-----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, VoMdzkOBmMQSOIu7LSBiXPXy0whkiOKgEhMzxa6zUmirvFTpWAUPlLlmMHx/dwRi DNGeVSN/PY5K5NZe62CYxw== 0000950149-98-000584.txt : 19980401 0000950149-98-000584.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950149-98-000584 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: AMEX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SHARED HOSPITAL SERVICES CENTRAL INDEX KEY: 0000744825 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 942918118 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08789 FILM NUMBER: 98580114 BUSINESS ADDRESS: STREET 1: 4 EMARCADERO CENTER STE 3620 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157885300 MAIL ADDRESS: STREET 1: 4 EMBARCADERO CENTER CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-K 1 FORM 10-K FOR AMERICAN SHARED HOSPITAL SERVICES 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM___________________ TO ________________ COMMISSION FILE NUMBER 1-8789 AMERICAN SHARED HOSPITAL SERVICES (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-2918118 STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION FOUR EMBARCADERO CENTER, SUITE 3620, SAN FRANCISCO, CALIFORNIA 94111 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415)788-5300 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK NO PAR VALUE AMERICAN STOCK EXCHANGE PACIFIC EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO/ / INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. /X/ AS OF MARCH 20, 1998, THE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $6,229,519. NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING AS OF MARCH 20, 1998: 4,769,384. NO DOCUMENTS ARE INCORPORATED BY REFERENCE IN THIS REPORT. 2 PART I ITEM 1. BUSINESS GENERAL American Shared Hospital Services ("ASHS" and together with its subsidiaries, the "Company") primarily provides shared diagnostic imaging services and radiosurgery services to more than 200 hospitals, medical centers and medical offices located in 22 states. The four principal diagnostic imaging services provided by the Company are Magnetic Resonance Imaging (MRI), Computed Axial Tomography Scanning (CT), Ultrasound, and Nuclear Medicine. Radiosurgery services are performed by the Company through its subsidiary, GK Financing, LLC, a California limited liability company ("GKF"), which provides Gamma Knife units to three major medical centers. The Company also provides Cardiac Catheterization Laboratory and Respiratory Therapy services. ASHS was incorporated in the state of California in September 1983. ASHS's predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital Services), a California limited partnership, was formed in June 1980. In October 1987, the Company acquired CuraCare, Inc. ("CuraCare") from Tenet Healthcare Corporation (formerly known as National Medical Enterprises, Inc., "Tenet") for $22,250,000. The acquisition of CuraCare significantly expanded and diversified the services offered by the Company and increased its market penetration. Prior to May 1989, the MRI services were provided through American Shared - CuraCare ("AS-C"), which was a joint venture between the Company and MMRI, Inc. ("MMRI"), a California corporation and a wholly-owned subsidiary of Tenet. Effective May 1, 1989, the Company purchased 100% of MMRI, ASHS's co-venturer in AS-C, from Tenet for $4,200,000. MMRI's only asset is its 50% interest in AS-C. Following its acquisition of CuraCare, the Company provided Respiratory Therapy services to acute care hospitals. On December 31, 1994, the Company sold a majority of its Respiratory Therapy department contracts and its Respiratory Registry for approximately $4,000,000 in cash plus the assumption by the buyer of $300,000 in liabilities. In June 1995, the Company incorporated two new wholly-owned subsidiaries: African American Church Health & Economic Services, Inc. ("ACHES"), a California corporation, and ACHES Insurance Services, Inc., ("AIS"), a California corporation and insurance agency qualified to sell life, health and disability insurance in California and New York. On October 17, 1995, the Company, through its wholly-owned subsidiary, American Shared Radiosurgery Services ("ASRS"), and Elekta Holdings U.S., Inc. ("Elekta"), through its wholly-owned subsidiary, GKV Investments, Inc., a Georgia corporation ("GKV"), entered into an agreement to form GKF to provide alternative financing of Elekta Gamma Knife units in the United States and Brazil. See "Gamma Knife Joint Venture." 2 3 RECENT DEVELOPMENTS On March 12, 1998, the Company and MMRI entered into a Securities Purchase Agreement (the "Purchase Agreement") with Alliance Imaging, Inc., and two of its subsidiaries (collectively, the "Purchaser"). Pursuant to the Purchase Agreement, the Purchaser would acquire all of the outstanding common stock of CuraCare and all of the partnership interests in AS-C. These entities together constitute the Company's diagnostic imaging business through which it provides MRI, CT, Ultrasound, Nuclear Medicine services, as well as Cardiac Catheterization Laboratory, and Respiratory Therapy services. The purchase price is $13,552,000 in cash and the assumption by the Purchaser of the liabilities of the Company's diagnostic imaging business, including approximately $26.1 million in debt. Following the transaction, the Company will continue to provide Gamma Knife radiosurgery services through its 81% interest in GKF. The proposed transaction is subject to customary conditions, including receipt of regulatory approvals and the approving vote of the holders of a majority of the Company's outstanding common shares. The Company will seek the approval of its shareholders in the near future, and expects the transaction to be consummated in the third quarter of 1998. The Company, however, can give no assurance that the transaction will in fact be consummated. OPERATIONS DIAGNOSTIC IMAGING SERVICES General. Medical diagnostic imaging systems facilitate the diagnosis of diseases and disorders at an early stage, often minimizing the amount and cost of care needed to stabilize, treat or cure the patient and frequently obviating the need for exploratory surgery. This diagnostic procedure can often be performed on an out-patient basis eliminating the need for hospitalization. Diagnostic imaging systems utilize energy waves to penetrate human tissue and generate computer-processed cross-sectional images of the body, which can be displayed either on film or on a video monitor. The Company provides its diagnostic imaging services as of December 31, 1997, to 216 health care providers including hospitals, clinics and physicians' offices located in 22 states. The Company's technologists operate the equipment under the direction of licensed physicians on the customer's staff who order procedures, interpret examination results and maintain general responsibility for the patient. Generally, the Company directly charges the hospitals, medical centers and medical offices that have contracted for its services. The Company, to a significantly lesser extent, bills patients directly or relies on third party reimbursement. Third party reimbursement comprises approximately 10% of the Company's medical services 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 3 4 with certain governmental regulations. MAGNETIC RESONANCE IMAGING MRI utilizes magnetic fields and applied radio waves to obtain computer processed cross-sectional images of the body. MRI provides clinical images superior to alternative technologies in many applications by providing information concerning neurologic, orthopedic, vascular and oncologic diseases. MRI benefits from multiplanar imaging, obviates the need for ionizing radiation and generally offers superior image resolution than previously available from CT. The Company is a leading provider of high field strength MRI units on a shared-service basis. The Company believes that it has a competitive advantage because of its strategy of operating primarily top-of-the-line, high magnetic field strength (1.5 Tesla superconductive magnet systems) mobile MRI units. MRI units containing higher strength magnets are preferred technology because they provide improved image quality, faster operating speed and greater potential for new applications than do MRI units with less powerful magnets. Of the Company's 27 MRI units operating at December 31, 1997, 17 of such units are 1.5 Tesla units, 7 are 1.0 Tesla units, and 3 are 0.5 Tesla units. All of the company's MRI units are mobile or transportable. The Company had 146 MRI customers at December 31, 1997, compared to 144 customers as of December 31, 1996. MRI revenues constituted 76%, 75% and 73% of total medical services revenues in years 1997, 1996 and 1995, respectively. To a greater extent during the past several years, increased indications of MRI utility plus reductions in equipment costs have allowed more hospitals to purchase their own system instead of utilizing the Company's services. This has contributed to a more competitive marketplace for the Company's services. COMPUTED AXIAL TOMOGRAPHY The Company operated 15 CT units as of December 31, 1997. CT utilizes multiple x-ray beams and detectors to derive information that 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 lumbosacral region, although examinations of the chest, pelvis and extremities are also performed. With the advent of MRI, the relative benefits of CT have decreased. Due to a variety of factors, including increased competition among manufacturers of CT units, the selling price of CT units has decreased thereby enabling more hospitals and health care providers to acquire their own units instead of utilizing the Company's services. Consequently, the Company has reduced its services in this area in response to these changes in the market. CT revenues were approximately 8%, 10% and 10% of medical services revenues in 1997, 1996 and 1995, respectively. ULTRASOUND AND NUCLEAR MEDICINE The Company owns and operates approximately 18 systems providing Ultrasound and Nuclear Medicine services as of December 31, 1997. 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 4 5 physician to establish the presence or absence of disease. Nuclear Medicine not only provides an anatomic image, but also provides functional information that cannot be provided by MRI or CT. Nuclear Medicine services of the Company primarily consist of Single Photon Emission Computed Tomography ("SPECT") wherein radioisotopes are injected into the patient and the patient is subsequently imaged by a camera that 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 a shared service 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. The Company's Nuclear Medicine services consist of one mobile SPECT system as of December 31, 1997. Ultrasound and Nuclear Medicine revenues were approximately 6% of medical services revenues in 1997 and 7% and 8% in 1996 and 1995, respectively. GAMMA KNIFE The Gamma Knife treats certain vascular malformations and intracranial tumors without surgery. The Gamma Knife defines a small three dimensional intracranial target volume and delivers a clinically significant dose of radiation (Cobalt-60) within the target volume while avoiding the delivery of a clinically significant dose beyond the target volume to healthy tissue. The Company's first Gamma Knife, which is operated by GKF at a major university medical center on a fee-per-procedure basis, commenced operation in September 1991. The Company's second Gamma Knife, which became operational on August 3, 1994, was contributed to GKF in February 1996. GKF commenced operation of its third Gamma Knife unit in September, 1997 at a medical center on a fee-per-procedure basis. GAMMA KNIFE JOINT VENTURE The Company, through ASRS, a California corporation, and Elekta, through its wholly-owned subsidiary, GKV, entered into an operating agreement on October 17, 1995, to form GKF, a California limited liability corporation. Pursuant to the operating agreement, as amended, the Company contributed its Gamma Knife units and related assets to GKF in exchange for an 81% ownership interest held by ASRS in GKF. GKV contributed cash for a 19% ownership interest in GKF and loaned funds to GKF. GKF will be the preferred alternative financing provider in the United States and Brazil for the purchase of Gamma Knife units sold by Elekta Instruments, Inc., a U.S. subsidiary of the Gamma Knife manufacturer. GKF's primary business will be to provide financing on a fee-for-service basis. The results of operations of GKF are included in the consolidated financial statements of the Company. CUSTOMERS AND MARKETING The market for services offered by the Company consists of major urban medical centers, suburban and rural hospitals, health maintenance organizations ("HMOs") and other managed care providers, governmental institutions, large multi-specialty medical groups, physician offices and medical clinics. The type of services offered by the Company in a given area may vary, depending upon such factors as the size of the client medical care provider, the treatment needs of specific patient groups within the client's service area, the modalities and services required by the client and the number and nature of competitive services available. 5 6 The more capital intensive services, such as MRI, CT, and Gamma Knife, may be effectively offered to urban medical centers, hospitals, large multi-specialty medical groups, governmental institutions, larger HMOs and large third-party purchasers of health services. The less capital-intensive services, such as Ultrasound, Nuclear Medicine and, under certain circumstances, CT, are most effectively offered to suburban and rural hospitals, physicians' offices and medical clinics. The Company believes that it offers among the broadest range of services to health care providers of companies in the shared diagnostic imaging services industry and therefore has a unique ability to service a broad spectrum of the health care market. The Company continually monitors developments in the medical equipment industry and makes an effort to acquire new modalities and equipment as the opportunity arises in order to maintain its technologically advanced services and to expand its market share. When the Company's medical equipment does not generate adequate revenues, the Company seeks to sell such equipment and to upgrade existing equipment or acquire newer, more advanced replacement equipment when appropriate. During the normal course of business, the Company has customer contracts that terminate. The Company's sales representatives and operational managers must replace terminating customers with new customers to maintain the Company's revenues. Revenue fluctuations may occur dependent upon the maturation cycle of terminating existing contracts and how quickly replacement customers can attain the revenue levels of terminating customers. Revenues per customer are historically higher for established customers. Revenue on all contracts and contract amendments is recognized as earned based upon services provided for each monthly period. At the end of 1997, the Company employed twelve sales and marketing and two regional operational managers. 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 1997 or 1996. COMPETITION Utilization of the Company's diagnostic imaging services depends upon several factors, including the number of physicians and their respective areas of practice, the number and nature of competitive diagnostic units available, and the size and demographics of the service areas. The market for diagnostic imaging services is highly competitive. The Company faces competition from other providers of mobile diagnostic services, some of which may have greater financial resources than those of the Company, and from equipment manufacturers, hospitals, imaging centers and health care providers owning in-house diagnostic units. Significant competitive factors in the diagnostic services market include equipment price and availability, performance quality, ability to upgrade equipment performance and software, service and reliability. Mobile diagnostic services providers with greater financial resources may have increased access to capital and are better able to withstand adverse market conditions. The increased competition among MRI equipment manufacturers has resulted in greater availability to end users of new imaging equipment from manufacturers at more competitive prices. Lower equipment pricing may make it more advantageous for the end user to purchase the equipment rather than contracting with full-service providers such as the Company. 6 7 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. 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 have 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. Effective October 1, 1997, Gamma Knife services for Medicare hospital in-patients were reclassified from DRG 1 to either DRG 7 or DRG 8. This reclassification is estimated to reduce hospital revenues from the Medicare DRG program by approximately 30%. This reclassification does not directly effect other third party payors, which comprise the majority of the hospital's payors. The Company is not currently directly impacted by the change, because all of its existing contracts are reimbursed by the hospital to the Company on a fee-per-service basis. However, the Company has entered into one contract that has not yet commenced on a shared revenue basis. Revenues under this contract will be reduced due to the reimbursement rate change. A significant number of future contracts for Gamma Knife services may be based on a shared revenue instead of a fee-for-service basis. Several health care reform proposals have been promulgated during the Clinton administration. These proposals attempt to increase access to care and to control rising health care expenditures. Since a specific health care reform policy has not been enacted, the impact on the Company's business of such a proposal, if made, cannot be determined at this time. The payment of remuneration to induce the referral of health care business has been a subject of increasing governmental and regulatory focus in recent years. Section 1128B(b) of the Social Security Act (sometimes referred to as the "federal anti-kickback statute") provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services for which payment may be made under the Medicare and Medicaid programs and certain other government funded programs. The Social Security Act provides authority to the Office of Inspector General through civil proceedings to exclude an individual or entity from participation in the Medicare and state health programs if it is determined any such party has violated Section 1128B(b) of the Social Security Act. 7 8 The Company believes that it is in compliance with the federal anti-kickback statute. Additionally, the Omnibus Budget Reconciliation Act of 1993, often referred to as "Stark II" bans physician self referrals to providers of designated health services with which the physician has a financial relationship. The term "designated health services" includes: clinical laboratory services, physical therapy services, occupational therapy services, radiology or other diagnostic services, radiation therapy services, durable medical equipment, parenteral and enteral nutrients, equipment and supplies, home health services, outpatient prescription drugs, 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 cannot determine what impact this legislation will have on the demand for its services. Legislation in various jurisdictions requires that health facilities obtain a Certificate of Need ("CON") prior to making expenditures for medical technology in excess of specified amounts. The CON procedure can be expensive and time consuming, and consequently a health care facility may elect to use the Company's services rather than purchase imaging equipment subject to CON requirements. CON requirements vary from state to state in their application to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures to provide its services and in other jurisdictions customers must comply with CON procedures before using the Company's services. The Company's nuclear medicine imaging equipment requires the use of radioactive isotopes for which there are existing governmental regulations covering storage, use and disposal. All contracts for nuclear medicine imaging include arrangements for the disposal of radioactive isotopes either by the supplier of the isotopes or by agreement with the nuclear medicine department of the client hospital. The Company is also subject to periodic review concerning the storage, use and disposal of isotopes used in its nuclear medicine imaging equipment. The Company's Gamma Knife units contain Cobalt-60 radioactive sources. The medical centers which house the Company's Gamma Knife units are responsible for obtaining possession and user's licenses for the Cobalt-60 source. Mobile diagnostic imaging equipment must, where applicable, comply with federal and state regulations concerning patient safety, equipment operating specifications and radiation exposure levels. The equipment manufacturer is primarily responsible for assuring compliance. The Company believes that its equipment complies with all such regulations based on the quality control features and specifications of the equipment manufacturers and the Company's preventative maintenance program. Certain states in which the Company operates require that certain of the Company's personnel be licensed or certified. Such requirements generally involve educational requirements and the payment of specified fees. All of the Company's technical personnel are duly licensed or certified where required to perform the services provided by the Company. The Company continually monitors the compliance of its personnel with such licensing and certification requirements. The Company believes it is in substantial compliance with the various rules and regulations which effect its businesses. 8 9 INSURANCE AND INDEMNIFICATION The Company's contracts with equipment vendors generally do not contain indemnification provisions. The Company maintains a comprehensive insurance program covering the value of its property, equipment and vehicles, subject to deductibles which the Company believes are reasonable. The Company's customer contracts generally contain mutual indemnification provisions. The Company maintains general and professional liability insurance and believes its present insurance coverage and indemnification agreements are adequate for its business. EMPLOYEES At December 31, 1997, the Company employed approximately 189 employees on a full-time basis and approximately 155 on a part-time basis. None of these employees is subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes its employee relations are good. ITEM 2. PROPERTIES The Company's corporate offices are located at Four Embarcadero Center, Suite 3620, San Francisco, California, where it leases 2,996 square feet for $8,893 per month. This lease runs through September 1999. The Company also leases office space in Modesto, California. Additional properties are leased by the Company principally for field operations and sales support in West Chicago, Illinois, and Sacramento, California. For the year ended December 31, 1997, the Company's aggregate net rental expenses for all properties and equipment were approximately $3,285,000. ITEM 3. LEGAL PROCEEDINGS There are no material pending, legal proceedings involving the Company or any of its property. The Company knows of no legal or administrative proceedings against the Company contemplated by governmental authorities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common shares, no par value (the "Common Shares"), are currently traded on the American Stock Exchange ("AMEX") and the Pacific Exchange ("PCX"). The Company's losses and net capital deficiency have caused the Company to no longer satisfy the minimum criteria with respect to net income and net worth for continued listing published by the AMEX. The per share trading price is also below the minimum criteria of such exchange. The closing per share price of the Common Shares was $1-11/16 at March 20, 1998. The Company has been advised that its net capital deficiency is inconsistent with the criteria applied by the PCX for continued listing on such exchange. The AMEX and the PCX are continuing to monitor the Company's financial condition in order to determine whether the Common Shares will continue to be listed for trading thereon. The table below sets forth the high and low closing sales prices of the Common Shares of the Company 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, 1996 2 1-1/4 June 30, 1996 2 1-1/4 September 30, 1996 1-3/4 1-1/4 December 31, 1996 1-15/16 1-3/16 March 31, 1997 2-3/16 1-3/8 June 30, 1997 1-5/8 3/4 September 30, 1997 1-7/8 1 December 31, 1997 2-3/16 1-7/16
The Company estimates that there were approximately 1200 beneficial holders of its Common Shares as of December 31, 1997. The Company did not pay cash dividends in 1997, 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. 10 11 ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS YEAR ENDED DECEMBER 31, (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996 1995(1) 1994 1993(2) -------- -------- -------- -------- -------- Medical services revenues $ 37,172 $ 36,989 $ 34,077 $ 38,545 $ 39,485 ======== ======== ======== ======== ======== Costs of operations 27,044 28,071 32,675 34,145 37,071 Selling and administrative expense 5,901 5,309 8,432 5,971 6,820 Interest expense 3,671 4,199 5,310 7,423 6,752 Write-down of intangible assets 0 0 600 0 5,308 -------- -------- -------- -------- -------- Total costs and expenses 36,616 37,579 47,017 47,539 55,951 -------- -------- -------- -------- -------- 556 (590) (12,940) (8,994) (16,466) Gain on sale of assets and early termination 821 3 226 3,294 124 of capital leases Interest and other income 155 227 258 183 691 -------- -------- -------- -------- -------- Income (loss) before income taxes and 1,532 (360) (12,456) (5,517) (15,651) extraordinary item Income tax provision (benefit) 10 (7) 3 20 (7) -------- -------- -------- -------- -------- Income (loss) before extraordinary item 1,532 (353) (12,459) (5,537) (15,644) Extraordinary item 0 0 19,803 362 0 -------- -------- -------- -------- -------- Net income (loss) $ 1,522 $ (353) $ 7,344 $ (5,175) $(15,644) ======== ======== ======== ======== ======== Earnings (loss) per common share: $ 0.32 $ (0.08) ($ 2.96) $ (1.93) $ (5.46) Income (loss) before extraordinary item Extraordinary item $ 0.00 $ 0.00 $ 4.71 $ 0.13 $ 0.00 -------- -------- -------- -------- -------- Net income (loss) $ 0.32 $ (0.08) $ 1.75 $ (1.80) $ (5.46) ======== ======== ======== ======== ======== Earnings (loss) per common share assuming dilution: Income (loss) before extraordinary item $ 0.24 $ (0.08) $ (2.96) $ (1.93) $ (5.46) Extraordinary item $ 0.00 $ 0.00 $ 4.71 $ 0.13 $ 0.00 -------- -------- -------- -------- -------- Net income (loss) per common share assuming dilution: $ 0.24 $ (0.08) $ 1.75 $ (1.80) $ (5.46) ======== ======== ======== ======== ========
See Accompanying Notes 11 12 BALANCE SHEET DATA
DECEMBER 31, ----------------------------- 1997 1996 1995(1) 1994 1993(2) -------- -------- -------- -------- -------- Working capital deficiency $ (8,039) $(10,888) $ (6,793) $(33,369) $(56,518) Total assets 30,209 32,969 31,335 47,222 50,179 Current portion of long-term debt and 10,929 13,182 8,720 11,214 26,635 obligation under capitalized leases Long-term debt and obligations under 21,569 23,935 26,125 24,244 3,106 capitalized leases less current portion Senior subordinated notes 0 0 773 18,467 18,788 Stockholders' equity (Net capital $ (8,953) $(10,475) $(10,576) $(22,341) $(17,754) deficiency) See Accompanying Notes
(1) In June 1995, ASHS incorporated a new wholly-owned subsidiary, African American Church Health And Economic Services, Inc. ("ACHES") and ACHES' wholly-owned subsidiary, ACHES Insurance Services, Inc. ("AIS"), and in October 1995, entered into an operating agreement granting ASRS an 81% ownership interest in GK Financing, LLC. Accordingly, the financial data for the Company presented above include the results of the establishment of ACHES, AIS, and GK Financing, LLC for 1995 through 1997. (2) In August 1993, ASHS incorporated a new wholly owned subsidiary, American Shared Radiosurgery Services ("ASRS"). Accordingly, the financial data for the Company presented above include the results of the establishment of the subsidiary for 1993 through 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company had net income of $1,522,000 ($0.32 per share) on medical services revenues of $37,172,000 in 1997. The Company had a net loss of $353,000 ($(0.08) per share) on medical services revenues of $36,989,000 in 1996. TOTAL REVENUES
Increase Increase (In Thousands) 1997 (Decrease) 1996 (Decrease) 1995 - -------------- ---- ---------- ----- --------- ----- Medical Services $37,172 0.5% $36,989 8.6% $34,077
12 13 Medical services revenues increased 0.5% in 1997 compared to 1996, and increased 8.6% in 1996 compared to 1995. The 0.5% increase in 1997 and the 8.6% increase in 1996 compared to prior years were primarily due to increases in MRI revenues. MRI revenues increased 2% ($650,000) in 1997 compared to 1996 and increased 11% ($2,667,000) in 1996 compared to 1995. The increases in 1997 and 1996 were primarily due to the commencement of new customer contracts and increased utilization from contracts commenced in prior periods. MRI revenues as a percentage of total medical services revenues were 76%, 75% and 73% in years 1997, 1996 and 1995, respectively. The Company's non-MRI diagnostic imaging services revenues decreased 19% ($1,176,000) in 1997 compared to 1996 after a 1% ($60,000) decrease in 1996 compared to 1995. The revenue decline in 1997, compared to 1996, was primarily attributable to decreased CT revenue which was due to utilization of two (2) fewer CT units in 1997, and decreased nuclear medicine revenue due to the termination of an in-house nuclear medicine contract in March 1997. Revenues from CT operations decreased $614,000 in 1997 and $26,000 in 1996 from 1995 revenues of $3,563,000. The decrease in Nuclear Medicine and Ultrasound revenues was $562,000 in 1997 and $34,000 in 1996 from a 1995 revenue base of $2,782,000. Non-MRI diagnostic imaging services revenues as a percentage of total medical services revenues was 14%, 17% and 18% for the years ended 1997, 1996 and 1995, respectively. The Company's CT, Ultrasound, and Nuclear Medicine services revenues continue to decline because customers are increasingly buying their own equipment. Contract service revenues consisting of Respiratory Therapy services and Cardiac Catheterization Laboratory revenues increased $354,000 in 1997 compared to 1996 and decreased $415,000 in 1996 compared to 1995. The increase in 1997 was primarily due to revenues from the Cardiac Catheterization Laboratory contracts which commenced May 1996 and December 1996, respectively. The decrease in 1996 compared to 1995 resulted primarily from four terminated Respiratory Therapy service contracts in 1995. The Company currently has one Respiratory Therapy service contract. Gamma Knife revenues increased $354,000 and $705,000 in 1997 and 1996, respectively, compared to the prior years. The 1997 increase was primarily due to the commencement of a third Gamma Knife unit in September 1997. The increase in 1996 was a result of the inclusion of results of the Company's second Gamma Knife beginning in February 1996. COST OF OPERATIONS
Increase Increase (In Thousands) 1997 (Decrease) 1996 (Decrease) 1995 - -------------- ---- ---------- ---- -------- ---- Cost of Operations, Exclusive of $27,044 (3.7%) $28,071 (2.7%) $28,850 Write-Down of Equipment Percentage of Revenue 72.8% 75.9% 84.7% Write-Down of Equipment $ 0 0% $ 0 (100.0%) $ 3,825 Percentage of Revenue 0.0% 0.0% 11.2%
13 14 The Company's cost of operations, consisting of payroll, maintenance and supplies, depreciation and amortization, equipment rental and other operating expenses (such as vehicle fuel, building rents, regional office costs, insurance, property taxes, bad debt expense, fees and training expenses) decreased $1,027,000 in 1997 and $4,604,000 in 1996 compared to prior years. Medical services payroll costs, the largest component of total cost of operations, increased by $221,000 in 1997 compared to 1996 and increased by $328,000 in 1996 compared to 1995. Medical services payroll costs as a percent of medical services remains constant at 20% in years 1997, 1996 and 1995. The 1997 and 1996 increase was primarily due to staffing increases to service additional MRI customer volumes and an increase in staffed units in 1997. The Company's maintenance and supplies costs were 16%, 18% and 20% of medical service revenues in 1997, 1996 and 1995 respectively. Maintenance and supplies costs decreased $739,000 in 1997 compared to 1996 and decreased $68,000 in 1996 compared to 1995. The decreases in 1997 and 1996 are primarily attributable to MRI maintenance cost savings. Depreciation and amortization decreased $233,000 in 1997 compared to 1996 and $1,671,000 in 1996 compared to 1995. The decrease in 1997 was primarily attributable to decreased MRI and nuclear medicine depreciation as a result of fewer MRI units accounted for as capital leases in 1997. The decrease in 1996 is primarily attributable to the early adoption of Financial Accounting Standards No. 121 (FAS 121) during the second quarter of 1995 as explained in detail below. In addition, the majority of capital leases were extended as of October 1, 1995 thereby extending the depreciable life of the asset (as leased assets are depreciated based on lease terms) and decreasing depreciation expense commencing the fourth quarter of 1995. Equipment rental as a percentage of medical services revenues was 7% in 1997, 9% in 1996 and 8% in 1995. Equipment rental decreased $763,000 in 1997 compared to 1996 and increased $641,000 in 1996 compared to 1995. The decrease in 1997 is primarily attributable to the return of five (5) MRI rental units which resulted from mobile route consolidation and customer contract terminations. The increase in 1996 is primarily attributable to the utilization of short-term MRI and CT rentals to meet customer commitments. Other costs of operations as a percentage of medical services revenues was 12%, 11% and 12% in 1997, 1996 and 1995, respectively. The increase of $487,000 in 1997 compared to 1996 reflects increased fuel, personal property tax costs, insurance, and bad debt expenses. The decrease of $9,000 in 1996 compared to 1995 reflects a decrease in equipment and CON related costs and regional office administrative costs offset by increased fuel costs, MRI space rental costs and physician reading fees. In connection with the early adoption of the statement of Financial Accounting Standards No. 121 (FAS 121) during the second quarter of 1995, management reviewed the recoverability of the carrying value of long-lived assets, primarily fixed assets, goodwill and deferred costs. The Company initiated its review of potential loss impairment due to the continuing changes in the health care environment which have put downward pressure on customer and equipment pricing and reduced forecasted operating results for certain assets to a level below previous expectations. Following its review, management concluded that there was an impairment in the recorded value of fixed assets, goodwill and deferred costs under FAS 121 based on management's estimate of future undiscounted cash flows over the estimated remaining useful life of certain assets. Accordingly, an impairment loss of $4,425,000 was recorded in the second quarter of 1995 based on the differences between the fair value of such assets as determined by third parties and the recorded values. The impairment loss is comprised of a charge for the write-downs of equipment and deferred assets of 14 15 $3,825,000 (primarily MRI, CT and Nuclear Medicine) and goodwill of $600,000. SELLING AND ADMINISTRATIVE
Increase Increase (In Thousands) 1997 (Decrease) 1996 (Decrease) 1995 - -------------- ---- --------- ---- --------- ---- Selling and Administrative Costs $5,901 11.2% $5,309 (37.0%) $8,432 Percentage of Revenue 15.9% 14.4% 24.7%
The Company's selling and administrative costs increased $592,000 in 1997 compared to 1996 and decreased $3,123,000 in 1996 compared to 1995. The increase in 1997 was primarily due to increased sales and administrative payroll costs, building rental costs, audit and tax fees and legal fees associated with a proposed acquisition of the Company which was not consummated. The decrease in 1996 is primarily attributable to a 1995 stock compensation expense totaling $2,679,000 which is comprised of shares and options issued to the Company's Chairman and Chief Executive Officer, Ernest A. Bates, M.D. Salary and wage expense was charged $265,000 in the second quarter of 1995 for the issuance of 184,000 Common Shares to Dr. Bates for his continued services to the Company and his personal guarantee of $6,500,000 of indebtedness of the Company. In addition, during the fourth quarter of 1995, a charge to salary and wage expense of $2,414,000 was recorded in connection with the grant to Dr. Bates, following shareholder approval, of an option to acquire 1,495,000 additional Common Shares for $0.01 per share as further consideration for his continued service to the Company and his personal guarantee of $6,500,000 of the Company's new credit facilities. See "Liquidity and Capital Resources." The decrease in 1996 was also related to reduced legal and insurance costs. INTEREST EXPENSE
Increase Increase (In Thousands) 1997 (Decrease) 1996 (Decrease) 1995 - -------------- ---- ---------- ---- ---------- ---- Interest Expense $3,671 (12.6%) $4,199 (20.9%) $5,310 Percentage of Revenue 9.9% 11.4% 15.6%
The Company's interest expense decreased $528,000 in 1997 compared to 1996 and $1,111,000 in 1996 compared to 1995. The decrease in 1997 and 1996 are primarily attributable to a lower outstanding amount of interest bearing debt due to the repurchase by the Company on May 17, 1995 of $17,964,000 aggregate principal amount of its Senior Subordinated Notes, the exchange for common shares ($413,000 aggregate principal amount) and payment at maturity ($360,000 aggregate principal amount) of its Senior Subordinated Notes in the third and fourth quarters of 1996, respectively, and decreased capitalized lease-related interest. WRITE-DOWN OF INTANGIBLE ASSETS (In Thousands)
Increase Increase 1997 (Decrease) 1996 (Decrease) 1995 ----- ---------- ----- ---------- ---- Write-down of Intangible Assets 0 0.0% $ 0 (100%) $600 Percentage of Revenue 0.0% 0.0% 1.8%
15 16 The Company's write-down of intangible assets decreased $600,000 in 1996 as compared to 1995. The decrease in 1996 compared to 1995 is solely attributable to the early adoption of FAS 121 in the second quarter of 1995. See "Cost of Operations" above. IMPACT OF YEAR 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruption of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost has not been estimated, but is not expected to be material. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. OTHER INCOME AND EXPENSE
(In Thousands) Increase Increase 1997 (Decrease) 1996 (Decrease) 1995 -------- ---------- -------- ---------- ------ $821 27,267% $ 3 (98.7%) $226 Gain on Sale of Assets and Early Termination of Capital Leases Percentage of Revenue 2.2% 0.0% 0.7% Interest and Other Income $155 (31.7%) 227 (12.0%) 258 Percentage of Revenue 0.4% 0.6% 0.8%
The Company's gain on sale of assets and early termination of capital leases increased $818,000 in 1997 compared to 1996 and decreased $223,000 in 1996 compared to 1995. The increase in 1997 was the result of a gain on the early termination of a capital lease ($141,000) when the customer's in-house nuclear medicine contract was terminated during March 1997, an insurance settlement ($388,000) following the loss of a mobile MRI unit in an accident during second quarter 1997, a gain on sale of another MRI unit ($140,000) during third quarter 1997 and a gain on sale of a mobile SPECT unit ($115,000) in the fourth quarter of 1997. Gain on sale of equipment fluctuates depending on the timing of asset dispositions. The Company continues to sell non-essential assets in the normal course of business. NET INCOME (LOSS)
(In Thousands, Increase Increase except per share amounts) 1997 (Decrease) 1996 (Decrease) 1995 - ------------------------- ---- ---------- ---- ---------- ---- Income (loss) before income taxes and extraordinary item $1,532 525.6% $ (360) (97.1%) $(12,456) Percentage of Revenue 4.1% (1.0%) (36.6%)
16 17 Income (loss) Per Share $ 0.32 500.0% $(0.08) (97.3%) $ (2.96) Extraordinary item $0 0.0% $ 0 (100.0%) $ 19,803 Extraordinary Item, $ 4.71 Per share $ 0.00 0.00% $ 0.00 (100.0%) Net Income (loss) $1,522 531.2% $ (353) (104.8%) $ 7,344 Net Income (loss) per share $ 0.32 500.0% $(0.08) (104.6%) $ 1.75
The Company had net income of $1,522,000 in 1997 compared to a net loss of $353,000 for 1996. Net income for 1997 resulted in part from increased operating margins and in part from gains from early termination of capital leases and sale of assets. The Company had a net loss of $353,000 for 1996 compared to net income of $7,344,000 for 1995. The Company's net income for 1995 included an extraordinary gain of $19,803,000 from its debt restructuring recorded on May 17, 1995. The gain resulted from the purchase of $17,694,000 aggregate face amount plus $8,853,000 of accrued and unpaid interest of the Company's 14-3/4% and 16-1/2% Senior Subordinated Notes due October 15, 1996 net of cash, Common Shares and warrants to purchase Common Shares issued and transaction related costs of $3,893,000, $1,836,000 and $1,015,000, respectively. Included in the Company's 1995 results was a charge of $4,425,000 due to adoption of FAS 121 and stock compensation expense of $2,679,000 (see "Selling and Administrative"). LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $17,000 at December 31, 1997 compared to $368,000 at December 31, 1995. The Company's cash position decreased $351,000 due primarily to the Company's debt payment requirements and working capital needs. Restricted cash at December 31, 1997 and December 31, 1996 reflects cash that may only be used for the operations of GK Financing, LLC. The increase in restricted cash is due to cash flow from Gamma Knife operations. On May 17, 1995, the Company repurchased (the "Notes Repurchase") for cash and securities approximately 96% of its outstanding Senior Subordinated Notes ("Subordinated Notes"). The Notes Repurchase, together with a December 1994 lease restructuring and the availability of up to $8,000,000 of new debt financing, concluded a broad restructuring of the Company's obligations as more fully explained in the Company's 1996 Form 10-K. On December 29, 1995 and March 1, 1996, the Company further restructured certain of its medical equipment leases and related notes (the "GE Notes") to extend the terms of the leases for periods of up to an additional 26 months, to defer certain monthly lease payments and to defer certain installment payments due at the beginning of 1996. This further restructuring resulted in payment reductions of approximately $1,200,000 for the Company in 1996 and subsequent years. The various restructuring transactions described above cured all of the Company's then-outstanding defaults relating to its debt and lease obligations. The Company nevertheless remains highly leveraged and has significant cash payment requirements under its equipment leases and credit facilities. Scheduled equipment capital lease payments and operating lease payments during the 12 months ending December 31, 1998 are $7,487,000 and $2,551,000, respectively, with related maintenance commitments of approximately 17 18 $1,916,000. Scheduled interest and principal payments under the Company's other debt obligations during such period are approximately $4,855,000 which excludes the Company's revolving line of credit balance of $5,438,000 at December 31, 1997 ($5,207,000 at February 28, 1998) whose maturity has been extended to May 31, 1999. Although the Company's operating performance has improved, the Company is uncertain it will have the cash resources to pay all of its obligations when they are due. Accordingly, the Company will continue its program of expense reductions, revenue enhancements and asset sales as well as refinancing or renegotiating the terms of its fixed obligations ("Program"). The Company's ability to meet its obligations when due are dependent upon the success of the Company's Program. Any inability of the Company to meet its obligations when due would result in a default which could permit the relevant obligor to accelerate the obligations and seek other remedies including seizure of the Company's medical imaging equipment. In such event, the Company would be forced to seek a liquidation under Chapter 7 or a reorganization under Chapter 11 of the United States Bankruptcy Code. As part of the Program, the Company in March 1996 sold its Modesto buildings for $650,000 in cash, and negotiated an increase in its working capital line of credit to $5,500,000 and extended its maturity date by two years to May 31, 1999. The Company also completed in August 1996 an exchange offer (the "Exchange Offer") for $413,000 aggregate principal amount of Subordinated Notes. The purpose of the Exchange Offer was to improve the Company's capital structure and relieve the Company of the requirement to pay $836,000 of principal and interest in October, 1996 when the Subordinated Notes were to mature. In the Exchange Offer, the Company issued approximately 287,000 additional shares of Common Stock for $413,000 principal amount of Subordinated Notes. The remaining $360,000 of the Subordinated Notes was paid at maturity on October 16, 1996. In the long term, the Company believes that it must respond to fundamental changes in the industry. The medical diagnostic imaging business, both mobile and fixed, is in a period of consolidation as a result of the growth of managed care and other competitive forces. Smaller companies, such as the Company, must either grow through acquisitions or become part of larger enterprises in order to compete successfully and achieve acceptable returns for their shareholders. In light of the unavailability of capital to the Company and continuing weakness in the price of its common stock, the Company has been willing to entertain acquisition offers. In late 1996 and early 1997, the Company unsuccessfully pursued a merger with a larger industry participant. In late 1997, the Company was approached by Alliance Imaging, Inc., another major industry participant, with respect to a sale of the Company's medical diagnostic imaging business. On March 12 1998, the Company and Alliance entered into an agreement under which the Company would sell its medical diagnostic imaging assets to Alliance for consideration consisting of cash and the assumption of related liabilities. See Part I, Item 1 "Business -- General --Recent Developments". The Company accepted the proposed transaction in response to the industry trend toward consolidation, the increasingly difficult competitive environment for smaller participants, such as the Company, and to provide capital for the expansion of the Company's radiosurgery services business. There can be no assurance that the transaction will be consummated. If the transaction is not consummated, the Company will be required to continue to operate as an independent entity, and to face the serious liquidity and other problems referred to above. IMPACT OF INFLATION AND CHANGING PRICES The Company does not believe inflation has had a significant impact on operations, because most of its customer contracts include a cost of living price adjustment provision, which the Company believes will be sufficient to offset the impact of any future inflation on the Company's costs of operation. 18 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to Consolidated Financial Statements and Financial Statement Schedules included at page A-1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT THE BOARD OF DIRECTORS The following provides current information concerning those persons who serve on the Company's Board of Directors. 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 61 years old. WILLIE R. BARNES has been a director and Corporate Secretary of the Company since 1984. He has been a partner in the law firm of Musick Peeler & Garrett since June 1992, was in solo practice from February 1992 until June 1992, was a partner in the law firm of Katten Muchin Zavis & Weitzman from March 1991 until January 1992, was a partner in the law firm of Wyman Bautzer Kuchel & Silbert from April 1989 until its dissolution effective March 14, 1991, and was a partner in the law firm of Manatt Phelps Rothenberg & Phillips from April 1979 until March 1989. He is a Director of Franchise Finance Corporation of America. Mr. Barnes is 66 years old. MATTHEW HILLS became a director in 1996. He has been a partner in BG Affiliates, a private equity investment group, since 1996. Prior to that, he was the Chief Planning Officer and a Senior Vice President of The Berkshire Group, a healthcare and financial services company, since 1993. From 1990 to 1993, Mr. Hills was a Manager and Consultant at The LEK Partnership. Prior to joining LEK, Mr. Hills was an Associate in the Corporate Finance Department at Drexel Burnham Lambert from 1987 to 1990. He is also a Director of K-Bro Linen Systems, Inc. and in Aspen Furniture, Inc. Mr. Hills graduated from Brandeis University in 1981 and from Harvard Business School in 1987. Mr. Hills was nominated to serve on the Board of Directors by certain shareholders who were participants in the Notes Repurchase. Mr. Hills is 38 years old. 19 20 JOHN F. RUFFLE has been a director of the Company since 1995. He retired in 1993 as Vice-Chairman of the Board and a Director of J.P. Morgan & Co. Incorporated and Morgan Guaranty Trust Co. of New York. He also is a Director of Bethlehem Steel Corporation; a member of the Boards of Managers of North Moore Fund, LLC and JP Morgan Global Emerging Markets Fund, LLC; a Trustee of JPM Series Trust II; a Director of Trident Corp.; a Director of Polymer Group, Inc.; a Director of Wackenhut Corrections Corp; and a Trustee of the Johns Hopkins University. He is a graduate of The Johns Hopkins University, with an MBA in finance from Rutgers University, and is a Certified Public Accountant. Mr. Ruffle is 60 years old. STANLEY S. TROTMAN, JR., became a director of the Company in 1996. He has been a Managing Director with the Health Care Group of PaineWebber, an investment banking firm, since 1995 following the consolidation of Kidder, Peabody, also an investment banking firm, with PaineWebber, and had previously co-directed Kidder, Peabody's Health Care Group since April 1990. Formerly he had been head of the Health Care Group at Drexel Burnham Lambert, Inc. where he had been employed for approximately 22 years. He received his undergraduate degree from Yale University in 1965 and holds an M.B.A from Columbia Business School in 1967. Mr. Trotman is 54 years old. AUGUSTUS A. WHITE III, M.D. has been a director of the Company since 1990. He has been a Professor of Orthopedic Surgery at Harvard Medical School since 1978. He was Orthopedic Surgeon-in-Chief at Beth Israel Hospital, Boston, MA., from 1978 to 1991. He also is a director of Orthologic Corporation. Dr. White is 61 years old. CHARLES B. WILSON, M.D. most recently has been a director of the Company since 1993. He also was a director of the Company from March 1984 until March 1989. He has been a Professor of Neurosurgery at the University of California Medical Center, San Francisco, since 1968. From 1968 until April 1994, and from March 1996 until July 1997, Dr. Wilson also held the position of Chairman of the University's Department of Neurosurgery. He also is a Senior Research Fellow of The Institute for the Future. Dr. Wilson is 67 years old. EXECUTIVE OFFICERS The following table provides current information, concerning those persons who serve as executive officers of the Company. The executive officers were appointed by the Board of Directors and serve at the discretion of the Board of Directors.
Name: Age: Position: - ------------------------------------ -------- ---------------------------------------------------------------------- Ernest A. Bates, M.D. 61 Chairman of the Board of Directors, Chief Executive Officer and Acting President and Chief Operating Officer Craig K. Tagawa 44 Senior Vice President - Chief Financial Officer Richard Magary 57 Senior Vice President - Administration, Assistant Secretary David Neally 45 Senior Vice President - Operations Gregory Pape 42 Senior Vice President - Sales and Marketing - ------------------------------------ -------- ----------------------------------------------------------------------
20 21 ERNEST A. BATES, M.D., founder of the Company, has served in the positions listed above since the incorporation of the Company, except for the periods May 1, 1991 through November 6, 1992 and February 1989 through August 1989, during which time Dr. Bates did not serve in the capacity of President and Chief Operating Officer. Dr. Bates is a graduate of the Johns Hopkins University and the University of Rochester School of Medicine. He is currently an Assistant Clinical Professor of Neurosurgery at the University of California Medical Center at San Francisco, and a member of the Board of Trustees of the Johns Hopkins University and the University of Rochester. CRAIG K. TAGAWA has served as Chief Financial Officer since May 1996. Mr. Tagawa also served as Chief Financial Officer from January 1992 through October 1995. Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice President on February 28, 1993. He is also the Chief Executive Officer of GK Financing, LLC. From September 1988 through January 1992, Mr. Tagawa served in various positions with the Company. From 1982 through August 1988, Mr. Tagawa served as Vice President of Finance and Controller of Medical Ambulatory Care, Inc., the Dialysis division of National Medical Enterprises, Inc. (now Tenet Healthcare Corporation), an owner and operator of hospitals and other health care businesses. Mr. Tagawa received his Undergraduate degree from the University of California at Berkeley and his M.B.A from Cornell University. RICHARD MAGARY has served as Senior Vice President - Administration since February 28, 1993 and Assistant Secretary since 1985. From April 1987 through February 1993, Mr. Magary served as a Vice President in the same capacity. From 1982 through March 1987, he served as Chief Financial Officer of the Company and its predecessor. Mr. Magary is a graduate of the University of San Francisco. DAVID NEALLY has served as Senior Vice President - Operations since May 1994. From January 1993 through May 1994, Mr. Neally was a Zone Vice President for Operations. Prior to January 1993, Mr. Neally had served in a variety of sales and operations positions since joining CuraCare in 1980. Mr. Neally received his undergraduate degree from John Wood College in Quincy, Illinois and is also a graduate of St. Mary's School of Cardiopulmonary Technology in Quincy, Illinois. GREGORY PAPE has served as Senior Vice President - Sales and Marketing since June 1994. From January 1993 through June 1994, Mr. Pape was a Zone Vice President - Sales and Marketing for the Company. Mr. Pape served in the capacity of Regional Sales Manager for the Company for the period from March 1991 through January 1993. From September 1989 through February 1991, Mr. Pape was a Regional Sales Manager for Medical Imaging Corporation of America, Inc. Mr. Pape earned his undergraduate degree at the University of Miami, with postgraduate work in law at the University of Dayton, Ohio. COMPLIANCE WITH SECTION 16(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 Reports filed under the Exchange Act and received by the Company on or after January 1, 1997, indicate that during 1997 directors, officers and 10% shareholders of the Company filed all required reports within the periods established by applicable rules. 21 22 ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS During 1997 non-employee Directors were scheduled to receive an annual retainer fee of $5,000 each. The non-employee Directors agreed to defer payment of their 1997 retainer fees until a date to be determined in 1998, to assist the Company with its cash flow. Non-employee Directors in 1997 also received $1,000 for attendance in person at each regular and special meeting of the Board Directors, and $200 for attendance in person at each committee meeting, as well as an automatic grant of Options from the Company's 1995 Stock Option Plan, to acquire up to 4,000 common shares annually of the Company's common stock at the market price on date of grant, until a Director has options for a total of 12,000 shares in all Company plans. 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. All three of the Board meetings held during 1997 were regular meetings which Directors attended in person. Non-employee directors also received reimbursement of expenses incurred in attending meetings. No payment is made for attendance at meetings by a Director who is an employee of the Company. The Company had no employment contracts with its directors or executive officers named in the Summary Compensation Table in 1997. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the compensation paid by the Company for the fiscal years ending December 31, 1995, December 31, 1996, and December 31, 1997 and paid in those years for services rendered in all capacities during 1995, 1996 and 1997 respectively, to the Chief Executive Officer and each executive officer other than the Chief Executive Officer who served as an officer at December 31, 1997 and earned cash compensation of $100,000 or more during 1997. 22 23
SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION AWARDS (3) ANNUAL COMPENSATION OTHER ANNUAL SECURITIES NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION(2) UNDERLYING OPTIONS - --------------------------- ---- -------- ------- --------------- ------------------ Ernest A. Bates, M.D 1997 $267,994 -- -- -- Chairman of the Board 1996 $223,412 -- -- -- Chief Executive Officer 1995 $223,253 -- -- 1,495,000 Craig K. Tagawa 1997 $216,000 (4) -- -- -- Senior Vice President 1996 $165,747 -- -- -- Chief Financial Officer 1995 $129,328 $26,003 -- 90,000 David Neally 1997 $139,162 -- -- -- Senior Vice President 1996 $101,000 $38,500 -- -- Operations 1995 $104,654 $48,076 -- 45,000 Gregory Pape 1997 $292,650 (5) -- -- -- Senior Vice President 1996 $278,895 (6) -- -- -- Sales and Marketing 1995 $265,745 (7) -- -- 45,000 Richard Magary 1997 $118,813 -- -- -- Senior Vice President 1996 $ 99,780 -- -- -- Administration 1995 $ 99,780 $ 9,927 -- 45,000
23 24 (1) Each amount under this column includes amounts accrued in 1995, 1996, and 1997, that would have been paid to such persons in such years, except that such amounts were instead deferred pursuant to the Retirement Plan for Employees of American Shared Hospital Services and CuraCare, a defined contribution plan and ASHS' Flexible Benefit Plan, a defined contribution plan. Both plans are available to employees of the Company generally. (2) The Company has determined that, with respect to the executive officers named in the Summary Compensation Table, the aggregate amount of other benefits does not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported in the Summary Compensation Table as paid to such executive officer in the relevant year. (3) No restricted stock awards or long-term incentive plan payouts were made to the executive officers named in the Summary Compensation Table during the years listed in the Summary Compensation Table. (4) Includes sales commissions of approximately $45,000 earned and paid in 1997. (5) Includes sales commissions of approximately $92,000 earned in 1996 and paid in 1997 and approximately $58,000 earned and paid in 1997. (6) Includes sales commissions of approximately $82,000, earned in 1995 and paid in 1996, and $107,000 earned and paid in 1996. (7) Includes sales commissions of approximately $83,000, earned in 1994 and paid in 1995, and approximately $92,000 earned and paid in 1995. OPTION GRANTS IN LAST FISCAL YEAR "The Option Grants for the Fiscal Year" Table has been omitted because no options were granted during 1997 to the Company's executive officers named in the Summary Compensation Table. LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR The "Long-term Incentive Plan Awards" ("LTIP Awards") table has been omitted because no LTIP Awards were made during 1997 to the Company's executive officers named in the Summary Compensation Table. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth the number of shares acquired on exercise of stock options and the aggregate gains realized upon exercise of such options during 1997, by the Company's executive officers named in the Summary Compensation Table. The following table also sets forth the number of shares underlying exercisable and unexercisable options held by such executive officers on December 31, 1997. 24 25 1984 AND 1995 STOCK OPTION PLANS AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT FISCAL FISCAL YEAR-END YEAR-END($)(1) SHARES ACQUIRED VALUE ------------------------------- ------------------------------ NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------- ----------- ---------- ----------- ------------- ----------- ------------- Ernest A. Bates -- -- 1,495,000 -- $2,601,300 -- Craig K. Tagawa -- -- 125,000 -- $ 15,625 -- David Neally -- -- 53,350 1,650 $ 6,669 $206 Gregory Pape -- -- 61,000 4,000 $ 7,625 $500 Richard Magary -- -- 60,000 -- $ 7,500 --
(1) This amount is calculated by multiplying the number of Common Shares underlying the options at December 31, 1997 by the market price per Common Share on such date less the option exercise price. 25 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Shares as of March 23, 1998, 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 OWNERS AND MANAGEMENT
COMMON SHARES OWNED BENEFICIALLY NAME & ADDRESS OF AMOUNT & NATURE OF BENEFICIAL BENEFICIAL OWNER OWNERSHIP (3) PERCENT OF CLASS (8) ---------------- ----------------------------- -------------------- Total Number of Shares 6,981,050 (4) 100.0% Ernest A. Bates, M.D. (1) 2,334,070 (5) (7) 37.3% SunAmerica Inc. (2) 128,066 (2) 2.7% SunAmerica Life Insurance 277,473 (2) 5.7% Company (2) Anchor National Life Insurance 307,219 (2) 6.3% Company (2) Lion Advisors, L.P. 384,195 (6) (7) 7.9% 1301 Avenue of the Americas New York, NY 10019 AIF II, L.P. 170,752 (6) (7) 4.7% c/o Apollo Advisors, L.P. 1999 Avenue of the Stars Los Angeles, CA 90071 General Electric Company 225,000(7) 4.7% c/o GE Medical Systems 20825 Swenson Drive Waukesha, WI 53186
26 27 Willie R. Barnes (1) 9,000 (5) (7) * Matthew Hills (1) 6,915 (5) (7) * John F. Ruffle (1) 80,711 (5) (7) 1.7% Stanley S. Trotman, Jr. (1) 108,295 (5) (7) 2.3% Augustus A. White, III, M.D. (1) 17,992 (5) (7) * Charles B. Wilson, M.D. (1) 9,600 (5) * Craig K. Tagawa (1) Senior Vice President- Chief Financial Officer 137,600 (5) (7) 2.8% David Neally (1) Senior Vice President- Operations 55,100 (5) 1.1% Gregory Pape (1) Senior Vice President- Sales and Marketing 65,000 (5) 1.3% Richard Magary (1) Senior Vice President- Administration 78,300 (5) (7) 1.6% All Directors & Executive Officers as a Group (11 persons) 2,906,583 (5) (7) 44.0%
* 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. (2) Based on information provided to the Company 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 as of March 27, 1997, such entities then owned beneficial 712,758 Common Shares, including immediately exercisable Warrants to acquire 169,264 Common Shares. The address of each Beneficial Owner is c/o SunAmerica Center, Los Angeles, CA 90067. (3) 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. (4) Represents the aggregate of issued and outstanding Common Shares plus Common Shares that all persons or groups of persons are entitled to acquire upon the exercise of options or warrants within 60 days after March 23, 1998. (5) Includes shares underlying options that are currently exercisable or which will become exercisable within 60 days following March 23, 1998: Dr. Bates, 1,495,000; Mr. Barnes, 8,000 shares; Mr. Hills, 5,333 shares; Mr. Ruffle, 8,000 shares; Mr. Trotman, 5,333 shares; Dr. White, 12,000 shares; 27 28 Dr. Wilson, 9,600 shares; Mr. Tagawa, 125,000 shares; Mr. Neally, 54,000 shares; Mr. Pape, 65,000 shares; Mr. Magary, 55,000 shares; and Directors and Executive Officers as a group, 1,842,266 shares. (6) Based on information contained in the Schedule 13D dated March 23, 1998 and filed with the Securities and Exchange Commission by Apollo Advisors II, L.P. and affiliates, including Lion Advisors L.P. and AIF II, L.P., such entities own beneficially 554,947 Common Shares, including immediately exercisable warrants to acquire 115,629 Common Shares. The managing general partner of AIF II is Apollo Advisors, L.P. ("Advisors"), Advisors and Lion are affiliates. Lion beneficially holds the indicated securities for an investment account under management over which Lion has investment, dispositive and voting power. (7) In connection with the Securities Purchase Agreement dated March 12, 1998 among American Shared Hospital Services ("ASHS") and MMRI, Inc., and Alliance Imaging, Inc., Embarcadero Holding Corp. I, and Embarcadero Holding Corp. II ("Purchasers") the Purchasers entered into Stockholder Agreements, each dated as of March 12, 1998, with certain stockholders of ASHS, each of whose beneficial interest is indicated in the accompanying table. These stockholders have agreed to vote, and have granted a proxy to vote their shares of Common Stock (including in the case of Ernest A. Bates, M.D., the Common Stock issuable upon the exercise of his 1,495,000 options), in favor of the Securities Purchase Agreement and the transactions contemplated thereby. (8) Shares that any person or group of persons is entitled to acquire upon the exercise of options or warrants within 60 days after March 23, 1998, are treated as issued and outstanding for the purpose of computing the percent of the class owned by such person or group of persons but not for the purpose of computing the percent of the class owned by any other person. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Willie R. Barnes, the Secretary and a director of the Company, is a partner in the law firm of Musick, Peeler & Garrett. That law firm performed legal services for the Company in 1997 and may do so again in 1998. 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. Stanley S. Trotman, Jr., a director of the Company, is a managing director with the Health Care Group of PaineWebber, Inc., an investment banking firm. PaineWebber has provided investment banking services to the Company in the past and will provide such services in 1998 with respect to the proposed sale of the Company's diagnostic imaging business to Alliance Imaging, Inc. The management of the Company is of the opinion that the fees agreed to be paid to Mr. Trotman's firm are comparable to those fees that would have been paid for comparable investment banking services from a firm not affiliated with the Company. 28 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS AND SCHEDULES. The following Financial Statements and Schedules are filed with this Report: Report of Independent Auditors Audited Consolidated Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Financial Statement Schedules Valuation and Qualifying Accounts All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. Consent of Independent Auditors (b) EXHIBITS. The following Exhibits are filed with this Report. Exhibit Number: Description: - ------- ------------ 2.1 Securities Purchase Agreement, dated as of March 12, 1998, by and among Alliance Imaging, Inc.; Embarcadero Holding Corp. I; Embarcadero Holding Corp. II; American Shared Hospital Services; and MMRI, Inc. 3.1 Articles of Incorporation of the Company, as amended.(1) 3.2 By-laws for the Company, as amended.(2) 4.6 Form of Common Stock Purchase Warrant of American Shared Hospital Services.(2) 4.8 Registration Rights Agreement, dated as of May 17, 1995, by and among American Shared Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems.(2) 4.9 Promissory Note, dated May 17, 1995, by American Shared Hospital Services in favor of General Electric Company in the principal sum of $1,500,000, as amended.(2) 29 30 4.10 Promissory Note, dated January 31, 1996, by American Shared -CuraCare and CuraCare, Inc. in favor of DVI Business Credit Receivables Corporation, in the principal sum of $4,000,000. (3) 4.11 Promissory Note, dated May 17,1 995, by American Shared-CuraCare and CuraCare, Inc. in favor of DVI Financial Services Inc. in the principal sum of $2,500,000.(2) 4.12 Security Agreement dated as of May 17, 1995 by and between American Shared Hospital Services and General Electric Company, acting through GE Medical Systems.(2) 4.13 Agreement and Proxy, dated as of May 12, 1995 by Ernest A. Bates, M.D., Accepted and Agreed to by Anchor National Life Insurance Company, Sun Life Insurance Company of America, SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd., and Upchurch Living Trust U/A/D 12/14/90.(2) 4.14 Assignment and Assumption Agreement, dated as of December 31, 1995, between American Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee).(3) 4.15 Assignment and Assumption Agreement, dated as of February 3, 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee).(3) 4.16 USC University Hospital Option Agreement, dated February 3, 1996, among American Shared Hospital Services, Ernest A. Bates, M.D. and GK Financing, LLC.(3) 4.17 Assignment and Assumption Agreement, dated as of February 3, 1996, among Ernest A. Bates, M.D. (assignor) and GK Financing, LLC (assignee).(3) 4.18 Assignment and Assumption Agreement, effective as of February 3, 1996, among Ernest A. Bates, M.D. (assignor) and GK Financing, LLC (assignee).(3) 4.19 Promissory Note, dated January 1, 1995, by American Shared-CuraCare in favor in General Electric Company, acting through GE Medical Systems, in the principal sum of $2,000,000, as amended.(3) 4.20 Promissory Note, dated December 30, 1994, by American Shared-CuraCare in favor of General Electric Company, in the principal sum of $481,667.81, as amended.(3) 4.21 Promissory Note, dated April 29, 1996 by GK Financing, LLC in favor of Skandinaviska Enskilda Banken in the principal amount of $1,300,000.(4) 4.22 Promissory Note, dated December 23, 1996 by American Shared-CuraCare in favor of General Electric company, in the principal amount of $1,631,595.10.(4) 10.1 The Company's 1984 Stock Option Plan, as amended.(5) 30 31 10.2 The Company's 1995 Stock Option Plan, as amended. (6) 10.3 Form of Indemnification Agreement between American Shared Hospital Services and members of its Board of Directors. (5) 10.4 Agreement, effective as of November 1, 1994, by and among General Electric Company, acting through GE Medical Systems, and American Shared Hospital Services, and certain of its subsidiaries, as amended. (7) 10.5 Note Purchase Agreement, dated as of May 12, 1995, by and among Anchor National Life Insurance Company, Sun Life Insurance Company of America, and SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd. and Upchurch Living Trust U/A/D 12/14/90, American Shared Hospital Services and Ernest A. Bates, M.D. (2) 10.6 Loan and Security Agreement, dated as of January 31, 1996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation. (3) 10.7 Loan and Security Agreement, dated as of May 17, 1995, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Financial Services Inc. (2) 10.8 Form of Unconditional Continuing Guaranty of American Shared Hospital Services. (3) 10.9 Form of Unconditional Continuing Guaranty of Ernest A. Bates, M.D. (3) 10.10 Intercreditor Agreement among American Shared Hospital Services, American Shared-CuraCare, DVI Financial Services Inc. and DVI Business Credit Receivables Corporation and General Electric Company, acting through GE Medical Systems, dated as of January 31, 1996. (3) 10.11 Ernest A. Bates, Stock Option Agreement dated as of August 15, 1995. (8) 10.12 Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. (2) 10.13a Amendments dated as of October 26, 1995 and as of December 20, 1995 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (3) 10.13b Amendment dated as of October 16, 1996 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. 10.14 Amendment No. 1, dated March 29, 1996, to Loan and Security Agreement, dated as of January 31, 1996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation (Exhibit 10.6). (4) 10.15 Amendment No. 2, dated January 31, 1996, to Loan and Security Agreement, dated as of January 31, 1996, among American Shared-CuraCare and CuraCare, Inc., American Shared 31 32 Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation (Exhibit 10.6).(4) 10.16 Amendment No. 3, dated April 23, 1997, to Loan and Security Agreement, dated January 31, 1996 among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corp. (Exhibit 10.6). 10.17 Amendment No. 4, dated July 31, 1997, to Loan and Security Agreement, dated January 31, 1996 among American Shared-CuraCare and CuraCare, Inc., American Shared Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corp. (Exhibit 10.6). 10.18 Amendment No. 5, dated November 26, 1997, to Loan and Security Agreement, dated January 31, 1996 among American Shared-CuraCare and CuraCare, Inc., American Shared Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corp. (Exhibit 10.6). 21 Subsidiaries of American Shared Hospital Services. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule for the year ended December 31, 1997. 27.a Restated Financial Data Schedule for the fiscal year ended December 31, 1995. 27.b Restated Financial Data Schedule for the three months ended March 31, 1996. 27.c Restated Financial Data Schedule for the six months ended June 30, 1996. 27.d Restated Financial Data Schedule for the nine months ended September 30, 1996. 27.e Restated Financial Data Schedule for the fiscal year ended December 31, 1996. 27.f Restated Financial Data Schedule for the three months ended March 31, 1997. 27.g Restated Financial Data Schedule for the six months ended June 30, 1997. 27.h Restated Financial Data Schedule for the nine months ended September 30, 1997. - ---------------------------- (1) This document was filed as Exhibit 3.1 to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (2) These documents were filed as Exhibits 3.2, 4.6, 4.8, 4.9, 4.11, 4.12, 4.13, 10.5, 10.7 and 10.12, to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on October 26, 1995, which is incorporated herein by this reference. (3) These documents were filed as Exhibits 4.10, 4.14, 4.15, 4.16, 4.17,4.18, 4.19, 4.20, 10.6, 10.8, 10.9, 10.10 and 10.13, respectively, to the registrant's Pre-Effective Amendment No. 1 to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996, which is incorporated herein by this reference. (4) These documents were filed as Exhibits 4.21, 4.22, 10.14, and 10.15, respectively, to registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1996, which is incorporated herein by this reference. (5) These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant's Registration Statement on Form S-2 (Registration NO. 33-23416), which is incorporated herein by this reference. (6) This document was filed as Exhibit A to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. 32 33 (7) This document was filed as Exhibit 10.49 to registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1994, which is incorporated herein by this reference. (8) This document was filed as Exhibit B to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. (C) Reports on Form 8-K: The Company filed no reports on Form 8-K during the quarter ended December 31, 1997. 33 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN SHARED HOSPITAL SERVICES (Registrant) March 27, 1998 By: /s/ Ernest A. Bates ----------------------------- Ernest A. Bates Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Ernest A. Bates Chief Executive Officer March 27, 1998 - -------------------------------------- and Chairman of the Board Ernest A. Bates /s/ Willie R. Barnes Director and Secretary March 27, 1998 - -------------------------------------- Willie R. Barnes /s/ Mathew Hills Director March 27, 1998 - -------------------------------------- Matthew Hills /s/ John F. Ruffle Director March 27, 1998 - -------------------------------------- John F. Ruffle /s/ Stanley S. Trotman, Jr. Director March 27, 1998 - -------------------------------------- Stanley S. Trotman, Jr. /s/ Augustus A. White, III Director March 27, 1998 - -------------------------------------- Augustus A. White, III, /s/ Charles B. Wilson Director March 27, 1998 - -------------------------------------- Charles B. Wilson /s/ Craig K. Tagawa . Chief Financial March 27, 1998 - -------------------------------------- Officer (Principal Craig K. Tagawa Accounting Officer)
34 35 CONSOLIDATED FINANCIAL STATEMENTS AMERICAN SHARED HOSPITAL SERVICES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 36 American Shared Hospital Services Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 CONTENTS Report of Independent Auditors.................................................1 Audited Consolidated Financial Statements Consolidated Balance Sheets....................................................2 Consolidated Statements of Operations..........................................4 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency).......5 Consolidated Statements of Cash Flows..........................................6 Notes to Consolidated Financial Statements.....................................8 37 Report of Independent Auditors The Board of Directors and Stockholders American Shared Hospital Services We have audited the accompanying consolidated balance sheets of American Shared Hospital Services as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that American Shared Hospital Services will continue as a going concern. As more fully described in Note 1, the Company incurred operating losses in 1996 and 1995 and has a significant working capital deficiency and a net capital deficiency at December 31, 1997. In addition, the Company does not have sufficient cash resources to meet debt obligations maturing in 1998. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1, including a discussion of the proposed sale of certain significant assets subsequent to December 31, 1997. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. As discussed in Note 3 to the financial statements, in 1995, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Walnut Creek, California February 27, 1998, except for Note 14, as to which the date is March 12, 1998 1 38 American Shared Hospital Services Consolidated Balance Sheets
DECEMBER 31 -------------------------------- 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 17,000 $ 368,000 Restricted cash 651,000 218,000 Receivables, less allowance for uncollectible accounts of $1,302,000 ($1,240,000 in 1996): Trade accounts receivable 6,658,000 6,341,000 Other 472,000 207,000 ------------ ------------ 7,130,000 6,548,000 Prepaid expenses, inventories and other current assets 708,000 698,000 ------------ ------------ Total current assets 8,506,000 7,832,000 Property and equipment: Land, buildings and improvements 1,572,000 1,226,000 Medical, transportation, office and leased equipment 12,202,000 9,880,000 Capitalized leased medical and transportation equipment 26,410,000 29,318,000 Deposits and construction in progress 1,901,000 1,530,000 ------------ ------------ 42,085,000 41,954,000 Accumulated depreciation and amortization (21,983,000) (18,523,000) ------------ ------------ Net property and equipment 20,102,000 23,431,000 Other assets 563,000 468,000 Intangible assets, less accumulated amortization of $1,529,000 ($1,330,000 in 1996) 1,038,000 1,238,000 ------------ ------------ Total assets $ 30,209,000 $ 32,969,000 ============ ============
2 39 American Shared Hospital Services Consolidated Balance Sheets (continued)
DECEMBER 31 -------------------------------- 1997 1996 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable $ 3,693,000 $ 3,705,000 Accrued interest 32,000 50,000 Employee compensation and benefits 1,050,000 944,000 Other accrued liabilities 841,000 839,000 Current portion of long-term debt 4,784,000 6,816,000 Current portion of obligations under capital leases 6,145,000 6,366,000 ------------ ------------ Total current liabilities 16,545,000 18,720,000 Long-term debt, less current portion 11,936,000 7,690,000 Obligations under capital leases, less current portion 9,633,000 16,245,000 Deferred gain on early lease termination 296,000 -- Deferred income taxes 164,000 164,000 Minority interest 588,000 625,000 Stockholders' equity (net capital deficiency): Common stock, without par value: Authorized shares - 10,000,000 Issued and outstanding shares - 4,769,000 in 1997 and 1996 11,089,000 11,089,000 Common stock options issued to officer 2,414,000 2,414,000 Additional paid-in capital 930,000 930,000 Accumulated deficit (23,386,000) (24,908,000) ------------ ------------ Total stockholders' equity (net capital deficiency) (8,953,000) (10,475,000) ------------ ------------ Total liabilities and stockholders' equity (net capital deficiency) $ 30,209,000 $ 32,969,000 ============ ============
See accompanying notes. 3 40 American Shared Hospital Services Consolidated Statements of Operations
YEAR ENDED DECEMBER 31 ---------------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Revenues: Medical services $ 37,172,000 $ 36,989,000 $ 34,077,000 Costs and expenses: Costs of operations: Medical services payroll 7,533,000 7,312,000 6,984,000 Maintenance and supplies 5,959,000 6,698,000 6,766,000 Depreciation 6,398,000 6,631,000 8,302,000 Write-down of equipment -- -- 3,825,000 Equipment rental 2,686,000 3,449,000 2,808,000 Other 4,468,000 3,981,000 3,990,000 Selling and administrative 5,901,000 5,309,000 8,432,000 Interest 3,671,000 4,199,000 5,310,000 Write-down of intangible assets -- -- 600,000 ------------ ------------ ------------ Total costs and expenses 36,616,000 37,579,000 47,017,000 ------------ ------------ ------------ 556,000 (590,000) (12,940,000) Gain on sale of assets and early termination of capital leases due to 821,000 3,000 226,000 casualty loss Interest and other income 155,000 227,000 258,000 ------------ ------------ ------------ Income (loss) before income taxes and extraordinary item 1,532,000 (360,000) (12,456,000) Income tax expense (benefit) 10,000 (7,000) 3,000 ------------ ------------ ------------ Income (loss) before extraordinary item 1,522,000 (353,000) (12,459,000) Extraordinary item--gain on early extinguishment of debt (net of income -- -- 19,803,000 tax expense of $0) ------------ ------------ ------------ Net income (loss) $ 1,522,000 $ (353,000) $ 7,344,000 ============ ============ ============ Earnings (loss) per common share: Income (loss) before extraordinary item $ 0.32 $ (0.08) $ (2.96) Extraordinary item $ 0.00 $ 0.00 $ 4.71 ------------ ------------ ------------ Net income (loss) per common share $ 0.32 $ (0.08) $ 1.75 ============ ============ ============ Earnings (loss) per common share assuming dilution: Income (loss) before extraordinary item $ 0.24 $ (0.08) $ (2.96) Extraordinary item $ 0.00 $ 0.00 $ 4.71 ------------ ------------ ------------ Net income (loss) per common share assuming dilution $ 0.24 $ (0.08) $ 1.75 ============ ============ ============
See accompanying notes. 4 41 American Shared Hospital Services Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)
COMMON STOCK OPTIONS ADDITIONAL COMMON COMMON ISSUED TO PAID-IN ACCUMULATED SHARES STOCK OFFICER CAPITAL DEFICIT TOTAL --------- ------------ ------------ ---------- ------------ ------------ Balances at December 31, 1995 4,244,000 $ 10,635,000 $ 2,414,000 $ 930,000 $(24,555,000) $(10,576,000) Exercise of warrants to purchase 225,000 shares of common 225,000 2,000 -- -- -- 2,000 stock Issuance of common stock to noteholders 287,000 430,000 -- -- -- 430,000 Issuance of common stock to Board 13,000 22,000 -- -- -- 22,000 members Net loss -- -- -- -- (353,000) (353,000) --------- ------------ ------------ ---------- ------------ ------------ Balances at December 31, 1996 4,769,000 11,089,000 2,414,000 930,000 (24,908,000) (10,475,000) Net income -- -- -- -- 1,522,000 1,522,000 --------- ------------ ------------ ---------- ------------ ------------ Balances at December 31, 1997 4,769,000 $ 11,089,000 $ 2,414,000 $ 930,000 $(23,386,000) $ (8,953,000) ========= ============ ============ ========== ============ ============
See accompanying notes. 5 42 American Shared Hospital Services Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 -------------------------------------------------- 1997 1996 1995 ----------- ----------- ------------ OPERATING ACTIVITIES Net income (loss) $ 1,522,000 $ (353,000) $ 7,344,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary gain, after income taxes -- -- (19,803,000) Gain on sale of assets (270,000) (3,000) (23,000) Gain on early termination of capital leases (551,000) -- (203,000) Depreciation 6,752,000 6,978,000 8,818,000 Write-down of equipment -- -- 3,825,000 Write-down of intangible assets -- -- 600,000 Compensation expense related to stock grants -- -- 2,679,000 Changes in operating assets and liabilities: (Increase) decrease in restricted cash (433,000) 275,000 2,390,000 (Increase) decrease in receivables (582,000) (95,000) 264,000 (Increase) decrease in prepaid expenses, inventories and other assets (10,000) 493,000 (287,000) Increase (decrease) in accounts payable and accrued liabilities 843,000 1,563,000 (674,000) ----------- ----------- ------------ Net cash provided by operating activities 7,271,000 8,858,000 4,930,000 INVESTING ACTIVITIES Deposits made to purchase Gamma Knives -- (500,000) (1,000,000) Proceeds from sale and disposition of equipment 331,000 70,000 157,000 (Decrease) increase in minority interest (37,000) 442,000 129,000 Payment for purchase of property and equipment (349,000) (293,000) (226,000) Distributions received from partnerships -- 15,000 55,000 Other (168,000) (84,000) 210,000 ----------- ----------- ------------ Net cash used in investing activities (223,000) (350,000) (675,000) FINANCING ACTIVITIES Principal payments on long-term debt and obligations under capital leases (8,962,000) (8,226,000) (8,612,000) Payment for exercise of warrants -- 2,000 -- Net proceeds (payments) from revolving line of 1,563,000 (8,000) (1,000,000) credit Proceeds from loan agreement -- -- 7,000,000 Note payable from related party -- -- 1,300,000 Payment for repurchase of senior subordinated -- (360,000) (3,893,000) notes Other -- -- 177,000 ----------- ----------- ------------ Net cash used in financing activities (7,399,000) (8,592,000) (5,028,000) ----------- ----------- ------------ Net decrease in cash and cash equivalents (351,000) (84,000) (773,000) Cash and cash equivalents at beginning of year 368,000 452,000 1,225,000 =========== =========== ============ Cash and cash equivalents at end of year $ 17,000 $ 368,000 $ 452,000 =========== =========== ============ SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid $ 3,689,000 $ 4,320,000 $ 3,625,000 =========== =========== ============ Income taxes paid $ 29,000 $ 31,000 $ 82,000 =========== =========== ============
6 43 American Shared Hospital Services Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31 -------------------------------------------------- 1997 1996 1995 ----------- ----------- ------------ SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment with lease/debt $ 3,999,000 $ 9,996,000 $ 1,342,000 financing (Decrease) increase in medical and capitalized lease equipment due to lease restructuring (1,137,000) (1,461,000) (480,000) (Decrease) increase in capitalized lease obligations due to lease restructuring (2,036,000) (1,461,000) (480,000) Accrued interest payable not paid as part of Senior Subordinated Notes Repurchase -- 17,000 8,853,000 Stock and warrants issued to noteholders as part of Senior Subordinated Notes Repurchase -- 430,000 1,836,000 Noncash portion of Senior Subordinated Notes -- 413,000 13,801,000 redemption Note receivable from officer added to basis of acquired asset -- 248,000 -- Accounts payable converted to notes 817,000 1,971,000 --
See accompanying notes. 7 44 American Shared Hospital Services Notes to Consolidated Financial Statements December 31, 1997 1. BUSINESS AND BASIS OF PRESENTATION BUSINESS American Shared Hospital Services (the "Company") provides shared diagnostic imaging services to health care providers located in approximately 22 states in various geographic regions of the United States. The four diagnostic imaging services provided by the Company are Magnetic Resonance Imaging, Computed Axial Tomography Scanning, Ultrasound, and Nuclear Medicine. In addition, the Company provides Gamma Knife units to three medical centers. The Company also provides Cardiac Catheterization Laboratory and Respiratory Therapy services. In June 1995, African American Church Health and Economic Services, Inc. ("ACHES") and ACHES Insurance Services, Inc. ("AIS") were incorporated. AIS is a wholly owned subsidiary of ACHES. AIS is an insurance agency qualified to sell life, health, and disability insurance in the states of California and New York. ACHES through AIS sells life, health and disability insurance primarily to the African-American Community. On October 17, 1995, the Company (through American Shared Radiosurgery Services ("ASRS")) and Elekta AB, the manufacturer of the Gamma Knife (through its wholly owned United States subsidiary GKV Investments, Inc. ("GKV")), entered into an operating agreement which formed GK Financing, LLC ("GKF"). GKF provides alternative financing of Elekta Gamma Knife units in the United States and Brazil. GKF is the preferred provider for Elekta AB of financing arrangements, such as fee-for-service lease arrangements with health care institutions in the United States and Brazil. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, CuraCare, Inc. ("CuraCare"), MMRI, Inc., European Shared Medical Services Ltd., and its majority-owned subsidiary, GK Financing, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. 8 45 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 1. BUSINESS AND BASIS OF PRESENTATION (CONTINUED) BUSINESS (CONTINUED) The Company faces severe competition from other providers of diagnostic imaging services, some of which have greater financial resources than the Company, and from equipment manufacturers, hospitals, imaging centers and physician groups owning in-house diagnostic units. Significant competitive factors in the diagnostic services market include equipment price and availability, performance quality, ability to upgrade equipment performance and software, service and reliability. The Company's current financial problems may adversely affect its ability to obtain and retain certain profitable customer contracts, and its current high debt burden may affect its ability to offer technologically advanced equipment in the future. Due to the Company's financial condition, the two stock exchanges which list the Company's stock are continuing to monitor the Company's financial condition to determine whether the Company's common shares will remain listed. The Company is currently negotiating the sale of a significant amount of its operating assets. (See Note 14 -- Subsequent Event.) The Company leases substantially all of its medical equipment from one primary provider. BASIS OF PRESENTATION The Company has reported net income of $1,522,000 in 1997, and net losses before extraordinary items of $353,000, and $12,459,000 in 1996 and 1995, respectively. At December 31, 1997, the Company has a working capital deficiency of $8,039,000 and a net capital deficiency of $8,953,000. In addition, the Company will not have sufficient cash resources to repay its debt obligations at maturity and will be required to seek new financing. There can be no assurance that such financing will be available or that the terms of any such financing will be acceptable to the Company. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. 9 46 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 1. BUSINESS AND BASIS OF PRESENTATION (CONTINUED) BASIS OF PRESENTATION (CONTINUED) Management's plans with regard to these operating issues include the following: continue to implement its program of expense reductions; identify and sell non-essential assets; negotiate favorable concessions from major creditors and enhance revenues by increasing customer contracts and equipment utilization. It is uncertain as to whether these events will occur, and if they do, the extent to which they will address the Company's operating issues. The Company is currently negotiating the sale of a significant amount of its operating assets. (See Note 14 - Subsequent Event.) 2. ACCOUNTING POLICIES USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of the financial statements requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash in depository institutions which offer varying levels of federal insurance. Restricted cash is not considered a cash and cash equivalent for purposes of the consolidated statements of cash flows. RESTRICTED CASH Restricted cash represents cash limited as to use by a contractual arrangement. Restricted cash at December 31, 1997 and 1996 reflects cash that may only be used for the operations of GK Financing, LLC. 10 47 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 2. ACCOUNTING POLICIES (CONTINUED) REVENUES AND ACCOUNTS RECEIVABLE Revenue is recognized on a fee-for-service or contingent rental basis when the service is delivered. Trade accounts receivable are principally from hospitals and other health care providers located throughout the U.S., with no one customer providing a significant percent of revenues. The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential credit losses. A substantial portion of the Company's receivables collateralize its credit facilities (see Note 6). ACCOUNTING FOR MAJORITY-OWNED SUBSIDIARY The Company accounts for GK Financing, LLC, as a consolidated entity due to its 81% majority-equity interest. The minority interest's 19% share of earnings (loss) is netted against "Interest and Other Income" in the consolidated statements of operations. INVENTORIES Inventories, which consist of minor medical equipment and supplies used in the Company's business, are valued at the lower of cost or market, using a valuation method which approximates FIFO (first-in, first-out). PROPERTY AND EQUIPMENT In 1995, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (see Note 3). As a result of such adoption, property and equipment are stated at cost, or the estimated fair value as determined by third parties, if less. Depreciation is determined using the straight-line method over the estimated useful lives of the assets which for medical and transportation equipment is generally 2 - 10 years. Capitalized leased equipment consists primarily of mobile Magnetic Resonance Imaging ("MRI") units, which include scanners and mobile vans. Capitalized leased equipment is amortized over the term of the lease, which ranges from 24 to 96 months. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. 11 48 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 2. ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS Intangible assets represent the excess of cost of net assets acquired as the result of the acquisition of businesses and are being amortized by the straight-line method over 15 years. The Company annually assesses the recoverability of these intangible assets by determining whether the amortization of the intangible balance (for each business acquisition) over its remaining life can be recovered through forecasted future operations using an undiscounted cash flow methodology. INCOME TAXES The liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. Basic earnings per share has been computed based on the weighted-average number of common shares outstanding. The Company incurred a net loss for 1996 and 1995, therefore, the incremental shares that arise as a result of the stock options and warrants outstanding are anti-dilutive as they reduce the loss per share. 12 49 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 2. ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE (CONTINUED) The following table sets forth the computation of basic and diluted earnings (loss) per share:
1997 1996 1995 -------------- -------------- -------------- Numerator: Net income (loss) before extraordinary item $ 1,522,000 $ (353,000) $ (12,459,000) Extraordinary item -- -- 19,803,000 -------------- -------------- -------------- Numerator for basic and diluted earnings (loss) per share $ 1,522,000 $ (353,000) $ 7,344,000 ============== ============== ============== Denominator: Denominator for basic earnings (loss) per share - weighted-average shares 4,769,000 4,498,000 4,201,000 Effect of dilutive securities Employee stock options 1,574,000 -- -- -------------- -------------- -------------- Denominator for diluted earnings (loss) per share - adjusted weighted-average shares 6,343,000 4,498,000 4,201,000 ============== ============== ============== Basic earnings per share: Income before extraordinary item $ 0.32 $ (0.08) $ (2.97) Extraordinary item -- -- 4.71 -------------- -------------- -------------- Net income $ 0.32 $ (0.08) $ 1.75 ============== ============== ============== Diluted earnings per share: Income before extraordinary item $ 0.24 $ (0.08) $ (2.97) Extraordinary item -- -- 4.71 -------------- -------------- -------------- Net income $ 0.24 $ (0.08) $ 1.75 ============== ============== ==============
13 50 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 2. ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. The Company believes that adoption of SFAS 130 will not have a material impact on the Company's consolidated financial statements. SEGMENT INFORMATION In June 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to stockholders. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company believes that the application of the new rules will not have a material impact on the Company's consolidated financial statements. 14 51 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 2. ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS An estimate of the fair value of the Company's long-term debt would require the use of a discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Management believes that the Company's creditors entered into the borrowing arrangements as a result of the personal guarantees of an officer of the Company and believes that the Company would be unable to obtain similar financing given this fact and the current state of its financial matters. Accordingly, management is unable, without incurring excessive costs, to estimate its incremental borrowing rate, and considers estimation of fair value to be impracticable. The fair value of all other financial instruments approximate its recorded values. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the current year presentation. 3. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" In connection with the adoption of statement of Financial Accounting Standards No. 121 ("SFAS 121"), during the second quarter of 1995, management reviewed the recoverability of the carrying value of long-lived assets, primarily fixed assets, goodwill and deferred costs based on the life of the assets. The Company initiated its review of potential loss impairment due to the continuing changes in the health care environment, which have put downward pressure on customer and equipment pricing. These changes have resulted in recent operating results and revised future forecasted operating results for certain assets being less than previously planned. This situation led to the conclusion that there was a potential impairment in the recorded value of fixed assets, goodwill and deferred costs. Management's estimate of future undiscounted cash flows over the useful life of certain assets was determined to be less than their recorded values, indicating impairment of these assets under the provisions of SFAS 121. An impairment loss of $4,425,000 was recorded as of the second quarter of 1995 based on the differences between the fair value, as determined by third parties, and the recorded values of certain assets. The impairment loss is comprised of write-downs of equipment of $3,825,000 (primarily MRI, CT, nuclear medicine, and deferred assets), and a write-down of goodwill of $600,000. No such impairment loss adjustment was required in 1997 or 1996. 15 52 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 4. OTHER ASSETS Other assets consist of the following:
December 31 1997 1996 ----------- ----------- Capitalized regulatory licensing fees $ 110,000 $ 90,000 Prepaid commissions 114,000 114,000 Purchased software, less accumulated amortization of $424,000 and $417,000 in 1997 and 1996, respectively 50,000 51,000 Investment in partnerships - 33,000 Other assets 289,000 180,000 ----------- ----------- $ 563,000 $ 468,000 =========== ===========
5. SENIOR SUBORDINATED NOTES During 1996 and 1995, the Company repurchased certain of its Senior Subordinated Notes resulting in extraordinary gains of $0 and $19,803,000, respectively. The extraordinary gain in 1995 was the result of a debt restructuring agreement with four holders of $17,694,000 face value of its Senior Subordinated Notes. On May 17, 1995, these Senior Subordinated Noteholders ("ex-Noteholders") received approximately $3,900,000 in cash, plus 819,000 shares of common stock and warrants for an additional 216,000 shares of common stock. As a result of the additional options awarded to an officer of the Company, the ex-Noteholders were granted 374,000 additional common shares and 98,000 additional warrants to purchase common shares, to maintain their ownership interest at approximately 25% of the then fully diluted common shares. The warrants are immediately exercisable at $0.75 per share. The remaining Senior Subordinated Noteholders held $773,000 of the notes as of December 31, 1995. In addition, the debt covenants were amended which thereby cured the events of default on the Senior Subordinated Notes. During 1996, the Company extended an exchange offer for the remaining $773,000 of Senior Subordinated Notes for common stock. On August 30, 1996, the Company exchanged $413,000 of its Senior Subordinated Notes, and the interest accrued thereon, for 287,000 shares of common stock valued at $430,000, using the market price on the date of exchange. The remaining $360,000 of the Senior Subordinated Notes, and the accrued interest thereon, was settled by the Company in cash on October 15, 1996, the stated maturity date of the Senior Subordinated Notes. 16 53 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 5. SENIOR SUBORDINATED NOTES (CONTINUED) The following table summarizes the early extinguishment of debt during 1996 and 1995, as follows:
1996 1995 ------------ ------------ Principal amount of Notes repurchased $ 413,000 $ 17,694,000 Accrued interest related to the Notes 17,000 8,853,000 Unamortized debt issuance costs -- (525,000) Stock and warrants issued to note holders (430,000) (1,836,000) Estimated tax liability -- -- Closing costs -- (490,000) ------------ ------------ -- 23,696,000 Payment for repurchase -- (3,893,000) ------------ ------------ Extraordinary gain $ -- $ 19,803,000 ============ ============
6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31 1997 1996 ---------- ---------- Notes Issued in Conjunction with Lease Restructuring - ---------------------------------------------------- Promissory note payable to primary provider of medical equipment bearing interest at 5% (effective February 1996) and 4% during 1995, payable in 86 monthly installments maturing in February 2002, secured by the Company's accounts receivable and certain medical equipment $1,505,000 $1,823,000 Promissory note payable to primary provider of medical equipment bearing interest at 10.75%, payable in 60 monthly installments with the remaining balance due in January 2002 1,341,000 1,632,000 Promissory note payable to primary provider of medical equipment bearing interest at 10.5%, payable in 60 monthly installments maturing in February 2000 248,000 353,000 Promissory note payable to primary provider of medical equipment bearing interest at 10.75%, payable in 36 monthly installments with the remaining balance due in January 2000 104,000 147,000
17 54 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 6. LONG-TERM DEBT (CONTINUED)
DECEMBER 31 1997 1996 ------------ ------------ Borrowings for Repurchase of Senior Subordinated Notes - ------------------------------------------------------ Borrowings under $5.5 million Revolving Line of Credit bearing interest at prime rate plus 3.75% (12.25% at December 31, 1997) for repurchase of Senior Subordinated Notes maturing in May 1999 $ 5,438,000 $ 3,875,000 Borrowings under Term Loan for repurchase of Senior Subordinated Notes bearing interest at 15%, payable in 48 monthly installments maturing in June 1999 1,066,000 1,764,000 Gamma Knife loan payable to primary provider of medical equipment bearing interest at 10.5%, payable in 40 monthly installments maturing in September 1998 346,000 768,000 Other Notes and Borrowings - -------------------------- Gamma Knife loan payable to primary provider of medical equipment bearing interest at 10.5%, payable in 60 monthly installments maturing in July 1999 (Note 13) 1,128,000 1,752,000 Promissory note payable, bearing interest at prime rate plus 2% (10.25% at December 31, 1996) due in October 1998 (Note 13) 550,000 1,300,000 Borrowings under term loan bearing interest at 10.6%, payable in 84 monthly installments maturing in September 2004 2,271,000 -- Installment notes payable in monthly installments through March 2003, bearing interest at 9.9% to 22%, secured by certain medical equipment 985,000 983,000 Promissory note payable, bearing interest at 11.25%, payable in 25 monthly installments maturing in July 1997 -- 109,000 Promissory note payable, bearing interest at 10.6%, payable in 30 monthly installments maturing in March 2000 738,000 -- Borrowings for Gamma Knife deposits under promissory note, bearing interest at prime rate plus 2% (10.5% at December 31, 1997) payable when Gamma Knife units commence operation 1,000,000 -- ------------ ------------ 16,720,000 14,506,000 Less current portion (4,784,000) (6,816,000) ------------ ------------ $ 11,936,000 $ 7,690,000 ============ ============
18 55 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 6. LONG-TERM DEBT (CONTINUED) Annual contracted maturities under the initial terms of long-term debt for the five years after December 31, 1997 are as follows: $4,784,000 in 1998, $8,136,000 in 1999, $1,325,000 in 2000, $1,181,000 in 2001, $519,000 in 2002 and $775,000 thereafter. The Company is severely limited by covenants in its credit agreements which limit the Company's ability to merge with any other entity, to create subsidiaries, to pay cash dividends, to repurchase stock for cash, incur additional indebtedness, or to change the status of the equipment acting as collateral in such a way as to impair its value. In addition, the Company has pledged substantially all of its liquid assets and substantially all of its personal property to secure its existing debt. Notes Issued in Conjunction with Lease Restructuring The Company converted $481,000 of unpaid use taxes into a note payable to its primary provider of medical equipment. The note bears interest at 10.5% payable in 60 monthly payments beginning February 1, 1995. On December 23, 1996, the Company also converted past due service payments into a $1,632,000 promissory note with its primary provider of medical equipment. The note matures in January 2002 and bears interest at an annual rate of 10.75%. The note is unsecured. The Company also converted $147,000 of unpaid property taxes into a promissory note payable to its primary provider of medical equipment. The note bears interest at an annual rate of 10.75%, payable in 36 consecutive monthly installments with the remaining balance due in January 2000. 19 56 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 6. LONG-TERM DEBT (CONTINUED) Borrowings for Repurchase of Senior Subordinated Notes The repurchase of Senior Subordinated Notes (the "Notes Repurchase") was completed with the proceeds of three new credit facilities: a new revolving line of credit (the "Revolver"), a term loan, and a Gamma Knife Loan. Under the Revolver, the Company has available up to $5,500,000 according to a formula based on eligible accounts receivable. The Revolver provides for interest payments only (computed at the Bank of America prime rate plus 3.75%, 12.25% at December 31, 1997) until maturity on May 31, 1999, when all amounts are due and payable. The initial proceeds of $3,000,000 drawn under the Revolver were used primarily to fund the cash consideration in the Notes Repurchase. At December 31, 1997, the Company had drawn $5,438,000 under the Revolver and, based on eligible accounts receivable, had an additional $62,000 available under the facility. Under the terms of the agreement, the Company's cash receipts are processed through bank accounts controlled by the lender and the lender has a first priority lien on all of the Company's accounts receivable, certain equipment, inventory and general intangibles. The Revolver is personally guaranteed by an officer of the Company. The Company also entered into a $2,500,000 four-year loan agreement that will amortize in 48 equal installments with interest at an annual rate of 15% (the "Term Loan"). The Term Loan is secured by a first priority lien on certain equipment, inventory and certain real property of the Company and a second priority lien on the Company's accounts receivable and general intangibles. In addition to funding the repurchase of the Subordinated Notes, the proceeds of the Term Loan were applied to the refinancing of certain medical imaging equipment and to provide working capital to the Company. The Term Loan is also guaranteed by an officer of the Company. The Company also entered into a $1,500,000 loan at an interest rate of 10.5% (the "Gamma Knife Loan"). The proceeds of the Gamma Knife Loan were used to refinance the Company's first Gamma Knife, to fund in part the Notes Repurchase, and to provide working capital. The Gamma Knife Loan is collateralized with a first priority security interest in one of the Gamma Knife units owned by the Company. The payments on this loan were restructured from $90,431 per month to $40,203 per month effective September 17, 1995, and to extend the loan term to September 17, 1998, to match renegotiated terms of the underlying customer contract. 20 57 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets as of December 31, 1997 and 1996 are as follows:
1997 1996 ----------- ----------- Deferred tax liabilities: Other - net $ (164,000) $ (164,000) ----------- ----------- Total deferred tax liabilities (164,000) (164,000) Deferred tax assets: Net operating loss carryforwards 5,300,000 5,700,000 Fixed assets 2,200,000 3,100,000 Other - net 500,000 800,000 ----------- ----------- Net deferred tax assets 8,000,000 9,600,000 Valuation allowance for deferred tax assets 8,000,000 9,600,000 ----------- ----------- Total deferred tax assets -- -- ----------- ----------- Net deferred tax liabilities $ (164,000) $ (164,000) =========== ===========
The decrease in the valuation allowance during 1997 was $1,600,000. The components of the provision (benefit) for income taxes consist of the following:
Liability Method -------------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Current: Federal $ -- $ -- $ -- State 10,000 (7,000) 3,000 Deferred (reduction): Federal -- -- -- State -- -- -- ------------ ------------ ------------ $ 10,000 $ (7,000) $ 3,000 ============ ============ ============
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. 21 58 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) The provision (benefit) for income taxes as included in the consolidated financial statements is as follows:
1997 1996 1995 --------- --------- --------- Income (loss) before extraordinary gain $ 10,000 $ (7,000) $ 3,000 Extraordinary gain - - - --------- --------- --------- $ 10,000 $ (7,000) $ 3,000 ========= ========= =========
The provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (35% in 1997, 1996 and 1995) to income (loss) before taxes as follows:
1997 1996 1995 ----------- --------- ----------- Computed expected tax, including tax on extraordinary gain $ 536,000 $(126,000) $ 2,570,000 Change in valuation allowance (1,600,000) (300,000) (2,660,000) State income taxes (benefit), net of federal benefit 10,000 (7,000) 3,000 Reduction in carryovers and tax attributes 984,000 323,000 -- Other 80,000 103,000 90,000 ----------- --------- ----------- $ 10,000 $ (7,000) $ 3,000 =========== ========= ===========
At December 31, 1997, the Company has a net operating loss carryforward for federal income tax return purposes of approximately $13,000,000 which expires between 1999 and 2011. A substantial part of this carryforward is subject to separate return limitations. The company has state carryforwards of varying amounts. The Company's ability to utilize its net operating loss carryforwards and other deferred tax assets may be limited in the event of a 50% or more ownership change within any three-year period. Approximately $16,000,000 of net operating loss carryforwards were used to offset the gain on early extinguishment of the Senior Subordinated Notes in May 1995. (See Note 6 - Long-Term Debt.) 22 59 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY 1984 Stock Option Plan Under the Company's 1984 Stock Option Plan (the "Plan"), as amended, a total of 475,000 stock options were authorized for grant. The Plan terminated according to its terms on March 1, 1994. Options granted pursuant to the Plan generally had lives of 10 years from the date of grant, subject to earlier expiration in certain cases, such as termination of the grantee's employment. On August 15, 1995, the Stock Option Committee of the Board of Directors approved the amendment of the terms of substantially all options outstanding under the Company's 1984 Stock Option Plan, covering an aggregate of approximately 165,000 shares, to reduce the initial exercise price to $1.625 per share, which was the closing price of common shares on such date. 1995 Stock Option Plan The Company's 1995 Stock Option Plan, providing for nonqualified stock options and "incentive stock options," was approved by the Company's Board of Directors on August 15, 1995, subject to shareholder approval, which was given on October 6, 1995. Under the 1995 Plan, 330,000 common shares are reserved for awards to officers and other key employees, non-employee directors, and advisors. Provisions of the 1995 Stock Option Plan include an automatic grant to each non-employee director of up to 4,000 shares annually on the date of the Company's Annual Shareholder Meeting, at an exercise price equal to the market price of the Company's common shares on that date, until the non-employee director has options for a total of 12,000 shares of the Company's common stock in all Company plans. Directors who are appointed or elected to the Company's Board of Directors on a date other than that of the Annual Shareholder Meeting receive a pro-rata grant of such shares, at an exercise price equal to the market price of the Company's common shares on the date of grant. Grants of options for 19,000 shares were made pursuant to this provision during 1995. 23 60 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) 1995 Stock Option Plan (continued) Changes in options outstanding under the 1984 and 1995 Stock Option Plans from January 1, 1995 to December 31, 1997 are as follows:
NUMBER PRICE WEIGHTED AVERAGE OF SHARES PER SHARE EXERCISE PRICE ------------------------------------------------- Balance at January 1, 1995 256,000 $1.375-$7.50 -- Granted 256,000 $1.625 -- Exercised -- -- -- Forfeited (92,000) $3.00 - $7.125 -- --------------- Balance at December 31, 1995 420,000 $1.375-$1.625 -- Granted 19,000 $1.634 Forfeited (22,000) $1.625 --------------- Balance at December 31, 1996 417,000 $1.625 Granted 14,000 $1.688 Exercised -- -- Forfeited (2,000) $1.596 --------------- Balance at December 31, 1997 429,000 $1.627 ===============
At December 31, 1997, 43,000 options were available for grant and 7,000 shares were reserved for future issuance under the 1995 Plan. Shares and Options Issued to Officer Simultaneous with the Notes repurchase in 1995 (Note 5), the Company's Chairman and Chief Executive Officer was issued an additional 184,000 shares of the Company's stock, for which the Company recorded compensation expense of $265,000. The common shares were granted to the officer in partial consideration for a personal guarantee of $6.5 million of new credit facilities and for continued employment with the Company. 24 61 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) Shares and Options Issued to Officer (continued) In addition, on August 15, 1995, the officer was granted a ten-year, immediately exercisable option to purchase 1,495,000 common shares for an exercise price of $.01 per share for which the Company has recorded compensation expense of $2,414,000. These options were granted to the officer as final consideration for personal guarantees of the new credit facilities and for continued employment with the Company. The following table summarizes information about all options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE ----------------- --------------- ---------------- ----------- --------------- ----------- $ .01 1,495,000 7.80 $ 0.1 1,495,000 $ .01 1.625 - 1.6875 470,600 6.27 1.627 406,316 1.627 ----------------- --------------- ---------------- ----------- --------------- ----------- $ .01 -1.6875 1,965,600 7.46 $ 0.372 1,901,316 $ 0.355 ================= =============== ================ =========== =============== ===========
At December 31, 1997 and 1996, 1,890,000 and 1,873,000 options, respectively, were vested and exercisable. 25 62 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) Pro Forma Information related to Option Grants Pro forma information regarding net income and earnings per share is required by SFAS 123 for awards granted after December 31, 1995, as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's option grants under the 1984 and 1996 Plans was estimated assuming no expected dividends and the following weighted-average assumptions:
1997 1996 ------------------------------------ Expected life (years) 9.5 9.5 Expected volatility 93.8% 99.3% Risk-free interest rate 6.3% 7.9%
The weighted-average fair value of options granted during 1997 was $1.50. For pro forma purposes, the estimated fair value of the Company's options is amortized over the options' vesting period. The Company's pro forma information follows:
1997 1996 ------------- ----------- Net income (loss) As reported $ 1,522,000 $ (353,000) Pro forma 1,458,000 (387,000) Net income (loss) per share As reported .24 (0.08) Pro forma .23 (0.06)
Because SFAS 123 is applicable only to awards granted subsequent to December 31, 1995, its pro forma effect will not be fully reflected until approximately 1999. 26 63 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) 1995-1996 Director Retainer Shares On February 16, 1996, the Company's Board of Directors agreed that non-employee directors could elect to receive some or all of their $5,000 annual Directors' Retainer Fees for 1995 and/or 1996 in shares of the Company's common stock, instead of in cash, at the rate of $1.6875 per share, which was the closing price of the Company's common stock on that date. A total of 13,047 shares was issued during 1996 for that purpose. The remaining Director Retainer Fees due to non-employee directors for 1995 and/or 1996 were paid in cash during 1996. Warrants Issued in Conjunction with Lease Restructuring In 1995 and 1996, as consideration for the financial accommodations granted in the restructuring of the Company's lease obligations, the Company issued immediately exercisable warrants to its primary provider of leased equipment, granting the right to purchase 97,853 and 127,147 common shares, respectively, at a price of $.01 per share. In 1996, these warrants were exercised to purchase 225,000 common shares. Options and Warrants Issued in Conjunction with Repurchase of Senior Subordinated Notes On May 17, 1995, simultaneous with the Notes repurchase (Note 5), the Company issued 819,000 common shares (equal to approximately 20% of the Company's then fully diluted common shares) and warrants to purchase 216,000 shares of common stock (equal to approximately 5% of the then fully diluted common shares) to the holders of $17,694,000 face value of the Company's Senior Subordinated Notes that were repurchased. The warrants are immediately exercisable at $0.75 per share, expiring on May 17, 2002. As a result of the additional options awarded to an officer of the Company, the ex-Noteholders were granted 374,000 additional common shares and 98,000 additional warrants to purchase common shares, to maintain their ownership interest at approximately 25% of the then fully diluted common shares. The warrants are immediately exercisable at $0.75 per share, expiring on May 17, 2002. Capital shares reserved for future issuances total 2,951,000 shares at December 31, 1997. 27 64 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 9. RETIREMENT PLAN The Company has a defined contribution retirement plan for which substantially all full-time employees are eligible. Under the terms of the plan, the Company may contribute a discretionary matching contribution on behalf of each participant, determined each year by the Company, equal to a percentage of each participant's contributions and applicable to the first 6% of each participant's salary. The Company made no contributions to the plan in 1997, 1996 or 1995. 10. OBLIGATIONS UNDER CAPITAL LEASES The Company leases MRI units and other equipment under capital leases having an aggregate net book value of $12,284,000 at December 31, 1997. Amortization of assets recorded under capital leases is included with depreciation expense, and is primarily amortized over the life of the lease. On December 30, 1994 (effective as of November 1, 1994 for most leases that were considered capital prior to that date, and January 1, 1994 for leases that were considered operating prior to that date) and at the end of 1995 and certain leases again in early 1996, the Company and its major provider of medical equipment entered into a restructuring of the obligations of the Company under lease agreements. Substantially all capital leases of the Company have been restructured and after restructuring continued to meet the criteria to be accounted for as capitalized leases. Under these modified leases, required payments by the Company are scheduled to retire the unpaid principal balance over the extended lease terms which will expire on various dates through December 31, 1999. All the operating leases covered by the restructuring agreement in effect on October 31, 1994 were modified to extend the payment schedules. As a result of modification of lease terms, these leases met the criteria for capitalization, and were accounted for as capital leases in the accompanying financial statements. Under all the modified leases, the Company is entitled to purchase the equipment at its fair market value, or to extend the relevant lease, at the end of the lease term. The modified leases, as identified above, were further restructured effective October 1, 1995. No payments were required for the months of October through December 1995. During these months, interest was accrued and was added to the outstanding principal balance of the capital leases. In addition, the leases were extended up to an additional 26 months, where possible, to coincide with the probable termination of the Company's end-user contracts. After this restructuring, the modified leases continue to meet the criteria to be accounted for as capitalized leases. Under all the modified leases, the Company will be entitled to purchase the equipment at its fair value or to extend the relevant lease at the end of the lease term. 28 65 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 10. OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED) On March 1, 1996, the Company received an offer from its primary provider of medical equipment to restructure certain of its capital lease obligations. The general terms of the restructuring provide for various months of no payments in 1996 followed by increased payments in the latter part of the agreements. The Company completed this restructuring on March 8, 1996. Future minimum lease payments, together with the present value of the net minimum lease payments under capital leases at December 31, 1997, are summarized as follows:
NPV OF MAINTENANCE MINIMUM AND OTHER LEASE LEASE LEASE RELATED PAYMENT PAYMENTS COSTS TOTAL --------------------------------------------- 1998 $ 7,487,000 $ 1,916,000 $ 9,403,000 1999 6,157,000 1,580,000 7,737,000 2000 3,261,000 653,000 3,914,000 2001 917,000 158,000 1,075,000 2002 442,000 46,000 488,000 Thereafter 226,000 16,000 242,000 ------------- ------------- ------------ Total 18,490,000 $ 4,369,000 $ 22,859,000 ============= ============ Less amounts representing interest 2,712,000 ------------- Present value of net minimum lease payments 15,778,000 Less current portion 6,145,000 ------------- $ 9,633,000 =============
As shown above, in addition to the capital lease payments, the Company is also required to make maintenance and other executory cost lease related payments. During 1997, 1996 and 1995, the Company financed approximately $1,049,000, $7,263,000, and $1,342,000, respectively, of equipment purchases with capital lease obligations. During 1997, 1996 and 1995, the Company incurred interest costs of $3,671,000, $4,199,000, and $5,310,000, respectively. 29 66 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 11. OPERATING LEASES The Company leases certain MRI and CT scanning equipment, automobiles, transportation equipment, and office space under operating leases expiring at various dates through 2003. Future minimum payments under noncancelable operating leases having initial terms of more than one year consisted of the following at December 31, 1997: 1998 $ 2,551,000 1999 2,353,000 2000 1,926,000 2001 1,139,000 2002 886,000 Thereafter 156,000 ----------- $ 9,011,000 ===========
Payments for repair and maintenance agreements are included in the future minimum operating lease payments shown above. Rent expense was $3,285,000 $3,841,000, and $3,458,000 for the years ended December 31, 1997, 1996 and 1995, respectively, and includes the above operating leases as well as month-to-month rental and certain capital lease executory costs. 12. PURCHASE OF GAMMA KNIFE FROM RELATED PARTY On February 3, 1996, the Company purchased a Gamma Knife through its subsidiary, GK Financing, LLC from its Chief Executive Officer in exchange for forgiveness of the outstanding balance of a note due to the Company of $248,000 at December 31, 1996, plus assumption of a note payable in the amount of $2,270,000. The note is payable to the Company's primary provider of medical equipment, bearing interest at 10.5%, due in 60 monthly installments, with final payment due July 1999. 30 67 American Shared Hospital Services Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS AND CONTINGENCIES On October 11, 1996 and October 17, 1995, the Company, through GKF, entered into quotation agreements to purchase a total of seven Gamma Knife units from the equipment manufacturer. Under the terms of the quotation agreements, the Company is committed to purchase this equipment for $19,654,000, effective when the equipment is placed in service at each customer location. At December 31, 1997, the Company had a $1,750,000 deposit related to these purchase commitments which is classified as construction in progress. GFK has a promissory note for $1,320,000 with the equipment manufacturer to provide funds for future capital expenditures. As of December 31, 1997, there have been no borrowings under this note. 14. SUBSEQUENT EVENT - SALE OF ASSETS (UNAUDITED) On March 12, 1998, the Company entered into a definitive agreement to sell certain of its medical diagnostic imaging assets to Alliance Imaging, Inc. ("Alliance") an affiliate of Apollo Management, L.P. for $13.6 million in cash and the assumption of liabilities associated with the Company's diagnostic imaging business, including approximately $26.1 million of debt. The Company is in the process of finalizing its calculation of the gain it would expect to recognize on the sale. The following table presents certain financial information of the assets to be sold: Revenues for the year ended December 31, 1997 were approximately $ 34,772,000 Total assets at December 31, 1997 were approximately 22,100,000 Total liabilities at December 31, 1997 were approximately 31,900,000
The proposed transaction is subject to certain conditions, including receipt of regulatory approvals and the approving vote of a majority of the shareholders of the Company. 31 68 American Shared Hospital Services Valuation and Qualifying Accounts
Additions Additions Balance at Charged to Balance at Charged to December 31, Costs and Amounts December 31, Costs and 1994 Expenses Written Off 1995 Expenses ______________________________________________________________________________________________________ Allowance for $ (1,424,000) $ (1,347,00) $ 1,323,000 $ (1,448,000) $ (1,014,00) uncollectible accounts
Additions Balance at Charged to Balance at Amounts December 31, Costs and Amounts December 31, Written Off 1996 Expenses Written Off 1997 ______________________________________________________________________________________________________ Allowance for $ 1,222,000 $ (1,240,000) $ (1,296,000) $ 1,234,000 $ (1,302,000) uncollectible accounts
69 Index to Exhibits
Exhibit Sequential Page Number Description Number - ------ ----------- --------------- 2.1 Securities Purchase Agreement, dated as of March 12, 1998, by and among Alliance Imaging, Inc.; Embarcadero Holding Corp. I: Embarcadero Holding Corp. II; American Shared Hospital Services; and MMRI, Inc. 3.1 Articles of Incorporation of the Company, as amended. (1) * 3.2 By-laws for the Company, as amended. (2) * 4.6 Form of Common Stock Purchase Warrant of American Shared Hospital Services. (2) * 4.8 Registration Rights Agreement, dated as of May 17, 1995, by and among American Shared * Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems.(2) 4.9 Promissory Note, dated May 17, 1995, by American Shared Hospital Services in favor of * General Electric Company in the principal sum of $1,500,000, as amended. (2) 4.10 Promissory Note, dated January 31, 1996, by American Shared-CuraCare and CuraCare, * Inc. in favor of DVI Business Credit Receivables Corporation, in the principal sum of $4,000,000. (3) 4.11 Promissory Note, dated May 17,1 995, by American Shared-CuraCare and CuraCare, Inc. * in favor of DVI Financial Services Inc. in the principal sum of $2,500,000.(2) 4.12 Security Agreement dated as of May 17, 1995 by and between American Shared Hospital Services and General Electric Company, acting through GE Medical Systems.(2) * 4.13 Agreement and Proxy, dated as of May 12, 1995 by Ernest A. Bates, M.D., Accepted and * Agreed to by Anchor National Life Insurance Company, Sun Life Insurance Company of America, SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd., and Upchurch Living Trust U/A/D 12/14/90.(2) 4.14 Assignment and Assumption Agreement, dated as of December 31, 1995, between American * Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee).(3) 4.15 Assignment and Assumption Agreement, dated as of February 3, 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee).(3) * 4.16 USC University Hospital Option Agreement, dated February 3, 1996, among American Shared Hospital Services, Ernest A. Bates, M.D. and GK Financing, LLC. (3) *
70 4.17 Assignment and Assumption Agreement, dated as of February 3, 1996, among Ernest A. * Bates, M.D. (assignor) and GK Financing, LLC (assignee). (3) 4.18 Assignment and Assumption Agreement, effective as of February 3, 1996, among Ernest * A. Bates, M.D. (assignor) and GK Financing, LLC (assignee). (3) 4.19 Promissory Note, dated January 1, 1995, by American Shared-CuraCare in favor in General Electric Company, acting through GE Medical Systems, in the principal sum of * $2,000,000, as amended. (3) 4.20 Promissory Note, dated December 30, 1994, by American Shared-CuraCare in favor of * General Electric Company, in the principal sum of $481,667.81, as amended. (3) 4.21 Promissory Note, dated April 29, 1996 by GK Financing, LLC in favor of Skandinaviska * Enskilda Banken in the principal amount of $1,300,000. (4) 4.22 Promissory Note, dated December 23, 1996 by American Shared-CuraCare in favor of * General Electric company, in the principal amount of $1,631,595.10. (4) 10.1 The Company's 1984 Stock Option Plan, as amended. (5) * 10.2 The Company's 1995 Stock Option Plan, as amended. (6) * 10.3 Form of Indemnification Agreement between American Shared Hospital Services and * members of its Board of Directors. (5) 10.4 Agreement, effective as of November 1, 1994, by and among General Electric Company, * acting through GE Medical Systems, and American Shared Hospital Services, and certain of its subsidiaries, as amended. (7) 10.5 Note Purchase Agreement, dated as of May 12, 1995, by and among Anchor National Life * Insurance Company, Sun Life Insurance Company of America, and SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace Brothers, Ltd. and Upchurch Living Trust U/A/D 12/14/90, American Shared Hospital Services and Ernest A. Bates, M.D. (2) 10.6 Loan and Security Agreement, dated as of January 31, 1996, among American * Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation. (3) 10.7 Loan and Security Agreement, dated as of May 17, 1995, among American Shared-CuraCare * and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Financial Services Inc. (2) 10.8 Form of Unconditional Continuing Guaranty of American Shared Hospital Services. (3) * 10.9 Form of Unconditional Continuing Guaranty of Ernest A. Bates, M.D. (3) * 10.10 Intercreditor Agreement among American Shared Hospital Services, American * Shared-Curacare, DVI Financial Services Inc. and DVI Business Credit Receivables Corporation and General Electric Company, acting through GE Medical Systems, dated as of January 31, 1996. (3)
71 10.11 Ernest A. Bates, Stock Option Agreement dated as of August 15, 1995. (8) * 10.12 Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. (2) * 10.13a Amendments dated as of October 26, 1995 and as of December 20, 1995 to the GK Financing, * LLC Operating Agreement, dated as of October 17, 1995. (3) 10.13b Amendment dated as of October 16, 1996 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. 10.14 Amendment No. 1, dated March 29, 1996, to Loan and Security Agreement, dated as of * January 31, 1996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation (Exhibit 10.6). (4) 10.15 Amendment No. 2, dated January 31, 1996, to Loan and Security Agreement, dated as of * January 31, 996, among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corporation (Exhibit 10.6).(4) 10.16 Amendment No. 3, dated April 23, 1997, to Loan and Security Agreement, dated January 31, 1996 among American Shared-CuraCare and CuraCare, Inc., American Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corp. (Exhibit 10.6). 10.17 Amendment No. 4, dated July 31, 1997, to Loan and Security Agreement, dated January 31, 1996 among American Shared-CuraCare and CuraCare, Inc., American Shared Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corp. (Exhibit 10.6). (8) 10.18 Amendment No. 5, dated November 26, 1997, to Loan and Security Agreement, dated January 31, 1996 among American Shared-CuraCare and CuraCare, Inc., American Shared Shared Hospital Services, Ernest A. Bates, M.D. and DVI Business Credit Receivables Corp. (Exhibit 10.6). (8) 21. Subsidiaries of American Shared Hospital Services. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule for the year ended December 31, 1997. 27.a Restated Financial Data Schedule for the fiscal year ended December 31, 1995. 27.b Restated Financial Data Schedule for the three months ended March 31, 1996. 27.c Restated Financial Data Schedule for the six months ended June 30, 1996. 27.d Restated Financial Data Schedule for the nine months ended September 30, 1996. 27.e Restated Financial Data Schedule for the fiscal year ended December 31, 1996. 27.f Restated Financial Data Schedule for the three months ended March 31, 1997. 27.g Restated Financial Data Schedule for the six months ended June 30, 1997. 27.h Restated Financial Data Schedule for the nine months ended September 30, 1997.
- ------------------------ (1) This document was filed as Exhibit 3.1 to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (2) These documents were filed as Exhibits 3.2, 4.6, 4.8, 4.9, 4.11, 4.12, 4.13, 10.5, 10.7 and 10.12, to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on October 26, 1995, which is incorporated herein by this reference. 72 (3) These documents were filed as Exhibits 4.10, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19, 4.20, 10.6, 10.8, 10.9, 10.10, and 10.13, respectively, to the registrant's Pre-Effective Amendment No. 1 to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996, which is incorporated herein by this reference. (4) These documents were filed as Exhibits 4.21, 4.22, 10.14, and 10.15, respectively, to registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1996, which is incorporated herein by this reference. (5) These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (6) This document was filed as Exhibit A to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. (7) This document was filed as Exhibit 10.49 to registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1994, which is incorporated herein by this reference. (8) This document was filed as Exhibit B to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. EX-2.1 2 SECURITIES PURCHASE AGREEMENT 1 ================================================================================ Exhibit 2.1 SECURITIES PURCHASE AGREEMENT BY AND AMONG ALLIANCE IMAGING, INC. EMBARCADERO HOLDING CORP. I, EMBARCADERO HOLDING CORP. II, AMERICAN SHARED HOSPITAL SERVICES, AND MMRI, INC. DATED AS OF MARCH 12, 1998 ================================================================================ 2 SECURITIES PURCHASE AGREEMENT dated as of March 12, 1998, by and among ALLIANCE IMAGING, INC., a Delaware corporation ("Alliance"), EMBARCADERO HOLDING CORP. I, a Delaware corporation ("Purchaser A"), EMBARCADERO HOLDING CORP. II, a Delaware corporation ("Purchaser B" and, together with Purchaser A, the "Purchasers"), AMERICAN SHARED HOSPITAL SERVICES, a California corporation ("Parent") and MMRI, INC., a California corporation ("M Sub"). WHEREAS, each Entity is engaged in the business of providing mobile, shared diagnostic imaging services to hospitals, medical centers and medical offices (including magnetic resonance imaging ("MRI") services, computed axial tomography scanning ("CT") services, ultrasound services, nuclear medicine services and related services) (collectively, the "Business"); WHEREAS, the Parent owns all of the issued and outstanding shares of common stock, par value $1.00, of CT Sub (the "CT Shares") and the Parent Partnership Interests; WHEREAS, M Sub owns the M Sub Partnership Interests; WHEREAS, the Sellers desire to sell to Alliance, and Alliance desires to purchase from the Sellers, all of the Shares, on the terms and subject to the conditions contained in this Agreement; and WHEREAS, Alliance has designated the Purchasers, each of which is a wholly-owned Subsidiary of Alliance, to acquire the Shares for and on behalf of Alliance. NOW, THEREFORE, in consideration of the premises and the mutual representations hereinafter set forth, the parties hereto hereby agree as follows (certain capitalized terms used herein are defined on Annex I hereto): ARTICLE I PURCHASE AND SALE 1.1 TRANSFER OF SHARES. (a) On the terms and subject to the conditions of this Agreement, at the Closing (after the transactions referenced in Section 1.2 have been consummated), (i) the 3 Parent shall sell, transfer, convey and assign to Purchaser A, and Purchaser A shall purchase and acquire from the Parent, all of the Shares (other than the M Sub Partnership Interests), free and clear of all Encumbrances and (ii) M Sub shall sell, transfer, convey and assign to Purchaser B and Purchaser B shall purchase and acquire from M Sub, the M Sub Partnership Interests, free and clear of all Encumbrances. It is agreed by the parties, that Purchaser A and Purchaser B have been designated by, and hereto shall purchase the Shares for and on behalf of Alliance. (b) The Sellers shall, at any time after the Closing, upon the request of the Purchasers, take, execute, acknowledge and deliver, and cause to be taken, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney or assurances as may be required to transfer, convey, grant and confirm to and vest in the Purchasers, good and marketable title to all of the Shares, free and clear of all Encumbrances. 1.2 TRANSFERS OF ASSETS AND LIABILITIES. (a) Prior to the Closing Date, the Parent and M Sub shall effectively sell, transfer, convey and assign (the "Asset Contribution") to the Partnership, (i) all of the Parent's and M Sub's right, title and interest in, to and under the assets, properties, interests in properties and rights of the Parent or M Sub, as the case may be, of every kind, nature and description, whether real, personal or mixed, movable or immovable, tangible or intangible, used in or held for use in the Business, wherever located and listed on Schedule 1.2(a) hereof (the "Purchased Parent Assets") and (ii) all of the Liabilities (other than any Excluded Liabilities) related to the Purchased Parent Assets, on terms and conditions satisfactory to the Purchasers including, without limitation, pursuant to such deeds, bills of sale, endorsements, assignments and other good and sufficient instruments of sale, transfer, conveyance and assignment (collectively, the "Conveyance Instruments") as are necessary to sell, transfer, convey and assign to the Partnership the Purchased Parent Assets and such Liabilities. (b) Prior to the Closing Date, (i) the Parent shall cause each of the Entities to effectively sell, transfer, convey and assign (the "Asset Disposition") to the Parent all of such Entities' right, title and interest in, to and under the assets, properties, interests in properties and rights listed on Schedule 1.2(b) hereof (the "Excluded Assets") and (ii) the Parent shall assume from each of the Entities all of the Excluded Liabilities which are Liabilities of each Entity, on terms and conditions satisfactory to the Purchasers including, without limitation, pursuant to Conveyance Instruments as are necessary to sell, transfer, convey and assign to the Parent the Excluded Assets and the Excluded Liabilities. (c) Anything contained in this Agreement to the contrary notwithstanding, (i) neither the Purchasers nor Alliance are assuming any Liabilities (fixed or contingent, known or unknown, matured or unmatured) of the Sellers or the Entities whether or not relating to the Business which are specified on Schedule 1.2(c) (the "Excluded Liabilities") all of which Excluded Liabilities shall at and after the Closing become the exclusive 2 4 responsibility of the Parent and (ii) on the Closing Date, the Sellers or any of their Subsidiaries (other than the Entities and GK Finance) shall retain (x) not less than $600,000 aggregate amount of Liabilities in respect of accounts payable (y) not less than $175,000 aggregate amount of Liabilities in respect of accrued expenses (other than Liabilities in respect of accrued expenses referenced in Section 1.2(c)(z)) and (z) all of the Liabilities in respect of accrued expenses for "accrued payroll" and "accrued payroll taxes and benefits" outstanding as of the Closing Date. 1.3 PAYMENT OF THE PURCHASE PRICE. The aggregate purchase price (the "Purchase Price") to be paid by Alliance to the Sellers for the Shares and the covenants set forth in Section 6.10 of this Agreement shall be a cash amount equal to $13,552,000. At the Closing and subject to the terms and conditions of this Agreement and the Related Documents, Alliance shall cause the Purchasers to make payment of the Purchase Price (minus $75,000 of the Purchase Price which was previously paid to the Parent) to the Sellers by wire transfer of immediately available funds to the accounts previously designated in writing to the Purchasers by the Parent. 1.4 ALLOCATION OF PURCHASE PRICE. The parties hereto agree that the Purchase Price, subject to any indemnification payments made hereunder, shall be allocated to the CT Shares and to the Partnership Interests by the Purchasers on a basis reasonably satisfactory to the Sellers. ARTICLE II THE CLOSING Unless this Agreement shall have terminated pursuant to its terms, the closing (the "Closing") of the transactions contemplated by this Agreement and the Related Documents shall take place at the offices of O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York 10112, at 10:00 a.m. (New York time) on a date that shall be mutually agreeable to the parties hereto (the "Closing Date"), provided, however, that the parties shall use commercially reasonable efforts to consummate the Closing, in accordance with Section 6.3 hereof, as soon as practicable following the date of the Parent Stockholder Approval. ARTICLE III REPRESENTATIONS AND WARRANTIES The Sellers jointly and severally represent and warrant to the Purchasers and Alliance as of the date hereof, and as of the Closing Date as follows: 3 5 3.1 TITLE TO THE SHARES. Each of the Sellers is the lawful record and beneficial owner of the Shares purported to be owned by it and has good and marketable title to such Shares, free and clear of any Encumbrances whatsoever and with no restriction on the voting rights and other incidents of record and beneficial ownership pertaining thereto (except restrictions imposed by federal and state securities laws). No Entity is the subject of any bankruptcy, reorganization or similar proceeding. 3.2 ORGANIZATION, POWER, AUTHORITY AND GOOD STANDING. (a) CT Sub is a corporation. The Partnership is a general partnership. The Parent was incorporated on October 31, 1983 in the State of California. CT Sub was incorporated on May 1, 1984 in the State of Delaware. M Sub was incorporated on October 8, 1987 in the State of California. The Partnership was formed on March 7, 1985 in the State of California. (b) Each Seller and each Entity is duly organized and validly existing and in good standing under the laws of its jurisdiction of organization and has all requisite power and authority (corporate and otherwise) to own, lease and operate its assets and properties and to carry on its business as presently conducted. (c) Each Seller and each Entity is duly qualified and in good standing to transact business as a foreign Person in those jurisdictions set forth opposite its name on Schedule 3.2(c), which constitute all the jurisdictions in which the character of the property owned, leased or operated by such Person or the nature of the business or activities conducted by such Person makes such qualification necessary other than those jurisdictions in which the failure to be so qualified and in good standing could not reasonably be expected to have a Material Adverse Effect. (d) The Purchasers have been furnished with true, correct and complete copies of the Organizational Documents of each Entity and each Seller, in each case as amended and in effect on the date hereof. (e) No Entity or Seller has (i) during the five year period prior to the date hereof, engaged in any business other than the Business or as otherwise set forth opposite its name on Schedule 3.2(e)(i) and (ii) within the last five years, used any trade names or assumed names other than the trade names or assumed names set forth opposite its name on Schedule 3.2(e)(ii). (f) Each Seller has all requisite power and authority (corporate and otherwise) to execute, deliver and perform its obligations under this Agreement and each Related Document to which it is or will be a party and to consummate the transactions contemplated hereby and thereby. Except for the Parent Stockholder Approval, each Seller's execution and delivery of this Agreement and each Related Document to which it is or will be a party, and the performance by each Seller of its obligations hereunder and 4 6 thereunder have been duly and validly authorized by all requisite corporate action on the part of such Seller, and this Agreement and each Related Document to which either Seller is or will be a party has been, or upon the execution thereof will be, duly and validly executed and delivered by such Seller, respectively, and constitutes, or upon its execution and delivery will constitute, a valid and binding obligation of such Seller, respectively, enforceable against such Seller, respectively, in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or at law). Except as set forth on Schedule 3.2(f), none of the execution and delivery by each Seller of this Agreement and each Related Document, the performance by either Seller of its obligations under this Agreement and each Related Document to which it is or will be a party, or the consummation of the transactions contemplated hereby or thereby, does or will (a) result in the creation of an Encumbrance upon any Entities' assets or properties, (b) conflict with, or result in any violation or breach of, any of the terms, conditions or provisions of, or constitute (with due notice or lapse of time, or both) a default or give rise to any right of contingent payment, termination, cancellation, acceleration or non-renewal, under, any provision of any Organizational Document of any such Person or any Contract to which any such Person is a party or by which any of its assets or properties is or may be bound which, in the case of such Contracts, could reasonably be expected to have a Material Adverse Effect or prevent the consummation of the transactions contemplated hereby or under the Related Documents and other than with respect to the foregoing for which consents have been obtained, or (c) violate any Law applicable to any Entity or Seller, which conflict or violation could prevent the consummation of the transactions contemplated by this Agreement or any of the Related Documents to which any such Person is or will be a party. (g) Except as contemplated by this Agreement or as set forth on Schedule 3.2(g), no consent, approval, Permit, Order, notification or authorization of, or any exemption from or registration, declaration or filing with, any Governmental Entity or any Person is required in connection with the execution, delivery and performance by any Seller of this Agreement or any Related Document to which any Seller is or will be a party or the consummation by any Seller of the transactions contemplated hereby or thereby, except for those consents, approvals, Permits, Orders, notifications, authorizations, exemptions, registrations, declarations or filings the failure to obtain could not reasonably be expected to have a Material Adverse Effect or prevent the consummation of the transactions contemplated hereunder or under the Related Documents or for those consents, approvals, Permits, Orders, notifications, authorizations, exemptions, registrations, declarations and filings which have been obtained. 3.3 CAPITALIZATION. (a) The authorized capital stock of CT Sub consists of 1,000 duly authorized shares of common stock, par value $1.00 per share, of which 1,000 shares are duly and validly issued and outstanding, fully paid and nonassessable, with no personal 5 7 Liability attached to the ownership thereof and all of which are held of record and beneficially by the Parent. (b) The Partnership Interests of the Partnership are owned beneficially and of record in the amounts and by the Persons set forth in Schedule 3.3(b). (c) There are no securities outstanding which are convertible into, exchangeable for, or carrying the right to acquire, Equity Interests of any Entity, or subscriptions, warrants, options, calls, puts, convertible securities, registration or other rights, arrangements or commitments obligating any Entity to issue, sell, register, purchase or redeem any of its Equity Interests or any ownership interest or rights therein. There are no voting trusts or other similar agreements to which any Entity is bound with respect to the voting of the any Entity's Equity Interests. There are no stock appreciation rights, phantom stock rights or similar rights or arrangements outstanding with respect to any Entity. (d) Except as set forth on Schedule 3.3(d), there are no Contracts, commitments, arrangements, understandings or restrictions to which any Seller or any of its Subsidiaries is bound relating in any way to any Equity Interest of any Entity, including any rights of first refusal and any rights of first offer. (e) All Shares issued by each Entity have been issued in transactions exempt from registration under the Securities Act and the rules and regulations promulgated thereunder and all applicable state securities or "blue sky" laws, and no Entity has violated the Securities Act or any applicable state securities or "blue sky" laws which may give rise to rights of rescission, cancellation or damages in connection with the issuance of any such securities. 3.4 SUBSIDIARIES; INVESTMENTS. No Entity owns or holds, directly or indirectly, any Equity Interest in any Person. 3.5 FINANCIAL INFORMATION. (a) The Parent has filed with the SEC all reports, forms, schedules and statements and other documents required to be filed by it (the "SEC Documents"). As of their respective filing dates, (i) the SEC Documents complied in all material respects with the requirements of the Securities Act, or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents, and (ii) none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements included in the SEC Documents complied, as of their respective filing dates, as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP (except, in the case of unaudited 6 8 statements, as permitted by Form 10-Q of the SEC and as otherwise noted therein) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present, in all material respects, the consolidated financial position of the Parent and its Subsidiaries as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth on Schedule 3.5(a) and except for Liabilities incurred in the ordinary course of business consistent with past practices since the date of the most recent consolidated balance sheet included in the SEC Documents filed and publicly available prior to the date hereof, neither the Parent nor any of its Subsidiaries has any Liabilities of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a balance sheet or in the notes thereto. (b) Schedule 3.5(b) contains true, correct and complete copies of the unaudited balance sheets of each of the Entities as of December 31, 1997 (the "Latest Balance Sheet"; and such date being the "Latest Balance Sheet Date"), and the unaudited statements of operations, shareholders' equity and cash flows for the twelve month period then ended, adjusted to give effect to the consummation of the transactions contemplated by Section 1.2 hereof as if such transactions were consummated at January 1, 1997 prepared in accordance with GAAP (the "Entities' Financial Statements"). (c) Neither of the Sellers has any knowledge of any fact, event or circumstance that would reasonably cause it to believe that the Entities' Financial Statements do not fairly present, in all material respects, the financial position of the Persons referenced therein as of the dates indicated and the results of operations and cash flows of such Persons for the periods indicated. (d) Schedule 3.5(d) sets forth as of January 31, 1998, the Funded Indebtedness owed by the Parent and each Entity to any third party (separately identifying the portion of such Funded Indebtedness incurred in respect of each mobile and each fixed magnetic resonance imaging unit (each, an "MRI Unit"), each mobile and each fixed computed axial tomography unit (each, a "CT Unit"), each single photon emission computed tomography unit (each a "SPECT UNIT"), each ultrasound machine (each, an "Ultrasound Machine"), each respiratory system (each a "Respiratory System"), and each cardiac catherization lab (each a "Cath Lab" and together with the MRI Units, CT Units, SPECT Units, Ultrasound Machines, Respiratory Systems, and Cath Labs, the "Units") owned, leased or on order by any Entity and the Parent, if any). As of the date hereof, the sum of the aggregate commitments of the lenders under the DVI Revolving Credit Agreement is $5,500,000 and as of the close of business on March 10, 1998, the aggregate principal amount of loans and obligations outstanding thereunder is $5,222,484.75. (e) Schedule 3.5(e) sets forth as of (other than in the case of clause (iv) below) the date which is 10 Business Days prior to the date hereof, (i) the specifications of each Unit owned, leased, used or on order by any Entity or the Parent, (ii) the name of the applicable Entity or the Parent, whether such Unit is owned, leased, used or on order and, 7 9 in the case of Units used but not owned or leased by any such Person, the name of the owner or the lessee thereof, (iii) the date that such Person purchased, commenced leasing or using or, in the case of Units on order, has committed to purchase or lease, such Unit, (iv) the net book value per Unit as of December 31, 1997 or, in the case of Units on order, the price to be paid to the manufacturer thereof or that any such Person or any source of financing has committed to pay to the manufacturer thereof (specifying, if applicable, the price applicable to the Unit and the price applicable to the coach or van used or to be used to transport such Unit) and (v) a summary of whether Tax payments in respect of the lease payments for each Unit are paid at the inception of the relevant lease or as part of the monthly lease payment. (f) Schedule 3.5(f) sets forth (i) thedate and cost of each upgrade completed in the one year period prior to the date hereof to each Unit owned, leased or used by each Entity or the Parent and (ii) all amounts in excess of an aggregate of $25,000 that each Entity or the Parent has committed to pay in respect of any pending upgrade. (g) Schedule 3.5(g) sets forth a true and correct Schedule of all of the accounts payable of the Entities (including payee, amount due and due date) as of the close of business on January 31, 1998. (h) Schedule 3.5(h) sets forth a true and correct Schedule of (i) all principal payments or prepayments made by the Parent and each Entity for the year ended on the Latest Balance Sheet Date and for the one month period ending January 31, 1998, (ii) the interest expense incurred by the Parent and each Entity in respect of Funded Indebtedness for the year ended on the Latest Balance Sheet Date and for the one month period ending January 31, 1998, (iii) the revenues, cash operating expenses, and EBITDA generated per Unit for the Parent and each Entity for the year ended on the Latest Balance Sheet Date and for the one month period ending January 31, 1998 and (iv) the capital expenditures made by the Parent and each Entity for the year ended on the Latest Balance Sheet Date, and for the one month period ending January 31, 1998, in each case, setting forth such information separately for each such Person. 3.6 INFORMATION SUPPLIED. None of the information supplied or to be supplied by the Parent specifically for inclusion or incorporation by reference in any documents to be filed by the Parent with the SEC or any other Governmental Entity in connection with the Parent Stockholder Vote and the other transactions contemplated hereby and under the Related Documents will, on the date of its filing, or, with respect to the Proxy Statement, as supplemented if necessary, on the date it is sent or given to stockholders or at the time of the Parent Stockholder Vote, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading; provided, that no representation or warranty is made by the Sellers with respect to statements made or incorporated by reference therein based on information supplied by the Purchasers 8 10 specifically for inclusion or incorporation by reference therein. The Proxy Statement and any such other documents filed by the Parent with the SEC or with any other Governmental Entity will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder. 3.7 ABSENCE OF CHANGES. Since the Latest Balance Sheet Date and on or prior to the date hereof, except as set forth on Schedule 3.7, the Parent (with respect to the Business) and each Entity have been operated in the ordinary course, consistent with past practice, and there has not been: (a) any change or event that, individually or in the aggregate with any other change or event, has had or can reasonably be expected to have a material adverse effect on the assets, properties, business, financial condition, results of operations or prospects of the Business (a "Material Adverse Effect"); (b) any general uniform increase in the salaries or wages of employees of the Parent or any Entity, or any increase in salaries or wages payable to any officer, director or employee of any such Person whose total salary, wages, bonus and commissions for 1997 exceeded $75,000; (c) any change in the tax or other accounting methods or practices followed by the Parent or any Entity, any change in depreciation or amortization policies or rates previously adopted or any write-up of inventory or other assets; (d) any delivery of a notice of non-renewal or any failure to renew any Contract by any hospitals, clinics, medical or healthcare providers, health maintenance organizations or other customers or third party payors, which are material, individually or in the aggregate, except that any such event shall not be deemed material for this purpose to the extent that new or additional Contracts as replacements thereof have been obtained; (e) any loss of any employee of the Parent or any Entity who earned, during 1997, more than $125,000 (in salary, bonus and other cash compensation); (f) any sale, lease, license or other disposition of any assets with a book value in excess of $50,000 in the aggregate; (g) any issuance, sale or transfer of any Equity Interests of any Entity or issuance or sale of any securities convertible into, exercisable or exchangeable for or options or warrants to purchase or rights to subscribe for, any such Equity Interests; (h) any new Contract (except for any Contract related to any Employee Benefit Plan of the Parent for which neither Entity has assumed or has any Liability that is not disclosed hereunder) entered into with aggregate payments which could exceed $50,000, any incurrence of Funded Indebtedness or operating leases (other than Funded Indebtedness or operating leases outstanding on the date hereof and disclosed on any 9 11 Schedule hereunder) or any amendment, waiver or modification with respect to the terms of any Funded Indebtedness or operating leases (including, without limitation, any increase in the commitments to extend credit thereunder); (i) a change in any accounting principles or policies; (j) any material Tax election made or compromise of any material Tax Liability; (k) any payments made by the Parent or any Entity to or for the benefit of GK Finance (other than payments made on behalf of GK Finance and reimbursed by GK Finance on a basis consistent with past practices and in the ordinary course of business); (l) any amendment to any Organizational Document or Contracts; (m) any creation or incurrence (whether or not voluntary) of any Encumbrance other than Permitted Encumbrances and Encumbrances which exist on the date hereof and which have been disclosed on the Schedules to this Agreement; (n) any payments made or deferred in respect of accounts payable or any expenses in a manner which is not consistent with past practices or is not in the ordinary course of business; or (o) any agreement, whether in writing or otherwise, to take any of the actions specified in the foregoing clauses in this Section 3.7. 3.8 TAX MATTERS; CERTAIN DEFINITIONS. (a) Except as set forth on Schedule 3.8(a), each Entity, each Seller and every other corporation (a "Consolidated Affiliate") that is or has been included (or should have been included) in the filing of a consolidated or combined Tax Return that included any Entity or Seller, (but with respect to a Consolidated Affiliate, only for the years that such Consolidated Affiliate was (or should have been included) in such Tax Return (the "Years Included")), (i) has timely paid or caused to be paid all Taxes required to be paid by it through the date hereof and as of the Closing Date (including any Taxes shown due on any Tax Return filed by such Entity or Seller); (ii) has filed or caused to be filed in a timely and proper manner (within any applicable extension periods) all Tax Returns required to be filed by it with the appropriate Governmental Entities in all jurisdictions in which such Tax Returns are required to be filed; and 10 12 (iii) (iii) has not requested or caused to be requested any extension of time within which to file any Tax Return, which Tax Return has not since been filed. (b) The Sellers have previously delivered true, correct and complete copies of all Tax Returns filed by or on behalf of the Sellers and each Entity for each of the Tax years of each such Person for which the applicable statutes of limitation have not, as of the Closing Date, expired. All such Tax Returns are true, complete and correct. (c) Except as set forth in Schedule 3.8(c): (i) no Entity, Seller or Consolidated Affiliate, for the Years Included, has been notified by the Internal Revenue Service or any other taxing authority that any issues have been raised, which issues are currently pending, by the Internal Revenue Service or any other taxing authority in connection with any Tax Return of any such Person, there are no pending Tax audits and no waivers of statutes of limitation have been given or requested with respect to any such Person which waivers are currently in effect; (ii) full and adequate provision has been made (A) on the Latest Balance Sheet, and the books and records of each Entity and the Sellers for all Tax Liabilities of such Person for all periods ending on or prior to the Latest Balance Sheet Date, and (B) on the books and records of each such Person for all Tax Liabilities of each such Person for all periods beginning after the Latest Balance Sheet Date; (iii) no Entity, Seller or Consolidated Affiliate has or shall incur any Tax Liability from and after the Latest Balance Sheet Date through the Closing Date other than Taxes attributable to the transactions described herein or attributable to transactions or other activities conducted in the ordinary course of business and consistent with previous years and past practices; (iv) no Entity or the Sellers is or has (A) made an election to be treated as a "consenting corporation" under Section 341(f) of the Code or (B) been a "personal holding company" within the meaning of Section 542 of the Code; (v) each Entity, Seller and Consolidated Affiliate, for the Years Included, has complied in all respects with all applicable Laws relating to the collection or withholding of Taxes (such as sales Taxes or withholding of Taxes from the wages of employees); (vi) CT Sub is, as of the Closing Date will be, and has been from October 15, 1987 and through the Closing, a member of the affiliated group, as defined in Section 1504 of the Code, that included the Parent (the "Consolidated Group"). CT Sub has been included in all consolidated Tax Returns filed by the 11 13 Consolidated Group for all periods during which CT Sub has been a member of the Consolidated Group including the taxable year of the Consolidated Group that includes the Closing Date; (vii) no Entity or the Sellers has incurred any Liability to make or possibly make any payments either alone or in conjunction with any other payments, including payments that are made in connection with transactions contemplated hereunder or under the Related Documents, that would constitute a "parachute payment" within the meaning of, Section 280G of the Code (or any corresponding provision of state, local or foreign income Tax Law); (viii) no Entity has agreed with the Internal Revenue Service to change its method of accounting and the Internal Revenue Service has not proposed that any Entity change its method of accounting for any Tax period; (ix) no written claim has ever been made by any taxing authority in a jurisdiction in which any Entity, Seller or Consolidated Affiliate (for the Years Included) does not file Tax Returns that such Person is or may be subject to taxation by that jurisdiction; and (x) no Entity or the Sellers is a foreign Person within the meaning of Treas. Reg. Section 1.1445-2(b), and the Purchasers have been furnished with a true and accurate certificate of each such Person so stating which complies in all respects with Treas. Reg. Section 1.1445-2(b)(1). (d) Schedule 3.8(d) sets forth a list of all of the states and localities with respect to which each Entity and the Sellers is required to file or be included in a consolidated or combined filing of any corporate, income or franchise tax returns during the three taxable years ended December 31, 1996. (e) The Partnership, since its date of organization and for all years and periods thereafter up to the Closing, has been validly classified as a partnership for Federal, state and local income tax purposes and subject to the provisions of Subchapter K of the Code, the Partnership will have a valid Section 754 election in effect as of the Closing Date. (f) M Sub has not engaged in any sales, transfers or dispositions of tangible personal property (other than the sale of the M Sub Partnership Interests to be sold on the Closing Date) during the twelve month period ending on the Closing Date. 3.9 TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS. (a) Each Entity has (or will have after the consummation of the Asset Contribution) good and marketable title to all of the assets, properties and interests in properties, real, personal or mixed, reflected on its Latest Balance Sheet or acquired after such Latest Balance Sheet Date (except accounts receivable paid in full subsequent to the 12 14 Latest Balance Sheet Date), free and clear of all Encumbrances, of any kind or character, except for those Encumbrances set forth on Schedule 3.9 and Permitted Encumbrances. The properties and assets necessary or required to conduct the Business are in reasonably good repair and operating condition, ordinary wear and tear excepted and are sufficient for the conduct of the Business as presently conducted. After the consummation of the transactions contemplated by Section 1.2 hereof, the Parent and M Sub shall own no assets whatsoever related to the Business (other than the Excluded Assets) and the Partnership shall acquire good and marketable title to all of the Purchased Parent Assets. As of the Closing Date, each of the transactions contemplated by Section 1.2 hereof shall have been consummated in accordance with their respective terms. Each of Schedule 1.2(a), Schedule 1.2(b) and Schedule 1.2(c) accurately reflects the aggregate balances of each of the assets and liabilities set forth therein, in each case as of the date hereof. (b) Except as set forth in Schedule 3.9, the Parent and each Entity has complied in all material respects with the terms of all material leases to which it is a party or under which it is in occupancy relating to the Business, and all such leases are in full force and effect. The Parent and each Entity enjoy peaceful and undisturbed possession under all such material leases. 3.10 REAL PROPERTY-OWNED OR LEASED. No Entity owns any real property. Schedule 3.10(a) contains a list and brief description of all of the real property leased by each Entity pursuant to one or more leases (the "Leased Property"), and sets forth the names of the lessor and the lessee and the basic terms thereof. The Leased Property constitutes all real property used or occupied by the Entities in connection with the Business. 3.11 INTELLECTUAL PROPERTY. (a) Except in each case as set forth on Schedule 3.11(a): (i) each Entity owns, has the right to use, sell, license and dispose of, and has the right to bring actions for the infringement of, all Intellectual Property Rights necessary or required for the conduct of the Business (collectively, the "Owned Requisite Rights"), other than those Intellectual Property Rights for which any Entity has a valid license, all of which are listed on Schedule 3.11(a) (collectively, the "Licensed Requisite Rights"; and together with the Owned Requisite Rights, the "Requisite Rights"), and such rights to use, sell, license, dispose of and bring actions are exclusive with respect to the Owned Requisite Rights; (ii) each Entity has taken reasonable and practicable steps designed to safeguard and maintain (i) the secrecy and confidentiality of Confidential or Proprietary Information and (ii) the proprietary rights of each Entity in all of its Requisite Rights; 13 15 (iii) no Entity has interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property Rights of any Person or committed any acts of unfair competition, and no Entity has received from any Person in the past five years any notice, charge, complaint, claim or assertion thereof, and no such claim is impliedly threatened; and (iv) no Entity has sent to any Person in the past five years, or otherwise communicated to any Person, any notice, charge, complaint, claim or other assertion of any present, impending or threatened infringement by or misappropriation of, or other conflict with, any Intellectual Property Rights of any Entity by such other Person or any acts of unfair competition by such other Person, nor to the Best Knowledge of the Sellers, is any such infringement, misappropriation, conflict or act of unfair competition occurring or threatened. (b) Schedule 3.11(b) contains a true and complete list of all applications, filings and other formal actions made or taken pursuant to any Laws by each Entity to perfect or protect its interest in its Intellectual Property Rights, including, without limitation, all patents, patent applications, trademarks, trademark applications, service marks and service mark applications, copyrights and copyright applications. 3.12 AGREEMENTS, NO DEFAULTS, ETC. (a) Except for Contracts relating to any Employee Benefit Plan listed on Schedule 3.17(a), Schedule 3.12 contains a true and complete list and brief description of all Contracts, to which each Entity is a party and (x) which were entered into or made outside the ordinary course of business, or (y) which were entered into or made in the ordinary course of business and are described in any of clauses (i) through (xiv) of this Section 3.12(a). Except as set forth on Schedule 3.12, no Entity is a party to any of the following: (i) distributorship, dealer, sales, advertising, agency, manufacturer's representative or other Contract relating to the payment of a commission; (ii) Contract for the employment of any officer, employee or consultant or any other type of Contract or understanding with any officer, employee or consultant, including any agreement or understanding relating to severance payments, but excluding Contracts, agreements or understandings relating to any Employee Benefit Plan listed on Schedule 3.17(a); (iii) indenture, mortgage, promissory note, loan agreement, security agreement, pledge agreement, conditional sale, guarantee or other Contract for the borrowing of money, for a line of credit or for a Capital Lease; (iv) Contract for charitable contributions; (v) Contract for capital expenditures in excess of $25,000 individually or $100,000 in the aggregate; (vi) Contract or arrangement for the sale of any assets, properties or rights other than the sale of services or products in the ordinary course of business; (vii) lease or other agreement pursuant to which it is a lessee of or holds or operates any machinery, equipment (including Units), motor vehicles, office furniture, fixtures, products, merchandise or other personal property owned by any other Person, with annual lease payments in excess of $20,000 individually or $50,000 in the aggregate; (viii) Contract with respect to the lending or investing of funds, other than with respect to any Employee 14 16 Benefit Plan listed on Schedule 3.17(a); (ix) Contract with respect to any form of intangible property, including any Intellectual Property Rights; (x) Contract which restricts any Entity from engaging in any aspect of the Business or any other business anywhere in the world; (xi) Contract or group of related Contracts with the same Person (excluding purchase orders entered into in the ordinary course of business which are to be completed within three months of entering into such purchase orders) for the purchase or sale of products or services under which the undelivered balance thereof (including the aggregate undelivered balance under any such Contracts between the same Person and such Entity) has a selling price or outstanding balance in excess of $10,000; (xii) agreement for the acquisition or disposition of a Person or a division of a Person for which either of the Entities shall have continuing Liabilities after the Closing Date; (xiii) Contract to provide MRI, CT, ultrasound or nuclear medicine services to a hospital, clinic or provider; and (xiv) other Contract material to the Business, including all franchise agreements and license agreements and all financing agreements related thereto, other than with respect to any Employee Benefit Plan listed on Schedule 3.17(a). With respect to the Contracts specified in Section 3.12(a)(vii), Schedule 3.12 sets forth with respect to each such Contract, as of the date hereof, the aggregate annual rental payments (including interest factor) and the purchase price payable to terminate such Contract and acquire the underlying asset. With respect to the Contracts specified in Section 3.12(a)(xiii), Schedule 3.12 sets forth the fees, as of the date hereof, for each scan, study or other service performed thereunder. (b) All items listed on Schedule 3.12 are in full force and effect, constitute legal, valid and binding obligations of the respective parties thereto, and are enforceable in accordance with their respective terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or at law). Except as set forth on Schedule 3.12, there exists no default, or any event which upon the giving of notice or the passage of time, or both, would give rise to a claim of a default in the performance by any Entity or to the Best Knowledge of the Sellers, any other party to any of the foregoing of their respective obligations thereunder. The Purchasers have been furnished with true, complete and correct copies of all items listed on Schedule 3.12. 3.13 LITIGATION, ETC. (a) Except as disclosed on Schedule 3.13(a), there are no (i) Proceedings pending or, to the Best Knowledge of the Sellers, threatened against any Entity, whether at law or in equity, whether civil or criminal in nature or whether before or by any Governmental Entity or arbitrator, or (ii) Orders of any Governmental Entity or arbitrator with respect to, involving or against any Entity. The Sellers have delivered to the Purchasers, or made available to the Purchasers, all material documents and correspondence relating to such matters referred to on Schedule 3.13(a). 15 17 (b) Schedule 3.13(b) lists each matter described in Section 3.13(a) that was in existence within the last 3 years that resulted in any criminal sanctions or payments in excess of $50,000 by any Entity (whether as a result of a judgment, civil fine, settlement or otherwise). 3.14 COMPLIANCE WITH LAWS. Each Entity (a) has complied in all respects with, and is in compliance in all respects with, all Laws, Orders and Permits applicable to it and the Business, the noncompliance with which could reasonably be expected to have a Material Adverse Effect and (b) has all material Permits used or necessary in the conduct of the Business. All of such Permits are listed on Schedule 3.14, are in full force and effect, no violations with respect to any thereof have occurred or are or have been recorded, no Proceeding is pending or, to the Best Knowledge of the Sellers, threatened to revoke or limit any thereof except, in each case, such of the foregoing as could not reasonably be expected to have a Material Adverse Effect. No investigation or review by any Governmental Entity with respect to any Entity is pending or, to the Best Knowledge of the Sellers, threatened, nor has any Governmental Entity notified any Entity or any Seller of its intention to conduct the same. 3.15 INSURANCE. (a) Schedule 3.15(a) contains a true and complete list of all policies of liability, theft, fidelity, fire, product liability, workmen's compensation and other forms of insurance held by each Entity and/or by any Seller for the benefit of any Entity (specifying the insurer, amount of coverage, type of insurance, policy number and any pending claims thereunder) other than policies relating to any Employee Benefit Plan. (b) Except as set forth on Schedule 3.15(b), with respect to each policy of insurance listed on Schedule 3.15(a): (i) all premiums with respect thereto are currently paid and are not subject to adjustment, and no Person is in default in any respect with respect to its obligations under such policy, and (ii) no Entity has received any notice that such policy has been or shall be canceled or terminated or will not be renewed on substantially the same terms as are now in effect or the premium on such policy shall be materially increased on the renewal thereof. 3.16 LABOR RELATIONS: EMPLOYEES. (a) Schedule 3.16(a) sets forth a list of all directors, officers and employees of each Entity and employees of the Parent (solely with respect to the Business) as of the date hereof whose aggregate compensation exceeded $75,000 in 1997, together with their respective titles, their rate of annual salary, bonuses and commissions for 1997 and the respective dates on which they commenced employment. To the extent any such employee is on a leave of absence as of the date hereof, Schedule 3.16(a) indicates the nature of such leave of absence and such employee's anticipated date of return to active employment. Except as set forth on Schedule 3.16(a), no former employee whose 16 18 aggregate compensation exceeded $75,000 in 1997 has left the service of any Entity or the Parent within the last 6 months. The schedule of employees of the Parent and the Entities previously provided to the Purchasers by the Parent (which sets forth the Person (as among the Parent and the Entities) which employs each such employee) was true and correct as of the date provided and none of such employees who are currently employees of Parent or the Entities has become employed by any other Person (as among Parent and the Entities) since such date. (b) As of the date hereof, except as set forth on Schedule 3.16(b): (i) there is no labor strike or work stoppage actually pending against any Entity or the Parent; (ii) no Entity or the Parent is a party to or bound by any collective bargaining agreement or union contract; (iii) no such agreement is currently being negotiated by any Entity or the Parent and (iv) no Entity or the Parent has received a request for recognition from any labor organization or any notice that a petition for election with respect to such Person has been filed with the National Labor Relations Board. 3.17 ERISA COMPLIANCE. (a) Schedule 3.17(a) contains a true, complete and correct list of all existing Employee Benefit Plans (collectively, the "Employee Plans") (i) that cover any employees, contract employees or former employees of any Entity or any spouses, family members or beneficiaries thereof (A) that are maintained, sponsored or contributed to by any Entity or (B) with respect to which any Entity is obligated to contribute or has any Liability, or (ii) with respect to which any Entity has any Liability on account of the maintenance or sponsorship thereof or contribution thereto by any present or former ERISA Affiliate of any Entity. (b) Administration and Compliance. Except as set forth on Schedule 3.17(b), with respect to each Employee Plan: (i) such Employee Plan has been established, maintained, operated and administered in all material respects in accordance with its terms and in compliance in all material respects with ERISA, the Code, and other applicable Laws (including with respect to reporting and disclosure); (ii) all amounts withheld pursuant to such Employee Plan from employees have, where applicable, been timely deposited into the appropriate trust or account; (iii) no Entity or any ERISA Affiliate of either Entity has breached the fiduciary rules of ERISA or engaged in a prohibited transaction that could subject either Entity to any Tax or penalty imposed under Section 4975 of the Code or Section 502(i), (j) or (l) of ERISA in excess of $50,000; 17 19 (iv) as of the date hereof, no Proceedings (other than routine claims for benefits or administrative appeals with respect thereto) are pending against such Employee Plan; (v) such Employee Plan, if intended to be "qualified", within the meaning of Section 401(a) of the Code, has been determined by the Internal Revenue Service to be so qualified to the extent addressed in the most recent favorable determination letter, and nothing has occurred that has or could reasonably be expected to adversely affect such qualification; (vi) except as may be required under Laws of general application, such Employee Plan does not obligate any Entity to provide any employee or former employee, or their spouses, family members or beneficiaries, any post-employment or post-retirement health or life insurance, accident or other "welfare-type" benefits; (vii) if such Employee Plan is a "group health plan" within the meaning of Section 5000 of the Code, such Employee Plan has been maintained in compliance with Section 4980B of the Code and Title I, Subtitle B, Part 6 of ERISA so that no Tax imposed under Section 4980B of the Code has been or is expected to be incurred by either Entity in excess of $50,000; (viii) all reporting and disclosure obligations imposed under ERISA and the Code have been satisfied in all material respects and no IRS Form 5500 has been filed late (after consideration of any applicable extension) for any of the three most recently ended plan years; and (ix) without limiting Section 3.8(c), no benefit payable or which becomes payable by any Entity pursuant to such Employee Plan shall constitute an "excess parachute payment," within the meaning of Section 280G of the Code, which is or may be subject to the imposition of an excise Tax under Section 4999 of the Code or which will not be deductible by reason of Section 280G of the Code. (c) Since 1988, no Entity and no ERISA Affiliate of any Entity is or has ever maintained or been obligated to contribute to a "multiemployer plan" as defined in Section 3(37) of ERISA, a "multiple employer plan," as defined in Section 413 of the Code, or a "defined benefit pension plan," as defined in Section 3(35) of ERISA; (d) With respect to each Employee Plan, as of the date hereof, the Purchasers have been provided with true and complete copies, to the extent applicable, of each plan and trust document governing the terms of such Employee Plan, the two most recent annual reports (Form 5500 and attachments) and financial statements prepared therefor, the most recent favorable determination letter issued to Parent or either Entity (and pending requests therefor), and each of the foregoing documents accurately reflects the terms of such Employee Plan in effect at the time such document was prepared 18 20 (including, without limitation, any agreement or provision which would limit the ability of any Entity to make any prospective amendments or terminate such Employee Plan). 3.18 CERTAIN ADDITIONAL REGULATORY MATTERS. (a) None of the Sellers, the Entities or any officer, director or managing employee of the Sellers or the Entities (within the meaning of 42 U.S.C. (Section 1320a-5(b)) have engaged in any activities which constitute violations of, or are cause for imposition of civil penalties upon any Entity or mandatory or permissive exclusion of any Entity from Medicare or Medicaid, under (S) 1320a-7, 1320a-7a, 1320a-7b, or 1395nn of Title 42 of the United States Code, the federal Civilian Health and Medical Plan of the Uniformed Services statute ("CHAMPUS"), or the regulations promulgated pursuant to such statutes or regulations or related state or local statutes or which constitute violations of or deficiencies under the standards of any private accrediting organization from which any Entity is accredited or seeks accreditation, including the following activities: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any application for any benefit or payment; (ii) knowingly and willfully making or causing to be made any false statement or representation of a material fact for use in determining rights to any benefit or payment; (iii) knowingly and willfully presenting or causing to be presented a claim for reimbursement under CHAMPUS, Medicare, Medicaid or any other State Health Care Program or Federal Health Care Program that is (i) for an item or service that the Person presenting or causing to be presented knows or should know was not provided as claimed, or (ii) for an item or service where the Person presenting knows or should know that the claim is false or fraudulent; (iv) knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind (i) in return for referring, or to induce the referral of, an individual to a Person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part by CHAMPUS, Medicare or Medicaid, or any other State Health Care Program or any Federal Health Care Program, or (iii) in return for, or to induce, the purchase, lease, or order, or the arranging for or recommending of the purchase, lease, or order, of any good, facility, service, or item for which payment may be made in whole or in part by CHAMPUS, Medicare or Medicaid or any other State Health Care Program or any Federal Health Care Program; or (v) knowingly and willfully making or causing to be made or inducing or seeking to induce the making of any false statement or representation (or omitting to state a material fact required to be stated therein or necessary to 19 21 make the statements contained therein not misleading) of a material fact with respect to (i) the conditions or operations of a facility in order that the facility may qualify for CHAMPUS, Medicare, Medicaid or any other State Health Care Program certification or any Federal Health Care Program certification, or (ii) information required to be provided under (S) 1124(A) of the Social Security Act ("SSA") (42 U.S.C. (S) 1320a-3). (b) Each Entity has a Medicare provider number, and a participating provider agreement in force with a Medicare Part B carrier, in each locale, as applicable, in which such Entity bills directly to Medicare for services furnished by such Entity. (c) Each Entity has a Medicaid number and a participating provider agreement in each state, as applicable, in which such Entity bills directly to such states' Medicaid agency for services provided by such Entity. 3.19 MEDICARE/MEDICAID PARTICIPATION. None of the Sellers, the Entities, or any officer, director, or managing employee (as defined in SSA (S) 1126(b) or any regulations promulgated thereunder) of the Sellers or the Entities: (1) has had a civil monetary penalty assessed against him, her or it under (S) 1128A of the SSA or any regulations promulgated thereunder; (2) has been excluded from participation under the Medicare program or a state health care program as defined in SSA (S) 1128(h) or any regulations promulgated thereunder ("State Health Care Program") or a federal health care program as defined in SSA (S) 1128B(f) ("Federal Health Care Program"); or (3) has been convicted (as that term is defined in 42 C.F.R. (S) 1001.2) of any of the following categories of offenses as described in SSA (S) 1128(a) and (b)(1), (2), (3) or any regulations promulgated thereunder: (i) criminal offenses relating to the delivery of an item or service under Medicare or any State Health Care Program or any Federal Health Care Program; (ii) criminal offenses under federal or state law relating to patient neglect or abuse in connection with the delivery of a health care item or service; (iii) criminal offenses under federal or state law relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct in connection with the delivery of a health care item or service or with respect to any act or omission in a program operated by or financed in whole or in part by any federal, state or local governmental agency; (iv) federal or state laws relating to the interference with or obstruction of any investigation into any criminal offense; or 20 22 (v) criminal offenses under federal or state law relating to the unlawful manufacture, distribution, prescription or dispensing of a controlled substance. 3.20 ENVIRONMENTAL MATTERS. (a) Except as set forth on Schedule 3.20(a), each Entity is in material compliance with all applicable Environmental, Health and Safety Laws. Each Entity has all of the Permits, licenses, authorizations, registrations and approvals from Governmental Entities necessary to operate the Business, and all such Permits, licenses, authorizations, registrations and approvals are valid and in effect (b) Except as set forth on Schedule 3.20(b), there are no pending or, to the knowledge of the Sellers, threatened claims by any Governmental Entity concerning or alleging a violation of any Environmental Health and Safety Law by any Entity, nor are any pending or, to the knowledge of the Sellers, threatened claims under any Environmental Health and Safety Laws concerning any property or facility previously owned, leased or operated by any Seller or Entity or predecessor of any Seller or Entity. (c) Except as set forth on Schedule 3.20(c), no Entity presently is the subject of any ongoing administrative or judicial proceeding or investigation brought by any Governmental Entity under any Environmental, Health or Safety Law including, without limitation, any voluntary clean-up program or any Proceeding under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA," also known as "Superfund") or any state counterparts to CERCLA, nor is any Entity obligated to remediate, monitor, investigate, conduct corrective action or report on environmental, health and safety matters concerning the Business pursuant to any order, agreement, decree or mediation or arbitration proceeding. (d) Except as set forth on Schedule 3.20(d), in the five years preceding the date hereof, no Entity has received any written notice, report or other written information (i) regarding any actual or alleged violation of any Environmental, Health and Safety Laws, or (ii) that any Entity is potentially responsible under any Environmental, Health and Safety Laws for response costs, corrective action or natural resource damages, as those terms are defined under any Environmental, Health and Safety Laws. (e) Except as set forth on Schedule 3.20(e), Sellers are not aware of impending changes in Environmental Health or Safety Laws which could reasonably be expected to materialize before the one year anniversary of the Closing Date and which could result in a Material Adverse Effect. (f) Sellers have provided to the Purchasers copies of, or access for purposes of review to, all documents, reports, studies or other non-legally privileged information concerning environmental, heath or safety matters relating to the Business which are in the possession of Sellers. The information prepared or originated by the Sellers or the Entities and provided to the Purchasers is true and correct. 21 23 3.21 BROKERS. No Seller or Entity has employed any broker or finder or incurred any Liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby for which any Purchaser or Alliance may have Liability after the Closing. 3.22 RELATED TRANSACTIONS. Except as set forth on Schedule 3.22 or on Schedules 3.17 (a) or (b) and except for compensation to bona-fide employees of any Entity for services rendered in the ordinary course of business, no Affiliate of any Entity or any "associate" (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) thereof, is now (i) party to any transaction or Contract with any Entity providing for the furnishing of services by, or rental of real or personal property from, or otherwise requiring payments to, any such Affiliate or associate, or (ii) the direct or indirect owner of a controlling interest in any Person which is a present or potential competitor, supplier or customer of any Entity (other than nonaffiliated holdings in publicly held companies). Except as set forth on Schedule 3.22, no Entity is a guarantor or otherwise liable for any actual or potential Liability of its Affiliates and their associates (other than with respect to any Entity, the other Entity). Except as set forth on Schedule 3.22, no Entity owns or pays for any social club memberships, whether or not for the benefit of any Entity and/or its executives. 3.23 BANK ACCOUNTS; POWERS OF ATTORNEY. Schedule 3.23 sets forth a true and complete list of (i) all bank accounts and safe deposit boxes of each Seller and Entity and all Persons who are signatories thereunder or who have access thereto and (ii) the names of all persons, firms, associations, corporations or business organizations holding general or special powers of attorney from any Seller or Entity and a summary of the terms thereof. 3.24 VOTING. The affirmative vote of a majority of the outstanding shares (the "Parent Stockholder Approval") of the Parent's common stock, par value $0.01 per share (the "Parent Common Stock") is the only vote of the holders of any class or series of the Parent's capital stock which is necessary to approve this Agreement and the transactions contemplated hereby. 3.25 OPINION OF FINANCIAL ADVISOR. The Board of Directors of the Parent has received the oral opinion of Paine Webber Incorporated to the effect that, as of the date hereof, the consideration to be received in respect of Shares pursuant to this Agreement is fair from a financial point of view to the Parent. 22 24 3.26 PHYSICIAN RELATIONSHIPS. (a) Except as set forth in Schedule 3.26 the Entities do not have any "financial relationship" with any "referring physician" or an immediate family member of such physician, within those terms' meanings under 42 U.S.C. Section 1395nn. (b) To the Best Knowledge of each of the Sellers, no "referring physician" (within the meaning of 42 U.S.C. Section 1395nn) owns any securities of the Sellers. 3.27 OTHER HOSPITAL RELATIONSHIPS. Except as set forth in Schedule 3.27 other than with respect to reading radiologists, the Entities do not have any lease or other arrangement with any hospital or other entity whereby the Entities pay the hospital or other entity rent or any other fee the amount of which is dependent in whole or in part on the gross or net revenues, net income, or cash flow of any segment of the business of the Entities. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser represents and warrants, severally as to itself, as of the date hereof and as of the Closing Date as follows: 4.1 ORGANIZATION; CORPORATE AUTHORITY. Such Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation and has all requisite power and authority (corporate or otherwise) to own, lease and operate its assets and properties and to carry on its business as presently conducted and as presently proposed to be conducted. Such Purchaser is duly qualified and in good standing to transact business as a foreign Person in those jurisdictions set forth on Schedule 4.1, which, as of the date hereof, constitute all the jurisdictions in which the character of the property owned, leased or operated by such Purchaser or the nature of the business or activities conducted by such Purchaser makes such qualification necessary. 4.2 CORPORATE ACTION; AUTHORITY; NO CONFLICT. Such Purchaser has all requisite power and authority (corporate and otherwise) to execute, deliver and perform its obligations under this Agreement and each Related Document to which it is or will be a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by such Purchaser of this Agreement and each Related Document to which it is or will be a party, and performance of its obligations hereunder and thereunder have been duly and validly authorized by all necessary corporate action on the part of such Purchaser. This Agreement and each Related Document to which it is or will be a party has been or upon 23 25 the execution thereof will be, duly and validly executed and delivered by such Purchaser, and constitutes, or upon its execution and delivery will constitute, a valid and binding obligation of such Purchaser, enforceable against it in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or at law). Neither such Purchaser's execution and delivery of, and/or performance of its obligations under, this Agreement and each Related Document to which it is or will be a party, nor the consummation of the transactions contemplated hereby and thereby shall (i) conflict with or result in any violation or breach of, any of the terms, conditions or provisions of, or constitute (with due notice or lapse of time, or both) a default under, or give rise to any right of termination, cancellation or acceleration or result in the creation of any Encumbrance upon any of the assets or properties of such Purchaser under provision of such Purchaser's Organizational Documents or any Contract to which such Purchaser is a party (other than security documents relating to financing arrangements existing for the benefit of the Purchasers' Affiliates) or by which it or any of its assets or properties is or may be bound which, in the case of such Contracts, would reasonably be expected to have a material adverse effect on any Purchaser or prevent the consummation of the transactions contemplated hereby or under the Related Documents and other than with respect to the foregoing for which consents have been obtained or (ii) violate, or result in the creation of an Encumbrance upon any of such Purchaser's assets as a result of, any Law's applicable to such Purchaser or any of its properties or assets, in each case, which would prohibit the such Purchaser from consummating the transactions contemplated hereby. 4.3 BROKERS. Such Purchaser has not employed any broker or finder or incurred any Liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby for which any Seller may have any Liability after the Closing. 4.4 CONSENTS. Except as contemplated by this Agreement or as set forth on Schedule 4.4, and the Related Documents, no consent, approval, Order or authorization of, or registration, declaration or filing with or notification to, any Governmental Entity or any third party is required in connection with the execution, delivery and performance by such Purchaser of this Agreement or the Related Documents to which such Purchaser is or will be a party or the consummation of the transactions contemplated hereby or thereby except for those consents, approvals, Orders, authorizations, registrations, declarations, filings or notifications the failure to obtain could not reasonably be expected to have a material adverse effect on such Purchaser or except for those consents, approvals, Orders, authorizations, registrations, declarations or filings which have been obtained. 24 26 4.5 INVESTMENT REPRESENTATIONS. Each of the Purchasers are acquiring the Shares to be purchased by it, for its own account, for investment and not with a view to the distribution thereof in violation of the Securities Act. 4.6 INFORMATION SUPPLIED. None of the written information supplied or to be supplied by any Purchaser specifically for inclusion or incorporation by reference in the Proxy Statement, as supplemented if necessary, and any other documents to be filed by the Parent with the SEC or any Governmental Entity in connection with the transactions contemplated hereby will, on the date of its filing or, with respect to the Proxy Statement, as supplemented if necessary, on the date it is sent or given to stockholders or at the time of the Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. ARTICLE V REPRESENTATIONS AND WARRANTIES OF ALLIANCE Alliance represents and warrants, as to itself, as of the date hereof and as of the Closing Date as follows: 5.1 ORGANIZATION; CORPORATE AUTHORITY. Alliance is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation and has all requisite power and authority (corporate or otherwise) to own, lease and operate its assets and properties and to carry on its business as presently conducted and as presently proposed to be conducted. 5.2 CORPORATE ACTION; AUTHORITY; NO CONFLICT. Alliance has all requisite power and authority (corporate and otherwise) to execute, deliver and perform its obligations under this Agreement and each Related Document to which it is or will be a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Alliance of this Agreement and each Related Document to which it is or will be a party, and performance of its obligations hereunder and thereunder have been duly and validly authorized by all necessary corporate action on the part of Alliance. This Agreement and each Related Document to which Alliance is or will be a party has been or upon the execution thereof will be, duly and validly executed and delivered by it, and constitutes, or upon its execution and delivery will constitute, a valid and binding obligation of it, enforceable against it in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar 25 27 laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or at law). Neither Alliance's execution and delivery of, and/or performance of its obligations under, this Agreement and each Related Document to which it is or will be a party, nor the consummation of the transactions contemplated hereby and thereby shall (i) conflict with or result in any violation or breach of, any of the terms, conditions or provisions of, or constitute (with due notice or lapse of time, or both) a default under, or give rise to any right of termination, cancellation or acceleration or result in the creation of any Encumbrance upon any of the assets or properties of Alliance under provision of its Organizational Documents or any Contract to which it is a party or by which it or any of its assets or properties is or may be bound which, in the case of such Contracts, would reasonably be expected to have a material adverse effect on it or prevent the consummation of the transactions contemplated hereby or under the Related Documents and other than with respect to the foregoing for which consents have been obtained or (ii) violate, or result in the creation of an Encumbrance upon any of its assets as a result of, any Law's applicable to it or any of its properties or assets, in each case, which would prohibit it from consummating the transactions contemplated hereby. 5.3 DESIGNATION OF PURCHASERS. Alliance has duly designated the Purchasers to acquire the Shares hereunder, and will cause the Purchasers to perform each and every obligation undertaken by them herein. ARTICLE VI COVENANTS AND AGREEMENTS 6.1 ACCESS TO RECORDS AND PROPERTIES OF THE ENTITIES. From and after the date hereof until the Closing, the Sellers shall, and shall cause each Entity to afford, (i) to the Purchasers, their respective lenders and Affiliates and each of their respective authorized representatives, including accountants, consultants and attorneys, free and full access at all reasonable times to the assets, business, facilities, properties, books, records (including tax returns filed and in preparation), customers, consultants, and employees of or relating to each Entity and the Parent in order that the Purchasers have full opportunity to make such investigation as they shall reasonably desire to make of the affairs of each Entity and the Parent and in order that the Purchasers may integrate the Business into the business currently being conducted by the Purchasers' Affiliates, and (ii) to the respective independent certified public accountants of the Purchasers, free and full access at all reasonable times to the records of the independent certified public accountants of each Entity and the Parent. The Sellers shall cause their employees to actively cooperate and assist Purchasers and such other Persons in effecting such integration. From and after the date hereof until the Closing, (i) the Sellers shall provide to the Purchasers promptly but in any event no later than the 25th day after the 26 28 last day of each calendar month, a copy of the consolidated and consolidating balance sheets, statements of operations, shareholders equity and cash flows of the Parent and its Subsidiaries for each such calendar month, together with a copy of the Parent's "white book" and "blue book" (and any supporting information with respect thereto), and (ii) such other information regarding the Parent and its Subsidiaries as may be reasonably requested by the Purchasers. The investigation contemplated by this Section 6.1 shall not affect or otherwise diminish or obviate in any respect any of the representations and warranties or the indemnification obligations contained in this Agreement. 6.2 CONDUCT PENDING CLOSING. From and after the date hereof until the earlier of the Closing or the termination of this Agreement pursuant to Article IX, each of the Sellers shall, and shall cause each Entity to (unless otherwise consented to in writing by the Purchasers): (a) not sell, lease, license or otherwise dispose of any assets with a book value in excess of $50,000 in the aggregate; (b) not issue, sell or in any way transfer any Equity Interests of the Entities or issue or sell any securities convertible into, exercisable or exchangeable for or options or warrants to purchase or rights to subscribe for, any such Equity Interests; (c) not change the number of authorized shares of the Equity Interests of the Entities or reclassify, combine, split, subdivide or redeem or otherwise repurchase any of such Equity Interests, or issue, deliver, pledge or encumber any additional Equity Interests of the Entities or other securities equivalent to, or exchangeable for, Equity Interests of the Entities or enter into any Contract to do any of the foregoing; (d) not incur or issue any securities evidencing any Funded Indebtedness or enter into any operating leases (other than Funded Indebtedness of a Seller for which no Entity (or its assets) is liable or obligated (whether contractually, by applicable Law, as a guarantor or through the incurrence or grant of any Encumbrances), Funded Indebtedness related to money advanced from Sellers or GK Finance to an Entity on a basis consistent with past practice and in the ordinary course of business, provided that the amounts so advanced are repaid prior to the Closing Date, Funded Indebtedness or operating leases outstanding on the date hereof and disclosed on any Schedules hereunder), or amend, modify or agree to a waiver of the terms of any Funded Indebtedness or operating leases (including, without limitation increasing any commitments to extend credit thereunder); (e) not enter into any Contract with aggregate payments which could exceed $50,000 (except for any Contract related to any Employee Benefit Plan of the Parent or any Subsidiary other than the Entities, and for which Contract neither Entity assumes or has any Liability not disclosed hereunder) or any Contract in respect of the rental of any Unit; 27 29 (f) not enter into any employment agreement, or in any manner change the Person (as among the Parent and the Entities) which is the employer of the employees of the Parent and the Entities from the Person disclosed on the schedule referenced in the last sentence of Section 3.16(a) as such employee's employer, or terminate the employment of any employees in a manner which is inconsistent with past practices or policies, or except as required by applicable Law, effect any increase in the rate or terms of compensation payable or to become payable to officers or employees of any Entity or the Parent (solely as relating to the Business) other than increases in compensation under Employee Benefit Plans which are available to all employees generally; (g) not create or suffer to exist any Encumbrance on any of its assets or properties other than Permitted Encumbrances, Encumbrances on Equity Interests or assets of GK Finance or any assets of Subsidiaries of the Parent other than the Entities, and Encumbrances which exist on the date hereof and which have been disclosed on the Schedules to this Agreement; (h) not change its tax or accounting principles, policies or practices, change any depreciation or amortization policies or rates previously adopted or write-up inventory or any other assets; (i) not make any material Tax election or compromise any material Tax Liability; (j) not make any payments to or for the benefit of GK Finance (other than payments made on behalf of GK Finance and reimbursed by GK Finance on a basis consistent with past practices and in the ordinary course of business); (k) not amend any of its Organizational Documents or any Contracts (other than Contracts related to any Employee Plan); (l) not enter into any transaction other than in the ordinary course of business, or any transaction which is not at arms-length with unaffiliated third Persons; (m) not take or omit to take any action which would result in the representations and warranties contained in this Agreement and the Related Documents being untrue on the Closing Date, other than such action as shall have been previously agreed to in writing by the parties hereto; (n) not make any material change in the manner in which such Person extends discounts or credits to customers or any material change in the manner or terms by which such Person collects its accounts receivable or otherwise deals with customers; (o) not agree or otherwise commit to take any of the actions set forth above; 28 30 (p) promptly provide the Purchasers with at least five Business Days notice of (i) the terms and conditions with respect to renewals of any existing Contracts to be renewed by the Entities, (ii) any intention to not renew any existing Contracts and (iii) the actual nonrenewal of any existing Contract; (q) conduct its business substantially as presently conducted and only in the ordinary course consistent with past practice; (r) use commercially reasonable efforts to (i) maintain its business, assets, relations with present employees, customers, suppliers, partners, licensees and operations as an ongoing business and preserve its goodwill, in accordance with past custom and practice and (ii) to satisfy each of the closing conditions to be satisfied by it set forth in Article VII hereof; and (s) pay and continue to defer all accounts payable and all expenses in a manner which is consistent with past practices and in the ordinary course of business. 6.3 EFFORTS TO CONSUMMATE. Subject to the terms and conditions of this Agreement, each party shall use commercially reasonable efforts to take or cause to be taken all actions and do or cause to be done all things required under all applicable Laws, in order to consummate the transactions contemplated hereby. 6.4 NO SOLICITATION. (a) The Parent shall, shall cause M Sub and each Entity to and shall direct and cause its and each such Person's officers, directors, employees, representatives and agents to, immediately cease any discussions or negotiations with any parties (other than the Purchasers and Alliance) that may be ongoing with respect to an Alternative Transaction. The Parent shall not, shall cause M Sub and each Entity not to and shall not authorize or permit any of its or any such Person's officers, directors or employees or any investment banker, financial advisor, attorney, accountant or other representative representing any such Person to, directly or indirectly, (i) solicit, initiate or encourage (including by way of furnishing information), or take any other action to facilitate, any inquiries or the making of any proposal that may lead to an Alternative Transaction or (ii) participate in any discussions or negotiations regarding any proposed Alternative Transaction; provided, however, that if, at any time prior to the Closing Date, the Board of Directors of the Parent determines in good faith, based on written advice from outside counsel, that action is required by reason of such Board of Directors' fiduciary duties to the Parent's stockholders under applicable law, the Parent may (subject to compliance with Section 6.4(c)), in response to an unsolicited Third Party Proposal, (A) furnish information with respect to the Parent and the Entities to the Person making such Third Party Proposal pursuant to a confidentiality agreement that is at least as protective of the Parent's and its Subsidiaries' interests as is the Confidentiality Agreement and (B) participate in negotiations regarding such a Third Party Proposal. Without limiting the 29 31 foregoing, it is understood that any violation of the restrictions set forth in the preceding sentence by any director, officer or employee of the Parent, M Sub or any Entity or any investment banker, financial advisor, attorney, accountant or other representative acting on behalf of any such Person shall be deemed to be a breach of this Section 6.4(a). (b) Neither the Board of Directors of the Parent nor any committee thereof shall (i) withdraw or modify the approval or recommendation by such Board of Directors or such committee of this Agreement, the Related Documents or any of the transactions contemplated hereby or thereby, (ii) approve or recommend any Alternative Transaction or (iii) cause or permit the Parent, M Sub or any Entity to enter into any letter of intent, agreement in principle, acquisition agreement or other agreement (an "Acquisition Agreement") with respect to an Alternative Transaction unless the Board of Directors of the Parent shall have previously terminated this Agreement pursuant to Section 9.1(f). (c) In addition to the obligations of the Parent set forth in paragraphs (a) and (b) of this Section 6.4, the Parent shall immediately advise the Purchasers orally and in writing of any request for information or of any proposal or any inquiry regarding any Alternative Transaction, the material terms and conditions of such request, proposal or inquiry and the identity of the Person making such request, proposal or inquiry. The Parent will keep the Purchasers fully informed of the status and details (including amendments or proposed amendments) of any such request, proposal or inquiry. (d) Nothing contained in this Section 6.4 shall prohibit the Parent from at any time taking and disclosing to its stockholders a position contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Parent's stockholders, in each case with respect to any Third Party Proposal, if the Parent shall have provided the Purchasers with as much advance notice of its position and proposed disclosure as is possible under the circumstances; provided, however, that neither the Parent nor its Board of Directors nor any Committee thereof shall, except as permitted by Section 6.4(b), withdraw or modify, or propose to withdraw or modify, its position with respect to this Agreement, the Related Documents or any of the transactions contemplated hereby or thereby or approve or recommend, or propose to approve or recommend, an Alternative Transaction. 6.5 CONFIDENTIALITY. The Sellers and the Purchasers agree that, through and including the Closing Date, they shall comply with that certain letter agreement relating to matters of confidentiality dated as of July 24, 1997 (as amended, modified or supplemented, the "Confidentiality Agreement"). 6.6 NOTICE OF PROSPECTIVE BREACH. Each party shall immediately notify the other parties in writing upon the occurrence, or failure to occur, of any event, which occurrence or failure to occur would be reasonably likely to cause any representation or warranty of such party that is contained 30 32 in this Agreement or any Related Document to be untrue or inaccurate in any material respect at any time from the date of this Agreement to the Closing. 6.7 PUBLIC ANNOUNCEMENTS. Each party agrees that, except (i) as otherwise required by Law or Order and (ii) for disclosure to its respective directors, officers, employees, financial advisors, potential financing sources, legal counsel, independent certified public accountants or other agents, advisors or representatives on a need-to-know basis and with whom such party has a confidential relationship, it will not issue any reports, statements or releases, in each case pertaining to this Agreement or any Related Document to which it is a party or the transactions contemplated hereby or thereby, without consulting in advance with the other parties hereto. 6.8 COOPERATION REGARDING TAX FILINGS; SECTION 338(h)(10). (a) After the Closing, the Purchasers and the Sellers shall act in good faith and cooperate with one another for the purpose of filing all Tax Returns and reports required to be filed by any of them. Parent shall join Purchaser A in a timely election pursuant to Section 338(h)(10) of the Code (and under any comparable provision of any state or local law) with respect to the CT Shares (the "338(h)(10) Election"). The parties hereto recognize that the 338(h)(10) Election will result in the purchase of the CT Shares hereunder being treated as a sale of assets by CT Sub for Federal income Tax purposes and for applicable state and local tax purposes and that any Tax Liability arising with respect to the 338(h)(10) Election (other than a Liability for Transfer Taxes described in Section 10.14) shall be deemed a Covered Tax. None of the parties hereto shall make any Tax Return or other filing that is inconsistent with the foregoing. (b) The Purchasers shall be responsible for the preparation and filing of all 338(h)(10) Election forms and the Sellers shall execute and deliver to Purchasers such documents as are reasonably requested to properly complete such forms at least twenty (20) days prior to the date such 338(h)(10) Election is required to be filed. The Sellers agree that the Purchasers shall be entitled to determine the allocation of the Modified Aggregate Deemed Sales Price (as defined in the treasury regulations promulgated under Section 338 of the Code) among the assets of CT Sub in their sole discretion, and in accordance with Section 338 of the Code and the regulations thereunder (including the allocation of any adjustment to the Modified Aggregate Deemed Sales Price by reason of any purchase price adjustment or indemnification payment under this Agreement), and shall notify the Sellers of such determination as soon as possible after making such determination. The Purchasers and the Sellers agree to act in accordance with any such allocation in all relevant Tax Returns and filings. (c) Parent shall cause to be prepared and cause to be timely filed all consolidated, combined or unitary federal, state, local or foreign Tax Returns required to be filed with respect to Parent for all taxable periods ending before or including the Closing Date and shall include CT Sub in all such returns in which it is eligible to be 31 33 included. The Purchasers agree to cooperate with Parent and its Affiliates in the preparation of the portions of such Tax Returns pertaining to CT Sub. The Parent shall permit the Purchasers to review and comment on the portion of all Tax Returns prepared by Parent pursuant to this Section 6.8(c) pertaining to CT Sub, or the Partnership prior to the filing of such Tax Returns. Parent shall cause to be timely paid all Taxes to which such Tax Returns relate for all periods covered by such Tax Returns. (d) The extent to which Taxes of CT Sub and the Partnership for a taxable period that includes but does not end on the Closing Date are treated as Taxes for the period ending on or prior to the Closing Date shall be determined for all purposes, including for purposes of calculating Covered Taxes, as follows: (i) Taxes measured in whole or in part by net or gross income and Taxes relating to specific transactions shall be apportioned on the basis of a closing of the books of the Entity liable for such Tax at the close of business on the Closing Date; provided, however, that all transactions not in the ordinary course of business and not contemplated in this Agreement that occur on the Closing Date after Purchaser A's purchase of the CT Shares shall be reported on Purchaser A's federal income tax return to the extent permitted by Treas. Reg. Section 1502-76(b((1)(3); and (ii) all other Taxes shall be prorated according to the ratio of the number of days in such taxable period prior to and including the Closing Date to the number of days in such taxable period. (e) The Sellers shall cause to be prepared all required federal, state, local and foreign Tax Returns of CT Sub and the Partnership for any period which ends on or before the Closing Date, for which Tax Returns have not been filed as of the Closing Date (other than Tax Returns to be filed by Parent pursuant to Section 6.8(c)). The Purchasers shall cause to be prepared and cause to be timely filed all required federal, state, local and foreign Tax Returns of CT Sub and the Partnership (other than Tax Returns to be filed by Parent pursuant to Section 6.8(c)) for taxable periods beginning before and ending after the Closing Date. The Sellers and Purchasers agree to cooperate with each other in the preparation of such Tax Returns. The Purchasers shall permit Sellers to review and comment on all Tax Returns prepared by the Purchasers pursuant to this Section 6.8(e) and such Tax Returns shall be subject to the prior approval of the Sellers which approval shall not be unreasonably withheld. The Sellers shall permit the Purchasers to review and comment on all Tax Returns prepared by the Sellers pursuant to this Section 6.8(e). Prior to the date such Tax Returns are due, the Parent will provide the Purchasers with amounts equal to the Covered Taxes, as shown on the Tax Returns to be filed under this Section 6.8(e), after taking into account any Tax or estimated Tax paid with respect to such Covered Taxes prior to the Closing Date. Promptly after receipt by the Purchasers of the amounts in respect of the Covered Taxes from the Parent, the Purchasers will cause the applicable Tax Returns prepared by the Seller to be filed. (f) Parent shall be entitled to any refund of Taxes paid by or with respect to CT Sub that is attributable to taxable periods ending on or prior to the Closing Date, and the Purchasers shall cause CT Sub to pay over to Parent any such refunds (net of any Tax Liability attributable thereto and any expenses incurred in the collection of such refund) 32 34 within fifteen (15) days after receipt thereof. If the amount of such refund that is paid over by Parent is subsequently reduced by a Governmental Entity, Parent shall pay to Purchasers an amount necessary to reflect such adjustment. (g) The Parent shall not file any claim for a refund or credit, or an amended return claiming a refund or credit, after the Closing Date, for any Tax paid by CT Sub without the prior written consent of the Purchasers, which consent shall not be unreasonably withheld. (h) Each of the Purchasers and the Sellers shall promptly notify the other party upon receipt of a notice of any pending or threatened Tax audit or assessment (a "Tax Claim") that may affect the Tax Liabilities of CT Sub, or the Partnership and for which any Seller would be liable under this Agreement; provided, however, that no delay on the part of either party in so notifying the other party shall relieve the other party from any liability or obligation hereunder (unless, and then solely to the extent) that the other party is materially and irrevocably prejudiced by such delay. Such notice shall be accompanied by copies of all relevant documentation with respect to such Tax Claim. (i) If the Sellers shall acknowledge in a writing delivered to the Purchasers that such Tax Claim is properly subject to their indemnification obligations hereunder and the Sellers shall have the financial resources to meet such indemnification obligations, then subject to the further provisions of this Section 6.8(i), the Sellers shall have the right to assume the defense of such Tax Claim at their own expense and by their own counsel and other advisers, which counsel and other advisors shall be reasonably satisfactory to the Purchasers; provided, however, that the Sellers shall not have the right to assume the defense of any Tax Claim, notwithstanding the giving of such written acknowledgment, if the Sellers shall not have assumed the defense of such Tax Claim in a timely fashion. Notwithstanding anything to the contrary contained herein, if a Tax Claim involves, or could have a material effect on any material matter beyond the scope of the indemnification obligations of the Sellers, the Sellers and Purchasers shall jointly assume the defense of such Tax Claim at their own expense. If the Sellers exercise their right to assume the defense of a Tax Claim pursuant to and in accordance with this Section 6.8(i), (i) the Purchasers shall be entitled to participate in such defense with their own counsel and other advisors at their own expense, (ii) the Purchasers will reasonably cooperate with the Sellers and their counsel and advisors in the defense of such Tax Claim, and (iii) the Sellers shall not make any settlement of such Tax Claim without the written consent of the Purchasers, which consent shall not be unreasonably withheld, provided that consent may be withheld if any Losses to be incurred by the Purchasers pursuant to such settlement are not indemnified pursuant to the indemnification provisions set forth in Article VIII hereunder. (j) If the Sellers shall assume the defense of a Tax Claim pursuant to and in accordance with Section 6.8(i), the Sellers shall not be responsible for any legal or other defense costs subsequently incurred by the Purchasers in connection with the defense thereof. If the Sellers do not exercise their right to assume the defense of a Tax Claim or 33 35 are otherwise restricted from doing so pursuant to Section 6.8(i), the Sellers shall nevertheless be entitled to participate in such defense with their own counsel and other advisors at their own expense. If the defense of a Tax Claim is retained by the Purchasers, the Purchasers shall not be entitled to settle such Tax Claim without the prior written consent of the Sellers, which consent shall not be unreasonably withheld. (k) After the Closing Date, the Sellers and the Purchasers shall make available to the other, as reasonably requested, all information, records or documents relating to Tax Liabilities or potential Tax Liabilities of CT Sub or the Partnership for all periods ending on or prior to the Closing Date, and shall preserve all such information, records and documents until the expiration of any applicable statute of limitations or extensions thereof. (l) All Tax Returns which are required to be prepared by Sellers pursuant to Sections 6.8(c) and (e) shall be prepared and filed in a manner consistent with past practice and applicable Law and, on such Tax Returns, no position shall be taken, elections made or method adopted that is inconsistent with positions taken, elections made or methods used in preparing and filing similar Tax Returns in prior periods. 6.9 EXCHANGE PROCEEDS. If, between the date hereof and the Closing, any Entity or any Seller receives any proceeds in consideration for the exchange of any of its assets (solely, in the case of the Parent as it relates to the Purchased Parent Assets), whether from the sale of any such assets, from insurance proceeds payable on account of any loss or casualty to such assets, any proceeds from the taking of such assets pursuant to the power of eminent domain, or any other proceeds from whatever source relating to the disposition of such assets (the "Exchange Proceeds"), the Sellers shall immediately notify the Purchasers of the receipt of such Exchange Proceeds and shall consult with the Purchasers with respect to the application of any such Exchange Proceeds. The Sellers shall ensure that any Exchange Proceeds received by any Entity shall either be used to purchase replacement assets or shall be retained by the applicable Entity. 6.10 NON-COMPETE; NON-SOLICITATION. (a) During the Non-Compete Period, the Parent shall not, and cause its Affiliates not to, directly or indirectly, own, manage, control, participate in, consult with, render services for, or in any manner engage in or represent any business within any Restricted Territory that is competitive with the Business or any product or services of the Business as such Business is conducted or proposed to be conducted from and after the Closing Date; provided, however, that nothing herein shall be deemed to prevent the Parent or any of its Affiliates from engaging in any activities presently conducted or proposed to be conducted by GK Finance or from providing any imaging modality as part of its "Operating Room of the Twenty First Century" business. 34 36 (b) During the Non-Compete Period, none of the Parent nor any Affiliate shall directly or indirectly through another Person (i) induce or attempt to induce any employee of any Purchaser or any Affiliate of such Purchaser to leave the employ of such Purchaser or such Affiliate or in any way interfere with the relationship between such Purchaser or any such Affiliate, on the one hand, and any employee thereof, on the other hand, or (ii) induce or attempt to induce any customer, supplier, licensee or other business relation of any Purchaser or any Affiliate of such Purchaser to cease doing business with such Person or in any way interfere with the relationship between any such customer, supplier, licensee or business relation, on the one hand, and such Person, on the other hand. (c) If, at the time of enforcement of this Section 6.10, a court holds that the restrictions stated herein are unreasonable under the circumstances then existing, the parties agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area. The parties hereto acknowledge that money damages would be an inadequate remedy for any breach of this Section 6.10. Therefore, in the event of a breach or threatened breach of this Section 6.10, the Purchasers or their successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions of this Section 6.10. 6.11 CERTAIN TAX MATTERS. From the date hereof until the Closing Date, (i) the Parent shall and shall cause each Entity to file all tax returns and reports ("Post-Signing Returns") required to be filed in a manner consistent with past practices; (ii) the Parent shall and shall cause each Entity to timely pay all Taxes shown as due and payable on the Post-Signing Returns; (iii) the Parent shall and shall cause each Entity to make provision for all Taxes payable for which no Post-Signing Return is due prior to the Closing Date; (iv) the Parent shall allow the Purchasers an opportunity to review and comment on any Post-Signing Return prior to the due date of such Post-Signing Return; and (v) the Parent will promptly notify the Purchasers of any action, suit, proceeding, claim or audit pending against or with respect to the Parent or any Entity in respect of any Tax where there is a possibility of a determination or decision which could have an adverse effect on the Parent's or any Entity's Tax Liabilities or Tax attributes. 6.12 ADVICE OF CHANGES; FILINGS. The Parent shall confer with the Purchasers on a regular and frequent basis as reasonably requested by the Purchasers, report on operational matters and promptly advise the Purchasers orally and, if requested by the Purchasers, in writing of any change with respect to the Parent or any Entity. The Parent shall promptly provide to the Purchasers (or their counsel) copies of all filings made by the Parent or any Entity with any 35 37 Governmental Entity in connection with this Agreement and the transactions contemplated hereby. (a) The Parent will, as soon as practicable following the date hereof, duly call, give notice of, convene and hold a meeting of its stockholders (the "Stockholders Meeting") for the purpose of obtaining the approval of this Agreement, the Related Documents, and the transactions contemplated hereby and thereby. The Parent will, through its Board of Directors, recommend to its stockholders that the Parent Stockholder Approval be given. (b) The Parent will, as soon as practicable following the date hereof, prepare and file a preliminary proxy or information statement (as amended, modified or supplemented, the "Proxy Statement") with the SEC and will use its best efforts to respond to any comments of the SEC or its staff and to cause the Proxy Statement to be mailed to its stockholders as promptly as practicable after responding to all such comments to the satisfaction of the SEC staff. The Proxy Statement shall contain the written opinion of Paine Webber Incorporated, opining as to the matters set forth in Section 3.25. The Parent will afford the Purchasers opportunity to review and comment upon any description of the Purchasers or their Affiliates, this Agreement, the Related Documents or the transactions contemplated hereby and thereby set forth in the Proxy Statement (including all drafts or amendments thereto). Each Purchaser shall provide the Parent with all necessary information reasonably requested with respect to itself and Alliance solely for inclusion by the Parent in the Proxy Statement. The Parent will notify the Purchasers promptly of the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments or supplements to the Proxy Statement or for additional information and will supply the Purchasers with copies of all correspondence between the Parent or any of its representatives, on the one hand, and the SEC or its staff, on the other hand, with respect to the Proxy Statement. If at any time prior to the Stockholders Meeting there shall occur any event that should be set forth in an amendment or supplement to the Proxy Statement, the Parent will promptly prepare and mail to its stockholders such an amendment or supplement. 6.13 MAINTENANCE OF CASH AND CASH EQUIVALENTS. During the period commencing on the Closing Date and ending on April 15, 1999, the Parent shall at all times hold cash or Cash Equivalents of not less than $1,000,000 in the aggregate in an investment account at a financial institution reasonably satisfactory to the Purchasers which shall not be subject to any Encumbrance other than Permitted Encumbrances. During such period, the Parent shall provide copies of all notices or reports delivered to it in respect of such account to the Purchasers within 5 Business Days of the receipt thereof. 6.14 FURTHER ASSURANCES. The Sellers shall and shall cause the Entities to take such further actions or execute such further documents or instruments as shall be reasonably requested by the Purchasers 36 38 to further implement the transactions contemplated by Section 1.2 including, without limitation, discharging or disposing of any Excluded Liability which may be a Liability of any Entity on terms reasonably satisfactory to the Purchasers. 6.15 AUDITED FINANCIAL STATEMENTS. The Parent shall, and shall cause each of its Subsidiaries to, provide the Purchasers and their advisors with such information (including, without limitation, consolidating balance sheets and statements of operations as at December 31, 1997 and for the fiscal year then ended; such consolidating financial statements to incorporate the Entities in such form as presented in Schedule 3.5(b) as well as individual columns for each of GK Finance, Parent and each other Subsidiary of the Parent, in each case, as adjusted to give effect to the transactions contemplated by Section 1.2 hereof), and access to its books and records (including, without limitation, access to its management employees), to permit them or their advisors to prepare audited balance sheets of the Entities as of December 31, 1997, and related audited statements of operations, shareholders' equity and cash flows for the period then ended, in each case in accordance with GAAP and adjusted to give effect to the consummation of the transactions contemplated by Section 1.2 as if such transactions were consummated at January 1, 1997. 6.16 DVI FUNDED INDEBTEDNESS. At the request of the Purchasers, on the Closing Date, the Parent shall and shall cause its Subsidiaries to repay all Funded Indebtedness held by DVI Financial Services, Inc. and DVI Business Credit Receivables Corp. ("DVI") under agreements relating to Funded Indebtedness provided by DVI to the Parent and its Subsidiaries upon payment by the Purchasers in full of all amounts due on the Closing Date to DVI in respect of principal, accrued interest thereon and prepayment premiums not to exceed $75,000 in the aggregate. On the Closing Date, Parent shall deliver all instruments and documents reasonably requested by the Purchasers to evidence the repayment in full of such Funded Indebtedness including reasonably satisfactory pay-off letters, releases of Encumbrances, releases of pledges of Equity Interests and UCC-3 financing statements. 6.17 TRANSFER OF PARENT PARTNERSHIP INTERESTS. Upon the request of the Purchasers, the Parent shall, on or immediately prior to the Closing Date, assign the Parent Partnership Interests to a newly organized wholly-owned corporate Subsidiary (which shall conduct no business whatsoever) and shall cause such Subsidiary to assign the Parent Partnership Interests to Purchaser A in accordance with Section 1.1 hereof. 6.18 CERTAIN EMPLOYEE MATTERS. (a) On the Closing Date, the Purchasers shall or shall cause the Entities or an Affiliate of the Purchasers, to continue the employment of or offer employment, as applicable, to the employees of the Entities and Parent to be identified by the Purchasers 37 39 prior to the Closing Date in accordance with the terms of a letter, dated of even date herewith, delivered by Purchaser A to the Parent (any such employees who so continue or accept such offer of employment being referred to herein as the "Hired Employees"). Such employment shall be in a substantially similar position as such Hired Employee held while employed by the applicable Entity or Parent prior to the Closing, and the Purchasers shall have no Liability or obligation to any other employees of the Parent or any of its Subsidiaries (other than the Entities as set forth herein). Prior to the Closing, Parent and the Entities shall take such actions and, after the Closing Date, Parent and the Purchasers shall take, and the Purchasers shall cause the Entities to take, such actions as are necessary so that each Hired Employee shall cease to be entitled to participate in or accrue benefits under any of Parent's Employee Benefit Plans, programs, policies and arrangements except to the extent required by applicable Law. The Purchasers shall, or shall cause the Entities or an Affiliate of the Purchasers, to take such actions as may be necessary such that, subject to the provisions of this Section 6.18, on and after the Closing Date, each Hired Employee shall be eligible to participate in, and be subject to the provisions of, the Employee Benefit Plans (including a 401(k) plan and a flexible benefits plan), programs, personnel policies and guidelines sponsored or maintained by Alliance, and applicable for employees of Alliance or its Affiliates in a similar position, subject to the satisfaction of all the eligibility criteria for participation thereunder (except as otherwise provided in this Section 6.18). (b) With respect to the Alliance Employee Benefit Plans, programs, personnel policies and guidelines, Alliance shall grant all Hired Employees from and after the Closing Date credit for all service with the Entities and Parent prior to the Closing Date for all purposes. Alliance shall take such actions as are necessary to provide that on the Closing Date all Hired Employees and their spouses and dependents shall be immediately covered by the group health plan maintained by Alliance which shall (i) provide immediate coverage as of the Closing Date without any waiting period, (ii) waive any pre-existing condition exclusions or limitations, and (iii) provide that any amounts paid by Hired Employees through the Closing Date for medical expenses that are treated as deductible, co-insurance and out-of-pocket payments under the Parent's health plan shall reduce the amount of any deductible, co-insurance or out-of-pocket payments required to be paid for a similar period under the Alliance health plan; provided, however, that the Sellers shall provide Alliance with a list of all current and former employees participating in the Parent's health plan along with a listing of each employee's deductible and co-insurance payments through the Closing Date. (c) Effective as of the Closing, the Purchasers shall assume the Parent's or Entities' obligations with respect to accrued sick pay, personal holidays and vacation pay for Hired Employees, provided that the vacation pay costs as of the Latest Balance Sheet Date have been accrued and reflected on the Latest Balance Sheet. (d) Parent shall take such actions as are necessary to provide that the Hired Employees are fully vested in their benefits under the Retirement Plan for Employees of Parent and CT Sub (the "ASHS 401(k) Plan"). Parent shall also take such actions as are 38 40 necessary to provide that the Hired Employees will be eligible to receive distributions from the ASHS 401(k) Plan that will be eligible for rollover to the Alliance "401(k)" plan. The Purchasers shall take such action as is necessary after the Closing Date to provide that the Alliance "401(k)" plan will allow rollovers of distributions from the ASHS 401(k) Plan. (e) After the Closing Date, the Purchasers and the Sellers agree to take such actions as are necessary to provide for the transfer of the account balances of the flexible spending accounts of each Hired Employee from Parent's "Section 125" plan to the Alliance "Section 125" plan and the Purchasers shall provide for the reimbursement from the Alliance "Section 125" plan of medical and childcare expenses incurred by Hired Employees during 1998. (f) After the Closing Date, the Purchasers shall be responsible for providing health care continuation coverage pursuant to the requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), to the extent required by COBRA, for all former employees of the Entities and/or their "qualified beneficiaries" (as such term is defined in Part 6 of Title I of ERISA) who were receiving health care continuation coverage under COBRA prior to the Closing Date or who are or become eligible to receive such coverage on or after the Closing Date. As of the date hereof, there were 2 former employees of the Entities and/or their "qualified beneficiaries" who were receiving health care continuation coverage under COBRA and 8 former employees who experienced a "qualifying event" under COBRA. ARTICLE VII CLOSING CONDITIONS 7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each party to consummate the transactions contemplated hereby is subject to the satisfaction prior to the Closing Date of the following conditions unless waived (to the extent such conditions can be waived) by the Parent (on behalf of the Sellers) or the Purchasers and Alliance, as applicable: (a) Approvals. The authorizations, consents, Orders or approvals of, or declarations or filings with, or expiration of waiting periods of any Governmental Entity required to consummate the transactions contemplated hereby shall have been obtained or made. (b) Stockholder Approval. The Parent Stockholder Approval shall have been obtained. (c) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other Order issued by any court or Governmental Entity of competent jurisdiction nor other legal restraint or prohibition preventing the consummation of the transactions contemplated hereby shall be in effect. 39 41 (d) Actions and Statutes. No Proceeding shall have been taken or threatened, and no Law or Order shall have been enacted, promulgated or issued or deemed applicable to the transactions contemplated by this Agreement or the Related Documents by any Governmental Entity that could (i) make the consummation of the transactions contemplated hereby or thereby illegal or substantially delay the consummation of any material aspect of the transactions contemplated hereby or thereby or (ii) render any party unable to consummate the transactions contemplated hereby or thereby. 7.2 CONDITIONS TO OBLIGATIONS OF THE PURCHASERS AND ALLIANCE. The obligations of the Purchasers and Alliance under this Agreement are subject to the satisfaction of the following conditions unless waived (to the extent such conditions can be waived) by the Purchasers and Alliance: (a) Accuracy of Representations and Warranties. All representations and warranties made by the Sellers in this Agreement and the Related Documents shall be true and correct, individually or in the aggregate, in all material respects (except for such representations and warranties which are qualified by their terms by a reference to materiality, or "Material Adverse Effect" which representations and warranties as so qualified shall be true and correct, individually or in the aggregate, in all respects) as of the date hereof and as of the Closing Date (unless such representations and warranties relate to a specific date other than the Closing Date, in which case such representations and warranties shall be true and correct, individually or in the aggregate, in all material respects, or in all respects, as the case may be, on such date) with the same effect as if such representations and warranties had been made at and as of the Closing Date (including, after giving effect to the transactions contemplated by Section 1.2). (b) Performance of Obligations of the Sellers. The Sellers shall have performed in all material respects all obligations, agreements and covenants required to be performed by them under this Agreement and the Related Documents prior to or as of the Closing Date. (c) Certificates. At the Closing, in consideration of the delivery of the Purchase Price pursuant to Section 1.3 hereof, (a) the Parent shall deliver or cause to be delivered to Purchaser A, the certificates representing the Shares (other than the M Sub Partnership Interests) and the Parent shall deliver or cause to be delivered to Purchaser B, a certificate representing the M Sub Partnership Interests, in each case, duly endorsed in blank for transfer or accompanied by stock and partnership transfer powers duly executed in blank, sufficient in form and substance to convey to each Purchaser good and marketable title to all of the Shares purchased by such Purchaser, free and clear of all Encumbrances. (d) Consents and Approvals. The Purchasers shall have received duly executed copies of all consents and approvals required for or in connection with the execution and delivery by the Sellers of this Agreement and each of the Related 40 42 Documents to which any of them may be parties (including, without limitation, the assumption of any Funded Indebtedness and any consents or approvals necessary to be obtained in connection with the transactions contemplated by Section 10.4(b)), the consummation of the transactions contemplated hereby and thereby, and the continued conduct of the Business as previously conducted (including, without limitation, the transfer of any necessary regulatory Permits currently in the name of the Parent or any Subsidiary other than the Entities), in form and substance reasonably satisfactory to the Purchasers and their counsel. The Sellers shall obtain all Permits required to conduct the Business which have not been obtained on or prior to the date hereof in the name of the Entities. The Parent shall cause each of the Encumbrances designated to be terminated on or prior to the Closing Date on Schedule 3.9 to be so terminated on or prior to the Closing Date (unless such Encumbrances cease to be effective under applicable Law). (e) Asset Contribution and Asset Disposition. The Asset Contribution, Asset Disposition and the other transactions contemplated by Section 1.2 shall each be consummated in accordance with Section 1.2 hereof. (f) Absence of Material Adverse Effect. Since the Latest Balance Sheet Date, there shall have been no change in respect of the Business that has had or is reasonably likely to have a Material Adverse Effect. (g) Related Documents. Each of the agreements attached hereto as Exhibit A-1 and Exhibit A-2, respectively (each as amended, modified or supplemented, a "Related Document" or a "Stockholder Agreement") shall have been executed and delivered by the parties thereto and the transactions contemplated thereby to be completed at or prior to the Closing substantially consummated or effected, as the case may be, in accordance with the terms thereof. (h) Partnership Agreement Amendment. The Partnership Agreement shall be amended and restated in its entirety by the Sellers on such terms and conditions as shall be satisfactory to the Sellers and the Purchasers. (i) Sellers' Certificates. Each of the following certificates shall have been executed and delivered, as the case may be, by the Person who or which is the subject thereof: (i) a certificate of the Sellers, dated as of the Closing Date, certifying, in each case, (i) that true and complete copies of the Organizational Documents of each Entity and the Sellers as in effect on the Closing Date are attached thereto, (ii) as to the incumbency and genuineness of the signatures of each officer of such Seller executing this Agreement and the Related Documents, (iii) the genuineness of the resolutions (attached thereto) of the board of directors of the Sellers authorizing the execution, delivery and performance of this Agreement and the Related Documents to which the Sellers are a party and the consummation of the transactions contemplated hereby and thereby and (iv) the genuineness of the resolutions (attached thereto) of the management committee or 41 43 similar governing body of each Entity authorizing such Entity to consent to the transactions contemplated by this Agreement; (ii) certificates of the secretaries of state of the states (or other applicable office) in which each Seller and each Entity is organized and qualified to do business, dated as of a date not more than five days prior to the Closing Date, certifying as to the good standing and non-delinquent tax status of such Seller and Entity; (iii) a certificate signed by the principal executive officer of each Seller, dated as of the Closing Date, and certifying as to (A) the accuracy of the representations and warranties of the Sellers contained herein, as contemplated by Section 7.2(a) hereof, and (B) the performance of the obligations, covenants and agreements of the Sellers contained herein, as contemplated in Section 7.2(b) hereof; and (iv) a certificate of the Sellers dated as of the Closing Date, certifying that no Entity is a foreign person within the meaning of Section 1445 of the Code. (j) Resignation of Officers and Directors. The Purchasers shall have received letters from all of the officers and directors of the Entities, resigning their respective positions as officers and directors of such Entities, respectively, immediately upon the Closing. (k) Officer's Certificate. The Purchasers shall have received a certificate of a duly authorized officer of the Parent certifying as to the matters set forth in Section 7.2(e). 7.3 CONDITIONS TO OBLIGATIONS OF THE SELLERS. The obligations of the Sellers under this Agreement are subject to the satisfaction of the following conditions unless waived (to the extent such conditions can be waived) by the Sellers: (a) Accuracy of Representations and Warranties. All representations and warranties made by Alliance and the Purchasers in this Agreement and the Related Documents shall be true and correct, individually or in the aggregate, in all material respects (except for such representations and warranties which are qualified by their terms by a reference to materiality, or "Material Adverse Effect" which representations and warranties as so qualified shall be true and correct, individually or in the aggregate, in all respects) as of the date hereof and at and as of the Closing Date (unless such representations and warranties relate to a specific date other than the Closing Date, in which case, such representations and warranties shall be true and correct, individually or in the aggregate, in all material respects, or in all respects, as the case may be, on such date) 42 44 with the same effect as if such representations and warranties had been made at and as of the Closing Date. (b) Performance of Obligations of the Purchasers and Alliance. Alliance and the Purchasers shall have performed in all material respects all obligations, agreements and covenants required to be performed by them under this Agreement and the Related Documents prior to or as of the Closing Date. (c) Certificates. Each of the following certificates shall have been executed and delivered, as the case may be, by the Person who or which is the subject thereof: (i) a certificate of the secretary of Alliance and each Purchaser, dated as of the Closing Date, certifying, in each case, (i) that true and complete copies of its Organizational Documents as in effect on the Closing Date are attached thereto, (ii) as to the incumbency and genuineness of the signatures of each officer of Alliance and such Purchaser executing this Agreement and the Related Documents, and (iii) the genuineness of the resolutions (attached thereto) of the board of directors of Alliance and such Purchaser (or committee thereof) authorizing the execution, delivery and performance of this Agreement and the Related Documents to which Alliance or such Purchaser is a party and the consummation of the transactions contemplated hereby and thereby; (ii) (xlii) certificates of the secretaries of state of the states in which Alliance and each of the Purchasers is organized, dated a date not more than five days prior to the Closing Date as of the Closing Date, certifying as to the good standing and non-delinquent tax status of Alliance and the Purchasers; and (iii) (xliii) a certificate signed by a principal executive officer of Alliance and each Purchaser, dated as of the Closing Date, and certifying as to (A) the accuracy of the representations and warranties of Alliance and such Purchaser contained herein, as contemplated by Section 7.3(a) hereof and (B) the performance of the obligations, agreements and covenants of Alliance and such Purchaser contained herein, as contemplated in Section 7.3(b) hereof. ARTICLE VIII INDEMNIFICATION 8.1 INDEMNIFICATION GENERALLY; ETC. (a) Subject to the further terms of this Article VIII, the Sellers agree, jointly and severally, to indemnify the Purchaser Indemnified Persons for, and hold them harmless from and against, any and all Purchaser Losses arising from or in connection with any of the following: 43 45 (i) the untruth, inaccuracy or breach of any representation or warranty (without regard to whether such representation or warranty is qualified by reference to materiality or "Material Adverse Effect") of the Sellers contained herein, in any Related Document, or in any certificate delivered by any Seller relating thereto delivered in connection herewith (or any facts or circumstances constituting any such untruth, inaccuracy or breach); (ii) the breach of any agreement or covenant of the Sellers contained in this Agreement or in any Related Document; (iii) any Liability of any Entity in any manner related to a claim asserted under the Agreement for Purchase and Sale of Assets, dated as of December 30, 1994 among Vencor, Inc., CT Sub and Parent; (iv) for any Liability with respect to Covered Taxes and for 50% of any Liability with respect to all transfer, documentary, sales, use, stamp, registration and other such Taxes and fees ("Transfer Taxes") with respect to the transactions contemplated by Section 1.2; and (v) any Liability of any Entity for Taxes attributable to the inclusion of an adjustment in taxable income of an Entity under Section 481 of the Code for any Tax period beginning on or after the Closing Date as a result of a required or optional change in method of accounting with respect to a Tax period ending on or prior to the Closing Date. (b) Subject to the further terms of this Article VIII, each of Alliance and the Purchasers agree jointly and severally to indemnify the Seller Indemnified Persons for, and hold them harmless from and against, any and all Seller Losses arising from or in connection with any of the following: (i) the untruth, inaccuracy or breach of any representation or warranty (without regard to whether such representation or warranty is qualified by reference to materiality or "Material Adverse Effect") of Alliance or such Purchaser contained herein, any Related Document, or any certificate delivered by Alliance or such Purchaser in connection herewith at or before the Closing (or any facts or circumstances constituting any such untruth, inaccuracy or breach); (ii) the breach of any agreement or covenant of Alliance or either Purchaser contained in this Agreement or in any Related Document; (iii) any failure to comply after the Closing Date with the Worker Adjustment and Retraining Act of 1988, as amended, or any similar state law arising out of, or relating to, any actions taken by Alliance or the Purchasers with respect to Hired Employees after the Closing Date; and 44 46 (iv) any Liability for Transfer Taxes to be borne by Purchasers or Alliance pursuant to Section 10.14. (c) Notwithstanding the foregoing the Purchasers shall not be entitled to indemnification hereunder for any Losses arising as a result of the untruth or inaccuracy of any representation or warranty to the extent that a Liability arising as a result of such untruth or inaccuracy is reflected as a Liability in the financial statements delivered on the date hereof pursuant to Section 3.5 hereof. (d) Absent fraud, the rights of the parties for indemnification relating to this Agreement and the transactions contemplated hereby and under the Related Documents shall be strictly limited to those contained in this Article VIII, and such indemnification rights shall be the exclusive remedies of the parties subsequent to the Closing Date with respect to any matter relating to this Agreement or arising in connection herewith. 8.2 ASSERTION OF CLAIMS. No claim shall be brought for a breach of a representation or warranty under Section 8.1 hereof unless the Indemnified Persons, or any of them, at any time prior to the applicable Survival Date, give the Indemnifying Persons (a) written notice of the existence of any such claim, specifying the nature and basis of such claim and the amount thereof, to the extent known or (b) written notice pursuant to Section 8.3 of any Third Party Claim, the existence of which might give rise to such a claim. Upon the giving of such written notice as aforesaid, the Indemnified Persons, or any of them, shall have the right to commence legal proceedings prior to or subsequent to the Survival Date for the enforcement of their rights under Section 8.1. 8.3 NOTICE AND DEFENSE OF THIRD PARTY CLAIMS. The obligations and liabilities of an Indemnifying Person with respect to Losses resulting from the assertion of claim or Liability by third parties other than in respect of Tax Claims (each, a "Third Party Claim") shall be subject to the following terms and conditions: (a) The Indemnified Persons shall promptly give written notice to the Indemnifying Persons of any Third Party Claim which might give rise to any Loss by the Indemnified Persons, stating the nature and basis of such Third Party Claim, and the amount thereof to the extent known; provided, however, that no delay on the part of the Indemnified Persons in notifying any Indemnifying Persons shall relieve the Indemnifying Persons from any liability or obligation hereunder unless (and then solely to the extent) the Indemnifying Person thereby is materially and irrevocably prejudiced by the delay. Such notice shall be accompanied by copies of all relevant documentation with respect to such Third Party Claim, including any summons, complaint or other pleading which may have been served, any written demand or any other document or instrument. 45 47 (b) If the Indemnifying Persons shall acknowledge in a writing delivered to the Indemnified Persons that such Third Party Claim is properly subject to their indemnification obligations hereunder, then the Indemnifying Persons shall have the right to assume the defense of any Third Party Claim at their own expense and by their own counsel, which counsel shall be reasonably satisfactory to the Indemnified Persons; provided, however, that the Indemnifying Persons shall not have the right to assume the defense of any Third Party Claim, notwithstanding the giving of such written acknowledgment, if (i) the Indemnified Persons shall have been advised by counsel that there are one or more legal or equitable defenses available to them which are different from or in addition to those available to the Indemnifying Persons, and, in the opinion of the Indemnified Persons, counsel for the Indemnifying Persons could not adequately represent the interests of the Indemnified Persons because such interests could be in conflict with those of the Indemnifying Persons, or (ii) the Indemnifying Persons shall not have assumed the defense of the Third Party Claim in a timely fashion. (c) If the Indemnifying Persons shall assume the defense of a Third Party Claim (under circumstances in which the proviso to the first sentence of Section 8.3(b) is not applicable), the Indemnifying Persons shall not be responsible for any legal or other defense costs subsequently incurred by the Indemnified Persons in connection with the defense thereof. If the Indemnifying Persons do not exercise their right to assume the defense of a Third Party Claim by giving the written acknowledgment referred to in Section 8.3(b), or are otherwise restricted from so assuming by the proviso to the first sentence of Section 8.3(b), the Indemnifying Persons shall nevertheless be entitled to participate in such defense with their own counsel and at their own expense. If the defense of a Third Party Claim is assumed by the Indemnified Persons, the Indemnified Persons shall not be entitled to settle such Third Party Claim without the prior written consent of the Indemnifying Persons, which shall not be unreasonably withheld. (d) If the Indemnifying Persons exercise their right to assume the defense of a Third Party Claim, (i) the Indemnified Persons shall be entitled to participate in such defense with their own counsel at their own expense and (ii) the Indemnifying Persons shall not make any settlement of any claims without the written consent of the Indemnified Persons, which shall not be unreasonably withheld. 8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a) Subject to the further provisions of this Section 8.4, the representations and warranties contained in this Agreement, the Related Documents, or in any certificate or other writing delivered in connection with this Agreement shall survive the Closing Date until April 15, 1999; provided, however, that (i) the representations and warranties contained in Sections 3.1, 3.2, 3.3, 3.4, 3.21, 4.1, 4.2, 4.3, 4.4, 5.1, 5.2 and 5.3 (other than the covenant set forth therein which shall survive in accordance with the second sentence of this Section 8.4(a)) of this Agreement shall survive indefinitely and (ii) the representations and warranties contained in Sections 3.8 and 3.20 of this Agreement shall survive the Closing Date until the expiration of any applicable statue of limitations (those 46 48 representations and warranties referenced in the foregoing clauses (i) and (ii), being the "Excluded Representations and Warranties") for Third Party Claims applicable to the matters covered thereby. The covenants and other agreements of the parties contained in this Agreement and the Related Documents (including the indemnity provided for in Section 8.1(a)(iii) of this Agreement) shall survive the Closing Date until they are otherwise terminated by their terms. The obligations of the Sellers under Section 8.1(a)(iv) and (a)(v) shall survive the Closing Date until the expiration of any applicable statute of limitations with respect to the matters set forth therein. The obligations of Alliance and the Purchasers under Section 8.1(b)(iv) shall survive the Closing Date until the expiration of any applicable statute of limitations with respect to the matters set forth therein. (b) For convenience of reference, the date upon which any representation or warranty contained herein shall terminate, if any, is referred to herein as the "Survival Date". 8.5 LIMITATIONS ON INDEMNIFICATION. (a) Indemnity Baskets for the Sellers. The Purchaser Indemnified Persons shall not have the right to be indemnified for breaches of representations and warranties pursuant to Section 8.1(a)(i) unless and until the Purchaser Indemnified Persons shall have incurred on a cumulative basis aggregate Losses (without giving effect, in determining whether and to what extent representations and warranties were breached or Losses were incurred, to qualifications therein relating to materiality or "Material Adverse Effect") in an amount of $500,000, in which event the right to be indemnified shall apply in respect of all Losses; provided, however, that in no event shall the limitations set forth in this Section 8.5(a) apply with respect to the Excluded Representations and Warranties. (b) Indemnity Limitations for the Sellers. The sum of all Losses (without giving effect, in determining whether and to what extent representations and warranties were breached or Losses were incurred, to qualifications therein relating to materiality or "Material Adverse Effect") pursuant to which indemnification is payable by the Sellers pursuant to Section 8.1(a)(i) shall not exceed $2,000,000; provided, however, that in no event shall the limitations set forth in this Section 8.5(b) apply with respect to the Excluded Representations and Warranties. 8.6 LIMITATIONS ON INDEMNIFICATION. (a) Indemnity Baskets for the Purchasers and Alliance. The Seller Indemnified Persons shall not have the right to be indemnified for breaches of representations and warranties pursuant to Section 8.1(b)(i) unless and until the Seller Indemnified Persons shall have incurred on a cumulative basis aggregate Losses (without giving effect, in determining whether and to what extent representations and warranties were breached or Losses were incurred, to qualifications therein relating to materiality or "Material Adverse Effect") in an amount of $500,000, in which event the right to be indemnified shall apply in respect of all Losses; provided, however, that in no event shall 47 49 the limitations set forth in this Section 8.6(a) apply with respect to the Excluded Representations and Warranties. (b) Indemnity Limitations for the Purchasers and Alliance. The sum of all Losses (without giving effect, in determining whether and to what extent representations and warranties were breached or Losses were incurred, to qualifications therein relating to materiality or "Material Adverse Effect") pursuant to which indemnification is payable by the Purchasers and Alliance pursuant to Section 8.1(b)(i) shall not exceed $2,000,000; provided, however, that in no event shall the limitations set forth in this Section 8.6(b) apply with respect to the Excluded Representations and Warranties. 8.7 ALLOCATION OF INDEMNIFICATION PAYMENTS. The parties hereto agree that any indemnification payment shall be treated as an adjustment to the Purchase Price. ARTICLE IX TERMINATION; EFFECT OF TERMINATION 9.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing by: (a) the mutual written consent of the parties hereto; or (b) the Purchasers or Alliance, if there has been a breach by any Seller of any of the representations or warranties in this Agreement or in any Related Document, individually or in the aggregate, in any material respect (except for representations and warranties which are qualified by their terms by a reference to materiality or "Material Adverse Effect" in which case, such representations or warranties as so qualified shall have been breached in any respect), covenant, obligation or agreement set forth in this Agreement or in any Related Document and such breach shall not have been cured within 10 Business Days after notice thereof is given by any Purchaser or Alliance (except that no cure period shall be provided for a breach which by its nature cannot be cured); or (c) the Sellers, if there has been a breach by Alliance or any Purchaser of any of the representations or warranties in this Agreement or in any Related Document, individually or in the aggregate, in any material respect (except for representations and warranties which are qualified by their terms by a reference to materiality or "Material Adverse Effect" in which case, such representations or warranties as so qualified shall have been breached in any respect), covenant, obligation or agreement set forth in this Agreement or in any Related Document and such breach shall not have been cured within 10 Business Days after notice thereof is given by any Seller (except that no cure period shall be provided for a breach which by its nature cannot be cured); or 48 50 (d) either the Purchasers, Alliance or the Sellers, if the Closing shall not have been consummated by September 15, 1998; or (e) either the Purchasers, Alliance or the Sellers, if any permanent injunction or Order of a Governmental Entity preventing the Closing shall have become final and nonappealable; (f) By either Parent or the Purchasers if, prior to the Closing Date, (i) the Board of Directors of the Parent determines that a Third Party Proposal for an Alternative Transaction constitutes a Superior Proposal, (ii) the Parent promptly notifies the Purchasers of its determination in writing, which writing shall set forth the terms and conditions of the Third Party Proposal and the identity of the Person making the Third Party Proposal, (iii) ten days have elapsed following receipt by the Purchasers of such written notice, (iv) during such ten day period the Parent cooperates with the Purchasers with the intent of enabling, but not obligating, the Purchasers to agree to a modification of the terms and conditions of this Agreement so that the transactions contemplated hereby may be effected, and (v) at the end of such ten day period, the Board of Directors of the Parent continues to believe that such Third Party Proposal constitutes a Superior Proposal and the Parent pays to the Purchasers the amounts specified under Section 10.5(b) pursuant to the terms thereof. For purposes of this Agreement, a "Superior Proposal" means any Third Party Proposal to effect an Alternative Transaction; provided that (i) the Board of Directors of the Parent determines in its good faith judgment (following the consultation with, and the receipt of the advice of, the Parent's financial advisor) that such Third Party Proposal is on terms that are more favorable to the Parent's stockholders than the transactions contemplated by this Agreement (taking into account all relevant factors, including the amount and form of consideration to be received, the relative value of any non-cash consideration, and the timing and certainty of closing) and (ii) the Board of Directors of the Parent determines in its good faith judgment (based on the written advice of outside counsel) that the failure to recommend or accept such Third Party Proposal would violate the fiduciary duties of the Board of Directors of the Parent under applicable Law; provided, however, in each case, that none of the Sellers, Alliance nor the Purchasers shall be entitled to terminate this Agreement if such party's breach of this Agreement has prevented the satisfaction of a condition. Any termination pursuant to this Section 9.1 shall be effected by written notice from the party or parties so terminating to the other parties hereto, which notice shall specify the Section of this Agreement pursuant to which this Agreement is being terminated. 9.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided in Section 9.1, this Agreement shall be of no further force or effect, except for Section 6.7, Section 10.5 and this Section 9.2, each of which shall survive the termination of this Agreement; provided, however, that the Liability of any party for any intentional, willful or knowing breach by 49 51 such party of the representations, warranties, covenants, obligations or agreements of such party set forth in this Agreement occurring prior to the termination of this Agreement shall survive the termination of this Agreement and, in addition, in the event of any action for breach of contract in the event of a termination of this Agreement, the prevailing party shall be reimbursed by the other party to the action for reasonable attorneys' fees and expenses relating to such action. ARTICLE X MISCELLANEOUS PROVISIONS 10.1 AMENDMENT. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing signed by the parties hereto. No waiver by any party of any default, misrepresentation, or breach of representation or warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 10.2 ENTIRE AGREEMENT. This Agreement and the other agreements and documents referenced herein (including, but not limited to, the schedules and the exhibits (in their executed form) attached hereto) and any other document or agreement contemporaneously entered into with this Agreement (including the Related Documents) contain all of the agreements among the parties hereto with respect to the transactions contemplated hereby and supersede all prior agreements or understandings among the parties with respect thereto (including, but not limited to, the letter agreement dated September 15, 1997 (as amended to the date hereof) between the Parent and Apollo Management, L.P. 10.3 SEVERABILITY. It is the desire and intent of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the Law and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, in the event that any provision of this Agreement would be held in any jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 50 52 10.4 BENEFITS OF AGREEMENT. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Except as expressly provided herein, this Agreement shall not confer any rights or remedies upon any Person other than the foregoing; provided, however, that anything contained herein to the contrary notwithstanding, the Purchasers may (a) collaterally assign this Agreement and the Related Documents, without the prior consent of any other party, to a financial or lending institutions providing financing to such Persons or their Affiliates, (b) assign the rights to acquire any and all assets (including interests under leases, Permits and Contracts with third parties) related to certain MRI Units to be designated by the Purchasers to the Sellers to any Affiliate of the Purchasers, pursuant to Conveyance Instruments reasonably satisfactory to the Purchasers on the Closing Date and (c) assign this Agreement to any wholly-owned Subsidiary of Alliance. 10.5 FEES AND EXPENSES (a) Except as otherwise provided herein and as provided below in this Section 10.5, all fees and expenses incurred in connection with this Agreement, the Related Documents and the transactions contemplated hereby and thereby shall be paid by the party incurring such fees or expenses, whether or not such transactions are consummated; provided, however, that the Purchasers shall pay the reasonable fees and expenses of Ernst & Young, LLP in connection with the preparation of the financial statements referenced in Section 3.5(b) and Section 6.15. (b) If this Agreement is terminated pursuant to Section 9.1(f), the Sellers shall pay to the Purchasers promptly upon such termination $1,350,000 plus all Expenses. (c) If this Agreement is terminated by any Purchaser or Alliance pursuant to Section 9.1(d) as a result of a failure to be satisfied of the condition precedent set forth in Section 7.1(b), and, if, within 180 days of such termination either an Alternative Transaction shall be consummated or any Seller or Entity shall enter into an Acquisition Agreement providing for an Alternative Transaction, then the Sellers shall pay the Purchasers, upon the closing of such transaction, if and whenever it occurs, $1,350,000 plus all Expenses. No amounts whatsoever shall be payable to the Purchasers under this Section 10.5(c) if, at the Stockholders Meeting or any adjournments or postponements thereof, the Purchasers or their Affiliates fail to vote or cause to be voted, or fail to grant or cause the granting of consent or approval with respect to, any shares of Parent Common Stock owned by them or as to which they have voting rights, in favor of this Agreement and the transactions contemplated hereby. (d) The Sellers acknowledge that the agreements contained in this Section 10.5 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, the Purchasers and Alliance would not enter into this Agreement. Accordingly, if the Sellers fail promptly to pay any amount due pursuant to this Section 10.5, and, in order to obtain such payment, the Purchasers or Alliance 51 53 commence a suit which results in a judgment against the Sellers for the amounts set forth in this Section 10.5, the Sellers shall pay the Purchasers and Alliance all costs and expenses (including attorney's fees and expenses) in connection with such suit, together with interest on such amounts (excluding the Purchaser's and Alliance's costs and expenses) at the prime rate of the Bankers Trust Company in effect on the date such payment was required to be made. If such a suit results in a judgment against the Purchasers or Alliance, the Purchasers and Alliance shall pay to the Sellers all costs and expenses (including attorney's fees and expenses) in connection with such suit. "Expenses" shall mean all reasonably documented out-of-pocket expenses incurred by the Purchasers and Alliance in connection with this Agreement, the Related Documents and the transactions contemplated hereby and thereby, including fees and expenses of its consultants, attorneys, accountants, and other advisors; provided, however, that unless the Parent has previously agreed in writing to increase such amount, the aggregate amount of such Expenses reimbursable under this Section 10.5 shall not exceed $350,000. 10.6 HEADINGS. Descriptive headings are for convenience only and shall not control or affect in any way the meaning or construction of any provision of this Agreement. 10.7 NOTICES. All notices or other communications pursuant to this Agreement shall be in writing and shall be deemed to be sufficient if delivered personally, telecopied, sent by nationally-recognized, overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to any Seller, to: American Shared Hospital Services Four Embarcadero Center Suite 3620 San Francisco, California 94111 Attention: Ernest A. Bates, M.D. Telephone No.: (415) 788-5300 Facsimile No.: (415) 788-5660 52 54 with a copy to: Sidley & Austin 875 Third Avenue 14th Floor New York, New York 10022 Attention: Daniel Kelly Telephone No.: (212) 906-2000 Facsimile No.: (212) 906-2021 (b) if to the Purchasers or Alliance, to: Alliance Imaging, Inc. 1065 PacifiCenter Drive Suite 200 Anaheim, California 92806 Attention: Richard N. Zehner Telephone No.: (714) 688-7100 Facsimile No.: (714) 688-3388 with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Attention: John J. Suydam, Esq. Telephone No.: (212) 408-2400 Facsimile No.: (212) 408-2420. All such notices and other communications shall be deemed to have been given and received (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of delivery by telecopier, on the date of such delivery, (iii) in the case of delivery by nationally-recognized, overnight courier, on the Business Day following dispatch, and (iv) in the case of mailing, on the third Business Day following such mailing. 10.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. 10.9 GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING 53 55 PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK, OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK TO BE APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF NEW YORK WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY RELATED DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY HERETO HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY AND ASSETS, GENERALLY AND UNCONDITIONALLY THE JURISDICTION OF THE AFORESAID COURTS. 10.10 INCORPORATION OF EXHIBITS AND SCHEDULES. The Annexes, Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 10.11 INTERPRETATION; CONSTRUCTION. The term "Agreement" means this agreement together with all schedules, annexes and exhibits hereto, as the same may from time to time be amended, modified, supplemented or restated in accordance with the terms hereof. Unless the context otherwise requires, words importing the singular shall include the plural, and vice versa. In this Agreement, the term "Best Knowledge" of any Person means (i) the actual knowledge of such Person and (ii) that knowledge which should have been acquired by such Person after making such due inquiry and exercising such due diligence as a prudent businessperson would have made or exercised in the management of his or her business affairs, including due inquiry of those officers, directors, employees and professional advisers (including attorneys, accountants and consultants) of the Person who could reasonably be expected to have actual knowledge of the matters in question. When used in the case of the Sellers, the term "Best Knowledge" shall include the Best Knowledge of each Seller and each Entity. The use in this Agreement of the term "including" means "including, without limitation." The words "herein", "hereof", "hereunder", "hereby", "hereto", "hereinafter", and other words of similar import refer to this Agreement as a whole, including the schedules, annexes and exhibits, as the same may from time to time be amended, modified, supplemented or restated, and not to any particular article, section, subsection, paragraph, subparagraph or clause contained in this Agreement. All references to articles, sections, subsections, clauses, paragraphs, schedules and exhibits mean such provisions of this Agreement and the schedules and exhibits attached to this Agreement, except where otherwise stated. The title of and the article, section and paragraph headings in this Agreement are for convenience of reference only and shall not govern or 54 56 affect the interpretation of any of the terms or provisions of this Agreement. The use herein of the masculine, feminine or neuter forms shall also denote the other forms, as in each case the context may require. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The language used in this Agreement has been chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. Accounting terms used but not otherwise defined herein shall have the meanings given to them under GAAP. Unless expressly provided otherwise, the measure of a period of one month or year for purposes of this Agreement shall be that date of the following month or year corresponding to the starting date, provided that if no corresponding date exists, the measure shall be that date of the following month or year corresponding to the next day following the starting date. For example, one month following February 18 is March 18, and one month following March 31 is May 1. 10.12 REMEDIES. The parties shall each have and retain all rights and remedies existing in their favor under this Agreement, the Related Documents, at law or equity, including rights to bring actions for specific performance and injunctive and other equitable relief (including, without limitation, the remedy of rescission) to enforce or prevent a breach or any violation of this Agreement or the Related Documents. All such rights and remedies shall, to the extent permitted by applicable Law, be cumulative. 10.13 APPOINTMENT OF REPRESENTATIVE. M Sub hereby irrevocably appoints the Parent to be its attorney-in-fact and representative for the purpose of administering this Agreement on behalf M Sub. The Purchasers shall be entitled to deal exclusively with the Parent, as the representative of M Sub. Purchaser B hereby irrevocably appoints Purchaser A to be its attorney-in-fact and representative for the purpose of administering this Agreement on behalf of Purchaser B. The Sellers shall be entitled to deal exclusively with Purchaser A as the representative of Purchaser B. 10.14 SALE AND TRANSFER TAXES. All Transfer Taxes incurred in connection with the consummation of the transactions contemplated herein (other than the Transfer Taxes referenced in Section 8.1(a)(iv) to be borne by the Sellers) shall be paid 100% by Alliance and the Purchasers. 10.15 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENT. 55 57 * * * 56 58 IN WITNESS WHEREOF, the parties hereto have executed this Securities Purchase Agreement as of the date first written above. ALLIANCE IMAGING, INC. By: /s/ Richard N. Zehner ---------------------------------- Name: Richard N. Zehner Title: CEO EMBARCADERO HOLDING CORP. I By: /s/ Josh Harris ---------------------------------- Name: Josh Harris Title: Vice President EMBARCADERO HOLDING CORP. II By: /s/ Josh Harris ---------------------------------- Name: Josh Harris Title: Vice President AMERICAN SHARED HOSPITAL SERVICES By: /s/ Ernest A. Bates ---------------------------------- Name: Ernest A. Bates, M.D. Title: Chairman and CEO 57 59 MMRI, INC. By: /s/ Ernest A. Bates ---------------------------------- Name: Ernest A. Bates, M.D. Title: Chairman and President 58 60 ANNEX I DEFINITIONS "Acquisition Agreement" has the meaning ascribed thereto in Section 6.4. "Affiliate" means, with respect to any Person, (i) a director, officer or greater than 10% shareholder of such Person, (ii) a spouse, parent, sibling or descendant of such Person (or spouse, parent, sibling or descendant of any director or executive officer of such Person), or (iii) any other Person that, directly or indirectly through one or more intermediaries, Controls, or is Controlled by, or is under common Control with, such Person. "Alliance" has the meaning ascribed thereto in the preamble. "Alternative Transaction" means any (i) acquisition or purchase of any material portion of the Business or any material assets of either Entity outside the ordinary course of business, (ii) acquisition or purchase of any Equity Securities of any Entity, any tender offer or exchange offer that if consummated would result in any Person beneficially owning more than 50% of any class of Equity Securities of the Parent or any Equity Securities of either Entity or (iii) any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving any Entity, other than the transactions contemplated to be effected with the Purchasers by this Agreement. "ASHS 401(k) Plan" has the meaning ascribed thereto in Section 6.18. "Asset Contribution" has the meaning ascribed thereto in Section 1.2. "Asset Disposition" has the meaning ascribed thereto in Section 1.2. "Business" has the meaning ascribed thereto in the first WHEREAS clause. "Business Day" means any day that is not a Saturday, Sunday or a day on which banking institutions in New York, New York are not required to be open. "Capital Lease" means any obligation to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person as of such date computed in accordance with GAAP. "Cash Equivalents" means any of the following: (a) securities issued, or that are directly and fully guaranteed or insured, by the United States Government or any agency or instrumentality thereof having maturities of not more than 12 months from the date of acquisition, (b) time deposits and certificates of deposit having maturities of not more than 12 months from the date of acquisition of any domestic commercial bank having capital and surplus in excess of $500,000,000, (c) repurchase agreements with a 61 term of not more than seven days for underlying securities of the types described in clauses (a) and (b) above entered into with any bank meeting the qualifications specified in clause (b) above or with securities dealers of recognized national standing, and (d) commercial paper rated (as of the date of acquisition thereof) at least A-1 or the equivalent thereof by Moody's Investors Service, Inc. and at least P-1 or the equivalent thereof by Standard & Poor's Corporation and maturing within six months after the date of its acquisition. "Cath Lab" has the meaning ascribed thereto in Section 3.5. "CERCLA" has the meaning ascribed thereto in Section 3.20. "CHAMPUS" has the meaning ascribed thereto in Section 3.18. "Closing" has the meaning ascribed thereto in Article II. "Closing Date" has the meaning ascribed thereto in Article II. "COBRA" has the meaning ascribed thereto in Section 6.18. "Code" means the Internal Revenue Code of 1986, as amended. "Confidential or Proprietary Information" means all information disclosed (i) by or on behalf of any Entity or any Seller to the Purchasers, Alliance or to employees, consultants or others in a confidential relationship with any of them, or (ii) by or on behalf of the Purchasers or Alliance to any Seller or any Entity, or to employees, consultants or others in a confidential relationship with any of them, in each case other than such information which (A) becomes generally available to the public (other than as a result of a breach of this Agreement), (B) was known to the party to whom such information was disclosed prior to its disclosure to such party, (C) is hereafter available to the party to whom such information was disclosed on a non-confidential basis from a source (other than the party disclosing or on whose behalf such information was disclosed) which was, to the knowledge of the receiving party, entitled to disclose the same or (D) is compelled by Law or Order to be disclosed by the party to whom such information was disclosed. "Confidentiality Agreement" has the meaning ascribed thereto in Section 6.5. "Consolidated Affiliate" has the meaning ascribed thereto in Section 3.8. "Consolidated Group" has the meaning ascribed thereto in Section 3.8. "Contract" means any agreement, contract, or license (i) for purposes of Section 3.7(l) and Section 6.2(k), relating to payments by any Person of a dollar amount in excess of $25,000 and (ii) for purposes of all other Sections of this Agreement, relating to payments by any Person of a dollar amount in excess of $10,000. 62 "Control" means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of securities, by contract or otherwise. "Conveyance Instruments" has the meaning ascribed thereto in Section 1.2. "Covered Taxes" means, all Taxes of CT Sub and/or the Partnership with respect to periods ending on or prior to the Closing Date other than those Taxes that are to be paid by Purchasers and Alliance pursuant to Section 10.14. "CT Shares" has the meaning ascribed thereto in the second WHEREAS clause. "CT Sub" means CuraCare, Inc., a Delaware corporation. "CT Unit" has the meaning ascribed thereto in Section 3.5. "DVI" has the meaning ascribed thereto in Section 6.16. "DVI Revolving Credit Agreement" means the Loan and Security Agreement dated as of January 31, 1996 among MRI Sub and CT Sub, as borrowers, the Parent and Ernest A. Bates, M.D., as guarantors, and DVI, as lender, as amended by Amendment No. 1 dated March 26, 1996, as amended by Amendment No. 2 dated January 31, 1997, as amended by Amendment No. 3 dated April 30, 1997, as amended by Amendment No. 4 dated as of July 31, 1997 and as amended by Amendment No. 5 dated as of December 1, 1997. "EBITDA" means, for any period with respect to any Unit, net income (or net loss) from operations plus, to the extent deducted in calculating such net income (or net loss), the sum of (a) interest expense, (b) income tax expense, (c) depreciation expense and (d) amortization expense, in each case determined and as properly allocated to such Unit in accordance with GAAP. "Employee Benefit Plan" means (i) any qualified or non-qualified "employee pension benefit plan," as defined in Section 3(2) of ERISA, including any "multiemployer plan," as defined in Section 3(37) of ERISA, or "multiple employer plan," as defined in Section 413 of the Code, (ii) any "employee welfare benefit plan," as defined in Section 3(1) of ERISA, or (iii) any severance, employment, incentive, bonus, profit-sharing, stock option, stock purchase or other pension, welfare or fringe plan, program or arrangement, whether or not subject to ERISA and whether or not funded. "Employee Plans" has the meaning ascribed thereto in Section 3.17. "Encumbrances" shall mean any security interest, mortgage, lien, pledge or charge or any option or right of first refusal. "Entities" means CT Sub and the Partnership. 63 "Entities' Financial Statements" has the meaning ascribed thereto in Section 3.5. "Environmental, Health and Safety Laws" means all Laws, Permits, Orders and Contracts and all common Law relating to or addressing pollution or protection of the environment, public health and safety, or employee health and safety, including, but not limited to, all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation. "Equity Interests" means (i) with respect to a corporation, any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including all common stock and preferred stock, or warrants, options or other rights to acquire any of the foregoing and (ii) with respect to a partnership, limited liability company or similar Person, any and all units, interests, rights to purchase, warrants, options or other equivalents of, or other ownership interests in, any such Person. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means, with respect to any Person, any other Person that is a member of a "controlled group of corporations" with, or is under "common control" with, or is a member of the same "affiliated service group" with such Person as defined in Section 414(b), 414(c), 414(m) or 414(o) of the Code. "Exchange Act" has the meaning ascribed thereto in Section 3.22. "Exchange Proceeds" has the meaning ascribed thereto in Section 6.9. "Excluded Assets" has the meaning ascribed thereto in Section 1.2. "Excluded Liabilities" has the meaning ascribed thereto in Section 1.2. "Excluded Representations and Warranties" has the meaning ascribed thereto in Section 6.4. "Expenses" has the meaning ascribed thereto in Section 10.5. "Federal Health Care Program" has the meaning ascribed thereto in Section 3.19. "Funded Indebtedness" means, without duplication, with respect to any Person the aggregate amount (including the current portions thereof) of all (i) indebtedness for money borrowed from others and purchase money indebtedness (other 64 than accounts payable in the ordinary course) of such Person; (ii) indebtedness of the type described in clause (i) above guaranteed, directly or indirectly, in any manner by such Person, through an agreement, contingent or otherwise, to supply funds to, or in any other manner invest in, the relevant debtor, or to purchase indebtedness, or to purchase and pay for property if not delivered or pay for services if not performed, primarily for the purpose of enabling such debtor to make payment of the indebtedness or to assure the owners of the indebtedness against loss (any such arrangement being hereinafter referred to as a "Guaranty"), but excluding endorsements of checks and other instruments in the ordinary course; (iii) indebtedness of the type described in clause (i) above secured by any Encumbrances upon property owned by such Person, even though such Person has not in any manner become liable for the payment of such indebtedness; (iv) interest expense accrued but unpaid, and all prepayment premiums, on or relating to any of such indebtedness; (v) obligations in respect of leases which would be required to be capitalized under GAAP; and (vi) obligations under operating leases for Units. "GAAP" means United States generally accepted accounting principles, consistently applied. "GK Finance" means GK Financing, LLC, a California limited liability company. "Governmental Entity" means any federal, state, local or foreign government and any court, tribunal, administrative agency, commission or other governmental or regulatory authority or agency, domestic, foreign or supranational. "Guaranty" has the meaning ascribed thereto in the definition of Funded Indebtedness. "Hired Employees" has the meaning ascribed thereto in Section 6.18. "Indemnified Persons" means and includes the Seller Indemnified Persons and/or the Purchaser Indemnified Persons, as the case may be. "Indemnifying Persons" means and includes the Seller Indemnifying Persons and/or the Purchaser Indemnifying Persons, as the case may be. "Intellectual Property Rights" means all intellectual property rights, including, without limitation, patents, patent applications, trademarks, trademark applications, tradenames, servicemarks, servicemark applications, trade dress, logos and designs and the goodwill connected with the foregoing, copyrights and copyright applications, know-how, trade secrets, proprietary processes and formulae, confidential information, franchises, licenses, inventions, instructions, marketing materials and all documentation and media constituting, describing or relating to the foregoing, including, without limitation, manuals, memoranda and records. "Latest Balance Sheet" has the meaning ascribed thereto in Section 3.5. 65 "Latest Balance Sheet Date" has the meaning ascribed thereto in Section 3.5. "Law" means any applicable foreign, federal, state or local law, statute, treaty, rule, directive, regulation, ordinance and similar provision having the force or effect of law or an Order of any Governmental Entity (including all Environmental, Health and Safety Laws). "Leased Property" has the meaning ascribed thereto in Section 3.10. "Liability" means any liability whether fixed or unfixed or liquidated or unliquidated. "Licensed Requisite Rights" has the meaning ascribed thereto in Section 3.11. "Losses" means any and all losses, claims, damages, Liabilities, expenses (including reasonable attorneys' and accountants' and other professionals' fees), assessments and Taxes, (including interest or penalties thereon) that are the subject of indemnification under Article VIII, in each case, (i) net of any cash insurance benefits actually received and (ii) net of any Tax benefits realized in respect of the Losses for which the indemnification payments are being made. For purposes of this definition, Tax benefits realized shall mean the sum of all reductions in federal, state, local and foreign Taxes (including estimated Taxes) payable by the Indemnified Person solely as a result of the Losses for which the indemnification payments are being made. All calculations shall be made using reasonable assumptions agreed upon by the Purchasers, Alliance and the Sellers including the timing of the utilization of any such Tax benefits, and any such Tax benefits shall be assumed to be utilized in a given Tax year only after all other Tax benefits available in such year have first been taken into account. If a Tax benefit that has been taken into account for purposes of calculating Losses hereunder is wholly or partially disallowed by a taxing authority, the Indemnifying Person shall pay the Indemnified Person the amount that would have been paid originally with respect to such Losses had such disallowed Tax benefit not been taken into account. "M Sub" has the meaning ascribed thereto in the preamble. "M Sub Partnership Interests" means the 50% general partnership interests in the Partnership held or owned by M Sub. "Material Adverse Effect" has the meaning ascribed thereto in Section 3.7. "MRI Unit" has the meaning ascribed thereto in Section 3.5. "Non-Compete Period" means the period ending on the fifth anniversary of the Closing Date. 66 "Orders" means judgments, writs, decrees, compliance agreements, injunctions or judicial or administrative orders and determinations of any Governmental Entity or arbitrator. "Organizational Documents" means (i) any certificate or articles filed with any state which filing forms a Person and (ii) all agreements, documents or instruments governing the internal affairs of a Person, including such Person's by-laws, codes of regulations, partnership agreements, limited liability company agreements, joint venture agreements and operating agreements. "Owned Requisite Rights" has the meaning ascribed thereto in Section 3.11. "Parent" has the meaning ascribed thereto in the preamble. "Parent Common Stock" has the meaning ascribed thereto in Section 3.24. "Parent Partnership Interests" means the 50% general partnership interest in the Partnership held or owned by the Parent. "Parent Stockholder Approval" has the meaning ascribed thereto in Section 3.24. "Partnership" means American Shared-CuraCare, a California general partnership. "Partnership Agreement" means the Joint Venture Agreement, between M Sub and the Parent, dated March 7, 1985, as modified by the Modification to Joint Venture Agreement dated April 5, 1985, the Modification to Joint Venture Agreement dated May 20, 1985, the First Supplement to the Joint Venture Agreement dated as of October 14, 1987, the Second Supplement to the Joint Venture Agreement dated as of May 15, 1995, and as further amended, modified or supplemented from time to time including, without limitation, as amended and restated pursuant to Section 7.2 hereunder. "Partnership Interests" means the M Sub Partnership Interests and the Parent Partnership Interests. "Permits" means all permits, certificates of need, licenses, authorizations, registrations, franchises, approvals, certificates, variances and similar rights obtained, or required to be obtained, from Governmental Entities. "Permitted Encumbrances" means with respect to any Person, (i) Encumbrances for Taxes not yet due and payable or being contested in good faith by appropriate proceedings and for which there are adequate reserves on the books and records of such Person, (ii) workers or unemployment compensation liens arising in the ordinary course of business, (iii) statutory lessor liens arising under leases, and (iv) 67 mechanic's, materialman's, supplier's, vendor's or similar liens arising in the ordinary course of business securing amounts that are not delinquent. "Person" shall be construed broadly and shall include an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Entity (or any department, agency or political subdivision thereof). "Post Signing Returns" has the meaning ascribed thereto in Section 6.11. "Proceedings" means any action, suit, investigation or proceedings before any Governmental Entity or arbitrator other than the review by Internal Revenue Service of an application for a favorable determination letter regarding any Employee Plan. "Proxy Statement" has the meaning ascribed thereto in Section 6.12. "Purchase Price" has the meaning ascribed thereto in Section 1.3. "Purchased Parent Assets" has the meaning ascribed thereto in Section 1.2. "Purchaser A" has the meaning ascribed thereto in the preamble. "Purchaser B" has the meaning ascribed thereto in the preamble. "Purchaser Indemnified Persons" means and includes the Purchasers, their Affiliates (including, without limitation, Alliance), their successors and assigns, and the respective officers, directors, employees and agents of each of the foregoing. "Purchaser Indemnifying Persons" means Alliance and each Purchaser (jointly and severally) and their successors and assigns. "Purchaser Losses" means any and all Losses sustained, suffered or incurred by any Purchaser Indemnified Person arising from or in connection with any such matter which is the subject of indemnification under Article VIII. "Purchasers" has the meaning ascribed thereto in the preamble. "Related Documents" has the meaning ascribed thereto in Section 7.2 "Requisite Rights" has the meaning ascribed thereto in Section 3.11. "Respiratory System" has the meaning ascribed thereto in Section 3.5. "Restricted Territory" means any portion of the United States in which the Business has operated during the three years preceding the Closing Date. "SEC" means the United States Securities and Exchange Commission and any successor agency. 68 "SEC Documents" has the meaning ascribed thereto in Section 3.5. "Securities Act" means the Securities Act of 1933, as amended. "Seller Indemnified Persons" means and includes the Sellers and their respective successors and assigns. "Seller Indemnifying Persons" means and includes the Sellers (jointly and severally) and their respective successors and assigns. "Seller Losses" shall mean any and all Losses sustained, suffered or incurred by any Seller Indemnified Person arising from or in connection with any matter which is the subject of indemnification under Article VIII. "Sellers" means the Parent and M Sub. "Shares" means the CT Shares and the Partnership Interests. "SPECT UNIT" has the meaning ascribed thereto in Section 3.5. "SSA" has the meaning ascribed thereto in Section 3.18. "State Health Care Program" has the meaning ascribed thereto in Section 3.19. "Stockholders Agreement" has the meaning ascribed thereto in Section 7.2. "Stockholders Meeting" has the meaning ascribed thereto in Section 6.12. "Subsidiary" means any Person with respect to which a specified Person (or a Subsidiary thereof) has the power to vote or direct the voting of sufficient securities to elect a majority of the directors or other governing body. "Superfund" has the meaning ascribed thereto in Section 3.20. "Superior Proposal" has the meaning ascribed thereto in Section 9.1. "Survival Date" has the meaning ascribed thereto in Section 8.4. "Tax Claim" has the meaning ascribed thereto in Section 6.8. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Taxes" means, with respect to any Person, (i) all income taxes (including any tax on or based upon net income, gross income, income as specially defined, earnings, profits or selected items of income, earnings or profits) and all gross receipts, sales, use, 69 ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, alternative or add-on minimum taxes, customs duties and other taxes, fees, assessments or charges of any kind whatsoever, together with all interest and penalties, additions to tax and other additional amounts imposed by any taxing authority (domestic or foreign) on such Person (if any) and (ii) any liability for the payment of any amount of the type described in clause (i) above as a result of (A) being a "transferee" (within the meaning of Section 6901 of the Code or any other applicable Law) of another Person, (B) being a member of an affiliated, combined or consolidated group or (C) a contractual arrangement or otherwise. "Third Party Claim" has the meaning ascribed thereto in Section 8.3. "Third Party Proposal" means a bona fide proposal from a third party, which proposal did not result from a breach of Section 6.4(a) and which third party the Board of Directors of the Parent determines in good faith has the capacity and is reasonably likely to consummate a Superior Proposal. "338(h)(10) Election" has the meaning ascribed thereto in Section 6.8. "Transfer Taxes" has the meaning ascribed thereto in Section 8.1. "Ultrasound Machine" has the meaning ascribed thereto in Section 3.5. "Units" has the meaning ascribed thereto in Section 3.5. "Years Included" has the meaning ascribed thereto in Section 3.8. 70 ADDENDUM The following is a list of and description of the contents of Schedules to the foregoing Securities Purchase Agreement that have been omitted from such Agreement as filed with the Annual Report on Form 10-K; such Schedules will be provided to the Commission upon request:
Schedule Number Title and Description - --------------- --------------------- 1.2(a) Purchased Parent Assets: assets used in the business current held by the Parent and that are to be assigned or transfered to the Entities prior to the Closing. 1.2(b) Excluded Assets: assets held by either of the Entities that are to be assigned or transfered by the Entities to the Parent prior to the Closing. 1.2(c) Excluded Liabilities: liabilities of the Entities that are not being assumed by the Purchasers and that must be assumed by the Parent prior to the Closing. 3.2(c) Jurisdictions of Sellers and Entities: list of each state (other than the state of incorporation) in which the Sellers and Entities are qualified to do business and are in good standing. 3.2(e)(i) Businesses: Description of businesses engaged in during the last five years by the Sellers and the Entities. 3.2(e)(ii) Trade Names and Assumed Names: trade and assumed names used by the Sellers and the Entities. 3.2(f) Authority: listing of agreements or documents that would be in default as a result of the agreement, absent waiver or consent. 3.2(g) Consents: Consents of third parties that must be obtained for the transactions contemplated by the Agreement. 3.3(b) Partnership Interests: Listing of percentage of interests in the Partnership owned by each Seller. 3.3(d) Contracts re Equity Interests: Listing of any outstanding agreements related to equity interests in the Entities.
71 3.5(a) Parent and Subsidiary Liabilities Incurred Since September 30, 1997: Description of Liabilities incurred by Parent and its Subsidiaries since September 30, 1997. 3.5(b) Pro Forma Financial Statements: Financial Statements of the Entities pro forma for the transactions provided for in Section 1.2 of the Agreement. 3.5(d) Funded Indebtedness: Funded Indebtedness outstanding at January 31, 1998. 3.5(e) Specifications of Units: Information related to each Unit used in the Business, including specifications, net book value, date acquired. 3.5(f) Upgrades and Commitments for Upgrades of Units: Description of upgrades completed within the last year and upgrades that have been committed to be completed. 3.5(g) Accounts Payable: Accounts payable outstanding at January 31, 1998. 3.5(h) Principal Payments or Prepayments: Listing of principal and interest payments made and capital expenditures during the year ended December 31, 1997 and one month ended January 31, 1998; revenues and EBITDA for each Unit for the year ended December 31, 1997 and the one month ended January 31, 1998. 3.7 Changes in Operations: Description of changes in operations of the business since December 31, 1997. 3.8(a) Tax Returns: Description of any tax returns that have not been filed on a timely basis. 3.8(c) Audits: Description of any outstanding audits related to taxes. 3.8(d) States Where Filed Income Tax Returns: Listing of states in which income tax returns were required to be filed in each of the three years ended December 31, 1997. 3.9 Compliance with Leases; Encumbrances on Property: Schedule showing any existing defaults or items that, with passage of time or giving of notice, would constitute a default under leases and a listing of liens (UCC financing statements) on record against the Sellers and the Entities. 3.10(a) Leased Real Property: Listing of all real property leased by the Sellers and Entities and a description of the basic terms of the leases.
- 2 - 72 3.11(a) Owned or Leased Intellectual Property: Listing of intellectual property owned or leased by the Sellers and Entities. 3.11(b) Applications re Intellectual Property: Listing of applications to register trade marks or service marks that are pending. 3.12 Contracts: Listing of Contracts related to the Business. 3.12 Defaults: Defaults under Contracts existing at the signing date or items that, with the passage of time or giving of notice could constitute default. 3.13(a) Pending and Threatened Civil and Criminal Proceedings: Listing and description of pending and threatened civil and criminal litigation, investigations, administrative proceedings and similar matters. 3.13(b) Concluded Material Proceedings: Description of concluded matters in which the Entities paid more than $50,000 in settlement or damages during the last three years. 3.14 Permits: Listing of permits issued to Sellers or the Entities used in the Business. 3.15(a) Insurance: Listing of insurance policies maintained by the Sellers or the Entities in connection with the Business and a summary of pending claims. 3.15(b) Premiums: Listing of any premiums for insurance policies that have not been paid or are subject to adjustment or retrospective premium. 3.16(a) Officers, Directors and Employees Earning Greater than $75,000 per year: Listing of officers and directors of the Entitites and employees who earned more than $75,000 during 1997. 3.16(b) Labor Matters: Listing of any pending labor matters. 3.17(a) Employee Benefit Plans: Listing of employee benefit plans maintained by the Sellers or the Entities. 3.17(b) Administration of Employee Benefit Plans: Listing of any pending proceedings or violations in the administration of the employee benefit plans. 3.20(a) Environmental Matters: Listing of any matters in which the Entitites are not in compliance with environmental laws.
- 3 - 73 3.20(b) Environmental Claims: Listing of any pending or threatened claims by governmental entities concerning a violation of an environmental law. 3.20(c) Administrative Proceedings re Environmental: Listing of any pending administrative or judicial proceeding or investigation regarding remediation under environmental, health or safety laws. 3.20(d) Notices of Violations of Environmental: Listing of notices or violations or requirements to remediate or take corrective action related to environmental, health and safety laws during the last five years by the Entities. 3.20(e) Changes in Environmental Laws: Listing of changes in environmental laws of which the Sellers have knowledge. 3.22 Related Transactions: Summary of transactions with affiliates. 3.23 Bank Accounts and Powers of Attorney: Listing of bank accounts maintained by the Sellers or the Entities and powers of attorney granted by Entities or Sellers. 3.26 Physician Relationships: Description of any "financial relationships" of the Entities with "referring physicians" under 42 U.S.C. Section 1395nn.. 3.27 Hospital Relationships: Description of any relationships of the Entities with hospitals in connection with rental payments based on fees or revenues of any segment of the business of the Entities. 4.1 Organization of Purchasers: Jurisdictions in which Purchasers are qualified to do business as a foreign person. 4.4 Consents: Listing of consents that must be obtained or actions that must be taken by Purchasers to avoid conflicts with agreements or documents to which it is a party or subject.
- 4 - EX-10.13B 3 AMENDMENT TO GK FINANCING, LLC OPERATING AGREEMENT 1 Exhibit 10.13b THIRD AMENDMENT AGREEMENT This Amendment Agreement is made and entered as of October 16, 1996, by and between AMERICAN SHARED RADIOSURGERY SERVICES, INC. ("ASRS"), and GKV INVESTMENTS, INC. ("GKV"). WHEREAS, ASRS AND GKV are parties to that certain Operating Agreement for GK Financing, LLC dated as of October 17, 1995, as amended (the "Operating Agreement"); WHEREAS, ASRS AND GKV desire to amend the Operating Agreement in certain respects; NOW THEREFORE, in consideration of the mutual covenants contained herein, ASRS and GKV agree as follows: 1. Defined Terms. All capitalized terms used herein which are defined in the Operating Agreement shall have the meaning set forth in the Operating Agreement. 2. Amendment. Paragraph 9.1 of the Operating Agreement is hereby amended by deleting subparagraph (vii) (which relates to a failure by the Company to enter into six (6) alternative financing agreements during the two (2) year period commencing with the effective date of the Operating Agreement) therefrom in its entirety. 3. Full Force and Effect. Except as explicitly amended by this Third Amendment Agreement, the provisions of the Operating Agreement shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the date first above-written. GKV INVESTMENTS, INC. By: /s/ Richard Grome Title: President AMERICAN SHARED RADIOSURGERY SERVICES, INC. By: /s/ Ernest A. Bates Title: President EX-10.16 4 AMENDMENT #3 TO LOAN AND SECURITY AGREEMENT 1 Exhibit 10.16 AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT ("AGREEMENT") DATED JANUARY 31, 1996 AMONG AMERICAN SHARED-CURACARE AND CURACARE, INC. (BORROWER), AMERICAN SHARED HOSPITAL SERVICES ("GUARANTOR"), ERNEST A. BATES, M.D. ("INDIVIDUAL GUARANTOR"), AND DVI BUSINESS CREDIT RECEIVABLES CORP. ("LENDER") FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Agreement as follows: 1) The Agreement shall be renewed for two (2) years effective May 31, 1997. Upon execution hereof, Borrower shall pay Lender a renewal fee equal to 1% of the Commitment Amount. 2) Section 2.8 "Interest on the Loans" shall be amended and replaced in its entirety with the following: "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 three and three quarter percent (3.75%). 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 to the Base Rate plus three and three quarter percent (3.75%). 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. Any provision in Amendment No. 3 ("Amendment") hereof that may be contrary to any provision of the Agreement shall prevail and override the Agreement. Except as expressly set forth herein, all other provisions of the Agreement shall remain in full force and effect. Both parties warrant to each other that this Amendment has been authorized and duly executed and is binding on both parties hereto as of 30th day of April, 1997. LENDER: DVI BUSINESS CREDIT RECEIVABLES CORP. By: /s/ Cynthia J. Cohn --------------------- Name: Cynthia J. Cohn Title: Executive Vice President BORROWER: BORROWER: AMERICAN SHARED-CURACARE CURACARE, INC. A CALIFORNIA PARTNERSHIP By: /s/ Ernest A. Bates By: /s/ Ernest A. Bates -------------------------- -------------------------- Name: Ernest A. Bates, M.D. Name: Ernest A. Bates, M.D. Title: Chairman & CEO, American Shared Title: President Hospital Services, general partner The undersigned acknowledges that DVI has no obligation to provide it with notice of, or to obtain its consent to, the terms of this Amendment to Loan and Security Agreement. The undersigned nevertheless acknowledges and agrees to the terms and conditions of this Amendment and acknowledges that its Guaranty remains fully valid, binding, and enforceable against it in accordance with its terms. GUARANTOR: GUARANTOR: AMERICAN SHARED HOSPITAL SERVICES ERNEST A. BATES, M.D., INDIVIDUAL By: /s/ Ernest A. Bates By: /s/ Ernest A. Bates -------------------------- -------------------------- Print Name: Ernest A. Bates, M.D. Print Name: Ernest A. Bates, M.D., an Individual Title: Chairman & CEO Date: April 23, 1997 Date: April 23, 1997 EX-10.17 5 AMENDMENT #4 TO LOAN AND SECURITY AGREEMENT 1 Exhibit 10.17 AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT ("AGREEMENT") DATED JANUARY 31, 1996 AMONG AMERICAN SHARED-CURACARE AND CURACARE, INC. (BORROWER), AMERICAN SHARED HOSPITAL SERVICES ("GUARANTOR"), ERNEST A. BATES, M.D. ("INDIVIDUAL GUARANTOR"), AND DVI BUSINESS CREDIT RECEIVABLES CORP. ("LENDER") FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Agreement as follows: 1) Section 2.1 "The Loan" first sentence shall be amended to read as follows: 2) 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 the amount not to exceed the lesser of (i) Five Million and 00/100 Dollars ($5,000,000.00) (the "Commitment Amount"), and (ii) the Borrowing Base, which shall be evidenced by a Note. 3) Upon execution hereof, Borrower shall pay Lender an Origination Fee of one percent (1%) of the $500,000.00 increased Commitment Amount. Any provision in Amendment No. 4 ("Amendment") hereof that may be contrary to any provision of the Agreement shall prevail and override the Agreement. Except as expressly set forth herein, all other provisions of the Agreement shall remain in full force and effect. Both parties warrant to each other that this Amendment has been authorized and duly executed and is binding on both parties hereto as of ___ day of _______ 1997. LENDER: DVI BUSINESS CREDIT RECEIVABLES CORP. By: /s/ Cynthia J. Cohn ---------------------- Name: Cynthia J. Cohn Title: Executive Vice President BORROWER: BORROWER: AMERICAN SHARED-CURACARE CURACARE, INC. A CALIFORNIA PARTNERSHIP By: /s/ Ernest A. Bates By: /s/ Ernest A. Bates ---------------------- ------------------------- Name: Ernest A. Bates Name: Ernest A. Bates Title: Chairman & CEO Title: Chairman & CEO The undersigned acknowledges that DVI has no obligation to provide it with notice of, or to obtain its consent to, the terms of this Amendment to Loan and Security Agreement. The undersigned nevertheless acknowledges and agrees to the terms and conditions of this Amendment and acknowledges that its Guaranty remains fully valid, binding, and enforceable against it in accordance with its terms. GUARANTOR: GUARANTOR: AMERICAN SHARED HOSPITAL SERVICES ERNEST A. BATES, M.D., INDIVIDUAL By: /s/ Ernest A. Bates By: /s/ Ernest A. Bates ---------------------- ---------------------------- Print Name: Ernest A. Bates Print Name: Ernest A. Bates Title: Chairman & CEO Date: 7/31/97 Date: 7/31/97 EX-10.18 6 AMENDMENT #5 TO LOAN AND SECURITY AGREEMENT 1 Exhibit 10.18 AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT ("AGREEMENT") DATED JANUARY 31, 1996 AMONG AMERICAN SHARED-CURACARE AND CURACARE, INC. (BORROWER), AMERICAN SHARED HOSPITAL SERVICES ("GUARANTOR"), ERNEST A. BATES, M.D. ("INDIVIDUAL GUARANTOR"), AND DVI BUSINESS CREDIT RECEIVABLES CORP. ("LENDER") FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Agreement as follows: 1) Subject 2.1 "The Loan" first sentence shall be amended to read as follows: Subject to the terms and conditions and relying on the representations and warranties set forth herein, Lender agrees to advance to Borrrower, 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) Five Million Five Hundred Thousand Dollars ($5,500,000.00) (the "Commitment Amount"), and (ii) the Borrowing Base, which shall be evidenced by a Note. 2) Upon execution of this Amendment, Borrower shall pay Lender an Origination Fee of one percent (1%) on the increased Commitment Amount of $500,000.00. Increases to the Commitment Amount during the term will be charged on the incremental increase at the same origination percentage. All other fees will remain the same in accordance with the Agreement. Any provision in Amendment No. 5 ("Amendment") hereof that may be contrary to any provision of the Agreement shall prevail and override the Agreement. Except as expressly set forth herein, all other provisions of the Agreement shall remain in full force and effect. Both parties warrant to each other that this Amendment has been authorized and duly executed and is binding on both parties hereto as of the 1st day of December, 1997. LENDER: DVI BUSINESS CREDIT RECEIVABLES CORP. By: /s/ Cynthia J. Cohn --------------------- Name: Cynthia J. Cohn Title: Executive Vice President BORROWER: BORROWER: AMERICAN SHARED-CURACARE CURACARE, INC. By: /s/ Ernest A. Bates By: /s/ Ernest A. Bates ------------------------ -------------------------- Name: Ernest A. Bates, M.D. Name: Ernest A. Bates, M.D. Title: Chief Executive Officer Title: Chief Executive Officer The undersigned acknowledges that Lender has no obligation to provide it with notice of, or to obtain its consent to, the terms of this Amendment to Loan and Security Agreement. The undersigned nevertheless acknowledges and agrees to the terms and conditions of this Amendment and acknowledges that its Guaranty remains fully valid, binding, and enforceable against it in accordance with its terms. GUARANTOR: GUARANTOR: AMERICAN SHARED HOSPITAL SERVICES ERNEST A. BATES, M.D., INDIVIDUAL By: /s/ Ernest A. Bates By: /s/ Ernest A. Bates ------------------------ -------------------------- Name: Ernest A. Bates, M.D. Name: Ernest A. Bates, M.D. Title: Chief Executive Officer Date: November 26, 1997 Date: November 26, 1997 EX-21 7 SUBSIDIARIES OF AMERICAN SHARED HOSPITAL SERVICES 1 EXHIBIT 21.0 The subsidiaries of American Shared Hospital Services are: CuraCare, Inc. a Delaware corporation MMRI, Inc. a California corporation European Shared Medical Services Limited an English registered company American Shared Radiosurgery Services a California corporation African American Church Health and Economic Services, Inc. a California corporation ACHES Insurance Services, Inc. a California corporation GK Financing, LLC a California limited liability company EX-23.1 8 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement, as amended, (Forms S-8, No. 2-90646; No. 33-21509; No. 33-48980) pertaining to the 1984 Stock Option and Employment Agreement of American Shared Hospital Services; the Registration Statement (Form S-8, No. 33-45999) pertaining to the American Shared Hospital Services 1991 Employee Stock Bonus Plan; the Registration Statement (Form S-8, No. 333-08009) pertaining to the 1995 Stock Option Plan of American Shared Hospital Services; the Registration Statement, as amended, (Form S-3, No. 333-12879) pertaining to the registration of 2,679,047 of Common Shares of American Shared Hospital Services; and the Registration Statement, as amended, (Form S-3, No. 33-63721) pertaining to the registration of 1,290,853 or Common Shares of American Shared Hospital Services and 441,147 Warrants to purchase Common Shares of American Shared Hospital Services and in the related Prospectuses of our report dated February 27, 1998, except for Note 14, as to which the date is March 12, 1998, with respect to the consolidated financial statements and schedule of American Shared Hospital Services included in this Annual Report (Form 10-K) for the year ended December 31, 1997. March 30, 1998 Walnut Creek, California EX-27 9 FINANCIAL DATA SCHEDULE - YEAR ENDED 12/31/97
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 668 0 7,960 1,320 0 8,506 42,085 21,983 30,209 16,545 21,569 0 0 11,089 3,344 30,209 37,172 37,172 0 27,044 5,901 0 3,671 1,532 10 1,522 0 0 0 1,522 .32 .24
EX-27.A 10 RESTATED FINANCIAL DATA SCHEDULE - YEAR 12/31/95
5 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 945 0 7,564 1,313 67 8,646 33,686 14,015 31,345 15,439 26,125 0 0 10,635 930 31,345 34,077 34,077 0 33,275 8,423 0 5,310 (12,456) 3 (12,459) 0 19,803 0 7,344 1.75 1.75
EX-27.B 11 RESTATED FINANCIAL DATA SCHEDULE - QUARTER 3/31/96
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1,309 0 7,404 1,272 45 8,169 36,992 15,323 32,680 16,982 25,907 0 0 10,636 3,344 32,680 8,939 8,939 0 7,189 1,223 0 1,076 (486) (6) (480) 0 0 0 (480) (.11) (.11)
EX-27.C 12 RESTATED FINANCIAL DATA SCHEDULE - QUARTER 6/30/96
5 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 1,154 0 7,453 1,135 45 8,322 38,804 16,966 32,997 20,267 22,908 0 0 10,636 3,344 32,997 18,141 18,141 0 14,160 2,486 0 2,072 (455) (6) (449) 0 0 0 (449) (.10) (.10)
EX-27.D 13 RESTATED FINANCIAL DATA SCHEDULE - QUARTER 9/30/96
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1,196 0 7,511 1,079 45 8,645 40,816 17,518 34,723 20,526 23,885 0 0 11,089 3,344 34,723 27,725 27,725 0 21,330 3,848 0 3,180 (417) (5) (412) 0 0 0 (412) (.09) (.09)
EX-27.E 14 RESTATED FINANCIAL DATA SCHEDULE - YEAR 12/31/96
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 586 0 7,463 1,112 45 7,832 41,954 18,523 32,969 18,720 23,935 0 0 11,089 3,344 32,969 36,989 36,989 0 28,071 5,309 0 4,199 (360) (7) (353) 0 0 0 (353) (.08) (.08)
EX-27.F 15 RESTATED FINANCIAL DATA SCHEDULE - QUARTER 3/31/97
5 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 748 0 7,652 1,153 0 8,037 41,917 19,923 31,551 19,442 21,873 0 0 11,089 3,344 31,651 9,096 9,096 0 6,789 1,430 0 1,006 39 0 39 0 0 0 39 .01 .01
EX-27.G 16 RESTATED FINANCIAL DATA SCHEDULE - QUARTER 6/30/97
5 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 577 0 7,577 1,311 0 7,569 41,629 21,047 29,743 14,974 23,914 0 0 11,089 3,344 29,743 18,341 18,341 0 13,515 2,950 0 1,926 571 0 571 0 0 0 571 .12 .09
EX-27.H 17 RESTATED FINANCIAL DATA SCHEDULE - QUARTER 9/30/97
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 730 0 7,491 1,273 0 7,949 42,102 21,049 30,585 16,012 23,281 0 0 11,089 3,344 30,585 27,702 27,702 0 20,290 4,428 0 2,797 1,027 10 1,017 0 0 0 1,017 .21 .16
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