-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pl42pdupUGr+FdiJNsfShyYS2RkkdOZ4EX3yofC1aBlVrOx1Zj+RQa/cbXxzzcZy uUks4lY54ukKuAOZDpvjHg== 0000950149-95-000674.txt : 19951027 0000950149-95-000674.hdr.sgml : 19951027 ACCESSION NUMBER: 0000950149-95-000674 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19951026 SROS: AMEX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SHARED HOSPITAL SERVICES CENTRAL INDEX KEY: 0000744825 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 942918118 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 033-63721 FILM NUMBER: 95584522 BUSINESS ADDRESS: STREET 1: 4 EMARCADERO CENTER STE 3620 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157885300 MAIL ADDRESS: STREET 1: 4 EMBARCADERO CENTER CITY: SAN FRANCISCO STATE: CA ZIP: 94111 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 1995 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMERICAN SHARED HOSPITAL SERVICES (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 8099 94-2918118 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------ FOUR EMBARCADERO CENTER, SUITE 3620 SAN FRANCISCO, CALIFORNIA 94111-4115 (415) 788-5300 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ ERNEST A. BATES, M.D. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER AMERICAN SHARED HOSPITAL SERVICES FOUR EMBARCADERO CENTER, SUITE 3620 SAN FRANCISCO, CALIFORNIA 94111-4115 (415) 788-5300 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ WITH A COPY TO: DANIEL G. KELLY, JR. SIDLEY & AUSTIN 875 THIRD AVENUE NEW YORK, NEW YORK 10022 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION REGISTERED REGISTERED PER UNIT(1)(2) PRICE(1)(2) FEE(2)
- -------------------------------------------------------------------------------- Common Shares No Par Value....... 1,193,000 shares $1.56 $1,861,080.00 $641.75 - ------------------------------------------------------------------------------------------------------ Warrants to purchase Common Shares......................... 539,000 Warrants -- -- $0 - ------------------------------------------------------------------------------------------------------ Common Shares Underlying Warrants....................... 539,000 shares $1.56 $840,840.00 $289.95 - ------------------------------------------------------------------------------------------------------ Total Registration Fee........... $931.70
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the basis of average high and low prices of the Common Shares on the American Stock Exchange on October 20, 1995. The maximum offering price of the Common Shares is deemed to be the aggregate of their market value. (2) Pursuant to Rule 457(g) under the Securities Act of 1933, as amended, no separate registration fee is being paid in respect of the Warrants because a full registration fee is being paid for the Common Shares underlying such Warrants. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 AMERICAN SHARED HOSPITAL SERVICES ------------------------ CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
LOCATION IN REGISTRATION STATEMENT OR FORM S-1 ITEM NUMBER AND CAPTION PROSPECTUS - ------------------------------------------------- ------------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus..... Front Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.............................. Inside Front Cover Page and Outside Back Cover Page of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............... Risk Factors 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Determination of Offering Price 6. Dilution................................... * 7. Selling Security Holders................... Selling Securityholders 8. Plan of Distribution....................... Plan of Distribution 9. Description of Securities to be Registered................................. Description of Securities 10. Interests of Named Experts and Counsel..... Experts 11. Information with Respect to the Registrant: (a) Description of Business............... Management's Discussion and Analysis of Financial Condition and Results of Operations; Business (b) Description of Property............... Properties (c) Legal Proceedings..................... Legal Proceedings (d) Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters................... Market Price of and Dividends on the Common Shares (e) Financial Statements.................. Index to Consolidated Financial Statements; Consolidated Financial Statements (f) Selected Financial Data............... Selected Consolidated Financial Data (g) Supplementary Financial Information... Consolidated Financial Statements (h) Management's Discussion and Analysis of Financial Condition and Results of Operations............................ Management's Discussion and Analysis of Financial Condition and Results of Operations (i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. * (j) Directors and Executive Officers..... Management (k) Executive Compensation................ Management
- --------------- * Not Applicable 3
LOCATION IN REGISTRATION STATEMENT OR FORM S-1 ITEM NUMBER AND CAPTION PROSPECTUS - ------------------------------------------------- ------------------------------------------- (l) Security Ownership of Certain Beneficial Owners and Management........... Principal Shareholders (m) Certain Relationships and Related Transactions......................... Management 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................ Part II, Indemnification of Directors and Officers; Undertakings
4 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, OCTOBER 26, 1995 PROSPECTUS 1,732,000 COMMON SHARES (INCLUDING 539,000 COMMON SHARES ISSUABLE UPON THE EXERCISE OF WARRANTS) AND WARRANTS TO PURCHASE 539,000 COMMON SHARES AMERICAN SHARED HOSPITAL SERVICES The common shares, no par value ("Common Shares"), of American Shared Hospital Services, a California corporation ("ASHS" and together with its subsidiaries, the "Company"), warrants to purchase Common Shares ("Warrants") and the Common Shares issuable upon exercise of such Warrants (collectively, the "Securities") covered by this Prospectus may be sold from time to time by the securityholders specified in this Prospectus or their successors in interest (the "Selling Securityholders"). See "Selling Securityholders." On May 17, 1995, the Company repurchased $17,694,000 principal amount of its senior subordinated notes from certain of the Selling Securityholders for consideration comprised of cash, 819,000 Common Shares and 216,000 Warrants. Pursuant to the terms of the Note Purchase Agreement dated as of May 12, 1995, upon the occurrence of certain subsequent events the Company issued to such Selling Securityholders an additional 374,000 Common Shares and 98,000 Warrants. The repurchase of the senior subordinated notes was part of an overall financial restructuring in which the Company also restructured most of its medical equipment leases and issued its primary equipment lessor 225,000 Warrants. The 1,193,000 Common Shares, 539,000 Warrants issued in these transactions and 539,000 Common Shares underlying such Warrants are the Securities to which this Prospectus relates. Such Securities are being registered by the Company under the Securities Act of 1933, as amended (the "Act") pursuant to the terms of a Registration Rights Agreement dated as of May 17, 1995 among the Company and the Selling Securityholders (the "Registration Rights Agreement"). The Common Shares are listed on the American Stock Exchange ("AMEX") under the trading symbol "AMS." The Common Shares are also listed on The Pacific Stock Exchange ("PSE"). Each such exchange has commenced a review procedure to determine whether the Common Shares will remain listed. See "Risk Factors -- Trading of Common Shares; Possible Delisting of Common Shares." On October 20, 1995 the last reported sale price of the Common Shares on the AMEX was $1.50 per share. The Company will not receive any of the proceeds from the sale of the Securities being offered by the Selling Securityholders. The Selling Securityholders may, from time to time, sell the Securities at market prices prevailing on the AMEX or PSE, respectively, at the time of sale or sell the Securities under certain other terms. See "Plan of Distribution." THE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THE PROSPECTUS IS OCTOBER , 1995 5 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center, New York, New York 10007 and Northwestern Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained upon written request addressed to the Commission, Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois, at prescribed rates. The Company's Common Shares are listed on the American Stock Exchange and The Pacific Stock Exchange, and such reports, proxy statements, and other information concerning the Company can also be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York 10006 and at the offices of The Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104. Statements contained in this Prospectus as to the contents of any agreement or other document are not necessarily complete, and in each instance reference is made to the copy of such agreement or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company will provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, upon oral or written request, a copy of any or all of the documents incorporated herein by reference (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents). Written or telephone inquiries should be directed to American Shared Hospital Services, Four Embarcadero Center, Suite 3620, San Francisco, California 94111, Attention: Richard Magary (telephone: (415) 788-5300). Additional information regarding the Company and the Securities offered hereby is contained in the Registration Statement on Form S-1 and the exhibits (the "Registration Statement") filed with the Commission under the Act. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is made to the Registration Statement which may be inspected without charge at, and copies thereof may be obtained at prescribed rates from, the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. No dealer, salesperson or other person has been authorized to give any information or to make any representations in connection with the offer and sale of the Securities other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the Securities offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date of this Prospectus. 2 6 RISK FACTORS In addition to the other information and financial data set forth elsewhere in this Prospectus, the following specific factors should be considered carefully by prospective investors in evaluating the Company, its businesses and an investment in the Securities. DEFAULTS, POTENTIAL BANKRUPTCY AND RESTRUCTURING As a result of a serious cash shortage during the second half of 1992, the Company failed to make the required semi-annual interest payments under its 14 3/4% Senior Subordinated Notes Due 1996 (the "14 3/4% Notes") and Senior Subordinated Exchangeable Reset Notes Due 1996 (the "16 1/2% Notes") (the 14 3/4% Notes and the 16 1/2% Notes, collectively, are referred to as the "Subordinated Notes") that were due beginning on October 15, 1992. In addition, the Company suspended lease payments on a significant portion of its equipment leases beginning on December 1, 1992. The non-payment of interest and the suspension of lease payments caused defaults under the Company's Subordinated Notes and equipment leases and gave the holders of such obligations as well as the lender under the Company's senior secured working capital facility the right to declare all amounts immediately due and payable and to reclaim substantially all of the Company's diagnostic imaging equipment and other assets. The Company stated that if any of such creditors or lessors had exercised their rights, the Company would have been forced to seek a liquidation under Chapter 7 or a reorganization under Chapter 11 of the United States Bankruptcy Code. Following lengthy negotiations, the Company restructured its debt and most of its lease obligations. See "The Company -- Financial Restructuring." The restructuring had the effect of curing all defaults under the indentures governing the Subordinated Notes and the equipment leases. The Company nevertheless remains highly leveraged and has substantial fixed payment obligations. If defaults occur in the future, the Company's creditors and lessors would have the ability to accelerate the Company's obligations and seize substantially all of its medical imaging equipment and other assets. There can be no assurance that the Company will be able to avoid such defaults in the future. RECENT LOSSES; FINANCIAL CONDITION OF THE COMPANY The Company has reported significant operating losses in each of the last three fiscal years. The net loss of the Company (after extraordinary items) was $9,515,000, $15,644,000 and $5,175,000 for the years ended December 31, 1992, 1993 and 1994, respectively. The Company also reported a loss (before extraordinary gain on early extinguishment of debt and a charge to reflect the adoption of a new accounting standard) of $3,628,000 for the six month period ended June 30, 1995. The Company had a net capital deficiency of $22,341,000 at December 31, 1994 and $8,584,000 at June 30, 1995. The reduction in the net capital deficiency at June 30, 1995 was due to an extraordinary gain of $20,378,000 from the early extinguishment of debt at a discount. Unless the Company is able to increase its revenues and/or increase its operating margins through a reduction in its cost of operations, it will be unable to achieve profitability. There can be no assurance that the Company will be profitable in the future. HIGH DEBT LEVEL Even following the restructuring, in which the Company was able to repurchase at a significant discount and retire $17,694,000 principal amount of Subordinated Notes, the Company remains highly leveraged. At June 30, 1995, the Company had approximately $8,530,000 of long-term debt, $773,000 of Subordinated Notes and approximately $25,800,000 of obligations under capital leases ($8,512,000 of which is due within one year). Scheduled payments under debt obligations and capital leases are $6,031,000 during the last six months of 1995 and $12,501,000 during 1996. The Company's available cash flow during the first six months of 1995 would have been insufficient to meet this level of cash requirements. Accordingly, the Company during the next 18 months must increase its revenues and reduce its cost structure in order to meet its obligations as they become due. There can be no assurance that the Company will be able to meet its scheduled obligations as they become due in the next 12 to 18 months. Further, the high debt level may 3 7 adversely affect the Company's ability to offer technologically advanced equipment in the future to customers, which may adversely affect the Company's ability to secure or retain profitable contracts. ACCESS TO CAPITAL AND FINANCING The Company is severely limited by covenants in its credit agreements from incurring additional indebtedness without the consent of its lenders. In addition, the Company has pledged substantially all of its liquid assets and substantially all of its tangible personal property and real property to secure its existing debt. As a result, the Company has very little financial flexibility to address unforeseen cash needs, to fund future growth or to finance necessary equipment purchases and upgrades. NECESSITY TO REFINANCE MATURING INDEBTEDNESS A substantial portion of the Company's funded debt, including the Subordinated Notes which mature in October 1996, will mature in 24 to 48 months. During the last six months of 1995, and during 1996 and 1997, $4,377,000, $10,411,000 and $8,655,000 plus the then outstanding balance (currently approximately $3,200,000) of the New Revolver (as defined below) will come due. The Company will not have sufficient cash resources to pay these obligations at maturity. Accordingly, the Company will be required to seek new financing to meet its maturing obligations. There can be no assurance that such financing will be available or that the terms of any such financing will be acceptable to the Company. TRADING MARKET FOR COMMON SHARES; POSSIBLE DELISTING OF COMMON SHARES The Common Shares are currently traded on the American Stock Exchange and The Pacific Stock Exchange. The announcement by the Company of the terms of a restructuring in early April 1994 was followed by a significant decline in the market price of the Common Shares. The Company's losses and net capital deficiency have caused the Company to no longer satisfy the minimum criteria with respect to net income and net worth for continued listing published by the AMEX. The per share trading price of the Common Shares is also below the minimum criteria for continued listing on such exchange. The closing per share price was $1.625 at June 30, 1995. The Company has been advised that its net capital deficiency is inconsistent with the criteria applied by the PSE for continued listing on such exchange. The AMEX and PSE are currently reviewing the Company's financial condition following the restructuring in order to determine whether the Common Shares will continue to be listed on such exchanges. Accordingly, no assurances can be given that a holder of Common Shares will be able to sell Common Shares in the future on a national or regional securities exchange, or that there will be an active trading market for the Common Shares or as to the price at which the Common Shares might trade. OFFER AND SALE OF SECURITIES MAY DEPRESS MARKET PRICE OF COMMON SHARES The Selling Securityholders may offer and sell Common Shares in a number of different ways. See "Plan of Distribution." In the event that the Selling Securityholders do not sell their Common Shares in an underwritten offering, the offer and sale process may result in temporary disruptions in the market and adversely affect the price of Common Shares. In any event, the availability of the Securities (which represent approximately 30% of the fully diluted Common Shares after exercise of the Warrants) for sale by the Selling Securityholders may depress the market price of Common Shares for a significant period. NO DIVIDENDS The Company is prohibited by its credit agreements from paying dividends on the Common Shares and does not anticipate being in a position to pay dividends for the foreseeable future. CONTROL BY MAJOR SHAREHOLDERS As of October 6, 1995, Ernest A. Bates, M.D., the Company's Chairman of the Board and Chief Executive Officer, owns 2,666,000 Common Shares through directly owned shares and currently exercisable options, which represents approximately 46% of the Company's outstanding Common Shares. In addition, as a 4 8 result of Securities issued to them pursuant to the terms of the Note Purchase Agreement, the Selling Securityholders own directly or through immediately exercisable Warrants 1,732,000 Common Shares, representing approximately 37% of the outstanding securities of the Company. (On October 6, 1995, The Board of Directors increased the number of Directors, creating one vacancy to be filled by an independent third party nominated by the holders of the Noteholder Warrants, as defined below.) Thus, Dr. Bates and any of the Selling Securityholders acting together will have the power to determine the outcome of a shareholder vote with respect to any fundamental corporate transaction, including mergers and the sale of all or substantially all of the Company's assets. This could have the effect of blocking transactions that a majority of the other shareholders would otherwise find attractive. DEPENDENCE ON KEY PERSONNEL The Company's operations and business are dependent to a significant extent upon the continued active participation of its founder, Chairman of the Board and Chief Executive Officer, Ernest A. Bates, M.D. In the past, Dr. Bates has personally guaranteed various financial obligations of the Company, which has enabled the Company to secure insurance and obtain credit. Certain of the Company's lenders have also sought to insure the continued involvement of Dr. Bates by requiring his personal guarantee of a significant amount of the Company's debt. Should Dr. Bates become unavailable to the Company for any reason, it could have a material adverse effect on the Company's business, results of operations, financial condition and prospects. TECHNOLOGY Diagnostic imaging technology is subject to continuous development and change. New technological breakthroughs may require the Company to acquire new or technologically improved products to service its customers. There can be no assurance that the Company's financial resources will enable it to make the investment necessary to acquire such products. The failure to acquire or use new technology and products could have a material adverse effect on the Company's business and results of operations. REIMBURSEMENT Customers to which the Company provides services generally receive payment for patient care from governmental and private insurer reimbursement programs. As a result, a significant adverse change in such reimbursement policies might have a material adverse effect on the Company's business and results of operations. As a result of federal cost-containment legislation currently in effect, hospital in-patients covered by federally funded reimbursement programs are classified into diagnostic related groups ("DRG") in accordance with the patient's diagnosis, necessary medical procedures and other factors. Patient reimbursement is limited to a predetermined amount for each DRG. Because the reimbursement payment is predetermined, it does not necessarily cover the cost of all medical services actually provided. Currently the DRG system is not applicable to out-patient services, and consequently many health care providers have an incentive to use contract shared services on an out-patient basis. If the DRG program is at some future date expanded to include out-patient reimbursement, such change could have a material adverse effect on the Company's business and results of operations. RISK OF ADVERSE HEALTHCARE REFORM LEGISLATION In addition to extensive existing government healthcare regulation, there are numerous initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services, including a number of proposals that would significantly limit reimbursement under Medicare and Medicaid. It is not clear at this time what proposals, if any, will be adopted or, if adopted, what effect such proposals would have on the Company's business. Aspects of certain of these healthcare proposals, such as cutbacks in the Medicare and Medicaid programs, containment of healthcare costs on an interim basis by means that could include a short-term freeze on prices charged by healthcare providers, and permitting greater state flexibility in the administration of Medicaid, could adversely affect the Company. There can be no assurance that any currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have an adverse effect on the Company. 5 9 GOVERNMENT REGULATIONS Many aspects of the medical industry in the United States are subject to a high degree of governmental regulation. Generally, failure to comply with any such regulations may result in denial of the right to conduct business and significant fines. For example, legislation in various jurisdictions requires that health facilities obtain a Certificate of Need ("CON") prior to making expenditures in excess of specified amounts. The CON procedure can be expensive and time consuming, and consequently a health care facility may elect to use the Company's services rather than purchase equipment subject to CON requirements. CON requirements vary from state to state as they apply to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures before operating its services and in other jurisdictions customers must comply with CON procedures before using the Company's services. An increase in the complexity or substantive requirements of such federal, state and local laws and regulations could adversely affect the Company's business. LABOR SHORTAGES Shortages of licensed technicians in the diagnostic imaging fields in certain areas of the country could adversely affect the Company's labor costs in those areas should the shortage become acute. COMPETITION The Company faces severe competition from other providers of diagnostic imaging services, some of which have greater financial resources than the Company, and from hospitals, imaging centers and physician groups owning in-house diagnostic units. Significant competitive factors in the diagnostic services market include equipment price and availability, performance quality, ability to upgrade equipment performance and software, service and reliability. The Company's financial problems have adversely affected its ability to obtain and retain certain profitable customer contracts, and its high debt burden may adversely affect its ability to offer technologically advanced equipment in the future. There can be no assurance that the Company will be able to retain its competitive position in the medical imaging industry following the restructuring. 6 10 THE COMPANY The Company provides shared diagnostic imaging services to approximately 224 hospitals, medical centers and medical offices located in 20 states and one hospital in the United Kingdom. The four diagnostic imaging services provided by the Company are Magnetic Resonance Imaging (MRI), Computer Axial Tomography Scanning (CT), Ultrasound and Nuclear Medicine. In addition, the Company provides a Gamma Knife to a major university medical center and has an option to acquire a second Gamma Knife located in another major university medical center. ASHS's address is Four Embarcadero Center, Suite 3620, San Francisco, California 94111 and its telephone number is (415) 788-5300. 7 11 FINANCIAL RESTRUCTURING GENERAL On May 17, 1995, pursuant to the terms of the Note Purchase Agreement dated as of May 12, 1995 (the "Note Purchase Agreement"), the Company repurchased (the "Notes Repurchase") $17,694,000 principal amount of its Subordinated Notes from certain holders for consideration consisting of $3,893,000 in cash, 819,000 Common Shares and immediately exercisable Warrants to purchase an additional 216,000 Common Shares, at an exercise price of $0.75 per share, representing 20% and 5%, respectively, of the fully diluted Common Shares. Pursuant to the terms of the Note Purchase Agreement, these holders were issued an additional 374,000 Common Shares and 98,000 Warrants following the approval by the Company's shareholders of the grant to the Company's Chairman and Chief Executive Officer of an option to purchase 1,495,000 Common Shares. The 1,193,000 Common Shares and 314,000 Warrants issued as part of the Notes Repurchase, plus 225,000 Warrants issued pursuant to the Lease Restructuring (as defined below), and the Common Shares issuable upon exercise of such Warrants, are the Securities to which this Prospectus relates. The Notes Repurchase was the final event in a broad restructuring of the Company's capital structure that commenced in mid-1992. As part of the restructuring, the Company was able to amend most of the capital and operating leases covering its medical equipment (the "Lease Restructuring") to reduce monthly payments, eliminate $26,548,000 of indebtedness (including principal and accrued and unpaid interest) through the Notes Repurchase and replace its operating line of credit. On the date of the Notes Repurchase, the Company entered into three new credit facilities totalling $8,000,000, which provided funds for the Notes Repurchase and working capital, as well as term debt reduction and the refinancing of certain medical equipment. As a result, the Company was able to cure all existing defaults on its debt and equipment leases. BACKGROUND Beginning in 1992, the Company experienced substantial declines in revenues from its businesses. The revenue declines, which were caused by increased competition and reduced acceptance of the services offered by the Company, combined with high fixed payment obligations under existing equipment leases and the Subordinated Notes, led to a serious cash shortage in the second half of 1992. During this period the Company concluded that revenues from its operating activities would be insufficient to meet its fixed obligations and determined that these obligations would have to be restructured. The Company failed to make the required semi-annual payments due under the Subordinated Notes beginning on October 15, 1992. In addition, the Company suspended lease payments on a significant portion of its leases beginning on December 1, 1992. As a result of these actions, both the Subordinated Notes and the equipment leases relating to substantially all of the Company's medical imaging equipment were in default. This gave the holders of such obligations, as well as the lender under the Company's secured working capital facility, the right to declare all amounts immediately due and payable and, in the case of the leases, reclaim substantially all of the Company's medical imaging equipment. The Company stated that any such action by the holders would have forced the Company to seek a liquidation under Chapter 7 or a reorganization under Chapter 11 of the United States Bankruptcy Code. ELEMENTS OF RESTRUCTURING In light of the foregoing, the Company began negotiations in late 1992 to restructure its equipment lease and debt obligations to more closely match anticipated revenues and costs. These negotiations led to the Lease Restructuring in December 1994, and the Notes Repurchase and replacement of the Company's revolving credit facility in May 1995. Each of these events is described below: 1. Revolving Credit Facility. The Company's previous revolving credit facility provided for borrowings up to $5,000,000 based on a formula relating to eligible accounts receivable and was secured by a lien on the accounts receivable and inventory of CuraCare, Inc. ("CuraCare"), a Delaware corporation which is a wholly-owned subsidiary of ASHS. During the period in which defaults existed under the Subordinated Notes and equipment leases, the Company's revolving credit lender gradually reduced the funds available to the 8 12 Company under the facility. On December 31, 1994, in connection with the sale of a majority of the Company's respiratory therapy contracts and its respiratory therapy registry, the Company provided cash collateral equal to the amount borrowed under the revolving credit facility. The facility was repaid in full at maturity on February 28, 1995. 2. Lease Restructuring. On December 30, 1994 (effective as of November 1, 1994 for most capital leases and January 1, 1994 for operating leases) the Company and General Electric Company, a New York corporation acting through GE Medical Systems ("GE Medical") entered into the Lease Restructuring. American Shared-CuraCare, a California general partnership ("AS-C") whose partners are ASHS and a wholly-owned subsidiary of ASHS, is the entity through which the Company leases its MRI medical imaging equipment. In the Lease Restructuring, substantially all equipment financed by AS-C under capital leases (the "Existing Capital Leases") for which GE Medical was the lessor were restructured and after restructuring continue to meet the financial statement accounting criteria under generally accepted accounting principles ("GAAP") to be accounted for as capital leases. Under the restructured leases, scheduled payments by AS-C provide for the retirement of the unpaid principal balance under the Existing Capital Leases over the extended and restructured lease terms which will expire on various dates between December 31, 1996 through December 31, 1999. AS-C will be entitled to purchase the leased equipment at its fair market value, or to extend the relevant lease, at the end of the lease term, in each case on terms offered by GE Medical at that time. All operating leases in effect at January 1, 1994 under which GE Medical was the lessor of equipment to AS-C (the "Restructured GE Operating Leases") were amended to extend and restructure the payment schedules. AS-C will be entitled to purchase the leased equipment at its fair market value, or to extend the relevant lease, at the end of the lease term, in each case on terms offered by GE Medical at that time. As a result of the modification of lease terms, the Restructured GE Operating Leases meet the financial statement accounting criteria under GAAP to be accounted for as capital leases and are accounted for as such. The present value of the net minimum lease payments on the Company's capital leases was $25,812,000 as of June 30, 1995. As part of the Lease Restructuring, GE Medical converted various lease and service payments that were due and unpaid, and a portion of the restructured lease payments for the period from January 1, 1994 through March 31, 1994, totalling approximately $3,000,000, into a $2,000,000 promissory note dated January 1, 1995 (the "GE Note"). The GE Note was issued by AS-C to GE Medical and is guaranteed by ASHS and certain of its subsidiaries. The GE Note will mature in February 2002 and bears interest at a rate of 4% per annum. Monthly payments of interest only are due through November 1995 and thereafter the principal balance will amortize in 75 equal monthly installments until maturity. The GE Note and the Company's guarantee are secured by a second priority lien on the accounts receivable of ASHS and CuraCare and a first priority lien on certain medical imaging equipment. The GE Note contains restrictive covenants that limit the ability of the Company to incur debt, create liens, pay dividends on the Common Shares, make capital expenditures, acquire or dispose of assets and merge with other companies. In connection with the issuance of the GE Note, the Company issued GE Medical on December 30, 1994 an immediately exercisable warrant (the "December Warrant") to purchase 97,853 Common Shares for $0.01 per share until March 31, 1996. On May 17, 1995, an additional warrant was issued to purchase 127,147 Common Shares until September 30, 1996 (the "May Warrant", the December Warrant and the May Warrant being collectively referred to as the "GE Warrants"). 3. Notes Repurchase and New Credit Facilities. As described above, the Notes Repurchase was consummated on May 17, 1995. The Notes Repurchase was the culmination of over two years of negotiations between the Company and a small number of holders who owned in the aggregate approximately 96% of the Subordinated Notes. Prior to consummating the Notes Repurchase, the Company and such holders had agreed to a restructuring (the "Prior Restructuring") in which the holders would have exchanged their debt for new Common Shares that would have given them an 89.4% ownership interest in the outstanding common equity of ASHS. The Notes Repurchase was consummated in lieu of the Prior Restructuring. 9 13 The Notes Repurchase was completed with the proceeds of three new credit facilities. Concurrent with the Notes Repurchase on May 17, 1995, the Company entered into a new revolving credit facility (the "New Revolver") with a different lender than the previous revolving credit facility. Under the New Revolver, the Company will have available up to $4,000,000 according to a formula based on eligible accounts receivable. The New Revolver provides for interest payments only (computed at the Bank of America prime rate plus 5%) until maturity on May 17, 1997 when all amounts are due and payable. The initial proceeds of $3,000,000 drawn under the New Revolver were used primarily to fund the cash consideration in the Notes Repurchase. At September 30, 1995, the Company had drawn $3,201,000 under the New Revolver and, based on eligible accounts receivable, an additional $209,000 was available under the facility. The New Revolver is secured by a first priority lien on all of AS-C's and CuraCare's accounts receivable, certain equipment, inventory and general intangibles and is guaranteed by ASHS and Ernest A. Bates, M.D., individually. The Company also entered into a $2,500,000 four-year loan agreement that will amortize in 48 equal installments with interest at an annual rate of 15% (the "Term Loan"). The Term Loan is secured by a first priority lien on certain equipment and inventory of AS-C and CuraCare and CuraCare's real property in Modesto, California and a second priority lien on AS-C's and CuraCare's accounts receivable and general intangibles. In addition to funding the repurchase of the Subordinated Notes, the proceeds of the Term Loan were applied to the refinancing of certain medical imaging equipment and to provide working capital to the Company. On May 17, 1995, the Company also entered into a $1,500,000 18-month level amortizing loan at an interest rate of 10.5% (the "Gamma Knife Loan"). The proceeds of the Gamma Knife Loan were used to refinance the Company's Gamma Knife, to fund in part the Notes Repurchase, and to provide working capital. The Gamma Knife Loan is collateralized with a first priority security interest in the Gamma Knife owned by the Company. The payments on this loan were restructured in September 1995 from $90,431 per month to $40,203 per month effective September 17, 1995, and to extend the loan term to September 17, 1998, to match renegotiated terms of the underlying customer contract. In connection with the financing of the Notes Repurchase, the lenders that provided the New Revolver and the Term Loan required a personal guarantee from the Company's Chairman and Chief Executive Officer. In consideration of the guarantee and of his continued service to the Company, the Chairman and Chief Executive Officer was issued 184,000 Common Shares and, after obtaining shareholder approval on October 6, 1995, an immediately exercisable 10-year option to acquire 1,495,000 Common Shares for $0.01 per share. USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of the Securities. All of the proceeds will be received by the Selling Securityholders. See "Selling Securityholders." Upon exercise of any of the Warrants, the Company shall receive proceeds equal to the aggregate respective exercise price in return for the Common Shares. DETERMINATION OF OFFERING PRICE The offering price of the Securities will be determined by the Selling Securityholders in transactions entered into by them regarding the Securities. See "Plan of Distribution." 10 14 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1995 as reflected on the Company's unaudited condensed consolidated balance sheet. The table should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements contained elsewhere in this Prospectus.
JUNE 30, 1995 ------------- (UNAUDITED) Current portion of long-term debt(1)........................................... $ 1,152,000 Current portion of Obligations under Capital Leases(1)......................... 8,512,000 ---------- Total Current Obligations.................................................... 9,664,000 ---------- Long-term debt, less current portion(1)........................................ 7,378,000 Obligations under Capital Leases less current portion(1)....................... 17,300,000 Senior Subordinated Notes...................................................... 773,000 ---------- Total long-term obligations.................................................. 25,451,000 ---------- Total Obligations.................................................... 35,115,000 ---------- Stockholder's equity (Net Capital Deficiency): Common stock, without par value: authorized shares -- 10,000,000 3,870,000 shares issued and outstanding(2)........................................................... 10,141,000 Additional paid-in capital................................................... 849,000 Accumulated deficit.......................................................... (19,574,000) ---------- Total stockholders' equity (Net Capital Deficiency).................. (8,584,000) ---------- TOTAL CAPITALIZATION................................................. $ 26,531,000 ==========
- --------------- (1) See Notes 7 and 11 of the Notes to the Consolidated Financial Statements which describe in detail the long-term debt and capitalized lease obligations of the Company. (2) Does not include (i) 330,000 Common Shares reserved for issuance under the Company's 1995 Stock Option Plan, (ii) 183,100 Common Shares remaining exercisable in the Company's 1984 Stock Option Plan, (iii) 539,000 Common Shares underlying the Warrants, or (iv) 1,495,000 Common Shares issuable under an option granted to the Company's Chairman and Chief Executive Officer. 11 15 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the five years ended December 31, 1994 are derived from the consolidated financial statements. The condensed consolidated financial results for the six month periods ended June 30, 1995 and 1994 are derived from unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the six months ended June 30, 1995 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1995. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein. SUMMARY OF OPERATIONS
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ----------------- ------------------------------------------------- 1995 1994 1994 1993(1) 1992 1991 1990(2) ------- ------- ------- -------- -------- ------- ------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Medical services revenues............... $17,140 $19,451 $38,545 $ 39,485 $ 48,834 $58,952 $60,427 ======= ======= ======= ======== ======== ======= ======= Costs of operations..................... 18,446 17,238 34,145 37,071 45,169 43,941 47,969 Write-down of intangible assets......... 600 0 0 5,308 -- -- -- Selling and administrative expense...... 2,958 3,025 5,971 6,820 6,273 7,051 8,529 Interest expense........................ 3,274 3,082 7,423 6,752 7,520 8,542 8,614 ------- ------- ------- -------- -------- ------- ------- Total costs and expenses................ 25,278 23,345 47,539 55,951 58,962 59,534 65,112 ------- ------- ------- -------- -------- ------- ------- (8,138) (3,894) (8,994) (16,466) (10,128) (582) (4,685) (Loss)/gain on sale of assets........... (46) 145 3,294 124 270 138 218 Equity in earnings (losses) of partnerships.......................... 23 37 85 (51) 51 221 198 Interest and other income............... 108 45 98 742 181 310 656 ------- ------- ------- -------- -------- ------- ------- (Loss)/income before income taxes and extraordinary items................... (8,053) (3,667) (5,517) (15,651) (9,626) 87 (3,613) ------- ------- ------- -------- -------- ------- ------- Income tax provision (benefit).......... 0 18 20 (7) (111) 63 -- ------- ------- ------- -------- -------- ------- ------- (Loss)/income before extraordinary items................................. (8,053) (3,685) (5,537) (15,644) (9,515) 24 (3,613) Extraordinary items..................... 20,378 -- 362 -- -- 1,964 11 ------- ------- ------- -------- -------- ------- ------- Net income (loss)....................... $12,325 $(3,685) $(5,175) $(15,644) $ (9,515) $ 1,988 $(3,602) ======= ======= ======= ======== ======== ======= ======= Income (loss) per share: Income (loss) before extraordinary items.............................. $ (2.47) $ (1.29) $ (1.93) $ (5.46) $ (3.39) $ 0.01 $ (1.30) Extraordinary items................... $ 6.24 $ 0.00 $ 0.13 $ 0.00 $ 0.00 $ 0.69 $ 0.00 ------- ------- ------- -------- -------- ------- ------- Net income (loss) per share........... $ 3.77 $ (1.29) $ (1.80) $ (5.46) $ (3.39) $ 0.70 $ (1.30) ======= ======= ======= ======== ======== ======= =======
BALANCE SHEET DATA
DECEMBER 31, -------------------------------------------------- 1994 1993(1) 1992 1991 1990(2) -------- -------- -------- ------- ------- JUNE 30, 1995 ----------- (UNAUDITED) (AMOUNTS IN THOUSANDS) Working capital (deficiency)................. $(8,857) $(33,369) $(56,518) $(33,244) $(3,960) $(3,711) Total assets................................. 32,938 44,339 50,179 61,440 75,723 74,360 Current portion of long-term debt and obligations under capitalized leases....... 9,664 8,331 26,635 15,288 10,366 14,282 Long term debt and obligations under capitalized leases less current portion.... 24,678 24,244 3,106 19,792 30,950 21,823 Senior subordinated notes.................... 773 18,467 18,788 18,788 18,788 24,975 Stockholders' equity (Net capital deficiency)................................ $(8,584) $(22,341) $(17,754) $ (2,151) $ 7,192 $ 5,122
- --------------- 12 16 (1) In August 1993, ASHS incorporated a new wholly owned subsidiary, American Shared Radiosurgery Services. Accordingly, the financial data for the Company presented above include the results of the establishment of the subsidiary for 1993 through the six months ended June 30, 1995. (2) In November 1990, the Company started operations of a new wholly owned subsidiary, European Shared Medical Services Limited. Accordingly, the financial data for the Company presented above include the results of the newly established subsidiary for 1990 through the six months ended June 30, 1995. 13 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Comparison of Six Months Ended June 30, 1995 to Six Months Ended June 30, 1994 MEDICAL SERVICES REVENUES Medical services revenues of $17,140,000 for the six months ended June 30, 1995 represent a 12% decline compared to medical services revenues of $19,451,000 for the six months ended June 30, 1994. Revenues from MRI for the six month period ended June 30, 1995 increased $1,343,000 compared to the same period in the prior year. The increase was due primarily to the commencement of new customer contracts and increased utilization from contracts commenced in prior periods. The Company had a net increase of approximately 14 new customer contracts as of June 30, 1995 compared to June 30, 1994. CT revenues declined $395,000 for the six month period ended June 30, 1995 compared to the same period in the prior year due to the operation of two fewer scanners and lower revenue generation from mobile routes. Nuclear medicine and ultrasound revenues decreased $616,000 for the six month period ended June 30, 1995 compared to the same period in the prior year as a result of the December 31, 1994 sale by the Company of two ultrasound contracts as a part of its respiratory therapy department contract sale and the continued decline in mobile ultrasound usage. Respiratory therapy services revenues decreased $2,643,000 for the six month period ended June 30, 1995 compared to the same period in the prior year due to the sale of eight respiratory therapy contracts and the respiratory registry in December 1994, and the termination of three contracts in the first six months of 1995. During the remainder of 1995 an additional two contracts will terminate. Gamma Knife revenues remained constant for the six month period ended June 30, 1995 compared to the same period in the prior year. Gamma Knife revenues are currently not a significant component of the Company's revenues. COST OF OPERATIONS Total Costs of Operations increased $1,208,000 for the six month period ended June 30, 1995 compared to the same period in the prior year. The increase in total costs of operations resulted primarily from the write-down of equipment and deferred assets of $3,825,000. Medical services payroll, the largest routine component of total costs of operations, decreased $1,742,000 for the six month period ended June 30, 1995 compared to the same period in the prior year. The decrease is primarily attributable to the Company's sale of certain respiratory therapy contracts and the respiratory therapy registry during the fourth quarter of 1994. Maintenance and supplies decreased $109,000 for the six month period ended June 30, 1995 compared to the same period in the prior year. The decrease is primarily attributable to pricing reductions on MRI maintenance contracts and a decrease in supply usage associated with the sale and termination of respiratory therapy contracts. Depreciation and amortization increased $658,000 for the six month period ended June 30, 1995 compared to the same period in the prior year. The increase is primarily attributable to the Company's Lease Restructuring with its primary equipment lessor which was effective January 1, 1994 but recorded cumulatively in the fourth quarter of 1994. Equipment leases previously accounted for as rentals were accounted for as capitalized leases (increased depreciation and interest expense) due to the Lease Restructuring. Equipment rental decreased $1,107,000 for the six month period ended June 30, 1995 compared to the same period in the prior year as a result of the Lease Restructuring. Other operating costs decreased $317,000 for the six month period ended June 30, 1995 compared to the same period in the prior year primarily due to a reduction in regional office and property related costs. In connection with the adoption of the statement of Financial Accounting Standards No. 121 (FAS 121) during the second quarter of 1995, management reviewed the recoverability of the carrying value of long-lived assets, primarily fixed assets, goodwill and deferred costs based on the life of the assets. The Company initiated its review of potential loss impairment due to the continuing changes in the health care environment 14 18 which have put downward pressure on customer and equipment pricing and reduced forecasted operating results for certain assets to a level below previous expectations. Following its review, management concluded that there was an impairment in the recorded value of fixed assets, goodwill and deferred costs under FAS 121 based on management's estimate of future undiscounted cash flows over the useful life of certain assets. Accordingly, an impairment loss of $4,425,000 was recorded in the second quarter of 1995 based on the differences between the fair value determined by third parties and the recorded values of certain assets. The impairment loss is comprised of a charge for the write-downs of equipment and deferred assets of $3,825,000 (primarily MRI, CT and nuclear medicine) and goodwill of $600,000. SELLING AND ADMINISTRATIVE COSTS Selling and administrative costs decreased $67,000 for the six month period ended June 30, 1995 compared to the same period in the prior year. The six month period ended June 30, 1995 results would have reflected a higher decrease in expenses except for a second quarter 1995 charge of $265,000 to salary and wage expense for the 184,000 Common Shares issued to the Company's Chairman and Chief Executive Officer, Ernest A. Bates, M.D., for his continued services to the Company and his personal guarantee of $6,500,000 of indebtedness of the Company. See "Liquidity and Capital Resources". INTEREST EXPENSE Interest expense increased $192,000 for the six month period ended June 30, 1995 compared to the same period in the prior year. The increase is primarily due to the Lease Restructuring and utilization of a new credit facility commencing May 17, 1995 (see "Liquidity and Capital Resources"), offset by the reduction in interest from the Notes Repurchase on May 17, 1995 (see "Liquidity and Capital Resources") and the repayment of the Company's revolving credit facility on February 28, 1995. In addition, the GE Warrants issued on May 17, 1995 resulted in a charge to interest expense of $167,000. INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM The Company had a loss before extraordinary items of $8,053,000 for the six month period ended June 30, 1995 as compared to a loss of $3,685,000 for the same period in the prior year. Included in the Company's loss for the six month period ended June 30, 1995 was a charge of $4,425,000 due to adoption of FAS 121. NET INCOME The Company had net income of $12,325,000 for the six month period ended June 30, 1995 compared to a net loss of $3,685,000 for the same period in the prior year. The Company's net income for the six month period ended June 30, 1995 included an extraordinary gain of $20,378,000 on its debt restructuring recorded on May 17, 1995. The gain resulted from the repurchase of $17,694,000 of face amount plus $8,854,000 of accrued and unpaid interest of the Subordinated Notes net of cash, Common Shares and Warrants issued, and transaction related costs of $3,893,000, $1,250,000 and $1,027,000 respectively. Comparison of 1994 to 1993 and 1993 to 1992 MEDICAL SERVICES REVENUES Medical services revenues decreased 2.4% in 1994 compared to 1993 and decreased 19.1% in 1993 compared to 1992. The 2.4% and 19.1% decreases in 1994 and 1993, respectively, were caused primarily by an 18% decrease ($1,398,000) in respiratory therapy revenues in 1994 and a 19% decrease ($6,891,000) in diagnostic imaging services revenues in 1993. MRI revenues increased 11% ($2,223,000) in 1994 compared to 1993 and decreased 12% ($2,859,000) in 1993 compared to 1992. The increase in 1994 compared to 1993 was primarily due to the commencement of new customer contracts and increased utilization from contracts commenced in 1993. The decrease in 1993 compared to 1992 was due to the termination of services at three fixed site locations and a decline in revenues 15 19 from the mobile MRI units. MRI revenues from mobile units decreased due to the termination of certain long standing contracts and the replacement of those contracts with new contracts with lower pricing and procedure volumes. In addition, the marketing time required to replace terminating customers lengthened because of increased competition and the fact that more health care providers already had access to MRI services. Revenues were also negatively impacted by delays in the commencement of replacement contracts due to regulatory and site improvement delays and termination notification periods which certain customers were obligated to provide to previous providers. MRI revenues as a percentage of total medical services revenues were 59%, 52% and 48% in years 1994, 1993 and 1992, respectively. The Company's non-MRI diagnostic imaging services revenues declined 19% ($1,905,000) in 1994 compared to 1993 after a 29% ($4,032,000) decrease in 1993 compared to 1992. The decline in both years was attributable to decreased CT revenue from the reduction in the CT fleet by two scanners in 1994 and three scanners in 1993, lower revenue generated on mobile routes, reductions in per study wholesale prices and competition. The Company has had to convert the majority of its CT fleet from higher revenue and cost mobile routes to lower revenue and cost interim rental placement units to maintain utilization. Revenues from CT operations decreased $1,170,000 in 1994 and $2,209,000 in 1993 from 1992 revenues of $7,395,000. In addition, nuclear medicine and ultrasound revenues decreased in 1994 compared to 1993 and in 1993 compared to 1992 as a result of the Company's continued de-emphasis of mobile nuclear and ultrasound contracts and the expiration of one in-house ultrasound contract in 1994 and four ultrasound contracts in 1993. The decrease in nuclear medicine and ultrasound revenues was $735,000 in 1994 and $1,823,000 in 1993 from a 1992 revenue base of $6,560,000. Non-MRI diagnostic imaging services revenues as a percentage of total medical services revenues was 21%, 25% and 29% for the years ended 1994, 1993 and 1992, respectively. The Company on December 31, 1994 sold two ultrasound department contracts as a part of its respiratory therapy department contract sale. These contracts had 1994 revenues of approximately $850,000. Respiratory therapy services revenues in 1994 decreased $1,398,000 compared to 1993 due to the termination of six contracts at various periods during 1993. Revenues in 1993 decreased $2,415,000 from 1992 primarily due to the termination of six contracts. The Company on December 31, 1994 sold eight respiratory therapy department contracts and its respiratory therapy registry which had aggregate revenues in 1994 of approximately $5,300,000. COST OF OPERATIONS The Company's cost of operations, consisting of payroll, maintenance and supplies, depreciation and amortization, equipment rental, other operating expenses (such as vehicle fuel, building rents, regional office costs, insurance, property taxes, bad debt expense, fees and training expenses), and write-down of equipment decreased in absolute dollars both in 1994 and 1993 compared to prior years. Medical services payroll costs decreased by $1,158,000 in 1994 compared to 1993 and $2,431,000 in 1993 compared to 1992 and remained constant as a percent of medical services revenues (27% in 1994, 29% in 1993, 28% in 1992). The medical services payroll cost decline was due to the continued decrease in labor intensive (Respiratory Therapy, mobile CT, Ultrasound, Nuclear Medicine) service revenues due to contract expirations and termination of marginally profitable and unprofitable contracts. Depreciation and amortization increased $1,789,000 in 1994 compared to 1993. The increase in depreciation was primarily due to the impact of the Lease Restructuring. Effective January 1, 1994, equipment leases previously accounted for as rentals are accounted for as capitalized leases due to the Lease Restructuring. Secondarily, depreciation increased due to the full year's impact of depreciation on capital expenditures related to upgrades performed on certain MRI units in the last half of 1993. Depreciation and amortization decreased $1,040,000 in 1993 compared to 1992 primarily due to equipment acquired in the CuraCare acquisition in October 1987 being depreciated to salvage value during 1992 and 1993 and suspension of depreciation for certain MRI systems while in upgrade. The Company's maintenance and supplies costs were 20%, 19%, and 19% as a percent of medical service revenues in 1994, 1993, and 1992, respectively. Maintenance and supplies costs increased $377,000 in 1994 compared to 1993 and decreased $1,961,000 in 1993 compared to 1992. The increase in 1994 was primarily 16 20 attributable to equipment aging and additional equipment utilization. The decrease in 1993 was primarily attributable to improved pricing on MRI maintenance contracts. In addition, cost reductions were achieved in both 1994 and 1993 due to reduced medical supplies costs associated with fewer respiratory therapy contracts and fixed site MRI units and improved pricing on MRI cryogen supply contracts. Equipment rental as a percentage of medical services revenue was 4% in 1994, 13% in 1993 and 8% in 1992. The decrease in equipment rental of $3,487,000 in 1994 compared to 1993 was primarily attributable to the Lease Restructuring in which equipment previously accounted for as rentals, effective as of January 1, 1994, is being accounted for as capitalized leases and to less reliance on interim equipment rentals. The increase in equipment rental of $891,000 in 1993 compared to 1992 was primarily attributable to the addition of one operating lease, several MRI units under short term rental and the full year's impact in 1993 of the two operating leases entered into in 1992. Other costs of operations as a percentage of medical services revenue was 13%, 13% and 11% in 1994, 1993 and 1992, respectively. The $4,000 decrease in 1994 was due to the continued reduction in regional office costs. The $546,000 decrease in other costs in 1993 was due primarily to the continued reduction in regional office costs, building rent and relocation costs related to certain fixed site MRI units. In the fourth quarter of 1993 and the third and fourth quarters of 1992, the Company wrote down the carrying value of certain equipment to estimated net realizable value which reflects its future estimated income producing capacity. In 1993, the write-down of $443,000 resulted from the decline in market acceptance of two of the Company's less technologically advanced MRI units. Efforts to re-market these units have been unsuccessful. In 1992, the write-down resulted from the decline in market acceptance of five of the Company's less technologically advanced MRI units, six CT units and certain ultrasound and nuclear medicine equipment. After efforts to remarket these units during 1992, it became evident that there was a permanent impairment in their estimated net realizable value. The write-downs resulted in a charge to operations of $3,454,000 for the year ended December 31, 1992. SELLING AND ADMINISTRATIVE COSTS The Company's selling and administrative costs decreased $849,000 in 1994 compared to 1993 and increased $547,000 in 1993 compared to 1992. The decrease in 1994 was primarily attributable to a reduction in the costs associated with the fourth quarter of 1993 write-down of intangible assets associated with the Company's CuraCare acquisition, reduced travel related expenses and building rent. The increase in 1993 compared to 1992 was due to the increase in sales force initiated in the second half of 1992 in recognition of the more competitive MRI environment, costs associated with a reduction in force, relocation of the corporate office and restructuring fees totalling $340,000. INTEREST EXPENSE The Company's interest expense increased by $671,000 in 1994 compared to 1993 due to the Lease Restructuring in which equipment previously accounted for as rentals is treated as capitalized leases effective January 1, 1994. The Company's interest expense decreased by $768,000 in 1993 compared to 1992. The decrease occurred due to the maturation of existing equipment leases and long-term debt and the replacement of three MRI units sold or returned at lease maturity with two MRI units under capital lease financing. WRITEDOWN OF INTANGIBLE ASSETS During 1993, the Company's management continued to evaluate the realizability of intangible assets associated with its acquisition of CuraCare. CuraCare operates substantially all of the Company's non-MRI businesses, including CT, Respiratory Therapy, Ultrasound and Nuclear Medicine. Revenues and operating profits from CuraCare have continued to decline significantly over the past few years despite strategic plans implemented by management. During the fourth quarter of 1993, the Company's management determined it was unlikely that the Company's non-MRI businesses would have significant growth potential in the 17 21 foreseeable future. The Company's management, therefore, reduced the operational management and sales force for its non-MRI businesses. The changing health care environment and reduced barriers of entry due to decreased equipment costs for non-MRI businesses contributed to losses in 1992 and 1993. The Company determined, based on its methodology of evaluating the recoverability of intangible assets, that the forecasted cash flow for non-MRI businesses did not support the future amortization of the intangible asset balance of $5,308,000 at December 31, 1993, for these modalities. The Company projected forward its results from operations, and cash flows, including interest expense, for five years to analyze the recoverability of its intangible assets. In formulating the financial forecasts, the Company considered historical trends, current market conditions and potential new trends and their impact on revenues. Based on these forecasts it was determined that the cumulative results of operations and cash flows for non-MRI businesses were inadequate to recover any portion of the intangible asset balance associated with CuraCare. Accordingly, the Company wrote-down the intangible asset balance of $5,308,000 in the fourth quarter of 1993. The Company's remaining intangible asset balance of $2,118,000 at December 31, 1994 related primarily to its MRI business. GAIN ON SALE OF ASSETS The gain on sale of assets of $3,294,000 in 1994 was primarily due to a gain of $3,199,000 on the sale of certain respiratory therapy contracts. The sale resulted in the Company receiving cash of approximately $4,000,000 and the buyer assuming approximately $300,000 in liabilities. Gain (Loss) on sale of equipment fluctuates depending on the timing of asset dispositions. The Company continued selling non-essential assets during 1994. INTEREST AND OTHER INCOME Interest and other income decreased $644,000 in 1994 compared to 1993 because during 1993 the Company's insurance carrier paid a business interruption insurance claim of $575,000 for lost MRI service revenues in the United Kingdom. Interest and other income increased in 1993 compared to 1992 primarily due to the business interruption insurance payment. INCOME TAX PROVISION The 1994, 1993 and 1992 amounts relate to miscellaneous payments and refunds of federal and state income taxes and adjustments of amounts paid and accrued in prior years. NET LOSS The 1994 net loss of $5,175,000 was primarily attributable to a continued decline in medical services revenues without a corresponding reduction in operating costs, partially offset by the gain on the sale of respiratory therapy contracts. During September 1994, the Company recognized an extraordinary gain on the early extinguishment of indebtedness of $362,000. The extraordinary gain resulted from the repurchase of $321,000 face amount plus $115,000 of accrued and unpaid interest of the Company's 14 3/4% Notes, net of income tax and deferred financing costs of $10,000, for $64,000 in cash. The 1993 net loss of $15,644,000 was primarily attributable to the significant reduction in medical services revenues, the write-down of intangible CuraCare assets and interest on the Subordinated Notes. The 1992 net loss of $9,515,000 was primarily attributable to the significant reduction in medical services revenues, the write-down of equipment and interest payments on the Subordinated Notes. 18 22 BALANCE SHEET DATA Liquidity and Capital Resources The Company had cash and cash equivalents of $461,000 at June 30, 1995 compared to $1,225,000 at December 31, 1994. The Company's cash position decreased in 1995 as a result of its operating losses. On May 17, 1995, the Company repurchased for cash and securities approximately 96% of its outstanding Subordinated Notes. The Notes Repurchase, together with the December 1994 Lease Restructuring and the availability of up to $8,000,000 of new debt financing, concluded restructuring the Company's obligations. In 1992, the Company determined that it would not generate sufficient revenues or achieve sufficient expense reductions to meet in full its scheduled debt and lease obligations. Accordingly, the Company suspended interest payments under the Subordinated Notes beginning with the October 15, 1992 semi-annual interest payment and suspended lease payments on a significant portion of its equipment leases from December 1, 1992. As a result, the Company was in default under substantially all of its debt and lease obligations and the holders had the right to accelerate such obligations. The Company stated that any such acceleration would cause it to seek a liquidation in bankruptcy. The Company engaged in restructuring negotiations with its creditors following the actions referred to in the immediately preceding paragraph. As a result of these negotiations, the Company restructured certain of its outstanding obligations as described below. 1. Secured Credit Facility. The Company's revolving credit facility was repaid in full and terminated on February 28, 1995 with a portion of the proceeds of the sale of eight respiratory therapy contracts. The New Revolver was entered into in May 1995 in connection with the Notes Repurchase. 2. Equipment Leases. On December 30, 1994, the Company entered into the Lease Restructuring. Under the Lease Restructuring, the leases covering substantially all of the Company's medical equipment were modified to extend the lease terms and to reduce scheduled lease payments. During 1994, the Company made monthly aggregate payments based on the estimated restructured lease payments. In addition, certain accrued and unpaid lease and service payments were converted into the GE Note, a $2,000,000 secured seven year note. The GE Note bears interest at an annual rate of 4%, payable in arrears, and will mature in February 2002. Monthly payments of interest only are due through November, 1995. Thereafter the principal balance of the GE Note will amortize in 75 equal monthly installments until maturity. The GE Note is secured by a lien on the accounts receivable of CuraCare and AS-C. The GE Note is also secured by a lien on two CT units and one Ultrasound unit. In connection with the issuance of GE Note, the Company issued the GE Warrants to purchase an aggregate of 225,000 Common Shares for $0.01 per share. 3. Subordinated Notes. On May 12, 1995, in lieu of a previously negotiated restructuring that would have resulted in the exchange of approximately 96% of the Subordinated Notes for new common shares that would have represented approximately 89.4% of the Company's common equity, the Company agreed to repurchase such Subordinated Notes (including accrued and unpaid interest) for a combination of cash and equity securities equal to approximately 25% of the Company's fully diluted shares. On May 17, 1995 the Company completed the Notes Repurchase. After giving effect to certain subsequent adjustments, these holders received $3,892,681 in cash, plus a total of 1,193,000 Common Shares (equal to approximately 20% of ASHS's fully diluted Common Shares), and Warrants for an additional 314,000 Common Shares (equal to approximately 5% of the fully diluted Common Shares). The Warrants are immediately exercisable at $0.75 per share. The Restructuring results in annual interest savings related to the Subordinated Notes of approximately $2,890,000. After the Restructuring there remain outstanding approximately $773,000 principal amount of Subordinated Notes that mature in October 1996 with required annual interest payments of $125,000. The Company paid accrued and unpaid interest through April 15, 1995 of approximately $460,000 to holders of Subordinated Notes that were not purchased on May 17, 1995. The subsequent semi-annual interest payment due October 15, 1995 was paid timely by the Company. 19 23 The Notes Repurchase was completed with the proceeds of the Term Loan, New Revolver and the Gamma Knife Loan. The Term Loan is a 48 month level amortizing loan of $2,500,000 at an annual interest rate of 15%. The Term Loan is secured by various unencumbered equipment, CuraCare's Modesto real property and certain accounts receivable. The proceeds were used to repurchase the Subordinated Notes, refinance certain equipment and provide working capital. The New Revolver is a two year, $4,000,000 interest only revolving credit facility at Bank of America prime lending rate plus 5%. The New Revolver is secured by AS-C's and CuraCare's accounts receivable and had a balance of $3,201,000 as of September 30, 1995. The proceeds were used to repurchase Subordinated Notes. The Company had additional borrowing capacity under its revolving credit facility, based on its eligible accounts receivable valuation, of $209,000 at September 30, 1995. The Gamma Knife Loan is an 18 month level amortizing loan of $1,500,000 at an annual interest rate of 10.5%. The proceeds were utilized to refinance the Company's Gamma Knife and provide additional working capital. The payments on this loan were restructured in September 1995 from $90,431 per month to $40,203 per month, effective September 17, 1995, and to extend the loan term until September 17, 1998. At the Company's annual shareholder meeting held on October 6, 1995, the Company's shareholders approved the issuance of an option for additional Common Shares to Dr. Bates as further consideration for his continued service to the Company and his personal guarantee of $6,500,000 of the Company's new credit facilities. As a result of this issuance, Dr. Bates held approximately 46% of the Company's then fully diluted outstanding shares and the Selling Securityholders received additional shares and warrants to maintain their respective fully diluted ownership of the Common Shares. Existing shareholders own approximately 30% of the Common Shares, fully diluted. The various restructuring transactions described above cured all of the Company's outstanding defaults relating to its debt and lease obligations. The Company nevertheless remains highly leveraged and has significant cash payment requirements under its equipment leases and credit facilities. Scheduled cash equipment lease payments during the 12 months from July 1995 to June 1996 are $10,778,000 and scheduled interest and principal payments under the Company's other loan obligations during such period are approximately $2,167,000. The Company's revenues during the first six months of 1995 were not sufficient to make these payments. In addition, the Company has loan and other debt maturities of approximately $10,692,000 due prior to October 31, 1996 and an additional $8,359,000 due and the outstanding balance (currently approximately $3,200,000) of the New Revolver prior to October 31, 1997. Accordingly, the Company during the 12 months from July 1995 to June 1996 must increase its revenues and reduce its cost structure, and secure refinancing, in order to meet its obligations as they become due. There can be no assurance that the Company will be able to meet its scheduled obligations during the next 12 months. 20 24 BUSINESS GENERAL DEVELOPMENT The Company provides shared diagnostic imaging services to approximately 224 hospitals, medical centers and medical offices located in 20 states and one hospital in the United Kingdom. The four diagnostic imaging services provided by the Company are Magnetic Resonance Imaging, Computed Axial Tomography Scanning, Ultrasound, and Nuclear Medicine. In addition, the Company provides a Gamma Knife to a major university medical center and has an option to acquire a second Gamma Knife located in another major university medical center. ASHS was incorporated in the state of California in September 1983. ASHS's predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital Services), a California limited partnership, was formed in June 1980. In October 1987 the Company acquired CuraCare, Inc. from Tenet Healthcare Corporation (formerly known as National Medical Enterprises, Inc., "Tenet") for $22,250,000. The acquisition of CuraCare significantly expanded and diversified the services offered by the Company and increased its market penetration. Prior to May 1989, the MRI services were provided through AS-C, which was a joint venture between the Company and MMRI, Inc. ("MMRI"), a California corporation and a wholly owned subsidiary of Tenet. Effective May 1, 1989, the Company purchased 100% of MMRI, Inc., ASHS's co-venturer in AS-C, from Tenet for $4,200,000. MMRI's only asset is its 50% interest in AS-C. In November 1990 the Company started a new wholly owned subsidiary, European Shared Medical Services Limited, an English registered company, to provide MRI services in the United Kingdom. In addition, in August 1993, the Company incorporated a new wholly owned subsidiary in California, American Shared Radiosurgery Services, to provide Gamma Knife services. Following its acquisition of CuraCare, the Company provided respiratory therapy services to acute care hospitals. On December 31, 1994, the Company sold a majority of its respiratory therapy department contracts and its Respiratory Therapy Registry for approximately $4,000,000 in cash plus the assumption by the buyer of $300,000 in liabilities and agreed that it would no longer compete in such business. In June 1995, ASHS incorporated two new wholly owned subsidiaries, African-American Church Health & Economic Services, Inc. ("ACHES"), a California corporation, and ACHES Insurance Services, Inc., ("AIS"), a California corporation and insurance agency qualified to sell life, health and disability insurance in the state of California. On October 17, 1995, ASHS, through its wholly owned subsidiary, American Shared Radiosurgery Services ("ASRS") and Elekta AB, through its wholly owned United States subsidiary, GKV Investments, Inc., a Georgia corporation ("GKV"), entered into an agreement to form GK Financing, LLC, a limited liability company to provide alternative financing of Elekta Gamma Knife units in the United States and Brazil. See "Gamma Knife Joint Ventures." GENERAL Medical diagnostic imaging systems facilitate the diagnosis of diseases and disorders at an early stage, often minimizing the amount and cost of care needed to stabilize, treat or cure the patient and frequently obviating the need for exploratory surgery. This diagnosis can often be performed on a out-patient basis eliminating the need for hospitalization. Diagnostic imaging systems utilize energy waves to penetrate human tissue and generate computer processed cross-sectional images of the body which can be displayed either on film or on a video monitor. The Company provides its diagnostic imaging services to approximately 224 health care providers including hospitals, clinics and physicians' offices located in 20 states and the United Kingdom. The Company's technologists operate the equipment under the direction of licensed physicians on the customer's staff who order procedures, interpret examination results and maintain general responsibility for the patient. Generally, the Company directly charges the hospitals, medical centers and medical offices that 21 25 have contracted for its services. The Company, to a significantly lesser extent, bills patients directly or relies on third party reimbursement. Third party reimbursement comprises approximately 10% of the Company's medical services revenues. Non-MRI diagnostic imaging services revenues as a percentage of total medical services revenues were 21%, 25% and 29% in 1994, 1993, 1992, respectively. Following the sale of a substantial portion of its respiratory therapy contract management business in December 1994, the portion of the Company's revenues provided by non-MRI diagnostic imaging services is expected to decline. For the six month period ended June 30, 1995, non-MRI diagnostic imaging services revenues as a percentage of total medical services revenues were 20%. See "Management's Discussion and Analysis -- Total Revenues." The Company provides its diagnostic imaging services on both a shared and a full-time basis. Shared services are provided based on agreed upon time periods. The Company contracts with health care providers to provide equipment, operating technologists, patient care coordinators and, in some cases, operating supplies. The major advantages to a health care provider in contracting with the Company for such services include: (i) avoiding the high cost of owning and operating the equipment, (ii) avoiding the cost of hiring and training technical personnel and support staff, (iii) reducing the risks associated with technological obsolescence or under-utilization of the equipment and services, and (iv) not being required to incur the cost of complying with certain governmental regulations. Magnetic Resonance Imaging. MRI utilizes magnetic fields and applied radio waves to obtain computer processed cross-sectional images of the body. MRI provides clinical images superior to alternative technologies in many applications by providing information concerning neurologic, orthopedic, vascular and oncologic diseases. MRI benefits from multiplanar imaging, obviates the need for ionizing radiation and generally offers superior image resolution than previously available from CT. The Company is a leading provider of high field strength MRIs on a shared service basis. The Company believes that it has a competitive advantage because of its strategy of operating primarily top-of-the-line, high magnetic field strength (1.5 Tesla superconductive magnet systems) mobile MRI units. MRI units containing higher strength magnets are preferred technology because they provide improved image quality, faster operating speed and greater potential for new applications than do MRI units with less powerful magnets. Of the Company's 27 MRI units operating at December 31, 1994, 19 of such units are 1.5 Tesla units, three are 1.0 Tesla units, and five are 0.5 Tesla units. All 27 of the MRI units are mobile or transportable. In addition, the Company has two 1.5T less technologically advanced fixed site MRI units for sale. The Company had 104 MRI customers at December 31, 1994 compared to 90 customers as of December 31, 1993. In addition, effective January 5, 1995 the Company entered into a management agreement with an equipment leasing company to manage three of its mobile MRI units. MRI revenues constitute 59%, 52% and 48% of total medical services revenues in years 1994, 1993 and 1992, respectively. To a greater extent during the past several years, increased indications of MRI utility plus reductions in equipment costs have allowed more hospitals to purchase their own system instead of utilizing the Company's services. This has contributed to a more competitive marketplace for the Company's services. Computed Axial Tomography. The Company operates 16 CT units, 15 of which are housed in specially designed mobile vans serving one or more hospitals and one of which is a fixed-site unit. CT utilizes multiple X-Ray beams and detectors to derive information which is then synthesized by computers to produce cross-sectional images of organs or other areas of the body. CT can be used to perform examinations of any part of the human anatomy and provides a delineation of tissue not possible with conventional X-ray. CT eliminates the problem of overlapping structures such as bone and soft tissue inherent in images produced by conventional X-Ray. The most commonly performed CT examinations are of the brain, abdomen, and lumbo-sacral spine, although examinations of the chest, pelvis and extremities are also performed. With the advent of MRI, the relative benefits of CT have decreased. Due to a variety of factors, including increased competition among manufacturers of CT units, the selling price of CT units has decreased thereby enabling more hospitals and health care providers to acquire their own units instead of utilizing the Company's services. Consequently, the Company has reduced its services in this area in response to these changes in the market. CT revenues 22 26 were approximately 10% of medical services revenues in 1994 and 13% and 15% in 1993 and 1992, respectively. Ultrasound and Nuclear Medicine. The Company owns and operates approximately 30 systems providing ultrasound and nuclear medicine services. Ultrasound technology applies high-frequency pulsed and continuous sound waves to the body. These sound waves strike vessels and other internal body structures and echo back to the equipment, where they register upon a video monitor. Ultrasound systems provide a low medical risk, non-invasive procedure for determining the primary diagnosis in renal, pancreatic, vascular and abdominal diseases and obstetrics. Nuclear medicine is a diagnostic imaging system utilizing short-lived radioactive isotopes and computers to perform various examinations and process the resulting medical data for the physician to establish the presence or absence of disease. Nuclear medicine not only provides an anatomic image but also provides functional information which cannot be provided by MRI or CT. Nuclear medicine services of the Company are primarily composed of Single Photon Emission Computed Tomography ("SPECT") wherein radioisotopes are injected into the patient and the patient is subsequently imaged by a camera which moves around the patient. The information received by the camera is then reconstructed by computer to produce a three dimensional image. Although more costly, this three dimensional image yields a more accurate image when compared to other nuclear medicine techniques. The Company provides SPECT services on both a shared service and full-time basis. Smaller health care providers which require fewer studies on a regular basis may find it more cost efficient to utilize SPECT on a mobile shared service basis than acquiring their own unit. Ultrasound and nuclear medicine revenues were approximately 10% of medical services revenues in 1994 and 12% and 13% in 1993 and 1992, respectively. GAMMA KNIFE The Company's first Gamma Knife, which is operated at a major university medical center on a fee-per-procedure basis, commenced operation in September 1991. The Gamma Knife treats certain vascular malformations and intracranial tumors without surgery. In January 1993, the Company entered into a purchase agreement with the manufacturer for $2,900,000 plus sales tax on its second Gamma Knife and a fee-for-service lease with another university medical center. During 1993, the Company advanced $1,090,000 to the equipment manufacturer. Included in this amount was $800,000 advanced by a third party lessor and guaranteed by the Company's Chairman and Chief Executive Officer. The Company was unable to fund the next required advance payment and was notified by the manufacturer that the Company was in default under the provisions of the purchase agreement. On April 6, 1994, the Company's agreements to purchase the Gamma Knife from the manufacturer and lease the Gamma Knife to such university medical center were formally terminated. Settlement of these agreements entailed the payment of $130,000 in interest and costs to the manufacturer and the university medical center. The Company's Chairman and Chief Executive Officer simultaneously agreed to enter into substantially identical purchase and lease obligations as those previously executed by the Company. On April 6, 1994 new purchase and lease agreements were entered into by the Company's Chairman and Chief Executive Officer and the manufacturer and the university medical center. Of the $1,090,000 in advances previously paid to the manufacturer, $800,000 was refunded to the third party lessor and $290,000 (less certain settlement costs) was refunded to the Company and the Company simultaneously advanced $290,000 to the Chairman and Chief Executive Officer who executed a Promissory Note. As of September 30, 1995, the balance outstanding on the Promissory Note was approximately $262,000. The Promissory Note is repayable over 60 months including interest at 6% per annum. Concurrently, the third party lessor agreed to fund the remaining $2,610,000 purchase price of the Gamma Knife on behalf of the Chairman and Chief Executive Officer and the Company received an option to purchase the Gamma Knife. The option entitles the Company to purchase the Gamma Knife from its Chairman and Chief Executive Officer for an amount equal to the remaining debt obligation associated with the Gamma Knife plus costs and losses, if any, incurred by the Chairman and Chief Executive Officer, when the Company is able to obtain financing for this purchase. The Gamma Knife became operational on August 3, 1994. 23 27 GAMMA KNIFE JOINT VENTURE ASHS, through ASRS, a California corporation, and Elekta Holdings U.S., Inc., through its wholly owned subsidiary, GKV, entered into an agreement on October 17, 1995 to form GK Financing, LLC ("GKF"), a California limited liability corporation. In exchange for a 78% ownership interest held by ASRS in GKF the Company will contribute two Gamma Knives (each subject to a financing lease) and the respective leases relating thereto to GKF. GKV will contribute $800,000 for a 22% ownership interest in GKF and lend funds to GKF. GKF will be the preferred alternative financing provider in the United States and Brazil for the purchase of Gamma Knife units sold by Elekta Instruments, Inc., a U.S. subsidiary of the Gamma Knife manufacturer. Financing by GKV will most likely occur when an alternative payment method such as a fee-for-service arrangement is desired. GKF has placed orders for four new Gamma Knife systems. CUSTOMERS AND MARKETING The market for services offered by the Company consists of major urban medical centers, suburban and rural hospitals, health maintenance organizations ("HMOs") and other managed care providers, governmental institutions, large multi-specialty medical groups, physician offices and medical clinics. The type of services offered by the Company in a given area may vary, depending upon such factors as the size of the client medical care provider, the treatment needs of specific patient groups within the client's service area, the modalities and services required by the client and the number and nature of competitive services available. The more capital intensive services, such as MRI, CT, and Gamma Knife, may be effectively offered to urban medical centers, hospitals, large multi-specialty medical groups, governmental institutions, larger HMOs and large third-party purchasers of health services. The less capital intensive services, such as ultrasound, nuclear medicine and, under certain circumstances, CT, are most effectively offered to suburban and rural hospitals, physicians' offices and medical clinics. The Company believes that it offers among the broadest range of services to health care providers of companies in the shared diagnostic imaging services industry and therefore has a unique ability to service a broad spectrum of the health care market. The Company continually monitors developments in the medical equipment industry and makes an effort to acquire new modalities and equipment as the opportunity arises in order to maintain its technologically advanced services and to expand its market share. When the Company's medical equipment does not generate adequate revenues, the Company seeks to sell such equipment and acquire newer, more advanced replacement equipment when appropriate. During the normal course of business, the Company has customer contracts which terminate. The Company's sales representatives and operational managers must replace terminating customers with new customers to maintain the Company's revenues. Revenue fluctuations may occur dependent upon the maturation cycle of terminating existing contracts and how quickly replacement customers can attain the revenue levels of terminating customers. Revenues per customer are historically higher for established customers. The Company employed at the end of 1994 eight sales and marketing and four operational managers located in the Western, Southeastern, and Midwest regions of the country. The Company markets its services through a direct sales effort emphasizing the quality of its equipment, the reliability and efficiency of its services, the ability to tailor its services to specific customer needs and the cost containment benefits realized by the customer when it utilizes the Company's services. No single customer accounted for 10% or more of the Company's total revenues in 1994 nor for the Company's revenues for each of the first and second fiscal quarters of 1995. COMPETITION Utilization of the Company's diagnostic imaging services depends upon several factors, including the number of physicians and their respective areas of practice, the number and nature of competitive diagnostic units available, and the size and demographics of the service areas. The market for diagnostic imaging services is highly competitive. The Company faces competition from other providers of mobile diagnostic services, 24 28 some of which may have greater financial resources than those of the Company, and from hospitals, imaging centers and health care providers owning in-house diagnostic units. Significant competitive factors in the diagnostic services market include equipment price and availability, performance quality, ability to upgrade equipment performance and software, service and reliability. Adverse market conditions have significantly impacted providers of mobile services of which there are only approximately five operating on a national basis. Those with greater financial resources are better able to withstand adverse market conditions. Competition in the MRI service industry has increased since 1992 due to deterioration of market conditions in that industry. Recent deterioration is based partly upon a temporary increase in purchases of MRI units by physician partnerships in the late 1980s and early 1990s, which has largely been halted by legislation that limits self-referrals. The increased competition among MRI equipment manufacturers has resulted in greater availability to end users of new imaging equipment from manufacturers at more competitive pricing than contracting with full-service providers such as the Company. GOVERNMENT REGULATION Customers to whom the Company provides services receive payments for patient care from federal government and private insurer reimbursement programs. As a result of federal cost-containment legislation currently in effect, a prospective payment system ("PPS") is utilized to reimburse hospitals for care given to hospital in-patients covered by federally funded reimbursement programs. Patients are classified into a Diagnosis Related Group ("DRG") in accordance with the patient's diagnosis, necessary medical procedures and other factors. Patient reimbursement is limited to a predetermined amount for each DRG placing material limitations on actual reimbursement for imaging services. Because the reimbursement payment is predetermined, it does not necessarily cover the cost of all medical services actually provided. Currently the DRG system is not applicable to out-patient services, and consequently many health care providers have an incentive to use contracted shared services on an out-patient basis. In 1986 and again in 1990 the Congress enacted legislation requiring the Department of Health and Human Services ("DHHS") to develop proposals for a PPS for hospital outpatient services. DHHS has not as yet developed such a proposal, and the effect on the Company's business of such a proposal, if made, cannot be predicted at this time. The Company's experience suggests that the hospital in-patient DRG system and the expansion of managed care has had a favorable impact on the Company's business. Rising costs in the health care field together with the implementation of the DRG system have encouraged hospitals and other health care providers to minimize costs. The Company's shared diagnostic imaging services allow hospitals and other medical care providers to provide sophisticated diagnostic equipment and qualified personnel at a cost directly related to each service rendered to the patient. In recent years, however, competitive factors (such as equipment availability and pricing) have limited the Company's ability to benefit from the favorable impact of DRGs and managed care. Several health care reform proposals have been promulgated during the Clinton administration. These proposals attempt to increase access to care and to control rising health care expenditures. Since a specific health care reform policy has not been enacted, the impact on the Company's business of such a proposal, if made, cannot be determined at this time. The payment of remuneration to induce the referral of health care business has been a subject of increasing governmental and regulatory focus in recent years. Section 1128B(b) of the Social Security Act (sometimes referred to as the "federal anti-kickback statute") provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services, or induce the purchase, lease, order, or arrangement or the recommendation for the purchase, lease on order of items or services, in each case for which payment may be made under the Medicare and Medicaid programs and certain other government funded programs. The Social Security Act provides authority to the Office of Inspector General through civil proceedings to exclude an individual or entity from participation in the Medicare and state health programs if it is determined any such party has violated Section 1128B(b) of the Social Security Act. The Company believes that it is in compliance with the federal anti-kickback statute. Additionally, the Omnibus Budget Reconciliation Act of 1993, often referred to 25 29 as "Stark II" bans physician referrals to providers of designated health services with which the physician has a financial relationship. The term "designated health services" includes: clinical laboratory services, physical therapy services, occupational therapy services, radiology or other diagnostic services, radiation therapy services, durable medical equipment, parenteral and enteral nutrients, equipment and supplies, home health services, outpatient prescription drugs, inpatient and outpatient hospital services. On January 1, 1995, the Physician Ownership and Referral Act of 1993 became effective in California. This legislation prohibits physician self-referrals for covered goods and services including diagnostic nuclear medicine and diagnostic imaging if the physician (or the physician's immediate family) concurrently has a financial interest in the entity receiving the referral. The Company believes that it is in compliance with the Physician Ownership and Referral Act of 1993. The Company cannot determine what impact this legislation (which applies to all payors) will have upon demand for its services. Legislation in various jurisdictions requires that health facilities obtain a Certificate of Need ("CON") prior to making expenditures for medical technology in excess of specified amounts. The CON procedure can be expensive and time consuming, and consequently a health care facility may elect to use the Company's services rather than purchase imaging equipment subject to CON requirements. CON requirements vary from state to state in their application to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures to provide its services and in other jurisdictions customers must comply with CON procedures before using the Company's services. The Company's nuclear medicine imaging equipment requires the use of radioactive isotopes for which there are existing governmental regulations covering storage, use and disposal. All contracts for nuclear medicine imaging include arrangements for the disposal of radioactive isotopes either by the supplier of the isotopes or by agreement with the nuclear medicine department of the client hospital. The Company is also subject to periodic review concerning the storage, use and disposal of isotopes used in its nuclear medicine imaging equipment. The Company has passed all such reviews. The Company's other services are not generally subject to inspection or review by regulatory bodies. Mobile diagnostic imaging equipment must, where applicable, comply with federal and state regulations concerning patient safety, equipment operating specifications and radiation exposure levels. The equipment manufacturer is primarily responsible for assuring compliance. The Company believes that its equipment complies with all such regulations based on the quality control features and specifications of the equipment manufacturers and the Company's preventative maintenance program. Certain states in which the Company operates require that certain of the Company's personnel be licensed or certified. Such requirements generally involve educational requirements and the payment of specified fees. All of the Company's technical personnel are duly licensed or certified where required to perform the services provided by the Company. The Company continually monitors the compliance of its personnel with such licensing and certification requirements. INSURANCE AND INDEMNIFICATION The Company's contracts with equipment vendors generally do not contain indemnification provisions. The Company maintains a comprehensive insurance program covering the value of its property, equipment and vehicles, subject to deductibles which the Company believes are reasonable. The Company's customer contracts generally contain mutual indemnification provisions. The Company maintains general and professional liability insurance and believes its present insurance coverage and indemnification agreements are adequate for its business. EMPLOYEES At September 30, 1995, the Company employed approximately 200 employees on a full-time basis and approximately 130 on a part-time basis. None of these employees is subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes its employee relations are good. 26 30 PROPERTIES The Company owns approximately two acres of land and 27,000 square feet of office and warehouse space located thereon in Modesto, California. Title to the property has been pledged to secure its obligations under the Term Loan. The Company's corporate offices are located at Four Embarcadero Center, Suite 3620, San Francisco, California where it leases 2,996 square feet for $7,740 per month. This lease runs through September 1999. An additional property leased by the Company principally for field operations and sales support is located in West Chicago, Illinois. The Company's Tennessee office was closed in March 1995. For the year ended December 31, 1994 and the six month period ended June 30, 1995, the Company's aggregate net rental expenses for all properties and equipment were approximately $2,326,000 and $1,500,000 respectively. LEGAL PROCEEDINGS There are no material pending legal proceedings involving the Company or any of its property. The Company knows of no legal or administrative proceedings against the Company contemplated by governmental authorities. 27 31 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON SHARES The Common Shares are currently traded on the AMEX and PSE. The announcement by the Company of the terms of the Prior Restructuring in early April 1994 was followed by a significant decline in the market price of the Common Shares. The Company's losses and net capital deficiency have caused the Company to no longer satisfy the minimum criteria with respect to net income and net worth for continued listing published by the AMEX. The per share trading price is also below the minimum criteria of such exchange. The closing per share price of the Common Shares was $1.625 at June 30, 1995. The Company has been advised that its net capital deficiency is inconsistent with the criteria applied by the PSE for continued listing on such exchange. The AMEX and PSE are currently reviewing the Company's financial condition following the restructuring in order to determine whether the Common Shares will continue to be listed for trading thereon. The table below sets forth the high and low closing sales prices of the Common Shares of ASHS on the American Stock Exchange Consolidated Reporting System for each full quarter for the last two fiscal years.
PRICES FOR COMMON SHARES -------------- QUARTER ENDING HIGH LOW -------------- ---- --- March 31, 1993...................................... 3 7/8 2 3/4 June 30, 1993....................................... 4 1/4 2 7/8 September 30, 1993.................................. 4 5/8 3 3/8 December 31, 1993................................... 4 2 5/8 March 31, 1994...................................... 3 1/2 2 3/4 June 30, 1994....................................... 13/16 1/2 September 30, 1994.................................. 11/16 3/16 December 31, 1994................................... 5/8 3/16 March 31, 1995...................................... 5/8 1/4 June 30, 1995....................................... 2 5/16
The Company estimates that there were approximately 1700 beneficial holders of its Common Shares as of October 6, 1995. The Company did not pay cash dividends in 1993 or 1994 or in the first two quarters of 1995 and does not intend to pay dividends in the near future. The Company is prohibited by its credit agreements from paying dividends on the Common Shares and does not anticipate being in a position to pay dividends for the foreseeable future. 28 32 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS Set forth below is certain information as of October 6, 1995 regarding each of the directors of the Company. ERNEST A. BATES, M.D. has been a director, the Chairman of the Board and Chief Executive Officer of the Company since it was incorporated in 1983. He founded the Company's predecessor limited partnership in 1980. Dr. Bates is 58 years old. WILLIE R. BARNES has been a director and Secretary of the Company since 1984. He has been a partner in the law firm of Musick Peeler & Garrett since June 1992, was in solo practice from February 1992 until June 1992, was a partner in the law firm of Katten Muchin Zavis & Weitzman from March 1991 until January 1992, was a partner in the law firm of Wyman Bautzer Kuchel & Silbert from April 1989 until its dissolution effective March 14, 1991, and was a partner in the law firm of Manatt Phelps Rothenberg & Phillips from April 1979 until March 1989. Mr. Barnes is 63 years old. WILLIE L. BROWN, JR. has been a director of the Company since 1984. He has been a member of the Assembly of the state of California since 1964, was Speaker of the Assembly from 1980 until May 1995, and was named Speaker Emeritus in May 1995. He is the sole proprietor of the Law Offices of Willie L. Brown, Jr. in San Francisco, California, which began operations in 1978. He also is of counsel to the law firm of Christensen, White, Miller, Fink & Jacobs in Los Angeles, California since July 1994. Mr. Brown is 61 years old. JOHN F. RUFFLE was elected a Director of the Company on May 18, 1995. He retired in 1993 as Vice-Chairman of the Board of J.P. Morgan & Co. Incorporated. He also is a Director of Bethlehem Steel Corporation; a Director of J.P.M. Advisor Funds; a Director of Trident Corp.; a Trustee of The Johns Hopkins University; a Trustee of the Overlook Hospital Foundation, Summit, N.J.; and a Trustee of the Madison, N.J. YMCA. He is a graduate of The Johns Hopkins University, with an M.B.A. in finance from Rutgers University, and is a Certified Public Accountant. Mr. Ruffle is 58 years old. AUGUSTUS A. WHITE III, M.D. has been a director of the Company since 1990. He has been a Professor of Orthopaedic Surgery at Harvard Medical School since 1978. He was Orthopaedic Surgeon-in-Chief at Beth Israel Hospital, Boston, MA from 1978 to 1991. Dr. White is 58 years old. CHARLES B. WILSON, M.D. has most recently been a director of the Company since June 1993. He also was a director of the Company from March 1984 until March 1989. He has been a Professor and Director of the Brain Tumor Research Foundation at the University of California Medical Center, San Francisco since 1968, and from 1968 until April 1, 1994 was the Chief of its Department of Neurosurgery. Dr. Wilson is 66 years old. EXECUTIVE OFFICERS The following table provides certain information, as of October 6, 1995, concerning those persons who served as executive officers of the Company in 1994. The executive officers were appointed by the Board of Directors and serve at the discretion of the Board of Directors. 29 33
NAME AGE POSITION ---- --- -------- Ernest A. Bates, M.D............ 58 Chairman of the Board of Directors, Chief Executive Officer, and Acting President and Chief Operating Officer Craig K. Tagawa................. 42 Senior Vice President -- Chief Financial Officer Richard Magary.................. 54 Senior Vice President -- Administration James R. Brock.................. 62 Senior Vice President -- Special Projects Gregory Pape.................... 39 Senior Vice President -- Sales and Marketing David Neally.................... 43 Senior Vice President -- Operations
ERNEST A. BATES, M.D., founder of the Company, has served in the positions listed above since the incorporation of the Company, except for the periods May 1, 1991 through November 6, 1992 and February 1989 through August 1989 during which time Dr. Bates did not serve in the capacity of President and Chief Operating Officer. Dr. Bates is a graduate of The Johns Hopkins University and the University of Rochester. He is currently an Assistant Clinical Professor of Neurosurgery at the University of California Medical Center at San Francisco, and a member of the Board of Trustees of The Johns Hopkins University and the University of Rochester. CRAIG K. TAGAWA has served as Chief Financial Officer since January 1992. Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice President on February 28, 1993. 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 (owner, operator of hospitals and other health care businesses). Mr. Tagawa received his Undergraduate degree from the University of California at Berkeley and his MBA from Cornell University. RICHARD MAGARY has served as Senior Vice President -- Administration since February 28, 1993. 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. JAMES R. BROCK has served as Senior Vice President -- Special Projects since August 1, 1995. From January 1, 1995 to July 1995, Mr. Brock served as Senior Vice President -- Cardiovascular Services. From May 29, 1994 to December 1994, he served as a Regional Sales Manager. From May 1992 through February 1993, he served as a Vice President -- Corporate Development. Prior to May 1992, Mr. Brock served in a variety of sales and operational positions with the Company since its inception. Mr. Brock holds a Bachelor of Science Degree in Accounting and Economics from the University of Denver, with postgraduate work in law and health care management. 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. DAVID NEALLY has served as Senior Vice President -- Operations since May 1994. From January 1993 through May 1994, Mr. Neally was a Zone Vice President for Operations. Prior to January 1993, Mr. Neally had served in a variety of sales and operations positions since joining CuraCare in 1980. Mr. Neally received his undergraduate degree from John Wood College in Quincy, Illinois and is also a graduate of St. Mary's School of Cardiopulmonary Technology in Quincy, Illinois. 30 34 COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the compensation paid by the Company during 1994 and paid in 1994 for services rendered in all capacities during 1993 to the Chief Executive Officer and each executive officer other than the Chief Executive Officer who served as an executive officer at December 31, 1994, and earned cash compensation of $100,000 or more during 1994. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS(6) ANNUAL COMPENSATION ------------------- ----------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) OPTIONS - ---------------------------- ---- --------- ------- --------------- ------------------- Ernest A. Bates(3).......... 1994 $225,218 -- -- -- Chairman of the Board, 1993 $235,010 -- -- -- Chief Executive Officer 1992 $229,133 -- -- -- Craig K. Tagawa(4).......... 1994 $119,426 -- -- -- Senior Vice President 1993 $122,237 $ 700(5) -- -- Chief Financial Officer 1992 $113,902 -- -- 15,000 David Neally................ 1994 $ 92,827 $17,322 -- Senior Vice President 1993 $ 73,692 $ 5,137 -- 8,250 Operations 1992 $ 68,824 $13,009 -- 750 Gregory Pape................ 1994 $238,186 -- -- -- Senior Vice President 1993 $196,177 -- -- 20,000 Sales and Marketing 1992 $110,001 -- -- --
- --------------- (1) Each amount under this column includes amounts accrued in 1992, 1993 and 1994 that would have been paid to such persons in such years, except that such amounts were instead deferred pursuant to the Retirement Plan for Employees of American Shared Hospital Services and CuraCare, a defined contribution plan available to employees of the Company generally. (2) The Company has determined that with respect to the executive officers named in the Summary Compensation Table, the aggregate amount of other benefits does not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported in the Summary Compensation Table as paid to such executive officer in the relevant year. (3) The lower salary in 1992 compared with 1993 for Dr. Bates reflects a 10% salary reduction which was in effect during the first three months of 1992. Dr. Bates' salary again was reduced by 5%, effective February 6, 1994. (4) The lower salary in 1992 compared with 1993 for Mr. Tagawa reflects an 8% salary reduction which was in effect during the first three months on 1992. Mr. Tagawa's salary again was reduced by 5%, effective February 6, 1994. (5) Represents the fair market value of 100 Common Shares granted to Mr. Tagawa pursuant to the American Shared Hospital Services 1991 Employee Stock Bonus Plan. Pursuant to such Plan, 100 Common Shares were granted to each employee, other than the Chief Executive Officer, who was employed by the Company from June 21, 1991 through February 26, 1992 and whose basic employment compensation was reduced by 2% or more during that time period. (6) No restricted stock awards or long-term incentive plan payouts were made to the executive officers named in the Summary Compensation Table during the years listed in the Summary Compensation Table. 31 35 OPTION GRANTS AND LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR The "Option Grants in the Last Fiscal Year" table and "Long-Term Incentive Plan Awards" ("LTIP Awards") table has been omitted because no options were granted and no LTIP Awards made during 1994 to the Company's executive officers named in the Summary Compensation Table. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth the number of shares acquired on exercise of stock options and the aggregate gains realized upon exercise of such options during 1994, by the Company's executive officers named in the Summary Compensation Table. The following table also sets forth the number of shares underlying exercisable and unexercisable options held by such executive officers on December 31, 1994. The table does not include the aggregate gains that would have been realized had those options been exercised on December 31, 1994 because the option exercise price for each option exceeded the market price per Common Share on such date. 1984 STOCK OPTION PLAN AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS SHARES FISCAL YEAR-END AT FISCAL YEAR-END($) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- Ernest A. Bates, M.D........ -- -- -- -- -- -- Craig K. Tagawa............. -- -- 30,000 5,000 -- -- David Neally................ -- -- 4,800 5,200 -- -- Gregory Pape................ -- -- 8,000 12,000 -- --
1995 STOCK OPTION PLAN On August 15, 1995, the Board of Directors approved the Company's 1995 Stock Option Plan (the "1995 Plan") providing for non-qualified stock options and "incentive stock options," subject to approval by the Company's shareholders. At the 1995 Annual Meeting held on October 6, 1995, the shareholders approved the 1995 Plan. Under the 1995 Plan, 330,000 Common Shares have been reserved for awards to officers and other key employees, non-employee directors, and advisors subject to adjustment in the event of a stock split, stock dividend, recapitalization, reorganization, merger or other similar event or change in capitalization. Approximately six employees and five non-employee directors are eligible to participate in the 1995 Plan. Any person who beneficially owns more than 15% of the outstanding Common Shares is not be eligible to participate in the 1995 Plan. The 1995 Plan is administered by the Stock Option Committee of the Board of Directors (the "Committee") which determines when options become exercisable, provided that no option shall be exercisable later than ten years after its date of grant. Options may be exercised during the lifetime of the optionee only by such optionee and are not transferable other than by optionee's will or by the laws of descent or distribution or pursuant to beneficiary designation procedures specified in the 1995 Plan. Upon shareholder approval, the 1995 Plan became effective as of August 15, 1995 and will terminate ten years thereafter, unless terminated earlier by the Board of Directors. The Board of Directors may amend the 1995 Plan at any time except that, without the approval of the shareholders of the Company, no amendment may, among other things, (i) increase the number of Common Shares available under the 1995 Plan, (ii) reduce the minimum purchase price of a Common Share subject to an option or (iii) extend the term of the 1995 Plan. 32 36 Non-qualified stock options. On August 15, 1995, the Committee granted 243,500 non-qualified options to certain officers of the Company and other eligible persons, subject to approval of the 1995 Plan by the Company's shareholders. See "Security Ownership of Certain Beneficial Owners and Management." Each such option had an initial exercise price of $1.625 per Common Share, which was the closing price of the Common Shares on the AMEX on the date of grant, and vested immediately. The exercise price of all non-qualified stock options must be no less than 25% of the fair market value of the Common Shares on the date of the grant. Non-qualified options to purchase 4,000 Common Shares are also granted automatically to non-employee directors (up to an aggregate of 12,000 options granted to each non-employee director under any plan of the Company) on the date of each annual meeting of shareholders of the Company and, on the date a person first becomes a non-employee director, such non-employee director will be granted a number of options pro-rated for the period of time until the next annual meeting of shareholders. Such options will be fully exercisable one year after their date of grant with special provisions for death and termination for disability and will expire ten years after the date of grant. At its meeting on August 15, 1995, the Committee amended the terms of substantially all options outstanding under the Company's 1984 Option Plan (covering an aggregate of approximately 165,000 Common Shares) to reduce the initial exercise price to $1.625 per Common Share, which was the closing price of Common Shares on the AMEX on such date. In the event of certain change of control events or the approval by shareholders of a reorganization, merger or consolidation (unless the Company's shareholders receive 60% or more of the stock of the surviving company) or the approval by shareholders of a liquidation, dissolution or sale of all or substantially all of the Company's assets, all awards will become fully vested and be "cashed-out" by the Company except, in the case of a merger or similar transaction in which the shareholders receive publicly traded common stock, all outstanding options will become exercisable in full, and each option will represent a right to acquire the appropriate number of shares of common stock received in the merger or similar transaction. Special provisions regarding exercise exist in the event of death or termination for disability. Incentive Stock Options. No incentive stock option will be exercisable more than ten years after its date of grant, unless the recipient of the incentive stock option owns greater than ten percent of the voting power of all shares of capital stock of the Company (a "ten percent holder"), in which case the option must be exercised within five years after its date of grant. The option exercise price of an incentive stock option will not be less than the fair market value of the Common Shares on the date of grant of such option, unless the recipient of the incentive stock option is a ten percent holder, in which case the option exercise price will be 110% of fair market value. Special provisions regarding exercise exist in the event of death or termination for disability. 33 37 1995 STOCK OPTION PLAN TABLE The following table sets forth (i) the number of Common Shares underlying options that were granted to the Chairman and Chief Executive Officer and each executive officer named in the Summary Compensation Table, all executive officers as a group and to all persons (other than non-employee directors and executive officers) eligible to receive awards under the 1995 Plan and the value of such Common Shares at August 15, 1995, and (ii) the number of Common Shares underlying options to be granted to non-employee directors on the date of each annual meeting of shareholders beginning with the 1995 Annual Meeting on October 6, 1995.
NUMBER OF COMMON SHARES DOLLAR UNDERLYING VALUE(S)(5) NAME AND POSITION OPTIONS ($) ------------------------------------------------ ------------- ----------- Ernest A. Bates, M.D............................ 0 0 Chairman and Chief Executive Officer Craig K. Tagawa................................. 90,000(1) $ 146,250 Senior Vice President -- Chief Financial Officer David Neally.................................... 45,000(1) 73,125 Senior Vice President -- Operations Gregory Pape.................................... 45,000(1) 73,125 Senior Vice President -- Sales and Marketing Executive Group................................. 225,000(2) 365,625 Non-Executive Officer Employee Group............ 49,500(3) 80,438 Non-Executive Director Group (3 persons)........ 12,000(4) $ 19,500
- --------------- (1) Represents options granted on August 15, 1995, subject to shareholder approval of the 1995 Plan, at an exercise price equal to $1.625, which was the closing price of the Common Shares on the AMEX on such date. (2) Comprises four individuals who were granted options on August 15, 1995, subject to shareholder approval of the 1995 Plan, at an exercise price equal to $1.625, which was the closing price of the Common Shares on the AMEX on such date. (3) Comprises two individuals who were granted options on August 15, 1995, subject to shareholder approval of the 1995 Plan, at an exercise price equal to $1.625, which was the closing price of the Common Shares on the AMEX on such date. (4) The option exercise price per share would be the closing sale price of the Common Shares on the AMEX on the date of grant. On October 6, 1995, the closing sale price of Common Shares on the AMEX was $1.625 per share. Each option will be fully exercisable one year after the date of grant and will expire ten years after the date of grant. (5) Dollar value of options granted is calculated as the number of Common Shares underlying the options multiplied by the closing sale price of the Common Shares on the AMEX on the date of the grant. The taxable benefit received by each grantee upon exercise of the options will consist of any increase in the price of the Common Shares on the AMEX on the date of exercise from the closing price on the date of grant. In addition, the Board of Directors and the Company's shareholders have approved the terms of a NonQualified Stock Option Agreement between the Company and Dr. Bates. Pursuant to this Agreement, Dr. Bates may purchase, at any time prior to August 15, 2005, up to 1,495,000 Common Shares at an initial exercise price of $0.01 per share. COMPENSATION OF DIRECTORS During 1994, non-employee directors were scheduled to receive an annual retainer fee of $5,000 each. The non-employee directors agreed to defer payment of the retainer fee during 1994 to assist the Company 34 38 with its cash flow. The 1994 retainer fees were paid in February 1995. Non-employee directors also were entitled to receive $1,000 for attendance in person at each regular and special meeting of the Board of Directors. In addition, non-employee directors who were members of a committee of the Board of Directors were entitled to receive $200 for attendance in person at each committee meeting. Non-employee directors are not entitled to any fee for Board of Directors or committee meetings held by conference telephone at which they are not present in person. Of the four Board meetings held during 1994, one was a regular meeting which directors attended in person, and three were special meetings which were held by conference telephone. Non-employee directors also received reimbursement of expenses incurred in attending meetings. No payment is made for attendance at meetings by any director who is an employee of the Company. The director compensation schedule for 1995 will not change from the 1994 schedule. EMPLOYMENT AGREEMENTS In 1984, the Company entered into employment agreements with Ernest A. Bates, M.D. (the Company's Chairman and Chief Executive Officer) and James R. Brock (then the Company's Vice President -- Marketing) each of which was automatically extended for successive one-year periods through January 1994 when such agreements terminated in accordance with their terms. Each of the agreements provided that, in the event of a change in control or sale of all or substantially all of the assets of the Company, the employment agreements would not terminate and the surviving, resulting or acquiring corporation would be bound by the terms of the agreements. Each of these employment agreements provided for salary increases to be determined by the Board of Directors and certain other benefits. BOARD OF DIRECTORS AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION This Report of the Board of Directors and Stock Option Committee describes the Company's method of compensating its executive officers, and describes the basis on which 1994 compensation was paid to such executive officers, including those named in the Summary Compensation Table. The Board of Directors determined that compensation paid in 1994 by the Company to its Chief Executive Officer and other executive officers would be based on policies in effect in recent prior years. As a result, it was unnecessary for the Compensation Committee to meet, and it did not meet, during 1994. The Company's compensation program seeks to establish compensation that is competitive in both the healthcare industry and among entrepreneurial, growth-oriented companies in order to attract and retain high quality employees. Compensation is linked to each employee's level of responsibility and personal achievements with respect to operational and financial goals established by the Chief Executive Officer and the Board of Directors. Depending on the individual officer's area of responsibility, such goals may include new business and revenue acquisition, operating expense reduction and control, operating efficiencies, etc. In addition, the compensation system seeks to develop and encourage employee ownership of the Company's stock through stock options. The primary component of executive compensation for the Company is base salary, except in the case of the Senior Vice President -- Sales and Marketing where sales commissions are a substantial component of compensation and are included under "salary" in the Summary Compensation Table. Discretionary bonuses may be paid, based on a formula, if financial and other results of the individual executive's area of responsibility meet or exceed financial and operational targets established at the beginning of the fiscal year. No bonuses have been paid by the Company during the last three fiscal years, except in the case of bonuses paid pursuant to pre-established formulae based on goals and targets of a specific business area. Base salary was established for the Chief Executive Officer and other executive officers with the assistance of an outside consulting firm in 1991. Such compensation was designed to fall in the mid-range for the relevant executive position or compensation paid by a group of entrepreneurial, growth-oriented companies believed by the Company to be comparable in their stage of development and business condition, based on information provided by the independent compensation consulting organization. The companies surveyed were not identical to those reflected in the performance graph set forth in this Registration Statement. The compensation of most of the Company's senior executives, including the Chief Executive Officer, was reduced 35 39 by up to 10% during the period from June 1991 through March 1992. Such executive officers were compensated throughout 1993 at the level in effect prior to the reductions. Any other increases in base compensation during the past three fiscal years have been made only to reflect the increased responsibilities of the particular executive officer. The compensation of certain of the Company's executive officers again was reduced, beginning in February 1994, by 5%. In addition to base compensation, the Company has used grants of stock options to retain senior executives (other than the Chief Executive Officer) and to motivate them to improve long-term stock market performance. No new options were granted during 1994. The number of options granted in the past was determined by reference to the level of responsibility of the particular executive in the Company and such executive's proposed role in the Company's future operations. On August 15, 1995, the Board of Directors approved the 1995 Stock Option Plan and issued stock options to key employees and directors, subject to shareholder approval. See "1995 Stock Option Plan."
BOARD OF DIRECTORS STOCK OPTION COMMITTEE --------------------------------------------------- ---------------------- Ernest A. Bates, M.D., Chairman Ernest A. Bates, M.D. Willie R. Barnes John F. Ruffle Willie L. Brown, Jr. John F. Ruffle Augustus A. White III, M.D. Charles B. Wilson, M.D.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 6, 1994, the Company entered into settlement agreements with each of Elekta Instruments, Inc. ("Elekta"), the manufacturer of the Gamma Knife, and NME Hospitals, Inc., d/b/a USC University Hospital ("USC Hospital"), the lessor of a Gamma Knife, to resolve disputes arising out of the Company's inability to make a required progress payment under the agreement to purchase such Gamma Knife. The settlement agreements required that the Company terminate its original agreement to purchase the Gamma Knife from Elekta and to lease the Gamma Knife to USC Hospital. Further conditions to execution of the settlement agreements included that Dr. Bates, the Company's Chairman and Chief Executive Officer, enter into a purchase agreement and lease agreement with Elekta and USC Hospital, respectively, substantially identical to the respective terminated agreements. Pursuant to the new purchase agreement, Dr. Bates was entitled to purchase the Gamma Knife from Elekta for an aggregate purchase price of $2,900,000 plus sales tax. Dr. Bates obtained financing for the Gamma Knife purchase from an unaffiliated third party. Dr. Bates' lender has financed the total purchase price, less $290,000 advanced by the Company, pursuant to an interest bearing installment note and security agreement. The Company has advanced $290,000 of the purchase price, to be repaid by Dr. Bates over the term of the new lease agreement, pursuant to a promissory note bearing interest at 6% per annum and repayable over 60 months. The Company and Dr. Bates, have entered into an option agreement entitling the Company to purchase the Gamma Knife from Dr. Bates for an amount equal to the remaining debt obligations associated with the Gamma Knife plus costs and losses, if any, incurred by the Chief Executive Officer, when the Company is able to obtain financing for this purchase. It is the Company's intent to exercise the option to purchase the Gamma Knife from Dr. Bates as soon as the Company is able to obtain the required funds. On October 6, 1995 the Company entered into the Option Agreement with its Chairman and Chief Executive Officer. Under the Option Agreement, Dr. Bates was granted a ten-year option to purchase 1,495,000 Common Shares for an initial exercise price of $0.01 per share. In addition, on May 17, 1995, as part of the Notes Repurchase, the Company issued 184,000 Common Shares to Dr. Bates in partial consideration of his personal guarantee of $6,500,000 of indebtedness of the Company. 36 40 Willie R. Barnes, the Secretary and a director of the Company, is a partner in the law firm of Musick, Peeler & Garrett. That law firm performed legal services for the Company during 1994 and 1995. The management of the Company is of the opinion that the fees paid to Mr. Barnes' law firm are comparable to those fees that would have been paid for comparable legal services from a law firm not affiliated with the Company. COMPLIANCE WITH SECTION 16(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934 Reports filed under the Exchange Act and received by the Company on or after January 1, 1994 indicate that during 1994 and 1995 executive officers of the Company did not file timely reports as follows: James R. Brock, David Neally and Gregory Pape each did not file an Initial Statement of Beneficial Ownership of Securities within the required period following such person's appointment as an Executive Officer of the Company. Each such person filed the required report in June 1995. John F. Ruffle did not file an Initial Statement of Beneficial Ownership of Securities within the required period following his appointment as a Director of the Company. He filed the required report on June 20, 1995. James R. Brock did not file a Statement of Changes of Beneficial Ownership of Securities for a sale of Common Shares occurring in September 1995 within the required period following the transaction. He filed the required report on October 16, 1995. Ernest A. Bates, M.D. has not filed a Statement of Changes in Beneficial Ownership for the 184,000 Common Shares issued to him in May 1995. He will file the required report with a Statement of Beneficial Changes of Ownership for the option for 1,495,000 Common Shares issued to him in October 1995. 37 41 PERFORMANCE GRAPH, TOTAL RETURN TO SHAREHOLDERS The following graph and table compare cumulative total shareholder return on the Company's Common Shares with the cumulative total return of the Standard & Poor's 500 Stock Index and a group of peer companies in the diagnostic imaging industry during the five years ended December 31, 1994.
American Shared Hos- Measurement Period pital S&P 500 In- (Fiscal Year Covered) Services dex Peer Group 1989 100.00 100.00 100.00 1990 33.33 96.90 97.96 1991 148.15 126.42 77.73 1992 88.89 136.05 48.71 1993 77.78 149.76 20.80 1994 14.81 151.74 23.39
RETURN (AS A PERCENTAGE INCREASE OR DECREASE) --------------------------------------------- COMPANY/INDEX NAME 1990 1991 1992 1993 1994 ------- ------- ------- ------- ------- American Shared Hospital -66.67 344.44 -40.00 -12.50 -80.95 Services S&P 500 Index -3.11 30.47 7.62 10.08 1.32 Peer Group -2.04 -20.65 -37.34 -57.30 12.46
INDEXED CUMULATIVE RETURNS
BASE PERIOD RETURN -------------------------------------------------------------- COMPANY/INDEX NAME 1989 1990 1991 1992 1993 1994 ------- ------- ------- ------- ------- ------- American Shared Hospital 100.00 33.33 148.15 88.89 77.78 14.81 Services S&P 500 Index 100.00 96.90 126.42 136.05 149.76 151.74 Peer Group 100.00 97.96 77.73 48.71 20.80 23.39
PEER GROUP POPULATION Alliance Imaging Inc (included in the 1992-1994 returns only) American Health Services (excluded in the 1993, 1994 returns (no price information available)) Health Images Inc Maxum Health Corp. (included in the 1992 returns only) Medalliance Inc (included in the 1993, 1994 returns only (previously ImageAmerica Corp.)) Medical Diagnostics Inc (included in the 1993, 1994 returns only) Medical Imaging Centers of America Medical Resources Inc (included in the 1993, 1994 returns only) NMR of America Inc This total shareholders return model assumes reinvested dividends. Fiscal year basis: December Prepared by Standard & Poor's Compustat, a division of McGraw-Hill Inc.
38 42 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Shares as of October 6, 1995 of (i) each person known to the Company to own beneficially 5% or more of the Common Shares, (ii) each director of the Company, (iii) the chief executive officer and each other executive officer named in the Summary Compensation Table, and (iv) all directors and executive officers as a group. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON SHARES OWNED BENEFICIALLY -------------------------------------- AMOUNT AND NATURE OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(2) CLASS(8) ------------------------------------------------------ ----------------------- ---------- Total Number of Shares................................ 6,668,901(9) 100.0% Ernest A. Bates, M.D.(1).............................. 2,666,000(6) 46.0% SunAmerica Inc.(3).................................... 128,066(3) 2.9% SunAmerica Life Insurance Company(3).................. 277,473(3) 6.4% Anchor National Life Insurance Company(3)............. 406,819 9.3% Lion Advisors, L.P.................................... 384,195(4) 8.9% 1301 Avenue of the Americas New York, NY 10019 AIF II, L.P........................................... 170,752(4) 4.0% c/o Apollo Advisors, L.P. 1999 Avenue of the Stars Los Angeles, CA 90071 General Electric Company.............................. 225,000(5) 5.0% c/o GE Medical Systems 20825 Swenson Drive Waukesha, WI 53186 Willie R. Barnes(1)................................... 7,000(6) * Willie L. Brown, Jr.(1)............................... 6,000(6) * John F. Ruffle(1)(7).................................. 25,200(6)(7) * Augustus A. White, III, M.D.(1)....................... 14,000(6) * Charles B. Wilson, M.D.(1)............................ 4,800(6) * Craig K. Tagawa(1).................................... 127,600(6) 2.9% Senior Vice President -- Chief Financial Officer David Neally(1)....................................... 51,150(6) 1.2% Senior Vice President -- Operations Gregory Pape(1)....................................... 53,500(6) 1.2% Senior Vice President -- Sales and Marketing All Directors & Executive Officers as a Group (10 3,028,550(6) persons)............................................ 50.0%
- --------------- * Less than 1% (1) The address of each such individual is c/o American Shared Hospital Services, Four Embarcadero Center, Suite 3620, San Francisco, California 94111-4155. The share ownership information for Dr. Bates includes 1,495,000 Common Shares underlying an immediately exercisable option with an initial exercise price equal to $0.01 per share. (2) Each person directly or indirectly has sole voting and investment power with respect to the shares listed under this column as being owned by such person. (3) Based on information contained in the Schedule 13D dated May 17, 1995 and filed with the Securities and Exchange Commission by SunAmerica Inc. and its direct and indirect subsidiaries, SunAmerica Life Insurance Company (formerly known as Sun Life Insurance Company of America) and Anchor National Life Insurance Company, such entities then owned beneficially 557,923 Common Shares, including immediately exercisable Warrants to acquire 116,436 Common Shares. As of October 6, 1995, 39 43 such entities were issued an additional 201,607 Common Shares and 52,828 Warrants. The address of each Beneficial Owner is c/o SunAmerica Inc., 1 SunAmerica Center, Los Angeles, CA 90067. (4) Based on information contained in the Schedule 13D dated May 17, 1995 and filed jointly with the Securities and Exchange Commission by Lion Advisors, L.P. ("Lion") and AIF II, L.P. ("AIF II"), such entities then owned beneficially 381,135 Common Shares, including immediately exercisable Warrants to acquire 79,541 Common Shares. As of October 6, 1995, such entities were issued an additional 137,724 Common Shares and Warrants to acquire 36,088 Common Shares. The managing general partner of AIF II is Apollo Advisors, L.P. ("Advisors"). Advisors and Lion are affiliates. Lion beneficially holds the indicated securities for an investment account under management over which Lion has investment, dispositive and voting power. The Company does not believe that Lion and AIF II are affiliates of the Company under the Act. (5) Represents immediately exercisable Warrants to acquire 225,000 Common Shares. (6) Includes shares underlying options that are currently exercisable or which will become exercisable within 60 days following October 6, 1995: Dr. Bates, 1,495,000; Mr. Barnes, 6,000 shares; Mr. Brown, 6,000 shares; Mr. Ruffle, 4,000 shares; Dr. White, 12,000 shares; Dr. Wilson, 4,800 shares; Mr. Tagawa, 125,000 shares; Mr. Neally, 50,050 shares; Mr. Pape, 53,000 shares; and Directors and Executive Officers as a group, 1,815,850 shares. (7) Mr. Ruffle was elected to the Board of Directors effective May 18, 1995. (8) Shares that any person or group of persons is entitled to acquire upon the exercise of options or warrants within 60 days after October 6, 1995 are treated as issued and outstanding for the purpose of computing the percent of the class owned by such person or group of persons but not for the purpose of computing the percent of the class owned by any other person. (9) Represents the aggregate of issued and outstanding Common Shares plus Common Shares that all persons or groups of persons are entitled to acquire upon the exercise of options or warrants within 60 days after October 6, 1995. 40 44 SELLING SECURITYHOLDERS On May 17, 1995, in connection with the Notes Repurchase, the Company issued 819,000 Common Shares and immediately exercisable Warrants (the "Noteholder Warrants") to purchase 216,000 Common Shares to certain holders of the Subordinated Notes. An additional 374,000 Common Shares and 98,000 Noteholder Warrants were issued to such holders as of October 6, 1995. The Noteholder Warrants will expire on May 17, 2002 and have an initial exercise price of $0.75 per Common Share. In connection with the Lease Restructuring, on December 30, 1994, the Company issued to GE Medical immediately exercisable Warrants to acquire 97,853 Common Shares at an initial exercise price of $0.01 per share until March 31, 1996. On May 17, 1995, the Company issued additional Warrants to GE Medical to acquire 127,147 Common Shares at an initial exercise price of $0.01 per share until September 30, 1996. This Prospectus relates to the offer and sale by the Selling Securityholders of the 1,193,000 Common Shares, the Noteholder Warrants and GE Warrants and the 539,000 Common Shares underlying such Warrants. The Prospectus is part of a registration statement filed under the Act pursuant to the terms of the Registration Rights Agreement. In the Registration Rights Agreement, the Company has agreed to keep the registration statement effective for up to 36 months or until all of the Securities have been sold, if earlier. The Registration Rights Agreement provides that certain rights of the parties thereto are assignable in connection with a sale of Common Shares and/or Warrants. The Securities offered by this Prospectus are offered for the account of the Selling Securityholders. The following table sets forth, as of October 6, 1995, the names of the Selling Securityholders offering the Securities, the number and percentage of Common Shares owned by such Selling Securityholders, and the number of Warrants owned by such Selling Securityholders.
COMMON PERCENTAGE OF GE NOTEHOLDER PERCENTAGE SHARES COMMON SHARES WARRANTS WARRANTS OF OWNED OWNED OWNED OWNED WARRANTS ------- ------------- ------- ----------- ---------- SunAmerica Life Insurance Company.......... 219,659 5% -0- 57,814 11% Anchor National Life Insurance Company..... 322,053 8% -0- 84,766 16% SunAmerica Inc............................. 101,382 3% -0- 26,684 5% Lion Advisors, L.P......................... 304,144 7% -0- 80,051 15% AIF II, L.P................................ 135,174 3% -0- 35,578 7% General Electric Company acting through GE Medical Systems.......................... -0- 0% 225,000 -0- 42% Grace Brothers, Ltd........................ 105,385 2% -0- 27,737 5% Upchurch Living Trust U/A/D 12/14/90....... 5,203 * -0- 1,370 *
- --------------- * less than one percent Because the Selling Securityholders may sell all or a part of their Common Shares and Warrants, no estimate can be given as to the number of Common Shares or Warrants to be held by any Selling Securityholders upon termination of the offering. The Common Shares owned by the Selling Securityholders represent approximately 28% of the issued and outstanding Common Shares and the Common Shares underlying the Warrants represent approximately 11% of the issued and outstanding Common Shares plus those Common Shares underlying the Warrants. 41 45 DESCRIPTION OF SECURITIES COMMON SHARES The authorized capital stock of the Company consists of 10,000,000 Common Shares, no par value. At October 6, 1995, 4,244,401 shares were issued and outstanding and were held of record by 425 persons. The Company estimates there were approximately 1700 beneficial holders of its Common Shares as of October 6, 1995. The Common Shares of the Company are listed on the American Stock Exchange and The Pacific Stock Exchange under the symbol "AMS." The Company's Board of Directors has authorized completion of listing applications for additional Common Shares with the AMEX and PSE with respect to the Securities. See "Market Price on and Dividends on the Registrant's Common Shares." Each Common Share has the same rights, privileges and preferences as every other share and will share equally in the Company's net assets upon liquidation or dissolution. The Common Shares have no conversion or redemption rights or sinking fund provisions. All Common Shares outstanding are, and all Common Shares issued upon exercise of the Warrants will be, validly issued, fully paid and non-assessable. The Common Shares have no preemptive rights. Shareholders are entitled to one vote for each share owned on all matters submitted to the shareholders and have the right, subject to certain conditions, to elect to cumulate their votes in the election of directors. Shareholders are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. The Company did not pay dividends in 1993 or 1994 and does not intend to pay dividends in the near future. See "Market Price on and Dividends on the Registrant's Common Shares" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of financing agreements that prohibit or restrict the declaration of dividends on the Common Shares. The transfer agent and registrar for the Common Shares is American Stock Transfer & Trust Company, New York, New York. WARRANTS GE Warrants. The GE Warrants entitle the registered holder thereof to acquire up to 225,000 Common Shares at an initial exercise price of $0.01 per share, of which 97,853 Common Shares may be purchased to and including March 31, 1996 and 127,147 Common Shares may be purchased to and including September 30, 1996. The GE Warrants were issued in certificated form. The GE Warrants may be exercised by surrendering the warrant certificate evidencing such Warrants, a written election to exercise the GE Warrant specifying the number of Common Shares to be purchased and the payment of the exercise price. Payment of the exercise price may be made by check payable to the Company. Upon surrender of the warrant certificate and payment of the purchase price, the Company will deliver or cause to be delivered stock certificates representing the number of whole Common Shares to which such holder is entitled. If less than all of the GE Warrants evidenced by a warrant certificate are to be exercised, a new warrant certificate will be issued for the remaining number of GE Warrants. No fractional Common Shares will be issued upon exercise of the GE Warrants. A fractional share otherwise issuable will be rounded up to the nearest whole share. The number of Common Shares purchasable upon the exercise of the GE Warrants and the exercise price are subject to adjustment in certain events (and subject to certain limitations set forth in the warrant certificate) including: (i) the payment by the Company of a dividend or the making of a distribution on its Common Shares in additional Common Shares or in securities convertible into Common Shares other than convertible indebtedness or convertible preferred stock, (ii) subdivisions and combinations of the Common Shares, and (iii) reclassifications of the Common Shares. Until exercise of the GE Warrant and the purchase of Common Shares, the holder of the GE Warrants has no right to vote on matters submitted to the shareholders of the Company and has no right to receive dividends. Until such time, the holder of the GE Warrants is not entitled to share in the net assets of the Company in the event of liquidation, dissolution or the winding up of the Company's affairs. 42 46 Noteholder Warrants. The Noteholder Warrants entitle the registered holders thereof to acquire up to 314,000 Common Shares at an initial exercise price of $0.75 per share up to and including May 17, 2002. The Noteholder Warrants were issued in certificated form. The Noteholder Warrants may be exercised by surrendering the warrant certificate evidencing such warrants, a written election to exercise the Noteholder Warrant specifying the number of Common Shares to be purchased and the payment of the exercise price. Payment of the exercise price may be made at the holder's option (a) in cash, (b) by certified or official bank check payable to order of the Company, or (c) by the Company withholding that number of shares of Common Shares with a value as of the date of exercise equal to the aggregate exercise price. Upon surrender of the warrant certificate and the purchase price, the Company will deliver or cause to be delivered stock certificates representing the number of Common Shares designated to be exercised, less the number of Common Shares withheld by the Company as payment therefor, if applicable. If less than all of the Noteholder Warrants evidenced by a warrant certificate are to be exercised, a new warrant certificate will be issued for the remaining number of Noteholder Warrants. No fractional Common Shares will be issued upon exercise of the Noteholder Warrants. The Company shall pay to the holder of the Noteholder Warrant an amount in cash equal to the same fraction of the current value per share on the date of the exercise. The number of Common Shares purchasable upon the exercise of the Noteholder Warrants and the exercise price are subject to adjustment in certain events (and subject to certain limitations set forth in the warrant certificate) including: (i) the payment of a dividend on its Common Shares in additional shares of Common Shares, (ii) the payment of a dividend or other distribution on its Common Shares or other issuance to all holders of its Common Shares of rights or warrants entitling them to subscribe for Common Shares at a price per share less than the current market price on the record date of such dividend, distribution or issuance, (iii) subdivisions, combinations and reclassifications of the Common Shares, (iv) subject to an election to receive such dividend or distribution, the distribution to all holders of Common Shares of evidences of indebtedness, shares of capital stock, cash or assets (including securities, but excluding any dividend or distribution referred to in clauses (i) or (ii) above for which an adjustment is made), and (v) the issuance or sale of shares of Common Shares by the Company for consideration per share less than the current market price. No adjustment in the number of Common Shares purchasable and the exercise price will be required unless such adjustment would require an increase or decrease of at least 1% in the exercise price; provided, however, that any adjustment that is not made will be carried forward and taken into account in any subsequent adjustment. In case of certain consolidations, mergers or capital reorganizations or reclassifications of the Company, each holder of a Noteholder Warrant shall be entitled to receive, in lieu of the Common Shares of the Company, the kind and amount of securities, cash or other property to which such holder would have been entitled upon such consummation if such holder had exercised the Noteholder Warrant in full immediately prior thereto. The holders of the Noteholder Warrants have no right to vote on matters submitted to the shareholders of the Company. Except as set forth in the warrant certificate with respect to the right to elect to receive certain distributions, the holders of the Noteholder Warrants have no right to receive dividends. The holders of the Noteholder Warrants are not entitled to share in the net assets of the Company in the event of liquidation, dissolution or the winding up of the Company's affairs. PLAN OF DISTRIBUTION The Selling Securityholders may sell the Securities: (i) in an underwritten offering or offerings, (ii) through brokers and dealers, (iii) "at the market" to or through a market maker or into an existing trading market, on an exchange or otherwise, for such shares, (iv) in other ways not involving market makers or established trading markets, including direct sales to purchasers and (v) to the extent not prohibited by applicable securities law, in ways other than pursuant to the distribution plan presented in the Prospectus. Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to maintain the 43 47 effectiveness of the registration statement for a period of 36 months or until all of the Securities have been sold, if earlier. The distribution of Securities may be effected from time to time in one or more underwritten transactions at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Any such underwritten offering may be on a "best efforts" or a "firm commitment" basis. In connection with any such underwritten offering, underwriters or agents may receive compensation from the Selling Securityholders for whom they may act as agents in the form of discounts, concessions or commissions. Underwriters may sell Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. At any time a particular offer of Securities is made, if required, a Prospectus Supplement will be distributed that will set forth the names of the Selling Securityholder(s) offering such Securities, the aggregate amount of such Securities being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, any discounts, commissions and other items constituting compensation from the Selling Securityholders and any discounts, commissions or concessions allowed or reallowed or paid to dealers. Such Prospectus Supplement and, if necessary, a post-effective amendment to the Registration statement of which this Prospectus is a part will be filed with the Commission to reflect the disclosure of additional information with respect to the distribution of such Securities. The Selling Securityholders and any underwriters, dealers or agents that participate in the distribution of Securities may be deemed to be underwriters, and any profit on the sale of Securities by the Selling Securityholders and any discounts, commissions or concessions received by any such underwriters, dealers or agents might be deemed to be underwriting discounts and commissions under the Act. Under an agreement that may be entered into by the Company, underwriters, dealers, and agents who participate in the distribution of Securities may be entitled to indemnification by the Company against certain liabilities, including liabilities under the Act, or to contribution with respect to payments which such underwriters, dealers or agents may be required to make in respect thereof. The sale of the Securities by the Selling Securityholders may also be effected from time to time by Selling Securities directly to purchasers or to or through certain broker-dealers. In connection with any such sale, any such broker-dealer may act as agent for the Selling Securityholders or may purchase from the Selling Securityholders all or a portion of the Securities as principal and thereafter may resell any Securities so purchased. Sales by any such broker-dealer, acting as agent or as principal, may be made pursuant to any of the methods described below. Such sales may be made on the AMEX or PSE or other exchanges on which the Common Shares are then traded, in the over-the-counter market, in negotiated transactions or otherwise at prices and at terms then prevailing or at prices related to the then-current market prices or at prices otherwise negotiated. The Securities may also be sold in one or more of the following transactions: (a) block transactions (which may involve crosses) in which a broker-dealer may sell all or a portion of such shares as agent but may position and resell all or a portion of the block as principal to facilitate the transaction; (b) purchases by any such broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this Prospectus which is part of the Registration Statement; (c) a special offering, an exchange distribution or a secondary distribution in accordance with applicable stock exchange rules; and (d) ordinary brokerage transactions and transactions in which any such broker-dealer solicits purchasers. In effecting sales, broker-dealers engaged by the Selling Securityholders may arrange for other broker-dealers to participate. Broker-dealers will receive commissions or other compensation from the Selling Securityholders in amounts to be negotiated immediately prior to the sale that will not exceed those customary in the types of transaction involved. Broker-dealers may also receive compensation from purchasers of the shares which is not expected to exceed that customary in the types of transactions involved. 44 48 Unless prohibited by applicable law, the Selling Securityholders may assign their right to sell the Securities. No director, officer or agent of the Company is expected to be involved in soliciting offers to purchase the Securities offered hereby, and no such person will be compensated by the Company for the sale of any of such Securities. Certain officers of the Company may assist such representatives of the Selling Securityholders in such efforts but will not be compensated therefor. The Company will pay all of the expenses incident to the offering and sale of the Securities, other than commissions, discounts and fees of underwriters, dealers or agents. The Company has agreed to indemnify the Selling Securityholders against certain losses, claims, damages and liabilities, including liabilities under the Act. LEGAL MATTERS Certain legal matters with respect to the validity of the Securities offered hereby will be passed upon for the Company by Sidley & Austin, Los Angeles, California. EXPERTS The consolidated financial statements and schedule of American Shared Hospital Services at December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon (which contains an explanatory paragraph with respect to the substantial doubt surrounding the Company's ability to continue as a going concern mentioned in Note 1 to the consolidated financial statements) appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 45 49 AMERICAN SHARED HOSPITAL SERVICES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors......................................................... F-2 Consolidated Balance Sheets............................................................ F-3 Consolidated Statements of Operations.................................................. F-4 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)............... F-5 Consolidated Statements of Cash Flow................................................... F-6 Notes to Consolidated Financial Statements............................................. F-7
F-1 50 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders American Shared Hospital Services We have audited the accompanying consolidated balance sheets of American Shared Hospital Services as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Shared Hospital Services at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that American Shared Hospital Services will continue as a going concern. As more fully described in Note 1, the Company incurred substantial operating losses in 1994, 1993 and 1992 and has a significant working capital deficiency and a net capital deficiency at December 31, 1994. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP March 24, 1995, except for Note 15, as to which the date is May 17, 1995 F-2 51 AMERICAN SHARED HOSPITAL SERVICES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1994 1993 JUNE 30, ------------ ------------ 1995 ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............................................. $ 461,000 $ 1,225,000 $ 957,000 Receivables, less allowance for uncollectible accounts of $1,404,000 (unaudited) in 1995 ($1,424,000 in 1994 and $958,000 in 1993): Trade accounts receivable............................................ 5,381,000 6,183,000 5,617,000 Other................................................................ 541,000 537,000 530,000 Note receivable from officer......................................... 54,000 54,000 -- ------------ ------------ ------------ 5,976,000 6,774,000 6,147,000 Inventories............................................................ 113,000 146,000 347,000 Prepaid expenses and other current assets................................ 500,000 758,000 694,000 ------------ ------------ ------------ Total current assets............................................ 7,050,000 8,903,000 8,145,000 Note receivable from officer, less current portion....................... 232,000 248,000 -- Property and equipment: Land, buildings and improvements....................................... 2,204,000 2,351,000 1,741,000 Medical, transportation and office equipment........................... 5,006,000 9,670,000 14,651,000 Capitalized leased medical and transportation equipment................ 28,750,000 38,271,000 56,541,000 ------------ ------------ ------------ 35,960,000 50,292,000 72,933,000 Accumulated depreciation and amortization.............................. 12,121,000 18,165,000 35,236,000 ------------ ------------ ------------ Net property and equipment............................................... 23,839,000 32,127,000 37,697,000 Intangible assets, less accumulated amortization of $1,050,000 (unaudited) in 1995 ($1,386,000 in 1994 and $1,189,000 in 1993)........ 1,376,000 2,118,000 2,550,000 Other assets............................................................. 441,000 943,000 1,787,000 ------------ ------------ ------------ Total assets.................................................... $ 32,938,000 $ 44,339,000 $ 50,179,000 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable....................................................... $ 3,664,000 $ 4,450,000 $ 8,177,000 Accrued interest....................................................... 146,000 8,497,000 7,689,000 Employee compensation and benefits..................................... 1,050,000 1,210,000 1,260,000 Other accrued liabilities.............................................. 1,383,000 1,317,000 1,314,000 Advance for equipment purchase......................................... -- -- 800,000 Current portion of long-term debt...................................... 1,152,000 196,000 2,535,000 Current portion of obligations under capital leases.................... 8,512,000 8,135,000 24,100,000 Senior subordinated notes.............................................. -- 18,467,000 18,788,000 ------------ ------------ ------------ Total current liabilities....................................... 15,907,000 42,272,000 64,663,000 Senior Subordinated Notes................................................ 773,000 -- -- Long-term debt, less current portion..................................... 7,378,000 2,539,000 -- Obligations under capital leases, less current portion................... 17,300,000 21,705,000 3,106,000 Deferred income taxes.................................................... 164,000 164,000 164,000 Stockholders' equity (net capital deficiency): Common stock, without par value: Authorized shares -- 10,000,000 Issued and outstanding shares -- 3,870,000 (unaudited) in 1995, and 2,867,000 in 1994 and 1993........................................... 10,141,000 8,795,000 8,795,000 Additional paid-in capital............................................. 849,000 763,000 175,000 Accumulated deficit.................................................... (19,574,000) (31,899,000) (26,724,000) ------------ ------------ ------------ Total stockholders' equity (net capital deficiency)............. (8,584,000) (22,341,000) (17,754,000) ------------ ------------ ------------ Total liabilities and stockholders' equity (net capital deficiency)................................................... $ 32,938,000 $ 44,339,000 $ 50,179,000 ============= ============= =============
See accompanying notes. F-3 52 AMERICAN SHARED HOSPITAL SERVICES CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------- ---------------------------------------- 1994 1994 1993 1992 ----------- ----------- ------------ ----------- 1995 (UNAUDITED) ----------- (UNAUDITED) Revenues: Medical services........... $17,140,000 $19,451,000 $38,545,000 $ 39,485,000 $48,834,000 Costs and expenses: Costs of operations: Medical services payroll............... 3,473,000 5,215,000 10,284,000 11,442,000 13,873,000 Maintenance and supplies.............. 3,412,000 3,521,000 7,808,000 7,431,000 9,392,000 Depreciation and amortization.......... 4,623,000 3,965,000 9,504,000 7,715,000 8,755,000 Write-down of equipment and deferred assets... 3,825,000 -- -- 443,000 3,454,000 Equipment rental........ 1,208,000 2,315,000 1,580,000 5,067,000 4,176,000 Other................... 1,905,000 2,222,000 4,969,000 4,973,000 5,519,000 ----------- ----------- ----------- ------------ ----------- 18,446,000 17,238,000 34,145,000 37,071,000 45,169,000 Selling and administrative.......... 2,958,000 3,025,000 5,971,000 6,820,000 6,273,000 Interest................... 3,274,000 3,082,000 7,423,000 6,752,000 7,520,000 ----------- ----------- ----------- ------------ ----------- Total costs and expenses......... 24,678,000 23,345,000 47,539,000 50,643,000 58,962,000 ----------- ----------- ----------- ------------ ----------- (7,538,000) (3,894,000) (8,994,000) (11,158,000) (10,128,000) (Loss) gain on sale of assets..................... (46,000) 145,000 3,294,000 124,000 270,000 Write-down of intangible assets..................... (600,000) -- -- (5,308,000) -- Equity in earnings (losses) of partnerships............ 23,000 37,000 85,000 (51,000) 51,000 Interest and other income.... 108,000 45,000 98,000 742,000 181,000 ----------- ----------- ----------- ------------ ----------- Loss before income taxes and extraordinary item......... (8,053,000) (3,667,000) (5,517,000) (15,651,000) (9,626,000) Income tax expense (benefit).................. 0 18,000 20,000 (7,000) (111,000) ----------- ----------- ----------- ------------ ----------- Loss before extraordinary item....................... (8,053,000) (3,685,000) (5,537,000) (15,644,000) (9,515,000) Extraordinary item -- gain on early extinguishment of debt....................... 20,378,000 -- 362,000 -- -- ----------- ----------- ----------- ------------ ----------- Net income (loss)............ $12,325,000 $(3,685,000) $(5,175,000) $(15,644,000) $(9,515,000) =========== =========== =========== ============ =========== Per share amounts: Loss before extraordinary item.................... $ (2.47) $ (1.29) $ (1.93) $ (5.46) $ (3.39) Extraordinary item......... 6.24 -- .13 -- -- ----------- ----------- ----------- ------------ ----------- Net income (loss) per share................... $ 3.77 $ (1.29) $ (1.80) $ (5.46) $ (3.39) =========== =========== =========== ============ =========== Common shares and equivalents used in computing per share amounts.................... 3,267,000 2,867,000 2,867,000 2,863,000 2,810,000 =========== =========== =========== ============ ===========
See accompanying notes. F-4 53 AMERICAN SHARED HOSPITAL SERVICES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ----------- ---------- ------------ ----------- Balances at December 31, 1991.......... $ 8,582,000 $ 175,000 $ (1,565,000) $ 7,192,000 Issuance of 64,000 shares of common stock............................. 172,000 -- -- 172,000 Net loss............................. -- -- (9,515,000) (9,515,000) ---------- -------- ------------ ----------- Balances at December 31, 1992.......... 8,754,000 175,000 (11,080,000) (2,151,000) Issuance of 22,000 shares of common stock............................. 41,000 -- -- 41,000 Net loss............................. -- -- (15,644,000) (15,644,000) ---------- -------- ------------ ----------- Balances at December 31, 1993.......... 8,795,000 175,000 (26,724,000) (17,754,000) Issuance of warrant to purchase 97,853 shares of common stock..... -- 588,000 -- 588,000 Net loss............................. -- -- (5,175,000) (5,175,000) ---------- -------- ------------ ----------- Balances at December 31, 1994.......... 8,795,000 763,000 (31,899,000) (22,341,000) Issuance of 1,003,000 shares of common stock (unaudited).......... 1,346,000 -- -- 1,346,000 Issuance of warrants to purchase 343,147 shares of common stock (unaudited)....................... -- 336,000 -- 336,000 Stock issuance costs (unaudited)..... -- (250,000) -- (250,000) Net income (unaudited)............... -- -- 12,325,000 12,325,000 ---------- -------- ------------ ----------- Balance at June 30, 1995 (unaudited)... $10,141,000 $ 849,000 $(19,574,000) $(8,584,000) ========== ======== ============ ===========
See accompanying notes. F-5 54 AMERICAN SHARED HOSPITAL SERVICES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, -------------------------- ----------------------------------------- 1995 1994 1994 1993 1992 ------------ ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net income (loss)......................................... $12,325,000 $(3,685,000) $(5,175,000) $(15,644,000) $ (9,515,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: (Loss) gain on sale of assets........................... 46,000 (145,000 ) (3,294,000) (124,000) (270,000) Extraordinary gain, after income taxes.................. (20,378,000) -- (362,000) -- -- Depreciation and amortization........................... 4,928,000 4,324,000 10,206,000 8,600,000 9,940,000 Write-down of equipment and deferred assets............. 3,825,000 -- -- 443,000 3,454,000 Write-down of intangible assets......................... 600,000 -- -- 5,308,000 -- Equity in (earnings) losses of partnerships............. (23,000 ) (37,000 ) (85,000) 51,000 (51,000) Compensation from stock grants.......................... 265,000 -- -- -- -- Deferred income taxes................................... -- -- -- -- (68,000) Changes in operating assets and liabilities: Decrease (increase) in receivables.................... 798,000 (114,000 ) (573,000) 1,573,000 4,424,000 Decrease (increase) in inventories.................... 33,000 (20,000 ) 201,000 177,000 217,000 Decrease (increase) in prepaid expenses and other assets.............................................. 208,000 185,000 (64,000) 212,000 (97,000) (Decrease) increase in accounts payable and accrued liabilities......................................... (377,000 ) 1,474,000 4,267,000 8,881,000 1,364,000 ----------- ----------- ---------- ------------ ----------- Net cash provided by operating activities................. 2,250,000 1,982,000 5,121,000 9,477,000 9,398,000 INVESTING ACTIVITIES Proceeds from sale of respiratory therapy contracts....... -- -- 4,002,000 -- -- Issuance of restructuring notes........................... -- -- 2,486,000 -- -- Refund of deposit on Gamma Knife.......................... -- -- 1,090,000 -- -- Proceeds from sale and disposition of equipment........... 63,000 671,000 900,000 1,005,000 4,854,000 Payment for purchase of property and equipment............ 209,000 (785,000 ) (393,000) (354,000) (839,000) Note receivable to related party.......................... -- -- (290,000) -- -- Distributions received from partnerships.................. -- -- 58,000 27,000 241,000 Other..................................................... (111,000 ) 652,000 -- (401,000) 610,000 ----------- ----------- ---------- ------------ ----------- Net cash provided by investing activities................. 161,000 538,000 7,853,000 277,000 4,866,000 FINANCING ACTIVITIES Principal payments on long-term debt and obligations under capital leases.......................................... (5,719,000 ) (2,073,000 ) (8,959,000) (10,264,000) (14,102,000) Proceeds from loan agreement.............................. 7,000,000 -- -- -- -- Proceeds from issuance of common stock.................... -- -- -- 41,000 172,000 Cash deposited as collateral on loan...................... -- -- (2,883,000) -- -- Repayment of advance for equipment purchase............... -- -- (800,000) -- -- Payment for repurchase of senior subordinated notes....... (3,893,000 ) -- (64,000) -- -- Other..................................................... (563,000 ) -- -- -- -- ----------- ----------- ---------- ------------ ----------- Net cash used in financing activities..................... (3,175,000 ) (2,073,000 ) (12,706,000) (10,223,000) (13,930,000) Net (decrease) increase in cash and cash equivalents...... (764,000 ) 447,000 268,000 (469,000) 334,000 Cash and cash equivalents at beginning of period.......... 1,225,000 957,000 957,000 1,426,000 1,092,000 ----------- ----------- ---------- ------------ ----------- Cash and cash equivalents at end of period................ $ 461,000 $1,404,000 $ 1,225,000 $ 957,000 $ 1,426,000 =========== =========== ========== ============ =========== SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid............................................. $2,770,000 $ 466,000 $ 1,591,000 $ 1,613,000 $ 5,839,000 =========== =========== ========== ============ =========== Income taxes paid......................................... $ 54,000 $ 18,000 $ 25,000 $ 27,000 $ 27,000 =========== =========== ========== ============ ===========
See accompanying notes. F-6 55 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) 1. BUSINESS AND BASIS OF PRESENTATION American Shared Hospital Services (the "Company") provides multimodality diagnostic and respiratory therapy services to hospitals and other medical care providers. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, CuraCare, Inc. ("CuraCare"), MMRI, Inc., European Shared Medical Services Ltd., American Shared Radiosurgery Services, African American Church Health & Economic Services, Inc., and ACHES Insurance Services, Inc. All significant intercompany accounts and transactions have been eliminated. The Company accounts for its investment in partnerships using the equity method. The Company incurred net losses of $5,175,000, $15,644,000 and $9,515,000 in 1994, 1993 and 1992, respectively. At December 31, 1994, the Company has a working capital deficiency of $33,369,000 (including $18,467,000 in senior subordinated notes in default and classified as current liabilities) and a net capital deficiency of $22,341,000. This condition raises substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. The financial information as of June 30, 1995 and for the six months ended June 30, 1995 is unaudited, but includes all adjustments (consisting of only normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Operating results for the six months ended June 30, 1995 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1995. 2. ACCOUNTING POLICIES Revenues and Accounts Receivable Revenue is recognized on a fee-for-service basis when the service is delivered. Trade accounts receivable are principally from hospitals and other health care providers located throughout the U.S., with no one customer providing a significant percent of revenues. The Company's revenues from its foreign operations comprised approximately 1% of total revenues. The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential credit losses. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. 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). F-7 56 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) Property and Equipment Property and equipment is stated at cost, or estimated net recoverable value if less, and is depreciated by the straightline method over the estimated useful lives of the assets which are generally as follows: Building and improvements.............................. 25-40 years Medical and transportation equipment................... 2-10 years
Capitalized leased equipment consists primarily of fixed and mobile Magnetic Resonance Imaging ("MRI") units, which include scanners and mobile vans. Capitalized leased equipment is amortized over the term of lease, which range from 24 to 60 months, or the estimated useful life of the equipment if a bargain purchase option exists (eight years). Leasehold improvements are amortized over the shorter of the lease terms or the estimated useful lives. During 1993 and 1992, the Company experienced a decline in the market acceptance of certain of its less advanced MRI and CT scanning equipment. Accordingly, the Company reduced the carrying value of this equipment to the Company's estimate of the future revenue generating capacities of the equipment. These write-downs resulted in a charge to operations of $443,000 and $3,454,000 in 1993 and 1992, respectively. (See Unaudited Note 16 for further discussion.) During the six months ended June 30, 1995 and years ended December 31, 1994, 1993 and 1992, the Company incurred interest costs of $3,274,000, $7,423,000, $6,828,000 and $7,569,000, respectively. The Company capitalized interest related to construction in progress of $0, $0, $76,000 and $49,000 for the six months ended June 30, 1995 and the years ended December 31, 1994, 1993, and 1992, respectively. Intangible Assets Intangible assets represent the excess of cost of net assets acquired as the result of the acquisition of businesses and are being amortized by the straight-line method over 15 years. The Company 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. Per Share Amounts Per share information has been computed based on the weighted average number of common shares and dilutive common share equivalents outstanding. 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. 3. WRITE-DOWN OF INTANGIBLE ASSETS During 1993, the Company's management continued to evaluate the realizability of intangible assets recorded in connection with its acquisition of CuraCare in 1987, which subsidiary conducts substantially all of the Company's non-MRI operations, including CT scanning, respiratory therapy, ultrasound and nuclear F-8 57 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) medicine. Revenues and operating profits from CuraCare, have continued to decline significantly over the past few years despite several strategic plans implemented by management. In the fourth quarter of 1993, management continued to evaluate its non-MRI operations and determined that significant revenue growth was unlikely and reduced its operations management and sales force accordingly. These conditions helped to contribute to higher than expected losses in 1992 and 1993 and an accumulated deficit at December 31, 1993, before the write-off of goodwill. The Company has determined, based on its methodology of evaluating the recoverability of goodwill, that the forecasted results of operations for non-MRI operations (which were based on historic financial trends and current market conditions) did not support the future amortization of the recorded goodwill balance of $5,308,000 at December 31, 1993, for these modalities. The methodology employed to assess the recoverability of the Company's goodwill was to forecast results of operations, including interest expense, forward five years. The Company then evaluated the recoverability of goodwill on the basis of these forecasts of future operations. In formulating the financial forecasts, the Company considered the near-term, as well as the longer-term business outlook. These near-term forecasts took into consideration recent historical financial results and current market conditions, as well as foreseeable opportunities for future growth. For the longer-term, the Company also considered the possible emergence of new trends and their potential impact upon each of the modalities. Based on such forecasts, the cumulative results of operations for non-MRI operations were insufficient to recover any portion of the respective goodwill balances. Accordingly, the Company wrote off its remaining goodwill balances for these operations of $5,308,000 in the fourth quarter of 1993. 4. INVESTMENT IN PARTNERSHIPS The Company has entered into partnerships with health care providers for the acquisition and operation of CT scanners, and records its investment and its share of partnership earnings under the equity method. The summarized combined financial position and results of operations of the partnerships are as follows:
YEAR ENDED DECEMBER 31, JUNE 30, ------------------------ 1995 1994 1993 1992 -------- ---- ---- ------ (IN THOUSANDS) Assets............................................ $ 76 $187 $135 $ 461 Liabilities....................................... -- -- 65 302 Revenues.......................................... 191 525 556 1,534 Net income (loss)................................. 24 255 (58) 259
F-9 58 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) 5. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, JUNE 30, ----------------------- 1995 1994 1993 -------- -------- ---------- Capitalized stock issuance costs.................. $ -- $327,000 $ -- Capitalized regulatory licensing fees............. 84,000 212,000 -- Debt issuance costs, less accumulated amortization of $3,000, $950,000 and $957,000 in 1995, 1994 and 1993, respectively.......................... 77,000 129,000 289,000 Purchased software, less accumulated amortization of $515,000, $471,000 and $370,000 in 1995, 1994 and 1993, respectively.......................... 76,000 110,000 178,000 Investment in partnerships........................ 3,000 60,000 31,000 Deposits for purchase of Gamma Knife (Note 14).... -- -- 1,090,000 Other, less allowance of $165,000 in 1995 and 1994 and $185,000 in 1993............................ 201,000 105,000 199,000 -------- -------- ---------- $441,000 $943,000 $1,787,000 ======== ======== ==========
6. SENIOR SUBORDINATED NOTES In 1988, the Company completed a concurrent public common stock and debt offering consisting of $30,000,000 of senior subordinated exchangeable reset notes (the "Notes") due in 1996. The Notes bore interest at an initial rate of 14% per annum payable semiannually commencing April 15, 1989. On October 15, 1989, the interest rate on the Notes not previously exchanged, as described below, was reset to 16.5%. Prior to the October 15, 1989 reset date, $2,140,000 of Notes were exchanged into 14.75% senior subordinated notes due 1996. Except for the interest rate, optional and mandatory redemption provisions of the Notes and the fact that the 14.75% Notes were not exchangeable, the terms of the 14.75% Notes are substantially the same as the terms of the Notes. The Company may redeem all or part of the Notes for 100% of the principal amount, together with accrued and unpaid interest to the redemption date. The Company was required to make mandatory sinking fund payments of $4,500,000 annually commencing October 15, 1994, reduced by the principal amount of notes previously repurchased and canceled. These payments are calculated to retire 30% of the issue prior to maturity. Previously repurchased and canceled notes were adequate to satisfy mandatory sinking fund payments. Under the terms of the loan indenture, the Company is required to maintain consolidated net worth (shareholders' equity as defined) of at least $7,000,000. In the event consolidated net worth is below $7,000,000 at the end of any two consecutive fiscal quarters, the Company is required to make an offer within 65 days to repurchase 25% ($7,500,000) of the original principal amount of the Notes at face value plus accrued interest. The debt agreement limits the Company's ability to adopt a plan of sale or liquidation and to incur certain types of additional indebtedness subject to meeting certain earnings to fixed charge ratios, as defined. The debt agreement also limits the amount of dividends the Company can declare on capital stock to the sum of (1) 50% of consolidated net income, or 100% of net loss, since June 30, 1988; (2) 50% of the net proceeds from the sale of capital stock, or debt that has subsequently been converted to capital stock; (3) $2,000,000. F-10 59 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) During 1994, the Company repurchased certain of the Notes as follows: Principal amount of Notes repurchased............................. $321,000 Accrued interest related to the Notes............................. 115,000 Unamortized issuance costs........................................ (3,000) Estimated tax liability........................................... (7,000) -------- 426,000 Payment for repurchase............................................ (64,000) -------- Extraordinary gain................................................ $362,000 ========
The funds to repurchase the notes in 1994 came from operating activities. The amount at June 30, 1995 of senior subordinated debt outstanding is $773,000. 7. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, JUNE 30, --------------------------- 1995 1994 1993 ----------- ----------- ----------- Borrowings under loan agreement for repurchase of senior subordinated notes......................... $ 2,477,000 -- -- Borrowings under line of credit for repurchase of senior subordinated notes......................... 2,798,000 -- -- Borrowings under former loan agreement for repurchase of senior subordinated notes........... -- $ 2,883,000 $ 2,528,000 Less cash held by the lender as collateral.......... -- (2,883,000) -- Promissory note payable bearing interest at 4% payable in 86 monthly installments due in February 2002, secured by the Company's accounts receivable and certain medical equipment..................... 2,000,000 2,000,000 -- Promissory note payable bearing interest at 10.5% payable in 60 monthly installments due in February 2000.............................................. 443,000 481,000 -- Promissory note payable bearing interest at 11.25% payable in 25 monthly installments due in July 1997.............................................. 304,000 -- -- Installment notes, payable in monthly installments through May 1998, bearing interest at 11.25% to 11.88% secured by certain medical equipment....... 501,000 242,000 -- Other............................................... 7,000 12,000 7,000 ---------- ---------- ---------- 8,530,000 2,735,000 2,535,000 Less current portion................................ (1,152,000) (196,000) (2,535,000) ---------- ---------- ---------- $ 7,378,000 $ 2,539,000 $ -- ========== ========== ==========
Contracted maturities under the initial terms of long-term debt as of June 30, 1995 are as follows: $479,000, $1,268,000, $4,018,000, $1,161,000, $843,000 and $761,000 for the years ending December 31, 1995, 1996, 1997, 1998, 1999 and thereafter, respectively. F-11 60 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) Foothill Loan In March 1991, the Company entered into a loan agreement (as amended), which initially expired in March 1993 and was extended for periodic terms through March 1994, under which it could generally borrow up to 66% of eligible accounts receivable, reduced to 50% if total borrowings equal or exceed $4,000,000, up to a maximum of $5,000,000. On March 30, 1994, the agreement was modified to extend its term through February 28, 1995. Proceeds from loans under the agreement can only be used to repurchase the Company's senior subordinated notes. Borrowings under the agreement bear interest at the prime rate plus 4% (12.5% at December 31, 1994), payable monthly. Under the terms of the agreement, the Company's cash receipts are processed through bank accounts controlled by the lender and the lender has a first priority security interest in all accounts receivable and certain land and buildings. The loan agreement prohibits the Company from acquiring, merging or consolidating with any other business organization, from making any change in its financial structure and from prepaying existing indebtedness, without the consent of the lender. A former Director of the Company is the President and Co-Chief Executive of the lender. On December 31, 1994, with the proceeds from the sale of certain of the Company's respiratory therapy contracts (see Note 12), the Company deposited approximately $2,900,000 cash as collateral with the lender. On February 28, 1995 the loan agreement was terminated. Restructuring Notes On December 30,1994 the Company converted various service and other payments that were due and unpaid into a $2,000,000 promissory note with its primary provider of medical equipment. The note is dated January 1, 1995 and was issued by the Company in conjunction with the lease restructuring (see Note 11). The note matures in February 2002 and bears interest at an annual rate of 4% payable in arrears. Monthly payments of interest only are due for the first eleven months through November 1995. Thereafter, the principal balance of the note will amortize in 75 equal monthly installments until maturity. The note is secured by a second priority lien on the accounts receivable of the Company and a first priority lien on certain medical equipment. The Company also converted $481,000 of unpaid use taxes into a note payable to its primary provider of medical equipment. The note bears interest at 10.5% payable in 60 monthly payments beginning February 1, 1995. The restructuring notes limit the Company's ability to merge with any other entity, to create subsidiaries, to pay cash dividends, to repurchase stock for cash, or to change the status of the equipment acting as collateral in such a way as to impair its value. F-12 61 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) 8. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, JUNE 30, --------------------------- 1995 1994 1993 ---------- ----------- ----------- Deferred tax liabilities: Fixed assets............................... $ (164,000) $(5,200,000) $ (570,000) Other -- net............................... -- -- (4,000) --------- --------- --------- Total deferred tax liabilities............... (164,000) (5,200,000) (574,000) Deferred tax assets: Fixed assets............................... 1,600,000 -- -- Net operating loss carryforwards........... 2,600,000 11,500,000 11,400,000 Other -- net................................. 800,000 800,000 812,000 --------- --------- --------- Net deferred tax assets...................... 5,000,000 12,300,000 12,212,000 Valuation allowance for deferred tax assets..................................... (5,000,000) (7,264,000) (11,802,000) --------- --------- --------- Total deferred tax assets.................... -- 5,036,000 410,000 --------- --------- --------- Net deferred tax liabilities................. $ (164,000) $ (164,000) $ (164,000) ========= ========= =========
The decrease in the valuation allowance from December 31, 1994 to June 30, 1995 and from December 31, 1993 to December 31, 1994 of $2,264,000 and $4,538,000, respectively was due primarily to a decline in the net operating loss carryforward for 1995 and to an increase in total deferred tax assets related to fixed assets for 1994. The components of the provision (benefit) for income taxes consist of the following:
YEAR ENDED DECEMBER 31, --------------------------------- SIX MONTHS ENDED LIABILITY METHOD DEFERRED JUNE 30, ------------------- METHOD 1995 1994 1993 1992 ---------- ------- ------- --------- Current: federal............................... $ -- $ -- $ -- $ -- state................................. -- 27,000 (7,000) (43,000) Deferred (reduction): federal............................... -- -- -- (68,000) state................................. -- -- -- -- ------ ------- ------- --------- $ -- $27,000 $(7,000) $(111,000) ====== ======= ======= =========
The amounts relate to state income taxes, miscellaneous payments and refunds of federal and state income taxes and adjustments of amounts paid and accrued in prior years. F-13 62 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) The provision (benefit) for income taxes is included in the consolidated financial statements as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------- 1995 1994 1993 1992 ---------- ------- ------- --------- Income (loss) before extraordinary gain.................................. $ -- $20,000 $(7,000) $(111,000) Extraordinary gain...................... -- 7,000 -- -- ------- ------- ------- --------- $ -- $27,000 $(7,000) $(111,000) ======= ======= ======= =========
The provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (35% in 1995, 1994 and 1993 and 34% in 1992) to income (loss) before taxes as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------- 1995 1994 1993 1992 ----------- ----------- ----------- ----------- Computed expected tax, including tax on extraordinary gain............... $ 4,314,000 $(1,802,000) $(5,478,000) $(3,273,000) Cancellation of indebtedness.......... (4,347,000) (129,000) -- -- State income taxes (benefit), net of federal benefit..................... -- 27,000 (7,000) (43,000) Amortization and writedown of intangible assets................... 33,000 67,000 2,067,000 219,000 Limitation of net operating loss carryback........................... -- 1,864,000 3,386,000 2,966,000 Other................................. -- -- 25,000 20,000 ----------- ----------- ----------- ----------- $ 0 $ 27,000 $ (7,000) $ (111,000) =========== =========== =========== ===========
At December 31, 1994, the Company had a net operating loss carryforward for federal income tax return purposes of approximately $30,000,000 which expires between 1999 and 2008. This carryforward is subject, in part, to separate return limitations. The Company's ability to utilize the net operating loss carryforward may be limited in the event of a 50% or more ownership change within any three-year period. Approximately $22,600,000 (unaudited) of the net operating loss carryforward was used to offset the gain on early extinguishment of the senior subordinated notes in May 1995. 9. STOCKHOLDERS' EQUITY Stock Options 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 may be designated either as "incentive stock options" (as defined in the Internal Revenue Code, as amended) or as nonqualified options. Under the Plan, the exercise price must be at least 100% of the fair market value of the Company's common stock as of the date of grant. Options granted generally become exercisable at the rate of 20% per year, on a cumulative basis, beginning 11 months after the date of the grant. Options granted pursuant to the Plan generally were good for 10 years from the date of grant, subject to earlier expiration in certain cases, such as termination of the grantee's employment. F-14 63 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) Changes in options outstanding from December 31, 1991 to June 30, 1995 are as follows:
NUMBER EXERCISE PRICE OF SHARES PER SHARE --------- --------------- Options outstanding at December 31, 1991................... 390,000 $ 1.38 - $7.50 Granted.................................................. 86,000 $4.38 Exercised................................................ (64,000) $ 1.38 - $7.13 Forfeited................................................ (27,000) $3.00 -------- Options outstanding at December 31, 1992................... 385,000 $ 1.38 - $7.50 Granted.................................................. 93,000 $3.375 - $3.875 Exercised................................................ (22,000) $1.875 Forfeited................................................ (148,000) $ 1.875 - $6.50 -------- Options outstanding at December 31, 1993................... 308,000 $ 1.38 - $7.50 Granted.................................................. -- -- Exercised................................................ -- -- Forfeited................................................ (52,000) $ 1.38 - $5.00 -------- Options outstanding at December 31, 1994................... 256,000 Granted (unaudited)...................................... -- Exercised (unaudited).................................... -- Forfeited (unaudited).................................... 73,000 $3.625 - $7.125 -------- Options outstanding at June 30, 1995 (unaudited)........... 183,000 ======== Outstanding options exercisable at: December 31, 1992........................................ 237,000 $ 1.38 - $7.50 ======== December 31, 1993........................................ 213,000 $ 1.38 - $7.50 ======== December 31, 1994........................................ 190,000 $ 1.38 - $7.50 ======== June 30, 1995 (unaudited)................................ 135,000 $ 1.38 - $7.50 ======== Options available for grant at June 30, 1995 (unaudited)... 0 ========
Stock Warrant As partial consideration for the financial accommodations granted in the restructuring of the current service obligations in connection with the issuance of the restructuring notes described in Note 7, the Company issued an immediately exercisable stock warrant to its primary provider of leased equipment granting the right to purchase 97,853 common shares at a price of $0.01 per share. The warrant expires on March 31, 1996. The Company will be entitled to redeem the warrant in connection with a sale of all or substantially all the common shares. 10. RETIREMENT PLAN The Company has a defined contribution retirement plan which covers substantially all employees. Under the terms of the plan, the Company may contribute a discretionary matching contribution on behalf of each participant, determined each year by the Company, equal to a percentage of each participant's contributions F-15 64 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) and applicable to the first 6% of each participant's salary. The Company made no contributions to the plan in 1994, 1993 or 1992. 11. LEASES On December 30, 1994 (effective as of November 1, 1994 for most capital leases and January 1, 1994 for operating leases) the Company and its major provider of medical equipment entered into a restructuring of the obligations of the Company under its capital leases and operating leases. Modification of Leases Substantially all equipment financed by the Company under capital leases was restructured and after restructuring continues to meet the criteria of and to be accounted for as capitalized leases. Under these modified leases, required payments by the Company are scheduled to retire the unpaid principal balance over the extended lease terms which will expire on various dates through December 31, 1999. All the operating leases covered by the restructuring agreement in effect on October 31, 1994 were modified to extend the payment schedules. As a result of modification of lease terms, these leases now meet the criteria for capitalization, and are accounted for as capital leases in the accompanying financial statements. Under all the modified leases the Company will be entitled to purchase the equipment at its fair market value, or to extend the relevant lease, at the end of the lease term. Capital Leases The Company leases MRI units and other equipment under capital leases having an aggregate net book value of $20,584,000 at June 30, 1995 and $28,177,000 at December 31, 1994. Amortization of assets recorded under capital leases is included with depreciation expense. Future minimum lease payments, together with the present value of the net minimum lease payments under capital leases are summarized as follows:
JUNE 30, DECEMBER 31, 1995 1994 ----------- ------------ Year ended December 31: 1995.................................................... $ 5,422,000 $ 11,397,000 1996.................................................... 10,522,000 10,225,000 1997.................................................... 8,651,000 8,686,000 1998.................................................... 4,940,000 4,940,000 1999.................................................... 1,666,000 1,666,000 2000.................................................... 0 -- ----------- ----------- Net minimum lease payments................................ 31,201,000 36,914,000 Less amounts representing interest........................ (5,389,000) (7,074,000) ----------- ----------- Present value of net minimum lease payments............... 25,812,000 29,840,000 Less current portion...................................... (8,512,000) (8,135,000) ----------- ----------- $17,300,000 $ 21,705,000 =========== ===========
These lease agreements have end-of-term purchase options ranging from $1 to the fair market value of the equipment. F-16 65 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) During 1995, 1994, 1993 and 1992, the Company financed approximately $38,000, $2,358,000, $5,100,000 and $8,400,000, respectively, of equipment purchases with capital lease obligations. Operating Leases The Company leases MRI and CT scanning equipment, automobiles, transportation equipment, office space, and facilities to service and operate scanners under operating leases expiring at various dates through 1999. Future minimum payments under noncancelable operating leases having initial terms of more than one year consisted of the following as of:
JUNE 30, DECEMBER 31, 1995 1994 ---------- ------------ Year ended December 31: 1995..................................................... $ 376,000 $ 752,000 1996..................................................... 694,000 694,000 1997..................................................... 626,000 626,000 1998..................................................... 570,000 570,000 1999 and thereafter...................................... 433,000 433,000 ---------- ---------- $2,699,000 $3,075,000 ========== ==========
Rent expense was $1,500,000, $2,326,000, $6,083,000 and $5,072,000 for the six months ended June 30, 1995 and the years ended December 31, 1994, 1993 and 1992, respectively. 12. SALE OF RESPIRATORY THERAPY CONTRACTS The Company sold eight of fourteen respiratory therapy contracts to an unrelated third party on December 31, 1994 for approximately $4,000,000 in cash. As a result of the sale, the Company wrote off $180,000 in assets relating to the contracts. In addition, the purchaser agreed to assume $300,000 in lease obligations related to the assets. The Company recognized a gain on this transaction of $3,199,000. Revenues generated under these contracts was approximately $5,300,000 in 1994. A net loss in 1994 of $400,000 was recognized on these contracts on a fully costed basis. The sale of the contracts constitutes a sale of a portion of a product line in which the Company is reducing its emphasis. 13. NOTE RECEIVABLE FROM OFFICER At December 31, 1994, the Company has advanced $290,000 to the Chief Executive Officer who executed a promissory note payable to the Company. The note bears interest at 6% and is payable in 60 monthly fully amortizing payments beginning in January 1995. Interest income recognized during the year was $12,000 and has been added to the note receivable balance. 14. COMMITMENTS AND CONTINGENCIES In January 1993, the Company entered into a commitment to purchase a Gamma Knife for $2,900,000 and lease the Gamma Knife to a hospital. During 1993, $1,090,000 was advanced to the equipment manufacturer ("the Manufacturer") including $800,000 advanced by a third party lessor and guaranteed by the Chief Executive Officer of the Company. The Company was unable to pay or finance scheduled progress F-17 66 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) payments and had been informed by the manufacturer that the Company was in default under the terms of the purchase agreement and that such agreement was terminated. On April 6, 1994, the Company's agreements to purchase a Gamma Knife from an equipment manufacturer and lease the Gamma Knife to a hospital were terminated. As a settlement, the Company paid approximately $130,000 in interest and costs to the parties and the Company's Chief Executive Officer agreed to enter into purchase and lease obligations substantially identical to those previously entered into by the Company. The Manufacturer has agreed to sell the Gamma Knife to, and the hospital agreed to lease the Gamma Knife from, the Company's Chief Executive Officer. Of the $1,090,000 in deposits previously paid to the Manufacturer, $800,000 was returned to the third party lessor and $290,000 previously paid by the Company was advanced by the Company to the Chief Executive Officer who executed a promissory note payable (Note 13). Concurrently, the third party lessor agreed to fund the remaining $2,610,000 purchase price of the Gamma Knife on behalf of the Chief Executive Officer and the Company received an option to purchase the Gamma Knife from the Chief Executive Officer for an amount equal to the remaining debt obligation associated with the Gamma Knife plus costs and operating losses, if any, on the Gamma Knife if and when the Company is able to obtain financing for the purchase. 15. SUBSEQUENT EVENTS -- DEBT RESTRUCTURING Subsequent to year-end, on May 12, 1995, the Company entered into a revised debt restructuring agreement with four holders of approximately 96% of its Senior Subordinated Notes. On May 17, 1995, these Senior Subordinated Noteholders received approximately $3,900,000 in cash, plus 819,000 shares of common stock (equal to approximately 20% of the Company's then fully diluted outstanding shares), and warrants for an additional 216,000 shares of common stock (equal to approximately 5% of the then fully diluted common shares). The warrants are immediately exercisable at $0.75 per share. As part of the restructuring, the debt covenants were amended to remove the restrictions on the payment of dividends, to remove the maintenance of consolidated net worth requirements, and to remove the limitations on entering into additional indebtedness which thereby cured the events of default on the Senior Subordinated Notes. Concurrent with the closing of the Notes repurchase, the Company obtained three new credit facilities totaling $8 million. Proceeds from the new credit facilities were used for the Notes repurchase, for reduction of other term debt, for refinancing certain equipment, and for working capital. Simultaneous with the Notes repurchase, Ernest A. Bates, M.D. the Company's Chairman and Chief Executive Officer, was issued an additional 184,000 shares of the Company's common stock. The common shares were granted to Dr. Bates in partial consideration for his personal guarantees of the new credit facilities and for his continued employment with the Company. The remaining holders of the Company's Senior Subordinated Notes which was not repurchased were paid their past due interest. As a result of the debt restructuring, the Company recognized an extraordinary gain of $20,378,000 for the six months ended June 30, 1995. 16. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITORS Debt Restructuring On October 6, 1995, Dr. Bates was granted a ten-year option to purchase 1,495,000 common shares for an exercise price of $0.01 per share. These options were granted to Dr. Bates as the final consideration for his F-18 67 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) personal guarantees of the new credit facilities and for his continued employment with the Company. As a result of the additional options awarded to Dr. Bates, the ex-Noteholders of the Senior Subordinated Notes were granted 374,000 additional common shares and 98,000 additional warrants to purchase common shares to maintain their ownership interest at 25%. Stock Option Plan On October 6, 1995, the shareholders approved the Company's 1995 Stock Option Plan. Under the Plan, 330,000 shares of common stock have been reserved for award to officers and other key employees, and to non-employee directors. On August 15, 1995, the Stock Option Committee of the Board of Directors granted 243,500 options under the Plan, subject to shareholder approval. All such options were immediately exercisable at an exercise price of $1.625 per share. On October 6, 1995, options for an additional 12,000 shares were automatically granted in accordance with terms of the Plan to three Directors. The options were immediately exercisable at $1.625 per share. Adoption of FASB 121 -- Accounting for Long Lived Assets In connection with the adoption of the statement of Financial Accounting Standards No. 121 (FAS 121), during the second quarter of 1995, management reviewed the recoverability of the carrying value of long-lived assets, primarily fixed assets, goodwill and deferred costs based on the life of the assets. The Company initiated its review of potential loss impairment due to the continuing changes in the health care environment which have put downward pressure on customer and equipment pricing. These changes have resulted in recent operating results and future forecasted operating results for certain assets which were less than previously planned. This situation led to the conclusion that there was a potential impairment in the recorded value of fixed assets, goodwill and deferred costs. Management's estimate of future undiscounted cash flows over the useful life of certain assets was determined to be less than their recorded values, indicating impairment of these assets under provisions of FAS 121. An impairment loss of $4,425,000 was recorded in the second quarter of 1995 based on the differences between the fair value determined by third parties and the recorded values of certain assets. The impairment loss is comprised of write-downs of equipment of $3,650,000 (primarily MRI, CT and nuclear medicine); goodwill of $600,000; and deferred assets of $175,000. New Subsidiaries and Ventures GK FINANCING, LLC. On October 6, 1995, the Company through its wholly owned subsidiary American Shared Radiosurgery Services (ASRS) and Elekta AB through its wholly owned United States subsidiary GKV Investments, Inc. (GKV) reached an agreement in principle to form GK Financing, LLC (GKF). ASRS intends to contribute its ownership of two existing Gamma Knife units in return for approximately a 78% ownership interest in GKF. GKV is contributing approximately $800,000 in cash for its 22% ownership interest. GKV has also committed to making an initial loan to GKF of $1,300,000. GK Financing, LLC will provide alternative financing of Elekta Gamma Knife units in the United States and in Brazil. GKF will be a preferred provider of financing arrangements such as fee-for-service lease arrangements. GKF has placed deposits totalling $1,000,000 for four (4) Gamma Knife Systems. F-19 68 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1994 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) ACHES African-American Church Health & Economic Services, Inc. (ACHES), a California Corporation is a wholly owned subsidiary of American Shared Hospital Services and was incorporated on June 14, 1995. ACHES Insurance Services, Inc. (AIS), a California Corporation, is a wholly owned subsidiary of ACHES and was incorporated on June 22, 1995. AIS is an insurance agency qualified to sell life, health and disability insurance in the state of California. F-20 69 TABLE OF CONTENTS
PAGE ---- Available Information................. 2 Risk Factors.......................... 3 The Company........................... 7 Financial Restructuring............... 8 Use of Proceeds....................... 10 Determination of Offering Price....... 10 Capitalization........................ 11 Selected Consolidated Financial Data................................ 12 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 14 Business.............................. 21 Properties............................ 27 Legal Proceedings..................... 27 Market Price of and Dividends on the Registrant's Common Shares.......... 28 Management............................ 29 Principal Shareholders................ 39 Selling Securityholders............... 41 Description of Securities............. 42 Plan of Distribution.................. 43 Legal Matters......................... 45 Experts............................... 45 Consolidated Financial Statements..... F-1
70 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an itemized statement of all fees and expenses in connection with the distribution of the securities being registered pursuant to this Registration Statement, all of which fees and expenses will be paid by the Registrant: Securities and Exchange Commission registration fee.................. $ 931.70 American Stock Exchange fee.......................................... $ 17,500.00* Pacific Stock Exchange fee........................................... $ 4,330.00* Printing............................................................. $ 13,500.00* Accountants' fees and expenses....................................... $ 60,000.00* Legal fees and expenses.............................................. $ 35,000.00* Miscellaneous........................................................ $ 2,000.00* -------------- Total...................................................... $133,261,70.00* ==============
- --------------- * Estimates. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 204(10) of the California General Corporation Law ("GCL") permits the inclusion in the articles of incorporation of a California corporation of a provision eliminating or limiting the personal liability of a director for monetary damages in an action brought by or in the right of the corporation for breach of a director's duties to the corporation and its shareholders. The foregoing provision is subject to certain qualifications set forth in the GCL including, without limitation, that such provision may not limit or eliminate liability of directors for (i) intentional misconduct, (ii) transactions from which a director derived an improper personal benefit, (iii) reckless disregard of the director's duties, and (iv) an unexcused pattern of inattention. The Company's Articles of Incorporation, as amended, contains an article eliminating the liability of the directors for monetary damages to the fullest extent permissible under California law. Section 317 of the GCL permits the indemnification of officers, directors, employees and agents of California corporations. Article Fifth, Section 2, of the Company's Articles of Incorporation, as amended, provides that the Registrant is authorized to provide indemnification to its agents in excess of the indemnification otherwise permitted by Section 317 of the GCL. Article IX, Section 7, of the Bylaws of the Company contains the following indemnification provision: Section 7. Indemnification of Corporate Agents; Purchase of Liability Insurance. (a) The Corporation shall, to the maximum extent permitted by the General Corporation Law of the state of California, and as the same may from time to time be amended, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding to which such person was or is a party or is threatened to be made a party arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 7, an "agent" of the Corporation includes any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of the such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative, and includes an action or proceeding by or in the right of the Corporation to procure a judgment in its favor; and "expenses" includes attorneys' fees and any expenses of establishing a right to indemnification under this subdivision (a). II-1 71 (b) The Corporation shall, if and to the extent the Board of Directors so determines by resolution, purchase and maintain insurance in an amount and on behalf of such agents of the Corporation as the Board may specify in such resolution against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the Corporation would have the capacity to indemnify the agent against such liability under the provisions of this Section 7. Each of the directors of the Corporation has entered into an Indemnification Agreement with the Company pursuant to which the Company is, subject to the limitations in the following sentence, obligated to indemnify the directors to the fullest extent provided by law, notwithstanding such indemnification not specifically being provided in the Company's Articles, Bylaws or by statute. The Company is not obligated under the Indemnification Agreement to indemnify directors for the following: acts or omission or transactions from which a director may not be relieved from liability under Section 204 of the California General Corporation Law, a proceeding or action instituted by an appropriate bank regulatory agency, claims initiated by such director except with respect to proceedings to enforce a right of indemnification unless the Board has approved the initiation or bringing of such suit, a proceeding instituted by a director to enforce the Indemnification Agreement which is found by a court of competent jurisdiction to be not in good faith or frivolous, insured claims or claims under Section 16(b) of the Securities Exchange Act of 1934. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In connection with the Lease Restructuring and the Notes Repurchase (as defined in the Prospectus included as part of this Registration Statement), the Company issued various securities under the exemption provided by Section 4(2) of the Act and Rule 506 promulgated by the Commission thereunder. Each such issuance is described in the table of sales of unregistered securities below:
DATE OF ISSUANCE SECURITIES ISSUED RECIPIENT - --------------------- ----------------------------------------------- ---------------------- December 30, 1994.... Warrants to acquire 97,853 Common Shares GE Medical May 17, 1995......... Warrants to acquire 127,147 Common Shares GE Medical May 17, 1995......... 184,000 Common Shares Ernest A. Bates, M.D. May 17, 1995......... 819,000 Common Shares and Warrants to acquire Certain holders of 216,000 Common Shares Subordinated Notes October 6, 1995...... Option to acquire 1,495,000 Common Shares Ernest A. Bates, M.D. October 6, 1995...... 374,000 Common Shares and Warrants to acquire Certain holders of 98,000 Common Shares Subordinated Notes
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits The following exhibits are filed herewith:
EXHIBIT NUMBER DESCRIPTION ------ ------------------------------------------------------------------------------ 3.1* Articles of Incorporation of the Company, as amended. (See Exhibit 3.1 to the Company's Registration Statement on Form S-2, Registration No. 33-23416) 3.2 By-laws of the Company, as amended. 4.1* Indenture between American Shared Hospital Services and First Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the Senior Subordinated Exchangeable Reset Notes Due 1996. (See Exhibit 4.1 to the Company's Registration Statement on Form S-2, Registration No. 33-23416) 4.2* Indenture between American Shared Hospital Services and First Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the 14 3/4% Senior Subordinated Notes Due 1996. (See Exhibit 4.2 to the Company's Registration Statement on Form S-2, Registration No. 33-23416)
II-2 72
EXHIBIT NUMBER DESCRIPTION ------ ------------------------------------------------------------------------------ 4.3* Supplemental Indenture No. 1, dated as of October 15, 1989, to the Indenture between American Shared Hospital Services and First Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the Senior Subordinated Exchangeable Reset Notes Due 1996. (See Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989) 4.4 Supplemental Indenture No. 2 dated as of May 17, 1995 to the Indenture between American Shared Hospital Services and First Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the Senior Subordinated Exchangeable Reset Notes Due 1996. 4.5 Supplemental Indenture No. 1 dated as of May 17, 1995, to the Indenture between American Shared Hospital Services and First Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the 14 3/4% Senior Subordinated Notes Due 1996. 4.6 Form of Common Stock Purchase Warrant held by Selling Noteholders of American Shared Hospital Services. 4.7 Form of Common Stock Purchase Warrant for shares of Common Stock of American Shared Hospital Services held by General Electric Company, acting through GE Medical Systems. 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. 4.9 Promissory Note, dated May 17, 1995, by American Shared Hospital Services in favor of General Electric Company in the principal sum of $1,500,000, as amended. 4.10 Promissory Note, dated May 17, 1995, by American Shared-CuraCare and CuraCare, Inc. in favor of DVI Business Credit Corporation, in the principal sum of $4,000,000. 4.11 Promissory Note, dated May 17, 1995, by American Shared-CuraCare and CuraCare, Inc. in favor of DVI Financial Services Inc. in the principal sum of $2,500,000. 4.12 Security Agreement dated as of May 17, 1995 by and between American Shared Hospital Services and General Electric Company, acting through GE Medical Systems. 4.13 Agreement and Proxy dated as of May 12, 1995 by Ernest A. Bates, M.D. Accepted and Agreed to by Anchor National Life Insurance Company, Sun Life Insurance Company of America, SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd., and Upchurch Living Trust U/A/D 12/14/90. 5 Opinion of Sidley and Austin regarding legality of securities being registered. (To be filed by amendment) 10.1* The Company's 1984 Stock Option Plan, as amended. (See Exhibit 10.24 to the Company's Registration Statement on Form S-2, Registration No. 33-23416) 10.2* The Company's 1995 Stock Option Plan. (See Exhibit A to the Company's Proxy Statement, Registration No. 1-8789) 10.3* Form of Indemnification Agreement between the registrant and members of its Board of Directors. (See Exhibit 10.35 to the Company's Registration Statement on Form S-2, Registration No. 33-23416) 10.4* Agreement, effective as of November 1, 1994, by and among General Electric Company, acting through GE Medical Systems, and American Shared Hospital Services, and certain of its subsidiaries. (See Exhibit 10.49 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1994)
II-3 73
EXHIBIT NUMBER DESCRIPTION ------ ------------------------------------------------------------------------------ 10.5 Note Purchase Agreement dated as of May 12, 1995, by and among Anchor National Life Insurance Company, Sun Life Insurance Company of America, and SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd. and Upchurch Living Trust U/A/D 12/14/90, American Shared Hospital Services and Ernest A. Bates, M.D. 10.6 Loan and Security Agreement, dated as of May 17, 1995, among American Shared- CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Corporation. 10.7 Loan and Security Agreement, dated as of May 17, 1995, among American Shared- CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Financial Services Inc. 10.8 Form of Unconditional Continuing Guaranty of American Shared Hospital Services. 10.9 Form of Unconditional Continuing Guaranty of Ernest A. Bates, M.D. 10.10 Intercreditor Agreement among American Shared Hospital Services, American Shared-CuraCare, DVI Financial Services Inc. and DVI Business Credit Corporation and General Electric Company, acting through GE Medical Systems dated as of May 17, 1995. 10.11* Ernest A. Bates Stock Option Agreement dated as of August 15, 1995. (See Exhibit B to the Company's Proxy Statement, Registration No. 1-8789.) 10.12 Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. 21* Subsidiaries of American Shared Hospital Services (See Exhibit 21.0 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.) 23.1 Consent of Ernst & Young LLP. 23.2* Consent of Sidley & Austin, incorporated by reference to Exhibit 5 to this Registration Statement. 24* Power of Attorney, incorporated by reference to the signature page to this Registration Statement.
- --------------- * The exhibits thus designated are incorporated by reference as exhibits hereto. Following the description of such exhibits is a reference to the copy of the exhibit heretofore filed with the Commission, to which there have been no amendments or changes. (b) Financial Statement Schedules The following financial statement schedules are filed herewith:
SCHEDULE NUMBER DESCRIPTION - --------------- --------------------------------------- 5.02(4) Valuation and Qualifying Accounts.
Schedules other than that listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes. ITEM 17. UNDERTAKINGS The undersigned hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (A) To include any prospectus required by Section 10(a)(3) of the Act; (B) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration II-4 74 Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (C) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the Securities being registered which remain unsold at the termination of the offering. b. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 75 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Francisco, state of California on this 26th day of October, 1995. AMERICAN SHARED HOSPITAL SERVICES By /s/ ERNEST A. BATES, M.D. ------------------------------------ Ernest A. Bates, M.D. Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ernest A. Bates, M.D. and Richard Magary, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE - ------------------------------------------ -------------------------------- ----------------- Chairman of the Board October 26, 1995 /s/ ERNEST A. BATES, M.D. and Chief Executive Officer - ------------------------------------------ Ernest A. Bates, M.D. /s/ WILLIE R. BARNES Director and Secretary October 26, 1995 - ------------------------------------------ Willie R. Barnes /s/ WILLIE L. BROWN, JR. Director October 26, 1995 - ------------------------------------------ Willie L. Brown, Jr. /s/ JOHN F. RUFFLE Director October 26, 1995 - ------------------------------------------ John F. Ruffle /s/ AUGUSTUS A. WHITE, M.D. Director October 26, 1995 - ------------------------------------------ Augustus A. White, III, M.D. /s/ CHARLES B. WILSON, M.D. Director October 26, 1995 - ------------------------------------------ Charles B. Wilson, M.D. Chief Financial Officer October 26, 1995 /s/ CRAIG K. TAGAWA (Principal Accounting Officer) - ------------------------------------------ Craig K. Tagawa
II-6 76 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders American Shared Hospital Services We have audited the consolidated financial statements of American Shared Hospital Services as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, and have issued our report thereon dated March 24, 1995, except for Note 15, as to which the date is May 17, 1995 (included elsewhere in this Registration statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The financial statement schedule does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. ERNST & YOUNG LLP March 24, 1995 S-1 77 SCHEDULE 5.02(4) VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ADDITIONS ADDITIONS BALANCE AT CHARGED TO BALANCE AT CHARGED TO BALANCE AT CHARGED TO DECEMBER 31, COSTS AND AMOUNTS DECEMBER 31, COSTS AND AMOUNTS DECEMBER 31, COSTS AND 1991 EXPENSES WRITTEN OFF 1992 EXPENSES WRITTEN OFF 1993 EXPENSES ------------ ---------- ----------- ------------ ---------- ----------- ------------ ----------- Allowance for uncollectible accounts..... $ (1,357,000) $ (957,000) $ 1,003,000 $ (1,311,000) $ (986,000) $ 1,154,000 $ (1,143,000) $(1,266,000) BALANCE AT AMOUNTS DECEMBER 31, WRITTEN OFF 1994 ----------- ------------ Allowance for uncollectible accounts..... $ 820,000 $ (1,589,000)
S-2 78 INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL NUMBER EXHIBIT DESCRIPTION PAGE NUMBER - ------ ----------------------------------------------------------------------- ----------- 3.1 Articles of Incorporation of the Company, as amended.(1) * 3.2 By-laws of the Company, as amended. 4.1 Indenture between American Shared Hospital Services and First * Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the Senior Subordinated Exchangeable Reset Notes Due 1996.(2) 4.2 Indenture between American Shared Hospital Services and First * Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the 14 3/4% Senior Subordinated Notes Due 1996.(3) 4.3 Supplemental Indenture No. 1, dated as of October 15, 1989, to the * Indenture between American Shared Hospital Services and First Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the Senior Subordinated Exchangeable Reset Notes Due 1996.(4) 4.4 Supplemental Indenture No. 2 dated as of May 17, 1995 to the Indenture between American Shared Hospital Services and First Interstate Bank of California, as Trustee, dated October 15, 1988 relating to the Senior Subordinated Exchangeable Reset Notes Due 1996. 4.5 Supplemental Indenture No. 1 dated as of May 17, 1995, to the Indenture between American Shared Hospital Services and First Interstate Bank of California, as Trustee, dated October 15, 1988, relating to the 14 3/4% Senior Subordinated Notes Due 1996. 4.6 Form of Common Stock Purchase Warrant held by Selling Noteholders of American Shared Hospital Services. 4.7 Form of Common Stock Purchase Warrant for Shares of Common Stock of American Shared Hospital Services held by General Electric Company, acting through GE Medical Systems. 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. 4.9 Promissory Note, dated May 17, 1995, by American Shared Hospital Services in favor of General Electric Company in the principal sum of $1,500,000, as amended. 4.10 Promissory Note, dated May 17, 1995, by American Shared-CuraCare and CuraCare, Inc. in favor of DVI Business Credit Corporation, in the principal sum of $4,000,000. 4.11 Promissory Note, dated May 17, 1995, by American Shared-CuraCare and CuraCare, Inc. in favor of DVI Financial Services Inc. in the principal sum of $2,500,000. 4.12 Security Agreement dated as of May 17, 1995 by and between American Shared Hospital Services and General Electric Company, acting through GE Medical Systems. 4.13 Agreement and Proxy dated as of May 12, 1995 by Ernest A. Bates, M.D. Accepted and Agreed to by Anchor National Life Insurance Company, Sun Life Insurance Company of America, SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd., and Upchurch Living Trust U/A/D 12/14/90.
79
EXHIBIT SEQUENTIAL NUMBER EXHIBIT DESCRIPTION PAGE NUMBER - ------ ----------------------------------------------------------------------- -----------
5 Opinion of Sidley and Austin regarding legality of securities being registered.(5) 10.1 The Company's 1984 Stock Option Plan, as amended.(6) * 10.2 The Company's 1995 Stock Option Plan.(7) * 10.3 Form of Indemnification Agreement between American Shared Hospital * Services and members of its Board of Directors.(8) 10.4 Agreement, dated as of November 1, 1994, by and among General Electric * Company, acting through GE Medical Systems, and American Shared Hospital Services, and certain of its subsidiaries.(9) 10.5 Note Purchase Agreement dated as of May 12, 1995, by and among Anchor National Life Insurance Company, Sun Life Insurance Company of America, and SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd., Upchurch Living Trust U/A/D 12/14/90, American Shared Hospital Services and Ernest A. Bates, M.D. 10.6 Loan and Security Agreement, dated as of May 17, 1995, among American Shared-Curacare and Curacare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Corporation. 10.7 Loan and Security Agreement, dated as of May 17, 1995, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Financial Services Inc. 10.8 Form of Unconditional Continuing Guaranty of American Shared Hospital Services. 10.9 Form of Unconditional Continuing Guaranty of Ernest A. Bates, M.D. 10.10 Intercreditor Agreement dated as of May 17, 1995 among American Shared Hospital Services, American Shared-CuraCare, DVI Financial Services Inc. and DVI Business Credit Corporation and General Electric Company, acting through GE Medical Systems. 10.11 Ernest A. Bates Stock Option Agreement dated August 15, 1995.(10) * 10.12 Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. 21 Subsidiaries of American Shared Hospital Services. * 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Sidley & Austin, incorporated by reference to Exhibit 5 to * this Registration Statement. 24 Power of Attorney.(11) *
- --------------- * Not applicable. See the footnote below for the reference to the copy of the Exhibit incorporated by reference as an Exhibit hereto as such Exhibit has been heretofore filed with the Commission, to which there have been no amendments or changes; or to be filed by amendment hereto. (1) This document was previously filed as Exhibit 3.1 to registrant's Registration Statement on Form S-2 (Registration No. 33-23416) and is incorporated herein by this reference. (2) This documents was previously filed as Exhibit 4.1 to the registrant's Registration Statement on Form S-2 (Registration No. 33-23416) and is incorporated herein by this reference. (3) This document was previously filed as Exhibit 4.2 to the registrant's Registration Statement on Form S-2 (Registration No. 33-23416) and is incorporated herein by this reference. (4) This document was previously filed as Exhibit 4.3 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and is incorporated herein by this reference. 80 (5) To be filed by amendment. (6) This document was previously filed as Exhibit 10.24 to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), and is incorporated herein by this reference. (7) This document was previously filed as Exhibit A to registrant's Proxy Statement (Registration No. 1-8789) and is incorporated herein by this reference. (8) This document was filed as Exhibit 10.35 to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), and is incorporated herein by this reference. (9) This document was previously filed as Exhibit 10.49 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (10) This document was previously filed as Exhibit B to registrant's Proxy Statement (Registration No. 1-8789) which is incorporated herein by this reference. EX-3.2 2 BYLAWS OF AMERICAN SHARED HOSPITALS 1 EXHIBIT 3.2 BYLAWS OF AMERICAN SHARED HOSPITAL SERVICES (a California corporation) 2 TABLE OF CONTENTS
Page ---- ARTICLE I - Applicability......................................... 1 Section 1. Applicability of Bylaws.......................... 1 ARTICLE II - Offices.............................................. 1 Section 1. Principal Offices................................ 1 Section 2. Change in Location or Number of Offices................................ 1 ARTICLE III - Meetings of Shareholders............................ 1 Section 1. Place of Meetings................................ 1 Section 2. Annual Meetings.................................. 1 Section 3. Special Meetings................................. 2 Section 4. Notice of Annual, Special or Adjourned Meetings............................ 2 Section 5. Record Date...................................... 3 Section 6. Quorum........................................... 4 Section 7. Adjournment...................................... 5 Section 8. Validation of Action Taken at Defectively Called, Noticed or Held Meetings................................. 5 Section 9. Voting for Election of Directors................. 5 Section 10. Proxies.......................................... 6 Section 11. Inspectors of Election........................... 7 Section 12. Action by Written Consent........................ 7 ARTICLE IV - Directors............................................ 8 Section 1. Number of Directors.............................. 8 Section 2. Election of Directors............................ 8
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Page ---- Section 3. Term of Office................................... 8 Section 4. Vacancies........................................ 9 Section 5. Removal.......................................... 9 Section 6. Resignation...................................... 9 Section 7. Fees and Compensation............................ 10 ARTICLE V - Committees of the Board of Directors.................. 10 Section 1. Designation of Committees........................ 10 Section 2. Powers of Committees............................. 10 ARTICLE VI - Meetings of the Board of Directors and Committees Thereof.............................. 11 Section 1. Place of Meetings................................ 11 Section 2. Organization Meeting............................. 11 Section 3. Other Regular Meetings........................... 11 Section 4. Special Meetings................................. 11 Section 5. Notice of Special Meetings....................... 11 Section 6. Waivers, Consents and Approvals.................. 12 Section 7. Quorum; Action at Meetings; Telephone Meetings............................... 12 Section 8. Adjournment...................................... 12 Section 9. Action Without a Meeting......................... 12 Section 10. Meetings of and Action by Committees....................................... 12 ARTICLE VII - Officers............................................ 13 Section 1. Officers......................................... 13 Section 2. Election of Officers............................. 13 Section 3. Subordinate Officers, Etc. ...................... 13
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Page ---- Section 4. Removal and Resignation.......................... 13 Section 5. Vacancies........................................ 14 Section 6. Chairman of the Board............................ 14 Section 7. President........................................ 14 Section 8. Vice President................................... 14 Section 9. Secretary........................................ 14 Section 10. Chief Financial Officer.......................... 15 ARTICLE VIII - Records and Reports............................... 15 Section 1. Minute Book...................................... 15 Section 2. Share Register................................... 15 Section 3. Books and Records of Account..................... 16 Section 4. Bylaws........................................... 16 Section 5. Inspection of Records............................ 16 Section 6. Annual Report to Shareholders.................... 16 ARTICLE IX - Miscellaneous........................................ 16 Section 1. Checks, Drafts, Etc.............................. 16 Section 2. Contracts, Etc. - How Executed................... 16 Section 3. Certificates of Stock............................ 17 Section 4. Lost Certificates................................ 17 Section 5. Representation of Shares of Other Corporations............................... 17 Section 6. Construction and Definitions..................... 17 Section 7. Indemnification of Corporate Agents; Purchase of Liability Insurance........................................ 18 ARTICLE X - Amendments............................................ 18 Section 1. Amendments....................................... 18
iii 5 BYLAWS OF AMERICAN SHARED HOSPITAL SERVICES (a California corporation) ARTICLE I APPLICABILITY Section 1. Applicability of Bylaws. These Bylaws govern, except as otherwise provided by statute or its Articles of Incorporation, the management of the business and the conduct of the affairs of the Corporation. ARTICLE II OFFICES Section 1. Principal Offices. The Board of Directors shall fix the location of the principal executive office of the Corporation at any place within or outside the State of California. If the principal executive office is located outside this state, and the Corporation has one or more business offices in this state, the Board of Directors shall designate a principal business office in the State of California. Section 2. Change in Location or Number of Offices. The Board of Directors may change any office from one location to another or eliminate any office or offices. ARTICLE III MEETINGS OF SHAREHOLDERS Section 1. Place of Meetings. Meetings of the shareholders shall be held at any place within or without the State of California designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the Corporation. Section 2. Annual Meetings. An annual meeting of the shareholders shall be held within 180 days following the end of the fiscal year of the Corporation at a date and time designated by the Board of Directors. Directors shall be elected at each annual meeting and any other proper business may be transacted thereat. 1 6 Section 3. Special Meetings. (a) Special meetings of the shareholders may be called by the Board of Directors, the Chairman of the Board and the President or by the shareholders upon the request of the holders of shares entitled to cast not less than 10 percent of the votes at such meeting. (b) Any request for the calling of a special meeting of the shareholders shall (1) be in writing, (2) specify the date and time thereof, which date shall be not less than 35 nor more than 60 days after receipt of the request, (3) specify the general nature of the business to be transacted thereat and (4) be given either personally or by first-class mail, postage prepaid, or other means of written communication to the Chairman of the Board, President, any Vice President or Secretary of the Corporation. The officer receiving a proper request to call a special meeting of the shareholders shall cause notice to be given pursuant to the provisions of Section 4 of this article to the shareholders entitled to vote thereat that a meeting will be held at the date and time specified by the person or persons calling the meeting. If notice is not given within 20 days of the receipt of the request, the shareholders making the request may give notice of such meeting so long as the notice given complies with the other provisions of this subsection. (c) No business may be transacted at a special meeting unless the general nature thereof was stated in the notice of such meeting. Section 4. Notice of Annual, Special or Adjourned Meetings. (a) Whenever any meeting of the shareholders is to be held, a written notice of such meeting shall be given in the manner described in subdivision (d) of this section not less than 10 nor more than 60 days before the date thereof to each shareholder entitled to vote thereat. The notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the giving of the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, management intends to present for election. (b) Any proper matter may be presented at an annual meeting for action. However, any action to approve (1) a contract or transaction in which a director has a direct or indirect financial interest under Section 310 of the Corporations Code of California, (2) an amendment of the articles 2 7 of incorporation under Section 902 of that code, (3) a reorganization of the corporation, under Section 1201 of that code, (4) a voluntary dissolution of the corporation under Section 1900 of that code, or (5) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares under Section 2007 of that code may be taken only if the notice of the meeting states the general nature of the matter to be approved. (c) Notice need not be given of an adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, except that if the adjournment is for more than 45 days or if after the adjournment a new record date is provided for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at that meeting. (d) Notice of any meeting of the shareholders shall be given personally, by first class mail, or by telegraph or other written communication, addressed to the shareholder at his address appearing on the books of the Corporation or given by him to the Corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. Notice shall be deemed to have been given at the time when delivered personally to the recipient, deposited in the mail, delivered to a common carrier for transmission to the recipient or sent by other means of written communication. An affidavit of the mailing or other means of giving notice may be executed by the Secretary, assistant secretary or any transfer agent of the Corporation giving the notice and shall be prima facie evidence of the giving of the notice. Such affidavits shall be filed and maintained in the minute books of the Corporation. (e) If any notice or report addressed to the shareholder at his address appearing on the books of the Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon his written demand at the principal executive office of the Corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. Section 5. Record Date. (a) The Board of Directors may fix a time in the future as a record date for 3 8 determination of the shareholders (1) entitled to notice of any meeting or to vote thereat, (2) entitled to give written consent to any corporate action without a meeting, (3) entitled to receive payment of any dividend or other distribution or allotment of any rights or (4) entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall be not more than 60 nor less than 10 days prior to the date of any meeting of the shareholders nor more than 60 days prior to any other action. (b) In the event no record date is fixed: (1) The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. (c) Only shareholders of record on the close of business on the record date are entitled to notice and to vote, to give written consent or to receive a dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date. (d) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. Section 6. Quorum. (a) A majority of the shares entitled to vote at a meeting of the shareholders, represented in person or by proxy, shall constitute a quorum for the transaction of business thereat. 4 9 (b) The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. Adjournment. Any meeting of the shareholders may be adjourned from time to time whether or not a quorum is present by the vote of a majority of the shares represented thereat either in person or by proxy. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. Section 8. Validation of Actions Taken at Defectively Called, Noticed or Held Meetings. (a) The transactions of any meeting of the shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote thereat, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. Any written waiver of notice shall comply with subdivision (f) of Section 601 of the Corporations Code of the State of California. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (b) Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except (1) when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and (2) that attendance at a meeting is not a waiver of any right to object to the consideration of any matter required by the General Corporation Law of the State of California to be included in the notice but not so included, if such objection is expressly made at the meeting. Section 9. Voting for Election of Directors. (a) Except as provided in subdivision (c) of this section, the affirmative vote of the majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number is required by law or the Articles of Incorporation. 5 10 (b) Every shareholder complying with subdivision (c) of this section and entitled to vote at any election of directors may cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are normally entitled, or distribute his votes on the same principle among as many candidates as he thinks fit. (c) No shareholder shall be entitled to cumulate his votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidate's or candidates' names for which he desires to cumulate his votes have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of his intention to cumulate his votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. (d) Elections for directors may be by voice vote or by ballot unless any shareholder entitled to vote demands election by ballot at the meeting prior to the voting, in which case the vote shall be by ballot. (e) In any election of directors, the candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected as directors. Section 10. Proxies. (a) Every person entitled to vote shares may authorize another person or persons to act with respect to such shares by a written proxy signed by him or his attorney-in-fact and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by him or his attorney-in-fact. (b) Any validly executed proxy, except a proxy which is irrevocable pursuant to subdivision (c) of this section, shall continue in full force and effect until the expiration of the term specified therein or upon its earlier revocation by the person executing it prior to the vote pursuant thereto (1) by a writing delivered to the Corporation stating that it is revoked, (2) by written notice of death of the person executing the proxy, delivered to the Corporation, (3) by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting or (4) as to any meeting by attendance at such meeting and voting in person by the person executing the proxy. No proxy shall be 6 11 valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. The date contained on the form of proxy shall be deemed to be the date of its execution. (c) A proxy which states that it is irrevocable is irrevocable for the period specified therein subject to the provisions of subdivisions (e) and (f) of Section 705 of the Corporations Code of the State of California. Section 11. Inspectors of Election. (a) In advance of any meeting of the shareholders, the Board of Directors may appoint either one or three persons (other than nominees for the office of director) as inspectors of election to act at such meeting or any adjournments thereof. If inspectors of election are not so appointed, or if any person so appointed fails to appear or refuses to act, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse to act) at the meeting. If appointed at a meeting on the request of one or more shareholders or the proxies thereof, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. (b) The duties of inspectors of election and the manner of performance thereof shall be as prescribed in subdivisions (b) and (c) of Section 707 of the Corporations Code of the State of California. Section 12. Action by Written Consent. (a) Subject to subdivisions (b) and (c) of this section, any action which may be taken at any annual or special meeting of the shareholders may be taken without a meeting, without a vote and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the Secretary of the Corporation and maintained with the corporate records. (b) Except for the election of a director by written consent to fill a vacancy (other than a vacancy created by removal), directors may be elected by written consent only by the unanimous written consent of all shares entitled to vote for the election of directors. In the case of an election of a director by written consent to fill a vacancy (other than a vacancy created by removal), any such election requires the consent of a majority of the outstanding shares entitled to vote for the election of directors. 7 12 (c) Unless the consents of all shareholders entitled to vote have been solicited in writing, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in subdivision (d) of Section 4 of this Article III. In the case of approval of (1) contracts or transactions in which a director has a direct or indirect financial interest under Section 310 of the Corporations Code of California, (2) indemnification of agents of the corporation, under Section 317 of that code, (3) a reorganization of the corporation, under Section 1201 of that code, or (4) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, under Section 2007 of that code, notice of such approval shall be given at least ten (10) days before the consummation of any action authorized by that approval. (d) Any shareholder giving a written consent, or his proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the Corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the Corporation. ARTICLE IV DIRECTORS Section 1. Number of Directors. (a) The authorized number of directors shall depend upon the number of shareholders. If there is only one shareholder, then there will only be one director. Whenever there is more than one shareholder, then there will be no less than seven nor more than thirteen directors. The exact number of directors shall be fixed from time to time, within the limits specified in this subdivision, by an amendment of subdivision (b) of this section adopted by the Board of Directors. (b) The exact number of directors shall be one (1) until changed as provided in subdivision (a) of this section. Notwithstanding the preceding sentence, at all times while there is one (1) shareholder of the corporation, said shareholder, may without amending these bylaws determine that there shall be seven (7) directors. Said shareholder may elect the aforementioned seven (7) directors by noticing a meeting of the shareholders of the corporation. (c) The maximum or minimum authorized number of directors may only be changed by an amendment of this section approved by the vote or written consent of a majority of the an amendment reducing the minimum number to a number less than 5 shall not be adopted if the votes cast against its adoption at a meeting (or the shares not consenting in the 8 13 case of action by written consent) exceed 16-2/3% of such outstanding shares; and provided, further, that in no case shall the stated maximum authorized number of directors exceed two times the stated minimum number of authorized directors minus one. Section 2. Election of Directors. Directors shall be elected at each annual meeting of the shareholders. Section 3. Term of Office. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which he is elected and until a successor has been elected, and qualified. Section 4. Vacancies. (a) A vacancy in the Board of Directors exists whenever any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors or otherwise. (b) Except for a vacancy created by the removal of a director, vacancies on the Board of Directors may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director shall be filled only by a person elected by a majority of the shareholders entitled to vote at a duly held meeting at which there is a quorum present or by the unanimous written consent of the holders of the outstanding shares entitled to vote at such a meeting. (c) The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Section 5. Removal. (a) The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. (b) Any or all of the directors may be removed without cause if such removal is approved by a majority of the outstanding shares entitled to vote; provided, however, that no director may be removed (unless the entire Board of Directors is removed) if whenever the votes cast against his removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of his most recent election were then being elected. 9 14 (c) Any reduction of the authorized number of directors does not remove any director prior to the expiration of his term of office. Section 6. Resignation. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 7. Fees and Compensation. Directors may be paid for their services in such capacity a sum in such amounts, at such times and upon such conditions as may be determined from time to time by resolution of the Board of Directors and may be reimbursed for their expenses, if any, for attendance at each meeting of the Board. No such payments shall preclude any director from serving the Corporation in any other capacity and receiving compensation in any manner therefor. ARTICLE V COMMITTEES OF THE BOARD OF DIRECTORS Section 1. Designation of Committees. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate (1) one or more committees, each consisting of two or more directors and (2) one or more directors as alternate members of any committee, who may replace any absent member at any meeting thereof. Any member or alternate member of a committee shall serve at the pleasure of the Board. Section 2. Powers of Committees. Any committee, to the extent provided in the resolution of the Board of Directors designating such committee, shall have all the authority of the Board, except with respect to: (a) The approval of any action for which the General Corporation Law of the State of California also requires any action by the shareholders; (b) The filling of vacancies on the Board or in any committee thereof; (c) The fixing of compensation of the directors for serving on the Board or on any committee thereof; (d) The amendment or repeal of these Bylaws or the adoption of new bylaws; 10 15 (e) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the Corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) The designation of other committees of the Board or the appointment of members or alternate members thereof. ARTICLE VI MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES THEREOF Section 1. Place and Meetings. Regular meetings of the Board of Directors shall be held at any place within or without the State of California which has been designated from time to time by the Board or, in the absence of such designation, at the principal executive office of the Corporation. Special meetings of the Board shall be held either at any place within or without the State of California which has been designated in the notice of meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the Corporation. Section 2. Organization Meeting. Immediately following each annual meeting of the shareholders the Board of Directors shall hold a regular meeting for the purpose of organization and the transaction of other business. Notice of any such meeting is not required. Section 3. Other Regular Meetings. Other regular meetings of the Board of Directors shall be held without call at such time as shall be designated from time to time by the Board. Notice of any such meeting is not required. Section 4. Special Meetings. Special meetings of the Board of Directors may be called at any time for any purpose or purposes by the Chairman of the Board or the President or any vice president or the Secretary or any two directors. Notice shall be given of any special meeting of the Board. Section 5. Notice of Special Meetings. Notice of the time and place of special meetings of the Board of Directors shall be delivered personally or by telephone to each director or sent to each director by first-class mail or 11 16 telegraph, charges prepaid, addressed to each director at that director's address as shown on the records of the Corporation. Such notice shall be given four days prior to the holding of the special meeting if sent by mail or 48 hours prior to the holding thereof if delivered personally or given by telephone or telegraph. The notice or report shall be deemed to have been given at the time when delivered personally to the recipient or deposited in the mail or sent by other means of written communication. Notice of any special meeting of the Board of Directors need not specify the purpose thereof. Section 6. Waivers, Consents and Approvals. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 7. Quorum: Action at Meetings; Telephone Meetings. (a) A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the directors present is the act of the Board of Directors, unless action by a greater proportion of the directors is required by law or the Articles of Incorporation. (b) A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. (c) Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment so long as all members participating in such meeting can hear one another. Section 8. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 9. Action Without a Meeting. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board 12 17 individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 10. Meetings of and Action by Committees. The provisions of this Article apply to committees of the Board of Directors and action by such committees with such changes in the language of those provisions as are necessary to substitute the committee and its members for the Board and its members. ARTICLE VII OFFICERS Section 1. Officers. The Corporation shall have as officers, a President, a Secretary and a Chief Financial Officer. The Treasurer is the chief financial officer of the Corporation unless the Board of Directors has by resolution designated a vice president or other officer to be the chief financial officer. The Corporation may also have, at the discretion of the Board, a Chairman of the Board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two or more offices. Section 2. Election of Officers. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by the Board of Directors. Section 3. Subordinate Officers, Etc. The Board of Directors may appoint by resolution, and may empower the Chairman of the Board, if there be such an officer, or the President, to appoint such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are determined from time to time by resolution of the Board or, in the absence of any such determination, as are provided in these Bylaws. Any appointment of an officer shall be evidenced by a written instrument filed with the Secretary of the Corporation and maintained with the corporate records. Section 4. Removal and Resignation. (a) Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors or, except in case of any 13 18 officer chosen by the Board, by any officer upon whom such power of removal may be conferred by resolution of the Board. (b) Subject to the rights, if any, of the Corporation under any contract of employment, any officer may resign at any time effective upon giving written notice to the Chairman of the Board, President, any vice president or Secretary of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office. Section 6. Chairman of the Board. If there is a Chairman of the Booard, he shall, if present, preside at all meetings of the Board of Directors, exercise and perform such other powers and duties as may be from time to time assigned to him by resolution of the Board or prescribed by these Bylaws and, if there is no President, the Chairman of the Board shall be the chief executive officer of the Corporation and have the power and duties set forth in Section 7 of this Article. Section 7. President. Subject to such supervisory powers, if any, as may be given by these Bylaws or the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the chief executive officer and general manager of the Corporation and shall, subject to the control of the Board, have general supervision, direction and control of the business and affairs of the Corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by resolution of the Board. Section 8. Vice President. In the absence or disability of the President, the vice presidents in order of their rank as fixed by the Board of Directors, or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board or as the President may from time to time delegate. 14 19 Section 9. Secretary. (a) The Secretary shall keep or cause to be kept (1) the minute book, (2) the share register and (3) the seal, if any, of the Corporation. (b) The Secretary, an assistant secretary, or, if they are absent or unable to act, any other officer shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by these Bylaws or by law to be given, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or any committee of the Board of Directors. Section 10. Chief Financial Officer. (a) The Chief Financial Officer shall keep, or cause to be kept, the books and records of account of the Corporation. (b) The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated from time to time by resolution of the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and the Board, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board or as the President may from time to time delegate. ARTICLE VIII RECORDS AND REPORTS Section 1. Minute Book. The Corporation shall keep or cause to be kept in written form at its principal executive office or such other place as the Board of Directors may order, a minute book which shall contain a record of all actions by its shareholders, Board or committees of the Board including the time, date and place of each meeting; whether a meeting is regular or special and, if special, how called; the manner of giving notice of each meeting and a copy thereof; the names of those present at each meeting of the Board or committees thereof; the number of shares present or represented at each meeting of the shareholders; the proceedings of all meetings; any written waivers of notice, consents to the holding of a meeting or approvals of the minutes thereof; and written consents for actions without a meeting. 15 20 Section 2. Share Register. The Corporation shall keep or cause to be kept at its principal executive office or, if so provided by resolution of the Board of Directors, at the Corporation's transfer agent or registrar, a share register, or a duplicate share register, which shall contain the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. Section 3. Books and Records of Account. The Corporation shall keep or cause to be kept at its principal executive office or such other place as the Board of Directors may order, adequate and correct books and records of account. Section 4. Bylaws. The Corporation shall keep at its principal executive office or, in the absence of such office in the State of California, at its principal business office in the state, the original or a copy of the bylaws as amended to date. Section 5. Inspection of Records. The shareholders and directors of the Corporation shall have all of the rights to inspect the books and records of the Corporation that are specified in Section 213 and 1600 through 1602 of the Corporations Code of the State of California. Section 6. Annual Report to Shareholders. The Board of Directors shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year of the Corporation. Such report shall comply with the provisions of Section 1501 of the Corporations Code of the State of California and shall be sent in the manner specified in Section 4(d) of Article III at least 15 days prior to the annual meeting of shareholders to be held during the next fiscal year. ARTICLE IX MISCELLANEOUS Section 1. Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, and any assignment or endorsement thereof, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. 16 21 Section 2. Contracts, Etc. - How Executed. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board, no officer, employee or other agent shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 3. Certificates of Stock. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when the shares are fully paid or the Board of Directors may authorize the issuance of certificates for shares as partly paid provided that these certificates shall conspicuously state the amount of the consideration to be paid for them and the amount already paid. All certificates shall be signed in the name of the Corporation by the Chairman of the Board or the President or a vice president and by the Chief Financial Officer or an assistant treasurer or the Secretary or an assistant secretary, certifying the number of shares and the class or series thereof owned by the shareholder. Any or all of the signatures on a certificate may be by facsimile signature. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 4. Lost Certificates. Except as provided in this section, no new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered to the Corporation and canceled at the same time. The Board of Directors may in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions as the Board may require, including provision for indemnification of the Corporation secured by a bond or other adequate security sufficient to protect the Corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 5. Representation of Shares of Other Corporations. Any person designated by resolution of the 17 22 Board of Directors or, in the absence of such designation, the Chairman of the Board, the President or any vice president or the Secretary, or any other person authorized by any of the foregoing, is authorized to vote on behalf of the Corporation any and all shares of any other corporation or corporations, foreign or domestic, owned by the Corporation. Section 6. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the Corporations Code of the State of California shall govern the construction of these Bylaws. Section 7. Indemnification of Corporate Agents; Purchase of Liability Insurance. (a) The Corporation shall, to the maximum extent permitted by the General Corporation Law of the State of California, and as the same may from time to time be amended, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding to which such person was or is a party or is threatened to be made a party arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 7, an "agent" of the Corporation includes any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative, and includes an action or proceeding by or in the right of the Corporation to procure a judgment in its favor; and "expenses" includes attorneys' fees and any expenses of establishing a right to indemnification under this subdivision (a). (b) The Corporation shall, if and to the extent the Board of Directors so determines by resolution, purchase and maintain insurance in an amount and on behalf of such agents of the Corporation as the Board may specify in such resolution against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the Corporation would have the capacity to indemnify the agent against such liability under the provisions of this Section 7. 18 23 ARTICLE X AMENDMENTS Section 1. Amendments. New bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote. Subject to the next preceding sentence, bylaws (other than a bylaw or amendment thereof specifying or changing a fixed number of directors or the maximum or minimum number, or changing from fixed to a variable board or vice versa) may be adopted, amended or repealed by the Board of Directors. 19 24 SECRETARY'S CERTIFICATE I, Willie R. Barnes, do hereby certify that: 1. I am, and have been, at all times herein mentioned, the duly elected and acting Secretary of American Shared Hospital Services, a California corporation (the "Company"). 2. On April 17, 1984, the sole shareholder of the Company adopted the following resolution, approving an amendment to Section 1 of Article IV of the Bylaws of the Company by written consent in accordance with California law: BE IT RESOLVED that, subsections (a) and (b) of Section 1 of Article IV of the Bylaws of this Corporation, which presently read: "Section 1. Number of Directors. (a) The authorized number of directors shall be not less than seven nor more than thirteen. The exact number of directors shall be fixed from time to time within the limits specified in this subsection, by an amendment of subsection (b) of this section adopted by the Board of Directors. (b) The exact number of directors shall be seven until changed as provided in subsection (a) of this section." be, and they hereby are, amended to read: "Section 1. Number of Directors. (a) The authorized number of directors shall be not less than six nor more than eleven. The exact number of directors shall be fixed from time to time within the limits 25 specified in this subsection, by an amendment of subsection (b) of this section adopted by the Board of Directors. (b) The exact number of directors shall be six until changed as provided in subsection (a) of this section." 3. The total number of outstanding shares of the Company entitled to consent to the approval of the amendment to the Bylaws was 1,161,481 shares. The number of shares consenting to the approval was 1,161,481 shares, which constitutes 100% of the issued and outstanding shares of the Company. Therefore, the shareholders of the Company have duly approved the amendment to the Bylaws as set forth above in accordance with the provisions of California law. The foregoing resolutions are presently in full force and effect and have not been rescinded or revoked as of the date hereof. IN WITNESS WHEREOF, I have hereupon subscribed my name, and set the seal of the Company this 17 day of April, 1984. /s/ WILLIE R. BARNES ---------------------------------- Willie R. Barnes, Secretary [SEAL] 26 RESOLUTION OF THE BOARD OF DIRECTORS WHEREAS Section 1(a) of Article IV provides that the authorized number of Directors shall be no less than seven nor more than thirteen, with the exact number of Directors being fixed from time to time within these limits by an amendment to subdivision (b) of Section 1 of Article IV; WHEREAS subdivision (b) of Section 1 of Article IV provides that the exact number of Directors shall be six until changed by an amendment to this subdivision; and WHEREAS the Board desires to amend subdivision (b) of Section 1 of Article IV to specify that the exact number of Directors shall be seven RESOLVED THEREFORE that subdivision (b) of Section 1 of Article IV shall be amended to read as follows: "(b) The exact number of Directors shall be seven until changed as provided in subdivision (a) of this Section." I certify that the foregoing Resolution was adopted by the Board of Directors of American Shared Hospital Services on January 31, 1986. /s/ WILLIE R. BARNES -------------------------------- Willie R. Barnes Secretary 27 CERTIFICATE OF AMENDMENT TO BYLAWS OF AMERICAN SHARED HOSPITAL SERVICES The undersigned, being the Secretary of American Shared Hospital Services, a California corporation, hereby certifies that the Bylaws of this corporation were amended, effective March 23, 1988, by the Board of Directors to delete Article IX, Section 7 and to add the following new Article IX, Sections 7, 8, 9, 10, 11, and 12, which provide in their entirety as follows: ARTICLE IX INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS. Section 7. Mandatory Indemnification of Directors. The corporation shall, to the maximum extent and in the manner permitted by the California Corporations Code ("Code"), indemnify each of its directors against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceedings (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article IX, a "director" of the corporation includes any person (i) who is or was a director of the corporation, (ii) who is or was serving at the request of the corporation as a director of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. Section 8. Permissive Indemnification. The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its officers, employees and agents against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlemenets, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article IX, an "employee" or "agent" of the corporation (other than a director, includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation, as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of the corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 28 Section 9. PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 7 or for which indemnification is permitted pursuant to Section 8 following authorization thereof by the Board of Directors, in the case of directors shall and in the case of other agents of the corporation entitled to indemnification may, be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article IX. Section 10. INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article IX shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. Section 11. INSURANCE INDEMNIFICATION. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article IX. Section 12. CONFLICTS. No indemnification or advance shall be made under this Article IX, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders of an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Dated: June 3, 1988. /s/ WILLIE R. BARNES ---------------------------- Willie R. Barnes, Secretary 29 CERTIFICATE OF AMENDMENT TO BYLAWS OF AMERICAN SHARED HOSPITAL SERVICES The undersigned, being the Secretary of American Shared Hospital Services, a California corporation, hereby certifies that the Bylaws of this Corporation were amended, effective October 26, 1988, by the Board of Directors to amend Article IV, Section 1(b) to read as follows: "(b) The exact number of directors shall be nine (9) until changed as provided in Subdivision (a) of this Section." Dated: October 26, 1988 /s/ WILLIE R. BARNES ------------------------------------- Willie R. Barnes, Secretary 30 CERTIFICATE OF AMENDMENT TO BYLAWS OF AMERICAN SHARED HOSPITAL SERVICES The undersigned, being the Secretary of American Shared Hospital Services, a California corporation, hereby certifies that the Bylaws of this Corporation were amended, effective August 15, 1995 by the Board of Directors to amend Article IV, Section 1(b) to read as follows: "(b) The exact number of directors shall be six (6) until changed as provided in Subdivision (a) of this Section." Dated: October 19, 1995 /s/ WILLIE R. BARNES ------------------------------------- Willie R. Barnes, Secretary 31 CERTIFICATE OF AMENDMENT TO BYLAWS OF AMERICAN SHARED HOSPITAL SERVICES The undersigned, being the Secretary of American Shared Hospital Services, a California corporation, hereby certifies that the Bylaws of this Corporation were amended, effective October 6, 1995 by the Board of Directors to amend Article IV, Section 1(b) to read as follows: "(b) The exact number of directors shall be seven (7) until changed as provided in Subdivision (a) of this Section." Dated: October 19, 1995 /s/ WILLIE R. BARNES ------------------------------------- Willie R. Barnes, Secretary EX-4.4 3 SUPPLEMENTAL INDENTURE NO. 2 1 EXHIBIT 4.4 AMERICAN SHARED HOSPITAL SERVICES AND FIRST INTERSTATE BANK OF CALIFORNIA, AS TRUSTEE -------------------- SUPPLEMENTAL INDENTURE NO. 2 Dated as of May 17, 1995 to INDENTURE Dated as of October 15, 1988 Providing for $30,000,000 Senior Subordinated Exchangeable Reset Notes Due October 15, 1996 2 SUPPLEMENTAL INDENTURE NO. 2, dated as of May 17, 1995, between American Shared Hospital Services, a California corporation (the "Company"), and First Interstate Bank of California, a California corporation (the "Trustee"). WHEREAS, the Company and the Trustee executed an indenture (the "Indenture"), dated as of October 15, 1988, providing for the issuance of up to $30,000,000 in principal amount of the Company's Senior Subordinated Exchangeable Reset Notes Due October 15, 1996 (the "Securities"); WHEREAS, the Company and the Trustee executed a Supplemental Indenture (the "Supplemental Indenture"), dated as of October 15, 1989, providing for a new interest rate and optional redemption provisions for the Securities (the Indenture, as so modified by such Supplemental Indenture, is referred to herein as the "Indenture"); WHEREAS, pursuant to Section 9.02 of the Indenture, the Company and the Trustee may amend the Indenture or the Securities with the written consent of the holders of at least a majority in principal amount of the then outstanding Securities; WHEREAS, the Company received from the holders of approximately 96% of the outstanding Securities written consents to the amendments to the Indenture and the Securities effected hereby; WHEREAS, the Company has determined that all the requirements of law and the Articles of Incorporation and By-Laws of the Company and of the Indenture have been fully complied with and all other acts and things necessary to make this Supplemental Indenture No. 2 a valid, binding and legal agreement enforceable in accordance with its terms and the terms of the Indenture have been done and performed; NOW, THEREFORE, in consideration of the premises, and to embody the amendments set forth below, it is hereby agreed between the Company and the Trustee as follows: ARTICLE ONE 1. The Indenture is hereby amended to delete the following sections: Section 4.05 (Restrictions on Dividends and -2- 3 Other Payments); Section 4.07 (Maintenance of Consolidated Net Worth); Section 4.11 (Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries); and Section 4.12 (Limitation on Creation of Indebtedness). 2. The Securities (the form of which is incorporated by reference into the Indenture pursuant to Section 2.01 thereof) are hereby amended to delete Sections 8 (Maintenance of Consolidated Net Worth) and 9 (Limitation on Creation of Indebtedness). 3. The amendment of the Indenture and the Securities effected by this Supplemental Indenture No. 2 shall be evidenced upon the Securities authenticated and delivered under the Indenture after the date of this Supplemental Indenture No. 2 by placing on the face thereof a legend substantially in the following form: "The Indenture has been amended by a Supplemental Indenture No. 2, dated as of May 17, 1995, which, among other things, deletes certain covenants that limited the ability of the Company to pay dividends and create indebtedness and required the Company to maintain a specified minimum consolidated net worth. Reference is made to such Supplemental Indenture No. 2 for a statement of the amended rights and obligations of the Company and of the holders of the Securities." At the demand of and without cost to the holder of any of the Securities outstanding at the date of this Supplemental Indenture No. 2, such outstanding Securities may be exchanged for Securities modified as set forth in this paragraph 3 of like form and like denomination, upon surrender by such holder to the Trustee of such outstanding Securities. ARTICLE TWO Except as expressly altered or amended by this Supplemental Indenture No. 2, the Indenture and the Securities issued thereunder hereby are ratified and confirmed and all the terms, provisions and conditions thereof shall be and continue in full force and effect. The Indenture and this Supplemental Indenture No. 2 shall be read, taken and construed as one and the -3- 4 same instrument and shall be binding upon the holders of all Securities. ARTICLE THREE This Supplemental Indenture No. 2 may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -4- 5 SIGNATURES Dated as of May 17, 1995 AMERICAN SHARED HOSPITAL SERVICES By: __________________________ Ernest A. Bates, M.D. Chairman and Chief Executive Officer Attest: _____________________ Assistant Secretary Dated as of May 17, 1995 FIRST INTERSTATE BANK OF CALIFORNIA, as Trustee By: __________________________ Vice President -5- EX-4.5 4 SUPPLEMENTAL INDENTURE NO. 1 1 EXHIBIT 4.5 AMERICAN SHARED HOSPITAL SERVICES AND FIRST INTERSTATE BANK OF CALIFORNIA, AS TRUSTEE -------------------- SUPPLEMENTAL INDENTURE NO. 1 Dated as of May 17, 1995 to INDENTURE Dated as of October 15, 1988 Providing for 14-3/4% Senior Subordinated Notes Due October 15, 1996 2 SUPPLEMENTAL INDENTURE NO. 1, dated as of May 17, 1995, between American Shared Hospital Services, a California corporation (the "Company"), and First Interstate Bank of California, a California corporation (the "Trustee"). WHEREAS, the Company and the Trustee executed an indenture (the "Indenture"), dated as of October 15, 1988, providing for the issuance of up to $30,000,000 in principal amount of the Company's 14-3/4% Senior Subordinated Notes Due October 15, 1996 (the "Securities"); WHEREAS, pursuant to Section 9.02 of the Indenture, the Company and the Trustee may amend the Indenture or the Securities with the written consent of the holders of at least a majority in principal amount of the then outstanding Securities; WHEREAS, the Company received from the holders of approximately 92% of the outstanding Securities written consents to the amendments to the Indenture and the Securities effected hereby; WHEREAS, the Company has determined that all the requirements of law and the Articles of Incorporation and By-Laws of the Company and of the Indenture have been fully complied with and all other acts and things necessary to make this Supplemental Indenture a valid, binding and legal agreement enforceable in accordance with its terms and the terms of the Indenture have been done and performed; NOW, THEREFORE, in consideration of the premises, and to embody the amendments set forth below, it is hereby agreed between the Company and the Trustee as follows: ARTICLE ONE 1. The Indenture is hereby amended to delete the following sections: Section 4.05 (Restrictions on Dividends and Other Payments); Section 4.07 (Maintenance of Consolidated Net Worth); Section 4.11 (Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries); and Section 4.12 (Limitation on Creation of Indebtedness). 2. The Securities (the form of which is incorporated by reference into the Indenture pursuant to Section 2.01 thereof) -2- 3 are hereby amended to delete Sections 8 (Maintenance of Consolidated Net Worth) and 9 (Limitation on Creation of Indebtedness). 3. The amendment of the Indenture and the Securities effected by this Supplemental Indenture No. 1 shall be evidenced upon the Securities authenticated and delivered under the Indenture after the date of this Supplemental Indenture No. 1 by placing on the face thereof a legend substantially in the following form: "The Indenture has been amended by a Supplemental Indenture No. 1, dated as of May 17, 1995, which, among other things, deletes certain covenants that limited the ability of the Company to pay dividends and create indebtedness and required the Company to maintain a specified minimum consolidated net worth. Reference is made to such Supplemental Indenture No. 1 for a statement of the amended rights and obligations of the Company and of the holders of the Securities." At the demand of and without cost to the holder of any of the Securities outstanding at the date of this Supplemental Indenture No. 1, such outstanding Securities may be exchanged for Securities modified as set forth in this paragraph 3 of like form and like denomination, upon surrender by such holder to the Trustee of such outstanding Securities. ARTICLE TWO Except as expressly altered or amended by this Supplemental Indenture No. 1, the Indenture and the Securities issued thereunder hereby are ratified and confirmed and all the terms, provisions and conditions thereof shall be and continue in full force and effect. The Indenture and this Supplemental Indenture No. 1 shall be read, taken and construed as one and the same instrument and shall be binding upon the holders of all Securities. ARTICLE THREE This Supplemental Indenture No. 1 may be executed in any number of counterparts, each of which when so executed shall -3- 4 be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -4- 5 SIGNATURES Dated as of May 17, 1995 AMERICAN SHARED HOSPITAL SERVICES By: __________________________ Ernest A. Bates, M.D. Chairman and Chief Executive Officer Attest: _____________________ Assistant Secretary Dated as of May 17, 1995 FIRST INTERSTATE BANK OF CALIFORNIA, as Trustee By: __________________________ Vice President -5- EX-4.6 5 COMMON STOCK PURCHASE WARRANT 1 EXHIBIT 4.6 THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS, AND MAY BE OFFERED AND SOLD ONLY IF SO REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THE HOLDER OF THIS WARRANT OR ANY SUCH SHARES MAY BE REQUIRED TO DELIVER TO THE COMPANY, IF THE COMPANY SO REQUESTS, AN OPINION OF COUNSEL (REASONABLY SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY) TO THE EFFECT THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (OR QUALIFICATION UNDER STATE SECURITIES LAWS) IS AVAILABLE WITH RESPECT TO ANY TRANSFER OF THIS WARRANT OR THESE SHARES THAT HAS NOT BEEN SO REGISTERED (OR QUALIFIED). AMERICAN SHARED HOSPITAL SERVICES Common Stock Purchase Warrant No. ____________ _____________ shares May 17, 1995 AMERICAN SHARED HOSPITAL SERVICES, a California corporation (together with any corporation that shall succeed to or assume the obligations of the Company hereunder in compliance with Section 4, the "Company"), for value received, hereby certifies that ________, or its registered assigns (the "Holder"), is entitled to purchase from the Company an aggregate of ________ shares of Common Stock (as defined below), at the Exercise Price (as defined below) per share, subject to the terms, conditions and adjustments set forth below, in whole or in part, at any time or from time to time from and after the date hereof and on or prior to the Expiration Date (defined below). 1. The following terms shall have the meanings ascribed to them below: "Business Day" shall mean any day other than a Saturday or Sunday or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close. 2 "Closing Price" with respect to any security on any day shall mean (i) the closing sale price, regular way, on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading or (ii) if not so quoted or listed, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or (iii) if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors, or, to the extent permitted by applicable law, a duly authorized committee thereof (the "Board of Directors") for that purpose. "Common Stock" shall mean the Common Stock, no par value, of the Company and any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock. "Current Market Price" on any day shall mean the average Closing Price of the Common Stock during the 30 Trading Day period ending on such day. "Expiration Date" shall mean May 17, 2002. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, business trust, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof. "Record Date" with respect to any dividend or distribution, shall mean the record date fixed for the determination of stockholders entitled to receive such dividend or distribution. "Trading Day" with respect to any Security shall mean (x) if such security is listed or admitted for trading or quoted on a national securities exchange or quotation system, a day on which such national securities exchange is open for business or (y) if such security is not otherwise listed, admitted for trading or quoted, any Business Day. 2. Exercise of Warrant. 2.1 Manner of Exercise. This Warrant may be exercised by the Holder hereof, in whole or in part, during normal business hours on any Business Day, by surrender of this Warrant to the Company at its office maintained pursuant to Section 9, accompanied by a subscription in substantially the form attached to this Warrant (or a reasonable facsimile thereof), duly executed by such Holder and, in the case of clause (a) below, accompanied by payment of the aggregate Exercise Price of the number of shares of Common Stock designated in such subscription. Payment of such Exercise Price may be made, at the option of the Holder (a) in cash, by certified or official bank check payable to the order of the Company, or (b) by the Company withholding that number of shares of Common Stock with an aggregate Closing Price as of the date of exercise equal to such aggregate Exercise Price. 2 3 2.2 When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant and the accompanying subscription shall have been duly surrendered to the Company as provided in Section 2.1, and at such time the Holder shall be deemed to have become the holder of record of a number of shares of Common Stock equal to the number of shares designated in such subscription less, in the case of clause 2.1(b), the number of shares of Common Stock withheld by the Company as payment therefor. 2.3 Delivery of Stock Certificates, etc. As soon as practicable after each exercise of this Warrant, in whole or in part, in accordance with the terms of Section 2.1, the Company shall cause to be issued in the name of the Holder (or its designee), and delivered to the Holder (or at its direction), (a) a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock to which such Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash in an amount equal to the same fraction of the Closing Price per share on the date of such exercise, and (b) in case such exercise is in part only, a new Warrant of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal to the number of such shares called for on the face of this Warrant (after giving effect to any adjustment thereof after the date hereof) minus the number of such shares designated by the Holder upon such exercise as provided in Section 2.1. 3. Adjustments. 3.1 General. The number of shares of Common Stock that the Holder shall be entitled to receive upon each exercise hereof shall be determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 3) be issuable upon such exercise, by a fraction (i) the numerator of which is $0.75 and (ii) the denominator of which is the Exercise Price on the date of such exercise. The "Exercise Price" shall initially be $0.75 per share; provided, that the Exercise Price shall be adjusted and readjusted from time to time as provided in this Section 3; provided, however, that no such adjustment shall be made to the Exercise Price in connection with the issuance of (i) up to 1,495,000 shares of Common Stock to the chairman and chief executive officer of the Company on or prior to May 17, 1996, (ii) warrants to purchase shares of Common Stock to General Electric Company, a New York corporation acting through GE Medical Systems ("GE") on or prior to May 17, 1996, and (iii) options granted to members of management (other than the chairman and chief executive officer) pursuant to an incentive stock option plan approved by a majority of the Company's shareholders to purchase up to five percent (5%) of the fully-diluted shares of Common Stock outstanding on the date of adoption of the plan. 3.2 Stock Dividends. If, after the date hereof, the Company shall declare or pay any dividend on the Common Stock payable in Common Stock, then, and in each such case, the Exercise Price shall be reduced, as of the close of business on the Record Date, by multiplying such Exercise Price by a fraction (a) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on such Record Date 3 4 and (b) the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution. 3.3 Rights. If, after the date hereof, the Company shall pay or make a dividend or other distribution on its Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights or warrants entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price on the Record Date, the Exercise Price shall be reduced, as of the close of business on the Record Date, by multiplying such Exercise Price by a fraction (a) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on such Record Date plus the number of shares of Common Stock that the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Closing Price and (b) the denominator of which shall be the number of shares of Common Stock outstanding at the close of business on such record date plus the number of shares of Common Stock so offered for subscription or purchase. For purposes of this Section 3.3, the issuance of rights or warrants to subscribe for or purchase stock or securities convertible into shares of Common Stock shall be deemed to be the issuance of rights or warrants to purchase the shares of Common Stock into which such stock or securities are convertible at an aggregate offering price equal to the aggregate offering price of such stock or securities plus the minimum aggregate amount (if any) payable upon conversion of such stock or securities into Common Stock. 3.4 Stock Splits, etc. If, after the date hereof, the outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock or combined into a smaller number of shares of Common Stock by stock split, combination, reclassification or otherwise, the Exercise Price in effect at the close of business on the day upon which such subdivision or combination becomes effective shall be proportionately reduced or increased, such reduction or increase, as the case may be, to become effective immediately prior to the opening of business on the day following the day upon which such subdivision or combination becomes effective. 3.5 Other Distributions. If, after the date hereof, the Company shall, by dividend or otherwise, distribute to all holders of record of its Common Stock evidences of indebtedness, shares of capital stock, cash or assets (including securities, but excluding any dividend or distribution for which an adjustment is made pursuant to Section 3.2 or 3.3 above), the Exercise Price shall be reduced, as of the close of business on the Record Date, by multiplying such Exercise Price by a fraction (a) the numerator of which shall be the Closing Price per share of Common Stock on the Record Date less the fair market value on such Record Date, of such evidences of indebtedness, shares of capital stock, cash and assets that are distributed to a holder of one share of Common Stock and (b) the denominator of which shall be such Closing Price per share of the Common Stock. For purposes of this Section 3.5, any dividend or distribution that includes shares of Common Stock or rights or warrants to subscribe for or purchase shares of Common Stock shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, cash, assets or shares of capital stock other that such shares of Common Stock, rights or warrants (so that any Exercise Price reduction required by this Section 3.5 is made) immediately followed by (2) a dividend or distribution of such shares of Common Stock, rights or warrants (so that there is made any further Exercise Price reduction required by Section 3.2 or 3.3 hereof). In lieu of any adjustment to the Exercise Price provided for in this Section 3.5, the Holder may elect, in its sole discretion, to receive such dividend or distribution as would be received by a holder of the number 4 5 of shares of Common Stock issuable upon the exercise of this Warrant. Such dividend or distribution shall be declared, ordered, made or paid at the time such dividend or distribution is declared, ordered, made or paid on the Common Stock, without any requirement of any exercise hereof. 3.6 Sales Below Market Price. If, after the date hereof, the Company shall issue or sell its shares of Common Stock for consideration per share that is less than the Current Market Price on the Trading Day next preceding the date of such issuance (unless (i) the provisions of 3.2, 3.3, 3.4 or 3.5 shall be applicable, (ii) such issuance or sale is in connection with a bona fide underwritten public offering, or (iii) such issuance or sale is in consideration for assets or ownership interests acquired by the Company in an arm's length transaction with a bona fide third party) the Exercise Price shall be adjusted to equal the product of the Exercise Price in effect immediately prior to such action, multiplied by a fraction (a) the numerator of which is the Adjusted Fair Market Value per share and (b) the denominator of which is such Current Market Price. "Adjusted Fair Market Value" shall mean (i) the sum of (x) the product of (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale times (B) the Current Market Price, plus (y) the consideration, if any, received by the Company upon such issue or sale, divided by (ii) the number of shares of Common Stock outstanding immediately after such issue or sale. 3.7 Minimum Adjustment of Warrant Price. If the amount of any adjustment of the Exercise Price required pursuant to this Section 3 would be less than one percent (1%) of the Exercise Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate at least one percent (1%) of such Exercise Price, provided, that all such adjustments required pursuant to Section 3 and carried forward under this Section 3.7 shall be made upon (and in connection with) any exercise of the Warrant. 3.8 Form of Warrants. Irrespective of any adjustments in the Exercise Price or the number of shares of Common Stock purchasable upon the exercise of this Warrant, this Warrant (and any Warrant hereafter issued) may continue to express the same price and number and kind of shares as are stated in the Warrant initially issued. 4. Consolidation, Merger, etc. If, after the date hereof, the Company shall (a) consolidate with or merge into any other Person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) permit any other Person to consolidate with or merge into the Company and the Company shall be the continuing or surviving Person but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (c) effect a capital reorganization or reclassification of the Common Stock, 5 6 then (i) lawful and adequate provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder of this Warrant, upon the exercise hereof after the consummation of such transaction, shall be entitled to receive, in lieu of the Common Stock issuable upon such exercise, the kind and amount of securities, cash or other property to which such Holder would have been entitled upon such consummation if such Holder had exercised the rights represented by this Warrant in full immediately prior thereto and (ii) appropriate provision shall be made with respect to rights and interests of the Holder to the end that the provisions hereof (including without limitation provisions for adjustment of the Exercise Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of any conversion rights hereunder. 5. Certain Covenants. The Company shall (a) not permit the par value of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise, and (b) take all such action as may be necessary or appropriate to validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant. 6. Accountants' Report as to Adjustments. Upon the occurrence of any event requiring adjustment or readjustment in the Exercise Price or the shares of Common Stock issuable upon the exercise of this Warrant, the Company will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and cause independent certified public accountants of recognized national standing (which may be the regular auditors of the Company) to verify such computation and prepare a report setting forth such adjustment or readjustment and showing in reasonable detail the method of calculation thereof and the facts upon which such adjustment or readjustment is based. The Company will promptly mail a copy of each such report to the Holder. 7. Payment of Taxes. The Company shall pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Common Stock upon exercise of the Warrants. The Company shall not, however, be required to pay any tax payable in respect of any transfer involved in the issue or delivery of Warrants or shares of Common Stock issued upon exercise of the Warrants (or other securities or assets) in a name other than that in which the Warrants so exercised were registered. 8. Reservation of Stock, etc. The Company shall at all times reserve and keep available, solely for issuance and delivery upon exercise of this Warrant, the number of shares of Common Stock from time to time issuable upon exercise of this Warrant. All shares of Common Stock issuable upon exercise of this Warrant shall be duly authorized and, when issued upon such exercise in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable, with no liability on the part of the holders thereof. 9. Ownership and Transfer. (a) The Company shall treat the person in whose name this Warrant is registered on the register (the "Warrant Register") kept at the office of the Company maintained pursuant to this Section 9 as the owner and holder hereof for all purposes. (b) This Warrant shall be transferable only on the Warrant Register, upon delivery hereof, accompanied by a written instrument or instruments of transfer, duly executed by the registered Holder hereof or 6 7 by the duly appointed legal representative hereof or by a duly authorized attorney. Upon the surrender of this Warrant, properly endorsed, for registration of transfer or for exchange at the office of the Company maintained pursuant to Section 9, the Company shall execute and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face hereof. (c) The Company will maintain an office in the State of California, which office shall initially be at Four Embarcadero Center, Suite 3620, San Francisco, California 94111-4115, until such time as the Company shall notify the Holder of any change of location of such office. (d) If any warrant certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated certificate, or in lieu of and substitution for the certificate lost, stolen or destroyed, and upon receipt of evidence to their reasonable satisfaction of the destruction, loss or theft of any certificate and such security or indemnity as may reasonably be required by them to save each of them and any of their agents harmless, to issue a new certificate of like tenor and representing an equivalent right or interest. 10. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be construed as conferring upon the Holder any rights as a stockholder of the Company or as imposing any obligation on such Holder to purchase any securities or as imposing any liabilities on such Holder as a stockholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company. 11. Notices. All notices, demands, requests, consents, approvals or other communications required or permitted to be given hereunder or which are given with respect to this Warrant shall be in writing and shall be personally served or delivered by a reputable air courier service with charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile, addressed (a) if to the Holder, at the registered address of such Holder as set forth in the register kept at the principal office of the Company, or (b) if to the Company, to the attention of its Chief Executive Officer at its office maintained pursuant to Section 9, provided that the exercise of any Warrant shall be effective only in the manner provided in Section 2. Notice shall be deemed given on the date of service or confirmation of receipt of transmission if personally served or transmitted by telegram, telex or facsimile. Notice otherwise sent as provided herein shall be deemed given on the next Business Day following delivery of such notice to a reputable air courier service. 7 8 12. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. Titles and headings of sections of this Warrant are for convenience only and shall not affect the construction of any provision of this Warrant. AMERICAN SHARED HOSPITAL SERVICES By:_____________________________________ Name: Title: Attest By:_______________________________ Name: Title: 8 9 FORM OF SUBSCRIPTION [To be executed only upon exercise of Warrant] To: AMERICAN SHARED HOSPITAL SERVICES The undersigned registered holder of the within Warrant hereby irrevocably exercises such Warrant for, and purchases thereunder, ______* shares of Common Stock of AMERICAN SHARED HOSPITAL SERVICES and requests that the certificates for such shares be issued in the name of, and delivered to the undersigned, whose address is set forth below. In payment therefor (check one): [ ] The Company may withhold therefrom, and the undersigned holder hereby surrenders its right to, that number of shares of Common Stock with an aggregate Closing Price as of the date of exercise equal to the aggregate Exercise Price for the shares designated for purchase in the preceding sentence. [ ] The undersigned holder has included a certified or official bank check payable to the order of the Company in an amount equal to the aggregate Exercise Price for the shares designated for purchase in the preceding sentence. Dated: _____________________________________ (Signature must conform in all respects to name of holder as specified on the face of Warrant) _____________________________________ (Street Address) _____________________________________ (City) (State) (Zip Code) _____________________________________ * Insert here the number of shares called for on the face of this Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case after making any adjustment for additional shares of Common Stock which, pursuant to the adjustment provisions of this Warrant, may be delivered upon exercise. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of the Warrant, to the holder surrendering the Warrant. 9 10 FORM OF ASSIGNMENT For value received _________________ hereby sells, assigns and transfers unto ______________ the within Warrant, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ______________ attorney, to transfer said Warrant on the books of the Company, with full power of substitution in the premises. Dated: ___________________ _____________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant in every particular, without alternation or enlargement or any change whatever. Signature Guaranteed: 10 EX-4.7 6 COMMON STOCK PURCHASE WARRANT 1 EXHIBIT 4.7 AMERICAN SHARED HOSPITAL SERVICES COMMON STOCK PURCHASE WARRANT MAY 17, 1995 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. EXERCISE OF WARRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.1 Manner of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.4 Continued Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3. TRANSFER, DIVISION AND COMBINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.1 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.2 Division and Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.3 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.4 Maintenance of Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4. ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.1 Stock Dividends, Subdivisions, Combinations and Reclassification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.2 Other Provisions Applicable to Adjustments under this Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5. NOTICES TO WARRANT HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.1 Notice of Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Notice of Certain Corporate Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6. NO IMPAIRMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY . . 9 8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 9. RESTRICTIONS ON TRANSFERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 9.1 Restrictive Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 9.2 Notice of Proposed Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 9.3 Termination of Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 10. SUPPLYING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11. LOSS OR MUTILATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12. OFFICE OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13. FINANCIAL AND BUSINESS INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13.1 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13.2 Annual Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 13.3 Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-i- 3 [14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15. LIMITATION OF LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 16. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16.1 Nonwaiver and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16.2 Notice Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16.3 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16.4 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16.5 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16.8 Governing Law; Service of Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16.9 MUTUAL WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-ii- 4 THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES FOR WHICH IT CAN BE EXERCISED HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT OR STATE LAW, THE RULES AND REGULATIONS THEREUNDER OR THE TRANSFER RESTRICTIONS OF THIS WARRANT. AMERICAN SHARED HOSPITAL SERVICES COMMON STOCK PURCHASE WARRANT 127,147 Shares, Subject to Adjustment May 17, 1995 THIS IS TO CERTIFY THAT GENERAL ELECTRIC COMPANY, a New York corporation acting through GE Medical Systems, or registered assigns, is entitled, at any one time on and after the Exercise Date and on or prior to the Expiration Date (as hereinafter defined), to purchase from AMERICAN SHARED HOSPITAL SERVICES, a California corporation (the "Company"), 127,147 shares of Common Stock (as hereinafter defined and subject to adjustment as provided herein), of the Company at a purchase price of $0.01 per share (subject to adjustment as provided herein), all on the terms and conditions and pursuant to the provisions hereinafter set forth. 1. DEFINITIONS As used in this Warrant, the following terms have the respective meanings set forth below. "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company following the date of this Warrant. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the States of New York or California. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. 5 "Common Stock" shall mean (except where the context otherwise indicates) the Common Stock of the Company, and any capital stock into which such Common Stock may thereafter be changed, and shall also include capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption. "Convertible Securities" shall mean evidences of indebtedness, options, warrants or other rights to receive shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Warrant Price" shall mean, in respect of a share of Common Stock at any date herein specified, the price at which a share of Common Stock may be purchased pursuant to this Warrant on such date. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Date" shall mean the date hereof. "Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1. "Expiration Date" shall mean September 30, 1996 or such earlier date, if any, on which all or substantially all of the outstanding Common Stock is sold in one or a series of transactions. "Fully Diluted Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding at such date and all shares of Common Stock issuable in respect of this Warrant and all other options, warrants, Convertible Securities or other rights to purchase or receive Common Stock outstanding on such date. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "GE Medical" shall mean General Electric Company, a New York corporation acting through GE Medical Systems. "Holder" shall mean the Person or Persons in whose name the Warrant set forth herein is registered on the books of the Company -2- 6 maintained for such purpose. In the event more than one Person is so registered, "Holder" for purposes of consent, demand or other action allowed or required to be taken hereunder by the Holders of this Warrant, the word "Holder" shall refer to a simple majority in interest of such Persons. "NASD" shall mean the National Association of Securities Dealers, Inc., or any successor corporation thereto. "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held exclusively by or for the account solely of the Company or any wholly-owned subsidiary thereof (collectively, "Subsidiary-Held Shares"), and shall include all shares issuable in respect of any certificates representing fractional interests in shares of Common Stock. Subsidiary-Held Shares shall remain Subsidiary-Held Shares even if held in pledge as security unless and until such shares are foreclosed upon and record, beneficial or equitable ownership transferred. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Preferred Stock" shall mean any class of the Company's stock having rights, preferences or privileges senior or prior in right to any other class. "Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9.1(a). "Restructuring Agreement" shall mean that certain Agreement dated effective as of November 1, 1994, between the Company and General Electric Company, acting through GE Medical Systems which provides for restructuring of obligations of the Company and to which a form of this Warrant is attached as an exhibit. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Subsidiary" shall mean, with respect to any Person, any corporation of which an aggregate of more than 50 percent of the outstanding stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of -3- 7 whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person and/or one or more Subsidiaries of such Person. "Subsidiary-Held Shares" shall have the meaning set forth above in the definition of "Outstanding." "Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a sale thereof within the meaning of the Securities Act. "Transfer Notice" shall have the meaning set forth in Section 9.2. "Warrants" shall mean this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, this Warrant. All Warrants shall at all times be identical as to terms and conditions and date, except as to the percentage of Fully Diluted Outstanding Shares of Common Stock for which they may be exercised. Collectively, all unexercised Warrants shall be exercisable for the exact same number of shares as this Warrant would be exercisable in the event any such Transfer or division had not occurred. Exercise of any warrant shall not trigger any of the adjustments contemplated by Section 4 of this Warrant. "Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of such exercise. "Warrant Stock" shall mean the shares of Common Stock purchased by the holders of the Warrants upon the exercise thereof. 2. EXERCISE OF WARRANT 2.1 Manner of Exercise. From and after the Exercise Date and until 5:00 p.m., California time, on the Expiration Date, the Holder may exercise the Warrant on Business Days, for all or any part of 127,147 shares (subject to adjustment as provided hereunder) of Common Stock then purchasable hereunder. In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at Four Embarcadero Center, Suite 3620, San Francisco, California 94111 or at the office or agency designated by the Company pursuant to Section 12, (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (ii) payment of the Warrant Price in the manner specified below, and (iii) this Warrant. Such notice shall be substantially in the form of the subscription form -4- 8 appearing at the end of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon receipt thereof, the Company shall, as promptly as practicable, and in any event within five Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of Outstanding shares of Common Stock issuable upon such exercise. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as such Holder shall request in the notice and shall be registered in the name of Holder or, subject to Section 9, such other name as shall be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the payment as set forth below, and this Warrant are received by the Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid or agreed to be paid when finally determined. Payment of the Warrant Price shall be made by check. 2.2 Payment of Taxes. All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, unless such tax or charge is imposed by law upon Holder, in which case such taxes or charges shall be paid by Holder. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Common Stock issuable upon exercise of this Warrant in any name other than that of Holder, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the satisfaction of the Company that no such tax or other charge is due. 2.3 Fractional Shares. The Company shall not issue a fractional share of Common Stock upon exercise of this Warrant. A fractional share otherwise issuable shall be rounded up to the nearest whole share. 2.4 Continued Validity. A holder of shares of Common Stock issued upon the exercise of this Warrant (other than a holder who acquires such shares after the same have been publicly sold pursuant to a Registration Statement under the Securities Act or sold pursuant to Rule 144 thereunder) shall continue to be entitled with respect to such shares to all rights to which it would have been entitled as Holder under Sections 9, 10, 13, and 16 of this -5- 9 Warrant. The Company shall, at the time of each exercise of this Warrant upon the request of the holder of the shares of Common Stock issued upon such exercise hereof, acknowledge in writing, in form reasonably satisfactory to such holder, its continuing obligation to afford to such holder all such rights; provided, however, that if such holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder all such rights. 3. TRANSFER, DIVISION AND COMBINATION 3.1 Transfer. This Warrant shall be nontransferable other than to a division, subsidiary or affiliate of GE Medical except by merger of the Holder with another entity or otherwise as specifically contemplated in Section 9 hereof or by operation of law. Subject to compliance with Section 9, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company referred to in Section 2.1 or the office or agency designated by the Company pursuant to Section 12, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned in compliance with Section 9, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new Warrant issued. If requested by the Company, a new Holder shall acknowledge in writing, in form reasonably satisfactory to the Company, such Holder's continuing obligations under Section 9 of this Warrant. 3.2 Division and Combination. Subject to Section 9, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. -6- 10 3.3 Expenses. The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 3. 3.4 Maintenance of Books. The Company shall maintain, at its aforesaid office or agency, books for the registration, and the registration of transfer, of this Warrant. 4. ADJUSTMENTS The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant shall be subject to adjustment from time to time as set forth in this Section 4. The Company shall give each Holder notice of any event described below which requires an adjustment pursuant to this Section 4 at the time of such event. 4.1 Stock Dividends, Subdivisions, Combinations and Reclassification. If at any time the Company shall with respect to its Common Stock or Convertible Securities: (a) pay a dividend or make distribution of Additional Shares of Common Stock or Convertible Securities other than convertible indebtedness or convertible Preferred Stock (in which event such Additional Shares of Common Stock issuable upon exchange or conversion shall be deemed distributed), (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (d) reclassify its Common Stock (other than a change in par value, or from par value to no par value) into shares of Common Stock and shares of any other class of stock; and, if the Outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the Outstanding shares of Common Stock within the meaning of this Section 4.1., then (i) the number of shares of Common Stock for which this Warrant is exercisable after the occurrence of any such event shall be equal to (A) the maximum number of shares of Common Stock underlying this Warrant prior to the occurrence of any such event, multiplied by (B) the number of Fully Diluted Outstanding shares of Common Stock after any such event, divided by the number of Fully Diluted Outstanding shares of Common Stock prior to any such event, and (ii) the Current Warrant Price shall be adjusted to equal the Current Warrant Price multiplied (A) by the number of shares of -7- 11 Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. Any increased number of shares of Common Stock subject to this Warrant resulting from application of the foregoing shall be allocated ratably among all shares of Common Stock subject to this Warrant prior to each such event and the shares (including the newly allocated shares) not subject to clause (i) of Section 2.1 shall remain subject to the conditions precedent to exercise described in clause (ii) of Section 2.1. 4.2 Other Provisions Applicable to Adjustments under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable provided for in this Section 4: (a) When Adjustments to Be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (b) When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 5. NOTICES TO WARRANT HOLDERS 5.1 Notice of Adjustments. Whenever the number of shares of Common Stock for which this Warrant is exercisable, or whenever the price at which a share of such Common Stock may be purchased upon exercise of this Warrant, shall be adjusted pursuant to Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated, specifying the number of shares of Common Stock for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to each Holder in accordance with Section 16.2. The Company shall keep at its office or agency designated pursuant to Section 12 copies of all such certificates and cause the same to be available for inspection at said office during normal business -8- 12 hours by any Holder or any prospective purchaser of a Warrant designated by a Holder thereof. 5.2 Notice of Certain Corporate Action. The Holder shall be entitled to the same rights to receive notice of corporate action as any holder of Common Stock. 6. NO IMPAIRMENT The Company shall not by any action including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value, if any, of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Upon the request of Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY From and after the Closing Date, the Company shall at all times reserve and keep available for issuance upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable, and not subject to preemptive rights. Before taking any action which would cause an adjustment reducing the Current Warrant Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, the Company shall take any corporate action which may be -9- 13 reasonably necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Current Warrant Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Current Warrant Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be reasonably necessary from any public regulatory body or bodies having jurisdiction thereof. If any shares of Common Stock required to be reserved for issuance upon exercise of warrants require registration or qualification with any governmental authority under any federal or state law (otherwise than as provided in Section 9) before such shares may be so issued, the Company will in good faith and as expeditiously as possible and at its expense endeavor to cause such shares to be duly registered or qualified; provided that the provisions of Section 9 shall govern with respect to Company's obligation to effect the registration of its securities under the Securities Act. 8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of a record of such holders, the Company will in each such case take such a record and will take such record as of the close of business on a Business Day. The Company will not at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 9. RESTRICTIONS ON TRANSFERABILITY This Warrant shall not be transferable except to a division, subsidiary or affiliate of GE Medical or by merger of the Holder with another entity or otherwise by operation of law. Furthermore, this Warrant and the Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act and state law, with respect to the Transfer of this Warrant or any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. Furthermore, Holder, by acceptance of this Warrant and by acceptance and delivery of the Subscription Form in the form of Exhibit A hereto, represents and warrants to the Company for its reliance in connection with issuing this Warrant and the Warrant Stock, respectively, that (i) Holder is acquiring the Warrant, and if applicable, the Warrant Stock for -10- 14 Holder's own account for investment and not for sale or other disposition thereof; (ii) Holder understands that such securities are not registered under the Securities Act and must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available; (iii) Holder, by reason of its business and financial experience has the capacity to protect its own interests in connection with purchase and transfer of such securities and is able to bear the economic risk thereof; and (iv) the Company has made available to Holder all documents and information regarding an investment in such securities requested by or on behalf of Holder, including but not limited to all publicly available information on file with the Commission. 9.1 Restrictive Legend. (a) Except as otherwise provided in this Section 9, each certificate for Warrant Stock initially issued upon the exercise of this Warrant, and each certificate for Warrant Stock issued to any subsequent transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form: The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and are subject to the conditions specified in a certain Common Stock Purchase Warrant dated May 17, 1995, originally issued by American Shared Hospital Services. No transfer of the shares represented by this certificate shall be valid or effective until such conditions and any requirements of state law have been fulfilled. A copy of the form of said Warrant is on file with the Secretary of American Shared Hospital Services. The holder of this certificate, by acceptance of this certificate, agrees to be bound by the provisions of such Warrant. b) Except as otherwise provided in this Section 9, each Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: This Common Stock Purchase Warrant and the securities for which it can be exercised have not been registered under the Securities Act of 1933, as -11- 15 amended, and may not be transferred in violation of such Act or state law, the rules and regulations thereunder or the transfer restrictions of this Warrant. 9.2 Notice of Proposed Transfers. Prior to any Transfer or attempted Transfer of any Warrants or any shares of Warrant Stock, the holder of such Warrants or Warrant Stock shall give 10 days prior written notice (a "Transfer Notice") to the Company of such holder's intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and shall obtain and deliver to the Company an opinion in form and substance reasonably satisfactory to the Company (addressed to the Company and upon which the Company may rely) from counsel to such holder who shall be reasonably satisfactory to the Company, that the proposed Transfer of such Warrants or such Warrant Stock may be effected without registration under the Securities Act and any applicable state securities laws. After receipt of the Transfer Notice and opinion, the Company shall, within five days thereof, so notify the holder of such Warrants or Warrant Stock and such holder shall thereupon be entitled to Transfer such Warrants or such Warrant Stock, in accordance with the terms of the Transfer Notice. Each certificate, if any, evidencing such shares of Warrant Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(a), and each Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(b), unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act and any applicable state securities laws. The holder of the Warrants or the Warrant Stock, as the case may be, giving the Transfer Notice shall not be entitled to transfer and shall not transfer such Warrants or such Warrant Stock until (i) the Company receives a written statement of investment intent and sophistication from the proposed transferee of such Warrants or Warrant Stock in substance substantially similar to clauses (i), (ii) and (iii) of the final sentence of the first paragraph of Section 9 and (ii) such holder receives notice from the Company under this Section 9.2. 9.3 Termination of Restrictions. Notwithstanding the foregoing provisions of Section 9, the restrictions imposed by this Section upon the transferability after the Exercise Date of the Warrants and the Warrant Stock and the legend requirements of Section 9.1 shall terminate as to any particular Warrant or share of Warrant Stock (i) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel reasonably satisfactory to it that such legend is not required in order to ensure compliance with the Securities Act. Whenever after the Exercise Date the restrictions imposed by Section 9 shall terminate as to this Warrant, as -12- 16 hereinabove provided, the Holder hereof shall be entitled to receive from the Company, at the expense of the Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED IN SECTION 9 HEREOF TERMINATED ON___________, ______, AND ARE OF NO FURTHER FORCE AND EFFECT." All Warrants thereafter issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Whenever the restrictions imposed by this Section shall terminate as to any share of Warrant Stock, as hereinabove provided, the holder thereof shall be entitled to receive from the Company, at the Company's expense, a new certificate representing such Warrant Stock not bearing the restrictive legend set forth in Section 9.1(a). 10. SUPPLYING INFORMATION The Company shall cooperate with each Holder of a Warrant and each holder of Warrant Stock in supplying such information as may be reasonably necessary for such Holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrant or Restricted Common Stock. 11. LOSS OR MUTILATION Upon receipt by the Company from any Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it (it being understood that the written agreement of GE Medical shall be sufficient indemnity) and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to such Holder; provided, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 12. OFFICE OF THE COMPANY As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency (which shall initially be the principal executive offices of the Company) where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. The Company -13- 17 shall notify Holder in writing prior to any change of the address of the office at which the Warrants may be presented. 13. FINANCIAL AND BUSINESS INFORMATION 13.1 Information. Except during any period when the Company is a Public Company (as hereinafter defined), it will deliver to each Holder, as soon as practicable after the end of each month, and in any event within 30 days thereafter, and after the end of each quarter and in any event within 45 days thereafter, one copy of an unaudited consolidated balance sheet, statement of income and statement of cash flow of the Company and its Subsidiaries for such period setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal years. Such financial statements shall be prepared by the Company in accordance with GAAP and shall be accompanied by the certification of the Company's chief executive officer or chief financial officer that such financial statements are complete and correct and present fairly the consolidated financial position, results of operations and cash flow of the Company and its Subsidiaries as at the end of such period and for such year-to-date period, as the case may be. For purposes of this Section 13, the term "Public Company" shall mean a company (i) that is subject to the reporting requirements of Section 15(d) of the Exchange Act, or (ii) any of whose securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act. 13.2 Annual Information. Except during any period when the Company is a Public Company, it will deliver to each Holder as soon as practicable after the end of each fiscal year of the Company, and in any event within 90 days thereafter, one copy of: (i) an audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, and (ii) audited consolidated statements of income and retained earnings and cash flow of the Company and its Subsidiaries for such year; setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year; all prepared in accordance with GAAP, and which audited financial statements shall be accompanied by (i) an opinion thereon of the independent certified public accountants regularly retained by the Company, or any other firm of independent certified public accountants of recognized national standing selected by the Company and (ii) a report of such independent certified public accountants confirming, or describing the agreed upon procedures applied to the Company's schedules computing, any adjustment, made pursuant -14- 18 to Section 4 during such year. Such report shall include a description of any errors determined by the accountants in the Company's schedules. 13.3 Filings. The Company will file on or before the required date all required regular or periodic reports (pursuant to the Exchange Act) with the Commission and will deliver to Holder promptly upon their becoming available one copy of each report, notice or proxy statement sent by the Company to its stockholders generally, and of each regular or periodic report (pursuant to the Exchange Act) and any Registration Statement, prospectus or written communication (other than transmittal letters) pursuant to the Securities Act, filed by the Company with (i) the Commission or (ii) any securities exchange on which shares of Common Stock are listed (provided, however, that the Company may request filing extensions pursuant to Rule 12b-25 under the Securities and Exchange Act of 1934, as amended). [14. Intentionally Omitted.] 15. LIMITATION OF LIABILITY No provision hereof, in the absence of affirmative action by the Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of such Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. -15- 19 16. MISCELLANEOUS 16.1 Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Company shall operate as a waiver of such right or otherwise prejudice the Company's rights, powers or remedies. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Holder shall operate as a waiver of such right or otherwise prejudice the Holder's rights, powers or remedies. If the Company fails to make, when due, any payments provided for hereunder, or fails to comply with any other provision of this Warrant, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. 16.2 Notice Generally. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered (i) in person with receipt acknowledged, (ii) by facsimile transmission, with receipt electronically confirmed during normal business hours of recipient, and that is confirmed by sending, no later than one Business Day following such transmission, a copy of such facsimile, by registered or certified mail, return receipt requested, postage prepaid, or (iii) by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to any Holder or holder of Warrant Stock, at its last known address or facsimile transmission number appearing on the books of the Company maintained for such purpose. (b) If to the Company at: American Shared Hospital Services Four Embarcadero Center, Suite 3620 San Francisco, California 94111-4115 Attention: Chief Executive Officer (415) 788-5300 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged or sent by facsimile with receipt electronically confirmed during normal business hours of -16- 20 recipient, or three Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, approval, declaration, delivery or other communication to the person designated above to receive a copy shall in no way adversely affect the effectiveness of such notice, demand, request, approval, declaration, delivery or other communication. 16.3 Remedies. Each holder of Warrant and Warrant Stock, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under Section 9 of this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of Section 9 of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 16.4 Successors and Assigns. Subject to the provisions of Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant, and shall be enforceable by any such Holder. 16.5 Amendment. This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder, provided that no such Warrant may be modified or amended to reduce the number of shares of Common Stock for which such Warrant is exercisable or to increase the price at which such shares may be purchased upon exercise of such Warrant (before giving effect to any adjustment as provided therein) without the prior written consent of the Holder thereof. 16.6 Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. 16.7 Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 16.8 Governing Law; Service of Process. In all respects, including all matters of construction, validity and performance, this Agreement and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the -17- 21 laws of the state of the Company's incorporation applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. Service of process on the Company or Holder in any action arising out of or relating to this Agreement shall be effective if mailed to such party in accordance with the procedures and requirements set forth in Section 16.2. 16.9 MUTUAL WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE COMPANY AND HOLDER HEREOF WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE COMPANY AND HOLDER HEREOF DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE COMPANY AND HOLDER HEREOF WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. AMERICAN SHARED HOSPITAL SERVICES By:____________________________ Name: Ernest A. Bates, M.D. Title: Chief Executive Officer Attest: By:_______________________ Title: -18- 22 EXHIBIT A SUBSCRIPTION FORM (To be executed only upon exercise of Warrant) The undersigned registered owner of the attached Warrant irrevocably exercises such Warrant for the purchase of ___________ shares of Common Stock of American Shared Hospital Services and herewith makes payment therefor, all at the price and on the terms and conditions specified in such Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to __________________________ whose address is________________ ___________________ and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in such Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. __________________________________ Name of Registered Owner) __________________________________ (Signature of Registered Owner) __________________________________ (Street Address) __________________________________ (City) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. 23 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of the attached Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under such Warrant, with respect to the number of shares of Common Stock set forth below: Name and Address of Assignee No. of Shares of Common Stock and does hereby irrevocably constitute and appoint___________________ attorney-in-fact to register such transfer on the books of American Shared Hospital Services maintained for the purpose, with full power of substitution in the premises. Dated:____________________ Print Name:______________________ Signature:_______________________ Witness:_________________________ NOTICE: The signature on this assignment must correspond with the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-4.8 7 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.8 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made pursuant to the Note Purchase Agreement, dated as of May 17, 1995 among American Shared Hospital Services, a California corporation (the "Company"), the Holders referred to therein (the "Note Purchase Agreement") and General Electric Company, a New York corporation acting through GE Medical Systems. In order to induce the Holders to enter into the Note Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The parties hereby agree as follows: 1. Definitions Capitalized terms used by not otherwise defined herein shall have the meaning given thereto in the Note Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: Advice: See Section 5 hereof. Common Stock: The common stock, no par value, of the Company. DTC: See Section 5 hereof. GE Warrant: Warrants to purchase 225,000 shares of Common Stock. Losses: See Section 7 hereof. NASDAQ: See Section 5 hereof. Person: Any individual, partnership, corporation, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof, or other entity. Piggyback Registration: See Section 3 hereof. Prospectus: The prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously 2 omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. Registrable Securities: The Shares and Warrants and the GE Warrant, upon the respective original issuance thereof, and at all times subsequent thereto, until, in the case of any such security, (i) it is effectively registered under the Securities Act and disposed of in accordance with the Registration Statement covering it, (ii) it is saleable by the holder thereof pursuant to Rule 144(k) or (iii) it is distributed to the public pursuant to Rule 144. Registration Expenses: See Section 6 hereof. Registration Statement: Any registration statement of the Company that covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. Rule 144: Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. Shareholder: Each of the shareholders party hereto and GE Medical Systems and any party who shall hereafter acquire from a Shareholder and hold Registrable Securities. Shares: Any shares of capital stock of the Company owned by any Shareholder, whether owned on the date hereof or hereafter acquired, including (without limitation) any shares issued upon exercise of the Warrants or the GE Warrant. 2 3 Special Counsel: Any special counsel to the Shareholders, the fees and expenses of which the Shareholders of Registrable Securities will be reimbursed pursuant to Section 7(b) hereof. Underwritten registration or underwritten offering: A registration in which securities of the Company are to be sold to an underwriter for reoffering to the public. Warrants: Any warrants to purchase shares of Common Stock owned by any Shareholder, whether owned on the date hereof or hereafter acquired. Warrant Shares: The shares of Common Stock issued upon exercise of the Warrants in accordance with the terms thereof. 2. Shelf Registration (a) The Company shall, on or prior to July 31, 1995 prepare and file with the SEC a Registration Statement under the Securities Act for an offering to be made on a continuous basis pursuant to Rule 415 (or any similar rule that may be adopted by the SEC) under the Securities Act covering all the Registrable Securities (the "Shelf Registration"). (b) The Shelf Registration shall be on Form S-1 or another appropriate Form (reasonably acceptable to the holders of the Registrable Securities offered thereby) permitting registration of such Registrable Securities for resale by such holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company shall not permit any securities other than the Registrable Securities to be included in the Shelf Registration. (c) The Company shall use its best efforts to cause the Shelf Registration to become effective under the Securities Act on or prior to 60 days after the filing thereof and shall keep the Shelf Registration continuously effective for a period of 36 months from the date on which the Shelf Registration becomes effective under the Securities Act (subject to extension pursuant to Section 4(a) and Section 5 hereof), or such shorter period that will terminate when all Registrable Securities covered by the Shelf Registration have been sold. The Company shall also supplement or make amendments to the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used by the Company or if required by the Securities 3 4 Act or if reasonably requested by holders of a majority of the Registrable Securities covered by the Shelf Registration or any underwriter of the Registrable Securities. (d) If any of the Registrable Securities registered pursuant to the Shelf Registration are to be sold in one or more firm commitment underwritten offerings, and the managing underwriter advises the Shareholders of such securities in writing that in its opinion the total number or dollar amount of Registrable Securities proposed to be sold in such offering is such as to materially and adversely affect the success of such offering, then there shall be included in such firm commitment underwritten offering the number or dollar amount of Registrable Securities held by the Shareholders that in the opinion of such managing underwriter can be sold, and such Registrable Securities shall be allocated pro rata on the basis of the number or dollar amount of securities owned by each such Shareholder participating in such offering. 3. Piggyback Registration (a) Right to Piggyback. If at any time the Company proposes to file a registration statement under the Securities Act with respect to an offering of any class of equity securities (other than a registration statement (i) on Form S-4 or S-8 or any successor forms thereto, or (ii) filed in connection with an offering made solely to employees of the Company), whether or not for its own account, then the Company shall give written notice of such proposed filing to the Shareholders of Registrable Securities at least fifteen days before the anticipated filing date. Such notice shall offer such Shareholders the opportunity to register such amount of Registrable Securities as each such Shareholder may request (a "Piggyback Registration"). Subject to Section 3(b) hereof, the Company shall include in each such Piggyback Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein. The Shareholders of Registrable Securities shall be permitted to withdraw all or part of the Registrable Securities from a Piggyback Registration at any time prior to the effective date of such Piggyback Registration. (b) Priority on Piggyback Registrations. The Company shall cause the managing underwriter of a proposed underwritten offering to permit Shareholders of Registrable Securities requested to be included in the registration for such offering to include all such Registrable Securities on the same terms and conditions as any similar securities, if any, of the Company included therein. Notwithstanding the foregoing, if the managing underwriter of such offering delivers an opinion to the holders of Registrable Securities that the total number or dollar amount of securities that such Shareholders, the Company and any other Persons having rights to participate in 4 5 such registration ("Other Holders"), propose to include in such offering is such as to materially and adversely affect the success of such offering, then: (i) if such Piggyback Registration is a primary registration on behalf of the Company, the amount of securities to be offered for the account of Shareholders of Registrable Securities and Other Holders, shall be reduced (to zero if necessary) pro rata on the basis of the number or dollar amounts of securities owned by each such holder participating in such offering to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters; and (ii) if such Piggyback Registration is an underwritten secondary registration on behalf of holders of securities of the Company pursuant to demand registration rights, the Company shall include in such registration: (x) first, up to the full number or dollar amount of securities of such Persons exercising "demand" registration rights that in the opinion of such managing underwriter or underwriters can be sold or allocated among such holders as they may otherwise so determine, and (y) second, any securities to be sold for the account of the Company and (z) third, the number or dollar amount of Registrable Securities and securities held by Shareholders and Other Holders in excess of the amount of securities such Persons exercising "demand" registration rights propose to sell that, in the opinion of such managing underwriter or underwriters, can be sold (allocated pro rata among the Shareholders of such Registrable Securities and Other Holders on the basis of the number or dollar amount of securities owned by such holders). 4. Hold-Back Agreements (a) Restrictions on Sale by Shareholders of Registrable Securities. Each Shareholder agrees not to effect any sale or transfer of the Registrable Securities issued to it as part of the consideration under the Note Purchase Agreement until the earlier to occur of (i) September 17, 1995, and (ii) the shareholder vote with respect to the Additional Issuance. In addition, each Shareholder whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 2 or 3 hereof, agrees that, if such Shareholder is requested (pursuant to a timely written notice) by the managing underwriter in an underwritten offering, not to effect any public sale or distribution of any of the Company's equity securities, including a sale pursuant to Rule 144 (except as part of such underwritten registration), during the 10-day period prior to, and during the 90-day period beginning on, the closing date of each underwritten offering made pursuant to such Registration Statement. If a request is made pursuant to this Section 4(a), the time period during which a Shelf Registration is required to remain continu- 5 6 ously effective pursuant to Section 2(c) shall be extended by 100 days or such shorter period that will terminate when all such Registrable Securities not so included have been sold pursuant to such Registration Statement. (b) Restrictions on Sale by the Company and Others. The Company shall not effect any registration of its securities (other than a registration statement on Form S-8 or any successor form thereto), or effect any public or private sale or distribution of any of its securities other than in connection with the Additional Issuance, including a sale pursuant to Regulation D under the Securities Act, whether on its own behalf or at the request of any holder or holders of such securities (other than pursuant to and in accordance with this Agreement), (i) from the date hereof until 90 days after the effective date of the Shelf Registration, and (ii) for a 90 day period from the date of each notice to the Company of a Shareholder's intent to sell Registrable Securities pursuant to an underwritten public offering, unless the Company shall have first notified in writing the Shareholders of Registrable Securities covered by such Registration Statement of its intention to do so, and the Shareholders of a majority of the Registrable Securities requested to be registered pursuant to Section 2 shall have consented thereto in writing; provided that the Company shall not be obligated to refrain from sales or transfers pursuant to clause (ii) above with respect to more than one such underwritten public offering during any 12-month period. The Company shall cause each holder of its equity securities purchased from the Company at any time on or after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution of any such securities during such period, including a sale pursuant to Rule 144. 5. Registration Procedures In connection with the Company's registration obligations pursuant to Sections 2 and 3 hereof, the Company shall effect such registrations to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company shall as expeditiously as possible: (a) Prepare and file with the SEC a Registration Statement or Registration Statements on any appropriate Form under the Securities Act available for the sale of the Registrable Securities by the holders thereof in accordance with the intended method or methods of distribution thereof, and cause each such Registration Statement to become effective and remain effective as provided herein; provided, however, that before filing a Registration Statement or Prospectus or any amendments or supplements thereto (including documents that would be incorporated or deemed to 6 7 be incorporated therein by reference) the Company shall furnish to the Shareholders of the Registrable Securities covered by such Registration Statement, the Special Counsel and the managing underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the review of such Shareholders, the Special Counsel and such underwriters, and the Company shall not file any such Registration Statement or amendment thereto or any Prospectus or any supplement thereto (including such documents which, upon filing, would or would be incorporated or deemed to be incorporated by reference therein) to which the Shareholders of a majority of the Registrable Securities covered by such Registration Statement, the Special Counsel or the managing underwriter, if any, shall reasonably object to the contents thereof on a timely basis. (b) Prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement continuously effective for the applicable period specified in Section 2; cause the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement as so amended or to such Prospectus as so supplemented. (c) Notify the selling Shareholders of Registrable Securities, the Special Counsel and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or related Prospectus or for additional information, (iii) of the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if at any time the representations and warranties of the Company contained in any agreement contemplated by Section 5(m) below (including any underwriting agreement) below cease to be true and correct, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (vi) of the happening of any event which makes any statement made in such Registration Statement or related Prospectus or any document 7 8 incorporated or deemed to be incorporated therein by reference untrue or which requires the making of any changes in a Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact required to be stated therein is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. (d) Use every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest possible moment. (e) If requested by the managing underwriters, if any, or any Shareholder of Registrable Securities being sold, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters, if any, and such Shareholder agree should be included therein as may be required by applicable law, (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment, and (iii) supplement or make amendments to any Registration Statement. (f) Furnish to each selling Shareholder of Registrable Securities, the Special Counsel and each managing underwriter, if any, without charge, (i) at least one signed copy of the Registration Statement or Statements and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference or deemed incorporated therein by reference and all exhibits (including those previously furnished or incorporated by reference) at the earliest practicable time under the circumstances before the filing of such documents with the SEC and (ii) as many copies of the Prospectus or Prospectuses relating to such Registrable Securities (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may request. The Company hereby consents to the use of such Prospectus or each amendment or supplement thereto by each of the selling Shareholders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto. 8 9 (g) Prior to any public offering of Registrable Securities, to register or qualify or cooperate with the selling Shareholders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing; keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the applicable Registration Statement; provided, however, that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified or (ii) take any action that would subject it to taxation or general service of process in any such jurisdiction where it is not then so subject. (h) Cooperate with the selling Shareholders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall not bear any restrictive legends; and enable such Registrable Securities to be registered in such names as the managing underwriters, if any, request at least two business days prior to any sale of Registrable Securities to the underwriters. (i) Cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities. (j) Upon the occurrence of any event contemplated by paragraph 5(c)(vi) or 5(c)(vii) above, prepare a supplement or post-effective amendment to each Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (k) Cause all Registrable Securities covered by such Registration Statement to be (i) listed on each securities exchange, if any, on which similar securities issued by the Company are then listed, or (ii) authorized to be quoted on the National 9 10 Association of Securities Dealers Automated Quotation System ("NASDAQ") or the National Market System of NASDAQ if the securities so qualify. (l) Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other actions in connection therewith (including those requested by the managing underwriters, if any, or the Shareholders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration, (i) make such representations and warranties to the Shareholders of such Registrable Securities and the underwriters, if any, with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the Shareholders of a majority of the Registrable Securities being sold) addressed to each selling Shareholder of Registrable Securities and each of the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Shareholders and underwriters, including without limitation the matters referred to in paragraph 5(m)(i) above; (iii) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to each selling Shareholder of Registrable Securities and each of the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings; and (iv) deliver such documents and certificates as may be requested by the Shareholders of a majority of the Registrable Securities being sold, the Special Counsel and the managing underwriters, if any, to evidence the continued validity of the representations and warranties of the Company and its subsidiaries made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. (m) Make available for inspection by a representative of the Shareholders of Registrable Securities being sold, any underwriter participating in any disposition of Registrable Securities, if any, and any attorney or accountant retained by 10 11 such selling Shareholders or underwriter, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors and employees of the Company and its subsidiaries to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement; provided, however, that any records, information or documents that are designated by the Company in writing as confidential at the time of delivery of such records, information or documents shall be kept confidential by such Persons unless (i) such records, information or documents are in the public domain or otherwise publicly available, (ii) disclosure of such records, information or documents is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities or (iii) disclosure of such records, information or documents, in the opinion of counsel to such Person, is otherwise required by law (including, without limitation, pursuant to the requirements of the Securities Act). (n) File any reports required to be filed by it under the Securities Act and the Securities Exchange Act of 1934, as amended, and that it will take such further action as any Shareholder may reasonably request, all to the extent required from time to time to enable Shareholders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 or Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Shareholder, the Company will deliver to such Shareholder a written statement as to whether it has complied with such requirements. (o) Use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. (p) Prior to the effective date of the Shelf Registration or the first Piggy-Back Registration, whichever shall occur first, (i) provide the transfer agent with printed certificates for the Registrable Securities in a form eligible for deposit with The Depository Trust Company ("DTC"), and (ii) provide a CUSIP number for the Registrable Securities. (q) In connection with an underwritten offering, participate, to the extent reasonably requested by the managing underwriter for the offering or the Holders, in customary efforts to sell the securities under the offering, including, without 11 12 limitation, participating in "road shows"; provided that the Company shall not be obligated so to participate in more than one such offering in any 12-month period. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such Registrable Securities as the Company may, from time to time, reasonably request in writing. Each Shareholder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5(c)(ii), 5(c)(iii), 5(c)(v), 5(c)(vi) or 5(c)(vii) hereof, such Shareholder will forthwith discontinue disposition of such Registrable Securities covered by such Registration Statement or Prospectus until such Shareholder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 5(j) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus. In the event the Company shall give any such notice, the time period mentioned in Section 2(c) hereof shall be extended by the number of days during the time period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 5(j) hereof or (y) the Advice. 6. Registration Expenses (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any of the Registration Statements become effective. Such fees and expenses shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (x) with respect to filings required to be made with the National Association of Securities Dealers, Inc. and (y) of compliance with securities or "blue sky" laws (including without limitation fees and disbursements of counsel for the underwriters or selling holders in connection with "blue sky" qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the managing under- 12 13 writers, if any, or Shareholders of a majority of the Registrable Securities being sold may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities in a form eligible for deposit with DTC and of printing prospectuses if the printing of prospectuses is requested by the Shareholders of a majority of the Registrable Securities included in any Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) fees and disbursements of all independent certified public accountants referred to in Section (5)(m)(iii) hereof (including the expenses of any annual or special audit and "cold comfort" letters required by or incident to such performance), and (vi) fees and expenses of all other Persons retained by the Company. (b) In connection with any Shelf Registration or Piggyback Registration hereunder, the Company shall reimburse the Shareholders of the Registrable Securities being registered in such registration for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a conflict exists among such selling Shareholders in the exercise of the reasonable judgment of counsel for the selling Shareholders and counsel for the Company), together with appropriate local counsel, chosen by the Shareholders of a majority of the Registrable Securities being registered. 7. Indemnification (a) Indemnification by the Company. The Company shall, without limitation as to time, indemnify and hold harmless, to the fullest extent permitted by law, each Shareholder of Registrable Securities, the partners, officers, directors, agents and employees of each of them, each Person who controls such Shareholder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the partners, officers, directors, agents and employees of each such controlling person, from and against all losses, claims, damages, liabilities, costs (including, without limitation, the costs of preparation and attorneys' fees) and expenses (collectively, "Losses") to be reimbursed promptly, as incurred, arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or form of Prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are based solely upon information furnished in writing to the Company by such Shareholder expressly for use therein. The Company shall also indemnify each underwriter, selling broker, dealer manager and similar securities industry professional participating in the distribution, and each of their officers, directors, agents and employees and each Person 13 14 who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. (b) Indemnification by Shareholder of Registrable Securities. In connection with any Registration Statement in which a Shareholder of Registrable Securities is participating, such Shareholder of Registrable Securities shall furnish to the Company in writing such information as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and agrees to indemnify, to the fullest extent permitted by law, the Company, its directors and officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling persons, from and against all Losses arising out of or based upon any untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary prospectus or arising out of or based upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in and in conformity with any information so furnished in writing by such Shareholder to the Company expressly for use in such Registration Statement or Prospectus and that such information was solely relied upon by the Company in preparation of such Registration Statement, Prospectus or preliminary prospectus. In no event shall the liability of any selling Shareholder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds (net of payment of all expenses) received by such Shareholder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any Person shall be entitled to indemnity hereunder (an "indemnified party"), such indemnified party shall give prompt notice to the party from which such indemnity is sought (the "indemnifying party") of any claim or of the commencement of any Proceeding with respect to which such indemnified party seeks indemnification or contribution pursuant hereto; provided, however, that the failure to so notify the indemnifying party shall not relieve the indemnifying party from any obligation or liability except to the extent that the indemnifying party has been prejudiced materially by such failure. All such fees and expenses (including any fees and expenses incurred in connection with investigating or preparing to defend such action or proceeding) shall be paid to the indemnified party, as incurred, within five days of written notice thereof to the indemnifying party (regardless of whether it is ultimately determined that an indemnified party is not entitled to indemnification hereunder). The indemnifying party shall not consent to entry of any judgment or enter into any settlement or otherwise seek to terminate any Proceeding in 14 15 which any indemnified party is or could be a party and as to which indemnification or contribution could be sought by such indemnified party under this Section 7, unless such judgment, settlement or other termination includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release, in form and substance satisfactory to the indemnified party, from all liability in respect of such claim or litigation for which such indemnified party would be entitled to indemnification hereunder. (d) Contribution. If the indemnification provided for in this Section 7 is unavailable to an indemnified party under Section 7(a) or 7(b) hereof in respect of any Losses or is insufficient to hold such indemnified party harmless, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall, jointly and severally, contribute to the amount paid or payable by such indemnified party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the indemnifying party or indemnifying parties, on the one hand, and such indemnified party, on the other hand, in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such indemnifying party or indemnifying parties, on the one hand, and such indemnified party, on the other hand, shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include any legal or other fees or expenses incurred by such party in connection with any Proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provision of this Section 7(d), an indemnifying party that is a selling Shareholder of Registrable Securities shall not be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities sold by such indemnifying party and distributed to the public were offered to the public exceeds the amount of any damages which such indemnifying party has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 15 16 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity, contribution and expense reimbursement obligations of the Company hereunder shall be in addition to any liability the Company may otherwise have hereunder or otherwise. The provisions of this Section 7 shall survive so long as Registrable Securities remain outstanding, notwithstanding any transfer of the Registrable Securities by any Shareholder or any termination of this Agreement. 8. Underwritten Registrations If any of the Registrable Securities covered by a Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Shareholders of a majority of such Registrable Securities included in such offering. If any Piggyback Registration is an underwritten offering, the Company shall have the right to select the investment banker or investment bankers and managers to administer the offering; provided, however, that such investment bank or manager shall be reasonably satisfactory to the Shareholders of a majority of the Registrable Securities included in such offering. 9. Miscellaneous (a) Remedies. In the event of a breach by the Company of its obligations under this Agreement, each Shareholder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company has not, as of the date hereof, and shall not, on or after the date of this Agreement, enter into any agreement with respect to its securities which is inconsistent with the rights granted to the Shareholders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The Company has not entered into any agreement with respect to its securities granting any registration rights to any Person other than this Agreement. 16 17 (c) Amendments and Waivers. This Agreement may be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may be given, provided the same are in writing and signed by the Company and each of the Shareholders of Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Shareholders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Shareholders of Registrable Securities may, in lieu of complying with the first sentence of this Section 9(c), be given by all Shareholders of the Registrable Securities being sold; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing and shall be deemed given (i) when made, if made by hand delivery, (ii) upon confirmation, if made by telecopier or (iii) one business day after being deposited with a reputable next-day courier, postage prepaid, to the parties as follows: (x) if to a Shareholder of Registrable Securities, at the most current address given by such Shareholder to the Company in accordance with the provisions of this Section 9(d), which address initially is the address set forth on its respective signature page attached hereto; and (y) if to the Company, initially at Four Embarcadero Center, Suite 3620, San Francisco, California 94111-4115, Fax: (415) 788-5660, Attention: Chief Executive Officer, and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 9(d); or to such other address as any party may have furnished to the other parties in writing in accordance herewith. (e) Owner of Registrable Securities. The Company will maintain, or will cause its registrar and transfer agent to maintain, a stock book with respect to the Common Stock and the Warrants, in which all transfers of Registrable Securities of which the Company has received notice will be recorded. The Company may deem and treat the person in whose name Registrable Securities are registered in the stock book of the Company as the owner thereof for all purposes, including without limitation, the giving of notices under this Agreement. 17 18 (f) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of any and all successors and assigns of each of the parties and shall inure to the benefit of each Shareholder of any Registrable Securities. The Company may not assign its rights or obligations hereunder without the prior written consent of each Shareholder of any Registrable Securities. Notwithstanding the foregoing, no transferee shall have any of the rights granted under this Agreement (i) until such transferee shall acknowledge its rights and obligations hereunder by a signed written statement of such transferee's acceptance of such rights and obligations or (ii) if the transferor notifies the Company in writing on or prior to such transfer that the transferee shall not have such rights. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. (j) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. (k) Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the prevailing party, as determined by the court, shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 18 19 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date first above written. AMERICAN SHARED HOSPITAL SERVICES By:_______________________________ Name: Title: AIF II, L.P. By: Apollo Advisors, L.P. Managing General Partner By: Apollo Capital Management, Inc. General Partner By:___________________________ Its:__________________________ 1999 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attn: Pandora Pang Fax: (310) 201-4198 19 20 ANCHOR NATIONAL LIFE INSURANCE COMPANY By:_______________________________ Name: Title: Address for Notice: 1999 Avenue of the Stars, 38th Floor Los Angeles, California 90067 Attn: Fax: (310) 772-6150 GENERAL ELECTRIC COMPANY acting through GE MEDICAL SYSTEMS By:_______________________________ Name: Title: Address for Notice: 20825 Swensen Drive, Suite 100 Waukesha, Wisconsin 53186 Attn: Investment Manager Fax: (414) 798-4528 20 21 GRACE BROTHERS, LTD. By:_______________________________ Name: Title: Address for Notice: 1000 West Diversey Street, Suite 233 Chicago, Illinois 60614 Attn: Bradford Whitmore Fax: (312) 868-0509 LION ADVISORS, L.P. on behalf of an account under management By: Lion Capital Management, Inc. General Partner By:___________________________ Its:__________________________ Address for Notice: 1999 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attn: Pandora Pang Fax: (310) 201-4198 21 22 SUN LIFE INSURANCE COMPANY OF AMERICA By:_______________________________ Name: Title: Address for Notice: 1999 Avenue of the Stars, 38th Floor Los Angeles, California 90067 Attn: Fax: (310) 772-6150 SUNAMERICA INC. By:_______________________________ Name: Title: Address for Notice: 1999 Avenue of the Stars, 38th Floor Los Angeles, California 90067 Attn: Fax: (310) 772-6150 22 23 UPCHURCH LIVING TRUST U/A/D 12/14/90 By:_______________________________ Name: Title: Address for Notice: James B. Upchurch C/O Libra Investments, Inc. 11766 Wilshire Boulevard, Suite 870 Los Angeles, California 90025 Fax: (310) 312-5666 23 EX-4.9 8 PROMISSORY NOTE- MAY 17, 1995 1 EXHIBIT 4.9 PROMISSORY NOTE May 17, 1995 Four Embarcadero Ctr. Suite 3620 San Francisco CA 94111-4155 FOUR VALUE RECEIVED, American Shared Hospital Services ("Maker") promises, jointly and severally if more than one, to pay to the order of GENERAL ELECTRIC COMPANY or any subsequent holder hereof (each, a "Payee") at its office located at 20825 Swenson Drive, Waukesha, WI 53186 or at such other place as Payee may designate, the principal sum of One million five hundred thousand and 00/100 ($1,500,000.00), with interest on the unpaid principal balance from and including the date hereof at the rate of ten and 50/100 percent (10.50%) per annum, to be paid in lawful money of the United States, in 18 consecutive monthly installments of principal and interest of Ninety thousand four hundred thirty-one and 33/100 calculated in arrears ($90,431.33) and a final installment which shall be in the amount of the total outstanding principal and interest. The first installment shall be due and payable June 17, 1995 and the following installments shall be due and payable on the same day of each succeeding month (each, a "Payment Date"). All payments shall be applied first to interest and then to principal. The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver of Payee's right to receive payment in full at such time or at any prior or subsequent time. Interest shall be calculated on the basis of a 365 day year and will be charged for each calendar day on which any principal is outstanding. The Maker hereby expressly authorizes General Electric Company to insert the date value is actually given in the blank space on the face hereof. Time is of the essence hereof. If any installment of principal and interest or any other sum due under this Note is not received within ten (10) days after the applicable Payment Date, the Maker agrees to pay in addition to the amount of each such installment a late payment charge of five percent (5%) of said installment, but not exceeding any lawful maximum. In the event that (i) Maker fails to make payment of any amount due hereunder within ten (10) days after the same becomes due and payable; or (ii) Maker defaults or fails to perform under any term or condition contained in any other agreement with Payee, then the entire principal sum remaining unpaid, together with all interest thereon and any other sum payable under this Note, at the election of Payee, shall immediately become due and payable, with interest thereon at 20% per annum from the date of such accelerated maturity until paid. The Maker may prepay in full, but not in part, its entire indebtedness hereunder upon payment of an additional sum as a premium equal to the following percentages of the original principal balance for the indicated period: [Prior to the first annual anniversary date of this Note: five percent (5%) Prior to the second annual anniversary date of this Note: four percent (4%) Prior to the third annual anniversary date of this Note: three percent (3%) Prior to the fourth annual anniversary date of this Note: two percent (2%) Prior to the fifth annual anniversary date of this Note: one percent (1%) and zero percent (0%) thereafter, plus all other sums due hereunder.] Your default under a Schedule or default by you or any entity managed or controlled by you or by any principal of yours under any other agreement or contract with us, regardless of when the agreement or contract was entered into, will, at our sole option, if the default is not cured within ten days after written notice of default, constitute a default of that Schedule and all other agreements and contracts between you and/or such a principal or entity and us. Language indicated as being shown by strike out in the typeset document is enclosed in brackets "[" and "]" in the electronic format. 1 2 It is the intention of the parties hereto to comply with the applicable usury laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in this Note, in no event shall this Note require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under this Note, or in the event that all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under this Note on the principal balance shall exceed the maximum amount of interest permitted by applicable law, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither Maker nor any other person or entity now or hereafter liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to Maker, at the option of the Payee, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under this Note which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise by Payee in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for the Payee to receive a greater simple interest per annum rate than is presently allowed, the Maker agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to the maximum simple interest per annum rate allowed by the higher of the amended state law or the law of the United States of America. The Maker and all sureties, endorsers, guarantors or any others (each such person, other than the Maker, an "Obligor") who may at any time become liable for the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions or releases of any party primarily or secondarily liable on this Note or any term and provision hereof, which may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of payee without joinder of any other as a party thereto. The Maker and each Obligor hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note, and agrees to pay (if permitted by law) all expenses incurred in collection, including Payee's actual attorneys' fees. Maker and each Obligor agrees that fees not in excess of twenty percent (20%) of the amount then due shall be deemed reasonable. Maker and each Obligor hereby waives all benefits of valuation, appraisement and exemption laws. AMERICAN SHARED HOSPITAL SERVICES /s/ Richard Magary By: /s/ Ernest A. Bates, M.D. (Seal) - ---------------------------------- ------------------------------------- Witness Signature Ernest A. Bates, M.D. Chairman and CEO ------------------------------------- Print name (and title, if applicable) ACKNOWLEDGED: General Electric Company By: /s/ R. Schueller (Seal) - ---------------------------------- -------------------------------------- Witness Signature Richard Schueller -------------------------------------- Print name (and title, if applicable) 2 3 AMENDMENT TO PROMISSORY NOTE DATED MAY 17, 1995 CONTRACT 8508100-001 AMERICAN SHARED HOSPITAL SERVICES FOUR EMBARCADERO CENTER #3620 SAN FRANCISCO, CA 94111 This is an Amendment to Promissory Note ("Note") (contract 8508100) from AMERICAN SHARED HOSPITAL SERVICES ("ASHS") in favor of GENERAL ELECTRIC COMPANY ("GE") dated May 17, 1995. The Note was for $1,500,00.00 and was collateralized by the Gamma Knife at UCSF. The Note commenced billing June 17, 1995 (in arrears) for eighteen (18) months. It is agreed and understood that ASHS has obtained an extension to its contract with UCSF to provide the Gamma Knife on a per procedure basis. The contract between ASHS and UCSF will now run through September 17, 1998. In consideration of this contract extension, GE is extending the terms of its Note with ASHS effective September 17, 1995 and lowering the monthly payment. A new amortization schedule is attached as Exhibit A. All other Terms and Conditions from the original Note, to the extent not inconsistent herewith, shall remain as initially written and apply to this Amendment. _____________________________________________________________________________________________________________
Note Maker: Note Holder: AMERICAN SHARED HOSPITAL SERVICES GENERAL ELECTRIC COMPANY by /s/ ERNEST A. BATES, M.D. /s/ R. SCHUELLER ------------------------------------------ ---------------------------------------------- Ernest A. Bates, M.D. Signed Chairman and CEO September 5, 1995 September 7, 1995 ------------------------------------------ ---------------------------------------------- Date Date
EX-4.10 9 PROMISSORY NOTE- MAY 31, 1997 1 EXHIBIT 4.10 PROMISSORY NOTE Due May 31, 1997 FOR VALUE RECEIVED, the undersigned AMERICAN SHARED-CURACARE and CURACARE, INC. (collectively and individually "Maker") jointly and severally hereby promise to pay to DVI BUSINESS CREDIT CORPORATION or its assignee (the "Holder), or order, the principal sum of Four Million and No/100 Dollars ($4,000,000) or such amount thereof as may be from time to time advanced hereunder, pursuant to the terms of that certain Loan and Security Agreement dated as of the date hereof between Holder as Lender, Maker as Borrower, American Shared Hospital Services as Guarantor and Ernest A. Bates, M.D. as Individual Guarantor (the "Agreement"), with interest on the unpaid principal balance from time to time outstanding until paid at the fluctuating rate of interest announced publicly by Bank of America, NT&SA in San Francisco, California, from time to time as its base rate plus Five percent (5.0%) per annum, computed on the basis of a 360-day year and actual days elapsed, until paid. Interest shall be payable at the end of each month this Note is outstanding in accordance with the terms of the Agreement, with all unpaid principal and interest due and payable in full on May 31, 1997. If any part of the interest due on this Note is not paid when due, it shall be added to the principal amount of this Note and thereafter bear interest at the rate provided above. If the specified interest rate shall at any time exceed the maximum allowed by law, then the applicable interest rate shall be reduced to the maximum allowed by law. 1. This Note shall be subject to prepayment or redemption in whole or in part at any time without penalty or premium. Notwithstanding the foregoing, the Agreement may not be terminated, and will not be terminated by any prepayment, without payment of the termination fee required pursuant to Section 2.7 of the Agreement. 2. Principal and interest shall be payable to Holder at 4041 MacArthur Avenue, Suite 401, Newport Beach, California 92660, or such other place as the Holder may, from time to time in writing, appoint. 3. This Note is made pursuant to, and secured by the Agreement. This Note is also secured by any Security Documents referred to in the Agreement. The Agreement and the Security Documents create a lien on and security interest in, the personal property described therein ("Collateral"). The Agreement and the Security Documents shall hereinafter be collectively referred to as the "Loan and Security Documents" and are hereby incorporated by reference in and made a part of this Note. 4. The occurrence of any Event of Default under the Agreement shall, at the election of the Holder, make the entire unpaid balance of the principal amount of this Note and accrued interest immediately due and payable without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character. 1 2 5. Failure of the Holder to exercise the acceleration option of paragraph 4 of this Note on the occurrence of any of the events enumerated therein shall not constitute waiver of the right to exercise such option on the subsequent occurrence of any of the events enumerated therein. 6. Principal and interest shall be payable in lawful money of the United States of America which shall be legal tender in payment of all debts and dues, public and private, at the time of payment. Maker waives presentment, demand for payment, notice of nonpayment, protest and notice of protest, and all other notices and demands in connection with the delivery, acceptance, performance, default or enforcement of this Note. Maker consents to any and all assignments of this Note, extensions of time, renewals and waivers that may be made or granted by the Holder. Maker expressly agrees that such assignments, extensions of time, renewals or waivers shall not affect Maker's liability. Maker agrees that Holder may, without notice to Maker and without affecting the liability of Maker, accept additional or substitute security for this Note, release any security or any party liable for this Note or extend or renew this Note. 7. If Maker shall fail to make any payment of interest or principal, including the payment due upon maturity, when the same is due and payable and such failure shall continue for five (5) business days after nonpayment, a late charge by way of damages shall be immediately due and payable. Maker recognizes that default by Maker in making the payments herein agreed to be paid when due will result in the Holder incurring additional expenses, in loss to the Holder of the use of the money due and in frustration to the Holder in meeting its other commitments. Maker agrees that, if for any reason Maker fails to pay any amount due under this Note when due, the Holder shall be entitled to damages for the detriment caused thereby, but that it is extremely difficult and impractical to ascertain the extent of such damages. Maker therefore agrees that a sum equal to ten cents ($.10) for each one dollar ($1.00) of each payment which is not received within five (5) business days after the date it is due and payable is a reasonable estimate of the said damages to the Holder, which sum Maker agrees to pay on demand. 8. If action be instituted on this Note (including without limitation, any proceedings for collection hereof in any bankruptcy or probate matter or case), or if proceedings are commenced on or under any of the Loan and Security Documents, Maker promises to pay the Holder all costs of collection and enforcement including, without limitation, reasonable attorneys' fees. 9. Any and all notices or other communications or payments required or permitted to be given hereunder shall be effective when received or refused if given or rendered in writing, in the manner provided in the Agreement. 10. This Note shall inure to the benefit of the Holder's successors and assigns. References to the "Holder" shall be deemed to refer to the holder(s) of this Note at the time such reference becomes relevant. 2 3 11. If any term, provision, covenant, or condition of this Note is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the rest of this Note shall remain in full force and effect to the greatest extent permitted by law and shall in no other way be affected, impaired or invalidated. 12. Nothing contained herein or in the Loan and Security Documents shall be deemed to prevent recourse to and the enforcement against Maker and the Collateral of all liabilities, obligations and undertakings contained herein and in the Loan and Security Documents. 13. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND MAKER AGREES TO SUBMIT TO THE JURISDICTION OF THE STATE AND/OR FEDERAL COURTS IN THE STATE OF CALIFORNIA. Dated: May 17, 1995 MAKER: CURACARE, INC., a Delaware corporation By: _____________________________ Ernest A. Bates, M.D. President AMERICAN SHARED-CURACARE, a California general partnership By: American Shared Hospital Services, general partner By: _____________________________ Ernest A. Bates, M.D. President By: MMRI, Inc., general partner By: _____________________________ Ernest A. Bates, M.D. President 3 EX-4.11 10 PROMISSORY NOTE- JUNE 1, 1999 1 EXHIBIT 4.11 PROMISSORY NOTE Due June 1, 1999 FOR VALUE RECEIVED, the undersigned AMERICAN SHARED-CURACARE AND CURACARE, INC. (collectively and individually "Maker") hereby promise to pay to DVI FINANCIAL SERVICES INC. or its assignee (the "Holder), or order, the principal sum of Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000) with interest thereon at Fifteen and 00/100 percent (15.00%) per annum, computed on the basis of a 360-day year and actual days elapsed, until paid. Principal and interest shall be payable in forty-eight (48) equal monthly installments of Seventy Thousand Five and 77/100 Dollars ($70,005.77) each, commencing on the first day of July, 1995 ("Commencement Date") and on the first day of each succeeding month, with all unpaid principal and interest due and payable in full on June 1, 1999. If any part of the principal or interest of this Note is not paid when due, it shall thereafter bear interest a rate equal to the "Prime Rate" announced by National Westminster Bank, USA (which is not necessarily the best rate charged to its customers) plus two percent (2%) from and as of the date of delinquency until paid. If the specified interest rate shall at any time exceed the maximum allowed by law, then the applicable interest rate shall be reduced to the maximum allowed by law. 1. This Note shall not be subject to prepayment or redemption in whole or in part. 2. Principal and interest shall be payable to Holder at 500 Hyde Park, Doylestown, Pennsylvania 18901, or such other place as the Holder may, from time to time in writing, appoint. 3. This Note is made pursuant to, and secured by that certain Loan and Security Agreement dated as of the date hereof between Holder as Lender, and Maker as Borrower, American Shared Hospital Services as Guarantor and Ernest A. Bates, M.D. as Individual Guarantor (the "Agreement"). This Note is also secured by any Security Documents referred to in the Agreement. The Agreement and the Security Documents create a lien on and security interest in, the personal property described therein ("Collateral"). The Agreement and the Security Documents shall hereinafter be collectively referred to as the "Loan and Security Documents" and are hereby incorporated by reference in and made a part of this Note. 4. The occurrence of any Event of Default under the Agreement shall, at the election of the Holder, make the entire unpaid balance of the principal amount of this Note and accrued interest immediately due and payable without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character. 5. Failure of the Holder to exercise the acceleration option of paragraph 4 of this Note on the occurrence of any of the events enumerated therein shall not constitute waiver 1 2 of the right to exercise such option on the subsequent occurrence of any of the events enumerated therein. 6. Principal and interest shall be payable in lawful money of the United States of America which shall be legal tender in payment of all debts and dues, public and private, at the time of payment. Maker waives presentment, demand for payment, notice of nonpayment, protest and notice of protest, and all other notices and demands in connection with the delivery, acceptance, performance, default or enforcement of this Note. Maker consents to any and all assignments of this Note, extensions of time, renewals and waivers that may be made or granted by the Holder. Maker expressly agrees that such assignments, extensions of time, renewals or waivers shall not affect Maker's liability. Maker agrees that Holder may, without notice to Maker and without affecting the liability of Maker, accept additional or substitute security for this Note, release any security or any party liable for this Note or extend or renew this Note. 7. If Maker shall fail to make any payment of interest or principal, including the payment due upon maturity, when the same is due and payable and such failure shall continue for five (5) business days after nonpayment, a late charge by way of damages shall be immediately due and payable. Maker recognizes that default by Maker in making the payments herein agreed to be paid when due will result in the Holder incurring additional expenses, in loss to the Holder of the use of the money due and in frustration to the Holder in meeting its other commitments. Maker agrees that, if for any reason Maker fails to pay any amount due under this Note when due, the Holder shall be entitled to damages for the detriment caused thereby, but that it is extremely difficult and impractical to ascertain the extent of such damages. Maker therefore agrees that a sum equal to ten cents ($.10) for each one dollar ($1.00) of each payment which is not received within five (5) business days after the date it is due and payable is a reasonable estimate of the said damages to the Holder, which sum Maker agrees to pay on demand. 8. If action be instituted on this Note (including without limitation, any proceedings for collection hereof in any bankruptcy or probate matter or case), or if proceedings are commenced on or under any of the Loan and Security Documents, Maker promises to pay the Holder all costs of collection and enforcement including, without limitation, reasonable attorneys' fees. 9. Any and all notices or other communications or payments required or permitted to be given hereunder shall be effective when received or refused if given or rendered in writing, in the manner provided in the Agreement. 10. This Note shall inure to the benefit of the Holder's successors and assigns. References to the "Holder" shall be deemed to refer to the holder(s) of this Note at the time such reference becomes relevant. 11. If any term, provision, covenant, or condition of this Note is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the rest of this Note shall remain in full force and effect to the greatest extent permitted by law and shall in no other way be affect- 2 3 ed, impaired or invalidated. 12. Nothing contained herein or in the Loan and Security Documents shall be deemed to prevent recourse to and the enforcement against Maker and the Collateral of all liabilities, obligations and undertakings contained herein and in the Loan and Security Documents. 13. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF CALIFORNIA AND MAKER AGREES TO SUBMIT TO THE JURISDICTION OF THE STATE AND/OR FEDERAL COURTS IN THE STATE OF CALIFORNIA. Dated: May 17, 1995 MAKER: CURACARE, INC. a Delaware corporation By:_____________________________ Ernest A. Bates, M.D. President AMERICAN SHARED-CURACARE a California general partnership By: American Shared Hospital Services, general partner By:_____________________________ Ernest A. Bates, M.D. President By: MMRI, Inc., general partner By:_____________________________ Ernest A. Bates, M.D. President 3 EX-4.12 11 SECURITY AGREEMENT 1 EXHIBIT 4.12 SECURITY AGREEMENT BY AND BETWEEN AMERICAN SHARED HOSPITAL SERVICES, A CALIFORNIA CORPORATION AND GENERAL ELECTRIC COMPANY, A NEW YORK CORPORATION, ACTING THROUGH GE MEDICAL SYSTEMS 2 SECURITY AGREEMENT THIS SECURITY AGREEMENT is made and entered into as of May 17, 1995 by and between AMERICAN SHARED HOSPITAL SERVICES, a California corporation ("Obligor"), and GENERAL ELECTRIC COMPANY, a New York corporation, acting through GE Medical Systems ("GE"). R E C I T A L S A. GE is a primary supplier of equipment and services to Obligor and its affiliates, CuraCare, Inc., a Delaware corporation ("CuraCare"), and American Shared - CuraCare, a California general partnership ("AS-C") (collectively, "Affiliates"). B. GE has agreed to make a loan to Obligor, but only upon the condition precedent, among others, that Obligor shall have granted the lien and security interest to GE contemplated by this Security Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and for other good and valuable consideration, the receipt of which are hereby acknowledged, the parties hereto agree as follows: 1. Defined Terms. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires (any terms defined in that certain Agreement among GE, Obligor, AS-C and CuraCare dated effective as of November 1, 1994 (the "Agreement") and not otherwise defined herein shall have their meanings defined therein when used herein): "Code" shall mean, with respect to each state in which Obligor operates a business or owns property, the Uniform Commercial Code as codified by such state. "Collateral" shall mean, collectively, all of Obligor's present and future right, title and interest in and to the Equipment and Proceeds thereof. "DVI" shall mean DVI Financial Services, Inc. and DVI Business Credit Corporation. "DVI Loan Documents" shall mean those certain loan documents between the Affiliates and DVI that are more particularly described in Exhibit 1 hereto. "Equipment" shall mean the Leksell gamma knife unit more particularly described in Exhibit 2 hereto, as well as all 3 additions to, replacements of or accessions to any of the foregoing and accessories thereto whether installed thereon or affixed thereto. "Note" shall mean that certain Promissory Note of even date herewith from Obligor to GE in the original principal amount of One Million Five Hundred Thousand Dollars ($1,500,000). "Obligations" shall mean Obligor's obligations pursuant to the Note and this Security Agreement. "Permitted Liens" shall mean (a) the second priority Lien of DVI in the Equipment pursuant to the DVI Loan Documents and (b) any existing Liens of GE or Liens hereafter granted to GE by Obligor. "Proceeds" shall have the meaning assigned to it under the Code and shall include, but not be limited to, (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Obligor from time to time with respect to any of the Collateral, (b) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral, and (c) all accessions to, substitutions for and all replacements, products and proceeds of the Collateral. 2. Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due of the Obligations, Obligor hereby assigns, grants, conveys, mortgages, pledges, hypothecates and transfers to GE for the benefit of GE, a continuing first priority and perfected security interest in and lien on all of Obligor's right, title and interest in, to and under the Collateral. 3. Rights of GE. GE may, at any time or times hereafter, upon written notice to Obligor and after allowing Obligor ten (10) Business Days to resolve any security interest, lien, claim or encumbrance asserted by any Person against the Collateral (other than the Permitted Liens), without waiving or releasing any of the Obligations or any liability or duty of Obligor under any other documents, or any Event of Default, pay, acquire and/or accept an assignment of any such security interest, lien, claim or encumbrance asserted by any such Person. All sums paid by GE in respect thereof and all costs, fees and expenses, including, without limitation, reasonable attorneys' fees, court costs, expenses and other charges relating thereto, which are incurred by GE on account thereof, shall be payable, upon demand, by Obligor to GE and shall be additional Obligations hereunder secured by the Collateral. 4. Representations and Warranties. Obligor, with respect to itself and the Collateral, hereby represents and warrants to GE that: -2- 4 (a) This Security Agreement constitutes a valid obligation of Obligor, legally binding upon Obligor and enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. No consent or notification of any other party and no consent, license, approval or authorization, or registration or declaration with, any governmental authority, bureau or agency is required in connection with either the grant by Obligor of the liens and security interests granted hereby or the execution, delivery, performance, validity or enforceability of this Security Agreement. (b) Obligor is the sole legal and beneficial owner of the Collateral free and clear of any and all mortgages, liens, security interests, encumbrances, claims or rights of others except for the security interest granted to GE herein and the Permitted Liens. (c) No security agreement, financing statement, equivalent security or lien instrument or continuation statement covering all or any part of the Collateral is on file or of record in any public office, except such agreements, financing statements, security or lien instruments or continuation statements as relate exclusively to Permitted Liens or as may have been filed by Obligor in favor of GE prior to the date hereof or pursuant to this Security Agreement. (d) Upon GE taking all actions required under each applicable Code to perfect the security interest granted hereunder, this Security Agreement creates a valid and perfected first priority security interest in and Lien on all right, title and interest of Obligor in the Collateral, securing payment of the Obligations prior to all other liens, encumbrances, security interests and rights of others created under the UCC in the Collateral and is or will be, as applicable, enforceable as such as against creditors of and purchasers from Obligor to the extent provided in the Code. Obligor hereby warrants that, except for such actions required under the applicable Code to be taken by GE in order to perfect its security interest granted pursuant to this Security Agreement, all filings and other actions necessary or desirable to protect and perfect such lien and security interest in the Collateral have been duly made or taken. 5. Covenants. Unless GE otherwise consents in writing, Obligor, with respect to itself and the Collateral, hereby covenants and agrees with GE, subject to the rights of the holders of the Permitted Liens, that from and after the date of this Security Agreement and until the Obligations are fully satisfied: -3- 5 (a) At any time and from time to time, upon the written request of GE, and at the sole expense of Obligor, Obligor will promptly and duly execute and deliver any and all such further instruments and documents and take such further action that may be necessary or desirable or that GE may reasonably request in order to perfect and protect the security interest granted or purported to be granted hereby or to enable GE to exercise and enforce its rights and remedies hereunder with respect to the Collateral. Upon the written request of GE, Obligor will execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as GE may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby. (b) Obligor hereby authorizes GE to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Obligor where permitted by law. (c) Obligor will perform and comply in all material respects with all obligations under contracts and all other agreements to which it is a party or by which it is bound relating to the Collateral, the nonperformance of which would have a Material Adverse Effect on Obligor. (d) Other than Permitted Liens, Obligor will not create, permit or suffer to exist, and Obligor will defend the Collateral against and take such other action as is necessary to remove, any lien, security interest, encumbrance, claim or right, in or to the Collateral; and Obligor will defend the right, title and interest of GE in and to any of Obligor's rights to the Collateral, including, without limitation, in and to the Proceeds and products thereof against the claims and demands of all Persons whomsoever. (e) Obligor shall not sell, transfer, assign (by operation of law or otherwise), lease or otherwise dispose of or transfer any Collateral or any interest therein, or attempt, offer or contract to do so. (f) Obligor shall not enter into any transaction that is reasonably likely to have a Material Adverse Effect on the Collateral. (g) Obligor will advise GE promptly, in reasonable detail, of (i) any lien, security interest, encumbrance or claim made or asserted against any of the Collateral, other than the Permitted Liens, (ii) any material change in the Collateral, and (iii) the occurrence of any other event which would be reasonably likely to have a Material Adverse Effect on the aggregate value of the Collateral or on the security interest created hereunder. -4- 6 (h) GE shall at all times have full and free access during normal business hours to all the books, correspondence and records of Obligor, and GE or its representatives may examine the same, take extracts therefrom and make photocopies thereof, and Obligor agrees to render to GE, at Obligor's sole cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. GE and its representatives shall at all times also have the right to enter into and upon any premises where the Collateral is located for the purpose of inspecting the same, or protecting its interests therein. (i) Obligor shall not change its corporate name without giving GE at least thirty (30) days prior written notice of its intent to do so. 6. GE's Appointment as Attorney-in-Fact. (a) Obligor hereby irrevocably constitutes and appoints GE and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Obligor and in the name of Obligor or in GE's own name, from time to time in GE's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement and, without limiting the generality of the foregoing, Obligor hereby gives GE the power and right, on behalf of Obligor, without prior notice to or the consent of Obligor, to do the following after the occurrence and during the continuance of an Event of Default, subject, however, to the rights of the holders of the Permitted Liens: (i) in the name of Obligor or in GE's own name or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of monies due with respect to the Collateral; (ii) to enforce the rights of GE with respect to the Collateral; (iii) to defend any suit, action or proceeding brought with respect to the Collateral; (iv) to settle, compromise or adjust any suit, action or proceedings described above and, in connection therewith, to give such discharges or releases as GE may deem appropriate; (v) in connection with the dispositions provided in Section 8 below, to sell, transfer, pledge, make any agreement with respect to or otherwise deal with the Collateral as fully and completely as though GE were the absolute owner thereof for all purposes; and -5- 7 (vi) to do, at GE's option and Obligor's sole expense, at any time, or from time to time, all acts and things which GE deems necessary to protect, preserve or realize upon the Collateral and GE's security interest therein, in order to effect the intent of this Security Agreement, all as fully and effectively as Obligor might do. Obligor hereby ratifies all that said attorney-in-fact shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) If Obligor fails to perform any agreement contained herein, GE may itself perform, or cause performance of, such agreement. (c) The powers conferred on GE hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon it to exercise any such powers. GE shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to Obligor for any act or failure to act, except for its own gross negligence or willful misconduct. 7. Term; Performance by GE of Obligor's Obligations. (a) This Security Agreement shall remain in full force and effect until the payment and satisfaction in full of the Obligations. (b) If Obligor fails to perform or comply with any of its agreements contained herein and GE, as provided by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of GE incurred in connection with such performance or compliance, together with interest thereon at four percent (4%) per annum shall be payable by Obligor to GE on demand and shall constitute additional Obligations secured hereby. 8. Remedies, Rights Upon Default. Upon and after an Event of Default: (a) GE may, subject to the rights of the holders of the Permitted Liens, exercise, in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party or lien creditor under the Code (whether or not the Code applies to the affected Collateral) or under any other applicable law of any jurisdiction. Without limiting the generality of the foregoing, Obligor expressly agrees that in any such event GE shall have the right, subject, however, to the rights of the holders of the Permitted Liens to (i) enter upon the premises of Obligor, or any -6- 8 other place where the Collateral is located and kept, through self-help and without judicial process, without first obtaining a final judgment or giving Obligor notice and opportunity for a hearing on the validity of GE's claim and without any obligation to pay rent to Obligor, and to remove the Collateral and/or (ii) to require Obligor to assemble, and Obligor hereby agrees to assemble, the Collateral and make it available to GE at a place to be designated by GE, in its sole discretion. GE, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of the time and place of public or private sale) to or upon Obligor or any other Person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may, subject to the rights of the holders of the Permitted Liens, forthwith receive, appropriate and realize upon the Collateral, or any part thereof and/or may forthwith sell, assign, give an option or options to purchase, or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, at public or private sale or sales board or at any of GE's offices or elsewhere at such prices as it may deem best, for cash or on credit without assumption of any credit risk. Any such sales may be adjourned from time to time with or without notice. GE shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. GE shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption of Obligor released and, in lieu of actual payment of the purchase price therefor, to set off the amount of such purchase price against the Obligations. The net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any or all of the Collateral or in any way relating to the rights of GE hereunder, including reasonable attorneys' fees and legal expenses, shall be applied by GE to the payment in whole or in part of the Obligations, in such order as GE may elect. Obligor shall remain liable for any deficiency remaining unpaid after such application, and only after (i) so paying over such net proceeds and after the payment by GE of any other amount required by any provision of law, including the Code, and (ii) paying to DVI any surplus amounts held by GE which DVI has advised GE are payable to DVI, need GE account for the surplus, if any, to Obligor. To the extent permitted by applicable law, Obligor waives all claims, damages and demands against GE arising out of the repossession, retention or sale of the Collateral. Obligor agrees that GE need not give more than ten (10) days' notice of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. Obligor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which GE is entitled, Obligor also being liable for the -7- 9 reasonable fees and expenses of any attorneys employed by GE to collect such deficiency. (b) Except as otherwise provided in the Agreement and this Security Agreement, Obligor hereby waives presentment, demand, protest or any notice (to the extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral. 9. Limitation on GE's Duty in Respect of Collateral. Beyond the safe custody thereof, GE shall not have any duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of it or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. 10. Attorneys' Fees and Expenses. If, during the existence and continuance of an Event of Default, GE employs legal counsel or any other third person for advice, consultation or other representation or incurs legal and/or other costs and expenses in connection with: (a) the administration of this Security Agreement or the Note and the transactions contemplated hereby and thereby; (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (c) the exercise or enforcement of any of the rights of GE hereunder, (d) the failure by Obligor to perform or observe any of the provisions hereof, or (e) any litigation, contest, dispute, suit, proceeding or action (whether instituted by GE, Obligor or any other Person) in any way relating to the Collateral, this Security Agreement or the Note or Obligor's affairs; (f) any attempt to collect any of the amounts under the Note or to enforce any rights of GE against Obligor or any other Person which may be obligated to GE by virtue of this Security Agreement or the Note; and/or (g) any attempt to inspect, verify, protect, collect, sell, liquidate or otherwise dispose of the Collateral; then, in any such event, the reasonable attorneys' fees arising from such services and all reasonably incurred expenses, costs, charges and other fees of such counsel or third party or of GE or relating to any of the events or actions described in this Section 10 shall be payable, on demand, by Obligor to GE and shall be additional Obligations secured by the Collateral. 11. Waivers by Obligor. Except as otherwise provided for in the Agreement and in this Security Agreement, Obligor hereby waives to the extent allowed by law (a) presentment, demand and protest and notice of presentment, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, documents, instruments and guaranties at any time held by GE on which Obligor may in any way be liable and hereby ratifies and confirms whatever GE may do in this regard; (b) notice prior to taking possession or control of the Collateral or any bond or security which might be required by any court prior to allowing GE to exercise any of GE's remedies; -8- 10 and (c) the benefit of all valuation, appraisement and exemption laws. 12. Indemnity. (a) Obligor shall indemnify GE and its affiliates from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, fees and disbursements of counsel) which may be imposed on, incurred by, or asserted against GE in any litigation, proceeding or investigation instituted or conducted by any governmental agency or instrumentality or any other Person with respect to any aspect of, or any transaction contemplated by, or referred to in, or any matter related to, this Security Agreement or the Note, except to the extent that any of the foregoing arises out of the gross negligence or wilful misconduct of GE. (b) Obligor shall upon demand pay to GE the amount of any and all reasonable expenses which GE may incur in connection with (i) the administration of this Security Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of GE hereunder, or (iv) the failure by Obligor to perform or observe any of the provisions hereof. 13. Termination Statements. Obligor acknowledges and agrees that it is Obligor's intent that all financing statements filed hereunder shall remain in full force and effect until this Security Agreement and the Note shall have been terminated in accordance with the provisions hereunder and thereunder. Accordingly, Obligor waives any rights which it may have under the Code to demand the filing of termination statements with respect to the Collateral, and agrees that GE shall not be required to send such termination statements to Obligor, or to file them with any filing office, unless and until this Security Agreement and the Note shall have been terminated in accordance with their respective terms as a result of the performance of all covenants of Obligor, including the payment in full of all Obligations in immediately available funds. 14. Notices. All notices and other communications under this Security Agreement shall be given to GE and Obligor in accordance with Section 8.11 of the Agreement. 15. Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. -9- 11 16. No Waiver; Cumulative Remedies. GE shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by GE, and then only to the extent therein set forth. A waiver by GE of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which GE would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of GE, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Security Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by GE. 17. Successors and Assigns; Governing Law. This Security Agreement and all obligations of Obligor hereunder shall be binding upon the successors and assigns of Obligor, and shall, together with the rights and remedies of GE hereunder, inure to the benefit of GE and its successors and assigns. This Security Agreement shall be governed by, and be construed and interpreted in accordance with, the laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule (whether the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 18. No Third-Party Beneficiary. None of the provisions herein contained are intended by the parties, nor shall they be deemed, to confer any benefit on any person not a party to this Security Agreement. IN WITNESS WHEREOF, the parties have caused this Security Agreement to the executed by their duly authorized officers on the date first specified above. OBLIGOR: GE: AMERICAN SHARED HOSPITAL GENERAL ELECTRIC COMPANY, SERVICES, a California a New York corporation acting corporation through GE MEDICAL SYSTEMS By:_________________________ By:__________________________ Ernest A. Bates, M.D. Richard S. Berger President Manager, Financial Services -10- EX-4.13 12 AGREEMENT AND PROXY 1 EXHIBIT 4.13 AGREEMENT AND PROXY This AGREEMENT AND PROXY (the "Agreement"), dated as of May 12, 1995, is made by Ernest A. Bates, M.D. ("Dr. Bates"), in order to induce ANCHOR NATIONAL LIFE INSURANCE COMPANY, a California corporation, SUN LIFE INSURANCE COMPANY OF AMERICA, an Arizona corporation, and SUNAMERICA INC., a Maryland corporation (collectively, "SunAmerica"), AIF II, L.P., a Delaware limited partnership, LION ADVISORS, L.P., a Delaware limited partnership, on behalf of an account under management (together with AIF II, L.P., "Apollo"), GRACE BROTHERS, LTD., an Illinois limited partnership, and UPCHURCH LIVING TRUST U/A/D 12/14/90 (each a "Holder," and collectively the "Holders") to enter into the Note Purchase Agreement, dated the date hereof (the "Note Purchase Agreement"). NOW THEREFORE, Dr. Bates hereby agrees as follows: 1. Dr. Bates shall (a) not revoke any proxy granted by him or on his behalf in connection with the April 7, 1995 shareholders meeting of American Shared Hospital Services, a California corporation (the "Company") or any adjournments thereof; and (b) cause the Company to reconvene the April 7, 1995 shareholders meeting on May 18, 1995 and to take the shareholders vote and all related actions at such meeting with respect to the matters described in the Company's Proxy Statement dated February 14, 1995 (the "Matters") on such date. 2. Dr. Bates hereby represents that he is the legal and beneficial owner of 1,005,000 shares of Common Stock, no par value (the "Common Stock"), of the Company and he hereby irrevocably appoints and constitutes Apollo Advisors, L.P. and SunAmerica Inc., jointly and not severally, in accordance with the provisions of Section 705 of the California General Corporation Law, as his attorney and proxy, with full power of substitution, to attend meetings, vote, give consents and to otherwise act on his behalf to (a) cause the Company to reconvene the April 7, 1995 shareholders meeting (including all adjournments thereof) and take the shareholders vote with respect to all Matters, and (b) vote such shares with respect to all Matters; provided, that this proxy shall (i) not become effective until the first to occur of a default or other breach (x) by Dr. Bates of any provision hereof, or (y) by the Corporation of the penultimate paragraph of the Letter Agreement, dated May 5, 1995, among the Company, Apollo and SunAmerica, and (ii) terminate (x) immediately if it is used for any purpose other than as specified herein or (y) on May 25, 1995 if the transactions contemplated by the Exchange Agreement, dated February 14, 1995, as amended by the Note Purchase Agreement (the "Exchange Agreement") have not been consummated by such date. 2 3. Dr. Bates hereby represents that (a) this Agreement is a valid and binding obligation of Dr. Bates enforceable in accordance with its terms, except to the extent that such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditor's rights generally, and by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity) and (b) the proxy granted herein is given in consideration of the continuation of credit to the Company by the Holders. 4. Dr. Bates shall use all reasonable efforts to obtain all consents and approvals, and to do all other things, necessary for the transactions contemplated by this Agreement and the Note Purchase Agreement and to take such further action and to deliver or cause to be delivered to each other at the closing and at such other times thereafter as shall be reasonably agreed by such additional agreements or instruments as any of them may reasonably request for the purpose of carrying out this Agreement and the agreements and transactions contemplated hereby. 5. Dr. Bates hereby acknowledges and agrees that irreparable harm, for which there may be no adequate remedy at law and for which the ascertainment of damages would be difficult, would occur in the event any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Consequently, Dr. Bates hereby agrees that each Holder shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, in each instance without being required to post bond or other security and in addition to, and without having to prove the inadequacy of, other remedies at law. 6. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. 2 3 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. By their acceptance hereof, the Holders hereby agree that the exercise of the proxy granted to them by Dr. Bates pursuant to Section 2 hereof shall constitute their agreement to waive any then remaining conditions to the Holders' performance under the Exchange Agreement so long as the transactions contemplated by the Exchange Agreement are consummated on or before May 25, 1995. ____________________________________ Ernest A. Bates, M.D. Accepted and Agreed to: AIF II, L.P. By: Apollo Advisors, L.P. Managing General Partner By: Apollo Capital Management, Inc. General Partner By: ----------------------------- Its: ----------------------------- ANCHOR NATIONAL LIFE INSURANCE COMPANY 3 4 By:___________________________________ Its:__________________________________ GRACE BROTHERS, LTD. By:__________________________________ Its:_________________________________ LION ADVISORS, L.P. on behalf of an account under management By: Lion Capital Management, Inc. General Partner By: ----------------------------- Its: ----------------------------- SUN LIFE INSURANCE COMPANY OF AMERICA By: ----------------------------- Its: ----------------------------- SUNAMERICA INC. 4 5 By:_______________________________ Its:______________________________ UPCHURCH LIVING TRUST U/A/D 12/14/90 By:_______________________________ Its: Trustee 5 EX-10.5 13 NOTE PURCHASE AGREEMENT 1 EXHIBIT 10.5 NOTE PURCHASE AGREEMENT This NOTE PURCHASE AGREEMENT (the "Agreement"), dated as of May 12, 1995, is made by and among ANCHOR NATIONAL LIFE INSURANCE COMPANY, a California corporation, SUN LIFE INSURANCE COMPANY OF AMERICA, an Arizona corporation, and SUNAMERICA INC., a Maryland corporation (collectively, "SunAmerica"), AIF II, L.P., a Delaware limited partnership, LION ADVISORS, L.P., a Delaware limited partnership, on behalf of an account under management (together with AIF II, L.P., "Apollo"), GRACE BROTHERS, LTD., an Illinois limited partnership ("Grace") and UPCHURCH LIVING TRUST U/A/D 12/14/90 ("Upchurch") (each a "Holder," and collectively, the "Holders"), AMERICAN SHARED HOSPITAL SERVICES, a California corporation (the "Company") and Ernest A. Bates, M.D. ("Dr. Bates"). WHEREAS, the Company has not made interest payments with respect to its 14-3/4% Senior Subordinated Notes due 1996 (the "14-3/4% Notes") and its Senior Subordinated Exchangeable Reset Notes due 1996 (the "16-1/2% Notes" and together with the 14-3/4% Notes, the "Notes") since April 15, 1992; and WHEREAS, the Holders, severally and not jointly, are the beneficial owners of certain of the Notes; and WHEREAS, the parties hereto entered into an Exchange Agreement, dated as of February 14, 1995 (the "Exchange Agreement") providing for a comprehensive restructuring of the Company's obligations including (a) an exchange offer and certain other transactions contemplated by the Exchange Agreement (the "Exchange Offer"), providing for, among other things, the exchange of 1,969.3556 shares of Common Stock (as defined below) for each $1,000 principal amount (and accrued interest thereon) of the 14-3/4% Notes held by the Holders and 2,020.7943 shares of Common Stock for each $1000 principal amount (and accrued interest thereon) of the 16-1/2% Notes held by the Holders, as described in the Company's proxy statement dated February 14, 1995 (the "Proxy Statement") and (b) the modification of certain equipment leases and certain related transactions between the Company and its subsidiaries on the one hand and General Electric Company, acting through GE Medical Systems on the other hand, as described in the Proxy Statement (the "GE Lease Modification" and, together with the Exchange Offer, the "Restructuring Transactions"); 1 2 WHEREAS, the Company has proposed a purchase of the Holders' Notes (the "Note Purchase") for cash and equity in lieu of the Restructuring Transactions; and WHEREAS, the Company and the Holders' desire to amend the Exchange Agreement to, among other things, provide that the Exchange Agreement shall terminate upon consummation of the Note Purchase. NOW THEREFORE, the parties hereby agree as follows: SECTION 1. The Note Purchase Section 1.1 Agreement to Sell and to Purchase (a) Subject to the terms and conditions hereof, each of the Holders, severally and not jointly, shall sell to the Company, and the Company shall purchase from each Holder, such principal amount of Notes, the Company shall, in consideration therefore pay to each Holder, on the Closing Date, the amount of cash, and number of shares of Common Stock and warrants to purchase Common Stock, which shall be substantially in the form of Exhibit A hereto and immediately exerciseable upon the payment of an exercise price initially equal to $0.75 (the "Warrants") as set forth below:
Shares of Common Common Stock Holder Notes Cash Stock Warrants - ---------- ---------- ------------- ------- ------- SunAmerica $9,515,000 $2,098,372.45 441,487 116,436 Apollo $6,500,000 $1,433,465.15 301,594 79,541 Grace $1,600,000 $ 343,864.65 72,347 19,081 Upchurch $ 79,000 $ 16,978.32 3,572 942
(b) Subject to the terms and conditions hereof, if the Company issues additional equity to Dr. Bates as described in the letter agreement dated May 5, 1995 (the "Letter Agreement") among the Company, Apollo and SunAmerica (the "Additional Issuance") after the Closing Date, the Company shall, in consideration for the Notes purchased pursuant to this Section 1, concurrently issue to each Holder such number of additional Warrants and shares of Common Stock (the "Delayed Securities") 2 3 as set forth in Exhibit A to the Letter Agreement (and in any event sufficient Delayed Securities so that each such Holder thereafter holds the same percentage of the outstanding Common Stock (assuming full exercise of the Warrants)). Section 1.2 Closing The closing of the Note Purchase (the "Closing") shall take place at 2:00 p.m., local time, on May 17, 1995, or such other date as the parties hereto shall agree in writing (the "Closing Date"), at the offices of Sidley & Austin, Los Angeles, California or at such other place as the parties hereto shall agree in writing. At the Closing (a) each Holder shall deliver (i) either (A) certificates, duly endorsed for transfer, or (B) by book-entry transfer into the indenture trustee's account at The Depository Trust Company, of the Notes being delivered by such Holder pursuant to Section 1.1, (ii) duly executed consents with respect to each Note substantially in the form of Exhibit A to the Exchange Agreement (the "Consents"), and (iii) executed letters of withdrawal or resignation from the Board of Directors of the Company from each of the persons nominated by the Holders, and (b) the Company shall (i) deposit into bank accounts, designated by each Holder, by wire transfer of immediately available funds, an amount equal to the aggregate cash portion of the purchase price being paid to such Holder pursuant to Section 1.1 above, and (ii) deliver to each Holder (x) a stock certificate or certificates representing the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock specified pursuant to Section 1.1 above, and (y) a warrant certificate or certificates substantially in the form of Exhibit A representing the Warrants specified pursuant to Section 1.1 above. Concurrently with the closing of any Additional Issuance the Company shall deliver to each Holder a stock certificate or certificates representing the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock and a warrant certificate or certificates representing the duly authorized and validly issued Warrants comprising the Delayed Securities issuable on such date. The certificates representing the shares of Common Stock and the Warrants shall be in definitive form and registered in the name of the Holder or its nominee or designee and in such denominations as such Holder shall request not later than one business day prior to the Closing Date or the closing date of an Additional Issuance as the case may be. SECTION 2. Amendment of Exchange Agreement 3 4 (a) The last sentence of Section 1(a)(ii) of the Exchange Agreement is hereby amended in its entirety by substituting therefore the following: "The Consents shall not be effective for any purpose until immediately prior to the consummation of the Exchange Offer and shall be returned to the respective Holders who executed such instruments at the close of business on May 25, 1995, if the Exchange Offer has not been consummated." (b) Section 1(b) of the Exchange Agreement is hereby amended in its entirety by substituting therefore the following: "(b) The Company hereby agrees to cause all of the Notes tendered into the Exchange Offer to be returned to the respective Holders thereof at the close of business on May 25, 1995, if the Exchange Offer has not been consummated." (c) Section 2.1(o) of the Exchange Agreement is hereby amended in its entirety by substituting therefore the following: "the Company and CuraCare, Inc., on the one hand, and DVI Financial Services, Inc. and DVI Business Credit, Inc. (collectively, "DVI"), on the other hand, shall have entered into a permanent credit facility in accordance with the terms of DVI's letter to the Company dated April 28, 1995 and in accordance with the intercreditor arrangements with GE as set forth in GE's letter to the Company dated April 21, 1995;" (d) Section 5 of the Exchange Agreement is hereby amended by adding the following immediately after Section 5.4 thereof: "5.5 Shareholders Meeting The Company hereby agrees that it will (i) reconvene the April 7, 1995 shareholders meeting on May 18, 1995, (ii) not adjourn such reconvened meeting, and (iii) take the shareholders vote and all related actions with respect to the matters described in the Proxy Statement on such date. 4 5 5.6 Specific Performance Each of the Company and Dr. Bates hereby acknowledges and agrees that irreparable harm, for which there may be no adequate remedy at law and for which the ascertainment of damages would be difficult, would occur in the event any of the provisions of this Agreement or any of the Documents or any of the Restructuring Transactions were not performed in accordance with their specific terms or were otherwise breached. Consequently, each of the Company and Dr. Bates hereby agrees that each Holder shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement or any other Document or any of the Restructuring Transactions and to enforce specifically the terms and provisions hereof or thereof in any court of the United States or any state thereof having jurisdiction, in each instance without being required to post bond or other security and in addition to, and without having to prove the inadequacy of, other remedies at law." (e) Section 6.1(d) of the Exchange Agreement is hereby amended in its entirety by substituting therefore the following: "(d) automatically on the earlier of (i) the closing of the purchase of the Notes held by each Holder pursuant to the Note Purchase Agreement, dated as of May 12, 1995, by and among the parties hereto and (ii) May 25, 1995 or such earlier date on or after May 15, 1995 designated by Apollo and SunAmerica in a written notice to the Company." (f) Except as expressly set forth herein, all terms and conditions of the Exchange Agreement shall remain unaffected. All references to the term "Agreement" therein shall be deemed to refer to the Exchange Agreement as modified hereby. 5 6 SECTION 3. Closing Conditions Section 3.1 Conditions to Obligations of Holders The obligations of the Holders pursuant to Section 1 hereof are subject to the satisfaction of each of the following conditions: (a) The expiration or termination of any waiting period (and any extension thereof) applicable to the consummation of the Note Purchase or any of the transactions contemplated hereby (collectively, the "Purchase Transactions") under any applicable law; (b) the delivery of a certificate or certificates, dated the Closing Date and signed by the Chairman of the Board of Directors and the Chief Financial Officer of the Company, certifying (A) that the conditions set forth in Sections 3.1(h) and 3(j) hereof have been satisfied and (B) such other matters as each of the Holders may reasonably request; (c) the delivery of an opinion, dated the Closing Date and addressed to each Holder, from Sidley & Austin, counsel to the Company, substantially in the form of Exhibit B hereto; (d) the delivery of a certificate, dated as of a recent date and signed by the Company's stock transfer agent, certifying the number of outstanding Shares of Common Stock; (e) all fees and expenses incurred in connection with the negotiation of the Restructuring Transactions and the negotiation and consummation of the Note Purchase and the other Purchase Transactions including, without limitation, the fees and expenses of legal counsel representing Apollo and SunAmerica shall have been paid in full; (f) there shall have been no order or preliminary or permanent injunction entered in any action, claim or proceeding and no law enacted, entered, enforced, promulgated, amended, issued or deemed applicable to (A) the Holders, the Company or any subsidiary or affiliate of the Company or the Holders or (B) the Note Purchase, which shall have remained in effect and which shall have had the effect of: 6 7 (1) making illegal, materially delaying or otherwise directly or indirectly prohibiting or making materially more costly the consummation of the Note Purchase or the other Purchase Transactions; (2) prohibiting or materially limiting the ownership of the Company's Common Stock by any of the Holders; (3) compelling the Company, the Holders or any of their respective affiliates to dispose of or hold separate all or any material portion of the business or assets of the Company, the Holders or any of their respective affiliates, as a result of the Note Purchase; or (4) requiring divestiture by any Holder or any affiliate of any Holder of any Warrants or shares of Common Stock; (g) as of the Closing Date, each of the employees of the Company listed on Schedule A to the Exchange Agreement (each a "Key Employee") shall continue to be employed by the Company in the capacity indicated on Schedule A to the Exchange Agreement; (h) the representations and warranties contained in Section 4 of this Agreement shall be true and correct at and as of the Closing Date; (i) as of the date of the Proxy Statement and as of the Closing Date, none of the Proxy Statement or any amendment or supplement thereto contains or will contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (j) subsequent to the date hereof (A) there has been no material adverse effect on the condition, financial or otherwise, or in the earnings or business affairs or business prospects ("Material Adverse Effect") of the Company or its subsidiaries, whether or not arising in the ordinary course of business, the occurrence of which gives rise to an obligation of the Company to amend, supplement or otherwise revise the disclosure provided in the Proxy Statement, (B) without the prior written consent of each of the Holders, the Company has not incurred any material liabilities or obligations, direct or contingent, nor entered into any material transaction not in the ordinary course of business, or required to be disclosed on a balance sheet prepared in accordance with GAAP, either when considered alone or together with all other such transactions, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on its capital stock; (k) the Note Purchase shall not be prohibited by any applicable law; 7 8 (l) each of the Holders shall participate in the Note Purchase in accordance with Section 1 hereof; (m) the Company and CuraCare, Inc., on the one hand, and DVI Financial Services, Inc. and DVI Business Credit, Inc. (collectively, "DVI"), on the other hand, shall have entered into a permanent credit facility in accordance with the terms of DVI's letter to the Company dated April 28, 1995 and in accordance with the intercreditor arrangements with GE as set forth in GE's letter to the Company dated April 21, 1995 (the DVI Facility"); (n) the GE Lease Modification shall continue to remain in effect, an Event of Default (as defined in the documents relating to the GE Lease Modification) shall not have occurred and be continuing and any amendment thereto shall be under terms reasonably acceptable to each of the Holders; and (o) the Company and the Holders shall have entered into a registration rights agreement substantially in the form of Exhibit C hereto (the "Registration Rights Agreement"). Section 3.2 Conditions to Obligations of the Company (a) the expiration or termination of any waiting period (and any extension thereof) applicable to the consummation of the Note Purchase and the Purchase Transactions under any applicable law; (b) there shall have been no order or preliminary or permanent injunction entered in any action, claim or proceeding and no law enacted, entered, enforced, promulgated, amended, issued or deemed applicable to (A) the Holders, the Company or any subsidiary or affiliate of the Company or the Holders or (B) the Note Purchase, which shall have remained in effect and which shall have had the effect of: (1) making illegal, materially delaying or otherwise directly or indirectly prohibiting or making materially more costly the consummation of the Note Purchase or the other Purchase Transactions; (2) prohibiting or materially limiting the ownership of the Company's Common Stock by any of the Holders; (3) compelling the Company, the Holders or any of their respective affiliates to dispose of or hold separate all or any material portion of the business or assets of the Company, the Holders or any of their respective affiliates, as a result of the Note Purchase; or (iv) requiring divestiture by any Holder or any affiliate of any Holder of any Warrants of shares of Common Stock; and 8 9 (c) the Note Purchase shall not be prohibited by any applicable law; (d) each of the Holders shall participate in the Note Purchase in accordance with Section 1 hereof; and (e) each of the persons nominated by the Holders shall have withdrawn or resigned from the Company's Board of Directors; (f) each of the Holders shall have provided the Consents; and (g) DVI shall have agreed to enter into the DVI Facility. SECTION 4. Representations and Warranties The Company represents and warrants to each Holder as follows: Section 4.1 Capitalization (a) The total authorized capital stock of the Company consists of 10,000,000 shares of common stock, no par value (the "Common Stock"), 2,867,401 of which are issued and outstanding on the date hereof. Each share of the Company's capital stock that is issued and outstanding (i) has been duly authorized and validly issued and (ii) is fully paid and nonassessable and free of preemptive and similar rights. (b) Upon consummation of the Note Purchase, and upon each issuance of Delayed Securities, each Holder will acquire valid title to the shares of Common Stock and Warrants being acquired by it, free and clear of all liens and restrictions on voting and transfer other than (x) restrictions on transfer imposed by Federal and state securities laws, (y) liens or restrictions on voting and transfer arising from the actions of any Holder, and (z) as set forth in this Agreement and the Registration Rights Agreement. (c) The Common Stock and Warrants to be issued as consideration for the Notes (including the Delayed Securities, if any) have been duly authorized and, upon consummation of the Note Purchase, and upon each issuance of Delayed Securities, will be validly issued, fully paid and nonassessable and free of preemptive or similar rights, and the Common Stock issuable upon exercise of the 9 10 Warrants (the "Warrant Shares") has been duly authorized and, when issued upon such exercise in accordance with the terms thereof, will be validly issued, fully paid and nonassessable and free of preemptive or similar rights. A sufficient number of shares of Common Stock have been reserved solely for issuance and delivery upon exercise of the Warrants. (d) Except for this Agreement, the warrants to purchase an aggregate of 225,000 shares of Common Stock issued or to be issued in connection with the GE Lease Modification and the DVI Facility, the shares of Common Stock to be issued in the Additional Issuance, and options granted pursuant to and listed in the Proxy Statement and referred to in Exhibit A to the Letter Agreement, there are, and immediately following the Closing Date there will be, no outstanding (i) securities convertible into or exchangeable for any capital stock of the Company or any subsidiary of the Company, (ii) options, warrants or other rights to purchase or subscribe to capital stock of the Company or any subsidiary of the Company or securities convertible into or exchangeable for capital stock of the Company of any subsidiary of the Company, or (iii) contracts, commitments, agreements, understandings, arrangements, calls or claims of any kind, to which the Company or any of its subsidiaries is a party or that arise from any action of the Company or any of its subsidiaries, relating to the issuance of any capital stock of the Company or any subsidiary of the Company, any such convertible or exchangeable securities or any such options, warrants or rights. Section 4.2 Authorization of Agreement The execution and delivery of this Agreement and the other documents relating to the transactions contemplated hereby (the "Documents") to which the Company or any subsidiary of the Company is a party, and the consummation of the transactions contemplated hereby or thereby have been duly authorized by the Company and no other proceedings on the part of any of the Company, any subsidiary of the Company or any of their respective stockholders or affiliates are necessary to authorize this Agreement or the other Documents or to consummate the transactions contemplated hereby or thereby. This Agreement is, and as of the Closing Date, each of the Documents to which the Company or any subsidiary of the Company is a party will be, a valid and binding obligation of the Company or such subsidiary, as the case may be, enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting enforcement of creditor's rights generally, and by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 10 11 Section 4.3 No Violation Neither the execution or delivery by the Company or any of its subsidiaries of the Documents to which it is a party, the performance by each of the Company and each of its subsidiaries of its obligations under this Agreement and the other Documents, nor the consummation of the transactions contemplated hereby or thereby will (i) constitute a breach or violation under the Charter Documents of the Company or any of its subsidiaries, or (ii) constitute a violation of any Applicable Law, in each case as defined in the Exchange Agreement. Section 4.4 No Default (a) No Event of Default (as defined in each of the Documents) has occurred, which Event of Default could, singly or in the aggregate, have a Material Adverse Effect on the Company after the date on which the Purchase transactions are consummated. There exists no condition that, with the passage of time or otherwise, would (i) except as set forth in the Proxy Statement, result in a default by the Company or any of its subsidiaries under any agreement, which default could, singly or in the aggregate, have a Material Adverse Effect on the Company after the date on which the transactions contemplated hereby or thereby are consummated, or (ii) except as set forth in the Proxy Statement on the date hereof, result in the imposition of any penalty or the acceleration of any indebtedness or obligation which could, singly or in the aggregate, have a Material Adverse Effect on the Company. (b) Neither the execution or delivery by the Company or any of its subsidiaries of the Documents to which it is a party, the performance by any of the Company or any of its subsidiaries of its obligations under this Agreement and the other Documents, nor the consummation of the transactions contemplated hereby or thereby will conflict with, violate, constitute a breach or violation of or a default (with the passage of time or otherwise) under, require the consent of any person under, give to others any rights of termination, amendment, acceleration or cancellation of or result in the imposition of a lien on any of the properties or assets of any of the Company's subsidiaries or an acceleration of indebtedness pursuant to, any material agreement, except for such conflicts, violations, breaches or defaults (i) for which consents have already been obtained; and (ii) which could not, singly or in the aggregate, have a Material Adverse Effect on the Company. Section 4.5 Representations and Warranties in the Exchange Agreement 11 12 The representations and warranties of the Company in the Exchange Agreement were true on the date thereof, are true on the date hereof and will be true on the Closing Date after giving effect to the transactions contemplated by this Agreement and the other Documents. Section 4.6 Proposed Restructurings Neither the Company nor any of its subsidiaries is currently contemplating or has taken any action with respect to any liquidation, bankruptcy, dissolution or other reorganization proceedings except as contemplated by the Purchase Transactions and the Restructuring Transactions. SECTION 5. Representations and Warranties of each of the Holders Each of the Holders, severally and not jointly, represents and warrants to the Company as follows: Section 5.1 Authorization of Agreement The execution and delivery of this Agreement and the performance of its obligations hereunder have been duly authorized by such Holder and no other proceedings on the part of any such Holder or any of its respective stockholders or affiliates are necessary to authorize this Agreement or to consummate the Note Purchase. This Agreement is a valid and binding obligation of such Holder, enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting enforcement of creditor's rights generally, and by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). Section 5.2 Title to Notes 12 13 12 As of the date hereof, each of the Holders beneficially owns free and clear of all claims, liens, charges, encumbrances, options and security interests, to the Notes in the principal amount set forth below:
Principal Amount of Notes ---------- SunAmerica $9,515,000 Apollo $6,500,000 Grace $1,600,000 Upchurch $ 79,000
Section 5.3 Private Placement (a) Such Holder understands that the Note Purchase is intended to be exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). (b) The shares of Common Stock and Warrants (including the Delayed Securities, if any) to be acquired by such Holder in the Note Purchase are being acquired for its own account for investment and without a view to making a distribution thereof in violation of the Securities Act or any state securities laws which may be applicable. (c) Such Holder has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in such shares of Common Stock and Warrants (including the Delayed Securities, if any) and such Holder is capable of bearing the economic risks of such investment, including a complete loss of its investment. (d) Such Holder is an "accredited investor" as such term is defined in Regulation D under the Securities Act. (e) Such Holder acknowledges that the Company and, for purposes of the opinions to be delivered to the Holders pursuant to Section 3.1(c) hereof, Sidley & Austin, will rely on the accuracy and truth of its representations in this Section 5.3, and such Holder hereby consents to such reliance. 13 14 (f) Such Holder acknowledges that upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act, each certificate evidencing the shares of Common Stock and Warrants being acquired by it (including the Delayed Securities, if any) shall bear a legend substantially in the form of Schedule B hereto. SECTION 6. Other Agreements Section 6.1 Warrant Shares The Company hereby agrees that it will (a) not permit the par value, if any, of any Warrant Shares to exceed the amount payable therefor upon exercise, and (b) at all times reserve and keep available, solely for issuance and delivery upon exercise of the Warrants, the number of shares of Common Stock from time to time issuable upon exercise of the Warrants. Section 6.2 Supplemental Indentures The Company hereby agrees to execute and deliver the Supplemental Indentures. Section 6.3 Covenants of Holders Each Holder, severally and not jointly, hereby agrees: (a) to vote the shares of Common Stock issued to such Holder pursuant to Section 1 hereof (and held by such Holder on the date of any such vote) in favor of the Additional Issuance; and (b) that the exercise of the proxy granted by Dr. Bates pursuant to that certain Agreement and Proxy, dated as of the date hereof, shall constitute such Holder's agreement (i) to waive any then remaining conditions to the Holders' performance under the Exchange Agreement and (ii) to perform thereunder, in each case so long as (A) the Company performs its obligations thereunder and (B) the transactions contemplated by the Exchange Agreement are consummated on or before May 25, 1995. 14 15 Section 6.4 Further Assurances Each party hereto agrees to use all reasonable efforts to obtain all consents and approvals, and to do all other things, necessary for the transactions contemplated by this Agreement on or prior to the termination of this Agreement pursuant to Section 7.1 hereof. The parties agree to take such further action and to deliver or cause to be delivered to each other at the closing and at such other times thereafter as shall be reasonably agreed by such additional agreements or instruments as any of them may reasonably request for the purpose of carrying out this Agreement and the agreements and transactions contemplated hereby. SECTION 7. Miscellaneous Section 7.1 Termination This Agreement may be terminated and the Note Purchase may be abandoned at any time prior to the closing (provided that any such termination or consummation of the Exchange Offer shall not relieve any party from liability for a breach of any provision hereof prior to such termination): (a) by the unanimous written consent of the Company, Dr. Bates and the Holders; (b) by the Holders if (i) any representation, warranty, covenant or agreement of the Company or Dr. Bates contained in this Agreement or any of the other Documents shall have been breached in any material respect (other than those qualified by a materiality standard which shall have been breached in any respect); or (ii) the Company's board of directors fails to approve this Agreement or the Note Purchase and the other transactions contemplated hereby and by the other Documents; and (c) automatically on May 17, 1995, unless otherwise extended by the Holders in their sole discretion. Termination pursuant to the foregoing clause (a), (b) or (c) notwithstanding, Sections 2 and 6.3(b) hereof shall remain in effect. 15 16 Section 7.2 Successors and Assigns This Agreement shall be binding upon and shall inure to the benefit of any and all successors and assigns of the parties hereto. This Agreement may not be assigned by any party, by operation of law or otherwise, without the express prior written consent of each of the other parties, which consent may be granted or withheld in each such party's sole discretion; provided, however, that no such consent shall be necessary in connection with an assignment by Apollo or SunAmerica to any Related Person of such Holder if such Related Person shall agree to be bound by the terms of this Agreement. "Related Person" of any Holder means any subsidiary or affiliate of such Holder or any investment fund, investment account or investment entity whose investment manager, investment advisor, or principal thereof, is such Holder, an affiliate of such Holder or an investment manager, investment advisor or principal of such Holder or affiliate. Section 7.3 Specific Performance Each of the Company and Dr. Bates and, with respect to Section 6.3, the Holders hereby acknowledges and agrees that irreparable harm, for which there may be no adequate remedy at law and for which the ascertainment of damages would be difficult, would occur in the event any of the provisions of this Agreement or any of the Documents or any of the Purchase Transactions were not performed in accordance with their specific terms or were otherwise breached. Consequently, each of the Company and Dr. Bates and, with respect to Section 6.3, the Holders hereby agrees that each party hereto shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement or any other Document or any of the Purchase Transactions and to enforce specifically the terms and provisions hereof or thereof in any court of the United States or any state thereof having jurisdiction, in each instance without being required to post bond or other security and in addition to, and without having to prove the inadequacy of, other remedies at law. 16 17 Section 7.4 Amendment and Waiver This Agreement may be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may be given, provided that the same are in writing and signed by the parties hereto. Section 7.5 Counterparts This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 7.6 Headings The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Section 7.7 Governing Law THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. Section 7.8 Entire Agreement This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. 17 18 Section 7.9 Severability If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 18 19 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. AMERICAN SHARED HOSPITAL SERVICES By: ----------------------------- Its: Chairman and CEO AIF II, L.P. By: Apollo Advisors, L.P. Managing General Partner By: Apollo Capital Management, Inc. General Partner By: ----------------------------- Its: ----------------------------- ANCHOR NATIONAL LIFE INSURANCE COMPANY By: ----------------------------- ----------------------------- Ernest A. Bates, M.D. 19 20 GRACE BROTHERS, LTD. By: ----------------------------- Its: ----------------------------- LION ADVISORS, L.P. on behalf of an account under management By: Lion Capital Management, Inc. General Partner By: ----------------------------- Its: ----------------------------- SUN LIFE INSURANCE COMPANY OF AMERICA By: ----------------------------- SUNAMERICA INC. By: ----------------------------- Its: ----------------------------- 20 21 UPCHURCH LIVING TRUST U/A/D 12/14/90 By: ----------------------------- Its: Trustee 21 EX-10.6 14 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.6 LOAN AND SECURITY AGREEMENT among AMERICAN SHARED-CURACARE and CURACARE, INC. Borrower, AMERICAN SHARED HOSPITAL SERVICES Guarantor, ERNEST A. BATES, M.D. Individual Guarantor and DVI BUSINESS CREDIT CORPORATION Lender Dated as of May 17, 1995 2 TABLE OF CONTENTS
Page ---- SECTION 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.1. SPECIFIC DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.2. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND UNIFORM COMMERCIAL CODE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 1.3. CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2 LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.1. THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.2. REVOLVING NATURE OF THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.3. INTEGRAL AMOUNTS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.4. NOTICE OF BORROWING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.5. REPAYMENT OF LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.6. PREPAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.7. LENDER'S FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.8. INTEREST ON THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2.9. CONDITIONS TO THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3 SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 3.1. GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4 SPECIFIC REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 4.1. NAME OF GUARANTOR; BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 4.2. MERGERS AND CONSOLIDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 4.3. PURCHASE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 4.4. CHANGE OF NAME OR IDENTITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 4.5. CORPORATE STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 5 PROVISIONS CONCERNING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.1. OFFICE AND RECORDS OF BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.2. REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
i 3 SECTION 5.3. RETURNS AND REPOSSESSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.4. BORROWING BASE REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.5. SCHEDULES OF ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.6. LENDER'S RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 5.7. DISCLAIMER OF LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 5.8. POST DEFAULT RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 5.9. ACCOUNTS OWED BY FEDERAL GOVERNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 5.10. BUSINESS ACTIVITY REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ii 4 SECTION 6 PROVISIONS CONCERNING GENERAL INTANGIBLES . . . . . . . . . . . . . . . . . . . . 15 SECTION 6.1. CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 7 OTHER PROVISIONS CONCERNING COLLATERAL . . . . . . . . . . . . . . . . . . . . . 15 SECTION 7.1. TITLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 7.2. FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 7.3. LENDER'S DUTY OF CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 7.4. REINSTATEMENT OF LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 7.5. LENDER EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 7.6. INSPECTION OF RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 7.7. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 8 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 8.1. CORPORATE STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 8.2. AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 8.3. NO BREACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 8.4. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 8.5. DEFERRED COMPENSATION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 8.6. LITIGATION AND PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 8.7. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 8.8. LAWS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 8.9. FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 8.10. HEALTH CARE LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 8.11. CUMULATIVE REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 9 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 9.1. ENCUMBRANCE OF COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 9.2. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 9.3. CONDITION AND REPAIR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 9.4. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 9.5. ACCOUNTING SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 9.6. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 9.7. FURTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 9.8. ERISA COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
iii 5 SECTION 9.9. RESTRICTIONS ON MERGER, CONSOLIDATION, SALE OF ASSETS, ISSUANCE OF STOCK, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 9.10. HEALTH CARE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 9.11. DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9.12. SUBORDINATED OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9.13. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9.14. CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9.15. EQUIPMENT LEASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9.16. LENDER CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
iv 6 SECTION 10 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . 24 SECTION 11 REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 11.1. SPECIFIC REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 11.2. POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 11.3. EXPENSES SECURED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 11.4. EQUITABLE RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 11.5. REMEDIES ARE CUMULATIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 12 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 30 Section 12.1. General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 13 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 30 SECTION 13.1. DELAY AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 13.2. COMPLETE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 13.3. SEVERABILITY; HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 13.4. BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 13.5. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 13.6. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 13.7. JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 13.8. WAIVER OF TRIAL BY JURY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SCHEDULES 1.1. LIENS 3.1. GRANT OF SECURITY INTEREST 4.2. MERGERS AND CONSOLIDATIONS 4.3. PURCHASE OF ASSETS OUTSIDE ORDINARY COURSE OF BUSINESS 6.1. CONTRACTS 8.6. LITIGATION AND PROCEEDINGS 9.11 PERMITTED DISTRIBUTIONS v 7 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT ("Agreement") is entered into as of May 17, 1995 by and among DVI Business Credit Corporation, a Delaware corporation ("Lender"), American Shared-CuraCare, a California general partnership ("AS-CuraCare") and CuraCare, Inc., a Delaware corporation ("CuraCare") (AS-CuraCare and CuraCare, collectively and individually referred to as "Borrower"), American Shared Hospital Services, a California corporation ("Guarantor") and Ernest A. Bates, M.D. ("Individual Guarantor"). SECTION 1 DEFINITIONS SECTION 1.1. SPECIFIC DEFINITIONS. The following definitions shall apply: (a) "Account Debtors" shall mean Borrower's and its Affiliates' customers and all other persons who are obligated or indebted to Borrower or any Affiliate in any manner, whether directly or indirectly, primarily or secondarily, contingently or otherwise, with respect to Accounts. (b) "Accounts" shall mean all accounts, contract rights, instruments, documents, chattel paper and obligations in any form owing to Borrower or any Affiliate arising out of the sale or lease of goods or the rendition of services by Borrower or any Affiliate whether or not earned by performance; all credit insurance, guaranties, letters of credit, advises of credit and other security for any of the above; all merchandise returned to or reclaimed by Borrower or any Affiliate; and Borrower's Books relating to any of the foregoing. (c) "Advance" shall mean an advance of loan proceeds constituting all or a part of the Loan. (d) "Affiliate" shall mean with respect to any Person, any other Person which directly or indirectly Controls, is Controlled by or is under common Control with that Person. 1 8 (e) "Borrower's Books" shall mean all of Borrower's and its Affiliates' books and records including but not limited to: minute books, ledgers; records indicating, summarizing or evidencing Borrower's and its Affiliates' assets, liabilities and the Accounts; all information relating to Borrower's and its Affiliates business operations or financial condition; and all computer programs, disk or tape files, printouts, runs and other computer-prepared information and the equipment containing such information; provided, however, that confidential patient records shall not be included therein, except to the extent otherwise provided by law. (f) "Base Rate" shall mean the rate of interest announced publicly by Bank of America, NT&SA in San Francisco, California, from time to time as its base rate. (g) "Borrowing Base" shall mean, on the date of determination thereof, an amount equal to the lesser of (i) the sum of seventy-five percent (75%) of the Net Collectible Value for each type of Eligible Account, and (ii) one hundred percent of Borrower's gross receipts from Institutional and Retail Accounts during the preceding forty-five (45) day period; provided, however, that workers compensation and personal injury claims may never exceed ten percent (10%) of the Borrowing Base. (h) "Closing Date" shall mean the date of the first Advance of the Loan. (i) "Collateral" shall have the meaning specified in Section 3.1 hereof. (j) "Control" shall mean (i) the ownership of a majority of the voting power of all classes of voting stock of a corporation, or (ii) the ownership of a majority of the beneficial interest in income and capital of a person other than a corporation. (k) "Distribution" shall mean, with respect to any shares of capital stock or any warrant or right to acquire shares of capital stock or any other equity security, (i) the retirement, redemption, purchase or other acquisition, directly or indirectly, for value by the issuer of any such security, except to the extent that the consideration therefor consists of shares of stock, (ii) the declaration or (without duplication) payment of any 2 9 dividend in cash, directly or indirectly, on or with respect to any such security, (iii) any investment in the holder of five percent (5%) or more of any such security if a purpose of such investment is to avoid characterization of the transaction as a Distribution, and (iv) any other cash payment constituting a distribution under applicable laws with respect to such security. (l) "Eligible Accounts" shall mean Borrower's accounts receivable from commercial insurance, Medicare, Medi-Cal, managed care providers, workers' compensation and personal injury claims (collectively referred to as "Retail Accounts"), which have been due and payable for 90 or fewer days, and Borrower's account receivable under contracts with hospitals and other similar health service providers (referred to as "Institutional Accounts") which have been due and payable for 90 or fewer days. (m) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and all references to sections thereof shall include such sections and any predecessor provisions thereto, including any rules or regulations issued in connection therewith. (n) "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) that together with Borrower would be deemed a "contributing sponsor" to a single employee plan within the meaning of Section 4001 of ERISA. (o) "Event of Default" shall have the meaning specified in Section 10 hereof. (p) "Governmental Authority" shall mean any governmental or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality thereof, or any court, tribunal, grand jury or arbitrator, in any case whether foreign or domestic. (q) "Guaranty" shall mean the Unconditional Continuing Guaranty executed by Guarantor unconditionally guaranteeing Borrower's Obligations under this Agreement. (r) "Health Care Laws" shall mean all federal, state and local laws specifically relating to health care providers and health care services, including, but not limited to, Section 3 10 1877(a) of the Social Security Act as amended by the Omnibus Budget Reconciliation Act of 1993, 42 USC Section 1395nn. (s) "Indebtedness" of a Person shall mean (i) all items (except items of capital stock, capital or paid-in surplus or of retained earnings) which, in accordance with generally accepted accounting principles, would be included in determining total liabilities as shown on the liability side of the balance sheet of such Person as of the date as of which Indebtedness is to be determined, including any lease which, in accordance with generally accepted accounting principles would constitute indebtedness; (ii) all indebtedness secured by any mortgage, pledge, security, lien or conditional sale or other title retention agreement to which any property or asset owned or held by such Person is subject, whether or not the indebtedness secured thereby shall have been assumed; and (iii) all indebtedness of others which such Person has directly or indirectly guaranteed, endorsed (otherwise then for the collection or deposit in the ordinary course of business), discounted or sold with recourse or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, stock or equity purchase, capital contribution or otherwise) or otherwise to become directly or indirectly liable. (t) "Individual Guaranty" shall mean the Unconditional Continuing Guaranty executed by Individual Guarantor unconditionally guaranteeing Borrower's Obligations under this Agreement. (u) "Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated on or about the date hereof among Guarantor, AS-CuraCare, CuraCare, Lender, DVI Financial Services Inc. ("DVIFS") and General Electric Company, a New York corporation acting through GE Medical Systems ("GE"). (v) "Lender Expenses" shall mean (i) all costs or expenses (including, without limitation, taxes and insurance premiums) required to be paid by Borrower or its Affiliates under this Agreement or under any of the other Loan Documents that are paid or advanced by Lender; (ii) filing, recording, publication and search fees paid or incurred by Lender in connection with Lender's transactions with Borrower; (iii) costs and expenses incurred by Lender to correct any Event of Default or enforce any provision of 4 11 the Loan Documents or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, and preparing for sale or advertising to sell the Collateral, whether or not a sale is consummated, after the occurrence of an Event of Default; (iv) costs and expenses of suit incurred by Lender in enforcing or defending the Loan Documents or any portion thereof; (v) all costs or expenses incurred by Lender to convert any data submitted to Lender by Borrower or Guarantor to an acceptable form; and (vi) Lender's reasonable attorney fees and expenses incurred (before or after execution of this Agreement) in advising Lender with respect to, or in structuring, drafting, reviewing, negotiating, amending, terminating, enforcing, defending or otherwise concerning, the Security Documents or any portion thereof, irrespective of whether suit is brought. (w) "Lien" shall mean any security interest, mortgage, pledge, assignment, lien or other encumbrance of any kind, including any interest of a vendor under a conditional sale contract or consignment and any interest of a lessor under a capital lease. (x) "Loan" shall mean each loan or any other loan or loans made by Lender to Borrower pursuant to this Agreement. (y) "Loan Documents" shall mean (i) this Agreement; (ii) the Note; (iii) the Security Documents; (iv) any other agreements or documents hereafter delivered to secure repayment of the Loan; (v) the Lock Box Agreement and (vi) any other certificates, documents or instruments delivered by Borrower to Lender pursuant to the terms of this Agreement. (z) "Lock Box Agreement" shall mean the letter of direction with respect to those certain Lock Box Agreements between Borrower and First Interstate Bank of California and between Borrower and Bank of America NT & SA. (aa) "Net Collectible Percentage" shall mean seventy percent (70%) with respect to Retail Accounts and ninety-five percent (95%) with respect to Institutional Accounts. (bb) "Net Collectible Value" shall mean, for each type of Eligible Account, the Net Collectible Percentage times the aggregate current outstanding amount for such type of Eligible Account. 5 12 (cc) "Note" shall mean the Secured Promissory Note executed by Borrower pursuant to the terms of this Agreement. (dd) "Obligations" shall mean (i) the due and punctual payment of all amounts due or become due under the Note; (ii) the performance of all obligations of Borrower under this Agreement, the Note and all other Loan Documents (iii) all extensions, renewals, modifications, amendments and refinancings of any of the foregoing; (iv) all Lender Expenses; (v) all loans, advances, indebtedness and other obligations owed by Borrower to Lender of every description whether now existing or hereafter arising (including those owed by Borrower to others and acquired by Lender by purchase, assignment, or otherwise) and whether direct or indirect, primary or as guarantor or surety, absolute or contingent, liquidated or unliquidated, matured or unmatured, whether or not secured by additional collateral; and (vi) all loans, advances, indebtedness and other obligations owed by Borrower to Lender under the Other Loan Document of every description whether now existing or hereafter arising (including those owed by Borrower to others and acquired by Lender by purchase, assignment or otherwise) and whether direct or indirect, primary or as guarantor or surety, absolute or contingent, liquidated or unliquidated, matured or unmatured, whether or not secured by additional collateral. (ee) "Other Loan Document" shall mean that certain Loan and Security Agreement dated on or about the date hereof among Borrower, Guarantor, Individual Guarantor and DVIFS. (ff) "Permitted Liens" shall mean (i) Liens for property taxes and assessments or governmental charges or levies and Liens securing claims or demands of mechanics and materialmen, provided that payment thereof is not yet due or is being contested as permitted in this Agreement; (ii) Liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which has not expired, or in respect of which Borrower is in good faith prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review has been secured; (iii) Liens and priority claims incidental to the conduct of business or the ownership of properties and assets (including warehouse's and attorney's Liens and statutory landlord's Liens); deposits, pledges or Liens to secure the performance of bids, tenders, or trade contracts, or to secure statutory obligations; and surety or appeal bonds or other 6 13 Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided that in each case the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; and further provided that any such warehouse's or statutory landlord's Liens have been subordinated to the Liens of Lender in a manner satisfactory to Lender; and (iv) Liens existing on the date of this Agreement that secure indebtedness outstanding on such date and that are disclosed on Schedule 1.1 hereto; (gg) "Person" shall mean an individual, corporation, partnership, limited liability company, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), Governmental Authority or any other entity. (hh) "Proceeds" shall mean all proceeds and products of Collateral and all additions and accessions to, replacements of, insurance or condemnation proceeds of, and documents covering Collateral; all property received wholly or partly in trade or exchange for Collateral; all claims against third parties arising out of damage, destruction or decrease in value of the Collateral; all leases of Collateral; and all rents, revenues, issues, profits and proceeds arising from the sale, lease, license, encumbrance, collection or any other temporary or permanent disposition of the Collateral or any interest therein. (ii) "Security Documents" shall mean the Guaranty, the Individual Guaranty and any agreement or instrument entered into between Borrower and Lender or executed by Borrower, Guarantor or Individual Guarantor and delivered to Lender in connection with this Agreement. (jj) "Senior-Subordinated Notes" shall mean Guarantor's 16 1/2% Senior Subordinated Exchangeable Notes Due 1996 and Borrower's 14 3/4% Senior Subordinated Notes Due 1996. (kk) "Termination Date" shall mean May 31, 1997. (ll) "Unmatured Default" shall mean any event or condition that, with notice, passage of time, or a determination by Lender or any combination of the foregoing would constitute an Event of Default. 7 14 SECTION 1.2. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND UNIFORM COMMERCIAL CODE. All financial terms used in this Agreement, other than those defined in this Section 1, have the meanings accorded to them under generally accepted accounting principles. All other terms used in this Agreement, other than those defined in this Section 1, have the meanings accorded to them in the Uniform Commercial Code as enacted in any applicable jurisdiction. SECTION 1.3. CONSTRUCTION. (a) Unless the context of this Agreement clearly requires otherwise, the plural includes the singular, the singular includes the plural, the part includes the whole, "including" is not limiting, and "or" has the inclusive meaning of the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder" and other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. (b) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Lender or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties and its counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish the purposes and intentions of all parties hereto fairly. SECTION 2 LOAN SECTION 2.1. THE LOAN. Subject to the terms and conditions and relying on the representations and warranties set forth herein, Lender agrees to advance to Borrower, individually or collectively, from time to time and Borrower agrees to borrow from Lender, revolving loans in an amount not to exceed the lesser of (i) Four Million Dollars ($4,000,000) (the "Commitment Amount"), and (ii) the Borrowing Base, which shall be evidenced by a Note. Notwithstanding the above, the parties hereto acknowledge that the initial Borrowing Base is, and shall remain for a period of ten business days, $3,000,000. The proceeds of the Loan shall be used by Borrower to fund a Distribution to Borrower's corporate parent, 8 15 Guarantor, for the purpose of repaying a portion of the Senior-Subordinated Notes and as a part of Borrower's working capital. The Borrowing Base shall be calculated on a daily basis on the reports delivered to Lender pursuant to Section 5.4. SECTION 2.2. REVOLVING NATURE OF THE LOAN. On a daily basis the Borrowing Base will be recalculated by adding daily billings to the prior week's Eligible Accounts and subtracting deposits and adjustments, if applicable and then multiplying this amount by the Net Collectable Percentage. The Loan may be repaid or prepaid pursuant to Sections 2.5 or 2.6 and shall be mandatorily prepaid pursuant to Section 2.6 by the Borrower. Subject to the provisions of this Agreement, any amounts repaid may be reborrowed, up to the amounts available under Section 2.1 at the time of such Borrowing, until prepaid the business day immediately preceding the Termination Date. Lender's commitments to make Advances shall expire, and the amount of Loan then outstanding shall mature and be repaid by Borrower, without further action on the part of Lender, on the Termination Date. SECTION 2.3. INTEGRAL AMOUNTS OF LOANS. Advances may be of any minimum amount. SECTION 2.4. NOTICE OF BORROWING. Whenever Borrower desires to borrow under Section 2.1, Borrower shall deliver to Lender a Drawdown Request Form, in a form reasonably satisfactory to Lender, signed by an authorized officer no later than 11:00 a.m. at least one (1) business day in advance of the proposed funding date. The Drawdown Request Form shall specify (i) the funding date (which shall be a business day) with respect to the requested Loan and (ii) the amount of the proposed Advance. SECTION 2.5. REPAYMENT OF LOAN. All receipts from Borrower's and its Affiliates' accounts receivable shall be deposited on a daily basis in a bank depository lock box in accordance with the terms of the Lock Box Agreement. Lender will debit the lock box account at the end of each day in payment of (i) Lender's fees then due and payable in accordance with Section 2.7, (ii) amounts then due and payable under the Other Loan Document, and (iii) on the first day of each month with respect to interest accrued on the Loan during the preceding month. Excess receipts remaining in the lock box account after the payment of fees and interest shall be applied to the principal amount of the Loan on a daily basis. Lender will credit Borrower's account in 9 16 accordance with the foregoing priorities with respect to all funds debited net of fees from the lock box account on a daily basis. Notwithstanding the foregoing, after the occurrence and during the continuance of an Event of Default, receipts in the lock box will be distributed in accordance with the relative priorities set forth in and the terms and conditions of the Intercreditor Agreement. SECTION 2.6. PREPAYMENT. The Loan shall be subject to prepayment or redemption in whole or in part at the end of any month prior to the Termination Date. This Loan Agreement may not be terminated, and will not be terminated by any prepayment, without payment of the termination fee required pursuant to Section 2.7. If any aging report or Borrowing Base report delivered to Lender pursuant to Section 5.4 indicates that the outstanding Loan amount exceeds the Borrowing Base, Borrower shall immediately prepay a portion of the outstanding Loan amount such that after such prepayment the Borrowing Base equals or exceeds the outstanding Loan amount. SECTION 2.7. LENDER'S FEES. Upon the execution of this Agreement, Borrower shall pay to Lender a loan origination fee of Eighty Thousand Dollars ($80,000). On or before the anniversary date of the effective date of this Agreement, Borrower shall pay Lender a renewal fee of Forty Thousand Dollars ($40,000). On or before the first day of each month Borrower shall pay Lender a monthly maintenance fee of Two Thousand Five Hundred Dollars ($2,500). On or before the first day of each month Borrower shall pay Lender an unutilized loan fee of equal to one-half of one percent (0.5%) of the difference between the Commitment Amount and the outstanding Loan amount as of the immediately previous month-end. If Borrower elects to terminate this Agreement at any time before the Termination Date, Borrower shall pay Lender a termination fee of Eighty Thousand Dollars ($80,000) if terminated prior to the anniversary date of this Agreement and Forty Thousand Dollars ($40,000) thereafter. Lender's fees will be deducted, when due, directly from receipts from accounts receivable deposited in accordance with Section 2.5. SECTION 2.8. INTEREST ON THE LOANS. All Advances shall bear interest on the unpaid principal amount thereof from the date made until paid in full at a fluctuating rate equal to the Base Rate plus five percent (5.0%). The outstanding principal balance of all other Obligations shall bear interest from the date such Obligations are due until paid in full at a fluctuating rate equal 10 17 to the Base Rate plus five percent (5.0%). Interest accrued but not paid pursuant to Section 2.5 shall be treated as an Advance if not otherwise paid within five (5) days of the end of the month in which it accrues. SECTION 2.9. CONDITIONS TO THE CLOSING. The obligation of Lender to make Advances under this Agreement is subject to Lender's determination that Borrower as of the date of the Advance has satisfied, and continues to satisfy, the following conditions: (a) The representations and warranties set forth in this Agreement and in the Other Loan Document shall be true and correct on and as of the date hereof and shall be true and correct in all material respects as of the date of the Advance and Borrower shall have performed all obligations which were to have been performed by it hereunder. (b) Borrower shall have executed and delivered to Lender (or shall cause to be executed and delivered to Lender by the appropriate Persons) the following: (i) this Agreement; (ii) the Note; (iii) UCC-1 Financing Statements; (iv) the Guaranty; (v) the Individual Guaranty; (vi) the Intercreditor Agreement; (vii) the Lock Box Agreement; (viii) evidence satisfactory to Lender that each of CuraCare, Guarantor and the general partners of AS-CuraCare is a corporation duly formed, validly existing and in good standing in the state in which it was formed and in each state in which it is authorized to do business; (ix) pay-off letters, UCC Termination Statements and Lien Releases as required to grant Lender a first priority security 11 18 interest other than Permitted Liens in Collateral pledged as security for repayment of the Loan; (x) repayment of the Senior-Subordinated Notes on terms and conditions satisfactory to Lender; (xi) certified copies of resolutions of the Board of Directors of CuraCare, Guarantor and the general partners of AS-CuraCare authorizing the execution and delivery of Loan Documents to be executed by Borrower and Guarantor; (xii) copies of the Articles of Incorporation of each of CuraCare, Guarantor and the general partners of AS-Curacare, certified by the Secretary of State; (xiii) copies of the Bylaws of each of CuraCare, Guarantor and the general partners of AS-CuraCare certified by an officer thereof; (xiv) a copy of the Partnership Agreement of CuraCare certified by a general partner; (xv) the written opinion of counsel to Borrower issued on the Closing Date and satisfactory to Lender in scope and substance; and (xvi) a certificate from an officer of Borrower indicating that the representations and warranties contained herein are true and correct as of the Closing Date. (c) Borrower shall have paid closing fees to Lender including Lender's legal fees incurred by Lender for the negotiation and preparation of the Loan Documents. (d) Neither an Event of Default nor an Unmatured Default shall have occurred and be continuing. (e) None of Borrower, Guarantor or Individual Guarantor shall not have suffered a material or adverse change in its business, operations or financial condition from that reflected in the Financial Statements of Borrower, Guarantor and Individual Guarantor delivered to Lender or otherwise. 12 19 (f) Lender shall have received such additional supporting documents, certificates and assurances as Lender shall reasonably request which shall be satisfactory to Lender in form and substance. SECTION 3 SECURITY INTEREST SECTION 3.1. GRANT OF SECURITY INTEREST. In order to secure prompt payment and performance of all Obligations, Borrower hereby grants to Lender a continuing first-priority pledge and security interest in the following property of Borrower, subject to terms of the Intercreditor Agreement (the "Collateral"), whether now owned or existing or hereafter acquired or arising and regardless of where located subject only to Permitted Liens. This security interest in the Collateral shall attach to all Collateral without further action on the part of Lender or Borrower. The Collateral shall consist of the following, subject in each case only to Permitted Liens and the terms and conditions of the Intercreditor Agreement, together with such third-party consents, lien waivers and estoppel certificates as Lender shall reasonably require: (a) all of Borrower's presently existing and hereafter arising Accounts, contract rights, instruments, notes, drafts, documents, chattel paper and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services, whether or not earned by performance, and any and all credit insurance, guarantees and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and all of Borrower's Books relating to any of the foregoing, and the Proceeds of any of the foregoing, including the pledge to it of the Accounts, cash and non-cash Proceeds subject only to Permitted Liens; (b) all of Borrower's equipment and machinery listed on Schedule 3.1 and all machine tools, motors, tools, parts, attachments, accessories, accessions, replacements, upgrades, substitutions, additions and improvements related thereto, wherever located, and the Proceeds of any of the foregoing, including cash and non-cash Proceeds. 13 20 (c) all of Borrower's presently existing and hereafter acquired general intangibles (including, without limitation, any and all choses or things in action, goodwill, patents, trade names, trademarks, blueprints, drawings, purchase orders, computer programs, computer discs, computer tapes, literature, reports, catalogues, deposit accounts and tax refunds) other than goods and accounts, as well as all of Borrower's Books relating to any of the foregoing, and the Proceeds of any of the foregoing, including cash and non-cash Proceeds; (d) all of Borrower's presently existing and hereafter acquired inventory including, without limitation, goods held for sale or lease or to be furnished under a contract of service, wherever located, and any documents of title representing any of the above, and the Proceeds of any of the foregoing, including cash and non-cash Proceeds; provided, however, anything in the foregoing notwithstanding the Collateral does not include, and Lender takes no security interest in, equipment leased by GE or any other equipment lessor to Borrower or Borrower's leasehold interest in such equipment. SECTION 4 SPECIFIC REPRESENTATIONS SECTION 4.1. NAME OF GUARANTOR; BORROWER. (a) The exact corporate name of Guarantor is American Shared Hospital Services. Guarantor was incorporated under the laws of the State of California. The following are all previous legal names of Guarantor: None. Guarantor uses the following trade names: None. The following are all other trade names used by Guarantor in the past: None. (b) The exact corporate name of CuraCare is CuraCare, Inc. CuraCare was incorporated under the laws of the State of Delaware. The following are all previous legal names of CuraCare: None. CuraCare uses the following trade names: None. The following are all other trade names used by CuraCare in the past: None. (c) The exact name of AS-CuraCare is American Shared-CuraCare. AS-CuraCare was formed under the laws of the 14 21 State of California. The following are all previous legal names of AS-CuraCare: None. AS-CuraCare uses the following trade names: None. The following are all other trade names used by AS-CuraCare in the past: None. SECTION 4.2. MERGERS AND CONSOLIDATIONS. Except as disclosed on Schedule 4.2, no entity has merged into any of Borrower or its Affiliates or been consolidated with Borrower or any Affiliate. SECTION 4.3. PURCHASE OF ASSETS. Except as disclosed on Schedule 4.3 no entity has sold substantially all of its assets to Borrower or any Affiliate or sold assets to Borrower or any Affiliate outside the ordinary course of such seller's business at any time in the past. SECTION 4.4. CHANGE OF NAME OR IDENTITY. Borrower shall not change its or its Affiliates' name, business structure or identity or use or permit any Affiliate to use any new trade name with prior notifications of Lender or merge or permit any Affiliate to merge into or consolidate with any other entity. SECTION 4.5. CORPORATE STRUCTURE. Guarantor is the direct or indirect holder of one hundred percent (100%) of the ownership interests, whether stock or partnership interests, of CuraCare and AS-CuraCare. Individual Guarantor is the holder of twenty-five percent (25%) or more of the common stock of Guarantor. Such common stock is the sole authorized class of stock in Guarantor. SECTION 5 PROVISIONS CONCERNING ACCOUNTS SECTION 5.1. OFFICE AND RECORDS OF BORROWER. Borrower's and Guarantor's chief executive offices are located at: Four Embarcadero Center, Suite 3620, San Francisco, California 94111. Borrower and Guarantor maintain all of their records with respect to Accounts at 1400 Lone Palm Avenue, Modesto, California 95351. Borrower and Guarantor have not at any time within the past four (4) months maintained their chief executive office or their records with respect to Accounts at any other location and shall not do so hereafter except with the prior written consent of Lender. 15 22 SECTION 5.2. REPRESENTATIONS. Borrower and Guarantor represent and warrant that each Account at the time of its assignment to Lender (a) will be owned solely by Borrower, (b) will be for a liquidated amount maturing as stated in Borrower's Books; (c) will be a bona fide existing obligation created by the rendition of services to Account Debtors or their insured by Borrower in the ordinary course of its business; and (d) will not be subject to any known deduction, offset, counterclaim, return privilege, or other condition, except as reflected on Borrower's Books. Borrower and Guarantor shall neither redate any invoices nor reissue new invoices in full or partial satisfaction of old invoices nor permit an Affiliate to do so. Allowances, if any, as between Borrower and its customers will be on the same basis and in accordance with the usual customary practices of Borrower as they exist on the date of this Agreement. SECTION 5.3. RETURNS AND REPOSSESSIONS. Borrower shall notify Lender within five (5) business days of occurrence of all material claims asserted by Account Debtors. SECTION 5.4. BORROWING BASE REPORTS. Borrower shall on a weekly basis execute and deliver to Lender, in a form satisfactory to Lender, (i) a Borrowing Base report; (ii) a detailed aging of Accounts; and (iii) a charges, collections and adjustment summary for the week. Borrower shall on a daily basis execute and deliver to Lender an updated Borrowing Base report reflecting additional daily billings, writeoffs and deposits and all of Borrower's accounts receivable data in a computer disc or tape format acceptable to Lender. Lender shall periodically review Borrower's actual adjustments to cash receipts and writeoffs, as well as Borrower's payor profile. To the extent Borrower's adjustments, writeoffs and payor profile materially changes, Lender may, in its sole discretion, change the Net Collectible Percentage attributable to each type of account by written notice to Borrower of such change. SECTION 5.5. SCHEDULES OF ACCOUNTS. From time to time, Borrower shall provide Lender with schedules describing in the aggregate all Accounts created or acquired by Borrower; provided, however, that Borrower's failure to execute and deliver such schedules or assignments shall not affect or limit Lender's security interests and other rights in and to the Accounts. 16 23 Together with each schedule, Borrower shall, if requested by Lender, furnish Lender with copies of Borrower's sales journals or invoices, customer purchase orders or the equivalent, and original shipping or delivery receipts for all goods sold, and Borrower warrants the genuineness thereof. SECTION 5.6. LENDER'S RIGHTS. Any officer, employee or agent of Lender shall have the right, at any time or times hereafter, in the name of Lender or its nominee (including Borrower), with prior notice to Borrower, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone or otherwise; and all reasonable costs thereof shall be payable by Borrower to Lender. Lender, or its designee may at any time after default by Borrower hereunder notify customers or Account Debtors that Accounts have been assigned to Lender or of Lender's security interest therein and after default by Borrower hereunder collect the same directly and charge all reasonable collection costs and expenses to Borrower's account. SECTION 5.7. DISCLAIMER OF LIABILITY. Lender shall not be liable to Borrower or any third person for the correctness, validity or genuineness of any instruments or documents released or endorsed to Borrower by Lender (which shall automatically be deemed to be without recourse to Lender in any event) or for the existence, character, quantity, quality, condition, value or delivery of any goods purporting to be represented by any such documents; and Lender, by accepting a Lien on the Collateral or by releasing any Collateral to Borrower, shall not be deemed to have assumed any obligation or liability to any supplier or creditor of Borrower or to any other third party. Borrower agrees to indemnify and defend Lender and hold it harmless in respect to any claim or proceeding arising out of any matter referred to in this Section 5.7. SECTION 5.8. POST DEFAULT RIGHTS. If an Event of Default has occurred and is continuing hereunder, no discount, credit or allowance shall be granted or permitted by Borrower to any Account Debtor. Lender may, after default by Borrower, settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms that Lender considers advisable, and in such cases, Lender will credit Borrower's account with only the net amounts received by Lender in payment of such disputed Accounts, after deducting all Lender Expenses incurred in connection therewith. 17 24 SECTION 5.9. ACCOUNTS OWED BY FEDERAL GOVERNMENT. If any Accounts shall arise out of a contract with the United States of America or any department, agency, subdivision or instrumentality thereof, Borrower shall promptly notify Lender thereof in writing and take all other action requested by Lender to protect Lender's Lien on such Accounts under the provisions of the federal laws on assignment of claims. SECTION 5.10. BUSINESS ACTIVITY REPORTS. Borrower and its Affiliates have filed and shall file all legally required notices and reports of its business activities with the California taxing authorities and the appropriate Governmental Authority of each other jurisdiction in which Borrower or an Affiliate is legally required to file such a notice or report. SECTION 6 PROVISIONS CONCERNING GENERAL INTANGIBLES SECTION 6.1. CONTRACTS. (a) Schedule 6.1. is a true and complete list of all material contracts and agreements to which Borrower or any Affiliate is a party. (b) Neither Borrower nor any of its Affiliates shall amend, modify or supplement any contract or agreement included in the Collateral or waive any provision thereof other than in accordance with Borrower's standard business practice, nor shall such standard business practice be materially changed without Lender's consent, which shall not be unreasonably withheld. (c) Borrower and its Affiliates shall remain liable to perform all of its duties and obligations under any contracts and agreements included in the Collateral to the same extent as if this Agreement had not been executed; and Lender shall not have any obligation or liability under such contracts and agreements by reason of this Agreement or otherwise. (d) Borrower and its Affiliates need not pay any amount due under any contract or agreement listed on Schedule 6.1, nor otherwise perform any action required under the terms of any such contract or agreement, if such payment or performance is being 18 25 contested in good faith by appropriate proceedings promptly initiated and diligently conducted, if Lender is notified in advance of such contest, and if Borrower or an Affiliate establishes any reserve or other appropriate provision required by generally accepted accounting principles and deposits with Lender cash or an acceptable bond reasonably requested by Lender. SECTION 7 OTHER PROVISIONS CONCERNING COLLATERAL SECTION 7.1. TITLE. Borrower has good and marketable title to the Collateral, and the Liens granted to Lender pursuant to this Agreement are fully perfected first-priority Liens, subject only to the terms of the Intercreditor Agreement and the proper filing of any financing statement or notice necessary to provide notice to third parties of the existence of such Liens, in and to the Collateral with priority over the rights of every person in the Collateral is free, clear, and unencumbered by any Liens in favor of any person other than Lender except for Permitted Liens. SECTION 7.2. FURTHER ASSURANCES. Borrower shall execute and deliver to Lender, concurrent with Borrower's execution of this Agreement and at any time or times hereafter at the request of Lender, all financing statements, continuation financing statements, security agreements, chattel mortgages, assignments, endorsements of certificates of title, applications for titles, affidavits, reports, notices, schedules of accounts, letters of authority and all other documents Lender may reasonably request, in form satisfactory to Lender, to perfect and maintain perfected Lender's Liens in the Collateral and in order to consummate fully all of the transactions contemplated under the Loan Documents. Borrower and Guarantor hereby irrevocably make, constitute and appoint Lender (and any of Lender's officers, employees or agents designated by Lender) as Borrower's and its Affiliates' true and lawful attorney with power to sign the name of Borrower and its Affiliates on any of the above-described documents or on any other similar documents that need to be executed, recorded or filed in order to perfect or continue perfected Lender's Liens in the Collateral. The appointment of Lender as Borrower's and its Affiliates' attorney is irrevocable as long as any Obligations are outstanding. Any person dealing with Lender shall be entitled to 19 26 rely conclusively on any written or oral statement of Lender that this power of attorney is in effect. SECTION 7.3. LENDER'S DUTY OF CARE. Lender shall have no duty of care with respect to the Collateral except that Lender shall exercise reasonable care with respect to the Collateral in Lender's custody. Lender shall be deemed to have exercised reasonable care if such property is accorded treatment substantially equal to that which Lender accords its own property or if Lender takes such action with respect to the Collateral as the Borrower shall request or agree to in writing provided that no failure to comply with any such request nor any omission to do any such act requested by the Borrower shall be deemed a failure to exercise reasonable care. Lender's failure to take steps to preserve rights against any parties or property shall not be deemed to be failure to exercise reasonable care with respect to the Collateral in Lender's custody. All risk, loss, damage or destruction of the Collateral shall be borne by Borrower. SECTION 7.4. REINSTATEMENT OF LIENS. If, at any time after payment in full by Borrower of all Obligations and termination of Lender's Liens, any payments on Obligations previously made by Borrower or any other Person must be disgorged by Lender for any reason whatsoever (including, without limitation, the insolvency, bankruptcy, or reorganization of Borrower or such other Person), this Agreement and Lender's Liens granted hereunder shall be reinstated as to all disgorged payments as though such payments had not been made, and Borrower shall sign and deliver to Lender all documents and things necessary to perfect all terminated Liens. SECTION 7.5. LENDER EXPENSES. If Borrower or an Affiliate fails to pay any moneys (whether taxes, assessments, insurance premiums or otherwise) due to third persons or entities, fails to make any deposits or furnish any required proof of payment or deposit or fails to discharge any Lien not permitted hereby, all as required under the terms of this Agreement, then Lender may, to the extent that it determines that such failure by Borrower or its Affiliates could have a material adverse effect on Lender's interests in the Collateral, in its discretion and without prior notice to Borrower, make payment of the same or any part thereof. Any amounts paid or deposited by Lender shall constitute Lender Expenses, shall become part of the Obligations, shall bear interest at the rate of eighteen percent (18%) per annum, and shall be 20 27 secured by the Collateral. Any payments made by Lender shall not constitute (a) an agreement by Lender to make similar payments in the future or (b) a waiver by Lender of any Event of Default under this Agreement. Lender need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance or Lien and the receipt of the usual official notice for the payment of moneys to a governmental entity shall be conclusive evidence that the same was validly due and owing. Borrower shall immediately and without demand reimburse Lender for all sums expended by Lender that constitute Lender Expenses, and Borrower hereby authorizes and approves all advances and payments by Lender for items constituting Lender Expenses. SECTION 7.6. INSPECTION OF RECORDS. During usual business hours, Lender shall have the right to inspect and verify Borrower's Books in order to verify the amount or condition of, or any other matter relating to, the Collateral and Guarantor's and Borrower's financial condition and Borrower agrees to reimburse Lender for its costs and expenses in doing so and to copy and make extracts therefrom. Guarantor and Borrower waive the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Lender pursuant to this Agreement and agrees that Lender may directly contact any such accounting firm or service bureau in order to obtain such information. SECTION 7.7. WAIVERS. Except as specifically provided for herein, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments, chattel paper and guaranties at any time held by Lender on which Borrower may in any way be liable. SECTION 8 REPRESENTATIONS AND WARRANTIES As of the date hereof Guarantor and Borrower each hereby warrants and represents to Lender the following: 21 28 SECTION 8.1. CORPORATE STATUS. Each of CuraCare, Guarantor and AS-CuraCare's general partners is a corporation validly existing and in good standing under the laws of the state of its incorporation; AS-CuraCare is a general partnership validly existing under the laws of the State of California; and each of such entities is qualified and licensed to do business and is in good standing in any state in which the conduct of its business or its ownership of property requires that it be so qualified or licensed, and has the power and authority (corporate and otherwise) to execute and carry out the terms of the Loan Documents to which it is a party, to own its assets and to carry on its business as currently conducted. SECTION 8.2. AUTHORIZATION. The execution, delivery, and performance by Borrower and Guarantor of this Agreement and each Loan Document have been duly authorized by all necessary corporate or partnership action. Borrower, Guarantor and Individual Guarantor have duly executed and delivered this Agreement and each Loan Document to which they are a party, and each of them constitutes a valid and binding obligation of Borrower, Guarantor and Individual Guarantor, as applicable, enforceable according to its terms except as limited by equitable principles and by bankruptcy, insolvency or similar laws affecting the rights of creditors generally. SECTION 8.3. NO BREACH. The execution, delivery and performance by Borrower, Guarantor and Individual Guarantor of this Agreement and each Loan Document to which they or an Affiliate is a party (a) will not contravene any law or any governmental rule or order binding on Collateral; (b) will not violate any provision of the articles of incorporation, bylaws or partnership agreement, as applicable, of Borrower or its Affiliates; (c) will not violate any agreement or instrument by which Borrower, its Affiliates or Individual Guarantor, as applicable, is bound; (d) do not require any notice to consent by any governmental body; and (e) will not result in the creation of a Lien on any assets of Borrower or its Affiliates except the Lien to Lender granted herein. SECTION 8.4. TAXES. All assessments and taxes, whether real, personal or otherwise, due or payable by or imposed, levied or assessed against Borrower, its Affiliates or any of their property have been paid in full before delinquency or before the expiration of any extension period; and Borrower and its Affiliates have made due and timely payment or deposit of all federal, state, 22 29 and local taxes, assessments or contributions required of it by law, except only for items that Borrower or its Affiliates are currently contesting diligently and in good faith and that have been fully disclosed in writing to Lender. SECTION 8.5. DEFERRED COMPENSATION PLANS. Borrower and each ERISA Affiliate have made all required contributions to all deferred compensation plans to which such person is required to contribute, and neither Borrower nor any ERISA Affiliate has any liability for any unfunded benefits of any single-employer or multi-employer plans. Neither Borrower nor any ERISA Affiliate is or at any time has been a sponsor of, provided, or maintained for any employees any defined benefit plan. SECTION 8.6. LITIGATION AND PROCEEDINGS. Except as set forth on Schedule 8.6 attached hereto, there are no outstanding judgments against Borrower, its Affiliates or any of their assets and there are no actions or proceedings pending by or against Borrower or its Affiliates before any court or administrative agency. Borrower has no knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower or its Affiliates, except for ongoing collection matters in which Borrower or its Affiliates are the plaintiff and except as set forth in Schedule 8.6 hereto. SECTION 8.7. BUSINESS. Borrower and its Affiliates have all franchises, authorizations, patents, trademarks, copyrights and other rights necessary to advantageously conduct their business. They are all in full force and effect and are not in known conflict with the rights of others. Neither Borrower nor any of its Affiliates is a party to or subject to any agreement or restriction that is so unusual or burdensome that it might have a material adverse effect on Borrower's or its Affiliates' business, properties or prospects. SECTION 8.8. LAWS AND AGREEMENTS. Borrower and its Affiliates are in compliance with all material agreements applicable to it, including obligations to contribute to any employee benefit plan or pension plan regulated by ERISA. Borrower and its Affiliates are in material compliance with all laws applicable to it. For purposes of this Section 8.8, compliance with the GE Affected Debt (as defined in the Intercreditor Agreement) shall mean that an "Event of Default", as such term is 23 30 defined with respect to the GE Affected Debt, has not occurred and is continuing with respect thereto. SECTION 8.9. FINANCIAL CONDITION. All financial statements and information relating to Borrower and its Affiliates that have been or may hereafter be delivered by Borrower to Lender are accurate and complete and have been prepared in accordance with generally accepted accounting principles consistently applied. Borrower and its Affiliates have no material obligations or liabilities of any kind not disclosed in that financial information, and there has been no material adverse change in the financial condition of Borrower or its Affiliates since the date of the most recent financial statements submitted to Lender. SECTION 8.10. HEALTH CARE LAWS. (a) Borrower and its Affiliates have obtained all permits, licenses and other authorizations that are required under Health Care Laws applicable to Borrower and such Affiliates are in compliance in all material respects with all terms and conditions of the required permits, licenses and authorizations, and are also in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such Health Care Laws. (b) Borrower is not aware of, and has not received notice of, any past, present or future events, conditions, circumstances, activities, practices, incidents, actions or plans that may interfere with or prevent compliance or continued compliance in any material respect with Health Care Laws. (c) There is no civil, criminal or administrative action, suit, demand, claim, hearing, notice or demand letter, notice of violation, investigation or proceeding pending or threatened against Borrower or its Affiliates, relating in any way to Health Care Laws. SECTION 8.11. CUMULATIVE REPRESENTATIONS. The warranties, representations and agreements set forth herein shall be cumulative and in addition to any and all other warranties, representations and agreements that Borrower shall give, or cause to be given, to Lender, either now or hereafter. 24 31 SECTION 9 COVENANTS SECTION 9.1. ENCUMBRANCE OF COLLATERAL. Borrower shall not create, incur, assume or permit to exist any Lien on any Collateral now owned or hereafter acquired by Borrower or its Affiliates, except for Liens to Lender and Permitted Liens. SECTION 9.2. BUSINESS. Borrower and its Affiliates shall engage primarily in business of the same general character as that now conducted by Borrower and its Affiliates. SECTION 9.3. CONDITION AND REPAIR. Borrower and its Affiliates shall maintain in good repair and working order all properties used in their business and from time to time shall make all appropriate repairs and replacements thereof. SECTION 9.4. TAXES. Borrower and its Affiliates shall pay all taxes, assessments and other governmental charges imposed upon it or any of its assets or in respect of any of its franchises, business, income or profits before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or might become a Lien or charge upon any of its assets, provided that (unless any material item or property would be lost, forfeited or materially impaired as a result thereof) no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted, if Lender is notified in advance of such contest, and if Borrower or an Affiliate establishes any reserve or other appropriate provision required by generally accepted accounting principles with Lender and deposits cash or an acceptable bond in an amount equal to twice the amount of such charge or claim. Borrower and its Affiliates shall make timely payment or deposit of all FICA payments and withholding taxes required of it by applicable laws and will, upon request, furnish Lender with proof satisfactory to Lender indicating that Borrower or an Affiliate has made such payments or deposits. SECTION 9.5. ACCOUNTING SYSTEM. Borrower and its Affiliates at all times hereafter shall maintain a standard and 25 32 modern system of accounting in accordance with generally accepted accounting principles consistently applied, with ledger and account cards or computer tapes, disks, printouts and records that contain information pertaining to the Collateral that may from time to time be requested by Lender. Borrower shall not modify or change its method of accounting or enter into any agreement hereafter with any third-party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm's or service bureau's agreeing to provide to Lender information regarding the Collateral and Borrower's financial condition. SECTION 9.6. FINANCIAL STATEMENTS. Guarantor shall submit monthly financial statements, showing a comparison of actual expenditures to budgeted amounts, with respect to Guarantor on a consolidated basis, to Lender as soon as available, and in any event within twenty (20) days of the end of each month. Guarantor shall provide Lender with copies of all reports filed by it with the Securities and Exchange Commission. Additionally, Guarantor will submit audited financial statements with respect to Guarantor on a consolidated basis to Lender as soon as available, and in any event within ninety (90) days of the end of each fiscal year. With all financial statements, Guarantor will also deliver a certificate of its chief financial officer attesting that no Event of Default or Unmatured Default under the Agreement has occurred and is continuing. SECTION 9.7. FURTHER INFORMATION. Guarantor or Borrower shall promptly supply Lender with such other information concerning its affairs as Lender may reasonably request from time to time hereafter and shall promptly notify Lender of any material adverse change in Borrower's financial condition and any condition or event that constitutes a breach of or event that constitutes an Event of Default under this Agreement. In addition, Borrower and Guarantor authorize Lender to contact credit reporting agencies concerning Guarantor's, Borrower's and its Affiliates' credit standing. SECTION 9.8. ERISA COVENANTS. Guarantor and Borrower shall, and shall cause each ERISA Affiliate to, comply with all applicable provisions of ERISA and all other laws applicable to any deferred compensation plans with which Guarantor, Borrower or any ERISA Affiliate is associated, and shall promptly notify Lender of the occurrence of any event that could result in any material 26 33 liability of Borrower to any person to any person whatsoever with respect to any such plan. SECTION 9.9. RESTRICTIONS ON MERGER, CONSOLIDATION, SALE OF ASSETS, ISSUANCE OF STOCK, ETC. Unless authorized by Lender, Guarantor and Borrower shall not, nor shall they permit any Affiliate, to: (a) merge or consolidate with any Person; (b) sell, lease or otherwise dispose of its assets in any transaction or series of related transactions (other than sales in the ordinary course of business); (c) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction; (d) acquire interests in excess of Two Hundred Forty Thousand Dollars ($240,000) in the aggregate in any calendar year in any business (whether by purchase of assets, purchase of stock, merger or otherwise); (e) become subject to any agreement or instrument which by its terms would restrict Guarantor's or Borrower's right or ability to perform any of its obligations to Lender pursuant to the terms of the Loan Documents (Lender acknowledges that compliance with the terms of the Intercreditor Agreement shall not constitute a breach of this clause 9.9(e)); or (f) authorize or issue any additional stock or equity interest other than the issuance by Guarantor of its common stock. SECTION 9.10. HEALTH CARE COVENANTS. (a) Borrower and its Affiliates shall comply in all material respects with, and will obtain all permits required by all Health Care Laws applicable to Borrower and such Affiliates. (b) Borrower shall promptly furnish to Lender a copy of any communication from any governmental authority concerning any possible violation of any Health Care Laws or any occurrence of which Borrower or an Affiliate would be required to notify any governmental authority with jurisdiction over Health Care Laws. 27 34 SECTION 9.11. DISTRIBUTIONS. Except as set forth on Schedule 9.11 hereto, Guarantor shall not make any Distributions and shall prohibit its Affiliates that are not directly or indirectly wholly-owned by Guarantor from making any Distributions. SECTION 9.12. SUBORDINATED OBLIGATIONS. Neither Borrower nor any Affiliate shall voluntarily prepay any principal (including the making of any sinking fund payment), interest or any other amount in respect of any obligations that are subordinate to Borrower's Obligations to Lender, including without limitation, its Obligations to GE pursuant to the Deferral Note issued pursuant to that certain Agreement dated November 1, 1994 among GE and Guarantor and its Affiliates ("Subordinate Obligations"). Notwithstanding the foregoing, Guarantor shall be permitted to prepay or repurchase any Senior-Subordinated Notes upon receipt by Lender of prior notice of such Prepayment or repurchase and certification by Guarantor that such prepayment or repurchase will not impair Borrower's ability to perform its obligations under this Agreement. SECTION 9.13. AMENDMENTS. Neither Borrower nor its Affiliates shall amend any provision of any Subordinate Obligation if such amendment would (i) affect any of the subordination provisions thereof, (ii) advance the date of any required payment or prepayment thereunder, (iii) make covenants therein more burdensome, when considered in their entirety, to Borrower or its Affiliates, or (iv) reduce any default or grace period therein provided, or (v) otherwise have a material adverse effect on the interests of Lender. SECTION 9.14. CAPITAL EXPENDITURES. Neither Borrower nor its Affiliates shall make capital expenditures (excluding for purposes of this Section 9.14 expenditures permitted pursuant to Section 9.15) in excess of Two Hundred Forty Thousand Dollars ($240,000) in any transaction (or group of related transactions) or One Million Dollars ($1,000,000) in the aggregate in any calendar year. SECTION 9.15. EQUIPMENT LEASES. Neither Borrower nor its Affiliates shall become the lessee under any operating or capital lease (or series of operating or capital leases with respect to assets that are related to the operation of a unit of equipment (including, without limitation, the unit, associated van or modular building, and related component parts)), if the 28 35 aggregate payments thereunder during any one calendar year exceed Two Hundred Forty Thousand Dollars ($240,000) with respect to such unit of equipment and assets that are related to the operation of such unit of equipment; provided, however, that Borrower and its Affiliates are expressly permitted to remain lessee under, and make all payments required by, any leases with GE, entered into on or about or prior to the date of this Agreement, subject in each case to the terms of the Intercreditor Agreement of applicable; provided, further, Borrower notifies Lender of the existence of such leases on or prior to the Closing Date. SECTION 9.16. LENDER CONSENTS. Borrower or Guarantor may request that Lender consent to any action prohibited by Sections 9.9 and 9.11 through 9.15 by delivering a written request which specifies in reasonable detail the nature of the proposed action. Lender agrees to consider such request in a timely fashion and will provide Borrower or Guarantor with a written response to such request. Nothing in this Section 9.16 shall be construed to require Lender to approve any such request. SECTION 10 EVENTS OF DEFAULT An Event of Default shall be deemed to exist if any of the following events shall have occurred and be continuing: (a) Borrower fails to make any payment of principal or interest or any other payment on the Note or any other Obligation when due and payable, by acceleration or otherwise, and such failure shall continue for five (5) business days after the payment is due; (b) Borrower fails to observe or perform any covenant, condition or agreement to be observed or performed pursuant to the terms hereof or any Loan Document to which it is a party and such failure is not cured as soon as reasonably practicable and in any event within thirty (30) days after written notice thereof by Lender; provided, however, that if such failure can not be cured within such thirty (30) day period, Borrower shall not be in default if the cure is commenced within such thirty (30) day period and thereafter such cure is diligently pursued to completion; 29 36 (c) A court enters a decree or order for relief in respect of Borrower or an Affiliate in an involuntary case under any applicable bankruptcy, insolvency, or other similar law then in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator (or other similar official) of Borrower or an Affiliate or for any substantial part of their property, or orders the windup or liquidation of Borrower's or an Affiliate's affairs; or a petition initiating an involuntary case under any such bankruptcy, insolvency, or similar law is filed against Borrower or an Affiliate and is pending for sixty (60) days without dismissal; (d) Borrower or an Affiliate commences a voluntary case under any applicable bankruptcy, insolvency or other similar law then in effect, makes any general assignment for the benefit of creditors, fails generally to pay its debts as such debts become due, or takes corporate action in furtherance of any of the foregoing; (e) Final judgment for the payment of money on any claim in excess of $100,000 is rendered against Borrower or an Affiliate and remains undischarged for twenty (20) days during which execution is not effectively stayed; (f) Guarantor or Individual Guarantor revoke or attempt to revoke their guaranty of any of the Obligations, or becomes the subject of an insolvency proceeding of the type described in clauses (c) or (d) above with respect to Borrower or fails to observe or perform any covenant, condition or agreement to be performed under any Loan Document to which it is a party; (g) Borrower or an Affiliate makes any payment on account of any Subordinate Obligations, other than payments specifically permitted by the terms of such subordination or this Agreement; (h) Any person holding any Subordinate Obligations becomes the subject of any proceeding resulting in the termination of the subordination arrangement, terminates the subordination arrangement or asserts that it is terminated. (i) Any Collateral or any part thereof is sold, agreed to be sold, conveyed or allocated by operation of law or otherwise; 30 37 (j) Borrower or an Affiliate defaults under the terms of any Indebtedness or lease involving total payment obligations of Borrower or an Affiliate in excess of $100,000 and such default is not cured within the time period permitted pursuant to the terms and conditions of such Indebtedness or lease, or an event occurs that gives any creditor or lessor the right to accelerate the maturity of any such indebtedness or lease payments; provided, however, with respect to any default under the GE Affected Debt (as defined in the Intercreditor Agreement) an Event of Default shall not be deemed to exist under this Agreement until such default constitutes an "Event of Default", as such term is defined with respect to the GE Affected Debt; (k) Demand is made for payment of any Indebtedness in excess of $100,000 that was not originally payable upon demand when incurred but the terms of which were later changed to provide for payment upon demand; (l) Borrower or an Affiliate is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; (m) A judgment or other claim in excess of $100,000 becomes a Lien upon any or all of Borrower's or its Affiliates' assets, other than a Permitted Lien; (n) A notice of Lien, levy or assessment in excess of $100,000 is filed of record with respect to any or all of Borrower's or its Affiliates' assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal or other Government Agency; or any tax or debt owing at any time hereafter to any one or more of such entities becomes a Lien upon any or all of Borrower's or its Affiliates' assets and the same is not paid on the payment date thereof, except to the extent such tax or debt is being contested by Borrower or an Affiliate as permitted in Section 8.4; (o) There is a material impairment of the value of the Collateral or priority of Lender's Liens on the Collateral; (p) Any of Borrower's or its Affiliates' assets in excess of $100,000 or any Collateral are seized, subjected to a distress warrant, levied upon or come into the possession of any judicial officer; 31 38 (q) Any representation or warranty made in writing to Lender by any officer of Borrower in connection with the transaction contemplated in this Agreement is materially incorrect when made; (r) Guarantor shall be in default with respect to any of its Obligations to Lender and such default is not cured within the time provided permitted pursuant to the terms and conditions of such Obligation; (s) Borrower shall be in default with respect to any of its Obligations to Lender or an Event of Default or an Unmatured Default occurs under the Other Loan Document; (t) If the aggregate dollar value of all judgments, defaults, demands, claims and notices of Liens under clauses (e), (j), (k), (m) and (n) hereof exceeds $250,000; or (u) Borrower shall fail to direct all receipts from Accounts to the Lock Box. SECTION 11 REMEDIES SECTION 11.1. SPECIFIC REMEDIES. Upon the occurrence of any Event of Default, subject in each case to the terms of the Intercreditor Agreement: (a) Lender may cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under the Other Loan Document, or under any other agreement between Borrower and Lender. (b) Lender may declare all Obligations to be due and payable immediately, whereupon they shall immediately become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by Borrower. (c) Lender may set off against the Obligations all Collateral, balances, credits, deposits, accounts, or moneys of Borrower or its Affiliates then or thereafter held with Lender, including amounts represented by certificates of deposit. 32 39 (d) Lender may enter any premises of Borrower or its Affiliates, with or without judicial process, and take possession of the Collateral; provided however, that Lender may only exercise such remedy if it may do so without a breach of the peace. Lender may remove the Collateral and may remove or copy all records pertaining thereto, or Lender may remain on such premises and use the premises for the purpose of collecting, preparing and disposing of the Collateral, without any liability for rent or occupancy charges. Borrower shall, upon request of Lender, assemble the Collateral and any records pertaining thereto and make them available at a place designated by Lender that is reasonably convenient to both parties. (e) Lender may dispose of the Collateral in its then-existing condition or, at its election, may take such measures as it deems necessary or advisable to improve, process, finish, operation, demonstrate and prepare for sale the Collateral, and may store, ship, reclaim, recover, protect, advertise for sale or lease and insure the Collateral. Lender may use and operate equipment of Borrower or its Affiliates in order to process or finish inventory included in the Collateral. If any Collateral consists of documents, Lender may proceed either as to the documents or as to the goods represented thereby. (f) Lender may pay, purchase, contest or compromise any encumbrance, charge or Lien that, in the opinion of Lender, appears to be prior or superior to its Lien and pay all reasonable expenses incurred in connection therewith. (g) Lender may (i) notify Account Debtors to make payment on Accounts directly to Lender; (ii) settle, adjust, compromise, extend or renew Accounts, whether before or after legal proceedings to collect such Accounts have commenced; (iii) prepare and file any bankruptcy proofs of claim or similar documents against any Account Debtor; (iv) prepare and file any notice, assignment, satisfaction, or release of Lien, UCC termination statement or any similar document; (v) sell or assign Accounts, individually or in bulk, upon such terms, for such amounts, and at such time or times as Lender deems advisable; (vi) complete the performance required of Borrower or its Affiliates under any contract or agreement to which Borrower or an Affiliate is a party and out of which Accounts arise or may arise. 33 40 (h) Lender may (i) endorse Borrower's or its Affiliates' name on all checks, notes, drafts, money orders or other forms of payment of or security for Accounts or other Collateral; (ii) sign Borrower's or its Affiliates' name on drafts drawn on Account Debtors or issuers of letters of credit; and (iii) notify the postal authorities in Borrower's or its Affiliates' name to change the address for delivery of Borrower's or its Affiliates' mail to an address designated by Lender, receive and open all mail addressed to Borrower or an Affiliate, copy all mail, return all mail relating to Collateral, and hold all other mail available for pickup by Borrower or an Affiliate. (i) Lender may sell the Collateral at public or private sale and is not required to repossess Collateral before selling it. Any requirement of reasonable notice of any disposition of the Collateral shall be satisfied if such notice is sent to Borrower, ten (10) days prior to such disposition by any of the methods provided in Section 13.5 hereof. Borrower shall be credited with the net proceeds of such sale only when they are actually received by Lender, and Borrower shall continue to be liable for any deficiency remaining after the Collateral is sold or collected. (j) If the sale is to be a public sale, Lender shall also give notice of the time and place by publishing a notice one time at least five (5) days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held. (k) To the maximum extent permitted by applicable law, Lender may be the purchaser of any or all of the Collateral at any public sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any public sale, to use and apply all or any part of the Obligations as a credit on account of the purchase price of any Collateral payable by Lender at such sale. SECTION 11.2. POWER OF ATTORNEY. Guarantor and Borrower hereby appoints Lender (and any of Lender's officers, employees, or agents designated by Lender) as Guarantor's and Borrower's attorney, with power whether before or after the occurrence of an Event of Default: (a) to endorse Borrower's or its Affiliates' name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into Lender's possession; (b) to sign Borrower's or its Affiliates' name on 34 41 drafts against Account Debtors, on schedules and assignments of Accounts, on verifications of Accounts, and on notices to Account Debtors; (c) to notify the post office authorities to change the address for delivery of Borrower's or its Affiliates' mail to an address designated by Lender, to receive and open all mail addressed to Borrower or an Affiliate and to retain all mail relating to the Collateral and forward all other mail to Borrower or an Affiliate; (d) to send requests for verification of Accounts; (e) to execute UCC Financing Statements; and (f) to do all things necessary to carry out this Agreement. The appointment of Lender as Borrower's attorney and each and every one of Lender's rights and powers, being coupled with an interest, are irrevocable as long as any Obligations are outstanding. Lender agrees not to exercise the power granted in clauses 11.2(a) through 11.2(c) prior to the occurrence of an Event of Default and agrees not to exercise the power granted in clause 11.2(d) prior to notification of Borrower of its intent to do so, but such limitations do not limit the effectiveness of such power of attorney at any time. Any person dealing with Lender shall be entitled to rely conclusively on any written or oral statement of Lender that this power of attorney is in effect. Lender may also use Borrower's stationery in connection with exercising its rights and remedies and performing the Obligations of Borrower. SECTION 11.3. EXPENSES SECURED. All expenses, including attorney fees, incurred by Lender in the exercise of its rights and remedies provided in this Agreement, in the Other Loan Document or by law shall be payable by Borrower to Lender, shall be part of the Obligations, and shall be secured by the Collateral. SECTION 11.4. EQUITABLE RELIEF. Borrower recognizes that in the event Borrower fails to perform, observe, or discharge any of its Obligations or liabilities under this Agreement, no remedy of law will provide adequate relief to Lender, and Borrower agrees that Lender shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. SECTION 11.5. REMEDIES ARE CUMULATIVE. No remedy set forth herein is exclusive of any other available remedy or remedies, but each is cumulative and in addition to every other right or remedy given under this Agreement or under any other agreement between Lender and Borrower or Guarantor or now or hereafter existing at law or in equity or by statute. Lender may 35 42 pursue its rights and remedies concurrently or in any sequence, and no exercise of one right or remedy shall be deemed to be an election. No delay by Lender shall constitute a waiver, election or acquiescence by it. Borrower on its behalf waives any rights to require Lender to (i) proceed against Guarantor or any other party; or (ii) proceed against or exhaust any security held from Guarantor. Lender may at any time and from time to time, without notice to, or consent of, Borrower, and without affecting or impairing the obligation of Borrower hereunder do any of the following: (i) renew or extend any Obligations of Guarantor, or of any other party at any time directly or contingently liable for payment of any of the Obligations of Guarantor; (ii) accept partial payments of the Obligations of Guarantor; (iii) settle, release (by operation of law or otherwise), compound, compromise, collect or liquidate any of the Obligations of Guarantor and the security therefor in any manner; (iv) consent to the transfer or sale of any security or bid and purchase at any sale of any security of Guarantor. Borrower expressly agrees that the validity of this Agreement and the Obligations of Borrower shall not be terminated, affected or impaired by reason of the waiving, delaying, exercising or non-exercising, of any of Lender's rights against Guarantor or as a result of the substitution, release, repossession, sale, disposition or destruction of any Collateral securing any Obligations of Guarantor. Lender shall not be released or discharged, either in whole or in part, by Lender's failure or delay to perfect or continue the perfection of any security interest in any Collateral which secures the Obligations of Guarantor or to protect the property covered by such security interest. SECTION 12 INDEMNITY SECTION 12.1. GENERAL INDEMNITY. Borrower shall protect, indemnify and defend and save harmless Lender and its directors, officers, agents and employees from and against any and all loss, cost, liability (including negligence, tort and strict liability), expense, damage, suits or demands (including fees and disbursements of counsel) on account of any suit or proceeding before any Governmental Authority which arises from the transactions contemplated in this Agreement or otherwise arising in connection with or relating to the Loan and any security therefor, 36 43 unless such suit, claim or damages are caused by the negligence or intentional malfeasance of Lender or its directors, officer, agents or employees. Upon receiving knowledge of any suit, claim or demand asserted by a third-party that Lender believes is covered by this indemnity, Lender shall give Borrower timely notice of the matter and an opportunity to defend it, at Borrower's sole cost and expense, with legal counsel acceptable to Lender. Lender may, at its option, also require Borrower to so defend the matter. This obligation on the part of Borrower shall survive the termination of this Agreement and the repayment of the Note. SECTION 13 MISCELLANEOUS SECTION 13.1. DELAY AND WAIVER. No delay or omission to exercise any right shall impair any such right or be a waiver thereof, but any such right may be exercised from time to time and as often as may be deemed expedient. A waiver on one occasion shall be limited to that particular occasion. SECTION 13.2. COMPLETE AGREEMENT. This Agreement and the Schedules are the complete agreement of the parties hereto and supersede all previous understandings relating to the subject matter hereof. This Agreement may be amended only by an instrument in writing that explicitly states that it amends this Agreement and is signed by the party against whom enforcement of the amendment is sought. This Agreement may be executed in counterparts, each of which will be an original and all of which will constitute a single agreement. SECTION 13.3. SEVERABILITY; HEADINGS. If any part of this Agreement or the application thereof to any person or circumstance is held invalid, the remainder of this Agreement shall not be affected thereby. The section headings herein are included for convenience only and shall not be deemed to be a part of this Agreement. SECTION 13.4. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the respective legal representatives, successors and assigns of the parties hereto; however, Borrower may not assign any of its rights or delegate any of its Obligations hereunder. Lender (and any subsequent assignee) 37 44 may transfer and assign this Agreement and deliver the Collateral to the assignee, who shall thereupon have all of the rights of Lender; and Lender (or such subsequent assignee who in turn assigns as aforesaid) shall then be relieved and discharged of any responsibility or liability with respect to this Agreement and said Collateral. SECTION 13.5. NOTICES. Any notices under or pursuant to this Agreement shall be deemed duly sent when delivered in hand or when mailed by registered or certified mail, return receipt requested, or when delivered by courier or when transmitted by telex, telecopy, or similar electronic medium to the following addresses: To Borrower: American Shared Hospital Services Four Embarcadero Center, Suite 3620 San Francisco, CA 94111 Attention: Ernest A. Bates, M.D. Telephone: (415) 788-5300 Telecopier: (415) 788-5660 To Lender: DVI Business Credit c/o DVI Financial Services Inc. 4041 MacArthur Ave. Suite 401 Newport Beach, CA 92660 Attention: Cynthia J. Cohn Executive Vice President Telephone: (714) 414-6100 Telecopier: (714) 414-6199 Copies to: Jeffrey J. Wong, Esq. Cooper, White & Cooper 201 California Street 17th Floor San Francisco, CA 94111 Telephone: (415) 433-1900 Facsimile: (415) 433-5530 38 45 Either party may change such address by sending notice of the change to the other party; such change of address shall be effective only upon actual receipt of the notice by the other party. SECTION 13.6. GOVERNING LAW. ALL ACTS AND TRANSACTIONS HEREUNDER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF CALIFORNIA. SECTION 13.7. JURISDICTION. Borrower agrees that the state and federal courts in Orange County, California or any other court in which Lender initiates proceedings have jurisdiction over all matters arising out of this Agreement and that service of process in any such proceeding shall be effective if mailed to Borrower at its address described in the Notices section of this Agreement. Borrower waives any right it may have to assert the defense of forum non conveniens or to object to such venue and hereby consents to any court-ordered relief. SECTION 13.8. WAIVER OF TRIAL BY JURY. LENDER, GUARANTOR AND BORROWER HEREBY WAIVE THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS AGREEMENT OR ANY OF THE SECURITY DOCUMENTS OR THE CONDUCT OF THE RELATIONSHIP BETWEEN LENDER, GUARANTOR AND BORROWER. 39 46 IN WITNESS WHEREOF, Borrower, Guarantor and Lender have executed this Agreement by their duly authorized officers as of the date first above written. BORROWER: LENDER: CURACARE, INC. DVI BUSINESS CREDIT CORPORATION By:____________________________________ By:_______________________________ Ernest A. Bates, M.D. Anthony Turek President Executive Vice President AMERICAN SHARED-CURACARE By: American Shared Hospital Services, general partner By:___________________________ Ernest A. Bates, M.D. President By: MMRI, Inc., general partner By:___________________________ Ernest A. Bates, M.D. President GUARANTOR: AMERICAN SHARED HOSPITAL SERVICES By:____________________________________ Ernest A. Bates, M.D. President 40 47 INDIVIDUAL GUARANTOR: _________________________________ ERNEST A. BATES, M.D. 41 EX-10.7 15 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.7 LOAN AND SECURITY AGREEMENT among AMERICAN SHARED-CURACARE and CURACARE, INC. Borrower, AMERICAN SHARED HOSPITAL SERVICES Guarantor, ERNEST A. BATES, M.D. Individual Guarantor and DVI FINANCIAL SERVICES INC. Lender Dated as of May 17, 1995 2 TABLE OF CONTENTS
Page ---- SECTION 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.1. SPECIFIC DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.2. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND UNIFORM COMMERCIAL CODE . . . . . . . . . . . . . . . . . . 6 SECTION 1.3. CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2 LOAN . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.1. THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.2. TERM AND REPAYMENT OF LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.3. PREPAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.4. CONDITIONS TO THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 3 SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3.1. GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4 SPECIFIC REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . 10 SECTION 4.1. NAME OF GUARANTOR; BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4.2. MERGERS AND CONSOLIDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 4.3. PURCHASE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 4.4. CHANGE OF NAME OR IDENTITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 4.5. CORPORATE STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5 PROVISIONS CONCERNING COLLATERAL . . . . . . . . . . . . . . . . . . 11 SECTION 5.1. TITLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.2. NO WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.3. FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 5.4. ADDITIONAL COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 5.5. LENDER'S DUTY OF CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 5.6. BORROWER'S CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.7. REINSTATEMENT OF LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.8. LENDER EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.9. INSPECTION OF COLLATERAL AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.10. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 6 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . 14 SECTION 6.1. CORPORATE STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 6.2. AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 6.3. NO BREACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
i 3 SECTION 6.4. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 6.5. DEFERRED COMPENSATION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 6.6. LITIGATION AND PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 6.7. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 6.8. LAWS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 6.9. FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 6.10. ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 6.11. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 6.12. OWNERSHIP OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 6.13. HEALTH CARE LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 6.14. CUMULATIVE REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 7 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 7.1. ENCUMBRANCE OF COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 7.2. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7.3. CONDITION AND REPAIR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7.4. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7.5. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7.6. ACCOUNTING SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7.7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 7.8. FURTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 7.9. ERISA COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 7.10. ENVIRONMENTAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 7.11. RESTRICTIONS ON MERGER, CONSOLIDATION, SALE OF ASSETS, ISSUANCE OF STOCK, ETC . . . . . . . . . . . . . . 20 SECTION 7.12. HEALTH CARE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 7.13. DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 7.14. SUBORDINATED OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 7.15. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 7.16. CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 7.17. EQUIPMENT LEASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 7.18. LENDER CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 8 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . 22 SECTION 9 REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 9.1. SPECIFIC REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 9.2. POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 9.3. EXPENSES SECURED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 9.4. EQUITABLE RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 9.5. REMEDIES ARE CUMULATIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 10 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 10.1. GENERAL INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 10.2. SPECIFIC ENVIRONMENTAL INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ii 4 SECTION 11 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 11.1. DELAY AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 11.2. COMPLETE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 11.3. SEVERABILITY; HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 11.4. BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 11.5. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 11.6. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 11.7. JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 11.8. WAIVER OF TRIAL BY JURY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SCHEDULES 1.1. LIENS 3.1. GRANT OF SECURITY INTEREST 4.2. MERGERS AND CONSOLIDATIONS 4.3. PURCHASE OF ASSETS OUTSIDE ORDINARY COURSE OF BUSINESS 6.6. LITIGATION AND PROCEEDINGS 6.11. INSURANCE 6.12. OWNERSHIP OF PROPERTY 7.13. PERMITTED DISTRIBUTIONS iii 5 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT ("Agreement") is entered into as of May 17, 1995 by and between DVI Financial Services Inc., a Delaware corporation ("Lender"), American Shared-CuraCare, a California general partnership ("AS-CuraCare") and CuraCare, Inc., a Delaware corporation ("CuraCare") (AS-CuraCare and CuraCare, collectively and individually referred to as "Borrower"), American Shared Hospital Services, a California corporation ("Guarantor") and Ernest A. Bates, M.D. ("Individual Guarantor"). SECTION 1 DEFINITIONS SECTION 1.1. SPECIFIC DEFINITIONS. The following definitions shall apply: (a) "Account Debtors" shall mean Borrower's and its Affiliates' customers and all other persons who are obligated or indebted to Borrower or any Affiliate in any manner, whether directly or indirectly, primarily or secondarily, contingently or otherwise, with respect to Accounts. (b) "Accounts" shall mean all accounts, contract rights, instruments, documents, chattel paper and obligations in any form owing to Borrower or any Affiliate arising out of the sale or lease of goods or the rendition of services by Borrower or any Affiliate whether or not earned by performance; all credit insurance, guaranties, letters of credit, advises of credit and other security for any of the above; all merchandise returned to or reclaimed by Borrower or any Affiliate; and Borrower's Books relating to any of the foregoing. (c) "Advance" shall mean an advance of loan proceeds constituting all or a part of the Loan. (d) "Affiliate" shall mean with respect to any Person any other Person which directly or indirectly Controls, is Controlled by or is under common Control with that Person. (e) "Borrower's Books" shall mean all of Borrower's and its Affiliates' books and records including but not limited to: minute books, ledgers; records indicating, summarizing or evidencing Borrower's and its Affiliates' assets, liabilities and the Accounts; all information relating to Borrower's and its Affiliates business operations or financial condition; and all computer programs, disk or tape files, printouts, runs and other computer-prepared information and the equipment containing such information; provided, however, that confidential patient records shall not be included therein, except to the extent otherwise provided by law. 1 6 (f) "Closing Date" shall mean the date of the first Advance of the Loan. (g) "Collateral" shall have the meaning specified in Section 3.1 hereof. (h) "Control" shall mean (i) the ownership of a majority of the voting power of all classes of voting stock of a corporation, or (ii) the ownership of a majority of the beneficial interest in income and capital of a person other than a corporation. (i) "Deed of Trust" shall mean a deed of trust among CuraCare, Lender and Chicago Title and Trust Company with respect to CuraCare's Modesto property. (j) "Distribution" shall mean, with respect to any shares of capital stock or any warrant or right to acquire shares of capital stock or any other equity security, (i) the retirement, redemption, purchase or other acquisition, directly or indirectly, for value by the issuer of any such security, except to the extent that the consideration therefor consists of shares of stock, (ii) the declaration or (without duplication) payment of any dividend in cash, directly or indirectly, on or with respect to any such security, (iii) any investment in the holder of five percent (5%) or more of any such security if a purpose of such investment is to avoid characterization of the transaction as a Distribution, and (iv) any other cash payment constituting a distribution under applicable laws with respect to such security. (k) "Environmental Laws" shall mean all federal, state, local and foreign laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes, and any and all regulations, codes, plans, orders, decrees, judgments, injunctions, notices, or demand letters issued, entered, promulgated, or approved thereunder. (l) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and all references to sections thereof shall include such sections and any predecessor provisions thereto, including any rules or regulations issued in connection therewith. (m) "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) that together with Borrower would be deemed a "contributing sponsor" to a single employee plan within the meaning of Section 4001 of ERISA. 2 7 (n) "Event of Default" shall have the meaning specified in Section 8 hereof. (o) "Governmental Authority" shall mean any governmental or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality thereof, or any court, tribunal, grand jury or arbitrator, in any case whether foreign or domestic. (p) "Guaranty" shall mean the Unconditional Continuing Guaranty executed by Guarantor unconditionally guaranteeing Borrower's Obligations under this Agreement. (q) "Health Care Laws" shall mean all federal, state and local laws relating to health care providers and health care services, including, but not limited to, Section 1877(a) of the Social Security Act as amended by the Omnibus Budget Reconciliation Act of 1993, 42 USC Section 1395nn. (r) "Indebtedness" of a Person shall mean (i) all items (except items of capital stock, capital or paid-in surplus or of retained earnings) which, in accordance with generally accepted accounting principles, would be included in determining total liabilities as shown on the liability side of the balance sheet of such Person as at the date as of which Indebtedness is to be determined, including any lease which, in accordance with generally accepted accounting principles would constitute indebtedness; (ii) all indebtedness secured by any mortgage, pledge, security, lien or conditional sale or other title retention agreement to which any property or asset owned or held by such Person is subject, whether or not the indebtedness secured thereby shall have been assumed; and (iii) all indebtedness of others which such Person has directly or indirectly guaranteed, endorsed (otherwise then for the collection or deposit in the ordinary course of business), discounted or sold with recourse or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, stock or equity purchase, capital contribution or otherwise) or otherwise to become directly or indirectly liable. (s) "Individual Guaranty" shall mean the Unconditional Continuing Guaranty executed by Individual Guarantor unconditionally guaranteeing Borrower's Obligations under this Agreement. (t) "Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated on or about the date hereof among Guarantor, AS-CuraCare, CuraCare, Lender, DVI Business Credit ("DVIBC") and General Electric Company, a New York corporation acting through GE Medical Systems ("GE"). (u) "Lender Expenses" shall mean (i) all costs or expenses (including, without limitation, taxes and insurance 3 8 premiums) required to be paid by Borrower or its Affiliates under this Agreement or under any of the other Loan Documents that are paid or advanced by Lender; (ii) filing, recording, publication and search fees paid or incurred by Lender in connection with Lender's transactions with Borrower; (iii) costs and expenses incurred by Lender to correct any Event of Default or enforce any provision of the Loan Documents or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, and preparing for sale or advertising to sell the Collateral, whether or not a sale is consummated, after the occurrence of an Event of Default; (iv) costs and expenses of suit incurred by Lender in enforcing or defending the Loan Documents or any portion thereof; (v) all costs or expenses incurred by Lender to convert any data submitted to Lender by Borrower or Guarantor to an acceptable form; and (vi) Lender's reasonable attorney fees and expenses incurred (before or after execution of this Agreement) in advising Lender with respect to, or in structuring, drafting, reviewing, negotiating, amending, terminating, enforcing, defending or otherwise concerning, the Security Documents or any portion thereof, irrespective of whether suit is brought. (v) "Lien" shall mean any security interest, mortgage, pledge, assignment, lien or other encumbrance of any kind, including any interest of a vendor under a conditional sale contract or consignment and any interest of a lessor under a capital lease. (w) "Loan" shall mean each loan or any other loan or loans made by Lender to Borrower pursuant to this Agreement. (x) "Loan Documents" shall mean (i) this Agreement; (ii) the Note; (iii) the Security Documents; (iv) any other agreements or documents hereafter delivered to secure repayment of the Loan; (v) the Lock Box Agreement and (vi) any other certificates, documents or instruments delivered by Borrower to Lender pursuant to the terms of this Agreement. (y) "Lock Box Agreement" shall mean the letter of direction with respect to those certain Lock Box Agreements between Borrower and First Interstate Bank of California and between Borrower and Bank of America NT&SA. (z) "Note" shall mean the Secured Promissory Note executed by Borrower pursuant to the terms of this Agreement. (aa) "Obligations" shall mean (i) the due and punctual payment of all amounts due or become due under the Note; (ii) the performance of all obligations of Borrower under this Agreement, the Note and all other Loan Documents; (iii) all extensions, renewals, modifications, amendments and refinancings of any of the foregoing; (iv) all Lender Expenses; (v) all loans, advances, indebtedness and other obligations owed by Borrower to Lender of every description whether now existing or hereafter arising (including those owed by Borrower to others and acquired by Lender 4 9 by purchase, assignment, or otherwise) and whether direct or indirect, primary or as guarantor or surety, absolute or contingent, liquidated or unliquidated, matured or unmatured, whether or not secured by additional collateral; and (vi) all loans, advances, indebtedness and other obligations owed by Borrower to Lender under the Other Loan Document of every description whether now existing or hereafter arising (including those owed by Borrower to others and acquired by Lender by purchase, assignment or otherwise) and whether direct or indirect, primary or as guarantor or surety, absolute or contingent, liquidated or unliquidated, matured or unmatured, whether or not secured by additional collateral. (bb) "Other Loan Document" shall mean that certain Loan and Security Agreement among Borrower, Guarantor, Individual Guarantor and DVIBC dated on or about the date hereof. (cc) "Permitted Liens" shall mean (i) Liens for property taxes and assessments or governmental charges or levies and Liens securing claims or demands of mechanics and materialmen, provided that payment thereof is not yet due or is being contested as permitted in this Agreement; (ii) Liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which has not expired, or in respect of which Borrower is in good faith prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review has been secured; (iii) Liens and priority claims incidental to the conduct of business or the ownership of properties and assets (including warehouse's and attorney's Liens and statutory landlord's Liens); deposits, pledges or Liens to secure the performance of bids, tenders, or trade contracts, or to secure statutory obligations; and surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided that in each case the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; and further provided that any such warehouse's or statutory landlord's Liens have been subordinated to the Liens of Lender in a manner satisfactory to Lender; and (iv) Liens existing on the date of this Agreement that secure indebtedness outstanding on such date and that are disclosed on Schedule 1.1 hereto; (dd) "Person" shall mean an individual, corporation, partnership, limited liability company, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), Governmental Authority or any other entity. (ee) "Proceeds" shall mean all proceeds and products of Collateral and all additions and accessions to, replacements of, insurance or condemnation proceeds of, and documents covering Collateral; all property received wholly or partly in trade or exchange for Collateral; all claims against third parties arising 5 10 out of damage, destruction, or decrease in value of the Collateral; all leases of Collateral; and all rents, revenues, issues, profits and proceeds arising from the sale, lease, license, encumbrance, collection or any other temporary or permanent disposition of the Collateral or any interest therein. (ff) "Security Documents" shall mean the Guaranty, the Individual Guaranty, the Deed of Trust and any agreement or instrument entered into between Borrower and Lender or executed by Borrower, Guarantor or Individual Guarantor and delivered to Lender in connection with this Agreement. (gg) "Senior-Subordinated Notes" shall mean Borrower's 16 1/2% Senior Subordinated Exchangeable Notes Due 1996 and Borrower's 14 3/4% Senior Subordinated Notes Due 1996. (hh) "Unmatured Default" shall mean any event or condition that, with notice, passage of time, or a determination by Lender or any combination of the foregoing would constitute an Event of Default. SECTION 1.2. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND UNIFORM COMMERCIAL CODE. All financial terms used in this Agreement other than those defined in this Section, have the meanings accorded to them under generally accepted accounting principles. All other terms used in this Agreement, other than those defined in this Section, have the meanings accorded to them in the Uniform Commercial Code as is enacted in any applicable jurisdiction. SECTION 1.3. CONSTRUCTION. (a) Unless the context of this Agreement clearly requires otherwise, the plural includes the singular, the singular includes the plural, the part includes the whole, "including" is not limiting, and "or" has the inclusive meaning of the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. (b) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Lender or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties and its counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish the purposes and intentions of all parties hereto fairly. 6 11 SECTION 2 LOAN SECTION 2.1. THE LOAN. Subject to the terms and conditions and relying on the representations and warranties set forth herein, Lender agrees to advance to Borrower, individually or collectively, and Borrower agrees to borrow from Lender, a senior secured term loan in the amount of Two Million Five Hundred Thousand Dollars ($2,500,000) which shall be evidenced by a Note. The proceeds of the Loan shall be used by Borrower to repay a portion of the Senior-Subordinated Notes and as a part of its working capital. SECTION 2.2. TERM AND REPAYMENT OF LOAN. The "Term" of the Loan shall be forty-eight (48) months and shall be payable in forty-eight (48) consecutive monthly installments of Seventy Thousand Five Dollars and 77/100 ($70,005.77) on the same day of each calendar month commencing on the Commencement Date set forth in the Note. All payments of principal and interest shall be paid in full without setoff, deduction or counterclaim. Lender shall be entitled to debit the lock box maintained pursuant to the Lock Box Agreement on the due date of each monthly installment for all amounts due and payable pursuant to this Agreement. SECTION 2.3. PREPAYMENT. The Loan shall not be subject to prepayment or redemption in whole or in part prior to the expiration of the Term. SECTION 2.4. CONDITIONS TO THE CLOSING. The obligation of Lender to make an Advance on the Closing Date is subject to Lender's determination that Borrower has satisfied the following conditions on the Closing Date: (a) The representations and warranties set forth in this Agreement and in the Other Loan Document shall be true and correct on and as of the date hereof and shall be true and correct in all material respects as of the Closing Date and Borrower shall have performed all obligations which were to have been performed by it hereunder prior to Closing Date. (b) Borrower shall have executed and delivered to Lender (or shall cause to be executed and delivered to Lender by the appropriate Persons) the following: (i) this Agreement; (ii) the Note; (iii) UCC-1 Financing Statements; (iv) the Guaranty; (v) the Individual Guaranty; 7 12 (vi) the Deed of Trust; (vii) the Intercreditor Agreement; (viii) the Lock Box Agreement; (ix) an updated Appraisal with respect to CuraCare's Modesto, California property, satisfactory to Lender verifying a fair market value of $830,000 or more; (x) evidence satisfactory to Lender that each of CuraCare, Guarantor and the general partners of AS- CuraCare is a corporation duly formed, validly existing and in good standing in the state in which it was formed and in each state in which it is authorized to do business; (xi) certificates of insurance that evidence the insurance coverage and policy provisions required by this Agreement and in the Loan Documents; (xii) a mortgagee's title insurance policy with respect to the Modesto property acceptable to Lender; (xiii) pay-off letters, UCC Termination Statements, and Mortgage and Lien Releases as required to grant Lender a first priority security interest other than Permitted Liens in Collateral pledged as security for repayment of the Loan; (xiv) repayment of the Senior-Subordinated Notes on terms and conditions satisfactory to Lender; (xv) certified copies of resolutions of the Board of Directors of CuraCare, Guarantor and the general partners of AS-CuraCare authorizing the execution and delivery of Loan Documents to be executed by Borrower and Guarantor; (xvi) copies of the Articles of Incorporation of each of CuraCare, Guarantor and the general partners of AS-Curacare, certified by the Secretary of State; (xvii) copies of the Bylaws of each of CuraCare, Guarantor and the general partners of AS-CuraCare certified by an officer thereof; (xviii) a copy of the Partnership Agreement of CuraCare certified by a general partner; (xix) the written opinion of counsel to Borrower issued on the Closing Date and satisfactory to Lender in scope and substance; and (xx) a certificate from an officer of Borrower indicating that the representations and warranties contained herein are true and correct as of the Closing Date. 8 13 (c) Borrower shall have paid closing fees to Lender including Lender's legal fees incurred by Lender for the negotiation and preparation of the Loan Documents. (d) Neither an Event of Default nor an Unmatured Default shall have occurred and be continuing. (e) None of Borrower, Guarantor nor Individual Guaranty shall not have suffered a material or adverse change in its business, operations or financial condition from that reflected in the Financial Statements of Borrower and Guarantor delivered to Lender or otherwise. (f) Lender shall have received such additional supporting documents, certificates and assurances as Lender shall reasonably request which shall be satisfactory to Lender in form and substance. SECTION 3 SECURITY INTEREST SECTION 3.1. GRANT OF SECURITY INTEREST. In order to secure prompt payment and performance of all Obligations, Borrower hereby grants to Lender a continuing first-priority pledge and security interest in the following property of Borrower, subject to the terms of the Intercreditor Agreement (the "Collateral"), whether now owned or existing or hereafter acquired or arising and regardless of where located subject only to Permitted Liens. This security interest in the Collateral shall attach to all Collateral without further action on the part of Lender or Borrower. Regardless of the manner of affixation, the Collateral shall remain the personal property and not become part of the real estate. Borrower agrees to keep the Collateral at the location(s) set forth in Schedule 3.1, and will notify Lender promptly, in writing, of any change in the location of the Collateral within such state, but will not remove the Collateral from such state without the prior written consent of Lender. The Collateral shall consist of the following, subject in each case only to Permitted Liens and the terms and conditions of the Intercreditor Agreement, together with such third-party consents, lien waivers and estoppel certificates as Lender shall reasonably require: (a) the real estate owned by CuraCare at its Modesto, California facility and the fixtures thereon, all as more completely described in the Deed of Trust; (b) all of Borrower's equipment and machinery listed on Schedule 3.1 and all machine tools, motors, tools, parts, attachments, accessories, accessions, replacements, upgrades, substitutions, additions and improvements related thereto, wherever 9 14 located, and the Proceeds of any of the foregoing, including cash and non-cash Proceeds; (c) all of Borrower's presently existing and hereafter arising Accounts, contract rights, instruments, notes, drafts, documents, chattel paper and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services, whether or not earned by performance, and any and all credit insurance, guarantees and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and all of Borrower's Books relating to any of the foregoing, and the Proceeds of any of the foregoing, including the pledge to it of the Accounts, cash and non-cash Proceeds; (d) all of Borrower's presently existing and hereafter acquired general intangibles (including, without limitation, any and all choses or things in action, goodwill, patents, trade names, trademarks, blueprints, drawings, purchase orders, computer programs, computer discs, computer tapes, literature, reports, catalogues, deposit accounts and tax refunds) other than goods and accounts, as well as all of Borrower's Books relating to any of the foregoing, and the Proceeds of any of the foregoing, including cash and non-cash Proceeds; (e) all of Borrower's presently existing and hereafter acquired inventory including, without limitation, goods held for sale or lease or to be furnished under a contract of service, wherever located, and any documents of title representing any of the above, and the Proceeds of any of the foregoing, including cash and non-cash Proceeds; provided, however, anything in the foregoing notwithstanding the Collateral does not include, and Lender takes no security interest in, equipment leased by GE or any other equipment lessor to Borrower or Borrower's leasehold interest in such equipment. SECTION 4 SPECIFIC REPRESENTATIONS SECTION 4.1. NAME OF GUARANTOR; BORROWER. The exact corporate name of Guarantor is American Shared Hospital Services. Guarantor was incorporated under the laws of the State of California. The following are all previous legal names of Borrower: None. Borrower uses the following trade names: None. The following are all other trade names used by Borrower in the past: None. (b) The exact corporate name of CuraCare is CuraCare, Inc. CuraCare was incorporated under the laws of the State of Delaware. The following are all previous legal names of CuraCare: None. CuraCare uses the following trade names: None. The following are all other trade names used by CuraCare in the past: None. 10 15 (c) The exact name of AS-CuraCare is American Shared- CuraCare. AS-CuraCare was formed under the laws of the State of California. The following are all previous legal names of AS-CuraCare: None. AS-CuraCare uses the following trade names: None. The following are all other trade names used by AS-CuraCare in the past: None. SECTION 4.2. MERGERS AND CONSOLIDATIONS. Except as disclosed on Schedule 4.2, no entity has merged into any of Borrower or its Affiliates or been consolidated with Borrower or any Affiliate. SECTION 4.3. PURCHASE OF ASSETS. Except as disclosed on Schedule 4.3 no entity has sold substantially all of its assets to Borrower or any Affiliate or sold assets to Borrower or any Affiliate outside the ordinary course of such seller's business at any time in the past. SECTION 4.4. CHANGE OF NAME OR IDENTITY. Borrower shall not change its or its Affiliates' name, business structure, or identity or use or permit any Affiliate to use any new trade name with prior notifications of Lender or merge or permit any Affiliate to merge into or consolidate with any other entity. SECTION 4.5. CORPORATE STRUCTURE. Guarantor is the direct or indirect holder of one hundred percent (100%) of the ownership interests, whether stock or partnership interests, of CuraCare and AS-CuraCare. Individual Guarantor is the holder of twenty-five percent (25%) or more of the common stock of Guarantor. Such common stock is the sole authorized class of stock in Guarantor. SECTION 5 PROVISIONS CONCERNING COLLATERAL SECTION 5.1. TITLE. Borrower has good and marketable title to the Collateral, and the Liens granted to Lender pursuant to this Agreement are fully perfected first-priority Liens, subject only the terms of the Intercreditor Agreement and the proper filing of any financing statement or notice necessary to provide notice to third parties of the existence of such Liens, in and to the Collateral with priority over the rights of every person in the Collateral is free, clear, and unencumbered by any Liens in favor of any person other than Lender except for Permitted Liens. SECTION 5.2. NO WARRANTIES. This Agreement is solely a financing agreement. Borrower acknowledges that with respect to the appropriate Collateral: the Collateral has or will have been selected and acquired solely by Borrower for Borrower's purposes; Lender is not the manufacturer, dealer, vendor or supplier of the Collateral; the Collateral is of a size, design, capacity, description and manufacturer selected by Borrower; Borrower is 11 16 satisfied that the Collateral is suitable and fit for its purposes; and LENDER HAS NOT MADE AND DOES NOT MAKE ANY WARRANTY OR REPRESENTATION WHATSOEVER, EITHER EXPRESS OR IMPLIED, AS TO THE FITNESS, CONDITION, MERCHANTABILITY, DESIGN OR OPERATION OF THE COLLATERAL, ITS FITNESS FOR ANY PARTICULAR PURPOSE, THE VALUE OF THE COLLATERAL, THE QUALITY OR CAPACITY OF THE MATERIALS IN THE COLLATERAL OR WORKMANSHIP IN THE COLLATERAL, NOR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER. SECTION 5.3. FURTHER ASSURANCES. Borrower and its Affiliates shall execute and deliver to Lender, concurrent with Borrower's execution of this Agreement and at any time or times hereafter at the request of Lender, all financing statements, continuation financing statements, security agreements, chattel mortgages, assignments, endorsements of certificates of title, applications for titles, affidavits, reports, notices, schedules of accounts, letters of authority and all other documents Lender may reasonably request, in form satisfactory to Lender, to perfect and maintain perfected Lender's Liens in the Collateral and in order to consummate fully all of the transactions contemplated under the Loan Documents. Borrower and Guarantor hereby irrevocably make, constitute, and appoint Lender (and any of Lender's officers, employees, or agents designated by Lender) as Borrower's and its Affiliates' true and lawful attorney with power to sign the name of Borrower and its Affiliates on any of the above-described documents or on any other similar documents that need to be executed, recorded, or filed in order to perfect or continue perfected Lender's Liens in the Collateral. The appointment of Lender as Borrower's and its Affiliates' attorney is irrevocable as long as any Obligations are outstanding. Any person dealing with Lender shall be entitled to rely conclusively on any written or oral statement of Lender that this power of attorney is in effect. SECTION 5.4. ADDITIONAL COLLATERAL. If there is a material impairment of the value of the Collateral, Borrower shall grant a security interest to Lender in additional assets satisfactory to Lender having a value at least equal to the decline in value of the existing Collateral. SECTION 5.5. LENDER'S DUTY OF CARE. Lender shall have no duty of care with respect to the Collateral except that Lender shall exercise reasonable care with respect to the Collateral in Lender's custody. Lender shall be deemed to have exercised reasonable care if such property is accorded treatment substantially equal to that which Lender accords its own property or if Lender takes such action with respect to the Collateral as the Borrower shall request or agree to in writing provided that no failure to comply with any such request nor any omission to do any such act requested by the Borrower shall be deemed a failure to exercise reasonable care. Lender's failure to take steps to preserve rights against any parties or property shall not be deemed to be failure to exercise reasonable care with respect to the Collateral in Lender's custody. All risk, loss, damage or destruction of the Collateral shall be borne by Borrower. 12 17 SECTION 5.6. BORROWER'S CONTRACTS. Borrower and its Affiliates shall remain liable to perform its Obligations under any contracts and agreements included in the Collateral to the same extent as though this Agreement had not been entered into and Lender shall not have any Obligation or liability under such contracts and agreements by reason of this Agreement or otherwise. SECTION 5.7. REINSTATEMENT OF LIENS. If, at any time after payment in full by Borrower of all Obligations and termination of Lender's Liens, any payments on Obligations previously made by Borrower or any other Person must be disgorged by Lender for any reason whatsoever (including, without limitation, the insolvency, bankruptcy, or reorganization of Borrower or such other Person), this Agreement and Lender's Liens granted hereunder shall be reinstated as to all disgorged payments as though such payments had not been made, and Borrower shall sign and deliver to Lender all documents and things necessary to perfect all terminated Liens. SECTION 5.8. LENDER EXPENSES. If Borrower or an Affiliate fails to pay any moneys (whether taxes, assessments, insurance premiums or otherwise) due to third persons or entities, fails to make any deposits or furnish any required proof of payment or deposit or fails to discharge any Lien not permitted hereby, all as required under the terms of this Agreement, then Lender may, to the extent that it determines that such failure by Borrower or its Affiliates could have a material adverse effect on Lender's interests in the Collateral, in its discretion and without prior notice to Borrower, make payment of the same or any part thereof. Any amounts paid or deposited by Lender shall constitute Lender Expenses, shall become part of the Obligations, shall bear interest at the rate of eighteen percent (18%) per annum, and shall be secured by the Collateral. Any payments made by Lender shall not constitute (a) an agreement by Lender to make similar payments in the future or (b) a waiver by Lender of any Event of Default under this Agreement. Lender need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance or Lien, and the receipt of the usual official notice for the payment of moneys to a governmental entity shall be conclusive evidence that the same was validly due and owing. Borrower shall immediately and without demand reimburse Lender for all sums expended by Lender that constitute Lender Expenses, and Borrower hereby authorizes and approves all advances and payments by Lender for items constituting Lender Expenses. SECTION 5.9. INSPECTION OF COLLATERAL AND RECORDS. During usual business hours, Lender may inspect and examine the Collateral and check and test the same as to quality, quantity, value and condition and Borrower agrees to reimburse Lender for its costs and expenses in so doing. Lender shall also have the right at any time or times hereafter, during usual business hours to inspect and verify Borrower's Books in order to verify the amount 13 18 or condition of, or any other matter relating to, the Collateral and Guarantor's and Borrower's financial condition and to copy and make extracts therefrom. Guarantor and Borrower waive the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Lender pursuant to this Agreement and agrees that Lender may directly contact any such accounting firm or service bureau in order to obtain such information. SECTION 5.10. WAIVERS. Except as specifically provided for herein, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments, chattel paper, and guaranties at any time held by Lender on which Borrower may in any way be liable. SECTION 6 REPRESENTATIONS AND WARRANTIES As of the date hereof Guarantor and Borrower each hereby warrants and represents to Lender the following: SECTION 6.1. CORPORATE STATUS. Each of CuraCare, Guarantor and AS-CuraCare's general partners is a corporation validly existing and in good standing under the laws of the state of its incorporation; AS-CuraCare is a general partnership validly existing under the laws of the State of California; and each of such entities is qualified and licensed to do business and is in good standing in any state in which the conduct of its business or its ownership of property requires that it be so qualified or licensed, and has the power and authority (corporate and otherwise) to execute and carry out the terms of the Loan Documents to which it is a party, to own its assets and to carry on its business as currently conducted. SECTION 6.2. AUTHORIZATION. The execution, delivery, and performance by Borrower and Guarantor of this Agreement and each Loan Document have been duly authorized by all necessary corporate or partnership action. Borrower, Guarantor and ndividual Guarantor have duly executed and delivered this Agreement and each Loan Document to which they are a party, and each of them constitutes a valid and binding obligation of Borrower, Guarantor and Individual Guarantor, as applicable, enforceable according to its terms except as limited by equitable principles and by bankruptcy, insolvency or similar laws affecting the rights of creditors generally. 14 19 SECTION 6.3. NO BREACH. The execution, delivery and performance by Borrower, Guarantor and Individual Guarantor of this Agreement and each Loan Document to which they or an Affiliate is a party (a) will not contravene any law or any governmental rule or order binding on Collateral; (b) will not violate any provision of the articles of incorporation, bylaws or partnership agreement, as applicable, of Borrower or its Affiliates; (c) will not violate any agreement or instrument by which Borrower, its Affiliates or Individual Guarantor, as applicable, is bound; (d) do not require any notice to consent by any governmental body; and (e) will not result in the creation of a Lien on any assets of Borrower or its Affiliates except the Lien to Lender granted herein. SECTION 6.4. TAXES. All assessments and taxes, whether real, personal or otherwise, due or payable by or imposed, levied or assessed against Borrower, its Affiliates or any of their property have been paid in full before delinquency or before the expiration of any extension period; and Borrower and its Affiliates have made due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law, except only for items that Borrower or its Affiliates are currently contesting diligently and in good faith and that have been fully disclosed in writing to Lender. SECTION 6.5. DEFERRED COMPENSATION PLANS. Borrower and each ERISA Affiliate have made all required contributions to all deferred compensation plans to which such person is required to contribute, and neither Borrower nor any ERISA Affiliate has any liability for any unfunded benefits of any single-employer or multi-employer plans. Neither Borrower nor any ERISA Affiliate is or at any time has been a sponsor of, provided, or maintained for any employees any defined benefit plan. SECTION 6.6. LITIGATION AND PROCEEDINGS. Except as set forth on Schedule 6.6 attached hereto, there are no outstanding judgments against Borrower, its Affiliates or any of their assets and there are no actions or proceedings pending by or against Borrower or its Affiliates before any court or administrative agency. Borrower has no knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower or its Affiliates, except for ongoing collection matters in which Borrower or its Affiliates are the plaintiff and except as set forth in Schedule 6.6 hereto. SECTION 6.7. BUSINESS. Borrower and its Affiliates have all franchises, authorizations, patents, trademarks, copyrights and other rights necessary to advantageously conduct their business. They are all in full force and effect and are not in known conflict with the rights of others. Neither Borrower nor any of its Affiliates is a party to or subject to any agreement or restriction that is so unusual or burdensome that it might have a material adverse effect on Borrower's or its Affiliates' business, properties or prospects. 15 20 SECTION 6.8. LAWS AND AGREEMENTS. Borrower and its Affiliates are in compliance with all material agreements applicable to it, including obligations to contribute to any employee benefit plan or pension plan regulated by ERISA. Borrower and its Affiliates are in material compliance with all laws applicable to it. For purposes of this Section 6.8 compliance with the GE Affected Debt (as defined in the Intercreditor Agreement) shall mean that an "Event of Default", as such term is defined with respect to the GE Affected Debt, has not occurred and is not continuing with respect thereto. SECTION 6.9. FINANCIAL CONDITION. All financial statements and information relating to Borrower and its Affiliates that have been or may hereafter be delivered by Borrower to Lender are accurate and complete and have been prepared in accordance with generally accepted accounting principles consistently applied. Borrower and its Affiliates have no material obligations or liabilities of any kind not disclosed in that financial information, and there has been no material adverse change in the financial condition of Borrower or its Affiliates since the date of the most recent financial statements submitted to Lender. SECTION 6.10. ENVIRONMENTAL LAWS. (a) Borrower and its Affiliates have obtained all permits, licenses, and other authorizations that are required under Environmental Laws and Borrower and its Affiliates are in compliance in all material respects with all terms and conditions of the required permits, licenses and authorizations, and are also in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws. (b) Borrower is not aware of, and has not received notice of, any past, present or future events, conditions, circumstances, activities, practices, incidents, actions or plans that may interfere with or prevent compliance or continued compliance in any material respect with Environmental Laws, or may give rise to any material common-law or legal liability, or otherwise form the basis of any material claim, action, demand, suit, proceeding, hearing, study or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling or the emission, discharge, release or threatened release into the environment, of any pollutant, contaminant, chemical, or industrial, toxic or hazardous substance or waste. (c) There is no civil, criminal or administrative action, suit, demand, claim, hearing, notice or demand letter, notice of violation, investigation, or proceeding pending or threatened against Borrower or any of its Affiliates, relating in any way to Environmental Laws. 16 21 SECTION 6.11. INSURANCE. Schedule 6.11 sets forth a complete and accurate list of all policies of fire, liability, product liability, workers' compensation, health, business interruption and other forms of insurance currently in effect with respect to Borrower's business, true copies of which have heretofore been delivered to Lender. All such policies are valid, outstanding and enforceable policies and, to the best knowledge of Borrower, each will remain in full force and effect at least through the respective dates set forth on Schedule 6.11. SECTION 6.12. OWNERSHIP OF PROPERTY. Except as set forth Schedule 6.12 hereto, Borrower has good and marketable title to all of its properties and assets, free and clear of all liens, security interests and encumbrances, except liens to secure repayment of the Loan. Borrower has the exclusive right to use all such assets. SECTION 6.13. HEALTH CARE LAWS. (a) Borrower and its Affiliates have obtained all permits, licenses and other authorizations that are required under Health Care Laws applicable to Borrower and such Affiliates are in compliance in all material respects with all terms and conditions of the required permits, licenses and authorizations, and are also in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such Health Care Laws. (b) Borrower is not aware of, and has not received notice of, any past, present or future events, conditions, circumstances, activities, practices, incidents, actions or plans that may interfere with or prevent compliance or continued compliance in any material respect with Health Care Laws. (c) There is no civil, criminal or administrative action, suit, demand, claim, hearing, notice or demand letter, notice of violation, investigation or proceeding pending or threatened against Borrower or its Affiliates, relating in any way to Health Care Laws. SECTION 6.14. CUMULATIVE REPRESENTATIONS. The warranties, representations and agreements set forth herein shall be cumulative and in addition to any and all other warranties, representations and agreements that Borrower shall give, or cause to be given, to Lender, either now or hereafter. SECTION 7 COVENANTS SECTION 7.1. ENCUMBRANCE OF COLLATERAL. Borrower shall not create, incur, assume or permit to exist any Lien on any 17 22 Collateral now owned or hereafter acquired by Borrower or its Affiliates, except for Liens to Lender and Permitted Liens. SECTION 7.2. BUSINESS. Borrower and its Affiliates shall engage primarily in business of the same general character as that now conducted by Borrower and its Affiliates. SECTION 7.3. CONDITION AND REPAIR. Borrower and its Affiliates shall maintain in good repair and working order all material properties used in their business and from time to time shall make all appropriate repairs and replacements thereof. SECTION 7.4. TAXES. Borrower and its Affiliates shall pay all taxes, assessments and other governmental charges imposed upon it or any of its assets or in respect of any of its franchises, business, income or profits before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or might become a Lien or charge upon any of its assets, provided that (unless any material item or property would be lost, forfeited or materially impaired as a result thereof) no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted, if Lender is notified in advance of such contest, and if Borrower or an Affiliate establishes any reserve or other appropriate provision required by generally accepted accounting principles and deposits with Lender cash or an acceptable bond in an amount equal to twice the amount of such charge or claim. Borrower and its Affiliates shall make timely payment or deposit of all FICA payments and withholding taxes required of it by applicable laws and will, upon request, furnish Lender with proof satisfactory to Lender indicating that Borrower or an Affiliate has made such payments or deposits. SECTION 7.5. INSURANCE. Borrower and its Affiliates shall maintain, with financially sound and reputable insurers, insurance with respect to its properties and business against loss or damage of the kinds and in the amounts customarily insured against by corporations of established reputation engaged in the same or similar businesses. Each such policy shall name Lender as an additional insured and, where applicable, as loss payee under a lender loss payable endorsement satisfactory to Lender and shall provide for thirty (30) days' written notice to Lender before such policy is altered or canceled. SECTION 7.6. ACCOUNTING SYSTEM. Borrower and its Affiliates at all times hereafter shall maintain a standard and modern system of accounting in accordance with generally accepted accounting principles consistently applied, with ledger and account cards or computer tapes, disks, printouts, and records that contain information pertaining to the Collateral that may from time to time be requested by Lender. Borrower shall not modify or change its method of accounting or enter into any agreement hereafter with any 18 23 third-party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm's or service bureau's agreeing to provide to Lender information regarding the Collateral and Borrower's financial condition. SECTION 7.7. FINANCIAL STATEMENTS. Guarantor shall submit monthly financial statements, showing a comparison of actual expenditures to budgeted amounts, with respect to Guarantor, on a consolidated basis, to Lender as soon as available, and in any event within twenty (20) days of the end of each month. Guarantor shall provide Lender with copies of all reports filed by it with the Securities and Exchange Commission. Additionally, Guarantor will submit audited financial statements with respect to Guarantor on a consolidated basis to Lender as soon as available, and in any event within ninety (90) days of the end of each fiscal year. With all financial statements, Guarantor will also deliver a certificate of its chief financial officer attesting that no Event of Default or Unmatured Default under the Agreement has occurred and is continuing. SECTION 7.8. FURTHER INFORMATION. Borrower shall promptly supply Lender with such other information concerning its affairs as Lender may reasonably request from time to time hereafter and shall promptly notify Lender of any material adverse change in Borrower's financial condition and any condition or event that constitutes a breach of or event that constitutes an Event of Default under this Agreement. In addition, Borrower and Guarantor authorize Lender to contact credit reporting agencies concerning Guarantor's, Borrower's and its Affiliates' credit standing. SECTION 7.9. ERISA COVENANTS. Borrower shall, and shall cause each ERISA Affiliate to, comply with all applicable provisions of ERISA and all other laws applicable to any deferred compensation plans with which Borrower or any ERISA Affiliate is associated, and shall promptly notify Lender of the occurrence of any event that could result in any material liability of Borrower to any person to any person whatsoever with respect to any such plan. SECTION 7.10. ENVIRONMENTAL COVENANTS. (a) Borrower and its Affiliates shall comply in all material respects with, and will obtain all permits required by, all Environmental Laws. (b) Borrower shall promptly furnish to Lender a copy of any communication from the U.S. Environmental Protection Agency or any other governmental authority concerning any possible violation of, or the filing of a lien pursuant to, any Environmental Laws or any occurrence of which Borrower or an Affiliate would be required to notify any governmental authority with jurisdiction over Environmental Laws. 19 24 SECTION 7.11. RESTRICTIONS ON MERGER, CONSOLIDATION, SALE OF ASSETS, ISSUANCE OF STOCK, ETC. Unless authorized by Lender, Guarantor and Borrower shall not, nor shall they permit any Affiliate to: (a) merge or consolidate with any Person; (b) sell, lease or otherwise dispose of its assets in any transaction or series of related transactions (other than sales in the ordinary course of business); (c) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction; (d) acquire interests in excess of Two Hundred Forty Thousand Dollars ($240,000) in the aggregate in any calendar year in any business (whether by purchase of assets, purchase of stock, merger or otherwise); (e) become subject to any agreement or instrument which by its terms would restrict Guarantor's right or ability to perform any of its obligations to Lender pursuant to the terms of the Loan Documents (Lender acknowledges that compliance with the terms of the Intercreditor Agreement shall not constitute a breach of this clause 7.11(e)); or (f) authorize or issue any additional stock or equity interest other than the issuance by Guarantor of its common stock. SECTION 7.12. HEALTH CARE COVENANTS. (a) Borrower and its Affiliates shall comply in all material respects with, and will obtain all permits required by, all Health Care Laws applicable to Borrower and such Affiliates. (b) Borrower shall promptly furnish to Lender a copy of any communication from any governmental authority concerning any possible violation of any Health Care Laws or any occurrence of which Borrower or an Affiliate would be required to notify any governmental authority with jurisdiction over Health Care Laws. SECTION 7.13. DISTRIBUTIONS. Except as set forth on Schedule 7.13 hereto, Guarantor shall not make any Distributions and shall prohibit its Affiliates that are not directly or indirectly wholly-owned by Guarantor from making any Distributions. SECTION 7.14. SUBORDINATED OBLIGATIONS. Neither Guarantor nor any Affiliate shall voluntarily prepay any principal (including the making of any sinking fund payment), interest or any other amount in respect of any Obligations that are subordinate to Borrower's obligations to Lender, including without limitation, its Obligations to GE pursuant to the Deferral Note issued pursuant to that certain Agreement dated November 1, 1994 among GE and Guarantor and its Affiliates ("Subordinate Obligations"). 20 25 Notwithstanding the foregoing, Guarantor shall be permitted to prepay or repurchase any Senior-Subordinated Notes upon receipt by Lender of prior notice of such repayment or repurchase and certification by Guarantor that such prepayment or repurchase will not impair Borrower's ability to perform its obligations under this Agreement. SECTION 7.15. AMENDMENTS. Neither Borrower nor its Affiliates shall amend any provision of any Subordinate Obligation if such amendment would (i) affect any of the subordination provisions thereof, (ii) advance the date of any required payment or prepayment thereunder, (iii) make covenants therein more burdensome, when considered in their entirety, to Borrower or its Affiliates, or (iv) reduce any default or grace period therein provided, or (v) otherwise have a material adverse effect on the interests of Lender. SECTION 7.16. CAPITAL EXPENDITURES. Neither Borrower nor its Affiliates shall make capital expenditures (excluding for purposes of this Section 7.16 expenditures permitted pursuant to Section 7.17) in excess of Two Hundred Forty Thousand Dollars ($240,000) in any transaction (or group of related transactions) or One Million Dollars ($1,000,000) in the aggregate in any calendar year. SECTION 7.17. EQUIPMENT LEASES. Neither Borrower nor its Affiliates shall become the lessee under any operating or capital lease (or series of operating or capital leases with respect to assets that are related to the operation of a unit of equipment (including, without limitation, the unit, associated van or modular building, and related component parts)), if the aggregate payments thereunder during any one calendar year exceed Two Hundred Forty Thousand Dollars ($240,000) with respect to such unit of equipment and assets that are related to the operation of such unit of equipment; provided, however, that Borrower and its Affiliates are expressly permitted to remain lessee under, and make all payments required by, any leases with GE, entered into on or about or prior to the date of this Agreement, subject in each case to the terms of the Intercreditor Agreement if applicable; provided, further, Borrower notifies Lender of the existence of such leases on or prior to the Closing Date. SECTION 7.18. LENDER CONSENTS. Borrower or Guarantor may request that Lender consent to any action prohibited by Sections 7.11 and 7.13 through 7.17 by delivering a written request which specifies in reasonable detail the nature of the proposed action. Lender agrees to consider such request in a timely fashion and will provide Borrower or Guarantor with a written response to such request. Nothing in this Section 7.18 shall be construed to require Lender to approve any such request. 21 26 SECTION 8 EVENTS OF DEFAULT An Event of Default shall be deemed to exist if any of the following events shall have occurred and be continuing: (a) Borrower fails to make any payment of principal or interest or any other payment on the Note or any other Obligation when due and payable, by acceleration or otherwise, and such failure shall continue for five (5) days after the payment is due; (b) Borrower fails to observe or perform any covenant, condition or agreement to be observed or performed pursuant to the terms hereof or any Loan Document to which it is a party and such failure is not cured as soon as reasonably practicable and in any event within thirty (30) days after written notice thereof by Lender; provided, however, that if such failure can not be cured within such thirty (30) day period, Borrower shall not be in default if the cure is commenced within such thirty (30) day period and thereafter such cure is diligently pursued to completion; (c) Borrower fails to keep its and its Affiliates' assets insured as required herein, or material uninsured damage to or loss, theft or destruction of the Collateral occurs; (d) A court enters a decree or order for relief in respect of Borrower or an Affiliate in an involuntary case under any applicable bankruptcy, insolvency, or other similar law then in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator (or other similar official) of Borrower or an Affiliate or for any substantial part of their property, or orders the windup or liquidation of Borrower's or an Affiliate's affairs; or a petition initiating an involuntary case under any such bankruptcy, insolvency, or similar law is filed against Borrower or an Affiliate and is pending for sixty (60) days without dismissal; (e) Borrower or an Affiliate commences a voluntary case under any applicable bankruptcy, insolvency or other similar law then in effect, makes any general assignment for the benefit of creditors, fails generally to pay its debts as such debts become due, or takes corporate action in furtherance of any of the foregoing; (f) Final judgment for the payment of money on any claim in excess of $100,000 is rendered against Borrower or an Affiliate and remains undischarged for twenty (20) days during which execution is not effectively stayed; (g) Guarantor revokes or attempts to revoke its guaranty of any of the Obligations, or becomes the subject of an insolvency proceeding of the type described in clauses (d) or (e) above with respect to Borrower or fails to observe or perform any covenant, 22 27 condition or agreement to be performed under any Loan Document to which it is a party; (h) Borrower or an Affiliate makes any payment on account of any Subordinate Obligations, other than payments specifically permitted by the terms of such subordination or this Agreement; (i) Any person holding any Subordinate Obligations becomes the subject of any proceeding resulting in the termination of the subordination arrangement, terminates the subordination arrangement or asserts that it is terminated. (j) Any Collateral or any part thereof is sold, agreed to be sold, conveyed or allocated by operation of law or otherwise; (k) Borrower or an Affiliate defaults under the terms of any Indebtedness or lease involving total payment obligations of Borrower or an Affiliate in excess of $100,000 and such default is not cured within the time period permitted pursuant to the terms and conditions of such Indebtedness or lease, or an event occurs that gives any creditor or lessor the right to accelerate the maturity of any such indebtedness or lease payments; provided, however, with respect to any default under the GE Affected Debt (as defined in the Intercreditor Agreement) an Event of Default shall not be deemed to exist under this Agreement until such default constitutes an "Event of Default", as such term is defined with respect to the GE Affected Debt; (l) Demand is made for payment of any Indebtedness in excess of $100,000 that was not originally payable upon demand when incurred but the terms of which were later changed to provide for payment upon demand; (m) Borrower or an Affiliate is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; (n) A judgment or other claim in excess of $100,000 becomes a Lien upon any or all of Borrower's or its Affiliates' assets, other than a Permitted Lien; (o) A notice of Lien, levy or assessment in excess of $100,000 is filed of record with respect to any or all of Borrower's or its Affiliates' assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal or other Government Agency; or any tax or debt owing at any time hereafter to any one or more of such entities becomes a Lien upon any or all of Borrower's or its Affiliates' assets and the same is not paid on the payment date thereof, except to the extent such tax or debt is being contested by Borrower or an Affiliate as permitted in Section 6.4; 23 28 (p) There is a material impairment of the value of the Collateral or priority of Lender's Liens on the Collateral; (q) Any of Borrower's or its Affiliates' assets in excess of $100,000 or any Collateral are seized, subjected to a distress warrant, levied upon or come into the possession of any judicial officer; (r) Any representation or warranty made in writing to Lender by any officer of Borrower in connection with the transaction contemplated in this Agreement is materially incorrect when made; (s) Guarantor shall be in default with respect to any of its Obligations to Lender or an Event of Default or an Unmatured Default occurs under the Other Loan Document; or (t) If the aggregate dollar value of all judgments, defaults, demands, claims and notices of Liens under clauses (f), (k), (l), (n) and (o) hereof exceeds $250,000. SECTION 9 REMEDIES SECTION 9.1. SPECIFIC REMEDIES. Upon the occurrence of any Event of Default, subject in each case to the terms of the Intercreditor Agreement: (a) Lender may declare all Obligations to be due and payable immediately, whereupon they shall immediately become due and payable without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by Borrower. (b) Lender may set off against the Obligations all Collateral, balances, credits, deposits, accounts, or moneys of Borrower then or thereafter held with Lender, including amounts represented by certificates of deposit. (c) Lender may enter any premises of Borrower or its Affiliates, with or without judicial process, and take possession of the Collateral; provided however, that Lender may only exercise such remedy if it may do so without a breach of the peace. Lender may remove the Collateral and may remove or copy all records pertaining thereto, or Lender may remain on such premises and use the premises for the purpose of collecting, preparing and disposing of the Collateral, without any liability for rent or occupancy charges. Borrower shall, upon request of Lender, assemble the Collateral and any records pertaining thereto and make them available at a place designated by Lender that is reasonably convenient to both parties. 24 29 (d) Lender may dispose of the Collateral in its then-existing condition or, at its election, may take such measures as it deems necessary or advisable to improve, process, finish, operation, demonstrate and prepare for sale the Collateral, and may store, ship, reclaim, recover, protect, advertise for sale or lease, and insure the Collateral. Lender may use and operate equipment of Borrower or its Affiliates in order to process or finish inventory included in the Collateral. If any Collateral consists of documents, Lender may proceed either as to the documents or as to the goods represented thereby. (e) Lender may pay, purchase, contest, or compromise any encumbrance, charge or Lien that, in the opinion of Lender, appears to be prior or superior to its Lien and pay all reasonable expenses incurred in connection therewith. (f) Lender may (i) endorse Borrower's or its Affiliates' name on all checks, notes, drafts, money orders or other forms of payment of or security for Accounts or other Collateral; (ii) sign Borrower's or its Affiliates' name on drafts drawn on Account Debtors or issuers of letters of credit; and (iii) notify the postal authorities in Borrower's or its Affiliates' name to change the address for delivery of Borrower's or its Affiliates' mail to an address designated by Lender, receive and open all mail addressed to Borrower or an Affiliate, copy all mail, return all mail relating to Collateral, and hold all other mail available for pickup by Borrower or an Affiliate. (g) Lender may sell the Collateral at public or private sale and is not required to repossess Collateral before selling it. Any requirement of reasonable notice of any disposition of the Collateral shall be satisfied if such notice is sent to Borrower, ten (10) days prior to such disposition by any of the methods provided in Section 11.5 hereof. Borrower shall be credited with the net proceeds of such sale only when they are actually received by Lender, and Borrower shall continue to be liable for any deficiency remaining after the Collateral is sold or collected. (h) If the sale is to be a public sale, Lender shall also give notice of the time and place by publishing a notice one time at least five (5) days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held. (i) To the maximum extent permitted by applicable law, Lender may be the purchaser of any or all of the Collateral at any public sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any public sale, to use and apply all or any part of the Obligations as a credit on account of the purchase price of any Collateral payable by Lender at such sale. SECTION 9.2. POWER OF ATTORNEY. Guarantor and Borrower hereby appoint Lender (and any of Lender's officers, employees, or 25 30 agents designated by Lender) as Guarantor's and Borrower's attorney, with power whether before or after the occurrence of an Event of Default: (a) to endorse Borrower's or its Affiliates' name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into Lender's possession; (b) to sign Borrower's or its Affiliates' name on drafts against Account Debtors, on schedules and assignments of Accounts, on verifications of Accounts, and on notices to Account Debtors; (c) to notify the post office authorities to change the address for delivery of Borrower's or its Affiliates' mail to an address designated by Lender, to receive and open all mail addressed to Borrower or an Affiliate and to retain all mail relating to the Collateral and forward all other mail to Borrower or an Affiliate; (d) to send requests for verification of Accounts; (e) to execute UCC Financing Statements; and (f) to do all things necessary to carry out this Agreement. The appointment of Lender as Borrower's attorney and each and every one of Lender's rights and powers, being coupled with an interest, are irrevocable as long as any Obligations are outstanding. Lender agrees not to exercise the power granted in clauses 9.2(a) through 9.2(c) prior to the occurrence of an Event of Default and agrees not to exercise the power granted in clause 9.2(d) prior to notification of Borrower of its intent to do so, but such limitations do not limit the effectiveness of such power of attorney at any time. Any person dealing with Lender shall be entitled to rely conclusively on any written or oral statement of Lender that this power of attorney is in effect. Lender may also use Borrower's stationery in connection with exercising its rights and remedies and performing the Obligations of Borrower. SECTION 9.3. EXPENSES SECURED. All expenses, including attorney fees, incurred by Lender in the exercise of its rights and remedies provided in this Agreement, in the Other Loan Document or by law shall be payable by Borrower to Lender, shall be part of the Obligations, and shall be secured by the Collateral. SECTION 9.4. EQUITABLE RELIEF. Borrower recognizes that in the event Borrower fails to perform, observe, or discharge any of its Obligations or liabilities under this Agreement, no remedy of law will provide adequate relief to Lender, and Borrower agrees that Lender shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. SECTION 9.5. REMEDIES ARE CUMULATIVE. No remedy set forth herein is exclusive of any other available remedy or remedies, but each is cumulative and in addition to every other right or remedy given under this Agreement or under any other agreement between Lender and Borrower or Guarantor or now or hereafter existing at law or in equity or by statute. Lender may pursue its rights and remedies concurrently or in any sequence, and no exercise of one right or remedy shall be deemed to be an election. No delay by Lender shall constitute a waiver, election, or acquiescence by it. Borrower on its behalf waives any rights to 26 31 require Lender to (i) proceed against Guarantor or any other party; or (ii) proceed against or exhaust any security held from Guarantor. Lender may at any time and from time to time, without notice to, or consent of, Borrower, and without affecting or impairing the obligation of Borrower hereunder do any of the following: (i) renew or extend any Obligations of Guarantor, or of any other party at any time directly or contingently liable for payment of any of the Obligations of Guarantor; (ii) accept partial payments of the Obligations of Guarantor; (iii) settle, release (by operation of law or otherwise), compound, compromise, collect or liquidate any of the Obligations of Guarantor and the security therefor in any manner; (iv) consent to the transfer or sale of any security or bid and purchase at any sale of any security of Guarantor. Borrower expressly agrees that the validity of this Agreement and the Obligations of Borrower shall not be terminated, affected or impaired by reason of the waiving, delaying, exercising or non-exercising, of any of Lender's rights against Guarantor or as a result of the substitution, release, repossession, sale, disposition or destruction of any Collateral securing any Obligations of Guarantor. Lender shall not be released or discharged, either in whole or in part, by Lender's failure or delay to perfect or continue the perfection of any security interest in any Collateral which secures the Obligations of Guarantor or to protect the property covered by such security interest. SECTION 10 INDEMNITY SECTION 10.1. GENERAL INDEMNITY. Borrower shall protect, indemnify and defend and save harmless Lender and its directors, officers, agents and employees from and against any and all loss, cost, liability including negligence, tort and strict liability), expense, damage, suits or demands (including fees and disbursements of counsel) on account of any suit or proceeding before any Governmental Authority which arises from the transactions contemplated in this Agreement or otherwise arising in connection with or relating to the Loan and any security therefor, unless such suit, claim or damages are caused by the negligence or intentional malfeasance of Lender or its directors, officer, agents or employees. Upon receiving knowledge of any suit, claim or demand asserted by a third-party that Lender believes is covered by this indemnity, Lender shall give Borrower timely notice of the matter and an opportunity to defend it, at Borrower's sole cost and expense, with legal counsel acceptable to Lender. Lender may, at its option, also require Borrower to so defend the matter. This obligation on the part of Borrower shall survive the termination of this Agreement and the repayment of the Note. SECTION 10.2. SPECIFIC ENVIRONMENTAL INDEMNITY. Borrower hereby agrees unconditionally to indemnify, defend and 27 32 hold harmless Lender, its directors, officers, employees and agents against any loss, liability, damage or expense or claim arising under any Environmental Laws having jurisdiction over the property or assets of Borrower or its Affiliates or any portion thereof or its use. SECTION 11 MISCELLANEOUS SECTION 11.1. DELAY AND WAIVER. No delay or omission to exercise any right shall impair any such right or be a waiver thereof, but any such right may be exercised from time to time and as often as may be deemed expedient. A waiver on one occasion shall be limited to that particular occasion. SECTION 11.2. COMPLETE AGREEMENT. This Agreement and the Schedules are the complete agreement of the parties hereto and supersede all previous understandings relating to the subject matter hereof. This Agreement may be amended only by an instrument in writing that explicitly states that it amends this Agreement and is signed by the party against whom enforcement of the amendment is sought. This Agreement may be executed in counterparts, each of which will be an original and all of which will constitute a single agreement. SECTION 11.3. SEVERABILITY; HEADINGS. If any part of this Agreement or the application thereof to any person or circumstance is held invalid, the remainder of this Agreement shall not be affected thereby. The section headings herein are included for convenience only and shall not be deemed to be a part of this Agreement. SECTION 11.4. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the respective legal representatives, successors and assigns of the parties hereto; however, Borrower may not assign any of its rights or delegate any of its Obligations hereunder. Lender (and any subsequent assignee) may transfer and assign this Agreement and deliver the Collateral to the assignee, who shall thereupon have all of the rights of Lender; and Lender (or such subsequent assignee who in turn assigns as aforesaid) shall then be relieved and discharged of any responsibility or liability with respect to this Agreement and said Collateral. SECTION 11.5. NOTICES. Any notices under or pursuant to this Agreement shall be deemed duly sent when delivered in hand or when mailed by registered or certified mail, return receipt requested, or when delivered by courier or when transmitted by telex, telecopy, or similar electronic medium to the following addresses: 28 33 To Borrower: American Shared Hospital Services Four Embarcadero Center, Suite 3620 San Francisco, CA 94111 Attention: Ernest A. Bates, M.D. Telephone: (415) 788-5300 Telecopier: (415) 788-5660 To Lender: DVI Business Credit c/o DVI Financial Services Inc. 500 Hyde Park Doylestown, PA 18901 Attention: Michael A. O'Hanlon Telephone: (215) 345-6600 Telecopier: (215) 230-8108 Copies to: Jeffrey J. Wong, Esq. Cooper, White & Cooper 201 California Street 17th Floor San Francisco, CA 94111 Telephone: (415) 433-1900 Facsimile: (415) 433-5530 Either party may change such address by sending notice of the change to the other party; such change of address shall be effective only upon actual receipt of the notice by the other party. SECTION 11.6. GOVERNING LAW. ALL ACTS AND TRANSACTIONS HEREUNDER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF CALIFORNIA. SECTION 11.7. JURISDICTION. Borrower agrees that the state and federal courts in Orange County, California or any other court in which Lender initiates proceedings have jurisdiction over all matters arising out of this Agreement and that service of process in any such proceeding shall be effective if mailed to Borrower at its address described in the Notices section of this Agreement. Borrower waives any right it may have to assert the defense of forum non conveniens or to object to such venue and hereby consents to any court-ordered relief. SECTION 11.8. WAIVER OF TRIAL BY JURY. LENDER, GUARANTOR AND BORROWER HEREBY WAIVE THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS AGREEMENT OR ANY OF THE SECURITY DOCUMENTS OR THE CONDUCT OF THE RELATIONSHIP BETWEEN LENDER, GUARANTOR AND BORROWER. 29 34 IN WITNESS WHEREOF, Borrower, Guarantor, Individual Guarantor and the Lender have executed this Agreement by their duly authorized officers as of the date first above written. BORROWER: LENDER: CURACARE, INC. DVI FINANCIAL SERVICES INC. By: By: ------------------------------ -------------------------- Ernest A. Bates, M.D. Richard E. Miller President President AMERICAN SHARED-CURACARE By: American Shared Hospital Services, general partner By: ------------------------- Ernest A. Bates, M.D. President By: MMRI, Inc., general partner By: ------------------------- Ernest A. Bates, M.D. President GUARANTOR: AMERICAN SHARED HOSPITAL SERVICES By: ----------------------------------- Ernest A. Bates President INDIVIDUAL GUARANTOR: - --------------------------------------- ERNEST A. BATES, M.D. 30 EX-10.8 16 UNCONDITIONAL CONTINUING GUARANTY 1 EXHIBIT 10.8 UNCONDITIONAL CONTINUING GUARANTY (Loan Agreement) THIS UNCONDITIONAL CONTINUING GUARANTY ("Guaranty") is made and entered into as of May 17, 1995, for the benefit of _________________________________ ("Lender"), whose principal place of business is located at 4041 MacArthur Ave., Suite 401, Newport Beach, California 92660, by American Shared Hospital Services, a California corporation ("Guarantor"), whose principal place of business is located at Four Embarcadero Center, Suite 3620, San Francisco California 94111. RECITALS A. Guarantor directly or indirectly owns all of the ownership interests in American Shared-CuraCare, a California general partnership, and CuraCare, Inc., a Delaware corporation ("collectively and individually, "Borrower"). AGREEMENT 1. Guaranty. In order to induce Lender, and in consideration thereof, to enter into that certain Loan and Security Agreement dated as of the date hereof (the "Agreement") with Borrower, Guarantor and Ernest A. Bates, M.D., and any future agreements with Borrower, Guarantor unconditionally, absolutely and irrevocably guarantees and promises to Lender to pay, perform and discharge, any and all present and future indebtedness, liabilities and obligations (collectively "Obligations") of Borrower to Lender, including but not limited to the repayment to Lender of all sums presently due and owing and of all sums that shall in the future become due and owing from Borrower whether arising under the Agreement or otherwise. 2. Obligations. The Obligations of Borrower include any and all loans, advances, indebtedness and other obligations owed by Borrower to Lender of every description whether now existing or hereafter arising (including those owed to others by Borrower and acquired by Lender by purchase, assignment or otherwise) and include Obligations that are: (a) direct or indirect; (b) fixed or contingent; (c) primary or as guarantor or surety; (d) liquidated or unliquidated; (e) matured or unmatured; (f) acquired by pledge, assignment, security interest or purchase; (g) secured or unsecured; (h) primary or secondary; (i) joint, several or joint and several; (j) represented by letters of credit now or hereafter issued by Lender for the benefit of or at the request of Borrower; and (k) all of Lender's expenses, included but not limited to (i) all reasonable costs or expenses, including without limitation, taxes and insurance premiums, required to be paid by Borrower under the Agreement that are paid or advanced by Lender, (ii) all filing, recording, publication and search fees paid or incurred by Lender in connection with Lender's transactions with Borrower, (iii) all costs and expenses incurred by Lender to correct any Event of Default (as defined in the Agreement) or enforce any provision of the Agreement, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale or advertising to sell any security for the Obligations, whether or not a sale is consummated, after the occurrence of an Event of Default (iv) all costs and expenses of suit incurred by Lender and enforcing or defending the Agreement or any portion thereof, and (v) all reasonable Lender's attorney's fees and expenses incurred in advising, structuring, drafting, 1 2 reviewing, negotiating, amending, terminating, enforcing, defending or concerning the Agreement or any portion thereof, irrespective of whether suit is brought, and includes each Borrower's prompt, full and faithful performance, observance and discharge of each and every term, condition, agreement, representation, warranty, undertaking and provision to be performed by Borrower under the Agreement. 3. Attorneys' Fees. Guarantor agrees to pay Lender the costs and expenses of the enforcement of this Guaranty, including attorneys' fees. 4. Waivers. (a) Scope of Risk Defenses. Lender may at any time and from time to time, without notice to, or the consent of, Guarantor, and without affecting or impairing the obligation of Guarantor hereunder, do any of the following: (i) renew or extend any Obligations of Borrower, of its customers, of any co-guarantors (whether hereunder or under a separate instrument) or of any other party at any time directly or contingently liable for the payment of any of the Obligations; (ii) accept partial payments of the Obligations; (iii) settle, release (by operation of law or otherwise), compound, compromise, collect or liquidate any of the Obligations and the security therefor in any manner; (iv) consent to the transfer or sale of security, or (v) bid and purchase at any sale of any security. (b) Primary Obligation Defenses. Guarantor waives any rights to require Lender to (i) proceed against Borrower or any other party; (ii) proceed against or exhaust any security held from Borrower; or (iii) pursue any other remedy in Lender's power whatsoever. Guarantor waives any defense based on or arising out of any defense of Borrower other than payment in full of the Obligations, including without limitation any defense based on or arising out of any disability of Borrower, or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of Borrower. (c) Commercially Reasonable Sale and Anti-deficiency Laws. Lender may, at Lender's election, foreclose on any security held by Lender by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, or exercise any other right or remedy Lender may have against Borrower, or any security, without affecting or impairing in any way the liability of Guarantor except to the extent the Obligations have been paid. Guarantor waives any defense arising out of any such election by Lender, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Lender against Borrower or any security. In the absence of agreeing to the waivers contained in this subsection 4(c), Guarantor may have the right of subrogation or reimbursement against a Borrower. For example, if Lender elects to foreclose, by nonjudicial sale, any deeds of trust securing any indebtedness of Borrower to Lender, causing Guarantor to lose any such rights or create defenses to enforcement of this Guaranty, Guarantor gives up any such potential defenses by agreeing to these waivers. Guarantor also expressly waives any defense or benefit that may be derived from California Code of Civil Procedure Sections 580a, 580d or 726 or comparable provisions of the laws of any other state and all securityship defenses it would otherwise under California law or under the laws of any other state. 2 3 (d) Disclosure Defenses. Guarantor expressly waives all set-offs and counterclaims and waives all notices, protests and demands including, but not limited to, notice of default in payment or in the performance or observance of any of the terms, provisions, covenants or conditions contained in any agreement between Lender and any Borrower. (e) Borrowers' Defenses On Underlying Obligations. Guarantor expressly agrees that the validity of this Guaranty and the obligations of Guarantor shall not be terminated, affected or impaired by reason of the waiving, delaying, exercising or nonexercising, of any of Lender's rights against any Borrower pursuant to any of the Agreement against Guarantor by reason of this Guaranty or as a result of the substitution, release, repossession, sale, disposition or destruction of any collateral securing the Obligations. (f) Impairment of Collateral Defenses. Guarantor shall not be released or discharged, either in whole or in part, by Lender's failure or delay to perfect or continue the perfection of any security interest in any property which secures the Obligations of any Borrower or Guarantor to Lender, or to protect the property covered by such security interest. (g) Guarantor's Right to Revoke. Guarantor expressly waives the right to revoke or terminate this continuing Guaranty, including any statutory right of revocation under California Civil Code Section 2815, or comparable provisions of the laws of any other state. 5. Financial Condition of Borrower. Guarantor assumes all responsibility for being and keeping informed of Borrower's financial condition and assets and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks which Guarantor assumes and incurs hereunder, and agrees that Lender shall have no duty to advise Guarantor of information known to it regarding such circumstances or risks. 6. Guarantor Not Entitled To Subrogation. No payment by Guarantor hereunder shall entitle Guarantor, by subrogation, indemnity, reimbursement, contribution or otherwise, to any payment by Borrower or to any subrogation, indemnity, reimbursement or contribution out of the property of Borrower until the Obligations have been paid in full. 7. Recovery of Preferences. If a claim is made upon Lender at any time for repayment or recovery of any amount(s) or other value received by Lender, from any source, in payment of or on account of any of the Obligations of Borrower guaranteed hereunder and Lender repays or otherwise becomes liable for all or any part of such claim by reason of (a) any judgment, decree or order of any court or administrative body having competent jurisdiction, or (b) any settlement or compromise of any such claim, Guarantor shall remain liable to Lender hereunder for the amount so repaid or for which Lender is otherwise liable to the same extent as if such amount(s) had never been received by Lender, notwithstanding any termination hereof or the termination of any agreements evidencing any of the Obligations of Borrower. 8. Events Of Default. The occurrence of any Event of Default under the Agreement shall constitute an event of default under this Guaranty and upon the occurrence thereof and at Lender's election without notice or demand, Guarantor's obligations hereunder shall become due, payable and enforceable against Guarantor, whether or not the Obligations are then due and payable. 3 4 9. Binding On Successors and Assigns. This Guaranty shall bind Guarantor's legal representatives, successors and assigns, and shall inure to the benefit of Lender's successors and assigns, including, but not limited to, any party to whom Lender may assign the Agreement or any other agreements, and Guarantor hereby waives notice of any such assignment. All of Lender's rights are cumulative and not alternative. 10. Miscellaneous. This Guaranty contains the entire agreement of the parties hereto and no other oral or written agreement exists. This Guaranty may not be amended or modified except by a writing signed by Lender and Guarantor. This Guaranty is a valid and subsisting legal instrument and no provision which may be deemed unenforceable shall in any way invalidate any other provision or provisions, all of which shall remain in full force and effect. No invalidity, irregularity or unenforceability of all or any part of the Obligations guaranteed nor any other circumstance which might be a legal defense of a guarantor shall affect, impair, or be a defense to this Guaranty. Each of the persons who has signed this or any other Guaranty has unconditionally delivered it to Lender, and the failure to sign this or any other Guaranty by any other person shall not discharge the liability of any signer. The unconditional liability of the signer applies whether the signer is jointly and severally liable for the entire amount of the debt, or for only a pro-rata portion. 11. Choice of Law and Forum. THIS GUARANTY SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE AND GUARANTOR AGREES TO SUBMIT TO THE JURISDICTION OF THE STATE AND/OR FEDERAL COURTS IN THE STATE OF CALIFORNIA. GUARANTOR: AMERICAN SHARED HOSPITAL SERVICES BY: /s/ ERNEST A. BATES, M.D. ------------------------- Ernest A. Bates, M.D. President Chairman and Chief Executive Officer EX-10.9 17 UNCONDITIONAL CONTINUING GUARANTY 1 EXHIBIT 10.9 UNCONDITIONAL CONTINUING GUARANTY (Loan Agreement) THIS UNCONDITIONAL CONTINUING GUARANTY ("Guaranty") is made and entered into as of May 17, 1995, for the benefit of __________________________ ("Lender"), whose principal place of business is located at 4041 MacArthur Ave., Suite 401, Newport Beach, California 92660, by Ernest A. Bates, M.D., an individual ("Individual Guarantor") whose principal place of business is located at Four Embarcadero Center, Suite 3620, San Francisco, California 94111. RECITALS A. Individual Guarantor is the chief executive officer of American Shared Hospital Services, a California corporation ("Guarantor"), and owns twenty-five percent (25%) or more of the outstanding shares of Guarantor's common stock. B. Guarantor directly or indirectly owns all of the ownership interests in American Shared-CuraCare, a California general partnership, and CuraCare, Inc., a Delaware corporation ("collectively and individually, "Borrower"). AGREEMENT 1. Guaranty. In order to induce Lender, and in consideration thereof, to enter into that certain Loan and Security Agreement dated as of the date hereof (the "Agreement") with Borrower, Guarantor and Individual Guarantor and any future agreements with Borrower, Individual Guarantor unconditionally, absolutely and irrevocably guarantees and promises to Lender to pay, perform and discharge, any and all present and future indebtedness, liabilities and obligations (collectively "Obligations") of Borrower to Lender, including but not limited to the repayment to Lender of all sums presently due and owing and of all sums that shall in the future become due and owing from Borrower whether arising under the Agreement or otherwise. 2. Obligations. The Obligations of Borrower include any and all loans, advances, indebtedness and other obligations owned by Borrower to Lender of every description whether now existing or hereafter arising (including those owed to others by Borrower and acquired by Lender by purchase, assignment or otherwise) and include Obligations that are: (a) direct or indirect; (b) fixed or contingent; (c) primary or as guarantor or surety; (d) liquidated or unliquidated; (e) matured or unmatured; (f) acquired by pledge, assignment, security interest or purchase; (g) secured or unsecured; (h) primary or secondary; (i) joint, several or joint and several; (j) represented by letters of credit now or hereafter issued by Lender for the benefit of or at the request of Borrower; and (k) all of Lender's expenses, included but not limited to (i) all reasonable costs or expenses, including without limitation, taxes and insurance premiums, required to be paid by Borrower under the Agreement that are paid or advanced by Lender, (ii) all filing, recording, publication and search fees paid or incurred by Lender in connection with Lender's transactions with Borrower, (iii) all costs and expenses incurred by Lender to correct any Event of Default (as defined in the Agreement) or enforce any provision of the Agreement, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, 1 2 preparing for sale or advertising to sell any security for the Obligations, whether or not a sale is consummated, after the occurrence of an Event of Default (iv) all costs and expenses of suit incurred by Lender and enforcing or defending the Agreement or any portion thereof, and (v) all reasonable Lender's attorney's fees and expenses incurred in advising, structuring, drafting, reviewing, negotiating, amending, terminating, enforcing, defending or concerning the Agreement or any portion thereof, irrespective of whether suit is brought, and includes each Borrower's prompt, full and faithful performance, observance and discharge of each and every term, condition, agreement, representation, warranty, undertaking and provision to be performed by Borrower under the Agreement. 3. Attorneys' Fees. Individual Guarantor agrees to pay Lender the costs and expenses of the enforcement of this Guaranty, including attorneys' fees. 4. Waivers. (a) Scope of Risk Defenses. Lender may at any time and from time to time, without notice to, or the consent of, Individual Guarantor, and without affecting or impairing the obligation of Individual Guarantor hereunder, do any of the following: (i) renew or extend any Obligations of Borrower, of its customers, of any co-guarantors (whether hereunder or under a separate instrument) or of any other party at any time directly or contingently liable for the payment of any of the Obligations; (ii) accept partial payments of the Obligations; (iii) settle, release (by operation of law or otherwise), compound, compromise, collect or liquidate any of the Obligations and the security therefor in any manner; (iv) consent to the transfer or sale of security, or (v) bid and purchase at any sale of any security. (b) Primary Obligation Defenses. Individual Guarantor waives any rights to require Lender to (i) proceed against Borrower or any other party; (ii) proceed against or exhaust any security held from Borrower; or (iii) pursue any other remedy in Lender's power whatsoever. Individual Guarantor waives any defense based on or arising out of any defense of Borrower other than payment in full of the Obligations, including without limitation any defense based on or arising out of any disability of Borrower, or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of Borrower. (c) Commercially Reasonable Sale and Anti-deficiency Laws. Lender may, at Lender's election, foreclose on any security held by Lender by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, or exercise any other right or remedy Lender may have against Borrower, or any security, without affecting or impairing in any way the liability of Individual Guarantor except to the extent the Obligations have been paid. Individual Guarantor waives any defense arising out of any such election by Lender, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Lender against Borrower or any security. In the absence of agreeing to the waivers contained in this subsection 4(c), Individual Guarantor may have the right of subrogation or reimbursement against a Borrower. For example, if Lender elects to foreclose, by nonjudicial sale, any deeds of trust securing any indebtedness of Borrower to Lender, causing Individual Guarantor to lose any such rights or create defenses to enforcement of this Guaranty, Individual Guarantor gives up any such 2 3 potential defenses by agreeing to these waivers. Individual Guarantor also expressly waives any defense or benefit that may be derived from California Code of Civil Procedure Sections 580a, 580d or 726 or comparable provisions of the laws of any other state and all securityship defenses it would otherwise under California law or under the laws of any other state. (d) Disclosure Defenses. Individual Guarantor expressly waives all set-offs and counterclaims and waives all notices, protests and demands including, but not limited to, notice of default in payment or in the performance or observance of any of the terms, provisions, covenants or conditions contained in any agreement between Lender and any Borrower. (e) Borrowers' Defenses On Underlying Obligations. Individual Guarantor expressly agrees that the validity of this Guaranty and the obligations of Individual Guarantor shall not be terminated, affected or impaired by reason of the waiving, delaying, exercising or nonexercising, of any of Lender's rights against any Borrower pursuant to any of the Agreement against Individual Guarantor by reason of this Guaranty or as a result of the substitution, release, repossession, sale, disposition or destruction of any collateral securing the Obligations. (f) Impairment of Collateral Defenses. Individual Guarantor shall not be released or discharged, either in whole or in part, by Lender's failure or delay to perfect or continue the perfection of any security interest in any property which secures the Obligations of any Borrower or Individual Guarantor to Lender, or to protect the property covered by such security interest. (g) Individual Guarantor's Right to Revoke. Individual Guarantor expressly waives the right to revoke or terminate this continuing Guaranty, including any statutory right of revocation under California Civil Code Section 2815, or comparable provisions of the laws of any other state. 5. Financial Condition of Borrower. Individual Guarantor assumes all responsibility for being and keeping informed of Borrower's financial condition and assets and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks which Individual Guarantor assumes and incurs hereunder, and agrees that Lender shall have no duty to advise Individual Guarantor of information known to it regarding such circumstances or risks. 6. Individual Guarantor Not Entitled To Subrogation. No payment by Individual Guarantor hereunder shall entitle Individual Guarantor, by subrogation, indemnity, reimbursement, contribution or otherwise, to any payment by Borrower or to any subrogation, indemnity, reimbursement or contribution out of the property of Borrower until the Obligations have been paid in full. 7. Recovery of Preferences. If a claim is made upon Lender at any time for repayment or recovery of any amount(s) or other value received by Lender, from any source, in payment of or on account of any of the Obligations of Borrower guaranteed hereunder and Lender repays or otherwise becomes liable for all or any part of such claim by reason of (a) any judgment, decree or order of any court or administrative body having competent jurisdiction, 3 4 or (b) any settlement or compromise of any such claim, Individual Guarantor shall remain liable to Lender hereunder for the amount so repaid or for which Lender is otherwise liable to the same extent as if such amount(s) had never been received by Lender, notwithstanding any termination hereof or the termination of any agreements evidencing any of the Obligations of Borrower. 8. Events of Default. The occurrence of any Event of Default under the Agreement shall constitute an event of default under this Guaranty and upon the occurrence thereof and at Lender's election without notice or demand, Individual Guarantor's obligations hereunder shall become due, payable and enforceable against Individual Guarantor, whether or not the Obligations are then due and payable. 9. Binding On Successors and Assigns. This Guaranty shall bind Individual Guarantor's legal representatives, successors and assigns, and shall inure to the benefit of Lender's successors and assigns, including, but not limited to, any party to whom Lender may assign the Agreement or any other agreements, and Individual Guarantor hereby waives notice of any such assignment. All of Lender's rights are cumulative and not alternative. 10. Miscellaneous. This Guaranty contains the entire agreement of the parties hereto and no other oral or written agreement exists. This Guaranty may not be amended or modified except by a writing signed by Lender and Individual Guarantor. This Guaranty is a valid and subsisting legal instrument and no provision which may be deemed unenforceable shall in any way invalidate any other provision or provisions, all of which shall remain in full force and effect. No invalidity, irregularity or unenforceability of all or any part of the Obligations guaranteed nor any other circumstance which might be a legal defense of a guarantor shall affect, impair, or be a defense to this Guaranty. Each of the persons who has signed this or any other Guaranty has unconditionally delivered it to Lender, and the failure to sign this or any other Guaranty by any other person shall not discharge the liability of any signer. The unconditional liability of the signer applies whether the signer is jointly and severally liable for the entire amount of the debt, or for only a pro-rata portion. 11. Choice of Law and Forum. THIS GUARANTY SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE AND INDIVIDUAL GUARANTOR AGREES TO SUBMIT TO THE JURISDICTION OF THE STATE AND/OR FEDERAL COURTS IN THE STATE OF CALIFORNIA. INDIVIDUAL GUARANTOR: /s/ ERNEST A. BATES - -------------------- ERNEST A. BATES, M.D. 4 EX-10.10 18 INTERCREDITOR AGREEMENT 1 EXHIBIT 10.10 INTERCREDITOR AGREEMENT THIS INTERCREDITOR AGREEMENT ("Agreement") is made and entered into as of May 17, 1995 among American Shared Hospital Services, a California corporation, American Shared-CuraCare, a California general partnership, CuraCare, Inc., a Delaware corporation (collectively, "Debtor"), DVI Financial Services Inc. ("DVIFS") and DVI Business Credit Corporation ("DVIBC" and, together with DVIFS, sometimes referred to herein, collectively, as "DVI") and General Electric Company, a New York corporation acting through GE Medical Systems ("GE"). RECITALS A. CuraCare, Inc. ("CuraCare") and American Shared-CuraCare ("AS-C") are presently indebted to GE pursuant to certain notes, loan and security agreements and equipment leases, including, without limitation (1) a promissory note in the principal amount of $2,000,000 from AS-C to GE (the "Deferral Note"), (2) CuraCare's guaranty of the Deferral Note ("Guaranty"), and (3) various equipment leases between (a) GE and CuraCare and (b) GE and AS-C (the "GE Leases" and, together with the Deferral Note, sometimes referred to herein, collectively, as the "GE Affected Debt"). As security for the payment and performance of the Deferral Note and Guaranty, and each of them, CuraCare and AS-C, and each of them, pursuant to Security Agreements dated as of November 1, 1994 (collectively the "Security Agreements") have granted to GE a lien and security interest in certain assets of CuraCare and AS-C, including Accounts (as defined in Section 1 of the Security Agreements), whether from third parties of Debtor or affiliates of Debtor, and all rights of Debtor to receive monies due and to become due under or pursuant to (a) such Accounts, (b) Contract Rights (as defined in Section 1 of the Security Agreements), or (c) chattel paper, documents, instruments and other obligations of any kind of Debtor, now or hereafter existing (the "Accounts Receivable Collateral"), which lien is currently of first priority. B. DVI has been requested by Debtor to provide Debtor with loans, secured by, among other collateral, the Accounts Receivable Collateral. Debtor concurrently herewith has entered into certain Loan and Security Agreements with DVIFS and DVIBC, 1 2 respectively, (the "Loan Agreements") pursuant to which DVI will extend credit and make advances to Debtor. C. GE has been requested by Debtor to provide Debtor with an additional loan, secured by certain collateral, more particularly described as the "UCSF Gamma Knife" (as defined in the loan and security documentation between Debtor and GE). D. GE represents and warrants that the Accounts Receivable Collateral secures the Deferral Note and Guaranty only and does not secure any other GE Debt, including the GE Leases or the loan secured by the UCSF Gamma Knife. GE further represents and warrants that none of the GE Debt is cross-collateralized with respect to the Accounts Receivable Collateral, including the Deferral Note, GE Leases or the loan secured by the UCSF Gamma Knife. E. DVI and GE wish to agree as to their respective liens upon and security interests in the Accounts Receivable Collateral and the UCSF Gamma Knife and as to certain other rights, priorities and interests. NOW, THEREFORE, for value received and in consideration of the mutual covenants herein, the parties hereto intend to be legally bound and hereby do agree as follows: AGREEMENT 1. For purposes of this Agreement, the following terms are used as hereinafter defined: (a) "Acceleration Date" shall mean the earliest date of election specified in the notice provided by DVI or GE, as the case may be, pursuant to Section 2(b) hereof. (b) "DVI Debt" shall mean any and all indebtedness, liabilities and obligations, in an aggregate amount, for the purposes of this Agreement, up to, but not to exceed, the principal amount of Six Million Five Hundred Thousand Dollars ($6,500,000) plus an amount not to exceed Five Hundred Thousand Dollars ($500,000) for any other obligations including, but not limited to, interest, late charges, taxes, attorneys' fees, court costs, indemnities, and costs of repossession, transportation, storage, resale or re-lease, repair or refurbishment of any collateral, owed by Debtor to DVIBC or DVIFS 2 3 due and payable under, and evidenced by, the Loan Agreements, and any extensions or renewals thereof, and whether direct or indirect, absolute or contingent, now existing or hereafter arising. (c) "DVIBC Debt" shall mean any and all indebtedness, liabilities and obligations, in an aggregate amount for the purposes of this Agreement, up to but not to exceed the principal amount of Four Million Dollars ($4,000,000), owed by Debtor to DVIBC due and payable under, and evidenced by, the Loan Agreements, and any extensions or renewals thereof, and whether direct or indirect, absolute or contingent, now existing or hereafter arising. (d) "DVIFS Debt" shall mean any and all indebtedness, liabilities and obligations, in an aggregate amount, for the purposes of this Agreement, up to but not to exceed the principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000), owed by Debtor to DVIFS due and payable under, and evidenced by, the Loan Agreements, and any extensions or renewals thereof, and whether direct or indirect, absolute or contingent, now existing or hereafter arising. (e) "GE Debt" shall mean any and all indebtedness, liabilities and obligations owed by Debtor to GE, whether direct or indirect, absolute or contingent, now existing or hereafter arising (including, without limitation, the GE Affected Debt). (f) "Liquidation" shall refer to the collection, liquidation and disposition of the Accounts Receivable Collateral. (g) "Second Lien Liquidation Proceeds" shall mean proceeds, if any, from the Liquidation of Accounts Receivable Collateral, other than such proceeds, if any, received or to be received by DVIBC in connection with such Liquidation in respect of DVIBC's first priority lien and security interest in the Accounts Receivable Collateral. (h) "UCC" shall mean the California Uniform Commercial Code. 3 4 2. Relative Priorities relating to Accounts Receivable Collateral. (a) The parties agree at all times, whether before, during or after the pendency of any bankruptcy, reorganization or other insolvency proceeding, and notwithstanding the time of granting or of perfection of any security interest or lien or the time of filing or of recording of any financing statements or any other documents, instruments or agreements under the UCC or any other applicable law and as relates only to DVIBC Debt (i) DVIBC shall have a first priority lien upon and security interest in the Accounts Receivable Collateral superior to GE's security interest therein, and any security interest of GE therein, whether now existing or hereafter acquired, shall be subordinate to DVIBC's security interest therein; and (ii) each of GE and DVIFS shall have a second and junior lien upon and security interest in the Accounts Receivable Collateral ranking equally in priority. (b) In the event that either of DVIBC or DVIFS elects to accelerate any or all of Debtor's obligations pursuant to the DVI Debt, DVI shall, forthwith upon such acceleration, notify GE in writing of such election and the date thereof. In the event that GE elects to accelerate any or all of Debtor's obligations pursuant to the GE Affected Debt, GE shall, forthwith upon such acceleration, notify DVI in writing of such election and the date thereof. The failure of either party to give the notice required by this section 2(b) shall not affect the validity of the acceleration of the indebtedness with respect to Debtor or create any claim or right on behalf of any third party. The sending of such notice by either party shall not impose on the recipient thereof any obligation to cure any default or Event of Default. (c) GE and DVIFS (as related only to DVIFS Debt) shall share in equal amounts and on an equal basis (pari passu) in all Second Lien Liquidation Proceeds, if any, from any Liquidation of Accounts Receivable Collateral. (d) Irrespective of whether any Event of Default shall have occurred under any agreements evidencing the DVI Debt or the GE Debt, and notwithstanding any provisions of the UCC, so long as any DVI Debt remains unpaid, and DVIBC retains a security interest in the Accounts Receivable Collateral, GE shall not take 4 5 any action to foreclose or realize upon or enforce any of its rights with respect to the Accounts Receivable Collateral, including but not limited to, notifying any account debtor, without the prior written consent of DVI, and shall hold all Accounts Receivable Collateral and proceeds thereof, which may come into GE's possession in trust for DVI, and shall turn over any such collateral to DVI upon request. This provision does not limit GE's exercise of any rights and remedies it may have under the GE Leases. 3. Relative Priorities Relating to UCSF Gamma Knife. (a) The parties agree, at all times, whether before, during or after the pendency of any bankruptcy, reorganization or other insolvency proceeding, and notwithstanding the time of granting or of perfection of any security interest or lien or the time of filing or of recording of any financing statements or any other documents, instruments or agreements under the UCC or any other applicable law that GE shall have a first priority lien upon and security interest in the UCSF Gamma Knife superior to DVI's security interest therein, and any security interest of DVI therein, whether now existing or hereafter acquired, shall be subordinate to GE's security interest therein. (b) Irrespective of whether any Event of Default shall have occurred under the terms of any agreements evidencing the GE Debt or the DVI Debt, and notwithstanding any provisions of the UCC, so long as any of the GE Debt remains unpaid, and GE retains a security interest in the UCSF Gamma Knife, DVI shall not take any action to foreclose or realize upon or enforce any of its rights with respect to the UCSF Gamma Knife without the prior written consent of GE, and shall hold all collateral and proceeds thereof, which may come into DVI's possession in trust for GE, and shall turn over any such proceeds to GE upon request. (c) All proceeds realized from any disposition of the UCSF Gamma Knife shall be allocated between, and shared by, GE and DVI in conformity with their respective lien priorities. 4. Waivers and Consents. DVI and GE, and each of them, may at any time, and from time to time, without notice to, or consent of the other party, and without affecting or impairing 5 6 the priority, subordination, rights and obligations under this Agreement, do any of the following: (a) Modify, (as permitted by Section 4(h) with respect to the DVI Debt) renew or extend any DVI Debt or GE Debt respectively; (b) Accept partial payment of any DVI Debt or GE Debt, respectively; (c) Settle, release (by operation of law or otherwise), compound, compromise, collect or liquidate any DVI Debt or GE Debt, respectively, and the collateral therefor in any manner; (d) Consent to the transfer or sale of any collateral securing any DVI Debt or GE Debt, respectively; or (e) Bid and purchase at any sale of any sale of any collateral securing any DVI Debt or GE Debt, respectively. (f) Except for the notices required by Section 2(b) of this Agreement, DVI and GE, and each of them, waive all notices, protests and demands, including, but not limited to, notice of (i) default or (ii) payment or in performance or observance of any of the terms, provisions, covenants or conditions contained in any agreement or instrument with Debtor evidencing any senior DVI Debt or senior GE Debt, respectively. (g) DVI and GE, and each of them, agree that the validity of this Agreement and the subordination, priority, rights and obligations of DVI and GE, and each of them, shall not be terminated, affected or impaired by reason of the waiving, delaying, exercising or non-exercising of either party's rights relating to its debt or as a result of the substitution, release, repossession, sale, disposition or destruction of any collateral, or by either party's failure or delay to perfect or continue the perfection of any security interest in any Collateral or to perfect the Collateral securing the indebtedness owed to either party by Debtor. (h) DVIBC may at any time, and from time to time, without notice to, or consent of GE, and without affecting or impairing the priority, subordination, rights and obligations 6 7 under this Agreement, and with respect to the DVIBC Debt only, subject to the limitations set forth in Section 1(c) above, increase or reduce the amount of the DVIBC Debt, modify any formula or requirements for determining Eligible Accounts, modify the Net Collectible Value or Net Collectible Percentage of the Accounts, and modify the amounts of, and formula for determining, Advances and Advance Percentages. All capitalized terms in this Subsection 4(h) shall have the meanings set forth in the Loan Agreement between DVIBC and Debtor. 5. Debtor Repayment. GE hereby agrees that, at any time a payment with respect to the GE Debt is made thereto by Debtor and DVI has provided written notice to GE within thirty (30) days of such payment that amounts are then due and payable to DVI under the DVI Debt, GE shall pay over to DVI the amount then due and payable to DVI pursuant to the DVI Debt (including any balloon payments but excluding any amounts which have been accelerated by DVI), in each case as of the date of receipt of such notice by GE, provided, however, that any such payment by GE to DVI shall not exceed the amount of such payment by Debtor to GE. Debtor acknowledges that any such payment by GE to DVI will be deemed to reduce the amount of any such payment by Debtor with respect to such portion of the Affected GE Debt, as determined by GE, and that Debtor will therefore be in default with respect to such Affected GE Debt. Debtor agrees, on the date of payment, to notify DVI in writing of the date and amount of any payment made to GE with respect to the GE Debt. 6. Parties Intended to be Benefitted. All of the understandings, covenants and agreements contained herein are solely for the benefit of DVI and GE, and there are no other parties (including Debtor or any of its creditors, successors or assigns) which are intended to be benefitted, in any way, by this Agreement. 7. No Limitation Intended. Nothing contained in this Agreement is intended to or shall affect or limit, in any way, the rights that DVI and GE have with respect to Debtor or any third parties pursuant to any written agreement or otherwise. DVI and GE hereby specifically reserve all of their respective rights against Debtor and all other third parties. DVI shall be entitled to deal with Debtor free from interference by GE, and GE shall be entitled to deal with Debtor free from interference by DVI. Nothing contained in this Agreement, nor any action taken 7 8 by any of the parties hereto, is intended to constitute or shall be deemed to constitute DVI and GE as a partnership, association, joint venture or other entity. 8. Waiver of Marshalling. GE specifically waives and renounces any right, under any applicable law, including California Civil Code Section 3433 or any analogous statute, which it may have, whether at law or in equity, to require DVI to marshall the collateral unless it has been granted a security interest by Debtor, or any portion thereof, or to otherwise seek satisfaction from any particular assets of Debtor or from any third party. 9. Term. This Agreement shall have a term expiring upon the later of (a) the repayment, performance and satisfaction in full of the DVI Debt and the release by DVIBC and DVIFS of their respective security interests in the Accounts Receivable Collateral, or (b) the repayment, performance and satisfaction in full of the GE Debt and the release by GE of its respective security interest in the UCSF Gamma Knife. 10. Notices. Whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties hereto, or whenever any of the parties desires to give or serve upon the others communications with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be delivered either in person, with receipt acknowledged, or by regular, registered, or certified United States mail, postage prepaid, or by telefacsimile, addressed as follows: (a) If to DVIBC or DVIFS, at: DVI Financial Services, Inc. 500 Hyde Park Doylestown, PA 18901 Attn: Michael A. O'Hanlon Telefacsimile Number: (215) 230-8108 8 9 (b) If to GE, at: GE Medical Systems 20825 Swanson Drive, Suite 100 Waukesha, Wisconsin 53186 Attn: Manager - Financial Services Telefacsimile Number: (414) 798-4530 or at such other address as may be substituted by notice given as herein provided. Giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or actually received via telefacsimile transmission, or three (3) days after the same shall have been deposited in the United States mail. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall together constitute one and the same Agreement. 12. THE CONSTRUCTION, INTERPRETATION, VALIDITY AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE STATE OF CALIFORNIA. In any action, suit, arbitration or mediation relating to the enforcement of this Agreement, the prevailing party shall be entitled to recover its costs and expenses, including reasonable attorneys' fees. 13. This Agreement shall become effective upon the execution of the Loan Agreements by and between DVIFS and DVIBC, and each of them and Debtor, the form of which shall be reasonably acceptable to GE in its good faith judgment. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first written above. DEBTOR: AMERICAN SHARED HOSPITAL SERVICES, a California corporation 9 10 By: ___________________________________________________ Title:_____________________________________________ AMERICAN SHARED-CURACARE, a California general partnership By: AMERICAN SHARED HOSPITAL SERVICES Its: General Partner By: __________________________________________ Ernest A. Bates, M.D. Chief Executive Officer CURACARE, INC., a Delaware corporation By: _________________________________________________ Ernest A. Bates, M.D. Chief Executive Officer DVI: DVI FINANCIAL SERVICES INC. By: _________________________________________________ Title:___________________________________________ DVI BUSINESS CREDIT CORPORATION By: _________________________________________________ Title:___________________________________________ 10 11 GE: GENERAL ELECTRIC COMPANY, a New York corporation acting through GE MEDICAL SYSTEMS By: ________________________________________________ Title:__________________________________________ 11 EX-10.12 19 OPERATING AGREEMENT 1 EXHIBIT 10.12 OPERATING AGREEMENT FOR GK FINANCING, LLC This Agreement is effective as of the 17th day of October, 1995 2 OPERATING AGREEMENT FOR GK FINANCING, LLC RECITALS A. This Operating Agreement, effective as of October 17, 1995, governs the relationship among Members of GK Financing, LLC ("Company") and between Company and Members, pursuant to the Act and the Articles, as either may be amended from time to time. B. It is the intention of the Members that the Company be treated as a partnership for income tax purposes. Now therefore, in consideration of their mutual promises, covenants, and Agreements, the parties hereto do hereby promise, covenant, and agree as follows: ARTICLE I INTRODUCTORY MATTERS 1.1 FORMATION OF LIMITED LIABILITY COMPANY Pursuant to the Act American Shared Radiosurgery Services ("ASRS") and GKV Investments, Inc. ("GKV"), acknowledge they are Members of the limited liability company organized under the laws of the State of California known as GK Financing, LLC whose Articles were filed effective October 16, 1995. The purposes for the organization of Company shall be those set forth in its Articles. Company may, as provided in its Articles and the Agreement, exercise all of the powers described in Title 2.5 of Corporations Code of the State of California also known as the Beverly-Killea Limited Liability Company Act. 1 3 1.2 REGULATION OF INTERNAL AFFAIRS BY OPERATING AGREEMENT Consistent with the Articles and the Act, the internal affairs of Company and the conduct by its business shall be regulated by the Agreement as it shall be amended by the Members from time to time. 1.3 LAWS GOVERNING OPERATING AGREEMENT The Agreement is subject to, and governed by, the mandatory provisions of the Act and the Articles filed with the Secretary of State, as both are amended from time to time. In the event of a direct conflict between the provisions of the Agreement and the mandatory provisions of the Act or the provisions of the Articles, such provisions of the Act or the Articles, as the case may be, will be controlling. 1.4 TERM OF OPERATING AGREEMENT The term of the Agreement shall be co-terminus with the period of duration of Company provided in the Articles unless Company is earlier terminated upon its voluntary or involuntary dissolution. 1.5 USE OF FULL LEGAL NAME REQUIRED The business of Company shall be conducted under the name GK Financing, LLC, until such time as the Members shall designate otherwise and file amendments to the Articles in accordance with applicable law. The phrase "LLC" shall always appear as part of the name of Company on all correspondence, stationery, checks, invoices and any and all documents and papers executed by Company and as otherwise required by the Act. 1.6 NO INDIVIDUAL AUTHORITY FOR A MEMBER No Member acting alone, shall have any authority to act for, or to undertake or assume, any obligation, debt, duty or responsibility on behalf of the Company, unless that member is a Manager and acting in accordance with this Agreement. 2 4 1.7 LIMITATIONS ON CONTRACTION OF DEBTS Except as otherwise provided in the Agreement including Subparagraph 3.3.B, no debt shall be contracted or liability incurred by or on behalf of Company, except in accordance with Paragraph 2.14. 1.8 TITLE TO ALL PROPERTIES IN NAME OF COMPANY Real and personal property owned or purchased by Company shall be held and owned, and conveyance made, in the name of Company. Instruments and documents providing for the acquisition, mortgage or disposition of property of Company shall be valid and binding upon Company, except as otherwise limited in the Agreement including Subparagraph 3.3.B., if executed by the Manager. 1.9 MAINTENANCE OF REGISTERED OFFICE AND AGENT FOR SERVICE OF PROCESS IN CALIFORNIA Company shall have an agent for service of process in California who may be either a natural person or a corporation meeting the qualifications of Corporations Code Section 17061(d)(1) and Section 17050(a)(5). Every agent for service of process must have a street address for the service of process. The street address of the agent for service of process is the registered office of the limited liability company in this state. Within 30 days after changing the location of his office from one address to another in this state, an agent for service of process must file a certificate with the Secretary of State setting forth the names of the limited liability companies represented by him, the address at which he, she, or it has maintained the office for each of the limited liability companies, and the new address to which the office is transferred. 1.10 REQUIRED MAINTENANCE OF RECORDS IN CALIFORNIA OFFICE Company shall continuously maintain an office in the State of California which may but need not be a place of its business in this state or its registered office, at which it shall keep: 3 5 a. A current list of the full name and last known business address of each Member and of each holder of an Economic Interest in alphabetical order together with the Capital Contribution and Percentage Share in Net Profits and Net Losses; b. If the Articles provide Company is to be managed by one or more managers and not by all of its members, a current list of the full name and business or residence address of each Manager; c. A copy of the filed Articles and all amendments thereto, together with any powers of attorney pursuant to which the Articles or any amendments thereto were executed; d. Copies of Company's federal, state and local income tax returns or information returns and reports, if any, for the six (6) most recent taxable years; e. A copy of the Agreement and any amendments thereto, together with any powers of attorney pursuant to which any written operating Agreement or amendments were executed; f. Copies of financial statements of Company for the six (6) most recent taxable years; and g. The books and records of the Company as they relate to the internal affairs of the Company for at least the current and past four fiscal years. 1.11 RECORDS OF COMPANY SUBJECT TO INSPECTION Records kept pursuant to Paragraph 1.10 are subject to inspection and copying at the reasonable request, and at the expense, of any Member during ordinary business hours. 1.12 PLACES OF BUSINESS OUTSIDE STATE OF CALIFORNIA 4 6 Members, acting through the Policy Committee, may identify other places of business of Company outside the State of California, appoint agents for service of process and make filings as may be required or desirable under the laws of such other places. 1.13 FILING OF FICTITIOUS BUSINESS NAME STATEMENT The Manager shall file such fictitious business name statements as may be required or desirable under the laws of any place in which the Company holds assets or conducts business activities. 1.14 OTHER FORMATION MATTERS A. Adoption of Company Seal Members, acting through the Policy Committee, shall adopt a company seal circular in form containing the words GK FINANCING, LLC, together with the date of organization of Company. B. Maintenance of Company Minute Book Members shall authorize the maintenance of a Company minute book to include the Articles, the Agreement and any amendments thereto and the minutes of meetings (or consents in lieu of meetings) of Members and Managers and other important documents of Company. C. Establishment of Bank Accounts Members shall authorize the establishment of one or more depository accounts for the funds of Company and designate persons authorized to draw against such accounts on behalf of Company (more specifically described elsewhere in the Agreement). D. Reimbursement of Expenses of Organization Members shall authorize Company to pay its expenses of organization and to reimburse any person advancing 5 7 funds for this purpose. Provided, however, no Member shall be reimbursed for legal fees or expenses incurred in relation to the preparation and negotiation of this Agreement. 1.15 MINIMUM OF TWO MEMBERS The Company shall at all times have at least two Members. 1.16 DEFINITIONS OF TERMS The terms used in the Agreement with their initial letters capitalized, shall, unless the context otherwise requires, have the meanings specified in this Paragraph 1.16 or, if not defined in this Paragraph 1.16, elsewhere in the Agreement. When used in the Agreement, the following terms shall have the meanings set forth below: A. "Act" shall mean the Beverly-Killea Limited Liability Act as amended from time to time. B. "Affiliate" shall mean any individual, partnership, corporation, trust, or other entity or association, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with a Member, the Company or other Person, as the context requires. The term "control," as used in the immediately preceding sentence, means, with respect to a corporation the right to exercise, directly or indirectly, more than 50 percent of the voting rights attributable to the controlled corporation, and, with respect to any individual, partnership, trust, other entity or association, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. C. "Agreement" shall mean this Operating Agreement between all Members of Company regulating the affairs of Company and the conduct of its business, as originally executed and as amended from time to time, and shall refer to the Agreement as a whole, unless the context otherwise requires. 6 8 D. "Annual Budget" shall mean, with respect to each fiscal year, the Annual Operating Budget and the Annual Capital Budget for such fiscal year. The Annual Budget for the first fiscal year is included in the Business Plan. If the Policy Committee does not approve an Annual Budget for a particular fiscal year, then: (i) the Annual Operating Budget for such fiscal year shall be deemed to be the Annual Operating Budget for the immediately preceding fiscal year but with each line item in such budget increased by the percentage increase in the Wholesale Price Index which occurred during the preceding fiscal year plus any increase due to the expiration of a Gamma Knife warranty and the commencement of the service agreement for such Gamma Knife; (ii) no capital expenditures shall be made during such fiscal year. E. "Annual Capital Budget" shall mean, with respect to each fiscal year, the annual capital budget for such fiscal year proposed by the Manager and approved by the Policy Committee, except as provided herein. F. "Annual Operating Budget" shall mean, with respect to each fiscal year, the annual operating budget for such fiscal year proposed by the Manager and approved by the Policy Committee, except as provided herein. G. "Articles" shall mean the Articles of Organization for Company originally filed with the Secretary of State of California, including all amendments thereto or restatements thereof and shall mean the Articles as a whole unless the context otherwise requires. H. "ASHS" shall mean American Shared Hospital Services, a California corporation, which is the ultimate beneficial owner of all the outstanding capital stock of ASRS. I. "ASRS" shall mean American Shared Radiosurgery Services, a California corporation. J. "Bankruptcy" shall mean, (i) the entry of a decree or order for relief against a Member by a court of competent jurisdiction in any involuntary case brought against the Member under any bankruptcy, insolvency or other similar law 7 9 (collectively, "Debtor Relief Laws") generally affecting the rights of creditors and relief of debtors now or hereafter in effect; (ii) the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar agent under applicable Debtor Relief Laws for the Member or for any substantial part of its assets or property; (iii) the ordering by a court of competent jurisdiction of the winding up or liquidation of a Member's affairs; (iv) the filing of a petition in any such involuntary bankruptcy case, which petition remains not dismissed for a period of 180 days or which is not dismissed or suspended pursuant to Section 305 of the Federal Bankruptcy Code (or any corresponding provision of any future United States bankruptcy law); (v) the commencement by a Member of a voluntary case under any applicable Debtor Relief Law now or hereafter in effect; (vi) the consent by a Member to the entry of an order for relief in an involuntary case under any such law or to the appointment of or the taking of possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar agent under any applicable Debtor Relief Laws for the Member or for any substantial part of its assets or property; or (vii) the making by a Member of any general assignment for the benefit of its creditors. K. "Business Plan" shall mean that business plan for the Company which will be agreed to by the Members. L. "Capital Account" shall mean the amount of the capital interest of a Member or assignee determined in accordance with Article IV of the Agreement. M. "Capital Contribution" shall mean the value of any money, property (including promissory notes or other binding obligation to contribute money or property), contributed as capital in a Member's capacity as a Member, as shown in Exhibit A, as the same may be amended from time to time. In the case of an assignee who has not been admitted as a Member, the assignee's Capital Contribution shall include such contributions made by the assignee and the assignor. N. "Code" shall mean the Internal Revenue Code of 1986, as amended. All references herein to sections of the Code 8 10 shall include any corresponding provision or provisions of succeeding law. O. "Company" shall mean GK FINANCING, LLC. P. "Distribution" means a transfer of money or property by Company to its Members without consideration. Q. "Dissolution Event" for Company means with respect to any Member, the death, retirement, resignation, expulsion, bankruptcy or dissolution of such Member or occurrence of any other event which terminates his continued membership in the Company. R. "EHUS" shall mean Elekta Holdings U.S., Inc., a Georgia corporation, which is the indirect owner of all the outstanding capital stock of GKV and EII and an Affiliate of Elekta AB. S. "Economic Interest" shall mean the right to share in the Net Profits, Net Losses, deductions, credit or similar items and to receive Distributions from Company but neither Management and Voting Rights nor Information Rights except as provided in Act Section 17106. T. "Gamma Knife" shall mean the Leksell Gamma Knife, as such term is defined in the LGK Purchase Agreement. U. "GKV" shall mean GKV Investments, Inc., a Georgia corporation. V. "Information Rights" means the right to inspect, copy or obtain information and documents concerning the affairs of Company as provided in Act Section 17106 and in Paragraphs 6.3 and 6.4 of the Agreement. W. "Interest" means "Membership Interest". X. "LGK Purchase Agreement" shall mean that certain LGK Purchase Agreement to be executed on the effective date of 9 11 this Agreement by the Company and Elekta Instruments, Inc. ("EII") (a Georgia Corporation). EII is an affiliate of GKV. Y. "Majority-In-Interest" shall mean more than fifty percent (50%) of the interest of Members (or class of Members as the case may be) of the profits interests and of the capital interests of Company within the meaning of such term in Revenue Procedure 94-46, 1994-28 I.R.B. 1. Z. "Management and Voting Rights" shall be those rights of a Member described in Article III of the Agreement as they may be limited in the Agreement, the Articles and the Act. A(i). "Manager" shall be a Person elected by Members of Company to manage Company. B(i). "Member" shall mean each Person (other than any Person who has withdrawn, been expelled, died, retired or dissolved) who has been admitted to Company as a Member in accordance with the Articles and the Agreement. C(i). "Membership Interest" in Company shall mean the entire ownership interest of a Member in Company at any particular time, including collectively Economic Rights, Management and Voting Rights and Information Rights of such Member as provided in the Agreement and under the Act, together with the obligations of such Member to comply with all terms and provisions of the Agreement. A Membership Interest constitutes personal property. A Member or assignee of any Membership Interest of a Member has no interest in specific property of Company. D(i). "Officer" means any person elected as such by Policy Committee. E(i). "Percentage Interest" shall mean the percentage of a Member set forth opposite the name of such Member under the column "Member's Percentage Interest" in Exhibit A hereto, as such percentage may be adjusted from time to time pursuant to the terms of the Agreement. 10 12 F(i). "Person" includes individuals, general partnerships, limited partnerships, other limited liability companies, corporations, trusts, estates, real estate investment trusts and any other association. G(i). "Provisional Business Plan" shall mean that provisional business plan for the Company attached as Exhibit B hereto. H(i). "Provisional Budget" shall mean the Provisional Capital Budget and the Provisional Operating Budget. I(i). "Provisional Capital Budget" shall mean the initial capital budget for the period beginning on the date of this Agreement AND ENDING DECEMBER 31, 1995 proposed by the Manager and approved by the Policy Committee. J(i). "Provisional Operating Budget" shall mean the initial operating budget for the period beginning on the date of this Agreement AND ENDING DECEMBER 31, 1995 proposed by the Manager and approved by the Policy Committee. K(i). "Registered Office" shall mean the office maintained at the street address of the agent for service of process of the Company in California. L(i). "Regulations" shall, unless the context clearly indicates otherwise, mean the regulations currently in force as final or temporary that have been issued by the U.S. Department of Treasury pursuant to its authority under the Code. M(i). "Return of Capital" means any distribution to a Member to the extent of the positive balance in the Capital Account of the Member immediately before the distribution. N(i). "Secretary of State" shall mean the Secretary of State of California or his or her duly appointed delegate unless another state is mentioned in the same context. O(i). "Territory" shall mean the United States of America and Brazil. 11 13 P(i). "GKV Loan" shall have the meaning set forth in Subparagraph 12.22.A hereof. Q(i). "UCSF Assets" shall have the meaning set forth in Exhibit A hereto. R(i). "USC Assets" shall have the meaning set forth in Exhibit A hereto. S(i). "Draw Down Loan" shall have the meaning set forth in Subparagraph 12.23.A hereof. ARTICLE II MEMBERS, CAPITAL CONTRIBUTIONS AND WITHDRAWALS, MEMBERSHIP INTERESTS, ADMISSIONS, CERTIFICATES, LIMITATIONS ON LIABILITIES AND RESPONSIBILITIES OF MEMBERS AND CERTAIN FINANCING MATTERS 2.1 NAMES, ADDRESSES OF INITIAL MEMBERS AND INITIAL CAPITAL CONTRIBUTIONS A. Members, their respective addresses, their respective aggregate Capital Contributions to Company, and their respective Percentage Interests in Net Profits and Net Losses of Company are set forth on Exhibit A, as they may be amended from time to time, pursuant to Subparagraph 2.1.B hereof. B. (1) In the event a Member makes a capital contribution in addition to its Capital Contribution described on Exhibit A hereto, such Member's Percentage Interest shall be increased so as to be equal to: PPI x 1 - ( VNC ) + ( VNC ) --------- --------- (FMV + VNC) (FMV + VNC) where: PPI = the Contributing Member's Percentage Interest 12 14 immediately prior to the contribution expressed as a number less than 1. VNC= the amount of cash and/or the fair market value of the additional property contributed. FMV= the fair market value of the assets of the Company immediately prior to the contribution, but including the contract with a health care institution, if any, relating to the Gamma Knife contributed. The Percentage Interest of the other Member shall be reduced so as to be equal to: OPI x 1 - ( VNC ) ----------- ( FMV + VNC ) where: OPI = the other Member's Percentage Interest immediately prior to the contribution expressed as a number less than 1. (2) The fair market value of the Company's assets immediately prior to the contribution shall be determined by mutual agreement of the Members. In the event the Members are unable to agree on the fair market value of the Company's assets immediately prior to the contribution, such value shall be determined by an appraiser jointly agreed to by the Members. If the Members do not agree on an appraiser, each Member shall select an appraiser, at its own expense, and the two selected appraisers shall mutually select a third appraiser, at the expense of the Company. The Fair Market Value shall be the average of the two appraisals closest in amount to each other except that if one appraisal is equal to the average of all three appraisals, the Fair Market Value shall be equal to such average. 2.2 FORM OF CAPITAL CONTRIBUTIONS 13 15 As provided in the Articles, Members shall make the initial Capital Contributions in cash or property as provided in Exhibit A hereto. Members shall make subsequent Capital Contributions (other than those described on Exhibit A), if any, in cash unless otherwise agreed by all Members or as otherwise provided herein. No Member shall be required to make any Capital Contributions to Company other than the capital contributions set opposite to the name of Member on Exhibit A, as it may be amended from time to time. 2.3 ACCEPTANCE OF ADDITIONAL CAPITAL CONTRIBUTIONS As provided in the Articles, in order to obtain additional funds or for other business purposes, a Member may contribute additional capital to Company, but only upon the written consent of all other Members. Provided, however, GKV shall have the right to transfer to the Company, as Capital Contributions, one or two Gamma Knife units to be used in the Company's business at any time or times determined by GKV during the three (3) year period following the effective date of this Agreement. Each Gamma Knife unit shall be deemed to have a fair market value equal to the price which was paid by the Company for the last Gamma Knife purchased by it prior to such contribution pursuant to a Gamma Knife purchase agreement. During the first eighteen (18) months of the three year period following the effective date of this Agreement, GKV's right to transfer any such Gamma Knife unit as a Capital Contribution to the Company shall be subject to prior written approval of ASRS. ASRS shall have the right, but not the obligation, to make a Capital Contribution to the Company, in cash, in any amount less than or equal to the value of such Capital Contribution by GKV, which Capital Contribution by ASRS shall be due and payable on the effective date of the transfer of such Gamma Knife to the Company as a Capital Contribution. The transfer of a Gamma Knife unit to the Company as a Capital Contribution shall be effective upon delivery to the end user's site relating to such Gamma Knife. At the time of each such contribution of such Gamma Knife unit, the Company shall be valued to determine appropriate changes, if any, in the Percentage Interest of the Members, pursuant to Subparagraph 2.1.B. 2.4 LIMITATIONS ON WITHDRAWALS OF CAPITAL CONTRIBUTION 14 16 No Member shall have the right to withdraw its Capital Contributions or to demand and receive property of Company or any distribution in return for its Capital Contributions, except as may be specifically provided in the Agreement or required by law. No Member shall receive out of Company property any part of its Capital Contribution until (i) all liabilities of Company, except liabilities to Members on account of their Capital Contributions, have been paid or there remains property of Company sufficient to pay them; (ii) the consent of all Members is had, unless the return of the Capital Contributions may be rightfully demanded as provided in the Act; (iii) the Articles are canceled or so amended as to allow the withdrawal or reduction. Subject to other provisions of the Agreement and the Act, a Member may rightfully demand the return of its Capital Contributions on the dissolution of Company. In the absence of a statement in the Articles to the contrary or the consent of all Members of Company, a Member, irrespective of the nature of its contribution, has only the right to demand and receive cash in return for its Capital Contribution. 2.5 PERCENTAGE INTEREST OF MEMBER Each Member shall have a Percentage Interest as reflected on Exhibit A as it may be amended from time to time, pursuant to Subparagraph 2.1.B hereof. 2.6 ADMISSION OF ADDITIONAL MEMBER As provided in the Articles, (i) Members may admit to Company additional Member(s) who will participate in the profits, losses, available cash flow, and ownership of the assets of Company on such terms as are determined by all Members; (ii) admission of any such additional Member(s) shall require the written consent of all Members then having any Interest in Company, which may be granted or withheld in the sole and absolute discretion of each Member; and (iii) admission of such additional Member(s) may result in a dilution of the Percentage Interests of the then Members. 2.7 LIMITATION ON LIABILITY OF MEMBERS AND MANAGERS 15 17 Except as provided under applicable law, no Member or Manager shall be liable under a judgment, decree or order of a court, or in any other manner, for a debt, obligation or liability of Company whether that liability or obligation arises in contract or tort. No Member shall be required to loan any funds to Company except as provided herein. No Member shall be required to make any contribution to Company by reason of any negative balance in his Capital Account, nor shall any negative balance in a Member's Capital Account create any liability on the part of the Member to any third party. 2.8 LIABILITY OF MEMBERS TO COMPANY A. Liability of Members to Company A Member is liable to Company: (i) for the difference between his or its contribution to capital as actually made and that stated in the Articles, the Agreement, subscription for contribution or other document executed by the Member as having been made by the Member; and (ii) for any unpaid contribution to capital which he or it agreed in the Articles, the Agreement or other document executed by the Member to make in the future at the time and on the conditions stated in the Articles, Agreement or other document evidencing such agreement. No Member shall be excused from an obligation to Company to perform any promise to contribute money, property or to perform services because of death, disability, dissolution or any other reason. B. Member as Trustee for Company A Member holds as trustee for Company (i) specific property stated in the Articles, Agreement or other document executed by the Member as contributed by such Member, but which was not contributed or which has been wrongfully or erroneously returned; and (ii) money or other property wrongfully paid or conveyed to such Member on account of his or its contribution. C. Waiver of Liability of Member 16 18 The liabilities of a Member as set out in this Paragraph 2.8 can be waived or compromised only by the consent of all Members. 2.9 NO RESPONSIBILITY FOR PRE-FORMATION COMMITMENTS In the event that any Member (or any of such Member's shareholders, or Affiliates) has incurred any indebtedness or obligation prior to the date hereof that related to or otherwise affects Company, neither Company nor any other Member shall have any liability or responsibility for or with respect to such indebtedness or obligation unless such indebtedness or obligation is assumed by Company pursuant to a written instrument signed by all Members. Furthermore, neither Company nor any Member shall be responsible or liable for any indebtedness or obligation that is hereafter incurred by any other Member (or any of such Member's shareholders or Affiliates). In the event that a Member (or any of such Member's shareholders or Affiliates), (collectively, the "Liable Member"), whether prior to or after the date hereof, incurs (or has incurred) any debt or obligation that neither Company nor the other Members has any responsibility or liability for, the Liable Member shall indemnify and hold harmless Company and the other Members from any liability or obligation they may incur in respect thereof. 2.10 RESERVED 2.11 RIGHTS OF JUDGMENT CREDITOR OF MEMBER On application to a court of competent jurisdiction by a judgment creditor of a Member, the court may charge the Member's Interest with payment of the unsatisfied amount of the judgment with interest, if ordered by such court. To the extent so charged the judgment creditor has only the rights of an assignee of the Member's Interest. This Paragraph 2.11 does not deprive any Member of the benefit of any exemption applicable to his Interest. 2.12 MEMBER REMUNERATION Unless otherwise provided in this Agreement or in a separate written agreement, no Member is entitled to remuneration 17 19 for acting on Company business except for reasonable compensation under Act Section 17352(c) for winding up of affairs of Company. 2.13 LEGAL REPRESENTATIVE OR SUCCESSOR OF A MEMBER If a Member who is an individual dies or is adjudged by a court of competent jurisdiction to be incompetent to manage his or her person or property the executor, administrator, guardian, conservator or other legal representative may exercise all rights of the Member in the purpose of settling his or her estate or administering his or her property. 2.14 CERTAIN FINANCING MATTERS A. Initial Capital Budget The Members have established the Provisional Budget, including provision for capital equipment, startup expenditures, and Working Capital, which is set forth as Exhibit B. After all Capital Contributions described in Exhibit A on the effective date of this Agreement have been made, the Company shall, and the Members shall cause the Company to, maintain a cash reserve equal to $800,000.00. (a) Definition of "Working Capital": For the purposes of this Paragraph 2.14, the term "Working Capital" refers to the cash and cash equivalents available to the Company from time to time to satisfy its current obligations and other reasonable cash flow requirements. B. Additional Capital Requirements (a) General: It is the expectation and intention of the Members that, except as specifically provided in Paragraph 2.3 and in this Subparagraph 2.14.B, any and all additional capital requirements (if any) of the Company will be funded out of the operating profits of the Company. (b) Financing of Capital Requirements: Whenever it is determined by the Policy Committee that the Company's available Working Capital is, or is 18 20 presently likely to become, insufficient for the effective conduct of the Company's business, the Policy Committee may authorize the Manager, on behalf of the Company, to arrange a financing transaction to obtain additional capital to fund the operations of the business of the Partnership ("Financing Transaction"). A Financing Transaction may include: (i) loans from third party sources and/or any Member or any Affiliate of a Member (including without limitation accounts receivables financing), and (ii) any leasing transaction for equipment or furnishings utilized in the Company's business. (c) Loans by Members: Except as expressly provided herein, no Member shall lend or advance money to or for the Company's benefit without the prior approval of the Policy Committee. If any Member shall lend money to the Company or advance money on the Company's behalf, the amount of such loan or advance shall not be an increase in such Member's Interest, Capital Account or Economic Interest. The amount of such loan or advance shall be a debt due from the Company to such Member. ARTICLE III MANAGEMENT AND CONTROL OF BUSINESS INCLUDING MEETINGS 3.1 MANAGEMENT OF COMPANY AND DESIGNATION OF MANAGER A. Policy Committee (a) The Members shall establish the Policy Committee as follows: ASRS shall appoint one (1) individual, Ernest A. Bates, M.D., to serve on the Policy Committee, and act as Chairman thereof, and GKV shall appoint one (1) individual, Laurant Leksell, to serve on the Policy Committee. Either individual may appoint an alternate to represent them at a meeting of the Policy Committee. The foregoing composition of the Policy Committee shall not be changed by changes in a Member's Percentage Interest. The Policy Committee shall serve, generally speaking, in the same role as a board of directors of a corporation, and in this regard shall set operating policy of the Company and direct the Manager with respect to the implementation 19 21 thereof. Without limiting the generality of the foregoing, the Policy Committee shall: (a) set all operating policies for the Company; (b) review, revise and approve the Annual Budget proposed by the Manager; (c) review and approve all proposed contracts, equipment acquisitions and related leases; (d) approve contracts; (e) approve any individual expenditure over $10,000 not provided for in the Annual Budget; (f) oversee the Manager; (g) approve all distributions in accordance with Paragraph 5.3; (h) approve acquisition, mortgage and/or disposition of property; (i) exercise such other authorities as are reserved to the Policy Committee by other provisions of this Agreement; (i) approve all borrowings by the Company in excess of $10,000 (including all drawings by the Company under the GKV Loan and the Draw Down Loan) and (k) remove the Manager and select a replacement for such Manager. The individuals on the Policy Committee may be replaced at any time by a subsequent designee from the Member having appointed that individual. The Policy Committee may act only with unanimous approval of all of its members. (b) Upon written request to the Policy Committee by any Member, the Policy Committee shall immediately cause notice to be given to the Members entitled to vote that a meeting will be held at a time requested by the Member calling the meeting, not less than ten (10) days nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the Member entitled to call the meeting may give the notice or seek any remedy under applicable law. B. Management of Company by Manager As provided in the Articles and this Agreement, the business and affairs of Company shall be managed under the direction of the Manager, who shall be subject to the complete direction and control of the Policy Committee except as otherwise provided in this Agreement. The initial Manager shall be ASRS and it shall utilize Craig Tagawa as its agent for such purpose. A Member, unless also appointed (or hired) as a Manager, officer or other employee, shall not participate in the day to day operation of the business affairs of Company, except through the Policy Committee, and if so appointed (or hired), shall 20 22 participate only within the scope of authority of such position as defined in the Agreement or elsewhere. C. Designation of Managers Company shall have one Manager. Craig Tagawa on behalf of the Manager, ASRS, shall execute the duties of Manager on behalf of ASRS. Craig Tagawa shall be appointed Chief Executive Officer of Company unless he resigns, dies or is removed by the Policy Committee and until otherwise agreed by all of the Members. For as long as Craig Tagawa is employed by ASRS or any of its Affiliates, ASRS shall cause Craig Tagawa to devote approximately ninety percent (90%) of his business time to the Company. In the event of the death, disability or resignation of Craig Tagawa, a successor Chief Executive Officer shall be elected by the Policy Committee. D. Term of Manager A Manager whose term has expired shall continue to serve until a successor is elected and qualified. 3.2 SPECIFIC DUTIES OF MANAGER A. Duty to Present Financial Statements The Manager shall present monthly, quarterly and annual financial statements of the Company to the Policy Committee as soon as such financial statements are prepared. B. Duty of Manager to Qualify to Do Business in California and Other States If required by law, the Manager shall be qualified to do business in California by obtaining a certificate of authority to do so from the Secretary of State of the State of California and other states as required. C. Manager to Safekeep Funds of Company 21 23 The Manager shall have fiduciary responsibility for the safekeeping and use of all funds and assets of Company, whether or not in its immediate possession or control. The funds of Company shall not be commingled with the funds of any other person and the Manager shall not employ, or permit any other person to employ, such funds in any manner except for the benefit of Company. The bank accounts of Company shall be maintained in such banking institutions as are approved by the Policy Committee and withdrawals shall be made only in the regular course of Company business and as otherwise authorized in the Agreement on such signature or signatures as may be authorized by the Policy Committee. D. Day to Day Operations, etc Day to day operations of the Company shall be directed by the Manager. The Manager shall propose, subject to the review and approval of the Policy Committee: (a) the Annual Budget of the Company (which Manager shall propose to the Policy Committee not later than 60 days prior to the first day of each fiscal year); (b) operating policies and procedures; (c) accounting policies and procedures in accordance with United States generally accepted accounting principles; (d) financial systems and controls; (e) proposed expenditures by the Company with regards to the purchase and/or lease of equipment; and (f) personnel policies for the Company. ASRS shall perform billing services for the Company, either directly or through an arrangement with an Affiliate of Manager. ASRS shall provide accounting and other administrative services for the Company. Manager shall create an investment policy, which shall include consideration of prices to be charged, services to be offered, site and other minimum requirements, risk sharing with customers and return on Company investment. Such investment policy shall not dictate or limit the decisions of the Policy Committee, which may consider other relevant matters in deciding whether or not the Company will invest in any proposed project. E. Warranted Reliance by Manager on Others In performing its duties, Manager shall be entitled to rely on information, opinions, reports, or statements of the following persons or groups unless it has knowledge 22 24 concerning the matter in question that would cause such reliance to be unwarranted: (a) one or more employees or other agents of Company whom the Manager reasonably believes to be reliable and competent in the matters presented; (b) any attorney, public accountant, or other person as to matters which the Manager reasonably believes to be within such person's professional or expert competence; or (c) a committee that has been established by the Policy Committee, as to matters within such committee's designated authority, which committee the Manager reasonably believe to merit competence. F. Other Activities of Members Permitted Members may, subject to the limitations of Paragraph 12.9 hereof, engage in other business activities and shall be obliged to devote only as much of its time to the business of Company as shall be reasonably required in light of the purposes of Company. G. Manager's Liability Manager shall perform its duties as a Manager in good faith, in a manner it reasonably believes to be in the best interests of Company, with such care as an ordinarily prudent person in a like position would use under similar circumstances, and in accordance with the Articles, this Agreement and applicable law. A Person who so performs its duties shall not have any liability by reason of being or having been a Manager of Company. 3.3 POWERS OF MANAGER A. Powers of Manager Subject to the limitations of Subparagraph 3.3.B hereof, the Manager shall have all necessary powers to carry out the purposes, business, and objectives of Company consistent with 23 25 the decisions of the Policy Committee, including, but not limited to, the right to enter into and carry out contracts involving payments or obligations of less than $10,000 in the aggregate for each contract; to employ employees, agents, consultants and advisors on behalf of Company; to lend or borrow money involving amounts of less than $10,000 in the aggregate for each loan or borrowing and to issue evidences of indebtedness related thereto; to bring and defend actions in law or at equity; provided in each case that such actions are contemplated by the Provisional Budget or an Annual Budget and within the guidelines imposed by the Policy Committee. The Manager may deal with any Affiliate, but only on terms and conditions that would be available from an independent responsible third party that is willing to perform and with the prior written consent of all Members. The Manager shall have the authority to sign agreements and other documents on behalf of Company in the ordinary course of business, subject to the limitations of Subparagraph 3.3.B hereof. Subject to the limitations of Subparagraph 3.3.B, the Manager shall have power and authority, to act on behalf of Company and subject to the limitations of the Act and the limitations set forth herein: (a) To acquire property from any Person as Manager may determine, provided the aggregate payments or indebtedness for each acquisition is less than $10,000; (b) To borrow money for Company from banks, other lending institutions, the Members, or Affiliates of the Members or Manager on such terms as they deem appropriate, and in connection therewith, to hypothecate, encumber and grant security interests in the assets of Company to secure repayment of the borrowed sums, provided the aggregate payments or indebtedness for each borrowing is less than $10,000. Except as otherwise provided in the Act, no debt shall be contracted or liability incurred by or on behalf of Company, except by the Manager; (c) To purchase liability and other insurance to protect the property and business of Company. At a minimum, the Company shall maintain liability insurance covering each Gamma Knife site having a maximum deductible of $100,000 per site and coverage limit of at least $5,000,000 per site; 24 26 (d) To hold and own any Company real and personal properties in the name of Company; (e) To invest any funds of Company temporarily (by way of example but not limitation) in time deposits, short-term governmental obligations, commercial paper or other investments; (f) To execute on behalf of Company instruments and documents, including, without limitation, checks and drafts; provided the aggregate payments or indebtedness related to each such instrument or document is less than $10,000 and is contemplated by the Provisional Budget or an Annual Budget; (g) To employ accountants, legal counsel, managing agents or other experts to perform services for Company and to compensate them from Company funds, provided such employment is contemplated by the Provisional Budget or an Annual Budget; (h) To retain and compensate employees and agents generally, and to define their duties; (i) To enter into any and all other agreements on behalf of Company, with any other Person for any purpose necessary or appropriate to the conduct of the business of Company in the ordinary course of business; (j) Subject to the Provisional Budget or the Annual Budget, to pay reimbursement from Company of all expenses of Company reasonably incurred and paid by the Manager on behalf of Company; (k) Subject to the Provisional Budget or the Annual Budget, to pay from Company funds under control of Manager compensation due to ASRS or any Affiliate of ASRS; and (l) To do and perform all other acts as may be necessary or appropriate to the conduct of the business of Company; 25 27 B. Limitations on Power of Manager in Extraordinary Matters In addition to other limitations set forth in this Agreement, the Manager shall not have authority hereunder to cause Company to engage in transactions as set forth in this Subparagraph 3.3.B. without the prior approval of the Policy Committee. (a) The sale, exchange or other disposition of Company's assets not contemplated by an Annual Budget shall require the unanimous vote of Members. (b) The merger of Company with any other limited liability company or limited partnership shall require the unanimous vote of Members and the merger of Company with another corporation shall require the unanimous vote of all Members of Company. (c) Notwithstanding any other provisions of the Agreement, no equipment acquisition or related lease may be effected, debt (including debt refinancing), liability or individual expenditure of more than $10,000.00 may be contracted, no contract may be entered into on behalf of Company, no Company property may be disposed of, and no Distribution pursuant to Paragraph 5.2 shall be made except as approved by the Policy Committee. (d) The Manager shall neither change the amount nor character of Capital Contributions, nor change the character of the business of Company without the written consent of all Members. (e) The Manager shall not make a false or erroneous statement in the Articles. (f) The amendment of the Agreement shall require the unanimous agreement of all Members and as otherwise provided in Paragraph 12.13 hereof. (g) Any other transaction described in the Agreement as requiring a vote of Members. 26 28 C. Manager as Agent of Company The Manager is an agent of Company for the purpose of its business, and for purposes of the execution in name of Company of any instrument for apparently carrying on in the usual way the business of Company and binds Company, unless such act is in contravention of the Articles or the Agreement or unless the Manager so acting otherwise lacks the authority to act for Company and the person with whom he is dealing has knowledge of the fact that he has no such authority. D. Acts of Manager as Conclusive Evidence of Authority Every contract, deed, mortgage, lease and other instrument executed by the Manager shall be conclusive evidence in favor of every person relying thereon or claiming thereunder that at the time of the delivery thereof (i) Company was in existence, (ii) neither the Agreement nor the Articles had been amended in any manner so as to restrict the delegation of authority among Members or the Manager, and (iii) the execution and delivery of such instrument was duly authorized by Members and the Manager. Any person may always rely on a certificate addressed to him and signed by the Manager hereunder: (i) as to who are the Members or Manager hereunder; (ii) as to the existence or non-existence of any fact which constitutes a condition precedent to acts by the Members or the Manager or in any other manner germane to the affairs of Company; (iii) as to who is authorized to execute and deliver any instrument or document of Company; (iv) as to the authenticity of any copy of the Articles, the Agreement, amendments thereto and any other document relating to the conduct of the affairs of Company; or 27 29 (v) as to any act or failure to act by Company or as to any other matter whatsoever involving Company, the Manager or any Member in the capacity as a Member or Manager. 3.4 RESERVED 3.5 RESERVED 3.6 PROCEDURES FOR POLICY COMMITTEE MEETINGS Subject to the provisions of Paragraph 3.1.A, the meeting procedures set forth in the Act shall govern meetings of the Policy Committee. 3.7 COMPENSATION OF THE MANAGER, OFFICERS AND MEMBERS Subject to the Provisional Budget and Annual Budget, the Company shall reimburse ASRS for ninety percent (90%) of Craig Tagawa's compensation and all of his expenses directly related to the business of the Company for as long as Craig Tagawa is acting as Chief Executive Officer of the Company and for the costs reasonably incurred by ASRS in providing administrative services to the Company as described herein. Subject to the Provisional Budget and Annual Budget, the Company shall reimburse Members for all reasonable travel expenses related to the business of the Company. Subject to the Provisional Budget and Annual Budget, the Company shall reimburse GKV for sixty percent (60%) of Richard Grome's compensation and all of his expenses directly related to the business of the Company for as long as Richard Grome is acting as Chief Operating Officer. Such compensation shall not be a Distribution and shall be an expense of the Company for all purposes. 3.8 RESERVED 3.9 BUSINESS PURPOSE OF THE COMPANY The Company shall be the preferred alternative financing provider of EII and EISA to health care institutions in the United States and Brazil acquiring Gamma Knife units. The Company will purchase Gamma Knife units from EII or its Affiliates and may enter leases (other than traditional financing 28 30 leases), joint venture or enter into other operating arrangements with health care institutions for the use of the Gamma Knife units. The Company's activities in support of this business purpose will include: A. Acquiring or arranging for the use of space and facilities necessary for the implementation of the Company's business purpose. B. Acquiring or arranging for the use of equipment, supplies, and materials necessary for health care institutions' use of the Gamma Knife. C. Purchasing or leasing the Gamma Knife to be utilized by the Company. D. New or replacement equipment proposed to be utilized by the Company will be obtained pursuant to such purchase or leasing or other arrangements as may be approved by the Policy Committee. It is the current expectation and intention of the Members that all major pieces of equipment or significant upgrades to existing equipment will be obtained through leasing or other financial arrangements. E. Providing and obtaining the services of professional and technical support personnel and related services necessary for the performance of the Company's services. F. Entering into licensing and royalty agreements related to intellectual property developed or obtained by the Company. G. Engaging in or performing all acts and activities which are incidental to or in furtherance of its business purposes. H. The Company shall not engage in the provision of any services for which a license to practice medicine is required under California or other applicable law. ARTICLE IV 29 31 CAPITAL ACCOUNTS 4.1 CAPITAL ACCOUNT FOR EACH MEMBER Manager shall maintain a separate capital account (a "Capital Account") for each Member in accordance with the requirements of Regulations Section 1.704-1(b)(2)(iv). To the extent that the results determined under any provision of this Article IV vary from the results that would be required under the rules described in Regulations Section 1.704-1(b)(2)(iv), the rules set forth in Regulations Section 1.704-1(b)(2)(iv) shall be used and govern the maintenance of Capital Accounts under the Agreement. 4.2 RESERVED 4.3 CAPITAL ACCOUNT MAINTENANCE Subject to the other Paragraphs of this Article, the Capital Account of any Member shall be maintained for such Member in accordance with the following provisions: A. To each Member's Capital Account there shall be credited the amount of cash contributed by such Member, the initial Gross Asset Value of any property contributed by such Member, such Member's distributive share of Net Profits and any items in the nature of income or gains which are specially allocated, and the amount of any liabilities of Company assumed by the Member or which are secured by any property distributed to the Member. B. To each Capital Account there shall be debited the amount of cash and the Gross Asset Value of any property distributed to the Member pursuant to any provision of the Agreement, the Member's distributive share of Net Losses and any items in the nature of expenses or losses which are specially allocated, and the amount of any liabilities of the Member assumed by Company or which are secured by any property contributed by the Member to Company. C. In the event all or a portion of a Membership Interest is transferred in accordance with the terms of the 30 32 Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. D. In the event that assets of Company other than cash are distributed in kind to a Member, Capital Accounts shall be adjusted for the hypothetical "book" gain or loss that would have been realized by Company if the distributed assets had been sold for their fair market values in a cash sale (in order to reflect unrealized gain or loss). 4.4 DEFINITIONS USED IN CAPITAL ACCOUNT MAINTENANCE A. "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: a. The initial Gross Asset Value of any asset contributed by a Member to Company shall, except as otherwise provided in Section 2.3 hereof in relation to Gamma Knife units, be the gross fair market value of such asset, as determined by the Policy Committee. b. The Gross Asset Values of all assets of Company shall be adjusted to equal their respective gross fair market values, as determined by the Policy Committee, as of the following times: (i) the acquisition of an additional Interest by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) the distribution by Company to a Member of more than a de minimis amount of property as consideration for an Interest; and (iii) the liquidation of Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (i) and (ii) above shall be made only if the Policy Committee reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in Company. c. The Gross Asset Value of any asset of Company distributed to any Member shall be adjusted to equal the gross fair market value of such asset on the date of Distribution, as determined by the distributee and the Manager, provided that, if 31 33 the distributee is a Manager, the determination of the fair market value of the distributed asset shall require the consent of the non-distributee Members; or if the parties cannot agree, an appraiser mutually acceptable to both parties shall be selected to determine the Gross Asset Value of such asset. d. The Gross Asset Values of assets of Company shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this Subparagraph to the extent the Manager determines that an adjustment pursuant to Subparagraph 4.4.A.b above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Subparagraph. e. If the Gross Asset Value of an asset has been determined or adjusted pursuant to any of the Subparagraphs above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset and shall be utilized for purposes of computing Net Profits and Net Losses. B. "Net Profits" and "Net Losses" shall have the meanings set forth in Subparagraph 5.2.G. 4.5 POWER TO MODIFY CAPITAL ACCOUNTS TO COMPLY WITH REGULATIONS The foregoing provisions and the other provisions of the Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Policy Committee determines that it is necessary to modify the manner in which the Capital Accounts are computed in order to comply with such Regulations and to reflect the agreed upon sharing of the distribution of cash, the Policy Committee may make such modification, provided that it is not likely to have a material effect on the amounts 32 34 distributable to any Member upon the dissolution of Company. The Policy Committee also shall make any appropriate modifications in the event unanticipated events occur that might otherwise cause the Agreement not to comply with Regulations Section 1.704-1(b). ARTICLE V ALLOCATIONS OF NET PROFITS AND NET LOSSES AND DISTRIBUTIONS 5.1 ALLOCATIONS OF NET PROFITS AND NET LOSSES A. General Allocations of Net Profits and Net Losses After giving effect to the special allocations set forth elsewhere herein, Net Profits and Net Losses for any fiscal year of the Company shall be allocated as follows: (I) Allocation of Net Profits Net Profits for any fiscal year shall be allocated to each Member in accordance with its Percentage Interest. (II) Allocation of Net Losses Net Losses for any fiscal year shall be allocated to each Member in accordance with its Percentage Interest. B. Certain Special Allocations The following special allocations shall be made in the following order: (I) Company Minimum Gain Chargeback If there is a net decrease in Company Minimum Gain for a Company taxable year, then each Member shall be allocated items of income and gain for such year (and, if necessary, for subsequent years) in the manner and to the extent required by Regulations Section 1.704-2(f). 33 35 (II) Member Minimum Gain Chargeback If there is a net decrease during a Company fiscal year in Member Minimum Gain, then any Member with a share of Member Minimum Gain (determined under Regulations Section 1.704-2(i)(5)) at the beginning of such year shall be allocated items of Company income and gain for such year (and, if necessary, subsequent years) in the manner and to the extent required by Regulations Section 1.704-2(i)(4). (III) Qualified Income Offset Any Member who unexpectedly receives an adjustment, allocation or distribution described in Regulations Section 1.704-1(b)(2)(ii) (d)(4), (5), or (6) will be allocated items of income and gain (consisting of a pro rata portion of each item of Company income, including gross income and gain, for such year) in an amount and manner sufficient to eliminate any Adjusted Capital Account Deficit as quickly as possible, provided that such allocation shall be made if and only to the extent such Member would have an Adjusted Capital Account Deficit after all other allocations pursuant to this Subparagraph 5.1.B have been made tentatively as if this Subparagraph 5.1.B(III) were not in the Agreement. (IV) Gross Income Allocation In the event any Member has a deficit Capital Account at the end of any Company fiscal year which is in excess of the sum of (i) the amount such Member is obligated to restore, and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Section 1.704-2(g)(1) and Section 1.704-2(i)(5), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that any allocation pursuant to this Subparagraph 5.1.B(IV) shall be made if and only to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Subparagraph 5.1.B have been tentatively made as if this Subparagraph 5.1.B(IV) and Subparagraph 5.1.B(III) were not in the Agreement. 34 36 (V) Allocation of Nonrecourse Deductions Member Nonrecourse Deductions shall be allocated to the Member, if any, that bears the economic risk of loss for the Member Nonrecourse Debt to which the Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). Company Nonrecourse Deductions shall be allocated in the same manner as Net Profits. (VI) Syndication Expenses In the event that additional Members are admitted to the Company on different dates, all syndication expenses shall be divided among the persons who are Members from time to time so that, to the extent possible, the cumulative amount of syndication expenses allocated with respect to each Member at any time is in proportion to that Member's Percentage Interest as determined after such admission. In the event the Manager shall determine that such result is not likely to be achieved through future allocations of syndication expenses, the Manager may allocate other items of income, gain, deduction or loss so as to achieve the same effect on the Capital Accounts of the Members. C. Certain Other Allocation Rules (I) Allocation of Income, Gains and Losses Related to Contributed Property In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to Company for federal income tax purposes and its Gross Asset Value. In the event the Gross Asset Value of any Company asset is adjusted pursuant to the provisions of this Agreement, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations 35 37 thereunder. Any elections or other decisions relating to such allocations shall be made by the Policy Committee in any manner permitted by the Regulations that reasonably reflects the purpose and intention of the Agreement. Unless the Policy Committee determines otherwise, the method of allocation with respect to each item of contributed property shall be chosen in a manner that results in the greatest allocation of depreciation or amortization with respect to such item of property to the Members other than the Member that contributed such item of property. Allocations pursuant to this Subparagraph are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any member's Capital Account or share of Net Profits, Net Losses, or other items or distributions pursuant to any other provision of the Agreement. (III) Allocations to Avoid Adjusted Capital Account Deficit Notwithstanding any other provision of this Article, no Member shall receive an allocation of Net Losses or any other item of loss or deduction that would create or increase an Adjusted Capital Account Deficit of the Member. Any Net Loss, or item thereof, that cannot be allocated to a Member as a result of the foregoing limitation shall be allocated to all Members who do not have an Adjusted Capital Account Deficit. Any Net Loss, or item thereof, allocated to Members pursuant to the preceding sentence shall be taken into account in computing subsequent allocations of Net Profits so that the net amount of any items so allocated to each Member shall, to the extent possible, be equal to the net amount that would have been allocated to each Member if the allocations required by the preceding sentence had not been made. (IV) Excess Nonrecourse Liabilities Solely for purposes of determining a Member's proportionate share of the "excess nonrecourse liabilities" of the Company within the meaning of Regulations Section 1.752-3(a)(3), the Member's interests in the Company equal their respective Percentage Interests determined from time to time. 36 38 (V) Allocation of Net Profits and Losses and Distributions in Respect of a Transferred Interest If any Interest is transferred, or is increased or decreased by reason of the admission of a new Member or otherwise, during any fiscal year of Company, each item of income, gain, loss, deduction, or credit of Company for such fiscal year shall be allocated to the Members based upon the pro rata method, except that any gain or loss of Company realized in connection with a sale or other disposition of any of the assets of Company shall be allocated solely to the parties owning Interests in Company as of the date such sale or other disposition occurs. (VI) Curative Allocations The allocations set forth in Subparagraph 5.1.B hereof (the "Regulatory Allocations") are intended to comply with certain requirements in the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Subparagraph 5.1.C(VI). Therefore, notwithstanding any other provisions of this Agreement (other than the Regulatory Allocations), the Manager shall make such offsetting special allocations of Company income gain, loss or deduction in whatever manner the Manager determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of this Agreement and all Company items were located pursuant to Subparagraph 5.1.A. In exercising its discretion hereunder, the Manager shall take into account any future Regulatory Allocations that are likely to offset other Regulatory Allocations previously made. 5.2 DEFINITIONS OF TECHNICAL TERMS USED FOR ALLOCATION PURPOSES A. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such 37 39 Member's Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments: (i) Credit to such Capital Account means any amounts which such Member is obligated to restore pursuant to the terms of such Member's promissory note or otherwise) or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) Debit to such Capital Account means the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. B. "Company Minimum Gain" has the meaning set forth in Regulations Section 1.704-2(b)(2). C. "Company Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(b)(1). D. "Member Minimum Gain" means minimum gain attributable to a Member Nonrecourse Debt pursuant to Regulations Section 1.704-2(i)(3). E. "Member Nonrecourse Debt" means any debt of Company that is nonrecourse for purposes of Regulations Section 1.1001-2, for which any Member bears the economic risk of loss within the meaning of Regulations Section 1.752-2. F. "Member Nonrecourse Deduction" has the meaning set forth in Regulations Section 1.704-2(i)(1) and 1.704- 2(i)(2). G. "Net Profits" and "Net Losses" means, for each fiscal year or other period, an amount equal to Company's taxable income or loss for such year or period, determined in accordance with Code Section 703(a), and all items of income, gain, loss, or deduction required to be stated separately pursuant to Code 38 40 Section 703(a)(1) shall be included in taxable income or loss, with the following adjustments: (i) Any income of Company that is exempt from federal income tax and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this Paragraph, shall be added to such taxable income or loss; (ii) Any expenditures of Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704- 1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this Subparagraph, shall be subtracted from such taxable income or loss; (iii) In the event that the Gross Asset Value of any Company asset is adjusted pursuant to Subparagraph 4.4B, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Profits or Net Losses; (iv) Gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period; (vi) To the extent an adjustment to the adjusted tax basis of any Company asset is required pursuant to Code Section 734(b) or Code Section 743(b) and in accordance with Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member's interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from 39 41 the deposition of the asset and shall be taken into account for computing Net Profits or Net Losses; and (vii) Any items that are specially allocated pursuant to Article V of the Agreement shall not be taken into account in computing Net Profits or Net Losses. H. "Depreciation" means, for each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that, if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such fiscal year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Manager. 5.3 DISTRIBUTIONS OF NET CASH FLOW BY COMPANY Subject to any limitations found elsewhere in the Agreement and under law including the requirements of Section 17254 of the Act that the assets of Company after the distribution be in excess of all liabilities except for liabilities owed to Members for their capital Contributions as described in Paragraph 5.6, the Manager shall, with the prior approval of the Policy Committee, distribute Net Cash Flow as defined below to the Members in accordance with their respective Percentage Interests, but only to those persons or entities recognized on the books of Company as Members or as assignees of interests on the day of the distribution. With respect to any fiscal period, Net Cash Flow means all cash of the Company, other than cash retained for the purposes of a Working Capital reserve established by the Policy Committee, including cash from operations, financing, refinancing, exchange or other disposition of Company assets (other than upon the dissolution of the 40 42 Company) (all as determined by the Manager as directed by the Policy Committee); provided, however, (i) that no distribution of cash will be made until all amounts loaned by any Member, if any (and all interest with respect to such amounts) have been repaid in full; and (ii) that no distribution shall be made which is in violation of any security or lending agreement with a third party, or which would occur at a time prior to repayment in full of any debt of the Company, if any, to any Member. 5.4 RESERVED. 5.5 DISTRIBUTION OF ASSETS BY COMPANY Distributions of assets with respect of an Interest in Company shall be made only to the Members who, according to the books and records of Company, are the holders of record of the interests in respect of which such distributions are made on the actual date of distribution. Neither Company nor any Member shall incur any liability for making distributions in accordance with the provisions of the preceding sentence, whether or not Company or the Member has knowledge or notice of any transfer or purported transfer of ownership of Interest in Company which has not been approved by unanimous vote of the Members. 5.6 IMPAIRMENT OF CAPITAL LIMITATIONS ON DIVISION AND DISTRIBUTION OF NET CASH FLOW Company may, from time to time, distribute Net Cash Flow to the Members of Company upon the basis stipulated in this Article V (and subject to the limitations set forth in Paragraph 5.3); provided that after distribution is made, the assets of Company are in excess of all liabilities of Company except liabilities to Members on account of their Capital Contributions after giving effect to all distributions, revaluations and allocations. ARTICLE VI ACCOUNTING, RECORDS, AND REPORTING BY MEMBERS 6.1 ACCOUNTING DECISIONS AND RELIANCE ON OTHERS 41 43 All decisions as to accounting matters, except as otherwise specifically set forth herein, shall be made by the Manager. The Manager may rely upon the advice of accountants reasonably selected by the Manager as to whether such decisions are in accordance with accounting methods followed for federal income tax purposes. 6.2 RECORDS AND ACCOUNTING MAINTAINED The books and records of Company shall be kept, and the financial position and the results of its operations recorded, in accordance with United States generally accepted accounting principles. The books and records of Company shall reflect all Company transactions and shall be appropriate and adequate for Company's business. The fiscal year of Company for financial reporting and for federal income tax purposes shall be the calendar year. The Company's annual financial statements shall be audited by one of the following firms selected by the Policy Committee: (a) Arthur Andersen, LLP, (b) Ernst & Young LLP, (c) Coopers & Lybrand, (d) Deloitte & Touche, (e) Price Waterhouse, or (f) KPMG Peat Marwick. 6.3 ACCESS FOR MEMBERS TO ACCOUNTING RECORDS All books and records of Company shall be maintained at any office of Company or at Company's principal place of business, and each Member or holder of an Economic Interest, and his duly authorized representative, shall have access to them at such office of Company and the right to inspect and copy them at reasonable times. In addition, the Manager shall present monthly, quarterly and annual financial statements of the Company to the Policy Committee as soon as such financial statements are prepared. 6.4 ANNUAL TAX INFORMATION FOR MEMBERS Company shall prepare and deliver to each Member within the time period required by law after the end of each fiscal year all information necessary for the preparation of such Member's federal income tax return. Company shall also prepare and deliver, within 60 days after the end of each fiscal year, an audited financial report of Company for such fiscal year, 42 44 containing a balance sheet as of the last day of the year then ended, an income statement for the year then ended, a statement of cash flows, and a statement of reconciliation of the Capital Accounts of Members. 6.5 TAX MATTERS FOR COMPANY HANDLED BY MANAGER The Manager shall be designated as "Tax Matters Partner" (as defined in Code Section 6231), to represent Company (at Company's expense) in connection with all examinations of Company's affairs by tax authorities, including resulting judicial and administrative proceedings, and to expend Company funds for professional services and costs associated therewith. In its capacity as "Tax Matters Partner", the Manager shall oversee Company tax affairs in the overall best interests of Company. 6.6 FEDERAL INCOME TAX ELECTIONS MADE BY POLICY COMMITTEE The Manager, at the exclusive direction of the Policy Committee and on behalf of Company, may make all elections for federal income tax purposes, including but not limited to, the following: A. Use of Accelerated Depreciation Methods To the extent permitted by applicable law and regulations, Company may elect to use an accelerated depreciation method on any depreciable unit of the assets of Company. B. Adjustment of Basis of Assets In case of a transfer of all or part of the Interest of any Member, Company may elect, pursuant to Code Sections 734, 743, and 754 of the Code, as amended (or corresponding provisions of future law) to adjust the basis of the assets of Company. 43 45 C. Variation Between Tax Basis and Value To the extent permitted by the Regulations, the Policy Committee may elect any acceptable method under Code Section 704(c). 6.7 RESERVED 6.8 ANNUAL FILING OF LIST OF MANAGERS AND DESIGNATION OF AGENT FOR SERVICE OF PROCESS The Manager on behalf of Company shall, within ninety (90) days after filing the original Articles and annually thereafter on or before the last day of the month which the anniversary date of the filing of the original Articles occurs in each year, file with the Secretary of State an annual statement on a form prescribed by the Secretary of State and enclose any required filing fee. The statement required to be filed must contain all of the information required by Act Section 17060. ARTICLE VII CONSEQUENCES OF DEATH, DISSOLUTION, RETIREMENT OR BANKRUPTCY OF MEMBER 7.1 CONSENT TO CONTINUE BUSINESS OF COMPANY Upon the occurrence of any Dissolution Event, Company shall dissolve unless the remaining Members holding a Majority-In-Interest consent to the continuation of the business of Company. A Member whose actions or conduct result in the Dissolution Event is referred to herein as the "Former Member". 7.2 PURCHASE OF MEMBER'S INTEREST Upon the occurrence of any Dissolution Event specified in Subparagraph 9.1(iii) and the consent of the remaining Members holding a Majority-In-Interest (excluding for this purpose the Membership Interest of the Former Member) to continue the business of Company, the other Members (the "Remaining Members") shall have an option to purchase the Former Member's Membership Interest. Within ninety (90) days of such consent, or 44 46 within ninety (90) days of the inheritance or transfer by operation of law to a person of the Former Member's Membership Interest, the Remaining Members shall notify the Manager in writing of their desires to purchase a portion of the Former Member's Interest. 7.3 FAILURE TO SUBMIT NOTICE OF PURCHASE The failure of any Remaining Member to submit a notice within the applicable period shall constitute an election on the part of the Member not to purchase any of the Former Member's Interest. Each Remaining Member shall be entitled to purchase a portion of the Former Member's Interest on a pro rata basis based on the Remaining Member's Percentage of Interest on the date of the consent referred to in Paragraph 7.2 hereof. 7.4 ELECTION TO PURCHASE LESS THAN ALL OF AN INTEREST In the event any Remaining Member elects to purchase none or less than all of its pro rata part of the Former Member's Interest, then, at its election, those Remaining Members can elect to purchase more than their pro rata part, i.e., the proportion that the Percentage Interest of the Former Member bears to the aggregate of the Percentage Interests of all Members and the Former Member. If the Remaining Members fail to purchase the entire interest of the Former Member, Company may elect to purchase the unpurchased portion of the Former Member's Interest. If none of the above elects to purchase, the same shall pass by operation of law to any assignee or shall remain in the hands of the Former Member. Notwithstanding any provision of the Agreement to the contrary, the remaining Members may mutually agree to an allocation of the Former Member's Interest to be purchased by each of them. 7.5 VALUATION OF INTEREST OF MEMBER The Former Member's Interest shall be valued according to its book value determined in accordance with generally accepted accounting principles, provided, however, if the Former Member or such Former Member's trustee or heirs or any Remaining Member electing to purchase or Company if it elects to purchase, deems the book value to vary from fair market value by more than 45 47 five percent (5%), such person shall be entitled to require an appraisal. In such event, the value of the Former Member's Interest shall equal the fair market value of the Interest as determined by agreement within ninety (90) days after the notice to remaining Members or, in case of a failure to agree within such ninety (90) day period, as determined by three appraisers, one selected by the Former Member or such Former Member's trustee(s) or heir(s), one selected by the Remaining Member, and one selected by the two appraisers so named. All appraisers appointed under this Paragraph 7.5 shall be generally known and respected with respect to appraisals in the Company's industry. The fair market value of the Former Member's interest in Company shall be the average of the two appraisals closest in amount to each other except that if one appraisal is equal to the average of all three appraisals, the fair market value shall be equal to such average. In the event the fair market value is determined to be within five percent (5%) of book value, the party requesting such appraisal shall pay all expense of the same otherwise incurred by the parties offering to enter into the transaction at the book valuation. In the event the fair market value is determined not to be within five percent (5%) of book value, the expense of such appraisal shall be paid by the Company. 7.6 PAYMENT OF PURCHASE PRICE The purchase price shall be paid by Company or the Remaining Member, as the case may be, within 60 days after the determination of the fair market value of the Former Member's Interest in Company as provided herein. 7.7 PURCHASE TERMS VARIED BY AGREEMENT Nothing contained herein is intended to prohibit Members from agreeing upon terms and conditions for the purchase by Company or any Member of the Interest of any Member in Company desiring to retire, withdraw or resign, in whole or in part, as a Member (on such terms and conditions as may be agreed upon by the selling Member and Company or the remaining Members as the case may be), nor is anything herein intended to limit or otherwise affect the ability of a Member to demand a return of his or its contribution to Company as may be required in the Act. 46 48 ARTICLE VIII TRANSFER AND ASSIGNMENT OF INTERESTS 8.1 TRANSFER AND ASSIGNMENT OF INTERESTS No Member shall be entitled to assign, convey, sell, encumber or in any way alienate all or any part of his Membership Interest in Company as a Member except with the prior written consent of all other Members, which consent may be given or withheld, conditioned or delayed as the other Members may determine in their sole and absolute discretion. 8.2 FURTHER RESTRICTIONS ON TRANSFER OF INTERESTS In addition to other restrictions found in the Agreement, no Member shall assign, convey, sell, encumber or in any way alienate all or any part of his Interest in Company: (i) without registration under applicable federal and state securities laws, or unless he delivers an opinion of counsel satisfactory to Company that registration under such laws is not required; or (ii) if the Interest to be sold or exchanged, when added to the total of all other Interests sold or exchanged in the preceding twelve (12) consecutive months prior thereto, would result in the termination of Company under Code Section 708. 8.3 SUBSTITUTION OF MEMBERS AFTER TRANSFER OF INTEREST Notwithstanding anything herein to the contrary, a transferee of an Interest shall have the right to become a substitute Member (with all Membership Rights related thereto) only if (i) the other Members shall have consented thereto (which consent may be granted or withheld in the sole and absolute discretion of each Member), (ii) the requirements of Paragraph 8.2 relating to securities and tax requirements hereof are met, (which approval may be granted, delayed or withheld in their sole and absolute discretion), (iii) such Person executes an instrument satisfactory to the Remaining Members accepting and adopting the terms and provisions of the Agreement, and (iv) such Person pays any reasonable expenses in connection with his or her admission as a new Member. An assignee who becomes a substituted Member has, to the extent assigned, the rights and powers of a 47 49 Member under the Articles, the Agreement and the Act. An assignee who becomes a substituted Member is also liable for obligations to contribute to capital and to return any unlawful distributions made to such assignee. 8.4 EFFECTIVE DATE OF PERMITTED TRANSFERS OF AN INTEREST Any permitted transfer of all or any portion of an Interest in Company will take effect on the first day of the month following the date of receipt by the other Members of written notice of the transfer. Any transferee of an Interest in Company shall take subject to the restrictions on transfer imposed by the Agreement. 8.5 NO EFFECT TO TRANSFERS IN VIOLATION OF AGREEMENT Upon any transfer of an Interest in Company in violation of the Agreement, the transferee shall have only Economic Rights and shall have no Management and Voting Rights or Information Rights. Until the assignee of an Interest in Company becomes a Member, the assignor continues to be a Member and to have the power to exercise Management Rights and Information Rights. 8.6 RESERVED ARTICLE IX DISSOLUTION AND WINDING UP 9.1 CONDITIONS OF DISSOLUTION Company shall be dissolved, its assets shall be disposed of, and its affairs wound up on the first to occur of the following: (i) The expiration of the period fixed for the duration of Company term as stated in its Articles; (ii) A determination by the unanimous written agreement of all Members that Company shall be dissolved and wound up; 48 50 (iii) The occurrence of a Dissolution Event and the failure of either (a) Company or the Remaining Members to purchase the Interest of the Former Member as provided in Paragraph 7.2, (b) Members holding a Majority-In-Interest (excluding for this purpose the Membership Interest of the Former Member) to consent to the continuation of business of Company; (iv) The sale of all or substantially all of the assets of Company; (v) The entry of a decree of judicial dissolution by a court of competent jurisdiction providing for the dissolution of company filed by any Manager or any Member or Members; (vi) If performance of any term, covenant, condition or provision of this Agreement is or will be illegal or in violation of any statute, regulation or ordinance and cannot be corrected by the good faith efforts of the Members within ten (10) days after written notice thereof; (vii) If the Company has not entered into six (6) alternative financing agreements (evidenced by executed written contracts) during the two (2) year period commencing with the effective date of this Agreement; provided that this Subparagraph (vii) shall become void and of no further effect on the day on which the Company receives an equity capital contribution from a Member that is not ASRS or GKV; or (viii) If the Policy Committee is unable to attain a unanimous vote on any decision materially affecting the business of the Company, or to obtain a unanimous vote to approve an Annual Budget for two (2) consecutive fiscal years. 9.2 STATEMENT OF INTENT TO DISSOLVE As soon as possible following the occurrence of any of the events specified in Paragraph 9.1, the Manager on behalf of Company shall file a certificate of dissolution and form prescribed by the Secretary of State as required by the Act. The Manager shall deliver two signed copies of the Statement of Intent to Dissolve to the Secretary of State. Upon the filing of the certificate of dissolution, the Company shall cease to carry 49 51 on its business, except insofar as may be necessary for the winding up of its business, but its separate existence continues until the certificate of cancellation of articles of organization has been filed with the Secretary of State or until a decree dissolving the company has been entered by a court of competent jurisdiction. 9.3 WINDING UP Upon the occurrence of any of the events specified in Paragraph 9.1, Company shall continue solely for the purpose of winding up its affairs in an orderly manner, liquidating its assets, disposing of and conveying its property, collecting and dividing its assets, satisfying the claims of its creditors and prescribing and defending actions by or against Company in order to collect and discharge obligations. No Member shall take any action that is inconsistent with, or not necessary to or appropriate for, winding up the business and affairs of Company. To the extent not inconsistent with the foregoing, all covenants and obligations in the Agreement shall continue in full force and effect until such time as the assets have been distributed and Company has terminated. If any Member receives a distribution in kind such item or items shall be deemed to have been sold for fair market value, and Capital Accounts shall be adjusted to reflect deemed gain or loss on each such transaction. Upon the filing of the Statement of Intent to Dissolve, the following shall occur: A. ASRS shall have the right (but not the obligation) to purchase from the Company either or both of the Company's Gamma Knife projects (including all physical assets and all intangible assets associated with such projects) located at the USC University Hospital and at the University of California San Francisco Hospital previously transferred by ASRS to the Company. At the time of such transfer(s), if any, ASRS shall pay to the Company cash in an amount equal to the fair market value of such transferred assets as of the time of transfer. B. GKV shall have the right and obligation to purchase from the Company the rights of the Company under the LGK Purchase Agreement relating to each Gamma Knife for which the Company has not entered into an alternative financing agreement with an end- 50 52 user (and each such Gamma Knife if title thereto shall have passed to the Company), and the consideration for such rights shall consist of: (i) the assumption by GKV of all of the Company's obligations under the LGK Purchase Agreement relating to each such Gamma Knife; and (ii) a cash amount equal to any advance payments theretofore actually paid by the Company to EII and/or its Affiliates in relation to Gamma Knife units ordered by the Company but for which no alternative financing agreement has been entered by the Company with an end-user. However, GKV shall have the right to offset such cash payment against the then outstanding principal and accrued interest under the GKV Loan and/or the Draw Down Loan, whether or not such principal or accrued interest is then payable. C. In addition, the Members shall have the option to acquire the rights of the Company to other existing alternative financing agreements with end-users relating to Gamma Knives (which shall include any Gamma Knife related thereto) and other assets by paying to the Company cash in an amount equal to the fair market value of such transferred assets. Such fair market value shall be determined in accordance with the procedures described in Subparagraph 2.1.B.2. In the event more than one Member desires to exercise such right, such rights shall be exercised by the Members as closely as practicable in proportion to their Percentage Interests. 9.4 RESPONSIBILITIES FOR WINDING UP The Manager shall be responsible and be compensated for overseeing the winding up and liquidation of Company, shall take full account of the liabilities of Company and assets, shall cause its assets to be liquidated as promptly as is consistent with obtaining the fair market value thereof, and shall cause the proceeds therefrom, to the extent sufficient therefor, to be applied and distributed as next provided. The persons responsible for winding up the affairs of Company shall give written notice of the commencement of winding up by mail for all known creditors and claimants whose addresses appear on the records of Company. 51 53 9.5 ORDER OF PAYMENT UPON DISSOLUTION In settling accounts of Company after dissolution, the Manager shall settle the liabilities of Company with payments in the following order, as required by the Act: (i) To creditors, including Members, in the order of priority as provided by law, except those to Members of Company on account of their contributions; (ii) To Members of Company in accordance with the respective positive Capital Account balances after giving effect to all Capital Contributions, distributions, revaluations and allocations required under this Agreement, in an amount equal to the sum of such positive Capital Account balances; and (iii) Any remaining assets shall be distributed to the members in proportion to their Percentage Interests. 9.6 COMPLIANCE WITH REGULATIONS All distributions to the Members upon the winding up and dissolution of Company shall be strictly in accordance with the positive Capital Account balance limitation and other requirements of Regulations Section 1.704-1(b)(2)(ii)(d), provided however that no Member shall be required to restore a negative balance in its Capital Account upon dissolution of Company. 9.7 LIMITATIONS ON PAYMENTS MADE IN DISSOLUTION Except as otherwise specifically provided in the Agreement, each Member shall only be entitled to look solely at the assets of Company for the return of his positive Capital Account balance. The Manager shall be entitled to reasonable compensation for winding up the affairs of the Company. 52 54 ARTICLE X INDEMNIFICATION 10.1 INDEMNIFICATION OF MEMBERS AND MANAGER Company shall indemnify against expenses and liabilities any Member, Manager or Officer made a party or who was threatened to be made a party to any proceeding by Company or another because such party is or was a Member, Manager or Officer, as a matter of right, against all liability incurred by such individual in connection with any action, suit, or proceeding or any threatened, pending or complete action, suit or proceeding; whether civil, criminal, administrative, or investigative provided that it shall be determined in the specific case in accordance with Paragraph 10.5 of this Article X that indemnification of such individual is permissible in the circumstances because the individual has met the standard of conduct for indemnification set forth in this Article X. 10.2 ADVANCE UNDERTAKINGS FOR INDEMNIFICATION Company shall pay for or reimburse the reasonable expenses incurred by a Member, Manager or Officer in connection with any such proceeding as incurred in advance of final disposition of the action, suit, or proceeding thereof if (i) the person furnishes Company a written affirmation of the person's good faith belief that it has met the standard of conduct for indemnification described in Paragraph 10.5, (ii) the person furnishes Company a written undertaking, executed personally or on such person's behalf, to repay the advance if it is ultimately determined by a court of competent jurisdiction that such person did not meet such standard of conduct and that it is not entitled to be indemnified, and (iii) a determination is made in accordance with Paragraph 10.6 that based upon facts then known to those making the determination, indemnification would not be precluded under this Article. The undertaking described above must be a general obligation of the individual, subject to such reasonable limitations as Company may permit, but need not be secured and may be accepted without reference to financial ability to make 53 55 repayment. Company shall indemnify a Member, Manager or Officer who is wholly successful, on the merits or otherwise, in the defense of any such proceeding, as a matter of right, against reasonable expenses incurred by the person in connection with the proceeding without the requirement of a determination as set forth in Paragraph 10.6. 10.3 ADVANCEMENT OF EXPENSES Upon demand by a Member, Manager or Officer for indemnification or advancement of expenses incurred in defending a civil or criminal suit or proceeding, as the case may be, Company shall expeditiously determine whether the Member, Manager or Officer is entitled thereto in accordance with this Article X. 10.4 INDEMNIFICATION OF OTHERS Company shall be empowered, but shall not be obligated, to indemnify any individual who is or was an employee or agent of Company to the same extent as if such individual were a Member, Manager or Officer. Such indemnification shall occur only after unanimous approval by the Policy Committee. 10.5 STANDARDS OF CONDUCT FOR INDEMNIFICATION Indemnification of a Manager, Member or Officer is permissible under this Article X only if (i) such person conducted itself in good faith and within the scope of authority granted by the Policy Committee, and (ii) reasonably believed that its conduct was in or at least not opposed to Company's best interest; and (iii) in the case of any criminal proceeding, it had no reasonable cause to believe its conduct was unlawful. The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the person did not meet the standard of conduct described in this Paragraph 10.5. 54 56 10.6 PROCEDURES TO DETERMINE INDEMNIFICATION A determination as to whether indemnification of or advancement of expenses is permissible shall be made by any one of the following procedures: (i) By the Policy Committee in good faith by a unanimous vote; or (ii) By special legal counsel to the Company selected by the Policy Committee. 10.7 RESERVED 10.8 RESERVED 10.9 RESERVED 10.10 RESERVED 10.11 DEFINITIONS FOR INDEMNIFICATION PROVISIONS A. "Expenses" mean all reasonable direct and indirect costs (including without limitation counsel fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or out-of-pocket expenses) actually incurred in connection with the investigation, defense, settlement or appeal of a proceeding or establishing or enforcing a right to indemnification under this Article X, applicable law or otherwise. B. "Liabilities" mean the obligations (including one incurred by way of settlement) to pay a judgment, settlement, penalty, fine, excise tax (including an excise tax assessed with respect to an employee benefit plan), or reasonable expenses incurred with respect to a proceeding. 55 57 C. "Party" means a person who was, is or is threatened to be made a named defendant or respondent in a proceeding. D. "Proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal. 10.12 INSURANCE FOR INDEMNIFICATION Company shall, upon approval by the Policy Committee, which shall determine who may be covered, purchase and maintain insurance for the benefit of any person who is or was a Member, Manager or Officer, employee or agent, against any liability asserted against or expenses incurred by such person in any capacity or arising out of such person's service with Company, whether or not Company would have the power to indemnify such person against such liability. ARTICLE XI REQUIRED ARBITRATION OF DISPUTES 11.1 DISPUTES REQUIRING ARBITRATION All disputes arising in connection with this Agreement shall be finally settled by arbitration in Chicago, Illinois, under the Commercial Arbitration Rules of the American Arbitration Association. Judgement upon the awarded rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of such award and an order of enforcement as the case may be. 11.2 This Agreement shall be governed by and interpreted in accordance with the laws of the State of California, not including laws and principles relating to the conflict of laws. 56 58 ARTICLE XII MISCELLANEOUS 12.1 COMPLETE AGREEMENT The Agreement and the Articles constitute the complete and exclusive statement of agreement among Members. The Agreement and the Articles replace and supersede all prior agreements by and among Members or any of them. The Agreement and the Articles supersede all prior written and oral statements and no representation, statement, or condition or warranty not contained in the Agreement or the Articles will be binding on the Members or have any force or effect whatsoever. In the event of any conflict between provisions of the Agreement and provisions of the Articles, the Articles shall be controlling. 12.2 BINDING EFFECT Subject to the provisions of the Agreement relating to transferability, the Agreement will be binding upon and inure to the benefit of Members, and their respective distributees, successors and assigns, but only to the extent that assignment and approval by all Members is in accordance with the Act, the Articles and the Agreement. 12.3 NO THIRD PARTY BENEFICIARY The Agreement is made solely and specifically among and for the benefit of the parties hereto, and their respective successors and assigns subject to the express provisions hereof relating to successors and assigns, and no other person will have any rights, interest, or claims hereunder or be entitled to any benefits under or on account of the Agreement as a third party beneficiary or otherwise. 12.4 NOT FOR BENEFIT OF CREDITORS The provisions of the Agreement are intended only for the regulation of relations among Members and Company. The Agreement is not intended for the benefit of a creditor who is not a Member and does not grant any rights to or confer any benefits on any 57 59 creditor who is not a Member or any other person who is not a Member, a Manager, or an Officer. 12.5 GENDER AND NUMBER IN NOUNS AND PRONOUNS Common nouns and pronouns will be deemed to refer to the masculine, feminine, neuter, singular and plural, as the identity of the person or persons, firm or corporation may in the context require. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, as the context requires. Any reference to the Code, Regulations, the Act, California statutes or other statutes or laws will include all amendments, modifications, or replacements of the specific sections and provisions concerned. 12.6 HEADINGS All headings herein are inserted only for convenience and ease of reference and are not to be considered in the construction or interpretation of any provision of the Agreement. 12.7 REFERENCES IN THE AGREEMENT Numbered or lettered Articles, Paragraphs and Subparagraphs herein contained refer to Articles, Paragraphs and Subparagraphs of the Agreement unless otherwise expressly stated. 12.8 EXHIBITS All Exhibits attached to the Agreement are incorporated and shall be treated as if set forth herein. 12.9 RESTRICTED ACTIVITIES OF MEMBERS Each Member covenants that, while he or it is a Member of the Company, he or it shall not (and shall not allow any of its Affiliates to), directly or indirectly, either have any ownership or economic interest in, or be an employee, agent, independent contractor or otherwise participate in the operation or control of, any entity that engages in the ownership, operation or utilization of a Gamma Knife in the same city in which a site owned or being developed by the Company is located within the Territory, except 58 60 for those potential sites listed on Exhibit D. In addition, each Member shall have the obligation to inform the Company in writing of such potential ownership, operation or utilization of any other Gamma Knife in the Territory and the Company shall have 30 days to give the Member written notice that the Company will take over the obligations of the Member in pursuing this ownership, operation or utilization under the same or equivalent conditions and circumstances in place of the Member. If the Company does not notify the Member within 30 days, the Member is free to become involved in the aforementioned ownership, operation or utilization. Provided, however, nothing contained herein shall prohibit GKV or its Affiliates from any form of ownership, operation, utilization or participation in : (i) any Gamma Knife site in which GKV or any of its Affiliates presently has an ownership or participation as of the date of this Agreement as set forth in Exhibit D; (ii) any Gamma Knife potential site identified by EII or any of its Affiliates to the Company pursuant to that certain letter agreement dated October , 1995, between the Company and EII, if such site was not pursued by the Company in the manner described in such letter agreement; or (iii) any business ancillary to the sale of Gamma Knifes, including, without limitation, the provision of service or maintenance on a Gamma Knife or provision of clinical, educational or marketing support related to a Gamma Knife. In addition, ASRS covenants that while it is a Member it shall not (and shall not allow any of its Affiliates to) promote, own or invest, in the Territory, in alternative stereotactic radiosurgery equipment to the Gamma Knife, except for those potential sites listed on Exhibit D. Except for the foregoing restriction, any Member may engage in any other business, investment or professional activity, and neither the Company nor any other Member shall have any rights in and to said business, professions or investments, or in the income or profits derived therefrom by reason of this Agreement. 12.10 RESERVED 12.11 ADDITIONAL DOCUMENTS AND ACTS Each Member agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and 59 61 perform all of the terms, provisions, and conditions of the Agreement and the transactions contemplated hereby. 12.12 NOTICES Any notice to be given or to be served upon Company or any party hereto in connection with the Agreement must be in writing and will be deemed to have been given and received at the earlier of a) the time when personally delivered or delivered by telefax to the address specified by the party to receive the notice or b) four (4) days after deposited in the United States Mail for First Class delivery. Such notices will be given to a Member at the address specified below. Any Member or Company may, at any time by giving four (4) days' prior written notice to the other Members and Company, designate any other address in substitution of the foregoing address to which such notice will be given. The addresses of the Members are: GKV: 8 Executive Park West Suite 805 Atlanta, GA 30329 Telefax: (404) 634-3335 ASRS: Four Embarcadero Center Suite 3620 San Francisco, CA 94111-4155 Telefax: (415) 788-5660 12.13 AMENDMENTS All amendments to the Agreement will be in writing and signed by all the Members. 12.14 PUBLICITY Neither of the parties will make any disclosure of the transactions contemplated by the Agreement or the other agreements, or any discussions in connection therewith, without the prior written consent of each of the other parties. The preceding sentence shall not apply to any disclosure required to be made by 60 62 the Act, securities laws or other applicable law as reasonably determined by counsel to the party determining that such disclosure is required, except that such party, whenever practicable, shall be required to consult with the other party concerning the timing and content of such disclosure before making it. 12.15 RELIANCE ON AUTHORITY OF PERSON SIGNING AGREEMENT In the event that a Member is not a natural person, neither Company nor any Member will (a) be required to determine the authority of the individual signing the Agreement to make any commitment or undertaking on behalf of such entity or to determine any fact or circumstance bearing upon the existence of the authority of such individual or (b) be required to see to the application or distribution of proceeds paid or credited to individuals signing the Agreement on behalf of such entity. 12.16 WARRANTIES AND REPRESENTATIONS Each Member separately represents and warrants that he/she/it is not a party to any pending or threatened suit, action or legal, administrative, arbitration or other proceeding which might materially and adversely affect the business of the Company or the transactions contemplated by this Agreement, nor does such Member know of any facts which are likely with the passage of time to give rise to such a suit, action or proceeding. Each Member separately represents and warrants that he/she/it is not a party to any agreement, understanding, tment or other obligation that prohibits or restricts such Member's performance under this Agreement, except that it is understood that ASRS/ASHS is required to obtain certain approvals to transfer ownership of its assets contributed pursuant to Exhibit A. 12.17 REPRESENTATIONS Each of the Members acknowledges and agrees (a) that no representation or promise not expressly contained in this Agreement has been made by any of the other Members or by any of such Member's agents, employees, representatives or attorneys; (b) that this Agreement is not being entered into on the basis of, or in reliance upon, any promise or representation, express or implied, other than such as are set forth expressly in this Agreement; and 61 63 (c) that each Member has had the opportunity to be represented by counsel of said Member's choice in this matter, including the negotiations and transaction which preceded the execution of this Agreement. 12.18 REPRESENTATION BY COUNSEL, ETC. Each Member acknowledges and represents that it has been represented by counsel and other advisors of its own choice in the negotiations with respect to the formation of the Company, the preparation of the Articles, the preparation of this Agreement and all other documents with respect to the Company, the potential consequences of investment in and operation of the Company, and the decisions to invest in and become Members with respect to the Company. 12.19 MULTIPLE COUNTERPARTS The Agreement may be executed in several counterparts, each of which will be deemed an original but all of which will constitute one and the same instrument. However, in making proof hereof it will be necessary to produce only one copy hereof signed by the party to be charged. 12.20 RESERVED 12.21 PARENT UNDERTAKINGS A. Contemporaneously with the execution of this Agreement, each Member shall cause its parent (ASHS for ASRS and EHUS for GKV) to execute a Parent Undertaking in the form attached hereto as Exhibit E pursuant to which such parent agrees: (i) to respect and abide by the exclusivity provisions set forth in Paragraph 12.9 hereof; and (ii) not to allow a sale or transfer of any capital stock in such Member without first offering to sell such capital stock to the other Member for the same price and on the same terms and conditions as have been offered by a third party. 62 64 B. This Agreement shall not become effective until ASHS and EHUS have executed the Parent Undertaking. 12.22 LOAN BY GKV TO THE COMPANY A. On the date on which the Boards of Directors of the Members give their approval pursuant to Section 12.24, GKV shall make a loan to the Company in the amount of $1,300,000 (the "GKV Loan"). Such loan shall be evidenced by a promissory note in the form attached hereto as Exhibit F. Such loan shall bear interest at two percent (2%) above the "prime rate" as announced from time to time by the Wachovia Bank of Georgia, N.A. Interest shall be payable upon any payment of the principal amount. At a minimum, $1,000,000 in principal amount of the loan shall be payable one year from the date of this Agreement and the remaining principal balance shall be paid two years from the date of this Agreement, but a mandatory prepayment of $250,000 (subject to a maximum of $1,000,000) shall be made each time a Gamma Knife loan or lease financing is obtained by the Company. B. At any time prior to its maturity date, ASRS and GKV shall have the right by mutual consent, to convert up to $1,000,000 of the outstanding principal balance of the GKV Loan plus any accrued but unpaid interest on the GKV Loan into a capital contribution to GKV. Such capital contribution shall be deemed to have a fair market value equal to the outstanding principal balance of the GKV Loan and any accrued but unpaid interest on the GKV Loan. In the event of such conversion the outstanding principal balance of the GKV Loan into a Capital Contribution, the Percentage Interests of the Members shall be adjusted in the manner described in Subparagraph 2.1.B hereof. C. ASRS shall have the right, but not the obligation, to make a Capital Contribution to the Company, in cash, in any amount less than or equal to the amount converted described in Subparagraph 12.22.B, which Capital Contribution by ASRS shall be due and payable on the effective date of such conversion. 12.23 DRAW DOWN LOAN BY GKV TO THE COMPANY 63 65 A. Upon the effectiveness of this Agreement, the Company shall enter into the draw down Promissory Note attached hereto as Exhibit G (the "Draw Down Loan"). B. At any time prior to the maturity date of the Draw Down Loan, ASRS and GKV shall have the right by mutual consent, to convert any of the outstanding principal balance of the Draw Down Loan plus any accrued but unpaid interest on the Draw Down Loan into a capital contribution by GKV. Such capital contribution shall be deemed to have a fair market value equal to the converted principal of the Draw Down Loan plus any accrued but unpaid interest on the Draw Down Loan. In the event of such conversion of any of the Draw Down Loan into a capital contribution, the Percentage Interests of the Members shall be adjusted in the manner described in Subparagraph 2.1.B hereof. C. ASRS shall have the right, but not the obligation, to make a Capital Contribution to the Company, in cash, in any amount less than or equal to the amount converted described in Subparagraph 12.23.B, which Capital Contribution by ASRS shall be due and payable on the effective date of such conversion. 12.24 This Agreement shall not become effective until ASRS/ASHS receives approval from its Board of Directors and EHUS/GKV receives approval from their Boards of Directors. GKV shall have no obligation to make its initial capital contribution described in Exhibit A until any and all required consents and/or approvals necessary for ASRS/ASHS to contribute its UCSF Assets to the Company are obtained and provided to GKV. GKV shall have no obligation to make the second capital contribution described in Exhibit A until any and all required consents and/or approvals necessary for ASRS/ASHS to contribute its USC Assets to the Company are obtained and provided to GKV. IN WITNESS WHEREOF, all of the Members of GK FINANCING, LLC, A California Limited Liability Company, have executed the Agreement, effective the 17th DAY OF October, 1995. MEMBER: 64 66 GKV BY: ----------------------------- Title: ASRS: BY: ----------------------------- Title: 65 67 EXHIBIT A CAPITAL CONTRIBUTION OF MEMBERS OF GK FINANCING, LLC
===================================================================================================== MEMBER'S MEMBER'S NAME MEMBER'S ADDRESS MEMBER'S CAPITAL CONTRIBUTION PERCENTAGE INTEREST - ----------------------------------------------------------------------------------------------------- ASRS See Section 12.12 See below 78% - ----------------------------------------------------------------------------------------------------- GKV See Section 12.12 $278,000 in cash on date of ASRS's 22% initial contribution of the UCSF Assets, subject to Paragraph 12.24 and $522,000 in cash on date of ASRS's second contribution of USC Asset, subject to Paragraph 12.24 * - ----------------------------------------------------------------------------------------------------- TOTALS: =====================================================================================================
* NOTE: Cash amounts to be contributed by GKV may be adjusted as provided in paragraphs (1) and (3) below. Initial Capital Contribution by ASRS: (1) On the effective date of this Agreement or as soon as practical, ASRS shall transfer to the Company good and marketable title to the Gamma Knife located at the University of California at San Francisco (subject only to a financing lease with a current principal balance of approximately $1,237,000 (the "UCSF Lease")), the contract between ASHS/ASRS and the Regents of the University of California which is located at the University of California at San Francisco (the "UCSF Contract") relating to the Gamma Knife, and all other physical and intangible assets relating to such Gamma Knife (collectively, ("UCSF Assets")) The UCSF Assets shall not include accounts receivable. The UCSF Assets shall be deemed to 66 68 have a net fair market value of approximately $2,224,000. The exact fair market value of the UCSF Assets shall be determined as of the date of their transfer to the Company on the basis of the methodology and assumptions set forth in the existing valuation report by American Appraisal Associates. The exact amount of cash to be contributed by GKV on the date on which ASRS transfers the UCSF Assets to the Company shall be equal to 22/78 times the exact fair market value of the UCSF Assets as of the date of their transfer. (2) The Company shall assume the obligations of ASRS under the UCSF Lease and the UCSF Contract which accrue from and after the date on which ASRS transfer the UCSF Assets to the Company, but the Company shall assume no other obligations of ASRS related to the UCSF Assets, including accounts payable. ASRS shall indemnify the Company, GKV and their Affiliates for all damages, costs, expenses, and liabilities (including attorneys' fees) incurred by any of them in relation to any claims arising from or in relation to the UCSF Assets prior to the date on which ASRS transfers the UCSF Assets to the Company. Upon demand by the Company, GKV or their Affiliates, ASRS shall promptly reimburse the Company, GKV and their Affiliates for attorneys' fees incurred by them related thereto. (3) On January 1, 1996, or as soon as practical (when ASRS/ASHS has obtained all required consents /approvals to transfer said asset to Company), ASRS shall transfer to the Company good and marketable title to the Gamma Knife located at the USC University Hospital (subject only to a financing lease with an approximate principal balance as of January 1, 1996 of $2,314,000 (the "USC Leases")), the contract between ASRS and USC University Hospital (the "USC Contract") relating to the Gamma Knife, and all other physical and intangible assets relating to such Gamma Knife (collectively, the "USC Assets"). The USC Assets shall not include accounts receivable. The USC Assets shall be deemed to have a net fair market value of approximately $4,426,000. The exact fair market value of the USC Assets shall be determined as of the date of their transfer to the Company on the basis of the methodology and assumptions set forth in the existing valuation report by American Appraisal Associates. The exact amount of cash to be contributed by GKV on the date on which ASRS transfers the USC 67 69 Assets to the Company shall be equal to 22/78 times the exact fair market value of the USC Assets as of the date of their transfer. (4) The Company shall assume the obligations of ASRS under the USC Lease and the USC Contract which accrue from and after the date on which ASRS transfers the USC Assets to the Company, but the Company shall assume no other obligations of ASRS relating to the USC Assets, including accounts payable. ASRS shall indemnify the Company, GKV and their Affiliates for all damages, costs, expenses, and liabilities (including attorneys' fees) incurred by any of them in relation to any claims arising from or in relation to the USC Assets prior to the date on which ASRS transfers the USC Assets to the Company. Upon demand by the Company, GKV or their Affiliates, ASRS shall promptly reimburse the Company, GKV and their Affiliates for attorneys' fees incurred by them related thereto. (5) ASRS hereby represents and warrants to the Company and to GKV that the UCSF Contract, the UCSF Lease, the USC Contract and the USC Lease are in full force and effect and neither party to each such contract or lease is in breach thereof and that ASRS has heretofore delivered to GKV true, correct and complete copies of all such contracts and leases. (6) ASRS hereby represents and warrants to the Company and to GKV that there is no suit, action, claim or investigation pending or threatened against, affecting or relating to or arising from the UCSF Assets or the USC Assets, and there exists no basis or grounds for same. (7) If on a fiscal year basis, the cash flow (defined as revenues less direct cash operating expenses) generated by the UCSF Assets or the USC Assets, is insufficient to service the lease payments under the UCSF Lease or the USC Lease, as the case may be, ASRS shall reimburse the Company in cash for the difference between said lease payments and said cash flow, without credit to the Capital Account of ASRS for such payment. 68 70 EXHIBIT E PARENT UNDERTAKING WHEREAS, GKV INVESTMENTS, INC. ("GKV"), a Georgia corporation, and AMERICAN SHARED RADIOSURGERY SERVICES, INC. ("ASRS"), a California corporation, are parties to that certain Operating Agreement for GK Financing, LLC of even date herewith (the "Operating Agreement"); WHEREAS, AMERICAN SHARED HOSPITAL SERVICES ("ASHS"), a California corporation, is the ultimate beneficial owner of all of the outstanding capital stock of ASRS; WHEREAS, ELEKTA HOLDINGS U.S., INC. ("EHUS"), a Georgia corporation, is an indirect owner of all of the outstanding capital stock of GKV; WHEREAS, section 12.21 of the Operating Agreement requires EHUS and ASHS to execute this Parent Undertaking as a condition to the effectiveness of the Operating Agreement; WHEREAS, it is in the direct interest of ASHS and EHUS for the Operating Agreement to become effective; NOW THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, ASHS and EHUS hereby agree as follows: 1. Definitions. All capitalized terms used herein which are defined in the Operating Agreement shall have the meanings set forth in the Operating Agreement. 2. Exclusivity. 72 71 EHUS and ASHS agree to abide by the restrictions set forth in section 12.9 of the Operating Agreement and to cause each of their Affiliates to abide by the restrictions set forth in section 12.9 of the Operating Agreement. 3. Right of First Refusal. 3.1 Except as provided in this Section 3.1, ASHS hereby agrees that it shall not allow any shares of capital stock of ASRS to be sold, transferred, assigned, pledged or otherwise encumbered during the term of the Operating Agreement except for a bona fide sale for cash to a third party and then only after ASHS shall have given GKV written notice of such proposed sale, including the number of shares proposed to be sold, the price therefor, and the identity of the proposed purchaser, and the opportunity to purchase the shares proposed to be sold for the same price and on the same terms and conditions. GKV shall have a period of thirty (30) days after receipt of notice from ASHS in which to decide whether or not to purchase such shares. Notwithstanding the foregoing, GKV shall not have such right of first refusal if ASHS sells, transfers, assigns or pledges shares of capital stock of ASRS to an Affiliate of ASHS. 3.2 Except as provided in this Section 3.2, EHUS hereby agrees that it shall not permit any shares of capital stock of GKV to be sold, transferred, assigned, pledged or otherwise encumbered during the term of the Operating Agreement except for a bona fide cash sale to a third party and then only after EHUS shall have given notice to ASRS of the proposed sale, including the number of shares proposed to be sold, the price therefor, and the identity of the proposed purchaser, and the opportunity to purchase such shares proposed to be sold for the same price and on the same terms and conditions. ASRS shall have a period of thirty (30) days after the receipt of such notice in which to decide whether or not to purchase such shares. Notwithstanding the foregoing, ASRS shall not have such right of first refusal if EHUS sells, transfers, assigns or pledges shares of capital stock of GKV to an Affiliate of EHUS. 4. Indemnification for Representations. 4.1 ASHS hereby agrees to indemnify and hold harmless EHUS, GKV and their Affiliates for any and all damages, costs, expenses and liabilities (including attorneys' fees) incurred by any of them as a 73 72 result of the breach of any representation or warranty made by ASRS in, or any claim against ASRS for indemnification arising under, the Operating Agreement. 4.2 EHUS hereby agrees to indemnify and hold harmless ASHS, ASRS and their Affiliates for any and all damages, costs, expenses and liabilities (including attorneys' fees) incurred by any of them as a result of the breach of any representation or warranty made by GKV in, or any claim against GKV for indemnification arising under, the Operating Agreement. 5. Arbitration. All disputes arising in connection with this Undertaking shall be finally settled by arbitration in Chicago, Illinois under the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon the award rendered may be entered in any court having jurisdiction, or application may be made to such court for judicial acceptance of such award and an order of enforcement, as the case may be. Any arbitration arising in relation to this Undertaking may be joined with any arbitration arising in relation to the Operating Agreement. 6. Governing Law. This agreement shall be governed by and interpreted in accordance with the laws of the State of California, not including laws and principles relating to the conflict of laws. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the date first above-written. AMERICAN SHARED HOSPITAL SERVICES By: -------------------------------- Title: ----------------------------- 74 73 ELEKTA HOLDINGS U.S., INC. By: -------------------------------- Title: ----------------------------- 75 EX-23.1 20 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit No. 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 24, 1995, except for Note 15, as to which the date is May 17, 1995, in the Registration Statement (Form S-1 No. 33-00000) and related Prospectus of American Shared Hospital Services dated October 26, 1995. ERNST & YOUNG LLP San Francisco, California October 26, 1995 -----END PRIVACY-ENHANCED MESSAGE-----