American Shared Hospital Services (AMS) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the third quarter 2005 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to the turn call over to Dr. Ernest Bates, Chairman and Chief Executive Officer; Craig Tagawa, Chief Operating and Financial Officer, and Norm Houck, Controller of American Shared Hospital Services. Mr. Tagawa, you may begin.

Thank you, Tatyana, and thank everyone for joining us for AMS' third quarter earnings conference call and Web-cast. We will open the call for questions after Norm Houck and I review the financial results we announced this morning.

First, Safe Harbor statement -- various remarks that we may make about future expectations, plans and prospects for the Company, constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in the Company's filings with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31st, 2004, quarterly report on Form 10-Q for the period ended June 30th, 2005 and the definitive proxy statement for the annual meeting of shareholders, held on June 16th, 2005.

The Company assumes no obligation to update the information contained in this conference call. Norm?

Thanks, Craig. Revenue for third quarter, of 2005, increased 6% to $4,402,000 compared to $4,136,000 for third quarter of 2004. This growth primarily reflected the contribution of the three new Gamma Knife units that have become operational during the year, including our 21st Gamma Knife unit that went into service this past summer.

Additionally, we recognized a net downward third quarter retail revenue adjustment of approximately $60,000.

The total number of procedures performed during the third quarter increased to 597, compared to 552 procedures in third quarter, 2004.

Costs of revenue increased for this year's third quarter versus prior year, due to the increase in the number of Gamma Knife units. And especially, Gamma Knife units operate under turnkey revenue agreements, were the Company is responsible for paying all direct operating costs. We currently have a total of four units in this category.

On the other hand, selling and administrative costs were slightly lower than last year, primarily due to lower payroll-related costs. Interest expense also continues to decrease, as older loans approach maturity and we're able to take advantage of lower interest rates for new loans.

The net effect of these expense changes was that operating income increased to $867,000 compared to $860,000 in the year earlier period. This marks the 19th considered quarter of year-over-year increases in operating income.

Income before income taxes increased 3% to $633,000, from $614,000 for the third quarter of 2004. However, net income decreased to $502,000 or $0.10 per diluted share, reflecting an effective income tax rate of 21%. This compared to net income from last year's third quarter of $840,000 or $0.16 per diluted share, reflecting an income tax benefit of $226,000.

The reason for the increase in the effective tax rate is as follows -- during this year's third quarter, the Company's Chairman and Chief Executive Officer exercised the remaining 189,000 previously-expensed options to purchase common stock, which generated an income tax benefit to the Company of $123,000. This reduced the Company's effective income tax rate to 21%.

In contrast, for the third quarter 2004, the exercise of 730,000 stock options by the Chairman and CEO, generated the $226,000 net income tax benefit previously mentioned.

The 189,000 options exercised in this year's third quarter, as well as 90,000 options exercised by the Company's Chief Operating and Financial officer, were performed through a cashless exercise. What this means is that, upon exercise, equivalent common shares related to the exercise price and related taxes totaling approximate 114,000 shares were withheld and retired. This had the effect of return approximately 2% of the fully diluted shares of the Company.

With these option exercise programs now complete, we expect a 40% income tax rate beginning in the fourth quarter of 2005.

For the nine months ended September 30th, 2005, revenue increased 9% to $13,581,000, from $12,479,000 for the first nine months of 2004. Operating income increased 3% to $2,557,000 from $2,471,000 a year ago.

Income before income taxes increased 5% to $1,862,000 from $1,771,000 for the same period last year. Net income for the first nine months of 2005 is $1,288,000 or $0.26 per diluted share, reflecting an effective income tax rate of 21%. This compares to net income for the first nine months of 2004 of $1,599,000 or $0.31 per diluted share, reflecting an effective income tax rate of 10%.

Cash flow for the first nine months of 2005, as measured by earnings before interest, taxes, depreciation and amortization, increased to $2,486,000 compared to $2,362,000 for the same period of 2004.

Turning to the balance sheet, at December -- excuse me, at September 30th, 2005, AMS reported working capital of $4,187,000 including cash, cash equivalents and securities of $8,334,000. Shareholders equity was $18,079,000, up from $17,326,000 a year earlier. For this year's third quarter, there were approximate 5 million basic shares and 5.2 million fully-diluted shares outstanding.

Craig?

Thank you, Norm. During the third quarter, we were pleased to announce the opening of our 21st Gamma Knife unit and our third unit to open this year, at Mercy Health Center in Oklahoma City. On balance, our portfolio of Gamma Knife units performed in line with our expectations for the quarter. However, we have two underperforming sites and we are working to improve, as previously announced. One of the sites, we feel, has attained resolution which, will again result in profitability. The second site may require relocation of the unit if we are not able to show improvement over the next quarter or two.

I'm pleased to report that we have reached agreement with two current customers to upgrade their Gamma Knife units and extend the number of years of those agreements. These units are expected to be upgraded in late fourth quarter, 2005. Upgrades such as this on the older equipment in our portfolio represent an important source of continued revenue for AMS.

Longer-term, our growth strategy is to expand our portfolio of Gamma Knife units, and augment our Gamma Knife business with contracts for the latest Intensity Modulated Radiation Therapy and Image Guided Radiation Therapy equipment in our Operating Room for the 21st Century concept.

In contrast, for the past few years, we have not finalized a contract so far in 2005. We believe this primarily reflects the complex and often lengthy sales cycle that is characteristic of our business. Our customers' decision-making process was even further delayed this year, as hospitals and physicians evaluated the competitive advantages of our equipment versus other modalities that have entered the market, such as combined head-and-body units, most suitable for smaller-volume institutions. We are evaluating the opportunity for American Shared's participation in this market. We are currently in negotiations with Elekta, our partner at GK Financing, to develop a fee-per-use concept for a combined Gamma Knife and body-treatment system. The activity we are seeing and our analysis of the market, reinforces our belief that the market for Gamma Knife units and other advanced therapeutic equipment is large and underpenetrated. So we remain highly confident that we have an outstanding opportunity to deliver the long-term growth we are striving for.

We are encouraged by the substantial progress that we're making behind the scenes. Today I can report the we're in the late stages of negotiations for the development of several new projects, and we expect that contracts will be rewarded to AMS in the near future. We are also pursuing a number of serious opportunities related to IMRT and IGRT equipment as well as our Operating Room for the 21st Century concept.

Regarding OR21, we have made a patent application in conjunction with the architectural firm we've been working with on some of the unique design concepts of OR21. Recently, we have also presented the OR21 concept to several customers. We will keep you informed of OR21's continued progress in the future.

Tatyana, we're now ready for the first question.

(OPERATOR INSTRUCTIONS). Lenny Dunn (ph), Easy Stocks Incorporated (ph).

You know, clearly in looking at the numbers, there is a small amount of growth and will continue to be, and obviously increases in cash flow and the stock is probably trading very close to what its value is, on a private-market basis. But you know, little a under it, but not (Multiple Speakers)

Let me -- excuse me, but I don't understand that "on a private-market basis".

Well, if you had -- if somebody bought this and took the cash flows, assumed, there would be absolutely no further installations of Gamma Knifes or anything, the private-market value would be a little bit above where you're currently trading, based on the projected cash flows and the fact that as these Knives become (multiple speakers)

Hey, I don't think I agree with that. We know that there have been some recent sales of radiation therapy companies, and the multiple of EBITDA -- and these are all private sales -- are much higher than what our stock price reflects.

No, I think the stock is undervalued; I'm not that (multiple speakers)

(multiple speakers) I just misunderstood then.

I guess what I was getting to is that, you know, whether we could get $7 if we sold it tomorrow, and I'm sure that's not your intent. We couldn't get 10 or 12, because the growth isn't there. But once you start getting some more (multiple speakers)

Well, I'm not sure that. Lenny, I'm sorry, I don't want to argue with you on the conference call, but I'm not sure that's true. We've made no attempt to sell this company, because that's not our intent. Our intent is to grow it. I really believe if we would try to sell it, we would probably get a price much higher than what our market price reflects right now.

Well, that would be nice. But the reason we are invested is for some growth, and once you start -- once you resume selling some more of these Gamma Knifes or whatever else you're able to sell, on this fee-per-use basis, then the growth comes in, rather than a little bit of growth each quarter, where you're getting a little better cash flows -- you have a true growth company, as opposed to very slow growth. Because as things get paid for, they clearly generate more cash, and we get a little bit more use out of some of the machines as they mature. But -- so, could we really look forward, this time, to seeing some actual deals close in the fourth quarter?

We believe that we have a good opportunity to close some deals in the fourth quarter. We can't be a predictor whether they're going to actually happen in the fourth quarter, but we're very close on several transactions that we feel very good about.

I think what Craig has pointed out, is a problem we have recognized in the last several months -- is that, with the advent of new machines that do both bodies and heads, there is at the second-tier market -- and these are markets that are really not big enough for a Gamma Knife; they don't have enough volume for a Gamma Knife. But they do have enough volume for a Gamma Knife -- I'm sorry -- for a head unit and a body unit combined. And this has been a problem for us, and we've got not been able to penetrate that market. However, under our new negotiations that we've undertaken with Elekta, I think we're going to overcome that problem. We are going to be able to put a combined machine in one location, and so as a head and body unit. I'm very excited about this, because this is something right now, none of the other competitors will be able to offer.

That's good, because we just need something to get -- to wake the story back up again.

I understand. But you must remember, there are other things going on in the company. We don't talk about much about OR21, and I know that it's something in the future. But we are in negotiations with two hospitals for OR21's first base. And I'm very excited about those. In fact, one we're visiting tomorrow in Michigan. And this is going to happen. I'm quite confident it's going to happen.

And we've been at two shows, presenting OR21 and the reception has been outstanding.

Thank you. We certainly would appreciate some wake-up news out here, so the stock could wake up a little.

So would we.

(OPERATOR INSTRUCTIONS) There are no further questions. Would you like to make your closing remarks?

Yes, I'm going to ask Craig to just to make some comments about our revamped marketing strategy. We have a new marketing strategy. I'm going to ask Craig to talk about it. We are essentially increasing our marketing staff to three people, one who will concentrate on the Gamma Knife, one will concentrate on radix and one who will be selling OR21. And we're looking at some very good people; I'm very excited about this. Craig?

Yes. Expounding upon what Dr. Bates has just said, we've identified some great candidates; we should be bringing them on-board within the next 30 to 60 days, and we've looking as Dr. Bates is mentioning, about this new program of combining the head and body systems on a fee-per-use basis, which we're very excited about. And I think we're going to also, in terms of -- for existing centers, we are developing a new web site that will be used by any of our sites that want to. And we've been spending some time on that. We've done focus groups on that; we see Web-based marketing as the way to go. And I think you'll see probably within the next 60 to 70 days, we will be able to share that with you and you'll all be able to look at our first pilot case. And I think that's all very exciting.

We also continue to work with our existing customers on expanding the breadth of what we provide them. And they look upon us as a source of capital financing, and as their needs increase, we're going to try and be able to provide some of those capital requirements that they may have. So, those are some of the things that we're working on. As Dr. Bates mentioned, we're very excited about OR21 and the possibilities that we have in that realm.

And Tatyana, if there are no other questions, I think we will let you wrap up the call for us. And we thank everybody for participating on this conference call with us.

At this time I show no questions. This call will be available in digital replay immediately following today's conference. To access the system, dial 888-843-8996 and enter the pass code of 130-77-322 to access the replay. The Web-cast of this call will be available at www.ashs.com and www.companyboardroom.com.

This concludes today's teleconference. Thank you for participating; you may all disconnect.