American Shared Hospital Services (AMS) 10-Q 2005 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005 or

[  ]     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
(Exact name of registrant as specified in its charter)

California
(State or other jurisdiction of
Incorporation or organization) 94-2918118
(IRS Employer
Identification No.)

Four Embarcadero Center, Suite 3700, San Francisco, California
(Address of Principal Executive Offices) 94111
(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 [  ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     Yes [  ] No [X]

As of October 1, 2005, there are outstanding 5,018,885 shares of the Registrant’s common stock.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED BALANCE SHEETS

	(unaudited)			(audited)			LIABILITIES AND	(unaudited)		(audited)
ASSETS	September 30, 2005			December 31, 2004			SHAREHOLDERS' EQUITY	September 30, 2005		December 31, 2004
Current assets:							Current liabilities:
Cash and cash equivalents	$	3,759,000		$	8,121,000		Accounts payable	$	278,000	$	282,000
Restricted cash		50,000			50,000		Employee compensation           and benefits		223,000		88,000
Securities		4,525,000			957,000		Accrued dividends		238,000		215,000
Accounts receivable, net of allowance for							Other accrued liabilities		987,000		808,000
doubtful accounts of $170,000 in 2005
and $170,000 in 2004		3,482,000			2,950,000
Prepaid expenses and other assets		429,000			594,000		Current portion of           long-term debt		6,240,000		6,562,000
Current deferred tax assets		263,000			0		Current portion of           long-term capital leases		355,000		0
Total current assets		12,508,000			12,672,000		Total current liabilities		8,321,000		7,955,000
							Long-term debt, less current portion		16,584,000		18,924,000
Property and equipment:							Long-term capital leases, less current portion		2,459,000		0
Medical equipment and facilities		58,753,000			49,282,000		Deferred income taxes		671,000		366,000
Office equipment		538,000			492,000		Minority interest		2,436,000		2,315,000
Deposits and construction in progress		507,000			4,499,000		Shareholders' equity:
		59,798,000			54,273,000		Common stock, without par value:
Accumulated depreciation and							authorized shares - 10,000,000; issued
amortization		(23,942,000	)		(20,001,000	)	& outstanding shares, 5,018,885 in 2005
Net property & equipment		35,856,000			34,272,000		and 4,776,173 in 2004		9,306,000		9,238,000
							Additional paid-in capital		4,274,000		4,410,000
Other assets		186,000			162,000		Retained earnings		4,499,000		3,898,000
							Total shareholders' equity		18,079,000		17,546,000
Total assets	$	48,550,000		$	47,106,000		Total liabilities and shareholders' equity	$	48,550,000	$	47,106,000

See accompanying notes

2

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED INCOME STATEMENT
(Unaudited)

	Three months ended Sep. 30,						Nine months ended Sep. 30,
	2005			2004			2005			2004
Revenue:
Medical services	$	4,402,000		$	4,136,000		$	13,581,000		$	12,479,000
Costs and expenses:
Costs of revenue:
Maintenance and supplies		261,000			203,000			778,000			625,000
Depreciation and amortization		1,320,000			1,199,000			3,953,000			3,555,000
Other direct operating costs		629,000			504,000			2,068,000			1,756,000
		2,210,000			1,906,000			6,799,000			5,936,000
Gross margin		2,192,000			2,230,000			6,782,000			6,543,000
Selling and administrative expense		794,000			817,000			2,648,000			2,345,000
Interest expense		531,000			553,000			1,577,000			1,727,000
Operating income		867,000			860,000			2,557,000			2,471,000
Interest and other income		29,000			21,000			129,000			64,000
Minority interest		(263,000	)		(267,000	)		(824,000	)		(764,000	)
Income before income taxes		633,000			614,000			1,862,000			1,771,000
Income tax expense (benefit)		131,000			(226,000	)		574,000			172,000
Net income	$	502,000		$	840,000		$	1,288,000		$	1,599,000
Earnings per share:
Basic	$	0.10		$	0.18		$	0.26		$	0.38
Diluted	$	0.10		$	0.16		$	0.26		$	0.31

See accompanying notes

3

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED CASH FLOWS STATEMENT
(Unaudited)

	Nine months ended Sep. 30,
	2005			2004
Operating activities:
Net income	$	1,288,000		$	1,599,000
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization		4,032,000			3,621,000
Deferred income taxes		487,000			58,000
Minority interest in consolidated subsidiaries		824,000			764,000
Changes in operating assets and liabilities:
Receivables		(532,000	)		(614,000	)
Prepaid expenses and other assets		119,000			(6,000	)
Accounts payable and accrued liabilities		310,000			91,000
Net cash from operating activities		6,528,000			5,513,000
Investing activities:
Purchase of property and equipment (net of financing)		171,000			135,000
Investment in securities		(3,568,000	)		0
Net cash from investing activities		(3,397,000	)		135,000
Financing activities:
Principal payments on long-term debt and capitalized leases		(5,613,000	)		(5,634,000	)
Distribution to minority owners		(703,000	)		(304,000	)
Payment for stock/option repurchase		(670,000	)		(45,000	)
Payment received for exercise of stock options		157,000			20,000
Payment of dividends		(664,000	)		(485,000	)
Net cash from financing activities		(7,493,000	)		(6,448,000	)
Net change in cash and cash equivalents		(4,362,000	)		(800,000	)
Cash and cash equivalents at beginning of period		8,121,000			10,312,000
Cash and cash equivalents at end of period	$	3,759,000		$	9,512,000
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest paid	$	1,577,000		$	1,868,000
Income taxes paid	$	162,000		$	120,000
Schedule of noncash investing and financial activities:
Acquisition of equipment with lease/debt financing	$	5,765,000		$	3,790,000
Accrued dividends	$	238,000		$	214,000
Income tax benefit from exercise of stock options and warrants	$	445,000		$	965,000

See accompanying notes

4

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 September 30, 2005 and the results of its operations for the three and nine month periods ended September 30, 2005 and 2004, which results are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31, 2004 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, 2004 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, provides Gamma Knife units to twenty-one medical centers as of September 30, 2005 in Arkansas, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas and Wisconsin.

     All significant intercompany accounts and transactions have been eliminated in consolidation.

     Certain reclassifications have been made to the 2004 balances to conform with the 2005 presentation.

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 and nine months ended September 30, 2005 basic earnings per share was computed using 5,018,000 and 4,901,000 common shares, respectively, and diluted earnings per share was computed using 5,048,000 and 4,971,000 common shares and equivalents, respectively. For the three and nine months ended September 30, 2004 basic earnings per share was computed using 4,755,000 and 4,214,000 common shares, respectively, and diluted earnings per share was computed using 5,119,000 and 5,097,000 common shares and equivalents, respectively. The increase in common shares used in the basic earnings per share calculation in 2005 compared to 2004 is the result of stock options exercised, primarily in third quarter 2004.

5

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 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 as 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.

	Three months ended Sept. 30					Nine Months Ended Sept. 30
	2005			2004		2005			2004
Net income, as reported	$	502,000		$	840,000	$	1,288,000		$	1,599,000
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		($6,000	)	$	0		($14,000	)	$	0
Pro forma net income	$	496,000		$	840,000	$	1,274,000		$	1,599,000
Earnings per share:
Basic-as reported	$	0.10		$	0.18	$	0.26		$	0.38
Basic-pro forma	$	0.10		$	0.18	$	0.26		$	0.38
Diluted-as reported	$	0.10		$	0.16	$	0.26		$	0.31
Diluted-pro forma	$	0.10		$	0.16	$	0.26		$	0.31

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. 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 for the year ended December 31, 2004 and the definitive Proxy Statement for the Annual Meeting of Shareholders held on June 16, 2005.

     Medical services revenue increased $266,000 and $1,102,000 to $4,402,000 and $13,581,000 for the three and nine month periods ended September 30, 2005 from $4,136,000 and $12,479,000 for the three and nine month periods ended September 30, 2004, respectively. The increase for the three and nine month periods is primarily due to the addition of three new Gamma Knife units that commenced operation during 2005, including one that commenced operation during third quarter 2005. The revenue increase for the nine month period was due to the inclusion of four additional Gamma Knife units that commenced operation since second quarter 2004.

6

     The Company had twenty-one Gamma Knife units in operation at September 30, 2005 compared to eighteen at September 30, 2004. Fifteen of the Company’s customers are under fee-per-use contracts, and six customers are under retail arrangements. 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.

     The number of Gamma Knife procedures increased by 8% to 597 and by 11% to 1,808 for the three and nine month periods ended September 30, 2005 from 552 and 1,628 for the three and nine month periods ended September 30, 2004, respectively. This increase was due to the addition of three new Gamma Knife units that commenced operation during 2005, including one new Gamma Knife unit that commenced operation during third quarter 2005. There were minor changes in the number of procedures performed at Gamma Knife units in operation more than one year, for both the three month period and the nine month period ended September 30, 2005, compared to the same periods in the prior year.

     Total costs of revenue increased $304,000 and $863,000 to $2,210,000 and $6,799,000 for the three and nine month periods ended September 30, 2005 from $1,906,000 and $5,936,000 for the three and nine months periods ended September 30, 2004. Maintenance and supplies increased by $58,000 and $153,000 for the three and nine month periods ended September 30, 2005 compared to the same periods in the prior year, primarily due to an increase in the number of Gamma Knife units covered under maintenance contract. There were eighteen Gamma Knife units covered under maintenance contract as of September 30, 2005 compared to sixteen as of September 30, 2004. Depreciation and amortization increased by $121,000 and $398,000 for the three and nine month periods ended September 30, 2005 compared to the same periods in the prior year primarily due to the addition of three new Gamma Knife units that commenced operation during 2005, including one that began operation during third quarter 2005. Other direct operating costs increased $125,000 and $312,000 for the three and nine month periods ended September 30, 2005 compared to the same periods in the prior year. For both the three and nine month periods, these increases are primarily due to additional Gamma Knife turn-key revenue agreements where the Company is responsible for paying all the direct operating costs, and are partially offset by lower site specific marketing and promotion costs. There are four turn-key revenue agreements in effect at September 30, 2005 compared to two at September 30, 2004.

     Selling and administrative costs decreased by $23,000 and increased by $303,000 to $794,000 and $2,648,000 for the three and nine month periods ended September 30, 2005 from

7

$817,000 and $2,345,000 for the three and nine month periods ended September 30, 2004. For the three month period the decrease is due to reduced payroll costs partially due to the resignation of a sales person, and partially due to higher employer paid payroll taxes in third quarter 2004 relating to option exercises. For the nine month period, the increase was primarily due to increased marketing and business development costs, investor relations costs, contributions and costs of the Company’s second Gamma Knife User’s Group meeting which was held in February 2005.

     Interest expense decreased by $22,000 and $150,000 to $531,000 and $1,577,000 for the three and nine month periods ended September 30, 2005 from $553,000 and $1,727,000 for the three and nine month periods ended September 30, 2004 primarily due to lower interest expense on the debt relating to the more mature Gamma Knife units, partially offset by additional interest expense relating to the financing of the four new Gamma Knife units that commenced operation after second quarter 2004. The mature units have lower interest expense because interest expense decreases as the outstanding principal balance of each loan is reduced. In addition, the financing on the more recent Gamma Knife units is at lower interest rates than the older loans.

     Interest and other income increased by $8,000 and $65,000 to $29,000 and $129,000 for the three and nine month periods ended September 30, 2005 from $21,000 and $64,000 for the three and nine month periods ended September 30, 2004 primarily due to increased interest income as a result of higher interest rates on invested cash balances.

     Minority interest decreased by $4,000 and increased by $60,000 to $263,000 and $824,000 for the three and nine month periods ended September 30, 2005 from $267,000 and $764,000 for the three and nine month periods ended September 30, 2004. Since minority interest represents the 19% interest of GK Financing owned by a third party, the decrease in the three month period and increase in the nine month period reflect the reduced or increased profitability respectively of GK Financing.

     Income tax expense increased by $357,000 and $402,000 to $131,000 and $574,000 for the three and nine month periods ended September 30, 2005 compared to an income tax benefit of $226,000 for the three month period and income tax expense of $172,000 for the nine month period ended September 30, 2004. For the three and nine month periods, the Company recorded a 40% income tax provision in both 2005 and 2004. However, the effective income tax rate was reduced to approximately 21% and 31% for the three and nine month periods ended September 30, 2005 compared to an income tax benefit and a 10% effective income tax rate for the same periods in the prior year, respectively. This is due to income tax benefits that were recognized on the exercise of previously expensed options to purchase common stock. For the three month period ended September 30, 2005 an income tax benefit of $123,000 was recorded for the exercise of 189,000 previously expensed options, compared to an income tax benefit of $472,000 on the exercise of 730,000 previously expensed options for the same period in the prior year. For the nine month period ended September 30, 2005 an income tax benefit of $171,000 was recorded for the exercise of 264,000 previously expensed options, compared to an income tax benefit of $537,000 on the exercise of 830,000 previously expensed options for the same period in the prior year. These income tax benefits are the result of compensation expense that was recognized when the options were granted in 1995.

8

     The Company had net income of $502,000 ($0.10 per diluted share) and $1,288,000 ($0.26 per diluted share) for the three and nine month periods ended September 30, 2005 compared to net income of $840,000 ($0.16 per diluted share) and $1,599,000 ($0.31 per diluted share) for the same periods in the prior year. The decrease for both the three and nine month periods was primarily due to higher income tax expense as the result of lower income tax benefits on the exercise of stock options.

Liquidity and Capital Resources

     The Company had cash and cash equivalents of $3,759,000 at September 30, 2005 compared to $8,121,000 at December 31, 2004. The Company’s cash position decreased by $4,362,000 primarily due to $3,568,000 of cash invested in securities, payment of shareholder dividends of $664,000, and $670,000 on the repurchase of the Company’s common stock or options to purchase common stock.

     During the nine month period ended September 30, 2005, the Company paid quarterly dividends of $215,000 ($0.045 per share), $218,000 ($0.045 per share), and $231,000 ($0.0475 per share) in first, second and third quarters, respectively. On September 23, 2005 the Company declared a quarterly dividend of $0.0475 per share payable on October 17 to shareholders of record on October 3, 2005, which resulted in a reduction in retained earnings of $238,000 in third quarter 2005.

     The Company as of September 30, 2005 had shareholders’ equity of $18,079,000, working capital of $4,187,000 and total assets of approximately $48,550,000.

     The Company has scheduled interest and principal payments under its debt obligations of approximately $7,668,000 during the next 12 months. In third quarter 2005, the Company entered into a capital lease obligation collateralized by existing Gamma Knife equipment. This obligation has a stated interest rate of 7.74%, is payable in 84 monthly payments, and matures in September 2012. The company has scheduled capital lease payments of approximately $557,000 during the next 12 months. The Company believes that its cash flow from operations and cash resources are adequate to meet its scheduled debt and capital lease obligations during the next 12 months.

     The Company has a $6,000,000 line of credit, renewable annually, available as needed for equipment purchases and working capital. Amounts drawn against the line of credit are secured by the Company’s cash invested with the bank. At September 30, 2005 there were no amounts drawn against the line of credit.

     The Company invests its cash primarily in money market or similar funds and high quality short to intermediate-term fixed income securities in order to maximize current income while minimizing the potential for principal erosion. A portion of these investments are classified as securities on the balance sheet and are consideredheld-to-maturityinvestments because it is the Company’s ability and intent to hold these securities until maturity. At September 30, 2005 these investments were primarily AAA rated or better government and corporate bonds with maturity dates from one year to approximately 18 months.

9

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.

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
10.22a	Addendum to Lease Agreement for a Gamma Knife unit effective April 1, 2005 between GK Financing, LLC and New England Medical Center Hospitals, Inc. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in

10

accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.)

10.49

Lease Agreement for a Gamma Knife unit dated as of May 28, 2004 between GK Financing, LLC and Mercy Health Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.)

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.

                         (b)       Reports on Form 8-K

The following report on Form 8-K was filed during the three months ended September 30, 2005:

Form 8-K dated and filed July 26, 2005 relating to a press release announcing the Company’s preliminary financial results for its second quarter of fiscal year 2005.

The following reports on Form 8-K were filed after September 30, 2005:

Form 8-K dated and filed October 27, 2005 relating to a press release announcing the Company’s preliminary financial results for its second quarter of fiscal year 2005.

11

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:         November 14, 2005	/s/ Ernest A. Bates, M.D.
	Ernest A. Bates, M.D.
	Chairman of the Board and Chief Executive Officer

Date:         November 14, 2005	/s/ Craig K. Tagawa
	Craig K. Tagawa
	Senior Vice President Chief Operating and Financial Officer

12