AMERICAN SHARED HOSPITAL SERVICES - Annual Report: 2004 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

Commission file number 1-8789

American Shared Hospital Services

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(415) 788-5300

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

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 þ          No o

      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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes o          No þ

      As of June 30, 2004, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $17,390,000.

      Number of shares of common stock of the registrant outstanding as of March 8, 2005: 4,778,840.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

PART I

GENERAL

      American Shared Hospital Services (“ASHS” and, together with its subsidiaries, the “Company”) provides Gamma Knife stereotactic radiosurgery services to nineteen (19) medical centers in seventeen (17) 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 revenue in 2004.

      At present, the Company is developing its design and business model for “The Operating Room for the 21^st Century”® (“OR21”®). OR21 is not expected to generate significant revenue within the next twelve months.

      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 patients 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 melanoma), 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.

      As of December 31, 2004, there were 90 Gamma Knife sites in the United States and 210 units in operation worldwide. An estimated percentage breakdown of Gamma Knife procedures performed in the U.S. by indications treated is as follows: malignant (44%) and benign (29%) brain tumors, functional disorders (14%) and vascular disorders (13%).

      The Company, as of March 7, 2005, has nineteen (19) Gamma Knife units operating at nineteen (19) sites in the United States. In addition, the Company has two (2) 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 2,100 procedures in 2004 for a cumulative total of approximately 11,600 procedures through December 31, 2004.

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

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

      GKF’s profits and/or losses and any cash distributions are allocated based on membership interests. GKF’s Operating Agreement requires that it have a cash reserve of at least $50,000 before cash distributions are made to its members. From inception to December 31, 2004, GKF distributed $13,122,000 to the Company and $3,078,000 to the minority partner.

RISKS OF GAMMA KNIFE BUSINESS

      There are significant risks involved in the Company’s Gamma Knife business, including the following:

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 million to $4 million, including equipment, site construction and installation. The Company pays for the Gamma Knife and the medical center generally pays for site and installation costs. The following is a listing of the Company’s current sites and sites under development as of March 8, 2005:

      One of the Company’s sites under development at December 31, 2004, Baptist Hospital of East Tennessee, became operational in January 2005. The other two sites currently under development are scheduled to commence operation in second and third quarters 2005.

      The Company’s fee per use agreement is typically for a ten-year term. The fixed fee per use reimbursement amount that the Company receives from the customer is based on the Company’s cost to provide the service and the anticipated volume of the customer. The contracts signed by the Company typically call for a fee ranging from $7,500 to $9,000 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 another site.

      The Company’s revenue sharing agreements (“retail”) are for a period of eight 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.

      No individual customers accounted for more than 10% of the Company’s revenue in 2004 and 2003. Two customers (Yale and UAMS) each accounted for more than 10% of the Company’s revenue in 2002.

MARKETING

      The Company markets its services through its preferred provider status with Elekta and a direct sales effort. From April 2003 to March 2004, the direct sales effort was executed by the Company’s Chief Executive and Chief Operating Officers. In March 2004, the Company hired a Director of Sales to lead the direct sales effort. The major advantages to a health care provider in contracting with the Company for Gamma Knife services include:

FINANCING

      The Company’s Gamma Knife business is operated through GKF. Through 2003 GKF funded its existing Gamma Knife units with loans from a single lender, DVI Financial Services Inc. (“DVI”), for 100% of the cost of each Gamma Knife, plus any sales tax, customs and duties. An alternative lender was utilized for financing the Company’s Gamma Knife unit that opened during 2004. The loans are predominantly 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.

      DVI filed for Chapter 11 bankruptcy protection during 2003, and all the Company’s loans with DVI were subsequently assumed by another lender as successor servicer. The Company continues to make payments to

the successor servicer on these outstanding note balances, and has secured financing for its projects under development from other lending sources. Management believes that the financial condition of DVI has not had a material adverse effect on the Company’s financial position or results of operations.

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 secure additional customers for Gamma Knife services is dependent on its ability to effectively 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 previously lost sales to customers that chose to purchase a Gamma Knife directly from Elekta. The Company may continue to lose future sales to such customers and may also lose sales to the Company’s competitors.

GOVERNMENT REGULATION

      The Company’s Gamma Knife customers receive payments for patient care from federal government and private insurer reimbursement programs. Currently in the United States, Gamma Knife services are performed on an in-patient and 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 35% 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 are predominantly reimbursed under either DRG 7 or DRG 8.

      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 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 is modified periodically but the total reimbursement amount has remained fairly constant. The Company has two contracts from which its revenue is directly affected by changes in payment rates under the APC system. During 2002, these two contracted hospitals primarily treated 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 revenue of the Company. In 2003, one of the two hospitals started treating its patients on an outpatient basis and it is estimated that revenue decreased by approximately $100,000 to $150,000. Some of the Company’s fee per use customers treat patients on an out-patient basis and may also have experienced a

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 revenue 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 out-patient hospital services. On January 1, 1995, the Physician Ownership and Referral Act of 1993 became effective in California. This legislation prohibits physician self-referrals for covered goods and services, including radiation oncology, if the physician (or the physician’s immediate family) concurrently has a financial interest in the entity receiving the referral. The Company believes that it is in compliance with these rules and regulations.

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

      Legislation in various jurisdictions requires that health facilities obtain a Certificate of Need (“CON”) prior to making expenditures for medical technology in excess of specified amounts. Four of the Company’s existing customers were required to obtain a CON or its equivalent. The CON procedure can be expensive and time consuming and may impact the length of time before Gamma Knife services commence. CON requirements vary from state to state in their application to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures to provide its services and in other jurisdictions customers must comply with CON procedures before using the Company’s services.

      The Company’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 medicine and therefore believes its present insurance coverage and indemnification agreements are adequate for its business.

EMPLOYEES

      At December 31, 2004, the Company employed eight (8) 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.

      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 Vice Chairman of the Board of Trustees of The Johns Hopkins University, a member of the Board of Trustees at 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 Board of Directors of Copia and the Capital Campaign Chairman and a Board Member of the Museum of African Diaspora. Dr. Bates is also a member of the State of California Commission for Jobs and Economic Growth, a member of the Board of Directors of Salzburg Seminar, a board member of the Center for Accelerating Medical Solutions-Milken Institute and a member of the Brookings Institution. 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 GKF. 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.

AVAILABLE INFORMATION

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

      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 approximately $2,000 per month. These sub-sublease agreements run through May 2006.

      For the year ended December 31, 2004 the Company’s aggregate net rental expenses for all properties and equipment were approximately $323,000.

      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.

      No matter was submitted to a vote of the Company’s security holders through the solicitation of proxies or otherwise during the fourth quarter of 2004.

PART II

      The Company’s common shares, no par value (the “Common Shares”), are currently traded on the American Stock Exchange 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.

Prices for Common Shares

      The Company estimates that there were approximately 2,500 beneficial holders of its Common Shares at December 31, 2004.

      The Board of Directors authorized in March 1999 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 have been repurchased in the open market pursuant to that authorization at a cost of approximately $1,213,000, although no shares have been repurchased since 2001. 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. No shares have been repurchased under this additional authorization.

      During 2004 holders of options to acquire the Company’s common stock exercised their respective rights pursuant to such securities, resulting in the Company issuing 858,000 new shares of common stock for approximately $40,000.

      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, 2004 the Company had 4,776,173 issued and outstanding common shares, 755,627 common shares reserved for options, and 5,208 shares reserved pursuant to the Company’s Shareholder Rights Plan.

      In fourth quarter 2004, the Board of Directors declared a quarterly dividend of $.045 per common share to shareholders of record on January 3, 2005, paid on January 14, 2005. During 2004, shareholders of record as of January 2, 2004, April 2, 2004, July 2, 2004 and October 1, 2004 were paid quarterly dividends respectively as follows: $0.04 on January 15, 2004, $0.04 on April 16, 2004, $0.0425 on July 15, 2004, and $0.045 on October 15, 2004. The Board of Directors anticipates declaring and paying quarterly 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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

      The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

      The most significant accounting policies followed by the Company are presented in Note 2 to the consolidated financial statements. These policies along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for doubtful accounts and revenue recognition to be two areas that required the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. The following are our critical accounting policies in which management’s estimates, assumptions and judgments most directly and materially affect the financial statements:

      The Company has only one revenue-generating activity, which is the operation of Gamma Knife units by GK Financing, LLC (“GKF”), an 81% owned subsidiary of the Company.

      Revenue is recognized when services have been rendered and collectibility is reasonably assured, on either a fee per use or revenue sharing basis. The Company has 14 fee per use hospitals and five retail hospitals. Under both of these types of agreements, the hospital is responsible for billing patients and collection of fees for services performed. Revenue associated with installation of the Gamma Knife units, if any, is a part of the negotiated lease amount and not a distinctly identifiable amount. The costs, if any, associated with installation of the units are amortized over the period of the related lease to match revenue recognition of these costs.

      For fee per use agreements, revenue is not estimated because these contracts provide for a fixed fee per procedure, and are typically for a ten year term. Revenue is recognized at the time the procedures are

performed, based on each hospital’s contracted rate. There is no guaranteed minimum payment. Costs related to operating the units are charged to costs of operations as incurred, which approximates the recognition of the related revenue. Revenues under fee per use agreements are recorded on a gross basis.

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

      Under net revenue sharing arrangements the hospital shares in the responsibility and risk with GKF for the capital investment to acquire and install the Gamma Knife. Unlike our turn-key arrangement, GKF’s lease payment under a net revenue sharing arrangement is a percentage of revenue less operating costs. Payments are made by the hospital, generally on a monthly basis, to GKF based on an agreed upon percentage allocation of income remaining after all operating expenses are deducted from cash collected. Revenue is recognized during the period in which the procedure is performed, and is determined based on the net reimbursement amount that GKF expects to receive from the hospital for each Gamma Knife procedure. Under the net revenue sharing arrangement, the percent of revenue received by GKF is recorded net of costs to provide a Gamma Knife treatment. This estimate is reviewed on a regular basis and adjusted as necessary to more accurately reflect the expected payment amount.

      Revenue from retail arrangements amounted to approximately 25%, 24% and 25% of revenue for the years ended December 31 2004, 2003 and 2002, respectively.

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

      If the Company’s net accounts receivable estimates for revenue sharing customers as of December 31, 2004 changed by as much as 10% based on actual collection information, it would have the effect of increasing or decreasing revenue by approximately $130,000.

GENERAL

      During the years ended December 31, 2004, 2003 and 2002, 100% of the Company’s revenue was derived from its Gamma Knife business.

TOTAL REVENUE

      Medical services revenue increased 1.3% in 2004 compared to 2003 and increased 21.0% in 2003 compared to 2002. The increase in 2004 is due to an increase in the number of Gamma Knife units in operation. The increase in 2003 is attributable to an increase in revenue at locations in operation for more than one year, as well as an increase in the number of Gamma Knife units in operation.

      Gamma Knife revenue increased $211,000 and $2,812,000 in 2004 and 2003, respectively, compared to the prior years. The 2004 increase was due to one new Gamma Knife unit that began operation during 2004 and the full year inclusion of three new Gamma Knife units that began operation during 2003, which offset a 14% decrease in revenue for Gamma Knife units in operation more than one year. The 2003 increase was primarily due to three new Gamma Knife units that began operation during 2003, the full year inclusion of two Gamma Knife units that began operation during 2002, and a 5% increase in revenue for Gamma Knife units in operation more than one year. The Company had eighteen, seventeen and fourteen Gamma Knife units in operation at December 31, 2004, 2003 and 2002, respectively.

      The increase in the number of Gamma Knife procedures in 2004 compared to 2003 was due to the increase in the number of Gamma Knife units in operation, which offset a 10% decrease in procedures for Gamma Knife units in operation more than one year. The number of Gamma Knife procedures in 2003 increased by 420 compared to 2002 due to the increase in the number of Gamma Knife units in operation, as well as a 9% increase in procedures for Gamma Knife units in operation more than one year.

      Revenue per procedure increased $12 in 2004 compared to 2003. The Company’s contracts generally have different procedure rates because their investment basis varies, so revenue per procedure can vary year to year depending primarily on the mix of procedures performed at certain locations. Gamma Knife revenue per procedure decreased by $235 in 2003 compared to 2002 primarily because there was an increase in the number of procedures performed at certain Gamma Knife locations that have a lower per procedure rate, as well as a decrease in the amounts received from Medicare at one of the Company’s retail sites.

COSTS OF OPERATIONS

      The Company’s costs of operations, consisting of maintenance and supplies, depreciation and amortization, and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and other fees) increased $487,000 in 2004 compared to 2003, and increased $2,001,000 in 2003 compared to 2002.

      The Company’s maintenance and supplies costs were 5%, 5% and 3% of medical service revenue in 2004, 2003 and 2002, respectively. Maintenance and supplies costs increased $139,000 in 2004 compared to 2003, and increased $301,000 in 2003 compared to 2002. The increase in 2004 compared to 2003 was primarily due to the expiration of the warranty period on two Gamma Knife units and the full year inclusion of three Gamma Knife units whose warranty period expired during 2003. The increase in 2003 compared to 2002 was primarily due to the expiration of the warranty period on three Gamma Knife units and the full year inclusion of maintenance on two Gamma Knife units whose warranty period expired during the previous year.

      Depreciation and amortization increased $577,000 in 2004 compared to 2003, and increased $753,000 in 2003 compared to 2002. The increase in 2004 was due to the addition of one new Gamma Knife unit that

commenced operation during third quarter 2004 and a full year’s depreciation on three Gamma Knife units that started operation in 2003. The increase in 2003 was due to the addition of three new Gamma Knife units that commenced operation during first, second and third quarters of 2003 and a full year of depreciation on two new Gamma Knife units that started operation during 2002.

      Other direct operating costs as a percentage of medical services revenue were 13%, 15% and 11% in 2004, 2003 and 2002, respectively. The decrease of $229,000 in 2004 compared to 2003 was primarily due to lower operating costs related to a lower number of procedures performed at one of the Company’s retail locations. The increase of $947,000 in 2003 compared to 2002 was primarily due to increased spending for marketing, increased operating costs related to the Company’s additional retail units, startup and training costs at the Company’s three new Gamma Knife centers, and higher insurance and taxes due to additional Gamma Knife units in operation.

SELLING AND ADMINISTRATIVE

      The Company’s selling and administrative costs decreased $292,000 in 2004 compared to 2003, and decreased $58,000 in 2003 compared to 2002. The decrease in 2004 was primarily due to lower payroll and business development costs of approximately $142,000, recruiting fees of $42,000 and insurance of $26,000. Also, during 2003 there was a non-recurring write-off of approximately $58,000 in previously deferred costs relating to the future placement of a Gamma Knife unit in Brazil, and the Company’s semi-annual Gamma Knife User’s Meeting of approximately $45,000. The decrease in 2003 from 2002 was primarily due to reduced business development costs of approximately $152,000 and legal and accounting fees of $104,000. These reductions were partially offset by increased employment recruiting fees of $60,000, the Company’s Gamma Knife User’s Meeting of approximately $45,000 and a write-off of approximately $58,000 in previously deferred costs relating to the future placement of a Gamma Knife unit in Brazil, which was reallocated to another location.

INTEREST EXPENSE

      The Company’s interest expense decreased $286,000 in 2004 compared to 2003, and increased $110,000 in 2003 compared to 2002. The decrease in 2004 was primarily due to lower interest expense on the Company’s more mature Gamma Knife units and final payment on the debt for one Gamma Knife unit. This decrease was partially offset by additional interest expense on the financing of the Company’s new Gamma Knife unit in 2004. The increase in 2003 was due to additional interest expense on the financing of the Company’s three new Gamma Knife units in 2003, which was partially offset by lower interest expense on the Company’s more mature Gamma Knife units. Except for one unit that has been paid in full, all of the Company’s operating Gamma Knife units are financed by means of interest bearing debt. Twelve of the Company’s eighteen Gamma Knife units have been in operation for more than three years, and have lower interest expense than newer units because interest expense decreases with each principal payment.

OTHER INCOME AND EXPENSE

      Interest and other income decreased $19,000 in 2004 compared to 2003 and decreased $50,000 in 2003 compared to 2002. The decrease in 2004 was primarily due to lower invested cash balances during 2004. The decrease in 2003 was primarily due to lower invested cash balances during 2003 and lower interest rates during 2003 compared to 2002.

      Minority interest increased $55,000 in 2004 and $97,000 in 2003 compared to the prior year, respectively. Minority interest represents the pre-tax income earned by the minority partner’s 19% interest in GKF. The increase in minority interest reflects the increased profitability of GKF.

INCOME TAXES

      Income tax expense decreased $375,000 in 2004 compared to 2003, and increased $332,000 in 2003 compared to 2002. The Company’s 40% income tax provision for 2004 was reduced by a $547,000 income tax benefit from the exercise of options to purchase 846,000 common shares. The Company’s 40% income tax provision for 2003 was reduced by an $81,000 income tax benefit from the exercise of options to purchase 125,000 common shares. The income tax benefit is a result of compensation expense that was recognized when these options for common shares were granted in 1995.

      The Company anticipates that it will continue to record income tax expense if it operates profitably in the future. Currently there are minimal income 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, 2004 of approximately $12,000,000.

NET INCOME

      The Company had net income of $1,985,000 in 2004 compared to $1,382,000 in 2003 and $1,102,000 in 2002. Net income for 2004 included increased income from operations compared to 2003 of $302,000 which was primarily due to lower selling and administrative costs and interest expense. In addition, income tax expense was $375,000 less than 2003 due to an income tax benefit of $547,000 on the exercise of options to purchase common stock. Net income for 2003 included increased income from operations of $759,000 compared to 2002, which was primarily due to the addition of three new Gamma Knife units and a 5% increase in revenue from Gamma Knife units in operation more than one year.

LIQUIDITY AND CAPITAL RESOURCES

      The Company had cash and cash equivalents of $8,121,000 at December 31, 2004 compared to $10,312,000 at December 31, 2003. The Company’s expected primary cash needs on both a short and long-term basis are for capital expenditures, business expansion, working capital, payment of quarterly dividends and other general corporate purposes.

      Securities of $957,000 represents a portion of the Company’s cash that is invested in high-quality short to intermediate-term fixed income securities in order to maximize income on its available cash. It is the Company’s intent to hold these securities until maturity.

      Restricted cash of $50,000 at December 31, 2004 reflects cash that may only be used for the operations of GKF.

      Operating activities provided cash of $7,608,000 in 2004. Net income of $1,985,000, depreciation and amortization of $4,892,000 and an increase in the minority interest of $983,000 were the primary reasons. The Company’s trade accounts receivable increased to $2,793,000 at December 31, 2004 from $2,209,000 at December 31, 2003. This increase was primarily due to the addition of one new Gamma Knife contract during 2004 and an increase in the number of days revenue outstanding (“DSO”) in accounts receivable for some of the Gamma Knife contracts. The DSO was 66 and 54 days as of December 31, 2004 and December 31, 2003, respectively. We expect DSO to fluctuate in the future depending on timing of customer payments received and the mix of fee per use vs. retail customers. Other receivables decreased by $101,000 primarily due to application of credits due on certain under-funded loans.

      Investing activities used $1,325,000 of cash in 2004 primarily due to an investment in short to mid-term securities of $957,000 and for the purchase of site improvements at certain Gamma Knife locations.

      Financing activities used $8,474,000 of cash during 2004, primarily due to principal payments on long-term debt of $7,371,000, distributions to minority owners of $399,000 and the payment of dividends of $699,000.

      Working capital decreased $551,000 to $4,717,000 at December 31, 2004 from $5,268,000 at December 31, 2003 primarily due to a decrease in cash and securities of $1,234,000 which was partially offset by an increase in trade accounts receivable of $584,000.

      The Company primarily invests its cash in money market or similar funds and high quality short to mid-term securities in order to minimize the potential for principal erosion. 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 2005.

      The Company finances all of its Gamma Knife units, and anticipates that it will continue to do so with future contracts, but there can be no assurance that financing will continue to be available on acceptable terms. During 2003 the Company’s primary lender, DVI, filed for Chapter 11 bankruptcy protection. The Company made claims in DVI’s bankruptcy case for certain unfunded amounts under credit agreements in place at the time of the bankruptcy filing. The principal balance of notes that included the unfunded amounts were transferred by DVI to a third party lender, and the Company has subsequently satisfactorily resolved any issues related to these unfunded amounts with that lender. The Company continues to make payments on the outstanding note balances serviced by the third party lender who acts as successor servicer. The Company has secured financing for its current projects in progress and anticipates that it will be able to secure financing on future projects from other lending sources on comparable terms. The Company meets all debt covenants required under notes with its lenders, and expects that any covenants required by future lenders will be acceptable to the Company.

IMPACT OF INFLATION AND CHANGING PRICES

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

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

      The following table presents, as of December 31, 2004, the Corporation’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

      Further discussion of the long-term debt commitment is included in Note 4, and operating leases in Note 9 of the consolidated financial statements.

      The Company has no significant off-balance sheet arrangements.

      The table below presents information about certain market-sensitive financial instruments as of December 31, 2004. The fair values were determined based on quoted market prices for the same or similar instruments.

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

      At December 31, 2004, we had no significant long-term, market-sensitive investments. Our cash is invested primarily in short-term money market or similar funds to minimize potential for principal erosion.

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

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

      None.

      (a) Evaluation of disclosure controls and procedures.

      Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2004 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures (as required by paragraph (b) of the Securities and Exchange Act of 1934 Rules 13a-15 or 15d-15) were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

      (b) Changes in internal controls over financial reporting.

      There were no significant changes in our internal controls over financial reporting in connection with the evaluation required by paragraph (d) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

      None.

PART III

      Information regarding directors is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Shareholders (the “2005 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.

      Information concerning the identification of our standing audit committee required by this Item is incorporated by reference from the 2005 Proxy Statement.

      Information concerning our audit committee financial experts required by this Item is incorporated by reference from the 2005 Proxy Statement.

      Information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference from the 2005 Proxy Statement.

      We have adopted a Code of Ethics that is incorporated by reference from the 2005 Proxy Statement.

ITEM 11.      EXECUTIVE COMPENSATION

      Incorporated herein by reference from the 2005 Proxy Statement.

      Incorporated herein by reference from the 2005 Proxy Statement.

      Incorporated herein by reference from the 2005 Proxy Statement.

      Incorporated herein by reference from the 2005 Proxy Statement.

PART IV

      (a) Financial Statements and Schedules.

      The following Financial Statements and Schedules are filed with this Report:

      (b) Reports on Form 8-K:

      The following reports on Form 8-K were filed during the fiscal year ended December 31, 2004:

      (c) Exhibits.

      The following Exhibits are filed with this Report.

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.

March 29, 2005

      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.

AMERICAN SHARED HOSPITAL SERVICES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

and

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004, 2003 and 2002

Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

American Shared Hospital Services

      We have audited the accompanying consolidated balance sheets of American Shared Hospital Services as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board of 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 financial statements referred to above present fairly, in all material respects, the financial position of American Shared Hospital Services at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

San Francisco, California

January 21, 2005

American Shared Hospital Services

Consolidated Balance Sheet

See accompanying notes

American Shared Hospital Services

Consolidated Statements of Operations

See accompanying notes

American Shared Hospital Services

Consolidated Statement of Shareholders’ Equity

See accompanying notes

American Shared Hospital Services

Consolidated Statements of Cash Flows

American Shared Hospital Services

Consolidated Statements of Cash Flows

See accompanying notes

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 Leksell Gamma Knife® (“Gamma Knife”) units to eighteen medical centers in Arkansas, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Texas and Wisconsin.

      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 and formed GK Financing, LLC (“GKF”). GKF provides alternative financing of 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.

      OR21, Inc., is a wholly-owned subsidiary of the Company that will provide the product “The Operating Room for the 21^st Century^sm”, which is currently under development.

      MedLeader.com, Inc., is a wholly-owned subsidiary of the Company that will provide continuing medical education online and through videos for doctors, nurses and other healthcare workers. This subsidiary is not operational at this time.

      The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, OR21, Inc., MedLeader.com, Inc., ASRS and its majority-owned subsidiary, GK Financing, LLC.

      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 generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

      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.

      Securities — The Company invests excess cash in short to intermediate term fixed income securities. It is the Company’s intent and ability to hold these securities until maturity and they are therefore regarded as held-to-maturity investments. As of December 31, 2004, the cost of these securities approximated fair market value, and they ranged in maturity up to six months.

      Restricted cash — Restricted cash represents the minimum cash that, by agreement, must be maintained in GK Financing LLC (GKF) to fund operations.

      Business and credit risk — The Company maintains its cash balances in financial institutions which exceed federally insured limits, and the Company’s securities are invested in short to intermediate term fixed income securities that are not insured. The Company has not experienced any losses and believes it is not exposed to any significant credit risk on cash, cash equivalents and securities.

      All of the Company’s revenue is provided by eighteen customers. These customers constitute accounts receivable at December 31, 2004. The Company performs credit evaluations of its customers and generally does not require collateral. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

American Shared Hospital Services

Notes to Consolidated Financial Statements — (Continued)

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

      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. 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 $94,000 and $202,000 in 2004 and 2003, 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, 2004, the Company held equipment under operating lease contracts with customers with an original cost of $46,915,000 and accumulated depreciation of $19,010,000. At December 31, 2003, the Company held equipment under operating lease contracts with customers with an original cost of $43,710,000 and accumulated depreciation of $14,455,000.

      Revenue recognition — Revenue is recognized when services have been rendered and collectibility is reasonably assured. There are no guaranteed minimum payments. The Company’s contracts are typically for a ten year term and are classified as either fee per use or retail. Retail arrangements are further classified as either turn-key or net revenue sharing. Revenue from fee per use contracts is recorded on a gross basis as determined by each hospital’s contracted rate. Under turn-key arrangements, the Company receives payment from the hospital in the amount of its reimbursement from third party payors, and is responsible for paying all the operating costs of the Gamma Knife. Revenue is recorded on a gross basis and estimated based on historical experience and hospital contracts with third party payors. For net revenue sharing arrangements the Company receives a contracted percentage of the reimbursement received by the hospital less the operating expenses of the Gamma Knife. Revenue is recorded on a net basis and estimated based on historical experience. Any revenue estimates are reviewed periodically and adjusted as necessary. Revenue recognition is consistent with guidelines provided under EITF 99-19.

      Income taxes — The Company accounts for income taxes in accordance with SFAS No 109, Accounting 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 shareholders 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

American Shared Hospital Services

Notes to Consolidated Financial Statements — (Continued)

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, 2004, 2003 and 2002.

      In 2004 options outstanding to purchase 16,500 shares of common stock at an exercise price of $5.50 per share were not included in the calculation of diluted earnings per share as the exercise price of the options was greater than the average market price of common stock during the year.

      In 2002, options outstanding to purchase 17,500 shares of common stock at $4.10 per share were not included in the computation of diluted earnings per share as the exercise price of the options was greater than the average market price of the common stock during the year.

      Reclassifications — Certain reclassifications have been made to the 2003 balances to conform with the 2004 presentation.

      Stock-based compensation — The Company has three stock-based employee compensation plans, which are described more fully in Note 7. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price greater than or equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. For pro forma purposes, the estimated fair value of the Company’s options is amortized over the options’ vesting period, which is generally from one to five years.