKF
may suffer or incur which are solely caused by Hospital's Site preparation and
the Equipment's positioning, if the Site preparation or the Equipment's
positioning was not done in compliance with Elekta's Site Planning Criteria.
Hospital shall be liable to GKF for any damage to the Equipment caused by
(a) defects in construction of the Site or defects in the positioning of the
Equipment at the Site; (b) defects arising out of materials or parts provided,
modified or designed by Hospital with respect to the Site; or (c) negligent or
intentional acts of omission or commission by Hospital or any of its officers,
agents, physicians, and employees in connection with the Site preparation or
operation of the Equipment at the Site.
Hospital warrants that it shall utilize its best efforts to fulfill on an
expeditious basis its obligations under this Paragraph 4. Hospital further
warrants that it shall on a regular basis keep GKF informed of Hospital's
progress in fulfilling its obligations pursuant to this Paragraph 4. Should
Hospital not have all Site preparations completed by the delivery date
specified by a separate agreement plus a sixty (60) day grace period such that
the Site is acceptable for positioning and installation of the equipment,
Hospital shall reimburse GKF for its holding (cost of funds) and warehousing
costs until the Site is prepared to allow positioning and installation of the
equipment.
5. Term of the Equipment. GKF agrees to provide to Hospital the
Equipment pursuant to the terms of this Agreement, for a term of ten (10) years
from the Commencement Date as described in Paragraph 3 hereinabove (the
"Term"), unless terminated earlier as provided herein.
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6. Per Procedure Payments. *
7. Use of the Equipment. The Equipment may be used by Hospital only at
the location stated above and shall not be removed therefrom. Hospital shall not
assign or sublease the Equipment or its rights hereunder without the prior
written consent of GKF, which consent shall not be unreasonably withheld. No
permitted assignment or sublease shall relieve Hospital of any of its
obligations hereunder. Hospital shall not use nor permit the Equipment to be
used in any manner nor for any purpose for which, in the opinion of Elekta or
GKF, the Equipment is not designed or reasonably suitable. Hospital shall not
permit any liens, whether voluntary or involuntary, to attach to the Equipment,
without the prior written consent of GKF. Hospital shall have no interest in the
Equipment other than the rights acquired as lessee hereunder and the Equipment
shall remain the property of GKF regardless of the manner in which it may be
installed or attached at the Site. Hospital shall, at GKF's request, affix to
the Equipment tags, decals, or plates furnished by GKF, indicating GKF's
ownership of the Equipment.
8. Additional Covenants of Hospital. In addition to the other covenants
made by Hospital, Hospital shall at its own cost and expense:
(a) Provide properly trained professional, technical and support
personnel and supplies required for the proper performance of medical
procedures utilizing the Equipment.
(b) Assume all medical and financial responsibility for the overseers'
monitoring of all patients' medical condition and treatment.
(c) Fully comply with all of its obligations under the LGK Agreement.
(d) Indemnify GKF as herein provided: (i) Hospital hereby agrees to fully
indemnify and/or reimburse (including attorney's fees) GKF on a prompt basis
for any and
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October 29, 1996
all damage to the Equipment (including any violations by Hospital, its agents,
officers, physicians, employees, successors and assigns of the Service Agreement
described in Paragraph 13 hereof) to the extent such damages are caused by the
negligent or wrongful acts or omissions of Hospital, its agents, officers,
physicians and employees. In the event the Equipment is destroyed or rendered
unusable, this indemnification shall extend up to (but not exceed) the full
replacement value of the Equipment at the time of its destruction less salvage
value, if any, (ii) Hospital hereby further agrees to indemnify and hold GKF,
its agents, officers, employees, successors and assigns, harmless from and
against any and all claims, liabilities, obligations, losses, damages, injuries,
penalties, actions, costs and expenses (including attorneys' fees) for all
events and/or occurrences described in Article 7.3 of the LGK Agreement to the
same extent that Hospital agrees to indemnify Elekta thereunder. Hospital
further agrees to fully indemnify and hold harmless GKF for any loss, damage,
claim, or expense (including attorneys' fees) GKF may suffer or incur as a
result of Hospital's breach of the LGK Agreement.
(e) Provide reasonable and customary marketing materials (i.e. brochures,
announcements, etc.) and marketing support from an administrative and clinical
(i.e. seminars by neurosurgeons and radiation therapists to referring
physicians, etc.) standpoint for this clinical service.
9. Additional Covenants, Representations and Warranties of GKF. In
addition to the other covenants, representations and warranties, made by GKF in
this Agreement:
(a) GKF represents and warrants that GKF has full power and authority to
enter into this Agreement, and that this Agreement does not and will not violate
any agreement, contract or instrument binding upon GKF.
(b) GKF represents and warrants to Hospital that, upon delivery of the
Equipment to Hospital, GKF shall use its best faith efforts to require that
Elekta meets its contractual obligations to GKF and in putting the Equipment, as
soon as possible, into good and safe serviceable condition and fit for its
intended use in accordance with the manufacturer's specifications guidelines and
field modification instructions.
(c) GKF represents and warrants that throughout the term of this
Agreement, Hospital shall enjoy the use of the Equipment, free of the rights of
any other persons
<PAGE> 6
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except for those rights reserved by GKF or granted to Elekta under the LGK
Agreement or under Elekta's Purchase Agreement with GKF.
(d) During the entire term of this agreement and subsequent extension
thereof, GKF shall maintain in full force and effect: (i) the Service Agreement
referenced in Paragraph 13 hereof; and (ii) any other service or other
agreements required to fulfill GKF's obligations to Hospital pursuant to this
Paragraph 9(d), GKF represents and warrants that during the entire term of this
Agreement and any subsequent extensions thereof, that it will fully pursue any
and all remedies it may have against Elekta under the Service Agreement to
insure that the Equipment will be in conformity with Elekta's warranties so
that it is free from defects in design, materials, and workmanship which result
in noncompliance with the specifications and/or Elekta's warranties to GKF. In
no event, however, shall the warranty obligations of GKF to Hospital with
respect to the Equipment be greater or more extensive than Elekta's warranty
obligations to GKF with respect to the Equipment.
10. Ownership/Title. It is expressly understood that Hospital shall
acquire no right, title or interest in or to the Equipment, other than the
right to the possession and use of the same in accordance with the terms of
this Agreement. Hospital shall have no interest in the Equipment other than the
rights acquired as a lessee hereunder and the Equipment shall remain the
property of GKF regardless of the manner in which it may be installed or
attached at the Site. Hospital shall, at GKF's request, affix to the Equipment
tags, decals, or plates furnished by GKF, indicating GKF's ownership of the
Equipment.
GKF may at its sole discretion finance the Equipment. Financing may be in
the form of an installment loan or a finance lease or other commercially
available debt instrument. Should GK finance the Equipment through an
installment loan, GKF shall be required to provide the Equipment as collateral
against the loan. Should GKF finance the Equipment through a financing lease
title shall vest with the lessor until GKF exercises its buy-out option. In
addition, should GKF finance the equipment, said Agreement may be used as
collateral against the loan.
11. Cost of Use of the Equipment. Except as is otherwise provided herein,
Hospital shall bear the entire cost of using the Equipment during the Term of
this Agreement. This shall include, but not be limited to, providing trained
professionals, technical and support personnel and supplies to properly
operate the Equipment. Hospital
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October 29, 1996
shall be fully responsible and liable for all acts and/or omissions of such
professional, technical and support personnel.
12. Taxes. GKF shall only be responsible for personal property taxes
levied against the Equipment.
13. Maintenance and Inspections. GKF agrees to exercise due and proper
care in the maintenance of the Equipment and to keep the Equipment in a good
state of repair, reasonable wear and tear excepted. Hospital shall be liable to
GKF for all damage to the Equipment caused by the misuse, negligence, improper
use or other intentional or negligent acts or omissions of Hospital's employees,
officers, agents, and physicians.
GKF (and Elekta) shall have the right of access to the Equipment for the
purpose of inspecting same at all reasonable times and upon reasonable notice
and with a minimum of interference to Hospital's operations. In the event the
Equipment is improperly used by Hospital or its employees, agents, officers, and
physicians, GKF may service or repair the same as needed and such expense shall
be paid by Hospital, unless the repair is covered by the Service Agreement that
GKF simultaneously with the execution of this Agreement enters into with Elekta.
Any work so performed by or in the service or maintenance of the Equipment
as a result of Hospital's failure or neglect to do so shall not deprive GKF of
any of its rights, remedies or actions against Hospital for damages caused by
such failure or neglect.
14. Equipment Modifications/Additions/Upgrades. The parties agree that
the necessity and financial responsibility for modifications/additions/upgrades
to the Equipment, including the disposal and reloading of the Cobalt-60 source,
shall be discussed and mutually decided by GKF and Hospital. GKF shall be
responsible for the removal and disposal where necessary, of the Cobalt.
15. Termination. If, after the initial twenty-four (24) month period of
service, and subsequent 12 month periods of service, Hospital does not provide
GKF with a reasonable economic justification to continue providing Gamma Knife
services hereunder, then and in that event, GKF shall have the option of
terminating this Agreement upon the giving of written notice to Hospital of said
termination not less than ninety (90) days prior to GKF's
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October 29, 1996
designated termination date. Following termination GKF shall remove the
Equipment in accordance with Paragraph 16(a)(ii).
16. Options to Extend Agreement.
(a) Hospital shall have the option at the end of ten (10) year initial
Term to:
(i) Renegotiate this Agreement for a specified renewal term
taking into account the first ten (10) years of activity of the Equipment at
the Site.
(ii) Terminate this Agreement. If Hospital terminates this
Agreement at the end of the initial Term, GKF shall remove the Equipment and be
responsible for the removal of the Cobalt within a reasonably mutually agreed
upon period of time after the expiration of the ten (10) year initial Term.
Hospital shall exercise one (1) of the two (2) options referred
to above, by mailing an irrevocable written notice thereof to GKF at Four
Embarcadero Center, Suite 3620, San Francisco, California, 94111, by registered
mail, postmarked on or before the end of the ninth (9th) year of the ten (10)
year initial Term of this Agreement. Any such notice shall be sufficient if it
states in substance that Hospital elects to exercise its option and states which
of the two (2) options referred to above Hospital is exercising.
17. No Warranties by GKF. Hospital warrants that as of the Commencement
Date, it shall have (a) thoroughly inspected the Equipment; (b) determined for
itself that all items of the Equipment are of a size, design, capacity and
manufacture selected by it; and (c) satisfied itself that to the best of its
knowledge the Equipment is suitable for Hospital's stated purposes. GKF
SUPPLIES THE EQUIPMENT "AS IS" AND NOT BEING THE MANUFACTURER OF THE EQUIPMENT
OR THE MANUFACTURER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER
EXPRESSED OR IMPLIED, AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, DESIGN, CONDITION, DURABILITY, CAPACITY, MATERIAL OR
WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it being agreed that all
such risks as between GKF and Hospital and/or Elekta (to the extent of its
express written warranty of the Equipment), shall be borne by Hospital.
Hospital agrees to look solely to the manufacturer (Elekta) or to suppliers of
the Equipment (and its software) for any and all warranty claims. Any and all
warranties made by Elekta will be enforced by GKF in its
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good faith best efforts on behalf of Hospital during the ten (10) year initial
Term hereof. Hospital agrees that GKF shall not be responsible for the delivery,
installation, or operation of the Equipment or for any delay or inadequacy of
any or all of the foregoing. GKF shall not be responsible for any direct or
indirect consequential loss or damage resulting from the installation,
operation or use of the Equipment or otherwise. Hospital expressly waives any
right to hold GKF liable hereunder for any claims, demands and liabilities
arising out of or in connection with the design, manufacture, possession or
operation of the Equipment.
18. Events of Default and Remedies. The occurrence of any one of the
following shall constitute an Event of Default hereunder:
(a) Hospital fails to pay any installment of monthly procedure
payments when due when such default continues for a period of thirty (30) days
after notice thereof from GKF or its assignee is given to Hospital.
(b) Hospital attempts to remove, sell, transfer, encumber, sublet
or part with possession of the Equipment or any items thereof, except as
expressly permitted herein;
(c) Hospital shall fail to observe or perform any of the other
obligations required to be observed or performed by Hospital hereunder and such
failure shall continue uncured for twenty (20) days after written notice thereof
to Hospital by GKF;
(d) Hospital ceases doing business as a going concern, makes an
assignment for the benefit of creditors, admits in writing its inability to pay
its debts as they become due, files a voluntary petition in bankruptcy, is
adjudicated a bankrupt or an insolvent, files a petition seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar arrangement under any present or future statue, law or regulation or
files an answer admitting the material allegations of a petition filed against
it in any such proceeding, consents to or acquiesces in the appointment of a
trustee, receiver, or liquidator of it or of all or any substantial part of its
assets or properties, or it or its shareholders shall take any action looking to
its dissolution or liquidation.
(e) Within sixty (60) days after the commencement of any proceedings
against Hospital seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such
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proceedings shall not have been dismissed, or if within thirty (30) days after
the appointment without Hospital's consent or acquiescence of any trustee,
receiver or liquidator of it or of all or any substantial part of its assets
and properties, such appointment shall not be vacated.
Upon the occurrence of an Event of Default, GKF may at its option do any
or all of the following: (i) by notice to Hospital, terminate this Agreement as
to the Equipment in default, wherever situated, and for such purposes, enter
upon the Site without liability for so doing or GKF may cause Hospital and
Hospital hereby agrees to return the Equipment to GKF at Hospital's sole cost
and expense; (ii) recover from, as liquidated damages for the loss of the
bargain and not as a penalty, an amount equal to the present value of the
unpaid estimated future lease payments by Hospital to GKF through the end of
the Agreement term discounted at the rate of nine percent (9%), which payment
shall become immediately due and payable. Unpaid estimated future lease
payments shall be based on the prior 12 months lease payments with an annual
five (5%) percent increase; (iii) sell, dispose of, hold, use or lease the
Equipment in default, as GKF in its sole discretion may determine (and GKF
shall not be obligated to give preference to the sale, lease or other
disposition of the Equipment over the sale, lease or other disposition of
similar Equipment owned or leased by GKF). In any event, Hospital shall,
without further demand, pay to GKF an amount equal to all sums due and payable
for all periods up to and including the date on which GKF had declared this
Agreement to be in default.
In the event that Hospital shall have paid to GKF the liquidated damages
referred to in (ii) above, GKF hereby agrees to pay to Hospital promptly after
receipt thereof, all rentals or proceeds received from the reletting or sale of
the Equipment during the balance of the ten (10) year initial Term (after
deduction of all expenses incurred by GKF, said amount never to exceed the
amount of the liquidated damages paid by Hospital). Hospital agrees that GKF
shall have no obligation to sell the Equipment. Hospital shall in any event
remain fully liable for reasonable damages as provided by law for all costs and
expenses incurred by GKF on account of such default, including but not limited
to, all court costs and reasonable attorneys' fees. Hospital hereby agrees
that, in any event, it shall be liable for any deficiency after any sale, lease
or other disposition of the Equipment by GKF. The rights afforded GKF hereunder
shall not be deemed to be exclusive, but shall be in addition to any other
rights or remedies provided by law.
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19. Insurance.
(a) During the ten (10) year initial Term of this Agreement (and any
successive terms) GKF shall, at its own cost and expense, keep in effect an all
risk and hazard insurance policy except earthquake insurance covering the
Equipment. The all risk and hazard insurance policy shall be for an amount not
less than the replacement cost of the Equipment. During the ten (10) year
initial Term of this Agreement, Hospital shall, at its own cost and expense keep
in effect public liability and professional liability insurance policies
concerning the operation of the Equipment by Hospital. Said policies shall be in
the amounts of not less than $1,000,000 per occurrence and $5,000,000 in
aggregate per year. Hospital and GKF, their successors and assigns, shall be
named as additional insureds and/or loss payees on the insurance policies
maintained hereunder by the other party. Evidence of such insurance coverages
shall be furnished by both parties to the other party upon written request, by
no later than the Commencement Date.
(b) If the Equipment is rendered unusable as a result of any
physical damage to, or destruction of, the Equipment, Hospital shall give to GKF
immediate notice. GKF shall determine, within thirty (30) days after the date of
occurrence of such damage or destruction, whether the Equipment can be repaired.
In the event GKF determines that the Equipment cannot be repaired, GKF at its
sole cost and expense shall promptly replace the Equipment. This Agreement shall
continue in full force and effect as though such damage or destruction had not
occurred. In the event GKF determines that the Equipment can be repaired, GKF
shall cause the Equipment to be promptly repaired.
20. Notices. Any notices required under this Agreement shall be sent
in writing and shall be deemed to have been duly given if delivered by hand or
mailed by certified or registered mail to the following addresses:
To GKF: Craig K. Tagawa, C.E.O.
Four Embarcadero Center, Suite 3620
San Francisco, CA 94111
To Hospital: Steve C. Moreau
301 Newport Blvd., P.O. Box 610
Newport Beach, CA 92658-6100
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Or to such other addresses as either party may specify for the reception of
notice from time to time in writing to the other party. Any such notice shall
be effective only when actually received by the party to whom addressed.
21. Integration/Supersedure. This Agreement contains the full and
entire Agreement between the parties hereto, and no oral or written
understanding is of any force or effect whatsoever unless expressly contained
in a writing executed subsequent to the date of this Agreement.
22. Waivers. To the extent that GKF fails or chooses not to pursue any
of its remedies under this Agreement or pursuant to applicable law such shall
not prejudice GKF's rights to pursue any of those remedies at any future time
and shall not constitute a waiver of GKF's rights.
23. Assignments. This Agreement is binding upon and shall inure to the
benefit of the permitted successors or assigns of the respective parties
hereto, except that neither party may assign its rights or obligations under
this Agreement without the express written consent of the other (which consent
shall not be unreasonably withheld).
24. Amendments. This Agreement shall not be amended or altered in any
manner unless such amendment or alteration is in a writing signed by both
parties.
25. Record-Keeping Requirements. To the extent required by the
regulations promulgated by the Health Care Financing Administration pursuant to
Section 952 of the Omnibus Reconciliation Act of 1980, GKF shall:
(a) Until the expiration of four (4) years following the
furnishing of services pursuant to this Agreement, GKF agrees to make available
upon written request of the Secretary of Health and Human Services or the U.S.
Comptroller General or any of their duly authorized representatives, this
Agreement, any books, documents and records necessary to verify the nature and
extent of costs incurred by Hospital by reason of the activities of GKF under
this Agreement; and
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(b) If GKF elects to delegate any of its duties under this Agreement
(which have a cost or value of Ten Thousand Dollar ($10,000.00) or more over a
twelve (12) month period) to a related organization, GKF may do so only through
a subcontractor which is consented to by Hospital, it being understood that,
inasmuch as Hospital is entering into this Agreement in reliance on GKF's
reputation and expertise, that Hospital shall be the sole judge of the
reputation and expertise of the proposed delegee, and only through a
subcontractor which provides that, until the expiration of four (4) years
following the furnishing of services under such subcontract, the related
organization shall make available, on request of the Secretary of Health and
Human Services or the U.S. Comptroller General or any of their authorized
representatives, the subcontract, and books, documents and records of the
nature and extent of costs incurred by Hospital by reason of activities of such
related organization under such subcontract. No delegation by GKF of its duties
hereunder shall relieve GKF from liability hereunder.
26. Miscellaneous Provisions.
(a) The invalidity or unenforceability of any portion or provision
of this Agreement shall not effect the validity or enforceability of any other
portion, nor shall either party's implied or express consent to the breach or
waiver of any provision of this Agreement constitute a waiver of such provision
as to any subsequent breach.
(b) In the event of any claim or controversy arising hereunder, the
prevailing party in such claim or controversy shall be entitled to a reasonable
attorneys' fee in addition to whatever other relief said party would be
otherwise entitled.
(c) Force Majeure. Failure to perform by either party will be excused
in the event of any delay or inability to perform its duties under this
Agreement directly or indirectly caused by conditions beyond its reasonable
control including without limitation, fires, floods, earthquakes, snow, ice,
disasters, Acts of God, accidents, riots, wars, operation of law, strikes,
governmental action or regulations, shortages or labor, fuel, power, materials,
manufacturer delays or transportation problems.
IN WITNESS WHEREOF, the parties have signed this Agreement on the day and
year first above written.
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October 29, 1996
Hoag Memorial Hospital Presbyterian GK Financing, LLC
By: /s/ Michael D. Stephens By: /s/ C. K. TAGAWA
----------------------------- -----------------------------
Craig K. Tagawa
Chief Executive Officer
<PAGE> 15
Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of 1934, as amended.
Omitted information has been replaced with asterisks.
ASSIGNMENT BY
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
OF ITS AGREEMENT TO PURCHASE
THE LEKSELL GAMMA KNIFE
FROM ELEKTA INSTRUMENTS, INC.
THIS ASSIGNMENT OF AGREEMENT FOR PURCHASE AND SALE ("Assignment") is
made as of the 31st day of October, 1996 ("Effective Date"), by and between THE
REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California corporation
("University"), and GK FINANCING, LLC, a California limited liability company
("GK FINANCING"), with reference to the following facts:
As of February 22, 1995, University entered into an agreement with
ELEKTA INSTRUMENTS, INC., a Georgia corporation ("Elekta"), pursuant to which
University agreed to purchase that certain Leksell Gamma Knife ("LGK") form
Elekta ("Purchase Agreement"); and
University now proposes to assign the Purchase Agreement to GK Financing
and GK Financing is prepared to accept assignment of the Purchase Agreement, and
Elekta is prepared to consent to such assignment.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. University (hereinafter "Assignor") hereby assigns and transfers
to GK Financing (hereinafter "Assignee") all of Assignor's rights, title and
interest in, to and under the Purchase Agreement, and Assignor hereby delegates
to Assignee all
- 1 -
<PAGE> 16
of its duties and obligations or performance under said Purchase Agreement. All
rights subject to the foregoing assignment are referred to herein as the
"Rights" and all duties and obligations subject to the foregoing delegation are
referred to herein as the "Duties." The Purchase Agreement is attached hereto
as Exhibit 1 and it is hereby incorporated herein by this reference.
2. Assignee hereby accepts the foregoing assignment of Rights and hereby
assumes and agrees to perform all Duties delegated above by Assignor to the
same extent as if Assignee had been an original party to the Purchase
Agreement, and Assignee indemnifies and holds harmless Assignor from and
against any and all losses, liabilities, claims, costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses) incurred with
respect to the performance or non-performance of any or all of said delegated
Duties.
3. Assignor, effective upon the Effective Date, is hereby released
entirely from all Duties in said Purchase Agreement.
4. Assignee agrees to pay to Elekta, when and as due, all amounts
required to be paid under the Purchase Agreement, and to faithfully discharge
and perform all Duties under said Purchase Agreement, and Elekta, by consenting
to this Assignment, agrees to look solely to Assignee for discharge and
performance of all Duties under said Purchase Agreement.
5. Assignee acknowledges that Assignor has paid Elekta Six Hundred
Twenty-Four Thousand Nine Hundred Fifty Dollars ($624,950) toward the purchase
price of the LGK under the Purchase
-2-
<PAGE> 17
Agreement being assigned to Assignee. Assignee intends to enter into an
agreement with a user of the LGK ("User"). GKF, in consideration and
acknowledgement of the Assignor's payment of the aforesaid $624,950 to Elekta,
agrees to obtain the User's agreement, on terms reasonably acceptable to
Assignor, that the User of the LGK will permit Assignor to use the LGK, such
terms to include terms which recognize the $624,950 paid by Assignor as a credit
against use (or similar) charges ("Use Charge") which the User assesses Assignor
for the use of the LGK. The Use Charge, before the credit, shall be no higher
than the charge paid by the User to GKF. Assignor acknowledges that the
agreement between GKF and Hoag Memorial Presbyterian Hospital ("Hoag"), attached
hereto as Exhibit 2, meets the requirement of this paragraph 5.
6. As conditions to the effectiveness of Elekta's consent to this
Assignment:
a. Assignor shall immediately pay $75,000 to Elekta, representing
payment in full of all obligations, including, without limitation, all interest
owed by Assignor to Elekta under the Purchase Agreement; and
b. Assignor, Assignee and Elekta hereby agree to amend the Purchase
Agreement by deleting paragraph (2) of Exhibit H to the Purchase Agreement,
relating to research grants, in its entirety.
c. Assignor agrees, as a demonstration of its commitment to a gamma
knife therapy program ("Program"), that, provided that Assignee and Hoag enter
into an agreement
-3-
<PAGE> 18
for Hoag to operate a Program, Assignor will participate in said Program under
terms mutually acceptable to Assignor and Hoag, such terms to include, but not
be limited to, the following:
1) Assignor will permit the name of the Program to include the
Assignor's name;
2) Assignor will participate in the recruitment of the Director of
the Program and provide a faculty appointment to a qualified individual serving
as the Medical Director of the Program;
3) Assignor will refer patients to the Program, as appropriate; and
4) Assignor will participate in the development of the Program's
operating, business (including marketing and promotion), and research planning.
7. None of the Rights or provisions of this Assignment shall be
assignable by any party hereto. This Assignment shall inure to the benefit of
and be binding upon each of the parties hereto and their respective permitted
successors.
8. This Assignment shall be governed by, and construed and enforced in
accordance with, the internal law, and not the law pertaining to the choice of
conflicts of law, of the State of California.
9. This Assignment contains the entire agreement between the parties
hereto with respect to the transactions contemplated herein and shall supersede
all previous oral and written and all contemporaneous oral negotiations,
commitments and understandings.
-4-
<PAGE> 19
No waiver, modification or amendment of this Assignment shall be effective
unless embodied in a written instrument executed by both parties hereto.
10. Neither party hereto nor their respective counsel shall be deemed the
drafter of this Assignment for purposes of construing the provisions hereof.
The language in all parts of this Assignment shall in all cases be construed
according to its fair meaning, and not strictly for or against either party
hereto.
IN WITNESS WHEREOF, the undersigned have executed this Assignment as of
the date first above written.
"ASSIGNOR"
THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA, a California corporation
By /s/ SANDRA LIER
---------------------------------
Associate Vice Chancellor
By /s/ MARK LARET
---------------------------------
Its Director UCIMC
---------------------------------
"ASSIGNEE"
GK FINANCING, a California limited
liability company
By /s/ CRAIG K. TAGAWA
---------------------------------
Its CEO
---------------------------------
-5-
<PAGE> 20
Consented to by: ELEKTA INSTRUMENTS, INC., a Georgia
corporation
By /s/ C. Gilmore
---------------------------------
Its President
---------------------------------
-6-
<PAGE> 1
EXHIBIT 10.17
Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of 1934, as amended.
Omitted information has been replaced with asterisks.
ADDENDUM
TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT
This ADDENDUM TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT (this
"Addendum") is effective December 1, 1998 between Hoag Memorial Hospital
Presbyterian, a California Corporation ("Hospital"), and GK Financing, LLC, a
California limited liability company ("GKF").
RECITALS
WHEREAS, on October 31, 1996, GKF and Hospital executed a Lease
Agreement for a Gamma Knife Unit (the "Original Lease");
WHEREAS, the parties desire to amend the terms and provisions of the
Original Lease as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
AGREEMENT
1. DEFINED TERMS. Unless otherwise defined herein, the capitalized terms
used herein shall have the same meaning set forth in the Original Lease.
2. *
3. MARKETING. Hospital and GKF agree to cooperatively market Gamma Knife
services at the Hoag/UCI Gamma Knife center.
4. TERM OF AMENDMENT. This addendum shall be in effect for a one year
period, December 1, 1998, though November 30, 1999.
5. FULL FORCE AND EFFECT. Except as otherwise amended hereby or provided
herein, all of the terms and provisions of the Original Lease shall remain in
full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Addendum effective as
of the date first written above.
"HOSPITAL" Hoag Memorial Hospital Presbyterian
BY: /s/ MICHAEL D. STEPHENS
------------------------------------
MICHAEL D. STEPHENS, PRESIDENT
"GKF" GK Financing, LLC
BY: /s/ CRAIG K. TAGAWA
------------------------------------
Craig K. Tagawa,
Chief Executive Officer
<PAGE> 1
EXHIBIT 10.18
Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of 1934, as amended.
Omitted information has been replaced with asterisks.
LEASE AGREEMENT FOR A GAMMA KNIFE UNIT
THIS LEASE AGREEMENT FOR A GAMMA KNIFE UNIT dated as of October 29, 1996,
(hereinafter, referred to as the "Agreement") is entered into between GK
Financing, LLC, a California Limited Liability Company, (hereinafter referred to
as "GKF"), and METHODIST HEALTHCARE SYSTEM OF SAN ANTONIO, LTD. dba SOUTHWEST
TEXAS METHODIST HOSPITAL, a Texas corporation, (hereinafter referred to as
"Hospital").
RECITALS
WHEREAS, Hospital wants to lease a Leksell Stereotactic Gamma Unit
distributed by Elekta Instruments, Inc., (hereinafter referred to as the
"Equipment") and desires from GKF certain marketing and administrative support
related to utilization of said equipment, and
WHEREAS, GKF is willing to lease the Equipment which GKF has acquired from
Elekta Instruments, Inc., a Georgia corporation (hereinafter referred to as
"Elekta"), to Hospital, pursuant to the terms and conditions of this Agreement
and is willing to provide to Hospital its marketing and administrative
capabilities; and
NOW, therefore, in consideration of the foregoing premises and the
promises contained herein, the parties hereto hereby agree as follows:
1. Execution of LGK Agreement by and between Hospital and Elekta. GKF
hereby leases the Equipment to the Hospital on the terms and conditions
hereinafter set forth. Hospital agrees that simultaneously with the execution of
this Agreement it shall execute that certain LGK Agreement with Elekta,
(hereinafter referred to as the "LGK Agreement"), a copy of which is attached
hereto as Exhibit A and incorporated herein by this reference. Hospital agrees
to fulfill all of its obligations under the LGK Agreement and acknowledges that
GKF is a third party beneficiary of the LGK Agreement.
2. Delivery of the Equipment and Site preparation. GKF shall arrange to
have the Equipment delivered to Hospital, at ___________________ (the "Site") in
coordination with Elekta. The Equipment shall be the latest Gamma Knife
technology available at the date of this Agreement, including all hardware and
software options. GKF shall exert its best
<PAGE> 2
Lease Agreement Page 2
Southwest Texas Methodist Hospital
October 29, 1996
faith efforts to expedite the delivery of the Equipment to a site mutually
agreeable to GKF and Hospital in accordance with the terms and conditions of
the Purchase Agreement for the Equipment by and between GKF and Elekta.
Notwithstanding the preceding sentence, it is understood and agreed that GKF
has made no representations and warranties to Hospital concerning actual
delivery dates or schedules for the Equipment at the Site. GKF shall coordinate
with Hospital the estimated delivery date of equipment.
Hospital shall provide a safe, convenient and properly prepared Site, at
its own expense, in accordance with all of the Equipment manufacturer's
(Elekta's) guidelines, specifications, technical instruments and Site Planning
Criteria (which Site Planning Criteria are attached hereto as Exhibit B and
incorporated herein by this reference), which criteria shall include Elekta's
estimated delivery schedule when and as received by GKF, on Hospital controlled
property for the proper performance of Gamma Knife procedures. Site location
shall be acceptable to GKF. Hospital shall prepare at its sole cost and expense
the requisite site plans and specifications and shall submit them to Elekta and
GKF for approval before implementation of such plans. Hospital shall apply for,
in a timely manner and use its best efforts to obtain as soon as reasonably
possible thereafter a User License from the Nuclear Regulatory Commission and/or
appropriate state agency authorizing it to take possession of the Cobalt Supply
and shall obtain such other licenses, permits, approvals, consents and
authorizations, which may be required by local governmental or other regulatory
agencies for the Site, its preparation, the charging of the Equipment with its
Cobalt Supply, the conduct of Acceptance tests, and the use of the Equipment as
more fully set forth in Article 2.1 of the LGK Agreement.
3. Gamma Knife Service Term. GKF agrees to provide to Hospital, and
Hospital agrees to accept and utilize from GKF, the Equipment pursuant to the
terms of this Agreement for a term (the "Gamma Knife Service Term") commencing
on the day (the "Commencement Day") that the first procedure using the
Equipment is performed on a patient of the Hospital for which payment is due
GKF from the Hospital pursuant to the provisions of Section 6 of this
Agreement, and ending on that date which is ten (10) years thereafter, unless
terminated earlier in accordance with the terms of this Agreement. Hospital
shall be liable to GKF for the payments referred to in Paragraph 6 below as
applicable, upon the Commencement Date.
<PAGE> 3
Lease Agreement Page 3
Southwest Texas Methodist Hospital
October 29, 1996
4. Cost of Site Preparation: Costs of Installation. Hospital's
obligations shall include preparation of plans and specifications for the
construction and preparation of the Site in such form as will result in the
Site, when constructed in accordance with such plans and specifications, being
in full compliance with Elekta's Site Planning Criteria. Hospital shall at its
own expense and risk, prepare, construct and make ready the Site as necessary,
for the installation of the Equipment, including, but not limited to, providing
any temporary and/or permanent shielding for the charging of the equipment and
its use, selecting and preparing a proper foundation for the Equipment and for
such shielding and walls, as well as proper alignment of the Site and wiring.
Hospital shall be responsible for the positioning of the Equipment on its
foundation at the Site in compliance with Elekta's Site Planning criteria
(attached as Exhibit B).
Hospital shall also at its own expense select, purchase and install all
radiation monitoring equipment and devices, safety circuits and radiation
warning signs needed for the Equipment at the Site, according to all applicable
federal, state and local laws and regulations.
Hospital warrants that the Site will be prepared in compliance with the Site
Planning Criteria.
Hospital shall be liable to GKF for any damage to the Equipment caused by
(a) defects in construction of the Site or defects in the positioning of the
Equipment at the Site; (b) defects arising out of materials or parts provided,
modified or designed by Hospital with respect to the Site; or (c) negligent or
intentional acts of omission or commission by Hospital or any of its officers,
agents, physicians, and employees in connection with the Site preparation; or
(d) operation of the Equipment at the Site.
Hospital warrants that it shall utilize its reasonable efforts to fulfill on
an timely basis its obligations under this Paragraph 4. Hospital further
warrants that it shall on a regular basis keep GKF informed of Hospital's
progress in fulfilling its obligations pursuant to this Paragraph 4. Should
Hospital not have all Site preparations completed by the delivery date (which
delivery date the parties shall negotiate in good faith and document) plus a
sixty (60) day grace period such that the Site is acceptable for positioning and
installation of the Equipment, Hospital shall reimburse GKF at an interest rate
of Bank of America's prime rate plus 2% on GKF's Equipment cost until the site
is prepared to allow positioning.
<PAGE> 4
Lease Agreement Page 4
Southwest Texas Methodist Hospital
October 29, 1996
and installation of the Equipment. Should the Equipment not be delivered by the
delivery date plus a sixty (60) day grace period, other than by reasons of
force majeure (see Section 27(c)) or Hospital's failure to complete Site
preparations necessary for the positioning and installation of the Equipment,
GKF shall reimburse Hospital at an interest rate of bank of America's prime
rate plus two percent (2%) on Hospital's costs in constructing and finishing
out the Site until the Equipment is delivered.
5. Marketing Support. GKF will assist and provide financial marketing
support to Hospital of at least $250,000 during the first five (5) years of
this project, subject to approval by Hospital.
6. Per Procedure Payments. *
<PAGE> 5
Lease Agreement Page 5
Southwest Texas Methodist Hospital
October 29, 1996
*
If no procedures are performed utilizing the Equipment, no charges shall be
incurred by the Hospital.
A procedure shall be defined as a single patient treatment session that may
include one or more isocenters during that session. Hospital shall be billed on
the fifteenth (15th) and the last day of each month for the actual number of
procedures performed during the first and second half of the month,
respectively. Hospital shall pay the procedures invoiced within thirty (30)
days after being invoiced. Interest shall accrue at the rate of 1-1/2% per
month on all invoices remaining unpaid after 45 days.
Billing statements, as provided above, will set forth two components of the
charges. The equipment-related component will equal sixty-eight (68%) percent
of the total fee per procedure and the administrative component will equal
thirty-two (32%) percent of the total fee per procedure.
7. Use of the Equipment. The Equipment may be used at Hospital only at
the Site identified and shall not be removed therefrom. Hospital shall not use
nor permit the Equipment to be used by any personnel who are not properly
trained or in any manner nor for any purpose for which Elekta or GKF has
notified the Hospital the Equipment is not designed or reasonably suitable.
Hospital shall not permit any liens, whether voluntary or involuntary, to attach
to the Equipment, without the prior written consent of GKF.
<PAGE> 6
Lease Agreement Page 6
Southwest Texas Methodist Hospital
October 29, 1996
8. Additional Covenants of Hospital. In addition to the other covenants
made by Hospital, Hospital shall at its own cost and expense:
(a) Provide properly trained professional, technical and support
personnel and supplies required for the proper performance of medical
procedures utilizing the Equipment. Hospital will have on staff a minimum of
two (2) Gamma Knife trained teams of neurosurgeons, radiation therapists and
physicists. Parties acknowledge that physicians, radiation therapists and
physicists are not employees of the Hospital and are independent contractors.
(b) Notwithstanding any requirements to the contrary or the absence of any
requirements in the bylaws, rules and regulations of Hospital's medical staff,
Hospital shall cause all neurosurgeons, radiation therapists and physicists that
may use the Equipment as contemplated in this Agreement to obtain and maintain,
at no expense to GKF, throughout the Gamma Knife Service Term, a policy or
policies of insurance insuring their respective risks of professional medical
liability incurred in connection with providing professional services utilizing
the Equipment as contemplated in this Agreement, in amounts for each such person
which shall be not less than $500,000 per incident and $1,000,000 in the annual
aggregate. Upon expiration of the Gamma Knife Service Term or its earlier
termination in accordance with the terms of this Agreement, if occurrence
coverage has not been carried, Hospital shall cause, at no cost to GKF,
professional liability tail coverage to be obtained and maintained with respect
to each such person with the same limits as in effect on the last day of the
term of this Agreement, such tail coverage policy or policies to cover such
person's risks of professional medical liability arising during the Gamma Knife
Service Term. Also, upon the expiration or termination of any such policy prior
to the expiration of the Gamma Knife Service Term or its earlier termination,
Hospital shall cause, at no cost to GKF, a substitute policy or tail coverage to
be obtained and maintained with the same limits as in effect on the date of
expiration or termination, such substitute policy or tail coverage to cover any
such person's risk of professional medical liability arising during the Gamma
Knife Service Term. Prior to the commencement of the Gamma Knife Service Term or
before a neurosurgeon, radiation therapists or physicist first uses the
Equipment, and annually, thereafter (i.e., upon policy renewal), Hospital shall
provide GKF (or cause neurosurgeons, radiation therapists and physicists to
provide GKF) with certificates of insurance or other written evidence with
respect to each such policy. Hospital shall also cause all such neurosurgeons,
radiation therapists and physicists to provide GKF with written notice of any
change to such coverage throughout the Gamma Knife Service Term.
<PAGE> 7
Lease Agreement Page 7
Southwest Texas Methodist Hospital
October 29, 1996
(c) Fully comply with all of its obligations under the LGK Agreement.
(d) Indemnify GKF as herein provided:
(i) Hospital shall fully indemnify, hold harmless and/or reimburse GKF
(and its members and their respective officers, directors, agents, employees and
affiliates) for any loss, liability, damage, penalty, action, claim, cost or
expense (including reasonable attorneys' fees)(hereinafter collectively referred
to as "damages") which GKF may suffer or incur which are solely caused by
Hospital's Site preparation and the Equipment's positioning, if the Site
preparation or the Equipment's positioning was not done in compliance with
Elekta's Site Planning Criteria. Except as relates to Site plans, specifications
and positioning plans reviewed and approved by GKF and/or Elekta, or
construction of other Site preparation done in compliance with Elekta's Site
Planning Criteria, Hospital shall be liable for any damages to the Equipment
caused by (a) defects in construction of the Site or defects in positioning of
the Equipment at the Site; (b) defects arising out of materials or parts
provided, modified or designed by Hospital with respect to the Site; (c)
negligent or intentional acts of omission or commission by Hospital or any of
its officers, agents or employees in connection with the Site preparation; or
(d) negligent operation of the Equipment at the Site. However, neither the
review and approval of Site plans, specifications and/or positioning plans by
GKF and/or Elekta, nor the construction of any other Site preparation, shall
relieve hospital for liability for damages to the Equipment caused by the
failure to comply with applicable federal, state or local laws or regulations,
including building codes, or those portions of the Site Planning Criteria
relating to the load bearing capacity of the floor of the treatment room and to
radiation protection.
(ii) Hospital shall fully indemnify, hold harmless and/or reimburse
(including reasonable attorneys' fees) GKF (and its members and their respective
officers, directors, agents, employees and affiliates), on a prompt basis for
any and all damages to the Equipment (including any violation by Hospital, its
agents, officers, employees, successors and assigns or by any physician-users of
the Equipment, of the Services Agreement described in Section 15 hereof) to the
extent such damages are caused by the negligent or wrongful acts or omissions of
Hospital, its agents, officers, employees, successor or assigns or by any
physician-users of the Equipment. In the event the Equipment is destroyed or
rendered unusable, this indemnification shall extend up to the full replacement
value of the Equipment at the time of its destruction less salvage value, if
any.
<PAGE> 8
Lease Agreement Page 8
Southwest Texas Methodist Hospital
October 29, 1996
(iii) Hospital shall fully indemnify, hold harmless and/or reimburse
GKF (and its members and their respective officers, directors, agents, employees
and affiliates) for any damages which GKF may suffer or incur as a result of
Hospital's breach or alleged breach of this Lease Agreement.
(iv) Hospital shall fully indemnify, hold harmless and/or reimburse
GKF (and its members and their respective officers, directors, agents, employees
and affiliates) for any damages, claims, judgments and liabilities by or to
third parties (plus litigation costs incurred and reasonable attorneys fees)
which GKF may suffer or incur resulting from injury to or death of any person or
physical loss or damage to property arising out of the negligent operation or
negligent medical use of the Equipment by or for the Hospital (but which is not
attributable to defective materials, workmanship or manufacture of the
Equipment), the defective maintenance of the Equipment by or for the Hospital
(but only to the extent not performed by or on behalf of Elekta), the failure of
the Site to comply with the Site Planning Criteria, or the training referred to
in Section 3.2 of the LGK Agreement. It is agreed that non-employee
physician/users of the Equipment are independent of the Hospital and are not
acting by or for the Hospital.
(e) Provide reasonable and customary marketing materials (i.e.
brochures, announcements, etc.) and marketing support from an administrative and
clinical (i.e. seminars by neurosurgeons and radiation therapists to referring
physicians, etc.) standpoint for this clinical service.
(f) Keep and maintain the Equipment and Site fully protected,
secure and free from unauthorized access or use by any person.
9. Additional Covenants, Representations and Warranties of GKF. In
addition to the other covenants, representations and warranties, made by GKF in
this Agreement:
(a) GKF represents and warrants that GKF has full power and
authority to enter into this Agreement, and that this Agreement does not and
will not violate any agreement, contract or instrument binding upon GKF.
(b) GKF represents and warrants to Hospital that, upon delivery of
the Equipment to the Hospital GKF shall use its reasonable commercial efforts to
require that Elekta meets its contractual obligations to GKF and in putting the
Equipment, as required by the LGK Purchase Agreement into good, safe and
serviceable condition and fit for its
<PAGE> 9
Lease Agreement Page 9
Southwest Texas Methodist Hospital
October 29, 1996
intended use in accordance with the manufacturer's specifications, guidelines
and field modification instructions.
(c) GKF represents and warrants that throughout the term of this
Agreement, Hospital shall enjoy the use of the Equipment, free of the rights of
any other persons except for those rights reserved by GKF or the right of
access granted to Elekta under the LGK Agreement or under the LGK Purchase
Agreement with GKF.
(d) During the entire term of this Agreement and subsequent extension
thereof, GKF shall maintain in full force and effect: (i) the Service
Agreement referenced in Paragraph 15 hereof. GKF represents and warrants that
during the entire term of this agreement and any subsequent extensions thereof,
that it will fully pursue any and all remedies it may have against Elekta under
the Service Agreement to insure that the Equipment will be in conformity with
Elekta's warranties so that it is free from defects in design, materials, and
workmanship which result in noncompliance with the specifications and/or
Elekta's warranties to GKF. In no event, however, shall the warranty
obligations of GKF to Hospital with respect to the Equipment be greater or more
extensive than Elekta's warranty obligations to GKF with respect to the
Equipment. Hospital and GKF acknowledge that Exhibit D of that certain LGK
Purchase Agreement, dated as of October 11, 1995, by and between Elekta and GKF
(the "LGK Purchase Agreement") sets forth the warranties with respect to the
Equipment granted by Elekta to GKF, which warranties are identical in form and
content to the warranties provided by Elekta to Hospital in Exhibit D of the
LGK Agreement. Hospital is an intended third-party beneficiary of the
warranties granted by Elekta to GKF in Exhibit D of the LGK Purchase Agreement
and Hospital shall be entitled to enforce the obligations of Elekta thereunder
directly.
10. Ownership/Title. It is expressly understood that Hospital shall
acquire no right, title or interest in or to the Equipment, other than the
leasehold interests conveyed hereunder, including, the right to the possession
and use of the same in accordance with the terms of this Agreement, except as
outlined under Paragraph 17. Hospital shall have no interest in the Equipment
other than the rights acquired as a lessee hereunder and the Equipment shall
remain the property of GKF regardless of the manner in which it may be
installed or attached at the Site. Hospital shall, at GKF's request, affix to
the Equipment tags, decals, or plates furnished by GKF, indicating GKF's
ownership of the Equipment.
GKF may at its sole discretion finance the Equipment. Financing may be in
the form of an installment loan or a financing lease or other commercially
available debt instrument.
<PAGE> 10
Lease Agreement Page 10
Southwest Texas Methodist Hospital
October 29, 1996
Should GKF finance the Equipment through an installment loan, GKF shall be
required to provide the Equipment as collateral against the loan. Should GKF
finance the Equipment through a financing lease title shall vest with the lessor
until GKF exercises its buy-out option. In addition, should GKF finance the
equipment, said Agreement may be used as collateral against the loan. Hospital's
right to possess and use the Equipment hereunder shall be subject to the
interest of GKF's financing entities, if any. GKF shall instruct any such
financing entities to notify (the "Default Notice") GKF and Hospital in writing
within ten (10) business days after any payment defaults by GKF to any financing
entity with respect to the Equipment at the Site (each, a "Payment default"). If
GKF has not provided Hospital with reasonably satisfactory evidence that it has
cured any such Payment Default within twenty (20) business days after Hospital's
receipt of the Default Notice, Hospital shall have the right to cure any such
Payment Default by paying to any such financing entity, as appropriate, the
amount of the Payment Default and providing GKF with reasonably satisfactory
written evidence of any such payment. Any amounts paid by Hospital to any such
financing entity pursuant to the provisions of this Section 10 shall be offset
against amount due GKF from the Hospital pursuant to Paragraph 6 of this
Agreement. Except as otherwise specifically provided in this Paragraph 10,
Hospital shall have no rights of set off against amounts due GKF from the
Hospital pursuant to this agreement or otherwise.
11. Cost of Use of the Equipment. Except as is otherwise provided
herein, Hospital shall bear the entire cost of using the Equipment during the
Term of this Agreement. This shall include, but not be limited to, providing
trained professionals, technical and support personnel and supplies to properly
operate the Equipment.
12. Taxes. GKF shall pay any personal property and sales and use taxes
levied against the Equipment and any other taxes or governmental fees or
assessments, however denoted, whether of the federal government, any state
government or any local government, levied or based on this Agreement or the
use of the Equipment except for taxes, if any, assessed on the basis of net
income, gross income or gross receipts of Hospital.
13. Maintenance and Inspections. GKF agrees to exercise due and proper
care in the maintenance of the Equipment and to keep the Equipment in a good
state of repair, reasonable wear and tear excepted.
<PAGE> 11
Lease Agreement Page 11
Southwest Texas Methodist Hospital
October 29, 1996
GKF (and Elekta) shall have the right of access to the Equipment for the
purpose of inspecting same at all reasonable times and upon reasonable notice
and with a minimum of interference to Hospital's operations. In the event the
Equipment is improperly used by Hospital or its employees, agents, officers,
physicians, or any other non-GKF or non-Elekta individual GKF may service or
repair the same as needed and such expense shall be paid by Hospital, unless
the repair is covered by the Service Agreement described in Paragraph 15 hereof.
Any work so performed by or in the service or maintenance of the
Equipment as a result of Hospital's failure or neglect to do so shall not
deprive GKF of any of its rights, remedies or actions against Hospital for
damages caused by such failure or neglect.
14. Equipment Modifications/Additions/Upgrades. The parties agree that
the necessity and financial responsibility for future modifications/additions/
upgrades to the Equipment, including the reloading of the Cobalt-60 source,
shall be discussed and mutually agreed to by GKF and Hospital.
15. Service Agreement. GKF warrants that it shall simultaneously with
the execution of this Agreement enter into a Service Agreement with Elekta.
Service Agreement shall be at GKF's sole expense.
16. Intentionally omitted
17. Options
(a) Hospital shall have the option, exercisable as set forth below, to:
(i) Renegotiate this Agreement on terms mutually agreeable to GKF
for a specified renewal term taking into account the first ten (10) years of
activity of the Equipment at the Site. Pursuant to Paragraph 17(a)(ii), if
terms and conditions of Agreement extension are not executed by both parties by
the end of the 114th month, this Agreement shall terminate. Both parties shall
negotiate in good faith on the terms and conditions of an extension of this
Agreement.
(ii) Terminate this Agreement. If Hospital fails to renew the
Equipment Term at the end of the initial term. GKF shall, at its sole expense
remove the Gamma Knife
<PAGE> 12
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Southwest Texas Methodist Hospital
October 29, 1996
within a reasonable period of time after the expiration of the ten (10) year
initial Term. Hospital shall cooperate in good faith in such removal.
(iii) *
(iv) *
Hospital shall exercise one (1) of the four (4) options referred to
above, by mailing an irrevocable written notice thereof to GKF at Four
Embarcadero Center, Suite 3620, San Francisco, California, 94111, by registered
mail, postmarked on or before the end of the ninth (9th) year of the ten (10)
year initial Equipment Term of this Agreement. Any such notice shall be
sufficient if it states in substance that Hospital elects to exercise its option
and states which of the four (4) options referred to above Hospital is
exercising.
18. No Warrants by GKF. Hospital warrants that as of the Commencement
Date, it shall have (a) thoroughly inspected the Equipment; (b) determined for
itself that all items of the Equipment are of a size, design, capacity and
manufacture selected by it; and (c) satisfied itself that to the best of its
knowledge the Equipment is suitable for Hospital's stated purposes. GKF SUPPLIES
THE EQUIPMENT "AS IS" AND NOT BEING THE
<PAGE> 13
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Southwest Texas Methodist Hospital
October 29, 1996
MANUFACTURER OF THE EQUIPMENT OR THE MANUFACTURER'S AGENT, MAKES NO WARRANTY OR
REPRESENTATION, EITHER EXPRESSED OR IMPLIED, AS TO THE EQUIPMENT'S
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION,
DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR
THE LIKE, it being agreed that all such risks as between GKF and Hospital, shall
be borne by Hospital. Hospital agrees to look solely to the manufacturer
(Elekta) or to suppliers of the Equipment (and its software) for any and all
warranty claims. GKF will use reasonable commercial efforts to enforce any and
all warranties made by Elekta on behalf of Hospital during the ten (10) year
initial Equipment Term and any extensions hereof. Hospital agrees that GKF shall
not be responsible for the delivery, installation, or operation of the Equipment
or for any delay or inadequacy of any or all of the foregoing. GKF shall not be
responsible for any direct or indirect consequential loss or damage resulting
from the installation, operation or use of the Equipment or otherwise. Hospital
expressly waives any right or claim to hold GKF liable hereunder for any claims,
demands and liabilities arising out of or in connection with the design,
manufacture, possession or operation of the Equipment.
19. Events of Default and Remedies. The occurrence of any one of the
following shall constitute an Event of Default hereunder:
(a) Hospital fails to pay any installment of semi-monthly procedure
payments when due when such default continues for a period of thirty (30) days
after notice thereof from GKF or its assignee is given to Hospital.
(b) Hospital attempts to remove, sell, transfer, encumber, sublet or
part with possession of the Equipment or any items thereof, except as expressly
permitted herein;
(c) Hospital shall fail to observe or perform any of the other
obligations required to be observed or performed by Hospital hereunder and such
failure shall continue for twenty (20) days after written notice thereof to
Hospital by GKF, unless Hospital has cured or is attempting to cure such
failure during such period. So long as Hospital is diligently attempting to
cure its failure to observe or perform any of its obligations, in good faith,
such failure shall not constitute an Event of Default hereunder, unless such
failure results in material damage or loss to GKF.
(d) Hospital ceases doing business as a going concern, makes an
assignment for the benefit of creditors, admits in writing its inability to pay
its debts as they
<PAGE> 14
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Southwest Texas Methodist Hospital
October 29, 1996
become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt
or an insolvent, files a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law or regulation or files an
answer admitting the material allegations of a petition filed against it in any
such proceeding, consents to or acquiesces in the appointment of a trustee,
receiver, or liquidator of it or of all or any substantial part of its assets or
properties, or it or its shareholders or directors shall take any action looking
to its dissolution or liquidation.
(e) Within sixty (60) days after the commencement of any proceedings
against Hospital seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceedings shall not have been dismissed, or if within thirty
(30) days after the appointment without Hospital's consent or acquiescence of
any trustee, receiver or liquidator of it or of all or any substantial part of
its assets and properties, such appointment shall not be vacated.
Upon the occurrence of an Event of Default, GKF may at its option do
any or all of the following: (i) by notice to Hospital, terminate this Agreement
as to the Equipment in default, wherever situated, and for such purposes, enter
upon the Site without liability for so doing or GKF may cause Hospital and
Hospital hereby agrees to return the Equipment to GKF at Hospital's sole cost
and expense; (ii) recover from, as liquidated damages for the loss of the
bargain and not as a penalty, an amount equal to the present value of the unpaid
estimated future lease payments by Hospital to GKF through the end of the
Equipment Term discounted at the rate of nine percent (9%), which payment shall
become immediately due and payable. Unpaid estimated future lease payments shall
be based on the prior 12 months lease payments and incorporating an annual five
(5%) percent increase; (iii) sell, dispose of, hold, use or lease the Equipment
in default, as GKF in its sole discretion may determine (and GKF shall not be
obligated to give preference to the sale, lease or other disposition of the
Equipment over the sale, lease or other disposition of similar Equipment owned
or leased by GKF). In any event, Hospital shall, without further demand, pay to
GKF an amount equal to all sums due and payable for all periods up to and
including the date on which GKF had declared this Agreement to be in default.
<PAGE> 15
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Southwest Texas Methodist Hospital
October 29, 1996
In the event that Hospital shall have paid to GKF the liquidated damages
referred to in (ii) above, GKF hereby agrees to pay to Hospital promptly after
receipt thereof, all rentals or proceeds received from the reletting or sale of
the Equipment during the balance of the ten (10) year initial Equipment Term
(after deduction of all expenses incurred by GKF (including costs of unloading,
shipping, installing, and reloading the Equipment); said amount never to exceed
the amount of the liquidated damages paid by Hospital). Hospital agrees that GKF
shall have no obligation to sell the Equipment. Hospital shall in any event
remain fully liable for reasonable damages as provided by law for all costs and
expenses incurred by GKF on account of such default, including but not limited
to, all court costs and reasonable attorneys' fees. Hospital hereby agrees that,
in any event, it shall be liable for any deficiency after any sale, lease or
other disposition of the Equipment by GKF. The rights afforded GKF hereunder
shall not be deemed to be exclusive, but shall be in addition to any other
rights or remedies provided by law.
20. INSURANCE.
(a) During the ten (10) year initial Equipment Term of this
Agreement (and any successive terms) GKF shall, at its own cost and expense,
keep in effect an all risk and hazard insurance policy covering the Equipment.
The all risk and hazard insurance policy shall be for an amount not less than
the replacement cost of the Equipment. Hospital shall be named as an additional
insured under the all risk and hazard insurance policy maintained by GKF to the
extend to its leasehold interest. Evidence of such insurance coverage shall be
furnished by GKF to Hospital upon written request. During the ten (10) year
initial Equipment Term of this Agreement, Hospital shall, at its own cost and
expense keep in effect public liability and professional liability insurance
policies concerning the possession and operation of the Equipment by Hospital.
Said policies shall be in the amounts of not less than $1,000,000 per occurrence
and $5,000,000 in aggregate per year. GKF and its members, successors and
assigns, shall be named as additional insureds under the liability and
professional liability policies maintained by Hospital. Evidence of such
insurance coverages shall be furnished by Hospital to GKF upon written request,
by no later than the Commencement Date.
(b) If the Equipment is rendered unusable as a result of any
physical damage to, or destruction of the Equipment, Hospital shall give to GKF
immediate notice. GKF shall determine, within thirty (30) days after the date of
occurrence of such damage or destruction, whether the Equipment can be repaired.
In the event GKF determines that the Equipment cannot be repaired, GKF at its
sole cost and expense shall promptly
<PAGE> 16
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Southwest Texas Methodist Hospital
October 29, 1996
replace the Equipment. This Agreement shall continue in full force and effect as
though such damage or destruction had not occurred. In the event GKF determines
that the Equipment can be repaired, GKF shall cause the Equipment to be promptly
repaired.
21. Notices. Any notices required under this Agreement shall be sent in
writing and shall be deemed to have been duly given if delivered by hand or
mailed by certified or registered mail to the following addresses:
To GKF: Craig K. Tagawa, C.E.O.
Four Embarcadero Center, Suite 3620
San Francisco, CA 94111
To Hospital: James C. Scoggin, Jr., CEO
Southwest Texas Methodist Hospital
7700 Floyd Curl Drive
San Antonio, TX 78229
Or to such other addresses as either party may specify for the reception of
notice from time to time in writing to the other party. Any such notice shall be
effective only when actually received by the party to whom addressed.
22. Integration/Supersedure. This Agreement together with all exhibits and
addenda attached hereto contains the full and entire Agreement between the
parties hereto, and no oral or written understanding is of any force or effect
whatsoever unless expressly contained in a writing executed subsequent to the
date of this Agreement.
23. Waivers. To the extent that GKF fails or chooses not to pursue any of
its remedies under this Agreement or pursuant to applicable law, such shall not
prejudice GKF's rights to pursue any of those remedies at any future time and
shall not constitute a waiver of GKF's rights. To the extent that Hospital fails
or chooses not to pursue any of its remedies under this Agreement or pursuant to
applicable law, such shall not prejudice Hospital's rights to pursue any of
those remedies at any future time and shall not constitute a waiver of
Hospital's rights.
<PAGE> 17
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Southwest Texas Methodist Hospital
October 29, 1996
24. Assignments. This Agreement is binding upon and shall inure to the
benefit of the permitted successors or assigns of the respective parties hereto,
except that Hospital may not assign its rights or obligations under this
Agreement without the express written consent of GKF (which consent shall not be
unreasonably withheld). Hospital shall not assign or sublease the Equipment or
its rights hereunder without the prior written consent of GKF; which consent
shall not be unreasonably withheld. No permitted assignment or sublease shall
relieve Hospital of any of its obligations hereunder. For purposes of this
Section 24, a reorganization, recapitalization, merger, or other business
combination or restructuring of Hospital shall not be considered an assignment
of this Agreement, so long as Methodist Healthcare System of San Antonio, Ltd.,
retains at least a fifty percent (50%) direct or indirect ownership interest in
the Hospital.
25. Amendments. This Agreement shall not be amended or altered in any
manner unless such amendment or alteration is in a writing signed by both
parties.
26. Record-Keeping Requirements. To the extent required by the
regulations promulgated by the Health Care Financing Administration pursuant to
Section 952 of the Omnibus Reconciliation Act of 1980, GKF shall:
(a) Until the expiration of four (4) years following the furnishing of
services pursuant to this Agreement, GKF agrees to make available upon written
request of the Secretary of Health and Human Services or the U.S. Comptroller
General or any of their duly authorized representatives, this Agreement, any
books, documents and records necessary to verify the nature and extent of costs
incurred by Hospital by reason of the activities of GKF under this Agreement;
and
(b) If GKF elects to delegate any of its duties under this Agreement
(which have a cost of value of Ten Thousands Dollars ($10,000.00) or more over a
twelve (12) month period) to a related organization, only through a
subcontractor which provides that, until the expiration of four (4) years
following the furnishing of services under such subcontract, the related
organization shall make available, on request of the Secretary of Health and
Human Services or the U.S. Comptroller General or any of their authorized
representatives, the subcontract, and books, documents and records of the nature
and extent of costs incurred by Hospital by reason of activities of such related
organization under such subcontract. No delegation by GKF of its duties
hereunder shall relieve GKF from liability hereunder.
<PAGE> 18
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Southwest Texas Methodist Hospital
October 29, 1996
27. Miscellaneous Provisions.
(a) The invalidity or unenforceability of any portion or provision
of this Agreement shall not effect the validity or enforceability of any other
portion, nor shall either party's implied or express consent to the breach or
waiver of any provision of this Agreement constitute a waiver of such provision
as to any subsequent breach.
(b) In the event of any claim or controversy arising hereunder, the
prevailing party in such claim or controversy shall be entitled to a reasonable
attorneys' fee in addition to whatever other relief said party would be
otherwise entitled.
(c) Force Majeure. Failure to perform any obligation hereunder
(except for the payment of money) by either party will be excused in the event
of any delay or inability to perform its duties under this Agreement directly
or indirectly caused by conditions beyond its reasonable control including
without limitation, fires, floods, earthquakes, snow, ice, disasters, Acts of
God, accidents, riots, wars, operation of law, strikes, governmental action or
regulations, shortages of labor, fuel, power, materials, manufacturer delays or
transportation problems.
(d) Governing Law. The Agreement will be governed by Texas Law.
(e) Dispute Resolution. Should a dispute arise out of this contract,
the parties to the dispute shall first attempt to resolve it through direct
discussions in the spirit of mutual cooperation. If the parties' attempts to
resolve their disagreements through negotiation fail, the dispute shall be
mediated by a mutually acceptable third-party to be chosen by the disputing
parties within thirty (30) days after written notice by one of them demanding
mediation. The disputing parties shall share the cost of the mediation equally.
By mutual agreement the parties may postpone mediation until each has completed
some specified but limited discovery about the dispute. By mutual agreement the
parties may use a nonbinding form of dispute resolution other than mediation.
Any nonbinding dispute resolution process conducted under the terms of this
section shall be confidential within the meaning of Tex. Civ. Prac. and Rem.
Code sec. 154.053 and 154.073. In the event that neither a negotiated or
mediated resolution is obtained within the time periods provided by this
section, the parties may pursue any available legal or equitable remedy.
<PAGE> 19
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Southwest Texas Methodist Hospital
October 29, 1996
IN WITNESS WHEREOF, the parties have signed this Agreement on the day and
year first above written.
SOUTHWEST TEXAS GK FINANCING, LLC
METHODIST HOSPITAL
By: /s/ JAMES C. SCOGGIN, JR. By: /s/ CRAIG K. TAGAWA
----------------------------- -----------------------------
James C. Scoggin, Jr. Craig K. Tagawa
Chief Executive Officer Chief Executive Officer
<PAGE> 20
Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of 1934, as amended.
Omitted information has been replaced with asterisks.
ADDENDUM TO
LEASE AGREEMENT FOR A GAMMA KNIFE UNIT
1. GKF shall participate jointly with Hospital in the design,
development and construction solicitation required in connection with the
preparation of the Site for the Equipment. In this regard:
(a) GKF and Hospital have identified and approved Garza, Bomberger
and Associates as the architectural firm to be engaged by Hospital to develop
the design, layout, and plans and specifications for the Site. GKF shall assist
Hospital with, and the Hospital shall regularly consult with GKF with regard
to, the design or layout of the Site and all matters related to the preparation
of the plans and specifications.
(b) GKF also shall participate with Hospital in the identification
and review of possible construction, engineering and/or design firms (general
contractors and/or any subcontractors) to be engaged by Hospital to construct
the Site. GKF shall have the right to interview all construction, engineering
and/or design firms proposed by Hospital or GKF for the project. All bids to
perform the construction, engineering and/or design work for the Site shall be
submitted to GKF for review prior to Hospital's selection thereof. The
construction, engineering and/or design firm(s) finally selected by Hospital to
perform the work and its bid shall be subject to the written approval of GKF,
which approval shall not be unreasonably withheld, conditioned or delayed.
2. As soon as reasonably possible after Hospital enters into the
principal contracts for the design, preparation and construction of the Site
(i.e., design/layout, architectural engineering and general construction),
Hospital shall determine in writing the aggregate costs and expenses previously
incurred and shall estimate the aggregate costs and expenses to be subsequently
incurred by Hospital to design, plan, prepare, construct and complete the Site
for the Equipment (the "Site Preparation Costs") based upon the amounts
reflected in said contracts. A copy of the written determination shall be
delivered by Hospital to GKF. If the aggregated Site Preparation Costs set
forth in the written determination are Nine Hundred Fifty Thousand
($950,000.00) or less, Hospital shall be responsible for the payment of all
Site Preparation Costs. If the aggregate Site Preparation Costs set forth in
the written determination are more than Nine Hundred Fifty Thousand Dollars
($950,000.00), GKF shall reimburse Hospital in the manner set forth in Section
3 below for the amount of Site Preparation Costs set forth in the written
documentation in excess of Nine Hundred Fifty Thousand Dollars ($950,000.00)
(the "Excess Site Preparation Amount").
3. If GKF is required to reimburse Hospital the Excess Site Preparation
Costs:
(a) Concurrent with the payment of any invoices or periodic
installments for Site Preparation Costs, Hospital shall deliver to GKF a copy
of all invoices or statements, a copy of all evidences of payment (e.g.,
copies of checks), an accounting of the aggregated Site
1
<PAGE> 21
Preparation Costs, and a comparison of the estimated Site Preparation Costs (as
set forth in the written determination) to the actual Site Preparation Costs
paid by Hospital. The inadvertent failure of Hospital to provide the foregoing
documentation will not affect Hospital's right to reimbursement hereunder, so
long as such documentation is provided to GKF promptly upon request by GKF. When
the aggregate Site Preparation Costs paid by Hospital, exceed Nine Hundred Fifty
Thousand Dollars ($950,000.00), Hospital shall itemize and request in writing
that GKF reimburse Hospital for such excess Costs. GKF shall reimburse the
Hospital for the excess costs up to the Excess Site Preparation Amount not more
than (3) days after the written request for reimbursement and other items
described herein are delivered by Hospital to GKF.
(b) Modifications or additions to the Site Preparation Costs,
including change orders, shall be subject to written approval of GKF, which
approval shall not be unreasonably withheld, conditioned or delayed.
(c) Hospital shall regularly report to GKF on the status of the
preparation and construction of the Site. Upon reasonable advance request by
GKF, GKF shall have the right to visit and inspect the Site to review the
progress of construction.
4. Except as otherwise set forth in the Addendum, all of the provisions
of the Lease Agreement remain in full force and effect.
GK Financing, LLC, Methodist Healthcare System of San
a California limited Antonio, LTD, dba Southwest Texas
liability company Methodist Hospital, a Texas Corporation
By: /s/ CRAIG K. TAGAWA By: /s/ JAMES C. SCOGGIN, JR.
---------------------------------- ----------------------------------
Craig K. Tagawa James C. Scoggin, Jr.
Chief Executive Officer Chief Executive Officer
Dated: October 31, 1996 Dated: October 31, 1996
2
<PAGE> 1
EXHIBIT 10.19
Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of 1934, as amended.
Omitted information has been replaced with asterisks.
LEASE AGREEMENT FOR A GAMMA KNIFE UNIT
THIS AGREEMENT FOR A GAMMA KNIFE UNIT on April 10, 1997 (hereinafter
referred to as the "Agreement") is entered into between GK FINANCING, LLC, a
California Limited Liability Company (hereinafter referred to as "GKF") and
YALE-NEW HAVEN AMBULATORY SERVICES CORPORATION, a Connecticut Corporation
(hereinafter referred to as "Yale").
RECITALS
WHEREAS, Yale wants to lease a Leksell Stereotactic Gamma Unit, also known
as the Leksell Gamma Knife Model 23004 (B-type) which is technically specified
in "Exhibit A" to the LGK Agreement (hereinafter defined) which is "Exhibit A"
to this Lease Agreement, all of which technical specifications are incorporated
herein and referred to collectively as the "Equipment" from GKF and further
desires from GKF certain marketing support related to promotion and utilization
of said Equipment; and
WHEREAS, GKF is willing to purchase the Equipment distributed by Elekta,
Inc., a Georgia corporation (hereinafter referred to as "Elekta") and lease the
Equipment to Yale pursuant to the terms and conditions of this Agreement and is
further willing to provide to Yale marketing support.
NOW THEREFORE, in consideration of the promises contained herein, the
parties hereto hereby agree as follows:
1. Execution of LGK Agreement by and between Yale and Elekta. Yale
agrees that simultaneously with the execution of this Agreement it shall enter
into that certain LGK Agreement with Elekta and GKF (hereinafter referred to as
the "LGK Agreement"), a copy of which is attached hereto as "Exhibit A" and
incorporated herein by reference. Yale agrees to fulfill all of its obligations
under the LGK Agreement and acknowledges that GKF is a third party beneficiary
of the LGK Agreement.
2. Certificate of Need. The parties hereto acknowledge that the
installation and use of the Equipment by Yale is conditional upon the issuance
of a Certificate of Need (hereinafter "CON") by the Connecticut Commission on
Hospitals and Health Services. Yale will use all reasonable efforts to obtain a
CON, however, in the event a CON is denied or its issuance is conditioned upon
circumstances or events beyond Yale's reasonable control, then in such event
this Agreement shall be rendered null and void and all parties shall thereafter
be excused from performing any obligation or duty hereunder.
3. Delivery of the equipment and Site Preparation. GKF shall arrange to
have the Equipment delivered to Yale and installed at Temple Medical Center, New
Haven, Connecticut
1
<PAGE> 2
(the "Site") in coordination with Elekta. Elekta shall be responsible for
transporting the Equipment for F.O.B. loading dock to the Site and the
subsequent positioning of the Equipment, as well as, construction of the
temporary hot cell to facilitate charging of the Equipment with its cobalt
supply. Elekta has provided Yale with a written estimate for the costs
associated with transporting, installing and positioning the Equipment on Site,
as well as, construction of the temporary hot cell to facilitate charging of the
Equipment with its cobalt supply. Actual costs of transporting, installing and
positioning the Equipment shall be reimbursed by Yale. GKF shall use its best
faith efforts to expedite the delivery of the Equipment in accordance with the
terms and conditions of the Purchase Agreement for the Equipment in accordance
with the terms and conditions of the Purchase Agreement for the Equipment by and
between GKF and Elekta. Notwithstanding the preceding sentence, it is understood
and agreed that GKF has made no representations or warranties to Yale concerning
actual delivery dates or schedules for the Equipment at the Site. GKF shall
coordinate with Yale the estimated delivery date of Equipment.
Yale shall prepare and provide the Site, at its own expense, in
accordance with Elekta's Site Planning Criteria (which Site Planning Criteria
are attached to the LGK Agreement as "Exhibit B" thereto and incorporated herein
by reference) pursuant to site plans and specifications to be prepared by Yale
and submitted to Elekta and GKF for prior written approval.
Yale shall obtain, in a timely manner, a User License from the Nuclear
Regulatory Commission and/or appropriate state agency authorizing it to take
possession of the Cobalt Supply and obtain such other licenses, permits,
approvals, consents and authorizations, which may be required by local
governmental or other regulatory agencies for the Site, its preparation, the
charging of the Equipment with its Cobalt Supply, the conduct of Acceptance
tests, and the use of the Equipment all as more fully set forth in Article 2.1
of the LGK Agreement.
4. Term. The term of this Agreement (the "Term") shall commence as of
the date hereof and unless earlier terminated in accordance with the provisions
of this Agreement, shall continue for the period of ten (10) years following the
date of performance of the first billed Gamma Knife procedure at the Site (the
"First Procedure Date"). Yale shall become liable to GKF for the GKF monthly
reimbursement as hereinafter defined in paragraph 7 upon the First Procedure
Date.
5. Costs of Site Preparation; Costs of Installation. Yale shall, at
its own expense, prepare, construct and make ready the Site in accordance with
the Site plans previously approved by Elekta and GKF pursuant to paragraph 3
hereof, for the installation of the Equipment.
Yale shall, at its own expense, select, purchase, install and
maintain all radiation monitoring equipment and devices, safety circuits and
radiation warning signs required at the Site in connection with the use and
operation of the Equipment, all in accordance with the Site Planning Criteria
and the applicable federal, state and local laws and regulations.
<PAGE> 3
Yale warrants that upon completion of the Site, it will comply
with the Site Planning Criteria and the site plans and specifications referred
to in paragraph 3 above.
Yale shall be liable for any damages to the Equipment caused by:
(a) Its failure to construct the Site in accordance with the
plans and specifications referred to in paragraph 3 above
and the Site Planning Criteria; or
(b) Negligent or intentional acts of omission or commission by
Yale or any of its officers, agents, physicians or
employees in connection with the construction of the Site.
Yale shall utilize its best efforts to fulfill on an
expeditious basis its obligations under this paragraph 5, and keep GKF informed
to Yale's progress in fulfilling its obligations pursuant to this paragraph 5.
Should Yale not have all Site preparations complete by the mutually agreed upon
delivery date specified by a separate agreement between the parties, plus a
sixty (60) day grace period such that the Site is acceptable for positioning
and installation of the Equipment. Yale shall reimburse GKF at an interest rate
of Bank of America's prime rate plus two percent (2%) on GKF's equipment cost
from such agreed delivery date until the Site is prepared to allow positioning
and installation of the Equipment. Should GKF not deliver the Equipment to Yale
on the later of the above scheduled delivery date plus a sixty (60) day grace
period or when Site is ready to accept the Equipment. GKF shall reimburse Yale
at an annual interest rate of Bank of America's prime rate plus two percent
(2%) on its actual cost expended to prepare the Site until the Equipment is
installed at the Site.
6. Marketing Support. GKF will provide marketing support for the Gamma
Knife service in coordination with Yale.
7. Reimbursement to GKF. As its sole consideration for the Lease of the
Equipment and GKF's provision of certain marketing and administrative support
service. Yale shall pay GKF as follows:
*
3
<PAGE> 4
*
The amount due to GKF hereunder shall be determined and paid on a
monthly basis throughout the initial Term and any successive Terms, and
thereafter to the extent any technical component revenues associated with Gamma
Knife treatments during the Term or any successive Term of the Lease are
received subsequent to termination of the Lease. Within ten days after the last
day of each calendar month of the initial Term and any successive terms (and
upon the termination or expiration of the initial Term or any subsequent term
with respect to a period shorter than a calendar month) each party shall submit
to the other a statement setting forth such party's portion of the Direct
Operating Expenses, and the parties shall calculate the Direct Operating
Expenses with respect to such month (or portion thereof). The parties shall
also calculate the net technical component of revenues (determined on a cash
basis) with respect to cash receipts for Gamma Knife treatments paid in such
month; and within ten days after the conclusion of such month or portion
thereof Yale shall provide to GKF all revenue data necessary to perform such
calculation. The GKF shares of such revenues for such month (or portion
thereof) is referred to herein as the GKF Monthly Reimbursement."
*
On or before the First Procedure Date, the parties shall execute a preliminary
amendment to this paragraph 7 setting forth GKF's equipment cost. Yale's cost
to install the Equipment and Yale's cost to obtain the CON for the Gamma Knife
and Yale's pre-opening marketing costs. Each party shall first provide to the
other documentary proofs of expenditure to justify the amounts claimed for such
costs. A final cost accounting of these aforementioned costs shall be completed
and documented in a final amendment to this paragraph 7 no later than six
months after the First Procedure Date.
The technical fees to be billed for Gamma Knife procedures performed
from time to time during the term of this Agreement shall be an amount which is
economically justifiable based upon each party's Direct Operating Expenses (as
described hereinabove), the total project costs (as described hereinabove)
together with a return thereon, utilization of the Equipment and payments made
by third party payers to Yale from time to time for Gamma Knife procedures.
Yale shall consult with GKF from time to time regarding the amount of the
technical fees to be
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billed by Yale for Gamma Knife procedures and any revisions thereto; however,
subject to compliance with the standard described in the preceding sentence.
Yale shall not be required to obtain the consent of GKF to set or revise the
amount of the technical fees.
With respect to any period for which net technical component revenues
associated with Gamma Knife treatment are equal to or less than Direct Operating
Expenses associated with providing Gamma Knife treatment, GKF shall be entitled
to no reimbursement other than for Direct Operating Expenses incurred by GKF, to
the extent available. Further, the excess of Direct Operating Expenses over net
technical component revenues for any such period shall be paid when incurred by
Yale to the extent of the Yale Percentage, as hereinafter defined in paragraph
11 and by GKF to the extent of the GKF Percentage as hereinafter defined in
paragraph 11.
Throughout the initial Term and any successive terms, and thereafter until
final settlement of all amounts owed to or claimed by either party under this
Agreement, each party shall have the right to inspect, audit and copy the other
party's books and records which relate to the accounting for and calculation of
revenues from the provision of Gamma Knife procedures, Direct Operating
Expenses, project cost. Yale's cost to install the Equipment and Yale's cost to
obtain the CON for the Gamma Knife and GKF's equipment acquisition cost.
8. Use of the Equipment. The Equipment may be used by Yale only at the
Site and shall not be removed therefrom. Yale shall not assign or sublease the
Equipment or its rights hereunder without the prior written consent of GKF,
which consent shall not be unreasonably withheld. No permitted assignment or
sublease shall relieve Yale of any of its obligations hereunder. Yale shall not
use nor permit the Equipment to be used in any manner nor for any purpose for
which the Equipment is not designed or reasonably suitable. Yale shall not
permit any liens whether voluntary or involuntary, to attach to the Equipment,
without the prior written consent of GKF. Yale shall have no interest in the
Equipment other than the rights acquired as a lessee hereunder and the Equipment
shall remain the property of GKF regardless of the manner in which it may be
installed or attached at the Site. Yale shall at GKF's request, affix to the
Equipment tags, decals, or plates furnished by GKF, indicating GKF's ownership
of the Equipment.
9. Additional Covenants of Yale. In addition to the other covenants
made by Yale. Yale shall, at its own cost and expense:
(a) Provide properly trained professional, technical and support
personnel and supplies required for the proper performance of
medical procedures utilizing the Equipment.
(b) Monitor all patients' condition and treatment.
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(c) Fully comply with all of its obligations under the LGK
Agreement.
(d) To the extent any loss realized by GKF is not fully covered by
insurance, indemnify GKF as herein provided:
(i) Yale shall indemnify, hold harmless and/or reimburse GKF
on a prompt basis for any and all damage to the
Equipment, reasonable wear and tear excepted (including
any damage relating to or arising out of violations by
Yale, its agents, officers, physicians, employees,
successors and assigns of the Services Agreement
described in paragraph 16 hereof), together with
reasonable attorney fees incurred by GKF to establish or
enforce its right to indemnity hereunder, to the extent
the damage (or a portion thereof) is caused by the
negligent or wrongful acts or omissions of Yale, its
agents, officers, directors, physicians, employees,
successors or assigns. Yale shall not be obligated to
indemnify GKF hereunder to the extent the damage (or a
portion thereof) is caused by the negligent or wrongful
acts or omissions of GKF or its agents, officers,
directors, employees, successors or assigns. In the
event the Equipment is destroyed or rendered unusable,
this indemnification shall extend up to the full
replacement value of the Equipment at the time of its
destruction less salvage value, if any.
(ii) Yale shall indemnify, hold harmless and/or reimburse GKF
for any loss, claim, liability or damage (collectively
"damages") which GKF may suffer or incur, and for
reasonable attorneys fees incurred by GKF to defend
itself against such damages or to establish or enforce
its rights to indemnity hereunder with respect to the
events or occurrences described in Section 7.3 of the
LGK Agreement to the same extent that Yale agrees to
indemnify Elekta thereunder, Notwithstanding the
foregoing in no event shall liability of Yale hereunder
cause or result in a recovery in favor of GKF which is
duplicative of any damages paid directly to Elekta.
(iii) Yale shall indemnify, hold harmless and/or reimburse GKF
for any damages (as defined in sub-part (ii) above) and
for reasonable attorneys fees incurred by GKF to defend
itself against such damages or to establish or enforce
its right to indemnity hereunder which GKF may suffer or
incur as a result of Yale's breach of the LGK Agreement.
Notwithstanding the foregoing in no event shall
liability of Yale hereunder cause or result in a
recovery in favor of GKF which is duplicative of any
damages paid directly to Elekta.
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(e) Provide reasonable and customary marketing materials (i.e.
brochures, announcements, etc.) and marketing support.
10. Additional Covenants, Representations and Warranties of GKF. In
addition to the other covenants, representations and warranties, made by GKF in
this Agreement:
(a) GKF represents and warrants that GKF has full power and authority
to enter into this Agreement, and that this Agreement does not
and will not violate any agreement, contractor or instrument
binding upon GKF.
(b) GKF represents and warrants to Yale that, upon delivery of the
Equipment to Yale, GKF shall use its best faith efforts to
require that Elekta places the Equipment in service, as soon as
possible, consistent with all reasonable safety precautions. In
accordance with the manufacturer's specifications, guidelines
and field modification instructions.
(c) GKF represents and warrants that throughout the term of this
Agreement, Yale shall peaceably enjoy the use of the Equipment,
free of the rights of any other persons except for those rights
reserved by GKF in this Agreement or granted to Elekta under the
LGK Agreement or under Elekta's Purchase Agreement, with GKF, a
full and complete copy of which has been provided to Yale and
incorporated as an exhibit to the LGK Agreement.
(d) During the entire term of this Agreement and subsequent
extensions thereof, GKF shall maintain at its sole cost the
Equipment to Elekta's specifications and shall maintain in full
force and effect: (1) the Service Agreement referenced in
paragraph 16 hereof; and (2) any other service or other
agreements required to fulfill GKF's obligations to Yale
pursuant to this paragraph 10(d). Unless Yale elects in its sole
discretion to pursue any warranty claim directly against Elekta.
GKF represents and warrants that during the entire term of this
agreement and any subsequent extensions hereof, that it will
fully pursue any and all remedies it may have against Elekta
under the Service Agreement to insure that the Equipment will be
in conformity with Elekta's warranties so that it is free from
defects in design, materials, and workmanship which result in
noncompliance with the Equipment's specifications and/or
Elekta's warrants to GKF. In no event, however, shall the
warranty obligations
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of GKF to Yale with respect to the Equipment be greater or more
extensive than Elekta's warranty obligations to GKF with respect
to the Equipment.
11. Ownership/Title. Except as hereinafter provided, it is expressly
understood that Yale shall acquire no right, title or interest in or to the
Equipment, other than the right to quietly and peacefully possess and use the
same in accordance with the terms of the Agreement. Upon termination of this
Agreement (whether by expiration or early termination) Yale shall be granted a
percentage ownership interest in the Equipment equal to the percentage that
Yale's cost to install the Equipment at the Site. Yale's cost to obtain the CON
for the Gamma Knife and Yale's pre-opening marketing costs is to the total
project cost (the "Yale Percentage"). Upon termination of this Agreement, GKF
shall be granted an ownership interest in those leasehold improvements at the
Site which can be removed on termination of this Agreement without any damage to
the Site equal to the percentage that GKF's equipment cost is to the total
project cost (the "GKF Percentage"). The total project cost for the purposes of
this of this paragraph shall be equal to GKF's equipment cost (equipment
acquisition cost, sales tax and customs and duty) plus Yale's cost to install
the Equipment at the Site, its cost to obtain the CON for the Gamma Knife and
Yale's pre-opening marketing costs. The grant of an ownership interest to Yale
under this paragraph shall be subject to the condition that, at the termination
of the Agreement. Yale must pay a percentage of the total cost to relocate the
Equipment equal to the Yale percentage. Yale's ownership interest in the
Equipment shall be subject to a security interest in the Equipment of any and
all entities that provide financing to GKF with respect to the Equipment.
The Equipment may be subject to a security interest in favor of Elekta
to secure the purchase price for the Equipment due to Elekta. Upon payment of
the full purchase price to Elekta and release of its security interest. GKF may
in its sole discretion finance the Equipment. Financing may be in the form of an
installment loan or a capitalized lease or other commercially available debt
instrument. Should GKF finance the Equipment through an installment loan, GKF
shall be required to provide the Equipment as collateral against the loan.
Should GKF finance the Equipment through a capitalized lease title shall vest
with the lessor until GKF exercises its buy-out option. Yale's interest shall be
subject to the interests of Elekta and thereafter any financing entity. GKF, as
a condition of this Agreement, shall provide to Yale complete copies of all
financing documents prior to execution and shall cause Elekta and any subsequent
financing entity to notify Yale within ten (10) business days of any payment
defaults on the loan/lease agreement for the Equipment installed at the Yale
Site (Payment Default). In the event of a Payment Default by GKF, GKF's Monthly
Reimbursement shall not be paid to GKF until the Payment Default is cured.
Unless Yale exercises its right of assumption of the GKF financing as
hereinafter provided, Yale shall pay all withheld Monthly Reimbursement payments
to GKF forthwith upon receiving written notice from the secured party that
Payment Default has been cured by GKF. In the event a Payment Default remains
uncured by GKF for a period of thirty (30) days after written notice thereof is
received by Yale, Yale in its sole discretion, may cure the Payment Default by
paying the amount owing to the holder of any security interest in the Equipment
("Secured Party"), and assuming and agreeing to be bound by all terms and
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covenants of the financing: provided that (i) in the event GKF's financing
covers Leksell Gamma Knife units other than the Equipment that is the subject
of this Agreement, the financing assumed by Yale shall be limited to the
portion thereof that relates to the Equipment; (ii) the amount of the financing
assumed by Yale shall not exceed the amount of the original purchase price of
the Equipment as set forth in Elekta's Purchase Agreement with GKF (exclusive
of any interest, late fees or other costs or charges that may have been imposed
by the Secured Party and added to the outstanding principal balance
thereunder); (iii) such financing assumed by Yale shall not be cross-defaulted
with any other collateral security other than the Equipment, this Agreement or
any property or other interests related thereto; and (iv) Yale shall give
written notice to GKF and the Secured Party upon the exercise of its election
to satisfy the Payment Default and assume the financing. The Secured Party must
enter into an estoppel and subordination agreement with Yale at or prior to the
time GKF enters into any financing of the Equipment (other than with respect to
Elekta which shall enter into such estoppel and subordination agreement with
Yale within sixty (60) days following the execution of this Agreement by the
parties) wherein the Secured Party's rights in the Equipment shall be fully
subordinate and subject to the rights of Yale to cure any such default and
assume GKF's obligations under the financing as set forth above (subject to the
reasonable approval by the Secured Party of Yale's financial status); provided
that, in the event Yale does not elect to cure such default and assume and
agree to be bound by all terms and covenants of such financing within thirty
(30) days after notice of a Payment Default is received by Yale as set forth
above, the Secured Party shall thereupon be entitled to exercise all of its
rights as a secured party pursuant to the terms and provisions of its financing
documents. In the event Yale exercises its right of assumption upon default by
GKF, all rights of redemption in and to the Equipment shall thereafter vest
solely in Yale, and GKF shall have no further right to any payments under
paragraph 7 hereof. Further, in the event of default by GKF and the exercise
by Yale of its right of assumption of the GKF financing as hereinabove
provided. GKF shall have waived all right, title and interest in and to the GKF
Percentage and to any and all equity it may have previously had in and to the
Equipment, and Yale shall have no obligation to resell the Equipment or take
any action to preserve or protect such equity in the Equipment as GKF may have.
The exercise by Yale of any rights or remedies it may have hereunder shall be
deemed to be commercially reasonable.
11.1. Right of First Refusal. If at any time or from time to time during
the terms of this Agreement, Yale desires to purchase, lease or otherwise
acquire one or more additional Leksell Gamma Knife units for use or operation
within the State of Connecticut. Yale shall provide to GKF no less than sixty
(60) days prior written notice of its intended purchase, lease or acquisition
(the "Option Notice"). In the event Yale's desire is to lease any such Leksell
Gamma Knife, for sixty (60) days following GKF's receipt of the Option Notice,
GKF shall have the exclusive option and right to purchase, lease or acquire
such Leksell Gamma Knife and to lease such Leksell Gamma Knife to Yale on the
same terms and conditions as are set forth in this Agreement. In the event
Yale's desire is to acquire any such Leksell Gamma Knife other than by lease,
for sixty (60) days following GKF's receipt of the Option Notice, GKF shall
have the exclusive option and right to so acquire such Leksell Gamma Knife
jointly with Yale. Exercise of the foregoing option by GKF shall be
accomplished by giving written notice of exercise (the
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"Exercise Notice") to Yale dated on or before the expiration of sixty (60) days
following receipt of the Option Notice by GKF. Within ninety (90) days following
receipt of the Exercise Notice by Yale, (i) with respect to the lease of such
Leksell Gamma Knife by Yale; GKF and Yale shall enter into a lease agreement on
the same terms and conditions as are set forth in this Agreement, or (ii) with
respect to the acquisition of such Leksell Gamma Knife other than by lease, GKF
and Yale shall enter into such other agreement pertaining to such acquisition on
terms and conditions as shall be mutually agreed upon between GKF and Yale,
provided that in the event the parties are unable to agree upon the terms and
conditions of such other agreement within such 90-day period, the parties shall
submit the matter to arbitration as set forth in Section 29(e) below. In the
event GKF fails to exercise its option within such sixty (60) day period, Yale
may purchase, lease or acquire such Leksell Gamma Knife independent of GKF,
provided that such purchase, lease or acquisition shall be limited only to the
Leksell Gamma Knife unit referenced in the Option Notice. The parties agree that
a violation of the terms of this Section 11.1 may be enforced by way of an
action for preliminary and permanent injunctive relief since monetary damages
may be difficult to ascertain.
12. Cost of Use of the Equipment. Except as is otherwise provided
herein and subject to Yale's right to charge Direct Operating Expenses against
technical component revenues under paragraph 7 above, Yale shall bear the
entire cost of the operation of the Equipment during the Term of this
Agreement. This shall include, but not be limited to, providing trained
professionals, technical and support personnel and supplies to properly
operate the Equipment. Yale shall be fully responsible and liable for all acts
and/or omissions of such professional, technical and support personnel.
13. Taxes. GKF shall pay any personal property taxes levied against the
Equipment and any other taxes or governmental fees or assessments, however
denoted, including sales and use tax, whether of the federal government, any
state government or any local government, levied or based on this Agreement or
the use of the Equipment except for those taxes, if any, pertaining to the
gross income or gross receipts of Yale.
14. Maintenance and Inspections. GKF agrees to exercise due and proper
care in the maintenance of the Equipment and to keep the Equipment in good
state of repair consistent with Elekta's specifications and the intended use of
the Equipment, reasonable wear and tear excepted. Yale shall be liable to GKF
for all damage to the Equipment caused by the misuse, negligence, improper use
or other intentional or negligent acts or omissions of Yale's employees,
officers, agents and physicians (not employed by GKF or Elekta).
GKF (and Elekta) shall have the right of access to the Equipment for the
purpose of inspecting same at all reasonable times and upon reasonable notice
and with a minimum of interference to Yale's operations. In the event the
Equipment is improperly used by Yale or its employees, agents, officers and
physicians, GKF may service or repair the same as needed and such expense shall
be paid by Yale, unless the repair is covered by the Service Agreement
described in paragraph 16 hereof.
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15. EQUIPMENT MODIFICATIONS/ADDITIONS/UPGRADES. The parties agree
that the necessity and financial responsibility for modifications/additions/
upgrades to the Equipment, including the reloading for the Cobalt-60 source,
shall be discussed and mutually decided by GKF and Yale. If GKF and Yale agree
to reload the Cobalt-60 source (in approximately Year 8 of the initial Term)
GKF and Yale shall share in the expenses of this Cobalt-60 reload in the same
proportions as they share in revenues and expenses as calculated under
paragraph 7. If a reloading of the Equipment occurs, the original term shall be
extended by eight (8) years less the number of years remaining in the original
term.
16. SERVICE AGREEMENT. GKF warrants that it shall simultaneously with
the execution of this Agreement enter into and be solely responsible for the
costs of a Service Agreement with Elekta (the "Service Agreement"), a copy of
which is annexed to Elekta's Purchase Agreement with GKF as "Exhibit F". GKF
shall obtain from Elekta the right to assign GKF's rights under the Service
Agreement to Yale, which assignment shall be made upon Yale's written request
for the same. In no event shall such assignment relieve GKF from its obligation
to pay all costs associated with the Service Agreement.
17. TERMINATION. The Agreement may be terminated after the initial
eighteen (18) month period of service, and after each subsequent twelve (12)
month period of service, upon mutual agreement by the parties.
18. OPTIONS TO EXTEND AGREEMENT.
(a) Yale shall have the option at the end of the ten (10) year
initial Term to:
(1) Extend the term of the lease under this Agreement for an
additional term of five (5) years under the same terms and
conditions as are set forth herein.
(2) Terminate this Agreement. If Yale terminates this Agreement
at the end of the initial Term, GKF shall remove the Gamma
Knife within an agreed upon period of time after the
expiration of the (10) year initial Term.
Yale shall exercise one (1) of the two (2) options referred to
above, by mailing an irrevocable written notice thereof to GKF at Four
Embarcadero Center, Suite 3620, San Francisco, California 94111, by certified
mail, postmarked on or before the end of the ninth (9th) year of the initial
Term of this Agreement. Any such notice shall be sufficient if it states in
substance that Yale elects to exercise its option and states which of the two
(2) options referred to above Yale is exercising.
19. NO WARRANTIES BY GKF. As of the First Procedure Date, Yale shall
have thoroughly inspected the Equipment. Provided that all manufacturer's
warranties are assigned to
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Yale with the written consent of Elekta and without waiving any rights, Yale
has under this Agreement to require GKF to provide a Service Agreement to
service and maintain the Equipment. Yale agrees to look solely to the
manufacturer (Elekta) or to suppliers of the Equipment (and its software) for
any and all warranty claims. Any and all warranties made by Elekta will be
enforced by GKF in its good faith best efforts on behalf of Yale during the ten
(10) year initial Term hereof.
GKF SUPPLIES THE EQUIPMENT "AS IS" AND NOT BEING THE MANUFACTURER
OF THE EQUIPMENT OR THE MANUFACTURER'S AGENT, MAKES NO WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE EQUIPMENT'S
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION,
DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR THE LIKE.
GKF shall not be liable for any direct, indirect or consequential
losses or damages resulting from operation or use of the Equipment by Yale.
20. EVENTS OF DEFAULT BY YALE AND REMEDIES. The occurrence of any
one of the following shall constitute an Event of Default hereunder:
(a) Yale fails to make payment required pursuant to Paragraph 7
when due and such default conditions for a period of thirty
(30) days after written notice thereof from GKF or its
assignee is given to Yale.
(b) Yale attempts to remove, sell, transfer, encumber, sublet or
part with possession of the Equipment or any items thereof;
except as expressly permitted herein.
(c) Yale shall fail to observe or perform any of the other
obligations required to be observed or performed by Yale
hereunder and such failure shall continue uncured for twenty
(20) days after the expiration of a reasonable time
necessary to cure such default has lapsed and written notice
thereof has been received by Yale;
(d) Yale ceases doing business, makes an assignment for the
benefit of creditors, admits in writing its inability to pay
its debts as they become due, files a voluntary petition in
bankruptcy, is adjudicated a bankrupt or an insolvent, files
a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation,
dissolution or similar arrangement under any present or
future statute, law or regulation or files an answer
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admitting the material allegations of a petition filed
against it in any such proceeding, consents to or
acquiesces in the appointment of a trustee, receiver, or
liquidator of it or of all or any substantial part of
its assets or properties, or it or its shareholders
shall take any action looking to its dissolution or
liquidation.
(e) Within sixty (60) days after the commencement of any
proceedings against Yale seeking reorganization,
arrangement, readjustment, liquidation, dissolution or
similar relief under any present or future statute, law
or regulation, such proceedings shall not have been
dismissed, or if within thirty (30) days after the
appointment without Yale's consent or acquiescence of
any trustee, receiver or liquidator of it or of all or
any substantial part of its assets and properties, such
appointment shall not be vacated.
Upon the occurrence of an Event of Default, GKF may, at its option, do any
or all of the following; (i) by notice to Yale, terminate this Agreement as to
the Equipment in default, wherever situated, and for such purposes, enter upon
the Site without liability for so doing or GKF may cause Yale and Yale hereby
agrees to return the Equipment to GKF at Yale's sole cost and expense; (ii)
recover from Yale, as liquidated damages for the loss of the bargain and not as
a penalty, an amount equal to the present value of the unpaid estimated future
lease payments by Yale to GKF through the end of the then current Agreement term
less the reasonable salvage value of the Equipment discounted at the rate of
nine percent (9%), which payment shall become immediately due and payable.
Unpaid estimated future lease payments shall be based on the prior twelve (12)
months' lease payments with an annual five percent (5%) increase; (iii) sell,
dispose of, hold, use or lease the Equipment in default, as GKF in its sole
discretion may determine (and GKF shall not be obligated to give preference to
the sale, lease or other disposition of the Equipment over the sale, lease or
other disposition of similar Equipment owned or leased by GKF). In any event,
Yale shall, without further demand, pay to GKF an amount equal to all sums due
and payable for all periods up to and including the date on which GKF had
declared this Agreement to be in default.
In the event that Yale shall have paid to GKF the liquidated damages
referred to in (ii) above, GKF hereby agrees to pay to Yale promptly after
receipt thereof, all rentals or proceeds received from the reletting or sale of
the Equipment during the balance of the initial Term (after deduction of all
expenses incurred by GKF; said amount never to exceed the amount of the
liquidated damages paid by Yale). Yale agrees that GKF shall have no obligation
to sell the Equipment. Yale shall, in any event, remain fully liable for
reasonable damages as provided by law for all costs and expenses incurred by GKF
on account of such default, including but not limited to all court costs and
reasonable attorney's fees.
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21. Events of Default by GKF and Remedies. The occurrence of any one of
the following shall constitute an Event of Default hereunder:
(a) GKF fails to enter into and maintain in force the Service
Agreement as required under paragraph 16 hereof.
(b) Elekta or any successor Secured Party declares GKF in default
of any financing agreements entered into by GKF to finance the
acquisition of the Equipment.
(c) GKF fails to observe or perform any other obligation required
to be observed or performed by GKF hereunder and such failure
shall continue uncured for twenty days after the expiration of
a reasonable time necessary to cure such default has lapsed
and written notice thereof has been received by GKF.
(d) GKF ceases doing business, makes an assignment for the benefit
of creditors, admits in writing its inability to pay its debts
as they become due, files a voluntary petition in bankruptcy,
is adjudicated a bankrupt or an insolvent, files a petition
seeking for itself any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law or
regulation or files an answer admitting the material
allegations of a petition filed against it in any such
proceeding, consents to or acquiesces in the appointment of a
trustee, receiver, or liquidator of it or of all or any
substantial part of its assets or properties, or it or its
shareholders shall take any action looking to its dissolution
or liquidation.
(e) Within sixty (60) days after the commencement of any
proceedings against GKF seeking reorganization, arrangement,
readjustment, liquidation, dissolution or similar relief under
any present or future statute, law or regulation, such
proceedings shall not have been dismissed, or if within thirty
(30) days after the appointment without GKF's consent or
acquiescence of any trustee, receiver or liquidator of it or
of all or any substantial part of its assets and properties,
such appointment shall not be vacated.
Upon the occurrence of an Event of Default described in sub-paragraph (b)
above, Yale's exclusive remedy shall be that described in paragraph 11 above.
Upon the occurrence of any other Event of Default, Yale may, at its option, do
any or all of the following: (i) by notice to GKF terminate this Agreement as to
the Equipment and, in such event, GKF shall remove the
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Equipment at GKF's sole cost and expense or, in the absence of removal by GKF
within a reasonable period of time after written request therefor, Yale may
remove the Equipment with all due care and store the Equipment at GKF's sole
cost and expense; and (ii) recover from GKF such reasonable damages as may be
realized by Yale as a result of such breach or default. GKF shall also be liable
for all costs and expenses incurred by Yale on account of any such default,
including but not limited to all court costs and reasonable attorney's fees.
Except as provided in the first sentence of this paragraph, the rights afforded
Yale hereunder shall not be deemed to be exclusive, but shall be in addition to
any other rights or remedies provided by law.
22. Insurance.
(a) During the initial Term (and any successive terms) GKF shall,
at its own cost and expense, keep in effect an all risk and hazard insurance
policy covering the Equipment. The all risk and hazard insurance policy shall be
for an amount not less than the replacement cost of the Equipment. During the
initial Term of this Agreement (and any successive terms), Yale shall, at its
own cost and expense, keep in effect public liability and professional liability
insurance policies concerning the operation of the Equipment by Yale. Said
policies shall be in the amounts of not less than $1,000,000.00 per occurrence
and $5,000,000.00 in aggregate per year. Yale and GKF, their successors and
assigns, shall be named as additional insureds and/or loss payees on the
insurance policies maintained hereunder by the other party. All policies shall
provide for a waiver of the right of subrogation as to each additional insured.
Evidence of such insurance coverages shall be furnished by both parties to the
other party upon written request, by no later than the First Procedure Date.
(b) If the Equipment is rendered unusable as a result of any
physical damage to, or destruction of, the Equipment. Yale shall give to GKF
immediate notice. GKF shall determine, within thirty (30) days after the date of
occurrence of such damage or destruction, whether the Equipment can be repaired.
In the event GKF determines that the Equipment cannot be repaired. GKF, at its
sole cost and expense (subject to Yale's obligations elsewhere in this
Agreement) shall promptly replace the Equipment. This Agreement shall continue
in full force and effect as though such damage or destruction had not occurred.
In the event GKF determines that the Equipment can be repaired, GKF shall cause
the Equipment to be promptly repaired.
23. Notices. Any notices required under this Agreement shall be sent in
writing and shall be deemed to have been given if delivered by hand or mailed by
certified or registered mail to the following addresses:
To GKF: Craig K. Tagawa, C.E.O.
Four Embarcadero Center, Suite 3620
San Francisco, CA 94111
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To Yale: Alvin Greenberg, M.D. Administrator
Yale New Haven Ambulatory Services Corporation
229 George Street
New Haven, CT 06510
or to such other addresses as either party may specify for the reception of
notice from time to time in writing to the other party. Any such notice shall
be effective only when actually received by the party to whom addressed.
24. Integrated/Supersedure. This Agreement contains the full and entire
Agreement between the parties hereto, and no oral or written understanding is
of any force or effect whatsoever unless expressly contained in a writing
executed subsequent to the date of this Agreement.
25. Waivers. To the extent that GKF fails to chooses not to pursue any of
its remedies under this Agreement or pursuant to applicable law, such shall not
prejudice GKF's right to pursue any of those remedies at any future time and
shall not constitute a waive of GKF's rights.
26. Assignments. This Agreement is binding upon and shall inure to the
benefit of the permitted successors or assigns of the respective parties
hereto, except that neither party may assign its rights or obligations under
this agreement without the express written consent of the other (which consent
shall not be unreasonably withheld).
27. Amendments. This Agreement shall not be amended or altered in any
manner unless such amendments or alteration is in writing signed by both
parties.
28. Record Keeping Requirements. To the extent required by the regulations
promulgated by the Health Care Financing Administration pursuant to Section 952
of the Omnibus Reconciliation Act of 1980, GKF shall:
(a) Until the expiration of four (4) years following the furnishing
of services pursuant to this Agreement, GKF agrees to make
available upon written request of the Secretary of Health and
Human Services or the U.S. Comptroller General or any of their
duly authorized representatives, this Agreement, any books,
documents and records necessary to verify the nature and extent
of costs incurred by Yale by reason of the activities of GKF
under this Agreement; and
(b) If GKF elects to delegate any of its duties under this Agreement
(which have a cost or value of Ten Thousand
16
<PAGE> 17
only 00/100 [$10,000.00] Dollars or more over a twelve (12) month
period) to a related organization. GKF may do so only through a
subcontractor which is consented to by Yale, it being understood that,
inasmuch as Yale is entering into this Agreement in reliance on GKF's
reputation and expertise, that Yale shall be the sole judge of the
reputation and expertise of the proposed delegatee, and only through a
subcontractor which provides that, until the expiration of four (4)
years following the furnishing of services under such subcontract, the
related organization shall make available, on request of the Secretary
of Health and Human Services or the U.S. Comptroller General or any of
their authorized representatives, the subcontract, and books,
documents and records of the nature and extent of costs incurred by
Yale by reason of activities of such related organization under such
subcontract. No delegation by GKF of its duties hereunder shall relief
GKF from liability hereunder.
29. Miscellaneous Provisions.
(a) The invalidity or unenforceability of any portion or provision of this
Agreement shall not effect the validity or enforceability or any other
portion, nor shall either party's implied or express consent to the
breach or waiver of any provision of this Agreement constitute a
waiver of such provision as to any subsequent breach.
(b) In the event of any claim or controversy arising hereunder, the
prevailing party in such claim or controversy shall be entitled to a
reasonable attorneys' fee in addition to whatever other relief said
party would be otherwise entitled.
(c) Force Majeure. Failure to perform by either party will be excused in
the event of any delay or inability to perform its duties under this
Agreement directly or indirectly caused by conditions beyond its
reasonable control including without limitation, fires, floods,
earthquakes, snow, ice, disasters. Acts of God, accidents, riots,
wars, operation of law, strikes, governmental action or regulations,
shortages of labor, fuel, power, materials, manufacturer delays or
transportation problems.
17
<PAGE> 18
(d) Choice of Law. This Agreement shall be governed by, and construed,
enforced and interpreted in accordance with the laws of the State of
Connecticut and the laws of the United States of America applicable to
transactions within the State of Connecticut.
(e) Any controversy or claim arising out of or relating to this contract,
or the breach thereof, shall be settled by arbitration to be conducted
in Atlanta, Georgia in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, and Judgment upon the
award rendered by the arbitrators may be entered in any Court having
jurisdiction thereof.
IN WITNESS WHEREOF, the parties have signed this Agreement on the day and
year first above written.
YALE-NEW HAVEN AMBULATORY GK FINANCING, LLC
SERVICES CORPORATION
BY: /s/ BART PRICE /s/ CRAIG K. TAGAWA
-------------------------------- ----------------------------
CRAIG K. TAGAWA
-------------------------------- Chief Executive Officer
Its: President
--------------------------
18
<PAGE> 1
Exhibit 21.0
The subsidiaries of American Shared Hospital Services are:
MMRI, Inc.
a California corporation
Embarcadero Transition Corp. III
a California corporation
American Shared Radiosurgery Services
a California corporation
European Shared Medical Services Limited
an English registered company
African American Church Health and Economic Services, Inc.
a California corporation
ACHES Insurance Services, Inc.
a California corporation
GK Financing, LLC
a California limited liability company
<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 Plan of American Shared Hospital Services; the Registration
Statement (Form S-8, No. 33-45999) pertaining to the American Shared Hospital
Services 1991 Employee Stock Bonus Plan; the Registration Statement (Form S-8,
No. 333-08009) pertaining to the 1995 Stock Option Plan of American Shared
Hospital Services; the Registration Statement, as amended, (Form S-3, No.
333-12879) pertaining to the registration of 2,679,047 Common Shares of American
Shared Hospital Services; and 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 March 12, 1999, 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, 1998.
March 29, 1999 /s/ Grant Thornton LLP
Stockton, California
<PAGE> 1
EXHIBIT 23.2
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 27, 1998, with respect to the consolidated
financial statements and schedule of American Shared Hospital Services included
in the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
March 29, 1999
Walnut Creek, California
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
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<RECEIVABLES> 1,228,000
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<COMMON> 11,087,000
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