AMS

Business Context and Reporting Period

Company: American Shared Hospital Services (ASHS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: ASHS provides medical equipment and services, primarily Gamma Knife radiosurgery units and radiation therapy equipment, to medical centers. As of September 30, 2009, the company operated 19 Gamma Knife units across the United States. The company also holds a significant investment in Still River Systems, Inc., a developer of proton beam radiation therapy (PBRT) systems.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Medical services revenue decreased by $1,683,000 (11.7%) for the nine months ended September 30, 2009, compared to the same period in 2008. This was driven by lower patient volumes at one site, extended downtime for a Perfexion upgrade, and a shift in volume to sites with lower payment rates.
• Profitability Shift: While consolidated net income was $425,000, net loss attributable to ASHS shareholders was $(51,000), a significant decrease from net income of $394,000 in the prior year. This was primarily due to reduced revenue and transaction costs.
• Transaction Costs: The company incurred $342,000 in transaction costs for the nine-month period related to terminated negotiations for the sale of its 81% interest in GK Financing, LLC. No such costs were incurred in the prior year.
• Cost Management: Total costs of revenue decreased by $485,000, and selling and administrative expenses decreased by $482,000, largely due to lower operating costs at retail sites, reduced marketing, and lower payroll.
• Debt Structure: The company repaid $6,500,000 in line of credit advances from the prior year-end but drew $7,500,000 against the line of credit by September 30, 2009. Long-term debt decreased by approximately $3.7 million due to principal payments.

Guidance, Outlook, and Risks

• Equipment Upgrades and Expansion: The company has commitments totaling approximately $43,000,000 for future equipment purchases, including three Monarch250 proton beam systems from Still River and two Gamma Knife Perfexion units. Delivery of the first two proton beam systems is anticipated in late 2010 or 2011, pending FDA approval.
• Financing Risks: Management noted that obtaining financing has become more difficult due to current economic conditions. Recent financing for a Gamma Knife unit required a corporate guarantee, which was not previously required. There is no assurance that financing will be available for future projects at acceptable terms.
• Investment Impairment: The company holds a $2,617,000 investment in Still River Systems. While an unrealized loss of approximately $1.2 million exists based on recent financing rounds, management does not consider the impairment "other-than-temporary" due to Still River's progress on prototype testing and adequate cash flow.
• Operational Risks: Revenue is sensitive to physician turnover at client sites and equipment downtime for upgrades. One site performed zero procedures in the quarter due to physician turnover.

Investor Verification Checklist

• Financing Availability: Verify the company's ability to secure the remaining $43 million in equipment commitments given the tightened credit market and new requirement for corporate guarantees.
• Still River Progress: Monitor the timeline for FDA approval of the Monarch250 system and the status of the $2.25 million in deposits made toward the purchase of these units.
• Revenue Recovery: Assess whether the revenue decline is a temporary anomaly due to specific site issues (turnover, upgrades) or a structural shift in the market.
• Debt Covenants: Review the terms of the $9 million line of credit and long-term debt to ensure compliance with covenants, especially given the recent increase in interest rates on the line of credit.
• Stock Repurchase Program: Note that the company has repurchased approximately 919,000 shares to date, with 81,133 shares remaining under the current authorization.