-----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, OCkJ3T5ZcbKpURmDEMHLvGxn14Q1ZThKquzaVNuy5KK5065yf/qv6xHwccdfehPt Qj3DCleitzPRx4Ta6HN/uQ== 0000950149-99-000585.txt : 19990402 0000950149-99-000585.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950149-99-000585 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99580145 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 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 1-8789 ------------------------ AMERICAN SHARED HOSPITAL SERVICES (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-2918118 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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. [ ] As of March 15, 1999, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $3,286,054. Number of shares of common stock of the registrant outstanding as of March 15, 1999: 3,972,372. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 1999 Annual Meeting of its shareholders are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL American Shared Hospital Services ("ASHS" and, together with its subsidiaries, the "Company") currently provides stereotactic radiosurgery services to five medical centers in three states. The Company provides these services through its 81% indirect interest in GK Financing, LLC, a California limited liability company ("GKF"). The remaining 19% of GKF is owned by Elekta Holdings U.S., Inc., a wholly owned subsidiary of Elekta AG, a Swedish company ("Elekta"). Elekta is the manufacturer of the Leksell Gamma Knife (the "Gamma Knife"). GKF is a non-exclusive provider of alternative financing services for Elekta. At present, the Company is developing a business plan for "The Operating Room for the 21st Century" (sm) concept and owns an insurance services business. Neither The Operating Room for the 21st Century nor the Company's insurance services business are expected to generate significant revenues within the next twelve months. During November 1998, the Company sold its diagnostic imaging business (the "Sale") to affiliates of Alliance Imaging, Inc. (the "Purchaser") for $13,552,000 in cash and the assumption by the Purchaser of substantially all of the liabilities of the diagnostic imaging business, including approximately $27.1 million in debt and other liabilities. Prior to this sale, the Company provided Magnetic Resonance Imaging ("MRI"), Computed Axial Tomography ("CT"), Ultrasound, Nuclear Medicine and Cardiac Catheterization Laboratory services to approximately 190 customers in 22 states. The diagnostic imaging business provided approximately 88%, 94% and 95% of the Company's revenues for the years ended December 31, 1998, 1997 and 1996, respectively. The Company was incorporated in the state of California in 1983 and its predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital Services), a California limited partnership, was formed in June 1980. GAMMA KNIFE OPERATIONS Gamma Knife stereotactic radiosurgery, a non-invasive procedure, is an alternative to conventional brain surgery or can be an adjunct to conventional brain surgery. Compared to conventional surgery, Gamma Knife surgery usually involves shorter patient hospitalization, lower risk of complications and can be provided at a lower cost. Typically, Gamma Knife patients resume their normal activities one or two days after treatment. The Gamma Knife treats the patient with 201 single doses of gamma rays that are focused with great precision on small, well circumscribed and critically located structures in the brain. The Gamma Knife delivers the concentrated dose of gamma rays from 201 sources of Cobalt 60 housed in the Gamma Knife. The 201 Cobalt 60 sources converge at the target area and deliver a dose that is high enough to destroy the diseased tissue without damaging surrounding healthy tissue. The Gamma Knife treats selected benign brain tumors (i.e. meningiomas, pituitary and acoustic neuromas, craniopharyngiomas), malignant tumors (i.e. gliomas, nasopharyngeal carcinomas, ocular meningiomas and solitary and multiple metastatic tumors), arteriovenous malformations and trigeminal neuralgia. Research is being conducted in the treatment of Parkinson's disease, epilepsy, and other functional disorders. There are currently 47 Gamma Knife units operating at 46 sites in the United States and 119 units worldwide. As of December 31, 1998, approximately 100,000 procedures had been performed worldwide. An estimated percentage breakdown of these 100,000 procedures by indications treated are as follows: Benign (38%) and malignant (36%) tumors, vascular disorders (22%) and functional disorders (4%). The Company currently has five (5) Gamma Knife units at five (5) sites in the United States. The Company's first Gamma Knife commenced operation in September 1991. The Company's Gamma Knife units have performed approximately 2,060 procedures through December 31, 1998. 1 3 Gamma Knife revenues for the Company during the five (5) years ended December 31, 1998, and the percentage of total revenues of the Company represented by the Gamma Knife for each of the last five years are set forth below:
TOTAL GAMMA KNIFE GAMMA KNIFE/ YEAR ENDED DECEMBER 31, REVENUES (IN THOUSANDS) TOTAL REVENUES ----------------------- ----------------------- -------------- 1998...................... $4,156 11.8% 1997...................... $2,384 6.4% 1996...................... $2,030 5.5% 1995...................... $1,325 3.9% 1994...................... $1,411 3.7%
The Company conducts its Gamma Knife business through its 81% indirect interest in GKF. The remaining 19% interest is indirectly owned by Elekta. GKF, a limited liability company, was formed in October 1995. The Company contributed two customer contracts for its 81% membership interest and Elekta contributed cash of approximately $700,000 for its 19% membership interest in GKF. At GKF's inception, Elekta additionally guaranteed a loan in the amount of $1,300,000 by a third party lender to GKF for deposits on four (4) Gamma Knife units and also made available a loan in the amount of $1,320,000. The loan for $1,300,000 has been refinanced by another third party lender without Elekta's guarantee. GKF never drew down funds on the $1,320,000 loan and the loan commitment has expired. GKF is managed by its policy committee. The policy committee is composed of one representative from the Company, Ernest A. Bates, M.D., and one representative from Elekta. The policy committee sets the operating policy for GKF. The policy committee may act only with the unanimous approval of all of its members. The policy committee selects a manger to handle GKF's daily operations. Craig K. Tagawa, Chief Executive Officer of GKF, serves as the GKF's manager. GKF profits and/or losses and any cash distributions are allocated based on membership interests. GKF is required to have a cash reserve of at least $50,000 prior to cash distributions to its members. As of December 31, 1998, $1,176,000 was available for distribution to members. From inception to December 31, 1998, GKF had distributed in the aggregate $100,000 to the Company. RISKS OF GAMMA KNIFE BUSINESS There are significant risks involved in the Company's Gamma Knife business, including the following: - Each Gamma Knife unit requires a substantial capital investment. The Company's cost for a Gamma Knife is approximately $2,900,000. Due to the structure of its contracts with medical centers, there can be no assurance that this cost will be fully recovered or that the Company will earn a satisfactory return on its investment. - There is a limited market for the Gamma Knife. Due to the substantial costs of acquiring a Gamma Knife, the Company must identify medical centers that possess large enough neurosurgery and oncology departments capable of performing a large number of Gamma Knife procedures. The Company has identified approximately 200 such medical centers in the United States as potential future sites. There were 47 operating Gamma Knife units in the United States at the end of February 1999, five (5) of which are Company-supplied units. There can be no assurance that the Company will be successful in placing units at a significant number of sites in the future. - There are currently four companies (in addition to the Company) that supply the Gamma Knife to potential customers. Two of the four companies have purchased a Gamma Knife within the last twelve months. The Company does not currently have an exclusive relationship with Elekta and has lost sales in the past to customers that choose to purchase a Gamma Knife directly from Elekta. In addition, the Company may continue to lose sales in the future to such customers and may also lose sales to competitors of the Company. There can be no assurance that the Company will be able to successfully compete against others to place units in the future. 2 4 - There are several methods of radiosurgery that compete against the Gamma Knife, including the modified linear accelerator and microsurgery. Currently, there are approximately 200 medical centers in the United States with modified linear accelerators. Each of the medical centers targeted by the Company could decide to acquire a modified linear accelerator instead of a Gamma Knife. In addition, surgeons who are primarily responsible for referring patients for Gamma Knife surgery may not be willing to make such referrals for various reasons. There can be no assurance that the Company will be able to secure a sufficient number of sites or Gamma Knife procedures to attain profitability and growth. - The amount reimbursed to medical centers for each Gamma Knife treatment may decline in the future. The reimbursement decrease may come from Federally mandated programs (i.e. Medicare and Medicaid) and other third party payor groups. A significant amount of the Company's existing contracts are reimbursed by the medical center to the Company on a fee-for-service basis. The primary risk to the Company under this type of contract is that actual volumes of procedures were less than projected. In July 1998, the Company began a contract on a shared revenue basis. Revenues under this contract and any future shared revenue basis contracts will be impacted by any reimbursement rate change. A significant number of future contracts for Gamma Knife services may be based on a shared revenue instead of a fee-for-service basis. There can be no assurance that future changes in healthcare regulations and reimbursement rates will not adversely affect the Company's Gamma Knife revenues. - As with other highly sophisticated medical equipment, there is constant change and innovation in the market. New and improved medical equipment can be introduced that could make the Gamma Knife technology obsolete and that would make its operation uneconomic. It is expected that Elekta will introduce an upgraded Gamma Knife in the near future. This upgrade is anticipated to primarily automate the patient positioning process and therefore involve less health care provider intervention. Three (3) of the Company's existing Gamma Knife units are upgradeable. The cost for the new unit or the upgrade package is not known at this time. 3 5 CUSTOMERS The Company's primary business is the outsourcing of Gamma Knife stereotactic radiosurgery services. The market for these services primarily consists of major urban medical centers. The Gamma Knife business is capital intensive. Purchasing and installing each Gamma Knife costs between $3,200,000 and $4,000,000. Typically, the Company's costs for acquisition are approximately $2,900,000, with the medical center paying for site and installation costs.
ORIGINAL CUSTOMER TERM OF CONTRACT BASIS OF PAYMENT -------- ---------------- ---------------- EXISTING SITES UCSF-Stanford Health Care 10 years fee per use San Francisco, California USC University Hospital 5 years fee per use Los Angeles, California Hoag Memorial Hospital Presbyterian 10 years fee per use Newport Beach, California Southwest Texas Methodist Hospital 10 years fee per use San Antonio, Texas Yale New Haven Ambulatory Services Corporation 10 years revenue sharing New Haven, Connecticut SITES UNDER DEVELOPMENT Kettering Medical Center 10 years fee per use Kettering, Ohio New England Medical Center 10 years fee per use Boston, Massachusetts JFK Medical Center 10 years fee per use Edison, New Jersey University of Arkansas 15 years revenue sharing Little Rock, Arkansas Hospital Barra D'Or 10 years fee per use Rio de Janeiro, Brazil
One of the Company's contracts ends in the third quarter of 1999 and the Company currently is negotiating an extension with that customer. If the Company cannot negotiate an extension with that customer, the contract will terminate in third quarter 1999. The Company estimates that one site under development will become operational in second quarter 1999 and three additional sites under development will become operational in third quarter 1999. The Company's contract with Hospital Barra D'Or is currently being renegotiated with the customer in light of the changes in the Brazilian economic environment. If the contract cannot be successfully renegotiated, it will be terminated. The Company's fee per use agreement is typically for a ten year term. The fixed fee per use reimbursement amount the Company receives from the customer is based on the Company's cost to provide the service and the anticipated volumes of the customer. The contracts signed by the Company typically call for a fee ranging from $7,500 to $9,500 per procedure. There are no minimum volume guarantees required of the customer. Typically, GKF is responsible for providing the Gamma Knife and related ongoing Gamma Knife expenses (i.e. personal property taxes, insurance, equipment maintenance and marketing services). Typically, the customer is obligated to pay site and installation costs and the costs of operating the Gamma Knife. Generally, the customer can either renew the agreement or terminate the agreement upon the termination date of the agreement. If the customer chooses to terminate the agreement, then GKF removes the equipment from the medical center. The Company's revenue sharing agreement is typically for a period of ten to fifteen years. Instead of receiving a fixed fee, the company receives a percentage of the reimbursement (exclusive of physician fees) received by the customer less the operating expenses of the Gamma Knife. The Company is at risk to any reimbursement rate changes for Gamma Knife services by third party payors. The Company is also at risk if it 4 6 inefficiently operates its Gamma Knife services. There are no minimum volume guarantees required of the customer. No single customer accounted for 10% or more of the Company's total revenues in 1998 or 1997, but each of the five Gamma Knife customers accounted for more than 10% of the Company's Gamma Knife services revenues, in those years of operation. MARKETING At the end of 1998, the Company employed one sales executive. The Company markets its services through its preferred provider status with Elekta and a direct sales effort. The major advantages to a health care provider in contracting with the Company for Gamma Knife services include: - The medical center avoids the high cost of owning the equipment. By not acquiring the Gamma Knife unit, the medical center is able to allocate the funds required to purchase the Gamma Knife to other projects. - The medical center avoids the risk of Gamma Knife under-utilization. The Company does not have minimum volume requirements. The medical center pays the Company only for each Gamma Knife procedure performed on a patient. - The medical center transfers the risk of technological obsolescence to the Company. The medical center and its physicians are not under any obligation to utilize technologically obsolete equipment. FINANCING The Company's Gamma Knife business is operated through GKF. GKF has funded its existing Gamma Knife units with loans from a single lender for 100% of the cost of the Gamma Knife, plus any sales tax, customs and duties. The loans are fully amortized over an 84 month period. The loans are collateralized by the Gamma Knife and customer contracts and are without recourse to the Company and Elekta. GKF currently has loan commitments and has received progress payments from its primary lender for four (4) of its five (5) Gamma Knife projects under development. The loan commitments require that GKF has a debt to equity plus subordinated debt ratio of 5 to 1. After recognition of a $810,000 and $190,000 cash distribution from GKF to the Company and Elekta, respectively, in January 1999, GKF must increase its equity and/or subordinated debt balances by approximately $1,400,000 to be eligible for full funding of its approximately $11,000,000 cash requirement for its four (4) projects in development. GKF currently has the capability for additional borrowings of $3,800,000, which is adequate to meet its customer obligations through the middle of the second quarter of 1999. GKF and the Company are exploring options as to how GKF can best meet its customer obligations. These options include (i) requesting a waiver of GKF's debt to equity covenant from GKF's primary lender, (ii) the Company and Elekta making additional capital contributions when necessary, and (iii) the Company providing subordinated debt to GKF. The Company has the financial resources to allow GKF to meet its customer obligations and intends to provide these financial resources so that GKF can meet its obligations to its customers. COMPETITION Conventional neurosurgery is the primary competitor of Gamma Knife radiosurgery. Gamma Knife surgery is gaining acceptance as an alternative and/or adjunct to conventional surgery due to its comparable morbidity outcomes for certain procedures as well as its non-invasiveness. Utilization of the Company's Gamma Knife units is contingent on the acceptance of Gamma Knife radiosurgery by the customer's neurosurgeons, radiation oncologists and referring physicians. In addition, the utilization of the Company's Gamma Knife units is impacted by the proximity of competing Gamma Knife centers and providers using modified linear accelerators to perform radiosurgery. 5 7 The Company's ability to contract with additional customers for Gamma Knife services is dependent on its ability to compete against (i) other companies that outsource Gamma Knife services, (ii) Elekta, the manufacturer of the Gamma Knife, and (iii) manufacturers of competing radiosurgery devices (primarily modified linear accelerators). The Company does not have an exclusive relationship with Elekta and has lost sales in the past to customers that choose to purchase a Gamma Knife directly from Elekta. The Company may continue to lose sales in the future to such customers and may also lose sales to competitors of the Company. GOVERNMENT REGULATION The Company's Gamma Knife services customers receive payments for patient care from federal government and private insurer reimbursement programs. Currently, Gamma Knife services are performed predominantly on an in-patient basis, although some are performed on an out-patient basis. A Prospective Payment System ("PPS") is utilized to reimburse hospitals for care given to hospital in-patients covered by federally funded reimbursement programs. Patients are classified into a Diagnosis Related Group ("DRG") in accordance with the patient's diagnosis, necessary medical procedures and other factors. Patient reimbursement is limited to a predetermined amount for each DRG. The reimbursement payment may not necessarily cover the cost of all medical services actually provided because the payment is predetermined. Effective October 1, 1997, Gamma Knife services for Medicare hospital in-patients were reclassified from DRG 1 to either DRG 7 or DRG 8. This reclassification is estimated to reduce medical center revenues from the Medicare DRG program by approximately 30%. In the future, this reduction may lower reimbursement from other third party payors. In 1986 and again in 1990, Congress enacted legislation requiring the Department of Health and Human Services ("DHHS") to develop proposals for a PPS for hospital outpatient services. DHHS has proposed a new payment system, Ambulatory Product Classifications ("APC"), which affects all outpatient services, including those performed in a hospital based or free-standing facility. APC were scheduled to take effect January 1, 2000. The implementation of APC have been delayed due to year 2000 computer issues and the volume of responses to the proposed APC system. The APC consist of 346 clinically, homogenous classifications or groupings of codes that are typically used in outpatient billing. Outpatient services will be bundled with fixed rates of payment determined according to specific regional and national factors, similar to that of the in-patient PPS. Overall, the system is expected to reduce payments for select services and encourage the most efficient use of resources for outpatient care. The current APC proposal categorizes radiosurgery under conventional radiation therapy. Therefore, both procedures would receive the same reimbursement amounts. This categorization makes no distinction with regard to the types of resources utilized (e.g. technology) for each procedure classification. Therefore, regardless of resource consumption and clinical outcomes, all procedures within a group qualify for equal reimbursement. Specifically, stereotactic radiosurgery would receive the same reimbursement per session as conventional radiation therapy. This would result in a significant reimbursement decrease for Gamma Knife patients covered by Medicare treated on an outpatient basis. Various groups are informing DHHS of the discrepancies of these service levels in an attempt to be compensated in line with the intent of the APC system. It is not the intent of the APC system to compensate providers similarly for clinically different procedures. The Company has one shared revenue basis contract that is directly affected by changes in payment rates by Medicare and other third party payors. A number of future contracts for Gamma Knife services may be on a shared revenue basis instead of a fee-for-service basis. As a result of lower reimbursement rates, profitability from future contracts will be reduced unless the number of Gamma Knife procedures can be increased or if the costs to provide Gamma Knife services can be lowered. The payment of remuneration to induce the referral of health care business has been a subject of increasing governmental and regulatory focus in recent years. Section 1128B(b) of the Social Security Act 6 8 (sometimes referred to as the "federal anti-kickback statute") provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services for which payment may be made under the Medicare and Medicaid programs and certain other government funded programs. The Social Security Act provides authority to the Office of Inspector General through civil proceedings to exclude an individual or entity from participation in the Medicare and state health programs if it is determined any such party has violated Section 1128B(b) of the Social Security Act. The Company believes that it is in compliance with the federal anti-kickback statute. Additionally, the Omnibus Budget Reconciliation Act of 1993, often referred to as "Stark II", bans physician self referrals to providers of designated health services with which the physician has a financial relationship. The term "designated health services" includes: clinical laboratory services, physical therapy services, occupational therapy services, radiology or other diagnostic services, radiation therapy services, durable medical equipment, parenteral and enteral nutrients, equipment and supplies, home health services, outpatient prescription drugs, in-patient and outpatient hospital services. On January 1, 1995, the Physician Ownership and Referral Act of 1993 became effective in California. This legislation prohibits physician self-referrals for covered goods and services including diagnostic nuclear medicine and diagnostic imaging if the physician (or the physician's immediate family) concurrently has a financial interest in the entity receiving the referral. The Company believes that it is in compliance with these rules and regulations. Legislation in various jurisdictions requires that health facilities obtain a Certificate of Need ("CON") prior to making expenditures for medical technology in excess of specified amounts. One of the Company's existing customers was required to obtain a CON. The CON procedure can be expensive and time consuming and may impact the length of time before Gamma Knife services commence. CON requirements vary from state to state in their application to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures to provide its services and in other jurisdictions customers must comply with CON procedures before using the Company's services. The Company's Gamma Knife units contain Cobalt 60 radioactive sources. The medical centers that house the Company's Gamma Knife units are responsible for obtaining possession and user's licenses for the Cobalt 60 source. The Company believes it is in substantial compliance with the various rules and regulations that affect its businesses. INSURANCE AND INDEMNIFICATION The Company's contracts with equipment vendors generally do not contain indemnification provisions. The Company maintains a comprehensive insurance program covering the value of its property and equipment, subject to deductibles which the Company believes are reasonable. The Company's customer contracts generally contain mutual indemnification provisions. The Company maintains general and professional liability insurance. The Company is not involved in the practice of medicine and therefore believes its present insurance coverage and indemnification agreements are adequate for its business. EMPLOYEES At December 31, 1998, the Company employed approximately 25 employees on a full-time basis and approximately 2 employees on a part-time basis. None of these employees is subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes its employee relations are good. The Company expects to employ fewer than ten (10) people after it completes its transition service obligations to the purchaser of its diagnostic imaging business in April 1999. 7 9 EXECUTIVE OFFICERS OF THE COMPANY The following table provides current information concerning those persons who serve as executive officers of the Company. The executive officers were appointed by the Board of Directors and serve at the discretion of the Board of Directors.
NAME: AGE: POSITION: ----- ---- --------- Ernest A. Bates, M.D. 62 Chairman of the Board of Directors, Chief Executive Officer Craig K. Tagawa 45 Senior Vice President -- Chief Operating and Financial Officer Richard Magary 58 Senior Vice President -- Administration, Assistant Secretary Gregory Pape 43 Senior Vice President -- Sales and Marketing
ERNEST A. BATES, M.D., founder of the Company, has served in the positions listed above since the incorporation of the Company, except for the periods May 1, 1991 through November 6, 1992 and February 1989 through August 1989, during which time Dr. Bates did not serve in the capacity of President and Chief Operating Officer. Dr. Bates is a graduate of the Johns Hopkins University and the University of Rochester School of Medicine. He is currently an Assistant Clinical Professor of Neurosurgery at the University of California Medical Center at San Francisco, and a member of the Board of Trustees of the Johns Hopkins University and the University of Rochester, a Director of the Industrial Policy Advisory Committee of the Engineering Research Center (CISST) at Johns Hopkins University, a Member of the State of California High Speed Rail Authority, and a Member of the Board of Directors of Salzburg Seminar. CRAIG K. TAGAWA has assumed the additional duties of Chief Operating Officer since February 1999 in addition to serving as Chief Financial Officer since May 1996. Mr. Tagawa also served as Chief Financial Officer from January 1992 through October 1995. Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice President on February 28, 1993. He is also the Chief Executive Officer of GK Financing, LLC. From September 1988 through January 1992, Mr. Tagawa served in various positions with the Company. From 1982 through August 1988, Mr. Tagawa served as Vice President of Finance and Controller of Medical Ambulatory Care, Inc., the Dialysis division of National Medical Enterprises, Inc. (now Tenet Healthcare Corporation), an owner and operator of hospitals and other health care businesses. Mr. Tagawa received his Undergraduate degree from the University of California at Berkeley and his M.B.A from Cornell University. RICHARD MAGARY has served as Senior Vice President -- Administration since February 28, 1993 and Assistant Secretary since 1985. Mr. Magary will conclude his current duties in April or May of 1999 and become an advisor to the Company. From April 1987 through February 1993, Mr. Magary served as a Vice President in the same capacity. From 1982 through March 1987, he served as Chief Financial Officer of the Company and its predecessor. Mr. Magary is a graduate of the University of San Francisco. GREGORY PAPE has served as Senior Vice President -- Sales and Marketing since June 1994. From January 1993 through June 1994, Mr. Pape was a Zone Vice President -- Sales and Marketing for the Company. Mr. Pape served in the capacity of Regional Sales Manager for the Company for the period from March 1991 through January 1993. From September 1989 through February 1991, Mr. Pape was a Regional Sales Manager for Medical Imaging Corporation of America, Inc. Mr. Pape earned his undergraduate degree at the University of Miami, with postgraduate work in law at the University of Dayton, Ohio. 8 10 ITEM 2. PROPERTIES The Company's corporate offices are located at Four Embarcadero Center, Suite 3620, San Francisco, California, where it leases 2,996 square feet for $9,275 per month. This lease runs through September 1999. The Company's administrative office is located in Modesto, California, where it leases 5,413 square feet for $6,135 per month. This lease runs through May 1999. For the year ended December 31, 1998, the Company's aggregate net rental expenses for all properties and equipment were approximately $4,696,000. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings involving the Company or any of its property. The Company knows of no legal or administrative proceedings against the Company contemplated by governmental authorities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting of shareholders on November 13, 1998, the shareholders of the Company approved the Sale pursuant to the Securities Purchase Agreement dated as of March 12, 1998 among the Company and the Purchaser. Holders of 3,494,291 common shares voted in favor of the sale, 13,675 common shares voted against, and 3,500 shares abstained. The shares voting in favor of the sale represented 98.6% of the total number of shares present in person or by proxy at the Special Meeting of Shareholders and 73.3% of the outstanding common shares. The Sale closed immediately following the Special Meeting. 9 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common shares, no par value (the "Common Shares"), are currently traded on the American Stock Exchange ("AMEX") and the Pacific Exchange ("PCX"). The Company's losses and net capital deficiency have caused the Company to no longer satisfy the minimum criteria with respect to net income and net worth for continued listing published by the AMEX. The per share trading price is also below the minimum criteria of such exchange. The closing per share price of the Common Shares was $1.125 on March 12, 1999. The Company has been advised that its net capital deficiency is inconsistent with the criteria applied by the PCX for continued listing on such exchange. The AMEX and the PCX are continuing to monitor the Company's financial condition in order to determine whether the Common Shares will continue to be listed for trading thereon. With the completion of the Sale, the Company believes it now meets AMEX's and PCX's minimum criteria. The Company will submit its audited financial statements to AMEX and PCX and believes rulings regarding continued listing will be issued by AMEX and PCX in second quarter 1999. The table below sets forth the high and low closing sales prices of the Common Shares of the Company on the American Stock Exchange Consolidated Reporting System for each full quarter for the last two fiscal years. PRICES FOR COMMON SHARES
QUARTER ENDING HIGH LOW -------------- ------ ----- March 31, 1997......................................... 2 3/16 1 3/8 June 30, 1997.......................................... 1 5/8 3/4 September 30, 1997..................................... 1 7/8 1 December 31, 1997...................................... 2 3/16 1 7/16 March 31, 1998......................................... 1 15/16 1 3/8 June 30, 1998.......................................... 1 7/8 1 1/4 September 30, 1998..................................... 1 1/4 5/8 December 31, 1998...................................... 1 1/4 5/8
The Company estimates that there were approximately 1200 beneficial holders of its Common Shares as of December 31, 1998. On March 8, 1999, the Company repurchased substantially all of its remaining securities owned by two major holders who acquired them in the Company's 1995 restructuring (see "Subsequent Events"). The Company did not pay cash dividends in 1998 and does not anticipate paying cash dividends in 1999. 10 12 ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- -------- -------- -------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Medical services revenues..................... $35,162 $37,172 $ 36,989 $ 34,077 $ 38,545 ======= ======= ======== ======== ======== Costs of operations........................... 25,826 27,044 28,071 32,675 34,145 Selling and administrative expense............ 5,116 5,901 5,309 8,432 5,971 Interest expense.............................. 3,186 3,671 4,199 5,310 7,423 Write-down of intangible assets............... 0 0 0 600 0 ------- ------- -------- -------- -------- Total costs and expenses...................... 34,128 36,616 37,579 47,017 47,539 ------- ------- -------- -------- -------- 1,034 556 (590) (12,940) (8,994) (Loss) gain on sale of assets and early termination of capital leases............... (2) 821 3 226 3,294 Gain on disposal of product line.............. 20,478 N/A N/A N/A N/A Interest and other income..................... 54 155 227 258 183 ------- ------- -------- -------- -------- Income (loss) before income taxes and extraordinary item.......................... 21,564 1,532 (360) (12,456) (5,517) Income tax provision (benefit)................ 1,513 10 (7) 3 20 ------- ------- -------- -------- -------- Income (loss) before extraordinary item....... 20,051 1,522 (353) (12,549) (5,537) Extraordinary Item............................ 0 0 0 19,803 362 ------- ------- -------- -------- -------- Net income (loss)............................. $20,051 $ 1,522 $ (353) $ 7,344 $ (5,175) ======= ======= ======== ======== ======== Earnings (loss) per common share: Income (loss) before extraordinary item..... $ 4.23 $ 0.32 ($ 0.08) $ (2.96) $ (1.93) Extraordinary item.......................... $ 0.00 $ 0.00 $ 0.00 $ 4.71 $ 0.13 ------- ------- -------- -------- -------- Net income (loss)........................... $ 4.23 $ 0.32 $ (0.08) $ 1.75 $ (1.80) ======= ======= ======== ======== ======== Earnings (loss) per common share assuming dilution: Income (loss) before extraordinary item..... $ 3.15 $ 0.24 $ (0.08) $ (2.96) $ (1.93) Extraordinary item.......................... $ 0.00 $ 0.00 $ 0.00 $ 4.71 $ 0.13 ------- ------- -------- -------- -------- Net income (loss)........................... $ 3.15 $ 0.24 $ (0.08) $ 1.75 $ (1.80) ======= ======= ======== ======== ========
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- -------- -------- -------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) BALANCE SHEET DATA Restricted cash............................... $ 2,226 $ 651 $ 218 $ 493 $ 2,883 Working capital (deficiency).................. 9,088 (8,039) (10,888) (6,793) (33,369) Total assets.................................. 26,919 30,209 32,969 31,335 47,222 Current portion of long-term debt and obligations under capitalized leases........ 1,885 10,929 13,182 8,720 11,214 Long-term debt and obligations under capitalized leases, less current portion.... 8,823 21,569 23,935 26,125 24,244 Senior subordinated notes..................... 0 0 0 773 18,467 Shareholders' equity (Net capital deficiency)................................. $11,096 $(8,953) $(10,475) $(10,576) $(22,341)
See accompanying notes (1) In June 1995, ASHS incorporated a new wholly-owned subsidiary, African American Church Health and Economic Services, Inc. ("ACHES") and ACHES' wholly-owned subsidiary, ACHES Insurance Services, Inc. ("AIS"), and in October 1995, entered into an operating agreement granting to American Shared Radiosurgery Services (a California corporation and a wholly-owned subsidiary of the Company) an 81% ownership interest in GK Financing, LLC. Accordingly, the financial data for the Company presented above include the results of the establishment of ACHES, AIS, and GK Financing, LLC for 1995 through 1998. 11 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL During the years ended December 31, 1998, 1997 and 1996, approximately 88%, 94% and 95%, respectively, of the Company's revenues were derived from its diagnostic imaging business. The Company sold its diagnostic imaging business in November 1998. Currently, the Company's business consists of the provision of Gamma Knife services, which accounted for only 12%, 6% and 5% of the Company's total revenues during the years ended December 31, 1998, 1997 and 1996, respectively. As a result of the Sale, the Company was relieved of substantially all of the liabilities of the imaging division, consisting of approximately $27,100,000 of debt and other obligations, and received approximately $13,500,000 of cash. The Sale resulted in a one-time gain of $20,478,000, which eliminated the Company's capital deficiency. Following the Sale, the Company's operations were significantly reduced and it has substantially reduced its staff. Accordingly, the discussion below, which largely reflects the Company's operations prior to the Sale, is not an indication of results anticipated by the Company for 1999 or future years. The Company had net income of $20,051,000 ($4.23 per share) on medical services revenues of $35,162,000 in 1998. Included in net income for 1998 is a $20,478,000 gain on disposal of product line less Sale-related income taxes of $1,500,000. The Company had net income of $1,522,000 ($0.32 per share) on medical services revenues of $37,172,000 in 1997. TOTAL REVENUES
INCREASE INCREASE 1998 (DECREASE) 1997 (DECREASE) 1996 ------- ---------- ------- ---------- ------- (IN THOUSANDS) Medical Services....................... $35,162 (5.4)% $37,172 0.5% $36,989
Medical services revenues decreased 5.4% in 1998 compared to 1997, and increased 0.5% in 1997 compared to 1996. The 5.4% decrease in 1998 was primarily attributable to the Sale, which occurred in November 1998. The 0.5% increase in 1997 compared to 1996 was primarily due to an increase in MRI revenues. Gamma Knife revenues increased $1,772,000 and $354,000 in 1998 and 1997, respectively, compared to the prior years. The 1998 increase was primarily due to the commencement of the Company's fourth Gamma Knife in March 1998 and the fifth Gamma Knife in July 1998, and full year inclusion of the Company's third Gamma Knife unit. The 1997 increase was primarily due to the commencement of a third Gamma Knife unit in September 1997. MRI revenues decreased 6% ($1,821,000) in 1998 compared to 1997 and increased 2% ($650,000) in 1997 compared to 1996. The decrease in 1998 was primarily attributable to the Sale. The increase in 1997 was primarily due to the commencement of new customer contracts and increased utilization from contracts commenced in prior periods. MRI revenues as a percentage of total medical services revenues were 75%, 76%, and 75% in years 1998, 1997, and 1996, respectively. The Company's non-MRI diagnostic imaging services revenues decreased 35% ($1,763,000) in 1998 compared to 1997 after a 19% ($1,176,000) decrease in 1997 compared to 1996. The 1998 versus 1997 revenue decline was primarily due to the continued decline of CT and Nuclear Medicine revenues and the Sale. The revenue decline in 1997, compared to 1996, was primarily attributable to decreased CT revenue that was due to utilization of two (2) fewer CT units in 1997, and decreased nuclear medicine revenue due to the termination of an in-house nuclear medicine contract in March 1997. Revenues from CT operations decreased $1,147,000 in 1998 and $614,000 in 1997 from 1996 revenues of $3,537,000. The decrease in Ultrasound and Nuclear Medicine revenues was $616,000 in 1998 and $562,000 in 1997 from a 1996 revenue base of $2,747,000. Non-MRI diagnostic imaging services revenues as a percentage of total medical services revenues was 10%, 14% and 17% for the years ended 1998, 1997 and 1996, respectively. The Company's CT, Ultrasound, and Nuclear Medicine services revenues continued to decline because customers were increasingly buying their own equipment. 12 14 Contract service revenues consisting of Respiratory Therapy services and Cardiac Catheterization Laboratory revenues decreased $195,000 in 1998 compared to 1997 and increased $354,000 in 1997 compared to 1996. The decrease in 1998 was primarily attributable to the Sale. The increase in 1997 was primarily due to revenues from Cardiac Catheterization Laboratory contracts which commenced in May 1996 and December 1996, respectively. COST OF OPERATIONS
INCREASE INCREASE 1998 (DECREASE) 1997 (DECREASE) 1996 ------- ---------- ------- ---------- ------- (IN THOUSANDS) Cost of Operations..................... $25,826 (4.5)% $27,044 (3.7)% $28,071 Percentage of Revenue.................. 73.5% 72.8% 75.9%
The Company's cost of operations, consisting of payroll, maintenance and supplies, depreciation and amortization, equipment rental and other operating expenses (such as vehicle fuel, building rents, regional office costs, insurance, property taxes, bad debt expense, fees and training expenses) decreased $1,218,000 in 1998 and decreased $1,027,000 in 1997 compared to prior years. Medical services payroll costs, the largest component of total cost of operations, decreased by $446,000 in 1998 compared to 1997 and increased by $221,000 in 1997 compared to 1996. Medical services payroll costs decreased primarily due to the Sale. Medical services payroll costs, as a percent of medical services, remained constant at 20% in years 1998, 1997 and 1996. The 1997 and 1996 increase was primarily due to staffing increases to service additional MRI customer volumes and an increase in staffed units in 1997. The Company's Gamma Knife services currently do not involve staffing of its centers. The Company's maintenance and supplies costs were 15%, 16% and 18% of medical service revenues in 1998, 1997 and 1996, respectively. Maintenance and supplies costs decreased $775,000 in 1998 compared to 1997 and decreased $739,000 in 1997. The 1998 decrease was primarily due to the Sale. The $739,000 decrease in 1997 was primarily attributable to MRI maintenance cost savings. Depreciation and amortization decreased $842,000 in 1998 compared to 1997 and decreased $233,000 in 1997 compared to 1996. The decrease in 1998 was primarily attributable to the Sale and fewer MRI units accounted for as capitalized leases in 1998, offset by increases in equipment depreciation due to the addition of one Gamma Knife unit in late 1997 and two units during 1998. The decrease in 1997 was primarily attributable to decreased MRI depreciation as a result of fewer MRI units accounted for as capital leases in 1997. Equipment rental as a percentage of medical services revenues was 12% in 1998, 7% in 1997 and 9% in 1996. Equipment rental increased $1,378,000 in 1998 compared to 1997 and decreased $763,000 in 1997 compared to 1996. The increase in 1998 is primarily due to two (2) replacement and three (3) new MRI units accounted for as operating leases during 1998 and fourth quarter 1997, offset by decreases associated with the Sale. The decrease in 1997 is primarily attributable to the return of five (5) MRI rental units that resulted from mobile route consolidation and customer contract terminations. Other costs of operations as a percentage of medical services revenues was 11%, 12% and 11% in 1998, 1997 and 1996, respectively. The decrease of $533,000 in 1998 compared to 1997 was primarily attributable to the Sale. The increase of $487,000 in 1997 compared to 1996 reflects increased fuel, personal property tax costs, insurance, and bad debt expenses. SELLING AND ADMINISTRATIVE
INCREASE INCREASE 1998 (DECREASE) 1997 (DECREASE) 1996 ------ ---------- ------ ---------- ------ (IN THOUSANDS) Selling and Administrative Costs......... $5,116 (13.3)% $5,901 11.2% $5,309 Percentage of Revenue.................... 14.6% 15.9% 14.4%
13 15 The Company's selling and administrative costs decreased $785,000 in 1998 compared to 1997 and increased $592,000 in 1997 compared to 1996. The decrease in 1998 was primarily due to the Sale and decreased salary, investor relations and legal expenses. The increase in 1997 was primarily due to increased sales and administrative payroll costs, building rental costs, audit and tax fees and legal fees associated with a previously-proposed acquisition of the Company that was not consummated. INTEREST EXPENSE
INCREASE INCREASE 1998 (DECREASE) 1997 (DECREASE) 1996 ------ ---------- ------ ---------- ------ (IN THOUSANDS) Interest Expense.......................... $3,186 (13.2)% $3,671 (12.6)% $4,199 Percentage of Revenue..................... 9.1% 9.9% 11.4%
The Company's interest expense decreased $485,000 in 1998 compared to 1997 and decreased $528,000 in 1997 compared to 1996. The decrease in 1998 was primarily attributable to the Sale and decreased capitalized lease-related interest, offset by increased interest related to additional Gamma Knife units. The decrease in 1997 was primarily attributable to decreased capitalized lease-related interest. IMPACT OF YEAR 2000 The Year 2000 ("Y2K") issue results from programs written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruption of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Due to the Sale, the Company is in the process of downsizing its computer operations. The Company is in the process of replacing much of its computer hardware and programs with equipment and programs that are Y2K compatible. This replacement process is expected to be completed in the second quarter of 1999 and the cost is not expected to exceed $60,000. The Company's current revenue source, the Gamma Knife, is Y2K compliant. The Company's five current operational customers, which are large urban medical centers, all have disbursement systems that are or will be Y2K compliant during 1999. Should the disbursement systems of the Company's operating customers not be Y2K compliant, the Company would be materially impacted. The Company would exercise its contractual rights due to non-payment, if necessary. The Company believes that the Y2K issue, except for any customer disbursement systems which are not Y2K compliant on January 1, 2000, and for which the customer cannot produce manual checks, will not materially affect the Company's business, results of operations, or financial condition. OTHER INCOME AND EXPENSE
INCREASE INCREASE 1998 (DECREASE) 1997 (DECREASE) 1996 ------- ---------- ---- ---------- ---- (IN THOUSANDS) (Loss) gain on sale of assets and early termination of capital leases............. $ (2) (100.2)% $821 27,267% $ 3 Percentage of revenue....................... 0.0% 2.2% 0.0% Gain on sale of product line................ $20,478 NM $ 0 NM $ 0 Percentage of revenue....................... 58.2% 0.0% 0.0% Interest and other income................... $ 54 (65.2)% $155 (31.7)% 227 Percentage of revenue....................... 0.2% 0.4% 0.6%
14 16 The Company's gain on sale of product line increased $20,478,000 in 1998 compared to 1997. Gain on sale of assets and early termination of capital leases decreased $823,000 in 1998 compared to 1997. The gain on sale of product line represents the gain associated with the Sale. The gain was net of transaction costs of approximately $2,700,000. Transaction costs include legal, investment banking, management bonuses related to the Sale, employee severance costs, and the costs related to the discontinuance of the Diagnostic Imaging Business. The gain on sale of assets and early termination of capital leases in 1997 compared to 1996 was the result of a gain on the early termination of a capital lease ($141,000) when the customer's in-house nuclear medicine contract was terminated during March 1997, an insurance settlement ($388,000) following the loss of a mobile MRI unit in an accident during second quarter 1997, a gain on sale of another MRI unit ($140,000) during third quarter 1997 and a gain on sale of a mobile SPECT unit ($115,000) in the fourth quarter of 1997. Gain on sale of equipment fluctuates depending on the timing of asset dispositions. INCOME TAXES
INCREASE INCREASE 1998 (DECREASE) 1997 (DECREASE) 1996 ------ ---------- ---- ---------- ----- (IN THOUSANDS) Income Tax Provision (Benefit)............... $1,513 15,030.0% $10 243% $ (7) Percentage of Revenue........................ 4.3% 0% 0%
The Company's income tax provision increased $1,503,000 in 1998 compared to 1997. The increase, approximately $1,500,000, was related to the gain on the sale of product line and resulted in the Company's use of substantially all of its available federal and state net operating loss carryforwards. At December 31, 1998, the Company had a net operating loss carryforward for federal income tax return purposes of approximately $800,000. The Company's income tax provision of $10,000 in 1997 was after utilization of its federal and state net operating losses. NET INCOME (LOSS)
INCREASE INCREASE 1998 (DECREASE) 1997 (DECREASE) 1996 ------- ---------- ------ ---------- ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Income (loss)........................ $20,051 1,217% $1,522 531% $ (353) Net Income (loss) per share.............. $ 4.23 1,222% $ 0.32 500% $(0.08)
The Company had net income of $20,051,000 in 1998 compared to net income of $1,522,000 in 1997. Net income for 1998 includes a $18,978,000 gain net of income taxes ($1,500,000) primarily from the Sale. Net income for 1998, exclusive of the net gain from the sale of product line was $1,073,000 and reflects increased operating margins. Net income for 1997 resulted in part from increased operating margins and in part from gains from early termination of capital leases and sale of assets. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $11,114,000 at December 31, 1998 compared to $17,000 at December 31, 1997. The Company's cash position increased $11,097,000 due primarily to the proceeds from the Sale. An additional $1,000,000 is restricted until April 15, 1999 under the terms of the Sale. The $1,000,000 related to the Sale is included under restricted cash. Restricted cash of $2,226,000 at December 31, 1998 and $651,000 at December 31, 1997 reflects cash that may only be used for the operations of GK Financing, LLC and amounts previously described as restricted under terms of the Sale. The 1998 increase in restricted cash of $1,575,000 is due to the $1,000,000 related to the Sale and cash flow from Gamma Knife operations. The Sale resulted in the Company receiving approximately $13,500,000 in cash and the Purchaser assuming $27,100,000 of debt and other liabilities. The Company estimates that after transaction costs and income taxes, it will retain approximately $10,000,000 in cash. 15 17 The Sale has resulted in the Company having shareholders' equity of approximately $11,100,000, working capital of approximately $9,100,000 and total assets of $26,919,000 as of December 31, 1998 compared to a net capital deficiency of approximately $9,000,000, a working capital deficit of approximately $8,000,000 and total assets of $30,209,000 at December 31, 1997. The Company intends to invest its cash in overnight repurchase agreements and commercial paper pending use in the Company's operations. The Company believes its cash position combined with its working capital is adequate to service the Company's cash requirements in 1999. SUBSEQUENT EVENTS In 1995, the Company completed a major restructuring of its medical equipment leases and senior subordinated notes. As part of the restructuring, the Company issued (a) warrants to acquire 225,000 common shares for $0.01 per share to its equipment lessor and (b) 1,193,000 common shares and warrants to acquire 314,000 common shares for $0.75 per share to the holders of approximately 96% of the senior subordinated notes. As part of the Sale, the Company re-acquired from its equipment lessor 225,000 common shares for cash consideration of $2,250. On March 8, 1999, the Company completed the repurchase of substantially all of its remaining securities owned by two major holders who acquired them in the Company's 1995 restructuring. Repurchases were made directly from the holders. The repurchased securities include shares of the Company's common stock, and warrants to acquire additional shares of common stock. The repurchased securities represented approximately 12.6% of the Company's issued and outstanding common shares and about 12.6% of its fully diluted outstanding shares. The aggregate repurchase price paid by the Company was approximately $702,000. Following the repurchases, the Company has 5,929,508 fully diluted shares outstanding, including 3,972,372 issued and outstanding common shares, 29,107 common shares reserved for warrants and 1,922,200 common shares reserved for options. On March 22, 1999, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of its common stock from time to time in the open market at prevailing prices. On March 22, 1999, the Company adopted a Shareholder Rights Plan ("Plan"). Under the Plan, the Company will make a dividend distribution of one Right for each outstanding share of the Company's common stock as of the close of business on April 1, 1999. Prior to the date upon which the Rights would become exercisable under the Plan, the Company's outstanding stock certificates will represent both the shares of the Company's common stock and the Rights, and the Rights will trade only with the shares of common stock. The Rights become exercisable only if any person or group, with certain exceptions, becomes an "acquiring person" (acquires 15 percent or more of the Company's outstanding common stock) or announces a tender or exchange offer to acquire 15 percent or more of the Company's outstanding common stock. The Company may redeem the Rights at $0.01 per Right at the direction of the Board prior to the earlier of ten days after the public announcement that there is an acquiring person and the expiration of the Plan. The Rights will expire in 10 years unless redeemed earlier or exchanged by the Company. IMPACT OF INFLATION AND CHANGING PRICES The Company does not believe inflation has had a significant impact on operations, because most of its customer contracts included a cost of living price adjustment provision, or whose costs were primarily fixed at the date of commencement. The Company believes these factors will be sufficient to offset the impact of any future inflation on the Company's costs of operation. 16 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to Consolidated Financial Statements and Financial Statement Schedules included at page A-1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company on December 14, 1998 engaged Grant Thornton, LLP as its independent accountant to audit the Company's financial statements for the year ended December 31, 1998. The Company and Grant Thornton, LLP have a long established relationship as Grant Thornton has served as the Company's tax advisor since 1990. In light of its engagement of Grant Thornton, the Company will no longer engage Ernst & Young, LLP to audit the Company's financial statements. Ernst & Young had served as the Company's auditor since 1983. The Company, during its two prior fiscal years (1997 and 1996) and any subsequent interim period preceding its change of independent accountant, did not have any disagreements with the former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The Company did not have any disagreement with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure on the audit of 1998 financial statements. 17 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is incorporated herein by reference from the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders (the "1999 Proxy Statement"). Information regarding executive officers of the Company, included herein under the caption "Executive Officers of the Registrant" in Part I, Item 1 above, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the 1999 Proxy Statement. 18 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS AND SCHEDULES. The following Financial Statements and Schedules are filed with this Report: Report of Independent Auditors Audited Consolidated Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Financial Statement Schedules Valuation and Qualifying Accounts All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. CONSENT OF INDEPENDENT AUDITORS (b) EXHIBITS. The following Exhibits are filed with this Report.
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.(1) 3.1 Articles of Incorporation of the Company, as amended.(2) 3.2 By-laws for the Company, as amended.(3)* 4.6 Form of Common Stock Purchase Warrant of American Shared Hospital Services.(3) 4.8 Registration Rights Agreement, dated as of May 17, 1995, by and among American Shared Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems.(3) 10.1 The Company's 1984 Stock Option Plan, as amended.(5) 10.2 The Company's 1995 Stock Option Plan, as amended.(6) 10.3 Form of Indemnification Agreement between American Shared Hospital Services and members of its Board of Directors.(5) 10.4 Ernest A. Bates Stock Option Agreement dated as of August 15, 1995.(7) 10.5 Operating Agreement for GK Financing, LLC, dated as of October 17, 1995.(3) 10.6 Amendments dated as of October 26, 1995 and as of December 20, 1995 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995.(4) 10.7 Amendment dated as of October 16, 1996 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995.(1) 10.8 Amendment dated as of March 31, 1998 ("Fourth Amendment") to the GK Financing, LLC Operating Agreement dated as of October 17, 1995.
19 21
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.9 Amendment dated as of March 31, 1998 ("Fifth Amendment") to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. 10.10 Amendment dated as of June 5, 1998 to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. 10.11a Assignment and Assumption Agreement, dated as of December 31, 1995, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee). 10.11b Assignment and Assumption Agreement, dated as of November 1, 1995, between American Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee).(4) 10.11c Amendment Number One dated as of August 1, 1995 to the Lease Agreement for a Gamma Knife Unit between The Regents of the University of California and American Shared Hospital Services. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) 10.11d Lease Agreement dated as of July 3, 1990 for a Gamma Knife Unit between American Shared Hospital Services and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) 10.12 Amendment Number Two dated as of February 6, 1998 to the Lease Agreement for a Gamma Knife Unit between UCSF-Stanford Health Care and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) 10.13 Assignment and Assumption Agreement, dated as of February 3, 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee).(4) 10.14 Lease Agreement for a Gamma Knife Unit dated as of April 6, 1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) 10.15 Assignment and Assumption and Agreement dated as of February 1, 1996 between Ernest A. Bates, M.D. and GK Financing, LLC with respect to the Lease Agreement for a Gamma Knife dated as of April 6, 1994 between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital.
20 22
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.16 Lease Agreement for a Gamma Knife Unit dated as of October 31, 1996 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) 10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as of December 1, 1998 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) 10.18 Lease Agreement for a Gamma Knife Unit dated as of October 29, 1996 between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) 10.19 Lease Agreement for a Gamma Knife Unit dated as of April 10, 1997 between Yale-New Haven Ambulatory Services Corporation and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) 21. Subsidiaries of American Shared Hospital Services. 23.1 Consent of Grant Thornton, LLP. 23.2 Consent of Ernst & Young, LLP. 27. Financial Data Schedule for the year ended December 31, 1998.
- --------------- (1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1997, which is incorporated herein by this reference. (2) This document was filed as Exhibit 3.1 to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on October 26, 1995, which is incorporated herein by this reference. (4) These documents were filed as Exhibits 4.14 and 10.13, respectively, to the registrant's Pre-Effective Amendment No. 1 to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996, which is incorporated herein by this reference. (5) These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (6) This document was filed as Exhibit A to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. (7) This document was filed as Exhibit B to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. 21 23 (c) REPORTS ON FORM 8-K: The Company filed the following reports on Form 8-K during the quarter ended December 31, 1998: (i) Report on Form 8-K dated November 13, 1998 reporting shareholder approval and closing of the Sale. (ii) Report on Form 8-K dated December 14, 1998 reporting a change in the Company's independent auditor. 22 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN SHARED HOSPITAL SERVICES (Registrant) March 29, 1999 By: /s/ ERNEST A. BATES ------------------------------------ Ernest A. Bates Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ERNEST A. BATES Chief Executive Officer and March 29, 1999 - --------------------------------------------------- Chairman of the Board Ernest A. Bates /s/ WILLIE R. BARNES Director and Secretary March 29, 1999 - --------------------------------------------------- Willie R. Barnes /s/ JOHN F. RUFFLE Director March 29, 1999 - --------------------------------------------------- John F. Ruffle /s/ STANLEY S. TROTMAN, JR. Director March 29, 1999 - --------------------------------------------------- Stanley S. Trotman, Jr. /s/ AUGUSTUS A. WHITE, III Director March 29, 1999 - --------------------------------------------------- Augustus A. White, III /s/ CHARLES B. WILSON Director March 29, 1999 - --------------------------------------------------- Charles B. Wilson /s/ CRAIG K. TAGAWA Chief Operating Officer and March 29, 1999 - --------------------------------------------------- Chief Financial Officer Craig K. Tagawa (Principal Accounting Officer)
23 25 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AMERICAN SHARED HOSPITAL SERVICES YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 26 CONTENTS
PAGE ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2 CONSOLIDATED FINANCIAL STATEMENTS BALANCE SHEETS............................................ F-3 STATEMENTS OF OPERATIONS.................................. F-4 STATEMENT OF SHAREHOLDERS' EQUITY......................... F-5 STATEMENTS OF CASH FLOWS.................................. F-6 NOTES TO FINANCIAL STATEMENTS............................. F-7
F-1 27 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders American Shared Hospital Services We have audited the accompanying consolidated balance sheet of American Shared Hospital Services as of December 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Shared Hospital Services at December 31, 1998, and the consolidated results of their operations and consolidated cash flows for the year then ended in conformity with generally accepted accounting principles. We have also audited Schedule II for the year ended December 31, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP /s/ Grant Thornton LLP San Francisco, California March 12, 1999 F-2 28 AMERICAN SHARED HOSPITAL SERVICES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31 --------------------------- 1998 1997 ----------- ------------ CURRENT ASSETS Cash and cash equivalents................................. $11,114,000 $ 17,000 Restricted cash........................................... 2,226,000 651,000 Receivables, less allowance for uncollectible accounts of $0 ($1,302,000 in 1997): Trade accounts receivable............................ 1,228,000 6,658,000 Other................................................ 104,000 472,000 ----------- ------------ 1,332,000 7,130,000 Prepaid expenses, inventories and other current assets.... 285,000 708,000 ----------- ------------ Total current assets.............................. 14,957,000 8,506,000 PROPERTY AND EQUIPMENT Land and building......................................... 247,000 1,572,000 Medical, transportation, and office equipment............. 15,447,000 12,202,000 Capitalized leased medical, transportation, and office equipment.............................................. 83,000 26,410,000 Deposits and construction in progress..................... 1,079,000 1,901,000 ----------- ------------ 16,856,000 42,085,000 Accumulated depreciation and amortization................. (5,097,000) (21,983,000) ----------- ------------ Net property and equipment........................ 11,759,000 20,102,000 OTHER ASSETS................................................ 183,000 563,000 INTANGIBLE ASSETS, less accumulated amortization of $30,000 ($1,529,000 in 1997)...................................... 20,000 1,038,000 ----------- ------------ $26,919,000 $ 30,209,000 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.......................................... $ 338,000 $ 3,693,000 Accrued interest.......................................... 54,000 32,000 Employee compensation and benefits........................ 814,000 1,050,000 Other accrued liabilities................................. 519,000 841,000 Income tax payable........................................ 1,664,000 -- Current portion of accrued exit costs..................... 595,000 -- Current portion of long-term debt......................... 1,873,000 4,784,000 Current portion of obligations under capital leases....... 12,000 6,145,000 ----------- ------------ Total current liabilities......................... 5,869,000 16,545,000 LONG-TERM DEBT, less current portion........................ 8,792,000 11,936,000 OBLIGATIONS UNDER CAPITAL LEASES, less current portion...... 31,000 9,633,000 ACCRUED EXIT COSTS, less current portion.................... 400,000 -- DEFERRED GAIN ON EARLY LEASE TERMINATION.................... -- 296,000 DEFERRED INCOME TAXES....................................... -- 164,000 MINORITY INTEREST........................................... 731,000 588,000 SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Common stock, $0 par value Authorized -- 10,000,000 shares Issued and outstanding shares -- 4,544,000 in 1998 and 4,769,000 in 1997...................................................... 11,087,000 11,089,000 Common stock options issued to officer.................... 2,414,000 2,414,000 Additional paid-in capital................................ 930,000 930,000 Accumulated deficit....................................... (3,335,000) (23,386,000) ----------- ------------ Total shareholders' equity (net capital deficiency)..................................... 11,096,000 (8,953,000) ----------- ------------ $26,919,000 $ 30,209,000 =========== ============
The accompanying notes are an integral part of these statements. F-3 29 AMERICAN SHARED HOSPITAL SERVICES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- REVENUES: Medical services.................................. $35,162,000 $37,172,000 $36,989,000 COSTS AND EXPENSES: Costs of operations: Medical services payroll.......................... 7,087,000 7,533,000 7,312,000 Maintenance and supplies.......................... 5,184,000 5,959,000 6,698,000 Depreciation...................................... 5,556,000 6,398,000 6,631,000 Equipment rental.................................. 4,064,000 2,686,000 3,449,000 Other............................................. 3,935,000 4,468,000 3,981,000 Selling and administrative........................ 5,116,000 5,901,000 5,309,000 Interest.......................................... 3,186,000 3,671,000 4,199,000 ----------- ----------- ----------- Total costs and expenses.................. 34,128,000 36,616,000 37,579,000 ----------- ----------- ----------- 1,034,000 556,000 (590,000) (Loss) gain on sale of assets and early termination of capital leases.................. (2,000) 821,000 3,000 Gain on sale of product line...................... 20,478,000 -- -- Interest and other income......................... 54,000 155,000 227,000 ----------- ----------- ----------- Income (loss) before income taxes................. 21,564,000 1,532,000 (360,000) Income tax expense (benefit)...................... 1,513,000 10,000 (7,000) ----------- ----------- ----------- Net income (loss)................................. $20,051,000 $ 1,522,000 $ (353,000) =========== =========== =========== Earnings (loss) per common share: Earnings (loss) per common share -- basic........... $ 4.23 $ 0.32 $ (0.08) =========== =========== =========== Earnings (loss) per common share -- assuming dilution.......................................... $ 3.15 $ 0.24 $ (0.08) =========== =========== ===========
The accompanying notes are an integral part of these statements. F-4 30 AMERICAN SHARED HOSPITAL SERVICES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1998
COMMON STOCK OPTIONS ADDITIONAL COMMON COMMON ISSUED TO PAID-IN ACCUMULATED SHARES STOCK OFFICERS 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 stock...... 225,000 2,000 -- -- -- 2,000 Issuance of common stock to noteholders....... 287,000 430,000 -- -- -- 430,000 Issuance of common stock to Board members........... 13,000 22,000 -- -- -- 22,000 Net loss............. -- -- -- -- (353,000) (353,000) --------- ----------- ---------- -------- ------------ ------------ Balances at December 31, 1996............. 4,769,000 11,089,000 2,414,000 930,000 (24,908,000) (10,475,000) Net income........... -- -- -- -- 1,522,000 1,522,000 --------- ----------- ---------- -------- ------------ ------------ Balances at December 31, 1997............. 4,769,000 11,089,000 2,414,000 930,000 (23,386,000) (8,953,000) Repurchase of Common Stock............. (225,000) (2,000) -- -- -- (2,000) Net income........... -- -- -- -- 20,051,000 20,051,000 --------- ----------- ---------- -------- ------------ ------------ Balances at December 31, 1998............. 4,544,000 $11,087,000 $2,414,000 $930,000 $ (3,335,000) $ 11,096,000 ========= =========== ========== ======== ============ ============
The accompanying notes are an integral part of this statement. F-5 31 AMERICAN SHARED HOSPITAL SERVICES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------ ----------- ----------- OPERATING ACTIVITIES Net income (loss)......................................... $ 20,051,000 $ 1,522,000 $ (353,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of product line............................ (20,478,000) -- -- Loss (gain) on sale of equipment........................ 2,000 (270,000) (3,000) Gain on early termination of capital leases............. -- (551,000) -- Depreciation and amortization........................... 6,095,000 6,752,000 6,978,000 Deferred income tax benefit............................. (164,000) -- -- Changes in operating assets and liabilities: (Increase) decrease in restricted cash.................... (1,575,000) (433,000) 275,000 Decrease in receivables................................... (154,000) (582,000) (95,000) (Increase) decrease in prepaid expenses, inventories and other assets............................................ 187,000 (10,000) 493,000 Increase in accounts payable, accrued liabilities and income taxes payable.................................... 3,767,000 843,000 1,563,000 ------------ ----------- ----------- Net cash provided by operating activities................... 7,731,000 7,271,000 8,858,000 INVESTING ACTIVITIES Deposits made to purchase Gamma Knives...................... -- -- (500,000) Proceeds from sale of product line, net of selling costs.... 12,240,000 -- -- Proceeds from sale and disposition of equipment............. 4,000 331,000 70,000 Increase (decrease) in minority interest.................... 143,000 (37,000) 442,000 Payment for purchase of property and equipment.............. (746,000) (349,000) (293,000) Distributions received from partnerships.................... -- -- 15,000 Other....................................................... -- (168,000) (84,000) ------------ ----------- ----------- Net cash provided by (used in) investing activities......... 11,641,000 (223,000) (350,000) FINANCING ACTIVITIES Principal payments on long-term debt and obligations under capital leases............................................ (8,291,000) (8,962,000) (8,226,000) Proceeds from issuance of long-term debt.................... 855,000 -- -- Payment for exercise of warrants............................ -- -- 2,000 Net (payments on) proceeds from revolving line of credit.... (837,000) 1,563,000 (8,000) Payment for repurchase of senior subordinated notes......... -- -- (360,000) Repurchase of common stock.................................. (2,000) -- -- ------------ ----------- ----------- Net cash used in financing activities....................... (8,275,000) (7,399,000) (8,592,000) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents........ 11,097,000 (351,000) (84,000) Cash and cash equivalents at beginning of year.............. 17,000 368,000 452,000 ------------ ----------- ----------- Cash and cash equivalents at end of year.................... $ 11,114,000 $ 17,000 $ 368,000 ============ =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid............................................... $ 3,163,000 $ 3,689,000 $ 4,320,000 ============ =========== =========== Income taxes paid........................................... $ 36,000 $ 29,000 $ 31,000 ============ =========== =========== SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment with lease/debt financing.......... $ 6,952,000 $ 3,999,000 $ 9,996,000 (Decrease) increase in medical and capitalized lease equipment due to lease restructuring...................... -- (1,137,000) (1,461,000) (Decrease) increase in capitalized lease obligations due to lease restructuring....................................... -- (2,036,000) (1,461,000) Accrued interest payable not paid as part of Senior Subordinated Notes Repurchase............................. -- -- 17,000 Stock and warrants issued to noteholders as part of Senior Subordinated Notes Repurchase............................. -- -- 430,000 Noncash portion of Senior Subordinated Notes redemption..... -- -- 413,000 Note receivable from officer added to basis of acquired asset..................................................... -- -- 248,000 Accounts payable converted to notes......................... -- 817,000 1,971,000 Net liabilities, primarily trade accounts receivable and payable, property and equipment, capital lease obligations, and long-term debt, assumed by buyer in sale of product line........................................... 9,808,000 -- --
The accompanying notes are an integral part of these statements. F-6 32 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE A -- BUSINESS AND BASIS OF PRESENTATION 1. Business American Shared Hospital Services (the "Company") provides Gamma Knife units to five medical centers in California, Texas, and Connecticut. The Company provided shared diagnostic imaging services to health care providers located in various geographic regions of the United States through November of 1998. The five diagnostic imaging services provided by the Company were Magnetic Resonance Imaging, Computed Axial Topography Scanning, Ultrasound, Nuclear Medicine, and Cardiac Catheterization Laboratory services. On November 13, 1998, the diagnostic imaging services product line was sold to a third party. In June 1995, African American Church Health and Economic Services, Inc. (ACHES) and ACHES Insurance Services, Inc. ("AIS") were incorporated. AIS is a wholly owned subsidiary of ACHES. AIS is an insurance agency qualified to sell life, health, and disability insurance in the states of California and New York. ACHES, through AIS, sells life, health and disability insurance primarily to the African-American Community. On October 17, 1995, the Company (through American Shared Radiosurgery Services ("ASRS")) and Elekta AB, the manufacturer of the Gamma Knife (through its wholly owned United States subsidiary GKV Investments, Inc. ("GKV")), entered into an operating agreement which formed GK Financing, LLC ("GKF"). GKF provides alternative financing of Elekta Gamma Knife units and is the preferred provider for Elekta AB of financing arrangements, such as fee-for-service lease arrangements with health care institutions in the United States and Brazil. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, CuraCare, Inc. ("CuraCare"), MMRI, Inc., European Shared Medical Services Ltd., ACHES and its wholly-owned subsidiary, AIS, and ASRS and its majority-owned subsidiary, GK Financing, LLC. The stock of CuraCare was sold on November 13, 1998 in conjunction with the sale of the diagnostic imaging services product line. All significant intercompany accounts and transactions have been eliminated in consolidation. NOTE B -- ACCOUNTING POLICIES 1. Use of Estimates in the Preparation of Financial Statements In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Cash and Cash Equivalents The Company considers all liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash in depository institutions which offer varying levels of federal insurance. Restricted cash is not considered a cash equivalent for purposes of the consolidated statements of cash flows. 3. Restricted Cash Restricted cash represents cash limited as to use by contractual arrangement. Of the restricted cash held at December 31, 1998, $1,000,000 is restricted until April 15, 1999 to satisfy covenants of the securities F-7 33 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 purchase agreement between American Shared Hospital Services and buyer in conjunction with the sale of diagnostic imaging services product line. The remaining restricted cash reflects cash that may only be used for the operations of GK Financing, LLC. 4. Accounts Receivable Subsequent to November, 1998, substantially all of the Company's revenue is provided by five customers. These customers constitute accounts receivable at December 31, 1998. The Company performs credit evaluations of its customers and generally does not require collateral. At December 31, 1998, the Company did not maintain an allowance for doubtful accounts because management believes that accounts receivable are fully collectible. 5. Accounting for Majority-Owned Subsidiary The Company accounts for GK Financing, LLC (GKF), as a consolidated entity due to its 81% majority-equity interest. The minority interest's 19% share of GKF's earnings (loss) is netted against "Interest and Other Income" in the consolidated statements of operations. 6. Inventories Inventories, which consist of minor medical equipment and supplies used in the Company's business, are valued at the lower of cost or market, using a valuation method which approximates FIFO (first-in, first-out). 7. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets which for medical and transportation equipment is generally 2 - 10 years. Through November of 1998, capitalized leased equipment consisted primarily of mobile Magnetic Resonance Imaging ("MRI") units, which include scanners and mobile vans. Following the sale of the diagnostic imaging services product line, leased equipment consists primarily of office equipment. Capitalized leased equipment is amortized over the term of the lease, which ranges from 24 to 96 months. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. 8. Operating Leases The Company leases Gamma Knife equipment to its customers under arrangements accounted for as operating leases. Revenue is provided for and recognized on a fee-for-service or contingent rental basis when the service is delivered. The lease agreements are generally over ten year terms. At December 31, 1998, the Company held equipment under operating lease contracts with customers with an original cost of $15,447,000 and accumulated depreciation of $4,531,000. 9. Intangible Assets Intangible assets represent the excess of cost of net assets acquired as the result of the acquisition of businesses and organization costs related to the initiation of new businesses. Intangible assets are being amortized by the straight-line method over 5 to 15 years. The Company annually assesses the recoverability of these intangible assets by determining whether the amortization of the intangible balance (for each business acquisition) over its remaining life can be recovered through forecasted future operations using an undiscounted cash flow methodology. F-8 34 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 10. Income Taxes The liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 11. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. Basic earnings per share has been computed based on the weighted-average number of common shares outstanding. The Company incurred a net loss for 1996, therefore, the incremental shares that arise as a result of the stock options and warrants outstanding are antidilutive as they reduce the loss per share. The following table sets forth the computation of basic and diluted earnings (loss) per share:
1998 1997 1996 ----------- ---------- ---------- Numerator for basic and diluted earnings (loss) per share............................................... $20,051,000 $1,522,000 $ (353,000) Denominator: Denominator for basic earnings (loss) per share -- weighted-average shares.......................... 4,735,000 4,769,000 4,498,000 Effect of dilutive securities Employee stock options/warrants................................. 1,631,000 1,574,000 -- ----------- ---------- ---------- Denominator for diluted earnings (loss) per share -- adjusted weighted-average shares................. 6,367,000 6,343,000 4,498,000 =========== ========== ========== Earning (loss) per share -- basic..................... $ 4.23 $ 0.32 $ (0.08) =========== ========== ========== Earning (loss) per share -- assuming dilution......... $ 3.15 $ 0.24 $ (0.08) =========== ========== ==========
12. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Disclosure requirements in accordance with SFAS No. 123 are included in Note F. 13. Fair Value of Financial Instruments The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other accrued liabilities approximated their fair value as of December 31, 1998 because of the relatively short maturity of these instruments. The carrying amounts of the F-9 35 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 Company's various debt obligations approximated fair value as of December 31, 1998 based upon interest rates that are currently available for the Company for issuance of instruments with similar terms and remaining maturities. In 1997 management was unable, without incurring excessive costs, to estimate its incremental borrowing rate, and considered estimation of fair value to be impracticable. NOTE C -- OTHER ASSETS Other assets consist of the following:
1998 1997 -------- -------- Capitalized regulatory licensing fees....................... $ -- $110,000 Prepaid commissions......................................... -- 114,000 Purchased software, less accumulated amortization of $211,000 and $424,000 in 1998 and 1997, respectively...... -- 50,000 Other deferred charges...................................... 183,000 289,000 -------- -------- $183,000 $563,000 ======== ========
NOTE D -- LONG-TERM DEBT Long-term debt consists of the following:
1998 1997 ----------- ----------- Notes Issued in Conjunction with Lease Restructuring Promissory note payable to primary provider of medical equipment bearing interest at 5% (effective February 1996) and 4% during 1995, payable in 86 monthly installments maturing in February 2002, secured by the Company's accounts receivable and certain medical equipment............................................... $ -- $ 1,505,000 Promissory note payable to primary provider of medical equipment bearing interest at 10.75%, payable in 60 monthly installments with the remaining balance due in January 2002............................................ -- 1,341,000 Promissory note payable to primary provider of medical equipment bearing interest at 10.5%, payable in 60 monthly installments maturing in February 2000.......... -- 248,000 Promissory note payable to primary provider of medical equipment bearing interest at 10.75%, payable in 36 monthly installments with the remaining balance due in January 2000............................................ -- 104,000 Borrowings for Repurchase of Senior Subordinated Notes Borrowings under $5.5 million Revolving Line of Credit bearing interest at prime rate plus 3.75% (12.25% at December 31, 1997) for repurchase of Senior Subordinated Notes maturing in May 1999.............................. -- 5,438,000 Borrowings under Term Loan for repurchase of Senior subordinated Notes bearing interest at 15%, payable in 48 monthly installments maturing in June 1999........... -- 1,066,000 Gamma Knife loan payable to primary provider of medical equipment bearing interest at 10.5%, payable in 40 monthly installments maturing in September 1998......... -- 346,000 Other Notes and Borrowings Gamma Knife loan payable to primary provider of medical equipment bearing interest at 10.5%, payable in 60 monthly installments maturing in July 1999, collateralized by equipment............................. 440,000 1,128,000
F-10 36 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996
1998 1997 ----------- ----------- Promissory note payable, bearing interest at prime rate plus 2%, due October, 1998.............................. -- 550,000 Borrowings under term loan bearing interest at 10.6%, payable in 84 monthly installments maturing in September 2004, collateralized by equipment....................... 2,044,000 2,271,000 Installment notes payable in monthly installments through March 2003, bearing interest at 9.9% to 22%, secured by certain medical equipment............................... -- 985,000 Promissory note payable, bearing interest at 10.6%, payable in 30 monthly installments maturing in March 2000.................................................... -- 738,000 Borrowings under term loan bearing interest at 10.6%, payable in 84 monthly installments maturing in April 2005, collateralized by equipment....................... 2,926,000 -- Borrowings under term loan bearing interest at 10.6%, payable in 85 monthly installments maturing in July 2005, collateralized by equipment....................... 3,073,000 -- Borrowings under term loan bearing interest at 10.7%, payable in 84 monthly installments maturing in September 2005, collateralized by equipment....................... 1,077,000 -- Promissory note payable, bearing interest at prime rate plus 2% (9.75% at December 1998) due in February 1999, unsecured............................................... 330,000 -- Promissory note payable, bearing interest at prime rate plus 2% (9.75% at December 1998) due in November 1999, unsecured............................................... 25,000 -- Borrowings for Gamma Knife deposits under promissory note, bearing interest at prime rate plus 2% (9.75% at December 31, 1998) payable when Gamma Knife units commence operation, collateralized by equipment......... 750,000 1,000,000 ----------- ----------- 10,665,000 16,720,000 Less current portion.................................... (1,873,000) (4,784,000) ----------- ----------- $ 8,792,000 $11,936,000 =========== ===========
Annual contracted maturities under the initial terms of long-term debt for the five years after December 31, 1998 are as follows: $1,873,000 in 1999, $1,318,000 in 2000, $1,422,000 in 2001, $1,579,000 in 2002, $1,754,000 in 2003 and $2,719,000 thereafter. F-11 37 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 NOTE E -- INCOME TAXES Significant components of the Company's deferred tax liabilities and assets as of December 31, 1998 and 1997 are as follows:
1998 1997 ----------- ---------- Deferred tax liabilities: Fixed assets............................................. $(1,000,000) $ -- Other -- net............................................. -- (164,000) ----------- ---------- Total deferred tax liabilities................... (1,000,000) (164,000) Deferred tax assets: Net operating loss carryforwards......................... 275,000 5,300,000 State income taxes....................................... 450,000 -- Fixed assets............................................. -- 2,200,000 Accrued reserves......................................... 710,000 -- Other -- net............................................. 360,000 500,000 ----------- ---------- Total deferred tax assets.................................. 1,795,000 8,000,000 Valuation allowance for deferred tax assets................ (795,000) 8,000,000 ----------- ---------- Net deferred tax assets.................................... 1,000,000 -- ----------- ---------- Net deferred tax liabilities............................... $ -- $ (164,000) =========== ==========
The components of the provision (benefit) for income taxes consist of the following:
1998 1997 1996 ---------- ------- ------- Current: Federal........................................... $ 360,000 $ -- $ -- State............................................. 1,317,000 10,000 (7,000) ---------- ------- ------- Deferred: Federal........................................... -- -- -- State............................................. (164,000) -- -- ---------- ------- ------- $1,513,000 $10,000 $(7,000) ========== ======= =======
The provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (35% in 1998, 1997 and 1996) to income (loss) before taxes as follows:
1998 1997 1996 ----------- ----------- --------- Computed expected tax........................ $ 7,500,000 $ 536,000 $(126,000) Change in valuation allowance................ (7,205,000) (1,600,000) (300,000) State income taxes (benefit), net of federal benefit.................................... 1,400,000 10,000 (7,000) Reduction in carryovers and tax attributes... -- 984,000 323,000 Other........................................ (182,000) 80,000 103,000 ----------- ----------- --------- $ 1,513,000 $ 10,000 $ (7,000) =========== =========== =========
At December 31, 1998 and 1997, the Company had a net operating loss carryforward for federal income tax return purposes of approximately $800,000 and $13,000,000, respectively, which expires between 1999 and 2011. A substantial part of this carryforward is subject to separate return limitations. At December 31, 1997 the Company had state carryforwards of varying amounts. These state carryforwards were utilized or expired F-12 38 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 during 1998. The Company's ability to utilize its net operating loss carryforwards and other deferred tax assets may be limited in the event of a 50% or more ownership change within any three-year period. NOTE F -- SHAREHOLDERS' EQUITY 1984 Stock Option Plan Under the Company's 1984 Stock Option Plan (the "Plan"), as amended, a total of 475,000 stock options were authorized for grant. The Plan terminated according to its terms on March 1, 1994. Options granted pursuant to the Plan generally had lives of 10 years from the date of grant, subject to earlier expiration in certain cases, such as termination of the grantee's employment. On August 15, 1995, the Stock Option Committee of the Board of Directors approved the amendment of the terms of substantially all options outstanding under the Company's 1984 Stock Option Plan, covering an aggregate of approximately 165,000 shares, to reduce the initial exercise price to $1.625 per share, which was the closing price of common shares on such date. 1995 Stock Option Plan The Company's 1995 Stock Option Plan, providing for nonqualified stock options and "incentive stock options," was approved by the Company's Board of Directors on August 15, 1995, subject to shareholder approval, which was given on October 6, 1995. Under the 1995 Plan, 330,000 common shares are reserved for awards to officers and other key employees, non-employee directors, and advisors. Provisions of the 1995 Stock Option Plan include an automatic grant to each non-employee director of options to purchase up to 4,000 shares annually on the date of the Company's Annual Shareholder Meeting, at an exercise price equal to the market price of the Company's common shares on that date, until the non-employee director has options for a total of 12,000 shares of the Company's common stock in all Company plans. Directors who are appointed or elected to the Company's Board of Directors on a date other than that of the Annual Shareholder Meeting receive a pro-rata grant of such options, at an exercise price equal to the market price of the Company's common shares on the date of grant. Changes in options outstanding under the 1984 and 1995 Stock Option Plans from January 1, 1996 to December 31, 1998 are as follows:
WEIGHTED NUMBER AVERAGE OF OPTIONS EXERCISE PRICE ---------- -------------- Balance at January 1, 1996.................................. 420,000 -- Granted................................................... 19,000 $1.634 Forfeited................................................. (22,000) 1.625 ------- Balance at December 31, 1996................................ 417,000 1.625 Granted................................................... 14,000 1.688 Exercised................................................. -- -- Forfeited................................................. (2,000) 1.596 ------- Balance at December 31, 1997................................ 429,000 1.627 Granted................................................... -- -- Exercised................................................. -- -- Forfeited................................................. (40,000) 1.625 ------- Balance at December 31, 1998................................ 389,000 $1.628 =======
F-13 39 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 At December 31, 1998, 43,000 options were available for grant and 7,000 shares were reserved for future issuance under the 1995 Plan. Shares and Options Issued to Officer On August 15, 1995, the Company's Chairman and Chief Executive Officer was granted a ten-year, immediately exercisable option to purchase 1,495,000 common shares for an exercise price of $.01 per share for which the Company recorded compensation expense of $2,414,000. These options were granted to the officer as final consideration for personal guarantees of the new credit facilities and for continued employment with the Company. The following table summarizes information about all options outstanding at December 31, 1998:
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 - --------------- ----------- ------------ -------- ----------- -------- $ 0.01 1,495,000 6.83 $ 0.01 1,495,000 $ 0.01 1.625 - 1.6875 389,000 5.84 1.628 389,000 1.628 - --------------- ----------- ------------ -------- ----------- -------- $ .01 - 1.6875 1,884,000 6.63 $ .344 1,884,000 $ .344 =============== =========== ============ ======== =========== ========
At December 31, 1998 and 1997, 1,884,000 and 1,890,000 options, respectively, were vested and exercisable. At December 31, 1998, there were 314,000 warrants outstanding at an exercise price of $.75 per warrant. These warrants are exercisable through May 2002 (see note L). Pro Forma Information related to Option Grants Pro forma information regarding net income and earnings per share is required by SFAS 123 for awards granted after December 31, 1995, as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's option grants under the 1984 and 1995 Plans was estimated assuming no expected dividends and the following weighted-average assumptions:
1998 1997 1996 ---- ---- ---- Expected life (years).................................. 9.5 9.5 9.5 Expected volatility.................................... 93.8% 93.8% 99.3% Risk-free interest rate................................ 6.3 6.3 7.9
F-14 40 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 No options were granted during 1998. The weighted-average fair value of options granted during 1997 and 1996 was $1.50 and $1.49, respectively. For pro forma purposes, the estimated fair value of the Company's options is amortized over the options' vesting period. The Company's pro forma information follows:
1998 1997 1996 ----------- ---------- --------- Net income (loss) As reported................................. $20,051,000 $1,522,000 $(353,000) Pro forma................................... 20,040,000 1,458,000 (387,000) Earnings (loss) per share -- basic As reported................................. 4.23 .32 (0.08) Pro forma................................... 4.23 .31 (0.06) Earnings (loss) per share -- assuming dilution As reported................................. 3.15 .24 (0.08) Pro forma................................... 3.15 .23 (0.06)
NOTE G -- RETIREMENT PLAN The Company has a defined contribution retirement plan for which substantially all full-time employees are eligible. Under the terms of the plan, the Company may contribute a discretionary matching contribution on behalf of each participant, determined each year by the Company, equal to a percentage of each participant's contributions and applicable to the first 6% of each participant's salary. The Company made no contributions to the plan in 1998, 1997 or 1996. NOTE H -- OPERATING LEASES The Company leases certain office equipment and space under operating leases expiring at various dates through 2001. Future minimum payments under noncancelable operating leases having initial terms of more than one year consisted of the following at December 31, 1998: 1999............................ $157,000 2000............................ 40,000 2001............................ 2,000 -------- $199,000 ========
Payments for repair and maintenance agreements are included in the future minimum operating lease payments shown above. Rent expense was $4,696,000, $3,285,000, and $3,841,000 for the years ended December 31, 1998, 1997 and 1996, respectively, and includes the above operating leases as well as month-to-month rental and certain capital lease executory costs. NOTE I -- COMMITMENTS AND CONTINGENCIES Under the terms of various Gamma Knife quotation agreements, the Company is committed to purchase Gamma Knife equipment for $13,838,000 effective when the equipment is placed in service at each customer location. At December 31, 1998, the Company had a $1,000,000 deposit related to these purchase commitments which is classified as construction in progress. F-15 41 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 NOTE J -- REPORTABLE SEGMENTS American Shared Hospital Services (ASHS) has two reportable segments: Diagnostic Imaging Services and Gamma Knife. The Diagnostic Imaging Services segment uses medical diagnostic imaging systems to facilitate the diagnosis of diseases and disorders. The Gamma Knife segment treats certain vascular malformations and intracranial tumors without surgery. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. ASHS evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. Applicable general and administrative expenses are allocated to segments based on relative percentage of revenues. Certain corporate expenses are not allocated to the segments. ASHS does not have significant intersegment sales transactions. The segments share common expenses and provide management activities to one another in which they charge management fees. These management fees are not considered significant. ASHS's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. REPORTABLE SEGMENT INFORMATION
1998 1997 1996 ------- ------- ------- (THOUSANDS) DIAGNOSTIC IMAGING SERVICES Revenues.............................................. $30,993 $34,772 $34,944 Interest expense...................................... 1,770 2,571 2,972 Depreciation and Amortization......................... 4,514 5,590 5,969 Segment profit (loss)................................. 156 1,208 (192) Segment assets........................................ -- 20,905 32,547 Other significant noncash items: Acquisition of equipment with lease/debt financing........................................ 820 1,767 7,701 Capitalized lease restructuring..................... -- (3,173) (2,922) Accounts payable converted to notes payable......... -- 817 1,971 GAMMA KNIFE Revenues.............................................. 4,156 2,384 2,030 Interest expense...................................... 773 303 327 Depreciation and Amortization......................... 1,042 808 661 Segment profit........................................ 1,115 392 305 Segment assets........................................ 15,125 7,859 5,268 Other significant noncash items: Acquisition of equipment with lease/debt financing........................................ 6,132 2,232 2,270
F-16 42 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 RECONCILIATION TO CONSOLIDATED AMOUNTS
1998 1997 1996 ------- ------- ------- (THOUSANDS) REVENUES Total revenues for reportable segments...................... $35,149 $37,156 $36,974 Other revenues.............................................. 13 16 15 ------- ------- ------- Total consolidated revenues............................ $35,162 $37,172 $36,989 TOTAL PROFIT FOR REPORTABLE SEGMENTS Total profit................................................ $ 1,271 $ 1,600 $ 113 Gain on sale of product line................................ 20,478 -- -- Other....................................................... (185) (68) (473) ------- ------- ------- Income before income taxes.................................. $21,564 $ 1,532 $ (360) ASSETS Total assets for reportable segments........................ $15,025 $28,764 $37,815 Other assets................................................ 12,042 1,907 845 Elimination of receivables from corporate headquarters...... (148) (462) (5,691) ------- ------- ------- Consolidated total..................................... $26,919 $30,209 $32,969
OTHER SIGNIFICANT ITEMS
SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS TOTALS ------- ----------- ------------ (THOUSANDS) 1998 Interest expense.......................................... $2,543 $643 $3,186 Expenditures for assets................................... 50 5 55 Depreciation and amortization............................. 5,556 -- 5,556 1997 Interest expense.......................................... $2,874 $797 $3,671 Expenditures for assets................................... 320 26 346 Depreciation and amortization............................. 6,398 -- 6,398 1996 Interest expense.......................................... $3,299 $900 $4,199 Expenditures for assets................................... 293 -- 293 Depreciation and amortization............................. 6,631 -- 6,631
Adjustments to reconcile reportable segment totals to consolidated totals include unallocated amounts and amounts from non-reportable segments. MAJOR CUSTOMERS Revenues from the Company's Gamma Knife segment were provided by five customers in 1998, three customers in 1997 and two customers in 1996. Revenue from the Diagnostic Imaging Services segment was provided by various customers throughout the U.S. NOTE K -- SALE OF PRODUCT LINE On November 13, 1998, the Company consummated a sale of their diagnostic imaging services product line to a third party. The diagnostic imaging services line included Magnetic Resonance Imaging (MRI), F-17 43 AMERICAN SHARED HOSPITAL SERVICES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 Computed Axial Tomography Scanning (CT), Ultrasound, Nuclear Medicine and Cardiac Catheterization Laboratory services. The Company sold the assets of this product line for $13.5 million in cash and the assumption by the third party of approximately $27.1 million in liabilities of the Company. The Company recognized a gain on disposal of product line of approximately $20 million in conjunction with this transaction. In conjunction with the product line sale, one of the Company's facility's which provides certain administrative and scheduling functions will be closed during 1999. At December 31, 1998, in accordance with the Emerging Issues Task Force (EITF) Abstract 94-3, the Company has accrued certain future exit costs related to the sale of the product line and corresponding facility closure which totaled $995,000 at December 31, 1998. The accrued costs include employee compensation of $215,000, tail coverage insurance costs of $500,000, legal and professional fees of $105,000, administrative costs of $115,000 and other costs totaling $60,000. Insurance costs of approximately $400,000 have been classified as long-term as they will be incurred subsequent to 1999. The accrued costs have been included as a reduction to the gain on sale of product line in the 1998 Statement of Operations. The revenue and net operating income or losses from the disposed diagnostic imaging services line for fiscal years ended 1998, 1997, and 1996 are presented at Note J. NOTE L -- SUBSEQUENT EVENT On March 8, 1999, the Company repurchased approximately 572,000 common shares and approximately 285,000 warrants for an aggregate repurchase price of approximately $702,000. F-18 44 AMERICAN SHARED HOSPITAL SERVICES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1998, 1997 AND 1996
ADDITIONS ADDITIONS BALANCE AT CHARGED TO BALANCE AT CHARGED TO BALANCE AT JANUARY 1, COSTS AND AMOUNTS DECEMBER 31, COSTS AND AMOUNTS DECEMBER 31, 1996 EXPENSES WRITTEN OFF 1996 EXPENSES WRITTEN OFF 1997 ----------- ----------- ----------- ------------ ----------- ----------- ------------ Allowance for uncollectible accounts........... $(1,448,000) $(1,014,000) $1,222,000 $(1,240,000) $(1,296,000) $1,234,000 $(1,302,000) ADDITIONS ASSUMED BY CHARGED TO BUYER IN BALANCE AT COST AMOUNTS PRODUCT LINE DECEMBER 31, EXPENSES WRITTEN OFF SALE 1998 ----------- ----------- ------------ ------------ Allowance for uncollectible accounts........... $(1,095,000) $1,031,000 $1,366,000 $ --
F-19 45 INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE 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.(1)........................ 3.1 Articles of Incorporation of the Company, as amended.(2).... * 3.2 By-laws for the Company, as amended.(3)..................... * 4.6 Form of Common Stock Purchase Warrant of American Shared * Hospital Services.(3)....................................... 4.8 Registration Rights Agreement, dated as of May 17, 1995, by * and among American Shared Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems.(3)......................................... 10.1 The Company's 1984 Stock Option Plan, as amended.(5)........ * 10.2 The Company's 1995 Stock Option Plan, as amended.(6)........ * 10.3 Form of Indemnification Agreement between American Shared * Hospital Services and members of its Board of Directors.(5)............................................... 10.4 Ernest A. Bates Stock Option Agreement dated as of August * 15, 1995.(7)................................................ 10.5 Operating Agreement for GK Financing, LLC, dated as of * October 17, 1995.(3)........................................ 10.6 Amendments dated as of October 26, 1995 and as of December * 20, 1995 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995.(4).................................. 10.7 Amendment dated as of October 16, 1996 to the GK Financing, * LLC Operating Agreement, dated as of October 17, 1995.(1)... 10.8 Amendment dated as of March 31, 1998 ("Fourth Amendment") to the GK Financing, LLC Operating Agreement dated as of October 17, 1995............................................ 10.9 Amendment dated as of March 31, 1998 ("Fifth Amendment") to the GK Financing, LLC Operating Agreement dated as of October 17, 1995............................................ 10.10 Amendment dated as of June 5, 1998 to the GK Financing, LLC Operating Agreement dated as of October 17, 1995............ 10.11a Assignment and Assumption Agreement, dated as of December 31, 1995, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee)................. 10.11b Assignment and Assumption Agreement, dated as of November 1, * 1995, between American Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee).(4).... 10.11c Amendment Number One dated as of August 1, 1995 to the Lease Agreement for a Gamma Knife Unit between The Regents of the University of California and American Shared Hospital Services. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.).................................................
46
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER ------- ----------- ----------- 10.11d Lease Agreement dated as of July 3, 1990 for a Gamma Knife Unit between American Shared Hospital Services and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.).............. 10.12 Amendment Number Two dated as of February 6, 1998 to the Lease Agreement for a Gamma Knife Unit between UCSF-Stanford Health Care and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.).......................... 10.13 Assignment and Assumption Agreement, dated as of February 3, * 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee).(4)............. 10.14 Lease Agreement for a Gamma Knife Unit dated as of April 6, 1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.).......................... 10.15 Assignment and Assumption and Agreement dated as of February 1, 1996 between Ernest A. Bates, M.D. and GK Financing, LLC with respect to the Lease Agreement for a Gamma Knife dated as of April 6, 1994 between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital. ............... 10.16 Lease Agreement for a Gamma Knife Unit dated as of October 31, 1996 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.).................................................
47
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER ------- ----------- ----------- 10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as of December 1, 1998 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.).......................... 10.18 Lease Agreement for a Gamma Knife Unit dated as of October 29, 1996 between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.)................................................. 10.19 Lease Agreement for a Gamma Knife Unit dated as of April 10, 1997 between Yale-New Haven Ambulatory Services Corporation and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.)................................................. 21. Subsidiaries of American Shared Hospital Services. ......... 23.1 Consent of Grant Thornton, LLP. ............................ 23.2 Consent of Ernst & Young, LLP. ............................. 27. Financial Data Schedule for the year ended December 31, 1998. ......................................................
- --------------- (1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1997, which is incorporated herein by this reference. (2) This document was filed as Exhibit 3.1 to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on October 26, 1995, which is incorporated herein by this reference. (4) These documents were filed as Exhibits 4.14 and 10.13, respectively, to the registrant's Pre-Effective Amendment No. 1 to registrant's Registration Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996, which is incorporated herein by this reference. (5) These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant's Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference. (6) This document was filed as Exhibit A to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. (7) This document was filed as Exhibit B to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference. EX-10.8 2 FOURTH AMENDED AGREEMENT DATED AS OF 3/31/1998 1 Exhibit 10.8 FOURTH AMENDMENT AGREEMENT This Amendment Agreement is made and entered into this 31st day of March, 1998, by and between AMERICAN SHARED RADIOSURGERY SERVICES, INC. ("ASRS") and GKV INVESTMENTS, INC. ("GKV"). WHEREAS, ASRS and GKV are parties to that certain Operating Agreement for GK FINANCING, LLC dated October 17, 1995, as amended (the "Operating Agreement"); WHEREAS, ELEKTA INSTRUMENTS, INC. and GK FINANCING, LLC have entered into two separate LGK Purchase Agreements for the sale/purchase of total seven Leksell Gamma Knives on October 11, 1995 and October 11, 1996 respectively and to which two separate Amendment Agreements have been entered into on the same date as this Fourth Amendment Agreement thereby absolving ELEKTA INSTRUMENTS, INC. of any and all obligations to pay interest on monies received from GK FINANCING, LLC for payments made under the Purchase Agreements; WHEREAS, ASRS and GKV desire to amend the Operating Agreement in certain respects; NOW THEREFORE, in consideration of the mutual covenants and obligations herein contained, ASRS and GKV agree as follows: 1. Defined Terms. All capitalized terms and expressions used herein which are defined in the Operating Agreement shall have the meaning set forth in the Operating Agreement except for the term "Draw Down Loan" as amended herein. 2. Amendment. Paragraph 12.23 "Draw Down Loan by GKV to the Company" is hereby amended as per the following: a) "Draw Down Loan" is redefined to mean the "Promissory Note" provided to Skandinaviska Enskilda Banken, New York, and signed by GK FINANCING, LLC on April 29, 1996, in consideration for the USD 1,300,000.- received by GK FINANCING, LLC. b) GKV will pay to GK FINANCING, LLC 50% of the interest charged by Skandinaviska Enskilda Banken relating to the capital amount of USD 250,000 as calculated from October 30, 1997 until either the date upon which this capital amount is repaid to Skandinaviska Enskilda Banken or October 17, 1998, which ever date comes 2 first. This interest will be paid semiannually as per the Promissory Note terms and conditions. Amendment. GKV will pay to GK FINANCING, LLC 50% of the interest (interest rate to be equal to that of the Promissory Note above) relating to USD 500,000 received by ELEKTA INSTRUMENTS, INC. as advance payment for the third (3) Leksell Gamma Knife purchased by GK FINANCING, LLC as per the LGK Purchase Agreement dated October 11, 1996. This interest will be calculated from October 30, 1997, and will be paid semiannually on the same dates as payments of interest under the Promissory Note above and until either October 17, 1998, or the date upon which this Leksell Gamma Knife is delivered to enduser's site, which ever date comes first. 3. Full Force and Effect. Except as explicitly amended by this Fourth Amendment Agreement and all previous amendments, the provisions of the Operating Agreement shall remain in full force and effect. 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. AMERICAN SHARED RADIOSURGERY SERVICES, INC. By: /s/ Ernest A. Bates -------------------------------- Title: CEO ----------------------------- GKV INVESTMENTS, INC. By: /s/ Richard Grome -------------------------------- Title: President ----------------------------- EX-10.9 3 FIFTH AMENDED AGREEMENT DATED AS OF 3/31/1998 1 Exhibit 10.9 FIFTH AMENDMENT AGREEMENT This Amendment Agreement is made and entered as of March 31, 1998, by and between AMERICAN SHARED RADIOSURGERY SERVICES, INC. ("ASRS"), and GKV INVESTMENTS, INC. ("GKV"). WHEREAS, ASRS AND GKV are parties to that certain Operating Agreement for GK Financing, LLC dated as of October 17, 1995, as amended (the "Operating Agreement"); WHEREAS, ASRS AND GKV desire to amend the Operating Agreement in certain respects; NOW THEREFORE, in consideration of the mutual covenants contained herein, ASRS and GKV agree as follows: 1. Defined Terms. All capitalized terms used herein which are defined in the Operating Agreement shall have the meaning set forth in the Operating Agreement. 2. Amendment. Paragraph 2.14A of the Operating Agreement is hereby amended whereby the amount of cash reserve to be maintained by the Company is reduced from $800,000 to $600,000. 3. Full Force and Effect. Except as explicitly amended by this Fifth Amendment Agreement, the provisions of the Operating Agreement shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the date first above-written. GKV INVESTMENTS, INC. By: Richard Grome --------------------------------- Title: President ------------------------------ AMERICAN SHARED RADIOSURGERY SERVICES, INC. By: Ernest A. Bates --------------------------------- Title: CEO ------------------------------ EX-10.10 4 SIXTH AMENDED AGREEMENT DATED AS OF 6/5/1998 1 Exhibit 10.10 SIXTH AMENDMENT AGREEMENT This Amendment Agreement is made and entered as of June 5, 1998, by and between AMERICAN SHARED RADIOSURGERY SERVICES, INC. ("ASRS"), and GKV INVESTMENTS, INC. ("GKV"). WHEREAS, ASRS AND GKV are parties to that certain Operating Agreement for GK Financing, LLC dated as of October 17, 1995, as amended (the "Operating Agreement"); WHEREAS, ASRS AND GKV desire to amend the Operating Agreement in certain respects; NOW THEREFORE, in consideration of the mutual covenants contained herein, ASRS and GKV agree as follows: 1. Defined Terms. All capitalized terms used herein which are defined in the Operating Agreement shall have the meaning set forth in the Operating Agreement. 2. Amendment. Paragraph 2.14A of the Operating Agreement is hereby amended whereby the amount of cash reserve to be maintained by the Company is reduced from $600,000 to $50,000. 3. Full Force and Effect. Except as explicitly amended by this Sixth Amendment Agreement, the provisions of the Operating Agreement shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the date first above-written. GKV INVESTMENTS, INC. By: Jonas Serlachius --------------------------------- Title: V.P. ------------------------------ AMERICAN SHARED RADIOSURGERY SERVICES, INC. By: Ernest A. Bates --------------------------------- Title: CEO ------------------------------ EX-10.12 5 AM. NO.2 TO LEASE AGREEMENT DATED 2/6/1998 1 Exhibit 10.12 Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks. AMENDMENT NUMBER TWO TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT BETWEEN UCSF-STANFORD HEALTH CARE AND GK FINANCING, LLC This AMENDMENT NUMBER TWO TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT (the "Amendment") is dated effective as of February 6, 1998, and is entered into between GK FINANCING, LLC, a California limited liability company ("GKF"), and UCSF- STANFORD HEALTH CARE, a California nonprofit public benefit corporation ("UCSF SHC"), with reference to the following facts: RECITALS A. Reference is made to a certain Lease Agreement for a Gamma Knife Unit (as amended, the "Agreement") which was dated July 6, 1990 but which first became effective on September 17, 1991, between The Regents of the University of California ("University") and American Shared Hospital Services, a California corporation ("ASHS"). B. The Agreement was amended pursuant to a certain Amendment Number One to the Lease Agreement for a Gamma Knife Unit (the "First Amendment") dated effective August 1, 1995 between University and ASHS. C. ASHS subsequently assigned all of its right, title and interest in and to the Agreement to its wholly-owned subsidiary, American Shared Radiosurgery Services ("ASRS"). D. On December 31, 1995, ASRS assigned all of its right, title and interest in and to the Agreement to GKF pursuant to a certain Assignment and Assumption Agreement, which assignment was consented to by University pursuant to a certain Estoppel Certificate and Consent to Assignment dated December 21, 1995. E. UCSF SHC was incorporated on November 1, 1997 and was assigned certain assets and assumed certain liabilities, including all of University's rights and obligations under the Agreement. F. GKF and UCSF SHC desire to further amend the Agreement as provided below. Page 1 of 7 2 NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree to amend the Agreement as follows: AGREEMENT 1. Defined Terms. Unless otherwise defined herein, the capitalized terms used herein shall have the same meanings set forth in the Agreement. 2. Extension of Term. The Term of the Agreement shall be extended through September 17, 2008. 3. Option to Purchase Equipment. UCSF SHC shall not exercise any of its options set forth in Sections 14(a)(i) or 14(a)(ii) of the Agreement to purchase the Leksell Gamma Knife Model U Unit (the "Original Unit") that is currently being leased by GKF to UCSF SHC under the Agreement. Accordingly, title to the Original Unit shall remain with GKF. 4. Replacement of the Original Unit. GKF shall be responsible for removing the Original Unit from the Site, and replacing it with a new Leksell Gamma Knife Model B (the "New Unit") to be located at such Site; provided that UCSF SHC shall be responsible for repairing the Site to its original condition and implementing any changes UCSF SHC wishes to make to the Site or which are required to support the New Unit. UCSF SHC shall indemnify GKF for any such repairs or changes made or implemented by UCSF SHC, which indemnification shall be in the same manner as GKF is indemnified in Section 8(d) of the Agreement. a. The Original Unit shall be removed and the New Unit shall be installed by GKF after all appropriate licenses, permits, approvals, consents and authorizations (collectively, the "Permits") have been obtained by (and at the sole cost and expense of) UCSF SHC for such removal and installation, including, without limitation, the removal and reloading of the cobalt-60. The timing and procedure for such removal and installation shall be as mutually agreed upon between the parties. As used herein, the "installation" of the New Unit by GKF shall mean the placement of the New Unit at the Site and the loading of the cobalt-60. b. If UCSF SHC has performed its obligations hereunder with respect to the removal of the Original unit and the installation of the New Unit, including, without limitation, obtaining the Permits, but the New Unit has not been installed in accordance with the agreement of the parties, UCSF SHC shall give written notice thereof to GKF. Subject to Section 26(c) (Force Majeure) of the Agreement, if the New Unit has not been so installed within seven (7) days after GKF's receipt of such notice from UCSF SHC, GKF shall pay liquidated damages to UCSF SHC in the amount of One Thousand Dollars ($1,000) for each business day after the expiration of such seven (7) day period until the New Unit has been installed. The Page 2 of 7 3 parties agree that (i) it would be impractical and extremely difficult to estimate the damages suffered by UCSF SHC as a result of GKF's failure to complete the installation of the New Unit; and (ii) the liquidated damages provided for above represent a reasonable estimate of the damages which UCSF SHC would incur as a result of such failure and that such liquidated damages will be the full, agreed and liquidated damages for such failure. 5. * 6. Per Procedure Payment. Effective on the date the first clinical treatment is performed on the New Unit, Section 2 of the First Amendment shall be deleted and replaced with the following: * 7. Cobalt Reloading. It is anticipated that after the New Unit has been in clinical operation for six (6) years, UCSF SHC will remove and reload the cobalt-60 into the New Unit Page 3 of 7 4 during the seventh (7th) Rate Year. UCSF SHC shall be responsible for all costs associated with the removal and disposal of the depleted cobalt and the installation of the new cobalt-60 into the New Unit. In addition, UCSF SHC shall indemnify GKF for the foregoing in the same manner as GKF is indemnified in Section 8(d) of the Agreement. 8. Transfer of Title to New Unit. At the end of the seventh (7th) Rate Year, GKF shall transfer all of its right, title and interest in and to the New Unit to UCSF SHC in consideration for the payment by UCSF SHC to GKF of One Dollar ($1.00). 9. Services Performed by GKF. In addition to GKF's responsibilities under the Agreement, GKF shall provide marketing support and research funding assistance, and use its efforts to include UCSF SHC in networks with third party payors, where warranted, for the provision of Gamma Knife services. Such services shall include the following: a. Sponsoring a guest lecturer for Gamma Knife symposiums in each for the first seven (7) Rate Years. b. Assisting in the funding of, at minimum, one research project related to the clinical applications of the Gamma Knife to functional procedures (i.e., epilepsy, Parkinson). Additional research projects with Gamma Knife clinical applications shall be considered on a case-by-case basis. c. Develop a marketing and sales plan within thirty (30) days of execution of this Amendment for review by UCSF SHC. GKF and UCSF SHC shall meet at minimum quarterly to review the effectiveness of the marketing and sales plan. * 10. Allocation of Responsibility. It is understood by the parties that GKF is not responsible for any additional hardware, cobalt reloading, software changes and/or other modifications to the New Unit except as agreed upon in writing by UCSF SHC and GKF. The Agreement may be modified to reflect any additional changes or modifications. Page 4 of 7 5 11. Financing. GKF shall ensure that the financing of its New Unit shall not restrict or prohibit the transfer of title to the New Unit pursuant to Section 8 above. 12. Service Liaison. UCSF SHC shall designate an individual to be responsible for conveying any Gamma Knife service/maintenance issues to Elekta. The designated individual, however, must obtain prior written approval from GKF for any service and/or maintenance that is not covered by warranty or under GKF's service agreement with Elekta. Notwithstanding the foregoing, it is understood that upon transfer of title to the New Unit to UCSF SHC pursuant to Section 8 above, the Service Agreement between GKF and Elekta referenced in Section 16 of the Agreement shall terminate and GKF shall have no further obligation to service or repair the New Unit pursuant to this Section 12 or under the Agreement. 13. Acknowledgment of Assignment. UCSF SHC acknowledges the assignment by University to UCSF SHC of all of University's rights and obligations under the Agreement and the LGU Agreement (as defined in the Agreement), and UCSF SHC hereby accepts such assignment and assumes and agrees to perform all of University's obligations arising thereunder. In furtherance of the foregoing, UCSF SHC shall cause University to execute this Amendment solely for the purpose of acknowledging such assignment. 14. Captions. The captions and paragraph headings used herein are for convenience only and shall not be used in construing or interpreting this Amendment. 15. Full Force and Effect. Except as amended by this Amendment, all of the terms and provisions of the Agreement shall remain in full force and effect. 16. Dispute Resolution. In the event any dispute should arise between the parties hereto as to the validity, construction, enforceability or performance of this Agreement or any of its provisions, such dispute shall be settled by arbitration. a. Arbitrators. There shall be one (1) arbitrator for the arbitration hearing who shall be chosen as follows. Within ten (10) days following any such election by either of the parties hereto to arbitrate, each party shall provide the other with written notice of its designee, who shall be a lawyer actively practicing in San Francisco with not less than ten (10) years experience in commercial healthcare matters, who shall have no prior relationship, attorney/client or otherwise, with any of the parties and who shall have committed in writing his or her willingness to timely serve hereunder. Within ten (10) days after such exchange of such identification of such designees, the designees shall meet and select and identify in writing to each of the parties a third party ("Arbitrator") who either meets the eligibility requirements of such designees, or who is a retired judge actively engaged in alternative dispute Page 5 of 7 6 resolution matters in San Francisco, California, with not less than ten (10) years experience on the bench or in alternative dispute resolution matters. In the event that any party fails to timely designate its designee, such dispute shall thereupon immediately be deemed determined in accordance with the position of the other party, but only so long as such other party has not also failed to timely designate its designee. In the event that such designees are unable to timely select and identify Arbitrator, such designees shall, without further action, automatically be deemed dismissed and the parties hereto shall, within ten (10) days thereafter, repeat the designation process provided for in this Section. b. Arbitrator Authority. Arbitrator (i) shall have all authority of a court of competent jurisdiction, including the authority to issue injunctive and/or other orders, including rules of discovery, procedure and/or evidence, and to award damages, actual, compensatory and/or punitive, (ii) shall designate another person to act in his or her place in any instance in which he or she is unable to act within the mandated time frame within ten (10) days after making such determination, and (iii) shall determine and designate the prevailing and nonprevailing parties to any dispute. c. Law to be Applied. The substantive law of the State of California shall be applied by Arbitrator to the resolution of the dispute; provided that the arbitration shall be conducted in accordance with the rules then prevailing of the American Arbitration Association. The parties shall have the rights of discovery as provided for in Part 4 of the California Code of Civil Procedure and the provisions of Section 1283.05 of the California Code of Civil Procedure are hereby incorporated by reference into this Agreement pursuant to the provisions of Section 1283.1(b) of the California Code of Civil Procedure. In the event that either said Sections is amended in a manner which limits or reduces the discovery rights contained in said Sections as of the date hereof, said amendment shall not be deemed to apply to this Agreement unless the parties agree in writing that the same shall apply. In the event that either Section 1283.05 or 1283.1(b) is repealed, the provisions of Section 1283.05 shall nevertheless continue to apply and the parties shall have the discovery rights as provided therein as of the date of this Agreement. The California Evidence Code shall apply to all testimony and documents submitted to Arbitrator. d. Place and Timing Arbitration. The arbitration shall take place in San Francisco, California, unless the parties otherwise agree in writing. As soon as reasonably practicable, a hearing with respect to the dispute or matter to be resolved shall be conducted by Arbitrator. As soon as reasonable practicable, but not later than thirty (30) days after the hearing is completed, Arbitrator shall arrive at a final decision, which shall be reduced to writing, signed by Arbitrator and mailed to each of the parties and their respective legal counsel. e. Limited Judicial Action. The designated prevailing party may, but need not, apply to any court of competent jurisdiction to enter a confirming award as to any Arbitrator decisions. No appeal may be taken from any Arbitrator decision except on a claim of Page 6 of 7 7 fraud on the part of Arbitrator, provided that no such appeal shall in any way stay or otherwise delay the effect of the appealed decision. f. Fees and Costs. The designated nonprevailing party in any dispute shall be required (i) to fully compensate Arbitrator, and each of the designees, for their respective services hereunder at their respective prevailing hourly rate of compensation, and (ii) to fully reimburse the designated prevailing party in any dispute for all of its documented attorneys' fees and costs in connection with such dispute, as confirmed by Arbitrator without right of challenge by such nonprevailing party. g. Rights Reserved by Parties. The provisions of this Section shall not limit, require the postponement of implementation, or in any other way preclude the exercise of any rights otherwise enjoyed by any party to this Agreement under the provisions hereof. IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the date first written above. GK FINANCING, LLC UCSF-STANFORD HEALTH CARE BY: Craig K. Tagawa BY: /s/ ----------------------------- -------------------------- TITLE: CEO TITLE: Administrative -------------------------- Materials Manager ----------------------- DATE: February 6, 1998 DATE: March 27, 1998 --------------------------- ------------------------ THE UNDERSIGNED PARTY IS EXECUTING THIS AMENDMENT SOLELY FOR THE PURPOSE OF ACKNOWLEDGING AND CONFIRMING THE ASSIGNMENT SET FORTH IN SECTION 13 ABOVE: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA BY: /s/ M. Gonzales ----------------------------- TITLE: -------------------------- DATE: --------------------------- Page 7 of 7 EX-10.14 6 LEASE AGREEMENT FOR A GAMMA KNIFE DATED 4/6/1994 1 EXHIBIT 10.14 Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks. LEASE AGREEMENT FOR A GAMMA KNIFE UNIT THIS AGREEMENT FOR A GAMMA KNIFE UNIT, (hereinafter, referred to as the "Agreement") is entered into on April 6, 1994 between Ernest A. Bates, M.D. an individual, (hereinafter referred to as "PROVIDER"), and NME HOSPITALS, INC. a Delaware corporation, dba USC University Hospital (hereinafter referred to as "NME"). R E C I T A L S WHEREAS, the Lease Agreement dated as of February 1, 1993 (the "Original Lease") entered into by and between NME and American Shared Hospital Services ("ASHS") for the lease of a Leksell Stereotactic Gamma Unit (hereinafter referred to as the "Equipment") manufactured by Elekta Instruments, Inc., a Georgia corporation ("Elekta") was terminated pursuant to that certain Agreement for Termination of Agreements and Mutual Release dated April 6, 1994 (the "Termination Agreement") between NME and ASHS and Provider prior to the delivery of the Equipment under the Original Lease; WHEREAS, NME wants to lease the Equipment; and WHEREAS, PROVIDER will enter into a LGK Purchase Agreement with Elekta for the purchase of the Equipment in the form attached hereto as Exhibit A (the "Purchase Agreement"), and an Installment Note and Security Agreement with General Electric Company for the financing of the purchase of the Equipment in the form attached hereto as Exhibit B (the "Note"); WHEREAS, PROVIDER is willing to lease the Equipment which PROVIDER has acquired from Elekta to NME, pursuant to the terms and conditions of this Agreement. NOW, therefore, in consideration of the foregoing premises and the promises contained herein, the parties hereto hereby agree as follows: 1. Execution of Related Agreements (a) NME agrees that simultaneously with the execution of this Agreement it shall execute that certain LGK Agreement with Elekta, (hereinafter referred to as the "LGK Agreement"), a copy of which is attached hereto as Exhibit C and incorporated herein by this reference. NME agrees to fulfill all of its obligations under the LGK Agreement and acknowledges that PROVIDER is a third party beneficiary of the LGK Agreement. NME shall fully indemnify and hold harmless PROVIDER in the event that PROVIDER suffers any loss, 2 damage, claim or expense (including attorneys' fees) solely as a result of NME's breach or alleged breach of the LGK Agreement. (b) PROVIDER agrees that on or before the execution of this Agreement, PROVIDER shall execute the Purchase Agreement and the Note. PROVIDER agrees to fulfill all of its obligations under the Purchase Agreement and the Note and acknowledges that NME is a third party beneficiary of the Purchase Agreement and the Note. 2. Delivery of the Equipment and Site Preparation. PROVIDER shall arrange to have the Equipment delivered to NME, at 1500 San Pablo Street, Los Angeles, California (the "Site") in coordination with Elekta on or before April 6, 1994. Elekta shall be responsible for transporting the Equipment from F.O.B. loading dock to the Site and the subsequent positioning of the Equipment, as well as, construction of the temporary hot cell to facilitate charging of the Equipment with its cobalt supply. Elekta shall be reimbursed by NME for the costs associated with transporting, installing and positioning the Equipment to the Site as well as the construction of the temporary hot cell to facilitate charging of the Equipment with its cobalt supply. Such costs shall not exceed $70,000 and shall be paid upon presentation of documented expenses. PROVIDER shall exert its best faith efforts to expedite the delivery of the Equipment in accordance with the terms and conditions of the Purchase Agreement for the Equipment by and between PROVIDER and Elekta. PROVIDER shall immediately inform NME of any delay in the delivery of the Equipment. Should PROVIDER not deliver the Equipment to NME on April 6, 1994 due to no fault of NME and except for reasons of force majeure as defined under paragraph 25(c) PROVIDER shall reimburse NME at an annual interest rate of Bank of America's prime rate plus 2% on its actual cost expended to prepare the Site as of sixty (60) days subsequent to April 6, 1994 until the Equipment is delivered. NME shall provide a safe, convenient and properly prepared Site, at its own expense, in accordance with all of the Equipment manufacturer's (Elekta's) guidelines, specifications, technical instruments and Site Planning Criteria (which Site Planning Criteria are attached hereto as Exhibit D and incorporated herein by this reference). NME shall obtain a User License from the Nuclear Regulatory Commission and/or appropriate state agency authorizing it to take possession of the Cobalt Supply and shall obtain such other licenses, permits, approvals, consents and authorisations, which may be required by local governmental or other regulatory agencies for the Site, its preparation, the charging of the Equipment with its Cobalt Supply, the conduct of the Acceptance tests, and the use of the Equipment all as more fully set forth in Article 2.1 of the LGK Agreement. 3. Commencement of the Term. The Term (hereinafter defined) of this Agreement shall commence upon the performance of the first Gamma Knife procedure at the Site (the "Commencement Date"). NME -2- 3 shall become liable to PROVIDER for the payments referred to in Paragraph 6 hereinbelow upon the Commencement Date. 4. Costs of Site Preparation; Costs of Installation. NME's obligations shall include preparation of plans and specifications for the construction and preparation of the Site in such form as will result in the Site, when constructed in accordance with such plans and specifications, being in full compliance with Elekta's Site Planning Criteria. NME shall at its own expense and risk, prepare, construct and make ready the Site as necessary, for the installation of the Equipment, including, but not limited to, providing any temporary and/or permanent shielding of the charging of the Equipment and its use, selecting and preparing a proper foundation for the Equipment and for such shielding and walls, as well as proper alignment of the Site and wiring. NME shall reimburse Elekta for the costs associated with transporting, installing and positioning the LGK, up to a maximum of $70,000 in accordance with the LGK Agreement. NME shall also at its own expense select, purchase and install all radiation monitoring Equipment and devices, safety circuits and radiation warning signs needed for the Equipment at the Site, according to all applicable federal, state and local laws, regulations, recommendations or custom. Upon completion of the Site, NME shall warrant that the Site will be safe and suitable for its use of the Equipment. NME shall fully indemnify and hold harmless PROVIDER from any and all loss, liability, damage, expense or claim (including attorneys' fees) which PROVIDER may suffer and incur and which relate to the Site. NME shall be liable to PROVIDER for any change to the Equipment caused by (a) defects in construction of the Site; (b) defects arising out of materials or parts provided, modified or designed by NME with respect to the SITE; or (c) negligent or intentional acts or omission or commission by NME or any of its officers, agents, physicians, and employees in connection with the Site preparation or operation of the Equipment at the Site. NME hereby warrants that all site preparations are complete and ready for delivery of the Equipment. 5. Term of the Equipment. PROVIDER agrees to provide to NME the Equipment pursuant to the terms of this Agreement, for a term of five (5) years from the Commencement Date as described in Paragraph 3 hereinabove (the "Term"), unless terminated earlier as provided herein. 6. * -3- 4 * 7. Use of the Equipment. The Equipment may be used by NME only at the location stated above and shall not be removed therefrom. NME shall not assign or sublease the Equipment or its rights hereunder without the prior written consent of PROVIDER; which consent shall not be unreasonably withheld. No permitted assignment or sublease shall relieve NME of any of its obligations hereunder. NME shall not use nor permit the Equipment to be used in any manner nor for any purpose for which, in the opinion of Elekta or PROVIDER, the Equipment is not designed or reasonably suitable. NME shall not permit any liens, whether voluntary or involuntary, arising through NME to attach to the Equipment, without the prior written consent of PROVIDER. NME shall have no interest in the Equipment other than the rights acquired as a lessee hereunder and the Equipment shall remain the property of PROVIDER regardless of the manner in which it may be installed or attached at the Site. NME shall, at PROVIDER's request, affix to the Equipment tags, decals, or plates furnished by PROVIDER, indicating PROVIDER's ownership of the Equipment. 8. Additional Covenants of NME. In addition to the other covenants made by NME, NME shall at its own cost and expense: (a) Provide properly trained professional, technical and support personnel required for the proper performance of medical procedures utilizing the Equipment. PROVIDER shall be responsible to coordinate with Elekta adequate training of initial hospital personnel. (b) Assume all medical and financial responsibility for the overseers' monitoring of all patients' medical condition and treatment. (c) Fully comply with all of its obligations under the LGK Agreement. (d) Indemnify PROVIDER as herein provided: (i) NME hereby agrees to fully indemnify and/or reimburse (including reasonable attorneys' fees) PROVIDER on a prompt basis for any and all damage to the Equipment (including any violations by NME, its agents, - 4 - 5 officers, physicians, employees, successors and assigns of the Service Agreement described in Paragraph 15 hereof) to the extent such damages are caused by the negligent or wrongful acts or omissions of NME, its agents, officers, physicians and employees. In the event the Equipment is destroyed or rendered unusable, this indemnification shall extend up to (but not exceed) the full replacement value of the Equipment at the time of its destruction less salvage value, if any, (ii) NME hereby further agrees to indemnify and hold PROVIDER, its agents, officers, employees, successors and assigns, harmless from and against any and all claims, liabilities, obligations, losses, damages, injuries, penalties, actions, costs and expenses (including reasonable attorneys' fees) for all events and/or occurrences described in Article 7.3 of the LGX Agreement to the same extent that NME agrees to indemnify Electa thereunder. NME further agrees to fully indemnify and hold harmless PROVIDER for any loss, damage, claim, or expense (including reasonable attorneys' fees) PROVIDER may suffer or incur as a result of NME's breach or breach alleged in litigation with the LGX Agreement. 9. Additional Covenants, Representations and Warranties of PROVIDER. In addition to the other covenants, representations and warranties made by PROVIDER in this Agreement: (a) PROVIDER represents and warrants that PROVIDER has full power and authority to enter into this Agreement, and that this Agreement does not and will not violate any agreement, contract or instrument binding upon PROVIDER. (b) PROVIDER represents and warrants to NME that, upon delivery of the Equipment to NME, PROVIDER shall use its best faith efforts to require that Electa meets its contractual obligations to PROVIDER and in putting the Equipment, as soon as possible, into good, safe and serviceable condition and fit for its intended use in accordance with the manufacturer's specifications, guidelines and field modification instructions. (c) PROVIDER represents and warrants that throughout the term of this Agreement, NME shall enjoy the use of the Equipment, free of the rights of any other persons except for those rights reserved by PROVIDER for granted to Electa under the LGX Agreement or under Electa's Purchase Agreement with PROVIDER. This provision shall in no way limit the rights of NME under Section 10. (d) During the entire term of this Agreement and subsequent extension thereof, PROVIDER shall maintain in full force and effect: (i) the Service Agreement referenced in Paragraph 15 hereof; and (ii) any other service or other agreements required to -5- 6 fulfill PROVIDER's obligations to NME pursuant to this Paragraph 9(c), PROVIDER represents and warrants that during the entire term of this Agreement and any subsequent extensions thereof, that it will fully pursue any and all remedies it may have against Elekta under the Service Agreement to insure that the Equipment will be in conformity with Elekta's warranties so that it is free from defects in design, materials, and workmanship which result in noncompliance with the specifications and/or Elekta's warranties to PROVIDER. In no event, however, shall the warranty obligations of PROVIDER to NME with respect to the Equipment be greater or more extensive than Elekta's warranty obligations to PROVIDER with respect to the Equipment. PROVIDER's obligations to service the Equipment shall include that duty to provide preventative maintenance, parts, and labor. The parties agree that the necessity and financial responsibility for upgrades to the Equipment shall be mutually discussed and decided by PROVIDER and NME. NME warrants that it shall not knowingly allow or cause any acts by its agents, officers, employees, patients, etc. which may or will jeopardize PROVIDER's rights under the Service Agreement. 10. Ownership/Title. It is expressly understood that NME shall acquire no right, title or interest in or to the Equipment other than the right to the possession and use of the same in accordance with the terms of this Agreement. PROVIDER may at its sole discretion finance the Equipment, subject to obtaining an Attornment Agreement from the lender in form and substance satisfactory to NME. Financing may be in the form of an installment loan or a capitalized lease or other commercially available debt instrument, should PROVIDER finance the Equipment through an installment loan, PROVIDER shall be required to provide the Equipment and contract as collateral against the loan. Should PROVIDER finance the Equipment through a capitalized lease, title shall vest with the lessor. PROVIDER shall, however, structure the capitalized lease or loan such that the default of PROVIDER shall not affect the rights of NME to the quiet use and enjoyment of the Equipment provided that the lender shall have all of the rights and obligations of PROVIDER under this Agreement pursuant to the terms of the Attornment Agreement. PROVIDER is also authorized to assign its rights under this LEASE as collateral for any such financing. 11. Cost of the Equipment. Except as is otherwise provided herein, NME shall bear the entire cost of using the Equipment during the Term of this Agreement. This shall include, but not be limited to, providing trained professionals, technical and support personnel and supplies to properly operate the Equipment. NME shall be fully responsible and liable for all acts -6- 7 and/or omissions of such professional, technical and support personnel. 12. Taxes. PROVIDER shall pay any personal property taxes levied against the Equipment and any other taxes or governmental fees or assessments, however denoted, whether of the federal government, any state government or any local government, levied or based on this Agreement or the use of the Equipment except for those taxes, if any, pertaining to the gross income or gross receipts of NME. In the event that PROVIDER fails to pay any such taxes, NME shall have the right, in its sole and absolute discretion, to pay such taxes on behalf of PROVIDER and offset such amounts against any payments owned under Section 6. 13. Maintenance and Inspections. PROVIDER agrees to exercise due and proper care in the maintenance of the Equipment and to keep the Equipment in a good state of repair, reasonable wear and tear excepted. NME shall be liable to PROVIDER for all damage to the Equipment caused by the misuse, negligence, improper use or other intentional or negligent acts or omissions of NME's employees, officers agents, and physicians. PROVIDER (and Elekta) shall have the right of access to the Equipment for the purpose of inspecting same at all reasonable times and upon reasonable notice and with a minimum of interference to NME's operations. In the event the Equipment is improperly used by NME or its employees, agents, officers, and physicians, PROVIDER may service or repair the same as needed and such expense shall be paid by NME, unless the repair is covered by the Service Agreement described in Paragraph 15 hereof. Any work so performed by or in the service or maintenance of the Equipment as a result of NME's failure or neglect to do so shall not deprive PROVIDER of any of its rights, remedies or actions against NME for damages cause by such failure or neglect. 14. Options to Extend Agreement. (a) NME shall have the option at the end of the five (5) year initial Term to: (i) * (ii) * -7- 8 * (iii) Terminate this Agreement. If NME terminates this Agreement at the end of the initial term and does not purchase the Gamma Knife, PROVIDER shall remove the Gamma Knife within an agreed upon period of time after the expiration of the five (5) year initial Term. (iv) Renegotiate this Agreement for a specified renewal term taking into account the first five (5) years of activity of the Equipment at the Site. NME shall exercise one (1) of the four (4) options referred to above, by mailing an irrevocable written notice thereof to PROVIDER at 444 Market Street, Suite 2420, San Francisco, California 94111, by registered mail, postmarked on or before the end of the fourth (4th) year of the five (5) year initial Term of this Agreement. Any such notice shall be sufficient if it states in substance that NME elects to exercise its option and states which of the four (4) options referred to above NME is exercising. In the event that option * In the event NME chooses to exercise either option (i) or (ii) of the options listed above, the following terms shall apply to the transaction: The "Closing Date" shall be the first (1st) business day sixty (60) months after the Commencement Date. The Closing Date may be extended by mutual agreement of the parties. On or before the Closing Date, NME shall deliver to PROVIDER cash funds in the amount of the purchase price. On or before the Closing Date, PROVIDER shall deliver to NME four (4) duplicate original copies of a bill of sale duly executed and acknowledged by NME and the legal owner of the Equipment, which bills of sale shall warrant and defend NME from - 8 - 9 and against any and all liens, encumbrances, security interests for claims of third parties, and shall be in a form reasonably satisfactory to counsel for NME. 15. Service Agreement. PROVIDER warrants that it shall simultaneously with the execution of this Agreement enter into a Service Agreement with Elekta (the "Service Agreement") a copy of which is attached hereto as Exhibit S and incorporated herein by this reference. Such Agreement shall be in full force and effect for the initial term of this Agreement and shall be renewed for subsequent extensions thereof. 16. No Warranties by PROVIDER. NME warrants that as of the Commencement Date, it shall have (a) thoroughly inspected the Equipment; (b) determined for (itself that all items of the Equipment are of a size, design, capacity and manufacture selected by it; and (c) satisfied itself that to the best of its knowledge the Equipment is suitable for NME's stated purposes. PROVIDER NOT BEING THE MANUFACTURER OF THE EQUIPMENT OR THE MANUFACTURER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE. Any and all warranties made by Elekta will be in its good faith best efforts enforced by PROVIDER on behalf of NME during the five (5) year initial Term hereof and any subsequent extension thereof. NME agrees to look solely to the manufacturer (Elekta) or to suppliers of the Equipment (and its software) with respect to nonstary compensation for any and all warranty claims. NME agrees that PROVIDER shall not be responsible for the delivery, installation, or operation of the Equipment or for any delay or inadequacy of any or all of the foregoing. PROVIDER shall not be responsible for any direct or indirect consequential loss or damage resulting from the installation, negligent operation or use of the Equipment or otherwise. NME expressly waives any right to hold PROVIDER liable hereunder for any claims, demands and liabilities arising out of or in connection with the design, manufacture, possession or operation of the Equipment. 17. Events of Default and Remedies. The occurrence of any one of the following shall constitute an Event of Default hereunder: (a) NME fails to pay any installment of monthly procedure payments when due when such default continues for a period of thirty (30) days after notice thereof from PROVIDER or its assignee is given to NME; -9- 10 (b) NME attempts to remove, sell, transfer, encumber, sublet or part with possession of the Equipment or any items thereof, except as expressly permitted herein; (c) NME shall fail to observe or perform any of the other obligations required to be observed or performed by NME hereunder and such failure shall continue uncured for twenty (20) days after written notice thereof to NME by PROVIDER; (d) NME ceases doing business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation or files an answer admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or it or its shareholders shall take any action looking to its dissolution or liquidation. (e) Within sixty (60) days after the commencement of any proceedings against NME seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceedings shall not have been dismissed, or if within thirty (30) days after the appointment without NME's consent or acquiescence of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated. Upon the occurrence of an Event of Default, PROVIDER may at its option do any or all of the following: (i) by notice to NME, terminate this Agreement as to the Equipment in default, wherever situated, and for such purpose, either upon the Site without liability for so doing or PROVIDER may cause NME and NME hereby agrees, to return the Equipment to PROVIDER at NME's sole cost and expense: (ii) recover from, as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to the present value of the then unfunded costs of the PROVIDER calculated in accordance with the formula set forth in Paragraph 14a(ii) discounted at the rate of nine percent (9%), which payment shall become immediately due and payable; (iii) sell, dispose of, hold, use or lease the Equipment in default, as PROVIDER in its sole discretion may determine (and PROVIDER shall not be obligated to give preference to the sale, lease or to the disposition of the Equipment over the sale, lease or other disposition of similar Equipment owned or leased by PROVIDER). In any event, NME shall, without further demand, pay to PROVIDER an amount equal to all sums -10- 11 due and payable for all periods up to and including the date on which PROVIDER has declared this Agreement to be in default. In the event that NME shall have paid to PROVIDER the liquidated damages referred to in (ii) above, PROVIDER hereby agrees to pay to NME promptly after receipt thereof, all rentals or proceeds received from the reletting or sale of the Equipment during the balance of the five (5) year initial Term (after deduction of all expenses incurred by PROVIDER; said amount never to exceed the amount of the liquidated damages paid by NME). NME agrees that PROVIDER shall have no obligation to sell the Equipment. NME shall in any event remain fully liable for reasonable damages as provided by law for all costs and expenses incurred by PROVIDER on account of such default, including but not limited to, all court costs and reasonable attorneys' fees. NME hereby agrees that, in any event, it shall be liable for any deficiency after any sale, lease or other disposition of the Equipment by PROVIDER. The rights afforded PROVIDER hereunder shall not be deemed to be exclusive, but shall be in addition to any other rights or remedies provided by law. 18. Insurance. (a) During the five (5) year initial Term of this Agreement (and any successive terms) PROVIDER shall, at its own cost and expense, keep in effect an all risk and hazard insurance policy covering the Equipment. The all risk and hazard insurance policy shall be for an amount not less than the replacement cost of the Equipment. During the five (5) year initial Term of this Agreement, NME shall, at its own cost and expense keep in effect public liability and professional liability insurance policies or self insurance concerning the operation of the Equipment by NME. Said policies shall be in the amounts of not less than $1,000,000 per occurrence and $5,000,000 in aggregate per year. NME and PROVIDER, their successors and assigns, shall be named as additional insureds and/or loss payees on the insurance policies maintained hereunder by the other party. Evidence of such insurance coverages shall be furnished by both parties to the other party upon written request, by no later than the Commencement Date. (b) If the Equipment is rendered unusable as a result of any physical damage to, or destruction of, the Equipment, NME shall give to PROVIDER immediate notice. PROVIDER shall determine, within thirty (30) days after the date of occurrence of such damage or destruction, whether the Equipment can be repaired. In the event PROVIDER determines that the Equipment cannot be repaired, PROVIDER at its sole cost and expense shall promptly replace the Equipment. This Agreement shall continue in full force and effect as though such damage or destruction had not occurred. In the - 11 - 12 event PROVIDER determines that the Equipment can be repaired, PROVIDER shall cause the Equipment to be promptly repaired. All proceeds of insurance received by PROVIDER under said policy shall be applied toward the cost of any such repair or replacement of the Equipment. 19. Notices. Any notices required under this Agreement shall be sent in writing and shall be deemed to have been duly given if delivered by hand or mailed by certified or registered mail to the following addresses: To PROVIDER: E.A. Hates, M.D. 444 Market Street, Suite 2420 San Francisco, CA 94111 To NME: NME Hospitals, Inc. c/o USC University Hospital 1500 San Pablo Street Los Angeles, CA 90033 Attn: Jeff Green With copy to: National Medical Enterprises, Inc. 2700 Colorado Avenue Santa Monica, CA 90404 Attn: Regional Counsel Or to such other addresses as either party may specify for the reception of notice from time to time in writing to the other party. Any such notice shall be effective only when actually received by the party to whom addressed. 20. Integration/Supersedure. This Agreement contains the full and entire Agreement between the parties hereto, and no oral or written understanding is of any force or effect whatsoever unless expressly contained in a writing executed subsequent to the date of this Agreement. 21. Waivers. To the extent that PROVIDER fails or chooses not to pursue any of its remedies under this Agreement or pursuant to applicable law, such shall not prejudice PROVIDER's rights to pursue any of those remedies at any future time and shall not constitute a waiver of PROVIDER's rights. 22. Assignments. This Agreement is binding upon and shall inure to the benefit of the permitted successors or assigns of the respective parties hereto, except that neither party may assign its rights or obligations under this Agreement without the express written consent of the other (which consent shall not be unreasonably withheld). Notwithstanding the foregoing, NME hereby agrees to consent to the assignment of this Agreement and any collateral agreements attached hereto by PROVIDER to ASHS or any affiliate upon reasonable assurances that the signee has fully -12- 13 assumed all of the obligations under the Lease collateral agreements. 23. Amendments. This Agreement shall not be amended or altered in any manner unless such amendment or alteration is in a writing signed by both parties. 24. Record-Keeping Requirements. To the extent required by the regulations promulgated by the Health Care Financing Administration pursuant to Section 952 of the Omnibus Reconciliation Act of 1980, PROVIDER shall: (a) Until the expiration of four (4) years following the furnishing of services pursuant to this Agreement, PROVIDER agrees to make available upon written request of the Secretary of Health and Human Services or the U.S. Comptroller General of any of their duly authorized representatives, this Agreement, any books, documents and records necessary to verify the nature and extent of costs incurred by NME by reason of the activities of PROVIDER under this Agreement; and (b) If PROVIDER elects to delegate any of its duties under this Agreement (which have a cost or value of Ten Thousand Dollars ($10,000.00) or more over a twelve (12) month period) to a related organization, PROVIDER may do so only through a subcontractor which is consented to by NME, it being understood that, inasmuch as NME is entering into this Agreement in reliance on PROVIDER's reputation and expertise, that NME shall be the sole judge of the reputation and expertise of the proposed delegates, and only through a subcontractor which provides that, until the expiration of four (4) years following the furnishing of services under such subcontract, the related organization shall make available, on request of the Secretary of Health and Human Services or the U.S. Comptroller General or any of their authorized representatives, the subcontract, and books, documents and records of the nature and extent of costs incurred by NME by reason of activities of such related organization under such subcontract. No delegation by PROVIDER of its duties hereunder shall relieve PROVIDER from liability hereunder. 25. Miscellaneous Provisions. (a) The invalidity or unenforceability of any portion or provision of this Agreement shall not affect the validity or enforceability of any other portion, nor shall either party's implied or express consent to the breach or waiver of any provision of this Agreement constitute a waiver of such provision as to any subsequent breach. - 13 - 14 (b) In the event of any claim controversy arising hereunder, the prevailing party in such claim or controversy shall be entitled to a reasonable attorneys' fee in addition to whatever other relief said party would be otherwise entitled. (c) Force Majeure. Failure to perform by either party will be excused in the event of any delay or inability to perform its duties under this Agreement directly or indirectly caused by conditions beyond its reasonable control including without limitation, fires, floods, earthquakes, snow, ice, disasters, Acts of God, accidents, riots, wars, operation of law, strikes, governmental action or regulations, shortages of labor, fuel, power, materials, manufacturer delays or transportation problems. - 14 - 15 IN WITNESS WHEREOF, the parties have signed this Agreement on the day and year first above written. NME Hospitals, Inc. Ernest A. Bates, M.D. By: /s/ Gerald Bosworth By: /s/ ERNEST A. BATES, M.D. -------------------------- --------------------------- Ernest A. Bates, M.D. an individual - 15 - 16 EXHIBIT C * 17 EXHIBIT D * EX-10.15 7 ASSIGNMENT AND ASSUMPTION AGREEMENT DATED 2/1/1996 1 EXHIBIT 10.15 ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is made as of the 1st day of February 1996 by and between ERNEST A. BATES, M.D., an individual ("Assignor") and GKF FINANCING, LLC, a California limited liability Company ("Assignee"). RECITALS: A Assignor desires to Assign to Assignee that contract between NME Hospitals, Inc., a Delaware corporation, dba USC University Hospital dated April 6, 1994, a full copy of which is attached here as Exhibit A (the "Contract"). AGREEMENT: NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and in consideration of the premises and mutual covenants herein contained, the parties hereby agree as follows: 1. ASSIGNMENT. Assignor hereby grants, conveys, transfers and assigns to Assignee, its successors and assigns, all of Assignor's rights, title and interest under, in and to the Contract: 2. ASSUMPTION OF LIABILITIES. Assignee hereby accepts the grant, conveyance, transfer and assignment by Assignor to Assignee, its successors and assigns, of all of Assignor's rights, title and interest under, in and to the Contract, and hereby assumes and agrees to perform and discharge all of Assignor's executory obligations arising under the Contract (the "Assumed Contract Liabilities"). 3. NO ASSUMPTION OF OTHER LIABILITIES. Except for the Assumed Contract Liabilities identified in Section 2. Assignee does not assume, and shall not in any manner become responsible or liable for, and Assignor shall retain, pay, discharge and perform in full, all other debts, obligations or liabilities of Assignor, whether known or unknown, fixed, contingent or otherwise. 4. MISCELLANEOUS PROVISIONS. 4.1 FURTHER ASSURANCES. Assignor and Assignee agree, at the other party's request, whether on or after the date hereof, and without further consideration, that each shall execute and deliver any and all further instruments and documents, and take such further actions, as the other party may reasonably request or as may reasonably be required in order more effectively to vest in Assignee all of Assignor's rights, title and interest under, in and to the Contract and to evidence Assignee's assumption of the Assumed Contract Liabilities, or to otherwise carry out the provisions of this Agreement. 4.2 BINDING EFFECT. All of the terms, provisions and conditions of this Agreement shall be binding on, and shall inure to and be enforceable by, the parties hereto and their respective successors and assigns. 2 4.3 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of California. IN TESTIMONY WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. ERNEST A. BATES, M.D. By: /s/ ERNEST A. BATES, M.D. ------------------------------ Ernest A. Bates Title: (an Individual) --------------------------- ("Assignor") GK FINANCING, LLC By: /s/ C.K.TAGAWA ------------------------------ Craig K. Tagawa Title: Chief Executive Officer --------------------------- ("Assignee") EX-10.16 8 LEASE AGREEMENT FOR A GAMMA KNIFE UNIT 10/31/1996 1 EXHIBIT 10.16 Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks. LEASE AGREEMENT FOR A GAMMA KNIFE UNIT THIS LEASE AGREEMENT FOR A GAMMA KNIFE UNIT on October 31, 1996 (hereinafter, referred to as the "Agreement") is entered into between GK Financing, LLC, a California Limited Liability Company, (hereinafter referred to as "GKF"), and HOAG MEMORIAL HOSPITAL PRESBYTERIAN, a California corporation (hereinafter referred to as "Hospital") R E C I T A L S WHEREAS, Hospital wants to lease a Leksell Stereotactic Gamma Unit distributed by Elekta Instruments, Inc. (hereinafter referred to as the "Equipment"), and WHEREAS, GKF is willing to lease the Equipment which GKF has acquired from UCI Medical Center, a California corporation (hereinafter referred to as "UCI"), to Hospital, pursuant to the terms and conditions of this Agreement. NOW, therefore, in consideration of the foregoing premises and the promises contained herein, the parties hereto hereby agree as follows: 1. Execution of LGK Agreement by and between Hospital and Elekta. GKF hereby leases the Equipment to the Hospital on the terms and conditions hereinafter set forth. Hospital agrees that simultaneously with the execution of this Agreement it shall execute that certain LGK Agreement with Elekta, (hereinafter referred to as the "LGK Agreement"), a copy of which is attached hereto as Exhibit A and incorporated herein by this reference. Hospital agrees to fulfill all of its obligations under the LGK Agreement and acknowledges that GKF is a third party beneficiary of the LGK Agreement. Hospital shall fully indemnify and hold harmless GKF in the event that GKF suffers any loss, damage, claim or expense (including attorneys' fees) solely as a result of Hospital's breach of the LGK Agreement. 2. Delivery of the Equipment and Site preparation. GKF shall arrange to have the Equipment delivered to Hospital, at One Hoag Dr. (the "Site") in coordination with Elekta. GKF shall exert its best faith efforts to expedite the delivery of the Equipment in accordance with the terms and conditions of the Purchase Agreement for the Equipment by and between GKF and Elekta. Notwithstanding the preceding sentence, it is understood and agreed that GKF has made no representations and warranties to Hospital concerning actual delivery dates or schedules for the Equipment at the Site. 2 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 2 Lease Agreement October 29, 1996 Hospital shall provide a safe, convenient and properly prepared site on Hospital controlled property (The "Site") for the proper performance of Gamma Knife procedures, at its own expense, in accordance with all of the Equipment manufacturer's (Elekta's) guidelines, specifications, technical instruments and Site Planning Criteria (which Site Planning Criteria are attached hereto as Exhibit B and incorporated herein by this reference). Site location shall be acceptable to GKF. Hospital shall prepare at its sole cost and expense the requisite site plans and specifications and shall submit them to Elekta and GKF for approval. Hospital shall obtain, in a timely manner, a User License from the Nuclear Regulatory Commission and/or appropriate state agency authorizing it to take possession of the Cobalt Supply and shall obtain such other licenses, permits, approvals, consents and authorizations, which may be required by local governmental or other regulatory agencies for the Site, its preparation, the charging of the Equipment with its Cobalt Supply, the conduct of Acceptance tests, and the use of the Equipment all as more fully set forth in Article 2.1 of the LGK Agreement. 3. Commencement of Term. The Term (hereinafter defined) of this Agreement shall commence upon the performance of the first chargeable clinical Gamma Knife procedure at the Site (the "Commencement Date"). Hospital shall become liable to GKF for the payments referred to in Paragraph 6 hereinbelow upon the Commencement Date. 4. Costs of Site Preparation; Costs of Installation. Hospital's obligations shall include preparation of plans and specifications for the construction and preparation of the Site in such form as will result in the Site, when constructed in accordance with such plans and specifications, being in full compliance with Elekta's Site Planning Criteria. Hospital shall at its own expense and risk, prepare, construct and make ready the Site as necessary, for the installation of the Equipment, including, but not limited to, providing any temporary and/or permanent shielding for the charging of the equipment and its use, selecting and preparing a proper foundation for the Equipment and for such shielding and walls, as well as proper alignment of the Site and wiring. Hospital shall be financially responsible for the positioning of the Equipment on its foundation at the Site. 3 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 3 Lease Agreement October 29, 1996 Hospital shall also at its own expense select, purchase and install all radiation monitoring equipment and devices, safety circuits and radiation warning signs needed for the Equipment at the Site, according to all applicable federal, state and local laws, regulations, recommendations or custom. Upon completion of the Site, Hospital shall warrant that the Site will be safe and suitable for its use of the Equipment. Hospital shall fully indemnify, hold harmless and/or reimburse GKF (and its members and their respective officers, directors, agents, employees and affiliates) for any loss, liability, damage, penalty, action, claim, cost or expense (including reasonable attorneys' fees)(hereinafter collectively referred to as "damages") which GKF may suffer or incur which are solely caused by Hospital's Site preparation and the Equipment's positioning, if the Site preparation or the Equipment's positioning was not done in compliance with Elekta's Site Planning Criteria. Hospital shall be liable to GKF for any damage to the Equipment caused by (a) defects in construction of the Site or defects in the positioning of the Equipment at the Site; (b) defects arising out of materials or parts provided, modified or designed by Hospital with respect to the Site; or (c) negligent or intentional acts of omission or commission by Hospital or any of its officers, agents, physicians, and employees in connection with the Site preparation or operation of the Equipment at the Site. Hospital warrants that it shall utilize its best efforts to fulfill on an expeditious basis its obligations under this Paragraph 4. Hospital further warrants that it shall on a regular basis keep GKF informed of Hospital's progress in fulfilling its obligations pursuant to this Paragraph 4. Should Hospital not have all Site preparations completed by the delivery date specified by a separate agreement plus a sixty (60) day grace period such that the Site is acceptable for positioning and installation of the equipment, Hospital shall reimburse GKF for its holding (cost of funds) and warehousing costs until the Site is prepared to allow positioning and installation of the equipment. 5. Term of the Equipment. GKF agrees to provide to Hospital the Equipment pursuant to the terms of this Agreement, for a term of ten (10) years from the Commencement Date as described in Paragraph 3 hereinabove (the "Term"), unless terminated earlier as provided herein. 4 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 4 Lease Agreement October 29, 1996 6. Per Procedure Payments. * 7. Use of the Equipment. The Equipment may be used by Hospital only at the location stated above and shall not be removed therefrom. Hospital shall not assign or sublease the Equipment or its rights hereunder without the prior written consent of GKF, which consent shall not be unreasonably withheld. No permitted assignment or sublease shall relieve Hospital of any of its obligations hereunder. Hospital shall not use nor permit the Equipment to be used in any manner nor for any purpose for which, in the opinion of Elekta or GKF, the Equipment is not designed or reasonably suitable. Hospital shall not permit any liens, whether voluntary or involuntary, to attach to the Equipment, without the prior written consent of GKF. Hospital shall have no interest in the Equipment other than the rights acquired as lessee hereunder and the Equipment shall remain the property of GKF regardless of the manner in which it may be installed or attached at the Site. Hospital shall, at GKF's request, affix to the Equipment tags, decals, or plates furnished by GKF, indicating GKF's ownership of the Equipment. 8. Additional Covenants of Hospital. In addition to the other covenants made by Hospital, Hospital shall at its own cost and expense: (a) Provide properly trained professional, technical and support personnel and supplies required for the proper performance of medical procedures utilizing the Equipment. (b) Assume all medical and financial responsibility for the overseers' monitoring of all patients' medical condition and treatment. (c) Fully comply with all of its obligations under the LGK Agreement. (d) Indemnify GKF as herein provided: (i) Hospital hereby agrees to fully indemnify and/or reimburse (including attorney's fees) GKF on a prompt basis for any and 5 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 5 Lease Agreement October 29, 1996 all damage to the Equipment (including any violations by Hospital, its agents, officers, physicians, employees, successors and assigns of the Service Agreement described in Paragraph 13 hereof) to the extent such damages are caused by the negligent or wrongful acts or omissions of Hospital, its agents, officers, physicians and employees. In the event the Equipment is destroyed or rendered unusable, this indemnification shall extend up to (but not exceed) the full replacement value of the Equipment at the time of its destruction less salvage value, if any, (ii) Hospital hereby further agrees to indemnify and hold GKF, its agents, officers, employees, successors and assigns, harmless from and against any and all claims, liabilities, obligations, losses, damages, injuries, penalties, actions, costs and expenses (including attorneys' fees) for all events and/or occurrences described in Article 7.3 of the LGK Agreement to the same extent that Hospital agrees to indemnify Elekta thereunder. Hospital further agrees to fully indemnify and hold harmless GKF for any loss, damage, claim, or expense (including attorneys' fees) GKF may suffer or incur as a result of Hospital's breach of the LGK Agreement. (e) Provide reasonable and customary marketing materials (i.e. brochures, announcements, etc.) and marketing support from an administrative and clinical (i.e. seminars by neurosurgeons and radiation therapists to referring physicians, etc.) standpoint for this clinical service. 9. Additional Covenants, Representations and Warranties of GKF. In addition to the other covenants, representations and warranties, made by GKF in this Agreement: (a) GKF represents and warrants that GKF has full power and authority to enter into this Agreement, and that this Agreement does not and will not violate any agreement, contract or instrument binding upon GKF. (b) GKF represents and warrants to Hospital that, upon delivery of the Equipment to Hospital, GKF shall use its best faith efforts to require that Elekta meets its contractual obligations to GKF and in putting the Equipment, as soon as possible, into good and safe serviceable condition and fit for its intended use in accordance with the manufacturer's specifications guidelines and field modification instructions. (c) GKF represents and warrants that throughout the term of this Agreement, Hospital shall enjoy the use of the Equipment, free of the rights of any other persons 6 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 6 Lease Agreement October 29, 1996 except for those rights reserved by GKF or granted to Elekta under the LGK Agreement or under Elekta's Purchase Agreement with GKF. (d) During the entire term of this agreement and subsequent extension thereof, GKF shall maintain in full force and effect: (i) the Service Agreement referenced in Paragraph 13 hereof; and (ii) any other service or other agreements required to fulfill GKF's obligations to Hospital pursuant to this Paragraph 9(d), GKF represents and warrants that during the entire term of this Agreement and any subsequent extensions thereof, that it will fully pursue any and all remedies it may have against Elekta under the Service Agreement to insure that the Equipment will be in conformity with Elekta's warranties so that it is free from defects in design, materials, and workmanship which result in noncompliance with the specifications and/or Elekta's warranties to GKF. In no event, however, shall the warranty obligations of GKF to Hospital with respect to the Equipment be greater or more extensive than Elekta's warranty obligations to GKF with respect to the Equipment. 10. Ownership/Title. It is expressly understood that Hospital shall acquire no right, title or interest in or to the Equipment, other than the right to the possession and use of the same in accordance with the terms of this Agreement. Hospital shall have no interest in the Equipment other than the rights acquired as a lessee hereunder and the Equipment shall remain the property of GKF regardless of the manner in which it may be installed or attached at the Site. Hospital shall, at GKF's request, affix to the Equipment tags, decals, or plates furnished by GKF, indicating GKF's ownership of the Equipment. GKF may at its sole discretion finance the Equipment. Financing may be in the form of an installment loan or a finance lease or other commercially available debt instrument. Should GK finance the Equipment through an installment loan, GKF shall be required to provide the Equipment as collateral against the loan. Should GKF finance the Equipment through a financing lease title shall vest with the lessor until GKF exercises its buy-out option. In addition, should GKF finance the equipment, said Agreement may be used as collateral against the loan. 11. Cost of Use of the Equipment. Except as is otherwise provided herein, Hospital shall bear the entire cost of using the Equipment during the Term of this Agreement. This shall include, but not be limited to, providing trained professionals, technical and support personnel and supplies to properly operate the Equipment. Hospital 7 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 7 Lease Agreement October 29, 1996 shall be fully responsible and liable for all acts and/or omissions of such professional, technical and support personnel. 12. Taxes. GKF shall only be responsible for personal property taxes levied against the Equipment. 13. Maintenance and Inspections. GKF agrees to exercise due and proper care in the maintenance of the Equipment and to keep the Equipment in a good state of repair, reasonable wear and tear excepted. Hospital shall be liable to GKF for all damage to the Equipment caused by the misuse, negligence, improper use or other intentional or negligent acts or omissions of Hospital's employees, officers, agents, and physicians. GKF (and Elekta) shall have the right of access to the Equipment for the purpose of inspecting same at all reasonable times and upon reasonable notice and with a minimum of interference to Hospital's operations. In the event the Equipment is improperly used by Hospital or its employees, agents, officers, and physicians, GKF may service or repair the same as needed and such expense shall be paid by Hospital, unless the repair is covered by the Service Agreement that GKF simultaneously with the execution of this Agreement enters into with Elekta. Any work so performed by or in the service or maintenance of the Equipment as a result of Hospital's failure or neglect to do so shall not deprive GKF of any of its rights, remedies or actions against Hospital for damages caused by such failure or neglect. 14. Equipment Modifications/Additions/Upgrades. The parties agree that the necessity and financial responsibility for modifications/additions/upgrades to the Equipment, including the disposal and reloading of the Cobalt-60 source, shall be discussed and mutually decided by GKF and Hospital. GKF shall be responsible for the removal and disposal where necessary, of the Cobalt. 15. Termination. If, after the initial twenty-four (24) month period of service, and subsequent 12 month periods of service, Hospital does not provide GKF with a reasonable economic justification to continue providing Gamma Knife services hereunder, then and in that event, GKF shall have the option of terminating this Agreement upon the giving of written notice to Hospital of said termination not less than ninety (90) days prior to GKF's 8 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 8 Lease Agreement October 29, 1996 designated termination date. Following termination GKF shall remove the Equipment in accordance with Paragraph 16(a)(ii). 16. Options to Extend Agreement. (a) Hospital shall have the option at the end of ten (10) year initial Term to: (i) Renegotiate this Agreement for a specified renewal term taking into account the first ten (10) years of activity of the Equipment at the Site. (ii) Terminate this Agreement. If Hospital terminates this Agreement at the end of the initial Term, GKF shall remove the Equipment and be responsible for the removal of the Cobalt within a reasonably mutually agreed upon period of time after the expiration of the ten (10) year initial Term. Hospital shall exercise one (1) of the two (2) options referred to above, by mailing an irrevocable written notice thereof to GKF at Four Embarcadero Center, Suite 3620, San Francisco, California, 94111, by registered mail, postmarked on or before the end of the ninth (9th) year of the ten (10) year initial Term of this Agreement. Any such notice shall be sufficient if it states in substance that Hospital elects to exercise its option and states which of the two (2) options referred to above Hospital is exercising. 17. No Warranties by GKF. Hospital warrants that as of the Commencement Date, it shall have (a) thoroughly inspected the Equipment; (b) determined for itself that all items of the Equipment are of a size, design, capacity and manufacture selected by it; and (c) satisfied itself that to the best of its knowledge the Equipment is suitable for Hospital's stated purposes. GKF SUPPLIES THE EQUIPMENT "AS IS" AND NOT BEING THE MANUFACTURER OF THE EQUIPMENT OR THE MANUFACTURER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it being agreed that all such risks as between GKF and Hospital and/or Elekta (to the extent of its express written warranty of the Equipment), shall be borne by Hospital. Hospital agrees to look solely to the manufacturer (Elekta) or to suppliers of the Equipment (and its software) for any and all warranty claims. Any and all warranties made by Elekta will be enforced by GKF in its 9 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 9 Lease Agreement October 29, 1996 good faith best efforts on behalf of Hospital during the ten (10) year initial Term hereof. Hospital agrees that GKF shall not be responsible for the delivery, installation, or operation of the Equipment or for any delay or inadequacy of any or all of the foregoing. GKF shall not be responsible for any direct or indirect consequential loss or damage resulting from the installation, operation or use of the Equipment or otherwise. Hospital expressly waives any right to hold GKF liable hereunder for any claims, demands and liabilities arising out of or in connection with the design, manufacture, possession or operation of the Equipment. 18. Events of Default and Remedies. The occurrence of any one of the following shall constitute an Event of Default hereunder: (a) Hospital fails to pay any installment of monthly procedure payments when due when such default continues for a period of thirty (30) days after notice thereof from GKF or its assignee is given to Hospital. (b) Hospital attempts to remove, sell, transfer, encumber, sublet or part with possession of the Equipment or any items thereof, except as expressly permitted herein; (c) Hospital shall fail to observe or perform any of the other obligations required to be observed or performed by Hospital hereunder and such failure shall continue uncured for twenty (20) days after written notice thereof to Hospital by GKF; (d) Hospital ceases doing business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statue, law or regulation or files an answer admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or it or its shareholders shall take any action looking to its dissolution or liquidation. (e) Within sixty (60) days after the commencement of any proceedings against Hospital seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such 10 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 10 Lease Agreement October 29, 1996 proceedings shall not have been dismissed, or if within thirty (30) days after the appointment without Hospital's consent or acquiescence of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated. Upon the occurrence of an Event of Default, GKF may at its option do any or all of the following: (i) by notice to Hospital, terminate this Agreement as to the Equipment in default, wherever situated, and for such purposes, enter upon the Site without liability for so doing or GKF may cause Hospital and Hospital hereby agrees to return the Equipment to GKF at Hospital's sole cost and expense; (ii) recover from, as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to the present value of the unpaid estimated future lease payments by Hospital to GKF through the end of the Agreement term discounted at the rate of nine percent (9%), which payment shall become immediately due and payable. Unpaid estimated future lease payments shall be based on the prior 12 months lease payments with an annual five (5%) percent increase; (iii) sell, dispose of, hold, use or lease the Equipment in default, as GKF in its sole discretion may determine (and GKF shall not be obligated to give preference to the sale, lease or other disposition of the Equipment over the sale, lease or other disposition of similar Equipment owned or leased by GKF). In any event, Hospital shall, without further demand, pay to GKF an amount equal to all sums due and payable for all periods up to and including the date on which GKF had declared this Agreement to be in default. In the event that Hospital shall have paid to GKF the liquidated damages referred to in (ii) above, GKF hereby agrees to pay to Hospital promptly after receipt thereof, all rentals or proceeds received from the reletting or sale of the Equipment during the balance of the ten (10) year initial Term (after deduction of all expenses incurred by GKF, said amount never to exceed the amount of the liquidated damages paid by Hospital). Hospital agrees that GKF shall have no obligation to sell the Equipment. Hospital shall in any event remain fully liable for reasonable damages as provided by law for all costs and expenses incurred by GKF on account of such default, including but not limited to, all court costs and reasonable attorneys' fees. Hospital hereby agrees that, in any event, it shall be liable for any deficiency after any sale, lease or other disposition of the Equipment by GKF. The rights afforded GKF hereunder shall not be deemed to be exclusive, but shall be in addition to any other rights or remedies provided by law. 11 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 11 Lease Agreement October 29, 1996 19. Insurance. (a) During the ten (10) year initial Term of this Agreement (and any successive terms) GKF shall, at its own cost and expense, keep in effect an all risk and hazard insurance policy except earthquake insurance covering the Equipment. The all risk and hazard insurance policy shall be for an amount not less than the replacement cost of the Equipment. During the ten (10) year initial Term of this Agreement, Hospital shall, at its own cost and expense keep in effect public liability and professional liability insurance policies concerning the operation of the Equipment by Hospital. Said policies shall be in the amounts of not less than $1,000,000 per occurrence and $5,000,000 in aggregate per year. Hospital and GKF, their successors and assigns, shall be named as additional insureds and/or loss payees on the insurance policies maintained hereunder by the other party. Evidence of such insurance coverages shall be furnished by both parties to the other party upon written request, by no later than the Commencement Date. (b) If the Equipment is rendered unusable as a result of any physical damage to, or destruction of, the Equipment, Hospital shall give to GKF immediate notice. GKF shall determine, within thirty (30) days after the date of occurrence of such damage or destruction, whether the Equipment can be repaired. In the event GKF determines that the Equipment cannot be repaired, GKF at its sole cost and expense shall promptly replace the Equipment. This Agreement shall continue in full force and effect as though such damage or destruction had not occurred. In the event GKF determines that the Equipment can be repaired, GKF shall cause the Equipment to be promptly repaired. 20. Notices. Any notices required under this Agreement shall be sent in writing and shall be deemed to have been duly given if delivered by hand or mailed by certified or registered mail to the following addresses: To GKF: Craig K. Tagawa, C.E.O. Four Embarcadero Center, Suite 3620 San Francisco, CA 94111 To Hospital: Steve C. Moreau 301 Newport Blvd., P.O. Box 610 Newport Beach, CA 92658-6100 12 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 12 Lease Agreement October 29, 1996 Or to such other addresses as either party may specify for the reception of notice from time to time in writing to the other party. Any such notice shall be effective only when actually received by the party to whom addressed. 21. Integration/Supersedure. This Agreement contains the full and entire Agreement between the parties hereto, and no oral or written understanding is of any force or effect whatsoever unless expressly contained in a writing executed subsequent to the date of this Agreement. 22. Waivers. To the extent that GKF fails or chooses not to pursue any of its remedies under this Agreement or pursuant to applicable law such shall not prejudice GKF's rights to pursue any of those remedies at any future time and shall not constitute a waiver of GKF's rights. 23. Assignments. This Agreement is binding upon and shall inure to the benefit of the permitted successors or assigns of the respective parties hereto, except that neither party may assign its rights or obligations under this Agreement without the express written consent of the other (which consent shall not be unreasonably withheld). 24. Amendments. This Agreement shall not be amended or altered in any manner unless such amendment or alteration is in a writing signed by both parties. 25. Record-Keeping Requirements. To the extent required by the regulations promulgated by the Health Care Financing Administration pursuant to Section 952 of the Omnibus Reconciliation Act of 1980, GKF shall: (a) Until the expiration of four (4) years following the furnishing of services pursuant to this Agreement, GKF agrees to make available upon written request of the Secretary of Health and Human Services or the U.S. Comptroller General or any of their duly authorized representatives, this Agreement, any books, documents and records necessary to verify the nature and extent of costs incurred by Hospital by reason of the activities of GKF under this Agreement; and 13 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Page 13 Lease Agreement October 29, 1996 (b) If GKF elects to delegate any of its duties under this Agreement (which have a cost or value of Ten Thousand Dollar ($10,000.00) or more over a twelve (12) month period) to a related organization, GKF may do so only through a subcontractor which is consented to by Hospital, it being understood that, inasmuch as Hospital is entering into this Agreement in reliance on GKF's reputation and expertise, that Hospital shall be the sole judge of the reputation and expertise of the proposed delegee, and only through a subcontractor which provides that, until the expiration of four (4) years following the furnishing of services under such subcontract, the related organization shall make available, on request of the Secretary of Health and Human Services or the U.S. Comptroller General or any of their authorized representatives, the subcontract, and books, documents and records of the nature and extent of costs incurred by Hospital by reason of activities of such related organization under such subcontract. No delegation by GKF of its duties hereunder shall relieve GKF from liability hereunder. 26. Miscellaneous Provisions. (a) The invalidity or unenforceability of any portion or provision of this Agreement shall not effect the validity or enforceability of any other portion, nor shall either party's implied or express consent to the breach or waiver of any provision of this Agreement constitute a waiver of such provision as to any subsequent breach. (b) In the event of any claim or controversy arising hereunder, the prevailing party in such claim or controversy shall be entitled to a reasonable attorneys' fee in addition to whatever other relief said party would be otherwise entitled. (c) Force Majeure. Failure to perform by either party will be excused in the event of any delay or inability to perform its duties under this Agreement directly or indirectly caused by conditions beyond its reasonable control including without limitation, fires, floods, earthquakes, snow, ice, disasters, Acts of God, accidents, riots, wars, operation of law, strikes, governmental action or regulations, shortages or labor, fuel, power, materials, manufacturer delays or transportation problems. IN WITNESS WHEREOF, the parties have signed this Agreement on the day and year first above written. 14 Hoag Memorial Hospital Presbyterian and GK Financing, LLC Lease Agreement October 29, 1996 Hoag Memorial Hospital Presbyterian GK Financing, LLC By: /s/ Michael D. Stephens By: /s/ C. K. TAGAWA ----------------------------- ----------------------------- Craig K. Tagawa Chief Executive Officer 15 Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks. ASSIGNMENT BY THE REGENTS OF THE UNIVERSITY OF CALIFORNIA OF ITS AGREEMENT TO PURCHASE THE LEKSELL GAMMA KNIFE FROM ELEKTA INSTRUMENTS, INC. THIS ASSIGNMENT OF AGREEMENT FOR PURCHASE AND SALE ("Assignment") is made as of the 31st day of October, 1996 ("Effective Date"), by and between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California corporation ("University"), and GK FINANCING, LLC, a California limited liability company ("GK FINANCING"), with reference to the following facts: As of February 22, 1995, University entered into an agreement with ELEKTA INSTRUMENTS, INC., a Georgia corporation ("Elekta"), pursuant to which University agreed to purchase that certain Leksell Gamma Knife ("LGK") form Elekta ("Purchase Agreement"); and University now proposes to assign the Purchase Agreement to GK Financing and GK Financing is prepared to accept assignment of the Purchase Agreement, and Elekta is prepared to consent to such assignment. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. University (hereinafter "Assignor") hereby assigns and transfers to GK Financing (hereinafter "Assignee") all of Assignor's rights, title and interest in, to and under the Purchase Agreement, and Assignor hereby delegates to Assignee all - 1 - 16 of its duties and obligations or performance under said Purchase Agreement. All rights subject to the foregoing assignment are referred to herein as the "Rights" and all duties and obligations subject to the foregoing delegation are referred to herein as the "Duties." The Purchase Agreement is attached hereto as Exhibit 1 and it is hereby incorporated herein by this reference. 2. Assignee hereby accepts the foregoing assignment of Rights and hereby assumes and agrees to perform all Duties delegated above by Assignor to the same extent as if Assignee had been an original party to the Purchase Agreement, and Assignee indemnifies and holds harmless Assignor from and against any and all losses, liabilities, claims, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred with respect to the performance or non-performance of any or all of said delegated Duties. 3. Assignor, effective upon the Effective Date, is hereby released entirely from all Duties in said Purchase Agreement. 4. Assignee agrees to pay to Elekta, when and as due, all amounts required to be paid under the Purchase Agreement, and to faithfully discharge and perform all Duties under said Purchase Agreement, and Elekta, by consenting to this Assignment, agrees to look solely to Assignee for discharge and performance of all Duties under said Purchase Agreement. 5. Assignee acknowledges that Assignor has paid Elekta Six Hundred Twenty-Four Thousand Nine Hundred Fifty Dollars ($624,950) toward the purchase price of the LGK under the Purchase -2- 17 Agreement being assigned to Assignee. Assignee intends to enter into an agreement with a user of the LGK ("User"). GKF, in consideration and acknowledgement of the Assignor's payment of the aforesaid $624,950 to Elekta, agrees to obtain the User's agreement, on terms reasonably acceptable to Assignor, that the User of the LGK will permit Assignor to use the LGK, such terms to include terms which recognize the $624,950 paid by Assignor as a credit against use (or similar) charges ("Use Charge") which the User assesses Assignor for the use of the LGK. The Use Charge, before the credit, shall be no higher than the charge paid by the User to GKF. Assignor acknowledges that the agreement between GKF and Hoag Memorial Presbyterian Hospital ("Hoag"), attached hereto as Exhibit 2, meets the requirement of this paragraph 5. 6. As conditions to the effectiveness of Elekta's consent to this Assignment: a. Assignor shall immediately pay $75,000 to Elekta, representing payment in full of all obligations, including, without limitation, all interest owed by Assignor to Elekta under the Purchase Agreement; and b. Assignor, Assignee and Elekta hereby agree to amend the Purchase Agreement by deleting paragraph (2) of Exhibit H to the Purchase Agreement, relating to research grants, in its entirety. c. Assignor agrees, as a demonstration of its commitment to a gamma knife therapy program ("Program"), that, provided that Assignee and Hoag enter into an agreement -3- 18 for Hoag to operate a Program, Assignor will participate in said Program under terms mutually acceptable to Assignor and Hoag, such terms to include, but not be limited to, the following: 1) Assignor will permit the name of the Program to include the Assignor's name; 2) Assignor will participate in the recruitment of the Director of the Program and provide a faculty appointment to a qualified individual serving as the Medical Director of the Program; 3) Assignor will refer patients to the Program, as appropriate; and 4) Assignor will participate in the development of the Program's operating, business (including marketing and promotion), and research planning. 7. None of the Rights or provisions of this Assignment shall be assignable by any party hereto. This Assignment shall inure to the benefit of and be binding upon each of the parties hereto and their respective permitted successors. 8. This Assignment shall be governed by, and construed and enforced in accordance with, the internal law, and not the law pertaining to the choice of conflicts of law, of the State of California. 9. This Assignment contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and shall supersede all previous oral and written and all contemporaneous oral negotiations, commitments and understandings. -4- 19 No waiver, modification or amendment of this Assignment shall be effective unless embodied in a written instrument executed by both parties hereto. 10. Neither party hereto nor their respective counsel shall be deemed the drafter of this Assignment for purposes of construing the provisions hereof. The language in all parts of this Assignment shall in all cases be construed according to its fair meaning, and not strictly for or against either party hereto. IN WITNESS WHEREOF, the undersigned have executed this Assignment as of the date first above written. "ASSIGNOR" THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California corporation By /s/ SANDRA LIER --------------------------------- Associate Vice Chancellor By /s/ MARK LARET --------------------------------- Its Director UCIMC --------------------------------- "ASSIGNEE" GK FINANCING, a California limited liability company By /s/ CRAIG K. TAGAWA --------------------------------- Its CEO --------------------------------- -5- 20 Consented to by: ELEKTA INSTRUMENTS, INC., a Georgia corporation By /s/ C. Gilmore --------------------------------- Its President --------------------------------- -6- EX-10.17 9 ADDENDUM TO LEASE AGREEMENT FOR A GAMMA KNIFE 1 EXHIBIT 10.17 Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks. ADDENDUM TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT This ADDENDUM TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT (this "Addendum") is effective December 1, 1998 between Hoag Memorial Hospital Presbyterian, a California Corporation ("Hospital"), and GK Financing, LLC, a California limited liability company ("GKF"). RECITALS WHEREAS, on October 31, 1996, GKF and Hospital executed a Lease Agreement for a Gamma Knife Unit (the "Original Lease"); WHEREAS, the parties desire to amend the terms and provisions of the Original Lease as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: AGREEMENT 1. DEFINED TERMS. Unless otherwise defined herein, the capitalized terms used herein shall have the same meaning set forth in the Original Lease. 2. * 3. MARKETING. Hospital and GKF agree to cooperatively market Gamma Knife services at the Hoag/UCI Gamma Knife center. 4. TERM OF AMENDMENT. This addendum shall be in effect for a one year period, December 1, 1998, though November 30, 1999. 5. FULL FORCE AND EFFECT. Except as otherwise amended hereby or provided herein, all of the terms and provisions of the Original Lease shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties have executed this Addendum effective as of the date first written above. "HOSPITAL" Hoag Memorial Hospital Presbyterian BY: /s/ MICHAEL D. STEPHENS ------------------------------------ MICHAEL D. STEPHENS, PRESIDENT "GKF" GK Financing, LLC BY: /s/ CRAIG K. TAGAWA ------------------------------------ Craig K. Tagawa, Chief Executive Officer EX-10.18 10 LEASE AGREEMENT FOR A GAMMA KNIFE - 10/29/1996 1 EXHIBIT 10.18 Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks. LEASE AGREEMENT FOR A GAMMA KNIFE UNIT THIS LEASE AGREEMENT FOR A GAMMA KNIFE UNIT dated as of October 29, 1996, (hereinafter, referred to as the "Agreement") is entered into between GK Financing, LLC, a California Limited Liability Company, (hereinafter referred to as "GKF"), and METHODIST HEALTHCARE SYSTEM OF SAN ANTONIO, LTD. dba SOUTHWEST TEXAS METHODIST HOSPITAL, a Texas corporation, (hereinafter referred to as "Hospital"). RECITALS WHEREAS, Hospital wants to lease a Leksell Stereotactic Gamma Unit distributed by Elekta Instruments, Inc., (hereinafter referred to as the "Equipment") and desires from GKF certain marketing and administrative support related to utilization of said equipment, and WHEREAS, GKF is willing to lease the Equipment which GKF has acquired from Elekta Instruments, Inc., a Georgia corporation (hereinafter referred to as "Elekta"), to Hospital, pursuant to the terms and conditions of this Agreement and is willing to provide to Hospital its marketing and administrative capabilities; and NOW, therefore, in consideration of the foregoing premises and the promises contained herein, the parties hereto hereby agree as follows: 1. Execution of LGK Agreement by and between Hospital and Elekta. GKF hereby leases the Equipment to the Hospital on the terms and conditions hereinafter set forth. Hospital agrees that simultaneously with the execution of this Agreement it shall execute that certain LGK Agreement with Elekta, (hereinafter referred to as the "LGK Agreement"), a copy of which is attached hereto as Exhibit A and incorporated herein by this reference. Hospital agrees to fulfill all of its obligations under the LGK Agreement and acknowledges that GKF is a third party beneficiary of the LGK Agreement. 2. Delivery of the Equipment and Site preparation. GKF shall arrange to have the Equipment delivered to Hospital, at ___________________ (the "Site") in coordination with Elekta. The Equipment shall be the latest Gamma Knife technology available at the date of this Agreement, including all hardware and software options. GKF shall exert its best 2 Lease Agreement Page 2 Southwest Texas Methodist Hospital October 29, 1996 faith efforts to expedite the delivery of the Equipment to a site mutually agreeable to GKF and Hospital in accordance with the terms and conditions of the Purchase Agreement for the Equipment by and between GKF and Elekta. Notwithstanding the preceding sentence, it is understood and agreed that GKF has made no representations and warranties to Hospital concerning actual delivery dates or schedules for the Equipment at the Site. GKF shall coordinate with Hospital the estimated delivery date of equipment. Hospital shall provide a safe, convenient and properly prepared Site, at its own expense, in accordance with all of the Equipment manufacturer's (Elekta's) guidelines, specifications, technical instruments and Site Planning Criteria (which Site Planning Criteria are attached hereto as Exhibit B and incorporated herein by this reference), which criteria shall include Elekta's estimated delivery schedule when and as received by GKF, on Hospital controlled property for the proper performance of Gamma Knife procedures. Site location shall be acceptable to GKF. Hospital shall prepare at its sole cost and expense the requisite site plans and specifications and shall submit them to Elekta and GKF for approval before implementation of such plans. Hospital shall apply for, in a timely manner and use its best efforts to obtain as soon as reasonably possible thereafter a User License from the Nuclear Regulatory Commission and/or appropriate state agency authorizing it to take possession of the Cobalt Supply and shall obtain such other licenses, permits, approvals, consents and authorizations, which may be required by local governmental or other regulatory agencies for the Site, its preparation, the charging of the Equipment with its Cobalt Supply, the conduct of Acceptance tests, and the use of the Equipment as more fully set forth in Article 2.1 of the LGK Agreement. 3. Gamma Knife Service Term. GKF agrees to provide to Hospital, and Hospital agrees to accept and utilize from GKF, the Equipment pursuant to the terms of this Agreement for a term (the "Gamma Knife Service Term") commencing on the day (the "Commencement Day") that the first procedure using the Equipment is performed on a patient of the Hospital for which payment is due GKF from the Hospital pursuant to the provisions of Section 6 of this Agreement, and ending on that date which is ten (10) years thereafter, unless terminated earlier in accordance with the terms of this Agreement. Hospital shall be liable to GKF for the payments referred to in Paragraph 6 below as applicable, upon the Commencement Date. 3 Lease Agreement Page 3 Southwest Texas Methodist Hospital October 29, 1996 4. Cost of Site Preparation: Costs of Installation. Hospital's obligations shall include preparation of plans and specifications for the construction and preparation of the Site in such form as will result in the Site, when constructed in accordance with such plans and specifications, being in full compliance with Elekta's Site Planning Criteria. Hospital shall at its own expense and risk, prepare, construct and make ready the Site as necessary, for the installation of the Equipment, including, but not limited to, providing any temporary and/or permanent shielding for the charging of the equipment and its use, selecting and preparing a proper foundation for the Equipment and for such shielding and walls, as well as proper alignment of the Site and wiring. Hospital shall be responsible for the positioning of the Equipment on its foundation at the Site in compliance with Elekta's Site Planning criteria (attached as Exhibit B). Hospital shall also at its own expense select, purchase and install all radiation monitoring equipment and devices, safety circuits and radiation warning signs needed for the Equipment at the Site, according to all applicable federal, state and local laws and regulations. Hospital warrants that the Site will be prepared in compliance with the Site Planning Criteria. Hospital shall be liable to GKF for any damage to the Equipment caused by (a) defects in construction of the Site or defects in the positioning of the Equipment at the Site; (b) defects arising out of materials or parts provided, modified or designed by Hospital with respect to the Site; or (c) negligent or intentional acts of omission or commission by Hospital or any of its officers, agents, physicians, and employees in connection with the Site preparation; or (d) operation of the Equipment at the Site. Hospital warrants that it shall utilize its reasonable efforts to fulfill on an timely basis its obligations under this Paragraph 4. Hospital further warrants that it shall on a regular basis keep GKF informed of Hospital's progress in fulfilling its obligations pursuant to this Paragraph 4. Should Hospital not have all Site preparations completed by the delivery date (which delivery date the parties shall negotiate in good faith and document) plus a sixty (60) day grace period such that the Site is acceptable for positioning and installation of the Equipment, Hospital shall reimburse GKF at an interest rate of Bank of America's prime rate plus 2% on GKF's Equipment cost until the site is prepared to allow positioning. 4 Lease Agreement Page 4 Southwest Texas Methodist Hospital October 29, 1996 and installation of the Equipment. Should the Equipment not be delivered by the delivery date plus a sixty (60) day grace period, other than by reasons of force majeure (see Section 27(c)) or Hospital's failure to complete Site preparations necessary for the positioning and installation of the Equipment, GKF shall reimburse Hospital at an interest rate of bank of America's prime rate plus two percent (2%) on Hospital's costs in constructing and finishing out the Site until the Equipment is delivered. 5. Marketing Support. GKF will assist and provide financial marketing support to Hospital of at least $250,000 during the first five (5) years of this project, subject to approval by Hospital. 6. Per Procedure Payments. * 5 Lease Agreement Page 5 Southwest Texas Methodist Hospital October 29, 1996 * If no procedures are performed utilizing the Equipment, no charges shall be incurred by the Hospital. A procedure shall be defined as a single patient treatment session that may include one or more isocenters during that session. Hospital shall be billed on the fifteenth (15th) and the last day of each month for the actual number of procedures performed during the first and second half of the month, respectively. Hospital shall pay the procedures invoiced within thirty (30) days after being invoiced. Interest shall accrue at the rate of 1-1/2% per month on all invoices remaining unpaid after 45 days. Billing statements, as provided above, will set forth two components of the charges. The equipment-related component will equal sixty-eight (68%) percent of the total fee per procedure and the administrative component will equal thirty-two (32%) percent of the total fee per procedure. 7. Use of the Equipment. The Equipment may be used at Hospital only at the Site identified and shall not be removed therefrom. Hospital shall not use nor permit the Equipment to be used by any personnel who are not properly trained or in any manner nor for any purpose for which Elekta or GKF has notified the Hospital the Equipment is not designed or reasonably suitable. Hospital shall not permit any liens, whether voluntary or involuntary, to attach to the Equipment, without the prior written consent of GKF. 6 Lease Agreement Page 6 Southwest Texas Methodist Hospital October 29, 1996 8. Additional Covenants of Hospital. In addition to the other covenants made by Hospital, Hospital shall at its own cost and expense: (a) Provide properly trained professional, technical and support personnel and supplies required for the proper performance of medical procedures utilizing the Equipment. Hospital will have on staff a minimum of two (2) Gamma Knife trained teams of neurosurgeons, radiation therapists and physicists. Parties acknowledge that physicians, radiation therapists and physicists are not employees of the Hospital and are independent contractors. (b) Notwithstanding any requirements to the contrary or the absence of any requirements in the bylaws, rules and regulations of Hospital's medical staff, Hospital shall cause all neurosurgeons, radiation therapists and physicists that may use the Equipment as contemplated in this Agreement to obtain and maintain, at no expense to GKF, throughout the Gamma Knife Service Term, a policy or policies of insurance insuring their respective risks of professional medical liability incurred in connection with providing professional services utilizing the Equipment as contemplated in this Agreement, in amounts for each such person which shall be not less than $500,000 per incident and $1,000,000 in the annual aggregate. Upon expiration of the Gamma Knife Service Term or its earlier termination in accordance with the terms of this Agreement, if occurrence coverage has not been carried, Hospital shall cause, at no cost to GKF, professional liability tail coverage to be obtained and maintained with respect to each such person with the same limits as in effect on the last day of the term of this Agreement, such tail coverage policy or policies to cover such person's risks of professional medical liability arising during the Gamma Knife Service Term. Also, upon the expiration or termination of any such policy prior to the expiration of the Gamma Knife Service Term or its earlier termination, Hospital shall cause, at no cost to GKF, a substitute policy or tail coverage to be obtained and maintained with the same limits as in effect on the date of expiration or termination, such substitute policy or tail coverage to cover any such person's risk of professional medical liability arising during the Gamma Knife Service Term. Prior to the commencement of the Gamma Knife Service Term or before a neurosurgeon, radiation therapists or physicist first uses the Equipment, and annually, thereafter (i.e., upon policy renewal), Hospital shall provide GKF (or cause neurosurgeons, radiation therapists and physicists to provide GKF) with certificates of insurance or other written evidence with respect to each such policy. Hospital shall also cause all such neurosurgeons, radiation therapists and physicists to provide GKF with written notice of any change to such coverage throughout the Gamma Knife Service Term. 7 Lease Agreement Page 7 Southwest Texas Methodist Hospital October 29, 1996 (c) Fully comply with all of its obligations under the LGK Agreement. (d) Indemnify GKF as herein provided: (i) Hospital shall fully indemnify, hold harmless and/or reimburse GKF (and its members and their respective officers, directors, agents, employees and affiliates) for any loss, liability, damage, penalty, action, claim, cost or expense (including reasonable attorneys' fees)(hereinafter collectively referred to as "damages") which GKF may suffer or incur which are solely caused by Hospital's Site preparation and the Equipment's positioning, if the Site preparation or the Equipment's positioning was not done in compliance with Elekta's Site Planning Criteria. Except as relates to Site plans, specifications and positioning plans reviewed and approved by GKF and/or Elekta, or construction of other Site preparation done in compliance with Elekta's Site Planning Criteria, Hospital shall be liable for any damages to the Equipment caused by (a) defects in construction of the Site or defects in positioning of the Equipment at the Site; (b) defects arising out of materials or parts provided, modified or designed by Hospital with respect to the Site; (c) negligent or intentional acts of omission or commission by Hospital or any of its officers, agents or employees in connection with the Site preparation; or (d) negligent operation of the Equipment at the Site. However, neither the review and approval of Site plans, specifications and/or positioning plans by GKF and/or Elekta, nor the construction of any other Site preparation, shall relieve hospital for liability for damages to the Equipment caused by the failure to comply with applicable federal, state or local laws or regulations, including building codes, or those portions of the Site Planning Criteria relating to the load bearing capacity of the floor of the treatment room and to radiation protection. (ii) Hospital shall fully indemnify, hold harmless and/or reimburse (including reasonable attorneys' fees) GKF (and its members and their respective officers, directors, agents, employees and affiliates), on a prompt basis for any and all damages to the Equipment (including any violation by Hospital, its agents, officers, employees, successors and assigns or by any physician-users of the Equipment, of the Services Agreement described in Section 15 hereof) to the extent such damages are caused by the negligent or wrongful acts or omissions of Hospital, its agents, officers, employees, successor or assigns or by any physician-users of the Equipment. In the event the Equipment is destroyed or rendered unusable, this indemnification shall extend up to the full replacement value of the Equipment at the time of its destruction less salvage value, if any. 8 Lease Agreement Page 8 Southwest Texas Methodist Hospital October 29, 1996 (iii) Hospital shall fully indemnify, hold harmless and/or reimburse GKF (and its members and their respective officers, directors, agents, employees and affiliates) for any damages which GKF may suffer or incur as a result of Hospital's breach or alleged breach of this Lease Agreement. (iv) Hospital shall fully indemnify, hold harmless and/or reimburse GKF (and its members and their respective officers, directors, agents, employees and affiliates) for any damages, claims, judgments and liabilities by or to third parties (plus litigation costs incurred and reasonable attorneys fees) which GKF may suffer or incur resulting from injury to or death of any person or physical loss or damage to property arising out of the negligent operation or negligent medical use of the Equipment by or for the Hospital (but which is not attributable to defective materials, workmanship or manufacture of the Equipment), the defective maintenance of the Equipment by or for the Hospital (but only to the extent not performed by or on behalf of Elekta), the failure of the Site to comply with the Site Planning Criteria, or the training referred to in Section 3.2 of the LGK Agreement. It is agreed that non-employee physician/users of the Equipment are independent of the Hospital and are not acting by or for the Hospital. (e) Provide reasonable and customary marketing materials (i.e. brochures, announcements, etc.) and marketing support from an administrative and clinical (i.e. seminars by neurosurgeons and radiation therapists to referring physicians, etc.) standpoint for this clinical service. (f) Keep and maintain the Equipment and Site fully protected, secure and free from unauthorized access or use by any person. 9. Additional Covenants, Representations and Warranties of GKF. In addition to the other covenants, representations and warranties, made by GKF in this Agreement: (a) GKF represents and warrants that GKF has full power and authority to enter into this Agreement, and that this Agreement does not and will not violate any agreement, contract or instrument binding upon GKF. (b) GKF represents and warrants to Hospital that, upon delivery of the Equipment to the Hospital GKF shall use its reasonable commercial efforts to require that Elekta meets its contractual obligations to GKF and in putting the Equipment, as required by the LGK Purchase Agreement into good, safe and serviceable condition and fit for its 9 Lease Agreement Page 9 Southwest Texas Methodist Hospital October 29, 1996 intended use in accordance with the manufacturer's specifications, guidelines and field modification instructions. (c) GKF represents and warrants that throughout the term of this Agreement, Hospital shall enjoy the use of the Equipment, free of the rights of any other persons except for those rights reserved by GKF or the right of access granted to Elekta under the LGK Agreement or under the LGK Purchase Agreement with GKF. (d) During the entire term of this Agreement and subsequent extension thereof, GKF shall maintain in full force and effect: (i) the Service Agreement referenced in Paragraph 15 hereof. GKF represents and warrants that during the entire term of this agreement and any subsequent extensions thereof, that it will fully pursue any and all remedies it may have against Elekta under the Service Agreement to insure that the Equipment will be in conformity with Elekta's warranties so that it is free from defects in design, materials, and workmanship which result in noncompliance with the specifications and/or Elekta's warranties to GKF. In no event, however, shall the warranty obligations of GKF to Hospital with respect to the Equipment be greater or more extensive than Elekta's warranty obligations to GKF with respect to the Equipment. Hospital and GKF acknowledge that Exhibit D of that certain LGK Purchase Agreement, dated as of October 11, 1995, by and between Elekta and GKF (the "LGK Purchase Agreement") sets forth the warranties with respect to the Equipment granted by Elekta to GKF, which warranties are identical in form and content to the warranties provided by Elekta to Hospital in Exhibit D of the LGK Agreement. Hospital is an intended third-party beneficiary of the warranties granted by Elekta to GKF in Exhibit D of the LGK Purchase Agreement and Hospital shall be entitled to enforce the obligations of Elekta thereunder directly. 10. Ownership/Title. It is expressly understood that Hospital shall acquire no right, title or interest in or to the Equipment, other than the leasehold interests conveyed hereunder, including, the right to the possession and use of the same in accordance with the terms of this Agreement, except as outlined under Paragraph 17. Hospital shall have no interest in the Equipment other than the rights acquired as a lessee hereunder and the Equipment shall remain the property of GKF regardless of the manner in which it may be installed or attached at the Site. Hospital shall, at GKF's request, affix to the Equipment tags, decals, or plates furnished by GKF, indicating GKF's ownership of the Equipment. GKF may at its sole discretion finance the Equipment. Financing may be in the form of an installment loan or a financing lease or other commercially available debt instrument. 10 Lease Agreement Page 10 Southwest Texas Methodist Hospital October 29, 1996 Should GKF finance the Equipment through an installment loan, GKF shall be required to provide the Equipment as collateral against the loan. Should GKF finance the Equipment through a financing lease title shall vest with the lessor until GKF exercises its buy-out option. In addition, should GKF finance the equipment, said Agreement may be used as collateral against the loan. Hospital's right to possess and use the Equipment hereunder shall be subject to the interest of GKF's financing entities, if any. GKF shall instruct any such financing entities to notify (the "Default Notice") GKF and Hospital in writing within ten (10) business days after any payment defaults by GKF to any financing entity with respect to the Equipment at the Site (each, a "Payment default"). If GKF has not provided Hospital with reasonably satisfactory evidence that it has cured any such Payment Default within twenty (20) business days after Hospital's receipt of the Default Notice, Hospital shall have the right to cure any such Payment Default by paying to any such financing entity, as appropriate, the amount of the Payment Default and providing GKF with reasonably satisfactory written evidence of any such payment. Any amounts paid by Hospital to any such financing entity pursuant to the provisions of this Section 10 shall be offset against amount due GKF from the Hospital pursuant to Paragraph 6 of this Agreement. Except as otherwise specifically provided in this Paragraph 10, Hospital shall have no rights of set off against amounts due GKF from the Hospital pursuant to this agreement or otherwise. 11. Cost of Use of the Equipment. Except as is otherwise provided herein, Hospital shall bear the entire cost of using the Equipment during the Term of this Agreement. This shall include, but not be limited to, providing trained professionals, technical and support personnel and supplies to properly operate the Equipment. 12. Taxes. GKF shall pay any personal property and sales and use taxes levied against the Equipment and any other taxes or governmental fees or assessments, however denoted, whether of the federal government, any state government or any local government, levied or based on this Agreement or the use of the Equipment except for taxes, if any, assessed on the basis of net income, gross income or gross receipts of Hospital. 13. Maintenance and Inspections. GKF agrees to exercise due and proper care in the maintenance of the Equipment and to keep the Equipment in a good state of repair, reasonable wear and tear excepted. 11 Lease Agreement Page 11 Southwest Texas Methodist Hospital October 29, 1996 GKF (and Elekta) shall have the right of access to the Equipment for the purpose of inspecting same at all reasonable times and upon reasonable notice and with a minimum of interference to Hospital's operations. In the event the Equipment is improperly used by Hospital or its employees, agents, officers, physicians, or any other non-GKF or non-Elekta individual GKF may service or repair the same as needed and such expense shall be paid by Hospital, unless the repair is covered by the Service Agreement described in Paragraph 15 hereof. Any work so performed by or in the service or maintenance of the Equipment as a result of Hospital's failure or neglect to do so shall not deprive GKF of any of its rights, remedies or actions against Hospital for damages caused by such failure or neglect. 14. Equipment Modifications/Additions/Upgrades. The parties agree that the necessity and financial responsibility for future modifications/additions/ upgrades to the Equipment, including the reloading of the Cobalt-60 source, shall be discussed and mutually agreed to by GKF and Hospital. 15. Service Agreement. GKF warrants that it shall simultaneously with the execution of this Agreement enter into a Service Agreement with Elekta. Service Agreement shall be at GKF's sole expense. 16. Intentionally omitted 17. Options (a) Hospital shall have the option, exercisable as set forth below, to: (i) Renegotiate this Agreement on terms mutually agreeable to GKF for a specified renewal term taking into account the first ten (10) years of activity of the Equipment at the Site. Pursuant to Paragraph 17(a)(ii), if terms and conditions of Agreement extension are not executed by both parties by the end of the 114th month, this Agreement shall terminate. Both parties shall negotiate in good faith on the terms and conditions of an extension of this Agreement. (ii) Terminate this Agreement. If Hospital fails to renew the Equipment Term at the end of the initial term. GKF shall, at its sole expense remove the Gamma Knife 12 Lease Agreement Page 12 Southwest Texas Methodist Hospital October 29, 1996 within a reasonable period of time after the expiration of the ten (10) year initial Term. Hospital shall cooperate in good faith in such removal. (iii) * (iv) * Hospital shall exercise one (1) of the four (4) options referred to above, by mailing an irrevocable written notice thereof to GKF at Four Embarcadero Center, Suite 3620, San Francisco, California, 94111, by registered mail, postmarked on or before the end of the ninth (9th) year of the ten (10) year initial Equipment Term of this Agreement. Any such notice shall be sufficient if it states in substance that Hospital elects to exercise its option and states which of the four (4) options referred to above Hospital is exercising. 18. No Warrants by GKF. Hospital warrants that as of the Commencement Date, it shall have (a) thoroughly inspected the Equipment; (b) determined for itself that all items of the Equipment are of a size, design, capacity and manufacture selected by it; and (c) satisfied itself that to the best of its knowledge the Equipment is suitable for Hospital's stated purposes. GKF SUPPLIES THE EQUIPMENT "AS IS" AND NOT BEING THE 13 Lease Agreement Page 13 Southwest Texas Methodist Hospital October 29, 1996 MANUFACTURER OF THE EQUIPMENT OR THE MANUFACTURER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it being agreed that all such risks as between GKF and Hospital, shall be borne by Hospital. Hospital agrees to look solely to the manufacturer (Elekta) or to suppliers of the Equipment (and its software) for any and all warranty claims. GKF will use reasonable commercial efforts to enforce any and all warranties made by Elekta on behalf of Hospital during the ten (10) year initial Equipment Term and any extensions hereof. Hospital agrees that GKF shall not be responsible for the delivery, installation, or operation of the Equipment or for any delay or inadequacy of any or all of the foregoing. GKF shall not be responsible for any direct or indirect consequential loss or damage resulting from the installation, operation or use of the Equipment or otherwise. Hospital expressly waives any right or claim to hold GKF liable hereunder for any claims, demands and liabilities arising out of or in connection with the design, manufacture, possession or operation of the Equipment. 19. Events of Default and Remedies. The occurrence of any one of the following shall constitute an Event of Default hereunder: (a) Hospital fails to pay any installment of semi-monthly procedure payments when due when such default continues for a period of thirty (30) days after notice thereof from GKF or its assignee is given to Hospital. (b) Hospital attempts to remove, sell, transfer, encumber, sublet or part with possession of the Equipment or any items thereof, except as expressly permitted herein; (c) Hospital shall fail to observe or perform any of the other obligations required to be observed or performed by Hospital hereunder and such failure shall continue for twenty (20) days after written notice thereof to Hospital by GKF, unless Hospital has cured or is attempting to cure such failure during such period. So long as Hospital is diligently attempting to cure its failure to observe or perform any of its obligations, in good faith, such failure shall not constitute an Event of Default hereunder, unless such failure results in material damage or loss to GKF. (d) Hospital ceases doing business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they 14 Lease Agreement Page 14 Southwest Texas Methodist Hospital October 29, 1996 become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation or files an answer admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or it or its shareholders or directors shall take any action looking to its dissolution or liquidation. (e) Within sixty (60) days after the commencement of any proceedings against Hospital seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceedings shall not have been dismissed, or if within thirty (30) days after the appointment without Hospital's consent or acquiescence of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated. Upon the occurrence of an Event of Default, GKF may at its option do any or all of the following: (i) by notice to Hospital, terminate this Agreement as to the Equipment in default, wherever situated, and for such purposes, enter upon the Site without liability for so doing or GKF may cause Hospital and Hospital hereby agrees to return the Equipment to GKF at Hospital's sole cost and expense; (ii) recover from, as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to the present value of the unpaid estimated future lease payments by Hospital to GKF through the end of the Equipment Term discounted at the rate of nine percent (9%), which payment shall become immediately due and payable. Unpaid estimated future lease payments shall be based on the prior 12 months lease payments and incorporating an annual five (5%) percent increase; (iii) sell, dispose of, hold, use or lease the Equipment in default, as GKF in its sole discretion may determine (and GKF shall not be obligated to give preference to the sale, lease or other disposition of the Equipment over the sale, lease or other disposition of similar Equipment owned or leased by GKF). In any event, Hospital shall, without further demand, pay to GKF an amount equal to all sums due and payable for all periods up to and including the date on which GKF had declared this Agreement to be in default. 15 Lease Agreement Page 15 Southwest Texas Methodist Hospital October 29, 1996 In the event that Hospital shall have paid to GKF the liquidated damages referred to in (ii) above, GKF hereby agrees to pay to Hospital promptly after receipt thereof, all rentals or proceeds received from the reletting or sale of the Equipment during the balance of the ten (10) year initial Equipment Term (after deduction of all expenses incurred by GKF (including costs of unloading, shipping, installing, and reloading the Equipment); said amount never to exceed the amount of the liquidated damages paid by Hospital). Hospital agrees that GKF shall have no obligation to sell the Equipment. Hospital shall in any event remain fully liable for reasonable damages as provided by law for all costs and expenses incurred by GKF on account of such default, including but not limited to, all court costs and reasonable attorneys' fees. Hospital hereby agrees that, in any event, it shall be liable for any deficiency after any sale, lease or other disposition of the Equipment by GKF. The rights afforded GKF hereunder shall not be deemed to be exclusive, but shall be in addition to any other rights or remedies provided by law. 20. INSURANCE. (a) During the ten (10) year initial Equipment Term of this Agreement (and any successive terms) GKF shall, at its own cost and expense, keep in effect an all risk and hazard insurance policy covering the Equipment. The all risk and hazard insurance policy shall be for an amount not less than the replacement cost of the Equipment. Hospital shall be named as an additional insured under the all risk and hazard insurance policy maintained by GKF to the extend to its leasehold interest. Evidence of such insurance coverage shall be furnished by GKF to Hospital upon written request. During the ten (10) year initial Equipment Term of this Agreement, Hospital shall, at its own cost and expense keep in effect public liability and professional liability insurance policies concerning the possession and operation of the Equipment by Hospital. Said policies shall be in the amounts of not less than $1,000,000 per occurrence and $5,000,000 in aggregate per year. GKF and its members, successors and assigns, shall be named as additional insureds under the liability and professional liability policies maintained by Hospital. Evidence of such insurance coverages shall be furnished by Hospital to GKF upon written request, by no later than the Commencement Date. (b) If the Equipment is rendered unusable as a result of any physical damage to, or destruction of the Equipment, Hospital shall give to GKF immediate notice. GKF shall determine, within thirty (30) days after the date of occurrence of such damage or destruction, whether the Equipment can be repaired. In the event GKF determines that the Equipment cannot be repaired, GKF at its sole cost and expense shall promptly 16 Lease Agreement Page 16 Southwest Texas Methodist Hospital October 29, 1996 replace the Equipment. This Agreement shall continue in full force and effect as though such damage or destruction had not occurred. In the event GKF determines that the Equipment can be repaired, GKF shall cause the Equipment to be promptly repaired. 21. Notices. Any notices required under this Agreement shall be sent in writing and shall be deemed to have been duly given if delivered by hand or mailed by certified or registered mail to the following addresses: To GKF: Craig K. Tagawa, C.E.O. Four Embarcadero Center, Suite 3620 San Francisco, CA 94111 To Hospital: James C. Scoggin, Jr., CEO Southwest Texas Methodist Hospital 7700 Floyd Curl Drive San Antonio, TX 78229 Or to such other addresses as either party may specify for the reception of notice from time to time in writing to the other party. Any such notice shall be effective only when actually received by the party to whom addressed. 22. Integration/Supersedure. This Agreement together with all exhibits and addenda attached hereto contains the full and entire Agreement between the parties hereto, and no oral or written understanding is of any force or effect whatsoever unless expressly contained in a writing executed subsequent to the date of this Agreement. 23. Waivers. To the extent that GKF fails or chooses not to pursue any of its remedies under this Agreement or pursuant to applicable law, such shall not prejudice GKF's rights to pursue any of those remedies at any future time and shall not constitute a waiver of GKF's rights. To the extent that Hospital fails or chooses not to pursue any of its remedies under this Agreement or pursuant to applicable law, such shall not prejudice Hospital's rights to pursue any of those remedies at any future time and shall not constitute a waiver of Hospital's rights. 17 Lease Agreement Page 17 Southwest Texas Methodist Hospital October 29, 1996 24. Assignments. This Agreement is binding upon and shall inure to the benefit of the permitted successors or assigns of the respective parties hereto, except that Hospital may not assign its rights or obligations under this Agreement without the express written consent of GKF (which consent shall not be unreasonably withheld). Hospital shall not assign or sublease the Equipment or its rights hereunder without the prior written consent of GKF; which consent shall not be unreasonably withheld. No permitted assignment or sublease shall relieve Hospital of any of its obligations hereunder. For purposes of this Section 24, a reorganization, recapitalization, merger, or other business combination or restructuring of Hospital shall not be considered an assignment of this Agreement, so long as Methodist Healthcare System of San Antonio, Ltd., retains at least a fifty percent (50%) direct or indirect ownership interest in the Hospital. 25. Amendments. This Agreement shall not be amended or altered in any manner unless such amendment or alteration is in a writing signed by both parties. 26. Record-Keeping Requirements. To the extent required by the regulations promulgated by the Health Care Financing Administration pursuant to Section 952 of the Omnibus Reconciliation Act of 1980, GKF shall: (a) Until the expiration of four (4) years following the furnishing of services pursuant to this Agreement, GKF agrees to make available upon written request of the Secretary of Health and Human Services or the U.S. Comptroller General or any of their duly authorized representatives, this Agreement, any books, documents and records necessary to verify the nature and extent of costs incurred by Hospital by reason of the activities of GKF under this Agreement; and (b) If GKF elects to delegate any of its duties under this Agreement (which have a cost of value of Ten Thousands Dollars ($10,000.00) or more over a twelve (12) month period) to a related organization, only through a subcontractor which provides that, until the expiration of four (4) years following the furnishing of services under such subcontract, the related organization shall make available, on request of the Secretary of Health and Human Services or the U.S. Comptroller General or any of their authorized representatives, the subcontract, and books, documents and records of the nature and extent of costs incurred by Hospital by reason of activities of such related organization under such subcontract. No delegation by GKF of its duties hereunder shall relieve GKF from liability hereunder. 18 Lease Agreement Page 18 Southwest Texas Methodist Hospital October 29, 1996 27. Miscellaneous Provisions. (a) The invalidity or unenforceability of any portion or provision of this Agreement shall not effect the validity or enforceability of any other portion, nor shall either party's implied or express consent to the breach or waiver of any provision of this Agreement constitute a waiver of such provision as to any subsequent breach. (b) In the event of any claim or controversy arising hereunder, the prevailing party in such claim or controversy shall be entitled to a reasonable attorneys' fee in addition to whatever other relief said party would be otherwise entitled. (c) Force Majeure. Failure to perform any obligation hereunder (except for the payment of money) by either party will be excused in the event of any delay or inability to perform its duties under this Agreement directly or indirectly caused by conditions beyond its reasonable control including without limitation, fires, floods, earthquakes, snow, ice, disasters, Acts of God, accidents, riots, wars, operation of law, strikes, governmental action or regulations, shortages of labor, fuel, power, materials, manufacturer delays or transportation problems. (d) Governing Law. The Agreement will be governed by Texas Law. (e) Dispute Resolution. Should a dispute arise out of this contract, the parties to the dispute shall first attempt to resolve it through direct discussions in the spirit of mutual cooperation. If the parties' attempts to resolve their disagreements through negotiation fail, the dispute shall be mediated by a mutually acceptable third-party to be chosen by the disputing parties within thirty (30) days after written notice by one of them demanding mediation. The disputing parties shall share the cost of the mediation equally. By mutual agreement the parties may postpone mediation until each has completed some specified but limited discovery about the dispute. By mutual agreement the parties may use a nonbinding form of dispute resolution other than mediation. Any nonbinding dispute resolution process conducted under the terms of this section shall be confidential within the meaning of Tex. Civ. Prac. and Rem. Code sec. 154.053 and 154.073. In the event that neither a negotiated or mediated resolution is obtained within the time periods provided by this section, the parties may pursue any available legal or equitable remedy. 19 Lease Agreement Page 19 Southwest Texas Methodist Hospital October 29, 1996 IN WITNESS WHEREOF, the parties have signed this Agreement on the day and year first above written. SOUTHWEST TEXAS GK FINANCING, LLC METHODIST HOSPITAL By: /s/ JAMES C. SCOGGIN, JR. By: /s/ CRAIG K. TAGAWA ----------------------------- ----------------------------- James C. Scoggin, Jr. Craig K. Tagawa Chief Executive Officer Chief Executive Officer 20 Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks. ADDENDUM TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT 1. GKF shall participate jointly with Hospital in the design, development and construction solicitation required in connection with the preparation of the Site for the Equipment. In this regard: (a) GKF and Hospital have identified and approved Garza, Bomberger and Associates as the architectural firm to be engaged by Hospital to develop the design, layout, and plans and specifications for the Site. GKF shall assist Hospital with, and the Hospital shall regularly consult with GKF with regard to, the design or layout of the Site and all matters related to the preparation of the plans and specifications. (b) GKF also shall participate with Hospital in the identification and review of possible construction, engineering and/or design firms (general contractors and/or any subcontractors) to be engaged by Hospital to construct the Site. GKF shall have the right to interview all construction, engineering and/or design firms proposed by Hospital or GKF for the project. All bids to perform the construction, engineering and/or design work for the Site shall be submitted to GKF for review prior to Hospital's selection thereof. The construction, engineering and/or design firm(s) finally selected by Hospital to perform the work and its bid shall be subject to the written approval of GKF, which approval shall not be unreasonably withheld, conditioned or delayed. 2. As soon as reasonably possible after Hospital enters into the principal contracts for the design, preparation and construction of the Site (i.e., design/layout, architectural engineering and general construction), Hospital shall determine in writing the aggregate costs and expenses previously incurred and shall estimate the aggregate costs and expenses to be subsequently incurred by Hospital to design, plan, prepare, construct and complete the Site for the Equipment (the "Site Preparation Costs") based upon the amounts reflected in said contracts. A copy of the written determination shall be delivered by Hospital to GKF. If the aggregated Site Preparation Costs set forth in the written determination are Nine Hundred Fifty Thousand ($950,000.00) or less, Hospital shall be responsible for the payment of all Site Preparation Costs. If the aggregate Site Preparation Costs set forth in the written determination are more than Nine Hundred Fifty Thousand Dollars ($950,000.00), GKF shall reimburse Hospital in the manner set forth in Section 3 below for the amount of Site Preparation Costs set forth in the written documentation in excess of Nine Hundred Fifty Thousand Dollars ($950,000.00) (the "Excess Site Preparation Amount"). 3. If GKF is required to reimburse Hospital the Excess Site Preparation Costs: (a) Concurrent with the payment of any invoices or periodic installments for Site Preparation Costs, Hospital shall deliver to GKF a copy of all invoices or statements, a copy of all evidences of payment (e.g., copies of checks), an accounting of the aggregated Site 1 21 Preparation Costs, and a comparison of the estimated Site Preparation Costs (as set forth in the written determination) to the actual Site Preparation Costs paid by Hospital. The inadvertent failure of Hospital to provide the foregoing documentation will not affect Hospital's right to reimbursement hereunder, so long as such documentation is provided to GKF promptly upon request by GKF. When the aggregate Site Preparation Costs paid by Hospital, exceed Nine Hundred Fifty Thousand Dollars ($950,000.00), Hospital shall itemize and request in writing that GKF reimburse Hospital for such excess Costs. GKF shall reimburse the Hospital for the excess costs up to the Excess Site Preparation Amount not more than (3) days after the written request for reimbursement and other items described herein are delivered by Hospital to GKF. (b) Modifications or additions to the Site Preparation Costs, including change orders, shall be subject to written approval of GKF, which approval shall not be unreasonably withheld, conditioned or delayed. (c) Hospital shall regularly report to GKF on the status of the preparation and construction of the Site. Upon reasonable advance request by GKF, GKF shall have the right to visit and inspect the Site to review the progress of construction. 4. Except as otherwise set forth in the Addendum, all of the provisions of the Lease Agreement remain in full force and effect. GK Financing, LLC, Methodist Healthcare System of San a California limited Antonio, LTD, dba Southwest Texas liability company Methodist Hospital, a Texas Corporation By: /s/ CRAIG K. TAGAWA By: /s/ JAMES C. SCOGGIN, JR. ---------------------------------- ---------------------------------- Craig K. Tagawa James C. Scoggin, Jr. Chief Executive Officer Chief Executive Officer Dated: October 31, 1996 Dated: October 31, 1996 2 EX-10.19 11 LEASE AGREEMENT FOR A GAMMA KNIFE - 4/10/1997 1 EXHIBIT 10.19 Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks. LEASE AGREEMENT FOR A GAMMA KNIFE UNIT THIS AGREEMENT FOR A GAMMA KNIFE UNIT on April 10, 1997 (hereinafter referred to as the "Agreement") is entered into between GK FINANCING, LLC, a California Limited Liability Company (hereinafter referred to as "GKF") and YALE-NEW HAVEN AMBULATORY SERVICES CORPORATION, a Connecticut Corporation (hereinafter referred to as "Yale"). RECITALS WHEREAS, Yale wants to lease a Leksell Stereotactic Gamma Unit, also known as the Leksell Gamma Knife Model 23004 (B-type) which is technically specified in "Exhibit A" to the LGK Agreement (hereinafter defined) which is "Exhibit A" to this Lease Agreement, all of which technical specifications are incorporated herein and referred to collectively as the "Equipment" from GKF and further desires from GKF certain marketing support related to promotion and utilization of said Equipment; and WHEREAS, GKF is willing to purchase the Equipment distributed by Elekta, Inc., a Georgia corporation (hereinafter referred to as "Elekta") and lease the Equipment to Yale pursuant to the terms and conditions of this Agreement and is further willing to provide to Yale marketing support. NOW THEREFORE, in consideration of the promises contained herein, the parties hereto hereby agree as follows: 1. Execution of LGK Agreement by and between Yale and Elekta. Yale agrees that simultaneously with the execution of this Agreement it shall enter into that certain LGK Agreement with Elekta and GKF (hereinafter referred to as the "LGK Agreement"), a copy of which is attached hereto as "Exhibit A" and incorporated herein by reference. Yale agrees to fulfill all of its obligations under the LGK Agreement and acknowledges that GKF is a third party beneficiary of the LGK Agreement. 2. Certificate of Need. The parties hereto acknowledge that the installation and use of the Equipment by Yale is conditional upon the issuance of a Certificate of Need (hereinafter "CON") by the Connecticut Commission on Hospitals and Health Services. Yale will use all reasonable efforts to obtain a CON, however, in the event a CON is denied or its issuance is conditioned upon circumstances or events beyond Yale's reasonable control, then in such event this Agreement shall be rendered null and void and all parties shall thereafter be excused from performing any obligation or duty hereunder. 3. Delivery of the equipment and Site Preparation. GKF shall arrange to have the Equipment delivered to Yale and installed at Temple Medical Center, New Haven, Connecticut 1 2 (the "Site") in coordination with Elekta. Elekta shall be responsible for transporting the Equipment for F.O.B. loading dock to the Site and the subsequent positioning of the Equipment, as well as, construction of the temporary hot cell to facilitate charging of the Equipment with its cobalt supply. Elekta has provided Yale with a written estimate for the costs associated with transporting, installing and positioning the Equipment on Site, as well as, construction of the temporary hot cell to facilitate charging of the Equipment with its cobalt supply. Actual costs of transporting, installing and positioning the Equipment shall be reimbursed by Yale. GKF shall use its best faith efforts to expedite the delivery of the Equipment in accordance with the terms and conditions of the Purchase Agreement for the Equipment in accordance with the terms and conditions of the Purchase Agreement for the Equipment by and between GKF and Elekta. Notwithstanding the preceding sentence, it is understood and agreed that GKF has made no representations or warranties to Yale concerning actual delivery dates or schedules for the Equipment at the Site. GKF shall coordinate with Yale the estimated delivery date of Equipment. Yale shall prepare and provide the Site, at its own expense, in accordance with Elekta's Site Planning Criteria (which Site Planning Criteria are attached to the LGK Agreement as "Exhibit B" thereto and incorporated herein by reference) pursuant to site plans and specifications to be prepared by Yale and submitted to Elekta and GKF for prior written approval. Yale shall obtain, in a timely manner, a User License from the Nuclear Regulatory Commission and/or appropriate state agency authorizing it to take possession of the Cobalt Supply and obtain such other licenses, permits, approvals, consents and authorizations, which may be required by local governmental or other regulatory agencies for the Site, its preparation, the charging of the Equipment with its Cobalt Supply, the conduct of Acceptance tests, and the use of the Equipment all as more fully set forth in Article 2.1 of the LGK Agreement. 4. Term. The term of this Agreement (the "Term") shall commence as of the date hereof and unless earlier terminated in accordance with the provisions of this Agreement, shall continue for the period of ten (10) years following the date of performance of the first billed Gamma Knife procedure at the Site (the "First Procedure Date"). Yale shall become liable to GKF for the GKF monthly reimbursement as hereinafter defined in paragraph 7 upon the First Procedure Date. 5. Costs of Site Preparation; Costs of Installation. Yale shall, at its own expense, prepare, construct and make ready the Site in accordance with the Site plans previously approved by Elekta and GKF pursuant to paragraph 3 hereof, for the installation of the Equipment. Yale shall, at its own expense, select, purchase, install and maintain all radiation monitoring equipment and devices, safety circuits and radiation warning signs required at the Site in connection with the use and operation of the Equipment, all in accordance with the Site Planning Criteria and the applicable federal, state and local laws and regulations. 3 Yale warrants that upon completion of the Site, it will comply with the Site Planning Criteria and the site plans and specifications referred to in paragraph 3 above. Yale shall be liable for any damages to the Equipment caused by: (a) Its failure to construct the Site in accordance with the plans and specifications referred to in paragraph 3 above and the Site Planning Criteria; or (b) Negligent or intentional acts of omission or commission by Yale or any of its officers, agents, physicians or employees in connection with the construction of the Site. Yale shall utilize its best efforts to fulfill on an expeditious basis its obligations under this paragraph 5, and keep GKF informed to Yale's progress in fulfilling its obligations pursuant to this paragraph 5. Should Yale not have all Site preparations complete by the mutually agreed upon delivery date specified by a separate agreement between the parties, plus a sixty (60) day grace period such that the Site is acceptable for positioning and installation of the Equipment. Yale shall reimburse GKF at an interest rate of Bank of America's prime rate plus two percent (2%) on GKF's equipment cost from such agreed delivery date until the Site is prepared to allow positioning and installation of the Equipment. Should GKF not deliver the Equipment to Yale on the later of the above scheduled delivery date plus a sixty (60) day grace period or when Site is ready to accept the Equipment. GKF shall reimburse Yale at an annual interest rate of Bank of America's prime rate plus two percent (2%) on its actual cost expended to prepare the Site until the Equipment is installed at the Site. 6. Marketing Support. GKF will provide marketing support for the Gamma Knife service in coordination with Yale. 7. Reimbursement to GKF. As its sole consideration for the Lease of the Equipment and GKF's provision of certain marketing and administrative support service. Yale shall pay GKF as follows: * 3 4 * The amount due to GKF hereunder shall be determined and paid on a monthly basis throughout the initial Term and any successive Terms, and thereafter to the extent any technical component revenues associated with Gamma Knife treatments during the Term or any successive Term of the Lease are received subsequent to termination of the Lease. Within ten days after the last day of each calendar month of the initial Term and any successive terms (and upon the termination or expiration of the initial Term or any subsequent term with respect to a period shorter than a calendar month) each party shall submit to the other a statement setting forth such party's portion of the Direct Operating Expenses, and the parties shall calculate the Direct Operating Expenses with respect to such month (or portion thereof). The parties shall also calculate the net technical component of revenues (determined on a cash basis) with respect to cash receipts for Gamma Knife treatments paid in such month; and within ten days after the conclusion of such month or portion thereof Yale shall provide to GKF all revenue data necessary to perform such calculation. The GKF shares of such revenues for such month (or portion thereof) is referred to herein as the GKF Monthly Reimbursement." * On or before the First Procedure Date, the parties shall execute a preliminary amendment to this paragraph 7 setting forth GKF's equipment cost. Yale's cost to install the Equipment and Yale's cost to obtain the CON for the Gamma Knife and Yale's pre-opening marketing costs. Each party shall first provide to the other documentary proofs of expenditure to justify the amounts claimed for such costs. A final cost accounting of these aforementioned costs shall be completed and documented in a final amendment to this paragraph 7 no later than six months after the First Procedure Date. The technical fees to be billed for Gamma Knife procedures performed from time to time during the term of this Agreement shall be an amount which is economically justifiable based upon each party's Direct Operating Expenses (as described hereinabove), the total project costs (as described hereinabove) together with a return thereon, utilization of the Equipment and payments made by third party payers to Yale from time to time for Gamma Knife procedures. Yale shall consult with GKF from time to time regarding the amount of the technical fees to be 4 5 billed by Yale for Gamma Knife procedures and any revisions thereto; however, subject to compliance with the standard described in the preceding sentence. Yale shall not be required to obtain the consent of GKF to set or revise the amount of the technical fees. With respect to any period for which net technical component revenues associated with Gamma Knife treatment are equal to or less than Direct Operating Expenses associated with providing Gamma Knife treatment, GKF shall be entitled to no reimbursement other than for Direct Operating Expenses incurred by GKF, to the extent available. Further, the excess of Direct Operating Expenses over net technical component revenues for any such period shall be paid when incurred by Yale to the extent of the Yale Percentage, as hereinafter defined in paragraph 11 and by GKF to the extent of the GKF Percentage as hereinafter defined in paragraph 11. Throughout the initial Term and any successive terms, and thereafter until final settlement of all amounts owed to or claimed by either party under this Agreement, each party shall have the right to inspect, audit and copy the other party's books and records which relate to the accounting for and calculation of revenues from the provision of Gamma Knife procedures, Direct Operating Expenses, project cost. Yale's cost to install the Equipment and Yale's cost to obtain the CON for the Gamma Knife and GKF's equipment acquisition cost. 8. Use of the Equipment. The Equipment may be used by Yale only at the Site and shall not be removed therefrom. Yale shall not assign or sublease the Equipment or its rights hereunder without the prior written consent of GKF, which consent shall not be unreasonably withheld. No permitted assignment or sublease shall relieve Yale of any of its obligations hereunder. Yale shall not use nor permit the Equipment to be used in any manner nor for any purpose for which the Equipment is not designed or reasonably suitable. Yale shall not permit any liens whether voluntary or involuntary, to attach to the Equipment, without the prior written consent of GKF. Yale shall have no interest in the Equipment other than the rights acquired as a lessee hereunder and the Equipment shall remain the property of GKF regardless of the manner in which it may be installed or attached at the Site. Yale shall at GKF's request, affix to the Equipment tags, decals, or plates furnished by GKF, indicating GKF's ownership of the Equipment. 9. Additional Covenants of Yale. In addition to the other covenants made by Yale. Yale shall, at its own cost and expense: (a) Provide properly trained professional, technical and support personnel and supplies required for the proper performance of medical procedures utilizing the Equipment. (b) Monitor all patients' condition and treatment. 5 6 (c) Fully comply with all of its obligations under the LGK Agreement. (d) To the extent any loss realized by GKF is not fully covered by insurance, indemnify GKF as herein provided: (i) Yale shall indemnify, hold harmless and/or reimburse GKF on a prompt basis for any and all damage to the Equipment, reasonable wear and tear excepted (including any damage relating to or arising out of violations by Yale, its agents, officers, physicians, employees, successors and assigns of the Services Agreement described in paragraph 16 hereof), together with reasonable attorney fees incurred by GKF to establish or enforce its right to indemnity hereunder, to the extent the damage (or a portion thereof) is caused by the negligent or wrongful acts or omissions of Yale, its agents, officers, directors, physicians, employees, successors or assigns. Yale shall not be obligated to indemnify GKF hereunder to the extent the damage (or a portion thereof) is caused by the negligent or wrongful acts or omissions of GKF or its agents, officers, directors, employees, successors or assigns. In the event the Equipment is destroyed or rendered unusable, this indemnification shall extend up to the full replacement value of the Equipment at the time of its destruction less salvage value, if any. (ii) Yale shall indemnify, hold harmless and/or reimburse GKF for any loss, claim, liability or damage (collectively "damages") which GKF may suffer or incur, and for reasonable attorneys fees incurred by GKF to defend itself against such damages or to establish or enforce its rights to indemnity hereunder with respect to the events or occurrences described in Section 7.3 of the LGK Agreement to the same extent that Yale agrees to indemnify Elekta thereunder, Notwithstanding the foregoing in no event shall liability of Yale hereunder cause or result in a recovery in favor of GKF which is duplicative of any damages paid directly to Elekta. (iii) Yale shall indemnify, hold harmless and/or reimburse GKF for any damages (as defined in sub-part (ii) above) and for reasonable attorneys fees incurred by GKF to defend itself against such damages or to establish or enforce its right to indemnity hereunder which GKF may suffer or incur as a result of Yale's breach of the LGK Agreement. Notwithstanding the foregoing in no event shall liability of Yale hereunder cause or result in a recovery in favor of GKF which is duplicative of any damages paid directly to Elekta. 6 7 (e) Provide reasonable and customary marketing materials (i.e. brochures, announcements, etc.) and marketing support. 10. Additional Covenants, Representations and Warranties of GKF. In addition to the other covenants, representations and warranties, made by GKF in this Agreement: (a) GKF represents and warrants that GKF has full power and authority to enter into this Agreement, and that this Agreement does not and will not violate any agreement, contractor or instrument binding upon GKF. (b) GKF represents and warrants to Yale that, upon delivery of the Equipment to Yale, GKF shall use its best faith efforts to require that Elekta places the Equipment in service, as soon as possible, consistent with all reasonable safety precautions. In accordance with the manufacturer's specifications, guidelines and field modification instructions. (c) GKF represents and warrants that throughout the term of this Agreement, Yale shall peaceably enjoy the use of the Equipment, free of the rights of any other persons except for those rights reserved by GKF in this Agreement or granted to Elekta under the LGK Agreement or under Elekta's Purchase Agreement, with GKF, a full and complete copy of which has been provided to Yale and incorporated as an exhibit to the LGK Agreement. (d) During the entire term of this Agreement and subsequent extensions thereof, GKF shall maintain at its sole cost the Equipment to Elekta's specifications and shall maintain in full force and effect: (1) the Service Agreement referenced in paragraph 16 hereof; and (2) any other service or other agreements required to fulfill GKF's obligations to Yale pursuant to this paragraph 10(d). Unless Yale elects in its sole discretion to pursue any warranty claim directly against Elekta. GKF represents and warrants that during the entire term of this agreement and any subsequent extensions hereof, that it will fully pursue any and all remedies it may have against Elekta under the Service Agreement to insure that the Equipment will be in conformity with Elekta's warranties so that it is free from defects in design, materials, and workmanship which result in noncompliance with the Equipment's specifications and/or Elekta's warrants to GKF. In no event, however, shall the warranty obligations 7 8 of GKF to Yale with respect to the Equipment be greater or more extensive than Elekta's warranty obligations to GKF with respect to the Equipment. 11. Ownership/Title. Except as hereinafter provided, it is expressly understood that Yale shall acquire no right, title or interest in or to the Equipment, other than the right to quietly and peacefully possess and use the same in accordance with the terms of the Agreement. Upon termination of this Agreement (whether by expiration or early termination) Yale shall be granted a percentage ownership interest in the Equipment equal to the percentage that Yale's cost to install the Equipment at the Site. Yale's cost to obtain the CON for the Gamma Knife and Yale's pre-opening marketing costs is to the total project cost (the "Yale Percentage"). Upon termination of this Agreement, GKF shall be granted an ownership interest in those leasehold improvements at the Site which can be removed on termination of this Agreement without any damage to the Site equal to the percentage that GKF's equipment cost is to the total project cost (the "GKF Percentage"). The total project cost for the purposes of this of this paragraph shall be equal to GKF's equipment cost (equipment acquisition cost, sales tax and customs and duty) plus Yale's cost to install the Equipment at the Site, its cost to obtain the CON for the Gamma Knife and Yale's pre-opening marketing costs. The grant of an ownership interest to Yale under this paragraph shall be subject to the condition that, at the termination of the Agreement. Yale must pay a percentage of the total cost to relocate the Equipment equal to the Yale percentage. Yale's ownership interest in the Equipment shall be subject to a security interest in the Equipment of any and all entities that provide financing to GKF with respect to the Equipment. The Equipment may be subject to a security interest in favor of Elekta to secure the purchase price for the Equipment due to Elekta. Upon payment of the full purchase price to Elekta and release of its security interest. GKF may in its sole discretion finance the Equipment. Financing may be in the form of an installment loan or a capitalized lease or other commercially available debt instrument. Should GKF finance the Equipment through an installment loan, GKF shall be required to provide the Equipment as collateral against the loan. Should GKF finance the Equipment through a capitalized lease title shall vest with the lessor until GKF exercises its buy-out option. Yale's interest shall be subject to the interests of Elekta and thereafter any financing entity. GKF, as a condition of this Agreement, shall provide to Yale complete copies of all financing documents prior to execution and shall cause Elekta and any subsequent financing entity to notify Yale within ten (10) business days of any payment defaults on the loan/lease agreement for the Equipment installed at the Yale Site (Payment Default). In the event of a Payment Default by GKF, GKF's Monthly Reimbursement shall not be paid to GKF until the Payment Default is cured. Unless Yale exercises its right of assumption of the GKF financing as hereinafter provided, Yale shall pay all withheld Monthly Reimbursement payments to GKF forthwith upon receiving written notice from the secured party that Payment Default has been cured by GKF. In the event a Payment Default remains uncured by GKF for a period of thirty (30) days after written notice thereof is received by Yale, Yale in its sole discretion, may cure the Payment Default by paying the amount owing to the holder of any security interest in the Equipment ("Secured Party"), and assuming and agreeing to be bound by all terms and 8 9 covenants of the financing: provided that (i) in the event GKF's financing covers Leksell Gamma Knife units other than the Equipment that is the subject of this Agreement, the financing assumed by Yale shall be limited to the portion thereof that relates to the Equipment; (ii) the amount of the financing assumed by Yale shall not exceed the amount of the original purchase price of the Equipment as set forth in Elekta's Purchase Agreement with GKF (exclusive of any interest, late fees or other costs or charges that may have been imposed by the Secured Party and added to the outstanding principal balance thereunder); (iii) such financing assumed by Yale shall not be cross-defaulted with any other collateral security other than the Equipment, this Agreement or any property or other interests related thereto; and (iv) Yale shall give written notice to GKF and the Secured Party upon the exercise of its election to satisfy the Payment Default and assume the financing. The Secured Party must enter into an estoppel and subordination agreement with Yale at or prior to the time GKF enters into any financing of the Equipment (other than with respect to Elekta which shall enter into such estoppel and subordination agreement with Yale within sixty (60) days following the execution of this Agreement by the parties) wherein the Secured Party's rights in the Equipment shall be fully subordinate and subject to the rights of Yale to cure any such default and assume GKF's obligations under the financing as set forth above (subject to the reasonable approval by the Secured Party of Yale's financial status); provided that, in the event Yale does not elect to cure such default and assume and agree to be bound by all terms and covenants of such financing within thirty (30) days after notice of a Payment Default is received by Yale as set forth above, the Secured Party shall thereupon be entitled to exercise all of its rights as a secured party pursuant to the terms and provisions of its financing documents. In the event Yale exercises its right of assumption upon default by GKF, all rights of redemption in and to the Equipment shall thereafter vest solely in Yale, and GKF shall have no further right to any payments under paragraph 7 hereof. Further, in the event of default by GKF and the exercise by Yale of its right of assumption of the GKF financing as hereinabove provided. GKF shall have waived all right, title and interest in and to the GKF Percentage and to any and all equity it may have previously had in and to the Equipment, and Yale shall have no obligation to resell the Equipment or take any action to preserve or protect such equity in the Equipment as GKF may have. The exercise by Yale of any rights or remedies it may have hereunder shall be deemed to be commercially reasonable. 11.1. Right of First Refusal. If at any time or from time to time during the terms of this Agreement, Yale desires to purchase, lease or otherwise acquire one or more additional Leksell Gamma Knife units for use or operation within the State of Connecticut. Yale shall provide to GKF no less than sixty (60) days prior written notice of its intended purchase, lease or acquisition (the "Option Notice"). In the event Yale's desire is to lease any such Leksell Gamma Knife, for sixty (60) days following GKF's receipt of the Option Notice, GKF shall have the exclusive option and right to purchase, lease or acquire such Leksell Gamma Knife and to lease such Leksell Gamma Knife to Yale on the same terms and conditions as are set forth in this Agreement. In the event Yale's desire is to acquire any such Leksell Gamma Knife other than by lease, for sixty (60) days following GKF's receipt of the Option Notice, GKF shall have the exclusive option and right to so acquire such Leksell Gamma Knife jointly with Yale. Exercise of the foregoing option by GKF shall be accomplished by giving written notice of exercise (the 9 10 "Exercise Notice") to Yale dated on or before the expiration of sixty (60) days following receipt of the Option Notice by GKF. Within ninety (90) days following receipt of the Exercise Notice by Yale, (i) with respect to the lease of such Leksell Gamma Knife by Yale; GKF and Yale shall enter into a lease agreement on the same terms and conditions as are set forth in this Agreement, or (ii) with respect to the acquisition of such Leksell Gamma Knife other than by lease, GKF and Yale shall enter into such other agreement pertaining to such acquisition on terms and conditions as shall be mutually agreed upon between GKF and Yale, provided that in the event the parties are unable to agree upon the terms and conditions of such other agreement within such 90-day period, the parties shall submit the matter to arbitration as set forth in Section 29(e) below. In the event GKF fails to exercise its option within such sixty (60) day period, Yale may purchase, lease or acquire such Leksell Gamma Knife independent of GKF, provided that such purchase, lease or acquisition shall be limited only to the Leksell Gamma Knife unit referenced in the Option Notice. The parties agree that a violation of the terms of this Section 11.1 may be enforced by way of an action for preliminary and permanent injunctive relief since monetary damages may be difficult to ascertain. 12. Cost of Use of the Equipment. Except as is otherwise provided herein and subject to Yale's right to charge Direct Operating Expenses against technical component revenues under paragraph 7 above, Yale shall bear the entire cost of the operation of the Equipment during the Term of this Agreement. This shall include, but not be limited to, providing trained professionals, technical and support personnel and supplies to properly operate the Equipment. Yale shall be fully responsible and liable for all acts and/or omissions of such professional, technical and support personnel. 13. Taxes. GKF shall pay any personal property taxes levied against the Equipment and any other taxes or governmental fees or assessments, however denoted, including sales and use tax, whether of the federal government, any state government or any local government, levied or based on this Agreement or the use of the Equipment except for those taxes, if any, pertaining to the gross income or gross receipts of Yale. 14. Maintenance and Inspections. GKF agrees to exercise due and proper care in the maintenance of the Equipment and to keep the Equipment in good state of repair consistent with Elekta's specifications and the intended use of the Equipment, reasonable wear and tear excepted. Yale shall be liable to GKF for all damage to the Equipment caused by the misuse, negligence, improper use or other intentional or negligent acts or omissions of Yale's employees, officers, agents and physicians (not employed by GKF or Elekta). GKF (and Elekta) shall have the right of access to the Equipment for the purpose of inspecting same at all reasonable times and upon reasonable notice and with a minimum of interference to Yale's operations. In the event the Equipment is improperly used by Yale or its employees, agents, officers and physicians, GKF may service or repair the same as needed and such expense shall be paid by Yale, unless the repair is covered by the Service Agreement described in paragraph 16 hereof. 10 11 15. EQUIPMENT MODIFICATIONS/ADDITIONS/UPGRADES. The parties agree that the necessity and financial responsibility for modifications/additions/ upgrades to the Equipment, including the reloading for the Cobalt-60 source, shall be discussed and mutually decided by GKF and Yale. If GKF and Yale agree to reload the Cobalt-60 source (in approximately Year 8 of the initial Term) GKF and Yale shall share in the expenses of this Cobalt-60 reload in the same proportions as they share in revenues and expenses as calculated under paragraph 7. If a reloading of the Equipment occurs, the original term shall be extended by eight (8) years less the number of years remaining in the original term. 16. SERVICE AGREEMENT. GKF warrants that it shall simultaneously with the execution of this Agreement enter into and be solely responsible for the costs of a Service Agreement with Elekta (the "Service Agreement"), a copy of which is annexed to Elekta's Purchase Agreement with GKF as "Exhibit F". GKF shall obtain from Elekta the right to assign GKF's rights under the Service Agreement to Yale, which assignment shall be made upon Yale's written request for the same. In no event shall such assignment relieve GKF from its obligation to pay all costs associated with the Service Agreement. 17. TERMINATION. The Agreement may be terminated after the initial eighteen (18) month period of service, and after each subsequent twelve (12) month period of service, upon mutual agreement by the parties. 18. OPTIONS TO EXTEND AGREEMENT. (a) Yale shall have the option at the end of the ten (10) year initial Term to: (1) Extend the term of the lease under this Agreement for an additional term of five (5) years under the same terms and conditions as are set forth herein. (2) Terminate this Agreement. If Yale terminates this Agreement at the end of the initial Term, GKF shall remove the Gamma Knife within an agreed upon period of time after the expiration of the (10) year initial Term. Yale shall exercise one (1) of the two (2) options referred to above, by mailing an irrevocable written notice thereof to GKF at Four Embarcadero Center, Suite 3620, San Francisco, California 94111, by certified mail, postmarked on or before the end of the ninth (9th) year of the initial Term of this Agreement. Any such notice shall be sufficient if it states in substance that Yale elects to exercise its option and states which of the two (2) options referred to above Yale is exercising. 19. NO WARRANTIES BY GKF. As of the First Procedure Date, Yale shall have thoroughly inspected the Equipment. Provided that all manufacturer's warranties are assigned to 11 12 Yale with the written consent of Elekta and without waiving any rights, Yale has under this Agreement to require GKF to provide a Service Agreement to service and maintain the Equipment. Yale agrees to look solely to the manufacturer (Elekta) or to suppliers of the Equipment (and its software) for any and all warranty claims. Any and all warranties made by Elekta will be enforced by GKF in its good faith best efforts on behalf of Yale during the ten (10) year initial Term hereof. GKF SUPPLIES THE EQUIPMENT "AS IS" AND NOT BEING THE MANUFACTURER OF THE EQUIPMENT OR THE MANUFACTURER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR THE LIKE. GKF shall not be liable for any direct, indirect or consequential losses or damages resulting from operation or use of the Equipment by Yale. 20. EVENTS OF DEFAULT BY YALE AND REMEDIES. The occurrence of any one of the following shall constitute an Event of Default hereunder: (a) Yale fails to make payment required pursuant to Paragraph 7 when due and such default conditions for a period of thirty (30) days after written notice thereof from GKF or its assignee is given to Yale. (b) Yale attempts to remove, sell, transfer, encumber, sublet or part with possession of the Equipment or any items thereof; except as expressly permitted herein. (c) Yale shall fail to observe or perform any of the other obligations required to be observed or performed by Yale hereunder and such failure shall continue uncured for twenty (20) days after the expiration of a reasonable time necessary to cure such default has lapsed and written notice thereof has been received by Yale; (d) Yale ceases doing business, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation or files an answer 12 13 admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or it or its shareholders shall take any action looking to its dissolution or liquidation. (e) Within sixty (60) days after the commencement of any proceedings against Yale seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceedings shall not have been dismissed, or if within thirty (30) days after the appointment without Yale's consent or acquiescence of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated. Upon the occurrence of an Event of Default, GKF may, at its option, do any or all of the following; (i) by notice to Yale, terminate this Agreement as to the Equipment in default, wherever situated, and for such purposes, enter upon the Site without liability for so doing or GKF may cause Yale and Yale hereby agrees to return the Equipment to GKF at Yale's sole cost and expense; (ii) recover from Yale, as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to the present value of the unpaid estimated future lease payments by Yale to GKF through the end of the then current Agreement term less the reasonable salvage value of the Equipment discounted at the rate of nine percent (9%), which payment shall become immediately due and payable. Unpaid estimated future lease payments shall be based on the prior twelve (12) months' lease payments with an annual five percent (5%) increase; (iii) sell, dispose of, hold, use or lease the Equipment in default, as GKF in its sole discretion may determine (and GKF shall not be obligated to give preference to the sale, lease or other disposition of the Equipment over the sale, lease or other disposition of similar Equipment owned or leased by GKF). In any event, Yale shall, without further demand, pay to GKF an amount equal to all sums due and payable for all periods up to and including the date on which GKF had declared this Agreement to be in default. In the event that Yale shall have paid to GKF the liquidated damages referred to in (ii) above, GKF hereby agrees to pay to Yale promptly after receipt thereof, all rentals or proceeds received from the reletting or sale of the Equipment during the balance of the initial Term (after deduction of all expenses incurred by GKF; said amount never to exceed the amount of the liquidated damages paid by Yale). Yale agrees that GKF shall have no obligation to sell the Equipment. Yale shall, in any event, remain fully liable for reasonable damages as provided by law for all costs and expenses incurred by GKF on account of such default, including but not limited to all court costs and reasonable attorney's fees. 13 14 21. Events of Default by GKF and Remedies. The occurrence of any one of the following shall constitute an Event of Default hereunder: (a) GKF fails to enter into and maintain in force the Service Agreement as required under paragraph 16 hereof. (b) Elekta or any successor Secured Party declares GKF in default of any financing agreements entered into by GKF to finance the acquisition of the Equipment. (c) GKF fails to observe or perform any other obligation required to be observed or performed by GKF hereunder and such failure shall continue uncured for twenty days after the expiration of a reasonable time necessary to cure such default has lapsed and written notice thereof has been received by GKF. (d) GKF ceases doing business, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation or files an answer admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or it or its shareholders shall take any action looking to its dissolution or liquidation. (e) Within sixty (60) days after the commencement of any proceedings against GKF seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceedings shall not have been dismissed, or if within thirty (30) days after the appointment without GKF's consent or acquiescence of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated. Upon the occurrence of an Event of Default described in sub-paragraph (b) above, Yale's exclusive remedy shall be that described in paragraph 11 above. Upon the occurrence of any other Event of Default, Yale may, at its option, do any or all of the following: (i) by notice to GKF terminate this Agreement as to the Equipment and, in such event, GKF shall remove the 14 15 Equipment at GKF's sole cost and expense or, in the absence of removal by GKF within a reasonable period of time after written request therefor, Yale may remove the Equipment with all due care and store the Equipment at GKF's sole cost and expense; and (ii) recover from GKF such reasonable damages as may be realized by Yale as a result of such breach or default. GKF shall also be liable for all costs and expenses incurred by Yale on account of any such default, including but not limited to all court costs and reasonable attorney's fees. Except as provided in the first sentence of this paragraph, the rights afforded Yale hereunder shall not be deemed to be exclusive, but shall be in addition to any other rights or remedies provided by law. 22. Insurance. (a) During the initial Term (and any successive terms) GKF shall, at its own cost and expense, keep in effect an all risk and hazard insurance policy covering the Equipment. The all risk and hazard insurance policy shall be for an amount not less than the replacement cost of the Equipment. During the initial Term of this Agreement (and any successive terms), Yale shall, at its own cost and expense, keep in effect public liability and professional liability insurance policies concerning the operation of the Equipment by Yale. Said policies shall be in the amounts of not less than $1,000,000.00 per occurrence and $5,000,000.00 in aggregate per year. Yale and GKF, their successors and assigns, shall be named as additional insureds and/or loss payees on the insurance policies maintained hereunder by the other party. All policies shall provide for a waiver of the right of subrogation as to each additional insured. Evidence of such insurance coverages shall be furnished by both parties to the other party upon written request, by no later than the First Procedure Date. (b) If the Equipment is rendered unusable as a result of any physical damage to, or destruction of, the Equipment. Yale shall give to GKF immediate notice. GKF shall determine, within thirty (30) days after the date of occurrence of such damage or destruction, whether the Equipment can be repaired. In the event GKF determines that the Equipment cannot be repaired. GKF, at its sole cost and expense (subject to Yale's obligations elsewhere in this Agreement) shall promptly replace the Equipment. This Agreement shall continue in full force and effect as though such damage or destruction had not occurred. In the event GKF determines that the Equipment can be repaired, GKF shall cause the Equipment to be promptly repaired. 23. Notices. Any notices required under this Agreement shall be sent in writing and shall be deemed to have been given if delivered by hand or mailed by certified or registered mail to the following addresses: To GKF: Craig K. Tagawa, C.E.O. Four Embarcadero Center, Suite 3620 San Francisco, CA 94111 15 16 To Yale: Alvin Greenberg, M.D. Administrator Yale New Haven Ambulatory Services Corporation 229 George Street New Haven, CT 06510 or to such other addresses as either party may specify for the reception of notice from time to time in writing to the other party. Any such notice shall be effective only when actually received by the party to whom addressed. 24. Integrated/Supersedure. This Agreement contains the full and entire Agreement between the parties hereto, and no oral or written understanding is of any force or effect whatsoever unless expressly contained in a writing executed subsequent to the date of this Agreement. 25. Waivers. To the extent that GKF fails to chooses not to pursue any of its remedies under this Agreement or pursuant to applicable law, such shall not prejudice GKF's right to pursue any of those remedies at any future time and shall not constitute a waive of GKF's rights. 26. Assignments. This Agreement is binding upon and shall inure to the benefit of the permitted successors or assigns of the respective parties hereto, except that neither party may assign its rights or obligations under this agreement without the express written consent of the other (which consent shall not be unreasonably withheld). 27. Amendments. This Agreement shall not be amended or altered in any manner unless such amendments or alteration is in writing signed by both parties. 28. Record Keeping Requirements. To the extent required by the regulations promulgated by the Health Care Financing Administration pursuant to Section 952 of the Omnibus Reconciliation Act of 1980, GKF shall: (a) Until the expiration of four (4) years following the furnishing of services pursuant to this Agreement, GKF agrees to make available upon written request of the Secretary of Health and Human Services or the U.S. Comptroller General or any of their duly authorized representatives, this Agreement, any books, documents and records necessary to verify the nature and extent of costs incurred by Yale by reason of the activities of GKF under this Agreement; and (b) If GKF elects to delegate any of its duties under this Agreement (which have a cost or value of Ten Thousand 16 17 only 00/100 [$10,000.00] Dollars or more over a twelve (12) month period) to a related organization. GKF may do so only through a subcontractor which is consented to by Yale, it being understood that, inasmuch as Yale is entering into this Agreement in reliance on GKF's reputation and expertise, that Yale shall be the sole judge of the reputation and expertise of the proposed delegatee, and only through a subcontractor which provides that, until the expiration of four (4) years following the furnishing of services under such subcontract, the related organization shall make available, on request of the Secretary of Health and Human Services or the U.S. Comptroller General or any of their authorized representatives, the subcontract, and books, documents and records of the nature and extent of costs incurred by Yale by reason of activities of such related organization under such subcontract. No delegation by GKF of its duties hereunder shall relief GKF from liability hereunder. 29. Miscellaneous Provisions. (a) The invalidity or unenforceability of any portion or provision of this Agreement shall not effect the validity or enforceability or any other portion, nor shall either party's implied or express consent to the breach or waiver of any provision of this Agreement constitute a waiver of such provision as to any subsequent breach. (b) In the event of any claim or controversy arising hereunder, the prevailing party in such claim or controversy shall be entitled to a reasonable attorneys' fee in addition to whatever other relief said party would be otherwise entitled. (c) Force Majeure. Failure to perform by either party will be excused in the event of any delay or inability to perform its duties under this Agreement directly or indirectly caused by conditions beyond its reasonable control including without limitation, fires, floods, earthquakes, snow, ice, disasters. Acts of God, accidents, riots, wars, operation of law, strikes, governmental action or regulations, shortages of labor, fuel, power, materials, manufacturer delays or transportation problems. 17 18 (d) Choice of Law. This Agreement shall be governed by, and construed, enforced and interpreted in accordance with the laws of the State of Connecticut and the laws of the United States of America applicable to transactions within the State of Connecticut. (e) Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration to be conducted in Atlanta, Georgia in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and Judgment upon the award rendered by the arbitrators may be entered in any Court having jurisdiction thereof. IN WITNESS WHEREOF, the parties have signed this Agreement on the day and year first above written. YALE-NEW HAVEN AMBULATORY GK FINANCING, LLC SERVICES CORPORATION BY: /s/ BART PRICE /s/ CRAIG K. TAGAWA -------------------------------- ---------------------------- CRAIG K. TAGAWA -------------------------------- Chief Executive Officer Its: President -------------------------- 18 EX-21 12 SUBSIDIARIES OF AMERICAN SHARED HOSPITAL SERVICES 1 Exhibit 21.0 The subsidiaries of American Shared Hospital Services are: MMRI, Inc. a California corporation Embarcadero Transition Corp. III a California corporation American Shared Radiosurgery Services a California corporation European Shared Medical Services Limited an English registered company African American Church Health and Economic Services, Inc. a California corporation ACHES Insurance Services, Inc. a California corporation GK Financing, LLC a California limited liability company EX-23.1 13 CONSENT OF GRANT THORNTON, LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement, as amended, (Forms S-8, No. 2-90646; No. 33-21509; No. 33-48980) pertaining to the 1984 Stock Option Plan of American Shared Hospital Services; the Registration Statement (Form S-8, No. 33-45999) pertaining to the American Shared Hospital Services 1991 Employee Stock Bonus Plan; the Registration Statement (Form S-8, No. 333-08009) pertaining to the 1995 Stock Option Plan of American Shared Hospital Services; the Registration Statement, as amended, (Form S-3, No. 333-12879) pertaining to the registration of 2,679,047 Common Shares of American Shared Hospital Services; and the Registration Statement, as amended, (Form S-3, No. 33-63721 pertaining to the registration of 1,290,853 of Common Shares of American Shared Hospital Services and 441,147 Warrants to purchase Common Shares of American Shared Hospital Services and in the related Prospectuses of our report dated March 12, 1999, with respect to the consolidated financial statements and schedule of American Shared Hospital Services included in this Annual Report (Form 10-K) for the year ended December 31, 1998. March 29, 1999 /s/ Grant Thornton LLP Stockton, California EX-23.2 14 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.2 We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated February 27, 1998, with respect to the consolidated financial statements and schedule of American Shared Hospital Services included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ Ernst & Young LLP March 29, 1999 Walnut Creek, California EX-27 15 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-1-1998 DEC-31-1998 13,340,000 0 1,228,000 0 0 14,957,000 16,856,000 5,097,000 26,919,000 5,869,000 0 0 0 11,087,000 3,344,000 26,919,000 35,162,000 35,162,000 0 25,826,000 5,116,000 0 3,186,000 21,564,000 1,513,000 20,051,000 0 0 0 20,051,000 4.23 3.23
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