UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

FORM 10-K

(Mark One)

 

  x Annual Report Pursuant To Section 13 or 15(d) Of The Securities Exchange Act of 1934
    For The Fiscal Year Ended December 31, 2014
     
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 94111-4107
(Address of Principal Executive Offices) (Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock No Par Value   NYSE MKT

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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 if 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

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

 

As of June 30, 2014, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $8,683,000.

 

Number of shares of common stock of the registrant outstanding as of March 1, 2015: 5,361,000.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement for the 2015 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 
 

 

TABLE OF CONTENTS Page
   
FORWARD-LOOKING STATEMENTS 3
     
PART I:    
     
Item 1 Business 4
     
Item 1A Risk Factors 13
     
Item 1B Unresolved Staff Comments 15
     
Item 2 Properties 15
     
Item 3 Legal Proceedings 15
     
Item 4 Mine Safety Disclosures 15
     
PART II:    
     
Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15
     
Item 6 Selected Financial Data 17
     
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 7A Quantitative and Qualitative Disclosure about Market Risk 28
     
Item 8 Financial Statements and Supplementary Data 28
     
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28
     
Item 9A Controls and Procedures 28
     
Item 9B Other Information 29
     
PART III:    
     
Item 10 Directors, Executive Officers and Corporate Governance 29
     
Item 11 Executive Compensation 30
     
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 30
     
Item 13 Certain Relationships and Related Transactions, and Director Independence 30
     
Item 14 Principal Accountant Fees and Services 30
     
PART IV:    
     
Item 15 Exhibits and Financial Statement Schedules 30

 

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FORWARD-LOOKING STATEMENTS

 

Certain matters discussed in this Annual Report on Form 10-K other than statements of historical information are “forward-looking statements.” The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we “believe”, “anticipate”, “target”, “expect”, “pro forma”, “estimate”, “intend”, “will”, “is designed to”, “plan” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning and include, but are not limited to, such things as:

 

· capital expenditures
· earnings
· liquidity and capital resources
· financing of our business
· government programs and regulations
· legislation affecting the health care industry
· the development of our proton beam therapy business
· accounting matters
· compliance with debt covenants
· competition
· technology
· interest rates

 

These forward-looking statements involve known and unknown risks that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statement. Factors that would cause or contribute to such differences include, but are not limited to, such things as:

 

· our high level of debt
· the limited market for our capital intensive services
· the impact of lowered federal reimbursement rates
· the impact of recent U.S. health care reform legislation
· competition and alternatives to our services
· technological advances and the risk of equipment obsolescence
· our significant investment in development stage company in the proton beam therapy business
· the small and illiquid market for our stock

 

These lists are not all-inclusive because it is not possible to predict all factors. A discussion of some of these factors is included in this document under the headings “Risk Factors” and “Management’s Discussion and Analysis” “–Summary of Critical Accounting Policies and Estimates” and “–Liquidity and Capital Resources.” This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter. Any forward-looking statement speaks only as of the date such statement was made, and we are not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made, except as required by applicable laws or regulations.

 

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PART I

 

ITEM 1. BUSINESS

 

GENERAL

 

American Shared Hospital Services (“ASHS” and, together with its subsidiaries, the “Company”) provides Gamma Knife stereotactic radiosurgery equipment and radiation therapy and related equipment to eighteen (18) medical centers in seventeen (17) states in the United States, as of March 1, 2015. The Company provides Gamma Knife services through its 81% indirect interest in GK Financing, LLC, a California limited liability company (“GKF”). The remaining 19% of GKF is owned by GKV Investments, Inc., a wholly, owned U.S. subsidiary of Elekta AG, a Swedish company (“Elekta”). Elekta is the manufacturer of the Leksell Gamma Knife â (the “Gamma Knife”). GKF is a non-exclusive provider of alternative financing services for Elekta Gamma Knife units.

 

GKF has established the wholly-owned subsidiaries, GK Financing U.K., Limited (“GKUK”), Instituto de Gamma Knife del Pacifico S.A.C. (“GKPeru”), and the 70% majority owned subsidiary EWRS, LLC (“EWRS”) for the purpose of providing similar Gamma Knife services in England, Peru, and Turkey respectively. The remaining 30% of EWRS is owned by EMKA, LLC, a wholly, owned limited liability company owned by Mert Ozyurek, a Director of American Shared Hospital Services. GKUK is inactive.

 

EWRS owned 100% of EWRS Tibbi Cihazlar Ticaret Ltd Sti (“EWRS Turkey”). The Company sold EWRS Turkey on June 10, 2014. GKF also owns a 51% interest in Albuquerque GK Equipment, LLC (“AGKE”) and Jacksonville GK Equipment, LLC (“JGKE”). The remaining 49% in each of these two companies is owned by radiation oncologists.

 

The Company continues to develop its design and business model for “The Operating Room for the 21 st Century” SM (“OR21” SM ). OR21 is not expected to generate significant revenue within the next two years. The Company is also the majority owner of Long Beach Equipment, LLC (“LBE”) formed to provide proton beam therapy services in Long Beach, California.

 

In April 2006, the Company invested $2,000,000 for a minority equity interest in Mevion Medical Systems, Inc. (formerly Still River Systems, Inc.) (“Mevion”), a Littleton, Massachusetts company which, in collaboration with scientists from MIT’s Plasma Science and Fusion Center, was developing a medical device for the treatment of cancer patients using proton beam radiation therapy (“PBRT”). In September 2007, December 2011, and June 2012, the Company invested approximately $617,000, $70,000 and $31,000, respectively, for additional equity interests in Mevion. The Company has deposited an additional $5,000,000 towards the purchase of three MEVION S250 PBRT systems (“MEVION S250”) from Mevion. The first MEVION S250, located at Barnes-Jewish Hospital in St. Louis, MO (“Barnes-Jewish Hospital”), treated its first patient on December 19, 2013. The Company’s first MEVION S250 system was delivered to UF Health Cancer Center at Orlando Health in November 2014 and anticipates treating patients in the first quarter 2016.

 

The Company was incorporated in the State of California in 1983 and its predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital Services), a California limited partnership, was formed in June 1980.

 

OPERATIONS

 

Gamma Knife Operations

 

Gamma Knife stereotactic radiosurgery, a non-invasive procedure, is an alternative to conventional brain surgery or can be an adjunct to conventional brain surgery, radiation therapy, or chemotherapy. Compared to conventional surgery, Gamma Knife radiosurgery usually is an out-patient procedure with lower risk of complications and can be provided at a lower cost. Typically, Gamma Knife patients resume their pre-surgical activities one or two days after treatment. The Gamma Knife treats patients with 201 single doses of gamma rays that are focused with great precision on small and medium sized, well circumscribed and critically located structures in the brain. During 2006, Elekta introduced a new Gamma Knife model, the Perfexion™ unit (“Perfexion”), which treats patients with 192 single doses of gamma rays. The Gamma Knife delivers a concentrated dose of gamma rays from Cobalt-60 sources housed in the Gamma Knife. The Cobalt-60 sources converge at the target area and deliver a dose that is high enough to destroy the diseased tissue without damaging surrounding healthy tissue.

 

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The Gamma Knife treats selected malignant and benign brain tumors, arteriovenous malformations, and functional disorders including trigeminal neuralgia (facial pain). Research is being conducted to determine whether the Gamma Knife can be effective in the treatment of epilepsy and other functional disorders.

 

As of December 31, 2014, there were approximately 130 Gamma Knife sites in the United States and more than 315 units in operation worldwide. Based on the most recent available data, an estimated percentage breakdown of Gamma Knife procedures performed in the U.S. by indications treated is as follows: malignant (48%) and benign (28%) brain tumors, vascular disorders (8%), and functional disorders (16%).

 

The Company, as of March 1, 2015, has eighteen (18) operating Gamma Knife units located in the United States. The Company’s first Gamma Knife commenced operation in September 1991. The Company’s Gamma Knife units performed approximately 2,046 procedures in 2014 for a cumulative total of approximately 33,000 procedures through December 31, 2014.

 

Revenue from Gamma Knife services for the Company during each of the last five (5) years ended December 31, and the percentage of total revenue of the Company represented by the Gamma Knife for each of the last five years, are set forth below:

 

Year Ended
December 31,
  Total Gamma Knife
Revenue (in thousands)
    Gamma Knife % of
Total Revenue
 
2014   $ 14,521       94.2 %
2013   $ 16,127       91.7 %
2012   $ 15,154       88.9 %
2011   $ 21,077 (1)     94.9 %
2010   $ 15,600       93.6 %

 

(1) includes $4,984,000 of equipment sales revenue from the sale of a Gamma Knife system to an existing Gamma Knife customer at the end of the contract term.

 

The Company conducts its Gamma Knife business through its 81% indirect interest in GKF. The remaining 19% interest is indirectly owned by Elekta. GKF, formed in October 1995, is managed by its policy committee. The policy committee is composed of one representative from the Company, Ernest A. Bates, M.D., ASHS’s Chairman and CEO, and one representative from Elekta. The policy committee sets the operating policy for GKF. The policy committee may act only with the unanimous approval of both of its members. The policy committee selects a manager to handle GKF’s daily operations. Craig K. Tagawa, Chief Executive Officer of GKF and Chief Operating and Financial Officer of ASHS, serves as GKF’s manager.

 

GKF’s profits and/or losses and any cash distributions are allocated based on membership interests. GKF’s operating agreement requires that it have a cash reserve of at least $50,000 before cash distributions are made to its members. From inception to December 31, 2014, GKF has distributed $41,877,000 to the Company and $9,823,000 to the non-controlling member.

 

Image Guided Radiation Therapy Operations (“IGRT”)

 

The Company’s radiation therapy business currently consists of one IGRT system that began operation in September 2007 at an existing Gamma Knife customer site. A second IGRT system located in Turkey was sold in the second quarter of 2014. Revenue generated under IGRT services accounted for approximately 6% of the Company’s total revenue in 2014.

 

IGRT technology integrates imaging and detection components into a state-of-the-art linear accelerator, allowing clinicians to plan treatment, verify positioning, and deliver treatment with a single device, providing faster, more effective radiation therapy with less damage to healthy tissue.  IGRT captures cone beam imaging, fluoroscopic and/or x-ray images on a daily basis, creating three-dimensional images that pinpoint the exact size, location and coordinates of tumors. Once tumors are pinpointed, the system delivers ultra-precise doses of radiation which ultimately leads to improved patient outcomes.

 

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Based on the most recently available information, there are approximately 4,000 linear accelerator based radiation therapy units installed in the United States, and it is estimated that a majority of these units provide Intensity-Modulated Radiation Therapy (“IMRT”), IGRT or a combination of this advanced radiation therapy capability. Radiation therapy services are provided through approximately 2,300 hospital based and free-standing oncology centers.

 

Additional information on our operations can be found in Item 6–“Selected Financial Data”, Item 7–“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 of our consolidated financial statements beginning on page A-8 of this report.

 

CUSTOMERS

 

The Company’s current business is the outsourcing of stereotactic radiosurgery services and radiation therapy services. The Company typically provides the equipment, as well as planning, installation, reimbursement and marketing support services. The majority of the Company’s customers pay the Company on a fee per use basis. The market for these services primarily consists of major urban medical centers. The business is capital intensive; the total cost of a Gamma Knife or IGRT facility usually ranges from $3.0 million to $5.5 million, including equipment, site construction and installation. The Company pays for the equipment and the medical center generally pays for site and installation costs. The following is a listing of the Company’s sites as of March 1, 2015:

 

Customers (Gamma Knife except as noted)   Original Term of
Contract
  Year Contract
Began
  Basis of Payment
             
Southwest Texas Methodist Hospital   10 years   1998   Fee per use
San Antonio, Texas            
Yale New Haven Hospital   10 years   1998   Fee per use
New Haven, Connecticut            
Kettering Medical Center   10 years   1999   Revenue sharing
Kettering, Ohio            
Tufts Medical Center   10 years   1999   Fee per use
Boston, Massachusetts            
University of Arkansas for Medical Sciences   15 years   1999   Revenue sharing
Little Rock, Arkansas            
Froedtert Memorial Lutheran Hospital   10 years   1999   Fee per use
Milwaukee, Wisconsin            
JFK Medical Center   10 years   2000   Fee per use
Edison, New Jersey            
Sunrise Hospital and Medical Center   10 years   2001   Fee per use
Las Vegas, Nevada            
Central Mississippi Medical Center   10 years   2001   Fee per use
Jackson, Mississippi            
OSF Saint Francis Medical Center   10 years   2001   Fee per use
Peoria, Illinois            
Albuquerque Regional Medical Center   10 years   2003   Fee per use
Albuquerque, New Mexico            
Northern Westchester Hospital   10 years   2005   Fee per use
Mt. Kisco, New York            
Mercy Health Center   10 years   2005   Revenue Sharing
Oklahoma City, Oklahoma            
Tufts Medical Center  (IGRT)   10 years   2007   Revenue Sharing
Boston, Massachusetts            
USC University Hospital   10 years   2008   Fee per use
Los Angeles, California            
Ft. Sanders Regional Medical Center   10 years   2011   Revenue Sharing
Knoxville, Tennessee            
St. Vincent’s Medical Center   10 years   2011   Revenue Sharing
Jacksonville, Florida            
Sacred Heart Medical Center   10 years   2013   Revenue Sharing
Pensacola, Florida            
PeaceHealth Sacred Heart Medical Center at RiverBend   10 years   2014   Revenue Sharing
Eugene, Oregon            

 

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The Company’s fee per use agreement is typically for a ten year term. The fixed fee per use reimbursement amount that the Company receives from the customer is based on the Company’s cost to provide the service and the anticipated volume of the customer. The Gamma Knife contracts signed by the Company typically call for a fee ranging from $7,500 to $9,500 per procedure. There are no minimum volume guarantees required of the customer. Typically, GKF is responsible for providing the Gamma Knife and related ongoing Gamma Knife equipment expenses (i.e., personal property taxes, insurance, and equipment maintenance) and also helps fund the customer’s Gamma Knife marketing. The customer generally is obligated to pay site and installation costs and the costs of operating the Gamma Knife. The customer can either renew the agreement or terminate the agreement at the end of the contractual term. If the customer chooses to terminate the agreement, then GKF removes the equipment from the medical center for possible placement at another site.

 

The Company’s revenue sharing agreements (“retail”) are for a period of seven to fifteen years. Instead of receiving a fixed fee, the Company receives all or a percentage of the reimbursement (exclusive of physician fees) received by the customer. The Company is at risk for any reimbursement rate changes for radiosurgery or radiation therapy services by the government or other third party payors. There are no minimum volume guarantees required of the customer.

 

In 2014, no one customer accounted for more than 10% of the Company’s total revenue. In 2013, two customers accounted for approximately 10%, each, of the Company’s total revenue. In 2012, two customers accounted for approximately 13% and 11% each of the Company’s total revenue.

 

MARKETING

 

The Company markets its services through its preferred provider status with Elekta and a direct sales effort led by its Vice President of Sales and Business Development and its Chief Operating Officer. The major advantages to a health care provider in contracting with the Company for Gamma Knife services include:

 

§ The medical center avoids the high cost of owning the equipment. By not acquiring the Gamma Knife unit or other medical equipment, the medical center is able to allocate the funds otherwise required to purchase and/or finance the Gamma Knife to other projects.

 

§ The Company does not have minimum volume requirements, so the medical center avoids the risk of equipment under-utilization. The medical center pays the Company only for each procedure performed on a patient.

 

§ For contracts under revenue sharing arrangements, the Company assumes all or a portion of the risk of reimbursement rate changes. The medical center pays the Company only the contracted portion of revenue received from each procedure.

 

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§ The medical center transfers the risk of technological obsolescence to the Company. The medical center and its physicians are not under any obligation to utilize technologically obsolete equipment.

 

§ The Company provides planning, installation, operating and marketing assistance and support to its customers.

 

FINANCING

 

The Company’s Gamma Knife business is operated through GKF. GKF generally finances its U.S. Gamma Knife units, upgrades and additions with loans or capital leases from various finance companies for 100% of the cost of each Gamma Knife, plus any sales tax, customs and duties. The financing is predominantly fully amortized over an 84 month period and is collateralized by the equipment, customer contracts and accounts receivable, and is generally without recourse to the Company and Elekta.

 

COMPETITION

 

Conventional neurosurgery, radiation therapy and other radiosurgery devices are the primary competitors of Gamma Knife radiosurgery. Gamma Knife radiosurgery has gained acceptance as an alternative and/or adjunct to conventional surgery due to its more favorable morbidity outcomes for certain procedures as well as its non-invasiveness. Utilization of the Company’s Gamma Knife units is contingent on the acceptance of Gamma Knife radiosurgery by the customer’s neurosurgeons, radiation oncologists and referring physicians. In addition, the utilization of the Company’s Gamma Knife units is impacted by the proximity of competing Gamma Knife centers and providers using other radiosurgery devices.

 

The Company’s ability to secure additional customers for Gamma Knife services and other radiosurgery and radiation therapy services is dependent on its ability to effectively compete against (i) Elekta, the manufacturer of the Gamma Knife, (ii) manufacturers of other radiosurgery and radiation therapy devices, and (iii) other companies that outsource these services. The Company does not have an exclusive relationship with Elekta or other manufacturers and has previously lost sales to customers that chose to purchase equipment directly from manufacturers. The Company may continue to lose future sales to such customers and may also lose sales to the Company’s competitors.

 

GOVERNMENT PROGRAMS

 

The Medicare program is administered by the Centers for Medicare and Medicaid Services (“CMS”) of the U.S. Department of Health and Human Services (“DHHS”). Medicare is a health insurance program primarily for individuals 65 years of age and older, certain younger people with disabilities, and people with end-stage renal disease, and is provided without regard to income or assets.

 

The Medicare program is subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to patients and the timing of payments to our client hospitals.

 

The Company’s Gamma Knife and radiation therapy customers receive payments for patient care from federal government and private insurer reimbursement programs. Currently in the United States, Gamma Knife services are performed primarily on an out-patient basis. Gamma Knife patients with Medicare as their primary insurer, treated on either an in-patient or out-patient basis, comprise an estimated 30-45% of the total Gamma Knife patients treated nationwide. Radiation therapy patients with Medicare as their primary insurer are treated primarily on an out-patient basis, and comprise an estimated 45% to 50% of the total radiation therapy patients treated. The Company estimates that its percentage of patients with Medicare as their primary insurer approximates these national averages.

 

A Prospective Payment System ("PPS") is utilized to reimburse hospitals for care given to hospital in-patients covered by federally funded reimbursement programs. Patients are classified into a Diagnosis Related Group ("DRG") in accordance with the patient's diagnosis, necessary medical procedures and other factors. Patient reimbursement is limited to a predetermined amount for each DRG. The reimbursement payment may not necessarily cover the cost of all medical services actually provided because the payment is predetermined. Effective October 1, 1997, Gamma Knife services for Medicare hospital in-patients are reimbursed under various DRG codes.

 

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In 1986 and again in 1990, Congress enacted legislation requiring the DHHS to develop proposals for a PPS for Medicare out-patient services. DHHS proposed a new payment system, Ambulatory Payment Classifications (“APC”), which affects all out-patient services performed in a hospital based facility. APC implementation took place in the third quarter of 2000.

 

The APC consists of 346 clinically homogenous classifications or groupings of codes that are typically used in out-patient billing. Out-patient services are bundled with fixed rates of payment determined according to specific regional and national factors, similar to that of the in-patient PPS.

 

Congress enacted legislation in 2013 that significantly reduced the Medicare reimbursement rate for outpatient Gamma Knife treatment by setting it at the same amount paid for linear accelerator-based radio surgery treatment. Previously, CMS had permitted a higher reimbursement rate for the Gamma Knife than for linear accelerator due to the higher cost of providing Gamma Knife services. Beginning in April 2013, Gamma Knife delivery code reimbursement was reduced by nearly 60% from $7,910 to $3,300. This reduction directly impacted revenues at the Company’s six Gamma Knife revenue sharing sites, but also resulted in the Company voluntarily lowering its charges at three fixed fee sites in recognition of the reduced amounts received for treatments by the customer-hospitals. The Gamma Knife reimbursement rate was subsequently raised to $3,592 effective January 2014. Effective January 1, 2015, CMS has established a comprehensive Ambulatory Payment Classification (APC) for both Gamma Knife and LINAC one session cranial radiosurgery. The comprehensive reimbursement rate of approximately $9,768 will be inclusive of the delivery and ancillary codes, but exclusive of co-insurance payments or other adjustments. The average current CMS reimbursement rate for delivery and ancillary codes (exclusive of co-insurance and other adjustments) is approximately $5,600. Prior to 2013, the Gamma Knife reimbursement rate had been relatively stable for many years.

 

The Company’s IGRT services are reimbursed by CMS and other insurers. Reimbursement for these services has remained fairly stable.

 

We are unable to predict the effect of future government health care funding policy changes on operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if one or more of our hospital clients are excluded from participation in the Medicare program or any other government health care program, there could be a material adverse effect on our business.

 

Affordable Care Act

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, (“Affordable Care Act”), which has resulted in significant changes to the health care industry. The primary goal of the legislation was to extend health care coverage to approximately 32 million uninsured legal U.S. residents through both an expansion of public programs and reforms to private sector health insurance. The expansion of insurance coverage is expected to be funded in part by measures designed to promote quality and cost efficiency in health care delivery and by budgetary savings in the Medicare and Medicaid programs. Because the Company is not a health care provider, we are not directly affected by the law, but we could be indirectly affected principally as follows:

 

· An increase in the number of insured residents could potentially increase the number of patients seeking Gamma Knife or radiation therapy treatment.
     
· The Company’s retail contracts are subject to reimbursement rate changes for radiosurgery or radiation therapy services by the government or other third party payors. Any changes to Medicare or Medicaid reimbursement through the implementation of the Affordable Care Act could affect revenue generated from these sites.

 

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GOVERNMENT REGULATION

 

The payment of remuneration to induce the referral of health care business has been a subject of increasing governmental and regulatory focus in recent years. Section 1128B(b) of the Social Security Act (sometimes referred to as the "federal anti-kickback statute") provides criminal penalties for individuals or entities that offer, pay, solicit or receive remuneration in order to induce referrals for items or services for which payment may be made under the Medicare and Medicaid programs and certain other government funded programs. The Affordable Care Act amended the anti-kickback statute to eliminate the requirement of actual knowledge, or specific intent to commit a violation, of the anti-kickback statute. The Social Security Act provides authority to the Office of Inspector General through civil proceedings to exclude an individual or entity from participation in the Medicare and state health programs if it is determined any such party has violated Section 1128B(b) of the Social Security Act. The Company believes that it is in compliance with the federal anti-kickback statute. Additionally, the Omnibus Budget Reconciliation Act of 1993, often referred to as "Stark II", bans physician self-referrals to providers of designated health services with which the physician has a financial relationship. On September 5, 2007, the third and final phase of the Stark regulations (Phase III) was published. The term "designated health services" includes, among others, radiation therapy services and in-patient and out-patient hospital services. On January 1, 1995, the Physician Ownership and Referral Act of 1993 became effective in California. This legislation prohibits physician self-referrals for covered goods and services, including radiation oncology, if the physician (or the physician's immediate family) concurrently has a financial interest in the entity receiving the referral. The Company believes that it is in compliance with these rules and regulations.

 

On August 19, 2008, the CMS published a final rule relating to inpatient hospital services paid under the Inpatient Prospective Payment System for discharges in the Fiscal Year 2009 (the “Final Rule”). Among other things, the Final Rule prohibits “per-click payments” to certain physician lessors for services rendered to patients who were referred by the physician lessor. This prohibition on per-click payments for leased equipment used in the treatment of a patient referred to a hospital lessee by a physician lessor applies regardless of whether the physician himself or herself is the lessor or whether the lessor is an entity in which the referring physician has an ownership or investment interest. The effective date of this prohibition was October 1, 2009. However, referrals made by a radiation oncologist for radiation therapy or ancillary services necessary for, and integral to, the provision of radiation therapy (such as Gamma Knife services) are not subject to this prohibition so long as certain conditions are met. GK Financing’s majority owned subsidiaries, Albuquerque GK Equipment, LLC (“AGKE”) and Jacksonville GK Equipment, LLC (“JGKE”) have minority ownership interests that are held solely by radiation oncologists, who are otherwise exempt from the referral prohibition under the Final Rule. The Company believes it is in compliance with the Final Rule.

 

A range of federal civil and criminal laws target false claims and fraudulent billing activities. One of the most significant is the Federal False Claims Act, which prohibits the submission of a false claim or the making of a false record or statement in order to secure a reimbursement from a government-sponsored program. In recent years, the federal government has launched several initiatives aimed at uncovering practices which violate false claims or fraudulent billing laws. Claims under these laws may be brought either by the government or by private individuals on behalf of the government, through a "whistleblower" or "qui tam" action. The Company believes that it is in compliance with the Federal False Claims Act; however, because such actions are filed under seal and may remain secret for years, there can be no assurance that the Company or one of its affiliates is not named in a material qui tam action.

 

Legislation in various jurisdictions requires that health facilities obtain a Certificate of Need ("CON") prior to making expenditures for medical technology in excess of specified amounts. Four of the Company’s existing customers were required to obtain a CON or its equivalent. The CON procedure can be expensive and time consuming and may impact the length of time before Gamma Knife services commence. CON requirements vary from state to state in their application to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures to provide its services and in other jurisdictions customers must comply with CON procedures before using the Company's services. The Company is unable to predict if any jurisdiction will eliminate or alter its CON requirements in a manner that will increase competition and, thereby, affect the Company's competitive position.

 

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The Company's Gamma Knife units contain Cobalt 60 radioactive sources. The medical centers that house the Company's Gamma Knife units are responsible for obtaining possession and user's licenses for the Cobalt 60 source from the Nuclear Regulatory Commission.

 

Standard linear accelerator equipment utilized to treat patients is regulated by the FDA. The licensing is obtained by the individual medical center operating the equipment.

 

The Company believes it is in substantial compliance with the various rules and regulations that affect its businesses.

 

INSURANCE AND INDEMNIFICATION

 

The Company's contracts with equipment vendors generally do not contain indemnification provisions. The Company maintains a comprehensive insurance program covering the value of its property and equipment, subject to deductibles, which the Company believes are reasonable.

 

The Company's customer contracts generally contain mutual indemnification provisions. The Company maintains general and professional liability insurance. The Company is not involved in the practice of medicine and therefore believes its present insurance coverage and indemnification agreements are adequate for its business.

 

PROTON BEAM RADIATION THERAPY BUSINESS

 

PBRT is an alternative to traditional external beam, photon based radiation delivered by linear accelerators. PBRT, first clinically introduced in the 1950s, has physics advantages compared to photon based systems which allow PBRT to deliver higher radiation doses to the tumor with less radiation to healthy tissue. PBRT currently treats prostate, eye, cranial-spinal, head and neck, lung, liver and breast tumors. In excess of 80,000 patients have been treated with protons worldwide.

 

Introduction of PBRT in the United States, until recently, has been limited due to the high capital costs of these projects. The Company believes that the current development of one and two treatment room PBRT systems at lower capital costs and the level of reimbursement for PBRT from the CMS will help make this technology available to a larger segment of the market.

 

There are several competing manufacturers of proton beam systems, including Mevion, IBA Particle Therapy Inc., Hitachi Ltd., Optivus Proton Therapy Inc., Varian Medical Systems, Inc. (Accel), Sumitomo Heavy Industries, ProTom International, Inc. and Mitsubishi Electric. The Company has invested in Mevion and has made deposits towards the purchase of three of the MEVION S250 systems. The Mevion system potentially provides cancer centers the opportunity to introduce single treatment room PBRT services with cost in the range of approximately $25 to $30 million rather than four and five PBRT treatment room programs costing in excess of $120 million. The MEVION S250 system received FDA approval in the second quarter of 2012 and the first clinical treatment occurred in December 2013 at Barnes-Jewish Hospital.

 

The Company believes the business model it has developed for use in its Gamma Knife and radiation therapy businesses can be tailored for the PBRT market segment. The Company is targeting large, hospital based cancer programs. The Company’s ability to develop a successful PBRT financing entity depends on the decision of cancer centers to self-fund or to fund the PBRT through conventional financing vehicles, the Company’s ability to capture market share from competing alternative PBRT financing entities, and the Company’s ability to raise capital to fund PBRT projects.

 

EMPLOYEES

 

At December 31, 2014, the Company employed seven (7) people on a full-time basis and two (2) on a part-time basis. None of these employees is subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes that its employee relations are good.

 

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EXECUTIVE OFFICERS OF THE COMPANY

 

The following table provides current information concerning those persons who serve as executive officers of the Company. The executive officers were appointed by the Board of Directors and serve at the discretion of the Board of Directors.

 

Name:   Age:   Position:
Ernest A. Bates, M.D.   78   Chairman of the Board of Directors and Chief Executive Officer
         
Craig K. Tagawa   61   Senior Vice President - Chief Operating and Financial Officer
         
Ernest R. Bates   48   Vice President of Sales and Business Development

 

Ernest A. Bates, M.D., founder of the Company, has served in the positions listed above since the incorporation of the Company.  A board-certified neurosurgeon, Dr. Bates is Emeritus Vice Chairman of the Board of Trustees of the Johns Hopkins University and serves on the Board of Visitors of the Johns Hopkins Medical Center and the Johns Hopkins Neurosurgery Advisory Board.  He serves on the boards of Shared Imaging and FasterCures.  Dr. Bates was appointed to the California Commission for Jobs and Economic Growth and the Magistrate Judge Merit Selection Panel. From 1981-1987 he was a member of the Board of Governors of the California Community Colleges, and he served on the California High Speed Rail Authority from 1997 to 2003.  Dr. Bates is a member of the Board of Overseers at the University of California, San Francisco, School of Nursing.  Dr. Bates is a Partner in Black Coyote Chateau Wines, LLC.  He is a graduate of the School of Arts and Sciences of the Johns Hopkins University, and he earned his medical degree at the University of Rochester School of Medicine and Dentistry.

 

Craig K. Tagawa has served as Chief Operating Officer since February 1999 in addition to serving as Chief Financial Officer since May 1996. Mr. Tagawa also served as Chief Financial Officer from January 1992 through October 1995. Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice President on February 28, 1993. He is also the Chief Executive Officer of GKF. From September 1988 through January 1992, Mr. Tagawa served in various positions with the Company. He is a former Chair of the Industrial Policy Advisory Committee of the Engineering Research Center for Computer-Integrated Surgical Systems and Technology at The Johns Hopkins University. He received his undergraduate degree from the University of California at Berkeley and his M.B.A. from Cornell University.

 

Ernest R. Bates joined the Company in January 2007 as Vice President of Sales and Business Development. He was on the Board of Directors of the Company from 2004 through February 2007. Prior to joining the Company, he had been Managing Director, Institutional Fixed Income Sales of HSBC Securities (USA), Inc. since 2003. Mr. Bates has also served as Managing Director, Head of Asian Product for HSBC Securities (USA) Inc. from 1999 to 2003. From 1993 through 1999, Mr. Bates held various positions with Merrill Lynch, last serving as Vice President, European Syndicate for Merrill Lynch International. He received his undergraduate degree from Brown University and a M.B.A. degree from The Wharton Business School. Ernest R. Bates is the son of Chairman of the Board and Chief Executive Officer Dr. Ernest A. Bates.

 

AVAILABLE INFORMATION

 

Our Internet address is www.ashs.com . We make available free of charge, through our Internet website under the “Investor Center” tab in the “Corporate” section, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information contained on our Internet website is not part of this document.

 

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ITEM 1A. RISK FACTORS

 

In addition to the other information in this report, the following factors could affect our future business, results of operations, cash flows or financial position, and could cause future results to differ materially from those expressed in any of the forward-looking statements contained in this report.

 

The Federal Reimbursement Rate for Gamma Knife Treatments Has Been Substantially Reduced

In April 2013, the Medicare reimbursement rate for Gamma Knife services was lowered by nearly 60% (from $7,910 to $3,300) per treatment session. This sudden reduction in a rate that had historically been stable resulted in a significant decrease in the Company’s revenues from all of our revenue sharing and some of our fixed fee medical centers. The reimbursement rate was subsequently increased by approximately 9% in 2014 and increased again in 2015. The 2015 reimbursement level is comparable to the level in effect prior to 2013. There can be no assurance that it will be maintained at current levels. Any future reductions in the reimbursement rate would adversely affect the Company’s revenues and financial results.

 

The Company’s Capital Investment at Each Site is Substantial

Each radiosurgical or radiation therapy device requires a substantial capital investment. In some cases, we contribute additional funds for capital costs and/or annual operating and equipment related costs such as marketing, maintenance, insurance and property taxes. Due to the structure of our contracts with medical centers, there can be no assurance that these costs will be fully recovered or that we will earn a satisfactory return on our investment.

 

The Market for the Gamma Knife is Limited

There is a limited market for the Gamma Knife, and the market in the United States may be mature. The Company has begun operation at only four (4) new Gamma Knife sites in the United States since 2011. Due to the substantial costs of acquiring a Gamma Knife unit, we must identify medical centers that possess neurosurgery and radiation oncology departments capable of performing a large number of Gamma Knife procedures. As of December 31, 2014, there were approximately 130 operating Gamma Knife units in the United States, of which 18 units were owned by the Company. There can be no assurance that we will be successful in placing additional units at any sites in the future. The Company’s existing contracts with its customers are fixed in length and there can be no assurance that the customers will wish to extend the contract beyond the end of the term.

 

The Company Has a High Level of Debt

The Company’s business is capital intensive. The Company finances its Gamma Knife units through its GKF subsidiary. The amounts financed through GKF have been generally non-recourse to ASHS. The Company’s combined long term debt and capital leases totals $26,884,000 as of December 31, 2014 and is collateralized by the Gamma Knife and other assets, including accounts receivable and future proceeds from any contract between the Company and any end user of the financed equipment. This high level of debt may adversely affect the Company’s ability to secure additional credit in the future, and as a result may affect operations and profitability. If default on debt occurs in the future, the Company’s creditors would have the ability to accelerate the defaulted loan, to seize the Gamma Knife unit or other equipment with respect to which default has occurred, and to apply any collateral they may have at the time to cure the default. The Company also has a line of credit with a bank, against which it has drawn $8,780,000 as of December 31, 2014. The line of credit was paid off in full on January 2, 2015.

 

A Small Number of Customers Account for a Major Portion of our Revenues

A limited number of customers have historically accounted for a substantial portion of the Company’s total revenue, and the Company expects such customer concentration to continue for the foreseeable future. For example, in 2014, six (6) customers in total accounted for more than 50% of the Company’s revenue. The loss of a significant customer or a significant decline in the business from the Company’s largest customers could have a material adverse effect on the Company’s business and results of operations.

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The Market for the Company’s Services is Competitive

The Company estimates that there are two other companies that actively provide alternative, non-conventional Gamma Knife financing to potential customers. We believe there are no competitor companies that currently have more than three Gamma Knife units in operation. The Company’s relationship with Elekta, the manufacturer of the Leksell Gamma Knife unit, is non-exclusive, and in the past the Company has lost sales to customers that chose to purchase a Gamma Knife unit directly from Elekta. In addition, the Company may continue to lose future sales to such customers and may also lose future sales to its competitors. There can be no assurance that the Company will be able to successfully compete against others in placing future units.

 

There are Alternatives to the Gamma Knife

Other radiosurgery devices and conventional neurosurgery compete against the Gamma Knife. Each of the medical centers targeted by the Company could decide to acquire another radiosurgery device instead of a Gamma Knife. In addition, neurosurgeons who are primarily responsible for referring patients for Gamma Knife surgery may not be willing to make such referrals for various reasons, instead opting for invasive surgery. There can be no assurance that the Company will be able to secure a sufficient number of future sites or Gamma Knife procedures to sustain its profitability and growth.

 

International Operations

The Company has plans to install a Gamma Knife in Peru. The Company sold its operations in Turkey on June 10, 2014. International operations can be subject to exchange rate volatility which could have an adverse effect on our financial results and cash flows. In addition, international operations can be subject to legal and regulatory uncertainty and political and economic instability, which could result in problems asserting property or contractual rights, potential tariffs, increased compliance costs, increased regulatory scrutiny, potential adverse tax consequences, the inability to repatriate funds to the United States, and the Company’s inability to operate in those locations.

 

New Technology and Products Could Result in Equipment Obsolescence

There is constant change and innovation in the market for highly sophisticated medical equipment. New and improved medical equipment can be introduced that could make the Gamma Knife technology obsolete and that would make it uneconomical to operate. During 2000, Elekta introduced an upgraded Gamma Knife which cost approximately $3.6 million plus applicable tax and duties. This upgrade includes an Automatic Positioning System™ (“APS”), and therefore involved less health care provider intervention. In early 2005, Elekta introduced a new upgrade, the Gamma Knife Model 4C (“Model 4C”). The cost to upgrade existing units to the Model 4C with APS was approximately $200,000 to $1,000,000, depending on the current Gamma Knife configuration. In 2006 Elekta introduced a new model of the Gamma Knife, the Perfexion, which costs approximately $4.5 million plus applicable taxes and duties. The Perfexion can perform procedures faster than previous Gamma Knife models and it involves less health care personnel intervention. Existing models of the Gamma Knife are not upgradeable to the Perfexion model. As of March 1, 2015, 14 of the Company’s Gamma Knife units are Perfexion models; of the Company’s remaining Gamma Knife units, three are Model 4C with APS and one is upgradeable to a more advanced Model 4C unit. The failure to acquire or use new technology and products could have a material adverse effect on our business and results of operations.

 

In addition, there are constant advances made in radiation therapy equipment. The Company purchased IGRT and CT Simulator systems in 2006 with a list price of approximately $8,300,000. As in the Gamma Knife business, new and improved IGRT equipment can be introduced that could make the existing technology obsolete and that would make it uneconomical to operate.

 

The Company Has Invested in a Proton Beam Business that is Developmental

We have committed a substantial amount of our financial resources to next-generation proton beam technology. The first MEVION S250 system began treating patients in December 2013. We have committed to purchase three MEVION S250 systems, and have already made deposits of $5,000,000 towards this commitment. There can be no assurance that we will be able to finance these machines and if we do, that we won’t recover this investment or future investments, or our $2,709,000 common stock investment in Mevion. To date, we have been unable to finalize permanent financing for these units.

 

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The Trading Volume of Our Common Stock is Low

Although our common stock is listed on the NYSE MKT, our common stock has experienced low trading volume, both historically and recently. Reported average daily trading volume in our common stock for the three-month period ended December 31, 2014 was approximately 6,700 shares. There is no reason to think that a more active trading market in our common stock will develop in the future. Limited trading volume subjects our common stock to greater price volatility and may make it difficult for you to sell your shares in a quantity or at a price that is attractive to you.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

The Company's corporate offices are located at Four Embarcadero Center, Suite 3700, San Francisco, California, where it leases approximately 4,640 square feet for $24,935 per month with a lease expiration date in May 2016. The Company has subleased approximately 3,500 rentable square feet of the office space for $15,458 per month. The sublease expires in May 2016. The Company also has a satellite office in Fairfield, California, where it leases 895 square feet for $2,461 per month with a lease expiration date in April 2016.

 

For the year ended December 31, 2014 the Company's aggregate net rental expenses for all properties were approximately $301,000, net of sublease income of $173,000.

 

ITEM 3. LEGAL PROCEEDINGS

 

There are no material pending legal proceedings involving the Company or any of its property. The Company knows of no legal or administrative proceedings against the Company contemplated by governmental authorities.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information and Dividend Policy

 

The Company's common shares, no par value (the "Common Shares"), are currently traded on the NYSE Amex Exchange. At December 31, 2014, the Company had 5,361,000 issued and outstanding common shares, 659,000 common shares reserved for options, 3,000 unvested restricted stock units issued, 115,000 vested restricted stock units reserved for issuance and warrants to issue 200,000 shares of common stock.

 

The following table sets forth the high and low closing sale prices of the Common Shares of the Company on the NYSE Amex Exchange for each full quarter for the last two fiscal years.

 

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    Prices for Common Shares  
Quarter Ending   High     Low  
             
March 31, 2013   $ 2.80     $ 1.87  
                 
June 30, 2013   $ 2.31     $ 1.55  
                 
September 30, 2013   $ 3.21     $ 2.14  
                 
December 31, 2013   $ 3.01     $ 2.31  
                 
March 31, 2014   $ 3.35     $ 2.64  
                 
June 30, 2014   $ 3.15     $ 2.40  
                 
September 30, 2014   $ 3.00     $ 2.09  
                 
December 31, 2014   $ 2.82     $ 2.01  

 

The Company estimates that there were approximately 1,400 beneficial holders of its Common Shares at December 31, 2014.

 

There were no dividends declared or paid during 2014 or 2013. Dividends had been paid by the Company from 2001 to 2007, but during 2007 the Board of Directors suspended dividends for the purpose of preserving cash for the development of its PBRT business. The Company did not pay cash dividends prior to 2001.

 

Stock Repurchase Program

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 from time to time at prevailing prices, and in 2008 the Board reaffirmed these authorizations. In 2014, there were approximately 1,000 shares repurchased at a cost of approximately $2,000. There were no shares repurchased in 2013. In 2012 there were approximately 9,000 shares repurchased at a cost of approximately $28,000. A total of approximately 928,000 shares have been repurchased in the open market pursuant to these authorizations at a cost of approximately $1,957,000. As of December 31, 2014, there were approximately 72,000 shares remaining under the repurchase authorizations.

 

Shareholder Rights Plan

On March 22, 1999, the Company adopted a Shareholder Rights Plan (“Plan”). Under the Plan, the Company made a dividend distribution of one Right for each outstanding share of the Company’s common stock as of the close of business on April 1, 1999. The Rights become exercisable only if any person or group, with certain exceptions, becomes an “acquiring person” (acquires 15% or more of the Company’s outstanding common stock) or announces a tender or exchange offer to acquire 15% or more of the Company’s outstanding common stock. The Company’s Board of Directors adopted the Plan to protect shareholders against a coercive or inadequate takeover offer. On March 12, 2009, the Board of Directors of the Company approved the First Amendment to its existing shareholder rights plan which, among other things, extends the final date on which the Rights are exercisable until the close of business on April 1, 2019.

 

Equity Compensation Plans

During 2014 no holders of options to acquire the Company’s common stock exercised their respective rights pursuant to such securities; however, 3,000 restricted stock units, 30,000 restricted stock units for deferred compensation and 522,000 options were issued during 2014. Additional information regarding our equity compensation plans is incorporated herein by reference from the 2014 Proxy Statement. Also, see Note 9-Shareholders’ Equity to the Consolidated Financial Statements.

 

Recent Sales of Unregistered Securities

The Company sold 750,000 shares of common stock to members of the Board of Directors in two private placement transactions during 2014.

 

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ITEM 6. SELECTED FINANCIAL DAT A

 

Summary of Operations   Year Ended December 31,  
    (Amounts in thousands except per share data)  
    2014     2013     2012     2011     2010  
Revenue   $ 15,417     $ 17,584     $ 17,048     $ 22,221     $ 16,675  
Costs of revenue     10,138       10,640       10,118       14,224       9,466  
Selling and administrative expense     3,630       4,025       4,045       4,041       4,240  
Interest expense     1,699       1,799       2,155       2,367       2,104  
Total expenses     15,467       16,464       16,318       20,632       15,810  
(Loss) income from operations     (50 )     1,120       730       1,589       865  
(Loss) on sale of subsidiary     (572 )     0       0       0       0  
Gain (loss) foreign currency transactions     161       (1,174 )     132       (27 )     0  
Interest and other income     28       25       58       135       107  
(Loss) income before income taxes     (433 )     (29 )     920       1,697       972  
Income tax expense     129       84       107       208       166  
Net (loss) income     (562 )     (113 )     813       1,489       806  
Less net income attributable to non-controlling interest     (390 )     (199 )     (775 )     (983 )     (749 )
Net (loss) income attributable to ASHS   $ (952 )   $ (312 )   $ 38     $ 506     $ 57  
                                         
Net (loss) income per common share attributable to ASHS:                                
Basic   $ (0.19 )   $ (0.07 )   $ 0.01     $ 0.11     $ 0.01  
Diluted   $ (0.19 )   $ (0.07 )   $ 0.01     $ 0.11     $ 0.01  

See accompanying note (1)

 

Balance Sheet Data   As of December 31,  
    (Amounts in thousands)  
    2014     2013     2012     2011     2010  
Cash and cash equivalents   $ 1,059     $ 1,909     $ 1,564     $ 2,580     $ 1,438  
Certificate of deposit and securities     9,000       9,000       9,000       9,000       9,000  
Restricted cash     50       50       50       50       50  
Working capital (deficit)     (2,004 )     (4,079 )     (2,697 )     (1,329 )     (1,369 )
Total assets     67,528       71,742       73,323       74,535       65,340  
Advances on line of credit     8,780       8,840       8,550       7,850       8,500  
Current portion of long-term debt and capital leases     6,108       8,771       7,674       7,616       6,073  
Long-term debt/capital leases, less current portion     20,776       23,690       27,010       28,135       23,170  
Shareholders' equity   $ 26,154     $ 24,055     $ 24,830     $ 25,171     $ 23,044  

See accompanying note (1)

 

(1) In 1995, the Company entered into an operating agreement granting to American Shared Radiosurgery Services (a California corporation and a wholly-owned subsidiary of the Company) an 81% ownership interest in GKF. During 2010 and 2011, GKF established new operating subsidiaries, EWRS, EWRS Turkey, AGKE, and JGKE, and other subsidiaries that are not yet operational. On June 10, 2014, the Company sold EWRS Turkey. Accordingly, the financial data for the Company presented above include the results of GKF and its subsidiaries for the periods 2010 through 2014.

 

This financial data as of December 31, 2014, 2013 and 2012 and for the years ended December 31, 2014, 2013 and 2012 should be read in conjunction with our consolidated financial statements and the notes thereto beginning on page A-1 of this report and with Item 7–“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

APPLICATION OF CRITICAL ACCOUNTING POLICIES

 

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

 

The most significant accounting policies followed by the Company are presented in Note 2 to the consolidated financial statements. These policies along with the disclosures presented in the other financial statement notes and in this discussion and analysis, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts, and the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for doubtful accounts, estimated useful lives of fixed assets and its salvage values, revenues and costs of sales for turn-key and revenue sharing arrangements, and the carrying value of its Mevion investment to be the areas that required the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. The following are our critical accounting policies in which management’s estimates, assumptions and judgments most directly and materially affect the financial statements:

 

Revenue Recognition

The Company has one revenue-generating activity, which consists of equipment leasing to hospitals, and includes the operation of Gamma Knife units by GKF and the operation of IGRT sites by ASHS and GKF. During 2014, the Company entered into a lease agreement in December 2014 where the lessee gave the Company a piece of equipment for $1. The Company estimated and recorded the fair market value of the equipment received and recognized deferred revenue. The fair market value of the equipment received during the year ended December 31, 2014 was $700,000.

 

Revenue is recognized when services have been rendered and collectability is reasonably assured, on either a fee per use or revenue sharing basis. During 2014, the Company had eleven (11) fee per use arrangements and eleven (11) retail service arrangements. Under both of these types of agreements, the hospital is responsible for billing patients and collection of technical component fees for services performed. Revenue associated with installation of the Gamma Knife and IGRT units, if any, is a part of the negotiated lease amount and not a distinctly identifiable amount. The costs, if any, associated with installation of the units are amortized over the period of the related lease to match revenue recognition of these costs.

 

For fee per use agreements, revenue is not estimated because these contracts provide for a fixed fee per procedure, and are typically for a ten year term. Revenue is recognized at the time the procedures are performed, based on each hospital’s contracted rate. There is no guaranteed minimum payment. Costs related to operating the units are charged to costs of operations as incurred, which approximates the recognition of the related revenue. Revenue under fee per use agreements is recorded in accordance with the contract terms.

 

During 2014, ASHS had one (1) agreement and GKF had ten (10) agreements that are based on revenue sharing. These can be further classified as either “turn-key” arrangements or “revenue sharing” arrangements. For GKF’s four (4) turn-key sites, GKF is solely responsible for the costs to acquire and install the Gamma Knife. In return, GKF receives payment from the hospital in the amount of its reimbursement from third party payors. Revenue is recognized by the Company during the period in which the procedure is performed, and is estimated based on what can be reasonably expected to be paid by the third party payor to the hospital. The estimate is primarily determined from historical experience and hospital contracts with third party payors. These estimates are reviewed on a regular basis and adjusted as necessary to more accurately reflect the expected payment amount. The Company also records an estimate of operating costs associated with each procedure during the period in which the procedure is performed. For two of the turn-key sites, the Company also shares a percentage of net operating profit. The Company records an estimate of net operating profit based on estimated revenues, less estimated operating costs. Costs are determined primarily based on historical treatment protocols and cost schedules with the hospital. The Company’s estimated operating costs are reviewed on a regular basis and adjusted as necessary to more accurately reflect the actual operating costs. Revenue for turn-key sites is recorded on a gross basis, and the operating expenses the Company reimburses to the hospital are recorded in other operating costs.

 

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Under revenue sharing arrangements the hospital shares in the responsibility and risk with the Company for the capital investment to acquire and install the equipment. Unlike our turn-key arrangement, the lease payment under a revenue sharing arrangement is a percentage of reimbursed revenue. Payments are made by the hospital, generally on a monthly basis, to the Company based on an agreed upon percentage allocation of cash collected. Revenue is recognized during the period in which procedures are performed, and is estimated based on the reimbursement amount that the Company expects to receive from the hospital for those procedures. This estimate is reviewed on a regular basis and adjusted as necessary to more accurately reflect the expected payment amount.

 

Revenue from retail arrangements amounted to approximately 42%, 44% and 47% of total revenue for the years ended December 31, 2014, 2013 and 2012, respectively. Because the revenue estimates are reviewed on a quarterly basis, any adjustments required for past revenue estimates would result in an increase or reduction in revenue during the current quarterly period.

 

Allowance for Doubtful Accounts

The allowance for doubtful accounts is estimated based on possible losses relating to the Company’s customers. The Company receives reimbursement from the customer based on the customer’s collections from individuals and third-party payors such as insurance companies and Medicare. Receivables are charged against the allowance in the period that they are deemed uncollectible.

 

If the Company’s net accounts receivable estimates for revenue sharing customers as of December 31, 2014 changed by as much as 10% based on actual collection information, it would have the effect of increasing or decreasing revenue by approximately $211,000.

 

Carrying Value of Mevion Investment

 

The Company carries its investment in Mevion at cost ($2,709,000) 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. In assessing whether the impairment is other than temporary, we evaluate 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. Mevion announced on June 11, 2012 that it had received final FDA 510(k) clearance for its MEVION S250 proton therapy system, the world’s first superconducting synchrocyclotron. Clearance allows a hospital to begin treating patients as soon as installation of the system has been completed. Mevion also received CE Mark certification for its MEVION S250 Proton Therapy System, which allows Mevion to market, sell and install the system throughout the European Union and any country recognizing the CE Mark approval. First clinical treatment by a MEVION S250 system occurred in December 2013 and the system treated in excess of 100 patients in its first year of operation. The investment in Mevion is not without certain risk, and the operation of the first unit took longer than originally anticipated. However, the Company believes that the current market value, which we believe to be less than cost, is a temporary situation and is not a reflection on the progress or viability of Mevion or its PBRT design, and believes that our investment in Mevion is only temporarily impaired. If the Company’s view changes, it could be required to write off some or all of its investment, which would have a material negative impact on financial condition and earnings in the period. For additional information, see “Impairment Analysis of Investment in Equity Securities.”

 

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GENERAL

 

Recent Development

 

The American Taxpayer Relief Act of 2012 reduced Medicare’s reimbursement rate for Gamma Knife services from $7,910 to $3,300 per treatment effective April 1, 2013. These cuts directly reduced revenue at the Company’s U.S. “retail” Gamma Knife sites, where we receive a percentage of the hospital’s Medicare reimbursement. This reduction also resulted in the revision of three fixed fee agreements. Effective January 1, 2014, the Gamma Knife delivery code reimbursement was increased by approximately 9%. Effective January 1, 2015, CMS has established a comprehensive Ambulatory Payment Classification (APC) for both Gamma Knife and LINAC one session cranial radiosurgery. The comprehensive reimbursement rate of approximately $9,768 will be inclusive of the delivery and ancillary codes, but exclusive of co-insurance payments or other adjustments. The average current CMS reimbursement rate for delivery and ancillary codes (exclusive of co-insurance and other adjustments) is approximately $5,600. This represents an estimated increase of $4,168 per Medicare Gamma Knife treatment (exclusive of co-insurance and other adjustments) effective January 1, 2015.

 

2014 Results

 

For the year ended December 31, 2014, 94% of the Company’s revenue was derived from its Gamma Knife business, and the remaining 6% from its IGRT business. For the year ended December 31, 2013, 92% of the Company’s revenue was derived from its Gamma Knife business, and the remaining 8% from its IGRT business. For the year ended December 31, 2012, 89% of the Company’s revenue was derived from its Gamma Knife business, and the remaining 11% from its IGRT business.

 

TOTAL REVENUE

 

(in thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                                         
Total revenue   $ 15,417       (12.3 )%   $ 17,584       3.1 %   $ 17,048  

 

Total revenue decreased 12.3% compared to 2013 primarily due to the sale of EWRS Turkey which contributed $999,000 to the decline for 2014. IGRT revenue was down 38.6% compared to 2013, which contributed 25.9% to the decline in total revenue. The sale of EWRS Turkey contributed 63.6% to the decline in IGRT revenue. Excluding the sale of EWRS Turkey, total Gamma Knife revenue decreased $964,000 compared to 2013 due to a decrease in procedures at existing sites and increased procedures at sites with lower revenue per procedure than the Company’s historical average. Total revenue increased by 3.1% compared to 2012 primarily due to an increase in Gamma Knife revenue. Total Gamma Knife revenue increased 6.4% from 2012, offset by a 23.1% decrease in IGRT revenue for 2013.

 

Gamma Knife Revenue

Total Gamma Knife revenue for 2014 decreased 10.0% to $14,521,000 compared to $16,127,000 in 2013. Total Gamma Knife revenue for 2013 increased 6.4% to $16,127,000 compared to $15,154,000 in 2012.

 

    2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
Medical services revenue from Gamma Knife (in thousands)   $ 14,521       (10.0 )%   $ 16,127       6.4 %   $ 15,154  
                                         
Number of Gamma Knife procedures     2,046       (17.6 )%     2,482       18.6 %     2,092  
                                         
Average revenue per procedure   $ 7,097       9.2 %   $ 6,498       (10.3 )%   $ 7,244  

 

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The decrease in revenue in 2014 compared to 2013 was due to the sale of EWRS Turkey which contributed $642,000 to the decline, and the decrease in number of Gamma Knife procedures at certain of its U.S. sites. The increase in revenue in 2013 compared to 2012 was primarily due to the increase in number of Gamma Knife procedures, offset by a decrease in the average revenue per procedure. The Company had twenty, nineteen and nineteen Gamma Knife units in operation at December 31, 2014, 2013 and 2012.

 

The number of Gamma Knife procedures performed in 2014 decreased by 436 compared to 2013, primarily due to the sale of EWRS Turkey which reported 343 more procedures in 2013. The remaining decline in procedures was due to personnel issues at existing Gamma Knife sites. The number of Gamma Knife procedures performed in 2013 increased by 390 compared to 2012, primarily due to an increase in procedures at existing sites and procedures at a new site, which began operations in April 2013. Furthermore, 2013 was the first full year of operations for the two sites in Turkey. This increase was partially offset by lower procedure volumes at several other sites.

 

Revenue per procedure increased by $599 in 2014 and decreased by $746 in 2013 compared to 2013 and 2012, respectively. For 2014, this increase was due to a favorable change in payor mix and the sale of the EWRS Turkey units which were reimbursed at lower rates compared to the Company’s other units. For 2013, this decrease is primarily due to the impact of The American Taxpayer Relief Act of 2012 that became effective April 1, 2013, which reduced Medicare reimbursement rates and the first full year for the two sites in Turkey which have lower revenue per procedure than the Company’s historical average.

 

IGRT Revenue

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                                         
Medical services revenue from IGRT   $ 896       (38.5 )%   $ 1,457       (23.1 )%   $ 1,894  

 

 

Medical services revenue from the Company’s IGRT contracts decreased by $561,000 in 2014 compared to 2013. The sale of EWRS Turkey contributed $357,000 to the decline, in addition to lower volume at the Company’s existing site. Medical services revenue from the Company’s IGRT contracts decreased by $437,000 in 2013 compared to 2012. The decrease in 2013 was due to lower volume at the Company’s existing sites.

 

COSTS OF REVENUE

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
Total costs of revenue   $ 10,138       (4.7 )%   $ 10,640       5.2 %   $ 10,118  
                                         
Percentage of total revenue     65.8 %             60.5 %             59.4 %

 

The Company's costs of revenue, consisting of maintenance and supplies, depreciation and amortization, and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and operating costs from the Company’s retail sites) decreased by $502,000 in 2014 compared to 2013 and increased by $522,000 in 2013 compared to 2012.

 

The Company's maintenance and supplies costs were 11.0% of total revenue in 2014, 10.2% of total revenue in 2013 and 9.0% of total revenue in 2012. Maintenance and supplies costs decreased by $100,000 in 2014 compared to 2013 but increased by $262,000 in 2013 compared to 2012. The decrease in 2014 compared to 2013 is due to the sale of the Company’s units in Turkey which had maintenance contracts. The increase in 2013 compared to 2012 is primarily due to maintenance contracts in Turkey which began in May 2013.

 

Depreciation and amortization costs as a percentage of total revenue were 40.0%, 35.9%, and 35.0% in 2014, 2013 and 2012, respectively. Depreciation and amortization costs decreased $138,000 in 2014 compared to 2013 and increased $344,000 in 2013 compared to 2012. The decrease in 2014 compared to 2013 is due to the extension of two customer agreements which spread the remaining depreciation expense over the extended contract term. In addition, the sale of EWRS Turkey lessened depreciation expense. The increase in 2013 compared to 2012 is due to the addition of one new Perfexion unit, plus two existing sites that were reloaded with new cobalt and one site that was upgraded to a Perfexion unit, therefore increasing the value of the unit and depreciation expense for those sites.

 

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Other direct operating costs as a percentage of total revenue were 14.8%, 14.4% and 15.4% in 2014, 2013 and 2012, respectively. Other direct operating costs decreased by $264,000 in 2014 compared to 2013 and decreased by $84,000 in 2013 compared to 2012. The decrease in 2014 is due to lower insurance costs and property taxes. The decrease in 2013 is due to lower costs from the Company’s turn-key sites, as a result of lower volumes at some of the turn-key sites. This decrease was offset by increases in building rent, marketing, insurance, property taxes and state or county licenses fees.

 

SELLING AND ADMINISTRATIVE EXPENSE

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
Selling and administrative costs   $ 3,630       (9.8 )%   $ 4,025       (0.5 )%   $ 4,045  
                                         
Percentage of total revenue     23.5 %             22.9 %             23.7 %

 

The Company's selling and administrative costs decreased $395,000 in 2014 compared to 2013 and decreased by $20,000 in 2013 compared to 2012. The decrease in 2014 is due to reduction in payroll expense driven by lower headcount, building rent, travel expense, and legal and consulting fees, partially offset by increased tax and audit fees. Building rent decreased due to accrued rent relating to a sublease of a portion of the Company’s office space, recorded in the first quarter of 2013. The decrease in 2013 is due to lower travel expense of $168,000, offset by increases in temporary help for the Turkey sites of $80,000 and building rent of $68,000. Building rent increased due to accrued rent expense and commissions relating to a sublease of a portion of the Company’s office space, recorded in the first quarter of 2013.

 

INTEREST EXPENSE

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
 Interest expense   $ 1,699       (5.6 )%   $ 1,799       (16.5 )%   $ 2,155  
                                         
Percentage of total revenue     11.0 %             10.2 %             12.6 %

 

The Company's interest expense decreased $100,000 in 2014 compared to 2013 and decreased $356,000 in 2013 compared to 2012. The decrease in 2014 compared to 2013 and in 2013 compared to 2012 is due to lower interest expense on the financing for the Company’s more mature Gamma Knife units. Interest expense on financing decreases over time as payments reduce the principal amount outstanding. In addition, the Company paid off one contract in 2014 and one contract in 2013, reducing interest expense.

 

(LOSS) ON SALE OF SUBSIDIARY

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
 (Loss) on sale of subsidiary   $ (572 )     (572.0 )%   $ 0       0.0 %   $ 0  
                                         
 Percentage of total revenue     (3.7 )%             0.0 %             0.0 %

 

Loss on sale of subsidiary was $572,000 compared to $0 in prior years. Effective May 31, 2014 (with closing occurring June 10, 2014) the Company sold EWRS Turkey for EUR 4.2 million (approximately $6.0M). The proceeds were used to pay-off outstanding debt associated with the Turkey operations and the excess was cash to the Company of $768,000.

 

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GAIN (LOSS) FOREIGN CURRENT TRANSACTIONS

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
Gain (loss) foreign transactions   $ 161       113.7 %   $ (1,174 )     (989.4 )%   $ 132  
                                         
Percentage of total revenue     1.0 %             (6.7 )%             0.8 %

 

Gain (loss) from foreign currency transactions increased $1,335,000 in 2014 compared to 2013 and decreased $1,306,000 in 2013 compared to 2012. The increase or decrease in gain (loss) from foreign currency transactions is due to the strengthening or weakening of the Turkish Lira against the US dollar.

 

INTEREST AND OTHER INCOME

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
Interest and other income   $ 28       12.0 %   $ 25       (56.9 )%   $ 58  
                                         
Percentage of total revenue     0.2 %             0.1 %             0.3 %

 

Interest and other income increased $3,000 in 2014 compared to 2013 and decreased $33,000 in 2013 compared to 2012. The decrease in 2013 was due to lower interest income of $15,000 and a loss on sales of assets of $4,000, compared to a gain of $14,000 in 2012.

 

INCOME TAX EXPENSE

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
Income tax expense   $ 129       53.6 %   $ 84       (21.5 )%   $ 107  
                                         
Percentage of total revenue     0.8 %             0.5 %             0.6 %
                                         
Percentage of (loss) income before income taxes     (29.8 )%             (289.7 )%             11.6 %

 

 

Income tax expense increased $45,000 in 2014 compared to 2013. Income tax expense decreased $23,000 in 2013 compared to 2012. The increase in 2014 is primarily due to the results of GKF’s operations. The decrease in 2013 is primarily due to lower computed expected federal income tax calculated on lower income before income taxes, compared to 2012. Generally the Company has higher state income taxes because they are calculated at the Company’s profitable operating subsidiary level, where in many states, separate state income tax returns are required and net operating loss carryforwards cannot be applied.

 

The Company anticipates that it will continue to record income tax expense if it operates profitably in the future. Currently there are state income tax payments required for most states in which the Company operates. However, there are minimal current federal income tax payments required due to net operating loss carryforwards and other deferred tax assets available for federal tax purposes.

 

The Company had a net operating loss carryforward for federal income tax return purposes at December 31, 2014 of approximately $9,518,000.

 

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NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

 

(In thousands)   2014     Increase
(Decrease)
    2013     Increase
(Decrease)
    2012  
                               
Net income attributable to non-controlling interests   $ 390       96.0 %   $ 199       (74.3 )%   $ 775  
                                         
Percentage of total revenue     2.5 %             1.1 %             4.5 %

 

Net income attributable to non-controlling interests increased $191,000 compared to 2013 and decreased $576,000 in 2013 compared to 2012. Net income attributable to non-controlling interests represents the pre-tax income earned by the 19% non-controlling interest in GKF, and the pre-tax income or losses 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.

 

NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN SHARED HOSPITAL SERVICES

 

(In thousands,
except per share amounts)
  2014     Increase (Decrease)     2013     Increase (Decrease)     2012  
                               
Net (loss) income attributable to ASHS   $ (952 )     (205.1 )%   $ (312 )     (921.1 )%   $ 38  
                                       
Net (loss) income per share attributable to ASHS, diluted   $ (0.19 )     (171.4 )%   $ (0.07 )     (800.0 )%   $ 0.01  

 

Net loss attributable to American Shared Hospital Services was $952,000 in 2014 and $312,000 in 2013, compared to net income of $38,000 in 2012. The $640,000 decrease in income in 2014 was primarily due to the loss on sale of EWRS Turkey of $572,000. The $350,000 decrease in income in 2013 compared to 2012 was primarily due to the foreign currency losses incurred of $1,174,000 compared to a foreign currency gain of $132,000 in 2012.

 

IMPAIRMENT ANALYSIS OF INVESTMENT IN EQUITY SECURITIES

 

The Company evaluated its investment in Mevion for impairment at December 31, 2014 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, including the following specific events.

 

Beginning in October 2008 Mevion offered a sequence of Series D rounds of funding to raise cash for its next phase of development and continued manufacture of the prototype model of the proton beam unit. Due to the troubled economy and scarcity of funds available during this time, these rounds were offered at a per share price less than the Company’s investment. Mevion received approximately $65 million from these Series D rounds from new and existing investors.

 

In January 2012, Mevion announced that it had closed a $45 million round of Series E financing which is to be used to accelerate the manufacturing and worldwide deployment of the MEVION S250. A new investor was the largest investor in this round, which also included existing investors. This round of financing was offered at a per share price higher than the effective price of the last round of Series D financing, and initially funded at 55%, with the remaining 45% funded in June 2012, upon Mevion’s receipt of final FDA 510(k) clearance. The Company invested an additional $70,000 in this round.

 

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In June 2013, Mevion announced that it had closed a $55 million round of financing, which will be used to accelerate the manufacturing and worldwide deployment of the MEVION S250. This round of financing was offered at a price per share higher than the effective price of the most recent Series E financing. The Company did not participate in this round of funding. Subject to the Pay-to-Play Provision, implemented through the amendment of the Sixth Amended and Restated Articles of Incorporation, the preferred shares held by the Company were converted to common.

 

Upon conversion of the Preferred Stock, the Company’s investment represents an approximate 0.77% interest in the common stock of Mevion where it remained as of December 31, 2014. The Company does not have a Board of Directors seat with Mevion.

 

In December 2014 Mevion announced that it had closed a $10M round of financing, which will be used to accelerate the manufacturing and worldwide deployment of the MEVION S250. Mevion entered into a Note and Warrant Purchase Agreement with existing investors to issue convertible promissory notes for aggregate proceeds of up to $15M. This round of financing was offered at a price per share higher than the effective price of the most recent Series E financing. The Company did not participate in this round of funding.

 

The lower price per share of the Series D and Series E offerings and the price per common share compared to the Company’s original investment could be viewed as a reasonable estimate of the fair value of our cost-method investment, indicating that our investment is impaired. The Company estimates that there is currently an unrealized loss (impairment) of approximately $2.4 million based on the issuance of the Series B, C and E funding compared to the Company’s cost of its investment.

 

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 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 and the successful clinical operation of the first MEVION S250 system at Barnes Jewish Hospital and Mevion’s significant revenue backlog provide a significantly higher potential valuation.

 

This is based primarily on the following:

· In spite of the uncertain economic climate and a limited number of potential investors, with the initial Series D offering Mevion was still able to raise the cash required to continue its operations, was able to add two new major investors, and continued to be able to raise additional cash with Series D extensions and the new Series E offering. It also added an additional major investor in the Series E offering with ProQuest Investments. Due to the high level of interest in more compact and lower cost proton beam radiation therapy devices, Mevion has been able to attract funding from financially significant and highly sophisticated investors, such as Caxton Health and Life Sciences, Venrock Associates and CHL Medical Partners, who have continued to invest in the various rounds of financing, and the new investor, ProQuest Investments. Mevion’s ability to raise significant funds indicates the investment is only temporarily impaired.
· In June 2012 Mevion announced that it had received FDA 510(k) clearance for its MEVION S250 proton therapy system which includes the world's first superconducting synchrocyclotron. FDA clearance allows a hospital to begin treating patients as soon as installation of the system has been completed. In March 2012 Mevion announced that it had secured CE certification throughout the European Union.
· As of June 30, 2013, the Company’s investment in Mevion was reduced to 0.77% and converted from preferred stock to common stock. Management of the Company believes that the successful clinical operation of Mevion’s first system is a pivotal point in determining that the Company’s investment is other than temporarily impaired. In fact, this first MEVION S250 system at Barnes-Jewish Hospital treated in excess of 100 patients in its first year of operation. The company estimates that its ownership interest in Mevion is still great enough to result in a return higher than its cost basis in the future.
· Mevion is continuing the installation process at five other sites, including the Company’s site at Orlando Health. The Company’s Orlando Health site broke ground for construction in September 2012 and the accelerator was delivered in November 2014. It is projected that the first patient will be treated in early 2016.
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· The Company has analyzed its investment potential by comparing available financial information from Mevion to financial data from initial public offerings (“IPO”) of companies with similar technologies and has determined that it could reasonably expect that the value of its investment in Mevion would exceed the cost of its investment.

 

In addition the Company considered the following:

· In the latter part of 2009 Mevion added a new CEO, strengthened its management depth, and with the new investors, increased its board strength as well. Independent board members consist of the following: Robert Wilson, Former Vice Chairman of Johnson and Johnson; Peter P. D’Angelo, President, Caxton Associates; Anders Hove, MD, Partner, Venrock Associates; Myles D. Greenberg, MD, General Partner, CHL Medical Partner; Paul Volcker, Former Chairman, United States Federal Reserve. Jay Moorin of ProQuest Investments was added to Mevion’s Board of Directors in January 2012. Stephen Buckley, Former Partner, Ernst & Young LLP was also added to Mevion’s Board of Directors in 2012.
· Mevion has a backlog of $257.6 million per its recently filed S-1 document.

 

The estimated recovery period is anticipated to occur subsequent to the first system’s clinical treatment of patients. The first system began treating patients in December 2013. The Company has the intent and ability to maintain its investment in Mevion.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company had cash and cash equivalents of $1,059,000 at December 31, 2014 compared to $1,909,000 at December 31, 2013, a decrease of $850,000. The Company’s expected primary cash needs on both a short and long-term basis are for capital expenditures, business expansion, working capital and other general corporate purposes.

 

At both December 31, 2014 and 2013 the Company had approximately $9,000,000 invested in a certificate of deposit with a bank scheduled to mature on August 30, 2015.

 

Restricted cash of $50,000 at December 31, 2014 reflects cash that may only be used for the operations of GKF.

 

The Company has a $9,000,000 renewable line of credit with a bank that is secured by a certificate of deposit. The line of credit has been in place since June 2004. The Company’s earnings in 2013 were insufficient to satisfy the “profitability” covenant in the line of credit. The Bank waived this default on August 8, 2014 and agreed to change the maturity date of the facility to December 31, 2014. The line of credit was paid using the proceeds from the certificate of deposit on January 2, 2015. As of December 31, 2014, there was $8,780,000 borrowed against the line of credit, compared to $8,840,000 as of December 31, 2013.

 

Operating activities provided cash of $6,773,000 in 2014, which was driven by non-cash charges for depreciation and amortization of $6,383,000, loss on sale of subsidiary of $572,000, deferred income tax of $76,000, stock-based compensation expense of $138,000, changes in receivables of $1,069,000, changes in other assets of $11,000, and other non-cash items of $107,000. These were partially offset by gain on disposal of fixed assets of $1,000, gain on foreign currency transactions of $161,000, decrease in accounts payable of $859,000, and net loss of $562,000.

 

The Company’s trade accounts receivable decreased by $1,330,000 to $3,192,000 at December 31, 2014 from $4,522,000 at December 31, 2013, primarily due to decreased procedures at existing sites and increased cash collections on a few customer accounts. The number of days revenue (sales) outstanding (“DSO”) in accounts receivable as of December 31, 2014 decreased to 76 days compared to 94 days at December 31, 2013. DSO can and does fluctuate depending on timing of customer payments received and the mix of fee per use versus retail customers. Retail sites generally have longer collection periods than fee per use sites.

 

Investing activities used $4,452,000 of cash in 2014 due to payments made towards the purchase of property and equipment of $5,212,000 and investment in equity securities of $8,000, partially offset by $768,000 proceeds from sale of subsidiary.

 

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Financing activities used $3,163,000 of cash during 2014, primarily due to principal payments on long-term debt of $3,263,000, principal payments towards capital leases of $4,429,000, distributions to non-controlling interests of $951,000, payments on the line of credit of $1,200,000, and a stock repurchase of $2,000. This was partially offset by long term debt financing on equipment of $2,625,000, advances on the line of credit of $1,140,000, capital contributions from non-controlling interests in subsidiaries of the Company of $117,000, private placement of common stock of $1,800,000 to certain Board members, and promissory notes issued to certain Board members of $1,000,000 (“Board Note”).

 

The Company had negative working capital at December 31, 2014 of $2,004,000 compared to negative working capital of $4,079,000 at December 31, 2013. The $2,075,000 increase in net working capital was due to net decreases in the current portion of long term debt and capital leases of $2,663,000, decreases in accounts payable, employee compensation and benefits and other accrued liabilities of $151,000, $25,000 and $1,475,000, respectively, increases in current deferred tax asset of $25,000 and net increase of $220,000 from the re-class of advances on the line of credit and certificate of deposit to current. This was offset by decrease in cash of $850,000, receivables of $1,342,000, and prepaid expenses of $292,000.

 

The Company initially finances all of its Gamma Knife and radiation therapy units and anticipates that it will continue to do so with future contracts. The Company has secured financing for its projects from several lenders and anticipates that it will be able to secure financing on future projects from these or other lending sources, but there can be no assurance that financing will continue to be available on acceptable terms. The Company meets all debt covenants required under notes with its lenders, and expects that any covenants required by future lenders will be acceptable to the Company.

 

IMPACT OF INFLATION AND CHANGING PRICES

 

The Company does not believe that inflation has had a significant impact on operations because a substantial majority of the costs that it incurs under its customer contracts are fixed through the term of the contract.

 

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF BALANCE SHEET ARRANGEMENTS

 

The following table presents, as of December 31, 2014, the Company’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the notes to the consolidated financial statements referenced below. For purposes of this table, these commitments are listed in the less than 1 year and 1-3 year categories.

 

    Payments Due by Period  
Contractual Obligations   Total amounts
committed
    Less than
1 year
    1-3 years     4-5 years     After 5 years  
                               
Long-term debt (includes interest)   $ 12,574,000     $ 2,707,000     $ 6,262,000     $ 2,680,000     $ 925,000  
Capital leases (includes interest)     18,682,000       5,108,000       9,065,000       4,129,000       380,000  
Line of credit     8,780,000       8,780,000       -       -       -  
Promissory note (includes interest)     1,413,000       150,000       1,263,000       -       -  
Future equipment purchases     45,434,000       6,834,000       38,600,000       -       -  
Operating leases     175,000     $ 114,000     $ 61,000       -       -  
                                         
Total contractual obligations   $ 87,058,000     $ 23,693,000     $ 55,251,000     $ 6,809,000     $ 1,305,000  

 

Further discussion of the long-term debt commitment is included in Note 5, capital leases in Note 6, and operating leases in Note 12 of the consolidated financial statements.

 

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The Company has commitments to purchase three PBRT systems, one Gamma Knife Perfexion system, one Gamma Knife model 4C system, and two Cobalt-60 reloads, both at existing sites, as of December 31, 2014. Financing has been committed to the Model 4C unit and the Cobalt-60 reloads at existing sites. The Company has a lease financing commitment, pending execution of definitive documents, for an additional $9,000,000, for its first PBRT project. The total of these commitments is approximately $45,434,000, of which, the Company has made non-refundable deposits totaling approximately $7,784,000 towards the purchase of this equipment. The timing of progress payments for PBRT contracts two and three are dependent upon future events, for which, the Company has some latitude in the timing of the due dates of these commitments. Approximately $27,000,000 of these commitments are not expected to start becoming due until 2016.

 

    Commitment     Cash Deposits  
Proton Beam Units   $ 38,600,000     $ 5,000,000  
                 
Gamma knife Units     6,834,000       2,784,000  
                 
Total Commitments   $ 45,434,000     $ 7,784,000  

 

The Gamma Knife model 4C system is projected to be installed in late 2015 at the Company’s new customer site in Peru. The Perfexion is for a site yet to be determined. The first PBRT system was delivered in December 2014 and the remaining two currently have anticipated delivery dates in 2015 and later, pending certain construction milestones. The deposits and progress payments are classified as deposits and construction in progress under Property and Equipment.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The table below presents information about certain market-sensitive financial instruments as of December 31, 2014. The fair values were determined based on quoted market prices for the same or similar instruments.

 

    Payments Due by Period                    
(amounts in thousands)   2015     2016     2017     2018     2019     There-
after
    Total     Fair
Value
 
                                                 
Fixed rate long-term debt and present value of capital leases   $ 6,262     $ 6,772     $ 5,542     $ 4,070     $ 2,238     $ 1,238     $ 26,122     $ 23,829  
                                                                 
Average interest rates     6.6 %     6.5 %     6.3 %     6.1 %     6.0 %     6.3 %     6.4 %        

 

We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.

 

At December 31, 2014, we had no significant long-term, market-sensitive investments.

 

We have no affiliation with partnerships, trusts or other entities whose purpose is to facilitate off-balance sheet financial transactions or similar arrangements, and therefore have no exposure to the financing, liquidity, market or credit risks associated with such entities.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See the Index to Consolidated Financial Statements and Financial Statement Schedules included at page A-1 of this report.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

 

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

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(b) Management’s report on internal control over financial reporting.

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to its management and Board of Directors regarding the preparation and fair presentation of published financial statements.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (1992). Based on this assessment management believes that, as of December 31, 2014, the Company’s internal control over financial reporting is effective based on those criteria.

 

(c) Changes in internal controls over financial reporting.

 

Our Chief Executive Officer and our Chief Financial Officer have evaluated the changes to the Company’s internal control over financial reporting that occurred during our last fiscal quarter ended December 31, 2014, as required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15, and have concluded that there were no such changes that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information regarding directors is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2015 Annual Meeting of Shareholders (the “2015 Proxy Statement”). Information regarding executive officers of the Company, included herein under the caption “Executive Officers of the Company” in Part I, Item 1 above, is incorporated herein by reference.

 

Information concerning the identification of our standing audit committee required by this Item is incorporated by reference from the 2015 Proxy Statement.

 

Information concerning our audit committee financial experts required by this Item is incorporated by reference from the 2015 Proxy Statement.

 

Information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference from the 2015 Proxy Statement.

 

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We have adopted a Code of Ethics that is available on our website at www.ashs.com . The information on our website is not part of this report. You may also request a copy of this document free of charge by writing our Corporate Secretary.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Information required by this Item is incorporated herein by reference from the 2015 Proxy Statement.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information required by this Item is incorporated herein by reference from the 2015 Proxy Statement.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Information required by this Item is incorporated herein by reference from the 2015 Proxy Statement.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information required by this Item is incorporated herein by reference from the 2015 Proxy Statement.

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) Financial Statements and Schedules.
  The following Financial Statements and Schedules are filed with this Report:
  Report of Independent Registered Public Accounting Firm
  Audited Consolidated Financial Statements
  Consolidated Balance Sheets
  Consolidated Statements of Operations
  Consolidated Statements of Shareholders' Equity
  Consolidated Statements of Cash Flows
  Notes to Consolidated Financial Statements
  Financial Statement Schedules- no schedules are included since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
   
(b) Exhibits.
  The following Exhibits are filed with this Report.

 

Exhibit
Number:
  Description:
     
2.1   Securities Purchase Agreement, dated as of March 12, 1999, by and among Alliance Imaging, Inc.; Embarcadero Holding Corp. I; Embarcadero Holding Corp. II; American Shared Hospital Services; and MMRI, Inc. (1)
     
3.1   Articles of Incorporation of the Company, as amended. (2)
     
3.2   By-laws of the Company, as amended. (3)
     
4.6  

Form of Common Stock Purchase Warrant of American Shared Hospital Services. (3)

 

 

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4.8   Registration Rights Agreement, dated as of May 17, 1995, by and among American Shared Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems. (3)
     
4.9   Rights Agreement dated as of March 22, 1999 between American Shared Hospital Services and American Stock Transfer & Trust Company as Rights Agent. (25)
     
10.1   The Company's 1984 Stock Option Plan, as amended. (4)
     
10.2   The Company's 1995 Stock Option Plan, as amended. (5)
     
10.3   Form of Indemnification Agreement between American Shared Hospital Services and members of its Board of Directors. (4)
     
10.4   Ernest A. Bates Stock Option Agreement dated as of August 15, 1995. (6)
     
10.5   Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. (3)
     
10.6   Amendments dated as of October 26, 1995 and as of December 20, 1995 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (7)
     
10.7   Amendment dated as of October 16, 1996 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (1)
     
10.8   Amendment dated as of March 31, 1998 (“Fourth Amendment”) to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
     
10.9   Amendment dated as of March 31, 1998 (“Fifth Amendment”) to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
     
10.10   Amendment dated as of June 5, 1999 to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
     
10.11a   Assignment and Assumption Agreement, dated as of December 31, 1995, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee). (8)
     
10.11b   Assignment and Assumption Agreement, dated as of November 1, 1995, between American Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee). (4)
     
10.11c   Amendment Number One dated as of August 1, 1995 to the Lease Agreement for a Gamma Knife Unit between The Regents of the University of California and American Shared Hospital Services. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
     
10.11d   Lease Agreement dated as of July 3, 1990 for a Gamma Knife Unit between American Shared Hospital Services and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
     
10.12   Amendment Number Two dated as of February 6, 1999 to the Lease Agreement for a Gamma Knife Unit between UCSF-Stanford Health Care and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
     
10.13   Assignment and Assumption Agreement, dated as of February 3, 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee). (4)

 

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10.14   Lease Agreement for a Gamma Knife Unit dated as of April 6, 1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
     
10.15   Assignment and Assumption Agreement dated as of February 1, 1996 between Ernest A. Bates, M.D. and GK Financing, LLC with respect to the Lease Agreement for a Gamma Knife dated as of April 6, 1994 between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital. (8)
     
10.16   Lease Agreement for a Gamma Knife Unit dated as of October 31, 1996 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
     
10.17   Addendum to Lease Agreement for a Gamma Knife Unit dated as of December 1, 1999 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
     
10.18   Lease Agreement for a Gamma Knife Unit dated as of October 29, 1996 between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
     
10.18a   Amendment to Lease Agreement for a Gamma Knife Unit effective December 13, 2003 by and between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (22 )
     
10.18b   Second Amendment to Lease Agreement for a Gamma Knife Unit effective December 23, 2009 by and between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (38 )
     
10.19   Lease Agreement for a Gamma Knife Unit dated as of April 10, 1997 between Yale-New Haven Ambulatory Services Corporation and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
     
10.19a   Amendment to Lease Agreement for a Gamma Knife Unit effective October 25, 2005 by and between Yale-New Haven Ambulatory Services Corporation and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (27)
     
10.19b   Amendment to Lease Agreement for a Gamma Knife Unit effective June 30, 2006 by and between Yale-New Haven Ambulatory Services Corporation and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (31)

 

32
 

  

10.19c   Second Amendment to Lease Agreement for a Gamma Knife Unit effective May 15, 2009 by and between Yale-New Haven Hospital, Inc. a/k/a Yale-New Haven Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (37)
     
10.19c   Third Amendment to Lease Agreement for a Gamma Knife Unit effective July 1, 2014 by and between Yale-New Haven Hospital, Inc. a/k/a Yale-New Haven Hospital and GK Financing, LLC. (50)
     
10.20   Lease Agreement for a Gamma Knife Unit dated as of June 1, 1999 between GK Financing, LLC and Kettering Medical Center. (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.) (9)
     
10.21   Addendum to Contract with GKF and KMC/WKNI, dated June 1, 1999 between GK Financing, LLC and Kettering Medical Center. (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.) (9)
     
10.21a   Purchased Services Agreement for a Gamma Knife Perfexion Unit dated November 19, 2008 between GK Financing, LLC and Kettering Medical Center. (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.) (34)
     
10.21b   First Amendment to Purchased Services Agreement for a Gamma Knife Perfexion Unit dated June 11, 2009 between GK Financing, LLC and Kettering Medical Center. (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.) (34)
     
10.21c   Second Amendment to Purchased Services Agreement for a Gamma Knife Perfexion Unit dated February 27, 2014 between GK Financing, LLC and Kettering Medical Center. (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.) (51)
     
     
10.22   Lease Agreement for a Gamma Knife Unit dated as of October 5, 1999 between GK Financing, LLC and New England Medical Center Hospitals, 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.) (9)
     
10.22a   Addendum to Lease Agreement for a Gamma Knife unit effective April 1, 2005 between GK Financing, LLC and New England Medical Center Hospitals, 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.) (24)
     
10.22b   Lease Agreement for a Gamma Knife Unit (Perfexion Upgrade) effective July 30, 2013 between GK Financing, LLC and Tufts Medical Center, 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.) (48)

 

33
 

  

10.23   Equipment Lease Agreement dated as of October 29, 1999 between GK Financing, LLC and the Board of Trustees of the University of Arkansas on behalf of The University of Arkansas for Medical Sciences. (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.) (9)
     
10.23a   Amendment to Lease Agreement effective as of September 15, 2005 between GK Financing, LLC and the Board of Trustees of the University of Arkansas on behalf of The University of Arkansas for Medical Sciences. (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.) (26)
     
10.23b   Amendment to Lease Agreement effective as of October 31, 2007 between GK Financing, LLC and the Board of Trustees of the University of Arkansas on behalf of The University of Arkansas for Medical Sciences. (32)
     
10.23c   Amendment Three to Lease Agreement effective as of June 11, 2010 between GK Financing, LLC and the Board of Trustees of the University of Arkansas on behalf of The University of Arkansas for Medical Sciences. (36)
     
10.24   First Amendment to Lease Agreement for a Gamma Knife Unit effective as of August 2, 2000 between GK Financing, LLC and Tenet HealthSystems Hospitals, Inc. (formerly known as NME Hospitals, Inc.) dba USC University Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (9)
     
10.25   Addendum Two, dated as of October 1, 2000, to Lease Agreement for a Gamma Knife Unit dated as of October 31, 1996 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (10)
     
10.26   Lease Agreement for a Gamma Knife Unit dated as of May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (10)
     
10.26a   First Amendment to Lease Agreement for a Gamma Knife Unit dated as of December 28, 2009 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (35)
     
10.26b   Second Amendment to Lease Agreement for a Gamma Knife Unit dated as of May 16, 2013 between GK Financing, LLC and Froedtert Memorial Lutheran Hospital, 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.) (46)
     
10.26c   Third Amendment to Lease Agreement for a Gamma Knife Unit dated as of December 15, 2014 between GK Financing, LLC and Froedtert Memorial Lutheran Hospital, Inc. (51)
     
10.27   Addendum dated June 24, 2000 to Lease Agreement for a Gamma Knife Unit dated as of May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)
     
10.28   Amendment dated July 12, 2000 to Lease Agreement for a Gamma Knife Unit dated May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)

 

34
 

  

10.29   Amendment dated August 24, 2000 to Lease Agreement for a Gamma Knife Unit dated May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)
     
10.30   Lease Agreement for a Gamma Knife Unit dated as of December 11, 1996 between The Community Hospital Group, Inc. dba JFK Medical Center and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (11)
     
10.30a   Addendum One to Lease Agreement for a Gamma Knife Unit dated January 9, 2008 between GK Financing, LLC and The Community Hospital Group, Inc. dba JFK Medical Center. (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). (33)
     
10.30b   Addendum Two to Lease Agreement for a Gamma Knife Unit dated January 9, 2008 between GK Financing, LLC and The Community Hospital Group, Inc. dba JFK Medical Center. (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). (33)
     
10.31   Lease Agreement for a Gamma Knife Unit dated as of June 3, 1999 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC dba Sunrise Hospital and Medical Center. (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.) (12)
     
10.32   Addendum to Lease Agreement for a Gamma Knife Unit dated as of June 3, 1999 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC dba Sunrise Hospital and Medical Center. (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.) (12)
     
10.33   Lease Agreement for a Gamma Knife Unit dated as of November 1, 1999 between GK Financing, LLC and Jackson HMA, Inc. dba Central Mississippi Medical Center. (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.) (13)
     
10.34   Addendum to Lease Agreement for a Gamma Knife Unit dated as of November 1, 1999 between GK Financing, LLC and Jackson HMA, Inc. dba Central Mississippi Medical Center. (13)
     
10.35   Lease Agreement for a Gamma Knife Unit dated as of February 18, 2000 between GK Financing, LLC and OSF HealthCare System. (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.) (13)
     
10.35a   Addendum to Lease Agreement for a Gamma Knife Unit effective April 13, 2007, between GK Financing, LLC and OSF HealthCare System. (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.) (30)
     
10.35b   Addendum Two to Lease Agreement for a Gamma Knife Unit effective October 31, 2012 between GK Financing, LLC and OSF Healthcare System. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (46)

 

35
 

  

10.36   American Shared Hospital Services 2001 Stock Option Plan. (14)
     
10.37   Amendment Number Three to Lease Agreement for a Gamma Knife Unit dated as of June 22, 2001 between GK Financing, LLC and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (15)
     
10.38   Addendum Three to Lease Agreement for a Gamma Knife Unit dated as of October 1, 2000 between GK Financing, LLC and Hoag Memorial Hospital Presbyterian. (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.) (15)
     
10.39   Lease Agreement for a Gamma Knife Unit dated as of July 18, 2001 between GK Financing, LLC and Bayfront Medical Center, 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.) (16)
     
10.40   Lease Agreement for a Gamma Knife Unit dated as of September 13, 2001 between GK Financing, LLC and Mercy Medical Center. (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.) (17)
     
10.41   Addendum Number One to Contract dated September 13, 2001 between GK Financing, LLC and Mercy Medical Center. (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.) (17)
     
10.42   Lease Agreement for a Gamma Knife Unit dated as of May 22, 2002 between GK Financing, LLC and The Johns Hopkins Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (18)
     
10.43   Lease Agreement for a Gamma Knife Unit dated as of July 11, 2002 between GK Financing, LLC and Southern Baptist Hospital of Florida, Inc. D/B/A Baptist Medical Center. (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.) (19)
     
10.43a   First Amendment to Lease Agreement for a Gamma Knife Unit dated as of June 30, 2011 between GK Financing, LLC and Southern Baptist Hospital of Florida, Inc. (40)
     
10.44   Lease Agreement for a Gamma Knife Unit dated as of February 13, 2003 between GK Financing, LLC and AHS Albuquerque Regional Medical Center LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (20)
     
10.45   Lease Agreement for a Gamma Knife Unit dated as of May 28, 2003 between GK Financing, LLC and Lehigh Valley Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (21)
     
10.45a   First Amendment to Lease Agreement for a Gamma Knife Unit dated November 2006 between GK Financing, LLC and Lehigh Valley Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (28)

 

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10.45b   Second Amendment to Lease Agreement for a Gamma Knife Unit dated effective as of March 2, 2011 between GK Financing, LLC and Lehigh Valley Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks). (42)
     
10.45c   Third Amendment to Lease Agreement for a Gamma Knife Unit dated effective as of March 2, 2011 between GK Financing, LLC and Lehigh Valley Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks). (42)
     
10.46   Lease Agreement for a Gamma Knife Unit dated as of March 21, 2003 between GK Financing, LLC and Northern Westchester Hospital Center. (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.) (23)
     
10.46a   Amendment to Equipment Lease Agreement (Perfexion Upgrade) effective as of June 8, 2012 between GK Financing, LLC and Northern Westchester Hospital Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (46)
     
10.47   Amendment Four to Lease Agreement for a Gamma Knife Unit effective as of December 1, 2002 between GK Financing, LLC and Hoag Memorial Hospital Presbyterian. (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.) (23)
     
10.48   Line of credit agreement between American Shared Hospital Services and Bank of America dated July 1, 2004 and related amendments No. 1 and No. 2 dated June 23, 2005. (23)
     
10.48a   Loan Agreement between American Shared Hospital Services and Bank of America (dated as of September 30, 2011). (49)
     
10.48b   Amendment No. 1 to Loan Agreement between American Shared Hospital Services and Bank of America (dated as of August 31, 2012). (49)
     
10.48c   Amendment No. 2 to Loan Agreement between American Shared Hospital Services and Bank of America (dated as of September 20, 2013). (49)
     
10.48d   Waiver and Amendment No. 3 to Loan Agreement between American Shared Hospital Services and Bank of America (dated August 8, 2014). (49)
     
10.49   Lease Agreement for a Gamma Knife Unit dated as of May 28, 2004 between GK Financing, LLC and Mercy Health Center. (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.) (24)
     
10.49a   Addendum One to Lease Agreement for a Gamma Knife Unit dated effective as of December 23, 2011 between GK Financing, LLC and Mercy Health Center. (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.) (44)

 

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10.50   Lease Agreement for a Gamma Knife Unit dated as of August 7, 2003 between GK Financing, LLC and Baptist Hospital of East Tennessee. (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.) (26)
     
10.50a   Amendment No. 1 to Lease Agreement for a Gamma Knife Unit dated as of May 28, 2004 between GK Financing, LLC and Baptist Hospital of East Tennessee. (26)
     
10.51   Addendum Two to Lease Agreement for a Gamma Knife Unit dated as of November 6, 2006 between GK Financing, LLC and Jackson HMA, Inc. d/b/a Central Mississippi Medical Center. (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.) (28)
     
10.52   Amendment dated as of October 18, 2006 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (28)
     
10.53   Addendum Two to Lease Agreement for a Gamma Knife Unit effective January 17, 2007 between GK Financing, LLC and Sunrise Hospital Medical Center, LLC d/b/a Sunrise Hospital Medical Center. (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.) (29)
     
10.54   Amendment Five to Lease Agreement for a Gamma Knife Unit effective May 9, 2007 between GK Financing, LLC and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (30)
     
10.55   Addendum Two to Lease Agreement for a Gamma Knife Unit effective June 20, 2007 between GK Financing, LLC and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (30)
     
10.56   Agreement to Purchase Gamma Knife Perfexion Unit effective May 7, 2007 between GK Financing, LLC and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (30)
     
10.57   Purchased Services Agreement for a Gamma Knife Perfexion Unit dated as of March 5, 2008 between GK Financing, LLC and USC University Hospital, 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). (33)
     
10.57a   First Amendment to Purchased Services Agreement for a Gamma Knife Perfexion Unit dated as of April 1, 2009 between GK Financing, LLC and USC University Hospital, 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). (34)
     
10.57b   Second Amendment to Purchased Services Agreement dated effected as of October 1, 2013 between GK Financing, LLC and University of Southern California (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks). (49)

 

38
 

  

10.58   Addendum Three to Lease Agreement for a Gamma Knife Unit effective as of June 20, 2007 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC dba Sunrise Hospital and Medical Center. (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.) (37)
     
10.59   Addendum Four to Lease Agreement for a Gamma Knife Unit effective as of February 8, 2010 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC dba Sunrise Hospital and Medical Center. (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.) (37)
     
10.60   Lease Agreement for a Gamma Knife Unit dated as of May 1, 2010 between GK Financing, LLC and Fort Sanders Regional Medical Center. (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.) (39)
     
10.61   Purchase and License Agreement for a Gamma Knife Unit and Axesse System dated as of August 25, 2010 between Elekta Instrument AB and Baskent University, Adana, Turkey. (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.) (40)
     
10.61a   Assignment Agreement from Elekta Instrument AB to EWRS Tibbi Cihazlar Ticaret Limited Sirketi dated March 11, 2011, for Purchase and License Agreement between Elekta Instrument AB and Baskent University. (40)
     
10.62   Lease Agreement for a Gamma Knife Unit effective as of April 8, 2011 between GK Financing, LLC and Lovelace Health System, Inc., d/b/a Lovelace Medical Center. (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.) (41)
     
10.62a   Assignment and Assumption of Purchase and License Agreement with Elekta, Inc., from GK Financing, LLC to Albuquerque Gamma Knife Equipment, LLC dated February 2, 2011. (40)
     
10.63   Purchased Services Agreement for a Gamma Knife Perfexion Unit effective as of August 5, 2011 between Jacksonville GK Equipment, LLC and St. Vincent’s Medical Center, 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). (43)
     
10.63a   First Amendment to Purchased Services Agreement for a Gamma Knife Perfexion Unit effective as of October 10, 2011 between Jacksonville GK Equipment, LLC and St. Vincent’s Medical Center, 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). (43)
     
10.64   Lease Agreement for a Gamma Knife Unit entered into on November 16, 2011 between EWRS TIBBİ CİHAZLAR LTD. TURKEY, and FLORENCE NIGHTINGALE HASTANESİ A.Ş., a Turkish corporation. (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.) (44)
     
10.65   Leksell Gamma Knife Perfexion Purchased Services Agreement entered into on 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.) (45)

 

39
 

  

10.66   Addendum Five to Lease Agreement for a Gamma Knife Unit effective as of May 18, 2012 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (47)
     
10.67   Purchased Services Agreement for a Gamma Knife Perfexion Unit dated as of March 27, 2014 between GK Financing, LLC and PeaceHealth doing business through its operating division PeaceHealth Sacred Heart Medical Center at RiverBend (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.) (51)
     
21.   Subsidiaries of American Shared Hospital Services.
     
23.1   Consent of Independent Registered Public Accounting Firm.
     
31.a & b   Rule 13a-14(a)/15d-14(a) Certifications.
     
32.   Section 1350 Certifications (furnished and not to be considered filed as part of the Form 10-K).
     
101.   The following materials from the Annual Report on Form 10-K for American Shared Hospital Services for the year ended December 31, 2013, filed on March 31, 2014, formatted in XBRL: Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012; Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011; Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012 and 2011; Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011; Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011; and Notes to the Consolidated Financial Statements, detail tagged.

 

 

(1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, which is incorporated herein by this reference.

 

(2) This document was filed as Exhibit 3.1 to registrant’s Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference.

 

(3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, to registrant’s Registration Statement on Form S-1 (Registration No. 33-63721) filed on October 26, 1995, which is incorporated herein by this reference.

 

(4) These documents were filed as Exhibits 10.24 and 10.35, respectively, to registrant’s Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference.

 

(5) This document was filed as Exhibit A to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference.

 

(6) This document was filed as Exhibit B to registrant's Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference.

 

(7) These documents were filed as Exhibits 4.14 and 10.13, respectively, to the registrant’s Pre-Effective Amendment No. 1 to registrant’s Registration Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996, which is incorporated herein by this reference.

 

(8) These documents were filed as Exhibits 10.8, 10.9, 10.10, 10.11a, 10.11c, 10.11d, 10.12, 10.14, 10.15, 10.16, 10.17, 10.18 and 10.19, respectively, to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, which is incorporated herein by this reference.

 

40
 

  

(9) These documents were filed as Exhibits 10.20, 10.21, 10.22, 10.23, and 10.24, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, which is incorporated herein by this reference.

 

(10) These documents were filed as Exhibits 10.25, 10.26, 10.27, 10.28 and 10.29, respectively, to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, which is incorporated herein by this reference.

 

(11) This document was filed as Exhibit 10.30 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000, which is incorporated herein by this reference.

 

(12) These documents were filed as Exhibits 10.31 and 10.32, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001, which is incorporated herein by this reference.

 

(13) These documents were filed as Exhibits 10.33, 10.34 and 10.35, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, which is incorporated herein by this reference.

 

(14) This document was filed as Exhibit 10.36 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001, which is incorporated herein by this reference.

 

(15) These documents were filed as Exhibits 10.37 and 10.38 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, which is incorporated herein by this reference.

 

(16) This document was filed as Exhibit 10.39 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, which is incorporated herein by this reference.

 

(17) These documents were filed as Exhibits 10.40 and 10.41, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002, which is incorporated herein by this reference.

 

(18) This document was filed as Exhibit 10.42 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, which is incorporated herein by this reference.

 

(19) This document was filed as Exhibit 10.43 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003, which is incorporated herein by this reference.

 

(20) This document was filed as Exhibit 10.44 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, which is incorporated herein by this reference.

 

(21) This document was filed as Exhibit 10.45 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, which is incorporated herein by this reference.

 

(22) This document was filed as Exhibit 10.18a to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, which is incorporated herein by this reference.

 

(23) These documents were filed as Exhibits 10.46, 10.47 and 10.48, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, which is incorporated herein by this reference.

 

(24) These documents were filed as Exhibits 10.22a and 10.49, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, which is incorporated herein by this reference.

 

(25) This document was filed as Exhibit 4 to the registrant’s Current Report on Form 8-K filed on April 1, 1999, which is incorporated herein by this reference.

 

(26) These documents were filed as Exhibits 10.23a, 10.50 and 10.50a, respectively, to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which is incorporated herein by this reference.

 

(27) This document was filed as Exhibit 10.19a to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006, which is incorporated herein by this reference.

 

(28) These documents were filed as Exhibits 10.45a, 10.51 and 10.52, respectively, to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which is incorporated herein by this reference.

 

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(29) This document was filed as Exhibit 10.53 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007, which is incorporated herein by this reference.

 

(30) These documents were filed as Exhibits 10.35a, 10.54, 10.55 and 10.56, respectively, to the registrant’s Quarterly Report on Form 10-Q for the fiscal year ended June 30, 2007, which is incorporated herein by this reference.

 

(31) This document was filed as Exhibit 10.19b to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007, which is incorporated herein by this reference.

 

(32) This document was filed as Exhibit 10.23b to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, which is incorporated herein by this reference.

 

(33) These documents were filed as Exhibits 10.30a, 10.30b and 10.57, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, which is incorporated herein by this reference.

 

(34) These documents were filed as Exhibits 10.21a, 10.21b and 10.57a, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, which is incorporated herein by this reference.

 

(35) This document was filed as Exhibit 10.26a to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, which is incorporated herein by this reference.

 

(36) This document was filed as Exhibit 10.23c to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, which is incorporated herein by this reference.

 

(37) These documents were filed as Exhibits 10.19c, 10.58 and 10.59, respectively, to the registrant’s Quarterly Report on Form 10-Q /A for the quarterly period ended June 30, 2010, which is incorporated herein by this reference.

 

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(38) This document was filed as Exhibit 10.18b to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, which is incorporated herein by this reference.

 

(39) This document was filed as Exhibit 10.60 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, which is incorporated herein by this reference.

 

(40) These documents were filed as Exhibits 10.43a, 10.61, 10.61a and 10.62a to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, which is incorporated herein by this reference.

 

(41) These documents were filed as Exhibits 10.62 to the registrant’s Quarterly Report on Form 10-Q/A for the quarterly period ended June 30, 2011, which is incorporated herein by this reference.

 

(42) These documents were filed as Exhibits 10.45b and 10.45c to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, which is incorporated herein by this reference.

 

(43) These documents were filed as Exhibits 10.63 and 10.63a to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which is incorporated herein by this reference.

 

(44) These documents were filed as Exhibits 10.49a and 10.64 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, which is incorporated herein by this reference.

 

(45) This document was filed as Exhibit 10.65 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, which is incorporated herein by this reference.

 

(46) These documents were filed as Exhibits 10.26b, 10.35b, and 10.46a to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, which are incorporated herein by this reference.

 

(47) This document was filed as Exhibit 10.66 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, which is incorporated herein by this reference.

 

(48) This document was filed as Exhibit 10.22b to the registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which is incorporated herein by this reference.

 

(49) These documents were filed as Exhibits, 10.48a, 10.48b, 10.48c, 10.48d, and 10.57b to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, which is incorporated herein by this reference.

 

(50) This document was filed as Exhibit 10.19c to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, which is incorporated herein by this reference.

 

(51) These documents were filed as Exhibits 10.21c, 10.26c, and 10.67 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which is incorporated herein by this reference.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  AMERICAN SHARED HOSPITAL SERVICES
  (Registrant)
     
March 31, 2015 By:

/s/ Ernest A. Bates, M.D.

    Ernest A. Bates, M.D.
   

Chairman of the Board and 

    Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Ernest A. Bates   Chairman of the Board and   March 31, 2015
Ernest A. Bates, M.D.   Chief Executive Officer    
    (Principal Executive Officer)    
         
/s/ David A. Larson   Director   March 31, 2015
David A. Larson, M.D.        
         
/s/ S. Mert Ozyurek   Director   March 31, 2015
S. Mert Ozyurek        
         
/s/ John F. Ruffle   Director   March 31, 2015
John F. Ruffle        
         
/s/ Raymond C. Stachowiak   Director   March 31, 2015
Raymond C. Stachowiak        
         
/s/ Stanley S. Trotman, Jr.   Director   March 31, 2015
Stanley S. Trotman, Jr.        
         
/s/ Craig K. Tagawa   Chief Operating Officer and   March 31, 2015
Craig K. Tagawa   Chief Financial Officer    
    (Principal Accounting Officer)    

 

44
 

 

 

AMERICAN SHARED HOSPITAL SERVICES

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

and

CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2014, 2013 and 2012

 

 
 

 

Contents

 

  PAGE
   
Report of Independent Registered Public Accounting Firm 1
   
Consolidated Financial Statements  
Balance sheets 2
Statements of operations 3
Statements of comprehensive income (loss) 4
Statement of shareholders’ equity 5
Statements of cash flows

6

Notes to financial statements 7 – 24

 

 
 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

American Shared Hospital Services

 

We have audited the accompanying consolidated balance sheets of American Shared Hospital Services and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Shared Hospital Services and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accepted accounting principles generally accepted in the United States of America.

 

/s/ Moss Adams LLP

 

San Francisco, California

March 31, 2015

 

1
 

 

American Shared Hospital Services
Consolidated Balance Sheets

 

    DECEMBER 31,  
    2014     2013  
ASSETS                
                 
CURRENT ASSETS                
Cash and cash equivalents   $ 1,059,000     $ 1,909,000  
Restricted cash     50,000       50,000  
Certificate of deposit     9,000,000       -  
Trade accounts receivable, net of allowance for doubtful accounts of $100,000 in 2014 and 2013     3,192,000       4,522,000  
Other receivables     131,000       143,000  
Prepaid expenses and other current assets     448,000       740,000  
Current deferred tax assets     367,000       342,000  
                 
Total current assets     14,247,000       7,706,000  
                 
PROPERTY AND EQUIPMENT, net     50,036,000       51,381,000  
                 
CERTIFICATE OF DEPOSIT     -       9,000,000  
INVESTMENT IN EQUITY SECURITIES     2,709,000       2,701,000  
OTHER ASSETS     536,000       954,000  
                 
TOTAL ASSETS   $ 67,528,000     $ 71,742,000  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Accounts payable   $ 421,000     $ 572,000  
Employee compensation and benefits     179,000       204,000  
Other accrued liabilities     763,000       2,238,000  
Current portion of long-term debt     2,005,000       4,804,000  
Current portion of capital leases     4,103,000       3,967,000  
Advances on line of credit     8,780,000       -  
                 
Total current liabilities     16,251,000       11,785,000  
                 
LONG-TERM DEBT, less current portion     8,586,000       10,740,000  
LONG-TERM CAPITAL LEASES, less current portion     12,190,000       12,950,000  
ADVANCES ON LINE OF CREDIT     -       8,840,000  
DEFERRED REVENUE, less current portion     874,000       -  
DEFERRED INCOME TAXES     3,473,000       3,372,000  
COMMITMENTS AND CONTINGENCIES (See Note 12)                
                 
SHAREHOLDERS’ EQUITY                
Common stock, no par value                
Authorized – 10,000,000 shares; Issued and outstanding shares – 5,361,000 in 2014 and 4,609,000 in 2013     10,376,000       8,578,000  
Additional paid-in capital     5,508,000       4,990,000  
Accumulated other comprehensive loss     -       (442,000 )
Retained earnings     5,542,000       6,494,000  
                 
Total equity- American Shared Hospital Services     21,426,000       19,620,000  
Non-controlling interests in subsidiaries     4,728,000       4,435,000  
                 
Total shareholders’ equity     26,154,000       24,055,000  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 67,528,000     $ 71,742,000  

 

See accompanying notes 2
 

 

American Shared Hospital Services
Consolidated Statement of Operations

 

    YEARS ENDED DECEMBER 31,  
    2014     2013     2012  
Revenue:                        
Medical services   $ 15,417,000     $ 17,584,000     $ 17,048,000  
      15,417,000       17,584,000       17,048,000  
                         
Costs of revenue:                        
Maintenance and supplies     1,691,000       1,791,000       1,529,000  
Depreciation and amortization     6,171,000       6,309,000       5,965,000  
Other direct operating costs     2,276,000       2,540,000       2,624,000  
      10,138,000       10,640,000       10,118,000  
                         
Gross margin     5,279,000       6,944,000       6,930,000  
                         
Selling and administrative expense     3,630,000       4,025,000       4,045,000  
Interest expense     1,699,000       1,799,000       2,155,000  
                         
Operating (loss) income     (50,000 )     1,120,000       730,000  
                         
(Loss) on sale of subsidiary     (572,000 )     -       -  
Gain (loss) foreign currency transactions     161,000       (1,174,000 )     132,000  
Interest and other income     28,000       25,000       58,000  
                         
(Loss) income before income taxes     (433,000 )     (29,000 )     920,000  
Income tax expense     129,000       84,000       107,000  
                         
Net (loss) income     (562,000 )     (113,000 )     813,000  
Less: net income attributable to non-controlling interests     (390,000 )     (199,000 )     (775,000 )
                         
Net (loss) income attributable to American Shared Hospital Services   $ (952,000 )   $ (312,000 )   $ 38,000  
                         
Net (loss) income per share attributable to American Shared Hospital Services:                        
(Loss) earnings per common share- basic   $ (0.19 )   $ (0.07 )   $ 0.01  
                         
                         
(Loss) earnings per common share- diluted   $ (0.19 )   $ (0.07 )   $ 0.01  

 

See accompanying notes 3
 

 

American Shared Hospital Services
Consolidated Statements of Comprehensive Income (Loss)

 

    YEARS ENDED DECEMBER 31,  
    2014     2013     2012  
                   
Net (loss) income attributable to American Shared Hospital Services   $ (952,000 )   $ (312,000 )   $ 38,000  
                         
Other comprehensive income (loss):                        
Foreign currency translation adjustments     779,000       (142,000 )     (637,000 )
                         
Total comprehensive (loss)     (173,000 )     (454,000 )     (599,000 )
Less comprehensive (loss) attributable to the non-controlling interest     337,000       (57,000 )     (280,000 )
                         
Comprehensive income (loss) attributable to American Shared Hospital Services   $ (510,000 )   $ (397,000 )   $ (319,000 )

 

See accompanying notes 4
 

 

American Shared Hospital Services
Consolidated Statement of Shareholders’ Equity

 

    THREE YEARS ENDED DECEMBER 31, 2014  
                                                 
                      Accumulated                          
                Additional     Other                 Non-controlling        
    Common     Common     Paid-in     Comprehensive     Retained     Sub-Total     Interests in        
    Shares     Stock     Capital     (Loss) Income     Earnings     ASHS     Subsidiaries     Total  
                                                 
Balances at January 1, 2012     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  
                                                                 
Non-controlling interest investment in subsidiaries     -       -       -       -       -       -       217,000       217,000  
                                                                 
Cumulative translation adjustment     -       -       -       (357,000 )     -       (357,000 )     (280,000 )     (637,000 )
                                                                 
Cash distributions to non-controlling interest     -       -       -       -       -       -       (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     3,000       -       88,000       -       -       88,000       -       88,000  
                                                                 
Non-controlling interest investment in subsidiaries     -       -       -       -       -       -       184,000       184,000  
                                                                 
Cumulative translation adjustment     -       -       -       (85,000 )     -       (85,000 )     (57,000 )     (142,000 )
                                                                 
Cash distributions to non-controlling interest     -       -       -       -       -       -       (792,000 )     (792,000 )
                                                                 
Net (loss) income     -       -       -       -       (312,000 )     (312,000 )     199,000       (113,000 )
                                                                 
Balances at December 31, 2013     4,609,000       8,578,000       4,990,000       (442,000 )     6,494,000       19,620,000       4,435,000       24,055,000  
                                                                 
Repurchase of common stock     (1,000 )     (2,000 )     -       -       -       (2,000 )     -       (2,000 )
                                                                 
Stock based compensation expense     3,000       -       373,000       -       -       373,000       -       373,000  
                                                                 
Private placement common stock     750,000       1,800,000       -       -       -       1,800,000       -       1,800,000  
                                                                 
Fair value of warrants issued with promissory notes     -       -       145,000       -       -       145,000       -       145,000  
                                                                 
Non-controlling interest investment in subsidiaries     -       -       -       -       -       -       517,000       517,000  
                                                                 
Cash distributions to non-controlling interests     -       -       -       -       -       -       (951,000 )     (951,000 )
                                                                 
Cumulative translation adjustment     -       -       -       442,000       -       442,000       337,000       779,000  
                                                                 
Net (loss) income     -       -       -       -       (952,000 )     (952,000 )     390,000       (562,000 )
                                                                 
Balances at December 31, 2014     5,361,000     $ 10,376,000     $ 5,508,000     $ -     $ 5,542,000     $ 21,426,000     $ 4,728,000     $ 26,154,000  

 

5 See accompanying notes
 

 

American Shared Hospital Services
Consolidated Statements of Cash Flows

 

    YEARS ENDED DECEMBER 31,  
    2014     2013     2012  
                   
OPERATING ACTIVITIES                        
Net (loss) income   $ (562,000 )   $ (113,000 )   $ 813,000  
Adjustments to reconcile net (loss) income to net cash from operating activities:                        
Depreciation and amortization     6,383,000       6,410,000       6,096,000  
(Gain) loss on disposal of assets     (1,000 )     20,000       3,000  
Loss on sale of subsidiary     572,000       -       -  
Deferred income tax     76,000       59,000       25,000  
(Gain) loss on foreign currency transactions     (161,000 )     1,174,000       (132,000 )
Stock-based compensation expense     138,000       88,000       74,000  
Other non-cash items     107,000       -       -  
Changes in operating assets and liabilities:                        
Receivables     1,069,000       (643,000 )     655,000  
Prepaid expenses and other assets     11,000       58,000       (316,000 )
Accounts payable and accrued liabilities     (859,000 )     1,023,000       (349,000 )
                         
Net cash from operating activities     6,773,000       8,076,000       6,869,000  
                         
INVESTING ACTIVITIES                        
Payment for purchase of property and equipment     (5,212,000 )     (1,710,000 )     (6,634,000 )
Investment in equity securities     (8,000 )     (14,000 )     (31,000 )
Proceeds from sale of subsidiary     768,000       -       -  
                         
Net cash used in investing activities     (4,452,000 )     (1,724,000 )     (6,665,000 )
                         
FINANCING ACTIVITIES                        
Principal payments on long-term debt     (3,263,000 )     (3,523,000 )     (6,818,000 )
Principal payments on capital leases     (4,429,000 )     (3,476,000 )     (3,732,000 )
Proceeds from long-term debt financing on property and equipment     2,625,000       1,298,000       9,219,000  
Advances on line of credit     1,140,000       369,000       1,300,000  
Payments on line of credit     (1,200,000 )     (79,000 )     (600,000 )
Capital contributions from non-controlling interests     117,000       184,000       217,000  
Distributions to non-controlling interests     (951,000 )     (792,000 )     (780,000 )
Private placements of common stock     1,800,000       -       -  
Common stock repurchase     (2,000 )     -       (28,000 )
Proceeds from promissory notes     1,000,000       -       -  
                         
Net cash used in financing activities     (3,163,000 )     (6,019,000 )     (1,222,000 )
                         
Net change in cash and cash equivalents     (842,000 )     333,000       (1,018,000 )
                         
Effect of changes in foreign exchange rates on cash     (8,000 )     12,000       2,000  
                         
CASH AND CASH EQUIVALENTS, beginning of year     1,909,000       1,564,000       2,580,000  
                         
CASH AND CASH EQUIVALENTS, end of year   $ 1,059,000     $ 1,909,000     $ 1,564,000  
                         
SUPPLEMENTAL CASH FLOW DISCLOSURE                        
Cash paid for interest   $ 2,070,000     $ 2,116,000     $ 2,352,000  
Cash paid for income taxes   $ 41,000     $ 44,000     $ 158,000  
                         
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES                        
Acquisition of equipment with capital lease financing   $ 3,709,000     $ 3,478,000     $ 264,000  
Warrants issued with promissory notes   $ 145,000     $ -     $ -  
Nonmonetary equipment trade-in   $ 700,000     $ -     $ -  
                         
Equipment relieved in sale of subsidiary   $ (4,921,000 )   $ -     $ -  
Other assets relieved in sale of subsidiary   $ (826,000 )   $ -     $ -  
Debt relieved in sale of subsidiary   $ 5,181,000     $ -     $ -  
Other liabilities relieved in sale of subsidiary   $ 14,000     $ -     $ -  
Net equity relieved in sale of subsidiary   $ 1,351,000     $ -     $ -  
OCI released to net income in sale of subsidiary   $ (779,000 )   $ -     $ -  
Investment released to net income in sale of subsidiary   $ (1,360,000 )   $ -     $ -  

 

6 See accompanying notes
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 1 – Business and Basis of Presentation

 

Business These financial statements include the accounts of American Shared Hospital Services (the “Company”) and its subsidiaries as follows: The Company wholly-owns the subsidiaries OR21, Inc. (“OR21”); MedLeader.com, Inc. (“MedLeader”), and American Shared Radiosurgery Services (“ASRS”). The Company is also the majority owner of Long Beach Equipment, LLC (“LBE”). ASRS is the majority-owner of GK Financing, LLC (“GKF”) which wholly-owns the subsidiaries GK Financing U.K., Limited (“GKUK”), and Instituto de Gamma Knife del Pacifico S.A.C. (“GKPeru”). GKF is also the majority-owner of the subsidiaries Albuquerque GK Equipment, LLC (“AGKE”), Jacksonville GK Equipment, LLC (“JGKE”) and EWRS, LLC (“EWRS”), which, prior to its sale in June 2014, wholly-owned the subsidiary, EWRS Tibbi Cihazlar Ticaret Ltd Sti (“EWRS Turkey”).

 

The Company (through ASRS) and Elekta AB, the manufacturer of the Gamma Knife (through its wholly-owned United States subsidiary, GKV Investments, Inc.), entered into an operating agreement and formed GK Financing, LLC. During 2014 GKF provided Gamma Knife units to eighteen medical centers in the United States in the states of Arkansas, California, Connecticut, Florida, Illinois, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Tennessee, Oklahoma, Ohio, Texas, Washington and Wisconsin, and two medical centers in Turkey, in the cities of Adana and Istanbul.

 

The Company also provided radiation therapy and related equipment directly to a medical center in Massachusetts and one in Adana, Turkey during 2014.

 

The Company has formed the subsidiaries GKUK, GKPeru, EWRS, 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 2015. GKUK is inactive and LBE is not expected to generate revenue in the next two years. The Company sold EWRS Turkey on June 10, 2014.

 

OR21 will provide the product “The Operating Room for the 21st Century SM ”, which is currently under development.

 

MedLeader was formed to provide continuing medical education online and through videos for doctors, nurses and other healthcare workers. This subsidiary is not operational at this time.

 

All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Note 2 – Accounting Policies

 

Use of estimates in the preparation of financial statements – In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for doubtful accounts, estimated useful lives of fixed assets and its salvage values, revenues and costs of sales for turn-key and revenue sharing arrangements, and the carrying value of its Mevion investment.  Actual results could differ from those estimates.

 

Advertising costs – The Company expenses advertising costs as incurred. Advertising costs were $155,000, $119,000, and $103,000 during the years ended December 31, 2014, 2013, and 2012, respectively. Advertising costs are recorded in other direct operating costs and sales and administrative costs in the consolidated statements of operations.

 

7  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 2 – Accounting Policies (continued

 

Cash and cash equivalents – The Company considers all liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Restricted cash is not considered a cash equivalent for purposes of the consolidated statements of cash flows.

 

Restricted cash – Restricted cash represents the minimum cash that must be maintained in GKF to fund operations.

 

Business and credit risk – The Company maintains its cash balances, which exceed federally insured limits, in financial institutions. Currently much of the Company’s cash is invested in a certificate of deposit. The Company has not experienced any losses and believes it is not exposed to any significant credit risk on cash, cash equivalents and securities. The Company monitors the financial condition of the financial institutions it uses on a regular basis.

 

All of the Company’s revenue was provided by twenty and nineteen customers in 2014 and 2013, and these customers constitute accounts receivable at December 31, 2014 and 2013, respectively. The Company performs credit evaluations of its customers and generally does not require collateral. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in any particular geographic area.

 

Accounts receivable and doubtful accounts – Accounts receivable are recorded at net realizable value. An allowance for doubtful accounts is estimated based on historical collections plus an allowance for probable losses. Receivables are considered past due based on contractual terms and are charged off in the period that they are deemed uncollectible. Recoveries of receivables previously charged off are recorded as revenue when received.

 

Non-controlling interests - The Company reports its non-controlling interests as a separate component of shareholders’ equity. The Company also presents the consolidated net income and the portion of the consolidated net income and other comprehensive income allocable to the non-controlling interests and to the shareholders of the Company separately in its consolidated statements of operations and comprehensive income (loss).

 

Property and equipment – Property and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, which for medical and office equipment is generally 3 – 15 years, and after accounting for salvage value on the equipment where indicated. Salvage value is based on the estimated fair value of the equipment at the end of its useful life. The Company capitalized interest of $371,000, $390,000, and $196,000 in 2014, 2013, and 2012, respectively, as costs of medical equipment.

 

The Company leases Gamma Knife and radiation therapy equipment to its customers under arrangements typically accounted for as operating leases. At December 31, 2014, the Company held equipment under operating lease contracts with customers with an original cost of $82,151,000 and accumulated depreciation of $46,138,000. At December 31, 2013, the Company held equipment under operating lease contracts with customers with an original cost of $86,712,000 and accumulated depreciation of $43,805,000.

 

Certificate of deposit – As of December 31, 2014 and 2013, the Company had a $9,000,000 investment in a certificate of deposit with a bank. On January 2, 2015 proceeds from the certificate of deposit were used to pay-off the Company’s line of credit agreement with the same bank who issued the certificate of deposit.

 

Investment in equity securities – As of December 31, 2014 the Company had common stock representing an approximate 0.77% interest in Mevion Medical Systems, Inc. (“Mevion”), and accounts for this investment under the cost method. The cost of the Company’s investment in Mevion was $2,709,000 and $2,701,000 as of December 31, 2014 and December 31, 2013, respectively. The Company reviews its investment in Mevion for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value of the investment may not be recoverable. See Note 4 – Investment in Equity Securities for further discussion.

 

8  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 2 – Accounting Policies (continued)

 

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 December 31, 2014 and December 31, 2013 were as follows (in thousands):

 

    Level 1     Level 2     Level 3     Total     Carrying
Value
 
December 31, 2014                                        
                                         
Assets:                                        
Cash, cash equivalents, restricted cash   $ 1,109     $ -     $ -     $ 1,109     $ 1,109  
Certificate of deposit     9,000       -               9,000       9,000  
Investment in equity securities     -       -       330       330       2,709  
Total   $ 10,109     $ -     $ 330     $ 10,439     $ 12,818  
                                         
Liabilities                                        
Advances on line of credit     8,780       -       -       8,780       8,780  
Debt obligations     -       10,658       -       10,658       10,591  
Total   $ 8,780     $ 10,658     $ -     $ 19,438     $ 19,371  
                                         
December 31, 2013                                        
                                         
Assets:                                        
Cash, cash equivalents, restricted cash   $ 1,959     $ -     $ -     $ 1,959     $ 1,959  
Certificate of deposit     9,000       -       -       9,000       9,000  
Investment in equity securities     -       -       300       300       2,701  
Total   $ 10,959     $ -     $ 300     $ 11,259     $ 13,660  
                                         
Liabilities                                        
Advances on line of credit     8,840       -       -       8,840       8,840  
Debt obligations     -       15,082       -       15,082       15,544  
Total   $ 8,840     $ 15,082     $ -     $ 23,922     $ 24,384  

 

Revenue recognition - Revenue is recognized when services have been rendered and collectability is reasonably assured, on either a fee per use or revenue sharing basis. As of December 31, 2014, there are no guaranteed minimum payments. The Company’s contracts are typically for a ten year term and are classified as either fee per use or retail. Retail arrangements are further classified as either turn-key or revenue sharing.

 

Revenue from fee per use contracts is determined by each hospital’s contracted rate. Revenue is recognized at the time the procedures are performed, based on each hospital’s contracted rate. Under revenue sharing arrangements, the Company receives a contracted percentage of the reimbursement received by the hospital. The amount the Company expects to receive is recorded as revenue and estimated based on historical experience. Under turn-key arrangements, the Company receives payment from the hospital in the amount of its reimbursement from third party payors, and the Company is responsible for paying all the operating costs of the Gamma Knife. The Company also records an estimate of net operating profit based on estimated revenues, less estimated operating costs. The gross amount the Company expects to receive is recorded as revenue and estimated based on historical experience and hospital contracts with third party payors. Revenue estimates are reviewed periodically and adjusted as necessary. Revenue recognition is consistent with guidelines provided under the applicable accounting standards for revenue recognition.

 

9  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 2 – Accounting Policies (continued)

 

Stock-based compensation – The Company measures all stock-based compensation awards at fair value and records such expense in its consolidated financial statements over the requisite service period of the related award. See Note 9 for additional information on the Company’s stock-based compensation programs.

 

Costs of revenue – The Company's costs of revenue consist primarily of maintenance and supplies, depreciation and amortization, and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and operating costs from the Company’s retail sites). Costs of revenues are recognized as incurred.

 

Sales and Marketing – The Company markets its services through its preferred provider status with Elekta and a direct sales effort led by its Vice President of Sales and Business Development and its Chief Operating Officer. The Company’s current business is the outsourcing of stereotactic radiosurgery services and radiation therapy services. The Company typically provides the equipment, as well as planning, installation, reimbursement and marketing support services.

 

Income taxes – The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. See Note 8 for further discussion on income taxes.

 

Comprehensive income (loss) – Comprehensive income (loss) encompasses all changes in shareholders’ equity other than those arising from transactions with stockholders, and consists of net loss and foreign currency translation adjustments.

 

Functional currency – 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 predominantly self-sufficient, the Company will change its accounting for the operation to the local currency from the U.S. dollar.

 

The Company determined that the functional currency of its Turkish operation, EWRS Turkey, should change from the U.S. dollar to the Turkish lira effective in the third quarter 2012. Therefore, in accordance with ASC 830, EWRS Turkey’s balance sheet accounts were translated at rates in effect as of August 31, 2012, or other rates in accordance with guidance provided under ASC 830, and accumulated gains and losses and translation differences were recorded in accumulated other comprehensive loss, which is a separate component of shareholders’ equity. Monthly, the Company's balance sheet accounts were translated at rates in effect as of the balance sheet date, and income and expense accounts were translated at the weighted average rates of exchange during the period following the change. Translation adjustments resulting from this process were also recognized under accumulated other comprehensive loss.

 

Gains and losses from foreign currency transactions and remeasurement are listed in the Company’s consolidated statements of operations. The net foreign currency gain for 2014, prior to the sale of EWRS Turkey, was $161,000 compared to a loss in 2013 of $1,174,000, and a gain of $132,000 in 2012.

 

Cumulative translation adjustment – Based on guidance provided in accordance with ASU No 2013-05 Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries of Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”), the Company no longer holds a financial interest in EWRS Turkey. As such, the cumulative translation adjustments previously recognized under accumulated other comprehensive income (loss) were released into net income as a component of the loss for the sale of EWRS Turkey in the statement of operations. The total cumulative translation adjustment of $779,000, previously recognized under accumulated other comprehensive income (loss), was included as a component of the loss calculation for the sale of EWRS Turkey, reported in the statement of operations for the year ended 2014.

 

10  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 2 – Accounting Policies (continued)

 

Discontinued Operations – Based on guidance provided in accordance with ASU No. 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), the Company has analyzed the factors that define a discontinued operation and determined that the sale of EWRS Turkey is considered the sale of a significant component, but does not represent a major shift in the business, and therefore is not a discontinued operation.

 

Effective May 31, 2014 (with closing occurring June 10, 2014) the Company sold EWRS Turkey for EUR 4.2 million (approximately $6.0M). The proceeds were used to reduce outstanding debt and the excess was cash to the Company of $768,000. Cash transactions were recorded for the time period June 1 to June 10, 2014, the date of closing. The Company recorded a loss on sale of subsidiary of $572,000. The Company is also eligible for an earn-out in fiscal years 2014 and 2015 based on future revenue derived from the units sold to Euromedic. It is not practicable to estimate the revenue from the earn-outs at this time and therefore no amounts have been recorded as of December 31, 2014

 

Earnings per share – Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the year. The fully vested restricted stock units not issued and outstanding, are also included therein. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options or warrants. The following table illustrates the computations of basic and diluted earnings per share for the years ended December 31, 2014, 2013 and 2012.

 

    2014     2013     2012  
                   
Numerator for basic and diluted (loss) earnings per share   $ (952,000 )   $ (312,000 )   $ 38,000  
                         
Denominator:                        
Denominator for basic (loss) earnings per share – weighted-average shares     5,028,000       4,608,000       4,609,000  
Effect of dilutive securities                        
Employee stock options/restricted stock units     3,000       3,000       3,000  
                         
Denominator for diluted (loss) earnings per share – adjusted weighted- average shares     5,031,000       4,611,000       4,612,000  
                         
(Loss) earnings per common share- basic   $ (0.19 )   $ (0.07 )   $ 0.01  
                         
(Loss) earnings per common share- diluted   $ (0.19 )   $ (0.07 )   $ 0.01  

 

In 2014, options outstanding to purchase 633,000 shares of common stock at an exercise price range of $2.43 - $6.16 per share, and warrants to purchase 200,000 shares of common stock, issued with promissory notes, at an exercise price of $2.20, were not included in the calculation of diluted earnings per share because they would be anti-dilutive.

 

In 2013, options outstanding to purchase 576,000 shares of common stock at an exercise price range of $2.30 - $6.50 per share were not included in the calculation of diluted earnings per share because they would be anti-dilutive.

 

In 2012, options outstanding to purchase 588,000 shares of common stock at an exercise price range of $2.76 - $6.50 per share were not included in the calculation of diluted earnings per share because they would be anti-dilutive.

 

11  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 2 – Accounting Policies (continued)

 

Business segment information - The Company, which engages in the business of leasing radiosurgery and radiation therapy equipment to health care providers, has one reportable segment, Medical Services Revenue.

 

The following table provides a break out of domestic and foreign allocations of medical services revenues and net property and equipment:

 

    2014     2013     2012  
                   
Medical services revenues                        
Domestic     97 %     91 %     93 %
                         
Foreign     3 %     9 %     7 %
                         
Total     100 %     100 %     100 %
                         
      2014       2013          
Property and equipment, net                        
Domestic     94 %     84 %        
                         
Foreign     6 %     16 %        
                         
Total     100 %     100 %        

 

Nonmonetary transactions – Based on guidance provided in accordance with ASC No. 845 Nonmonetary Transactions (“ASC 845”), barter transactions with commercial substance are recorded at the estimated fair value of the products exchanged, unless the products received have a more readily determinable estimated fair value. The Company entered into a lease agreement in December 2014 where the lessee exchanged certain medical services equipment for a nominal amount and more beneficial contract terms related to the revenue sharing arrangement. The Company estimated and recorded the fair value of the equipment received and recognized deferred revenue. The fair value of the equipment received during the year ended December 31, 2014 was $700,000.

 

Long lived asset impairment – The Company assesses the recoverability of its long-lived assets when events or changes in circumstances indicate their carrying value may not be recoverable. Such events or changes in circumstances may include: a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company assesses recoverability of a long-lived asset by determining whether the carrying value of the asset group can be recovered through projected undiscounted cash flows over their remaining lives. If the carrying value of the asset group exceeds the forecasted undiscounted cash flows, an impairment loss is recognized, measured as the amount by which the carrying amount exceeds estimated fair value. An impairment loss is charged to operations in the period in which management determines such impairment. No such impairment has been noted as of December 31, 2014 and 2013.

 

Out-of-Period Adjustment: During the fourth quarter of 2014, the Company reclassified $400,000 to non-controlling interests and $235,000 to additional paid-in capital that were incorrectly classified as liabilities. The corrections were not material to any previously reported financial periods or to the year ended December 31, 2014.

 

12  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 2 – Accounting Policies (continued)

 

Recently issued accounting pronouncements – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures and has not yet selected a transition method.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern ("ASU 2014-15 "). ASU 2014-15 provides guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for reporting periods ending after December 15, 2016. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to affect the Company's consolidated financial position, results of operations or cash flows.

 

Note 3 – Property and Equipment

 

Property and equipment consists of the following:

 

    DECEMBER 31,  
    2014     2013  
             
Medical equipment and facilities   $ 82,151,000     $ 86,712,000  
Office equipment     721,000       749,000  
Deposits and construction in progress     8,736,000       4,719,000  
Deposits towards purchase of proton beam systems     5,000,000       3,000,000  
                 
      96,608,000       95,180,000  
Accumulated depreciation     (46,572,000 )     (43,799,000 )
                 
Net property and equipment   $ 50,036,000     $ 51,381,000  

 

The Company has equipment that is secured under capitalized leases, which is included in Medical equipment and facilities, with a total cost of $29,548,000 and associated accumulated depreciation of $11,269,000 as of December 31, 2014 and a total cost of $30,538,000 and associated accumulated depreciation of $9,858,000 as of December 31, 2013.

 

As of December 31, 2014, the Company has $5,000,000 in deposits toward the purchase of three MEVION S250 proton beam radiation therapy (“PBRT”) systems from Mevion. The Company has a commitment for the remaining balance for each system. The Company’s first PBRT system was delivered in 2014. The Company has entered into a partnership agreement (LBE) with a radiation oncology physician group, which has contributed $400,000 towards the deposits on the third machine. The Company reviews the carrying value of these deposits for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value may not be recoverable. See Note 12-Commitments and Contingencies for additional discussion on purchase commitments.

 

Note 4 – Investment in Equity Securities

 

On April 10, 2006 the Company invested $2,000,000 for a convertible preferred stock interest in Mevion, formerly Still River Systems, Inc., a development-stage company based in Littleton, Massachusetts, which in collaboration with scientists from MIT’s Plasma Science and Fusion Center, is developing a medical device for the treatment of cancer patients using proton beam radiation therapy. The Company also has deposits towards the purchase of three Mevion PBRT systems as described more fully in Note 3.

 

13  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 4 – Investment in Equity Securities (continued)

 

The Company’s initial investment in Mevion consisted of approximately 2,353,000 shares of Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock is considered pari passu with previously issued Series A Convertible Preferred Stock.

 

On September 5, 2007 the Company invested approximately $617,000 for an additional equity interest in Mevion. This investment represented approximately 588,000 shares of Series C Convertible Preferred Stock, which is considered pari passu with the previously issued Series A and Series B Convertible Preferred Stock (all issues together “Preferred Stock”).

 

Since October 2008 Mevion had continued to offer a sequence of Series D rounds of funding to raise cash for its next phase of development and continued manufacture of the prototype model of the proton beam unit. Due to the troubled economy and scarcity of funds available during this time, these rounds were offered at a price less than the Company’s investment. Mevion received approximately $65 million from these Series D rounds.

 

In mid-2011, Mevion performed a reverse stock split of all shares in which 100 shares were converted to one share. The reason for the reverse stock split was to move the number of outstanding shares and price per share more in line with industry norms. The reverse stock split did not change any investor’s relative ownership in Mevion.

 

In January 2012, Mevion announced that it had closed a $45 million Series E round of financing which was used to accelerate the manufacturing and worldwide deployment of the MEVION S250. This round of financing was offered at a price per share higher than the effective price of the most recent Series D financing, and initially funded at 55%, with the remaining 45% due upon Mevion’s receipt of final FDA 510(k) clearance, which occurred during the second quarter 2012. The Company invested an additional $70,000 in the Series E round.

 

In June 2013, Mevion announced that it had secured a $55 million Series E round of financing, which will be used to accelerate the manufacturing and worldwide deployment of the MEVION S250. This round of financing was offered at a price per share higher than the effective price of the most recent Series E financing. The Company did not participate in this round of funding. Subject to the Pay-to-Play Provision, implemented through the amendment of the Sixth Amended and Restated Articles of Incorporation, the preferred shares held by the Company were converted to common shares.

 

Upon conversion of the Preferred Stock, the Company’s investment represents an approximate 0.77% interest in the common stock of Mevion where it remained as of December 31, 2014. The Company does not have a Board of Directors seat with Mevion.

 

In December 2014 Mevion announced that it had secured a $10M round of financing, which will be used to accelerate the manufacturing and worldwide deployment of the MEVION S250. This round of financing was offered at a price per share higher than the effective price of the most recent Series E financing. The Company did not participate in this round of funding.

 

The Company accounts for its investment in Mevion under the cost method and evaluates the investment 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 reviewed its investment in Mevion at December 31, 2014 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.

 

The lower price per share of the Series D and Series E offerings could be viewed as a reasonable estimate of the fair value of our cost-method investment, indicating that our investment is impaired. The Company estimates that there is currently an unrealized loss (impairment) of approximately $2.4M based on the issuance of the Series E funding compared to the Company’s cost of its investment.

 

14  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 4 – Investment in Equity Securities (continued)

 

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 and that the successful operation of the first MEVION S250 System and Mevion’s significant revenue backlog provide a higher potential valuation.

 

Note 5 – Long-Term Debt

 

Long-term debt consists primarily of eight notes with financing companies, related to Gamma Knife equipment and construction and installation, totaling $9,724,000, as of December 31, 2014. These notes are payable in 36 to 84 fully amortizing monthly installments, mature between December 2015 and November 2021, and are collateralized by the respective Gamma Knife units. The notes accrue interest at fixed annual rates between 3.95% and 7.48%. Long term debt as of December 31, 2014 also includes $1,000,000 in promissory notes and warrants funded by four members of the Company’s Board of Directors. The fair value of the warrants are estimated at $145,000 and are reported as capital contributed during 2014. The promissory notes are reported net of the amount allocated to the warrants, which is amortized over the term of the obligation. See Note 13-Note, Warrant, & Common Stock Purchase Agreement for additional discussion on promissory notes and warrants with the Board. As of December 31, 2013 long-term debt consisted of eleven notes totaling $15,544,000.

 

The following are contractual maturities of long-term debt by year at December 31, 2014:

 

Year ending December 31,   Principal     Interest  
2015   $ 2,053,000     $ 654,000  
2016     2,698,000       525,000  
2017     2,669,000       369,000  
2018     1,546,000       159,000  
2019     891,000       85,000  
Thereafter     867,000       58,000  
                 
    $ 10,724,000     $ 1,850,000  

 

Note 6 – Obligations Under Capital Leases

 

The Company has ten capital lease obligations with four financing companies, collateralized by Gamma Knife equipment having an aggregate net book value of $18,279,000 at December 31, 2014. These obligations have stated interest rates ranging between 5.15% and 9.50%, are payable in 60 to 84 monthly installments, and mature between July 2015 and May 2020. As of December 31, 2013, the Company had nine capital lease obligations with four finance companies with an aggregate net book value of $20,680,000. At the end of the lease term, the Company has a bargain purchase option to purchase the equipment.

 

15  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 6 – Obligations Under Capital Leases (continued)

 

Future minimum lease payments, together with the present value of the net minimum lease payments under capital leases at December 31, 2014, are summarized as follows:

 

    Net Present Value  
    of Minimum  
    Lease Payments  
Year ending December 31,        
2015   $ 5,108,000  
2016     4,783,000  
2017     4,282,000  
2018     2,714,000  
2019     1,415,000  
Thereafter     380,000  
Total capital lease payments     18,682,000  
Less imputed interest     2,389,000  
      16,293,000  
Less current portion     4,103,000  
    $ 12,190,000  

 

Note 7 – Line of Credit

 

As of December 31, 2014 and 2013, the Company had a $9,000,000 renewable line of credit with a bank secured by a certificate of deposit. The line of credit has been in place since June 2004. The Company’s earnings in 2013 were insufficient to satisfy the “profitability” covenant in the line of credit. The Bank waived this default on August 8, 2014 and agreed to change the maturity date of the facility to December 31, 2014. The line was paid-off using the proceeds from the certificate of deposit on January 2, 2015.

 

Borrowing under the line of credit is subject to interest expense at a rate equal to the bank’s prime rate minus 0.5 percentage point, or alternatively at the Company’s discretion, the LIBOR rate plus 1.0 percentage point. The weighted average interest rate on money borrowed against the line of credit during 2014 was 1.40%. As of December 31, 2014 and 2013, there was $8,780,000 and $8,840,000 borrowed against the line of credit, respectively.

 

Note 8 – Income Taxes

 

The Company has adopted accounting standards which prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Additionally, these accounting standards specify that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities. The Company has made no reclassifications between current taxes payable and long term taxes payable under this guidance. Also, the Company had no amounts of unrecognized tax benefits that, if recognized, would affect its effective income tax rate for the years ended December 31, 2014, 2013 and 2012.

 

The Company’s policy for deducting interest and penalties is to treat interest as interest expense and penalties as taxes. As of December 31, 2014, the Company had no amount accrued for the payment of interest and penalties related to unrecognized tax benefits.

 

16  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 8 – Income Taxes (continued)

 

The tax return years 2010 through 2014 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. Additionally, net operating losses generated on a tax return basis by the Company for calendar years 1999 through 2004 and 2009 remain open to examination by the major domestic taxing jurisdictions.

 

Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2014 and 2013 are as follows:

 

    DECEMBER 31,  
    2014     2013  
Deferred tax liabilities:                
Property and equipment   $ (7,145,000 )   $ (7,201,000 )
                 
Total deferred tax liabilities     (7,145,000 )     (7,201,000 )
                 
Deferred tax assets:                
Net operating loss carryforwards     3,424,000       3,607,000  
Accruals and allowances     173,000       240,000  
Tax credits     319,000       318,000  
Other – net     235,000       101,000  
Capital loss carryover     437,000       -  
                 
Total deferred tax assets     4,588,000       4,266,000  
                 
Valuation allowance     (549,000 )     (95,000 )
                 
Deferred tax assets net of valuation allowance     4,039,000       4,171,000  
                 
Net deferred tax liabilities   $ (3,106,000 )   $ (3,030,000 )

 

These amounts are presented in the financial statements as follows:

 

    DECEMBER 31,  
    2014     2013  
             
Current deferred tax assets   $ 367,000     $ 342,000  
Deferred income taxes (non-current)     (3,473,000 )     (3,372,000 )
                 
    $ (3,106,000 )   $ (3,030,000 )

 

17  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 8 – Income Taxes (continued)

 

The components of the provision for income taxes consist of the following:

 

    YEARS ENDED DECEMBER 31,  
    2014     2013     2012  
Current:                        
Federal   $ -     $ -     $ 18,000  
State     54,000       23,000       65,000  
Foreign     -       -       -  
Total current     54,000       23,000       83,000  
                         
Deferred:                        
Federal     (131,000 )     184,000       95,000  
State     40,000       12,000       (41,000 )
Foreign     166,000       (135,000 )     (30,000 )
Total deferred     75,000       61,000       24,000  
                         
    $ 129,000     $ 84,000     $ 107,000  

 

The provision for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2014, 2013 and 2012) to income before taxes as follows:

 

    YEARS ENDED DECEMBER 31,  
    2014     2013     2012  
                   
Computed expected federal income tax   $ (280,000 )   $ (92,000 )   $ 49,000  
State income taxes, net of federal benefit     66,000       120,000       38,000  
Non-deductible expenses     21,000       28,000       24,000  
Change in valuation allowance     416,000       (68,000 )     (61,000 )
Other     (94,000 )     96,000       57,000  
                         
    $ 129,000     $ 84,000     $ 107,000  

 

At December 31, 2014, the Company had net operating loss carryforwards for federal income tax return purposes of approximately $9,518,000 which expire between 2019 and 2033. The Company has net operating loss carryforwards for state income tax purposes of approximately $1,540,000 that begin to expire in 2014 and 2029. A substantial part of this carryforward is subject to separate return limitations.

 

Due to uncertainty surrounding the realization of capital losses and certain state net operating losses, the Company has placed a valuation allowance against a portion of its net domestic and foreign deferred tax assets. The net valuation allowance increased by $416,000, decreased by $68,000, and decreased by $61,000 for the tax years ended December 31, 2014, 2013, and 2012, respectively.

 

18  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 8 – Income Taxes (continued)

 

The Company’s ability to utilize its net operating loss carryforwards and other deferred tax assets may be limited in the event of a 50% or more ownership change within any three-year period. Future federal net operating losses generated by the Company can be carried forward for 20 years.

 

It is the intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. The Company does not provide for U.S. income taxes on the earnings of foreign subsidiaries as such earnings are to be reinvested indefinitely. As of December 31, 2014, there is a minimal cumulative amount of earnings upon which U.S. income taxes have not been provided.

 

Note 9 – Shareholders’ Equity

 

Incentive Compensation Plan

 

In June 2010 shareholders approved an amendment and restatement of the Company’s stock incentive plan, renaming it the Incentive Compensation Plan (the “Plan”), and among other things, increasing the number of shares of the Company’s common stock reserved for issuance under the Plan to 1,630,000. The Plan provides that the shares reserved under the Plan are available for issuance to officers of the Company, other key employees, non-employee directors, and advisors. The Plan is a successor to the Company’s previous plans, and any shares awarded and outstanding under those plans were transferred to the Plan. No further grants or share issuances will be made under the previous plans. As of December 31, 2014, approximately 738,000 shares remain available for grant under the Plan.

 

The Plan provides for nonqualified stock options, qualified (or incentive) stock options and stock grants. The Plan has a provision to reduce the number of shares reserved for award and issuance under the Plan by a ratio of 1.59 shares of common stock for each share of common stock that is issued pursuant to a Full Value Award (stock grant).

 

The Plan also provides for an Incentive Bonus Program with incentive bonus opportunities through performance unit awards and special cash incentive programs tied to the attainment of pre-established performance milestones.

 

Provisions of the Plan include an automatic annual grant to each non-employee director of options to purchase up to 2,000 shares on the date of the Company’s Annual Shareholder Meeting, at an exercise price equal to the market price of the Company’s common shares on that date, an automatic annual grant of 500 restricted stock units of the Company’s common shares and an annual cash retainer fee for Board or Board Committee service, which may be converted to restricted stock unit awards. Options and restricted stock units awarded under the automatic annual grant program for non-employee directors vest after one year. Restricted stock units awarded in lieu of retainer fees vest quarterly, over a one year period. These awards become outstanding upon the conclusion of the individual Board members service on the Company’s Board of Directors. Other options may vest fully and immediately, or over periods of time as determined by the Plan Administrator, but no longer than seven years from the grant date. Discretionary options currently awarded under the Plan vest over a period of 5 years.

 

Under the Plan, a total of 138,000 restricted stock units have been granted, consisting of 23,000 of annual automatic grants to non-employee directors and the corporate secretary and 115,000 of deferred retainer fees to non-employee members of the Board. The restricted stock units are fully vested but not yet deemed issued and outstanding as of December 31, 2014. The Company granted 3,000 shares of restricted stock and 30,000 shares of restricted stock in lieu of retainer fees in 2014 with a fair value of $2.64 per share. For the year ended December 31, 2014, total compensation expense recorded in the consolidated statements of income related to restricted stock units in lieu of retainer fees was $80,000. For the year ended December 31, 2014, total compensation expense recorded in the consolidated statements of income for annual restricted stock units awarded was $7,000, with an offsetting tax benefit of $1,900, as this expense is deductible for income tax purposes. As of December 31, 2014, there was $2,100 of total unrecognized compensation cost related to annual restricted sock units which is expected to be recognized over a period of .5 years. During 2014, 2013, and 2012 shares of restricted stock units totaling 3,000 with a fair value of approximately $6,000 vested and became unrestricted.

 

19  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 9 – Shareholders’ Equity (continued)

 

Changes in stock options outstanding under the Incentive Compensation Plans during 2014 are as follows :

 

                Weighted        
          Weighted     Average        
          Average     Remaining     Aggregate  
    Number     Exercise     Contractual     Intrinsic  
Options   of Options     Price     Term (Years)     Value  
                         
Balance at December 31, 2013     601,000     $ 3.50                  
Granted     522,000     $ 2.89                  
Exercised     -     $ -                  
Forfeited     (464,000 )   $ 3.34                  
                                 
Balance at December 31, 2014     659,000     $ 3.13       5.57     $ -  
                                 
Exercisable at December 31, 2014     123,000     $ 4.25       2.15     $ -  

 

The weighted average grant-date fair value of the options granted during the years 2014, 2013 and 2012 was $1.23, $1.28, and $1.60 respectively. There was no total intrinsic value of options exercised during any of the years ended December 31, 2014 and 2013 and 2012.

 

There was no cash received from options exercised under any share-based payment arrangements for the years ended December 31, 2014, 2013 and 2012, and as a result, there was no actual tax benefit realized for tax deductions from option exercises in any of those years.

 

Total compensation expense recognized for stock options for the years ended December 2014, 2013, and 2012 was $51,000, $88,000, and $74,000, respectively.

 

A summary of the status of the Company’s non-vested shares as of December 31, 2014, and changes during the year ended December 31, 2014 is presented below:

 

          Weighted  
          Average  
    Number     Grant-Date  
Nonvested Shares   of Options     Fair Value  
             
Nonvested at December 31, 2013     26,000     $ 1.25  
Granted     522,000     $ 1.23  
Vested     (12,000 )   $ 1.14  
Forfeited     -     $ -  
                 
Nonvested at December 31, 2014     536,000     $ 1.23  

 

At December 31, 2014, there was approximately $732,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. This cost is expected to be recognized over a period of approximately five years.

 

20  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 9 – Shareholders’ Equity (continued)

 

The Company’s stock-based awards to employees are calculated using the Black-Scholes options valuation model. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. 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 present value estimates. For these reasons, management believes that the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees.

 

The fair value of the Company’s option grants issued during 2014, 2013 and 2012 were estimated using assumptions for expected life, volatility, dividend yield, forfeiture rate, and risk-free interest rate which are specific to each award as summarized in the following table. The estimated fair value of the Company’s options is amortized over the period during which the optionee is required to provide service in exchange for the award, usually the vesting period.

 

The fair value of the Company’s option grants under the Plan in 2014, 2013 and 2012 was estimated using the following assumptions:

 

    2014     2013     2012  
                   
Expected life (years)     7.0       7.0       7.0  
Expected forfeiture rate     0.0 %     0.0 %     0.0 - 4.0 %
Expected volatility     40 %     49 %     40 - 45 %
Dividend yield     0 %     0 %     0 %
Risk-free interest rate     2.0 %     2.6 - 3.0 %     1.7 %

 

Repurchase of Common Stock, Common Stock Warrants and Stock Options

 

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. During 2014, the Company repurchased approximately 1,000 shares of its stock on the open market. There were no shares of the Company repurchased during 2013. During 2012 the Company repurchased approximately 9,000 shares of its stock on the open market. There are approximately 72,000 shares remaining under this repurchase authorization.

 

Note 10 – Retirement Plan

 

The Company has a defined-contribution retirement plan (the “Retirement Plan”) that allows for a matching safe harbor contribution. For 2014, the Board of Directors elected to match participant deferred salary contributions up to a maximum of 4% of the participant’s annual compensation. Discretionary profit sharing contributions are allowed under the Retirement Plan in years that the Board does not elect a safe harbor match. The Company has accrued approximately $43,000 for the estimated safe harbor matching contribution for the year ended December 31, 2014. The Company contributed $41,000 to the Retirement Plan for the safe harbor match for the years ended December 31, 2013 and December 31, 2012, respectively.

 

21  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 11 – Operating Leases

 

The Company leases office space and equipment under operating leases expiring at various dates through 2016. Future minimum payments under non-cancelable operating leases, net of expected sublease income, having initial terms of more than one year consisted of the following:

 

Year ending December 31,      
       
2015   $ 114,000  
2016     61,000  
Thereafter     -  
         
    $ 175,000  

 

Payments for repair and maintenance agreements incorporated in operating lease agreements are not included in the future minimum operating lease payments shown above.

 

Net rent expense was $301,000, $549,000, and $438,000 for the years ended December 31, 2014, 2013 and 2012, respectively, and includes the above operating leases as well as month-to-month rental and certain executory costs. Total rent expense was recognized net of sublease income of $173,000 and $116,000 for the years ended December 31, 2014 and 2013. In 2013, 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, resulting in a cumulative loss of $115,000. This loss will be amortized against total rent expense over the term of the sublease and it is included in total rent expense for 2014.

 

Note 12 – Commitments and Contingencies

 

As of December 31, 2014, the Company has contractual commitments to purchase three PBRT systems, one Gamma Knife Perfexion system, one Gamma Knife model 4C system, and two Cobalt-60 reloads, both at existing sites. Financing has been committed to the Model 4C unit and the Cobalt-60 reloads at existing sites. The Company has a lease financing commitment, pending execution of definitive documents, for an additional $9,000,000, for its first PBRT project. The total of these commitments is approximately $45,434,000, of which, the Company has made non-refundable deposits totaling approximately $7,784,000 towards the purchase of this equipment. The timing of progress payments for PBRT contracts two and three are dependent upon future events, for which, the Company has some latitude in the timing of the due dates of these commitments. Approximately $27,000,000 of these commitments are not expected to start becoming due until 2016.

 

    Commitment     Cash Deposits  
             
Proton Beam Units   $ 38,600,000     $ 5,000,000  
                 
Gamma Knife Units     6,834,000     2,784,000  
                 
Total Commitments   $ 45,434,000     $ 7,784,000  

 

The Gamma Knife model 4C system is projected to be installed in late 2015 at the Company’s new customer site in Peru. The Perfexion is for a site yet to be determined. The first PBRT system was delivered in December 2014 and the remaining two currently have anticipated delivery dates in 2015 and later, pending certain construction milestones. The deposits and progress payments are classified as deposits and construction in progress under Property and Equipment.

 

Note 13 – Note, Warrant, & Common Stock Purchase Agreement

 

The Company entered into a common stock purchase agreement (the “Purchase Agreement”) with three members of the Company’s Board of Directors, to sell, in a private offering, an aggregate of 650,000 shares of the Company’s common stock, no par value, for gross proceeds of approximately $1,600,000. The private offering closed on June 12, 2014. The Shares are restricted securities and may not be offered or sold absent registration under the Securities

22  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 13 – Note, Warrant, & Common Stock Purchase Agreement (continued)

 

Act of 1933. Pursuant to the terms of the Purchase Agreement, the Company has agreed to provide demand registration rights with respect to the Shares, with certain limited exceptions. The Investors’ demand registration rights will expire on June 12, 2015. Pursuant to the terms of the Purchase Agreement, the Company has also granted the Investors a one-year preemptive right to participate pro rata in future issuances of the Company’s common stock.

 

The Company entered into a Note and Warrant Purchase Agreement (the “Note and Warrant Purchase Agreement”) with four members of the Company’s Board of Directors to issue an aggregate of $1,000,000 in principal amount of promissory notes (the “Notes”) and warrants (the “Warrants”) to purchase an aggregate of 200,000 shares of the common stock, no par value (the “Common Stock”), of the Company (the “Notes and Warrants Offering”). The Notes will bear interest at a rate of 15.0% per annum and mature October 22, 2017. Interest only payments are due monthly with the option to prepay the outstanding principal on or after December 31, 2015. The Company is required to prepay the outstanding principal within five days of the next milestone payment to Mevion, if that occurs before the maturity date. The Warrants expire three years after their initial issuance date and may be exercised for a purchase price equal to $2.20 per share of Common Stock, the closing price per share of the Company’s Common Stock on the New York Stock Exchange MKT on the date preceding the date of the Note and Warrant Purchase Agreement.

 

Concurrently with the Note and Warrant Purchase Agreement, the Company entered into a common stock purchase agreement (the “Common Stock Purchase Agreement”) with one member of the Company’s board of directors to sell, in a private offering, 100,000 shares of the Company’s Common Stock (the “Private Placement Shares”), for gross proceeds of $220,000 (the “Common Stock Offering” and, together with the Notes and Warrants Offering, the “Private Offering”). The Common Stock Purchase Agreement contains terms and conditions that are customary for a transaction of this type.

 

The Company received gross proceeds of $1,220,000 in the Private Offering, which were used, together with cash on hand, to make two payments of $1,000,000 each to Mevion as deposits pursuant to the terms of purchase commitments with Mevion.

 

Note 14 – Significant Related Party Transactions

 

The Company’s Gamma Knife and IGRT businesses in Turkey was operated through EWRS Turkey. GKF owned indirectly 70% of EWRS Turkey, through its 70% ownership of EWRS LLC. The remaining 30% ownership of EWRS LLC was held by EMKA LLC (“EMKA”). EMKA is owned and operated by Mert Ozyurek (“Mr. Ozyurek”) who also sits on the Board of Directors of the Company. Mr. Ozyurek operates a foreign company called Ozyurek A.S. EWRS Turkey purchased its two Gamma Knife units from Ozyurek A.S. and had contracts for service and maintenance on the machines. The Company believes all its transactions with Mr. Ozyurek were arm’s-length transactions.

 

The Company’s Gamma Knife business is operated through its 81% indirect interest in its GKF subsidiary. The remaining 19% of GKF is owned by a wholly owned U.S. subsidiary of Elekta, which is the manufacturer of the Gamma Knife. Since the Company purchases its units from Elekta, there are significant related party transactions with Elekta such as equipment purchases, commitments to purchase equipment, deposits for such equipment purchases, and costs to maintain the equipment. The Company believes that all its transactions with Elekta are arm’s-length transactions. At December 31, 2014, the Company had commitments to purchase one Gamma Knife Perfexion system, one Gamma Knife model 4C system and two Cobalt-60 reloads from Elekta, as discussed in Note 12.

 

23  
 

 

American Shared Hospital Services
Notes to Consolidated Financial Statements

 

Note 15 – Major Customers

 

The Company’s revenue was provided by twenty customers in 2014 and nineteen customers in 2013 and 2012. In 2014, two customers each accounted for approximately 9% of total revenue. In 2013, two customers each accounted for approximately 10% of total revenue. In 2012, two customers accounted for approximately 13% and 11% of total revenue.

 

Note 16 – Subsequent Events

 

The Company has evaluated subsequent events through the date the financial statements were available to be issued.

 

24  

 

 

Exhibit 10.21c

 

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.

 

SECOND AMENDMENT TO PURCHASED SERVICES AGREEMENT

 

This SECOND AMENDMENT TO PURCHASED SERVICES AGREEMENT (this “Amendment”) is dated as of the 27th day of February, 2014, and is entered into between GK FINANCING, LLC, a California limited liability company (“GKF”), or its wholly owned subsidiary whose obligations hereunder shall be guaranteed by GKF, and KETTERING MEDICAL CENTER, an Ohio non-profit corporation, (“Medical Center”).

 

Recitals :

 

WHEREAS, GKF and Medical Center are parties to a certain Purchased Services Agreement dated as of November 19, 2008 (but dated December 9, 2008 by Medical Center), as amended by a First Amendment to Purchased Services Agreement (the "First Amendment") dated June 11, 2009 (as amended, the “Agreement”), which the parties desire to further amend as set forth herein.

 

NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereby agree as follows:

 

Agreement :

 

1. Defined Terms . Unless otherwise defined herein, the capitalized terms used herein shall have the same meanings set forth in the Agreement.

 

2. Extension of Term of the Agreement . Pursuant to the First Amendment, the Term of the Agreement was extended to July 31, 2016. The Term of the Agreement is hereby further extended for an additional three (3) years (i.e., to July 31, 2019), plus an additional period of time equal to the period of time that the Equipment is unavailable to perform procedures due to the “Reload” (as defined below) (which Reload is estimated to take approximately three (3) weeks). All references in the Agreement to the “Term” shall be deemed to refer to the Term, as extended hereby.

 

3. Cobalt Reload of the Equipment . The Equipment shall be reloaded with new Cobalt-60 that meets the manufacturer’s radioactivity level specifications (the “Reload”), subject to the following terms and conditions:

 

a. Scheduling and Process for the Reload . The Reload shall be performed at the Site and shall include any required installation and rigging. Subject to scheduling availability, GKF shall use its commercially reasonable efforts to perform the Reload in the third quarter of 2014; provided that the Reload shall be performed only after all necessary and appropriate licenses, permits, approvals, consents and authorizations, including, without limitation, the proper handling of the Cobalt-60 (collectively, the “Permits”), have been obtained by Medical Center at Medical Center’s sole cost and expense. The timing and procedure for such Reload shall be as mutually agreed upon between the parties. Notwithstanding anything to the contrary contained in this Amendment, GKF makes no representation or warranty to Medical Center concerning the Reload, and GKF shall have no obligation or liability to pay any damages to Medical Center resulting therefrom, including, without limitation, any lost revenues or profits during the period of time that the Equipment is unavailable to perform procedures due to the Reload process.

 

 
 

 

b. Medical Center Personnel and Services . Upon request and as required by GKF, Medical Center, at Medical Center’s cost and expense, shall provide GKF with Medical Center personnel (including Medical Center’s physicists) and services in connection with the Reload, among other things, to oversee, supervise and assist with construction and compliance with local, state and federal regulatory requirements and with nuclear regulatory compliance issues and the calibration of the Equipment.

 

c. Cost of Reload . Subject to Sections 3.a and 3.b above, the actual costs of the Reload paid or payable to third parties shall be the responsibility of GKF; provided that (i) in no event shall the total amount paid by GKF hereunder in connection with the Reload exceed * in the aggregate; and (ii) all Reload costs in excess of * in the aggregate shall be the responsibility of Medical Center. Medical Center shall not be entitled to reimbursement for its personnel costs, internal costs or overhead in connection with the Reload.

 

4. Captions . The captions and paragraph headings used herein are for convenience only and shall not be used in construing or interpreting this Amendment.

 

5. Full Force and Effect . Except as amended by this Amendment, all of the terms and provisions of the Agreement shall remain in full force and effect. In the event of any conflict or inconsistency between the terms and provisions of this Amendment and that of the Agreement, the terms and provisions of this Amendment shall prevail and control.

 

IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the date first written above.

 

GKF:   Medical Center:
     
GK FINANCING, LLC   KETTERING MEDICAL CENTER
         
         
By:   /s/ Ernest A. Bates, M.D.   By: /s/ Steve Chavez
  Ernest A. Bates, M.D.   Name:   Steve Chavez
  Policy Committee Member   Title: CFO

 

 

 

Exhibit 10.26c

 

THIRD AMENDMENT TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT

 

This THIRD AMENDMENT TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT (this “Third Amendment”) is dated effective as of the 15 th day of December 2014, and is entered into between GK FINANCING, LLC, a California limited liability company (“GKF”), and FROEDTERT MEMORIAL LUTHERAN HOSPITAL, INC., a non-profit Wisconsin corporation (“Medical Center”), with reference to the following facts:

 

RECITALS

 

WHEREAS, GKF and Medical Center are parties to a certain Lease Agreement for a Gamma Knife United dated May 28, 1999, which Lease Agreement was amended by letter addendums, by a First Amendment dated December 29, 2008, and by a Second Amendment dated May 16, 2013 (as amended, the “Agreement”); and

 

WHEREAS, the parties desire to further amend the terms and provisions of the Agreement as set forth herein.

 

NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereby amend the Agreement as follows:

 

AGREEMENT

 

1. Defined Terms . Unless otherwise defined herein, the capitalized terms used herein shall have the same meanings set forth in the Agreement.

 

2. Extension of Term . It is acknowledged that the Agreement is currently set to expire on December 15, 2014, which expiration date the parties hereby agree to extend to March 31, 2015.

 

3. Full Force and Effect . Except as amended by this Third Amendment, all of the terms and provisions of the Agreement shall remain in full force and effect. Notwithstanding the foregoing, to the extent of any conflict or inconsistency between the terms and provisions of this Third Amendment and that of the Agreement, the terms and provisions of this Third Amendment shall prevail and control.

 

[Signatures continued on next page]

 

 
 

  

IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the date first written above. 

 

GKF:   Medical Center:
         
GK FINANCING, LLC   FROEDTERT MEMORIAL LUTHERAN
      HOSPITAL, INC.
         
By: /s/ Ernest A. Bates, M.D.   By: /s/ Jeffrey Van De Kreeke
Name:   Ernest A. Bates, MD   Name:   Jeffrey Van De Kreeke
Title: Policy Committee Member   Title: Vice President, Finance

 

 

 

Exhibit 10.67

 

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 the date of the last party to sign below, by and between GK FINANCING, LLC, a California limited liability company (“GKF”) and PEACEHEALTH , a Washington non-profit corporation (“PeaceHealth”), doing business through its operating division PEACEHEALTH SACRED HEART MEDICAL CENTER AT RIVERBEND (“Medical Center”), with reference to the following facts:

 

R E C I T A L S

 

WHEREAS, PeaceHealth currently operates a Gamma Knife at another of its Oregon facilities; and

 

WHEREAS, PeaceHealth administrators do not consider the current Gamma Knife center financially viable; and

 

WHEREAS, the current Gamma Knife equipment requires expensive upkeep to remain functional, and is outmoded in comparison to more recently developed technology; and

 

WHEREAS, PeaceHealth administrators and GKF have determined through financial and community need analysis that a newer, more clinically flexible Gamma Knife, located at Medical Center, could reasonably be expected to serve a broader cohort of patients, enhancing quality of care and financial viability; and

 

WHEREAS, without access to additional resources, PeaceHealth would not be able to purchase or otherwise obtain access to newer, more flexible equipment, so that the quality of care available to the community could be adversely affected; and

 

WHEREAS, GKF is willing provide additional resources to PeaceHealth according to the terms and conditions of this Agreement, and thereby join with Medical Center to ensure that the community has access to updated, more flexible Gamma Knife services by providing Medical Center with the right to use a Leksell Gamma Knife ® Perfexion (the “Equipment”), manufactured by Elekta Instruments, Inc., a Georgia corporation ("Elekta"); and

 

 
 

 

WHEREAS, Medical Center is willing to transfer ownership of its current Leksell Gamma Knife ® Model 4C unit, serial number 4366 (the “Model 4C”) to GKF for * free and clear of any and all liens, encumbrances or debt obligations, and to join with GKF according to the terms and conditions of this Agreement to furnish Gamma Knife services to the people of the community.

 

A G R E E M E N T

 

NOW, THEREFORE, in consideration of the above recitals, which are hereby made a part of this Agreement, and of the mutual covenants, conditions and agreements set forth herein, and for 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, 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.

 

2. LGK Agreement . Simultaneously with the execution of this Agreement, Medical Center and Elekta shall enter into that certain Leksell Gamma Knife ® End User Agreement pertaining to the Equipment (the “LGK Agreement”). Medical Center shall 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 shall be entitled to enforce Medical Center’s performance, satisfaction and fulfillment of its obligations thereunder.

 

3. Term of the Agreement . The initial term (“Initial Term”) of this Agreement shall commence as of the date hereof and, unless earlier terminated or extended (“Renewal Term”; Initial Term and Renewal Term may be referred to collectively as the “Term”) 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 below) 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 any Term of this Agreement. Medical Center also shall apply for and use its reasonable 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 assistance to the Medical Center as reasonably requested 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.

 

 
 

 

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 September 30, 2014 , subject to all approvals and User Licenses having been obtained by Medical Center. GKF makes no representations or warranties, and assumes no responsibility or liability, concerning delivery of the Equipment to the Site or the actual date thereof. Medical Center shall bear no risk of loss prior to actual delivery of Equipment to the Site.

 

5.2 Medical Center shall provide access to the Site for the 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 (collectively 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 .

 

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 for the review and consideration of all plans and specifications following the submission thereof for approval (and GKF and Elekta 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 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.

 

 
 

 

6.2 Based upon the plans and specifications approved by GKF and Elekta, Medical Center, at its cost, expense and risk, shall prepare, 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. In connection with the construction of the Site, Medical Center, at its cost and expense, 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 that upon completion of preparation, construction, and improvement of the Site including the positioning of the Equipment on its foundation at the Site and installation of the 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 In accordance with the schedule determined by GKF and/or Elekta, Medical Center, at its cost, expense and risk, shall be responsible for the appropriate de-installation of the Model 4C, including the rigging in and out of (i) the Model 4C, and (ii) cobalt loading machine, and the loading of the Model 4C onto the truck furnished by Elekta at the Site. Notwithstanding the above, GKF, at GKF’s expense, shall be responsible for providing a cobalt loading machine that will unload and dispose the Model 4C’s cobalt (loading machine to be rigged in and out by the Medical Center). Effective upon the loading of the Model 4C onto the truck furnished by Elekta at the Site, and for a purchase price of *, Medical Center shall sell, assign, transfer and convey to GKF (or to Elekta, if designated by GKF), and GKF (or Elekta, if designated by GKF) shall purchase and acquire the Model 4C from Medical Center, free and clear of all liens, encumbrances and adverse claims. In furtherance of the foregoing, concurrently with the execution of this Agreement, Medical Center shall deliver to GKF a duly executed bill of sale in substantially the form set forth on Exhibit A attached hereto. Medical Center shall be responsible for any sales and use taxes levied by any state or political subdivision thereof which may become due and owing by reason of the sale of the Model 4C. It is acknowledged by the parties that GKF intends to trade in the Model 4C to Elekta for credit towards GKF's purchase of the Equipment, and that the trade in credit pertaining to the Model 4C has been factored by GKF into the calculation of the Purchased Services Payment set forth herein. Neither GKF nor Elekta shall bear any risk of loss prior to the loading of the Model 4C onto the truck furnished by Elekta at the Site.

 

 
 

 

6.6 Medical Center shall use its reasonable efforts to satisfy its obligations under this Section 6 in a timely manner. Medical Center shall keep GKF informed on a regular basis of its 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, Medical Center shall complete all construction and improvement of the Site required for the installation, positioning and testing of the Equipment 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.

 

7. Marketing Support .

 

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 to GKF 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 average marketing budget will not exceed * in the aggregate during the Term of this Agreement.

 

7.2 The Gamma Knife program at Medical Center (the “Program”) shall be named the PeaceHealth Sacred Heart Medical Center at RiverBend Gamma Knife Center of the Oregon Neuroscience Institute. All signage at the Gamma Knife center and all communications to the public regarding the Program shall identify the Program as being a Medical Center service, as required by applicable federal billing and reimbursement guidelines. The cost of the signage shall be treated as a shared marketing expense under Section 7.1 above. Without limiting Section 7.1 above, Medical Center shall use commercially reasonable and industry standard efforts to promote the 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, cobalt unloading assistance, 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 and other services rendered 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 in this Agreement:

 

(a) “Purchased Services Payments” shall be 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 other equipment or devices at the Site during the Term of this Agreement.

 

(b) " Gross Technical Component Collections " means *. Subject to all applicable legal requirements, Medical Center agrees that it will utilize best efforts to maximize third party reimbursement for the Program and revenues from the Program; provided , however , that GKF acknowledges and agrees that Medical Center shall perform Procedures as medically indicated 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) as medically indicated and consistent with appropriate utilization parameters of the Equipment.

 

 
 

 

8.3 Within thirty ( 3 0) 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.

 

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 Term, 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 Collections; 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 Program, and to include in new managed care contracts provisions covering such services

 

8.8 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. 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. Medical Center shall not use nor permit the Equipment to be used in any manner nor for any purpose which, in the opinion of Elekta or GKF, the Equipment is not designed or reasonably suitable.

 

9.2 Notwithstanding anything to the contrary contained in this Agreement, this is an agreement of purchasing a service only. 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. 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.

 

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, to cause this Agreement or any statement or other instrument showing the interest of GKF in the Equipment to be filed or recorded, or refiled or re-recorded, with all governmental agencies considered appropriate by GKF. 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 also shall promptly 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.

 

 
 

 

9.4 At Medical Center's cost and expense, Medical Center shall (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, (c) give GKF immediate written notice of any matter described in clause (b), 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 maintain on staff at least two (2) neurosurgeons, two (2) radiation oncologists and (1) physicist to operate the Equipment. 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 Provide reasonable and customary marketing materials (i.e. brochures, announcements, etc.) together with administrative and physician support (e.g., seminars for physicians by neurosurgeons and radiation therapists, in accordance with Medical Center’s policies and procedures, etc.) for the Equipment to be operated by the Medical Center. The obligation to provide marketing materials and administration and physician support shall be included in, and not in addition to, the annual marketing budget referenced in Section 7 above.

 

 
 

 

10.4 Keep and maintain the Equipment and the Site fully protected, 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.

 

10.5 Operate a fully functional radiation therapy department at the Site or Affiliate site which shall include the Equipment.

 

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 Pay the tuition costs for up to ten (10) Perfexion training slots for physicians and physicists who will be using the Equipment. Travel and entertainment associated with training shall not be the responsibility of GKF.

 

11.4 To the extent GKF personnel may, during the performance of their obligations under this Agreement, be exposed to or otherwise access Protected Health Information, as that term is defined in the Health Insurance Portability and Accountability Act of 1996 and regulations promulgated thereunder, codified at 45 C.F.R §§ 160 – 164, GKF agrees to ensure that GKF personnel who furnish services at Medical Center are trained as appropriate and comply with all privacy and security provisions of HIPAA and similar state and federal laws. GKF agrees to indemnify and hold harmless Medical Center for any breach of this Section 11.4, which shall survive the termination of this Agreement. Medical Center shall not disclose any Protected Health Information (and shall de-identify any Protected Health Information prior to its disclosure) to GKF or any of its personnel.

 

11.5 Provide suggested marketing materials for the Gamma Knife, including content for web pages, that GKF has found to be effective in other areas.

 

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

 

12.1 During the Term and except as otherwise provided in this Agreement, GKF, at its cost and expense, shall (a) 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.

 

 
 

 

12.2 GKF and Elekta shall have the right to 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.

 

12.3 Medical Center shall be liable for, and in the manner described in Section 21 below shall indemnify GKF from and against, any damage to or destruction of the Equipment caused by the misuse, improper use, or other intentional and wrongful or negligent acts or omissions of Medical Center’s officers, employees, agents, contractors and physicians. In the event the Equipment is damaged as a result of the misuse, improper use, or other intentional and wrongful or negligent acts or omissions of Medical Center’s officers, employees, agents, contractors and/or physicians, to the extent such damage is not covered by warranties or insurance, GKF may service or repair the Equipment as needed and the cost thereof shall be paid by Medical Center to GKF immediately upon written request together with 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.

 

12.4 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 determine, within thirty (30) days after it is given written notice of such damage or destruction, whether the Equipment can be repaired. In the event GKF determines that the Equipment cannot be repaired (a) subject to Section 12.3 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 then 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.

 

 
 

 

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. If (a) GKF and Medical Center agree to reload the Cobalt-60 source ( i.e. , on or around the 75 th month of the Term), then, notwithstanding any provisions to the contrary herein, the Initial Term shall be automatically extended for an additional three (3) 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 12.3, are GKF’s and Medical Center’s responsibility, respectively) shall be paid equally by GKF and Medical Center.

 

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 financing term ends or GKF exercises its buy-out option, if any, under the financing. If required by the Lender, GKF may also be required to assign its interest under this Agreement as security for the financing described above. Medical Center's interest under this Agreement shall be subordinate to the interests of the Lender, which Medical Center shall promptly confirm in writing on Lender's form, if requested by GKF.

 

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. In case of a failure by either party to pay any taxes, assessments, licenses or other charges when and as required under this Section, the other party may pay all or any part of such taxes, in which event the amount paid by such paying party shall be immediately payable to the paying party upon written request together with interest thereon at the rate of 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).

 

 
 

 

16. No Warranties by GKF . Medical Center warrants that as of the First Procedure Date, it shall have (a) thoroughly inspected the Equipment to the best of their 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 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. As between GKF and Medical Center, Medical Center shall bear all risks with respect to the foregoing warranties. Notwithstanding the foregoing, GKF shall use its commercially reasonable efforts as set forth below in this Section 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, 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. GKF shall not be responsible for the delivery or operation of the Equipment or for any delay or inadequacy of either or both of the foregoing.

 

 
 

 

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 one hundred eighty (180) 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 (b) the sum of the aggregate (i) debt service on the Equipment, (ii) maintenance expenses, (iii) marketing support, and (iv) Equipment-related personal property taxes and insurance during such period.

 

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

 

18.2 Terminate this Agreement as of the expiration of the Initial Term. Upon the expiration of the Initial 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.

 

18.3 Medical Center shall exercise one (1) of the two (2) options referred to above by giving an irrevocable written notice thereof to GKF at least one (1) year 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 two (2) options referred to above Medical Center is exercising. If Medical Center fails to exercise the option granted herein at least one (1) year 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 the option specified in Section 18.1 above and the parties are unable to mutually agree upon the length of the extension of the Initial Term or any other terms or conditions applicable to such extension prior to the expiration of the Initial 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 thirty (30) 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 thirty (30) 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 items thereof, except as expressly permitted herein.

 

19.1.3 Medical Center fails to observe or perform any of its covenants, duties or obligations arising under this Agreement or the LGK 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 as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation or files an answer admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or it or its shareholders shall take any action looking to its dissolution or liquidation.

 

19.1.5 Within sixty (60) days after the commencement of any proceedings against Medical Center seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceedings shall not have been dismissed, or if within thirty (30) days after the appointment without Medical Center consent or acquiescence of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated.

 

 
 

 

19.1.6 Medical Center is suspended or terminated from participation in the Medicare program.

 

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 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, 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.

 

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 as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation or files an answer admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or it or its shareholders shall take any action looking to its dissolution or liquidation.

 

 
 

 

19.2.5 Within sixty (60) days after the commencement of any proceedings against GKF seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceedings shall not have been dismissed, or if within thirty (30) days after the appointment without GKF consent or acquiescence of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated.

 

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 as to the Equipment, wherever situated, but only upon the occurrence of a GKF Event of Default under Subsections 19.2.1 or 19.2.2. 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 and/or 19.2.2.

 

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, 19.1.2, 19.1.6 and/or noncompliance with Sections 10.1 and/or 10.5 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 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) recover from Medical Center as liquidated damages for the loss of the bargain represented by this Agreement and not as a penalty an amount equal to the present value of the unpaid estimated future Purchased Services Payments to be made by Medical Center to GKF through the end of the Term discounted at the rate of nine percent (9%), which liquidated damages shall become immediately due and payable. The unpaid estimated future Purchased Services Payments shall be based on the prior twelve (12) months Purchased Services Payments made by Medical Center to GKF hereunder with an annual four (4%) percent increase thereof through the end of the Term. Medical Center and GKF acknowledge that the liquidated damages formula set forth in this Section constitutes a reasonable method to calculate GKF’s damages resulting from any Termination Default and under the circumstances existing as of the date of this Agreement.

 

 
 

 

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, 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 as of the date of termination. In the event that Medical Center shall pay the liquidated damages referred to in Section 19.3.2 above to GKF, GKF shall pay to Medical Center promptly after receipt thereof all rentals or proceeds received from the reletting or sale of the Equipment during the balance of the Initial Term (after deduction of all costs and expenses, including reasonable attorneys’ fees and costs, incurred by GKF as a result of the Event of Default), said amount never to exceed the amount of the liquidated damages paid by Medical Center. 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 16 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.

 

20. Insurance .

 

20.1 During the Term, GKF shall, at its cost and expense, purchase and maintain in effect an all-risk property and casualty insurance policy covering the Equipment. 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. The all-risk property and casualty insurance policy maintained by GKF 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 Site (together with all premises where the Site is located) and the use or operation of the Equipment by Medical Center or its officers, directors, agents, employees, contractors or physicians. Medical Center has a self-insured retention coverage which provides 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 program is operated by PeaceHealth and is funded in accordance with recognized actuarial projections. GKF shall be named as additional insured party on the general liability and professional 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. PeaceHealth will not cancel or terminate this program of self-insurance without at least thirty (30) days prior written notice to GKF, together with a description of the insurance program to be substituted; provided that GKF shall be named as an additional insured party on any such substitute insurance programs or policies, as evidenced by a certificate of insurance or other reasonable documentation which shall be delivered by Medical Center upon request to GKF.

 

 
 

 

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.

 

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.

 

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 attorneys’ 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) defects arising out of materials or parts provided, modified or designed by Medical Center for or with respect to the Site; (d) the maintenance of the Site during the Term by Medical Center; (e) 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); (f) 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) ; and (g) any other matters for which Medical Center has specifically agreed to indemnify GKF pursuant to this 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 attorneys’ 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 or removal of the Equipment, (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.

 

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 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 t he 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.

 

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.

 

22. Miscellaneous .

 

22.1 Binding Effect . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Medical Center shall not assign this Agreement or any of its rights hereunder or sublease the Equipment without the prior written consent of GKF, which consent shall not be unreasonably withheld; 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 GKF, an assignment or sublease shall not relieve Medical Center of any liability for performance of this Agreement during the remainder of the Term. Any purported assignment or sublease made without GKF’s prior written consent shall be null, void and of no force or effect .

 

 
 

 

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 Attorneys’ Fees and Costs . In the event of any action, arbitration or other proceedings between or among the parties hereto with respect to this Agreement, the non-prevailing party or parties to such action, arbitration or proceedings shall pay to the prevailing party or parties all costs and expenses, including reasonable attorneys’ fees, incurred in the defense or prosecution thereof by the prevailing party or parties. The party which is a “prevailing party” shall be determined by the arbitrator(s) or judge(s) hearing the matter and shall be the party who is entitled to recover his, her or its costs of suit, whether or not the matter proceeds to a final judgment, decree or determination. A party not entitled to recover his, her or its costs of suit shall not recover attorneys’ fees. If a prevailing party or parties shall recover a decision, decree or judgment in any action, arbitration or proceeding, the costs and expenses awarded to such party may be included in and as part of such decision, decree or judgment.

 

22.5 Entire Agreement; Amendment . This Agreement together with the Exhibits and Schedules 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 written and oral agreements 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.

 

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 by the parties hereto. All counterparts shall be construed together and shall constitute one agreement.

 

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 Oregon.

 

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 Ambiguities . 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.

 

22.13 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.

 

22.14 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: GK Financing, LLC
    4 Embarcadero Center, Suite 3700
    San Francisco, CA 94111
    Attn: Craig K. Tagawa, CEO
     
  To Medical Center: PeaceHealth Sacred Heart Medical Center at RiverBend
    3333 RiverBend Drive
    Springfield, OR  97477
    Attn: Hospital Administrator

 

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.

 

22.15 Special Provisions Respecting Medicare and Medicaid Patients

 

22.15.1 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.

 

22.15.2 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.

 

 
 

 

22.15.3 It is the intent of the parties to comply fully with all applicable requirements of federal law, including but not limited to the Federal Anti-Kickback Statute, codified at 42 U.S.C. § 1320a-7b, and regulations promulgated thereunder, codified at 42 C.F.R. § 1001.952. All payments under this Agreement have been negotiated at arm’s length and are, to the best knowledge of the parties, consistent with fair market value for items and services rendered. Nothing in this Agreement is intended to encourage or induce referral for any item or service payable under federal health care programs.

 

22.16 Force Majeure . Failure to perform by either party will be excused in the event of any delay or inability to perform its duties under this Agreement directly or indirectly caused by conditions beyond its reasonable control, including, without limitation, fires, floods, earthquakes, snow, ice, disasters, acts of God, accidents, riots, wars, operation of law, strikes, governmental action or regulations, shortages of labor, fuel, power, materials, manufacturer delays or transportation problems. 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. Notwithstanding the foregoing, and for the avoidance of doubt, (i) no reductions or other changes to reimbursement amounts and/or payment methodology(ies) pertaining to any third party payors or governmental programs, including, without limitation, Medicare, Medicaid, any other federal or state programs, and/or any commercial payors, and (ii) no suspension or exclusion of Medical Center from participation in the Medicare program shall be deemed to constitute a force majeure event under this Section, and shall not excuse or delay Medical Center’s obligations under this Agreement or provide Medical Center with the right to terminate this Agreement.

 

22.17 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.

 

22.18 Supplier and Owner of Equipment . The parties hereto agree that, notwithstanding anything to the contrary set forth in this Agreement, this Agreement is and shall be treated and interpreted as a "finance lease," as such term is defined in Article 2A of the Uniform Commercial Code, that GKF shall be treated as a finance lessor who is entitled to the benefits and releases from liability accorded to a finance lessor under Article 2A of the Uniform Commercial Code. In furtherance of the foregoing, Medical Center acknowledges that, before signing this Agreement, GKF has informed Medical Center in writing (a) that Elekta is the entity supplying the Equipment to GKF, (b) that Medical Center is entitled (under Section 2A of the Uniform Commercial Code) to the promises and warranties, including those of any third party, provided to GKF by Elekta which is the entity supplying the goods in connection with or as part of the contract by which GKF acquired the Equipment or the right to possession and use of the Equipment, and (c) that Medical Center may communicate with Elekta and receive an accurate and complete statement of those promises and warranties, including any disclaimers and limitations of them or of remedies. Medical Center also acknowledges that Medical Center has selected Elekta to supply the Equipment and has directed GKF to acquire the Equipment or the right to possession and use of the Equipment from Elekta.

 

 
 

 

22.19 Legal Status .

 

22.19.1 Notwithstanding anything to the contrary herein, if two (2) independent legal counsel specializing in healthcare law (collectively, the “Independent Legal Counsel”), one of whom shall be chosen by and at the expense of Medical Center, and one of whom shall be chosen by and at the expense of GKF, issue separate written legal opinions addressed to both of the parties stating that performance by either of the parties hereto of any term of this Agreement shall jeopardize the licensure of Medical Center, or the full accreditation of Medical Center by Medical Center’s accrediting body, or the tax-exempt status of PeaceHealth, or the ability of PeaceHealth to issue tax-exempt bonds or should be in violation of applicable laws or regulations (each, a "Disqualifying Event"), then, the parties mutually agree to use their best efforts to renegotiate such term. In the event (a) the parties are unable to renegotiate said term within sixty (60) days following receipt of such written opinions from the Independent Legal Counsel; and (b) the Independent Legal Counsel each determine in writing that any modification to the Agreement would be impossible, illegal or would disqualify a party from providing services to Medicare or Medicaid patients, then, (i) either party may terminate this Agreement upon thirty (30) days prior written notice to the other party, except for any obligations under the Agreement accruing to the date of termination and those obligations surviving the date of termination as provided hereunder; and (ii) if any part or all of the representations and warranties made by Medical Center set forth in Section 22.19.3 were untrue as of the date made, then, Medical Center shall, upon such termination, pay to GKF as liquidated damages for the loss of the bargain represented by this Agreement and not as a penalty an amount equal to that specified in Section 19.3.2(b).

 

22.19.2 Each party shall select one of the two Independent Legal Counsel to render the aforementioned opinions. All costs and expenses of the Independent Legal Counsel will be borne by the party initiating the request unless the determination is made by the Independent Legal Counsel as described above that the performance by either of the parties hereto of any term of this Agreement shall result in the occurrence of a Disqualifying Event, in which event, such costs and expenses shall be shared equally between the parties. In the event that the two Independent Legal Counsel render conflicting opinions, either the parties hereto shall decide upon a third attorney who meets the above qualifications or shall instruct the Independent Legal Counsel to select a third attorney specializing in healthcare law to review and render an opinion, which opinion by such third attorney shall be binding on both parties. Under the circumstance of having to select a third attorney, the costs of the Independent Legal Counsel shall be borne by the party selecting such counsel and the costs of the third attorney shall be borne equally by the parties.

 

 
 

 

22.19.3 Medical Center represents and warrants to GKF that, as of the date of the parties' respective execution and delivery of this Agreement, (a) no Disqualifying Event has occurred or will occur as of such date; and (b) the percentage of tax-exempt bond proceeds and/or tax-exempt bond financed property (pertaining to any specific tax-exempt bond issue or in the aggregate) that are used directly or indirectly for any private business use (after taking into account the effect of this Agreement) does not exceed nine hundredths percent (.09%). For purposes of determining at any time or from time-to-time the percentage of tax-exempt bond proceeds and/or tax-exempt bond financed property (pertaining to any specific tax-exempt bond issue or in the aggregate) that are used directly or indirectly for any private business use, Medical Center shall (and any Independent Legal Counsel shall be instructed to) disregard any private business use unrelated to this Agreement arising or that has been placed into service after the commencement date of the Initial Term of this Agreement.

 

[Signatures on next page]

 

 
 

 

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:  
    Title:  
    Date:                         
       
  “MEDICAL CENTER” PEACEHEALTH SACRED HEART
MEDICAL CENTER AT RIVERBEND
       
    By:  
    Title:  
    Date:  

 

 
 

 

Exhibit A

 

BILL OF SALE

 

This BILL OF SALE is executed and delivered effective as of the date of the last party to sign below, but is made effective at the “Effective Time" (as defined below) by PEACEHEALTH, a Washington non-profit corporation (“PeaceHealth”), doing business through its operating division PEACEHEALTH SACRED HEART MEDICAL CENTER AT RIVERBEND (“Medical Center”), and GK FINANCING, LLC, a California limited liability company ("GKF").

 

1. In consideration for the sum of * and other good and valuable consideration, effective as of the Effective Time, Medical Center hereby sells, bargains, grants, assigns, conveys, transfers and delivers to GKF, and GKF hereby accepts, all of Medical Center’s right, title and interest to the equipment listed on Schedule A attached hereto (collectively, the "Equipment"). As used herein, the “Effective Time" shall mean the date on which the Equipment is loaded by Medical Center onto the truck furnished by Elekta Instruments, Inc. ("Elekta") at the "Site" (as defined in the below-referenced Agreement).

 

2. Medical Center hereby covenants and agrees with GKF that Medical Center shall duly execute and deliver all such deeds, bills of sale, endorsements, assignments, drafts, checks, and other instruments of transfer as may be necessary or helpful more fully to sell, transfer, assign and convey to and to invest in GKF, the Equipment hereby sold, transferred, assigned and conveyed by this Bill of Sale.

 

3. Medical Center represents and warrants that it has full, complete and absolute right to transfer the Equipment to GKF. Medical Center further represents and warrants that the Equipment is free and clear of all liens, claims, debts, liabilities, liens and encumbrances of any kind. All of the terms and provisions of this Bill of Sale shall be binding upon Medical Center and its respective successors and assigns, and shall inure to the benefit of GKF and its successors and assigns. Medical Center agrees to indemnify, defend and hold GKF and its successors and assigns harmless from and against all expenses including reasonable attorneys’ fees, costs, losses, liabilities, judgment and damages including amounts paid in settlement incurred by GKF and its successors and assigns in connection with any claim, assertion or lawsuit made or brought by any party claiming title to or any interest whatsoever in the Equipment, other than a party claiming to have derived its interest as a grantee of GKF.

 

4. This Bill of Sale is being executed and delivered in connection with that certain Purchased Services Agreement dated ______, 2014, between Medical Center and GKF (the "Agreement"). This Bill of Sale is in all respects subject to the provisions of the Agreement and is not intended in any way to supersede, limit or qualify any provision of the Agreement. This Bill of Sale may be assigned at any time by GKF to Elekta without Medical Center's consent.

 

5. This Bill of Sale shall be governed by and construed in accordance with the laws of the State of Oregon without regard to the principles of conflicts of laws.

 

 
 

 

IN WITNESS WHEREOF, Medical Center has caused this Bill of Sale to be executed by its duly authorized officers effective as of the Effective Date.

 

  PEACEHEALTH SACRED HEART
  MEDICAL CENTER AT RIVERBEND
     
  By:                      
  Title:    
  Date:  

 

 

AGREED AND ACCEPTED:  
   
GK FINANCING, LLC  
   
By:                
Title:      
Date:    

 

 
 

 

Schedule 1

 

The Purchased Services Payment percentage is as follows:

 

Purchased Services Payment Percentage:            *

  

 

Exhibit 21

 

The subsidiaries of American Shared Hospital Services are :

 

MedLeader.com, Inc.

A California corporation

 

OR21, Inc.

A California corporation

 

Long Beach Equipment, LLC

A Delaware limited liability company

 

American Shared Radiosurgery Services

A California corporation

 

Subsidiaries of American Shared Radiosurgery Services

 

GK Financing, LLC

A California limited liability company

 

Subsidiaries of GK Financing, LLC

 

Albuquerque GK Equipment, LLC

A Delaware limited liability company

 

Jacksonville GK Equipment, LLC

A Delaware limited liability company

 

Instituto de Gamma Knife del Pacifico S.A.C.

A Peruvian company

 

GK Financing U.K. LTD

An England and Wales private limited company

 

EWRS, LLC

A Delaware limited liability company

 

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in the Registration Statements (No. 333-170650, No. 333-139446, No. 333-81138, No. 333-73172, No. 333-08009) on Form S-8 of our report dated March 31, 2015, relating to the consolidated financial statements appearing in the Annual Report on Form 10-K of American Shared Hospital Services for the year ended December 31, 2014.

 

/s/ Moss Adams LLP

 

San Francisco, CA

March 31, 2015

 

 

 

Exhibit 31 (a)

 

CERTIFICATION

 

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

 

1. I have reviewed this annual report on Form 10-K for the period ended December 31, 2014 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 officer 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, or caused such disclosure controls and procedures to be designed under our supervision, 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;

 

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 (the registrant’s 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; and

 

5. The registrant's other certifying officer 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 the registrant's board of directors (or persons performing the equivalent functions):

 

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 control over financial reporting .

 

March 31, 2015

 

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

 

 

Exhibit 31 (b)

 

CERTIFICATION

 

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

 

1. I have reviewed this annual report on Form 10-K for the period ended December 31, 2014 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 officer 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, or caused such disclosure controls and procedures to be designed under our supervision, 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;

 

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 (the registrant’s 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; and

 

5. The registrant's other certifying officer 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 the registrant's board of directors (or persons performing the equivalent functions):

 

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 control over financial reporting

 

March 31, 2015

 

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

 

 

 

 

Exhibit 32

March 31, 2015

 

Securities and Exchange Commission

450 Fifth Street, N.W

Washington, D.C. 20549

 

Ladies and Gentlemen:

 

The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Rule 13a-14(b) and 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. This certification is not to be deemed filed pursuant to the Exchange Act and does not constitute a part of the Annual Report on Form 10-K (the “Report”) accompanying this letter.

 

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 operationsof American Shared Hospital Services.

 

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