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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1999 0-26575
U.S. NEUROSURGICAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1842411
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2400 Research Boulevard, Suite 325, Rockville, Maryland 20850
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (301) 208-8998
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K.
The aggregate market value of Registrant's Common Stock held by
non-affiliates was approximately $400,000 on March 29, 2000, based upon the
average of the bid and asked prices as reported on the OTC Bulletin Board.
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding as of March 29, 2000, was 7,316,685.
1
Part I
ITEM 1. BUSINESS
U.S. Neurosurgical, Inc. (USN) owns and operates stereotactic radiosurgery
centers, utilizing the Gamma Knife technology. As used herein, unless the
context indicates otherwise, the term "Company", "Registrant" and "USN." means
U.S.Neurosurgical, Inc. and its subsidiary, U.S. Neurosurgical Physics, Inc..
The Company, a Delaware corporation, was formed in July 1993. The Company's
executive offices are located at 2400 Research Boulevard, Suite 325, Rockville,
Maryland 20850, and its telephone number is (301) 208-8998.
Disclosure Regarding Forward Looking Statements
Statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results may differ materially from that projected or suggested herein due to
certain risks and uncertainties including, without limitation, the outcome of
the Company's legal proceedings, the payment, timing and ultimate collectability
of accounts receivable for Gamma Knife procedures from different payor groups
such as Medicare and private payors; competition; technological obsolescence;
government regulation; and malpractice liability. Additional information
concerning certain risks and uncertainties that could cause actual results to
differ materially from that projected or suggested may be identified from time
to time in the Company filings with the Securities and Exchange Commission (SEC)
and the Company's public announcements, copies of which are available from the
SEC or from the Company upon request.
U. S. NeuroSurgical, Inc.
Spinoff from GHS, Inc.
On September 17, 1999 GHS, Inc., USN's former parent GHS, Inc("GHS")
completed the spin-off of USN to GHS shareholders of record on September 8,
1999. On September 17, 1999, GHS distributed one share of USN common stock for
each share of common stock of GHS After the spin-off, USN became a separate
company, no longer owned in any way by GHS.
2
General
USN, was organized in July 1993 to own and operate stereotactic
radiosurgery centers, utilizing the Gamma Knife technology. USN currently owns
and operates two Gamma Knife centers, one on the premises of Research Medical
Center (RMC) in Kansas City, Missouri, and one on the premises of New York
University Medical Center (NYU) in New York, New York. The Company, intends to
continue to explore opportunities to open additional Gamma Knife Centers. USN's
business strategy is to provide a mechanism whereby hospitals, physicians, and
patients can have access to Gamma Knife treatment capability, a high capital
cost item. USN provides the Gamma Knife to medical facilities on a "cost per
treatment" basis. USN owns the Gamma Knife units, and is reimbursed by the
facility where it is housed, based on utilization.
USN's principal target market is medical centers in major health care
catchment areas that have physicians experienced with and dedicated to the use
of the Gamma Knife. As it has with its RMC and NYU Gamma Knife centers, USN
would seek cooperative ventures with these facilities if it were to explore
opening additional centers. USN believes that, as of December 31, 1999, there
were approximately 45 Gamma Knife treatment centers in the United States.
Gamma Knife Technology
The Leksell Gamma Knife is a unique stereotactic radiosurgical device used
to treat brain tumors and other malformations of the brain without invasive
surgery. The Gamma Knife delivers a single, high dose of ionizing radiation
emanating from 201 cobalt-60 sources positioned about a hemispherical, precision
machined cavity. The lesion is first targeted with precision accuracy using
advanced imaging and three dimensional treatment planning techniques such as CT
Scans, MR Scans, conventional X-rays, or angiography. Each individual beam is
focused on a common target producing
3
an intense concentration of radiation at the target site, destroying the lesion
while spreading the entry radiation dose uniformly and harmlessly over the
patient's skull. The mechanical precision at the target site is +/- 0.1mm (1/10
of 1 millimeter). Because of the steep fall-off in the radiation intensity
surrounding the target, the lesion can be destroyed, while sparing the
surrounding tissue.
The procedure, performed in a single treatment, sharply reduces hospital
stay times and eliminates post-surgical bleeding and infection. When compared
with conventional neurosurgery, Gamma Knife treatment is less expensive.
However, not all patients are candidates for radiosurgery since the decision to
use the Gamma Knife depends on the type, size, and location of the lesion.
Kansas City and New York Centers
In July 1993, USN purchased its first Leksell Gamma Knife from Elekta
Instruments, Inc. (Elekta), for the purpose of installing it at RMC in Kansas
City, Missouri. USN paid approximately $3,000,000 for the Gamma Knife through a
capital lease financing.
USN opened its first Gamma Knife Center on the premises of RMC in
September 1994. RMC is part of Health Midwest, a consortium of eleven hospitals
and numerous affiliates. USN formed a cooperative venture with RMC in September,
1993. Per an agreement with RMC, GHS sold 500,000 shares of its common stock for
$500,000 to RMC to secure additional working capital in order to enable USN to
develop and construct a Gamma Knife Facility. USN installed the Gamma Knife in
the facility, where it is being utilized by neurosurgeons credentialled by RMC.
USN is reimbursed for use of the Gamma Knife by RMC based on a percentage of the
fees collected by RMC for Gamma Knife procedures. USN is responsible for the
maintenance and insurance for the Gamma Knife equipment at the RMC facility.
Pursuant to a ground lease agreement, RMC leased to USN the land on which to
build the Gamma Knife facility. USN's facility agreements with RMC expire in
2015 and there are no renewal options. For the year
4
ended December 31, 1999 and the fiscal years 1998 and 1997 USN derived revenues
from the RMC center of approximately $2,109,000, $1,115,000 and $1,442,000,
respectively, as a result of 153, 124 and 134 procedures performed,
respectively, during such periods.
USN opened its second treatment center in July 1997 on the campus of NYU
in New York, New York. Construction of the Gamma Knife suite was completed in
July 1997. The Gamma Knife cost and the cost of the facility improvements
totaled approximately $4,700,000. In July 1997 the Company commenced its lease
for the NYU Gamma Knife. DVI Financial Services, Inc. (DVI) provided the capital
lease financing for the NYU facility. The term is six years with incremental
payments for the first year and fixed payments thereafter. The interest rate for
such capital lease is 12%. The Company has retained a marketing representative
to help introduce the technology to neurosurgeons in the New York tri-state
region. Pursuant to USN's facility agreement with NYU, USN is responsible for
the maintenance and insurance for the Gamma Knife equipment at the NYU facility
and is reimbursed for use of the Gamma Knife based on a fee per procedure
performed with the equipment. NYU provides the medical and technical staff to
operate the facility. USN's agreement with NYU expires in November 2003 and NYU
has options to renew the agreement for successive three year periods thereafter.
For the years ended December 31, 1999, 1998, and 1997, USN derived revenues from
the NYU center of approximately $980,000, $890,000, and $190,000, respectively,
as a result of 98, 89, and 19 procedures performed, respectively, during such
periods.
In March 1997, USN refinanced the lease on the RMC Gamma Knife with DVI.
The effects of this transaction were to lower its interest costs to 10.4 % per
annum and provide proceeds to pay for the buildout of The NYU Gamma Knife suite.
USN also commenced loans with DVI for working capital of $188,000 to finance the
remainder of the buildout. The terms of these loans are three years and they
bear interest between 12% and 12.9% per annum.
5
Regulatory Environment
The levels of revenues and profitability of companies involved in the
health services industry, such as USN, may be affected by the continuing efforts
of governmental and third party payors to contain or reduce the costs of health
care through various means. Although the Company does not believe that its
business activities will be materially affected by changes in the regulatory
environment, it is uncertain what legislative proposals will be adopted or what
actions federal, state or private payors for healthcare goods and services may
take in response to any healthcare reform proposals or legislation. The Company
cannot predict the effects healthcare reform may have on its business, and no
assurance can be given that any such reforms will not have a material effect on
USN.
In addition, the provision of medical services in the United States is
dependent on the availability of reimbursement to consumers from third party
payors, such as government and private insurance companies. Although patients
are ultimately responsible for services rendered, the Company expects that the
majority of its revenues will be derived from reimbursements by third party
payors. Medicare has authorized reimbursement for Gamma Knife treatment. Over
the last several years, such third party payors are increasingly challenging the
cost effectiveness of medical products and services and taking other
cost-containment measures. Therefore, although treatment costs using the Gamma
Knife compare favorably to traditional invasive brain surgery, it is unclear how
this trend among third party payors and future regulatory reforms affecting
governmental reimbursement will affect procedures in the higher end of the cost
scale.
In the future, the Company may establish additional Gamma Knife centers.
Completion of future centers would require approvals and arrangements with
hospitals, health care organizations, or other third parties, including certain
regulatory authorities. The Food and Drug Administration has issued the
requisite pre-market approval for the Gamma Knife to be utilized by USN. In
addition, many states require hospitals to obtain
6
a Certificate of Need (CON) before they can acquire a significant piece of
medical equipment. Should the Company enter into future ventures such "need"
will be demonstrable, but it can have no assurance that Certificates of Need
will be granted. In addition, the Nuclear Regulatory Commission (NRC) must issue
a permit to USN to permit loading the COBALT at each Gamma Knife site. While the
Company believes that it can obtain a NRC permit for each Gamma Knife machine,
there is no assurance that it will.
Liability Insurance
Although USN does not directly provide medical services, it has obtained
professional medical liability insurance, and has general liability insurance as
well. USN's professional medical liability and general liability policies have
limits of $2 million each and USN has also purchased an excess coverage policy
providing an additional $8 million of insurance coverage The Company believes
that its insurance is adequate for providing treatment facilities and
non-medical services, although there can be no assurance that the coverage
limits of such insurance will be adequate or that coverage will not be reduced
or become unavailable in the future.
Competition
The health care industry, in general, is highly competitive and the
Company expects to have substantial competition from other independent
organizations, as well as from hospitals in establishing future Gamma Knife
centers. There are other companies that provide the Gamma Knife on a "cost per
treatment basis". In addition, larger hospitals may be expected to install Gamma
Knife technology as part of their regular
7
inpatient services. Some of these competitors have greater financial and other
resources than the Company. Principal competitive factors include quality and
timeliness of test results, ability to develop and maintain relationships with
referring physicians, facility location, convenience of scheduling and
availability of patient appointment times. The Company believes that cost
containment measures will encourage hospitals to seek companies that are
providing the technology, instead of incurring the capital cost of establishing
their own Gamma Knife centers.
Gamma Knife Supply and Servicing
Currently the only company that manufactures, sells, and services the
Gamma Knife is Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm,
Sweden. In 1993, USN entered into purchase agreements with Elekta for the
purchase of the Gamma Knives at its RMC and NYU centers. The purchase price for
each Gamma Knife was approximately $3,000,000. Elekta was responsible for the
installation and testing of the equipment and the training of the hospital staff
in the operation of the equipment. As part of the purchase of the Gamma Knife
devices from Elekta, USN entered into purchase and maintenance agreements
pursuant to which Elekta provides USN with ongoing maintenance, repairs and
software upgrades for the RMC and NYU Gamma knives at an aggregate cost of
$120,000 per year. Any interruption in the supply or services from Elekta would
adversely affect USN's ability to maintain its Gamma Knife treatment centers.
Gamma Knife Financing
The Company has secured capital lease financing from FSI for the first
Gamma Knife installation at the RMC site and for its second Gamma Knife in New
York from DVI. The lease at RMC was refinanced in the spring of 1997 with DVI.
The Gamma
8
Knife is an expensive piece of equipment presently costing approximately
$3,400,000. Therefore, the Company's development of new Gamma Knife centers is
dependent on its ability to secure favorable financing. On February 8, 2000, the
Company entered into a cobalt reloading agreement with Elekta for the RMC Gamma
Knife in the amount of $650,000, which is being financed by DVI pursuant to an
agreement dated March 16, 2000 at the rate of prime plus one percent, payable in
forty monthly installments of $19,383. In addition, the Company expects to incur
approximately $150,000 of excavation costs in order to reload the cobalt. The
Company believes that it will continue to be successful in obtaining financing
but can give no absolute assurance that it will.
New Technology/Possible Obsolescence
Gamma Knife technology may be subject to technological change.
Consequently, the Company will have to rely on the Gamma Knife's manufacturer,
Elekta, to introduce improvements or upgrades in order to keep pace with
technological change. Any such improvements or upgrades which the Company may be
required to introduce will require additional financing. In addition, newly
developed techniques and devices for performing brain surgery may render the
Gamma Knife less competitive or obsolete.
Employees
U.S. Neurosurgical, Inc. has five full-time employees and one part-time
employee. Of these employees, three are engaged in sales and marketing, one
technical, and two in administration and office support.
ITEM 2. PROPERTIES
The Company's base facility, from which it conducts substantially all of
its operations, is located in Rockville, Maryland and occupies approximately
1,300 square feet. The rent is approximately $33,000 per year. USN occupies
approximately 1,600
9
square feet in its RMC facility. This facility is located on the campus of RMC
in Kansas City, Missouri. USN also occupies about 2,000 square feet at the NYU
Medical Center in New York, New York. Pursuant to the facility agreements with
RMC and NYU, USN is not required to pay separate rent for the premises occupied
by its Gamma Knife centers. USN's agreements with RMC expire in September 2015
and there are no renewal options. USN's agreement with NYU expires in November
2003 and NYU has options to renew the agreement for successive three year
periods thereafter.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board. The
following table displays the range of high and low bid quotations as reported by
NASDAQ System for the period from September 17, 1999 through December 31, 1999.
There were no quotes in the period from September 17, 1999 to September 30, 1999
Period High Bid Low Bid
------ -------- -------
September 17 - September 30, 1999 -- --
October 1 - December 31, 1999 .625 .062
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of March 30, 2000, there were approximately 400 holders of record of
the Company's Common Stock.
To date the Company declared no dividends on its Common Stock and does not
anticipate declaring dividends in the foreseeable future.
11
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected financial data pertaining to the financial
condition and operations of the Company for the years ended December 31, 1995
through 1999. The latest financial statements of the Company are included in
Item 14 in Part IV of this report. The information set forth should be read in
conjunction with such financial statements and the notes thereto.
Year Ended
December 31,
(in thousands, except per share amounts)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating Revenue $3,089 $2,332 $1,830 $1,452 $1,283
Expenses:
Patient expense 1,115 1,221 843 574 545
General and administrative 1,445 1,148 585 417 279
Interest expense 409 555 485 302 499
Net Income (loss) 66 (1,011) (53) 95 (40)
Pro forma basic and diluted Income (loss) per $0.01 ($0.14) ($0.01) $0.01 ($0.01)
common share (1)
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents $464 $21 $60 $14 $0
Total assets 5,283 5,811 6,836 6,604 3,636
Long-term obligations 2,517 3,514 4,667 5,659 3,347
Stockholders equity (deficiency) 1,151 (1,043) (657) (712) (486)
(1) Pro forma basic and diluted income (loss) per common share is calculated
assuming that the Spin-off and the stock-split of USN Common Stock required to
effect Spin-off had occurred as of January 1, 1994
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes set forth elsewhere in this report.
Results of Operations
1999 Compared to 1998
Patient revenue increased 32% to $3,089,000 in 1999 from $2,332,000 in
1998. The increase was due to an increase in the number of treatments at our New
York and Kansas City centers. The Company has increased its marketing and
training of physicians at the NYU facility and expects to continue to increase
its presence at both of the centers. Patient expenses decreased 9% to $1,115,000
in 1999 from $1,221,000 in 1998. Selling, general and administrative expense
(S,G & A) increased 26% to $1,445,000 in 1999 from $1,148,000 in 1998. The
increase was due to professional fees related to the spin-off of USN by GHS, Inc
of $250,000. In 1998 the Company incurred expenses of $934,000 related to a
litigation settlement (See Item 13). There was no such expense in 1999.
For the year ended December 31, 1999 income from operations was $529,000
compared to a loss of $971,000 in 1998. Interest expense decreased to $409,000
in 1999 compared to $555,000 in 1998. The decrease was due to paydown of
principal on the Gamma Knife capital leases. Net income in 1999 was $66,000 as
compared to a loss of $1,011,000 in 1998.
1998 Compared to 1997
Patient revenue increased 27% to $2,332,000 in 1998 from $1,830,000 in
1997. The increase was due to added revenue from the NYU Gamma Knife which
completed its first calendar year of service. Patient expenses increased 45% to
$1,221,000 from $843,000 in 1997. The increase was due to a full year of
depreciation to the NYU Gamma Knife as well as amortization for the NYU
leasehold improvements. Selling, general and administrative expense (S,G & A)
increased 96% to $1,148,000 from $585,000 in 1997. The increase was due to the
legal expenses incurred in connection with proceedings described in "Certain
Relationships and Related Party Transaction" herein
13
and in the Combined Financial Statements and the effects of salaries and related
office costs incurred for employees who were employed by USN for a greater
period in 1998 than for 1997. For the year ended 1998, loss from operations was
$971,000 as compared to income from operations of $402,000 in 1997. The loss was
primarily due to a charge of $934,000 which was accrued in 1998 for settlements
of the legal proceedings described in Item 13. Interest expense increased 14% to
$555,000 from $485,000 in the previous year. The increase was due to a full year
of debt service on the NYU Gamma Knife in 1998 as compared to 1997 when $178,000
of interest was capitalized, prior to the opening of the Center. As a result of
these factors the Company had a loss from continuing operations of $1,011,000 in
1998 and a loss of $53,000 in 1997.
Liquidity and Capital Resources
At December 31, 1999 the Company had a working capital deficit of $742,000
as compared to $2,974,000 at December 31, 1998. The decrease in the deficit is
primarily due to the contribution by GHS of its receivable from the Company to
the capital of the Company. Cash and cash equivalents at December 31, 1999 were
$464,000 as compared to $21,000 at December 31, 1998. The increase is primarily
due to a cash contribution from GHS. Net cash provided by operating activities
was $1,334,000 as compared with $475,000 for the same period, a year earlier.
Depreciation and amortization was $1,136,000 as compared to $1,121,000 in 1998.
.
Net cash used in financing activities for the year ended 1999 was $42,000
as compared to $23,000 in the year ago period.
Net cash used in financing activities for the year ended December 31, 1999
was $849,000 as compared to $491,000 in 1998. The Company paid $1,423,000
towards its capital leases in 1999 as compared to $1,195,000 in 1998. There were
cash and services received by GHS of $674,000 in 1999 as compared to $341,000 in
1998. The Company paid $100,000 towards the liability assumed in connection with
the spin-off.
The annual lease payments for the Gamma Knife at RMC in Kansas City
amounted to $827,000 in 1999. At December 31, 1999 USN had six months remaining
on this capital lease. The leases for the NYU equipment and improvements require
annual payments of $792,000 and $65,000 respectively. In addition, as part of
the settlement of litigation involving GHS and USN in May 1999, USN issued
promissory notes in the aggregate amount of $450,000, bearing interest at the
rate of 6% per annum,
14
and payable over a four-year period as follows: $100,000 on the first, third and
fourth anniversaries of closing of the settlement and $150,000 on the second
anniversary of such closing. As consideration for financial advisory services
rendered by Allen & Company Incorporated to GHS in connection with the CYL
Transaction and Brainfuel Transaction through May 27, 1999, GHS agreed to pay
Allen a financial advisory fee of $400,000. As a result of the Assignment and
Assumption Agreement entered into between GHS and USN, USN will be solely
responsible for the payment of such fees. USN made its first $100,000 payment of
this fee in October 1999. Management believes that the capital resources derived
through internally generated funds from operations and current cash balances
will be sufficient to satisfy the Company's operating and capital needs for the
forseeable future.
Year 2000 Compliance
The Company relies significantly on computer technology throughout its
business to effectively carry out its day-to-day operations. The Company has
assessed all of its computer systems to ensure that they are "Year 2000"
compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are listed under Item 14
in this Annual Report of Form 10-K and attached hereto.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Alan Gold 55 President & Chairman
William F. Leimkuhler 48 Director
Charles H. Merriman, III 65 Director
Howard Grunfeld 39 Vice President--Finance, Treasurer
Susan Greenwald 54 Vice President and Secretary
Alan Gold has served as President and Chairman of USN since 1996. Mr. Gold
has also been a director of USN since its formation in 1993. Mr Gold served as
President of GHS from 1983 through May 1999 and director of GHS since its
formation through November 1999. Mr. Gold, 55, was one of the founders of Global
Health Systems, the predecessor of GHS, serving as its President since its
formation in July 1983. From 1981 to 1983 he served as Executive Vice-President
of Libra Group, a company located in Rockville, Maryland, engaged in health care
automation, where he was President of Global Health Foundation and Libra
Research and Executive Vice President of Libra Technology. From July 1997
through March 1998 Mr. Gold was also an employee of Health Management Systems.
William F. Leimkuhler has served as director of USN since May 1999. He
also served as a director of GHS since its inception in 1984 through November
1999. Mr Leimkuhler, 48, acts as a consultant on corporate and business
development matters to several emerging growth companies. From January 1994
until October 1999, he served as Vice President and General Counsel of Allen &
Company Incorporated, an investment banking firm.
16
Charles H. Merriman, III has served as a director of USN since May 1999.
He also served as a director of GHS from October 1997 to November 1999. Mr
Merriman, 65, is a Managing Director of the Investment Banking and Corporate
Finance Department of Scott & Stringfellow, an investment banking firm where he
has been employed since 1972. Mr . Merriman has extensive knowledge of USN's
primary focus on healthcare and technology.
Howard Grunfeld has served as Treasurer of USN since 1993. He was the
Controller of GHS from 1990 until May 1999. Mr Grunfeld, 39, was appointed Vice
President Finance and Chief Financial Officer of USN in May 1999. Mr Grunfeld
served as the Controller of Global Health Systems from 1990 through July 1997.
From July 1997 through February 1998, Mr Grunfeld was an employee of Health
Management Systems, Inc.
Susan Greenwald has served as Vice President of Marketing Communications
and as Secretary of USN since May 1999. She performed services for GHS in the
same capacity from its inception in 1983 through May 1999. Ms. Greenwald, 54,
was one of the founders of Global Health Systems, the predecessor of GHS, and
served as its Vice President of Marketing Communications since 1983. From 1981
through 1983 she was the Proposal Manager for Libra Technology and Global Health
Foundation, sister companies engaged in Federal contracting and private
enterprise, respectively, in the healthcare information technology business.
From July 1997 through February 1998, Ms. Greenwald was an employee of Health
Management Systems.
Pursuant to the Company's bylaws, the Company's Board of Directors is
elected by the stockholders at each annual meeting to serve until the next
annual meeting or until their successors are elected and qualified. In the case
of a vacancy, a director will be
17
appointed by a majority of the remaining directors then in office to serve the
remainder of the term left vacant. Directors do not receive any fees for
attending board meetings. Directors are entitled to receive reimbursement for
travelling costs and other out-of-pocket expenses incurred in attending board
meetings. During the year ended December 31, 1999, the Board of Directors held
two meetings, which were attended by all incumbent directors. The Company does
have a standing audit committee, but does not have a nominating or compensation
committee.
Pursuant to the Company's bylaws, officers of the Company hold office
until the first meeting of directors following the next annual meeting of
stockholders and until their successors are chosen and qualified.
Section 16 (a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the copies of the forms furnished to the
Company, or written representations from certain reporting persons, the Company
believes that during the years ended December 31, 1999, except as set forth
below, all filing requirements applicable to its officers and directors were
complied with by such individuals.
ITEM 11 EXECUTIVE COMPENSATION
The information below sets forth the compensation for the year ended
December 31, 1999, 1998, and 1997, for the Chief Executive Officer of the
Company. Prior to the Spin-off all amounts were paid by GHS.
Summary Compensation Table
Name and Annual Compensation
Principal Position Year Salary($)
- ------------------ ---- ---------
Alan Gold 1999 $191,000
President & Director 1998 $207,500
1997 $115,000
The Company and Mr. Gold are parties to an employment agreement giving
either the Company or Mr. Gold the option to terminate the agreement by giving
the other party 6 months written notice.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 30, 2000, certain information
with respect to each beneficial owner of more than 5% of the Company's Common
Stock and each director and executive officer of the Company:
Number of Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1) Class
- ------------------- --------- -----
Alan Gold (2) 640,246 8.6%
2400 Research Blvd
Rockville, MD 20850
William F. Leimkuhler -- --
43 Salem Straits Road
Darien, CT 06820
Charles H. Merriman III 30,672 *
C/O Scott & Stringfellow
PO Box 1575
Richmond, VA 23218
Howard Grunfeld 50,900 *
2400 Research Blvd
Rockville, MD 20850
Stanley S. Shuman (3) 2,743,000 37.5%
711 Fifth Avenue
New York, NY 10022
Allen & Company Incorporated 1,902,000 26.0%
711 Fifth Avenue
New York, NY 10022
Research Medical Center 375,000 5.1%
2316 East Meyer Blvd
Kansas City, MO 64132
All Directors and Officers of USN 721,818 9.9%
as a group (2) (four persons)
- ----------------
19
(1) Unless otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the person named above.
(2) Includes 630,246 shares held jointly by Mr. Gold and his wife, Susan
Greenwald, as joint tenants with right of survivorship.
(3) Includes 1,902,000 shares owned by Allen & Company Incorporated, Mr.
Shuman disclaims beneficial ownership in such shares, except to the extent
of his pecuniary interest therein. .
* Less than one percent
20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1993, pursuant to an agreement (the "USN Agreement") between the
Company and A. Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D
("Brown") , the Company, among other things, granted an aggregate 20% interest
in USN to Brown and Kirshenbaum. In addition, following the execution of the USN
agreement, Kirshenbaum was appointed as an officer of USN and Brown was
appointed to the Company's Board of Directors and executed an employment
agreement with USN. Under the terms of the USN Agreement, the Company possessed
the right to repurchase for cash or Common Stock such 20% interest during each
of the third through sixth full fiscal years of the USN Agreement at a value to
be calculated by the Company in accordance with the terms of the USN Agreement.
The Company exercised its right to repurchase the 20% interest in USN in
November 1996 at a value of $38,781.40, which value was disputed by Brown and
Kirshenbaum.
In June 1997, the Company instituted an action (the "Declaratory Action")
in the United States District Court of Maryland, Southern Division against
Kirshenbaum and Brown seeking a declaration from the Court that its repurchase
of Brown's and Kirshenbaum's 20% interest in USN for $38,781.40 was fair and
equitable. In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against GHS, USN, Alan Gold and Allen & Co.
Incorporated, a significant stockholder of GHS, citing various claims including
causes of action for breach of contract and fraud. U SN filed a counterclaim
against Brown and Kirshenbaum alleging various torts claims arising out of the
business relationship.
In addition to the above described federal court action, Brown filed a
state court action in the District Court in and for Montgomery County, Maryland
against USN and other parties seeking breach of contract damages for lost
salary, unreimbursed expenses and for consequential damages and costs arising
out of what he claims to be an improper termination from USN.
On May 25, 1999, the parties to the above-described actions settled all of
above described legal proceedings pursuant to an Agreement and Plan of
Settlement dated March 22, 1999 between Brown, Kirshenbaum, GHS, USN, Alan Gold,
and Allen & Company. As part of the closing of such settlement, GHS delivered
$200,000 in cash and 68,688 additional shares of GHS common stock to Brown and
Kirshenbaum. In addition, USN delivered to Brown and Kirshenbaum promissory
notes (the "Settlement Notes") in the aggreagate amount of $450,000, bearing
interest at the rate of 6 % per annum, and
21
payable over a four-year period as follows: $100,000 on the first, third and
fourth anniversaries of such closing and $150,000 on the second anniversary of
such closing. USN will be solely responsible for the payment of the Settlement
Notes.. The Settlement Notes are secured by a second-priority security interest
in USN's receivables from its Kansas City and New York Gamma Knife centers. On
June 9, 1999, the Declaratory Action was dismissed with prejudice by the
parties, and said dismissal was approved by the District Court judge.
As consideration for financial advisory services rendered by Allen &
Company Incorporated ("Allen") to GHS in connection with GHS's acquisition of
ChangeYourLife.com, LLC and Concept Development Inc. through May 27,1999, GHS
agreed to pay Allen a financial advisory fee of $400,000, payable in
installments of $100,000 on each of August 1, 1999, August 1, 2000, September 1,
2000 and October 1, 2000. As a result of the Assignment and Assumption Agreement
entered into between GHS and USN in connection with USN's Spinoff from GHS, USN
will be solely responsible for the payment of such fees because such fees relate
to events occurring prior to May 27 , 1999. Allen is a significant shareholder
of the Company.
In May 1999, GHS retained Scott & Stringfellow, an investment banking
firm, to prepare an appraisal of USN in connection with the Spin-off. Mr.
Charles H. Merriman III, a director of GHS and USN , is a Managing Director of
Scott & Stringfellow.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Page No.
--------
Consolidated Financial Statements of the Company
Independent Auditors Report F-2
Balance Sheet as of December 31, 1999 and 1998 F-3
Statements of Operations for the years ended
December 31, 1999, 1998, and 1997. F-4
Statements of Changes in Stockholders'
Equity (Deficiency) for the period
January 1, 1997 through December 31, 1999 F-5
Statements of Cash Flows for the year ended
December 31, 1999, 1998, and 1997. F-6
Notes to Financial Statements F-7
All schedules have been omitted as the conditions requiring their
filing are not present or the information required therein has been
included in the notes to the financial statements.
(b) Reports on Form 8-K
None
Exhibits
(a) Form of Amended and Restated Certificate of Incorporation of U.S.
Neurosurgical, Inc. ("USN") (1)
(b) Form of Amended and Restated Bylaws of USN (1)
(c) Form of Stock Certificate of Common Stock (1)
(d) Distribution Agreement dated May 27, 1999 between GHS, Inc. ("GHS") and
USN (1)
(e) Tax Matters Agreement dated May 27,1999 betwwen GHS and USN (1)
(f) Assignment and Assumption Agreement dated May 27, 1999 between GHS and USN
(1)
23
(g) Employment Agreement dated December 14,1984 betwwen USN and Alan Gold, as
amended March 7, 1986 (incorporated by reference to Exhibit 10.3 of GHS's
Registration Statement No. 33-4532-W on form S-18)
(h) Gamma Knife Neuroradiosurgery Equipment Agreement dated August, 1993
between Research Medical Center and USN (incorporated by reference to
Exhibit 10h to GHS's Quarterly Report or Form 10-Q for the quarter ended
September 30, 1993).
(i) Ground Lease Agreement dated August, 1993 between Research Medical Center
and USN (incorporated by reference to Exhibit 10j to GHS's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993).
(j) LGK Agreement dated July 12, 1993 between Elekta Instruments, Inc. and USN
(incorporated by reference to Exhibit 10k to GHS's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993).
(k) Agreement dated December 29, 1993 between USN and Elekta Instruments, Inc.
(incorporated by reference to 10o to GHS's 1994 Annual Report on Form
10-K).
(l) Agreement dated August 1, 1996 between USN and DVI, Inc. (incorporated by
reference 10j to GHS's 1997 Annual Report on form 10-K).
(m) Gamma Knife Neuroradiosurgery Equipment dated as of November 26, 1996
betwwen New York University on behalf of New York University Medical
Center and USN. (1)
(n) List of Susidiaries (1)
(1) Previously filed as an exhibit to the Form 10. Registration Statement of
USN filed with the SEC on August 25, 1999.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 30, 2000
U.S. Neurosurgical, Inc.
(Registrant)
By /s/ Alan Gold
-----------------------------------
Alan Gold
President and Chief Executive Officer
By /s/ Howard Grunfeld
-----------------------------------
Howard Grunfeld
Vice President of Finance and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 30, 2000 /s/ Alan Gold
-----------------------------------
Alan Gold
President and Director
(Chief Executive Officer)
March 30, 2000 /s/ William F. Leimkuhler
-----------------------------------
William F. Leimkuhler
Director
March 30, 2000 /s/ Charles H. Merriman III
-----------------------------------
Charles H. Merriman III
Director
25
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of December 31, 1999 and 1998 F-3
Statements of operations for the years ended December 31, 1999, 1998 and 1997 F-4
Statements of changes in stockholders' equity (deficiency) for the years ended
December 31, 1999, 1998 and 1997 F-5
Statements of cash flows for the years ended December 31, 1999, 1998 and 1997 F-6
Notes to financial statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
U.S. NeuroSurgical, Inc. and subsidiary
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of U.S.
NeuroSurgical, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of U.S.
NeuroSurgical, Inc. and subsidiary as of December 31, 1999 and 1998, and the
consolidated results of their operations and cash flows for each of the years in
the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 2, 2000
With respect to Note K
March 16, 2000
F-2
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 464,000 $ 21,000
Accounts receivable 300,000 238,000
Deferred tax asset 83,000 80,000
Other current assets 26,000 27,000
----------- -----------
Total current assets 873,000 366,000
----------- -----------
Property and equipment:
Gamma Knives (net of accumulated depreciation
of $3,483,000 in 1999 and $2,560,000 in 1998) 2,983,000 3,906,000
Leasehold improvements (net of accumulated
amortization of $592,000 in 1999
and $395,000 in 1998) 1,249,000 1,447,000
Office furniture and computers (net of accumulated
depreciation of $24,000) 82,000
----------- -----------
4,314,000 5,353,000
----------- -----------
Cash held in escrow 96,000 92,000
----------- -----------
$ 5,283,000 $ 5,811,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 148,000 $ 66,000
Note payable - litigation settlement 100,000 200,000
Obligations under capital lease and
loans payable - current portion 1,043,000 1,423,000
Due to GHS, Inc. 1,651,000
Due to Allen and Company 300,000
Other current liabilities 24,000
----------- -----------
Total current liabilities 1,615,000 3,340,000
Note payable - litigation settlement -
net of current portion 350,000 450,000
Deferred tax liability 416,000 270,000
Obligations under capital lease and loans
payable - net of current portion 1,751,000 2,794,000
----------- -----------
4,132,000 6,854,000
Commitments, litigation and other matters
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Common stock - U.S. NeuroSugical, Inc. par
value $.01; 25,000,000 shares authorized;
7,316,685 shares issued and outstanding 73,000
Additional paid-in capital 2,789,000 734,000
Accumulated deficit (1,711,000) (1,777,000)
----------- -----------
1,151,000 (1,043,000)
----------- -----------
$ 5,283,000 $ 5,811,000
=========== ===========
See notes to consolidated financial statements F-3
Consolidated Statements of Operations
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenue:
Patient revenue $ 3,089,000 $ 2,332,000 $ 1,830,000
----------- ----------- -----------
Costs and expenses:
Patient expenses 1,115,000 1,221,000 843,000
Selling, general and administrative 1,445,000 1,148,000 585,000
Litigation settlement 934,000
----------- ----------- -----------
2,560,000 3,303,000 1,428,000
----------- ----------- -----------
Income (loss) from operations 529,000 (971,000) 402,000
----------- ----------- -----------
Interest expense (409,000) (555,000) (485,000)
Interest income 19,000 4,000 22,000
----------- ----------- -----------
(390,000) (551,000) (463,000)
----------- ----------- -----------
Income (loss) before income tax 139,000 (1,522,000) (61,000)
Income tax (benefit) 73,000 (511,000) (8,000)
----------- ----------- -----------
Net income (loss) $ 66,000 $(1,011,000) $ (53,000)
=========== =========== ===========
Basic and diluted net income (loss) per share $ .01 $ (.14) $ (.01)
=========== =========== ===========
Weighted average common shares outstanding 7,316,685 7,316,685 7,316,685
=========== =========== ===========
See notes to consolidated financial statements F-4
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
U.S.
NeuroSurgical, Inc.
-------------------
Common Stock
-------------------
Number Additional
of Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
Balance - January 1, 1997 100 $ 0 $ 1,000 $ (713,000) $ (712,000)
Selling, general and administrative services
contributed by GHS, Inc. 108,000 108,000
Net loss for the year ended December 31, 1997 (53,000) (53,000)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997 100 0 109,000 (766,000) (657,000)
Selling, general and administrative services
contributed by GHS, Inc. 341,000 341,000
Portion of litigation settlement paid by GHS, Inc. 284,000 284,000
Net loss for the year ended December 31, 1998 (1,011,000) (1,011,000)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998 100 0 734,000 (1,777,000) (1,043,000)
Issuance of common stock in connection with
spin-off from GHS, Inc. 7,316,585 73,000 (73,000) 0
Contribution by GHS, Inc. of intercompany
receivable 1,340,000 1,340,000
Contribution of cash by GHS, Inc. 374,000 374,000
Selling, general and administrative services
contributed by GHS, Inc. 300,000 300,000
Contribution of U.S. NeuroSurgical
Physics, Inc. common stock by GHS, Inc. 114,000 114,000
Net income for the year ended December 31,
1999 66,000 66,000
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1999 7,316,685 $ 73,000 $ 2,789,000 $(1,711,000) $ 1,151,000
=========== =========== =========== =========== ===========
See notes to consolidated financial statements F-5
Consolidated Statements of Cash Flows
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 66,000 $(1,011,000) $ (53,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,136,000 1,121,000 784,000
Deferred income tax (benefit) provision 143,000 (260,000) 106,000
Accrued litigation settlement 650,000
Changes in:
Accounts receivable (62,000) (29,000) (115,000)
Other current assets 1,000 (3,000) 40,000
Accounts payable and accrued expenses 26,000 7,000 (268,000)
Other current liabilities 24,000
----------- ----------- -----------
Net cash provided by operating activities 1,334,000 475,000 494,000
----------- ----------- -----------
Cash flows from investing activities:
Property and equipment (38,000) (20,000) (1,102,000)
Refundable deposits 43,000
(Increase) decrease in cash held in escrow (4,000) (3,000) 818,000
----------- ----------- -----------
Net cash used in investing activities (42,000) (23,000) (241,000)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of capital lease and loan obligations (1,423,000) (1,195,000) (486,000)
Cash received on refinancing of capital lease 100,000
Selling, general and administrative services contributed by GHS, Inc. 300,000 341,000 108,000
Portion of litigation settlement paid by GHS, Inc. 284,000
Increase in due to GHS, Inc. 79,000 67,000
Cash received from GHS, Inc. 374,000
Payment on liability assumed in connection with spin-off (100,000)
----------- ----------- -----------
Net cash used in financing activities (849,000) (491,000) (211,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 443,000 (39,000) 42,000
Cash and cash equivalents - beginning of year 21,000 60,000 18,000
----------- ----------- -----------
Cash and cash equivalents - end of year $ 464,000 $ 21,000 $ 60,000
=========== =========== ===========
Supplemental disclosures of cash flow information: Cash paid for:
Interest $ 427,000 $ 555,000 $ 485,000
Income taxes $ 12,000 $ 290,000
Supplemental disclosures of noncash financing activities:
Property acquired under capital lease obligations and through
loans payable $ 3,327,000
Progress payments for Gamma Knife $(2,610,000)
Refinancing of loans payable and capital lease obligation with new
capital lease obligation $ 2,172,000
Refinancing of progress payment obligation with capital lease $ 3,139,000
Loans payable to finance property acquisitions $ 188,000
Contribution of amounts previously due to GHS, Inc., legal settlement
paid and property and equipment $ 1,910,000
Assumed liabilities in connection with spin off from GHS, Inc. $ (456,000)
See notes to financial statements F-6
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
[1] Basis of preparation:
U.S. NeuroSurgical, Inc. ("U.S. Neuro") owns and operates stereotactic
radiosurgery centers, utilizing the Gamma Knife technology. U.S.
NeuroSurgical Physics, Inc. ("USNP") administers the billing and
collection of the fees charged by the physicist who operates the Kansas
City gamma knife. U.S. Neuro and USNP are collectively referred to herein
as the Company. The Company was a wholly owned subsidiary of GHS, Inc.
("GHS"), a publicly owned company. Effective May 27, 1999, GHS transferred
its investment in USNP to U.S. Neuro. On May 20, 1999 the Board of
Directors of U.S. Neuro authorized a stock split of U.S. Neuro's common
stock which would result in the number of outstanding shares of U.S. Neuro
common stock equaling the number of shares of GHS common stock outstanding
on the date of the spin-off. The Board of Directors of GHS resolved to
distribute such common shares to its own stockholders on a one-to-one
basis in a spin-off transaction. Immediately following the spin-off, U.S.
Neuro became a publicly held company.
The consolidated financial statements include the accounts of U.S. Neuro
and USNP. All intercompany transactions and balances have been eliminated.
During the three years ended December 31, 1999, GHS incurred operating
expenses on behalf of U.S. Neuro. Such expenses consisted principally of
officers salaries, rent, professional fees and insurance were allocated
100% to U.S. Neuro after the sale by GHS of GHS's investments in two
former operating subsidiaries in July 1997. Prior to July 1997 operating
expenses were allocated among GHS's operating entities based on the nature
of the expense such as time spent by salaried individuals and use of
rented space. Management considers such allocation to be reasonable.
Prior to the spin-off the Company was financed by GHS. As of December 31,
1998 the Company had a working capital deficit of $2,974,000. In 1999, GHS
paid the Company's $200,000 current litigation settlement liability,
contributed $374,000 in cash to the Company and contributed its entire
receivable from the Company (amounting to approximately $1,300,000 at May
31, 1999) to the capital of the Company. In addition, the Company assumed
a $400,000 liability of GHS, payable $100,000 in August 1999 and $300,000
in three equal installments from August 2000 to October 2000. In addition,
U.S. Neuro agreed to indemnify GHS with respect to liabilities and claims
attributable to any events occurring before May 27, 1999. Management of
the Company believes that its cash from operations plus cash on hand as of
the date of the spin-off will be sufficient to fund its cash requirements
through at least January 1, 2001, although there can be no assurances that
this will be the case.
[2] Revenue recognition:
Patient revenue is recognized when the Gamma Knife procedure is rendered.
[3] Long-lived assets:
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
[4] Allowance for uncollectible accounts receivable:
No allowance for uncollectible accounts receivable was required at
December 31, 1999 and 1998.
[5] Depreciation and amortization:
The Gamma Knives are being depreciated on the straight-line method over an
estimated useful life of seven years. Leasehold improvements are being
amortized on the straight-line method over 7 to 20 years, the life of the
leases.
F-7
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] Net earnings (loss) per share:
Net earnings (loss) per share gives retroactive effect to the stock split
and spin-off described in Note A[1].
[7] Statements of cash flows:
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
[8] Estimates and assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
[9] Fair values of financial instruments:
The estimated fair value of financial instruments has been determined
based on available market information and appropriate valuation
methodologies. The carrying amounts of cash, certificates of deposit,
accounts receivable, other current assets and accounts payable approximate
fair value at December 31, 1999 and 1998 because of the short maturity of
these financial instruments. The carrying value of the obligations under
capital leases and loans payable approximate fair value because the
interest rates on these instruments approximate the market rates at
December 31, 1999 and 1998. The fair value estimates were based on
information available to management as of December 31, 1999 and 1998.
NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER ("RMC")
[1] Gamma Knife neuroradiosurgery equipment agreement:
U.S. Neuro entered into a neuroradiosurgery equipment agreement (the
"equipment agreement") with RMC for a period of 21 years which commenced
with the completion of the neuroradiosurgery facility (the "facility") in
September 1994. The equipment agreement, among other matters, requires
U.S. Neuro to provide (i) the use of the Gamma Knife equipment (the
"equipment") to RMC, (ii) the necessary technical personnel for the proper
operation of the equipment, (iii) sufficient supplies for the equipment,
(iv) the operation, maintenance and repair of the equipment, (v) all basic
hardware and software updates to the equipment and, (vi) an uptime
guarantee. In return, RMC pays U.S. Neuro 80% of RMC's fees for the use of
the equipment and the facility. The agreement also provides for U.S. Neuro
to establish for the benefit of RMC an escrow account funded with an
amount equal to one month's average of the compensation payable to U.S.
Neuro. U.S. Neuro is the owner of and entitled to the income from the
escrow account so long as no event of default has occurred. As of December
31, 1999 and 1998, the escrow account had a balance of $96,000 and
$92,000, respectively. The equipment agreement terminates automatically
upon termination of the ground lease agreement (see Note B[2]) and may be
terminated by mutual agreement in the sixth year of the ground lease term.
[2] Ground lease agreement:
U.S. Neuro constructed a facility in Kansas City, Missouri on property
which the Company leases from RMC. The lease term is for a period of 21
years commencing September 1994. Rental expense is $3,600 per annum. The
terms of the lease include escalation clauses for increases in certain
operating expenses and for payment of real estate taxes and utilities.
Title to all improvements upon the land vests in RMC.
F-8
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE C - AGREEMENT WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY
MEDICAL CENTER ("NYU")
During November 1996, U.S. Neuro entered into a neuroradiosurgery equipment
agreement ("NYU agreement") with NYU for a period of seven years ("the term"),
with an option for NYU to extend the term for successive three year periods or
to purchase the Gamma Knife equipment at an appraised market value price. U.S.
Neuro may negotiate the purchase price and upon failure of the parties to agree
may request that the facility be closed. All costs associated with closing and
restoring the facility to its original condition will be the liability of U.S.
Neuro. The equipment agreement, among other matters, requires U.S. Neuro to
provide (i) the use of the Gamma Knife equipment to NYU, (ii) training necessary
for the proper operation of the Gamma Knife equipment, (iii) sufficient supplies
for the equipment, (iv) the repair and maintenance of the equipment, (v) all
basic hardware and software upgrades to the equipment and, (vi) an uptime
guarantee. In return, NYU will pay U.S. Neuro a scheduled fee based on the
number of patient procedures performed.
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE
In a prior year, U.S. Neuro acquired a Gamma Knife ("Knife 1") from Elekta
Instruments ("Elekta") for $2,900,000. The acquisition was financed by Financing
for Science International ("FFSI") under a five year capital lease, with an
implicit interest rate of approximately 12.7% per annum. During September 1996,
Finova Capital Corp. ("Finova") bought out FFSI and became the lessor. During
March 1997, U.S. Neuro refinanced this lease with DVI Financial Services, Inc.
("DVI") for $2,272,000 under a 39 month capital lease with an implicit interest
rate of approximately 10.4%. In connection with the refinancing, DVI paid to
Finova $1,647,000 in settlement of the lease obligations, the Company's demand
loan of $525,000 payable to DVI was repaid, and DVI paid the Company $100,000.
On December 6, 1994, U.S. Neuro entered into an additional agreement with Elekta
to acquire a second Gamma Knife ("Knife 2") for $2,900,000. The construction of
the knife initially was financed by FFSI through funding of progress payments
made to Elekta; however, during 1996, the Company refinanced the progress
payments with DVI at which time the Company's deposit was returned. In July
1997, upon completion of construction, the progress payments were converted into
a capital lease obligation for $3,139,000. The lease payments provide for
interest at the higher of 12.0% or that rate adjusted for any increase in the
thirty month Treasury Note rate.
In addition, the Company entered into two (2) three-year loans with DVI in the
amounts of $325,000 and $163,000 to finance the leasehold improvements required
to install the Gamma Knife at New York University Medical Center. One of the
loans was repaid in full during 1999. The remaining loan bears interest at 12.0%
per annum. The leases and loans payable are collateralized by all the assets of
U.S. Neuro and subsidiaries.
The obligations under the capital lease and loans payable are as follows:
December 31,
1999 1998
---------- ----------
Capital leases - Gamma Knife $2,763,000 $3,983,000
Loans payable - leasehold improvements 31,000 234,000
---------- ----------
2,794,000 4,217,000
Less current portion 1,043,000 1,423,000
---------- ----------
$1,751,000 $2,794,000
========== ==========
F-9
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
Future payments as of December 31, 1999 on the equipment leases and loans are as
follows:
Year Ending
December 31,
------------
2000 $1,306,000
2001 792,000
2002 792,000
2003 462,000
----------
3,352,000
Less interest 558,000
----------
Present value of net minimum obligation $2,794,000
==========
NOTE E - CONCENTRATIONS
For the years ended December 31, 1999, 1998 and 1997, the Company derived
substantially all of its patient revenue from two hospitals, one of which
accounted for 67%, 60% and 90%, respectively of the Company's revenue. For the
years ended December 31, 1999 and 1998, two customers accounted for 100% of the
accounts receivable.
The Company has been dependent on one manufacturer who sells, supplies and
services the Gamma Knife.
NOTE F - TAXES
The components of the income tax provision (benefit) are as follows:
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Current:
Federal $ (70,000) $(201,000) $(112,000)
State (50,000) (2,000)
--------- --------- ---------
(70,000) (251,000) (114,000)
--------- --------- ---------
Deferred:
Federal 114,000 (208,000) 106,000
State 29,000 (52,000)
--------- --------- ---------
143,000 (260,000) 106,000
--------- --------- ---------
Income tax provision (benefit) $ 73,000 $(511,000) $ (8,000)
========= ========= =========
F-10
NOTE F - TAXES (CONTINUED)
A reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported follows:
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Income tax (benefit) at the federal statutory rate $ 47,000 $(517,000) $ (6,000)
State income tax (benefit), net of federal taxes 7,000 (80,000) (2,000)
Accrued litigation settlement 114,000
Difference for change in depreciation 19,000
Other (28,000)
--------- --------- ---------
Income tax provision (benefit) $ 73,000 $(511,000) $ (8,000)
========= ========= =========
Items which give rise to deferred tax assets and liabilities are as follows:
December 31,
---------------------
1999 1998
--------- ---------
Deferred tax asset:
Litigation settlement accrued for financial reporting
purposes, deductible when paid for tax purposes $ 180,000 $ 260,000
Net operating loss 43,000
Deferred tax liability:
Excess of tax depreciation over book depreciation (556,000) (450,000)
--------- ---------
Net deferred tax liability $(333,000) $(190,000)
========= =========
In 1999 and 1998, no valuation allowance was provided for the deferred tax asset
because management believes that it is more likely than not that the benefit
will be realized through future taxable income.
NOTE G - LITIGATION
In 1993, pursuant to an agreement (the "USN Agreement") between GHS and A. Hyman
Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D ("Brown"), GHS, among
other things, granted an aggregate 20% interest in U.S. Neuro to Brown and
Kirshenbaum. In addition, following the execution of the USN Agreement,
Kirshenbaum was appointed as an officer of U.S. Neuro and Brown was appointed to
GHS's Board of Directors and executed an employment agreement with U.S. Neuro.
Under the terms of the USN Agreement, the Company possessed the right to
repurchase for cash or common stock such 20% interest during each of the third
through sixth full fiscal years of the USN Agreement. GHS exercised its right to
repurchase the 20% interest in U.S. Neuro in September 1996 at a value of
$38,781 which was calculated by GHS in accordance with the terms of the USN
Agreement and in 1997, GHS paid the purchase price through the issuance of
shares of its common stock valued at $31,332 plus offsetting a receivable of
$7,450 from Brown against the purchase price. Such valuation was disputed by
Brown and Kirshenbaum.
F-11
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - LITIGATION (CONTINUED)
In June 1997, GHS instituted an action (the "Declaratory Action") in the United
States District Court of Maryland, Southern Division against Kirshenbaum and
Brown seeking a declaration from the Court that its repurchase of Brown's and
Kirshenbaum's 20% interest in U.S. Neuro for $38,781 was fair and equitable.
Because of the dispute between GHS and Brown and Kirshenbaum on the valuation of
their 20% interest in U.S. Neuro, GHS filed the Declaratory Action to determine:
(1) whether GHS's repurchase is proper; (2) whether the valuation of Brown's and
Kirshenbaum's 20% interest in U.S. Neuro is just and fair; and (3) whether
Brown's and Kirshenbaum's valuation of their 20% interest in U.S. Neuro is
improper.
In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against GHS, U.S. Neuro and others. The
counterclaim against GHS and third party claim against U.S. Neuro and the other
parties was purportedly for violations of: (1) the RICO statutes; (2) various
causes of action for fraud; and (3) various causes of action for breach of
contract. The United States District Court of Maryland dismissed the RICO claims
against U.S. Neuro and GHS. The fraud counts sought damages of not less than $9
million per count and the imposition of treble damages for punitive damages for
the fraud counts. The breach of contract counts ranged from $250,000 to
$600,000. The claims of fraud arose out of an alleged conspiracy between GHS and
other parties to misappropriate a business concept allegedly created by Brown
and Kirshenbaum. The remainder of Brown's and Kirschenbaum's claims were in the
nature of a breach of contract between GHS, U.S. Neuro and Brown and
Kirshenbaum.
In addition to the above-described federal court action, Brown filed a state
court action in the District Court in and for Montgomery County, Maryland
against U.S. Neuro and other parties seeking breach of contract damages for lost
salary, unreimbursed expenses and for consequential damages and costs arising
out of what he claimed to be an improper termination from U.S. Neuro. Brown
sought approximately $381,000 for lost salary and $36,000 for unreimbursed
expenses in addition to the consequential damages and treble damages under the
various counts of his compliant.
On May 25, 1999, the parties to the above-described actions settled all of the
above-described legal proceedings pursuant to an agreement and plan of
settlement dated March 22, 1999. As part of the closing of such settlement, GHS
issued in the aggregate 68,688 additional shares of GHS common stock to Brown
and Kirshenbaum and delivered $200,000 in cash to them. In addition, USN
delivered to Brown and Kirshenbaum promissory notes (the "Settlement Notes") in
the aggregate amount of $450,000, bearing interest at the rate of 6% per annum,
and payable over a four-year period as follows: $100,000 on the first, third and
fourth anniversaries of such closing and $150,000 on the second anniversary of
such closing. USN is solely responsible for the payment of the Settlement Notes.
The Settlement Notes are secured by a second-priority security interest in USN's
receivables from its Kansas City and New York Gamma Knife centers. During 1998,
$934,000 was charged to expense for this settlement including the value of the
stock issued by GHS.
On June 9, 1999 the Declaratory Action was dismissed with prejudice by the
parties.
F-12
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE H - COMMITMENT
The Company leases office space under an operating lease expiring March 2003.
The terms of the lease include an escalation clause for a portion of certain
operating expenses. At December 31, 1999, the annual future minimum rental
payments under the operating lease are as follows:
2000 $ 32,000
2001 32,000
2002 32,000
2003 8,000
---------
$ 104,000
---------
Rent expense was approximately $33,000, $21,000 and none for the years ended
December 31, 1999, 1998 and 1997, respectively.
NOTE I - EMPLOYEES' 401(K) PLAN
During 1997 the Company established a 401(k) plan covering substantially all of
its employees, which includes employer participation, in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan allows
participants to make pre-tax contributions and the Company may, at its
discretion, match certain percentages of the employee contribution. Amounts
contributed to the plan are deposited into a trust fund administered by
independent trustees. The Company's discretionary matching 401(k) contributions
for 1999, 1998 and 1997 were $14,000, $13,000 and $2,200, respectively.
NOTE J - RELATED PARTY TRANSACTIONS
[1] The Company and its president are parties to an employment agreement
giving either party the option to terminate employment by giving the other
party six months written notice. The president's salary for the year ended
December 31, 1999, 1998 and 1997 were $255,000, $208,000 and $115,000,
respectively.
[2] During the year ended December 31, 1999, the Company hired a family member
of an officer for computer consulting services. Such consulting expense
amounted to $45,000 for the year.
[3] During the year ended December 31, 1999, the Company hired a consulting
firm. A director of the Company was also the Managing Director of the
consulting firm. Such consulting expense amounted to $30,000 for the year.
NOTE K - SUBSEQUENT EVENT
On February 8, 2000, the Company entered into a cobalt reloading agreement for
the RMC Gamma Knife in the amount of $650,000, which is being financed by DVI
pursuant to an agreement dated March 16, 2000 at the rate of prime plus one
percent, payable in forty monthly installments of $19,383. In addition, the
Company expects to incur approximately $150,000 of excavation costs in order to
reload the cobalt.
F-13