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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, 2000 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 $120,000 on March 20, 2001, 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 20, 2001, 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.
FO
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
2
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, 2000, there
were approximately 50 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 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
3
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, Inc., USN's former parent, ("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 ended December 31, 2000 and the fiscal years 1999 and 1998 USN
derived revenues from the RMC center of approximately $1,341,000,
4
$2,081,000 and $1,425,000, respectively, as a result of 116, 153 and 124
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. DVI Financial Services, Inc. (DVI) provided
the capital lease financing for the NYU facility. The lease 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, 2000, 1999, and 1998,
USN derived revenues from the NYU center of approximately $1,207,000, $980,000,
and $890,000, respectively, as a result of 121, 98, and 89 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. These loans had three year terms and were paid off in
1999 and 2000.
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
5
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 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
6
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 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
7
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 Gamma 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 the
fourth quarter of 2000 the Company completed
8
the reload on the RMC unit. The cost to transport it and install into the
machine were approximately $200,000 and were financed by DVI at the same terms
as above, requiring forty monthly installments of $5,782.
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
physicist, and two in administration and office support.
ITEM 2. PROPERTIES
The Company's base facility, from which it conducts substantially all of
its administrative operations, is located in Rockville, Maryland and occupies
approximately 1,300 square feet. The rent is approximately $35,000 per year. USN
occupies approximately 1,600 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
9
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, 2000.
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 .62 .06
January 1 - March 31, 2000 .16 .12
April 1 - June 30, 2000 .14 .09
July 1 - September 30, 2000 .10 .08
October 1 - December 31, 2000 .09 .04
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of March 23, 2001, 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, 1996
through 2000. 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)
- --------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Operating Revenue $ 2,575 $3,089 $ 2,332 $ 1,830 $ 1,452
Expenses:
Patient expense 1,097 1,115 1,221 843 574
General and administrative 1,366 1,445 1,148 585 417
Interest expense 318 409 555 485 302
Net Income (loss) (17) 66 (1,011) (53) 95
Basic and diluted Income per common share $ 0.00 $ 0.01 ($ 0.14) ($ 0.01) $ 0.01
December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents $ 286 $ 464 $ 21 $ 60 $ 14
Total assets 4,856 5,283 5,811 6,836 6,604
Long-term obligations 2,168 2,517 3,514 4,667 5,659
Stockholders equity (deficiency) 1,131 1,151 (1,043) (657) (712)
(1) For the years ended December 31, 1996 through 1999 the per share information
presented is proforma. 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
2000 Compared to 1999
Patient revenue decreased 17% to $2,575,000 in 2000 from $3,089,000 in
1999. The decrease was a result of two factors. The center in Kansas City closed
for more than one month at the end of the third quarter 2000 in order to reload
the cobalt source. In addition, effective August 1, 2000, the Department of
Health and Human Services implemented the Ambulatory Product Classifications
("APC") Medicare outpatient payment system. Gamma Knife patients, with Medicare
as their primary insurer and treated on either an in-patient or out-patient
basis, comprise an estimated 20% to 30% of the total patients treated. The
reimbursement for Medicare patients receiving Gamma Knife services on an
outpatient basis has decreased by as much as 80%. Patient expenses decreased 2%
to $1,097,000 in 2000 from $1,115,000 in 1999. Selling, general and
administrative expense (S,G & A) decreased 6% to $1,366,000 in 2000 from
$1,455,000 in 1999, primarily due to reduced professional fees.
As a result of the above income from operations declined to $112,000 from
$529,000 in 1999. Interest expense declined to $318,000 in 2000 from $409,000 in
1999. This was due to the paydown of principal on the Gamma Knife lease. The
Company also had extraordinary income of $109,000, net of taxes, in 2000 from a
collection of a receivable which originated with GHS. The net loss was $17,000
in 2000 compared to net income of $66,000 in 1999.
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. S,G & A
13
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.
Liquidity and Capital Resources
At December 31, 2000 the Company had a working capital deficit of $787,000
as compared to $742,000 at December 31, 1999. Cash and cash equivalents at
December 31, 2000 were $286,000 as compared to $464,000 at December 31, 1999.
The decrease is primarily due to a lengthy collection process from one of its
clients. Net cash provided by operating activities was $910,000 as compared with
$1,334,000 for the same period, a year earlier. Depreciation and amortization
was $1,174,000 as compared to $1,136,000 in 1999.
Net cash used in investing activities for the year ended 2000 was $850,000
as compared to $42,000 in the year ago period. The Company reloaded the cobalt
on its Kansas City unit during the current year.
Net cash used in financing activities for the year ended December 31, 2000
was $238,000 as compared to $849,000 in 1998. The Company paid $1,079,000
towards its capital leases in 2000 as compared to $1,423,000 in 1999. During
2000 the lease for the Kansas City Gamma Knife was paid in full. The Company
financed $844,000 for the reload of the cobalt and improvements. There were cash
and services received by GHS of $674,000 in 1999.
The leases for the NYU equipment require annual payments of $792,000. The
Kansas City Cobalt reload has annual payments of $300,000. In addition, as part
of the
14
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, 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. 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.
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.
1998 31-Mar 30-Jun 30-Sep 31-Dec Year
------ ------ ------ ------ ----
Revenue $588 $675 $472 $597 $2,332
Income (Loss) from operations 104 1 (90) (986) (971)
Net Income (loss) 1 (104) (150) (758) (1,011)
Basic and diluted Income per common share $0.00 ($0.02) ($0.02) ($0.10) ($0.14)
1999 31-Mar 30-Jun 30-Sep 31-Dec Year
------ ------ ------ ------ ----
Revenue $940 $755 $808 $586 $3,089
Income (Loss) from operations 274 151 171 (67) 529
Net Income (loss) 98 29 53 (114) 66
Basic and diluted Income per common share $0.01 $0.00 $0.01 ($0.02) $0.01
2000 31-Mar 30-Jun 30-Sep 31-Dec Year
------ ------ ------ ------ ----
Revenue $588 $683 $653 $651 $2,575
Income (Loss) from operations 37 115 (55) 15 112
Net Income (loss) (23) 97 (53) (38) -17
Basic and diluted Income per common share $0.00 $0.01 ($0.01) $0.00 $0.00
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 56 President & Chairman
William F. Leimkuhler 49 Director
Charles H. Merriman, III 66 Director
Howard Grunfeld 40 Vice President--Finance, Treasurer
Susan Greenwald 55 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, 56, 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, 49, acts as a consultant on corporate and business
development matters to several emerging growth companies. From January 1994
until October 1999, he served
16
as Vice President and General Counsel of Allen & Company Incorporated, an
investment banking firm.
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, 66, 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, 40, 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, 55,
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.
17
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 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 traveling costs and other out-of-pocket
expenses incurred in attending board meetings. During the year ended December
31, 2000, 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, 2000, 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, 2000, 1999, and 1998, for the Chief Executive Officer of the
Company. Prior to the Spin-off all amounts were paid by GHS.
Summary Compensation Table
Annual Compensation
Name and -------------------
Principal Position Year Salary($)
- ------------------ ---- ---------
Alan Gold 2000 $254,000
President & Director 1999 $191,000
1998 $207,000
18
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 30, 2001, 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 55,900 *
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
19
All Directors and Officers of USN 726,818 9.9%
as a group (2) (four persons)
- ----------------
(1) Unless otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the person named above.
(2) Includes 640,246 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. USN 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,
21
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 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. on 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, 2000 and 1999 F-3
Statements of Operations for the years ended
December 31, 2000, 1999, and 1998. F-4
Statements of Changes in Stockholders' Equity
for the period January 1, 1998 through
December 31, 2000 F-5
Statements of Cash Flows for the year ended
December 31, 2000, 1999, and 1998. 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 Subsidiaries (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: April 11, 2001
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.
April 11, 2001 /s/ Alan Gold
--------------------------------------------
Alan Gold
President and Director
(Chief Executive Officer)
April 11, 2001 /s/ William F. Leimkuhler
--------------------------------------------
William F. Leimkuhler
Director
April 11, 2001 /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, 2000 and 1999 F-3
Statements of operations for the years ended
December 31, 2000, 1999 and 1998 F-4
Statements of stockholders' equity for the years ended
December 31, 2000, 1999 and 1998 F-5
Statements of cash flows for the years ended
December 31, 2000, 1999 and 1998 F-6
Notes to financial statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
U.S. NeuroSurgical, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of U.S.
NeuroSurgical, Inc. and subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2000.
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, 2000 and 1999, and the
consolidated results of their operations and cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with generally
accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 24, 2001
F-2
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
-----------------------------
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 286,000 $ 464,000
Accounts receivable, net of allowance of $150,000 in 2000 300,000 240,000
Accounts receivable - stockholder 97,000 60,000
Deferred tax asset 60,000 83,000
Other current assets 27,000 26,000
----------- -----------
Total current assets 770,000 873,000
----------- -----------
Property and equipment:
Gamma Knives (net of accumulated depreciation of $4,407,000 in 2000 and
$3,483,000 in 1999) 2,058,000 2,983,000
Leasehold improvements (net of accumulated amortization of $818,000 in 2000
and $592,000 in 1999) 1,868,000 1,249,000
Office furniture and computers (net of accumulated depreciation of $48,000 in
2000 and $24,000 in 1999 ) 59,000 82,000
----------- -----------
3,985,000 4,314,000
----------- -----------
Cash held in escrow 101,000 96,000
----------- -----------
$ 4,856,000 $ 5,283,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 106,000 $ 148,000
Note payable - litigation settlement-current portion 150,000 100,000
Obligations under capital lease and loans payable - current portion 841,000 1,043,000
Due to stockholder 300,000 300,000
Income tax payable 135,000
Other current liabilities 25,000 24,000
----------- -----------
Total current liabilities 1,557,000 1,615,000
Note payable - litigation settlement - net of current portion 200,000 350,000
Deferred tax liability 250,000 416,000
Obligations under capital lease and loans payable - net of current portion 1,718,000 1,751,000
----------- -----------
3,725,000 4,132,000
----------- -----------
Commitments, litigation and other matters (Notes B,C,G and H )
STOCKHOLDERS' EQUITY
Common stock - par value $.01; 25,000,000 shares
authorized; 7,316,685 shares issued 73,000 73,000
Additional paid-in capital 2,789,000 2,789,000
Accumulated deficit (1,728,000) (1,711,000)
Treasury stock, at cost (3,000)
----------- -----------
1,131,000 1,151,000
----------- -----------
$ 4,856,000 $ 5,283,000
=========== ===========
See notes to consolidated financial statements F-3
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenue (Notes B and C) $ 2,575,000 $ 3,089,000 $ 2,332,000
----------- ----------- -----------
Costs and expenses:
Patient expenses 1,097,000 1,115,000 1,221,000
Selling, general and administrative 1,366,000 1,445,000 1,148,000
Litigation settlement 934,000
----------- ----------- -----------
2,463,000 2,560,000 3,303,000
----------- ----------- -----------
Income (loss) from operations 112,000 529,000 (971,000)
----------- ----------- -----------
Interest expense (318,000) (409,000) (555,000)
Interest income 12,000 19,000 4,000
----------- ----------- -----------
(306,000) (390,000) (551,000)
----------- ----------- -----------
(Loss) income before income taxes and extraordinary item (194,000) 139,000 (1,522,000)
Income tax (benefit) provision (68,000) 73,000 (511,000)
----------- ----------- -----------
(Loss) income before extraordinary item (126,000) 66,000 (1,011,000)
Extraordinary item (less applicable
income tax of $61,000) 109,000
----------- ----------- -----------
Net (loss) income $ (17,000) $ 66,000 $(1,011,000)
=========== =========== ===========
Basic and diluted net (loss) income per share:
(Loss) income before extraordinary item $ (.01) $ .01 $ (.14)
Extraordinary item .01
----------- ----------- -----------
Net (loss) income $ 0 $ .01 $ (.14)
=========== =========== ===========
Weighted average common shares outstanding 7,312,575 7,316,685 7,316,685
=========== =========== ===========
See notes to consolidated financial statements F-4
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Common Stock Treasury Stock
------------------ -----------------
Number Additional Number
of Paid-in Accumulated of
Shares Amount Capital Deficit Shares Amount Total
--------- ------- ---------- ----------- ------- -------- -----------
Balance - January 1, 1998 100 $ 0 $ 109,000 $ (766,000) 0 $ 0 $ (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) 0 0 (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) 0 0 1,151,000
Purchase of 40,000 shares of treasury stock (40,000) (3,000) (3,000)
Net loss for the year ended December 31, 2000 (17,000) (17,000)
--------- ------- ---------- ----------- ------- -------- -----------
Balance - December 31, 2000 7,316,685 $73,000 $2,789,000 $(1,728,000) (40,000) $ (3,000) $ 1,131,000
========= ======= ========== =========== ======= ======== ===========
See notes to consolidated financial statements F-5
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net (loss) income $ (17,000) $ 66,000 $(1,011,000)
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Provisions for doubtful accounts 150,000
Depreciation and amortization 1,174,000 1,136,000 1,121,000
Deferred income tax (benefit) provision (143,000) 143,000 (260,000)
Accrued litigation settlement 650,000
Changes in:
Accounts receivable (210,000) (166,000) (24,000)
Accounts receivable - stockholder (37,000) 104,000 (5,000)
Other current assets (1,000) 1,000 (3,000)
Accounts payable and accrued expenses (142,000) 26,000 7,000
Other current liabilities 136,000 24,000
----------- ----------- -----------
Net cash provided by operating activities 910,000 1,334,000 475,000
----------- ----------- -----------
Cash flows from investing activities:
Property and equipment (845,000) (38,000) (20,000)
Increase in cash held in escrow (5,000) (4,000) (3,000)
----------- ----------- -----------
Net cash used in investing activities (850,000) (42,000) (23,000)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of capital lease and loan obligations (1,079,000) (1,423,000) (1,195,000)
Cash received on financing of equipment 844,000
Selling, general and administrative services contributed by GHS, Inc. 300,000 341,000
Portion of litigation settlement paid by GHS, Inc. 284,000
Increase in due to GHS, Inc. 79,000
Cash received from GHS, Inc. 374,000
Purchase of treasury stock (3,000)
Payment of liability assumed in connection with spin-off (100,000)
----------- ----------- -----------
Net cash used in financing activities (238,000) (849,000) (491,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (178,000) 443,000 (39,000)
Cash and cash equivalents - beginning of year 464,000 21,000 60,000
----------- ----------- -----------
Cash and cash equivalents - end of year $ 286,000 $ 464,000 $ 21,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 318,000 $ 427,000 $ 555,000
Income taxes $ 1,000 $ 12,000
Supplemental disclosures of noncash financing activities:
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 consolidated 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. ("USN") 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. USN 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 USN. On May 20, 1999 the Board of Directors of USN
authorized a stock split of USN's common stock which would result in the
number of outstanding shares of USN 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, USN became a publicly held company.
The consolidated financial statements include the accounts of USN and
USNP. All intercompany transactions and balances have been eliminated.
Management of the Company believes that its cash from operations plus cash
on hand as of December 31, 2000 will be sufficient to fund its cash
requirements through at least January 1, 2002, 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] 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.
[5] 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].
[6] 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.
[7] 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.
F-7
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[8] 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, 2000 and 1999 because of the short maturity of
these financial instruments. The carrying values 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, 2000 and 1999.
NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER ("RMC")
[1] Gamma Knife neuroradiosurgery equipment agreement:
USN entered into a neuroradiosurgery equipment agreement (the "equipment
agreement") with RMC, a stockholder of the Company 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 USN 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 USN 80% of
RMC's fees for the use of the equipment and the facility. The agreement
also provides for USN 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 USN. USN 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, 2000 and 1999, the escrow account had a
balance of $101,000 and $96,000, respectively. The equipment agreement
terminates automatically upon termination of the ground lease agreement
(see Note B[2]). The Company had patient revenue from RMC in the amounts
of $1,341,000, $2,081,000 and $1,425,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
[2] Ground lease agreement:
USN 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. The lease provides for rent at $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.
NOTE C - AGREEMENT WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY
MEDICAL CENTER ("NYU")
During November 1996, USN 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. USN 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 USN.
The equipment agreement, among other matters, requires USN 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 is to pay USN a scheduled fee based on the number of patient
procedures performed. The Company had patient revenue from NYU in the amounts of
$1,234,000, $1,008,000 and $907,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
F-8
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE
USN acquired its first Gamma Knife ("Knife 1") from Elekta Instruments
("Elekta") for $2,900,000 under a capital lease. The Company refinanced the
lease with DVI Financial Services, Inc. ("DVI") under a 39-month capital lease
with an implicit interest rate of approximately 10.4%.
On December 6, 1994, USN entered into an additional agreement with Elekta to
acquire a second Gamma Knife ("Knife 2') for $2,900,000 which was also financed
by DVI pursuant to a capital lease obligation. The lease terms 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, USN had 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 NYU. The loans were repaid in full during 1999 and
2000, respectively. The leases and loans payable were collateralized by all the
assets of the Company.
During 2000, USN entered into two(2) three-year loans with DVI in the amounts of
$625,000 and $194,000 to finance the removal and reinstallation of the supply of
cobalt at RMC. The loans bear interest at 10.7% per annum and are collateralized
by the Gamma Knife at RMC.
The obligations under the capital lease and loans payable are as follows:
December 31,
--------------------------
2000 1999
---------- ----------
Capital leases - Gamma Knife $1,750,000 $2,763,000
Loans payable - leasehold improvements 809,000 31,000
---------- ----------
2,559,000 2,794,000
Less current portion 841,000 1,043,000
---------- ----------
$1,718,000 $1,751,000
========== ==========
Future payments as of December 31, 2000 on the equipment leases and loans are as
follows:
Year Ending
December 31,
------------
2001 $ 1,094,000
2002 1,094,000
2003 764,000
2004 49,000
-----------
3,001,000
Less interest 442,000
-----------
Present value of net minimum obligation $ 2,559,000
===========
F-9
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E - CONCENTRATIONS
For the years ended December 31, 2000, 1999 and 1998, the Company derived all of
its patient revenue from two hospitals. These two hospitals also accounted for
100% of the accounts receivable at December 31, 2000 and 1999.
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,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
Current:
Federal $ 65,000 $ (70,000) $(201,000)
State 10,000 (50,000)
--------- --------- ---------
75,000 (70,000) (251,000)
--------- --------- ---------
Deferred:
Federal (121,000) 114,000 (208,000)
State (22,000) 29,000 (52,000)
--------- --------- ---------
(143,000) 143,000 (260,000)
--------- --------- ---------
Income tax provision (benefit) $ (68,000) $ 73,000 $(511,000)
========= ========= =========
A reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported follows:
Year Ended December 31,
----------------------------------------
2000 1999 1998
--------- --------- ---------
Income tax (benefit) at the federal statutory rate $ (65,000) $ 47,000 $(517,000)
State income tax (benefit), net of federal taxes (3,000) 7,000 (80,000)
Accrued litigation settlement 114,000
Other 19,000 (28,000)
--------- --------- ---------
Income tax provision (benefit) $ (68,000) $ 73,000 $(511,000)
========= ========= =========
Items which give rise to deferred tax assets and liabilities are as follows:
December 31,
-------------------------
2000 1999
--------- ---------
Deferred tax asset:
Litigation settlement accrued for financial reporting
purposes, deductible when paid for tax purposes $ 140,000 $ 180,000
Net operating loss 43,000
Deferred tax liability:
Excess of tax depreciation over book depreciation (330,000) (556,000)
--------- ---------
Net deferred tax liability $(190,000) $(333,000)
========= =========
F-10
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE F - TAXES (CONTINUED)
In 2000 and 1999, 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 settlement of a litigation in May 1999, the Company paid $200,000 cash and
issued 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. The Settlement Notes are secured by a second-priority security interest
in the Company'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 68,688 shares of common stock issued by GHS.
NOTE H - COMMITMENTS
Leases:
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, 2000, the annual future minimum rental
payments under the operating lease and the ground lease referred to in Note B
(2) are as follows:
2001 $ 36,000
2002 36,000
2003 12,000
2004 4,000
2005 4,000
Thereafter 40,000
---------
$ 132,000
=========
Rent expense was approximately $34,000, $33,000 and $21,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Gamma Knives:
The Company is required to reload cobalt at each facility approximately every 7
years. The cobalt of RMC was reloaded in 2000 (see Note D). The NYU facility
will require cobalt reload in approximately 2003.
NOTE I - EMPLOYEES' 401(K) PLAN
The Company has established an employee benefits 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 the year ended 2000, 1999 and 1998 were $14,000, $14,000 and $13,000,
respectively.
F-11
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE J - RELATED PARTY TRANSACTIONS9+
[1] The amount due to stockholder is due on demand without interest.
[2] 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, 2000, 1999 and 1998 were $265,000, $255,000 and $208,000,
respectively.
[3] During the year ended December 31, 2000 and 1999, the Company hired a
family member of an officer for computer consulting services. Such
consulting expense amounted to $44,000 and $45,000, respectively.
[4] 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 1999.
NOTE K - EXTRAORDINARY ITEM
Extraordinary item represents amounts received by the Company on a receivable
which originated with GHS.
F-12