Good morning, everyone, and welcome to the 2013 Fourth Quarter Financial Results Conference Call for American Shared Hospital Services. [Operator Instructions] I would now like to turn the call over to Dr. Ernest Bates, Chairman and Chief Executive Officer; Craig Tagawa, Chief Operating and Financial Officer; Ernest R. Bates, Vice President, Sales and Business Development; and Alexis Wallace and Brad Roberts, Assistant Controllers of American Shared Hospital Services. Mr. Tagawa, you may begin.

Thank you, Dawn, and thank you, all, for joining us for AMS's fourth quarter and 2013 financial results conference call and webcast. Please note that various remarks that we may make on this conference call 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 31, 2012; the quarterly report on Form 10-Q for the quarters ended on March 31, 2013, June 30, 2013, and September 30, 2013; and the definitive proxy statement for the Annual Meeting of Shareholders held on June 11, 2013. The company assumes no obligation to update the information contained in this conference call. 2013 was a challenging year for AMS, one of the most challenging in our history. I believe we met the challenges effectively. We delivered higher operating and pretax income before foreign currency transaction charges for the fourth quarter and 2013 compared to the same periods of 2012. We also made substantial progress in our proton therapy initiatives. We continue to see proton therapy as an outstanding, long-term growth opportunity for our company and an opportunity we are uniquely positioned to take advantage of. Reduction in Medicare reimbursement for Gamma Knife services that went into effect on April 1, 2013, as mandated by the American Taxpayer Relief Act of 2012, was a significant headwind last year, as was an unfavorable mix of procedures by location in the fourth quarter. We were able to offset the impact of reduced reimbursement to…

Thank you, Craig. For the 3 months ended December 31, 2013, medical services revenue decreased 4.6% to $3,937,000 compared to medical services revenue for the fourth quarter of 2012 of $4,125,000. The net loss for the fourth quarter of 2013 of $82,000 or $0.02 per basic and diluted share included a pretax loss from foreign currency transactions of $334,000 due to the weakening of the Turkish lira against the U.S. dollar. Before this foreign currency transaction loss, pretax income for the fourth quarter of 2013 was $151,000, net of losses attributable to noncontrolling interests. In comparison, net income for the fourth quarter of 2012 of $5,000 or $0.00 per basic and diluted share included a pretax gain from foreign currency transactions of $137,000. Before this foreign currency transaction gain, the pretax loss for the fourth quarter of 2012 was $18,000, net of income attributable to noncontrolling interests. Operating income for the fourth quarter of 2013 increased to $262,000 compared to operating income for the fourth quarter of 2012 of $56,000. The number of procedures performed on Gamma Knife Perfexion systems supplied by AMS increased 5% for the fourth quarter and 18% for 2013 compared to the same periods of 2012. The total number of procedures performed in AMS's Gamma Knife business, including Gamma Knife and Gamma Knife Perfexion procedures, increased 7% for the fourth quarter and 19% for 2013 compared to the same periods of 2012. Medical services gross margin for the fourth quarter of 2013 was 34.3% compared to medical services gross margin of 37% for the fourth quarter of 2012. Selling and administrative expenses for the fourth quarter of 2013 decreased 21.2% to $750,000 compared to $952,000 for the fourth quarter of 2012. For the 12 months ended December 31, 2013, medical services revenue increased 3.1% to $17,584,000 compared to medical services revenue of $17,048,000 for 2012. The net loss for 2013 of $312,000 or $0.07 per basic and diluted share included a pretax loss from foreign currency transactions of $1,174,000. Before this foreign currency transaction loss, pretax income for 2013 was $438,000, net of losses attributable to noncontrolling interests. Net income for 2012 of $38,000 or $0.01 per basic and diluted share included a pretax gain from foreign currency transactions of $132,000. Before this foreign currency transaction gain, pretax income of for 2012 was $70,000, net of income attributable to noncontrolling interests. Cash flow, as measured by earnings before interest, taxes, depreciation and amortization, was $1,984,000 for the fourth quarter and $7,969,000 for 2013 compared to $2,067,000 for the fourth quarter and $8,306,000 for 2012. Turning to the balance sheet. At December 31, 2013, cash, cash equivalents and certificates of deposit were $10,909,000 compared to $10,564,000 at December 31, 2012. Shareholders' equity at December 31, 2013, was $24,055,000 or $5.22 per outstanding share. This compares to shareholders' equity at December 31, 2012, of $24,830,000 or $5.39 per outstanding share. Craig?

Thank you, Alexis. And, Dawn, we are ready for the first question.

[Operator Instructions] Our first question comes from Tony Kamin from Eastwood Partners.

First question. Craig, maybe you can help with this. The codes for the Gamma Knife reimbursement, and you sort of quote that the basic and then the sort of wider ancillary services, if I'm seeing it correctly around it, how does that compare if you look at that wider number compared to what you were getting in 2013?

Well, I think it's obviously down a little bit, but we noticed -- and in some cases, it varied very little. And the reason for that is there's a formula called the Medicare outlier adjustment for outpatients. And when the reimbursement goes below what the cost factors are for a hospital in an outpatient basis, the rate that they get for Gamma Knife procedure gets adjusted upward. Is that what the question was? Was it on proton -- I'm sorry, I thought you said gamma.

No, no, it was gamma. What I'm trying to get at is, clearly, the basic rate is up by 10% or whatever it is, a few percent. But then you made a point in this call in your opening remarks, I'm talking about sort of the wider you can get up to $9,000 now. And I wonder, is that really any change from 2013?

It is for some. It depends on what the Medicare outlier adjustment figure is. So it varies by hospital by hospital.

Got you. And so do you expect -- okay, well, that's a good answer. Second question, in terms of your cost reductions that you put in place, which I think were great, those SG&A kind of cost reductions, are those anticipated to kind of stay in place now for 2014?

Yes. The total reduction that you saw in the fourth quarter, however, included some other adjustments that aren't related to the cost reductions that we set into place. So I think it's a little -- you saw a little bit of greater adjustment in the fourth quarter than you will on an ongoing basis, but there will still be a significant adjustment.

Okay. And then this question is sort of -- this is an important question. I hope I can -- it's sort of a compound question, so I hope I can explain it right. But normally, I ask about your pipeline of proton opportunities, and I know that's it's been pretty steady as I've asked over the last few quarters that there's more than 10 -- I think you answered maybe up to 15 hospitals potentially who are interested in protons from you at some point as a solution. But here we are, 2 years from -- 2 years or more from FDA approval, a year or more since the unit went into Barnes, a few months now after the first treatment, I realize that one of the gating factors may be that to sign up new protons, you need -- you'll need to put a deposit down with Mevion. But for all of us who've been around the company and you guys, more than anyone, but for a lot of us as investors, too, with all of these milestones, FDA and so on, having been met for a long time, I really would like to see -- I think a lot of other shareholders would like to see a real acceleration here of you signing up more proton beams. I guess, my concern is we've all waited for this opportunity. If we don't take it, I'm concerned about getting too far back in the Mevion delivery pipeline. I know you need some money for this, so is financing the gating factor to acceleration? And if not, what is it and what can we do to accelerate?

I think financing is one aspect of it. I think everybody's looking to see from Barnes how fast they ramp up, and I think they are starting to ramp up fairly quickly now. So I think we'll get that question answered. But obviously, the deposits are our concern, and we're looking at ways to tackle that problem, as well as lining up some of the best customers, I think, for the next couple of units that we have. So I think you'll hear more or see more activities in not too distant future. But obviously, financing of these systems is a little more difficult than the Gamma Knife just because of the magnitude of the dollars that are involved and also the commitment from the hospital systems, what they have to put in for the facility cost.

What do you think it is, Craig, that breaks that log jam, though? Is it -- I mean, it sounds like it's a couple of things. Maybe it's Barnes continuing to treat, and so the hospitals get comfortable. And then it's -- is it sort of developing your first financing relationship with an institution that maybe will finance a few for you? Or what do you think the thing will be that lets the world know AMS is now here and able to finance and move forward?

I think we're developing relationships with the finance companies. I think they will go beyond one. I think, as you mentioned, that's an important aspect. I think the success for our Gamma Knife business over time and how we finance those gives lenders comfort that we do, do our due diligence and we really learn about the technology before we make investments. And the hospitals that we are contemplating to partner with are all very large institutions, as you can imagine. And I think that the fact that many of these are putting in large sums of money gives the finance companies comfort as well that we all have a stake in the game to make sure that these sites are appropriate for delivery of protons.

Tony, this is Dr. Bates. We are probably still in discussion with at least 15 hospitals across the country, and it could be more if we want. The problem for the hospitals is their commitment for construction can be anywhere from $5 million to $6 million to $13 million. I think the construction cost at Orlando is about $13 million or so. So these are huge commitments. And what these hospitals want to see before they make that huge commitment is that the Barnes unit is operating almost flawlessly. And I think that is the case. We just talked with Mevion earlier today, and Barnes yesterday did 12 patients and expecting by the end of April to do 25. And once they start operating at that level, I think hospitals will have the comfort that this machine is working and will work. So I think that's been the problem. We are in discussions with several institutions who have expressed an interest in financing. I don't think that's going to be a problem getting financing, not with the luminary institutions that we are dealing with. The problem at the present time is just getting these machines to -- getting this machine to work with a comfort. Everybody says this is a successful machine and it's not going to have any problem once I put it into my institution. You must remember that those initial machines that were put into United States, particularly those 2- and 3- and 4-room machines all had start-up problems. This machine has had very little start-up problems considering when you compare it with the other larger machines. We were just told today that the start-up for this 1-room machine has done more patients in 10 months than similar machines that started up with other manufacturers. So I think you'll see that things are going to improve dramatically. Of course, each of these machines is requiring $1 million deposit, and that's a problem. And that will be a problem until we get 1 machine out there working and working successfully. So I don't think it's got -- it's not a long-term problem.

Yes, I just -- I think in relation to the size of the opportunity and the incremental benefit to AMS of finding $1 million deposit per machine should be very doable. So anyway, I thank you for the answers. It's been a long wait for all of us, and I think we're really very excited and would really just like to see the thing accelerate.

Our next question comes from Lenny Dunn from Freedom Investors Corporation.

The quarter was actually reasonably successful. I'm comfortable with the legacy business, and I really -- when I look at this, I look at that as a legacy business. I think that it works. It's a solar growth business clearly, and the proton beam is the exciting part. And I understand that medical devices take a long time for acceptance, and this whole process is taking us a lot longer than anyone expected because it was 6, 7 years since we started working with Mevion. But it's working. And I think that the future looks very bright. And the fact that everyone's being cautious and not putting these things up and running because they're so expensive is very understandable. And it sounds to me like from the start-up at Barnes there, that it's just a matter of time and not a long time now before some of these hospitals will step forward. And again, as the previous caller said, I don't think that the $1 million deposits are an issue. It's making sure that they make sense. And you have deposits, unless I'm mistaken, on 2 more machines anyhow.

Yes, we do.

So that would certainly give us a pretty good start with 3 of them. And if we fall a little better further back in the queue because of caution, that may not be a bad thing.

I want to point out also that Mevion has a backlog of over $300 million or roughly 17 or 18 machines and just recently signed up 4 machines internationally and 1 domestic machine. So their business is increasing.

I know, I understand. And I also look forward to them becoming a public company, which I hope that by sometime this summer, they can do an IPO because that will mean a lot to us. Maybe we'll have $1.5 per share, maybe we have $2 a share just from the Mevion stock.

Yes. What is our investment in Mevion at this point, Craig?

About $2.7 million.

$2.7 million. I think, historically, we can look at some guidelines. Accuray went public -- how many years ago was that, Craig?

I think in 2006 or '07.

And I think our backlog is not as big as what Mevion is and went out at valuation of roughly $1 billion.

A little under $1 billion.

A little under $1 billion. I'm not saying that, that's what's going to happen to these guys if they should choose that route. But we're encouraged by what has happened historically with medical device companies that make radiation therapy machines.

Okay. Again, I look at this as 2 separate companies with the same parent. The legacy business, which is slow growth but a good healthy business; and the Mevion, which could be fast growth. And then we also have the Mevion stock, which, I think, is of substantial value.

Yes, I think we're seeing a resurgence in the Gamma Knife business. Craig just recently signed a contract or will sign a contract this week. Do you want to say a word about that?

Yes, we just -- we have in the North -- Pacific Northwest a hospital that wants us to partner with them for Perfexion. So we'll be making that announcement probably sometime next week.

And Elekta is coming out with an upgraded -- a Gamma Knife machine that sounds very exciting. It may not need -- always need the frame, it will be the option of the doctor whether he wants the frame. But it will also have image guidance that's never been put on a Gamma Knife before. That is also exciting. What is that image guidance? The MRI or CT?

It's a cone beam.

Cone beam.

CT cone beam.

And I think with these new developments in Gamma Knife, we're going to see that business come back.

Our next question comes from Steve Miskin [ph] from Miskin Investments [ph].

I'd like to go back to Tony's original question regarding the Gamma Knife procedures. And what percent of Gamma Knife procedures that you help perform fall under your Medicare reimbursement? And what percent qualify for that higher reimbursement under the ancillary services, if you know that?

We don't break it out. There are a portion of our customers where we get a percentage of the technical component revenues. So it's not all of our contracts. Probably half of our contracts are on, what we call, a fee-for-service or a set rate. The other half will vary dependent on the mix of the patients that are treated and what the reimbursement rates are. I would say that roughly 35% to 40% of our patients that we do, what we call, a revenue-sharing basis, where our revenue fluctuates according to what the hospital gets our Medicare patients.

Okay, got it. And then Dr. Bates, you talked about patient volumes at the Barnes-Jewish Hospital. Can you just provide a little bit more color about the initial volumes that have been going on? Have they been more than expected, less than expected? And what's that key number that providers want to see for them to look at this as a viable option?

Well, I'd say what most providers want to see, a machine that's easily performing 20 to 25 patients a day and not having any significant downtime. That has always been the concern with these new treatment devices that you don't have significant downtime. The early proton machines did have a lot of downtime, and that's why Barnes was very careful and -- when they introduced this technology there to go slow so there would not be these problems that existed with other machines. To do 12, which was what they did yesterday, after only really been treating patients for about 2 months is really remarkable.

Yes, I think the -- just to add on to Dr. Bates, the other important thing is -- that we're finding is the Mevion system is very efficient. They're able to treat patients fairly quickly on this machine, and it's meeting their expectations in terms of how long it takes to treat a patient. Unlike with the Gamma Knife, patients are receiving treatments over a course of maybe 3 to 6 weeks. And they're given slots of between 15 and 25 to 30 minutes apart. So to be able to treat efficiently is what gives you the ability to treat a greater number of patients within a reasonable amount of time during the day. So I think we're seeing then -- I think that's an important fact so that we can see that this machine will be able to treat a good number of patients once they're fully ramped up. And I think that's important for both the hospital and for AMS going forward.

Craig, at Orlando, we're expecting to operate there at least 16 hours a day. And then 16 hours will do over 32 patients a day.

We should be able to, based on what Barnes is doing.

What's our breakeven there, roughly?

We've never given that number out. So...

Well, 32 is a good number.

32 is a good number, a very good number for us, mainly because we have -- we purchased these units early. So we did purchase it at a far lower amount than what is currently being -- they're being sold for.

Okay. And moving on to the foreign currency charge. Can you provide a breakdown of -- it's a large number. What's that coming from?

It's mostly coming from the debt that we have on the books. And we have, what, Alexis, about $6 million?

It's about $5.3 million at the end of the year.

$5.3 million at the end of the year. And that's what's most of it is coming from. And as you can see, that was a fairly large loss for us. We didn't anticipate that the Turkish lira would weaken that significantly, obviously, during the year. And as we've mentioned in the previous conference calls, it was -- it really wasn't practical for us to hedge it.

Okay. And then, finally, back in 2012, there was a story that came out about the operating room of the 21st century and a joint venture with another company. Any news on that? Is that still an option? Or is that -- we just haven't heard any news on that over the recent quarters.

Yes, it is still an option. We are working on it, actually, as we speak. We have a partner, a manufacturing partner that we're working with, as well as a partner that owns the patents with us. And we're trying to complete a licensing deal with them to build these. And we think once we complete that, it should take about a couple of years before we have a commercial product, and our first product will be surgical lights.

When do you expect that agreement will be signed with the manufacturer?

I would hope within 30 days. But we've been working on it, and I think we're getting very close.

Craig, are these patents pending? Or do we have the patents?

Some are pending, some of the adjustments that we've made to the patents to better perfect them from encroachment. But we feel they're very solid, and I think what you'll see eventually, and we can't disclose it at this point, but it's a very unique concept that we've come up with.

We have Tony Kamin on line from Eastwood Partners.

Question on proton beam treatments. I just wondered, Dr. Bates, if you could let us know whether there's any new research that has come out in terms of outcomes and effectiveness of treatment?

Well, I think we've mentioned this several times. I don't think there's any recent PEC papers that are any different than what we've told you in the past. But clearly, the rates for -- the treatments for prostates are quite exciting. And now we're seeing good results with esophageal carcinomas, with liver carcinomas and with colon cancer and, particularly, non-small [ph] cell lung cancer. Good results. But you must remember that in terms of long-term survival, we don't get those results until at least 5 years of treatment. But clearly, the results for protons are far better than they are for photons [ph]. It's been the cost, but I think Mevion has solved that problem. They've made a machine that's affordable.

Perfect. And then final question on the surgical lighting, can you just tell us whether there's any movement there? Or what the time frame is we should expect to hear some news on that?

Hopefully, within about 30 days, we can complete our arrangement with our partner. And we would expect in about 2 years to come out with a commercial product, 2 to 2.5 years.

Thank you. Mr. Tagawa, there are no further questions. Would you like to make your closing remarks?

Thank you for joining us this afternoon, and we look forward to speaking with you on our first quarter results conference call that will be held fairly shortly.

Thank you. This call will be available in digital replay immediately following today's conference. To access the system, dial (888) 843-7419 and enter the passcode 36965752, followed by the pound sign to access the replay. The webcast of this call will be available at www.ashs.com and www.earnings.com. This concludes today's teleconference. Thank you for participating. You may now disconnect.