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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2003 or

For the transition period from         to        .

Commission file number 1-8789

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]

As of May 4, 2003, there are outstanding 3,818,203 shares of the Registrant’s common stock.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes

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

See accompanying notes

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

See accompanying notes

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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 March 31, 2003 and the results of its operations for the three month periods ended March 31, 2003 and 2002, which results are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31, 2002 have been derived from audited financial statements.

     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, provided Gamma Knife units to fifteen medical centers as of March 31, 2003 in Arkansas, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Mississippi, Nevada, New Jersey, New York, Ohio, Texas and Wisconsin.

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

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 months ended March 31, 2003 basic earnings per share was computed using 3,787,000 common shares and diluted earnings per share was computed using 5,070,000 common shares and equivalents. For the three months ended March 31, 2002 basic earnings per share was computed using 3,554,000 common shares and diluted earnings per share was computed using 5,012,000 common shares and equivalents.

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 if the Company had applied the fair value recognition

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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.

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 and the risks of developing its IMRT and The Operating Room for the 21^st Century® programs. 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, 2002 and the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 12, 2003.

     Medical services revenues increased $424,000 to $3,669,000 for the three month period ended March 31, 2003 from $3,245,000 for the three month period ended March 31, 2002. The increase reflects the addition of three new Gamma Knife units and a 3% revenue increase at Gamma Knife centers in operation for longer than one year. The Company had fifteen Gamma Knife units in operation at March 31, 2003 compared to twelve at March 31, 2002. Twelve of the Company’s customers are under fee-per-use contracts, and three customers are under revenue sharing agreements (“retail”). For retail units the Company receives all or a percentage of the reimbursement (exclusive of physician fees) received by the customer, and is responsible for all or a percentage of the operating expenses of the Gamma Knife.

     The number of Gamma Knife procedures increased by 80 in first quarter 2003 to 490 from 410 in the same quarter in the prior year. This increase was the result of a 9% increase in procedures performed at Gamma Knife units in operation more than one year and the addition of three new units.

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     Total costs of operations increased $300,000 to $1,535,000 for the three month period ended March 31, 2003 from $1,235,000 for the three month period ended March 31, 2002. Maintenance and supplies increased by $66,000 for the three month period ended March 31, 2003 compared to the same period in the prior year, primarily due to an increase in the number of Gamma Knife units covered under maintenance contract, and a maintenance expense credit of $19,000 in the prior year. There were twelve Gamma Knife units covered under maintenance contract as of March 31, 2003 compared to ten as of March 31, 2002. Depreciation and amortization increased by $138,000 for the three month period ended March 31, 2003 compared to the same period in the prior year due to the addition of three new Gamma Knife units. Other operating costs increased $96,000 for the three month period ended March 31, 2003 compared to the same period in the prior year primarily due to an increase in marketing and promotion costs.

     Selling and administrative costs increased by $28,000 to $826,000 for the three month period ended March 31, 2003 from $798,000 for the three month period ended March 31, 2002. This increase was primarily due to the write-off of approximately $58,000 in previously deferred costs relating to the future placement of a Gamma Knife unit in Brazil. The Gamma Knife unit originally scheduled for Brazil has been reallocated to another location. This write-off was partially offset by reductions in legal and accounting fees and business development costs.

     Interest expense decreased by $43,000 to $581,000 for the three month period ended March 31, 2003 from $624,000 for the three month period ended March 31, 2002 primarily due to lower interest expense on the debt relating to the more mature Gamma Knife units. The mature units have lower interest expense because interest expense decreases as the outstanding principal balance of each loan is reduced. Interest expense reduction on existing loans offset additional interest expense from financings of three new Gamma Knife units. In addition, the debt relating to newer Gamma Knife units is at a lower interest rate than the more mature units.

     Interest and other income decreased by $10,000 to $44,000 for the three month period ended March 31, 2003 from $54,000 for the three month period ended March 31, 2002 primarily due to lower average invested cash balances and lower interest rates available on those balances.

     Minority interest increased by $21,000 to $238,000 for the three month period ended March 31, 2003 from $217,000 for the three month period ended March 31, 2002 due to increased profitability of GK Financing. Minority interest represents the 19% interest of GK Financing owned by a third party.

     Income tax expense increased by $92,000 to $197,000 in the first quarter 2003 compared to $105,000 in the first quarter 2002. The increase was due to increased profitability and an increase in the effective income tax rate in first quarter 2003 compared to first quarter 2002. The Company recorded a 40% income tax provision in both first quarter 2003 and first quarter 2002. The effective income tax rate in 2003 was reduced to approximately 37% due to an income tax benefit of $16,000 that was recorded for the exercise of 25,000 previously expensed options. In first quarter 2002, the effective income tax rate was reduced to 25% due to an income tax benefit of $65,000 that was recorded for the exercise of 100,000 previously expensed options. These income tax benefits are the result of compensation expense that was recognized when the options were granted in 1995.

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     The Company had net income of $336,000 ($0.07 per diluted share) for the three month period ended March 31, 2003 compared to net income of $320,000 ($0.06 per diluted share) in the same period in the prior year. The increase was primarily due to increased utilization of Gamma Knife units in operation more than one year, which resulted in higher operating income. This was partially offset by higher income tax expense, primarily due to the higher effective income tax rate of 37% in first quarter 2003 compared to 25% in first quarter 2002.

Liquidity and Capital Resources

     The Company had cash and cash equivalents of $11,341,000 at March 31, 2003 compared to $9,924,000 at December 31, 2002. The Company’s cash position increased by $1,417,000 primarily due to the net reimbursement of progress payments of $966,000 on Gamma Knife projects financed in first quarter 2003 and a decrease in accounts receivable of $313,000.

     During first quarter 2003, the Company declared an annual dividend of $0.12 per share to shareholders of record on March 14, 2003, which resulted in a reduction in retained earnings of $454,000. The dividends are payable to shareholders on April 4, 2003.

     The Company as of March 31, 2003 had shareholders’ equity of $14,467,000, working capital of $7,373,000 and total assets of approximately $46,729,000.

     The Company has scheduled interest and principal payments under its debt obligations of approximately $8,196,000 during the next 12 months. The Company believes that its cash flow from operations and cash resources are adequate to meet its scheduled debt obligations during the next 12 months.

     The Company is investing its cash in an institutionally priced money market fund pending use in the Company’s operations. The investment objective of the money market fund is to maintain a stable net asset value, in order to maximize yield while preserving principal value.

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 Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days of the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

     (b)  Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date.

PART II - OTHER INFORMATION

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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

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CERTIFICATION

I, Craig K. Tagawa, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Shared Hospital Services;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we 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 quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; 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; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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CERTIFICATION

I, Ernest A. Bates, M.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Shared Hospital Services;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we 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 quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; 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; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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