AMS

Business Context and Reporting Period

Company: American Shared Hospital Services (ASHS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: ASHS provides Gamma Knife radiosurgery units to medical centers. As of September 30, 2006, the Company operated 21 Gamma Knife units across the United States. The Company also invests in development-stage technologies, including a $2 million investment in Still River Systems, Inc. for proton beam radiation therapy.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 14.8% year-over-year for the nine-month period, driven by the inclusion of two new Gamma Knife units and a 2% increase in revenue at existing centers.
• Procedure Volume: The number of Gamma Knife procedures increased 9% to 1,967 for the nine-month period.
• Expense Increases:
  • Costs of Revenue: Increased $1.087 million, primarily due to higher maintenance costs for newer units and increased operating costs at retail turn-key sites.
  • Selling & Administrative: Increased $453,000 due to higher legal fees, business development costs, and bonuses related to the proton beam business.
  • Interest Expense: Increased $86,000 due to financing for a Gamma Knife upgrade and utilization of the line of credit.
• Tax Rate: The effective income tax rate rose to 39% for the nine months ended Sep 30, 2006, compared to 31% in the prior year. The prior year benefited from tax benefits on the exercise of previously expensed stock options.
• Investments: The Company invested $2 million in convertible preferred stock of Still River Systems, Inc. and $1 million for an option to purchase proton beam systems.

Guidance, Outlook, and Risks

• Future Projects:
  • Finalized an agreement for an image-guided radiation therapy (IGRT) system at Tufts-New England Medical Center, expected to commence in Q2 2007.
  • Ordered four Leksell Gamma Knife Perfexion systems for upgrades in 2007, with a total cost estimated between $12.4 million and $15.6 million. Financing commitments have been received.
  • Agreed to provide a Clinatron-250 PBRT system to Tufts-New England Medical Center, anticipated to commence in 2009 pending FDA approval.
• Liquidity: The Company maintains a $6 million line of credit, with $3.45 million drawn as of September 30, 2006. Management believes cash flow from operations is adequate to meet scheduled debt and lease obligations for the next 12 months.
• Risks: Forward-looking statements involve risks related to the Gamma Knife business, the development of IMRT and "The Operating Room for the 21st Century" programs, and the investment in Still River Systems, which is a development-stage company without a proven product.
• Dividends: The Company declared a quarterly dividend of $0.0475 per share on September 21, 2006.

Investor Verification Checklist

• Debt Servicing: Verify the Company's ability to service approximately $6.2 million in scheduled debt payments and $1.355 million in capital lease payments over the next 12 months.
• Capital Expenditures: Confirm the funding sources for the upcoming $12.4M–$15.6M investment in four new Gamma Knife Perfexion systems.
• Regulatory Approvals: Monitor the status of FDA approval and Massachusetts Department of Public Health Determination of Need for the Clinatron-250 PBRT system scheduled for 2009.
• Minority Interest: Review the profitability of the GK Financing subsidiary, which accounts for a significant portion of minority interest expense ($1.025 million for the nine months).
• Stock-Based Compensation: Note the transition to FASB Statement No. 123R in 2006, which began expensing stock options, though the impact on net income for the period was minimal ($25,000).