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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, 2003 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, 2003
----- -------------------------------
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,
2003 2002
---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 109,000 $ 88,000
Accounts receivable 564,000 623,000
Other current assets 63,000 118,000
----------- -----------
Total current assets 736,000 829,000
----------- -----------
Gamma Knife (net of accumulated depreciation of
$6,573,000 in 2003 and $5,714,000 in 2002) 1,469,000 1,594,000
Leasehold improvements (net of accumulated
amortization of $1,334,000 in 2003 and $1,501,000 in 2002) 508,000 341,000
Office furniture and computers (net of accumulated
depreciation of 105,000 in 2003 and $99,000 in 2002) 3,000 8,000
----------- -----------
Total property and equipment 1,980,000 1,943,000
----------- -----------
Deferred tax asset 55,000 85,000
Cash held in escrow 106,000 106,000
----------- -----------
TOTAL $ 2,877,000 $ 2,963,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 281,000 $ 119,000
Note payable -- 100,000
Obligations under capital leases
and loans payable- current portion 461,000 790,000
Due to stockholder 300,000 300,000
Deferred tax liability -- 146,000
Other current liabilities 89,000 39,000
----------- -----------
Total current liabilities 1,131,000 1,494,000
Obligations under capital leases and loans payable
Net of current portion 402,000 101,000
----------- -----------
1,533,000 1,595,000
----------- -----------
Stockholders' equity:
Common stock 79,000 79,000
Additional paid-in capital 2,808,000 2,808,000
Accumulated deficit (1,526,000) (1,510,000)
Treasury stock, at cost (17,000) (9,000)
----------- -----------
Total stockholders' equity 1,344,000 1,368,000
----------- -----------
TOTAL $ 2,877,000 $ 2,963,000
=========== ===========
The accompanying notes to financial statements are an integral part hereof.
2
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
-------------
2003 2002
---- ----
Revenue:
Patient Revenue $ 490,000 $ 660,000
----------- -----------
Expenses:
Patient Expenses 261,000 235,000
Selling, General and Administrative 386,000 361,000
----------- -----------
Total 647,000 596,000
----------- -----------
(Loss) income from operations (157,000) 64,000
Interest expense (21,000) (36,000)
Interest income -- 1,000
----------- -----------
(Loss) income before tax (178,000) 29,000
Income tax benefit (provision) 68,000 (10,000)
----------- -----------
Net (loss) income $ (110,000) $ 19,000
=========== ===========
Earnings per share $ (.01) $ --
=========== ===========
Proforma weighted average shares outstanding 7,841,185 7,866,185
The accompanying notes to financial statements are an integral part hereof.
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U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
Revenue:
Patient Revenue $ 1,875,000 $ 2,044,000
----------- -----------
Expenses:
Patient Expenses 724,000 691,000
Selling, General and Administrative 1,106,000 1,024,000
----------- -----------
Total 1,830,000 1,715,000
----------- -----------
Income from operations 45,000 329,000
Interest expense (68,000) (135,000)
Interest income 1,000 2,000
----------- -----------
(Loss) income before tax (22,000) 196,000
Income tax benefit (provision) 6,000 (78,000)
----------- -----------
Net (loss) income (16,000) 118,000
=========== ===========
Earnings (loss) per share $ -- $ .02
=========== ===========
Proforma weighted average shares outstanding 7,841,185 7,866,185
The accompanying notes to financial statements are an integral part hereof.
4
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30
------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net (loss) income $ (16,000) $ 118,000
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization: 697,000 675,000
Changes in operating assets and liabilities:
Decrease (increase) in receivables 59,000 (240,000)
Decrease in other current assets 55,000 --
Deferred tax (liability) benefit (91,000) 42,000
Increase in accounts payable and accrued expenses 185,000 35,000
--------- ---------
Net cash provided by operating activities 889,000 630,000
--------- ---------
Cash flows from investing activities :
Property and equipment (732,000) --
Increase in cash held in escrow -- (1,000)
--------- ---------
Net cash used in investing activities (732,000) (1,000)
--------- ---------
Cash flows from financing activities:
Cash received on financing of equipment 582,000 --
Repayment of note payable (100,000) (100,000)
Purchase of treasury stock (8,000) (8,000)
Payment of capital lease obligations (610,000) (683,000)
--------- ---------
Net cash used in financing activities (136,000) (791,000)
--------- ---------
Net increase (decrease) in cash and cash equivalents 21,000 (162,000)
Cash and cash equivalents - beginning of period 88,000 311,000
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 109,000 $ 149,000
========= =========
Supplemental disclosures of cash flow information:
Cash paid for
Interest 68,000 135,000
Income Taxes 3,000 125,000
The accompanying notes to financial statements are an integral part hereof.
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U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Preparation
The accompanying financial statements at September 30, 2003, and for the
three and nine months ended September 30, 2003 and 2002, 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, 2002 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
accounting principles generally accepted in the United States of America 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 the nine months ended September 30, 2003, the Company purchased as
part of its buyback program, 204,000 shares of its own common stock at an
aggregate cost of $8,000.
6
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 2002 Annual Report on Form 10-K, filed on March 28, 2003, 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 2003 Compared to Third Quarter 2002 and Nine Months Ended
September 30, 2003 Compared to Nine Months Ended September 30, 2002
Patient revenue decreased 26% to $490,000 in the quarter ended September
30, 2003 from $660,000 for the quarter ended September 30, 2002. The reason for
the decline was a decrease in revenue from NYU caused by temporary closure of
the facility during the quarter to reload the cobalt source. In addition, NYU
has had a reduced patient flow during the quarter. Patient expenses increased
11% to $261,000 from $235,000 in the same period from a year earlier primarily
due to increased depreciation on our NYU gamma knife related to the cobalt
reload. Selling, general and administrative expense for the quarter ended
September 30 increased 7% to $386,000 from $361,000 a year ago. The increase was
primarily due to higher insurance costs. Interest expense decreased 42% to
$21,000 from $36,000 in the same period a year earlier due to repayment of our
leases on the Gamma Knife properties. As a result of decreased revenue and
increase in expenses for the quarter ended September 30, 2003, net loss was
$110,000 as compared to income of $19,000 for the same period a year earlier.
The reload of the cobalt source at NYU in August of 2003, was financed by
the Company's leasing company, DVI, Inc. On August 13, 2003 DVI, Inc. filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Shortly thereafter
the Company discovered that DVI, Inc. had failed to make the final 20% of the
payments for the reload due to Elekta Instruments, the supplier. The lease was
assigned by DVI, Inc. to U.S. Bank Corporation for the full amount of the cobalt
of $732,000 even though only $582,000 was funded by DVI, Inc. U. S. Bank Corp
claims that $732,000 is due under the lease. The Company vigorously refutes this
claim. Should U.S. Bank Corporation prevail, the Company believes that it may
have liability to U.S. Bank Corporation for the $732,000 in addition to the
$150,000 representing the remaining unfunded amount, still
7
due to Elekta. The Company recorded a total liability of $732,000 during the
quarter ended September 30, 2003 consisting of obligations under capital leases
of $582,000 and the remaining amount of $150,000, which is included in accounts
payable.
For the nine months ended September 30, revenue decreased 8% to $1,874,000
from $2,044,000 in the same period a year earlier due to the same reasons as
explained above. Patient expenses increased 5% to $724,000 in 2003 from $691,000
in the same period in 2002. Selling, general and administrative expenses
increased 8% to $1,106,000 as compared to $1,024,000 in the same period, a year
earlier. The increase was due to increased insurance costs. Interest expense
decreased 50% to $68,000 from $135,000 in the same period a year ago. The
decrease was due to repayment of our leases on the Gamma Knife properties. The
net loss was $16,000 for the nine months ended September 30, 2003 as compared to
income of 118,000 for the nine months ended September 30, 2002, due to the
reasons noted above.
Liquidity and Capital Resources
At September 30, 2003 the Company had a working capital deficit of
$340,000 as compared to a deficit of $665,000 at December 31, 2002. Cash and
cash equivalents at September 30, 2003 were $109,000 as compared with $88,000 at
December 31, 2002. Net cash provided by operating activities was $898,000 for
the nine months ended September 30, 2003 as compared with $630,000 for the same
period, a year earlier. The increase was primarily due to better collection of
accounts receivable from NYU. Depreciation and amortization was $697,000 for the
nine month period ended September 30, 2003 and was 675,000 in the 2002 period.
There was a decrease in accounts receivable of $59,000 in 2003 compared to an
increase of $240,000 during the nine months ended September 30, 2002.
Accounts payable and accrued expenses increased $185,000 for the nine
months ended September 30, 2003 as compared to $35,000 for the same period in
2002 primarily due to an increase of $150,000 for the liability with Elekta
regarding the cobalt reload and increase in income tax payable.
Net cash used in financing activities was $136,000 for the nine months
ended September 30, 2003 as compared to $791,000 for the same period a year ago.
The Company incurred $732,000 for the cobalt reload offset by a funding of
$582,000 by DVI, Inc. In addition, the Company paid $710,000 towards repayment
of its capital lease obligations and notes payable for the nine months ended
September 30, 2003 as compared to $783,000 in the same period in 2002.
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
8
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 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.
9
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 13, 2003 By /s/ Alan Gold
----------------------
Alan Gold
Director and President
Chief Executive Officer
Date November 13, 2003 By /s/ Howard Grunfeld
----------------------
Howard Grunfeld
Chief Financial Officer
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