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, 2002 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 $100,000 on March 15, 2003, 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 15, 2003, was 7,866,185.
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 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.
General
USN, was organized in July 1993 to own and operate stereotactic
radiosurgery centers, utilizing the Gamma Knife technology. USN currently owns
and operates two Gamma Knife centers, one on the premises of Research Medical
Center (RMC) in
2
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, 2002, there
were approximately 80 Gamma Knife treatment centers in the United States.
Through September 9, 1999, USN was a wholly owned subsidiary of GHS, Inc
("GHS"). Effective on September 17, 1999 GHS distributed its shares of USN to
the stockholders of GHS ( the "Spinoff").
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
3
the steep fall-off in the radiation intensity surrounding the target, the lesion
can be destroyed, while sparing the surrounding tissue.
The procedure, performed in a single treatment, sharply reduces hospital
stay times and eliminates post-surgical bleeding and infection. When compared
with conventional neurosurgery, Gamma Knife treatment is less expensive.
However, not all patients are candidates for radiosurgery since the decision to
use the Gamma Knife depends on the type, size, and location of the lesion.
Kansas City and New York Centers
In July 1993, USN purchased its first Leksell Gamma Knife from Elekta
Instruments, Inc. (Elekta), for the purpose of installing it at RMC in Kansas
City, Missouri. USN paid approximately $3,000,000 for the Gamma Knife through a
capital lease financing.
USN opened its first Gamma Knife Center on the premises of RMC in
September 1994. RMC is part of Health Midwest, a consortium of eleven hospitals
and numerous affiliates. USN formed a cooperative venture with RMC in September,
1993. Per an agreement with RMC, GHS, Inc., 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, 2002 and the fiscal years 2001 and 2000 USN derived revenues from the RMC
center of approximately $1,473,000, $1,397,000 and $1,341,000
4
respectively, as a result of 131, 114 and 116 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%. This lease will be paid in full in
July 2003. During 2003 the Company extended the term of its agreement with NYU
until 2009. The Company has 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.
For the years ended December 31, 2002, 2001, and 2000, USN derived revenues from
the NYU center of approximately $1,166,000, $1,176,000 and $1,234,000,
respectively, as a result of 150, 148 and 121 procedures performed,
respectively, during such periods. The reimbursement for the procedures has
remained consistent the past two years. We expect reimbursement to remain about
the same in the next year.
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.
5
Regulatory Environment
The levels of revenues and profitability of companies involved in the
health services industry, such as USN, may be affected by the continuing efforts
of governmental and third party payors to contain or reduce the costs of health
care through various means. Although the Company does not believe that its
business activities will be materially affected by changes in the regulatory
environment, it is uncertain what legislative proposals will be adopted or what
actions federal, state or private payors for healthcare goods and services may
take in response to any healthcare reform proposals or legislation. The Company
cannot predict the effects healthcare reform may have on its business, and no
assurance can be given that any such reforms will not have a material effect on
USN.
In addition, the provision of medical services in the United States is
dependent on the availability of reimbursement to consumers from third party
payors, such as government and private insurance companies. Although patients
are ultimately responsible for services rendered, the Company expects that the
majority of its revenues will be derived from reimbursements by third party
payors. Medicare has authorized reimbursement for Gamma Knife treatment. Over
the last several years, such third party payors are increasingly challenging the
cost effectiveness of medical products and services and taking other
cost-containment measures. Therefore, although treatment costs using the Gamma
Knife compare favorably to traditional invasive brain surgery, it is unclear how
this trend among third party payors and future regulatory reforms affecting
governmental reimbursement will affect procedures in the higher end of the cost
scale.
In the future, the Company may establish additional Gamma Knife centers.
Completion of future centers would require approvals and arrangements with
hospitals, health care organizations, or other third parties, including certain
regulatory authorities. The Food and Drug Administration has issued the
requisite pre-market approval for the Gamma Knife 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
6
equipment. Should the Company enter into future ventures such "need" will be
demonstrable, but it can have no assurance that Certificates of Need will be
granted. In addition, the Nuclear Regulatory Commission (NRC) must issue a
permit to USN to permit loading the COBALT at each Gamma Knife site. While the
Company believes that it can obtain a NRC permit for each Gamma Knife machine,
there is no assurance that it will.
Liability Insurance
Although USN does not directly provide medical services, it has obtained
professional medical liability insurance, and has general liability insurance as
well. USN's professional medical liability and general liability policies have
limits of $2 million each and USN has also purchased an excess coverage policy
providing an additional $3 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
7
than the Company. Principal competitive factors include quality and timeliness
of test results, ability to develop and maintain relationships with referring
physicians, facility location, convenience of scheduling and availability of
patient appointment times. The Company believes that cost containment measures
will encourage hospitals to seek companies that are providing the technology,
instead of incurring the capital cost of establishing their own Gamma Knife
centers.
Gamma Knife Supply and Servicing
Currently the only company that manufactures, sells, and services the
Gamma Knife is Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm,
Sweden. In 1993, USN entered into purchase agreements with Elekta for the
purchase of the Gamma Knives at its RMC and NYU centers. The purchase price for
each Gamma Knife was approximately $3,000,000. Elekta was responsible for the
installation and testing of the equipment and the training of the hospital staff
in the operation of the equipment. As part of the purchase of the Gamma Knife
devices from Elekta, USN entered into purchase and maintenance agreements
pursuant to which Elekta provides USN with ongoing maintenance, repairs and
software upgrades for the RMC and NYU Gamma knives at an aggregate cost of
$130,000 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. The
Company has begun the reload process for its New York location. In November 2002
the Company entered
8
into a cobalt reloading agreement with Elekta for August 2003. The cobalt and
related installation costs are expected to be approximately $950,000, 100% of
which will be financed. The Company made a down payment of $225,000 in December.
This will be financed by DVI in a 40 month payment plan. The cost of the cobalt
project will run about 300,000 annually for the term of the loan. 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 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.
In May of 2001 the Company borrowed $200,000 to fund its short term obligations.
The term of the loan is 40 months and carries an interest rate of 9.5% and has a
monthly payment of $5,851.
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.
9
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 is a
physicist, and two are 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 $36,000 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. Rent is deducted up
front in the fee paid to USN for the use of the Gamma Knife. USN's agreements
with RMC expire in September 2015 and there are no renewal options. USN's
agreement with NYU was extended this year and now expires in November 2009.
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 January 1, 2001 through December 31, 2002.
PERIOD HIGH BID LOW BID
------ -------- -------
January 1 - March 31, 2001 .12 .05
April 1 - June 30, 2001 .10 .06
July 1 - September 30, 2001 .16 .02
October 1 - December 31, 2001 .12 .03
January 1 - March 31, 2002 .15 .07
April 1 - June 30, 2002 .10 .07
July 1 - September 30, 2002 .07 .06
October 1 - December 31, 2002 .08 .06
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of March 15, 2003, 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, 1998
through 2002. 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)
- ------------------------------------------------------------------------------------------------
2002 21001 2000 1999 1998
------ ------ ------ ------ ------
OPERATING REVENUE $2,639 $2,573 $2,575 $3,089 $2,332
EXPENSES:
Patient expense 930 1,133 1,125 1,115 1,221
General and administrative 1,386 1,282 1,338 1,445 1,148
Interest expense 163 277 318 409 555
NET INCOME (LOSS) 98 120 (17) 66 (1,011)
BASIC AND DILUTED INCOME PER COMMON SHARE $ 0.01 $ 0.02 $ 0.00 $ 0.01 ($0.14)
BALANCE SHEET DATA:
Cash and cash equivalents $ 88 $ 311 $ 286 $ 464 $ 21
Total assets 2,963 3,795 4,856 5,283 5,811
Long-term obligations 101 1,005 2,168 2,517 3,514
Stockholders equity (deficiency) 1,368 1,279 1,131 1,151 (1,043)
(1) For the years ended December 31, 1998 and 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, 1998.
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
2002 COMPARED TO 2001
Patient revenue was $2,639,000 in 2002 compared to $2,573,000 in 2001.
Reimbursement continued at the same levels as the prior year. Patient expenses
decreased 18% to $930,000 from $1,133,000 in 2001. The reason for the decrease
is that one of the knives has been fully depreciated. Selling, general and
administrative expense (S,G & A) increased 8% to $1,386,000 in 2002 from
$1,282,000 in 2001. The major factor contributing to the increase was insurance
expense. Income from operations was $323,000 in 2002 compared to $158,000 in
2001. Interest expense declined to $163,000 in 2002 from $277,000 in 2001. This
was due to the paydown of principal on the Gamma Knife lease. Also, in 2001 we
received $67,000, net of tax effect on receivables that originated with GHS. As
a result of the above, net income was $98,000 compared to $120,000 in 2001.
During the year, the contract between USN and Research Medical Center (RMC) was
assigned to The Cancer Institute (TCI), a joint venture between RMC and St.
Lukes Hospital. The assignment had no effect on our revenue from the center.
2001 COMPARED TO 2000
Patient revenue was $2,573,000 in 2001 compared to $2,575,000 in 2000. The
Company continues to experience the effects of the Department of Health and
Human Services implementation of the Ambulatory Product Classifications ("APC")
Medicare outpatient payment system in August 2000. 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
increased 1% to $1,133,000 in 2001 from $1,125,000 in 2000. The reason for the
slight increase is depreciation on the 2000 cobalt reload offset
13
one of the knives being fully depreciated. Selling, general and administrative
expense (S,G & A) decreased 4% to $1,282,000 in 2001 from $1,338,000 in 2000.
As a result of the above income from operations increased to $158,000 in
2001 from $112,000 in 2000. Interest expense declined to $277,000 in 2001 from
$318,000 in 2000. This was due to the paydown of principal on the Gamma Knife
lease. The Company also had extraordinary income of $67,000, and $109,000 net of
taxes, in 2001 and 2000 respectively, from collections of receivables which
originated with GHS. The benefit of income taxes in 2001 was $163,000 compared
to $68,000 in 2000. This was primarily due to the finalization of the tax
effects of the spinoff which took place in 1999. Net income was $120,000 in 2001
compared to a net loss of $17,000 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002 the Company had a working capital deficit of $665,000
as compared to a working capital deficit of $677,000 at December 31, 2001. The
Company is concerned about the deficit but does not expect it to impact
operations and is confident that it will manange its receivables to continue to
make timely payments on all of its obligations. Cash and cash equivalents at
December 31, 2002 were $88,000 as compared to $311,000 at December 31, 2001. Net
cash provided by operating activities was $733,000 as compared with $763,000 for
the same period a year earlier. Depreciation and amortization was $912,000 as
compared to $1,129,000 in 2001. The Company issued $40,000 worth of stock as
compensation to officers and directors in 2001.
Net cash used in investing activities for the year ended 2002 was $1,000
as compared to $4,000 in the year ago period.
Net cash used in financing activities for the year ended December 31, 2002
was $955,000 as compared to $734,000 in 2001. The Company paid $946,000 towards
its capital leases in 2002 as compared to $922,000 in 2001. The Company borrowed
$200,000 for working capital purposes during 2001. The Company also bought back
114,000 shares of common stock during 2002 at a cost of $9,000 and 210,500
shares in 2001 at a cost of $12,000.
14
The leases for the NYU equipment require annual payments of $792,000. This
lease will be complete in July 2003. In August 2003 the NYU machine will have
its cobalt reloaded. The cost is estimated to be $950,000, which includes the
cost of the cobalt and related installation. This will be financed by DVI, Inc.
It is expected to have annual payments of $300,000. The Kansas City Cobalt
reload has annual payments of $360,000. In addition, as part of the settlement
of litigation involving GHS and USN in May 1999, USN issued promissory notes in
the aggregate amount of $450,000, bearing interest at the rate of 6% per annum,
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. The remaining liability as of December 31, 2002 is
$100,000. 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.
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
2001 31-MAR 30-JUN 30-SEP 31-DEC YEAR
------ ------ ------ ------ ----
REVENUE 531 705 657 680 $2,573
INCOME (LOSS) FROM OPERATIONS (128) 87 55 144 158
NET INCOME (LOSS) (126) 67 (6) 185 120
BASIC AND DILUTED INCOME PER COMMON SHARE -$0.02 $0.01 $0.00 $0.03 $0.02
2002 31-MAR 30-JUN 30-SEP 31-DEC YEAR
------ ------ ------ ------ ----
REVENUE 746 638 660 595 $2,639
INCOME (LOSS) FROM OPERATIONS 196 69 64 (6) 323
NET INCOME (LOSS) 84 15 19 (20) 98
BASIC AND DILUTED INCOME PER COMMON SHARE $0.01 $0.00 $0.00 $0.00 $0.01
15
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 58 President & Chairman
William F. Leimkuhler 51 Director
Charles H. Merriman, III 68 Director
Howard Grunfeld 42 Vice President--Finance, Treasurer
Susan Greenwald 57 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, 58, 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
16
Leimkuhler, 51, is currently the Director of Business Development for Paice
Corporation, the developer of an advanced hybrid electric powertrain for
passenger vehicles, a position he has held since October 1999. He also acts as a
consultant on corporate and business development matters to several emerging
growth companies. From January 1994 until October 1999, he served as Vice
President and General Counsel of Allen & Company Incorporated, an investment
banking firm.
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, 68, Mr. Merriman retired at the close of the year 2001 from service as
Senior Vice President and Managing Director of BB&T Capital Markets ("BB&T"), an
investment banking enterprise, where he was employed in various capacities since
1972 by BB&T and its predecessor. 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, 42, 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, 57,
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
17
companies engaged in Federal contracting and private enterprise, respectively,
in the healthcare information technology business. From July 1997 through
February 1998, Ms. Greenwald was an employee of Health Management Systems.
Pursuant to the Company's bylaws, the Company's Board of Directors is
elected by the stockholders at each annual meeting to serve until the next
annual meeting or until their successors are elected and qualified. In the case
of a vacancy, a director will be 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, 2002, the Board of Directors held three 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, 2002, all filing requirements
applicable to its officers and directors were complied with by such individuals.
18
ITEM 11 EXECUTIVE COMPENSATION
The information below sets forth the compensation for the year ended
December 31, 2002, 2001, and 2000, for the Chief Executive Officer of the
Company. Prior to the Spin-off all amounts were paid by GHS.
Summary Compensation Table
--------------------------
Name and Annual Compensation
Principal Position Year Salary($)
- ------------------ ---- ---------
Alan Gold 2002 $300,000
President & Director 2001 $305,000
2000 $265,000
The Company and Mr. Gold are parties to an employment agreement giving
either the Company or Mr. Gold the option to terminate the agreement by giving
the other party 6 months written notice.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 15, 2003, 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) 1,140,246 14.5%
2400 Research Blvd.
Rockville, MD 20850
Howard Grunfeld 155,900 2.0%
2400 Research Blvd.
Rockville, MD 20850
William F. Leimkuhler 100,000 1.3%
43 Salem Straits Road
Darien, CT 06820
19
Charles H. Merriman III 130,672 1.7%
5507 Cary St. Road
Richmond, VA 23226
Stanley S. Shuman (3) 2,688,000 34.2%
711 Fifth Avenue
New York, NY 10022
Allen & Company Incorporated 1,847,000 23.4%
711 Fifth Avenue
New York, NY 10022
All Directors and Officers of USN 1,526,818 19.5%
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 1,140,246 shares held jointly by Mr. Gold and his wife, Susan
Greenwald, as joint tenants with right of survivorship.
(3) Includes 1,847,000 shares owned by Allen & Company Incorporated, Mr.
Shuman disclaims beneficial ownership in such shares, except to the extent
of his pecuniary interest therein. .
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.
22
Item 14. Controls and Procedures.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of a date within the
90-day period prior to the filing of this report, an evaluation of the
effectiveness of USN's "disclosure controls and procedures" (as such term
is defined in Rules 13a-14(c) and 15d-14(c) of the United States
Securities Exchange Act of 1934 (the "Exchange Act")) was carried out by
our Chief Executive Officer and our Chief Financial Officer. Based on that
evaluation, the CEO and CFO have concluded that as of such date our
disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in United States Securities and
Exchange Commission rules and forms.
(B) CHANGES IN INTERNAL CONTROLS. Subsequent to the completion of their
evaluation, there have been no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART IV
ITEM 15. 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 Sheets as of December 31, 2002 and 2001 F-3
Statements of Operations for the years ended
December 31, 2002, 2001, and 2000. F-4
Statements of Changes in Stockholders' Equity
for the period January 1, 2000 through
December 31, 2002 F-5
Statements of Cash Flows for the year ended
December 31, 2002, 2001, and 2000. 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
23
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)
(g) Employment Agreement dated December 14,1984 between 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).
24
(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.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 2003
U.S. Neurosurgical, Inc.
(Registrant)
By /s/ Alan Gold
--------------------------------------------------
Alan Gold
President and Chief Executive Officer
By /s/ Howard Grunfeld
---------------------------------------------------
Howard Grunfeld
Vice President of Finance and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 26, 2003 /s/ Alan Gold
--------------------------------------------
Alan Gold
President and Director
(Chief Executive Officer)
March 26, 2003 /s/ William F. Leimkuhler
-----------------------------------
William F. Leimkuhler
Director
March 26, 2003 /s/ Charles H. Merriman III
---------------------------
Charles H. Merriman III
Director
26
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 annual report on Form 10-K of U.S. Neurosurgical,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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):
27
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
annual 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: March 26, 2003 /s/ Mr. Alan Gold
-----------------
Mr. Alan Gold
President
28
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 annual report on Form 10-K 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 annual 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
annual 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 annual 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
annual 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):
29
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
annual 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: March 26, 2003 /s/ Mr. Howard Grunfeld
----------------------------
Mr. Howard Grunfeld
Chief Financial Officer
30
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONTENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report ............................................................... F-2
Balance sheets as of December 31, 2002 and 2001 ............................................ F-3
Statements of operations for the years ended December 31, 2002, 2001 and 2000 .............. F-4
Statements of stockholders' equity for the years ended December 31, 2002, 2001 and 2000 .... F-5
Statements of cash flows for the years ended December 31, 2002, 2001 and 2000 .............. 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 US
NeuroSurgical, Inc. & subsidiary as of December 31, 2002 and 2001, 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, 2002.
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 auditing standards generally accepted
in the United States of America. 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 US
NeuroSurgical, Inc. & subsidiary as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
Eisner LLP
New York, New York
January 28, 2003
F-2
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 88,000 $ 311,000
Accounts receivable 514,000 401,000
Accounts receivable - stockholder 109,000 30,000
Deferred tax asset 40,000
Other current assets 118,000 52,000
----------- -----------
Total current assets 829,000 834,000
----------- -----------
Property and equipment:
Gamma Knives (net of accumulated depreciation of $5,714,000 in 2002 and
$5,192,000 in 2001) 1,594,000 1,273,000
Leasehold improvements (net of accumulated amortization of $1,501,000 in
2002 and $1,136,000 in 2001) 341,000 1,550,000
Office furniture and computers (net of accumulated depreciation of $99,000 in
2002 and $74,000 in 2001) 8,000 33,000
----------- -----------
1,943,000 2,856,000
----------- -----------
Cash held in escrow 106,000 105,000
Deferred tax asset 85,000
----------- ----------
$ 2,963,000 $ 3,795,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 119,000 $ 52,000
Note payable - litigation settlement - current portion 100,000 100,000
Obligations under capital leases and loans payable - current portion 790,000 1,000,000
Due to stockholder 300,000 300,000
Income tax payable 36,000
Deferred tax liability 146,000
Other current liabilities 39,000 23,000
----------- -----------
Total current liabilities 1,494,000 1,511,000
Note payable - litigation settlement - net of current portion 100,000
Deferred tax liability 68,000
Obligations under capital leases and loans payable - net of current portion 101,000 837,000
----------- -----------
1,595,000 2,516,000
----------- -----------
Commitments, litigation and other matters (Notes A[10], C, E and H)
STOCKHOLDERS' EQUITY
Common stock - par value $.01; 25,000,000 shares authorized; 7,866,185 shares
issued at December 31, 2002 and
2001 79,000 79,000
Additional paid-in capital 2,808,000 2,808,000
Accumulated deficit (1,510,000) (1,608,000)
Treasury stock, at cost, 114,000 shares (9,000)
----------- -----------
1,368,000 1,279,000
----------- -----------
$ 2,963,000 $ 3,795,000
=========== ===========
See notes to consolidated financial statements
F-3
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------- ------------ ------------
Revenue (Notes B and C) $ 2,639,000 $ 2,573,000 $ 2,575,000
------------- ------------ ------------
Costs and expenses:
Patient expenses 930,000 1,133,000 1,125,000
Selling, general and administrative 1,386,000 1,282,000 1,338,000
------------- ------------ ------------
2,316,000 2,415,000 2,463,000
------------- ------------ ------------
Income from operations 323,000 158,000 112,000
------------- ------------ ------------
Interest expense (163,000) (277,000) (318,000)
Interest income 3,000 9,000 12,000
------------- ------------ ------------
(160,000) (268,000) (306,000)
------------- ------------ ------------
Income (loss) before income taxes and extraordinary item 163,000 (110,000) (194,000)
Provision for income tax (benefit) 65,000 (163,000) (68,000)
------------- ------------ ------------
Income (loss) before extraordinary item 98,000 53,000 (126,000)
Extraordinary item (less applicable income tax of $33,000 and
$61,000 in 2001 and 2000) 67,000 109,000
------------- ------------ ------------
NET INCOME (LOSS) $ 98,000 $ 120,000 $ (17,000)
============= ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $.01 $.01 $(.01)
Extraordinary item .01 .01
---- ---- -----
NET INCOME (LOSS) $.01 $.02 $.00
==== ==== ====
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,796,645 7,230,852 7,312,575
========= ========= =========
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 - DECEMBER 31, 2000 7,316,685 $ 73,000 $2,789,000 $(1,711,000) $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, 2001 (17,000) (17,000)
--------- -------- ---------- ----------- -------- ------- ----------
BALANCE - DECEMBER 31, 2001 7,316,685 73,000 2,789,000 (1,728,000) (40,000) (3,000) 1,131,000
Purchase of 210,500 shares of treasury stock (210,500) 12,000) (12,000)
Issuance of common stock as compensation 800,000 8,000 32,000 40,000
Retirement of treasury stock (250,500) (2,000) (13,000) 250,500 15,000 0
Net income for the year ended December 31, 2002 120,000 120,000
--------- -------- ---------- ----------- -------- ------- ----------
BALANCE - DECEMBER 31, 2002 7,866,185 79,000 2,808,000 (1,608,000) 0 0 1,279,000
Purchase of 114,000 shares of treasury stock (114,000) (9,000) (9,000)
Net income for the year ended December 31, 2002 98,000 98,000
--------- -------- ---------- ----------- -------- ------- ----------
BALANCE - DECEMBER 31, 2002 7,866,185 $ 79,000 $2,808,000 $(1,510,000) (114,000) $(9,000) $1,368,000
========= ======== ========== =========== ======== ======= ==========
See notes to consolidated financial statements F-5
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 98,000 $ 120,000 $ (17,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provisions for doubtful accounts 150,000
Depreciation and amortization 912,000 1,129,000 1,174,000
Deferred income tax provision (benefit) 33,000 (162,000) (143,000)
Stock issued as compensation 40,000
Changes in:
Accounts receivable (113,000) (101,000) (210,000)
Accounts receivable - stockholder (79,000) 67,000 (37,000)
Other current assets (65,000) (25,000) (1,000)
Accounts payable and accrued expenses (including litigation
settlement) (33,000) (204,000) (142,000)
Income tax payable and other current liabilities (20,000) (101,000) 136,000
----------- ----------- -----------
Net cash provided by operating activities 733,000 763,000 910,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment (845,000)
Increase in cash held in escrow (1,000) (4,000) (5,000)
----------- ----------- -----------
Net cash used in investing activities (1,000) (4,000) (850,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease and loan obligations (946,000) (922,000) (1,079,000)
Cash received on financing of equipment 200,000 844,000
Purchase of treasury stock (9,000) (12,000) (3,000)
----------- ----------- -----------
Net cash used in financing activities (955,000) (734,000) (238,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (223,000) 25,000 (178,000)
Cash and cash equivalents - beginning of year 311,000 286,000 464,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 88,000 $ 311,000 $ 286,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 158,000 $ 271,000 $ 318,000
Income taxes $ 164,000 149,000 $ 1,000
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Issuance of stock as compensation $ 40,000
See notes to consolidated financial statements F-6
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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 resulted 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 and the Company did
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. 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, 2002 will be sufficient to fund its cash
requirements through at least January 1, 2004, although there can be no
assurances that this will be the case.
[2] CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
[3] REVENUE RECOGNITION:
Patient revenue is recognized when the Gamma Knife procedure is rendered.
[4] 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.
[5] DEPRECIATION AND AMORTIZATION:
The Gamma Knives are being depreciated on the straight-line method over an
estimated useful life of seven years. The related costs incurred to reload
the cobalt are being amortized on a straight-line method over an estimated
useful life of five years. Leasehold improvements are being amortized on
the straight-line method over 7 to 20 years, the life of the leases.
Office furniture and computers are being depreciated on a straight-line
method over their estimated useful lives ranging from 3 to 7 years.
[6] INCOME TAXES:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets or liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-7
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
[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, accounts receivable, other
current assets and accounts payable approximate fair value at December 31,
2002 and 2001 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, 2002 and
2001.
[9] RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 is effective for fiscal years
beginning after June 15, 2002 and requires companies with legal
obligations associated with the retirement of a tangible long-lived asset
to recognize the fair value of the liability in the period in which it is
incurred if a reasonable estimate of the fair value can be made. Such
liability is to be capitalized as a cost of the related asset.
Additionally, if an asset is acquired with a legal obligation for its
retirement, the fair value of the liability shall be recorded upon
acquisition.
The Company will be required to adopt SFAS 143 in the year ending December
31, 2003 and has not yet determined the effect of such adoption. As
disclosed in Note C, the Company has an obligation to restore its gamma
knife facility at New York University Medical Center ("NYU") to its
original condition upon the closing of the facility. The timing and the
ultimate cost of such restoration have not been determined.
[10] Certain prior year balances have been reclassified to conform to current
year presentation.
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, subject to adjustments, 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, 2002 and 2001, the escrow account
had a balance of $106,000 and $105,000, 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 $1,473,000, $1,397,000 and $1,341,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
F-8
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER ("RMC") (CONTINUED)
[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 responsibility 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 pays USN a scheduled fee based on the number of patient
procedures performed. The Company had patient revenue from NYU in the amounts of
$1,166,000, $1,176,000 and $1,234,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
During November 2002, USN and NYU agreed to an early renewal of the NYU
agreement and an early reload of the cobalt contained in the Gamma Knife
Equipment. The reload process is expected to be completed in the summer of 2003
at a cost of $692,000. The NYU agreement has been extended from November 2004 to
five and one half years from the date the first patient procedure utilizing the
Gamma Knife Equipment with the reloaded cobalt is performed. In addition, the
fee structure under the amendment has changed, effective December 1, 2004, to
provide for a payment to USN of a flat fee for each patient procedure performed.
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.
During 2000, USN entered into two(2) three-year loan agreements 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.
On May 22, 2001, USN entered into a forty-month loan agreement with DVI in the
amount of $200,000. The loan bears interest at 9.479% per annum and is
collateralized by the Gamma Knife at RMC.
F-9
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
The obligations under the capital lease and loans payable are as follows:
DECEMBER 31,
----------------------
2002 2001
-------- ----------
Capital leases - Gamma Knife $556,000 $1,251,000
Loans payable - leasehold improvements 335,000 586,000
-------- ----------
891,000 1,837,000
Less current portion 790,000 1,000,000
-------- ----------
$101,000 $ 837,000
======== ==========
Future payments as of December 31, 2002 on the equipment leases and loans are as
follows:
YEAR ENDING
DECEMBER 31,
2003 $ 817,000
2004 102,000
---------
919,000
Less interest 28,000
---------
Present value of net minimum obligation $ 891,000
=========
The Company's Gamma Knives are held under capital leases and amortization is
included in depreciation expense.
NOTE E - CONCENTRATIONS
For the years ended December 31, 2002, 2001 and 2000, 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, 2002 and 2001.
The Company has been dependent on one manufacturer who sells, supplies and
services the Gamma Knife.
F-10
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE F - TAXES
The components of the income tax provision (benefit) are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ---------
Current:
Federal $ 24,000 $ (1,000) $ 65,000
State 8,000 10,000
---------- ---------- ---------
32,000 (1,000) 75,000
---------- ---------- ---------
Deferred:
Federal 28,000 (130,000) 121,000)
State 5,000 (32,000) (22,000)
---------- ---------- ---------
33,000 (162,000) 143,000)
---------- ---------- ---------
Income tax (benefit) $ 65,000 $ (163,000) $ (68,000)
========== ========== =========
A reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
-------- --------- ---------
Income tax (benefit) at the federal statutory rate $ 52,000 $ (37,000) $ (65,000)
State income tax (benefit), net of federal taxes 13,000 (7,000) (3,000)
Other (1) (119,000)
-------- --------- ---------
Income tax provision (benefit) $ 65,000 $(163,000) $ (68,000)
======== ========= =========
(1) In 2001, the other tax benefit is the result of the finalization of
the tax effects of the spin-off which took place in 1999.
Items which give rise to deferred tax assets and liabilities are as follows:
DECEMBER 31,
-----------------------
2002 2001
--------- ---------
Deferred tax asset:
Litigation settlement accrued for financial reporting
purposes, deductible when paid for tax purposes $ 40,000 $ 80,000
Excess of book depreciation over tax depreciation 85,000
Deferred tax liability:
Excess of tax depreciation over book depreciation (108,000)
Net effect of the conversion from accrual basis of
accounting to cash basis for tax purposes (2) (186,000)
--------- ---------
Net deferred tax liability $ (61,000) $ (28,000)
========= =========
(2) In January 2003, the Company filed with the Internal Revenue Service
to compute its taxable income utilizing the cash basis of accounting
rather than the accrual basis.
F-11
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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 collateralized by a second-priority security
interest in the Company's receivables from its Kansas City and New York Gamma
Knife centers. At December 31, 2002 and 2001, the balance on these notes
amounted to $100,000 and $200,000, respectively.
NOTE H - COMMITMENTS
Leases:
The Company leases office space under an operating lease expiring March 2008.
The terms of the lease include an escalation clause for a portion of certain
operating expenses. At December 31, 2002, the annual future minimum rental
payments under the operating lease and the ground lease referred to in Note B(2)
are as follows:
2003 $ 36,000
2004 36,000
2005 36,000
2006 36,000
2007 36,000
Thereafter 36,000
---------
$ 216,000
=========
Rent expense was approximately $36,000, $38,000 and $34,000 for the years ended
December 31, 2002, 2001, and 2000, 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 at a cost of approximately
$800,000. Subsequent to year end, the Company entered into an agreement to have
the cobalt reloaded at the NYU facility, during 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 years ended 2002, 2001 and 2000 were approximately $33,000, $30,000 and
$14,000, respectively.
F-12
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE J - RELATED PARTY TRANSACTIONS
[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 compensation for the
years ended December 31, 2002, 2001 and 2000 were $300,000, $305,000 and
$265,000, respectively.
[3] During the years ended December 31, 2002, 2001 and 2000, the Company hired
a family member of an officer for computer consulting services. Such
consulting expense amounted to $4,000, $22,000 and $44,000, respectively.
NOTE K - TREASURY STOCK
In December 2000, the USN board of directors authorized the repurchase of up to
500,000 shares of USN's common stock. Through December 31, 2002, the Company had
repurchased 364,500 shares at a cost of $24,000.
NOTE L - EXTRAORDINARY ITEM
Extraordinary item represents amounts received by the Company on receivables
which had originated with GHS.
F-13