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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(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, 1999
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
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AMERICAN SHARED HOSPITAL SERVICES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2918118
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TWO EMBARCADERO CENTER, SUITE 2370, SAN FRANCISCO, CALIFORNIA 94111-3823
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 788-5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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 27, 2000, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $12,158,073.
Number of shares of common stock of the registrant outstanding as of March
27, 2000: 3,810,042.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of its Shareholders are incorporated by reference into Part III of this
report.
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PART I
ITEM 1. BUSINESS
GENERAL
American Shared Hospital Services ("ASHS" and, together with its
subsidiaries, the "Company") currently provides Gamma Knife stereotactic
radiosurgery services to eight medical centers in seven states. The Company
provides these services through its 81% indirect interest in GK Financing, LLC,
a California limited liability company ("GKF"). The remaining 19% of GKF is
owned by GKV Investments, Inc., a wholly owned U.S. subsidiary of Elekta AG, a
Swedish company ("Elekta"). Elekta is the manufacturer of the Leksell Gamma
Knife (the "Gamma Knife"). GKF is a non-exclusive provider of alternative
financing services for Elekta. Gamma Knife services accounted for almost 100% of
the Company's revenues in 1999.
At present, the Company is developing a business plan for "The Operating
Room for the 21st Century" (sm) ("OR21" (sm)). The Company also is exploring
Internet-related business opportunities that relate strategically and
operationally to its existing and developing lines of business. Neither OR21 nor
the Internet-related businesses are expected to generate significant revenues
within the next twelve months. The Company's former insurance services business
did not contribute significant revenues and was discontinued during second
quarter 1999.
During November 1998, the Company sold its diagnostic imaging business to
affiliates of Alliance Imaging, Inc. (the "Purchaser") for $13,552,000 in cash
and the assumption by the Purchaser of substantially all of the liabilities of
the diagnostic imaging business, including approximately $27.1 million in debt
and other liabilities. Prior to that sale, the Company provided Magnetic
Resonance Imaging ("MRI"), Computed Axial Tomography ("CT"), Ultrasound, Nuclear
Medicine and Cardiac Catheterization Laboratory services to approximately 190
customers in 22 states. The diagnostic imaging business provided approximately
88% and 94%, respectively, of the Company's revenues for the years ended
December 31, 1998 and 1997.
The Company was incorporated in the state of California in 1983 and its
predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital
Services), a California limited partnership, was formed in June 1980.
GAMMA KNIFE OPERATIONS
Gamma Knife stereotactic radiosurgery, a non-invasive procedure, is an
alternative to conventional brain surgery or can be an adjunct to conventional
brain surgery. Compared to conventional surgery, Gamma Knife surgery usually
involves shorter patient hospitalization, lower risk of complications and can be
provided at a lower cost. Typically, Gamma Knife patients resume their normal
activities one or two days after treatment. The Gamma Knife treats the patient
with 201 single doses of gamma rays that are focused with great precision on
small, well circumscribed and critically located structures in the brain. The
Gamma Knife delivers the concentrated dose of gamma rays from 201 sources of
Cobalt 60 housed in the Gamma Knife.
The 201 Cobalt 60 sources converge at the target area and deliver a dose
that is high enough to destroy the diseased tissue without damaging surrounding
healthy tissue.
The Gamma Knife treats selected benign brain tumors (i.e. meningiomas,
pituitary and acoustic neuromas, craniopharyngiomas), malignant tumors (i.e.
gliomas, nasopharyngeal carcinomas, ocular meningiomas and solitary and multiple
metastatic tumors), arteriovenous malformations and trigeminal neuralgia (facial
pain). Research is being conducted in the treatment of Parkinson's Disease,
epilepsy, and other functional disorders.
There currently are 55 Gamma Knife units operating at 54 sites in the
United States and approximately 135 units worldwide. As of December 31, 1999,
approximately 135,000 procedures had been performed worldwide. An estimated
percentage breakdown of these Gamma Knife procedures performed in the U.S. by
indications treated are as follows: malignant (40%) and benign (32%) tumors,
vascular disorders (17%) and functional disorders (11%).
The Company currently has eight (8) Gamma Knife units operating at eight
(8) sites in the United States. In addition, the Company has signed agreements
with four (4) more hospitals that are currently under development or
construction, plus two (2) signed contracts that are subject to state regulatory
approval. The
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Company's first Gamma Knife commenced operation in September 1991. The Company's
Gamma Knife units had performed approximately 3,300 procedures through December
31, 1999.
Gamma Knife revenues for the Company during the five (5) years ended
December 31, 1999, and the percentage of total revenues of the Company
represented by the Gamma Knife for each of the last five years are set forth
below:
YEAR ENDED TOTAL GAMMA KNIFE GAMMA KNIFE/
DECEMBER 31, REVENUES (IN THOUSANDS) TOTAL REVENUES
------------ ----------------------- --------------
1999.................................... $7,151 99.9%
1998.................................... $4,156 11.8%
1997.................................... $2,384 6.4%
1996.................................... $2,030 5.5%
1995.................................... $1,325 3.9%
The Company conducts its Gamma Knife business through its 81% indirect
interest in GKF. The remaining 19% interest is indirectly owned by Elekta. GKF,
a limited liability company, was formed in October 1995. GKF is managed by its
policy committee. The policy committee is composed of one representative from
the Company, Ernest A. Bates, M.D., and one representative from Elekta. The
policy committee sets the operating policy for GKF. The policy committee may act
only with the unanimous approval of all of its members. The policy committee
selects a manager to handle GKF's daily operations. Craig K. Tagawa, Chief
Executive Officer of GKF and Chief Operating and Financial Officer of the
Company, serves as GKF's manager.
GKF profits and/or losses and any cash distributions are allocated based on
membership interests. GKF's Operating Agreement requires that it have a cash
reserve of at least $50,000 prior to cash distributions to its members. From
inception to December 31, 1999, GKF had distributed $1,558,000 to the Company.
RISKS OF GAMMA KNIFE BUSINESS
There are significant risks involved in the Company's Gamma Knife business,
including the following:
- Each Gamma Knife unit requires a substantial capital investment. The
Company's cost for a Gamma Knife unit historically has been approximately
$2,750,000. In some cases, the Company contributes additional funds for
capital costs and/or annual operating costs such as marketing. Due to the
structure of its contracts with medical centers, there can be no
assurance that these costs will be fully recovered or that the Company
will earn a satisfactory return on its investment.
- There is a limited market for the Gamma Knife. Due to the substantial
costs of acquiring a Gamma Knife, the Company must identify medical
centers that possess neurosurgery and oncology departments capable of
performing a large number of Gamma Knife procedures. The Company has
identified approximately 200 such medical centers in the United States as
potential future sites. There currently are 55 operating Gamma Knife
units in the United States, eight (8) of which are Company-operated
units. There can be no assurance that the Company will be successful in
placing additional units at a significant number of sites in the future.
- There currently are four companies (in addition to the Company) that
supply the Gamma Knife to potential customers. One of the four companies
purchased one Gamma Knife within the last twelve months. The Company does
not currently have an exclusive relationship with Elekta and has lost
sales in the past to customers that choose to purchase a Gamma Knife
directly from Elekta. In addition, the Company may continue to lose sales
in the future to such customers and may also lose sales to competitors of
the Company. There can be no assurance that the Company will be able to
successfully compete against others to place units in the future.
- There are several methods of radiosurgery (including the modified linear
accelerator) as well as conventional neurosurgery that compete against
the Gamma Knife. Currently, there are approximately 200 medical centers
in the United States with modified linear accelerators. Each of the
medical centers targeted by the Company could decide to acquire another
radiosurgery modality instead of a Gamma Knife. In addition,
neurosurgeons who are primarily responsible for referring patients for
Gamma Knife surgery may not be willing to make such referrals for various
reasons, instead opting for invasive
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surgery. There can be no assurance that the Company will be able to
secure a sufficient number of sites or Gamma Knife procedures to attain
profitability and growth.
- The amount reimbursed to medical centers for each Gamma Knife treatment
may decline in the future. The reimbursement decrease may come from
federally mandated programs (i.e. Medicare and Medicaid) and other third
party payor groups. A significant amount of the Company's existing
contracts are reimbursed by the medical center to the Company on a
fee-for-service basis. The primary risk to the Company under this type of
contract is that actual volumes of procedures could be less than
projected. The Company also has two contracts where it receives revenues
based directly on the amount of reimbursement received for procedures
performed. Revenues under those contracts and any future contracts with
revenue based directly on reimbursement amounts will be impacted by any
reimbursement rate change. Some of the Company's future contracts for
Gamma Knife services may have revenues based on such reimbursement rates
instead of a fee-for-service basis. There can be no assurance that future
changes in healthcare regulations and reimbursement rates will not
adversely affect the Company's Gamma Knife revenues.
- As with other highly sophisticated medical equipment, there is constant
change and innovation in the market. New and improved medical equipment
can be introduced that could make the Gamma Knife technology obsolete and
that would make its operation uneconomic. During the current year, Elekta
is introducing an upgraded Gamma Knife which is expected to cost
approximately $3.4 million plus applicable tax and duties. This upgrade
is anticipated to automate the patient positioning process and therefore
involve less health care provider intervention. Seven (7) of the
Company's existing Gamma Knife units are upgradeable. The cost to upgrade
existing units to the new model is estimated to be up to $900,000.
CUSTOMERS
The Company's current business is the outsourcing of Gamma Knife
stereotactic radiosurgery services. The Company typically provides the Gamma
Knife equipment, as well as planning, installation and marketing support
services. Customers usually pay the Company on a fee-per-use basis. The market
for these services primarily consists of major urban medical centers. The Gamma
Knife business is capital intensive. The total cost of a Gamma Knife facility
usually ranges from $3.25 million to $4 million, including equipment, site
construction and installation. The Company's typical, historical costs for
acquisition are approximately $2,750,000 with the medical center paying for site
and installation costs.
CUSTOMER ORIGINAL TERM OF CONTRACT BASIS OF PAYMENT
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EXISTING SITES
UCSF-Stanford Health Care ( "UCSF")
San Francisco, California...................... 10 years Fee per use
Hoag Memorial Hospital Presbyterian ("Hoag")
Newport Beach, California...................... 10 years Fee per use
Southwest Texas Methodist Hospital ("STMH") San
Antonio, Texas................................. 10 years Fee per use
Yale New Haven Ambulatory Services Corporation
("Yale") New Haven, Connecticut................ 10 years Revenue sharing
Kettering Medical Center ("Kettering")
Kettering, Ohio................................ 10 years Fee per use
New England Medical Center ("NEMC") Boston,
Massachusetts.................................. 10 years Fee per use
University of Arkansas for Medical Sciences
("UAMS") Little Rock, Arkansas................. 15 years Revenue sharing
Froedtert Memorial Lutheran Hospital ("FMLH")
Milwaukee, Wisconsin........................... 10 years Fee per use
SITES UNDER DEVELOPMENT
JFK Medical Center
Edison, New Jersey............................. 10 years Fee per use
Sunrise Hospital and Medical Center
Las Vegas, Nevada.............................. 10 years Fee per use
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CUSTOMER ORIGINAL TERM OF CONTRACT BASIS OF PAYMENT
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Clinica San Felipe
Lima, Peru..................................... 10 years Revenue Sharing
Hospital Barra D'Or
Rio de Janeiro, Brazil......................... 10 years Fee per use
SIGNED, PENDING STATE
REGULATORY APPROVAL
Two additional contracts are signed, pending state regulatory approval.
The Company's second Gamma Knife contract, with the University of Southern
California ("USC") ended in third quarter 1999. The customer exercised its
option to purchase the equipment for its net book value, approximately $1.2
million. Currently, one of the Company's sites now under development is
projected to become operational in second quarter 2000, and two additional
contracts are expected to become operational in fourth quarter 2000. The
Company's contract with Hospital Barra D'Or currently is being renegotiated with
the customer in light of the changes in the Brazilian economic environment. If
the contract cannot be successfully renegotiated, it will be terminated. The
projected operational dates for contracts pending state regulatory approval
cannot currently be estimated.
The Company's fee per use agreement is typically for a ten-year term. The
fixed fee per use reimbursement amount that the Company receives from the
customer is based on the Company's cost to provide the service and the
anticipated volumes of the customer. The contracts signed by the Company
typically call for a fee ranging from $7,500 to $9,500 per procedure. There are
no minimum volume guarantees required of the customer. Typically, GKF is
responsible for providing the Gamma Knife and related ongoing Gamma Knife
equipment expenses (i.e. personal property taxes, insurance, equipment
maintenance) and also helps fund the customer's Gamma Knife marketing.
Typically, the customer is obligated to pay site and installation costs and the
costs of operating the Gamma Knife. Generally, the customer can either renew the
agreement or terminate the agreement upon the termination date of the agreement.
If the customer chooses to terminate the agreement, then GKF removes the
equipment from the medical center.
The Company's revenue sharing agreements are typically for a period of ten
to fifteen years. Instead of receiving a fixed fee, the company receives all or
a percentage of the reimbursement (exclusive of physician fees) received by the
customer less the operating expenses of the Gamma Knife. The Company is at risk
for any reimbursement rate changes for Gamma Knife services by third party
payors. The Company is also at risk if it inefficiently operates its Gamma Knife
services. There are no minimum volume guarantees required of the customer.
Four customers each accounted for more than 10% of the Company's revenues
in 1999: USC, Hoag, STMH and Yale. No single customer accounted for 10% or more
of the Company's total revenues in 1998 or 1997, but each of the five Gamma
Knife customers in 1998 and each of the three Gamma Knife customers in 1997
accounted for more than 10% of the Company's Gamma Knife services revenues in
those years of operation.
MARKETING
At the end of 1999, the Company employed one sales executive. The Company
markets its services through its preferred provider status with Elekta and a
direct sales effort. The major advantages to a health care provider in
contracting with the Company for Gamma Knife services include:
- The medical center avoids the high cost of owning the equipment. By not
acquiring the Gamma Knife unit, the medical center is able to allocate
the funds required to purchase and/or finance the Gamma Knife to other
projects.
- The medical center avoids the risk of Gamma Knife under-utilization. The
Company does not have minimum volume requirements. The medical center
pays the Company only for each Gamma Knife procedure performed on a
patient.
- The medical center transfers the risk of technological obsolescence to
the Company. The medical center and its physicians are not under any
obligation to utilize technologically obsolete equipment.
- The Company provides planning, installation, operating and marketing
assistance and support to its Gamma Knife customers.
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FINANCING
The Company's Gamma Knife business is operated through GKF. GKF has funded
its existing Gamma Knife units with loans from a single lender for 100% of the
cost of each Gamma Knife, plus any sales tax, customs and duties. The loans are
fully amortized over an 84-month period. The loans are collateralized by the
Gamma Knife, customer contracts, and accounts receivable and are without
recourse to the Company and Elekta.
GKF currently has loan commitments and has received progress payments from
its primary lender for two (2) of its four (4) Gamma Knife projects under
development. The loan commitments require that GKF have a debt to equity plus
subordinated debt ratio of 6 to 1. GKF currently meets the ratio requirement to
be eligible for funding of the approximately $6,500,000 remaining cash
requirements for its four (4) projects under development.
COMPETITION
Conventional neurosurgery is the primary competitor of Gamma Knife
radiosurgery. Gamma Knife surgery is gaining acceptance as an alternative and/or
adjunct to conventional surgery due to its more favorable morbidity outcomes for
certain procedures as well as its non-invasiveness. Utilization of the Company's
Gamma Knife units is contingent on the acceptance of Gamma Knife radiosurgery by
the customer's neurosurgeons, radiation oncologists and referring physicians. In
addition, the utilization of the Company's Gamma Knife units is impacted by the
proximity of competing Gamma Knife centers and providers using other
radiosurgery modalities.
The Company's ability to contract with additional customers for Gamma Knife
services is dependent on its ability to compete against (i) other companies that
outsource Gamma Knife services, (ii) Elekta, the manufacturer of the Gamma
Knife, and (iii) manufacturers of competing radiosurgery devices (primarily
modified linear accelerators). The Company does not have an exclusive
relationship with Elekta and has lost sales in the past to customers that choose
to purchase a Gamma Knife directly from Elekta. The Company may continue to lose
sales in the future to such customers and may also lose sales to competitors of
the Company.
GOVERNMENT REGULATION
The Company's Gamma Knife services customers receive payments for patient
care from federal government and private insurer reimbursement programs.
Currently, Gamma Knife services are performed primarily on an in-patient basis,
although a significant number are performed on an outpatient basis.
A Prospective Payment System ("PPS") is utilized to reimburse hospitals for
care given to hospital in-patients covered by federally funded reimbursement
programs. Patients are classified into a Diagnosis Related Group ("DRG") in
accordance with the patient's diagnosis, necessary medical procedures and other
factors. Patient reimbursement is limited to a predetermined amount for each
DRG. The reimbursement payment may not necessarily cover the cost of all medical
services actually provided because the payment is predetermined. Effective
October 1, 1997, Gamma Knife services for Medicare hospital in-patients were
reclassified from DRG 1 to either DRG 7 or DRG 8. This reclassification is
estimated to have reduced medical center revenues from the Medicare DRG program
by approximately 30%. In the future, this reduction may lower reimbursement from
other third party payors.
In 1986 and again in 1990, Congress enacted legislation requiring the
Department of Health and Human Services ("DHHS") to develop proposals for a PPS
for hospital outpatient services. DHHS has proposed a new payment system,
Ambulatory Product Classifications ("APC"), which affects all outpatient
services, including those performed in a hospital based or free-standing
facility. APC implementation is anticipated in the third or fourth quarter 2000.
The APC consist of 346 clinically, homogenous classifications or groupings
of codes that are typically used in outpatient billing. Outpatient services will
be bundled with fixed rates of payment determined according to specific regional
and national factors, similar to that of the in-patient PPS. Overall, the system
is expected to reduce payments for select services and encourage the most
efficient use of resources for outpatient care.
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The current APC proposal categorizes radiosurgery under conventional
radiation therapy. Therefore, both procedures would receive the same
reimbursement amounts. This categorization makes no distinction with regard to
the types of resources utilized (e.g. technology) for each procedure
classification. Therefore, regardless of resource consumption and clinical
outcomes, all procedures within a group qualify for equal reimbursement.
Specifically, stereotactic radiosurgery would receive the same reimbursement per
session as conventional radiation therapy. This would result in a significant
reimbursement decrease for Gamma Knife patients covered by Medicare treated on
an outpatient basis. Various groups have informed DHHS of the discrepancies of
these service levels in an attempt to be compensated in line with the intent of
the APC system. It is not the intent of the APC system to compensate providers
similarly for clinically different procedures. The APC reimbursement amount is
not known at this time.
The Company has two contracts where the revenue is directly affected by
changes in payment rates by Medicare and other third party payors. Some of GKF's
future contracts for Gamma Knife services may be on a similar
reimbursement-sensitive basis instead of a fee-for-service basis. As a result of
lower reimbursement rates, profitability from future contracts will be reduced
unless the number of Gamma Knife procedures can be increased or if the costs to
provide Gamma Knife services can be lowered.
The payment of remuneration to induce the referral of health care business
has been a subject of increasing governmental and regulatory focus in recent
years. Section 1128B(b) of the Social Security Act (sometimes referred to as the
"federal anti-kickback statute") provides criminal penalties for individuals or
entities that knowingly and willfully offer, pay, solicit or receive
remuneration in order to induce referrals for items or services for which
payment may be made under the Medicare and Medicaid programs and certain other
government funded programs. The Social Security Act provides authority to the
Office of Inspector General through civil proceedings to exclude an individual
or entity from participation in the Medicare and state health programs if it is
determined any such party has violated Section 1128B(b) of the Social Security
Act. The Company believes that it is in compliance with the federal
anti-kickback statute. Additionally, the Omnibus Budget Reconciliation Act of
1993, often referred to as "Stark II", bans physician self-referrals to
providers of designated health services with which the physician has a financial
relationship. The term "designated health services" includes, among others,
radiation therapy services and in-patient and outpatient hospital services. On
January 1, 1995, the Physician Ownership and Referral Act of 1993 became
effective in California. This legislation prohibits physician self-referrals for
covered goods and services, including radiation oncology, if the physician (or
the physician's immediate family) concurrently has a financial interest in the
entity receiving the referral. The Company believes that it is in compliance
with these rules and regulations.
A range of federal civil and criminal laws target false claims and
fraudulent billing activities. One of the most significant is the Federal False
Claims Act, which prohibits the submission of a false claim or the making of a
false record or statement in order to secure a reimbursement from a
government-sponsored program. In recent years, the federal government has
launched several initiatives aimed at uncovering practices which violate false
claims or fraudulent billing laws. Claims under these laws may be brought either
by the government or by private individuals on behalf of the government, through
a "whistleblower" or "qui tam" action. The Company believes that it is in
compliance with the Federal False Claims Act; however, because such actions are
filed under seal and may remain secret for years, there can be no assurance that
the Company or one of its affiliates is not named in a material qui tam action.
Legislation in various jurisdictions requires that health facilities obtain
a Certificate of Need ("CON") prior to making expenditures for medical
technology in excess of specified amounts. One of the Company's existing
customers was required to obtain a CON. Two more of the Company's more
recently-signed contracts are subject to CONs. The CON procedure can be
expensive and time consuming and may impact the length of time before Gamma
Knife services commence. CON requirements vary from state to state in their
application to the operations of both the Company and its customers. In some
jurisdictions the Company is required to comply with CON procedures to provide
its services and in other jurisdictions customers must comply with CON
procedures before using the Company's services.
The Company's Gamma Knife units contain Cobalt 60 radioactive sources. The
medical centers that house the Company's Gamma Knife units are responsible for
obtaining possession and user's licenses for the Cobalt 60 source.
The Company believes it is in substantial compliance with the various rules
and regulations that affect its businesses.
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INSURANCE AND INDEMNIFICATION
The Company's contracts with equipment vendors generally do not contain
indemnification provisions. The Company maintains a comprehensive insurance
program covering the value of its property and equipment, subject to
deductibles, which the Company believes are reasonable.
The Company's customer contracts generally contain mutual indemnification
provisions. The Company maintains general and professional liability insurance.
The Company is not involved in the practice of medicine and therefore believes
its present insurance coverage and indemnification agreements are adequate for
its business.
EMPLOYEES
At December 31, 1999, the Company employed eight (8) employees on a
full-time basis. None of these employees is subject to a collective bargaining
agreement and there is no union representation within the Company. The Company
maintains various employee benefit plans and believes that its employee
relations are good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table provides current information concerning those persons
who serve as executive officers of the Company. The executive officers were
appointed by the Board of Directors and serve at the discretion of the Board of
Directors.
NAME: AGE: POSITION:
----- ---- ---------
Ernest A. Bates, M.D. 63 Chairman of the Board of Directors, Chief
Executive Officer
Craig K. Tagawa 46 Senior Vice President -- Chief Operating and
Financial Officer
Richard Magary 59 Senior Vice President -- Administration,
Assistant Secretary
Gregory Pape 44 Senior Vice President -- Sales and Marketing
ERNEST A. BATES, M.D., founder of the Company, has served in the positions
listed above since the incorporation of the Company, except for the periods May
1, 1991 through November 6, 1992 and February 1989 through August 1989, during
which time Dr. Bates did not serve in the capacity of President and Chief
Operating Officer. Dr. Bates is a graduate of The Johns Hopkins University and
the University of Rochester School of Medicine. He is currently an Assistant
Clinical Professor of Neurosurgery at the University of California Medical
Center at San Francisco, and a member of the Board of Trustees of The Johns
Hopkins University and the University of Rochester, a Director of the Industrial
Policy Advisory Committee of the Engineering Research Center for
Computer-Integrated Surgical Systems and Technology ("CISST") at The Johns
Hopkins University, a Member of the State of California High Speed Rail
Authority, and a Member of the Board of Directors of Salzburg Seminar.
CRAIG K. TAGAWA has served as Chief Operating Officer since February 1999
in addition to serving as Chief Financial Officer since May 1996. Mr. Tagawa
also served as Chief Financial Officer from January 1992 through October 1995.
Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice
President on February 28, 1993. He is also the Chief Executive Officer of GK
Financing, LLC. From September 1988 through January 1992, Mr. Tagawa served in
various positions with the Company. From 1982 through August 1988, Mr. Tagawa
served as Vice President of Finance and Controller of Medical Ambulatory Care,
Inc., the Dialysis division of National Medical Enterprises, Inc. (now Tenet
Healthcare Corporation), an owner and operator of hospitals and other health
care businesses. Mr. Tagawa received his Undergraduate degree from the
University of California at Berkeley and his M.B.A from Cornell University.
RICHARD MAGARY has served as Senior Vice President -- Corporate Development
or Administration since February 28, 1993 and as Assistant Secretary since 1985.
Mr. Magary will conclude his current duties in May of 2000 and become an advisor
to the Company. From April 1987 through February 1993, Mr. Magary served as a
Vice President in the same capacity as his current duties. From 1982 through
March 1987, he
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served as Chief Financial Officer of the Company and its predecessor. Mr. Magary
is a graduate of the University of San Francisco.
GREGORY PAPE has served as Senior Vice President -- Sales and Marketing
since June 1994. From January 1993 through June 1994, Mr. Pape was a Zone Vice
President -- Sales and Marketing for the Company. Mr. Pape served in the
capacity of Regional Sales Manager for the Company for the period from March
1991 through January 1993. From September 1989 through February 1991, Mr. Pape
was a Regional Sales Manager for Medical Imaging Corporation of America, Inc.
Mr. Pape earned his undergraduate degree at the University of Miami, Florida
with postgraduate work in law at the University of Dayton, Ohio.
ITEM 2. PROPERTIES
The Company's corporate offices are located at Two Embarcadero Center,
Suite 2370, San Francisco, California, where it leases approximately 2,550
square feet for $11,208 per month. This lease runs through September 2002.
For the year ended December 31, 1999 the Company's aggregate net rental
expenses for all properties and equipment were approximately $117,000.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings involving the Company or
any of its property. The Company knows of no legal or administrative proceedings
against the Company contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common shares, no par value (the "Common Shares"), are
currently traded on the American Stock Exchange ("AMEX") and the Pacific
Exchange ("PCX"). The table below sets forth the high and low closing sales
prices of the Common Shares of the Company on the American Stock Exchange
Consolidated Reporting System for each full quarter for the last two fiscal
years.
PRICES FOR COMMON SHARES
QUARTER ENDING HIGH LOW
-------------- ---- ---
March 31, 1998............................................. 1 15/16 1 3/8
June 30, 1998.............................................. 1 7/8 1 1/4
September 30, 1998......................................... 1 1/4 5/8
December 31, 1998.......................................... 1 1/4 5/8
March 31, 1999............................................. 1 11/16 15/16
June 30, 1999.............................................. 3 1 1/2
September 30, 1999......................................... 6 1/4 2 3/8
December 31, 1999.......................................... 5 3/8 3 7/16
The Company estimates that there were approximately 1,400 beneficial
holders of its Common Shares as of December 31, 1999.
The Company's Board of Directors authorized, and the Company completed in
March 1999 the repurchase of all of its remaining securities owned by two major
holders who acquired them in the Company's 1995 financial restructuring. The
repurchases were made directly from the holders.
The repurchased securities included shares of the Company's Common Stock,
and Warrants to acquire additional shares of Common Stock. The repurchased
securities represented approximately 12.6% of the
9
10
Company's then-issued and outstanding common shares and about 12.6% of its
then-fully diluted outstanding shares. The aggregate repurchase price paid by
the Company was approximately $702,000.
The Board of Directors also authorized in March 1999 the repurchase of up
to 500,000 additional shares of the Company's Common Stock in the open market
from time to time at prevailing prices. Approximately 196,000 shares were
repurchased in the open market pursuant to that authorization, through December
31, 1999, at a cost of approximately $498,000.
During 1999 holders of warrants and of options to acquire the Company's
common stock exercised their respective rights pursuant to such securities,
resulting in the Company issuing approximately 37,000 new shares of its common
stock, in exchange for payments totaling approximately $37,000.
On March 22, 1999, the Company adopted a Shareholder Rights Plan ("Plan").
Under the Plan, the Company made a dividend distribution of one Right for each
outstanding share of the Company's common stock as of the close of business on
April 1, 1999. The Rights become exercisable only if any person or group, with
certain exceptions, becomes an "acquiring person" (acquires 15 percent or more
of the Company's outstanding common stock) or announces a tender or exchange
offer to acquire 15 percent or more of the Company's outstanding common stock.
The Company's Board of Directors adopted the Plan to protect shareholders
against a coercive or inadequate takeover offer. The Board of Directors is not
aware that any person or group intends to make a takeover offer for the Company.
Following the transactions described above, as of December 31, 1999 the
Company had 5,732,964 fully diluted shares outstanding, including 3,813,042
issued and outstanding common shares, 1,370 common shares reserved for warrants,
1,912,867 common shares reserved for options, and 5,685 shares reserved pursuant
to the Company's Shareholder Rights Plan.
The Company did not pay cash dividends in 1999 and does not anticipate
paying cash dividends in 2000.
10
11
ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995(1)
------- ------- ------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Medical services revenues.................... $ 7,156 $35,162 $37,172 $ 36,989 $ 34,077
======= ======= ======= ======== ========
Costs of operations.......................... 2,165 25,826 27,044 28,071 32,675
Selling and administrative expense........... 1,803 5,116 5,901 5,309 8,432
Interest expense............................. 1,309 3,186 3,671 4,199 5,310
Write-down of intangible assets.............. 0 0 0 0 600
------- ------- ------- -------- --------
Total costs and expenses..................... 5,277 34,128 36,616 37,579 47,017
------- ------- ------- -------- --------
1,879 1,034 556 (590) (12,940)
(Loss) gain on sale of assets and early
termination of capital leases.............. 10 (2) 821 3 226
Gain on disposal of product line............. 0 20,478 0 0 0
Interest and other income.................... 603 220 118 170 258
Minority interest............................ (501) (166) 37 57 0
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item......................... 1,991 21,564 1,532 (360) (12,456)
Income tax benefit (expense)................. 716 (1,513) (10) 7 (3)
------- ------- ------- -------- --------
Income (loss) before extraordinary item...... 2,707 20,051 1,522 (353) (12,549)
Extraordinary item........................... 0 0 0 0 19,803
------- ------- ------- -------- --------
Net income (loss)............................ $ 2,707 $20,051 $ 1,522 $ (353) $ 7,344
======= ======= ======= ======== ========
Earnings (loss) per common share:
Income (loss) before extraordinary
item.................................. $ 0.68 $ 4.23 $ 0.32 $ (0.08) $ (2.96)
Extraordinary item...................... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 4.71
------- ------- ------- -------- --------
Net income (loss)....................... $ 0.68 $ 4.23 $ 0.32 $ (0.08) $ 1.75
======= ======= ======= ======== ========
Earnings (loss) per common share assuming
dilution:
Income (loss) before extraordinary
item.................................. $ 0.48 $ 3.15 $ 0.24 $ (0.08) $ (2.96)
Extraordinary item...................... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 4.71
------- ------- ------- -------- --------
Net income (loss)....................... $ 0.48 $ 3.15 $ 0.24 $ (0.08) $ 1.75
======= ======= ======= ======== ========
BALANCE SHEET DATA
Cash......................................... $12,903 $11,114 $ 17 $ 368 $ 452
Restricted Cash.............................. 50 2,226 651 218 493
Working capital (deficiency)................. 11,125 9,088 (8,039) (10,888) (6,793)
Total assets................................. 36,986 26,919 30,209 32,969 31,335
Current portion of long-term debt............ 2,545 1,885 10,929 13,182 8,720
Long-term debt, less current portion......... 19,887 8,823 21,569 23,935 26,125
Senior subordinated notes.................... 0 0 0 0 773
Shareholders' equity (Net capital
deficiency)................................ $12,639 $11,096 $(8,953) $(10,475) $(10,576)
See accompanying note
- ---------------
(1) In June 1995, ASHS incorporated a new wholly-owned subsidiary, African
American Church Health and Economic Services, Inc. ("ACHES") and ACHES'
wholly-owned subsidiary, ACHES Insurance Services, Inc. ("AIS"), and in
October 1995, entered into an operating agreement granting to American
Shared Radiosurgery Services (a California corporation and a wholly-owned
subsidiary of the Company) an 81% ownership interest in GK Financing, LLC.
Accordingly, the financial data for the Company presented above include the
results of the establishment of ACHES, AIS, and GK Financing, LLC for 1995
through 1999.
11
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the years ended December 31, 1999, 1998 and 1997, approximately
100%, 12% and 6% respectively, of the Company's revenues were derived from its
Gamma Knife business. The Company in November 1998 sold its diagnostic imaging
business which accounted for 0%, 88% and 94% of the Company's total revenues
during the years ended December 31, 1999, 1998 and 1997, respectively. As a
result, the Company was relieved of substantially all of the liabilities of the
imaging division, consisting of approximately $27,100,000 of debt and other
obligations, and received approximately $13,500,000 in cash. The sale of its
imaging division resulted in a one-time gain of $20,478,000 in 1998, which
eliminated the Company's capital deficiency. Following the sale, the Company's
operations were significantly reduced and it has substantially reduced its
staff. Accordingly the discussions below related to 1998 and 1997 predominantly
reflect the Company's operations prior to the sale of its imaging division.
The Company had net income of $2,707,000 ($0.68 per share) on medical
services revenues of $7,156,000 in 1999. Net income in 1999 included an
insurance expense credit of $325,000 and an income tax benefit of $716,000. The
Company had net income of $20,051,000 ($4.23 per share) on medical services
revenues of $35,162,000 in 1998. Included in net income for 1998 is a
$20,478,000 gain on disposal of product line less Sale-related income taxes of
$1,500,000.
TOTAL REVENUES
INCREASE INCREASE
1999 (DECREASE) 1998 (DECREASE) 1997
------ ---------- ------- ---------- -------
(IN THOUSANDS)
Medical services................................ $7,156 (79.6%) $35,162 (5.4%) $37,172
Medical services revenues decreased 79.6% in 1999 compared to 1998, and
decreased 5.4% in 1998 compared to 1997. Both decreases are primarily
attributable to the sale of the Company's imaging division, which occurred in
November 1998.
Gamma Knife revenues increased $2,995,000 and $1,772,000 in 1999 and 1998,
respectively, compared to the prior years. The 1999 increase was primarily due
to the commencement of four new Gamma Knife contracts during 1999 and full year
inclusion of the Company's fourth and fifth Gamma Knife units. The Company's
sixth Gamma Knife commenced operation in second quarter 1999, the seventh and
eighth commenced operation during third quarter 1999, and the ninth commenced
operation in late fourth quarter 1999. The Company's second Gamma Knife contract
expired during fourth quarter 1999 leaving a net of eight Gamma Knife units in
operation at December 31, 1999. The customer purchased the Gamma Knife after the
expiration of the contract for $1,200,000 in cash in November 1999. The 1998
increase vs. 1997 was primarily due to the commencement of the Company's fourth
Gamma Knife in March 1998 and the fifth Gamma Knife in July 1998, and full year
inclusion of the Company's third Gamma Knife unit.
MRI revenues decreased $26,498,000 and $1,821,000 in 1999 and 1998 compared
to prior years. The decreases were primarily attributable to the sale of the
imaging division. MRI revenues as a percentage of total medical services
revenues were 0%, 75%, and 76% in years 1999, 1998, and 1997, respectively.
The Company's non-MRI diagnostic imaging services revenues decreased
$3,345,000 and $1,763,000 in 1999 and 1998 compared to prior years. The decrease
in 1999 was due to the sale of the imaging division. The decline in 1998 was
primarily due to the continued decline of CT and Nuclear Medicine revenues and
the sale of the imaging division. Non-MRI diagnostic imaging services revenues
as a percentage of total medical services revenues were 0%, 10% and 14% for the
years ended 1999, 1998 and 1997, respectively.
Contract service revenues, consisting of Respiratory Therapy services and
Cardiac Catheterization Laboratory revenues, decreased $1,150,000 and $195,000
in 1999 and 1998 compared to prior years. These decreases were primarily
attributable to the sale of the imaging division.
12
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COSTS OF OPERATIONS
INCREASE INCREASE
1999 (DECREASE) 1998 (DECREASE) 1997
------ ---------- ------- ---------- -------
(IN THOUSANDS)
Costs of operations..................... $2,165 (91.6)% $25,826 (4.5)% $27,044
Percentage of revenue................... 30.3% 73.5% 72.8%
The Company's costs 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 $23,661,000 in 1999 as compared to 1998 and decreased $1,218,000 in
1998 compared to 1997.
Medical services payroll decreased by $7,084,000 in 1999 compared to 1998
and decreased by $446,000 in 1998 compared to 1997. This decrease is primarily
due to the sale of the imaging division and the fact that the Company does not
currently provide labor as a component of its Gamma Knife services. Medical
services payroll costs, as a percent of medical services revenues, were less
than 1% in 1999 and remained constant at 20% in years 1998 and 1997.
The Company's maintenance and supplies costs were 2%, 15% and 16% of
medical service revenues in 1999, 1998 and 1997, respectively. Maintenance and
supplies costs decreased $5,041,000 in 1999 compared to 1998 and decreased
$775,000 in 1998 vs. 1997. These decreases were primarily due to the sale of the
imaging division. Maintenance and supply costs for Gamma Knife services
increased $63,000 in 1999 compared to 1998 and decreased $30,000 in 1998
compared to 1997. The increase in 1999 was primarily due to the expiration of
the warranty period on three units. The decrease in 1998 compared to 1997 was
due to commencement of the warranty period on a replacement Gamma Knife unit at
an existing customer.
Depreciation and amortization decreased $3,940,000 in 1999 compared to 1998
and decreased $842,000 in 1998 compared to 1997. The decreases in 1999 and 1998
were both primarily attributable to the sale of the imaging division. The
decrease in 1999 was partially offset by the addition of four Gamma Knife units
during 1999. The decrease in 1998 was also due to fewer MRI units accounted for
as capitalized leases in 1998, offset by increases in equipment depreciation due
to the addition of two Gamma Knife units during 1998 and one unit in late 1997.
Depreciation and amortization for Gamma Knife services in 1999 and in 1998
increased $573,000 and $235,000, respectively, compared to prior years. The
increase in 1999 was mitigated because the Company's second Gamma Knife unit,
which was sold, was depreciated to its salvage value during third quarter 1999.
Equipment rental as a percentage of medical services revenues was 0% in
1999, 12% in 1998 and 7% in 1997. Equipment rental decreased $4,064,000 in 1999
compared to 1998 and increased $1,378,000 in 1998 compared to 1997. The decrease
in 1999 was due to the sale of the imaging division. The Company's Gamma Knife
services currently do not require the rental of equipment. The increase in 1998
is primarily due to two replacement and three new MRI units accounted for as
operating leases during 1998 and fourth quarter 1997, offset by decreases
associated with the sale of the imaging division.
Other costs of operations as a percentage of medical services revenues were
6%, 11% and 12% in 1999, 1998 and 1997, respectively. The decreases of
$3,532,000 in 1999 compared to 1998 and $533,000 in 1998 compared to 1997 were
primarily attributable to the sale of the imaging division. Other costs of
operations for Gamma Knife services increased $135,000 and $150,000,
respectively, compared to prior years. These increases were primarily due to
increased insurance costs and property taxes because of additional Gamma Knife
units, as well as increased marketing costs.
SELLING AND ADMINISTRATIVE
INCREASE INCREASE
1999 (DECREASE) 1998 (DECREASE) 1997
------ ---------- ------ ---------- ------
(IN THOUSANDS)
Selling and administrative costs.......... $1,803 (64.8)% $5,116 (13.3)% $5,901
Percentage of revenue..................... 25.2% 14.6% 15.9%
The Company's selling and administrative costs decreased $3,313,000 in 1999
compared to 1998 and $785,000 in 1998 compared to 1997. The decrease in 1999 was
primarily due to the sale of the imaging
13
14
division. Also during 1999, the Company revised its estimate regarding the need
for and the corresponding cost of liability insurance related to divested
operations. This change in estimate resulted in a $325,000 decrease to selling
and administrative expenses during fourth quarter 1999. Selling and
administrative costs increased as a percentage of revenue because of the lower
revenue base compared to the required level of selling and administrative costs.
The decrease in 1998 was primarily due to the sale of the imaging division and
decreased salary, investor relations and legal expenses.
INTEREST EXPENSE
INCREASE INCREASE
1999 (DECREASE) 1998 (DECREASE) 1997
------ ---------- ------ ---------- ------
(IN THOUSANDS)
Interest expense.......................... $1,309 (58.9)% $3,186 (13.2)% $3,671
Percentage of revenue..................... 18.3% 9.1% 9.9%
The Company's interest expense decreased $1,877,000 in 1999 compared to
1998 and decreased $485,000 in 1998 compared to 1997. The decrease in 1999 was
primarily attributable to the sale of the imaging division offset by increased
interest related to Gamma Knife units. The decrease in 1998 was primarily
attributable to the sale of the imaging division and decreased capitalized
lease-related interest, offset by increased interest related to additional Gamma
Knife units. Interest expense for Gamma Knife units increased $528,000 in 1999
and $470,000 in 1998 compared to prior years. Interest as a percentage of
revenue increased from 9.1% in 1998 to 18.3% in 1999 because all of the
Company's operating Gamma Knife units are financed by means of interest bearing
debt.
OTHER INCOME AND EXPENSE
INCREASE INCREASE
1999 (DECREASE) 1998 (DECREASE) 1997
----- ---------- ------- ---------- ----
(IN THOUSANDS)
(Loss) gain on sale of assets and early
termination of capital leases............ $ 10 600.0% $ (2) (100.2)% $821
Percentage of revenue...................... 0.1% 0.0% 2.2%
Gain on sale of product line............... $ 0 NM $20,478 NM $ 0
Percentage of revenue...................... 0.0% 58.2% 0.0%
Interest and other income.................. $ 603 174.1% $ 220 86.4% $118
Percentage of revenue...................... 8.4% 0.6% 0.3%
Minority interest.......................... $(501) 201.8% $ (166) 548.7% $ 37
Percentage of revenue...................... (7.0)% (0.5)% 0.1%
The Company's gain on sale of product line decreased to $0 in 1999 and
increased $20,478,000 in 1998 compared to 1997. The gain on sale of product line
in 1998 represents the gain associated with the sale of the imaging division.
The gain was net of transaction costs of approximately $2,700,000. Transaction
costs include legal, investment banking and management bonuses related to the
sale of the imaging division; employee severance costs; and the costs related to
the discontinuance of the diagnostic imaging division. Gain on sale of assets
and early termination of capital leases increased $12,000 in 1999 compared to
1998 and decreased $823,000 in 1998 compared to 1997. The $821,000 gain on sale
of assets and early termination of capital leases in 1997 was primarily due to
the gain on early termination of a capital lease, an insurance settlement, and
gains on sales of assets.
Interest and other income increased $383,000 in 1999 and $102,000 in 1998
compared to prior years. The increase in both 1999 and 1998 was primarily due to
additional interest income from higher cash balances that are invested in
overnight securities.
Minority interest increased $335,000 in 1999 and $203,000 in 1998 compared
to prior years. Minority interest represents the pre-tax income earned by the
minority member's 19% interest in GKF. The increase in minority interest
reflects the increased profitability of GKF.
14
15
INCOME TAXES
INCREASE INCREASE
1999 (DECREASE) 1998 (DECREASE) 1997
---- ---------- ------- ---------- ----
(IN THOUSANDS)
Income tax benefit (expense)................ $716 (147.3)% $(1,513) 15,030.0% $(10)
Percentage of revenue....................... 10.0% (4.3)% 0.0%
The Company received an income tax benefit of $716,000 in 1999 compared to
an income tax provision of $1,513,000 in 1998, a decrease in income tax expense
of $2,229,000. The $716,000 income tax benefit is primarily a result of an
overestimate of the federal and state income tax provision in 1998 resulting
from the sale of the imaging division. The overestimate was adjusted in 1999
when tax returns were completed for filing with taxing agencies. The Company's
income tax provision increased $1,503,000 in 1998 compared to 1997 primarily due
to the gain on sale of product line. The Company had a net operating loss
carryforward for federal income tax return purposes at December 31, 1999 of
approximately $8,330,000.
NET INCOME
INCREASE INCREASE
1999 (DECREASE) 1998 (DECREASE) 1997
------ ---------- ------- ---------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income............................... $2,707 (86.5)% $20,051 1,217% $1,522
Net income per share..................... $ 0.68 (83.9)% $ 4.23 1,222% $ 0.32
The Company had net income of $2,707,000 in 1999 compared to net income of
$20,051,000 in 1998. Net income for 1999 included an insurance expense credit of
$325,000 and a tax benefit of $716,000. Net income for 1998 included a
$18,978,000 gain net of income taxes ($1,500,000) primarily from the Sale. Net
income for 1998, exclusive of the net gain from the sale of product line was
$1,073,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $12,903,000 at December 31,
1999 compared to $11,114,000 at December 31, 1998. The Company's cash position
increased $1,789,000 due primarily to the availability of cash that had
previously been classified as restricted until April 15, 1999 to cover potential
claims relating to the sale of the imaging division. In addition, during the
second quarter 1999 the GK Financing, LLC Operating Agreement was amended to
require a minimum cash reserve of $50,000 which resulted in an increase in cash
and equivalents of $1,176,000.
Restricted cash of $50,000 at December 31, 1999 reflects cash that may only
be used for the operations of GK Financing, LLC. At December 31, 1998 restricted
cash of $2,226,000 reflected cash that may only be used for GK Financing, LLC
and amounts previously described as restricted under terms of the agreements
relating to the sale of the imaging division.
The Company's total cash, cash equivalents and restricted cash decreased
$387,000 in 1999 compared to 1998 due to the payment of federal and state income
taxes primarily related to the sale of the imaging division ($1,059,000 net of
refunds received), the Company's repurchase of Common Stock and Warrants
($1,164,000) and payment of costs relating to the sale of the imaging division
($1,159,000). Increased cash flow from operations and cash received on the sale
of a Gamma Knife unit ($1,200,000) mitigated this decrease.
Following the Company's stock repurchases the Company had Shareholders'
Equity of $12,639,000, Working Capital of $11,125,000, and Total Assets of
$36,986,000 at December 31, 1999 compared to Shareholders' Equity of
$11,096,000, Working Capital of $9,088,000, and Total Assets of $26,919,000 as
of December 31, 1998.
The Company invests its cash in overnight repurchase agreements and
commercial paper pending use in the Company's operations. The Company believes
its cash position combined with its working capital is adequate to service the
Company's cash requirements in 2000.
15
16
IMPACT OF INFLATION AND CHANGING PRICES
The Company does not believe that inflation has had a significant impact on
operations because a substantial majority of the costs that it incurs under its
customer contracts are fixed through the term of the contract.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements and Financial Statement
Schedules included at page A-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 31, 1999 the local Grant Thornton offices that provided
accounting and tax services for the Company were sold to Moss Adams LLP, an
accounting and consulting firm. The Company has elected to retain Moss Adams as
its independent auditors and tax advisors. In light of its engagement of Moss
Adams, the Company will no longer engage Grant Thornton, LLP to audit the
Company's financial statements. Grant Thornton had served as the Company's
auditor during the year ended December 31, 1998. Ernst & Young had served as the
Company's auditor from 1983 through 1997.
The Company on December 14, 1998 engaged Grant Thornton, LLP as its
independent accountant to audit the Company's financial statements for the year
ended December 31, 1998. The Company and Grant Thornton, LLP had a long
established relationship as Grant Thornton had served as the Company's tax
advisor since 1990.
The Company, during its two prior fiscal years (1998 and 1997) and any
subsequent interim period preceding its change of independent accountant, did
not have any disagreements with the former accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is incorporated herein by reference from
the Company's definitive Proxy Statement for the 2000 Annual Meeting of
Shareholders (the "2000 Proxy Statement"). Information regarding executive
officers of the Company, included herein under the caption "Executive Officers
of the Registrant" in Part I, Item 1 above, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the 2000 Proxy Statement.
16
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES.
The following Financial Statements and Schedules are filed with this
Report:
Report of Independent Auditors
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules
Valuation and Qualifying Accounts
(All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.)
(B) EXHIBITS.
The following Exhibits are filed with this Report.
EXHIBIT
NUMBER: DESCRIPTION:
- ------- ------------
2.1 Securities Purchase Agreement, dated as of March 12, 1998,
by and among Alliance Imaging, Inc.; Embarcadero Holding
Corp. I; Embarcadero Holding Corp. II; American Shared
Hospital Services; and MMRI, Inc.(1)
3.1 Articles of Incorporation of the Company, as amended.(2)
3.2 By-laws of the Company, as amended.
4.6 Form of Common Stock Purchase Warrant of American Shared
Hospital Services.(3)
4.8 Registration Rights Agreement, dated as of May 17, 1995, by
and among American Shared Hospital Services, the Holders
referred to in the Note Purchase Agreement, dated as of May
12, 1995 and General Electric Company, acting through GE
Medical Systems.(3)
10.1 The Company's 1984 Stock Option Plan, as amended.(4)
10.2 The Company's 1995 Stock Option Plan, as amended.(5)
10.3 Form of Indemnification Agreement between American Shared
Hospital Services and members of its Board of Directors.(4)
10.4 Ernest A. Bates Stock Option Agreement dated as of August
15, 1995.(6)
10.5 Operating Agreement for GK Financing, LLC, dated as of
October 17, 1995.(3)
10.6 Amendments dated as of October 26, 1995 and as of December
20, 1995 to the GK Financing, LLC Operating Agreement, dated
as of October 17, 1995.(7)
10.7 Amendment dated as of October 16, 1996 to the GK Financing,
LLC Operating Agreement, dated as of October 17, 1995.(1)
10.8 Amendment dated as of March 31, 1998 ("Fourth Amendment) to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.(8)
10.9 Amendment dated as of March 31, 1998 ("Fifth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.(8)
10.10 Amendment dated as of June 5, 1998 to the GK Financing, LLC
Operating Agreement dated as of October 17, 1995.(8)
17
18
EXHIBIT
NUMBER: DESCRIPTION:
- ------- ------------
10.11a Assignment and Assumption Agreement, dated as of December
31, 1995, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(8)
10.11b Assignment and Assumption Agreement, dated as of November 1,
1995, between American Shared Hospital Services (assignor)
and American Shared Radiosurgery Services (assignee).(4)
10.11c Amendment Number One dated as of August 1, 1995 to the Lease
Agreement for a Gamma Knife Unit between The Regents of the
University of California and American Shared Hospital
Services. (Confidential material appearing in this document
has been omitted and filed separately with the Securities
and Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(8)
10.11d Lease Agreement dated as of July 3, 1990 for a Gamma Knife
Unit between American Shared Hospital Services and The
Regents of the University of California. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
Securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)(8)
10.12 Amendment Number Two dated as of February 6, 1998 to the
Lease Agreement for a Gamma Knife Unit between UCSF-Stanford
Health Care and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8)
10.13 Assignment and Assumption Agreement, dated as of February 3,
1996, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(4)
10.14 Lease Agreement for a Gamma Knife Unit dated as of April 6,
1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc.
dba USC University Hospital. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8)
10.15 Assignment and Assumption and Agreement dated as of February
1, 1996 between Ernest A. Bates, M.D. and GK Financing, LLC
with respect to the Lease Agreement for a Gamma Knife dated
as of April 6, 1994 between Ernest A. Bates, M.D. and NME
Hospitals, Inc. dba USC University Hospital.(8)
10.16 Lease Agreement for a Gamma Knife Unit dated as of October
31, 1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(8)
10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as
of December 1, 1998 between Hoag Memorial Hospital
Presbyterian and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8)
18
19
EXHIBIT
NUMBER: DESCRIPTION:
- ------- ------------
10.18 Lease Agreement for a Gamma Knife Unit dated as of October
29, 1996 between Methodist Healthcare Systems of San
Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(8)
10.19 Lease agreement for a Gamma Knife Unit dated as of April 10,
1997 between Yale-New Haven Ambulatory Services Corporation
and GK Financing, LLC. (Confidential material appearing in
this document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(8)
10.20 Lease Agreement for a Gamma Knife Unit dated as of June 1,
1998 between GK Financing, LLC and Kettering Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(9)
10.21 Addendum to Contract with GKF and KMC/WKNI, dated June 1,
1998 between GK Financing, LLC and Kettering Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(9)
10.22 Lease Agreement for a Gamma Knife Unit dated as of October
5, 1998 between GK Financing, LLC and New England Medical
Center Hospitals, Inc. (Confidential material appearing in
this document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(9)
10.23 Equipment Lease Agreement dated as of October 29, 1998
between GK Financing, LLC and the Board of Trustees of the
University of Arkansas on behalf of The University of
Arkansas for Medical Sciences. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(9)
10.24 First Amendment to Lease Agreement for a Gamma Knife Unit
effective as of August 2, 1999 between GK Financing, LLC and
TenetHealthSystems Hospitals, Inc. (formerly known as NME
Hospitals, Inc.) dba USC University Hospital. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(9)
10.25 Addendum Two, dated as of October 1, 1999, to Lease
Agreement for a Gamma Knife Unit dated as of October 31,
1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)
19
20
EXHIBIT
NUMBER: DESCRIPTION:
- ------- ------------
10.26 Lease Agreement for a Gamma Knife Unit dated as of May 28,
1999 between Froedtert Memorial Lutheran Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)
10.27 Addendum dated June 24, 1999 to Lease Agreement for a Gamma
Knife Unit dated as of May 28, 1999 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC.
10.28 Amendment dated July 12, 1999 to Lease Agreement for a Gamma
Knife Unit dated May 28, 1999 between Froedtert Memorial
Lutheran Hospital and GK Financing, LLC.
10.29 Amendment dated August 24, 1999 to Lease Agreement for a
Gamma Knife Unit dated May 28, 1999 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC.
21. Subsidiaries of American Shared Hospital Services.
23.1 Consent of Moss Adams, LLP.
23.2 Consent of Grant Thornton, LLP.
23.3 Consent of Ernst & Young, LLP.
27. Financial Data Schedule for the year ended December 31,
1999.
- ---------------
(1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, which is incorporated herein by this reference.
(2) This document was filed as Exhibit 3.1 to registrant's Registration
Statement on Form S-2 (Registration No. 33-23416), which is incorporated
herein by this reference.
(3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, to
registrant's Registration Statement on Form S-1 (Registration No. 33-63721)
filed on October 26, 1995, which is incorporated herein by this reference.
(4) These documents were filed as Exhibits 10.24 and 10.35 respectively, to
registrant's Registration Statement on Form S-2 (Registration No. 33-23416),
which is incorporated herein by this reference.
(5) This document was filed as Exhibit A to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(6) This document was filed as Exhibit B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(7) These documents were filed as Exhibits 4.14 and 10.13, respectively, to the
registrant's Pre-Effective Amendment No. 1 to registrant's Registration
Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996,
which is incorporated herein by this reference.
(8) These documents were filed as Exhibits 10.8, 10.9, 10.10, 10.11a, 10.11c,
10.11d, 10.12, 10.14, 10.15, 10.16, 10.17, 10.18 and 10.19, respectively, to
the registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, which is incorporated herein by this reference.
(9) These documents were filed as Exhibits 10.20, 10.21, 10.22, 10.23, and
10.24, respectively, to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999, which is incorporated herein
by this reference.
(C) REPORTS ON FORM 8-K:
None.
20
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN SHARED HOSPITAL SERVICES
(Registrant)
March 29, 2000 By: /s/ ERNEST A. BATES
------------------------------------
Ernest A. Bates, M.D.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ERNEST A. BATES Chief Executive Officer and March 29, 2000
- -------------------------------------------------------- Chairman of the Board
Ernest A. Bates, M.D.
/s/ WILLIE R. BARNES Director and Secretary March 29, 2000
- --------------------------------------------------------
Willie R. Barnes
/s/ JOHN F. RUFFLE Director March 29, 2000
- --------------------------------------------------------
John F. Ruffle
/s/ STANLEY S. TROTMAN, JR. Director March 29, 2000
- --------------------------------------------------------
Stanley S. Trotman, Jr.
/s/ CHARLES B. WILSON Director March 29, 2000
- --------------------------------------------------------
Charles B. Wilson
/s/ CRAIG K. TAGAWA Chief Operating Officer and March 29, 2000
- -------------------------------------------------------- Chief Financial Officer
Craig K. Tagawa (Principal Accounting
Officer)
21
22
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
23
CONTENTS
PAGE
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......... F-2
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS............................................ F-4
STATEMENTS OF INCOME...................................... F-5
STATEMENT OF SHAREHOLDERS' EQUITY......................... F-6
STATEMENTS OF CASH FLOWS.................................. F-7
NOTES TO FINANCIAL STATEMENTS............................. F-8
F-1
24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
American Shared Hospital Services
We have audited the accompanying consolidated balance sheet of American
Shared Hospital Services as of December 31, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Shared Hospital Services at December 31, 1999, and the consolidated
results of their operations and consolidated cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
--------------------------------------
MOSS ADAMS LLP
Stockton, California
February 18, 2000
F-2
25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
American Shared Hospital Services
We have audited the accompanying consolidated balance sheet of American
Shared Hospital Services as of December 31, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Shared Hospital Services at December 31, 1998, and the consolidated
results of their operations and consolidated cash flows for the year then ended
in conformity with generally accepted accounting principles.
We have also audited Schedule II for the year ended December 31, 1998. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
--------------------------------------
GRANT THORNTON LLP
San Francisco, California
March 12, 1999
F-3
26
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS
1999 1998
----------- -----------
CURRENT ASSETS
Cash and cash equivalents................................. $12,903,000 $11,114,000
Restricted cash........................................... 50,000 2,226,000
Trade accounts receivable................................. 982,000 1,228,000
Other receivables......................................... 244,000 104,000
Prepaid expenses and other current assets................. 516,000 285,000
----------- -----------
Total current assets.............................. 14,695,000 14,957,000
PROPERTY AND EQUIPMENT
Medical equipment and facilities.......................... 23,560,000 15,199,000
Office equipment.......................................... 617,000 578,000
Deposits and construction in progress..................... 3,276,000 1,079,000
----------- -----------
27,453,000 16,856,000
Accumulated depreciation and amortization................. (5,397,000) (5,097,000)
----------- -----------
Net property and equipment........................ 22,056,000 11,759,000
OTHER ASSETS.............................................. 235,000 203,000
----------- -----------
$36,986,000 $26,919,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 101,000 $ 338,000
Accrued interest.......................................... 229,000 54,000
Employee compensation and benefits........................ 87,000 814,000
Other accrued liabilities................................. 597,000 519,000
Income tax payable........................................ -- 1,664,000
Current portion of accrued exit costs..................... 11,000 595,000
Current portion of long-term debt......................... 2,545,000 1,885,000
----------- -----------
Total current liabilities......................... 3,570,000 5,869,000
LONG-TERM DEBT, less current portion........................ 19,887,000 8,823,000
ACCRUED EXIT COSTS, less current portion.................... -- 400,000
MINORITY INTEREST........................................... 890,000 731,000
SHAREHOLDERS' EQUITY
Common stock, $0 par value, authorized -- 10,000,000
shares, issued and outstanding shares -- 3,813,000 in
1999 and 4,544,000 in 1998............................. 10,036,000 11,087,000
Common stock options issued to officer.................... 2,414,000 2,414,000
Additional paid-in capital................................ 817,000 930,000
Accumulated deficit....................................... (628,000) (3,335,000)
----------- -----------
Total shareholders' equity........................ 12,639,000 11,096,000
----------- -----------
$36,986,000 $26,919,000
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
27
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
1999 1998 1997
---------- ----------- -----------
REVENUES:
Medical services................................... $7,156,000 $35,162,000 $37,172,000
COSTS AND EXPENSES:
Costs of operations:
Medical services payroll........................... 3,000 7,087,000 7,533,000
Maintenance and supplies........................... 143,000 5,184,000 5,959,000
Depreciation....................................... 1,616,000 5,556,000 6,398,000
Equipment rental................................... -- 4,064,000 2,686,000
Other.............................................. 403,000 3,935,000 4,468,000
Selling and administrative......................... 1,803,000 5,116,000 5,901,000
Interest........................................... 1,309,000 3,186,000 3,671,000
---------- ----------- -----------
Total costs and expenses................... 5,277,000 34,128,000 36,616,000
---------- ----------- -----------
1,879,000 1,034,000 556,000
Gain (loss) on sale of assets and early termination
of capital leases............................... 10,000 (2,000) 821,000
Gain on sale of product line....................... -- 20,478,000 --
Interest and other income.......................... 603,000 220,000 118,000
Minority interest.................................. (501,000) (166,000) 37,000
---------- ----------- -----------
Income before income taxes......................... 1,991,000 21,564,000 1,532,000
Income tax benefit (expense)....................... 716,000 (1,513,000) (10,000)
---------- ----------- -----------
Net income......................................... $2,707,000 $20,051,000 $ 1,522,000
========== =========== ===========
Earnings per common share:
Earnings per common share -- basic................... $ .68 $ 4.23 $ .32
========== =========== ===========
Earnings per common share -- assuming dilution....... $ .48 $ 3.15 $ .24
========== =========== ===========
The accompanying notes are an integral part of these statements.
F-5
28
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
COMMON
STOCK
OPTIONS ADDITIONAL
COMMON COMMON ISSUED TO PAID-IN ACCUMULATED
SHARES STOCK OFFICER CAPITAL DEFICIT TOTAL
--------- ----------- ---------- ---------- ------------ ------------
Balances at December
31, 1996............ 4,769,000 $11,089,000 $2,414,000 $ 930,000 $(24,908,000) $(10,475,000)
Net income....... -- -- -- -- 1,522,000 1,522,000
--------- ----------- ---------- --------- ------------ ------------
Balances at December
31, 1997............ 4,769,000 11,089,000 2,414,000 930,000 (23,386,000) (8,953,000)
Repurchase of
Common Stock... (225,000) (2,000) -- -- -- (2,000)
Net income....... -- -- -- -- 20,051,000 20,051,000
--------- ----------- ---------- --------- ------------ ------------
Balances at December
31, 1998............ 4,544,000 11,087,000 2,414,000 930,000 (3,335,000) 11,096,000
Options exercised... 9,000 16,000 -- -- -- 16,000
Exercise of
warrants......... 28,000 21,000 -- -- -- 21,000
Repurchase of common
stock............ (768,000) (1,088,000) -- -- -- (1,088,000)
Repurchase of
warrants......... -- -- -- (113,000) -- (113,000)
Net income....... -- -- -- -- 2,707,000 2,707,000
--------- ----------- ---------- --------- ------------ ------------
Balances at December
31, 1999............ 3,813,000 $10,036,000 $2,414,000 $ 817,000 $ (628,000) $ 12,639,000
========= =========== ========== ========= ============ ============
The accompanying notes are an integral part of these statements.
F-6
29
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ -----------
OPERATING ACTIVITIES
Net income................................................ $ 2,707,000 $ 20,051,000 $ 1,522,000
Adjustments to reconcile net income to net cash from
operating activities:
Gain on sale of product line............................ -- (20,478,000) --
(Gain) loss on sale of assets and early termination of
capital leases........................................ (10,000) 2,000 (821,000)
Depreciation and amortization........................... 1,621,000 6,095,000 6,752,000
Deferred income tax benefit............................. -- (164,000) --
Change in estimate of accrued exit costs................ (375,000) -- --
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash................ 2,176,000 (1,575,000) (433,000)
Decrease (increase) in receivables.................... 106,000 (154,000) (582,000)
(Increase) decrease in prepaid expenses and other
assets............................................. (263,000) 187,000 (10,000)
(Decrease) increase in accounts payable, accrued
liabilities and income taxes payable............... (2,375,000) 3,767,000 843,000
------------ ------------ -----------
Net cash from operating activities.......................... 3,587,000 7,731,000 7,271,000
INVESTING ACTIVITIES
Proceeds from sale of product line, net of selling costs.... -- 12,240,000 --
Payment of accrued exit costs............................... (609,000) -- --
Proceeds from sale and disposition of equipment............. 1,210,000 4,000 331,000
Increase (decrease) in minority interest.................... 159,000 143,000 (37,000)
Payment for purchase of property and equipment.............. (131,000) (746,000) (349,000)
Other....................................................... -- -- (168,000)
------------ ------------ -----------
Net cash from investing activities.......................... 629,000 11,641,000 (223,000)
FINANCING ACTIVITIES
Principal payments on long-term debt and obligations under
capital leases............................................ (1,513,000) (8,291,000) (8,962,000)
Proceeds from issuance of long-term debt.................... 250,000 855,000 --
Payment for exercise of stock warrants...................... 21,000 -- --
Payment for exercise of stock options....................... 16,000 -- --
Net (payments on) proceeds from revolving line of credit.... -- (837,000) 1,563,000
Repurchase of warrants...................................... (113,000) -- --
Repurchase of common stock.................................. (1,088,000) (2,000) --
------------ ------------ -----------
Net cash from financing activities.......................... (2,427,000) (8,275,000) (7,399,000)
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents........ 1,789,000 11,097,000 (351,000)
Cash and cash equivalents at beginning of year.............. 11,114,000 17,000 368,000
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $ 12,903,000 $ 11,114,000 $ 17,000
============ ============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................................... $ 1,135,000 $ 3,163,000 $ 3,689,000
============ ============ ===========
Income taxes paid........................................... $ 1,059,000 $ 36,000 $ 29,000
============ ============ ===========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment with lease/debt financing.......... $ 13,311,000 $ 6,952,000 $ 3,999,000
Decrease in medical and capitalized lease equipment due to
lease restructuring....................................... $ -- $ -- $(1,137,000)
Decrease in capitalized lease obligations due to lease
restructuring............................................. $ -- $ -- $(2,036,000)
Accounts payable converted to notes......................... $ -- $ -- $ 817,000
Net liabilities, primarily trade accounts receivable and
payable, property and equipment, capital lease
obligations, and long-term debt, assumed by buyer in sale
of product line........................................... $ -- $ 9,808,000 $ --
The accompanying notes are an integral part of these statements.
F-7
30
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE A -- BUSINESS AND BASIS OF PRESENTATION
1. Business
American Shared Hospital Services (the "Company") provides Gamma Knife
units to eight medical centers in California, Texas, Connecticut, Ohio,
Massachusetts, Arkansas, and Wisconsin. The Company provided shared diagnostic
imaging services to health care providers located in various geographic regions
of the United States through November of 1998. The five diagnostic imaging
services provided by the Company were Magnetic Resonance Imaging, Computed Axial
Tomography Scanning, Ultrasound, Nuclear Medicine, and Cardiac Catheterization
Laboratory services. On November 13, 1998, the diagnostic imaging services
product line was sold to a third party.
In June 1995, African American Church Health and Economic Services, Inc.
(ACHES) and ACHES Insurance Services, Inc. ("AIS") were incorporated. AIS is a
wholly owned subsidiary of ACHES. AIS is an insurance agency qualified to sell
life, health, and disability insurance in the states of California and New York.
ACHES, through AIS, sells life, health and disability insurance primarily to the
African-American Community. In 1999, the operations of ACHES and AIS were
discontinued.
On October 17, 1995, the Company (through American Shared Radiosurgery
Services ("ASRS")) and Elekta AB, the manufacturer of the Gamma Knife (through
its wholly owned United States subsidiary GKV Investments, Inc. ("GKV")),
entered into an operating agreement which formed GK Financing, LLC ("GKF"). GKF
provides alternative financing of Elekta Gamma Knife units and is the preferred
provider for Elekta AB of financing arrangements, such as fee-for-service lease
arrangements with health care institutions.
In November, 1999, OR21, Inc., was incorporated. This wholly-owned
subsidiary of the Company will provide the product "The Operating Room for the
21st Century(sm)", which is currently under development.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, CuraCare, Inc. ("CuraCare"), MMRI, Inc., European
Shared Medical Services Ltd., OR21, Inc., ACHES and its wholly-owned subsidiary,
AIS, and ASRS and its majority-owned subsidiary, GK Financing, LLC. The stock of
CuraCare was sold on November 13, 1998 in conjunction with the sale of the
diagnostic imaging services product line.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
NOTE B -- ACCOUNTING POLICIES
1. Use of Estimates in the Preparation of Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. Cash and Cash Equivalents
The Company considers all liquid investments with original maturities of
three months or less at the date of purchase to be cash equivalents. Restricted
cash is not considered a cash equivalent for purposes of the consolidated
statements of cash flows.
3. Restricted Cash
Restricted cash represents cash limited as to use by contractual
arrangement.
F-8
31
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
4. Accounts Receivable
Substantially all of the Company's revenue is provided by eight customers.
These customers constitute accounts receivable at December 31, 1999. The Company
performs credit evaluations of its customers and generally does not require
collateral. At December 31, 1999, the Company did not maintain an allowance for
doubtful accounts because management believes that accounts receivable are fully
collectible.
5. Accounting for Majority-Owned Subsidiary
The Company accounts for GK Financing, LLC (GKF), as a consolidated entity
due to its 81% majority-equity interest.
6. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is determined using the straight-line method over the
estimated useful lives of the assets which for medical and office equipment is
generally 3 - 10 years.
7. Operating Leases
The Company leases Gamma Knife equipment to its customers under
arrangements accounted for as operating leases. Revenue is provided for and
recognized on a fee-for-service or contingent rental basis when the service is
delivered. The lease agreements are generally over ten to fifteen year terms. At
December 31, 1999, the Company held equipment under operating lease contracts
with customers with an original cost of $22,862,000 and accumulated depreciation
of $4,796,000.
8. 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.
9. 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.
F-9
32
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
The following table sets forth the computation of basic and diluted
earnings per share:
1999 1998 1997
---------- ----------- ----------
Numerator for basic and diluted earnings
per share................................... $2,707,000 $20,051,000 $1,522,000
Denominator:
Denominator for basic earnings per share --
weighted-average shares.................. 3,967,000 4,735,000 4,769,000
Effect of dilutive securities employee stock
options/warrants......................... 1,679,000 1,631,000 1,574,000
---------- ----------- ----------
Denominator for diluted earnings per share--
adjusted weighted-average shares......... 5,646,000 6,366,000 6,343,000
========== =========== ==========
Earning per share -- basic.................... $ .68 $ 4.23 $ .32
========== =========== ==========
Earning per share -- assuming dilution........ $ .48 $ 3.15 $ .24
========== =========== ==========
10. Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options granted to employees is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock. Disclosure
requirements in accordance with SFAS No. 123 are included in Note E.
11. Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, and other
accrued liabilities approximated their fair value as of December 31, 1999 and
1998, because of the relatively short maturity of these instruments. The
carrying amounts of the Company's various debt obligations approximated fair
value as of December 31, 1999 and 1998, based upon interest rates that are
currently available for the Company for issuance of instruments with similar
terms and remaining maturities.
12. Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
NOTE C -- LONG-TERM DEBT
Long-term debt consists primarily of 8 notes with a financing company,
related to Gamma Knife construction and installation, totaling $19,290,000.
These notes accrue interest at fixed annual rates between 10.5% and 10.7%, are
payable in 84 monthly installments, mature between September, 2004, and
November, 2006, and are collateralized by the respective Gamma Knives.
Additionally, the Company has $3,142,000 in borrowings outstanding for deposits
for two Gamma Knives under construction at December 31, 1999 (note H). These
borrowings accrue interest at prime plus 2% (10.5 % at December 31, 1999), are
payable when the
F-10
33
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
Gamma Knife units commence operation, and are collateralized by the equipment.
The following are contractual maturities of long-term debt by year at December
31, 1999:
Year ending December 31, 2000........... $ 2,545,000
2001............................... 4,126,000
2002............................... 3,283,000
2003............................... 3,645,000
2004............................... 3,929,000
Thereafter......................... 4,904,000
-----------
$22,432,000
===========
NOTE D -- INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1999 and 1998 are as follows:
1999 1998
----------- -----------
Deferred tax liabilities:
Fixed assets......................................... $(2,389,000) $(1,000,000)
----------- -----------
Total deferred tax liabilities.................. (2,389,000) (1,000,000)
Deferred tax assets:
Net operating loss carryforwards..................... 2,941,000 275,000
State income taxes................................... -- 450,000
Accrued reserves..................................... 5,000 710,000
Other -- net......................................... 300,000 360,000
----------- -----------
Total deferred tax assets....................... 3,246,000 1,795,000
Valuation allowance for deferred tax assets............. (857,000) (795,000)
----------- -----------
Net deferred tax assets................................. 2,389,000 1,000,000
----------- -----------
Net deferred tax liabilities............................ $ -- $ --
=========== ===========
The components of the provision (benefit) for income taxes consist of the
following:
1999 1998 1997
--------- ---------- -------
Current:
Federal.......................................... $ -- $ 360,000 $ --
State............................................ (716,000) 1,317,000 10,000
--------- ---------- -------
Deferred:
Federal.......................................... -- -- --
State............................................ -- (164,000) --
--------- ---------- -------
$(716,000) $1,513,000 $10,000
========= ========== =======
F-11
34
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. federal statutory tax rate (34% in 1999, 1998 and 1997) to
income (loss) before taxes as follows:
1999 1998 1997
----------- ----------- -----------
Computed expected tax..................... $ 677,000 $ 7,500,000 $ 536,000
Change in valuation allowance........... 62,000 (7,205,000) (1,600,000)
State income taxes, net of federal
benefit.............................. 116,000 1,400,000 10,000
Change in carryovers and tax
attributes........................... (1,571,000) -- 984,000
Other................................... -- (182,000) 80,000
----------- ----------- -----------
$ (716,000) $ 1,513,000 $ 10,000
=========== =========== ===========
At December 31, 1999, the Company had a net operating loss carryforward for
federal income tax return purposes of approximately $8,330,000 which expires
between 1999 and 2019. A substantial part of this carryforward is subject to
separate return limitations. 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.
The Company's estimated income tax liability for the year ended December
31, 1998 was overstated by approximately $700,000. This change in estimate is
the result of finalization of unresolved details associated with the 1998 sale
of the diagnostic imaging services product line. The effect of the resolution of
these details was estimated in the 1998 financial statements. The effect of the
final resolution was a reduction of the Company's income tax liability resulting
in an income tax benefit for the year ended December 31, 1999 as well as an
increase in the net operating loss carryforwards available to the Company. The
tax effected amount of the increase in net operating losses is approximately
$1,571,000 and is reflected as a change in carryovers and tax attributes in the
reconciliation from expected to actual income tax expense above.
NOTE E -- SHAREHOLDERS' EQUITY
1984 Stock Option Plan
Under the Company's 1984 Stock Option Plan (the "Plan"), as amended, a
total of 475,000 stock options were authorized for grant. The Plan terminated
according to its terms on March 1, 1994. Options granted pursuant to the Plan
generally had lives of 10 years from the date of grant, subject to earlier
expiration in certain cases, such as termination of the grantee's employment.
1995 Stock Option Plan
The Company's 1995 Stock Option Plan, providing for nonqualified stock
options and "incentive stock options," was approved by the Company's Board of
Directors on August 15, 1995, subject to shareholder approval, which was given
on October 6, 1995. Under the 1995 Plan, 330,000 common shares are reserved for
awards to officers and other key employees, non-employee directors, and
advisors. Provisions of the 1995 Stock Option Plan include an automatic grant to
each non-employee director of options to purchase up to 4,000 shares annually on
the date of the Company's Annual Shareholder Meeting, at an exercise price equal
to the market price of the Company's common shares on that date, until the
non-employee director has options for a total of 12,000 shares of the Company's
common stock in all Company plans. Directors who are appointed or elected to the
Company's Board of Directors on a date other than that of the Annual Shareholder
Meeting receive a pro-rata grant of such options, at an exercise price equal to
the market price of the Company's common shares on the date of grant.
F-12
35
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
Changes in options outstanding under the 1984 and 1995 Stock Option Plans
from January 1, 1997 to December 31, 1999 are as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------
Balance at January 1, 1997.................................. 417,000 $1.625
Granted................................................... 14,000 $1.688
Exercised................................................. -- --
Forfeited................................................. (2,000) $1.596
------- ------
Balance at December 31, 1997................................ 429,000 $1.627
Granted................................................... -- $ --
Exercised................................................. -- $ --
Forfeited................................................. (40,000) $1.625
------- ------
Balance at December 31, 1998................................ 389,000 $1.628
Granted................................................... 53,000 $3.000
Exercised................................................. (9,000) $1.660
Forfeited................................................. (58,000) $1.625
------- ------
Balance at December 31, 1999................................ 375,000 $1.820
======= ======
At December 31, 1999, 43,000 options were available for grant under the
1995 Plan.
Shares and Options Issued to Officer
On August 15, 1995, the Company's Chairman and Chief Executive Officer was
granted a ten-year, immediately exercisable option to purchase 1,495,000 common
shares for an exercise price of $.01 per share for which the Company recorded
compensation expense of $2,414,000. These options were granted to the officer as
final consideration for personal guarantees of credit facilities and for
continued employment with the Company.
The following table summarizes information about all options outstanding at
December 31, 1999:
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 5.83 $ 0.01 1,495,000 $ 0.01
1.625 - 3.000 375,000 5.37 1.820 361,000 1.772
--------- ---- ------ --------- ------
$ .01 - 3.000 1,870,000 5.74 $ .373 1,856,000 $ .352
========= ==== ====== ========= ======
At December 31, 1999 and 1998, 1,856,000 and 1,884,000 options,
respectively, were vested and exercisable.
At December 31, 1999, there were 1,370 warrants outstanding at an exercise
price of $.75 per warrant. These warrants are exercisable through May 2002.
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
F-13
36
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, the Black-Scholes
model requires the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock-based awards to employees
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's option grants
under the 1984 and 1995 Plans was estimated assuming no expected dividends and
the following weighted-average assumptions:
1999 1998 1997
---- ---- ----
Expected life (years)....................................... 9.5 9.5 9.5
Expected volatility......................................... 82.0% 93.8% 93.8%
Risk-free interest rate..................................... 5.9% 6.3% 6.3%
No options were granted during 1998. The weighted-average fair value of
options granted during 1999 was $2.54. 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:
1999 1998 1997
---------- ----------- ----------
Net income
As reported................................. $2,707,000 $20,051,000 $1,522,000
Pro forma................................... $2,595,000 $20,040,000 $1,458,000
Earnings per share -- basic
As reported................................. $ .68 $ 4.23 $ .32
Pro forma................................... $ .65 $ 4.23 $ .31
Earnings per share -- assuming dilution
As reported................................. $ .48 $ 3.15 $ .24
Pro forma................................... $ .46 $ 3.15 $ .23
NOTE F -- RETIREMENT PLAN
The Company has a defined contribution retirement plan for which
substantially all full-time employees are eligible. The plan does not currently
provide for a Company matching distribution.
NOTE G -- OPERATING LEASES
The Company leases office space and equipment under operating leases
expiring at various dates through 2002.
Future minimum payments under noncancelable operating leases having initial
terms of more than one year consisted of the following at December 31, 1999:
2000.............................................. $153,000
2001.............................................. 137,000
2002.............................................. 101,000
--------
$391,000
========
Payments for repair and maintenance agreements are included in the future
minimum operating lease payments shown above.
Rent expense was $117,000, $4,696,000, and $3,285,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, and includes the above operating
leases as well as month-to-month rental and certain capital lease executory
costs.
F-14
37
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE H -- COMMITMENTS AND CONTINGENCIES
Under the terms of 2 Gamma Knife quotation agreements, the Company is
committed to purchase Gamma Knife equipment for $6,136,000 effective when the
equipment is placed in service at each customer location. At December 31, 1999,
the Company had $3,142,000 in deposits related to these purchase commitments
which are classified as construction in progress.
NOTE I -- REPORTABLE SEGMENTS
American Shared Hospital Services (ASHS) has one reportable segment: Gamma
Knife. The Gamma Knife segment treats certain vascular malformations and
intracranial tumors without surgery. Prior to November 1998 the Company also had
a Diagnostic Imaging Services segment which used medical diagnostic imaging
systems to facilitate treatment and the diagnosis of diseases and disorders.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. ASHS evaluates performance based
on profit or loss from operations before income taxes not including nonrecurring
gains and losses. Applicable general and administrative expenses are allocated
to segments based on relative percentage of revenues. Certain corporate expenses
are not allocated to the segments.
ASHS does not have significant intersegment sales transactions. The
segments share common expenses and provide management activities to one another
for which they charge management fees. These management fees are not considered
significant.
ASHS's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
Reportable Segment Information
DIAGNOSTIC IMAGING SERVICES
-----------------------------
1999 1998 1997
----- -------- --------
(THOUSANDS)
Revenues................................................. $-- $30,993 $34,772
Interest expense......................................... $-- $ 1,770 $ 2,571
Depreciation and amortization............................ $-- $ 4,514 $ 5,590
Segment profit........................................... $-- $ 156 $ 1,208
Segment assets........................................... $-- $ -- $20,905
Other significant noncash items:
Acquisition of equipment with lease/debt financing..... $-- $ 820 $ 1,767
Capitalized lease restructuring........................ $-- $ -- $(3,173)
Accounts payable converted to notes payable............ $-- $ -- $ 817
GAMMA KNIFE
----------------------------
1999 1998 1997
------- ------- ------
(THOUSANDS)
Revenues............................................... $ 7,151 $ 4,156 $2,384
Interest expense....................................... $ 1,305 $ 773 $ 303
Depreciation and amortization.......................... $ 2,135 $ 1,042 $ 808
Segment profit......................................... $ 2,637 $ 1,115 $ 392
Segment assets......................................... $28,920 $15,125 $7,859
Other significant noncash items:
Acquisition of equipment with lease/debt financing... $13,311 $ 6,132 $2,232
F-15
38
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
Reconciliation to Consolidated Amounts
1999 1998 1997
------- ------- -------
(THOUSANDS)
REVENUES
Total revenues for reportable segments................ $ 7,151 $35,149 $37,156
Other revenues........................................ 5 13 16
------- ------- -------
Total consolidated revenues...................... 7,156 35,162 37,172
PROFIT OR LOSS
Total profit for reportable segments.................. 2,637 1,271 1,600
Gain on sale of product line.......................... -- 20,478 --
Other................................................. (646) (185) (68)
------- ------- -------
Income before income taxes....................... 1,991 21,564 $ 1,532
ASSETS
Total assets for reportable segments.................. 28,920 15,025 28,764
Other assets.......................................... 8,066 12,042 1,907
Elimination of receivables from corporate
headquarters........................................ -- (148) (462)
------- ------- -------
Consolidated total.......................... $36,986 $26,919 $30,209
======= ======= =======
Other Significant Items
1999
------------------------------------
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
------- ----------- ------------
(THOUSANDS)
Interest expense...................................... $1,305 $ 4 $1,309
Expenditures for assets............................... $ -- $ 131 $ 131
Depreciation and amortization......................... $2,135 $(514) $1,621
1998
------------------------------------
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
------- ----------- ------------
Interest expense...................................... $2,543 $ 643 $3,186
Expenditures for assets............................... $ 50 $ 5 $ 55
Depreciation and amortization......................... $5,556 $ -- $5,556
1997
------------------------------------
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
------- ----------- ------------
Interest expense...................................... $2,874 $ 797 $3,671
Expenditures for assets............................... $ 320 $ 26 $ 346
Depreciation and amortization......................... $6,398 $ -- $6,398
Adjustments to reconcile reportable segment totals to consolidated totals
include unallocated amounts and amounts from non-reportable segments.
Major Customers
Revenues from the Company's Gamma Knife segment were provided by eight
customers in 1999, five customers in 1998, and three customers in 1997.
F-16
39
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE J -- SALE OF PRODUCT LINE
On November 13, 1998, the Company consummated a sale of its diagnostic
imaging services product line to a third party. The diagnostic imaging services
line included Magnetic Resonance Imaging (MRI), Computed Axial Tomography
Scanning (CT), Ultrasound, Nuclear Medicine and Cardiac Catheterization
Laboratory services. The Company sold the assets of this product line for $13.5
million in cash and the assumption by the third party of approximately $27.1
million in liabilities of the Company. The Company recognized a gain on disposal
of product line of approximately $20 million in conjunction with this
transaction.
In conjunction with the product line sale, one of the Company's facilities
which provided certain administrative and scheduling functions was closed during
1999. At December 31, 1998, in accordance with the Emerging Issues Task Force
(EITF) Abstract 94-3, the Company accrued certain future exit costs related to
the sale of the product line and corresponding facility closure which totaled
$995,000 at December 31, 1998. The accrued costs include employee compensation
of $215,000, liability tail insurance coverage costs of $500,000, legal and
professional fees of $105,000, administrative costs of $115,000 and other costs
totaling $60,000. Insurance costs of approximately $400,000 were classified as
long-term as they were intended to be incurred subsequent to 1999. During 1999,
management revised its estimate regarding the use and corresponding cost of
liability tail insurance coverage. This change in estimate resulted in a
$325,000 decrease to selling and administrative expenses in the corresponding
Statement of Income for the year ended December 31, 1999.
The revenue and net operating income or losses from the disposed diagnostic
imaging services line for fiscal years ended 1998 and 1997 are presented at Note
I.
F-17
40
AMERICAN SHARED HOSPITAL SERVICES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1999, 1998 AND 1997
BALANCE AT ADDITIONS BALANCE AT ADDITIONS
JANUARY 1, CHARGED TO AMOUNTS DECEMBER 31, CHARGED TO AMOUNTS
1997 COSTS AND EXPENSES WRITTEN OFF 1997 COST EXPENSES WRITTEN OFF
----------- ------------------ ----------- ------------ ------------- -----------
Allowance for
uncollectible
accounts............... $(1,240,000) $(1,296,000) $1,234,000 $(1,302,000) $(1,095,000) $1,031,000
ASSUMED BY BALANCE AT
BUYER IN DECEMBER 31,
PRODUCT LINE SALE 1998
----------------- ------------
Allowance for
uncollectible
accounts............... $1,366,000 $--
F-18
41
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
2.1 Securities Purchase Agreement, dated as of March 12, 1998, *
by and among Alliance Imaging, Inc.; Embarcadero Holding
Corp. I; Embarcadero Holding Corp. II; American Shared
Hospital Services; and MMRI, Inc.(1)........................
3.1 Articles of Incorporation of the Company, as amended.(2) *
3.2 By-laws of the Company, as amended..........................
4.6 Form of Common Stock Purchase Warrant of American Shared *
Hospital Services.(3).......................................
4.8 Registration Rights Agreement, dated as of May 17, 1995, by *
and among American Shared Hospital Services, the Holders
referred to in the Note Purchase Agreement, dated as of May
12, 1995 and General Electric Company, acting through GE
Medical Systems.(3).........................................
10.1 The Company's 1984 Stock Option Plan, as amended.(4)........ *
10.2 The Company's 1995 Stock Option Plan, as amended.(5)........ *
10.3 Form of Indemnification Agreement between American Shared *
Hospital Services and members of its Board of
Directors.(4)...............................................
10.4 Ernest A. Bates Stock Option Agreement dated as of August *
15, 1995.(6)................................................
10.5 Operating Agreement for GK Financing, LLC, dated as of *
October 17,
1995.(3)....................................................
10.6 Amendments dated as of October 26, 1995 and as of December *
20, 1995 to the GK Financing, LLC Operating Agreement, dated
as of October 17,
1995.(7)....................................................
10.7 Amendment dated as of October 16, 1996 to the GK Financing, *
LLC Operating Agreement, dated as of October 17, 1995.(1)...
10.8 Amendment dated as of March 31, 1998 ("Fourth Amendment") to *
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.(8)........................................
10.9 Amendment dated as of March 31, 1998 ("Fifth Amendment") to *
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.(8)........................................
10.10 Amendment dated as of June 5, 1998 to the GK Financing, LLC *
Operating Agreement dated as of October 17, 1995.(8)........
10.11a Assignment and Assumption Agreement, dated as of December *
31, 1995, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(8).............
10.11b Assignment and Assumption Agreement, dated as of November 1, *
1995, between American Shared Hospital Services (assignor)
and American Shared Radiosurgery Services (assignee).(4)....
10.11c Amendment Number One dated as of August 1, 1995 to the Lease *
Agreement for a Gamma Knife Unit between The Regents of the
University of California and American Shared Hospital
Services. (Confidential material appearing in this document
has been omitted and filed separately with the Securities
and Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(8)..............................................
10.11d Lease Agreement dated as of July 3, 1990 for a Gamma Knife *
Unit between American Shared Hospital Services and The
Regents of the University of California. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
Securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)(8)...........
42
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
10.12 Amendment Number Two dated as of February 6, 1998 to the *
Lease Agreement for a Gamma Knife Unit between UCSF-Stanford
Health Care and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8).......................
10.13 Assignment and Assumption Agreement, dated as of February 3, *
1996, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(4).............
10.14 Lease Agreement for a Gamma Knife Unit dated as of April 6, *
1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc.
dba USC University Hospital. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8).......................
10.15 Assignment and Assumption Agreement dated as of February 1, *
1996 between Ernest A. Bates, M.D. and GK Financing, LLC
with respect to the Lease Agreement for a Gamma Knife dated
as of April 6, 1994 between Ernest A. Bates, M.D. and NME
Hospitals, Inc. dba USC University Hospital.(8).............
10.16 Lease Agreement for a Gamma Knife Unit dated as of October *
31, 1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(8)..............................................
10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as *
of December 1, 1998 between Hoag Memorial Hospital
Presbyterian and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8).......................
10.18 Lease Agreement for a Gamma Knife Unit dated as of October *
29, 1996 between Methodist Healthcare Systems of San
Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(8)..............................................
10.19 Lease Agreement for a Gamma Knife Unit dated as of April 10, *
1997 between Yale-New Haven Ambulatory Services Corporation
and GK Financing, LLC. (Confidential material appearing in
this document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(8)..............................................
10.20 Lease Agreement for a Gamma Knife Unit dated as of June 1, *
1998 between GK Financing, LLC and Kettering Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(9)..............................................
43
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
10.21 Addendum to Contract with GKF and KMC/WKNI, dated June 1, *
1998 between GK Financing, LLC and Kettering Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(9)..............................................
10.22 Lease Agreement for a Gamma Knife Unit dated as of October *
5, 1998 between GK Financing, LLC and New England Medical
Center Hospitals, Inc. (Confidential material appearing in
this document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(9)..............................................
10.23 Equipment Lease Agreement dated as of October 29, 1998 *
between GK Financing, LLC and the Board of Trustees of the
University of Arkansas on behalf of The University of
Arkansas for Medical Sciences. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(9).......................
10.24 First Amendment to Lease Agreement for a Gamma Knife Unit *
effective as of August 2, 1999 between GK Financing, LLC and
Tenet HealthSystems Hospitals, Inc. (formerly known as NME
Hospitals, Inc.) dba USC University Hospital. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)(9)...........
10.25 Addendum Two, dated as of October 1, 1999, to Lease
Agreement for a Gamma Knife Unit dated as of October 31,
1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.).................................................
10.26 Lease Agreement for a Gamma Knife Unit dated as of May 28,
1999 between Froedtert Memorial Lutheran Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.).................................................
10.27 Addendum dated June 24, 1999 to Lease Agreement for a Gamma
Knife Unit dated as of May 28, 1999 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC............
10.28 Addendum dated July 12, 1999 to Lease Agreement for a Gamma
Knife Unit dated as of May 28, 1999 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC.
10.29 Addendum dated August 24, 1999 to Lease Agreement for a
Gamma Knife Unit dated as of May 28, 1999 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC............
44
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
21. Subsidiaries of American Shared Hospital Services...........
23.1 Consent of Moss Adams, LLP..................................
23.2 Consent of Grant Thornton, LLP..............................
23.3 Consent of Ernst & Young, LLP...............................
27. Financial Data Schedule for the year ended December 31,
1999........................................................
- ---------------
(1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, which is incorporated herein by this reference.
(2) This document was filed as Exhibit 3.1 to registrant's Registration
Statement on Form S-2 (Registration No. 33-23416), which is incorporated
herein by this reference.
(3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, to
registrant's Registration Statement on Form S-1 (Registration No. 33-63721)
filed on October 26, 1995, which is incorporated herein by this reference.
(4) These documents were filed as Exhibits 10.24 and 10.35 respectively, to
registrant's Registration Statement on Form S-2 (Registration No. 33-23416),
which is incorporated herein by this reference.
(5) This document was filed as Exhibit A to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(6) This document was filed as Exhibit B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(7) These documents were filed as Exhibits 4.14 and 10.13, respectively, to the
registrant's Pre-Effective Amendment No. 1 to registrant's Registration
Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996,
which is incorporated herein by this reference.
(8) These documents were filed as Exhibits 10.8, 10.9, 10.10, 10.11a, 10.11c,
10.11d, 10.12, 10.14, 10.15, 10.16, 10.17, 10.18 and 10.19, respectively, to
the registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, which is incorporated herein by this reference.
(9) These documents were filed as Exhibits 10.20, 10.21, 10.22, 10.23, and
10.24, respectively, to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999, which is incorporated herein
by this reference.