AMERICAN SHARED HOSPITAL SERVICES - Quarter Report: 2004 March (Form 10-Q)
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SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004 or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 1-8789
American Shared Hospital Services
| California | 94-2918118 | |
| (State or other jurisdiction of Incorporation or organization) |
(IRS Employer Identification No.) |
| Four Embarcadero Center, Suite 3700, San Francisco, California | 94111 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (415) 788-5300
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Securities Exchange Act Rule 12b-2). Yes o No x
As of May 3, 2004, there are outstanding 3,950,173 shares of the Registrant’s common stock.
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED BALANCE SHEETS
| (unaudited) | (audited) | |||||||
| ASSETS |
Mar. 31, 2004 |
Dec. 31, 2003 |
||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 10,062,000 | $ | 10,312,000 | ||||
Restricted cash |
50,000 | 50,000 | ||||||
Accounts receivable, net of allowance for
doubtful accounts of $170,000 in 2004
and $170,000 in 2003 |
2,431,000 | 2,467,000 | ||||||
Prepaid expenses and other assets |
620,000 | 473,000 | ||||||
Total current assets |
13,163,000 | 13,302,000 | ||||||
Property and equipment: |
||||||||
Medical equipment and facilities |
46,839,000 | 46,072,000 | ||||||
Office equipment |
452,000 | 430,000 | ||||||
Deposits and construction in progress |
850,000 | 1,463,000 | ||||||
| 48,141,000 | 47,965,000 | |||||||
Accumulated depreciation and
amortization |
(16,328,000 | ) | (15,137,000 | ) | ||||
Net property & equipment |
31,813,000 | 32,828,000 | ||||||
Other assets |
167,000 | 174,000 | ||||||
Total assets |
$ | 45,143,000 | $ | 46,304,000 | ||||
| LIABILITIES AND | (unaudited) | (audited) | ||||||
| SHAREHOLDERS’ EQUITY |
Mar. 31, 2004 |
Dec. 31, 2003 |
||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 224,000 | $ | 371,000 | ||||
Accrued interest |
158,000 | 145,000 | ||||||
Employee compensation and benefits |
128,000 | 126,000 | ||||||
Other accrued liabilities |
654,000 | 539,000 | ||||||
Income taxes payable |
50,000 | 50,000 | ||||||
Current portion of long-term debt |
6,873,000 | 6,803,000 | ||||||
Total current liabilities |
8,087,000 | 8,034,000 | ||||||
Long-term debt, less current portion |
18,353,000 | 20,114,000 | ||||||
Deferred income taxes |
1,197,000 | 1,096,000 | ||||||
Minority interest |
1,944,000 | 1,731,000 | ||||||
Shareholders’ equity: |
||||||||
Common stock, without par value: |
||||||||
authorized shares - 10,000,000; issued
& outstanding shares, 3,950,173 in 2004
and 3,918,203 in 2003 |
9,210,000 | 9,198,000 | ||||||
Additional paid-in capital |
3,469,000 | 3,461,000 | ||||||
Retained earnings |
2,883,000 | 2,670,000 | ||||||
Total shareholders’ equity |
15,562,000 | 15,329,000 | ||||||
Total liabilities and shareholders’ equity |
$ | 45,143,000 | $ | 46,304,000 | ||||
See accompanying notes
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AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
Revenues: |
||||||||
Medical services |
$ | 4,229,000 | $ | 3,669,000 | ||||
Costs and expenses: |
||||||||
Costs of operations: |
||||||||
Maintenance and supplies |
203,000 | 145,000 | ||||||
Depreciation and amortization |
1,178,000 | 940,000 | ||||||
Other direct operating costs |
653,000 | 450,000 | ||||||
| 2,034,000 | 1,535,000 | |||||||
Selling and administrative |
766,000 | 826,000 | ||||||
Interest |
612,000 | 581,000 | ||||||
Total costs and expenses |
3,412,000 | 2,942,000 | ||||||
Operating income |
817,000 | 727,000 | ||||||
Interest and other income |
23,000 | 44,000 | ||||||
Minority interest |
(251,000 | ) | (238,000 | ) | ||||
Income before income taxes |
589,000 | 533,000 | ||||||
Income tax expense |
219,000 | 197,000 | ||||||
Net income |
$ | 370,000 | $ | 336,000 | ||||
Net income per share: |
||||||||
Earnings per common share — basic |
$ | 0.09 | $ | 0.09 | ||||
Earnings per common share — assuming dilution |
$ | 0.07 | $ | 0.07 | ||||
See accompanying notes
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AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
Operating activities: |
||||||||
Net income |
$ | 370,000 | $ | 336,000 | ||||
Adjustments to reconcile net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,198,000 | 961,000 | ||||||
Deferred income taxes |
153,000 | 197,000 | ||||||
Minority interest in consolidated subsidiaries |
251,000 | 238,000 | ||||||
Changes in operating assets and liabilities: |
||||||||
Receivables |
36,000 | 313,000 | ||||||
Prepaid expenses and other assets |
(147,000 | ) | 89,000 | |||||
Accounts payable and accrued liabilities |
(17,000 | ) | 18,000 | |||||
Net cash from operating activities |
1,844,000 | 2,152,000 | ||||||
Investing activities: |
||||||||
Purchase of property and equipment (net of financing) |
(176,000 | ) | 811,000 | |||||
Net cash from investing activities |
(176,000 | ) | 811,000 | |||||
Financing activities: |
||||||||
Payment of dividends |
(157,000 | ) | 0 | |||||
Payment received for exercise of options |
13,000 | 24,000 | ||||||
Distribution to minority owners |
(38,000 | ) | (265,000 | ) | ||||
Payment for repurchase of stock |
(45,000 | ) | 0 | |||||
Principal payments on long-term debt and capitalized leases |
(1,691,000 | ) | (1,305,000 | ) | ||||
Net cash from financing activities |
(1,918,000 | ) | (1,546,000 | ) | ||||
Net change in cash and cash equivalents |
(250,000 | ) | 1,417,000 | |||||
Cash and cash equivalents at beginning of period |
10,312,000 | 9,924,000 | ||||||
Cash and cash equivalents at end of period |
$ | 10,062,000 | $ | 11,341,000 | ||||
Supplemental cash flow disclosure: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 599,000 | $ | 576,000 | ||||
Income taxes |
$ | 66,000 | $ | 19,000 | ||||
See accompanying notes
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AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly American Shared Hospital Services’ consolidated financial position as of March 31, 2004 and the results of its operations for the three month periods ended March 31, 2004 and 2003, which results are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31, 2003 have been derived from audited financial statements.
These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003 included in the Company’s 10-K filed with the Securities and Exchange Commission.
These financial statements include the accounts of American Shared Hospital Services (the “Company”) and its wholly-owned subsidiaries: OR21, Inc. (“OR21”); MedLeader.com, Inc. (“MedLeader”); American Shared Radiosurgery Services (“ASRS”); and ASRS majority-owned subsidiary, GK Financing, LLC (“GK Financing”).
The Company through its majority-owned subsidiary, GK Financing, provided Gamma Knife units to seventeen medical centers as of March 31, 2004 in Arkansas, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Ohio, Texas and Wisconsin.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Note 2. Per Share Amounts
Per share information has been computed based on the weighted average number of common shares and dilutive common share equivalents outstanding. For the three months ended March 31, 2004 basic earnings per share was computed using 3,923,000 common shares and diluted earnings per share was computed using 5,104,000 common shares and equivalents. For the three months ended March 31, 2003 basic earnings per share was computed using 3,787,000 common shares and diluted earnings per share was computed using 5,070,000 common shares and equivalents.
Note 3. Stock-based Compensation
The Company has two stock-based employee compensation plans, the 1995 and 2001 Stock Option Plans. The Company accounts for those plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
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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.
| Quarter Ended March 31 |
||||||||
| 2004 |
2003 |
|||||||
Net income, as reported |
$ | 370,000 | $ | 336,000 | ||||
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all awards,
net of related tax effects |
0 | 0 | ||||||
Pro forma net income |
$ | 370,000 | $ | 336,000 | ||||
Earnings per share: |
||||||||
Basic-as reported |
$ | 0.09 | $ | 0.09 | ||||
Basic-pro forma |
$ | 0.09 | $ | 0.09 | ||||
Diluted-as reported |
$ | 0.07 | $ | 0.07 | ||||
Diluted-pro forma |
$ | 0.07 | $ | 0.07 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report to the Securities and Exchange Commission may be deemed to contain certain forward-looking statements with respect to the financial condition, results of operations and future plans of American Shared Hospital Services, which involve risks and uncertainties including, but not limited to, the risks of the Gamma Knife business and the risks of developing its IMRT and The Operating Room for the 21st Century® programs. Further information on potential factors that could affect the financial condition, results of operations and future plans of American Shared Hospital Services is included in the filings of the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K and 10-K/A for the year ended December 31, 2003 and the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 17, 2004.
Medical services revenues increased $560,000 to $4,229,000 for the three month period ended March 31, 2004 from $3,669,000 for the three month period ended March 31, 2003. The increase is primarily due to the addition of three new Gamma Knife units that commenced operation during 2003. This increase was partially offset by reduced revenue at two existing units that were affected by the death and sabbatical of key neurosurgeons at those locations. As a result, revenue at Gamma Knife centers in operation for longer than one year decreased by 9% in first quarter 2004 compared to first quarter 2003. The Company had seventeen Gamma Knife units in operation at March 31, 2004 compared to fifteen at March 31, 2003. Thirteen of the Company’s customers are under fee-per-use contracts, and four customers are under revenue sharing agreements (“retail”). For retail units the Company receives all or a percentage of the
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reimbursement (exclusive of physician fees) received by the customer, and is responsible for all or a percentage of the operating expenses of the Gamma Knife.
The number of Gamma Knife procedures increased by 73 to 563 in first quarter 2004 from 490 in the same quarter in the prior year. This increase was due to the addition of three new Gamma Knife units that commenced operation during 2003, and, excluding the two units mentioned above, a 5% increase in treatments for Gamma Knife units in operation more than one year compared to first quarter 2003. Including the two units, procedures decreased by 4% at Gamma Knife units in operation more than one year.
Total costs of operations increased $499,000 to $2,034,000 for the three month period ended March 31, 2004 from $1,535,000 for the three month period ended March 31, 2003. Maintenance and supplies increased by $58,000 for the three month period ended March 31, 2004 compared to the same period in the prior year, primarily due to an increase in the number of Gamma Knife units covered under maintenance contract. There were fourteen Gamma Knife units covered under maintenance contract as of March 31, 2004 compared to twelve as of March 31, 2003. Depreciation and amortization increased by $238,000 for the three month period ended March 31, 2004 compared to the same period in the prior year due to the addition of three new Gamma Knife units. Other direct operating costs increased $203,000 for the three month period ended March 31, 2004 compared to the same period in the prior year primarily due to an increase in marketing and promotion costs, operating costs related to the addition of a new retail site in 2003, and incremental costs for insurance and property taxes due to additional Gamma Knife units.
Selling and administrative costs decreased by $60,000 to $766,000 for the three month period ended March 31, 2004 from $826,000 for the three month period ended March 31, 2003. This decrease was primarily due to decreased payroll costs relating to the termination of a sales position in second quarter and a marketing position in third quarter 2003. The sales position was filled in late first quarter 2004. In addition, in first quarter 2003 there was a write-off of approximately $58,000 in previously deferred costs relating to the future placement of a Gamma Knife unit in Brazil.
Interest expense increased by $31,000 to $612,000 for the three month period ended March 31, 2004 from $581,000 for the three month period ended March 31, 2003 primarily due to additional interest expense relating to the financing of the three new Gamma Knife units in 2003, which offset declining interest expense on the more mature units. The mature units have lower interest expense because interest expense decreases as the outstanding principal balance of each loan is reduced.
Interest and other income decreased by $21,000 to $23,000 for the three month period ended March 31, 2004 from $44,000 for the three month period ended March 31, 2003 primarily due to interest income of approximately $17,000 in first quarter 2003 relating to a state sales/use tax refund.
Minority interest increased by $13,000 to $251,000 for the three month period ended March 31, 2004 from $238,000 for the three month period ended March 31, 2003 due to
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increased profitability of GK Financing. Minority interest represents the 19% interest of GK Financing owned by a third party.
Income tax expense increased by $22,000 to $219,000 in the first quarter 2004 compared to $197,000 in the first quarter 2003. The increase was due to increased profitability. The Company recorded a 40% income tax provision in both first quarter 2004 and first quarter 2003, and both quarters were reduced to an effective income tax rate of approximately 37% due to income tax benefits of $16,000 in each quarter that were recorded for the exercise of 25,000 previously expensed options. These income tax benefits are the result of compensation expense that was recognized when the options were granted in 1995.
The Company had net income of $370,000 ($0.07 per diluted share) for the three month period ended March 31, 2004 compared to net income of $336,000 ($0.07 per diluted share) in the same period in the prior year. The increase was primarily due to the addition of the three new Gamma Knife units during 2003 and lower selling and administrative costs.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $10,062,000 at March 31, 2004 compared to $10,312,000 at December 31, 2003. The Company’s cash position decreased by $250,000 primarily due to capital expenditures of $176,000 and payment of shareholder dividends of $157,000.
During first quarter 2004, the Company paid quarterly dividends of $157,000, or $0.04 per share, that had been declared in fourth quarter 2003. On February 12, 2004 the Company declared a quarterly dividend of $0.04 per share to shareholders of record on April 2, 2004, which resulted in a reduction in retained earnings of $157,000 in first quarter 2004. The dividends are payable to shareholders on April 16, 2004.
The Company as of March 31, 2004 had shareholders’ equity of $15,562,000, working capital of $5,076,000 and total assets of approximately $45,143,000.
The Company has scheduled interest and principal payments under its debt obligations of approximately $8,862,000 during the next 12 months. The Company believes that its cash flow from operations and cash resources are adequate to meet its scheduled debt obligations during the next 12 months.
The Company’s primary lender for its Gamma Knife projects, DVI Financial Services Inc. (“DVI”) filed for Chapter 11 bankruptcy protection in August 2003. This will not materially affect the financing that has been committed to existing projects. The Company is currently in the process of seeking other financing options for future projects. There can be no assurance that the Company will secure financing in amounts and/or terms as favorable as that historically provided by DVI.
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The Company is investing its cash in an institutionally priced money market fund pending use in the Company’s operations. The investment objective of the money market fund is to maintain a stable net asset value, in order to maximize yield while preserving principal value.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Exchange Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
| (a) | Exhibits | |||
| The following exhibits are filed herewith: | ||||
| Exhibit Number |
Description |
|||||
| 31.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
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| 31.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (b) | Reports on Form 8-K | |||
| None. | ||||
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SIGNATURES
Pursuant to the requirements 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 |
||
Date: May 14, 2004
|
/s/ Ernest A. Bates, M.D. | |
| Ernest A. Bates, M.D. Chairman of the Board and Chief Executive Officer Duly Authorized Officer and Principal Executive Officer |
||
Date: May 14, 2004
|
/s/ Craig K. Tagawa | |
| Craig K. Tagawa Senior Vice President Chief Operating and Financial Officer Duly Authorized Officer and Principal Executive Officer |
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EXHIBIT INDEX
| Exhibit Number |
Description |
|||||
| 31.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| 31.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||