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American Shared Hospital Services – ‘10-K/A’ for 12/31/97

As of: Friday, 8/28/98 · For: 12/31/97 · Accession #: 950149-98-1536 · File #: 1-08789

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/28/98  American Shared Hospital Services 10-K/A     12/31/97    2:110K                                   Bowne - San Francisco/FA

Amendment to Annual Report — Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K/A      Form 10-K/A (1)                                       50    218K 
 2: EX-23.1     Consent of Ernst & Young LLP                           1      6K

10-K/A — Form 10-K/A (1)
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Business Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) Cost of Operations Earnings per Share Exhibits, Financial Statement Schedules, and Reports on Form 8-K Financial Statement Schedule General Interest expense Liquidity and Capital Resources Management's Discussion and Analysis of Financial Condition and Results of Operations Net income (loss) Notes to Consolidated Financial Statements Report of Independent Auditors Selected Financial Data Summary of Operations Selling and Administrative Stockholders' equity (Net capital deficiency) Valuation and Qualifying Accounts Write-down of intangible assets
1	1st Page - Filing Submission
2	Item 6. Selected Financial Data Summary of Operations
4	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
"	General
"	Cost of Operations
5	Selling and Administrative
6	Interest expense
"	Write-down of intangible assets
7	Net income (loss)
8	Liquidity and Capital Resources
9	Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
"	Report of Independent Auditors
17	Consolidated Balance Sheets
18	Stockholders' equity (Net capital deficiency)
19	Consolidated Statements of Operations
20	Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)
21	Consolidated Statements of Cash Flows
23	Notes to Consolidated Financial Statements
"	Business
27	Earnings per Share
48	Financial Statement Schedule
49	Valuation and Qualifying Accounts

10-K/A 1st Page of 50 TOC ↑Top Previous Next ↓Bottom Just 1st
 

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-K/A(1)
(MARK ONE)                                                                      

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE          
SECURITIES EXCHANGE ACT OF 1934                                 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 

OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE      
SECURITIES EXCHANGE ACT OF 1934                                 

FOR THE TRANSITION PERIOD FROM ____________ TO ____________ 

COMMISSION FILE NUMBER 1-8789 

AMERICAN SHARED HOSPITAL SERVICES 
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                                                [Download Table]
                                                                           
               CALIFORNIA                             94-2918118           
    (STATE OR OTHER JURISDICTION OF       (IRS EMPLOYER IDENTIFICATION NO.)
     INCORPORATION OR ORGANIZATION)                                        
  FOUR EMBARCADERO CENTER, SUITE 3620,                                     
       SAN FRANCISCO, CALIFORNIA                        94111              
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)           

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415)788-5300

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: 

                                                                [Download Table]

   TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
   -------------------                 -----------------------------------------
                                                                                
COMMON STOCK NO PAR VALUE            AMERICAN STOCK EXCHANGE                    
                                     PACIFIC EXCHANGE                           

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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

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

   As of March 20, 1998, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $6,229,519.               

    Number of shares of common stock of the registrant outstanding as of March
20, 1998: 4,769,384.                                                            

NO DOCUMENTS ARE INCORPORATED BY REFERENCE IN THIS REPORT.

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ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS                           

YEAR ENDED DECEMBER 31, 
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

                                                        [Enlarge/Download Table]

                                         1997     1996     1995(1)     1994     1993(2)  
                                        -------  -------   --------   -------   -------- 
                                                                                         
Medical services revenues.............. $37,172  $36,989   $ 34,077   $38,545   $ 39,485 
                                        =======  =======   ========   =======   ======== 
Costs of operations....................  27,044   28,071     32,675    34,145     37,071 
Selling and administrative expense.....   5,901    5,309      8,432     5,971      6,820 
Interest expense.......................   3,671    4,199      5,310     7,423      6,752 
Write-down of intangible assets........       0        0        600         0      5,308 
                                        -------  -------   --------   -------   -------- 
          Total costs and expenses.....  36,616   37,579     47,017    47,539     55,951 
                                        -------  -------   --------   -------   -------- 
                                            556     (590)   (12,940)   (8,994)   (16,466)
Gain on sale of assets and early                                                         
  termination of capital leases........     821        3        226     3,294        124 
Interest and other income..............     155      227        258       183        691 
                                        -------  -------   --------   -------   -------- 
Income (loss) before income taxes and                                                    
  extraordinary item...................   1,532     (360)   (12,456)   (5,517)   (15,651)
Income tax provision (benefit).........      10       (7)         3        20         (7)
                                        -------  -------   --------   -------   -------- 
Income (loss) before extraordinary                                                       
  item.................................   1,522     (353)   (12,459)   (5,537)   (15,644)
Extraordinary item.....................       0        0     19,803       362          0 
                                        -------  -------   --------   -------   -------- 
Net income (loss)...................... $ 1,522  $  (353)  $  7,344   $(5,175)  $(15,644)
                                        =======  =======   ========   =======   ======== 
Earnings (loss) per common share:                                                        
  Income (loss) before extraordinary                                                     
     item.............................. $  0.32  $ (0.08)  $  (2.96)  $ (1.93)  $  (5.46)
  Extraordinary item................... $  0.00  $  0.00   $   4.71   $  0.13   $   0.00 
                                        -------  -------   --------   -------   -------- 
  Net income (loss).................... $  0.32  $ (0.08)  $   1.75   $ (1.80)  $  (5.46)
                                        =======  =======   ========   =======   ======== 
Earnings (loss) per common share                                                         
  assuming dilution:                                                                     
  Income (loss) before extraordinary                                                     
     item.............................. $  0.24  $ (0.08)  $  (2.96)  $ (1.93)  $  (5.46)
  Extraordinary item................... $  0.00  $  0.00   $   4.71   $  0.13   $   0.00 
                                        -------  -------   --------   -------   -------- 
Net income (loss) per common share                                                       
  assuming dilution.................... $  0.24  $ (0.08)  $   1.75   $ (1.80)  $  (5.46)
                                        =======  =======   ========   =======   ======== 

See Accompanying Notes. 
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BALANCE SHEET DATA

                                                        [Enlarge/Download Table]

                                                            DECEMBER 31,                       
                                       ------------------------------------------------------- 
                                        1997        1996      1995(1)       1994      1993(2)  
                                       -------    --------    --------    --------    -------- 
                                                                                               
Working capital deficiency...........  $(8,039)   $(10,888)   $ (6,793)   $(33,369)   $(56,518)
Total assets.........................   30,209      32,969      31,335      47,222      50,179 
Current portion of long-term debt and                                                          
  obligation under capitalized                                                                 
  leases.............................   10,929      13,182       8,720      11,214      26,635 
Long-term debt and obligations under                                                           
  capitalized leases less current                                                              
  portion............................   21,569      23,935      26,125      24,244       3,106 
Senior subordinated notes............        0           0         773      18,467      18,788 
Stockholders' equity (Net capital                                                              
  deficiency)........................  $(8,953)   $(10,475)   $(10,576)   $(22,341)   $(17,754)

---------------                                                                 
(1) In June 1995, ASHS incorporated a new wholly-owned subsidiary, African      
American Church Health And Economic Services, Inc. ("ACHES") and ACHES' 
wholly-owned subsidiary, ACHES Insurance Services, Inc. ("AIS"), and in 
October 1995, entered into an operating agreement granting ASRS an 81%  
    ownership interest in GK Financing, LLC. Accordingly, the financial data for
the Company presented above include the results of the establishment of 
ACHES, AIS, and GK Financing, LLC for 1995 through 1997.                

(2) In August 1993, ASHS incorporated a new wholly owned subsidiary, American   
  Shared Radiosurgery Services ("ASRS"). Accordingly, the financial data for
   the Company presented above include the results of the establishment of the
subsidiary for 1993 through 1997.                                       

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

GENERAL                                                                         

The Company had net income of $1,522,000 ($0.32 per share) on medical 
services revenues of $37,172,000 in 1997. The Company had a net loss of $353,000
($(0.08) per share) on medical services revenues of $36,989,000 in 1996.        

TOTAL REVENUES                                                                  

                                                        [Enlarge/Download Table]

                                          INCREASE                 INCREASE          
                                 1997    (DECREASE)     1996      (DECREASE)   1995  
                                -------  ----------    -------    ----------  -------
                                                   (IN THOUSANDS)                    
                                                                                     
Medical Services............... $37,172     0.5%       $36,989       8.6%     $34,077

Medical services revenues increased 0.5% in 1997 compared to 1996, and
increased 8.6% in 1996 compared to 1995. The 0.5% increase in 1997 and the 8.6% 
increase in 1996 compared to prior years were primarily due to increases in MRI 
revenues.                                                                       

     MRI revenues increased 2% ($650,000) in 1997 compared to 1996 and increased
11% ($2,667,000) in 1996 compared to 1995. The increases in 1997 and 1996 were  
primarily due to the commencement of new customer contracts and increased       
utilization from contracts commenced in prior periods. MRI revenues as a        
percentage of total medical services revenues were 76%, 75% and 73% in years    
1997, 1996 and 1995, respectively.                                              

  The Company's non-MRI diagnostic imaging services revenues decreased 19%
($1,176,000) in 1997 compared to 1996 after a 1% ($60,000) decrease in 1996     
compared to 1995. The revenue decline in 1997, compared to 1996, was primarily  
attributable to decreased CT revenue which was due to utilization of two (2)    
fewer CT units in 1997, and decreased nuclear medicine revenue due to the       
termination of an in-house nuclear medicine contract in March 1997. Revenues    
from CT operations decreased $614,000 in 1997 and $26,000 in 1996 from 1995     
revenues of $3,563,000. The decrease in Nuclear Medicine and Ultrasound revenues
was $562,000 in 1997 and $34,000 in 1996 from a 1995 revenue base of $2,782,000.
Non-MRI diagnostic imaging services revenues as a percentage of total medical   
services revenues was 14%, 17% and 18% for the years ended 1997, 1996 and 1995, 
respectively. The Company's CT, Ultrasound, and Nuclear Medicine services       
revenues continue to decline because customers are increasingly buying their own
equipment.                                                                      

  Contract service revenues consisting of Respiratory Therapy services and
Cardiac Catheterization Laboratory revenues increased $354,000 in 1997 compared 
to 1996 and decreased $415,000 in 1996 compared to 1995. The increase in 1997   
was primarily due to revenues from the Cardiac Catheterization Laboratory       
contracts which commenced May 1996 and December 1996, respectively. The decrease
in 1996 compared to 1995 resulted primarily from four terminated Respiratory    
Therapy service contracts in 1995. The Company currently has one Respiratory    
Therapy service contract.                                                       

Gamma Knife revenues increased $354,000 and $705,000 in 1997 and 1996,
respectively, compared to the prior years. The 1997 increase was primarily due  
to the commencement of a third Gamma Knife unit in September 1997. The increase 
in 1996 was a result of the inclusion of results of the Company's second Gamma  
Knife beginning in February 1996.                                               

COST OF OPERATIONS                                                              

                                                        [Enlarge/Download Table]

                                           INCREASE                 INCREASE           
                                 1997     (DECREASE)     1996      (DECREASE)   1995   
                                -------   ----------    -------    ----------  ------- 
                                                    (IN THOUSANDS)                     
                                                                                       
Cost of Operations, Exclusive                                                          
  of Write-Down of Equipment... $27,044      (3.7)%     $28,071        (2.7)%  $28,850 
Percentage of Revenue..........    72.8%                   75.9%                  84.7%
Write-Down of Equipment........ $     0         0%      $     0      (100.0)%  $ 3,825 
Percentage of Revenue..........     0.0%                    0.0%                  11.2%

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  The Company's cost of operations, consisting of payroll, maintenance and
supplies, depreciation and amortization, equipment rental and other operating   
expenses (such as vehicle fuel, building rents, regional office costs,          
insurance, property taxes, bad debt expense, fees and training expenses)        
decreased $1,027,000 in 1997 and $4,604,000 in 1996 compared to prior years.    

Medical services payroll costs, the largest component of total cost of
operations, increased by $221,000 in 1997 compared to 1996 and increased by     
$328,000 in 1996 compared to 1995. Medical services payroll costs as a percent  
of medical services remains constant at 20% in years 1997, 1996 and 1995. The   
1997 and 1996 increase was primarily due to staffing increases to service       
additional MRI customer volumes and an increase in staffed units in 1997.       

The Company's maintenance and supplies costs were 16%, 18% and 20% of 
medical service revenues in 1997, 1996 and 1995 respectively. Maintenance and   
supplies costs decreased $739,000 in 1997 compared to 1996 and decreased $68,000
in 1996 compared to 1995. The decreases in 1997 and 1996 are primarily          
attributable to MRI maintenance cost savings.                                   

   Depreciation and amortization decreased $233,000 in 1997 compared to 1996
and $1,671,000 in 1996 compared to 1995. The decrease in 1997 was primarily     
attributable to decreased MRI and nuclear medicine depreciation as a result of  
fewer MRI units accounted for as capital leases in 1997. The decrease in 1996 is
primarily attributable to the early adoption of Financial Accounting Standards  
No. 121 (FAS 121) during the second quarter of 1995 as explained in detail      
below. In addition, the majority of capital leases were extended as of October  
1, 1995 thereby extending the depreciable life of the asset (as leased assets   
are depreciated based on lease terms) and decreasing depreciation expense       
commencing the fourth quarter of 1995.                                          

 Equipment rental as a percentage of medical services revenues was 7% in
1997, 9% in 1996 and 8% in 1995. Equipment rental decreased $763,000 in 1997    
compared to 1996 and increased $641,000 in 1996 compared to 1995. The decrease  
in 1997 is primarily attributable to the return of five (5) MRI rental units    
which resulted from mobile route consolidation and customer contract            
terminations. The increase in 1996 is primarily attributable to the utilization 
of short-term MRI and CT rentals to meet customer commitments.                  

    Other costs of operations as a percentage of medical services revenues was
12%, 11% and 12% in 1997, 1996 and 1995, respectively. The increase of $487,000 
in 1997 compared to 1996 reflects increased fuel, personal property tax costs,  
insurance, and bad debt expenses. The decrease of $9,000 in 1996 compared to    
1995 reflects a decrease in equipment and CON related costs and regional office 
administrative costs offset by increased fuel costs, MRI space rental costs and 
physician reading fees.                                                         

In connection with the early adoption of the statement of Financial   
Accounting Standards No. 121 (FAS 121) during the second quarter of 1995,       
management reviewed the recoverability of the carrying value of long-lived      
assets, primarily fixed assets, goodwill and deferred costs. The Company        
initiated its review of potential loss impairment due to the continuing changes 
in the health care environment which have put downward pressure on customer and 
equipment pricing and reduced forecasted operating results for certain assets to
a level below previous expectations. Following its review, management concluded 
that there was an impairment in the recorded value of fixed assets, goodwill and
deferred costs under FAS 121 based on management's estimate of future           
undiscounted cash flows over the estimated remaining useful life of certain     
assets. Accordingly, an impairment loss of $4,425,000 was recorded in the second
quarter of 1995 based on the differences between the fair value of such assets  
as determined by third parties and the recorded values. The impairment loss is  
comprised of a charge for the write-downs of equipment and deferred assets of   
$3,825,000 (primarily MRI, CT and Nuclear Medicine) and goodwill of $600,000.   

SELLING AND ADMINISTRATIVE                                                      

                                                        [Enlarge/Download Table]

                                             INCREASE                INCREASE          
                                    1997    (DECREASE)     1996     (DECREASE)   1995  
                                   ------   ----------    ------    ----------  ------ 
                                                      (IN THOUSANDS)                   
                                                                                       
Selling and Administrative                                                             
  Costs........................... $5,901      11.2%      $5,309      (37.0)%   $8,432 
Percentage of Revenue.............   15.9%                  14.4%                 24.7%

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   The Company's selling and administrative costs increased $592,000 in 1997
compared to 1996 and decreased $3,123,000 in 1996 compared to 1995. The increase
in 1997 was primarily due to increased sales and administrative payroll costs,  
building rental costs, audit and tax fees and legal fees associated with a      
proposed acquisition of the Company which was not consummated. The decrease in  
1996 is primarily attributable to a 1995 stock compensation expense totaling    
$2,679,000 which is comprised of shares and options issued to the Company's     
Chairman and Chief Executive Officer, Ernest A. Bates, M.D. Salary and wage     
expense was charged $265,000 in the second quarter of 1995 for the issuance of  
184,000 Common Shares to Dr. Bates for his continued services to the Company and
his personal guarantee of $6,500,000 of indebtedness of the Company. In         
addition, during the fourth quarter of 1995, a charge to salary and wage expense
of $2,414,000 was recorded in connection with the grant to Dr. Bates, following 
shareholder approval, of an option to acquire 1,495,000 additional Common Shares
for $0.01 per share as further consideration for his continued service to the   
Company and his personal guarantee of $6,500,000 of the Company's new credit    
facilities. See "Liquidity and Capital Resources." The decrease in 1996 was also
related to reduced legal and insurance costs.                                   

INTEREST EXPENSE                                                                

                                                        [Enlarge/Download Table]

                                             INCREASE                INCREASE          
                                    1997    (DECREASE)     1996     (DECREASE)   1995  
                                   ------   ----------    ------    ----------  ------ 
                                                      (IN THOUSANDS)                   
                                                                                       
Interest Expense.................. $3,671     (12.6)%     $4,199      (20.9)%   $5,310 
Percentage of Revenue.............    9.9%                  11.4%                 15.6%

    The Company's interest expense decreased $528,000 in 1997 compared to 1996
and $1,111,000 in 1996 compared to 1995. The decreases in 1997 and 1996 are     
primarily attributable to a lower outstanding amount of interest bearing debt   
due to the repurchase by the Company on May 17, 1995 of $17,964,000 aggregate   
principal amount of its Senior Subordinated Notes, the exchange for common      
shares ($413,000 aggregate principal amount) and payment at maturity ($360,000  
aggregate principal amount) of its Senior Subordinated Notes in the third and   
fourth quarters of 1996, respectively, and decreased capitalized lease-related  
interest.                                                                       

WRITE-DOWN OF INTANGIBLE ASSETS                                                 

                                                        [Enlarge/Download Table]

                                             INCREASE                INCREASE          
                                    1997    (DECREASE)     1996     (DECREASE)   1995  
                                   ------   ----------    ------    ----------  ------ 
                                                      (IN THOUSANDS)                   
                                                                                       
Write-down of Intangible Assets...      0       0.0%      $    0       (100)%   $  600 
Percentage of Revenue.............    0.0%                   0.0%                  1.8%

     The Company's write-down of intangible assets decreased $600,000 in 1996 as
compared to 1995. The decrease in 1996 compared to 1995 is solely attributable  
to the early adoption of FAS 121 in the second quarter of 1995. See "Cost of    
Operations" above.                                                              

IMPACT OF YEAR 2000                                                             

     Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer     
programs have time-sensitive software that recognize a date using "00" as the   
year 1900 rather than the year 2000. This could cause a system failure or       
miscalculations causing disruption of operations, including among other things, 
a temporary inability to process transactions, send invoices, or engage in      
similar normal business activities.                                             

    The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly    
with respect to dates in the year 2000 and thereafter. The total Year 2000      
project cost has not been estimated, but is not expected to be material.        

The Company believes that with modifications to existing software and 
conversions to new software, the Year 2000 issue will not pose significant      
operational problems for its computer systems. However, if such modifications   
and conversions are not made or are not completed timely, the Year 2000 issue   
could have a material impact on the operations of the Company.                  

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OTHER INCOME AND EXPENSE                                                        

                                                                [Download Table]

                                        INCREASE                    INCREASE        
                                1997   (DECREASE)       1996       (DECREASE)  1995 
                                ----   ----------  --------------  ----------  ---- 
                                                   (IN THOUSANDS)                   
                                                                                    
Gain on Sale of Assets and                                                          
  Early Termination of Capital                                                      
  Leases....................... $821     27,267%        $  3         (98.7)%   $226 
Percentage of Revenue..........  2.2%                    0.0%                   0.7%
Interest and Other Income...... $155      (31.7)%       $227         (12.0)%   $258 
Percentage of Revenue..........  0.4%                    0.6%                   0.8%

The Company's gain on sale of assets and early termination of capital 
leases increased $818,000 in 1997 compared to 1996 and decreased $223,000 in    
1996 compared to 1995. The increase in 1997 was the result of a gain on the     
early termination of a capital lease ($141,000) when the customer's in-house    
nuclear medicine contract was terminated during March 1997, an insurance        
settlement ($388,000) following the loss of a mobile MRI unit in an accident    
during second quarter 1997, a gain on sale of another MRI unit ($140,000) during
third quarter 1997 and a gain on sale of a mobile SPECT unit ($115,000) in the  
fourth quarter of 1997. Gain on sale of equipment fluctuates depending on the   
timing of asset dispositions. The Company continues to sell non-essential assets
in the normal course of business.                                               

NET INCOME (LOSS)                                                               

                                                        [Enlarge/Download Table]

                                            INCREASE                INCREASE               
                                  1997     (DECREASE)     1996     (DECREASE)      1995    
                                 ------    ----------    ------    ----------    --------  
                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)          
                                                                                           
Income (loss) Before Income                                                                
  Taxes and Extraordinary                                                                  
  Item.......................... $1,532      525.6%      $ (360)      (97.1)%    $(12,456) 
Percentage of Revenue...........    4.1%                   (1.0)%                   (36.6)%
Income (loss) per Share......... $ 0.32      500.0%      $(0.08)      (97.3)%    $  (2.96) 
Extraordinary Item.............. $    0        0.0%      $    0      (100.0)%    $ 19,803  
Extraordinary Item, per Share... $ 0.00       0.00%      $ 0.00      (100.0)%    $   4.71  
Net Income (loss)............... $1,522      531.2%      $ (353)     (104.8)%    $  7,344  
Net Income (loss) per Share..... $ 0.32      500.0%      $(0.08)     (104.6)%    $   1.75  

    The Company had net income of $1,522,000 in 1997 compared to a net loss of
$353,000 for 1996. Net income for 1997 resulted in part from increased operating
margins and in part from gains from early termination of capital leases and sale
of assets.                                                                      

   The Company had a net loss of $353,000 for 1996 compared to net income of
$7,344,000 for 1995. The Company's net income for 1995 included an extraordinary
gain of $19,803,000 from its debt restructuring recorded on May 17, 1995. The   
gain resulted from the purchase of $17,694,000 aggregate face amount plus       
$8,853,000 of accrued and unpaid interest of the Company's 14 3/4% and 16 1/2%  
Senior Subordinated Notes due October 15, 1996 net of cash, Common Shares and   
warrants to purchase Common Shares issued and transaction related costs of      
$3,893,000, $1,836,000 and $1,015,000, respectively. Included in the Company's  
1995 results was a charge of $4,425,000 due to adoption of FAS 121 and stock    
compensation expense of $2,679,000 (see "Selling and Administrative").          

 The Company's net income (loss) for 1997, 1996 and 1995 was enhanced by
$526,000, $0, and $2,567,000, respectively, due to the realization of deferred  
tax assets in conformity with FAS 109. The Company has maintained a valuation   
allowance completely off-setting its deferred tax assets based on Management's  
evaluation of the realizability of these deferred tax assets based on FAS 109.  

   At the end of 1996 and 1997, the Company had deferred tax asset valuation
allowances of $9,600,000 and $8,000,000. These valuation allowances were        
established after weighing the potential effect of negative and positive        
evidence regarding the realizability of the Company's deferred tax assets. The  
Company's prior history of net operating losses was given significant weight, as
required under Statement of Financial Accounting Standards No. 109. The Company 
did not consider the gain which would be recognized in connection with the      

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transaction with Alliance Imaging, Inc. (discussed below) because of the lack of
assurance that the transaction will be consummated. Reductions in previously    
established valuation allowances increased reported earnings by $2,660,000 in   
1995, $300,000 in 1996 and $1,600,000 in 1997. The reduction in 1995 resulted   
from the recognition of financial statement income, adjusted for permanent      
differences, of $7,600,000. The decreases in 1996 and 1997 resulted in part from
the recognition of financial statement losses, adjusted for permanent           
differences, of $66,000 in 1996 and the recognition of financial statement      
income, adjusted for permanent differences, of $1,760,000 in 1997. Virtually all
of the additional decrease in 1996 resulted from decreases in the carrying      
amount of net operating loss carryover. Additional decreases in 1997 resulted   
from decreases in the carrying amount of deferred tax assets for carryovers,    
fixed assets, and other items because of decreases in the amount of net         
operating loss carryover and decreases in the tax attributes associated with    
fixed assets and other items during 1997. The decreases in the carrying amounts 
of net operating losses and tax attributes associated with fixed assets and     
other items in 1996 and 1997 were made because it was determined that the tax   
carrying amounts for those carryovers and attributes were overstated. The       
effects of these additional decreases were $194,000, $500,000 and $290,000      
respectively.                                                                   

In the event that the proposed sale transaction (see Part I, Item 1   
"Business -- General -- Recent Developments") is consummated, the Company       
anticipates that it will fully realize its deferred tax assets.                 

LIQUIDITY AND CAPITAL RESOURCES                                                 

   The Company had cash and cash equivalents of $17,000 at December 31, 1997
compared to $368,000 at December 31, 1996. The Company's cash position decreased
$351,000 due primarily to the Company's debt payment requirements and working   
capital needs.                                                                  

    Restricted cash of $651,000 and $218,000 at December 31, 1997 and December
31, 1996, respectively, reflects cash that may only be used for the operations  
of GK Financing, LLC. The increase in restricted cash is due to cash flow from  
Gamma Knife operations.                                                         

    On May 17, 1995, the Company repurchased (the "Notes Repurchase") for cash
and securities approximately 96% of its outstanding Senior Subordinated Notes   
("Subordinated Notes"). The Notes Repurchase, together with a December 1994     
lease restructuring and the availability of up to $8,000,000 of new debt        
financing, concluded a broad restructuring of the Company's obligations as more 
fully explained in the Company's 1996 Form 10-K.                                

  On December 29, 1995 and March 1, 1996, the Company further restructured
certain of its medical equipment leases and related notes (the "GE Notes") to   
extend the terms of the leases for periods of up to an additional 26 months, to 
defer certain monthly lease payments and to defer certain installment payments  
due at the beginning of 1996. This further restructuring resulted in payment    
reductions of approximately $1,200,000 for the Company in 1996 and subsequent   
years.                                                                          

 The various restructuring transactions described above cured all of the
Company's then-outstanding defaults relating to its debt and lease obligations. 
The Company nevertheless remains highly leveraged and has significant cash      
payment requirements under its equipment leases and credit facilities. Scheduled
equipment capital lease payments and operating lease payments during the 12     
months ending December 31, 1998 are $7,487,000 and $2,551,000, respectively,    
with related maintenance commitments of approximately $1,916,000. Scheduled     
interest and principal payments under the Company's other debt obligations      
during such period are approximately $4,855,000 which excludes the Company's    
revolving line of credit balance of $5,438,000 at December 31, 1997 ($5,207,000 
at February 28, 1998) whose maturity has been extended to May 31, 1999. Although
the Company's operating performance has improved, the Company is uncertain it   
will have the cash resources to pay all of its obligations when they are due.   
Accordingly, the Company will continue its program of expense reductions,       
revenue enhancements and asset sales as well as refinancing or renegotiating the
terms of its fixed obligations ("Program"). The Company's ability to meet its   
obligations when due are dependent upon the success of the Company's Program.   
Any inability of the Company to meet its obligations when due would result in a 
default which could permit the relevant obligor to accelerate the obligations   
and seek other remedies including seizure of the Company's medical imaging      
equipment. In such event, the Company would                                     

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be forced to seek a liquidation under Chapter 7 or a reorganization under       
Chapter 11 of the United States Bankruptcy Code.                                

As part of the Program, the Company in March 1996 sold its Modesto    
buildings for $650,000 in cash, and negotiated an increase in its working       
capital line of credit to $5,500,000 and extended its maturity date by two years
to May 31, 1999. The Company also completed in August 1996 an exchange offer    
(the "Exchange Offer") for $413,000 aggregate principal amount of Subordinated  
Notes. The purpose of the Exchange Offer was to improve the Company's capital   
structure and relieve the Company of the requirement to pay $836,000 of         
principal and interest in October, 1996 when the Subordinated Notes were to     
mature. In the Exchange Offer, the Company issued approximately 287,000         
additional shares of Common Stock for $413,000 principal amount of Subordinated 
Notes. The remaining $360,000 of the Subordinated Notes was paid at maturity on 
October 16, 1996.                                                               

    In the long term, the Company believes that it must respond to fundamental
changes in the industry. The medical diagnostic imaging business, both mobile   
and fixed, is in a period of consolidation as a result of the growth of managed 
care and other competitive forces. Smaller companies, such as the Company, must 
either grow through acquisitions or become part of larger enterprises in order  
to compete successfully and achieve acceptable returns for their shareholders.  
In light of the unavailability of capital to the Company and continuing weakness
in the price of its common stock, the Company has been willing to entertain     
acquisition offers. In late 1996 and early 1997, the Company unsuccessfully     
pursued a merger with a larger industry participant. In late 1997, the Company  
was approached by Alliance Imaging, Inc., another major industry participant,   
with respect to a sale of the Company's medical diagnostic imaging business. On 
March 12, 1998, the Company and Alliance entered into an agreement under which  
the Company would sell its medical diagnostic imaging assets to Alliance for    
consideration consisting of cash and the assumption of related liabilities. See 
Part I, Item 1 "Business -- General -- Recent Developments". The Company        
accepted the proposed transaction in response to the industry trend toward      
consolidation, the increasingly difficult competitive environment for smaller   
participants, such as the Company, and to provide capital for the expansion of  
the Company's radiosurgery services business. There can be no assurance that the
transaction will be consummated. If the transaction is not consummated, the     
Company will be required to continue to operate as an independent entity, and to
face the serious liquidity and other problems referred to above.                

IMPACT OF INFLATION AND CHANGING PRICES                                         

The Company does not believe inflation has had a significant impact on
operations, because most of its customer contracts include a cost of living     
price adjustment provision, which the Company believes will be sufficient to    
offset the impact of any future inflation on the Company's costs of operation.  

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K       

(a) Financial Statements and Schedules. The following Financial Statements and  
Schedules are filed with this Report:                                           

Report of Independent Auditors                                        
Audited Consolidated Financial Statements                             
Consolidated Balance Sheets                                           
Consolidated Statements of Operations                                 
Consolidated Statements of Stockholders' Equity                       
Consolidated Statements of Cash Flows                                 
Notes to Consolidated Financial Statements                            
Financial Statement Schedules                                         
Valuation and Qualifying Accounts                                     

All other schedules are omitted since the required information is not 
present or is not present in amounts sufficient to require submission of the    
schedule, or because the information required is included in the financial      
statements and notes thereto.                                                   

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Consent of Independent Auditors                                       

(b) Exhibits. The following Exhibits are filed with this Report.                

                                                                [Download Table]

EXHIBIT                                                                
NUMBER:                            DESCRIPTION:                        
-------                            ------------                        
                                                                       
   2.1     Securities Purchase Agreement, dated as of March 12, 1998,  
           by and among Alliance Imaging, Inc.; Embarcadero Holding    
           Corp. I; Embarcadero Holding Corp. II; American Shared      
           Hospital Services; and MMRI, Inc.(9)                        
   3.1     Articles of Incorporation of the Company, as amended.(1)    
   3.2     By-laws for the Company, as amended.(2)                     
   4.6     Form of Common Stock Purchase Warrant of American Shared    
           Hospital Services.(2)                                       
   4.8     Registration Rights Agreement, dated as of May 17, 1995, by 
           and among American Shared Hospital Services, the Holders    
           referred to in the Note Purchase Agreement, dated as of May 
           12, 1995 and General Electric Company, acting through GE    
           Medical Systems.(2)                                         
   4.9     Promissory Note, dated May 17, 1995, by American Shared     
           Hospital Services in favor of General Electric Company in   
           the principal sum of $1,500,000, as amended.(2)             
   4.10    Promissory Note, dated January 31, 1996, by American        
           Shared-CuraCare and CuraCare, Inc. in favor of DVI Business 
           Credit Receivables Corporation, in the principal sum of     
           $4,000,000.(3)                                              
   4.11    Promissory Note, dated May 17, 1995, by American            
           Shared-CuraCare and CuraCare, Inc. in favor of DVI Financial
           Services Inc. in the principal sum of $2,500,000.(2)        
   4.12    Security Agreement dated as of May 17, 1995 by and between  
           American Shared Hospital Services and General Electric      
           Company, acting through GE Medical Systems.(2)              
   4.13    Agreement and Proxy, dated as of May 12, 1995 by Ernest A.  
           Bates, M.D., Accepted and Agreed to by Anchor National Life 
           Insurance Company, Sun Life Insurance Company of America,   
           SunAmerica Inc., AIF II, L.P., Lion Advisors, L.P., Grace   
           Brothers, Ltd., and Upchurch Living Trust U/A/D 12/14/90.(2)
   4.14    Assignment and Assumption Agreement, dated as of December   
           31, 1995, between American Shared Hospital Services         
           (assignor) and American Shared Radiosurgery Services        
           (assignee).(3)                                              
   4.15    Assignment and Assumption Agreement, dated as of February 3,
           1996, between American Shared Radiosurgery Services         
           (assignor) and GK Financing, LLC (assignee).(3)             
   4.16    USC University Hospital Option Agreement, dated February 3, 
           1996, among American Shared Hospital Services, Ernest A.    
           Bates, M.D. and GK Financing, LLC.(3)                       
   4.17    Assignment and Assumption Agreement, dated as of February 3,
           1996, among Ernest A. Bates, M.D. (assignor) and GK         
           Financing, LLC (assignee).(3)                               
   4.18    Assignment and Assumption Agreement, effective as of        
           February 3, 1996, among Ernest A. Bates, M.D. (assignor) and
           GK Financing, LLC (assignee).(3)                            
   4.19    Promissory Note, dated January 1, 1995, by American         
           Shared-CuraCare in favor in General Electric Company, acting
           through GE Medical Systems, in the principal sum of         
           $2,000,000, as amended.(3)                                  
   4.20    Promissory Note, dated December 30, 1994, by American       
           Shared-CuraCare in favor of General Electric Company, in the
           principal sum of $481,667.81, as amended.(3)                
   4.21    Promissory Note, dated April 29, 1996 by GK Financing, LLC  
           in favor of Skandinaviska Enskilda Banken in the principal  
           amount of $1,300,000.(4)                                    
   4.22    Promissory Note, dated December 23, 1996 by American        
           Shared-CuraCare in favor of General Electric Company, in the
           principal amount of $1,631,595.10.(4)                       
  10.1     The Company's 1984 Stock Option Plan, as amended.(5)        
  10.2     The Company's 1995 Stock Option Plan, as amended.(6)        
  10.3     Form of Indemnification Agreement between American Shared   
           Hospital Services and members of its Board of Directors.(5) 

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                                                                [Download Table]

EXHIBIT                                                                
NUMBER:                            DESCRIPTION:                        
-------                            ------------                        
                                                                       
  10.4     Agreement, effective as of November 1, 1994, by and among   
           General Electric Company, acting through GE Medical Systems,
           and American Shared Hospital Services, and certain of its   
           subsidiaries, as amended.(7)                                
  10.5     Note Purchase Agreement, dated as of May 12, 1995, by and   
           among Anchor National Life Insurance Company, Sun Life      
           Insurance Company of America, and SunAmerica Inc., AIF II,  
           L.P., Lion Advisors, L.P., Grace Brothers, Ltd. and Upchurch
           Living Trust U/A/D 12/14/90, American Shared Hospital       
           Services and Ernest A. Bates, M.D.(2)                       
  10.6     Loan and Security Agreement, dated as of January 31, 1996,  
           among American Shared-CuraCare and CuraCare, Inc., American 
           Shared Hospital Services, Ernest A. Bates, M.D. and DVI     
           Business Credit Receivables Corporation.(3)                 
  10.7     Loan and Security Agreement, dated as of May 17, 1995, among
           American Shared-CuraCare and CuraCare, Inc., American Shared
           Hospital Services, Ernest A. Bates, M.D. and DVI Financial  
           Services Inc.(2)                                            
  10.8     Form of Unconditional Continuing Guaranty of American Shared
           Hospital Services.(3)                                       
  10.9     Form of Unconditional Continuing Guaranty of Ernest A.      
           Bates, M.D.(3)                                              
  10.10    Intercreditor Agreement among American Shared Hospital      
           Services, American Shared-CuraCare, DVI Financial Services  
           Inc. and DVI Business Credit Receivables Corporation and    
           General Electric Company, acting through GE Medical Systems,
           dated as of January 31, 1996.(3)                            
  10.11    Ernest A. Bates, Stock Option Agreement dated as of August  
           15, 1995.(8)                                                
  10.12    Operating Agreement for GK Financing, LLC, dated as of      
           October 17, 1995.(2)                                        
 10.13a    Amendments dated as of October 26, 1995 and as of December  
           20, 1995 to the GK Financing, LLC Operating Agreement, dated
           as of October 17, 1995.(3)                                  
 10.13b    Amendment dated as of October 16, 1996 to the GK Financing, 
           LLC Operating Agreement, dated as of October 17, 1995.(9)   
  10.14    Amendment No. 1, dated March 29, 1996, to Loan and Security 
           Agreement, dated as of January 31, 1996, among American     
           Shared-CuraCare and CuraCare, Inc., American Shared Hospital
           Services, Ernest A. Bates, M.D. and DVI Business Credit     
           Receivables Corporation (Exhibit 10.6).(4)                  
  10.15    Amendment No. 2, dated January 31, 1996, to Loan and        
           Security Agreement, dated as of January 31, 1996, among     
           American Shared-CuraCare and CuraCare, Inc., American Shared
           Hospital Services, Ernest A. Bates, M.D. and DVI Business   
           Credit Receivables Corporation (Exhibit 10.6).(4)           
  10.16    Amendment No. 3, dated April 23, 1997, to Loan and Security 
           Agreement, dated January 31, 1996 among American            
           Shared-CuraCare and CuraCare, Inc., American Shared Hospital
           Services, Ernest A. Bates, M.D. and DVI Business Credit     
           Receivables Corp. (Exhibit 10.6).(9)                        
  10.17    Amendment No. 4, dated July 31, 1997, to Loan and Security  
           Agreement, dated January 31, 1996 among American            
           Shared-CuraCare and CuraCare, Inc., American Shared Shared  
           Hospital Services, Ernest A. Bates, M.D. and DVI Business   
           Credit Receivables Corp. (Exhibit 10.6).(9)                 
  10.18    Amendment No. 5, dated November 26, 1997, to Loan and       
           Security Agreement, dated January 31, 1996 among American   
           Shared-CuraCare and CuraCare, Inc., American Shared Shared  
           Hospital Services, Ernest A. Bates, M.D. and DVI Business   
           Credit Receivables Corp. (Exhibit 10.6).(9)                 
  21       Subsidiaries of American Shared Hospital Services.(9)       
  23.1     Consent of Ernst & Young LLP.                               
  27       Financial Data Schedule for the year ended December 31,     
           1997.(9)                                                    
  27.a     Restated Financial Data Schedule for the fiscal year ended  
           December 31, 1995.(9)                                       
  27.b     Restated Financial Data Schedule for the three months ended 
           March 31, 1996.(9)                                          
  27.c     Restated Financial Data Schedule for the six months ended   
           June 30, 1996.(9)                                           

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                                                                [Download Table]

EXHIBIT                                                               
NUMBER:                            DESCRIPTION:                       
-------                            ------------                       
                                                                      
  27.d     Restated Financial Data Schedule for the nine months ended 
           September 30, 1996.(9)                                     
  27.e     Restated Financial Data Schedule for the fiscal year ended 
           December 31, 1996.(9)                                      
  27.f     Restated Financial Data Schedule for the three months ended
           March 31, 1997.(9)                                         
  27.g     Restated Financial Data Schedule for the six months ended  
           June 30, 1997.(9)                                          
  27.h     Restated Financial Data Schedule for the nine months ended 
           September 30, 1997.(9)                                     

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

(2) These documents were filed as Exhibits 3.2, 4.6, 4.8, 4.9, 4.11, 4.12, 4.13,
10.5, 10.7 and 10.12, to registrant's Registration Statement on Form S-1
    (Registration No. 33-63721) filed on October 26, 1995, which is incorporated
herein by this reference.                                               

(3) These documents were filed as Exhibits 4.10, 4.14, 4.15, 4.16, 4.17,4.18,   
4.19, 4.20, 10.6, 10.8, 10.9, 10.10 and 10.13, respectively, to the     
registrant's Pre-Effective Amendment No. 1 to registrant's Registration 
  Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996,
which is incorporated herein by this reference.                         

(4) These documents were filed as Exhibits 4.21, 4.22, 10.14, and 10.15,        
respectively, to registrant's Annual Report on Form 10-K for fiscal year
ended December 31, 1996, which is incorporated herein by this reference.

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

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

(7) This document was filed as Exhibit 10.49 to registrant's Annual Report on   
Form 10-K for fiscal year ended December 31, 1994, which is incorporated
herein by this reference.                                               

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

(9) These documents were filed as Exhibits 2.1, 10.13(b), 10.16, 10.17, 10.18,  
21, 27, 27.a, 27.b, 27.c, 27.d, 27.e, 27.f, 27.h, respectively, to      
  registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, which is incorporated herein by this reference.               

(c) Reports on Form 8-K. The Company filed no reports on Form 8-K during the    
quarter ended December 31, 1997.                                                

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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)

August 28, 1998                           By:      /s/ ERNEST A. BATES          

                                            ------------------------------------
                                           Ernest A. Bates
                                            Chairman and Chief Executive Officer

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 CONSOLIDATED FINANCIAL STATEMENTS

 AMERICAN SHARED HOSPITAL SERVICES

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

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 American Shared Hospital Services

 Consolidated Financial Statements

Years ended December 31, 1997, 1996 and 1995

CONTENTS

                                                        [Enlarge/Download Table]
                                                                                           
Report of Independent Auditors...........................................................1 

Audited Consolidated Financial Statements                                                  

Consolidated Balance Sheets..............................................................2 
Consolidated Statements of Operations....................................................4 
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency).................5 
Consolidated Statements of Cash Flows....................................................6 
Notes to Consolidated Financial Statements...............................................8 

Financial Statement Schedule.............................................................. 

Valuation and Qualifying Accounts.......................................................33 

All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or  
because the information required is included in the financial statements and    
notes thereto.                                                                  

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[ERNST & YOUNG LLP LETTERHEAD]

Report of Independent Auditors

The Board of Directors and Stockholders                                         
American Shared Hospital Services                                               

We have audited the accompanying consolidated balance sheets of American Shared 
Hospital Services as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency), and    
cash flows for each of the three years in the period ended December 31, 1997.   
Our audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements and the schedule are the responsibility 
of the Company's management. Our responsibility is to express an opinion on     
these financial statements and the schedule based on our audits.                

We conducted our audits in accordance with generally accepted auditing          
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the consolidated financial statements referred to above present 
fairly, in all material respects, the consolidated financial position of        
American Shared Hospital Services at December 31, 1997 and 1996, and the        
consolidated results of its operations and its cash flows for each of the three 
years in the period ended December 31, 1997, in conformity with generally       
accepted accounting principles. Also, in our opinion, the related financial     
statement schedule, when considered in relation to the basic consolidated       
financial statements taken as a whole, presents fairly, in all material         
respects, the information set forth therein.                                    

The accompanying financial statements have been prepared assuming that American 
Shared Hospital Services will continue as a going concern. As more fully        
described in Note 1, the Company incurred operating losses in 1996 and 1995 and 
has a significant working capital deficiency and a net capital deficiency at    
December 31, 1997. In addition, the Company does not have sufficient cash       
resources to meet debt obligations maturing in 1998. These conditions raise     
substantial doubt about the Company's ability to continue as a going concern.   
Management's plans in regard to these matters are also described in Note 1,     
including a discussion of the proposed sale of certain significant assets       
subsequent to December 31, 1997. The financial statements do not include any    
adjustments to reflect the possible future effects on the recoverability and    
classification of assets or the amounts and classification of liabilities that  
may result from the outcome of this uncertainty.                                

As discussed in Note 3 to the financial statements, in 1995, the Company adopted
Financial Accounting Standards Board Statement No. 121, "Accounting for the     
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".   

                                                           /s/ Ernst & Young LLP

Walnut Creek, California                                                        
February 27, 1998                                                               

Ernst & Young LLP is a member of Ernst & Young International, LTD.

B-1 

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 American Shared Hospital Services

 Consolidated Balance Sheets

                                                        [Enlarge/Download Table]

                                                                  DECEMBER 31           
                                                            1997               1996     
                                                        ------------       ------------ 
                                                                                        
ASSETS                                                                                  
Current assets:                                                                         
  Cash and cash equivalents                             $     17,000       $    368,000 
  Restricted cash                                            651,000            218,000 
  Receivables, less allowance for uncollectible                                         
    accounts of $1,302,000 ($1,240,000 in 1996):                                        
      Trade accounts receivable                            6,658,000          6,341,000 
      Other                                                  472,000            207,000 
                                                        ------------       ------------ 
                                                           7,130,000          6,548,000 
  Prepaid expenses, inventories and other current                                       
    assets                                                   708,000            698,000 
                                                        ------------       ------------ 
Total current assets                                       8,506,000          7,832,000 

Property and equipment:                                                                 
  Land, buildings and improvements                         1,572,000          1,226,000 
  Medical, transportation, office and leased equipment    12,202,000          9,880,000 
  Capitalized leased medical and transportation                                         
    equipment                                             26,410,000         29,318,000 
  Deposits and construction in progress                    1,901,000          1,530,000 
                                                        ------------       ------------ 
                                                          42,085,000         41,954,000 
  Accumulated depreciation and amortization              (21,983,000)       (18,523,000)
                                                        ------------       ------------ 
Net property and equipment                                20,102,000         23,431,000 

Other assets                                                 563,000            468,000 
Intangible assets, less accumulated amortization of                                     
  $1,529,000 ($1,330,000 in 1996)                          1,038,000          1,238,000 
                                                        ------------       ------------ 

Total assets                                            $ 30,209,000       $ 32,969,000 
                                                        ============       ============ 

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 American Shared Hospital Services

 Consolidated Balance Sheets (continued)

                                                        [Enlarge/Download Table]

                                                                 DECEMBER 31          
                                                            1997             1996     
                                                        ------------     ------------ 
                                                                                      
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL                                     
  DEFICIENCY)                                                                         
Current liabilities:                                                                  
   Accounts payable                                     $  3,693,000     $  3,705,000 
   Accrued interest                                           32,000           50,000 
   Employee compensation and benefits                      1,050,000          944,000 
   Other accrued liabilities                                 841,000          839,000 
   Current portion of long-term debt                       4,784,000        6,816,000 
   Current portion of obligations under capital leases     6,145,000        6,366,000 
                                                        ------------     ------------ 
Total current liabilities                                 16,545,000       18,720,000 

Long-term debt, less current portion                      11,936,000        7,690,000 
Obligations under capital leases, less current portion     9,633,000       16,245,000 
Deferred gain on early lease termination                     296,000               -- 
Deferred income taxes                                        164,000          164,000 
Minority interest                                            588,000          625,000 

Stockholders' equity (net capital deficiency):                                        
  Common stock, without par value:                                                    
    Authorized shares - 10,000,000                                                    
    Issued and outstanding shares - 4,769,000 in 1997                                 
      and 1996                                            11,089,000       11,089,000 
  Common stock options issued to officer                   2,414,000        2,414,000 
  Additional paid-in capital                                 930,000          930,000 
  Accumulated deficit                                    (23,386,000)     (24,908,000)
                                                        ------------     ------------ 
Total stockholders' equity (net capital deficiency)       (8,953,000)     (10,475,000)
                                                        ------------     ------------ 
Total liabilities and stockholders' equity (net                                       
  capital deficiency)                                   $ 30,209,000     $ 32,969,000 
                                                        ============     ============ 

See accompanying notes.                                                         

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 American Shared Hospital Services

 Consolidated Statements of Operations

                                                        [Enlarge/Download Table]

                                                                 YEAR ENDED DECEMBER 31             
                                                         1997             1996             1995     
                                                     ------------     ------------     ------------ 
                                                                                                    
Revenues:                                                                                           
  Medical services                                    $37,172,000      $36,989,000     $ 34,077,000 

Costs and expenses:                                                                                 
  Costs of operations:                                                                              
    Medical services payroll                            7,533,000        7,312,000        6,984,000 
    Maintenance and supplies                            5,959,000        6,698,000        6,766,000 
    Depreciation                                        6,398,000        6,631,000        8,302,000 
    Write-down of equipment                                    --               --        3,825,000 
    Equipment rental                                    2,686,000        3,449,000        2,808,000 
    Other                                               4,468,000        3,981,000        3,990,000 
  Selling and administrative                            5,901,000        5,309,000        8,432,000 
  Interest                                              3,671,000        4,199,000        5,310,000 
  Write-down of intangible assets                              --               --          600,000 
                                                      -----------      -----------     ------------ 
Total costs and expenses                               36,616,000       37,579,000       47,017,000 
                                                      -----------      -----------     ------------ 
                                                          556,000         (590,000)     (12,940,000)

Gain on sale of assets and early                                                                    
  termination of capital leases due to                    821,000            3,000          226,000 
  casualty loss                                                                                     
Interest and other income                                 155,000          227,000          258,000 
                                                      -----------      -----------     ------------ 
Income (loss) before income taxes and                                                               
  extraordinary item                                    1,532,000         (360,000)     (12,456,000)
Income tax expense (benefit)                               10,000           (7,000)           3,000 
                                                      -----------      -----------     ------------ 
Income (loss) before extraordinary item                 1,522,000         (353,000)     (12,459,000)

Extraordinary item--gain on early                                                                   
  extinguishment of debt (net of income                                                             
  tax expense of $0)                                           --               --       19,803,000 
                                                      -----------      -----------     ------------ 
Net income (loss)                                     $ 1,522,000      $  (353,000)    $  7,344,000 
                                                      ===========      ===========     ============ 

Earnings (loss) per common share:                                                                   
  Income (loss) before extraordinary item             $      0.32      $     (0.08)    $      (2.96)
  Extraordinary item                                  $      0.00      $      0.00     $       4.71 
                                                      -----------      -----------     ------------ 
Net income (loss) per common share                    $      0.32      $     (0.08)    $       1.75 
                                                      ===========      ===========     ============ 

Earnings (loss) per common share assuming dilution:                                                 
  Income (loss) before extraordinary item             $      0.24      $     (0.08)    $      (2.96)
  Extraordinary item                                  $      0.00      $      0.00     $       4.71 
                                                      -----------      -----------     ------------ 
Net income (loss) per common share assuming                                                         
  dilution                                            $      0.24      $     (0.08)     $      1.75 
                                                      ===========      ===========     ============ 

See accompanying notes.                                                         

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Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)

                                                        [Enlarge/Download Table]

                                                          COMMON                                              
                                                       STOCK OPTIONS  ADDITIONAL                              
                                 COMMON     COMMON       ISSUED TO     PAID-IN     ACCUMULATED                
                                 SHARES      STOCK        OFFICER      CAPITAL       DEFICIT         TOTAL    
                               ---------  -----------    ----------   ---------   ------------   ------------ 
                                                                                                              
Balances at December 31, 1994  2,867,000  $ 8,795,000    $       --   $ 763,000   $(31,899,000)  $(22,341,000)
  Issuance of warrants                                                                                        
    to purchase 216,000                                                                                       
    shares of common stock            --           --            --     180,000             --        180,000 
  Issuance of warrants                                                                                        
    to purchase 127,147                                                                                       
    shares of common stock            --           --            --     156,000             --        156,000 
  Issuance of warrants                                                                                        
    to purchase 98,000                                                                                        
    shares of common stock            --           --            --      81,000             --         81,000 
  Stock issuance costs                --           --            --    (250,000)            --       (250,000)
  Issuance of common                                                                                          
    stock to officer             184,000      265,000            --          --             --        265,000 
  Issuance of common                                                                                          
    stock to noteholders       1,193,000    1,575,000            --          --             --      1,575,000 
  Issuance of common                                                                                          
    stock options to officer          --           --     2,414,000          --             --      2,414,000 
  Net income                          --           --            --          --      7,344,000      7,344,000 
                               ---------  -----------    ----------   ---------   ------------   ------------ 
Balances at December 31, 1995  4,244,000   10,635,000     2,414,000     930,000    (24,555,000)   (10,576,000)
  Exercise of warrants                                                                                        
    to purchase 225,000                                                                                       
    shares of common stock       225,000        2,000            --          --             --          2,000 
  Issuance of common                                                                                          
    stock to noteholders         287,000      430,000            --          --             --        430,000 
  Issuance of common                                                                                          
    stock to Board members        13,000       22,000            --          --             --         22,000 
  Net loss                            --           --            --          --       (353,000)      (353,000)
                               ---------  -----------    ----------   ---------   ------------   ------------ 
Balances at December 31, 1996  4,769,000   11,089,000     2,414,000     930,000    (24,908,000)   (10,475,000)
  Net income                          --           --            --          --      1,522,000      1,522,000 
                               ---------  -----------    ----------   ---------   ------------   ------------ 
Balances at December 31, 1997  4,769,000  $11,089,000    $2,414,000   $ 930,000   $(23,386,000)  $ (8,953,000)
                               =========  ===========    ==========   =========   ============   ============ 

See accompanying notes.                                                         

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 Consolidated Statements of Cash Flows

                                                        [Enlarge/Download Table]

                                                                  YEAR ENDED DECEMBER 31            
                                                           1997           1996             1995     
                                                       -----------     -----------     ------------ 
                                                                                                    
OPERATING ACTIVITIES                                                                                
Net income (loss)                                      $ 1,522,000     $  (353,000)    $  7,344,000 
Adjustments to reconcile net income (loss) to                                                       
  net cash provided by operating activities:                                                        
    Extraordinary gain, after income taxes                      --              --      (19,803,000)
    Gain on sale of assets                                (270,000)         (3,000)         (23,000)
    Gain on early termination of capital leases           (551,000)             --         (203,000)
    Depreciation                                         6,752,000       6,978,000        8,818,000 
    Write-down of equipment                                     --              --        3,825,000 
    Write-down of intangible assets                             --              --          600,000 
    Compensation expense related to stock grants                --              --        2,679,000 
    Changes in operating assets and liabilities:                                                    
       (Increase) decrease in restricted cash             (433,000)        275,000        2,390,000 
       (Increase) decrease in receivables                 (582,000)        (95,000)         264,000 
       (Increase) decrease in prepaid                                                               
        expenses, inventories and other assets             (10,000)        493,000         (287,000)
      Increase (decrease) in accounts payable                                                       
        and accrued liabilities                            843,000       1,563,000         (674,000)
                                                       -----------     -----------     ------------ 
Net cash provided by operating activities                7,271,000       8,858,000        4,930,000 

INVESTING ACTIVITIES                                                                                
Deposits made to purchase Gamma Knives                          --        (500,000)      (1,000,000)
Proceeds from sale and disposition of equipment            331,000          70,000          157,000 
(Decrease) increase in minority interest                   (37,000)        442,000          129,000 
Payment for purchase of property and equipment            (349,000)       (293,000)        (226,000)
Distributions received from partnerships                        --          15,000           55,000 
Other                                                     (168,000)        (84,000)         210,000 
                                                       -----------     -----------     ------------ 
Net cash used in investing activities                     (223,000)       (350,000)        (675,000)

FINANCING ACTIVITIES                                                                                
Principal payments on long-term debt and                                                            
  obligations under capital leases                      (8,962,000)     (8,226,000)      (8,612,000)
Payment for exercise of warrants                                --           2,000               -- 
Net proceeds (payments) from revolving line of credit    1,563,000          (8,000)      (1,000,000)
Proceeds from loan agreement                                    --              --        7,000,000 
Note payable from related party                                 --              --        1,300,000 
Payment for repurchase of senior subordinated notes             --        (360,000)      (3,893,000)
Other                                                           --              --          177,000 
                                                       -----------     -----------     ------------ 
Net cash used in financing activities                   (7,399,000)     (8,592,000)      (5,028,000)
                                                       -----------     -----------     ------------ 
Net decrease in cash and cash equivalents                 (351,000)        (84,000)        (773,000)
Cash and cash equivalents at beginning of year             368,000         452,000        1,225,000 
                                                       -----------     -----------     ------------ 
Cash and cash equivalents at end of year               $    17,000     $   368,000     $    452,000 
                                                       ===========     ===========     ============ 

SUPPLEMENTAL CASH FLOW DISCLOSURE                                                                   
Interest paid                                          $ 3,689,000     $ 4,320,000     $  3,625,000 
                                                       ===========     ===========     ============ 
Income taxes paid                                      $    29,000     $    31,000     $     82,000 
                                                       ===========     ===========     ============ 

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Consolidated Statements of Cash Flows (continued) 

                                                        [Enlarge/Download Table]

                                                                    YEAR ENDED DECEMBER 31            
                                                             1997            1996            1995     
                                                         -----------     -----------     ------------ 
                                                                                                      
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES                                                

Acquisition of equipment with lease/debt financing       $ 3,999,000     $ 9,996,000     $  1,342,000 

(Decrease) increase in medical and capitalized                                                        
  lease equipment due to lease restructuring                      --      (1,461,000)        (480,000)
Decrease in medical and capitalized lease                                                             
  equipment due to early termination of leases            (1,137,000)             --               -- 
(Decrease) increase in capitalized lease                                                              
  obligations due to lease restructuring                          --      (1,461,000)        (480,000)
Decrease in capitalized lease obligations due                                                         
  to early termination of leases                          (2,036,000)             --               -- 
Accrued interest payable not paid as part of                                                          
  Senior Subordinated Notes Repurchase                            --          17,000        8,853,000 
Stock and warrants issued to noteholders as                                                           
  part of Senior Subordinated Notes Repurchase                    --         430,000        1,836,000 
Noncash portion of Senior Subordinated Notes redemption           --         413,000       13,801,000 
Note receivable from officer added to basis of                                                        
  acquired asset                                                  --         248,000               -- 
Accounts payable converted to notes                          817,000       1,971,000               -- 

See accompanying notes.                                                         

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Notes to Consolidated Financial Statements

 December 31, 1997

1. BUSINESS AND BASIS OF PRESENTATION                                           

BUSINESS                                                                        

American Shared Hospital Services (the "Company") provides shared diagnostic    
imaging services to health care providers located in approximately 22 states in 
various geographic regions of the United States. The four diagnostic imaging    
services provided by the Company are Magnetic Resonance Imaging, Computed Axial 
Tomography Scanning, Ultrasound, and Nuclear Medicine. In addition, the Company 
provides Gamma Knife units to three medical centers. The Company also provides  
Cardiac Catheterization Laboratory and Respiratory Therapy services.            

In June 1995, African American Church Health and Economic Services, Inc.        
("ACHES") and ACHES Insurance Services, Inc. ("AIS") were incorporated. AIS is a
wholly owned subsidiary of ACHES. AIS is an insurance agency qualified to sell  
life, health, and disability insurance in the states of California and New York.
ACHES through AIS sells life, health and disability insurance primarily to the  
African-American Community.                                                     

On October 17, 1995, the Company (through American Shared Radiosurgery Services 
("ASRS")) and Elekta AB, the manufacturer of the Gamma Knife (through its wholly
owned United States subsidiary GKV Investments, Inc. ("GKV")), entered into an  
operating agreement which formed GK Financing, LLC ("GKF"). GKF provides        
alternative financing of Elekta Gamma Knife units in the United States and      
Brazil. GKF is the preferred provider for Elekta AB of financing arrangements,  
such as fee-for-service lease arrangements with health care institutions in the 
United States and Brazil.                                                       

The consolidated financial statements include the accounts of the Company, its  
wholly owned subsidiaries, CuraCare, Inc. ("CuraCare"), MMRI, Inc., European    
Shared Medical Services Ltd., ACHES, AIS and its majority-owned subsidiary, GK  
Financing, LLC.                                                                 

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

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 American Shared Hospital Services

Notes to Consolidated Financial Statements (continued)

1. BUSINESS AND BASIS OF PRESENTATION (CONTINUED)                               

BUSINESS (CONTINUED)                                                            

The Company faces severe competition from other providers of diagnostic imaging 
services, some of which have greater financial resources than the Company, and  
from equipment manufacturers, hospitals, imaging centers and physician groups   
owning in-house diagnostic units. Significant competitive factors in the        
diagnostic services market include equipment price and availability, performance
quality, ability to upgrade equipment performance and software, service and     
reliability. The Company's current financial problems may adversely affect its  
ability to obtain and retain certain profitable customer contracts, and its     
current high debt burden may affect its ability to offer technologically        
advanced equipment in the future. Due to the Company's financial condition, the 
two stock exchanges which list the Company's stock are continuing to monitor the
Company's financial condition to determine whether the Company's common shares  
will remain listed. The Company is currently negotiating the sale of a          
significant amount of its operating assets. (See Note 14 Subsequent Event.)     

The Company leases substantially all of its medical equipment from one primary  
provider.                                                                       

BASIS OF PRESENTATION                                                           

The Company has reported net income of $1,522,000 in 1997, and net losses before
extraordinary items of $353,000, and $12,459,000 in 1996 and 1995, respectively.
At December 31, 1997, the Company has a working capital deficiency of $8,039,000
and a net capital deficiency of $8,953,000. In addition, the Company will not   
have sufficient cash resources to repay its debt obligations at maturity and    
will be required to seek new financing. There can be no assurance that such     
financing will be available or that the terms of any such financing will be     
acceptable to the Company.                                                      

These conditions raise substantial doubt about the Company's ability to continue
as a going concern. These financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of 
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.               

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Notes to Consolidated Financial Statements (continued)

1. BUSINESS AND BASIS OF PRESENTATION (CONTINUED)                               

BASIS OF PRESENTATION (CONTINUED)                                               

Management's plans with regard to these operating issues include the following: 
continue to implement its program of expense reductions; identify and sell      
non-essential assets; negotiate favorable concessions from major creditors and  
enhance revenues by increasing customer contracts and equipment utilization. It 
is uncertain as to whether these events will occur, and if they do, the extent  
to which they will address the Company's operating issues. The Company is       
currently negotiating the sale of a significant amount of its operating assets. 
(See Note 14 - Subsequent Event.)                                               

2. ACCOUNTING POLICIES                                                          

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS                     

The preparation of the financial statements requires management to make         
estimates and assumptions that affect reported amounts. These estimates are     
based on information available as of the date of the financial statements.      
Actual results could differ from those estimates.                               

CASH AND CASH EQUIVALENTS                                                       

The Company considers all liquid investments with original maturities of three  
months or less at the date of purchase to be cash equivalents. The Company      
maintains its cash in depository institutions which offer varying levels of     
federal insurance. Restricted cash is not considered a cash and cash equivalent 
for purposes of the consolidated statements of cash flows.                      

RESTRICTED CASH                                                                 

Restricted cash represents cash limited as to use by a contractual arrangement. 
Restricted cash at December 31, 1997 and 1996 reflects cash that may only be    
used for the operations of GK Financing, LLC.                                   

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Notes to Consolidated Financial Statements (continued)

2. ACCOUNTING POLICIES (CONTINUED)                                              

REVENUES AND ACCOUNTS RECEIVABLE                                                

Revenue is recognized on a fee-for-service basis when the service is delivered. 
Trade accounts receivable are principally from hospitals and other health care  
providers located throughout the U.S., with no one customer providing a         
significant percent of revenues. The Company performs credit evaluations of its 
customers and generally does not require collateral. The Company maintains an   
allowance for doubtful accounts at a level which management believes is         
sufficient to cover potential credit losses. A substantial portion of the       
Company's receivables collateralize its credit facilities (see Note 6).         

ACCOUNTING FOR MAJORITY-OWNED SUBSIDIARY                                        

The Company accounts for GK Financing, LLC, as a consolidated entity due to its 
81% majority-equity interest. The minority interest's 19% share of earnings     
(loss) is netted against "Interest and Other Income" in the consolidated        
statements of operations.                                                       

INVENTORIES                                                                     

Inventories, which consist of minor medical equipment and supplies used in the  
Company's business, are valued at the lower of cost or market, using a valuation
method which approximates FIFO (first-in, first-out).                           

PROPERTY AND EQUIPMENT                                                          

In 1995, the Company adopted Statement of Financial Accounting Standards No.    
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived     
Assets to be Disposed Of" (see Note 3). As a result of such adoption, property  
and equipment are stated at cost, or the estimated fair value as determined by  
third parties, if less.                                                         

Depreciation is determined using the straight-line method over the estimated    
useful lives of the assets which for medical and transportation equipment is    
generally 2 - 10 years.                                                         

Capitalized leased equipment consists primarily of mobile Magnetic Resonance    
Imaging ("MRI") units, which include scanners and mobile vans. Capitalized      
leased equipment is amortized over the term of the lease, which ranges from 24  
to 96 months. Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful life.                                              

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Notes to Consolidated Financial Statements (continued)

2. ACCOUNTING POLICIES (CONTINUED)                                              

INTANGIBLE ASSETS                                                               

Intangible assets represent the excess of cost of net assets acquired as the    
result of the acquisition of businesses and are being amortized by the          
straight-line method over 15 years. The Company annually assesses the           
recoverability of these intangible assets by determining whether the            
amortization of the intangible balance (for each business acquisition) over its 
remaining life can be recovered through forecasted future operations using an   
undiscounted cash flow methodology.                                             

INCOME TAXES                                                                    

The liability method is used to account for income taxes. Under this method,    
deferred tax assets and liabilities are determined based on differences between 
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.                                                        

EARNINGS PER SHARE                                                              

In 1997, the Financial Accounting Standards Board issued Statement of Financial 
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128       
replaced the calculation of primary and fully diluted earnings per share with   
basic and diluted earnings per share. Unlike primary earnings per share, basic  
earnings per share excludes any dilutive effects of options, warrants and       
convertible securities. Diluted earnings per share is very similar to the       
previously reported fully diluted earnings per share. All earnings per share    
amounts for all periods have been presented, and where appropriate, restated to 
conform to the SFAS 128 requirements.                                           

Basic earnings per share has been computed based on the weighted-average number 
of common shares outstanding. The Company incurred a net loss for 1996 and 1995,
therefore, the incremental shares that arise as a result of the stock options   
and warrants outstanding are anti-dilutive as they reduce the loss per share.   

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Notes to Consolidated Financial Statements (continued)

2. ACCOUNTING POLICIES (CONTINUED)                                              

EARNINGS PER SHARE (CONTINUED)                                                  

The following table sets forth the computation of basic and diluted earnings    
(loss) per share:                                                               

                                                        [Enlarge/Download Table]

                                                 1997         1996             1995      
                                              ----------  -------------   -------------- 
                                                                                         
Numerator:                                                                               
   Net income (loss) before extraordinary                                                
      item                                    $1,522,000  $    (353,000)  $  (12,459,000)
   Extraordinary item                                 --             --       19,803,000 
                                              ----------  -------------   -------------- 
Numerator for basic and diluted earnings                                                 
   (loss) per share                           $1,522,000  $    (353,000)  $    7,344,000 
                                              ==========  =============   ============== 

Denominator:                                                                             
   Denominator for basic earnings (loss) per                                             
      share - weighted-average shares          4,769,000      4,498,000        4,201,000 
   Effect of dilutive securities                                                         
      Employee stock options                   1,574,000             --               -- 
                                              ----------  -------------   -------------- 
Denominator for diluted earnings (loss) per                                              
   share - adjusted weighted-average shares    6,343,000      4,498,000        4,201,000 
                                              ==========  =============   ============== 

Basic earnings per share:                                                                
   Income before extraordinary item           $     0.32  $       (0.08)  $        (2.97)
   Extraordinary item                                 --             --             4.71 
                                              ----------  -------------   -------------- 
Net income                                    $     0.32  $       (0.08)  $         1.75 
                                              ==========  =============   ============== 

Diluted earnings per share:                                                              
   Income before extraordinary item           $     0.24  $       (0.08)  $        (2.97)
   Extraordinary item                                 --             --             4.71 
                                              ----------  -------------   -------------- 
Net income                                    $     0.24  $       (0.08)  $         1.75 
                                              ==========  =============   ============== 

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Notes to Consolidated Financial Statements (continued)

2. ACCOUNTING POLICIES (CONTINUED)                                              

STOCK-BASED COMPENSATION                                                        

Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting   
for Stock-Based Compensation," encourages but does not require companies to     
record compensation cost for stock-based employee compensation plans at fair    
value. The Company has chosen to continue to account for stock-based employee   
compensation using the intrinsic value method prescribed in Accounting          
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to          
Employees," and related Interpretations. Accordingly, compensation cost for     
stock options granted to employees is measured as the excess, if any, of the    
quoted market price of the Company's stock at the date of the grant over the    
amount an employee must pay to acquire the stock.                               

COMPREHENSIVE INCOME                                                            

In June 1997, the Financial Accounting Standards Board released Statement of    
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive   
Income." SFAS 130 establishes standards for the reporting and display of        
comprehensive income and its components in a full set of general purpose        
financial statements and is effective for fiscal years beginning after December 
15, 1997. The Company believes that adoption of SFAS 130 will not have a        
material impact on the Company's consolidated financial statements.             

SEGMENT INFORMATION                                                             

In June 1997, the Financial Accounting Standards Board released Statement of    
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 will change the way         
companies report selected segment information in annual financial statements and
also requires those companies to report selected segment information in interim 
financial reports to stockholders. SFAS 131 is effective for fiscal years       
beginning after December 15, 1997. The Company believes that the application of 
the new rules will not have a material impact on the Company's consolidated     
financial statements.                                                           

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Notes to Consolidated Financial Statements (continued)

2. ACCOUNTING POLICIES (CONTINUED)                                              

FAIR VALUE OF FINANCIAL INSTRUMENTS                                             

An estimate of the fair value of the Company's long-term debt would require the 
use of a discounted cash flow analysis based on the Company's current           
incremental borrowing rates for similar types of borrowing arrangements.        
Management believes that the Company's creditors entered into the borrowing     
arrangements as a result of the personal guarantees of an officer of the Company
and believes that the Company would be unable to obtain similar financing given 
this fact and the current state of its financial matters. Accordingly,          
management is unable, without incurring excessive costs, to estimate its        
incremental borrowing rate, and considers estimation of fair value to be        
impracticable.                                                                  

The fair value of all other financial instruments approximate its recorded      
values.                                                                         

RECLASSIFICATIONS                                                               

Certain prior year balances have been reclassified to conform to the current    
year presentation.                                                              

3. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121, "ACCOUNTING 
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF"                                                                             

In connection with the adoption of statement of Financial Accounting Standards  
No. 121 ("SFAS 121"), during the second quarter of 1995, management reviewed the
recoverability of the carrying value of long-lived assets, primarily fixed      
assets, goodwill and deferred costs based on the life of the assets. The Company
initiated its review of potential loss impairment due to the continuing changes 
in the health care environment, which have put downward pressure on customer and
equipment pricing. These changes have resulted in recent operating results and  
revised future forecasted operating results for certain assets being less than  
previously planned. This situation led to the conclusion that there was a       
potential impairment in the recorded value of fixed assets, goodwill and        
deferred costs. Management's estimate of future undiscounted cash flows over the
useful life of certain assets was determined to be less than their recorded     
values, indicating impairment of these assets under the provisions of SFAS 121. 
An impairment loss of $4,425,000 was recorded as of the second quarter of 1995  
based on the differences between the fair value, as determined by third parties,
and the recorded values of certain assets. The impairment loss is comprised of  
write-downs of equipment of $3,825,000 (primarily MRI, CT, nuclear medicine, and
deferred assets), and a write-down of goodwill of $600,000.                     

No such impairment loss adjustment was required in 1997 or 1996.                

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Notes to Consolidated Financial Statements (continued)

4. OTHER ASSETS                                                                 

Other assets consist of the following:                                          

                                                                [Download Table]

                                                              DECEMBER 31     
                                                            1997        1996  
                                                          --------    --------

                                                                              
Capitalized regulatory licensing fees                     $110,000    $ 90,000
Prepaid commissions                                        114,000     114,000
Purchased software, less accumulated amortization of                          
  $424,000 and $417,000 in 1997 and 1996, respectively      50,000      51,000
Investment in partnerships                                      --      33,000
Other assets                                               289,000     180,000
                                                          --------    --------
                                                          $563,000    $468,000
                                                          ========    ========

5. SENIOR SUBORDINATED NOTES                                                    

During 1996 and 1995, the Company repurchased certain of its Senior Subordinated
Notes resulting in extraordinary gains of $0 and $19,803,000, respectively.     

The extraordinary gain in 1995 was the result of a debt restructuring agreement 
with four holders of $17,694,000 face value of its Senior Subordinated Notes. On
May 17, 1995, these Senior Subordinated Noteholders ("ex-Noteholders") received 
approximately $3,900,000 in cash, plus 819,000 shares of common stock and       
warrants for an additional 216,000 shares of common stock. As a result of the   
additional options awarded to an officer of the Company, the ex-Noteholders were
granted 374,000 additional common shares and 98,000 additional warrants to      
purchase common shares, to maintain their ownership interest at approximately   
25% of the then fully diluted common shares. The warrants are immediately       
exercisable at $0.75 per share. The remaining Senior Subordinated Noteholders   
held $773,000 of the notes as of December 31, 1995. In addition, the debt       
covenants were amended which thereby cured the events of default on the Senior  
Subordinated Notes.                                                             

During 1996, the Company extended an exchange offer for the remaining $773,000  
of Senior Subordinated Notes for common stock. On August 30, 1996, the Company  
exchanged $413,000 of its Senior Subordinated Notes, and the interest accrued   
thereon, for 287,000 shares of common stock valued at $430,000, using the market
price on the date of exchange. The remaining $360,000 of the Senior Subordinated
Notes, and the accrued interest thereon, was settled by the Company in cash on  
October 15, 1996, the stated maturity date of the Senior Subordinated Notes.    

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Notes to Consolidated Financial Statements (continued)

5. SENIOR SUBORDINATED NOTES (CONTINUED)                                        

The following table summarizes the early extinguishment of debt during 1996 and 
1995, as follows:                                                               

                                                                [Download Table]

                                                 1996             1995     
                                             ------------     ------------ 
                                                                           
Principal amount of Notes repurchased        $    413,000     $ 17,694,000 
Accrued interest related to the Notes              17,000        8,853,000 
Unamortized debt issuance costs                        --         (525,000)
Stock and warrants issued to note holders        (430,000)      (1,836,000)
Estimated tax liability                                --               -- 
Closing costs                                          --         (490,000)
                                             ------------     ------------ 
                                                       --       23,696,000 
Payment for repurchase                                 --       (3,893,000)
                                             ------------     ------------ 
Extraordinary gain                           $         --     $ 19,803,000 
                                             ============     ============ 

6. LONG-TERM DEBT                                                               

Long-term debt consists of the following:                                       

                                                        [Enlarge/Download Table]

                                                                      DECEMBER 31      
                                                                  1997           1996  
                                                               ----------    ----------
                                                                                       
Notes Issued in Conjunction with Lease Restructuring                                   

Promissory note payable to primary provider of medical                                 
  equipment bearing interest at 5% (effective February 1996)                           
  and 4% during 1995, payable in 86 monthly installments                               
  maturing in February 2002, secured by the Company's                                  
  accounts receivable and certain medical equipment            $1,505,000    $1,823,000

Promissory note payable to primary provider of medical                                 
  equipment bearing interest at 10.75%, payable in 60                                  
  monthly installments with the remaining balance due in                               
  January 2002                                                  1,341,000     1,632,000

Promissory note payable to primary provider of medical                                 
  equipment bearing interest at 10.5%, payable in 60 monthly                           
  installments maturing in February 2000                          248,000       353,000

Promissory note payable to primary provider of medical                                 
  equipment bearing interest at 10.75%, payable in 36 monthly                          
  installments with the remaining balance due in January 2000     104,000       147,000

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Notes to Consolidated Financial Statements (continued)

6. LONG-TERM DEBT (CONTINUED)                                                   

                                                        [Enlarge/Download Table]

                                                                        DECEMBER 31          
                                                                   1997             1996     
                                                               ------------     ------------ 
                                                                                             
Borrowings for Repurchase of Senior Subordinated Notes                                       

Borrowings under $5.5 million Revolving Line of Credit                                       
  bearing interest at prime rate plus 3.75% (12.25% at                                       
  December 31, 1997) for repurchase of Senior Subordinated                                   
  Notes maturing in May 1999                                   $  5,438,000     $  3,875,000 

Borrowings under Term Loan for repurchase of Senior                                          
  Subordinated Notes bearing interest at 15%, payable in 48                                  
  monthly installments maturing in June 1999                      1,066,000        1,764,000 

Gamma Knife loan payable to primary provider of medical                                      
  equipment bearing interest at 10.5%, payable in 40                                         
  monthly installments maturing in September 1998                   346,000          768,000 

Other Notes and Borrowings                                                                   

Gamma Knife loan payable to primary provider of medical                                      
 equipment bearing interest at 10.5%, payable in 60 monthly                                  
 installments maturing in July 1999 (Note 13)                     1,128,000        1,752,000 

Promissory note payable, bearing interest at prime rate                                      
  plus 2% (10.25% at December 31, 1996) due in October 1998                                  
  (Note 13)                                                         550,000        1,300,000 

Borrowings under term loan bearing interest at 10.6%, payable                                
  in 84 monthly installments maturing in September 2004           2,271,000               -- 

Installment notes payable in monthly installments through                                    
  March 2003, bearing interest at 9.9% to 22%, secured by                                    
  certain medical equipment                                         985,000          983,000 

Promissory note payable, bearing interest at 11.25%,                                         
  payable in 25 monthly installments maturing in July 1997               --          109,000 

Promissory note payable, bearing interest at 10.6%, payable                                  
  in 30 monthly installments maturing in March 2000                 738,000               -- 

Borrowings for Gamma Knife deposits under promissory note,                                   
  bearing interest at prime rate plus 2% (10.5% at                                           
  December 31, 1997) payable when Gamma Knife units                                          
  commence operation                                              1,000,000               -- 
                                                               ------------     ------------ 
                                                                 16,720,000       14,506,000 
Less current portion                                             (4,784,000)      (6,816,000)
                                                               ------------     ------------ 
                                                               $ 11,936,000     $  7,690,000 
                                                               ============     ============ 

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Notes to Consolidated Financial Statements (continued)

6. LONG-TERM DEBT (CONTINUED)                                                   

Annual contracted maturities under the initial terms of long-term debt for the  
five years after December 31, 1997 are as follows: $4,784,000 in 1998,          
$8,136,000 in 1999, $1,325,000 in 2000, $1,181,000 in 2001, $519,000 in 2002 and
$775,000 thereafter.                                                            

The Company is severely limited by covenants in its credit agreements which     
limit the Company's ability to merge with any other entity, to create           
subsidiaries, to pay cash dividends, to repurchase stock for cash, incur        
additional indebtedness, or to change the status of the equipment acting as     
collateral in such a way as to impair its value.                                

In addition, the Company has pledged substantially all of its liquid assets and 
substantially all of its personal property to secure its existing debt.         

Notes Issued in Conjunction with Lease Restructuring                            

The Company converted $481,000 of unpaid use taxes into a note payable to its   
primary provider of medical equipment. The note bears interest at 10.5% payable 
in 60 monthly payments beginning February 1, 1995.                              

On December 23, 1996, the Company also converted past due service payments into 
a $1,632,000 promissory note with its primary provider of medical equipment. The
note matures in January 2002 and bears interest at an annual rate of 10.75%. The
note is unsecured.                                                              

The Company also converted $147,000 of unpaid property taxes into a promissory  
note payable to its primary provider of medical equipment. The note bears       
interest at an annual rate of 10.75%, payable in 36 consecutive monthly         
installments with the remaining balance due in January 2000.                    

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Notes to Consolidated Financial Statements (continued)

6. LONG-TERM DEBT (CONTINUED)                                                   

Borrowings for Repurchase of Senior Subordinated Notes                          

The repurchase of Senior Subordinated Notes (the "Notes Repurchase") was        
completed with the proceeds of three new credit facilities: a new revolving line
of credit (the "Revolver"), a term loan, and a Gamma Knife Loan. Under the      
Revolver, the Company has available up to $5,500,000 according to a formula     
based on eligible accounts receivable. The Revolver provides for interest       
payments only (computed at the Bank of America prime rate plus 3.75%, 12.25% at 
December 31, 1997) until maturity on May 31, 1999, when all amounts are due and 
payable. The initial proceeds of $3,000,000 drawn under the Revolver were used  
primarily to fund the cash consideration in the Notes Repurchase. At December   
31, 1997, the Company had drawn $5,438,000 under the Revolver and, based on     
eligible accounts receivable, had an additional $62,000 available under the     
facility. Under the terms of the agreement, the Company's cash receipts are     
processed through bank accounts controlled by the lender and the lender has a   
first priority lien on all of the Company's accounts receivable, certain        
equipment, inventory and general intangibles. The Revolver is personally        
guaranteed by an officer of the Company.                                        

The Company also entered into a $2,500,000 four-year loan agreement that will   
amortize in 48 equal installments with interest at an annual rate of 15% (the   
"Term Loan"). The Term Loan is secured by a first priority lien on certain      
equipment, inventory and certain real property of the Company and a second      
priority lien on the Company's accounts receivable and general intangibles. In  
addition to funding the repurchase of the Subordinated Notes, the proceeds of   
the Term Loan were applied to the refinancing of certain medical imaging        
equipment and to provide working capital to the Company. The Term Loan is also  
guaranteed by an officer of the Company.                                        

The Company also entered into a $1,500,000 loan at an interest rate of 10.5%    
(the "Gamma Knife Loan"). The proceeds of the Gamma Knife Loan were used to     
refinance the Company's first Gamma Knife, to fund in part the Notes Repurchase,
and to provide working capital. The Gamma Knife Loan is collateralized with a   
first priority security interest in one of the Gamma Knife units owned by the   
Company. The payments on this loan were restructured from $90,431 per month to  
$40,203 per month effective September 17, 1995, and to extend the loan term to  
September 17, 1998, to match renegotiated terms of the underlying customer      
contract.                                                                       

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Notes to Consolidated Financial Statements (continued)

7. INCOME TAXES                                                                 

Significant components of the Company's deferred tax liabilities and assets as  
of December 31, 1997 and 1996 are as follows:                                   

                                                                [Download Table]

                                                   1997            1996    
                                               -----------     ----------- 
                                                                           
Deferred tax liabilities:                                                  
  Other - net                                  $  (164,000)    $  (164,000)
                                               -----------     ----------- 
Total deferred tax liabilities                    (164,000)       (164,000)

Deferred tax assets:                                                       
  Net operating loss carryforwards               5,300,000       5,700,000 
  Fixed assets                                   2,200,000       3,100,000 
  Other - net                                      500,000         800,000 
                                               -----------     ----------- 
Net deferred tax assets                          8,000,000       9,600,000 
Valuation allowance for deferred tax assets      8,000,000       9,600,000 
                                               -----------     ----------- 
Total deferred tax assets                               --              -- 
                                               -----------     ----------- 
Net deferred tax liabilities                   $  (164,000)    $  (164,000)
                                               ===========     =========== 

The decrease in the valuation allowance during 1997 was $1,600,000.             

The components of the provision (benefit) for income taxes consist of the       
following:                                                                      

                                                                [Download Table]

                                                     LIABILITY METHOD           
                                         ---------------------------------------
                                           1997            1996            1995 
                                         --------         -------         ------
                                                                                
Current:                                                                        
  Federal                                $     --         $    --         $   --
  State                                    10,000          (7,000)         3,000

Deferred (reduction):                                                           
  Federal                                      --              --             --
  State                                        --              --             --
                                         --------         -------         ------
                                         $ 10,000         $(7,000)        $3,000
                                         ========         =======         ======

The amounts relate to state income taxes, miscellaneous payments and refunds of 
federal and state income taxes and adjustments of amounts paid and accrued in   
prior years.                                                                    

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Notes to Consolidated Financial Statements (continued)

7. INCOME TAXES (CONTINUED)                                                     

The provision (benefit) for income taxes as included in the consolidated        
financial statements is as follows:                                             

                                                                [Download Table]

                                                   1997         1996       1995 
                                                 --------     -------     ------
                                                                                
Income (loss) before extraordinary gain          $ 10,000     $(7,000)    $3,000
Extraordinary gain                                     --          --         --
                                                 --------     -------     ------
                                                 $ 10,000     $(7,000)    $3,000
                                                 ========     =======     ======

The provision (benefit) for income taxes differs from the amount computed by    
applying the U.S. federal statutory tax rate (35% in 1997, 1996 and 1995) to    
income (loss) before taxes as follows:                                          

                                                                [Download Table]

                                                  1997         1996        1995     
                                              -----------   ---------   ----------- 
                                                                                    
Computed expected tax, including tax on                                             
  extraordinary gain                          $   536,000   $(126,000)  $ 2,570,000 
Change in valuation allowance                  (1,600,000)   (300,000)   (2,660,000)
State income taxes (benefit), net of federal       10,000      (7,000)        3,000 
  benefit                                                                           
Reduction in carryovers and tax attributes        984,000     323,000            -- 
Goodwill                                           59,000      88,000        77,000 
Other                                              21,000      15,000        13,000 
                                              -----------   ---------   ----------- 
                                              $    10,000   $  (7,000)  $     3,000 
                                              ===========   =========   =========== 

At December 31, 1997, the Company has a net operating loss carryforward for     
federal income tax return purposes of approximately $13,000,000 which expires   
between 1999 and 2011. A substantial part of this carryforward is subject to    
separate return limitations. The company has state carryforwards of varying     
amounts. The Company's ability to utilize its net operating loss carryforwards  
and other deferred tax assets may be limited in the event of a 50% or more      
ownership change within any three-year period. Approximately $16,000,000 of net 
operating loss carryforwards were used to offset the gain on early              
extinguishment of the Senior Subordinated Notes in May 1995. (See Note 6 -      
Long-Term Debt.)                                                                

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Notes to Consolidated Financial Statements (continued)

8. STOCKHOLDERS' EQUITY                                                         

1984 Stock Option Plan                                                          

Under the Company's 1984 Stock Option Plan (the "Plan"), as amended, a total of 
475,000 stock options were authorized for grant. The Plan terminated according  
to its terms on March 1, 1994. Options granted pursuant to the Plan generally   
had lives of 10 years from the date of grant, subject to earlier expiration in  
certain cases, such as termination of the grantee's employment.                 

On August 15, 1995, the Stock Option Committee of the Board of Directors        
approved the amendment of the terms of substantially all options outstanding    
under the Company's 1984 Stock Option Plan, covering an aggregate of            
approximately 165,000 shares, to reduce the initial exercise price to $1.625 per
share, which was the closing price of common shares on such date.               

1995 Stock Option Plan                                                          

The Company's 1995 Stock Option Plan, providing for nonqualified stock options  
and "incentive stock options," was approved by the Company's Board of Directors 
on August 15, 1995, subject to shareholder approval, which was given on October 
6, 1995. Under the 1995 Plan, 330,000 common shares are reserved for awards to  
officers and other key employees, non-employee directors, and advisors.         
Provisions of the 1995 Stock Option Plan include an automatic grant to each     
non-employee director of up to 4,000 shares annually on the date of the         
Company's Annual Shareholder Meeting, at an exercise price equal to the market  
price of the Company's common shares on that date, until the non-employee       
director has options for a total of 12,000 shares of the Company's common stock 
in all Company plans. Directors who are appointed or elected to the Company's   
Board of Directors on a date other than that of the Annual Shareholder Meeting  
receive a pro-rata grant of such shares, at an exercise price equal to the      
market price of the Company's common shares on the date of grant. Grants of     
options for 19,000 shares were made pursuant to this provision during 1995.     

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Notes to Consolidated Financial Statements (continued)

8. STOCKHOLDERS' EQUITY (CONTINUED)                                             

1995 Stock Option Plan (continued)                                              

Changes in options outstanding under the 1984 and 1995 Stock Option Plans from  
January 1, 1995 to December 31, 1997 are as follows:                            

                                                                [Download Table]

                                                                    WEIGHTED    
                                  NUMBER          PRICE             AVERAGE     
                                OF SHARES       PER SHARE         EXERCISE PRICE
                              ------------------------------------------------- 
                                                                                
Balance at January 1, 1995      256,000           $1.375-$7.50          --      
   Granted                      256,000           $ 1.625               --      
   Exercised                         --                --               --      
   Forfeited                    (92,000)          $3.00 - $7.125        --      
                                -------                                         
Balance at December 31, 1995     42,000           $1.375-$1.625         --      
   Granted                       19,000                            $ 1.634      
   Forfeited                    (22,000)                           $ 1.625      
                                -------                                         
Balance at December 31, 1996    417,000                            $ 1.625      
   Granted                       14,000                            $ 1.688      
   Exercised                         --                                 --      
   Forfeited                     (2,000)                           $ 1.596      
                                -------                                         
Balance at December 31, 1997    429,000                            $ 1.627      
                                =======                                         

At December 31, 1997, 43,000 options were available for grant and 7,000 shares  
were reserved for future issuance under the 1995 Plan.                          

Shares and Options Issued to Officer                                            

Simultaneous with the Notes repurchase in 1995 (Note 5), the Company's Chairman 
and Chief Executive Officer was issued an additional 184,000 shares of the      
Company's stock, for which the Company recorded compensation expense of         
$265,000. The common shares were granted to the officer in partial consideration
for a personal guarantee of $6.5 million of new credit facilities and for       
continued employment with the Company.                                          

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Notes to Consolidated Financial Statements (continued)

8. STOCKHOLDERS' EQUITY (CONTINUED)                                             

Shares and Options Issued to Officer (continued)                                

In addition, on August 15, 1995, the officer was granted a ten-year, immediately
exercisable option to purchase 1,495,000 common shares for an exercise price of 
$.01 per share for which the Company has recorded compensation expense of       
$2,414,000. These options were granted to the officer as final consideration for
personal guarantees of the new credit facilities and for continued employment   
with the Company.                                                               

The following table summarizes information about all options outstanding at     
December 31, 1997:                                                              

                                                        [Enlarge/Download Table]

                             OPTIONS OUTSTANDING                OPTIONS EXERCISABLE     
                   ----------------------------------------  ---------------------------
                                     WEIGHTED                                           
                                      AVERAGE      WEIGHTED                   WEIGHTED  
                                     REMAINING     AVERAGE                    AVERAGE   
    RANGE OF          NUMBER        CONTRACTUAL    EXERCISE     NUMBER        EXERCISE  
EXERCISE PRICES    OUTSTANDING     LIFE (YEARS)      PRICE   EXERCISABLE       PRICE    
----------------  -------------    ------------   ---------  -----------    ------------
                                                                                        
 $          0.01     1,495,000           7.80      $  0.01     1,495,000     $   0.01   
  1.625 - 1.6875       470,600           6.27         1.627      406,316         1.627  
 ---------------     ---------      ---------      --------    ---------     ---------  
 $  .01 - 1.6875     1,965,600           7.46      $  0.372    1,901,316     $   0.355  
 ===============     =========      =========      ========    =========     =========  


At December 31, 1997 and 1996, 1,890,000 and 1,873,000 options, respectively,   
were vested and exercisable.                                                    

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Notes to Consolidated Financial Statements (continued)

8. STOCKHOLDERS' EQUITY (CONTINUED)                                             

Pro Forma Information related to Option Grants                                  

Pro forma information regarding net income and earnings per share is required by
SFAS 123 for awards granted after December 31, 1995, as if the Company had      
accounted for its stock-based awards to employees under the fair value method of
SFAS 123. The fair value of the Company's stock-based awards to employees was   
estimated using a Black-Scholes option pricing model. The Black-Scholes options 
valuation model was developed for use in estimating the fair value of traded    
options which have no vesting restrictions and are fully transferable. In       
addition, the Black-Scholes model requires the input of highly subjective       
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different    
from those of traded options, and because changes in the subjective input       
assumptions can materially affect the fair value estimate, in management's      
opinion, the existing models do not necessarily provide a reliable single       
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's option grants under the 1984 and 1996 Plans was estimated      
assuming no expected dividends and the following weighted-average assumptions:  

                                                                [Download Table]

                                        1997             1996   
                                    -----------       ----------
                                                                
Expected life (years)                    9.5               9.5  
Expected volatility                     93.8%             99.3% 
Risk-free interest rate                  6.3%              7.9% 

The weighted-average fair value of options granted during 1997 was $1.50. For   
pro forma purposes, the estimated fair value of the Company's options is        
amortized over the options' vesting period. The Company's pro forma information 
follows:                                                                        

                                                                [Download Table]

                                          1997              1996     
                                      -------------     -------------

                                                                     
Net income (loss)  As reported        $   1,522,000     $  (353,000) 
                   Pro forma              1,458,000        (387,000) 

Net income (loss)                                                    
   per share       As reported                  .24           (0.08) 
                   Pro forma                    .23           (0.06) 

Because SFAS 123 is applicable only to awards granted subsequent to December 31,
1995, its pro forma effect will not be fully reflected until approximately 1999.

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Notes to Consolidated Financial Statements (continued)

8. STOCKHOLDERS' EQUITY (CONTINUED)                                             

1995-1996 Director Retainer Shares                                              

On February 16, 1996, the Company's Board of Directors agreed that non-employee 
directors could elect to receive some or all of their $5,000 annual Directors'  
Retainer Fees for 1995 and/or 1996 in shares of the Company's common stock,     
instead of in cash, at the rate of $1.6875 per share, which was the closing     
price of the Company's common stock on that date. A total of 13,047 shares was  
issued during 1996 for that purpose. The remaining Director Retainer Fees due to
non-employee directors for 1995 and/or 1996 were paid in cash during 1996.      

Warrants Issued in Conjunction with Lease Restructuring                         

In 1995 and 1996, as consideration for the financial accommodations granted in  
the restructuring of the Company's lease obligations, the Company issued        
immediately exercisable warrants to its primary provider of leased equipment,   
granting the right to purchase 97,853 and 127,147 common shares, respectively,  
at a price of $.01 per share. The Company recorded the transactions as a        
reduction of the debt payable to its primary provider, and of the extraordinary 
gain on the notes repurchase, and adjusted common stock and additional paid-in  
capital by the appraised value of the warrants. In 1996, these warrants were    
exercised to purchase 225,000 common shares.                                    

Options and Warrants Issued in Conjunction with Repurchase of Senior            
Subordinated Notes                                                              

On May 17, 1995, simultaneous with the Notes repurchase (Note 5), the Company   
issued 819,000 common shares (equal to approximately 20% of the Company's then  
fully diluted common shares) and warrants to purchase 216,000 shares of common  
stock (equal to approximately 5% of the then fully diluted common shares) to the
holders of $17,694,000 face value of the Company's Senior Subordinated Notes    
that were repurchased. The warrants are immediately exercisable at $0.75 per    
share, expiring on May 17, 2002.                                                

As a result of the additional options awarded to an officer of the Company, the 
ex-Noteholders were granted 374,000 additional common shares and 98,000         
additional warrants to purchase common shares, to maintain their ownership      
interest at approximately 25% of the then fully diluted common shares. The      
warrants are immediately exercisable at $0.75 per share, expiring on May 17,    
2002.                                                                           

Capital shares reserved for future issuances total 2,951,000 shares at December 
31, 1997.                                                                       

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Notes to Consolidated Financial Statements (continued)

9. RETIREMENT PLAN                                                              

The Company has a defined contribution retirement plan for which substantially  
all full-time employees are eligible. Under the terms of the plan, the Company  
may contribute a discretionary matching contribution on behalf of each          
participant, determined each year by the Company, equal to a percentage of each 
participant's contributions and applicable to the first 6% of each participant's
salary. The Company made no contributions to the plan in 1997, 1996 or 1995.    

10. OBLIGATIONS UNDER CAPITAL LEASES                                            

The Company leases MRI units and other equipment under capital leases having an 
aggregate net book value of $12,284,000 at December 31, 1997. Amortization of   
assets recorded under capital leases is included with depreciation expense, and 
is primarily amortized over the life of the lease.                              

On December 30, 1994 (effective as of November 1, 1994 for most leases that were
considered capital prior to that date, and January 1, 1994 for leases that were 
considered operating prior to that date) and at the end of 1995 and certain     
leases again in early 1996, the Company and its major provider of medical       
equipment entered into a restructuring of the obligations of the Company under  
lease agreements.                                                               

Substantially all capital leases of the Company have been restructured and after
restructuring continued to meet the criteria to be accounted for as capitalized 
leases. Under these modified leases, required payments by the Company are       
scheduled to retire the unpaid principal balance over the extended lease terms  
which will expire on various dates through December 31, 1999. All the operating 
leases covered by the restructuring agreement in effect on October 31, 1994 were
modified to extend the payment schedules. As a result of modification of lease  
terms, these leases met the criteria for capitalization, and were accounted for 
as capital leases in the accompanying financial statements. Under all the       
modified leases, the Company is entitled to purchase the equipment at its fair  
market value, or to extend the relevant lease, at the end of the lease term.    

The modified leases, as identified above, were further restructured effective   
October 1, 1995. No payments were required for the months of October through    
December 1995. During these months, interest was accrued and was added to the   
outstanding principal balance of the capital leases. In addition, the leases    
were extended up to an additional 26 months, where possible, to coincide with   
the probable termination of the Company's end-user contracts. After this        
restructuring, the modified leases continue to meet the criteria to be accounted
for as capitalized leases. Under all the modified leases, the Company will be   
entitled to purchase the equipment at its fair value or to extend the relevant  
lease at the end of the lease term.                                             

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Notes to Consolidated Financial Statements (continued)

10. OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)                                

On March 1, 1996, the Company received an offer from its primary provider of    
medical equipment to restructure certain of its capital lease obligations. The  
general terms of the restructuring provide for various months of no payments in 
1996 followed by increased payments in the latter part of the agreements. The   
Company completed this restructuring on March 8, 1996.                          

Future minimum lease payments, together with the present value of the net       
minimum lease payments under capital leases at December 31, 1997, are summarized
as follows:                                                                     

                                                        [Enlarge/Download Table]

                                                 NPV OF      MAINTENANCE               
                                                MINIMUM       AND OTHER       LEASE    
                                                 LEASE      LEASE RELATED    PAYMENT   
                                               PAYMENTS        COSTS         TOTAL     
                                             -------------  -------------  ------------
                                                                                       
1998                                         $   7,487,000  $   1,916,000  $  9,403,000
1999                                             6,157,000      1,580,000     7,737,000
2000                                             3,261,000        653,000     3,914,000
2001                                               917,000        158,000     1,075,000
2002                                               442,000         46,000       488,000
Thereafter                                         226,000         16,000       242,000
                                             -------------  -------------  ------------
Total                                           18,490,000  $   4,369,000  $ 22,859,000
                                                            =============  ============
Less amounts representing interest               2,712,000                             
                                             -------------                             
Present value of net minimum lease payments     15,778,000                             
Less current portion                             6,145,000                             
                                             -------------                             
                                             $   9,633,000                             
                                             =============                             

As shown above, in addition to the capital lease payments, the Company is also  
required to make maintenance and other executory cost lease related payments.   
During 1997, 1996 and 1995, the Company financed approximately $1,049,000,      
$7,263,000, and $1,342,000, respectively, of equipment purchases with capital   
lease obligations. During 1997, 1996 and 1995, the Company incurred interest    
costs of $3,671,000, $4,199,000, and $5,310,000, respectively.                  

The deferred gain on early lease termination of $296,000 included on the balance
sheet as of December 31, 1997, reflects gains on a lease which was terminated in
1997 for which the lessor agreed to waive the obligations under that lease      
contingent upon the Company entering into two new leases with the lessor. The   
deferred gain on the lease termination will be amortized over the terms of the  
two new leases, which commence in the second quarter of 1998.                   

29

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 American Shared Hospital Services

Notes to Consolidated Financial Statements (continued)

11. OPERATING LEASES                                                            

The Company leases certain MRI and CT scanning equipment, automobiles,          
transportation equipment, and office space under operating leases expiring at   
various dates through 2003.                                                     

Future minimum payments under noncancelable operating leases having initial     
terms of more than one year consisted of the following at December 31, 1997:    

                                                                [Download Table]
                       
1998        $ 2,551,000
1999          2,353,000
2000          1,926,000
2001          1,139,000
2002            886,000
Thereafter      156,000
            -----------
            $ 9,011,000
            ===========

Payments for repair and maintenance agreements are included in the future       
minimum operating lease payments shown above.                                   

Rent expense was $3,285,000 $3,841,000, and $3,458,000 for the years ended      
December 31, 1997, 1996 and 1995, respectively, and includes the above operating
leases as well as month-to-month rental and certain capital lease executory     
costs.                                                                          

12. PURCHASE OF GAMMA KNIFE FROM RELATED PARTY                                  

In January 1993, the Company entered into a commitment to purchase a Gamma Knife
for $2,900,000 and lease the Gamma Knife to a hospital. During 1993, $1,090,000 
was advanced to the equipment manufacturer (the "Manufacturer") including       
$800,000 advanced by a third-party lessor and guaranteed by the Chief Executive 
officer of the Company. The Company was unable to pay or finance scheduled      
progress payments and had been informed by the Manufacturer that the Company was
in default under the terns of the purchase agreement and that such agreement was
terminated.                                                                     

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Notes to Consolidated Financial Statements (continued)

12. PURCHASE OF GAMMA KNIFE FROM RELATED PARTY (CONTINUED)                      

On April 6, 1994, the Company's agreements to purchase a Gamma Knife from an    
equipment manufacturer and lease the Gamma Knife to a hospital were terminated. 
As a settlement, the Company paid approximately $130,000 in interest and costs  
to the parties, and the Company's Chief Executive Officer agreed to enter into  
purchase and lease obligations substantially identical to those previously      
entered into by the Company. The Manufacturer has agreed to sell the Gamma Knife
to, and the hospital agreed to lease the Gamma Knife from, the Company's Chief  
Executive Officer. Of the $1,090,000 in deposits previously paid to the         
Manufacturer, $800,000 was returned to the third-party lessor and $290,000      
previously paid by the Company was advanced by the Company to the Chief         
Executive Officer who executed a promissory note payable. Concurrently, the     
third-party lessor agreed to fund the remaining $2,610,000 purchase price of the
Gamma Knife on behalf of the Chief Executive Officer and the Company received an
option to purchase the Gamma Knife from the Chief Executive Officer for an      
amount equal to the remaining debt obligation associated with the Gamma Knife   
plus costs and operating losses, if any, on the Gamma Knife.                    

On February 3, 1996, the Company purchased a Gamma Knife through its subsidiary,
GK Financing, LLC from its Chief Executive Officer in exchange for forgiveness  
of the outstanding balance of a note due to the Company of $248,000 at December 
31, 1996, plus assumption of a note payable in the amount of $2,270,000. The    
note is payable to the Company's primary provider of medical equipment, bearing 
interest at 10.5%, due in 60 monthly installments, with final payment due July  
1999.                                                                           

13. COMMITMENTS AND CONTINGENCIES                                               

On October 11, 1996 and October 17, 1995, the Company, through GKF, entered into
quotation agreements to purchase a total of seven Gamma Knife units from the    
equipment manufacturer. Under the terms of the quotation agreements, the Company
is committed to purchase this equipment for $19,654,000, effective when the     
equipment is placed in service at each customer location. At December 31, 1997, 
the Company had a $1,750,000 deposit related to these purchase commitments which
is classified as construction in progress. GKF has a promissory note for        
$1,320,000 with the equipment manufacturer to provide funds for future capital  
expenditures. As of December 31, 1997, there have been no borrowings under this 
note.                                                                           

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Notes to Consolidated Financial Statements (continued)

14. SUBSEQUENT EVENT - SALE OF ASSETS (UNAUDITED)                               

On March 12, 1998, the Company entered into a definitive agreement to sell      
certain of its medical diagnostic imaging assets to Alliance Imaging, Inc.      
("Alliance") an affiliate of Apollo Management, L.P. for $13.6 million in cash  
and the assumption of liabilities associated with the Company's diagnostic      
imaging business, including approximately $26.1 million of debt. The Company is 
in the process of finalizing its calculation of the gain it would expect to     
recognize on the sale.                                                          

The following table presents certain financial information of the assets to be  
sold:                                                                           

                                                                [Download Table]
                                                                              
Revenues for the year ended December 31, 1997 were approximately  $ 34,772,000
Total assets at December 31, 1997 were approximately                22,100,000
Total liabilities at December 31, 1997 were approximately           31,900,000

The proposed transaction is subject to certain conditions, including receipt of 
regulatory approvals and the approving vote of a majority of the shareholders of
the Company.                                                                    

32

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Financial Statement Schedule

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 American Shared Hospital Services

 Valuation and Qualifying Accounts

                                                        [Enlarge/Download Table]

                               Additions                              Additions                                 Additions  
                 Balance at    Charged to               Balance at    Charged to                 Balance at     Charged to 
                December 31,   Costs and     Amounts    December 31,  Costs and       Amounts    December 31,   Costs and  
                   1994        Expenses    Written Off     1995        Expenses     Written Off     1996         Expenses  
                -----------   -----------  ----------   -----------   -----------   -----------  -----------   ----------- 
                                                                                                                           
Allowance for                                                                                                              
 uncollectible                                                                                                             
 accounts       $(1,424,000)  $(1,347,000) $1,323,000   $(1,448,000)  $(1,014,000)  $ 1,222,000  $(1,240,000)  $(1,296,000)


                                                                [Download Table]


                                 Balance at 
                    Amounts     December 31,
                  Written Off      1997     
                  -----------   ----------- 
                                            
Allowance for                               
 uncollectible                              
 accounts         $ 1,234,000   $(1,302,000)


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 EXHIBIT INDEX

                                                                [Download Table]

EXHIBIT                                                    
NUMBER                                          DESCRIPTION

                                                           

23.1        Consent of Ernst & Young LLP.

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-K/A’ Filing	Date	First	Last	Other Filings

	5/17/02	42
	12/31/99	43		10-K
	5/31/99	8	35
	12/31/98	8		10-K, 10-K/A
	9/17/98	35
Filed on:	8/28/98	13
	3/20/98	1		8-K
	3/12/98	9	47	8-K
	2/28/98	8
	2/27/98	16
For Period End:	12/31/97	1	47	10-K
	12/15/97	29
	11/26/97	11
	9/30/97	12		10-Q
	7/31/97	11
	6/30/97	12		10-Q
	4/23/97	11
	3/31/97	12		10-K405, 10-Q
	12/31/96	8	46	10-K405
	12/23/96	10	34
	10/16/96	9	11	S-3/A
	10/15/96	7	31
	10/11/96	46
	9/30/96	12
	8/30/96	31
	6/30/96	11		10-Q
	4/29/96	10
	3/31/96	11		10-Q
	3/29/96	11	12	S-1/A
	3/8/96	44
	3/1/96	8	44
	2/16/96	42
	2/3/96	10	46
	1/31/96	10	11
	12/31/95	10	45	10-K
	12/29/95	8
	12/20/95	11
	10/26/95	11	12	S-1
	10/17/95	11	46
	10/6/95	38		DEF 14A
	10/1/95	5	43
	9/17/95	35
	8/31/95	12		DEF 14A
	8/15/95	11	40
	5/17/95	6	42
	5/12/95	10	11
	2/1/95	34
	1/1/95	10	39
	12/31/94	12
	12/30/94	10	43
	11/1/94	11	43
	10/31/94	43
	4/6/94	46
	3/1/94	38
	1/1/94	43
				List all Filings

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Filing Submission 0000950149-98-001536 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

American Shared Hospital Services – ‘10-K/A’ for 12/31/97

As of: Friday, 8/28/98 · For: 12/31/97 · Accession #: 950149-98-1536 · File #: 1-08789

Previous ‘10-K’: ‘10-K’ on 3/31/98 for 12/31/97 · Next: ‘10-K’ on 3/31/99 for 12/31/98 · Latest: ‘10-K’ on 4/1/24 for 12/31/23

Amendment to Annual Report — Form 10-KFiling Table of Contents

10-K/A — Form 10-K/A (1)Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Amendment to Annual Report — Form 10-K
Filing Table of Contents

10-K/A — Form 10-K/A (1)
Document Table of Contents