UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013 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 1-08789

 

 

 

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 3700, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (415) 788-5300

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller reporting company x

 

As of May 1, 2013, there are outstanding 4,605,870 shares of the Registrant’s common stock.

 

 
 

  

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

  

AMERICAN SHARED HOSPITAL SERVICES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    (unaudited)        
ASSETS   March 31, 2013     December 31, 2012  
             
Current assets:                
Cash and cash equivalents   $ 1,302,000     $ 1,564,000  
Restricted cash     50,000       50,000  
Certificate of deposit     9,000,000       9,000,000  
Accounts receivable, net of allowance for doubtful accounts of $100,000 in 2013 and $100,000 in 2012     4,510,000       3,706,000  
Other receivables     311,000       401,000  
Prepaid expenses and other current assets     788,000       925,000  
Current deferred tax assets     311,000       310,000  
                 
Total current assets     16,272,000       15,956,000  
                 
Property and equipment:                
Medical equipment and facilities     84,334,000       84,453,000  
Office equipment     694,000       694,000  
Deposits and construction in progress     9,872,000       9,754,000  
      94,900,000       94,901,000  
Accumulated depreciation and amortization     (42,683,000 )     (41,224,000 )
Net property and equipment     52,217,000       53,677,000  
                 
Investment in preferred stock     2,687,000       2,687,000  
Other assets     978,000       1,003,000  
                 
Total assets   $ 72,154,000     $ 73,323,000  

 

LIABILITIES AND SHAREHOLDERS' EQUITY   (unaudited)
March 31, 2013
    December 31, 2012  
             
Current liabilities:                
Accounts payable   $ 434,000     $ 263,000  
Employee compensation and benefits     188,000       168,000  
Customer deposits/deferred revenue     747,000       747,000  
                 
Other accrued liabilities     1,172,000       801,000  
Current portion of long-term debt     4,159,000       3,932,000  
Current portion of obligations under capital leases     3,727,000       3,742,000  
                 
Total current liabilities     10,427,000       9,653,000  
                 
Long-term debt, less current portion     12,820,000       13,837,000  
Long-term capital leases, less current portion     12,232,000       13,173,000  
Advances on line of credit     8,550,000       8,550,000  
                 
Deferred income taxes     3,280,000       3,280,000  
                 
Shareholders' equity:                
Common stock (4,606,000 shares at March 31, 2013 and 4,606,000 shares at December 31, 2012)     8,578,000       8,578,000  
Additional paid-in capital     4,939,000       4,902,000  
Accumulated other comprehensive income (loss)     (349,000 )     (357,000 )
Retained earnings     6,831,000       6,806,000  
Total equity-American Shared Hospital Services     19,999,000       19,929,000  
Non-controlling interest in subsidiary     4,846,000       4,901,000  
Total shareholders' equity     24,845,000       24,830,000  
                 
Total liabilities and shareholders' equity   $ 72,154,000     $ 73,323,000  

 

See accompanying notes

  

1
 

  

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

  

    Three Months ended March 31,  
    2013     2012  
             
Medical services revenue   $ 4,668,000     $ 4,403,000  
                 
Costs of revenue:                
                 
Maintenance and supplies     381,000       390,000  
                 
Depreciation and amortization     1,474,000       1,545,000  
                 
Other direct operating costs     695,000       631,000  
                 
      2,550,000       2,566,000  
                 
Gross Margin     2,118,000       1,837,000  
                 
Selling and administrative expense     1,235,000       1,024,000  
                 
Interest expense     471,000       574,000  
                 
Operating income     412,000       239,000  
                 
Interest and other income (loss)     (127,000 )     1,000  
                 
Income before income taxes     285,000       240,000  
                 
Income tax expense     52,000       11,000  
                 
Net income     233,000       229,000  
Less: Net income attributable to non-controlling interest     (208,000 )     (220,000 )
                 
Net income attributable to American Shared Hospital Services   $ 25,000     $ 9,000  
                 
Net income per share:                
                 
Earnings per common share - basic   $ 0.01     $ -  
                 
Earnings per common share - diluted   $ 0.01     $ -  

  

See accompanying notes

  

2
 

  

AMERICAN SHARED HOSPITAL SERVICES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

  

    Three months ended March 30,  
    2013     2012  
             
Net income attributable to American Shared Hospital Services   $ 25,000     $ 9,000  
                 
Other comprehensive income:                
Foreign currency translation adjustments     22,000       -  
                 
Total comprehensive income     47,000       9,000  
Less comprehensive income attributable to the non-controlling interest     14,000       -  
               
Comprehensive income attributable to American Shared Hospital Services   $ 33,000     $ 9,000  

  

See accompanying notes

 

3
 

  

AMERICAN SHARED HOSPITAL SERVICES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

 

    PERIODS ENDED DECEMBER 31, 2011 AND 2012 AND MARCH 31, 2013  
                      Accumulated                          
                Additional     Other                 Non-controlling        
    Common     Common     Paid-in     Comprehensive     Retained     Sub-Total     Interests in        
    Shares     Stock     Capital     Income (Loss)     Earnings     ASHS     Subsidiaries     Total  
                                                 
Balances at January 1, 2011     4,597,000     $ 8,606,000     $ 4,703,000     $ -     $ 6,262,000     $ 19,571,000     $ 3,473,000     $ 23,044,000  
                                                                 
Stock based compensation expense     14,000       -       125,000       -       -       125,000       -       125,000  
                                                                 
Investment in subsidiaries by non-controlling interests     -       -       -       -       -       -       1,509,000       1,509,000  
                                                                 
Cash distributions to non-controlling interests     -       -       -       -       -       -       (996,000 )     (996,000 )
                                                                 
Net income     -       -       -       -       506,000       506,000       983,000       1,489,000  
                                                                 
Balances at December 31, 2011     4,611,000       8,606,000       4,828,000       -       6,768,000       20,202,000       4,969,000       25,171,000  
                                                                 
Repurchase of common stock     (9,000 )     (28,000 )     -       -       -       (28,000 )     -       (28,000 )
                                                                 
Stock based compensation expense     4,000       -       74,000       -       -       74,000       -       74,000  
                                                                 
Investment in subsidiaries by non-controlling interests     -       -       -       -       -       -       217,000       217,000  
                                                                 
Cumulative translation adjustment     -       -       -       (357,000 )     -       (357,000 )     (280,000 )     (637,000 )
                                                                 
Cash distributions to non-controlling interests     -       -       -       -       -       -       (780,000 )     (780,000 )
                                                                 
Net income     -       -       -       -       38,000       38,000       775,000       813,000  
                                                                 
Balances at December 31, 2012     4,606,000       8,578,000       4,902,000       (357,000 )     6,806,000       19,929,000       4,901,000       24,830,000  
                                                                 
Stock based compensation expense     -       -       37,000       -       -       37,000       -       37,000  
                                              -                  
Investment in subsidiaries by non-controlling interests     -       -       -       -       -       -       14,000       14,000  
                                                                 
Cumulative translation adjustment     -       -       -       8,000       -       8,000       14,000       22,000  
                                                                 
Cash distributions to non-controlling interests     -       -       -       -       -       -       (291,000 )     (291,000 )
                                                                 
Net income     -       -       -       -       25,000       25,000       208,000       233,000  
                                                                 
Balances at March 31, 2013 (unaudited)     4,606,000     $ 8,578,000     $ 4,939,000     $ (349,000 )   $ 6,831,000     $ 19,999,000     $ 4,846,000     $ 24,845,000  

 

See accompanying notes

 

4
 

 

 

AMERICAN SHARED HOSPITAL SERVICES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Three Months ended March 31,  
    2013     2012  
Operating activities:                
Net income   $ 233,000     $ 229,000  
                 
Adjustments to reconcile net income to net cash from operating activities:                
                 
Depreciation and amortization     1,485,000       1,548,000  
                 
Deferred income tax     (1,000 )     -  
                 
Loss (gain) on foreign currency transactions     140,000       5,000  
                 
Stock based compensation expense     37,000       32,000  
                 
Changes in operating assets and liabilities:                
                 
Receivables     (714,000 )     211,000  
                 
Prepaid expenses and other assets     137,000       (678,000 )
                 
Customer deposits/deferred revenue     -       (12,000 )
                 
Accounts payable and accrued liabilities     562,000       58,000  
                 
Net cash from operating activities     1,879,000       1,393,000  
                 
Investing activities:                
Payment for purchase of property and equipment     (119,000 )     (3,143,000 )
                 
Investment in subsidiaries by non-controlling interests     -       55,000  
                 
Net cash from investing activities     (119,000 )     (3,088,000 )
                 
Financing activities:                
Principal payments on long-term debt     (790,000 )     (1,068,000 )
                 
Principal payments on capital leases     (956,000 )     (832,000 )
                 
Long term debt financing on property and equipment     -       3,525,000  
                 
Advances on line of credit     -       250,000  
                 
Payments on line of credit     -       (600,000 )
                 
Capital contributions from non-controlling interests     15,000       -  
                 
Distributions to non-controlling interests     (291,000 )     (372,000 )
                 
Net cash from financing activities     (2,022,000 )     903,000  
                 
Net change in cash and cash equivalents     (262,000 )     (792,000 )
                 
Cash and cash equivalents at beginning of period     1,564,000       2,580,000  
                 
Cash and cash equivalents at end of period   $ 1,302,000     $ 1,788,000  
                 
Supplemental cash flow disclosure:                
Cash paid during the period for:                
                 
Interest   $ 482,000     $ 620,000  
                 
Income taxes   $ 10,000     $ 28,000  
                 
Schedule of non-cash investing and financing activities                
Acquisition of equipment with capital lease financing   $ -     $ 264,000  

 

See accompanying notes

  

5
 

 

AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Basis of Presentation

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly American Shared Hospital Services’ consolidated financial position as of March 31, 2013 and the results of its operations for the three month period ended March 31, 2013 and 2012, which results are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31, 2012 have been derived from audited financial statements.

 

These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2012 included in the Company’s 10-K filed with the Securities and Exchange Commission.

 

These financial statements include the accounts of American Shared Hospital Services (the “Company”) and its wholly-owned subsidiaries: OR21, Inc. (“OR21”); MedLeader.com, Inc. (“MedLeader”); and American Shared Radiosurgery Services (“ASRS”); ASRS’ majority-owned subsidiary, GK Financing, LLC (“GKF”); GKF’s wholly-owned subsidiaries, GK Financing U.K., Limited (“GKUK”) and Instituto de Gamma Knife del Pacifico S.A.C. (“GKPeru”); ASHS’ majority owned subsidiary, Long Beach Equipment, LLC (“LBE”), GKF’s majority owned subsidiaries, Albuquerque GK Equipment, LLC (“AGKE”), Jacksonville GK Equipment, LLC (“JGKE”) and EWRS, LLC (“EWRS”), and EWRS’ wholly owned subsidiary, EWRS Tibbi Cihazlar Ticaret Ltd Sti (“EWRS Turkey”).

 

The Company through its majority-owned subsidiary, GKF, provided Gamma Knife units to nineteen medical centers as of March 31, 2013 in the states of Arkansas, California, Connecticut, Florida, Illinois, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Tennessee, Oklahoma, Ohio, Texas and Wisconsin, and in Turkey.

 

GKF also provides radiation therapy equipment to the radiation therapy department at the Gamma Knife site in Turkey. The Company also directly provides radiation therapy and related equipment, including Intensity Modulated Radiation Therapy (“IMRT”), Image Guided Radiation Therapy (“IGRT”) and a CT Simulator to the radiation therapy department at an existing Gamma Knife site in the United States.

 

The Company formed the subsidiaries GKUK, GKPeru, EWRS and EWRS Turkey for the purposes of expanding its business internationally into the United Kingdom, Peru and Turkey; LBE to provide proton beam therapy services in Long Beach, California; and AGKE and JGKE to provide Gamma Knife services in Albuquerque, New Mexico and Jacksonville, Florida. AGKE and EWRS Turkey began operation in the second quarter 2011 and JGKE began operation in the fourth quarter 2011. GKPeru is expected to begin operation in the latter part of 2013. GKUK is inactive and LBE is not expected to begin operations in 2013.

 

6
 

 

During 2012 and 2013, the Company’s partner in its Turkey operation, and its partners in the Jacksonville Gamma Knife operations have made investments in EWRS, and JGKE, respectively. These investments are included in the line item “Non-controlling interests in subsidiaries” in the Company’s financial statements.

 

Based on guidance provided in accordance with ASC 830, Foreign Currency Matters (“ASC 830”), the Company analyzes its operations outside the United States to determine the functional currency of each operation. Management has determined that these operations are initially accounted for in U.S. dollars since the primary transactions incurred are in U.S. dollars and the Company provides significant funding towards the startup of the operation. When Management determines that an operation has become self-sufficient, the Company may change its accounting for the operation to the local currency from the U.S. dollar, depending on the facts and circumstances. The Company determined that effective in the third quarter 2012, the functional currency for its Turkish operation, EWRS Turkey, was the Turkish lira. Therefore, in accordance with ASC 830, EWRS Turkey’s balance sheet accounts were translated at rates in accordance with guidance provided under ASC 830, and accumulated gains and losses and translation differences were recorded in accumulated other comprehensive income (loss), which is a separate component of equity.

 

As of March 31, 2013 and December 31, 2012, EWRS Turkey’s balance sheet accounts were translated at rates in effect as of those dates, respectively, and income and expense accounts were translated at the weighted average rates of exchange during those respective periods. Translation adjustments resulting from this process were also recognized under accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in interest and other income in the Company’s Consolidated Statements of Operations. The Company recorded a net foreign currency loss of $141,000 for the three month period ended March 31, 2013 and net foreign currency gain of approximately $133,000 for the year ended December 31, 2012.

 

The Company has only one operating segment. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2012 balances to conform with the 2013 presentation.

 

Note 2. Per Share Amounts

 

Per share information has been computed based on the weighted average number of common shares and dilutive common share equivalents outstanding. For the three months ended March 31, 2013 basic earnings per share was computed using 4,606,000 common shares and diluted earnings per share was computed using 4,610,000 common shares and equivalents. For the three months ended March 31, 2012 basic earnings per share was computed using 4,611,000 common shares and diluted earnings per share was computed using 4,638,000 common shares and equivalents.

 

7
 

 

The computation for 2013 excluded approximately 592,000 of the Company’s stock options because the strike price of the options was higher than the average market price during the quarter. The computation for 2012 excluded approximately 289,000 of the Company’s stock options because the strike price of the options was higher than the average market price during the quarter.

 

Note 3. Stock-based Compensation

 

On June 2, 2010, the Company’s shareholders approved an amendment and restatement of the 2006 Stock Incentive Plan (the “2006 Plan”). Among other things, the amendment and restatement renamed the 2006 Plan to the Incentive Compensation Plan (the “Plan”) and increased the number of shares of the Company’s common stock reserved for issuance under the Plan by an additional 880,000 shares from 750,000 shares to 1,630,000 shares. The shares are reserved for issuance to officers of the Company, other key employees, non-employee directors, and advisors. The Plan serves as successor to the Company’s previous two stock-based employee compensation plans, the 1995 and 2001 Stock Option Plans. The shares reserved under those two plans, including the shares of common stock subject to currently outstanding options under the plans, were transferred to the Plan, and no further grants or share issuances will be made under the 1995 and 2001 Plans. Under the Plan, there have been 112,000 restricted stock units granted, consisting primarily of annual automatic grants and deferred compensation to non-employee directors, and there are 596,000 options granted, of which 571,000 options are vested as of March 31, 2013.

 

Compensation expense associated with the Company’s stock-based awards to employees is calculated using the Black-Scholes valuation model. The Company’s stock-based awards have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimates. The estimated fair value of the Company’s option grants is estimated using assumptions for expected life, volatility, dividend yield, and risk-free interest rate which are specific to each award. The estimated fair value of the Company’s options is amortized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Accordingly, stock-based compensation cost before income tax effect in the amount of $37,000 is reflected in net income for the three month period ended March 31, 2013, compared to $32,000 in the same period in the prior year. There were no options issued and no options exercised during either of the three month periods ended March 31, 2013 or March 31, 2012. There were no excess income tax benefits to report.

 

Note 4. Convertible Preferred Stock Investment

 

As of March 31, 2013 and December 31, 2012 the Company has a $2,687,000 investment in the convertible preferred stock (“Preferred Stock”) of Mevion Medical Systems, Inc. (“Mevion”), formerly Still River Systems, Inc., representing an approximate 1.0% interest in Mevion. The Company accounts for this investment under the cost method.

 

8
 

 

The Preferred Stock is convertible at any time at the option of the holder into shares of common stock of Mevion at a conversion price, subject to certain adjustments, but initially set at the original purchase price. The Preferred Stock has voting rights equivalent to the number of common stock shares into which it is convertible, and holders of the Preferred Stock, subject to certain exceptions, have a pro-rata right to participate in subsequent stock offerings. In the event of liquidation, dissolution, or winding up of Mevion, the Preferred Stock holders have preference to the holders of common stock, and any other class or series of stock that is junior to the Preferred Stock . The Company does not have the right to appoint a member of the Board of Directors of Mevion.

 

The Company carries its investment in Mevion at cost and reviews it for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value of the investment may not be recoverable. The Company evaluated this investment for impairment at December 31, 2012 and reviewed it at March 31, 2013 in light of both current market conditions and the ongoing needs of Mevion to raise cash to continue its development of the first compact, single room PBRT system. Based on its analysis, the Company estimates that there is currently an unrealized loss (impairment) of approximately $1.3 million.

 

In assessing whether the impairment is other than temporary, we evaluated the length of time and extent to which market value has been below cost, the financial condition and near term prospects of Mevion and our ability and intent to retain our investment for a period sufficient to allow for an anticipated recovery in the market value. Although the investment is not without certain risk, and the manufacture of the first unit has taken longer than originally anticipated, the Company believes that the current market value is a temporary situation brought on solely due to the continuing downturn of the economy, and is not a reflection on the progress or viability of Mevion or its PBRT design.

 

During the second quarter of 2012, Mevion announced that it had received FDA 510(k) clearance for its MEVION S250 system, which enables users of the system to treat patients immediately upon completion of system installation. Mevion had previously announced that it had received the CE Mark certification which enables Mevion to market, sell and install these systems through the European Union and any country that recognizes the CE Mark. Based on the continuing progress being made by Mevion toward the manufacture and installation of the first single room PBRT system, the Company believes that our investment in Mevion is not other than temporarily impaired, and the fair value will increase so that the carrying value will be recovered.

 

Note 5. Line of Credit

 

The Company has a $9,000,000 renewable line of credit with the Bank of America (the “Bank”) that has been in place since June 2004 and has a maturity date of August 1, 2013. The line of credit is drawn on from time to time as needed for equipment purchases and working capital. Amounts drawn against the line of credit are at an interest rate per year equal to the Bank’s prime rate minus 0.5 percentage point, or alternately, at the Company’s discretion, the LIBOR rate plus 1.0 percentage point, and are secured by the Company’s cash invested with the Bank. The Company is in compliance with all debt covenants required. The weighted average interest rate during the first three months of 2013 was 1.40%. At March 31, 2013, $8,550,000 was borrowed against the line of credit, compared to $8,550,000 at December 31, 2012.

 

9
 

 

Note 6. Fair Value of Financial Instruments

 

The Company’s disclosures of the fair value of financial instruments is based on a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. Level 1 inputs are unadjusted quoted market prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for assets or liabilities, and reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

The estimated fair value of the Company’s assets and liabilities as of March 31, 2013 and December 31, 2012 were as follows (in thousands):

 

    Level 1     Level 2     Level 3     Total     Carrying Value  
March 31, 2013                                        
                                         
Assets:                                        
Cash, cash equivalents, restricted cash   $ 10,352                     $ 10,352     $ 10,352  
Receivables     4,821                     $ 4,821       4,821  
Preferred stock investment             1,300             $ 1,300       2,687  
Total   $ 15,173     $ 1,300     $ -     $ 16,473     $ 17,860  
                                         
Liabilities                                        
Accounts payable and other accrued liabilities   $ 2,541                     $ 2,541     $ 2,541  
Advances on line of credit   $ 8,550                     $ 8,550     $ 8,550  
Debt obligations                     32,986     $ 32,986       32,938  
Total   $ 11,091     $ -     $ 32,986     $ 44,077     $ 44,029  
                                         
December 31, 2012                                        
                                         
Assets:                                        
Cash, cash equivalents, restricted cash   $ 10,614                     $ 10,614     $ 10,614  
Receivables     4,107                     $ 4,107       4,107  
Preferred stock investment             1,300             $ 1,300       2,687  
Total   $ 14,721     $ 1,300     $ -     $ 16,021     $ 17,408  
                                         
Liabilities                                        
Accounts payable and other accrued liabilities   $ 1,979                     $ 1,979     $ 1,979  
Advances on line of credit   $ 8,550                     $ 8,550     $ 8,550  
Debt obligations                     34,577     $ 34,577       34,684  
Total   $ 10,529     $ -     $ 34,577     $ 45,106     $ 45,213  

 

10
 

 

Note 7. Repurchase of Common Stock

 

In 1999 and 2001, the Board of Directors approved resolutions authorizing the Company to repurchase up to a total of 1,000,000 shares of its own stock on the open market, which the Board reaffirmed in 2008. There were no shares repurchased in the first quarter of 2013. In 2012, the Company repurchased 9,000 shares at an average price of $3.26 per share. There are approximately 72,000 shares remaining under this repurchase authorization.

 

Note 8. Income Taxes

 

We generally calculate our effective income tax rate at the end of an interim period using an estimate of the annual effective income tax rate expected to be applicable for the full fiscal year. However, when a reliable estimate of the annual effective income tax rate cannot be made, we compute our provision for income taxes using the actual effective income tax rate for the year-to-date period. Our effective income tax rate is highly influenced by the amount of the nondeductible stock-based compensation associated with grants of our common stock options. A small change in estimated annual pretax income (loss) can produce a significant variance in the annual effective income tax rate given the expected amount of these items. Because of this variability, a reliable estimate of the annual effective income tax rate for 2013 cannot be made. As a result, we have computed our provision (benefit) for income taxes for the three months ended March 31, 2013 by applying the actual effective tax rate to income (loss) for the period.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This quarterly report to the Securities and Exchange Commission may be deemed to contain certain forward-looking statements with respect to the financial condition, results of operations and future plans of American Shared Hospital Services, which involve risks and uncertainties including, but not limited to, the risks of the Gamma Knife and radiation therapy businesses, the risks of developing The Operating Room for the 21 st Century® program, and the risks of investing in a development-stage company, Mevion Medical Systems, Inc. (“Mevion”), without a proven product. Further information on potential factors that could affect the financial condition, results of operations and future plans of American Shared Hospital Services is included in the filings of the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 11, 2013.

 

The Company had twenty Gamma Knife units in operation at March 31, 2013 and nineteen at March 31, 2012. Three of the Company’s customer contracts are through subsidiaries where GKF or its subsidiary is the majority owner and managing partner. Twelve of the Company’s nineteen current Gamma Knife customers are under fee-per-use contracts, and eight customers are under retail arrangements. The Company’s two contracts to provide radiation therapy and related equipment services to existing Gamma Knife customers are considered retail arrangements. Retail arrangements are further classified as either turn-key or revenue sharing. Revenue from fee per use contracts is recorded on a gross basis as determined by each hospital’s contracted rate. Under turn-key arrangements, the Company receives payment from the hospital in the amount of its reimbursement from third party payors, and is responsible for paying all the operating costs of the equipment. Revenue is recorded on a gross basis and estimated based on historical experience of that hospital’s contracts with third party payors. For revenue sharing arrangements the Company receives a contracted percentage of the reimbursement received by the hospital. The gross amount the Company expects to receive is recorded as revenue and estimated based on historical experience.

 

11
 

 

The American Taxpayer Relief Act of 2012 reduces Medicare’s reimbursement rate for Gamma Knife services from $7,910 to $3,300 per treatment effective April 1, 2013. These cuts will directly reduce revenue at the Company’s six U.S. “retail” Gamma Knife sites, where we receive a percentage of the hospital’s Medicare reimbursement. This reimbursement rate will indirectly impact some of our remaining centers, where AMS’s revenue per procedure is contractually fixed with the hospital. If the Company’s business mix in the last 9 months of 2013 is identical to that in 2012, revenues are estimated to be reduced by approximately $600,000 to $700,000 and pretax income by approximately $350,000 to $450,000 during the last nine months of 2013. Actual results could vary materially, however, based on many factors, including, but not limited to, payer mix, patient volumes and mitigation efforts.

 

Medical services revenue increased by $265,000 to $4,668,000 for the three month period ended March 31, 2013 from $4,403,000 for the three month period ended March 31, 2012. However, revenue from the Company’s radiation therapy contracts decreased for the three month period by $128,000, to $367,000 from $495,000 for the same period in the prior year. The decrease was due to a decline in volume at the existing radiation therapy sites. The decrease in revenue from radiation therapy was offset by a $393,000 increase in Gamma Knife revenue to $4,301,000 from $3,908,000 for the same period in the prior year. The increase in Gamma Knife revenue was primarily due to two new contracts that began operation in the second quarter 2012 and first quarter 2013, and increased volume at its existing Gamma Knife sites.

 

The number of Gamma Knife procedures increased by 107 to 621 in the first quarter 2013 from 514 in the same quarter in the prior year, primarily due to the start of operations at two new Gamma Knife sites that were not in operation during the first quarter 2012. In addition, two of our Gamma Knife 4C sites experienced increased volume during the quarter. For the three month period, volume at the Company’s sites where Perfexion units have been installed increased by 11%.

 

Total costs of revenue decreased by $16,000 to $2,550,000 for the three month period ended March 31, 2013 from $2,566,000 for the three month period ended March 31, 2012. Maintenance and supplies decreased by $8,000 for the three month period ended March 31, 2013 compared to the same period in the prior year, primarily due to lower contract maintenance costs. Depreciation and amortization decreased by $71,000 for the three month period ended March 31, 2013 compared to the same period in the prior year. This was due to a reduction in depreciation for three sites where depreciation was stopped in 2012 because the remaining value of the equipment had reached its salvage value. Other direct operating costs increased by $64,000 for the three month period ended March 31, 2013 compared to the same period in the prior year primarily due to increased property tax expense. This was partially offset by lower operating costs in connection with the Company’s retail sites and lower marketing costs.

 

12
 

 

Selling and administrative costs increased by $211,000 to $1,235,000 for the three month period ended March 31, 2013 from $1,024,000 for the three month period ended March 31, 2012. This increase was primarily due to higher payroll related costs, accounting and consulting fees and rent expense, partially offset by reduced legal fees. The higher rent expense is due to accrued rent expense of approximately $115,000 in the first quarter 2013, relating to a sublease of a portion of the Company’s office space. The rent accrual is required because the Company subleased a portion of its existing office space through the remainder of its lease term at a rate lower than its lease rate, which resulted in a cumulative loss through the remainder of the lease term.

 

Interest expense decreased by $103,000 to $471,000 for the three month period ended March 31, 2013 from $574,000 for the three month period ended March 31, 2012. Lower interest expense is driven by lower interest rates from financing Gamma Knife units and other medical equipment. Reduced financing interest was driven by lower expense relating to the more mature units. The mature units have lower interest expense because interest expense decreases as the outstanding principal balance of each loan is reduced.

 

Interest and other income decreased by $128,000 to a loss of $127,000 for the three month period ended March 31, 2013 from a gain of $1,000 for the three month period ended March 31, 2012 due to unfavorable exchange rate variances. There was a net loss from exchange rate variances of $140,000 in the first quarter 2013 compared to a $5,000 loss in the same period in the prior year.

 

The Company had income tax expense of $52,000 for the three month period ended March 31, 2013 compared to income tax expense of $11,000 for the three month period ended March 31, 2012. The increase in income tax expense is primarily due to higher taxable income attributable to American Shared Hospital Services. In addition, the Company estimated an income tax rate of 68% to be applied to the first quarter 2013, based on income attributable to American Shared Hospital Services, compared to an estimated 56% income tax rate used in the first quarter 2012.

 

Net income attributable to non-controlling interest decreased by $12,000 to $208,000 for the three month period ended March 31, 2013 from $220,000 for the three month period ended March 31, 2012. Net income attributable to non-controlling interests represents net income earned by the 19% non-controlling interest in GKF, and net income of the non-controlling interests in various subsidiaries controlled by GKF. The decrease or increase in net income attributable to non-controlling interests reflects the relative profitability of GKF.

 

The Company had net income of $25,000, or $0.01 per diluted share, for the three month period ended March 31, 2013 compared to net income of $9,000, or $0.00 per diluted share, in the same period in the prior year. The increase in net income was primarily due to an increase in medical services revenue and lower interest expense, partially offset by increased selling and administrative costs, a loss in interest and other income and higher income tax expense.

 

13
 

 

Liquidity and Capital Resources

 

The Company had cash and cash equivalents of $1,302,000 at March 31, 2013 compared to $1,564,000 at December 31, 2012. The Company’s cash position decreased by $262,000 due to payments for the purchase of property and equipment of $119,000, principal payments on long term debt and capital leases of $1,746,000, and distributions to non-controlling interests of $291,000. These decreases were offset by net cash from operating activities of $1,879,000, and an investment by a non-controlling interest of $15,000.

 

As of March 31, 2013, the Company has a $9,000,000 principal investment in a certificate of deposit with a bank at an interest rate of 0.45% and a maturity date in August 2013.

 

The Company has a two year renewable $9,000,000 line of credit with a bank, available as needed for equipment purchases and working capital. Amounts drawn against the line of credit are secured by the Company’s cash invested with the bank. At March 31, 2013 there was $8,550,000 drawn against the line of credit.

 

The Company has scheduled interest and principal payments under its debt obligations of approximately $4,633,000 and scheduled capital lease payments of approximately $4,822,000 during the next 12 months. The Company believes that its cash flow from operations and cash resources are adequate to meet its scheduled debt and capital lease obligations during the next 12 months.

 

The Company as of March 31, 2013 had shareholders’ equity of $24,845,000, working capital of $5,845,000 and total assets of $72,154,000.

 

Commitments

 

The Company has a $2,687,000 preferred stock investment in Mevion Medical Systems, Inc., a development stage company, which is considered a long-term investment on the balance sheet and is recorded at cost. As of March 31, 2013, the Company also has $3,000,000 in non-refundable deposits toward the purchase of three MEVION S250 proton beam radiation therapy (PBRT) systems from Mevion. The Company has entered into an agreement with a radiation oncology physician group which has contributed $400,000 towards the deposits on the third system. The Company’s first PBRT system has an anticipated delivery date in the second half of 2014.

 

The Company has made non-refundable deposits totaling $5,147,000 towards the purchase of a LGK Model 4 Gamma Knife unit to be installed at a site in Peru, a Perfexion unit at a new customer site in Florida, and two Perfexion units scheduled to be installed at sites yet to be determined.

 

14
 

 

 

Including the commitments for the three MEVION S250 systems, the three Perfexion units, and the LGK Model 4 Gamma Knife unit, the Company has total remaining commitments to purchase equipment in the amount of approximately $40,000,000. It is the Company’s intent to finance the remaining purchase commitments as needed, and a financing commitment has been obtained for the first MEVION S250 system and for the Gamma Knife units in Florida and Peru. However, due to the current economic and credit market conditions it has been more difficult to obtain financing for some of the Company’s projects. The Company expects that it will be able to obtain financing on the commitments for the remaining Perfexion units. The Company also expects that it will be able to obtain financing commitments from lenders for its other two PBRT systems now that Mevion has obtained FDA approval on the MEVION S250. However, there can be no assurance that financing will be available for the Company’s current or future projects, or at terms that are acceptable to the Company.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company does not hold or issue derivative instruments for trading purposes and is not a party to any instruments with leverage or prepayment features. The Company does not have affiliation with partnerships, trust or other entities whose purpose is to facilitate off-balance sheet financial transactions or similar arrangements , and therefore has no exposure to the financing, liquidity, market or credit risks associated with such entities. At March 31, 2013 the Company had no significant long-term, market-sensitive investments.

 

Item 4. Controls and Procedures

 

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934. These controls and procedures are designed to ensure that material information relating to the company and its subsidiaries is communicated to the chief executive officer and the chief financial officer. Based on that evaluation, our chief executive officer and our chief financial officer concluded that, as of March 31, 2013, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the chief executive officer and the chief financial officer, and recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

There were no changes in our internal control over financial reporting during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

15
 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

None.

  

Item 1A. Risk Factors

There are no changes from those listed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. [Removed and Reserved.]

 

Item 5. Other Information.

None.

 

Item 6. Exhibits.
(a) Exhibits

The following exhibits are filed herewith:

 

10.65 Purchased Services Agreement for a Gamma Knife Perfexion Unit effective as of January 19, 2012 between GK Financing, LLC and Sacred Heart Health System, Inc. (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).

 

31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

16
 

 

101. The following materials from the Quarterly Report on Form 10-Q for American Shared Hospital Services for the quarter ended March 31, 2013, filed on May 15, 2013, formatted in XBRL: Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012; Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2013 and 2012; Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012; Condensed Consolidated Statement of Shareholders’ Equity for the periods ended December 31, 2011 and 2012 and three months ended March 31, 2013 (unaudited); Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2013 and 2012; and Notes to the Unaudited Condensed Consolidated Financial Statements, detail tagged.

 

SIGNATURES

 

Pursuant to the requirements 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

 

Date: May 15, 2013 /s/ Ernest A. Bates, M.D.  
    Ernest A. Bates, M.D.
    Chairman of the Board and Chief Executive Officer
       
Date: May 15, 2013 /s/ Craig K. Tagawa  
    Craig K. Tagawa
    Senior Vice President
    Chief Operating and Financial Officer

 

17

 

Exhibit 10.65

 

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.

 

LEKSELL GAMMA KNIFE PERFEXION

PURCHASED SERVICES AGREEMENT

 

THIS PURCHASED SERVICES AGREEMENT ("Agreement") is made and entered into as of January 19, 2012 (the "Effective Date"), by and between GK FINANCING, LLC, a California limited liability company ("GKF") and SACRED HEART HEALTH SYSTEM, INC., a Florida non-profit corporation, ("Medical Center"), with reference to the following facts:

 

RECITALS

 

WHEREAS, Medical Center wants to obtain the right to use (the "Service") a Leksell Gamma Knife Perfexion, including all associated and necessary software (the "Equipment"), manufactured by Elekta Instruments, Inc., a Georgia corporation ("Elekta"); and

 

WHEREAS, GKF is willing to provide Medical Center with the right to use the Equipment which GKF has acquired from Elekta, pursuant to the terms and conditions of this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, and for such other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.            Right to Use the Equipment . Subject to and in accordance with the covenants and conditions set forth in this Agreement, GKF hereby grants the right to use the Equipment to Medical Center, including all software licensed to GKF by Elekta and sublicensed to Medial Center pursuant to the LGK Agreement (as defined below) between Elekta and Medical Center, and Medical Center hereby accepts the right to use the Equipment from GKF. The Equipment to be placed at the Medical Center pursuant to this Agreement shall include the Gamma Knife technology as specified in Exhibit 1 , including all hardware and software related thereto.

 

 
Exhibit 10.65

 

2.            LGK Agreement . Simultaneously with the execution of this Agreement, Medical Center and Elekta shall enter into that certain Leksell Gamma Knife End User License Agreement pertaining to the Equipment (the "LGK Agreement"). Medical Center shall use best efforts to perform, satisfy and fulfill all of its obligations arising under the LGK Agreement when and as required thereunder. Medical Center acknowledges that GKF is a third party beneficiary of the LGK Agreement and, in that capacity, GKF may be entitled to enforce the terms and provisions of the LGK Agreement.

 

3.            Term of the Agreement . The initial term of this Agreement (the "Term") shall commence as of the date hereof and, unless earlier terminated or extended in accordance with the provisions of this Agreement, shall continue for a period of ten (10) years following the date of the performance of the first clinical Procedure (as defined in Section 8) performed on the Equipment (the "First Procedure Date") at the Site (as defined in Section 5.1). The parties agree to amend this Agreement to memorialize the First Procedure Date upon the performance of the first clinical Procedure performed on the Equipment. Medical Center’s obligation to make the "Purchased Services Payments" to GKF for the Equipment described in Section 8 below shall commence as of the First Procedure Date.

 

4.            User License . Medical Center shall apply for and use its reasonable efforts to obtain in a timely manner a User License from the Nuclear Regulatory Commission and, if necessary, from the applicable state agency authorizing it to take possession of and maintain the Cobalt supply required in connection with the use of the Equipment during the Term of this Agreement. Medical Center also shall apply for and use its best efforts to obtain in a timely manner all other licenses, permits, approvals, consents and authorizations which may be required by state or local governmental or other regulatory agencies for the development, construction and preparation of the Site, the charging of the Equipment with its Cobalt supply, the conduct of acceptance tests with respect to the Equipment, and the use of the Equipment during the Term, as more fully set forth in Article 2.1 of the LGK Agreement. GKF shall provide all necessary assistance to the Medical Center in applying for and for obtaining all such licenses, permits, approvals, consents or authorizations. If the applicable regulatory authorities affirmatively decline to issue a required license, permit, approval, consent or authorization notwithstanding Medical Center’s best efforts to obtain the same, all parties shall be released from further performance or any obligations or duties arising under this Agreement and this Agreement shall terminate immediately with no penalty to Medical Center.

 

 
Exhibit 10.65

 

5.            Delivery of Equipment; Site .

 

5.1           GKF shall coordinate with Elekta and Medical Center to have the Equipment delivered to Medical Center at the site, as described in Exhibit 5.1 of this Agreement (the "Site"), which delivery is anticipated to be on or before ______TBD_________, a date which has been mutually agreed to by the parties, subject to all approvals and User Licenses having been obtained by Medical Center. Elekta and GKF shall, at their cost, expense and risk, coordinate and cause all Equipment to be delivered to Medical Center FOB Destination and C.I.F. For the purposes of this Section, C.I.F. shall mean that the pricing set forth herein includes the insurance, freight, and transport costs and that risk of loss of the Equipment shall pass to Medical Center’s contractor at delivery and to Medical Center upon acceptance of Equipment at Site by physicist as further describe in Section 6.6 herein.

 

5.2           Upon advance notice and at a mutually agreeable time, Medical Center shall provide reasonable access to the Site for the delivery of Equipment. Medical Center at its cost and expense shall prepare the Site for the Equipment in accordance with Elekta’s guidelines, specifications, technical instructions and site planning criteria, which have been provided to Medical Center (the "Site Planning Criteria"). The location of the Site has been agreed upon by Medical Center and GKF as described in Exhibit 5.1 of this Agreement.

 

6.            Site Preparation and Installation of Equipment and Acceptance .

 

6.1           Medical Center, at its cost, expense and risk, shall prepare all plans and specifications required to construct and improve the Site for the installation, use and operation of the Equipment during the Term. The plans and specifications shall comply in all respects with the Site Planning Criteria and with all applicable federal, state and local laws, rules and regulations. All plans and specifications prepared by or on behalf of Medical Center (and all material changes thereto following approval by GKF and Elekta) shall be subject to the written approval of GKF and Elekta prior to commencement of construction at the Site. Medical Center shall provide GKF and Elekta with a reasonable period of time (not to exceed fourteen (14) days) for the review and consideration of all plans and specifications following the submission thereof for approval (and GKF shall not unreasonably withhold or delay its approval). Following approval of the plans and specifications by GKF and Elekta, Medical Center, at its cost and expense, shall use best efforts to obtain all permits, certifications, approvals or authorizations required by applicable federal, state or local laws, rules or regulations necessary to construct and improve the Site for the installation, use and operation of the Equipment. GKF and Elekta will provide all necessary assistance to Medical Center in obtaining such permits and/or approvals.

 

 
Exhibit 10.65

 

6.2            Based upon the plans and specifications approved by GKF and Elekta, Medical Center, at its cost, expense and risk, shall construct and improve the Site as necessary for the installation, use and operation of the Equipment during the Term, including, without limitation, providing all temporary or permanent shielding required for the charging of the Equipment with the Cobalt supply and for its subsequent use, selecting and constructing a proper foundation for the Equipment and the temporary or permanent shielding, aligning the Site for the Equipment, and installing all electrical systems and other wiring required for the Equipment, which are identified in the Site Planning Criteria, and secure/authorized badge entry to the Site compatible with Medical Center’s systems. In connection with the construction of the Site, Medical Center shall select, purchase and install all radiation monitoring equipment, devices, safety circuits and radiation warning signs required, if any, at the Site in connection with the use and operation of the Equipment, all in accordance with applicable federal, state and local laws, rules, regulations or custom.

 

6.3           Medical Center, at its cost, expense and risk, shall be responsible for the installation of the Equipment at the Site, including the positioning of the Equipment on its foundation at the Site in compliance with the Site Planning Criteria.

 

6.4           Medical Center warrants and ensures that upon completion of preparation, construction, and improvement of the Site, and delivery of Equipment, (a) the Site shall comply in all material respects with the Site Planning Criteria and all applicable federal, state and local laws, rules and regulations, and (b) with respect to those portions of the Site that are not addressed by the Site Planning Criteria, the Site shall be safe and suitable for the ongoing use and operation of the Equipment during the Term.

 

6.5           The parties shall use their reasonable efforts to satisfy their obligations under this Section 6 in a timely manner. The parties shall keep each other informed on a regular basis of the progress in the design of the Site, the preparation of plans and specifications, the construction and improvement of the Site, and the satisfaction of its other obligations under this Section 6. In all events, all construction and improvement of the Site required for the installation, positioning and testing of the Equipment shall be completed on or prior to the delivery date described in Section 5.1 above. During the Term, Medical Center, at its cost and expense, shall maintain the Site in a good working order, condition and repair, reasonable wear and tear excepted.

 

6.6           Medical Center shall have accepted the Equipment when Medical Center’s physicist has timely approved the Equipment in accordance with Elekta’s technical specifications which have been provided to Medical Center . The Equipment shall be accepted prior to any Procedures being performed using the Equipment.

 

 
Exhibit 10.65

 

7.            Marketing .

 

7.1           Within ninety (90) days of acceptance of the Equipment and the commencement of each succeeding twelve (12) month period during the Term, GKF and Medical Center shall jointly develop an annual marketing plan, budget and timeline for the clinical service to be supported by the Equipment for the succeeding twelve (12) month period of the Term (the "Plan"), which Plan shall be implemented by Medical Center based on the approved budget and timeline. The Plan shall require the approval of both GKF and Medical Center; however, neither party’s approval of such Plan shall be unreasonably withheld or delayed. As funds are expended by Medical Center in accordance with the Plan, Medical Center shall submit invoices for its marketing expenses paid to unrelated third parties that are included in the Plan and promptly following the receipt of such invoices, GKF shall reimburse Medical Center for * of approved expenditures. Medical Center shall make available upon request invoices (together with documentary evidence supporting the invoices) for marketing expenditures paid to unrelated third parties that are included in the Plan. The annual marketing budget will not exceed * in the aggregate.

 

The parties shall use commercially reasonable efforts to promote the Gamma Knife Program and to encourage the use thereof by the public and medical community.

 

8.            Purchased Services Payments .

 

8.1         The parties have negotiated this Agreement at arm’s length based upon reasonable and jointly derived assumptions regarding the capacity for clinical services available from the Equipment, Medical Center’s capabilities in providing high quality radiation oncology services, market dynamics, GKF’s risk in providing the Equipment, and the provision to GKF of a reasonable rate of return on its investment in support of the Equipment. Based thereon, the Parties believe that the “Purchased Services Payments” as defined below represent fair market value for the use of the Equipment, service, maintenance, insurance and personal property tax and marketing expenses related to the Equipment, as well as other services to be provided by GKF to Medical Center hereunder. Medical Center undertakes no obligation to perform any minimum number of procedures on the Equipment, and the use of the Equipment for the performance of procedures is wholly based upon the independent judgment of physicians who order such procedures to meet the medical needs of their patients.

 

8.2         In consideration for and as compensation to GKF for use of the Equipment, pursuant to this Agreement, Medical Center shall pay GKF, on a monthly basis, the applicable “Purchased Services Payments” (as defined below) for each “Procedure” that is performed by Medical Center, whether on an inpatient or outpatient basis, and irrespective of whether the Procedure is performed on the Equipment or using any other equipment or devices. As used :

 

(a)          “Purchased Services Payments” shall equal to the applicable percentage (%) (Set forth in Schedule 1 of this Agreement) of the “Gross Technical Component Collections” for the applicable period relating to each Procedure performed using the Equipment and/or any of the Equipment of devices at the Site during the Term of this Agreement.

 

 
Exhibit 10.65

 

(b)          " Gross Technical Component Collections " means the total amount actually collected (less any uncontested returns or refunds) by Medical Center during each month from any and all payor sources, including, without limitation, patients, insurance companies, state or federal government programs or any other third party payors, including, without limitation, all copayments and deductibles, as reimbursement for the technical component of all services (including, but not limited to, treatment planning and delivery) pertaining to each Procedure performed on the Equipment and/or any other equipment or devices during the Term of this Agreement . Subject to all applicable legal requirements, Medical Center agrees that it will utilize best efforts to maximize third party reimbursement for the Gamma Knife program and revenues from the Gamma Knife program; provided, however, GKF acknowledges and agrees that Medical Center may perform Procedures on patients who qualify under Medical Center’s guidelines for free or reduced cost care regardless of such patients’ ability to pay.

 

(c)          " Procedure " means any treatment that involves stereotactic, external, single fraction, conformal radiation, commonly called radiosurgery, that may include one or more isocenters during the patient treatment session, delivered to any site(s) superior to the foramen magnum.

 

8.3          Within thirty (30) days after the last day of each month (or portion thereof) during the term of this Agreement, (a) Medical Center shall inform GKF in writing as to (i) the number of Procedures performed during that month utilizing the Equipment (and, if applicable, any other equipment or devices); and (ii) the Gross Technical Component Collections during that month. Medical Center certifies that all claims submitted for reimbursement to the appropriate payors shall be in accordance with its standard billing and collection policies and procedures which provide that claims shall be submitted within thirty (30) days of (i) each outpatient Procedure and (ii) discharge for each inpatient Procedure. If no Gross Technical Component Collections are received during any month, then, no Purchased Services Payments shall be owing by Medical Center to GKF for that month.

 

8.4          During the Term of this Agreement, Medical Center shall, by the twenty-fifth (25th) day of each month, remit GKF’s aggregate Purchased Services Payment, for the immediately preceding month, and, for a period of eighteen (18) months following the termination or expiration of this Agreement (the "Collections Run-Out Period"), Medical Center shall, by the twenty-fifth (25th) day of each such month, continue to remit GKF’s aggregate Purchased Services Payment pertaining to Gross Technical Component Collections received during the Collections Run-Out Period. All or any portion of any Purchased Services Payment which are not paid in full within forty-five (45) days after its due date shall bear interest at the rate of one and one-half percent (1.50%) per month (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) until the unpaid Purchased Services Payment, together with all accrued interest thereon are paid in full. GKF will accept payment from Medical Center in the following forms: check and electronic funds transfer. If GKF shall at any time accept any Purchased Services Payment from Medical Center after it shall become due, such acceptance shall not constitute or be construed as a waiver of any or all of GKF’s rights under this Agreement, including the rights of GKF set forth in Section 19 hereof.

 

 
Exhibit 10.65

 

8.5           Within thirty (30) days after the close of each month, Medical Center shall provide GKF with a written report, in a format mutually agreed upon by the parties, indicating the status of billings and collections for each Procedure performed during that month using the Equipment and/or any other equipment or devices, including, without limitation, the amount of the claim submitted and the amount received for each such Procedure provided, however, Medical Center shall not identify the patient or payor.

 

8.6            Inspection of Records and Record Retention . 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, at its own expense, shall have the right upon request and from time-to-time, not more than once annually, to inspect, audit and copy the other party's books and records which relate to the accounting for and calculation of Gross Technical Component Revenues; provided that any patient names or identifiers shall not be disclosed. GKF acknowledges that Medical Center's managed care contracts may contain confidentiality provisions that prohibit Medical Center from disclosing payment rates to GKF. Accordingly, Medical Center agrees to provide payment rates to GKF’s designated auditing firm for purposes of auditing and monitoring the Purchase Services Payments and other obligations contemplated by the parties under this Agreement. GKF’s designated auditing firm shall agree to (i) only use the payment rate information in connection with this Agreement, and (ii) disclose to GKF the minimum amount information regarding payment rates as necessary for GKF to audit and monitor the Purchased Services Payments and other obligations contemplated by the parties under this Agreement; provided, however, GKF's auditing firm shall in no case share Medical Center's payment rates with GKF.

 

8.7            Reimbursement Rate for Gamma Knife Procedures . Medical Center shall use commercially reasonable efforts to renegotiate Medical Center's existing managed care contracts to include coverage for stereotactic radiosurgery services utilizing the Equipment to be provided through the Gamma Knife Program and to include in new managed care contracts provisions covering such services. It is understood that certain Procedures may be performed on the Equipment for research or charity purposes. If feasible, the parties shall mutually agree in advance as to the number of research procedures that will be performed.

 

8.8            Purchase Services Payment Reduction . Medical Center shall have an option in its sole discretion to reduce the Purchase Service Payment, as set forth below. Medical Center may exercise the following option only if (a) no “Medical Center Event of Default” (as defined in Section 19 below) has occurred and no act or omission which, with the giving of notice and/or the passage of time would constitute a Medical Center Event of Default shall have occurred; and (b) Medical Center shall have complied and continue to be in compliance with all of the requirements set forth in this Agreement, including this Section. The option may be exercised only once and only on either (i) the First Anniversary of the First Procedure Date, or (ii) the Second Anniversary of the First Procedure Date (the “Option Exercise Dates”). If Medical Center elects to exercise the option, Medical Center shall give written notice thereof to GKF not less than ninety (90) days prior to the Option Exercise Date selected by Medical Center. The Medical Center shall have the option to reduce the capital component of its Purchase Service Payment Percentage to * from * through a one-time cash payment to GKF of * on the First Anniversary of the First Procedure Date or * on the Second Anniversary of the First Procedure Date. If Medical Center exercises its option, the Total Purchased Services Payment Percentage will be reduced to * (the “New PSA Percentage”). The pro-rata share for capital expenditures shall also be adjusted proportionally to * for GKF. In addition, Medical Center shall concurrently execute and deliver to GKF an Amendment to Purchased Services Agreement in the form attached hereto as Exhibit 8.8 ( the “Amendment”). The New PSA Percentage shall not be applied retroactively and shall become effective on the third business day after GKF receives the applicable full cash payment. The Parties believe that the New PSA Percentage represents the fair market value for the use of the Equipment, service, maintenance, insurance and personal property tax and marketing expenses related to the Equipment, as well as other services to be provided by GKF to Medical Center hereunder, and in consideration of the lump sum option payment made by the Medical Center.

 

 
Exhibit 10.65

 

8.9            Survival . The provisions of this Section 8 shall survive the termination or expiration of this Agreement.

 

9.            Use of the Equipment .

 

9.1           The Equipment shall be used by Medical Center only at the Site and shall not be removed therefrom, unless otherwise authorized in writing by (i) GKF, and (ii) Lender (but only to the extent that the Equipment is subject to financing at the time Medical Center requests the removal). Medical Center shall use the Equipment only in the regular and ordinary course of Medical Center’s business operations and only within the capacity of the Equipment as determined by Elekta’s specifications, unless otherwise authorized in writing by GKF and Elekta. Medical Center shall not use or permit the Equipment to be used in any manner or for any purpose which, the Equipment is not designed or reasonably suitable, unless otherwise authorized in writing by GKF and Elekta.

 

9.2           Notwithstanding anything to the contrary contained in this Agreement, this is an agreement of purchasing the Service only. GKF shall only offer to Medical Center the Service pursuant to the terms and conditions of this Agreement. Nothing herein shall be construed as conveying to Medical Center any right, title or interest in or to the Equipment, except for the express right to use the Equipment granted herein to Medical Center during the Term. Unless otherwise provided under this Agreement, all Equipment shall remain personal property (even though said Equipment may hereafter become attached or affixed to real property) and the title thereto shall at all times remain exclusively in GKF or Lender.

 

 
Exhibit 10.65

 

9.3           During the Term, upon the request of GKF, Medical Center shall promptly affix to the Equipment an identifying label supplied by GKF indicating GKF’s ownership of the Equipment, and shall keep the same affixed for the entire Term. Medical Center hereby authorizes GKF or its Lender (as defined in Section 14), as the case may be and at GFK's or its Lender's own cost and expense, to cause this Agreement or any statement or other instrument showing the interest of GKF or its Lender in the Equipment to be filed or recorded, or refiled or re-recorded, with all governmental agencies considered appropriate by GKF or its Lender. Without limiting the generality foregoing, Medical Center hereby authorizes GKF or its Lender to execute and file any statement or instrument, including a UCC-1 financing statement(s), for the purpose of evidencing GKF’s and/or such Lender’s, as the case may be, interest in the Equipment. Medical Center shall after review and within a commercially reasonable time, execute and deliver, or cause to be executed and delivered, other relevant statements, agreements, waivers and other documents with respect to GKF’s and its Lender’s rights in the Equipment for the Term of the Agreement, subject to the prior review and approval of Medical Center. Upon expiration of this Agreement, GFK or its Lender shall, within a commercially reasonable amount of time, take all reasonably necessary steps to extinguish its security interest in the Equipment at GFK's or Lender's sole expense.

 

9.4           For the Term of the Agreement and at Medical Center's cost and expense, Medical Center shall use commercially reasonable efforts to (a) protect and defend GKF’s ownership of and title to the Equipment from and against all persons claiming against or through Medical Center, (b) at all times keep the Equipment free from any and all liens, encumbrances, attachments, levies, executions, burdens, charges or legal processes imposed against Medical Center, and (c) give GKF written notice of any matter described in this clause within five (5) business days of Medical Center’s knowledge thereof, and (d) in the manner described in Section 21 below indemnify GKF harmless from and against any loss, cost or expense (including reasonable attorneys’ fees) with respect to any of the foregoing.

 

10.           Additional Covenants of Medical Center . In addition to the other covenants of Medical Center contained in this Agreement, Medical Center shall, at its cost and expense:

 

10.1         Provide properly trained professional, technical and support personnel and supplies required for the proper performance of Gamma Knife procedures utilizing the Equipment. In this regard, Medical Center shall make reasonable efforts to maintain on staff a minimum of two (2) Gamma Knife trained teams comprised of neurosurgeons, radiation oncologists and physicists. The Gamma Knife shall be available for use by all credentialed neurosurgeons, radiation oncologists and physicists.

 

10.2         Direct, supervise and administer the provision of all services relating to the performance of Procedures utilizing the Equipment in accordance with all applicable laws, rules and regulations.

 

10.3         Keep and maintain the Equipment and the Site secure and free from unauthorized access or use by any person to the extent that Medical Center provides security for its other radiation oncology services.

 

10.4         Operate a radiation therapy department at the Site.

 

 
Exhibit 10.65

 

11.           Additional Covenants of GKF . In addition to the other covenants of GKF contained in this Agreement, GKF, at its cost and expense, shall:

 

11.1         Use its best efforts to require Elekta to meets its contractual obligations to GKF and Medical Center upon delivery of the Equipment and put the Equipment, as soon as reasonably 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.

 

11.2         Cause Medical Center to enjoy the use of the Equipment, free of the rights of any other persons except for those rights reserved by GKF or granted to Elekta under the LGK Agreement.

 

11.3         Cover the tuition costs for up to ten (10) Perfexion training slots for physicians and physicists who will be using the Equipment. In accordance with Medical Center’s policies, copies of which have been provided to GKF, all documented and incurred expenses for travel, lodging, and meals associated with training course attendance shall be at GKF’s cost and expense.

 

11.4         To the extent reasonably requested by Medical Center, GKF agrees to use best efforts to exercise GKF’s rights to the warranty provided by Elekta to GKF which has been provided to Medical Center.

 

12.           Maintenance of Equipment; Damage or Destruction of Equipment .

 

12.1        During the Term and except as otherwise provided in this Agreement, GKF, shall maintain the Equipment in good operating condition and repair, reasonable wear and tear excepted. Medical Center shall promptly notify GKF in the event of any damage or destruction to the Equipment or of any required maintenance or repairs to the Equipment, regardless of whether such repairs or maintenance are covered or not covered by the Service Agreement. GKF will work with Medical Center in selecting a Service Agreement which shall be entered into by and between GKF and the service provider.

 

12.2         To the extent that GKF is provided with software updates and upgrades at no additional charge, then GKF shall ensure that such equipment software updates and upgrades will be provided at no additional cost to Medical Center. Otherwise, Medical Center and GKF shall mutually agree in writing to the updates and upgrades, and such updates and upgrades shall be paid pro-rata by the parties as set forth on Schedule 1. GKF and Elekta shall have the right to reasonably access the Equipment for the purpose of inspection and the performance of repairs at all reasonable times, upon reasonable advance notice and with a minimum of interference or disruptions to Medical Center’s regular business operations.

 

 
Exhibit 10.65

 

12.3         GKF shall promptly provide Medical Center with a copy of all communications from the Elekta or the FDA advising of a recall, request for a recall, market withdrawal, safety alert, or an issue of Equipment availability. GKF shall provide Medical Center with written notice of any Class I recall, whether voluntary or initiated by the FDA, affecting any of the Equipment within twenty-four (24) hours of Elekta’s or GKF's receipt of any such request for a recall, or shorter period of time provided in the recall strategy.

 

12.4         In the event the Equipment is damaged as a result of the intentional and wrongful or negligent acts or omissions of Medical Center’s officers, employees, agents, or contractors, to the extent such damage is not covered by warranties or insurance, in addition to the rights set forth in Section 21 of this Agreement, GKF may service or repair the Equipment as needed and the cost thereof shall be paid by Medical Center to GKF within thirty (30) day of written request. In the event that the costs are not paid to GKF within thirty (30) days, Medical Center shall pay interest thereon at the rate of one percent (1%) per month (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) and reasonable attorneys’ fees and costs incurred by GKF in collecting such amount from Medical Center. Any work so performed by GKF shall not deprive GKF of any of its rights, remedies or actions against Medical Center for such damages .

 

12.5         If the Equipment is rendered unusable as a result of any physical damage to or destruction of the Equipment, Medical Center shall give GKF written notice thereof. GKF shall use best efforts to determine, within fifteen (15) days after it is given written notice of such damage or destruction, whether the Equipment can be repaired provided, however, if GKF cannot determine whether the Equipment can be repaired within fifteen (15) days, then GKF shall have such additional time as may be reasonable and necessary for such determination provided, however, GKF shall provide Medical Center with weekly status reports. In the event GKF determines that the Equipment cannot be repaired (a) subject to Section 12.4 above, GKF, at its cost and expense, shall replace the Equipment as soon as reasonably possible taking into account the availability of replacement equipment from Elekta, Elekta’s other existing orders for equipment, and the then existing limitations on Elekta’s manufacturing capabilities, (b) the Term of this Agreement shall be extended for the period of time the Equipment is unusable, and (c) 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 repaired as soon as reasonably possible thereafter. Medical Center shall fully cooperate with GKF to effect the replacement of the Equipment or the repair of the Equipment (including, without limitation, providing full access to the Site) following the damage or destruction thereof.

 

12.6         To the extent reasonably requested by Medical Center, GKF agrees to use best efforts to exercise GKF’s rights to the uptime guarantee provided by Elekta to GKF, a copy of which shall be provided to Medical Center prior to execution of this Agreement.

 

 
Exhibit 10.65

 

13.           Alterations and Upgrades to Equipment .

 

13.1         Medical Center shall not make any modifications, alterations or additions to the Equipment (other than normal operating accessories or controls) without the prior written consent of GKF. Medical Center shall not, and shall not permit any person other than representatives of Elekta or any other person authorized by GKF to, effect any inspection, adjustment, preventative or remedial maintenance, or repair to the Equipment without the prior written consent of GKF. All modifications, alterations, additions, accessories or operating controls incorporated in or affixed to the Equipment (herein collectively called "additions" and included in the definition of "Equipment") shall become the property of the GKF upon termination of this Agreement.

 

13.2         The necessity and financial responsibility for modifications, additions or upgrades to the Equipment, including the reloading of the Cobalt- 60 source, shall be mutually agreed upon by GKF and Medical Center in advance. If (a) GKF and Medical Center agree to reload the Cobalt-60 source (i.e., on or around the 7 2 nd month of the Term), then, notwithstanding any provisions to the contrary herein, the initial Term shall be automatically extended for an additional two (2 ) years. The necessity for modifications, additions or upgrades to the Equipment, including the reloading of the Cobalt-60 source, shall be as mutually agreed upon by GKF and Medical Center, and the financial responsibility for such modifications, additions and upgrades (excluding repairs, which pursuant to Section 12.1 and subject to Section 12.5, are GKF’s and Medical Center’s responsibility, respectively) shall be paid either (i) pro-rata by the parties as set forth on Schedule 1 , or (ii) shall be paid by GKF provided that the parties shall assess GKF’s modifications, additions or upgrades and shall determine whether the Purchased Services Payments need to be adjusted to ensure that Purchased Services Payments for the products and services provided by each party continues to be commensurate with their fair market value, provided the Purchased Services Payments shall not be adjusted more than annually.

 

14.           Financing of Equipment by GKF . GKF, in its sole discretion, may finance the Equipment. If GKF finances the Equipment, GKF may be required to grant the lender, lessor or other financing entity (the “Lender”) a security interest in the Equipment as collateral for the loan, and Lender may file a UCC-1 financing statement(s) to perfect its security interest in the Equipment. In addition, if GKF finances the Equipment, title to the Equipment may remain with Lender until the lease term ends and GKF exercises its buy-out option under the lease, if any. If required by the Lender, GKF may also be required to assign its interest under this Agreement as security for the financing described above.

 

 
Exhibit 10.65

 

15.           Taxes . GKF shall pay all sales or use taxes imposed or assessed in connection with the use or purchase of the Equipment and all personal property taxes imposed, levied or assessed on the ownership and possession of the Equipment during the Term. Unless Medical Center provides GKF with a tax exemption certificate, all other taxes, assessments, licenses or other charges imposed, levied or assessed on the Equipment during the Term for which Medical Center is not expressly exempt, shall be paid by Medical Center before the same shall become delinquent, whether such taxes are assessed or would ordinarily be assessed against GKF or Medical Center; provided, however, Medical Center shall not be required to pay any federal, state or local income, franchise, corporation or excise taxes imposed upon GKF's net income realized from the Purchased Services Payments of the Equipment.

 

16.           No Warranties by Medical Center and GKF . Medical Center warrants that as of the First Procedure Date, it shall have (a) thoroughly inspected the Equipment to the best of its knowledge, (b) determined that to the best of its knowledge the Equipment is consistent with the size, design, capacity and manufacture selected by it, and (c) satisfied itself that to the best of its knowledge the Equipment is suitable for Medical Center intended purposes and is good working order, condition and repair. GKF represents and warrants that it has and shall continue to have for the Term of this Agreement, good title to the Equipment delivered to Medical Center without violating the property rights or interests of any third party inclusive of the intellectual property contained therein. GKF will work with Medical Center in good faith to remedy any problems identified in writing by Medical Center during Medical Center's inspection. GKF SUPPLIES THE EQUIPMENT UNDER THIS AGREEMENT IN ITS "AS IS" CONDITION. GKF, 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 OR USE, DESIGN, CONDITION, DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE. Notwithstanding the foregoing, GKF shall (i) to the extent reasonably requested by Medical Center, use best efforts to exercise GKF’s rights to the warranty provided by Elekta to GKF a copy of which has been provided to Medical Center, and (ii) use its best efforts to ensure that all benefits under the manufacturer’s warranty shall run to the Medical Center. GKF shall not be liable for any direct, indirect and consequential losses or damages suffered by Medical Center or by any other person, and Medical Center 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, including, without limitation, injury to persons or property resulting from the failure of, defective or faulty design, operation, condition, suitability or use of the Equipment. All warranty or other similar claims with respect to the Equipment shall be made by Medical Center solely and exclusively against Elekta and any other manufacturers or suppliers, but shall in no event be asserted against GKF. In this regard and with prior written approval of GKF, which shall not be unreasonably delayed or withheld, Medical Center may, in GKF’s name, but at Medical Center’s sole cost and expense, enforce all warranties, agreements or representations, if any, which may have been made by Elekta or manufacturers, suppliers or other third parties regarding the Equipment to GKF or Medical Center.

 

 
Exhibit 10.65

 

17.           Termination for Economic Justification . If, following the initial twenty four (24) months after the First Procedure Date and following each subsequent twelve (12) month period thereafter during the Term, based upon the utilization of the Equipment and other factors considered relevant by GKF in the exercise of its reasonable discretion, within a reasonable period of time after GKF’s written request, Medical Center does not provide GKF with a reasonable economic justification to continue this Agreement and the utilization of the Equipment at the Medical Center, then and in that event, GKF shall have the option to terminate this Agreement by giving a written notice thereof to Medical Center not less than ninety (90) days prior to the effective date of the termination designated in GKF’s written notice . Without limiting the generality of the foregoing, for purposes of this Section, "reasonable economic justification to continue this Agreement" shall not be deemed to exist (and GKF shall have the option to terminate this Agreement) if, during the twelve (12) month period immediately preceding the issuance of GKF’s written notice of termination, the "Net Cash Flow"

is negative. As used herein, "Net Cash Flow" shall mean, for the applicable period, (a) the aggregate Purchased Services Payments actually received by GKF during such period, minus the sum of the aggregate debt service on the Equipment during such period. In the event of such termination, Medical Center shall have no further obligation hereunder, except for obligations accruing and becoming payable prior to the date of termination.

 

18.           Options to Extend Agreement . As of the end of the Term, Medical Center shall have the option to:

 

18.1       Extend the Term of this Agreement for a specified period of time and upon such other terms and conditions as may be agreed upon by GKF and Medical Center;

 

 
Exhibit 10.65

 

18.2       Upon the expiration of the Term, Medical Center shall have the option to purchase GKF’s ownership interest in the Equipment (the “Purchase Option”) for a fair market value purchase price as then determined by an independent third party valuation expert to be selected by Medical Center in its sole discretion (the “Option Purchase Price”). The Option Purchase Price shall be paid in full in cash to GKF upon the expiration of the Term of the Agreement, upon which GKF shall transfer, convey and assign to Medical Center, free and clear of all encumbrances, all of GKF’s right, title and interest in and to the Equipment, on an “as is, where is” basis with all faults, and without representation or warranty (other than as to clear title), and GKF shall further transfer, convey and assign to Medical Center all of GKF’s rights under the LGK Agreement free and clear of all encumbrances and/or costs. If the Purchase Option is exercised, upon the expiration or termination of the Agreement, it is understood that GKF shall have no obligation with respect to the removal, relocation, reinstallation and/or repair of the Equipment, except as to any obligations to insure and/or repair the Equipment that arose under the Agreement prior to such expiration or termination. If the Purchase Option is exercised at the expiration of the Term, GKF shall use reasonable efforts to transition all ancillary services and agreements to Medical Center, including the Service Agreement.

 

18.3       Terminate this Agreement as of the expiration of the Term. Upon the expiration of the Term and within a reasonable time thereafter, GKF, at its cost and expense, may enter upon the Site under Medical Center supervision and remove the Equipment.

 

18.4       Medical Center shall exercise one (1) of the three (3) options referred to above by giving written notice thereof to GKF at least one hundred eighty (180) days prior to the expiration of the initial Term. Any such notice shall be sufficient if it states in substance that Medical Center elects to exercise its option and states which of the three (3) options referred to above Medical Center is exercising. If Medical Center fails to exercise the option granted herein at least one hundred eighty (180) days prior to the expiration of the initial Term, the option shall lapse and this Agreement shall expire as of the end of the initial Term. Further, if Medical Center exercises either option specified in Sections 18.1 or 18.2 above and the parties are unable to mutually agree upon the terms or conditions applicable to such option prior to the expiration of the Term, this Agreement shall expire as of the end of the initial Term.

 

19.           Events of Default and Remedies .

 

19.1       Medical Center Event of Default. The occurrence of any one of the following shall constitute a Medical Center event of default under this Agreement (a "Medical Center Event of Default"):

 

19.1.1  Medical Center fails to pay any Purchased Services Payment when due pursuant to Paragraph 8 above and such failure continues for a period of forty-five (45) days after written notice thereof is given by GKF or its assignee to Medical Center; however, if Medical Center cures the Purchased Services Payment default within the applicable forty-five (45) day period, such default shall not constitute an Event of Default.

 

19.1.2  Medical Center attempts to remove, sell, transfer, encumber, assign, sublet or part with possession of the Equipment or any parts thereof, except as expressly permitted herein or as otherwise authorized by GKF in writing.

 

 
Exhibit 10.65

 

19.1.3  Medical Center fails to observe or perform any of its covenants, duties or obligations arising under this Agreement and such failure continues for a period of thirty (30) days after written notice thereof by GKF to Medical Center; however, if Medical Center cures the default within the applicable thirty (30) day period or if the default reasonably requires more than thirty (30) days to cure, Medical Center commences to cure the default during the initial thirty (30) day period and Medical Center diligently completes the cure within sixty (60) days following the end of the thirty (30) day period, such default shall not constitute a Medical Center Event of Default; provided that the foregoing cure periods shall not apply to a Medical Center Event of Default under Subsections 19.1.1 or 19.1.2.

 

19.1.4  Medical Center 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 bankrupt or 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.

 

19.2        GKF Event of Default . The occurrence of any one of the following shall constitute a GKF event of default under this Agreement (a "GKF Event of Default"):

 

19.2.1  GKF causes Medical Center’s quiet enjoyment and use of the Equipment pursuant to this Agreement to be materially interfered with (other than by reason of a Medical Center Event of Default or in connection with routine servicing, maintenance or repairs as contemplated in this Agreement), and GKF fails to cure such default within thirty (30) days after written notice thereof is given by Medical Center or its assignee to GKF; however, if GKF cures such default within the applicable thirty (30) day period or if the default reasonably requires more than thirty (30) days to cure, GKF commences to cure the default during the initial thirty (30) day period and GKF diligently completes the cure within a commercially reasonable amount of time, such default shall not constitute an GKF Event of Default.

 

19.2.2  GKF fails to pay or reimburse Medical Center for any monies payable by GKF to Medical Center pursuant to this Agreement and such failure continues for a period of thirty (30) days after written notice thereof is given by Medical Center or its assignee to GKF; however, if GKF cures the default within the applicable thirty (30) day period, such default shall not constitute a GKF Event of Default.

 

 
Exhibit 10.65

 

19.2.3  GKF fails to observe or perform any of its covenants, duties or obligations arising under this Agreement and such failure continues for a period of thirty (30) days after written notice thereof by Medical Center to GKF; however, if GKF cures the default within the applicable thirty (30) day period or if the default reasonably requires more than thirty (30) days to cure, GKF commences to cure the default during the initial thirty (30) day period and GKF diligently completes the cure within sixty (60) days following the end of the thirty (30) day period, such default shall not constitute a GKF Event of Default; provided that the foregoing cure periods shall not apply to a GKF Event of Default under Subsections 19.2.1 or 19.2.2.

 

19.2.4  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 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.

 

19.3       Upon the occurrence of a Medical Center Event of Default or a GKF Event of Default, the non-breaching party may at its option do any or all of the following:

 

19.3.1  By written notice to GKF, Medical Center may at its option immediately terminate this Agreement, wherever situated, but only upon the occurrence of a GKF Event of Default under Subsections 19.2.1, 19.2.2, 19.2.4 or as set forth in Section 22.20. As a result of such termination, Medical Center may, at its option and upon written notice to GKF, demand that GKF immediately enter upon the Site and remove the Equipment at GKF’s sole cost and expense. For the avoidance of doubt, Medical Center shall not have the right to terminate this Agreement by reason of a GKF Event of Default, other than due to the occurrence of a GKF Event of Default under Subsections 19.2.1, 19.2.2, 19.2.4 or as set forth in Section 22.20.

 

 
Exhibit 10.65

 

19.3.2  By written notice to Medical Center, GKF may at its option immediately terminate this Agreement as to the Equipment, wherever situated, but only upon the occurrence of any of the Medical Center Events of Default as set forth in Subsections 19.1.1 and 19.1.2 and/or noncompliance with Sections 10.1 and/or 10.4 above (which noncompliance has not been cured within the periods set forth in Section 19.1.3 above) (collectively, the “Termination Defaults”). For the avoidance of doubt, but without limiting GKF’s rights under Section 17 above (Termination for Economic Justification), GKF shall not have the right to terminate this Agreement by reason of a Medical Center Event of Default, other than due to the occurrence of any Termination Default. As a result of such termination pursuant to any Termination Default, GKF may (a) provide reasonable notice to Medical Center of its intention to remove the Equipment, and upon such date as provided by notice, GKF may then enter upon the Site and remove the Equipment in a manner and at a time that causes the least amount of disruption to patient care, or, at Medical Center’s election, Medical Center shall remove and return the Equipment to GKF, but in either event at Medical Center’s sole cost and expense; and (b) may exercise any other rights pursuant to this Agreement or permitted by law, equity or otherwise.

 

19.3.3  With respect to all other Medical Center Events of Default, GKF may:

 

A.          Sell, dispose of, hold, use or lease the Equipment (other than on the premises of the Medical Center), as GKF in its sole and absolute 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).

 

B.          Exercise any other right or remedy which may be available to GKF under the Uniform Commercial Code or any other applicable law or proceed by appropriate court action, without affecting GKF’s title or right to possession of the Equipment, to enforce the terms hereof or to recover damages for the breach hereof or to cancel this Agreement as to the Equipment.

 

19.3.4  Upon termination of this Agreement or the exercise of any other rights or remedies under this Agreement or available under applicable law following a Medical Center Event of Default, Medical Center shall, without further request or demand, pay to GKF all Purchased Services Payments and other sums owing under this Agreement. However, Medical Center acknowledges that GKF shall have no obligation to sell the Equipment. Medical Center shall in any event remain fully liable for all damages as may be provided by law and 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.

 

19.3.5  Subject to Section 17 above, each party shall in any event remain fully liable to the other non-defaulting party for all damages as may be provided by law and for all costs and expenses incurred by the non-defaulting party on account of such default, including but not limited to, all court costs and reasonable attorneys’ fees.

 

19.3.6  Subject to Sections 19.3.1 and 19.3.2 above (regarding limitations on the right to terminate this Agreement), the rights and remedies afforded a non-defaulting party under this Agreement shall be deemed cumulative and not exclusive, and shall be in addition to any other rights or remedies available to the non-defaulting party provided by law or in equity.

 

 
Exhibit 10.65

 

20.          Insurance .

 

20.1         During the Term and during the construction of the Site and prior to the First Procedure Date, GKF shall, at its cost and expense, purchase and maintain in effect an all risk property and casualty insurance policy covering the Equipment and general liability and professional liability insurance coverage/policies covering GKF and its officers, directors, agents, employees, or contractors. The general liability and professional liability insurance policies shall provide coverage in amounts not less than One Million Dollars ($1,000,000.00) per occurrence and Five Million Dollars ($5,000,000.00) annual aggregate. The all risk property and casualty insurance policy shall be for an amount not less than the replacement cost of the Equipment. Medical Center shall be named as an additional insured party on the all risk property and casualty insurance policy to the extent of its interest in the Equipment arising under this Agreement and under the general liability insurance coverage/policy to be maintained by hereunder by GKF. The coverage/policies to be maintained by GKF hereunder shall be evidenced by a certificate of insurance or other reasonable documentation which shall be delivered by GKF to Medical Center upon request following the commencement of this Agreement and as of each annual renewal of such policy during the Term.

 

20.2         During the Term, Medical Center shall, at its cost and expense, purchase, and maintain in effect general liability and professional liability insurance coverage/policies covering the Medical Center and the use or operation of the Equipment by Medical Center or its officers, directors, agents, employees, or contractors. The general liability and professional liability insurance policies shall provide coverage in amounts not less than One Million Dollars ($1,000,000.00) per occurrence and Three Million Dollars ($3,000,000.00) annual aggregate. GKF shall be named as additional insured party on the general liability insurance coverage/policies to be maintained hereunder by Medical Center. The coverage/policies to be maintained by Medical Center hereunder shall be evidenced by a certificate of insurance or other reasonable documentation which shall be delivered by Medical Center upon request to GKF no later than the First Procedure Date and as of each annual renewal of such policies during the Term. Medical Center shall require any physicians using the Equipment to show evidence of professional liability insurance consistent with Medical Center’s Medical Staff Bylaws.

 

20.3         During the construction of the Site and prior to the First Procedure Date, Medical Center, at its cost and expense, shall purchase, and maintain a general liability insurance policy which conforms with the coverage amounts and other requirements described in Section 20.2 above and which names GKF as an additional insured party. The policy to be maintained by Medical Center hereunder shall be evidenced by a certificate of insurance or other reasonable documentation which shall be delivered by Medical Center to GKF prior to the commencement of any construction at the Site.

 

 
Exhibit 10.65

 

20.4         During the Term, Medical Center and GKF shall purchase and maintain all workers compensation insurance to the maximum extent required by applicable law.

 

20.5         Medical Center may maintain any insurance policies or coverage required of it by this Agreement through a self-insurance program.

 

21.          Indemnification .

 

21.1         Medical Center shall be liable for and shall indemnify, defend, protect and hold GKF and its members, managers, officers, employees, agents and contractors (collectively "GKF") harmless from and against all losses, claims, damages, liabilities, assessments, deficiencies, actions, proceedings, orders, judgments, liens, costs and other expenses (including reasonable attorney’s fees) of any nature or kind whatsoever asserted against or incurred by GKF (collectively "Damages") which in any manner arise out of or relate to (a) the failure by Medical Center to fully perform, observe or satisfy its covenants, duties or obligations contained in this Agreement or in the LGK Agreement; (b) negligent, intentional or wrongful acts or omissions by Medical Center or any of its officers, directors, agents, contractors (or their subcontractors), or employees in connection with the use and operation of the Equipment during the Term; (c) Damages to the Equipment caused by the negligent or wrongful acts or omissions of Medical Center, its agents, officers, employees or contractors (if the Equipment is destroyed or rendered unusable, subject to Section 21.7 below, this indemnity 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); or (d) the events or occurrences described in Article 7.3 of the LGK Agreement to the same extent that Medical Center agrees to indemnify Elekta thereunder (other than with respect to the failure of the Site to comply with the Site Planning Criteria or defective maintenance of the Equipment under the Service Agreement).

 

21.2         GKF shall be liable for and shall indemnify, defend, protect and hold Medical Center and its directors, members, managers, officers, employees, agents and contractors (collectively "Medical Center") harmless from and against all losses, claims, damages, liabilities, assessments, deficiencies, actions, proceedings, orders, judgments, liens, costs and other expenses (including reasonable attorney’s fees) of any nature or kind whatsoever asserted against or incurred by Medical Center (collectively "Damages") which in any manner arise out of or relate to (a) the failure by GKF to fully perform, observe or satisfy its covenants, duties or obligations contained in this Agreement; (b) negligent, intentional or wrongful acts or omissions by GKF or any of its officers, directors, agents, contractors (or their subcontractors), or employees in connection with the installation, operation, maintenance, use or removal of the Equipment but only to the extent that GKF is responsible for such activities under this Agreement, (c) the failure by GKF to maintain the Equipment as provided in this Agreement; and (d) any other matters for which GKF has specifically agreed to indemnify Medical Center pursuant to this Agreement.

 

 
Exhibit 10.65

 

21.3         Upon the occurrence of an event for which GKF or Medical Center is entitled to indemnification under this Agreement ("Indemnitee"), such party shall give written notice thereof to the other party ("Indemnitor") setting forth the type and amount of Damages. If the indemnity relates to a Third Party Claim (as defined in Section 21.4 below), the matter shall be subject to Section 21.4 below. If the indemnity relates to any Damages other than a Third Party Claim, not more than thirty (30) days after written notice is given, the indemnifying party shall acknowledge its obligation in writing to the Indemnitee to indemnify hereunder and pay the Damages in full to the Indemnitee.

 

21.4         GKF or Medical Center, as Indemnitee, shall give written notice to the other party as Indemnitor as soon as reasonably possible after the Indemnitee has knowledge of any third party claim or legal proceedings ("Third Party Claim") for which the Indemnitee is entitled to indemnification under this Section 21. Indemnitor shall (a) immediately assume, at its sole cost and expense, the defense of the Third Party Claim with legal counsel approved by the Indemnitee (which approval will not be unreasonably withheld, delayed or conditioned), and (b) as soon as reasonably possible after Indemnitee’s written notice is given to the Indemnitor, acknowledge in writing to Indemnitee its obligation to indemnify Indemnitee in accordance with the terms of this Agreement. If either party as the Indemnitor fails to assume the defense of a Third Party Claim or fails to timely acknowledge in writing its obligation to indemnify the Indemnitee, then, the Indemnitee may assume the defense of the Third Party Claim in the manner described in Section 21.5 below. Each party shall cooperate with the other in the defense of any Third Party Claim. Any settlement or compromise of a Third Party Claim to which either party is a party shall be subject to the express written approval of the other party, which approval shall not be unreasonably withheld, delayed or conditioned as long as an unconditional term of the settlement or compromise is the full and absolute release of the Indemnitee from all Damages arising out of the Third Party Claim. Either party as Indemnitee, at its own cost and expense, may participate on its own behalf with legal counsel of its own selection in the defense of any Third Party Claim which may have a material impact on it.

 

21.5         If either party having the obligation as Indemnitor fails to promptly assume the defense of any Third Party Claim, the Indemnitee may assume the defense of the Third Party Claim with legal counsel selected by the Indemnitee, all at the Indemnitor’s cost and expense. The defense of an action by an Indemnitee under this Section 21.5 shall not impair, limit or otherwise restrict Indemnitor’s indemnification obligations arising under this Section 21 or Indemnitee’s right to enforce such obligations.

 

 
Exhibit 10.65

  

21.6         The indemnity obligations under this Section 21 shall expire on the expiration of the applicable statute of limitations relating to the underlying claim that is the subject of the indemnification claim. Any indemnification obligation shall be in proportion to the amount of responsibility found attributable to the Indemnitor.

 

21.7         The indemnification obligations set forth in this Agreement are intended to supplement, and not supersede, supplant or replace, any coverage for Damages which may be available under any insurance policies that may be maintained by GKF or Medical Center. In the event any Damages may be covered by insurance policies, the parties shall exercise good faith and use their best efforts to obtain the benefits of and apply the available insurance coverage to the Damages subject to indemnification under this Agreement. In the event that an insurer provides coverage under an insurance policy on the basis of a "reservation of rights," the indemnification obligations under this Agreement shall apply to all Damages which are finally determined as not being covered under the insurance policy.

 

21.8         GKF acknowledges Medical Center’s obligations to comply with certain laws and regulations as well as the need for GKF’s employees, agents, and contractors to comply with reasonable requests, standard rules, and regulations of Medical Center regarding personal and professional conduct, including the use of an identification badge or personal protective equipment and the adherence to health care facility laws or regulations, including in some instances, criminal background checks, credit checks, health screening, vaccinations and testing, and general safety practices or procedures, generally applicable to such facilities. GKF shall provide Medical Center with reasonable assistance in ensuring GKF employee, agent, and contractor compliance with (i) laws and regulations affecting Medical Center’s facility(ies) and (ii) Medical Center’s facility rules and regulations. GKF warrants and represents that it has enforceable written agreements with all of its employees, agents, and contractors involved during the course of this Agreement in any provision of services and Equipment under this Agreement, obligating such employees and contractors upon terms and conditions no less restrictive than contained herein, not to use or disclose any confidential information, proprietary rights, or information learned or acquired during the course of such employment or engagement. To the extent an employee of GKF has access to Protected Health Information as such is defined in HIPAA, GKF warrants that it will educate such employees about the obligation imposed by the HIPAA regulations. Medical Center may, after written notice including an explanation of its concerns and a fifteen (15) day cure period, require GKF to replace any personnel provided by GKF, including any contractor personnel, if such personnel does not perform satisfactorily, does not comply with Medical Center’s security requirements or other rules and regulations applicable to the conduct of Medical Center’s employees or contractors, or for other good cause. GKF shall be solely responsible for the acts and omissions of its employees, agents, and contractors hereunder.

 

 
Exhibit 10.65

  

21.9         GKF and its employees, agents, and contractors shall comply with and abide by Medical Center’s rules, policies and/or procedures for vendor credentialing, copies of which are available upon request. GKF expressly acknowledges and agrees that as a condition of access to Medical Center, GKF and its employees, agents, and contractors shall cooperate and work with any third party vendor credentialing services entity with which Medical Center has a contract and from which Medical Center requests GKF and its employees, agents, and contractors to obtain credentialing. No representatives of GKF will be given access to Medical Center absent successful completion of Medical Center’s vendor credentialing program and continued strict compliance with Medical Center’s rules, standards, policies and procedures (e.g., immunization policies, identification requirements, HIPAA compliance, appointment requirements, etc.). GKF expressly agrees that it shall instruct all of its representatives of the above requirements, and the fact that each representative, prior to admission to Medical Center, must have a scheduled appointment in place. No standing appointments are permissible or will be allowed. Nothing herein shall be construed as granting a representative access or permission to any locations within Medical Center, other than the main lobby of Medical Center. Any GKF representatives seeking access to Medical Center for the purpose of performing Services must have a scheduled appointment with Medical Center’s Director of Materials Management. Any GKF representative that does not comply with the above, will be removed from Medical Center and may be sanctioned and/or permanently prohibited from access to Medical Center. Notwithstanding the provisions of 21.8 and 21.9, Medical Center will use all reasonable efforts to assist and promptly respond to GKF, so as to ensure reasonable access to the Medical Center, Equipment and all affiliated persons.

 

22.          Miscellaneous .

 

22.1         Binding Effect and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, neither party may assign, subcontract, delegate, or otherwise transfer this Agreement or any of its rights or obligations hereunder except as contemplated herein, without the other party’s written consent; provided, however that the Medical Center may assign this Agreement without prior written consent of GKF to an entity controlled by, controlling, or under common control with the Medical Center and which entity is the holder of the general acute care hospital license for the facility at which the Equipment is located, and provided further, that such entity shall have credit rating and financial position equivalent to or higher than that of Medical Center as reasonably determined by GKF . Unless otherwise agreed to in writing by the parties, an assignment or sublease shall not relieve a party of any liability for performance of this Agreement during the remainder of the Term. Any purported assignment or sublease made without the other party’s prior written consent shall be null, void and of no force or effect .

 

 
Exhibit 10.65

 

22.2         Agreement to Perform Necessary Acts. Each party agrees to perform any further acts and execute and deliver any further documents which may be reasonably necessary or otherwise reasonably required to carry out the provisions of this Agreement.

 

22.3         Validity. If for any reason any clause or provision of this Agreement, or the application of any such clause or provision in a particular context or to a particular situation, circumstance or person, should be held unenforceable, invalid or in violation of law by any court or other tribunal of competent jurisdiction, then the application of such clause or provision in contexts or to situations, circumstances or persons other than that in or to which it is held unenforceable, invalid or in violation of law shall not be affected thereby, and the remaining clauses and provisions hereof shall nevertheless remain in full force and effect.

 

22.4 Compliance with Anti-Terrorism Plan. GKF acknowledges that Medical Center has in place an Anti-Terrorism Plan (“Plan”), a copy of which has been provided to GKF, and GKF further acknowledges that the Equipment and Cobalt source shall be in compliance with such Plan at all times. GKF shall use its best efforts to make any repairs or updates to the Equipment as soon as practicable in order for such Equipment to be operating in accordance with the Plan.

 

22.5         Entire Agreement; Amendment. This Agreement together with the Exhibits attached hereto constitutes the full and complete agreement and understanding between the parties hereto concerning the subject matter hereof and shall supersede any and all prior negotiations written and oral agreements and understandings between the parties with regard to such subject matter. This Agreement may be modified or amended only by a written instrument executed by all of the parties hereto. The parties agree that the electronic signature provisions of the Electronic Signatures in the Global and National Commerce Act shall not be applicable to this Agreement.

 

22.6         Number and Gender. Words in the singular shall include the plural, and words in a particular gender shall include either or both additional genders, when the context in which such words are used indicates that such is the intent.

 

22.7         Effect of Headings. The titles or headings of the various paragraphs hereof are intended solely for convenience or reference and are not intended and shall not be deemed to modify, explain or place any construction upon any of the provisions of this Agreement.

 

22.8         Counterparts. This Agreement may be executed in one or more counterparts each bearing a handwritten signature of an authorized official, collectively which shall constitute one and the same instrument. All counterparts shall be construed together and shall constitute one agreement.

 

 
Exhibit 10.65

 

22.9         Governing Law. This Agreement shall be interpreted and enforced in accordance with the internal laws, and not the law of conflicts, of the State of Florida. Each party irrevocably agrees that any claim brought by it in any way arising out of this Agreement must be brought solely and exclusively in state or federal courts located in the Pensacola, Escambia County, Florida and each party irrevocably accepts and submits to the sole and exclusive jurisdiction of each of the aforesaid courts in personam, generally and unconditionally with respect to any action, suit, or proceeding brought by it or against it by the other party. THE EXCLUSIVE JURISDICTION REQUIREMENT SET FORTH IN THIS SECTION SHALL NOT APPLY IN THE EVENT THAT THERE IS THIRD PARTY JOINDER BY EITHER PARTY OR A THIRD PARTY INSTITUTES AN ACTION AGAINST ANY PARTY TO THIS AGREEMENT, AND SUCH THIRD PARTY IS NOT AMENABLE TO JOINDER IN AN ACTION BROUGHT IN THE STATE OR FEDERAL COURTS LOCATED IN PENSACOLA, ESCAMBIA COUNTY, FLORIDA.

 

22.10       Exhibits and Schedules. All exhibits and Schedules attached hereto and referred to in this Agreement are hereby incorporated by reference herein as though fully set forth at length.

 

22.11       Priority of Documents. This Agreement shall take priority over all agreements relating to Services executed prior to the Effective Date between GKF and Medical Center except to the extent GKF and Medical Center expressly agree otherwise. Except to the extent expressly agreed by Medical Center and GKF, the terms of this Agreement shall not be modified or conflicted by subsequent agreements between GKF and Medical Center. In the event of a conflict between this Agreement and related documents, the terms of this Agreement shall be given effect. The terms of any pre-printed form documents, including invoices and purchase orders, between GKF and Medical Center shall have no effect on the relationship of the parties. The terms of this Agreement shall supersede the terms and conditions on any purchase orders, invoices, price quotes or other documents or agreements GKF may utilize with Medical Center relating to the Services covered under this Agreement. The general rule that ambiguities are to be construed against the drafter shall not apply to this Agreement. In the event that any provision of this Agreement is found to be ambiguous, each party shall have an opportunity to present evidence as to the actual intent of the parties with respect to such ambiguous provision.

 

22.12       Representations. Each of the parties hereto represents: (a) that no representation or promise not expressly contained in this Agreement has been made by any other party hereto or by any of its agents, employees, representatives or attorneys; (b) that this Agreement is not being entered into on the basis of, or in reliance on, any promise or representation, expressed or implied, other than such as are set forth expressly in this Agreement; (c) that it has been represented by counsel of its own choice in this matter or has affirmatively elected not to be represented by counsel; (d) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (e) it has full power and authority to execute, deliver and perform this Agreement; and (f) the execution, delivery and performance of this Agreement has been duly authorized by all necessary corporate or other similar action.

 

 
Exhibit 10.65

  

22.13       Publicity. GKF agrees that it shall not, without prior written consent of Medical Center in each instance, use in advertising, publicity, or otherwise, the name of Medical Center, or any partner or employee of Medical Center, or any trade name, trademark, trade device, or simulation thereof owned by Medical Center, or represent, directly or indirectly, that any product or any service provided by GKF has been approved, recommended, certified, or endorsed by Medical Center. In addition to the foregoing, the content and timing of any public announcement including, but not limited to, any press release regarding the arrangements outlined under this Agreement, shall require the mutual agreement of the parties.

 

22.14       Non-Waiver. No failure or delay by a party to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement, or to exercise any right, power or remedy hereunder or under law or consequent upon a breach hereof or thereof shall constitute a waiver of any such term, condition, covenant, agreement, right, power or remedy or of any such breach or preclude such party from exercising any such right, power or remedy at any later time or times.

 

22.15       Notices. All notices, requests, demands or other communications required or permitted to be given under this Agreement shall be in writing and shall be delivered to the party to whom notice is to be given either (a) by personal delivery (in which case such notice shall be deemed to have been duly given on the date of delivery), (b) by next business day air courier service (e.g., Federal Express or other similar service) (in which case such notice shall be deemed given on the business day following deposit with the air courier service), or (c) by United States mail, first class, postage prepaid, registered or certified, return receipt requested (in which case such notice shall be deemed given on the third (3rd) day following the date of mailing), and properly addressed as follows:

 

To GKF: Four Embarcadero Center
  Suite 3700
  San Francisco, CA 94111
  Attn:  Chief Executive Officer
   
To Medical Center: Sacred Heart Health System, Inc.
  5151 N. Ninth Avenue
  Pensacola, FL 32504
  Attn:  Chief Executive Officer

  

A party to this Agreement may change his, her or its address for purposes of this Section by giving written notice to the other parties in the manner specified herein.

 

 
Exhibit 10.65

  

22.16      Special Provisions Respecting Medicare and Medicaid Patients

 

22.16.1  Medical Center and GKF shall generate such records and make such disclosures as may be required, from time to time, by the Medicare, Medicaid, TriCare, HCAP and other third party payment programs with respect to this Agreement in order to meet all requirements for participation and payment associated with such programs, including but not limited to the matters covered by Section 1861(v)(1)(I) of the Social Security Act.

 

22.16.2  For the purpose of compliance with Section 1861(v)(1)(I) of the Social Security Act, as amended, and any regulations promulgated pursuant thereto, both parties agree to comply with the following statutory requirements (a) Until the expiration of four (4) years after the termination of this Agreement, both parties shall make available, upon written request to the Secretary of Health and Human Services or, upon request, to the Comptroller General of the United States, or any of their duly authorized representatives, the contract, and books, documents and records of such party that are necessary to certify the nature and extent of such costs, and (b) if either party carries out any of the duties of the contract through a subcontract with a value or cost of $10,000 or more over a twelve month period, with a related organization, such subcontract shall contain a clause to the effect that until the expiration of four (4) years after the furnishing of such services pursuant to such subcontract, the related organization shall make available, upon written request to the Secretary, or upon request to the Comptroller General, or any of their duly authorized representatives the subcontract, and books, documents and records of such organization that are necessary to verify the nature and extent of such costs.

 

22.17      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, hurricane, tropical storm, 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. Notwithstanding the foregoing, all parties shall make good faith efforts to perform under this Agreement in the event of any such circumstance. Further, once such an event is resolved, the parties shall again perform their respective obligations under this Agreement. Should either party to this Agreement be notified by any governmental agency or its counsel that performance under this Agreement creates a substantial risk of violation of any material state or federal law or regulation, such party shall notify the other party, and the parties shall, in good faith, attempt to amend this Agreement in all respects necessary to comply with such laws or regulations. If such amendment is not in compliance with applicable legal requirements in the written opinion of counsel for either party to this Agreement, or if the parties cannot agree on an alternative acceptable arrangement, then this Agreement may be terminated by either party upon the delivery of written notice to the other party thirty (30) days prior to the date of termination and all of the rights and obligations of the parties hereunder shall cease and this Agreement shall become null and void.

 

 
Exhibit 10.65

  

22.18      Independent Contractor. It is mutually understood and agreed that nothing in this Agreement is intended nor shall be construed to create between GKF and Medical Center, with respect to their relationship hereunder, an employer/employee relationship, a partnership or joint venture relationship, or a landlord/tenant relationship.

 

22.19      Anti-Kickback Statute. The sole purpose of this Agreement is to enter into a commercially reasonable and fair market value arrangement. The parties in good faith believe that this Agreement fully complies with the provisions of 42 U.S.C. 1320a-7b (the "Anti-Kickback Statute"). Neither Medical Center nor GKF are, by virtue of this Agreement or otherwise, willfully offering, paying, soliciting, or receiving remuneration in return for referring an individual to or from each other for the furnishing of any item or service reimbursed under the Medicare or state health care programs. Pricing hereunder does not take into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare or a state health care program.

 

22.20      Each party represents and warrants to the other party that neither it, nor any of its employees or other contracted staff (collectively referred to in this paragraph as "employees") has been or is about to be excluded from participation in any Federal Health Care Program (as defined herein). Each party agrees to notify the other party within five (5) business days of receipt of notice of intent to exclude or actual notice of exclusion from any such program. The listing of either party or any of its employees on the Office of Inspector General’s exclusion list (OIG website), the General Services Administration’s Lists of Parties Excluded from Federal Procurement and Nonprocurement Programs (GSA website) for excluded individuals or entities, any state Medicaid exclusion list, or the Office of Foreign Assets Control’s (OFAC’s) blocked list shall constitute "exclusion" for purposes of this paragraph. In the event that either party is excluded from any Federal Health Care Program or placed on the OFAC’s blocked list, it shall be a material breach and this Agreement shall immediately terminate without penalty to the other party, unless the other party elects in writing to continue this Agreement. For the purpose of this paragraph, the term "Federal Health Care Program" means the Medicare program, the Medicaid program, TRICARE, any health care program of the Department of Veterans Affairs, the Maternal and Child Health Services Block Grant program, any state social services block grant program, any state children’s health insurance program, or any similar program.

 

 
Exhibit 10.65

 

22.21      Each party shall keep strictly confidential all Non-Public Information disclosed by the other party. For the purposes of this Agreement "Non-Public Information" shall include the terms of this Agreement and all information disclosed by the parties, inclusive of Medical Center purchasing information and characteristics. The parties expressly acknowledge that Medical Center is a member or affiliate of Ascension Health. The parties further agree that, notwithstanding anything to the contrary herein, Medical Center may disclose Non-Public Information to Ascension Health and its health ministries, affiliates, business partners, consultants and those third-party entities with whom Ascension Health and/or Medical Center have an agreement requiring the third-party entity to maintain the confidentiality of such Non-Public Information and to only use such Non-Public Information for the benefit of Ascension Health and Medical Center. Each party shall use best efforts to return any confidential information to the disclosing party upon request. Medical Center and GKF may freely disclose this Agreement internally within their respective organizations and to their professional advisors.

 

22.22      Medical Center has in place a Corporate Responsibility Program ("Program") which has as its goal to ensure that Medical Center complies with federal, state and local laws and regulations, a copy of which is available for review at jaxhealth.com in the Patients and Visitors section. The Program focuses on risk management, the promotion of good corporate citizenship, including the commitment to uphold a high standard of ethical and legal business practices, and the prevention of misconduct. GKF acknowledges Medical Center's commitment to Corporate Responsibility and agrees that it will not act or conduct business in a manner that requires Medical Center to violate or act in a manner that contravenes any legal requirement.

 

22.23      The parties acknowledge that the operations of Medical Center and its affiliates are in accordance with the Ethical and Religious Directives for Catholic Health Care Services, as promulgated by the United States Conference of Catholic Bishops, Washington, D.C., of the Roman Catholic Church or its successor ("Directives") and the principles and beliefs of the Roman Catholic Church is a matter of conscience to Medical Center and its affiliates. The Directives are located at http://www.usccb.org/bishops/directives.shtml. It is the intent and agreement of the parties that neither this Agreement nor any part hereof shall be construed to require Medical Center or its affiliates to violate said Directives in their operation and all parts of this Agreement must be interpreted in a manner that is consistent with said Directives.

 

22.24      GKF represents and warrants that the Equipment, to GKF’s knowledge, complies with the requirements of all applicable federal, state and local laws, ordinances, regulations and codes including those relating to the privacy or security of information including, but not limited to, the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and corresponding regulations. The parties agree that based upon and in reliance upon the representations, warranties and covenants set forth in this Section, GKF is not a Business Associate of Medical Center as defined in HIPAA. GKF represents, warrants and covenants that in the provision of Equipment under this Agreement, GKF does not require and shall not request access to, or attempt to access, any Protected Health Information of Medical Center or any of its affiliates. If GKF inadvertently comes in contact with Protected Health Information, GKF will keep such information confidential and not further access, use or disclose it. If GKF becomes a Business Associate, it agrees to comply with all applicable provisions of HIPAA and agrees to sign Medical Center's then-current business associate agreement. For purposes of this Section, "Protected Health Information" has the meaning set forth in 45 CFR §160.103.

 

 
Exhibit 10.65

  

22.25       Restrictive Covenants . During the Term of the Agreement: (1) GKF covenants that it and any affiliate of GKF will not be involved in any way in the ownership, management, or operation of, or investment in, any Gamma Knife models that perform Procedures within one hundred (100) miles of Medical Center, and (2) Medical Center covenants that Medical Center will not be involved in any way in the ownership, management, or operation of, or investment in, any Gamma Knife models on the Medical Center campus, located in Pensacola, Florida. In the event that this restrictive covenant (or element thereof) shall be determined to be over-broad, then the terms of this Section 22.25 may be either stricken or reduced by a court of competent jurisdiction to the extent such court deems reasonable, and this Section 22.25 may then be enforced in accordance with any remaining and revised language of this Section 22.25.

 

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed as of the date first set forth above.

 

"GKF"   GK FINANCING, LLC
  By: /s/ Ernest A. Bates, MD
    Title: Policy Committee Member
    Date: 1/19/2012
     
"MEDICAL CENTER"   SACRED HEART HEALTH SYSTEM, INC.
     
  By: /s/ Carol Schmidt
    Title: COO
    Date: 1/19/2012

 

1180229

 

 
Exhibit 10.65

 

Exhibit 1

 

LESSELL GAMMA KNIFE® PERFEXION™

 

 

 

PRODUCT SPECIFICATION

Standard turn-key system

  

Qty   Description   Article no.
1   Leksell Gamma Knife® PERFEXION™   715000
2   Leksell® Coordinate Frame™ Kit for PERFEXION™   1002407
1   Leksell GammaPlan®   in BOM
1   PERFEXION™ system tool kit    
1   LESS Spare Part Kit for Leksell® Coordinate Frame™   1002406
1   Skull scaling instrument   A0202-01
1   CT planning kit    
1   MRI planning kit    
1   X-pay planning kit    
1   Set of Co 60 sources   2000000
1   Cobalt loading    
1   Installation and commissioning    
1   Support and Education & Training for PERFEXION™   SER PERFEXION 0001

 

 
Exhibit 10.65

 

Exhibit 5.1

 

Sacred Heart Hospital

5151 N. Ninth Avenue

Pensacola, FL 32504

 

 
Exhibit 10.65

Schedule 1

 

The Purchased Services Payment percentage and pro-rata share for capital expenditures are as follows:

 

 

Purchased Services Payment

Percentage

Pro-rata Share for

Capital Expenditures

   

Capital Component *

Operating Expense Component *

Medical Center *

GKF *

 

Total Purchased Services Payment Percentage *

 

 
Exhibit 10.65

 

Exhibit 8.8

Form of Amendment

 

LEKSELL GAMMA KNIFE PERFEXION

PURCHASED SERVICES AGREEMENT AMENDMENT # [INSERT]

  

THIS AMENDMENT is dated [INSERT] (the “Amendment”) amends the PURCHASED SERVICES AGREEMENT , dated [INSERT] by and between GK FINANCING, LLC, a California limited liability company ("GKF") and SACRED HEART HEALTH SYSTEM, INC., a Florida non-profit corporation, ("Medical Center").

 

WHEREAS, Medical Center has duly exercised it rights and obligations under Section 8.8 of the Agreement; and

 

WHEREAS, Medical Center and GKF desire to replace Schedule 1 of the Agreement.

 

NOW, THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, and for such other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.     Effective on the third business day after GKF receives the applicable full cash payment as set forth in Section 8.8 in the Agreement, Schedule 1 is hereby deleted and replaced with Schedule 1 – A attached hereto.

 

IN WITNESS WHEREOF , the parties hereto have caused this Amendment to be executed as of the date first set forth above.

 

"GKF" GK FINANCING, LLC
  By:  
    Title:
    Date:
     
"MEDICAL CENTER" SACRED HEART HEALTH SYSTEM, INC.
     
  By:
    Title:
    Date:

 

 
Exhibit 10.65

 

Exhibit 8.8

Form of Amendment (Continued)

 

Schedule 1-A

(Only applicable if Medical Center duly exercises its rights and obligations under Section 8.8 of the Agreement)

 

2.          The Purchased Services Payment percentage and pro-rata share for capital expenditures are as follows:

 

Purchased Services Payment

Percentage

Pro-rata Share for

Capital Expenditures

   

Capital Component *

Operating Expense Component *

Medical Center *

GKF *

 

Total Purchased Services Payment Percentage *

  

 

 

 

Exhibit 31.1

 

CERTIFICATION

 

I, Ernest A. Bates, M.D., as chief executive officer of American Shared Hospital Services, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of American Shared Hospital Services;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (or the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting .

 

May 15, 2013

  

/s/ Ernest A. Bates, M.D.
Ernest A. Bates, M.D.
Chief Executive Officer
 

  

 

Exhibit 31.2

 

CERTIFICATION

 

I, Craig K. Tagawa., as chief financial officer of American Shared Hospital Services, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of American Shared Hospital Services;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (or the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting .

 

May 15 2013

  

/s/ Craig K. Tagawa
Craig K. Tagawa
Chief Financial Officer
 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q of American Shared Hospital Services for the quarterly period ended March 31, 2013 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

 

Ernest A. Bates, M.D., the Chief Executive Officer and Craig K. Tagawa, the Chief Financial Officer of American Shared Hospital Services, each certifies that, to the best of his knowledge:

 

1.          the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.          the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of American Shared Hospital Services.

 

May 15, 2013

 

  /s/ Ernest A. Bates, M.D.
  Ernest A. Bates, M.D.
  Chief Executive Officer
   
  /s/ Craig K. Tagawa
  Craig K. Tagawa
  Chief Financial Officer