- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K
<Table>
(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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
</Table>
COMMISSION FILE NUMBER 1-8789
---------------------
AMERICAN SHARED HOSPITAL SERVICES
(Exact name of registrant as specified in its charter)
<Table>
CALIFORNIA 94-2918118
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
</Table>
<Table>
FOUR EMBARCADERO CENTER, SUITE 3700, SAN FRANCISCO, 94111-4107
CALIFORNIA
(Address of Principal Executive Offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(415) 788-5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock No Par Value American Stock Exchange
Pacific Exchange
</Table>
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 15, 2002, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $8,365,000.
Number of shares of common stock of the registrant outstanding as of March
15, 2002: 3,650,203.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2002 Annual
Meeting of its Shareholders are incorporated by reference into Part III of this
report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
GENERAL
American Shared Hospital Services ("ASHS" and, together with its
subsidiaries, the "Company") provides Gamma Knife stereotactic radiosurgery
services to twelve medical centers in eleven 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 100% of the Company's
revenues in 2001.
At present, the Company is developing its business model for "The Operating
Room for the 21st Century" (sm) ("OR21" (sm)). OR21 is not expected to generate
significant revenues within the next twelve months.
In 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.
Prior to that sale, the Company provided Magnetic Resonance Imaging ("MRI"),
Computed Axial Tomography, Ultrasound, Nuclear Medicine and Cardiac
Catheterization Laboratory services to approximately 190 customers in 22 states.
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 and medium, 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 malignant tumors (i.e. solitary and
multiple metastatic tumors, gliomas, nasopharyngeal carcinomas and ocular
meningiomas), benign brain tumors (i.e. meningiomas, pituitary and acoustic
neuromas, craniopharyngiomas), arteriovenous malformations and trigeminal
neuralgia (facial pain). Research is being conducted to determine whether the
Gamma Knife can be effective in the treatment of epilepsy, Parkinson's Disease
and other functional disorders.
In the early 1950's, Lars Leksell, M.D., professor of neurological surgery
at the Karolinska Institute in Stockholm, Sweden, researched ways to
non-invasively treat brain disorders using stereotactically directed beams of
energy. Dr. Leksell is acknowledged as the developer of stereotactic
radiosurgery. Stereotactic radiosurgery is a surgical procedure in which
radiation is stereotactically delivered to a prescribed target. In 1968, Dr.
Leksell and Borte Larsson, professor of biophysics at the Gustaf Werner
Institute at the University of Uppsala in Sweden, introduced the first prototype
Gamma Knife, at the Karolinska Hospital. Initially, the Gamma Knife treated
vascular malformations, benign brain tumors and functional disorders. The Gamma
Knife was first introduced into the United States in 1987. During the past
decade, Gamma Knife treatment of malignant brain tumors became accepted clinical
practice and is now the most prevalent Gamma Knife
1
indication. The Gamma Knife continued to evolve and the B unit was introduced in
the United States in 1997. The latest Gamma Knife, the C unit, was first
installed in the United States in 2000.
There are currently 66 Gamma Knife units operating at 65 sites in the
United States and approximately 156 units in operation worldwide. As of December
31, 2001, in excess of 170,000 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 (43%) and benign (30%)
brain tumors, vascular disorders (14%) and functional disorders (13%).
The Company, as of March 15, 2002, has twelve (12) Gamma Knife units
operating at twelve (12) sites in the United States. In addition, the Company
has three (3) more hospitals that are currently under development. The Company's
first Gamma Knife commenced operation in September 1991. The Company's Gamma
Knife units performed approximately 1,500 procedures in 2001 for a cumulative
total of approximately 5,700 procedures through December 31, 2001.
Gamma Knife revenues for the Company during the five (5) years ended
December 31, 2001 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:
<Table>
<Caption>
YEAR ENDED TOTAL GAMMA KNIFE GAMMA KNIFE/
DECEMBER 31, REVENUES TOTAL REVENUES
------------ ----------------- --------------
(IN THOUSANDS)
2001............................................... $11,758 100.0%
2000............................................... $ 9,336 100.0%
1999............................................... $ 7,151 99.9%
1998............................................... $ 4,156 11.8%
1997............................................... $ 2,384 6.4%
</Table>
The Company conducts its Gamma Knife business through its 81% indirect
interest in GKF. The remaining 19% interest is indirectly owned by Elekta. GKF,
formed in October 1995, is managed by its policy committee. The policy committee
is composed of one representative from the Company, Ernest A. Bates, M.D., the
Company's Chairman and CEO, and one representative from Elekta. The policy
committee sets the operating policy for GKF. The policy committee may act only
with the unanimous approval of 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 before cash distributions are made to its members.
From inception to December 31, 2001, GKF distributed $6,337,000 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.
Historically our cost for a Gamma Knife unit has been approximately
$2,710,000. In some cases, we contribute additional funds for capital
costs and/or annual operating costs such as marketing. Due to the
structure of our contracts with medical centers, there can be no
assurance that these costs will be fully recovered or that we will earn a
satisfactory return on our investment.
- There is a limited market for the Gamma Knife. Due to the substantial
costs of acquiring a Gamma Knife unit, we must identify medical centers
that possess neurosurgery and oncology departments capable of performing
a large number of Gamma Knife procedures. We have identified
approximately 200 such medical centers in the United States as potential
future sites. There currently are approximately 66 operating Gamma Knife
units in the United States, 12 of which are units owned by
2
us, and approximately 156 units in operation worldwide. There can be no
assurance that we will be successful in placing additional units at a
significant number of sites in the future.
- Our business is capital intensive and we have traditionally financed each
Gamma Knife with debt. Our long term debt totals $25,920,000 and is
collateralized by the Gamma Knife units and other assets, including our
accounts receivable and future proceeds from any contract between us and
any end user of the financed equipment. This high level of debt may
adversely affect our ability to secure additional credit in the future,
and as a result may affect our operations and profitability. If default
occurs in the future, our creditors would have the ability to accelerate
the defaulted loan, to seize the Gamma Knife unit with respect to which
default has occurred, and to apply any collateral they may have at the
time to cure the default.
- There currently are approximately four companies (in addition to our
company) that provide alternative, non-conventional Gamma Knife financing
to potential customers. There are no competitor companies that currently
have more than four Gamma Knife units in operation. Our relationship with
Elekta, the manufacturer of the Leksell Gamma Knife units, is
non-exclusive, and in the past we have lost sales to customers that chose
to purchase a Gamma Knife unit directly from Elekta AG. In addition, in
the future, we may continue to lose sales to such customers and may also
lose sales to our competitors. There can be no assurance that in the
future we will be able to successfully compete against others in placing
units.
- 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 300-350 medical
centers in the United States with modified linear accelerators. Each of
the medical centers targeted by us 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 surgery. There can be no assurance
that we will be able to secure a sufficient number of sites or Gamma
Knife procedures to sustain its 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) or other third
party payor groups. Ten of our existing contracts are reimbursed by the
medical center to us on a fee-for-service basis. The primary risk to us
under this type of contract is that actual volumes of procedures could be
less than projected. However, a significant reimbursement rate reduction
may result in the Company restructuring certain of the existing
contracts. We also have two contracts where we receive revenues based
directly on the amount of reimbursement received for procedures
performed. Revenues under those contracts and any future contracts with
revenues based directly on reimbursement amounts will be impacted by any
reimbursement rate change. Some of our 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 directly or
indirectly adversely affect our 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 2000, Elekta AG
introduced an upgraded Gamma Knife which costs approximately $3.4 million
plus applicable tax and duties. This upgrade includes an Automated
Patient Positioning system, or APS, and therefore involves less health
care provider intervention. Ten of our existing Gamma Knife units are
upgradeable and one Gamma Knife unit has already been upgraded. The cost
to upgrade existing units to the new model C Gamma Knife with APS is
estimated to be approximately $950,000. The failure to acquire or use new
technology and products could have a material adverse effect on our
business and results of operations.
3
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, reimbursement 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 $2,710,000 with the medical center paying for site
and installation costs. The following is a listing of the Company's current
sites and sites under development as of March 15, 2002:
<Table>
<Caption>
ORIGINAL TERM
OF CONTRACT
(YEAR CONTRACT BASIS OF
CUSTOMER BEGAN) PAYMENT
- -------- -------------- ---------------
Existing sites
--------------
UCSF Medical Center......................................... 10 years Fee per use
San Francisco, California (1991)
Hoag Memorial Hospital Presbyterian ("Hoag")................ 10 years Fee per use
Newport Beach, California (1997)
Southwest Texas Methodist Hospital ("STMH")................. 10 years Fee per use
San Antonio, Texas (1998)
Yale New Haven Ambulatory Services Corporation ("Yale")..... 10 years Revenue sharing
New Haven, Connecticut (1998)
Kettering Medical Center.................................... 10 years Fee per use
Kettering, Ohio (1999)
New England Medical Center.................................. 10 years Fee per use
Boston, Massachusetts (1999)
University of Arkansas for Medical Sciences ("UAMS")........ 15 years Revenue sharing
Little Rock, Arkansas (1999)
Froedtert Memorial Lutheran Hospital........................ 10 years Fee per use
Milwaukee, Wisconsin (1999)
JFK Medical Center.......................................... 10 years Fee per use
Edison, New Jersey (2000)
Sunrise Hospital and Medical Center......................... 10 years Fee per use
Las Vegas, Nevada (2001)
Central Mississippi Medical Center.......................... 10 years Fee per use
Jackson, Mississippi (2001)
OSF Saint Francis Medical Center............................ 10 years Fee per use
Peoria, Illinois (2001)
Sites Under
Development
--------------
Bayfront Medical Center..................................... 10 years Fee per use
St. Petersburg, Florida
Mercy Medical Center........................................ 10 years Fee per use
Rockville Center, New York
Hospital Barra D'Or......................................... 10 years Revenue sharing
Rio de Janeiro, Brazil
</Table>
The Company's second Gamma Knife contract, with the University of Southern
California ended in the third quarter of 1999. The customer exercised its option
to purchase the equipment for its net book value, approximately $1.2 million.
Currently, two of the Company's sites now under development are projected to
4
become operational in mid 2002. The Company's contract with Hospital Barra D'Or
is being converted to a joint venture arrangement.
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. The
customer generally is obligated to pay site and installation costs and the costs
of operating the Gamma Knife. The customer can either renew the agreement or
terminate the agreement at the end of the contractual term. If the customer
chooses to terminate the agreement, then GKF removes the equipment from the
medical center for possible placement at an another site.
The Company's revenue sharing agreements ("retail") 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 the government or other third party payors. The Company is also at risk if it
inefficiently operates the Gamma Knife. There are no minimum volume guarantees
required of the customer.
Four customers each accounted for more than 10% of the Company's revenues
in 2001, 2000 and 1999: Hoag, STMH, Yale and UAMS.
MARKETING
The Company markets its services through its preferred provider status with
Elekta and a direct sales effort. The direct sales effort is executed by the
Company's Vice President of Sales, who joined the Company in April 2001. 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.
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 of its three 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
5
for funding of the approximately $3,700,000 remaining cash requirements for the
two 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) Elekta, the
manufacturer of the Gamma Knife, (ii) manufacturers of competing radiosurgery
devices (primarily modified linear accelerators), and (iii) other companies that
outsource Gamma Knife services. 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 in the United States, the majority of Gamma Knife services are
performed on an in-patient basis, although a significant number are performed on
an out-patient basis. Gamma Knife patients, with Medicare as their primary
insurer and treated on either an in-patient or out-patient basis, comprise an
estimated 20% to 30% of the total Gamma Knife patients treated.
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 1986 and again in 1990, Congress enacted legislation requiring the
Department of Health and Human Services ("DHHS") to develop proposals for a PPS
for Medicare out-patient services. DHHS has proposed a new payment system,
Ambulatory Product Classifications ("APC"), which affects all out-patient
services, performed in a hospital based facility. APC implementation took place
in the third quarter of 2000.
The APC consists of 346 clinically, homogenous classifications or groupings
of codes that are typically used in out-patient billing. Out-patient services
are bundled with fixed rates of payment determined according to specific
regional and national factors, similar to that of the in-patient PPS.
The reimbursement for Medicare patients receiving Gamma Knife services on
an out-patient basis is estimated to have decreased approximately 40% under the
APC system. The Gamma Knife APC rate, effective April 1, 2002 is anticipated to
increase. The exact increased amount will be individually hospital dependent and
is not known at this time. The Company has two contracts from which revenues are
directly affected by changes in payment rates under the APC system. Currently,
these two contracted hospitals are primarily treating Medicare Gamma Knife
patients on an in-patient basis and therefore the Company believes that adoption
of APC's has not had a significant impact on the revenues of the Company.
However, some of the Company's fee-per-use customers treat patients on an
out-patient basis and may have experienced a
6
reduction in Medicare payment. There can be no assurance that the adoption of
APC's will not have a negative impact directly or indirectly on the Company's
revenues in the future.
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. Four of the Company's existing
customers were required to obtain a CON or its equivalent. One of the Company's
more recently signed contracts is subject to CON, and is still awaiting
regulatory approval. The CON procedure can be expensive and time consuming and
may impact the length of time before Gamma Knife services commence. CON
requirements vary from state to state in their application to the operations of
both the Company and its customers. In some jurisdictions the Company is
required to comply with CON procedures to provide its services and in other
jurisdictions customers must comply with CON procedures before using the
Company's services.
The Company's Gamma Knife units contain Cobalt 60 radioactive sources. The
medical centers that house the Company's Gamma Knife units are responsible for
obtaining possession and user's licenses for the Cobalt 60 source.
The Company believes it is in substantial compliance with the various rules
and regulations that affect its businesses.
INSURANCE AND INDEMNIFICATION
The Company's contracts with equipment vendors generally do not contain
indemnification provisions. The Company maintains a comprehensive insurance
program covering the value of its property and equipment, subject to
deductibles, which the Company believes are reasonable.
The Company's customer contracts generally contain mutual indemnification
provisions. The Company maintains general and professional liability insurance.
The Company is not involved in the practice of
7
medicine and therefore believes its present insurance coverage and
indemnification agreements are adequate for its business.
EMPLOYEES
At December 31, 2001, the Company employed nine (9) people 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.
<Table>
<Caption>
NAME AGE POSITION
- ---- ---- --------
Ernest A. Bates, M.D. .................... 65 Chairman of the Board of Directors, Chief
Executive Officer
Craig K. Tagawa........................... 48 Senior Vice President -- Chief Operating and
Financial Officer
</Table>
Ernest A. Bates, M.D., founder of the Company, has served in the positions
listed above since the incorporation of the Company. He is currently a member of
the Board of Trustees of The Johns Hopkins University and the University of
Rochester, a member of the Board of Overseers of the University of California at
San Francisco School of Nursing, a member of the State of California High Speed
Rail Authority, and a member of the Board of Directors of Salzburg Seminar. Dr.
Bates is a graduate of The Johns Hopkins University and the University of
Rochester School of Medicine.
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. He is currently a Chair of the Industrial
Policy Advisory Committee of the Engineering Research Center for
Computer-Integrated Surgical Systems and Technology at The Johns Hopkins
University. He received his Undergraduate degree from the University of
California at Berkeley and his M.B.A. from Cornell University.
ITEM 2. PROPERTIES
The Company's corporate offices are located at Four Embarcadero Center,
Suite 3700, San Francisco, California, where it subleases approximately 4,100
square feet for $24,258 per month. This sublease runs through May 2006. A
portion of the office space is subleased to two third parties for $3,000 per
month. These sub-sublease agreements run through November 2002 and May 2006.
The Company continues to lease 2,550 square feet of office space at Two
Embarcadero Center, Suite 2370, San Francisco, CA for $11,054 per month. This
lease runs through September 2002 and is subleased for $7,442 per month through
the end of the lease term.
For the year ended December 31, 2001 the Company's aggregate net rental
expenses for all properties and equipment were approximately $245,000.
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.
8
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. The table below sets forth the high and low closing sale 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.
<Table>
<Caption>
PRICES FOR
COMMON SHARES
-------------
QUARTER ENDING HIGH LOW
- -------------- ----- -----
March 31, 2000.............................................. $4.75 $3.38
June 30, 2000............................................... $4.25 $2.81
September 30, 2000.......................................... $2.88 $2.00
December 31, 2000........................................... $2.44 $1.75
March 31, 2001.............................................. $2.85 $2.00
June 30, 2001............................................... $4.65 $2.20
September 30, 2001.......................................... $4.50 $2.95
December 31, 2001........................................... $3.30 $3.02
</Table>
The Company estimates that there were approximately 1,200 beneficial
holders of its Common Shares at December 31, 2001.
The Board of Directors authorized in March 2000 the repurchase of up to
500,000 shares of the Company's Common Stock in the open market from time to
time at prevailing prices. Approximately 484,000 shares were repurchased in the
open market pursuant to that authorization, through December 31, 2001, at a cost
of approximately $1,213,000. The Board of Directors on February 2, 2001
authorized the repurchase of up to another 500,000 shares of the Company's
common stock in the open market from time to time at prevailing prices.
During 2001 holders of options to acquire the Company's common stock
exercised their respective rights pursuant to such securities, resulting in the
Company issuing approximately 9,000 new shares of common stock for approximately
$16,000.
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.
At December 31, 2001 the Company had 5,253,268 fully diluted shares
outstanding, including 3,524,853 issued and outstanding common shares, 1,799,017
common shares reserved for options, and 5,248 shares reserved pursuant to the
Company's Shareholder Rights Plan.
The Board of Directors has declared a dividend of $.12 per common share to
shareholders of record on March 15, 2002 to be paid on April 2, 2002.
Shareholders of record on March 15, 2001 were paid a dividend of $0.10 per
common share on April 2, 2001. The Board of Directors anticipates declaring and
paying annual
9
cash dividends in similar amounts in the future subject to evaluation of the
Company's level of earnings, balance sheet position and availability of cash.
The Company did not pay cash dividends prior to 2001.
ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Medical services revenues.................... $11,758 $ 9,336 $ 7,156 $35,162 $37,172
======= ======= ======= ======= =======
Costs of operations.......................... 4,285 3,435 2,165 25,826 27,044
Selling and administrative expense........... 3,245 2,655 1,803 5,116 5,901
Interest expense............................. 2,456 2,118 1,309 3,186 3,671
------- ------- ------- ------- -------
Total costs and expenses..................... 9,986 8,208 5,277 34,128 36,616
------- ------- ------- ------- -------
1,772 1,128 1,879 1,034 556
Gain (loss) on sale of assets and early
termination of capital leases.............. 0 25 10 (2) 821
Gain on disposal of product line............. 0 0 0 20,478 0
Interest and other income.................... 480 804 603 220 118
Minority interest............................ (751) (645) (501) (166) 37
------- ------- ------- ------- -------
Income before income taxes................... 1,501 1,312 1,991 21,564 1,532
Income tax benefit (expense)................. (433) 0 716 (1,513) (10)
------- ------- ------- ------- -------
Net income................................... $ 1,068 $ 1,312 $ 2,707 $20,051 $ 1,522
======= ======= ======= ======= =======
Earnings per common share basic:
Net income................................. $ 0.30 $ 0.34 $ 0.68 $ 4.23 $ 0.32
======= ======= ======= ======= =======
Earnings per common share assuming dilution:
Net income................................. $ 0.21 $ 0.24 $ 0.48 $ 3.15 $ 0.24
======= ======= ======= ======= =======
BALANCE SHEET DATA
Cash......................................... $11,580 $12,421 $12,903 $11,114 $ 17
Restricted cash.............................. 50 50 50 2,226 651
Working capital (deficiency)................. 9,351 10,155 11,125 9,088 (8,039)
Total assets................................. 42,385 40,209 36,986 26,919 30,209
Current portion of long-term debt............ 4,305 4,126 2,545 1,885 10,929
Long-term debt, less current portion......... 21,615 20,300 19,887 8,823 21,569
Shareholders' equity (Net capital
deficiency)................................ $13,785 $13,658 $12,639 $11,096 $(8,953)
</Table>
- ---------------
(1) In October 1995, the Company entered into an operating agreement granting to
American Shared Radiosurgery Services (a California corporation and a
wholly-owned subsidiary of the Company) an 81% ownership interest in GK
Financing, LLC. ASHS incorporated a new wholly-owned subsidiary, OR21, Inc.
("OR21") in November 1999, and a new wholly-owned subsidiary, MedLeader.com,
Inc. ("MedLeader") in April 2000. Accordingly, the financial data for the
Company presented above include the results of GKF for 1997 through 2001,
OR21 for 1999 through 2001, and MedLeader for 2000 and 2001.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the years ended December 31, 2001, 2000 and 1999, 100% of the
Company's revenues were derived from its Gamma Knife business.
TOTAL REVENUES
<Table>
<Caption>
INCREASE INCREASE
2001 (DECREASE) 2000 (DECREASE) 1999
------- ---------- ------ ---------- ------
Medical services revenue (In thousands)...... $11,758 25.9% $9,336 30.5% $7,156
Number of Gamma Knife procedures............. 1,455 23.9% 1,174 18.2% 993
Average revenue per procedure................ $ 8,081 1.6% $7,952 10.4% $7,206
</Table>
Medical services revenues increased 25.9% in 2001 compared to 2000, and
increased 30.5% in 2000 compared to 1999. The increase in 2001 compared to 2000
is primarily attributable to an increase in the number of Gamma Knife units in
operation. The increase in 2000 compared to 1999 is primarily attributable to an
increase in the number of Gamma Knife units in operation as well as increased
revenues at Gamma Knife locations in operation for more than one year.
Gamma Knife revenues increased $2,422,000 and $2,185,000 in 2001 and 2000,
respectively, compared to the prior years. The 2001 increase was primarily due
to three new Gamma Knife units that started at various times during 2001 and the
full year inclusion of one new Gamma Knife unit that commenced operation in
April 2000. The 2000 increase was due to the full year inclusion of four new
Gamma Knife units that started at various times during 1999, the commencement of
a new Gamma Knife unit in April 2000, and a 20% increase in revenues for Gamma
Knife units in operation more than one year. The increase was partially offset
by the expiration of the Company's second Gamma Knife contract in the fourth
quarter of 1999. The customer purchased the Gamma Knife after the expiration of
the contract for $1,200,000 in cash. The Company had twelve, nine and eight
Gamma Knife units in operation at December 31, 2001, 2000 and 1999,
respectively.
The number of Gamma Knife procedures increased 281 and 181 in 2001 and 2000
respectively compared to prior years because of the increase in the number of
Gamma Knife units in operation each year.
Gamma Knife revenue per procedure increased by $129 in 2001 compared to
2000 primarily because of the three new contracts that started during 2001. One
of the Company's older contracts is at a lower procedure rate due to a lower
investment basis, while the newer contracts have a higher per procedure rate.
The increase in revenue per procedure of $746 in 2000 from 1999 is primarily due
to the addition in late 1999 of a new retail account. In retail accounts the
Company collects higher average per procedure revenues and is also responsible
for all or a portion of the operating costs associated with the procedure.
COSTS OF OPERATIONS
<Table>
<Caption>
INCREASE INCREASE
2001 (DECREASE) 2000 (DECREASE) 1999
------ ---------- ------ ---------- ------
(IN THOUSANDS)
Costs of operations........................... $4,285 24.7% $3,435 58.7% $2,165
Percentage of revenue......................... 36.4% 36.8% 30.3%
</Table>
The Company's costs of operations, consisting of maintenance and supplies,
depreciation and amortization, equipment rental and other operating expenses
(such as insurance, property taxes, sales taxes, marketing costs and other fees)
increased $850,000 in 2001 as compared to 2000 and increased $1,270,000 in 2000
as compared to 1999.
The Company's maintenance and supplies costs were 3%, 2% and 2% of medical
service revenues in 2001, 2000 and 1999, respectively. Maintenance and supplies
costs increased $152,000 in 2001 compared to 2000 and increased $44,000 in 2000
compared to 1999. The increase in 2001 compared to 2000 was primarily due to the
expiration of the warranty period on one Gamma Knife unit and the full year
inclusion of maintenance on
11
three Gamma Knife units whose warranty period expired during the previous year.
The increase in 2000 was primarily due to the expiration of the warranty period
on three Gamma Knife units.
Depreciation and amortization increased $663,000 in 2001 compared to 2000
and increased $652,000 in 2000 compared to 1999. The increase in 2001 was due to
the addition of three new Gamma Knife units that commenced operation at various
times during 2001 and a full year of depreciation of a new Gamma Knife unit that
started operation during 2000. The increase in 2000 was due to the addition of a
new Gamma Knife unit in second quarter 2000 and a full year's depreciation on
four new Gamma Knife units that started operation during 1999.
Other costs of operations as a percentage of medical services revenues were
9%, 10%, and 6% in 2001, 2000 and 1999, respectively. The increase of $35,000 in
2001 compared to 2000 was primarily due to increased sales and use tax, as well
as increased insurance expense because of additional Gamma Knife units and
higher insurance rates. The increase was partially offset by an $80,000 credit
to property tax expense in third quarter 2001. The increase of $574,000 in 2000
compared to 1999 is due to operating expenses at the Company's retail site that
started in September 1999, increased property tax and insurance expenses due to
additional Gamma Knife units, and increased marketing costs.
SELLING AND ADMINISTRATIVE
<Table>
<Caption>
INCREASE INCREASE
2001 (DECREASE) 2000 (DECREASE) 1999
------ ---------- ------ ---------- ------
(IN THOUSANDS)
Selling and administrative costs.............. $3,245 22.2% $2,655 47.3% $1,803
Percentage of revenue......................... 27.6% 28.4% 25.2%
</Table>
The Company's selling and administrative costs increased $590,000 in 2001
compared to 2000 and increased $852,000 in 2000 compared to 1999. The increase
in 2001 was primarily due to increased investor relations costs of approximately
$64,000, increased building rent of approximately $67,000, increased insurance
expense of $66,000 and increased business development costs of approximately
$278,000. The increase in business development costs was primarily due to the
addition of a sales person in second quarter and the implementation of a broad
based marketing program throughout the year. The increase in 2000 was primarily
due to startup costs of approximately $228,000 on the Company's two newest
ventures, OR21 and MedLeader, management and employee bonuses of approximately
$125,000, and restructuring costs of approximately $120,000 resulting in the
elimination of two senior management positions. The increase in 2000 was also
caused by inclusion in 1999 of a $325,000 credit due to a change in estimate
regarding the need for and the corresponding cost of liability insurance related
to divested operations.
INTEREST EXPENSE
<Table>
<Caption>
INCREASE INCREASE
2001 (DECREASE) 2000 (DECREASE) 1999
------ ---------- ------ ---------- ------
(IN THOUSANDS)
Interest expense.............................. $2,456 16.0% $2,118 61.8% $1,309
Percentage of revenue......................... 20.9% 22.7% 18.3%
</Table>
The Company's interest expense increased $338,000 in 2001 compared to 2000
and increased $809,000 in 2000 compared to 1999. The increase in 2001 was
primarily due to the addition of three new Gamma Knife units at various times
during the year, all of which were financed. The increase in 2000 was primarily
due to the addition of five new Gamma Knife units during 2000 and 1999, all of
which were financed. All of the Company's operating Gamma Knife units are
financed by means of interest bearing debt. Four of the Company's twelve Gamma
Knife units have been in operation for less than two years, and have higher
interest expense than units with more mature loans because interest expense
decreases with each subsequent loan payment.
12
OTHER INCOME AND EXPENSE
<Table>
<Caption>
INCREASE INCREASE
2001 (DECREASE) 2000 (DECREASE) 1999
----- ---------- ----- ---------- -----
(IN THOUSANDS)
Gain (loss) on sale of assets, early
termination of capital leases, other......... $ 0 (100.0)% $ 25 150.0% $ 10
Percentage of revenue.......................... 0.0% 0.3% 0.1%
Interest and other income...................... $ 480 (40.3)% $ 804 33.3% $ 603
Percentage of revenue.......................... 4.1% 8.6% 8.4%
Minority interest.............................. $(751) 16.4% $(645) 28.7% $(501)
Percentage of revenue.......................... (6.4)% (6.9)% (7.0)%
</Table>
Gain on sale of assets, early termination of capital leases and other
decreased $25,000 in 2001 and increased $15,000 in 2000 compared to prior years.
Sale or disposal of assets or early termination of capital leases is not a
normal recurring item in the Company's current line of business.
Interest and other income decreased $324,000 in 2001 compared to 2000 and
increased $201,000 in 2000 compared to 1999. The decrease in 2001 was primarily
due to reduced return on cash investments due to the market decline in interest
rates that occurred during 2001. The increase in 2000 was primarily due to
additional interest income from higher cash balances that were invested in
overnight securities that had a higher interest rate than in 1999.
Minority interest increased $106,000 in 2001 and $144,000 in 2000 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.
INCOME TAXES
<Table>
<Caption>
INCREASE INCREASE
2001 (DECREASE) 2000 (DECREASE) 1999
----- ---------- ---- ---------- -----
(IN THOUSANDS)
Income tax benefit (expense)..................... $(433) 100.0% $ 0 (100.0)% $ 716
Percentage of revenue............................ 3.7% 0.0% 10.0%
</Table>
The Company began recording a federal and state income tax provision in
2001 as the Company's deferred tax liability began to exceed its deferred tax
assets. The valuation allowance that had been provided for the deferred tax
asset in excess of the deferred tax liability was eliminated in second quarter
2001. In 2000 the Company recorded no income tax expense or benefit because a
valuation allowance was provided for the entire deferred tax asset in excess of
the deferred tax liability. The Company received an income tax benefit of
$716,000 in 1999, which was 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 anticipates that with future profits it will continue to record
income tax expense. Currently there are minimal actual tax payments required due
to net operating loss carryforwards and other deferred tax assets available for
tax purposes.
The Company had a net operating loss carryforward for federal income tax
return purposes at December 31, 2001 of approximately $9,166,000.
NET INCOME
<Table>
<Caption>
INCREASE INCREASE
2001 (DECREASE) 2000 (DECREASE) 1999
------ ---------- ------ ---------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income.................................... $1,068 (18.6)% $1,312 (51.5)% $2,707
Net income per share.......................... $ 0.30 (11.8)% $ 0.34 (50.0)% $ 0.68
</Table>
13
The Company had net income of $1,068,000 in 2001 compared to $1,312,000 in
2000 and $2,707,000 in 1999. Net income for 2001 included a provision for
federal and state income taxes of $433,000, startup costs for OR21 and MedLeader
of $200,000 and an increase compared to 2000 of $278,000 in business development
costs. Net income for 2000 included restructuring costs of $120,000 and startup
costs for OR21 and MedLeader of $228,000. Net income for 1999 included an
insurance expense credit of $325,000 and a tax benefit of $716,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $11,580,000 at December 31,
2001 compared to $12,421,000 at December 31, 2000. The Company's cash position
decreased $841,000 due primarily to payment of dividends to shareholders of
$361,000, deposits of $518,000 on future Gamma Knife projects, and payments of
approximately $596,000 to repurchase equity securities.
Restricted cash of $50,000 at December 31, 2001 reflects cash that may only
be used for the operations of GK Financing, LLC.
The Company's trade accounts receivable increased slightly to $2,160,000 at
December 31, 2001 from $2,155,000 at December 31, 2000. This increase was due to
higher revenue in 2001 compared to 2000, which was offset by a shortened
collection period for some of the Gamma Knife contracts.
The Company changed its cash investments during 2001 from overnight
repurchase agreements and commercial paper to money market funds to minimize the
effects of declining interest rates. Cash is invested in these short term funds
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 2002.
Working capital decreased $804,000 due to the decrease in cash, as well as
an increase in the current portion of long term debt due to the addition of
three Gamma Knife units during 2001, all of which were financed.
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
None.
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 2002 Annual Meeting of
Shareholders (the "2002 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 2002 Proxy Statement.
14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the 2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the 2002 Proxy Statement.
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.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Securities Purchase Agreement, dated as of March 12, 1999,
by and among Alliance Imaging, Inc.; Embarcadero Holding
Corp. I; Embarcadero Holding Corp. II; American Shared
Hospital Services; and MMRI, Inc.(1)
3.1 Articles of Incorporation of the Company, as amended.(2)
3.2 By-laws of the Company, as amended.(3)
4.6 Form of Common Stock Purchase Warrant of American Shared
Hospital Services.(3)
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)
</Table>
15
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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, 1999 ("Fourth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.(8)
10.9 Amendment dated as of March 31, 1999 ("Fifth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.(8)
10.10 Amendment dated as of June 5, 1999 to the GK Financing, LLC
Operating Agreement dated as of October 17, 1995.(8)
10.11a Assignment and Assumption Agreement, dated as of December
31, 1995, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(8)
10.11b Assignment and Assumption Agreement, dated as of November 1,
1995, between American Shared Hospital Services (assignor)
and American Shared Radiosurgery Services (assignee).(4)
10.11c Amendment Number One dated as of August 1, 1995 to the Lease
Agreement for a Gamma Knife Unit between The Regents of the
University of California and American Shared Hospital
Services. (Confidential material appearing in this document
has been omitted and filed separately with the Securities
and Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(8)
10.11d Lease Agreement dated as of July 3, 1990 for a Gamma Knife
Unit between American Shared Hospital Services and The
Regents of the University of California. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
Securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)(8)
10.12 Amendment Number Two dated as of February 6, 1999 to the
Lease Agreement for a Gamma Knife Unit between UCSF-Stanford
Health Care and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8)
10.13 Assignment and Assumption Agreement, dated as of February 3,
1996, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(4)
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, 1999 between Hoag Memorial Hospital
Presbyterian and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8)
</Table>
16
<Table>
<Caption>
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,
1999 between GK Financing, LLC and Kettering Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(9)
10.21 Addendum to Contract with GKF and KMC/WKNI, dated June 1,
1999 between GK Financing, LLC and Kettering Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(9)
10.22 Lease Agreement for a Gamma Knife Unit dated as of October
5, 1999 between GK Financing, LLC and New England Medical
Center Hospitals, Inc. (Confidential material appearing in
this document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(9)
10.23 Equipment Lease Agreement dated as of October 29, 1999
between GK Financing, LLC and the Board of Trustees of the
University of Arkansas on behalf of The University of
Arkansas for Medical Sciences. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(9)
10.24 First Amendment to Lease Agreement for a Gamma Knife Unit
effective as of August 2, 2000 between GK Financing, LLC and
Tenet HealthSystems Hospitals, Inc. (formerly known as NME
Hospitals, Inc.) dba USC University Hospital. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(9)
10.25 Addendum Two, dated as of October 1, 2000, to Lease
Agreement for a Gamma Knife Unit dated as of October 31,
1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(10)
10.26 Lease Agreement for a Gamma Knife Unit dated as of May 28,
2000 between Froedtert Memorial Lutheran Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(10)
10.27 Addendum dated June 24, 2000 to Lease Agreement for a Gamma
Knife Unit dated as of May 28, 2000 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC.(10)
10.28 Amendment dated July 12, 2000 to Lease Agreement for a Gamma
Knife Unit dated May 28, 2000 between Froedtert Memorial
Lutheran Hospital and GK Financing, LLC.(10)
</Table>
17
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.29 Amendment dated August 24, 2000 to Lease Agreement for a
Gamma Knife Unit dated May 28, 2000 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC.(10)
10.30 Lease Agreement for a Gamma Knife Unit dated as of December
11, 1996 between The Community Hospital Group, Inc. dba JFK
Medical Center and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(11)
10.31 Lease Agreement for a Gamma Knife Unit dated as of June 3,
1999 between GK Financing, LLC and Sunrise Hospital and
Medical Center, LLC dba Sunrise Hospital and Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(12)
10.32 Addendum to Lease Agreement for a Gamma Knife Unit dated as
of June 3, 1999 between GK Financing, LLC and Sunrise
Hospital and Medical Center, LLC dba Sunrise Hospital and
Medical Center. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(12)
10.33 Lease Agreement for a Gamma Knife Unit dated as of November
1, 1999 between GK Financing, LLC and Jackson HMA, Inc. dba
Central Mississippi Medical Center. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(13)
10.34 Addendum to Lease Agreement for a Gamma Knife Unit dated as
of November 1, 1999 between GK Financing, LLC and Jackson
HMA, Inc. dba Central Mississippi Medical Center.(13)
10.35 Lease Agreement for a Gamma Knife Unit dated as of February
18, 2000 between GK Financing, LLC and OSF HealthCare
System. (Confidential material appearing in this document
has been omitted and filed separately with the Securities
and Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(13)
10.36 American Shared Hospital Services 2001 Stock Option
Plan.(14)
10.37 Amendment Number Three to Lease Agreement for a Gamma Knife
Unit dated as of June 22, 2001 between GK Financing, LLC and
The Regents of the University of California. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
Securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)(15)
10.38 Addendum Three to Lease Agreement for a Gamma Knife Unit
dated as of October 1, 2000 between GK Financing, LLC and
Hoag Memorial Hospital Presbyterian. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(15)
21. Subsidiaries of American Shared Hospital Services.
</Table>
- ---------------
(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.
18
(3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, to
registrant's Registration Statement on Form S-1 (Registration No. 33-63721)
filed on October 26, 1995, which is incorporated herein by this reference.
(4) These documents were filed as Exhibits 10.24 and 10.35 respectively, to
registrant's Registration Statement on Form S-2 (Registration No.
33-23416), which is incorporated herein by this reference.
(5) This document was filed as Exhibit A to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(6) This document was filed as Exhibit B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(7) These documents were filed as Exhibits 4.14 and 10.13, respectively, to the
registrant's Pre-Effective Amendment No. 1 to registrant's Registration
Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996,
which is incorporated herein by this reference.
(8) These documents were filed as Exhibits 10.8, 10.9, 10.10, 10.11a, 10.11c,
10.11d, 10.12, 10.14, 10.15, 10.16, 10.17, 10.18 and 10.19, respectively,
to the registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, which is incorporated herein by this reference.
(9) These documents were filed as Exhibits 10.20, 10.21, 10.22, 10.23, and
10.24, respectively, to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2000, which is incorporated herein
by this reference.
(10) These documents were filed as Exhibits 10.25, 10.26, 10.27, 10.28 and
10.29, respectively, to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 2000, which is incorporated herein
by this reference.
(11) This document was filed as Exhibit 10.30 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000, which is
incorporated herein by this reference.
(12) These documents were filed as Exhibits 10.31 and 10.32, respectively, to
the registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001, which is incorporated herein by this reference.
(13) These documents were filed as Exhibits 10.33, 10.34 and 10.35,
respectively, to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001, which is incorporated herein by this
reference.
(14) This document was filed as Exhibits 10.36 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2001,
which is incorporated herein by this reference.
(c) Reports on Form 8-K.
None.
19
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)
By: /s/ ERNEST A. BATES
------------------------------------
Ernest A. Bates
Chairman of the Board and
Chief Executive Officer
April 1, 2002
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.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ERNEST A. BATES Chairman of the Board and April 1, 2002
- ------------------------------------------------ Chief Executive Officer
Ernest A. Bates
/s/ WILLIE R. BARNES Director and Secretary April 1, 2002
- ------------------------------------------------
Willie R. Barnes
/s/ JOHN F. RUFFLE Director April 1, 2002
- ------------------------------------------------
John F. Ruffle
/s/ STANLEY S. TROTMAN, JR. Director April 1, 2002
- ------------------------------------------------
Stanley S. Trotman, Jr.
/s/ CHARLES B. WILSON Director April 1, 2002
- ------------------------------------------------
Charles B. Wilson
/s/ CRAIG K. TAGAWA Chief Operating Officer and April 1, 2002
- ------------------------------------------------ Chief Financial Officer
Craig K. Tagawa (Principal Accounting Officer)
</Table>
20
AMERICAN SHARED HOSPITAL SERVICES
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CONTENTS
<Table>
<Caption>
PAGE
----
INDEPENDENT AUDITOR'S REPORT................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets............................................ F-3
Statements of income...................................... F-4
Statement of shareholders' equity......................... F-5
Statements of cash flows.................................. F-6
Notes to financial statements............................. F-7
</Table>
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
American Shared Hospital Services
We have audited the accompanying consolidated balance sheets of American
Shared Hospital Services as of December 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Shared Hospital Services at December 31, 2001 and 2000, and the
consolidated results of their operations and consolidated cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Stockton, California
January 15, 2002
F-2
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $11,580,000 $12,421,000
Restricted cash........................................... 50,000 50,000
Trade accounts receivable, net of allowance for doubtful
accounts of $70,000 in 2001 and $0 in 2000............. 2,160,000 2,155,000
Other receivables......................................... 209,000 52,000
Prepaid expenses and other current assets................. 789,000 573,000
----------- -----------
Total current assets.............................. 14,788,000 15,251,000
PROPERTY AND EQUIPMENT, net................................. 27,354,000 24,749,000
OTHER ASSETS................................................ 243,000 209,000
----------- -----------
$42,385,000 $40,209,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 412,000 $ 81,000
Accrued interest and other liabilities.................... 505,000 699,000
Employee compensation and benefits........................ 215,000 190,000
Current portion of long-term debt......................... 4,305,000 4,126,000
----------- -----------
Total current liabilities......................... 5,437,000 5,096,000
LONG-TERM DEBT, less current portion........................ 21,615,000 20,300,000
DEFERRED INCOME TAXES....................................... 383,000 --
MINORITY INTEREST........................................... 1,165,000 1,155,000
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized -- 10,000,000 shares
Issued and outstanding shares -- 3,525,000 in 2001 and
3,711,000 in 2000..................................... 9,240,000 9,746,000
Common stock options issued to officer.................... 2,414,000 2,414,000
Additional paid-in capital................................ 740,000 814,000
Retained earnings......................................... 1,391,000 684,000
----------- -----------
Total shareholders' equity........................ 13,785,000 13,658,000
----------- -----------
$42,385,000 $40,209,000
=========== ===========
</Table>
See accompanying notes
F-3
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
----------- ---------- ----------
REVENUES:
Medical services...................................... $11,758,000 $9,336,000 $7,156,000
COSTS AND EXPENSES:
Costs of operations:
Maintenance and supplies.............................. 339,000 187,000 143,000
Depreciation.......................................... 2,931,000 2,268,000 1,616,000
Other................................................. 1,015,000 980,000 406,000
Selling and administrative............................ 3,245,000 2,655,000 1,803,000
Interest.............................................. 2,456,000 2,118,000 1,309,000
----------- ---------- ----------
Total costs and expenses...................... 9,986,000 8,208,000 5,277,000
----------- ---------- ----------
1,772,000 1,128,000 1,879,000
Gain (loss) on sale of assets, early termination of
capital leases, and other.......................... -- 25,000 10,000
Interest and other income............................. 480,000 804,000 603,000
Minority interest..................................... (751,000) (645,000) (501,000)
----------- ---------- ----------
Income before income taxes............................ 1,501,000 1,312,000 1,991,000
Income tax benefit (expense).......................... (433,000) -- 716,000
----------- ---------- ----------
Net income............................................ $ 1,068,000 $1,312,000 $2,707,000
=========== ========== ==========
Earnings per common share -- basic...................... 0.30 0.34 0.68
=========== ========== ==========
Earnings per common share -- assuming dilution.......... 0.21 0.24 0.48
=========== ========== ==========
</Table>
See accompanying notes
F-4
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
THREE YEARS ENDED DECEMBER 31, 2001
------------------------------------------------------------------------------
COMMON
STOCK RETAINED
OPTIONS ADDITIONAL EARNINGS
COMMON COMMON ISSUED TO PAID-IN (ACCUMULATED
SHARES STOCK OFFICER CAPITAL DEFICIT) TOTAL
--------- ----------- ---------- ---------- ------------ -----------
Balances at January 1, 1999............ 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
Options exercised.................... 92,000 150,000 -- -- -- 150,000
Repurchase of common stock........... (194,000) (440,000) -- -- -- (440,000)
Repurchase of warrants............... -- -- -- (3,000) -- (3,000)
Net income........................... -- -- -- -- 1,312,000 1,312,000
--------- ----------- ---------- --------- ----------- -----------
Balances at December 31, 2000.......... 3,711,000 9,746,000 2,414,000 814,000 684,000 13,658,000
Options exercised.................... 9,000 16,000 -- -- -- 16,000
Repurchase of common stock and
options............................ (195,000) (522,000) -- (74,000) -- (596,000)
Dividends............................ -- -- -- -- (361,000) (361,000)
Net income........................... -- -- -- -- 1,068,000 1,068,000
--------- ----------- ---------- --------- ----------- -----------
Balances at December 31, 2001.......... 3,525,000 $ 9,240,000 $2,414,000 $ 740,000 $ 1,391,000 $13,785,000
========= =========== ========== ========= =========== ===========
</Table>
See accompanying notes
F-5
AMERICAN SHARED HOSPITAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net income............................................ $ 1,068,000 $ 1,312,000 $ 2,707,000
Adjustments to reconcile net income to net cash from
operating activities:
Gain on sale of assets, early termination of capital
leases and other non-cash transactions........... -- (25,000) (10,000)
Depreciation and amortization....................... 3,003,000 2,357,000 1,621,000
Deferred income tax liability....................... 383,000 -- --
Change in estimate of accrued exit costs............ -- -- (375,000)
Changes in operating assets and liabilities:
Restricted cash.................................. -- -- 2,176,000
Receivables...................................... (162,000) (981,000) 106,000
Prepaid expenses and other assets................ (288,000) (94,000) (263,000)
Accounts payable and accrued liabilities......... 162,000 (54,000) (2,375,000)
----------- ----------- -----------
Net cash from operating activities.................... 4,166,000 2,515,000 3,587,000
INVESTING ACTIVITIES
Payment of accrued exit costs......................... -- -- (609,000)
Proceeds from sale and disposition of equipment....... -- -- 1,210,000
Increase in minority interest......................... 10,000 265,000 159,000
Payment for purchase of property and equipment........ (724,000) (542,000) (131,000)
----------- ----------- -----------
Net cash from investing activities.................... (714,000) (277,000) 629,000
FINANCING ACTIVITIES
Principal payments on long-term debt and obligations
under capital leases................................ (3,352,000) (2,427,000) (1,513,000)
Proceeds from issuance of long-term debt.............. -- -- 250,000
Payment of dividends.................................. (361,000) -- --
Proceeds from exercise of stock warrants and
options............................................. 16,000 150,000 37,000
Repurchase of stock options/warrants.................. (74,000) (3,000) (113,000)
Repurchase of common stock............................ (522,000) (440,000) (1,088,000)
----------- ----------- -----------
Net cash from financing activities.................... (4,293,000) (2,720,000) (2,427,000)
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents......................................... (841,000) (482,000) 1,789,000
CASH AND CASH EQUIVALENTS, beginning of year.......... 12,421,000 12,903,000 11,114,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year................ $11,580,000 $12,421,000 $12,903,000
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid......................................... $ 2,433,000 $ 2,194,000 $ 1,135,000
=========== =========== ===========
Income taxes paid..................................... $ 23,000 $ 14,000 $ 1,059,000
=========== =========== ===========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment with lease/debt financing.... $ 4,847,000 $ 4,444,000 $13,311,000
</Table>
See accompanying notes
F-6
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND BASIS OF PRESENTATION
Business -- American Shared Hospital Services (the "Company"), a California
corporation, provides Gamma Knife units to twelve medical centers in California,
Texas, Connecticut, Ohio, Massachusetts, Arkansas, Wisconsin, Nevada, Illinois,
Mississippi and New Jersey.
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.
In April, 2000, MedLeader.com, Inc., was incorporated. This wholly-owned
subsidiary of the Company will provide continuing medical education online and
through videos for doctors, nurses and other healthcare workers. Currently this
subsidiary is not operational.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, European Shared Medical Services Ltd., OR21,
Inc., MedLeader.com, Inc., ACHES and its wholly-owned subsidiary, AIS, and ASRS
and its majority-owned subsidiary, GK Financing, LLC. On April 28, 2000,
European Shared Medical Services, Ltd. was dissolved.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
NOTE 2 -- ACCOUNTING POLICIES
Use of estimates in the preparation of financial statements -- In preparing
financial statements in conformity with accounting principles generally accepted
in the United States of America, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents -- The Company considers all liquid investments
with original maturities of three months or less at the date of purchase to be
cash equivalents. Restricted cash is not considered a cash equivalent for
purposes of the consolidated statements of cash flows.
Restricted cash -- Restricted cash represents the minimum cash that, by
agreement, must be maintained in GK Financing LLC (GKF) to fund operations.
Concentration of credit risk -- The Company maintains its cash balances in
financial institutions which exceed federally insured limits. The Company has
not experienced any losses and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Accounts receivable -- Substantially all of the Company's revenue is
provided by twelve customers. These customers constitute accounts receivable at
December 31, 2001. The Company performs credit evaluations of its customers and
generally does not require collateral.
F-7
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for majority-owned subsidiary -- The Company accounts for GKF as
a consolidated entity due to its 81% majority-equity interest.
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 3-15 years. The Company capitalized
interest of $195,000 and $168,000 in 2001 and 2000, respectively, as costs of
medical equipment.
The Company leases Gamma Knife equipment to its customers under
arrangements accounted for as operating leases. At December 31, 2001, the
Company held equipment under operating lease contracts with customers with an
original cost of $30,585,000 and accumulated depreciation of $7,041,000.
Revenue recognition -- Revenue is provided for and recognized on either a
fee-per-use or revenue sharing basis. The fee-per-use agreements call for a
fixed fee per procedure and are typically for a ten-year term. Revenue is
recognized at the time the procedures are performed. The Company receives a
percentage of the reimbursement received by the medical center less the
operating expenses of the Gamma Knife under the revenue sharing agreements.
These agreements are typically for a ten to fifteen year term. Revenue is
recognized at the time the procedures are performed based on an estimate of
previously collected net revenue per procedure at the medical centers.
Income taxes -- The liability method is used to account for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Earnings per share -- Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the year. Diluted earnings per
share reflect the potential dilution that could occur if common shares were
issued pursuant to the exercise of options or warrants. The following table
illustrates the computations of basic and diluted earnings per share for the
years ended December 31, 2001, 2000 and 1999.
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Numerator for basic and diluted earnings per share....... $1,068,000 $1,312,000 $2,707,000
Denominator:
Denominator for basic earnings per
share -- weighted-average shares.................... 3,567,000 3,810,000 3,967,000
Effect of dilutive securities Employee stock
options/warrants.................................... 1,559,000 1,593,000 1,679,000
---------- ---------- ----------
Denominator for diluted earnings per share -- adjusted
weighted-average shares............................. $5,126,000 $5,403,000 $5,646,000
========== ========== ==========
Earning per share -- basic............................... $ 0.30 $ 0.34 $ 0.68
========== ========== ==========
Earning per share -- assuming dilution................... $ 0.21 $ 0.24 $ 0.48
========== ========== ==========
</Table>
Options to purchase 5,000 and 17,150 shares of common stock at $3.06 and
$4.10 per share, respectively, were outstanding during 2001. They were not
included in the computation of earnings per share assuming dilution because the
exercise price of the options were greater than the average market price of the
common shares.
Stock-based compensation -- Statement of Financial Accounting Standards
(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
F-8
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 6.
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, 2001 and 2000, 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, 2001 and 2000, based
upon interest rates that are currently available for the Company for issuance of
instruments with similar terms and remaining maturities.
Business segment information -- The Company has one reportable segment, the
Gamma Knife, which engages in the business of leasing equipment to health care
providers that treat certain vascular malformations and intracranial tumors
without surgery. Two of the Company's wholly owned subsidiaries, OR21 and
MedLeader.com, Inc., are currently in the initial stages of operations and
development. The results of operations and financial information for these
subsidiaries are not material to the Company's consolidated financial
statements.
Recent accounting pronouncements -- In June 2001, the Financial Standards
Accounting Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses
financial accounting and reporting for business combinations and supersedes APB
Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises". SFAS No. 141 is
effective for transactions initiated after June 30, 2001. SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. SFAS No. 142 also addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The Company does not
expect the adoption of these statements to have a material effect on its
consolidated results of operations or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. The Company is
required to adopt the provisions of SFAS No. 143 no later than the beginning of
fiscal year 2003, with early adoption permitted. The Company does not expect the
adoption of this statement to have a material effect on its consolidated results
of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. SFAS No. 144
becomes effective for fiscal years beginning after December 15, 2001, with early
applications encouraged. The Company does not expect the adoption of this
statement to have a material effect on its consolidated results of operations or
financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101, as amended, summarizes
F-9
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain aspects of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company was
required to adopt SAB 101 in the fourth quarter of 2000. The adoption of SAB 101
did not have a material effect on the Company's operations or financial
position.
In September 1999, the FASB issued Emerging Issues Task Force Topic No.
D-83, "Accounting for Payroll Taxes Associated with Stock Option Exercises"
(EITF D-83). EITF D-83 requires that payroll taxes paid on the difference
between the exercise price and the fair value of acquired stock in association
with an employee's exercise of stock options be recorded as operating expenses.
The Company was required to adopt EITF D-83 in the fourth quarter of 1999. There
was no material effect on the Company's operations or financial position as a
result of adoption.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
Medical equipment and facilities........................... $31,278,000 $29,942,000
Office equipment........................................... 234,000 225,000
Deposits and construction in progress...................... 3,202,000 1,819,000
----------- -----------
34,714,000 31,986,000
Accumulated depreciation and amortization.................. (7,360,000) (7,237,000)
----------- -----------
Net property and equipment....................... $27,354,000 $24,749,000
=========== ===========
</Table>
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists primarily of 12 notes with a financing company,
related to Gamma Knife construction and installation, totaling $25,920,000.
These notes accrue interest at fixed annual rates between 8.5% and 10.95%, are
payable in 84 monthly installments, mature between September, 2004, and January,
2007, and are collateralized by the respective Gamma Knives. Additionally, the
Company has $1,590,000 in borrowings outstanding for deposits for three Gamma
Knives under construction at December 31, 2001 (Note 9). These borrowings accrue
interest at prime plus 2% (6.75% at December 31, 2001), are payable when the
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, 2001:
<Table>
<Caption>
YEAR ENDING DECEMBER 31,
- ------------------------
2002................................................... $ 4,305,000
2003................................................... 6,371,000
2004................................................... 5,228,000
2005................................................... 4,630,000
2006................................................... 3,338,000
Thereafter............................................. 2,048,000
-----------
$25,920,000
===========
</Table>
F-10
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
as of December 31 are as follows:
<Table>
<Caption>
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
Deferred tax liabilities:
Fixed assets............................................. $(3,881,000) $(3,141,000)
----------- -----------
Total deferred tax liabilities............................. (3,881,000) (3,141,000)
Deferred tax assets:
Net operating loss carryforwards......................... 3,180,000 2,976,000
State income taxes....................................... 8,000 4,000
Accrued reserves......................................... 28,000 41,000
Other -- net............................................. 282,000 253,000
----------- -----------
Total deferred tax assets.................................. 3,498,000 3,274,000
Valuation allowance for deferred tax assets................ -- (133,000)
----------- -----------
Net deferred tax assets.................................... 3,498,000 3,141,000
----------- -----------
Net deferred tax liabilities............................... $ (383,000) $ --
=========== ===========
</Table>
The components of the provision (benefit) for income taxes consist of the
following:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
-------- -------- ---------
Current:
Federal........................................... $ -- $ -- $ --
State............................................. 50,000 -- (716,000)
-------- -------- ---------
Deferred:
Federal........................................... 25,000 -- --
State............................................. 358,000 -- --
-------- -------- ---------
$433,000 $ -- $(716,000)
======== ======== =========
</Table>
The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. federal statutory tax rate (34% in 2001, 2000 and 1999) to
income before taxes as follows:
<Table>
<Caption>
2001 2000 1999
--------- --------- -----------
Computed expected tax.................................... $ 510,000 $ 450,000 $ 677,000
Change in valuation allowance............................ (133,000) (724,000) 62,000
State income taxes, net of federal benefit............... 125,000 77,000 116,000
Change in carryovers and tax attributes.................. (69,000) 197,000 (1,571,000)
--------- --------- -----------
$ 433,000 $ -- $ (716,000)
========= ========= ===========
</Table>
At December 31, 2001, the Company had a net operating loss carryforward for
federal income tax return purposes of approximately $9,166,000 which expire
between 2002 and 2021. 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
F-11
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
within any three-year period. Future federal net operating losses generated by
the Company can be carried forward for 20 years.
The Company recorded no income tax expense or benefit in 2000 because a
valuation allowance was provided for its entire deferred tax asset in excess of
its deferred tax liability.
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 6 -- 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.
2001 STOCK OPTION PLAN
The Company's 2001 Stock Option Plan, providing for nonqualified stock
options and "incentive stock options," was approved by the Company's Board of
Directors in October 2001. Under the 2001 Plan, 250,000 common shares are
reserved for awards to officers who beneficially own 15% or less of the
outstanding shares of the Company's stock, other key employees, non-employee
directors, and advisors. Provisions of the 2001 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. As of December 31, 2001, no stock options had been granted under
the 2001 Stock Option Plan.
F-12
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in options outstanding under the Stock Option Plans from January 1,
1999 to December 31, 2001 are as follows:
<Table>
<Caption>
WEIGHTED
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
Balance at January 1, 1999.................................. 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
Granted................................................... 15,000 $3.063
Exercised................................................. (92,000) $1.625
-------
Balance at December 31, 2000................................ 298,000 $1.943
Granted................................................... 27,000 $3.474
Exercised................................................. (9,000) $1.661
Forfeited................................................. (18,000) $2.695
Repurchased............................................... (70,000) $1.625
-------
Balance at December 31, 2001................................ 228,000 $2.156
=======
</Table>
At December 31, 2001, 76,000 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, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- ------------ -------- ----------- --------
$ 0.01.................................. 1,495,000 3.83 $0.01 1,495,000 $0.01
1.625 - 4.100.......................... 228,000 5.05 2.156 201,000 1.945
$ .01 - 4.100........................... 1,723,000 3.99 $0.294 1,696,000 $0.239
</Table>
At December 31, 2001 and 2000, 1,696,000 and 1,781,000 options,
respectively, were vested and exercisable.
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
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 effects of applying SFAS No. 123 in this
proforma disclosure are not indicative of future amounts. 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:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
Expected life (years)....................................... 9.5 9.5 9.5
Expected volatility......................................... 65.0% 74.0% 8.2%
Risk-free interest rate..................................... 5.1% 6.4% 5.9%
</Table>
The weighted-average fair values of options granted during 2001 and 2000
were $1.87 and $2.49, respectively. For pro forma purposes, the estimated fair
value of the Company's options is amortized over the options' vesting period.
The Company's pro forma information follows:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Net income
As reported.................................... $1,068,000 $1,312,000 $2,707,000
Pro forma...................................... $1,028,000 $1,272,000 $2,595,000
Earnings per share -- basic
As reported.................................... $ 0.30 $ 0.34 $ 0.68
Pro forma...................................... $ 0.29 $ 0.33 $ 0.65
Earnings per share -- assuming dilution
As reported.................................... $ 0.21 $ 0.24 $ 0.48
Pro forma...................................... $ 0.20 $ 0.24 $ 0.46
</Table>
REPURCHASE OF COMMON STOCK, COMMON STOCK WARRANTS AND STOCK OPTIONS
On March 8, 1999, the Board of Directors authorized the repurchase of
572,000 shares from two shareholders who were previous bondholders of the
Company. These shares were originally issued in conjunction with a debt
restructuring. On March 22, 1999, the Board of Directors approved a resolution
authorizing the Company to repurchase up to 500,000 shares of its own stock on
the open market. Correspondingly, the Company repurchased 155,000, 134,000 and
196,000 shares of its own stock on the open market during the years ending
December 31, 2001, 2000 and 1999, respectively. Additionally, the Company
repurchased 40,000 and 60,000 common shares from a director during the years
ending December 31, 2001 and 2000, respectively. As the Company's stock has no
par value, the entire repurchase price of the stock is recorded as a reduction
to common stock.
In previous years, the Company had issued 314,000 common stock warrants
with an exercise price of $.75 per share in conjunction with the restructuring
of certain debt and lease obligations of the Company. During 2000, the Company
repurchased all of the common stock warrants. The original issue of the warrants
was recorded as an addition to additional paid-in-capital and the repurchase has
correspondingly been recorded as a decrease to additional paid-in-capital.
F-14
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2001, the Company repurchased 20,000 options under the 1984 stock option
plan and 50,000 options under the 1995 stock option plan from former employees.
The repurchase of the options is recorded as a reduction in additional
paid-in-capital.
NOTE 7 -- RETIREMENT PLAN
The Company amended its defined-contribution retirement plan (the "Plan")
effective in 2002 to allow for a matching safe harbor contribution. For 2002,
the Board of Directors elected to match participant deferred salary
contributions up to a maximum of 4% of the participant's annual compensation.
Matching contributions must be invested in shares of the Company's stock.
Discretionary profit sharing contributions are allowed under the Plan in years
that the Board does not elect a safe harbor match. Through December 31, 2001,
the Plan did not provide for Company matching contributions nor did the Board
elect to make a discretionary profit sharing contribution.
NOTE 8 -- OPERATING LEASES
The Company leases office space and equipment under operating leases
expiring at various dates through 2005.
Future minimum payments under noncancelable operating leases having initial
terms of more than one year consisted of the following at December 31, 2001:
<Table>
<Caption>
YEAR ENDING DECEMBER 31,
- ------------------------
2002................................................... $426,000
2003................................................... 314,000
2004................................................... 208,000
2005................................................... 12,000
2006................................................... 5,000
--------
$965,000
========
</Table>
Payments for repair and maintenance agreements are included in the future
minimum operating lease payments shown above.
Rent expense was $245,000, $188,000, and $117,000 for the years ended
December 31, 2001, 2000 and 1999, respectively, and includes the above operating
leases as well as month-to-month rental and certain executory costs.
In August 2001, the Company entered into an agreement to sublease office
space expiring in September 2002. The minimum sublease rental income to be
received is $66,960.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Under the terms of six Gamma Knife quotation agreements, the Company is
committed to purchase Gamma Knife equipment for $11,224,000 when the equipment
is placed in service at each customer location. At December 31, 2001, the
Company had $1,855,500 in deposits related to these purchase commitments which
are classified as construction in progress.
NOTE 10 -- MAJOR CUSTOMERS
Revenues from the Company's Gamma Knife segment were provided by twelve
customers in 2001, nine customers in 2000, and nine customers in 1999.
F-15
AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2001, revenues from four individual customers of $1,699,000, $1,621,000,
$1,363,000, and $1,309,000, respectively, exceeded 10% of the Company's total
revenue. In 2000, revenues from four individual customers of $2,192,000,
$1,454,000, $1,254,000, and $1,114,000, respectively, exceeded 10% of the
Company's total revenue. In 1999, revenues from four individual customers of
$1,590,000, $1,543,000, $1,437,000, and $884,000, respectively, exceeded 10% of
the Company's total revenue.
F-16
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
2.1 Securities Purchase Agreement, dated as of March 12, 1999, *
by and among Alliance Imaging, Inc.; Embarcadero Holding
Corp. I; Embarcadero Holding Corp. II; American Shared
Hospital Services; and MMRI, Inc.(1)
3.1 Articles of Incorporation of the Company, as amended.(2) *
3.2 By-laws of the Company, as amended.(3) *
4.6 Form of Common Stock Purchase Warrant of American Shared *
Hospital Services.(3)
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, 1999 ("Fourth Amendment") to *
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.(8)
10.9 Amendment dated as of March 31, 1999 ("Fifth Amendment") to *
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.(8)
10.10 Amendment dated as of June 5, 1999 to the GK Financing, LLC *
Operating Agreement dated as of October 17, 1995.(8)
10.11a Assignment and Assumption Agreement, dated as of December *
31, 1995, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(8)
10.11b Assignment and Assumption Agreement, dated as of November 1, *
1995, between American Shared Hospital Services (assignor)
and American Shared Radiosurgery Services (assignee).(4)
10.11c Amendment Number One dated as of August 1, 1995 to the Lease *
Agreement for a Gamma Knife Unit between The Regents of the
University of California and American Shared Hospital
Services. (Confidential material appearing in this document
has been omitted and filed separately with the Securities
and Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(8)
10.11d Lease Agreement dated as of July 3, 1990 for a Gamma Knife *
Unit between American Shared Hospital Services and The
Regents of the University of California. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
Securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)(8)
</Table>
<Table>
<Caption>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
10.12 Amendment Number Two dated as of February 6, 1999 to the *
Lease Agreement for a Gamma Knife Unit between UCSF-Stanford
Health Care and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8)
10.13 Assignment and Assumption Agreement, dated as of February 3, *
1996, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).(4)
10.14 Lease Agreement for a Gamma Knife Unit dated as of April 6, *
1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc.
dba USC University Hospital. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8)
10.15 Assignment and Assumption Agreement dated as of February 1, *
1996 between Ernest A. Bates, M.D. and GK Financing, LLC
with respect to the Lease Agreement for a Gamma Knife dated
as of April 6, 1994 between Ernest A. Bates, M.D. and NME
Hospitals, Inc. dba USC University Hospital.(8)
10.16 Lease Agreement for a Gamma Knife Unit dated as of October *
31, 1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(8)
10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as *
of December 1, 1999 between Hoag Memorial Hospital
Presbyterian and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(8)
10.18 Lease Agreement for a Gamma Knife Unit dated as of October *
29, 1996 between Methodist Healthcare Systems of San
Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(8)
10.19 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, *
1999 between GK Financing, LLC and Kettering Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(9)
</Table>
<Table>
<Caption>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
10.21 Addendum to Contract with GKF and KMC/WKNI, dated June 1, *
1999 between GK Financing, LLC and Kettering Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(9)
10.22 Lease Agreement for a Gamma Knife Unit dated as of October *
5, 1999 between GK Financing, LLC and New England Medical
Center Hospitals, Inc. (Confidential material appearing in
this document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(9)
10.23 Equipment Lease Agreement dated as of October 29, 1999 *
between GK Financing, LLC and the Board of Trustees of the
University of Arkansas on behalf of The University of
Arkansas for Medical Sciences. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(9)
10.24 First Amendment to Lease Agreement for a Gamma Knife Unit *
effective as of August 2, 2000 between GK Financing, LLC and
Tenet HealthSystems Hospitals, Inc. (formerly known as NME
Hospitals, Inc.) dba USC University Hospital. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange 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, 2000, to Lease *
Agreement for a Gamma Knife Unit dated as of October 31,
1996 between Hoag Memorial Hospital Presbyterian and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(10)
10.26 Lease Agreement for a Gamma Knife Unit dated as of May 28, *
2000 between Froedtert Memorial Lutheran Hospital and GK
Financing, LLC. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(10)
10.27 Addendum dated June 24, 2000 to Lease Agreement for a Gamma *
Knife Unit dated as of May 28, 2000 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC.(10)
10.28 Addendum dated July 12, 2000 to Lease Agreement for a Gamma *
Knife Unit dated as of May 28, 2000 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC.(10)
10.29 Addendum dated August 24, 2000 to Lease Agreement for a *
Gamma Knife Unit dated as of May 28, 2000 between Froedtert
Memorial Lutheran Hospital and GK Financing, LLC.(10)
</Table>
<Table>
<Caption>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
10.30 Lease Agreement for a Gamma Knife Unit dated as of December *
11, 1996 between The Community Hospital Group, Inc. dba JFK
Medical Center and GK Financing, LLC. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(11)
10.31 Lease Agreement for a Gamma Knife Unit dated as of June 3, --
1999 between GK Financing, LLC and Sunrise Hospital and
Medical Center, LLC dba Sunrise Hospital and Medical Center.
(Confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(12)
10.32 Addendum to Lease Agreement for a Gamma Knife Unit dated as --
of June 3, 1999 between GK Financing, LLC and Sunrise
Hospital and Medical Center, LLC dba Sunrise Hospital and
Medical Center. (Confidential material appearing in this
document has been omitted and filed separately with the
Securities and Exchange Commission in accordance with Rule
24b-2, promulgated under the Securities and Exchange Act of
1934, as amended. Omitted information has been replaced with
asterisks.)(12)
10.33 Lease Agreement for a Gamma Knife Unit dated as of November --
1, 1999 between GK Financing, LLC and Jackson HMA, Inc. dba
Central Mississippi Medical Center. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)(13)
10.34 Addendum to Lease Agreement for a Gamma Knife Unit dated as --
of November 1, 1999 between GK Financing, LLC and Jackson
HMA, Inc. dba Central Mississippi Medical Center.(13)
10.35 Lease Agreement for a Gamma Knife Unit dated as of February --
18, 2000 between GK Financing, LLC and OSF HealthCare
System. (Confidential material appearing in this document
has been omitted and filed separately with the Securities
and Exchange Commission in accordance with Rule 24b-2,
promulgated under the Securities and Exchange Act of 1934,
as amended. Omitted information has been replaced with
asterisks.)(13)
10.36 American Shared Hospital Services 2001 Stock Option --
Plan.(14)
10.37 Amendment Number Three to Lease Agreement for a Gamma Knife --
Unit dated as of June 22, 2001 between GK Financing, LLC and
The Regents of the University of California. (Confidential
material appearing in this document has been omitted and
filed separately with the Securities and Exchange Commission
in accordance with Rule 24b-2, promulgated under the
Securities and Exchange Act of 1934, as amended. Omitted
information has been replaced with asterisks.)
10.38 Addendum Three to Lease Agreement for a Gamma Knife Unit --
dated as of October 1, 2000 between GK Financing, LLC and
Hoag Memorial Hospital Presbyterian. (Confidential material
appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in
accordance with Rule 24b-2, promulgated under the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)
21. Subsidiaries of American Shared Hospital Services. --
</Table>
- ---------------
(1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, which is incorporated herein by this reference.
(2) This document was filed as Exhibit 3.1 to registrant's Registration
Statement on Form S-2 (Registration No. 33-23416), which is incorporated
herein by this reference.
(3) These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, to
registrant's Registration Statement on Form S-1 (Registration No. 33-63721)
filed on October 26, 1995, which is incorporated herein by this reference.
(4) These documents were filed as Exhibits 10.24 and 10.35 respectively, to
registrant's Registration Statement on Form S-2 (Registration No.
33-23416), which is incorporated herein by this reference.
(5) This document was filed as Exhibit A to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(6) This document was filed as Exhibit B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.
(7) These documents were filed as Exhibits 4.14 and 10.13, respectively, to the
registrant's Pre-Effective Amendment No. 1 to registrant's Registration
Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996,
which is incorporated herein by this reference.
(8) These documents were filed as Exhibits 10.8, 10.9, 10.10, 10.11a, 10.11c,
10.11d, 10.12, 10.14, 10.15, 10.16, 10.17, 10.18 and 10.19, respectively,
to the registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, which is incorporated herein by this reference.
(9) These documents were filed as Exhibits 10.20, 10.21, 10.22, 10.23, and
10.24, respectively, to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2000, which is incorporated herein
by this reference.
(10) These documents were filed as Exhibits 10.25, 10.26, 10.27, 10.28 and
10.29, respectively, to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 2000, which is incorporated herein
by this reference.
(11) This document was filed as Exhibit 10.30 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000, which is
incorporated herein by this reference.
(12) These documents were filed as Exhibits 10.31 and 10.32, respectively, to
the registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001, which is incorporated herein by this reference.
(13) These documents were filed as Exhibits 10.33, 10.34 and 10.35,
respectively, to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001, which is incorporated herein by this
reference.
(14) This document was filed as Exhibits 10.36 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2001,
which is incorporated herein by this reference.