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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549s
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, 2003 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, 2004, 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, 2004, was 7,866,185.
1
Part I
ITEM 1. BUSINESS
U.S. Neurosurgical, Inc. (USN) owns and operates stereotactic radiosurgery
centers, utilizing the Leksell Gamma Knife technology (Gamma Knife). 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 Kansas
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City, Missouri, and one on the premises of New York University Medical Center
(NYU) in New York, New York. Management continues 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, 2003, there
were approximately 90 Gamma Knife treatment centers in the United States of
America.
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 the
3
steep fall-off in the radiation intensity surrounding the target, the lesion can
be destroyed, while sparing the surrounding tissue.
The procedure, performed in a single treatment, sharply reduces hospital
stay times and eliminates post-surgical bleeding and infection. When compared
with conventional neurosurgery, Gamma Knife treatment is less expensive.
However, not all patients are candidates for radiosurgery since the decision to
use the Gamma Knife depends on the type, size, and location of the lesion.
Kansas City and New York Centers
In July 1993, USN purchased its first Leksell Gamma Knife from Elekta
Instruments, Inc. (Elekta), for the purpose of installing it at RMC in Kansas
City, Missouri. USN paid approximately $3,000,000 for the Gamma Knife through a
capital lease financing.
USN opened its first Gamma Knife Center on the premises of RMC in
September 1994. RMC is part of Health Midwest, a consortium of eleven hospitals
and numerous affiliates. USN formed a cooperative venture with RMC in September,
1993. Per an agreement with RMC, GHS, Inc., sold 500,000 shares of its common
stock for $500,000 to RMC to secure additional working capital in order to
enable USN to 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. Costs associated with closing and
restoring the RMC facility to its original condition are the responsibility of
USN. For the year ended December 31, 2003, 2002 and 2001, USN derived revenues
from the RMC
4
center of approximately $1,449,000, $1,473,000 and $1,397,000 respectively, as a
result of 117, 131 and 114 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 was six years
with incremental payments for the first year and fixed payments thereafter. This
lease was paid in full in July 2003. In August 2003, the Cobalt source was
reloaded in the New York Gamma Knife. After making the first 80% of payments
equivalent to $582,000 to Elekta Instruments, DVI, the leasing company that USN
had used for the previous six years on all transactions, filed for protection
under Chapter 11 of the U.S. Bankcruptcy Code. USN began making all lease
payments into an escrow account beginning in September 2003 while the Company
continued to negotiate with DVI and its successor. During November 2002 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. Costs associated with
closing and restoring the NYU facility to its original condition are the
responsibility of USN/ NYU provides the medical and technical staff to operate
the facility. For the years ended December 31, 2003, 2002, and 2001, USN derived
revenues from the NYU center of approximately $995,000, $1,166,000 and
$1,176,000, respectively, as a result of 131, 150 and 148 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.
5
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. In August 2003 USN commenced payment on a $750,000 lease for the
NYU cobalt reload, that was originally thought to be fully funded by DVI, Inc.
In August after making the first payment of $21,584 on August 10, 2003 USN found
that DVI, Inc. had failed to make the final 2 payments to Elekta that amounted
to $150,000. On August 15, 2003 DVI, Inc. filed for protrection under Chapter 11
of the U.S. Bankcruptcy Code seeking to reorganize. In September and the months
after, the Company made lease payments into an escrow account controlled by
counsel while it negotiated a resolution to the shortfall created by DVI. During
February the Company paid $50,000 towards its balance with Elekta. As of March
15, 2004 the Company has made current all prior lease payments with DVI and has
reached an agreement to pay off the amount of the NYU reload that was funded by
DVI ($582,000). Upon completion of the new financing the Company will pay the
remaining balance to Elekta ($100,000) and have a new lease for approximately
$728,000 that will be payable over 36 months at $22,974 per month.
RISK FACTORS:
- -------------
Regulatory Enviroment
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
6
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 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.
7
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 the past two years a new technology called CyberKnife has
also entered into the noninvasive market. In addition, larger hospitals may be
expected to install Gamma Knife or competing technologies as part of their
regular inpatient services. Some of these competitors have greater financial and
other resources than the Company. Principal competitive factors include quality
and timeliness of test results, ability to develop and maintain relationships
with referring physicians, facility location, convenience of scheduling and
availability of patient appointment times. The 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.
8
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
$145,000 per year. Any interruption in the supply or services from Elekta would
adversely affect USN's ability to maintain its Gamma Knife treatment centers.
Gamma Knife Financing
The Gamma Knife is an expensive piece of equipment presently costing
approximately $3,400,000. Therefore, the Company's development of new Gamma
Knife centers is dependent on its ability to secure favorable financing. On
February 8, 2000, the Company entered into a cobalt reloading agreement with
Elekta for the RMC Gamma Knife in the amount of $650,000, which was 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
9
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. The loans
for the RMC cobalt and related activities were paid off in February 2004. The
cobalt at the NYU facility was reloaded in August 2003 and the costs were
approximately $800,000, which were partially financed. The Company made a down
payment of $225,000 in December 2002. In May 2003 the Company borrowed $137,000
to fund its short term obligations. The term of the loan is 40 months and
carries an interest rate of 8.5% and has a monthly payment of $3,960.
New Technology/Possible Obsolescence
Gamma Knife technology may be subject to technological change.
Consequently, the Company will have to rely on the Gamma Knife's manufacturer,
Elekta, to introduce improvements or upgrades in order to keep pace with
technological change. Any such improvements or upgrades which the Company may be
required to introduce will require additional financing. In addition, newly
developed techniques and devices for performing brain surgery may render the
Gamma Knife less competitive or obsolete.
Employees
U.S. Neurosurgical, Inc. has five full-time employees and one part-time
employee. Of these employees, three are engaged in sales and marketing, one 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
10
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
11
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, 2002 through December 31, 2003.
Period High Bid Low Bid
------ -------- -------
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
January 1 - March 31, 2003 .10 .05
April 1 - June 30, 2003 .12 .07
July 1 - September 30, 2003 .17 .08
October 1 - December 31, 2003 .13 .08
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, 2004, 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.
12
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, 1999
through 2003. 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)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operating Revenue $2,444 $2,639 $2,573 $2,575 $3,089
Expenses:
Patient expense 820 930 1133 1,125 1,115
General and administrative 1411 1386 1282 1,338 1,445
Interest expense 86 163 277 318 409
Net Income (loss) 61 98 120 (17) 66
Basic and diluted Income per common share $0.01 $0.01 $0.02 $0.00 $0.01
December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents 89 $88 $311 $286 $464
Total assets 3,150 2,963 3,795 4,856 5,283
Long-term obligations 542 101 1,005 2,168 2,517
Stockholders equity (deficiency) 1,337 1,368 1,279 1,131 (1,151)
(1) For the year ended December 31, 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, 1999.
13
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
2003 Compared to 2002
Patient revenue declined 7% to $2,444,000 in 2003 as compared to
$2,639,000. The decrease was mainly due to the reload of the cobalt source at
our NYU site during the summer of 2003. The site was not available for use for
about one month. Reimbursement continued at the same levels as the prior year.
Patient expenses declined 12% to $820,000 from $930,000 in 2002. The decrease
was due to decreased depreciation on the knives. Selling, general and
administrative expense (S,G & A) increased 2% to $1,411,000 from $1,386,000 in
the previous year. Interest expense declined 48% to 85,000 in 2003 from $160,000
in 2002. This was due to the payoff of the NYU Gamma Knife lease. As a result of
the above the net income was $61,000 as compared to $98,000 in 2002.
The trends of the recent past lead us to believe that reimbursement will
continue to remain at current levels.
During 2003, the Company adopted FAS 143 and recorded asset retirement
obligations of $200,000 based upon estimated amounts, consisting principally of
removal of Gamma Knives and disposal of regulated materials and the restoration
of facilities at NYU and RMC. The pro forma amount of the liability as of
January 1, 2002 and December 31, 2002 would also approximate $200,000. Such
liabilities have been measured using current information, current assumptions
and current interest rates and have been recorded with a corresponding increase
in the carrying value of the Gamma Knives. The Company is amortizing such costs
over the lives of the respective useful lives from inception.
Upon initial application of FAS 143, the Company has recognized $140,000
of accumulated depreciation and a deferred tax asset of $56,000 and a net
increase in accumulated deficit of $84,000 as the cumulative effect of a change
in accounting principles during the year ended December 31, 2003. Application of
provisions of FAS 143 would have resulted in a decrease in net income of
approximately $12,000 for each of the years ended December 31, 2002 and 2001.
If the Company had adopted this standard effective January 1, 2003, total
assets, liabilities and accumulated deficit at the end of each of the first
three quarters would have increased by $120,000, $200,000 and $80,000,
respectively. In addition, amortization expense would be $1,000 higher in each
of the first three quarters of 2003.
2002 Compared to 2001
Patient revenue was $2,639,000 in 2002 compared to $2,573,000 in 2001.
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. 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 the Company 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 2002, the contract
between USN and Research Medical Center (RMC) was
14
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.
Liquidity and Capital Resources
At December 31, 2003 the Company had a working capital deficit of $359,000
as compared to a working capital deficit of $665,000 at December 31, 2002. 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. 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. Cash and cash equivalents at December
31, 2003 were $89,000 as compared to $88,000 at December 31, 2002. Net cash
provided by operating activities was $992,000 as compared with $733,000 for the
same period a year earlier. Depreciation and amortization was $779,000 as
compared to $912,000 in 2002. Accounts receivable decreased $142,000 during the
year as compared to an increase of $113,000 in 2002. The reload of the NYU
cobalt was the main reason for the decrease in accounts receivable as there was
no revenues generated from the NYU facility during the reload.
Net cash used in investing activities for the year ended 2003 was
$1,014,000 as compared to $1,000 in the year ago period. The Company reloaded
the cobalt on its NYU machine for $803,000 and also placed $211,000 in escrow to
pay its debt obligations.
Net cash provided by financing activites for the year ended December 31,
2003 was $23,000 as compared to net cash used of $955,000 in 2002. The Company
paid $688,000 towards its capital leases in 2003 as compared to $946,000 in
2002. The Company borrowed $719,000 for working capital and cobalt reload
purposes during 2003. The Company also bought back 90,000 shares of common stock
during 2003 at a cost of $8,000 and 114,000 shares in 2002 at a cost of $9,000.
Critical accounting policies:
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.
Asset retirement obligations:
In June 2001, the Financial Accounting Standards Board ("FASB"), issued
Statement No. 143, "Accounting for Asset Retirement Obligations," ("FAS 143")
effective for the fiscal years beginning after June 15, 2002. Accordingly, the
Company recorded liabilities for legal obligations associated with the
retirement of tangible long-lived assets based the estimated fair value of such
liabilities. The estimated costs of these obligations is capitalized as costs of
the assets subject to the retirement obligations and amortized over the lives of
the assets.
Recently issued accounting pronouncement:
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46"). FIN 46 relates to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient capital at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
Under certain circumstances, an enterprise may be required to consolidate such
an entity if it will absorb a majority of the entity's expected losses, receive
a majority of the entity's residual returns, or both. FIN 46 became effective
for variable interest entities created after January 31, 2003, and had no effect
on the Company's financial position as of December 31, 2003, and its results of
operations for the year then ended.
15
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.
Quarter Ended
-------------
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
2003 31-Mar 30-Jun 30-Sep 31-Dec Year
------ ------ ------ ------ ----
Revenue 835 550 490 569 $2,444
Income (Loss) from operations 257 (54) (157) 167 213
Net Income (loss) 136 (41) (110) 76 61
Basic and diluted Income per common share $0.02 -$0.01 -$0.01 $0.01 $0.01
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
16
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 59 President & Chairman
William F. Leimkuhler 52 Director
Charles H. Merriman, III 69 Director
Howard Grunfeld 43 Vice President--Finance, Treasurer
Susan Greenwald 58 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, 59, was one of the founders of Global
Health Systems, the predecessor of GHS, serving as its President since its
formation in July 1983. From 1981 to 1983 he served as Executive Vice-President
of Libra Group, a company located in Rockville, Maryland, engaged in health care
automation, where he was President of Global Health Foundation and Libra
Research and Executive Vice President of Libra Technology. From July 1997
through March 1998 Mr. Gold was also an employee of Health Management Systems.
William F. Leimkuhler has served as director of USN since May 1999. He
also served as a director of GHS since its inception in 1984 through November
1999. Mr Leimkuhler, 52, 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
17
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, 69, 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, 43, 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, 58,
was one of the founders of Global Health Systems, the predecessor of GHS, and
served as its Vice President of Marketing Communications since 1983. From 1981
through 1983 she was the Proposal Manager for Libra Technology and Global Health
Foundation, sister companies engaged in Federal contracting and private
enterprise, respectively, in the healthcare information technology business.
From July 1997 through February 1998, Ms. Greenwald was an employee of Health
Management Systems.
18
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, 2003, 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, 2003, all filing requirements
applicable to its officers and directors were complied with by such individuals.
19
ITEM 11 EXECUTIVE COMPENSATION
The information below sets forth the compensation for the year ended
December 31, 2003, 2002, and 2001, 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 2003 $300,000
President & Director 2002 $300,000
2001 $305,000
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, 2004, 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
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)
20
- ----------
(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.
21
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,
22
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.The final payment was made in may 2003. 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.
23
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, 2003 and 2002 F-3
Statements of Operations for the years ended
December 31, 2003, 2002, and 2001. F-4
Statements of Changes in Stockholders' Equity
for the period January 1, 2001 through
December 31, 2003 F-5
Statements of Cash Flows for the year ended
December 31, 2003, 2002, and 2001. 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
24
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 betwwen USN and Alan Gold, as
amended March 7, 1986 (incorporated by reference to Exhibit 10.3 of GHS's
Registration Statement No. 33-4532-W on form S-18)
(h) Gamma Knife Neuroradiosurgery Equipment Agreement dated August, 1993
between Research Medical Center and USN (incorporated by reference to
Exhibit 10h to GHS's Quarterly Report or Form 10-Q for the quarter ended
September 30, 1993).
(i) Ground Lease Agreement dated August, 1993 between Research Medical Center
and USN (incorporated by reference to Exhibit 10j to GHS's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993).
(j) LGK Agreement dated July 12, 1993 between Elekta Instruments, Inc. and USN
(incorporated by reference to Exhibit 10k to GHS's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993).
(k) Agreement dated December 29, 1993 between USN and Elekta Instruments, Inc.
(incorporated by reference to 10o to GHS's 1994 Annual Report on Form
10-K).
(l) Agreement dated August 1, 1996 between USN and DVI, Inc. (incorporated by
reference 10j to GHS's 1997 Annual Report on form 10-K).
25
(m) Certifications of CEO and CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(n) 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)
(o) 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.
26
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 29, 2004
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 29, 2004 /s/ Alan Gold
----------------------------
Alan Gold
President and Director
(Chief Executive Officer)
March 29, 2004 /s/ William F. Leimkuhler
----------------------------
William F. Leimkuhler
Director
March 29, 2004 /s/ Charles H. Merriman III
---------------------------
Charles H. Merriman III
Director
27
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Consolidated balance sheets as of December 31, 2003 and 2002 F-3
Consolidated statements of operations for the years ended
December 31, 2003, 2002 and 2001 F-4
Consolidated statements of stockholders' equity for the years ended
December 31, 2003, 2002 and 2001 F-5
Consolidated statements of cash flows for the years ended
December 31, 2003, 2002 and 2001 F-6
Notes to financial statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
U.S. NeuroSurgical Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of U.S.
NeuroSurgical, Inc. and subsidiary as of December 31, 2003 and 2002, 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, 2003.
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 U.S.
NeuroSurgical, Inc. and subsidiary as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note E to the consolidated financial statements, effective
January 1, 2003, the Company adopted a recent accounting standard requiring the
fair value of liability for an asset retirement obligation to be recognized. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived assets. In the year of adoption, the Company recognized the
cumulative effect of initially applying this statement as a change in accounting
principle.
Eisner LLP
New York, New York
February 4, 2004
With respect to Note D
March 22, 2004
F-2
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
--------------------------
2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 89,000 $ 88,000
Accounts receivable 372,000 514,000
Accounts receivable - stockholder 96,000 109,000
Other current assets 144,000 118,000
Cash held in escrow 211,000
----------- -----------
Total current assets 912,000 829,000
----------- -----------
Property and equipment:
Gamma Knives (net of accumulated depreciation of $6,645,000 in 2003 and
$6,030,000 in 2002) 1,467,000 1,279,000
Leasehold improvements (net of accumulated amortization of $1,483,000 in
2003 and $1,185,000 in 2002) 559,000 656,000
Office furniture and computers (net of accumulated depreciation of $105,000
in 2003 and $99,000 in 2002) 2,000 8,000
----------- -----------
2,028,000 1,943,000
----------- -----------
Cash held in escrow 106,000 106,000
Deferred tax asset 104,000 85,000
----------- -----------
$ 3,150,000 $ 2,963,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 198,000 $ 119,000
Note payable - litigation settlement - current portion 100,000
Obligations under capital leases and loans payable - current portion 581,000 790,000
Due to stockholder 300,000 300,000
Deferred tax liability 150,000 146,000
Other current liabilities 42,000 39,000
----------- -----------
Total current liabilities 1,271,000 1,494,000
Obligations under capital leases and note payable - net of current portion 342,000 101,000
Asset retirement obligations 200,000
----------- -----------
1,813,000 1,595,000
----------- -----------
Commitments, litigation and other matters (Notes A, F, H and I)
STOCKHOLDERS' EQUITY
Common stock - par value $.01; 25,000,000 shares authorized;
7,866,185 shares issued at December 31, 2003 and 2002 79,000 79,000
Additional paid-in capital 2,808,000 2,808,000
Accumulated deficit (1,533,000) (1,510,000)
Treasury stock, at cost, 204,000 shares in 2003 and 114,000 shares in 2002 (17,000) (9,000)
----------- -----------
1,337,000 1,368,000
----------- -----------
$ 3,150,000 $ 2,963,000
=========== ===========
See notes to consolidated financial statements F-3
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Year Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenue (Notes B and C) $ 2,444,000 $ 2,639,000 $ 2,573,000
----------- ----------- -----------
Costs and expenses:
Patient expenses 820,000 930,000 1,133,000
Selling, general and administrative 1,411,000 1,386,000 1,282,000
----------- ----------- -----------
2,231,000 2,316,000 2,415,000
----------- ----------- -----------
Income from operations 213,000 323,000 158,000
----------- ----------- -----------
Interest expense (86,000) (163,000) (277,000)
Interest income 1,000 3,000 9,000
----------- ----------- -----------
(85,000) (160,000) (268,000)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary item 128,000 163,000 (110,000)
Provision for income tax (benefit) 67,000 65,000 (163,000)
----------- ----------- -----------
Income before extraordinary item 61,000 98,000 53,000
Extraordinary item (less applicable income tax of $33,000 in 2001) 67,000
----------- ----------- -----------
Net income $ 61,000 $ 98,000 $ 120,000
=========== =========== ===========
Basic and diluted net income per share:
Income before extraordinary item $ 0.01 $ .01 $ .01
Extraordinary item .01
----------- ----------- -----------
Net income $ 0.01 $ .01 $ .02
=========== =========== ===========
Weighted average common shares
outstanding - basic and diluted 7,791,555 7,796,645 7,230,852
=========== =========== ===========
See notes to consolidated financial statements F-4
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Common Stock
-------------------------
Number Additional
of Paid-in (Accumulated
Shares Amount Capital Deficit)
---------- -------- ----------- ------------
Balance - December 31, 2000 7,316,685 $ 73,000 $ 2,789,000 $ (1,728,000)
Purchase of 210,500 shares of treasury stock
Issuance of common stock as compensation 800,000 8,000 32,000
Retirement of treasury stock (250,500) (2,000) (13,000)
Net income for the year ended December 31, 2001 120,000
---------- -------- ----------- ------------
Balance - December 31, 2001 7,866,185 79,000 2,808,000 (1,608,000)
Purchase of 114,000 shares of treasury stock
Net income for the year ended December 31, 2002 98,000
---------- -------- ----------- ------------
Balance - December 31, 2002 7,866,185 79,000 2,808,000 (1,510,000)
Cumulative effect of change in accounting principle,
net of applicable income tax of $56,000 (84,000)
Purchase of 90,000 shares of treasury stock
Net income for year ended December 31, 2003 61,000
---------- -------- ----------- ------------
Balance - December 31, 2003 7,866,185 $ 79,000 $ 2,808,000 $ (1,533,000)
========== ======== =========== ============
Treasury Stock
-----------------------------
Number
of
Shares Amount Total
--------- ----------- -------------
Balance - December 31, 2000 (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 40,000
Retirement of treasury stock 250,500 15,000 0
Net income for the year ended December 31, 2001 120,000
--------- ----------- -------------
Balance - December 31, 2001 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
--------- ----------- -------------
Balance - December 31, 2002 (114,000) (9,000) 1,368,000
Cumulative effect of change in accounting principle,
net of applicable income tax of $56,000 (84,000)
Purchase of 90,000 shares of treasury stock (90,000) (8,000) (8,000)
Net income for year ended December 31, 2003 61,000
--------- ----------- -------------
Balance - December 31, 2003 (204,000) $ (17,000) $ 1,337,000
========= =========== =============
See notes to consolidated financial statements F-5
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------------
2003 2002 2001
----------- --------- -----------
Cash flows from operating activities:
Net income $ 61,000 $ 98,000 $ 120,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 779,000 912,000 1,129,000
Deferred income tax (benefit) provision 41,000 33,000 (162,000)
Stock issued as compensation 40,000
Changes in:
Accounts receivable 142,000 (113,000) (101,000)
Accounts receivable - stockholder 13,000 (79,000) 67,000
Other current assets (26,000) (65,000) (25,000)
Accounts payable and accrued expenses
(including note payable - litigation settlement) (21,000) (33,000) (204,000)
Income tax payable and other current liabilities 3,000 (20,000) (101,000)
----------- --------- -----------
Net cash provided by operating activities 992,000 733,000 763,000
----------- --------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (803,000)
Increase in cash held in escrow (211,000) (1,000) (4,000)
----------- --------- -----------
Net cash used in investing activities (1,014,000) (1,000) (4,000)
----------- --------- -----------
Cash flows from financing activities:
Repayment of capital lease and loan obligations (688,000) (946,000) (922,000)
Cash received on financing of equipment and working capital loan 719,000 200,000
Purchase of treasury stock (8,000) (9,000) (12,000)
----------- --------- -----------
Net cash provided by (used in) financing activities 23,000 (955,000) (734,000)
----------- --------- -----------
Net increase (decrease) in cash and cash equivalents 1,000 (223,000) 25,000
Cash and cash equivalents - beginning of year 88,000 311,000 286,000
----------- --------- -----------
Cash and cash equivalents - end of year $ 89,000 $ 88,000 $ 311,000
=========== ========= ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 86,000 $ 158,000 $ 271,000
Income taxes $ 164,000 149,000
Supplemental disclosure 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, 2003 and 2002
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, 2003 will be sufficient to fund its cash
requirements through at least January 1, 2005, 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 shorter of useful life or
the life of the leases. Office furniture and computers are being
depreciated on a straight-line method over their estimated useful lives
ranging from three to seven 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
of a change in tax rates on deferred tax assets or liabilities 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, 2003 and 2002
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 values of financial instruments have 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,
2003 and 2002 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, 2003 and
2002.
[9] Asset retirement obligations:
In June 2001, the Financial Accounting Standards Board ("FASB"), issued
Statement No. 143, "Accounting for Asset Retirement Obligations," ("FAS
143") effective for the fiscal years beginning after June 15, 2002.
Accordingly, the Company recorded liabilities for legal obligations
associated with the retirement of tangible long-lived assets based the
estimated fair value of such liabilities. The estimated costs of these
obligations is capitalized as costs of the assets subject to the
retirement obligations and amortized over the lives of the assets.
[10] Recently issued accounting pronouncement:
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46"). FIN 46 relates to certain entities in which
equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient capital at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. Under certain circumstances, an enterprise may
be required to consolidate such an entity if it will absorb a majority of
the entity's expected losses, receive a majority of the entity's residual
returns, or both. FIN 46 became effective for variable interest entities
created after January 31, 2003, and had no effect on the Company's
financial position as of December 31, 2003, and its results of operations
for the year then ended.
[11] Reclassifications:
Certain prior year balances have been reclassified to conform to current
year presentation.
F-8
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
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. Costs associated with closing and restoring the facility to its
original condition are the responsibility of USN. 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. In 2002 the contract with RMC was assigned to the Cancer
Institute, a joint venture between RMC and St. Lukes Hospital. 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 both December 31, 2003 and 2002, the
escrow account had a balance of $106,000. The equipment agreement
terminates automatically upon termination of the ground lease agreement.
The Company had patient revenue from RMC in the amounts of $1,449,000,
$1,473,000 and $1,397,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
[2] Ground lease agreement:
USN constructed a facility in Kansas City, Missouri, on property which the
Company leases from RMC. The lease term is for a period of 21 years
commencing September 1994. The lease provides for rent at $36,000 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
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 are 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
$995,000, $1,166,000 and $1,176,000 for the years ended December 31, 2003, 2002
and 2001, 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 was completed in the summer of 2003 at a cost of
$803,000. 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 was 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.
F-9
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE D - OBLIGATIONS 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, as defined in the agreement.
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.
During July 2003, USN entered into a 30-month lease agreement with DVI to
finance the removal and reinstallation of the supply of cobalt at NYU, the loan
bears interest at 8.5% and is collateralized by the Gamma Knife at NYU.
During May 2003, USN entered into a forty-month loan agreement with DVI in the
amount of $137,000. The loan bears interest at 9.208% per annum and is
collateralized by the Common Knife at RMC.
The obligations under the capital lease and loans payable are as follows:
December 31,
------------------------
2003 2002
---------- ----------
Capital leases - Gamma Knife and cobalt $ 756,000 $ 556,000
Loans payable 167,000 335,000
---------- ----------
923,000 891,000
Less current portion 581,000 790,000
---------- ----------
$ 342,000 $ 101,000
========== ==========
Future payments as of December 31, 2003 on the equipment leases and loans are as
follows:
Year Ending
December 31,
------------
2004 $ 415,000
2005 307,000
2006 54,000
-------------
776,000
Less interest (64,000)
-------------
Present value of net minimum obligation $ 712,000
=============
The Company's Gamma Knives are held under capital leases and amortization is
included in depreciation expense.
F-10
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE D - OBLIGATIONS UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
In August 2003, USN commenced payment on a $750,000 lease for the NYU cobalt
reload, that was originally thought to be fully funded by DVI. Also in August
2003, DVI filed for protection under Chapter 11 of the U.S. Bankruptcy Code and
it was determined that DVI had failed to make payments of $150,000 to the cobalt
vendor, Elekta. Commencing September 2003, the Company made all loan and lease
payments, then owed to DVI or its successor, into an escrow account held by the
Company's attorney and commenced negotiations for a resolution to the
underfunding of the payments to Elekta. During February 2004, the Company paid
$50,000 of the amount owed to Elekta. As of March 15, 2004, the Company has
released the escrowed amounts to DVI or its successor in payment of all loan and
lease obligations through that date and has reached an agreement that the amount
owed to DVI or its successor for the NYU cobalt reload was equal to $560,000
representing the amount funded by DVI of $582,000 reduced by a payment made by
USN during August 2003. As of March 22, 2004 USN has obtained a commitment from
a third-party to refinance the lease for an amount of $728,000, which will be
used to repay $560,000 owed to DVI or its successor, to pay the remaining
$100,000 plus sales tax owed to Elekta and to refund $50,000 to the Company for
the payment made to Elekta during February 2004.
NOTE E - ASSET RETIREMENT OBLIGATIONS
During 2003, the Company adopted FAS 143 and recorded asset retirement
obligations of $200,000 based upon estimated amounts, consisting principally of
removal of Gamma Knives and disposal of regulated materials and the restoration
of facilities at NYU and RMC. The pro forma amount of the liability as of
January 1, 2002 and December 31, 2002 would also approximate $200,000. Such
liabilities have been measured using current information, current assumptions
and current interest rates and have been recorded with a corresponding increase
in the carrying value of the Gamma Knives. The Company is amortizing such costs
over the lives of the respective useful lives from inception.
Upon initial application of FAS 143, the Company has recognized $140,000 of
accumulated depreciation and a deferred tax asset of $56,000 and a net increase
in accumulated deficit of $84,000 as the cumulative effect of a change in
accounting principles during the year ended December 31, 2003. Application of
provisions of FAS 143 would have resulted in a decrease in net income of
approximately $12,000 for each of the years ended December 31, 2002 and 2001.
NOTE F - CONCENTRATIONS
For the years ended December 31, 2003, 2002 and 2001, the Company derived all of
its patient revenue from RMC and NYU. These two entities also accounted for all
of the accounts receivable at December 31, 2003 and 2002.
The Company has been dependent on one manufacturer who sells, supplies and
services the Gamma Knife.
F-11
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE G - TAXES
The components of the income tax provision (benefit) are as follows:
Year Ended December 31,
------------------------------------------
2003 2002 2000
------------ ------------ ------------
Current:
Federal $ (15,000) $ 24,000 $ (1,000)
State 41,000 8,000
------------ ------------ ------------
26,000 32,000 (1,000)
------------ ------------ ------------
Deferred:
Federal 35,000 28,000 (130,000)
State 6,000 5,000 (32,000)
------------ ------------ ------------
41,000 33,000 (162,000)
------------ ------------ ------------
Income tax (benefit) $ 67,000 $ 65,000 $ (163,000)
============ ============ ============
A reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported follows:
Year Ended December 31,
------------------------------------------
2003 2002 2000
--------- --------- ----------
Income tax (benefit) at the federal statutory rate $ 44,000 $ 52,000 $ (37,000)
State income tax (benefit), net of federal taxes 23,000 13,000 (7,000)
Other (1) (119,000)
--------- --------- ----------
Income tax provision (benefit) $ 67,000 $ 65,000 $ (163,000)
========= ========= ==========
(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,
----------------------------
2003 2002
------------ ------------
Deferred tax asset (liability):
Litigation settlement accrued for financial reporting
purposes, deductible when paid for tax purposes $ 40,000
Asset retirement obligations recorded for
financial reporting including $56,000 relating
cumulative change in accounting principles $ 58,000
Excess of book depreciation over tax depreciation 46,000 85,000
Deferred tax liability:
Net effect of the conversion from accrual basis of
accounting to cash basis for tax purposes (2) (150,000) (186,000)
------------ ------------
Net deferred tax liability $ (46,000) $ (61,000)
============ ============
(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-12
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE H - 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 were 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, the balance on these notes amounted to
$100,000, which was repaid during 2003.
NOTE I - 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, 2003, the annual future minimum rental
payments under the operating lease and the ground lease referred to in Note B(2)
are as follows:
2004 $ 36,000
2005 36,000
2006 36,000
2007 36,000
2008 9,000
------------
$ 153,000
============
Rent expense was approximately $36,000, $36,000 and $38,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
Gamma Knives:
The Company is required to reload cobalt at each facility approximately every 5
years. The cobalt of RMC was reloaded in 2000 at a cost of approximately
$800,000 and cobalt at NYU was reloaded in 2003 at a cost of approximately
$803,000.
NOTE J - 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 2003, 2002 and 2001 were approximately $45,000, $33,000 and
$30,000, respectively.
F-13
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE K - 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, 2003, 2002 and 2001 were $300,000, $300,000 and
$305,000, respectively.
[3] During the years ended December 31, 2002 and 2001, the Company hired a
family member of an officer for computer consulting services. Such
consulting expense amounted to $4,000 and $22,000, respectively.
NOTE L - TREASURY STOCK
In December 2000, the USN Board of Directors authorized the repurchase of up to
500,000 shares of USN's common stock in the open market. Through December 31,
2003, the Company had repurchased 454,500 shares at a cost of $32,000, of which
250,500 shares were retired during 2001.
NOTE M - EXTRAORDINARY ITEM
Extraordinary item, in 2001, represents amounts received by the Company on
receivables which had originated with GHS.
NOTE N - FOURTH QUARTER ADJUSTMENT
As described in Notes A[9] and E, the Company adopted FAS 143 during 2003. If
the Company had adopted this standard effective January 1, 2003, total assets,
liabilities and accumulated deficit at the end of each of the first three
quarters would have increased by $120,000, $200,000 and $80,000, respectively.
In addition, amortization expense would be $1,000 higher in each of the first
three quarters of 2003.
F-14