UNITED STATES
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, 2010 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 1-08789
 
 
American Shared Hospital Services
(Exact name of registrant as specified in its charter)

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

Four Embarcadero Center, Suite 3700, San Francisco, California
94111
(Address of Principal Executive Offices)
(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 ¨   No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨      Accelerated Filer ¨      Non-Accelerated Filer ¨      Smaller reporting company x

As of November 1, 2010, there are outstanding 4,597,070 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)
 
ASSETS
 
September 30, 2010
   
December 31, 2009
 
             
Current assets:
           
Cash and cash equivalents
  $ 1,091,000     $ 833,000  
Restricted cash
    50,000       50,000  
Certificate of deposit
    9,000,000       9,000,000  
Accounts receivable, net of allowance for doubtful accounts of $100,000 in 2010 and 2009
    4,085,000       3,817,000  
Other receivables
    119,000       60,000  
Prepaid expenses and other assets
    540,000       495,000  
Current deferred tax assets
    219,000       219,000  
                 
Total current assets
    15,104,000       14,474,000  
                 
Property and equipment:
               
Medical equipment and facilities
    74,338,000       73,643,000  
Office equipment
    676,000       692,000  
Deposits and construction in progress
    6,041,000       5,852,000  
      81,055,000       80,187,000  
Accumulated depreciation and amortization
    (35,215,000 )     (36,898,000 )
                 
Net property and equipment
    45,840,000       43,289,000  
                 
Investment in preferred stock
    2,617,000       2,617,000  
Other assets
    201,000       241,000  
                 
Total assets
  $ 63,762,000     $ 60,621,000  
                 
LIABILITIES AND
 
(unaudited)
   
(audited)
 
SHAREHOLDERS' EQUITY
 
September 30, 2010
   
December 31, 2009
 
                 
Current liabilities:
               
Accounts payable
  $ 243,000     $ 318,000  
Employee compensation and benefits
    235,000       199,000  
Other accrued liabilities
    712,000       755,000  
                 
Current portion of long-term debt
    3,457,000       4,894,000  
Current portion of obligations under capital leases
    2,969,000       1,811,000  
                 
Total current liabilities
    7,616,000       7,977,000  
                 
Long-term debt, less current portion
    9,696,000       11,836,000  
Long-term capital leases, less current portion
    12,072,000       7,233,000  
Advances on line of credit
    8,500,000       7,900,000  
                 
Deferred income taxes
    2,920,000       2,920,000  
                 
Shareholders' equity:
               
Common stock (4,597,000 shares at September 30, 2010 and 4,595,000 shares at December 31, 2009)
    8,606,000       8,606,000  
Additional paid-in capital
    4,678,000       4,593,000  
Retained earnings
    6,222,000       6,205,000  
Total equity-American Shared Hospital Services
    19,506,000       19,404,000  
Non-controlling interest in subsidiary
    3,452,000       3,351,000  
Total shareholders' equity
    22,958,000       22,755,000  
                 
Total liabilities and shareholders' equity
  $ 63,762,000     $ 60,621,000  

See accompanying notes

 
1
 

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Medical services revenue
  $ 4,280,000     $ 3,926,000     $ 12,523,000     $ 12,676,000  
                                 
Costs of revenue:
                               
                                 
Maintenance and supplies
    441,000       350,000       1,256,000       1,143,000  
                                 
Depreciation and amortization
    1,494,000       1,637,000       4,455,000       4,888,000  
                                 
Other direct operating costs
    500,000       356,000       1,518,000       1,547,000  
                                 
      2,435,000       2,343,000       7,229,000       7,578,000  
                                 
Gross Margin
    1,845,000       1,583,000       5,294,000       5,098,000  
                                 
Selling and administrative expense
    1,091,000       875,000       3,235,000       2,870,000  
                                 
Transaction costs
    -       22,000       -       342,000  
                                 
Interest expense
    558,000       514,000       1,542,000       1,526,000  
                                 
Operating income
    196,000       172,000       517,000       360,000  
                                 
Other income - net
    27,000       -       89,000       16,000  
                                 
Income before income taxes
    223,000       172,000       606,000       376,000  
                                 
Income tax expense (benefit)
    19,000       16,000       51,000       (49,000 )
                                 
Net income
    204,000       156,000       555,000       425,000  
Less: Net income attributable to non-controlling interest
    (198,000 )     (139,000 )     (538,000 )     (476,000 )
                                 
Net income (loss) attributable to American Shared Hospital Services
  $ 6,000     $ 17,000     $ 17,000     $ (51,000 )
                                 
Net income (loss) per share:
                               
                                 
Earnings per common share - basic
  $ -     $ -     $ -     $ (0.01 )
                                 
Earnings per common share - assuming dilution
  $ -     $ -     $ -     $ (0.01 )

See accompanying notes

 
2
 
 
AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

   
PERIODS ENDED DECEMBER 31, 2008 AND 2009 AND SEPTEMBER 30, 2010
 
               
Additional
               
Non-controlling
       
   
Common
   
Common
   
Paid-in
   
Retained
   
Sub-Total
   
Interest in
       
   
Shares
   
Stock
   
Capital
   
Earnings
   
ASHS
   
Subsidiary
   
Total
 
                                           
Balances at January 1, 2008 (audited)
    5,026,000     $ 9,320,000     $ 4,304,000     $ 5,916,000     $ 19,540,000     $ 3,153,000     $ 22,693,000  
                                                         
Repurchase of common stock
    (316,000 )     (443,000 )     -       -       (443,000 )     -       (443,000 )
                                                         
Stock based compensation expense
    2,000       -       137,000       -       137,000       -       137,000  
                                                         
True-up tax benefit from share-based payment arrangements
    -       -       17,000       -       17,000       -       17,000  
                                                         
Cash distributions to non-controlling interest
    -       -       -       -       -       (798,000 )     (798,000 )
                                                         
Net income
    -       -       -       477,000       477,000       855,000       1,332,000  
                                                         
Balances at December 31, 2008 (audited)
    4,712,000       8,877,000       4,458,000       6,393,000       19,728,000       3,210,000       22,938,000  
                                                         
Repurchase of common stock
    (119,000 )     (271,000 )     -       -       (271,000 )     -       (271,000 )
                                                         
Stock based compensation expense
    2,000       -       135,000       -       135,000       -       135,000  
                                                         
Cash distributions to non-controlling interest
    -       -       -       -       -       (513,000 )     (513,000 )
                                                         
Net income (loss)
    -       -       -       (188,000 )     (188,000 )     654,000       466,000  
                                                         
Balances at December 31, 2009 (audited)
    4,595,000       8,606,000       4,593,000       6,205,000       19,404,000       3,351,000       22,755,000  
                                                         
Stock based compensation expense
    2,000       -       85,000       -       85,000       -       85,000  
                                                         
Cash distributions to non-controlling interest
    -       -       -       -       -       (437,000 )     (437,000 )
                                                         
Net income
    -       -       -       17,000       17,000       538,000       555,000  
                                                         
Balances at September 30, 2010 (unaudited)
    4,597,000     $ 8,606,000     $ 4,678,000     $ 6,222,000     $ 19,506,000     $ 3,452,000     $ 22,958,000  

See accompanying notes

 
3
 

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine months ended September 30,
 
   
2010
   
2009
 
Operating activities:
           
Net income
  $ 555,000     $ 425,000  
                 
Adjustments to reconcile net income to net cash from operating activities:
               
                 
Depreciation and amortization
    4,541,000       4,970,000  
                 
Stock based compensation expense
    85,000       101,000  
                 
Changes in operating assets and liabilities:
               
                 
Receivables
    (327,000 )     578,000  
                 
Prepaid expenses and other assets
    (45,000 )     (71,000 )
                 
Accounts payable and accrued liabilities
    (82,000 )     (326,000 )
                 
Net cash from operating activities
    4,727,000       5,677,000  
                 
Investing activities:
               
Payment for purchase of property and equipment
    (451,000 )     (880,000 )
                 
Investment in certificate of deposit
    -       (9,000,000 )
                 
Net cash from investing activities
    (451,000 )     (9,880,000 )
                 
Financing activities:
               
Cash distribution to non-controlling interest
    (437,000 )     (417,000 )
                 
Advances on line of credit
    600,000       1,700,000  
                 
Payments on line of credit
    -       (700,000 )
                 
Long term financing on purchase of property and equipment
    928,000       811,000  
                 
Capital lease financing on property and equipment
    1,000,000       -  
                 
Stock repurchase
    -       (271,000 )
                 
Principal payments on capital leases
    (1,604,000 )     (1,200,000 )
                 
Principal payments on long-term debt
    (4,505,000 )     (5,537,000 )
                 
Net cash from financing activities
    (4,018,000 )     (5,614,000 )
                 
Net change in cash and cash equivalents
    258,000       (9,817,000 )
                 
Cash and cash equivalents at beginning of period
    833,000       10,286,000  
                 
Cash and cash equivalents at end of period
  $ 1,091,000     $ 469,000  
                 
Supplemental cash flow disclosure:
               
Cash paid during the period for:
               
                 
Interest
  $ 1,838,000     $ 1,647,000  
                 
Income taxes
  $ 67,000     $ 51,000  
                 
Schedule of non-cash investing and financing activities
               
Acquisition of equipment with capital lease financing
  $ 6,601,000     $ 4,716,000  

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, 2010 and the results of its operations for the three and nine month periods ended September 30, 2010 and 2009, which results are not necessarily indicative of results on an annualized basis.  Consolidated balance sheet amounts as of December 31, 2009 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, 2009 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”); and American Shared Radiosurgery Services (“ASRS”); ASRS majority-owned subsidiary, GK Financing, LLC (“GK Financing”); GKF wholly-owned subsidiaries, GK Financing U.K. (“GKUK”), Limited and Instituto de Gamma Knife del Pacifico S.A.C. (“GKPeru”); and ASHS majority owned subsidiary, Long Beach Equipment, LLC (“LBE”).

The Company through its majority-owned subsidiary, GK Financing, provided Gamma Knife units to nineteen medical centers as of September 30, 2010 in Arkansas, California, Connecticut, Florida, Illinois, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Tennessee, Oklahoma, Ohio, Pennsylvania, Texas and Wisconsin.

The Company also directly provides radiation therapy and related equipment, including Intensity Modulated Radiation Therapy (“IMRT”), Image Guided Radiation Therapy (“IGRT”) and a CT Simulator to the radiation therapy department at an existing Gamma Knife site.

The Company has formed the subsidiaries GKUK, GKPeru and LBE for the purposes of expanding its business into the United Kingdom and Peru and to provide proton beam therapy services in Long Beach, California.  None of these entities are expected to generate significant operations for the remainder of 2010.

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

Certain reclassifications have been made to the 2009 balances to conform with the 2010 presentation.

 
5
 

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, 2010 basic earnings per share was computed using 4,597,000 and 4,596,000 common shares, respectively, and diluted earnings per share was computed using 4,621,000 and 4,609,000 common shares and equivalents, respectively.  For the three and nine months ended September 30, 2009, basic earnings per share was computed using 4,634,000 and 4,677,000 common shares, respectively, and diluted earnings per share was computed using 4,636,000 and 4,677,000 common shares and equivalents, respectively.

The computation for the three month periods ended September 30, 2010 and 2009 excluded approximately 310,000 and 599,000, respectively, of the Company’s stock options because the exercise price of the options was higher than the average market price during the period.  The computation for the nine month period ended September 30, 2009 excluded all stock options issued since the effect of including them would be anti-dilutive because of the net loss.

Note 3.               Stock-based Compensation

On June 2, 2010, the Company’s shareholders approved an amendment and restatement of the 2006 Stock Incentive Plan (the “2006 Plan”). Among other things, the amendment and restatement increased the number of shares of the Company’s common stock reserved for issuance under the 2006 Plan by an additional 880,000 shares from 750,000 shares to 1,630,000 shares.  The shares are reserved for issuance to officers of the Company, other key employees, non-employee directors, and advisors.  The 2006 Plan serves as successor to the Company’s previous two stock-based employee compensation plans, the 1995 and 2001 Stock Option Plans.  The shares reserved under those two plans, including the shares of common stock subject to currently outstanding options under the plans, were transferred to the 2006 Plan, and no further grants or share issuances will be made under the 1995 and 2001 Plans.  Under the 2006 Plan, there are 2,000 restricted stock units granted, consisting of annual automatic grants to non-employee directors, and approximately 605,000 options granted, of which approximately 385,000 options are vested, as of September 30, 2010.

Compensation expense associated with the Company’s stock-based awards to employees is calculated using the Black-Scholes valuation model.  The Company’s stock-based awards have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the present value estimates.  The estimated fair value of the Company’s option grants is estimated using assumptions for expected life, volatility, dividend yield, and risk-free interest rate which are specific to each award.  The estimated fair value of the Company’s options is amortized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period.  Accordingly, stock-based compensation cost before income tax effect in the amount of approximately $29,000 and $85,000 is reflected in net income for the three and nine month periods ended September 30, 2010, respectively, compared to approximately $35,000 and $101,000 in the same periods in the prior year.  There were no options issued and no options exercised during the three month period ended September 30, 2010.  There were no excess income tax benefits to report.

 
6
 

Note 4.               Convertible Preferred Stock Investment

As of September 30, 2010 the Company has a $2,617,000 investment in the convertible preferred stock (“Preferred Stock”) of Still River Systems, Inc. (“Still River”), representing an approximate 1.8% interest in Still River.  The Company accounts for this investment under the cost method.

The Preferred Stock is convertible at any time at the option of the holder into shares of common stock of Still River at a conversion price, initially set at the original purchase price, but subject to certain adjustments including an anti-dilutive multiplier.  The Preferred Stock has voting rights equivalent to the number of common stock shares into which it is convertible, and holders of the Preferred Stock, subject to certain exceptions, have a pro-rata right to participate in subsequent stock offerings.  In the event of liquidation, dissolution, or winding up of Still River, the Preferred Stock holders have preference to the holders of common stock, and any other class or series of stock that is junior to the Preferred Stock .   The Company does not have the right to appoint a member of the Board of Directors of Still River.

The Company carries its investment in Still River at cost and reviews it for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value of the investment may not be recoverable.  The Company evaluated this investment for impairment at December 31, 2009 and at September 30, 2010 in light of both current market conditions and the ongoing needs of Still River to raise cash to continue its development of the first compact, single room PBRT system.
 
During the first quarter of 2009, Still River proposed a Series D round of financing to raise cash, which it was able to do, but at a per share price lower than the Company’s cost basis investment.  The Company calculated that, based on the Series D funding, there is an unrealized loss of approximately $1.2 million compared to the Company’s cost of its investment.  However, based on its analysis, the Company believes that this investment is only temporarily impaired.  The Company believes that this is a temporary situation brought on solely due to the worldwide economic downturn, and is not a reflection on the progress or viability of Still River or its PBRT design, and believes that its investment in Still River is temporarily impaired.  It is the Company’s intent to hold this investment for a reasonable period of time sufficient for a recovery of the investment’s fair value; therefore the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2010.
 
Note 5.               Line of Credit
 
The Company amended its $9,000,000 line of credit with the Bank of America (the “Bank”) effective August 1, 2010, extending it for a two year period.  The line of credit is drawn on from time to time as needed for equipment purchases and working capital.  Amounts drawn against the line of credit are at an interest rate per year equal to the Bank’s Prime Rate, or alternately the LIBOR rate plus 1.50 percentage points, and are secured by the Company’s cash invested with the Bank.  The weighted average interest rate during the first nine months of 2010 was 2.01%.  At September 30, 2010, $8,500,000 was borrowed against the line of credit.

 
7
 

Note 6.               Fair Value of Financial Instruments

The carrying value of financial instruments including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other accrued liabilities approximated their fair value as of September 30, 2010 and December 31, 2009 because of the relatively short maturity of these instruments.  The fair value of the Company’s various debt obligations, discounted at currently available interest rates was approximately $27,878,000 and $25,746,000 at September 30, 2010 and December 31, 2009, respectively.

Note 7.               Repurchase of Common Stock

In 1999 and 2001, the Board of Directors approved resolutions authorizing the Company to repurchase up to a total of 1,000,000 shares of its own stock on the open market, and in 2008 the Board reaffirmed this authorization.  The Company did not repurchase any of its stock during the first nine months of 2010, but repurchased approximately 119,000 shares of its stock during 2009.  There are approximately 81,000 shares remaining under this repurchase authorization.

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 and radiation therapy businesses, the risks of developing The Operating Room for the 21 st Century® program, and the risks of investing in a development-stage company, Still River Systems, Inc. (“Still River”), without a proven product.  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, 2009 and the definitive Proxy Statement for the Annual Meeting of Shareholders held on June 2, 2010.

  The Company had nineteen Gamma Knife units in operation at both September 30, 2010 and September 30, 2009.  Fourteen of the Company’s nineteen current Gamma Knife customers are under fee-per-use contracts, and five customers are under retail arrangements.  The Company’s contract to provide additional radiation therapy and related equipment services to an existing Gamma Knife customer is considered a retail arrangement.  Retail arrangements are further classified as either turn-key or 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 equipment.  Revenue is recorded on a gross basis and estimated based on historical experience and hospital contracts with third party payors.  For revenue sharing arrangements, the Company receives a contracted percentage of the reimbursement received by the hospital.  The gross amount the Company expects to receive is recorded as revenue and estimated based on historical experience.

 
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Medical services revenue increased by $354,000 and decreased by $153,000 to $4,280,000 and $12,523,000 for the three and nine month periods ended September 30, 2010 from $3,926,000 and $12,676,000 for the three and nine month periods ended September 30, 2009, respectively.  The increase for the three month period is primarily due to an increase in Gamma Knife volume at several sites compared to the same period in the prior year, particularly at sites where the Company has upgraded its existing Gamma Knife units or replaced Gamma Knife units with Perfexion units.  As a result, revenue from Gamma Knife operations increased by $414,000 to $4,040,000 from $3,626,000 for the same quarter in the prior year.  The increase for the quarter was partially offset by a $60,000 decrease in revenue from $300,000 to $240,000 from the Company’s radiation therapy contract.   The decrease for the nine month period is primarily due to a shift in volume during the period to Gamma Knife sites with relatively lower payment rates per procedure compared to the same period in the prior year, partially offset by revenue generated from a 5% increase in overall Gamma Knife procedure volume.  As a result, revenue from Gamma Knife operations during the nine month period decreased $10,000 to $11,703,000 from $11,713,000 compared to the same period in the prior year.  In addition, revenue from the Company’s radiation therapy contract for the nine month period decreased by $143,000 to $820,000 from $963,000 for the same period in the prior year due to lower volume at that site.

The number of Gamma Knife procedures increased by 64 and by 68 to 497 and 1,399 for the three and nine month periods ended September 30, 2010 from 433 and 1,331 in the same periods in the prior year, respectively.  For both the three and nine month periods, there were volume increases at many of the Company’s sites, particularly those where the Company has upgraded its existing Gamma Knife units or replaced Gamma Knife units with Perfexion units.  For both the three and nine month periods, these increases were partially offset by decreases in the number of procedures performed at four of the Company’s historically higher volume sites.

Total costs of revenue increased by $92,000 and decreased by $349,000 to $2,435,000 and $7,229,000 for the three and nine month periods ended September 30, 2010 from $2,343,000 and $7,578,000 for the three and nine month periods ended September 30, 2009.  Maintenance and supplies increased by $91,000 and $113,000 for the three and nine month periods ended September 30, 2010 compared to the same periods in the prior year, primarily due to maintenance contracts that started in fourth quarter 2009 and second quarter 2010 at two sites after coming off warranty, and higher costs for repairs and maintenance that were not covered by maintenance contracts.  Depreciation and amortization decreased by $143,000 and $433,000 for the three and nine month periods ended September 30, 2010 compared to the same periods in the prior year.  The decrease for both the three and nine month periods is partially due to a change in the asset life of one Gamma Knife unit because the contract with the customer was extended.  In addition, depreciation on three other units ended because the remaining value of the equipment had reached salvage value.  Other direct operating costs increased by $144,000 and decreased by $29,000 for the three and nine month periods ended September 30, 2010 compared to the same periods in the prior year.  For the three month period, the increase is primarily due to higher insurance, marketing and operating costs in connection with the Company’s retail sites, partially offset by a decrease in property taxes.  For the nine month period, the decrease is primarily due to lower insurance expense, property taxes and operating costs in connection with the Company’s retail sites, partially offset by higher marketing costs.

 
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Selling and administrative costs increased by $216,000 and $365,000 to $1,091,000 and $3,235,000 for the three and nine month periods ended September 30, 2010 from $875,000 and $2,870,000 for the same periods in the prior year, respectively.  For both the three and nine month periods, this increase was primarily due to higher legal and accounting fees and travel related costs in connection with developing new business.  For the three month period, the increase was also due to higher investor relations costs.

There were no transaction costs during the three and nine month periods ended September 30, 2010 compared to $22,000 and $342,000 for the three and nine month periods ended September 30, 2009.  The transaction costs in 2009 were legal, accounting, investment banking and other costs related to discussions the Company had with two parties concerning the possible sale of its 81% interest in GKF, one of which provided indicative pricing that would have been attractive to the Company, if it were to sell its interest in GK Financing.  In May 2009, the Company announced that the parties failed to reach an agreement and that the negotiations had terminated.

Interest expense increased by $44,000 and $16,000 to $558,000 and $1,542,000 for the three and nine month periods ended September 30, 2010 from $514,000 and $1,526,000 for the three and nine month periods ended September 30, 2009, respectively.  For both the three and nine month periods, this was primarily due to increased interest expense on the Company’s line of credit with a bank, as well as increased interest expense from new financing obtained on two Gamma Knife units in 2009, new financing on two Gamma Knife units in the second and third quarters 2010 and financing of a 2009 Gamma Knife upgrade that occurred in the third quarter 2010.  This was partially offset by lower interest expense on debt relating to the more mature Gamma Knife units.  The more mature units have lower interest expense because interest expense decreases as the outstanding principal balance of each loan is reduced.

Other income - net increased by $27,000 and $73,000 to $27,000 and $89,000 for the three and nine month periods ended September 30, 2010 from zero and $16,000 for the same periods in the prior year, respectively.   The increase for both the three and nine month periods was primarily due to an increase in interest income as a result of higher interest rates available on invested cash balances.  For both the three and nine month periods this was partially offset by a cost of approximately $9,000 from the early extinguishment of debt.  For the nine month period ended September 30, 2009 there was a cost of approximately $20,000 from the early extinguishment of debt.

 
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The Company had income tax expense of $19,000 and $51,000 for the three and nine month periods ended September 30, 2010 compared to income tax expense of $16,000 and an income tax benefit of $49,000 for the three and nine month periods ended September 30, 2009, respectively.  For both the three and nine month periods ended September 30, 2009 this increase is due to an increase in income before income taxes to $223,000 and $606,000 compared to income before income taxes of $172,000 and $376,000 for the same period in 2009.  Also, based on the Company’s current estimated effective income tax rate for 2010, a 75% income tax provision was applied to net income before income taxes and net income attributable to non-controlling interest, compared to a 49% rate applied in 2009 which resulted in an income tax benefit.  The Company’s effective income tax rate is higher than the expected statutory federal and state income tax rates at a consolidated level, primarily due to higher income at the Company’s subsidiary levels in certain states where there are separate state income tax filing requirements.

Net income attributable to non-controlling interest increased by $59,000 and by $62,000 to $198,000 and $538,000 for the three and nine month periods ended September 30, 2010 from $139,000 and $476,000 for the three and nine month periods ended September 30, 2009, due to increases in the profitability of GK Financing.  Non-controlling interest represents the 19% interest of GK Financing owned by a third party.

The Company had net income of $6,000, or $0.00 per diluted share, and $17,000, or $0.00 per diluted share, for the three and nine month periods ended September 30, 2010, compared to net income of $17,000, or $0.00 per diluted share, and a net loss of $51,000, or ($0.01) per diluted share, in the same periods in the prior year, respectively.  The decrease for the three month period was primarily due to higher costs of revenue, selling and administrative costs and net income attributable to non-controlling interest, partially offset by an increase in medical services revenue compared to the prior year.  The increase for the nine month period was primarily due to reduced costs of revenue and no transaction costs compared to the prior year, partially offset by lower medical services revenue, higher selling and administrative costs and increased income tax expense.
 
Liquidity and Capital Resources

The Company had cash and cash equivalents of $1,091,000 at September 30, 2010 compared to $833,000 at December 31, 2009.  The Company’s cash position increased by $258,000 due to net cash from operating activities of $4,727,000, capital lease and long term debt financing on the purchase of property and equipment of $1,928,000 and advances on the Company’s line of credit with a bank of $600,000.  These increases were partially offset by payments for the purchase of property and equipment of $451,000, principal payments on long term debt and capital leases of $6,109,000 and distributions to the non-controlling interest of $437,000.

As of September 30, 2010, the Company has a $9,000,000 principal investment in a certificate of deposit with a bank at an interest rate of 0.7% and a maturity date in August 2012.

The Company has a two year renewable $9,000,000 line of credit with a bank, 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, 2010 there was $8,500,000 drawn against the line of credit.

 
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The Company has scheduled interest and principal payments under its debt obligations of approximately $4,662,000 and scheduled capital lease payments of approximately $4,293,000 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 as of September 30, 2010 had shareholders’ equity of $22,958,000, working capital of $7,488,000 and total assets of $63,762,000.

Commitments
 
The Company has a $2,617,000 preferred stock investment in Still River Systems, Inc., a development stage company, which is considered a long-term investment on the balance sheet and is recorded at cost.   As of September 30, 2010, the Company also has $2,250,000 in deposits toward the purchase of three Monarch250 proton beam radiation therapy (PBRT) systems from Still River.  For the first two machines, the Company has a commitment to total deposits of $3,000,000 per machine until FDA approval is received, at which time the remaining balance is committed.  The delivery dates for the first two machines are anticipated to be in 2012.  For the third machine, the Company has a commitment to total deposits of $500,000 until FDA approval is received, at which time the remaining balance is committed.  The Company has entered into an agreement with a radiation oncology physician group, which has contributed $50,000 towards the deposits on the third machine.  The Still River PBRT system is not commercially proven and there is no assurance FDA approval will be received.
 
The Company has made deposits totaling $2,345,000 towards the purchase of a Gamma Knife Perfexion unit at a site still to be determined and an LGK Model 4 Gamma Knife, expected to be installed in early 2011 at a new customer site.
 
Including the commitments for the three Monarch250 systems, the Perfexion unit and the LGK Model 4 Gamma Knife, the Company has total remaining commitments to purchase equipment in the amount of approximately $40,000,000.  It is the Company’s intent to finance these purchase commitments as needed.  However, since the economic and credit market downturn that began in the latter part of 2008, it has been more difficult to obtain financing for the Company’s projects.  The Company expects that it will not receive financing commitments from a lender for its PBRT systems until Still River obtains FDA approval on the Monarch250.  As such, there can be no assurance that financing will be available for the Company’s current or future projects, or at terms that are acceptable to the Company.

Impairment Evaluation of Still River

The Company carries its investment in Still River at cost and reviews it for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value of the investment may not be recoverable.  The Company evaluated this investment for impairment at December 31, 2009 and reviewed it at September 30, 2010 in light of both current market conditions and the ongoing needs of Still River to raise cash to continue its development of the first compact, single room PBRT system.

 
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During the first quarter of 2009, Still River proposed a Series D round of financing to raise cash, which it was able to do, but at a per share price lower than the Company’s cost basis investment.  The Company calculated that, based on the Series D funding, there is an unrealized loss of approximately $1.2 million compared to the Company’s cost of its investment.  However, based on its analysis, the Company believes that this investment is only temporarily impaired.  It is the Company’s intent to hold this investment for a reasonable period of time sufficient for a recovery of the investment’s fair value; therefore the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2010, based in part on the following:
 
 
·
Still River’s single room PBRT concept and design, although a departure from the large scale three and four room PBRT systems on the market, is based on the existing principle of generating protons from a cyclotron. Still River, through design innovations and advances in magnet technology, has made the cyclotron more compact such that it can be mounted on the gantry.
 
·
A gantry mounted cyclotron, although appearing to be revolutionary, has in fact been done previously.  A neutron generating gantry mounted cyclotron has successfully treated patients for over ten years at one medical center in the United States.
 
·
Still River’s development approach for the Monarch250 has been to integrate as many commercially existing components as possible into the Monarch250.  The patient couch, CT imaging and treatment planning software are all commercially available and will be integrated into the Monarch250.
 
·
Still River has hired engineers and staff with many years of accelerator and proton beam experience, including personnel with prior experience at MIT’s Plasma Fusion Lab and one of Still River’s proton beam competitors.
 
·
Still River has built the first three units of the magnet and other cyclotron subsystems, has completed the manufacture/assembly of the gantry system, and demonstrated integrated software control of all cyclotron operations on the prototype unit.
 
·
Still River completed and passed the cold mass test on the prototype unit in 2009 and completed the beam extraction test during second quarter 2010.  Both the cold mass test and beam extraction test are considered major milestones and an integral part of the process towards gaining FDA approval.
 
·
Although there were some minor problems during some of the tests that were quickly rectified, they caused delays in the scheduled delivery of the first unit.  As a result, the Company’s expected delivery of its two units has also been delayed.  However, minor problems such as these are expected in a new technology, and do not affect the Company’s position on the viability of Still River technology.
 
·
Installation of the system is performed in three phases:  Phase 1 consists of rigging and mounting the gantry; Phase 2 includes assembling and installing the clinical environment and the clinical software interfaces; Phase 3 consists of the installation of the accelerator module.  The first two installation phases have been completed at the first site, and Still River has begun work on the final phase, with installation at the site expected in May 2011.
 
·
A respected physicist was hired by the Company as a third party consultant to perform a technical review of this project, and continues to make periodic reviews of Still River’s progress at the request of the Company.  His discussions with Still River’s chief technology officer indicated that the delays encountered have at times resulted in modifications being required, but the modifications were not significant, and he believes that development of the PBRT machine will be completed according to Still River’s timeline.  The consultant was not engaged to analyze Still River’s financial condition.

 
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·
In spite of the uncertain economic climate and a limited number of potential investors, with the Series D offering, Still River was still able to raise the cash required to continue its operations, and was able to add two new major investors.  Still River also raised additional funding under the Series D offering in second quarter 2010.  The Company chose not to invest in this additional funding.
 
·
Based on ongoing discussions with Still River management and regular review of their financial statements and cash flow projections, the Company believes that Still River will have adequate cash flow to continue development of the system.  Still River, as a development stage company manufacturing its first product, continuously analyzes its cash requirements.  Due to the high level of interest in more compact and lower cost proton beam radiation therapy devices, Still River has been able to attract funding from financially significant and highly sophisticated investors, such as Caxton Health and Life Sciences, Venrock Associates and CHL Medical Partners.  Still River is prepared, as required, to raise additional funds as its needs dictates.
 
·
In recent months Still River added a new CEO, strengthening its management depth, and with the new investors, increased its board strength as well.  Independent board members consist of the following:  Robert Wilson, Former Vice Chairman of Johnson and Johnson; Peter P. D’Angelo, President, Caxton Associates; Dr. Anders Hove, MD, Partner, Venrock Associates; Dr. Myles D. Greenberg, MD, General Partner, CHL Medical Partners; Dr. Jay Rao, MD, JD, Portfolio Manager, Green Arrow Capital Management; and Mr. Paul Volcker, Former Chairman, United States Federal Reserve.
 
·
Still River currently has deposits from 15 sites to install the Monarch250 system.
 
The estimated recovery period is anticipated to occur subsequent to the first system’s clinical treatment of patients, which would shortly follow obtaining FDA approval.  The treatment of patients is anticipated to begin by late 2011.  The Company has the intent and the ability to maintain its investment in Still River until at least these milestones are met.

Item 3.               Quantitative and Qualitative Disclosures About Market Risk

The Company does not hold or issue derivative instruments for trading purposes and is not a party to any instruments with leverage or prepayment features.  The Company does not have affiliation with partnerships, trust or other entities whose purpose is to facilitate off-balance sheet financial transactions or similar arrangements , and therefore has no exposure to the financing, liquidity, market or credit risks associated with such entities.  At September 30, 2010 the Company had no significant long-term, market-sensitive investments.

 
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Item 4.               Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934.  These controls and procedures are designed to ensure that material information relating to the company and its subsidiaries is communicated to the chief executive officer and the chief financial officer.  Based on that evaluation, our chief executive officer and our chief financial officer concluded that, as of September 30, 2010, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the chief executive officer and the chief financial officer, and recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the three months ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.             Legal Proceedings.
None.

Item 1A.          Risk Factors
There are no changes from those listed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2.             Unregistered Sales of Equity Securities and Use of Proceeds.
None.

Item 3.             Defaults Upon Senior Securities.
None.

Item 4.               Removed and Reserved .

Item 5.             Other Information.
None.

Item 6.             Exhibits.
(a)             Exhibits
The following exhibits are filed herewith:

 
10.18b
Second Amendment to Lease Agreement for a Gamma Knife unit effective as of December 23, 2009 between GK Financing, LLC and Methodist Healthcare System of San Antonio, Ltd., d/b/a Southwest Texas Methodist Hospital (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.)

 
15
 

 
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.

 
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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 15, 2010
/s/ Ernest A. Bates, M.D.
 
   
Ernest A. Bates, M.D.
 
   
Chairman of the Board and Chief Executive Officer
 
       
Date:
November 15, 2010
/s/ Craig K. Tagawa
 
   
Craig K. Tagawa
 
   
Senior Vice President
 
   
Chief Operating and Financial Officer
 

 
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Exhibit 10.18b
 
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.
 
SECOND AMENDMENT TO
LEASE AGREEMENT FOR A GAMMA KNIFE UNIT
(PERFEXION UPGRADE)
 
This SECOND AMENDMENT TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT (this “Second Amendment”) is dated effective as of December 23, 2009 (the “Effective Date”)  and is entered into by and between GK FINANCING, LLC , a California limited liability company (“GKF”), or its wholly owned subsidiary whose obligation under this agreement shall be guaranteed by GKF, and METHODIST HEALTHCARE SYSTEM OF SAN ANTONIO, LTD., d/b/a Southwest Texas Methodist Hospital, a Texas corporation ("Hospital").

Recitals :

A.           On October 29, 1996, GKF and Hospital entered into a certain Lease Agreement For A Gamma Knife Unit (as amended, the “Lease”), which was amended pursuant to a certain Addendum dated October 31, 1996, Addendum Two dated October 16, 1997, and an Amendment To Lease Agreement For A Gamma Knife Unit dated effective December 13, 2003 (the “First Amendment”).
 
B.           Hospital and GKF desire to further amend the Lease to provide for the replacement and upgrade of the existing Leksell Gamma Knife, Model B (the “Model B”) that is currently being leased by GKF to Hospital pursuant to the Lease, with a Leksell Gamma Knife Perfexion unit (such Perfexion unit leased hereunder is referred to as the “Perfexion”), which will be installed at the existing Site at which the Model B is currently installed, and contemporaneously with the de-installation of the Model B.
 
Agreement :

NOW, THEREFORE , in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.            Defined Terms .  Unless otherwise defined herein, the capitalized terms used herein shall have the same meanings set forth in the Lease.
 
2.            Upgrade of the Model B to the Perfexion .
 
a.      Subject to the terms and conditions set forth herein, GKF shall acquire and hold title to, and install the Perfexion with new cobalt-60 source, at the Site (the “Perfexion Upgrade”).  GKF shall use its commercially reasonable efforts to perform the Perfexion Upgrade on or around April 2010, subject to availability of the Perfexion from the equipment manufacturer, issuance of all regulatory approvals, permits and/or waivers, and completion of construction of the Site.  The parties acknowledge that Hospital may not be able to perform procedures for several weeks during the Perfexion Upgrade and the deinstallation of the Model B.  Prior to the Perfexion Upgrade, Hospital shall enter into a mutually acceptable LGK Agreement with Elekta for the Perfexion.

 
 
 
   
Exhibit 10.18b
 
b.      GKF shall be solely responsible for the construction and preparation of the Site in connection with the Perfexion Upgrade and the rigging and installation of the Perfexion.
 
c.      GKF shall be solely responsible for maintenance and service, personal property taxes, and the cost of insurance coverage for the Perfexion to the same extent and at the same levels as required under the Lease.
 
d.      In connection with the Perfexion Upgrade, Hospital, at Hospital’s sole cost and expense, shall provide GKF with Hospital personnel (including Hospital physicists) and services upon reasonable request and as reasonably required by GKF, among other things, to oversee, supervise and assist with construction and compliance with local, state and federal regulatory requirements and with nuclear regulatory compliance issues and the calibration of the Perfexion.
 
e.      Notwithstanding the foregoing, the Perfexion Upgrade shall be performed by GKF only after all necessary and appropriate licenses, permits, approvals, waivers, consents and authorizations, and the proper handling of the cobalt-60 (collectively, the “Permits”), have been obtained by Hospital at Hospital’s sole cost and expense.  The timing and procedure for the Perfexion Upgrade shall be as mutually agreed upon between the parties.
 
f.      In consideration for the Perfexion Upgrade, Hospital shall pay to GKF the sum of *, which shall be paid in full by Hospital to GKF upon shipment of the Perfexion to the Site.  It is acknowledged by the parties that the foregoing payment by Hospital as set forth in this Section has been factored by GKF into the calculation of Hospital’s Per Procedure Payments.
 
g.      Upon request by GKF and at GKF’s reasonable expense, Hospital shall execute and deliver a commercially reasonable form of consent to sublease if such a document is reasonably requested by the third party financing company which holds a security interest in the Perfexion.
 
h.      In order to facilitate Hospital’s earlier use of Elekta’s software that allows 3T and 1.5T planning scans to be merged, GKF shall use its commercially reasonable efforts to cause Elekta to issue the necessary software licenses to allow the use of such software with the Model B (prior to the Perfexion Upgrade) in addition to its use with the Perfexion.
 
i.       GKF agrees to provide Hospital the option to retain its existing headframes, fiducial boxes, pin sets and table adapters from the Model B for use on the Perfexion.  In the event that Hospital exercises this option, GKF also agrees that it shall, at its sole cost and expense, refurbish such existing headframes, fiducial boxes, and table adapters (but not the existing pin sets) for use on the Perfexion.  It is acknowledged that the Perfexion will come with two (2) new headframes, one (1) new fiducial box, new pin sets and one (1) new table adapter.
 
j.       GKF, at its cost and expense, shall cover the Perfexion training tuition costs for those physicians and physicists who will be using the Perfexion.  Such training shall be on-site at Hospital during a one-week period to be coordinated between Hospital and Elekta.  Any travel and entertainment associated with training shall not be the responsibility of GKF.
 
3.            De-Installation of the Model B; No Ownership Interests .   Promptly following the Perfexion Upgrade, GKF shall de-install, remove and retain all ownership rights and title to the existing Model B.  Notwithstanding anything to the contrary set forth in the Lease or herein, Hospital shall have no ownership interest (or option to purchase any ownership interest) in the Model B and/or the Perfexion, and Hospital hereby waives any ownership interest (or option to purchase any ownership interest) in the Model B and/or the Perfexion.

 
 
 
   
Exhibit 10.18b
 
4.            Extension of Lease Term .  In consideration of GKF’s agreement to perform the Perfexion Upgrade, the Term is hereby extended to the date that is ten (10) years following the First Perfexion Procedure Date (as hereinafter defined) ; provided that (a) if the Perfexion is delivered to the Site prior to April 7, 2010 ( i.e. , the former expiration date of the Lease), then, in order to offset the effect of the earlier delivery of the Perfexion, the Term will be automatically extended further by the number of days between such Perfexion delivery date and April 7, 2010; and (b) the Term may be further extended as set forth in Section 7 below.
 
5.             Compensation .
 
a.        The parties acknowledge that the compensation payable to GKF for the Perfexion as set forth in this Second Amendment has been negotiated by the parties at arm’s length based upon reasonable and jointly derived assumptions regarding the capacity for clinical services available from the Perfexion, Hospital’s capabilities in providing high quality radiation oncology services, market dynamics, GKF’s risk in providing the Perfexion, and the provision to GKF of a reasonable rate of return on its investment in support of the Perfexion.  Based thereon, the Parties believe that the Per Procedure Payments represent fair market value for the use of the Perfexion, the de-installation and removal of the Model B, the Perfexion Upgrade, marketing support, maintenance and service, personal property taxes, cost of insurance coverage for the Perfexion, and the other additional services and costs to be provided or paid for by GKF pursuant to this Second Amendment, and taking into account the Hospital’s payment pursuant to Section 2.f above.  Hospital undertakes no obligation to perform any minimum number of procedures on the Perfexion, and the use of the Perfexion for the performance of procedures is wholly based upon the independent judgment of physicians who order such procedures to meet the medical needs of their patients.
 
b.        Commencing from the first procedure performed using the Perfexion at the Site (the “First Perfexion Procedure Date”) and continuing through the duration of the Term (as extended hereby), Hospital shall pay to GKF on a monthly basis, the applicable payments for each and every “Procedure” (as defined below) as set forth in Exhibit “A” attached hereto (“Per Procedure Payments”).  For the avoidance of doubt, Per Procedure Payments shall be due and owing to GKF for each and every Procedure that is performed by Hospital, its representatives, affiliates, joint ventures and/or partnerships, on an inpatient or outpatient basis, and/or “under arrangement,” and irrespective of (i) whether the Procedure is performed on the Perfexion or using any other equipment or devices, or (ii) the actual amounts billed or collected, if any, pertaining to such Procedures. The parties acknowledge that the Per Procedure Payments represent fair market value for the use of the Perfexion as described herein.  As used herein, "Procedure" means any treatment that involves stereotactic, external, single fraction, conformal radiation, commonly called radiosurgery, that may include one or more isocenters during the patient treatment session, delivered to any site(s) superior to the foramen magnum.
 
c.        On or before the fifteenth (15) day and the last day of each month (or portion thereof) during the Term of the Lease (as extended hereby), Hospital shall inform GKF in writing as to the number of Procedures performed during that month utilizing the Perfexion (and, if applicable, any other equipment or devices).  If no Procedures are performed utilizing the Perfexion or any other equipment or devices, no Per Procedure Payments shall be owing by Hospital to GKF.
 
d.        GKF shall submit an invoice for Per Procedure Payments to Hospital on the fifteenth (15th) and the last day of each calendar month (or portion thereof) for the actual number of Procedures performed utilizing the Perfexion and any other equipment or devices during the first and second half of the calendar month, respectively.  Hospital shall pay the invoice within thirty (30) days after submission by GKF to Hospital.  All or any portion of an invoice which is not paid in full within forty-five (45) days after submission shall bear interest at the rate of one and one-half percent (1.50%) per month (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) until the unpaid invoice together with all accrued interest thereon is paid in full.

 
 
 
   
Exhibit 10.18b
 
e.        Throughout the Term (as extended hereby) and thereafter until final settlement of all amounts owed to either party under the Lease, each party shall have the right at reasonable times and upon reasonable advance notice to inspect, audit and copy the other party’s books and records which relate to scheduling and billing of, and reimbursement for, Procedures performed (utilizing the Perfexion and/or any other equipment or devices) and the Per Procedure Payments.
 
f.             Notwithstanding the foregoing, the compensation payable to GKF pertaining to procedures performed prior to the First Perfexion Procedure Date shall continue to be calculated and paid by Hospital in accordance with the First Amendment.
 
6.             Marketing Support . The parties obligations with respect to marketing the Perfexion shall continue in the same manner and with the same amounts as set forth in Section 6 of the First Amendment.
 
7.            Cobalt Reload .  I f GKF and Hospital mutually agree to reload the Cobalt-60 source (i.e., after six (6) years have elapsed following the First Perfexion Procedure Date), then, (a) GKF will be solely responsible for the costs of such Cobalt-60 reloading; and (b) the Term (as extended by this Second Amendment) shall be further extended for an additional two (2) years, plus the period of time during which the Perfexion is not in use due to the Cobalt-60 reloading.
 
8.            Termination for Economic Justification .  Notwithstanding anything to the contrary contained in the Lease or herein, if, at any time after the initial twelve (12) months following the First Perfexion Procedure Date , based upon the utilization of the Perfexion and other factors considered relevant by GKF in the exercise of its reasonable   discretion, within a reasonable period of time after GKF’s written request, Hospital does not provide GKF with a reasonable economic justification to continue the Lease and the utilization of the Perfexion at the Hospital, then and in that event, but without waiving any or all of GKF’s rights or remedies under the Lease, GKF shall have the option to terminate the Lease by giving a written notice thereof to Hospital not less than ninety (90) days prior to the effective date of the termination designated in GKF’s written notice.  Without limiting the generality of the foregoing, for purposes of this Section, “reasonable economic justification to continue the Lease” shall not be deemed to exist (and GKF shall have the option to terminate the Lease) if, during the twelve (12) month period immediately preceding the issuance of GKF’s written notice of termination, the “Net Cash Flow” is negative.  As used herein, “Net Cash Flow” shall mean, for the applicable period, (a) the aggregate Per Procedure Payments actually received by GKF during such period, minus (b) the sum of the aggregate (i) debt service on the Perfexion, (ii) maintenance expenses, and (iii) Perfexion-related personal property taxes and insurance during such period.
 
9.             Supplier and Owner of Perfexion .  The parties hereto agree that, notwithstanding anything to the contrary set forth herein, the Lease and this Second Amendment is and shall be treated and interpreted as a "finance lease," as such term is defined in Article 2A of the Uniform Commercial Code and Section 2A.103(a)(7) of the Business and Commerce Code (Vernon's Texas Statutes and Codes), that GKF shall be treated as a finance lessor who is entitled to the benefits and releases from liability accorded to a finance lessor under Article 2A of the Uniform Commercial Code and Section 2A.103(a)(7) of the Business and Commerce Code (Vernon's Texas Statutes and Codes).  In furtherance of the foregoing, Hospital acknowledges that, before signing this Second Amendment, GKF has informed Hospital in writing (a) that Elekta is the entity supplying the Perfexion to GKF, (b) that Hospital is entitled (under Section 2A of the Uniform Commercial Code and Section 2A.103(a)(7) of the Business and Commerce Code (Vernon's Texas Statutes and Codes)) to the promises and warranties, including those of any third party, provided to GKF by Elekta which is the entity supplying the goods in connection with or as part of the contract by which GKF acquired the Perfexion or the right to possession and use of the Perfexion, and (c) that Hospital may communicate with Elekta and receive an accurate and complete statement of those promises and warranties, including any disclaimers and limitations of them or of remedies.  Hospital also acknowledges that Hospital has selected Elekta to supply the Perfexion and has directed GKF to acquire the Perfexion or the right to possession and use of the Perfexion from Elekta.

 
 
 
   
Exhibit 10.18b
 
10.            Miscellaneous .  This Second Amendment (a) shall be governed by and construed under the laws of the State of Texas, without reference to its principles of conflicts of law; and (b) may be executed in separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts shall together constitute the same instrument.  The captions and paragraph headings used herein are for convenience only and shall not be used in construing or interpreting this Second Amendment.  This Second Amendment together with the Exhibits attached hereto constitutes the full and complete agreement and understanding between the parties hereto concerning the subject matter hereof and shall supersede any and all prior written and oral agreements with regard to such subject matter.
 
11.            Full Force and Effect .  Except as amended by this Second Amendment, all of the terms and provisions of the Lease shall remain unchanged and in full force and effect and, together with this Second Amendment, represent the entire agreement of the parties with respect to the Perfexion and its use by Hospital.  Unless the context requires otherwise, with respect to the Perfexion, all references in the Lease to (i) the “Equipment” shall be deemed to mean the Perfexion; (ii) “Installation” shall be deemed to refer to the Perfexion Upgrade; (iii) the “LGK Agreement” shall be deemed to refer to the new LGK Agreement to be executed by Hospital relating to the Perfexion; (iv) the “Site” shall be deemed to refer to the Site; (v) the “Term” shall be deemed to refer to the Term, as extended pursuant to this Second Amendment.  To the extent any of the terms of the Lease conflict with the terms of this Second Amendment, the terms and provisions of this Second Amendment shall prevail and control.  Where not different or in conflict with the terms and provisions of this Second Amendment, all applicable terms and provisions set forth in the Lease are incorporated within this Second Amendment as is if set forth herein and shall apply with equal force and effect to the Perfexion.  Nothing set forth in this Second Amendment shall relieve either party from any or all of its obligations under the Lease with respect to the Model B, including, without limitation, the obligation to pay per procedure payments and the service, insurance and property tax expenses associated with the Model B.
 
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment as of the day first written above.

GKF :
 
Hospital :
     
GK FINANCING, LLC
 
METHODIST HEALTHCARE SYSTEM OF SAN
   
ANTONIO, LTD., d/b/a Southwest Texas
By:
/s/ Ernest A. Bates, M.D.
 
Methodist Hospital
 
Ernest A. Bates, M.D.
     
 
Policy Committee Member
 
By:
/s/ Michael D. Beaver
         
Dated:
1/25/10
 
Name:  
Michael D. Beaver
         
     
Title:
Chief Operating Officer
         
     
Dated:
12/22, 2009

 
 
 
   
Exhibit 10.18b
 
Exhibit “A”

PER PROCEDURE PAYMENTS

Annual Paid Procedures Performed 
 
Per Procedure Payment
*
 
*
*
 
*

Notwithstanding anything to the contrary set forth herein, for purposes of determining the Per Procedure Payments, (a) the number of annual Procedures performed on the Perfexion or using any other equipment or devices shall be reset to zero (0) at the commencement of each anniversary of the First Procedure Date; (b) any patient treatment provided on a fractionated basis shall count as one (1) Procedure; (c) charity cases shall not be counted towards the annual Procedures performed; and (d) there shall be no retroactive adjustment of the Per Procedure Payments irrespective of whether the number of Procedures performed reaches a lower Per Procedure Payment level.  For example, if during an annual measuring period, the number of annual Procedures totals *, then, the Per Procedure Payments for the first * Procedures would remain at * per Procedure while the Per Procedure Payments for the next * procedures (i.e., for Procedures * through *) would be * per Procedure.  There are no minimum volume requirements.

 
 
 
 
Exhibit 31.1
 
CERTIFICATION
 
I, Ernest A. Bates, M.D., as chief executive officer of American Shared Hospital Services, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of American Shared Hospital Services;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (or the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting .
 
November 15, 2010
 
/s/ Ernest A. Bates, M.D.
Ernest A. Bates, M.D.
Chief Executive Officer

 
 
 
 
Exhibit 31.2
 
CERTIFICATION
 
I, Craig K. Tagawa., as chief financial officer of American Shared Hospital Services, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of American Shared Hospital Services;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (or the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting .
 
November 15, 2010
 
/s/ Craig K. Tagawa
Craig K. Tagawa
Chief Financial Officer

 
 
 
 
Exhibit 32.1
 
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q of American Shared Hospital Services for the quarterly period ended September 30, 2010 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
Ernest A. Bates, M.D., the Chief Executive Officer and Craig K. Tagawa, the Chief Financial Officer of American Shared Hospital Services, each certifies that, to the best of his knowledge:
 
1.           the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.           the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of American Shared Hospital Services.
 
November 15, 2010
 
/s/ Ernest A. Bates, M.D.
Ernest A. Bates, M.D.
Chief Executive Officer
 
/s/ Craig K. Tagawa
Craig K. Tagawa
Chief Financial Officer