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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission file number
September 30, 2002 0-26575
U.S. NEUROSURGICAL, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-1842411
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
2400 Research Blvd, Suite 325, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 208-8998
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 25, 2002
- ---------------------------- -------------------------------
Common Stock, $.01 par value 7,866,185 Shares
PART I
FINANCIAL INFORMATION
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2002 2001
---- ----
Current assets:
Cash and cash equivalents $ 149,000 $ 311,000
Accounts receivable 671,000 431,000
Deferred tax asset -- 40,000
Other current assets 52,000 52,000
----------- -----------
Total current assets 872,000 834,000
----------- -----------
Gamma Knife (net of accumulated depreciation of
$5,574,000 in 2002 and $5,192,000 in 2001) 892,000 1,273,000
Leasehold improvements (net of accumulated
amortization of $1,410,000 in 2002 and $1,136,000 in 2001) 1,275,000 1,550,000
Office furniture and computers (net of accumulated
depreciation of 93,000 in 2002 and $74,000 in 2001) 14,000 33,000
----------- -----------
Total property and equipment 2,181,000 2,856,000
----------- -----------
Cash held in escrow 106,000 105,000
----------- -----------
TOTAL $ 3,159,000 $ 3,795,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 108,000 $ 52,000
Note payable 100,000 100,000
Obligations under capital lease
and loans payable- current portion 940,000 1,000,000
Due to stockholder 300,000 300,000
Income tax payable -- 36,000
Other current liabilities 38,000 23,000
----------- -----------
Total current liabilities 1,486,000 1,511,000
Note payable -- 100,000
Deferred tax liability 70,000 68,000
Obligations under capital lease and loans payable
Net of current portion 214,000 837,000
----------- -----------
1,770,000 2,516,000
----------- -----------
Stockholders' equity:
Common stock 79,000 79,000
Additional paid-in capital 2,808,000 2,808,000
Accumulated deficit (1,490,000) (1,608,000)
Treasury stock, at cost (8,000) --
----------- -----------
Total stockholders' equity 1,389,000 1,279,000
----------- -----------
TOTAL $ 3,159,000 $ 3,795,000
=========== ===========
The accompanying notes to financial statements are an integral part hereof.
2
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
-------------
2002 2001
---- ----
Revenue:
Patient Revenue $ 660,000 $ 657,000
--------- ---------
Expenses:
Patient Expenses 235,000 308,000
Selling, General and Administrative 361,000 294,000
--------- ---------
Total 596,000 602,000
--------- ---------
Income (loss) from operations 64,000 55,000
Interest expense (36,000) (63,000)
Interest income 1,000 2,000
--------- ---------
Income before tax 29,000 (6,000)
Income tax 10,000 --
--------- ---------
Net Income (loss) $ 19,000 $ (6,000)
========= =========
Earnings per share $ -- $ --
========= =========
The accompanying notes to financial statements are an integral part hereof.
3
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
Revenue:
Patient Revenue $ 2,044,000 $ 1,893,000
----------- -----------
Expenses:
Patient Expenses 691,000 979,000
Selling, General and Administrative 1,024,000 900,000
----------- -----------
Total 1,715,000 1,879,000
----------- -----------
Income from operations 329,000 14,000
Interest expense (135,000) (216,000)
Interest income 2,000 8,000
----------- -----------
Income (loss) from continuing operations 196,000 (194,000)
before tax
Income tax (benefit) 78,000 (62,000)
----------- -----------
Income (loss) from continuing operations 118,000 (132,000)
Income from Discontinued Operations (less applicable -- 67,000
Income tax of $33,000 in 2001)
----------- -----------
Net Income (loss) $ 118,000 $ (65,000)
=========== ===========
Earnings (loss) per share from continuing operations $ .02 $ (.02)
=========== ===========
Earnings per share from discontinued operations $ -- $ .01
=========== ===========
Earnings (loss) per share $ .02 $ (.01)
=========== ===========
The accompanying notes to financial statements are an integral part hereof.
4
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
------------
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $ 118,000 $ (65,000)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization: 675,000 952,000
Changes in operating assets and liabilities:
Increase in receivables (240,000) (155,000)
Increase in income tax receivable and other assets -- (33,000)
Deferred tax benefit 42,000 15,000
Increase (decrease) in payables and income tax payable 35,000 (164,000)
--------- ---------
Net cash provided by operating activities 630,000 550,000
--------- ---------
Cash flows from investing activities :
Increase in cash held in escrow (1,000) (4,000)
--------- ---------
Net cash used in investing activities (1,000) (4,000)
--------- ---------
Cash flows from financing activities:
Proceeds from loan -- 200,000
Repayment of note payable (100,000) (150,000)
Purchase of treasury stock (8,000) (9,000)
Payment of capital lease obligations (683,000) (639,000)
--------- ---------
Net cash used in financing activities (791,000) (598,000)
--------- ---------
Net (decrease) in cash and cash equivalents (162,000) (52,000)
Cash and cash equivalents - beginning of period 311,000 286,000
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 149,000 $ 234,000
========= =========
Supplemental disclosures of cash flow information:
Cash paid for
Interest 135,000 216,000
Income Taxes 125,000 135,000
The accompanying notes to financial statements are an integral part hereof.
5
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Preparation
The accompanying financial statements at September 30, 2002, and for the
three and nine months ended September 30, 2002 and 2001, are unaudited. However,
in the opinion of management, such statements include all adjustments necessary
for a fair statement of the information presented therein. The balance sheet at
December 31, 2001 has been derived from the audited financial statements at that
date appearing in the Company's Annual Report on Form 10-K.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
generally accepted accounting principles for complete financial statements.
Accordingly, these statements should be read in conjunction with the Company's
most recent annual financial statements.
Results of operations for interim periods are not necessarily indicative
of those to be achieved for full fiscal years.
Note B - Treasury Stock
During 2002, the Company purchased as part of its buyback program, 94,500
shares of its own common stock at a cost of $8,000.
Note C - Recent Accounting Announcements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires the purchase method of accounting be
used for all business combinations subsequent to June 30, 2001 and specifies the
criteria for the recognition of intangible assets acquired in a business
combination. Under SFAS No. 142, we will be required to reassess the value of
goodwill and other intangible assets previously recorded in connection with
prior acquisitions, as well as their useful lives. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 and will require that goodwill
not be amortized, but rather be subject to an impairment test at least annually.
Separately identified and recognized intangible assets resulting from business
combinations completed before July 1, 2001 that do not meet the new criteria for
separate recognition of intangible assets will be included in goodwill upon
adoption. In addition, the useful lives of recognized intangible assets acquired
in transactions completed before July 1, 2001 will be reassessed and the
remaining amortization periods adjusted accordingly. Adoption of SFAS No. 141
and 142 did not have a significant impact on our financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds Statement No. 4, which required all gains
and losses from
6
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Upon adoption of SFAS No.
145, companies will be required to apply the criteria in APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" in determining the classification of gains and losses
resulting from the extinguishments of debt. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. We believe adoption of SFAS No. 145 will
have no material effect on our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by SFAS No. 146 include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. We believe SFAS No. 146 will have no material effect on our financial
statements
7
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND
ANALYSIS OF OPERATIONS
AND FINANCIAL CONDITION
Critical Accounting Policies
Our condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting policies have a significant impact on amounts reported in
the financial statements. A summary of those significant accounting policies can
be found in our 2001 Annual Report on Form 10-K, filed on January 25, 2002, in
the Notes to the Financial Statements, Note A. In particular, judgment is used
in areas such as determining the allowance for doubtful accounts, and asset
impairments.
The following discussion and analysis provides information, which the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein.
Results of Operations
Third Quarter 2002 Compared to Third Quarter 2001 and Nine Months Ended
September 30, 2002 Compared to Nine Months Ended September 30, 2001
Patient revenue increased 1% to $660,000 in the quarter ended September
30, 2002 from $657,000 for the quarter ended September 30, 2001. Patient
expenses decreased 24% to $235,000 from $308,000 in the same period from a year
earlier. The decrease was due to the completion of depreciation on our Kansas
City gamma knife. Selling, general and administrative expense for the quarter
ended September 30 increased 27% to $361,000 from $294,000 a year ago. The
increase was due to higher insurance costs as well as increased salaries.
Interest expense decreased 43% to $36,000 from $63,000 in the same period a year
earlier. The decrease was due to a reduction of our leases on the Gamma Knife
properties. For the quarter ended September 30, 2002, the net income from
continuing operations was $19,000 as compared to a loss of $6,000 for the same
period a year earlier. During the quarter, the contract between USN and Research
Medical Center (RMC) has been restructured whereby The Cancer Institute (TCI), a
joint venture between RMC and St. Lukes Hospital has been assigned this
contract.
For the nine months ended September 30, revenue increased 8% to $2,044,000
from $1,893,000 in the same period a year earlier. Patient expenses decreased
29% to $691,000 in 2002 from $979,000 in the same period in 2001. The decrease
was due to the completion of depreciation on our Kansas City gamma knife.
Selling, general and administrative expenses increased 14% to $1,024,000 as
compared to $900,000 in the same period, a year earlier. The increase was due to
an increase in salaries and increased insurance costs. Interest expense
decreased 37% to $135,000 from $216,000 in the same period a year ago. The
decrease was due to a reduction of our leases on the Gamma Knife properties.
Income from continuing operations was $118,000 for the nine months ended
September 30, 2002 as compared to a loss of 132,000 for the nine months ended
8
September 30, 2001. The Company received $100,000 in 2001 from collection on
contracts from discontinued operations.
Liquidity and Capital Resources
At September 30, 2002 the Company had a working capital deficit of
$614,000 as compared to a deficit of $677,000 at December 31, 2001. Cash and
cash equivalents at September 30, 2002 were $149,000 as compared with $311,000
at December 31, 2001. The decrease in cash was due to paydown of capital leases
as well as a delay in collection of accounts receivable from NYU.
Net cash provided by operating activities was $630,000 for the nine months
ended September 30, 2002 as compared with $550,000 for the same period, a year
earlier. Depreciation and amortization was $675,000 for the nine month period
ended September 30, 2002 and was 952,000 in the 2001 period. The decrease was
due to the completion of depreciation on our Kansas City gamma knife. There was
an increase in accounts receivable of $240,000 in 2002 and $155,000 during the
nine months ended September 30, 2001.
Payables and income tax payable increased $35,000 for the nine months
ended September 30, 2002 as compared to a decrease of $164,000 for the same
period in 2001.
Net cash used in financing activities was $791,000 for the nine months
ended September 30, 2002 as compared to $598,000 for the same period a year ago.
The Company paid $683,000 towards its capital lease obligations for the nine
months ended September 30, 2002 as compared to $639,000 in the same period in
2001. Notes payable decreased by $100,000 in 2002 as compared to $150,000 in
2001. The company borrowed $200,000 during 2001 to fund its short term operating
costs. This is a forty month loan payable at 9.5 percent.
The Company expects cash flow from operations and cash on hand to be
sufficient to finance the business for the next twelve months.
Disclosure Regarding Forward Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document contains
such "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues and cash flow. Words such as "anticipates," "estimates,"
"expects," "projects," "intends," "plans," "believes," "will be," "will
continue," "will likely result," and words and terms of similar substance used
in connection with any discussion of future operating or financial performance
identify such forward-looking statements. Those forward-looking statements are
based on management's present expectations about future events. As with any
projection or forecast, they are inherently susceptible to uncertainty and
changes in circumstances, and USN is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking statements
whether as a result of such changes, new information, future events or
otherwise.
USN operates in a highly competitive and rapidly changing environment and
business segments that are dependent on our ability to: achieve profitability;
increase
9
revenues; sustain our current level of operation; introduce on a timely basis
new products; maintain satisfactory relations with our customers; attract and
retain key personnel; maintain and expand our strategic alliances; and protect
our know-how. USN's actual results could differ materially from management's
expectations because of changes in such factors. New risk factors can arise and
it is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on the company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
Investors should also be aware that while the company might, from time to
time, communicate with securities analysts, it is against the company's policy
to disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Furthermore, the company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Thus, to the extent that reports issued by securities analysts or others
contain any projections, forecasts or opinions, such reports are not the
responsibility of the company.
In addition, USN's overall financial strategy, including growth in operations,
maintaining financial ratios and strengthening the balance sheet, could be
adversely affected by increased interest rates, failure to meet earnings
expectations, significant acquisitions or other transactions, economic slowdowns
and changes in USN's plans, strategies and intentions
ITEM 4. CONTROLS AND PROCEDURES
U.S. Neurosurgical management, including the President and the Chief
Financial Officer, conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14 within 90 days of
the filing of this report. Based on that evaluation, the President and the Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to them in a timely fashion. There have
been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the President and
the Chief Financial Officer completed their evaluation.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. NEUROSURGICAL, INC.
Date November 12, 2002 By /s/ Alan Gold
----------------- ----------------------------
Alan Gold
Director and President
Chief Executive Officer
Date November 12, 2002 By /s/ Howard Grunfeld
----------------- ----------------------------
Howard Grunfeld
Chief Financial Officer
11
CERTIFICATION OF PRESIDENT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mr. Alan Gold, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Neurosurgical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 /s/ Mr. Alan Gold
-----------------
Mr. Alan Gold
President
12
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mr. Howard Grunfeld, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Neurosurgical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
c6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 /s/ Mr. Howard Grunfeld
----------------------------
Mr. Howard Grunfeld
Chief Financial Officer
13